Q2 2024 Bank OZK Earnings Call

Operator: At the end of this 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 various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements. Joining me on the call to take your questions are George Gleason, Chairman and CEO, Brandon Hamblen, President, Tim Hicks, Chief Financial Officer, and Cindy Wolfe, Chief Operating Officer.

Jay Staley: 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 violence for more information on various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.

What are expectations estimates and outlook for the future.

Speaker Change: Please refer to our earnings release, management comments, and other public filings for more information on various factors and risks that may cause actual results or outcomes to vary from those projected in 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 Hamblon, President; Tim Hicks, Chief Financial Officer; and Cindy Wolfe, Chief Operating Officer. We will now open up the lines for your questions.

Speaker Change: 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.

Operator: We will now open up the lines for your questions. Let me now ask our operator, Carmen, to remind our listeners how to queue in for questions. Thank you. Yes. And as a reminder, that is star one one to get in the queue and wait for your name to be announced. To remove yourself, press star 11 again.

Operator: Let me now ask our operator, Carmen, to remind our listeners how to queue in for questions. Thank you, yes, and I very mind that that is, start one-one to get in the queue and wait for your name to be announced. To remove yourself, press start one-one again. One moment for our first question.

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

Carmen: Thank you. Yes. And as a reminder, that is star 11 to get in the queue and wait for your name to be announced. To remove yourself, press star 11 again. One moment for our first question.

Operator: One moment for our first question, and it comes from the line of Matt Olney with Stephens. Please proceed. Hey, thanks. Good morning, everybody.

Operator: Any comments from the line of Matt Olney with Stephen's, please proceed?

Speaker Change: And it comes from the line of Matt Olney with Stephens. Please proceed.

Matthew Olney: Hi, thank you for morning, everybody.

Matthew Covington Olney: Good morning, Matt. So I want to start off, I guess, on that San Diego Life Science Project and the additional capital that you disclosed in the management commentary. Any color on why the amount of the $87 million that was included? I mean, presumably, I guess, the new capital partners have some type of intrinsic value they're assuming in the project. Any color on how we arrived at $87 million? At our loans, all include reserve replenishment requirements that you know are subject to a calculation in our reasonable judgment, and that was simply a mathematical calculation based on our judgment per the loan document. So it was a regularly scheduled reserve replenishment that was required to come from additional equity, and there was no magic to it. It was just a mathematical calculation.

Matthew Olney: Morning, Matt. So, I want to start off, I guess, on that San Diego life science project and the additional capital that you did this close to the management commentary. Any color on why the amount of the $87 million that was included, presumably I guess the new capital partners have some type of intrinsic value there assuming the project. Any color on how we arrived at $87 million?

Matthew Covington Olney: Hey, thanks. Good morning, everybody.

George G. Gleason: Okay, thanks for that. And then, I guess, just kind of following up there, the $87 million, did it come in the form of additional collateral? Or did the new Mez partner take out the original equity sponsor? Just any more details behind the transaction that took place?

Speaker Change: Morning, Matt.

Matthew Covington Olney: So, I want to start off, I guess, on that San Diego Life Science Project and the additional capital that you disclosed in the management commentary.

Matthew Covington Olney: Any color on why the amount of the $87 million that was included, I mean, presumably, I guess the new capital partners have some type of intrinsic value they're assuming in the project. Any color on how we arrived at $87 million?

George Gleason: Matt, our loans all include reserve replenishment requirements that are subject to a calculation in our reasonable judgment. And that was simply a mathematical calculation based on our judgment per the loan document.

Speaker Change: Matt, our loans.

Speaker Change: All include reserve replenishment requirements that, you know, are subject to a calculation in our reasonable judgment.

Speaker Change: And that was simply a mathematical calculation based on our judgment.

George Gleason: So, it was a regularly scheduled reserve replenishment that was required to come from additional equity. And there was; there was no magic to it; it was just mathematical calculation.

Speaker Change: per the loan document. So it was a regularly scheduled reserve replenishment that was required to come from additional equity and there was no magic to it, it was just a mathematical calculation.

Matthew Covington Olney: Okay, thanks for that.

George Gleason: And then I guess, you know, just kind of following up there, the $87 million did it come in the form of additional collateral, or did the new meds partner take out the original equity sponsor? Do you see any more details behind the transaction that took place?

Speaker Change: Okay, thanks for that. And then I guess, you know, just kind of following up there, the $87 million, did it come in the form of additional collateral or did the new MES partner take out the original equity sponsor? Just any more details behind the transaction that took place?

George G. Gleason: of the original equity sponsors fully engaged in the transaction and pursuing it, the MES partner is fully engaged in the transaction and pursuing it, and came in the form of a cash by wire transfer as almost all capital contributions due into an account in the bank where they're held as a reserve for future interest and expenses on the deal. So it was a very standard deal. There was no drama or, uh, nothing unique about it. It was a If the analyst that wrote the research on the report on this had bothered to ask us any questions about it regarding, you know, what your capital structure is like, who's in it, are they going to continue to support it, and so forth, we could have explained that we have two very strong parties in this transaction.

George Gleason: The original equity sponsor was fully engaged in the transaction and pursuing it. The meds partner is fully engaged in the transaction and pursuing it came in the form of cash by wire transfer. It is almost all capital contributions due into an account in the bank where it's held as a reserve for future interest and expenses on the day.

Speaker Change: The original equity sponsor is fully engaged in the transaction and pursuing it. The MES partner is fully engaged in the transaction and pursuing it.

Speaker Change: came in the form of a cash-by-wire transfer as

Speaker Change: Almost all capital contributions due into an account in the bank where it's held as a reserve for future

George Gleason: So, I mean, first standard deal, there was no grammar or no, nothing unique about it; it was a standard replenishment of reserves.

Speaker Change: interest and expenses on the deal so it I mean very standard deal there was no drama or no nothing unique about it was a standard replenishment of reserves

George Gleason: If the analyst wrote the research on the report on this had bothered to ask us any questions about it, regarding, you know, what's your capital structure like. Who's in it, you know, are they going to continue to support it and so forth? We could have explained we have two very strong parties in this transaction. We've not a lot of business with the meds lender in this, who is the strongest of the two partners by far. Their capability to support the project financially, as well as executed if they had to, is clear cut. But the sponsor is fully engaged in this; they're proceeding with the transaction. The equity part of the meds partners are needed.

Speaker Change: If the analyst that wrote the research on the report on this had bothered to ask us any questions about it regarding, you know, what's your capital structure like.

Speaker Change: who's in it, you know, are they going to continue to support it, and so forth. We could have explained it. We have two very strong...

George G. Gleason: We've done a lot of business with the MES lender in this, who is the strongest of the two partners by far. Their capability to support the project financially as well as execute it if they had to is clear, but the sponsor is fully engaged in this. They're proceeding with the transaction, the equity part, and the MES partner is there if needed. But, you know, this thing should have never gotten the attention it deserved.

Speaker Change: parties in this transaction. We've done a lot of business with the Mazlender in this, who is

Speaker Change: the strongest of the two partners by far.

Speaker Change: Their capability to support the project financially, as well as execute it if they had to, is clear cut.

Speaker Change: But the sponsor is fully engaged in this. They're proceeding with the transaction. The equity part, the MAS partner is there if needed, but, you know, this thing should have never gotten the attention it deserved, let's say.

George Gleason: But, you know, this thing should have never gotten the attention it deserves, say. Great asset, five great buildings, and probably one of the best locations on the West Coast with a very strong, very capable sponsor capital partner group supporting it. And if it takes two years to waste, or three years to waste, or five years to waste, those guys will get the finish line on it. I'm confident that's certainly our view of it.

George G. Gleason: Great assets, uh five great buildings in probably one of the best locations on the west coast with a very strong very capable uh sponsor capital partner group supporting it and if it takes two years to lease or three years to lease or five years to lease those guys uh will get to the finish line on it i'm i'm confident that's certainly our view of it and uh you know if we had been asked questions about it i think we could have uh avoided all the drama and and unnecessary uh publicity about this project because it's an excellent asset and as we said in our management comments we've given full disclosure on it there we consider it a high quality asset and we don't expect to discuss it again. Okay, appreciate that and appreciate all the good disclosures on that on that project.

Speaker Change: Great asset.

Speaker Change: Five great buildings.

Speaker Change: and probably one of the best locations on the West Coast with a very strong, very capable

Speaker Change: sponsor, capital partner group supporting it.

Speaker Change: And if it takes two years to lease, or three years to lease, or five years to lease, those guys will get to the finish line on it. I'm confident, that's certainly our view of it.

George Gleason: And, you know, if we had been asked questions about it, I think we could have avoided all the drama and unnecessary publicity about this project because it's an excellent answer. And as we said in our management comments, we're given pull disclosure on the dire we consider the high quality asset.

Speaker Change: And, you know, if we had been asked questions about it, I think we could have avoided all the drama and unnecessary...

Speaker Change: publicity about this project because it's an excellent asset. And as we said in our management comments, we've given full disclosure on it there. We consider it a high-quality asset.

George Gleason: And we don't expect to discuss it again.

Speaker Change: And we don't expect to discuss it again.

Matthew Olney: Okay, appreciate that and appreciate all the good disclosures on that project.

George G. Gleason: I guess one of the questions that I'm getting from investors is just trying to understand the circumstances that would result in a construction loan being graded below pass rated. And not necessarily for any specific project, just more broadly, if the construction loan is still under its interest reserve period, but you know, the lease ups are behind schedule or something's behind the project, help us just appreciate the circumstances that would drive that construction loan to be below pass rated. Well, Matt, it's going to depend on the totality of circumstances.

Speaker Change: Okay, appreciate that and appreciate all the good disclosures on that project.

Matthew Olney: I guess one of the questions that I'm getting from investors are just trying to understand the circumstances that would result in a construction loan to be graded below pass rate. And not necessarily for any specific project, just more broadly, if the construction loan is still under its interestors or a period, but the lease ups are behind plan or something's behind plan the project. Help us just appreciate the circumstances that would drive that construction loan to be below pass rate.

Speaker Change: I guess one of the questions that I'm getting from investors are just trying to understand the circumstances.

Speaker Change: that would result in a construction loan to be graded below pass rated.

Speaker Change: And not necessarily for any specific project, just more broadly, if the construction loan is still under its interest reserve period,

Speaker Change: But, you know, the lease-ups are behind plan or something's behind plan, the project. Help us just appreciate the circumstances that would drive that construction loan to be below pass rated.

George Gleason: Well, Matt, it's kind of dependent on a totality of circumstances. Number one, we're always looking at the strength and quality of sponsorship and capital partners and their investment and their commitment to continue to support a project that may be maturing a little more slowly than was originally expected. So, sponsorship, quality of sponsorship, capabilities of sponsorship are certainly number one. And number two is just the long-term expected prognosis and outcome on that project. It's not particularly alarming to us that a project delivers without leasing. The question that really drives our evaluation of a project is, number one, do the sponsors have the will and capability to support a project till you have a successful outcome?

George G. Gleason: Number one, you know, we're always looking at the strength and quality of sponsorship and capital partners, and their investment, and their commitment to continue to support a project that may be maturing a little more slowly than was originally expected. So sponsorship, quality of sponsorship, and capabilities of sponsorship are certainly number one, and number two is just the long-term expected prognosis and outcome for that project. It's not particularly alarming to us that a project delivers without leasing.

Speaker Change: Well, Matt, it's going to depend on a totality of circumstances. Number one, you know, we're always looking at the strength and quality of sponsorship and capital partners.

Speaker Change: and their investment.

Speaker Change: and their commitment to continue to support a project that may be maturing a little more slowly than was originally expected. So sponsorship, quality of sponsorship, capabilities of sponsorship.

Speaker Change: are certainly number one, and number two is just the long-term expected prognosis and outcome on that on that project.

Speaker Change: It's not particularly alarming to us that a project delivers without leasing. The question that really drives our evaluation of a project is, number one,

George G. Gleason: The question that really drives our evaluation of a project is, number one, Do the sponsors have the will and the capability to support a project until you have a successful outcome? And, number two, is the project of the quality and nature that you're going to have a successful outcome, whether it's this year or next year, you know, three or four years down the road.

Speaker Change: Do the sponsors have the will and the capability to support a project until you have a successful outcome? And number two is the project of the quality and nature that you're going to have a successful outcome, whether it's this year or next year.

George Gleason: And number two is the project of the quality and nature that you're going to have a successful outcome whether it's this year, or next year, or three or four years down the road.

George G. Gleason: And if you've got sponsors who have the motivation and the capacity to carry them, and the project is going to ultimately have a successful outcome, then, you know, you certainly have a positive view of the project, and the San Diego project certainly fits that criteria. The motivation that drives our customers to support their projects is largely dependent upon the tremendous investments they have. You know, if you've got our average loan to cost in our portfolio, I think it's 51%, Jay. Is that where we are now?

George G. Gleason: And if you've got sponsors who have the motivation and the capacity to carry it, and the project is going to ultimately have a successful outcome, then you certainly have a positive view of the project, and the San Diego project certainly fits that criteria. You know, the motivation that drives our customers to support their project is largely dependent upon the tremendous investments they have in the projects. You know, if you've got our average loan cost on our portfolio, I think it's 51% J. Is that where we are now? And, you know, our average loan value is 42% to 43%.

Speaker Change: you know, three or four years down the road. And if you've got sponsors.

Speaker Change: who have the motivation and the capacity to carry it and the project is going to ultimately have a successful outcome.

Speaker Change: Then, you know, you certainly have a positive view of the project, and the San Diego project certainly fits that criteria. You know, the motivation that drives

Speaker Change: Our customers to support their project is largely dependent upon the tremendous investments they have in the projects.

Speaker Change: You know, if you've got our average loan cost on our portfolio, I think it's 51%, Jay, is that where we are now?

George G. Gleason: And, you know, our average loan to value is 42, 43%. Even with all the reappraisals in this cycle, that's still where we are on the weighted average loan to cost, loan to value basis. When you've got 50% of the cost of a project invested as equity, prep equity, or mass, you're subordinating members of the capital structure. You have a, uh...

Jay: And, you know, our average loan-to-value is 42, 43%. Even with all the reappraisals in this cycle, that's still where we are on a weighted average loan-to-cost, loan-to-value basis.

George Gleason: Even with all the re-appraisals in the cycle, that's still where we are on a weighted average loan cost loan value basis. When you've got 50% of the cost of a project invested is equity, prep equity or math as your subordinating members of the capital structure. You have the very nature of the cap stack. You have an inherent motivation to defend that investment. For example, you know, our loan on the San Diego projects, a half billion dollars. The capital partners in that equity and math have over a billion dollars committed to that project. They are not going to walk away from a billion-dollar investment.

Jay: When you've got 50% of the cost of a project invested as equity, PREP, equity, or MAS, you're subordinating members of the capital structure.

George G. Gleason: The very nature of the cap stack, you have an inherent motivation to defend that investment. For example, you know, our loan on the San Diego project is a half billion dollars. The capital partners in that, Equity and Mazz, have over a billion dollars committed to that project. They are not going to walk away from a billion-dollar investment. So the second part of the test is, is the project capable of having a successful execution?

Jay: you have a

Jay: the very nature of the capstack.

Jay: You have an inherent

Jay: motivation to defend that investment.

Jay: For example, you know, our loan on the San Diego project's a half-billion dollars. The capital partners in that, Equity and Mazz, have over a billion dollars committed to that project. They are not going to...

George Gleason: Valley. So the second part of the test is, is the project capable of having a successful execution. Now there's a lot of noise in the CRE world today about projects that are just totally dead. And those are projects that are principally older projects that are, you know, in bad locations, have 50 or 60 or 30 or 40-year-old designs and are not built to current standards. So the combination of our low leverage and the fact that we've got ground-up new construction that is built to modern standards, modern needs, modern expectations from tenant buyers says that our sponsors have won a huge incentive because of their big investment.

Jay: walk away from a billion-dollar investment lightly.

Speaker Change: So, the second part of the test is...

Jay: is the project capable of having a successful execution.

George G. Gleason: Now there's a lot of noise in the CRE world today about projects that are just totally dead. And those are projects that are principally older projects that are in bad locations, have 50 or 60 or 30 or 40 year old designs, and are not built to current standards. So the combination of our low leverage and the fact that we've got ground-up new construction that is built to modern standards, modern needs, and modern expectations from tenants and buyers says that our sponsors have won a huge incentive because of their big investment.

Jay: Now there's a lot of noise in the CRE world today about projects that are just totally dead.

Jay: And those are projects that are principally older projects that are, you know, in bad locations, have 50 or 60 or 30 or 40-year-old designs and are not built to current standards.

Jay: So, the combination of our low leverage and the fact that we've got ground-up new

Jay: construction that is built to modern standards, modern needs, modern expectations from tenant and buyers so that our sponsors have won a huge incentive because of their big investment.

George G. Gleason: And two, I have motivation to continue to support it because our projects will ultimately lease or sell and be successful. The other thing I would tell you about that is, you know, we talk a lot, and we've said this since the Fed started raising rates, that we expected the vast majority of our sponsors would continue to support their projects until economic conditions normalized or property performance reached a stabilized state. And that's certainly true.

George Gleason: And too, I'm motivation to continue to support it because our projects will ultimately lease or sell and be successful. The other thing I would tell you about that is, you know, we talk a lot and we've said this since the Fed started raising rates that we expected the vast majority of our sponsors would continue to support their projects until economic conditions normalized or property performance reached a stabilized state. And that's certainly true. What I would point out to you while we have a handful of substandard loans and a handful of special mention loans in the RISG portfolio, all of those loans are current, and the sponsors remain engaged in working towards solutions on those projects.

Jay: And two, I have motivation to continue to support it because our projects will ultimately lease or sell and be successful.

Speaker Change: The other thing I would tell you about that is, you know, we talk a lot and we've said this since the Fed started raising rates.

Speaker Change: that we expected the vast majority of our sponsors would continue to support their projects until economic conditions normalized or property performance reached a stabilized state.

George G. Gleason: What I would point out to you is that while we have a handful of substandard loans and a handful of special mention loans in the RESG portfolio, all of those loans are current, and the sponsors remain engaged in working towards solutions on those projects, and the only two instances we've had where sponsors have given up on a project are the two pieces of OREA we have. So every one of our substandard credits is current and performing in the sense that it's not past due.

Jay: And that's certainly true. What I would point out to you, while we have a handful of substandard loans and a handful of special mention loans in the RESG portfolio,

Jay: all of those loans.

Jay: are current, and the sponsors remain engaged in working towards solutions on those projects.

George Gleason: And the only two instances we've had where sponsors have given up on a project are the two pieces of Oreo we have. So every one of our substandard credits is current and performing in the sense that it's not past due. Now we put one of them on non-cruel because we mentioned the sponsors about their commitment on that small project to continue to support it. So that we consider the most challenged project we've got. But even with that, the sponsors have made their monthly interest payment out of their pocket this month, and they continue to work to try to craft a path forward that will salvage some of their investment and keep our long car.

Jay: And the only two instances we've had where sponsors have given up on a project are the two pieces of OREA we have.

Jay: So, every one of our substandard credits is current, and

George G. Gleason: Now we put one of them on non-accrual because we wrote it down, and what caused us to do that was some noise from the sponsors about their commitment to that small project to continue to support it.

Jay: performing in the sense that it's not past due. Now, we put one of them on non-accrual because we wrote it down. And what...

Jay: caused us to do that is some noise from the sponsors about their commitment on that small project to continue to support it so

George G. Gleason: So that we consider it the most challenging project we've got, but even with that, the sponsors have made their monthly interest payment out of their pocket this month, and they continue to work to try to craft a path forward that will salvage some of their investment to keep our loan card. We wrote it down, we classified it because we take a pretty conservative, proactive view on these things, but it's still a current loan. Okay, thanks to all the color. I'll be back in the queue.

Jay: That, we consider the most challenged project we've got, but even with that,

Jay: The sponsors have made their monthly interest payment out of their pocket.

Jay: this month, and they continue to work.

Speaker Change: to try to craft a path forward that will salvage some of their investment and keep our loan current. We wrote it down. We classified it because we take a pretty conservative, proactive view on these things. But it's still a current loan.

George Gleason: We wrote it down. We classified it because we take a pretty conservative, proactive view on these things, but it's still a current loan. Okay.

Matthew Covington Olney: Thanks for all the color. All back.

Operator: Thank you. All right.

Operator: All right. Thank you, Matt. Thank you. One moment for our next question. And it's from Catherine Mealor with KBW. Please proceed. Hi, thanks, good morning. Hi, good morning, Catherine.

Operator: Thank you, Matt. Thank you.

Speaker Change: Okay, thanks to all the color, I'll be back in the queue.

Catherine Mealor: One moment for our next question. And is from Catherine Miller with KBW.

Speaker Change: All right. Thank you, Matt.

Speaker Change: Thank you. One moment for our next question.

Catherine Mealor: Please proceed. Hi, thanks. Good morning.

Speaker Change: And it's from Catherine Mealor with KBW. Please proceed.

Catherine Mealor: Hi. Good morning, Catherine. Let's start on paydowns, which were accelerated this quarter.

Catherine Fitzhugh Summerson Mealor: Hi. Thanks. Good morning.

Catherine Fitzhugh Summerson Mealor: I want to start with paydowns, which were accelerated this quarter. I know that you mentioned there were two larger loans that paid down, but just any thoughts on what you think that will look like for the back half of the year? Are there any larger credits that you foresee coming in? Or was this kind of large level an anomaly?

Speaker Change: Hi. Good morning, Catherine.

