Bank OZK

Good day, and thank you for standing by. Welcome to the BankOZK first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jay Staley, Managing Director of Investor Relations and Corporate Development. Please go ahead.

Good morning. I'm Jay Staley, Managing Director of Investor Relations and Corporate Development for Bank OZK. Thank you for joining our call this morning and participating in our question and answer session. In today's Q&A session, we may make forward-looking statements about our expectations, estimates, and outlook for the future. Please refer to our earnings release, management comments, financial supplement, 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, Cindy Wolfe, Chief Operating Officer, Tim Hicks, Chief Financial 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, Tanya, to remind our listeners how to queue in for questions.

Certainly. As a reminder, to ask a question, you will need to 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 our Q&A roster. And one moment for our first question, which will come from Manan Gosalia of Morgan Stanley. Your line is open.

Hi, good morning. Thanks for taking my question. The first one is just around the CIB, you know, strong growth again this quarter. And I guess I appreciate that you guys are growing in attractive markets, you know, you're building teams. But at the same time, we continue to hear across the board that competition is growing. I guess the question is, how do you assess risk in that business? And, you know, I guess what, if anything, would cause you to pull back there?

All right. Jake, you want to take that? Thank you for the question, Manan. Yeah.

Good morning, Manan. Great to catch up with you and hear you. Good question. You know, we continue to grow at a steady clip, as you mentioned, within CIB. Across all of our major business lines this quarter, we had really some nice success in generating over nearly two dozen new relationships, upsizing nearly a dozen legacy relationships. And so we continue to see some nice growth across all of those. You know, you have a good point there. What we're really building here, and you need to remember, is it's a diversified CNI. And so it is not a CIB business that's focused in one niche. These verticals encompass over 42 different industry niches in particular, and so it's allowing us, whether that's through ABLG, CBSF, EFG, Fund Finance, LFG, NRG, our franchise capital solutions that we mentioned we launched this last quarter, we're creating a really diversified book within CIB that allows us to take advantage of opportunities within those specific industries and push into them. So if we see a slowdown or an increased competition or decreased pricing, let's say, in ABLG, it affords us the opportunity to push more into our CBSF or NRG business lines. And so that diversification that we're building within CIB is allowing us to continue to grow at a nice clip in a way where we're not taking on any undue credit risk.

And are you seeing any spread compression in certain businesses that is causing you to pivot into others?

We are. Exactly. Yeah. So in our ABLG, some of our large corporate opportunities there, we have seen some pricing compression. And so we've switched that and moved downstream a little bit more towards the middle markets and the lender opportunities in particular. If we look at our fund finance business line, we've had to pull back a little bit in our capital call subscription line. facilities just due to increased pressure there, specifically from non-bank lenders and then insurance companies who have really entered that market and pushed down a little bit on pricing. And then if we're looking at our lender finance group too, in our lender finance group, we've seen some pricing and structure compression there too. So again, there's been some competition in those business lines, but as a result, it's allowed us to push in a little bit more within our CBSF, our EFG, and our NRG business lines. And so again, the diversification and the nature of which we're building CIB is affording us the opportunity to continue to grow without giving up yield and without sacrificing credit quality.

Got it. And then just in terms of helping us model out NIM, we saw some material securities growth queue on queue. Any color you can provide there on what you're putting on? And I guess how should we be modeling yields in that portfolio beyond the 460 to 470 that you've guided to for next quarter?

Tim, do you want to jump in there? Tim, go ahead.

Yeah, sure. Thanks, Manon. Yeah, we early in the quarter took the opportunity to use some of our excess liquidity and buy a decent amount of investments during the quarter and enhance our yield. About 40% of those are in muni housing bonds, and 60% are in mortgage-backed securities. Those both have favorable yields. muni housing bonds are a tax equivalent yield of around six percent and the mortgage-backed securities are somewhere around the 460 range or better um so um these are agency mortgage back agency mortgage back so we saw good growth there we gave you some guidance on um where we thought the range would be for yields for for that portfolio we had a nice pickup in in Q1, and we'll see another nice pickup in Q2. And then from there, we'll see what the market brings to us on opportunities. But the team did a great job of finding good-yielding, attractive, high-quality investments, and that's going to certainly help us on NII during the quarter and will help continue to help us throughout the year.

Great. Thank you.

And our next question will be coming from the line of Steven Scouten of Piper Sandler. Your line is open.

