Q2 2021 Bank Ozk Earnings Call
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Good morning, I'm, Tim Hicks, Chief credit and administrative officer for bankers. The K. Thank you for joining our call. This morning and participating in our question and answer session.
On 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 on 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 So of George Gleason, Chairman and CEO.
Hamlin President, Greg Mckinney, Chief Financial Officer, and Cindy Wolfe Chief Banking Officer.
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Our first question comes from the line of Ken Zerbe of Morgan Stanley. Please go ahead.
Alright, Thank you and good morning.
Good morning, Dan.
With hopefully can start off.
George Youre thinking Youre your sort of prepared remarks, you talked about total loan growth in our ESG potentially starting to grow again in fourth quarter.
Payoffs of Ben just such a headwind over the last several years.
Is the common is designed to say the air suggests that payoffs could actually start to slow on fourth quarter.
Could we really be seeing of turnaround that those are starting to end in a big way.
Ken No I don't think Thats the proper interpretation I think payoffs will continue to be high and I think the.
A more appropriate interpretation as to think about origination volumes beginning to increase.
And of meaningful way.
I spent 6 weeks on the road.
During the second quarter visiting the.
The majority of our major our ESG markets.
Almost all of our origination team members out there.
The scores of.
Customer meetings and interactions.
Looking at projects. So we're we're pretty optimistic about our ability to begin to achieve higher origination volumes that will offset the.
The elevated.
Refinements that we are experiencing now because we're getting repayments at natura.
Naturally would've occurred last year, but for delays from the Covid dynamic pandemic plus.
Repayments that would naturally of occurred this year.
I think.
We originate construction and development loans from repayments are going to be.
The common part of the business now obviously, we've got them.
The higher level of.
Accumulated pre payments this year than normal just because of the COVID-19 related delays.
Project completion construction sales leasing refinancing the last year.
But we're going to continue to have to.
Originate more to offset the fact that all of our loans in that construction and development book probably half. So we're focused on growth we've got a great franchise.
Franchise has proven itself now through the great recession proven itself through the pandemic our customers know they can count on us from rely on us that we're always going to be there for them.
I think we've got a chance to really.
Grow our business over the next several years and in the.
6 weeks on the road during this last quarter that I spent with our origination team out there certainly.
Suggest that.
Late 2021, 2022, 2023 weekend take care of our ESG business too.
A more of a significant level then we've we've taken it in the past because of the opportunities seem to be there and of course brand names.
Going to go on the road.
There are a lot of the same sort of networking that idea of income in quarters in.
I think all of that work with our origination team is going to help produce an increasing volume of business certainly next year and hopefully we will see some of that begin to filter through in Q4.
Got it okay perfect and then just wanted my 1 follow up question.
In terms of the net interest margin. Obviously, we had as you saw we had a very good increase.
There and it seems that some of it may have been driven by unusually high minimum of interest collections et cetera, but also lower deposit cost when you think about the NIM on a go forward basis from here should.
Should we expect the lower deposit cost to continue to drive the name of higher or how should we think about the trajectory of margin. Thank you.
I would suggest that we're at or near peak on the NIM probably in the near term.
We commented in our management comments that we're originating loans at lower rates and the rates that were earned on loans last quarter.
That is unfortunately.
Part of this very.
Liquid low rate environment in which we find ourselves.
<unk> on all sorts of financial instruments, and the loans are lower than they were in probably lower than they should be but it's part of the.
Environment so.
As loans roll off we're not able to replace those yields with equal yields.
We are being diligent to not sacrifice, our credit standards and structure standards that we've adhered to for a long time that are the hallmark of a great asset quality, but we are having to get more aggressive on price too.
Not only replace assets that are rolling off but also grow assets.
So growth was important pricing a bit negotiable in here.
So.
Loan yields are probably almost certainly headed lower.
<unk> got room Sandy can talk about this later in detail, we've got room to continue to lower our deposit costs for awhile to some extent.
And on.
I think there'll be.
Some pressure on core spread and some pressure on NIM, we did benefit in the quarter just ended from.
A very good level of minimum interest in loans and I noted several of the.
Research reports.
On our on our results noted that we didn't quantify of that and the reason we didn't quantify that is it's hard to know what normal.
The quarters, that's 9 or $10 million, some quarters as 3 or $4 million.
It bounces around all over the place we were on the high end of the range.
This quarter, we could be.
On the low the middle of the high end of the range for the next few quarters. It just depends on a lot of things that are hard to know when.
Of particular loans pay off in.
