Q2 2020 Bank Ozk Earnings Call
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I'd now like to hand, the conference over to your Speaker today Mr. Tim Hicks. Thank you. Please go ahead Sir.
Good morning, and Tim Hicks, Chief administrative officer, and executive Director of Investor Relations for Bank goes okay.
Thank you for joining our call this morning and participating in our question and answer session.
And today, it's QNX 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 then implied.
Such forward looking statements.
Joining me on the call to take your questions or George Gleason, Chairman and CEO, Greg Mckinley, Chief Financial Officer, and bringing in Hamilton, President and CEO of our real estate specialties group.
We will now open up the one that's for your questions. Let me ask our operator, Daniel to remind our listeners how to Q answer questions.
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Our first question comes from Ken Zerbe <unk> with Morgan Stanley. Your line is now open.
Great. Thanks, good morning.
Good morning.
I guess first of all starting off I think it's absolutely Crazy you saw a stronger loan growth in the quarter and I get that was really driven by by lower repayments to some extent I guess given some of the commentary.
You made about repayments picking up in fourth quarter and the bridge in permanent winters coming back into the market that purse seems to be cautious or can you just elaborate a little bit about how you see sort of that that.
Loan growth trending over the next few quarters.
Again, I would tell you first off we don't we don't know what the exact numbers are going to be there a lot of moving parts to that we feel pretty positive about our our top line going forward.
Course.
Good top line is a good thing, but you've still got to get those loans approved and closed and an executed.
And you.
You know, we are saying as we indicated and the.
Management comments documents.
Oh, the bridge lenders and a permanent lenders are stepping back into the market that that's certainly not a tidal wave, but it is a.
You know noteworthy that those guys are coming back as we expected by what they're getting their burns and figuring out.
Where everything is settling out so you know, we're saying that activity yet it's hard to know how that plays out there. There's uncertainty. So you know we are.
Cautiously optimistic about or our ability to continue to put up a you know some nice growth numbers and our yes, two portfolio and not get a totally undercut our refinements in the second half a year, but are we still got to get back growth put on the books and and recorded.
Was transactions closed and you know, we'll we'll see where they are repayment numbers of settle out over the course of this year in early next year.
We're pleased with the White house working out so far we're getting good origination volume Oh really quality deals with quality sponsorship and we have as you and I've talked about for several years desire to see out slower right of pay downs on our own our loans that.
Please turn or is like near completion. So that that is working out very favorably portion, we're very pleased about that in.
Of course that was one of the critical factors and translate into the improvement in net interest income in Q2 versus Q1.
Got it okay, perfect and then maybe a different question.
In terms of NIM compression. So obviously I like the comments that you made about NIM potentially being a reflecting senior being stable reflects higher from here.
But given the I think it was 92% of all your variable rate loans are already on the floors and fixed rate or fixed rate and then given I guess, a rather large mass C.D. repricing that you have available it seems.
Almost to keep event that your NIM should be moving higher from here.
You just talked about <unk>, what would be the factory said, we'd actually drive.
NIM compression given the floors plus Cds. Thanks.
Well you know a couple of things that contributed to our compression in them in the quarter. Joe stand. It is one was our PPP lines, but have a a 1% coupon and yield under 3%.
You know how to just when you factor in the.
Amortization of the fees on those which were amortizing over the life of the loans. So that that knocked a bikes was born or to all from them in the quarter just stand it and then.
Our liquidity bells, yeah, we're in an environment, where we think it's prudent to build more liquidity and.
There's not much yield on any securities you can buy out there that you're excited about owning them one I'm you know.
Keep short for liquidity purposes, so that probably to Tam what wasn't another six eight basis points. All burn out I think is around five or 6.5 or six by Cisco once in a quarter just standard so you know.
Continued liquidity bailed.
And having a full quarter the b b b loans on the books now when that was forgiveness and repayments start coming in is dependent upon the government's programs and timing for that so.
That's hard to predict so that could that could weigh on margin a little bit they the counter.
That is is what I think as a very constructive thesis for margin going forward and ideas is way. We showed on page 10 at the man or I'm sorry.
Figure to the management's comments document.
You know, we do have I, a pretty good opportunity to continue at a lower our cost of interest bearing deposits.
With they see day maturity as you.
Noted and hopefully we're gonna be able to keep those three d. rights coming down even lower as we roll over that seems to be they prevailing trend and hopefully that will continue so.
So that should help us lower our cost of a interest bearing deposits over the next several quarters.
And then.
And a lot of parts of the market competition is very intense in other parts competition is as backed off so.
We're getting wider spreads on our new originations and they are U.S.G. space than we were getting [noise].
On a those loans, you know six months or or nine months ago, which as appropriate calls where say so you have to hold more reserves. So you ought to get paid more for those loans.
So we view that as a second leg of our margin thesis of personalized gifts keep that cost of interest bearing deposits coming down over the next several quarters and then you know the loans were closing now and I'm close this year and our U.S.G. are typically concern.
Ructions loans that will fund and 21.
And a 22, so as a those loans that were originating this year with what will hopefully continue to be higher spreads than the loans were originated last year began to fund.
In the next couple of years that ought to give us a second.
I'd like to our margin.
Expansion basis, so where we're cautiously optimistic we've got two key ingredients to improving our margin in place and one is better spreads versus ly bore prime or whatever the index has on newly originated loans on the other is calls to venture brand upon.
That's and those are two important parts of the puzzle love the mix or the balance sheet.
