Q1 2022 Bank Ozk Earnings Call

Good day, and thank you for standing by and welcome to the Bank Z K first quarter 2022 earnings conference call.

This time, all participants are in a listen only mode. After the speaker presentation, there will be a question answer session.

During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded and if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today Jay Staley. Please go ahead.

Good morning, I'm, James Daly director of Investor Relations and corporate development for bankers Dk.

Thank you for joining our call this morning and participating in our question and answer session.

In today's Q&A session. We may make forward looking statements about our expectations estimates and outlook for the future.

Please refer to our earnings release management comments and other public filings for more information.

On the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward looking statements.

Joining me on the call to take your questions are George Gleason, Chairman and CEO Brannon Hamblen President.

Tim Hicks, Chief credit and administrative officer, and Cindy Wolfe Chief Banking Officer.

We will now open up the lines for your questions. Let me now ask our operator, Victor to remind our listeners how to queue in for questions.

Yes.

Sorry to ask a question you will need to press star one on your telephone.

And to withdraw your question just press the pound key.

And by while we compile the Q&A roster.

First question from the line of Tim or Brazil, or.

Wells Fargo. Your line is open.

Yeah.

Hi, good morning.

Good morning, Jeremy.

So very encouraging signs on our ESG originations are kind of in line with the commentary.

You all provided last quarter and kind of throughout the quarter. I guess my question is on the repayments fraud.

And the commentary for continued expectation for record level of repayments here in 'twenty two I'm just wondering what's driving that it seems like we're now at kind of 2018 2019 vintages that are beginning to pay down those are a little bit smaller than the origination activity.

Funding activity you saw in 2017 is there something particularly lumpy.

The pay downs are expected to occur during the course of this year, that's driving that commentary or is there still some effects from lack of activity in 2020 in 'twenty. One that is kind of getting pushed into 'twenty, two that's driving that outlook.

Tomorrow.

I would point out to you the figure right in the management comments document that shows that we've got.

About 230 million left in our 2016 vintage originations and 1.34 billion left in our 2017 originations and you are correct. The normal cadence of payoffs would be in 'twenty, two we would be getting mostly 2018.

In 2019.

Repayments are there still you know a one and a half billion plus of 'twenty.

2016, and 2017 vintage originations that.

Oh, probably probably and I'll put a little more slowly than we would typically have been the case, just because of COVID-19 delays and construction progress and so poor polymer project. So.

We would.

We would reiterate what we have been signing for couple of quarters that we expect record repayments and our 2022 are within the yard as chi portfolio exceeding the record level that we had last year.

And of course.

Q1 was lower than any quarter of last year. The quarter just ended as far as rate payments that just reflects two to your point. The choppiness of luxury pregnancies are there are a lot of larger credits in the yard USG portfolio and.

If you have several of the larger ones right buy in a particular quarter you can really have an outsized quarter end.

That was a player like us are.

Modest level of repayments in the quarter. Just ended so we still expect Hum and are pretty confident we will have a record level of repayments this year.

Saving last year's record level.

Okay. Thanks for that and then on the other side on the origination front.

Maybe just talk through the status of the our ESG pipeline.

I know you had called out that you had originated a couple office and I think there was one hotel loan and in the first quarter I'm just wondering as most of the pipeline mixed use projects at this point or are you starting to see individual offices and in hotel type construction starting to come.

Back online.

Well, Brandon Hamlin will take a question plays Brandon.

Absolutely thanks for the question.

No.

In our in our most recent quarter, we were seeing as we have been alluding to a lot of multifamily still.

And and is definitely the largest in terms of number of loans, but to your point, we are actually seeing a number of one off office deals and and still still have our mixed used it as a material part of our what we close and what's in the pipeline today.

So not not a huge shift I would say from what we've historically experienced it we're still getting a very good diversity.

And in what were closing and what we're seeing in the pipeline coming up the guys are doing a phenomenal job of working on.

Intensely competitive environment to continue to find great projects across really Oh.

As we continue just to say a very diverse.

Market set.

And success really across all the L. P o's.

Yeah.

Okay, Great and then just last one for me just looking at NII and net interest margin.