This quarter next quarter and so forth. So we didn't quantify it but if we were on the high end of that so that naturally alone we will have some.
Pressure on.
On loan yields in Q3 and.
The key is going to be our ability to continue to offset that pressure with the reducing deposit cost and the guys are doing the risk.
Matt.
Alright, perfect. Thank you very much.
Long term can growth is the key.
Understood.
Alright. Thanks.
Thank you. Our next question comes from Timur <unk> of Wells Fargo. Your question. Please.
Hi, good morning.
George maybe just following up on your last comment that long term growth is the key.
Our ESG and director of the RV Marine ABL deviation.
On our converge in 'twenty, 2 I guess, what does the near term growth rate look like in 'twenty, 2 and then once.
All of the normalized with Paydowns payoffs kind of stabilizing in origination starting to pick up again, what does that growth rate look like.
Tomorrow, I think I'll, let brannon hamblen address that because Brandon.
Our president, but he oversees our ESG and our corporate and business specialty group of hand.
New asset base lending group, so he's got a pretty good perspective firsthand on most of that so Brandon you want to take that.
Absolutely absolutely. Thanks for the question the good morning.
Picking of normalized growth rate is a little bit fine point to me, but what I would tell you is from <unk> perspective, and George alluded to this.
We're seeing very good pipeline activity we're.
Very strong there and our conversion.
Our wins of what's available out there is starting to pick up so.
I'm on.
Expecting the back half of the year for originations in our ESG to the definitely moving in the right direction.
And back toward and beyond what we've historically done you guys know, it's a construction loan portfolio and what you've closed today.
When you've got 50% average loan to cost it takes a while to get those dollars out.
So while we will have.
We've.
Included again the.
The graph on page 7 of the comments. It really gives you a sense of what's left from the legacy portfolio. That's outstanding in and therefore, what's left to pay down so back to Ken's earlier question, you get a real sense of what the what that cycle is going to look like so we will still have some pay offs, but.
I'm seeing really good growth opportunities in the on the origination side that will start to 2.
And we've obviously.
Once sitting on our hands in 2019 and 2020, so some of those loans.
Starting to hit with funding will help as well to offset or at least in part of these pay offs that will keep coming in.
The velocity that you see on page 7 following the originations and the natural lifecycle.
In our.
New.
Asset based lending group.
Excited again as I mentioned last quarter about the addition of that team and that team is is growing were adding incrementally.
And we look forward to having we think some really solid players in.
Probably.
Texas and Georgia markets first is what we think is going to happen there and and.
Mike Shaffer, who leads that group is in addition, the building the team on the infrastructure.
Originating gets first loan is very active in the market.
As well and I expect that those guys will.
The start to start to originate probably probably the first closings in Q4 or early Q4, possibly get 1 and.
In the Q3, but the opportunities that they are seeing out there in the geography that they're covering.
I'm feeling good about those guys really contributing to our growth.
The start.
At a moderate pace, but I think gather steam.
Pretty pretty good towards the back half of 2022 and keep going into 2023.
There's good potential for originating some really solid credits in that world.
And our Cvs G.
As we noted going to have some headwinds early on but they are building of base in.
Getting competitive in originating some some new stuff when the new borrowers there so.
We'll see that accelerate as well so tomorrow, it's hard it's hard to circle of number but I can tell you that that the.
The the outlook is positive across all 3 of those groups.
And I think our ESG is the big driver there.
We're looking forward to getting back to what we've seen in previous years. There we think that the volume is there.
And we're out there trying to haul it in and having some good success now.
Okay. That's helpful. Thank you Manav on AD pie would add that.
We are gaining in a very steady and consistent manner of traction with our indirect lending group and the new business model that we rolled out about a year ago now of almost a year ago. There in that unit and we really like the way that's performing we're going to we think being able to protect our app.
The quality, while paying low per lower premiums and getting better.
Better spreads now given where rates are we might get better spreads, but that might not translate better rates right now just because of how low every everything is and our community Bank is also.
Getting some traction I think so.
Growth will continue to be of challenge and outstanding certainly through Q3, I hope that we will have a positive growth number in Q4.
And I think as <unk>.
<unk> said there is a lag time between getting the signings closed and beginning to get funding all of them.
Think we ought to.
C of steady progression in.
Our total outstanding balances and earning assets from the loan side.
Throughout 2002 and into the future and I think we've got all of these units.
Going the right direction the.
The business model is certainly.
<unk> proven and I think we've got really good prospects of.
Stepping up to higher level of origination volume across the company more diversified also than it's ever been before.
