Nery, not sure if you had a chance to look at OZK, but tomorrow may be your chance if you still like the stock. The hedge funds are going to crush this thing tomorrow. I have to digest the management commentary and figure out whether the new information offsets to fact they had to charge stuff off, but I’m leaning towards buying tomorrow. After hours trading has it at something like 1.3x tangible book.

The hedge funds think this thing is going to zero.

For anyone interested in bank stocks, you rarely get this level of information - so interesting stuff:


Yea I got the alert on it. Down 20 percent. I’m gonna read the transcript and see what’s up. i’ll need min 3 days cuz i got to sell something to buy it. i was hoping to get in new year but the price is just so juicyyyyy. why do people think its going to 0?

Let me know if you have any questions. There is pretty close to zero chance it stays at this valuation - it either fails (goes to zero) or does well over a decent enough holding period. I have a conference call tomorrow during the call but I’m going to listen to the recording afterwards

If it trades at 30 bucks, market cap is 3.8b. for reference ozk portfolio is 22b. net income 2017 is 420m. for q3 2018 net income was 74m vs 96m in 2017. ytd 2018 income is still 10% higher. overall the hit isnt that bad. I’ll take my chances.

So here is the big issue:


quick summary on issues: macro stuff on there: existing homes are undercutting the price of new residential construction. and retail malls are dying due to rising rates and shit performance shoutout sears and jcp.

why the underperformance: shoulda been 110m to 130m in net income, but due to 11m from restructuring and 26m from 2 out of its 3 shitty classified loans underperformed. all loans are from 2007 to 2008. (people prolly thing these 2 might be further markdown) they reppraised and wrote it down to 80% as credit. There is another shit loan with an ltv of 100% that is twice the size of both combined, but ozk think it will still do well. (lol, allocatin potential 60m lost). anyways it aint too much a problem imo as they are making money everywhere else.

the next shitty loan after this is around 75% ltv and is tiny. there are some scary large ones in the 65% range, so if there is a downtrun that causes real estate to fall 35%, this co will take a really large hit. enough to do major damage. anyways overall the portfolio median ltv is prolly 50%.

There was a Fed white paper back in 2013 that found banks with construction lending concentrations like this had more than a 23% chance of failing in a downturn (as the highest risk factor for failure) versus like <1% for the rest. If you layer on the lumpiness of portfolio, the sheer size of growth and the fact that the head of the lending group has left, there are real risks here to be aware of.

I have previously worked in bank regulation and I did it during the crisis, so I’m very familiar with the risks of this sort of lending. And I’ve done a lot of similar sort of probability of failure studies on my own. Banks have a very rich data set to analyze

And honestly that’s the market opportunity, unless I’ve I been either massively deceived or missed some data available. Like I told Nerdy in the other thread, Ozark has every red flag that you see before a bank failure. These are well known heuristics for bank people and they really get applied when the perception of risk goes up.

It’s interesting they are being applied almost exclusively to Ozark. Banks that I think have riskier CRE Portfolios are not being questioned yet, but they may be weak after the Ozark read through.

I think this has a good chance of being a heuristic producing a false positive. The issue is there lending isn’t typical construction lending that banks do and which these heuristics are based. This lending isn’t risk free, but it is subject to different risks than most bank investors think of when they think of normal construction and development lending.

Honestly the size of individual loans has always been my biggest concern. And I thought management’s explanation for why they didn’t syndicate is less than satisfactory. And in banking these loan sizes could easily bankrupt Ozark if things went wrong.

We will see where it opens, but this valuation is compelling. It is hard being on the opposite side of lots of investors I respect such as Chanos. Possible I’m too close to this bank, since I’ve talked to people who have regulated it, people who work there, the management teams, etc.

I suspect both the management departure and loan write downs are likely to be regulation related. I don’t think that resg guy liked dealing with Washington. He was a high strung lawyer who I could see getting frustrated very easily with bank examiners

i think the main question you have to ask yourself is will default rates for commercial real estate loans spike up? there is only 30 yrs of data, lmk if u can find sum more. see link below


default rate history commercial loans:

so data start at a peak default rate of 14% in 1991 and decelerated to 2% in 1996, then they remained below 2% until 2007. then they spiked up to 16% in 2011 and only recently decelerated to below 2% in 2014. they are currently still below 2%.

the new problem is the rising rates. so you gotta compare it to a typical cap rate. rates are pretty low, so cap rate spread is pretty good, but should rates rise, then there will be problems, but the hope is that they increased their underwriting standard to anticipate rising rates!

the poor ones will die, and the good ones will pay higher rates thus making the world safer!


