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spk01: Thank you for standing by and welcome to the BankOZK second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. Should you require any further assistance, please press star 0. I would now like to hand the conference over to your host, Tim Hicks, please go ahead.
spk03: Good morning. I'm Tim Hicks, Chief Credit and Administrative Officer 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, 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, Greg McKinney, Chief Financial Officer, and Cindy Wolfe, Chief Banking Officer. To make the most efficient use of the time we have for this call, we'd ask that you please limit your questions to one or two at a time and then re-enter the queue for any follow-up questions if needed. We will now open up the lines for your questions. Let me ask our operator to remind our listeners how to queue in for questions.
spk01: As a reminder, to ask a question, you will need to press star 1 on your touchtone telephone. Again, that's star 1 on your touchtone telephone to ask a question. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ken Zerbe of Morgan Stanley. Please go ahead.
spk08: All right. Thank you. Good morning. Good morning, Ken. I was hoping we could start off, George, I think in your sort of prepared written remarks, you talked about total loan growth and RESG potentially starting to grow again in fourth quarter. I know payoffs have been just such a headwind over the last several years. Is the comments designed to say that or suggest that payoffs could actually start to slow in fourth quarter? I mean, could we really be seeing a turnaround that those are starting to end in a big way?
spk04: Ken, no, I don't think that's the proper interpretation. I think, you know, payoffs will continue to be high. And I think the more appropriate interpretation is to think about origination volumes beginning to increase in a meaningful way. I spent six weeks on the road during the second quarter, visiting The vast majority of our major RESG markets and almost all of our origination team members out there, we had scores of customer meetings and interactions and looking at projects. So we're pretty optimistic about our ability to begin to achieve higher origination volumes that will offset the... the elevated repayments that we are experiencing now because we're getting repayments that, you know, naturally would have occurred last year but for delays from the COVID pandemic plus repayments that would naturally have occurred this year. You know, I think we originate construction and development loans, so repayments are going to be a – a common part of the business. Now, obviously, we've got a higher level of accumulated prepayments this year than normal just because of the COVID-related delays in project completion, construction, sales, leasing, refinancing last year. But we're going to continue to have to... originate more to offset the fact that all of our loans in that construction and development book pay off. So we're focused on growth. We've got a great franchise. Our franchise has proven itself now through the Great Recession, proven itself through the pandemic. Our customers know they can count on us and rely on us, that we're always going to be there for them. And I think we've got a chance to really grow our business over the next several years and the six weeks on the road during this last quarter that I spent with our origination team out there certainly suggest that late 2021, 2022, 2023, we can take our RESG business to a more significant level than we've taken it in the past because the opportunities seem to be there. Of course, Brannon's going to go on the road and do a lot of the same sort of networking that I did in coming quarters, and I think all of that work with our origination team is going to help produce an increasing volume of business, certainly next year, and hopefully we'll see some of that begin to filter through in Q4. Got it.
spk08: Okay, that's perfect. And then just my one follow-up question. In terms of the net interest margin, obviously, you saw you had a very good increase there, and it seems that some of it may have been driven by unusually high minimum interest collections, et cetera, but also lower deposit costs. When you think about the NIM on a go-forward basis from here, should we expect the lower deposit costs to continue to drive the NIM higher, or how should we think about the trajectory of margin? Thank you.
