Bank OZK CEO Reveals How to Grow in Uncertain Times

Thank you, Pat. It's great to be with you. And before I say anything else, I just want to say thank you to the work that your organizations, Policy and Taxation Group and Family Enterprise USA, do for our family and many, many other families and in support of the US free enterprise system and our economy that is so important. So thank you for the work you guys are doing.

Well, my family business story is really two parts. One was as a very young person and I became involved in business at a very early age. I was the oldest son of two very entrepreneurial depression-era parents. They were very hardworking, very thrifty, and had a bunch of small mom and pop businesses: a grocery store, a hardware and dry goods store, a livestock manufacturing feed mill, a cattle operation, a poultry operation, a row crop operation, rental property, both residential and commercial. And I was involved in all of those enterprises as a small child and worked in them and did the dirtiest, nastiest, most dangerous things, but also got to go with my dad at night and by the time I was 12, I was doing book work. By the time I was 14, I was doing his tax returns. When I was 16, I laid out my family's estate plan for my parents. When I was 18, I sued my parents to become an emancipated minor with their approval, of course, so that I could actually run some of their businesses as an adult with legal capacity to contract. So I had a very unusual laboratory experiment learning business from my parents at a very early age. What I drew from that was a lot of positive experiences, a lot of knowledge, and it's a great example for a lot of your families who are trying to figure out how to develop that next generation of leaders: immerse them, as my parents did, in your various businesses and let them learn and let them make mistakes. It's a great way to train that next generation of family members. But one of the lessons I learned is that my parents had no vision to scale any of those businesses. They were very successful and did a great job running businesses, but they had no vision to scale it. So as a very young man after working for a little while as an attorney at age 25, I bought controlling interest, as you said, in what was then Bank of Ozarks, a $28 million bank, and my vision for that was to scale it. Now I didn't realize quite how far we would scale it. It was somewhere around the 10,500th largest bank in the US at that time. We're now, if you include US subsidiaries of foreign banks, the 57th largest bank in the country and the 40th most profitable bank in the United States. So moving from 10,500th — there aren't even that many banks now — to 57th in the country is a pretty significant move. And as you said, we've actually increased the size of the bank about 1,500-fold over that period of time. So we've had great success, as you say. We've been profitable every year and have built a great company based on a great team.

Well, it is a very uncertain time and in my 46-plus years of doing this job as chairman and CEO of Bank OZK, it's probably the most uncertain time with the largest standard deviation in potential outcomes and the largest tail risk in both directions for potential outcomes that I have ever experienced. We as a company embrace turbulence and uncertainty. Our experience over my 46-year career is that the times when you have the greatest opportunities, the times when you can achieve the most significant advances in your company or your business, are often in times of economic turbulence and uncertainty. Our view on that has been borne out in a number of downturns. When you do something as I've done for 46 years, you go through a lot of cycles. And we've always produced the best results as a result of adverse economic cycles. Now, our approach on that is you really need three ingredients all the time to be ready to take advantage of those cycles. One is you need great leadership and management with a vision for where risks are and where opportunities are. In every turbulent economic time, there are a lot of challenges that bring a lot of risk, but for every challenge and every risk there is a corresponding opportunity on the other side of the equation if you can identify it. So having great management resources and vision and an awareness that yes, I've got to address the challenges but I can also identify and capitalize on opportunities is step number one. Then you need to be well capitalized with the financial strength undergirding your enterprise so that you can take advantage of those opportunities and withstand the adverse impacts of challenges. And number three, you need enough liquidity that you can really go out and deploy the resources you need to both deal with the defensive matters you need to deal with and also the opportunity to capitalize in that environment. So that's the way we've approached it. And I think most successful family offices and family enterprises do the same thing. They operate with strong management, a lot of capital, a lot of liquidity, and they're ready for adversity. They plan for it. They expect it. And they also know that that will create some great opportunities for them.

Well, that's a great question. I have a lot of history in real estate. I did my first real estate development deal when I was 19 years old. So when I got in the banking business, it was a natural fit to gravitate toward real estate activity. So we have always been engaged in real estate finance. Now, when we were starting out 46 years ago as a $28 million bank, you couldn't make a very significant real estate loan. Today we make loans on a lot of the largest and most complex real estate projects all over the United States, and our focus is on doing very high quality projects. We're in every major market in the US, most of the secondary markets, and a fair number of the tertiary markets across the United States. As probably the most active construction and development lender among banks in the United States, we see probably 80% or more of the transactions done in the US that have a loan size of $40 or $50 million or more. So we do a lot of really large, very complex projects and have developed an unusual level of expertise for a bank in that regard. So what I would tell you are the three things we employ to make that business very safe. Number one, we're a very low leverage lender. Our average loan to project cost over the entire portfolio is about 50%. Our average loan to appraised value today, based on most recent appraisals even in this kind of challenging environment, is 46% loan to appraised value. So our sponsors have massive amounts of equity in those transactions, and that ensures that the sponsor is going to protect that senior loan that we have vigorously and has a lot of stake in the game to protect and defend. Secondly, we focus on large projects, as I say. That typically means you're dealing with really high quality sponsorship — people who have a lot of experience in commercial real estate, a lot of expertise. They're not going to get rattled when a cycle comes because they've been through a lot of cycles before. And they have the capital and liquidity to protect those large investments that they've made in those projects and to carry those projects through an extended development cycle if economic conditions change and they have to turn a three-year or four-year development cycle into a five, six, or seven-year development cycle. And then the final thing is focusing on really high quality assets. Your clients and members will quickly apprehend the fact that high quality assets always find a bid, whether it's commercial real estate or art or whatever. The high quality assets always have a bidder wanting to acquire them, or if it's a lease property, wanting to lease it. Because we do mostly construction loans on ground-up new construction, our assets are modern, the type of assets that sponsors are looking to develop, that tenants are looking to lease, or that buyers are looking to buy because they have a future. People want to be in them. They're high quality assets. So low leverage, great sponsorship, high quality assets are really the three keys to how we've been able to be in a business that most people consider very cyclical, very risky. We're in it every day, every year, every part of the cycle. And we've had an exceptional track record over the 23 years that we've had that Real Estate Specialties Group in operation. We've averaged about 13/100 of 1% loss ratio per annum. So very, very low loss ratios from it because of the quality of sponsorship, the quality of assets, and our very low leverage position.

