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spk60: Good day and thank you for standing by. Welcome to Bank OZK's second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To remove yourself from the queue, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jay Staley, Director of Investor Relations and Corporate Development. Please go ahead, Jay.
spk28: Good morning. I'm Jay Staley, Director of Investor Relations and Corporate Development for BankOZK. 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 Hamblin, President, Tim Hicks, Chief Financial Officer, and Cindy Wolfe, Chief Operating Officer. We will now open up the lines for your questions. Let me now ask our operator, Norma, to remind our listeners how to queue in for questions.
spk61: Thank you.
spk60: As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question.
spk61: And our first question comes from the line of Stephen Skilton with Piper Sandwell.
spk60: Your line is now open.
spk50: Hey, good morning, everyone. Thanks for the time. Maybe if we could start actually around loan growth. I mean, it's been phenomenal the last few quarters, and the commentary seems to be that origination trends are improving. Obviously, repayments are still a little bit more muted. It seems like we could continue to see this path of growth. I'm just curious how, you know, if you could comment on that and then just any thoughts around pushback from folks that might not want to see growth in today's environment and why you still feel good about adding that growth on these loans you booked, you know, largely last year. Yeah, thank you.
spk39: Thank you, Steven. Appreciate the question. And we are cautiously optimistic about our continued growth prospects. and view that as a very positive opportunity. You know, we're being very conservative on credit quality. We're very focused on that. We've got a long tradition and track record of that. So we believe in this more challenging environment and the ability to be very conservative in what we're doing that we're putting on really great quality new assets and getting paid well for it. So we view it as a very opportunistic time for growth. you know, we're achieving better diversification in our portfolio. But the reality is Real Estate Specialty Group is still the largest loan generating unit, growth generating unit in our company. And Brandon Hamlin is closer to that than anybody in our company. So Brandon, since REOG is the the big dog in the pack leading the growth. I'm going to let you take the rest of that question.
spk16: Sure, George. Happy to do that. And Stephen, thanks again for the question. I'll just tag onto what George said about our absolute confidence in the quality of the credits that we're adding today. We're in the market every day through cycles and really always sort of pushing leverage down and pricing up as the market gives us opportunity to do that. And certainly, the market that we're in today has done that. If you look at what we've closed more recently, as some of the uncertainty in the market has increased, you absolutely see our new closing loan to values and loan to costs being lower than our portfolio average. And and pricing spreads strong quarter to quarter. So feel great about the quality of what's going on and in terms of the opportunity, there are still a lot of deals that are coming to the market. There are some that have stepped back as we've talked about in previous quarters. But, you know, our guys just do a phenomenal job and have over the years and built such great market penetration on the origination side and such absolutely outstanding servicing on the asset management side that we get, you know, continue to get a lot of repeat business from from really super sponsors with with great projects and and and. as I said before, a lot of capital in these deals with our loan to costs on average being lower currently in this market. So great job by the guys continuing to stay in the market. And of course, working with a lot of sponsors that have seen our execution and the word gets around and we've got new ones available as well. And along with that, there's obviously, if you read the paper, you know, there are a lot of banks that are that are pulled back and not giving us as much competition in certain cases as we might otherwise have. So a number of factors involved, but we have an opportunity to put some really great quality, low leverage, well-priced credits on the book, and we're going to keep doing that.
spk50: Yeah, that's great, Culler. Appreciate the commentary about improving quality. So, if we, you know, if I, for one, take growth as maybe a bit of a given and think you'll have nice growth trends into back half of this year and next year, I appreciate the commentary around the NIM and that that will face pressure on the funding side. And I know the commentary, I guess, was NII growth was uncertain, maybe. I forget the exact verbiage used, but it feels like that would still need to be pressured higher given the amount of growth that you're seeing, or am I just maybe underweighting the continued funding pressures and maybe how you need to fund up this rampant growth?
spk39: How can I think about that? That's a great question, Stephen. And really, you know, there's a tradeoff coming between growth and and margin to determine whether we can continue to put up positive net interest income items. We hope we can. We are working to make that happen, but as we've said from, gosh, April of last year, right after the Fed started raising rates, we made the comment that our variable rate loans would move quickly as the Fed raised rates. Deposit costs would lag, and we've said for a number of quarters now, well over a year, that deposit costs would begin to catch up with the increases in loan yields when the Fed neared or reached the end of their tightening cycle. And we saw that in this... last quarter when our NEM gave back some of that 100 basis point plus of NEM expansion that we saw over the prior quarters when the loan yields were reacting faster than deposit costs. So there's a catch up. And we're having to be pretty aggressive on deposit costs because we have such tremendous growth opportunities. We want to continue those growth opportunities But to achieve the kind of deposit growth that we're achieving, we're having to be moderately aggressive on those rates. And we can afford to do that. We have probably the best net interest margin of our entire peer group by far, so we can afford to do that. And we're getting really good yields, as Brandon mentioned, on the loan side. So we can afford to do that, and we're doing that. We'll put a little pressure on our NIM and we've said for a couple of quarters now that the challenge is going to be to keep net interest income growing. We're going to have less NIM. We're going to have more average earning assets because of the growth and how that plays out is uncertain. If we get really good growth and do a good job of mitigating the impact on our NIM, we'll have slightly positive net interest income numbers and If we get a little less growth and do a little less good job on mitigating the NIM pressure, we could be flat to down a little bit on the net interest income. So it's a horse race.
spk50: Got it. Great color. Based on the track record, I'm betting on NI growth. So appreciate all the commentary.
spk37: All right. Thanks, man. Appreciate it.
spk60: Thank you, Stephen. One moment for our next question. And our next question comes from the line of Matt Olney with Stevens. Your line is now open.
spk53: Great. Thanks. Good morning. I want to ask some questions around credit. It sounds like there were two loans that were downgraded this quarter as a result of some of those new appraisal values that you disclosed. I assume you've approached these borrowers to ask for additional equity since you've gotten those appraisals back? If so, any color on these conversations with the borrowers?
spk39: Yeah, what I would tell you on that is both borrowers are working very constructively with us. Both were already engaged in processes of bringing new capital to those transactions, so we're monitoring that closely. We are pretty confident in both these borrowers' ability to get something done that will be useful to them and useful to us in that regard. These guys have shown real commitment to these assets, and we hope and expect that will continue.
spk51: Okay. Appreciate the color.
spk39: Brandon, do you have any color you want to add on those two deals?
spk16: Well, you know, I would echo what you're saying, George. I mean, they were, you know, pre-engaged in those activities and making, you know, real tangible progress. So, you know, we've done a lot of business really with the sponsors in both cases on these projects. So, yeah. We feel good about the direction those are going and would hope to reflect that in the numbers next quarter.
spk39: Matt, I would point out, and Brandon can give you the details on this, but the equity on the Landale has posted a substantial reserve account to continue to carry this asset while they're working on the recap. And Brandon, you might, you know, the details.
spk16: Yeah. Yeah. Yeah. So that's Matt that's on the, on the land deal. That's at 95%. And they, they have a $11 million cash reserve there. That's additional support for that credit. It's not included in the LTV, but additional support for it. And, and you know, cash reserves for, for carry and, and so forth. So, and this is a sponsor there that very prolific developer, national footprint, great reputation for developing successful projects. We financed, as I said, a number of their, their projects. And, um, so, uh, you know, good, good, good thing to call out there, George. And, and, um, you know, in the, in the other case, um, uh, you know, dollars, dollars, uh, have been coming in, uh, historically that sponsor has put in a, you know, that we, We did an extension, and in this case, I'm talking about the hotel mat at 101%, but during COVID, they put up additional capital, and we did an extension then, and they've continued to fund operating shortfalls and debt service, so a significant capital, already ongoing capital infusion in that project. So, yeah. Those are not so much hope cards as historic performance that we have good expectations of the outcomes there.
spk39: And I would add on the hotel, this is a really nice, smaller asset, and it's performing at or above the comp set in the market. This is just a Midwestern market that has been really slow recently. to come back from the pandemic and the changes in travel patterns and so forth from the pandemic. But it is a really nice asset. So the quality of the asset there, as well as the sponsor's proven commitment, it gives us a fair degree of confidence and cautious optimism about the path forward.
spk51: Okay.
spk53: Appreciate the detail, and then just digging a little bit more, I guess, on the topic. You've been disclosing these updated appraisals now with RESG for a while now, and typically the LTVs have more limited movement post-appraisal. These two obviously have been outliers. Anything else unique about these transactions and these properties that would have driven a more significant value deterioration than other ones we've seen in not just this quarter but in past years as well?
spk39: You know, what I would comment, and Brandon may want to add something to this, but land appraisals tend to have a lot of variability to the valuation conclusions from land appraisals. And, you know, I'll give you an example. You might have a land appraisal that has a $300 million terminal value You get a new appraisal on it, and the terminal value is still $300 million, but land appraisals are done on a discounted net present value basis. So if the discount rate on that, because the Fed's moved 500 basis points, the discount rate on that goes up another 500 basis points from, say, 12% to 17%, and the holding period gets extended from three years to... eight years, you have a massive contraction in value that has nothing to do with the terminal value of the land asset. It's simply a function of the higher discount rate and the elongated holding period. We've been doing this a long time, so we've seen these land values fluctuate up and down because of those conditions. what I would tell you is most of the land we finance, Matt, is kind of a bridge to a near-term vertical development. We do very few deals that are intended to be long-term land holes when we go into them. So you notice land going the other direction on that appraisal list as well where the loan devalues went down and I'm not sure the specifics of those, but in some situations, the holding period to development actually shortens and the land value, the loan value gets better. So don't get too excited about some of these variations in land values just because if you look at the map, you realize they're saying an eight-year holding period. That's probably on the long side reflecting current economic uncertainties you get on the other side of a recession, those values tend to come back really quickly. And that's what the equity guys are looking at is what's the reality of that. The other thing I would tell you is we're keeping the valuations on this portfolio pretty closely considered while we had, I think it was 15 or 16 Assets reappraised last quarter. We had 22 payoff and new loans going on. So if you look at kind of the inflows and outflows of deals, we probably have fresh values either on new loans and old loans paid off or reappraisals on something approaching 10% of the portfolio every quarter. So, you know, these values are staying pretty freshly updated on the portfolio. Yeah.
spk15: Okay, thanks, guys.
spk60: Thank you, Matt. One moment for our next question, please. And our next question comes from the line of Manon Gosselia with Morgan Stanley. Your line is now open.
spk10: Hey, good morning. I just wanted to follow up on that last comment there. about 10% of the portfolio comes up for reappraisal every quarter. Is it fair to say about 40% of the portfolio has been reappraised over the last 12 months?
spk39: Well, Monon has either been reappraised or had new appraisals because, you know, their new loans originated. So I would say that's a rough estimate. I haven't actually calculated that, but I would say that's a fair approximation. You know, we've As I mentioned, we had 22 loans pay off and the quarter just ended and I don't know exactly how many we originated, but it was probably somewhere in the same range of that. So, you know, new loans have new appraisals and the old appraisals, old loans go up and we're reappraising a dozen 15 to 18 that just come up for extension renewal or otherwise show some signs of concern. If an asset is, if we think there's a likely movement in the value and performance of that asset, it's getting reappraised.
spk16: Or I might add, George, there's an opportunity, good things are happening at the project and there's some reason that we might consider an upsize of a loan. And of course, anytime we do that, we get a new appraisal as well. So There are positive activity reasons for that to happen.
spk10: So then maybe a big picture question on downgrades in general and not specifically related to those transactions. But you clearly get a lot of repeat business, so you have great relationships with these sponsors. Can you walk us through other deals where you've had success in bringing in equity and And I guess what you had to bring into that deal, right? So is it just a concession on spreads? Is it re-upping the loan? Or is there anything else that goes into that negotiation?
spk39: Well, we had several loans in the last quarter that were on that reappraisal list because they were up for renewal, extension. that the sponsors brought substantial equity. Brandon, you might be able to recap those. And I don't think we gave any concessions on any of them. We probably improved our economics and terms on those, but did get paydowns. And Brandon, do you have the recap?
spk16: Sure, sure. Yeah, it's a great question. And yeah, most of these are going to have they're going to have better terms in addition to, you know, just in the quarter just ended, I can think of four different situations where we extended the loan and got, you know, material paydowns, you know, one for $20 million on a multifamily project in Philadelphia, one for $10 million on a multifamily project in Oakland. We had another project in Oakland that we actually you know, um, curtailed the loan, didn't, didn't need the full loan amount. So it wasn't, it wasn't a pay down, but a curtailment. And then we had another, uh, Midwest hotel that we had a $5 million pay down on. And, and, and there were others, you know, in, in, in, in Q1 or right before Q1, and we had a $54 million pay down on a mixed use project. So, um, just, just to name a few.