Catherine Mealor: I know that you mentioned there were two larger loans that paid down, but just any thoughts on what you think that will look like for the back half of the year. Are there any larger credits that you foresee come in, or was this kind of large level and anomaly will kind of get back to you in more like the $800 to $1 billion kind of pace that we've seen recently in the back half of the year.

Catherine Fitzhugh Summerson Mealor: I want to start on paydowns, which were accelerated this quarter. I know that you mentioned there were two larger loans that paid down, but just any thoughts on...

Speaker Change: What do you think that will look like for the back half of the year? Are there any larger credits that you foresee come in? Or with this kind of large level and anomaly, we'll kind of get back to more like the $800 to $1 billion kind of pace that we've seen recently in the back half of the year.

George G. Gleason: We'll kind of get back to more like the 800 to a billion dollar kind of pace that we've seen recently in the back half of the year. Catherine, we were happy this quarter to have included in all of our prior quarterly discussions about paydowns the comments that paydowns may vary significantly from quarter to quarter and may have a significant impact in one quarter or another. So, true to that form, you know, you've seen a wide dispersion in paydowns in the first two quarters of this year. $790 million in Q1, $1,840,000,000 in Q2.

Catherine Fitzhugh Summerson Mealor: Catherine Mealor, we were happy this quarter to have included in all of our friars' quarterly discussions about playdowns, the comments that playdowns may very significantly from quarter to quarter, and I have a significant impact in one quarter or another. So, true to that form, you know, you've seen I wide dispersions in playdowns and the first two quarters of this year: 790 million in Q1, a billion, 840 million in Q2. We have telegraphed for some time that we expected a higher level of RISG repayments in the future, and that future showed its first signs of manifesting in the quarter just ended.

Catherine: Catherine, we were happy this quarter to have included in all of our prior quarterly discussions about paydowns the comments that paydowns may vary significantly from quarter to quarter and may have a significant impact in.

Catherine: and one quarter or another.

Catherine: So, true to that form, you know, you've seen a wide dispersion in paydowns in the first two quarters of this year, $790 million in Q1, $1,840 million in Q2.

George G. Gleason: We have telegraphed for some time that we expected a higher level of RESG repayment in the future, and that future showed its first signs of manifesting in the quarter just ended. I think when we'll really see, you know, a greater acceleration of paydowns quarter to quarter will be when the Fed starts reducing rates and probably a couple of cuts into that initiative. You'll really begin to see some projects move. My best guess And I'm going to lean heavily on our long-standing comment that pay repayments can vary significantly from quarter to quarter.

Catherine: We have telegraphed for some time that we expected a higher level of RESG repayments.

Catherine: and the future, and that future...

Catherine: showed its first signs of manifesting in the quarter just ended. I think when we'll really see, you know, a greater acceleration of paydowns quarter to quarter will be when the Fed starts reducing rates.

Catherine Mealor: I think when we really see, you know, a greater acceleration of playdowns quarter quarter will be when the Fed starts reducing rates and probably a couple of cuts into that.

Catherine Mealor: A niche to be a really began to see some some projects move my best gas, and I'm going to lean heavily on our longstanding comment that. How you repayments can very significantly from quarter quarter, but my best guess is that Q1 and Q2 this year sort of frame. A range within which our Q3 and Q4 repayments will fall.

Catherine: and probably a couple of cuts into that initiative you'll really begin to see some some projects move. My best guess

Catherine: And I'm going to lean heavily on our long-standing comment that repayments can vary significantly from quarter to quarter, but my best guess is that Q1 and Q2 of this year sort of frame

George G. Gleason: But my best guess is that Q1 and Q2 of this year sort of frame a range within which our Q3 and Q4 repayments will fall. I'd be very surprised if we had over 1.84 billion in repayments in Q3 or Q4 because, you know, I don't think the Fed's going to move rates until September or December, and I think really getting more big quarters of paydowns is probably going to be dependent upon getting some rate movement. So, you know, I think Q1 was low, Q2 was high, and Q3 and Q4 probably fall somewhere in the middle of those, which is our current best guess.

Catherine: a range within which our Q3 and Q4 repayments will fall. I'd be very surprised if we had over 1.8 for

Catherine Mealor: I'd be very surprised if we had over 1.84 billion in repayments in Q3 or Q4 because, you know, I don't think the Fed's going to move rates until September, December, and you know, I think really getting. More big quarters of playdowns is probably going to be dependent upon getting some rate movement. So, you know, I think I think Q1 was low, Q2 was high, Q3 and Q4 probably fall somewhere in the in the middle of those, says, is our current best gas.

Catherine: Billion in repayments in Q3 or Q4 because, you know, I don't think the Fed's going to move rates.

Catherine: until September or December , and

Catherine: More big quarters of paydowns is probably going to be dependent upon getting some rate movement. So, you know, I think Q1 was low, Q2 was high, Q3 and Q4 probably fall somewhere in the middle of those is our current best guess.

George G. Gleason: That makes sense. And then as we think about paydowns accelerating next year and trying to refill that bucket, I know there's a lot of momentum in your CIB business, and that's now $2 billion or about 7% of loans. Can you just talk a little bit about your outlook for that business? You know, what size loans are you typically doing, or what you expect to do?

Brandon Thomas King: That makes sense, and then as we think about. Hey, down's accelerating next year and trying to refill that bucket. I know there's a lot of momentum in your CID business, and that's now. Two billion, or about seven percent of loans. Can you just talk a little bit about your outlook for that.

Speaker Change: That makes sense. And then as we think about...

Speaker Change: Paydown's accelerating next year and trying to refill that bucket. I know there's a lot of momentum in your CIB business and that's now

Speaker Change: $2 billion or about 7% of loans. Can you just talk a little bit about your outlook for that?

Brandon Hamlin: Business, you know, what size loans are you typically doing or you expect to do, and maybe how fast would you expect this business to grow over the next couple of years to refill. You know, potentially get the client and RSG balances.

Speaker Change: business, you know, what size loans are you typically doing or you expect to do and maybe how fast would you expect this business to grow over the next couple years to refill, you know, potentially a decline in RSG balances.

Brandon Hamlin: Yeah, I'm going to ask Brandon Hamlin, who's on the line with us, to comment on CID and the importance of that handoff for continuing growth and our balance sheet. You're here. So, Brandon. Yeah, you bet, George Catherine. Thanks for the question. Great question, a topic that you have heard us talk more about. And as George indicated, there's a great sort of transition in front of us. You know, as REC repayments start to come in and this is something we've been working on for a while, and the latest. Higher and expansion of the team that we made are really just the latest evolution of the strategy that we've been working on for quite some time.

George G. Gleason: And maybe how fast would you expect this business to grow over the next couple years to refill, you know, potentially a decline in the RSG balance? Yeah, I'm gonna ask Brandon Hamblen, who's on the line with us to comment on CIB and the importance of that handoff for continued growth and our balance sheet in the future. So, Brandon.

Brandon Thomas King: Yeah, I'm going to ask Brandon Hamblen, who's on the line with us, to comment on CID and the importance of that handoff for continued growth in our balance sheet in the future years.

Brandon Thomas King: Yeah, you bet, George. Catherine, thanks for the question. Great question, a topic that we've heard us talk more about, and we'll see us talk more about in the future. And as George indicated, there's a great sort of transition in front of us, you know, as RESG repayments start to come in. And this is something we've been working on for a while.

Brandon Thomas King: Yeah, you bet, George. Catherine, thanks for the question. Great question. A topic that you have heard us talk more about. We'll see us talk more about in the future.

Brandon Thomas King: As George indicated, there's a great sort of transition in front of us.

Speaker Change: you know, as RESG repayments start to come in.

Speaker Change: And this is something we've been working on for a while, and the latest hires and expansion of the team that we've made are really just the latest evolution of a strategy that we've been working on for quite some time.

Brandon Thomas King: And the latest hires and expansion of the team that we made are really just the latest evolution of a strategy that we've been working on for quite some time. The CIB team, as we've said, is made up of several different sort of sub-business lines. And three of those were in place, ABLG and Equipment Finance, the most recent being the last couple years. And those teams have really started to hit their stride.

Brandon Hamlin: The CID team, as we've said, is made up of several different sort of sub-business lines, and three of those. We're in place a BLG and equipment finance most recent as the last couple years and those teams have really started to hit their stride. But we've also added some new team members. We've had some phenomenal opportunities to have some folks join our team that are really incredibly talented, incredibly connected. Great, great performance already. You know, in their respective careers, and they've got a credit mindset that's really well suited to our priorities, which, as you know, we're always quality and in yield ahead of growth. But they have, as you can see, demonstrated the ability to achieve all free and.

Speaker Change: The CIB team, as we've said, is made up of several different sort of sub-

Speaker Change: business lines, and three of those were in place, ABLG and Equipment Finance, the most recent as the last couple years.

Speaker Change: And those teams have really started to hit their stride. But we've also added some new team members. We've had some phenomenal opportunities to...

Brandon Thomas King: But we've also added some new team members. We've had some phenomenal opportunities to have some folks join our team that are really incredibly talented, incredibly connected, and have shown great performance already, you know, in their respective careers. And they've got a credit mindset that's really well suited to our priorities, which, as you know, are always quality and yield ahead of growth. But they have, as you can see, demonstrated the ability to achieve

Speaker Change: to have some folks join our team that are really incredibly talented, incredibly connected.

Speaker Change: great, great

Speaker Change: performance already, you know, in their respective careers. And they've got a credit mindset that's really well suited to our priorities, which, as you know, are always quality and yield ahead of growth. But they have, as you can see, demonstrated the ability to achieve.

Brandon Thomas King: And as it relates to sort of the size of the loans, you know, it's a lot like RESG in that we have a pretty good spread in terms of the size of the loans. The loans aren't as big as some of the RESG loans, but it's not uncommon to sort of live in that, call it, you know, $30 to $100, $150 million range. We'll have some that will be bigger.

Brandon Thomas King: As it relates to sort of the size of credits, you know, it's a lot like. RASG and that we have a pretty good spread in terms of the size of the credits, and the villains aren't as big as some of the RASG loans, but it's not uncommon to sort of live in that, call it, you know, 30 to 150 million dollar range; we'll have some that'll be bigger. But, but they're, you know, they're solid solid credits, highly monitored credits that we expect to have very good credit quality on, and as we said. So our use you noted 7% of the funded portfolio, that's 2.1 billion.

Speaker Change: all three, and...

Speaker Change: As it relates to sort of the size of credits, you know, it's a lot like RESG in that we have a pretty good

Speaker Change: spread in terms of the size of the credits. The loans aren't as big as some of the RESG loans, but it's not uncommon.

Speaker Change: to sort of live in that, call it, you know, 30 to 100, 150 million dollar range. We'll have some that'll be bigger, but, but they're, you know, they're solid, solid credits, highly monitored credits.

Brandon Thomas King: But they're, you know, solid, solid credits, highly monitored credits that we expect to have very good credit quality on. And as we said, you noted 7% of the funded portfolio; that's $2.1 billion. They actually originated over $500 million in the quarter just ended. So, as we see the repayments likely accelerate, as George said, in the near future, we believe we've orchestrated what should be a pretty smooth handoff, sort of passing of the loan growth baton, if you will, from RESG to CIB in a very beneficial manner. I think we got a great shot at timing that in an almost optimal manner.

Speaker Change: that we expect to have very good credit quality on and

Speaker Change: As you noted, 7% of the funded portfolio, that's $2.1 billion, they actually originated over $500 million in the quarter just ended.

Brandon Hamlin: They actually originated over 500 million in the quarter just ended. So we, as we see, the repayments likely accelerate, as George said, in the near future. We believe we've orchestrated, which should be a pretty smooth handoff sort of passing of the long growth, the time, if you will. For Marius G to see, I be in a very beneficial manner. I think we got a great shot at timing that in a almost optimal manner. So we're we're extremely excited about the opportunity there to grow grow in the verse of our book.

Speaker Change: We, as we see the repayments...

Speaker Change: likely accelerate as George said in the near future. We believe we've orchestrated what should be a pretty smooth handoff sort of passing of the lung growth baton if you will.

George G. Gleason: from RESG to CIB in a very beneficial manner. I think we got a great shot at timing that in an almost optimal manner. So we're extremely excited about the opportunity there to grow, grow, and diversify our book.

Operator: So we're extremely excited about the opportunity there to grow, grow, and diversify our book. Great, thank you. Please take one moment for our next question, which is from Manan Gosalia with Morgan Stanley. Please proceed. Hi, good morning.

Operator: Thank you. One moment for our next question.

Speaker Change: Great, thank you.

Manan Gosalia: And is Fran Manan Gosalia with Morgan Staley?

Speaker Change: Thank you one moment for our next question.

Manan Gosalia: Please proceed. Hi, good morning.

Speaker Change: and is from Manan Gosalia with Morgan Stanley . Please proceed.

Manan Gosalia: Good morning, Manan. You noted that sponsors have a lot of motivation to support the properties, given how much they've invested at the bottom of the gap stack. You know, I'm assuming that if the problem is taking time to lease, it also stays on your books for longer.

Manan Gosalia: Morning, Manan. You noted that sponsors have a lot of motivation to support the properties given how much they've invested at the bottom of the cap stack. I'm assuming that if the property is taking time to lease, it also stays on your books for longer. I guess my question is, what does a borrower do in the meantime? Is it an interest-only loan until it repays?

Manan Gosalia: Hi, good morning.

Manan Gosalia: Morning, Manan.

Manan Gosalia: So you noted that sponsors have a lot of motivation to support the properties, given how much they've invested at the bottom of the cap stack. I'm assuming that if the property is taking time to lease, it also stays on.

Manan Gosalia: I guess my question is, you know, what does a borough do in the meantime? Is it an interest-only loan under the repays? Do they bring in more reserves?

Manan Gosalia: Your books for longer So I guess my question is, you know, what does a borrower do in the meantime, you know Is it an interest-only loan until it repays? Do they bring in more reserves? You know, can you explain what risk mitigants you bake in when Loans are extended and they essentially stay on the books for longer

George G. Gleason: Do they bring in more reserves? Can you explain what risk mitigants you bake in when loans are extended, and they essentially stay on the books for longer? Yes, I'd be happy to do so, Manan.

Manan Gosalia: Can you explain what risk mitigates you back in when loans are expanded and they essentially stay on the books for longer?

George Gleason: Yes, happy to do so, Manan. You know, what I would tell you is our portfolio management to date through this cycle has not resulted in any concessions by us on any of those loans that would constitute one of those loans. Having been a TDR troubled at restructuring, if we were in the, if we were in the old accounting world where there were TDRs. So we're sensitive to make sure that we're not becoming equity-like in our handling of the transaction if it takes time to work these things out. So, you know, we continue to maintain market rates on those current rates on those. In many cases, we're improving the terms; the sponsors typically have to pay standard or upsized fees to extend those loans.

George G. Gleason: You know, what I would tell you is... Our portfolio management to date through this cycle has not resulted in any concessions by us on any of those loans that would constitute one of those loans, having been a TDR, troubled debt restructuring, if we were in the old accounting world where there were TDRs. We're sensitive to make sure that we're not becoming equity-like in our handling of the transaction if it takes time to work these things out.

Manan Gosalia: Yes, happy to do so, Manan. You know, what I would tell you is,

Manan Gosalia: our portfolio management to date.

Manan Gosalia: through this cycle.

Manan Gosalia: has not resulted in any...

Manan Gosalia: concessions by us on any of those loans that would

Manan Gosalia: constitute one of those loans.

Manan Gosalia: Having been a TDR, Troubled Area Restructuring, if we were in the...

Manan Gosalia: if we were in the old.

Manan Gosalia: accounting world where there were TDRs so

Manan Gosalia: We're sensitive to make sure that

Manan Gosalia: We're not becoming equity-like in our handling of the transaction if it takes time to work these things out. So we continue to maintain.

George G. Gleason: We continue to maintain market rates on those, current rates on those. In many cases, we're improving the terms. The sponsors typically have to pay standard or upsized fees to extend those loans, and we require replenishment of reserves as we deem appropriate, and in many cases, we are getting principal paydowns on those loans. So equity is equity. Equity has equity responsibilities. We're the senior secured loan. We don't have equity responsibilities.

George G. Gleason: And we require replenishment of reserves as we name appropriate. And in many cases, are getting principal paydowns on those loans. So equity is equity; equity has equity responsibilities. We're the senior secured loan. We don't have equity responsibilities. So the equity has to do the equity lifting on these things. But, as I said, you know, where needed, our sponsors have done that, with the exception of the two sponsorship groups that we have those Oreo properties in there. So yes, loans may stay on the books longer, but those loans are structured in a way that we feel good about them staying on the books long, making substantial profits on those.

Manan Gosalia: replenishment of reserves, as we deem appropriate.

Manan Gosalia: and, in many cases, are getting...

Manan Gosalia: principal paydowns on those loans. So, equity is equity. Equity has equity responsibilities. We're the senior secured loan. We don't have equity responsibilities.

George G. Gleason: So the equity has to do the equity lifting on these things. But as I said, you know, where needed, our sponsors have done that, with the exception of the two sponsorship groups that we have those OREO properties in there. So yes, loans may stay on the books longer, but those loans are structured in a way that we feel good about them staying on the books longer in the making. I'll give you a good example.

Manan Gosalia: So the equity has to do the equity lifting on these things, but as I said

Manan Gosalia: You know, where needed, our sponsors have...

Manan Gosalia: We've done that with the exception of the two sponsorship groups that we have those OYO properties.

Manan Gosalia: So, yes, loans may stay on the books longer, but those loans are structured in a way that we feel good about them staying on the books longer than making them.

George Gleason: And as long as the sponsors are doing the right thing on those credits, we're happy to have those loans on the books.

Manan Gosalia: substantial profits on those. And as long as the sponsors are doing the right thing on those credits, we're happy to have those loans on the book.

George Gleason: You know, I'll give you a good example. Our our longest standing classified asset in the RST portfolio is the project out the development out there near like time that we had some nice progress on that in the last quarter. with a sponsor selling the club amenities that the development project had reached the point of maturation that it was time and the opportunity was there to sell those club amenities that resulted in an 11.1 million dollar paydown in our loan. I believe, and I haven't looked at this in probably since the beginning of the year, but I believe that over the life of that loan, our sponsors have paid us 30 something million dollars in interest and fees on that loan, which is roughly about the same as our 32.3 million dollar funded balance.

George G. Gleason: Our longest-standing, The only classified asset in the RESG portfolio is the project out, the development out near Lake Tahoe. We had some nice progress on that in the last quarter, with a sponsor selling the club amenities. That development project had reached the point of maturation where it was time, and the opportunity was there to sell those club amenities. It resulted in an $11.1 million pay-down on our loans. I believe, and I haven't looked at this in a while, probably since the beginning of the year.

Manan Gosalia: You know, I'll give you a good example, our longest standing

Manan Gosalia: classified asset in the RESG portfolio is the project out, the development out, near Lake Tahoe. We had some nice progress on that in the last quarter.

Manan Gosalia: with a sponsor selling the club amenities that development project had reached the point that of maturation that it was time and the opportunity was there to sell those club amenities it resulted in

Manan Gosalia: an $11.1 million pay down in our loan.

George G. Gleason: But I believe that over the life of that loan, our sponsors have paid us 30 million dollars in interest and fees on that loan, which is roughly about the same as our 32.3 million dollar funded balance. So while we would prefer to not have a classified loan on the books long-term, if the sponsor is doing the right thing and working the project and paying the interest, paying the fees, and performing on the loan, we're going to do the right thing and work with the sponsor.

Speaker Change: I believe, and I haven't looked at this in a...

Speaker Change: probably since the beginning of the year but I believe that over the life of that loan our sponsors have paid us thirty something million dollars in interest and fees on that loan which is roughly about the same as our thirty two point three million dollar funded balance

George Gleason: So while we would prefer to not have a classified loan on the books long term, if the sponsor is doing the right thing and working project and paying the interest and paying the fees and performing on the loan, we're going to do the right. That thing and work with the sponsor, you know, again, we would prefer to not have a classified asset on the books for a long time, but our principles of do the right thing always mean that we got to do the right thing for our sponsor. And the sponsor has got a project that's got challenges; they're rising up and doing the equity responsibilities to meet those challenges.

Speaker Change: So while we would prefer to not have a classified loan on the books long term if the sponsor is doing the right thing

Speaker Change: and working the project.

Speaker Change: Paying the interest and paying the fees and...

Speaker Change: and performing on the line, we're going to do the right thing and work with the sponsor. You know, again, we would prefer to not have a classified asset on the books for a long time.

George G. Gleason: Again, we would prefer to not have a classified asset on the books for a long time. But our principles of doing the right thing always mean that we've got to do the right thing for our sponsor, and if the sponsor's got a project..., and that's profitable for us to do it, even if we prefer not to have the classified asset program. That's great, Kala.

Speaker Change: But our principles of do the right thing always mean that we've got to do the right thing for our sponsor, and if the sponsor's got a project that's

Speaker Change: We've got challenges.

George G. Gleason: Then we've got to be fair and reasonable and work with the sponsor on our originally great terms to get that project to a successful conclusion. We're going to do the senior lender thing; they got to do the equity responsibilities, but we got to be fair and reasonable with them, and that's profitable for us to do it even if we've heard or not have the classified asset profile.

Speaker Change: They're rising up and doing the equity.

Speaker Change: responsibilities to meet those challenges.

Speaker Change: then we've got to be fair and reasonable and work for the sponsor on our...

Speaker Change: originally agreed terms to

Speaker Change: Get that project to a successful conclusion. We're going to do the senior lender thing. They've got to do the equity responsibilities, but we've got to be fair and reasonable with them. And that's profitable for us to do it, even if we prefer to not have the Classified Asset Program.