Yeah, thanks, everyone. Good morning. I guess the first question would be around commentary within the management comments document around 2027. You guys seem pretty upbeat about the potential for the bank in 2027, both in terms of growth and maybe even resolution progress within RESG and the resumption of growth within that book. So I'm wondering if you could give any additional color as to what kind of driving that confidence, whether anecdotal or more concrete, that would kind of give us a view into that progression.

Yeah, Steven, happy to address that. Obviously, Jake's already spoken about CIB and the diversification, the new areas we're pushing into there, CIB will be the predominant growth engine we would expect in 2027 as it has been last year and will be this year. So we expect that leadership to continue from the CIB group. We're continuing to add people. We're continuing to push into other verticals there. RESG may not be a great source of growth in 2027, but we're looking for a slowing of the headwinds from RESG repayments in 2027. It may be 2028 before we actually see significant growth there. We would expect our indirect lending group you know, to continue to grow nicely. It stayed steady at 12 and sort of pushed up to about 13% of our portfolio. That portfolio is, you know, a very high-end prime, high prime, super prime consumer portfolio, and it has continued to just perform very well and very consistently. And we expect to get some more growth out of our commercial banking community banking group next year. So we think the headwinds from RESG repayments ease quite a bit in 27. We expect these other business lines to actually accelerate a touch more in 27, contributing to that better incremental growth we're seeing that year. The other thing that I think is important is we're building a number of other and investing to build a number of other fee generating businesses. We're putting increased emphasis on trust and wealth. We've got a mortgage group that we've been building for a couple of years now that continues to gain scale. Although the mortgage business is not a hot business right now, we think it will improve and that unit will gain more scale. We're continuing to grow our fee income through treasury management and improving what we're doing there a lot. And probably the biggest source of fee income opportunity just as far as growth is in our CIB group where there are a number of fee-based businesses and opportunities we're tapping into. And I think you'll begin to see that incrementally add some non-interest income in subsequent quarters this year and really hit a good pace in 2027. So we're fairly optimistic about 2027.

Got it. Really helpful color, George. And I guess my other question would be maybe similar to Manon's question in a way, but thinking about CIB, I mean, With RESG, we've all known you guys to have a best-in-class platform for the last 20 years or so that you've shown a differentiated model. How do you give investors confidence around the pace of growth within CIB and that there is a more differentiated model there as well that we should have the same level of confidence as you grow that this rapidly, similar to the results you've delivered in RESG over the life of that business?

Yeah, great question. Thank you for that. I'm going to let Jake answer part of that question. But before he does, I'm going to tell you a couple of things. Number one is talent and leadership are critically important in our company. And Jake will talk a little bit about talent as he answers your question. And the other thing is we've really built CIB aligned with the way we have built and approached RESG, and that is you're going to look at a whole universe of opportunities all over the country. You're going to focus on a very narrow subset of that universe that meets your criteria for quality of credit, profitability, and relationship building, and then you're going to close those transactions with very intentional bank protective documentation. You're going to service and manage those assets in a very engaged way so that you see early warning signs. You're able to influence behaviors and move those transactions in a way that is conducive with bank standards and objectives. So, Jake, I'm going to let you talk about your team and why, given the growth you're experiencing and projecting to experience, you're comfortable with what we're doing.

Yeah, George, I appreciate that. And, Stephen, good morning. A good question, as usual. You know, it's really about building an infrastructure that's scalable to George's point. So when we got over here and we started to develop CIB, In a very similar form and fashion to RESG, it started with building out a really strong portfolio management and operations team. And so our portfolio management are underwriting our quarterly status reporting on every single credit we do within this book of business. Our four operations teams that sit within PMO that ensure, you know, from beginning to end, it's a clean and crisp process for our clients as they're onboarded and serviced through the life of their relationship with us. And then it's also building out something that's scalable from a cross-sell and a products and capabilities standpoint. George mentioned that answering your last question about fee income. But if you go back a couple of years ago to where we are now, we've really developed some nice additional business lines that support the needs of our clients and our communities, but also will assist in generating some really nice non-interest income. So whether that's our syndications desk that's afforded us and blessed us with the opportunity to now lead more deals as admin agent, whether that's our interest rate hedging capabilities, our foreign exchange capabilities, whether that's our capital markets program that we have that allows companies to access the capital markets with our partnership that we have there, or whether that's our great treasury management platform that Cindy and Chad continue to develop and build out. We really have the products and the capabilities now to grow with a company and scale with a company over the long-term horizon within the CNI space. And then to top it all off, and really the most important part that George hit on, it's all about talent. At the end of the day, we're in the business of people. We're banking people, we're banking communities, we're banking businesses. And so attracting the right talent who has a like mind for credit, who has the fire in their bellies to say, to get in here and roll up their sleeves and make a difference, that talent is really what's been differentiating us. And so put it all together. We've developed all the products and capabilities that are needed to scale this business. We have a great foundation with our portfolio management operations team. And then, you know, we've sat here and developed and bolted on complementary business lines. So whether it's our asset-based lending or corporate banking and sponsor finance or equipment finance or lender finance or fund finance or natural resources groups, and now our franchise capital solutions, we're just getting started. There's a great market out there. We're being highly selective in what we're doing, to George's point. Our pull-through rate on our more mature businesses is still around 14%, 15%. And so we are passing on 80%, 85% of the deals we see in the market, whether it's a credit or a pricing-driven pass. But being highly selective in who we bring on, being highly selective in the products and services that we're launching into the market to ensure that they're best in class. It's all really working out well for us, and we're seeing nice continued growth and true franchise growth really built one relationship at a time.

