Bank OZK Stock

Ladies and gentlemen, thank you for standing by. Welcome to Bank OZK Second Quarter 2026 Earnings Conference Call. [Operator Instructions].

I would like to welcome the enconference 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 Mun, President, Corporate and Institutional Banking.

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

[Operator Instructions] Our first question is going come from Stephen Scouten with Piper Sandler.

I guess I'd love to start kind of with some updated thoughts around CIB, if you could, and kind of walking us through some of the comments you made in the management commentary about the internal diversification within CIB.

And just kind of how you think that will -- now that we've progressed a bit down the past how you expect to see CIB impact loan loss reserves in the future if we should continue to see that come down as a percentage of the loans given their lower credit risk seemingly and just the impact that they've had on fees to date and projected moving forward?

Thank you for the question, Stephen. We appreciate it. I'm going to turn it straight over to Jake Munn. This is his area. I'll preface Jake's remarks by saying that CIB is a very important and rapidly growing and developing part of our franchise. We're investing a lot in it and hiring really talented experienced people to lead it. We are looking forward and enjoying the diversification now of our loan portfolio with CIB's addition and the CRE concentration coming down and significantly from RSG.

And we want to make sure that we're not trading 1 concentration for another. So the diversification within CIB's portfolio, which it has a lot of different business lines to a lot of different types of customers. is a very important long-term franchise value enhancement, we believe, for Bank OZK.

So Jake, I'm going to let you take some of the other points there that need addressing in response to Steven's question.

Yes. I appreciate that, George. And Stephen, it's good to hear from you. We're excited about the growth of CIB that we continue to make across these diversified business segments, and George hit the nail on the head there. Currently, we have over 7 business lines or major business lines. If you want to call them, our corporate banking and Sponsor Finance group or fund finance, our lender finance group, our Natural Resources Group our recently launched Franchise Capital Solutions group, which focuses on multiunit franchises across our footprint.

Our asset-based lending group, 1 of our older business units and then our recently reconfigured equipment finance group. In addition to that, we're excited and we shared in our management comments, the introduction of our emerging middle market group, which is going to be an exciting bridge between our legacy Community Bank and the area that our CBS F group, in particular, was playing in. So that will fill that $15 million to $100 million, call it, revenue size, family-owned, nonenterprise value business, which is really going to be a nice addition and true franchise grower for us with a focus on our core footprint, I'm really complementing again, our community bank and our branch network.

And so we're excited about that growth. Again, all of these business lines continued to contribute to our quarter-over-quarter and year-over-year growth for CIB. And to George's point, it allows us to have diversification and the underlying loan base. So we represent over 42 different specific and unique MAC currently. But in addition to that, it allows us to have different levers to pull depending on the seasons that we're in. whether those are macroeconomic changes, microeconomic changes, tightening and compression of margins in 1 group.

It allows us to focus on continuously building but building in a way that's beneficial to our bottom line. and in a way where we don't take on any undue credit risk. And so you'll see our CBSF group in the case of this last quarter as well as our NRG group really be the shining stars of growth. ABL a little bit less just because we've seen some tightening in pricing within that group over the last quarter or 2, and we've also seen in that market a little bit more aggressive advance rates.

And so we'll pull out of 1 of those segments a little bit or back away, I should say, while we lean into another depending on current market terms, but it's allowing us to have a very diversified engine to continue to grow our C&I coverage in concert with our community bank to really add franchise value. And what we love about these different CIB business units is that -- it's not just the loan book, right? We're talking about deposit opportunities.

We're talking about working with Chad Permore and his team on the treasury management side that Cindy is doing a fantastic job really building out. In addition to that, it gives the opportunity to cross-sell our private wealth management, our private client, commodity hedging, interest rate hedging, our capital market solutions. And so it's a true relationship-focused 1 relationship at a time build, which is allowing for some nice scaling in that diversified C&I side.

Okay. Fantastic. I appreciate all that color, Jake and -- and I guess maybe kind of pivoting to the legacy RESG book. Is there any update you can give as we obviously continue to move towards, obviously, on that IQ HQ property? And just kind of any color in terms of what you might expect next quarter upon that maturity, if there's any commentary that you can give there as we reach that maturity date?

