Bank OZK(OZK)Q2 2026 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Bank OZK second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Jay Staley, Managing Director of Investor Relations and Corporate Development. Please go ahead.

Good morning. I'm Jay Staley, Managing Director of Investor Relations and Corporate Development for Bank OZK. Thank you for joining our call this morning and participating in our question and answer session. In today's Q&A session, we may make forward-looking statements about our expectations, estimates, and outlook for the future. Please refer to our earnings release, management comments, financial supplement, and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements. Joining me on the call to take your questions are George Gleason, Chairman and CEO, Brannon Hamblen, President, Tim Hicks, Chief Financial Officer, and Jake Munn, President, Corporate and Institutional Banking. We'll now open up the lines for your questions. Let me now ask our operator, Michelle, to remind our listeners how to queue in for questions.

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question is going to come from Stephen Scouten with Piper Sandler. Your line is now open.

Yeah, good morning. Thanks, everyone. I would like to start with some updated thoughts around CIB, if you could, walking us through some of the comments you made in the management commentary about the internal diversification within CIB and how you think that will, now that we've progressed a bit down the path, impact loan loss reserves in the future, whether we should continue to see that come down as a percentage of loans given the lower credit risk, and also the impact that CIB has had on fees to date and projected moving forward.

Hey, thank you for the question, Stephen. We appreciate it. I am going to turn this straight over to Jake Munn. This is his area. I will preface Jake's remarks by saying that CIB is a very important and rapidly growing and developing part of our franchise. We are investing a lot in it and hiring really talented, experienced people to lead it. We are looking forward to and enjoying the diversification now of our loan portfolio with CIB's addition and the CRE concentration coming down significantly from RESG. We want to make sure that we are not trading one concentration for another. The diversification within CIB's portfolio, which has a lot of different business lines and a lot of different types of customers, is a very important long-term franchise value enhancement for Bank OZK. Jake, I am going to let you take some of the other points that need addressing in response to Stephen's question.

Yeah, I appreciate that, George. Good morning, Stephen. It is good to hear from you. We are excited about the growth of CIB that we continue to make across these diversified business segments, and George hit the nail on the head. Currently, we have over seven major business lines: our corporate banking and sponsor finance group, our fund finance group, our lender finance group, our natural resources group, our recently launched franchise capital solutions group which focuses on multi-unit franchises across our footprint, our asset-based lending group which is one of our older business units, and our recently reconfigured equipment finance group. In addition, we are excited about the introduction of our emerging middle market group which will be an exciting bridge between our legacy community bank and the area our CBSF group was playing in. That will fill the $15 million to $100 million revenue size, family-owned, non-enterprise value business, which will be a true franchise grower for us with a focus in our core footprint and will complement our community bank and branch network.

We are excited about that growth. All of these business lines continue to contribute to our quarter-over-quarter and year-over-year growth for CIB. To George's point, it allows us to have diversification in the underlying loan base. We represent over 42 different specific and unique NAICS currently. In addition, it allows us to have different levers to pull depending on the seasons we're in, whether those are macroeconomic changes, microeconomic changes, or tightening and compression of margins in one group. It allows us to focus on continuously building, but building in a way that's beneficial to our bottom line and in a way where we don't take on undue credit risk. You'll see our CBSF group in the case of this last quarter, as well as our natural resources group, really be the shining stars of growth. ABLG was a little less, just because we've seen some tightening in pricing within that group over the last quarter or two, and we've also seen some more aggressive advance rates.

We'll pull back from one of those segments a bit while we lean into another, depending on current market terms. It's allowing us to have a very diversified engine to continue to grow our C&I coverage in concert with our community bank to really add franchise value. What we love about these different CIB business units is that it's not just the loan book. We're talking about deposit opportunities. We're talking about working with Chad Parramore and his team on the treasury management side that Cindy is doing a fantastic job building out. In addition, it gives the opportunity to cross-sell our private wealth management, our private client services, commodity hedging, interest rate hedging, and capital market solutions. It's a true relationship-focused, one-relationship-at-a-time build, which is allowing for some nice scaling in that diversified C&I side.