Manan Gosalia: Thank you. Maybe as a follow-up on NII, you notice the proportion of NII coming from interest reserves has been rising slightly. Can you talk a little bit more about that dynamic? Is that indicative of more stress in general in the CRE market, or is it just a function of loans just staying on the books for a longer time while rates are higher? Can you just walk us through how that works? It is not a function of any stress at all whatsoever.

Manan Gosalia: That's great cause, thank you.

Manan Gosalia: Maybe as a follow-up on NII.

Kala: That's great, Kala. Thank you. Maybe as a follow-up on NII, you know, notice the proportion of NII coming from interest reserves has been taking up slightly. Can you talk a little bit more about that dynamic? You know, is that indicative of more stress in general in the CRE market, or is it just a function of loans just staying on the books for a longer time while rates are higher? Can you just walk us through how that works? Sure.

Manan Gosalia: Notice the proportion of NII coming from interest reserves has been taking up slightly. Can you talk a little bit more about that dynamic? Is that indicative of more stress in general in the CRE market, or is it just a function of loan just staying on the books for longer time while rates are higher? Can you just walk us through how that works? It is not a function of any stress at all whatsoever.

Speaker Change: It is not a function of any stress at all whatsoever. Money coming from interest reserves

George Gleason: Money coming from interest reserves sounds like, oh my gosh, you're burning down your reserves, but here's the deal. When you put together a loan, you have a capital stack on that loan and a sources and uses funds on that loan from day one. So interest over the period of construction, the life of the construction of the loan is built into that. You've got your land cost, you've got your hard construction cost, you've got your closing cost and fees, your tenant improvement and leasing commissions, your interest reserves, your tax reserves, all the costs that go into the cap stack.

George G. Gleason: Money coming from interest rates sounds like, oh, my gosh, you know, you're burning down your reserve. But here's the deal. When you put together a loan, Manan, you know you have a capital stack on that loan and sources and uses of funds on that loan from day one. So interest over the period of construction, the life of the construction of the loan is built into that. You know, you've got your land costs, you've got your hard construction costs, you've got your closing costs and fees, your tenant improvement and leasing commissions, your interest reserve, your tax reserve, your, you know, all the costs that go into the cap stack. We want the sponsors to put all of their equity in before we put ours in.

George G. Gleason: So if we say to the sponsor, okay, you're going to fund 50% of the cost of this $200 million project; we want all your $100 million to come in first, well, there's no interest there. So all the sponsor's money is gonna come in for the land and the architect's fees and the closing costs and the title policy and the initial construction. And then we start funding the last $100 million of the loan. Well, that's gonna complete construction, but that's when all of your interest is going to occur.

Speaker Change: Sounds like, oh my gosh, you know, you're burning down your reserve. But here's the deal. When you put together a loan, Manan,

Manon: You know, you have a capital stack on that loan and the sources and uses.

Manon: funds on that loan from Taiwan.

Manon: So, interest over the period of construction, the life of the construction of the loan is built into that. You know, you've got your land costs, you've got...

Manon: your hard construction costs, you've got your closing costs and fees, your tenant improvement and leasing commissions, your interest reserve, your tax reserve, your, you know, all the costs that go into the cap stack.

George Gleason: We want the sponsors to put all of their equity in before we put in. So if we say to the sponsor, okay, you're going to fund 50% of the cost of this $200 million project. We want all your $100 million to come in first. Well, there's no interest. of the beginning. So all the sponsors' money is going to come in for the land and the architects' fees and the closing cost and the title policy and the beginning initial construction. And then we start funding the last hundred million dollars of the loan. Well, that's going to complete construction, but that's when all of your interest is going to occur.

Manon: We want the sponsors.

Manon: to put all of their equity in before we put in. So if we say to the sponsor,

Manon: Okay, you're going to fund 50% of the cost of this $200 million project. We want all your $100 million to come in first.

Speaker Change: Well, there's no interest at the beginning.

Speaker Change: journey.

Speaker Change: So all the sponsors money is going to come in for the land.

Speaker Change: and the architect's fees, and the closing cost, and the title policy, and the beginning initial construction. And then we start funding the last $100 million.

Speaker Change: of the Lamb.

George Gleason: So all of the interest on these loans is typically in our budget, not because we're subsidizing the project by carrying the interest, but we made the sponsor put in all of their equity up front. Now, we could be really stupid and not structure the loan in an intelligent manner and say, okay, sponsor, you put in 85 million if you're a hundred up front. And then, when it comes time to pay the interest rights checks for the other 15 million, that's the interest. But then what if the sponsor doesn't write the checks, or what if he doesn't have the 15 million.

George G. Gleason: So all of the interest on these loans is typically in our budget, not because we're subsidizing the project by carrying the interest, but we made the sponsor put in all of their equity up front. Now, we could be really spooked and not structure the loan in an intelligent manner and say, okay, sponsor, you put in 85 million of your 100 upfront. And then when it comes time to pay the interest right checks for the other 15 million, that's the interest, but then what if the sponsor doesn't write the checks or what if he doesn't have the 15 million?

Speaker Change: Well, that's kind of complete construction, but that's when all of your interest is going to occur. So all of the interest on these loans is typically in our budget, not because we're subsidizing the project by carrying the interest, but we made the sponsor.

Speaker Change: put in all of their equity up front. Now we could be really stupid.

Speaker Change: and not structure the loan in an intelligent manner and say okay sponsor you put in 85 million of your hundred up front and then when it comes time to pay the interest right checks for the other 15 million that's the interest.

George G. Gleason: So we get all the sponsor money up front because that's a smart say point to do it. And that means all the interest trees are of is in our loan. So, as all those loans, that big record volume of originations we have in 2022 funds up, more interest is being funded from interest trees than before. It doesn't mean anything about weakness in those credits. It just means that we're smart in the way we structure these loans. We make sure we've got the equity or the equity in first so that there's no doubt about the equity coming in later.

George G. Gleason: So we get all the sponsor money up front because that's a smart, safe way to do it, and that means all the interest reserve is in our loan. So as all those loans, that big record volume of originations we have in 2022 fund more interest is being funded from interest reserves than before. It doesn't mean anything about weakness in those credits.

Speaker Change: But then, what if the sponsor doesn't write the checks, or what if he doesn't have the $15 million?

Speaker Change: So we get all the sponsor money up front because that's the smart, safe way to do it.

Speaker Change: And that means all the interest reserve is in our loan. So it's all those loans, that big record volume of originations we have.

Speaker Change: in 2022.

Speaker Change: Thumbs up!

Speaker Change: More Antrist.

Speaker Change: is being funded from interest reserves than before.

George G. Gleason: It just means that we're smart in the way we structure these loans. We make sure we've got the equity or the equity in first so that there's no doubt about the equity coming in later, and that means the interest reserve is built into our loan. It is not, in any way, a sign of weakness.

Speaker Change: It doesn't mean anything.

Speaker Change: about weakness in those credits. It just means that we're smart in the way we structure these loans. We make sure we've got the equity.

George G. Gleason: And that means the interest reserve is built on our loan. It is not in any way a sign of weakness. Our loan is also structured so that if we get to the end of construction and the project's not leasing or selling the refinancing as quickly, then the sponsor has an obligation to replenish those interest reserves. And that's happening with virtually every loan extension, modification, renewal. The sponsor is having to put more equity into the project to replenish those reserves to carry it longer because we've got built into our budget enough interest typically to carry it through construction and what was expected to be stabilization of the project.

Speaker Change: are at the equity end first, so that there's no doubt about the equity coming in later, and that means the interest reserve is built on our line. It is not in any way a sign of weakness.

Manan Gosalia: Our loan is also structured so that if we get to the end of construction and the project's not leasing or selling or refinancing as quickly, then the sponsor has an obligation to replenish those interest reserves. And that happens with virtually every loan extension, modification, or renewal. The sponsor is having to put more equity into the project to replenish those reserves to carry it longer because we've got built into our budget enough interest, typically, to carry it through construction and what was expected to be the stabilization of the project. If it takes longer to get to stabilization, then the sponsor has to write additional checks to carry it, and that's an equity responsibility, not a lender responsibility. God, that's very helpful.

Speaker Change: Our loan is also structured.

Speaker Change: so that if we get to the end of construction...

Speaker Change: And the project's not leasing or selling or refinancing as quickly, then the sponsor has an obligation to replenish those interest reserves. And that's happening with virtually every loan extension, modification, renewal, the sponsor's having to put more equity into the project.

Speaker Change: to replenish those reserves to carry it longer because we've got built into our budget enough interest typically to carry it through construction and what was expected to be stabilization of the project. If it takes longer to get to stabilization, we're going to have a problem.

George Gleason: If it takes longer to get to stabilization, then the sponsor has to write additional checks to carry it, and that's an equity responsibility, not a lender of responsibility.

Speaker Change: then the sponsor has to write additional checks to carry it, and that's an equity responsibility, not a lender responsibility.

Manan Gosalia: That's very helpful.

Manan Gosalia: Thanks so much.

Operator: Okay, thank you.

Michael Rose: Thank you. One moment for our next question.

Speaker Change: God, that's very helpful, thanks so much.

Michael Edward Rose: And it's from the line of Michael Rose with Raymond James.

George G. Gleason: Thanks so much. Okay, thank you. Thank you. One moment for our next question, and it's on the line between Michael Rose and Raymond James. Please proceed. Hey, good morning, everyone.

Speaker Change: Okay, thank you. Thank you. One moment for our next question.

Michael Rose: Please proceed. Good morning, everyone.

Michael Edward Rose: Good morning. Thanks for taking my questions. I just wanted to go back to the life science credit, not to beat a dead horse here, but I think one of the things that, you know, I heard from investors, which is kind of the spec nature of that project in particular, and I just wanted to get a sense for, you know, if you have some sort of, you know, proportion of loans or percentage of loans that, you know, the projects are somewhat spec in nature, because it's, I think, relative to your history, somewhat contrary to what you typically do, where there's, you know, a lot of analytical work done, you're pretty sure of the lease-ups, even in the condo stuff, during some more difficult challenges, you know, good projects in good markets, and, you know, is that a concern that we should be worried about? It's certainly a question I'm getting. We just love some general commentary there.

Speaker Change: And it's from the line of Michael Rose with Raymond James. Please proceed.

Michael Rose: Good morning. Thanks for taking my questions.

Michael Rose: I just wanted to go back to the life science credit and not to be the dead horse here. But I think one of the things that you know I heard from investors, which is kind of the spec nature of that project in particular.

Michael Edward Rose: Good morning everyone. Good morning. Thanks for taking my questions.

Michael Edward Rose: Just wanted to go back to the life science credit, not to beat a dead horse here, but I think one of the things that I heard from investors

Michael Rose: And I just wanted to get a sense for, you know, if you have some sort of, you know, proportion of loans or percentage of loans that, that, you know, the projects are somewhat spec in nature because it's, I think, relative to your history somewhat contrary to what you typically do where there's, you know, a lot of analytical work done. You're pretty sure of the least ups, even in the condo stuff during some more difficult challenges. You know, good, good projects and good markets. And you know, is that a concern that we should be worried about?

Speaker Change: which is kind of the spec nature of that project in particular, and I just wanted to get a sense for...

Speaker Change: if you have some sort of proportion of loans or percentage of loans that.

Speaker Change: That, you know, the projects are somewhat speck in nature because it's...

Speaker Change: I think relative to your history, it's somewhat contrary to what you typically do, where there's a lot of analytical work done. You're pretty sure of the lease-ups, even in the condo stuff, during some more difficult challenges.

Michael Rose: It's certainly a question I'm getting.

Speaker Change: You know, good projects in good markets and, you know, is that a concern that we should be worried about? It's certainly a question I'm getting. We just love some general commentary there. Thanks.

Michael Rose: We just love some general commentary there. Thanks.

George Gleason: No, I don't think it's a concern you should be worried about at all, and it's not any sort of change in our business strategy. You know, large parts of what we have done over the 23-year history of our ESG are our unleased properties. It's inherent in our business model, and it's reflected in the eight basis point annualized net charge-off ratio of that portfolio over the 23 year history. Now we love leasing, and we love it when transactions come to us and have pre-leasing for the vast majority of transactions we've always done.

George G. Gleason: Thanks. No, I don't think it's a concern you should be worried about at all, and it's not any sort of change in our business strategy. You know, large parts of what we have done over the 23-year history of RESG are unleased properties. The very first loan that we made was on a totally unleased property.

Speaker Change: No, I don't think it's a concern you should be worried about at all, and it's not any sort of change in our business strategy.

Speaker Change: You know, large parts of what we have done over the 23-year history.

Speaker Change: of RESG are unleased properties. The very first loan that we made was on a totally unleased property.

George G. Gleason: So it's inherent in our business model, and it's reflected in the eight basis point annualized net charge-off ratio of that portfolio over the 23-year history. Now, we love leasing, and we love it when transactions come to us with pre-leasing. But the vast majority of the transactions we've always done have not had significant pre-leasing in them. Now, back when we did retail, and retail was, you go back to 2010 or so, 11 retail was probably 20 or 30% of our portfolio.

Speaker Change: So, it's inherent in our business model.

Speaker Change: It's reflected in the...

Speaker Change: 8 basis point annualized net charge-off ratio of that portfolio over the 23-year history. Now, we love leasing, and we love it when transactions come to us and have pre-leasing. But the vast majority of the transactions we've always done have pre-leasing.

George Gleason: If not had significant pre-leasing in them now, back when we did retail and retail was, if you go back to 2010 or so, retail 11 retail was probably 20 or 30% of our portfolio. Pre-leasing was inherent in all of those days because you don't build a shopping centers back. You've got leases lined up condos in Miami. You you almost always have a high level of presales, and in most cases, when you close the loan, enough presales to repay your loan with 30 to 50% deposits down condos in New York.

Speaker Change: have not had significant pre-lacing in them. Now, back when we did retail, and retail was

Speaker Change: If you go back to 2010 or so, retail, 2011, retail was probably 20 or 30% of our portfolio. Pre-leasing was inherent in all of those deals because you don't build a shopping center spec, you've got leases lined up.

George G. Gleason: Pre-leasing was inherent in all of those deals because you don't build a shopping center spec; you've got leases lined up, condos in Miami, you almost always have a high level of presales. And in most cases, when you close the loan, you have enough presales to repay your loan with 30 to 50% deposit, condos in New York. Since your offering circular has to be approved and go through a process with the state government there, and that process typically doesn't happen until you're midway through construction or farther, you typically have zero pre-sales on a New York condo project.

Speaker Change: condos in Miami. You almost always have a high level of pre-sales and in most cases when you close the loan enough pre-sales to repay your loan with 30 to 50 percent deposits down.

George Gleason: Since you're offering circular as to be approved and go through a process with the state government there, and that process typically doesn't happen until you're midway through construction or farther, you typically have zero presales on a New York condo project. If you do get to a point of having presales, you typically got 10 or 20% deposits instead of that 30 to 50% deposits in Miami. These things vary all over the country by product type and geography. We know what market is, we know how business is done and office markets across the country, and our loans, sponsorship, structure, capitalization, leverage points are all designed to be appropriate and mitigants to those who ask.

Speaker Change: condos in New York,

Speaker Change: Friends

Speaker Change: Your offering circular has to be approved and go through a process with the state government there, and that process typically doesn't happen until you're midway through construction or farther.

Speaker Change: You typically have zero pre-sales on a New York condo project. If you do get to a point of having pre-sales, you've typically got 10 or 20 percent deposits instead of the 30 to 50 percent deposits.

George G. Gleason: If you do get to a point of having pre-sales, you've typically got 10 or 20 percent deposits instead of the 30 to 50 percent deposits in Miami. These things vary all over the country by product type and geography. We know what the market is, we know how business is done in office markets across the country, and our loans, sponsorships, structure, capitalization, and leverage points are all designed to be appropriate mitigants to those risks.

Speaker Change: Miami. These things vary all over the country by product type and

Speaker Change: and geography. We know what market is. We know how business is done in office markets across the country. And our loans, sponsorship.

Speaker Change: structure, capitalization, leverage points are all designed to be appropriate mitigants to those risks. So there's no...

George Gleason: So there's no degradation or shift in the way we're underwriting or thinking about things.

George G. Gleason: So there's no degradation or shift in the way we're underwriting or thinking about things. This is what we've always done, and we feel very good about that. That's very helpful. And maybe just as a follow-up, I certainly appreciate the focus on CIB and then kind of in the other areas of the portfolio. Is the ramp up there, and maybe what we're kind of expecting for paydowns, is this all to help drive the CRE concentration ratio below 300 percent over time?

George Gleason: This is what we've always done, and we feel very good about that.

Speaker Change: degradation or shift in the way we're underwriting or thinking about things this is what we've always done and we feel very good about that.

George Gleason: That's very helpful, and maybe just as a follow-up, certainly appreciate the focus on CIB and then kind of in the other areas of the portfolio is the ramp-up there and maybe what we're kind of expecting for pay downs. Is this all to help drive the CRE concentration ratio below 300% over time? I know there's been a big regulatory focus there. We've actually seen some capital raises to address those issues, some sales, some acquisitions as well, some sales of banks as well. But how should we think about that for you guys? I know you guys have always kind of operated above 300, 100, and kind of is the goal over time to migrate below those thresholds.

Speaker Change: That's very helpful. And maybe just as a follow-up, certainly appreciate the focus on CIB and then...

Speaker Change: kind of in the other areas of the portfolio.

Speaker Change: Is the ramp up there and maybe, you know, what we're kind of expecting for paydowns, is this all to, you know, help drive the CRE concentration ratio, you know, below 300% over time? I know there's been a big regulatory, you know, focus there. We've actually seen some capital raises.

George G. Gleason: I know there's been a big regulatory focus there, and we've actually seen some capital raises to address those issues, some sales and some acquisitions as well, some bank sales as well. But how should we think about that for you guys?

George G. Gleason: I know you guys have always kind of operated above 300 and 100. And is it kind of the goal, over time, to migrate below those thresholds? [inaudible] The goal is to diversify our balance sheet. And, you know, Michael, I so appreciate that question. Thank you for asking that. You know, we have built a level of expertise and an understanding of commercial real estate and our real estate specialties group that is exceptional in my view and highly differentiated from the way most folks understand and think about commercial real estate.

Speaker Change: to address those issues, some sales, some acquisitions as well, some sales of banks as well. How should we think about that for you guys? I know you guys have always kind of operated above the 300, 100. Is the goal over time to migrate below those thresholds? Thanks.

George Gleason: The goal is to diversify our balance sheet. And, you know, Michael, I'm so appreciate that question. Thank you for asking it. You know, we have built a level of expertise and understanding of commercial real estate and our real estate specialty group that is exceptional, in my view. And highly differentiated from the way most folks understand and think about commercial real estate. And, you know, we have established ourselves as the leader in that field among banks and really among all the lenders, including the debt funds. I think we enjoy a great deal of respect for what we do and a clear understanding within the real estate community that we're different than other people and we're very conservative, but we deliver a level of execution and expertise that is worth paying for, even with our conservative view on projects.

Speaker Change: The goal is to diversify our balance sheet and, you know, Michael, I so appreciate that question. Thank you for asking it. You know, we have built a level of expertise.

Speaker Change: and understanding of commercial real estate and our real estate specialties group that is

Speaker Change: exceptional in my view and highly differentiated from the way most folks understand and think about commercial real estate. And you know, we have

George G. Gleason: And, you know, we have established ourselves as the leader in that field among banks and really among all the lenders, including the debt funds. I think we enjoy a great deal of respect for what we do and a clear understanding within the real estate community that we're different than other people and we're very conservative, but we deliver a level of execution and expertise that is worth paying for, even with our conservative view on projects. So, we have built a very high-performing business with Real Estate Specialties Group, and we want to continue to let that group grow and seize every opportunity that meets our conservative, high-quality underwriting standards.

Speaker Change: We have established ourselves as the leader in that field among banks and really among

Speaker Change: All the lenders, including the debt funds, I think we...

Speaker Change: enjoy a great deal of respect.

Speaker Change: for what we do and a clear understanding within the real estate community that we're different than other people and we're very conservative, but.

Speaker Change: We deliver a level of execution and expertise that is worth paying for even with our conservative view on projects.

George Gleason: So we have built a very high performing business with a real estate specialty group, and we want to continue to let that group grow and seize every opportunity that meets our conservative high quality underwriting standards. But we also realize that, I mean, our performance metrics look at our ROI, look at our efficiency, look at our return on equity, look at our ask, look at all of our numbers. We ought to be trading at a two or three multiple premium, appears because our financial performance consistently, over the time we've been public, consistently has been at the top of the industry.

Speaker Change: So, we have built a very high-performing business with Real Estate Specialties Group, and we want to continue to let that group grow and seize every opportunity that meets our conservative, high-quality underwriting standards.

George G. Gleason: But we also realized that, I mean, our performance metrics, look at our ROI, look at our efficiency, look at our return on equity, look at our ask, look at all of our numbers, we ought to be trading at two or three multiples to peers because our financial performance consistently, over the time we've been public, consistently has been at the top of the industry. We're not getting that premium.

Speaker Change: But we also realized that, I mean, our performance metrics, look at our ROA, look at our efficiency, look at our return on equity, look at our ASCQA, look at all of our numbers. We ought to be trading at 8.

Speaker Change: two or three multiple premiums to peers because our financial performance consistently

George Gleason: We're not getting that premium. We know we're not getting that premium because there are a whole bunch of folks that don't understand the unique expertise and capabilities and conservative approach we take to commercial real estate. And yes, commercial real estate's a complicated business, and it can be risky if you don't do it in an extremely disciplined manner, and we are extremely disciplined. We don't want to lose that extraordinary business we built, but we also realize if we let RESG grow its full potential and we grow other high quality businesses around it. So it goes from the what peak was 70% of the funded balance of our loans to over the next several years 50% of the funded balance of our loans because indirect marine and RV and CID and community banking lines of business consumer lines of business and our community banking world all grow.

