Bank OZK

Good day and thank you for standing by. Welcome to the Bank OZK Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will 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 hand the conference over to your first speaker today, Jay Staley, Managing Director of Investor Relations. Please go ahead.

Good morning. I'm Jay Staley, Managing 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, Cindy Wolfe, Chief Operating Officer, and Jake Munn, President, Corporate and Institutional Banking. We will now open up the lines for your questions. Let me now ask our operator, Marvin, to remind our listeners how to queue in for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

And our first question comes from the line of Steven Scottman of Pepper Sandler.

Your line is now open.

Yeah, good morning, everyone.

So I wanted to talk a little bit about growth trends and kind of how you guys are thinking about the results of the handoff kind of more to the CIB and Marine and RV and the growth-growth diversification kind of plan.

It feels like you guys are a little bit ahead of schedule, at least as I was kind of thinking about it. And as I look at figures three and four, it looks like the trends in CIB in particular are pretty good.

Um, so I just wonder if you could talk more about that. And, um, I know your growth kind of guidance for 25 is the same as it was last quarter, but, um, this again, just kind of how you're feeling and how you think those trends could, could play out through the next couple of years as you continue to build out those teams.

Uh, Steven, thanks for the question. Um, I will tell you that, you know, we're, we're pretty much on plan and, and, uh, in line with where we had hoped we would be. With that intro and that very executive summary, let me ask Jake Munn to comment on the CIB group that's probably going to be the largest contributor to our growth in 2025 and 2026. So, Jake, talk about that. Steven, good to hear from you. And, George, I appreciate that. CIB really took off. This last quarter wasn't necessarily a surprise to us by any means. We're happy with the results that came through. But 2024 for CIB was really laying the foundation, getting the policy procedures, the underwriting templates, really our portfolio management operations foundation in place to start to really build and scale CIB as a whole across all those various originating business units. And so we were successful in doing so, partnering with our credit and risk partners and getting everything up and running. With that, we saw some great originations in fourth quarter. We had a number of strong deals that actually slipped into first quarter that we're excited about here on the horizon as well. But we view this as being relatively on target for what we were planning, and we're excited about the future, and we're optimistic about continued growth across those respective CIB business lines. We've got plans next year to really, you know, look out into the market and continue to grow. We're well positioned in our existing footprint from Arkansas and Texas to Florida and Georgia and the Carolinas. We view the bank's true footprint to be home to a myriad of strong manufacturing and distribution and industrial banking opportunities, driven really by a growing workforce there and favorable economic and pro-business tailwinds. finding the best and the brightest talent from across the region. We feel very optimistic going into 2025 about continued growth across the CIB. George, Brandon, anything to add there? I think you covered it well. Brandon, do you have any comments?

No, I would just say I would agree with George and Jake that we are on target and just tell you that Jake and the guys that he's brought over are really top shelf individuals, a phenomenal fit with our culture and the way that they've dovetailed in, I think, is part of the reason we've been so successful. But they're very well connected in the marketplace. The bank has been very focused on adding all the top talent that we can. As we've guided, you'll You'll see expense growth next year around a lot of different areas, whether it be sending in the world of raising deposits, additional retail branches to fund what will be growth that Jake achieves with a good number of additional employees and additional business lines. So we're extremely excited about the handoff that we have achieved and where it's going to go in the future. Got it. Really helpful. And then just as I'm thinking about the accounting of this handoff, isn't it kind of natural what we saw this quarter as the unfunded book becomes, I think it was like 12% CIB and RESG, the unfunded book percentage goes down, that that could have kind of a benefit on the loan loss reserves from an unfunded perspective and we could continue to see that dynamic play out just kind of from an accounting perspective?

I mean, Steven, this is Tim. I mean, certainly that's one component. of the ACL bill that we've had our growth in both funded and unfunded over the last, say, 10 quarters. Our view on the macro conditions is also a very, very big component of that as well. So multi-factors, many factors go into the ACL provision and build. But that is one of them. And I would add the comment that our CIB group, our community banking group, our indirect RV marine group, all of our business lines have the same intense focus on credit quality that has been a hallmark of RESG. and and all of them operate under the philosophy credit is the top priority non-negotiable profitability is the secondary consideration and growth is a tertiary consideration and and jake and his team parrot that all the time back to us in in their pipeline calls and their credit meetings and so forth and they completely uh embrace that concept Credit quality is paramount. Profitability is an important secondary, and if we get growth, great, and if we don't. With that said, the goal of CIB over the next number of years is to build a unit comparable in the non-real estate space to what we've built in RESG, both in quality, profitability, and size. You commented, wow, we had a really good quarter of growth in CIV. Yes, we did, but these guys, they're just on the first steps of the journey of building that unit to be an equal partner with RESG in our company. We expect RESG to continue to grow in future years, so that means these guys have got a long runway and they're just getting started. Yeah, that's great. That's helpful, George.

And that kind of points me to my other question here is the focus on credit. I mean, you had some really good updates kind of quarter over quarter on special mention substandard. And one of the things I like that you guys lay out is this figure 11 kind of where you're talking about the modifications and extensions and some of the enhancements that you've gotten.