Brendan, do you want to take that?

Yes, sure, Steven, great to hear from me again. And Yes, has been discussed, we do have a maturity upcoming actually next month. We are engaged in conversations around the multiyear extension and recapitalization of that project with both the sponsor and the mezz lender engaged on that. Terms haven't been fully developed, but we're pleased with the constructive nature of the conversations. -- and look forward to the evolution of that extension. I can't really say more about it now, but hopefully, in around 92 days, we'll have more to report.

Okay. Great. That's encouraging. So I guess, I mean, really goes along with what you guys have been trying to do with all these projects, which is continuing to engage sponsors, get more capital when needed. -- and work through the resolution as quickly as possible, right? I mean kind of more of the same, right?

Very much so, and the sponsors have been supportive, and we're encouraged about the conversations so far.

And the next question is going to come from Matt Olney with Stephens.

I want to ask about the RESG repayments that were elevated in the second quarter. I think the commentary calls for RESG repayments to remain elevated the balance of this year and into '27. And I wanted to focus on '27. I think that's a little bit newer commentary -- any more color you can share on expectations of these repayments in the back half of the year into next year?

Yes. Thank you, Matt. Appreciate the question. I'll take that and then Brannon can add any color he wants to add to that. Obviously, the quarter just ended was a big quarter of repayments with that number approaching $3 billion if you look across the last 4 quarters -- trailing 4 quarters, we've averaged about $2.5 billion a quarter. So -- all of that is consistent with our guidance that repayments will vary somewhat from quarter-to-quarter and that they're going to be elevated as we work through that big origination year of 2022, a record origination year there.

Those were all cycling through. We do expect continued repayments this year and into next year. Our sense is that will taper off a bit next year. but still be at an elevated level based on our current projections elevated, but slightly less elevated than 2027. I think that's the guidance we can give you on that. Obviously, this is a natural phenomenon given the cadence of originations and the typical life of these loans on our RESG book. Brannon may want to add something to that.

I don't know that I can add a whole lot that last point. It's really important to understand and why we've included that our RHD repayment cadence in a report after before you sort of follow what's left. And these things move around, as George said, the market conditions, market factors, and even our sponsor sort of strategy around refinancing key for sale and the impact of cap rate changes on those things. So -- but no, I think we're -- a lot of it is just the natural cadence of the portfolio moving through the pipe.

Okay. Appreciate the commentary. And I guess sticking with the loan growth discussion, I think the guidance still calls for the mid-single-digit loan growth for the full year, that would imply a nice improvement in the back half of the year. Any more color you can share about expectations for loan growth over the next 2 quarters?

I think the guidance we gave at the beginning of the year, and we've reiterated it in the management comments here of mid-single digits is a good number. In the quarter just ended, we got a wave of repayments early, which had us significantly down on loan volume early in the quarter, and we were chasing volume all quarter trying to catch up with that early wave of repayments. So I think that some useful perspective on the color.

Notwithstanding that, we were able to improve our margin 4 basis points in the quarter and still put up higher net interest income in Q2 than Q1, but we were battling that prepayment wave really hard on in Q2. So hopefully, those prepayments will be a little more levelized in Q3 and Q4. As Brannon mentioned, these repayments move around. But when you get a big slug of them right off the bat early in the quarter, it's just -- it's hard to catch up on the average earning assets.

The next question is going to come from Manan Gisella with Morgan Stanley.

So maybe just a follow-up to the question that you just responded to. I guess -- with the changes in the NII commentary in the management comments, is that largely a function of the payoff activity? Because as we think about -- we came into this year with a few rate cuts in the forward curve, it is a more asset-sensitive balance sheet with the prospect of rate hike that should be a little bit more beneficial. But is pay down really the only reason that the NII commentary is changing a little bit?

Yes, Manan. I think that's the principal reason it's average earning assets. And not so much the volume of paydowns as just the sequence and timing of those. When we started the year, we had expected a little bit more sort of linear growth and not the pullback in growth in Q2, we were up 2% roughly after Q1 and then had negative growth in Q2. So we went backwards with expected that to be a little more linear through the year, and that's tamped down our average earning assets.

