Bank OZK (OZK) Q3 2026 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Bank OZK Third Quarter 2026 conference call. At this time, all participants are in a listen-only mode. If you'd like to ask a question during the Q&A session, please press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Jay Staley, Managing Director of Investor Relations and Corporate Development. Please go ahead.

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

As a reminder, if you'd like to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question will come from Matt Olney with Stephens.

Hey, thanks for taking the question. I want to start on the loan growth. We saw good results in the third quarter, but it sounds like you're anticipating some pretty meaningful decline in the current quarter. Can you talk about the line of sight you have for those loan balances decline in the near term? Then conversely, you expect to see some positive growth in 2027. Also talk about the line of sight you have for loan balances to rebound meaningfully next year. Thanks.

Yeah, thank you, Matt. Appreciate you being on the call this morning and appreciate the question. Obviously, we had a very good quarter of loan growth in Q3. Also that was driven by growth in CIB and to a lesser extent, indirect marine and RV and Community Banking. As expected, RESG had moderate to heavy payoffs in the quarter. The real directional difference between Q3 and Q4 is several RESG payoffs we had projected in Q3 actually have occurred in Q4. You've already seen that in the guidance we gave that we've already had in the first 19 days of October, $690 million or so of RESG payoffs and pay downs. There was a little bit of shift from Q3 to Q4. We expect as we said in the management comments, near record RESG payoffs and perhaps record RESG payoffs in Q4. That will butt up against continued strong origination from CIB and what we expect will be continued positive origination from Indirect Lending and Community Banking. We think you may see a little bit of retracement in balances in Q4. We've given the guidance that we expect growth for the full year to be at 3%-5%, so that would suggest retracement in Q4. That is probably a percent or so below the guidance we had given at the beginning of the year, and that reflects the fact that we've got a few RESG repayments that we had originally, at the beginning of the year, thought would occur in Q1 of next year that may pull into this year. That movement and potential shift from Q4 of this year and next year sort of explains the fact that we've given a percent increase to our upside loan growth guidance for next year, really reflects the fact that some of that may come into Q4. It's all the same expected movements. It's just a little bit of difference between Q3 and Q4, and Q4 and Q1 of next year in that guidance. To follow on to your second point, we do expect really nice loan growth next year being 10%-12%. You never have them closed till you have them closed and on the books, but we have a pretty good line of sight into opportunities that all of our business lines are working on. Of course, that gets you a quarter or 2, but you can see the momentum of those business lines, and we feel pretty good about that guidance and expect that loan growth number to accelerate further in 2028 from the 2027 level as a result of the fact that we should be pretty much through, if not all the way through this RESG repayment wave by the time we get to 2028. We think RESG's balances that have been steadily declining because of the high level of pay-downs will inflect at some point in 2028. We hope that's earlier rather than later, but we'll have more clarity on that as we get a few quarters down the road. But we think RESG will contribute to growth at some point in 2028, along with the continued positive momentum from CIB, Indirect Lending, and Community Banking. You will also note we've enhanced our Indirect Lending growth potential by adding another business line that launched October 1. We feel pretty good about those future growth numbers.

I appreciate the color, George, on the loan growth front. If I could move over to the credit, the foreclosed asset balances, I think we're now at $420 million. I appreciate you guys providing some good details behind each of those 7 main properties that make up that balance. Any more color you can provide on when you expect to see more activity with these properties that will result in declines of the overall foreclosed balance? Thanks.

I appreciate that question. Obviously, that's a focus. While it is a focus, Matt, it's not something we're being hasty or urgent about. You can liquidate these properties in a thoughtful manner and not get in a hurry and not take losses you don't need to take. That's what we're trying to do, is be smart and responsible. As we mentioned in the management comments, we've got active buyers potentially working on all of those properties except for one. On that one, we're really not focused on selling it as much as we are leasing it. We mentioned in the management comments that there's a property, the property in Atlanta, that we feel like there's really good potential for some upside on that property if we're patient and approach the leasing on that. We have a couple of interested parties that we're working for leasing opportunities. Those things, whether it's a sale of a big commercial property or a lease of a property, take several quarters to work out. Sometimes, as we've seen with that Sunset land in Los Angeles, you have to go through the process a couple of times to finally get one that gets to the finish line and works. We feel like we have those appropriately valued. We're working diligently on prospects all the time on those, and they'll sell at the right time and hopefully for the right price. We feel pretty good about that portfolio. We share your desire and the desire of all of our shareholders that we get those balances moved on and off of our books as quickly as we can, but we want to do that prudently and not recklessly or hastily.

Okay. Those are my questions.

Thanks for the question.

Our next question comes from Woody Lay with KBW.

Hey, good morning, guys.

Morning, Woody.

I just wanted to touch on the NII guide to start, and I appreciate the 2027 color you gave of low single-digit growth relative to 2026. I believe that assumes no further Fed rate hikes. I was just curious, if we did get a couple of rate hikes, how y'all would expect that to impact overall NII growth?

Tim, you want to take that?