I mean, I know, look, in a perfect world, you probably would love to not have to modify any loans, but that's just the reality of it. So can you kind of talk about that mindset and why that's just a good business practice and kind of how that process works with your equity and capital partners there?

Well, we – you know, modifications we view as a positive. If you're modifying the loan – you're collecting fees, we're not modifying the loans in a negative sense in that we're not lowering spreads, we're not advancing additional credit, we're not expanding our commitments, we're not lowering our floors. We don't do any of those negative things that are concessions to customers. Our modifications are the customers replenish reserves, the customers make a pay down if we I believe that's absolutely essential to the loan. The customers pay a fee for those modifications. So we view modifications as a positive thing, not a negative thing. And you can see in the little tables that accompany that, you know, we had some significant unscheduled pay downs in Q4, $52 million. Plus, in connection with modifications, we reduced 41.8 million in unfunded commitments, collected 8.4 million in fees. Some of those fees were on short-term modifications that went straight to income. Some of those fees were on one-year or longer modifications that are deferred over the life of the loan. We collected 38.8 million of additional reserves, all that on 58 modifications. We view those as very positive and the numbers as far as additional reserves and so forth will look even better probably this quarter from this quarter's crop of modifications in Q1. So we view that as positive. There's been a lot of effort in guys that are taking a negative thesis on our story to go out and try to do a map of projects that have been completed and study the leasing on those projects. That is certainly a valid piece of information, but it's not the most controlling, most important piece of information. We've been super clear on this since the first time the Fed started raising rates in this cycle, that we have made the statement that we expect our RESG sponsors and their capital partners will continue to support their properties if needed. Through times of economic stress, that includes higher interest rate until business and economic conditions and property performance normalized. And that's certainly been the case. So the question is not, guys, did the building get built and do you have leases or not? That's relevant information, but that's not the important consideration. The important consideration is will your sponsors continue to support that project, pay the interest, pay the carry cost, work the leasing, work the sales, whatever, and get that project to a successful conclusion. And we just had hundreds of examples of that in the portfolio and a relative handful of examples where the customers have not done that. So we're very happy with the performance of our portfolio. We continue to expect in the vast majority of credits the sponsor is going to do what they need to do to get to a successful outcome. And our business model is designed to make that happen. The low leverage, and, you know, we've reappraised the vast majority of the portfolio now in the current interest rate or higher interest rate environment. So we've taken into account higher cap rates and so forth. And, you know... Some folks make a big deal out of the fact that, well, our loan-to-value is on a lot of those loans when we reappraise them have gone up. Yes, but like a comment was made, our life science portfolio went up 10% or something. Well, it went from 45% loan-to-value to 55% loan-to-value. Big deal. That's why we do these low leverage loans is we allow for adverse scenarios to occur that could affect valuations and us still be super deep in the money, super well covered by the value of the collateral. And that fact that we're deep in the money means that the sponsor and their capital partners are still well in the money and they're going to continue to defend these assets. It's a very simple element that if you apply it with discipline has a very beneficial effect for the portfolio. And we'll continue to see the benefits of that strategy. Our strategy is certainly proven out in this cycle.

Yeah, that's great, Coach George. Thanks so much, and congrats to you and the team on a great 2024. Appreciate it. Thank you.

Thank you. One moment for our next question.

And our next question comes from the line of Catherine Miller of KBW.

Your line is now open.

Thanks. Good morning.

Good morning.

So as we think about the current rate environment, I mean, clearly, George, less rate cuts is better for you in terms of the margin and potentially less paydowns. And I think you just answered the question on what the incremental credit risk is. It still feels like you feel really comfortable with that even in kind of a higher rate environment. But can you Maybe comment a little bit on that, on just what higher rates could mean for credit risk. And then secondly is just on some new origination volume. If we don't get any more rate cuts this year, how do you think that might impact origination volume at RESG and then some of your new initiatives at CIB?

Okay. Well, Jake, let's take those in reverse order. If we don't get any more rate cuts this what does that do to CIB's volume? The beauty of the position that we're in, Catherine, is a good question, is that we are absorbing and sharing picking new clients in the current environment. So we don't necessarily have a large amount of baggage or what have you from clients that haven't gone through the ups and downs of the current market environment. And so As we look out and we start to cherry pick and move forward across ABLG and CBSF and EFCS and our fund finance groups and other potential expansion groups that we're toying with, overall from an impact on the interest rate, we believe we'll be in a good position there. pricing we're getting across the board still remains pretty good from a spread standpoint. Our CBSF group, which is our fastest growing group, continues to kind of carry the flag with the best spread across those business units too. So we feel like we're in a pretty good position. George, any thoughts there? Brandon, you want to talk about what no cuts or higher rates does for RESGs volume?

