Q3 2023 Bank OZK Earnings Call
Yeah.
Yeah.
Speaker 1: Good day and thank you for standing by and welcome to the Bank of OZK third quarter 2023 earnings conference call. At this time, our participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You then hear an automated message advising your hand is raised.
Good day, and thank you for standing by and welcome to the bank of O Z K third quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on you.
Telephone you then here in the automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now.
Speaker 1: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would like to introduce your host for today's call, Jayce Bailey, Director of Investor Relations and Corporate Development. You may begin.
Like to introduce your host for today's call James Daly Director of Investor Relations and corporate development you may begin.
Speaker 2: Good morning. I'm Jay Staley, Director of Investor Relations and Corporate Development for BankOZK. 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.
Good morning, I'm, Jay Staley director of Investor Relations and corporate development for Banco de Chile.
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.
Speaker 2: Please refer to our earnings release, management comments, and other public filings for more information on the various factors and risks.
Please refer to our earnings release management comments and other public filings for more information on the various factors and risks.
Speaker 2: that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.
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 Financial Officer, and Cindy Wolfe Chief Operating Officer, We will now open up the line for your questions.
Speaker 2: 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 Wolf, Chief Operating Officer. We will now open up the line for your questions. Let me now ask our operator Justin to remind our listeners how to queue in for questions.
Let me now ask our operator, Justin to remind our listeners how to queue in for questions.
Speaker 1: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster and one moment for our first question.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please stand by we compile the Q&A roster and one moment for our first question.
Yeah.
Speaker 1: And our first question comes from Steven Scouten from Piper Sandler Companies. Your line is now open.
And our first question comes from Stephen Scouten from Piper Sandler companies. Your line is now open.
Hey, good morning, everyone.
Speaker 3: Great quarter here. I'm curious, it looks like an amazement comment that your guidance a pretty strong origination growth in the fourth quarter. And I'm wondering if you could get some comments there. I would assume that's occurring as some of your competitors may be pulled back from the space. And obviously that's been a time when you guys have done really well. So I'm just curious kind of if that's what's happening today and kind of where you're seeing the pickup in originations category-wise. And I would Texans minus October August , 2020 at the Ford Cay School. Sometimes it will be the parking spot of your permanent service part of your turn. Something like police?
Great quarter here I'm curious it looks like in the management comments that youre guiding to pretty strong origination growth in the fourth quarter and I'm wondering if you could give some comments there I would assume that's occurring in some of your competitors maybe pull back from the space and obviously thats been a time when you guys have done really well. So I'm just curious kind of if that's what.
It happening today, and kind of where you're seeing the pickup in originations category wise.
Speaker 3: Brandon, you want to take that one? Be happy to, Stephen, great to talk to you. Thanks for the question. That is in part some of the explanation. It's been an interesting year. As we've seen generally a slowdown in the number of projects.
Brandon you want to take that one.
Be happy to Steven Great to talk to you. Thanks for the question that is in part.
Some of the explanation, it's it's been an interesting year.
As we've we've seen generally a slow down in the number of projects.
Speaker 3: that we've seen. Now that would differ from region to region. As we've said a number of times through the year the Southeast region has remained strong, certainly relative to other regions.
We've seen it and.
Now that that would differ from region to region.
As we've said a number of times.
Through the year, the South East region has remained.
Strong certainly relative to other regions and.
Speaker 3: even certain periods of time in the southeast. So we continue to see very good activity in that region and over in Texas in the Southwest.
Even certain periods of time in the southeast. So we continue to see very good activity in that region.
And and and and over in the Texas and the southwest.
Speaker 3: But yes, despite the slowdown in the number of deals that are out there, there's also been a pullback from some of our competitors out there. And we have...
But yes, despite the slowdown in the number of deals that are out there. There's also been a pull back from some of our.
Competitors out there and.
We have as time goes on.
Speaker 3: As time gone on, continued to press down on leverage.
Continued to.
Press down on leverage.
Speaker 3: try to expand on spread. So, and all the time say very true to our discipline to approach to origination, but with...
<unk> tried to expand on spread so.
And in all the time say very true to our disciplined approach to origination, but with in many cases fewer competitors out there, where we're able to still.
Speaker 3: In many cases fewer competitors out there were able to still close a number of deals, great deals with improved leverage and pricing metrics.
Close a number of deals great deals.
With improved leverage and pricing metrics so.
Speaker 3: You know, in terms of the what continued theme would be multifamily and industrial. We're closing other types of loans. I think, you know, I've mentioned a couple of times over the last few quarters that are.
Yeah.
In terms of the what.
Continued theme would be multifamily and industrial.
We're closing other types of loans I think you know what I've mentioned, a couple of times over the last few quarters that R. R.
Speaker 3: Our Atlanta office that covers the Miami market is seeing a lot of opportunity in condos.
Our Atlanta office that it covers the Miami market is seeing a lot of opportunity in and condos.
Speaker 3: in the Miami markets. So we'll see some opportunity there. But multifamily and industrial has been for the most part, the big movers. We've had some good mixed use in there as well. But those are where we're seeing a lot of our opportunity.
In the Miami markets. So, we'll see some some opportunity there.
But but multifamily and industrial has been for the most part.
The big move for US we've had some good mixed use in there as well.
But yeah. Those are those are where we're seeing a lot of opportunity.
Speaker 4: Great, and Brandon, appreciate that. You spoke to spread there. What are you, and I know every credit's obviously different, but what are you seeing on new loan spreads kind of relative to the incremental funding cost? And I guess you would feel based on that growth that you're getting paid well and compensated well on this new loan production.
Great and Brian appreciate that you you spoke to spread there what are you I know I don't know every credit is obviously different but.
What are you seeing on new loan spreads kind of relative to the incremental funding cost and I guess, you would feel based on that growth, but you're getting paid well and contemplated well on this new loan production.
Speaker 3: Absolutely. We've talked about how our spreads differ pretty materially depending on the product type, but I would say that we're ranging from sort of middish threes to up into the fours depending on the product type and where it is.
Absolutely.
No doubt.
We we we've talked about how our spreads.
Differ pretty materially depending on the product type, but I would say that that were you know ranging from from sort of mid threes to up into the fours, depending on the product type and end and when where it is.
Okay.
Speaker 4: Okay, and then just the last thing for me, you know, obviously the RISG loans are staying on the books for longer. I assume this has been driving some of the, what I see is conservatism around the loan losses earth, but how do you guys kind of speak to that pushback maybe from some market participants and say like, oh, these loans staying around longer is a bad thing, not a good thing, even though you're earning more money.
Okay, and then just last thing for me.
CVR ESG loans expand on the books for longer.
This has been driving some of the what I see is conservatism around the loan loss reserve, but but how do you guys kind of speak to that pushback, maybe from some market participants and say like these are staying around longer.
Not a good thing, even though youre, earning more money.
Speaker 3: Well, and George, you weigh on this one as well. I think I would first point out that we've had more payoffs than we have had originations this year. So, as you can see from the numbers reported, it's not a significant increase, but they have been up every quarter, a quarter over quarter. And evidence of other capital out there in the market.
Well.
And George can weigh on this one as well I think I would first point out that we've had more payoffs than we have had originations this year. So.
You know as we as you can see from the numbers, we reported it's not significant.
Significant increase but they haven't been hub every quarter quarter over quarter.
And and and evidence of of other capital.
Out there in the market.
Speaker 3: You know, they're paying off with refives. They're paying off with sellouts or sales of, you know, income properties from developer to the new owner. And even have some situations.
But you know there are paying off with refis, there, they're paying off with sell outs or sales of income properties from from developer to a new owner and.
Even have some situations that are <unk>.
Speaker 3: the bar or come into a lot of cash and just pay us off in that method. But as you noted, we don't mind having the earning balances on our book and are getting paid well for those loans. So look, with rates doing what they've done, we've known we were going to have a slower repayment.
The borrower come into a lot of cash and just pay us off.
And that method.
But.
As you noted.
We don't mind, having the earning balances on our on our book and and and are getting paid in paid well for those loans. So lucky.
With rates doing what they've done.
Now we were going to have a slower repayment.
Speaker 3: volume but it it has been a repayment volume continues to be there's still people in the market with capital So we're we're not surprised and I would say on the whole Police to see the payoffs continue to come in and the numbers that they do
Volume, but it has been a repayment volume continues to be there's still people in the market with capital.
So we're not surprised and I would say on the whole.
Pleased to see the payoffs continue to come in and the numbers that they do.
Okay.
Speaker 5: Stephen, let me clarify just for our listeners, we don't press loans all the time. Brandon said that our spreads typically in the RISG portfolio, I think you said we're ranging in kind of the mid 300s up into the 400s, and that references to a spread over 30-day term suffer is what we use as the predominant index.
Good evening.
Sure let me clarify just.
For listeners, who don't brass loans all the time.
Brandon said that.
Our spreads typically in the <unk> portfolio I think you said were ranging in the.
And kind of the mid three hundreds up into the four hundreds and that references to spread over so for 30 day terms sulfur is what we use as the predominant index. So.
That's a spread over so for in <unk>.
Speaker 5: I wanted to clarify that. We just talk about it just spread out the time, but...
Wanted to clarify that.
Just talk about it is spread out the time, but.
Speaker 5: you know, there are a lot of different indexes and we're up to see spread over 30 day term.
There are a lot of different indexes and we're referencing spread over 30 day terms sofa.
Speaker 5: And, you know, a point that Brandon made is that our leverage points are coming down probably over the last two years.
And a.
My point, there, Brian and made is that our leverage points are coming down probably over the last two years.
Speaker 5: you know, our loan value loan to cost ratio is quarter to quarter. Quarter have had a generally down trend not every quarter, but we're probably down five to somewhere between five and 10 percentage points.
Our loan to value loan to cost ratios quarter to quarter to quarter have had a generally down train them out every quarter, but we're probably down to somewhere between five and 10 percentage points.
Speaker 5: on leverage now versus what was originated two years ago. So that's very favorable for credit quality. And I would just echo what Brandon said. We're thrilled to have loans stay on the books longer.
Leverage now versus what was originated two years ago. So.
Thats very favorable for credit quality and I would just echo what brannen said, we're thrilled to death to have.
<unk> loans stay on the books longer.
Speaker 5: you know, in a lot of times sponsors are quick to exit our loan to go to a keeper permanent loan solution.
And a lot of times sponsors are quick to exit Ireland to go to a cheaper.
<unk>, our permanent loans solution sponsor, who are very very reticent about I'm trying to figure out where their best exit as ray commands wise, so that's keeping the loans on our.
Speaker 5: are being very reticent about trying to figure out where their best exit is, reconnance-wise, so that's keeping the loans on our.
Speaker 5: books and our higher yield construction loans longer. Our leverage points are allowed.
Books, and our higher yield construction loans longer.
Our leverage points are low.
Speaker 5: So we're very happy to have those loans on the books for an extended death.
So we're very happy to have those loans on the books.
Warren extended.
Period of time.
Speaker 6: Yep, it makes sense to me. Appreciate the color and congrats on all the success again. Thank you. And thank you.
Yes, it makes sense to me.
The color and congrats on all the things that again.
Thank you and thank you.
And one moment for our next question.
Speaker 1: And our next question comes from Manon, Ghasilia. From Morgan Stanley , your line is now open.
And our next question comes from Manav, because Giulia <unk> from Morgan Stanley . Your line is now open.
Speaker 7: Hey, good morning. So maybe just as a follow up to that question, as we think about growth in funded balances over the next few quarters, I think this quarter you had about a 1.4 billion increase. Is that a good run rate to consider as we go through 2024?
Hey, good morning.
So maybe just as a follow up to that question as we think about growth.
Our funded balances over the next few quarters.
I think this quarter you had about a $1 4 billion increase is that a good run rate to consider as we go through 2024.
Okay.
Speaker 5: You know, I don't know that we're willing to lock in on that guidance. Menon, we expect good growth over the next year, but we're not giving specific guidance on that for the year yet or for the quarter. We'll probably in our January call give some specific growth cadents on the
I don't know that.
We're willing to lock in on back gardens benign, we expect good growth over the next year, but.
We're not giving specific guidance on that for the year yet.
Quarter.
Probably in our January call give some specific growth guidance on.
Speaker 5: total loan expected growth in in 2024. We expect it to be a nice growth here, but I'm not ready to block in on a number yet.
Total loan expected growth in 2024, we expect it to be a nice growth here, but I'm not ready to lock in on a number yet.
Speaker 7: All right, fair enough. And then just on credit, it feels like a good quarter on credit. As we compare the properties that were re-praised this quarter versus last quarter, you had much less LTV migration into some of the high LTVs. Was there something fundamentally different about the properties re-praised this quarter versus last?
Alright fair enough.
And then just on credit it feels like a good quarter on credit.
As we compare the properties that will reappraise this quarter versus last quarter, you had much less LTV migration and just some of the high ltvs.
Is there something fundamentally different about the properties reappraised this quarter versus last year.
Speaker 5: Now, it's just the normal cycle of what was due for security extension renewal reappraisal.
No it says.
Just the normal cycle of fault was due for maturity extension renewal reappraisal in.
Speaker 5: There was nothing unique about that. You know, Brandon and his...
There was nothing unique about that.
Brandon.
His team.
Speaker 5: At RISG, continue to do an excellent job of getting paydowns on a lot of these loans where we would have had an upward migration in the loan to value based on a reappraisal as part of an extension process. We continue to get quite a few paydowns.
At our ESG continued to do an excellent job of.
Getting pay downs on a lot of these loans, where we were we would have had an upward migration in.
