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spk06: Good day, and thank you for standing by, and welcome to the Bank of OZK third quarter 2023 earnings conference call. At this time, our 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 the 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 withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would like to introduce your host for today's call, Jay Staley, Director of Investor Relations and Corporate Development. You may begin.
spk10: 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 line for your questions. Let me now ask our operator, Justin, to remind our listeners how to queue in for questions.
spk06: As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster, and one moment for our first question. And our first question comes from Steven Skouten from Piper Sandler Companies. Your line is now open.
spk09: Hey, good morning, everyone.
spk11: Great quarter here. I'm curious. It looks like in the management comments that you're guiding a pretty strong origination growth in the fourth quarter, and I'm wondering if you could give some comments there. I would assume that's occurring as some of your competitors maybe pull back from the space, and obviously that's been a time when you guys have done really well. So I'm just curious kind of if that's what's happening today and kind of where you're seeing the pickup in originations category-wise.
spk09: Brandon, you want to take that one? Be happy to, Steven. Great to talk to you. Thanks for the question. That is in part some of the explanation. It's been an interesting year as we've seen generally a slowdown in the number of projects that we've seen. Now, that would differ from region to region, as we've said a number of times. through the year, the southeast region has remained strong, certainly relative to other regions and even certain periods of time in the southeast. So we continue to see very good activity in that region and over into Texas and the southwest. But yes, despite the slowdown in the number of deals that are out there, there's also been a a pullback from some of our, um, competitors out there. And, um, you know, we have, as time gone on, uh, continued to, uh, press down on leverage, uh, try to expand on spread. So, uh, and, and all the times they very true to our, our disciplined approach to origination, but with, in many cases, fewer competitors out there were able to still, you know, close a number of deals, great deals with improved leverage and pricing metrics. So, you know, and in terms of the what continued theme would be multifamily and industrial. We're closing other types of loans. I think, you know, I've mentioned a couple of times over the last few quarters that our Our Atlanta office that covers the Miami market is seeing a lot of opportunity in condos in the Miami markets. So we'll see some opportunity there. But multifamily and industrial has been, for the most part, the big movers. We've had some good mixed use in there as well. But those are where we're seeing a lot of opportunity.
spk11: Great. And Brandon, appreciate that. You spoke to spread there. What are you, I know, and I know every credit is obviously different, but, you know, what are you seeing on new loan spreads kind of relative to the incremental funding costs? And I guess you would feel based on that growth that you're getting paid well and compensated well on this new loan production.
spk09: Absolutely. You know, we've talked about how our spreads differ from, pretty materially depending on, you know, the product type. But I would say that we're, you know, ranging from sort of middish threes to up into the fours, depending on the product type and where it is.
spk11: Okay. And then just last thing for me, you know, obviously the RESG loans are staying on the books for longer. I'd assume this has been driving some of the, what I see as conservatism around the loan loss reserve, but But how do you guys kind of speak to that pushback maybe from some market participants and say, like, oh, these loans staying around longer is a bad thing, not a good thing, even though you're earning more money?
spk09: Well, and George can weigh in on this one as well. I think I would first point out that we've had more payoffs than we have had originations this year or so. You know, as you can see from the numbers we reported, it's not, you know, a significant increase, but they have been up every quarter, quarter over quarter, and evidence of other capital out there in the market. You know, they're paying off with refis. They're paying off with sellouts or sales of, you know, income properties from developer to new owner and even have some situations that the borrower come into a lot of cash and just pay us off in that method. But as you noted, we don't mind having the earning balances on our book and are getting paid well for those loans. So look, with rates doing what they've done, we've known we were going to have a slower repayment. um uh volume but it it has been uh a repayment volume continues to be there's still people in the market with capital um uh so we're we're not surprised and i would say on the whole uh pleased to see the payoffs continue to come in and the numbers that they do let me clarify just uh uh
spk12: for our listeners who don't price loans all the time. Brandon said that our spreads typically in the RUSG portfolio, I think he said we're ranging in kind of the mid 300s up into the 400s. And that references to a spread over SOFR, 30-day term SOFR is what we use as the predominant index. So that's a spread over SOFR. I wanted to clarify that. We just talk about it as spread all the time, but there are a lot of different indexes, and we're referencing spread over 30-day terms so far. A point that Brandon made is that our leverage points are coming down probably over the last two years. Our loan-to-value, loan-to-cost ratios quarter to quarter to quarter have had a generally downtrend, not every quarter, but we're probably down five to somewhere between five and 10 percentage points on leverage now versus what was originated two years ago. So that's very favorable for credit quality. And I would just echo what Brandon said. We're thrilled to death to have loans stay on the books longer. And a lot of times, sponsors are quick to exit our loan to go to a cheaper permanent loan solution sponsors are being very reticent about trying to figure out where their best exit is refinance wise so that's keeping the loans on our books and our higher yield construction loans longer our leverage points are low so we're we're very happy to have those loans on the books for an extended
spk06: period of time yep makes sense to me uh appreciate the color and congrats on all the success again thank you and thank you and one moment for our next question and our next question comes from anon goselia from morgan stanley your line is now open
spk02: Hey, good morning. So maybe just as a follow-up to that question, as we think about growth in funded balances over the next few quarters, I think this quarter you had about a $1.4 billion increase. Is that a good run rate to consider as we go through 2024?