Sure, Catherine, happy to answer the question. So, you know, from where we stand today, and we noted that in the environment we are in, we are cautiously optimistic that we can achieve a higher or more typical level of origination in 2024. You've noted that our mindset's been around, you know, zero to two cuts during the year, but if they stick where they are, what we're seeing is even with the two that we've had in September and December, an increase in the deal flow. So our guys have done a great job staying in touch with the market and watching what deals are out there and staying in touch with the developers. And what they're seeing is the incremental benefit that they're getting from the recent cuts. And really beyond that, I mean, these high rates have – halted or provided substantial headwinds to deal flow, that flows down into the other inputs of the process, land being one of them, and we're starting to see those valuations push down. So one of the inputs in the project is at a more attractive place. So you get incremental impact or benefit from declining land values get benefit from interest rates being off a little bit. And we've seen that start to induce more of the deals coming off the shelf and moving forward. So, you know, we're seeing the market adjust to what could be, as we all know, a longer-term elevated rate environment. Cap rates are adjusting. We're seeing valuations drop. bottom out and come back up. So we obviously love the benefit to our bottom line, to the revenue we generate on these loans that we have on book in a flat-up environment. But we think the market is adjusting to – I don't know if this is new normal, but if it is, we think we could still see strong deal flow. Now, again – If it's massive moves up, that could change the needle. But we are seeing an adjustment that would tell us that even where we are, we're going to see more volume in the pipeline for our ESG. We certainly, you know, in the quarters you spend it, saw improved volume. We saw improved conversion in terms of our guys getting executed term sheets. So going into the year here, we've got We've got a good pipeline for the quarter, still have to close them, but we come into the year with that thought that even if things were to stick where they are, we ought to be able to improve over last year.

Catherine, let me provide one other comment, and Brandon, correct me if I'm wrong, but I think our RESG originations in the fourth quarter were our lowest originations in 2017. 27 quarters. You could look at that and say, wow, gosh, that's a horrible origination quarter and says that there's not a lot of new deals percolating. You sort of have to factor in the lag effect, though, on projects. It takes a long time to conceive a project and get it to closing. So That really low four-quarter origination volume probably reflects the mindset of sponsors two or three quarters below before that. At the same time, we had the lowest origination volume in 27 quarters. Our RESG pipeline of signed term sheets at year end was, Brandon, describe that. I don't want to misstate it, so you describe it. Brandon, you're on.

It was actually one of our best in maybe, I want to say, four to six quarters of term sheets executed. So it definitely stood out on the map.

And I think what you're seeing there is... the fact that 100 basis points lower rates have sponsors excited about dusting off some projects, signing a term sheet, and getting ready to move forward. And frankly, I think the election has stimulated enthusiasm and excitement about the US economy with the expectation that we're headed into a more pro-business constructive environment that's going to be good for economic growth. So we're getting those vibes from our customers and seeing that. So we're feeling cautiously optimistic about loan growth in 2025, even knowing we're going to still be dealing with a big bunch of headwinds from RESG payoffs because, you know, 2025 is the third year following the record 2022 origination year in RESG. So CIB's momentum, the fact that we're getting some new term sheets and a higher volume term sheets coming through RESG makes us pretty optimistic about our ability to grow next year. Now, your question on margin. Yeah, go ahead.

Let me just ask one thing on the paydowns. On the paydowns, do you think even if rates are higher, we still – I mean, to your point, you're in the third year, so that's when you naturally see it. But do you still think you see as many extensions as we've been seeing in the past? Or because we're kind of in a more normalized rate environment and maybe there's not the belief that we'll get so many cuts, you see a lot of these loans just go ahead and go into permanent financing? I guess the question is, do we – it's probably fair to believe that no matter what with rates, paydowns should still be pretty high this year.

Yeah. You know, the last three quarters, we've seen elevated levels of prepayments or repayments, not prepayments, but elevated levels of repayments on our RISG loans. And I think that reflects the fact that sponsors are – dialing in on the fact that we're probably in the right environment. We're going to be more or less going forward and the waiting for rates to go back to zero is no longer a reality in people's minds and they're going ahead and dealing with the reality of where we are today or where they think we're going to be next quarter and making plans and actions to move these projects to more permanent or bridge financing away from our construction loan because they think we're getting where we are. So I think that's been one factor in the elevated level of repayments the last three quarters. I think that continues in the coming year. Will that result in a lower level of modifications? I don't know that it will. We may still see a high level of modifications. For example, we've got a sponsor on a project who's got a term sheet lined up from a bridge lender to take them out of our project to give them more time. That was approved in committee. they needed a 90-day extension on that to get that closed. Our guess is that it will take them, it's the complexity of the project, it'll take them more than 90 days. So we've pre-approved a second 90-day extension if they need it. So we can see that loan payoff go to a bridge lender in the second quarter, maybe the first quarter of this year, and see one or two extensions booked on that as a result. So I think you're going to see a high level of extensions this year, but I also think you're going to continue to see a high level of repayments as we've seen over the last four quarters.

Awesome. Very helpful. Thank you.

All right. Thank you. Thank you. One moment for our next question.

And our next question comes from the line of Manon Casalia of Morgan Stanley.

Your line is now open.

Hi, good morning, all. Good morning. I wanted to ask about on the appraisal front, it looks like the number of loans you're getting appraisals for has gone up quite meaningfully over the past couple of quarters. I wanted to ask what's driving that? Is it more normal costs? Is that part of a more concerted effort to go through the book and see where you need sponsors to bring in more equity?