Got it. That's extremely helpful, Culler, and positioning it like RESG was built is something I wasn't fully aware of, so thank you for going into that detail. I appreciate you. Thank you.

And our next question will be coming from the line of Brian Martin of Brain Capital. Your line is open, Brian.

Hi. Good morning, guys.

Good morning, Brian.

Say maybe just one on the margin. I know you gave a little commentary in the management comments, but just thinking about if we don't see a change, any changes in rates here in the near term, just thinking about kind of the comments in the in the release about the, you know, the pressure that you're, you know, maybe upward pressure you may be seeing on the deposit side. And then secondly, just try and understand, you know, with the growth in CIB, you know, how much of that is variable rate versus fixed rate. Just kind of how to think about the, you know, the margin in the stable environment given kind of the changes here on the loan mix. And then just maybe what funding pressure you're seeing.

Yeah. Cindy, you want to talk about deposit? pricing, and then we'll jump to Jake on his CIB pricing.

Sure. Thanks, Brian. Well, we did see competition increase last quarter. We've seen that before, so I'm just really proud of Adi Curley, our chief banking officer, and his team for actually reducing rates by 18 basis points in spite of that and growing. We have an incredibly talented machine that manages to synchronize our deposit growth right along with our loan growth, which you can see remains a good kind of challenge with CIB and their success. So we're poised to continue to do that. And we also have a veteran leader of government and institutional banking, Drew Harper. So we have a great mix of very large depositors and yet we remain average balances of our depositors of $52,000, which really when you do the math at just under $2 billion in growth over the last year, it just represents an incredible amount of hard work every day by our retail bankers and our commercial bankers in our 255 offices. So we're going to continue to do that and We're cheering RESG and CIB and our other bankers on in their growth, and we'll continue to perform really well.

Jake, you want to talk about CIB pricing?

Yeah. Yes, sir. So on the CIB side, it's predominantly a variable floating rate book. Very rarely do we balance fix outside of our equipment finance group. If a client has a desire to fix rate, we offer them through our interest rate hedging solutions desk the opportunity to swap their loan and then artificially fix as a result, which would generate additional non-interest income for the bank. You know, it continues to be a bit of hand-to-hand combat out there on these deals as it relates to pricing. I know Manan had a question earlier about pricing and any compression we're seeing in specific business lines. Again, the beauty of what we're building is the nature of the diversification, though. So we can pull on the levers and push into the business lines where we can get a little bit better yield. You know, if we look at our legacy book versus the new deals generated this last quarter, there was actually about, call it a 12-bit uptick on the average spread. And so we're actually leaning into the market and pushing on pricing. I know I'm actively challenging the teams. The business line heads are challenging the teams. For sure, George and Brandon are challenging the teams to go out there and try to really get the best yield possible for the bank. And then the final thing I'll say there, aside from the raw spread on these opportunities that we're looking at, if we go back to the comments earlier about our loan syndications and corporate services and the various business lines and non-interest fee income that they can generate, if we go back to our treasury management platform and all the hard work and time that Cindy and Chad are putting into that, we talked about our trust and wealth You know, it goes on and on, the products and services that we're building to be best in class out there that will allow us to continue to drive and really ramp up that non-interest income over the long term, which makes us even more competitive in the market. And then lastly, I'll just say it's important to remember that this is true relationship lending that we're doing within CIB. If we look across the CIB book of business, over 97% of those relationships or either single lender direct deals where we get 100% of the wallet, so everything from deposit accounts to treasury management to interest rate hedging, et cetera, or it's club deals, two bank club deals where we're splitting that wallet, or in the case of broad syndications, over 95% of all the syndications we're in, we're either in the driver's seat or the passenger seat, meaning we're an admin agent or a JLA or a like title. We really have no interest in going out there. We're not buying books of business within CIB. We're not going in as participants. We really want to be a thought partner for these relationships. We want an opportunity to provide additional products and services beyond just a loan. So as a result, we're starting to see some really nice movement there with fee income, but also the opportunity to augment and impact the structure and the actual pricing of these loans long term.