Speaker Change: over the time we've been public, consistently has been at the top of the industry. We're not getting that premium. We know we're not getting that premium because there are a whole bunch of folks that don't understand.

George G. Gleason: We know we're not getting that premium because there are a whole bunch of folks that don't understand the unique expertise and capabilities and conservative approach we take to commercial real estate. And yes, commercial real estate is a complicated business, and it can be risky if you don't do it in an extremely disciplined manner. And we are extremely disciplined.

Speaker Change: The unique expertise and capabilities and conservative approach we take to commercial real estate.

Speaker Change: And yes, commercial real estate is a complicated business, and it can be risky if you don't do it in an extremely disciplined manner. And we are extremely disciplined. We don't want to lose that.

George G. Gleason: We don't wanna lose that extraordinary business we built, but we also realize that if we let RESG grow to its full potential and we grow other high-quality businesses around it. So it goes from being what at the peak was 70% of the funded balance of our loans to, over the next several years, 50% of the funded balance of our loans because indirect marine and RV and CIB and community banking lines of business, consumer lines of business, and our community banking world all grow. That's going to let us achieve the multiple.

Speaker Change: extraordinary business we built, but we also realize if we let RESG grow to its full potential.

Speaker Change: and we grow other high-quality businesses around it. So it goes from being what, at the peak, was 70% of the funding balance of our loans to, over the next several years, 50%.

Speaker Change: of the funded balance of our loans because indirect marine and RV and CIB and community banking lines of business, consumer lines of business, and our community banking world all grow.

George G. Gleason: So that that's going to let us achieve the multiple, the two or three premium multiple that we ought to have based on our company's performance, as opposed to suffering a two or three multiple discount because we're the poster child for CRE, even though we do it differently than everybody else.

George G. Gleason: The two or three premium multiples that we opt to have based on our company's performance as opposed to suffering a two or three multiple discount because we're the poster child for CRE even though we do it differently than everybody else.

Speaker Change: that that's going to let us achieve the multiple.

Speaker Change: The two or three premium multiple that we ought to have based on our company's performance as opposed to suffering a two or three multiple discount because we're the poster child for CRE even though we do it differently than everybody else.

George Gleason: House. So the answer to your question is, yes, we want to diversify. We're not specifically focused on getting below the 300 and 100 thresholds that will probably be a natural product of diversification. It's not the goal. It's just a byproduct of diversifying our balance sheet so that we can get the most helpful that our shareholders deserve for the high-quality performance we could have. Thanks for all the comments. I appreciate it.

George G. Gleason: So, the answer to your question is... Yes, we want to diversify. But we're not specifically focused on getting below the 300 and 100 thresholds.

Speaker Change: So, the answer to your question is, yes, we want to diversify.

Speaker Change: Bye. Bye.

George G. Gleason: That will probably be a natural product though of diversification. It's not the goal; it's just a byproduct of diversifying our balance sheet so that we can get the multiple that our shareholders deserve for the high-quality performance we put up. Thanks for all the comments; I appreciate them.

Speaker Change: We're not specifically focused on getting below the 300 and 100 thresholds.

Speaker Change: That will probably be a natural product, though, of diversification. It's not the goal. It's just a byproduct.

Speaker Change: diversifying our balance sheet so that we can get the multiple that our shareholders deserve for the high quality performance we put up.

Operator: All right. Thank you, Mark. Thank you. Our next question is from Steven Scouten with Piper Sandler Companies. Please proceed. Hey, good morning, everyone.

George Gleason: All right.

George G. Gleason: Thank you, Mark.

George Gleason: Thank you.

Stephen Scouten: Our next question is from Stephen Scouten with Piper Sandler Company. Please proceed.

Speaker Change: Thanks for all the comments. I appreciate it.

Speaker Change: All right. Thank you, Michael.

Stephen Kendall Scouten: Hi, good morning, everyone. So I know there's been a couple questions around CID already, and I appreciate your call to Catherine's question. But specifically seeing the commentary around it within the expense commentary of aggressive hiring within that segment, can you give me a view for what that looks like in terms of how many people you might have there now and how large you want to build that team? And kind of, as we saw this quarter, we started to reach that handoff point where CID and indirect marine are going to continue to exceed our ESG contributions here near term.

Speaker Change: Thank you. Our next question is from Stephen Scouten with Piper Sandler Companies. Please proceed.

Stephen Kendall Scouten: So I know there's been a couple questions around CIB already. And Brandon, I appreciate your color on Catherine's question, but specifically seeing the commentary around it within the expense commentary about aggressive hiring within that segment, can you give me a view of what that looks like in terms of how many people you might have there now and how large you want to build that team? And if, as we saw this quarter, we started to reach that handoff point where CIB and indirect marine are going to continue to exceed RESG contributions here in New York, Yeah, well, I would tell you on the indirect marine, you know, we've targeted that to be 10 and between 10 and 15% of our portfolio. We were bouncing along for a while, a long while, at 11% of total portfolio, I think it bounced But we're not adding a lot of people there.

Stephen Kendall Scouten: Hey, good morning everyone. So I know there's been a couple questions around CIB already and Brandon, I appreciate your color to Catherine's question, but specifically seeing the commentary around

Stephen Kendall Scouten: With any expense commentary of aggressive hiring within that segment, can you give me a view for what that looks like in terms of how many people you might have there now and how large you want to build that team?

Speaker Change: And kind of, as we saw this quarter, we started to reach that handoff point where CIB and indirect marine are going to continue to exceed RESG contributions here near term.

Stephen Kendall Scouten: Yeah. Well, I would tell you on the indirect marine, you know, we've targeted that to be 10 and between 10 and 15% of our portfolio. We were bouncing along for a while, long while, about 11% of total portfolio. I think it bounced up to like 12% in the quarter just ended. So, you know, that's going to stay in that 10 to 15% range. It may be get to 13. You know, who knows. But we're not adding a lot of people there. We are eating a few, but they're just marginal incremental staff additions. We had a nucleus of folks in fund finance and asset based lending and equipment finance that, you know, was, I don't know, eight or 10 people who were doing those lines of business for before.

Speaker Change: Yeah.

Speaker Change: Well, I would tell you on the indirect marine, you know, we've targeted that to be 10 and 15, between 10 and 15% of our portfolio, we were.

Speaker Change: bouncing along for a while, long while, about at 11% of total portfolio. I think it bounced up to like 12% in the quarter just ended. So, you know, that's going to stay in that 10 to 15% range. It may be get to 13%, you know, who knows. But

George G. Gleason: We are adding a few, but they're just marginal incremental staff additions. We had as a nucleus of folks in fund finance and asset-based lending and equipment finance who, you know, I don't know, eight or ten people who were doing those lines of business for us before. And I would guess our headcount in the last six months is approaching 30 or so in Georgia. Yeah, I think it's probably a little north of there, but they've been, as you know, really finding great opportunities to bring Stephen across, not just your, you know, sort of origination side, but they, you know, have, as I said, a very light mindset around credit.

Speaker Change: We're not adding a lot of people there.

Speaker Change: We are adding a few, but they're just marginal incremental staff additions.

Speaker Change: We had, as a

Speaker Change: a nucleus of folks in fund finance and asset-based lending and equipment finance that, you know, was...

Stephen Scouten: And I would guess our headcount in the last six months, Brandon, is approaching 30 or so people in those. Yeah, I think it's probably a little north of there, but it's, you know, they've been, as you know, really finding great opportunities to bring on. And even across not just your sort of origination side, but they, you know, have, as I said, a very light mindset around credit. They really take a strategic and calculated approach to how they're focused on what they're lending on, who they're lending to, and how that can be built into cross-sell opportunities across the organization.

Brandon Thomas King: I don't know, eight or ten people who were doing those lines of business for us before. And I would guess our headcount in the last six months, Brandon is

Brandon Thomas King: approaching 30 or so people.

Brandon Thomas King: and uh...

Brandon Thomas King: Yeah I think it's probably a little north of there but it's you know they've been as you know really finding great opportunities to bring on

Stephen: is Stephen Across.

Speaker Change: not just your sort of origination side, but...

George G. Gleason: They really take a strategic and calculated approach to how they're focused on what they're lending on, who they're lending to, how that can be built into cross-sell opportunities across the organization, and how they can manage the loans, which are all senior in nature, that are all stressed for downside when they're originated, but how they can manage those with a great sort of portfolio management group as well.

Brandon Thomas King: They, you know, have, as I said, a very light mindset around credit.

Brandon Thomas King: They really take a strategic and calculated approach to how they're focused on what they're lending on, who they're lending to, how that can be built into cross-sell opportunities across the organization.

Stephen Scouten: And how they can manage the loans, which are all senior in nature that are all stressed for downside when they're originally, but how they can manage those with a great sort of portfolio management group as well.

Brandon Thomas King: and how they can manage the loans, which are all senior in nature, that are all stressed for downside when they're originated, but how they can manage those with a great sort of portfolio management.

Stephen Scouten: So you brought up RISG. There is really a lot of similarities in the way. That infrastructure is being built, how it's being built for defensive, you know, structuring and underroading on the front side, but also, you know, it's a very, significantly monitored portfolio. It's not a cuddly kind of platform, but really digging in deep, you know, the front and middle, all the way to the end of the line of life cycle. So, yeah, they've been hiring, made some great hires on the origination side, but also some strong hires on the portfolio management side. And as you know, from the way we've run RISG and really the organization, since George bought it, has been quality, quality, quality, and make sure that portfolio is populated with the right kind of credits and managed the right way throughout and sustainable and scalable.

Brandon Thomas King: There are really a lot of similarities in the way that infrastructure is being built, how it's being built for the defensive, you know, structuring and underwriting on the front side, but also, you know, it's a very significantly monitored portfolio. It's not a Cove-like kind of platform, but really digging in deep, you know, the front and middle, all the way to the end of the loan life cycle. So, yeah, they've been hiring, and they made some great hires on the origination side, but also made some strong hires on the portfolio management side.

Brandon Thomas King: group as well. So you brought up RESG. There is really a lot of similarities in the way

Brandon Thomas King: that infrastructure is being built.

Brandon Thomas King: and how it's being built for the defensive.

Brandon Thomas King: you know, structuring and underwriting on the front side, but also, you know, it's a very significantly monitored portfolio. It's not a Covelight kind of platform, but really digging in deep.

Brandon Thomas King: You know, the front, middle, all the way to the end of the loan life cycle. So, yeah, they've been hiring, made some great hires on the origination side, but also some strong hires.

Brandon Thomas King: And as you know, the way we've run RESG, and really the organization since George bought it, has been quality, quality, quality, making sure that the portfolio is populated with the right kind of credits and managed the right way throughout, and sustainable, and scalable, and these guys are well along the path to doing that. Okay, and so just to clarify, has that kind of significant expansion you guys mentioned in the major comments kind of already occurred, or is it, it's kind of ongoing, like it's expanded a lot already, but it will continue to, from a headcount perspective?

George G. Gleason: on the portfolio management side. And as you know, from the way we've run RESG and really the organization since George bought it.

George G. Gleason: has been quality, quality, quality, and make sure that portfolio is populated with the right kind of credits and managed the right way throughout and sustainable and scalable and these guys are well along the path to doing that.

Stephen Scouten: And these guys are well along the path to doing that. Okay, and so just to clarify, had that kind of significant expansion, you guys mentioned in the major comments, kind of already occurred, or is it, it's kind of ongoing, like it's expanded a lot already, but it will continue to. We've gone from the original nucleus of folks; we had probably around eight or ten people in that area, eight or ten high quality people, I would tell you that, where we're building in and around, under and over that group, because it is a great group that we had, but there were, I don't know, eight or ten.

Speaker Change: Okay, and so just to clarify, has that kind of significant expansion you guys mentioned in the major comments kind of already occurred? Or is it, it's kind of ongoing, like it's expanded a lot already, but it will continue to expand?

Brandon Thomas King: We've gone, we've gone from the original nucleus of folks; we had probably around eight or 10 people in that area, eight or 10 high-quality people. I would tell you that we're building in and around under and over that group because it is a great group that we had, but there were, I don't know, eight or ten people, maybe 12 at the max. We're probably, as Brandon said, probably north of 30 people now.

Speaker Change: We've gone from the original nucleus of folks we had probably around

Speaker Change: Eight or ten people in that area. Eight or ten high-quality people, I would tell you that. We're building in and around

Stephen Scouten: People might be 12 at the max were, as Brandon said, probably north of 30 people now, and that, that group will continue to grow, will will end up with 40 and then 50 and then 60 and then more people there, probably, you know, by this time next year, I would guess we will have continued to grow that and be in the 50 to 60 person range there. There are highly skilled people that are not cheap, and that's why, Tim, as we're having success, hiring people, and more frankly, we're having more success, hiring more highly skilled quality people than we thought possible. And that's why Tim's having to catch his expense, gotten up a couple of percent.

Speaker Change: under and over that group because it is a great group that we had, but there were, I don't know, eight or ten

Speaker Change: people, maybe 12 at the max. We're, as Brandon said, probably north of 30 people now, and that

George G. Gleason: And that the group will continue to grow. We'll end up with 40, and then 50, and then 60, and then..., more people there, probably. You know, by this time next year, I would guess we will continue to grow that, being in the 50 to 60 person range there. And these are highly skilled people who are not cheap. And that's why Tim, as we're having success hiring people, and, more frankly, we're having more success hiring more highly skilled, quality people than we thought possible.

Speaker Change: That group will continue to grow. We'll end up with 40 and then 50 and then 60 and then more people there probably.

Speaker Change: you know, by this time next year, I would guess we will continue to grow that and be in the 50 to 60 person range there. And these are highly skilled people that are not cheap and that's why Tim

Speaker Change: As we're having success hiring people, and more frankly, we're having more success hiring more highly skilled, quality people than we thought possible. And that's why Tim's having to catch his...

George G. Gleason: And that's why Tim's having to catch his... expense guidance up a couple of percent growth rate because we're finding more high-quality people than we thought we could. You guys have heard me speak at length about people being critical to our business, and high quality, talented, smart, experienced people are essential to our business. And we're in an unusual window here with a lot of banks having pulled back to add a lot of talent. So it's a time to harvest that talent, get those guys on the team.

Stephen Kendall Scouten: growth rate, because we're finding more high quality people than we thought we could, and you guys have heard me speak at length about people are critical to our business and high quality talented smart experienced people are essential to our business, and we're going to an unusual window here where a lot of banks having pulled back. to add a lot of talent. So it's a time to harvest that talent, get those guys on the team and mature those businesses further while we can add the excellent talent.

Tim Hicks: Expense guidance up a couple of percent, growth rate, because we're finding more high-quality people than we thought we could.

Speaker Change: You guys have heard me.

Speaker Change: speak at length about

Speaker Change: People are critical to our business and high-quality, talented, smart, experienced people are essential to our business and we're in an unusual window here with a lot of banks having pulled back.

Speaker Change: to add a lot of talent.

George G. Gleason: [inaudible] mature those businesses further while we can add excellent talent. Yeah, that's fantastic. And then on the capital side, I mean, some of these larger repayments obviously open up some capital, and you announced the share repurchase. I would presume that to be more opportunistic. And then can you talk about how that would maybe stand against potential M&A as another ability to deploy capital and also diversify the balance sheet? It feels like we might be on the precipice of a big pickup in M&A. So I'm just kind of wondering how you guys are thinking about that, given your strong track record there.

Speaker Change: So it's a time to harvest that talent, get those guys on the team, and mature those businesses further while we can add the excellent talent.

Tim Hicks: Yeah, that's fantastic. And then on the capital side of my note, some of these larger repayments obviously open up some capital, and you now have to share a purchase. I would presume that plays to be more opportunistic, and then can you talk about that wood. and maybe stand against potential M&A as another ability to deploy capital and also diversify the balance sheet. It feels like we might be on the precipice of a big pickup in M&A, so just kind of wondering how you guys are thinking about that, giving your strong track record there? Well, first, if any FDIC transactions occur, we would like to have an opportunity on those, and you probably noted that one sizable deal that's occurred this year. We were in the bidder group on that, and we'll continue to look very favorably on opportunities to apply.

Speaker Change: Yeah, that's fantastic. And then on the capital side, I mean, I know some of these larger repayments obviously open up some capital and you announced the share repurchase. I would presume that played to be more opportunistic. And then can you talk about how that would

Speaker Change: maybe stand against potential M&A as another ability to deploy capital and also diversify the balance sheet.

George G. Gleason: Well, first, you know, if any FDIC transactions occur, we would love to have an opportunity on those. And, you know, you probably noted the one sizable bill that occurred this year. We were in the bidder group on that, and, you know, we'll continue to look. Bank of the Ozarks, Tim Hicks, Samuel Varga, Bank of the Ozarks, Gregor, YM&A.

Speaker Change: It feels like we might be on the precipice of a big pickup in M&A, so just kind of wondering how you guys are thinking about that, given your strong track record there.

Speaker Change: Well, first, you know, if any FDIC transactions occur, we would...

Speaker Change: We would love to have an opportunity on those, and you know, you probably noted the one sizable deal that's occurred this year. We were in the bidder group on that, and you know, we'll continue to look.

Tim Hicks: That's why we have failed bank transactions if there are already, and that is always a preferred way. We've got great track record and history doing that, so that would be the preferred way. But Tim, you want to come in a little more on Sockley Purchase's capital and regular way M&A. Yeah, thanks, Steven. Certainly, a lot of positive things on capital this quarter. We haven't really talked about so far on this call how good a quarter it was as far as earnings. I'm a seventh consecutive record earnings, really amazing track record, and you saw during this quarter what the additional repayments and saw our unfunded balance go down, just really the power of that earnings on capital.

Speaker Change: very favorably on opportunities to acquire failed bank transactions, if there are any.

Speaker Change: and that, you know, is always a preferred way. We've got great track record and history doing that, so that would be the preferred way. But, Tim, you want to comment a little more on stock repurchases, capital, and...

Tim Hicks: Yeah, thanks, Steven. Certainly, you know, a lot of positive things about capital this quarter. We haven't really talked about so far on this call how good a quarter it was as far as earnings go. You know, a seventh consecutive record earnings really is an amazing track record.

Tam: regular YM&A. Yeah, thanks Steven. Certainly, you know, a lot of positive things on capital this quarter. We haven't...

Tim Hicks: really talked about, so far on this call, how good a quarter it was as far as earnings. A seventh consecutive record earnings, really is an amazing track record.

Tim Hicks: And you saw during this quarter with the additional repayments and saw our unfunded balance go down, just really the power of that earnings on capital. So when we have less growth than we've had in recent quarters, you saw our risk-based capital ratios expand nearly 30 basis points. So that does open up opportunities. I felt like having a share repurchase authorization in place was prudent to be able to, you know, utilize that when there's, you know, lower growth at times. M&A, to your point, is another way to use capital.

Tim Hicks: You saw during this quarter what the additional repayments and saw our unfunded balance go down.

Tim Hicks: So when we have less growth than we've had in recent quarters, you saw our risk-based capital ratios expand nearly 30 basis points. So that does open up opportunities. Felt like having a share repurchase authorization in place was prudent to be able to utilise that when there's lower growth at times. M&A, to your point, is another way to use capital, where we've been active at times, and we've certainly continued to look at M&A in a very disciplined manner. Certainly, a lot of thanks out there that have marked a market adjustment that would need to be considered if you were looking at M&A.

Tim Hicks: just really the power of that earnings on capital. So when we have less growth than we've had in recent quarters, you saw our risk-based capital ratios expand nearly 30 basis points.

Tim Hicks: So that does open up opportunities.

Tim Hicks: Felt like having a share repurchase authorization.

Tim Hicks: We've been, you know, active at times and certainly continue to look at M&A in a very disciplined manner. There are certainly a lot of banks out there that have mark-to-market adjustments that would need to be considered if you were looking at M&A. As George alluded to, we've already been active in looking at FDIC deals this year and certainly would be active if any others showed up as well. But, as you said, we try to be very prudent in how we manage our capital. And it was nice to see the earnings power that we had and our growth in risk-based capital ratios. And our TCE ratio was up during the quarter.

Tim Hicks: in place was prudent.

Speaker Change: to be able to, you know, utilize that when there's

Speaker Change: you know, lower growth at times. M&A, to your point, is another...

Speaker Change: Another way to use capital. We've been active at times and certainly continue to look at M&A in a very disciplined manner. Certainly a lot of banks out there that

Tim Hicks: As George alluded to, we've already been active in looking at FDSC deals this year, and certainly would be active, and if any others showed up as well. So, as you said, we try to be very prudent in how we manage our capital, and it was nice to see the earnings power that we had in our growth and risk-based capital ratios. And our TCE was up; TCE ratio was up during the quarter, or tangible book value over 12 months has been up $5.18, another good track record there. So a lot of positive things happening in this quarter.

Speaker Change: have mark-to-market adjustments that would need to be considered if you're looking at M&A. But we, as George alluded to, we've already been active in looking at FDIC deals this year and certainly would be active.

Speaker Change: and if any others showed up as well. So,

Speaker Change: As you said, we try to be very prudent in how we manage our capital and it was nice to see the earnings power that we had and our growth.

Tim Hicks: Our tangible book value over 12 months has been up $5.18, another good track record there. So there are a lot of positive things happening in this quarter. Great. That's all super helpful.

Speaker Change: growth and risk-based capital ratios, and our TCE was up, TCE ratio was up during the quarter, our tangible book value over 12 months has been up $5.18.