It really, I think, is a reflection of the fact that there's been a lot of questions, guys, should you reappraise the portfolio? What are those appraisals going to look like? We have pretty good ideas on that ourselves, so we're not as concerned about that as perhaps some of the folks sitting in your chair or your investors' chairs are. So we just made a decision to kind of go at the max pace that our appraisal services function can engage, review, and validate the third-party appraisals. We're going as fast as we can. I think, Brandon, you were telling me recently we have a I can't remember the number of RESG loans that are pre-December 2022 appraisals. Yeah, we've got, I think, 68 of those left that were predated December 15, 2022. And of that 68, we're probably going to have between 40 and 45 of those

reappraised this this quarter and and and then we'll have others beyond that so our count our total account this quarter will will be probably in around where where it was last quarter but and then we'll have some loans that you know in that vintage we're talking about that that'll pay off as well so we're we've made a lot of progress there but getting close to the end of those older appraisals getting them updated

By the end of Q1, we should have just a handful of loans in RESG that have not been reappraised in the current interest rate environment or a higher interest rate environment starting from December 2022 forward. We're not terribly concerned about these reappraisals. I mean, we know that a property is probably going to appraise in many cases for a little higher loan-to-value, a little lower valuation than it did three years ago. We all know where cap rates have gone and time periods to stabilize. So that has an impact on appraised values, and we're seeing that. But we wanted to get the... we want to get essentially the full portfolio reappraised as quickly as we could so that everyone that's interested in our numbers would understand where those numbers are. What we're really proud about and expected to occur is even though we reappraised 80 or 90-something percent of the portfolio, Our loan-to-value in the last year on the portfolio only went from 43% to 44%. Now, a lot's made, oh, gosh, you had a few loans that went up 20% or 30% loan-to-value or more, and you had a bunch that went up 10% loan-to-value or more. But at the portfolio level, and I'm managing a portfolio, our weighted average loan-to-value is 44%. That reflects the fact that even though, as we're reappraising, a majority of the appraisals are showing a higher loan-to-value, the new product that we are originating is below average loan-to-value, so new originations are working that down. And we continue to get a lot of paydowns on previous loans, both at modifications and subsequent to modifications. We're getting some very accretive partial releases on projects where one part of it is sold and the other part is retained, and we get an accretive pay down on that. On our condo projects, we have pretty big project condos. As those things sell out, those loan-to-values go down because every unit sale is highly accretive to our loan-to-value. The result of all those moving parts is that we've continued to keep the portfolio at a very, very conservative 44% weighted average loan value.

Got it. Very, very helpful. And maybe pivoting over to NIM and the loan floors, What behavior have you seen from clients who have hit their floors now that we're 100 basis points lower than where we started? Have they been looking to replace their loans or have there been any trends that you've noticed on those loans?

Brandon, I'm not aware of any. Do you want to comment on that?

No, the only trend I can positively identify is they pay their debt service But, you know, in all seriousness, there really hasn't been. I mean, look, the other trend is in these modifications, we've noted that we haven't lowered any of those floors. We've increased quite a number of those floors. It's a negotiated, heavily negotiated item, both on the front end of deals we're closing and the mods that we're negotiating. But, you know, our guys... do a great job there, and the evidence of that is very clear in our report. But no, we don't typically see an exit based on the floor. Again, that's part of the picture, but the bigger picture is in terms of the project and the takeout markets is a much bigger piece of that.

So as we think about loan yields from here, I think there's been about a 60% beta on loan yield so far, and I think part of that is also just coming from the loan mix changing. So now as more loans hit their floors, is it fair to expect that the loan yield betas on the downside will be slower from here? Or just how should we think about that from here?

That's a good question. I would point you to figure 27 in our management comments. You know, 14% of our loans were at their floor rate. 14% of our variable rate loans were at their floor rate at December 31. And I emphasize that 14% because one of our commentators got that wrong and said we had 7% of our loans at the floor rate. That was only half right. And you see if you go down 50 basis points, you're at 42% of loans at their floor rate. So the guidance that we've given and the assumptions that we've used, well, I think they're the most likely case. No rate cuts to two rate cuts this year. Obviously, one rate cut. you know, we're going to be at 26 or more percent of our loans, so the flow rate, two rate cuts, 42. So if we had three or four or five rate cuts, once you get into that 40s, your loan beta really slows down. Our deposit beta is going to, of course, continue to speed up if we prepress loans. So both our provision expense would benefit from three or four or five cuts, and our NEM would have a significant expansion opportunity from three or four or five or six cuts because we would benefit from those floor rates kicking in. And as Brandon said, we don't get paid off usually because of floor rates. That's a rare issue because negotiated customers know it. They hit the floor, they hit the floor, they live with it because that was part of the deal. The flip side of that is if we went higher, our variable rate loan portfolio would generate significantly more net interest income. We would give back part of that with higher provision expense because of the elevated stress that a rising rate environment would put on our customers. The guidance we've given and the assumptions we've made are actually the worst-case scenario. Zero rate cuts to 50 basis points and rate cuts this year is the worst-case scenario for us, and yet we're coming out with some pretty darn good results, even in that worst-case scenario. So more rate cuts is better. Rate increases net-net are better, even though our higher margins would be partially given back by our provision expense. But the worst case scenario is where we are, which is zero to 50 basis points. We've given you guidance based on that.

Great. Thank you. Thank you.

One moment for our next question. And our next question comes from the line of Matt Halney of Stevens.

