Author Topic: OZRK - Bank of the Ozarks  (Read 56868 times)

atbed

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Larry

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Re: OZRK - Bank of the Ozarks
« Reply #41 on: April 11, 2017, 05:26:34 AM »
Q1 results out.

Quote
Company Release - 4/11/2017 7:00 AM ET

LITTLE ROCK, Ark.--(BUSINESS WIRE)-- Bank of the Ozarks, Inc. (NASDAQ: OZRK) today announced that net income for the first quarter of 2017 was a record $89.2 million, a 72.6% increase from $51.7 million for the first quarter of 2016. Diluted earnings per common share for the first quarter of 2017 were a record $0.73, a 28.1% increase from $0.57 for the first quarter of 2016.

The Company’s annualized returns on average assets, average common stockholders’ equity and average tangible common stockholders’ equity for the first quarter of 2017 were 1.93%, 12.80% and 17.17%, respectively, compared to 1.98%, 14.00% and 15.59%, respectively, for the first quarter of 2016. The calculation of the Company’s return on average tangible common stockholders’ equity and the reconciliation to generally accepted accounting principles (“GAAP”) are included in the schedules accompanying this release.

George Gleason, Chairman and Chief Executive Officer, stated, “We are very pleased to report our excellent results for the first quarter of 2017, including quarterly records in net income, diluted earnings per common share and trust income, $612 million growth in the funded balance of non-purchased loans and leases, $1.19 billion growth in the unfunded balance of non-purchased loans and leases, a 4.88% net interest margin, a 35.0% efficiency ratio and excellent asset quality.”

atbed

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Re: OZRK - Bank of the Ozarks
« Reply #42 on: April 11, 2017, 09:34:08 PM »
Q1 results out.

Quote
Company Release - 4/11/2017 7:00 AM ET

LITTLE ROCK, Ark.--(BUSINESS WIRE)-- Bank of the Ozarks, Inc. (NASDAQ: OZRK) today announced that net income for the first quarter of 2017 was a record $89.2 million, a 72.6% increase from $51.7 million for the first quarter of 2016. Diluted earnings per common share for the first quarter of 2017 were a record $0.73, a 28.1% increase from $0.57 for the first quarter of 2016.

The Company’s annualized returns on average assets, average common stockholders’ equity and average tangible common stockholders’ equity for the first quarter of 2017 were 1.93%, 12.80% and 17.17%, respectively, compared to 1.98%, 14.00% and 15.59%, respectively, for the first quarter of 2016. The calculation of the Company’s return on average tangible common stockholders’ equity and the reconciliation to generally accepted accounting principles (“GAAP”) are included in the schedules accompanying this release.

George Gleason, Chairman and Chief Executive Officer, stated, “We are very pleased to report our excellent results for the first quarter of 2017, including quarterly records in net income, diluted earnings per common share and trust income, $612 million growth in the funded balance of non-purchased loans and leases, $1.19 billion growth in the unfunded balance of non-purchased loans and leases, a 4.88% net interest margin, a 35.0% efficiency ratio and excellent asset quality.”

"I know when someone cuts their prices 3% or 8% on the listing prices on condos and that gets a big article in Barron’s or Investor’s Business Daily or The Wall Street Journal or Crain’s or some place, it tends to freak folks out. But the reality is we are typically in the 40s to 50% loan to cost and the 40s to 50% loan to value on those projects. And somebody cuts their prices 4% or 8%. There is still – the sponsors are still making a profit. They may not be making as much profit if they were getting full list price, but they are still making a profit. The mezzanine lenders are still getting paid off. We are still getting paid off.

