Q1 2024 Bank OZK Earnings Call

Operator: Good day, and thank you for standing by. Welcome to the BankOZK first quarter 2024 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, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jay Staley, Director of Investor Relations and Corporate Development. Please go ahead.

Good day, and thank you for standing by Bolcom to the bank or Z K first quarter 2024 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 you will need to press star one.

On your telephone you will then hear an 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 like to hand, the conference over to your speaker today, Jay Staley director of Investor Relations and corporate development. Please go ahead.

Jay Staley: Good morning. I'm Jay Staley, Director of Investor Relations and Corporate Development for Banco ZK. Thank you for joining our call this morning and participating in our question and answer session. In today's Q&A session, we may make forward-looking statements about our expectations, estimates, and outlook for the future. Please refer to our earnings release, management comments, and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.

Good morning, I'm, Jay Staley director of Investor Relations and corporate development for bankers he came.

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

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

Jay Staley: Please refer to our earnings release management comments and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected or implied by such forward looking statements.

Jay Staley: Joining me on the call to take your questions are George Gleason, Chairman and CEO, Brandon Hamblen, President, Tim Hicks, Chief Financial Officer, and Cindy Wolfe, Chief Operating Officer. We will now open up the lines for your questions. Please let me now ask our operator, Abigail, to remind our listeners how to queue in for questions. Thank you.

Jay Staley: Joining me on the call to take your questions are George Gleason, Chairman and CEO Brannon Hamblen, President, Tim Hicks Chief Financial Officer.

Jay Staley: Cindy Wolfe Chief operating officer.

Speaker Change: I'll open up the lines for your questions. Let me now ask our operator, Abigail to remind our listeners how to queue in for questions.

Operator: Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. One moment for our first question. Our first question comes from a line from Stephen Scouten with Piper Sandler. Please proceed with your question.

Speaker Change: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for our first question.

Speaker Change: Our first question comes from the line of Stephen Scouten with Piper Sandler. Please proceed with your question.

Stephen Kendall Scouten: Yeah, thanks everyone. Appreciate the time. Great quarter here again. I really appreciated this addition of figure 30 in the management comments and showing

Stephen Kendall Scouten: Yeah. Thank you everyone I appreciate the time great quarter here again.

Stephen Kendall Scouten: I really appreciate it. The addition of figure 30 in the management comments and showing the the loan floors and kind of help how that helps protect the NIM I'm curious if you guys have done any sort of sensitivity around that to kind of.

Stephen Kendall Scouten: I'm curious if you guys have done any sort of sensitivity around that to any kind of degree.

Stephen Kendall Scouten: frame up the magnitude of potential change that

Stephen Kendall Scouten: Frame up the magnitude of potential change that could happen there on them quarterly or yearly basis.

Stephen Kendall Scouten: That could happen there on a quarterly or yearly basis as we continue to be in this hire for longer environment and you add new loans. I mean, you've talked a lot about that, but I'm wondering if there's a way to frame it

Stephen Kendall Scouten: Continue to be in this higher for longer environment, and you add new loans I mean, you talked a lot about that but I'm wondering if there's a way to frame up the magnitude of benefit moving forward.

George G. Gleason: I wonder if there's a way to frame up the magnitude of benefit moving forward. Stephen, we don't disclose anything about that, but our regular ALCO runs that we do, you know, certainly provide that information to management. And we don't disclose that because we run large numbers of those runs, in various right scenarios and so forth.

Speaker Change: Stephen we don't disclose anything on that but our regular.

Speaker Change: Our Alco runs that.

Stephen Kendall Scouten: We do.

Certainly provide that information to manage momentum, we don't disclose that because we run.

Stephen Kendall Scouten: Large numbers of those runs.

Stephen Kendall Scouten: And various rate scenarios.

George G. Gleason: So we feel, I would tell you, we feel very good about our position there. Obviously, as we said in the management comments, hiring for longer at current rates is an excellent scenario for us. It gives us time to reset that floor, and it also keeps repayments at a fairly muted level, both of which are very helpful to us from a net interest income perspective. Obviously, as we also said, management comments higher for longer are hard on some of our borrowers.

Stephen Kendall Scouten: Go for it so we feel I would tell you we feel very good about our position there obviously as we said in managed from our comments.

Higher for longer at current rates of.

Stephen Kendall Scouten: X one scenario for us.

Stephen Kendall Scouten: Gives us time to reset that floor.

Stephen Kendall Scouten: And it also keeps our repayments that are at a fairly muted level, both of which are very helpful to us.

From a net interest income perspective, obviously as we also said management conference higher for longer as hard on some of our borrowers.

George G. Gleason: So we believe any incremental credit costs are far more than outweighed in that flat rate scenario by the additional net interest income that we earn. So we view that as a net positive higher for longer. Obviously, we are pleased that expectations for cutting rates seem to be getting reduced a little bit. We view that as a scenario that will be constructive for us at a later date when we've had more opportunities to reset floors.

Stephen Kendall Scouten: So we believe any incremental credit costs are far more than outweighed in that flat rate scenario.

Stephen Kendall Scouten: The additional net.

Stephen Kendall Scouten: Net interest income that we are so we view that as a net positive higher for longer obviously, we.

Stephen Kendall Scouten: Our plays that expectations for.

Stephen Kendall Scouten: Cutting rates seem to be getting reduced a little bit.

Stephen Kendall Scouten: <unk>.

Stephen Kendall Scouten: And our view that as a scenario that will be constructive for us at a later date, when we've had more opportunities to reset floors.

George G. Gleason: So we would just assume the pets stay where they are, and cut rates mid to late next year, if they cut rates, and obviously, if the tail risk of higher rates comes into play, that would be very beneficial for our net interest margin, but that incremental benefit would probably be offset by the higher provision expense that our models would roll out. So hopefully that's helpful to you.

Stephen Kendall Scouten: So we're just assuming that fed stay where they are and.

Stephen Kendall Scouten: Cut rates mid to late next year, if they cut rates and obviously.

Stephen Kendall Scouten: If the tail risk of higher rates come into play.

Stephen Kendall Scouten: That would be very beneficial for our net interest margin, but that <unk>.

Stephen Kendall Scouten: Incremental benefit would probably be offset by.

Stephen Kendall Scouten: The higher provision experience that our models would rollout so hopefully that's helpful to you.

Stephen Kendall Scouten: And as I'm looking at figure seven...

Speaker Change: It is very helpful.

Speaker Change: As I'm looking at figure 17 kind of where you show the various tranches.

Stephen Kendall Scouten: [inaudible]

Stephen Kendall Scouten: The additions have been coming in the lower end of the spectrum, more so in the 0-125 million range, which, granted, that's the line.

Speaker Change: Credit size within our ESG seems like especially this quarter, but really for the last couple of quarters. The additions have largely been coming in the lower at the lower end of that spectrum more so than they are at a $125 million, which granted thats. The lions share of the credit anyways, but but I'm curious if that's an intentional move from you guys to kind of focus on those.

Stephen Kendall Scouten: share the credits anyways, but I'm curious if that's an intentional move from you guys to kind of

Stephen Kendall Scouten: I'm going to kind of focus on those smaller, you know, slightly more granular credits.

Smaller slightly more granular credits.

Stephen Kendall Scouten: Credit, Function, and Market Dynamics, or what might be at play there.

Speaker Change: Market dynamics are what might be at play there.

George G. Gleason: We're still open to any good piece of business of any size. I think it just is a reflection of the fact that equity is probably finding more opportunities to put together deals that make sense to the equity, and hence we're seeing requests for loans toward that smaller end. There are some larger transactions percolating through the pipe that may or may not get to a closing at some point in time, but yes, the deal sizes we're seeing from the sponsors are probably leaning a little smaller than what we have seen in the past, and that's just a reflection of what makes sense in the economy for the sponsors today.

Speaker Change: We're still open to any good place of business of any size I think it just is a reflection of.

Speaker Change: The fact that equity is finding.

Speaker Change: Probably more opportunities to put together deals that make sense to the equity and hence we're saying.

Speaker Change: Requests for loans toward that smaller and there are.

Speaker Change: Some larger transactions.

Speaker Change: Dark lighting.

Speaker Change: Through the path that may or may not get to.

Speaker Change: Closing at some point in time.

Speaker Change: But yes.

Speaker Change: Yes, the deal sizes were saying.

Speaker Change: From from the sponsors are probably leaning a little smaller.

Speaker Change: Then what we have in the past and that's just a reflection of what makes sense in the economy private sponsors today.

Stephen Kendall Scouten: Got it. Got it. Okay. And then just lastly for me, you know, I mean, we're seeing a lot of negative headlines and optics around office and, you know, you guys are pretty well insulated one from a loan to cost perspective, obviously, and the newness of your projects, but I'm wondering if you could speak to the dynamics you're seeing from like a capital supply perspective, similar to what you guys were able to do in the great financial crisis where, you know, if a loan did, for whatever reason, have some issues, other MES providers or sponsors were able to step in, are you seeing overall strength in terms of willingness to step in on maybe distressed products and overall capital?

Speaker Change: Got it got it Okay and then just lastly for me.

Speaker Change: I mean, we're seeing a lot of negative headlines in optics around office.

Speaker Change: You guys are pretty well insulated one from one of the cost perspective, obviously and the newness of your projects, but I'm wondering if you could speak to the dynamics youre seeing from like a capital supply perspective, similar to what you guys were able to do in the great financial crisis, where.

Speaker Change: How long did for whatever reason they have some issues other mezz providers their sponsors we're able to step in or are you seeing overall strength in terms of willingness to step in on maybe distressed product and overall capital in the system.

George G. Gleason: Brandon may have a better view of that than I do. Brandon, you want to take a shot at that? Sure. Sure. Well, you know, you kind of focused your question on us.

Speaker Change: Brendan may have a better view on that than I do Brian you want to take a shot at sure sure well you're kind of your questions focused on our existing portfolio, but what's going on in the new.

Brandon Thomas King: Sure. Well, your question is focused on our existing portfolio, but what's going on in the new side of the product is obviously there as well. I mean, there are a lot fewer new projects going up, and that's true across a number of property types, Stephen. Just returns much harder for equity hits and fewer deals coming to market.

Brendan: <unk> side of the product is obviously, there as well I mean, there are a lot fewer new projects going up and that's true across a number of property types Steven.

Brian: Returns much harder for equity hit and fewer deals coming to market.

Brandon Thomas King: But there's strong data behind the proposition that the product that's, call it, the 2015 vintage and later, has such a material advantage over the older vintage product that the capital flows will be focused more narrowly on that vintage, whether it's brand new or constructed in the last five years, as would be the case for most of our office portfolio. So, the quality of the product does materially enhance the likelihood that you're going to see that support capital on existing products in our portfolio. We've had a number of situations over the last year where that has been the case.

Brian: But.

Brian: There is a strong strong data behind the proposition that the product that's call. It 2015 vintage and later.

Brian: As such a material advantage over the older vintage product that the capital flows will be focused more narrowly on that vintage whether it's brand new or constructive in the last five years as it would be the case for most of our office portfolio.

