Q1 2023 Bank Ozk Earnings Call
Good day, and thank you for standing by welcome to Bank O C K.
<unk> first quarter 2023 earnings conference call at this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear automated message advising your hand this race to remove yourself from the queue. Please.
Star One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Jay Staley director of Investor Relations and corporate development. Please go ahead Sir.
Good morning, I'm, James Daly director of Investor Relations and corporate development for Banco de Chile. Thank.
Thank you for joining our call this morning and participating in our question and answer session. In today's Q&A session. We may make forward looking statements about our expectations estimates and outlook for the future.
Please refer to our earnings release management comments and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward looking statements.
Joining me on the call to take your questions are George Gleason, Chairman and CEO , Brandon Hamblin, President, Tim Hicks, Chief Financial Officer, and Cindy Wolfe Chief operating officer.
Now I'll open up the lines for your questions.
Let me now ask our operator to remind our listeners how to queue in for questions.
Thank you.
As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question. Please press star one again, please wait for your name to be announced please standby, while we compile the Q&A roster.
Yeah.
One moment for your first question.
Our first question comes from Tamir Bachelor with Wells Fargo. Your line is open.
Yeah.
Hi, good morning, everyone.
Good morning.
But starting on the.
Land loan that was moved into Oreo.
Yes.
What's the price at which that loan could be sold out today and I'm wondering you know putting it into Oreo with the appraised value of 100.
Why not use the sale value today is kind of the basis for that long.
Yeah.
Brandon you want to talk about that credit.
Sure sure to mere thanks for the question Yeah, We've we've talked about the credit last quarter and and describe the credit for you I would I would say in specific answer to your question. You know we we obviously had the appraisal originally at 139 in June of 'twenty one.
On a Mac had another one more recently at 100 point.
0.4.
You know as to as to where we book it looked at the end of the day the the the the basis.
Is is known by our.
By our notices out there so and in terms of where we come in there you know that's going to be affected by that that's a it's a great site, we feel very good about our ability to market that site over the next year or two and as we said feel feel good that we'll have.
Little if any loss associated with that.
Yeah.
Okay. Thanks for that and then maybe looking at the continued strength on the lending side would just love to hear your thoughts on the plan for funding in the rest of the year and then maybe just talk through what the incremental spread on the loan production in 2023.
Mike.
Yes.
Pardon me.
Take that tomorrow.
Our prospects for continued loan growth.
Pretty good to us obviously, we reiterated.
Our guidance for our ESG originations that we gave in the first quarter.
Our first quarter results were very consistent with that January guidance and.
We think that continues to be good for <unk>.
Continued to enjoy diversification and the growth all of our units contributed to some degree.
Two are positive loan growth in the quarter just ended.
I'm not sure they'll all be positive every quarter, but over the course of the year I would expect all of them to be positive contributors to loan growth.
We're continuing.
With our underwriting and application process origination process totally business as usual here there have been.
No adjustments because of the economy.
We continue to do business as we did in the great recession, and the Covid pandemic and other times.
Economic stress, we just continue to do business with quality sponsors on quality projects on terms and structures that make sense and we're always there for our customers. So we expect.
Good origination volume throughout the year certainly off the grid.
Record pace of our ESG originations last year, but consistent with that 2021 level of our ESG origination with good contributions from other groups.
On the deposit side as you.
So.
In the quarter just ended we had good deposit growth.
Three 6% growth in deposits not annualized that was organically through our branch networks most of our deposit growth.
It comes from our 229 branches in Arkansas, Texas, Georgia, Florida, and North Carolina.
We expect those branches will continue to.
On that growth going forward in the remainder of the year, we've not had any changes in our deposit gathering strategies or adjustment would not become more reliant on wholesale deposit source. So I don't expect to do.
So.
So we're driving that with organic branch deposit growth then we.
We feel very good about the prospects for that now.
As you saw our deposit cost were up.
Because we are we're generating a lot of growth there those branches and you have seen most banks have negative that have reported that I've seen at latest patent negative deposit growth numbers, we had massively positive deposit growth numbers, because we've got growth in our business that.
We made growth in deposits to fund it so we are.
Sure.
And for that so our.
Deposit costs, probably rose.
Yeah.
Upper half of bags.
In the quarter, but our net interest margin increased nicely.
We've got a national a balanced.
Balance sheet between bare.
Variable rate loans, and our cost of deposits, that's letting us offset that.
Still generate very nice returns and of course.
We already have an industry, leading net interest margin by a wide.
Distance from our competitors and that that's a very nice thing to have.
Okay.
Great. Thanks for that color I'll step back.
Thank you one moment for our next question.
Yeah.
Our next question comes from the line of Stephen Scouten with Piper Sandler Your line is now open.
Yeah.
Hey, good morning.
Good morning, David.
George you look good on Bloomberg yesterday, well done.
Alright.
Nice to be there, although I don't I don't think I'd, probably look good anywhere I'm, a little out of the Midwest.
Well it sounded good either way.
Alright, well I'm curious as you think about your new loan production I mean, you just spoke to having to having to pay up for deposits. Because you guys are in the enviable position of having some good growth, but how do you think about the spread you manage to on that kind of marginal cost of deposits.