The loan to value based on a reappraisal.
As part of an extension process, we continue to get quite a few pay downs from sponsors on those but they bring the loan to values back.
Speaker 5: from sponsors on those that bring the loan to buy used back out of closer to the loan to buy the time of underwriting. That just reflects the...
Closer to the loan to value at the time of underwriting that just reflects the.
Speaker 5: Strength of the sponsors and the quality of the <expletive> .
Strength of the sponsors and the quality of the assets.
Speaker 7: Got it. And anything different you were seeing on the credit side. Some of your peers have been increasing their NPLs on commercial real estate and also their criticized assets. And I know your business is different, but I was just wondering if you were seeing anything, anything different in the areas where you all are praying.
Got it and anything.
You are seeing on the credit side some of your peers have been increasing there.
Npls on commercial real estate and also the criticized assets.
I know you are.
Business is different.
Just wondering if youre seeing anything.
Any anything different.
The areas, where you're operating.
Speaker 5: No, I'm not, and I'll let Brandon address that, but the reality is that the quality of our sponsorship, the quality of our new construction project.
No I'm, not and I'll, let Brandon address that but.
The reality is that.
The quality of our sponsorship the quality of our new construction projects.
Speaker 5: combined with the low leverage, low value, low cost metrics on these projects as contributed to the excellent performance of our portfolio so far during this cycle. We continue to think that those are fundamental ingredients, great sponsorship, great state-of-the-art credit issues support us.
Combined with a low leverage loan to value loan to cost metrics on these projects.
Contributed to the excellent performance of our portfolio. So far during the cycle. We continue to think that those are fun.
Fundamental ingredients great sponsorship great stated they are new assets.
Speaker 8: low, low value low on the cost that will continue to help our portfolio perform very well on a relative basis to the industry going forward. Great, thank you.
Low loan to value, let alone the cost that will continue to help our portfolio performed very well on a relative basis to the industry going forward.
Great. Thank you.
And thank you.
And one moment for our next question.
Speaker 1: And our next question comes from Tamirah, Brazil, from Wealth Bargol Securities. Your line is now open.
And our next question comes from Tamir, Brazil or from Wells Fargo Securities. Your line is now open.
Hi, good morning.
Speaker 9: I have a three-part question following up on Stephen's question just...
I have a three part question.
Following up on Steven's question just.
Speaker 9: on loans staying on longer within the RISG. I guess can you a put a number around just how much longer these loans are sticking on balance sheet versus a quote unquote normal time, B, is there a contractual limit for how long these loans can stay in construction status? And then C, how much of a cliff or a headwind to growth should we expect as the ReFi market re-engages and pay down stormalized, or that that's in 25 or 26 whenever that might be?
Loans staying on longer within the ISG I guess can you put a number around just how much longer. These loans are sticking on balance sheet versus a quote unquote normal time.
B is there a contractual limit for how long these loans can stay in construction status and then see how much of a cliff or a headwind to growth should we expect as the refi market re engages in paydowns normalize whether that's in 'twenty five 'twenty six whenever that might be.
Speaker 5: You know, the length of duration that alone will stay in construction status because they're waiting for a better exit or trying to time the markets for an exit. It's hard to predict.
Yes.
The length of duration that alone will stay in construction status because they are waiting for a better exit are trying to time the markets for an exit.
To predict it varies quite a lot.
Speaker 8: from, uh, uh, uh, line to line and, uh,
From.
A lot of the loan in.
Speaker 5: Brandon shared some statistics with me earlier, which I'm gonna...
Brandon shared some statistics with me earlier, which I'm going to.
Speaker 5: I can't recall them, but on exactly where loans have paid off recently and how many of them.
I can't recall them, but but.
On exactly.
Where loans have paid off recently and how many of them are.
Speaker 5: read by how many of them is sold and so forth so so the properties and so forth so I'll let him share that and that may answer that part of your question to give you a little color on it won't answer it but it will kind of uh
<unk>, how many of them as sold and so forth. So so the properties and so forth. So I'll, let him share of that and that answered that part of your question I'll give you a little color on it won't answer it but it will go.
Kind of.
Explain that.
Speaker 5: situation and you know you're your accurate in that payoffs that extend today you know the things that would have been a normal cycle don't get paid off this quarter because the sponsor is going to wait to what they hope will be a better exit execution to apartment loans.
Situation and.
Youre accurate in that payoffs that extend to a day.
The things that would have in a normal cycle don't get paid out this quarter because the sponsor is going to wait to what I hope will be a better exit execution to a permanent loan.
Speaker 5: you know, a quarter or a year from now or 18 months from now, when...
A quarter or a year from now or 18 months from now when.
Speaker 5: A market sentiment develops that's broad base that is time to exit. Yes, we will have a lot of payoffs at that point in time. And our RESG teams, our asset base lending teams, our equipment structured finance teams.
Hi.
Market sentiment develops that's broad based that it's time to exit yes, we will have a <unk>.
Lot of payouts at that point in time.
And our our ESG teams are asset based lending teams our equipment in structured finance teams.
Speaker 5: Our commercial banking teams are all keenly aware that we've got to build our business and diversify our business.
Our commercial banking teams are all keenly aware that we've got to build our business and diversify our business.
Speaker 5: be in a position to reach native volumes that will replace those assets when we get that way to pay off. So we're building our infrastructure.
They are in a position to originate volumes there.
Replace those assets when we get that way for payoffs. So we're building our infrastructure.
Speaker 5: That goes back to one of the comments I made in our last conference call that we're working really hard to add quality team members from banks that are that are cutting back on origination staff and other sorts of staff we're building.
That goes back to one of the comments I made in our last conference call that were.
Working really hard to add quality team members from banks that are that are cutting back on origination staff and other sorts of staff we are building that.
Speaker 5: quality of our team. We've got some really good things that we're very positive about in the works on that. That, you know, I think will help us continue to grow our balance sheet and grow our loan balances.
Quality of our team and we've got some really good things that were very positive about in the works on that debt.
I think will help us continue to grow our balance sheet and grow our loan balances.
Speaker 5: even when we get some pretty chunky wides of payoffs in the future. So we're looking...
Even when we get some pretty chunky waves of payoffs in the future. So we're.
We're looking.
Speaker 5: a year, two years, three years into the future on what those volumes are planning. Of course. We always do look into the future in plan, and that's why our portfolio.
A year two years three years in the future on what those volumes are in planning.
We always do look into the future and plan and Thats wire.
Our portfolio and our our performance metrics right now are doing so well two years ago.
Speaker 5: performance metrics not now doing so well two years ago.
Speaker 5: We were in three years ago and four years ago, we were planning for an environment where rights escalated and economic conditions changed. We're doing that with our verbal right loans, with our floors and our loans, with our low loan deviance.
We were three years ago four years ago, we were planning for an environment where rates escalated in economic conditions changed.
<unk> that with our variable rate loans with our floors on our loans with our low loan to value tax.
Speaker 5: patch structuring on credit. And all that is paying off now.
Tax structuring on credit and all that is paying off now.
Speaker 5: as we're going through this part of the cycle. We're looking forward in a one, two, three, four years to future iterations and changes in the balance sheet and preparing now to continue to have a nice, steady trajectory in those periods.
As we're going through the best part of the cycle, where looking forward.
1234 years to future.
Iterations and changes in the balance sheet and preparing now to continue to have a nice steady trajectory in those periods of time.
Great. Thank you my gut feeling those stats SaaS for you George.
Speaker 3: You mean, filling those stats for your George in a sort of way to it earlier earlier before, but we've had your date of 53.
Yes sort of alluded to it earlier earlier before but we've had year to date 53.
Speaker 3: loan repayments. So I got my count right of that 53. We've had a belief 32 that were paid off with a third party, you know, refinance.
Loan repayments, if I've got my count right of that 53, we've had I believe 32 that were paid off with a third party refinance.
Speaker 3: We had one that we actually had a land loan out and the borrower's ready to move forward with a vertical construction loan. So we essentially paid off our land load and moved into a new construction loan there. And then we had 15 that sold that were either condos sell out so they sell out as the condos.
We had one that we actually had a land loan out and the borrowers ready move for where the vertical.
Construction loans, so we essentially paid off our land loan and moved into.
New construction loan there and then we had 15 that sold that.
We're either condo sellout so they sell out as the condos.
Speaker 3: contracts were closed over time, but we had a number of those that completed their their loan repayment and then it.
Contracts are closed over time, but we had a number of those that completed their loan repayment and then a few industrial properties that sold.
Speaker 3: a few industrial properties that sold complete billing sale.
Complete building sale.
Speaker 3: And then as I said, we had just a pure cash repayment by a sponsor that had a lot of cash on hand and then we had
And then as I said, we have had.
Just a pure cash repayment by sponsors that had a lot of cash on hand, and then we had.
Speaker 3: four projects that the sponsor decided not to move forward on the vertical construction and so paid off the the moderate balance that would have been outstanding nominal balance it would have been outstanding at closing so
For projects that the sponsor decided not to move forward on the vertical construction and so paid off.
Moderate balanced.
Would have been outstanding nominal balance it would've been outstanding at closing so.
Speaker 3: And I would just say in terms of how long they're staying on. Look, it's, you look back over time. There have been times where our average age has been longer than it is today. And there have been times and it's been a bit shorter. But it...
And I would just say in terms of how long they're staying on look it's.
You look back over time, there have been times, where our average age has been.
Longer than it is today and there have been times and it's been a bit shorter but it at.
Speaker 3: It all makes complete sense in terms of the environment that we're in and it's George alluded to. When you're locking one down for a while, you sure want to try to get it lower than the rates are today. And so it's playing out.
It all makes.
Please sense in terms of the environment that we're in and as George alluded to the.
When youre locking one down for a while you've sure want to try to get it lower than the rates are today and so it's playing out really.
Speaker 3: really as we expected it to and we're very happy as we said to be.
As we expected it.
Two in.
And we're very happy as we said to be met.
Speaker 3: making the return while they're on our ballad sheet.
The return while there while they are on our our balance sheet.
Speaker 9: Great, thanks for the color. And then just one follow up on the credit side. You mentioned...
Great. Thanks for the color and then just one follow up on the credit side.
I mentioned just now.
Speaker 9: just now land loans and conversations around going vertical. Maybe just provide some commentary as to what you're seeing in the land portfolio and some of the updated conversations you're having with sponsors about their decision to go over.
Land loans and conversations around going vertical maybe just provide some commentary as to what youre seeing in the land portfolio and some of the updated conversations youre, having with sponsors about their decision to go vertical.
Speaker 3: You know, there's a mix there. We gave you some pretty good color, I think, on the Lampor Folio and the appraisal stats that we included in our comments in terms of...
There is a mix there.
Gave you some pretty good.
Color I think on the land portfolio in the appraisal didnt.
Staffs that we included in our comments in terms of.
Speaker 3: You know, we had I think four different land appraisals that were completed that showed stable to declining LTVs at the end of the day.
We had I think four different land appraisals that were completed that showed stable to declining ltvs at the end of the day.
Speaker 3: And, you know, as we noted in the past, a significant portion of our land portfolio is...
And.
As we've noted in the past.
Significant portion of our land portfolio is as you said.
Speaker 3: As you said, initial shorter term land loan with the thought that the sponsor, you know, once they have plans drawn up and costs sort of circled.
<unk>.
Initial shorter term land loan with the thought that the sponsor once they have plans drawn up in costs sort of circled.
Operator: Good day, and thank you for standing by, and welcome to the Bank of OZK, 3rd quarter, 2023 earnings conference call. At this time, our participants are on listen only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You then hear an automated message advised in your hand is raised. So, withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded.
Speaker 3: would move forward and we are, as I said, seeing some of those move forward. But I also mentioned, you know, we had four that did not move forward. So we're still in a period where just like with refinances moving forward with a construction loan in today's rate environment.
It would move forward and we are.
As I said.
Seeing some of those move forward, but I also mentioned.
Mentioned.
We had four that did not move forward. So we're still in a period, where just like with refinances moving forward with a construction loan in today's rate environment.
Speaker 3: and some of the economic uncertainty certainly makes one think two, three, four times for moving forward. And we're seeing some of those decisions say, you know, what we're going to wait. The deal is just not got enough room in it for us to want to move forward. And at the same time, we're...
And some of the.
Economic uncertainty certainly.
Jay Staley: I would like to introduce your host for today's call, Jay Staley, Director of Investor Relations and Corporate Development. You may begin. Good morning.
Makes one think two three and four times for moving forward and we're seeing some of those decisions.
Jay Staley: I'm Jay Staley, Director of Investor Relations and Corporate Development for Bank of OZK. Thank you for joining our call this morning and participating in our question and answer session. In today's Q&A session, we may make forward-looking statements about our expectations, estimates, and outlook for the future.
Say what.
Wait.
The deals just not got enough room in it for us to want to move forward and at the same time, we're seeing.
Speaker 3: seeing a number that are going to move forward. And that's whether that's land-lone situations and we have that move vertical or outside our portfolio. I think there's some, you can deduct some.
Seeing a number that in that.
Jay Staley: Please refer to our earnings release, management comments, and other public filings for more information on the various factors and risk that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.
<unk> are going to move forward and Thats, whether thats land loan situations that we have they moved vertical or outside of our portfolio.
I think there is some.
And you can deduct some.
Speaker 6: information from our thoughts about originations in Q4. So again, it depends on the market. It all comes down to the return that one can make and versus the cost that it takes to develop. And there's more room in certain markets and product types and there are another. So it's a mix bag there. Great. Thanks for taking my questions. Thank you.
