Bank OZK Aktie

Good day, and thank you for standing by. Welcome to the Bank OZK First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, 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; Brandon Hamlin, President. Cindy Wolfe, Chief Operating Officer; Tim Hicks, Chief Financial Officer; and Jake Munn, President, Corporate and Institutional Banking.

We will now open up the lines for your questions. Let me now ask our operator, Tanya, to remind our listeners how to queue in for questions.

[Operator Instructions] And 1 moment for our first question, which will come from Manan Gosalia of Morgan Stanley.

Hi, good morning. The first 1 is just around the CIB, strong growth again this quarter. And I guess -- appreciate that you guys are growing in attractive markets. You're building teams. But at the same time, we continue to hear across the board that competition is growing. I guess the question is, how do you assess risk in that business? And I guess, what, if anything, would cause you to pull back there?

All right. Jake, do you want to take that? Thank you for the question, Manan.

Great to catch up with you and hear you. Good question. We continue to grow at a steady clip, as you mentioned, within CIB. Across all of our major business lines this quarter, we had really some nice success in generating over or nearly 2 dozen new relationships, upsizing nearly a dozen legacy relationships. And so we continue to see some nice growth across all of those. .

You have a good point there. What we're really building here, and you need to remember is it's a diversified C&I. And so it is not a CIB business that's focused in on niche These verticals encompass over 42 different industry niches in particular. And so it's allowing us, whether that's through ABLG,/CBSF, EFG, fund finance, LFG, NRG our franchise capital solutions that we mentioned, we launched this last quarter.

We're creating a really diversified book within CIB that allows us to take advantage of opportunities within those specific industries and push into them. So if we see a slowdown or increased competition, or increase or decrease pricing, let's say, in ABLG, it affords us the opportunity to push more into our CBSF or NRG business lines. And so that diversification that we're building within CIB is allowing us to continue to grow at a nice clip. -- in a way where we're not taking on any undue credit risk.

And are you seeing any spread compression in certain businesses that has caused to pivot into others?

We are exactly, yes. So in our ABL G are some of our large corporate opportunities there, we have seen some pricing compression. And so we've switched that and moved downstream a little bit more towards the middle market, single lender opportunities, in particular, -- if we look at our fund finance business line, we've had to pull back a little bit in our capital call subscription facilities just due to increased pressure there. specifically from nonbank lenders and then insurance companies who have really entered that market and pushed down a little bit on pricing.

And then if we're looking at our lender finance group, too, in our lender finance group. We've seen some pricing and structure compression there, too. So again, there's been some competition in those business lines. But as a result, it's allowed us to push in a little bit more within our CBSF,ourEG in our NRG business lines. And so again, the diversification and the nature of which we're building, CIB is affording us the opportunity to continue to grow without giving up yield and without sacrificing credit quality.

And then just in terms of helping us model out NIM. We saw the material securities growth Q-on-Q. Any color you can provide there on what you're putting on -- and I guess, how should we be modeling yields in that portfolio beyond the $460 million to $470 million that you've guided to for next quarter? .

Tim, do you want to jump in there? Jim, go ahead. .

Yes, sure. Mannes, we -- early in the quarter, took the opportunity to use some of our excess liquidity and buy a decent amount of investments during the quarter and enhance our yield. About 40% of those are in muni housing bonds and 60% are in mortgage-backed securities. Those have both have favorable yields. The muni housing bonds or a tax equivalent yield of around 6% and the mortgage-backed securities are somewhere around the 460 range or better. So these are agency mortgage backed. Agency mortgage backed. So we saw good growth there.

We gave you some guidance on where we thought the range would be for yields for that portfolio. We had a nice pickup in Q1, and we'll see another nice pickup in Q2 and then from there, we'll see what the market brings to us on opportunities. But the team did a great job of finding good yielding attractive high-quality investments, and that's going to certainly help us on NII during the quarter and will help continue to help us throughout the year.

And our next question will be coming from the line of Stephen Scouten of Piper Sandler. .

I guess the first question would be around commentary within the management - the common document around 2027. You guys seem pretty upbeat about the potential for the bank in 2027, both in terms of growth and maybe even resolution progress within RESG and the resumption of growth within that book. So I'm wondering if you could give any additional color as to what kind of driving that confidence, whether anecdotal or more concrete that would kind of give us a view into that progression?

Yes, Stephen, happy to address that. Obviously, Jake's already spoken about CIB and diversification, the new areas we're pushing into their CIB will be the predominant growth engine we would expect in 2027 as it has been last year and will be this year. So we expect that leadership to continue from the CIB group. We're continuing to add people. We're continuing to push into other verticals there. .

RESG may not be a great source of growth in 2027, but we're looking for a slowing of the headwinds from RESG repayments in 2027. It may be 2028 before we actually see significant growth there. We would expect our indirect lending group to continue to grow nicely. It stayed steady at 12% and sort of pushed up to about 13% of our portfolio. That portfolio is a very high-end prime, high prime, super prime consumer portfolio, and it has continued to just perform very well and very consistently And we expect to get some more growth out of our commercial banking, community banking group next year.

So we think the headwinds from RESG repayments ease quite a bit in '27. We expect these other business lines to actually accelerate a touch more in '27 contributing to that. better incremental growth we're seeing that year. The other thing that I think is important is we're building a number of other and investing to build a number of other fee-generating businesses. We're putting increased emphasis on trust and wealth. We've got a mortgage group that we've been building for a couple of years now that continues to gain scale.

Although the mortgage business is not a hot business right now. We think it will improve, and that unit will gain more scale. We're continuing to grow our fee income through treasury management and improving what we're doing there a lot and probably the biggest source of fee income opportunity just as far as growth is in our CIB group, where there are a number of fee-based businesses and opportunities we're tapping into. And I think you'll begin to see that incrementally add some noninterest income in subsequent quarters this year and really hit a good pace in 2027. So we're fairly optimistic about 2027.

Got it. Really helpful color, George. And then I guess my other question would be maybe similar to Manan's question in a way, but thinking about CIB, I mean, with RESG, we've all known you guys to have a best-in-class platform for the last 20 years or so you've shown a differentiated model. How do you give investors confidence around the pace of growth within CIB and that there is a more differentiated model there as well that we should have the same level of confidence as you grow that this rapidly similar to the results you've delivered in RESG over the life of that business?

Yes. Great question. Thank you for that. I'm going to let Jayse answer part of that question. But before he does, I'm going to tell you a couple of things. Number 1 is talent and leadership are critically important in our company. And Jake will talk a little bit about talent as he answers your question. And the other thing is we've really built CIB aligned with the way we have built and approached RESG, and that is you're going to look at a whole universe of opportunities all over the country.

You're going to focus on a very narrow subset of that universe that meets your criteria for quality of credit, profitability and relationship building, and then you're going to close those transactions with very intentional bank protective documentation, you're going to service and manage those assets in a very engaged way so that you see early warning signs you're able to influence behaviors and move those transactions in a way that is conducive with bank standards and objectives.

So Jake, I'm going to let you talk about your team and why, given the growth you're experiencing and projecting to experience you're comfortable with what we're doing. .

Yes. George, I appreciate that. And Steve, good question as usual. It's really about building an infrastructure that's scalable to George's point. So when we got over here and we started to develop CIB in a very similar form in fashion, RESG has started with building out a really strong portfolio management and operations team. And so our portfolio management our underwriting, our quarterly status reporting on every single credit we do within this book of business.

Our 4 operations teams that sit within PMO that ensure from beginning to end. It's a clean and crisp process for our clients as they're onboarded and service through the life of their relationship with us. And then it's also building out something that's scalable from a cross-sell and a products and capability standpoint. George mentioned that answering your last question about fee income. But if you go back a couple of years ago, to where we are now. We've really developed some nice additional business lines that support the needs of our clients and our communities, but also will assist in generating some really nice noninterest income.

So whether that's our syndications desk that's afforded us and blessed us with the opportunity to now lead more deals as admin agent. whether that's our interest rate hedging capabilities, our foreign exchange capabilities, whether that's our capital markets program that we have that allows companies to access the capital markets with our partnership that we have there for whether that's our great treasury management platform that Cindy and Chad continue to develop and build out, we really have the products and the capabilities now to grow with the company and scale with the company over the long-term horizon within the C&I space.

And then to top it all off and really the most important part that George hit on, it's all about talent. At the end of the day, we're in the business of people. We're banking people, we're banking communities, we're banking businesses. And so attracting the right talent who has a like mind for credit who has the fire in their bellies to say, to get in here and roll up their sleeves and make a difference. That talent is really what's been differentiating us.

And so put it all together, we've developed all the products and capabilities that are needed to scale this business. We have a great foundation with our portfolio management and operations team. And then we've sat here and developed and bolted on complementary business lines. So whether it's our asset-based lending or corporate banking and sponsor finance our equipment finance, our lender finance, our fund finance, our Natural Resources Group and now our franchise capital solutions. We're just getting started.

There's a great market out there. We're being highly selective in what we're doing to George's point, our pull-through rate on our more mature businesses is still around 14%, 15%. And so we are passing on 80%, 85% of the deals we see in the market, whether it's a credit or a pricing-driven path but being highly selective in who we bring on, being highly selective in the products and services that we're launching into the market to ensure that they're best in class. It's all really working out well for us, and we're seeing nice continued growth and true franchise growth, really built 1 relationship at a time.

That's extremely helpful color. And positioning it like RSG was built is something I wasn't fully aware of. So thank you for going into that detail. I appreciate you. Thank you. .

And our next question will be coming from the line of Brian Martin of Bain Capital. .

Sam, maybe just 1 on the margin. I know you gave a little commentary in the management comments, but just thinking about if we don't see a change any changes in rates here in the near term, just thinking about kind of the comments in the in the release about the pressure that you may be upward pressure you may be seeing on the deposit side? And then secondly, just trying to understand with the growth in CIB, how much of that is variable rate versus fixed rate? Just kind of how to think about the margin in the stable environment, given kind of the changes here on the loan mix and then just maybe what funding pressure you're seeing?

Cindy, you want to talk about deposit pricing, and then we'll jump to Jake on his CIB pricing. .

Sure. Thanks, Brian. Well, we did see competition increase last quarter. We've seen that before. So I'm just really proud of Audi Curley, our Chief Banking Officer and his team for actually reducing rates by 18 basis points in spite of that and growing we have an incredibly talented machine that manages to synchronize our deposit growth right along with our loan growth, which you can see remains a good kind of challenge with CIB and their success.

So we're poised to continue to do that. And we also have a veteran leader of government and institutional banking, Drew Harbor. So we have a great mix of very large depositors and yet we remain average balances of our depositors of $52,000, which really, when you do the math of just under $2 billion in growth over the last year, it just represents an incredible amount of hard work every day by our retail bankers and our commercial bankers in our 255 offices. So we're going to continue to do that. And we're cheering RESG and CIB and our other bankers on in their growth, and we'll continue to perform really well. .

Jake, do you want to talk about CIB pricing? .

Yes, sir. So on the CIB side, it's predominantly a variable floating rate book. Very rarely do we balance fix outside of our equipment finance group. -- if a client has a desire to fix rate, we offer them through our interest rate hedging solutions desk, the opportunity to swap their loan. And then artificially fixed as a result, which would generate additional noninterest income for the bank.

It continues to be a bit of hand-to-hand combat out there on these deals as it relates to pricing. I know Manan had a question earlier about pricing and any compression we're seeing in specific business lines. Again, the beauty of what we're building is the nature of the diversification though, so we can pull on the levers and push into the business lines where we can get a little bit better yield.

If we look at our legacy book versus the new deals generated this last quarter, there was actually about, call it, a 12 bp uptick on the average spread and so we're actually leaning into the market and pushing on pricing. I know I'm actively challenging the teams. The business line heads are challenging the teams. For sure, George and Brandon are challenging the teams to go out there and try to really get the best yield possible for the bank.

And then the final thing I'll say there, aside from the rough spread on these opportunities that we're looking at, if we go back to the comments earlier about our loan syndications and corporate services, in the various business lines and noninterest fee income that they can generate. If we go back to our treasury management platform and all the hard work and time that Cindy and Chad are putting into that. We talked about our trust and wealth it goes on and on the products and services that we're building to be best-in-class out there that will allow us to continue to drive and really ramp up that noninterest income over the long term, which makes us even more competitive in the market.

And then lastly, I'll just say it's important to remember that this is true relationship lending that we're doing within CIB. If we look across the CIB book of business, over 97% of those relationships or either single under direct deals where we get 100% of the wallet. So everything from deposit accounts to treasury management to interest rate hedging, et cetera, or it's club deals, 2 bank club deals, where we're splitting that wallet or in the case of broad syndications, over 95% of all the syndications we're in, we're either in the driver seat or the passenger meaning we're an admin agent or a JLA or like title We really have no interest in going out there. We're not buying books of business within CIB. We're not going in as participants. We really want to be a thought partner for these relationships. We want an opportunity to provide additional products and services beyond just a loan. So as a result, we're starting to see some really nice movement there with fee income, but also the opportunity to augment and impact the structure and the actual pricing of these loans long term.

Brian, I would close up with this thought. Our long history is to be very profitable and that profitability is driven by margin. And while it's a very competitive deposit environment now, a very competitive loan environment. if you look around our peers in the industry, that 420 net interest margin we have is really strong. And that focus as Jake described, and as Cindy described on both sides of the balance sheet on really, really trying to get every basis point of yield or reduce every basis point of cost is just inherent in our culture and that drives our profitability metrics well above the industry. .

No, that's helpful. So yes, I think I've got your message there. So thank you for the insight there. And then maybe just my follow-up just would be in terms of credit quality, just looking at the reserve maybe coming down a touch this quarter, but just your NPAs and criticized were up a touch in the quarter. But I guess, more importantly, the commentary seems to suggest that you're a bit more optimistic on just the environment. So just kind of trying to think about how you're thinking about credit here as you go over the next couple of quarters if we see a bit more resolutions and just given it seems the tender is a bit more positive.

Brian, what I would tell you is that the economy in which we're operating has been surprisingly resilient in my view, given all the noise. I mean there's a lot going on in the world today. And yet the U.S. economy continues to chug along at a pretty decent rate. And I've already mentioned our indirect lending business, which is 13% of our business, but that's a consumer business now granted, it's at the higher end of the consumer space. But I mean we're seeing very, very stable and favorable credit results from that business.

Jake in his business is -- and of course, he's very carefully selecting what we do, but we're seeing very favorable results on credit and looking through to the customers in that, the trends of those customers, by and large, very favorable trends on their net income, EBITDA, cash flow coverages and so forth. Our RESG book, if you look at multifamily, if you look at industrial, you look at condos, wherever you are in the country and those categories of business they are very solid, and we're experiencing some really good results on that.

Where you run into some issues and where we've had some issues is in the land, the office and the life science parts of the portfolio. And that is very transaction-specific and region specific. If you go to the parts of the country, that are pro-business and low tax and having significant in-migration and we're in a lot of those markets, a lot of our franchise risk in those markets. Those assets, office, whatever land are doing very well in those markets. It's the markets where you've had increasing tax burden and developing less friendly business, pro-business environment and out-migration of population or churn in population that's kind of kept the population neutral and eliminated the prospects for growth.

That's where those transactions are struggling. So the economy, generally, in our view, is pretty solid. And the challenges are basically limited to a couple of property types in more adversely affected regions of the country. And I think we're doing a good job working through those. We've got 5 RESG loans that we talked about in detail that the sponsors are working on 2 of them. Recapitalization opportunities. One of those is Rich's point, they've got a signed letter of intent to recap the deal. We've got 2 of those 5 that are actively engaged in a sale process. And the fifth 1 of those 5 is a transaction that has a lot of activity from multiple partial or full buyers of the land that secures that credit.

So those 5 assets account for the vast majority of our past due loans and the vast majority of our nonaccrual loans and do all 5 of those deals that are working get closed, probably not, do 0 of them get closed, probably not, but some combination of those transactions probably get closed this quarter or next quarter. And if the transaction doesn't close, they're -- you're on to the next opportunity to get those closed. So at the basis we're in those assets, there seems to be a pretty good interest and ability for us to put together exits from those.

So yes, I would tell you, we know there are going to be a few more of those bumps in the road on asset quality in that office life science space, and we'll work through those. But we're feeling like we're late in this stage of the cycle. We're working through what is going to have to be worked through, and we're doing it in a very constructive way.

Brandon, do you want to add anything on that or -- you might want to talk about what we're seeing on leasing and so forth?

Yes. No, I would just throw in there the great summary of how we view the world, what we're seeing we are in the property types, George mentioned condo, multifamily, industrial. We've got a lot of industrial and boy, a lot of industrial leasing is coming through our projects. Really happy to see that. But I would I would even say on the office side, we're -- and again, a great summary there of how market-specific this activity is but we're really encouraged on the office leasing side as well. So we're starting to see some green shoots there. Life science, as you noted, is that is challenges, but even on a market-specific basis, and we've mentioned this before in the Bay Area, the AI with is generating opportunities for our life science product, which as we've noted, is flexible to go life science or go more traditional office and .

We've got 2 projects that are in serious contention for more of your tech AI-type users just as examples of how that's playing out, not just generally, but in our portfolio. But yes, great summary, George. We're a lot of noise, a lot of headwinds in various shapes and forms, but we're seeing some good resilience in our portfolio. And and I would say, office in particular, I'm just glad to see it starting to pick up and move. We're getting some progress there. That's the detail I would add, George.

Our next question will be coming from the line of Michael Rose of Raymond James. .

Maybe just a bigger picture question just on a lot of the efforts that you guys have ongoing, specifically in CIB. You noticed in the management comments that the head count is up from 18 to 97 new vertical this quarter, you're building out some of the fee income verticals. Certainly, I understand the expense guide. But George, I just wanted you to frame this kind of longer term.

