Q3 2024 Bank OZK Earnings Call
Speaker Change: Good day, thank you for standing by. Welcome to the Bank of the K-3424 earnings conference call. At this time, all participants are listening only mode.
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Speaker Change: Good morning, I'm Jay Staley, Managing Director and Investor Relations and Corporate Development for Bank OZK.
Speaker Change: Thank you for joining our call this morning and participating in our question and answer session. In today's Q&A session we may make forward-looking statements about our expectations, estimates, and outlook for the future.
Speaker Change: Please refer to our earnings release, management comments, and other public guidelines for more information on the various factors in the risk that may cause actual results are outcomes to vary from those projected in or implied by such forward-looking statements.
Speaker Change: Joining me on the call to take your questions, our George Gleason, Chairman and CEO, Brandon Hamlin, President, Tim Hicks, Chief Financial Officer, Cindy Wolf, Chief Operating Officer, and Jake Munn, President of Corporate and Institutional Banking.
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Speaker Change: Our first Washington for line of Stevens Gallion of Pepper Sandler, you line is not open.
Speaker Change: Thank you everyone. I'm appreciate all the guidance and the management comment especially.
Stevens Gallion: The potential for nomencletion in late 25 I think was interesting. I'm hoping you might be able to give some color on kind of the puts and takes. Obviously a lot going on there. Maybe talk a little bit about the CD yields on repricing and beta expectations on the way down.
Stevens Gallion: kind of the impact of the floors and that lag effect you talk about on 10-1. And then sort of the potential drag on the limb from the hand off of RSHG to see ID and the other verticals.
Stevens Gallion: You know, that coupled with any debt material, you just, that holistic picture of the putton takes around the nim and what gives you confidence around that potential for inflection in the back after 25th.
Speaker Change: Thompson's Steven's question touches everything on the balance sheet and I think I'm stable. Would you like to take that? Sure, thanks Steven. How you doing?
Stevens Gallion: Great, great. Yeah, I mean, a lot of different variables happening, obviously the pace.
Stevens Gallion: of bad moves. It was a big component on the timing of the magnitude of the changes in our NM. The floors, we gave you a good schedule on our floors and when those are expected.
Stevens Gallion: to the impacting our loan yields and those are on figure 27.
Stevens Gallion: and then really the pace of the cost of interest-braying deposits and how quickly we can reprise those. You can see that on page 24, figure 26, a big component of that is going to be our time deposit and the maturity schedule there. You can see five point nine.
Stevens Gallion: Billion dollars of time deposits repricing this quarter that weighed average rate.
Stevens Gallion: there's 5.19 and you can see 6.2 billion in Q1 with average rate of 5.10 so that's a big component.
Stevens Gallion: Currently our current special is well below that 7 months EDF-460.
Stevens Gallion: 13 month CD at 425. So as those come over and reprise, we've got to get opportunity to move down to public costs pretty quickly over the next few quarters.
Stevens Gallion: and then we mentioned our securities portfolio, having a pretty good impact of fast flow coming.
Stevens Gallion: and 2-1 and then early in 2-4 and a little bit in 2-1.
Stevens Gallion: with a good amount of cash flow. It's going to be replaced at higher yields too.
Stevens Gallion: A lot of different moving parts, the fed moving, how quickly they move.
Stevens Gallion: Lily's dependent was...
Stevens Gallion: will depend on really the pace of our impact for them on the way down and in the collection point and hopefully give us hope in the back half of the next year. Our Fed assumption is assumed 25 basis point declined to the next six meetings so the Fed moves.
Stevens Gallion: Swallower than that, then that's a good situation for us that that moves a quicker quicker pace than that's more head-to-wence for us that they move even after in the end to the back half of 2025.
Stevens Gallion: will have more of our floors at more of our loans at their floors.
Stevens Gallion: led more opportunity to reprise our CDs even more that voice that's not a bad situation for us either. So we feel like our guidance was given is pretty good in a lot of different scenarios.
Speaker Change: Perfect. Thank you. Thank you. Let me add a little color to that and make sure you agree with this that I'm thinking right. The assumption that our base case assumption is that our margin will be under pressure.
Speaker Change: and Q4 and Q1, because of the 25-vices point decreases in each meeting and the fact that
Speaker Change: The deposits will reprise, but loans will reprise faster. We saw the benefit of that on the way up, we'll catch the, the, the, the, the, the, the, the, the, the, the, the, the.
Speaker Change: headwind of that on the way down.
Speaker Change: If the failed war to move 50s.
Speaker Change: in 50 chunks, that would be more impactful in a negative sort of way on Q4.
Speaker Change: That we would reach the floor much more quickly, so we would hit the inflection point and then we would start improving more quickly next year. So that's a...
Speaker Change: Point that needs to be understood because those floors are going to begin to kick in, you know.
Speaker Change: I'm pretty quite here with another couple of bad moves or with a in-tem reference due to that chart. But that will lead us to an inflection point when we start catching a lot of those floors.
Speaker Change: Perfect. Perfect. Great. And it seems as though you got to feel a little bit more confident around the handoff strategy and the ability to grow loans nicely. I think you said mid to high single digits in 25, which is great.
Speaker Change: And I like that you have Jay here on the call. So can you talk a little bit about that hand off the confidence, maybe the incremental investments, if you can frame those up within CID from a head count perspective, that gives you that level of confidence.
Speaker Change: Yeah, why don't we start out and let Brandon Hamlin talk about the overall expectations for lung growth and then he can introduce Jay can Jay can come in on some CBI specifics.
Brandon Hamlin: Absolutely. Good morning guys. Great to be on with you.
Brandon Hamlin: Yeah, a lot of moving parts as we look forward in respect to long growth, obviously, I mean, RESG has had.
Brandon Hamlin: coming off 2022, 13.8 billion originations has had a lot of funding that sustained a great growth trajectory, but as we move forward, we all know that those construction loans complete in that level of
Brandon Hamlin: We'll start to turn back around in terms of repayments.
Brandon Hamlin: and you still got some deferred payments from sort of the COVID error loans as well. So we've had great, great progress, Maria's G, but that'll start turning its way around. It's Chucky.
Brandon Hamlin: It's not easy to be spot on with when some of these moves occur but we've got a great asset management team. I know we've said it many times, those guys have on average about 15 looms of peace.
Brandon Hamlin: They spend a lot of time focused on the projects and a really important part of that is forecasting those funding and repayment.
Brandon Hamlin: Now forecast 36 months forecast that we do every single month.
Brandon Hamlin: So we do a really good job of focusing on accuracy there, but based on, you know, based on what we see, we know that the RISG will be coming back the other way and we're extremely excited to have.
Brandon Hamlin: to have Jay can his team on board. I obviously let Jay talk about what they've done there, but I've spent a lot of my time this year.
Brandon Hamlin: sort of assisting Jay get that team up and running and it's, you know, when we came to the year we probably had.