Jay Staley: Joining me on the call to take your questions are George Gleason, Chairman and CEO, Brandon Hamlin, President, Tim Hicks, Chief Financial Officer, and Cindy Wolf, Chief Operating Officer. We will now open up the line for your questions. Let me now ask our operator Justin to remind our listeners how to Q&N for questions. As a reminder to ask a question, please press star 111 on your telephone and wait for your name to be announced. To withdraw your question, please press star 111 again. Please stand by, we compile the Q&A roster and one moment for our first question.
Information from our thoughts about originations in Q4 so.
Again, it depends on the market.
It all comes down to the return that one can make in versus the cost that it takes to develop in.
And there is more room in certain markets and product types and there are another so it's a mixed bag there.
Great. Thanks for taking my questions.
And thank you.
And one moment for our next question.
Stephen Scouten: And our first question comes from Steven Scouton from Piper Sandler Companies. Your line is now open. Hey, good morning, everyone. Great quarter here. I'm curious. It looks like an engagement comment that your guidance a pretty strong origination rose in the fourth quarter. And I'm wondering if you could get some comments there. I would assume that's occurring as some of your competitors may be pulled back from the space. Obviously that's been a time when you guys have done really well. I'm just curious kind of if that's what's happening today and kind of where you're seeing the pickup and origination category wise.
Speaker 1: And our next question comes from Katherine Meeler from KBW. Your line is now open.
And our next question comes from Catherine Mealor from <unk>. Your line is now open.
Thanks, Good morning.
Good morning.
Speaker 10: I just wanted to switch over to the funding side of
I just wanted to switch over to the funding side.
Speaker 10: The conversation, just ask about how you're thinking about funding growth, you know, as we look through 24. You have really nice CD growth, of course, that's coming in at a higher cost. How do you think about kind of the...
The conversation just ask about how youre thinking about funding growth look through 'twenty four.
Really nice PD growth of course that is coming in at a higher cost.
How do you think about.
Speaker 10: It's what they said, fun, stay stable from where we are today. Where do you think ultimately the blended kind of cost of funding peaks for you as you continue to reprise you at a 5-5.5% pace as you grew?
It's let's say at that time.
<unk> stable from where we are today, where do you think ultimately the blended kind of cost of funding peak for you as you continue to reprice.
Brandon Hamlin: Brandon, you want to take that one? Be happy to Steven. Great to talk to you. Thanks for the question. That is in part some of the explanation. It's been an interesting year. As we've seen generally a slowdown in the number of projects that we've seen, you know, that would differ from region to region. As we've said a number of times through the year, the Southeast region has remained strong, certainly relative to other regions and even certain periods of time in the Southeast.
5% pace. Thank you Christine.
Speaker 5: Well, Catherine, you know, what I would tell you is our guys are doing a great job on the deposit front. And we're growing deposits nicely as
Well Catherine.
What I would tell you is our guys are doing a great job on the deposit front and we're growing deposits nicely as well.
Brandon Hamlin: So we continue to see very good activity in that region and over in the Texas and the Southwest. But yes, despite the slowdown in the number of deals that are out there, there's also been a pullback from some of our competitors out there. We have, as time gone on, continued to press down on leverage, tried to expand on spread. So and all the time say very true to our discipline approach to origination.
Speaker 5: Almost all banks are experiencing or the vast majority. You know, these higher rates available on CDs or other alternative investments for customers are sucking money out of you know, non-interest bearing and lower interest bearing time and saving or a non-term.
Almost all banks are experiencing or the vast majority.
These higher rates available on Cds or either.
Alternative investments for customers are sucking money out of.
Noninterest bearing and lower interest bearing time and savings are non time and.
Speaker 5: savings and money market accounts. So that trend is an industry trend. We're experiencing that. You know, we are.
Savings and money market accounts.
So that trend is an industry trend we're experiencing that.
We are.
Speaker 5: As you mentioned having great success growing seed aid deposits, we expect that that will continue and that will put some upward pressure on our deposit cost as we've talked about.
As you've mentioned and having great success growing deposits we expect.
That will continue and that will put some.
Upward pressure.
On our deposit cost as we've talked about.
Speaker 5: you know, since the April call last year, as the Fed has raised rates, deposit costs will go up and will call CDs. You know, that's staggered materities, the impacts.
Since the.
April call last year.
As the fed has raised rates deposit cost will go up and because Cds.
Brandon Hamlin: But in many cases fewer competitors out there were able to still close a number of deals, great deals with improved leverage and pricing metrics. So in terms of the what continued theme would be multifamily and industrial. We're closing other types of loans. I've mentioned a couple of times over the last few quarters that our Atlanta office that covers the Miami market is seeing a lot of opportunity in condos in the Miami markets.
Staggered maturities the impacts of <unk>.
Speaker 5: Last quarter's fed increases, or if their fed increases this quarter, those will be felt, you know, three or four quarters down the road when CD is issued in that timeframe, we're all over and get reprised in connection with that last quarter increase or whatever. So there's an upward trajectory there. We know it. That's why we've said that, you know, we will get back some of this.
Last quarter's padding increases or fed.
Fed increases this quarter those will be felt.
Three or four quarters down the road when Sadie.
Brandon Hamlin: So we'll see some opportunity there. But multifamily and industrial has been for the most part the big movers. We've had some good mixed use in there as well. But those are those are where we're seeing a lot of our opportunity.
As issued in that time frame rollover and get repriced in connection with that last quarter increase or whatever so there is an upward trajectory there we know it.
That's why we've said that we will give back some of this.
Speaker 5: Very nice expansion that has occurred over four or five of the last six quarters in our net interest margin. Course spreads expanded broadly as loans reprised faster than deposits.
Nice expansion that has occurred.
Core <unk> for the last six quarters, and our and our net interest margin core spreads expanded broadly as loans reprice faster than deposits.
Speaker 5: last quarter and we gave some of that back as we said would happen. We expect that would continue to happen. So...
Last quarter in and we gave some of that back as we said would happen.
That would continue to happen so.
Speaker 5: you know, I don't know exactly what the Fed's going to do. I don't think the Fed knows exactly what they're going today. And it's hard to know exactly where that goes, but the trend is up.
I don't know exactly what the fed's going to do I don't think the fed knows exactly what theyre going today.
Stephen Scouten: Great, and Brian, appreciate that. You spoke to spread there. What are you, and I know every credit is obviously different, but, you know, what are you seeing on new loan spreads kind of relative to the incremental funding cost, and I guess you would feel based on that growth that you're getting paid well and compensated well on this new loan production? Absolutely. You know, we talked about how our spreads differ pretty materially depending on, you know, the product type, but I would say that we're, you know, ranging from, from sort of midish threes to up into the forest, depending on the product type and when where it is.
<unk>.
It's hard to know exactly where that goes but the trend is up.
Speaker 5: for deposit pricing because we're rolling overseas. These now that we're priced two, three, four quarters ago and their market rates are higher now than they were then. So I think our guys are doing a great job of funding our balance sheet and- and they're not going to our developer home still?? have horns.
For deposit pricing, because we're rolling over say they know that.
We're priced 234 quarters ago.
They are market rates are higher now than they were then so.
I think our guys are doing a great job.
Funding, our balance sheet and doing it in.
Speaker 5: What is a very cost effective way, particularly considering how much we are growing our balance sheet. So we feel pretty good about that.
What is a very cost effective way, particularly considering how much we are growing our balance sheet. So we feel super good about that.
Sandy Artic early.
Speaker 5: drew hard for the other guys on the deposit came the guys in the retail branches
Very hard for the other guys on the deposit team the guys in the retail branches.
Stephen Scouten: Okay, and then just the last thing for me, you know, obviously the RESG loans are staying on the books for longer. I assume this has been driving some of the, what I see is conservatism around the loan losses, but, but how do you guys kind of speak to that pushback maybe from, from some market participants and say, like, oh, these loans staying around longer is a bad thing, not a good thing, even though you're earning more money.
Speaker 5: 12,500 people in those retail branches, they are doing wonderful work for us.
12, 1500 people in those retail branches by Youre doing wonderful work for us.
We're real pleased with it.
Okay.
Speaker 10: You've been one of the few banks that's been able to continue to grow NII, since your name has really held in better and then also you've grown so much. But I assume that we've talked to this in past calls, that one's flex.
You've been one of the few banks that enable to continue to grow.
Yes.
<unk> has really tell them better and then also you've grown so much but.
Brandon Hamlin: Well, and George can weigh on this one as well. I think I would first point out that we've had more payoffs than we have had originations this year. So, you know, as we, as you can see from the numbers reported, it's not, you know, a significant increase, but they have been up every quarter, a quarter over quarter. And evidence of other capital out there in the market. You know, they're paying off with refives, they're paying off with sellouts or sales of, you know, income properties from, from developer to the new owner and even have some situations that the bar or come into a lot of cash and just, you know, pay us off in that method.
And that at least half a dozen past call that one lakh essentially this year just as and then Paul just on deposit cost catching up so better than the industry if that answer your.
Speaker 10: potentially this year just as the NIMBALS just from the POSI cost catching up. It's a little better than the industry, but the inflection should be in the next headquarters. But could you argue that with the higher, the better origination volume you're seeing, the better growth that we could still see in other few quarters of actual dollar NII growth?
Questions will be in the next few quarters, but could you argue that with the higher the better origination volumes youre seeing in the better growth that we could still see another few quarters of actual dollar NII growth.
It remains to be seen.
We we said in the last quarter's conference call I think Tim talked about this and I did that.
It was it was going to be a quarter in the third quarter, where we're going to give back some of our net interest margin and we're going to have to offset that with growth in average, earning assets and that it was a horse race and I think the way I characterize.
Speaker 5: and that it was a harsh race. And I think it was the way I characterized it as whether or not we would be able to achieve positive growth in that interest income. I think we were up about 10 million in that interest income, this quarter over the third, over the second quarter of this year. So the growth horse.
Brandon Hamlin: But as you noted, we don't mind having the earning balances on our, on our book and, and, and our getting paid, paid well for those loans. So look, with, with rates doing what they've done, we've, we've known we were going to have a slower repayment volume, but it, it has been a repayment volume continues to be there's still people in the market with capital. So, we're, we're not surprised and I would say on the whole police to see the payoff continue to come in and the numbers that they do.
It is whether or not we would pay.
So you're able to achieve positive growth in net interest income I think we were up about $10 million and net interest income this quarter over the third.
Second quarter of this year so.
The growth horse.
Speaker 5: Outran the net interest margin shrinking horse and we put up record net interest income. It's going to be a toss up probably quarter to quarter.
Rand.
Hi.
Net interest margin shrinking horse.
And we put up record net interest income, it's going to be a policy probably quarter to quarter to quarter in the coming quarters to see which horse wins that right and if we can.
Speaker 5: in the coming quarters to see which horse ones that race and if we can continue to improve it if it goes up a little better or if it goes down a little better or stays the same. I don't know, I can't handicap that right now, but.
George Gleason: Let me clarify just for our listeners who don't price loans all the time. Brandon said that, you know, our spreads typically in the RISG portfolio. I think you said we're ranging in the, in kind of the mid 300s up into the 400s. And, and that references to a spread over so per 30 day term, so far is what we use as, as the predominant index. So that's a spread over so far.
Continue to improve it if it goes up a little bit or if it goes down a little better stays the same I don't know I can't handicap that right now but.
Speaker 5: You know, it's not clear, but we're working really hard to...
It's not clear, but we're working really hard.
Speaker 5: the best we can do to maintain as much margin as possible book as much growth as we can book that meets our quality standards and pricing standards and hopefully keep the
<unk>.
The best we can do to maintain as much margin as possible book as much growth as we can book that meets our quality standards and pricing standards and keep hopefully keep the.
George Gleason: And I wanted to clarify that. We, we just talked about it spread out the time. But, You know, there are a lot of different indexes and we're referencing Spread Over 30 Day Terms Sofer. And, you know, a point that Brandon made is that our leverage points are coming down probably over the last two years. You know, our loan to value loan to calls for a shows quarter to quarter quarter have had a generally down trend, not every quarter, but we're probably down five to somewhere between five and 10 percentage points on the left.
Speaker 5: same horse winning in future quarters, but I can't, I can't predict that how
Same horse winning in future quarters, but I can't.
I can't predict that outcome.
Yes.
Speaker 10: If you don't mind, there's one clarifying question on the credit comment earlier. On credit stats and watchless loans, you did not see any change to that this quarter. Is that correct?
If you don't mind, one clarifying question on the credit.
Comment earlier on criticized the Westwood one.
You did not see any change to that this quarter is that correct.
Sam do you have that.
Speaker 4: I don't have the specific numbers, Catherine, but no significant increase that we haven't already talked about. Obviously, in our management comments.
I don't have those specific numbers Catherine but no.
No significant increase that we haven't already talked about obviously in our management comments.
George Gleason: The leverage now versus what was originated two years ago. So that's very favorable for credit quality. And I would just echo what Brandon said. We're thrilled to have loans stay on the books longer. You know, and in a lot of times sponsors are quick to exit our loan to go to a cheaper permanent loan solution sponsor. We're being very reticent about trying to figure out where their best exit is reconnance wise.
Speaker 4: We talked about the one loan at RESG, the hotel loan, that did have a small charge off of $3.7 million. That loan did go from performing to non-performing, but that was already a substandard loan. It was just substandard of cruel going to substandard non-acrual. So no other significant movement into risk rating classifications. So no other significant movement into risk rating classifications.
We've talked about.
Sure.
The one loan at our ESG the hotel loan that did have a.
A small charge off of $3 $7 million.