Can you quantify the dollar amount of fees that were booked this quarter compared to last quarter that are included in that number.

We typically don't qualified what I would tell you as you know last quarter, we called out I think three categories of our contributors to our net interest income that we're about.

I think we suggested about $19 million for Q4 above normal.

Q1 was much more in line with what we would typically expect for a quarter now.

Those numbers bounce around all over the place quarter to quarter, So, saying, what's normal is a fool's errand, but it was a fairly typical.

Typical.

The quarter in line with our expectations.

And I guess, how how does that correlate with the expectation for accelerating paydown activity should we expect to see.

It's kind of fees.

Ancillary fees increase with that expectation for paydown activity or are we you know more or less a normal level here and there's no visibility for future Gallery data I'll answer you lap last let us.

Someone else get the next question Tomorrow.

Thank you.

We have a lot of payments.

Particularly longer dated loans that had burned off all their fees over the life of loan fees, we amortize over the life of loan. So I alone that was originated in 2016 or 17 or even 18.

No.

Juice left in the fee income on that loan because it's all been ratably accretive over the life of a loan.

Fee. This more alone has more recently originated will typically have some accretive fees or minimum interest are so poor so whether accelerated prepayments are higher levels of prepayments result in a rack.

Recognition of unusual phase are not really just depends on on the vintage of that payment and that's going to vary from quarter to quarter. So theres not really good guidance I can give you on that but thank you for your question.

Great. Thank you.

Yeah.

Our next question will come from the line of Stephen Scouten from Piper Sandler Your line is open.

Hey, good morning, everyone. Thanks for the time.

I'm sorry.

I guess, one quick clarifying question I noticed that the 664 million dollar commitment loan and on slide 36, either maybe change commitment or left the bank could you give any color there.

On that shift.

Yes.

I think we've talked about that project contains.

Nine or 10 different buildings within it are the first one of those buildings to complete and payoffs left that our credit facility.

Which resulted in a in a very accretive and a significant pay down on our credit facility dropping it from.

I think from the 600 million bucket Tam does the 500 million bucket is that right that's right.

It dropped it into another bucket all that was in line with expectations.

Perfect, which kind of leads to my next question as you guys.

People love to pushback on your stock on your company around the outsize risk concentrated loans, obviously, the history of the credit doesn't support that pushed back but.

I'm kind of wondering along those lines.

How you can give people any more confidence that you have with your track record over time and kind of what drove you to use the stagflation.

Waiting or wait more so to the stagflation model in the Moody's modeling that seemed like a highly conservative move as well.

Tammy you want to take the model Whiting question, Yes, happy too David.

Yeah.

Obviously it was was a conservative move in a move from what we had at year end.

When we had.

What was Moody's S three which was a moderate recession scenario, yes, there's obviously a lot of variables.

More so than.

And then what.

Even what we saw at year end.

With the economy, and and we listed a lot of those in our management comments.

And thought that that was the most appropriate weighting.

Two to go I mean, it probably is a little bit more conservative than our peers, but we think it's appropriate.

Okay, Great and then maybe just last thing for me.

You have I think $325 million left in the share repurchase plan, but then you know obviously growth opportunities look phenomenal and maybe theres. Some some potential economic dislocation I know you guys like to keep dry powder to be opportunistic. So can you kind of give us just some high level thoughts on how you think about that if if you might slow the pace of it.

Purchases based on what you're seeing or kind of what the mindset is today.

Yes, Stephen this is Sam I'll take that one as well.

Yes, Youre right I mean, we're halfway through our program, where we've repurchased $325 million of our $650 million authorization, we've got two and a half quarters to go.

You know Theres a lot of factors that go in.

Go into our consideration stock price is one of those but it's just one of many.

Our thoughts on our future growth prospects go into that as well.

So given all that I would expect us to be continued to be active but probably at a little bit more moderated pace than what we've what we've seen.

Just last quarter again dependent on a lot of different factors that.

Yeah, we look at as well.

Fantastic. Thanks for all the color and congrats on a phenomenal quarter here. Thank.

Thank you.

And next question will come from line of Brock Vandervliet.

UBS.

You may begin.

Thank you.

I'm wondering.

Just.