spk39: Yeah. So we're, uh, you know, as we get appraisals that, that, uh, indicate higher loan-to-values. I know one of the loans that is in that list of reappraisals, we got the appraisal early. The loan's coming up for maturity this quarter. We got the appraisal early, so the higher loan-to-value reflects the new appraisal versus the current balance of the loan. we would expect a several million dollar pay down on that loan in connection with the extension of the loan. And we're granting the guys extensions and additional time. We're improving the economics on the deal in most cases as well as that. So keeping the risk in check by getting the curtailments and improving the economics of the transaction at the same time.
spk10: Got it. That's helpful. So as I think about the yield on loans, the 8.4%, 8.5% or so that you have right now, as we do get one more rate hike from the Fed, so how should we think about those yields? Should they peak somewhere around 8.75% or based on the fact that you're getting some better economics on certain deals that there is additional repricing that we're not taking into account?
spk39: Well, you know, obviously if the Fed continues to raise rates, that will translate through to loan yields. The vast majority of our loans are variable rate. Tim, you probably have that number exactly. What is it? Yeah, 79% are variable rate. 79% of our variable rate loans, and most of those are just monthly. So a... 25 basis point movement, the Fed funds target rate, if it has a comparable movement in SOFR and prime, which it probably would, you would get about 20 basis points of that, you know, or 18 or 20 basis points of that would translate through into improved loan yields from the impact of that Fed rate increase.
spk10: Right, but is there anything beyond that as well that you could get from some of these renegotiations or some of the lagging repricing of the remaining 20% that are not variable rate?
spk39: Yes, in some cases, clearly we are getting better economics on those transactions, but that's a small number of loans that are that are being dealt with there. So is that a basis point or two or, you know, it's not going to move the needle a ton. That's sort of just some of that pluses and minuses that goes into the normal wash of those loan deals.
spk09: Got it. Thank you. Thank you.
spk60: Thank you, Manon. One moment for our next question. And the next question comes from the line of Catherine Mueller with KBW. Your line is now open.
spk03: Thanks. Good morning. I just had a couple of follow-up questions on the credit discussion. Maybe question one is just what market? I know you said the hotel loan was in a Midwest market. Can you tell us the market that the land loan is in? And then my second question on those projects was did we see any increase in the specific reserve related to those two downgrades?
spk39: the land loans in Chicago. And obviously we hold higher levels of reserves for loans that are special mention and pass and higher levels of reserves are substandard as opposed to special mention. So yeah, the reserves went up on those loans in connection with the change in risk rating.
spk03: And I appreciate your commentary, George, about just the pace at which you get new appraisals. It feels like you're mostly getting new appraisals either at maturity or an extension, or if you see degradation in the project for some reason. So maybe just kind of help us think through that, and particularly in the land portfolio, how much of that book do you feel like has an updated appraisal? Is there risk within just that book that we could see, as we move through this process, just additional appraisals that are going to kind of increase the LTV significantly, just that land book?
spk39: Yeah, well, your first premise is correct. Your understanding is correct. We typically get appraisals, obviously, on new loans, and then at maturities, extensions, or if an issue arises that makes us think we need to get a new appraisal to kind of recalibrate our valuation on a loan. So that keeps our appraisal services guys and our outside appraisers pretty busy doing all of that workload. As I mentioned, Catherine, I think it's really important to know that if you look at the figure in the management comments that shows distribution of loans by asset type. The land loans are kind of down there on the far right. It's one of our smaller land type distributions. And as I mentioned earlier, most of those land loans are done as really a bridge to a vertical construction. So we're doing a a lot of times a 12-month land loan with a couple of six-month extensions to give the sponsors who are acquiring a piece of land time to complete their plans, specs, and cost out and get ready to close into a vertical development loan. So those tend to be pretty short-term, short-duration assets that really, you know, put us on the inside track to do the vertical construction on those loans. As I mentioned, there are very few land hold loans. Now, the asset that we dealt with a quarter or two ago, the Landale out in California, that was a land track that was scheduled for vertical development. and that ended up being a land hold instead because their cost just blew out. That's a fairly unusual situation, but that will occur now and again. And, you know, other than those sort of situations and maybe a couple of land hold loans, you know, I think that portfolio is well margined and will perform very well. There may be an occasional bump here and there, and we've seen that, but I'm not worried about that having a material impact on asset quality.
spk16: George, I might just add to that. Catherine, I just circle back to your question. I mean, because of what George said, you're going to have a more currently appraised portfolio in land. I don't know the numbers, but I'm going to say... the majority of that portfolio has valuations that are a year or less old because of the short terms that George alluded to. So just to kind of circle all the way back to your question on, you know, timing of appraisals, it stays pretty tight on land. And in that figure that George pointed out, it's our lowest loan to value, uh, property type.
spk03: Great. Okay.
spk16: Yeah, that's helpful.
spk03: And on that Chicago project, what was the impetus to needing a new appraisal for that loan?
spk16: Brandon, you want to take that? I'm sorry. I didn't understand the question, Catherine.
spk03: So why did you need to get a new appraisal on that loan? Was it degradation? Did they come to maturity?
spk16: It was in connection with an extension loan maturity.
spk03: Okay.
spk16: Great.
spk03: And then one other question just on the growth outlook. I just wanted to make sure that I'm thinking about this right. So I think you mentioned in the management comments that you think origination volumes are going to be closer to 2011 levels, which was about $8 billion. And if I do the math, that's putting your origination volumes well over $2 billion for the next couple of quarters. Am I thinking about that right?
spk39: 2021, not 2011.
spk02: Excuse me, 2021.
spk39: Yes, thank you. I knew what you meant, and you knew what you meant, but I didn't want others to be scrambling back through the historical archives.
spk12: We've been doing this a long time.
spk39: Yeah, you know, we had previously said we expected the, you know, number to be in the range of 2020 to 2021, which is kind of, you know, a In round numbers, we ran off of $6.5 to $8 billion range. The thrust of that comment is we now think we're coming in at the high end and a little over probably the high end of that range by the end of the year based on the pipelines we're seeing. So we didn't want to surprise anybody with that. you know, raise the possibility that we now may be at or somewhat above that $7.94 billion level of 2021. Great.
spk03: So a pretty big acceleration in the back half of the year. Got it. But it also felt like you were saying repayments should also increase some in the back half of the year as well.
spk39: Repayments, I don't know. That's going pretty slow. So we had indicated, I think, that around the 21-22 level, and we cited you to a five-year average that's slightly below the low side of that. So I think we're expecting more prepayments to slide into next year. And because of the fact that A lot of sponsors for the last several quarters have really been sort of slow playing. They're bringing forward projects for development in a lot of cases that they've been working on for quite a while. I think as folks are thinking the Fed's getting near the end of the tightening cycle, they're getting a little more clarity at the sponsorship level on how a lot of these markets are playing out. Our sense is that a lot of sponsors on certain transactions in certain markets are saying, okay, we've got enough clarity about how the economy and the market's playing out and where the terminal interest rates are likely to be to decide the economics of this still makes sense and we're ready to move forward. there was a lot of uncertainty about how far the Fed was going and how much impact that was going to have on the economy and different product types and so forth. And I think there's, A, a little more certainty for some sponsors on some projects. And that's not broad-based, all sponsors, all projects. But some sponsors on some projects in certain markets seem to be getting a little more clarity And at the same time, as Brandon mentioned earlier, competition has reduced, particularly, you know, in the bank space. So we're getting probably a little bit bigger pieces of pie and pies, maybe a little bigger now than we thought it would be 90 days ago, just because folks are getting a little more confidence about where everything sort of settles out at the end.
spk03: Great. Makes sense. All right. Thank you.
spk60: Thank you, Catherine. One moment for our next question. And our next question comes from the line of Tamir Brazila with Wells Fargo. Your line is now open.
spk42: Hi. Good morning. Thanks for the question.
spk43: Maybe starting on the funding side, Just looking at the deposit base, do you think the rates where you have them right now are sufficient in providing funding and kind of getting all the deposits that you need? Or is there still some needed acceleration and kind of fine-tuning your offering in order to get an adequate amount of funding going forward?
spk39: We've been at the same rate level the last few weeks, and inflow volumes seem to be holding up really well at those levels. So tomorrow there may be a tweak here and there, or the Fed action potentially next week could cause folks to move a little bit. But where we are today, we feel good about.
spk43: Okay, and then I guess as you look at funding kind of the near-term loan growth, deposit growth is actually quite strong this quarter. Cash balance has increased. You have some bonds that are coming due over the next 12 months. How should we think about funding loan growth here over the next kind of two to three quarters? Is there going to be as much an impetus in growing deposits, or are there some other levers you can pull in funding some of this near-term loan growth?
spk39: Absolutely continuing a very strong focus on deposit growth. And I tell you, Cindy, Adi Curley, Drew Harper, Dan Hart, Dan Roulette, just our 1,500, 1,800 people in our 240 retail banking offices in five states did an incredibly good job of growing deposits. we had a big deposit growth quarter. We expect that to continue. If loans grow, you know, a billion five and a quarter or a billion dollars and a quarter, we're going to expect deposits to grow a little more than loan growth. So we would expect that to stay the same. And, you know, hopefully we'll be able to maintain roughly the same mix of deposits. We've been able to do this with you know, mostly organically, locally generated deposits growing our customer base significantly. And we've not really increased in percentage terms as a percentage of deposits in any material respect. Our reliance on brokered deposits over the last several quarters or anything, we stayed in that mid-high 9% of deposits there. And we hope to continue that. We've got clearly flexibility to increase that if we needed to, but we like growing the organic local deposits through our branches, and we're having really good success with that.
spk43: Okay. And then if we can take out the crystal ball and kind of fast forward into the back end of 24, just given the funding schedule for RESG and that pace that that's at, let's say the Fed starts cutting rates in the back end of 24, Are deposit costs going to fall commensurately with the Fed cuts, or is there going to be a lag on the way down as there remain some funding constraints from the increased production activity?
spk39: Well, clearly, as deposit costs lagged on the way up, there'll be a deposit cost lag on the way down. And that's just going to be reflective of the fact that Most of the CD deposits we have have four to 13-month terms. That's sort of the range of where the vast majority of them are. So those deposit costs will tend to lag a bit on the way down. Okay. And then just last for me, maybe... It would be fun with them lagging when it was going up. It'll be less fun with them lagging when... when the rates are coming down. The trick to that is to do a good job getting floors set in our loans that will mitigate somewhat the ramp down in our loan rates as Fed starts cutting. That's a negotiating challenge in every loan and it's becoming more difficult to negotiate it. Sponsors think more about a future where rates are lower rather than higher. So that's a big part of the strategy. And we've had good success mitigating the impact of declining rates, slowing that decline of rates on the loan yields down so that it gives us a little room to maintain and protect our margin.
spk43: Got it. Thanks for that. Just lastly for me, maybe circling back to credit, can you provide the allowance that you currently have on the loan book? And then I'm wondering, you know, you saw the California land deal last quarter where the sponsor kind of balked at developing in this environment. If that type of activity starts to accelerate, given the expectation for recession at some point in the future, Does that inherently increase the allowance that's allocated to the loan book or to the land book?
spk39: Well, Tim, I'm going to let you start off, and then I'll add a little color at the end, maybe.
spk38: Tamir, was your question what is the allocation of ACL to the land book or the loan book?
spk43: The land book.
spk38: Yeah, I don't have that number right here. This probably is a good opportunity to talk about our overall ACL. We added a new chart in there talking about the build that we've had in our ACL over the last four quarters, growing the dollar amount by $127 million when our cumulative net charge-offs were only $23 million over that same period, and also the percentage has gone up during that time period as well. That reflects, obviously, our loan growth during that time period, substantial loan growth during that time period, and obviously our cautious outlook on the economy during that time period and the uncertainties that are still present. Overall, from an ACL perspective, we feel like we're in a good position there. I don't have the specific allocation to that land book in front of me.