That loan did go from performing to nonperforming.
But that was already a substandard loan it was a substandard accrual.
The substandard non accrual.
So no no other significant movement.
Movement into <unk>.
Risk rating classifications.
George Gleason: So that's keeping the loans on our books and our higher yield construction loans longer. Our leverage points are low. So we're we're very happy to have those loans on the books for an extended period of time. Yep, makes sense to me. Appreciate the color and congrats on all the success again. Thank you. And thank you.
Okay, great. Thanks for the clarification.
Speaker 6: and thank you.
And thank you.
Operator: And one moment for our next question.
And one moment for our next question.
Speaker 1: And our next question comes from Matt O'Leary from Steve Inge, a line of not open.
And our next question comes from Matt Olney from Stephens. Your line is now open.
Speaker 2: Hey, thanks. Good morning. Wanna ask more about loan floors within the RISG portfolio? I think on the path calls you've talked about, that the mix of Reggie loans is important dynamic, because the new originations have more significant level of loan floors than the older advantages. Any updated thoughts or color you can provide with respect to Reggie and loan floors?
Hey, Thanks, good morning.
Want to ask more about loan floors within the <unk> portfolio I think on the past calls you've talked about.
Manan Gosalia: And our next question comes from a non gocelia from Morgan Stanley. Your line is not open.
The mix of resi loans is important dynamic because the the new originations have more significant level of loan floors than the older vintages any updated thoughts or color you can provide with respect to raise G and loan floors.
Manan Gosalia: Hey, good morning. So maybe just as a follow up to that question. As we think about growth in funded balances over the next few quarters. I think this quarter you had about a 1.4 billion increase. Is that a good run rate to consider as we go through 2024? You know, I don't know that we're willing to lock in on that guidance. Menon, we expect good growth over the next year, but we're not giving specific guidance on that for the year yet or for the quarter.
Speaker 8: Well, every quarter when we have older loans pay off and we've talked about that volume.
Well every quarter when we have older loans pay off.
And we've talked about that volume.
Speaker 5: you know, those floors typically are much lower than the floors on newly originated loans. So, you know, our favored desired scenario is that the fed is at or within quarter of the end of their tightening cycle and that they stay at these rates for two years.
Those floors typically are much lower than the floors on newly originated loans. So.
Right.
Our our favoured desired.
Scenario is that the fed is at or within a quarter of the end of their tightening cycle and then they stay at these rates for two years.
Manan Gosalia: We'll probably in our January call give some specific growth guidance on the total loan expected growth in 2024. We expect it to be a nice growth here, but I'm not ready to lock in on a number yet.
Speaker 5: or longer, because if the Fed does that, then we get a chance to recycle the vast majority of RISG loans from lower floors to higher floors.
Our longer.
Because if the fed does that then we get a chance to recycle.
Vast majority of our ESG loans from lower floors to higher floors.
Speaker 5: which will be very helpful to us in a downright environment. So every time we hear the market beginning to embrace the concept that the Fed's mantra of higher for longer is likely to be reality. It brings a smile to my face because that's our best scenario. So we are, we are.
It will be very helpful to us in a down rate environment. So every time, we hear the market beginning to embrace the concept.
George Gleason: All right, fair enough. And then just on credit, you know, it feels like a good quarter on credit. You know, as we compare the properties that were re-appraised this quarter versus last quarter, you had much less LTV migration into some of the high LTVs. Was there something fundamentally different about the properties re-appraised this quarter versus last? No, it's just the normal cycle of what was due for security, extension, renewal, re-appraisal, and there was nothing unique about that.
Beds mantra.
Higher for longer is likely to be reality. It brings a smile to my face because that's that's our best scenario for profitability.
Speaker 7: Okay, appreciate the commentary. And I guess switching over to the capital, I guess with the growth this year, you've been able to pull away some of the excess capital. I think you just made that CET1 ratio is around 10.7%. We'll love to get some updated thoughts around capital thresholds and what's the lower band you become for operating in the current environment?
Okay I appreciate the commentary and.
I guess switching over to the capital.
I guess, what the growth this year, you've been able to deploy some of the excess capital.
I think you guys made that CET, one ratios around 10, 7%.
George Gleason: You know, Brandon and, and his team at RESG continue to do an excellent job of getting paydowns on a lot of these loans where we would have had an upward migration in the loan to value based on a re-appraisal as part of an extension process. We continue to get quite a few paydowns from sponsors on those days, but they bring the loan to value back out of closer to the loan to value the time of unwriting.
Have to get some updated thoughts around capital thresholds.
And what's the lower band you'd be comfortable operating in and the current environment and I guess specifically what.
Speaker 11: and i get specifically will you become a little allowing that ct one ratio to drop below ten percent
Would you be comfortable allowing that CET, one ratio to drop below 10%.
Speaker 4: Damn, you're the capitals are. All right. Matt, thanks for the question. Yeah, I mean, as you noticed during the quarter, we had significant long growth, a RLA and excess of 2% and that allowed us to capitalize the vast majority of that growth. We did have a small decline in CET1 ratio, but.
Damn near the capitals are.
Matt Thanks for the question.
Yes.
You noticed during the quarter, we had significant loan growth a ROA in excess of 2%.
George Gleason: That just reflects the strength of the sponsors and the quality of the assets. Gordon, anything different you are seeing on the credit side? Some of your peers have been increasing their NPL's on commercial real estate and also their criticized assets. I know your business is different, but I was just wondering if you were seeing anything different in the areas where you all are printing. No, I'm not, and I'll let Brandon address that, but the reality is that the quality of our sponsorship, the quality of our new construction projects, combined with the low leverage, loan to value, loan to cost metrics on these projects has contributed to the excellent performance of our portfolio so far during this cycle.
And.
That allowed us to capitalize.
The vast majority of that growth, we did have a small decline in CET, one ratio, but still feel like we have very strong levels of capital.
Speaker 4: feel feel like we have very strong levels of capital. We've seen a significant increase.
We've seen a significant increase.
Speaker 4: and unfunded over the past year, significant increase and funded that has used some of our capital through organic loan growth. But I don't see the pace of...
In unfunded over the past year significant increase in funded that has used some of our <unk>.
Some of our capital through organic loan growth, but.
George Gleason: We continue to think that those are fundamental ingredients, great sponsorship, great state-of-the-art new assets, low loan to value, low loan cost that will continue to help our portfolio perform very well on a relative basis to the industry going forward.
Yes, I don't see the pace.
Speaker 4: of decline being the same pace that we've had over the past year and would anticipate that our growth in earnings would help capitalize whatever growth we have on the balance sheet.
<unk>.
Of decline being the same pace that we've had over the past year.
And would anticipate.
Our our our growth and earnings will help capitalize.
Whatever growth we have on the balance sheet.
Speaker 4: So you've not seen us go below 10% in CET-1. And so if we have a quarter or two of further declines and work our way back up over time, that would be generally my thought at this point.
So you've not seen us go below 10% and CET one.
And so if.
If we have a quarter or two of further declines and work our way back up over time.
Manan Gosalia: Great, thank you.
That would.
That would be generally my my thought at this point.
Speaker 11: And then Tim, I guess the second part of that would be around the stock buyback, obviously no activity in the third quarter, but I think we're now at these valuations where you were more active in the first part of the year. So any updates, thoughts around the buyback from here. Thanks.
And then Tim I guess, the second part of that would be around the stock buyback, obviously no activity and in the third quarter, but I think we're now at these valuations where you are more active in the first part of the year. So any updated thoughts around the buyback from here. Thanks.
Operator: And thank you. And one moment for our next question.
Speaker 4: Yeah, I mean, you saw in our comments we're focused on loan growth and we'll continue to be focused on our organic growth. We continue to deliver.
Yes, I mean, you saw in our comments, we're focused on loan growth and will continue to be focused on our organic growth we continue to deliver for.
Tamirah: And our next question comes from Tamirah, from Wells Fargo Securities. Your line is now open. Hi, good morning.
Speaker 4: For the last four quarters we've had a return on tangible common equity of over 17% are
For the last four quarters, we've had a return on tangible common equity of over 17% our tangible book value per share has increased year over year.
George Gleason: I have a three-part question following up on Stephen's question, just on loan staying on longer within the RISG. I guess can you a put a number around just how much longer these loans are sticking on balance sheet versus a, quote, unquote, normal time, B, is there a contractual limit for how long these loans can stay in construction status? And then see how much of a cliff or a headwind to growth should we expect as the ReFi market re-engages and pay-downs normalize, whether that's in 25 or 26, whatever that might be?
Speaker 4: changeable book value per share has increased year over year at 14.5%. So, you know, if you go back to 2021, 2022, 2023, I think we've done a really good job of managing our capital in 2021. We took advantage of the low rates and issued a lot of really low rate capital
14, 5%.
So.
If you go back to 2021.
George Gleason: You know, the length of duration that a loan will stay in construction status because they're waiting for a better exit or trying to time the markets for an exit, it's hard to predict. It varies quite a lot from loan to loan and Brandon shared some statistics with me earlier, which I'm going to... I can't recall them, but on exactly where loans have paid off recently and how many of them have repiled, how many of them have sold and so forth, so the properties and so forth, so I'll let him share that and that may answer that part of your question and give you a little color on it won't answer it, but it will kind of explain that situation.
2022, 2023, I think we've done a really good job of managing our capital in 2021, we took advantage of the low rates and issued a lot of.
Really low rate capital at that point.
Speaker 4: over the coming years when we had slower growth we used that capital to buy back our stock.
Over the coming years, when we had slower growth, we use that capital to buyback our stock.
Speaker 4: I think we ended up buying back nearly 13% of our shares outstanding when we started the program. And then now this year we've had a lot of great organic loan growth and so we pulled back on the share repurchases. So I think we've managed to capital levels of share repurchase just how we wanted to do it.
I think we ended up buying back nearly 13% of our shares outstanding.
When we started the program and then now this year, we've had a lot of great organic loan growth and so we've pulled back on the share repurchases. So.
So I think we've managed our capital levels of share repurchase just how how we wanted to and we.
Speaker 4: We've got good prospects for meaningful growth going forward and want to be...
We've got good prospects for meaningful growth going forward and want to be.
<unk>.
Speaker 4: The focus on that is both the focus on chairy purchases.
B.
I'm focused on that as opposed to focus on share repurchases.
Speaker 12: However, we do expect to sometime in 2024 still have another authorization when values of our stock are very compelling. We would continue to be active at the right price. Yeah. OK. Thanks, Jacob. My questions, guys.
However, we do expect sometime in 2024 still have another authorization when values of our stock are very compelling we would continue to be active at that at the right price.
Yes.
Okay. Thanks.
Thanks for taking my questions guys.
And thank you.
And one moment for our next question.
Speaker 1: And our next question comes from Brian Martin from Janie Montgomery, Scott LLC. Your line is now open.
Okay.
And our next question comes from Brian Martin from Janney Montgomery, Scott LLC. Your line is now open.
George Gleason: And, you know, you're accurate in that payoffs that extend today, you know, the things that would have been a normal cycle, don't get paid off this quarter because the sponsor is going to wait to what they hope will be a better exit execution to apartment loan, you know, a quarter or a year from now or 18 months from now, when a market sentiment develops that's broad base that it's time to exit, yes, we will have a lot of payoffs at that point in time.
Hey, good morning.
Speaker 13: Morning. Say just one back to the margin. I think you guys, George, you talked about the dollars of an I.I. and kind of the outlook there just as far as the, you know, commenter in the past about, you know, once the Fed does stop that the margin.
Good morning.
Just one back to the margin I think you guys. George you talked about the dollars of NII in kind of the outlook there just as far as the.
Commentary in the past about once the fed does stop the margin.
Speaker 13: pass cycles is kind of taking a quarter to to kind of reach an inflection point of that drop is Is that still how you're kind of thinking things play out here based on kind of the pricing you're seeing on the new new Reginations that you know maybe the margin bottom zero the next couple quarters and then Can stabilize their after is that You
In past cycles has kind of taken a quarter or two to kind of retain inflection point of that trough is.
Is that still how youre kind of thinking things play out here based on kind of the pricing youre seeing on the new new originations that <unk>.
Maybe the margin bottoms here over the next couple of quarters and then.
George Gleason: And our RESG teams, our asset base lending teams, our equipment structured finance teams, our commercial banking teams are all keenly aware that we've got to build our business and diversify our business and be in a position to reach native volumes that will replace those assets when we get that way to pay off, so we're building our infrastructure and that goes back to one of the comments I made in our last conference call that we're working really hard to add quality team members from banks that are cutting back on origination staff and other sorts of staff. We're building the quality of our team and we've got some really good things that we're very positive about in the works on that that, you know, I think will help us continue to grow our balance sheet and grow in the future, so we're looking a year, two years, three years into the future on what those volumes are planning.
Can stabilize thereafter is that.
Still.
The right way to think about it.
Speaker 14: Brian , what I would tell you in that regard, if we get just to a flat pet environment, say in 24 and there's no pet moves either way, our CD...
Brian what I would tell you in that regard if we're if we get just a flat fed environment.
Say in 'twenty, four and there is no fed moves either way.
Sure.
Our.
<unk>.
CD issuance.
As ladder throughout.
Speaker 5: you know, every quarter of my issue news feed ease, it's a very ladder book, but there's a small chunk in the seven month time frame and a really big chunk in the 13 month time frame. So...
Every quarter, we issue new Cds, it's a very ladder book, but there is.
A small chunk in the seven months timeframe and a really big chunk in the 13 months timeframe.
So the.