Better triangulate on prepay activity.

Brandon how much.

Im assuming you have a lot of visibility behind the curtain in terms of the actual.

Chance of a of a prepay I mean are you actively.

Actively and you must be actively in dialogue, you know kind of what's coming at you.

Just talk about that.

Absolutely Brock.

We are in active dialogue.

Our guys are.

Working on what the future holds on a monthly basis I think the thing I would tell you is you know.

As we've said many times. These are these are lumpy.

They can be lumpy they can be large and when you have a loan move from one day to the next that can be the difference in which quarter. It falls into I think.

One of the one of the other things that is at play you know sponsors or.

Are often vacillating between you know I'm not going to sell this am I gonna or am I going to refinance it.

You've frequently got mixed use projects that may be you know you've got those multiple options across multiple parts of the project. So there are a number of factors that.

Frankly can can move the needle on the timing of some of these projects. So we do our very best our guys are very communicative.

But you know where it's at.

Not at all uncommon for us to have conversations with sponsors that it's.

You know they think they know that their direction.

And quite honestly there are some situations, where we try to change that direction in and sit and try to find a way to keep the alone.

Now on book a bit longer if it makes sense from a risk reward point of view and so there are a number of different factors and conversations that can change as the timing of these of these repayments but.

As I said some of these loans are large and they move the needle quite a lot if they fall from one quarter to the next.

Yeah, we're not blind, but we don't control the pace. We just do the very best we can estimate when those are going to occur and of course, you know theyre not all.

One and done.

Repayments include partial repayments around con condominiums, and Youre projecting out for example, you know when does that T. C is going to come in and you know with with with if you've got big pre sales again, you move the date out that affects a pretty significant dollar amount in terms of when it occurs. So that's that's just some color around.

Some of the variability that we're dealing with there.

I would think.

<unk> on the fixed income market and seeing spreads move out on anything that's got to be helping there.

<unk>.

Go back to that comment.

I think George made on the $1 5 billion of 16, and 17 origination that's kind of still out there.

What does that represent if you had to bucket it or that those loans, where the projects are just slower than expected or did they actually.

Swap out of construction lines and Thats.

Quasi permanent.

Financing at this point, what what's in there.

Well I would say.

A couple of things and it's top of mind is COVID-19 . There were some of those projects were definitely delayed at some level around completion some were delayed around lease up.

And and why I wouldn't use the term permanent financing and anything that's still on that.

That list.

We did again, where it where it made good sense.

Extend some loans and valued the opportunity to keep you know good earning assets on book a bit longer.

When you're when you're.

When you're at the point of selling or refinancing.

You know obviously the sponsor wants to get every bit they can on the income producing project before they make either one of those transactions.

So there's been a good bit of that involved as well.

But.

Again.

Our direction or our guidance around 2022, and what we expect to be a record year.

Would communicate to you that those circumstances.

Largely across the board or are going to culminate in into a successful sale of refinance in 2022 of those of those legacy loans.

Got it okay, great stuff. Thank you.

Thank you.

And our next question comes from the line Michael Rose from Raymond James Your.

Your line is open.

Hey, good morning, Thanks for taking my questions.

So marine and RV lending.

Obviously on an upswing here in the past two quarters, but is there anything out on the horizon that maybe gives you pause about.

Growing that concentration maybe back closer to that kind of peak that you've laid out around 15% just given some.

Some broader macro concerns just just trying to get a intermediate term view on how you guys view that that business in that portfolio. Thanks.

Yeah, Michael This is George place and.

Do we have any pause about growing that portfolio back 15%.

The answer I would give you on that is no not not at all.

Given the quality.

The product that we're originating buyer and the job that our team is doing underwriting and servicing those loans.

The flipside of that is I think it's a long way and I don't know that we have.

Have any pathway to see that getting back to 15% of our portfolio.

You know where they are what are we came in about 11%.

We're about 11%, we're really pleased to see that portfolio grow in the last two quarters on a outstanding balance basis.

I think we continue to grow it I hope, we do I don't know that it will grow every quarter, but I think it grows most of the quarters going forward.

But we're getting enough growth while our aggregate portfolio is also growing to make that get to a 12% or 13% would be really.