Speaker Change: Another good track record there, so a lot of positive things happening in this quarter.

Stephen Scouten: Great. That's all. Super helpful. Appreciate the time.

Stephen Kendall Scouten: I appreciate your time. Thank you. One moment for our next question, and it's from Timur Braziler with Wells Fargo. Hi, good morning.

Operator: Thank you. One moment for our next question.

Timur Felixovich Braziler: And is from Timur Braziler with Wells Fargo. Hi, good morning.

Speaker Change: Great, that's all super helpful. Appreciate the time.

Speaker Change: Thank you. One moment for our next question. And it's from Timur Braziler with Wells Fargo.

Timur Felixovich Braziler: I wanted to ask my first question, maybe a little bit more of a nuanced question as to the interplay of internal risk ratings when leasing trends don't match the kind of expectations that were set in underwriting. Is there anything happening beneath the scenes when leasing kind of doesn't match underwriting expectations? Yeah, I'll leave it there. Well, that's a great question.

Timur Braziler: I wanted to ask my first question, maybe a little bit more of a nuanced question as to the interplay of the internal risk ratings when leasing trends don't match expectations that were set at the underwriting. Is there anything happening beneath the scenes when leasing doesn't match underwriting expectations? Yeah, I'll leave it there.

Timur Felixovich Braziler: Hi, good morning.

Timur Felixovich Braziler: I wanted to ask my first question, maybe a little bit more of a nuanced question, as to the interplay of internal risk ratings.

Timur Felixovich Braziler: when leasing trends don't match kind of expectations that were set at the underwriting. Is there anything happening below or beneath the scenes when leasing kind of doesn't match underwriting expectations? Yeah, I'll leave it there.

George G. Gleason: And the answer is, yes, reappraisals or internal evaluations of loans reflect changes in leasing expectations. And if the expectation is that leasing is not going to just take longer but occur at lower rates or with higher TI costs, that is built into the NOI of those projects. So those factors do find their way into risk ratings.

George Gleason: Well, that's a great question. And the answer is yes, reapprisals or internal evaluations of loans, you know, reflect changes in leasing expectations. And if the expectation is that leasing is not going to just take longer but occur at lower rates or with higher T.I. calls, that is built into the NOI of those projects. So those factors do find their way into risk ratings. And, you know, over the eight quarters now that the Fed has first raised rates, and then for the last two or three quarters kept them at very high levels. You know, we've seen a migration of risk ratings within our portfolio.

Speaker Change #100: Well, that's a great question, and the answer is yes, reappraisals or internal evaluations of loans.

Speaker Change #101: you know, reflect changes in leasing expectations and if the

Speaker Change #102: The expectation is that leasing is not going to just take longer but occur at lower rates or with higher TI costs. That is built into the NOI of those projects.

Speaker Change #102: So those factors do find their way into risk ratings.

George G. Gleason: And, you know, over the eight quarters now that the Fed has first raised rates and then, for the last two or three quarters, kept them at very high levels, we've seen a migration of risk ratings within our portfolio. We have 72 risk ratings in the portfolio. And a lot of those are pass ratings, a lot of them are low pass ratings, and then you get to, you know, the more verified special mention and substandard ratings.

Speaker Change #102: and, you know, over the...

Speaker Change #102: eight quarters now that the Fed is...

Speaker Change #102: First raised rates and then for the last two or three quarters Kept them at very high levels. You know you we've seen a Migration of risk ratings within our portfolio. We have 72

George Gleason: We have 72 risk ratings in the portfolio. And a lot of those are pass ratings. A lot of them are low pass ratings. And then you get to, you know, the more verified special mention and substandard ratings. But there's been a migration from, you know, one pass category to another pass category or pass category to a low pass category that you've not seen. And you know, that's just a reflection of higher for longer creates challenges for our sponsors and the projects. You have seen the evidence of those risk ratings while we haven't. We don't disclose, you know, those 72 risk ratings.

Speaker Change #102: risk ratings in the portfolio and a lot of those are past ratings a lot of them are low past ratings and then you get to you know the the more verified special mention and and substandard ratings

George G. Gleason: But there's been a migration from, you know, one past category to another past category or past category to a low past category that you've not seen. And, and, you know, that's just a reflection of higher for longer creating challenges for our sponsors and the project. You have seen the evidence of those risk ratings while we haven't, we don't disclose, you know, those 72 risk ratings. You've seen the evidence of that migration and the fact that, over the last eight quarters, our reserve for credit losses has almost doubled from $300 million to $574 million.

Speaker Change #102: But there's been a migration from...

Speaker Change #102: You know, one PASS category to another PASS category, or a PASS category to a low PASS category that you've not seen, and, you know, that's just a reflection of higher for longer creates challenges for our sponsors and the projects.

George Gleason: You've seen the evidence of that migration in the fact that over the last eight quarters, our reserve for credit losses has almost doubled from $300 million to $574 million. So that's a $274 million increase in our ACL after, you know, the modest chargehouse we've experienced. Granted, a chunk of that was portfolio growth. But you can see the qualitative migration in the fact that that reserve percentage has gone from 0.83% of total loans and commitments to 1.19% of total loans and commitments over a period of time. So that 36 basis point increase in the ACL percentage as a percent of total loans funded, non-funded, reflects the migration.

Speaker Change #102: You have seen the evidence of those risk ratings while we don't disclose those 72 risk ratings.

Speaker Change #102: You've seen the evidence of that migration and the fact that over the last eight quarters our reserve for credit losses

George G. Gleason: So that's a $274 million increase in our ACL after, you know, the modest charge-offs we've experienced. Granted, a chunk of that was for portfolio growth, but you can see the qualitative migration in the fact that that reserve percentage has gone from 0.83% of total loans and commitments to 1.19% of total loans and commitments over that period of time. So that 36 basis point increase in the ACL percentage as a percent of total loans funded and unfunded reflects the migration that has occurred in those risk ratings of that portfolio.

Speaker Change #102: has almost doubled from $300 million to $574 million.

Speaker Change #102: So, that's a $274 million increase in our ACL after

Speaker Change #102: you know, the modest charge-offs we've experienced.

Speaker Change #102: Granted, a chunk of that was for portfolio growth, but you can see the qualitative migration and the fact that that reserve percentage has gone from .83 percent

Speaker Change #102: of total loans and commitments to 1.19%.

Speaker Change #102: of total loans and commitments over that period of time. So that 36 basis point increase in the ACL percentage as a percent of total loans funded and unfunded reflects the migration.

George G. Gleason: that has occurred in those risk ratings of that portfolio. Again, we feel very good about the portfolio. As we said, in January, we expect charge also this year to be higher than last year, but still well below industry average that continues to be our expectation. That's not an indication of, you know, any sort of serious weakness in the portfolio; it's just to reflect in the fact that these high interest rates call stress, and some of that stress is going to translate through into losses. Now, for the first six months of the year, our six-month charge-off ratio was just minutely up over last year's net charge-off ratio.

George G. Gleason: Again, we feel very good about the portfolio. As we said in January, we expect chargeoffs this year to be higher than last year, but still well below the industry average. That continues to be our expectation. That's not an indication of, you know, any sort of serious weakness in the portfolio.

Speaker Change #102: that has occurred in those risk ratings of that portfolio.

Speaker Change #102: Again, we feel very good about the portfolio. As we said in January , we expect charge-offs this year to be

Speaker Change #102: higher than last year but still well below industry average. That continues to be our expectation. That's not an indication of, you know.

George G. Gleason: It's just a reflection of the fact that these high interest rates cause stress, and some of that stress is going to translate through into losses. Now, for the first six months of the year, our six-month charge-off ratio is just barely up over last year's net charge-off ratio, but that could drift higher in the second half of the year.

Speaker Change #102: Any sort of serious weakness in the portfolio is just a reflection of the fact that

Speaker Change #102: These high interest rates cause stress and some of that stress is going to translate through into into losses. Now for the first six months of the year, our six-month charge-off ratio is just

George Gleason: But that could drift higher in the second half of the year. But again, that's why we built 274 million in additional ACL over the last eight quarters: is the expectation there would be some credit deterioration. Great. Thanks.

George G. Gleason: But again, that's why we built $274 million in additional ACL over the last eight quarters with the expectation there would be some credit deterioration. Great, thanks. And I guess as a follow-up, looking at the life science sector specifically, I think some of the cyclical pressures there and some of the recent projects that have come online and have been kind of widely noted. I guess, maybe what are your expectations for broader life sciences?

Speaker Change #102: minutely up over last year's net charge-off ratio.

Speaker Change #102: but that could drift higher in the second half of the year. But again, that's why we've built 274 million in additional ACL over the last eight quarters is the expectation there would be some credit deterioration.

George G. Gleason: Do you need a reversal of some of these cyclical trends in order to lease up some of these projects? Or, I guess, what's the availability of converting some of the existing office space to suit other industries outside of life science? Well, you know, if one of our clients, when I was on the West Coast a couple of months ago, who does live science, showed me a very interesting graph that was not, it's not our material.

George Gleason: And I guess as a follow-up looking at the life science sector, specifically, I think some of the cyclical pressures there and some of the recent projects that have come online and have been kind of widely noted. I guess maybe what are your expectations for broader life sciences? Do you need reversal of somebody's cyclical trends in order to lease up some of these projects, or what I guess what's the availability to convert some of the existing office space to suit other industries outside of life sciences? Well, you know, if one of our clients, when I was on the West Coast a couple of months ago, who does life science, showed me a very interesting graph that was.

Speaker Change #103: Great, thanks. And I guess as a follow-up, looking at the life science sector specifically,

Speaker Change #104: I think some of the cyclical pressures there and some of the recent projects that have come online and have been kind of widely noted, I guess.

Speaker Change #105: Maybe what are your expectations for broader life sciences? Do you need reversal of some of these cyclical trends in order to lease up some of these projects or what's the availability to convert some of the existing office space to suit other industries outside of life sciences?

Speaker Change #106: Well, you know, if you, if one of our clients

Speaker Change #107: When I was on the West Coast a couple of months ago, who does live science, showed me a very interesting graph that was...

George Gleason: It's not, it's not our materials on. We've not reproduced it and shared it, but it showed the venture capital and IPO money going into the life science industry over like the last two or three years. And, you know, there was a steady flow of funds into the space when interest rates began to rise and venture capital funding slowed. And then, in the wake of Silicon Valley Bank, there was a significant slowdown in venture capital funding in the IPO market when there was thoughts, you know, 15, 16 months ago that there was going to be a banking crisis that was going to have some sort of systemic impact.

George G. Gleason: So I'm, we haven't reproduced it and shared it, but it shows the venture capital and IPO money going into the life science industry over the last two or three years. And, you know, there was a steady flow of funds into the space. When interest rates began to rise and venture capital funding slowed, and then in the wake of Silicon Valley Bank, there was a significant slowdown in venture capital funding and the IPO market when there were thoughts, you know, 15, 16 months ago that there was going to be a banking crisis that was going to have some sort of systemic impact.

Speaker Change #108: It's not our material, so we've not reproduced it and shared it, but it showed the venture capital and IPO money going into the life science industry.

Speaker Change #108: over like the last two or three years and you know there was a steady flow of funds into the space

Speaker Change #108: When interest rates began to rise and venture capital funding slowed, and then in the wake of Silicon Valley Bank, there was a significant slowdown in venture capital funding and the IPO market.

George G. Gleason: IPO markets sort of dried up as well, and you had a significant period of time there where there was very, very little new money flowing into the live science space from venture capital and IPOs. And starting late last year, September, October, that began to click up a little bit. And this chart I was looking at, again, this was a couple of months ago, but it was a steady monthly progression of increase in money flowing into the life science space to people who do that business, who operate those businesses, from venture capital and IPOs.

George Gleason: IPO market sort of brought up as well, and you had a significant period of time there where there was very, very little new money flowing in the life science space from venture capital and IPOs, and starting late last year. September October that began to click up a little bit, and this chart I was looking at again, this was a couple of months ago, but it was a steady monthly progression of increase in money flowing into the life science space to people who do that business who operate those business. from Venture Capital and IPOs. And you've also seen there have been several announced acquisitions of smaller life-size companies, bigger life-size companies.

Speaker Change #109: There was thoughts.

Speaker Change #109: You know, 15.

Speaker Change #109: Sixteen months ago that there was going to be a banking...

Speaker Change #109: crisis that was going to have some sort of systemic impact, IPO markets sort of dried up as well. And you had a significant period of time there where there was very

Speaker Change #109: Very little new money flowing into the live science space from venture capital and IPOs.

Speaker Change #109: and starting late last year, September , October , that began to click up a little bit. And this chart I was looking at, and again, this was a couple of months ago, but it was a steady monthly progression of increase.

George G. Gleason: And you've also seen that there have been several announced acquisitions of smaller life science companies by bigger life science companies. Those are the things that drive the demand for life science space. So when I was on the West Coast... San Francisco and Seattle a couple of months ago,

Speaker Change #109: and money flowing into the life science space to people who do that business, who operate those businesses.

Speaker Change #109: from Venture Capital and IPOs. And you've also seen, there've been several announced acquisitions of smaller life-size companies by bigger life-size companies. Those are the things that drive the demand for life-size space.

George G. Gleason: Those are the things that drive the demand for life-size space. So when I was on the West Coast, San Francisco and Seattle a couple of months ago, the clients there who do life-size were very encouraged by the uptick and tenant inquiries in recent months, caused by the fact that funding is returning to that space after a hiatus funding for that space last year. So we've seen a little bit of that translate into leases. We've heard quite a bit of chatter from different life-size sponsors suggesting that they're seeing a meaningful uptick in interest in space. So I think it's way premature to talk about repurposing life-size space for conventional office or other purposes.

George G. Gleason: The clients there, who do live science, were very encouraged by the uptick in tenant inquiries in recent months caused by the fact that funding is returning to that space after a hiatus of funding for that space last year. We've seen a little bit of that translate into leases. We've heard quite a bit of chatter from different life science sponsors suggesting that they're seeing a meaningful uptick in interest in space. So I think it's way too premature to talk about repurposing life science space for conventional office or other purposes.

Speaker Change #109: So, when I was on the West Coast,

Speaker Change #109: San Francisco and Seattle a couple of months ago. The clients there who do life science

Speaker Change #109: were very encouraged by the uptick in tenant inquiries.

Speaker Change #109: in recent months, caused by the fact that funding is returning to that space after a hiatus of funding for that space last year.

Speaker Change #109: We've seen a little bit of that translate into leases, we've heard quite a bit of

Speaker Change #109: chatter from different life science sponsors suggesting that they're seeing a meaningful uptick in interest in space.

Speaker Change #109: So I think it's way premature to talk about repurposing live science space for conventional office.

George G. Gleason: You know, it is repurposable, uh... for conventional office easily, and one of the clients that we met with when I was in San Francisco had a, you know, national credit tenant quality tenant looking at an entire building that they had built for life science. It was not a life science tenant, but the tenant liked the building, liked the location, it fit the needs of their people. So, you know, they were in contention along with several other buildings as a solution for the space needs of that tenant that was not a life science tenant, even though the building was built to high purpose-built life science standards.

George Gleason: You know, it is repurposed so both for conventional office easily. And one of the clients that we met with when I was in San Francisco had a, you know, national credit tenant quality tenant looking at an entire building that they had built for life-size. It was not a life-size tenant, but the tenant liked the building like the location it fit the needs for their people. So, you know, they were in contention along with several other buildings as a solution for the space needs for that tenant. There was not a life-size tenant, even though the building was built to high purpose-built life-size standards.

Speaker Change #109: or other purposes, you know, it is repurposable for conventional office easily and

Speaker Change #110: One of the clients that we met with when I was in San Francisco had a

Speaker Change #110: You know, national credit tenant quality tenant looking at a entire building that they had built for life science. It was not a life science tenant, but the

Speaker Change #110: Tenant liked the building, liked the location, it fit the needs for their people, so

Speaker Change #110: They were in contention, along with several other buildings, as a solution for the space needs for that tenant that was not a life science tenant, even though the building was built to pay.

George G. Gleason: So it is convertible, but I think you're going to see, you know, a significant improvement in leasing over the next 12 months or so in the life science space because capital is returning to that space, and certainly the aging of not only the US but the world population, and the increased focus on health care at the government level. There are just a lot of factors that are favorable long-term factors for the life science industry.

George Gleason: So it is convertible, but I think you're going to see, you know, a significant improvement in leasing over the next 12 months or so in the life-size space because capital is returning to that space. And certainly the aging of not only our U.S. but the world population, the increased focus on health care at the government level. There are just a lot of factors that are favorable long-term factors for the life-size industries. I think you're going to see improved leasing conditions there. Great. Thanks for the call of the goods. Okay. Thank you. I appreciate it. Thank you.

Speaker Change #110: purpose-built life science standards. So it is convertible, but I think you're going to see, you know, a significant

Speaker Change #110: improvement in leasing over the next 12 months or so in the life science space because capital is returning to that space.

Speaker Change #110: aging of not only our U.S. but the world population, the increased focus on health care at the government level. There are just a lot of factors.

George G. Gleason: I think you're going to see improved leasing conditions there. Great. Thanks for the call, George. Okay, thank you. I appreciate it.

Speaker Change #110: that are favorable long-term factors for the life science industry.

Speaker Change #110: I think you're going to see improved leasing conditions there.

Operator: Thank you. Our next question comes from Samuel Varga with UBS. Please proceed. Good morning.

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

Speaker Change #110: Great. Thanks for the call, George.

Samuel Varga: Good morning. Good morning, Samuel.

George G. Gleason: Okay, thank you. I appreciate it.

Samuel Varga: Good morning, Samuel. I wanted to just switch back to payoffs just for a second and, hopefully, dive a little bit into your view of the industry. Is there a, when I'm thinking about the permanent marquee and receiving these projects, you know, as they pay off, are there certain types of buildings or industries that are, sort of, more ready from a permanent market perspective, or there's no real trend that you can see yet at this point? George.

Speaker Change #111: Thank you. Our next question comes from Samuel Varga with UBS. Please proceed.

Samuel Varga: I wanted to just switch back to pay-offs just for a second, and hoping to sort of that have a little bit into your view of the industry. I'm thinking about the permanent marquee and receiving these projects as they pay off. Are there certain types of buildings or industries that are sort of more ready from a permanent market perspective, or there's no real trend that you can see yet at this point?

Samuel Varga: Good morning.

Samuel Varga: Good morning, Samuel.

Samuel Varga: I wanted to just switch back to payoffs just for a second and hoping to sort of...

Speaker Change #113: Let's dive a little bit into your view of the industry.

Samuel Varga: Is there a, when I'm thinking about the permanent market and receiving these projects as they pay off, are there certain types of buildings or industries that are sort of more ready from a permanent market perspective, or there's no real trend that you can see yet at this point?

Brandon Hamlin: Let me take that, George.

Brandon Thomas King: Yeah, yeah, yeah. So yeah, we've been tracking our repayments to try to understand Samuel exactly what he was saying. That the answer to that question, and you know, we're starting to actually see some movement there in terms of how much is being refinanced, how much is actually being paid off from sale, what, you know, what's going on there. And actually, in the first quarter, all of our repayments were coming from refinance opportunities, but in the second quarter, we actually had a pretty good number, I think, of the 17 payoffs that we had.

Brandon Hamlin: Yeah, Brian. Yeah, we've been tracking our repayments to try to understand, Samuel, exactly the answer to that question, and we're starting to actually see some movement there in terms of how much being refinanced, how much is actually being paid off from sale, what's going on there? And actually, in the first quarter, all of our repayments were coming from refinance opportunities, but in the second quarter we actually had a pretty good number. I think of the 17 payoffs that we had. We actually had a couple that sold; of course, our condo projects sell out. And then we actually had, I don't know that it's permanent financing; I'm guessing it's temporary, but some folks just pay us off without debt.

Speaker Change #114: Let me take that, George.

George G. Gleason: Yeah, yeah, so yeah, we've been tracking...

Samuel Varga: our repayments to try to understand, Samuel, exactly that.

Speaker Change #115: The answer to that question, and we're starting to actually see some movement there in terms of how much is being refinanced, how much is actually being paid off from sale.

Speaker Change #115: What's going on there and actually in the in the in the first quarter all of our repayments

Speaker Change #115: were coming from refinance.

Brandon Thomas King: We actually had a couple that sold, and of course, our condo projects sold out. And then we actually had, I don't know if it's permanent financing, I'm guessing it's temporary, but some folks just pay us off without debt. But we did have 11, I think, of those were refi by a third party.

Speaker Change #115: opportunities.

Speaker Change #115: But in the second quarter, we actually had a pretty good number, I think, of the 17 payoffs that we had.

Speaker Change #115: We actually had a couple that sold. Of course, our condo projects sell out. And then we actually had, I don't know that it's permanent financing. I'm guessing it's temporary, but some folks just pay us off.

Brandon Hamlin: But we did have 11, I think, of those were re-five by third party. In most cases, it's going to be more of a bridge solution. The interest rate levels are still at a place where, as we said before, our sponsors are carefully monitoring what's going on there. And we've everyone realizes we've been strung along over the last eight, nine months around visions of rate reductions that would spur that refinance market. But I mean, at the end of the day, we're still seeing good refinance activity in our projects. I think most of it, though, is going to be more at the bridge level, still floating rate, still short term where they can move on to a more desirable and for them profitable long term financing.

Brandon Thomas King: In most cases, it's going to be more of a bridge solution. The interest rate levels are still at a place where, as we said before, our sponsors are carefully monitoring what's going on there. And everyone realizes we've been strung along over the last eight, nine months around visions of rate reductions that would spur that refinance market. But I mean, at the end of the day, we're still seeing good refinance activity in our projects.