spk04: I would suggest that we're at or near a peak on the NIM probably in the near term. We commented in our management comments that we're originating loans at lower rates than the rates that were earned on loans last quarter. That is unfortunately a part of this very liquid, low-rate environment in which we find ourselves, yields on all sorts of financial instruments and loans are lower than they were and probably lower than they should be, but it's part of the environment. So as loans roll off, we're not able to replace those yields with equal yields. We are being diligent to not sacrifice our credit standards and structure standards that we've adhered to for a long time that are the hallmark of our great asset quality. But we are having to get more aggressive on price to not only replace assets that are rolling off, but also grow assets. So growth is important. Pricing is a bit negotiable in here. So loan yields are probably almost certainly headed lower. We've got room. Cindy can talk about this later in detail. We've got room to continue to lower our deposit costs for a while. to some extent. And I think there'll be some pressure on CoreSpread and some pressure on them. We did benefit, and the order just ended, from a very good level of minimum interest and loan fees. And I noted several of the research reports on our results noted that we didn't quantify that and the reason we didn't quantify that is it's hard to know what normal you know some quarters that's nine or ten million dollars some quarters it's three or four million dollars and it bounces around all over the place we were on the high end of the range this quarter we could be you know below the middle of the high end of the range for the next few quarters it's it just depends on a lot of things that are hard to know when particular loans pay off and, you know, is it this quarter or next quarter and so forth. So we didn't quantify it, but we were on the high end of that. So that naturally alone will have some pressure on loan yields in Q3. And, you know, the key is going to be our ability to continue to offset that pressure with reducing deposit costs. And the guys are doing a really good job on that.
spk08: All right, perfect. Thank you very much.
spk04: Long-term, Ken, growth is the key.
spk08: Understood. All right, thanks.
spk01: Thank you. Our next question comes from Timur Brasler of Wells Fargo. Your question, please.
spk12: Hi, good morning. George, maybe just following up on your last comment, that long-term growth is the key. It seems like RESG, indirect RV, RV Marine, ADL, CDSG all converge in 22. I guess what does the near-term growth rate look like in 22? And then once RESG is fully normalized with payoffs kind of stabilizing and originations starting to pick up again, what does that growth rate look like?
spk04: Well, Tamara, I think I'll let Brandon Hamlin address that because Brandon, you know, is our president, but he oversees RESG and our corporate and business specialties group and our new asset-based lending group. So he's got a pretty good perspective firsthand on most of that. So, Brandon, you want to take that?
spk13: Absolutely. Absolutely. Thanks for the question. Good morning. Good morning. You know, picking a normalized growth rate is a little bit fine point to make, but what I would tell you is from RESG's perspective, and George alluded to this, we're seeing very good pipeline activity. We're very strong there, and our conversion, you know, our wins of what's available out there is starting to pick up. So, you know, I'm I'm expecting the back half of the year for originations in RESG to be definitely moving in the right direction and back toward and beyond what we've historically done. You guys know it's a construction loan portfolio, and what you close today, when you've got 50% average loan to cost, it takes a while to get those dollars out. So while we will have, you know, we've We've included again the graph on page seven of the comments. It really gives you a sense of what's left from the legacy portfolio that's outstanding and therefore what's left to pay down. So back to Ken's earlier question, you get a real sense of what that cycle is going to look like. So we'll still have some payoffs, but I'm seeing really good growth opportunities on the origination side that will start to And we obviously weren't sitting on our hands in 2019 and 2020, so some of those loans starting to hit with funding will help as well to offset, or at least impart, these payoffs that will keep coming in the velocity that you see on page seven following the originations and the natural life cycle. new asset-based lending group. Excited, again, as I mentioned last quarter about the addition of that team, and that team is growing. We're adding incrementally and look forward to having, we think, some really solid players in our probably Texas and Georgia markets first is what we think is going to happen there, and And Mike Sheff who leads that group is in addition to building the team and the infrastructure toward originating its first loan is very active in the market as well. And I expect that those guys will start to originate probably the first clothings in Q4. or early Q4, possibly get one in the Q3, but the opportunities that they're seeing out there and the geography that they're covering, I'm feeling good about those guys really contributing to our growth. You know, they'll start, you know, at a moderate pace, but I think, you know, gather steam pretty good towards the back half of 2022 and keep going in 2023. I think there's good potential for originating some really solid credits in that world. And our CBSG group is, as we noted, going to have some headwinds early on, but they're building a base and getting competitive and originating some new stuff with new borrowers there. So we'll see that accelerate as well. Tamara, it's hard to circle a number, but I can tell you that the outlook is positive across all three of those groups. And I think RESG is the big driver there. We're looking forward to getting back to what we've seen in previous years there. We think that the volume is there, and we're out there trying to haul it in and having some good success now.