Okay I appreciate the color and then my follow up in the release you had indicated that you are seeing fewer origination opportunities in large urban markets such as New York that of meeting your standard.
That's still a few number of deals that are coming online are you starting to see some deals come on line that arent necessarily checking your credit box or other standard.
Well, we always say a lot of deals that don't fit our credit box, but.
I would say.
<unk>.
I was on a lot of our major markets.
New York I was in Boston I was in Chicago I was in Miami and the.
Tampa St Pete area of Us in Phoenix I was in.
Los Angeles, San Francisco Denver.
I've been in a lot of our markets. Some of this last quarter end.
Larger mixed use projects that we've missed the origination on those for the last several quarters just because of lot of those projects got put on hold.
And the pandemic there are a lot of those opportunities that.
Look really good that makes a lot of sense that are coming.
Back to the market now and we're working on a good portfolio of those.
And we're seeing quite a few other opportunities began 2 of margin.
More urban markets that were more significantly impacted by the Covid pandemic shutdowns and work from home phenomenon. So.
I think things are normalizing and that bodes well for future origination volume.
Thank you for the questions.
Thank you. Our next question comes from Brock Vandervliet of UBS.
UBS Your line is open.
Hey, good morning, everyone.
Just on the on the deposit.
The NAMIC George it's great to see.
What seems to be something you've talked about for a couple of quarters now really in motion.
Tangible remix declining time deposits from both categories.
And as a result, lower lower funding costs could you Chuck.
Basically on top of the house, what inning OEM in that process and more granularly.
Thank you.
On your total deposit costs of our interest costs could settle out by say year end.
Brock I wanted to give credit where credit is due on that Cindy Wolfe, our chief banking officer is on the filing so I'm going to let Cindy answer that question, but Cindy has built a great team under her that includes the.
Carmen Mclennan, our chief retail banking officer of Naughty currently our chief deposit officer and number of other key players and they are doing really good job I'm going to advise sending to not try to tell you of what inning, we're in but just give you color on.
Thanks.
Where she thinks we are in are going in our process of transforming our deposit base. So sandeep take that 1 of if you would.
Sure Yes.
Further I won't guess, what our cost of funds will be at year end, but as you can see on page 14, we have runway left in our CD maturities. So I can I can talk about how thats been going so far and it will.
There are indications that those trends will continue and that's that when we went into this wave of CD maturities, we expect to retain a certain amount of them based on our historic low historical performance around retention of CD and the industry and we actually reached.
And more than this go round and we thought we would which we're happy about that and of course, obviously they are being repriced much lower.
You can see that.
And the figure 16, and so we will continue to take advantage of that not only in lowering cost of Benjamin changing our mix of deposits and replacing with the core.
Got it.
And just as a follow up.
I noted the comments.
Closing selling of branch or 2 here and there.
Picking out some head count.
Yes.
What's kind of going on in that process behind the scenes is that sort of.
A.
And interest in kind of stack ranking of the profitability of the of the various branches.
Well it is that it.
It's really no different than the way we've always ran on branch network planning, we we look at the number of different factors, but.
I will say that a lot of it is client driven and we want to be a client centric bank.
So we have all of these various consumer channel where our clients.
Prefer to interact with us whether it's over the phone over on mobile device online and of course in branches. So as long as our clients want our branches and they're keeping them busy.
We want the NAV that option.
Really.
Expanding the market with our with our branch network.
Got you okay. Thanks for the color on out.
Brock I would add a little color there as well.
The Covid pandemic, Cindy and our team responded really aggressive les and updated our mobile banking apps of couple of times.
Accelerated some plans we had to improve the look feel of functionality performance of those apps. They worked closely with our technology team too.
Improve the.
Speed.
And reliability metrics of that as well and all of those things are on the drawing board, but the pandemic.
Which meant that.
In our branches were interacting with customers.
On a different way.
By appointment only or <unk>.
Driving the only or whatever.
The pushed.
Those mobile channels out much faster and encourage customers who might have been slow adopters to be more rapid.
Aggressive adopters of that technology and that has changed the dynamics.
Of.
How customers are interacting with these branches, so that that changing customer interaction increased reliance on utilization of mobile online and.
Other non face to face technologies has.
Accelerated the closure of some of these branches and most of these of branches situations, where we had 2 or 3 branches in an area and we concluded that based on changing customer utilization patterns and increased technology utilization we could.
Sorry of our customers effectively with 2 instead of 3 of 1 instead of 2 branches in an area. So it is helping too.
Offset cost of <unk> seen that in our fairly muted noninterest expense growth.
Those cost saves are going to be very important because we're in an environment now where.