Speaker 5: 13 month's treaties will basically mean that when the Fed is done and market rates is stabilized, you'll still see that final tail of our deposit book, reprising 13 months after the last Fed.
13 months Cds will basically mean that when the fed is done and market rates have stabilized you'll still see that that final tail of our deposit book repricing 13 months after the last fed move.
Speaker 5: So it's really probably a four quarter phenomenon to get to if the Fed is stopped. It's probably four quarters of the...
It's really probably a four quarter.
Nominally to get to.
It has stopped its probably four quarters.
George Gleason: We always do look into the future and plan and that's why our portfolio and our performance metrics right now are doing so well two years ago, you know, we were in three years ago and four years ago, we were planning for an environment where rates escalated and economic conditions changed. We're doing that with our verbal right loans, with our floors and our loans, with our low loan the value, touch structuring on credit and all that is paying off now and as we're going through this part of the cycle, we're looking forward in a one, two, three, four years to future iterations and changes in the balance sheet and preparing now to continue to have a nice steady trajectory in those periods of time.
Rising.
Speaker 5: Deposit cost, to get to point where deposit cost is stalized, and and.
Deposit costs to get to a point where deposit costs have stabilized and.
And Paul fracture in there.
Speaker 13: Gotcha. Okay. That makes that makes sense. And then as far as where we exit on the cost of interest, paying deposits for
Got you, Okay that makes that makes sense and then as far as where we exited.
On the cost of interest bearing deposits for.
Speaker 13: for the month of September , would you have that or...
For the month of September what would you have that or.
Speaker 15: I don't have it, but I have someone here that probably has a send you to have that. Yes, I do. So September was 3.67 compared to 3.48 for the course.
I don't have it but I have someone here that probably hasn't extended do you have that yes.
So September was $3 67, compared to $3 48 for the quarter.
Okay.
Speaker 13: for it. Okay, perfect. Thanks, Indian. Then maybe just one or two others just on the expenses in the core. I think you saw a decline and talked about kind of the guide for the full year, but just thinking about the decline in the quarter and just how you're thinking about the investments you're making and kind of outlining in the management comments. I mean, the rate of expense growth is we look into next year. Is it?
Okay perfect. Thanks, Cindy and then.
Maybe just one or two others just on the expenses in the quarter. I think you saw a decline and talked about kind of that the guide for the full year, but just thinking about it.
The decline in the quarter and just how you're thinking about the investments youre, making in kind of outlining in the management comments.
Brandon Hamlin: Great, let me fill in those stats for you, George. I sort of read to it earlier, earlier before, but you know, we've had year-to-date of 53. Loan Repayments. So, I got my count right of that 53. We've had, I believe, 32 that were paid off with a third party refinance. We had one that we actually had a land loan out and the borrower has already moved forward with a vertical construction loan.
The rate of expense growth as we look into next year.
Is it should we expect to see some moderation in that expense growth given the investments you've made this year, albeit that you still expect.
Speaker 13: I should expect to see some moderation in that expense growth given the investments you've made this year, all be it that you still expect kind of continued growth going forward.
Continued growth going forward.
And the investments.
Damn place.
Speaker 4: Brian , yeah, if you look through the expense lines, you would see some pretty significant increases in salary and benefits. You'd see significant increases in the FDSC insurance, given the...
Yes, Brian .
Yes, if you look.
Through the expense lines, you would see some pretty significant increases in salary and benefits you'd see significant increases in the FDIC insurance given the.
Brandon Hamlin: So, we essentially paid off our land load and moved into a new construction loan there. And then we had 15 that sold, that were either condos sell out. So, they sell out as the condos contracts were closed over time. But we had a number of those that completed their loan repayment and then a few industrial properties that sold complete building sale. And then, as I said, we had just a pure cash repayment by a sponsor that had a lot of cash on hand.
Speaker 4: the rate increase on one one that impacted the entire industry and of course our growth in the positive.
The rate increase on <unk>.
One that impacted the entire industry and then of course our growth in deposits.
Speaker 4: and then our advertising has certainly been elevated. You know, so those have generated a bigger growth rate this year, over a year, compared to what I would expect next year for thinking year over year. However, you know, I'm a week.
Our advertising has certainly been elevated.
So those have generated a bigger growth rate this year over year.
Compared to what I would expect.
Next year.
Year over year however.
Speaker 4: On expenses, what we focus on is how do we grow our bank? How do we invest in growing our bank, invest in our people? So we are super focused on expenses, but we're more focused on ways to grow our bank. And we try to do that in the most efficient way possible.
On expenses, what we focus on is how do we grow our bank how do we.
Invest in growing our bank invest in our people.
Brandon Hamlin: And then we had four projects that the sponsor decided not to move forward on the vertical construction. And so, paid off the moderate balance that would have been outstanding, nominal balance that would have been outstanding at closing.
So.
We are super focused on expenses, but we're more focused on ways to grow our bank.
And we try to do that in the most efficient way possible.
Speaker 4: But we've got good prospects for growth. If we George talked about good prospects for adding new teams throughout the coming quarters. So that's really our focus. And on the rate of increase year-to-year, I don't expect 24 to be at the same rate of increase that we had in 23.
Brandon Hamlin: So, and I would just say in terms of, you know, how long they're staying on. Look, you look back over time. There have been times where our average age has been longer than it is today. And there have been times and it's been a bit shorter. But it all makes complete sense in terms of the environment that we're in. And as George alluded to, you know, when you're locking one down for a while, you sure want to try to get it lower than the rates are today. And so, it's playing out really as we expected it to. And we're very happy, as we said, to be making the return while they're while they're on our our balance sheet.
But we've got good prospects for growth George has talked about good prospects for adding new.
New teams.
Throughout.
Throughout the coming quarters, so thats really our focus.
And.
On the rate of increase year over year I don't expect 24 to be at the same rate of increase that we had in 'twenty three.
Speaker 4: got you. Okay. And I would comment that the fact that third quarter non-interest expense was a few hundred thousand dollars below second quarter. That's that's a countertrend anomaly. I would expect in Tim you can comment on this. I would expect non-interest expense to generally go up every quarter going forward. Yes. I would agree with that being an anomaly. We're wrong.
Got you okay.
Comment that the fact that third quarter noninterest expense was a few hundred thousand dollars below second quarter. That's that's a counter trend anomaly.
I would expect in Tam you can comment on this I would expect noninterest expense to generally go up every quarter going forward, yes, I would agree with that being an anomaly.
Brandon Hamlin: Great. Thanks for the color. And then just one follow up on the credit side. You mentioned just now land loans and conversations around going vertical. Maybe just provide some commentary as to what you're seeing in the land portfolio and some of the updated conversations you're having with sponsors about their decision to go vertical. Yeah, there's a mix there. We gave you some pretty good color, I think, on the land portfolio and the appraisal stats that we included in our comments in terms of, you know, we had I think four different land appraisals that that were completed that showed stable to declining LTVs at the end of the day.
Okay.
Speaker 13: Got you. Okay, so if I saw that and then how about just on the ARIA Sheepfront, you talked about the payoffs.
Gotcha, Okay, Nope I saw that and then.
But just on the ISG front.
Kind of you talked about the payoffs.
Speaker 13: still being someone muted here. I mean, is it likely that we see, you know, I guess some pickup next year, I mean, you're talking about how long the loans are on the books and the pay off cycle, and should we expect the, you know, some of the pay off that don't occur this year to spill into next year is that, you know.
Still being somewhat muted here.
Is it likely that we see.
I guess some pick up next year, I mean talking about how long the loans on the books and the payout cycle and should we expect the some of the payoffs that don't occur this year to spill into next year is that.
The right way to be thinking about this.
Speaker 4: Certainly it's correct to think that some of the payoffs that might, you know, a more typical interest rate dynamic would have paid out this year, will pay off next year or the year after, you know, I would expect a...
Certainly it's correct to think that some of the payoffs that Matt.
More typical interest rate dynamic would've paid out their share will pay out next year or the year after.
I would expect.
Brandon Hamlin: And, you know, as we noted in the past, the significant portion of our land portfolio is, as you said, initial shorter term land loan with the thought that the sponsor, you know, once they have plans drawn up and costs sort of circled, would move forward. And we are, as I said, seeing some of those move forward. But I also mentioned, you know, we had four that did not move forward. So we're still in a period where just like with refinances moving forward with a construction loan in the day's rate environment.
Speaker 5: somewhat of an increase in the payoff volume next year. That's going to depend on market conditions, interest rate conditions, and so forth. But I would expect to see somewhat of an improving trend. And we'll try to, and improving trend, I guess, is a, I probably shouldn't use improving because,
Somewhat of an increase in the.
The payoff volume next year, that's going to depend on market.
Conditions interest rate conditions, and so forth, but I would expect to see somewhat of an improving trend and we will try to.
An improving trend I guess.
Probably shouldn't you improving because.
Speaker 5: If you want pay offsets and employment if you're enjoying the
If you want payoffs, that's an improvement if youre enjoying.
Speaker 5: tremendous earnings we're generating off of. It's it's not an improvement. You know, every time we have a payoff in this environment, we have very mixed emotions, but it's nice to see that guys are still able to migrate to the secondary market or sell out projects when they want to migrate to the secondary market or sell them out. We also hate losing that spread income. So it's, you know, there's pluses of money.
Tremendous earnings were generating alpha.
It's not an improvement.
We have a payout in this environment, we're very mixed emotions about it is nice to say that guys are still <unk>.
Brandon Hamlin: And some of the economic uncertainty certainly makes one think two, three, four times for moving forward. And we're seeing some of those decisions, say, you know, what we're going to wait. The deal is just not got enough room in it for us to want to move forward. And at the same time, we're seeing a number that are going to move forward. And that's whether that's, you know, land loan situations that we have that move vertical or, you know, or outside our portfolio, I think there's some, you can deduct some information from, you know, our thoughts about originations and key four.
Two.
Great to the secondary market or sellout projects when they want to migrate to the secondary markers of Allomap, we also hate losing that that.
That spread income side.
There is pluses and minuses both ways.
Speaker 13: that she and then maybe just the last one and I she with the fundings in funding to steadily picked up each quarter this year given you know i guess the strong originations and twenty two i guess
Gotcha, and then maybe just the last one in ISG with the fundings fundings are steadily ticked up each quarter. This year, given I guess the strong originations in 'twenty two I guess.
Is that.
Speaker 13: I guess the year-to-day type of level, it's kind of a sustainable level given that record originations in 22 and what's going to continue to fund up here. And I think as we look in the 24, maybe not at the pace or at the third quarter, but kind of on a year-to-day blended base.
I guess as a current I guess year to date type of level of kind of a sustainable level given that record originations in 'twenty, two and what's going to continue to fund up here and I think as we look into 'twenty four.
Brandon Hamlin: So again, it depends on the market. It depends. It all comes down to the return that one can make and versus the cost that it takes to develop. And there's more room in certain markets and product types and there are another. So it's a mix bag there.
The pace of adding a third quarter, but kind of on a year to date blended base.
Tamirah: Great. Thanks for taking my question. And thank you.
Operator: And one moment for our next question.
<unk>.
Speaker 5: Yeah, obviously the record origination volume that was exceptional performance by our RISD team in 2022 is leading to significant funding in 2023. And that fund up of that big chunk of the portfolio will continue in 2024. And I would...
Yes.
Obviously.
The record origination volume, but was exceptional performance by our ESG attainment. In 2022 is is leading to significant funding in.
In 2023 and that.
Fund up of that big chunk of the portfolio will.
We will continue in 2024.
Catherine Mealor: And our next question comes from Catherine Mealor from KBW. Your line is now open. Thanks, good morning. Good morning. I just wanted to switch over to the funding side of the conversation. Just ask about how you're thinking about funding growth, you know, if we look through 24. You've really nice CD growth. You're of course that's coming in at a higher cost. How do you think about kind of the, if it's what they said, fun, stay stable from where we are today.
I would.
Speaker 5: I'll invite you to the cadence kind of the pay off funding cadence chart that we've included our management comments for years now that gives you a visual picture of what's funded out of that 22 book and that gives you an indication of what is still the fund out of that 22 book
Sachin to the cadence kind of payout funding cadence chart.
Included in our management comments for years now.
Catherine Mealor: Where do you think ultimately the blended kind of cost of funding. You can pick for you as you continue to reprise you at a five and a half percent pace as you grow CDs. Well, Catherine, you know, what I would tell you is our guys are doing a great job on the deposit front and we're growing deposits nicely as almost all banks are experiencing or the vast majority. You know, these higher rates available on CDs or other alternative investments for customers are sucking money out of, you know, non interest bearing and lower interest bearing time and savings or a non time and savings and money market accounts.
That gives you a visual picture of whats funded out of that 22 boats.
That gives you an indication of what is still to fund out of that 22 book.
Speaker 5: And as we've said a lot of times, these lawns tend to find in the...
As we've said a lot of times these loans tend to fund.
Speaker 5: one mostly in the one to two years after originations and payoff and three and four years after.
One mostly in the one to two years after origination and payoff in three and four years after originations.
Speaker 13: Okay, thanks for taking the questions and a nice quarter.
Gotcha, Okay. Thanks for taking the questions and nice quarter.
Thank you very much.
Speaker 1: And thank you. And if you would like to ask a question that is star 11, again, if you would like to ask a question that is star 11, one moment for our next question. And our next question comes from Brody Preston from UBS. Uline is now open.
Thank you and if you would like to ask a question that is star one one again, if you would like to ask a question that is star 111 moment for our next question and our next question comes from Brody Preston from UBS. Your line is now open.
Hey, good morning, everyone.