One can read these headline articles about while prices came down 4%, or I read one the other day that said sales of condos in this part of New York were taking 103 days on the market versus 89 days a year ago. And that’s true, but that hardly is prices. Yes, if you are selling, you’d rather have your money 2 weeks earlier than not, but a 2-week extension and time on the market. And it’s – these are relatively modest issues that seem to get a disproportionate amount of attention. So, one has to really look at the data and the analytics and make smart decisions based on that and not get carried away by headline that says all of the properties are down 4% from where they are a year ago and they are all in the market 14 days longer than they were a year ago and the sponsor is making an 18% return instead of a 22% return on its money. So keep it in perspective."

https://seekingalpha.com/article/4061815-bank-ozarks-ozrk-ceo-george-gleason-q1-2017-results-earnings-call-transcript?part=single

Green King

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Re: OZRK - Bank of the Ozarks
« Reply #43 on: April 12, 2017, 03:17:14 AM »
don't you think it is odd the stock didn't rally with these great numbers?
GK

Schwab711

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Re: OZRK - Bank of the Ozarks
« Reply #44 on: April 12, 2017, 06:10:47 AM »

One can read these headline articles about while prices came down 4%, or I read one the other day that said sales of condos in this part of New York were taking 103 days on the market versus 89 days a year ago. And that’s true, but that hardly is prices. Yes, if you are selling, you’d rather have your money 2 weeks earlier than not, but a 2-week extension and time on the market. And it’s – these are relatively modest issues that seem to get a disproportionate amount of attention. So, one has to really look at the data and the analytics and make smart decisions based on that and not get carried away by headline that says all of the properties are down 4% from where they are a year ago and they are all in the market 14 days longer than they were a year ago and the sponsor is making an 18% return instead of a 22% return on its money. So keep it in perspective."

https://seekingalpha.com/article/4061815-bank-ozarks-ozrk-ceo-george-gleason-q1-2017-results-earnings-call-transcript?part=single

This is wrong and almost seems misleading considering he has run the bank for 30 years or something. In general, construction loans have relatively fixed costs and variable revenue. Lets assume it is 90 cents of costs for every $1 of revenue, which gives 10 cents of profit or 10% margin. If prices decline 4%, then 96 cents of revenue produces 6 cents of profit, or a 40% decline in profits. If 10% margin equated to a 22% return then a 6% margin equates to a 13.2% return. That's a decline 8.8% and not 4%. We also know there has to be leverage on these projects or OZRK wouldn't be loaning money. Construction/Development projects probably (hopefully) have 1x-3x leverage (25% to 50% equity).

A 4% decline in prices can substantially effect investment returns on RE development projects. Good underwriting would assume some variability in projected prices. Construction loans generally have the issue that decisions are primarily made for financial reasons, as opposed to mortgages where the buyer genuinely wants to live in the dwelling. There is nothing wrong with with positive spin but Gleason's comment is plain untrue.

Larry

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Re: OZRK - Bank of the Ozarks
« Reply #45 on: April 12, 2017, 07:53:46 AM »
Just finished the transcript. Gleason seems to be very confident with their real estate loans:

Quote
For decades, our focus has been on real estate lending and we are one of the largest and most active CRE lenders in the country. Our track record, including our record through great recession, speaks for itself. Our significant expertise and the conservatism we employ in our CRE lending are significant factors in our asset quality. Many people tend to lump everyone involved in CRE transactions in the same category without distinguishing between equity mezzanine lender and senior secured lender priorities and without distinguishing between high quality, low-leverage portfolios and lower quality, high-leverage portfolios. In almost every transaction we do, we are the sole senior secured lender, which means that in the event of a default, every penny of equity and every penny provided by mezzanine lender would be lost before we lose even $0.01 of interest or principal. Simply stated, we have the lowest risk position in the capital stack. Likewise, our extremely low loan to cost and loan to value ratios are probably more conservative than just about every other CRE lender in the country. Accordingly, we believe our CRE portfolio may be the lowest risk CRE portfolio in the industry.