At some point, the significant buildout will probably begin to slow. It seems like that could be in 2028, which could be at the same time that RESG balances begin to inflect higher after heavy paydowns. So I guess my question is, when do you expect to see the higher levels of expense build decelerate? And then it seems like 2028 could be a pretty significant year for operating leverage from just thinking about it conceptually. So would just love some longer-reaching thoughts on all the efforts that you guys have done to date and as we look forward?

I appreciate the question, Michael. I'm reluctant to give a lot of guidance on 2028. That seems like a long time into the future. But I think your premise is correct that we will reach a point with CIB where the percentage increase in their head count and the percentage increase in their expense base will decline.

Now Jake mentioned, we've got right now access into 42 different business and industry groups with CIB. If you look at the broad breadth of CIB that number of business and industry groups could be 100 or 200. I mean there are a lot of places we're not in. And I think the expectation is that, that business is going to continue to grow, continue to grow and continue to grow. But if we had 3 verticals in a year, or 2 verticals in a year. And 3 years from now, we had the same 2 or 3 verticals every year. The percentage increase from that subsequent addition is going to be less.

There are also a lot of geographies that we're not in that we would like to be in with the CIB platform in the markets that we already serve on our commercial community banking business. So there's a lot of room to build out. And CIB is designed so that the speed of that build-out is geared to their volume of business and the profit margins generated by that business. In the early conversations that Brandon and I had with Jake understood that we didn't want to go out and spend of expense and have a dead start on that, that we needed to take the teams that we had incorporate them into CIB and get them really lined up with the CIB vision, and we needed to add people incrementally as the business was growing, and we were paying for those and creating more profits in CIB.

And that will continue to be the approach going forward. So if I overhead grows 20% per annum. That's going to mean that their revenue is growing more than 20% per annum. So there's going to be a positive operating leverage from the continued growth an expansion of CIB. I would hope and our goal is that is we're building out more infrastructure and treasury management, more infrastructure and trust and wealth, more infrastructure and mortgage that you're going to see the same things.

Now we're earlier in the real build-out and expansion of those. But I would expect you would see those gain positive operating leverage as we go forward. And to the earlier question of where does our efficiency ratio go I hate to apologize for a 39% efficiency ratio, that's a pretty good number. But we would like to see that in future years. Begin to work back down to our more custom ratio over the last decade. But it will stay in that high 30s range this year and maybe into next year, while we're building out some of these businesses. But they are designed long term to achieve positive operating leverage.

Now there's no way we're going to run a much expanded trust and wealth business that doesn't have a 50-something percent efficiency ratio or mortgage business that doesn't have a 60% or 70% efficiency ratio. But the operating leverage that we will get in other businesses, I think we'll even those things out and let us get to a longer-term slightly improving efficiency ratio.

And George, real quick, just to run off of your thought there on CIB. I think it's important to note, too, as we continue to grow and expand CIB, again, the beauty of what we've built. We've got a credit analyst training program as an example in there. So over the long term, you'll see us hiring less portfolio managers as we have analysts and associates coming out of our in-house training. And so when you kind of put all that together, we ran this analysis at the end of last year, the folks on average we're hiring in this year have a lower average base salary and expense carried than the year before, and we can make the assumption that next year, that will continue to reduce in theory, right, as we're building CIB will need less cheaps and more Indians for lack of a better term. And so we'll continue to staff in that way in a very thoughtful and strategic fashion where we hope to continue to improve the efficiency ratio within CIB itself.

Good comment. Thank you. .

No, that's helpful color. I wasn't looking for specific guidance, just trying to frame the narrative, but it seems like based on the answer that you guys have many years to come of kind of continuing to build out the business. So maybe the best way to characterize it. I don't want to put words in your mouth, but are we -- would you characterize the build-out is still kind of in the earlier to mid-innings versus the later innings? It seems like based on the commentary that's where we'd be.

Well, Jake made the comment in his earlier remarks that we were just beginning. I've written enough checks to our expensive people that I don't feel like we're at the beginning. But yes, we're in the early stages of achieving CIB's potential. And we've commented I think we commented in the management comments in me, Tim, that we expected in 2027 that CIB would pull up even with RESG as far as portfolio size.

And given the momentum it has it's expected here that it's going to pull ahead of RESG, at least until RESG gets that next wave and wind of origination opportunities that come from a more stable commercial real estate, more balanced commercial real estate market.

In mind or 2, that head count in CIB includes services that are enterprise-wide. So the syndications desk, interest rate hedging, et cetera, we're adding people that don't just benefit the growth of CIB but are going to benefit the growth of the institution as a whole in our noninterest income in future periods.

And our next question will be coming from the line of Matt Olney .

I want to go back to the discussion around credit trends at RESG. And I think investors are looking for this inflow of newly identified substandard loans that to slow? I counted 3 new loans identified in the first quarter from your management commentary. Thank the 2 in Seattle University, 1 in Boston Life As you look at the Regie portfolio and recent upcoming appraisals and considering the conversations with sponsors, what are your expectations for the incremental inflow of new RESG loans into that substandard bucket? .

That's a great question. What I would tell you, Matt, and I want Brandon to weigh in on this is we as we've said multiple times, we will probably have a few more sponsors who just reach a point they cannot or will not continue to support their transaction. So I would expect there will be some further inflow we've done a real good job of liquidating. Last year, we had 4 properties in foreclosed assets at some point during the year from RESG, we sold 3 of those last year. .

So we've done a good job of liquidating. We've had several substandard loans that we liquidated out with the collaboration of our sponsors. So I think you'll see assets come in and assets go out of that. The other thing I would tell you is, and you mentioned appraisals, we are at a low leverage point on these loans. And for us to take a loss on the loans, all of the common equity, all of the prep equity, all of the mess that you got to burn through all of that to get to a point that we take a loss on these loans.

So a lot of the assets that we've had resolution on, we've had no loss and the losses have been fairly well contained given the size of credits on the ones that we have had losses on. So I think you'll see assets come in and assets go out of that group. We'll do a lot of very collaborative work with our sponsors to help them work through this environment. I think our guidance we've given on net charge-offs and so forth is good guidance, given the loss content in those loans that are likely to pop in and out of classified status. Brandon, you might want to add color on that.

Again, great summary, George. I mean I would also point out that we've been very diligent in our reappraisal process within the portfolio. We pointed that out in our comments. We've kept those appraisals current. You may note that there were fewer appraisals that resulted in LTV increases that were most within that plus or minus 10%. So the market -- as we said in our comments, we feel like we're in the later stages of the cycle. There's always an interesting new element to consider as we go from quarter-to-quarter with our conflict in the Mid East being the most recent add to that and uncertainty. But as George noted, the underlying economy seems to be really resilient. We're seeing good leasing, as I noted before.

We will have projects where ultimately the sponsor does gets to the point that they're not able or willing to continue to support the deal. But we're -- our team does a great job of being on top of where these projects are and making sure we're on top of a making sure we're on top of ratings. So George's comments are spot on with respect to how we see the future.

Brenda, I'm glad you pointed out the appraisal and for those on the call that didn't focus on a figure 28 and the narrative around Figure 28 in our management comments, 50% of the total RESG commitments have been appraised within the last 4 quarters and 92% have been appraised in the last 8 quarters. So the only appraisal is a loan that has a $1,500 nominal balance on a project that is sort of stalled and we'll never fund beyond $1,500. So that's the only pre 2023 appraisal on the book.

So we're very current on the appraisals and continue to recycle those and renew those, keep them up. So we feel pretty good about that.

I appreciate the commentary on that. And just as a follow-up, kind of a similar question, but more on the Oro foreclosed asset bucket. I think that balance is $150 million, mostly 3 Reggie properties. I get these properties are all unique, but it feels like there could be additional foreclosures this year. So trying to anticipate if we should see that balance move up throughout the year? Or do you expect those existing 3 properties to move off the balance sheet? .

We're working on all of those and there are discussions going on regarding all of those particularly a lot of discussions around the oldest 1 of those and several discussions going around the Chicago property. So I would hope that we'll over the course of this year, move some or all of those assets off the books. I repeat what I said earlier last year, we had 4 in that category. We moved 3 of them off during the year. 1 we didn't move off is that Los Angeles land. We've got a lot of activity on that right now.

I would point out that we did make $12 million in contract extension fees and for a earnest money off the last contract we had on that, that never closed. So we'll work those things actively. It's premature to try to project what the outcome will be on that. But I would be surprised if over the course of the year, we didn't move some of those assets.

And our next question will be coming from the line of Catherine Mealor of KBW.

We've spent a lot of time talking about the Life Science book and the office book. I wanted to see if we could get specific picture update on your multifamily book, maybe in 2 pieces. First, on just level of prepayments you're expecting in that book. It feels like that was the sector that was leading a lot of your prepayments over the past few quarters. And so our view on that moving forward, especially given the new rate environment. and then also in just credit and appraisal activities. To your point, the appraisals feel like they're coming in better than we've seen in some past quarters. So just kind of an update on the to health of the multifamily book?

Yes. I'm going to let Brendan take the multifamily. And yes, the degree the rate of change in the appraisals is less significant than some of the earlier appraisals were in the last couple of years. And that just reflects the fact that the market has moved over a number of years. a lot of these assets are getting reappraised on an annual basis. And as a result, the LTVs on those assets are moving less significantly with the newer appraisals than they might have moved as the market was adjusting 2 years ago or 3 years ago. .

So Brandon, do you want to take the multifamily story and talk about that?

Absolutely, Catherine, good to hear from you. You are correct. We a lot of the payoff story that we're seeing in our portfolio is a direct answer to your question, both the health of the multifamily product in terms of its lease-up to the point of being attractive, obviously, for refi or sale or other takeout. And so what we see there is that -- and part of it that -- that's our largest property type by concentration. So by definition, they're going to have a outsized ratio of the repayments.

But that's absolutely been the case. And some of the headwinds that we've talked about and our RESG repayments are driven in large part by the multifamily projects. And you'll continue to see that as we go forward. That was the case in the quarter just ended. It's been the case, and you can look back 6, 12 months, that's going to be the case. They're the heaviest part of our payoff. It's a healthy portfolio. And as the valuations, those this cap rates, that product type probably started out lower and moved as much as anything. But again, going back to our tried-and-true rules of having a lot of equity in these deals and being on a low basis even with those cap rate moves that, again, talking about appraisals, they've sort of the changes have slowed and everything seems to be sort of landing where it's going to be. It's a healthy portfolio, but it will, as you noted, result in a number of payoffs as we move forward.

And then 1 other has this question last quarter, but just to get an update on the IQHQ San Diego life science credit. And then last quarter, you talked about new leadership that came in that you were excited about. I know there was a lawsuit that's too press recently. So just any update on that project that you can provide for us would be helpful?

Yes. Yes, I appreciate the question. And litigation, Catherine, that's really can't provide any meaningful commentary there on that. I mean that's for IQHQ to address. But -- to your point, we were excited. We are excited. We continue to be engaged with the new leadership there, very very excited about the energy that they're bringing and the traffic they're driving, the strategy that they're taking with respect to the different sort of segments of tenants that they're pursuing. It's not just the life science end market life science and office use, but clinical research, big pharma, tech, AI, even defense.

So there -- the demand that they're tracking for the projects is -- it was good. In December, it's better as we sit here today in terms of the tours they're giving, the RFPs, LOIs and lease negotiations that they're having I would tell you the office demand, office user, the non-life science user is the bigger part of that traffic and demand that they're tracking, but they're seeing material demand there. And then they continue to work on the retail with some large block retail opportunities that they started to really get the project activated at the street level, and they're working some exciting opportunities that will continue to add to that energy and activation around the project.

So yes, we're where we continue to be pleased with their focus and the demand they're generating. And we've noted in the past the material financial commitments they've made and and that was in '24, early '25. Some of this new leadership came in after that, and we really take their engagement with this project at that point in time. as a clear sign of their belief in the opportunity there. So yes, we're continuing to track the project and excited they're in the driver's seat and working hard on it.

I know that credit matures in August of this year. Is there anything that you think you need to see in terms of leasing or equity payments or anything that would present this loan from negatively migrating at maturity if you don't see a meaningful improvement in the leasing trends?

Let me comment on that, and then Brandon, you can add some additional color. Sponsor support for a transaction is a key element in the migration or not migration of these assets. So based on our dialogue with the sponsor, I think, at this point in time, we expect sponsor support to continue for that asset. We'll see August is in some respects, not too far away. But in the world we live in today, August is an alternate from now. So we will see if that realization and expectation of sponsors continued support contribution of reserves as needed for this project is there, and that's our current expectation that that's going to be the case.

I will I agree with Brandon, we're not going to comment on their litigation with one of their investors. But it's well known and been widely publicized in the media that QHCs had multiple tranches of capitalization and recapitalization come into that project. And in regard to the litigation, I'll just note that a lot of times when you have 1, 2, 3 or 4 different capital raises in a transaction, and there are different rights and preferences between the investors that come in at different points in the transaction. there's room for disagreement and hurt feelings between earlier investors who may get diluted out in subsequent capital raises.

So that's a matter fran their investor to deal with. I don't think that has any significant bearing on our project with IQHQ or any other project with IQHQ, -- that's an interfamily squabble between the different tiers of investors in this transaction. Brandon, do you want to add anything to that?

No. You covered it well, George.

Our next question will be coming from the line of Janet Lee of TD Co. .

Good morning I would expect that the prospect of rate cuts is incrementally benefit benefiting for your net interest margin, generally speaking, given your variable rate loan rate component. But if the rates were to be relatively stable from here, is there any reason why your net interest margin would decrease further from here, whether that's because of the asset mix shift or the deposit competition? Or could we do stable NIM or potentially increasing from here?

Yes. Janet, our view on that at this point is we're relatively agnostic as to whether rates go up 25 basis points or 50 basis points, or rates go down 25 basis points or 50 basis points are stay the same. Obviously, if rates go up, given our highly variable rate loan portfolio, we will get a couple of quarters probably of improved margin, but increasing rates would adversely affect a few of our customers on the bubble.

And that increased margin would probably be more or less offset with incremental provision expense and credit costs. Conversely, if rates go down 25 basis points or 50 basis points, we -- that's going to be a bit of relief to a handful of customers that are on the margin there and probably lower some credit cost, but cut into our margin for a couple of quarters as our loan book reprices faster than deposits.

So we've sort of reached the point with our balance sheet that we're agnostic about which way rates go, which is probably a good place to be today since nobody can really develop a firm thesis about which way they are going to go. Our margin will move around a little bit. We've talked about the competition on the loan side. We talked about the competition on the deposit side. We've talked about the a little bit of lift we're going to get from the securities book. So we'll just see where that plays out on the net interest margin in coming quarters.

And really appreciate the new guidance around your net charge-off expectations for the full year, which looks like it's pointing to around 50 basis point-ish. You already gave us a lot of color on credit. And given your commentary around inflows on the classified and criticized assets earlier. Is it fair to say that does NCO expectation assumes bakes in an assumption that classified and criticized assets will increase further from here? Or is there any other color you could provide on what kind of underlying assumptions are being used in this NCO expectations whether that you're assuming more losses than others and certain 5 RESG credits that you called out at the management commentary, et cetera?

Janet, I think we've probably touched on all that to put a little more definition around it again as we've said it a couple of times on this call in the management comments and in prior quarters, we expect that there will be a small number of our customers that in this economy with these interest rates will just become unable or unwilling to continue with their project. So I think there will be some inflows of assets, small numbers into that special asset, substandard asset, foreclosed asset category over the course of the year. .

We've had a good history of resolution. We've got some pretty meaningful activity toward resolving 5 of those assets as we've discussed, not all 5 probably make, but some portion of those do. So our -- whether that number goes up or down I think our guidance is good guidance. It's the best we can give you right now. And I think we'll have things come in and things go out of classification categories as the year goes on, and we'll just have to see how that unfolds.

And I would now like to turn the conference back to George Gleason for closing remarks.

All right. Guys, I think we're out of questions. So thank you so much for your time and attention today. We appreciate that we've used all of our time. So have a great day. We look forward to talking with you in about 90 days. Thanks so much. .

And this concludes today's program. Thank you for participating. You may now disconnect.

Good day, and thank you for standing by. Welcome to Bank OZK Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, 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; Cindy Wolfe, Chief Operating Officer; 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, Shannon, to remind our listeners how to queue in for questions.

[Operator Instructions] Our first question comes from the line of Stephen Scouten with Piper Sandler.

I wanted to start with one kind of around the loan sale in the quarter and kind of your outlook on credit, net charge-offs and such. And maybe wondering what could lead you all to potentially lean further into the potential loan sales like you had on that 1 credit this quarter?

And kind of given the commentary and the management comments around 2027 loss trends and a belief that those will improve kind of what gives you confidence to that end? And in that kind of positive outlook as we get beyond the CRE cycle?

Yes. Great question. Thank you, Stephen. I appreciate it. Brannon, do you want to talk about the loan sale first, and then I'll take the second part of his question. .

Absolutely, Steven. Good morning. Great to have you, great to have the question. Appreciate it. Yes. We would be happy to say that contrary to some speculation that was out there. We sold that loan at par. We collected all our outstanding principal, all our accrued interest on the note sale, but I would reiterate what we said in our comments, Stephen, that the note sale does not reflect any change in our strategy.

We've sold our ESG loans from time to time in the past in this particular case, and I would say that our note sales historically have been sort of one-off unique cases. In this case, there was an overlap between the project that was -- that secured that loan in multiple situations where the sponsor there and its equity partners were no longer willing to or able to support those projects.

And that would include the large land development in Lincoln Yards that we sold in the third quarter, the Lincoln Yards life science project that's classified of standard nonaccrual so it's a particular fact pattern. It doesn't happen often. It's not a change in strategy. It's just the normal course of business as those occur.