A lot of people of change they are working.
Plans and patterns and behaviors following the pandemic and the experience they add per year or so during the pandemic. So we're experiencing labor cost as we mentioned in the management comments.
Closing these branches that are no longer needed and eliminating other redundant inefficient cost and our structure.
Going to be.
Critically important in our effort to maintain or even improve our best in class efficiency ratio.
Great. Thank you for the color George.
Thank you. Our next question comes from Catherine Mealor of <unk>. Please go ahead.
Thanks, Good morning.
Good morning Catherine.
Instead of just see the buyback authorization just wanted to get your sense of how active.
Do you intend to be and is it more opportunistic or is the the plan. Initially go ahead of us that whole $300 million.
Tim do you want to take that 1.
Yes, happy to Catherine and good morning, good to hear from the good morning. Thanks.
The question.
Yes.
Obviously this is our first share repurchase authorization that we've done on our company's history.
It is an authorization that.
As of 1 year.
Exploration. So it does go through July of next year.
I think it will be.
Have a moderate pace there I mean, we will be opportunistic.
Obviously, if our stock price were to go down we're probably going to be more active when.
Our stock price goes up we will be less active so I think we'll look look for opportunities.
To be opportunistic at a moderate pace.
Like the win there that was of a sneak.
Jim.
Yes.
Okay.
And then my other question is just on on the growth outlook.
Just kind of an interesting question just to think about how we keep hearing about supply chain issues in construction costs that are impacting on.
New construction projects, how much of that is impacting origination today and what's your sense of how that kind of moves along as we move through the back half of the year and how the kind of impact year on year growth outlook.
Brendan would you like to address that.
Absolutely absolutely and thanks for the question Katherine I think.
On decreasingly, so is the short way to answer that.
As we have.
Move through the year, there have been situations, where there are really some impact.
Nothing outside of the realm of what we're used to dealing with in our 18 year history on construction projects and.
And.
As the affecting originations as George alluded to in his travels thus far this year and.
Weekend week out over the past quarter, you have seen opportunities.
Creasing the come to market. So it really it really doesn't feel as though or any data presented itself that would say that there is any material impact there.
Theres a cost impact of projects.
And so on.
There is a fine tooth pencil that the.
That's their right after the closing projects and they're in there from a pure closing alone perspective, it may delay that a bit but as we've alluded to the liquidity in the market.
And on <unk>.
Some of the.
The lowered expectations on the yield of some of that money.
Is helping the capital stacks to absorb.
The cost impact.
And the net cost impact seems to be moderating.
In certain cases so.
In short deal flow is moving much better.
As we move through the year, so to the extent that it's.
Then on issue.
It is not keeping the market from from <unk>.
Increasing.
Increasing number of deals on deals.
<unk> type deals.
That came up earlier I think.
We're definitely.
Looking at more of those those larger <unk>.
<unk> projects that had been slow out of the box out of Covid and so.
I would expect in the my expectation would be anything can happen, but that will start to see on average.
A larger loan amounts as we close into the the back half of this year and into 2022, there is a lot of.
There are a lot of projects out there a lot of large projects out there yet to come in the market and of course, our capital puts us in a great position to be able to to bid on those large projects. So.
Hopefully that answers your question.
Yes, no it does.
Great.
And then maybe 1 for all of it if I could just on the follow up on the loan yield conversation.
I know, it's hard to pinpoint the.
Steve the accelerated fees this quarter, but could you maybe give us a sense of maybe anecdotes about where new production is coming on today in the particularly in the resi book.
Absolutely.
On.
It's.
Sort of the same story in terms of of.
The product type.
There's been a lot of a lot of residential weather, whether the multifamily or condo origination of going on.
But we continue to have really good diversification.
Across the other product types as well.
On our footprint geographically.
<unk> is very well situated to.
I enjoyed the benefit of a lot of.
The migration trends.
Into in particular of the southeast, but also of southwest West.
Our guys. There was a question earlier on New York.
While while we haven't seen yet the origination pick back up there the opportunities that we're looking at and definitely are and I think what.
We'll be doing more business there but.
While that's been flow of the garage, the guys and a great job of penetrating in the Boston market good activity there.
The D C market.
So it's.
We have a lot of ways that we slice and dice our portfolio of for you in our comments and what we're seeing is is not.
All of that difference.
From.
In the future of origination pipeline from from what we saw.
Said in our comments this quarter, while we haven't been closing the big ones and some of the big markets, they're coming to the market in the meantime, we've done a lot of stuff in and some of the other smaller markets. So keeping busy closing a lot of loans across a lot of different markets.
