RankingBanking 24 Digital (1) - Flipbook - Page 16
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compared to a traditional fixed rate CRE loan. De-
and liquidity quarterly and capital annually, each
velopers still have incentives to lease up the new
using multiple scenarios. Gleason wants to make
building and refinance the loan, and may be able
sure the bank can survive the scenarios, some of
to obtain lower rates on the traditional CRE loan
which are “very adverse and very complex.”
than their construction loan.
“We’re thinking all the time about, ‘what ad-
RESG loans are predominately variable rate —
justments and tweaks can we do to manage that
and that could be a good or a bad thing. Gerlinger
risk?’” later adding: “It’s our responsibility to
believes the changes in the interest rate and office
manage our credit portfolio in a way that it per-
environments have been so rapid that there is a
forms relatively well in all economic scenarios.”
rising risk of default, despite OZK’s long track re-
The bank also maintains relatively high capi-
cord of low losses, and that the bank’s provisioning
tal levels: Its tangible common equity to tangible
“needs to go up pretty dramatically to account for
assets was 12.33% in 2023, according to Bank
these vacant buildings.”
Director’s RankingBanking analysis. High capital
levels help the bank support the extended nature
Asset Quality so Far
Bank OZK’s asset quality has held up so far. The
of the real estate development loans as more of a
project becomes funded.
industry’s quarterly net charge-off rate was 0.65%
in the first quarter of 2024, according to the latest FDIC’s Quarterly Banking Profile. In contrast,
Moving Beyond Construction and
Development
Bank OZK’s second quarter annualized net charge-
And although RESG is the bank’s moneymaker,
off ratio to average total loans was 0.17%. Other
management is still cultivating other lending lines
loss ratios are similarly low.
to service clients and diversify earnings. Bank OZK
Those credit quality figures could be interpreted
is actively hiring veteran bankers to staff up and
as a sign of under-reserving or as a sign of dis-
grow its community banking and corporate and
ciplined credit underwriting. In contrast to the
business specialties groups. The idea is to take the
pessimism of Citi’s Gerlinger, Scouten has had an
same talent approach, performance standards and
“overweight” stock rating on the firm for “years”
credit culture that has made Bank OZK so suc-
to indicate his belief that the stock should outper-
cessful in RESG and apply it to other credit verti-
form its industry in the broader market. He says
cals. Still, the revenues from these groups pale in
the bank is easy to misunderstand, especially for
comparison to RESG.
investors who don’t specialize in banking and are
looking for “easy stocks” to short.
“We have consistently and repeatedly said that
we want to let RESG be as big as it can be, while
“They’re really good underwriters, and they
maintaining the discipline and the standards, prac-
have had better credit for the 14 years I’ve cov-
tices and processes that we have put around that,”
ered [banks] than anybody else,” he says.
Gleason says, making it clear that the bank is not
Gleason says OZK’s balance sheet has been de-
pulling back from its commitment to the space.
signed to manage stressors that come from rate
Proponents say Gleason himself is another ad-
movements, and that an expanding margin and
vantage the bank enjoys. Haskell spent some time
record profitability have helped the bank afford
with him and his management team on investor
higher credit costs ahead of anticipated losses. The
road shows while Haskell worked at the broker-
bank also uses stress testing to inform its strategy
age firm Sterne Agee, prior to starting Colarion
and drive adjustments. It tests its CRE portfolio
in 2016. He says Gleason thinks like a portfolio
