Bank OZK recorded its strongest quarter for new commercial real estate loans since the second quarter of last year, but CRE now accounts for a smaller portion of its growing portfolio as other business lines gain ground and the bank continues trimming its real estate exposure.
The Arkansas headquarters for Bank OZK
The Bank OZK Real Estate Specialties Group, or RESG, originated $1.5B in new loans in Q2, a modest uptick from the prior quarter and its best showing since Q2 2024, when it originated $1.6B. The company had predicted growth in the high single digits for 2025 and had already hit 10.1% at the midway point.
“Obviously, we blew that away,” Chairman and CEO George Gleason said on the company’s quarterly earnings call Friday morning.
Yet those loans won’t contribute meaningfully to balance sheet growth for about 12 months after closing since the bank has all of its sponsors funding their equity upfront, Bank OZK President Brannon Hamblen said.
“We’re pleased with the job that our guys have done on the origination side,” Hamblen said. “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.”
Elevated repayments and muted new deal flow have gradually chipped away at RESG’s overall property footprint. Total loan commitments fell to $32.9B as of June 30, down from a peak of $34.5B at the end of March 2024.
The largest payoff was for an unnamed New York multifamily property, while a Miami borrower paid off the bank’s largest land loan.
“So, very broad-based range of payoffs across product types and geographies, and we expect that will continue,” Gleason said.
The numbers support the slide: Repayments totaled $950M in Q2 and had already reached $540M through Thursday, suggesting an even faster pace of runoff in Q3.
“RESG is likely to see somewhat of a headwind to growth,” Gleason said. “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’re expecting much higher prepayments in the current quarter.”
More than $11B of RESG’s portfolio comes from deals originated in 2022, the largest remaining block of loan commitments from a single year. Most loans made since 2020 have already been paid down substantially. By contrast, the group has originated just $2.7B in 2025 so far, pacing well below the $13.8B booked in 2022.
Even so, Gleason reiterated on the call that the company remains committed to CRE lending.
“We are not deemphasizing RESG,” Gleason said. “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 and diversification strategy.”
But the bank’s overall loan composition calls those comments into question.
RESG’s share of the bank’s total loan balance has steadily declined, falling to 60% as of June 30, down from 62% at the end of March and an all-time peak of 70%. With most of the bank’s expected growth in late 2025 and 2026 coming from other lending divisions, Bank OZK expects RESG’s share will continue to shrink over the coming quarters, according to written comments.
Gleason said RESG is trending toward real estate accounting for 50% or less of the bank’s balance sheet because its other business will continue to grow faster. The bank’s fastest-growing vertical is its corporate and institutional banking division, which contributed the most to total loan growth in the first half.
Bank OZK’s shrinking CRE loan composition comes after the bank announced last October it was putting a limit of $500M on newly originated loans and reducing its overall exposure.
“When you’ve got a big credit out there, it creates an environment where people can make that a target and spin a story that may have no foundation and basis in fact and may not be completely accurate to create a lot of drama about a single credit,” Gleason said on Bank OZK’s Q3 2024 earnings call. “We just decided that wasn’t worth the headache of having to deal with that sort of crap, honestly.”
Bank OZK saw a modest bump in share prices early Tuesday due to stronger-than-expected earnings for the quarter. Earnings per share beat estimates, coming in at $1.58, compared to a forecast $1.53. Revenue also came in ahead of expectations at almost $428M, versus an anticipated $423.5M.