And your new loan growth and kind of how you how you think about that marginal spread versus your current NIM.
Matt that's a great questions David.
It's a constant debate on every transaction I've got a.
An opportunity that landed in my Inbox late last night or early this morning that I was looking at before I came to work this morning that <unk>.
Certainly as a question.
One of those questions. It's a piece of business you would love to do and the quality is great. But you are looking at it.
The spread is just not what you would want to say versus our marginal cost of deposit so.
I'm going to sit down with brannon and lenders involved in that transaction. After this meeting and we're going to parse that out looking at.
Other opportunities of that relationship.
Generate the deposits that will come with it if there is any cost on those deposits the magnitude of that.
And I'll just go through and do that got rich than you do.
1000 times, a quarter of making a value judgment is there enough.
Our return.
And long term relationship building value to that relationship to do it so.
We do that all the time and.
I think we are.
Parse that.
Out pretty well for our shareholders.
Our customers as well because we have a lot of customers that want to do business with as evidenced by the fact that our loans are growing and our deposits are growing.
Generate a really good return for our shareholders as shown by our industry, leading net interest margin and return on average assets.
Efficiency ratio, so I think we're parsing those decisions well.
But it's very much a case by case basis.
On every credit we've got some guidelines and principles. We won't go below has asked for beyond that but.
<unk>.
There are nuances in every situation, what's that historical relationship with the customer what's the prospects for additional business, what's the deposits what's the other ancillary.
Fees Treasury and other services you get with it and we try to we tried to factor all those together and make good decisions and I think our our wonderful team of.
Our bankers have had a good track record of doing that is reflected in our numbers.
Yeah.
Yep, Okay definitely George I appreciate that and I guess, you guys are transparent as always which I appreciate and your management commentary here and if im looking at that figure 22, you show the deposit composition and kind of where you are.
From a broker deposit perspective, how high could that nine 5% go I guess within your internal guidance or regulatory or what have you.
Because I'm assuming.
That the duration of the ISG book is extended in this environment and maybe I'm wrong, but I would presume that some of these loans.
Would stay on your books, a little bit longer than they would have two years ago, which should be a positive to your earnings and capital build but might put some pressure on deposit gathering and the size of the balance sheet. So just kind of curious how big that could get and what other ways you might fund that unfunded book as it moves over.
Yes good.
Good and good comment and I'll sort of take that backwards and say, yes, our ESG.
Yeah.
Is having loans stay on the books longer part of that is just.
There continued to be shortages of certain flavors out there.
And some materials, particularly <unk>.
<unk> and electronic components building seem to we have a lot of.
Delays on those sort of things and again, it's just an environment where.
Everything seems to move a little slower than it did pre COVID-19. So projects are taking longer and because of the turbulence in the interest rate markets. There. They are staying on the books longer.
And that's good.
And.
It is it is a positive and it gives us additional earning assets. So we're not.
Objecting to that at all and.
It's easy to overstate that we've already had several loans payoff this quarter.
So flow has not stopped it's just it's just slower.
Your question about broker deposits number one we have no regulatory limit on how much broker deposits we could have.
Two are.
Internal laminate is broken down into target tolerance buffer and capacity limitations in.
The capacity limitation is is.
Why beyond where we are now we're sort of in the.
Lower half of the tolerance range for that so we could we could increase that if we needed to.
As I said on the last call are sort of working premise phase, we'll keep that under.
10%, but.
We needed that to go higher it could but.
Our working premise is that we'll keep that under 10%. So we've got a lot of.
A lot of room to move around on deposits.
The following figure 23 of the.
Slide deck, we gave you the fact that we've got right at $10 billion of cash.
Cash Unpledged investment Securities.
FHFA fed funds borrowing capacity in <unk> and <unk> credit lines of credit are not tap fed funds or the fed discount window is not tapped in.
That borrowing capacity that we've given you. There doesn't include anything for this new bank term funding program, which we don't have any expectation of using but its available out there, but we didn't even included in the calculation because we don't expect to add it.
Expect to use that as I've said earlier.
We believe we will find a.
Growth in our balance sheet this year through our traditional means of organic growth through our 229 branch network.
Feel pretty good about the prospects of doing that.
Okay.
That's great Fantastic color George appreciate it and congrats on all the record results here this quarter.
Alright, Thanks, David.
Thank you.
One moment for our next question.
Our next question comes from the line of Milan <unk> with Morgan Stanley . Your line is now open.
Hi, good morning.
Good morning.
Just given the general concerns around credit and CRE.
Hoping you could give us some more color on the special mentioned loan you discussed in the release.
If you can what drove the potential buyer to to withdraw and.
Why did the sponsor chose to surrender rather than look for another buyer and I guess a question for you is.
The recent appraised value is above your loan basis.
Why not sell now why why wait for sort of macro conditions to change.
Well, let me answer that and then.
Part of that and why not sell now youre talking about selling.
<unk>.
It's a great site.
But people who buy pieces of land.
Or a little bit different than people, who buy them all.
Office buildings or apartments, or hotels or condo balance.
They've got two can save a project go out and.
Design build that project.
All of the development work for that and.
You don't typically buy a piece of land until you are ready to start that process and have some visibility going forward. So.