Your line is now open.

Hey, thanks for taking the question, guys. I want to ask more of a bigger picture question, and it's more around the longer-term aspirations of the company with respect to both loan growth and investment spend. And for 2025, you've been clear about the loan growth expectations, mid to high single digits with that handoff from ResG to the other growth segments. And you've also talked about the expense growth of around 10% because of these various growth initiatives and all these new hires. I guess if we look beyond 2025, just trying to appreciate the longer-term loan growth aspirations of the company and what type of investments you think will be required to maintain those aspirations.

Well, let me take that, Matt, and then I'll give Jake and Brandon a... chance to comment on that. We have traditionally been a very growth-oriented company and have had a lot of success. In a couple of months, I'll celebrate my 46th year here, and the balance sheet is about 1,400 times the size balance sheet that we were when we started, and I expect to be here into the future and expect to continue to see solid growth. As far as the expenses to achieve that growth, there will be incremental expenses as we add more lenders, add more loans, add more customers, but I think we have incurred a huge amount of the expense this year and last year to achieve some really important growth elements for us. And obviously CIB is getting a lot of attention because it's become the dominant engine for loan growth. But Jake mentioned they came in and started building CIB and built the credit and the service thing and the risk and the compliance and all the governance things around that really rock solid to have a foundation to originate their first loans. They took the ABLG and equipment finance and fund finance businesses that we had, wrapped them into a much more rigorous servicing asset management governance structure that has already been created and is clearly in the run rate of our numbers. So CIB's growth going forward, which I think it will rival RESG in future years, whether that's three or five or seven years, who knows, but I think it will be in five to ten years as big a part of our company and the structure for that is in place, and it's paid for. It's in our run rate of expenses. Now, incremental growth, you'll have incremental expenses, but that unit is going to get more and more efficient as they go forward because the foundational expenses are late. Same thing with our mortgage division. We've been losing money in mortgage business all year long in 2024 as we built that and ramped it up. But it's been built right. That infrastructure is there. Those monthly and quarterly negative numbers are getting smaller and smaller, and I think that unit becomes a positive contributor next year. The same thing in our consumer elements of our book. We've ramped up... in tandem, the partnership between Cindy's Retail Banking Units and Alan Jessup's Community Banking Units, originating consumer and small business loans and so forth. We put a lot of the infrastructure in place over the last two years, and those guys are just beginning to hit some meaningful strides in growth. Our Trust and Wealth Unit, we've really built up a much more significant infrastructure there. That infrastructure is in place. We're getting some real positive growth there, and I think you'll really see that next year. So, you know, I think we will have expenses ramp, but I would expect to maintain, you know, an industry-leading efficiency ratio as we have seen. because we expect revenue is going to ramp faster than expenses. So, you know, I would expect us to continue to be in that sort of mid-30s, low-30s sort of efficiency ratio going forward. And I'll just piggyback off that quickly off of George's guidance there. You know, specific to the CIB, you know, efficiency is a key factor. And so if you look at 2024, to his point, it was really the foundational build of our portfolio management and operations team to ensure that, you know, we maintain a very healthy and clean book of business and we're best in class across our peers in that aspect. And so when you look at it as it relates to the future build, it's really going to be a little bit more focused on the origination side. And again, we take a little bit different view here, you know, between George and Brandon and I, You know, a lot of our competitors might go out and start a market or get in and launch a CBSF team in Nashville or Atlanta or wherever it might be and hire 10, 15 people out of the gate and then just hope the business comes and hope that thing repays itself within a decent timeline. And it's really not the approach we take. We take a much more level-headed, pragmatic approach where we challenge our business head leads within CIB. So whether that's Mark over CBSF or Pruel over Fund Finance or or Jim over our EFCS, Tim over our Loan Syndication and Corporate Services, or Mr. Sheff over our ABLG group, we really ask them to prepay for the next person before we bring the next person on. And so to George's point, before we're hiring this high-quality talent, we're actively challenging that team to generate additional new business so that when that person comes on, even if they were not to contribute in the worst-case scenario, the business is already there and the revenue is already there to have prepaid for that person so that we can keep our efficiency ratios really best in class.

Okay. Thanks for the commentary. Very comprehensive. I guess I want to switch gears and also ask about any potential regulatory changes. We've got the new administration coming to the White House. The market has some anticipation there could be more favorable changes for the industry. We'd love to hear your perspective about any potential regulatory changes for the industry and how this could impact the bank.