Brian: The quality of the product does materially enhance the likelihood.

Brian: That youre going to see that support capital on our existing product in our portfolio we've had.

Brian: There are situations over the last year, where that has been the case I think we will see additional situations over the next 12 to 24 months, where that will be the case, all comes down to quality and ability and our focus on.

Brandon Thomas King: I think we'll see additional situations over the next 12, 24 months where that will be the case. It all comes down to quality and ability, and our focus on best-in-class sponsorship with demonstrable experience and financial wherewithal significantly improves the likelihood that those newly developed projects are going to be supported. So, yeah, that's been the case, and from an opportunity in what we'll call the distress world, obviously, that word carries a broad meaning.

Brian: Uh huh.

Brian: Best in class sponsorship and.

Brian: And with demonstrable experience and financial Wherewithal.

Brian: Significantly improves the likelihood that those those new newly developed projects are going to be supported so yes, it's been the case.

Brian: And from an opportunity in what we'll call the distress world, obviously that work carries a broad meaning.

Brandon Thomas King: People are gathering capital to enter that space from the outside of deals. Of course, we've got a lot of great capital providers in our deals at lower attachment points than the equity, so more likely to defend, but there's capital being raised out there for that distress. I think George brought up the reticence of equity to pull the trigger. That's the case on new deals and, I think, in office, even on distress deals.

Brian: People are gathering data gathering capital to enter that space.

Brian: From the outside of deals of course, we've got a lot of great capital providers in our deals at lower attachment points than the equity.

Brian: So more likely to defend but there's capital being raised out there for that distress I think.

Brian: The George brought up the reticence of equity you pull the trigger of that that's the case on new deals and I think in an office even on distressed deals youre starting to see some transactions that will I think ultimately gain momentum as there's price discovery and more.

Brandon Thomas King: You're starting to see some transactions that will, I think, ultimately gain momentum as there's price discovery and more of that capital starts to enter the marketplace in a rescue situation, if you want to call it that. It still hasn't materially developed, but there are transactions coming off, so I think you'll see a lot of capital flow that way. The most opportunity, the lowest-hanging fruit from the standpoint of uncertainty, creates great buy opportunities that result in great long-term investments. So, I think we'll see more of that develop over the next 12 to 24 months, but again, I think a lot of it will be in that newer vintage product.

Brian: Of that capital starts to enter the marketplace and rescue situation, if you want to call it that.

Brian: It's still it's still hasnt materially develop but there are transactions coming off so I think youll see a lot of a lot of capital flow that way, there's the most opportunity the lowest hanging fruit from the standpoint of on on.

Brian: Uncertainty.

Brian: It creates great.

Brian: By opportunities that result in great long term investment. So I think we will see more of that develop over the next 12 months to 24 months, but again I think a lot of it will be in that newer vintage product.

Speaker Change: Great color I appreciate the time, guys and great to see the continued NII growth.

Operator: One moment for our next question. Our next question comes from Catherine Mealor with KBW. Please proceed with your question.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Catherine Mealor with <unk>. Please proceed with your question.

Catherine Fitzhugh Summerson Mealor: Thanks, Good morning. I just want to ask if we could get a little bit of color on extensions. I know we talked a little bit about that last quarter and that you're continuing to see clients ask for, you know, short-term extensions, just as we kind of wait for rates to just be cut in a higher for longer scenario. What's your gut on how that trend continues and kind of what that could do to the size of your balance sheet? And is there any way to quantify maybe the size of your portfolio that you've seen take some kind of extension or modification over the past few quarters?

Catherine Fitzhugh Summerson Mealor: Thanks, Good morning.

Catherine Fitzhugh Summerson Mealor: Yeah.

Keith: This is Keith.

You get a little bit of color on extensions I know, we talked a little bit about.

Keith: About that last quarter and that Youre continuing to see clients ask for.

Keith: Short term extensions, just as we kind of rate or wait for rates to.

Keith: Yes.

Speaker Change: All right.

Speaker Change: Higher for longer scenario, what's your what's your guide and how that that trend continues and kind of what that could do to the size of your balance sheet and is there any way to quantify maybe the size of your portfolio that you that you've seen.

Speaker Change: Encounters an extension or a modification over the past few quarters.

George G. Gleason: Catherine, we have all that data. I don't have it at my fingertips, and we haven't disclosed it, but I would tell you that's a business-as-usual sort of situation. I think we probably commented last quarter that, you know, our extensions typically maintain or improve the economics on the transactions for us. You know, our fees are what they would normally be for an Azebrite extension or higher. We're typically trying to reset floors and get that done in the vast majority of those extensions and getting other appropriate contributions to improve the cap stack, replenish reserves, and so forth in most cases.

Speaker Change: Catherine we have all that data I don't have it at my fingertips, and we haven't disclosed it.

Speaker Change: I would tell you, it's a business as usual sort of situation.

Speaker Change: We probably commented last quarter that.

Speaker Change: Our extensions, where typically maintaining or improving the economics on the transactions.

Speaker Change: Yes.

Speaker Change: In rfps or what they would normally be important as abroad expansion or higher we're typically trying to reset floors.

Speaker Change: And getting that done and the vast majority of those extensions and getting other appropriate.

Speaker Change: Contributions to improved cap stack replenish reserves and so forth in most cases so.

George G. Gleason: So, we have not done any extensions yet that, in the old world, would have been a TDR. You know, these have all been flat to improve the economics for us as we have extended. So, we think these are very constructive. By and large, you know, as we've said in our management comments for quite some time, we expect the vast majority of our sponsors, certainly not all of them, but the vast majority of them, to step up and support their projects until interest rates get to a better place or economic conditions and uncertainties resolve, and that continues to be the case, and we see that in the behavior of these sponsors and the extensions.

Speaker Change: We have not done any extension, Jeff that in the old world would've been a PDR.

Speaker Change: These valve.

Speaker Change: Flat to improved economics for us as these have extended so we think theres a very constructive.

Speaker Change: By and large.

Speaker Change: As we've said in our management comments for quite some time, we expect the vast majority of our sponsors certainly not all of them the vast majority of them.

Speaker Change: To step up and support their projects.

Speaker Change: Until interest rates get to a better place or economic conditions and uncertainties resolve.

Speaker Change: And that continues to be the case, and we're seeing that behavior of the sponsors and the extensions.

Catherine Fitzhugh Summerson Mealor: And then maybe a question on the margin, if I could. Is there any way to quantify or think about the incremental cost of new deposits that were added this quarter and how close we might be to kind of a peak in deposit rates? It feels like you've still got a lot of growth coming in CDs, and so there's a thought that your deposit cost might peak a few quarters later than maybe some of your peers. So just curious how close we are to that gap closing as we get to peak deposit rates. Thanks.

Speaker Change: Great.

Speaker Change: And then maybe a question on the margin if I could.

Speaker Change: Can you is there any way to quantify or think about what.

Speaker Change: Incremental cost of new.

Speaker Change: These new deposits that were added this quarter end and how close we might be.

Speaker Change: Kind of a peak in deposit rate it feels like you've still got a lot of growth coming in Cds and scale.

There was a thought that your deposit costs might peak a few quarters later than maybe some of your peers, but just curious how close we are to that gap closing I think it tends to peak deposit rate.

Tim Hicks: Yeah, well, what I would tell you is our incremental cost of deposits in Q1 was less than our incremental cost of deposits in Q4. And that's reflected in the fact that, you know, there was a high expectation at the beginning of the year that rates were going to get cut, and that led to a cut in the deposit process that has recoiled about halfway from where we saw it in January to probably where it was in Q4.

Speaker Change: Yes, well what I would tell you is our incremental cost of deposits in Q1 were less than our incremental cost of deposits in Q4.

Speaker Change: Yeah.

Speaker Change: And that's reflected on bad debt.

Speaker Change: Hi expectation at the beginning of the year that rates were going to get caught in that that led to cut.

Speaker Change: And deposit pricing that has recoiled about half way from where we saw it in January two.

Speaker Change: Probably where it was in Q4, so you're still the run rate on that re pricing is lower than the run rate on new issuance see days in Q4.

Tim Hicks: So you're still, the run rate on that repricing is lower than the run rate on new issuance CDs in Q4, but not as low as it was in January. It seems to have stabilized here. And, you know, we've said, gosh, for seven quarters now, I think that we would have some continued escalation in pricing for, you know, several quarters after the last Fed increase, and just because of the rollover in our CD portfolio, the longest maturities in that portfolio, predominantly 13 months at a rich duration.

Speaker Change: It's not as low as it was in January it seems to have stabilized in here.

Speaker Change: And.

Speaker Change: We've said gosh for seven quarters now.

Speaker Change: I think that.

Speaker Change: We would have some continued escalation in pricing for.

Several quarters.

Speaker Change: After the last fed increase.

Speaker Change: <unk>.

Speaker Change: Just because of the rollover in our CD portfolio, the longest maturities in that portfolio predominantly 13 months set of rich duration. So we're getting now where we've got a couple of more quarters, where.

Tim Hicks: So we're getting down to where we've got a couple of more quarters where... You know, those CDs are going to be rolling over from lower rates to higher rates, but that rate of change, as we said in our management comments, is at a decreasing rate of increase.

Speaker Change: Those those Cds are going to be rolling over from lower rates to higher rates.

Speaker Change: But that rate of change as we said in our management comments.

Catherine Fitzhugh Summerson Mealor: Great, that makes sense. Thank you.

Speaker Change: The <unk> rate of increase.

Speaker Change: Great that makes sense. Thank you.

Operator: One moment for our next question. Our next question comes from Matt Olney with Stevens. Please proceed with your question.

Speaker Change: Okay.

Speaker Change: One moment our next question.

Speaker Change: Our next question comes from Matt Olney with Stephens. Please proceed with your question.

Matthew Covington Olney: Hey, great, thanks guys. The management commentary references that in 2025 and 2026 we could see higher levels of RESG repayments, and that obviously makes sense. We're seeing higher rates now and expectations for lower rates eventually. I'm just trying to appreciate the level of RESG loans that are currently eligible to be repaid but, for various reasons, have not yet been paid down. Is the best way to think about that, just looking at that figure 12, and just looking at the Res-G loans that have a vintage of 2020 or earlier, and just assuming those are currently eligible and probably awaiting lower rates?

Matthew Covington Olney: Hey, great. Thanks, guys.

Matthew Covington Olney: The management commentary references that 2025, and 2026, we could see higher levels of <unk> repayments and that obviously it makes sense, we're seeing higher rates now and expectations for lower rates eventually.

Matthew Covington Olney: Just trying to appreciate the level of <unk> loans that are currently eligible to be repay but for various reasons have not yet been paid down.

Is the best way to think about that just looking at that that figure 12, and just looking at.

Matthew Covington Olney: The rest of the loans that have a vintage two.

Matthew Covington Olney: 2020, our earlier.

Matthew Covington Olney: And just assuming those are currently eligible and probably a weighting lower rates.

George G. Gleason: I think obviously age is probably the key indicator there, so that's probably a pretty reasonable way to look at it, ma'am.