Okay. Fantastic. Appreciate all that color, Jake and George. Maybe pivoting to the legacy RESG book, is there any update you can give as we obviously continue to move towards August on that IQHQ property and any color in terms of what you might expect next quarter upon that maturity, if there's any commentary you can give as we reach that maturity date?

Brannon, you want to take that?

Yeah, sure, Stephen. Great to hear from you again. Yes, as has been discussed, we do have a maturity upcoming next month. We are engaged in conversations around the multi-year extension and recapitalization of that project with both the sponsor and the mezzanine lender engaged. Terms haven't been fully developed; we're pleased with the constructive nature of the conversations and look forward to the evolution of that extension. Can't really say more about it now; hopefully in around 92 days, we'll have more to report.

Okay, great. That's encouraging. That aligns with what you guys have been trying to do with these projects—continuing to engage sponsors, get more capital when needed, and work through the resolution as quickly as possible. More of the same, right?

Very much so. These sponsors have been supportive and we're encouraged about the conversation so far.

Fantastic. Appreciate it. Thanks for the time, guys.

Thank you.

Thank you. The next question is going to come from Matt Olney with Stephens. Your line is open.

Hey, thanks. Good morning. I want to ask about the RESG repayments that were elevated in the second quarter. The commentary calls for RESG repayments to remain elevated for the balance of this year and into 2027. I want to focus on 2027. Any more color you can share on expectations of these repayments in the back half of the year and into next year?

Yes. Thank you, Matt. I'll take that and then Brannon can add any color. Obviously, the quarter just ended was a big quarter of repayments with that number approaching $3 billion. If you look across the last trailing four quarters, we've averaged about $2.5 billion a quarter. All of that is consistent with our guidance that repayments will vary somewhat from quarter to quarter and that they're going to be elevated as we work through that big origination year of 2022, a record origination year. Those are all cycling through. We do expect continued repayments this year and into next year. Our sense is that they will taper off a bit next year, but still be at an elevated level based on our current projections—elevated but slightly less elevated than 2027. I think that's the guidance we can give you on that. Obviously, this is a natural phenomenon given the cadence of originations and the typical life of these loans on our RESG book. Brannon may want to add something to that.

I don't know that I can add a whole lot. That last point is important to understand and why we've included our RESG repayment cadence in report after report. You can sort of follow what's left. These things move around, as George said—market conditions, market factors, and even our sponsors' strategy around repay or refinance and keep or sell, and the impact of cap rate changes on those things. A lot of it is just the natural cadence of the portfolio moving through the pipe.

Okay. Appreciate the commentary. Sticking with the loan growth discussion, the guidance still calls for mid-single-digit loan growth for the full year. That would imply a nice improvement in the back half of the year. Any more color you can share about expectations for loan growth over the next two quarters?

I think the guidance we gave at the beginning of the year, and we've reiterated in the management comments here, of mid-single digits is a good number. In the quarter just ended, we had a wave of repayments early, which had us significantly down on loan volume early in the quarter, and we were chasing volume all quarter trying to catch up with that early wave of repayments. That is some useful perspective. Notwithstanding that, we were able to improve our margin 4 basis points in the quarter and still put up higher net interest income in Q2 than Q1. We were battling that prepayment wave really hard early on in Q2. Hopefully those prepayments will be a little more levelized in Q3 and Q4. As Brannon mentioned, these repayments move around; when you get a big slug of them right off the bat early in the quarter, it's hard to catch up on average earning assets.

Okay. I'll step back. Thank you.

Thank you.

Thank you. The next question is going to come from Manan Gosalia with Morgan Stanley. Your line is open.

Hey, good morning. Maybe a follow-up to the question you just responded to. With the changes in the NII commentary in the management comments, is that largely a function of the payoff activity? As we think about coming into this year with a few rate cuts in the forward curve, being a more asset-sensitive balance sheet with the prospect of rate hikes should be a little more beneficial. But is paydown activity really the primary reason the NII commentary is changing?