Pleasing to me I don't have any near term expectations at that portfolio, it's kind of get a 14 or 15% of our outstanding balances.

Okay helpful. And then just looking at a page page 14 in the management comments just on the on the floors in the.

Variable rate loans.

You know, there's obviously a pretty high possibility of you know a lot of those loans could be moving out force here relatively quickly can you talk about that into quite along with kind of where your loan to deposit ratio is in and then any updated thoughts on the on the liability side as we are as those loans move off the floors, just as we think about the.

The margin over the next couple of quarters. Thanks.

Yeah glad to do so obviously, even if rates weren't moving this chart would be getting better each quarter.

As older loans that had a higher floor has paid off and replaced with newer loans that have floor rates closer to where they are the formula right. Provolone is today. So there's a recycling of this chart that that occurs anyway, and obviously with pad.

Having raised rates once in the prospect of significant and possibly even 50 or more basis point rise is coming.

More and more of these loans are going to get off their floors and become actively bearable and their pricing in the quarters ahead. It would seem assuming the fed goes through with it.

Plan to rise right, that's kind of become a much more significant percentage of them that'll be actively variable much sooner. So that's helpful to R. R.

Our yield on our loan portfolio, both purchased and non purchased loans, because we have a large chunk of variable rate loans in both the purchased and the mountain purchase portfolios.

So that should that should have a positive influence on loan yields going forward.

Flip side of that and pushing the other direction as we've commented for at least a year now that the.

Newly originated loans that we're originating are at tighter spreads than a lot of the older vintage loans that are paying off because market conditions have just gotten very competitive for the last a year or two.

So.

That fact that more newly originated loans have lower spreads in the.

The old vintage loans that are paying off.

Put some dampening effect on.

The increases in loan yields that are coming from.

Uh huh.

Upward movement in AR and the variable rate loans and then the other factor you mentioned is on the liability side.

I think we alluded to the fact that we expect our cost of interest bearing deposits to be going up in future quarters. We are.

Here's what we think is probably an inflection point.

And.

And our cost of interest bearing deposits in February March was up I believe a basis point or two over February which was down a basis point or two from Janney.

January so we think we are.

So nobody should be surprised if that was an inflection point given the fed rate scenarios out there. So we do think we will see some increases in cost of interest bearing deposits in the current quarter in future quarters based on the feds.

Cited intention dot plot expectations for higher rates so.

You know our job is to manage all of those and on them and a good why were.

The positive impact on our variable rate loans more than offset the.

Negative impact of.

Our.

More competitive loan pricing environment, we've been in for a couple of years and the fact that cost of interest bearing deposits are going up.

We've done a lot of work to make that happen Theres no assurance that happens, but we'll continue to work hard to do it in our deposit guys have done them.

A really good job of shifting the mix and the composition and.

Diversifying our deposit book.

Which should help us.

Vantage that deposit by more effectively it's still going to go up more effectively on the deposit by then.

And then what we've seen probably in a more recent.

Upright environments for our buying we've got a much more core focus deposit scenario now than we did a few years ago, so that should be helpful to us.

I appreciate all the color George Thanks for taking my questions Alright, Thank you Michael.

Our next question comes from the line of Matt Olney.

From Stephens Your line is open.

Great. Thanks for taking my question just wanted to dig a little bit more into the nuances of the variable rate loans with higher rates can you. Just help me appreciate the lag time between the LIBOR and the prime loans and how quickly these loans can can reset.

Daily reset or a monthly reset or any kind of.

Commentary you can give us on the nuances behind the resets.

Brandon the vast majority of our variable rate loans are in the <unk> portfolio. It's the biggest chunk by far so you want to take that question.

Absolutely. Thanks for the question Matt.

The vast majority of our ESG loans are resetting on a monthly basis.

Somewhere between the first and the 11th through the month. So you know when we talk about those.

Those those four graphs moving.

They they will be moving fairly quickly and the vast majority of our loans are LIBOR based or sofa based obviously, we're transitioning to sow for.

As as appropriate there.

I think we have a couple that are prime base, but no more than two or three so you know I don't know those percentages off the top of my head, but but again the vast vast majority.