From SA transcript: https://seekingalpha.com/article/4061815-bank-ozarks-ozrk-ceo-george-gleason-q1-2017-results-earnings-call-transcript?part=single
« Last Edit: April 12, 2017, 07:57:43 AM by Larry »

atbed

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Re: OZRK - Bank of the Ozarks
« Reply #46 on: April 12, 2017, 09:22:48 AM »

One can read these headline articles about while prices came down 4%, or I read one the other day that said sales of condos in this part of New York were taking 103 days on the market versus 89 days a year ago. And that’s true, but that hardly is prices. Yes, if you are selling, you’d rather have your money 2 weeks earlier than not, but a 2-week extension and time on the market. And it’s – these are relatively modest issues that seem to get a disproportionate amount of attention. So, one has to really look at the data and the analytics and make smart decisions based on that and not get carried away by headline that says all of the properties are down 4% from where they are a year ago and they are all in the market 14 days longer than they were a year ago and the sponsor is making an 18% return instead of a 22% return on its money. So keep it in perspective."

https://seekingalpha.com/article/4061815-bank-ozarks-ozrk-ceo-george-gleason-q1-2017-results-earnings-call-transcript?part=single

This is wrong and almost seems misleading considering he has run the bank for 30 years or something. In general, construction loans have relatively fixed costs and variable revenue. Lets assume it is 90 cents of costs for every $1 of revenue, which gives 10 cents of profit or 10% margin. If prices decline 4%, then 96 cents of revenue produces 6 cents of profit, or a 40% decline in profits. If 10% margin equated to a 22% return then a 6% margin equates to a 13.2% return. That's a decline 8.8% and not 4%. We also know there has to be leverage on these projects or OZRK wouldn't be loaning money. Construction/Development projects probably (hopefully) have 1x-3x leverage (25% to 50% equity).

A 4% decline in prices can substantially effect investment returns on RE development projects. Good underwriting would assume some variability in projected prices. Construction loans generally have the issue that decisions are primarily made for financial reasons, as opposed to mortgages where the buyer genuinely wants to live in the dwelling. There is nothing wrong with with positive spin but Gleason's comment is plain untrue.

I don't disagree with most of what you said. However, I don't think his comments are false either. For what it is worth, I believe the 4% drop he quoted is a fall in the developer's IRR from 22% to 18%. Profit margins for condo developments in Manhattan are much much higher than 10%. This profit margin has to be lost as well before OZRK loses money.

« Last Edit: April 12, 2017, 09:53:48 AM by atbed »

Green King

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Re: OZRK - Bank of the Ozarks
« Reply #47 on: April 12, 2017, 09:45:45 AM »

One can read these headline articles about while prices came down 4%, or I read one the other day that said sales of condos in this part of New York were taking 103 days on the market versus 89 days a year ago. And that’s true, but that hardly is prices. Yes, if you are selling, you’d rather have your money 2 weeks earlier than not, but a 2-week extension and time on the market. And it’s – these are relatively modest issues that seem to get a disproportionate amount of attention. So, one has to really look at the data and the analytics and make smart decisions based on that and not get carried away by headline that says all of the properties are down 4% from where they are a year ago and they are all in the market 14 days longer than they were a year ago and the sponsor is making an 18% return instead of a 22% return on its money. So keep it in perspective."

https://seekingalpha.com/article/4061815-bank-ozarks-ozrk-ceo-george-gleason-q1-2017-results-earnings-call-transcript?part=single

This is wrong and almost seems misleading considering he has run the bank for 30 years or something. In general, construction loans have relatively fixed costs and variable revenue. Lets assume it is 90 cents of costs for every $1 of revenue, which gives 10 cents of profit or 10% margin. If prices decline 4%, then 96 cents of revenue produces 6 cents of profit, or a 40% decline in profits. If 10% margin equated to a 22% return then a 6% margin equates to a 13.2% return. That's a decline 8.8% and not 4%. We also know there has to be leverage on these projects or OZRK wouldn't be loaning money. Construction/Development projects probably (hopefully) have 1x-3x leverage (25% to 50% equity).

A 4% decline in prices can substantially effect investment returns on RE development projects. Good underwriting would assume some variability in projected prices. Construction loans generally have the issue that decisions are primarily made for financial reasons, as opposed to mortgages where the buyer genuinely wants to live in the dwelling. There is nothing wrong with with positive spin but Gleason's comment is plain untrue.