Brian, I would close up with this thought. Our long history is to be very profitable, and that profitability is driven by margin. And while it's a very competitive deposit environment now, a very competitive loan environment, if you look around our peers in the industry, that 420 net interest margin we have is is really strong, and that focus, as Jake described and as Cindy described, on both sides of the balance sheet on really, really trying to get every basis point of yield or reduce every basis point of cost is just inherent in our culture, and that drives our, you know,

profitability metrics well above the industry no that's helpful so it doesn't yeah i think i think i've got your your message there so thank you for the uh for the insight there and then maybe just my follow-up just would be in terms of credit quality just looking at the uh you know the reserve maybe coming down a touch this quarter but you know just your mpas and uh criticize we're up a touch in the quarter, but, you know, I guess more importantly, the commentary seemed to suggest that, you know, you're a bit more optimistic on, you know, just the environment. So just kind of trying to think about, you know, how you're thinking about credit here as you go over the next couple quarters, if we see a bit more resolutions and just given it seems the tenor is a bit more positive.

Brian, what I would tell you is that the, you know, economy in which we're operating has been surprisingly resilient, in my view, given all the noise. I mean, there's a lot going on in the world today, and yet the U.S. economy continues to chug along at a pretty decent rate. And I've already mentioned our indirect lending business, which is 13% of our business, but that's a you know, consumer business. Now, granted, it's at the higher end of the consumer space, but, I mean, we're seeing very, very stable and favorable credit results from that business. Jake and his business is, and, of course, he's very carefully selecting what we do, but we're seeing very favorable results on credit and looking through to the customers in that the trends of those customers, by and large, very favorable trends on their net income, EBITDA, cash flow coverages, and so forth. Our RESG book, if you look at multifamily, if you look at industrial, you look at condos, wherever you are in the country, in those categories of business, They are very solid, and we're experiencing really good results on that. Where you run into some issues and where we've had some issues is in the land, the office, and the life science parts of the portfolio. And that is very transaction-specific and region-specific. If you go to the parts of the country that are pro-business, and low tax and having significant in-migration, and we're in a lot of those markets, a lot of our franchise rests in those markets. Those assets, office, whatever, land, are doing very well in those markets. It's the markets where you've had increasing tax burden and developing less friendly business pro-business environment and out migration of population or a churn in population that's kind of kept the population neutral and eliminated the prospects for growth, that's where those transactions are struggling. So the economy generally in our view is pretty solid. and the challenges are basically limited to a couple of property types in more adversely affected regions of the country, and I think we're doing a good job working through those. You know, we've got five RESG loans that we talked about in detail that, you know, the sponsors are working on two of them, recapitalization opportunities. One of those has reached the point they've got a signed letter of intent to recap the deal. We've got two of those five that are actively engaged in a sale process. And the fifth one of those five is a transaction that has a lot of activity from multiple partial or full buyers of the land. that secures that credit. Those five assets account for the vast majority of our past due loans and the vast majority of our non-accrual loans. Do all five of those deals that are working get closed? Probably not. Do zero of them get closed? Probably not, but some combination of those transactions probably get closed this quarter or next quarter. And if the transaction doesn't close, you're on to the next opportunity to get those closed. So at the basis we're in those assets, there seems to be a pretty good interest and ability for us to put together access from those. So yes, I would tell you we know there are going to be a few more of those bumps in the road. on asset quality in that office life science space, and we'll work through those, but we're feeling like we're late in this stage of the cycle. We're working through what is going to have to be worked through, and we're doing it in a very constructive way. Brandon, do you want to add anything on that? You may want to talk about what you've seen on leasing and so forth.

Yeah, no, I would just... throw in there that you know great summary of of how we view the world what we're seeing um we are you know the property types George mentioned condo multifamily uh industrial we've got a lot of industrial and you know boy a lot of industrial leasing is is coming through our projects really happy to see that but I would I would even say on the office side we're and again uh great great summary there of how market specific this activity is but we're really encouraged on on the office leasing side as well so we're starting to see some green shoots there you know life science as you noted is that it's challenges but even on a market you know specific basis and we've mentioned this before in the Bay Area the the AI sort of boom is is is generating opportunities for our life science product, which, as we've noted, is flexible to go life science or go more traditional office. We've got two projects that are in serious contention for more of your tech AI-type users, just as examples of how that's playing out, not just generally, but in our portfolio. Yeah, great summary, George. A lot of noise, a lot of headwinds in various shapes and forms, but we're seeing some good resilience in our portfolio, and I would say office in particular. I'm just glad to see it starting to pick up and move. We're getting some progress there. That's the detail I would add, George.