Brandon Hamlin: I don't know, 10 or 15 folks in that group and he's been working hard and fast to expand that by a factor of three, I think he's close to mid 40s now in terms of employees. So the timing we think we have really...
Brandon Hamlin: Nail pretty perfectly and I'll turn over him to let him talk about what he's seeing there and what after he has to take the baton, as we've said, from RASG.
Speaker Change: Thanks Brian, I appreciate it and a great question. The CIB was formed in March of this year and really most of it came to fruition.
Speaker Change: Just the last quarter with the launch of our corporate banking and sponsor finance group as well as our loan syndications and corporate services group. And so what you're seeing in the third quarter numbers is really just, you know, in a sense a teaser for what's to come, we feel confident, we have great pipelines as it relates to our legacy asset based lending group.
Speaker Change: We provided additional staffing there on the Regionation side to really help propel growth there.
Speaker Change: In addition to that, our equipment financing capital solutions team is really on a roll. We provide additional portfolio management operational support over the last quarter there to to free them up from some of the administrative oversight so they could really focus again.
Speaker Change: I'm building up a nice pipeline of opportunities for the future.
Speaker Change: And then finally our fund finance group underneath the C.I.B. as well as is really off to a great start. We have a new leader in from a nice institution who's coming and involved with personal use. And it's really adding to the overall profile there. So we're excited about what's become optimist. We can feel good about it.
Speaker Change: Fantastic. And if I could squeeze in one quick one on a kind of an accounting question, can you give in a color on what causes the transfer of like a construction loan into maybe a more permanent CRE classification, is that like when you reach a CO or kind of what drives that classification change and does that change how you guys have to evaluate the from a rating perspective internally.
Speaker Change: Brandon, yeah, Stephen I'll take that, it's really a very simple two criteria.
Brandon Hamlin: that make that move. A, the properties complete and has a certificate of occupancy and B, the loan structure includes within a monthly amortizing feature. With respect to the second part of that question, does it change how we look at it or rate it? You know, we are constantly
Speaker Change: re-evaluating our risk ratings on a quarterly basis. Nothing really changes there. We're taking into account before it's complete. What's going to happen after it's complete? What we expect to occur? Valuations, all those sorts of things. So not really a big change there.
Speaker Change: Got it. Thank you for the color and congrats on more record earns.
Speaker Change: Yeah, Steve, I want to give a little additional color on this hand-off in addition to what Brandon and Jake said. A couple of things, you know, while our corporate and institutional banking group under Drake's leadership is new and he is tripled plus the...
Speaker Change: The size of the teams are over the course of this year.
Speaker Change: and really brought in.
Speaker Change: and veteran.
Speaker Change: High quality, very experienced, very talented people.
Speaker Change: He is also building on something that is three poor and five years old in our company. Our fund finance business, our asset-based lending business, and our equipment finance and structural solutions businesses.
Speaker Change: has been here of 3-4-5 years each.
Speaker Change: and all those team members are staying and those are businesses we built and perved up and now Jayke is in his team, you know, we're taking those integrating them, expanding them, adding more talent. But all of our existing team members that were here at the beginning of the year are still here.
Speaker Change: because they're right team members, they're doing a great job. So we're adding strength on top of strength there.
Speaker Change: and the second thing.
Speaker Change: that we need to cover in regard to this hand-off.
Speaker Change: is that, you know, it's not just corporate and institutional banking.
Speaker Change: Allen Jessup, Ken Ronaker, Dennis Poer, the guys who are doing our commercial bike lending through our community bike structure that includes all sorts of different types of lending and Dennis Poer over the indirect lending and the consumer lending business. Those guys are likewise.
Speaker Change: really stepping up their game and again, we've been building the infrastructure for that step up and for this handout for a couple of years.
Speaker Change: So, it's a broad-based deal with broad-based contribution from CAB and the reckoning, commercial banking that an increased emphasis on small business business banking consumer.
Speaker Change: is lending through our branch network at well. So we are feeling really good about it and it's burning accurately. Say, we think we've got the timing of this just right.
Speaker Change: that just as we're at the point where RESG funded balances are probably going to be more or less flat.
Speaker Change: through year and next year and that will very quite a bit from quarter quarter. More or less flat we're still projecting mid to high single digit growth.
Speaker Change: because of the contribution from all these other business units that are getting a new emphasis, but certainly not new to our company.
Speaker Change: Thanks for all incremental colors, we appreciate it. Thank you.
Speaker Change: Our next question comes from a line of men in Gossaya, Morgan Stanley, your line is not open.
Speaker Change: Hey good morning.
Speaker Change: Good morning.
Speaker Change: I was just trying to think through the relationship between paid-out and floors and the impact that might have on them.
Speaker Change: There's a scavener market to open up more loans get paid down.
Speaker Change: Is it more likely that some of the older launch that we made with lower floors get paid down first?
Speaker Change: or that some of the more recent lawns that were made with higher floors get paid down sooner. So, you know, I recognize that there's a pre-payment penalty, but at some point, you know, with 200 basis points of Fed rate cuts.
Speaker Change: has become an NPV positive for some of the people that have high floors down the beta-preparement battle day.
Speaker Change: That's a good question, and certainly a possibility, Manan, but what I would tell you is that our experience and Brandon may want to comment on this, but our experience is that, you know, customers have some degree of reluctance, it's not unprecedented, certainly not unheard of or impossible, but there's a degree of reluctance and...
Speaker Change: You know, inertia for customers does not pay off loans, bit construction.
Speaker Change: Typically, where you get an early payout that generates some minimum interest.
Speaker Change: All that credit is, you know, at the time that you've got the building substantially complete and so forth. So, most of these things will go to a full completion term and if they don't go to the point that we would earn our target minimum return on equity will be protected by minimum interest. So, that would actually be very favorable for my yield point of view. Thank you.
Speaker Change: And I think you're your first part of that question relating to overlones with lower floors. Yes, our expectation is that we'll have a...
Speaker Change: I hire a level of older lungs with lower floors by all, as opposed to zero lungs with higher floors.
Speaker Change: Got it, so as a figure 27 is a good metric to look at, you know, as rates come down, you know, what portion of your lawn to hold at their floors. And then, you know, we can use that to model out the name going forward.
Speaker Change: Yes.
Speaker Change: Got it in that chart, I know it's based on commitment, but it should be pretty similar for loans that are actually on the balance sheet.
Speaker Change: The loans on the balance sheet, because they are the older loans, probably have lower then the commitments on average.
Speaker Change: Got it. Okay, perfect. And then, you know, separately, you know, so you launched a new launch indications desk and reduced the whole limit. Would you consider reducing the whole limit further in the future? Or, you know, even if you don't reduce the aggregate whole level, this is give you the opportunity to be a little bit more flexible, syndicating smaller loans in the future?
Speaker Change: We have no plans or faults or discussions about reducing the whole limit further. And you know, have not had any discussions about syndicating any of our RESG loans that are smaller than that. This simply reflects the fact that, you know, as we talked about.
Speaker Change: for a number of quarters and actually a couple of years now, you know, we're focused on more diversification within the portfolio.