They are.
Decision the whole more liquidity.
Loan yields that are investment securities yields those things or other factors and layer, but the.
We got two big pieces lined up in a very constructive way. So we're we're cautiously optimistic.
Hi, perfect. Thank you very much for the answers.
Thank you.
Thank you. Our next question comes from Jennifer Demba with Suntrust. Your line is open.
Thank you good morning.
Good morning.
Questions about what kind of transactions, you're seeing a pipeline now and what kind of project developers are moving forward with right now in this environment can you give us some thoughts on what you're saying.
Yeah, the clientele as a as a proxy.
Yeah, Brandon Hamlin as president of our real estate specialties group, so brand and by being the best position to answer that he's in the details of that every minute of every day. So Brandon sure sure happy to answer that and good morning, you know I would say no you probably won't be.
Prize to learn that a fairly significant number of the deals that we're seeing our our multifamily we're still you know seeing.
And looking at it seriously considering you know all the other property types.
But in most of what we're moving forward on the majority of that would be in the multifamily space.
So you noted and as you look out at the landscape about whats you know.
Easy easy more easily understood in terms of what the future looks like certainly that that category would would would fall.
In line, there, but again, we're seeing we're seeing.
All types, even you know folks.
Working on hotel deals and and office deals notwithstanding some of the near term uncertainty, but you know is as you know most of what we close on the day won't deliver for a 24 to 36 months. So.
We're we're looking at and all the options there as as sponsored bring those to market.
[noise] I assume you're evaluating office and hotel deals on case by case basis, you guys have always prided yourself on being very consistent not.
You know coming totally away from different asset classes of geography or whatever.
Absolutely.
Has always been the case and certainly continues to be absolutely. The same way today, we we.
Try very hard to too.
Go into every deal we do with the best sponsorship out there and the best markets and.
You know some of the things that didn't make the best market.
Today changes tomorrow, so staying on top of that with with folks that are.
Developing in multiple markets across the country and.
Learning and exploring what's going on out there is very helpful to our business. Yeah. We're we're every bit as diligent today in that regard as we have been since since Ori SG began.
Over 17 years ago.
What kind of pricing in loan to value equity can you demand now versus maybe six months ago.
Yeah I'm on the leverage side, we've we've pushed that and are attempting to move you know in some cases, we've been able to meet depending on the property type you know.
It would be 10, you go from L. LTC is maybe if you were at 55 before you're going to the 45.
And it really depends on the product type in the market and the size and whose chasing the deal as to how far you can get but we're we're trying to win you know 5% to 10% there on the leverage side and obviously that translates into the to the equity on the pricing side as George mentioned.
Sure.
Really we immediately and so I think we've probably told you guys. Following Q1 began to to reprice and.
At work.
We're pricing you know 75 to 800 Bips wide in terms of spread from where we were you know six 912 months ago and [noise].
As long as in the last answer it'll be a while before we see that because it does take a while to fund these large loans off with all the equity in front of us.
You know in 21, and 22 will definitely start to see the benefit of those those wider spreads.
Thanks, so much.
<unk>.
Thank you. Our next question comes from Timur Braziler with Wells Fargo. Your line is no.
Hi, good morning.
Sticking to the spread question as some of the competitors step back into the arena and that's construction begins to ramp up and normalize as expectation that those spreads tightened here in the not too distant future as or something else going on that you think wider spreads are going to be here to stay.
[noise] import.
Impossible to know that or you know.
How how.
And we'll competitors step back into the space, how aggressive robos competitors. They it's it's it's hard to know that certainly in an environment, where you have more competitors. Your your spreads will get tighter.
In an environment, where you have lives competitors your spreads will get wider hopefully the.
Competitors when they do come back into despise Whoa Whoa did the same map that we do and that is under say, so where you've got to but up.
And allocate.
Reserves for the entire life of alone you've got higher reserve calls that they've got to be a associated with every loan and.
Pardon would dictate that you get paid a higher spread cover those reserve calls to generate the same return on equity or return on assets there. So.
It's hard to know how all those factors play out in the timing of all that but you know we're committed to.
Get an appropriate.
Return on every loan we make in and as you guys saw late last year in first quarter. This year in our indirect space where competition got really aggressive we just let our business volume dwindle down because competition was going too far.
And yeah, we've shown that same discipline in our U.S.G. So.
I think one of the.
He thinks you've got I understand about our company is we're gonna be disciplined on credit and we're going to be debts blend on pricing and we're not going again.
A follow up competitors and do crazy things because other people are doing crazy things and that certainly.
Has us in a fantastic position in the current in our our desk one on pricing you know still got us at a margin that well above the industry, even though its tighter than it was a couple of years ago and now we're in a good position to began to improve that margin and our discipline on credit.
You know has us in an excellent position and once again to be a very and challenging.
Economic environment, probably for sometime to come so we feel really good about discipline and we're certainly not going to give up that discipline in the future.
I appreciate that maybe switching over to the color you provide on updated appraisals, that's all very useful.
Not doing it's quite hard though to get you know into enough granularity and enough visibility in examining current financials and cash flows.
In this environment is that we were looking at are you looking at current financials or is there some sort of embedded recovery assumption that you're layering in into the appraisals.
And then you want to address the appraisal sure sure.
You know.
You got to look back to the fact that that the vast majority of what our yes. She's originating is new construction and so there there is a ford look a in virtually every appraisal that's done on the loans in our portfolio there.
There are there are certainly you know.