Matthew Covington Olney: Yeah.

Matthew Covington Olney: I think obviously ages.

Matthew Covington Olney: Is probably the key indicator there so that's probably a pretty raised more way to look at it now.

Matthew Covington Olney: Okay. And then if we do see that, you know, those paydowns over the next few years for Res-G, there were some mentions in that management commentary about increased efforts over the next few years. So I guess I'm curious, more strategically, how do you think about loan mix longer term? I think Res-G is now 65% of the non-purchase loans, and the feedback I hear from investors is that they believe Res-G is the best in the business in terms of within that niche, but believe it's just shouldn't be such a dominant part of a bank. So, strategically, how you view Res-G in terms of, you know, longer term, how big of a portion it will be in the overall bank. Thanks. Yeah, you know, we've said that many times.

Matthew Covington Olney: Okay.

Matthew Covington Olney:

Matthew Covington Olney: And then if we do see that.

Matthew Covington Olney: Those pay downs over the next few years for <unk>.

Matthew Covington Olney: There were some mentions in the management commentary about increased diversification in the next few years.

Matthew Covington Olney: So I guess I'm curious more strategically.

Matthew Covington Olney: How do you think about loan mix longer term.

Matthew Covington Olney: <unk> is now 65% of the non purchase loans and the feedback I hear from investors is they believe that <unk> is the best in the business in terms of within that niche, but believe it's just that shouldnt be such a dominant part of our bank. So curious strategically.

How you view <unk> in terms of.

Matthew Covington Olney: Longer term, how big of a portion of it will be the overall bank.

Matthew Covington Olney: Yes.

George G. Gleason: Yeah, you know, we've said many times that we would agree with that statement from the investors. You're quoting that RISD is the best in the business.

We've said many times, we would agree with that statement from the investors you are quoting.

Matthew Covington Olney: <unk> is the best in the business I think we built a fabulous team and have a great business model at real estate specialties group that generates.

George G. Gleason: I think we've built a fabulous team and have a great business model at Real Estate Specialties Group that generates excellent returns with below-average risk. So our principle, which is in our strategic plan and has been communicated many times, is we're going to let RESG get as big as it can be while maintaining its discipline and adhering to its stringent credit quality and servicing quality on that portfolio. We agree that our company is becoming more and more valuable as a more diversified business model, even if the other lines of business are not quite as good as RESG in regard to risk-adjusted returns.

Matthew Covington Olney: Excellent returns with <unk>.

Matthew Covington Olney: Low average risk.

Matthew Covington Olney: So are our principal that is in our strategic plan and has been communicated. Many times is we're going to let our ESG get as big as it can be while maintaining its discipline in it.

Matthew Covington Olney: Adhering to its stringent credit quality and servicing quality on that portfolio.

Speaker Change: We agree.

Speaker Change: That our company is worth more and more valuable.

As a more diversified business model, even if the other lines of business are not quite as good as our ESG in regard to our risk adjusted returns we think that diversification is very important.

George G. Gleason: We think that diversification is very important. That's why we talk in this document and have talked for quite a while about a growth, growth, and diversification strategy, the first step being to let RESG grow as much as it will naturally grow.

It's why we talk in this call.

Speaker Change: Document and we've talked for quite a while about a growth growth and diversification strategy, but first growth being led our ESG grow.

Speaker Change: As much as it will naturally grow.

George G. Gleason: The second growth is growing other lines of business more broadly and more quickly over time. That may not happen this year, but I think we'll see that really make a significant impact next year and in 2026. And you know, I've privately stated that I would like to see RESG grow to 50% of our business, and I say grow to 50% at 65% or more or less now. But I want it to continue to grow, but get down to 50% of our business, even if it gets bigger.

Speaker Change: <unk> growth being grow other lines of business.

More broadly.

Speaker Change: More quickly over time.

Speaker Change: That might not happen this year, but I think we'll see that really in significant impact next year and in 2026 and <unk>.

Speaker Change: Hi.

Speaker Change: Privately stated that I would like to see <unk> grow to 50% of our business.

Speaker Change: As they grow to 50% at 65% or more or less now, but I wanted to continue to grow but get down to 50% of our business even it is.

Speaker Change: And to get bigger and I think our.

George G. Gleason: And I think our indirect lending, our asset-based lending, our equipment finance and capital solutions group, our fund finance group, and the other augmentations in our commercial and institutional banking group that we newly named and created by rolling those groups together and adding a lot of talent over the last few months to that team. I think we'll see significant growth out of CIB. I think we'll see significant growth out of our commercial banking and community banking group, the commercial banking part of community banking.

Speaker Change: Indirect lending our asset based lending are equipped.

Speaker Change: Equipment finance and <unk>.

Speaker Change: Capital Solutions group by our fund Finance group and the other.

Speaker Change: Augmentations.

Speaker Change: In our.

Speaker Change: Commercial and institutional banking group.

Speaker Change: Newly named in and created by Rolling those groups together and adding a lot of talent.

Speaker Change: Over the past few months.

Speaker Change: To that team I think we will see significant growth out of <unk>.

Speaker Change: I think we will see significant growth out of our commercial banking community banking group the commercial banking part of community banking.

George G. Gleason: We realigned some reporting structures, have added quite a few people to that team in recent weeks and months, and realigned some reporting structures to take advantage of the leadership capabilities of some of the members of that team that have now stepped up and are carrying a bigger role under Alan Jessup's leadership. And I think all that has real positive implications. We're also ramping up our consumer banking efforts that flow through Cindy Wolfe's retail banking franchise.

Speaker Change: Ray Alliance and reporting structures.

Speaker Change: Added quite a few people in that team and recent.

Speaker Change: <unk> in months and.

Speaker Change: Realize from reporting structures to take advantage of our leadership capabilities of some of the members of that team that have now stepped up and are carrying a bigger ROE under Alan Jessup leadership.

Speaker Change: I think all of that has real positive implications were also ramping up.

Our consumer banking efforts.

Speaker Change: Flows the semi world retail banking franchise the bank branches.

George G. Gleason: The bank branches and HELOCs are a big part of that. We just started, and, of course, we'll sell these loans, but they're an important part of growing our consumer business. We just started taking mortgage loan applications with our new secondary market mortgage team yesterday. So we're focused on a lot of things that will help those other parts of our business grow and ultimately get to where collectively they equal or exceed RESG. It's going to be a multi-year process to get there, but we're headed that way.

Speaker Change: Locks are a big part of glass.

Speaker Change: We just.

Speaker Change: Started of course, we will sell these loans, but it's an important part of growing our consumer business. We just started tightening mortgage loan applications with our new secondary market mortgage team yesterday.

Speaker Change: So we're focused on a lot of things that will help those other parts of our business grow in.

Speaker Change: Ultimately get to where collectively equal or exceed our ESG.

Speaker Change: It's going to be a multiyear process to get there, but we're headed that way.

Speaker Change: Thank you.

Operator: One moment for our next question. Our next question comes from Michael Rose with Raymond James. Please proceed with your question.

One question.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Michael Rose with Raymond James. Please proceed with your question.

Michael Edward Rose: Hey, good morning. Thanks for taking my question.

Michael Edward Rose: Hey, good morning, guys. Thanks for them.

Michael Edward Rose: Nice set down in expenses this quarter. I know you reiterated the kind of mid...

Michael Edward Rose: Taking my question.

Michael Edward Rose: Nice step down in expenses this quarter I know you reiterated the kind of mid single digit.

Michael Edward Rose: opportunistic hiring, you know, things of that nature. Can you just size the opportunity for you guys and maybe what the expectations are for additions and how we should expect that to impact the run rate?

Michael Edward Rose: Growth outlook you mentioned.

Michael Edward Rose: Opportunistic hiring things of that such can you just size the opportunity for you guys and maybe what the expectations are for four additions and how we should expect.

Michael Edward Rose: The impact the run rate as we move through the year I'm, just trying to get a sense for cadence.

George G. Gleason: We're going to be very opportunistic and already have been. Tim, through last quarter, we hired 40-something new people, net new people. And over the last four quarters, I think we gave this data in the management comments, somewhere between 110 and 120 net new people. It wouldn't surprise me at all to see us adding 40 people plus or minus a quarter going forward. A lot of banks have pulled back; many banks have shut down entire teams and divisions.

Michael Edward Rose: How opportunistic you'll be thanks.

Michael Edward Rose: We're going to be very opportunistic and already have been Tam last through last quarter, we hired 40 something people.

Michael Edward Rose: People and over the last.

Michael Edward Rose: Four quarters I think we gave this guidance in the management comments somewhere between 110 and 120 net new people.

Michael Edward Rose: Wouldn't surprise me at all.

Michael Edward Rose: Say us adding <unk>.

<unk>.

Michael Edward Rose: People, plus or minus a quarter going forward.

Michael Edward Rose: A lot of banks have pulled back a lot of banks have shut down entire themes and divisions.

George G. Gleason: There's real talent out there to be acquired, veteran, experienced people. And we see value in adding a lot of those team members. In the short run, it will, you know, mute our ability to increase EPS and net income because we'll be hiring people and knowing that they won't produce much of any revenue for some number of quarters.

Michael Edward Rose: They're real talent out there.

To be acquired better and experienced people.

Michael Edward Rose: We see value and add in a lot of those team members in the short run it will.

Michael Edward Rose: Uh huh.

Mute, our ability to increase EPS and net income because we will be hiring people and knowing that I won't produce much if any revenue for some number of quarters.

George G. Gleason: But we think it's a great time to add some talent. You know, I talked about this two or three quarters ago on the call, making the comment that we believe that talent is essential. We've always placed a great emphasis on high intellect, high capability, high aptitude people who work hard and fit our very team-oriented culture. And we continue to believe [inaudible] So, George, are the additions going to be kind of across the business lines, or is it going to be more focused on some of the, you know, branch and community type lending personnel? It's really across all the business lines.

But we think it's a great time to add some talent.

Michael Edward Rose: I've talked about this two or three quarters ago on Macau.

Michael Edward Rose: Making the comment that.

Michael Edward Rose: We believe that talent is essential.

Michael Edward Rose: <unk> placed a great emphasis on high analytic capability.

Michael Edward Rose: People, who work hard and are.

Michael Edward Rose: Our very team oriented culture and we.

Michael Edward Rose: We continue to believe.

Michael Edward Rose: Even in a world, where technology and I are going to do more and more of that having the best people is going to.

Michael Edward Rose: Separate.

Michael Edward Rose: Winners from losers.

Michael Edward Rose: Early success from less successful firms. So we just continue to be very focused on talent and theres a lot of talent for sale right now.

Michael Edward Rose: So our Georgia, the additions going to be kind of across the.

Michael Edward Rose: The business lines or is it going to be more focused on some of the branch.

Michael Edward Rose: And community type lending personnel.

Michael Edward Rose: It's really across all the business lines as I mentioned.