I don't think his comments are patently false. For what it is worth, I believe the 4% drop he quoted is a fall in the developer's IRR from 22% to 18%. The profit margin for condo developments in Manhattan is much much higher than 10%.

please source on margin and article. TIA

This doesn't confirm with any of the numbers. No position long popcorn.
http://www.cnbc.com/2017/02/17/toll-brothers-big-sale-is-a-warning-manhattan-condo-market-is-cracking.html
GK

Schwab711

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Re: OZRK - Bank of the Ozarks
« Reply #48 on: April 12, 2017, 09:59:34 AM »

One can read these headline articles about while prices came down 4%, or I read one the other day that said sales of condos in this part of New York were taking 103 days on the market versus 89 days a year ago. And that’s true, but that hardly is prices. Yes, if you are selling, you’d rather have your money 2 weeks earlier than not, but a 2-week extension and time on the market. And it’s – these are relatively modest issues that seem to get a disproportionate amount of attention. So, one has to really look at the data and the analytics and make smart decisions based on that and not get carried away by headline that says all of the properties are down 4% from where they are a year ago and they are all in the market 14 days longer than they were a year ago and the sponsor is making an 18% return instead of a 22% return on its money. So keep it in perspective."

https://seekingalpha.com/article/4061815-bank-ozarks-ozrk-ceo-george-gleason-q1-2017-results-earnings-call-transcript?part=single

This is wrong and almost seems misleading considering he has run the bank for 30 years or something. In general, construction loans have relatively fixed costs and variable revenue. Lets assume it is 90 cents of costs for every $1 of revenue, which gives 10 cents of profit or 10% margin. If prices decline 4%, then 96 cents of revenue produces 6 cents of profit, or a 40% decline in profits. If 10% margin equated to a 22% return then a 6% margin equates to a 13.2% return. That's a decline 8.8% and not 4%. We also know there has to be leverage on these projects or OZRK wouldn't be loaning money. Construction/Development projects probably (hopefully) have 1x-3x leverage (25% to 50% equity).

A 4% decline in prices can substantially effect investment returns on RE development projects. Good underwriting would assume some variability in projected prices. Construction loans generally have the issue that decisions are primarily made for financial reasons, as opposed to mortgages where the buyer genuinely wants to live in the dwelling. There is nothing wrong with with positive spin but Gleason's comment is plain untrue.

I don't think his comments are patently false. For what it is worth, I believe the 4% drop he quoted is a fall in the developer's IRR from 22% to 18%. The profit margin for condo developments in Manhattan is much much higher than 10%.

I wasn't trying to imply that those were standard margins, I was just trying to provide an example. I understood that Gleason was referring to the IRRs earned by developers. If we are discussing the concepts of ratios (which is all a percentage is) then it really doesn't matter what metric we refer to. I was just trying to keep my example as simple as possible.

A little off-topic but for back of the envelope valuation/return calculations, stock appreciation + dividend yield is roughly equal to total return over a one year period. Technically, it's precisely wrong. For most situations (like in person conversations) over a one year period the error is so small that it really doesn't matter. However, that simple formula only provides a close approximation over short time frames. The delta between the actual and estimated returns increases when discussing longer periods. It becomes essentially unusable over several-year periods. The situation and time frame dictates when it is acceptable to use approximate vs. exact formulas when discussing ratios or deltas. In Gleason's case, I think his use of approximation was inappropriate, all things considered.

The reason we have phrases like "operating leverage" is because various income line items move disproportionately with changes in revenue. As I mentioned, for any business where costs are generally fixed and revenues are generally variable, relative changes in revenue lead to substantially greater changes in profit (both up and down). It's just a consequence of that type of business model. All business models have certain 'operating leverage' tendencies.

IRRs measure an entirely different ratio than profit margins and revenue delta. All will likely have different denominators. Only in limited special situations would all of these ratios move in lock-step. It would be extremely unusual for a 4% change in revenue to equate to a 4% change in returns (regardless of what 'return' metric we are measuring - for example purposes it really doesn't matter). I don't need to know specifics to know Gleason is wrong.