Good morning.
Speaker 16: I wanted to start maybe just a question for Cindy just on the just in the deposit cost. Have you guys had to increase your you know your new offering rates at all during the quarter and if so could you kind of give us an indication that's how much.
I wanted to start maybe just a question for Cindy.
Just on the deposit costs.
Have you guys had to increase your <unk>.
A new offering rates at all during the quarter.
Catherine Mealor: So that trend is an industry trend. We're experiencing that, you know, we are, as you mentioned, having great success growing CD deposits, we expect that that will continue and that will put some upward pressure on our deposit cost as we've talked about, you know, since the April call last year. As the Fed has raised rates deposit cost will go up and because CDs, you know, that staggered materities, the impacts of last quarters fed increases or if they're fed increases this quarter, those will be felt, you know, three or four quarters down the road when CDs issued in that time frame, we're over and get reprised in connection with that last quarter increase or whatever.
So because you kind of.
Give us an indication as to how much.
Speaker 15: Sure, we increased slightly during the quarter from, 13 months went from five different.
Sure we increased slightly during the quarter.
<unk> from.
13 month went from 50.
Speaker 5: to $660. And that was as a result of a little bit of movement in the competitive space. And Brody, that is an APY that you report to the customers of the actual rates probably more like.
Two six fixed income.
And that.
That was as a result of a little bit of movement in the in the competitive space.
Brody that AEP why that you report to the customers. So the actual rates probably more line.
Speaker 5: went from like, five, 30, something to five, 40, something, half, five, 30, five, 40s on the actual rate.
When per month.
530, something to 540, something <unk> to have $540 on the actual rate.
Speaker 16: Got it. Okay. Well, thanks for that. And then maybe one for Tim. I just wanted to better understand the loan yields, the beta slowed quite a bit on a quarterly basis this quarter. And so I wanted to ask what what growth that was it kind of new production coming in at lower yields or do any other reduced up of free cap.
Got it okay cool thanks for that and then.
Maybe one for Tim.
I just wanted to better understand.
The loan yields.
Beta slowed quite a bit on a quarterly basis.
This quarter and so I wanted to ask what drove that was it kind of.
Catherine Mealor: So there's an upward trajectory there. We know it. That's why we've said that, you know, we will get back some of this very nice expansion that is covered over four or five of the last six quarters and our net interest margin and course spreads expanded broadly as loans reprised faster than deposits. That's, you know, last quarter and and we gave some of that back as we said would happen. We expect that would continue to happen.
New production coming in at lower yields.
The other <unk>.
<unk>.
Okay.
No rate caps.
That.
Some of the resi loans have rate caps as a part of their structure, where a third party is the counterparty we are not the counterparty. So we benefit in all of the rate increases so nothing nothing capped on our yields there.
Speaker 4: Brody, I'd have to go back and look at what Sofer did in Q2 compared to Sofer did and...
Brody I'd have to go back and look at look at what so far did in Q2 compared to so for did in <unk>.
Catherine Mealor: So, you know, I don't know exactly what the Fed's going to do. I don't think the Fed knows exactly what they're going today. And it's hard to know exactly where that goes, but the trend is up, for deposit pricing, because we're rolling over CDs now that we're priced two, three, four quarters ago, and their market rates are higher now than they were then. So I think our guys are doing a great job of funding our balance sheet and doing it in what is a very cost effective way, particularly considering how much we are growing our balance sheet.
In Q3, if that had any impact.
But.
Generally speaking.
Yeah, It was a little bit lower increase quarter over quarter than we've seen in other other quarters, but there's nothing nothing capped.
From an <unk> perspective.
Certainly had.
Payoff volume has been.
<unk>.
At the subdued level that we've talked about sometimes that generates mid.
Speaker 4: minimum interest or other fees that are associated with that, that was probably at the lower end of a normal range but still within a normal range that may have contributed to.
Minimum interest or other.
Fees that are associated with that.
That was probably at the lower end of our normal range, but still within a normal range.
Catherine Mealor: So we feel, please forget about that, and Cindy, Audit Carly, Drew Harper, the other guys on the deposit team, the guys on the retail branches, they're, you know, 12, 1500 people in those retail branches, they are doing wonderful work for us, and we're replaced with it. You've been one of the few banks that's been able to continue to grow NII, you know, since your, your name has really held in better, and then also you've grown so much, but I assume that, we've talked with us in past calls that won't select potentially this year, just as the name falls just from, you know, deposit costs catching up.
That may have contributed to it a little bit.
Speaker 5: I think the biggest factor is just the slowing rate of federal reserve rating increase.
I think the biggest factors just a slowing rate of federal reserve rate increases.
Speaker 5: of our lone user. Variable right, and they mostly adjust either daily or monthly. So as the Fed has told the rate of increases, the rate of...
Our loan yields are variable rate and they mostly adjust either daily or monthly so as the fed has slowed the rate of increases the rate of.
Speaker 5: increase in our loan yields as moved proportionally.
The increase in our loan yields is as move proportionately.
Got it.
Speaker 16: I wanted to move back to RISP. I really appreciate you guys giving us those stats on...
I wanted to move back to <unk>.
I really appreciate you guys, giving us those stats on.
Speaker 16: on the refines and on the paydowns and all that stuff.
On the on the Refis.
Pay downs and all that stuff.
Speaker 16: I want to ask Brandon, do you take a look back as to how that compared to kind of year to date trends from prior periods, how that mix kind of looked between straight payoffs versus third party exits or anything like that?
I wanted to ask Brendan maybe just take a look back as to how that compared to kind of.
Catherine Mealor: It's a little better than the industry, but, you know, the inflection should be in the next headquarters, but could you argue that with the higher, the better origination volume you're seeing, the better growth that we could still see in other few quarters of actual dollar NII growth? You know, it remains to be seen. We said in the last quarters conference call, I think Tim talked about this, and I did that, you know, it was, it was going to be a quarter in the third quarter where we're going to give back some of our net interest margin, and we were going to have to offset that with growth and average earning assets, and that it was a horse race, and I think it was the way I characterized it as whether or not we would be able to achieve positive growth in that interest income.
Year to date trends from prior periods.
How that mix kind of look between paid like straight payoffs versus third party exits or anything like that.
Speaker 3: You know, Brody, I would be guessing if I told you that. You know, the guess would be probably...
Catherine Mealor: I think we were up about 10 million in net interest income, this quarter over the third, over the second quarter of this year, so the growth horse out ran the net interest margin shrinking horse, and we put up record net interest income. It's going to be a toss up probably quarter to quarter in the coming quarters to see which horse wins that race, and if we can continue to improve it, if it goes up a little better, it goes down a little better, it stays the same.
Brody.
I'd be guessing if I told you that.
The guests would be probably.
Speaker 3: more refies, but I don't know what the pure mix was. We started paying a little bit more attention to that recently. I think we got a question last quarter and we're all...
More refis, but.
I don't know what the pure mix was we started paying a little bit more attention to that recently I think we got a question last quarter and we're all incredibly curious here so.
Speaker 3: incredibly curious here. So, you know, did have the stats ready for you, but I'd be stepping out there too far to tell you, you know, how much I think that's different. But I felt, you know, I felt like, you know, roughly, well, over 50% of the payoffs coming from REFI was a pretty positive result in today's world. Yeah.
Did have those stats ready for you, but I'd be stepping out there too far.
Tell you how much I think that's different.
I felt like.
Roughly well over 50% of the payoffs coming from refi was it was a pretty positive result in today's world.
Got it okay.
Speaker 16: Could I ask you to speak maybe to the land loan in Oreo? I'm sorry if somebody asked you this already. I didn't, I thought I didn't hear anybody ask you about it.
Can I ask you to speak maybe to the land loan and Oreo I'm sorry, if somebody asked me. This already I didn't I thought I didn't hear anybody ask you about at the one that's.
Speaker 16: The big one, you know, that's in there and I think we got it under a sale kind of process. You know, I know you got to be sensitive to kind of that process at this point from a confidentiality perspective, but you noted it was subject to standard due diligence. I was wondering if you had a sense for how far into the due diligence process you actually are at this point.
The big one.
And there and I think we've got it under a sale kind of process.
I know you're going to be sensitive to kind of that process. At this point from a confidentiality perspective, but you noted it was subject to standard due diligence I was wondering if you had a sense for how far into the due diligence process you actually are at this point.
Catherine Mealor: I don't know, I can't hand it at that right now, but, you know, it's not clear that we're working really hard to do the best we can do to maintain as much margin as possible, book as much growth as we can book that meets our quality standards and pricing standards, and hopefully keep the same horse winning in future quarters, but I can't predict that outcome. If you don't mind, there's one clarifying question on the credit comment earlier.
Speaker 5: Yeah, let me address that. You know, we've got, at September 30, we add a total of six pieces of foreclosed real estate. They're in five different...
Yes, let me address that we've got.
Yes.
Timber 30, we add a total of six pieces.
Foreclosed real estate.
They are in five different states.
Speaker 5: and we were very pleased to have gotten
And we were very pleased to have gotten three of those and it just so happened. It was about three largest six under contract so 99% of our Oreo balances are under contract for sale as you mentioned Broudy all of those are subject to.
Speaker 5: three of those and it just so happened it was the three largest of those six under contract. So 99% of our oil balances are under contract or sale. As you mentioned, Brody, all of those are subject to standard due diligence and
Standard due diligence in.
Speaker 5: closing conditions and requirements is always the case.
Catherine Mealor: On credit stats and watchlist loans, you did not see any change to that this quarter is that correct? Sam, do you have that? I don't have the specific numbers, Catherine, but no significant increase that we haven't already talked about. Obviously in our management comments, we talked about the one loan at RESG, the hotel loan, that did have a small charge off of $3.7 million. That loan did go from performing to non-performing, but that was already a substandard loan. It was just substandard accrual going to substandard not accrual. So no other significant movement into risk grading classifications. Great. Thanks for the clarification. And thank you. And one moment for our next question.
Closing conditions and requirements as is always the key.
Speaker 5: Each of those three contacts would clear our book value. Each of them is scheduled to close sometime before March 31 of 2024.
Each of those three contacts would.
Catherine Mealor: And our next question comes from Matt Olney from Evangelion.
Clear our book value each of them is scheduled to close sometime before March 31 of 2024 and.
Speaker 5: And we'll see what happens. Sometimes contracts close, sometimes they don't close, but...
We'll see what happens sometimes contracts closed sometimes they don't close but typically people don't go to the time travel and legal expense to put them under contract unless they intend to close them. So we're very.
Speaker 5: Typically people don't go to the time trouble and legal expense to put them under contract unless they intend to close them. So we're very...
Speaker 5: pleased about that and the fact that all of them you know clear our book balance and it's the vast majority of our our Oreo is a good thing these contracts all have various provisions about
Pleased about that and the fact that all of them.
Clear our book balance and it's the vast majority of our Oreo is a good thing. These contracts all have various provisions about confidentiality in them as is customary in these contracts. So we're going to limit our commentary on it to that general comment at this time.
Speaker 5: confidentiality in them is is customer in these contracts, so we're going to limit our our commentary on it to that general comment at this
Speaker 16: Got it. I appreciate that detail. And then I did also ask just, you know, getting the quarterly approval data is very helpful. And, you know, I just kind of tried to quickly aggregate it last night and...
Got it I appreciate that detail.
And then I did also ask just.
Getting the quarterly appraisal.
Data.
Very helpful.
I just kind of tried to quit.
Quickly aggregate it last night.
Speaker 16: I guess when I looked at it as about 50 projects, it's your re-appraise, year-to-date, at least that you've disclosed, and that's like $4.7 billion. So either way you cut it, that's about like,
And I.
I guess when I looked at it is about 50 projects secured reappraise year.
George Gleason: I'm not open. Hey, thanks. Good morning. I want to ask more about loan floors within the RESG portfolio. I think on the path calls you've talked about, the mix of Reggie loans is important dynamic because the new originations have more significant level of loan floors than the older advantages. Any updated thoughts or color you can provide with respect to RESG and loan floors? Well, every quarter when we have older loans pay off and we've talked about that volume, those floors typically are much lower than the floors on newly originated loans.
Year to date.
At least that you've disclosed.
That's like $4 $7 billion, so either way you cut it that's about like <unk>.
Speaker 16: 14 to 15% of your commitments, you know, either from a number or a dollar perspective. Is that kind of normally, you know, what we should expect to be on a pace to re-aprays 20% per year?
<unk> thousand 14% to 15%.
Sure.
Fitments.
Either from a number or a dollar perspective.
That kind of normally.
What we should expect you to be on a pace to reappraise, 20% per year.
Speaker 5: Yeah, I mean, you know, it's going to depend on, um,
Okay.
Yes, I mean, it's.
Going to depend on.
Speaker 5: what loans are maturing and coming up for extension, either as a variety extension because our as a variety extension provisions usually have a loan to buy you requirement in them and or what are coming up for extension that don't have an as a brand when we're gonna get an appraisal. Or what
What loans are maturing and coming up for expansion either as a brand extension because our as a variety of extension.
George Gleason: So our favored desired scenario is that the Fed is at or within quarter of the end of their tightening cycle and that they stay at these rates for two years or longer. Because if the Fed does that, then we get a chance to recycle the vast majority of RESG loans from lower floors to higher floors, which will be very helpful to us in a downright environment. So every time we hear the market beginning to embrace the concept that the Fed's mantra of higher for longer is likely to be reality. It brings a smile to my face because that's our best scenario for profitability.
Provisions, usually have a loan to value requirement in them.