Speaker Change: and Los concentration risk. Obviously, you know, when you got a big credit out there it creates an environment where people can make that a target.
Speaker Change: You know, it's been a story that my parents had no foundation and basis and fact might not be completely accurate, but still create a lot of drama about a single credit and we just decided that that wasn't worth the headache of having to deal with that sort of crap honestly.
Speaker Change: and you know we've only had five lungs in our history that were above five hundred million. We only have two now we've granted positive those two so it's not going to be a material.
Speaker Change: In fact, on our business to do that and actually probably opens up the door for us to do more loans.
Speaker Change: you know there are lungs that we have passed on in the past that we're too big for our whole limit.
Speaker Change: that would now be in the strikes on for us to syndicate.
Speaker Change: So, I might let, you know, our, our syndications desk, our capital margin desk is part of our corporate and institutional banking group and it's a new part of that. So, Jay, if you would, take just a minute and give a few sentences on what that desk is and what else it does other than potentially syndicating the RUSG lines.
Speaker Change: Right, I appreciate that George and Dick Keller in good question.
Speaker Change: You know that the Loan syndications group and the desk falls underneath Loan syndications and corporate services within the CIB which is a relatively new business line and it can't really be something we're very excited about. Our Loan syndications desk is fully functional. This allows the bank to now serve as admin agent and lead opportunities.
Speaker Change: and as you all know, with coming and leading opportunities, results in additional typically the income and potentially.
Speaker Change: Spread Skimming.
Speaker Change: on multi-bank deals and so we view it as an overall benefit it allows us to George's point have more.
Speaker Change: and more levers to pull so we can chase larger deals if we want to and then sell them down in a very, you know, credit-minded way and as well as pursue more syndicate opportunities across the bank as needed. Aside from the syndication's death that I mentioned and again all this rolls up to Tim Newhouse within our LSCS, we've also launched an interest rate hedging desk and so the bank has historically pushed off all of our hedging opportunities, whether those are caps or swaps or other derivative instruments, to a third party. We now have the opportunity and the abilities and capabilities to handle those in-house through a desk that we've stood up and so...
Speaker Change: That combined with our addition of permanent placement solutions where we can now assist our real-state clients and accessing other sources of capital when they decided to go permanent, so placing those with institutional with read, etc.
Speaker Change: Those expanded capabilities under LSCS were very excited about. We view it to be, again, a step in the right direction for diversification for the bank. It allows us to chase additional clients, but it also allows us to keep our eye on overtime, continue to improve our additional fee income for the institution. So, excited about it and what Tim Newhouse and his team has brought to the bank for us.
Speaker Change: thanks to a great act
Speaker Change: Great, I appreciate it, I'll be a bigger small thank you.
Speaker Change: Of course.
Speaker Change: Our next question comes from a line of ma'am honey, a Steven's, a line's now open.
Speaker Change: Hey, thanks for taking the question. I want to ask about credit quality and I guess specifically the Chicago Lane loan that drove the higher charge-off in the quarter. I think you've been waiting on that sponsor to recap the project. So just any more color on these efforts that ultimately drove the action to charge down a portion of the loan and move the remaining portion to the non-accruals.
Speaker Change: Yeah, good question, Matt, and thank you, and our sponsor layer continues to be very actively engaged in.
Speaker Change: We're in discussions with them now about putting up additional reserves to continue to give them time to work that.
Speaker Change: Those discussions are wrong going in.
Speaker Change: that's all I'm going to say about him at this time.
Speaker Change: We're growing...
Speaker Change: Last Patient.
Speaker Change: with the progress that our sponsors making and just given the fact that the progress has been slow despite the sponsors.
Speaker Change: you know serious and hard work to work accomplishing it and they are making progress, but just not as much progress we would expect to have something.
Speaker Change: Resolved on that by the end of the...
Speaker Change: The third quarter and when they didn't get to a resolution even though they're continuing working, we're just decided the purring thing was to do that.
Speaker Change: right at down, given the, what was the elevator to praise by you on it.
Speaker Change: at that time, and take a write down. We had the reserve built for it, and we've still got a sizable reserve on it, and all of that, the reserve plus the charge down, the current reserve plus the charge down we took her about equal to the reserve we had on it last quarter. So it's really not a big move as far as our allocation for this credit. It just simply just seemed like it was time to, uh,
Speaker Change: to recognize.
Speaker Change: hi
Speaker Change: The slow pace of that progress by putting it on on a crew.
Speaker Change: You know, you've asked about asset quality. I would tell you, we viewed the quarter as a very positive quarter of asset quality improvement. Our large piece of Oreo out in Los Angeles, you know, the sponsor for the third consecutive quarter paid a million dollar fee to extend their contract, put up another million dollars, they've not got three million dollars and hard earned this money. Up on that contract, the reports were getting on that as they're making great progress and, you know, moving through all the city entitlement redesign.
Speaker Change: So forth related to that project, so...
Speaker Change: Every quarter when they put up another million dollar fee that doesn't apply to the purchase price and put up another million dollars.
Speaker Change: Non-refundable Ernest Money that does our assessment of the likelihood of that transaction closing in that loan pain or that property pain off next year is increases.
Speaker Change: the sponsor on our arch district, Los Angeles building that we put, I think, in the second quarter on non-acruble or maybe first quarter.
Speaker Change: charged down 9.3 million dollars.
Speaker Change: that's sponsored.
Speaker Change: continued to pay so we got close to a million dollars in additional pay downs last quarter on that.
Speaker Change: We're not going to get additional pay downs on that. I don't think.
Speaker Change: except the sponsor has continued to stay with us and has the project sold under contract.
Speaker Change: at a press that would...
Speaker Change: fully pay out our current loan balance and provide a substantial recovery and possibly a full recovery.
Speaker Change: of the $9.3 million rattle if we previously took on that back in Q2.
Speaker Change: So we view that contract as a significant progress and you know I tell you this tells you a lot about our portfolio, this sponsors equity and this project is gone.
Speaker Change: Staley Sponsor has made the last payments fit.
Speaker Change: They're obligated Mike.
Speaker Change: under the transaction, which they made in the last quarter and yet they are staying engaged.
Speaker Change: successfully sell property in a transaction that essentially pays off our loan, the principle part of our loan and...
Speaker Change: So forth and the sponsor is not going to get anything out of this, but they're doing this because it's the right thing to do and their people of integrity and so forth. So that just tells you a lot about many of the sponsors we've got in our portfolio.
Speaker Change: the three other...
Speaker Change: Classpad blooms that are in the RST portfolio all had payments and progress on them. In addition, it was our supposed to, and so forth. So we thought it was a very positive...
Speaker Change: at the quarter on the asset quality front.
Speaker Change: Okay, great. Thanks for the color on all the Res G credit details there. I guess switching gears on the loan pricing, I think it may be alluded to earlier, but just to be more color as far as how the loan pricing and that Res G compares to the CIB loans. I know there are several segments that roll up into CIB, but just take a way of the average within CIB. I'm curious how these spreads compared to the Res G spreads.