And the same general product types that we've been the.
Active in in the last couple of quarters.
Great and then pricing on this on the <unk>.
The 1.
Catherine let me take that 1 yes, let me take that 1.
It's all over the board and we're trying to diversify more into industrial and life Sciences, because we think that further diversification of that our USG portfolio is helpful.
That tends to be.
Thanks, again done at a lower margin tighter pricing. So it really is all over the board I think the loans we've probably.
Having committee in the last.
6 weeks or so we probably had a 300 basis point differential between the.
Lowest approved deals and the highest approved deals and it just reflects the product tap the market the complexity of the transaction.
Variety of things, we get to <unk>.
Start doing more.
Really complex transactions that that are not as commodity type transactions that require our expertise in suppress.
Sophistication to execute we get better pricing on both of them, we do a plain vanilla apartment deal but.
Pretty much any any lender can compete bar so it's hard to nail down pricing I would tell you on average the.
The <unk>.
Loan yields we're getting on new originations are less than the yields on the book in that.
That is surprising to anybody of I've been under under a rock for the last couple of years because of the fed has got the <unk>.
Market so liquid.
Theres just not the yield out there there was so clearly as we said.
<unk> pressure on loan yields we've got offset that with volume we've got to offset that.
With the.
Controlling deposit cost and keeping our efficiency ratio really low so we understand our game plan on how to address.
And the environment, where there is pressure on.
Loan pricing and the locker lock our plan and I like our prospects of being successful with that.
Got it understood. Thanks for all of the color. Thank.
Thank you.
Thank you. Our next question comes from Stephen Scouten of Piper Sandler. Please go ahead.
Good morning, Steven.
David and you might be on mute.
Jason This message press pound or.
People would go from the next question.
Our next question comes from the line Michael Rose of Raymond James Your line is open.
Hey, good morning, everyone. Thanks for taking my questions.
1 area of that Hasnt been hit on yet George is technology.
Becoming a big issue I know you guys have spent a lot of money.
Over the years moving into new headquarters systems investments things like that but the the tax bank continues to move higher for.
For the industry just wanted to get an update on maybe some things that youre working on and maybe how you would expect the fund them you guys have been really good on the expense control front. After some of those larger investments a couple of years ago. So I just wanted to get a broad update on on the technology efforts on where we stand.
Hey, Brandon.
Do you want to take that obviously data innovation and technology now reports to Brandon.
<unk> been for a couple of quarters. So Brandon you want to talk about that.
Absolutely.
Ill say that.
A lot of the efforts have been I think we've talked about this last quarter around.
The efficiency of the way, we were on the operation and George and Cindy alluded to the.
The outward facing side as well so it's a 2 front of war.
It's focused on our efficiency internally.
And in the preparation of everything that we do today is focused on what we want to be tomorrow and.
That's.
The bigger better and faster so we're we're working on them.
The initiatives that is focused on.
Bringing some some.
Application that was developed initially at our ESG and bringing that into the rest of the organization.
And on.
Moody's book platform at the same time and both working together to.
Mike give us the opportunity to be more efficient of the delivery of.
Of data from 1 end of the process to the other gives up on management better insight into what's going on from beginning to end of the process. So there's a lot of it.
And then just managing our data in the new data marts and new platforms, so efficiencies of the big word.
As it relates to the internal side and then.
Cindy and Carmen has been working with our labs team as George alluded to on a number of fronts.
To move with the market.
As the needs and desires and technology change, we want to stay at the leading edge of that.
To ensure that we.
Putting sending her team and the best possible position to.
To move the deposit.
World, where it needs to go so.
We have said many times that we are committed to <unk>.
Excellent and not just our credit but also.
Our efficiency in the way, we serve both customers and provide our employees with the opportunity to do their jobs, so that will be.
That will be something we're always focused on I think everyone on the call understands the speed at which technology is changing and it's our desire to stay up with and ahead of that at all times.
Yeah.
Okay, great well maybe not.
Let me add a little bit to do that and we really are a portion of the have an excellent technology team and that whole group now technology data and innovation reports up to Malcolm Hicks, who reports directly to 2 Brandon and.
We've.
Been very effective in the last years, Brandon said in the delivering quick.
Quick technology, Hansman upgrades and solutions, our labs unit has been very instrumental on that those guys I think are doing the.
Best worked very very well done we've gotten.
A very pragmatic practical get things done accomplish improvements sort of focus throughout that the group that makes them really effective in helping our cap on avian.