spk04: I would add that we are gaining in a very steady and consistent manner traction with our indirect lending group and the new business model that we rolled out about a year ago now or almost a year ago there in that unit, and we really like the way that's performing. We're going to, we think, be able to protect our asset quality while paying lower premiums and getting better returns. better spreads. Now, given where rates are, we may get better spreads, but that might not translate into better rates right now just because of how low everything is. And our community bank is also getting some traction, I think. So, you know, growth will continue to be a challenge and outstanding certainly through Q3. I hope that we'll have a positive growth number in Q4. And I think, as Brandon said, there's a lead time between getting these things closed and beginning to get funding on them. But I think we ought to see a steady progression in our total outstanding balances and earning assets from the loan side throughout 22 and into the future. And I think we've got all these units going the right direction. The business model has certainly been proven, and I think we've got really good prospects of stepping up to a higher level of origination volume across the company, more diversified also than it's ever been before.
spk12: Okay, I appreciate the caller. And then my follow-up in the release, you had indicated that you're seeing fewer origination opportunities in large urban markets such as New York that are meeting your standards. Is that still a few number of deals that are coming online or are you starting to see some deals come online that aren't necessarily checking your credit box or other standards?
spk04: Well, we always see a lot of deals that don't fit our credit box. But I will tell you, you know, I was in a lot of our major markets. I was in New York. I was in Boston. I was in Chicago. I was in Miami. I was in the Tampa, St. Pete area. I was in Phoenix. I was in Los Angeles, San Francisco, Denver. I've been in a lot of our markets in this last quarter and larger mixed-use projects that we've missed the origination on those for the last several quarters just because a lot of those projects got put on hold in the pandemic. There are a lot of those opportunities that look really good. that make a lot of sense that are coming back to the market now and we're working a good portfolio of those. And we're seeing quite a few other opportunities begin to emerge in those more urban markets that were more significantly impacted by the COVID pandemic shutdowns and work from home phenomena. So I think things are normalizing and that bodes well for future origination volume.
spk12: Thank you for the question.
spk01: Thank you. Our next question comes from Brock Vandervliet of UBS. Your line is open.
spk09: Hey, good morning, everyone. Just on the deposit dynamics, George, it's great to see what seems to be something you've talked about for a couple quarters now really in motion with a tangible remix, declining time deposits in both categories, and as a result, you know, lower funding costs. Could you talk basically – top of the house, what inning are we in in that process? And more granularly, where you think your total deposit costs or interest costs could settle out by, say, year end?
spk04: Brock, I want to give credit where credit is due on that. Cindy Wolfe, our chief banking officer, is on the phone, so I'm going to let Cindy answer that question. But Cindy has built a great team under her that includes a Carmen McLennan, our Chief Retail Banking Officer, and Adi Curley, our Chief Deposit Officer, and a number of other key players. And they are doing really a good job. I'm going to advise Cindy to not try to tell you what inning we're in, but just give you color on where she thinks we are and are going in our process of transforming our deposit base. So Cindy, take that one, if you would.
spk06: Sure, yes. And further, I won't guess what our cost of funds will be at year end. But as you can see on page 14, we have runway left in our CD maturities. So I can talk about how that's been going so far, and there are indications that those trends will continue. And that's that when we went into this wave of CD maturities, we expected to retain a certain amount of them based on our historical performance around retention of CDs and the industry. And we actually retained more this go-round than we thought we would, which we're happy about that. And of course, obviously, they're being repriced much lower. So you can see that in Figure 16. And so we'll continue to take advantage of that, not only in lowering cost of funds, but changing our mix of deposits and replacing with core.
spk09: Got it. And just as a follow-up, I noted the comments, closing and selling a branch or two here and there, taking out some headcount. you know, what's kind of going on in that process behind the scenes? Is that sort of an interest in kind of stack ranking the profitability of the various branches?