All right. And Stephen, on the other question you asked, we've given guidance in our management comments that we expect results to look a lot like our 2024 and 2025 results in various respects. We've also detailed in considerable length in the comments there, the challenging environment that our sponsors have been operating in for a number of years. .

And that should be no surprise to anyone because we've talked about it, particularly at length over the last 14 quarters as we have built that ACL up, and we've depicted that ACL build in a chart in figure 23 of our management comments.

So there was a build based on the expectation that the longer this challenging cycle drag on for our sponsors, the more likely it would be that individual, sponsors on some individual projects would run into trouble and either choose to no longer support their projects or become unable to support their projects.

And we've seen that over the last couple of years. And I think we've managed that really well and the ACL build was a prudent preparation for the environment we're in. I think we're getting towards the later stages, really in the late stages of the CRE cycle.

We're seeing a lot of green shoots out there on leasing and property sales, we're seeing a lot of refinances because of the surge in credit availability, liquidity that has really manifested itself in the sector in the last couple of quarters.

And obviously, the 100 basis points of Fed fund rate reductions in late in the last 4 months of 2024 and the 5 basis points of additional Fed fund rate reductions in the last 4 months of last year are providing some relief to sponsors on the interest cost. So we're not all the way through the cycle, but we think 2026 is pretty near the end of working through that cycle.

And we think we see a decided upturn in not just improvements in the conditions for our sponsors, but also new volume and so forth. There's been a real constraint on new origination volume in recent years, and a lot of that is just the lack of equity and the fact that the market needed to balance supply demand, we're seeing that come more and more into balance in various markets on various product types across the country.

So we think our guidance is good, and we're very optimistic about 2027. We think 2026 is another year like 2025 where we're just working through the environment. with our sponsors.

Got it. Very helpful context there. And then just one other one for me around fee income growth potential. I mean, I know that it's never really been a big part of the story or a demonstrable proportion of kind of income at DK, but it sounds like there's a lot of tailwinds there with the investments that have been made in CIB.

So I just kind of curious what that could look like, not only in 2026, but kind of beyond and if there -- if you feel like there's really longer-term tailwinds there on the fee income side of things and if that could be a multiyear kind of growth pattern.

Stephen, we're early in the process. So we haven't talked about it a lot. But clearly, if you read our comments closely, not only do we want to continue to achieve this diversification in our earning assets, which is well in tow and clearly evident.

But we also want to see longer term. And you won't see huge strides in this in the short term. But longer term, we want to see fee income become a much larger part of our revenue. So we're so early in it. We've not talked about it a lot. We've given some general hints about it.

But perhaps Jake could comment on CIB and then I'll comment on a couple of other items, Jake, do you want to talk about the fee income pieces of what you're doing.

Yes, happy to, George. I appreciate it, Stephen. Good question there. As you all know, we've discussed on previous earnings calls, our loan syndication and Corporate Services business line within CIB was planted about 18 months ago and continues to build those services provide kind of shared services bank-wide, including our capital markets program.

It includes our interest rate hedging program, our loan syndications desk, our permanent placement solutions and also include some foreign and some additional capabilities in cities that George alluded to that we'll be rolling out here over the course of the next couple of quarters. All of that will continue to grow in line with CIB.

CIB is their primary customer base for those shared services. But that being said, we're starting to see some nice penetration, for instance, with the interest rate hedging providing caps to our RESG customers, whether that be that or swaps that we're providing to some of our community bank customers.

We are starting to see some nice growth and lift there through LSCS and some of those noninterest income initiatives that we're rolling out.

And then thank you, Jake. Outside of CIB, obviously, we're into now our about to start our third year in the mortgage business. It was a very slow rollout. In year one, we gained traction in this last year, and we expect to continue to gain traction. So mortgage lending fee income by originating loans as many, many banks do, most banks for resell in the secondary market is a good source of fee income for us.

And then we've really put an increased emphasis on growing our trust and wealth business really venturing into the wealth sector more so than just the fiduciary trust business that has historically been what we've done, but we're growing both those parts of that business.

And then we've also launched a private banking business. It's small. We're just really working with the first group of customers that -- we've carefully selected to help us work out all the bugs and make sure that we're delivering the quality of service and enhanced experience that those private banking customers need but that is a good opportunity for revenue.

And of course, we're enhancing and working really hard to increase our treasury management services, which is a large lift because we really want to improve that because of the fact that a lot of our CIB customers have needs in that regard for specification and products that we've not had in the past that we did not need for our smaller commercial bank C&I customers.

So we've spent a lot of money, hired a lot of people built a lot of technology, acquired a lot of technology to launch all of these different lines of business. I think you'll see some incremental improvements in the noninterest income line in '26. As a result of that, I think you'll see the real impact of that in 2027 and subsequent year.

Got it. Appreciate the time.

Our next question comes from the line of [indiscernible] Gosalia with Morgan Stanley.

So I wanted to start on credit, particularly in office and life sciences in the management comments. Can you give us some more color on what you're seeing there I guess, especially on the life sciences side, how long do you think it will take for the life sciences market to rebound?

What you're hearing from sponsors? How have those conversations changed? And if you could also remind us on the levels of protection that are built into some of the larger life sciences loans.

Brannon, you want to comment on life science and office as well, if you would like to?

Absolutely. Thanks for the question. And as we've said in the past, we've seen different results, different projects, different markets. We've got some that have had great success and others that have been slower. I think faced some strong headwinds, you've had all the different macroeconomic factors that we've experienced and very specifically cuts to funding from NIH and its impact on demand for space over the last couple of years, a lot less in sort of the venture capital raise space.

But the good side of that coin is there hasn't been really any additional spec life science start across the country. The there have been starts with pre-leasing in them. And we actually see that our originators see those out there. And we've got -- we see tenants expanding so it's a little bit of a dichotomy in some of those outcomes.

But again, the good news is not additional supply being added to the challenge and you've got continued, albeit muted demand in some markets chewing into that. It's going to take time. You see a great impact from in certain markets, demand that's really stimulated capital investment in AI that's starting to push in to Life Science as you've got markets that have a dearth of traditional office space.

And as we've said, life science provides a great alternative for those users so you've got some winners, you've got some losers, but you've got absorption slowly moving forward. It's going to take some time.

As George said, we've seen this coming for appropriately managed our in anticipation of that. And we -- as we've said, entered these deals at low leverage and with strong sponsorship and we're pleased to see a number of those sponsors continue to continue to support those. I mean you've seen some, obviously, that are no longer willing or able to support them.

And we've been clear reporting on those, but it's going to take some time on the bottom line with life science and we're, again, pleased to see the support in the interim. -- office has really been a positive story for us. Really pleased with the trends that we're seeing in some office markets in our portfolio, in particular, especially some projects that had more limited activity over the last 12 to 18 months are starting to see benefit office leases are 5- to 7- to 10-year leases frequently and takes a while for the portfolio of leases in any market to roll and then again, there's continued sort of incremental positive impact from return to office.

And as these tenants begin to look around making leasing decisions about where their new home is going to be, that flight to quality that we've talked so much about historically remains very apparent. We saw good lease on a number of our projects in various markets during the fourth quarter.

And we're tracking a number of other leases that are nearing lease execution in the near term. So on the whole, really good quarter for office leasing in many of our projects in many markets and more to come based on what we're seeing. And beyond that, office is showing a great deal of liquidity.

As I reviewed the last 12 months, realized that we -- in terms of projects paying off office was second behind multifamily. And I think that's true over the last 6 months as well. So we've continued to see good liquidity in the market, in particular, on the credit side that is supporting refinance activity.

So not just from a leasing perspective, but from a capital investment perspective, we've seen good results on the office side.

And to put an emphasis on Brandon's point about the liquidity returning to the office space. I think we had 4 office projects refinanced in the last quarter and 1 of our mixed-use projects that refinanced out was -- had a significant office component within it. And some of the office projects we've seen refinanced in the last year, a lot of them, in fact, have had no leasing.

But the liquidity is there and people recognize the value in these high-quality buildings and the fact that the supply-demand metrics are normalizing and these things that have been slow to lease or getting to the point that leases are very likely to be in the near term. So that's providing some support for the space and a lot of liquidity and new investment in refinancing product that is out there.

And similarly, in some markets around the country, you're beginning to not have the office available in the market that's built that meets the needs of some of the sponsors, and that really is providing an opportunity for life science projects to fill with space and that's office use space or another alternative you space.

And Brannon mentioned, particularly in the San Francisco Silicon Valley area AI is driving a lot of demand for that space and creating guys that are kicking the tires and walking and looking at some of the projects we've got in the life science space there for AI usage. So it's the environment is getting more constructive in a noticeable way.

Got it. So your conversations with the sponsors on the Life Sciences side kind of indicated that they're in for the long haul, they're willing to support the properties for more time. And any thoughts on I guess, the protections that are built into some of the larger life sciences loans that you have out there?

Well, we are dependent upon sponsor support to your point. I think the mood in the attitude is generally every sponsor is different. Every project is different. The mood and the attitude is somewhat improved.

Our guys had a meeting with our largest life science loan, our largest loan, the leadership team, the management team on that, that group came Dallas to just give us an update and report on where they were. I was not part of that meeting, but my understanding that was a very constructive, very positive meeting with plans and commitments in place to really push that project onto a higher level of leasing and activity.

So we're cautiously optimistic will every life science project get to the finish line and have a successful outcome with its current sponsorship and capital partners, maybe not. There may be a casualty or 2 along the way. But I think generally, it reflects what we've seen from our sponsors. And let me explain what I mean in that.

In the last -- in this cycle, we've had 4 RESG assets that went into foreclosure or we acquired title to really didn't, I think, foreclose on any of them. We required title to them in satisfaction of the debt. Three of those were liquidated in the last year, one in the third quarter, the largest at Chicago land, 2 were liquidated in the fourth quarter. And the 1 project we had that didn't sell was under contract for a couple of years and the sponsor paid us $12 million in contract extension fees and forfeited earnest money on that, that Los Angeles plant.

So a relatively small number of project. I will comment someone wrote that we had taken a charge-off on that L.A. land. That is not correct. We moved it to OREO at our book value and the reduction in the value of that on our carrying value on that over the last couple of years as a result of forfeited earnings money, not any charge-offs.

So we've never taken a charge on that asset and feel like we're appropriately valued on it now. But we've got 4 loans on nonaccrual. So a relatively small number of RESG assets where the sponsors have been unable or unwilling to continue to support the asset. The flip side of that is detail, and we've been giving you this information for most of the last 14 quarters on figure 28 of our management comments.

And just to give you a data point, last quarter, we had 49 loans that were, that had an extension of their term. We collected $56.7 million in reserve deposits $7.6 million in modification fees, $45.1 million in unscheduled principal paydowns in connection with those loans. If you look over the last 14 quarters since the Fed started raising rates, that is $1.3 billion in additional equity contributions, $866 million of reserve deposits, $429 million in unscheduled principal paydowns.

And I don't know the fee number, but tens of millions of dollars in fee income to us on those loans. And what that tells you is that plus or minus of our RESG loans are experiencing and continue to experience good sponsor support.

Will there be a few more fall out before we get to the end of the cycle? Probably so. But we built our ACL from $30 million to $60 million in anticipation that there would be a few bumps in the road. So we feel like we've prudently prepared for this. We feel like we've done a really good job of working through and liquidating these assets when we've had cases where the sponsors have given up, and we're well positioned to get through the rest of this cycle in good form.

Our next question comes from the line of Brian Martin of Janney.

Thanks for all the commentary thus far. Just maybe just in terms of -- it doesn't sound like much in the way of additional sponsors likely to maybe not be supporting these based on kind of your commentary. But just in terms of the resolution of the current level of non-performings, can you talk about maybe the time line in terms of any big chunks you expect to see get resolved in time frame? Just kind of how you expect to work some of that down as you go forward?

Well, on the Boston property, for example, the sponsor on that project would have done an extension renewal and put up their part of the required capital to do that. There are 2 equity partners in that transaction. Really decided that they were not going to put up more capital until they got a lease.

And our rule is you pay, you stay, you don't pay, you don't stay. So when they ask us to give them 9 months or so, 6 months, whatever to work through the lease without making any payments on the loan, we just said that's not the way we operate. If you want time, you have to pay for the time, if you don't pay for the time, then we're going to move to resolve the asset.

So the resolution of that asset can occur several ways. Number 1 is the sponsor in that transaction is out trying to put together new equity partners to continue with the successful outcome of that project. We're hopeful they'll be successful, but we're also dual tracking our acquiring title to that property so that if they're not successful, we're ready to take that asset over and continue to move that asset forward in a constructive way.

So obviously, if they raise new capital, that could get resolved and our view on that could change dramatically and quickly. On the flip side, if we have to take that over, then we'll look for opportunities to sell it if we can get a favorable price on a sale, we would sell it.

If not, we'll lease it up and then sell it when we get it into a better shape. I would comment also on that property, they're with some commentary out there that the lease situation has blown up and gone. That is not our understanding of the situation.

The sponsor continues to be actively engaged with the tenant. Prospective tenant, the prospective tenant. Our understanding is they just delayed their process for about 6 months. And instead of making a decision early in the year, expect to make a decision midyear third quarter or so forth.

And I think our building is still in the kind of the inside lane on the opportunity there to work out a lease with that sponsor. It's still early, but that activity is still ongoing. And we're working with the sponsor and whether we acquire title or the sponsor recaps, we'll work very collaboratively with this sponsor.

We have a good relationship with the sponsor, and we'll work very collaboratively to make sure that those ongoing leasing efforts are maximized the opportunity. So the office building that's on nonaccrual in Santa Monica, we're pursuing opportunities that would result in a sale of that asset fairly quickly.

The Chicago Life Science deal, the sponsor is working on a short sell opportunity on that. We've written it down based on our understanding of the financial metrics of that short sale -- if they accomplish that, then we could be paid off quickly over the next couple of quarters, however long it takes to close that.

If they don't accomplish that sale at a price that's satisfactory to us, then we'll take that property and sell it the Baltimore land we've talked about at length in previous conversations and we're working on a potential sale of that property right now.

We're also working, continue to work with the current sponsor on our taking title and continuing to integrate our development and liquidation of that property. We have other developments that the sponsors successfully achieved on that -- in that area. So it's hard to know when these things actually come to fruition. There are variable multiple paths that each other then could take, but we're working those things diligently.

And sometimes you resolve things fairly quickly. The 3 pieces of OREO we sold last year. there were RESG assets. All those were resolved in a pretty short time frame for sale of a piece of foreclosed real estate. The flip side of that is the one we've still got there, while we've made a lot of money on extension fees over the last couple of years with that and got a nice paydown on our carrying value of that OREO through the for to earn money, we work on that thing, 2 to 3 years with that prospective buyer.

And it didn't come to fruition and now we're back in the market with it. So some of them will work out fairly quickly. Some of them for 1 region other will take a bit longer to work out. We try to be very constructive about the way we approach these things. And I'll give you a good example.

Our oldest substandard accrual asset in the RESG portfolio is that development there like Tahoe, California. And that thing has been substandard accrual since 2019. And with special mention for some number of quarters, I believe. But for that, I don't remember when it went on special mention. But you hear the adage a lot of times about problem assets and the old adage that everybody seems to quote is your first loss is your lease loss.

Well, a lot of times, maybe a majority of the times first loss is your lease loss. But as we looked at that asset, we said the sponsors not going to put new capital in this, but the sponsor remains engaged. We can work out an opportunity here where we don't have to put new money in it, but we can work with the sponsor and help them chart a path to a successful resolution of that.

So instead of blowing that asset up in 2019 when it went on substandard and probably taking a 10 or 20 or loss on it, we work with the sponsor develop a plan to address that, and we've earned $43 million in interest and fees on that loan. And our total commitment today is $43 million, and our outstanding balance is about $34 million on that.

So we've earned more in interest and fees than our outstanding balance on that loan. And there's a very high probability that we get through that all the way to pay off with a successful resolution of that asset earning money all the way and never taking a loss on that.

So you've got to be thoughtful and constructive in the way you approach these and understand what the assets are and understand how to maximize the value from them.

Got you. Maybe just let me ask one follow-up and I'll hop off. Just in terms of the margin came in better than expected, I guess, in the quarter. Just wondering if you could give a little bit of thought about that given the rate cuts that have already occurred and just kind of how you see the margin in a relatively stable environment here. And then just on the buyback, any commentary from Tim on kind of the outlook of the buyback here prospectively .

Tim, you want to take the buyback first and you're welcome to take the margin it to as well.

Sure. Thanks, Brian. Yes. I mean our buyback, obviously, we started the new authorization July 1. And we said all along that we would be opportunistic in using that. And certainly, fourth quarter, as we were trading that was just too good of a value to pass up.

So we bought 2.25 million shares for an average price of $44.45. That's well below or a couple of dollars below our current tangible book value. So very accretive to not only EPS but certainly accretive to tangible book value as well.

We still have just under $100 million left in that authorization, and we'll be opportunistic if the if we're trading in similar ranges, I think we'll be active, pretty active in this quarter and could use it all this quarter. It may -- it expires at the end of June. And so either if we're either this quarter or next, depending on how we're trading. So at the same time, you may have noticed, we increased our dividend for the, I believe its 62nd quarter in a row and also had our capital ratios increase.

I think, Brian, you pointed out in your note, our tangible common equity increased 35 basis points during the quarter, at the same time of buying back $100 million of common stock and our preferred income and dividend combined is roughly $55 million. So very pleased about being able to grow capital ratios, grow capital in dollars and still return a lot of capital to our shareholders during the quarter.

On the margin, yes, you may remember, Brian, I mean our margin held up fairly well during the quarter. our rates on most of our ESG loans reset of the tenth of the month. So on December 10 is when the reset that did not reflect the full impact of the move in SOFR and there's still 8 or 9 basis points left that SOFR has moved down already from the tenth of December to January 10, when they reset again.