Yeah, I sure will. Obviously, in our management comments, we talk about how our loan yields typically move a lot quicker than our deposit costs on increases in the Fed rate and one-month term SOFR sometimes leads that increase as well. So we benefit from that being ahead of the Fed, just like we saw in September. I think we had 10 or 12 basis points of increase in one-month term SOFR on September 10th, which is typically when a lot of our, either the first or 10th, is when a lot of our variable rate loans reset. I think if you looked at our interest rate sensitivity analysis in an up 100 scenario, you've got our interest rate sensitivity shows about a 4% increase in NII over that time period. So every quarter point is a meaningful increase. Depends on the timing of that and where the deposit costs come in, and we've talked about deposit costs being competitive throughout the year. But it would improve what we've guided to. The extent of the improvement depends on the timing and the amount of any increase.

Yeah, Woody, we're not seeing a scenario near term where there's Fed rate reductions, Fed rate cuts. So our guidance assumption of no, which permeates through all of our interest guidance numbers of no further Fed increases, is pretty much the most conservative scenario, I think. To Tim's point, a 100 or a 25 or a 50 or 75 basis point increase in rates with one, two, or 3 increases in interest rates over the next 5 quarters should be somewhat helpful to our net interest income and net interest margin.

Yep. I appreciate the color there. Maybe shifting over to capital. You are now below the 300% regulatory CRE ratio. I think you call out you will soon be under the 100% C&D ratio. In your comments, you talk about how that being below those thresholds provides greater flexibility for capital deployment. I was just curious on any color how you would plan to use that capital flexibility, and does it shift the capital ratio that you all would target longer term?

Sam?

Yeah. As we have talked about, George just mentioned organic growth. We are expecting to be stronger in 2027 than it was in 2026, and we are expecting it to be stronger in 2028 than it was in 2027. Obviously, deploying our capital for organic growth is priority number one. We do have robust capital levels, which allow us to be opportunistic in buying back shares when they are at a good value like they have been recently. We do have quite a bit of flexibility in our capital. That is a great position to be in. We have increased our dividend for 65 quarters in a row, and have had really accretive share repurchases not only this year, but if you look back at the last 5 years, almost $1 billion of share repurchases over that time period. We are disciplined in how we deploy our capital looking for different opportunities and organic growth and adding different business lines as George mentioned, with an Indirect Lending. Obviously CIB has several different growth engines that we have talked about in management comments as well. We are in a great position from a capital standpoint and allows us a lot of flexibility to look to increase shareholder value where we can.

We are looking at additional ways that we can enhance our capital utilization and efficiency with the goal of getting our return on equity up. That is one of our goals. We mentioned that on the first page of text in our management comments at the bottom of the page, that improving our efficient use of capital and return on capital is an important goal for us. No longer being subject to any additional capital requirements because of being CRE concentrated is a really good first step in being able to have more flexibility and efficiency in the way we utilize capital. You mentioned we are no longer subject to the 300 guideline. We are below that. We will soon, I think in the next quarter or 2, probably 3 at the most, be below the 100% guideline. Those are important steps in improving our capital efficiency.

That's great to hear. If I could just sneak one more in on the credit side. There were some headlines on the reported sale of the Portico Waterfront apartment loan in Oakland. I was just curious if there was any color on that sale and how it could impact credit here in the near term.

We were paid off in full on that loan, and the sale that occurred after our payoff was after we were paid off. Brannon, do you have any comments you want to make on that Portico project?

No, that's an accurate statement, George. The equity partner in the deal paid us off and then took the action they took. So, no credit impact to us.

That's great to hear. All right. Well, thanks for taking my questions.

Thank you.

Our next question comes from Brian Martin with Brean Capital.

Hey, good morning, everyone.

Morning, Brian.

Hey, George or whomever, can you just talk a little bit about just given your comments about the payoffs, George, in the fourth quarter potentially being record for RESG, just the pace of diversification and just that portfolio shift, where you think if you just line of sight into 2027, how you think that plays out given some of the payoffs you're expecting near term?

Yes. Diversification is one of our sort of core tenets and objectives in really repositioning our balance sheet and our company. Of the 4 things we mentioned on the front page of management comments, it's the one we're farthest along in achieving. You clearly see that as RESG has dropped from a high of 70% of our loans a few years ago to below 50% and continues to decline. As we mentioned, CIB is almost certainly going to surpass RESG in outstanding balances at some point next year. Somebody could look at that and say, "Oh my gosh, CIB is the new RESG," and then you've traded one concentration for another. CIB has a multiplicity of businesses and, as we mentioned already, even with the size of their customer base today, customers with 44 different three-digit NAICS codes. It's very diversified by loan type. It's reflective of the different business teams within CIB. It's very reflective by borrower business. It's reflective by the diversity of NAICS codes. It's very diversified by geography. So it is inherently diversified within itself, which certainly lines up well with our theme and objective of just getting a more highly diversified balance sheet. We've been in the Indirect Lending business now for 10 years, more or less. Really, I think proven out to everybody's satisfaction what a high-quality consumer portfolio we have with our RV Indirect Lending business and our marine Indirect Lending business. We have added, effective October 1, powersports to that. We've been working on this, talking about it for years, and really working on it for a year, and roll that out effective October 1, and have already booked our first handful of transactions in the powersports space. So that's another element of diversification. While the dealer base that we work with, 1,500, 1,800, 2,000, however many it is, dealers we work with to originate boat loans and RV loans, a lot of those dealers also have powersports businesses. So it lets us utilize our same dealer base to some extent. There'll be separate dealers for each as well, but there's a lot of overlap there. But it lets us reach a very different customer base. Your powersports customer is a different customer, typically, than your RV or your marine customer. We'll still be looking at high prime, super prime sort of customer base there, as is consistent with our focus throughout our company on credit quality. But it gives us another element of diversification there. You're seeing some positive growth in our Community Banking business with a real focus there on more small business and consumer. That is further accretive to our efforts for diversification. We're very serious about long-term diversification of the portfolio, and we think that's a very important step to building shareholder value and getting a share price that is reflective of the exemplary financial performance that we achieve. Our shareholders are not getting paid for the performance we're putting up because of the concerns about our CRE concentration, and we understand that. We're going to fix that, and we're very focused on delivering good shareholder value. I think you'll see steady progress in that regard over the next several years.