We continue to advance on a lot of fronts. So I am pleased with where we are I think your question probably.
Was.
Aimed at was where are we going to see huge increases in expenditure.
Regarding technology, I think we will see increasing spend but.
Fairly moderate rate of growth because I think our guidance are being very efficient and very pragmatic in how they're approaching the but we are at the same time advancing our technology capabilities consistently and.
And I think pretty pretty materially I feel real good about the progress we're making.
And the cost that we're incurring to make that progress seems very efficient to me.
Okay, Great and maybe just as a quick follow up the service charges were up this quarter, there's been some headlines out there some.
Some self imposed but also some external pressure on on NSF fees I know, that's not a big line.
For you guys, but is this.
What day, what drove the increase and then B.
What have what steps do you plan to take as it relates to the NSF score for those customers that have and again I know, it's a small proportion for it but it has been on the news lately.
Well we are.
We're monitoring.
What.
Uh huh.
Political and regulatory conversations are going on about that subject. It does the.
Seeing the likely that some changes are in the wind.
Had we don't have any significant plans to change anything in the short run increase or decrease in that regard.
We have seen particularly the last month or 2.
It is.
Economies of.
More fully reopened and people are out spending and so forth we have seen.
An improvement in service charge activity.
Part of that is just the.
Philosophical approach the Sydney and her team are taking on deposits and getting more core customers and less interest rate driven customers in those core customers tend to engage in activities that.
Create more service charge revenue. So I would tell you the biggest impact in the improvement in the last quarter was just the normalization of the economic activity and reopening.
The second to that is improvement that Cindy and her team are making in the quad.
Quality and value and profitability of our deposit base.
Great. Thanks for taking my questions.
Thank you.
Thank you. Our next question comes from Matt Olney of Stephens, Inc. Your line is open.
Thank you.
I'll start on the interest bearing deposit costs. It sounds like there is more room to bring that down in the near term, but I guess from.
Strategic standpoint, with all of the liquidity in the system I'm just curious if the bank of yet considering locking in longer term funding and of <unk>.
The patient of higher rates in the future.
Sandy do you want to take that.
Okay.
Would you repeat the question please.
Yes, I would just add.
Asking if the bank is considering locking in longer term funding.
Precipitation of higher interest rates.
So on.
<unk>.
And our Chief deposit Officer drew Harper, our managing director of wholesale deposits.
Been working on that and arguing zone.
Relatively conservative steps team increased duration in our book we're not.
The going overboard with it but yes, we are having those conversations and making some moves to add duration.
Okay. Thanks for that same day.
And Matt we're doing that on a cost effective manner. If you now think sandy.
Pointed out that chart at the bottom of.
The.
The types there on deposit cost figure of <unk> I think it was in.
If you look at our new and renewed time deposits from Q2, they were a fraction of 1 basis point of it actually rounded up instead of down.
This quarter they were fraction of a basis point higher in Q2 than in Q1 and that differential really reflected.
Their efforts too.
Without materially impacting our cost of funds begin to ladder in some longer duration deposits.
Okay. Thank you.
And then I guess I wanted to circle back on the discussion around loans fees and as you said, you're just not easy to predict where that's kind of land in any given quarter.
But does it feel like these fees have been elevated for a few consecutive quarters is that fair and then for.
For the short term extension fees in particular, I think that was the 1 of the things that was mentioned in the management comments.
My working assumption has been that some of the extension fees are associated with our ESG project delays that were driven by the pandemic last year is that right and if so can we assume that some of those projects or the.
The were delayed or not coming back online and getting back to the almost schedule and so should we assume that those extension fees will be lower next year compared to the greater this year.
But that's probably a fair assumption Matt.
And again these kind of extraordinary extension phase minimum interest and so forth I mean, we're talking of range on a low quarter 3 of $4 million of quarter and a high quarter.
8 or $9 million.
The more typically somewhere in between there, but it does just bounce around a lot.
Yes.
You are correct that a lot of projects that were delayed.
The 3 to 6 months by Covid.
Another 3 months or 6 months of 4 months too.
Get the project.
Completed in.
Sold units closed in the loan paid all 4.
To refinance to the permanent market and that has been.
A nice source of fee income, particularly the last couple of quarters, we've seen quite of bit of short term extension phase of the last 2 quarters.
And I think we'll continue to see some level of that.
And the last 2 quarters of the year and diminishing somewhat next year.
The other fees just tend to even in normal times 10.
<unk> interest in.
Acceleration of deferred loan origination fees from faster than expected payoffs those things standard just bounce around a lot and good times and bad times.
And the.