Or what are coming up for extension that don't have an answer Brad we're going to get an appraisal.
Or what's.
Speaker 5: alone that is getting some attention on our part that we feel like we need to re-apprise. So, you know, there are a variety of reasons you get an extension, I get an appraisal, but that
Alone that is getting some attention on our part that we feel like we need to re price. So there are a variety of reasons, you get an extension or get an appraisal but thats.
Speaker 5: you know there's nothing unusual let me say it that way there's nothing unusual about volume it's just the normal way we would do that now if you factor in the
There is nothing unusual let me say it that way there is nothing unusual about volume. It's just the normal way, we would do that now if you factor in the.
Speaker 5: you know, the originations over the last 12 quarters, that's another 25% of the portfolio. So what that tells you is something, you know, 40 to 50% of the portfolio has a pressure price over the last 12 months on it, which is probably pretty good.
The originations over the last.
12 quarters, that's another 25% of the portfolio.
She is something 40% to 50% of the portfolio is has the pressure price or within the last 12 months online.
Which is probably pretty typical.
Speaker 3: Got it. Okay, I appreciate that. Suffice to say though, based on the SPATS, we can see Georgia's, you know, about 15% has been reappraised so far, you know, on our end and the average change in the loan to values a little less than 3%.
Tim Hicks: Okay, I appreciate the commentary and I guess switching over to the capital. I guess with the growth this year, you've been able to pull away some of the excess capital. I think you may have that CET-1 ratio is around 10.7%. Well, let's get some updated thoughts around capital thresholds and what's the lower band you become fool operating in the current environment. And I guess specifically, would you be comfortable allowing that CET-1 ratio to drop below 10%.
Got it okay I appreciate that.
Suffice to say, though based on the stat. So you can see George it's about 15% spend reappraised so far.
On our end.
The average change in the loan to values, a little less than 3%.
Speaker 5: Yeah, and again, I would go on out to that average change of 3% is after
Yes, and again I would point out that that average change at 3% is after.
Speaker 5: substantial payday. You know, we get an appraisal if it, if the loan to value is materially different than what it was at origination or doesn't meet the as of right extension requirements.
Substantial pay downs.
We get an appraisal if it if the loan to value is.
Tim Hicks: Tim, you're the capitals are. Matt, thanks for the question. Yeah, I mean, as you noticed during the quarter, we had significant loan growth, a R.O.A, excess of 2% and that allowed us to capitalize the vast majority of that growth. We did have a small decline in C.E.T. 1 ratio, but still feel like we have very strong levels of capital. We've seen a significant increase in unfunded over the past year, significant increase in funded that has used some of our capital through organic loan growth, but I don't see the pace of decline being the same pace that we've had over the past year and would anticipate that our growth in earnings would help capitalize whatever growth we have on the balance sheet.
Uh huh.
Materially different than what it was at origination or it doesn't meet the as of rat extension requirements.
Speaker 5: Our sponsors in many cases are coming to the table with paydown.
Our sponsors in many cases are coming to the table with paydowns on those loans.
Speaker 5: on those loans to reduce them back in line with our extension criteria requirements. So...
To reduce them back in line with our extension criteria.
<unk> so.
<unk>.
The 3% is a really good number.
It's a result of appraisals plus paydowns.
That are reducing those balances to back to a lower loan to value.
Speaker 16: Got it. And then last one for me was just, you know, there's been obviously everybody knows there's been a big shift in the interest rate, you know, environment.
Got it and then last one for me was just.
Theres been obviously, everybody knows there's been a big shift in the interest rate environment.
I wanted to ask you kind of just given that 2021.
It was a it was a bigger origination year.
And rates where rates were still at zero.
How do you guys I guess how did.
What would you assume kind of cap rates like anything you can kind of give us on how cap rates were when you kind of underwrote. These projects like what do you assume like exit cap rate was how you kind of stress that in your underwriting.
Tim Hicks: So you've not seen us go below 10% in C.E.T. 1 and so if we have a quarter or two of further declines and work our way back up over time, that would be generally my thought at this point.
And I.
I guess, how that compares to.
The current environment today, I think would be helpful.
Tim Hicks: And then, Tim, I guess the second part of that would be around the stock buyback, obviously no activity in the third quarter, but I think we're now at the evaluations where you were more active in the first part of the year, so any updated thoughts around the buyback from here. Thanks. Yeah, I mean, you saw in our comments we're focused on loan growth and we'll continue to be focused on our organic growth.
Yes.
We stress.
Debt service coverage in 100 basis point increments up 500 basis points, using our loan and the projected performance of the project and projected or the performance of the project. We used the sponsors projections and run that wrap beside ours. So we're looking at it under.
Speaker 5: what the sponsors expectations are versus our underwriting expectations of 100, 200, 300, 400, 500 basis points.
Tim Hicks: We continue to deliver for the last four quarters. We've had a return on tangible common equity of over 17%. Our tangible book value per share has increased year-over-year at 14.5%. If you go back to 2021, 2022, 2023, I think we've done a really good job of managing our capital in 2021. We've took advantage of the low rates and issued a lot of really low rate capital at that point over the coming years.
The sponsor's expectations are versus our underwriting expectations up 100, 200, 300, 400 500 basis points.
Speaker 5: We look at exit refinance market conditions, what the current.
We look at exit refinance.
Market conditions, what the.
Current.
Speaker 5: Secondary market, permanent market refinance is for those up one hundred two hundred three hundred four hundred five hundred basis points. And then we look at cap rates and take current cap rates for that property type and stress those up one hundred two hundred three hundred four hundred five hundred basis points. So, you know, we we underwrite for a lot of interest rate stress and that certainly, you know, is is what we have seen.
Secondary market permanent market refinance as part of that was up 100, 200, 300, 400 500 basis points and then we look at cap rates and current cap rates for that property type and stress that was up 100, 200, 300, 400 500 basis point so.
Tim Hicks: When we had slower growth, we used that capital to buyback our stock. I think we ended up buying back nearly 13% of our shares outstanding when we started the program. And then now this year we've had a lot of great organic loan growth, and so we pulled back on the share repurchases. So I think we've managed to capital levels to share repurchase just how we wanted to and we've got good prospects for meaningful growth going forward and want to be focused on that as opposed to focused on share repurchases. However, we do expect to sometime in 2024 still have another authorization when values of our stock are very compelling. We would continue to be active at the right price.
We underwrite for a lot of interest rate stress in that.
That certainly is.
As what we have seen with fed move in the fed funds target rate 525 basis points.
Speaker 5: With that moving me, I've had time started right 500 and 25 basis points.
Speaker 5: from the zero lower bound. So, you know, our methodology, so you know, have been very sound and very helpful and very appropriate for the environment.
Zero lower bound so.
Our methodologies there have been very sound and very helpful and very appropriate for the environment and.
Speaker 5: which we find ourselves. So that's, I think, that focus on how you can stress these loans. And, you know, the solution is if you really lock project, and it doesn't stress well enough, you just gotta get the leverage down to where it does stress. And that's one of the reasons we have so much.
Which we find ourselves so that's I think that focus on how you can stress these loans.
The solution is to really lock project <unk> done stress well enough you've just got to get the leverage down to where it does stress and that's one of the reasons we have so much.
Speaker 5: Equity in our projects and our leverages so low as we are stressing these projects for significant market risk
Equity in our projects and our Leverages. So as we are stressing these projects for significant market risk.
Tim Hicks: Okay, thanks for taking my questions, guys. And thank you.
Speaker 5: including interest rate risk and that's played out. Now you, on cap rates, the interesting thing is, you know, cap rates have come up, but cap rates on, P60 ultra-comme-count Thank you for all of you that have been removed. We have released a number. Thank you for all of you that have been removed.
Including interest rate risk and that's played out.
Operator: And one moment for our next question. And our next question comes from Brian Martin from Janie Montgomery, Scott LLC. Your line is now open.
On cap rates. So the interesting thing is cap rates have come off.
Cap rates on.
Speaker 5: property types such as apartments and industrial and life sciences had not moved nearly in tandem.
Brian Martin: Good morning. Morning. Say just one back to the margin. I think you guys, George, you talked about the dollars of an I.I, and kind of outlook there just as far as the, you know, comments are in the past about, you know, once the Fed does stop that the margin, you know, past cycles is kind of taking a quarter to to kind of reach an inflection point of that drop is, is that still how you're kind of thinking things play out here, based on kind of the pricing you're seeing on the new, new rig.
Property types, such as apartments in industrial and life Sciences have not moved nearly in tandem.
Speaker 5: with FADS move. So, you know, the magnitude of changes in cap rates over this period where the FADS moved.
With the fed's moves so.
No.
Magnitude of changes in cap rates over this period, where the fed has moved.
Speaker 5: 500 basis points is 525 basis points has been less than 525 basis points It's interesting to us if you know, we see further movement in those cap rates going forward And they ultimately catch up with the pad and I think that's really going to be a product of are we punitely in a
500 basis points or 525 basis points has been less than 525 basis points.
It's interesting to us if we see further movement in those cap rates going forward and they ultimately catch up with the pad and I think that's really going to be a product of <unk>.
Brian Martin: And the marginations that, you know, maybe the margin bottom zero of the next couple quarters and then can stabilize thereafter is that still, you know, the right way to think about it. Brian, what I would tell you in that regard, if we get just to a flat Fed environment, you know, say in 24 and there, there's no Fed moves either way. Our, our CD issuance is, is laddered throughout, you know, every quarter of my issue new CDs, it's a very laddered book, but there's a small chunk in the seven month time frame and a really big chunk in the 13 months time frame.
We permanently.
Five in a quarter.
Speaker 5: to five and a half bed funds target range environment is and you know, it's the 10 year gonna.
To five and half fed funds target rate environment is.
Or is the 10 year going on.
Speaker 5: permanently readjust to a high fours low fives sort of situation and we've had a fundamental shift and if we're in that environment 234 version out, it's a cap rates fully catch up with that.
Permanently readjust too.
High fours low fives sort of situation and we've had a fundamental shift and if we're in that environment 234 years from now you'll see cap rates fully catch up with that.
Speaker 5: But right now the capricing or reflect this element, at some point rates are going to come lower to some degree from where they are now. So that's.
But right now the <unk>.
<unk> seem to reflect the sentiment that at some point rates are going to come lower to some degree from where they are now.
Brian Martin: So the 13 month CDs will basically mean that when the Fed is done and market rates is stabilized, you'll still see that that final tail of our deposit book reprising 13 months after the last Fed move. So it's really probably a four quarter phenomenon I'd get to, if the Fed is stopped, it's probably four quarters of rising deposit cost to get to a point where deposit cost is stabilized and and full texture in there.
So that's that's.
Speaker 5: providing some degree of support property by
Providing some degree of support property valuations.
Speaker 16: George, what do you just say about the cap rates? You said you stress them up 300, 400 basis points. Does that mean that even in that scenario, when you underwrite that loan, when you stress the cap rates to that degree, does the loan still perform and pay off when you kind of get to that left tail type of event?
George's what did you say about the cap rates you said, you've got some up 300 400 basis points does that does that mean that even in that scenario. When you underwrite that loan when you stress the cap rates to that degree that the loans still perform and pay off when you kind of get to that left tail type of event.
Speaker 5: Yes on the caprate stress,
Yes.
Cap rate stress.
Speaker 5: That's I can remember. I don't think we have closed alone that wouldn't tolerate 500 basis points of cap rates dressing still cover our loan. Where there may have been a...
Yes.
NASDAQ and remember I don't think we have.
Closed alone that wouldn't tolerate 500 basis points cap rate stressing still cover our loan where they.
Brian Martin: Gotcha okay, that makes that makes sense and then as far as where we exit on the cost of interest paying deposits for for the month of September, would, would you have that or. I don't have it, but I have someone here that probably has a Cindy, do you have that? Yes, I do so September was 3.67 compared to 3.48 for the quarter. Okay, perfect, thanks, Indian, then maybe just one or two others just on the expenses in the core, I think you started to climb and talked about kind of the guide for the full year, but just thinking about, you know, the decline in the quarter and just how you're thinking about, you know, the investments you're making and kind of outlining the management comments.
There may have been.
Speaker 5: Hand full of exceptions to that in the 300 and something once in the R-E-R-S-T-P-L-L, but you know the vast majority of them can tolerate that kind of stress on the cap.
Okay.
Handful of exceptions to that in the 300 and some loans in the <unk> portfolio, but.
The vast majority of them can tolerate that kind of stress on the cap rates.
Speaker 5: I appreciate that. I lied. I'll sneak in one more. Do you have any to know what the reserve on the office portfolio is at this point? No. No.
Got it I appreciate that.
I lied I'll sneak in one more do you happen to know what the reserve on the office portfolio is at this point now.
No.
Nobody here knows that broken out specific.
Speaker 12: Got it. Awesome. Well, thank you very much. Take my questions. Everyone, I appreciate it. Have a great rest of the day.
Got it awesome well. Thank you very much for taking my questions everyone. I appreciate it have a great rest of the day.
And thank you.
Speaker 1: And at this time, I see no further questions. I'll turn the call back over to Chair Mancée, oh, George Gleason, for closing remarks.
And at this time I see no further questions I'll turn the call back over to chairman and CEO , George Gleason for closing remarks alright.
Brian Martin: I mean, the rate of expense growth, as we look into next year, is that, is it, you should we expect to see some moderation in that expense growth given the investments you've made this year, you know, albeit that you still expect, you know, kind of continued growth going forward, you know, in the investments. Yeah, Brian, yeah, if you look through the expense lines, you would see some pretty significant increases in salary and benefits, you'd see significant increases in the FDSC insurance given the rate increase on one one that impacted the entire industry.