So again, as Brannon mentioned, it's a very valid comment. A lot of these loans are chunkier loans. So a loan pulling forward 2 months ahead of schedule or something moves the projections there. So cautious guidance on being able to equal or beat last year's net interest income number just simply as product of average earning assets.

Got it. So it's nothing related to, I guess, funding competition, anything else on the liability side?

Well, we have projected a pretty competitive deposit gathering environment in the beginning of the year. So it has been a competitive deposit gathering environment, but there's nothing new about that. I think if you look at analyst consensus estimates on net interest margin, I think the consensus numbers, they are more or less correct on where we think.

Our guidance that we're likely to be a little bit under the first quarter's 420 NIM is consistent with what the consensus number has got built in. So I think the Street pretty much has this on consensus about right.

Got it. And then maybe on the loan loss reserves. I know there are some specific reserves that you're releasing as you take some charge-offs. But maybe if you can talk about how you're thinking about reserves relative to the prospect of higher rates in the forward curve and maybe some of the pressure that you're seeing on the special mention loan category this quarter?

Yes. Let me comment on special mention. And then we'll let Tim talk about the reserve. We did have an increase in our volume of special mention loans, but we made a -- I wouldn't read too much into that. Loans come into special mention. Some of them, as we saw a couple of examples out in the quarter just ended, become more severely. -- rated and move into classified asset category.

But a lot of loans coming to special mention extensions, recapitalizations get accomplished in the ordinary course of business, and they move back to pass-rated credit. We put a sentence in the management comments this time commenting that several of those loans are in special mention, we're in really good discussions and good activities that would result in those loans moving back to a status.

So they're in there because those discussions are going on, and we've got to get to a final conclusion on those discussions. But I think there are several of them that look like they're going to work out favorably and be candidates for upgrade over the next couple of quarters, if not the next month or 2. So Tim, you want to comment on the ACL.

Yes. Manan, certainly, you've seen our comments over the last several years about growing our ACL in anticipation of charge-offs that would be realized at a later time. As those charge-offs are actually now being realized, we felt it appropriate to decrease our ACL over the last couple of quarters. And as those charge-offs have been recognized.

For instance, in the previous quarter, we had built a pretty sizable ACL on the 2 Seattle buildings that went into ORE this quarter included a charge-off of $22 million on the office and $3.7 million in the life science building. Those were already reserved for in the previous quarter. So I mean, I think we take a very cautious prudent approach to building the ACL at the appropriate time.

As we're working through some of these problem assets in the life science and office portfolios, that we've seen over the last few quarters, that provision has come -- the ACL has come down, and that provision has, I think, over the last several quarters, the provision number that we put up has been less than what the consensus number was.

I think you'll probably see that continue to drift down, assuming the economy maintains some of the resiliency and strength that we've seen over the last several years. We are in the later stages of working through some of these additional assets that are -- that we've outlined on Pages 24 and 25 and 23 and 24. So I think the trends that you've seen in the last few quarters are consistent with what my thoughts would be moving forward.

And the next question will come from Catherine Miller with KBW.

Maybe 1 question just to serve back on credit and the direction of the reserve. Can you just give us an update on any trends that you're seeing in your life science portfolio? It feels like that's been where a lot of the negative migration has been an working through that. And so any comfort that you can give us that you've worked through maybe some of the more stressed projects within that portfolio, and that would lead you to believe that the reserve might be able to come down over the next few quarters?

We have a pretty healthy ACL for that portfolio, reflecting the general challenges on that sector. We've got several of these life-sized assets that do have good leasing. And we're -- they're no issues at all with those. They're well leased. We got 1 of our really nice paydowns that we got in the quarter just ended was a big paydown on well-leased life science project that we extended the term on -- so that was a nice win.

The life science loan that we took a charge-off on this quarter that was previously special mention that we took a short payoff on to exit. That was, I think, probably our least desirable, in my view, single asset in the portfolio. Now other folks might disagree with that. But we're focused on asset-by-asset basis, looking at these, and that's all that was probably a more challenging asset from a long-term value and future perspective than some of the others.

So we got a chance to exit that at discounted payoff, we thought that was a nice improvement to the portfolio to move that out. There is a fair amount of leasing activity ongoing on several of the life science projects, a lot of it is not for life science, it's for technology, AI or office purposes, but there is some activity there. So Brannon, I'll let you share any additional thoughts you want to share about life science.