spk39: And Tamir, your question about if, I think you asked the question, if we have a recession, will that result in further increases? Will we need to build our allowance more for that? And that remains to be seen, obviously. What's the severity and the duration of the recession and how does it impact different parts of our portfolio. But we think we've been pretty cautious in our approach on this and as we've noted in our management comments every quarter for the last five or six, our scenario selection has been weighted predominantly to the downside scenarios, either the Moody's S4 scenario, which is their, I can't remember exactly what they call it. What is it, Tim? Adverse? Yeah, alternative adverse scenario. Alternative adverse scenario. That's sort of their downside recession scenario. And then their S6 scenario, that's the stagflation scenario. So that's been the majority of our weighting. And I think that's why you've seen us have significant provisions over and above what we would have for growth every quarter, even as our charge-offs have been pretty benign there. So we've been modeling for the recession, which has proved to be very elusive, and that's no surprise to anybody. I mean, everybody on all the business talk shows is the recession is always going to happen in a couple of quarters and a couple of quarters and a couple of quarters. And we've been talking about this for a year and a half now and it hasn't materialized and may not materialize, may materialize. That's above my pay grade. But we think we're well positioned from an ACL point of view for a pretty cautiously selected series of outcomes.
spk35: Great. Thanks for that.
spk60: Thank you, Tamir. One moment for our next question, please. And the next question will come from the line of Michael Rose with Raymond James. Your line is now open.
spk49: Hey, good morning, everyone. I thought I'd start off with a non-credit or margin question. In the management comments, you guys talked about additional people that you're going to add to benefit to growth in coming quarters. Can you just give us a sense for kind of what areas you're looking to add in and understand the guidance for this year, but, you know, would that hiring kind of extend into next year to support, you know, what looks to be pretty strong growth? Thanks.
spk39: Thank you, Michael. I appreciate the focus there. And, you know, one of the long history and traditions of our company is to be well capitalized, have ample liquidity, have a great management team, and be able to capitalize on opportunities in times of economic challenge and turmoil. And you've followed us for a number of years and a number of folks on the call have seen us really be very opportunistic and capitalize on opportunities presented. every time of economic turbulence kind of results in different opportunities to capitalize on. And certainly our opportunities that Brandon's mentioned already on the loan side to capture market share and lower leverage and increase margins on loans is an opportunity that's been very good to us in the current economic times. The fact that a lot of our competitors are shrinking and laying off some really good people or curtailing the business plans of some really good people, I think it's going to give us the opportunity to make some nice additions of talent across different business lines in our company to grow and expand those, acquire people who have a different set of customer relations than we currently have, which in the long run will hopefully allow us to expand our customer base in a material way. So without getting specific, I would tell you right now we're looking at probably 10 or so people that we would really like to add that are across three or four different lines of business And we hope to bring some of those guys on board. And they're men and women. They would be very nice augmentations to the robust pool of talent we already have. And I think talent is going to be one of the most important factors for companies going forward. And we're doing more work to... recruit and retain, improve the quality of recruits and retain our existing high-quality talent than probably ever before. And I'm spending a lot of time on this, Sandy Wolf, and others are spending a lot of time on it. But, you know, the U.S. workforce is aging. mindsets regarding hours of work and the trade-off between hours of work and leisure hours and family hours and recreational hours has been probably forever changed by the pandemic. Mindsets that four years ago we would have ascribed to a younger generation of workers have been adopted by the more senior members of the workforce. And you know, our educational system in the U.S. is not what it once was, so we're not turning out as many high-quality workers as a percent of the population as we were before. All of those factors suggest that there is going to be a very challenging environment to recruit and retain talent in the long run, and we are keenly focused on that. So if we can pick up 10, 20, 30, 50 people over the next year that are not happy or no longer with a competitor, and they're high-quality people that really have a long-term value in place in our company, I think that's a huge opportunity. So we're keenly focused on capitalizing on that.
spk49: Okay, perfect. Maybe just going back to some comments in the management documents You talk about slower loan repayments in the current environment. So it sounds like, and I think what we've read about, right, is that the permanent market for these loans is pretty much closed. You guys have a lot of unfunded commitments that will fund up in strong growth, as you've talked about. Do you see this as an issue? You know, on the one hand, obviously, it's good that those loans stick around. You get a little bit more kind of NII, but it would put some pressure on capital levels. Just help us think about how you know, these dynamics that play out over the next year or two. Thanks.
spk39: Yeah, well, I would say that anyone that tells you that the markets, permanent loan markets are closed is exaggerating or hyperbolic in that statement. You know, as I mentioned, we had 22 loans pay off and go permanent last quarter. So the markets are not closed and uh, our, uh, repayments in Q2, I think we're a little above our repayments in Q1 where they say I'm about a hundred million or so. So the markets are not closed and, and those markets, just like our sponsors who are getting a little more settled now, knowing, uh, uh, you know, thinking that they've got a clear view of where all the, uh, Fed rate hacks are going to end and the impact of the economy, whether that's going to look like it's a little clearer than it was six months or three months or nine months ago. I think the same is true in the secondary market. Now, the reality is a lot of our sponsors look at the secondary market and they think, wow, that's not the rate I want to refinance into. So I'm going to see if I can stick with OCK another 12 months or six months and see improve the performance of my project another degree and maybe rates will come down and I can get a better exit scenario. So we don't really view this as a problem. We're happy to have these books, these assets on the books longer term at our leverage. Bear in mind that the permanent loans that take us out are usually a substantially larger loan, sometimes 150, 200, 225% of our loan amount. So we're quite happy to keep these assets on our books at our rates at our leverage for a while longer into the future. So we view this an opportunity, not a downside.
spk49: All right. Thanks for taking my questions.
spk60: Thank you, Michael. One moment for our next question, please. And our next question will come from the line of Brian Martin with Jannie Montgomery Scott. Your line is now open.
spk54: Hey, good morning, guys. Good morning, Brian. Just a couple of follow-ups for me, just on kind of the reserve build, maybe for Tim, just, you know, given kind of where you've gone, you know, come from, you know, maybe an 85 basis point level to 95 over the last four quarters, you know, I guess, Are you feeling you're kind of at a point now where you don't need to continue to kind of build that reserve, given your outlook, or should we expect that there's more of that to come, just given your cautious outlook and the outlook for loan growth?
spk22: Yeah, Brian, I mean, there's just too many factors to really predict that at this point.
spk38: Clearly, it's going to be dependent on the growth that we have during the quarter, and you've heard our comments around that. And then also at each quarter end, we've got to look at the macro environment at that time and determine the appropriate provision in ACL given the current environment. So naturally, if the environment and the uncertainties are improving, then you would expect a lower level of provision. But if there's still the same amount of uncertainties or worse than the current amount, then you would expect the provision to go higher or at similar levels to what we've got now. So, it's just too many factors to predict what that provision will be in future quarters at this point.
spk54: Got you. Okay. And then maybe just on the expense outlook, you know, I think George talked about the hiring, you know, potentially, you know, what could happen. I mean, the expense rate this year is a pretty lofty level, you know, given what's hired as far as the people you've added. I mean, does the expense growth rate, should that come down next year, you know, relative to this year, even with the additional hiring or just kind of high level? How should we think about, you know, the rate of expense growth as you get into 24, given, you know, what you just mentioned as far as opportunities to add some talent?
spk38: Yes, certainly you saw our comments on the mid to high teens for this year, 2023 versus 2022 full year. This year we obviously have the new FDIC assessment that came into effect 1-1. We're likely to have a special assessment this year, so our guidance there does not contemplate any sort of special assessments. In addition, this year we've had elevated levels of advertising and marketing. We would expect those to continue throughout this year and likely throughout next year as well. The level of headcount depends on the opportunities. Obviously, we were at really diminished levels starting into last year. We've had great success on hiring great talent. I think our headcount's up 10% year over year. We've had, you know, obviously really strong levels of compensation increases to Georgia's point to retain our top talent. So I could see the level of increase, percentage of increase decreasing next year compared to our 2023 level. Too early to tell or give any sort of thoughts there. we wouldn't expect the mid to high teens percentage to be a run rate for an extended period of time unless we find just compelling opportunities to add additional headcount.
spk39: I would add to what Tim said and agree with all that, Brian, but I would add the comment that our growth rate next year is going to be a significant factor in that, obviously, if we grow our balance sheet 15 or 20%, then we're gonna have to add headcount commensurate with that. And I'm not saying we'll grow it 15 or 20%, but if it grows 10%, you're gonna have one level of headcount. If it grows 15 or 20, you're gonna have another level of headcount additions. And we are likely to start scattering some new branches into our network of branches. You know, we're 240 retail banking offices today, and you've been a longtime follower of our company. And we've talked for years about the tremendous capacity we have in those branches for growth. And you guys have seen that play out, you know, right before your eyes over recent quarters. But we're also looking forward three, four, five years down the road at what our franchise and balance sheet looks like then and the size of that balance sheet and the funding needs of that balance sheet. And we're going to need to add some more branch infrastructure starting really now, starting later this year and into next year to uh, provide the additional, uh, customer connectivity that we're going to need to, uh, to be able to support our growth three to five years out. So you will see a handful of branches. I don't know where that's five or eight or 10 added in next year. Uh, but, but that will add a little bit to our, our operating costs. But again, that's going to be offset by growth. And that's going to be a critical part of our long-term strategic plan to, uh, make sure that we've got the branch infrastructure and the customer connectivity and convenience factors to continue to support our balance sheet growth many years into the future.
spk54: Gotcha. I appreciate that. That's helpful. And maybe just one final one. Just do, I don't know whether it's Tim or Cindy or whom, would you have kind of where the spot rate was on the cost of deposits and the margin for the for the end of the quarter? Cindy, you want to take that?
spk04: I do. So June cost of interest-bearing deposits was 3.11% compared to the quarter of 2.92%.
spk54: I got you. Okay. And then on the margin?
spk39: We don't give that number. We've got that number internally, but that margin tends to bounce around months and months within the quarters. We don't. typically disclose those margin numbers. But Cindy gave you a good cost of interest-bearing deposit number for June.
spk54: Yeah, okay. And then just maybe just trying to just on the margins kind of from a high-level view, just trying to appreciate the comments about the NII and just kind of focus on that being worth that. Just try and understand maybe where the margin, you know, given the lag you talk about, George, on the deposit side, when that might trough if the Fed does you know, pause here after the next meeting. But, you know, the lag, is it a couple quarter lag? So, we should be thinking about the margin percentage dropping, you know, all else equal in the near term and, you know, the first quarter, kind of fourth or first quarter. Is that fair?
spk39: You know, there are a lot of variables in that. I think given the fact that a lot of our deposits run out as far as 13 months, you're probably looking at several quarters there on the deposit side before if Fed stops and then starts cutting, it takes several quarters to work through those deposits. The other thing is how long are we at current rates before the Fed starts cutting? If the Fed raises one more time or two more times and then stays there throughout much of next year, we're going to have a really effective time at getting a lot of floor rates reset to near the top of the market levels, which will give us a lot of protection to our margin as rates fall. even as deposit rates lag coming down. On the other hand, if the Fed goes to a peak terminal number and then a month or two later starts cutting rates, that's going to be harder to get our floor set, reset. So we were very pleased to see the Fed take a pause and maybe extend the pace of this last cut or two out over a slower period of time because that's very beneficial in helping us get old loans with really low floor rates rolled off the books and new loans with floor rates at or near current origination rates on the books. So that's really helpful. So we would, our best scenario is Fed raises once or twice more and then stays there for a year, which is probably really good to help Fed accomplish their actually getting inflation under control and not reigniting inflationary pressures. And that's a perfect scenario for us from a margin point of view.
spk54: Gotcha. And under that scenario, George, is that trough in early, you know, late fourth quarter, early first quarter kind of realistic, given those dynamics, if the Fed doesn't, you know, start cutting until second half or late next year?
spk39: Well, let me just leave you with the concepts, and I'll let you figure out where the trough is. We've got a We run, gosh, between two and three dozen interest rate models in various scenarios every month. And where the trough is in rates just depends on which set of model assumptions you've got. So I'll kind of give you those color comment points and let you run your own models and see where you think the trough should be because I could give you an answer any quarter, and it would match one of our models or more.
spk52: Perfect. I appreciate the call, George. Thank you. All right. Thank you.
spk60: Thank you, Brian. One moment for our next question. As a reminder, ladies and gentlemen, that's star 11 to ask your question. Again, that's star 11 to ask your question. And our next question comes from the line of Brody Preston with the UBS. Your line is now open.
spk46: Hey, good morning, everyone. How are you?
spk31: Good morning.