Yeah, thank you, Brandon.

Thanks, guys. I appreciate it.

And our next question will be coming from the line of Michael Rose of Raymond James. Your line is open, Michael.

Hey, good morning, guys. Thanks for taking my questions. Maybe just a bigger picture question just on, you know, a lot of the efforts that you guys have ongoing specifically in CIB. You know, you notice in the management comments that the headcount is up from 18 to 97, new vertical this quarter. You're building out some of the fee income verticals. Certainly understand the expense guide. But, you know, George, I just wanted you to frame this kind of longer term. You know, at some point, you know, the significant build-out will probably begin to slow. It seems like that could be in 2028, which would be at the same time that, you know, RESG balances begin to inflect higher after, you know, heavy paydowns. So, I guess my question is, when do you expect to see the higher levels of expense build decelerate? And then it seems like 2028 could be a pretty significant year for operating leverage, just thinking about it conceptually. So we'd just love some longer-reaching thoughts on all the efforts that you guys have done to date and as we look forward. Thanks.

Hey, I appreciate the question, Michael. I'm reluctant to give a lot of guidance on 2028. That seems like a long time into the future. But I think your premise is correct that we will reach a point with CIB where the percentage increase in their headcount and the percentage increase in their expense base will decline. Now, Jake mentioned we've got right now access into 42 different business and industry groups with CIB. If you look at the broad breadth of CIB, that number of business and industry groups could be 100 or 200. I mean, there are a lot of places we're not in. And I think the expectation is that that business is going to continue to grow, continue to grow, and continue to grow. But if we add three verticals in a year or two verticals in a year and three years from now we add the same two or three verticals every year, the percentage increase from that subsequent addition is going to be less. There are also a lot of geographies that we're not in that we would like to be in with a CIB platform in the markets that we already serve on our commercial community banking business. So there's a lot of room to build out. And CIB is designed so that the speed of that build-out is geared to their volume of business and the profit margins generated by that business. In the early conversations that Brandon and I had with Jake, Jake understood that we didn't want to go out and spend $20 million of expense and have a dead start on that, that we needed to take the teams that we had incorporate them into CIB and get them really lined up with the CIB vision. And we needed to add people incrementally as the business was growing and we were paying for those and creating more profits in CIB. And that will continue to be the approach going forward. So if CIBs overhead grows 20% per annum, that's going to mean that their revenue is growing more than 20% per annum. So there's going to be positive operating leverage from the continued growth and expansion of CIB. I would hope, and our goal is, that as we're building out more infrastructure in treasury management, more infrastructure in trust and wealth, more infrastructure in mortgage, that you're going to see the same things. Now, we're earlier in the real build-out and expansion of those, but I would expect you would see those gain positive operating leverage as we go forward. And to the earlier question of you know, where does our efficiency ratio go? You know, I hate to apologize for a 39% efficiency ratio. That's a pretty good number. But we would like to see that, you know, in future years begin to work back down to our more accustomed ratio over the last decade. But it will stay in that high 30s range this year and maybe into next year while we're building out some of these businesses. But they are designed long-term to achieve positive operating leverage. Now, there's no way we're going to run a much expanded trust and wealth business that doesn't have a 50-something percent efficiency ratio or a mortgage business that doesn't have a 60 or 70 percent efficiency ratio. But the operating leverage that we will get in other businesses, I think, will even those things out and let us get to a longer-term, slightly improving efficiency ratio.

George, real quick, just to run off of your thought there on CIB, I think it's important to note, too, As we continue to grow and expand CIB, again, the beauty of what we've built, we've got a credit analyst training program as an example in there. So over the long term, you'll see us hiring less portfolio managers as we have analysts and associates coming out of our in-house training. And so when you kind of put all that together, we ran this analysis at the end of last year. The folks on average we're hiring this year have a lower average base salary and expense carry than the year before. And we can make the assumption that next year that will continue to reduce. In theory, right, as we're building CIB, we'll need less chiefs and more Indians, for lack of a better term. And so we'll continue to staff in that way in a very thoughtful and strategic fashion where we hope to continue to improve the efficiency ratio within CIB itself.