spk12: You know, I don't know that we're willing to lock in on that guidance Manon we expect good growth over the next year but we're not giving specific guidance on that for the year yet or for the quarter we'll probably in our January call give some specific growth guidance on total loan expected growth in 2024. We expect it to be a nice growth here, but I'm not ready to lock in on a number yet.
spk02: All right, fair enough. And then just on credit, you know, it feels like a good quarter on credit. You know, as we compare the properties that were reappraised this quarter versus last quarter, you had much less LTV migration into some of the higher LTVs. Was there something fundamentally different about the properties reappraised this quarter versus last?
spk12: No, it's just the normal cycle of what was due for maturity, extension, renewal, reappraisal, and there was nothing unique about that. You know, Brandon and his team at RESG continue to do an excellent job of – getting paydowns on a lot of these loans where we would have had an upward migration in the loan-to-value based on a reappraisal as part of an extension process. We continue to get quite a few paydowns from sponsors on those that bring the loan-to-values back at or closer to the loan-to-value at the time of underwriting. That just reflects strength of the sponsors and the quality of the assets.
spk02: Got it. And anything different you're seeing on the credit side? Some of your peers have been increasing their NPLs on commercial real estate and also their criticized assets. I know your business is different, but I was just wondering if you're seeing anything different in the areas where you're operating.
spk12: No, I'm not, and I'll let Brandon address that. But, you know, the reality is that the quality of our sponsorship, the quality of our new construction projects combined with the low leverage loan-to-value, loan-to-cost metrics on these projects has – you know, contributed to the excellent performance of our portfolio so far during this cycle. We continue to think that those are fundamental ingredients, great sponsorship, great state-of-the-art new assets, low loan-to-value, low loan-to-cost that will continue to help our portfolio perform very well on a relative basis to the industry going forward. Great. Thank you.
spk06: And thank you. And one moment for our next question. And our next question comes from Tamir Braziller from Wells Fargo Securities. Your line is now open. Hi, good morning.
spk13: I have a three-part question following up on Steven's question just on loan staying on longer within the RESG. I guess, can you, A, put a number around just how much longer these loans are sticking on balance sheet versus a quote-unquote normal time? B, is there a contractual limit for how long these loans can stay in construction status? And then C, how much of a cliff or a headwind to growth should we expect as the refi market re-engages and paydowns normalize, whether that's in 25 or 26, whatever that might be?
spk12: You know, the length of duration that a loan will stay in construction status because they're waiting for a better exit or trying to time the markets for an exit, it's hard to predict. It varies quite a lot from loan to loan. And Brandon shared some statistics with me earlier, which I'm going to... I can't recall them, but on exactly where loans have paid off recently and how many of them have refied, how many of them have sold and so forth, sold the properties and so forth. I'll let him share that and that may answer that part of your question or give you a little color on it. It won't answer it, but it will kind of explain that situation. And you're accurate in that payoffs that extend today, the things that would have been a normal cycle, don't get paid off this quarter because the sponsor is going to wait to what they hope will be a better exit execution to a permanent loan a quarter or a year from now or 18 months from now. a market sentiment develops that's broad-based that it's time to exit, yes, we will have a lot of payoffs at that point in time. And our RESG teams, our asset-based lending teams, our equipment and structured finance teams, our commercial banking teams are all keenly aware that we've got to build our business and diversify our business and be in a position to originate volumes that will replace those assets when we get that wave of payoffs. So we're building our infrastructure and that goes back to one of the comments I made in our last conference call that we're working really hard to add quality team members from banks that are cutting back on origination staff and other sorts of staff. We're building the quality of our team and we've got some really good things that we're very positive about in the works on that that I think will help us continue to grow our balance sheet and grow our loan balances even when we get some pretty chunky waves of payoffs in the future. So we're looking a year, two years, three years into the future on what those volumes are and planning accordingly. We always do what into the future and plan, and that's why our portfolio and our performance metrics right now are doing so well. Two years ago, you know, we were, and three years ago and four years ago, we were planning for an environment where rates escalated and economic conditions changed. We're doing that with our variable rate loans, with our floors and our loans, with our low loan-to-value type structuring on credit. And all that is paying off now. And as we're going through this part of the cycle, we're looking forward in a one, two, three, four years to future iterations and changes in the balance sheet and preparing now to continue to have a nice, steady trajectory in those periods of time.