Yes, Manan, I think that's the principal reason. It's average earning assets, and not so much the volume of paydowns as the sequence and timing of those. When we started the year, we had expected a little more linear growth and not the pullback in growth in Q2. We were up roughly 2% after Q1, and then had negative growth in Q2, so we went backwards. We had expected that to be a little more linear through the year, and that's tamped down our average earning assets. As Brannon mentioned, a lot of these loans are chunkier loans, so a loan pulling forward two months ahead of schedule moves the projections. The cautious guidance on being able to equal or beat last year's net interest income number is simply a product of average earning assets.

Got it. Nothing related to funding competition or anything else on the liability side?

We had projected a pretty competitive deposit gathering environment at the beginning of the year. It has been a competitive environment, but there's nothing new about that. I think if you look at analyst consensus estimates on net interest margin, the consensus numbers are more or less correct on where we think. Our guidance that we're likely to be a little bit under the first quarter's 4.20% NIM is consistent with what the consensus number has built in. I think the Street pretty much has this on consensus about right.

Got it. Maybe on the loan loss reserves: I know there are some specific reserves that you're releasing as you take some charge-offs. Can you talk about how you're thinking about reserves relative to the prospect of higher rates in the forward curve and some of the pressure you're seeing on the special mention loan category this quarter?

Let me comment on special mention, and then I'll let Tim talk about the reserve. We did have an increase in our volume of special mention loans; I wouldn't read too much into that. Loans come into special mention. Some of them, as we saw in the quarter just ended, become more severely rated and move into classified asset categories. Many loans come into special mention, and extensions or recapitalizations are accomplished in the ordinary course of business and they move back to pass-rated credit. We put a sentence in the management comments this time commenting that several of those loans are in special mention. We're in very good discussions and activities that would result in those loans moving back to a pass status. They are in there because those discussions are ongoing and we've got to get to a final conclusion. I think several of them look like they're going to work out favorably and be candidates for upgrade over the next couple of quarters, if not the next month or two. Tim, you want to comment on the ACL?

Yeah. Hey, Manan. Certainly, you've seen our comments over the last several years about growing our ACL in anticipation of charge-offs that would be realized later. As those charge-offs are actually now being realized, we've felt it appropriate to decrease our ACL over the last couple of quarters since those charge-offs have been recognized. For instance, in the previous quarter, we had built a sizable ACL on the two Seattle buildings that went into OREO this quarter that included a charge-off of $22 million on the office and $3.7 million on the life science building. Those were already reserved for in the previous quarter. We take a cautious, prudent approach to building the ACL at the appropriate time. As we're working through some of these problem assets in the life science and office portfolios that we've seen over the last few quarters, the ACL has come down. Over the last several quarters, the provision number that we put up has been less than what consensus expected. I think you'll probably see that continue to drift down assuming the economy maintains some of the resiliency and strength we've seen. We are in the later stages of working through some of these additional assets that we've outlined in our materials. I think the trends over the last few quarters are consistent with how I see the path moving forward.

Great. Thanks, George. Thanks, Tim.

Thank you.

Thank you. The next question will come from Catherine Mealor with KBW. Your line is open.

Thanks. Good morning.

Good morning.

Maybe one question to circle back on credit and the direction of the reserve. Can you give us an update on any trends you're seeing in your life science portfolio? It feels like that's been where a lot of the negative migration has been and you're working through that. Any comfort you can give that you've worked through some of the more stressed projects within that portfolio and that would lead you to believe the reserve might be able to come down over the next few quarters?