Speaker Change: Well, the loan pricing in RESG and we've talked about this in the number of times is our RESG loan spreads.
Speaker Change: are going to be higher in the vast majority of cases.
Speaker Change: and the pricing and our corporate and institutional banking group plans.
Speaker Change: But with that said, our C.I.B. loans come with Treasury, the opportunities, collateral inspection, the opportunities on use, the capabilities, and their various other fees and so forth.
Speaker Change: benefits, including deposits and other cross-cell opportunities that come with OCIB loans. So when you look at the required capital allocations for the different loans, I think your return on equity numbers are not materially different between R-S-G and C-I-B. Our R-S-G loans require us to...
Speaker Change: Tulsa, ambiguous amount of additional capital because of our CRE concentration. We obviously on our CIV loans can be more capital-efficient as well as taking advantage of the deposit opportunities that are more prevalent and significant with the CIV loans and the other fee and cross-sell opportunities that are more significant. So, net net, I think you're coming out to about the same return on equity on those lines of business if you properly run both of them as we expect today.
Speaker Change: Thanks for taking the questions.
Speaker Change: So, alright, thank you.
Speaker Change: The next question comes from a line of Katherine Wheeler of KPW, your line is not open.
Speaker Change: Good morning. Morning.
Speaker Change: I noticed in your loan outstanding chart there was a shift out of construction and land development and into the non-carbon non-residential. More than we've seen in past quarters, just curious what drove that shift it was just a reclass or if there's any kind of change going on in there.
Speaker Change: Brandon, you want to take that one? Sure. Sure, Catherine. As we said earlier, there are really two criteria for moving from construction, or moving out of construction category. One is projects complete and has a certificate of occupancy. And the loan structure includes a monthly amortizing feature. And so we talked about, you know, the significant originations back in 22 and before. And those are starting to move through the completion process. Thank you very much.
Speaker Change: Okay, great. So that was in a reclass that was just a natural process of this blow and moving.
Speaker Change: Correct.
Speaker Change: And then with those, be the ones that we would, you could in theory think would be at higher risk of us.
Speaker Change: paying down as rates continue to go down.
Speaker Change: Yeah, I would say that's certainly true. As I mentioned earlier in response to a previous question, it's not unprecedented for a lone pay-out mid-construction, but the normal mindset of sponsors is to look at bridge or reap an anti-nopportunities when a project is completed. So I think you're thinking about that correctly, as these mature and migrate from an active construction to a post-construction.
Speaker Change: and particularly as amortizing payments kick in, you know, those are things that promote a sponsor to look at their opportunities to revitalize that.
Speaker Change: And as you examine the lungs that are moved into that theory bucket out of construction, is there more of it emphasis on kind of a cash flow analysis versus just LTVs in terms of the Azure looking at risk rating?
Speaker Change: Well we're up and now it's the same.
Speaker Change: The analysis, I mean, obviously changes, evolves. I don't know that it drops off the clip, but there's an evolution in your analysis because obviously once you get post-construction, there's a greater emphasis and focus on what are their sales doing or what is their leasing doing and what's going on in the market. So those are all factors that go into our assessment of risk-riding.
Speaker Change: that's not singularly the factor that we've talked about in previous calls.
Speaker Change: Just because project is not lacing as quickly as we thought it doesn't mean it's problem project.
Speaker Change: It could be a problem project, it can be up into the sponsor to support the project is not fair.
Speaker Change: but you know we gave you some significant data points on the history of
Speaker Change: in our sponsors putting.
Speaker Change: A additional money and project, paying for extensions, renewals, rebalancing, reserves, making principal paydowns and so forth on that.
Speaker Change: H-12 of our Management Comments document. And sponsor support is the critical thing that, you know, really drives our disdarmination. If we're absolutely confident that our sponsors are going to defend their asset and carry that asset through an extended leasing time, then that's just not a problem. Credit, it's unfortunate for the sponsor, and it costs them money, but it doesn't become a problem for us. And certainly we've seen tremendous support from our sponsors on their projects.
Speaker Change: Great. And if I could do one follow-up on your bubble chart, you got some disclosures on your special mention alone. And I know that you should, there's four in the special mention category. There's that one line, three of them are pretty easy to see in the bubble chart. There's one that points to kind of the massive bubble, so it's hard to see kind of the type of credit in [inaudible]
Speaker Change: It would seem that that would be a fairly large credit if there are any.
Speaker Change: and any kind of color or it's just kind of...
Speaker Change: Education you can give us to what.
Speaker Change: kind of size and type of credit that might be. You know, Katherine, I'm not going to talk about the special mentioned credits. They're not as unite a conversation. I think about three months ago.
Speaker Change: on the subject. And as I told you, in our special mentioned credits, we don't view as problem credits. And when we talk about credits, that's an unfair invasion of our customer's privacy and so forth. So we give extreme details on our substandard credits.
Speaker Change: and I think we're very transparent about everything going on in the portfolio.
Speaker Change: and give a lot of information.
Speaker Change: You can have a draw the line someplace and getting into detail information on those substandard credits is just not fair enough appropriate for our customer.
Speaker Change: I thought was adding figure 31.
Speaker Change: You know, you may don't be more open to getting a full bit more disclosure on it, I think it. And again, if we don't need to know where it is or if I think the size and maybe what type of credit would be helpful just because you can't really tell in the bubble chart.
Speaker Change: I appreciate that I appreciate, you know. Yeah, we've given you, because we've got some questions about it. Last quarter, we've given you the appendix, the information that gives you property types and the breakdown of the portfolio between past special mention and substandard. This is data that's previously been in our 10Q and annual report. We had some questions about it, so we went ahead and put that in appendix B that's on page 43 of the management comments. So I think you've got the information you need on that page as to the...
Speaker Change: Breakdown of Special Mentoring Credits.
Speaker Change: I think that gets to what you're looking at looking forward to. Thank you for that. All right, I appreciate it. All right, thank you.
Speaker Change: Our next question, confirm line up Michael Rose, a Brendan James. Your line is not open.
Michael Rose: Good morning everyone. Excuse me, thanks for taking my questions. Just on the CIP, though, about is there any sort of deposit opportunity there I assume that there would be, and maybe if you could quantify what you'd expect that to be kind of over time. And I know it's going to depend on different types of loan verticals, things like that, but anyway, to kind of think about that or size it, thanks.
Speaker Change: The answer, Michael is yes and I'm going to ask Jake Munn if he would provide a low color on that and how to thank him about that and approach that. So, Jake, you have to another question.
Speaker Change: So I'm up for an I appreciate George and good question at that.
Jake Munn: We look across the CIV. There's obviously certain verticals that are going to be more deposit rich than others just given the inherent nature of what they do and the customers they provide.
Jake Munn: and we're looking at working capital intensive customers that we had find that our needs might shift ABL team for instance.