Speaker 1: All right, thank you guys. We appreciate you joining the Kyle. Thanks for the good questions. We look forward to talking with you in about 90 days. Have a great rest of the quarter. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Alright. Thank you guys. We appreciate you joining the call. Thanks for the good questions.
Forward to talking with you in about 90 days have a great rest of the quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
[music].
Brian Martin: And then of course our growth and deposits and then our advertising has certainly been elevated. You know, so those have generated a bigger growth rate this year, over year, compared to what I would expect next year for thinking year over year. However, you know, we, on expenses, what we focus on is how do we grow our bank, how do we invest in growing our bank, invest in our people. So, you know, we are super focused on expenses, but we're more focused on ways to grow our bank.
Okay.
[music].
Okay.
[music].
Brian Martin: And we try to do that in the most efficient way possible, but we've got good prospects for growth. George has talked about good prospects for adding new teams throughout the coming quarters. So, that's really our focus and on the rate of increase year over year, I don't expect 24 to be at the same rate of increase that we had in 23. I would comment that the fact that third quarter, non-interest expense was a few hundred thousand dollars below second quarter, that's a countertrend anomaly.
Brian Martin: I would expect, Tim, you can comment on this, I would expect non-interest expense to generally go up every quarter going forward. Yes, I would agree with that being an anomaly. On the RISG front, you talked about the payoffs still being muted here. Is it likely that we see some pick-up next year, talking about how long the loans are on the books and the payoffs cycle, should we expect some of the payoffs that don't occur this year to spill into next year?
Brian Martin: Is that the right way to be thinking about this? Certainly, it's correct to think that some of the payoffs that might in a more typical interest rate dynamic would have paid out this year, will pay off next year or the year after. I would expect a somewhat of an increase in the payoff volume next year, that's going to depend on market conditions, interest rate conditions and so forth, but I would expect to see somewhat of an improving trend.
Brian Martin: I will try to, and improving trend, I guess, is a probably shouldn't use improving because if you want payoffs, it's an improvement. If you're enjoying the tremendous earnings, we're generating outpubments, it's not an improvement. Every time we have a payoff in this environment, we have very mixed emotions, but it's nice to see that guys are still able to migrate to the secondary market or sell out projects when they want to migrate to the secondary market or sell them out.
Brian Martin: We also hate losing that spread income, so there's pluses and minuses both ways. And then maybe just the last one on our issue with the fundings, the fundings have steadily checked out each quarter this year, given, you know, I guess, the strong originations in 22, I guess, is that, I guess, is the current, I guess year-to-day type of level, a kind of a sustainable level, given that record originations in 22 and what's going to continue to fund up here and, you know, I think as we look in the 24, you know, maybe not at the pace or at the third quarter, but kind of on a year-to-date blended base.
Brian Martin: Yeah, obviously, the record origination volume that was exceptional performance by our RISG team in 2022 is leading to significant funding in 2023, and that fund up of that big chunk of the portfolio will continue in 2024. And, you know, I would cite you to the cadence, kind of the pay-off funding cadence chart that we've included our management comments for years now that, you know, gives you a visual picture of what's funded out of that 22 book, that gives you an indication of what is still to fund out of that 22 book, and, you know, as we've said a lot of times these loans tend to fund in the one mostly in the one to two years after originations and pay off in three and four years after originations. Gotcha. Okay.
Brian Martin: Thanks for taking the questions in the next quarter. Thank you very much. And thank you. And if you would like to ask a question that is star 1-1, again, if you would like to ask a question that is star 1-1, one moment for our next question.
Cindy Wolfe: And our next question comes from Brody Preston, from UBS. You line is now open. Hey, good morning, everyone. Morning. I wanted to start maybe just a question for Cindy just on the, just on the deposit cost. Have you guys had to increase your, you know, your new offering rates at all during the quarter? Sure. And if so, could you kind of give us an indication as to how much? Sure. We increased slightly during the quarter from, our 13 month went from 550 to 60.
Cindy Wolfe: And that was as a result of a little bit of movement in the, in the competitive space. And Brody, that, that is an APY that you report to the customers of the actual rates probably more like. Went from like 530 something to 540 something, half 530s to half 540s on the actual rate. Got it. Okay. Cool. Thanks for that.
Tim Hicks: And then maybe one for Tim. I just wanted to better understand the loan yields. The beta slowed quite a bit on a quarterly basis this quarter. And so I wanted to ask what, what drove that was it kind of. New production coming in at lower yields. Are there any other strategies up of rate caps? No rate caps that, you know, some of the areas she loans have rate caps as a part of their structure where a third party is the counterparty.
Tim Hicks: We are not the counterparties that we benefit in all of the rate increases. So nothing, nothing capped on our yields there. Brody, I had to go back and look at, look at what sofa did in Q2 compared to sofa did and in in Q3 if that had any impact. But, you know, generally speaking. You know, it was a little bit lower increase quarter over quarter than we've seen in other other quarters.
Tim Hicks: But there's nothing, nothing capped from an RISG perspective. Certainly had pay off volume has been, you know, at the subdued level that we've talked about sometimes that generates minimum interest. There are other fees that are associated with that. You know, that was probably at the lower end of a normal range, but still within a normal range. That may have contributed to it a little bit.
Tim Hicks: I think the biggest factor is just the slowing rate of federal reserve rate increases. You know, our loan yields are variable rate and they mostly adjust either daily or monthly. So as the Fed has plugged the rate of increase is the rate of...
Broderick Preston: I wanted to move back to RISD. I really appreciate you guys giving us those stats on the on the re on the refives and on the pay downs and all that stuff. I want to ask, you know, Brandon, do you take a look back as to how that compared to kind of, you know, year-to-date trends from prior periods, you know, how that mix kind of looked between paid like straight pay-offs versus, you know, third-party exits or anything like that.
Broderick Preston: You know, Brodie, I would be guessing if I told you that, you know, the guess would be probably more refies, but, you know, I don't know what the pure mix was. We started paying a little bit more attention to that recently. I think we got a question last quarter and we're all incredibly curious here. So, you know, did have the stats ready for you, but I'd be stepping out there too far to tell you, you know, how much I think that's different. But I felt, you know, I felt like, you know, roughly over 50% of the pay-offs coming from REFI was a pretty positive result in today's world. Yeah, okay.
Broderick Preston: Can I ask you to speak maybe to the land loan in Oreo? I'm sorry if somebody asked you this already. I didn't, I thought I didn't hear anybody ask you about it. The one that's, the big one, you know, that's in there and I think you got it under a sale kind of process. You know, I know you got to be sensitive to kind of that process at this point from a confidentiality perspective, but you noted it was subject to standard due diligence. I was wondering if you had a sense for how far into the due diligence process you actually are at this point.
George Gleason: Yeah, let me address that. You know, we've got, at September 30, we had a total of six pieces of foreclosed real estate. They're in five different states and we were very pleased to have gotten three of those and it just so happened, it was the three largest of those six under contract. So 99% of our Oreo balances are under contract or sale. As you mentioned, Brody, all of those are subject to standard due diligence and closing conditions and requirements is always the case.
George Gleason: Each of those three contacts would clear our book value. Each of them is scheduled to close sometime before March 31 of 2024. And, you know, we'll see what happens. Sometimes contracts close, sometimes they don't close, but typically people don't go to the time trouble and legal expense to put them under contract unless they intend to close them. So we're very pleased about that and the fact that all of them, you know, clear our book balance and it's the vast majority of our Oreo is a good thing. These contracts all have various provisions about confidentiality in them is customer in these contracts. So we're going to limit our commentary on it to that general comment at this.
Broderick Preston: I appreciate that detail.
Broderick Preston: And then I didn't want to also ask just, you know, getting the quarterly appraisal data is very helpful. And, you know, I just kind of tried to quickly aggregate it last night. And I guess when I looked at it as about 50 projects, it's your reappraisal year-to-date, at least that you've disclosed. And that's like 4.7 billion dollars. So either way you cut it, that's about like 14 to 15% of your commitments, you know, either from a number or a dollar perspective.
George Gleason: Is that kind of normally, you know, what we should expect to be on a pace to reappraise 20% per year? Yeah, I mean, you know, it's going to depend on what loans are maturing and coming up for extension either as a variety extension because our as a variety extension provisions usually have a loan to buy you requirement in them. And, or what are coming up for extension that don't have an as a right when we're going to get an appraisal are what's alone that is getting some attention on our part that we feel like we need to reapprise.
George Gleason: So, you know, there are a variety of reasons you get an extension, get an appraisal, but that's, you know, there's nothing unusual. Let me say it that way. There's nothing unusual about volume. It's just the normal way we would do that. Now if you factor in the, you know, the originations over the last 12 quarters, that's another 25% of the portfolio. So what that tells you is something, you know, 40 to 50% of the portfolio has a pressure price of within the last 12 months on it, which is probably pretty difficult.
George Gleason: Got it. Okay. I appreciate that. Suffice to say though, based on the stats, we can see Georgia's, you know, about 15% has been reappraised so far, you know, on our end and the average change in the loan to values a little less than 3%. Yeah. And again, I would go on out, but that average change of 3% is after substantial pay down, you know, we get an appraisal if it belonged to value is materially different than what it was at origination or doesn't meet the as of right extension requirements.
George Gleason: Our sponsors in many cases are coming to the table with pay downs on those loans to reduce them back in line with our extension criteria requirements. So the 3% is a really good number, but it's a result of appraisals plus pay downs that are reducing those balances to back to the lower loan value. Got it.
George Gleason: And then last one for me was just, you know, there's been obviously everybody knows there's been a big shift in the interest rate, you know, environment. But I wanted to ask you kind of, you know, just given that 2021, you know, it was a it was a big origination year, you know, and rates were, rates were, you know, still at zero. How do you guys, I guess, how did, what would you assume kind of cap rates, like anything you can kind of give us on how cap rates were when you kind of underwrote these projects, like what the, what the assume like exit cap rate was, how you kind of stress that in your underwriting, you know, and, you know, I guess how that compares to, you know, the current environment today, I think would be helpful.
George Gleason: Yeah, we, you know, we stress, debt service coverage in 100 basis point increments, up 500 basis points using our loan and the projected performance of the project and projected of the performance of the project, we use the sponsor projections and run that right beside ours. So we're looking at it. Under what the sponsors expectations are versus our underwriting expectations, up 100, 200, 300, 500 basis points, we look at exit refinance market conditions, you know, what the current secondary market permanent market refinance is for those up 100, 200, 300, 400, 500 basis points.
George Gleason: And then we look at cap rates and take current cap rates for that property type and stress those up 100, 200, 300, 400, 500 basis points. So, you know, we, we underwrite for a lot of interest rate, stress and that certainly, you know, is, is what we have seen with that moving the Fed fund started rate 500 and 25 basis points from the zero lower bound. So, you know, our, our methodologies there, you know, have been very sound and, and very helpful and very appropriate for the environment and which we find ourselves.
George Gleason: So that's, I think at that focus on how you can stress these loans and, you know, the solution is if you really lock project, it doesn't stress well enough, you just got to get the leverage down to where it does stress. And that's one of the reasons we have so much equity in our projects and our leverage is so low as we are stressing these projects for significant market risk, including interest rate risk, and that's played out.
George Gleason: Now you, on cap rates, the interesting thing is, you know, cap rates have come up, but cap rates on, you know, property types, such as apartments. And industrial and life sciences have not moved nearly in tandem with Fed's moves. So, you know, the magnitude of changes in cap rates over this period where the Fed has moved 500 basis points as 525 basis points has been less than 525 basis points. It's interesting to us that, you know, we see part of the movement in those cap rates going forward and they ultimately catch up with the Fed.
George Gleason: And I think that's really going to be a product of. Department. Are we permanently in a five-and-a-quarter to five-and-a-half-bed funds target-rate environment? Is the ten-year going to permanently readjust to a high-forged low-fives sort of situation? And we've had a fundamental shift, and if we're in that environment, two, three, four-year-olds, we'll see cap rates fully catch up with that. But right now, the cap rates seem to reflect this element. At some point, rates are going to come lower to some degree from where they are now. So that's providing some degree of support for property valuations.
Broderick Preston: George, what do you just say about the cap rates? You know, you said you stress them up 300, 400 basis points. Does that mean that even in that scenario, when you underwrite that loan, when you stress the cap rates to that degree, that the loan still perform and pay off when you kind of get to that left-tail type event? Yes. On the cap rate stress, yeah. It's best I can remember. I don't think we have closed a loan that wouldn't tolerate 500 basis points of cap rate stress and still cover our loan.
Broderick Preston: There may have been a handful of exceptions to that in the 300 and something loans in the RISD portfolio. But, you know, the vast majority of them can tolerate that kind of stress on the cap rates. Yeah, I appreciate that.
Broderick Preston: I lied. I'll sneak in one more.
Broderick Preston: Do you ever know what the reserve on the office portfolio is at this point? No. Nobody here knows that.
Broderick Preston: We're open out specifically. Got it. Awesome.
Broderick Preston: Well, thank you very much for taking my questions. Everyone, I appreciate it. Have a great rest of the day. And thank you.
Operator: And at this time, I see no further questions.
George Gleason: I'll turn the call back over to Chairman C. Oh, George Gleason for closing remarks. All right. Thank you, guys. We appreciate you joining the call. Thanks for the good questions. We look forward to talking with you in about 90 days. Have a great rest of the quarter. Thank you.
Operator: This concludes these conference call. Thank you for participating. You may now disconnect.
Operator: Thank you.