We're gonna be loved the Ah.

Monthly resets.

Okay.

Helpful. And then I guess on the <unk> side I think over the last few quarters, you've been highlighting that the New York market was going to stabilize and start to grow again and it looks like we definitely saw that in the first quarter pretty pretty sizeable increase versus kind of late last year any more commentary on what youre seeing.

And the New York market and.

Youre seeing that gives you the opportunity for even incremental growth from here. Thanks.

Absolutely you are correct in.

A number of of the some.

Some of the older loans that will be paying off this year or definitely in our New York portfolio and that's been driving.

Our guidance, there and frankly.

In the quarter just ended if I'm not mistaken, we probably had more pay offs.

In New York than any other market, but again, it's it's it's what's there and it's what's gotten to that point and we'll continue to be the case, but.

New York also led the way in terms of new originations.

And you know by by number and by my My dollar volume so not surprising we've we've long said that we absolutely believe in that market.

You know there are there are a lot of different.

Waste to look at that by product type that the residential market. There as we've talked about many times been very strong in its rebound coming out of the pandemic we.

We see continued strength there in both the rental and the for sale market and.

We're very pleased to do business with a very reputable experienced in our.

Financially stout sponsorship there so we continue to.

To look to opportunities there and see those opportunities.

And really you know it's it's it involves condo it involves rental and involves office small office projects as well in and mixed use.

And you know the hotel market is starting to show some good signs of life we.

We did close one hotel loan in that market this quarter. So it's really.

The same thing that we've built it on is what we're seeing today and.

So so we will start to see what we're going to see a number of the older ones come to fruition and pay off we're seeing a lot of opportunity to generate new loans as well.

Okay. Thanks for taking the questions.

Thank you thank you Linda.

Our next question from the line.

Jennifer damper from truths you you may begin.

Thank you Jim I'm, just wondering hi, just wondering as rates go up what what portfolios do you see as most vulnerable to higher loan losses over the next several quarters.

Jennifer I would tell you we feel really good about our asset quality.

Obviously, our our past due ratio nonperforming loan ratios nonperforming asset ratios are all.

Uh huh.

Very favorable levels as of March 31, and that's consistent with where they've been for quite a while.

And.

Our.

Net charge off ratio in first quarter wasn't unusually.

Placing our net recoveries number of minus 0.0% to 1%. So a one basis point net recovery for the quarter. So we feel really good about asset quality you know, we stress test our loans when they are underwritten and approved.

Based on their ability too.

Stand interest rate stress.

Our loan structure.

And also their ability to withstand interest rate stress based on movement in where they are permanent refinance market is for those loans.

And also.

Based on.

Cap rate stress.

How far could cap rates move from where they are now and we still have room to come out on that project. So.

We don't underwrite loans that don't have a fair degree of resiliency in a changing rate environment.

We focus on that on every single loan so we.

We feel cautiously optimistic about the.

Quality of our portfolio and the ability of the vast majority of our loans to withstand a reasonable amounts of interest rate stress narrative.

<unk> go up.

Uh huh.

Hundreds of basis, you know 500, or 700 or 900 basis points, all bets are off and that kind of environment, because the world will change dramatically, but women.

Realm of rate increases that most folks were expecting we think the portfolio performed pretty well.

Thanks George.

Our next question comes from the line of Catherine Mealor from K B W.

Again.

Thanks, Good morning.

Good morning Catherine.

Question on figure 30.

And then I noticed I just thought it was interesting this is a small portfolio, but we'll see.

Just curious your commentary on that as the loan to cost.

Increased on the single family lots and homes.

It's category and just curious if you have any commentary on that.

I'll take that George.

That's actually.

Being more reflective of.

The one substandard credit Catherine we don't have a lot of single family.

Holmes lots and homes on our book and our recent repayment that weighted that number down.

Is the reason you're seeing that drift so I don't recall how many.

We have left on our book, but that's really reflecting fewer and more impact from you know the single substandard credit.

Got it.

Is it really that entire is that mostly that one credit in that.

I believe that's the bulk of what's there.

There's I think there are a couple of others in there, but that's the bulk of it.

Got it okay that makes sense.

We see and which is.