spk13: Great.
spk09: Give me a fill in those stats. That's for you, George. I sort of alluded to it earlier before, but we've had year-to-date 53 loan repayments, if I got my count right. Of that 53, we've had, I believe, 32 that were paid off with a third-party refinance. We had one that we actually had a land loan out, and the borrower was ready to move forward with a vertical repayment. uh, construction loans. So we, we, uh, essentially paid off our landlord and moved into a new construction loan there. And then we had 15 that sold, um, that were either, you know, condo sellout. So they, they sell out as the condos, uh, contracts were closed over time, but, but, uh, we had a number of those that completed their, their loan repayment. And then a a few industrial properties that sold complete building sale. And then, as I said, we had just a pure cash repayment by a sponsor that had a lot of cash on hand. And then we had four projects that the sponsor decided not to move forward on the vertical construction and so paid off the moderate balance that would have been outstanding, nominal balance that would have been outstanding at closing. And I would just say in terms of how long they're staying on, look, you look back over time, there have been times where our average age has been longer than it is today, and there have been times when it's been a bit shorter. But it all makes complete sense in terms of the environment that we're in, as George alluded to. you know, when you're locking one down for a while, you sure want to try to get it lower than the rates are today, and so it's playing out really as we expected it to, and we're very happy, as we said, to be making the return while they're on our balance sheet.
spk13: Great. Thanks for the call, and then just one follow-up on the credit side. You mentioned just now land loans and conversations around going vertical. Maybe just provide some commentary as to what you're seeing in the land portfolio and some of the updated conversations you're having with sponsors about their decision to go vertical.
spk09: There's a mix there. We gave you some pretty good color, I think, on the land portfolio and the appraisal stats that we included in our comments. We had, I think, four different land appraisals that were completed that showed stable to declining LTVs at the end of the day. as we've noted in the past, a significant portion of our land portfolio is, as you said, initial shorter-term land loan with the thought that the sponsor, once they have plans drawn up and costs sort of circled, would move forward. And we are, as I said, seeing some of those move forward. But I also mentioned we had four that did not move forward. So we're still in a period where, just like with refinances, moving forward with a construction loan in today's rate environment and some of the economic uncertainty certainly makes one think two, three, four times for moving forward. And we're seeing some of those decisions say, you know what, we're going to wait. The deal's just not got enough room in it for us to want to move forward. And at the same time, we're seeing a number that are going to move forward. And that's whether that's, you know, land loan situations that we have that move vertical or, you know, are outside our portfolio. I think there's some, you can deduct some information from our thoughts about originations in Q4. So again, it depends on the market. It all comes down to the return that one can make versus the cost that it takes to develop. And there's more room in certain markets and product types than there are in others. So it's a mixed bag there.
spk07: Great. Thanks for taking my questions.
spk06: And thank you. And one moment for our next question. And our next question comes from Catherine Miller from KBW. Your line is now open.
spk08: Thanks. Good morning.
spk06: Good morning.
spk01: I just wanted to switch over to the funding side of the conversation. Just ask about how you're thinking about funding growth, you know, as we look through 24 years. You have really nice CD growth. Of course, that's coming in at a higher cost. How do you think about kind of the, if let's say Fed Funds stay stable from where we are today, where do you think ultimately the blended kind of cost of funding peaks for you as you continue to reprice, you know, at a 5, 5.5% pace as you grow CDs?