Preleasing or early stage leasing and involved and if the property you know some of our hotels.
We're we're operating already and had ramped up and there's there's a current state to look at with respect to income, but you know most of the appraisals will be.
From today, the appraiser trying to understand what is the impact.
In the market or around the project too.
You know the ramp up when the project actually opens and so if if they think it's it's going to take longer and and rates are lower and the stabilize you know why is it is somewhat lower than you're gonna have you know a lower value and that can be.
The case as we noted there were some valuations that.
Came down and but there are other markets that are extremely strong and.
You know the projection would be that may not be everything it was but it's it's pretty close and as we've alluded to a number of times our underwriting on these deals is very strong in your analyst we focus Barry.
Very specifically on stress that these deals can endure and still provide debt service coverage can still demand a refinance debt or.
Property sale values that net or multiples of our loan amount so.
You know on Appraisers job. This is you know, it's it's it's not a certain things, but no there they're doing their best of they can in this environment and as we structured these deals as noted here. They can they can stand stress and still a you know still be it strong.
Loan to value levels and.
And.
Be able to be replaced by by take out data again at multiples or sale prices. The multiples are where we are [noise].
Yeah, Let me add a little color and brand on why NFV Bob.
Don't forget that are totally wrecked here you know at the bottom of page 31 of our management comments documents, we provided the table that showed.
The 36 loans in the Oreo Street portfolio that had reappraisals.
And net net.
The one a lot of change in most of those and in the aggregate our loan to value a went up eight tenths of 1%.
So type probably what most economically sensitive line item there hotel loans, we had 13 reprisals on buzz.
And our loan to values on those properties at March 31 were 46.4% night went up 2% to a 48.4% loan to value, which is on average which is exceptionally good and favorable and protective of the bank.
In in either scenario and you might look at Incyte were Wow, you know hotels, the hotel industry significantly impacted and future projections of hotel operations or.
Clearly got to be at a lower.
Projected revpar and and occupancy and and a daily rental right. Then then pass projections how is that possible.
And you know there a lot of moving parts in there the original appraisal might have been two or three years old. So if we had had they Ah Ah Ah if the original appraisal was 46.4% and we had price did in the fourth quarter of last year before coal bed methane that might have reappraised at four.
40%, because rental rights had gone up and and future expectations were better than than they were when the loan was closed two or three years ago.
And.
But now we're getting the new appraisal based on more adverse assumptions about future. So the loan to value is 48% in connection with the renewals of lot of these loans.
We curtailed balances that were in the loan, but we're not needed for budgeting purposes, and we've gotten paydowns on a lot of these loans too so the 48.4% loan to value reflects principal reductions and long curtailments as well.
And then you know in a lot of these situations lock on land and and other loans, where you've had reappraisals. The sponsors created a lot more entitlement rotce them were originally projected and and a price so in some cases and and.
That has led to a lower loan to value. So the reality is you know net Matt.
When you take into account curtailments and pay downs and value creation, where the sponsors have outperformed in improvement.
And certain other conditions as well as the adverse impacts of coal bed methane pandemic.
She is on valuations were met Matt not very far from where we just started when these loans were were underwriting with within a percent. So that's a pretty good outcome brand and you have any you agree with that are having different thoughts on that you want to share none to know George you you hit the nail the had you know one might expect.
More more change in some of these numbers, but the fact is a matter is they hadn't fully captured you know the value that was that was inherent there from from the market build up you know subsequent to our closing so.
You know.
Weve for comparing to up to a lower number and whilst while the values are down there.
No they were against a benchmark that was already already below where the market wasn't as I said as we said before our underwriting on these things is.
He is you know stressing even the levels with the appraisers are using off and then.
So we we feel very good about these results in India will have a number of Reappraisals every quarter or 2020 is three years. After 2017, which was a significant year in terms of volume. So we'll continue to gain.
Further insight into you know how valuations are holding up in the quarters to calm.
[noise] great color. Thank you.
Thank you. Our next question comes from Michael Rose with Raymond James Your line is now open.
Hey, Thanks for taking my questions, Georgia, just wanted to go to some some color on why you are deciding to to pull back a little bit marine in our view and.
The trends in that market or are fairly strong as it is just the competitive dynamic or.
Pricing et cetera, because it's been a good source of growth for you guys over the past couple of years. Thanks, Yeah.
That's a great question Michael. Thank you you know we pulled back really in Q4 in Q1 early Q1 because of the a competitive dynamic. We just saw guys, particularly like last year getting very aggressive on pricing and very aggressive on credit and.
We just didn't move in and how our price and credit standards and that resulted in us.
I'm, saying you know a pull back in volume and that continued into the I guess really the first half of Q1.
And in Q1, we decided we really as the pandemic toward the end of Q1 is the pandemic situation was beginning to ER.
<unk>.
Become more visible and we're getting more understanding of that.
And particularly going into early Q2. When you saw you know some extreme weekly jobless claims numbers and so forth, we decided to just pull back a little farther and and see how that portfolio.
Held up and make sure that it was going to hold up block. We bought it was so we raised our pricing and interestingly.
Competitors raised their pricing then.
We were trying to sort of shut down by honestly and I think we raised pricing three or four times, because when we would move competitor fruit move back in to where we work.
So a it's a market with some good opportunities now and we're continuing to monitor course the portfolio as has held up very well I think we're running at a.
Mid Thirtys basis point annualized loss ratio about 33, 35 basis points sort of annualized a.
