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CEO, is familiar with this criticism and CRE risk.
in now, they don’t panic, they recognize the chal-
He thinks the bank can manage it and still succeed
lenges they face, and they’ve got a playbook from
in this environment. (Bank Director interviewed
experience about how to solve those challenges,
Gleason prior to Gerlinger’s report publication; the
address the issues and turn them into opportuni-
bank declined to comment.)
ties.”
“Risk management permeates our culture,”
Bank OZK also participates as a senior secured
Gleason says. Everybody “realizes they’ve got to
lender in selected projects that already have a lot
be a risk manager. If they’re touching things that
of equity, Gleason says. The sponsor puts in all
have credit risk, if they’re touching things with in-
their equity before the bank funds; the bank is the
terest rate risk or reputational risk, or any of the
first to be paid in a payoff. The weighted average
legions of risk that a company our size faces, ev-
loan to cost for the entire RESG portfolio at the
erything’s got to be focused and attentive to that
end of 2023 was 52%, and the weighted average
all the time.”
loan to appraised value was 43%.
“There are a thousand details that go into having a properly structured transaction, but they all
boil down to the fact that you want equity to be
taking equity risk at every point,” Gleason says.
“I’m not sure it matters if it’s a high-rise
office or Pokémon cards: If you’re the last
40% in, you’re privileged, and that is a very
strong position to start from.”
“And as a senior secured lender, you never want to
take equity risk.”
Protecting the Bank
That underwriting discipline has protected the
bank, especially as predecessors and competitors
have blown up, says Sam Haskell, founder of investment management firm Colarion Partners
Sam Haskell / Colarion Partners
and publisher of the “Five Points” bank investing
newsletter. He says the underwriting approach,
plus deep familiarity with the “tricks” that developers use, gives the bank a preferential position in
To start, Bank OZK doesn’t generalize: It
the capital stack of these projects.
doesn’t make an RESG loan just because it’s in a
“I’m not sure it matters if it’s a high-rise of-
certain metro area or because it’s a certain type
fice or Pokémon cards: If you’re the last 40% in,
of commercial building. Instead, it looks at each
you’re privileged, and that is a very strong position
project on an “asset-by-asset” basis against the
to start from,” he says. “The project actually has
project’s submarkets and the supply-demand met-
to be destroyed within about three years for you to
rics, he says. The bank also works with high-quality
end up losing money.”
sponsors who have big, liquid balance sheets back-
Developers like working with Bank OZK on the
ing up their projects and the relevant expertise and
select projects it funds, says Stephen Scouten, a
skills to execute well on their proposals.
managing director and senior research analyst at
“Sponsorship is just critical. You like having
Piper Sandler & Co. Among developers, there’s a
veteran sponsorship that’s been through a bunch
sense that if the bank can make a loan work on
of cycles,” he says. “In an environment like we are
a prudent, risk-adjusted return, it will. If it can’t,