The comment was made in one of our.
Research reports that was issued.
But not that.
Land deals tend to be more variable in value and tend to make more variable in the marketability of them than other types of properties and that was that was a very.
Good observation.
The time to sell this and to get our maximum value out of it is probably.
When conditions stabilize and people are coming back to the market to start.
Incubated new deals and really.
Really looking forward to the opportunity to develop it.
Bye now.
Pace of land to hold an environment that has as much economic turbulence as the environment.
As you know.
Not something that a lot of people will do.
Just because there's uncertainty and there's holding cost carrier costs interest costs and so forth with.
Acquiring a track of land so we think.
Best strategy.
As to.
White to actively market this property until the fed's kind of stopped raising rates in the dust is settling in on current economic conditions.
And people sort of have a view of the future where they have enough certainty that we want to go out.
Incubated a new project on this piece of land.
It is a great site and.
And I will tell you without Mark again that we are having.
Some.
Unsolicited inquiries and interest in the site.
But again, our intent is to not actively go out and market beside until.
Economic conditions.
<unk>.
Level.
Okay.
Great and maybe if I can push a little bit on that.
Just given all the concerns around credit.
If that if the appraised value.
Is is data from December .
At what point would you need to reappraise this or are marked down what would you need to see for that to happen.
Well.
We're probably certainly ria price or at least annually.
And now we would re price it otherwise if we thought there was a material likelihood in the change of the value on it so our policy on Oreo properties as to reprice annually.
Yeah.
I will tell you when this appraisal was was done.
Our guys in appraisal services pushed.
Pretty hard on their price or.
Challenging emo.
By year end.
Prize or appraiser was adamant that he can.
Could not.
Get to a more conservative value.
No.
It is a reflection of the fab.
We've got it in Oreo pancreas reflection of.
Of the time.
Sponsor had it.
We had an agreement to sell it.
Sure.
When.
Signature and Silicon Valley Bank deals unravel.
Buyer.
Act out of.
Transaction based on that so.
Thank you, but we hadn't had the economic turbulence, we have this asset would already be down.
Great I appreciate all the color and then if I can just follow up with some.
Was hoping for some general comments on credit as you know investor concerns have ramped up since since the since the bank failures. So.
For you is how much do you share. These concerns given your unique vantage point and in the CRE market and.
Maybe if you can talk about how you're managing ahead of it. Thank you.
Yes, well.
So very good about our credit position.
Our ESG portfolios weighted average, 54% loan to cost 43% loan to value.
That gives us tremendous cushion for values to contract far beyond anything that I think anybody is talking about in commercial real estate on on.
Yes.
That I've seen so we feel very good about that.
We reiterated our guidance that Tim gave in the January call that we expect our net charge offs. This year to range from 6% to 16 basis points for the full year.
Our 14 basis points in Q1 was.
In that range.
I think that guidance is still good we feel pretty solid about it or we wouldn't have.
Reiterated that guidance.
There is a lot of chatter out there about commercial real estate and I would make.
Two points.
In regard.
To that and one point is that our portfolio is new construction and we referenced serves in the management comments. These are properties that.
Have the newest state of the art.
Features our newest amenities and accurate mutes that sponsors are building brand new because it's what renters are purchasers of those.
Billings are units are wanting.
And as a result.
Our property can debate.
Vast most highly marketable.
Our properties in the market so.
We're still doing office building and I know Theres a lot of noise around office buildings.
But we're still seeing good leasing activity on the office parts of our portfolio and it's it's not because world is out there running to buy office space and Theres, a giant competition to ran office space, but it's because we've got the best properties in markets or Submarkets and the.
Since that we've done make sense and.
There is demand for those now as leasing slower than it was.
Four years ago, or five years ago or three years ago before Covid, yes. It is Matt will give you that but we are seeing decent leasing velocity.
Loan loans on office buildings paid off because the office buildings are leasing up.
Moving now it is slower but they are getting there.
The second thing I would tell you is there is a lot of conversation about <unk> and the wave of maturities and all property types office gets talked about a lot.
Coming from <unk>, and that's not our market and those are not our type of properties.
I understand that there is going to be some challenges in commercial real estate from <unk> loans that have a three or 4% interest rate better maturing and now are going to refinance at a seven or 8% interest rate or maybe even higher.
It's going to put a lot of those projects in the ditch a lot of those projects will still work.
Because over the ensuing five years or seven years or 10 since that loan was originated it can put embassy MBS theres been substantial amortization on that loan and substantial increases in rents, but those are older properties, they're not new state.
The art properties, they're not going to buy and large benefit from the flat to quality sort of attributes that that our developers of new properties and joy.
Sure.
That's going to be harder to lease up if they're not already leased.
<unk> state of the art properties that has all of the desirable amenities that people want to be in and the current employment environment, where employers are trying to get employees to come back to work.
I desperately want them to come back to work for the most part they are trying to get them to come back to work.
The quality.
The office environment.
As.
Critically important in that regard if you got really nice office says that people lock and they have the amenities and the attributes that people want and going to the office as a pleasant experience because you lack where you work.
That is that's a valuable tool in recruiting people or sponsors who are building. These new state of the art office billings I understand that.
And if you've got it and that will be great building.