Speaker Change #115: without debt, but we did have 11, I think, of those were refined by third party.

Speaker Change #116: You know, in most cases, it's going to be more of a bridge solution.

Speaker Change #115: The interest rate levels are still at a place where, as we said before, our sponsors are carefully monitoring what's going on there, and everyone realizes we've been strung along over the last...

Speaker Change #115: you know, eight, nine months around visions of rate reductions that would

Brandon Thomas King: I think most of it, though, is going to be more at the bridge level, still floating rate, still short term, where they can move on to more desirable, and for them, profitable, long-term financing. There is long-term financing going on out there, but I don't think a lot of it is hitting our portfolio. Yeah, Brandon, I would add to that, you know, where we are seeing a lot of really permanent, long-term financing is in the multifamily space because Fannie and Freddie financing is a very stable, very cost-effective source of financing. So that's where we're seeing a lot of people really put some assets away permanently. I think you would agree with that, Brandon. Multifamily housing is definitely the place that that happens.

Speaker Change #115: spur that refinance market. But, I mean, at the end of the day, we're still seeing good, you know, refinance activity.

Speaker Change #117: in our projects. I think most of it, though, is going to be more at the bridge level, still floating rate, still short-term, where they can move on to a more desirable and, for them, profitable long-term financing.

Brandon Thomas King: There is long-term financing going on out there, but I don't think a lot of it is hitting our portfolio.

Speaker Change #117: There is long-term financing going on out there, but I don't think a lot of it is hitting our portfolio.

Brandon Hamlin: Brandon, I would add to that, where we are seeing a lot of really permanent long-term financing is in the multi-space because, in your opinion, pretty financing is a very stable, very cost-effective source of financing. So that's where we're seeing a lot of people really solve some assets away permanently. I think you would agree with that, Brandon. The multi-family is definitely the place that that happens. Yeah, but there is a lot of bridge financing coming in to sponsor. Yeah, it takes you all the color on that.

Speaker Change #115: Brandon, I would add to that, you know, where we are seeing a lot of really permanent long-term financing is in the multi-space because your Fannie and Freddie

Brandon Thomas King: Financing is a very stable, very cost-effective source of financing, so that's where we're seeing a lot of people really salt some assets away permanently. I think you would agree with that, Brandon.

Brandon Thomas King: Yeah, but there's a lot of bridge financing coming in to help sponsors. Thanks for the caller on that. And then just my follow-up question is around loan yields, trying to get a better sense of the residue originations that are currently, you know, funding up so far are those, do the spreads roughly approximate the book's average spread over SOFR, or is there a difference there? And then, too, on the indirect side, as you said, I had this sort of, an extra percentage point, let's say, of the loan book into into I'll tell you what...

Brandon Thomas King: The multifamily is definitely the place that that happens.

Brandon Thomas King: Yeah, but there is a lot of bridge financing coming in to sponsors.

Brandon Hamlin: And then just my follow-up is around low yields. I'm trying to get a better sense of the residue originations that are currently funding up so far. Are those due to spreads? Roughly approximate the book's average spread over sofa, or is there a difference there? And then just as an addition to that too, on the indirect side, as you add sort of an extra percentage point, let's say, of the loan book into that portfolio. What are the book yields on those? And are those floating rate as well? I'll tell you. Go ahead, Brandon.

Speaker Change #118: Thanks for all the color on that. And then just my follow-up is around loan yields. I'm trying to, I guess, get a better sense of the residency originations that are currently, you know, funding up so far. Are those

Speaker Change #119: Do the spreads.

Speaker Change #119: roughly approximate the book's average spread over SOFR or is there a difference there and then just as an addition to that too on the indirect side as you

Speaker Change #120: I had sort of...

Speaker Change #121: an extra percentage point, let's say, of the loan book into that portfolio. What are the book yields on those?

Brandon Thomas King: I will. I will. Go ahead, Brandon.

Brandon Thomas King: Well, I'll take the RISG, George, and you can you can dive into indirect, you know, a lot of a lot of the yield, the spread data is going to be determined by, you know, what types of projects you're doing, and how you're, you know, working hard, you know, market in, market out. The guys are doing a phenomenal job, really, of at the same time originating at lower leverage, you know, still getting strong spreads, and, of course, our condo loans, which, you know, George discussed earlier, we view as some of our safest lending opportunities, given the strong pre-sales, especially in the southeast, in Miami more particularly, where Greg continues to see a lot of opportunity, you tend to get strong spreads on that product type.

Brandon Hamlin: Well, I'll take Doris G. George and you can dive into indirect. A lot of the yield, the spread data is going to be determined by what types of projects you're doing and how you're working hard, market in, market out. The guys are doing a phenomenal job, really, of at the same time, originating at lower leverage, still getting strong spreads. And of course, our condo loans, which George discussed earlier, we view as some of our safest lending opportunities, given the strong pre-sales, especially in the southeast, in my any more particularly where Greg continues to see a lot of opportunity. You tend to get strong spreads on that product type.

Speaker Change #122: are those floating rate as well.

Speaker Change #123: you know I'll tell you

Speaker Change #123: Go ahead, Brandon. Well, I'll take the RISG, George, and you can dive into indirect. You know, a lot of the spread data is going to be determined by, you know, what types of projects you're doing.

Speaker Change #124: and how you're, you know, working hard, you know, market in, market out. The guys are doing a phenomenal job.

George G. Gleason: really of at the same time originating at lower leverage You know still getting strong spreads and and of course our condo loans Which you know George discussed earlier we view as some of our safest

George G. Gleason: lending opportunities given the strong pre-sales, especially in the southeast.

George G. Gleason: in Miami more particularly, where Greg continues to see a lot of opportunity. You tend to get strong spreads on that product type. So depending on how...

Brandon Thomas King: So, depending on how the book is weighted in terms of different product types, it'll move, but I believe generally, and I hadn't done a real thorough comparison on that, but I think the spreads today are comparing favorably to what we've got on the book, that we lose. Sam, are you there? Samuel?

Brandon Hamlin: So, depending on how the book is weighted in terms of different product types, it'll move. But I believe generally, and done a real thorough comparison on that. But I think the spreads today are comparing favorably to what we've got on the book. If we lose, I am Sam. Yes, I'm here.

Speaker Change #125: how the book is weighted in terms of different product types. It'll move, but I believe generally, and I hadn't done a real thorough comparison on that, but I think the spreads today are comparing favorably to what we've got on the book.

Brandon Thomas King: Yes, yes, I'm here. Yep. Yeah, George. Are you able to comment on him directly?

George Gleason: Yeah, George, are you able to come in on indirect? Now do you have any further questions? Yeah, I was just wondering if you can give some color around the indirect book yield and where those are regions that are coming in? Are those also floating rates? The indirect stuff is always all fixed. The RESG stuff is always all variable. And you know, I can't give you any color on the indirect, really. I don't think it's moved very much in the last 90 days from where we were. And we continue to continue to see a fairly even, steady flow of distance layer.

George G. Gleason: Now, do you have any further questions? Yeah, I was just wondering if you could give some color on the indirect book yield and where those originations are coming from. Are those also floating rates, or are there some fixed components there? The indirect stuff is always all fixed.

Speaker Change #125: Hang on.

Samuel Varga: Did we lose... Sam, are you there? Samuel? Yes, yes, I'm here. Yep. Yeah, George, are you able to comment on Indirect?

Speaker Change #126: Now, do you have any further questions?

Speaker Change #127: I was just wondering if you can give some color on the indirect book yield and where those originations are coming in. Are those also floating rates or are there some fixed components there? The indirect stuff is always all fixed. The RESG stuff is always all variable.

George G. Gleason: The RESG stuff is always all variable. And, you know, the... I can't give you any color on the indirect really. It, I don't think, has moved very much in the last 90 days from where we were, and we continue to continue to see a fairly even steady flow of business there. Understood. Thanks for the color.

Speaker Change #128: You know, the, uh, uh,

Speaker Change #129: I can't give you any color on the indirect, really.

Speaker Change #130: It, I don't think, has moved very much in the last 90 days from where we were, and we continue to see a fairly even, steady flow of business there.

George Gleason: Understood. Thank you for the color. All right. Thank you.

Samuel Varga: All right, thank you. Thank you. Our next question comes from the line of Brian Martin with Janie Montgomery Scott. Please proceed. Hey guys, most of mine have been answered, but just a follow-up to that last one, which I was going to ask, it sounds like the yields on the RESG portfolio versus the yields on the CIB portfolio are similar.

Brian Martin: Our next question comes from the line of Brian Martin with Janie Montgomery Scott. Please proceed.

Speaker Change #131: That's good.

Speaker Change #132: Understood. Thanks for the color.

Brian Joseph Martin: Hey guys, most lines have most of how they've been answered. But just a follow-up that last one, which I was going to ask you, it sounds like the yields on the, as you kind of have this transition or handoff, the yields on the RESG portfolio versus the yields on the CIB portfolio are similar. Is that fair how to think about that as you transition from one to the other depending on how things play out there? Is that...

Samuel Varga: Is that fair how to think about that as you transition from one to the other, depending on how things play out there? Are they generally consistent, or are there, you know, some significant differences there?

Speaker Change #133: All right. Thank you. Thank you.

Speaker Change #134: Our next question comes from the line of Brian Martin with Jenny Montgomery Scott. Please proceed.

Brian Joseph Martin: Hey guys, most of the lines have been answered, but just a follow-up to that last one which I was going to ask, it sounds like the yields on the, as you kind of have this transition or handoff, the yields on the RESG portfolio versus the yields on the CIB portfolio.

Brian Joseph Martin: Debbie, generally consistent, or is there some significant differences there? We are going to have a lower nominal yield, Brian, on the CIB portfolio and lower fees for the most part on that portfolio. The mitigating factor there is we get meaningful deposits with some of those CIB opportunities and treasury management opportunities, as well as some other business opportunities. I think when you look at it on a pure yield basis, you would say, well, you are giving up a lot, and you are going to delete your yields. If you look at it on a return on equity basis and you factor in all of the costs and benefits, including deposits, Treasury management, and so forth, I think we end up fairly close to the same place.

Speaker Change #136: are similar. Is that fair how to think about that as you transition from one to the other, depending on how things play out there?

Brian Joseph Martin: We are We're going to have a lower nominal yield, Brian, on the CIB portfolio and lower fees for the most part on that portfolio. The mitigating factor there is that we get meaningful deposits with some of those CIB opportunities and treasury management opportunities, as well as some other other business opportunities. So, I think when you... If you look at it on a pure yield basis, you would say, well, you're giving up a lot, and you're going to dilute your yields if you look at it on a return on equity basis and you factor in all of the costs and benefits, including deposits, treasury management, and so forth.

Speaker Change #136: Are they generally consistent or is there, you know, some significant differences there? We are going to have a lower nominal yield, Brian , on the CIB portfolio. And lower...

Speaker Change #137: These, for the most part, on that portfolio, the

Brian Joseph Martin: mitigating factor there is we get meaningful deposits with some of those CIV opportunities and Treasury management opportunities as well as some other other business opportunities.

Speaker Change #138: So, I think when you...

Speaker Change #139: When you, if you look at it on a pure yield basis, you would say, well, you're giving up a lot to...

Speaker Change #139: And you're going to dilute your yields. If you look at it on a return on equity basis, and you factor in all of the costs and benefits, including deposits, treasury management, and so forth.

George G. Gleason: I think we'll end up fairly close to the same place, but just from a pure nominal yield, yeah, there's going to be some long-term dilution to our headline margin number from that. Gotcha. Okay. So that's helpful. It makes sense. And you get the diversification with it as well.

Tim Hicks: But just from a pure nominal yield, there is going to be some long-term dilution to our headline margin number from that.

Speaker Change #139: I think we we end up fairly close to the same place, but just from a pure nominal yield, yeah, there's going to be some long-term dilution to our headline margin number from that.

Tim Hicks: That's it. That's helped. That makes sense.

Brian Joseph Martin: So, um, and then maybe just the other one was just on the margin this quarter was a little bit held up a little bit better than it seemed like we were looking for. Just kind of wondering if we do see, you know, a potential rate cut here in the back half, just, just kind of remind us of your kind of near-term outlook or you know as you get into the next, you know, two to four quarters on NIM. That'd be great.

Tim Hicks: You get the diversification with them as well.

Tim Hicks: Maybe just the other one was just on the margin. This quarter was a little bit held up a little bit better than we were looking for. Just wondering if we do see potential rate cut here in the back half, if you just remind us of your near-term outlook or, as you get into the next two to four quarters, on NIM, that would be great. Yeah, what I would tell you and I think we alluded to this in the management comments, you know, our higher level of repayments and Q2 contributed to a little bit higher level of kind of minimum interest celebrated deferred amortization or deferred origination fees and so forth.

Speaker Change #140: Gotcha, okay, so that's helpful, it makes sense, and you get the diversification with it as well. And then maybe just the other one was just on the margin this quarter was a little bit held up a little bit better than it seemed like we were looking for, just kind of wondering if we do see, you know, a potential rate cut here in the back half.

Speaker Change #141: if you just kind of remind us your kind of near-term outlook or you know as you get into the next you know two to four quarters on NIM.

George G. Gleason: Yeah, what I would tell you, and I think we alluded to this in the management comments, you know, our higher level of repayment, and Q2 contributed to a little bit higher level of minimum interest accelerated deferred amortization or deferred origination fees and so forth. So Q1 was probably on the low side of average, and these are such variable things, it's hard to say what the average is, but you know we felt like Q1 was probably under two or three million dollars. Q2 may have been high, a couple of million dollars. So there's a little noise, you know, bass is born or two sorts of noise and those numbers, but not anything too big.

Speaker Change #142: That'd be great.

Speaker Change #143: Yeah, what I would tell you, and I think we alluded to this in the management comments, you know, our higher level of repayments.

Speaker Change #143: and Q2 contributed to a little bit higher level of kind of

Tim Hicks: So Q1 was probably on the low side of average, and these are such bearable things. It's hard to say what average is, but you know, we felt like Q1 was probably low to a $3 million. Q2 may have been high, a couple of million dollars. So there's a little noise, you know, basis point or two sort of noise in those numbers, but not anything too big. The RISG portfolio is bearable rate. We've talked a lot about the floors, and in figure 29 of the management comment document, will give you the evolution of those floor rates over the last six months, which we made some significant progress there.

Speaker Change #143: Minimum interest, accelerated deferred amortization or deferred origination fees and so forth.

Speaker Change #143: Q1 was probably on the low side of average, and it's...

Speaker Change #144: These are such variable things, it's hard to say what average is, but you know, we felt like Q1 was probably low, two or three million dollars.

George G. Gleason: [inaudible] The RESG portfolio is a bearable rate. We've talked a lot about the floors, and in figure 29 of the management comment document, we give you the evolution of those floor rates over the last six months, which shows that we've made some significant progress there. But when the Fed does start lowering rates, since all of RESG's portfolio is variable, those will start heading down within a month after the Fed cuts right. Most of them are tied to one month-term SOFR.

Speaker Change #144: The...

Speaker Change #144: RESG portfolio is bearable right. We've talked a lot about the floors and

Speaker Change #144: Figure 29 of the Management Comment Document will give you the evolution of those floor rates over the last six months, which we've made some significant progress there. But when the Fed does start lowering rates,

Tim Hicks: But when the Fed does start lowering rates. Since all of our ESG's portfolio is variable. Those will start heading down within a month after Fed cuts, right? And most of them are tied to one month term so far, so they'll anticipate that reduction in most of them just on the first or the 11th of the month, so there'll be a few days depending on when the Fed cuts rates, like between a Fed impact and so forth. So what we've been trying to do to mitigate that is one, get those floor rates up as I mentioned, but two, we've been trying to shorten the duration of our deposit book, and Cindy and Otikarily, our Chief Deposit Officer, have done a really good job of that.

Speaker Change #144: since all of RESG's portfolios.

George G. Gleason: So, you know, they'll anticipate that reduction and most of them on the 1st or the 11th of the month, so it'll be a few days depending on when the Fed cuts rates, the lag between a Fed impact, and so forth. So what we've been trying to do to mitigate that is one, get those floor rates up, as I mentioned. But two, we've been trying to shorten the duration of our deposit book, and Cindy and Adi Curley, our chief deposit officer, have done a really good job of that.

Speaker Change #144: those will start heading down within a month after

Speaker Change #144: after the Fed cuts rates and most of them are tied to a one-month term SOFR so you know they'll

Speaker Change #144: anticipate that

Speaker Change #144: reduction and most of them on the 1st or the 11th of the month so it'll be

Speaker Change #144: A few days, depending on when the Fed cuts rates lag between a Fed impact and so forth. So what we've been trying to do to mitigate that

Speaker Change #144: is one, get those floor rates up as I mentioned, but two, we've been trying to shorten the duration of our deposit book.

George G. Gleason: So, you know, if the Fed started cutting a year ago or a month after they peaked rates, we would have seen a pretty good reversal in loan yields and a long duration adjustment over three or four quarters in our deposit book.

Tim Hicks: So, you know, if the Fed started getting a year ago, or a month after they've peaked rates, we would have seen a pretty good reversal in loan yields and a long duration adjustment of three or four quarters in our deposit books. We've got most of that deposit book adjustment gone from near term to one quarter and significantly more in the second quarter. So we're getting that lined up pretty well in anticipation of a Fed reduction. We'll get that impact quite a bit over the last few quarters.

Speaker Change #145: and Cindy and Heidi Curley, our Chief Deposit Officer, have done a really good job of that. So, you know, had the Fed started cutting a year ago, or a month after they've peaked rates,

George G. Gleason: We've got most of that deposit book adjustment gone from near term to one quarter and significantly more in the second quarter. So we're getting that lined up pretty well in anticipation of a Fed reduction. We'll see, we'll give up some margin in the short run for a quarter or two, but we've mitigated that impact quite a bit over the last few quarters.

Speaker Change #145: We would have seen a pretty good

Speaker Change #145: reversal and loan yields and a long-duration adjustment of three or four quarters on our deposit book.

Speaker Change #145: We've got most of that deposit book adjustment gone from near term to one quarter and significantly more in the second quarter. So we're getting that.

Speaker Change #145: lined up pretty well in anticipation of a Fed reduction. We'll give up some margin in the short run for a quarter or two, but we've mitigated that impact quite a bit over the last few quarters.

Tim Hicks: That's super helpful.

Brian Joseph Martin: Gotcha. That's super helpful. So thank you for taking the question. All right, thank you. Thank you. Please take a moment for our next question. All right, and as for Matt Olney from Stephens, please proceed. Yeah, thanks for taking the follow-up. The two large RESG repayments in the 2Q that were disclosed, I think you said one was in New York and one was in Chicago. I know that some of the larger projects at RESG have been published by local real estate publications, and some investors like to track these larger projects.

Tim Hicks: So thank you for taking the question.

Tim Hicks: All right, thank you.

Operator: Thank you. One moment for our next question. All right, and is from Matt Olney from Stephens. Please proceed.

Speaker Change #147: Gotcha. That's super helpful. So thank you for taking the questions.

Matthew Covington Olney: So, curious if you care to disclose which two projects these are that were repaid in the second quarter. Well, yeah, I think they've been pretty prominently disclosed and are on the market out there. So well, I'm always reticent about talking about specific projects. The big New York project was the High Rise Condo Project on the upper west side there, around 66th Street in New York. Gary Barnett, Exidel Project, a group we've done a lot of business with. They have just done a brilliant execution on that project.

Matthew Olney: Yeah, thanks for taking the follow-up. The two large RESG repayments in the two queues that were disclosed. I think you said one was in New York, Orleans, and Chicago. I know that some of the larger projects at RESG had been published by local real estate publications, and some investors like to track these larger projects.

Speaker Change #146: All right, thank you.

Speaker Change #148: Thank you. One moment for our next question.

Speaker Change #148: All right, and as for Matt Olney from Stephens, please proceed.

Matthew Covington Olney: Yeah, thanks for taking a follow-up. The two large RESG repayments in the 2Q that were disclosed, I think you said one was in...

Matthew Covington Olney: New York ones in Chicago. I know that some of the larger projects at RESG had been published by local real estate publications. And some investors like to track these larger projects. So curious if you care to disclose which two projects these are that were repaid in the second quarter.

George Gleason: So curious if you cared as close which two projects these are that were repaid in the second quarter. Well, yeah, I think I think they've been pretty prominently disclosed and marked out there.

George Gleason: So, well, I always read us about talking about specific projects. The Big New York project was the X-dale high-rise condo project on the Upper West Side there around 66 Straight in New York. Gary Burnett X-Dale project. A group we've done a lot of business with, and they have just done a brilliant execution on that project. And to give you an idea, you know, that was an $840 million total department. We were funded up to $511 million, expecting to fund up close to the MAX-840, but then they were expected to TCO the bottom half of that building and start closing on condos cells and that.

Speaker Change #149: Well, yeah, I think they've been pretty prominently disclosed and marked out there, so while I'm always reticent about talking about specific projects, the Big New York project was a...

Speaker Change #149: High Rise Condo Project on the upper west side there around 66th Street in New York. Gary Barnett, Extel Project.

George G. Gleason: And to give you an idea, you know, that was an $840 million total commitment. We were funded up to $511 million, expecting to end up close to the max 840, but then they were expected to TCO the bottom half of that building and start closing on condo sales on that. So we would have had substantial paydowns on that project in Q3, probably in Q4 this year, that would have materially reduced our loan just from condo sales on the bottom half of the project.

Speaker Change #149: a group we've done a lot of business with.

Speaker Change #149: They have just done a brilliant execution on that.