Yeah, certainly those are two very important factors, and there's a considerable amount of uncertainty, going back to your early question, around both of those. The Fed seems very much on a course to cut rates at least one additional and maybe two additional times this year and going into 2026. So I think we are going to see a Fed bias toward cutting. Of course, at the time we're recording this, the government is shut down and we have very limited supplies of current economic data for the Fed to use in making their decisions, which adds yet another level of uncertainty to this. My biggest concern is that the Fed cuts too much and too quickly, and we're still running with an inflation rate of slightly over 3%. If you strip out and look at the core and the super core, those numbers are even higher, and that's alarming. That's a long way from the Fed's target of 2%. I'm not sure 2% is really the number that the Fed should be targeting, but that is their stated target and has been, and they're a long way from it. So I'm afraid that the biggest risk here is the Fed cuts a couple of times too much and that reignites higher rates of inflation into next year, and then they find themselves having to increase rates sharply to try to curtail that inflation surge.

Well, we share your view that it is a very significant risk and a rapidly growing risk. The significant progress being made in artificial intelligence is just enhancing and amplifying cyber and other types of fraud risk significantly. So this is a growing problem, and it's a growing problem for the banking industry. It's a growing problem for your family enterprises that are members of your organization. It's a real issue. The fact that so many rogue foreign governments have state-sponsored cyber criminal activity just amplifies this whole risk profile. So we take this very seriously, and we've devoted a massive amount of resources to this, more so than a lot of banks, I think, because we are more sensitive to this risk than is generally the case. I'll give you a statistic: the average bank, on their phishing campaigns that they conduct among their employees, has a 15 to 20% click rate. We've done so much training and emphasize this so much that even our well-designed phishing campaigns that we throw at our employees have a below 2% click rate. That really is a result of a realization that cyber risk is not a technology risk. It's a business risk, and it's got to be managed and addressed and trained for like any other business risk. I would encourage all of our listeners today who run family enterprises to make that same decision: cyber risk is not a technology thing. It's a business risk. Just like anything else, you have to think about it, you have to train for it, you have to prepare for it, and address it proactively, or it will manifest itself in some sort of loss or problem for your company. So I think it's a very important issue. I would even offer up our chief information security officer to do a future webinar or podcast with you on this subject, because I think it would be incredibly useful to your members to hear a real expert on that subject address it. But very important, and there are lots of ways a business can protect themselves from cyber or other fraud losses.

Gosh, we do that in so many ways. But let me start out since you've talked about our real estate group. Obviously, if you're a family office or a family that is in the real estate development business, we've got a leading platform for that in our Real Estate Specialties Group. We're a national leader among banks in that business. We're number one in that business on the construction and development side. So we bring a great deal of expertise and capabilities to families who are actively engaged in that type of business. For families who are engaged in other businesses, we interact with them routinely through our corporate and institutional banking group. We have a lot of family companies that we do business with there, providing asset-backed lending facilities, equipment finance facilities, enterprise value finance facilities for acquisitions of businesses or development of businesses, fund finance facilities, and all sorts of corporate finance. That includes our natural resources group that does energy lending, oil and gas lending, and so forth. So that group deals with our customers on all the same sorts of complex, larger, more sophisticated lending structures that are not real estate related. And then, of course, our trust and wealth division provides a full level of fiduciary services, estate planning, and trust management for clients. They also work with our private banking folks to handle private credit, private equity, venture capital, and other sorts of investments, as well as more traditional equity and debt type investments. So we really interact with a lot of different family offices and a lot of different family enterprises to meet their needs at different points of our business. Our branch network is distinctively southeastern: Arkansas, Texas, Georgia, Florida, North Carolina, and Tennessee. We have about 250 branches in those six states today, but our business is truly nationwide. We're all over the United States, in every major city, doing business in most secondary markets and a lot of tertiary markets across the country.

All right. Well, thank you, Pat. It's been a pleasure to be with you, and once again, thank you for the fine work you guys are doing. We really appreciate it. Our country needs that sort of impetus among our legislators and governing forces to really support our free enterprise system, and we appreciate you. Thank you.