spk06: Well, it is that. It's really no different than the way we've always run our branch network planning. We look at a number of different factors, but I will say that a lot of it is client-driven. We want to be a client-centric organization. So we have all these various consumer channels where our clients prefer to interact with us, whether it's over the phone, over a mobile device, online, and, of course, in branches. So as long as our clients want our branches and they're keeping them busy, then we want them to have that option. So we're really responding to the market with our branch network.
spk09: Gotcha. Okay.
spk04: Thanks for the color. Brock, I would add a little color there as well. The COVID pandemic, Cindy and her team responded really aggressively and updated our mobile banking apps a couple of times and accelerated some plans we had to improve the look, feel, functionality, performance of those apps. They worked closely with our technology team to improved the speed and reliability metrics of that as well. All those things were on the drawing board, but the pandemic, which meant that our branches were interacting with customers in a different way, by appointment only or drive-in only or whatever, pushed those mobile channels out much faster and encourage customers who might have been slow adopters to be more rapid aggressive adopters of that technology and that has changed the dynamics of how customers are interacting with these branches so that That changing customer interaction increased reliance and utilization of mobile online and other non-face-to-face technologies has accelerated the closure of some of these branches. Most of these are situations where we had two or three branches in an area and we concluded that based on changing customer utilization patterns and increased technology utilization, we could serve our customers effectively with two instead of three or one instead of two branches in an area. So it is helping to offset cost, and you've seen that in our fairly muted non-interest expense growth. Those cost saves are going to be very important because we're in an environment now where a lot of people have changed their working plans and patterns and behaviors following the pandemic and the experience they had for a year or so during the pandemic. So we're experiencing labor costs, as we mentioned in the management comments, and closing these branches that are no longer needed and eliminating other redundant, inefficient costs in our structure are going to be critically important in our effort to maintain or even improve our best-in-class efficiency ratio.
spk09: Great. Thank you for the call, Jeff.
spk01: Thank you. Thank you. Our next question comes from Catherine Mueller of KBW. Please go ahead.
spk05: Thanks. Good morning.
spk01: Good morning, Catherine.
spk05: I was excited to see the buyback authorization. Just wanted to get your sense as to how active you intend to be, and is it more opportunistic or is the plan initially to go ahead and use that whole $300 million?
spk04: Tim, do you want to take that one?
spk03: Yeah, happy to. Katherine, good morning. Good to hear from you.
spk00: Good morning.
spk03: Hey, good question. Yeah, obviously this is our first share repurchase authorization that we've done in our company's history. It is an authorization that has a one-year expiration, so it does go through July of next year. You know, I think we'll be having moderate pace there. I mean, we will be opportunistic. You know, obviously, if our stock price were to go down, we're probably going to be more active. When our stock price goes up, we will be less active. So I think we'll look for opportunities to be opportunistic at a moderate pace.
spk05: Like the wind there, that was sneaky, Tim. And then my other question is just on the growth outlook. This is more just kind of an industry question. Just to think about how we keep hearing about supply chain issues and construction costs that are impacting new construction projects. How much of that is impacting originations today, and what's your sense as to how that kind of moves along as we move through the back half of the year and how that kind of impacts your growth outlook.
spk04: Brandon, would you like to address that?
spk13: Absolutely. Absolutely. And thanks for the question, Catherine. I think decreasingly so is the short way to answer that. You know, as we have moved through the year, there have been situations where, you know, there are really some impact, but nothing outside of the realm of what we're used to dealing with in our 18-year history on construction projects. And as to affecting originations, as George alluded to in his travels thus far this year, and week in, week out over the past quarter, you have seen opportunities increasingly come to market. So it really doesn't feel as though or any data present itself that would say that there is any material impact there. There's a cost impact to projects, and so there's a fine-tooth pencil that's there right up to the closing projects. And from a pure closing the loan perspective, it may delay that a bit. But as we've alluded to, the liquidity in the market – and some of the lowered expectations on the yield of some of that money is helping those capital stacks to absorb the cost impact and that cost impact seems to be moderating in certain cases. In short, deal flow is moving much better as we've moved through the year. So to the extent that it's been an issue, it's not keeping the market from bringing increasing number of deals and deals that are RESG type deals that came up earlier. I think we're definitely looking at more of those larger deals mixed-use projects that had been slow out of the box, you know, out of COVID. And so, you know, I would expect, I mean, my expectation would be anything can happen, but that we'll start to see, on average, you know, larger loan amounts as we close into the, you know, the back half of this year and into 2022. There are a lot of projects out there, a lot of large projects out there yet to come to the market. And, of course, our capital puts us in a great position to be able to to bid on those large projects. So hopefully that answers your question.