Speaker Change #149: project. And to give you an idea, you know, that was an eight hundred and forty million dollar total commitment.

Speaker Change #149: We were funded up to $511 million.

Speaker Change #149: expecting to fund up close to the max 840, but then they were

George Gleason: So we would have had substantial paydowns on that project in Q3, probably in Q4 this year. They would have materially reduced our loan just from condos cells on the bottom half of the project. But they found a re-finance opportunity that met some of their needs, better than staying in our loan. So they re-finance that away from us with our appreciation for having gotten to do the construction financing, that appreciation for that long-term relationship. The project in Chicago was JDL's One Chicago project, which beautifully elegant project, expertly done great execution. We had funded up to our maximum 475 million; all that had begun to pay down from closing of condos cells.

Speaker Change #149: expected to TCO.

Speaker Change #149: the bottom half of that building and start closing on condo sales and that.

Speaker Change #149: We would have had substantial paydowns on that project.

Speaker Change #149: in Q3 probably or in Q4 this year that would have materially reduced our loan just from condo sales on the bottom half of the project.

George G. Gleason: But they found a refinance opportunity that met some of their needs better than staying in our loans. They refinanced that away from us with our appreciation for having gotten to do the construction financing and appreciation for that long-term relationship. The project in Chicago was JDL's One Chicago project, which was a beautifully elegant project, expertly done, and great execution. We had funded up to our maximum $475 million, all that, and that had begun to pay down from the closing of condo sales. So we were down to $376 million on that. I think it was fully or nearly fully funded at the max and then started paying down from condo sales.

Speaker Change #149: but they found a refinance opportunity that met some of their needs better than staying in in our loans so

Speaker Change #149: project in Chicago was JDL's One Chicago project, which

Speaker Change #149: beautifully elegant project, expertly done, great execution. We had funded up to our maximum $475 million, all that, and that had begun to pay down.

George Gleason: So we were down to $376 million, and that it I think was fully or nearly fully funded at the MAX and then started paying down from condos cells. Another just excellent project with excellent execution from our customer customer.

Speaker Change #149: from closing of condo sales. So we were down to $376 million in that. It, I think, was fully or nearly fully funded at the max and then started paying down from condo sales. Another just

George G. Gleason: Another excellent project with excellent execution from our customers there. We appreciate that. All right, thank you. Thank you. I will pass it back to George Gleason for final comments. All right.

Matthew Covington Olney: Appreciate that.

Speaker Change #149: Excellent project with excellent execution from our customers there.

Jay Staley: All right, thank you. Thank you.

George Gleason: I would pass it back to George Gleason for final comments. All right, thank you. There have been no more questions.

George G. Gleason: There being no more questions, we thank you so much for your participation, Kyle. We look forward to talking with you in another 90 days and reporting another good quarter's results. So, thank you so much.

Speaker Change #150: Appreciate that.

Jay Staley: We thank you so much for your participation in Cal. We look forward to talking with you in another 90 days and reporting another good quarter's result. So thank you so much. Have a great day.

Speaker Change #150: All right, thank you. Thank you. I will pass it back to George Gleason for final comments.

George G. Gleason: All right, thank you. There being no more questions, we thank you so much for your participation in the call. We look forward to talking with you in another 90 days and reporting another good quarter's result. So thank you so much. Have a great day.

Operator: And thank you all for participating, and you may now disconnect.

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Speaker Change #152: Thanks for watching!

Speaker Change #152: [inaudible]

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Speaker Change #152: Thank you for watching!

Speaker Change #152: [inaudible]

Good day, everyone, and thank you for standing by. Welcome to Bank of the Decade 2nd Quarter 2024, Named Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. To participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please be advised that today's conference is being recorded.

Operator: [inaudible] Thanks for watching! [inaudible] Good day, everyone, and thank you for standing by. Welcome to Bank OzK's second quarter 2024 NINDS conference call. At this time, all participants are in a listen-only mode.

Speaker Change #153: Good day, everyone, and thank you for standing by. Welcome to Bank OzK Second Quarter 2024 NINDS Conference Call.

Jay Staley: After this presentation, there will be a question and answer session. To participate, you will need to press star 1-1 on your telephone. You will then hear a message advising that your hand is raised. To withdraw your question, simply press star 1-1 again.

Speaker Change #154: At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. To participate, you will need to press star 1 1 on your telephone. You will then hear a message advising your hand is raised.

Operator: Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Director of Investment Relations, Jay Staley. Please proceed. Good morning. I'm Jay Staley, Director of Investor Relations and Corporate Development for BankOZK.

I would now like to hand the conference over to the Director of Investor Relations. Jay Staley, please proceed.

Speaker Change #154: To withdraw your questions simply press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Director of Investment Relations, Jay Staley. Please proceed.

Good morning.

I'm Jay Staley, Director of Investor Relations and Corporate Development for Bank OZK. Thank you for joining our call this morning and participating in our question and answer session.

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

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

Jay Staley: Good morning. I'm Jay Staley, Director of Investor Relations and Corporate Development for BankOZK. Thank you for joining our call this morning and participating in our question and answer session. In today's Q&A session, we may make forward-looking statements about our expectations, estimates, and outlook for the future.

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

Joining me on the call to take your questions are George Gleason, Chairman and CEO; Brandon Hamlin, President; Tim Hicks, Chief Financial Officer; and Cindy Wolf, Chief Operating Officer. We will now open up the lines for your questions.

Operator: 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. Let me now ask our operator, Carmen, to remind our listeners how to queue for questions. Thank you. Yes. And as a reminder, that is star number one to get in the queue and wait for your name to be announced to remove yourself. Press star one one again.

Speaker Change #156: 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.

Let me now ask our operator, Carmen, to remind our listeners how to queue in for questions. Thank you. Yes, and as I remind her, that is star 1-1 to get in the queue and wait for your name to be announced. To remove yourself, press star 1-1 again.

Speaker Change #157: We will now open up the lines for your questions. Let me now ask our operator, Carmen, to remind our listeners how to queue in for questions.

Carmen: Thank you. Yes. And as a reminder, that is star 11 to get in the queue and wait for your name to be announced. To remove yourself, press star 11 again. One moment for our first question.

One moment for our first question. And he comes from the line of Matt Only with Stephens, please proceed.

Matthew Covington Olney: One moment for our first question, and it comes from the line of Matt Olney with Stephens. Please proceed. Hey, thanks. Good morning, everybody. Good morning, Matt. I'll see you next time.

Hey, thanks for morning, everybody. Morning, Matt. So, I want to start off, I guess, on that San Diego life science project and the additional capital that you did disclose in the management commentary. Any color on why the amount of the $87 million that was included, I mean, presumably, I guess the new capital partners have some type of intrinsic value there assuming the project.

George G. Gleason: So I want to start off, I guess, on that San Diego Life Science Project and the additional capital that you disclosed in the management commentary. Any color on why the amount of the $87 million that was included? I mean, presumably, I guess, the new capital partners have some type of intrinsic value they're assuming in the project. Any color on how we arrived at $87 million? Matt, our loans all include reserve replenishment requirements that, you know, are subject to a calculation in our reasonable estimation.

Speaker Change #158: And it comes from the line of Matt Olney with Stephens. Please proceed.

Matthew Covington Olney: Hey, thanks. Good morning, everybody.

Speaker Change #159: Morning, Matt.

Matthew Covington Olney: So, I want to start off, I guess, on that San Diego Life Science Project and the additional capital that you disclosed in the management commentary.

Matthew Covington Olney: Any color on why the amount of the $87 million that was included, I mean, presumably, I guess the new capital partners have some type of intrinsic value they're assuming in the project. Any color on how we arrived at $87 million?

Any color on how we arrived at $87 million? Matt, our loans all include reserve replenishment requirements that are subject to a calculation in our reasonable judgment. And that was simply a mathematical calculation based on our judgment per the loan document. So, it was a regularly scheduled reserve replenishment that was required to come from additional equity, and there was no magic to it; it was just a mathematical calculation.

Matthew Covington Olney: And are subject to a calculation in a reasonable judgment.

Matthew Covington Olney: And that was simply.

A mathematical calculation based on our judgment per the.

Speaker Change #160: Part of the loan documents so it was <unk>.

Speaker Change #160: Regularly scheduled reserve replenishment that was required to come from additional equity in there was there was no magic to it it was just a mathematical calculation.

Foundation. Okay, thanks for that.

And then, I guess, you know, just kind of following up there, the $87 million, did it come in the form of additional collateral, or did the new mes partner take out the original equity sponsor? Just any more details behind the transaction that took place? Yes, the original equity sponsors fully engaged in the transaction and pursuing it, the mes partner is fully engaged in the transaction and pursuing it, came in the form of cash by a wire transfer. It is almost all capital contributions due into an account in the bank, where it's held as a reserve for future interest and expenses on the day.

Speaker Change #165: Okay. Thanks for that and then I guess just kind of following up there.

Speaker Change #161: The $87 million did it come in the form of additional collateral or did the new mezz partner take out the original equity sponsor just any more details behind the transaction that took place.

Speaker Change #162: Of the original equity sponsors totally engaged in the transaction in and pursuing it mezz partner is fully engaged in the transaction and pursuing that came in the form of cash by a wire transfer is almost all capital contributions do into an account in the bank.

So I mean, very standard deal; there was no drama or no nothing unique about it. It was a standard replenishment of reserves.

Speaker Change #162: Where it's held as a reserve for future interest expenses.

Speaker Change #162: Expenses on the deal side.

If the analysts have wrote the research on the report on this, had bothered to ask us any questions about it regarding, you know, what's your capital structure like, who's in it? You know, are they going to continue to support it and so forth? We could have explained that we have two very strong parties in this transaction. We've done a lot of business with the mass lender in this. Who is the strongest of the two partners by far, their capability to support the project financially as well as executed if they had to is clear cut.

Speaker Change #162: Various standard deal there was no drama or no nothing unique about it was a standard replenishment of reserves.

Speaker Change #162: Okay.

Speaker Change #163: If the analyst wrote the race our Jamba report on this had bothered to.

Speaker Change #163: Ask us any questions about it.

Speaker Change #163: Regarding what your capital structure lock.

Speaker Change #164: Who's in it.

Speaker Change #164: How are they going to continue to support it and so forth we kind of explained with two very strong.

Speaker Change #164: Parties in this transaction.

We have not a lot of business with the Mezz lender and the answer is the strongest of the two partners by far.

But the sponsor is fully engaged in this; they're proceeding with the transaction, the equity part, the mes partner is there needed. But, you know, this thing should have never gotten the attention it deserved. It's a great asset, five great buildings, and probably one of the best locations on the West Coast with a very strong, very capable sponsor, capital partner group supporting it. And if it takes two years to lease, or three years to lease, or five years to lease, those guys will get the finish line on it. I'm confident that's certainly our view of it.

Speaker Change #164: Their capability to support the project financially as well as executed if they had to as clear cut but the sponsors poorly engaged in this there per saving.

Speaker Change #164: With a transaction the aggregate par the mass partners are needed but.

Speaker Change #166: This thing should have gotten the attention it deserved at site.

Speaker Change #167: Great asset.

Five great buildings, and probably one of the best locations on the West coast with a very strong very capable.

Speaker Change #167: Sponsored capital partner group supporting that and if it takes two years delays for three years for lease or five years delays those guys.

And, you know, if we had been asked questions about it, I think we could have avoided all the drama and unnecessary publicity about this project because it's an excellent asset. And as we said in our management comments, we've given polls disclosure on a buyer; we consider the high quality asset, and we don't expect to discuss it again.

Speaker Change #167: We'll get to the finish line on that.

Speaker Change #168: I am confident that certainly our view of it and.

Speaker Change #168: If we had been asked questions about it I think we could have avoided.

Speaker Change #168: Our board and all the drama in an unnecessary.

Speaker Change #168: Publicity about this project because its an excellent asset and as we said in our management comments were driven pull disclosure on a dire we consider the high quality asset.

Okay, appreciate that and appreciate all the good disclosures on that project. I guess one of the questions that I'm getting from investors are just trying to understand the circumstances that would result in a construction loan to be graded below pass rated and not necessarily for any specific project just more broadly. If the construction loan is still under its interestors are a period, but, you know, the lease ups are behind plan or something's behind plan the project. Help us just appreciate the circumstances that would drive that construction loan to be below pass rated. Well, Matt has kind of depend on a totality of circumstances.

Speaker Change #168: And we don't expect to discuss it again.

Speaker Change #169: Okay I appreciate that and appreciate all the good disclosures on that on that project I guess, one of the questions that I'm getting from investors are just trying to understand the circumstances that would result in a construction loan to be graded below pass rated and not necessarily for any specific project.

Speaker Change #169: Just more broadly if the construction loan is still under its investors or a period, but the lease ups are behind plan or something to behind plan. The project help us just appreciate the circumstances that would drive that construction loan to be to be below past rated.

Number one, you know, we're always looking at the strength and quality of sponsorship and capital partners and their investment and their commitment to continue to support a project that may be maturing a little more slowly than was originally expected. So sponsorship, quality of sponsorship, capabilities of sponsorship are certainly number one. And number two is just the long-term expected prognosis and outcome on that project. It's not particularly alarming to us that a project delivers without leasing. The question that really drives our evaluation of a project is, number one, do the sponsors have the will and the capability to support a project till you have a successful outcome.

Speaker Change #169: Well, Matt as kind of depend on a totality of circumstances are number one.

Speaker Change #170: We're always looking at the strength and quality of sponsorship and capital partners.

Speaker Change #171: And their investment and their commitment.

Matthew Covington Olney: To continue to support a project that may be maturing a little more slowly than was originally expected so sponsorship quality of sponsorship capabilities. So sponsorship.

Matthew Covington Olney: Certainly number one.

Matthew Covington Olney: And number two is just the long term.

Matthew Covington Olney: Expected prognosis and outcome on that on that project.

Matthew Covington Olney: It's not particularly alarming to us at a project delivers without leasing they the question that.

Matthew Covington Olney: Really drives our.

Matthew Covington Olney: Evaluation of a project is.

And number two is the project of the quality and nature that you're going to have a successful outcome whether it's this year or next year, you know, three or four years down the road. And if you've got sponsors who have the motivation and the capacity to carry it, and the project is going to ultimately have a successful outcome. Then, you know, you certainly have a positive view of the project, and the San Diego project certainly fits that criteria. You know, the motivation that drives our customers to support their project is largely dependent upon the tremendous investments they have in the projects.

Speaker Change #172: Number one do the sponsors have the will and the capability to support a project. So you have a successful outcome and number two is the project of the quality and nature of that you're going to have a successful outcome, whether its this year or next year.

Speaker Change #172: Three or four years down the road and if you've got sponsors.

Speaker Change #172: Have the motivation and the capacity to carry it and project is going to ultimately have a successful outcome.

Speaker Change #172: Then you certainly have a positive view of the project and the San Diego project, certainly fits that criteria.

Speaker Change #172: The motivation that drives.

Speaker Change #172: Our customers to support their project is largely dependent upon the tremendous investments they have and.

Our average loan cost on our portfolio, I think, is 51% J. Is that where we are now. And, you know, our average loan value is 42, 43%. Even with all the re-appraisals in this cycle, that's still where we are on a weighted average loan cost loan basis. When you've got 50% of the cost of a project invested as equity, prep equity or maize, your coordinated members of the capital structure, you have a very nature of the cap stack, you have an inherent motivation to defend that investment. For example, you know, our loan on the San Diego projects, a half billion dollars; the capital partners in that equity and maize have over a billion dollars committed to that project.

Speaker Change #172: And the projects.

Speaker Change #172: Our our average loan to cost on our portfolio I think is 51% Jay is that where we are now in.

Speaker Change #172: <unk>.

Jay Staley: Our average loan to values 42, 43%, even with all the re appraisals.

Jay Staley: And the cycle, that's still where we are on a weighted average loan to cost loan to value basis.

Speaker Change #174: When you've got 50% of the cost of a project invested as equity <unk> equity or my eyes, you're subordinated members of the capital structure.

Speaker Change #173: Do you have a.

Speaker Change #173: The.

Speaker Change #173: The very nature of the cap stack you have an inherent.

Speaker Change #173: Motivation to defend that investment for.

Speaker Change #173: For example.

Speaker Change #173: Our loan on the San Diego projects, a half million dollars.

They are not going to walk away from a billion-dollar investment lightly. So the second part of the test is, is the project capable of having a successful execution. Now, there's a lot of noise in the CRE world today about projects that are just totally dead. And those are projects that are principally older projects that are, you know, in bad locations, have 50 or 60 or 30 or 40-year-old designs that are not built to current standards. So the combination of our low leverage and the fact that we've got ground up new construction that is built to modern standards, modern needs, modern expectations from tenant buyers, so that our sponsors have won a huge incentive because of their big investments.

Capital partners in that equity and Mezz have over a billion dollars committed to that project they are not going to.

Speaker Change #173: Walk away from a $9 billion investment lightly.

Speaker Change #173: The second part of the test is.

Speaker Change #173: Is the project capable of having a successful execution now there's a lot of noise in the CRE world today about projects that are just totally dead and those are projects that are principally older projects that are.

Speaker Change #173: In bad locations have 50, or 60, or 30 or 40 year old designs and are not built to current standards. So the combination of our low leverage and the fact that we've got ground up new construction that is built to modern standards moderns natives modern expectations.

Management. And, too, I'm motivated to continue to support it because our projects will ultimately lease or sell and be successful. The other thing I would tell you about that is, you know, we talk a lot and we've said this since the Fed started raising rates that we expected the vast majority of our sponsors would continue to support their projects until economic conditions normalized or property performance reached a stabilized state. And that's certainly true. What I would point out to you while we have a handful of substandard loans and a handful of special mention loans in the RISG portfolio, all of those loans are current, and the sponsors remain engaged in working towards solutions on those projects.

Speaker Change #175: Tenant in bars.

But our sponsors have won a huge incentive because of their big investment.

Speaker Change #175: And two I motivation to continue to support it because our projects will ultimately lease or sale and be successful.

Speaker Change #175: The other thing I would tell you about that is we talk a lot and we've said this since the fed started rising brides.

Speaker Change #175: That we expected the vast majority of our sponsors would continue to support their projects until economic conditions normalized our property performance reached a stabilized state.

Speaker Change #175: And that's certainly true what I would point out to you why we have a handful of.

Speaker Change #175: Substandard loans in a handful of special mentioned loans in the <unk> portfolio.

Speaker Change #175: All of those loans are current and the sponsors remain engaged and working towards solutions on those projects.

And the only two instances we've had where sponsors have given up on a project are the two pieces of Oreo we have. So every one of our substandard credits is current and performing in the sense that it's not past due. Now, we put one of them online because we wrote it down. And what calls us to do that is some noise from the sponsors about their commitment on that small project to continue to support it. So that we consider the most challenged project we've got. But even with that, the sponsors have made their monthly interest payment out of their pocket this month.

And.

Speaker Change #175: Only two instances, where he pad where sponsors have given up on our project are the two pieces of Oreo.

Speaker Change #175: So every one of our substandard credits.

Speaker Change #175: Current and pro forming in the sense that it is not past due now we put one of them on non accrual because we wrote it down and what.

Caused us to do that as some noise from the sponsors about their commitment on that small project to continue to support it so.

Speaker Change #175: That we consider the most challenged project, we've got but even with that the sponsors have made their monthly interest payment out of their pocket.

And they continue to work to try to craft a path forward that will salvage some of their investment, keep our loan current. We wrote it down. We classified it because we take a pretty conservative, proactive view on these things, but it's still a current loan. Okay, thanks for all the color.

Speaker Change #175: This month and they continue to.

Speaker Change #175: Work to try to craft a path forward there.

Speaker Change #175: That will salvage some of their investment keep our longhorn we wrote it down we classified it because we take a pretty conservative proactive view on these things.

All back. Thank you.

All right. Thank you, Matt. Thank you.

Speaker Change #175: But it's still a current loan.

One moment for our next question. And is from Catherine Miller with KBW, please proceed.

Speaker Change #179: Okay. Thanks for all the color all back in the queue.

Matthew Covington Olney: Alright, Thank you Matt.

Hi, thanks.

Speaker Change #176: Thank you one moment for our next question.

Good morning.

Hey, good morning, Catherine. Let's start on paydowns, which were accelerated this quarter. I know that you mentioned there were two larger loans that paid down. But just any thoughts on what you think that will look like for the back half of the year? Are there any larger credits that you foresee come in? Or was this kind of large level and anomaly? We'll kind of get back to more like the $800 to $1,000,000 kind of pace that we've seen recently in the back half of the year. Catherine, we were happy this quarter to have included in all of our frying quarterly discussions about paydowns, the comments that paydowns might vary significantly from quarter to quarter and may have a significant impact in one quarter or another.

And he is from Catherine Mealor with <unk>. Please proceed.

Catherine Fitzhugh Summerson Mealor: Hi, Thanks, good morning.

Catherine: Hi, good morning Catherine.

Catherine Fitzhugh Summerson Mealor: I wanted to start on pay downs, which were accelerated this quarter I know that you mentioned there were two larger loans that pay down, but just any thoughts on.

Speaker Change #178: What do you think that will look like for the back half of the year are there any larger credits that you foresee come in or was this kind of large level, an anomaly will kind of get back to in.

Speaker Change #177: More like $800 billion kind of pace.

Speaker Change #177: That we've seen recently in the back half of the year.

Speaker Change #177: Catherine we were we were happy.

Catherine: This quarter to have included in all of our prior quarterly discussions about pay downs for comments that pay downs might vary significantly from quarter to quarter and might have a significant impact in in one quarter or another so true to that form.