Well, you hit most of the bullet points that would have hit there, George, in talking about portfolio. I mean, look, we've shared, it's been a challenged market. It's a -- it's hurdles with respect to the macro picture with respect to specific funding pictures in the industry. But generally speaking, this year, we've seen a pickup in venture capital focus that way. And we've seen an increase in just tenant activity in certain markets and specifically around some of these projects that we have.

George mentioned the AI influence. That continues to be the case. We continue to see tenants in the market that are operating from that perspective that are looking at these uses. But -- there are also very life science-focused tenants in the market as well. So we still have, as they say, some more to chop and working with the sponsors to continue to support these through lease-up. But I would say that generally, the first half of the year has had a more positive flavor to it just broadly in markets with had activity in space.

Okay. Great. Very helpful. And then my follow-up is just on the margin trajectory. Can you give us an update on just kind of how trends you're seeing in incremental deposit costs? I feel like -- and you've mentioned in your prepared remarks or your management comments that this is probably a bottom in deposit cost and move through the year, that will trickle up just with higher rates. But just any kind of incremental data on where your CDs kind of are coming on and -- and then any benefit that we'll get just from kind of some 4 to 5 from CIB, where it's just the incremental deposit costs coming on today?

Yes. We are probably 10 basis points higher than our low point on our CD specials across the board. We have increased that really in the last probably about 4 to 6 weeks ago. I don't remember the exact timing of that, but that is a reflection of the fact that we expect to need to grow more deposits in Q3 and Q4 based on moderately increased volume of outstanding loans. So we're ramping up a little bit for that.

We said in the management comments, Catherine, that we thought the Q2 cost of interest-bearing deposits was probably an inflection point and we go higher from there. I don't think we're expecting to run off the rails going higher. I think it's just somewhat of a slight increase higher from where we were on COIVD in Q2.

So modest increases in that cost as we go forward. And part of that is driven by the need to generate more deposit volume simply because we expect more loan growth in Q3 and Q4. We commented and managed some comments, we were really pleased with the good work that our funding team, deposit-generating teams did in Q2, getting that 5 basis point reduction in our cost of COIVD which combined with the work our investment team did on the investment portfolio, let us actually improve net interest margin 4 bps during the quarter.

I don't think anybody probably are not many people expected that improvement. It was a nice result for the quarter, particularly given the high level of paydowns early in the quarter that beat our average earning assets down for the quarter. So that was a nice offset. Will benefit less from that ability in Q3 and Q4 as we grow loans more, we'll have to be a little more aggressive on deposit generation.

And when we were getting a lot of loan payoffs early in the quarter, our deposit guys were able to adjust their deposit gathering strategy and squeeze a little bit of margin benefit out as a result of the higher level of loan payoffs. So there's a give and take there place we would rather have the volume. But if you don't get the volume, you like the way our team responded to that, and they were able to grind some margin improvement out in a lower volume environment.

the next question will come from Brian Martin with Brean.

The insight thus far. Maybe just 1 question for whomever, just on the progress you made this quarter and just recent quarters, George, on the shift to CIB and away from real estate, given the payoffs continue and the momentum continues at CIB -- the drop this quarter seems a little bit more given the payoffs were a little bit higher. But should it just be a more gradual decline also being equal, I know your comments about the payoffs being volatile.

But kind of from this 48% level. Just give us some update as you look out over the next 4 to 8 quarters, kind of how that -- where that ends or just maybe the trajectory. If you can give any color on that or any help on that?

Yes. The RESG origination volume, as we've reported in management comments has been pretty muted. We're working hard to find volume. But a lot of these cities where we've originated a lot of volume in the past or raising taxes and adopting policies that are not specifically pro business and a really anti-business and that is affecting the need for new product in those markets.

So that, plus the fact that there is a lot of capital out there chasing debt in the CRE space. It's very competitive on new deals, that's keeping that volume muted and probably is going to do so for some number of quarters farther. My crystal ball doesn't go too far out on that. But it's a challenging environment to originate volume, and of course, because of the high level of originations in '22 and to a lesser extent, '23, we're in the heart of a big payoff wave.