spk05: Yeah, no, it does. That's great. And then maybe one follow-up, if I could just follow up on the loan yield conversation. I know it's hard to pinpoint the fees or the accelerated fees this quarter, but could you maybe give us a sense or maybe anecdotes about where new production is coming on today, particularly in the RESG book?
spk13: Absolutely. It's sort of the same story in terms of the product type. There's been a lot of residential, whether multifamily or condo origination going on, but we continue to have really good diversification across the other product types as well. Our footprint geographically uh is is very well situated to um enjoy the benefit of a lot of migration trends you know into in particular the southeast but also southwest west um our you know our guys there was a question earlier on new york while while we haven't seen yet the origination picked back up there the opportunities that we're looking at definitely are, and I think, you know, we'll be doing more business there. But we've, you know, while that's been slow, the guys have done a great job of penetrating, you know, the Boston market, good activity there, the D.C. market. So it's, you know, we have a lot of ways that we slice and dice our portfolio for you in our comments, and what we're seeing is is not all that different in the future origination pipeline from what we said in our comments this quarter. While we haven't been closing the big ones in some of the big markets, they're coming to the market. In the meantime, we've done a lot of stuff in some of the other smaller markets. So keeping busy, closing a lot of loans across a lot of different markets. And the same general product types that we've been active in in the last couple of quarters.
spk05: Great. And then pricing on those new ones?
spk04: Catherine, let me take that one. Yeah, let me take that one. It's all over the board. And, you know, we're trying to diversify more into industrial and life sciences because we think that further diversification of that RESG portfolio is helpful. things that gets done at a lower margin, tighter pricing. So it really is all over the board. I think the loans that we've probably had in committee in the last six weeks or so, we've probably had a 300 basis point differential between the lowest approved yields and the highest approved yields. And, you know, it just reflects the product type, the market, the complexity of the transaction, a variety of things. We get to start doing more really complex transactions that are not as commodity-type transactions that require our expertise and sophistication to execute. We get better pricing on those than we do a plain vanilla apartment deal that, you know, pretty much any lender can compete for. So it's hard to nail down pricing. I would tell you on average, the loan yields we're getting on new originations are less than the yields on the book. And if that is surprising to anybody, they've been under a rock for the last couple of years because the Fed has got the market so liquid that there's just not the yield out there that there was. So Clearly, as we said, a downward pressure on loan yields, we've got to offset that with volume. We've got to offset that with controlling deposit costs and keeping our efficiency ratio really low. So we understand our game plan on how to address an environment where there is pressure on loan pricing. I like our plan and I like our prospects of being successful with that.
spk05: Got it. Understood. Thanks for all the color.
spk04: Thank you.
spk01: Thank you. Our next question comes from Steven of Piper Sandler. Please go ahead.
spk04: Good morning, Steven. Steven, you may be on mute.
spk05: To send this message, press pound or hang up.
spk01: We'll go to the next question. Our next question comes from the line of Michael Rose of Raymond James. Your line is open.
spk02: Hey, good morning, everyone. Thanks for taking my questions. One area that hasn't been hit on yet, George, is technology. It's becoming a big issue. I know you guys have spent a lot of money you know, over the years, you know, moving to new headquarters, systems investments, you know, things like that. But the tax spend continues to move higher, you know, for the industry. Just wanted to get an update on, you know, maybe some things that you're working on and maybe how you, you know, would expect to fund them. You guys have been really good on the expense control front after some of those larger investments a couple of years ago. So just wanted to get a broad update on the technology efforts and where we stand. Thanks.