So we benefited from that during the quarter and Audi and the deposit team did a really good job on really managing our deposit costs. I think those came in very favorably as well. So we were pleased with how our margin performed during the quarter.

We did mention a few things you may remember. In the first quarter, we have 2 fewer days. So that certainly is a headwind to net interest income for Q1. We gave you a range there of where we thought we would land for Q1 net interest income and we'll do our deposit team. We'll continue to work really hard on getting the best execution on our deposit costs as well.

So I think we are really pleased with how our margin was for Q4, but we'll continue to work hard on managing that moving forward.

Our next question comes from the line of Janet Lee with TD Securities.

Starting off with credit. So you've mentioned that your 2026 trends on credit would be similar to what you experienced in 2025, you probably have a better line of sight into your credit and the situation with sponsors.

So are we expect -- just to level set, are we expecting a similar range of net charge-offs that you experienced in 2025 into 2026, so call it, 50 basis points? And if I were to extrapolate the NCO expectations for 2026 into what you would be willing to do on your provision and allowance for loan losses.

It's been -- that's more than doubled over the past 3 years. So are we -- are you -- is a plan that you would draw down on your reserves in anticipation of any potential credit losses in 2026, given that you've built reserves for so long for a few years or similar to what you did for full year 2025, you would be taking a similar amount of provision or whatever expected credit losses are for '26.

Great question. And Janet, I would start off by telling you we're going to do the right thing, whatever that is. And that will depend on where the global economy goes where the U.S. economy goes where the quality metrics and risk ratings of our portfolio goes.

So if we need to build a reserve further, which is probably not my base case. But if we need to do that, we'll do that. We're going to do the right thing, whatever the economy and the models and the risk ratings tell us is the appropriate thing. We have been -- we talked about this at length in the management comments.

We've prudently built the reserve so when we incurred the charge-offs that we incurred in the quarter just ended, a large part of that was already provided for us. So we were able to absorb that and still run with all the models and put up all the reserves we needed to put up and we carefully looked at that and roll all those numbers forward and really validated that our decisions in that regard were correct.

So I would anticipate that if the economy plays out as we think it does and as the CRE cycle sort of winds down and early '27 as we think it will, that ACL percentage may continue to do what it did in the fourth quarter, and that has come down modestly.

As we absorb losses that we've provided for the likelihood and potential of and we'll see where that goes based on where the economy goes and how the portfolio performs. But I think we were very prudent at the risk events build over time.

And clearly, just the prolonged series of challenges that our CRE sponsors have faced going all the way back really to the COVID pandemic but for our purposes today, mostly from the last 14 quarters when the Fed started raising rates, and sponsors were dealing with the after effects of COVID and inflation and work from home and all of that and then got into a higher rate scenario, it was a challenging time.

As I said in the management comments, we think we are really in the late stages of working through that. And if that bears out then that reserve ACL percentage could continue to ease lower over the next year.

Got it. That's helpful color. And I know it's hard to exactly comment on this, but I'll still try. So when you say 2026 will be similar to 2025 working through some of the credits in the letters cycle of CRE. Is your expectation that you're going to see more of the migration into substandard nonaccrual from special mention and may be substandard accrual into the nonaccrual category within that classified and criticized assets that you have, which have been pretty stable overall over the past year?

Or are you anticipating more of the new credits that are -- that could be migrating over to the classified and criticized category over time. basically, do you have a line of sight into some of the potential credits that could be migrating into special mention or substandard overall? Or more of a potential credit migration within that classified category into nonaccrual based on what you're seeing now?

Well, a lot to unpack there. So let me start with this. The special mention category tends to be a fluid category. A lot of times, if we are having a very challenging extension modification negotiation with the customer, a loan may get into a special mention while we're involved in that negotiation because our challenges to the customer, maybe you got to put up X dollars and reserves.

We want to pay down on this, you've got to make other enhancements and changes to protect our position, the customer may resist that because they've got other things they're dealing with, too. And those negotiations may become very challenging and intense.

And usually, we get those resolved in a favorable manner. So a loan that is in the midst of intense negotiation and we're unsure how that's going to play out, may find itself in special mention. And then a lot of those get resolved, we get agonized pay down, we get reserves reposted.

We earned an ISP on the extension. It's kind of put back into a very healthy state and it migrates back out into some level of pass rating. Then you have loans that migrate in that you're not successful in negotiating that or maybe there was an issue with it that caused it to being special mention, and that doesn't work out well, that will migrate into substandard or substandard accrual, and we'll give you more disclosure on that.

So the special mention is not just a stepping stone to substandard loans come in that and go back out the other way back into a past status as well. And that happens very frequently. So there's a fair amount of churn in the special mention category. I would repeat what we said in the management comments, we've had a handful of sponsors who have been unable or unwilling to continue to support their project over the last 14 quarters, particularly the last couple of years. We expect that our experience in 2026 is going to be similar to our experience in 2024 and 2025.

So sort of giving you a couple of years to look at as a comparison for our expectations for 2026. So I think we very likely we'll have a handful of additional sponsors who give up on projects we're have an ACL built for that expectation. And it's a case-by-case basis. And in dealing with sponsors, you're not just dealing with the sponsor, but you're also dealing with the sponsors, capital partners in a lot of these cases. So there are multiple variables at play, and we're really good at working through those. We have a great team that works through these negotiations and arrangements.

I feel very good about that. But I think we've given you as good guidance as we can give you at this point in time.

Our next question comes from the line of Jordan Ghent with Stephens.

I just had a question on kind of the capital -- it looks like you guys have $350 million in sub debt that moves from fixed to floating this coming October. I think you guys have previously said you could redeem a whole par beginning in October. That's still the case. And then with that, how does that affect your buyback up until that point?

Jordan, you're right. We do have sub debt that goes from fixed to floating October 1. We've not made any decision regarding what we'll do on that right now. I think we'll make that decision as soon as we need to, but too early to comment on that.

Our buybacks, we have a lot of capital in you saw our CET1 ratio increase and our earnings. We haven't talked about earnings a lot on this call, but we earn a lot of money earned almost $700 million, almost a record again this year, almost equal to what we earned, which was a record last year.

That earnings power does allow us to have a lot of capital that we can use opportunistically in some years -- we're going to have a lot of a strong amount of growth. Some years, we're going to have mid-single digits. And so when we have mid-single digits and we have levels of earnings that we're expecting in the coming years. We're going to increase our capital levels, and we'll look for opportunities to deploy that and just like we did in the last quarter.

So too early to comment on sub debt. We've had sub debt outstanding really since for the last years. So some level of Tier 2 capital is a part of our capital structure. And that's over the long term, I would expect us to have a decent amount of Tier 2 capital. And so that's really kind of our long-term strategy there.

Got it. And then maybe just one more. Last quarter, you guys guided for loan balances to move lower in the pending quarter in '25. We didn't see this in major comments. Could you provide any commentary on what's going to happen maybe in the near term or kind of the trends you're seeing?

Tim, you want to take that or I'll be happy to.

Sure. Yes, we gave you loan guidance for the year. In Q1, I think we're expecting to be positive and not have a quarter like Q4, obviously, the payoff velocity sometimes moves around a little bit on us. And so -- but I think our growth will be -- will come mid- to late year Q1, I think, is still a positive quarter of growth but you could have a payoff or 2 that comes in or pushes out that can move that around a little bit.

But I think we'll have growth that comes in throughout the year, but probably second quarter, third quarter, fourth quarter will be stronger than first quarter.

Yes, I would agree with that. Our mid-single-digit loan growth guidance that we've given for the year is probably going to be loaded into the -- more in the final 3 quarters than the first quarter of the year. We've got -- we had a lot of payoffs that we are expecting in Q1.

Perfect.

Our next question comes from the line of Catherine Mealor with KBW.

One follow-up on the credit conversation. As we look at the special mention category and then George, you talked about how this is a fluid category where loans come in and out, but it was interesting to see that a number of those loans that are in special mention were highlighted on the appraisal chart. Bigger 29, and it feels like a couple of them have pre LTVs that are nearing 100. And so just curious if you could provide any commentary on some of those larger office special mission loans and are any -- are there maturates coming up near term?

Or are there things that we should be aware of in the next couple of quarters that could perhaps drive some of those to move into substandard?

Well, in respect for our sponsors, we really try to not talk about loans that we don't need to talk about in special mention loans fall in that category. So I don't know that we have a lot to really add on that, Catherine. And there's a balancing act between being totally transparent and providing for an accurate disclosure and to our investors and then going beyond that and providing disclosure, we don't need to provide this challenging detrimental to our sponsors.

So I don't have a lot of comment on that. Those loans are -- we feel like are appropriately risk rated special mention. That risk rating is reflective of the appraised values on them. And we've talked a lot about how fluid in and out our special mention is. So if those loans merit at a substandard rating, we would have them substandard rated if they merit a substandard rating in the future, we'll write them there at the appropriate time, and we think special mention is correct.

We gave you those notations there because we didn't want to invade the impression that gosh, we had loans that were higher loan-to-value loans that we had gotten an appraisal that said the loan to value on a lot higher than where it previously was and we weren't taking that into account in the risk ratings on them. So I think we're doing the appropriate and proper thing, prudent thing on those loans.

Got it. No, that's clear. I appreciate that. And then maybe another question, it might be the same answer, but I'll try it. But any update on the larger life science line out in San Diego, the Rad property? Just any leasing update or anything that you can bend a few quarters in just had an update on that. Just curious if there's anything you can provide on that larger credit.

Yes. I'll let Brannon comment on that. But you -- when I mentioned meeting with the management team on our largest loan in Dallas that was that loan. So Brannon, you I know you don't want to get into too many details, but you might sort of give you a flavor and take on that.

Sure, Catherine. Thanks for the question. And yes, I would just reiterate what George said around sponsorship and management. They have pulled in some new leadership that is extremely experienced in the segment and you may recall that over the last couple of years, the sponsor has injected a significant amount of capital in that project specifically but the company and its capital partners, I think they had -- I want to say it was a $900 million capital raise.

So with respect to the wherewithal, the sort of can do. They've got it with respect to capital, and they've got it with respect to expertise. We did have a great meeting. There's not been a lot of executed leasing activities. There are a number proposals out, predominantly on the office side.

That's probably all the detail I'll get into there as it relates to the leasing part of it. But this new management team is very impressive. The plan that they've laid out is -- starts the ground level. They are very much at the ground level and on a daily basis.

And the exciting thing now is activation. Tenants with their leasing improvements or tenant improvements wrapping up and starting to open here in the near term. So you'll start to get some good activation and so we feel very good about where they are in their commitment to the project, obviously, an outstanding asset, and we think these guys are going to have success in putting tenants in that asset.

Our last question comes from the line of Timur Braziler with Wells Fargo.

My first question is on the Boston property. It looks like in the third quarter, the reappraisal was done on a stabilized basis and implied a level that was much higher in 4Q, where it looks the appraisal was done now on an as-is basis. Can we just maybe talk through kind of what transpired between 3Q and 4Q that drove the more punitive appraisal?

Well, it was the same appraisal and it was used as a value. And our approach on this is we use as stabilized value when the sponsor is engaged in the project, supporting the project and the expectation is that the project is going to achieve stability. If the sponsor is in this case, then indicates that they're not going to continue to support the project and contribute capital and keep it current, keep it performing. .

Then, as I said earlier, you pay you stay, you don't pay you go. And we're going to take property, then we ship to liquidation value or an as-is value of the property. So we detail that in the footnote on the auto of figure 26, all of those substandard assets because sponsor support seems unlikely or is clearly not going to happen all those substandard nonaccrual assets are reflected is values.

The assets that continue to have sponsor support are reflected as stabilized value. typically nailed down the point you asked what was the change. The change was we expected the sponsor at -- when we were talking in October, would continue to support the project to some degree, and they seem to be close to a resolution and a favorable resolution on the pending lease project, because the prospective tenant extended their time line to make a decision on their lease by 6 months plus or minus.

The sponsor indicated they were not going to continue to support the project without a lease or the capital partners. The sponsor was still willing to support, but not the 2 capital partners. And that lack of support and the elongated time line on the lease decision led to the change in our appraisal selection for that asset.

Okay. Got it. And then maybe just one more on the allowance. George, you had made the comment in one of the earlier questions on kind of working through the environment. I'm just wondering in terms of allowance and the ability to maybe drive that lower, is that just working through the existing known problems?

And I'm just wondering to the extent that we do get additional risk migration into categories beyond special mention, is that going to warrant additional allowance actions? Or do you feel like the existing reserve that's in place today is going to be sufficient to work through whatever issues might surface over the course of the next 12 to 18 months.

The ACL reflects our expectations for all of the current portfolio for the life of those loans. That's what is all about you calculate your expected loss for the life of those loans. So we have an expected level of migration that is embedded within that even before early in the interest rate raising cycle, we were building the ACL because of expectations.

If this trend continues and goes on long enough, there will be some losses that will result in obviously, the longer the cycle went on and the higher interest rates win and then all of the other various macroeconomic challenges and uncertainties and impacts that occurred that resulted in that full ACL build to a $680 million level where it stood at September 30.

The environment is getting slightly more constructive, and we're resolving some of those specific losses by taking charge-offs on and resolving them in the last quarter. So that's why the came down. So based on our current expectation, there will be some migration in the portfolio. We don't know what specific loans are going to migrate, but we've got probability analysis basically on every loan, a probability of file the loss given default, some that we have lost reserves far will never become an issue which will free up those reserves.

Some that we have a loss reserve on will possibly migrate adversely and we'll need more reserve. But on average, I think we're in a really good position. And that's what your ACL does. It reflects your expectations for the whole portfolio and you do it on a loan level basis and sum all that up, but some of the vast majority of those reserves are not going to be needed for the specific loans they're on, but other things will get migrated to a more adverse status and you'll need some of that reserve that's freed up from others to meet that. So it's an average process.

Thank you. I would now like to turn the call back over to George Gleason for closing remarks.

All right, guys. Thank you so much. We appreciate all your time today, your interest in OZK. We look forward to talking with you in about 90 days. Have a great rest of the day. Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Bank OZK Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jay Staley, Managing Director of Investor Relations and Corporate Development at Bank OZK. 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; Brandon Hamblin, President; Tim Hicks, Chief Financial Officer; and Jake Munn, President, Corporate and Institutional Banking. We will now open up the lines for your questions. Let me now ask our operator, Gigi, to remind our listeners how to queue in for questions.

[Operator Instructions] Our first question comes from the line of Stephen Scouten from Piper Sandler.

Yes. So George, you and Brandon, your whole team, obviously, know these real estate markets better than any of us. I'm wondering from the heightened fear peak of like 2023 to today, if you could give some commentary on how absorption is trending in some of these various classes, whether it's office, industrial land, kind of how you view those in the landscape today, the attractiveness of each of those, how they're trending. And additionally, and maybe on these 2 new loans that moved to substandard, how we can think about when the ACL would tend to get recognized? Because obviously, the Chicago loan doesn't appear to have an ACL and the Boston 1 appears to have a massively significant ACL already associated with it. So just kind of understanding some of the puts and takes those loans migrate.

Yes. Let me take that last part of your question, and then I'll turn it over to Brendon for some more general commentary on what we're seeing. In regard to the -- we did have 3 loans migrate, 1 from substandard to substandard nonaccrual. That loan had a significant charge-off on it that recognized our exposure on that. We had a significant reserve part last quarter. but that did manifest itself in a charge-off. And that's a good example to answer your question, when do you -- when does a reserve on a loan become a charge-off, and that is when it becomes evident that we're moving forward with the liquidation or other resolution of that, that is not as an ongoing loan.

The second project, you mentioned the Chicago project. We took -- when we moved out that moved from special mention to substandard nonaccrual. We took the charge-off on that, reducing that to what we consider a liquidation value on that asset. The third asset you mentioned moved from special mention to substandard, and we put a sizable reserve on that representing what we think is a wide range of potential outcomes on that. Those sponsors are continuing to actively work a really good lease prospect and maybe others, I'm not aware of, but I know they've got 1 really good lease prospect that they're far along with. And hopefully, they'll be the winning proponent on that, they're also evaluating how to recapitalize that project and go forward. I think by the end of this next quarter or into Q1, we'll have more clarity on that.

Now with that said, I've read some of the analyst reports that have already been written on our release last night, and it seems that the universal characterization is it was a mixed bag on asset quality. And I would certainly agree that, that's an accurate picture. We did have those 3 migrations and a couple of charge-offs on that. None of those were surprises. They were all either substandard or special mention assets. But the flip side of that is we -- on the positive side, we had our largest foreclosed asset, which constituted more than half of our foreclosed assets that Lincoln Yards land in Chicago sell during the quarter at the book value we had it on the books for. So that was a big win. And the second and third largest OREO assets that we had at June 30, which are now our first and second largest OREO assets are both under contract as of October 2, with expected closings this quarter, and those will have a neutral to positive gains on sale, breakeven to gain on sale on those if they close, and assuming they do close. We never know they're going to close until they do. But if they do close, we'll have a positive outcome on that.

So I think we're doing a really good job of resolving credits that do come into the foreclosed asset category in a very effective way and feel good about that. I think that's a positive. The other thing that I think is positive, if you look at our combined special mention substandard and foreclosed assets, that aggregate number was actually down modestly during the quarter. So reflected a pretty stable asset quality from that front.

The third or fourth point, I guess, I would make is, on Page 29 of our management comments, we've talked for years now, since the beginning of the COVID-19 pandemic about the importance of sponsor support. And we had an outstanding quarter and sponsor support. We had 41 loans that reached a maturity that were extended and modified. We had almost $70 million of additional reserve deposits posted in connection with those modifications extensions. We collected $13.5 million of fees. We had over $80 million of unscheduled pay downs on those loans and $14 million of unfunded balances that were curtailed as a result of those.