Good comment. Thank you. No, that's a helpful call there. I wasn't looking for specific guidance, just trying to frame the the narrative, but it seems like based on the answer that you guys have, you know, many years to come of, of kind of continuing to build out the business. So maybe the best way to characterize it, I don't want the word words in your mouth, but are we, or would you characterize the build out is still kind of in the earlier to mid innings versus the later innings. It seems like based on the commentary, that's where we'd be.

Well, Jake made the comment in his earlier remarks that we were just beginning. I, I've written enough checks to hire expensive people that I don't feel like we're at the beginning. But yes, we're in the early stages of achieving CIB's potential. And, you know, we commented, I think we commented in the management comments, didn't we, Tim, that we expected in 2027 that CIB would pull up even with RESG as far as portfolio size. And given the momentum it has, it's expected here that it's going to pull ahead of RESG at least until RESG gets that next wave and wind of origination opportunities that come from a more stable commercial real estate, more balanced commercial real estate market.

In a reminder, too, that headcount in CIB includes services that are enterprise-wide, so the syndications desk, interest rate hedging, et cetera. We're adding people that don't just benefit the growth of CIB but are going to benefit the growth of the institution as a whole and our non-interest income in future periods.

Yeah. All right. I appreciate you taking my question. I'll step back. Thanks.

And our next question will be coming from the line of Matt Olney. Stephen, your line is open, Matt.

Hey, thanks. Good morning. I want to go back to the discussion around credit trends at RASG. And I think investors are looking for this inflow of newly identified substandard loans at RASG to slow. I counted three new loans identified in the first quarter from your management commentary today. I think the two in Seattle University, one in Boston Life. As you look at the RESG portfolio and recent upcoming appraisals and considering the conversations with sponsors, what are your expectations for the incremental inflow of new RESG loans into that substandard bucket?

That's a great question. What I would tell you, Matt, and I want Brandon to weigh in on this, is as we've said before, multiple times, we will probably have a few more sponsors who just reach a point they cannot or will not continue to support their transaction. So I would expect there will be some further inflow. We've done a real good job of liquidating. Last year we had four properties and foreclosed assets at some point during the year from RESG. We sold three of those last year. So we've done a good job of liquidating. We've had several substandard loans that we've liquidated out with the collaboration of our sponsors. So I think you'll see assets come in and assets go out of that. The other thing I would tell you is, and you mentioned appraisals, we are at a low leverage point on these loans. And for us to take a loss on the loans, all of the common equity, all of the prep equity, all of the mess debt, you've got to burn through all of that to get to a point that we take a loss on these loans. So a lot of the assets that we've had resolution on, we've had no losses. and the losses have been fairly well contained given the size of the credits on the ones that we have had losses on. So I think you'll see assets come in and assets go out of that group. We'll do a lot of very collaborative work with our sponsors to help them work through this environment I think our guidance we've given on net charge-offs and so forth is good guidance given the loss content in those loans that are likely to pop in and out of classified status. Brandon, you may want to add color on that.

Again, great summary, George. I would also point out that we've been very diligent in Our reappraisal process within the portfolio, we pointed that out in our comments. We've kept those appraisals current. You may note that there were fewer appraisals that resulted in LTV increases over 10% and most within that plus or minus 10%. So, you know, the market, as we said in our comments, we feel like we're in the later stages of the cycle. There's always an interesting new element to consider as we go from quarter to quarter with our conflict in the Mideast being the most recent add to that and uncertainty. But as George noted, the underlying economy seems to be really resilient. We're seeing good leasing, as I noted before. We will have projects where ultimately the sponsor does get to the point that they're not able or willing to continue to support the deal. But our team does a great job of being on top of where these projects are and making sure we're on top of the valuations and making sure we're on top of ratings. So George's comments are spot on with respect to how we see the future.

Friend, I'm glad you pointed out the appraisal, and for those on the call that didn't focus on it, Figure 28 and the narrative around Figure 28 in our management comments, 50% of the total RESG commitments have been appraised within the last four quarters, and 92% have been appraised in the last eight quarters. So... The only pre-2023 appraisal is a loan that has a $1,500 nominal balance on a project that is sort of stalled and will never fund beyond $1,500. So that's the only pre-2023 appraisal in the book. So we're very current on the appraisals and continue to recycle those and renew those, keep them up. So we feel pretty good about that.

I appreciate the commentary on that. And just as a follow-up, kind of a similar question, but more on the Oreo foreclosed asset bucket. I think that balance is $150 million, mostly three residue properties. I get these properties are all unique, but it feels like there could be additional foreclosures this year. So trying to anticipate if we should see that balance move up throughout the year, or do you expect those existing three properties to move off the balance sheet?