spk12: Well, Catherine, You know, what I would tell you is our guys are doing a great job on the deposit front and we're growing deposits nicely as almost all banks are experiencing or the vast majority, you know, these higher rates available on CDs or other alternative investments for customers are sucking money out of, you know, non-interest bearing and lower interest bearing time and savings or non-time and savings and money market accounts. So that trend is an industry trend. We're experiencing that. You know, we are, as you mentioned, having great success growing CD deposits. We expect that that will continue and that will put some upward pressure on our deposit cost as we've talked about since the April call last year. As the Fed has raised rates, deposit cost will go up and because CDs have staggered maturities, the impacts of last quarter's Fed increases or if their Fed increases this quarter, those will be felt three or four down the road when CD is issued and then that time frame roll over and get repriced in connection with that last quarter increase or whatever. So there's an upward trajectory there. We know it. That's why we've said that we will give back some of this very nice expansion that has over four or five of the last six quarters, and our net interest margin and core spreads expanded broadly as loans repriced faster than deposits last quarter. And we gave some of that back, as we said would happen. We expect that would continue to happen. So I don't know exactly what the Fed's going to do. I don't think the Fed knows exactly what they're going to do. and it's hard to know exactly where that goes, but the trend is up for deposit pricing because we're rolling over CDs now that were priced two, three, four quarters ago, and their market rates are higher now than they were then. So I think our guys are doing a great job funding our balance sheet and doing it in what is a very cost-effective way, particularly considering how much we are growing our balance sheet. So we feel super good about that. And Cindy, Adi Curley, Drew Harper, the other guys on the deposit team, the guys in the retail branches, you know, 1,200, 1,500 people in those retail branches, they are doing wonderful work. work for us and we're real pleased with it.
spk01: You've been one of the few banks that's been able to continue to grow NII, you know, since your NIM has really held in better and then also you've grown so much. But I assume that we've talked to this in past calls that will reflect potentially this year just as the NIM falls just from, you know, deposit costs catching up. Still better than the industry, but, you know, the inflection should be in the next few quarters. But Could you argue that with the better origination volume you're seeing and the better growth that we could still see another few quarters of actual dollar NII growth?
spk12: You know, it remains to be seen. We said in the last quarter's conference call, I think Tim talked about this and I did, that it was going to be a quarter in the third quarter where We were going to give back some of our net interest margin, and we were going to have to offset that with growth and average earning assets, and that it was a horse race, and I think it was the way I characterized it as whether or not we would be able to achieve positive growth in that net interest income. I think we were up about $10 million. in net interest income this quarter over the second quarter of this year. The growth horse outran the net interest margin shrinking horse and we put up record net interest income. It's going to be a toss-up probably quarter to quarter to quarter in the coming quarters to see which horse wins that race and if we can continue to improve it if it goes up a little bit or if it goes down a little bit or stays the same. I don't know. I can't handicap that right now, but it's not clear, but we're working really hard to do the best we can do to maintain as much margin as possible, book as much growth as we can book that meets our quality standards and pricing standards, and keep the hopefully keep the same horse winning in future quarters. But I can't predict that outcome right now.
spk01: If you don't mind, one clarifying question on the credit comment earlier. On criticized and watch list loans, you did not see any change to that this quarter. Is that correct?
spk12: Sam, do you have that? Yeah.
spk11: I don't have those specific numbers, Catherine, but no significant increase that we haven't already talked about. Obviously, in our management comments, we talked about the one loan at RESG, the hotel loan that did have a small charge off of $3.7 million. That loan did go from performing to non-performing. But that was already a substandard loan. It was just substandard accrual going to substandard non-accrual. So, no other significant movement into risk rating classifications.
spk01: Okay, great. Thanks for the clarification.
spk07: And thank you. And one moment for our next question.
spk06: And our next question comes from Matt Olney from Steven. Your line is now open.
spk05: Hey, thanks. Good morning. I want to ask more about loan floors within the RESG portfolio. I think on the past calls, you've talked about the mix of RESG loans is important dynamic because the new originations have more significant level of loan floors than the older vintages. Any updated thoughts or color you can provide with respect to and loan floors?
spk12: Well, every quarter when we have older loans pay off, and we've talked about that volume, those floors typically are much lower than the floors on newly originated loans. So our favored, desired scenario is that the Fed is at or within a quarter of the end of their tightening cycle and that they stay at these rates for two years or longer. Because if the Fed does that, then we get a chance to recycle the vast majority of RESG loans from lower floors to higher floors, which will be very helpful to us in a down rate environment. Every time we hear the market beginning to embrace the concept that the Fed's mantra of hire for longer is likely to be reality, it brings a smile to my face because that's our best scenario for profitability.