spk48: I wanted to maybe just circle back to, I've got some credit question, but I just wanted to, I just wanted to maybe focus on, on capital for, for a minute. So, you know, you obviously bought back a decent amount of stock. this quarter um but the difference between i think 33 and and 43 is is quite a bit on the stock price um so i guess and your cet1 ratios now i think it's 10 8 and it was 13 3 last quarter and so i guess is it kind of safe to assume if we hung out at these levels on on buyback that we we shouldn't be making a much more buyback and into our estimates just given the growth outlook remains pretty solid. And so you're going to want to preserve that capital for balance sheet growth.
spk25: Hey, Brody, it's Tim.
spk38: Yes, we gave you not only the average price that we paid in the quarter just ended, we also gave you the average price for the six months. Obviously, there were compelling value opportunities there at those prices. we still have some authorization remaining. So at these levels, though, I think we're going to focus on organic growth and preserving our capital for that. But if we do see additional compelling values in our stock price, we won't hesitate to repurchase some more shares at those values.
spk48: Got it. And then I did want to ask just And this is a little bit tangential to what you had talked about with discount rates, George. But I guess just given that the discount rates have moved up and these appraisals have been changing as a result, is there any relationship between the discount rates and the reserves, just given the change in the LTV? Like, if discount rates were to fall next year, you know, I guess, do the values you know, get better on these projects and therefore the LTVs fall and therefore maybe you don't need to carry as much reserves against them, or does that not play a role?
spk39: There's a degree of correlation between where interest rates are and where discount rates are, but it's not a perfect correlation. So what I would tell you is if Your thesis is correct, though. If that correlation maintains at a very positive level and interest rates fall and hence discount rates fall, then that should translate through into better appraised values and lower loan-to-values. But again, that's not a perfect correlation. And the second question you asked, does that have an impact on reserves? Yes. The loan-to-value is one of many factors that compute into our risk rating models for loans. So higher loan-to-values result in a higher risk rating. Lower loan-to-values, all other things being equal, result in a lower risk rating for loans. And those risk ratings are correlated to an expected loss and a probability of default calculation on every loan. And obviously, that has an effect on both those factors.
spk48: Got it. Thank you for that. And I did want to just circle back to the credit discussion. You know, I feel like I get an education from you guys every time I get on these calls and we talk about res G credits. But George, you said something as it relates to the values on these land loans and just given just given how sensitive they are to discount rates and duration within that kind of NPV analysis on the value. So I guess, are you saying that With the land loan that went from a 40% LTV to a 95% LTV, that one in Chicago, was there no change in the actual end value of the project? It was just the NPV inputs changed to the present value of the project? Am I understanding that correct?
spk39: Brody, I was using my example as a hypothetical. I'm not sure in that particular loan, Brandon may know that if the terminal value changed or not, but I do know that not surprisingly, and this is probably going to be true of any land loan that is a longer-term hold sort of land loan where development is not imminent in the next 12 to 18 months, your holding period is probably going to extend and your discount rate is going up. Now, Brandon, I don't know. Brandon might not even know if the terminal value on that.
spk16: I don't, George. Yeah, no, I don't have it off the top of my mind. But your point that longer periods and higher rates tend to have more impact than, you know, changes on that terminal value ultimately in the valuation in our LTV.
spk48: TAB, Mark McIntyre, Okay, and so I guess would that be the explanation between and I guess I was particularly interested in the land on that table just because you look at the top of that table and the bottom of that table you got about. TAB, Mark McIntyre, Two land loans about the same size, except the one went, you know the from 40 to 95 and the other one actually went down from 46 to 25 or whatever, and so it was just a bit of a stark contrast and to me. just from a layman's point of view, I said, well, maybe like the first one got delayed or the project's been shelved, but the bottom one is going forward and is really strong. I guess like what drives that kind of dichotomy between those two loans?
spk39: You're exactly right in that. Go ahead, Brandon.
spk16: Well, yeah, Brody, it's a great question. And But these tracts of land are located in various markets across the country, and there are very different dynamics that are in play in different markets. So in this case, if I'm not mistaken, you're probably looking at the bottom of the chart. I believe that's – attract in southern Florida. So dynamics and expectations are a little bit different there than they are perhaps in Chicago and certainly in other markets like San Francisco. So look, it's hard to look at a chart like this and draw correlations. There are so many different factors at play in every single tract of land that you're valuing.
spk39: Just to take what Brandon said and apply it to your concept, if Brandon's right, that lower piece of land, if it is in fact in Florida, the pace and magnitude of development in Florida is speeding up, in most cases not slowing down. it would uh to your point a piece of land that saw that's going to develop in three years now it's going to go vertical in 18 months that's going to improve the holding period discount on that track of land got it okay and and i guess right brandon's color is right got it okay no that that's helpful um and makes sense and i guess
spk48: if I could stay just on the land topic, is it, you know, because when I look at the LTV changes in the other properties, right? I mean, like some up, some down, they look fine. And like, if I'm a developer, right, you know, it's much easier for me to say to you guys, okay, like, yeah, like I'll definitely bring more equity to the table when I've already got like shovels in the ground. And, you know, we've got five floors of a 10 floor building kind of built, but like the land loan scheme, they might just, I guess, naturally be more at risk of LTV changes just because no development's actually happened yet. Is that a fair way to think about it?
spk39: Yes, exactly. As we said, they're the most variable pieces of our portfolio when it comes to variations in appraised value.
spk48: Justin Cappos, got it so when you when you do these reappraisals on the land, then you know just whether or not the values going up or down. Justin Cappos, I guess, what do you guys have a sense for what the relative success rate is that you've had over time in terms of. Justin Cappos, You know you're working with strong sponsors, you know they probably got multiple projects with you, maybe one of them is land at this point, maybe one of them is an office building at another point, you have a sense for kind of. the success rate of kind of getting sponsors to commit to commit more equity to a project, regardless of what phase it's in, you know, just just given the strength of the sponsor. So like they got a land loan with you, they're still willing to commit to more equity because they're a strong partner of yours. Or do they look at it differently? Like from an economic perspective, you know, maybe we need to commit less to this land project because we don't know how this is going to work out over the next few years. Like, I'm just trying to understand the psychology of these developers.
spk39: Well, first I would tell you, as Brandon mentioned, we had four or five loans or more last quarter that we had reappraisals on where the sponsors either contributed additional equity or curtailed loan amounts that kept the appraisals in line or closer to our original appraised values on that. So we have a good track record sponsors supporting their their loans and the reason for that is one we choose our sponsors well or we try to choose them well and have capable sponsors and two we we get so much equity in these you know the weighted average REST portfolio I think it 630 was 53% of appraisal or cost, and 43% of appraisal. So at 53% loaned cost, you've got a lot of equity in there that they've got to protect and defend. So we have a fair amount of leverage to encourage the sponsors to continue to support their asset. The other comment I would make on that is, you know, I think our weighted average RESG portfolio at March 31 was 43% and was 43% at June 30. So the percentage of the portfolio changed. So we, you know, it was unchanged on a lump value basis. So we had some appraisals that were higher and some lower. We had loans pay off, 22 of them. a bunch of new loans originated, and the net effect of all that on a weighted average basis was an unchanged loan-to-value ratio. And I think that speaks to the high quality of the portfolio and the high quality, low leverage of the new business we're originating.
spk48: Got it. And this is my last one, George, just on this. We're combing through proxies, you know, earlier this week. And, you know, one of the things I thought was interesting is that OZK is one of just two companies that I cover that, you know, includes a hard target NCO rate within their performance-based comp every year. Interestingly, the other company also does differentiated forms of lending. And so I guess, you know, to me, it says that you're telling your shareholders, hey, we do differentiated lending. We're really good at it. But, you know, we're aligning ourselves with you in terms of trusting us on credit to actually get paid the way that we want to get paid. Is that kind of what you're trying to do? And then, you know, two, you know, why do you view that as important as you do? And then three, why do you think other banks don't necessarily target NCO rates within their comp when they're being trusted by their investors to underwrite loans as well?
spk39: Well, we would never be presumptuous enough to try to explain why other banks do or don't do it, but I'm going to let Tim answer your other two questions.
spk38: Hey, Brody, yeah. So in our annual short-term incentive plan that all of our senior executives are a part of, Three of the components are financial-related. We've got EPS, efficiency ratio, and NIM. The other two, as you pointed out, one is net charge-offs. The other is non-performing assets. We've had a long-standing track record of having those as components of our short-term incentive. Our long-term incentive is a relative comparison to ROA, ROE, and total shareholder return. So we certainly feel like our incentive plans, both short and long, long-term are consistent and aligned with our shareholders. But asset quality, we've had a long track record of beating industry averages on asset quality, and we incentivize our team to maintain those industry-leading levels. And that's been that way for a very long time.
spk18: I guess maybe if I could sneak one more in.
spk39: Brody, I'll add one more piece of color to that. I talk with lenders and lending team recruits almost every day and probably every day for 40 years. The guys have heard it. Asset quality is of paramount primary importance, goal number one. Profitability margins are goal number two. and growth is purely a tertiary concern. So we live that. It is part of our culture. Asset quality, number one, profit margin, number two, and growth is a tertiary concern. So you saw a couple of years ago, our balance sheet grew very little year to year because competitors were out there being very aggressive on structure and leverage and very aggressive on pricing. you know, growth's not a primary concern. So if we don't grow for a year or two and just stack up capital, that's okay. We're doing the right thing for the long run. We're sticking to the fundamentals. Now, when you've got a situation where valuations on assets are a bit beat up and competition is out of the market, we can get lower leverage on asset values that are already kind of adjusted to a more severe market and get paid better for doing that, we get a much, much better risk-adjusted return. So we may grow a lot in an environment where we're getting high-quality assets at good margin at values that are already stress-tested compared to going out and trying to get a bunch of growth when everybody's growing and everybody's aggressive to grow. So we tend to be a little
spk48: uh counter cyclical and i think it's why we've been you know continuously profitable for 45 years i mean we we pay attention to the fundamentals got it and if i could maybe just sneak one last one in i know we're running long i just i did want to just ask you know just given you know the focus on asset quality you know given that you're paid on charge off when i when I think about the differentiated nature of what you do, like, I guess maybe could you give us some insight, you know, and I think you told me this at some point before, but just what's different about the way that you work out loans, like when you identify a res G loan that you think, you know, maybe needs a little bit of help, you know, I guess early identification is, is obviously pretty paramount, right. And strength of sponsor really matters, but is there something else that you're doing within the workout process that, you know, uniquely kind of positions you to take less losses on what some might perceive to be a riskier kind of asset?
spk39: Well, I would tell you that a great part of our success is the structure, the documentation, the underwriting, and the asset management. that goes into those. So the structures you set up on the front end, your documentation and the effectiveness and effectualness of those structures is critically important. So if you can identify where future weak points in a transaction may be long before those weak points, long before you've even closed the transaction, and structure around those weak points, that's critically important. And then getting all that documented in your documents and closed. And then the asset management team that Brandon and Clifton Hill and Juan Gonzalez, the other guys at RESG has built is just exceptional in their knowledge and monitoring of credits. We've got basically about one loan or about 14 loans assigned to every asset manager. Most of these asset managers are MBAs with a real estate-focused MBA program. It's a highly talented, educated team, and they've got really good tools and really good team leaders and really good group leaders over those teams. And they are monitoring these assets on a daily basis. They see every in and out, every lease, every sales contract, every third-party report. They're monitoring these things at a level that lets us know that issues are developing sometimes before the sponsors really get focused on issues. And being able to get ahead of things and fix them before they get big is very important in preserving and maintaining the asset quality of that portfolio. We just have an incredible team, and it goes all the way from the originators and the underwriters and the managers over originations all the way through the credit and closing process, and then all the way through the asset management process to pay off. We've had as As our slide deck in 20 years, we've had losses on, I think, six or seven RESG loans. We'll have a few losses here and there on that portfolio, but the job that our team does there is just very helpful, critically important in maintaining the quality of that portfolio.
spk44: Got it. Thank you very much for taking my questions, everyone. I really appreciate all the detail, George. Very thoughtful.
spk60: Thank you, Brody. And I'm currently showing no further questions at this time. I'd like to hand the conference to Mr. George Gleason for closing remarks.
spk39: Thank you, guys, for joining our call today. We're very proud of our quarterly results, feel really good about it, and very excited about talking to you again in 90 days. So thank you. Have a great day. That concludes our call.