So some of those numbers are among the highest over the 13 quarters that we've been tracking and reporting that data. So while you did have 3 loans migrate risk rating wise, which you'd always prefer to not see, but they were identifying credits, we had just a number of really strong sponsor support examples in our modifications and extensions.

And then the final point I'd make before I turn it over to Brannon in that regard is you've seen an infusion of liquidity into the CRE space as evidenced by the record level of RESG paydowns in the quarter just ended. And we've been communicating for some time that we expected a high level, elevated RESG paydowns for a number of quarters. That reached a new high in the quarter just ended. That should not have been a surprise to anybody because we've been talking about it for a number of quarters now, but it does reflect the fact that there is a growing degree of liquidity for refinance options and the sponsors are reaching a point that they're willing to grab on to some of those refinance options.

So all that is kind of my view on the credit quality front. I'll let Brendan address what he's seen in the -- at the ground level project project CRE [indiscernible].

Yes. Thanks, George. Thanks, Steve, for the question. I think broadly, a lot of the things that George just described. are evidence of continued improvement in real estate markets, our largest concentration in real estate on the residential side, multifamily and then through condos in there as well. And that's -- that particular part of the world has been performing very well across the portfolio. But then you need to work down, you mentioned office and industrial, and we were pleased in both cases with the continued absorption leases that are being signed up in various projects across the country. There are markets that are hotter, that are -- they've filled up, they've used up all the really strong Class A office space, and that trend of flight to quality just continues. We see it everywhere we go.

And as leases roll, it takes takes a little bit longer for an office contract to work its life than it does an apartment. And so it takes time to see the ultimate degree and magnitude of the migration from lower quality projects to higher quality projects, but we're encouraged at how we're seeing that take place in a number of markets across the country.

I mentioned industrial. We continue to see good lease up there. And I know that we had a -- saw a question around industrial appraisals where all our appraisals on these projects are reflecting the current state of markets, whether it's strong leasing or lesser leasing, and we're really pleased, as always, at our basis in these deals that may be not moving quite as quickly as others that are really leasing up well. So good activity there. And the office space strength has been strong enough that you're starting to get a bleed over in the life science sector, those markets where there's just not enough really high-class office for tenants to move to. Our sponsors in the life science world where demand has has been slower, are -- we're seeing them being open and porting tenants that are more of a traditional office use in those projects.

And of course, as we've noted several times over the past, our bases in those projects makes an office lease, a very executable proposition. So while life science has not attained the level of the magnitude, velocity of leasing that office has, you are starting to see office be considered and impactful to projects that are otherwise labeled life science.

So you got all the things George mentioned as evidence of the recovery in the commercial real estate markets. You've got perhaps a reignition of the easing cycle that will take some pressure, slow some headwinds with respect to both sponsors and real estate projects, with respect to tenants and operating businesses and all the impact that, that has. And obviously, the capital markets are giving a nod to those market dynamics in the origination of a lot of loans, many of which are are coming to take our projects away. And as has been mentioned, our payoffs this quarter are a pretty significant indicator of that.

Yes, fantastic level of detail. I really appreciate that. And maybe flipping the script a little bit. Reason through the management commentary, management comments, and I went back and read a bunch of them last night [indiscernible] 1017. It feels like you guys are about as bullish as I remember reading as it pertains to 2027 loan growth and kind of how you're positioned to be opportunistic there. And it seems like a lot of that is being passed the wall of these older vintage repayments in RESG. But just kind of, if you could comment further on that. It sounds like mid-single-digit growth expected in '26, meaningfully more expected in '27. So I don't know if you can frame that up at all, but it feels like loan growth and fee income growth, you're both pretty bullish on as we get into '27. And just any additional commentary there would be great.

Yes. Yes, Stephen, I think you correctly understand how we view the future here. Obviously, 2022 was RESG's record origination year. We originated $13.8 billion. We give that in that year. We give that cadence chart in our management comments document and have for years that, Tim, what page is that on?

Page 13, Figure 13.

Page 13, Figure 13 in the management comments document that shows that cadence. And we have told people for years that most of these loans have a 3- to 4-year life cycle. So it it's no surprise to anyone that's been following our stock that we would have an exceptionally high level of RESG payoffs in 2025, probably late 2025, and you certainly saw that in the quarter just ended, and in 2026, as those loans kind of reach that 3-, 4-year time frame.

So we've known since we were celebrating the extraordinary level of originations in 2022 that, gosh, we were going to be having to pedal hard to keep up in '25 and '26. And that realization was a strong impetus behind our effort to really ramp up our CIB group and diversify and build its origination capability so that we could achieve a handoff for the growth [indiscernible] from RESG as it was absorbing that payoff wave to another business unit that could match the quality that we've traditionally had in RESG that 12 or 13 basis point life of portfolio sort of net charge-off number, that high asset quality and also originating significant volume.

So our timing there, I think, was very good. If I were criticizing my leadership as CEO, I would have said, "Gosh, we should have started CIB a year sooner, and the timing would have been perfect." But we started it when we had the human resources lined up and felt like it was time to go on it, and we're pretty close to spot on there. So what I think happens is that RESG repayment wave just continues through '26 as we grind through the natural payoff cycle from all those '22 originations. And of course, there'll be a few older and a few newer originations that will pay off next year and some of the '22 will slide to '27. But next year is going to be the big payoff wave if the normal expected cadence holds true. And CIB is growing.

We've really ramped up the staff there. So I think those guys are going to carry the growth bar for us next year. And of course, we would expect our high-quality indirect marine and RV business to continue to grow kind of at a similar rate of growth to what it has grown this year. We would expect our commercial banking business to grow. And with that big RESG payoff wave, we think that gets us to a mid-single-digit loan growth rate next year. But once that payoff wave is behind us and RESG is beginning to contribute positively to future growth, and we're not absorbing all those payoffs, we think we've got all of those growth engines really contributing in a meaningful way, and that really is going to lead us to some nice, very diversified growth in the portfolio in '27 and years thereafter. And at that point, I think your 40%, 30%, 30% or 38%, 32%, whatever. It's a much more balanced, almost 3 parts of the portfolio that are more or less equal, with RESG, of course, being the legacy dominant part of that, CIB being almost equal, if not equal to RESG and the commercial banking indirect piece really filling in the final kind of third part of that equation.

So I think that diversification is good for asset quality. I think it's good for eliminating some of these concentration risk that's weighed on our valuation, and I think it's good for growth. So we're really excited. I think we've positioned ourselves well to be in a really good place at that point from a growth perspective. And I think we've gone through with mid-single-digit growth next year and a lot of banks out there would be happy with mid-single-digit loan growth. So we're feeling good about it.

Great. That's fantastic, George. And maybe just 1 accounting question to follow up on what you just said. As you migrate towards that maybe 40%, 40% over time with CIB and RESG, if that reduces the unfunded book further, which I would think it would. That would just simply unlock more potential capital for share repurchases. Is that right on how that accounting would generally work at a high level?

Yes. And the CIB guys are very cognizant of that, and they're focused on opportunities that not only meet our high asset quality and returns, but also have high utilization rates. Because we're very sensitive from our history with RESG where we got almost as many unfunded as funded that, that capital burden of all those unfunded loans really impairs our ability to be as efficient with capital allocations as we would like to. And we've had those conversations. Of course, Jake and his team are a bunch of really smart guys. They didn't need to have that explained to them. So they are actually working to weed out some of our older legacy business in those books that has a very low utilization rate and preference to new business that's very high-quality new business, but it's going to have a higher utilization rate and less unfunded. So we're focused on that as part of the strategy.

Yes. And George, to piggyback off of that, you can look in our management comments specifically in the CIB section. You'll notice quarter-over-quarter, we had a little bit of shrinkage in our fund finance group, for instance, that is exactly what George is explaining. We're actively as we grow, rebalancing these legacy books to ensure that we're optimizing utilization and the deployment of capital but also ensuring that we're getting the best return possible for our shareholders. And so you saw a little bit of a dip there in fund finance. That was primarily by design as we've shed some legacy borrowers who, in some cases, weren't even utilizing their facilities. We weren't getting the fees that we wanted out of those opportunities. The opportunity came around to exit those relationships on good terms, and so we did that. And so you'll see that continued rebalancing, to George's point, of the CIB book actively as we grow to ensure that we're improving our utilization quarter-over-quarter-over-quarter.

Our next question comes from the line of Manan Gosalia from Morgan Stanley.

So I appreciate all the comments on the credit for the RESG side. Can you talk a little bit about the CIB side, maybe what are you hearing? What are you seeing in the portfolio, especially given the recent headlines and the asset-backed lending corporate banking, sponsor finance, fund finance portfolios. Can you just talk a little bit about what you're seeing there?

Jake, do you want to take that?

Sure. That sounds great. It's great to hear from you. Quarter-over-quarter, we actually had record origination growth for CIB. We originated nearly 2 dozen new relationships upside, nearly a half dozen relationships which is very exciting to see. Now what you'll see within the management comments on a net basis due to both some of the strategic realignment that we mentioned earlier as well as the capital markets being really active this quarter. We had a record number of bond issuance and high-yield issuances, which are a blessing and a curse that took a little bit of a kick out of our outstandings growth quarter-over-quarter, but the upside is, now that we have our loan syndications and Corporate Services group, we're able to reap the benefit of additional fee income from our capital markets program, which is exciting.

But quarter-over-quarter, I do want to point out that it was very successful for CIB overall, our ABLG group really led the way along with CBSF, and then our new Natural Resources Group. To a lesser degree, we had great contributions from our fund finance and lender finance groups as well. And so we're excited about the continued diversification we're seeing there, the consistent growth we're seeing there. And candidly, the additional fee income that we're producing in partnership with CIB's LCS with that growth.

You touched on something that's really made the headlines lately, the NDFI space, the lender finance group. The beauty of what we're building here is we're building a wholesale banking infrastructure based on that diversification play. And so with the launch of these new business lines that we've brought into the fold, with the launch of business lines that we're looking into on the horizon here for the next couple of quarters that we feel like will be very complementary. As a whole, our exposure to that lender finance space will continue to dilute as a percentage of the bank's overall portfolio. And so I did want to point that out as we kind of get into the nitty-gritty here on the NDFI side and then some of the headline risk that you all heard of there. The bulk of our NDFIs here at Bank OZK, are really found in that lender finance group led by Jim Lions. Very experienced team. That is our former EFCS group, just to make it clear for everybody as we've renamed them and really honed in a focus on what they've been doing.

But an experienced group that's locked in arms with our portfolio management operations team to ensure deep underwriting, compliance oversight and really a credit focused and a credit-first mindset, specifically in that space. We're a little bit different in that space than most. And most that you've seen in the market have stubbed their toes there lately. We really focus on single lender opportunities and to a degree, 2-bank club deals within that niche more than the broader syndications. We think that's important in that space because that allows us to have tighter control, allows us to have a deeper look at the underlying portfolio of companies within those, the attachment points that the bank has at the loan level as well and it also ensures that we can put in place a structure that we find to be palatable and conservative in nature, too.

And so we take a little bit of a different approach there. We do a bottoms-up risking, which is very different than other institutions. We take the time to look at each portfolio company investment. We actually rate that against the bank's risk rating methodology to ensure that it meets the standards of our institution. We also not dive into their policy and their procedures to ensure that they're properly monitoring these loans. And then in addition to that, we also engaged third parties for field examinations, appraisals, you name it, to ensure that what we're lending to is; a, actually there; but b, is a value at the valuation that plugs into our assumptions for our overall loans. And so that's a space we've been in since 2019. That loan book has continued to grow but grow at a much smaller pace than our other business lines. And while we remain focused and committed to that space, I do want to point out over time, it will be -- continue to be a bit diluted just with the introduction of some of these other more diversified C&I business lines.

George, anything that you'd like to add?

Yes. I might. You were talking about the NFI loans, Jake, from your CIB group. But a chunk of our NDIF loans that show up on our call report, or actually RESG loans. And this goes back to our long-standing relationships with a lot of the debt funds that do commercial real estate lending. And we compete with those guys a lot of times, if they win a unitranche deal, they'll bifurcate it into a senior mezz and with the senior lender in there the math, sometimes they want to hold that whole loan on their books, but leverage it with a loan from us. And we do a loan to lenders or an NNFI loan to those guys. And we underwrite our loan to them exactly and service it and manage it exactly as if we were the senior lender on that and if we were making the senior loan. So in our view, there is no difference in the way we rate or evaluate those loans or the risk profile of those loans versus us being senior and them being mass, in the transaction. So that's a big chunk of our NDFI loans. We feel really good about that. It's a business we've been doing for many years with an exemplary track record. And in CIB, we are looking at the portfolios of the lenders that we're leveraging. As Jake said, our attachment points are very low and that is it gives us a lot of comfort, insulates us from a lot of risk.

How is [indiscernible] when I was listening to 1 of the news programs the other day and 1 of the executives from 1 of the lenders that has been called in 1 of these situations was on there, and he said, frankly, we just need to do better underwriting. And I thought, my gosh, you're making loans to complex entities out there. And you just now figured out you need to do better underwriting. I mean, we are thoroughly vetting and doing very diligent underwriting on these things. And Jake, really emphasized that talking about a lot of our deals, we're a single lender or small group lenders so that we're able to really influence that and dig in there and look at the underlying portfolios in a great detail. And of course, we've got locked boxes and third-party servicers and other protections there that ensure that we're doing those things the right way.

Yes. And George, just to piggyback off that again. I think it's important to point out that the NDFI opportunities and when we're looking at our lender finance book, for instance, it's going to be think of BDC's business development corps, for instance, we look at how they're looking at their investments, right? Concentration risk in ensuring that the bulk of their loans are senior secured loans are properly perfected. And then we also look at what industries are they focused on. We've mentioned on prior earnings calls that CIB recognizes there're certain industries out there that are currently a little bit higher risk or very competitive, but we're seeing people stretch on structures and it makes us candidly uncomfortable. And we see that in the consumer space, the auto space. We see that in the degree in health care venture capital and tech. And so there's a lot of BDCs and other what we'd classify as MDFIs that are focused in those niches and good on them, if that's their prerogative. But just like a direct loan that we would do here at Bank OZK, when we're lending to an NDFI, we look at the industries they're investing in to ensure that it is aligning with our overall credit philosophy as well.

Yes. And that conservatism and thorough underwriting is evident in our pull-through rates. Jake, what are we running [indiscernible], right?

Great point, George. We were still sub-15%, all. So when we look at that quarter-over-quarter, we're still being very selective on the opportunities that we're pursuing. 85% of the deals that come across our desk, we're passing on primarily from a credit structuring standpoint, from a yield standpoint. The market has gotten very competitive. And we've said that quarter-over-quarter. And we're choosing to pick the spaces, pick the markets that make sense to us, and we're sticking to our guns on credit quality. We rather have high credit quality names here and let our products and services speak for themselves versus chasing just yield and as a result, doing a bunch of highly levered deals or deals in kind of adverse industries and asset classes.

Yes. We're -- as we've said earlier, we're looking for CIB to become 30% to 40% of our loan book over the next several years. And obviously, even if we're 3% or 4% we would be paying close attention to it. We're realizing that it's going to become an -- our loan book, we expect to rival our RESG book as far as volume, we're certainly intent on doing this right.

Our next question comes from the line of Matt Olney from Stephens.

I wanted to switch gears a little bit, and I appreciate the commentary around the margin and the guidance for the NII in the fourth quarter. Very helpful and that all makes sense. Just want to understand your expectations of when that margin could stabilize? If we go back a year ago, that the Fed cut aggressively in the fourth quarter and the margin was down in the fourth quarter and then down a little bit more in 1Q and then stabilized in 2Q of this year. So call it a quarter or 2 lag after the Fed paused we saw the NIM stabilized. So just looking for any color on when you expect the margin to stabilize as it relates to Fed cuts?

Yes. Happy to address that. If Cindy we're here today, and she's off and not with us today, but if she were here, she would tell you that our predominant interest-bearing deposit product is a 7-month CD special. We have other maturities, but probably 80% or more of our CD issuances in that 7-month time frame right now. So our variable rate loans typically tend to reprice around the time of a Fed cut. Those CDs are going to reprice 7 months later, more or less. So that's a good example, Matt, of why there's a 2-quarter lag, more or less. You see spread getting compressed a little bit for a couple of quarters after a Fed cut until that deposit pricing catches up. And certainly, we'll see that this quarter, I would expect with the September Fed cut and likely 1 or 2 more this quarter.

So we're going to be chasing those loan yields for a couple of quarters with our deposit costs until the Fed stops and a couple of quarters after that, we should catch up.

Now the other side of that equation, though, is important, and we've included in our management comments on Page 19, Figure 20 that is the floor rates in our variable rate loans. So at September 30, 22% of those loans were at of our variable rate loans were at their floor. If the Fed cuts a 0.25 more, 36% will be at their floor and 50 basis points, 41%. So as we get to that 36% and then into the 40% numbers, those floor rates significantly slow down the repricing or stop the repricing of some portion of our variable rate loans. And that gives us the ability to catch up that margin differential much more quickly.

So I would tell you, given where the floors are now, it's probably a couple of quarters of compressed margin following Fed cuts to catch up. But as we go through more Fed cuts, if we end up with 3 or 4 or 5 Fed cuts, we're going to begin to derive some meaningful benefit and shorten that catch-up period because we'll have a lot of those loans that will no longer adjust downward.

Okay. That all makes sense. Appreciate the color there. And just to also go back and clarify a comment from a few minutes ago around 2026 and 2027. I think we all appreciate the RESG paydowns are going to be elevated in '26 and continued expense build out next year as well. It sounds like we should assume that the net income growth and the EPS growth year-over-year in '26 may not be significant, but as the loan growth accelerates in '27, it sounds like this is the year where we could see a lot more operating leverage and the EPS growth and then income growth could be more material. Is that a fair interpretation of your commentary?