Loss ratio.
On the portfolio and our you know percentage of loans compared to most banks consumer loan portfolios that we did deferrals I'll have been I'm pretty low and that.
In that portfolio. So we're continuing to monitor that the portfolio is performing very well I couldn't be more pleased with why the portfolio is.
Holding up and that's kind of very adverse environment.
Thank you will continue to hold up very well when we get to a post apparel sort of year, which we're really and now you know we.
Hey, Pat just less than 10% of our loans that got 190 day deferral.
Get a second deferral. So far we're early in that process, but I think that numbers down 8% as that's right yep, 8% of loans that had one deferrals, so far that have matured and gone out to floral they've gotten a second deferral and.
I'm not sure that many of the people actually got deferrals really had to have them I think it was more while this deferral program as valuable let's take it there's uncertainty and you know.
You offer folks have free benefit.
You have people want to take advantage of that so we like the portfolio. It could become a source of growth force you know.
And our other parts of the portfolio were not growing a lot and that portfolio that indirect part of the portfolio was growing a lot.
Okay.
I began to get just a little concerned about the balance that I don't want it to be 20% about of lung bug and.
It was a reaching levels that were.
From a mix point of view more than I wanted it today. So we'll we'll continue to.
Look at opportunities and hopefully Mike a good decision about when do the reengage that market more actively our team is intact and we would like to get those guys working originating again so.
We'll we'll keep you posted on land future quarterly report.
That's great color and maybe just as a follow up George is just thinking about the rescue business and kind of a history of it in these types of environments. When you have participants pullback or whether its non banks are bank competitors. Yeah. That's the at least in the coming out of the last cycle I mean that was real opportunity for you to gain.
Our market share I'm not sure. What's your approval rate is now and I think historically its been somewhere around five or 6% of all the deals that you've looked at met your criteria.
Does that number expand here just given even though there's less opportunities, but is there a chance to take further market share and actually show better growth and then one might expect at this point. Thanks. Yeah. We're we are a you know the pie is definitely smaller deals that make economic sense. You know you you've had a.
A long run of real estate construction end markets all across the country.
So there there's clearly a need for less of most product types. Then there was three years ago or five years ago. So the the tie in and it has gotten smaller and.
A couple that not saying certainly is a shrunk Pat Pat further.
So, yes, I don't know what our what percentage of loans that were seen today, we're actually getting pull through and closed.
I'm confident that our market share base or big competitors has increased.
Even though our originations are running it pretty close to the same level by did last year.
Just because five smaller so you know I think we are gaining market share in that space.
And you know our our sponsors.
I have always appreciated our sophistication and expertise and ability to execute.
I think that appreciation as is higher now and they've always appreciated our.
You know enduring upcycle in down cycle commitment to the space in the back that we're always.
You know buyer in the space and active in the space always there for Bam If I've got a good project that makes sense.
And I think that level of appreciation as probably higher today than it was a six months ago and that that is a good thing to help us below market share and customer loyalty and and business going forward to have that reputation of being consistent.
Reliable always disciplined.
And always focused on transactions that will endure.
You know throughout the throughout the cycle up and down so yeah, I think our ability to continue to grow that business in the future has only been enhanced what's happened in the last.
Six months.
Hey, guys I appreciate all the color. Thanks. Thank you.
Thank you. Our next question comes from Catherine Mealor with KBW. Your line is no.
Thanks, Good morning.
Good morning Kathryn.
And I wouldn't see if you could talk about the geographic distribution of some of your new originations right now I think you've got an interesting perspective for us given that you operate across the country analytic for metro markets that they've all been impacted differently from kind of it. So maybe maybe where are you seeing the biggest impact of.
Construction delays and maybe a pullback in new interest and where you maybe seeing more stable on a more promising market opportunity. Thanks.
You know construction delays were pretty a wide spread across most of the major.
Markets or in the country most of those markets kind of where he opened at least from a construction perspective. So I don't think we have a lot of.
Projects, if any projects right now that are being hampered by a shelter in place orders and so forth people seem to be a getting their projects either back to normal or near normal level of development and construction work on those projects. So that's.
That's a positive thing I think par customers and a positive thing.
For us.
Our originations continue to be broadly distributed across the country Cam you might I know you've got the top.
Markets, where we originated loans. This last quarter I think don't you I do or brand and you want to you want to take that or you want you want me to.
I thought you might give them the markets there were one two and three and four or five top yeah.
And then let brand and provide more color on what the pipeline looks like brand and you can correct me, if I'm wrong, but a it looked like L.A. was our largest.
Emmis say that had originations followed by Philly.
Miami, Austin, San Diego and Atlanta.
Right.
Atlanta is probably community bank, but.
You can provide some color on on the additional color on Ariyoshi originations.
Yeah, and I would say that.
A lot of as I look at what were <unk>.
Likely to convert on in the coming quarters, you see a good bit in you know the southwest.
And and southern California, but.
Arizona.
So some of the the less urban settings, which is probably not entirely surprising, but but I would also say that we're continuing to see opportunities in and you know all the top markets that that Weve historically, you know done business and probably less so.
In the New York, New York market, it's for a lot of the reasons that we've we've discussed and everybody's aware of.
More on the the cautious side and the more dense urban setting and some of those things are happening and influence there but a.
Really you know we're seeing good activity in the southeast as well.
Good good activity up through the middle part of the country.
So its <unk> again this widespread it does seem to be a little bit more.
Heavily weighted towards.