Actually the acceleration of deferred loan origination phase of the minimum interest can have a greater impact in periods, where things are going much faster.
Then when.
<unk> finances, and sales are going slow because of your projects typically tender iron out those fees on earn out that minimum interest before the pay off and when things are going slow so the.
It's a very dynamic situation and it's hard to generalize and Thats why we always are hard pressed to give really good guidance on it because it just bounces around a lot.
From quarter to quarter.
We're thankful for them and we are in them.
The clear on that.
Sure Thanks for the color.
Thank you.
Thank you again to ask question. Please press star 1 on your Touchtone telephone. Our next question comes from Brian Martin of Janney Montgomery. Please go ahead.
Hey, good morning, everyone.
Good morning, Brian.
Hey.
George just 1 whomever just maybe its more Tim just on the you talked about kind of the deployment of capital I mean, obviously the growth in the buyback you've mentioned just kind of any update on just how you are incorporating in the M&A.
On commentary on just how that how that's trending today of the opportunities of what Youre seeing and maybe seems less likely with the growth that's in front of either the you've already articulated.
Sam you want to talk about volume.
Yes happy to thanks, Brian for the question.
Certainly as we outlined on the management comment the organic growth is our number 1 growth priority.
Clearly, we've got a lot of things moving in a positive way there between our ESG asset base lending team of community banking team. If you exclude the PPP loans, our community banking team actually grew this quarter.
I think the.
No surprise are Florida, and Texas markets did really well on community banking.
Indirect lending seems to be.
Certainly on the <unk>.
Positive trend there as well so.
We're focused.
Heavily on organic growth and the opportunities there.
Obviously, we announced the share repurchase authorization, along with our earnings as well.
But.
Advertisers back for M&A.
Looking at opportunities.
It is of secondary growth opportunity for us to our organic growth opportunity. We don't want to do anything that would be of the size that would disrupt the momentum that we have organically.
But we are.
Actively looking in <unk>.
Looking for opportunities clearly are we still believe our stock price is undervalued compared to some of the peers of compare to some of the the valuations of some of the acquisitions that have occurred.
Recently, obviously, the M&A markets are very active right now.
<unk>.
We would look probably to do something of the size, where we can do it for cash or some combination of stock and cash so.
Lot of a lot of things moving there but.
That is that is 1.
1 of our primary focus areas is just how do we.
Deploy our capital in the best interest of our of our shareholders and we're looking at all avenues to do that.
Got you. Okay. That's helpful. Thanks, Tim and then maybe just the how do we think about the kind.
On the mix of the balance sheet of any of the securities were up a little bit this quarter, but just given the growth. That's in front of me just kind of how the net.
That mix May change as you go over the next 12 to 18 months, how should we think about that I think securities were maybe up to 18% of sale of.
Of assets maybe net.
Sure if I have that exactly right, but just up a little bit relative to the past.
Brian I would say, we typically maintained our loan to deposit ratio in that.
89% to 99% range, we we've been comfortable we've got all sorts of.
Stress testing in the secondary source of liquidity and other things that have given us comfort vein at that level were a little below that right now.
I would think that as we get the loan growth going where we want we'll we'll return back end of that 89% to 99% range in the.
The future.
Okay, perfect and I just sneak 1 in just last 1 for Greg maybe on the <unk>.
You said earlier, George this commentary about the wage inflation.
How the how that May impact expenses as we go forward here is just how we should think about that thanks.
Greg you want to take a shot at that.
Yes, Brian Thank you for the question.
As we mentioned in our management comments, we have experienced.
Pressure really broad rate of broad based pressure across the U S from from.
Wages.
And being able to find workers.
The feel all of the.
All of the the.
Of the spots here on the bank, where we want to have and we retain our teams and make sure that our teams are getting.
The compensated so.
I think there is going to be pressure from that as we look into the next quarter or 2 how long that continues.
Still to be determined but.
Some of the things that Cindy and her comments in response to a question about our branches. Some of those things that we're trying to make sure that we look at all of our operations and make sure we are eliminating any sort of redundancies or inefficiencies utilizing technology.
To really help us to the extent, we can offset those wage pressures.
Uh huh.
Hopefully, we can effectively offset that.
But as we mentioned in our prepared comments.
Certainly going to be a challenge and it is going to be up.
Probably the driver of increasing.
Salary and benefit cost for us over the next couple of quarters.
Hey, Brett.
Ryan This is Tim and just have it in our commentary, but just as a reminder for noninterest expense for Q3, specifically, we do have a couple of <unk>.
1 time.