Jake Munn: We anticipate, you know, smaller deposits there simply because they typically are on sweep tridents of this pay downs. They're associated debt on a recurring basis.
Jake Munn: And if we look across the board to equipment finance and capital solutions, which
Jake Munn: Jim Lyons runs out a little rock and does a fantastic job at. We do see a healthy amount of deposits there and Jim and has continued to push hard to generate additional opportunities as it relates there.
Jake Munn: um
Jake Munn: As a relates to our newest vertical, our corporate banking and sponsor finance, that's where you're going to see a good amount of depository growth. These are bread and butter, CNI clients, located across.
Jake Munn: are footprint and associated with our footprint.
Jake Munn: Public Companies, Private Companies, Sponsored Back Companies, and it's a mix of the acid-based type of lending, as well as enterprise value lending, and so with this vertical, that's coming online and you all are just getting a little bit of a taste of initially. We also anticipate great growth, kind of in the similar footprint of AVLG and EFCS.
Jake Munn: That vertical typically has a little bit of a better yield, the answer to him is prior question. So, we typically see spreads like 50 to 100 basis points and excess of the other verticals that I mentioned which is nice.
Jake Munn: But in addition to that, these are typically companies that are very low-level. They have a little bit more cash on their balance sheet and OZK has a fantastic treasury management platform. Underneath Mr. Jessup and as a result, we're starting to see a lift in deposits within the CIB.
Jake Munn: These verticals are not necessarily intended to ever be a one-to-one self-funded vertical dining means, but we're starting to see some steady lift there and over time, for instance, within CBSF, I would foresee tracking closer to a 30% self-funded ratio with that business line if they continue to come online and build out.
Speaker Change: That's a great color, very helpful, I appreciate it. Just as a follow-up, you know, as you guys do kind of...
Speaker Change: your shift along the book and I think the target is to get Russia to about 50% of.
Speaker Change: of total loans over the next couple of years.
Speaker Change: Can you talk about what that could potentially mean from a credit standpoint? Obviously other verticals are going to have, and other silos are going to have higher time default frequency and severity versus what we've seen with breast which is really just a handful of...
Speaker Change: of Walsh was over a very long period of time. Is there a way to kind of think about that? Obviously, the economy is in a good spot, but I would think some of those other verticals would be a little bit more economically sensitive and given the shifting mix. Could we expect to see a little bit higher just kind of run rate, just generally speaking of non-performers and charge-offs as we move forward? Thanks.
Speaker Change: Michael, I appreciate the fact that you've mentioned and acknowledged the outstanding long-term history of RORS, G-Portfolio quality.
Speaker Change: As you look back over the years, RST is at a lower.
Speaker Change: and that charge all percentage than any of our other verticals and almost every period since we went.
Speaker Change: active with RESD back in 2003. So it is a great track record and it's certainly...
Speaker Change: contributed to our consistent, the low average, the low industry average charge, our price shows every year.
Speaker Change: So I thank you right in that.
Speaker Change: Other business lines will have a somewhat higher net charge operation and that's true of all other business lines within O.C.K. not just the C.I. Begeric.
Speaker Change: with that said, you know, each of the guys that has come on board and, and,
Speaker Change: Jim.
Speaker Change: Jake mentioned Jim Lines and Mark Schaff who run a couple of those units and have run them for several years for us.
Speaker Change: These guys were attracted to OZK and we were attracted to them because they...
Speaker Change: Share that same philosophical ban on high-credit quality. Credit quality is paramount. Profitability is secondary and growth is tertiary sort of mindset that is just at the core DNA of Bank of CTA. So I think the...
Speaker Change: The Net Charge All Freshos that we'll experience from each of those units that we're building in corporate and institutional banking, and the same philosophy runs through Alan Jessup and Ken Ronnaker and Dennis Porz business units in commercial banking and ILD. I think that same commitment to excellence in asset quality and making that priority number one, profitability priority number two, and growth is totally a tertiary consideration.
Speaker Change: means that you just don't do things that don't make your credit standards. And that discipline is why over our 27 years as public economy we beat the industry's charge operation every year, every just about a third of the industry's charge operation. And if RESG is 50% of the book is opposed to 60% of the book.
Speaker Change: Yeah, Charles Joss might be a couple of basis points higher, but that fundamental culture of asset quality is always paramount, always the focus should continue to keep us at roughly, you know, a third of the industry is to our job fabrics, that's our goal and that's our expectation.
Speaker Change: In the real quick, the ECRA Georgia sentiment there specifically does CIB if you look at.
Speaker Change: of the types of opportunities that we're pursuing. You know, it's really a relationship focused. And that's where we're getting the yield and the cross-solid mention, but it's also a relationship focused and a very similar light to our ESG where we understand management visions. We understand the underlying sponsors. We've looked at these deals, we understand them. We're not chasing exotic sectors. We're being very picky and choosing our plays, if you will, of what industries we want to dive into that have better risk profiles. And that's you know, is a credit for philosophy. Thank you very much.
Speaker Change: In addition to that, if you look at our ABL lending, for instance, a lot of institutions out there, their ABL book is chock full of distressed assets or quasi distressed assets. That's not the case for our ABL group. We focus on high quality, larger scale ABL deals where they are not distressed ABL. Sam can be said for our CBSF, if you're to look at the leverage points on those opportunities we're pursuing, or the LTVs or LTVs, I should say, for our enterprise value deals. We have not unborted any leverage loans to that group and we don't intend to do so either and so lower leverage points, better quality sponsors, and we'll pick in our place.
Speaker Change: That's a very helpful. I appreciate the detail answer. I'll send back thanks.
Speaker Change: I'm next question, because I'm on a Brian Morin, I've changed, your line is not open.
Speaker Change: Take a morning everyone. Good morning Brown.
Speaker Change: Hey, George, just a follow-up to me to get a last question. It's just kind of as you look at this handoff from RISG to CAB, I guess, how to think about, you started, I guess we've covered some of it on, just how to think about provisioning, you know, as you kind of, you know, go into those different business and it's given your comments about, you know, how good, how well the performance has been of RISG over the years, you know, relative to CAB, which certainly sounds like, you know, from what Jake just said, you know, pretty high quality relationship, low leverage. So maybe not a lot of difference in how we think about the provisioning, you know, given kind of comments that have been made.
Speaker Change: Brian , that's a great question, and we're run models on every loan, and we run those models through our various macroeconomic models and our scenario selection for that and calculate an appropriate ACL for every loan in the portfolio of the whole every quarter. So, you know, we will, we will continue to do that and, you know, if that obviously in the current environment, [inaudible]
Speaker Change: Our commercial real estate customers are failing, you know, stress from the higher level of interest rates that have endured over the last couple of years, particularly the last year for those customers. We've got higher. Thank you very much.
Speaker Change: Reserved allocations, RACL allocations for our commercial real estate loans now, and we've had historically because it's a more challenging environment for our sponsors.
Speaker Change: and that's reflected in the fact that you know, we've...