Youre, probably looking to get out of that that's not our customer youre, probably looking to get out of that building and getting a place where you can recruit better talent, even though your cost per square foot kind of go up a lot to be in that nice or building. So we think we're very well positioned.
In this market.
Okay.
Great I appreciate the detailed answer thank you.
Thank you.
Thank you one moment for our next question. Please.
Our next question comes from the line of Brody Preston with UBS. Your line is now open.
Hey, good morning, everyone. Thanks for thanks for taking the questions.
I have a handful of them, but I'll just ask a few and then hop.
Hop back into the queue and maybe ask them at the end.
I did just wanted to follow up maybe.
Brandon.
On the on the loan that's been repossessed I wanted to ask if you could give us any color as to.
Geographically, where it's located and then secondarily.
Is it a straight land loan or has it been developed to any extent where about potential buyer might have to think about repurposing anything that's been done to to suit their needs.
For a new project.
Brandon.
Sure glad to answer that Brody.
This one is on the West coast, it's in La and as George has said is a phenomenal site I mean, it's right in the heart of that.
Entertainment culture there so.
I think we all fully expects that one day theres going to be a phenomenal vertical development on that.
Piece of dirt.
As to your question around <unk>.
<unk>.
I think the heart of your question no work to undo.
Not so much I mean.
The prior sponsor purchase that site in 2012, and it's been a decade on entitlements and just sort of pre development.
But late in late in the game.
They put a ton of equity and I don't think theyre cost basis was around 105 million.
So they've spent a lot of time on it but but but then got to a poll.
Where we've talked about rising costs, we've talked about rising interest rates and things of that nature, and they decided not to take that step forward.
To go vertical so.
There is there'll be a plan for a great great vertical development on that side.
Not a lot of work that has to be done to specifically answer your question.
As we said we feel good about about marketing that thing its just as George said taken the right time, when things are a little bit more certain a little bit more stable under a new owner.
Got it got it does that all.
I guess do all the permits and all the stuff that the previous owners done does that does that stay in place and does that help make it more attractive for a potential buyer.
I think so and of course, you can't make promises about what ultimately that I put there and whether they have to do some things, but but as George said, we've had some unsolicited interest in the site.
There is no question in our mind about its viability.
Great development going forward.
Okay got it thanks for that and could you just.
This is just a tick tack on this on this loan now but could you just help me.
Ring fence, what the loan yield is I'm, just trying to think about.
The slight loss to earnings here as it relates to this one.
Hi.
Don't know the exact rate.
On that on that one it was an older loan and floating rate so.
It's been up there.
But so are all the ones that we're replacing it with today.
Rowdy I assume.
Percent right on it that's kind of.
The norm, so that would be $408 million year $1 $2 million quarter in interest income.
Got it thank you very much.
And then I did.
Okay I did want to ask just on the on the updated appraisals that you had for the 15 properties or so just a couple of questions on that.
One what kind of drove the reappraisal. If there was any kind of one thing if you could help us understand that.
And then two should we expect more appraisals.
Going forward and I think a lot of us are maybe focused on maybe the office. So it was just one office reappraisal, there, but should we expect more of that just given the tougher office environment.
Sure. Good question go ahead.
Let me take this George absolutely.
In terms of what drives us.
Appraisals.
As we've talked about before we really stay on top of.
Our risk migration in the portfolio and it's sort of a natural evolution.
Nothing was really driving.
These appraisals more than the natural place in the lifecycle.
We have as we said typically three year, one would be would be standard.
And then we will have renewal options.
<unk> typically have some sort of economic hurdle to get over to allow the borrower to extend alone.
Not always.
I think virtually every every deal has an appraisal requirement so.
These were typically.
At the point of maturity and extension.
I don't know for sure there may have been some some other.
Reasons in here, but that's generally what you will see and this was normal course appraisals.
Answering your second question around future appraisals Youll see more of those normal course appraisals as as loans hit their initial maturity and look for extension and then.
Yes.
I would assume that will probably be similar.
<unk> that velocity is going to follow historic origination roughly three years ago.
If there was any reason, sometimes we have a reason to upsize alone.
If we were going to do that and we would of course get another appraisal then to understand the LTV at that point in time, but.
That's generally the background for.
Figure and then what youll see or hear about in the future.
And that's just that's extension just just because they're still they're still in the construction phase correct.
They might be in construction they may have just.
<unk> completed construction of entering the lease up phase it varies depending on the situation.
Yeah.
Got it Okay, and then I'll just ask one more before I hop back in the queue.
George.
Obviously for the last few years I think <unk> has been.
<unk> appointed debate amongst amongst the investment community and so.
I'm asking you never want to see a loan go bad, but just given that this loan is relatively small in size versus some of the other ISG loans.
Do you kind of look at this is like an opportunity to kind of maybe prove to some other folks that have been more negative on the resi strategy like we can take a land loan underwrite it really well and come out with potentially no loss on it in a pretty stressed environment do you think that that would be do you think perversely this credit could why.
That being beneficial to the story going forward.
Brody perhaps.
I don't know that you guys.
I find it amazing thing that people debate the merits of our ESG.
And <unk>.
Quality of that portfolio.
We've been we've been doing this 20 years now.