spk60: This concludes the conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day. Thank you. Thank you. Thank you. Thank you.
spk61: Good day, and thank you for standing by.
spk60: Welcome to BankOZK's second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To remove yourself from the queue, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jay Staley, Director of Investor Relations and Corporate Development. Please go ahead, Jay.
spk28: Good morning. I'm Jay Staley, Director of Investor Relations and Corporate Development for BankOZK. 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 Hamblin, President, Tim Hicks, Chief Financial Officer, and Cindy Wolfe, Chief Operating Officer. We will now open up the lines for your questions. Let me now ask our operator, Norma, to remind our listeners how to queue in for questions.
spk61: Thank you.
spk60: As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question.
spk61: And the first question comes from the line of Stephen Skilton with Piper Sandwell.
spk60: Your line is now open.
spk50: Hey, good morning, everyone. Thanks for the time. Maybe if we could start actually around loan growth. I mean, it's been phenomenal the last few quarters, and the commentary seems to be that origination trends are improving. Obviously, repayments are still a little bit more muted. It seems like we could continue to see this path of growth. I'm just curious if you could comment on that and then just any thoughts around pushback from folks that might not want to see growth in today's environment and why you still feel good about adding that growth on these loans you booked largely last year.
spk39: Thank you, Steven. Appreciate the question. We are cautiously optimistic about our continued growth prospects. and view that as a very positive opportunity. You know, we're being very conservative on credit quality. We're very focused on that. We've got a long tradition and track record of that. So we believe in this more challenging environment and the ability to be very conservative in what we're doing that we're putting on really great quality new assets and getting paid well for it. So we view it as a very opportunistic time for growth. you know, we're achieving better diversification in our portfolio, but the reality is Real Estate Specialty Group is still the largest loan-generating unit, growth-generating unit in our company, and Brandon Hamlin is closer to that than anybody in our company. So, Brandon, since REOG is the the big dog in the pack leading the growth. I'm going to let you take the rest of that question.
spk16: Sure, George. Happy to do that. And Stephen, thanks again for the question. I'll just tag onto what George said about our absolute confidence in the quality of the credits that we're adding today. We're in the market every day through cycles and really always sort of pushing leverage down and pricing up as the market gives us opportunity to do that. And certainly, the market that we're in today has done that. If you look at what we've closed more recently, as some of the uncertainty in the market has increased, you absolutely see our new closing loan to values and loan to costs being lower than our portfolio average. And and pricing spreads strong quarter to quarter. So feel great about the quality of what's going on and in terms of the opportunity, there are still a lot of deals that are coming to the market. There are some that have stepped back as we've talked about in previous quarters. But, you know, our guys just do a phenomenal job and have over the years and built such great market penetration on the origination side and such absolutely outstanding servicing on the asset management side that we get, you know, continue to get a lot of repeat business from from really super sponsors with with great projects and and and. as I said before, a lot of capital in these deals with our loan to costs on average being lower currently in this market. So a great job by the guys continuing to stay in the market. And of course, working with a lot of sponsors that have seen our execution and the word gets around and we've got new ones available as well. And along with that, there's Obviously, if you read the paper, you know there are a lot of banks that are pulled back and not giving us as much competition in certain cases as we might otherwise have. So a number of factors involved, but we have an opportunity to put some really great quality, low leverage, well-priced credits on the book, and we're going to keep doing that.
spk50: Yeah, that's great, Culler. Appreciate the commentary about improving quality. So if we, you know, if I, for one, take growth as maybe a bit of a given and think you'll have nice growth trends into back half of this year and next year, I appreciate the commentary around the NIM and that that will face pressure on the funding side. And I know the commentary, I guess, was NII growth was uncertain, maybe. I forget the exact verbiage used. But it feels like that would still need to be pressured higher given the amount of growth that you're seeing, or am I just maybe underweighting the continued funding pressures and maybe how you need to fund up this rampant growth?
spk39: How can I think about that? That's a great question, Stephen, and really there's a tradeoff coming between growth and and margin to determine whether we can continue to put up positive net interest income items. We hope we can. We are working to make that happen, but as we've said from, gosh, April of last year, right after the Fed started raising rates, we made the comment that our variable rate loans would move quickly as the Fed raised rates, deposit costs would lag, and we've said for a number of quarters now, well over a year, that deposit costs would begin to catch up with the increases in loan yields when the Fed neared or reached the end of their tightening cycle. And we saw that in this last quarter when our NEM gave back some of that 100 basis point plus of NEM expansion that we saw over the prior quarters when the loan yields were reacting faster than deposit costs. So there's a catch up. And we're having to be pretty aggressive on deposit costs because we have such tremendous growth opportunities. We want to continue those growth opportunities. uh but to uh achieve uh the kind of deposit growth that we're achieving we're having to to be moderately aggressive on those uh rates and we can afford to do that we have probably the best net interest margin of our entire peer group by far so we can afford to do that we're getting really good yields as brandon mentioned on the loan side so we can afford to do that and we're we're doing that but that We'll put a little pressure on our NIM and we've said for a couple of quarters now that the challenge is going to be to keep net interest income growing. We're going to have less NIM. We're going to have more average earning assets because of the growth and how that plays out is uncertain. If we get really good growth and do a good job of mitigating the impact on our NIM, we'll have slightly positive net interest income numbers and If we get a little less growth and do a little less good job on mitigating the NIM pressure, we could be flat to down a little bit on the net interest income. So it's a horse race.
spk50: Got it. Great color. Based on the track record, I'm betting on NI growth. So appreciate all the commentary.
spk37: All right. Thanks, man. Appreciate it.
spk60: Thank you, Stephen. One moment for our next question. And our next question comes from the line of Matt Olney with Stevens. Your line is now open.
spk53: Great. Thanks. Good morning. I want to ask some questions around credit. It sounds like there were two loans that were downgraded this quarter as a result of some of those new appraisal values that you disclosed. I assume you've approached these borrowers to ask for additional credit equity since you've gotten those appraisals back? If so, any color on these conversations with the borrowers?
spk39: Yeah, what I would tell you on that is both borrowers are working very constructively with us. Both were already engaged in processes of bringing new capital to those transactions, so we're monitoring that closely. We are pretty confident in both these borrowers' ability to get something done that will be useful to them and useful to us in that regard. These guys have shown real commitment to these assets, and we hope and expect that will continue.
spk51: Okay. Appreciate the color.
spk39: Brandon, do you have any color you want to add on those two deals?
spk16: Well, I would echo what you're saying, George. I mean, they were pre-engaged in those activities and making real tangible progress. So we've done a lot of business really with the sponsors in both cases on these projects. We feel good about the direction those are going and would hope to reflect that in the numbers next quarter.
spk39: Matt, I would point out, and Brandon can give you the details on this, but the equity on the Landale has posted a substantial reserve account to continue to carry this asset while they're working on the recap. And Brandon, you might, you know, the details.
spk16: Yeah. Yeah. Yeah. So that's Matt that's on the, on the land deal. That's at 95%. And they, they have a $11 million cash reserve there. That's additional support for that credit. It's not included in the LTV, but additional support for it. And, and you know, cash reserves for, for carry and, and so forth. So, and this is a sponsor there that very prolific developer, national footprint, great reputation for developing successful projects. We financed, as I said, a number of their, their projects. And, um, so, uh, you know, good, good, good thing to call out there, George. And, and, um, you know, in the, in the other case, um, uh, you know, dollars, dollars, uh, have been coming in, uh, historically that sponsor has put in a, you know, that we, We did an extension, and in this case, I'm talking about the hotel mat at 101%, but during COVID, they put up additional capital, and we did an extension then, and they've continued to fund operating shortfalls and debt service, so a significant capital, already ongoing capital infusion in that project. So, yeah. Those are not so much hope cards as historic performance that we have good expectations of the outcomes there.
spk39: And I would add on the hotel, this is a really nice, smaller asset, and it's performing at or above the comp set in the market. This is just a Midwestern market that has been really slow recently. to come back from the pandemic and the changes in travel patterns and so forth from the pandemic. But it is a really nice asset. So the quality of the asset there, as well as the sponsor's proven commitment, it gives us a fair degree of confidence and cautious optimism about the path forward.
spk51: Okay.
spk53: Appreciate the detail, and then just digging a little bit more, I guess, on the topic. You've been disclosing these updated appraisals now with RESG for a while now, and typically the LTVs have more limited movement post-appraisal. These two obviously have been outliers. Anything else unique about these transactions and these properties that would have driven a more significant increase value deterioration than other ones we've seen in not just this quarter, but in past years as well?
spk39: You know, what I would comment, and Brandon may want to add something to this, but land appraisals tend to have a lot of variability to the valuation conclusions from land appraisals. And, you know, I'll give you an example. You might have a land appraisal that has a $300 million terminal value You get a new appraisal on it, and the terminal value is still $300 million, but land appraisals are done on a discounted net present value basis. So if the discount rate on that, because the Fed's moved 500 basis points, the discount rate on that goes up another 500 basis points from, say, 12% to 17%, and the holding period gets extended from three years to... eight years, you have a massive contraction in value that has nothing to do with the terminal value of the land asset. It's simply the function of the higher discount rate and the elongated holding period. And so, you know, we've been doing this a long time, so we've seen these land values fluctuate up and down because of those conditions. what I would tell you is most of the land we finance Matt is kind of a bridge to a near term vertical development we do very few deals that are intended to be long term land holes when we go into them so you notice land going the other direction on that appraisal list as well where the loan devalues went down and I'm not sure of the specifics of those, but in some situations, the holding period to development actually shortens and the land value, the loan value gets better. So don't get too excited about some of these variations in land values just because if you look at the math, you realize they're saying an eight-year holding period. That's probably on the long side reflecting current economic uncertainties you get on the other side of a recession, those values tend to come back really quickly. And that's what the equity guys are looking at is what's the reality of that. The other thing I would tell you is we're keeping the valuations on this portfolio pretty closely considered while we had, I think it was 15 or 16 Assets reappraised last quarter. We had 22 payoffs and new loans going on. So if you look at kind of the inflows and outflows of deals, we probably have fresh values either on new loans and old loans paid off or reappraisals on something approaching 10% of the portfolio every quarter. So, you know, these values are staying pretty freshly updated on the portfolio. Yeah.
spk15: Okay, thanks, guys.
spk60: Thank you, Matt. One moment for our next question, please. And our next question comes from the line of Manon Gosselia with Morgan Stanley. Your line is now open.
spk10: Hey, good morning. I just wanted to follow up on that last comment there. about 10% of the portfolio comes up for reappraisal every quarter. Is it fair to say about 40% of the portfolio has been reappraised over the last 12 months?
spk39: Well, Manan has either been reappraised or had new appraisals because, you know, their new loans originated. So I would say that's a rough estimate. I haven't actually calculated that, but I would say that's a fair approximation.
spk13: You know, we've,
spk39: As I mentioned, we had 22 loans pay off and quarter just ended and I don't know exactly how many we originated, but it was probably somewhere in the same range of that. So, you know, new loans have new appraisals and the old appraisals, old loans go off and we're reappraising a dozen 15 to 18 that just come up for extension renewal or otherwise show some signs of concern. If we think there's a likely movement in the value and performance of that asset, it's getting reappraised.
spk16: Or I might add, George, there's an opportunity. Good things are happening at the project, and there's some reason that we might consider an upsize of a loan. And Of course, anytime we do that, we get a new appraisal as well. So there are positive activity reasons for that to happen.
spk10: So then maybe a big picture question on downgrades in general and not specifically related to those transactions. But you clearly get a lot of repeat business, so you have great relationships with these sponsors. Can you walk us through other deals where you've had success in bringing in equity and I guess what you had to bring into that deal, right? So is it just a concession on spreads? Is it re-upping the loan or is there anything else that goes into that negotiation?
spk39: Well, we had several loans in the last quarter that were on that reappraisal list because they were up for renewal, extension. that the sponsors brought substantial equity. Brandon, you might be able to recap those. And I don't think we gave any concessions on any of them. We probably improved our economics in terms on those, but did get paydowns. And Brandon, you have the recap.
spk16: Sure, sure. Yeah, it's a great question. And yeah, most of these are going to have they're going to have better terms in addition to, you know, just in the quarter just ended, I can think of four different situations where he extended the loan and got, you know, material paydowns, you know, one for $20 million on a multifamily project in Philadelphia, one for $10 million on a multifamily project in Oakland. We had another project in Oakland that we actually could you know, um, curtailed the loan, didn't, didn't need the full loan amount. So it was, it wasn't a pay down, but a curtailment. And then we had another, uh, Midwest hotel that we had a $5 million pay down on. And, and, and there were others, you know, in, in, in, in Q1 or right before Q1, and we had a $54 million pay down on a mixed use project. So, um, just, just to name a few.