Got you. Just line of sight, George Gleason, if you think out into late 2027 in terms of, are those pieces. I know CIB outpaces RESG sometime next year. I guess kind of still being equal partners in terms of CIB, RESG, and then kind of the other groups. Is that how to think about it longer term?

Yes. We've historically said we would keep Indirect Lending around 10%-15% of our business. It's been steadily in that 12%-13% range for years now. With the addition of powersports, we're willing to let that 15% ratio go up a couple of points. I do think you'll see a lot more contribution from our Community Banking group going forward. CIB continues to add teams focused on different lines of business. They're going to continue to add more teams in the future, getting further diversification in that line of business. I think, as I've said earlier, that RESG will have an inflection point on their balances and will begin to grow again in 2028. But there's a lot of momentum about CIB, so I don't know that RESG catches back up with where I think CIB will be in 2027 and 2028, future years. There's just so many more businesses that we're going to touch through CIB that it just creates a much broader spectrum of sustainable long-term consistent growth. When one of those business categories, one of those teams is finding themselves in an environment that for some reason or another has gotten hyper-competitive and it's harder to book deals that meet our return standards, you've got other teams that can step up and deliver, and it's just much more inherently diversified than our RESG business.

Got you. No, that's super helpful. Thanks for the color and congrats on the success of CIB. Maybe just the other one for me, just on the resolutions of the OREO you talked about, and then also, I guess the other point, the special mention, which are the early warning bucket, saw a really nice decline this quarter. Just touching on the reserve levels and just provisioning it, just feels like charge-offs may be being lower next year. The OREO potential resolution, like you say, gradual. Then, the decline here in special mention really point to a very positive credit pictures and maybe lower reserving going forward. Is that, in general, how we should expect things to play out, or at least you're expecting the next several quarters to look like?

Dan, you want to take that?

Hey, Brian. Thanks for that question. I think you're framing it right. We obviously have growth that's coming next year as well, so we'll have to take that into consideration. Macro environment, we'll have to take that into consideration. But you saw a lot of good credit quality improvements, and you're pointing to special mention improvement. That was a clear positive. Our net charge-off ratio being the lowest quarterly of the year was positive. So we're working hard to keep that momentum moving in the right direction. Hard to predict the provision level, but I think you're thinking about the factors correctly that would go into our consideration there.

Yeah. Okay. That's it for me, guys. I'll step back. Thank you.

Thank you.

Our next question comes from Janet Lee with TD Cowen.

Morning.

Good morning, Janet.

In the management commentary, you cited net charge-offs will likely remain elevated in 2026 and 2027, and then see an improving trend in 2027. In the back, if we get higher rates, how should we think about that in the context of 2027 improving? What gives you the confidence that the levels are coming down in 2027, and to what extent?

Well, I am going to ask Brannon to just comment on what he is seen in the market regarding leasing and sales activity in commercial real estate and some of our projects in particular, and I think that may give the color for your answer. Brannon, you want to talk about what you have kind of seen as trends and developments in the market?

Absolutely, Janet, thanks for the question. Look, it is an interesting environment with the macro issues, the rate issues. There are things moving different directions. But I can tell you with respect to all the things George just mentioned, the activity that we are seeing in our portfolio, it has been an encouraging year, and really, I would say across property types. We are seeing that in our existing portfolio. Look, even with the headwinds to new originations and to new projects starting, we are still seeing a decent pace there, an encouraging pace. In our legacy portfolio, the multifamily projects continue to lease. Obviously that particular product type tends to see, in certain markets, the easiest sort of path to overbuilding. But we have originated loans in markets that have very strong demand. While demand may soften as supply peaks, that demand is, we are seeing it quarter after quarter continue to do its work in resetting vacancy. So we see our occupancies building across our multifamily projects. In our industrial portfolio, continue to see good leasing activity there and really refinance activity. We have mentioned there is a lot of liquidity in the debt markets, and that makes life difficult for our originators. Very competitive on the origination side, but it creates liquidity on our legacy portfolio side and is generating a lot of repayments there. So we are seeing continued leasing in industrial office. We have said several times in our comments over the last couple of quarters that we are encouraged at the pace of office leasing and that that continues really across different projects, and you've got some stronger markets, Texas being one of those, that really have very strong leasing. But even in others, like Denver, that aren't as prolific, we're seeing good activity on our projects there. We're encouraged at our office activity. Even life science, we've got 9 life science projects in our portfolio. 5 of those have leasing, and 3 of those are between 98% and 100% leased. We've got 2 buildings that are working full building leases currently. Then we've got one project that's working a sale that would fully retire a loan, and another that the sponsor is taking to market in a portfolio sale pursuit that would also fully repay our loan. I can't say enough how encouraged we are at the continued progress in leasing and recapitalization, refinance payoffs, and sale payoffs across the board.