The less dense urban settings, but we're still seeing good deals that make great sense with sponsors and you know in Philly and you know the DC area.
So with all the markets that we've been pushing into and in the past and continue to see opportunity yen.
And then a follow up on that and just the appraisal that you talk about where any of those in New York I would imagine that would be a market where you may have.
Maybe a bigger stress on your on your LTV and so is that.
Reflected in some of these numbers.
Yeah.
Yeah, there were not there were a number of.
Those reprisals not thinking the New York.
Okay, Great and then question just on your reserve I mean, even really aggressive and building the feel of the past two quarters, you and I went from 60 basis points now on the too.
Yeah, and so it is hard question, but do you feel like you're at a peak provision or added peak reserve now where economic outlook is kind of factored into your reserve now and moving forward will be more of a balance between growth and pay downs.
Or do you see more economic kind of driven or is there a felt in the back half the year.
Well, Katherine you're asking us to predict they impossible to know here and Oh I. Appreciate the question I I want to I've asked the same question of a damn and Greg and but the reality. The the reality is as a you know where were working out the.
Ladies models.
And.
Moodys like all of us or trying to model any bad for which there is is truly know historical.
Precedent.
You know you you've never had a.
A pandemic of this scope and scale and modern times, where you've had such a global interconnected economy.
And you've never had this a level of.
Rapid fiscal and monetary response to.
Any van.
And you've never had.
That's where you probably had as much global tension and acrimony and political uncertainty and everything else is you have today, there's there's just a lot of.
Moving parts in the current situation, we feel right where we are.
Right the way our balance sheet is position, we're running Moody's models, you know, we we said and our management comments that they.
Base case, Moody's modeling, we use the July not the June the early July base case, Moody's model as our primary model and that July model was marginally more adverse than the light June model.
So we've we've used the most conservative Vice case model that Moody's has out there in the current time, Brian The July model.
And Oh, we then took their as three model, which is they are.
They're.
Primary kind of hard downside scenario and use that as our secondary whited model and then a signed I I very relatively low weight to any upside scenario buyer. So our.
Our use of their models is is July and.
I have a secondary whiting to a downside scenario and that.
You know waiting to the downside was based on what we saw is the rising number of coal that not thing cases across you know two thirds of the states are more.
And concerns of that might lead to a a greater health crisis that might lead to a more adverse economic environment.
And then we did overrides or overlays we just.
They they quite people in our company or trying to get bigger I understand the difference between overrides and over life. So.
I suggested the Tam, we just refer to them as adjustments in the management comment documents to.
Adjusted for things risk that we thought were not possibly fully incorporated in those and those models. So there were a number of adjustments per different parts of our purchase ban non purchase portfolios, where we thought there could be a.
Additional whereas so we've tried to be appropriate we've tried to be conservative.
And I think I think we have been very appropriate and very conservative based on the information here now now obviously, if the economy gets.
Much more severely impacted than what we envisioned you know and the first three weeks of July where we were finalizing the number and bottles and so forth. Then you know there could be more reserve build required if the economy plays out.
Inline with our model projections, then you know our reserve build out or just the for growth.
If the economy gets better than what we projected then we could have a zero or even negative provision expense and future quarter. So.
I've been doing that's a long time this is an unusual environment and.
You know truly an unprecedented environment and.
It's hard to know it's impossible to know actually how it's kind of play out over the next though.
Several quarters next couple of years, we fail exceptionally good about.
How our portfolio is performing in the environment and and really solid on what we've done from a IC out perspective, but there.
There are a lot of variables and.
You know a there's uncertainty even surrounding models because when you're modeling then environment that's never existed before.
You don't have the a foundational data.
Really build your model off ups, you're having to extrapolate into unknown. So.
Scenarios and that that's very difficult today.
Which I noted that was a tough question that she taking a crack at it. Thanks so much.
What do you mean.
Got it that was that was the answer is Kathryn.
[laughter] [laughter]. Thank you for the good question.
Thank you. Our next question comes from Brock Vandervliet would you be US your line is now open.
Hey, good morning, guys.
Hey.
I wondered if you could start with kind of an elevator pitch on.
Interest reserves and.
It means for.
Yes, Ci credits I know.
That number's been material in the past, maybe you could talk about where it is now at 630 versus.
You know say year end.
Now that sort of is a structural buffer to.
You know uncertainty.
That's that's part of these that's part of these loans.
Sure abroad, and that's a great question and something we.
We do focus heavily on rely heavily on and you know and this is a perfect example of why we've taken the conservative approach we have in structuring the loans the way we do.
And you know starting off with <unk>.
Tremendous amounts of equity that that sponsors are heavily incented to to protect and you know this we've been through a three or four months event that that threatens to to be longer none of us knows you know how how much longer.
That.
Would would definitely be utilizing more of those allocations within our loans for for the payment of interest there there are a number of different.
In areas that you can find yourself and depending on where in the project you are for that for those that are that are more advanced in terms of completion or being open or near opening.
Honestly.
There's there's more drain there's a higher interest costs. It has to be covered but you know we've talked about over the past quarter.
As we've dealt with our sponsors a in these situations. The is the quality of our sponsorship has has been size with respect to their character and their financial wherewithal that if if there was any sort.
<unk>.
Stress on the interest reserves they've been good too.
Re up and ran refill those buckets and Weve you know we structured some some loan modifications that.
Resulted in an extension to give them more time to ramp the property up and those come with additional deposits to cover the interest costs.
