Shares of Bank of the Ozarks (NASDAQ:OZRK) plunged by 12% as of 2 p.m. EDT on Friday, after Dan Thomas notified the company of his intention to resign immediately from his key roles as vice chairman, chief lending officer, and president of the bank's Real Estate Specialties Group.
Changeups in corporate ranks tend to be planned events, designed for a smooth transition rather than an overnight change. The abrupt resignation of one of Bank of the Ozarks' most important bankers raises questions about the company's future growth and the quality of its loan book.
Bank of the Ozarks has long been a popular bank among short sellers, particularly Muddy Waters' chief investment officer, Carson Block. Short theses focus on the bank's robust growth in loans originated by the Thomas-led Real Estate Specialties Group, which specializes in riskier construction, land development, and commercial real estate loans.
Loans classified as "construction/land development loans" grew from $1.5 billion at the end of 2014 to $5.3 billion at the end of 2016, according to its most recent annual report.
Investors are left only to speculate on why Thomas decided to resign.
On one hand, he may be leaving for greener pastures. Construction and development loans make up roughly 36% of the bank's total loan portfolio, and more than 1.8 times its capital base, far more than the prototypical regional bank. (For perspective, consider that the average bank has about 12% of its assets tied up in all types of commercial real estate lending.)
Regulators have increasingly warned about loan quality in commercial real estate, and have been rumored to stand in the way of bank mergers that involve banks with concentrated loan books. As an example, see New York Community Bancorp's failed attempt to merge with Astoria Financial.
On the other hand, Thomas' immediate resignation could be the canary in the credit-quality coal mine, a sign that relatively benign construction-loan losses could soon turn for the worse.
In the best case, Bank of the Ozarks lost a key executive who oversaw much of its rapid loan growth in recent years. In the worst case, Thomas' departure could suggest that credit quality at Bank of the Ozarks is deteriorating, and loan losses will follow.
Neither case is good for the bull thesis, which centers around Bank of the Ozarks' rapid balance-sheet expansion and low credit-loss experience.