Speaker Change: We've nearly doubled our ACL over the last nine quarters from $300 million to just almost $600 million So I would expect is rates decline in that stress abates in our commercial real estate that will tend to free up some of the reserve allocations for some of those loans and
Speaker Change: Reen out.
Speaker Change: We'll put appropriate reserve allocations up for the C.I.B. loans based on a loan by loan, order by quarter analysis of.
Speaker Change: the quality and condition of those loans and the macroeconomic in which environment which we are operating.
Speaker Change: and we all those.
Speaker Change: Reserves the Higher.
Speaker Change: and then our historical.
Speaker Change: RST Reserves and Normal Non Stress Times, you know, I don't know the answer to that. I think that just depends on...
Speaker Change: Those individual credits and how they perform.
Speaker Change: It wouldn't surprise me if there was a modest, like higher level of ACL, reserved associated with those loans long-term and our RESG loans where we have.
Speaker Change: Trans story asset, nice for those lungs, but we're structuring them well, we're structuring them very cautiously and conservatively.
Speaker Change: with the same sort of structures and the same sort of approach to credit quality in our CIB business that we have applied to get the good results in RST. So, you know, I don't think there's going to be a material difference in that. It may be a little difference, but not a material difference.
Speaker Change: Okay, I appreciate the color and you know, maybe just...
Speaker Change: Two other quick ones here just be in terms of the scaling and the build out of C.I.B. If you kind of talk about a road map of three to five years kind of where you see this business contributing to OZK, can you give a little, you know, a big picture commentary on how you see it unfolding or kind of, you know, where that will lead to or what your expectations are.
Speaker Change: Well, you know, I'll just say what we've said a number of times and maybe give a little additional color. You know, it's near its peak already as to it was about 70% of our funded balances. It's at the end of the last quarter was 64% around it up to 60%. It was like 63.55 I think.
Speaker Change: We expect RESG to continue to come down, not that we expect those balances.
Speaker Change: As I said, we're probably going to be more or less flat on funded balances over the next year.
Speaker Change: because we're going to take this hit from this payoff wave. It's going to keep R-E-F-D from growing. And during that period of time, I think, you know, we see these other lines of business and again, it includes our commercial bike and our I-L-D businesses.
Speaker Change: not just CBI, CBI is a big part of it, and we'll probably grow faster than the others.
Speaker Change: It you know, these other units are going to be big parts of what we do as well. So, you know, I think we will get to a period of time, even having RESG grow as much as it can grow and do every deal that meets our RESG standards. I think over two or three years we'll get to a point where RESG is.
Speaker Change: Less than 50% of our total outstanding book, it may be and probably will be bigger than it is today, but it will be less than 50% of our book because these other units will make big growth contributions. So...
Speaker Change: our guys, they understand the strict credit standards they got to adhere to, they completely embrace and agree with those standards.
Speaker Change: But we've got high performing teams over each of these verticals and CABs as well as our commercial banking and indirect lending units and those guys see lots of opportunities for us to grow out there.
Speaker Change: Perfect. Okay. I appreciate that yours and in the last last one for me, just maybe for Tim. Tim on me, you know, maybe just run back to her or just keep your overview on you kind of talking about the best.
Tim: Yeah, hey Brian, you know, our comments and cadences that we've given in the document assumes that the Fed is...
Speaker Change: Then that's obviously a better situation for us if they move quicker or the...
Speaker Change: Moving 50 basis point increments and that's more challenging.
Speaker Change: Environment for us. If they are more challenging in the upfront quarter, it is more helpful and the lighter for it. That is correct. Our floors will start to kick in, as you can see in that chart we gave you. There are floors, we will start to kick in pretty meaningful.
Speaker Change: in those scenarios too, and then the timing of when we can reprise our cost of ensuring deposit is obviously all dependent on.
Speaker Change: and the Fed moves as well. Okay, got you, and Tim you didn't, I knew you commented about the buyback in the slides but in terms of M&A, any change in the outlook in terms of M&A today or just how you're thinking of how reviewing that today?
Unknown Executive: No change. I mean, there's not a lot of activity from the traditional M&A standpoint.
Speaker Change: No change. I mean there's there's not a lot of activity from the traditional M&A standpoint. This this point I wouldn't be surprised that kind of opens up next year.
Unknown Executive: This point, I wouldn't be surprised that kind of opens up next year. We'll be active in looking at opportunities, but we've got such a great track record with our organic growth and the momentum we've got with CIV. We don't want to do anything that's disruptive to that organic growth that we've got, but we're very interested in growing our bank, and if there's an opportunity that fits our very disciplined M&A strategy, that's something that we would look at.
Speaker Change: We'll be active in looking at opportunities but we've got such a great track record with organic growth and the momentum we've got with CFE we don't want to do anything that's disruptive to that organic growth that we've got but we're very interested in growing our bank and if there's an opportunity that fits our very...
Speaker Change: discipline, emanate strategy, that's something that we would do.
Unknown Executive: Perfect. Thanks for taking the questions, guys.
Speaker Change: and something that we look at.
Speaker Change: Perfect. Thanks for taking the questions, guys.
Unknown Executive: One moment for our next question. Our next question comes online with Samuel Varga of UBS. Their line is now open.
Speaker Change: Our next question comes online the Samuel Bargo of UDS, July is now open.
Samuel Varga: Good morning. I just wanted to switch over to the POSIT.
Samuel Bargo: Good morning.
Samuel Varga: We quickly noted the branch expansion plans by the end of 2025, and I just was just curious if you have any particular specific deposit production targets for those branches that are coming online, and also what sort of geographies are you thinking?
Samuel Bargo: Good morning.
Samuel Bargo: I just wanted to use switch over to the positive, like quickly noted the branch extension plan by the end of 2025. I'm just curious if you have any particular specific deposit production targets for those branches that are coming online and also what sort of geographies are you thinking.
Cynthia Wolfe: Sure. This is Cindy. Thank you for the question.
Cynthia Wolfe: We don't have a specific deposit target when we open a branch. We have a general idea of what the market opportunity is. When we select those sites, we select them for any number of reasons. It could be that we have a hole in the marketplace that we're trying to fill because our customers want us to be there, and we get feedback from our customers. It could be that we need to have better coverage in a load of moderate income areas and so forth. We know about what each branch should do, but I can't paint each one with the same brush.
Speaker Change: Sure, this is Cindy, thank you for the question. We don't have a specific deposit target when we open a branch. We know we have a general idea of what the market opportunity is when we when we select those sites.
Speaker Change: We know about what each branch should do, but we don't.
Cynthia Wolfe: Each branch has a very individual approach to why we selected it, what our expectations are at the growth. But overall, if we're, as it says, in the management comments, we're growing roughly 10 percent over the next 18 months or so, and a lot of that timing depends on things like entitlements of the site, construction timelines, regulatory approvals, and the like. We know that generally, I'm going to say a minimum of, eventually, 20 to 50 million in deposits per branch and beyond, but again, that's just highly dependent upon the market and really the micro market that that branch is located in.