The supply chain issues in general like are you seeing and Im sure Youre thinking that any increase in cost obviously for these.

Jackson, So how is that reflected.

And kind.

Kind of how you're looking at these projects on a quarter to quarter basis.

And.

Ultimately kind of any risks that may come with the projects I'm not sure.

Sure sure well Theres no question that those issues are out there and one of the one of these many reasons that we're happy to be working with the sophistication in most cases that our sponsors have and and the buying power that they and their their general contractor very sophisticated general contractors.

Obviously costs have been increasing.

But.

On the other side of the spectrum and so many of these markets that we do business and you are seeing.

Very significant rental rate and.

And sale price increases as well so.

If if if that side of the equation you'd never change then cost would catch up to as much faster, but both.

Both sides of the equation had been moving and and supporting continued development of these projects. So.

And we as you know spend a lot of time monitoring structuring are.

Requiring good subcontractor buyout even behind.

GMP contracts that you know that.

Obviously sponsors are sharpening the pencil and making absolutely sure and so there's almost more certainty because of the of the cost implications out there around where that's going to land on projects that were there were closing into now so.

Again.

As George alluded to we do really focus on the stress that our projects can can incur before our loan has any sort of sense of real risk to the repayments that would include making sure that we've got good contingencies and arm alone.

Or in the project capitalization.

And in very capable again G M G.

Contractors general contractors and sponsors with deep pockets.

And again, we are in.

Enhanced by the massive equity that they're putting in front of us So and then beyond that.

This distress on from a rental rate from a vacancy rate from an interest rate point of view that we're <unk>.

Sort of from all different angles are working on making sure that we've got a stress buffer there.

That enhances our position.

Catherine I would I would add a couple of points are just to emphasize a couple of points.

Brandon alluded to this but I think it deserves a little more input so it's obviously.

As Brandon said, we're in an environment, where cost are moving up on almost every project if not every project in our our sophisticated sponsorship.

Is is by and large very sensitive to that so.

There is.

A greater percentage of these cars.

Contracts and subcontracts that are bought out or are then.

We would have seen in a very stable environment.

So the sponsors or are derisking.

That by getting firm.

Contracts with contractors and subcontractors.

Higher percentage of the total project cost than they were before so that's going to take some of the variability out and then the <unk>.

The second thing is as all of our construction loans have a completion guarantee.

That shifts the risk of cost overruns, all my project to our.

Two our guarantor.

Guarantor behind the behind the sponsor on that so if there are cost overruns beyond what's budgeted in our lab far with contingencies and project.

Completion guarantors have got to write a check.

Our balance that budget as soon as that out a balanced condition as identified in and bring that project into our completion.

In the context of buyer alone. So those completion guarantee structures or are very important.

And more important now in a rising cost environment and Niobrara per band.

And have you had to actively use any completion guarantees recently arent Margaret.

Oh, no I wouldn't say, we've had to actively use the guarantees but we have had sponsors on a vast number of projects active Hawaii voluntarily writing checks I mean, we've not had to call on the guarantee and so you've got a guarantee to do this they know it's their obligations.

So.

Cost of escalated beyond what were budgeted in the loan we've had a lot of sponsors writing checks voluntarily to cover those costs because they know what their obligation.

Great.

And then any change at all in terms of presale levels or is that fairly strong as it's been.

That depends on the market you're in if you're if you're in Miami, its 30% to 50% up here on the West coast of Florida tends to be 20% to 30% if you're in New York It tends to be nothing.

So.

It very much depends on the market share and I don't think and Brandon you can comment on there. So I don't think within the what's kind of customary and normal for each market, we've really seen any.

<unk> and presale practices or requirements in the last year or two is that accurate Brandon.

Thats absolutely accurate George.

Okay.

Great. Thank you for taking my questions Alright.

Alright, Thank you Kat.

Our next question line of Brian Martin from Janney Montgomery, you may begin.

Hey, good morning.

Good morning.

Just George maybe or I don't know.

Not sure who.

Discussion earlier about the impact on the deposits and the improvement just as you guys think about the deposit betas given the work you've done on that can you maybe frame up a little bit how you're thinking about the deposit betas behaved now.