Yeah, we're very hopeful that the change in administration is going to lead to a more constructive regulatory environment. I mean, certainly the banking industry and because of FDIC insurance, there's a level of safety and soundness regulation and and other regulation that is appropriate. But the regulatory environment has just gotten increasingly more and more and more challenging for the industry. I'm not telling anybody here anything. It's not widely known. And you're seeing that push lots of business that the banking industry used to do out to... private credit and non-bank financial firms. And there's a lot of risk to the economy and to consumers and business customers with that private credit and non-bank financial firms. So I think what we would hope to see, what we do hope to see, is a right-sizing of regulatory restraint on the industry, which lets more and more of the credit needs of the country be met by the banking industry as opposed to non-regulated, non-controlled sources of credit that I think pose a lot more risk to the economy and customers. So we are hopeful and we're advocating fiercely for that. And to the people we're advocating that to, that seems to be being met with a very favorable response. You know, the president-elect, soon to be president next week, has declared that he wants to extend the previous, the existing... tax regime and maybe even cut that tax regime and get the federal deficit down. To achieve that combination of lower taxes and a reduced deficit, the U.S. economy has got to grow. And I don't think the president and the administration incoming are going to be able to achieve the needed growth in the U.S. economy without removing the unnecessary regulatory burdens on the U.S. banking industry. The industry has the capital and has the skill and the ability to contribute to this next golden age of American economic growth, as it's being called, but the industry has got to be unfettered from the excesses of regulation. And we're making that point uh, repeatedly, uh, to, uh, people in Washington. And again, I think that's been well received. So, uh, it's a big job. Um, um, and, uh, there's going to be a lot of resistance from entrenched, uh, bureaucracy to, uh, you know, giving up some of those, uh, unnecessary regulations and restraints on the industry. But if we're going to have the economy that Preston envisions, it's got to be done.

Okay. Well, I appreciate hearing your perspective, and congrats on a great year. All right. Thank you.

Thank you.

One moment for our next question. And our next question comes from the line of Nick Holico of UBS.

Your line is now open.

Hi. Good morning.

Good morning.

Thanks for all the updates this morning. You know, in thinking about your commentary around potential for greater originations as we're progressing from here, you know, are there any specific types of properties or geographies that you would highlight as somewhere you'd highlight for a potential pickup and activity? Maybe on the other side of that, Obviously, everything is kind of on a case-by-case basis, but are there any either property types or regions of the country that you're specifically looking to avoid adding exposure at this point?

Yeah, absolutely, and Nicholas, appreciate the question. So, I would tell you that Most recently, our origination volume, which is obviously an indicator of where we see opportunity, has been fairly heavily weighted towards multifamily and industrial, but also condominium developments are a significant part of our current pipeline. A lot of that has some regional emphasis as well. Our highest geographic concentration continues to be in Miami, and the team there, obviously the economic activity in that realm of the world has been phenomenal, the in-migration driving demand. We have a long history of a successful lending there, and that continues to be the case. So we still are very bullish on that particular property type and that particular geography. We're fortunate to have a lot of experience and a lot of great originating firepower in some of the healthier markets across the South, Southeast, Southwest, But also, you know, New York continues to be active, perhaps not as active as it has been, you know, earlier in RESG's history. But that economy continues to move up and to the right, if you will, post-COVID and the ensuing sort of challenges that came out of that. So we like some good opportunities there as well. You know, geographically, we continue to diversify. Our guys, you know, focus on the more household name markets, but some of the others that don't get mentioned as much. And, you know, if you refer to our geographic diversity figure 14, you'll notice some new ads to that list. You know, for example, we've increased our presence in Utah. Mason Ross out of our San Francisco office, you know, there's been a lot of not so great press about San Francisco and Seattle. Those are markets that Mason covers, so he's been working very diligently to uncover opportunities in other markets within his regions and successfully so. So we have always said that quality is job number one, and so our guys are working to unearth those quality opportunities with new sponsorship, adding to the fold in terms of customers that we have not yet done business with, and we're seeing success there in some of these markets that you wouldn't have seen previously. been a lot of and will continue to be a lot of industrial development along our border with Mexico. And Victor Reynoso here in our Dallas office has done a great job of originating some industrial along the border in different markets there. So those are just some examples where we're seeing some good economic activity, some good um, sponsorship that, that in some cases we've done business with in other markets or we've not yet done business with before and have great track record. Um, but, uh, again, the, the, the, what is continues to be a good bit of multifamily. Um, you know, uh, we're, we're, we're picking our spots there, uh, because there has been a fair amount of construction, but, um, You have to remember when we originate a multifamily loan today, that's going to open in three years. And there's, you know, the supply buildup that we saw, you know, especially sort of coming into 22 has dropped off significantly. Absorption continues to sort of mop up that excess supply. And when you look three years out, when we'll actually deliver some of that multifamily product, there looks to be a real opportunity for our sponsors to capitalize on favorable market conditions. So, yeah, that's sort of the what and the where around RESG's originations currently.

Perfect. Thank you for that. And then just thinking a little bit more about the handoff strategy for this year and unpacking some of the growth there. In the quarter, it just looked like fund finance was a big part of the growth. I'm curious if that's an area where you think you took advantage of some resurgence in activity levels or if it was more just idiosyncratic as you're starting to win new business there.

Jake, that's yours. Yeah, that's a good question. I appreciate it. You know, some of it is just timing, right? As we've reshaped the CIB and brought fund finance in, and we're blessed to have Karul join us and Mark assist too there, we've really been able to kind of turn up the heat in that book. The beauty of OZK as a whole is the connectivity to some really good sponsors around the country, a lot of which were rather untapped previously.