We have a healthy ACL for that portfolio reflecting the general challenges in that sector. Several life science assets do have good leasing; there are no issues with those—they're well leased. One of the nice paydowns we got in the quarter just ended was a big paydown on a well-leased life science project where we extended the term. That was a nice win. The life science loan that we took a charge-off on this quarter was previously special mention and we took a short payoff on to exit. I thought that was probably the least desirable single asset in the portfolio from a long-term value perspective. We're focused on an asset-by-asset basis, and I thought that was a more challenging asset than some of the others. We exited it at a discounted payoff and thought that was a nice improvement to the portfolio. There is a fair amount of leasing activity ongoing in several life science projects. Much of it is not strictly life science—it's technology, AI, or office. There is some activity there. Brannon, I'll let you share any additional thoughts about life science.

You hit most of the bullet points. It's been a challenged market with hurdles related to the macro picture and specific funding dynamics in the industry. Generally this year we've seen a pickup in venture capital focus and an increase in tenant activity in certain markets around some of our projects. As George mentioned, the AI influence continues to be a factor. We continue to see tenants in the market operating from that perspective and life science-focused tenants as well. We still have some work to do and are working with sponsors to continue to support these through lease-up. I would say broadly the first half of the year has had a more positive flavor with respect to tenant activity in that space.

Great. Very helpful. My follow-up is on the margin trajectory. Can you give an update on trends you're seeing in incremental deposit costs? You mentioned in your management comments that Q2 was probably a bottom in deposit cost and as we move through the year that will trickle up with higher rates. Any incremental data on where your CDs are coming on and any benefit we'll get from core deposits coming from CIB versus just the incremental deposit cost coming on today?

We are probably about 10 basis points higher than our low point on CD specials across the board. We increased that about four to six weeks ago. That reflects the need to grow more deposits in Q3 and Q4 based on an expected moderate increase in outstanding loans. We're ramping up a bit for that. We said in the management comments that we thought Q2 cost of interest-bearing deposits was probably an inflection point and that we would go higher from there. I don't think we're expecting to run off the rails; it's a modest increase from Q2. Part of that is driven by the need to generate more deposit volume because we expect more loan growth in Q3 and Q4. We were pleased with our funding and deposit teams' work in Q2 getting a five basis point reduction in our cost of interest-bearing deposits, which combined with the investment team work on the investment portfolio, allowed us to improve net interest margin four basis points during the quarter.

That was a nice result given the high level of paydowns early in the quarter that reduced average earning assets for the quarter. We'll benefit less from that ability in Q3 and Q4. As we grow loans more, we'll need to be a little more aggressive on deposit generation. When we had a lot of loan payoffs early in the quarter, our deposit team was able to adjust and squeeze some margin benefit. There's a give and take. We would rather have the volume, but if you don't get the volume, our team responded well and were able to grind some margin improvement out in a lower volume environment.

Great. Very helpful. Thank you.

Thank you.

Thank you. The next question will come from Brian Martin with Brean. Your line is open.

Hey, good morning, everyone. Thanks for all the insight thus far. Maybe one question on the progress you made this quarter and recent quarters, George, on the shift to CIB and away from real estate. Given the repayments continue and momentum at CIB, the drop this quarter seems a little more given the higher payoffs. Should it be a more gradual decline otherwise? From this roughly 48% level, any update looking out over the next four to eight quarters where that ends up and the trajectory?

The RESG origination volume has been muted. We're working hard to find volume. Many cities where we've originated a lot of volume are raising taxes and adopting policies that are not specifically pro-business, which affects demand for new product in those markets. That plus a lot of capital chasing CRE debt, makes origination competitive and keeps volume muted, likely for a number of quarters. Because of the high level of originations in 2022 and to a lesser extent 2023, we're in a big payoff wave. RESG will continue to drop. We're now at our second quarter end under the regulatory concentration guidelines for total CRE, and probably by the end of the year or early next year we'll be under the 100% guideline for construction and development. That portfolio will continue to shrink for the remainder of this year and into next year. We commented that we expect CIB and RESG portfolios will be equal in size next year at some point.