spk39: Yeah. So we're, uh, you know, as we get appraisals that, that, uh, indicate higher loan-to-values. I know one of the loans that is in that list of reappraisals, we got the appraisal early. The loan's coming up for maturity this quarter. We got the appraisal early, so the higher loan-to-value reflects the new appraisal versus the current balance of the loan. we would expect a several million dollar pay down on that loan in connection with the extension of the loan. We're granting the guys extensions and additional time. We're improving the economics on the deal in most cases as well as that. Keeping the risk in check by getting the curtailments and improving the economics of the the transaction at the same time.
spk10: Got it. That's helpful. So as I think about the yield on loans, the 8.4, 8.5% or so that you have right now, if we do get one, as we do get one more rate hike from the Fed, so how should we think about those yields? Should they peak somewhere around 875 or, you know, based on the fact that you're getting some better economics on certain deals, that there is additional repricing that we're not taking into account?
spk39: Well, you know, obviously if the Fed continues to raise rates, that will translate through to loan yields. The vast majority of our loans are variable rate. Tim, you probably have that number exactly. What is it? Yeah, 79% are variable rate. 79% of our variable rate loans, and most of those are just monthly. So a 25 basis point movement, the Fed funds target rate, if it has a comparable movement in SOFR and prime, which it probably would, you would get about 20 basis points of that, or 18 or 20 basis points of that would translate through into... improved loan yields from the impact of that rate increase.
spk10: Right. But is there anything beyond that as well that you could get from some of these renegotiations or some of the lagging repricing of the remaining 20% that are not variable rate?
spk39: You know, yes. In some cases, clearly we are getting better economics and on those transactions. But, you know, that's a small number of loans that are being dealt with there. So is that a basis point or two? Or, you know, it's not going to move the needle a ton. That's sort of just some of that pluses and minuses that goes into the normal wash of those loan deals.
spk09: Got it. Thank you. Thank you.
spk60: Thank you, Manon. One moment for our next question. And the next question comes from the line of Catherine Mueller with KBW. Your line is now open.
spk03: Thanks. Good morning. I just had a couple of follow-up questions on the credit discussion. Maybe question one is just what market? I know you said the hotel loan was in a Midwest market. And can you tell us the market that the land loan is in? And then my second question on those projects was, did we see any increase in the specific reserve related to those two downgrades?
spk39: the land loans in Chicago and the obviously we hold higher levels of reserves for loans that are special mention and pass and higher levels of reserves for substandard as opposed to special mention so yeah the reserves went up on those loans in connection with the change in risk rating
spk03: And I appreciate your commentary, George, about just the pace at which you get new appraisals. It feels like you're mostly getting new appraisals either at maturity or an extension or if you see degradation in the project for some reason. So maybe just kind of help us think through that. And particularly in the land portfolio, how much of that book do you feel like has an updated appraisal? Is there risk within just that book that we could see, as we move through this process, just additional appraisals that are going to kind of increase the LTV significantly, just that land book?
spk39: Yeah, well, your first premise is correct. Your understanding is correct. We typically get appraisals, obviously, on new loans, and then at maturities, extensions, or if an issue arises that makes us think we need to get a new appraisal to kind of recalibrate our valuation on a loan. So that keeps our appraisal services guys and our outside appraisers pretty busy doing all of that workload. As I mentioned, Catherine, I think it's really important to know that if you look at the figure in the management comments that shows distribution of loans by asset type. The land loans are kind of down there on the far right. It's one of our smaller land type distributions. And as I mentioned earlier, most of those land loans are done as really a bridge to a vertical construction. So we're doing a a lot of times a 12-month land loan with a couple of six-month extensions to give the sponsors who are acquiring a piece of land time to complete their plans, specs, and cost out and get ready to close into a vertical development loan. So those tend to be pretty short-term, short-duration assets that really, you know, put us on the inside track to do the vertical construction on those loans. As I mentioned, there are very few land hold loans. Now, the asset that we dealt with a quarter or two ago, the Landale out in California, that was a land track that was scheduled for vertical development. and that ended up being a land hold instead because their cost just blew out. That's a fairly unusual situation, but that will occur now and again. And, you know, other than those sort of situations and maybe a couple of land hold loans, you know, I think that portfolio is well margined and will perform very well. There may be an occasional bump here and there, and we've seen that, but I'm not worried about that having a material impact on asset quality.
spk16: George, I might just add to that. Catherine, I just circle back to your question. I mean, because of what George said, you're going to have a more currently appraised portfolio in land. I don't know the numbers, but I'm going to say... the majority of that portfolio has valuations that are a year or less old because of the short terms that George alluded to. So just to kind of circle all the way back to your question on, you know, timing of appraisals, it stays pretty tight on land. And in that figure that George pointed out, it's our lowest loan to value, uh, property type.
spk03: Great. Okay. Yeah, that's helpful. And on that Chicago project, what was the emphasis to needing a new appraisal for that loan?
spk16: Brandon, you want to take that? I'm sorry. I didn't understand the question, Catherine.
spk03: So why did you need to get a new appraisal on that loan? Was it degradation? Did they come to maturity?
spk16: It was in connection with an extension loan maturity.
spk03: Okay.
spk16: Great.
spk03: And then one other question just on the growth outlook. I just wanted to make sure that I'm thinking about this right. So I think you mentioned in the management comments that you think origination volumes are going to be closer to 2011 levels, which was about $8 billion. And if I do the math, that's putting your origination volumes well over $2 billion for the next couple of quarters. Am I thinking about that right?
spk39: 2021, not 2011.
spk02: Excuse me, 2021. Yes, thank you.
spk39: I knew what you meant, and you knew what you meant, but I didn't want others to be scrambling back through the historical archives.
spk12: We've been doing this a long time.
spk39: Yeah, you know, we had previously said we expected the, you know, number to be in the range of 2020 to 2021, which is kind of, you know, a In round numbers, we ran off a $6.5 to $8 billion range. The thrust of that comment is we now think we're coming in at the high end and a little over probably the high end of that range by the end of the year based on the pipelines we're seeing. So we didn't want to surprise anybody with that. We wanted to raise the possibility that we now may be at or somewhat above that $7.94 billion level of 2021. Great.
spk03: So a pretty big acceleration in the back half of the year. But it also felt like you were saying repayments should also increase some in the back half of the year as well.
spk39: Repayments, I don't know. That's going pretty slow. So we had indicated... I think that around the 21-22 level, and we cited you to a five-year average that's slightly below the low side of that. So I think we're expecting more prepayments to slide into next year. And because of the fact that a lot of sponsors for the last several quarters have really been sort of slow plane, they're bringing forward projects for development in a lot of cases that they've been working on for quite a while. I think as folks are thinking the Fed's getting near the end of the tightening cycle, they're getting a little more clarity at the sponsorship level on how a lot of these markets are playing out. Our sense is that A lot of sponsors on certain transactions in certain markets are saying, okay, we've got enough clarity about how the economy and the market is playing out and where the terminal interest rates are likely to be to decide the economics of this still makes sense and we're ready to move forward. There was a lot of uncertainty about how far the Fed was going and how much impact that was going to have on the economy and different product types and so forth. And I think there's, A, a little more certainty for some sponsors on some projects. And that's not broad-based, all sponsors, all projects. But some sponsors on some projects in certain markets seem to be getting a little more clarity And at the same time, as Brandon mentioned earlier, competition has reduced, particularly in the bank space. So we're getting probably a little bit bigger piece of the pie and pies, maybe a little bigger now than we thought it would be 90 days ago, just because folks are getting a little more confidence about where everything sort of settles out at the end.
spk03: Great. Makes sense. All right. Thank you.
spk60: Thank you, Catherine. One moment for our next question. And our next question comes from the line of Tamir Brazila with Wells Fargo. Your line is now open.
spk42: Hi. Good morning. Thanks for the question.
spk43: Maybe starting on the funding side, Just looking at the deposit base, do you think the rates where you have them right now are sufficient in providing funding and kind of getting all the deposits that you need? Or is there still some needed acceleration and kind of fine tuning your offering in order to get an adequate amount of funding going forward?
spk39: We've been at the same rate level the last few weeks, and inflow volumes seem to be holding up really well at those levels. So tomorrow there may be a tweak here and there, or the Fed action potentially next week could cause folks to move a little bit. But where we are today, we feel good about.
spk43: Okay, and then I guess as you look at funding kind of the near-term loan growth, deposit growth is actually quite strong this quarter. Cash balances increased. You have some bonds that are coming due over the next 12 months. How should we think about funding loan growth here over the next kind of two to three quarters? Is there going to be as much an impetus in growing deposits, or are there some other levers you can pull in funding some of this near-term loan growth?
spk39: Absolutely continuing a very strong focus on deposit growth. And I tell you, Cindy, Adi Curley, Drew Harper, Dan Hart, Dan Roulette, just our 1,500, 1,800 people in our 240 retail banking offices in five states did an incredibly good job of growing deposits. we had a big deposit growth quarter. We expect that to continue. If loans grow, you know, a billion five and a quarter or a billion dollars and a quarter, we're going to expect deposits to grow a little more than loan growth. So we would expect that to stay the same. And, you know, hopefully we'll be able to maintain roughly the same mix of deposits. We've been able to do this with you know, mostly organically, locally generated deposits growing our customer base significantly. And we've not really increased in percentage terms as a percentage of deposits in any material respect. Our reliance on brokered deposits over the last several quarters or anything, we stayed in that mid-high 9% of deposits there. And we hope to continue that. We've got
spk43: clearly flexibility to increase that if we needed to but we like growing the organic local deposits through our branches and we're having really good success with that okay and then if we can take out the crystal ball and kind of fast forward into the back end of 24 just given the funding schedule for resg and that pace of that's at let's say the fed starts cutting rates in the back end of 24 Are deposit costs going to fall commensurately with the Fed cuts, or is there going to be a lag on the way down as there remain some funding constraints from the increased production activity?
spk39: Well, clearly, as deposit costs lagged on the way up, there'll be a deposit cost lag on the way down. And that's just going to be reflective of the fact that Most of the CD deposits we have have four to 13-month terms. That's sort of the range of where the vast majority of them are. So those deposit costs will tend to lag a bit on the way down. Okay. And then just last for me, maybe... It would be fun with them lagging when it was going up. It'll be less fun with them lagging when... when rates are coming down. The trick to that is to do a good job getting floors set in our loans that will mitigate somewhat the ramp down in our loan rates as Fed starts cutting. That's a negotiating challenge in every loan and it's becoming more difficult to negotiate it. Sponsors think more about a future where rates are lower rather than higher. So that's a big part of the strategy. And we've had good success mitigating the impact of declining rates, slowing that decline of rates on the loan yields down so that it gives us a little room to maintain and protect our margin.
spk43: Got it. Thanks for that. Just lastly for me, maybe circling back to credit, can you provide the allowance that you currently have on the loan book? And then I'm wondering, you know, you saw the California land deal last quarter where the sponsor kind of balked at developing in this environment. If that type of activity starts to accelerate, given the expectation for recession at some point in the future, Does that inherently increase the allowance that's allocated to the loan book or to the land book?
spk39: Well, Tim, I'm going to let you start off, and then I'll add a little color at the end, maybe. Tamir, was your question what is the allocation of ACL to the land book or the loan book?
spk43: The land book.
spk38: Yeah, I don't have that number right here. this probably is a good opportunity to talk about our overall ACL. We added a new chart in there talking about the build that we've had in our ACL over the last four quarters, growing the dollar amount by $127 million when our cumulative net charge-offs were only $23 million over that same period, and also the percentage has gone up during that time period as well. That That reflects, obviously, our loan growth during that time period, substantial loan growth during that time period, and obviously our cautious outlook on the economy during that time period and the uncertainties that are still present. Overall, from an ACL perspective, we feel like we're in a good position there. I don't have the specific allocation to that land book in front of me.