Yes. I think that's an accurate interpretation. We think that we can achieve record net interest income and record EPS next year. It's going to require a lot of work to do that and probably the year-over-year gains will be relatively small, as they've been this year, while we've been building out a lot of this infrastructure for the future and absorbing -- beginning to absorb a lot of these payouts. But we're putting up positive numbers year-over-year. We would expect to do that next year. and then to really see the benefits of all that investment kick in significantly in '27 and future years.

Our next question comes from the line of Catherine Mealor from KBW.

One follow-up to the margin question was just on the -- I fully appreciate the floor impact right now that will limit kind of the betas as we get further cuts? And then how do we then layer on just the mix change with pricing at CIB being lower yields than the RESG book, and how that can impact loan yields over the next couple of years?

That's a good question. And obviously, on our CIB book, we typically have a little lower spread than we do on our RESG book. We do get some fees and more treasury management opportunities, other miscellaneous fees on that book. And then Jake mentioned that as our customers go to capital markets, whether it's for bond issuance or equity issuance, we have now got through our CIB team, a unit that shares in those fees and lets us participate in that. So net-net, I think CIB's revenue generating capability is not far off RESG's on a pound-per-pound basis. And where we really, I think, will equalize or actually benefit from CIB as CIB becomes a bigger part of our book. And particularly if they can achieve the higher utilization rates on their credit lines that we are going to strive to achieve there, we will not have as much unfunded loan commitments on that portfolio and the diversification and elimination of our CRE concentration will let us be a little more judicious in our allocations of capital.

So I think on an ROE basis, CIB will help us be actually improve our return on equity, even if on an ROA basis, there's a slight deterioration in ROA because I think it will allow us to be much more judicious in the use of our capital.

And Catherine, as just a help there. As a reminder, as George mentioned, through LSC and the introduction and build-out of that business line last year, and it's really ramping up now. We have capabilities to collect bond tips and other capital markets fees. We have the capabilities to collect and serve our clients from an interest rate hedging standpoint and FX standpoint. We have the opportunity to produce income from a permanent placement standpoint, too. And so we're starting to see a real nice uptick and build there of additional fee income from LSCS, which is serving the broader bank as a whole. And then as a reminder, too, and how we do these deals. Over 96.9% of our deals this last quarter or for our book, I should say, as a whole, we're either single lender, they're 2 bank club, or if they're syndications were the admin agent or leading deals now or were the JLA. And so because of that, not only can we positively impact the overall structuring of those deals, but it's allowing us to unlock substantially more fee income as we serve in more impactful roles for our clients and both a cross-sell standpoint and then also just an upfront fee and the ranger fee, et cetera, standpoint.

So to George's point there, we're really starting to see a nice uptick in fees driven by that business unit, and we feel very optimistic about the future.

Yes. And the 1 item that Jake and I both neglected to mention that's really super important is our deposit opportunities for noninterest deposits, noninterest-bearing deposits, our low interest-bearing deposits, low-cost deposits to CIB is really an important part of the return on equity equation on that book of business. And obviously, we strive to get deposits with our RESG loans, but commercial real estate loans just don't have anywhere near the same level of deposit opportunities for low-cost deposits that you get with a CIB type of book. So that's a big part of the equation as well.

Okay. That's great. And then my follow-up is, there was a lot of movement in credit, and I agree with your conversation that it was kind of a mixed quarter on credit, but it was good to see the overall level of credits basically unchanged, right? Some came in because some team out, but the overall level was unchanged. I guess the big question is, what's kind of left to maybe come into special mention in your book? And maybe is there a way to give us some color around maybe some kind of migrations within the rest of your past credits? Like are you seeing kind of stabilization there? Or is there anything there that you're keeping an eye on?

And then secondly, how do we think about how lower rates could potentially impact the health of your RESG book, and perhaps limit the new inflows into special mention just because lower rates kind of helped the credit of some of those projects?

Yes. That's a great question. Obviously, all that RESG book is variable rate loans. There are a lot of floors in there, but we're not at the floors, unfortunately, on a lot of those loans. So our sponsors will, in large number, benefit from additional Fed rate cuts. That also -- a lower rate environment also creates additional opportunities for them to go to a permanent loan or go to a bridge lender that may be loaning them higher leverage money or cheaper money that will be attractive. So Fed cuts will tend to magnify to a small extent the rate of RESG loan repayment.

So it's a good thing on the quality side and good for our customers. It's a bad thing on the repayment side. But all these loans are going to pay off sooner or later 1 way or the other. So we're happy for our customers to get a good exit if market conditions allow that.

Your other question about what else is out there and what are we watching? I would tell you, we got guys that watch every loan in our portfolio every day. So we're looking at everything all the time, and that's part of the secret of the success we've had over our history as a company and certainly our 28 years since we went public, where we beat the industry's charge-off ratio every year, we're paying attention and servicing our loans in a very effective manner.

As for how do you know when something is going to become kind of migrate to those problems well, deteriorations and value deteriorations in market conditions, failure to lease all really are kind of summarized on Page 29 of our management comments where we talk about sponsor support. And that really is the key. Are our sponsors going to continue to support their projects until they get them leased or get themselves? And our track record on that, and we've said this, we said when the COVID pandemic started that we expected most of our sponsors will continue to support their projects until conditions normalize. We've reemphasized every quarter since the Fed started raising interest rates 13 quarters ago that we expected most of our sponsors would continue to support their projects until conditions normalize.

Now there are obviously a handful of exceptions and sponsor fatigue and energy and resources to support projects gets exhausted over a prolonged period of time. So we've seen some examples of that, but they've been limited number of examples. And when we've seen those examples, that's when loans become special mention. That's when loans become substandard. That's when loans move into the OREO book and then get liquidated out. So I would say the same thing I said at month 1 of the COVID-19 pandemic. And after the first Fed increase, we expect the majority of our sponsors, the vast majority of our sponsors will continue to support their projects until they get a successful conclusion. They'll do it because they're high-quality sponsors, they have high-quality assets, and they have a ton of money invested in them. And that keeps them engaged in the project.

We will have some along the way where they're just become exhausted in their ability and energy and resources to support a project, and we'll deal with those when we do. And I think we're very well reserved for what we think is a plausible set of scenarios in that regard.

And any changes you're seeing in the trends in life science loans? I think that's the 1 asset class we're all watching and worried about.

Brendan, do you want to talk about life sciences?

Yes, Catherine, good to talk to you. As I alluded to it in my comments earlier, that's been an industry that's had a lot of product delivered and less demand for space. And I would say there are still headwinds. There are still time to have some of those projects get where they want to go. But what we are seeing is a shift in the intention, the intended use of that space. It's -- and we've said this quarter after quarter after quarter. It absolutely has the flexibility to serve a more typical office user. And because of demand improvement that we're seeing in the office space, there's starting to be a lot more indication and real lease interest around life science space by the typical office user. So I think that's one of the green shoots that we're seeing in that space.

You don't always execute exactly the way you want to, but at the end of the day, getting a user in the space to pay a rent is what it's all about. And again, as I said earlier, our bases in these life science deals is such that executing on a different use on an office use in particular, is absolutely an executable transaction. So -- and you guys are aware, as we've said so many times about the significant good news, funding that we have in these loans and the cost of building out an office tenant space is typically a good deal lower than it is for a life science tenant. So the dynamics that exist there, again, you'd love for them to all be full with life science tenants, but we're encouraged at the office markets that are pushing prospective tenants to really high-quality assets that we've financed the construction of.

Our next question comes from the line of Janet Lee from TD Cowen.

Just given -- I know you appreciate that I will get more clarity in the fourth quarter and January, but on that Boston office loan that moved to substandard accrual, is that baseline expectation that they will win that 1/3 of the building for that potential tenant? And is that how you're your reserve tied to this loan is baked in. Just given the size, I would appreciate if you could give a little more color on what the likely path of this flow is in your current [indiscernible]?

Yes. We certainly don't want to get ahead of our sponsor here in their negotiations. They are working hard on leasing. They're also evaluating how to recapitalize that project for a longer runway. Our reserve on it as I said in my preliminary comments to the initial question reflects a wide range of scenarios here. So I think we're very well reserved on this, and we're going to let our sponsor continue to work this and endeavor to execute on it, and we'll see how that plays out over the next couple of quarters.

Got it. And just switching gears to loan origination. So if I look at the -- on the third quarter, it was 1 of the lowest levels. And in your management commentary, you talked about the expectations for higher origination volumes for 4Q, and I would believe beyond 4Q. Can you explain to us how the third quarter is sort of an outlier quarter, and then it will likely look better in that fourth quarter and beyond just given that you also commented on RESG commitments are likely to decline. But I guess that's more of the -- more driven by the payoff activities. Would appreciate any color.

Yes. You are correct in surmising that our expectation for continued decline in RESG commitments is really driven by the payoffs. I think it is very likely that our very low volume of originations in the quarter just ended was an anomaly. You never say that for sure. We'll be glad to put up another quarter of results and prove that. Hopefully, we will. What I can tell you is, we've already originated in the first 2 weeks or so of the current quarter about half the origination volume or a little more that we originated in the whole quarter last quarter.

So those transactions, I think there are 3 of them that we've already closed this quarter, would have been transactions we actually expected to close last quarter. But for 1 reason or another, they got pushed into this quarter. So we hope we'll return to a much more typical and normal level of originations in Q4 and future quarters.

As I mentioned and as we mentioned in the management comments document, there are not as many new CRE projects being originated just reflective of all the various market conditions out there. There are a lot of lenders chasing those projects. So you've got a situation where you've got too many lenders chasing too few projects. That's leading to some structures and pricing and leverage points that we would not go to. That is having an impact on our origination volume. But even with that, I do think we will return more likely than not to a better, more typical origination volume in Q4 and future quarters.

Our next question comes from the line of Brian Martin from Janney.

Most of mine have been answered here. But George, I've been kind of bouncing back and forth between calls, but just your -- the further build-out of the CIB group, George, can you just talk about if there's a lot more teams or people or verticals that maybe you're contemplating adding, I guess, and just kind of spell out kind of where you're thinking given the growth outlook in that unit and just give a little bit of color on that. I mean just -- I know you've talked about in the past, the fee income opportunity given it's such a small piece of revenue today. Just kind of, over time, where you think that fee income to revenue kind of percentage can get to as you go forward?

Let me tell you that we have a wonderful leadership team in our CIB group. And it's not just, Jake, but it's the leadership team under him. And they are -- thank you, operator. They are doing a great job of recruiting just top-tier veteran talent to the team, and they're being very careful about it, but they're also being very active out there in the market. So Jake, I'm going to come to you and let you unmute and talk about that and give a little additional color.

No, I appreciate that, Brian. You asked my favorite question in the morning talking about the fun stuff here. So I appreciate the question. It's a good 1 at that. I want to emphasize here in third quarter, we're looking at the management comments. You can see quarter-over-quarter, we're up $575 million in outstandings. If we look on a commitment basis, so that would be your outstandings, plus you're on funded, we're up [ 1.19. ] That's our net number, and I wanted to point that out again, from an origination standpoint, these teams are really starting to hit their stride across the board. Our Natural Resources group led by George McKean and Bonnie and our -- that team has really taken off and putting together some nice opportunities for us.

CBSF continues to grow. We have identified our leader out in Atlanta, John, and he's joined us, and he's building up our presence in that part of the country for us and our footprint. We've identified our leader and brought on mesh within CBSF out in Nashville. He's got great experience and it comes from a very large institution. We're excited to have him here, and we'll continue to build the team there as well. And so the CBSF and the diversification, the great yield that comes from that book is really, again, saw its infancy, and we're going to see that continue to grow and build and really be impactful leaders here for the institution.

In addition to that, Mike Chef's ABLG Group has continued to expand. We just hired a gentleman up in New York, and we'll continue to focus on. When we find the right people in the right spot that fit the OZK credit culture and overall culture, we're going to find those people. We're going to source them. We're going to bring them in and give them all the support they need to be successful, and we're seeing that in our ABL G group.

Our lender finance group, as previously mentioned by -- led by Jim Lyons is doing a fantastic job. We're seeing some nice opportunities come that way. We're being highly selective in that space, as I previously mentioned, because we are seeing a lot of pressure on the pricing and structure that we refused to give on. Our Fund Finance Group, the [indiscernible] and team is really doing a nice job and is going through that legacy book of business, as mentioned, and optimizing it. So we're proud of her and what she's doing. And and our portfolio management operations group, which is really the backbone and more than 50% of our CIB staff, continues to do a really good job in the underwriting, the compliance, the oversight space and partnering with our second line our loan review credit risk management partners, our enterprise analytic partners as well as our third line to ensure that all the lending that we're doing is safe and sound and it's what's best for both our institution and our shareholders and the communities we serve.

If we look at the overall growth of what we did in the third quarter, we actually originated about $1.6 billion in net new opportunities and material upsizes, which would have equated to about $850 million in outstandings. And so again, some of that delta between the net and the gross there is optimization of the book, which we mentioned, but also, as mentioned previously, capital markets were very ripe. And I'm sure you all saw it as well, but we had a lot of clients, our public clients access the markets, bond issuances, high-yield issuances, and as a result, we're reaping the benefits of the fee income now that we have a great capital markets partnership and program, but that resulted in a little bit of a chip off of our overall growth for third quarter.

As we look into fourth quarter, we're very cautiously optimistic. We feel nice about what we're doing. We have teams in place and executing at a high level. And we had over a dozen names that were originated in third quarter that will be booked here really in October and then going into November 2. So we anticipate fourth quarter being strong as well. And we continue to look at opportunities for additional business lines as you asked. That makes sense for what we do. That are natural complementary kind of bolt-ons that have nice returns for us, but also have positive kind of credit profiles that really fit the bill of OZK. So we're just getting started on the CIB side. I think you're going to see continued growth and momentum there, and we're very excited about it.

Yes. Let me add, Jake. And Jake's operating this addition and expansion of his staff [indiscernible] metric that Brandon and I are monitoring. And that metric is really volume and revenue generation. And as his volume grows and revenue from his business line grows, he can add the next guy or the next 3 guys. And there's a gating metric on that. We're adding -- these are very high-level team members. They're very well paid. They're veteran people, so you're paying for the experience and the knowledge and the relationships that they've built over decades in most cases. And it's not inexpensive to build this team. It's in fact, expensive to build this team, but we're being very disciplined about the way we do it, and we're getting revenue in place to generate positive leverage before we add the next person or the next group of people. We get positive leverage on that group. We get the next group. So Jake is growing it in a very responsible manner, and we're building it with high-class people in a very professional manner. And that's why I think we talked about '27 being these guys really hitting full stride in '27, we will have added a lot of additional people to their world between now and '27 that will generate a lot of additional growth opportunities across a very diverse book of business.

CIB, we're talking a lot about our desire to diversify our portfolio more. CIB is inherently internally diverse in what they're building, and that's another big plus out of that.

And George, to that point, if we look at CIB as a whole, it represents over over 40, 45 unique industries. And so there's a lot of diversification within that book, within the structures and the business lines they're under. And again, I just want to emphasize for everybody to George's point there that as we hire, we take a very different approach than what our competitor banks do. You see a lot of other banks will enter in a market and they'll hire 10, 20 people, and they'll give them years and years to build up a book and repay the institution for that initial hiring slug. But here, we're really doing it in a methodical way, to George's point. Before we hire the next person, the existing team pays for them. And so as a result, we ensure that as we grow, we're keeping a very close watch on expenses and a close watch on that efficiency ratio to ensure that we don't get over our skis.

At this time, I would now like to turn the conference back over to George Gleason, Chairman and CEO, for closing remarks.

Thank you, guys, all for being on the call today. We greatly appreciate it. We look forward to talking with you in about 3 months. Thank you. Have a great day. It concludes our call.

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

Good day, and thank you for standing by. Welcome to the Bank OZK Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Jay Staley, Managing Director of Investor Relations. 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; and Brannon, Hamblen, President; Tim Hicks, Chief Financial Officer; Cindy Wolfe, Chief Operating Officer; and Jake Munn, President, Corporate and Institutional Banking.

We will now open up the lines for your questions. Let me now ask our operator, Gigi, to remind our listeners how to queue in for questions.

[Operator Instructions] Our first question comes from the line of Stephen Scouten from Piper Sandler.

So obviously, growth was pretty phenomenal here this quarter, and it looks like I think the number was 109 new FTEs in the quarter. I'm curious if there's any sort of composition of those new hires that you have that you could kind of key us in on that are related to production hires? And anything on the NRG team as you guys build that out? Just kind of trying to think about the opportunity for CIB and NRG and these sort of verticals to continue to grow with the new hire activity.

Yes. Great question, Stephen. Thank you for it and thank you for being on the call today. The new hires were spread broadly across our company. As we mentioned in the conference call, we've opened, I think, 11 branches so far this year. We've got 14 more or less that we expect to open in the remainder of the year. A lot of those openings will occur in the current quarter, the third quarter.

So we would expect continued hiring related to those branches as we go through the remainder of the year, and that will continue into next year as we plan to open about 25 branches more or less next year. So branch count is probably the largest single number.

We've also been growing our CIB group, which is, obviously, a well-telegraphed and articulated plan. We continue to add people there. We'll continue to add people there as their business grows, and that is a very well planned and choreographed additional staff that really occurs commensurate with their continued portfolio growth and -- growth and opportunities. The Natural Resource Group, as you mentioned, is part of that.

We're growing out business banking teams that we built out the initial team last year in Florida. Earlier this year, a business banking team in Texas. We're now building out a business banking team in Georgia. Saw a fair amount of development of staff with those teams.

And then just lenders and staff additions in our existing network of branches because a branch that was handling $70 million of deposits is now handling $100 million, needs another FTE, for example, to continue to deliver the quality of service with our customers. And of course, that growth across all those production lines of business, whether it's deposits or loans, also leads to growth in your customer care center, your call center, leads to additional growth in risk and model and data and technology and all across the board.