I thought this was a thread about opening businesses in the Ozarks as a front to launder money.

Related image

Nerdy, in lending it is a two variable equation. Default rate is the probability of loss. Then loss given default is impacted by the loan to value and change in collateral valuation under stress. In construction lending, it’s the LGD that kills you

given the binary nature of this dog, hard to step into it now just as things start falling apart. this is a “buy it at $5-$10 situation”. if you buy now, you’re looking for 10%-30% upside and selling. how i see it at least.


rawraw, how much of this transitional type of real estate lending is on the balance sheets of community banks? I see some of these transitional properties in CRE CLO’s and some good income producing real estate in CMBS, but I worry there is a fair amount of these types of loans held on the community bank balance sheets. I’m also not sure some of the community banks really have that good of an understanding of what they are doing in terms of underwriting.

When you say transitional, do you mean just c&d loans in general? After the crisis I think most banks exited in a major way. Community banks definitely reduced their concentrations, but still probably have much higher exposures as a percentage than bigger banks. Given the years since the crisis, the concentration levels have increased quite a bit.

As of June 30th, for all banks in the country this loan type was roughly 30 percent of capital. For the 95th percentile, it is 150 percent. Ozrk is at 216 percent as of June.

In general, this loan type is among the riskiest. Commercial and industrial loans can be equally as risky, but most community banks have limited loans in that category. They tend to be real estate heavy

I’m lumping the “transitional” into C&D. The transitional is probably better quality in that I’m defining it by an existing property going through a re-purposing or remodeling.

My worry with the community banks is there is a lot of bad commercial real estate loans that could blow big holes in some balance sheets when the cycle turns. I know not all CRE is alike but the higher quality properties tend to be done by investors that aren’t community banks. I also bet there are some community banks run by people that don’t really know what they are doing. I know some are well-run, but some of them I wonder…

I think you’d be surprised on the knowledge of most bankers. And you also may need to define community bank for me, since that can vary widely. But in general bankers are a cautious bunch. But yes there are some banks, particularly in the Northeast, that are flying close to the sun with their real estate exposures and liquidity postures. Typical real estate lending is what kills banks, so it’s always prudent to be careful of banks with concentrations in the loan category. This is why Ozark screens so poorly and is now one of the cheapest banks in the country

I see OZK as a regional and that is not what I’m talking about. I’m talking about community banks as in ones that have market caps generally in the $100MM to $1B range. I’m mostly talking about the ones in that BANX fund that does pref and sub debt for the community banks. I’ve been a real happy investor in that for a while now (you were the one that brought it up so thanks), but I wonder about the underlying. It’s a diversified fund which helps a lot, but I blew out of some of it when I saw the OZK news out of fear for underlying bank balance sheets. I still hold a good deal of it. It’s been whacked around recently. I have a lot of questions about the underlying assets of this fund.

When I had a database for banks, I actually built a spreadsheet to pull all the banks. I haven’t bought a database yet, but if you want we could quantify the real estate risk of their portfolio fairly easily once new ubpr comes out. It’s only like 30 banks or something so not that hard. May be interesting to do and see if it’s getting. Whipped around unnecessarily

Do any of you know what in the hell the “Ozarks” are like?!?!? I am from Missouri born and raised and I can tell you there is NOTHING there. Literally nothing but a giant lake, hillbillies who live there, and some golf courses. OZK is probably the Enron of banks. If you are placing a dime in their public equity, might as well be better off flipping it into a koi fish pond and wishing for good luck.

lol. they have very little to do with the ozarks. they are the largest construction lender in the us. miami/la/nyc. any building going up is proly financed by them. the issue with construction though is that it has the highst default rate among commercial real estate, at its peak 14% of construction loans went on default.

Great response lol