For those following or still subscribed to theintelligentinvestor, it’s been a long time since I’ve posted.
If you’re no longer interested in the blog, feel free to unsubscribe. If you are interested, I plan to start posting more frequently. Over the last several years, I’ve been consumed with investing, running two funds, joining the board of a problem investment, and managing portfolios (separate accounts) for clients. While it may not seem like much it did consumed practically all my time.
My goal of blogging is to share my experience and knowledge with others. Additionally, I find that it useful to put ideas on paper as it forces me clarify my thoughts and helps keep my thinking accountable by inhibiting the revisionist historian in me (or all of us). Putting myself out there and subjecting myself to public scrutiny was probably the hardest obstacle – and still is. Do I really have something to say and is it important?
Here’s the first post.
I’ve followed OZK for a bit now and got interested when the stock tanked last year amidst the write-down of two legacy credits before the Great Financial Crisis (GFC) of 2008. While the carrying value of these two loans was $20m after write-down, the stock market wiped out $3 billion in market value.
Since then I’ve been following the stock and after the market close today (4/17/19), the bank released its Q1 2019 earnings.
- Net interest margin (NIM) 4.53% down 16 bps YoY but only down 2 bps QoQ.
- 76% of non-purchased loans have variable rates. So, net NIM should have some cushion from Fed rate increases.
- Book value (BV) and tangible book value (TBV) per share are $30.11 and $24.73, respectively. Until recently, this bank has never traded at 1x BV not to mention 1x TBV recently in December 2018.
- Real Estate Specialties Group (RESG) seems to be doing well, 5 bps charge-offs (vs. 50bps for peers), and Indirect RV & Marine lending continues to grow. RV & Marine lending represents 61% of funded non-purchased loans. In 2018, RESG funded loans was $4.74 billion and 2019, while lumpy, is expected to match or exceed 2018 numbers. About $11.5 billion unfunded loan balance, of which RESG is 91%.
- ROA, ROE and ROTE was 1.99%, 11.77% and 14.40%, respectively. Very good in the banking industry.
- Efficiency ratio is 38.5% vs 56% for peers.
- Portfolio LTC and LTV of 50% and 43%, respectively.
- 1ML, 3ML and 6ML rates compressing. Troubling for banks is the compression of LIBOR.
This will continue to put downward pressure on NIMs. Interestingly, during the 14-quarter period that the Fed increased rates, OZK’s Core Spread decreased only 10bps. Basically, the bank was able to offset and pass through interest rate hikes to its borrowers.
From the graph below, it looks like the “outperformance” of OZK over peers is decreasing as their purchase loans ruff-off. Basically, its NIM is dropping while other FDIC institutions are rising. Will the bank’s NIM ultimately converge with the industry, or with OZK continue to outperform?
We’ll see how the market trades this tomorrow, but it looks like the bank has been priced to show so bad news, yet Q1 2019 doesn’t seem to be bad so I would think this stock would trade higher. Long-term, this bank should be poised to do well with the same management at the helm that guided it through the GFC.