spk04: Hey, Brandon, do you want to take that? Obviously, data, innovation, and technology now reports to Brandon and has been for a couple quarters. So, Brandon, you want to talk about that?
spk13: Absolutely. And I'll say that a lot of the efforts have been, and I think we talked about this last quarter, around the efficiency of the way we run the operation. And George and Cindy alluded to you know, the outward facing side as well. So it's a two-front war. It's focused on our efficiency internally and, you know, and preparation. You know, everything that we do today is focused on what we want to be tomorrow. And that's, you know, bigger, better, and faster. So we're working on an initiative that is focused on bringing some application that was developed initially at RESG and bringing that into the rest of the organization and Moody's platform at the same time and both working together to just give us the opportunity to be more efficient in the delivery of data from one end of the process to the other. give upper management better insight into what's going on from beginning to end of the process. So there's a lot of, you know, and then just, you know, managing our data in new data marks and new platforms. So efficiency is a big word as it relates to the internal side. And then Cindy and Carmen have been working with our labs team, as George alluded to, on a number of fronts to move with the market as the needs and desires and technology change. We want to stay at the leading edge of that to ensure that we are putting Cindy and her team in the best possible position to move the deposit world where it needs to go. You know, we have said many times that we're committed to excellence and not just our credit, but also our efficiency and the way we serve both customers and provide our employees with the opportunity to do their jobs. So that will be something we're always focused on. I think everyone on the call understands the speed at which technology is changing, and it's our desire to to stay up with and ahead of that at all times.
spk04: Let me add a little bit to that. We really are fortunate to have an excellent technology team. That whole group now, technology, data, and innovation, reports up to Malcolm Hicks, who reports directly to Brannon. We've been very effective in the last year, as Brandon said, in delivering quick technology enhancements, upgrades, and solutions. Our labs unit has been very instrumental in that. Those guys, I think, are doing the best work they've ever done. We've gotten a very pragmatic, practical, get things done, accomplish improvements sort of focus throughout that group. that makes them really effective in helping our company. And we continue to advance on a lot of fronts. So I'm pleased with where we are. I think your question probably was aimed at were we going to see huge increases in expenditure regarding technology. I think we will see. increasing spend but at a fairly moderate rate of growth because I think our guys are being very efficient and very pragmatic in how they're approaching this, but we are at the same time advancing our technology capabilities consistently and I think pretty materially. I feel real good about the progress we're making. cost that we're incurring to make that progress seems very efficient to me.
spk02: Okay, great. Maybe just as a quick follow-up, you know, the service charges were up this quarter. You know, there's been some headlines out there, some self-imposed, but also some external pressure on NSF fees. I know that's not a big line, you know, for you guys, but is this, you know, what, A, what drove the increase? And then, you know, B, you know, What steps do you plan to take as it relates to NSF for those customers that have it? Again, I know it's a small proportion for you, but it has been in the news lately. Thanks.
spk04: Well, we are monitoring what political and regulatory conversations are going on about that subject. It does seem likely that some changes are in the wind. ahead. We don't have any significant plans to change anything in the short run, increase or decrease in that regard. We have seen, particularly the last month or two, as economies have more fully reopened and people are outspending and so forth, we have seen and improvement in service charge activity. And part of that is just the philosophical approach that Cindy and her team are taking on deposits and getting more core customers and less interest rate driven customers. And those core customers tend to engage in activities that create more service charge revenue. So I would tell you the biggest impact and the improvement in the last quarter was just the normalization of economic activity and reopening. Second to that is improvement that Cindy and her team are making in the quality and value and profitability of our deposit base.
spk02: Great. Thanks for taking my questions. Thank you.
spk01: Thank you. Our next question comes from Matt Oni of Stevens Inc. Your line is open.
spk10: Thank you. I'll start on the interest-bearing deposit cost. It sounds like there's more room to bring that down in the near term. But I guess from a strategic standpoint with all the liquidity in the system, I'm just curious if the bank is yet considering locking in longer-term funding in anticipation of higher rates in the future.