spk39: And Tamir, your question about if I think you asked the question if we have a recession, will that result in further increases? Will we need to build our allowance more for that? And that remains to be seen, obviously. What's the severity and the duration of the recession and how does it impact different parts of our portfolio. But we think we've been pretty cautious in our approach on this and as we've noted in our management comments every quarter for the last five or six, our scenario selection has been weighted predominantly to the downside scenarios, either the Moody's S4 scenario, which is their, I can't remember exactly what they call it. What is it, Tim? Adverse. Yeah, alternative adverse scenario. Alternative adverse scenario. That's sort of their downside recession scenario. And then their S6 scenario, that's the stagflation scenario. So that's been the majority of our weighting. And I think that's why you've seen us have significant provisions over and above what we would have for growth every quarter, even as our charge-offs have been pretty benign there. So we've been modeling for the recession, which has proved to be very elusive, and that's no surprise to anybody. I mean, everybody on all the business talk shows is the recession is always going to happen in a couple of quarters and a couple of quarters and a couple of quarters. And we've been talking about this for a year and a half now, and it hasn't materialized and may not materialize, may materialize. That's above my pay grade. But we think we're well positioned from an ACL point of view for a pretty cautiously selected series of outcomes.
spk35: Great. Thanks for that.
spk60: Thank you, Tamir. One moment for our next question, please. And the next question will come from the line of Michael Rose with Raymond James. Your line is now open.
spk49: Hey, good morning, everyone. I thought I'd start off with a non-credit or margin question. In the management comments, you guys talked about additional people that you're going to add to benefit to growth in coming quarters. Can you just give us a sense for kind of what areas you're looking to add in and understand the guidance for this year, but, you know, would that hiring kind of extend into next year to support, you know, what looks to be pretty strong growth? Thanks.
spk39: Thank you, Michael. I appreciate the focus there. And, you know, one of the long history and traditions of our company is to be well capitalized, have ample liquidity, have a great management team, and be able to capitalize on opportunities in times of economic challenge and turmoil. And you've followed us for a number of years and a number of folks on the call have seen us really be very opportunistic and capitalize on opportunities presented. every time of economic turbulence kind of results in different opportunities to capitalize on. And certainly our opportunities that Brandon's mentioned already on the loan side to capture market share and lower leverage and increase margins on loans is an opportunity that's been very good to us in the current economic times. The fact that a lot of our competitors are shrinking and laying off some really good people or curtailing the business plans of some really good people, I think it's going to give us the opportunity to make some nice additions of talent across different business lines in our company to grow and expand those, acquire people who have a different set of customer relations than we currently have, which in the long run will hopefully allow us to expand our customer base in a material way. So without getting specific, I would tell you right now we're looking at probably 10 or so people that we would really like to add that are across three or four different lines of business And we hope to bring some of those guys on board. And they're men and women. They would be very nice augmentations to the robust pool of talent we already have. And I think talent is going to be one of the most important factors for companies going forward. And we're doing more work to... recruit and retain, improve the quality of recruits and retain our existing high-quality talent than probably ever before. And I'm spending a lot of time on this, Sandy Wolf, and others are spending a lot of time on it. But, you know, the U.S. workforce is aging. Mindsets regarding hours of work and the tradeoff between hours of work and leisure hours and family hours and recreational hours has been probably forever changed by the pandemic. Mindsets that four years ago we would have ascribed to a younger generation of workers have been adopted by the more senior members of the workforce. you know, our educational system in the U.S. is not what it once was, so we're not turning out as many high-quality workers as a percent of the population as we were before. All of those factors suggest that there is going to be a very challenging environment to recruit and retain talent in the long run, and we are keenly focused on that. So if we can pick up 10, 20, 30, 50 people over the next year that are not happy or no longer with a competitor, and they're high-quality people that really have a long-term value in place in our company, I think that's a huge opportunity. So we're keenly focused on capitalizing on that.
spk49: Okay, perfect. Maybe just going back to some comments in the management documents You talk about slower loan repayments in the current environment. So it sounds like, and I think what we've read about, right, is that the permanent market for these loans is pretty much closed. You guys have a lot of unfunded commitments that will fund up in strong growth, as you've talked about. Do you see this as an issue? You know, on the one hand, obviously, it's good that those loans stick around to get a little bit more kind of NII, but it would put some pressure on capital levels. Just help us think about how you know, these dynamics that play out over the next year or two. Thanks.
spk39: Yeah, well, I would say that anyone that tells you that the markets, permanent loan markets are closed is exaggerating or hyperbolic in that statement. You know, as I mentioned, we had 22 loans pay off and go permanent last quarter. So the markets are not closed and, you know, uh, our, uh, repayments in Q2, I think we're a little above our repayments in Q1 where they found about a hundred million or so. So the markets are not closed and, and those markets, just like our sponsors who are getting a little more settled now, knowing, uh, uh, you know, thinking that they've got a clearer view of where all the, uh, Fed rate hacks are going to end and the impact of the economy, whether that's going to look like it's a little clearer than it was six months or three months or nine months ago. I think the same is true in the secondary market. Now, the reality is a lot of our sponsors look at the secondary market and they think, wow, that's not the rate I want to refinance into. So I'm going to see if I can stick with OCK another 12 months or six months and see improve the performance of my project another degree and maybe rates will come down and I can get a better exit scenario. So we don't really view this as a problem. We're happy to have these books, these assets on the books longer term at our leverage. Bear in mind that the permanent loans that take us out are usually a substantially larger loan, sometimes 150, 200, 225% of our loan amount. So we're quite happy to keep these assets on our books at our rates at our leverage for a while longer into the future. So we view this an opportunity, not a downside.
spk49: All right. Thanks for taking my questions.
spk60: Thank you, Michael. One moment for our next question, please. And our next question will come from the line of Brian Martin with Jannie Montgomery Scott. Your line is now open.
spk54: Hey, good morning, guys. Good morning, Brian. Just a couple of follow-ups for me, just on kind of the reserve build, maybe for Tim, just, you know, given kind of where you've gone, you know, come from, you know, maybe an 85 basis point level to 95 over the last four quarters, you know, I guess, Are you feeling you're kind of at a point now where you don't need to continue to kind of build that reserve, given your outlook? Or should we expect that there's more of that to come, just given your cautious outlook and the outlook for loan growth?
spk22: Yeah, Brian, I mean, there's just too many factors to really predict that at this point.
spk38: Clearly, it's going to be dependent on the growth that we have during the quarter, and you've heard our comments around that. And then also at each quarter end, we've got to look at the macro environment at that time and determine the appropriate provision in ACL given the current environment. So naturally, if the environment and the uncertainties are improving, then you would expect a lower level of provision. But if they're still the same amount of uncertainties or worse than the current amount, then you would expect the provision to go higher or at similar levels to what we've got now. So, it's just too many factors to predict what that provision will be in future quarters at this point.
spk54: Gotcha. Okay. And then maybe just on the expense outlook, you know, I think... George talked about the hiring, you know, potentially, you know, what could happen. I mean, the expense rate this year is a pretty lofty level, you know, given what's hired as far as the people you've added. I mean, does the expense growth rate, should that come down next year, you know, relative to this year, even with the additional hiring or just kind of high level? How should we think about, you know, the rate of expense growth as you get into 24, given, you know, what you just mentioned as far as opportunities to add some talent?
spk38: Yeah, certainly you saw our comments on the mid to high teens for this year, 2023 versus 2022 full year. This year we obviously have the new FDIC assessment that came into effect 1-1. We're likely to have a special assessment this year, so our guidance there does not contemplate any sort of special assessments. In addition, this year we've had elevated levels of advertising and marketing. We would expect those to continue throughout this year and likely throughout next year as well. The level of headcount depends on the opportunities. Obviously, we were at really diminished levels starting into last year. We've had great success on hiring great talent. I think our headcount's up 10% year over year. We've had obviously really strong levels of compensation increases to Georgia's point to retain our top talent. So I could see the level of increase, percentage of increase decreasing next year compared to our 2023 level. Too early to tell or give any sort of thoughts there. we wouldn't expect the mid to high teens percentage to be a run rate for an extended period of time unless we find just compelling opportunities to add additional headcount.
spk39: I would add to what Tim said and agree with all that, Brian, but I would add the comment that our growth rate next year is going to be a significant factor in that. Obviously, if we grow our balance sheet 15 or 20%, then we're gonna have to add headcount commensurate with that. And I'm not saying we'll grow it 15 or 20%, but if it grows 10%, you're gonna have one level of headcount. If it grows 15 or 20, you're gonna have another level of headcount additions. And we are likely to start scattering some new branches into our network of branches. You know, we're 240 retail banking offices today, and you've been a longtime follower of our company. And we've talked for years about the tremendous capacity we have in those branches for growth. And you guys have seen that play out, you know, right before your eyes over recent quarters. But we're also looking forward three, four, five years down the road at what our franchise and balance sheet looks like then and the size of that balance sheet and the funding needs of that balance sheet. And we're going to need to add some more branch infrastructure starting really now, starting later this year and into next year to uh, provide the additional, uh, customer connectivity that we're going to need to, uh, to be able to support our growth three to five years out. So you will see a handful of branches. I don't know where that's five or eight or 10 added in next year. Uh, but, but that will add a little bit to our, our operating costs. But again, that's going to be all set by growth and that's going to be, uh, a critical part of our longterm strategic plan to, uh, make sure that we've got the branch infrastructure and the customer connectivity and convenience factors to continue to support our balance sheet growth many years into the future.
spk54: Gotcha. I appreciate that. That's helpful. And maybe just one final one. Just do, I don't know whether it's Tim or Cindy or whom, would you have kind of where the spot rate was on the cost of deposits and the margin for the to the end of the quarter? Cindy, you want to take that?
spk04: I do. So June cost of interest-bearing deposits was 3.11% compared to the quarter of 3.92%.
spk54: I got you. Okay. And then on the margin?
spk39: We don't give that number. We've got that number internally, but that margin tends to bounce around months and months within the quarters. We don't. typically disclose those margin numbers. But Cindy gave you a good cost of interest bearing deposit number for June 9th.
spk54: Yeah. Okay. And then just maybe just trying to just on the margins kind of from a high level view, just trying to appreciate the comments about the NII and just kind of focus on that being worth that. Just try and understand maybe where the margin, you know, given the lag you talk about, George, on the deposit side, when that might trough if the Fed does you know, pause here after the next meeting. You know, the lag, is it a couple quarter lag? So, we should be thinking about the margin percentage dropping, you know, all else equal in the near term and, you know, the first quarter, kind of fourth or first quarter. Is that fair?
spk39: You know, there are a lot of variables in that. One is... I think given the fact that a lot of our deposits run out as far as 13 months, you're probably looking at several quarters there on the deposit side before if Fed stops and then starts cutting, it takes several quarters to work through those deposits. The other thing is how long are we at current rates before the Fed starts cutting? If the Fed raises one more time or two more times and then stays there throughout much of next year, we're going to have a really effective time at getting a lot of floor rates reset to near the top of the market levels, which will give us a lot of protection to our margin as rates fall. even as deposit rates lag coming down. On the other hand, if the Fed goes to a peak terminal number and then a month or two later starts cutting rates, that's going to be harder to get our floor set, reset. So we were very pleased to see the Fed take a pause and maybe extend the pace of this last cut or two out over a slower period of time because that's very beneficial in helping us get old loans with really low floor rates rolled off the books and new loans with floor rates at or near current origination rates on the books. That's really helpful. Our best scenario is Fed raises once or twice more and then stays there for a year, which is probably really good to help the Fed accomplish their actually getting inflation under control and not reigniting inflationary pressures. And that's a perfect scenario for us from a margin point of view.
spk54: Gotcha. And under that scenario, George, is that trough in early, you know, late fourth quarter, early first quarter kind of realistic given those dynamics that the Fed doesn't, you know, start cutting until second half or late next year?
spk39: Well, let me just leave you with the concepts and I'll let you figure out where the trough is. We've got a We run, gosh, between two and three dozen interest rate models in various scenarios every month. And where the trough is in rates just depends on which set of model assumptions you've got. So I'll kind of give you those color comment points and let you run your own models and see where you think the trough should be because I could give you an answer any quarter and it would match one of our models or more.
spk52: Perfect. I appreciate the color, George. Thank you. All right. Thank you.
spk60: Thank you, Brian. One moment for our next question. As a reminder, ladies and gentlemen, that's star 1-1 to ask your question. Again, that's star 1-1 to ask your question. And our next question comes from the line of Brody Preston with the UBS. Your line is now open.
spk46: Hey, good morning, everyone. How are you?
spk31: Good morning.