George G. Gleason: As I mentioned, this corporate and institutional banking group that we're building under Brandon that, you know, is a combination of our asset-based lending, equipment finance, capital solution, and what we're now calling fund finance group is the kind of foundation for a lot of new talent we're bringing in, including leadership at the top of that group, from other banks, bigger banks that have a lot of experience and have a shared commitment to credit quality and So we're adding there; we've added and begun to add a lot of business bankers to the retail team.

Michael Edward Rose: This corporate and institutional banking group.

Michael Edward Rose: Building under Brannen.

Michael Edward Rose: That.

Michael Edward Rose: As a.

A combination of our.

Michael Edward Rose: Asset based lending equipment finance capital solution and what we're now calling fund finance group is.

Michael Edward Rose: Kind of the foundation for a lot of new talent, we're bringing in including.

Michael Edward Rose: Later ship at the top of that group.

Michael Edward Rose: From other banks bigger banks that have a lot of experience in.

Michael Edward Rose: Have a shared commitment to.

Michael Edward Rose: Credit quality and profitability that aligns with with us. So we're adding there we've added.

Michael Edward Rose: Begin to add a lot of business bankers and the retail team, we're adding more staff and more branches on the retail side, we had sandy.

George G. Gleason: We're adding more staff and more branches on the retail side. You know, we had Cindy and her team did an excellent job generating $2 billion of deposit growth in the quarter just in. Really, a really nice number with our existing branch network, but we're going to be generating, you know, $2 billion in quarterly and deposit growth in future years. We're going to need to continue to develop our infrastructure to do that. And we're doing just that.

Michael Edward Rose: Amy and her team did an excellent job generating $2 billion of deposit growth in the quarter just ended.

Michael Edward Rose: Really really nice number with our existing branch network, but we're going to be generating $2 billion quarter in deposit growth in future years, we're going to need to continue to develop our infrastructure to do that and we're doing that so.

George G. Gleason: So, you know, we're doing the things that we need to do to continue to grow and grow in a very safe, very profitable manner going forward. Very proud of the fact that even though we added 40 something people and, over the last year, when a lot of banks have been cutting staff, we've added north of 110, close to 120 new people. Our efficiency ratio in the quarter just ended at under 33 percent, and that just speaks to the significant revenue That's helpful. And then, maybe just as one follow-up, I saw that you guys are not going to be doing buybacks, you know, at this point. It sounds like, you know, the efforts are clearly focused.

Michael Edward Rose: We're doing the things that we need to do.

Michael Edward Rose: To continue to grow and grow in a very safe very profitable manner going forward.

Michael Edward Rose: Right.

Michael Edward Rose: Very proud of the fact that even though we added 40 something people on and over the last year. When a lot of banks have been cutting staff. We've added north of 110 close to 120 new people.

Michael Edward Rose: Our efficiency ratio in the quarter just ended was sub 33%.

Michael Edward Rose: But that just speaks to the significant revenue generation capabilities of our franchise.

Michael Edward Rose: Yeah.

Speaker Change: That's helpful and then maybe just one follow up.

Speaker Change: You guys are not doing buybacks at this point it sounds like the <unk>.

Michael Edward Rose: on, you know, growing out your businesses, whether it be RISD or the others. Anything else that we should be thinking about?

Speaker Change: Efforts are currently focused on.

Speaker Change: At your businesses, whether it be our next year or the others.

Speaker Change: Anything else that we should have it.

Michael Edward Rose: Out in terms of, you know, why not just have a buyback in place as a tool?

Speaker Change: Should be thinking about in terms of.

Speaker Change: Why why not just have a buyback in place as a tool just given where the stock is trading even if you don't use it and then.

Michael Edward Rose: Which is given where the stock is trading, even if you don't use it.

Michael Edward Rose: you know, I think you.

Speaker Change: I think you just mentioned that maybe deposit growth could be a little bit stronger as we move forward.

Michael Edward Rose: forward.

Tim Hicks: Tim's the king of capitals. Hey, Michael. Yeah, you saw our comments there. And really, for the first 30 minutes of this call, I've been talking about how we're focused on growing organically. And that's, that's just really our primary focus. A lot of internal efforts go into that. So, you know, we don't have any plans to, (inaudible) totally understand it. If I could just squeeze one last one in. George, would you say that you're more confident in the ability of the company to grow EPS and PPM?

Speaker Change: How does that all kind of interplay.

Speaker Change: Vision and the board's decision not to.

Speaker Change: At least just have a buyback in place in general.

Tim Hicks: Tim King of capital.

Hey, Michael Yes, you saw our comments there and really the first 30 minutes of this call and talking about how how are we're focused on growing organically and thats.

Tim Hicks: It's just really our primary focus a lot of internal efforts.

Tim Hicks: Round there.

Tim Hicks: So we.

Tim Hicks: We don't have any plans to.

Tim Hicks: Buyback stock this year, given our growth last year and continued expectation for growth this year.

Speaker Change: So we will ask our board.

At a later time when we're ready.

Speaker Change: So there is no no reason to have a buyback in place.

Speaker Change: If we don't have any plans to use it.

Speaker Change: Totally got it if I could just squeeze one last one in George would you say that you're more confident in the ability to grow.

George G. Gleason: I think you're doing a lot better on PPS and PP&R or NII this year at a kind of record rate than you were maybe back in January. Just given the strong first quarter, that's a fair characterization.

Speaker Change: EPS in pp in our NII.

George G. Gleason: NII this year at a kind of a record rate than you were maybe back in January just given the strong first quarter that a fair characterization.

George G. Gleason: Michael, you know, we're going to spend some money, and there's a lot of uncertainty about the economy. So I would take a cautious outlook on the guidance we gave and our January call was that we expected our EPS and net income for the full year of 2024 to be a record, over 2023. And, of course, we had record numbers every year in 2023, coming off a record quarter in Q4 2022. And we started out this year really well with a record.

George G. Gleason: Michael.

Michael Edward Rose: We're going to we're going to spend some money and there is a lot of uncertainties about the economy. So I would I would take a cautious outlook about the guidance we gave in.

Michael Edward Rose: Our January call.

Michael Edward Rose: Was that we expected our EPS and net income for the full year of 2024 to be a record.

Michael Edward Rose: Over 2023 and of course, we had record numbers.

Michael Edward Rose: Every year in 2023 coming off a record quarter in Q4 of 2022.

Michael Edward Rose: We started out this year really good weather record it wasn't a huge improvement.

Michael Edward Rose: It wasn't a huge improvement, a penny a share, basically an improvement over Q4. We're going to continue to grind and work, and you know, I think we're taking a cautious view of it. And I would reiterate the guidance for the full year of 2024. We expect to be at a record EPS and net income number on top of 2023's record EPS and net income number, but I'm not sure about every quarter. You know, we would love to put up a little bit of improvement every quarter, but I can't guarantee it'll be linear, Dale, but we're confident about our guidance for the full year of 20 Great, thanks for taking my questions. Thank you.

Michael Edward Rose: Sure basically improvement over over Q4.

Michael Edward Rose: We're going to continue to grind and work in.

Speaker Change: I think we're taking a cautious view of it and I would reiterate guidance.

Speaker Change: Full year of.

Speaker Change: 2024, we expect to be at a record.

Speaker Change: EPS and net income number on top of 2020 Three's record EPS net income number but.

Speaker Change: I'm not sure about every quarter.

Speaker Change: We would love to.

Speaker Change: Put up a little bit of improvement every quarter, but I can't guarantee it'll be a linear.

Speaker Change: But we're confident about our guidance for the full year of 2012.

Speaker Change: Great. Thanks for taking my questions.

Operator: One moment for our next question. Our next question comes from Manan Gosalia with Morgan Stanley. Please proceed with your question.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Manan <unk> with Morgan Stanley. Please proceed with your question.

Manan: Hey, good morning.

Manan Gosalia: I appreciate the new disclosure on the loan floors. You know, I think you might have mentioned this, but those floors should keep migrating higher in a higher for longer rate environment. Is that correct?

Manan: Good morning.

Manan: I appreciate it.

Manan: Disclosure on the loan floors.

Manan: I think you might have mentioned this but dose floor should keep migrating higher and the highest rate environment is that correct.

George G. Gleason: Yes, definitely.

Speaker Change: Yes definitely.

Manan Gosalia: Okay, and then, you know, how do you think about the dynamic between capital market exits and these loan floors, you know, as we go through the next couple of years? With the loans that have higher floors automatically moving into the capital markets when rates move below those floors, would there be, would some of these loans exit rather than remain on their floors, or, you know, am I thinking about that the wrong way?

Speaker Change: Okay and then.

Speaker Change: How do you think about the dynamic between.

Speaker Change: Capital market exits and these loan floors and as we go through the next couple of years.

Speaker Change: What's the launch that have higher floor is automatically move into the capital markets when rates go below those floors would there be.

Speaker Change: Some of these loans exit rather than remain on their floors are.

Speaker Change: Am I thinking about that the wrong way.

George G. Gleason: Brandon, do you want to answer Manan's question? Sure.

Speaker Change: Brandon you want to answer <unk> question here.

Brandon Thomas King: Certainly, our borrowers love to pay lower interest rates if they can, but you have to look at it. It's a very complex topic, where the project is in its construction phase, where it is in its lease-up phase, and also where they think rates are going to go and how fast they're going to go. They all influence that. In a really simple world, yes, if they fall and hit their floor, then they would be looking, but there are other considerations.

Brandon: Sure well.

Brandon: Certainly.

Brandon: Our borrowers.

Brandon: To pay lower interest rates as they can but you you have to look at it as a very complex topic, where the project is in its construction phase where it is in its lease up phase.

Brandon: And also.

Brandon: Where do they think.

Brandon: Rates are going to go and how fast they're going to go there all influence that so yes.

Brandon: In a real simple world yes.

Brandon: If they fall and they hit their floor than they would be looking but there are other considerations and you have to remember in our projects with the low loan to cost that we have.

Brandon Thomas King: You have to remember, in our projects, with the low loan-to-cost that we have, they would be looking not just at the rate they're paying but also at the proceeds they're going to get. There are multiple motivations involved in that. Look, we're happy for our loans to be repaid, and to have a successful life cycle for them. We fully expect that, but there's much more to a successful move to the next stage for our sponsors than just where the interest rates are.

Brandon: Yeah.

Brandon: They would be looking not just at the rate they are paying but also at the proceeds they're going to get so there are multiple motivations involved in that so look we're happy for our loans to be repaid to have a successful sort of lifecycle to them. If the construction loan portfolio, we fully expect that but.

Brandon: There's much more to the <unk>.

Brandon: Successful.

Move to the next the next stage for our sponsors Dan just where the interest rates are so.

Brandon Thomas King: In short, rates are a part of it, but there's much more involved. And Manan, let me let me let me give a little more color on that, and Brandon can agree or disagree with us. But, you know, our construction loans are hard but not impossible for those to move mid-construction. I mean, it's easier in some states, because of lane loss and so forth than it is in other states.

Brandon: In short, yes rates are a part of it but there is much more involved.

Speaker Change: And Manav, let me, let me, let me give a little more color on that and Brandon can agree or disagree with us but.