spk05: Okay. Appreciate the commentary. And I guess switching over to the capitals. I guess with the growth this year, you've been able to deploy some of the excess capital. I think you estimated that CET1 ratio is around 10.7%. We'd love to get some updated thoughts around capital thresholds and what's the lower band you'd be comfortable operating in in the current environment. And I guess specifically, would you be comfortable allowing that CET1 ratio to drop below 10%? Sam?
spk11: Yeah, the capitals are. Matt, thanks for the question. Yeah, I mean, as you noticed during the quarter, we had significant loan growth, a ROA in excess of 2%, and that allowed us to capitalize the vast majority of that growth. We did have a small decline in CET1 ratio, but still feel like we have very strong levels of capital. We've seen a significant increase in unfunded over the past year, significant increase in funded that has used some of our capital through organic loan growth. I don't see the pace of decline being the same pace that we've had over the past year. and would anticipate that our growth in earnings would help capitalize whatever growth we have on the balance sheet. So you've not seen us go below 10% in CDT1. And so if we have a quarter or two of further declines and work our way back up over time, that would be generally my thought at this point.
spk05: And then, Tim, I guess the second part of that would be around the stock buyback. Obviously, no activity in the third quarter, but I think we're now with these valuations where you were more active in the first part of the year. So any updated thoughts around the buyback from here? Thanks.
spk11: Yeah, I mean, you saw in our comments, we're focused on loan growth and will continue to be focused on our organic growth. We continue to deliver for the last four quarters. We've had a return on tangible common equity of over 17%. Our tangible book value per share has increased year over year at 14.5%. So, you know, if you go back to 2021, 2022, 2023, I think we've done a really good job of managing our capital in 2021 We took advantage of the low rates and issued a lot of really low-rate capital at that point. Over the coming years, when we had slower growth, we used that capital to buy back our stock. I think we ended up buying back nearly 13% of our shares outstanding when we started the program. And then now this year, we've had a lot of great organic loan growth, and so we've pulled back on the share repurchases. So I think we've managed the capital levels, the share repurchase, just how we wanted to. And we've got good prospects for meaningful growth going forward and want to be focused on that as opposed to focus on share repurchases. However, we do expect to sometime in 2024 still have another authorization when values of our stock are very compelling. we would continue to be active at the right price.
spk05: Yeah. Okay. Thanks for taking my questions, guys.
spk06: And thank you. And one moment for our next question. And our next question comes from Brian Martin from Janie Montgomery Scott LLC. Your line is now open. Hey, good morning. Morning.
spk04: Say just one back to the margin. I think you guys, George, you talked about the dollars of NII and kind of the outlook there. Just as far as the commentary in the past about once the Fed does stop, that the margin in past cycles has kind of taken a quarter or two to kind of reach that inflection point of that trough. Is that still how you're kind of thinking things play out here based on kind of the pricing you're seeing on the new originations that, you know, maybe the margin bottoms here over the next couple quarters and then can stabilize thereafter? Is that still the right way to think about it?
spk12: Brian, what I would tell you in that regard, if we get just to a flat Fed environment, say in 24 and there's no Fed moves either way, our CD issuance is laddered throughout, you know, every quarter when we issue new CDs, it's a very laddered book. But there's a small chunk in the seven-month timeframe and a really big chunk in the 13-month timeframe. So the 13-month CDs will basically mean that when the Fed is done, and market rates have stabilized, you'll still see that final tail of our deposit book repricing 13 months after the last Fed move. So it's really probably a four-quarter phenomenon to get to. If the Fed is stopped, it's probably four quarters of rising deposit costs to get to a point where deposit costs have stabilized and full fracture in there.
spk04: Gotcha. Okay. That makes sense. And then as far as where we exited on the cost of interest-bearing deposits for the month of September, would you have that?
spk12: I don't have it, but I have someone here that probably has it. Cindy, do you have that?
spk08: Yes, I do. So September was 3.67 compared to 3.48 for the quarter.
spk04: Okay, perfect. Thanks, Cindy. And then maybe just one or two others. Just on the expenses in the quarter, I think you saw a decline and talked about kind of the guide for the full year, but just thinking about the decline in the quarter and just how you're thinking about the investments you're making and kind of outlining in the management comments. I mean, the rate of expense growth as we look into next year, is it Should we expect to see some moderation in that expense growth given the investments you've made this year, albeit that you still expect kind of continued growth going forward in the investments?
