Bank OZK Caps Loan Sizes, Braces for Impact of More Rate Cuts

As reported by Bisnow, Bank OZK (OZK), the largest construction lender in the U.S., is capping new loan sizes at $500M and diversifying its assets to avoid overexposure to large construction loans. 

This strategic shift comes as the bank prepares for the impact of expected rate cuts that could temporarily decrease its earnings.

Capping Large Loans

As noted in the bank’s Q3 earnings commentary, the decision to limit loan sizes stems from a desire to minimize risk. During a recent analyst call, Chairman and CEO George Gleason mentioned that large loans have attracted unwanted attention, leading to speculation and misinformation. 

One notable example was a $915M loan to IQHQ for a life sciences project in San Diego, which faced scrutiny due to a lack of signed tenants. This project was a factor in Citibank analysts downgrading Bank OZK’s stock earlier this year.

Diversification Efforts

To handle deals exceeding the new cap, Bank OZK has launched a loan syndication desk, allowing it to collaborate with other lenders. The bank will also continue to diversify its portfolio, aiming to reduce the share of its Real Estate Specialty Group (RESG) loans from 64% to around 50% by the end of 2025. 

Recent growth has also been noted in sectors like RV and marine lending, corporate banking, and community banking, as the bank seeks to balance its portfolio.

Earnings Update

Despite achieving record net income for eight consecutive quarters, Bank OZK anticipates a decline in its net interest margin starting in Q4 and continuing into 1H25. This projection aligns with the Federal Reserve’s expected rate cuts, which could lower the bank’s earnings from interest payments. 

However, Chief Financial Officer Tim Hicks noted that a slower pace of rate cuts might mitigate some of the adverse effects. The bank expects NIM to improve again in the 2H25.

Navigating a Minefield

Bank OZK’s extensive exposure to commercial real estate remains a critical focus. The bank acknowledged challenges with specific loans, including a past-due $38.1M loan in Los Angeles and a $128M land loan in Chicago that has faced difficulties with recapitalization. 

The latter, connected to a Sterling Bay affiliate, was recently written down by $20.8M, with ongoing discussions about potential additional reserves. While Bank OZK expressed a willingness to support sponsors, Gleason signaled diminishing patience over the lack of progress on this particular asset.

Why It Matters

Bank OZK’s strategic shift marks a notable move to safeguard against concentration risks while preparing for economic shifts brought by changing interest rates. The bank’s actions reflect broader trends in the CRE sector, where lenders are increasingly cautious amid uncertain economic conditions.