Sign Arkansas Banking Forbearance Agreement Simple

Industry sign banking arkansas forbearance agreement simple

hi everyone welcome back to the channel in this video i'll be addressing the seeking alpha article talking about bank ozk and saying that they may be hiding up to one billion dollars in bad loans so what we're going to do is we're going to dig through this article see what evidence they bring up and assess if that is a real risk to bank ozk now for anyone that doesn't know bank ock mainly operates in the commercial real estate space they have their real estate specialty group and this is where most of their lending activity takes place so this is a nice chart that really summarizes what this bank does so here is the portfolio by product type and by location where you have a multi-family condo office hotel and then land industrial so a lot of their loans are made in the commercial real estate space and they're also concentrated in large cities so we have new york city los angeles miami san francisco chicago sort of the five biggest locations where the real estate is concentrating so for a lot of investors they're going to see this and that's going to be enough for them they don't want to get any more involved into this stock after just seeing what kind of loans this company is writing and i think that is a fair concern especially right now where you're a company that's writing loans for hotels and office space in places like new york city in miami right those are two of the cities that have been harmed the most during this economy so it's no surprise that there is a lot of perceived risk in this stock so what the author of this article is claiming is that banco zk's taking advantage of the cares act to be able to keep bad loans on their books when they should otherwise be written off and this in fact is part of the cares act where deferrals won't violate the generally accepted accounting principles so basically what this cares act made happen is that financial institutions will not be in violation if they take advantage of deferrals or suspensions as permitted in the new federal relief law so what this means is if you have a borrower that stops making payments on that loan you don't have to report that loan as in default yet instead you can say they're temporarily impaired due to the pandemic and because of that they won't be reported as bad loans so this article is basically claiming that banko zk is taking advantage of this law to be able to keep bad loans on their books and this article says that they might have up to a billion dollars in bad loans so now we're actually going to take a look at banco zk's financial reports and see how much truth there is to this all right so here we are this is bank oziki's second quarter filing and so we are on the section of non-performing asset and we can skip right down to the part where they talk about their disaster relief loan program so in the first six months of 2020 which provided short-term payment deferrals on 3 352 loans totaling approximately 982 million as of june 30. and again since this is part of the cares act these deferrals are not considered tdrs which are troubled debt restructurings so that's where the person that wrote this article got the one billion dollar figure from i'm assuming that this bank has almost one billion dollars in non-performing assets right according to this it's 982 million all right so first of all the claim that this bank is hiding a billion dollars in bad loans is simply not true you know nothing they're doing is against the rules they are following the rules that are placed forward in the cares act to be able to legally defer these loans due to the economy and i don't think there's really anything wrong with that and these loans are definitely something to keep an eye on to see if they're taken out of this deferral category but i would say that the management isn't trying to hide these loans it's clearly stated here that they're in deferral under protection of the cares act now here's the thing banco zk is reporting their next earnings probably this week i don't know if they've come out with a definite date yet but it's going to be this upcoming week or the week after and at that point i think we'll get a lot better picture of how these loans are performing three months later if we take a look at this disaster relief loan program it says that the short-term deferrals generally last around three months on their loan portfolio so that was last quarter and it's been three months until this quarter so we should get a better picture of what amount of loans are still in this deferral category for now what i'm hoping for what would be best case is that the majority of the loans be taken out of this deferral category if we saw something like 75 percent of the one billion dollars be taken off of the non-performing assets i think that would be best case for the company and so another point to note is that the management has commented on this in one of my previous videos talking about bank or zk i talked about how the management actually welcomes these deferrals because if they put the loans in this temporary deferral state that just means they ultimately make more interest right this temporary non-performing loan category is usually a win-win for both sides because you have the borrowers who want to put off ping and then banko zk even though they're not receiving that money up front as long as the loan doesn't actually go bad it's it actually is beneficial to them in the long run because it'll just mean that they make more interest since the loan will take a longer time to be paid back and the last thing i want to point out is that these loans are some of the most conservatively written in the entire real estate space where if you take a look at all of the categories that this company writes loans for almost all of their loans are under 50 percent loan to value so i think these loans are being very conservatively written and even if we do see a substantial drop in property values you know the loans will still be fine just based on how conservatively they're written i'm not saying it's impossible for a bunch of bank ozk's loans to go back i think that's definitely a possibility and probably the main risk of this company at this point but the thing is and what i take comfort in is that if this bank's loans go bad that basically means that every other bank that's lending in these areas has to have loans that go bad as well and all these other banks loans are going to blow up as well and so if there's any bank that i want to be owning that lens in commercial real estate in this type of environment it would be this one and that's why i do own the stock and i haven't sold it and so that's really my thoughts on the real estate loans of this bank now just a quick note this is something that practically all banks are doing right this isn't anything that's just being utilized by bank ozk so right now on wells fargo's second quarter report and you can see it's largely the same thing for them if we take a look at their non-performing assets category their non-performing assets increased 1.4 billion from the first quarter of 2020 to 7.8 billion in the second quarter and then it goes on to say the economic impact of the pandemic continue to impact our customer base customer payment deferral activities instituted in response to the pandemic may delay recognition of delinquencies for customers who otherwise would have moved into non-accrual status so this is something that's been going on for every bank it's not just ozk every bank out there has been moving non-performing loans into this temporary category that's protected by the cares act and so this is probably why there's so much pessimism around the financial industry and why banks as an industry have been doing poorly compared to the rest of the market but again this is something that is impacting every bank not just bank or zk and even though banco zk may write loans in parts of the economy that people deem more risky is definitely not the case that they are intentionally hiding these bad loans in any other way than every other bank out there is so that's my response to this article that came out on seeking alpha i do think there is a lot of risk with this bank there is no doubt about it and it absolutely could be the case that a few hotels in new york city um you know default and then a few of these banks loans blow up and then this bank would be in a very bad position but that hasn't happened yet and so i'm hol and so i'm still holding on to the stock um you know it is one that i'm watching though i think this next quarterly report will be very important to keep an eye to see how those non-performing loans have been doing if they're still in that deferral category or if they've been moved out of that so that's my thoughts on this let me know down in the comments what you think if you're someone who owns banco zk stock or if you're someone that's just been watching some of my videos and know that i own it what is your take on this situation and do you think banco zk is screwed because they have too many loans in the commercial real estate space or do you think that even though the bank may have some short-term pain long-term they will be fine and will continue growing and so i'll make another video going over banko zk's third quarter results when they do come out either next week or the week after that so keep an eye out for that and if you got something of value from this video hit the like button to help you to push this out to more viewers and if you're new to the channel subscribe right now and hit the like button to get notified whenever you upload a new video and that's it for now so i'll see you next time [Music] you