Yeah. I would add to that, we're not all the way through this challenging CRE cycle, but we're a long way through that cycle. Another good data point, one of our folks that provides coverage on us seems focused on providing a list of loans that he's concerned about every so often. A week or 2 ago, he issued a report, and there was a list of loans attached to it. 4 of those loans have already paid off. Things that might look concerning out there's liquidity, there's movement in the markets. There is leasing occurring. We would like for that leasing to be faster. Our sponsors would like for that leasing to be faster. But there's a lot of very positive trends going. We've seen a lot of healing in the market in 2026 as far as correction of supply-demand dynamics and rebalancing of supply to get closer to demand. I think you see a lot of that again in 2027. We think it's a market that is largely behind us by the time we get to year-end 2027. Your question about rising rates and how that would impact the market. If the Fed raises rates another 25, 50, 75 basis points, I think that has a very negligible effect, and probably, it will obviously have some impact, but I think that's very negligible. If the Fed increases rates, we get in a situation where they have to increase rates 200 basis points, 300 basis points. That's a much more challenging environment. I don't think we get there, but there is a level at which increasing rates inflicts a lot of pain. I don't think that's in the base case scenario for many people or any people, or even one standard deviation or 2 standard deviations off the base case. We feel pretty good about the fact that the market should continue to improve. Janet, did that answer your question? All right. Liz?

Our next question comes from Ryan Kenny with Morgan Stanley.

As you build out CIB, can you just walk through the strategy to improve the funding mix on the deposit side? Any updates on the treasury management build-out and opportunities to win over more non-interest-bearing deposits and operating accounts?

Yes. Jake, do you want to talk about the focus that you've got and the improvements that you've made on the funded versus unfunded ratios of the portfolio, our utilization rates on these lines? Also talk about the work that you and your team are doing in treasury management, in coordination with that, to really build up our product services and capture a larger share of core deposit customers.

Sure, George. I appreciate it, and good morning. It's a great question. As CIB continues to grow and evolve, obviously, our focus is not only on driving quality loan growth, but at the heart of it is really driving a true relationship banking. Nearly 50% of all of our clients and relationships within CIB are direct single lender deals. If you add in club deals, then less than a third or about a third are broader syndications. Even with those, we're starting to see really good progress in full wallet. I know your question's deposit-focused, but aside from just the deposit side, it's allowing us to really start to cross-sell and provide additional products and services that will generate great non-interest income, fee income for the bank through commodity hedging, interest rate hedging, our capital markets program, and then also partnering with private wealth, private client, and then treasury management. The bank continues to put a really big focus and a lot of investment in acquiring top-tier talent across all these business lines, but including treasury management, and then also investing in the technology and the products and services that will really move us ahead to be a best-in-class leader from a TM standpoint. That treasury management functionality, the payment rails, the services that Chad and his team are building will be mission-critical to continue to serve the growth of CIB and to harvest those lower cost, and a lot of times, non-interest-bearing deposits. We're seeing really good momentum within that harvesting process already. We had over 20% growth within CIB in deposits quarter-over-quarter. As we continue to move out into the market, as we push into our CBSF teams, our Emerging Middle Market group that we announced the formation of, a lot of these at their heart are true relationship-focused banking platforms, which allow us to continue to drive additional lower-cost deposits for the institution as we march forward. Great progress has been made already. But we're really just at the beginning of the journey as it relates to driving additional deposit growth and interest income for the bank. We're excited about it. We're excited about the growth that we anticipate to see here over the next few quarters and then into 2027 and 2028.

That's great. It sounds like-

You know, I-

Oh, sorry. Go ahead.