RESG is going to continue to drop. And -- we don't talk about it a lot, but we're now, I think, at our second quarter end where we're under 300%. So we're below the regulatory concentration guidelines for total CRE and probably by the end of the year, we'll be under -- or early next year, we'll be under the 100% guideline for construction and development. So that portfolio is going to continue to shrink for the remainder of this year and into next year.

We commented in the management comments that we expect CIB and RESG portfolios will be equal in size next year, and that at some point next year. That gives you a real indication because CIB is $7 billion plus now an RESG is $15 billion plus, and we're expecting those are going to equalize and cross at some point in 2027, which means we're going to continue to see strong growth in CIB and strong paydowns in RESG.

I think what we don't talk about a lot that is important as is I think over the next 6 quarters through 2027, you're going to see more positive momentum out of our community banking group and continued positive momentum out of our indirect and RV group. That group was in the 12-something percent. It's now 13.7% of our portfolio in the indirect.

Our community banking portfolio is pretty much language around its current balance more or less for a couple of years now. We have reorganized some of the reporting structures there, took a little more straight line and clean cut set of reporting structures we've implemented there. I think the team is really excited about that. I think we're going to get some positive growth out of that.

If you look at the portfolio, is really being kind of 3 parts, the community banking indirect being 1 part, RESG being 1 for, CIB being 1 part. I think you get to more or less equal sized to a very diversified portfolio in 2027. I think being below the regulatory CRE concentrations, having that portfolio very diversified is really accretive to our long-term shareholder comfort and franchise value. That's part of this multiyear design and strategy we've been pursuing of getting more diversified.

I do think you will see RESG being an important contributor to our growth and portfolio long term. I think you will see it grow again. But it may get into the 20% of portfolio range before it hits that inflection point where origination of fundings exceed payoffs and it turns back to a more positive contributor to growth. So I don't think we're going to see a lot of change in the paydown volume for a number of quarters.

Got you. That's super helpful, George. And maybe just 1 follow-up, just on the credit front, given your comments about special mention and kind of some more positive movement there than negative, it normally would be anticipated in and the fact that most of the nonperforming issues are concentrated with a handful of credits.

Can you just give any big picture kind of resolution on the credit path. It feels like your bias or your outlook is a bit more positive, particularly with maybe not as much concern on the special mention. The other credits identified, the reserve coming down.

I just kind of want to understand if we're hearing that right? And just if that's more kind of how we should think about it if we do see some path for resolution here in the next couple of quarters, that's what it sounds as though.

Brian, what I would say on that is the RESG portfolio is recycling in a constructive and healthy and normal way. We mentioned there, we've had $9.95 billion, almost $10 billion of that portfolio pay off over the last 4 quarters. If you think about that in the context of the entire -- and those are funding balance. If you think about that in the context of the entire commitments in the portfolio, I mean that's a massive recycling of those assets.

It has been a very long and very tough CRE cycle for a lot of our customers. The quality of our sponsors and customers as shown up really well because we went through several years of that challenging environment with no problems to speak of, and we've had a handful of problems. We'll have a few more assets that will emerge as problems over the next year, 1.5 years as we work through this kind of final stages of that cycle.

But the portfolio is recycling really quickly with $2 billion to $3 billion a quarter in payoffs and the vast majority of our sponsors, as we have said all the way through, the vast majority of our sponsors are continuing to support their transactions in a very positive way. You saw that in the quarter just ended, we had $91.5 million of unscheduled paydowns in the RESG portfolio, $19.5 million of additional reserve deposits posted in connection with extensions of loans.

We had $37.5 million of unfunded balances curtailed in connection with the modification extension or loans and collected $5.4 million modification fees. So -- the vast majority of our sponsors continue to support their loans. There have been -- obviously, we've got 10, 12 assets that we're -- we've identified that are either in foreclosed assets or classified assets that we didn't get the support we needed. There will be a few more of those as we go forward.

But -- we also have 1 of those OREO assets and 3 of the substandard loans that I feel pretty optimistic about our ability to work those out over the next few months. We're far along with the resolution liquidation plans on those assets. We're working through the problems. The problems have been fairly isolated in number. I think we're doing an excellent job working through them as they come up.