Speaker Change: Our construction loans. It is it is hard but not impossible for those to move mid construction and its easier in some states because of laying laws and so forth than it is in other states.

George G. Gleason: So there's somewhat of a natural friction to a loan moving mid-construction. In addition to that, our loans contain minimum interest requirements that we've got to be paid X amount of interest over the life of the loan, and if they pay us off before we earn that interest, they've got to pay the difference to us as a minimum interest charge. So that tends to keep loans on the books even if the floor has become higher than Martin until they've burned off that minimum interest, unless there's an incredibly competitive reason to exit sync.

Speaker Change: So there is.

Speaker Change: Somewhat of a natural friction to alone moving mid construction.

Speaker Change: In addition to that or.

Speaker Change: Loans contain minimum interest requirement that.

Speaker Change: We've got to be paid X amount of interest for the poor over the life of a loan and if they pay us off before we earn that interest they've got to pay the difference to us.

Speaker Change: Minimum interest charge.

Speaker Change: So that tends to keep loans.

Speaker Change: The books, even if the floor has become higher than market.

Speaker Change: Until like burned out that minimum interest unless there's an incredibly compelling reason to exit sooner.

George G. Gleason: The loans that are fully completed projects that have met their minimum interest requirements, which are loans that..., sort of naturally would be right to go to a permanent refinance anyway. Those loans are more susceptible to being refinanced if that floor has that right above market rights, and we expect those loans to go anywhere, to the Permanent Market when they can, when it's advantageous for them to do so, so that's not bad for us.

The loans that are fully completed projects that have met their minimum interest requirement.

Speaker Change: Which are which are loans that would.

Speaker Change: Sort of naturally be rap.

Speaker Change: Two to go to a permanent refinance any way those loans are more susceptible to being right pod if that floor.

Speaker Change: Has that right above market rates and we expect those loans to go anyway to the permanent market when they can.

Speaker Change: When its advantageous for them to do so so, but that's not a negative to us either.

Brandon Thomas King: That's very helpful. I was going to add to that. Will, you're absolutely right about all that.

Speaker Change: Thats very helpful.

Speaker Change: I was just going to add to that.

Brandon Thomas King: And the guys have been doing a phenomenal job with the floors. We've mentioned that, but they've also done a great job in improving sort of the multiple on our loans, setting the minimum interest amount. So, you know, as a percentage of the loan amount, they work really hard on that piece of it as well. So yeah, I was bad to leave that one out. That's a really important function.

Speaker Change: Youre, absolutely right about all of that and the guys have been doing a phenomenal job with the floor as we mentioned that but they've.

Speaker Change: <unk> also done a great job improving sort of the multiple on our loans setting the minimum interest amount so as a percentage of loan amount. They work really hard on on that piece of it as well so yes. It was ours.

Speaker Change: Bad to leave that one out that's a really important function.

George G. Gleason: And for those of you who are not familiar with it, you know, the minimum interest is really not designed to be punitive to our customers, but it's designed to make sure we achieve a minimum return on our capital allocation to that project. Our typical loan is 50% of the cost of the project, more or less, and so we may have a commitment out for a full year or even 15 months or 18 months before we fund anything on that loan.

Speaker Change: And for those of you who are not familiar with it the minimum interest is really not designed to be punitive to our customers, but it's designed to make sure. We achieve a minimum return on our capital allocation to that project because.

Speaker Change: Our typical loan is 50% of the cost of the project more or less and so we may have a commitment out for a full year or even 15 months or 18 months before we fund anything on that loan.

George G. Gleason: We're required to hold capital against 50% of that commitment amount before it's funded. And so we could have a huge capital allocation for 18 months and never fund it because the customer decides, You know, they want to refinance to a lower rate or refinance to someone that will give them more leverage than we've allocated capital and never earn anything but an origination fee and some other fees on the loan. So the minimum interest is necessary and calculated to make sure that we achieve a minimum return on equity over the life of the loan, regardless of when it prepays.

Speaker Change: Required to hold capital against 50% of that commitment amount.

Speaker Change: Sure it's funded and so we could have a huge capital allocation for 18 months in Africa and never find the customer decides.

Speaker Change: They want to refinance to a lower rate or refinance with someone that will give them more leverage than we've allocated capital and never earned anything but that.

Speaker Change: Origination fee and some other fees on the loan so the minimum interest as necessary and calculated to make sure that we achieve a minimum return on equity over the life of loan irregardless of when it pre pays.

Manan Gosalia: That's very helpful; I really appreciate the fulsome answer there. Maybe just pivoting, you spoke about distressed transactions starting to pick up a little. What do you think drives that meaningfully higher? I know there's a lot of private capital waiting on the sidelines, so is it a function of them just waiting for valuations to fall more? Or is it resolution on this uncertainty about rates? What should drive some of those transactions meaningfully higher, in your view?

Speaker Change: Yes.

Speaker Change: That's very helpful. I really appreciate the fulsome answer there.

Speaker Change: Maybe just pivoting.

Speaker Change: You spoke about distress transaction starting to pick up a little.

Speaker Change: What do you think drives that meaningfully higher.

Speaker Change: There is a lot of private capital waiting on the sidelines. So is it a function of them just waiting for valuations to fall more.

Or is it.

Greg: Dr. Greg <unk>.

What should drive some of those transactions at meaningfully higher in your view.

George G. Gleason: I'm going to let Brandon answer that question, but I'm going to make sure that we don't create any misunderstandings. Those distressed transactions we're talking about are not our transactions. They're other transactions we see in the market. We have a huge view of those, across the US. So those are not our transactions. But Brandon, with that caveat and clarification, can you give some color to what's going to be the precipitating event that causes more of that rescue capital to go to work? Yeah, sure. I think Manan, you know, great questions.

Well, let me I'm going to let Brant and answer that question, but I'm going to.

Greg: Make sure that we don't create any misunderstanding those distressed transactions. We're talking about are not our transactions. There. There are other transactions we'd stay in the market we have a huge view of the.

Brant: Market across the U S.

Brant: So those are not our transactions, but brandon with that caveat and clarification can you can you give some color to what's going to what is going to be the precipitating event that causes more of that rescue capital to go to work.

Brandon: Yes, sure I think.

Brandon Thomas King: Yeah, sure. I think, Manan, you know, great question. George, great clarification. We are talking about the broader world outside of our portfolio, but you identified a number of issues, all of which are in play. I think as it relates to multifamily, that's a much more active market. Cap rates are more quickly reset, and buyers determining where those sort of levels down will start to draw them at a greater velocity into that space

Brandon: Great question, George Great clarification, we are talking about the broader world outside of our portfolio.

Brandon: But.

Brandon: You identified.

Brandon: Number of issues all of which are in play.

Brandon: As it relates to.

Brandon: Multifamily.

Brandon: That's a much more active market cap rates are more quickly reset.

Brandon: Buyers determining where those sort of level down will.

Brandon: We will start to draw them.

Brandon Thomas King: I think the one that is sort of the longer-term opportunity, if you look at it from the fund managers' point of view, they have raised billions of dollars for the opportunity to start to invest in distressed office space, but they'll be much more selective as it relates to the product type. There's some pause waiting to see exactly how some of that falls out. You've got a lot of leases that are going to mature over the next couple of years, and you have a lot of visibility into where occupancies are going to fall out in some of those older vintage products or even later vintage that have been leased up, but now trying to figure out who's going to stay and who's going to go.

Brandon: At a greater velocity and of that space I think the one that is sort of the longer term.

Brandon: <unk>.

Brandon: Opportunity if youre looking at it from many of the.

Brandon: Many funds have raised billions of dollars.

Brandon: For the opportunity to start to invest in distressed office, but.

Brandon: It'll be much more.

Brandon: Selective as it relates to the product type.

Brandon: There is some pause waiting to see exactly how some of that falls out you've got a lot of leases that are going to mature over the next couple of years and have a lot of visibility into where occupancies are going to fall out and some of those older vintage product or even later vintage that have been leased up but now.

Brandon: Trying to figure out who is going to stay and who's going to go.

Brandon Thomas King: The interest rate issue that you brought up very clearly, they've raised a lot of capital, but they want to be able to leverage that, and, quite frankly, just find debt capital out there with which to leverage it. There are a lot of institutions out there that are the holders of that distressed product type and not eager to re-up or expand their portfolio in that product type. It's part capital markets, part interest rates, part just letting things play out in terms of who's going to stay and who's going to go to office in various markets, but you have seen some bites at the apple on just a basis where either A, they don't think they can lose or they've been in the market forever.

Brandon: The interest rate issue that you brought up very clearly.

Brandon: They've raised a lot of capital that they want to they want to.

Brandon: You'll be able to lever that.

Brandon: And quite frankly, just finding that capital out there with which to elaborate.

Brandon: There are a lot of institutions out there.

Brandon: That are the holders of that distressed product type and not eager to re up or expand their portfolio in that product type. So.

Brandon: It's part capital market's part interest rates part just letting things play out in terms of who's going to stay and who's going to go in office in various markets, but you have seen some some some bites at the Apple.

Brandon: But basis, where.

Brandon: Either they don't think they can lose or they're.

Brandon Thomas King: They're not trying to turn it around in three years. They're going to have to be there. They're going to be there. They've got the patient money to see it play out over a longer period of time. Again, interest rate certainty, figure out how the world of office is going to play out more, and capital markets a little bit freer to help leverage deals. All those things are going to play into the rate at which that velocity begins to increase.

Brandon: They have been in the market forever Theyre not trying to turn it in three years, they're going to they're going to have been there theyre going to be there they've got the patient money to to see it.

Brandon: Play out over a longer period of time term, but again interest rate certainty figure out how the world of office is going to play out more capital markets, a little bit freer to help lever deals all of those things are going to play into that.

Brandon: The rate at which that velocity begins to increase.

Operator: One moment for our next question. Our next question comes from Timur Braziler with Wells Fargo. Please proceed with your question.

Speaker Change: That's great. Thank you.

Speaker Change: One moment our next question.

Speaker Change: Our next question comes from Timur Brasilia with Wells Fargo. Please proceed with your question.

Timur Felixovich Braziler: Hi, good morning.

Timur Felixovich Braziler: Looking at the deposit trends in a higher for longer environment, I know you guys were able to bring down some deposit pricing in January. It sounds like half of that was brought back in just with a higher for longer environment here. Just looking at net interest margin and the link order decline there at a decelerating pace, can we actually see NIM kind of compress at a decelerating pace going forward? Or are some of the deposit dynamics such that if we do end up in this higher for longer environment, then margin compression can actually pick up a little bit here as we go into the next couple of quarters? You know, I think if we...

Timur Brasilia: Morning.

Timur Felixovich Braziler: Looking at the deposit trends and a higher for longer environment. I know you guys are able to bring down some deposit pricing in January it sounds like half of that was brought back in just sort of a higher for longer environment here, just looking at net interest margin and the linked.

Timur Felixovich Braziler: Quarter decline there at a decelerating pace can we actually see NIM kind of compressed at a decelerating pace going forward or some of the deposit dynamics such that if we do end up in this higher for longer environment that margin compression can actually can pick up a little bit here as we go into the next couple of quarters.