Yeah. I would again just point you to page 2 of our management comments, first page of our communication. We talk about 4 really focal points for us that we think are critical to enhancing long-term shareholder value, and that loan diversification we've talked about already extensively today is number one. Improving that deposit mix and getting more non-interest bearing and low-cost deposits is number 2. I think you will see steady progress in that regard through 2027, and steady progress in that regard through 2028. That's a function of really continuing to capitalize on relationships, as Jake said, both in our CIB portfolio and our Community Banking portfolio. We're really doubling down that focus and capitalizing on this excellent deposit franchise we've got across the Sun Belt and getting more core business within that. We're going to grow a lot, so we're still going to be doing a lot of CDs. But we're going to get that core percentage and volume growing, and I'm pretty confident in that you'll see that throughout 2027 and 2028. As Jake mentioned, not just the deposits, but the fee businesses. As we talked about in management comments, we expect Q4 is going to be another, our second this year of record fee income, if you exclude the prior quarters in long ago history when we had bargain purchase gains on acquisitions and so forth. If you exclude those quarters, the second quarter was a record quarter of non-interest income. We expect to have another record quarter in Q4. We expect non-interest income in 2027 to be up high single digits versus this year's 2026 number, reflecting that we expect to continue to grow that. Those things, plus the capital efficiency we've talked about, we think are a potent combination to really get our stock price moving in a direction that is reflective of our strong earnings that we've inherently put up in the company and expect to continue to put up.

Excellent. Deepening relationships comes with better high-quality fee income and better low-cost deposit mix. What about the efficiency ratio impact? You're approaching 40%. Can you talk about what the right normalized rate is? As you transition to more of a relationship bank, does the efficiency ratio increase over time?

I think we're going to do some things that actually keep our efficiency ratio in that 30-something range where we have historically been. We've been spending a lot of money building out CIB. We've been spending out a lot of money building out mortgage and treasury and consumer lending and various other customer-facing lines of business. We've also been spending a lot of money on technology, data modeling, and various other things that are behind the scenes that our customers don't see, but are critical to delivering the products and services that our customers want and producing the results that our shareholders expect. We'll continue to spend money on those things. But we're also looking at a lot of the things that we've built over the last 3 to 5 years and realizing we can be a little more efficient in those. You've seen in our headcount, in 2024, 2025, 2026, the first quarter of this year, big growth in headcount. We really started in Q1 really looking at a review of a lot of these things we built, and some of them have been built over a decade. It's like a house, you add on a room, and you enclose the garage, and you add on another room, and you put a porch out back. You end up with a house that is big enough, but it's not the house that you envision you really want to have, and it's not as efficient as you want. Sometimes you just got to remodel. We've remodeled a lot of these business units, and the result is over the last 2 quarters, while we have been increasing headcount in important areas like CIB and various other areas where we need to be putting more resources, we've net-net reduced headcount by about 90 something people. Tim, what, 90?

94.

94. That's not a result of getting out of any businesses. That's not a result of any sort of retreat. That is just a fact that we've looked at a lot of these things we built over the last decade and realized while we can re-engineer those units and be much more effective, and at the same time we're being more effective delivering better products and services and getting better results, we can do it with less cost. I'm real proud of that, and I think those results will help keep a lid on that efficiency ratio as we go forward and let us continue to have a very good efficiency ratio consistent with our long tradition of being one of the most efficient, if not the most efficient banks in the country.

Thank you.

Thank you.

Our next question comes from Nicholas Holowko with Raymond James.

Hey, good morning. Thanks for taking my questions.

Good morning, Nick.

Maybe just following up on a couple of your key strategic priorities that you've been alluding to and that you highlighted at the beginning of the management comments. Coming back to the second, the funding mix and improving that over time. Understand you're going to aim to continue to see some progress on that over the next couple of years. But can you just talk a little bit about the progress that you've already seen and how that ties into the competitive backdrop for deposits and what that means for deposit costs over the coming year?

Yeah, happy to do so. Nick, what I would tell you is we haven't seen much of the progress so far. We've really been in a building stage of building the additional infrastructure and changing the mindset, and creating the environment within our company that's going to be helpful to us achieving that. Our treasury management area, for example, was a good treasury management function as far as our customer base before we got in the CIB business. As we've really begun to emphasize growth in CIB and made that a frontal piece of our growth strategies, put that out front and really pushed it, and have started dealing with a lot more larger customers with more sophisticated payments and cash management and other treasury management functional needs. We've realized we've got to step up our game and improve a lot. We've made the staff hires. We have moved forward with a lot of technology things to do that and continue to do so. I think the products of that, the benefits of that pretty much all lie in the future. The same in Community Banking. Traditionally what we would have called a commercial lender has become a relationship manager in our world with a Community Banking focus on deposits being as important and managing those deposit relationships are as important as managing the loan relationships. That cultural shift is beginning to bear fruit, but it takes a long time to change culture. We've been working on that for a couple of years, and really, I think in the last quarter or 2 with some changes we've made in our team there, has gotten those things really better articulated and more top of mind for our team members. I think we're beginning to see the first fruits of results. It's been a focus. We're much farther ahead with our portfolio diversification than we are with our deposit diversifications and enhancements and our fee income diversification enhancements. But just like you saw record fee income in Q2, and we think we'll have another record in Q4, we're seeing some first fruits on this deposit diversification effort. We're talking about those things now because they're evolutions in our business model that we think you're going to see steadily progress in 2027 and 2028. We're calling them out so you can help us watch our progress in those things.

That's great. Thank you.

Thank you.

And maybe just as a follow-up, we've seen such strong momentum across CIB. I think it's really exceeded expectations going back over the past couple of years now. Is there anything there that you would say has surprised you in terms of just the breadth of that opportunity to grow the loan side of the balance sheets? And I guess to the extent that people have any concerns about the pace of growth there, given the strong origination volumes. Just any thoughts on just explaining how we should just take comfort in that strong growth?