So it's a few people everywhere, but all of it is being driven by growth in our loans, growth in our deposits and growth in the production teams that are interacting with our customers. I could talk about trust and wealth, I could talk about private banking. There's a lot of initiatives going very well. And we're thrilled at the quality of talent that we're able to hire in this environment.

Yes. That's really good color, George. I wasn't aware of the business banking build-out to that degree. So that's helpful. In regards to the ability to bring in talent, obviously, we've seen a bit of a pickup in M&A activity in and around your markets. Do you think that that will add in the near term, your ability to continue to add more talent? Could that -- the new higher activity increase?

And maybe along with that, growth, growth and diversification strategy is playing out well, could M&A now for you guys as an acquirer once again be part of the story given the way your stock has been performing lately? And obviously, you have a great record there on an M&A front.

Let me answer your first question, then I'm going to ask Tim to answer your question about M&A opportunities. Clearly, we are focused on hiring very high-quality, high-performing talent. And obviously, all of us in the industry know that, a lot of times, M&A transactions at other banks frees up some high-quality talent that's not as enthused about the merger, the combination or perhaps their new teammates or new reporting structures as they were before. So yes, to your question, M&A will create additional opportunities.

But our ability to acquire really talented people that have deep relationships with customers. And deep relationships, I think, is more driven by our culture and the track record of performance and achievement and the reputation that our company has in the industry than it is by what our competitors are doing. We are adding a lot of team members that are leaving really highly regarded banks and big jobs at bigger institutions to come join OZK because they realize that we have a long track record of high achievement, high performance and doing things with a level of excellence that's commensurate with the way they want to pursue their jobs.

So I think our reputation is more important than hiring the talent that we're hiring, the really high-performing, [ high-octane ] people, than what's going on in other banks. So Tim, I'll ask you to address his M&A opportunity question.

Yes. Stephen, on M&A, we've had such a great track record over the last several years of being able to grow organically, that sets a really high bar for us in evaluating M&A opportunities. We do see opportunities that we look at, but they are in the context of the organic growth that we're having and the success we're having growing organically and whether an M&A transaction will take away from that momentum as part of the consideration. So I can't tell you if it's going to be part of our story long term.

We do have a very high bar for looking at that. We've been very, even when we're doing acquisitions 2010 through 2016, we were very conservative in how we looked and evaluated those acquisitions. And as you remember very well, all of those were very accretive to our bank. And those are the type of opportunities we're looking for. Does it add additional business lines and does it add some part of our business that can accelerate our strategy? So we continue to evaluate that, but we're really pleased with our organic growth story and the momentum we have there.

Great. Appreciate that. And one last quick one for me, if I could. I noticed there was 1 loan that got added in the $375 million to $500 million bucket. Was any portion of that loan potentially above $500 million? Have you syndicated out any portion of any loans as of yet?

We are syndicating loans in our CIB group. We've not yet had a $500 million-plus opportunity in RESG that we've syndicated. But we're certainly open and looking forward to the day when that opportunity presents itself.

Got it. Very helpful. Congrats on all the success. Appreciate it.

Our next question comes from the line of Michael Rose from Raymond James.

Just wanted to start on deposits. Obviously, you added a bunch of time deposits. I think you opened 8 branches in the quarter. But it was nice to see the interest-bearing deposit costs come down a little bit. Can you just speak to kind of the expectation for near-term deposit growth branch openings? I think you have some more slated. And then if we can see some further reduction in deposit costs, are we kind of at or near bottom at this point?

Cindy, you want to take that? .

Sure. Thank you. for the question. Our deposit costs are roughly going to be where they are until the Fed moves. We did -- I can tell you that in June, deposit costs were 3.68 compared to the 3.7 for the quarter. So you can see they're going to be where they are more or less.

And we'll grow deposits to the extent necessary to grow our balance sheet. I mean if -- obviously, if we need another quarter of $1.6 billion, it will cost more than if we only need a few hundred million. But we have the capacity to grow within our current branch network. And yes, we're adding branches, as George mentioned earlier. And those will serve us well for our growth in 2027, 2028, 2029.

Perfect. I appreciate the color. And I'm sorry if I missed this, I got on a little late, but just wanted to better appreciate the loan growth outlook for the back half of the year does imply some deceleration. I know you've talked about paydowns. But if you can just walk us through kind of maybe by bucket, what the expectations could be CIB versus RESG? I assume that will be a headwind, and then [ marine, RV, ] things like that.

Yes. Great. Happy to do so, Michael. Obviously, CIB has been our largest contributor of growth year-to-date. We expect that to continue as we expect strong growth from them in Q3 and Q4 and on into next year. As you acknowledged, RESG is likely to be somewhat of a headwind to growth. I don't know if that's a negative number for RESG or just a flat number. We'll see how the prepays shape out. But we are expecting much higher prepayments in the current quarter. We mentioned in the press release that we had had, I think, $0.47 billion in RESG paydowns in the first 15 days. If we had pulled that through close of business yesterday, that number would have been $0.54 billion as we had another paydown yesterday.

And those paydowns we're seeing, which we expect to see an accelerated volume of in the second half of this year, are broad-based. So far, our biggest paydown was a New York multifamily. We've got a Dallas multi payoff, our largest, I think, land loan in -- which was in Miami, paid off, a Washington State multifamily, a Chicago mixed-use, and then yesterday, a Chicago multi. So very broad-based range of payoffs across product types and geographies, and we expect that will continue.

The bottom line of that is the guidance we gave that we -- we had given guidance at the beginning of the year and reiterated that last call on April, that we expected mid-teens to high single-digit growth in loans this year. Obviously, we blew that away with 10.1% in the non-annualized in the first half of the year. So we exceeded our growth guidance for the year, which I may have missed it, high single digits -- I'm sorry, high single digits was our guidance. And we exceeded that already. So we do expect further growth, but we expect it's going to be significantly muted by paydowns. So we've increased that annual guidance to an 11% to 13% range for the full year.

Our next question comes from the line of Manan Gosalia from Morgan Stanley.

George, I was wondering if you could just expand on your -- the comments you just made on the repayments in the RESG book. Can you expand on what drove those paydowns? Because, I guess, the long end of the curve is still higher. Is it just that capital markets are opened up? Are they finding more opportunities to refi away from you? Can you maybe expand a little bit more on that?

Yes. It's a combination of factors, Manan. You're seeing, particularly on the multiproduct that I mentioned that was included in the paydown, a lot of those are reaching a stabilization level, that they're able to get to a reasonably favorable, probably not as good as they would like, but a reasonably favorable permanent exit. You're seeing some projects that are refinancing with a different lender with more liberal terms and higher proceeds, that give them a longer runway to stabilize their project and get to an ultimate permanent, a bridge lender situation, if you will. A lot of those are driven by property sales or enhanced leasing activity.

So it's all the normal factors that drive folks to refinance out of our construction loan into a bridge loan, a permanent loan or sell a property. So we've given guidance for a number of quarters that, somewhere in this time frame, we expected to see a significant uptick in payments. That was a little more muted probably than we had expected at the outset of the year in Q1 and Q2. There's been a lot of uncertainty and volatility in markets and the economy over the first 6 months of the year. So I think that led perhaps to a little slower execution on some of those refinances than what we expected in December.

The flip side of that, though, is that people seem to be getting a sort of sense of where the world is going in the midst of the uncertain environment today, and that's leading to execution on a lot of transactions.

Got it. Very helpful. And then as always, you guys gave some great granular disclosure on the new appraisals. I was wondering if you could comment on the 2 or 3 loans where the LTVs moved up significantly this quarter. Any common threads there or anything specific you were seeing there?

Well, we gave you 3 footnotes on those 3 highest loan-to-value reappraisals. And the footnotes are a pretty good disclosure. The first item out there is a very small office building loan, $10 million. The reappraisal on that is our highest loan-to-value at 129% loan-to-value. That would normally be a very disturbing sign, that kind of a loan to value, even though it's a very small loan.

But the sponsor recently executed a 12-month extension, made $1.5 million paydown, curtailed the $10.1 million of unfunded proceeds in that loan, put up another $1.1 million in carry reserves, paid an extension fee and closing cost for that, all customary charges. And they're evaluating how to reposition that property looking at alternatives for how to extract value from that.

The other is a -- second one is a multifamily project that was leasing well, but below pro forma rents. The sponsors have built that to condo standards. They've elected to proceed with the conversion to a condo project, and we had it reappraised as such. In connection with that conversion, they added another $6.5 million of cash equity to the project. So again, the sponsor continues to be engaged working on that project.

And then the third one was a land loan, and that was extended during the quarter. That's a substandard rated loan, substandard accrual to borrower, deposit is another $4.1 million in carry reserves for a short-term extension of 3 months while they're working to align a recapitalization partner with them in that project. So that's pretty much the story on those.

I think even though these loans are challenged from a loan-to-value perspective, they are good examples of guarantor, sponsor support and engagement. We talk about that a lot in our management comments and have talked about that a lot for, gosh, a couple of years now, about how important guarantor support is, particularly in this CRE market. And those are just good examples of projects that have had a really significant change in loan-to-value and yet the sponsors are staying engaged putting in additional money and continue to work toward a successful resolution.

Our next question comes from the line of Matt Olney from Stephens.

George, I appreciate the commentary on the loan growth outlook for the back half of the year from the earlier question. And I'm sure it's a little bit early for loan growth guidance for 2026, but appreciate any kind of commentary you can provide around framework for loan growth for next year. If we just assume the pace of loan growth in the back half of this year continues into next year, is that a reasonable framework for us to assume? Or are there other considerations we should keep in mind for next year?

Matt, I would agree with you, it's a quarter early for us to give loan growth guidance for next year. But I certainly understand the question and I realized that 2026 model results are gaining in importance in the minds of our analysts and investors. So Jake and Brannon, if you would, Jake, I'm going to -- since CIB is the king of growth in our company at the moment, I'm going to ask Jake to take the lead on that. And RESG is the -- still the champion and outstanding balances, I'll ask Brannon to follow up and talk about RESG, and without giving specific guidance, just talking generally about where we think we're going in 2026 with those 2 units that are very important. So Jake?

Perfect. Thank you, George, I appreciate it. And good question. I'll take CIB getting called the king of growth for as long as I possibly can. So I appreciate that compliment.

Pipelines remain strong for CIB, at least going into the third quarter to say the least. We continue to attract good talent across the footprint for CIB, as we discussed previously on the call.

I do want to reiterate to everyone that difficult trends are what we're seeing with the C&I growth here at OZK, specifically with CIB, where our first quarter is going to typically be our weakest, our second and fourth quarter should mimic one another, and our third quarter is usually our strongest, first quarter being the weakest because coming out of the holiday season and also CFOs and the like are focused on their audits and other reporting items.

We do have strong tailwinds coming out of second quarter into third quarter, so I do want to mention that and highlight it. We had a number of good deals that were approved pending close that ended up closing and funding early in this month, and so we're excited that those are going to contribute into our third quarter growth.

And in addition to that, George mentioned, touched on it earlier, but we have some nice tailwinds from the launch of our Natural Resources Group that's going to be taking flight in the third quarter. And so we should see a nice pickup in growth and third and fourth quarter from George and [ Monty ] and that team as they continue to grow and develop and add some substantial growth into 2026 as well.

In addition to that, CIB is really focused on the CBSS business unit. As a reminder, that's our corporate banking and sponsor finance business unit. [ It's really focused ] on diversified C&I lending in that middle market to large corporate space, both traditional asset-backed lending as well as our enterprise value based lending. And so I do want to highlight CBSS growth. We continue to see that. We'll see that push into third and fourth quarter as we start to expand and start markets or start presences in the greater Atlanta market, in the Nashville markets as well. We've identified some nice talent. We're going to start putting those offices together, which should contribute to additional loan growth across the broader platform.

Going into 2026 though, we're feeling like we're just now starting to hit a nice stride, and so I'm consciously optimistic about overall CIB performance as those business lines continue to grow, as well as our legacy business lines, our Fund Finance Group led by [ Perul ] Mike leading the helm at our [ ABLG ] shop and Jim running our [ EFCS ] as well as [ market income ] generating services through [ LSCS ].

And so we feel blessed with the quarter performance that we have here, and we feel very optimistic, or cautiously optimistic, I should say, about growth in third and fourth quarter and then into in 2026.

Jake, am I correct in summarizing that is that we expect CIB to accelerate, not slow down?

That would be a correct statement.

Brannon, do you want to give a little color on RESG?

Yes. Well, first of all, they're all very thankful that, Jake's guidance is acceleration and not deceleration. So thank you, Jake.

Matt, I appreciate the question. Good to hear from you this morning. So when you think about RESG growth, I want to obviously make the distinction between originations and funded balance growth. I'll kind of start on the origination side because, certainly, as we look forward, that's an important piece, although, as I've said before, our originations don't contribute meaningfully to balance growth for about 12 months after loan closing because we, as you know, have all our sponsors funding their equity in advance of our loan closing.

We're pleased with the job that our guys have done on the origination side, modestly increasing volume each quarter this year and highest level since second quarter of 2024. And that's in an environment where, as we've noted for several quarters, our sponsors are remaining cautious with respect to moving forward on new projects, and the volume of new deals that can be bid on in the market has clearly been suppressed relative to history.

Conversely, the number of lenders, whether it's bank or alternative lenders, has been elevated during that time period. A lot of lenders have had suppressed originations that are out there, hovering around, as I said, fewer deals. So a result of that is a healthy challenge for our origination team. It won't be easy, but these guys, as you see in the quarterly numbers, keep pressing that forward as the market will allow, and they're originating every loan that they can that fits our stringent leverage structure and pricing criteria.

On the funded balance side, the plus side of the equation, we still have unfunded balances to advance off the last couple of years of origination. So we do have that. But as we've guided, we expect significantly higher repayments in coming quarters and into 2026. So as George noted, not sure if that's a negative or a positive impact [indiscernible] but clearly, we've got headwinds to that funded balance growth in RESG and thankful to Jake's teams here and [ thickens up ] there.

I might add a few comments there. We've talked for a long time about our growth, growth and diversification strategy. And people have misunderstood that to mean that we were deemphasizing RESG or that RESG was -- we were trying to shrink or pull back from CRE. We are not deemphasizing RESG. We're not trying to pull back. We're not trying to shrink it. And growing RESG is one of those elements of the growth, growth and diversification strategy. So we were very pleased to see an uptick in origination volume in the quarter just ended in what was a very challenging origination environment.

I was on the phone yesterday just taking a call to kind of do a channel check with one of our long-time sponsors who said they're not looking at any new deals right now because they just can't make them pencil from the equity perspective in the current interest rate and economic environment. So it's a challenging environment to make new deals work from an equity perspective, which has slowed down the opportunities we're looking at. And yet we had, as Brannon pointed out, the best RESG origination quarter since the second quarter of last year. So best out of the last 4. So that, we take that as a win and certainly reflective of the fact we want to continue to grow RESG.

The other element of that growth is CIB indirect lending and commercial banking, our community bank business, everything else basically. And we want those to grow even faster than RESG so we achieve diversification, the third word in that growth, growth and diversification strategy. And you're seeing that. RESG in the quarter just ended hit the highest funded balances they've ever hit and yet they have grown over the last couple of years, they've grown from 70% of the funded balance of our loans to 60%, of the funded balance. And going from 70% to 60%, you wouldn't think is growing, but they have grown from 70% to 60% because CIB and indirect and commercial community banking groups have grown and contributed more of our volume. And that's exactly what we were trying to articulate when we first coined the phrase growth, growth and diversification strategy. And of course, the strategy existed in our minds and in our strategic plan long before we gave it a name, but we decided we needed to give it a name. So this is all playing out exactly as we expected.

We've talked a lot about CIB, we've talked a lot about RESG. I'll just give you a little -- the other pieces of it. Indirect lending has grown this year. It's still static, roughly 12% of our outstanding balances. Our articulated goal is 10% to 12% of our loans. It's been for the last several years right in that 12%, 13% range. We expect it will continue to grow and stay in that sort of middle of our target range there of 10% to 15%.

And our commercial banking, community banking teams were doing more consumer through our branch network. We're excited about that. And I mentioned the business banking teams that we launched last year in Florida earlier this year in Texas and now building in Georgia. And those should be meaningful sources of loan and deposit growth for us as we deal with a smaller commercial customer than what we would deal with in our CIB group, or deal with with our typical commercial lenders and our community banking organization.

So we're expecting to hit growth next year on all categories, whether or not prepayments just neutralize RESG's growth for a quarter or 2 or 3, that's certainly plausible we could have a very chunky quarter prepayments. But Long term, we expect RESG will continue to be an important contributor. But we also think that that growing from 70% to 60% will continue and that RESG is growing towards 50% of our balance sheet at some point in the future, and then less because CIB and other groups are going to grow faster.

Okay. That's all great commentary. I appreciate your help.

Our next question comes from the line of Catherine Mealor from KBW.

George, can we come back to the appraisal chart, which I actually was really encouraged by a few things that I saw on that chart that showed, I noticed there were 3 life science projects that had LTVs up, but only by 10% to 12%, it's still at levels that feel good. So we're just kind of curious on the life science, there's just a lot of chatter on that space, I'm just curious if you could provide any insight into trends that you're seeing in that asset class right now.

Yes. I'm going to ask Brannon, since those are RESG loans, to comment on that. But before he does, we're pleased at where we are in the appraisal process. We've now, depending on whether you're looking at loan count or dollar volume, 98% of our loans and number and 99% in dollar volume have appraisals dated on or after December 15, 2022. And that was when the Fed reached peak interest rates or reached this interest rate where they are now. They went on increased rates of 100 bps higher and then cut 100 bps. But all those appraisals from December 15, 2022 on have been done in the current or a higher interest rate environment. We only have 6 loans that haven't been reappraised in this environment.

