Please ensure Javascript is enabled for purposes of website accessibility

Why Bank of the Ozarks Dropped 12% on Friday

By Jordan Wathen - Jul 28, 2017 at 2:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A key executive departure at Bank of the Ozarks raises questions about its loan growth and credit quality.

What's happening?

Shares of Bank of the Ozarks (OZK 0.60%) 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.

So what

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.

A sign on a building reading "BANK"

Image source: Getty Images.

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.

Now what

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.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bank of the Ozarks, Inc. Stock Quote
Bank of the Ozarks, Inc.
$43.44 (0.60%) $0.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.