The thing that has surprised me the most is Jake and his team's ability to acquire absolutely top-tier talent. In whatever new team we have built, they've been able to go out and get folks that are very experienced and very knowledgeable, very smart, very hardworking in that category. And those people who have been doing the job for many years, and in some cases, multiple decades, have so much respect and such deep relationships in the space they serve that that's been the key to us bringing in so much business. If a customer has worked with somebody for a decade and that relationship and that knowledge of the customer's business by the lender is so deep that it really takes on a value of its own, and that guy or gal comes to our team and is on our team and is supported by this infrastructure of support people, analyst, underwriters, servicers that Jake has built at CIB. If they come in and they've got all that support and they come into a positive environment and they've got those relationships, the ability to bring customers over and move to the top of the bank group for that customer is a reality. The talent is the key to it. Jake and his leadership team have just done an absolutely masterful job of picking the right talent, and that right talent is what's letting us achieve this growth and do it in a profitable and high credit quality way that we're doing it.

I'd just piggyback there, too. George did a great job covering the most important part, which is the people aspect. When you look at what we've built, again, we now have 9 major business lines that are providing for this growth. These loans are typically pretty granular. If we look at growth over this last quarter, it was supported by 65 plus new relationships originated, 18 plus material upsizes, many of which, to George's point, were opportunities on multi-bank deals for us to take the admin agent lead role. It really is a very granular book of business spanning those 44 NAICS that are mentioned in the management comments. So relationship focus first, getting in there, understanding the sponsor maybe behind the deal, understanding and having a true relationship with the management team where we can be really a strategic advisor on all things banking to them. Not only providing the loan products, but if they have depository needs, if they need introductions to our private wealth team, interest rate hedging, commodity hedging. That true relationship focus is really where we aim to be and where we're really shining. So great quality talent, but also having the processes, the procedures, and the systems in place to appropriately scale and scale without giving up any sort of credit quality. In our management comments, we point out 0% past due within CIB at the end of the quarter, 0% on the trailing net charge-offs. We're really proud of that. We're being very selective of the deals that we're booking. We're staying away from the higher risk industries that we've mentioned on previous calls. We are focused on finding and sourcing and developing relationships with companies that are well capitalized, that are lower leverage, and that have great support behind them in the form of sponsors or family offices, private equity firms, you name it. It is a recipe for success, and I think we are just starting to see that bear fruit. We will see continued growth with these newer initiatives. There are additional initiatives on the horizon that we are excited about and look forward to sharing with you in forthcoming earnings calls.

That is perfect. Thank you very much.

Thank you.

Our next question comes from Janet Lee with TD Cowen.

Hello. Thanks for taking my question. Sorry for the technological mishap earlier. If we take your 2027 guidance, quick and dirty math shows that 2027 PPNR may be down a little bit versus 2026. Obviously, you've talked about efficiency ratio staying very strong and you're focused on improving your ROTCE. How should we think about the return profile in 2027, versus about 11% in the third quarter?

Yeah, Janet. I think we would be hopeful to beat your PPNR number that you've come up with. Obviously, that's our goal every year, is to improve upon that. I think we've achieved over $1 billion of PPNR for several years now. Where we have seen some accretive additions is in our opportunistic repurchases. You can see our repurchases during the last part of September and first part of October have been really accretive to current tangible book value. That obviously impacts the share count, that obviously impacts EPS. As you're reading in our management comments, one of our top 4 priorities is to look at our capital efficiency, and look at our tangible common equity and our CET1 and our risk-weighted asset density, and make sure we're thinking through all those items when we're allocating capital. I think our return profile is a high focus of ours, and we want to have that going in the right trajectory. That's what all those 4 items that we mentioned on the front page are really to outline our focus on those areas.

Thank you.

Thank you.

Janet, you had one other comment in one of your notes that I wanted to just highlight on, and that's our tax rate. You indicated that that was a low-quality win. I want to just make sure that we are being transparent in our tax rate and our tax strategy. We work hard on reducing that tax rate. You can see our municipal security increase. Our investment team is probably one of the best in the industry. Christy Harper is one of the best negotiators in the bond market, and she has found all sorts of municipal bonds that are high quality, good yielding, tax-exempt bonds that impact not only net interest income, but also impact our tax line item. In addition, our tax team really focuses on renewable energy tax credits. They work hard on doing that, and they find very attractive yielding tax credits that help reduce our tax rate. We work hard on every line item on our financial statement, and that tax rate's not declining because of happenstance. It's hard work from our investment team and hard work from our tax team. I want to just make sure that was transparent. We give you good guidance on where we expect that tax rate to be.

Tim, I'll just say publicly, I think you're doing high-quality work on that. All right. Thank you, Janet.

That's very fair. Thank you. Thanks.

Our next question comes from Stephen Scouten with Piper Sandler.