We've averaged an eight basis point.
Annualized loss ratio over 20 years, we've had tens and tens and tens of billions of dollars of projects that have paid off.
People in the industry.
Now that we've probably got the best risk adjusted real estate credit model and the.
The whole industry, we are always the senior secured lender, we're always low loan to value low loan to cost on these things.
And that track record through.
All sorts of economic environments, just proves that we're only going to have.
Occasional answer dental challenges in that portfolio and the life of the portfolio that losses are just undisputedly favorable at eight basis points over 20 years. So.
People, who want to be negative and want to be argumentative and want to be hard headed in and continue to argue that something that has demonstrated good quality is not a good quality and as some sort of <unk>.
Systemic risk to our balance sheet.
I don't know that you can prove to them that it's not.
But we've got a great business model it drives great quality assets it drives great yields which.
Give us an industry, leading net interest margin and industry, leading ROI and if they want to argue about it. They can argue about it we're just going to execute our business plan, well and consistently time and time again and I think however, long it takes the the naysayers will get over it.
Alright. Thank you thank.
Thank you.
Thank you.
One moment for our next question.
Our next question comes from the line of Matt Olney with Stephens. Your line is now open.
Hey, Thanks for taking my question.
I want to follow up on the Oreo property.
Just curious if you hold that property into 2024 and wait until conditions stabilize and improve.
So do you need to take or get another appraisal.
December of 'twenty, three if not if not earlier.
Is that fair.
Yes, as I said earlier, we will.
Our primary apprised that at least annually since it's an Oreo.
Okay, and I guess on that note I guess, we typically see from other banks is once that property is taken into Oreo I think that action typically requires.
David appraisal at that time, but that wasn't the case here.
Here any more clarity for us as far as why there wasn't a.
New appraisal when it did come.
And to the foreclosed assets for the bank.
Was essentially within 90 days, so a new appraisal by regulatory standards as anything thats, a year or less idled. So it was a new.
New appraisal at that time.
Okay. That's helpful and then I.
Thinking more about capital ratios.
The underfunded balance at <unk> with relatively flat I think in the first quarter.
Do you think we've seen a peak in that unfunded balance at least for the near term just looking for any kind of commentary on kind of where you think that could go over the next few quarters.
Sam do you want to take sure, Yes, Hey, Matt.
I would agree with you that it is certainly.
At its peak or near its peak.
Is likely to trend down as we go throughout the year.
Obviously, we had.
$14 billion of originations last year.
We're not going to have that much this year 13 point too.
Yeah.
Not expecting to have that much this year at this point.
So yes to your point I do think that will trend down as we go throughout the year.
And then Tim just to follow up on that as far as capital ratios any any commentary on kind of where we're.
Where do you expect capital ratios to go I mean, the banks have a good job of deploying some of the excess capital, but now you are sitting on a pretty pretty.
Pretty sizable slug of the unfunded balance just curious kind of where you expect to see this go.
Yes.
It's probably a good opportunity to talk about capital ratios and they obviously.
<unk> into light.
Pretty considerably over the last quarter and.
Certainly our tangible common equity ratio is among the top of our top 100 banks in the U S and if you adjust that for.
For a fair value of HTM or other things are.
It remains in the top.
Don't have any HTM securities.
So.
Looking at tangible common equity.
<unk> has maintained a very high level that over the years, we would expect to continue to do that obviously, our risk weighted asset.
It grew considerably.
Last year, we don't expect risk weighted assets to grow certainly at that level this year and possibly.
Relatively flat so with our earnings in a somewhat flat risk weighted asset.
Our capital ratios as we go throughout the year could be flat to up on a risk weighted basis.
Certainly maintaining really strong tangible comment and tier one leverage ratio throughout the year.
Okay. Thanks, everybody.
Thanks, Thank you.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
One moment for our next question.
Our next question comes from the line of Brian Martin with Janney Montgomery Scott. Your line is now open hey.
Good morning, guys.
Good morning, Brian maybe just a lot of it's been answered on the real estate that but just a couple of things just on the payoffs this quarter.
Our ESG are you beginning to see those it sounds like you had a couple of GA. This quarter already but are you starting to see that pick up I mean, given how low. It's been here is that I know that kind of commentary is that still where you're trending but are you beginning to see some acceleration there in the payoffs or still a lot of caution from the sponsors as they kind of gauge of the market.
Brian I don't know that I would say its accelerating.
But we are we are seeing continued level of payoffs it's not.
Slowing or stopping.
So.
We'll see where that goes I think we reiterated our our guidance.
For payoffs this year to be back in that same range as we had in <unk>.
21, and 'twenty, two which was kind of five 6% to $6 2 million plus or minus billions.
So I think I think we're.
I'm going to say somewhat of a repeat of the last couple of years payoffs that has some nice applications given the substantial origination volume last year for us to continue to have good growth in our funded balance of loans over the course of this year and next year.
That plays back into Tim's response to the.
To the capital question, we expect to continue to have industry leading.
Total tangible common equity and CET, one sort of capital ratios, but those ratios are going to support.
Expected growth.
Spec this year and next year.
Gotcha, Okay, and then just last two could you just touch a little bit George there's a lot of good momentum on the lending groups outside of our ESG, but.