Through through those extension terms and as George alluded to earlier in many cases, even even pay downs on our alone.
And those would be the most stressful situations, but you obviously have a number that you'll have some that habit that are still in the equity phase where the interest allocation hasn't even been touched yet.
And obviously no concerns there and then and then between those two extremes you'll have some that are perhaps entering the <unk> the debt funding stage, but lower interest costs and plenty of contingency in that line item.
To.
Deal with future unexpected delays all our loans.
We we structure, we require a capital structure that it has solid contingencies not just around hard costs, but around operating loss you know three ramp up and interest cost.
To the point of one zero debt service coverage and <unk> and we expect in our our underwriting that you are going to have delays.
As we said construction delays are a common occurrence and.
You know, we would never go into the deal without expecting that and being prepared for it and.
And our.
Our great sponsors are the same way about that they budget in the same way and you know we've had him in the past have a tremendous contingency that they they never touch that fund more equity notwithstanding that lets just away some of our our.
The conservatism not just in the way, we underwrite and structure, but some of them a lot of the just the sponsors we do business with so it's an important part of our of our lending.
Platform.
<unk> go ahead.
I guess just more pointedly.
What percentage of.
Hi from capitalized interest is that reason.
25% in Q1 is that risen from there.
You quantify that.
Block and Tim you may have those numbers.
Yeah, let him answer rock there, it's a very similar percentage that's roughly the same 25, 26%.
That that came in a in the quarter.
Okay. That's.
I infer that's positive.
Jumped up a tremendous amount.
Well you know I don't think it's positive or negative or either one you know are they the idea that some people have that CAD that having Andrew is built into your construction loan capital stack is I.
Somehow I, a weakness and underwriting is a silly misguided idea.
They.
I'll reality is.
Your your requiring the sponsor to put in all of their equity upfront. So us funding interest as part of alone is actually a conservative strategy as opposed to not having it in the and the loan budget and saying well the sponsors gonna have to come up with the interest along the way.
You know for sponsors going up that $10 million on a project for interest I would rather than put the 10 million on fraud on hard cost and that's been the interest and not have the 10 million in the caps back and trust them to London, along the way.
So our our premises to get all the sponsors money and before our money goes down and that made sense interest as Brian did lighter in the project that we're going to fund the interest out of the alone as opposed to the sponsor writing a check card so it.
You know what you've got a project that's kind of cost $100 million, it's kind of cost $100 million and when you rather the sponsor put in $45 million and then tight 5 million of interest along the way.
And as fun 50 million, while they're still paying interest or would you rather than put their whole 50 million up front and US fund the interest out of our reserve, it's much more conservative and much more protected but the buying for us to fund the interest out of our alone and make the sponsor put all that money in upfront.
Right.
That does philosophical discussion with several people are just didn't understand the dynamics of that and the Brandon's point you know, we do typically have pretty generous interest reserves in these things because.
You don't know whether interest rates are going to go up or down over the last of product project and whether or not you're going to happen delays that are going to cause more interest or credit and that's one of the reasons that on average we only fund about 85% of our loan commitments at our yesterday.
We have no hard cost contingencies, and solve cost contingencies, Andrew preserve and op loss reserves on.
Properties like apartments, and hotels that are gonna have to ramp up to operations. That's all built into the cap stack.
And that requires the sponsors to find that money up front, even though those items are built into our loans. So.
You know, where we start out with alone we think while we're finding 50% of the cost on 100 million dollar project in the sponsors funding 50, if we only 585% of bar.
Our our loan you know them wearing enough funding 45 or 46% of the project in the sponsors funding that Q4 55 because.
You know, we with Alaska as defined in the unused parts of the alone unused parts of the cap stack reduce our alone.
And that's that makes our loans, even more conservative than they then they.
Appear when you underwrite them and close them.
Yes.
Great.
Thats Super helpful.
Color.
Given all this uncertainty thanks George.
Thank you.
Thank you. Our next question comes from not only with Stephens. Your line is now.
Yeah. Thank you I wanted to circle back on the new already SG appraisal discussion and I'm curious, where these appraisals ordered under normal policy or were these appraisals ordered and evaluated.
In a in a post cobot 19 valuation check just to ensure the LTV either were stable on new environment, and then part part to the question is.
Looking at figure 39, there were a handful of ltvs that did increase by more than 10%.
Or more so implies a pretty good drop of value in some cases and I'd like to get a very small handful of loans, but and that case what is the solution at the LTV did increase by that much.
Well, let me tell you first that they are like we're all ordered in the.
Normal course of business.
You know loans for coming up.
Maturity for renewal and so forth and yes, there were three loans for the loan to value went up by more than 10%.
And if you look back at the figure before that Matt, which is figure 30, which is our bubble chart that shows all of our loan to values.
You'll notice that it says that other than they the one credit the martyrs credit that's high loan to value all of our loan to value right shows were less than 69%.
And if you looked at that lead incentives to that table last quarter. It would have said all of our loan to values Tam or less than 65% right. So we did have a couple of loans Oh three loans for the loan to values went up more than 10% and that that Bob.
Upped, our highest loan to value in the portfolio to just under 69 as oppose to just under 65.
As a result of that and I. Thank all three of the loans that had a a significant increase in loan to value. We're a hotel loans is that right Brandon.
Actually George to were hotel and one was a multifamily.
Loan that we actually.
There was a modification that actually part of the LTV and increase was because we.
Increase that loan.
