Muddy Waters’ places short bet on Little Rock-based Bank of the Ozarks, criticizes operating model

Shares of Bank of the Ozarks plummeted nearly 15% in trading today (May 4) after the Muddy Waters investment research firm revealed it has a huge short position against the fast-growing Little Rock banking group, which recently posted first quarter profits of nearly $52 million.

By the end of Wednesday’s closing bell, however, the fast-growing Little Rock bank had recouped most of its earlier trading losses after Muddy Waters Founder and Chief Investment Officer Carson Block announced his short bet at the Ira Sohn Conference in New York City.

According to CNBC and other media stories, Block said Bank of the Ozarks was “beginning to crack” due to a high concentration of real estate loans. He said the Little Rock bank is especially susceptible to construction losses from commercial lending.

“We are short the stock,” Block said at the CNBC-sponsored conference, where he was billed as the top speaker. “The company trades at a growth stock valuation which will re-rate lower as earnings growth deteriorates,” he added.

The bank’s loans are “about 90% in real estate lending” and “35% of their loan book is in construction lending,” Block told CNBC, adding that the Little Rock regional bank aggressively built the book since 2011 in maturing markets.

“Construction loans are really risky. When things stop, banks will get stuck with unfinished projects. If this happens, Ozark will take losses,” the manager said. “Their balance sheet could come under severe pressure in the worst case.”

In a Yahoo Finance story from the Sohn Conference, Block’s soundbites concerning Bank of the Ozarks were even more pointed and critical.

“Our thesis is that in the best case, Ozark re-rates because it can’t sustain this earnings growth and we think that it’s cracking right now. And, in the worst case when there are downturns in some of its real estate lending markets … their balance sheet really could come under severe pressure.”

He said the bank has an “a** backward business model,” saying that the bank is buying banks to support its commercial lending practices, according to the Yahoo Finance article. He said in the CNBC interview that such a practice is a “tail wagging the dog” approach to banking.

Following Block’s remarks, Bank of the Ozarks shares (NASDAQ: OZRK) slid 14.6% in Wednesday’s. However, the Little Rock bank had almost recovered by the closing bell, settling down only 4.4%, or $1.74 at $37.69. Bank of the Ozarks did not respond to inquiries from Talk Business & Politics seeking comments for this story.

Still, the huge attention brought by Block’s bet made Bank of the Ozarks one of Nasdaq’s most active stocks as more than 10.1 million shares traded hands, nearly eight times the local bank’s normal volume.

It still remains to be seen if Block’s bet turns out to be a win for the highly influential short seller who has earned fame on Wall Street over the past five years by bringing attention to publicly traded companies that have massively overstated financial results or have fundamental operational problems.

Block believes Bank of the Ozarks falls into the second category, although company Chairman and CEO George Gleason has boasted publicly about the bank’s strong balance sheet, conservative operations and leadership team.

The Little Rock banking group is also now likely to get more scrutiny from other speculative players and Wall Street hedge funds after cresting the $10 billion asset mark – the crucial milestone established by the Dodd-Frank Wall Street Reform and Consumer Protection act as the regulatory threshold between super-community banks and larger regional banking groups.

As of Wednesday, Bank of the Ozarks has assets of $11.4 billion and two major recently-announced acquisitions are not part of the bank’s balance sheet. On Oct. 19, Bank of the Ozarks announced an all-stock pact and plan of merger to acquire Community & Southern Holdings and its wholly-owned bank subsidiary, Community & Southern Bank, in a deal valued at nearly $800 million, or approximately $20.50 per fully diluted CSB share. At Sept. 30, 2015, CSB had approximately $4.4 billion of total assets, $3 billion of loans and $3.7 billion of deposits.

Following the CSB deal, Bank of the Ozarks said Nov. 16 it would expand its reach and acquire St. Petersburg, Fla.-based C1 Financial in an all-stock transaction valued at $402.5 million. C1 operates 32 Florida banking offices on the west coast of Florida and in Miami-Dade and Orange counties. The majority of the offices are located in Florida’s top six metropolitan markets. At Sept. 30, 2015, C1 had approximately $1.7 billion of total assets, $1.4 billion of loans and $1.3 billion of deposits.

Both deals are expected to close in the first half of 2016, pending normal regulatory and shareholder approvals, bank officials have said.

In the first quarter, the Little Rock bank reported net income of $51.7 million, or 57 cents per share, up 29.6% from $39.9 million, or 47 cents a year ago. Analysts surveyed by Thomson Reuters had expected the Little Rock banking holding company to report first quarter earnings of 55 cents per share on revenue of $133.7 million.

“We are very pleased with our outstanding first quarter results, highlighted by our $1.06 billion quarterly growth in non-purchased loans and leases and our $0.58 billion quarterly growth in the unfunded balance of closed loans. This excellent growth was achieved while adhering to our very conservative credit principles, as evidenced by some of our best asset quality ratios as a public company, including an annualized net charge-off ratio of just 0.05%,” Gleason said after the April 11 earnings report.