Just kind of where you think the momentum and given kind of the recessionary outlook here.
No.
How much how much momentum do you think can continue there on some of those those areas just kind of from a high level just give a little perspective, it would be it would be helpful.
Well I would say, we're cautiously optimistic about those guys.
And the other business units and their ability to.
Maintained momentum in.
Part of that.
As a result of the fact, Brian .
We think we're going to see some other banks that are pulling back.
There are banks that don't have robust capital levels that we do in banks that.
Don't have a more diverse stable organically originated deposit base that we do.
You've already read some banks commenting that value.
Shut down.
Loan growth and expect to shrink their balance sheet, and so forth or curtail new originations, our limit and restrict new originations going forward.
It's business as usual at Banco CK and we're looking for good customers good relationships good business.
So I think even though there might be some macro economic headwinds will be that will tend to constrained volume in some respects I think.
We might get some of the opportunities and bigger pieces of the pie that we wouldn't have gotten before they will tend to offset that but we'll just have to see how that plays out but we're.
Pretty.
Cautiously positive about that as we look at the remainder of the year.
Yes, I agree positioning looks really good there and maybe just last one for Tim was just Tim can you just give any color on just I know you gave some comments in the prepared remarks about the margin, but just.
Given how quickly it has gone up with the benefits over the last 12 months just how quickly you expect that to maybe come down as the funding cost kind of catch up here and just kind of just directionally how to think about maybe where we end up whether it be in margin percentage of our marketing dollars.
Whatever you can offer on that front.
Yes, Thanks, Brian .
Yes, certainly what the fed does throughout the year, it's going to impact my answer, but assuming fed increases once more in may and holds holds for the rest of the.
The rest of the year than certainly our loan yields will go up slightly more based on that May increase.
But.
Our deposit costs are going to grow up more more than that.
Got good.
Growth opportunities in our ESG and our other business lines, we will fund that as George said previously through our.
Retail branch network primarily.
And that's primarily going to be Cds.
We obviously are always working on.
Grabbing core core deposits and we'll continue to do that and ramp up those efforts.
We're supporting those efforts with enhanced.
Marketing and advertising that will help.
Hello, Paul.
All of the deposit raising efforts that we've got we are adding additional staff.
In our retail network, which we've talked about for last few quarters.
That will help with gathering core deposits and in.
Opening time deposits as well, but it's likely that our margin will continue to decrease each quarter.
This year, but as we said in our in our comments, we think the average.
Balance of earning assets.
Will help offset any decline we see in margin.
And as we look at net interest income for the year.
Obviously, we had a great.
Great quarter record quarter of net interest income in Q1.
We will have other great quarters as we go throughout.
Go throughout this year on net interest income and if you certainly look at our net interest income year over year really strong growth there as well. So hopefully that provides you some some commentary.
Brian .
Certainly.
Well in answering more questions you may have yes, no I think thats. Good and then just it sounds like Directionally. The NII. It will just be down sequentially in the next three quarters or so just as that plays out.
Not necessarily I don't know that NII will be down NIM will be down.
But NII.
As the opportunity to increase in one or more quarters. This year based on our average balance.
Okay understood alright, thanks for the questions.
Great quarter guys.
Thank you Brian .
Thank you one moment for our next question.
Next question comes from the line of Catherine Mealor with <unk>. Your line is now open.
Thanks, Good morning.
Good morning Catherine.
I wanted to start back on the deposit conversation can you give us an idea where new deposit rates are coming on and maybe where you when youre spot rate on average deposit costs were coming out of the quarter.
Sandy you want to.
Sure.
So.
Okay.
Okay.
I think this will give you an idea Catherine so.
<unk> cost of interest bearing deposits was $2 20 March was $2 37 does that give you an indication.
That's great.
That's helpful and then.
Looking at some of your offering online look like you Scott.
A 13 month special CD at 5% southern market for 40 of that.
Okay.
On average range of where you are seeing new CD coming on yes, yes those rate.
Those rates went into effect on March 10.
Continue and in fact, we have one exception to that which for competitive reasons I'll not talk about but yes, thats the general right out there today.
Okay.
Great and it seems like you still feel like you have capacity in your branch network to grow.
Can you grow your funding through core CD I think it really capped the brokered market yet even if even if your loan growth kind of continues at this.
Billing and billing.
Per quarter pace is that a fair conclusion from what you were saying earlier.
Is there.
We.
If you look at our branches in the aggregate.
We're in a lot of small markets as well as metro market. So.
The nature of our branch network.
We have a slightly lower.
Total deposits per branch than than than our peers.
That is something that we we don't want we want to get as many deposits per branch as we can.
That gives you that proves that there is capacity.
Any given market.
We do have room to grow and do better competing against our competition and we work on that all the time and our core deposit. So we know there is capacity there to continue to grow.
So are there any specific markets, where you found.
More success in growing these core Cds.
Well sure I mean to me, it's a function of talent primarily.
Yeah.
Our culture is a culture of being the best in and leaning in every market. So we focus a lot on our talent.
The way to <unk> and another huge focus is service quality consumers really do care about service quality in any retail business.
We're extremely focused on now I know the stores, mostly about pricing, but I'll spend most of my time on talent and service.