That gives you an indication: CIB is $7 billion plus now and RESG is $15 billion plus, and we're expecting those to equalize and cross in 2027, meaning continued strong growth in CIB and strong paydowns in RESG. Over the next six quarters through 2027, you're likely to see more positive momentum out of our community banking group and continued positive momentum out of our indirect and RV group. The indirect group is now 13.7% of our portfolio. Our community banking portfolio has been relatively flat for a couple of years. We've reorganized reporting structures and implemented cleaner reporting; the team is excited and I think we'll get some positive growth there. If you view the portfolio as three parts—community banking/indirect, RESG, and CIB—I think you move toward a more equal-sized, diversified portfolio in 2027. Being below regulatory CRE concentrations and having that diversification is accretive to long-term shareholder comfort and franchise value.

RESG will be an important contributor long term and will grow again, but it may get into the mid-20% range of the portfolio before origination fundings exceed payoffs and it turns back to a growth contributor. I don't expect a lot of change in paydown volume for a number of quarters.

Got you. That's very helpful. Maybe a follow-up on the credit front: given your comments about special mention and more positive movement than negative, and that most non-performing issues are concentrated in a handful of credits, can you give a big-picture resolution path on credit? It feels like your bias or outlook is a bit more positive—less concern on special mention and the other credits—and the reserve coming down. Should we think about resolution in the next couple of quarters?

Brian, the RESG portfolio is recycling constructively. We've had almost $10 billion of that portfolio pay off over the last four quarters. That's a massive recycling of those assets. It has been a long and tough CRE cycle for many customers. The quality of our sponsors has shown up well because we went through several years of a challenging environment with relatively few issues; we've had a handful of problems. We'll have a few more assets emerge as problems over the next year and a half as we work through final stages of this cycle. The portfolio is recycling quickly with $2 billion to $3 billion a quarter in payoffs. The vast majority of our sponsors, as we've said, continue to support their transactions in a positive way. You saw that in the quarter: we had $91.5 million of unscheduled paydowns in the RESG portfolio, $19.5 million of additional reserve deposits posted in connection with extensions, $37.5 million of unfunded balances curtailed in connection with modifications and extensions, and $5.4 million of modification fees collected.

The majority of sponsors continue to support their loans. There have been, obviously, about 10 to 12 assets identified as foreclosed or classified where we didn't get the support needed. There will be a few more as we go forward. We have one OREO asset and three substandard loans that I feel optimistic about resolving over the next few months; we're far along on resolution and liquidation plans. We're working through problems as they come up. We also built a substantial ACL to handle potential loss exposure and feel very good about its adequacy across the portfolio.

Perfect. That's helpful. One last brief question—Tim, could you comment on the buyback outlook?

Thank you. Tim?

Hey, Brian. I was pleased with the buyback activity over the last four quarters. I used about $175 million of the prior $200 million repurchase authorization. The average price was below tangible book value, which was very accretive to tangible book value and EPS. Moving forward, we have a brand-new $200 million authorization for the next four quarters. How much we'll use depends on our stock price over that period. I would anticipate we would use some of that; how much will really depend on the stock price.

All right. Thank you.

Thank you.

Thank you.

Thank you. The next question will come from Timur Braziler with UBS. Your line is open.

Hi, good morning.

Morning.

Regarding the net charge-off language, it looks like the commentary that it would be roughly in line with 2025 was removed. Is the current cadence the right way to think about charge-offs going forward? Then, using a baseball analogy, what inning do you think you're in regarding classifying and reappraising the current book and similarly on charging off and dealing with those reappraisals?

Timur, I'm going to resist the baseball analogy. What I will say is we've used the language for several quarters that we think we're in the late stages of a long cycle that has been challenging for our customers for several years. As the cycle has worn on, the resilience of some customers to support assets has diminished, which is why you're seeing the handful of special mention, foreclosed, and classified assets. As I said earlier, the RESG portfolio is recycling quickly—about $10 billion in payoffs over the last four quarters. We feel adequately provisioned for that. I think there will be a few more bumps and a few more problem assets, but we're resolving assets diligently as they come up. We feel like we're in the late stages and that likely continues this year and into next year. We're cautiously optimistic about getting back under the industry's net charge-off number for the year; we'll see how that plays out. Our charge-offs tend to be chunky because they are concentrated in larger problem credits rather than spread across many small loans. We have a long history of outperforming the industry and I think we have a good shot at getting back under the industry's number for the year.