spk12: Sam?
spk11: Yeah, Brian. Yeah, if you look through the expense lines, you would see some pretty significant increases in salary and benefits. You'd see significant increases in the FDIC insurance given the the rate increase on 1.1 that impacted the entire industry, and then of course our growth in deposits, and then our advertising has certainly been elevated. So those have generated a bigger growth rate this year over a year compared to what I would expect next year, if we're thinking year over year. On expenses, what we focus on is how do we grow our bank, how do we invest in growing our bank, invest in our people. We are super focused on expenses, but we're more focused on ways to grow our bank. We try to do that in the most efficient way possible. We've got good prospects for growth. George has talked about good prospects for adding new new teams throughout the coming quarters. So that's really our focus. But on the rate of increase year over year, I don't expect 24 to be at the same rate of increase that we had in 23. Gotcha.
spk04: Okay.
spk12: And I would comment that the fact that third quarter non-interest expense was a few hundred thousand dollars below second quarter That's a counter-trend anomaly. I would expect, and Tim, you can comment on this, I would expect non-interest expense to generally go up every quarter going forward.
spk11: Yes, I would agree with that being an anomaly. Gotcha.
spk04: Okay, I don't know if I saw that. And then how about just on the RESG front, kind of you talked about the payoffs, you know, still being somewhat muted here. I mean, is it likely that we see, you know, I guess some pickup next year? I mean, you're talking about how long the loans on the books in the payoff cycle and should we expect the, you know, some of the payoffs that don't occur this year to spill into next year? Is that, you know, the right way to be thinking about this?
spk12: Certainly, it's correct to think that some of the payoffs that might in a more typical interest rate dynamic would have paid off this year will pay off next year or the year after. I would expect somewhat of an increase in the payoff volume next year. That's going to depend on market conditions, interest rate conditions, and so forth. But I would expect to see somewhat of an improving trend. And we'll try to An improving trend, I guess, is I probably shouldn't use improving because if you want payoffs, it's an improvement. If you're enjoying the tremendous earnings we're generating off of them, it's not an improvement. Every time we have a payoff in this environment, we have very mixed emotions about it. It's nice to see that guys are still able to migrate to the secondary market or sell out projects when they want to migrate to the secondary market or sell them out, we also hate losing that spread income. So it's, you know, there's pluses and minuses both ways.
spk04: Gotcha. And then maybe just the last one on RSC. With the fundings, you know, fundings have steadily picked up each quarter this year given, you know, I guess the strong originations in 22, I guess. Is that I guess as a current, I guess, year-to-date type of level, kind of a sustainable level, given that record originations in 22 and what's going to continue to fund up here. And, you know, I think as we look into 24, you know, maybe not at the pace we're at in the third quarter, but kind of on a year-to-date blended basis.
spk12: Yeah, obviously the record origination volume that was exceptional performance by our RESG team in 2022 is, is leading to significant fundings in 2023 and that fund up of that big chunk of the portfolio will continue in 2024. I would cite you to the cadence, kind of the payoff funding cadence chart that we've included our management comments for years now. you know, gives you a visual picture of what's funded out of that $22, and that gives you an indication of what is still to fund out of that $22. And, you know, as we've said a lot of times, these loans tend to fund in the one, mostly in the one to two years after originations and pay off in three and four years after originations. Gotcha.
spk04: Okay. Thanks for taking the questions and a nice quarter.
spk12: Thank you very much.
spk06: And thank you. And if you would like to ask a question that is star 1-1, again, if you would like to ask a question that is star 1-1, one moment for our next question. And our next question comes from Brody Preston from UBS. Your line is now open.
spk03: Hey, good morning, everyone.
spk06: Morning.
spk03: I wanted to start maybe just a question for Cindy just on the – just in the deposit costs, have you guys had to increase your new offering rates at all during the quarter? And if so, could you kind of give us an indication as to how much?
spk08: Sure. We increased slightly during the quarter. Our 13-month went from $5.50 to $5.60. that was as a result of a little bit of movement in the competitive space.
spk12: And, Brody, that is APY that you report to the customer, so the actual rates probably more like went from like 530-something to 540-something, high 530s to high 540s on the actual rate.
spk03: Got it. Okay. Cool. Thanks for that. And then maybe one for Tim. Justin Fields- I just wanted to better understand the loan yields the beta slow quite a bit on a quarterly basis this quarter, and so I wanted to ask what what drove that was it kind of new production coming in at lower yields or any other stuff have recaps.