So true to that form, you know, you've seen I wide dispersions in paydowns and the first two quarters of this year: $790 million in Q1, $1,840 million in Q2. We have telegraphed for some time that we expected a higher level of RISG repayment. in the future, and that future showed its first signs of manifesting in the quarter just ended. I think when we'll really see, you know, a greater acceleration of paydowns quarter, quarter will be when the Fed starts reducing, right, and probably a couple of cuts into that. But the next, if you really began to see some projects move, my best guess, and I'm going to lean heavily on our longstanding comment that repayments can vary significantly from quarter to quarter, but my best guess is that Q1 and Q2 this year sort of frame a range within which our Q3 and Q4 repayments.

Speaker Change #180: <unk>, saying why dispersions and Paydowns in the first two quarters of this year $790 million in Q1 billion $840 million in Q2.

Speaker Change #181: Uh huh.

Speaker Change #182: We have.

Speaker Change #182: Telegraph for some time that we expected a higher level of our ESG repayments.

Speaker Change #182: In the future and.

Speaker Change #182: Future showed its first signs are manifesting in the quarter just ended.

I think one more really see.

Speaker Change #182: A greater acceleration of pay downs quarter to quarter will be when the fed.

Speaker Change #182: It starts reducing rights.

Speaker Change #182: And probably a couple of cuts into that.

Dave: Dave you are really began to see some some.

Project move.

Dave: My Best guess.

R: And I am going to lean heavily on R.

R: Our long standing comment that.

Speaker Change #185: Hi, repayments can vary significantly from quarter to quarter, but my best guess is that Q1 and Q2.

I'd be very surprised if we had over 1.84 billion repayments in Q3 or Q4 because, you know, I don't think the Fed's going to move right until September or December. And, you know, I think really getting more big quarters of paydowns is probably going to be dependent upon getting some rate movement. So, you know, I think Q1 was low, Q2 was high, Q3 and Q4 probably fall somewhere in the middle of those is our current best guess.

Speaker Change #185: This year sort of frame.

Speaker Change #185: A range within which our Q3 and Q4 repayments will fall I'd be very surprised if we.

Speaker Change #185: Had over 1.84.

Billion in repayments in Q3, or Q4, because I don't think beds going to move rates.

Speaker Change #185: Until September December and.

Speaker Change #185: I think really getting more big quarters of Paydowns is probably going to be dependent upon on getting some rate movement. So.

Speaker Change #186: I think I think Q1 was low Q2 was higher in Q3, and Q4, probably fall somewhere in the in the middle of those says.

That makes sense. And then, if we think about paydowns accelerating next year and trying to refill that bucket, I know there's a lot of momentum in your CID business, and that's now 2 billion or about 7% of loans. Can you just talk a little bit about your outlook for that business, you know, what size loans are you typically doing or you expect to do, and maybe how fast would you expect this business to go over the next couple of years to refill. You know, potentially a decline in RFC balances.

Speaker Change #187: He is our current best guess.

Speaker Change #188: That makes sense and then as we think about.

Speaker Change #189: Paydowns accelerating next year and trying to refill that bucket I know theres a lot of momentum in your CIB business and that's now 2 billion or about 7% of lung can you just talk a little bit about your outlook for that.

Speaker Change #190: Business you know what size loans are you typically doing or you expect to do and maybe how fast would you expect this business to grow over the next couple of years to resell.

Yeah, I'm going to ask Brandon Hamlin, who's on the line with us, to comment on CID and the importance of that handoff for continued growth and our balance sheet future here. So, Brandon. Yeah, you bet, George. Catherine, thanks for the question. Great question. A topic that you have heard us talk more about. We'll see us talk more about in the future. And as George indicated, there's a great sort of transition in front of us. You know, as Arias, she repayments start to come in. And this is something we've been working on for a while. And the latest hires and expansion of the team that we made are really just the latest evolution of the strategy that we've been working on for quite some time.

Speaker Change #191: Yeah, potentially a decline in our S G balances.

Speaker Change #190: Yes.

Speaker Change #190: As Brandon Hamlin who's on the line with us too.

Brandon: Comment on CIB and the importance of that handoff for continued growth in our balance sheet future year. So Brandon.

Yes, you bet George Katherine Thanks for the question Great question or topic that you have heard us talk more about we'll see us talk more about in the future and.

Brandon: As George indicated there's there's a great sort of transition in front of us.

Speaker Change #193: As our ESG repayments start to come in and this is something we've been working on for a while and the latest hires and expansion of the team that we've made are really just that.

The CAB team, as we've said, is made up of several different sort of sub-sub-business lines. And three of those were in place, ABLG and equivalent finance, the most recent as the last couple of years. And those teams have really started to hit their stride. But we've also added some new team members. We've had some phenomenal opportunities to have some folks join our team that are really incredibly talented, incredibly connected, great, great performance already. You know, in their respective careers. And they've got a credit mindset that's really well suited to our priorities, which, as you know, are always quality and yield ahead of growth.

Speaker Change #193: The latest evolution of the strategy that we've been working on for quite some time.

Speaker Change #193: The <unk> team as we've said is made up of several different sort of sub sub business lines and in three of those were.

Speaker Change #193: Were in place, our ABL and equipment finance most recent as the last couple of years and in.

Speaker Change #193: And those those teams have really started to hit.

Speaker Change #193: Hit their stride.

Speaker Change #193: We've also added some new team members, we've had some phenomenal opportunities too.

Have.

Speaker Change #193: Some folks join our team that are really incredibly talented incredibly connected.

Speaker Change #193: Great great.

Speaker Change #193: Performance already in their respective careers in and they've got a credit mindset, it's really well suited to our priorities, which as you know we're always quality and yield ahead of growth, but they they have as you can see demonstrated the ability to achieve all three.

But they have, as you can see, demonstrated the ability to achieve all three. And as it relates to sort of the size of credits, you know, it's a lot like Arias; she, and that we have a pretty good spread in terms of the size of the credits. And the loans aren't as big as some of the RST loans, but it's not uncommon to sort of live in that call it, you know, 30 to 150 million dollar range. We'll have some that'll be bigger. But there are solid, solid credits, highly monitored credits that we expect to have very good credit quality on.

Speaker Change #194: As it relates to sort of the size of credits you know, it's a lot like.

Speaker Change #194: Our ESG and that we have a pretty good <unk>.

Speaker Change #194: Spread in terms of the size of the credits the lines aren't as big as some of the <unk> allowance, but its not uncommon to sort of live in that call. It 30 to 100 $150 million range, we will have some that'll be bigger but.

And as we said, so you noted 7% of the funded portfolio, that's 2.1 billion. They actually originated over 500 million in the quarter just ended. So we, as we see the repayments, likely accelerate as George said in the near future, we believe we've orchestrated, which should be a pretty smooth handoff, sort of passing of the longer at the time, if you will. From Arias G to CID in a very beneficial manner, I think we've got a great shot at timing that in an almost optimal manner. So we're extremely excited about the opportunity there to grow, grow and diversify our book.

Speaker Change #195: But they are they.

Speaker Change #195: There are solid solid credits.

Speaker Change #195: We monitored credits.

Speaker Change #195: That we expect to have very good credit quality on end.

Speaker Change #195: Hum.

Speaker Change #195: As we said.

Speaker Change #196: You noted 7% of the funded portfolio is $2 1 billion.

Speaker Change #196: They actually originated over $500 million in the quarter just ended so.

Speaker Change #197: Yeah, as we see the repayments.

Speaker Change #197: Likely accelerate as George said in the near future.

Speaker Change #198: We believe we've orchestrated well it should be a pretty smooth handoff sort of passing of the loan growth Baton if you will.

Speaker Change #198: Marius Chi to CIB in AR and VR.

Speaker Change #198: Very beneficial manner, I think we got a great shot at timing that.

Great. Thank you.

Speaker Change #198: In our almost optimal manner. So we're extremely excited about the opportunity there too.

Thank you. One moment for our next question. And is from Aman Angosalya with Morgan Stanley, please proceed.

Speaker Change #198: ROE grow and diversify our book.

Speaker Change #199: Great. Thank you.

Hi, good morning. Good morning, Manan. You noted that sponsors have a lot of motivation to support the properties given how much they have invested at the bottom of the gap stack. You know, I'm assuming that if the problem is taking time to lease, it also stays on your books for longer.

Speaker Change #199: Thank you one moment for our next question.

Speaker Change #200: <unk> from Manan <unk> with Morgan Stanley. Please proceed.

Manan: Hi, good morning.

Manav: Good morning Manav.

Speaker Change #203: So you noted that sponsors have a lot of motivation to support their properties.

Speaker Change #204: How much you have invested at the bottom of the cap stack.

I guess my question is, you know, what does a borough do in the meantime? You know, is it an interest-only loan under the repays? Do they bring in more reserves? You know, can you explain what risk mitigates you back in when loans are expanded? And they essentially stay on the books for longer?

Speaker Change #204: I'm assuming that if.

Speaker Change #204: It probably is taking time to lease it also stays on your books for longer.

Speaker Change #205: So I guess my question is what does the borrower do in the meantime is at an interest only loan antlered Rebase do.

Speaker Change #206: Do they bring in more reserves can you explain what risk mitigate you bake in west La.

Yes, happy to do so, Manan. You know, what I would tell you is our portfolio management to date through this cycle has not resulted in any concessions by us on any of those loans that would constitute one of those loans. Having been a TDR troubled at restructuring, if we were in the, if we were in the old accounting world where there were TDRs. So we're sensitive to make sure that we're not becoming equity-like in our handling of the transaction if it takes time to work these things out. So, you know, we continue to maintain market rates on those current rates on those. In many cases, we're improving the terms; the sponsors typically have to pay standard or upsized fees to extend those loans.

Speaker Change #206: <unk> extended and they essentially stay on the books for longer.

Speaker Change #207: Yes happy to do so and on you know what I would tell you is our portfolio management to date through this cycle has not resulted in any concessions by us on any of those loans.

Speaker Change #207: Constitute one of those loans, having been a TD are troubled debt restructuring if we were in the.

Speaker Change #207: If we were in the old.

Speaker Change #207: Accounting World, where there were <unk> so.

Speaker Change #207: We're sensitive to make sure that we're not becoming equity lock in our handling of the transaction. If it takes time to work. These things out so we continue to maintain.

Speaker Change #207: Market rights on those current rates on those in many cases, we're improving the terms of the sponsors typically have too.

And we require replenishment of reserves as we deem appropriate. And in many cases, are getting principal paydowns on those loans. So equity is equity; equity has equity responsibilities, where the senior secured loan we don't have equity responsibilities. So the equity has to do the equity left in on these things. But, as I said, you know, where needed, our sponsors have done that, with the exception of the two sponsorship groups that we have those Oreo properties in there.

Speaker Change #207: Standard or upsized phase to extend those loans.

Speaker Change #207: We require.

Speaker Change #207: Plenish amount of reserves is as we deem appropriate and in many cases are getting principal paydowns on those loans. So equity is equity equity as equity responsibilities, where the senior secured loan we don't have equity responsibilities. So the equity is taboo.

Speaker Change #207: Equity lifting on these things, but as I said Oh.

Speaker Change #208: Were made at our sponsors have.

So, yes, loans may stay on the books longer, but those loans are structured in a way that we feel good about them staying on the books longer, making substantial profits on those. And as long as the sponsors are doing the right thing on those credits, we're happy to have those loans on the books.

Speaker Change #208: Done that with the exception of the.

Speaker Change #208: The two sponsorship groups that we.

Speaker Change #208: We have those Oreo properties and there so yes.

Speaker Change #209: Loans may stay on the books longer.

Speaker Change #209: But those loans are are structured in a way that we feel good about them staying on the books longer making that.

Speaker Change #209: Substantial.

Speaker Change #209: Profits on those and as long as the sponsors are doing.

You know, I'll give you a good example. Our longest standing classified asset in the RISG portfolio is the project out the development out there near like time that we had some nice progress on that in the last quarter. With a sponsor selling the club amenities, that development project had reached the point of maturation that it was time and the opportunity was there to sell those club amenities that resulted in an 11.1 million dollar paydown in our loan. I believe, and I haven't looked at this in probably since the beginning of the year, but I believe that over the life of that loan, our sponsors have paid us 30 something million dollars in interest and fees on that loan, which is roughly about the same as our 32.3 million dollar funded balance.

Speaker Change #209: The right thing on those credits, where we're happy to have those loans on the books.

Speaker Change #210: I gave you a good example R R.

Speaker Change #209: Our longest standing.

Speaker Change #209: Classified asset and they are ESG portfolio.

Speaker Change #209: Is the.

Speaker Change #209: Project out the development out clear near like Todd that we had some nice progress on that in the last quarter.

Speaker Change #209: With us.

Speaker Change #209: Our sponsor selling the club amenities that development project had reached the point that Matt.

Speaker Change #209: Maturation that it was a time when the opportunity was there to sell those club amenities that resulted in.

Speaker Change #209: On 11 $1 million pay down on our line.

Speaker Change #211: I believe and I haven't looked at this.

Speaker Change #212: Uh huh.

Speaker Change #212: Probably since the beginning of the year, but I believe.

Speaker Change #212: That over the life of that loan our sponsors.

Speaker Change #212: This 30 something million dollars in interest and fees on that loan which is roughly about the same as our $32 $3 million funded balance so.

So while we would prefer to not have a classified loan on the books long time, but the sponsor is doing the right thing and working project and paying the interest and paying the fees and performing on the loan. We're going to do the right thing and work with the sponsor. Again, we would prefer to not have a classified asset on the books for a long time, but our principals would do the right thing always. Being that we got to do the right thing for our sponsor, and if the sponsor's got a project that's got challenges, they're rising up and doing the equity responsibilities to meet those challenges.

Speaker Change #212: While we would prefer to not have a classified loan on the books long term if the sponsor is doing the right thing.

Speaker Change #212: And working the project and I am the interest in paying the base and and performing on the line, we're going to do the right thing and work with the sponsor.

Speaker Change #213: Got it.

Speaker Change #213: Again, we would prefer to not have a classified asset on the books for a long time.

But our principles of do the right thing always mean that we got to do the right thing for our sponsor co sponsors got a project. That's got challenges they are rising up and doing the equity responsibilities to meet those challenges then we gotta be prior and raised nimble and work with our sponsor on our <unk>.

Then we've got to be fair and reasonable and work with the sponsor on our originally great terms to get that project to a successful conclusion. We're going to do the senior lender thing. They got to do the equity responsibility. But we got to be fair and reasonable with them, and that's profitable for us to do it, even if we prefer to not have the classified asset profile.

Speaker Change #213: Originally agreed terms too.

Speaker Change #213: Get that project to a successful conclusion, we're going to do the senior lender thing they've got to do the equity responsibilities.

Speaker Change #213: Gotta be fair and reasonable with them and that's profitable for us to do it even if we would prefer to not have the classified asset profile.

That's great, Carlos.

Thank you. Maybe as a follow-up on NII.

Notice the proportion of NII coming from interest reserves has been taken up slightly.

Speaker Change #213: Okay.

That's great color. Thank you Tim.

Can you talk a little bit more about that dynamic? Is that indicative of more stress in general in the CRE market? Or is it just a function of loan just staying on the books for longer time while rates are higher? Can you just walk us through how that works?

Speaker Change #214: Maybe as a follow up on NII.

Noticed the proportion of NII coming from interest reserve has been ticking up slightly can.

Speaker Change #215: Can you talk a little bit more about that dynamic is that indicative of more stress in general in the CRE market or is it just a function of just staying on the books for a longer time where rates are higher.

It is not a function of any stress at all whatsoever. Money coming from interest reserves sounds like, oh my gosh, you're burning down your reserves. But here's the deal. When you put together a loan, Menon, you have a capital stack on that loan and a sources and uses funds on that loan from day one. So interest over the period of construction, the life of the construction of the loan is built into that. You've got your land cost, you've got your hard construction cost, you've got your closing cost and fees, your tenant improvement and leasing commissions, your interest reserves, your tax reserves, all the costs that go into the cap stack.

Can you just walk us through how that works.

It's a it is not a function of any stress at all whatsoever.

Speaker Change #216: <unk> coming from interest reserves.

Speaker Change #217: Sounds like Oh, My Gosh, you know, you're you're burning down your reserve, but here here's the deal when you put together I'd alone.

Minot.

Speaker Change #217: You have a capital stack on that loan and our sources and uses.

Speaker Change #217: Funds on that loan from day, one so interest over the period of construction of the life of the construction of alone is built into that <unk> got your land cost you've got your hard construction cost you've got your closing cost in these your tenant.

We want the sponsors to put all of their equity in before we put in. So if we say to the sponsor, okay, you're going to fund 50% of the cost of this $200 million project. We want all your $100 million to come in first. Well, there's no interest.

Speaker Change #217: Improvement in leasing commissions your interest reserve your tax reserve your.

Speaker Change #217: All of the costs that go into the cap stack.

Speaker Change #218: We want the sponsors to put all of their equity in before we put in so if we cited the sponsor.

Speaker Change #219: You're going to fund 50% of the cost of this $200 million project, we want all your $100 million to come in part while there is no interest at the beginning.

Speaker Change #219: So all of the sponsor's money is going to come in for the land and they architect space and the closing cost in the title policy and the beginning of National construction and then we start funding the last $100 million of the loan.

Speaker Change #219: That's kind of complete construction, but that's when all of your interest is going to occur. So all of the interest on these loans is typically and our budget not because we're subsidizing the project by carry and the interest, but we made the spa.

Speaker Change #219: Sponsor.

Speaker Change #219: Put in all of their equity upfront.

Speaker Change #219: Now, we could be really stupid and.

Speaker Change #219: And not structure that alone in an intelligent manner and say, okay sponsor you put in an $85 million of your hundred upfront and then when it compound pay the interest Raj checks for the other 15 million. That's the interest, but then what if the sponsor doesn't rebate checks or what if it doesn't have the $15 million. So we get all the spa.

Speaker Change #219: Or money upfront because that smart safe way to do it and that means all the interest reserve as NR alone.

Speaker Change #219: So as all of those loans that big record volume of originations we have.

Speaker Change #219: In 2022 funds up more interest is being funded from interest reserves than before it doesn't mean anything about weakness in those credits. It just means that we're smart in the way we structure. These loans, we make sure we've got the equity or the equity.

Speaker Change #219: And <unk>, so that Theres no doubt about the equity coming in lighter and that means the interest reserve is built on our it is not in any way.

Speaker Change #219: Kind of weakness.

Speaker Change #219: Our loan is also structured so that if we get to the end of construction and the project is not leasing or selling or refinancing as quickly then the sponsor as an obligation to replenish those interest reserves and thats happening with virtually every loan extension modification renewed all those sponsors having to put more etch.

Equity into the project to replenish those reserves to carry it longer because we've got built into our budget enough interest typically to carry it through construction and.

Speaker Change #219: What was expected to be stabilization of the project if it takes longer to get to stabilization.

Speaker Change #219: Then the sponsor has to write additional checks to carrier and Thats, an equity responsibility not a lender of responsibility.

Speaker Change #219: Okay.

Speaker Change #220: Got it that's very helpful. Thanks, so much.

Speaker Change #221: Okay. Thank you.

Speaker Change #222: Thank you one moment for our next question.

Speaker Change #222: And he is from the line of Michael Rose with Raymond.

Speaker Change #223: Raymond James Please proceed.

Michael Edward Rose: Hey, good morning, everyone.

Michael Edward Rose: Thanks for taking my questions.

Michael Edward Rose: Just wanted to go back to the life science credit not to beat a dead horse here, but I think one of the things that I heard from investors.

Speaker Change #224: Which is kind of a spec nature of that project in particular and I just wanted to get a sense for.

Speaker Change #225: If you have some sort of proportion of loans or percentage of loans that.

Speaker Change #225: The projects are somewhat spec in nature, because it's I think relative to your history somewhat contrary to what you typically do where there's.

Speaker Change #225: A lot of analytical work on you're pretty sure of the lease ups, even in the condo stuff growing some more difficult challenges.

Now, I don't think it's a concern you should be worried about at all, and it's not any sort of change in our business strategy. You know, large parts of what we have done over the 23-year history of RESG are unleashed properties. The very first one that we made was on a totally unleashed property. So, it's inherent in our business model, and it's reflected in the eight basis point annualized net charge off, where I show that portfolio over the 23-year history. Now, we love lacing, and we love it when transactions come to us and have pretty lacing.

Speaker Change #226: Good good projects and good markets and is that a concern that we should be worried about it but it's certainly a question that I'm getting would just love some general commentary there. Thanks.

Speaker Change #227: No I don't think it's a concern you should be worried about at all and it's not any sort of change in our business strategy.

Speaker Change #227: A large parts of what we have done over the 23 year history of our ESG.

Speaker Change #228: R R.

Speaker Change #229: On leased properties. The very first loan that we made was was on a totally unrelated property. So it's it's inherent in our business model and it's reflected in the <unk>.

Speaker Change #229: Eight basis point annualized net charge off ratio of that portfolio over the 23 year history now, we love Lacing and we love it when transactions come to us.

But the vast majority of the transactions we've always done have not had significant pre-lacing in them. Now, back when we did retail and retail was, if you go back to 2000, 10 or so, retail, 11 retail was probably 20 or 30 percent of our portfolio.

And have pre leasing for the vast majority of the transactions. We've always done have have not had a significant pre pre leasing them now back when we did retail and retail was.

Pre-lacing was inherent in all of those deals because you don't build a shopping center spec. Thank you.

Speaker Change #229: If you go back to two.

Speaker Change #229: 2010, or so retail 11, great tail was probably 20 or 30% of our portfolio of their pre leasing was inherent in all of those sales cause you don't build a shopping centers.