spk04: Cindy, you want to take that?
spk06: Would you repeat the question, please?
spk10: Yes, Cindy. I was just asking if the bank is considering locking in longer-term funding in anticipation of higher interest rates.
spk06: We are. So Adi and our Chief Deposit Officer, Drew Harper, our Managing Director of Wholesale Deposits have been working on that and are doing some relatively conservative steps to increase duration in our book. We're not going overboard with it, but yes, we're having those conversations and making some moves to add duration.
spk10: Okay. Thanks for that, Cindy.
spk04: And Matt, we're doing that in a cost-effective manner. I think Cindy pointed out that chart at the bottom of the page there on deposit cost figure 16, I think it was, and if you look at our new and renewed time deposits in Q2, they were a fraction of one basis point. It actually rounded up instead of down this quarter. They were a fraction of a basis point higher in Q2 than in Q1, and that differential really reflected their efforts to, without materially impacting our cost fund begin to ladder in some longer duration deposits.
spk10: Okay. Thank you. And then I guess I want to circle back on the discussion around loan fees. And as you said, George, it's not easy to predict where that's going to land any given quarter. But it does feel like these fees have been elevated for a few consecutive quarters. Is that fair? And then for the short-term extension fees in particular, I think that was one of the fees that was mentioned in the management comments. My working assumption has been that some of those extension fees are associated with RESG project delays that were driven by the pandemic last year. Is that right? And if so, can we assume that some of those projects that were delayed are now coming back online and getting back to a normal schedule? And should we assume that those extension fees will be lower next year compared to this year. Thanks.
spk04: That's probably a fair assumption, Matt. And, you know, again, these kind of extraordinary extension fees, minimum interest, and so forth, I mean, we're talking a range in a low quarter, $3 or $4 million a quarter, and a high quarter, you know, $8 or $9 million, and more typically somewhere in between there. But it does just bounce around a lot. So, yes, you're correct that a lot of projects that were delayed for three to six months by COVID need another three months or six months or four months to get the project completed and sold units closed and the loan paid off or to refinance to the permanent market and That has been a nice source of fee income, particularly the last couple of quarters. We've seen quite a bit of short-term extension fees the last two quarters. I think we'll continue to see some level of that in the last two quarters of the year and diminishing somewhat next year. The other fees just tend to, even in normal times, minimum interest and acceleration of deferred loan origination fees from faster than expected payoffs. Those things tend to just bounce around a lot in good times and bad times. actually the acceleration of deferred loan origination fees and minimum interest can have a greater impact in periods where things are going much faster than when refinances and sales are going slow because your projects typically tend to earn up those fees and earn up that minimum interest before they pay off when things are going slow. So it's very dynamic. and it's hard to generalize, and that's why we always are hard-pressed to give really good guidance on it because it just bounces around a lot from quarter to quarter. We're thankful for them when we earn them, though. Let me be clear on that.
spk10: Sure. Thanks for the color.
spk04: All right. Thank you.
spk01: Thank you. Again, to ask a question, please press star one on your touchtone telephone. Our next question comes from Brian Martin of Janie Montgomery. Please go ahead.
spk11: Hey, good morning, everyone.
spk04: Morning, Brian.
spk11: Hey, George, or just whomever, maybe it's more Tim, just on the, you talked about just kind of the deployment of capital. I mean, obviously the growth and the buyback you've mentioned, just kind of any update on just how you're incorporating in the M&A process commentary, just how that's trending today, the opportunities or what you're seeing maybe seems less likely with the growth that's in front of you that you've already articulated.
spk04: Tim, you want to talk about that?