spk11: No rate caps. Some of the RESG loans have rate caps as a part of their structure where a third party is the counterparty. We are not the counterparty, so we benefit in all of the rate increases, so nothing capped on our yields there. Brody, I'd have to go back and look at what SOFR did in Q2 compared to what SOFR did in Q3, if that had any impact. Generally speaking, it was a little bit lower increase quarter over quarter than we've seen in other quarters, but there's nothing capped from an RESG perspective. Certainly had payoff volume has been at the subdued level that we've talked about. Sometimes that generates minimum interest. There are other fees that are associated with that. That was probably at the lower end of a normal range, but still within a normal range. That may have contributed to it a little bit.
spk12: I think the biggest factor is just the slowing rate of Federal Reserve rate increases. Our loan yields are variable rate and they mostly adjust either daily or monthly. So as the Fed has slowed the rate of increases, the rate of increase in our loan yields has moved proportionally.
spk03: Got it. I wanted to move back to RESG. I really appreciate you guys giving us those stats on On the refis and, you know, on the paydowns and all that stuff. I want to ask, you know, Brandon, did you take a look back as to how that compared to kind of, you know, year-to-date trends from prior periods? You know, how that mix kind of looked between, like, straight payoffs versus, you know, third-party exits or anything like that?
spk09: You know, Brody, I would be guessing if I told you that. The guess would be probably more refis, but I don't know what the pure mix was. We started paying a little bit more attention to that recently. I think we got a question last quarter, and we're all incredibly curious here. So, um, you know, did have those stats ready for you, but I'd, I'd be stepping out there too far to tell you, you know, how much I think that's different, but I felt, you know, I felt like, you know, roughly over 50% of the, of the payoffs coming from refi was a, was a pretty positive result in today's world.
spk03: Got it. Okay. Um, Justin Fields- Can I ask you to speak, maybe to the land loan in Oreo i'm sorry if somebody asked you this already I didn't I thought I didn't hear anybody asked me about it, the one that's. Justin Fields- The big one, you know that that's in there, and I got it under a sale kind of process, you know I know you got to be sensitive to kind of. Justin Fields- That process at this point from a confidentiality perspective, but you know that it was subject to standard due diligence, I was wondering if you had a sense for how far into the due diligence process you actually are at this point.
spk12: Yeah, let me address that. At September 30, we had a total of six pieces of foreclosed real estate. They're in five different states, and we were very pleased to have gotten three of those, and it just so happened it was the three largest of those six under contract. So 99% of our OREO balances are under contract for sale. As you mentioned, Brody, all of those are subject to standard due diligence and closing conditions and requirements, as is always the case. Each of those three contacts would clear our book value. Each of them is scheduled to close sometime before March 31 of 2024. and we'll see what happens. Sometimes contracts close, sometimes they don't close, but typically people don't go to the time trouble and legal expense to put them under contract unless they intend to close them. So we're very pleased about that and the fact that all of them clear our book balance and it's the vast majority of our Oreo is a good thing. These contracts all have various provisions about confidentiality in them as is customer in these contracts. So we're going to limit our, our commentary on it to that general comment at this time.
spk03: Got it. I appreciate that, that detail. Um, and then I did want to also ask just, uh, you know, getting the quarterly appraisal data, uh, is very helpful. And, you know, I just kind of tried to quickly aggregate it last night and I guess when I looked at it, it was about 50 projects that you reappraised year to date, at least that you've disclosed. And that's like $4.7 billion. So either way you cut it, that's about like 14% to 15% of your commitments, you know, either from a number or a dollar perspective. Is that kind of... Normally, you know what we should expect you to be on a pace to reappraise 20% per year?
spk12: Yeah, I mean, you know, it's going to depend on what loans are maturing and coming up for extension either as of right extension because our as of right extension provisions usually have a loan to buy you requirement in them. and uh or what are coming up for extension that don't have an as of right when we're going to get an appraisal or what's a loan that is getting some attention on our part that we feel like we need to reappraise so you know there are a variety of reasons you get an extension get an appraisal but that's you know there's nothing unusual let me say it that way there's nothing unusual about volume it's just the normal way we would do that now if you factor in the uh You know, the originations over the last 12 quarters, that's another 25% of the portfolio. So what that tells you is something, you know, 40% to 50% of the portfolio has a pressure price within the last 12 months on it, which is probably pretty typical.