Lastly, I would say we built a big reserve in our ACL to deal with potential loss exposure on that, and we feel very good about the adequacy of the ACL to deal with that exposure across the entire portfolio.

Perfect. That's all helpful for me. I'll step back. Maybe -- and parting, maybe Tim could just comment if you've got 1 easy comment, Tim, on just the out your outlook on the buyback, but that'd be it. But thank you very much, George, for the comments and everyone else.

Thanks, Brian, buyback, Tim.

Yes. Brian, certainly, I was pleased with the buyback activity over the last 4 quarters. I think we used about $175 million of the $200 million repurchase authorization. The average price there was below tangible book value. which was very accretive, not only to attainable book value but EPS. Moving forward, I don't -- we have the brand new $200 million authorization for the next 4 quarters, how much we'll use of that will really be dependent on our on our stock price over that time period.

I would anticipate we would use some of that, but how much, again, just really is going to depend on our stock price.

The next question will come from Timur Braziler with UBS.

In regards to the net charge-off language, it looks like the commentary of it being roughly in line with 2025 was removed. Just wondering if the current cadence that we are on is the right way to think about charge-offs here going forward? And then maybe to use a baseball analogy, if you can provide what inning you think you're in, in terms of classifying kind of reappraisal of the current book? And then similarly on where we are with actually charging off and kind of dealing with those new appraisals?

Tomorrow, I'm going to resist the temptation to use the baseball analogy. I'm not a huge baseball fan. Even though our Arkansas Razorback baseball team is a great college team. But what I will point you to is the language that we've had for several quarters now in our management comments document, that is, we think we're in the right stages of a long cycle that has been a challenging cycle for our customers for a number of years.

As that cycle has worn on the resilience of some of our customers to continue to withstand that cycle and support their assets is diminished and that's why you're seeing the handful of special mention and foreclosed assets and then classified assets that you're seeing. So as I said in response to Brian's question, the RESG portfolio is recycling quickly the $10 billion in round numbers of payoffs over the last 4 quarters is a strong indication that, that portfolio is recycling and recycling quickly to current generation assets that are underwritten in a different environment.

We feel like we are adequately provisioned for that as I told, Brian, I think there'll be a few more bumps in the road, and we'll have a few more problem assets. But we're also resolving assets at a pretty diligent rate as well. So late stages, that probably continues this year and into next year. But I think we are we're feeling pretty good about where we are in the cycle.

Now as for the net charge-off number we are a little above the industry's Q1 number through 6 months. We have a long history of outperforming the industry, multi-decade history of outperforming the industry. I think we've got a good shot of getting back under the industry's number for the year. We'll see how that plays out. It's a chunky mix of charge-offs, the vast majority of our charge-offs in the quarter just ended were on for credit.

It tends to be a little chunky. -- in the way those are recognized. It's not like we have 100,000 loans that there's an averaging effect on. But we're cautiously optimistic about our ability to get back under the industry number for the year. We'll see how that plays out.

Okay. Great. And then as a follow-up, maybe 1 more on RAD in San Diego. Can you remind us, as IQHQ still making full cash payments? Or is that payment in kind? And then I'm just curious in terms of how you're thinking about risk migration with another extension coming up here in August. Maybe talk us through why pass rated from a risk kind of standpoint is still the right way to be here?

Yes. What I can tell you on payment and kind PIK interest, we don't pick interest on any loans. The interest on that credit is as all of our credits is being paid from reserves that were established for that purpose. You'll recall early last year and then previously in '24, there were 2 very large contributions to the reserve so that we were holding on those loans from the sponsorship group on that asset specifically, that have been paying operating cost and interest and other costs related to those projects.

We do not pick interest on loans. That's not relevant to that project or any other project. What I could tell you is this is a pass-rated credit there, and that's because of the very constructive dialogue that we've had with the sponsor and the mezz lender both of whom, as Brannon alluded to, are working in what appears to be a very constructive and positive negotiation work out a multiyear extension of that asset. That really is a negotiation with us, but it's also a negotiation between those 2 parties.

It will take a little while to negotiate that, but we're cautiously optimistic about the outcome of that and have every expectation that, that will be a successful outcome, and that will remain a pass-rated credit. Obviously, if our thoughts in that regard change will make appropriate adjustments to the classification of that asset.