And is there was there a market that you felt like there was more dislocation just.
Kevin.
Mark that you felt like it was you had better traction in.
Steady or ex market.
Okay.
The answers to all of that we know which markets are doing well.
Talk on a very granular level to each individual leader in those markets.
But we have the same product we have the same nice buildings.
At the same general competitors I mean, we have a good diversity in our competitive set which I consider a strength.
Our lineup of 100% in every market against just big banks or just community banks. So the factors that go into it are pretty complex as to why you might be winning in one market versus another and it's not just price driven.
No.
I would take a.
Way too much time in this meeting to go one by one.
One market might be doing better than that.
Say, it's not necessarily price.
And we work on all aspects.
The equation at all.
All the time not just pricing.
Okay Alright.
And that to the kind of credit conversation is your construction loans continue to reprice up and they're now at about an 8% yield can you talk about your ability for your borrowers to continue to afford that ray and any impact you are seeing that it has an interest reserve and any stress that youre seeing in your borrowers just with the higher rates on the construction loan today.
Yes.
Yes.
Like that obviously.
Catherine our sponsors.
The equity in these transactions are the guys that are most impacted by those higher rates than that.
Continued increases in interest rates are cutting into their profit margins on projects that they are pursuing which is frankly, why youre seeing fewer new new originations new projects being created this year than you did last year.
The significant ramp up in interest rates over the last.
<unk> thousand 14, 15 months has has impacted the profitability enhance desirability of a lot of those projects.
Our sponsors and the quality of our sponsorship in the structure of our transactions.
Is very protective of us.
And those situations.
Almost all of our resi loans requires sponsors to buy an interest rate.
Hedge an interest rate cap in.
Those those are beneficial to protecting our sponsors and those who are assigned to us additional collateral par alone. In addition, we are.
Very diligent and continuously monitoring and our asset management Department every loan evaluating the adequacy of reserves.
And adequacy of the cap stack our completion guarantees.
Require as part of the guarantee structure that.
A deficiency in the cap stack or any of the reserves develops the sponsors.
Have to rectify that by putting in more equity so that's a fairly common occurrence and.
Goes without a hitch in the normal course of.
Managing these credits that as interest rates have risen additional.
Reserves are sometimes required and our sponsors have to put that up.
<unk>.
That that's.
A discussion that they would rather not have but they honor that obligation and do that.
Almost without exception so yeah, it's a legitimate issue it's a issue for the sponsor of the equity as opposed to an issue for us hopefully if we manage and administer it right.
Okay. That's really helpful. And then my last question on credit is just.
I think paydowns have slowed obviously with their recently talked about in the past hour.
You have seen some of your projects that has been paid out so.
You are seeing success in moving the project to the permanent financing market can you just give us a flavor for what that looks like what the pricing looks likes how active the market is tight us buyer youre seeing.
Just to kind of give us a sense of what that what that process and market looks like today.
That's how all over the place I'm going to throw that to brand them and see if we can.
Farm and asked and answered.
Yeah.
Yes, George is right of course.
Catherine there are sales that are occurring as well as refis.
I would say what's paying off as is fairly even across the board I mean <unk> got.
I think in terms of number of loans this past quarter actually condo was the biggest.
In terms of actual number of loans that fully paid off and that's not counting all the condo loans that you actually had paydowns on.
In this environment, you might think with rates, where they are you wouldn't see that but of course, a lot of our condo loans are.
Secured by collateral and the southern mine.
Miami market and and those are typically pre sold with very high buyer deposits and those guys tend to follow through on those transactions.
Versus other markets that might not have such a big buyer of deposit and a little slower there.
But.
Behind that I would say multifamily tends to still be the most liquid course their cap rates are up but they're still.
On a historical basis.
Pretty reasonable.
Yes.
<unk> seen some some refis and heard some some sizing around some some agency type lenders that that was pretty compelling so.
Overall again, it's slower but.
They're still we're still seeing some stuff pay off we had it's not.
It was a big life science loans.
That was a refi.
Hum.
In industrial we had a hotel refi as well so.
The sensitivity of our of our assets is one thing that.
It's our by our borrowers can improve on that.
Right they are paying us at all.
It is a consideration so not an ideal market, but still.
Still seeing transactions come off.
Great. That's helpful. Thank you.
Thank you.
One moment.
Our next question comes from Brody Preston with UBS. Your line is open.
Hey, I just had I just had one follow up on the office for the rest of the projects that are office, there, obviously class a in nature and I know that some of those buildings when they are under construction.
Or at least a brand they can have pre leasing that occurs I wanted to ask if any of your office buildings that are under construction have pre leasing in place and if you could give us a sense for how much or how are you.
Often that occurs.
Absolutely Brody good question and the answer in short is yes.
<unk>.
We do some that are spec and we do some that have pre leasing of late.
More of it has.
Material pre leasing.
And in place or a requirement that it would be in place before.
Four we fund and the other thing to point out.
Youre starting at on average I think our office projects are at a 53% loan to cost right and.
And in addition to that <unk> got typically sequential funding, which means we are last to start funding.
And then on top of that you've got the fact that as leasing does occur.