Yeah, good morning. Tim, maybe you kind of touched on this a little bit with your last comment, but the securities investments that you guys have been making, can you give us a feel for the strategy there and if these investments should kind of continue at a recent pace? I mean, you guys have a really strong track record of making timely purchases in securities, but really since the great financial crisis. Just kind of curious what you guys are thinking and why you think this is the right time to be making these investments.

I'll address that, and then Tim can add on. One of the things we've worked to do, Stephen, is to have a pretty constant cash flow from our securities portfolio, so we don't get locked in just forever to certain things. So that portfolio is generating about $100 million a quarter in cash flow. The good news about that is, over the next 5 quarters through the end of next year is what we've given guidance on. We think that's $100 million a quarter, more or less, maybe $90 million, maybe $110 million in a particular quarter, but around $100 million average. The average roll-off rate on those securities is about 3.5%. So you've seen that portfolio yield going up very nicely as the bond market has moved higher this year. We've been able to roll off securities every quarter, every month. Reinvest those in higher yielding securities. We gave you some guidance in the management comments on what we think that looks like for Q4, and that is another nice increase in that portfolio yield. We think you'll continue to see some improvement in that yield. It may not be as dramatic as the Q2 to Q3 or Q3 to Q4 improvement, but some improving trend in that yield over the next year, just because we'll have the opportunity to reinvest this roll-off at much improved rates from the 3.5% plus or minus rate that's rolling off from the portfolio. Liquidity and cash flow are important elements of the portfolio. As Tim mentioned, our team has a long history, going back to the great financial crisis and even before, of finding opportunities that have low risk, very low risk. A lot of these are government-guaranteed mortgages that underlie them or so forth. Very low risk and the structure being a little out of favor or not being as broadly pursued by others gives us the chance to get a better yield with actually lower risk than a lot of the alternative investments. We've got a very risk-sensitive team managing the portfolio and a very yield-sensitive team managing the portfolio. They're just doing a good job of getting us good returns on that portfolio relative to the risk profile of the portfolio. Tim, you may want to add something.

Yeah. Stephen, in addition, when we talked about capital efficiency, this is one of the areas that we're referring to. The tax-exempt and taxable securities are very efficient from a capital standpoint, from a risk-weighted asset standpoint. A lot of those taxable securities are 20% risk-weighted or less, and so the return on those, when you look at a return on risk-weighted assets, is extremely high. That's just one of the many factors. Obviously, the duration and organic loan growth and everything else that we've been talking about are considerations when we're talking about capital efficiency. The bond market recently has provided some attractive opportunities for good yields. So we've got the team with the expertise and the appropriate risk tolerance to look for those opportunities and do it in a creative manner.

Yeah. Certainly, the mark-to-market adjustment on the portfolio in the last quarter was noteworthy. But you had a 25 basis point move in the Fed funds rate and an 82 basis point move in the quarter in the 10-year yield. That 82 basis point quarterly move in the 10-year yield was the largest in three and a half decades, more or less. I think the last time there was a near comparable move in the treasury, it was part of a 225 basis point Fed move, not a 25 basis point. The change in Chairman Warsh's Fed guidance, combined with just the quantity of treasury debt coming to the market and the angst that's slipped through the markets various times about funding the data center build-out and the AI infrastructure and the amount of securities coming there, has really created some unusual moves in the shape of the yield curve. That has given us opportunities to add new securities that we think will be even better for our portfolio going forward. We're not terribly concerned about the mark-to-market adjustment because we don't have any plan to sell these securities. We like the fact that the yield curve has shifted where it gives us a good entry point for new purchases.

Yeah. Good color. I know your team's always very thoughtful and opportunistic there, so that's helpful. Just one last clarification point. I don't think the chart is still in the management comments, but of the 84% of the variable rate loans, how many of those should we expect to be able to migrate higher on each subsequent rate hike or any kind of below where those adjustments would take effect?

There is a fraction of 1% that have a ceiling in them that is relevant. So there's tons of headroom. We're already thinking about the next cycle where the Fed's through increasing, whether that's no more or one, two, or 3 more, and thinking about cutting. So we're already worried and thinking about repositioning our floors on new originations to be protective in that next cycle of rates that will probably inevitably come in 2028 or 2029. So we're working on that. That's not relevant now. We have taken that floor chart out for a while. When we get to a peak and folks start speculating about when the next Fed rate cut is going to be, I'm sure Tim and Jay and team can dust that chart back off, and we'll put it back in because it will be relevant at that point in time.

Yeah. With that, I guess, given how asset sensitive you are and how much cheaper downside protection has gotten with this move in rates, is that something you think more about, any more sophisticated hedging and increasing that downside protection given your asset sensitivity?

We sell interest rate hedges. But we typically, as you know, Stephen, manage our interest rate risk pretty much on balance sheet in real time with real dollars. And that's worked really well for us over many decades. And we're always open to new things and adjusting our strategy where it's appropriate, but it's not something we're focused on right now.

Got it. Thanks for all the time and the color. Congrats.

Thank you. Appreciate the questions.

Our next question comes from Timur Braziler with UBS.

