KBRA Affirms Ratings for Bank OZK

KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, the preferred stock rating of BBB, and the short-term deposit and debt ratings of K2 for Little Rock, Arkansas based Bank OZK (NASDAQ: OZK) (“the bank”). The Outlook for all long-term ratings is Negative.

Key Credit Considerations

The continuation of the Negative Outlook is largely due to the continued stress within CRE markets, reflected in OZK’s reported credit trends, particularly within its RESG portfolio, where charge-offs have increased in consecutive years. While KBRA recognizes that charge-offs remained relatively well contained (OZK reported a 0.3% NCO ratio through 9M25, moderately elevated compared to peers), recent downgrades in the RESG portfolio portend continued elevated credit costs. Furthermore, although KBRA favorably views the increase in diversification of the loan portfolio in recent quarters, this was largely due to outsized growth in a segment (CIB has grown 75% through 9M25) that has various new lending verticals with limited credit history (somewhat mitigated by the strong credit culture throughout the bank). However, OZK has continued to generate above-peer earnings, with a reported ROAA of 1.8% through 9M25, reflective of the durability of the bank's earnings, despite its comparatively elevated credit costs (provisions for credit losses have generally tracked between 0.4% - 0.5% of average assets since 2023) and recent headwinds related to falling interest rates. Following the initial impact from the FOMC rate cuts in late 2024, NIM has largely stabilized, though additional rate reductions could weigh on NIM over the near term, primarily due to OZK’s asset sensitive balance sheet, with 86% of loans tied to variable interest rate terms (93% of variable rate loans have floors, providing downside protection against further rate cuts).

The bank’s strong earnings, coupled with muted loan growth in 3Q25, enabled a meaningful increase in OZK’s capital ratios with risk-based measures increasing roughly 40 – 50 bps, benefiting from a decrease in RWA related to the higher level of repayments ($2.4 billion in 3Q25) and more limited new originations ($0.7 billion) in the RESG portfolio, causing a $2 billion sequential decrease in total RESG commitments in 3Q25. RESG repayments are expected to remain elevated into 2026, which could allow for further build to capital ratios, particularly risk-based measures. In KBRA's view, given slower near term growth coupled with its greater earnings capacity and improved capital ratios, OZK's loss absorption is sufficient for the rating category. OZK’s funding strategy utilizes its widespread retail network to generate funding primarily via consumer time deposit offerings (45% of total deposits), supplemented by a higher usage of wholesale sources (~25% - 30% of total funding in recent years), resulting in a higher cost funding base. However, we note the relative granularity of its deposit book, with uninsured deposits in line with rated peers (mid-30% range of total deposits in recent years) and a materially lower amount of reciprocal deposits. Moreover, as reflected in its peer-leading NIM, OZK is able to offset the higher funding costs with higher loan yields.

Rating Sensitivities

A return to Stable Outlook may be considered in the event of stabilization of asset quality metrics (particularly charge-offs) demonstrated over multiple quarters as well as the maintenance of capital ratios at or above current levels, particularly risk-based measures. Conversely, further deterioration in asset quality with increased credit costs materially impacting earnings and curbing the bank’s ability to maintain capital levels or the return to more aggressive capital management could result in a rating downgrade.

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