As long as part of the sponsors me redesign of the project and was a very favorable I was a situation where it's not a negative.
Yeah, LTV and increase it was I understood. What we were doing there. So it really just two loans that were both hotel loans.
That that had more than a 10% move in the LTV that was you know related to stress.
Okay.
Good.
Hi, Brian in those two examples I guess on the hotel side did you did you ask them more equity or did you view the new LTV.
Satisfactory.
So in one case.
It was yes, there was equity contributed and these are you know George mentioned these are in the normal course right. So.
Loan modification or I'm, sorry loan maturities and.
Anytime we extend alone we get a new appraisal understand what the values at that point and and we typically have a loan to values thresholds that that were.
Wanting to meet in the case, a you know one to one of these new LTV is it 53%. So you know the change was significant but when you start at 43% and and moved to the 53%. That's that's considered that's why we start where we do and 53% loan to value in code.
It is we believe a very strong place so no no additional equity.
<unk> was required in that case, but the other situation was.
Weve listed for I believe.
Pandemic 19 deferrals.
In our comments and this was one of those and those were situations that you know, Tim and I've discussed over the past month or so with a number of you where.
Our our sponsors are contributing.
The same amount or more.
New equity towards interest or debt service payments into the future than we are deferring.
And in this case I believe that particular case. There was this you know us a deferral of six months, but the sponsor contributed.
Six months of debt service, so that you've got a 12 month extension that's fully covered with respect to our debt service. So that's no that was the situation on that particular hotel.
And not only are the sponsors and those situations that example that brand and gave you.
Contributing six months that servers, but in some cases, where we're doing extensions like that we're requiring them to pre fund some portion of future op losses, and a you know to carry the property through the pandemic and and tax and insurance reserves. So we're being very disciplined and require.
In our sponsors to be disciplined and why they're approaching nice.
Okay. That's that's helpful on and I really appreciate you guys disclosing the those new appraisal think that's that's helpful from from our side.
Well, we think it shows the quality of the portfolio and we're happy to give the information and happy that the information is showing pretty favorable results in a challenging environment.
Great.
And then one more question George you previously mentioned that the RV Marine portfolio was getting pretty sizable just in terms the overall.
Relative size of the overall loan portfolio and that was one of the reasons you wanting to curtail the growth from a concentration concern.
How do you think about concentration for Ferrari SG, it's now and 60% of the loan balance than it was 70% few years ago, what's your comfort level with the concentration of various GE more of a longer term analysis.
Well. That's good question you know we've always said that are already SG loans are our best quality best yielding loans and in every respect.
And.
That.
Point of view is only growing stronger every year and every quarter that there are best quality best shilling loans.
So where we're not I'm concerned about that concentration I think it's 59% a tam of the outstanding balance of our non purchased loans today were very comfortable with that number buyer.
We were very comfortable with it it at 70% frankly and.
We're not we're not I'm, telling these guys they cannot do their normal business and so forth.
The.
You know we've we've got 17 18 years experience 17, plus years her experience with that Ariyoshi portfolio and.
We.
Have a high level of confidence and how that a.
Portfolio will perform in a variety of environments.
And you know, it's it's not perfect, but man. It's the results on it has been exceptionally good and the entire 17 years, we've been in that Tim what our loss ratio was 30 13 basis point annualized loss ratio. So.
It's hard to not like a portfolio that has the the yield attributes of that portfolio has and you know is going to run.
Past run historically and I think probably similar in future you know running a a mid teens to a low teens, a sort of a net charge off right show on on average annual basis. So.
We like that portfolio, we like the indirect portfolio, it's just newer.
And we don't have the.
Two decades almost of experience with that that we have with.
With our yesterday, so we we want to.
You know we want to walk got thing up and I think it is an important part of our future.
And.
I just I wanted to get too big too quick to we have a lot of long term experience with it.
And as I said earlier, it's performing very well so far in this environment.
Don't have any reason at this point a bank that it won't continue to perform well in this environment, but seen it day, that's kind of a the proof and putting.
Got it thank you.
Thank you.
Thank you. Our next question comes from Stephen Scouten with Piper Sandler Your line is open.
Hey, Thanks, guys for taking the time here I'm just.
Just one more question maybe on the reappraisal process and again I do think it was extremely helpful. There always seems to be a disconnect around that ariyoshi booking.
The truth that Ltvs matter more than you know any sort of guarantees that a real estate developer could give you. So I'm wondering if you guys would consider more proactive reappraisals moving forward as opposed to one than the normal course of business, obviously, I know, they're expensive and arduous but is that a possible.
Saving them, we'll consider an appraisal wherever we think it's appropriate and obviously any loan that's up for maturity or extension or modification of any kind, a you know what upsizing or whatever the we're going to always get re appraisals on Bose.
If alone becomes problematic, we're gonna get a regular price alone it given the fairly short duration of the portfolio, even though most of those loans for three year loans. Some are 18 months summer 40 to 48 months, but most of them are three year are niche initial terms.
I think doing it in the ordinary course of business and whenever an issue a rise as is the appropriate a timing if that it would be a waste of energy and effort to.
You know go out and wholesale reprice portfolio and I would add a lot of cost and if you wouldn't know anymore than we already know I mean, we've got.
Data on all these loans and all these markets all the time, so we know it there's a material issue developing them, we're gonna getting appraisals or tell us.
To confirm what we know but.
It it's not necessary to do it more than the why we're doing it now.
Theres an area.