Versus obviously, what they were before in a different deposit mix.

Well.

The whole purpose brand of.

Getting a more diversified more core focus deposit portfolio and Cindy Wolfe is in here.

And you know our.

Our head of retail banking carbon climate, and our head of deposit shaped paused, all cirrhotic currently work or sandy and in their entire focus.

On the deposit book has been to build it and improve it and diversified and if.

If if it works as we.

Thank you will and as we have worked hard to make it work, we should have lower deposit betas.

This cycle than we had last cycle and you know it's hard to quantify those.

We're not sure if the fed is going to rise.

The next meeting 25, 50 or Mr. Bullard gets his why 75 basis points. So it's hard to quantify exactly.

Hum.

How things move, but I think we've done the preparatory foundational work I have better deposit betas.

Then we had in the last cycle and hopefully that will will be.

Improved enough that people will say, yes, I can see the results of their hard work.

Whatever they are this cycle will probably not be satisfied with that and the goal will be to continue and is to continue to improve that deposit base every month.

With go let it becomes less costly and less rate sensitive in a rising rate environment.

It's a process that is ongoing.

Gotcha.

Okay Alright.

Alright and.

And I guess, maybe just.

Can you just give a little commentary on the.

Just the outlook and maybe.

Whomever, but just on kind of the ABL and equipment finance I mean, both of them. Obviously, you guys sustain it to be pretty meaningful contributors going forward and then secondly on the community banking had a nice quarter.

You know kind of the P. P P noise, but just kind of thinking on how that what was driving that and just kind of the outlook there.

Well.

We have talked as you know Brian you've followed this long time, we talked for several years without the need to get a more diversified.

Asset generation book to complement the strong performance characteristics of our CRE real estate specialties group portfolio and I think we're seeing traction in that.

It was mentioned earlier, we've had a couple of quarters of positive growth in our indirect business.

We.

That continues in most quarters going forward.

We really lack the teams we put together for asset based lending in.

The equipment finance area those guys.

I've got a few.

Scans on the wall as far as transactions close, but I've got.

Decent pipelines.

<unk> actions, they're working on but look.

Look like that will result in some additional closings and then.

We're really Mike and I.

You know hard push.

To get our consumer small business commercial lending in our community bank.

Business businesses growing.

More significantly we are seeing.

Encouraging signs and saw encouraging signs in the first quarter with that and have good.

Pipelines going into Q2 for that.

Our G G L business government guaranteed lending business was primarily SBA has been <unk>.

<unk> mentioned for there.

Their attention for the last couple of years with getting all of the PPP loans booked for our customers to help our customers and then getting all of those PPP loans paid off and we're getting toward the end of that and that's letting us.

Get those guys refocused on their you know their bread and butter day to day mission of originating more seven and five O four loans in our in our community banking markets in Arkansas, Texas, Florida, Georgia, and North Carolina.

So we are cautiously optimistic about the ability to continue to get growth out of.

Most or all of these portfolio it was probably not all of them every quarter, but most of them.

On a quarterly basis going forward and I think.

That is helpful to our long term goal of getting a more diversified.

Asset book, and our bank, even as we let our ESG and our community Bank commercial real estate units continued to generate all the good loans. They can so we expect them to grow we expect these other elements too late.

Lead to greater diversification over the long haul.

Gotcha.

Helpful and just maybe if I can ask one last one and that was just on the maybe for Tim on the expense outlook.

Things look a little bit better I guess this quarter.

But it still sounds as though there is pressure out there on the expense line too.

Yes, Brian you are correct. We are obviously very pleased with the way the team managed expenses.

This quarter, although I don't think that level is sustainable.

We actually our head count was actually down in Q1, we.

Have had some positive trends in the last few weeks, there and moving in the right direction. There. So we.

We expect to be able to fill a lot more positions this quarter and going throughout the year.

So my expectation for Q2 is in the $112 million to $114 million range.

As for noninterest income noninterest expense.

You know we were at 110 in Q4 were 110 in Q3. So that's a couple of million more than where we were in those two quarters.

And then going forward I would expect probably another couple of million $2 million to $3 million per quarter increase over over that number that I just gave you for Q2.