You know, we're working on all of those and there are discussions going on regarding all of those, particularly a lot of discussions around the oldest one of those and several discussions going around the Chicago property. So I would hope that we'll over the course of this year move some or all of those assets off the books. I repeat what I said earlier. Last year we had four in that category. We moved three of them off during the year. One we didn't move off is that Los Angeles land. We've got a lot of activity on that right now. I would point out that we did make $12 million in contract extension fees and forfeited earnest money off the last contract we had on that that never closed. So we'll work those things actively. It's premature to try to project what the outcome will be on that, but I would be surprised if over the course of the year we didn't move some of those assets. Thank you. Thank you.

And our next question will be coming from the line of Catherine Miller of KBW. Your line is open, Catherine.

Thanks. Good morning.

Good morning.

We've spent a lot of time talking about the life science book and the office book. I wanted to see if we could get just a big picture update on your multifamily book, maybe in two pieces. First, on just level of prepayments you're expecting in that book. It feels like that was the sector that was leading a lot of your prepayments over the past few quarters. And so, you know, view on that moving forward, especially given the new rate environment. And then also in just credits and appraisal activities. To your point, the appraisals feel like they're coming in better than we've seen in some past quarters. So just kind of an update on the health of the multifamily book. Thanks.

Yeah, I'm going to let Brandon take the multifamily and Yes, you know, the rate of change in the appraisals is less significant than some of the earlier appraisals were in the last couple of years, and that just reflects the fact that the market has moved over a number of years. A lot of these assets are getting reappraised on an annual basis, and as a result, the market the LTVs on those assets are moving less significantly with the newer appraisals than they might have moved as the market was adjusting two years ago or three years ago. So, Brandon, you want to take the multifamily story and talk about that?

Absolutely, Catherine. Good to hear from you. You are correct. A lot of uh the the payoff story that we're seeing in our portfolio is is a direct answer to your question both the health of the multi-family product in terms of its you know lease up uh to uh the point of being attractive obviously for for refi or sale or or other takeout and so what we what we see there is that not you know and part of it's that That's our largest property type by concentration, so by definition, they're going to have an outsized ratio of the repayments, but that's absolutely been the case. Some of the headwinds that we've talked about in our ESG repayments are driven in large part by the multifamily project. You'll continue to see that as we go forward. That was the case in the quarter just ended. It's been the case. you can look back six, 12 months, that's going to be the case. They're the heaviest part of our payoff. It's a healthy portfolio. And as the valuations, those cap rates, that product type probably started out lower and moved as much as anything. But again, going back to our tried and true rules of having a lot of equity in these deals and being at a low basis, even with those cap rate moves that Again, talking about appraisals, the changes have slowed and everything seems to be sort of landing where it's going to be. It's a healthy portfolio, but it will, as you noted, result in a number of payoffs as we move forward.

And then one other, just to ask this question last quarter, but just to get an update on the IQ HQ San Diego life science credit. And then last quarter, you talked about new leadership that came in that you were excited about. And there was a lawsuit that's gotten a lot of press recently. So just any update on that project that you can provide for us would be helpful. Thanks.

Yeah, sure. Yeah. Yeah. Appreciate the question. And Litigation, Catherine, I really can't provide any meaningful commentary there on that. I mean, that's for IQHQ to address. But to your point, we were excited. We are excited. We continue to be engaged with the new leadership there. Very, very excited about the energy that they're bringing and the traffic they're driving, the strategy that they're taking. with respect to the different sort of segments of tenant that they're pursuing. You know, it's not just the life science, in-market life science and office use, but, you know, clinical research, big pharma, tech, AI, even, you know, defense. So the demand that they're tracking for the project, it was good. In December, it's better as we sit here today. in terms of the tours they're giving, the RFPs, LOIs, and lease negotiations that they're having. I would tell you the office demand, the office user, the non-life science user is the bigger part of that traffic and demand that they're tracking. But they're seeing material demand there, and then they continue to work on the retail with some large block retail opportunities that You know, they've started to really get the project activated at the street level, and they're working some exciting opportunities that will continue to add to that energy and activation around the project. So, yes, we continue to be pleased with their focus and the demand they're generating, and we've noted in the past the material financial commitment they've made and And that was, you know, in 24, early 25, you know, some of this new leadership came in after that. And we really take their engagement with this project, you know, at that point in time as a clear sign of their belief in the opportunity there. So, yes, we're continuing to track the project and are excited they're in the driver's seat and working hard on it.