George G. Gleason: You know, I think if we stay in a higher for longer environment at current rates, assuming that the tail risk of Fed rate increases doesn't materialize and, and the timing of Fed cuts doesn't happen near term, I think we get to a relatively flat cost of interest-bearing deposits a couple, three quarters out.

I think if we stay in a higher for longer environment at current rates, assuming that the tail risk of fed rate increases don't materialize.

Timur Felixovich Braziler: <unk>.

Timur Felixovich Braziler: The.

Timur Felixovich Braziler: The timing of the fed cuts doesn't happen near term I think we'd get to right.

Timur Felixovich Braziler: A relatively flat cost of interest bearing deposits.

Timur Felixovich Braziler: A couple of three quarters out.

George G. Gleason: Got it. And then maybe on the way down for...

Speaker Change: Okay got it.

Timur Felixovich Braziler: That assumes we continue to achieve growth at one to two billion dollars a quarter in deposits.

Speaker Change: And then maybe on the way down for that assumes we continue to achieve growth, 1% to $2 billion a quarter in deposits.

George G. Gleason: Oh, that makes sense. And then I guess on the way down in the ability to reprice time deposits lower. Do you think that's going to be fairly formulaic as rates come down, you're going to have the ability to reprice those lower, or is there something more idiosyncratic to just the reliance on time deposits, and maybe costs are going to have to stay elevated for a longer bit of a lag as we start getting some of these rate cuts in I think formulaic is probably a good way to describe it.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: And then I guess on the way down and the ability to re price time deposits lower.

Speaker Change: Do you think thats going to be.

Fairly formulaic as rates come down youre going to have the ability to reprice those lower or is there something more.

Speaker Change: Idiosyncratic to just the reliance on time deposits and maybe costs are going to have to stay elevated for a longer bit of a lag as we start getting some of these rate cuts were in place then that you want to take that sure.

Speaker Change: Hi, thank formulaic as probably a good way to describe it.

Timur Felixovich Braziler: We have begun the rise in maturities based on what we were doing a year ago, so that'll pick up in May and June, and I'll say the only thing that we've noted that is better than we anticipated is our retention. So I'll give that little bit of color that we've been really pleased so far with our retention rate on our maturing CDs, and we hope that that continues because that makes it even more great. Thanks.

Speaker Change: We have begun the rise in maturities based on what we were doing a year ago, So that'll that'll pick up in <unk>.

Speaker Change: May and June.

Speaker Change: And I will say the only.

Speaker Change: Thing that we've noted that is better than we anticipated as our retention. So I'll just give that little bit of color that we've been really pleased so far with our retention rate on our maturing Cds and we hope that that continues because that makes it even more predictable.

Timur Felixovich Braziler: And then just looking at an update on substandard credits, the Seattle office that was new this quarter. I know last quarter we had a couple office loans in Seattle that were reappraised, you know, quite higher from an LTV standpoint. And I'm wondering, is this one of those loans from last quarter? And then maybe just give us broader expectations around your exposure in the Pacific Northwest and what you might be seeing there that's a little bit more punitive than some of your other markets.

Speaker Change: Great. Thanks, and then.

Speaker Change: Just looking at then update.

Speaker Change: Sub standard credits the Seattle office.

Speaker Change: That was new this quarter.

Speaker Change: I know last quarter, we had a couple office loans in Seattle that were reappraised.

Speaker Change: Quite higher from an LTV standpoint, I'm wondering is this one of those loans from last quarter, and then maybe just give us broader expectations around your exposure in the Pacific northwest than what you might be seeing there that's a little bit more punitive than some of your other markets.

Brandon Thomas King: Brandon, do you want to take that? Absolutely. Yes.

Speaker Change: Brandon you want to take that.

Brandon Thomas King: Yes, the Seattle office that we called out, that we did downgrade to substandard, was one of those bubbles that had Floated Up that we had previously described to you, so same issue there. You know, I think about the broader question of the Northwest. I mean, obviously, we can't overgeneralize, but that particular market has had some different submarkets that have been sort of more affected by some of the turmoil, you know, in 2020-21. Obviously, as it relates to the office, you've got, you know, work from home that has impacted, you know, the entire industry, and made that more challenging.

Speaker Change: Yes.

Brandon: Seattle office that we that we called out.

Brandon: We did downgrade to substandard was.

Brandon: One of those bubbles that had floated up that we had previously described to you. So.

Brandon: Same issue there.

Brandon: I think to the broader question of the northwest I mean, obviously.

Speaker Change: We can't Overgeneralize.

Speaker Change: But that that has that particular market has had some some various submarkets that have been.

Speaker Change: Sort of more affected by some of the turmoil.

Speaker Change: 2000 2021.

Obviously as it relates to office you've got.

Speaker Change: Work from home.

Speaker Change: That is impacted.

Speaker Change: The entire.

Speaker Change: Industry.

Brandon Thomas King: But, you know, you've got other situations where mixed-use outcomes are superior, having superior... Leasing results and just the placemaking aspect of that really offset the risk you might have in one product or the other, offsets some of the risk that might be sort of overstated in any region. But, you know, I will say we've not been as active in the northwestern part of the country for a while. So I would say that our views are somewhat laid out just in terms of the lower origination value.

Speaker Change: Made that more challenging but.

Speaker Change: You've got other situations, where mixed use outcomes are superior.

Having superior.

Speaker Change: Leasing results and just the place making aspect of that.

Speaker Change: Really.

Speaker Change: Offsets the risk you might have in one product or the other offset some of the risk.

Speaker Change: B sort of overstated in any region.

Speaker Change: But.

Speaker Change: I will say, we've we've not been as active in the northwestern part of the country for a while so I would.

Speaker Change: I would say that are our views.

Speaker Change: Our somewhat laid out just in terms of the lower origination value. So.

Brandon Thomas King: So we're very happy that such a substantial part of our book does exist in the geographies that have had more positive trends in the last couple of years. Although I did, I don't recall the source but did see Seattle return to sort of a top ten opportunity list. I don't remember the resource or who was reporting on it, but I do think there are probably some more positive trends developing there. It will take the long term to play out, but yeah, we've been less active in that part of the country.

Speaker Change: We're very happy that.

Speaker Change: Such a substantial part of our book does exist in the geographies that are having more.

Speaker Change: We're positive.

Speaker Change: Trends in the last couple of years, although I.

Speaker Change: I did.

Speaker Change: Call the source, but did see Seattle returned to sort of a top 10 opportunity list I don't remember the resource or who was reporting on it but.

Speaker Change: I do think there are probably some some more positive trends developing there it will take a long term play out but.

Speaker Change: But yes, we've been less active in that part of the country.

Timur Felixovich Braziler: Okay, great. And then, just last for me, any update on the Chicago land loan? I know it's been extended to October, but how would you handicap that being resolved in advance of October? And how should we think about it if that loan is still on the books in October?

Speaker Change: Okay, Great and then just last for me any update on the Chicago land loan I know its been extended to October.

Speaker Change: Or would you handicap that being resolved in advance of October and how should we think about it that loan is still on the books in October.

Speaker Change: Yes, Brian and let me, let me comment on that I would tell you I thought we had good progress on each of the.

George G. Gleason: Yeah, Brandon, let me comment on that. You know, I would tell you I thought we had good progress on each of the specific assets that we've been discussing in our management comments documents over the last year, the Chicago, Land, Dale, you know, they continue to work hard, went way down the road with one potential capital source and concluded that was not the right solution. So they stepped up to the plate and put up $8 million to reengage some previous interested parties in that.

Speaker Change: Okay.

Speaker Change: Specific assets that we've been discussing in our management comments documents over the last year.

Speaker Change: Chicago land sale.

Speaker Change: Like continue to work hard.

Speaker Change: Went way down the road with one potential capital source.

Speaker Change: <unk> that was not the right solution.

Speaker Change: <unk> stepped up to the plate and put up $8 million too.

Speaker Change: Reengage some previous interested parties and that we view that positively certainly not conclusive that theyre going to be successful, but we viewed it positive that they came to the table with $8 million more capital to buy more time to continue to work on our <unk>.

George G. Gleason: We view that positively, certainly not conclusive that they're going to be successful, but we viewed it positively that they came to the table with $8 million more capital to buy more time to continue to work on a recap of that project. We have no way of handicapping the success or failure of that effort, but the $8 million we viewed as a positive step. I described it to the team as a first in 10, $8 million is a new set of downs that gets you 10 yards farther down the field, but they're still a long way from the end zone.

Speaker Change: Cap of that project.

Speaker Change:

Speaker Change: We have no way of handicapping, the success or failure of that effort, but the $8 million, we viewed as a.

Speaker Change: Positive staff.

Speaker Change: Grabbed it to the team as I.

Speaker Change: First and 10 eight.

Speaker Change: $8 million as a new set of downs catch 10 yards farther down the field, but there's still a long way from the enzyme.

George G. Gleason: Likewise, the $11 million sale of the amenities, which should hopefully close this quarter on the development near Lake Tahoe, is a really significant step forward if we get that closed to the final wind down of what's been a long-term workout credit for a number of years on our books and been discussed for a number of years. The fact that our L.A. land project didn't close was disappointing to us. We'd certainly prefer to close

Likewise, the $11 million.

Sale of the amenities, which should hopefully close this quarter on.

Speaker Change: Development near Lake Tahoe is a really significant step forward, if we get that closed to the final wind down of what's been a long term workout credit.

Speaker Change: Number of years on our books and had been discussed for a number of years. So we view that as an important step in the.

Speaker Change: The fact that our land.

Speaker Change: Project.

Speaker Change:

Didn't close was was disappointing to us we would certainly prefer to close but the flip side is they are spending a lot of money and a lot of energy and effort putting that project together.

George G. Gleason: But the flip side is they're spending a lot of money and a lot of energy and effort putting that project together. And the fact that they paid a million dollars for a million dollars of non-refundable earnest money up for a 90-day extension shows they're serious about it. As we mentioned, they've got three more 90-day extensions, each with a million-dollar fee and an additional million dollars.

Speaker Change: The fact that they've put a million dollar.

Speaker Change: <unk> two is paid $10 million paid it went to income and put $1 million of non refundable earnest money.

Speaker Change: For a 90 day extension shows they're serious about it.

Speaker Change: As we mentioned <unk> got three more 90 day extensions each with $1 million fee.

George G. Gleason: [inaudible] The Seattle Office, but that's an $11.4 million book, so I view it as another first down when you get rid of an $18.8 million asset and replace it with an $11.4 million asset. So we viewed all those as being positive trends related to those credits.

Speaker Change: An additional million dollars of.

Speaker Change: Non refundable earnest money they can exercise so that we viewed as a positive commitment both or income.

Speaker Change: In the earnest money going hard on that.

Speaker Change: And then we so the Minneapolis hotel loans on an $18 $8 million.

Timur Felixovich Braziler: Great. Thanks for the call, George. One moment for our next question.