Speaker Change: We don't I can't paint each one with the same brush. Each branch has a very individual approach
Speaker Change: to why we selected what our expectations are at the growth. But overall, if we're, as it says, in the management comments, we're growing roughly 10% over the next 18 months or so, and a lot of that timing depends on things like entitlements of the side, construction, timelines, regulatory approvals, and the like, we know that generally, you know, I'm going to say,
Speaker Change: You know, a minimum of eventually, you know, 20 to 50 million in deposits per branch and beyond. But again, that's just highly dependent upon the market and really the micro market that that branch is located in.
Cynthia Wolfe: The branches we're looking at adding are within our existing states of Arkansas, Texas, Tennessee, Georgia, Florida, and North Carolina, so we're not looking at any branches outside of those six states. at this time. And, as we said in the comments, we would expect that branch network to be up, plus or minus 10%, roughly 10%, between now and year in 2025. So our 230 number would be 250-255, something in that branch, where we would expect our branch camp to be. You know, it takes a while to get a branch to build a significant customer race. You just don't open it and get to full capacity in a year or six months.
Speaker Change: The branches were looking at adding or within our existing states of Arkansas, Texas, Tennessee, Georgia, Florida, and North Carolina. So we're not looking at any branches outside of those six states.
Speaker Change: at this time.
Speaker Change: As we said in the comments, we would expect that branch network to be a plus or minus 10% roughly 10% between now and year in 2025. So our 230 number would be 250 to 55 something in that range. We would expect our branch count to be. You know, it takes a while to get a branch.
Speaker Change: You know, to build a significant customer race, you just don't open it and get to a full capacity in a year or six months, it's a long-term process. So these branches we're adding are primarily expected to support the deposit growth needs in 26, 27 and 28. Thank you very much.
Cynthia Wolfe: It's a long-term process. So these branches we're adding are primarily expected to support our deposit growth needs in 26, 27, and 28. They are not going to have a meaningful impact on deposits next year. We'll continue to achieve that growth we need through our existing network. But this, you know, these will be important to our growth numbers three to six years out.
Speaker Change: They're not.
Speaker Change: I'm going to have a meaningful impact on the positive next year. We'll continue to achieve that growth we need to our existing network. But this, this, you know, this will be important to our growth numbers.
Cynthia Wolfe: I'll add some color about the geography that the biggest concentration of the new branches is in Texas. So those branches are in higher population areas and presumably would have a much higher deposit opportunity long term than some of the ones that we're opening in smaller areas in Carolina and Georgia, for example.
Speaker Change: 3 to 6 years out. I'll add some color about the geography that the biggest concentration of the new branches is in Texas. So those branches are in higher population areas and presumably would have a much higher
Speaker Change: to posit opportunity long-term than some of the ones that we're opening in smaller areas in North Carolina in Georgia, for example.
Unknown Executive: Thank you both for the color on that. And I guess my last one would just be around C income. It's not been a very significant part of the revenue pie, but you've touched in a number of drivers here. Well, there's this indication to ask or the hedging to ask or treasure management.
Speaker Change: Thank you for the for the color on that and I guess my last one would just be around seeing come
Speaker Change: It's not been a very significant part of the revenue tie, but you've touched on a number of drivers here, whether it's the syndication desk or the hedging desk or treasurer management even if I just want to get a sense for what you might think what you think would run right or the ramp might be, because these seem to be meaningful in your opportunities.
Unknown Executive: And so I just wanted to get a response for what you might think the run rate or the ramp might be because these seem to be meaningful new opportunities. Yeah, we're not giving any forward guidance on that, except I would tell you that over the course of 2025, we expect a nice upward trend in that now. What that what that is and how you quantify that I want to be cautious about that, but you know, earlier this year we launched a mortgage business. Those guys are. It was a year or two in planning. We launched it.
Speaker Change: Yeah, we're not giving any forward guidance on that except I would tell you that over the course of
Speaker Change: of 2025, we expect a nice upward trend in that now. What that is and how you quantify that I want to be.
Speaker Change: Kosh is about that, but you know, earlier they're here, we launched a mortgage business, those guys are...
Speaker Change: It was a year or two in planning. We launched it. We're very pleased with their initial.
Unknown Executive: We're very pleased with their initial results. They've got all the infrastructure bill. They started taking applications or sometimes right around the end of the year. If you want to begin in Q2, of course, we're losing several hundred thousand dollars of quarter in that as that startup infrastructure headcount cost and all like siege revenue. But we are beginning to have a really nice ramp up and origination volumes. And we have an internal projection that we're. We're certainly not going to share, but you know it shows a decent positive trajectory for that and that business becoming profitable next year as a contributor to net income.
Speaker Change: Results, they've got all the infrastructure built, they started taking applications or sometime right around the end of few one of the getting a Q2 course we're losing.
Speaker Change: I'm several hundred thousand dollars a quarter in that is that start-up infrastructure head-count cost and I'll like see each revenue but we are beginning to have a really nice ramp up and a rich nation volumes.
Speaker Change: We have an internal projection that we're certainly not going to share but
Speaker Change: It shows a decent positive trajectory for that and that business becoming profitable next year.
Unknown Executive: And then Jake gave some pretty good color about their syndications desk and the interest rate swap hedging cap part of that business. You know, there are some other elements of that capital market status that could generate some nice, be-income opportunities. It's too early for us to quantify and give any projections on that, but we're hopeful, and I think cautiously optimistic that those are going to become both mortgage and that capital market status, nice, be-income contributors.
Speaker Change: as a contributor to net income. And then Jayce gave some pretty good color about their syndication task and the interest rate, swallepaging cap part of that business.
Unknown Executive: And we've been spending a lot of money and a lot of resources on really growing and amping up the talent in our trust and wealth business. And while that's a very small business for us, we expect it to grow nicely between now and year 25 and also be a contributor. So we've got a lot of things that don't get much air time and any of our public comments because they're relatively newer, relatively small, but I think, you know, three years, five years from now, we'll look at those and see them as pretty important parts of our business.
Speaker Change: that capital market staff, NACP and come contributors and we've been spending a lot of money and a lot of resources on really growing and amping up the talent in our trust in wealth business.
Speaker Change: and while that's a very small business far, we expect it to.
Speaker Change: grow nationally between now and year in 25 and also be a contributor. So we've got a lot of things that don't get much airtime in any of our public comments because they're relatively newer, relatively small, but I think, you know, three years five years from now we'll look at those and see them as pretty important parts of our business.
Unknown Executive: Got it.
Unknown Executive: Thank you for all that color; appreciate.
Unknown Executive: All right, thank you. Thank you.
Speaker Change #100: Got it, thank you George for all that color and appreciate it.
Unknown Executive: We'll move on to our next question. Our next question comes from the line of Tim and Brader. A little farther.
Speaker Change #100: All right, thank you.
Unknown Executive: Your line is now open.
Speaker Change #101: Our next question comes from a line up to my braids here, or we'll start with your line is now open.