I know that credit matures in August of this year. Is there anything that you think you need to see in terms of leasing or equity payments or anything that would prevent this loan from negatively migrating at maturity if you don't see a meaningful improvement in the leasing terms by then?

So, yeah. I was. Let me come. Let me comment on that, and then, Brandon, you can add some additional color. You know, sponsor support for a transaction is a key element in the migration or not migration of these assets. So based on our dialogue with the sponsor, I think at this point in time we expect sponsor support to continue for that asset, we'll see. You know, August is, in some respects, not too far away, but in the world we live in today, August is an eternity from now. So we will see if that realization and expectation of sponsors' continued support, contribution of reserves as needed for this project is there, and that's our current expectation that that's going to be the case. You know, I will agree with Brandon. We're not going to comment on their litigation with one of their investors, but it's well known and been widely publicized in the media that IQ HQs had multiple tranches of capitalization and recapitalization come into that project. And in regard to the litigation, I'll just note that a lot of times when you have one, two, three, or four different capital raises in a transaction and there are different rights and preferences between the investors that come in at different points in the transaction. You know, there's room for disagreement and hurt feelings between earlier investors who may get diluted out in subsequent capital races. So that's a matter for IQ and their investor to deal with. I don't think that has any significant bearing on our project with IQ HQ or any other project with IQ HQ. That's a inner family squabble between the different tiers of investors in this transaction. Brandon, you want to add anything to that? No, you covered it well, George.

Great. Thank you for providing commentary on that credit. It's really helpful.

Thanks. And our next question will be coming from the line of Janet Lee of TD Cohen. Your line is open, Janet.

Good morning.

Good morning. I would expect that the prospect of no rate cuts is incrementally benefiting for your net interest margin, generally speaking, given your variable loan rate component. But if the rates were to be relatively stable from here, is there any reason why your net interest margin would decrease further from here, whether that's because of the asset mix shift or the deposit competition, or could we do stable NIM or potentially increasing from here?

Yeah, Janet, you know, our view on that at this point is we're relatively agnostic as to whether rates go up 25 or 50 basis points or rates go down 25 or 50 basis points or stay the same. Obviously, if rates go up, given our highly variable rate loan portfolio, we will get a couple of quarters probably of improved margin. But increasing rates would adversely affect a few of our customers on the bubble. And that increased margin would probably be more or less offset with incremental provision expense and credit costs. Conversely, if rates go down 25 or 50 basis points, that's going to be a bit of relief to a handful of customers that are on the margin there and probably lower some credit costs but cut into our margin for a couple of quarters as our loan book reprices faster. than deposits. So we've sort of reached the point with our balance sheet that we're agnostic about which way rates go, which is probably a good place to be today since nobody can really develop a firm thesis about which way they are going to go. Our margin will move around a little bit. We've talked about the competition on the loan side. We've talked about the competition on the deposit side. We've talked about the little bit of lift we're going to get from the securities book, so we'll just see where that plays out on the net interest margin in coming quarters.

Thank you. And really appreciate the new guidance around your NC net charge-off expectations for the full year, which looks like it's pointing to around 50 basis points-ish. You already gave us a lot of color on credit and given your commentary around and flows on the classified and criticized assets earlier, is it fair to say that this NCO expectation assumes, bakes in an assumption that classified and criticized assets will increase further from here or is there any other color you could provide on what kind of underlying assumptions are being used in this expectations, whether that you're assuming more losses than others on certain five RESG credits that you called out at the management commentary, et cetera.

Thanks. Janet, I think we've probably touched on all that. To put a little more definition around it, again, as we've said a couple of times on this call and the management comments and in prior quarters, we expect that there will be a small number of our customers that in this economy with these interest rates will just become unable or unwilling to continue with their projects. So I think there will be some inflows of assets, you know, small numbers into that special asset, substandard asset, foreclosed asset category over the course of the year. We've had a good history of resolution. We've got some pretty meaningful activity toward resolving five of those assets, as we've discussed. Not all five probably make, but some portion of those do. So whether that number goes up or down, I think our guidance Good guidance is the best we can give you right now, and I think we'll have things come in and things go out of classification categories as the year goes on, and we'll just have to see how that unfolds.

Thank you.

Thank you.

And I would now like to turn the conference back to George Gleason for closing remarks.

All right, guys, I think we're out of questions, so thank you so much for your time and attention today. We appreciate it. We've used all of our time, so have a great day. We look forward to talking with you in about 90 days. Thanks so much.

And this concludes today's program. Thank you for participating. You may now disconnect.