Just to clarify, I'm not trying to say anything other than what I'm saying. There's no need to read into it anymore than literally what I wrote. I have no idea how good their underwriting is. I'm not trying to imply anything about their underwriting. I don't know what their buffer or margin of safety is on loans like this. I don't know what the average margins or returns for developers are. All I know is Gleason is wrong about that particular example.

atbed

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Re: OZRK - Bank of the Ozarks
« Reply #49 on: April 12, 2017, 02:16:38 PM »

One can read these headline articles about while prices came down 4%, or I read one the other day that said sales of condos in this part of New York were taking 103 days on the market versus 89 days a year ago. And that’s true, but that hardly is prices. Yes, if you are selling, you’d rather have your money 2 weeks earlier than not, but a 2-week extension and time on the market. And it’s – these are relatively modest issues that seem to get a disproportionate amount of attention. So, one has to really look at the data and the analytics and make smart decisions based on that and not get carried away by headline that says all of the properties are down 4% from where they are a year ago and they are all in the market 14 days longer than they were a year ago and the sponsor is making an 18% return instead of a 22% return on its money. So keep it in perspective."

https://seekingalpha.com/article/4061815-bank-ozarks-ozrk-ceo-george-gleason-q1-2017-results-earnings-call-transcript?part=single

This is wrong and almost seems misleading considering he has run the bank for 30 years or something. In general, construction loans have relatively fixed costs and variable revenue. Lets assume it is 90 cents of costs for every $1 of revenue, which gives 10 cents of profit or 10% margin. If prices decline 4%, then 96 cents of revenue produces 6 cents of profit, or a 40% decline in profits. If 10% margin equated to a 22% return then a 6% margin equates to a 13.2% return. That's a decline 8.8% and not 4%. We also know there has to be leverage on these projects or OZRK wouldn't be loaning money. Construction/Development projects probably (hopefully) have 1x-3x leverage (25% to 50% equity).

A 4% decline in prices can substantially effect investment returns on RE development projects. Good underwriting would assume some variability in projected prices. Construction loans generally have the issue that decisions are primarily made for financial reasons, as opposed to mortgages where the buyer genuinely wants to live in the dwelling. There is nothing wrong with with positive spin but Gleason's comment is plain untrue.

I don't think his comments are patently false. For what it is worth, I believe the 4% drop he quoted is a fall in the developer's IRR from 22% to 18%. The profit margin for condo developments in Manhattan is much much higher than 10%.

It would be extremely unusual for a 4% change in revenue to equate to a 4% change in returns (regardless of what 'return' metric we are measuring - for example, purposes it really doesn't matter). I don't need to know specifics to know Gleason is wrong.

I respectfully disagree. It will depend on the specific project, but a 4% change in revenue will roughly reduce IRR by 4%.  I'll take a stab at explaining it directionally. I think you need to divide the reduction in total return by the weighted average life of the project. In your example of $100 sales and $90 costs, the ROA is 11.1% with no price reduction and 6.6% with a 4% price reduction.

10/90 = 11.1%
6/90 = 6.6%

Let's assume the profit margin already accounts for interest expense. If we assume 50% leverage, then ROE is:

10/45 = 22.2%
6/45 = 13.3%

Commercial real estate projects typically have a 3-4 year life. However, not all cash is spent at the beginning. For example, banks typically withhold funds until milestones are met. Some money is spent at 0 (i.e. land acquisition). Construction costs are spread out and could be paid out at 6 months, 12 months, 18 months, etc... This is why RE funds like to use IRR. It accounts for these irregular cash flows.

If we assume a weighted average life of capital = 2 years, we can take the 9% ROE differential and divide by 2. That gets you to about 4.5%. It'll be lower if we use a compound interest equation. Of course, this is extremely rough math. Coming up with exact assumptions regarding timing and amounts, running that through an XIRR model equation would be more accurate.

But I agree with you, IRR ain't perfect. An 18% IRR doesn't equate to an 18% annualized return. So it can't tell us the profit margin he generally sees across the portfolio. Gleason perhaps could have explained it better to the layman, but I don't think he was trying to misrepresent the situation.
« Last Edit: April 12, 2017, 07:25:16 PM by atbed »