And so,

Under this kind of a rework CIV organization, it's allowing us to kind of hone in and really kickstart that fund finance group once again and improve originations as a whole. From an actual deal account, CBSF, or Corporate Banking and Sponsor Finance, which you can view as more of our general CNI team, which also achieved the average highest yield for the book fourth quarter. from the actual loan count, they surpass the other business units. It's just typically smaller loan sizes. So a great question. We expect CBSF, Fund Finance, EFCS, ABLG, all to continue to grow in the coming quarter, so we're excited about that. We're excited to look at other opportunities that might be in the market for additional kind of a bolt-on business lines that could also benefit our growth in the future, and that we're equally as happy with Tim Newhouse and Rachel and Derek and everyone else on our, and Ryan and our loan syndications and corporate services team, as they've really picked things up and started our desk, which allowed us to lead deals and generate additional income. Our interest rate hedging solutions, we've been blessed where we have that up and running and we've actually executed on some caps and swaps to generate some additional fee income, as well as our real estate capital markets and other like business services. So we're on a roll, and we're looking forward to the next year, and we're optimistic.

Perfect. Thanks for taking my questions. Thank you.

Thank you. One moment for our next question. Hello?

And our next question comes from a line of Michael Rose of Raymond James. The line is now open.

Hey, good morning, guys.

Thanks for taking my questions. Just the first one, I don't think it's been asked about the buyback.

I guess the way the management comments reads, looks like, you know, the way I read it is, looks like you're going to see an increase in repurchase. Just wanted to get a sense for, you know, what the updated parameters, you know, could look like that would cause, you know, yourself to buy back some more stock. Thanks. Sam, that's yours.

Yeah, Michael, You know, as we said in the comments, we are planning on increasing the parameters in which or tranches as we have them for which we buy back. Now, how many we buy back is dependent on our stock price, so that may or not result in more share repurchases as well. But we were really close to buying some in Q4. We just didn't quite hit our tranche. um and um and even early january same same thing but um we do plan to increase the parameters which may or may not result in more repurchases all right and maybe um just one follow-up a lot of questions today about the the handoff between uh resg and uh cib um george as you think about the kind of intermediate to long-term interplay

can the company be as profitable as it's been? I mean, because CIV loans are going to inherently have, you know, lower, lower yields than, than residency loans, but also will come with deposits, which should be an offset.

So just trying to get a sense for, you know, is like a 2% ROI or above where you've historically operated. Is that still on the cards or should we kind of level set expectations as the, the, the mix of business shifts? Thanks.

Yeah, that's a good question. And, There are elements within our CIB group that generate comparable coupon rates to RESG loans. Jake mentioned possibly bolting on an additional business line or two to that unit. He mentioned we were toying with it. Toying is probably a little weak word. we're pretty deep in looking at that. And some of these additions could also generate comparable or even better yields with the low-risk profile we're looking for. So I would tell you across the board in the CIB, yes, the premise is correct, even though some units will have higher yields, the premise is correct that the the average coupon is probably going to be less than the average coupon we get on loans in RESG. But we do get treasury management fees and collateral inspection fees and unused fees and various other fee elements, both loan and treasury function-related fees, that will come from the CIV portfolio and we will get a higher volume of deposits as a percent of loans coming from that. So I think when you factor all that in, the overall return on assets, return on equity is pretty comparable. And we hold extra capital today because of our CRE concentration. As CIB grows and RESG grows but becomes less of a concentrated part of our balance sheet than it is today, over time we can begin to work those capital ratios to a little more typical for the industry sort of capital ratio level. And that should actually allow us to maintain or even enhance our return on equity as a result of CIV diluting the concentration of RESG. So I think that ROA, not too much difference. I think in the short run, not too much difference in ROE. But as we get two, three, five years out, and can be more efficient with our capital allocations because of the diversity of our balance sheet, I think it will actually improve our ROE. That's the working premise in any event.

Got it. Maybe just one quick follow-up, just as it relates to kind of what a typical CIB credit looks like in terms of size, because when you started out in REGI, you were doing you know, smaller loans and you eventually scaled up and now you're doing the largest, you know, some of the largest construction projects in the country. Is that a similar goal with CIB? Because as you would get larger in CIB, though, the coupon would inherently be less.

And I think we see that with your kind of large corporate lending versus, you know, small and mid-sized corporate lending. Thanks.

Well, I would say no, but I'm going to let Jake give you the real color on that. So, Jake, talk about what you think our loan-sized projects diversification profile within CIB will be? Yeah, and it's a great question too. As a whole, our loans are going to be noticeably smaller than RESG on the average. On average, if you look at fourth quarter, average loan size varied between, call it $30 and $60 million on the CIB side versus RESG, which can be a little bit more sizable. I think the key element, though, to think about in the CIB is we're relationship-focused banking. So we're following in the footsteps of RISG and all the other legacy business lines of OZK. And so with that, within the CIB, we're going to commit the dollars necessary to have the relationship with the customer where we've got a seat at the table, where we're helping to design the structure and the terms of the deal, where we can cross-sell some of those needed products alluded to, whether that's treasury or interest rate services, our fantastic private banking and private client services, whatever that might be that our customers need, we're relationship focused. And so that dollar amount per deal is really going to depend on that. So if you look at the broader book, 92, 95 plus percent of our deals are going to be a single lender. They're going to be two bank club deals with 100% voting rights and direct access to management. Or if they're broader syndications, there are opportunities where we're either leading or with a JLA or another strong named title. And so we're not here within the CIB to just buy paper. That's not what we're doing. That's not what we're going to do. We're relationship focused. And so those dollars that we'll commit are going to be dictated by the overall relationship. And so, you know, as a whole, most of the CIB loans are going to be well under $200, most likely well over under $150, $100 million holds. But at the end of the day, we're going to do what's needed to lead those opportunities to harvest the best economics for us, but also provide the best services, products, and customer service for our clients and end users. And, Michael, I would remind you also that we announced a quarter or two ago in connection with the activation of our capital markets desk in CID and our ability to syndicate loans, buy and sell, and so forth, that we've announced that going forward our single project hold limit in RESG is $500 million. We've only originated a handful of loans ever over that. We only have two over that threshold now and don't really consider that to be a restraint to our business, but actually an opportunity to do even larger transactions in RESG, but to do them on a syndicated basis. So that capability of our capital markets desk within CIB is really going to help us achieve, I think, greater growth in RESG, even though we've put that fairly unrestricted size limit on RESG single credit transactions.