Speaker Change: That went off the books.

Speaker Change: We added.

Speaker Change: Seattle.

Speaker Change: Office, but thats, an $11 4 million dollar book, So I view it as another first down when you get rid of an $18 $8 million of asset and replace it with an $11 4 million of assets. So.

Operator: Our next question comes from Ben Gerlinger with Citi. Please proceed with your question.

Speaker Change: We viewed all of those as being positive trends related to those credits.

Benjamin Tyson Gerlinger: Most of the questions I was thinking about have kind of been addressed to some extent, so I'll just follow up with Jay in terms of the specificities, but I'm just kind of curious when you think about the overall pace of growth this year. Let me give you guidance that it is going to be a little bit softer than last year, but I mean, last year was also a really strong year, following 22, which was also a strong year. Is the really strong deposit growth this quarter a leading indicator that 2Q could also be a really strong quarter, and then we kind of taper off in the back half of the year?

Speaker Change: Yes.

Speaker Change: Great. Thanks for the color.

Speaker Change: Yes.

Speaker Change: One moment for our next question.

Speaker Change: Okay.

Speaker Change: Yeah.

Speaker Change: Our next question comes from Ben Garlinger with Citi. Please proceed with your question.

Benjamin Tyson Gerlinger: Hi, good morning, everyone.

Benjamin Tyson Gerlinger: Good morning, Ben.

Benjamin Tyson Gerlinger: Just Scott most of the questions I was thinking I was kind of addressed to some extent. So I'll just talk with giant in terms of subsistence fees, but I'm just kind of curious when you think about the.

Benjamin Tyson Gerlinger: The overall pace of growth this year, and maybe give guidance that it was going to be a little bit softer than last year.

Benjamin Tyson Gerlinger: There was also a really strong year.

Benjamin Tyson Gerlinger: Following a 22, which was also strong here.

Benjamin Tyson Gerlinger: Okay.

Benjamin Tyson Gerlinger: Really strong deposit growth this quarter, a leading indicator that <unk> could also be a really strong quarter and then we kind of tapered down to the back half of the year.

Benjamin Tyson Gerlinger: Or did 1Q potentially kind of pull forward some of the loan growth? I know the cadence of quarter-to-quarter is always difficult, but I'm just kind of curious about what you're seeing over the next kind of three quarters here and how the lumpiness might transform.

Benjamin Tyson Gerlinger: <unk> potentially kind of pull forward some of the loan growth.

Speaker Change: The cadence of quarter to quarter is always difficult, but I was just kind of curious I mean, what youre seeing over the next kind of three.

Speaker Change: Three quarters here, how the lumpiness might cancel.

George G. Gleason: You know, we made the comment in our management comments document for years that the results of different parts of our performance could vary quite a bit from quarter to quarter, and that's certainly true of origination, certainly true of paydowns. Probably, the deposit side of our business is less lumpy and much more granular and thus prone to fewer sort of wild swings quarter to quarter.

Speaker Change: I don't think we have color on the lumpiness of quarter to quarter.

Speaker Change: <unk>.

Speaker Change: The comment in our management comments document.

Speaker Change: Sure.

Four years.

Speaker Change: Results of different parts of our performance could vary quite a bit from quarter to quarter and that's certainly true of origination certainly true pay downs.

Speaker Change: The probably the deposit side of our business is less lumpy and much more granular.

Speaker Change: And thus prone to less sort of.

George G. Gleason: I think that's about all I can say. Payoffs, originations, and total balance sheet growth could be fairly lumpy quarter to quarter. I would expect more stability and more of a sort of linear, straight-line basis on the deposit growth of Bayon two or a billion five and two billion or a billion eight. You can kind of have that sort of range, but we would expect steady growth, you know, with some variation quarter to quarter into the top.

Speaker Change: While swings quarter to quarter, but.

Speaker Change: I would I think that's about all I can cite is payoffs originations.

Speaker Change: In total balance sheet growth could be fairly lumpy quarter to quarter, I would expect more stability and more of a sort of linear straight line.

This is on the.

Speaker Change: The deposit growth I mean.

Speaker Change: <unk>.

Speaker Change: Two five.

Speaker Change: <unk> 2 billion or a billion.

Speaker Change: You can kind of add that sort of range, but we would expect steady growth.

Speaker Change: No.

Speaker Change: Some variation quarter to quarter and the deposits.

Benjamin Tyson Gerlinger: Gotcha. Yeah, that's a helpful call.

Benjamin Tyson Gerlinger: And I'm kind of just thinking when you think about just the ratios on your balance sheet. I know that you said you're gonna let RHG just do what it does, it's kind of the best in class. But do you have any sort of targets in terms of just the loan to deposit ratio, just from a 10,000 foot view? Or is it really just kind of let the loans grow and then match them with deposits where needed?

Speaker Change: Gotcha.

Speaker Change: That's helpful color and then kind of just thinking when you think about just the ratios under balance sheet.

Speaker Change: I know that you said are you going to let our ESG just do what it does kind of the best in class but.

Speaker Change: Do you have any sort of targets in terms of loan to deposit ratio just from a 10000 foot view.

Speaker Change: Or is it really just kind of let the loans grow and then match it with deposits where needed.

Speaker Change: Tim do you want to take.

Tim Hicks: Yeah, Hey, Ben.

Tim Hicks: Historically, we've been in the low to mid 90% loan to deposit ratio.

Benjamin Tyson Gerlinger: [inaudible]

George G. Gleason: Yeah, hey, Ben, you know, I mean, historically, we've been in the low...

Tim Hicks: And so I don't anticipate that changing much much at all.

Tim Hicks: So we do project out our funding needs on a monthly basis for 36 months in advance.

George G. Gleason: [inaudible] on a monthly basis for 36 months in advance. And we adjust our deposit-gathering initiatives based on those projections. And so, you know, we really look at it as how much earning asset growth do we need to fund to keep the loan-to-deposit ratio in the low-to-mid 90% range over the long term.

Tim Hicks: We.

Tim Hicks: We adjust our.

Tim Hicks: Deposit gathering initiatives based on those projections and so.

We really look at it as how much earning asset growth do we need to fund and keep the loan to deposit ratio in the low to mid 90% long long term.

Operator: One moment for our next question. Our next question comes from Brian Martin with Janie Montgomery-Scott. Please proceed with your question.

Speaker Change: One moment for our next question.

Speaker Change: Okay.

Speaker Change: Our next question comes from Brian Martin with Janney Montgomery Scott. Please proceed with your question.

Brian Joseph Martin: Hey, good morning, guys. I'll keep it short, given the timing constraints here, but just George, any commentary on the headcount that you've added? I mean, anything specific you can provide, I guess, and more broadly, just is it, at least the ones hired already, kind of new teams? Are these, you know, ads to existing businesses? Just try and understand, you know, given the talent that's out there; just kind of tell me how you're thinking about that.

Brian Joseph Martin: Hey, good morning, guys I'll keep it short given timing constraints here, but just George any any commentary on.

Brian Joseph Martin: The head count that you've added.

Brian Joseph Martin: Specific you can provide I guess more and more broadly just isn't.

Brian Joseph Martin: At least the ones hired already kind of are these new teams are these adds to existing businesses just trying to understand given the talent. That's out there just kind of directionally, how you're thinking about that.

George G. Gleason: We've not taken any teams out. It's been one-offs now.

Speaker Change: We have not lifted any teams out.

George G. Gleason: As it turns out, we've hired people. Several people that have worked together in the past, but we didn't hire them as a team. We hired them, you know, those were individual introductions on our part to those individuals. We think we've acquired some really great talent, and we're getting those guys in and getting them ramped up and deployed as quickly and effectively as we can. But we're going to do it the right way

Speaker Change: Ben one offs now as it turns out.

Speaker Change: We've hired people.

Speaker Change: Several people that have worked together in the past.

Speaker Change: But we didn't hire them as a team we are.

Speaker Change: Those were individual.

Speaker Change: Initiations on our part to those individuals.

Speaker Change: We think we've acquired some some really great talent.

Speaker Change: We're getting those guys and getting them.

Ramped up.

Speaker Change: Deployed as quickly.

Speaker Change: Quickly and effectively as we can but we're going to do it the right way, we're going to do it with.

George G. Gleason: We're going to do it with, you know, proper governance and risk assessments and training and make sure that we're all lined up with everything we need to. You know, we started talking a little over a year ago about getting in the mortgage business. We started originating yesterday in that mortgage business, so we're going to take the time it takes to do it right because it's very important that the business that we generate from these new team members fully aligns with our corporate philosophy on credit risk and profitability.

Speaker Change: Our governance and risk assessments training.

Speaker Change: Make sure that we're all lined up with everything we need.

Speaker Change: We started to talk in little over a year ago about getting in the mortgage business.

Speaker Change: We started originating yesterday.

Speaker Change: Mortgage business, so we're going to take the time it takes to do it right.

Speaker Change: Because it's very important.

Speaker Change: The business that we generate from these new team members.

Speaker Change: Fully aligns with our corporate philosophy on credit risk and profitability.

George G. Gleason: So we're very excited about this. We've got some great team members hired, and we have our eye on some more great team members. And as we said in that earlier question, it's pretty much across all lines of business in our..., and our company, except RESG and indirect. We're kind of fully built out where we need to be right now in those units, but everywhere else we're at in town.

Speaker Change: So we're very excited about this so we've got <unk>.

Speaker Change: Got some great team members hired and have our eye on.

Speaker Change: More great team members.

Speaker Change: And as we said that earlier question is pretty much across all lines of business and are.

Speaker Change: And our company, except our ESG and indirect or not.

Speaker Change: We're kind of totally built out where we need to be right now in those units, but everywhere else, we're adding talent.

Brian Joseph Martin: Gotcha. Okay. So it's more about adding talent to existing businesses rather than new business lines.

Speaker Change: Gotcha, Okay. So it's more adding.

Speaker Change: Adding talent to existing businesses, rather than new business lines.

George G. Gleason: And then maybe the last two, I don't know if it's more for Tim, but just on the reserve build and just kind of how you're thinking about reserve levels here, given the heavy lifting you guys have already done, just maybe any comments around the outlook, Tim. And then secondly, just on the capital side, I think given the growth and profitability, I guess your expectation is that, you know, capital levels can be stable or, you know, maybe up as you go through the balance of the year?

Speaker Change: I appreciate that and then just maybe the last two weeks.

Speaker Change: It's more for Tim, but just on the reserve build and just kind of how youre thinking about reserve levels here given the heavy lifting you guys have already done just maybe any commentary on the outlet Tim There and then secondly, just on the capital side I think given the growth and profitability I guess is your expectation that capital levels can be stable or maybe.

Tim Hicks: Before you answer that, Tim, I do want to say some of these team members we've hired will introduce kind of incremental expansions of existing lines of business, broadening the scope of that business line, and ultimately, I think, bring, you know, some additional business lines to us that we will launch in future quarters and years. But we will do that in a very intentional, very controlled manner. But yes, I think we will not just incrementally add to existing businesses, which is the initial focus, but we'll broaden the... I'm going to go through the scope of products and services offered by those businesses and add new lines over the next couple of years. Yeah, they are. Thank you. Yeah, Brian, on your provision question.