And most of that will come in the in the salaries and expense line item and we will be dependent on the level and pace that we're able to hire hire folks.

So thats current current expectations right now.

Around those ranges.

Perfect. Okay. Thanks for taking the question guys and congrats on a nice quarter.

Thank you.

And we have a follow up from Tim or Brazil or from Wells Fargo you may begin.

Alright, thanks for the follow up.

Just one more on the Securities book.

Quite a decent amount of cash flow expected both in the second quarter and then the remainder of the year balances dipped a little bit in the first quarter I'm just wondering what securities strategy looks like in the context of the rest of the balance sheet composition and growth.

Well, that's a great question and first I would tell you that we're feeling very good about our decision over the last couple of years to keep things really short in the.

The fact that over the next three quarters second third and fourth quarters of this year, we expect to get a little over 20% of our securities back in cash in.

Either be able to use that for other purposes are reinvested at higher yields is helpful. And we expect strong cash flows over the next couple of years, so that that helps us address that depreciation in that portfolio.

And a pretty quick manner. So we're pleased about that.

At the same time.

With rights moving upward and having moved upward as quickly as I had in it became pretty evident that we were going to say continued moves upward in rights.

As is the.

First border began to unfold, we pretty much went to the sidelines and elected did not.

Buy much in the way of new Securities and.

I think the guys running that portfolio have a very.

Big decision to make as to when we're far enough up in rates that it's time to step in and.

Bye.

Few more securities to replace some of this run off.

And when it's time to <unk>.

Extend duration, a little bit I don't think that I think we're there on either point at this time to die. So they will continue to monitor that.

They've done a very good job managing that portfolio for years I think they will continue to do so but.

Clearly it.

It's not our view that it's a time to buy today.

So we'll continue.

<unk> to monitor it.

Okay. Thank you.

And we have another follow up from me from Stephens you may begin.

Yes, Thanks, just a follow up on.

Fee revenue I see.

You called out the $1 8 million dollar gain on the sale of branch deal is there anything else worth calling out.

Unusual I'm looking specifically at AR.

The other assets that had been a $1 million over the last quarters, but with close to seven this quarter didn't know if there's anything else in that line as well.

Well the branch sale was in that line, but our special assets gas.

Did excellent job.

And.

Liquidating some of our pieces of Oreo that we had a very low value add it at a really good sales price so.

We had a and I think we referenced this in our prepared remarks that we had.

Elevated level of gains on sale of other assets, which included that branch number but it was as you note even taking the branch number out. It was it was elevated so we would expect that line item too to normalize Matt more consistent with some of the more.

Uh huh.

Subdued quarters that we've seen over the last year or two we've had branch sale numbers and several of those quarters in the last couple of years as we've.

Paired valves and sold at a profit some branches that really didn't fit our long term strategy, but the main item in that gain on sale line is <unk>.

<unk> on sale of foreclosed assets and that was unusually good in the quarter just ended.

Okay. That's helpful. George and then I guess going back to the discussion around deposits and deposit betas.

How much of your deposits are contractually indexed or very similar to index that would have a very high beta and any color on maybe how this would compare to <unk>.

Last cycle in that 2015 2018 timeframe.

You know what I would tell you Matt as you know last cycle our largest.

10, depositors have counted or high teens close to 20% I don't know that we ever hit 20%, but.

18, or 19% of our deposit base.

Several of those.

A majority of those were contractually indexed which meant by at essentially 100% beta.

Our top 10 concentration less now is somewhere less than 8% seven and change I think of our total book and I don't think any of those are <unk>.

<unk> indexed or if if they are it's a small number of them.

But that are contractually indexed so we've made a very conscious decision to get away from.

The big concentrated.

100 beta index deposits and.

Try to.

Control that deposit beta much more effectively going forward than we did in the last cycle.

Okay. Thank you.

Thank you.

Once again Thats star one for any questions or wanted one more quick questions.

And I'm not showing any further questions at this time I would like to turn the call alright. Thank yous. Thank you Victor there being no further questions. At this time that concludes our call and we thank you guys for joining us today and look forward to talking with you in about 90 days have a great quarter.

Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a fee.

Right.

[music].

Yes.

Okay.

Yes.