One of the more intriguing pieces of news to come out of the Sohn Investment Conference in May was Carson Block's call to short Bank of the Ozarks, a small Arkansas lender.
The $3.5 billion bank, which focuses on real estate and construction loans and has acquired other small banks to fuel growth, saw its short interest spike to a four-year high shortly before the presentation by Block of Muddy Waters Capital. The amount of shares borrowed and sold has remained elevated ever since, as bears patiently awaited a further collapse in the stock price:
On Monday, however, Bank of the Ozarks delivered a blow to the shorts by reporting earnings per share that were slightly better than estimated, unleashing what some correctly predicted would be a major short squeeze that's pushing the shares to near where they were before Block outlined his case:
Block's case revolves largely around potential deterioration in the real estate market, for which he said Bank of the Ozarks wasn't well-prepared, while defenders say the quality of the bank's loans is strong enough that it doesn't need more provisions for losses. Its latest earnings report seems to buttress that defense: Excluding purchased loans, only a tiny 0.09 percent of loans and leases were nonperforming as of the end of June, its best ratio as a public company.
Maybe a real estate downturn will reach the Ozarks one day. In the meantime, it's understandable to see some short-sellers' patience running thin.
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