Perfect. I appreciate it, caller. Thanks, guys.

Thank you. One moment for our next question. Our next question comes from the line of Brian Martin of JANI. Your line is now open.

Hey, good morning, everyone.

Good morning, Brian.

Most of my things have been answered, George. Just maybe a couple minor things. Just the Your comments about the yields within the RESG and the CIB group, this quarter, can you give any commentary on just now that we've got a nice quarter under our belt, just kind of what the yield difference between those two this quarter? I know it's general given all the different types, particularly in both units, but just any kind of commentary on just how to think about what those yields look like this quarter?

Brian, I would tell you that I'm not going to get specific in the numbers there, and honestly, I don't have those weighted average origination yields for each portfolio in front of me. But it's been consistent with our commentary. CIB has been a little lower spread than RESG, but augmented with various fees and deposit opportunities. You know, I think that general direction has certainly been borne out in the most recent quarters results.

Gotcha. Okay. And then should we expect any, you know, lumpiness, if you will, within, you know, the CIB group as you kind of look forward? I mean, should it be pretty consistent by quarter? Is there lumpiness we should expect with the different business units within CIB?

Yeah, I think it will be less lumpy than RESG has been. You know, RESG, you're dealing with, you know, a single sector of the economy. CIB is dealing with multiple teams working across multiple sectors of the economy. And in RESG, you've got a bigger average deal size. Jake did a good job of describing probably by a multiple of two. versus CIB, so the smaller dill size, the more significant number of originations that probably will have more originations in CIB than RESG, I would think, in time as they get their full momentum going. All of that, I think, leads to less lumpiness and more things leveling and averaging out with the CIB portfolio.

Gotcha. Okay. And just the other last two for me were just the opportunities on the fee income side. Can you give any – I mean, it looks like the fees have kind of stepped up a little bit here the last couple quarters. Should we be thinking about continued gradual ramp as you get more traction on the CIB group and kind of the initiatives there as we think into 2025?

Yeah, that's certainly our hope and expectation. And, you know, as Jake sort of alluded to, he didn't say it this way, but I think you can draw the conclusion from his comments that those guys are just getting started. And so, yeah, I would expect the fee elements from that to steadily increase. ramp up, you know, at a slow rate, but steadily climbing as they grow their business.

Gotcha. Okay. And then the last one, I don't know if anyone asked the Oreo property and just kind of the delay there. Can you give any, you know, commentary on how you're thinking about this? Is it likely, you know, just go back to remarketing at this point or is there still hope that, you know, the purchaser is back?

You know, our prospective buyer on that property has paid us $6 million in either fees or non-refundable earnest money that now we've captured when we canceled that contract and applied after the end of the quarter, we applied to capture that $3 million of non-refundable money and applied it to the loan. This sponsor's a busy guy. This prospective purchaser is a busy guy, and he's got his focus on a lot of different things. They seem to casually wander past the December 31 deadline to make their payments on our loan. We're not folks who deal with things casually, so we notified them of that. They said, we'll We'll deal with it. We're working on this, this, and this, and they didn't deal with it, so we just sent them a notice to the title company to close the escrow and send us the earnest money. We're continuing to have discussions with them about reinstating that contract. We're open to that. We're obviously going to get equal or better economics than we had, and they're going to have to demonstrate to us they're going to be respectful and serious about the timelines and the obligations they're staking on if they do that. If that happens, that's fine. If it doesn't, we'll remarket the property. Too soon to know exactly which way that's going to go.

Yeah. Okay. Understood. Thanks for taking the questions, and congrats on a great year.

Thank you so much. Appreciate it.

Thank you. This concludes our question and answer session. I'll now turn it back to George Gleason for closing remarks.

Let me close with one closing remark. As we noted at the end of our management comments, next quarter we're going to change the time of our quarterly earnings call so that it is outside of market trading hours. We think, you know, as we get to be a bigger company and have more shareholders and so forth, We just think we probably need to get the call outside of trading hours. So we're going to do that. We're telling you about it now so no one reads anything into that for next quarter. That's going to become our regular normal time to be outside of trading hours, and we'll announce the details of that when we announce the earnings call and time to release earnings next quarter. Thank you so much. Have a great day. Thanks for joining today's call. That concludes our call.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.