spk03: Yes, happy to. Thanks, Brian, for the question. Certainly, as we outlined in the management comments, organic growth is our number one growth priority. Clearly, we've got a lot of things moving in a positive way there between our RESG asset-based lending team, our community banking team. If you exclude the PPP loans, our community banking team actually grew this quarter. I think no surprise, our Florida and Texas markets did really well in community banking. Indirect lending seems to be certainly on a positive trend there as well. We're We're focused very heavily on organic growth and the opportunities there. Obviously, we announced the share repurchase authorization along with our earnings as well. But our appetite is back for M&A. We're looking at opportunities. It is a secondary growth opportunity for us to our organic growth opportunity. We don't want to do anything that would be of a size that would disrupt the minimum that we have organically. But we are actively looking and looking for opportunities. Clearly, we still believe our stock price is undervalued compared to some of the periods and compared to some of the valuations of some of the acquisitions that have occurred recently. Obviously, the M&A market's very active right now. we would look probably to do something of a size where we could do it for cash or some combination of stock and cash. So a lot of things moving there, but that is one of our primary focus areas is just how do we deploy our capital in the best interest of our shareholders, and we're looking at all avenues to do that.
spk11: Gotcha. Okay, that's helpful. Thanks, Tim. And then maybe just the How do we think about the kind of the mix of the balance? I mean, I know the securities were up a little bit this quarter, but just given the growth that's in front of you, just kind of how that mix may change as you, you know, go over the next, you know, 12 to 18 months. How should we think about that? I think securities are maybe up to 18% or so of assets. Maybe I'm not sure if I have that exactly right, but just up a little bit relative to the past.
spk04: Ron, I would say, you know, we've typically maintained our loan-to-deposit ratio in that 89 to 99 percent range. We've been comfortable. We've got all sorts of stress testing and secondary source of liquidity and other things that have given us comfort being at that level. We're a little below that right now. I would think that as we get the loan growth going where we want, we'll return back into that 89 to 99 percent range in the future.
spk11: Okay, perfect. And I'll just sneak one in, just last one for Greg, maybe on the, like you said earlier, George, there's some commentary about the wage inflation, just how that may impact expenses as we go forward here, just how we should think about that. Thanks.
spk04: Greg, you want to take a shot at that?
spk14: Yeah, I will. Brian, thank you for the question. As we mentioned in our management comments, we have experienced pressure, really broad-based pressure across the U.S. from wages and being able to find workers to fill all the spots here in the bank where we want to have and retain our teams and make sure that our teams are getting appropriately compensated. I think there is going to be pressure from that as we look into the next quarter or two, how long that continues. That's probably still to be determined, but some of the things that Cindy and her comments in response to a question about our branches, some of those things that we're trying to make sure that we look at all of our operations and make sure we are eliminating any sort of redundancies or inefficiencies, utilizing technology to really help us to the extent we can offset those wage pressures. Hopefully we can effectively offset that But as we mentioned in our prepared comments, that's certainly going to be a challenge and it's going to be probably a driver of increasing salary and benefit costs for us over the next couple of quarters.
spk03: Hey, Brian. Brian, this is Tim. We have it in our commentary, but just as a reminder for non-interest expense for Q3 specifically, we do have a couple of one-time type items that are going to impact Q3 non-interest expense. The $2 million of charges we are going to expect to incur from the closure of a few branches that we have and scheduled to close in Q3. And then we did redeem our sub-debt on July 1. That had about $800,000 of deferred issuance costs that were not amortized yet. That's going to come in. in Q3 as well. So just a reminder from that perspective that that will impact Q3 and not future quarters.
spk11: Gotcha. Okay, thanks for taking the questions, guys.
spk01: Thank you. Our next question comes from Steven Scooten of Piper Sandler. Your line is open.
spk07: Yeah, thank you very much. Appreciate it. Good morning. Good morning. So I wanted to follow up on the capital and just kind of how to think about capital deployment in light of kind of your legal lending limit. And I know the buyback is a part of it. Maybe you're able to find a deal that's cash or predominantly cash. And so is the right inference there that you don't need your legal lending limit theoretically to be as high and we might not see the bigger commitments, the $400,000, $500,000, $600,000 million? return anytime soon, or am I reading too much into that?
spk04: You're reading too much into that. You know, our legal loan limit now, which we've grown by accumulating a lot of capital in recent years, is a very important part of our strategy to significantly increase our RESG and other portfolios longer term. So I think what
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