Okay, great. As a follow-up, on RaDD in San Diego—IQHQ—can you remind us, is IQHQ still making full cash payments? Is that payment-in-kind? How are you thinking about risk migration with another extension coming up here in August? Why is pass-rated still the right classification here?

On payment-in-kind or PIK interest, we do not PIK interest on any loans. Interest on that credit, as with all our credits, is being paid from reserves established for that purpose. You'll recall early last year and previously in 2024 there were two large contributions to the reserve held on those loans from the sponsor group of that asset, which were paying operating costs and interest and other costs related to the projects. We do not PIK interest on loans. This credit is pass-rated because of the constructive dialogue we've had with the sponsor and the mezzanine lender, both of whom are engaged in what appears to be a constructive negotiation to work out a multi-year extension. That negotiation includes the sponsor and mezzanine lender. We're cautiously optimistic about the outcome and expect it to be a successful extension; if our views change, we'll adjust the classification appropriately.

Okay. Thank you.

Thank you.

Thank you. The next question will come from Janet Lee with TD Securities. Your line is open.

Good morning. Your expectation around CIB and RESG being roughly equal in size in 2027 is great for diversification. My understanding was CIB loans are slightly lower yielding than RESG. What is the implication on NIM perhaps in 2027 if CIB becomes larger? Does that result in a structurally lower NIM? Does it bring in lower-cost deposits longer term, and how should we understand the structural impact of a larger CIB on NIM?

I think much of that is already reflected in our net interest margin. RESG originations over the last couple of years have had more competitive spreads and a larger part of RESG is now multifamily, which has spreads similar to CIB loans. The remixing of RESG toward multifamily and industrial has reduced the differential. If you go back three to five years, RESG yielded more when we were doing large, complex mixed-use projects, office, and life science. That differential has diminished and the yields on the portfolios have converged. There's still a delta, but it's much smaller. Second, you correctly noted that we get more deposits with our CIB loans and more contribution to non-interest fee income from CIB. Jake discussed this—there's partnership with treasury management and cross-sell opportunities that generate fee income, whether it's interest hedges, commodity hedges, capital markets fees, or other loan-related non-interest fees. We think CIB will be as profitable long term as RESG, and the yield differential we expected is no longer as meaningful. Jake is managing the CIB book to move away from areas where spreads are compressed and toward categories with better risk-adjusted returns. I'm proud of the job they're doing.

I'll piggyback quickly. If you go back to 2019 and 2021 when these business lines were created, since then we've launched CBSF, FCS, NRG, EMM, and EFG. These new lines are relationship-focused, creating more cross-sell and non-interest fee income—commodity hedging, interest rate hedging, capital markets fees, treasury management, and more single-lender direct deals. As CIB has grown, the average return and spread have improved for these names and the average all-in yield has improved. Looking at recent quarter originations, average spread actually increased over the historic book—up over 25 basis points quarter over quarter on average spreads for new CIB loans compared to the legacy book. We're focused on relationship banking to harvest deposits and cross-sell beneficial products without giving up credit quality or loosening terms. We're taking our time, picking our plays, and doing it conservatively and strategically.

Got it. Thank you for all the color. On average earning assets, should we expect average earning assets in the second half to be relatively stable to Q2 given RESG repayments while you're still targeting mid-single-digit loan growth for the year? Or should it step up in the second half of 2026?

Janet, I still expect average earning assets to step up each quarter in Q3 and Q4 from where we are in Q2.

Okay. Thank you.

I will now turn the call back over to George Gleason for closing remarks.

Thank you all for being on the call today. We appreciate it. We look forward to talking to you again in about 92 days. Have a great day. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.