spk03: Got it. Okay. I appreciate that. Suffice to say, though, based on the stats, we can see, George, it's, you know, about 15% has been reappraised so far, you know, on our end, and the average change in the loan-to-value is a little less than 3%.
spk12: Yeah, and again, I would point out that that average change at 3% is after substantial pay down. You know, we get an appraisal if the loan-to-value is... uh materially different than what it was at origination or doesn't meet the as of right extension requirements our sponsors in many cases are coming to the table with pay downs on those loans to reduce them back in line with our extension criteria requirements so The 3% is a really good number, but it's a result of appraisals plus paydowns that are reducing those balances back to a lower loan-to-value.
spk03: Got it. And then last one for me was just, you know, obviously everybody knows there's been a big shift in the interest rate, you know, environment. but I wanted to ask you kind of, you know, just given that 2021, you know, it was a, it was a big origination year, um, you know, and rates were rates were still at zero. How do you guys, I guess, how did, what would you assume kind of cap rates, like anything you can kind of give us on how cap rates were when you kind of underwrote these projects, like what, what the assumed like exit cap rate was, how you kind of stress that in your underwriting, you know, and, and, I guess how that compares to the current environment today I think would be helpful.
spk12: Yeah. We stress debt service coverage in 100 basis point increments up 500 basis points using our loan and the projected performance of the project. And projected of the performance of the project, we use the sponsor's projections and run that right beside ours. So we're looking at it under what the sponsor's expectations are versus our underwriting expectations of 100, 200, 300, 400, 500 basis points. We look at exit refinance market conditions, what the current secondary market, permanent market refinance is for those up 100, 200, 300, 400, 500 basis points. And then we look at cap rates. and take current cap rates for that property type and stress those up 100, 200, 300, 400, 500 basis points. So, you know, we underwrite for a lot of interest rate stress, and that certainly, you know, is what we have seen with Fed moving the Fed funds target rate 525 basis points from the zero lower bound. So, you know, Our methodologies there have been very sound and very helpful and very appropriate for the environment in which we find ourselves. So I think that focus on how you can stress these loans and the solution is if you really like a project and it doesn't stress well enough, you've just got to get the leverage down to where it does stress, and that's one of the reasons we have so much equity in our projects and our leverage is so low, is we are stressing these projects for significant market risk, including interest rate risk, and that's paid off. Now, on cap rates, the interesting thing is, you know, cap rates have come up, but cap rates on, you know, property types such as apartments and industrial and life sciences have not moved nearly in tandem with the Fed's move. The magnitude of changes in cap rates over this period where the Fed has moved 525 basis points has been less than 525 basis points. It's interesting to us if you know, we see further movement in those cap rates going forward, and they ultimately catch up with the Fed, and I think that's really going to be a product of are we permanently in a five and a quarter to five and a half Fed funds target rate environment, and are, you know, is the 10-year going to permanently readjust to a high fours, low fives sort of situation, and we've had a fundamental shift. And if we're in that environment two, three, four years from now, we'll see cap rates fully catch up with that. But right now, the cap rates seem to reflect the sentiment that at some point, rates are going to come lower to some degree from where they are now. So that's providing some degree of support for property valuations.
spk03: George, what do you say about the cap rates? You know, you said you stress them up 300, 400 basis points. Does that mean that even in that scenario, when you underwrite that loan, when you stress the cap rates to that degree, does the loan still perform and pay off when you kind of get to that left tail type event?
spk12: Yes. On the cap rate stress, yeah, as best I can remember, I don't think we have closed a loan that wouldn't tolerate 500 basis points of cap rate stressing still cover our loan. There may have been a handful of exceptions to that in the 300 and something loans in the RESG portfolio, but the vast majority of them can tolerate that kind of stress on the cap rates.
spk03: I appreciate that. I lied. I'll sneak in one more. Do you happen to know what the reserve on the office portfolio is at this point?
spk12: No. No, no. Nobody here knows that broken out specifically.
spk03: Got it. Awesome. Well, thank you very much for taking my questions, everyone. I appreciate it. Have a great rest of the day.
spk06: And thank you. And at this time, I see no further questions. I'll turn the call back over to Chairman CEO George Gleason for closing remarks.
spk12: All right. Thank you, guys. We appreciate you joining the call. Thanks for the good questions. We look forward to talking with you in about 90 days. Have a great rest of the quarter. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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