Bank OZK, heavy in CRE loans, makes progress on diversifying

• Forward look: Bank OZK CEO George Gleason predicts a return to commercial-real-estate loan growth, though he doesn't expect it to come until 2028.
• Supporting data: As the Arkansas-based bank seeks to diversify away from commercial-real-estate lending, its Commercial and Institutional Banking division added 65 new client relationships during the third quarter.

Bank OZK took major strides toward diversifying its loan book and cleaning up problem credits in the third quarter, but the Little Rock, Arkansas-based lender still faces headwinds in its outsized commercial-real-estate portfolio that are expected to continue into 2027.

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Under the leadership of longtime CEO George Gleason, the $43.2 billion-asset bank built a reputation as one of the industry's most successful national CRE lenders. In past years, Bank OZK's business model paid off handsomely in the form of big profits and top-quartile profitability metrics. 

But more recently, Bank OZK's Real Estate Specialties Group has struggled, as a combination of higher interest rates, inflation and structural changes to the real-estate market — such as the rise of the work-from-home phenomenon — have roiled the sector.

Problem loans, formerly a rarity in the real-estate group's $15.4 billion-asset portfolio, have spiked. At the same time, increased availability of debt financing has enabled borrowers to obtain long-term financing elsewhere. That trend has contributed to what Gleason, who has served as Bank OZK's CEO since 1979, described as a "wave" of early payments. 

Bank OZK, which released its third-quarter earnings numbers Tuesday, reported significant headway in remedying credit issues. Nonperforming loans declined sharply, as did criticized loans, due in large part to Bank OZK shifting its largest single CRE deal, a $915 million construction loan in San Diego, back to a "pass" rating. The change followed a $100 million equity injection by the project's sponsor and mezzanine lender.

Though leasing the San Diego space has proved challenging, Gleason described the mixed-use development Wednesday as "an absolutely great asset."

"It's going to lease up and will have a successful outcome at some point," Gleason told analysts. "It's not a question of if, just a question of when."

"The quality of the asset, the commitment of the sponsor are super-encouraging. That's why it's a 'pass' credit on our book," he added. 

Bank OZK has been less successful in dealing with CRE repayments. They totaled $1.65 billion in the quarter ended Sept. 30, outpacing originations of $1.55 billion. And the repayment rate appeared to accelerate in the initial days of the fourth quarter.

During the first 19 days of the quarter, repayments amounted to $690 million, Gleason disclosed on the conference call, adding that Bank OZK is projecting that elevated repayment levels will continue in 2027 before tailing off in 2028. 

"We think RESG's balances that have been steadily declining because of the high levels of paydowns will inflect at some point in 2028," Gleason said. 

While the forecasted recovery appears to be a little further off than Gleason predicted earlier this year, the Bank OZK CEO said he remains confident about a turnaround. 

"We feel pretty good about those loan-growth numbers," Gleason said. 

Pivot to commercial loans

As Bank OZK's CRE operation began sputtering, the company started the process of diversifying. It ramped up traditional community-bank lending and deposit-gathering within its network of 240 branches spread across Georgia, Florida, North Carolina, Texas and Arkansas. In May 2024, it launched a Corporate and Institutional Banking division under the leadership of former Cadence Bancorp executive Jake Munn to originate larger-size commercial loans. 

That division had its best quarter to date during the three months that ended Sept. 30. It finished the period with $8.63 billion of loans, an increase of nearly $1.4 billion from the June 30, 2026, level. The expansion was driven by the addition of 65 new client relationships, Munn said on the conference call.

The growth has come "without giving up any sort of credit quality," Munn said, noting that the Corporate and Institutional Banking portfolio contained no past-due loans on Sept. 30. 

"We're being very selective in the deals we're booking," Munn said. 

Bank OZK reported third-quarter net income totaling $164.3 million, down 9% from a year ago. Net charge-offs were higher. Loans, buoyed by strong Corporate and Institutional Banking production, grew 3.9% year over year.

Still, the portfolio, which remains tilted toward variable-rate CRE credits, produced less net interest income following the series of interest rate cuts announced in 2024 and 2025. 

Even without its commercial-real-estate business firing on all cylinders, Gleason is predicting double-digit loan growth in 2027, with the trend strengthening in 2028 as CRE paydowns recede. Investors appeared convinced by his positive take. Bank OZK shares closed up more than 4% Wednesday at $48.09 per share. 

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Despite the year-over-year profit decline, Bank OZK's earnings-per-share of $1.50 beat analysts' consensus expectation of $1.44, according to S&P Capital IQ. 

Brean Capital analyst Brian Martin characterized the company's results as "a solid quarter with significant credit improvement and strong loan growth."

Ben Gerlinger, who covers Bank OZK for Citi, was more pessimistic, predicting that commercial-real-estate credit issues will "likely match — if not exceed" 2026 levels.