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Bank OZK is growing and diversifying, but one of the largest construction lenders in the U.S. is continuing to cut back on real estate.
Its real estate exposure fell to 52% of its total loan book in the first quarter, down from 54% in the final three months of last year, as the bank is getting rid of nonperforming assets, particularly in the office and life sciences sectors. And according to the bank, the cuts will keep coming throughout the year.
Bank OZK had its slowest first quarter for real estate loan origination in five years, at $1B. This is also a decrease from $1.2B in the fourth quarter.
The slowdown doesn’t necessarily come from a lack of desire. Opportunities to issue construction loans are limited by a strict monetary policy and macroeconomic headwinds delaying project starts. The construction backlog hit a four-year low last month as the high costs of tariffs made materials prices spike.
"A surge in liquidity available for debt financing has created significant competition for the new deals that have raised equity, which has contributed to our relatively subdued [Real Estate Specialties Group] origination volume," according to first-quarter management commentary.
The bank said it plans to originate roughly the same amount in 2026 as it did last year and the year before, which would be more than $5B.
Charge-offs, which realize losses from bad loans, have doubled. They grew to 0.57%, up from 0.25% a year prior. The bank had doubled its allowance for credit losses to prepare for the expected surge in charge-offs.
Nonperforming assets make up 1.08% of its total portfolio, a number that has grown from 0.99% the prior quarter and doubled year-over-year. The bank said five loans are primarily to blame, as they made up $409.5M, or 124 of the 141 basis points of past-due loans. Two of the loans are undergoing sales, one is in negotiations to be sold, and the other two are in the recapitalization process.
The country’s largest banks have been working to chip away at their nonperforming commercial real estate debt. Bank of America’s nonperforming commercial loans fell 44% year-over-year by the end of March. PNC cut by 26% over the same period, even though it was up from $574M in Q4. Wells Fargo got rid of 2.6% of its nonperforming commercial real estate loan portfolio.
Elevated repayments are also eating at Bank OZK's real estate footprint — repayments were $1.6B in the first quarter, an $850M increase year-over-year and higher than they have been during Q1 in five years. The bank has $634M in loan commitments, which have fallen 11% over the last four quarters.
Executives said they expect repayments to remain high because of increased debt financing in the market.
Across business lines, Bank OZK slightly missed profit estimates in the first quarter. Income was $159.3M, down 6.8% year-over-year, and expenses are up 12% from last quarter due to rising operating costs and higher employee compensation.
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