Bank OZK diversifies but remains bullish on commercial real estate

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Bank OZK may have shifted its growth emphasis away from commercial real estate amid investor worries, but it remains a lending juggernaut at a time when many of its peers are struggling to expand.

The Little Rock, Arkansas-based bank this week said it grew its third-quarter loans by 2% from the prior quarter and by 10% from the start of the year to $29.2 billion. It marked a ninth consecutive quarterly record for the company. For all U.S. banks over the four quarters that ended June 30, loans inched up just 1%, according to S&P Global Market Intelligence.

"We feel confident; we have great pipelines," Chairman and CEO George Gleason said during a call with analysts Friday after Bank OZK posted results.

The $37.4 billion-asset bank reported net income of $181.2 million, an increase from $173.8 million a year earlier. It posted earnings per share of $1.56, up from $1.50. Bank OZK said its pretax, pre-provision net revenue totaled $282.6 million for the third quarter, a 7% increase from a year earlier.

Earlier this year, Gleason said Bank OZK would diversify its CRE-heavy loan book, given concerns about vulnerabilities in office, multifamily and retail properties following the rise of remote-work trends and population losses in the urban cores of several big cities after the pandemic. The changes, along with inflation and higher interest rates over the past two years, devalued many properties and stressed some borrowers. Bank OZK is a national lender.

"We're focused on more diversification in the portfolio and less concentration risk," Gleason said.

Bank CRE mortgage delinquencies steadily climbed from the final quarter of 2022 through the second quarter of this year, more than doubling during that period to 2%, according to real estate data firm Trepp.

That sparked calls from investors for Bank OZK to diversify, and the company responded. Its Real Estate Specialties Group, which had made up more than 70% of the bank's loan portfolio at the start of this year, finished the third quarter accounting for 64%. Gleason expects that figure to decline to the upper-50s by year-end 2025 and further the following year as the bank grows its recreational vehicle and marine, corporate and institutional banking, and community lending divisions. Those units collectively accounted for about two-thirds of the bank's third-quarter loan growth.

Still, Bank OZK's real estate lending continued to expand and accounted for the remainder of its loan growth. Gleason expects the portfolio to grow more over the next couple years and remain the bank's most prominent division. He is bullish on CRE now and long term.

He said the real estate division has "outstanding long-term history" for low credit losses while steadily growing. "It is a great track record."

Bank OZK said its loan charge-offs rose in the third quarter but remained low. It reported net charge-offs of $26 million, up from $9.4 million a year earlier. Its annualized ratio of net charge-offs to average total loans was 0.36%, up from 0.15%. Historically, the industry considered a ratio below 1% as healthy.

"We view the quarter as a very positive quarter for asset quality," Gleason said. He said the bank has high levels of collateral and low loan-to-value levels on its credits.

The bank's provision for credit losses increased to $46.4 million from $44 million in the third quarter last year.

Gleason expects credit quality to remain strong. Expectations for continued low levels of overall loan losses proved an early theme this earnings season.

The American Bankers Association's latest Credit Conditions Index for the current quarter, released this week and based on assessments from bank economists, increased 28.2 points from the prior quarter to 56.9. It marked the highest reading since 2022 and the fourth consecutive quarter of improvement. The above-50 reading indicates that overall credit conditions are expected to strengthen over the next six months, driven by improved readings for both consumer and business credit.

The Federal Reserve cut its benchmark interest rate by 50 basis points last month and signaled further reductions were likely this year and in 2025. The Fed's shift is expected to support both the economy and credit quality, ABA Chief Economist Sayee Srinivasan said.

Rate reductions "should benefit consumers and businesses by lowering borrowing costs and improving credit availability," Srinivasan said. "Although the economy may slow in this year's fourth quarter due to heightened uncertainty regarding geopolitical risk and the upcoming election, bank economists are generally optimistic about economic conditions in 2025."

For the third quarter, Bank OZK said its net interest income rose 6% from a year earlier to $389.4 million, bolstered by lending advances. It expects more loan growth in the fourth quarter, and it projected it would expand its portfolio in the mid- to upper-single-digit percentage range next year.

There are "lots of opportunities to grow out there," Gleason said.