<unk> items that are going to impact Q3, non interest expense the.
$2 million of charges are going to expect to incur from the closure of a few branches that we have.
Scheduled to close in Q3, and then we did redeem our sub debt.
On July 1 that had about 800000 of of.
The cost that the deferred issuance cost that were not amortize yet that's going to come in in Q3 as well. So just a reminder from that perspective, but the.
That will impact Q3.
And future quarters.
Got you okay. Thanks for taking the questions guys.
Thank you. Our next question comes from Stephen Scouten of Piper Sandler Your line is open.
Yes. Thank you very much I appreciate it.
Morning.
So I wanted to follow up on the on the capital and just kind of how to think about capital deployment in light of kind of your legal lending limit and I know.
The by the buyback because of part of it maybe youre able to find the deal Thats cash are predominantly cash and so is the right inference. There that you don't need your legal lending limit theoretically to be as high and we might not see the.
The bigger commitments the.
400, 500 or $600 million return anytime soon or am I reading too much into that.
You are reading too much end of that.
<unk>.
Our our legal loan limit now.
Which we've grown by accumulating a lot of capital Embracement years is a very important part of our strategy 2 <unk>.
Significantly <unk>.
The increase on of our ESG and other portfolios longer term.
So I think what you are you are seeing through our increased dividend rate and the stock repurchase program.
Is not a situation thats going to take our aggregate dollars of capital down I would expect that.
Our strong earnings too.
Right from the dividends and the stock repurchase and let us maintain or even increase our aggregate level of capital.
Tim mentioned that.
In our management comments mentioned that are <unk>.
$225 million more or less of sub debt, we redeemed on July 1.
We will probably be back in the market mid quarter to replace that sub debt with.
Somewhat more somewhat last depending on market conditions, where we place that we think it.
Significantly reduced cost.
Of that sub debt will come back on refilling that part of the capital.
Bucket that the temporarily has gone away from July 1, but whenever we replace that sub debt, but we expect our legal limit to go back up and as Brandon mentioned in his comments we are seeing.
Sure.
A number of really large complex mixed use projects that are have.
The nominal.
The top of the inverse best in class sponsorship on best in class projects.
So I hope youre going to see us doing more.
Of those transactions going forward and not less and I think our legal loan limit even with the stock buyback and the dividend increase history that we've had will continue to grow based on strong earnings.
Okay. That's extremely helpful. Thanks, George and then my follow up question, I guess somewhat related and.
And if I look at figure of 44, it looks like some of those larger.
Commitments have been funding up.
Kind of pair that with the origination levels that it remains strong and figure 7 where it looks like the the headwind of prepayments should.
Should normalize as you look at 19% and 20 production. So I'm trying to think about how.
How the prepayments don't flow down more precipitously I know you said that they shouldnt necessarily been on.
I'm trying to reconcile that with figure 7 and then think about of growth could really returned to like the 7% level. We saw in 2020 or is that.
Too aggressive, but it seems it seems like everything is moving really strongly on the right direction.
Yes.
Everything is moving really strongly in the right direction of course.
Typically most of most of our deals are sort of.
The 2 to 4 years on the books 3 year average so.
We've still got some carryover from 16.17 and 18 all of the 2014 of 15 originations have paid off now in almost everything <unk> is by now.
Several more of those played up in the.
And the most recent quarter. So we're down to just the handful of <unk> deals.
The 16, 17 and 18 stuff is all.
Rob.
Stuff to pay off over the next several quarters.
And we're getting into the <unk>.
Point, where that 2019 origination volume is going to start seeing some sizable paydowns next year will be kind of hitting the 3 year mark on that.
That's kind of the prime time for deals to be moving out so we've got to grow origination volume.
2.
I'll set the payoffs.
If you look at our total origination volume, we were doing that from 14% to 15% to 16% to 17.
We're hopeful that when you say 'twenty 2 'twenty 3 of 24 Youll see on as upward trend in total annual originations in that.
Thats, what is going to take the actually grow our outstanding balances.
As an increasing volume of originations.
Plus the <unk>.
Contributions from a variety of other business units and.
I'm pretty optimistic about how we're positioned to accomplish that at all of our ESG and elsewhere.
Yes, I think that makes a lot of sense. So that's great congrats on the record quarter.
Thank you so much David.
Thank you at this time I would like to turn the call back over to CEO, George Gleason for closing remarks, Sir.
Thank you very much of if there no other questions that will conclude our call. Today. We appreciate all of you being on the call and we look forward to being with you.
In about 90 days or so so thanks have a great day that concludes our call.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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