Or anything that we're doing it.
Perfect and then any update by chance on the Lake Tahoe exposure I've heard kind of anecdotal information that some of those markets are seeing some some improvement from strength and wondering if you're seeing that on your and your properties as well.
Yeah, there's a footnote.
To the a bubble chart Tam where is that yes.
Yeah 30, yeah, I mean, that's about as they tell us update as we can give you. It's what closed in the last quarter what was under contract at June 30, and what's already close those are and.
Anecdotally you are correct that Oh, yeah, there's a.
How bad bad thing situation seems to be having a beneficial effect on a.
Projects like this project that or you know second home projects or vacation sort of home projects are.
You know out out in the open spaces sort of projects and.
I think it by our sponsors had more inventory built they would be selling more product a there the.
Sales velocity seems to be constrained by the fact that you know they've been judicious and not putting too much inventory on the ground and.
Suddenly there was a lot of my and so I think if they can get more inventory build quickly bike and.
Have better sales Brandon is that an accurate.
Absolutely accurate as bad years. It is it is indeed.
We're have the happy circumstances or.
Being low and inventory right now so we'll see if this holds and newly developed inventory is moving at the same right, but it's.
There's definitely been a drift towards the wide open spaces and we benefited from that.
Perfect Yeah, sorry, I missed that footnote that's good detail and then maybe last question for me just you guys have a great track record of being opportunistic in deploying your capital to very accretive.
Opportunities as they arise are you seeing anything I'm coming about yet today from many of the.
Tumult, we're seeing a market and man anything you can see burgeoning in the months in quarters to come that you might might be able to pursue.
Well you know as we talked about in the a and the last call. We had a nice opportunity to add a few hundred million dollars of bonds that we got good pricing on and.
Late March we also have have had the opportunity to improve pricing pretty much across the loan portfolio.
And to a gain market share in the Ari SG part of the portfolio. So those are the opportunities that you know I think are worth talking about so far.
So I I believe is this thing grinds on we'll see some additional opportunities, but I don't know what those are at this point and so we're we're scanning the horizon all the time looking to.
Make sure we don't Miss a good opportunity that that really makes sense and would be a good investment.
Great. Thanks to the color and all the detail in the management comments as always.
Thank you.
Thank you. Our next question comes from Brian Martin with Janney Montgomery. Your line is now.
Hey, guys I appreciate your sticking around for these calls but did the questions, but just last two for me and the liquidity. George can you just gave any sense and how you think that plays out I mean, how much I guess, we'd expect that to maybe moderate if at all or.
Maybe not in the near term, but just over the next 12 months, how you're thinking about that.
Brian we.
I was built up a lot of liquidity and I'd Tim might Oh.
Reference to that I think on page one of the management comments document right off the bat and the bullet points talking about the build and our investment portfolio in the building our cash position that is as I mentioned earlier Ben.
Negative for our margin, but you know I think this is an environment where.
You want to you Wanna holds a lot of liquidity and we've been building that.
For several quarters and feel like we're in good position great position.
From a liquidity perspective, so you know, we'll we'll make adjustments as a.
Circumstances suggest we should make adjustments, but we're very comfortable where where you are today and expect to be more or less than that same range for the time vein per se.
Yes got you, Okay, just trying to clarify that and then just secondly, the given your comments George about getting.
The better spreads today, and the fact that you've got so much in the loan book after floors, I guess kind of fair to think about it at the loan yields are kind of hearing at least on that on the non purchased piece kind of.
Approaching a bottom we're at today and it's kinda third I guess corresponds what you said earlier about your outlook for the margin, but just that fair. How we're thinking about that are you thinking about that yes, I think that's a reasonable assumption.
There were where were at or near the bottom.
Maybe not maybe not at the bottom, but if not at the bottom very near and.
Yeah, Brian.
Hi. This is 10 only thing I would add to that is in April we were.
Getting to our floors in April we were all at our floors for the whole month of April so they're down.
There are some yeah, we probably it may one we were at at where we are now in floors, but throughout the month of April there was probably still some some loans heading towards therefore, yeah. So it might be a full quarter factor being at the floor.
In Q3, where has gotten were above the floors for the person month or so you take yeah.
Okay and then just lastly, just on the on the forgiveness of the PPP. Just how you guys are thinking about that I know, there's a lot of uncertainty, but just any any thoughts is how you guys are thinking about it today.
The guys are are looking at options and.
We're waiting for the final governmental.
Guidance on on how to process all that so you know I think we've we did a good job putting them on the books and qualifying the customers to Oh.
Make sure we had customers that were going there were remixing the loans stay there we're going to be able to provide the documentation and support for a debt forgiveness program. So we think we'll do well with that once once we get started but I think everyone is.
Yeah ready to get on to that part of the program and and as you know, there's a move up but I don't know forgets passed or not to kinda kind of a more expedited ah forgiveness for loans that are 150000 or layoffs or maybe even we've heard some numbers being thrown around a 250000 or.
Last which makes a lot of south summing the government.
Intended to program benefit small business and you probably want small business focused on how they're going to get their businesses back up and running and functioning at a high level and not having to do a bunch of type of work together alone forgiven.
Right. Okay I appreciate the color George Thanks.
Thank you.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to George Gleason for any closing remarks.
All right guys. Thanks for joining US we'll look forward to talking with you in about 90 days have a great quarter.
That concludes our cow.
Ladies and gentlemen, this concludes todays conference call. Thank you participating you may now disconnect.
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