Hi, good morning. Thanks for the question. I guess first, any additional color you can provide on the RAD loan in San Diego behind some of those dealings over the past quarter. Clearly, it has been extended for 3 years. Principal has been reduced by $121 million. I guess what is changing behind the scenes or maybe what is giving you greater confidence that leasing activity is going to tick up here? Are you seeing anything on the ground that is giving you some greater confidence there? Is there a change in market strategy that they are approaching? I guess beyond just getting 3 more years there, what is giving you greater confidence that that loan or that property is going to start leasing up here sooner than later?

Yeah. I will make a couple of comments, and Brannon, I want you to weigh in on this. Well, obviously, first, the fact that the mezz lender and the equity jointly contributed a combined $100 million of additional capital to the project is an unquestionable statement from them that they are committed to this project and committed to seeing it through. There was a lot made by one of our analysts about the fact that there was a 45-day extension before that permanent extension was inked. We view that 45-day extension as incredibly positive. Our structure of our loan extension was agreed to before that 45-day extension was inked. The 45-day extension was really to allow the mezz lender and the equity time to negotiate and work out an agreement and a plan among themselves for future capital contributions and how that would be handled if needed. The fact that the guys had already agreed to put in $100 million and spent 45 days going back and forth among themselves talking about how they are going to share responsibility for future capital contributions, we view as a double tap on the fact that they are committed. $100 million is committed, spending legal fees over 45 days to negotiating how you handle the next capital contribution if needed, says these guys are very committed to this project. They are just not putting another $100 in and hoping it works and going to walk off. They are both, the equity and the mezz, have told us they are deeply committed to the success of the project. The reason that they are deeply committed to the success of this project, it is a great asset. It is an absolutely great asset. And I listen to a lot of commentary that different brokerage firms or real estate investment firms put out on the market. And one of the themes you are hearing over and over and over again, if you listen to those commentaries the last 9 months this year, is quality assets have value. And even in markets that are tremendously screwed up from a supply-demand metric, quality assets have value. The old, less desirable assets may have no value. They may be worthless. But high-quality assets continue to have value in trade and so forth. So this is an absolute great asset that is going to lease up and will have a successful outcome at some point. It is not a question of if, it is just a question of when. The quality of asset, the commitment of the sponsor are just super encouraging, and it's why it's past credit on our books. I'll let Brannon weigh in on kind of what adjustments they're making at the sponsorship level to strategy and what leasing looks like and activity. Brannon, weigh in, add anything that I missed on that.

Yeah. Happy to, George. Bottom line is, look, you don't put $1.2 billion into a project and not really keep focused. I think we've laid out for you since mid-2024 how that investment has increased. Then again, in late 2025, you had a new team come in and dive into the asset with extremely energetic focus. We've talked about the retail leasing, which there's a lot of other space to lease, but getting that piece of the project activated, actually getting those tenants signed up, getting them in, and developing a program for the project on the ground, Timur, as you noted, so important. They've done a great job of that. They've also expanded the world they're pursuing tenants in. Obviously, continued focus on in-market life science and office users, but out-of-market in different projects, clinical research, pharma, tech, AI, defense, every possible avenue that would make sense there. Look, we've been transparent. It's clear that lab demand is not what it was, but they are still tracking several lab tenants that are of size in the market and will continue to do that. Then a lot more focus on the office piece, and they're tracking a great deal of square footage there. So they've done a really good job in terms of identifying the targets, the opportunities, expanding that set, and then being very communicative with us around what the opportunity is and where those are, and we're encouraged at the opportunity that's there. Tremendous capital infusion over the last 2 years, and then the really high energy focus around acquiring tenancy, activating the tenancy that we have already acquired, and improving the marketability of what George appropriately defined as just exquisite asset. So we're encouraged by all those developments.

Okay, great. Thanks for that. Then maybe one more, if I can, just on the allowance, I guess, A, for CIB production, what is the reserve that is kind of being booked on that production? Then if you look at the allowance to loan ratio that has been marching down, call it 4 basis points per quarter for the last couple of quarters, is that a similar trajectory that we should kind of ink through here, assuming status quo from a credit standpoint?

Yeah. We are going to do the right thing every quarter on the allowance, whatever the models and the econometric models and our individual models on every loan suggest. On CIB, on average, those probably have a lower allowance percentage than our RESG loans. But it varies quite a bit within each CIB loan. So you cannot give you a 5 basis point or a 10 basis point range and say that is the allowance for a CIB loan. It varies quite a bit, and that is driven by our models for that loan overlaid with the econometric model selections that we use in our scenario selection process for our ACL. Tim, add additional color and comment.

Yeah, Timur, I do not have it at my fingertips, but if you go back to our 10-Q, we do disclose by broad categories what our ACL is for C&I loans specifically. You can refer to that for the ACL percentage. It is primarily going to be CIB related, but to George's point, every business line is slightly different. As Jake pointed out, his credit quality metrics are extremely good. So I think that is really all I would add there.

Great. Thank you.

I'm showing no further questions at this time. I'd like to turn the call back to George Gleason for closing remarks.

All right. Thanks, Liz. Thank you all for joining the call today and all the great questions. We really appreciate the questions. We appreciate your interest in OZK. Thank you. Have a great day. That concludes our call. We'll talk to you in about 3 months. Thank you.

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