Speaker Change: As you go through the balance of the year.

Speaker Change: Before you answer that Tim.

Speaker Change: Some of these team members we've hired.

Speaker Change: <unk>.

Speaker Change: Introduce.

Speaker Change: Kind of incremental expansions of existing lines of business broadening that scope of that business line and ultimately I think bring.

Speaker Change: Some additional business lines to us.

Speaker Change: That way, we will launch in future quarters and year, but we will do that in a very intentional very controlled manner, but yes, I think we will not just incrementally add to existing businesses, which is the initial focus will.

Speaker Change: We will broaden the sky.

Speaker Change: Scope of products and services offered by those businesses and add new lines over the next couple of years.

Speaker Change: Now Sam.

Sam: Thank you.

Sam: Yes, Brian on your provision question.

Tim Hicks: You know, as we mentioned earlier, the call rates being

As we mentioned earlier in the call.

Tim Hicks: Rates being higher for longer is certainly good for us from an earnings perspective and our trajectory of net interest income, but it could put some pressure on some of our borrowers as rates stay higher for longer, which is why you continue to see the build that we had in the quarter. As rates come down, obviously, that puts less pressure on the interest costs of some of our borrowers. And so, you know, I would anticipate a lower level of provision at a time when rates were to start coming down.

Rates being higher for longer is certainly good good from us from a from an earnings perspective, and our trajectory of net interest income.

But it could put some pressure on some of our borrowers as rates stay higher for longer which is why you continue to see the build that we had in the quarter.

Sam: As rates come down.

Sam: Obviously that puts less pressure.

Sam: On the interest cost of some of our borrowers and so.

Sam: I would anticipate.

Sam: A lower level of provision at a time when rates were to start start coming down.

Tim Hicks: And then on your capital question, yes, Matt, I think so.

Sam: And then on your capital and your capital question.

Tim Hicks: I think it depends on, you know, each quarter's growth of what it will do from a quarter to, and our capital ratios, what that will do from a quarter to quarter.

Speaker Change: Yes, so Matt I think it depends on each quarters.

Speaker Change: Growth of what it will do from a quarter of our capital ratios, what they will do from a quarter to quarter basis, but.

Tim Hicks: Obviously, we have a strong earnings profile, a Strong Earnings Retention Profile, and that can support a lot of growth, but as George said earlier, our growth can vary from quarter to quarter, and that may cause one quarter a decline and another quarter an increase in our capital ratios, but over the year, I would certainly expect us to be able to maintain, or slightly increase our capital ratios, risk-based

Speaker Change: We obviously have a strong earnings.

Speaker Change: Profile strong earnings retention profile and that can support a lot of growth but.

Speaker Change: As George said earlier, our growth can vary from quarter to quarter.

Speaker Change: And that May put.

Speaker Change: That may make one quarter or a decline in another quarter of an increase in our capital ratios, but.

Speaker Change: Over the year I would certainly expect us to be able to maintain.

Speaker Change: Grow slightly our capital ratios.

Brian Joseph Martin: Got you. Okay, thank you.

Speaker Change: Risk based capital ratios.

Got you okay. Thank you.

Operator: One moment for our next question. Our next question comes from Brandon King with Truist. Please proceed with your question. Hey, just one for me, and fine.

Speaker Change: Yeah.

One moment for our next question.

Speaker Change: Our next question comes from Brandon King with tourists. Please proceed with your question.

Brandon Thomas King: Hey, just one for me and following up on the commentary around getting to that 50% our ESG mix for the total loan portfolio do you think you need M&A to get there.

Brandon Thomas King: No, I think M&A could possibly accelerate that or augment that, but, you know, you never know if you're going to get an acquisition or not, so no, I don't think we need it. I think we can get there organically.

Brandon Thomas King: No.

Speaker Change: Thank you Emma.

Speaker Change: M&A, possibly could accelerate that or augment that.

Speaker Change: You never know, if youre going to get a acquisition or not so.

Speaker Change: No I don't think we need it.

Speaker Change: I think we get there organically.

Operator: One moment for our next question. Our next question comes from Samuel Varga with UBS. Please proceed with your question.

Speaker Change: Okay. That's all I had thank you.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Samuel Varga with UBS. Please proceed with your question.

Samuel Varga: George, last quarter you talked a little bit about how the Fed funds cuts expectations sort of make negotiating floors a bit more difficult for you. Since that has shifted as much as it has over the last 3-4 months, has that become easier again to get the higher floors, or once clients see the..., sort of potential, they don't really like gold that much.

Samuel Varga: Good morning, everyone.

Samuel Varga: Good morning.

Samuel Varga: George last quarter, you talked a little bit about how the fed funds cuts expectation sort of make negotiating floors a bit more difficult for you.

Samuel Varga: Since that has shifted as much as it has over the last three or four months.

Samuel Varga: I guess has that become easier again to get the higher floors are <unk> clients.

Samuel Varga: The potential they don't really like that.

George G. Gleason: Uh, no, Sam, it has not made it any easier. I don't think it's, uh... A lot more difficult either, but obviously...

George G. Gleason: No Sam it has not made it any easier I don't think its.

George G. Gleason: A lot more difficult either but but obviously.

George G. Gleason: I think most of our customers think we're at the peak of rates, and they believe rates will come down at some point, and they want some relief when they do. So that's making the negotiation of those floors a continued difficult conversation. But we need that. We need to do what we can in that regard. Our customers need to do what they can do. So it's a... It's a very intense negotiation in every transaction.

George G. Gleason: I think most of our customers think we're at the peak of rates and I.

George G. Gleason: They believe rates will come down at some point and.

George G. Gleason: I want some relief when by days, so, but that's making the negotiation of those floors. So continued.

Speaker Change: Difficult conversation, but we need that.

Speaker Change: We need to do what we can do in that regard our customers need to do what they can do so.

Speaker Change: It's a very intense negotiation in every transaction.

Samuel Varga: Understood. Thanks, Tyler. And just my quick follow up. You obviously have a pretty unique view on LTV migrations, and I appreciate all the disclosure. You have a quarter of a quarter. I was wondering if the evaluation adjustments that you've seen, if you think, if your view is that that's sort of appropriately baked into the Moody's scenarios? Or could there be sort of a lag effect in the allowance where it actually has to come up, not because of your own portfolio but because Moody's catches up to what you're already seeing today?

Speaker Change: Understood. Thanks for that color and just quick follow up.

Speaker Change: You, obviously have a pretty unique view on LTV migrations and.

Speaker Change: I appreciate all the disclosure you have quarter over quarter.

Speaker Change: I was wondering if.

Speaker Change: The valuation adjustments that you've seen if you think if your views that thats.

Speaker Change: Sort of appropriately baked into the Moody's scenarios or could there be sort of a lag effect and the allowance where it actually has to come up now because of your own portfolio, but because moodys catches up to what's you are seeing today.

George G. Gleason: You know, I think the valuations that we're getting are good valuations based on the information that is available to the appraiser. So we, and if we get appraisals that we don't think are reflective, our appraisal services guys, which is an independent unit within our company, push back and ask questions, and if there are bad assumptions or misinformation in the appraisals, they push back to get that cleaned up, get the appraisals lined up.

Speaker Change: I think our valuations that we're getting are good valuations based on the information that is available to the appraiser. So we.

Speaker Change: Now if we get appraisals that we don't think are brief.

Speaker Change: Collective our appraisal services guys, that's an independent unit within our cabinet pushback and ask questions.

Speaker Change: If they're bad assumptions or misinformation in the appraisal slight pushback get that cleaned up.

George G. Gleason: I think the appraisals we're getting are good. Our belief is that all of the relevant factors are adequately and appropriately addressed in the various Moody models in our ACL calculation. We continue to maintain a pretty cautious, Distribution of Assumptions, our Moody's S-4 scenario, which is sort of the adverse downside economic scenario. I guess you could characterize that as a hard landing scenario.

Speaker Change: Get their price was lineup. So I have to I think be appraisals, we're getting are good.

Speaker Change: Our belief is that.

Speaker Change: All of the relevant factors are adequately and appropriately addressed in the various Moody's models and our ACL calculation.

Speaker Change: We continue to maintain a pretty cautious.

Speaker Change: Distribution of assumptions, our Moody's SaaS for scenario, which is sort of a <unk>.

Speaker Change: Adverse downside.

Speaker Change: Economic scenario I guess.

Speaker Change: Maybe characterize that as a hard landing scenario.

George G. Gleason: And Moody's S-6, which is the state inflation scenario, or the majority of our allocation of our distributions, the baseline is less than the combined effect of the S-4 and the S-6 scenario. So I think we've got an appropriately..., conservative scenario selection. And that scenario selection is predicated on the fact that there are just a lot of moving economic, political, and geopolitical variables that could impact our customers and credit losses. So we've taken a fairly cautious view of that just because of the high degree of uncertainty in the global economy.

And the Moody's at six which is a slight inflation scenario.

Speaker Change: The majority of our allocation of our distributions the baseline is less than the combined effect of the S. Four and the AG six scenarios. So.

Speaker Change: I think we've got a appropriately.

Speaker Change: Conservative scenario selection in that scenario selections predicated on back of there just a lot of moving economic political geopolitical variables that could impact our customers from credit losses. So we've taken a fairly cautious view of that just because of.

Speaker Change: The high degree of uncertainty in the global economy.

George G. Gleason: So I feel good about what we're doing. And as Tim mentioned, over the last seven quarters since the Fed started raising rates, our ACL has gone from $300 million to $537 million. We're at a $237 million increase in our ACL, which, you know, I think appropriately addresses the fact that we've got a 525 basis point increase in the Fed funds target rate and it seems likely to stay there for a while.

Speaker Change: I feel good about what we're doing.

As Tim mentioned over the last seven quarters since the fed started raising rates. Our ICL has gone from $300 million to $137 million, we were at $237 million increase in our ACL.

Speaker Change: Which you know.

Speaker Change: <unk> appropriately.

Speaker Change: Addresses the fact, we've got a 525 basis point increase in the fed funds target rate and it seems likely to stay there for a while.

Samuel Varga: Understandable. I appreciate all the coverage. Thank you.

Speaker Change: Understood I appreciate it on the country. Thank you.

George G. Gleason: That concludes the question and answer session. At this time, I would like to turn the call back to Chairman and CEO George Gleason for closing remarks.

Speaker Change: That concludes the question and answer session. At this time I would like to turn the call back to chairman and CEO, George Gleason for closing remarks.

Operator: Thank you so much for joining the call. We look forward to talking with you and giving you an update in about 90 days. Have a great quarter. Thank you.

George G. Gleason: Thank you so much for joining the call and we look forward to talking with you and giving you an update in about 90 days and have a great quarter. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

George G. Gleason: Okay.

[music].

Okay.

Okay.

George G. Gleason: [music].

George G. Gleason: Okay.

George G. Gleason: [music].