Now our weighted average loan-to-value has gone up 2% as a result of that, from 43% to 45%. Now if you have been following the monthly or the quarterly scorecard we've been giving you on appraisals, you'll note that our loan-to-values as we've reappraised loans have gone up much more than 2%, but the portfolio as a whole has only gone up 2% because, after a lot of these loans have been appraised, we've gotten accrued paydowns or -- and, not or but and, the new loans that we've originated over the last couple of years, and you can see this in the bubble chart, are at much lower loan-to-value numbers.

So we've kept averaging down the loan-to-value of the portfolio with the new originations such that, in the aggregate, the portfolio has only gone up 2% loan-to-value over that entire cycle. We think that's a significant accomplishment and reflects very well on the RESG team's job of portfolio management.

So Brannon, I'm going to turn it over to you with that intro and let you talk about what you guys are seeing on life science in particular, you may want to talk about other product types as well.

Yes. Thanks, George. Catherine, thanks for the question. Just reiterate what George alluded to and note that, when we underwrite these loans, we stress them in a number of different categories, whether it's rental rates or vacancy rates, interest rates, but also cap rates. And obviously, when you go through a Fed rate tightening cycle like we've been in, you do get impact on the interest rate and cap rate side. But there's also been other macroeconomic factors that have influenced different property types, and life sciences is certainly -- not escape that situation.

But I think as it relates to our portfolio, we are seeing in certain pockets increased leasing activity on -- we've signed our first lab deal out in San Diego. Very, very pleased with that. And there have been other announcements in terms of large leases taking place.

The sector as a whole has certainly been muted over the last year or so, and we are thankful that our sponsors, as we pointed out, have appreciated the quality of the projects that they've built and the massive equity that they put in it and they continue to protect as these projects, as we've said, are going to take longer to lease up. So seeing some leasing there in life science.

I would say, to George's point about other sectors, it was an encouraging quarter, in the office portfolio, as we looked across, there's really a number of projects that we're seeing leasing. And not just big spaces, singular tenants, but singles and doubles that I think is interesting as it speaks to what's going on in the broader economy. And I would also make a plug that it speaks to the quality of the projects that we finance and their desirability. So those were encouraging signs.

Our apartment leasing has been strong. Industrial, actually seeing some industrial leases get signed and some that are very near signing across the portfolio. And of course, the strength of the multi and industrial projects are very evident when you look at sort of the composition of repayments across the portfolio, we've seen the dominant -- predominant repayment strength has been in that multifamily and industrial portfolio. But to your point, in that particular topic, has been broad across segments. So yes, that's kind of our view of the tenant movement and capital market view of the various property types.

Helpful. And maybe my one follow-up is just can you give us any insight into the step-up in special mention lens? We saw this quarter it was up about $176 million. I know this bounced around. But just curious if there's any 1 large property there to be aware of? Or is this just kind of a mix of lots of things?

Yes. As you noted, we disclosed that we're really kind of back to the level we were at December 31 of last year. So we had a small downtick in that number at March 31. We didn't really ascribe a lot of meaning to that downtick. We don't ascribe a lot of meaning to this uptick. It's just the normal ebb and flow of loans as we risk-rate them from quarter-to-quarter. And maturities and upcoming maturities and negotiations with sponsors have a lot to do that.

So in December, we had quite a few loans that we were in some fairly challenging negotiations or serious negotiations with sponsors that led us to special-mention some of those loans. Those negotiations went well by and large and resulted in those loans coming out of the special mention category at [ 331 ]. Very similarly, we've got some negotiations upcoming that are serious negotiations. So we moved some loans to special mention reflective of that. We'll see how that plays out. Hopefully, it will play out as well as in the last cycle.

Our next question comes from the line of Brian Martin from Janney.

Did I hear that right, George -- I was on a different call. But just the acceleration for Jake's group in terms of when you were talking about the acceleration, was that in dollar terms? I know this quarter was a strong quarter, around $900 million in growth. But that level is going to accelerate from the $900 million level, is that what you guys said?

I think in general, we've got an accelerating trend of business in CIB, Brian. So I'm not going to tell you that $900 million is going to accelerate in Q3. I don't know that. It may slow in Q3, it may accelerate in Q3, it might be the same. I don't know that. But over the next, say, 6 quarters, we would expect a larger and larger contribution from CIB to our growth and it being a larger part of our total portfolio over that time.

As I mentioned last quarter when I was talking about CIB, I think I mentioned that they're really just getting started with achieving their potential. And they've got a number of verticals built there, but they're expanding geographies to capitalize on more verticals. And as evidenced by our Natural Resources Group, they're expanding into new verticals. And within some of the verticals, they'll be adding some niche products as well.

We're getting some background noise. Are we on, guys?

We're on.

Okay. All right. So that's a very important part of our growth, and we feel really good about the prospects there.

I'd just piggyback real quick, George, off of that, Brian, just for your benefit. I mean we're still seeing great opportunities in the market. We're being highly selective. We're taking a credit first approach to what we're doing and what we're pursuing across CIB.

I'll give you a perfect example. CIB looked at over $7 billion worth of opportunities in the second quarter. Our pull-through rate was effectively 12%, a little more than that. And so that's a telltale sign right there that we're being selective on opportunities, on structure, on pricing to ensure that we're really sourcing and cherry-picking the best opportunities for Bank OZK and our shareholders. And so I wanted to reiterate that for you.

So we're cautiously optimistic. I think third quarter is going to be great. And we're hopeful that the momentum we have, we can continue to build upon, as George mentioned, with these new business lines and the expansion of existing.

Our next question comes from the line of Nicholas Holowko from UBS.

So clearly, a lot of success on the CIB build-out. And alongside that, you noted all the branch openings that you have planned, which are -- some great momentum as well. I'm curious though if the CIB build-out has begun to contribute on the deposit side of the house as you're starting to collect those relationships and establish those for the franchise, excuse me.

I will say yes, both on the deposit and begin to contribute on the fee income side, Jake, I'm going to let you give a little color on how we're approaching deposits and the relationships and also where we are in beginning to harvest ancillary fee opportunities from that business. It's early being some good progress.

Yes. I love the question, Nick. I appreciate that. We're starting to see some great full relationship opportunities across CIB. A number that I know Brannon and I are very proud of, at the end of the second quarter, 96.4% of all the relationships on a commitment basis. Within CIB, we were either single lender club, or if we were in a broader SNC, we were the admin JLA or another titled agent.

So why that's important is it demonstrates the fact that we are relationship-focused. We're not out there just getting into deals as participants or focused in on buying paper. We want true relationship banking. And so it provides us with the opportunity to not only opine on structuring and optimize our yield and economics with these deals, but it also allows us to cross-sell and have access to management.

So as a result, we're seeing some nice upticks. Our deposits for CIB, Brannon and I joke, grew nearly 20% quarter-over-quarter. The problem is -- or not the problem, but the blessing is our loan growth grew so much that it basically neutralized it to a degree.

So we're going to continue to see some nice deposit growth from CIB. We're excited about it. Our treasury management partners and our product offerings at OZK are really best-in-class. And so it really makes for a nice easy sell to our customers when we're approaching them for single lender opportunities, but also for admin opportunities too.

So we're focused on relationship banking. We're not focused on just buying paper or anything of that nature. And as a result, you're going to see continued improvements on those metrics that you mentioned. Our loan syndications and corporate services business line within CIB is also starting to hit a nice stride, as George alluded to. Our interest rate hedging services, it's run by [ Ryan Freddy ]. Ryan's having nice success. I think we saw a cap and a swap get done just last week, which was exciting [ through loan committee ]. Our capital markets programs are starting to see some success. We're starting to see some nice bond tips and other economics roll in.

Then, of course, our loan syndications group as well led by Rachel. She's doing a phenomenal job, her and Stephanie. And we're starting to see the opportunity to lead more and more deals as admin agent. And as such, that economics are further enhanced for us.

So again, cautiously optimistic we continue forward, but we're putting together a great team. And I think you all are starting to see the fruits of that labor.

Yes. And I would just echo all that and just acknowledge that we're just early in this. It's -- the broadening of our CIB function to include all these fee-related opportunities is new. We're having some nice early wins. But we expect this to become a much more important part of the CIB story in coming quarters and particularly in coming years. To really hit full stride in this and really fully capitalized on the opportunities is probably a '27, '28 deal. But we expect steady progression of progress here on a quarter-to-quarter basis.

That's helpful and great to hear. You mentioned how early days it is for the business and you're going to be on this growth path for a long time coming ahead. But maybe just in terms of early indications and any relationships that have been around longer, how satisfied are you with the credit performance from the CIB businesses that you've experienced so far?

I would say we're very satisfied. We've got a couple of the legacy assets there that are either substandard assets. I think we've got 2 small substandard assets, but those are legacy assets that predate Jake's ascension to leadership of the team. And they're small normal things you're going to have in the course of lending money. You make loans. They're not all going to work part of the original plan. So nothing is adversely surprising there to us at all and we are thrilled with the new production that we're getting.

I'll give you a data point, and Jake may want to comment on this. But our CIB growth, had we closed what we had approved in loan committee on club and syndicated transactions, would have been much higher than what we actually achieved in the quarter just ended. Because the quality of transactions, Jake mentioned our pull-through rate of about 12%, but the quality of transactions that we're working on is leading to these things being significantly oversubscribed. So we and all the other members of the loan syndicates here are getting scaled down on investments on most transactions. So we're approving a larger hold position than we're actually getting allocated at the end as everybody allocates down to deal with the over-subscription. If these were not high-quality assets, you wouldn't have a lot of banks fighting for pieces of them.

Yes. No, that's right, George. And a good data point to say the least. If we hadn't had final allocation cutbacks, we'd be in a much larger position, which is always fun to think about.

But just reiterating, it's a credit-first approach, yield second, growth third, with that 12% pull-through rate, we're looking closely at opportunities talking to sponsors. We're not necessarily, as a result, going to be a bank for all. We like plenty of equity into these deals. We like iron-flat balance sheets. We're staying away from -- actually away from highly levered transactions.

And we're also taking our plays, as we've mentioned on prior calls. We're not actively pursuing opportunities in the consumer discretionary retail space within CIB. We're staying a bit away from venture capital and tech, restaurant finance, smaller franchise finance, et cetera, strategically, just given some of the headwinds in those industries. And so we're being cautious about the industries we're pushing into. We're being cautious to ensure that we have a favorable LTV and LTEV metrics as well. And we continue to see nice success, even growing in a prudent fashion.

If I can just add a little bit to that and as an objective observer, Jake and his team have just been phenomenal around the quality side. And we talk a lot about the extra FTEs on the origination side, we talk about it on the deposit gathering side, but you've got in there a number of folks on the risk vertical side as well. And Jake is hiring, not just the origination side, but the portfolio management side to ensure that quality really is job #1.

And the way his team has integrated with our existing and growing second and third lines in this institution has been absolutely phenomenal such that we're getting quality with speed and certainty of execution in the standup of the new business lines that he's putting in place. So it's getting there quickly, but it's getting there with phenomenal coordination, collaboration with the second and third line to make sure our governance make sure our risk rating score cards and all those sorts of things that you have to do to ensure that quality are set up.

So Jake and CIB really do exemplify all the characteristics that RESG built its platform and portfolio around. So just the tip of the cap Jake and that team in the way they've conducted themselves there.

Yes. Brannon, I appreciate that. I'd be remiss, to your point, if I didn't mention our portfolio management and operations team within CIB. As we continue to hire here, as George and Brannon can attest, they're making -- taking up more than 50% of our new hires. Because it's vitally important to us that we have ample staffing, but also knowledgeable and experienced staffing as it relates to portfolio management, compliance and oversight. That way, we can be the best stewards of capital possible for both our shareholders or regulators and the communities we serve.

Our next question comes from the line of Timur Braziler from Wells Fargo.

I'd like to start on the condo loan that had previously been multifamily that was issued the extension with the borrower contributing some more funds there. I'm just wondering kind of the internal mechanics that keep this a pass-rated credit given the extension and kind of the change in asset class. Is it the borrower contribution with new equity that helped to maintain that status? And just if there's any reserves that have been set aside against that project.

Well, there are reserves on every loan in our portfolio, Timur. And yes, the borrowers' contribution, their commitment to the project and the soundness of their business plan or all factors in the continued carrying of that credit as a pass-rated credit.

Okay. That's helpful. And maybe just a bigger picture on allowance methodology. With CIB comprising a bigger portion of the future growth rate, I guess, how should we think about the allowance level for CIB versus RESG? That's part one.

And then, I guess, part 2, just thinking about the allowance build that we've seen over the last couple of years relative to still a very light charge-off, how do you see that ultimately playing out? Is this something that you're expecting to release those reserves should the environment improve over time? Is there an expectation for some higher losses on the comp, and that's why the reserving was done in advance? I would just love to think about -- to hear about how you guys are thinking about the allowance relative to charge-offs and how that gets resolved.

Yes. Good question. Thank you. Obviously, every CIB loan, just like every RESG loan has an ACL model that it is associated with that calculates the loss and the expected loss and the loss given default, the probability of default, the loss given default resulting in an expected loss. Those cumulative numbers for every loan in our portfolio, whether it's RESG, CIB or something else, is factored into our ACL calculation.

As Tim has mentioned in our management comments document, Tim and Jay, we have maintained our weighting very much to the downside scenario. So we mentioned in our management comments, in regard to our discussion about ACL, that our Moody's S4, which is a downside economic recession scenario, if you would, and our Moody's S6, which is a stagflation scenario, are currently weighted more highly in our calculation of losses than the Moody's baseline scenario.

So we've maintained, throughout this Fed tightening cycle, and I think we were fairly preemptive in the way we approached it, but we've maintained a fairly cautious outlook regarding the uncertainty around the economy. And we continue with that. We hope we get to a period of more certainty and that that certainty is economic stability and not a recession or not a stagflationary scenario. And if we get to a point where it becomes clear that we're not going into a recession and we're not going into a stagflation scenario, those risk ratings will become tail risk weightings and those elements of our ACL allocations will come down and the baseline would become the larger case.

But we're continuing to take what I think is a very prudent and appropriate approach and acknowledging that there's a lot of uncertainty still out there around a host of issues in the economy. So that has resulted in a $366 million build in our ACL over the last 12 quarters. And in almost all of those quarters, not every one of them, but almost all of them, we still, even without that big ACL build, had record net income and record earnings per share, which I think speaks to just the strength of our business model and the strength of our franchise to do that.

Now that's resulted in us putting about $4 in the reserve for every dollar of losses more or less over that period of time. So we've had a huge reserve bill, $366 million, as I mentioned. And if we get to the other side of this period of economic uncertainty and we don't incur losses, then, obviously, the reserve levels will come down. If we experience adversity, we feel like we're well reserved for that reflective of our allocation of risk models there. So we feel like we're well prepared.

I can't predict exactly how this economy is going to turn out. I don't think anybody can. Everybody has a thesis about it. But we're just being appropriately prudent and cautious as we continue to work through this period of uncertainty. Our portfolio is performing very well as we would expect it to. And you see this once again in our net charge-off ratio being 1/3 or 1/4 of the industry's net charge-off ratio, which it's been every year since we went public in 1997. We've averaged about 1/3 of the industry's charge-off ratio. And we're continuing to run close to that metric. So we feel very, very good about the way the portfolio is performing.

The principal reason our portfolio is performing as well as it is as our sponsors continue to support and be engaged with their projects. And we made the comment in the management comments that we expect most of our sponsors will continue to support their projects until normal property performance and economic conditions return, whenever that is.

Now we've obviously had I guess, I would say 5 exceptions to sponsor support, 4 of them were in foreclosed assets right now and 1 of them was that Arts District, Los Angeles office loan that we've talked a lot about last year. The sponsor quit supporting it in regard to making payments, but stayed engaged and successfully sold that project, so that we had a full recovery of principal and most or some of our post default interest actually. We lost just a bit of our post default interest on that. So I guess you could say the sponsor gave up and that they quit making payments, but they stayed engaged and helped achieve a very successful exit for that property given the fact that it was a distressed property. So we, again, think that just speaks to the quality of most of our sponsors.

Will we have additional bumps in the road? Probably. It's a very uncertain economy. Will those be things that will be disruptive to our earnings or cause us to have to increase reserves even further in some extraordinary way, we certainly don't expect that. We feel like we're adequately reserved and the portfolio is performing very, very well.

Timur, I might mention that list of loans you've been attaching to your research report, I think 5 have been paid off in the last quarter.

Okay. That's good color there. Maybe just, if I could just one more follow-up on your comments about the sponsor support and the optionality. Just maybe within life science specifically, can you just talk to some of the trends in occupancy that you're seeing there and the appetite to maybe convert those to traditional office if those conversations have started to pick up and just generally what your thoughts are on that asset class here?

Well, as Brannon mentioned, we've seen some life science leasing in the first half of the year and in the last quarter. It is slower than we would like. It's slower than our sponsors would like. But there is some positive momentum, it seems, around that. We are aware that our sponsors on a number of projects have active RFPs that they're in negotiation with on potential tenants. We'll have to see how that plays out.

Obviously, there are challenges surrounding that asset class. We acknowledge it. It's part of the reason for the reserve build. It's certainly an area that merits us continuing to give close attention. But to date, our sponsors have continued to support those assets. We expect the majority of our sponsors will continue to support those assets. And we're in a good basis in those assets, we feel like. So we'll continue to monitor that and give you ongoing reports.

Thank you. At this time, I'm showing no further questions.

All right. Well, thank you, guys, for joining the call today. We're really pleased to report a great quarter to you. We thank you for sharing that, and we look forward to talking with you in about 90 days about the next quarter. Have a great day. Thank you. That concludes our call.

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