The next question will come from Janet Lee with TD Security.

Good morning. So your expectation around CIB and RSG being roughly equal in size in 2027, which is great for diversification purposes. My understanding was that CIB loans are slightly lower yielding than RESG. What is the implication on NIM perhaps in 2027 at CIB were to become a larger size? Does it result in a structurally lower NIM? Or maybe it also brings in some lower cost depots over a longer term, but I just want to understand the structural impact of larger CIB on your net interest margin?

I think a lot of that, Janet, is already in our net interest margin. Our RESG originations over the last couple of years have had -- because of the competitive environment for those assets and the fact that a larger and larger part of our RESG loans are multifamily loans where the spreads on those loans look very much like the CIB loans. The remixing of the RESG portfolio to be predominantly multifamily and really industrial is a big part of it. Those spreads look like CIB related spreads.

If you point back 3 or 4 or 5 years, we certainly were getting higher spreads on RESG loans then when we were doing more large complex mixed-use projects, more office, life science sort of projects than we are getting on that portfolio today. That differential has tended to somewhat diminish and the yields on those portfolios have tended to get closer and closer together. They're still there's still a delta, but it's a much smaller delta than it would have been in past years.

The second thing you're correctly surmised that we get a lot more deposits with our CIB loans, and we get a lot more contribution to noninterest fee income from CIB. Jake's talked about that in his comments and talked about the partnership with treasury management and the focus on those various service parts of their business that generate fees, whether it's on interest hedges or commodity hedges or syndication of debt or equity transactions or just other kind of loan-related but noninterest of fees that they generate.

We think CIB is going to be as profitable for us as RESG long-term and that the yield differential we expected is really no longer there. Jake mentioned the way he is managing that CIB book and the different types of loans we make there. There are sometimes that various categories of loans get very aggressive because you've got a few people really trying to put a lot of money into that space.

Jake mentioned 1 category where we've seen yields compressed and we're finding we get better yields in other categories with the same or better risk profiles than those other categories. So he's done an excellent job he and his very capable, very better and team doing an excellent job of decelerating growth in areas where spreads are getting compressed by competition and accelerating where we can get real good value on a risk-adjusted basis. So super proud of the job they're doing on managing that.

Yes. And George, I'll just piggyback quickly off of that. If you really to emphasize what you were saying, yes, if you were to go back 2019, the fund finance book was created. 2021, you had the legacy ABL and lender finance group. Since then, we've launched our CBS F, our FCS, our NRG, EMM, EFG. All that being said is those new business lines are really relationship focused to George's point.

You have the opportunity for this great cross-sell this additional noninterest fee income generating engine, whether it's the commodity hedging, interest rate hedging, capital markets fees, treasury management, you name it. a lot more single lender direct deals as a result of that relationship is. As CIB has kind of grown and evolved over the last couple of years as part of the enterprise, the average return, the average spread has improved greatly for the CIB names, but also the average kind of all-in yield has improved greatly.

I think it's been quarter after quarter after quarter, if you were to look at for that most recent quarters, new loans originated. The average spread has actually increased over the historic book and quarter-over-quarter for this last quarter, it went up by over 25 bps on the average spread on these new loans that were originating in CIB just compared to the average across the legacy book.

We really are focused on relationship banking where we can harvest deposits where we have the opportunity to cross-sell products and services that are beneficial to our clients but results in a great return for the bank and for our shareholders. We're doing that without giving up any sort of credit or loosening terms or anything of that nature, too. So we're taking our time. We're picking our plays. We're doing it in a conservative and strategic manner.

Got it. And not to be on the dead horse, but on average earning assets, I just want to make sure that I'm understanding this correctly. So -- should we expect average earning assets in the second half to be relatively stable to the second quarter given the RESG repayment? So while you're still targeting mid-single-digit loan growth for the year. Or should it still step up in the second half of '26?

Tim?

Yes. Jan, I still expect it to step up each quarter in Q3 and Q4 from where we are in Q2.

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

Thank you, guys, for being on the call today. We appreciate it. We look forward to talking to you again in about 92 days. Have a great day. Thank you.

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

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.