It has leasing commissions and tenant improvement dollars are funded only at that point in time so.
There is I would tell you that probably.
Call. It a third of our commitments are actually funded on office.
So that in combination with in certain cases, a pre leasing requirement and in other cases.
Leasing taken place.
We feel good about the ultimate.
Loan to cost and loan to value and the way that that actually happens with future deliveries and Ti.
Ti and LC good news money, we call it so.
We feel good about our office portfolio as George alluded to in detail earlier.
Yeah.
Great. Thank you for that and then just my last quick one was the 8% kind of rate for that for that loan.
George I think Kathryn Catherine referenced it but is that a good rate to assume for the for what's funding currently like what funded this quarter.
And just remind us if those come on at Florida is right. So that so that interest rates should be relatively sticky if we were to get to.
Fed cut at any point over the next three to nine months.
Brandon you want to.
So yes, yes.
I don't know.
Exactly as I said, what that rate was but it's a good proxy and I want to say are non purchase yield was.
Eight and change in.
The force.
We've talked about the fact that we are.
We're closing loans today.
As we did and obviously, we closed a lot of loans last year.
Those those floors are typically going in at.
So for on the day of closing.
So <unk> moved a lot quickly as we all know so those those floors.
Moved up quickly as well.
You really have a good loan vintage chart.
Forget what I think that was figure 11 that sort of gives you.
Yes.
The vintage of our loans, but even even maybe more so and more granular basis figure nine where you see the quarterly originations and so you sort of follow the.
The movement of sofa through those quarters that sort of tell you where that where the floors are being set but but not only on the origination side, but.
George mentioned, the asset management group being busy with interest reserves and allocations and things of that nature or they are also busy as we're extending loans.
Mentioned mentioned before sort of natural around three to one average three years and there'll be a maturity and a possible extension at that point in time or any other point in time that the borrowers ask for any sort of modification that we feel like we can do and be in the same sort of same place. We were we will be.
Looking at that rate will be looking at that floor rate and attempting to move that up to increase the stickiness that you alluded to in.
In the legacy portfolio as well so it's an important part of what we do we work hard at it.
Every day.
And.
But again a lot of it has to do with the speed.
And magnitude of the sofa or changes over the last especially six to nine months.
Got it. Thank you very much for taking my questions everyone I appreciate it.
Thank you one moment.
And our next question comes from the line of Kumar of Rustler with Wells Fargo. Your line is now open.
Hey, guys. Thanks for the follow up just a couple of quick ones.
First on the allowance ratio it looks like over the last two quarters the incremental build to the allowance ratio has all been from the unfunded commitments, we started to see some incremental charge off activity happening outside of our ESG I'm just wondering as we enter into this period of incremental uncertainty how you're feeling about the overall.
101% allowance ratio and what that could trend like in the back end of the year.
Yes, Sameer this is Tim.
Obviously, we feel really good about that ratio in the overall ratio.
<unk>.
And you've seen us build the overall ratio of the last couple of quarters clearly our provision has been impacted in the last couple of quarters by growth in our funded balance.
Yes, it all depends on the Moody's macro scenarios and how we view those compared to our own view. There has been there continues to be a lot of uncertainties in the in the current environment and that's reflected in our in our viewpoint on our scenario selections our scenario weightings.
But.
Tim here, we've got a really low.
Net charge off ratio here.
Historically, our range that we've given is still.
On the low end, if you look at our non performing loans there.
On the low end of our historical norm or past due ratio is.
<unk> is low.
So our asset quality.
Has really good if you looked at our substandard loans in our special mentioned loans.
Outside of the one transfer to Oreo those are relatively stable to actually down a little bit this quarter over last quarter. So our asset quality is very very good.
Feel really good about where our ACO is in.
Expect.
The variables on that too.
To be or are funded growth in our view.
<unk> on the.
Forward looking economic scenarios.
And tomorrow I would do it.
Right, what Tim said that the last couple of quarters, we've had really good loan growth in the majority of our ICL.
<unk> growth has been attributable to.
Growth in the portfolio either funded or unfunded.
And.
That we are.
Did reiterate our prior guidance on net charge off ratios for this year.
Great. Thanks, and then just lastly on the buyback.
When you guys are pretty aggressive in the first quarter Im just wondering how much of that $85 million was bought back post Silicon Valley and then just how should we be thinking about the buyback for the rest of the year.
Yeah.
Sameer, we were very active in March so I'll leave it at that.
And.
Certainly we expect to be active.
This quarter and in future quarters, we've got $200 million left in our current authorization. So that gives us an opportunity to.
Remain active and certainly at the valuation that we're seeing now we feel like it's compelling to continue to be active.
And the current market.
Obviously, a lot of things go into our consideration of.
When we buy and how much we buy but certainly feel like we will remain active this quarter and potentially in future quarters.
Great and then just remind us when that 200 million authorizations through.
I think it's November 9th.
Got it great. Thanks for all the color I appreciate it.
Thank you.
Thank you for your question.
At this time I would like to turn the conference back over to Mr. George Gleason, Chairman and Chief Executive Officer for closing remarks.
Thank you guys for joining the call today. We appreciate it appreciate all the questions have a great day, we'll see you in about three months. Thank you that concludes our call.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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