spk48: I wanted to maybe just circle back to, I've got some credit question, but I just wanted to, I just wanted to maybe focus on, on capital for, for a minute. So, you know, you obviously bought back a decent amount of stock. this quarter. But the difference between, I think, 33 and 43 is quite a bit on the stock price. So I guess, and your CET1 ratio is now, I think it's 10.8 and it was 13.3 last quarter. And so I guess, is it kind of safe to assume if we hung out at these levels on buyback that we shouldn't be baking in much more buyback into our estimates just given the growth outlook remains pretty solid. And so you're going to want to preserve that capital for balance sheet growth.
spk25: Hey, Brody, it's Tim.
spk38: Yes, we gave you not only the average price that we paid in the quarter just ended, we also gave you the average price for the six months. Obviously, there were compelling value opportunities there at those prices. we still have some authorization remaining. So at these levels, though, I think we're going to focus on organic growth and preserving our capital for that. But if we do see additional compelling values in our stock price, we won't hesitate to repurchase some more shares at those values.
spk48: Got it. And then I did want to ask just And this is a little bit tangential to what you talked about with with discount rates, George. But I guess just just given that the discount rates have moved up and these appraisals have been have been changing as a result, is there any is there any relationship between the discount rates and the reserves? Just just given the change in the LTV, like if the if discount rates were to fall next year, you know, I guess the the values you know, get better on these projects and therefore the LTVs fall and therefore maybe you don't need to carry as much reserves against them, or does that not play a role?
spk39: There's a degree of correlation between where interest rates are and where discount rates are, but it's not a perfect correlation. So what I would tell you is if Your thesis is correct, though. If that correlation maintains at a very positive level and interest rates fall and hence discount rates fall, then that should translate through into better appraised values and lower loan-to-values. But again, that's not a perfect correlation. And the second question you asked, does that have an impact on reserves? Yes. The loan-to-value is one of many factors that compute into our risk rating models for loans. So higher loan-to-values result in a higher risk rating. Lower loan-to-values, all other things being equal, result in a lower risk rating for loans. And those risk ratings are correlated to an expected loss and a probability of default calculation on every loan. And obviously, that has an effect on both those factors.
spk48: Got it. Thank you for that. And I did want to just circle back to the credit discussion. You know, I feel like I get an education from you guys every time I get on these calls and we talk about res G credits. But George, you said something as it relates to the values on these land loans and just given just given how sensitive they are to discount rates and duration within that kind of NPV analysis on the value. So I guess, are you saying that With the land loan that went from a 40% LTV to a 95% LTV, that one in Chicago, was there no change in the actual end value of the project? It was just the NPV inputs changed to the present value of the project? Am I understanding that correct?
spk39: Brody, I was using my example as a hypothetical. I'm not sure in that particular loan, Brandon may know that if the terminal value changed or not, but I do know that not surprisingly, and this is probably going to be true of any land loan that is a longer term hold sort of land loan where development is not imminent in the next 12 to 18 months, your holding period is probably going to extend and your discount rate is going up. Now, Brandon, I don't know. Brandon might not even know if the terminal value on that.
spk16: I don't, George. Yeah, no, I don't have it off the top of my mind. But your point that longer periods and higher rates tend to have more impact than changes on that terminal value ultimately in the valuation in our LTV.
spk48: TAB, Mark McIntyre, Okay, and so I guess would that be the explanation between and I guess I was particularly interested in the land on that table just because you look at the top of that table and the bottom of that table you got about. TAB, Mark McIntyre, Two land loans about the same size, except the one went, you know the from 40 to 95 and the other one actually went down from 46 to 25 or whatever, and so it was just a bit of a stark contrast and to me. just from a layman's point of view, I said, well, maybe like the first one got delayed or the project's been shelved, but the bottom one is going forward and is really strong. I guess like what drives that kind of dichotomy between those two loans?
spk39: You're exactly right in that. Go ahead, Brandon.
spk16: Well, yeah, Brody, it's a great question. And But these tracts of land are located in various markets across the country, and there are very different dynamics that are in play in different markets. So in this case, if I'm not mistaken, you're probably looking at the bottom of the chart. I believe that's – attract in southern Florida. So dynamics and expectations are a little bit different there than they are perhaps in Chicago and certainly in other markets like San Francisco. So look, it's hard to look at a chart like this and draw correlations. There are so many different factors at play in every single tract of land that you're valuing.
spk39: Just to take what Brandon said and apply it to your concept, if Brandon's right, that lower piece of land, if it is in fact in Florida, the pace and magnitude of development in Florida is speeding up, in most cases not slowing down. It would, to your point, a piece of land that's going to develop in three years now is going to go vertical in 18 months. That's going to improve the holding period discount on that tract of land.
spk47: Got it. Okay.
spk39: And I guess... Brandon's color is right.
spk48: Got it. Okay. No, that's helpful and makes sense. And I guess... If I could stay just on the land topic, is it, you know, because when I look at the LTV changes and the other properties, right, I mean, like, some up, some down, they look fine. And, like, if I'm a developer, right, you know, it's much easier for me to say to you guys, okay, like, yeah, like, I'll definitely bring more equity to the table when I've already got, like, shovels in the ground and, you know, we've got, five floors of a 10-floor building kind of built but like the land loans seem like they might you know just i guess naturally be more at risk of of ltv um changes uh just just because no developments actually happened yet is is that a fair way to think about it yes exactly as we said they're the most variable uh
spk39: pieces of our portfolio when it comes to variations in appraised value.
spk48: Got it. So when you do these reappraisals on the land, and just whether or not the value is going up or down, I guess, do you guys have a sense for what the relative success rate is that you've had over time in terms of you know, you're working with strong sponsors, you know, they probably got multiple projects with you. Maybe one of them is land at this point, maybe one of them is an office building at another point. You have a sense for kind of the success rate of kind of getting sponsors to commit to commit more equity to a project, regardless of what phase it's in, you know, just just given the strength of the sponsor. So like they got a land loan with you, they're still willing to commit to more equity because they're a strong partner of yours. Or do they look at it differently? Like, from an economic perspective, you know, maybe we need to commit less to this land project because we don't know how this is going to work out over the next few years. Like, I'm just trying to understand the psychology of these developers.
spk39: Well, first I would tell you, as Brandon mentioned, you know, we had four or five loans or more last quarter that we had reappraisals on where the sponsors either contributed additional equity or curtailed loan amounts that kept the appraisals in line or closer to our original appraised values. So we have a good track record of sponsors supporting their loans. And the reason for that is, one, we choose our sponsors well, or we try to choose them well. and have capable sponsors. And two, we get so much equity in these. The weighted average REST portfolio, I think at 630 was 53% of cost and 43% of appraisal. So at 53% loaned cost, you've got a lot of equity in there. that they've got to protect and defend. So we have a fair amount of leverage to encourage the sponsors to continue to support their asset. The other comment I would make on that is I think our weighted average REST portfolio at March 31 was 43% and was 43% at June 30. percentage of the portfolio changed. So we, you know, it was unchanged on a lumped value basis. So we had some appraisals that were higher and some lower. We had loans pay off, 22 of them. We had a bunch of new loans originated. And the net effect of all that on a weighted average basis was an unchanged loan-to-value ratio. And, you know, I think that speaks to the... high quality of the portfolio and the high quality, low leverage of the business were originated.
spk48: Got it. And this is my last one, George, just on this is, you know, we're combing through proxies, you know, earlier this week. And, you know, one of the things I thought was interesting is that OZK is one of just two companies that I cover. that includes a hard target NCO rate within their performance-based comp every year. Interestingly, the other company also does differentiated forms of lending. And so I guess, to me, it says that you're telling your shareholders, hey, we do differentiated lending. We're really good at it. But we're aligning ourselves with you in terms of trusting us on credit to actually get paid the way that we want to get paid. Is that kind of what you're trying to do? And then, you know, two, you know, why do you view that as important as you do? And then three, why do you think other banks don't necessarily target NCO rates within their comp when they're being trusted by their investors to underwrite loans as well?
spk39: Well, we would never be presumptuous enough to try to explain why other banks do or don't do it, but I'm going to let Tim answer your other two questions.
spk38: Hey, Brody, yeah. So in our annual short-term incentive plan that all of our senior executives are a part of, three of the components are financial-related. We've got EPS, efficiency ratio, and NIM. The other two, as you pointed out, one is net charge-offs, the other is non-performing assets. We've had a long-standing track record of having those as components of our short-term incentive. Our long-term incentive is a relative comparison to ROA, ROE, and total shareholder returns. So we certainly feel like our incentive plans, both short and long-term are consistent and aligned with our shareholders. But asset quality, we've had a long track record of beating industry averages on asset quality, and we incentivize our team to maintain those industry-leading levels. And that's been that way for a very long time.
spk18: I guess maybe if I could sneak one more in.
spk39: Brody, I'll add one more piece of color to that. I talk with lenders and lending team recruits almost every day and probably every day for 40 years. The guys have heard it. Asset quality is of paramount primary importance, goal number one. Profitability margins are goal number two. and growth is purely a tertiary concern. So we live that. It is part of our culture, asset quality number one, profit margin number two, and growth is a tertiary concern. So you saw a couple of years ago, our balance sheet grew very little year to year because competitors were out there being very aggressive on structure and leverage and very aggressive on pricing. And, you know, growth's not a primary concern, so if we don't grow for a year or two and just stack up capital, that's okay. We're doing the right thing for the long run. We're sticking to the fundamentals. Now, when you've got a situation where valuations on assets are a bit beat up, and competition is out of the market, we can get lower leverage on asset values that are already kind of adjusted to a more severe market and get paid better for doing that. We get a much, much better risk-adjusted return, so we may grow a lot in an environment where we're getting high-quality assets at good margin at values that are already stress-tested. compared to going out and trying to get a bunch of growth when everybody's growing and everybody's aggressive to grow. So we tend to be a little counter cyclical. And I think it's why we've been, you know, continuously profitable for 45 years. I mean, we pay attention to the fundamentals.
spk48: Got it. And if I could maybe just sneak one last one in, I know we're running long. I just, I did want to just ask, you know, Just given, you know, the focus on asset quality, you know, given that you're paid on charge off, when I think about the differentiated nature of what you do, like, I guess maybe could you give us some insight, you know, and I think you told me this at some point before, but just what's different about the way that you work out loans? Like, when you identify a RESG loan that you think, you know, maybe needs a little bit of help? you know, I guess early identification is obviously pretty paramount, right? And strength of sponsor really matters. But is there something else that you're doing within the workout process that, you know, uniquely kind of positions you to take less losses on what, you know, some might perceive to be, you know, a riskier kind of asset?
spk39: Well, I would tell you that a great part of our success is the structure of the documentation, the underwriting, and the asset management that goes into those. So the structures you set up on the front end, your documentation, and the effectiveness and effectualness of those structures is critically important. So if you can identify where future weak points in a transaction may be long before those weak points, long before you've even closed the transaction, and structure around those weak points, that's critically important. And then getting all that documented in your documents and closed, and then the asset management team that Brandon and Clifton Hill and Juan Gonzalez, the other guys at RESG has built. You know, it's just exceptional in their knowledge and monitoring of credits. They are, you know, we've got basically about one loan or about 14 loans assigned to every asset manager. Most of these asset managers are MBAs with a real estate focused MBA program. You know, it's a highly talented, educated team. And they've got really good tools and really good team leaders and really good group leaders over those teams. And they are monitoring these assets on a daily basis. They see every in and out, every lease, every sales contract, every third-party report. They're monitoring these things at a level that lets us know that issues are developing sometimes before the sponsors really get focused on issues. And being able to get ahead of things and fix them before they get big is very important in preserving and maintaining the asset quality of that portfolio. We just have an incredible team, and it goes all the way from the – the originators and the underwriters and the managers over originations all the way through the credit and closing process and then all the way through the asset management process to pay off. We've had, as our slide deck in 20 years, we've had losses on I think six or seven RESG loans. we'll have a few losses here and there on that portfolio. But the job that our team does there is just very helpful, critically important in maintaining the quality of that portfolio.
spk44: Got it. Thank you very much for taking my questions, everyone. I really appreciate all the detail, George. Very thoughtful.
spk60: Thank you, Brody. And I'm currently showing no further questions at this time. I'd like to hand the conference to Mr. George Gleason for closing remarks.
spk39: Thank you guys for joining our call today. We're very proud of our quarterly results, feel really good about it, and very excited about talking to you again in 90 days. So thank you. Have a great day. That concludes our call.
spk60: This concludes the conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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