Tim Hicks: Hi, good morning. Circling back to Catherine's question around construction loans going into permanent financing, I'm just wondering, are those going from variable to a more typical perm kind of five, one type structure? Are those staying on as variable?
Speaker Change #102: Hi, good morning.
Speaker Change #103: Circling back to Katherine's question around construction loans going into permanent financing. I'm just wondering, are those going from variable to a more typical perm kind of five one type structure or those staying on as variable? And then I guess historically, OVG didn't seem to do much of their own permanent financing to the construction book, as those loans tended to get refight out, you know, kind of three years into the construction process. I'm just wondering, this change is this more indicative of what's going on in the broader kind of secondary market for these loans or is this more inclined of clients waiting maybe to refient?
Tim Hicks: And then I guess, you know, historically, OZK didn't seem to do much of their own permanent finance of the construction book as those loans tended to get refied out, you know, kind of three years into the construction process. I'm just wondering, this change is this more indicative of what's going on in the broader kind of secondary market for these loans, or is this more inclined of clients waiting, maybe to refile into something at a less punitive rate?
Unknown Executive: Now, it's none of the above. We're not converting from variable to fixed. They're all with the same exact variable right loan structure and minimum interest structure and so forth.
Speaker Change #103: or something at a left punitive rate.
Speaker Change #104: Now, it's none of the above. We're not converting from variable to fixed. They're all with the same exact variable right, long structure and minimum interest structure. And so forth they had as a construction line.
Unknown Executive: They had a construction loan. We're not re-leveraging the loans or extending additional credit to the customers. And, you know, the permanent loan opportunities or the bridge loan opportunities that are attractive to our customers, most of the time, not all the time, but most of the time are at substantially higher leverage points than our loans. Sometimes as much as 200% or 225% of our loan amount. So, we're certainly not a permanent loan solution for a customer that's going to come out of our loan and go into a permanent loan on the same asset at 150% to 225% of our loan amount.
Speaker Change #104: We are not really leveraging the loans or...
Speaker Change #104: Extending additional credit to the customers and you know the permanent loan opportunities or the bridge loan opportunities that are attractive to our customers most of the time not all the time of most of the time.
Speaker Change #104: are at substantially higher leverage points than our lungs.
Speaker Change #104: . Sometimes as much as 200% or 225% of our loan amount. So we're certainly not a permanent loan solution for a customer that's going to come out of our loan and go into a permanent loan on the same asset at 150 to 225% of our loan amount. So that's just not our business.
Unknown Executive: So, that's just not our business.
Unknown Executive: Conference. With that said, one of the elements of our CIB's capital market script is the ability for a fee to place permanent financing for our sponsors. This is a piece of business we've never tapped, and you know, we would not be the lender on that.
Speaker Change #105: With that said, one of the elements of our CI-B's capital market script is the ability for a for-feed to place permanent financing for our sponsors. This is...
Speaker Change #105: the piece of business we have never tapped and you know, we would not be the lender on that. But we do have relationships with our customers and our CBI career beliefs that we can
Unknown Executive: But we do have relationships with those customers, and our CIB crew believes that we can capitalize on the existing relationships we have with our customers and the ability of our team and experience of our team in placing credits on a bridge or permanent financing market to help our customers arrange that refinancing and generate some good fee income in the process. So, that is an additional part of that capital market staff that could become an asked and triggered profitability future.
Speaker Change #105: Capitalized on the existing relationships we have with our customers and the ability of our team and experience of our team and placing.
Speaker Change #105: Credits on a bridge or permanent financing market to help our customers arrange that refinancing and generate some good fee income in the process. So that is an additional part of that capital market status that could become an asking contributor to profitability future.
Unknown Executive: Great, thanks.
Tim Hicks: And then, as a follow-up, the comment about reducing the whole limit on new originated loans to 500 million, the placement of that in the paragraph and talking about CIB, I think would imply that maybe you're seeing some larger credits coming through that portfolio, or you're expecting to see some larger credits coming through that portfolio. I mean, that's a really competitive space. It seems like right now, with private credit and everything else, I guess.
Speaker Change #106: Thanks. And then as a follow-up, the comment about reducing the whole limit on New Year-Generage is loans to 500 million. The placement of that in the paragraph and talking about CIB, I think would imply that maybe you're seeing some larger credits coming through.
Speaker Change #107: That portfolio, or you're expecting to see some larger credits coming through that portfolio. I mean, that's a really competitive space. It seems like right now with private credit and everything else, I guess. You know, what's the typical deal size that we should expect to see out of C.I.B.? And then just I know you've touched in a little bit through the comments already, but just what's the competitive advantage that OZK is bringing to the space and maybe some of these other private players don't have or aren't willing to do? I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry.
Tim Hicks: You know, what's the typical deal size that we should expect to see out of CIB?
Tim Hicks: And then just, I know you've touched on it a little bit through the comments already, but just what's the competitive advantage that OZK is bringing through the space and maybe some of these other private players don't have or aren't willing to do?
Unknown Executive: Yeah, you want to talk about the relationship and the relatively diverse deal size we're looking at? That'd be great. And again, another good question. You know, the average relationship size really depends on the business line. If you look at our ABLG group, those relationships are typically called 50 to 150 million that the bank might be holding all the way down to some of the fund finance. And then all the way down to our corporate banking and sponsor finance group, where in some cases we're doing sponsor finance in the sense of providing leverage for providing debt, I should say, for M&A financing for family offices and private equity groups.
Speaker Change #108: Jake, you want to talk about the relationship and the, uh, relatively diverse deal size we're looking at.
Jake Munn: That would be great. Again, another good question. The average relationship size really depends on the business line. If you look at our ABLG group, those relationships are typically called 50 to 150 million that the bank might be holding all the way down to some of our fund finance. And then all the way down to our corporate banking and sponsor finance group, where in some cases we're doing sponsor finance in the sense of providing leverage for providing debt, I should say, for M&A financing for family officers and private equity groups.
Unknown Executive: Those loans are typically smaller. If you look at what was originated, you know, last quarter we were averaging an OZK hold size of right about 50 million. I'd say our CBSF group again is going to be holding, on average, 30 to 75 million per transaction.
Jake Munn: Those loans are typically smaller. If you look at what was originated.
Jake Munn: You know, last quarter we were averaging those EK hold size of about 50 million.
Jake Munn: I'd say our CBSF group again is holding on average 30 to 75 million per transaction. We'll go above and beyond if we're going to be agent of a larger syndication and need to, but it's really within the CNI side, as you know, striking the balance between a commitment for the bank and capital commitment, but also with best overall yield and the best in use of our dollars and so it's a balance that we walk.
Unknown Executive: We'll go above and beyond if we're going to be agent of a larger syndication and need to, but it's really within the CNI side is, you know, striking the balance between, you know, commitment for the bank and capital commitment, but also with best overall yield and investment use of our dollars. And so it's a balance that we walk, associated with it there. Again, a lot of our additional yields will continue to come through fantastic cross zones. and Opportunities.
Jake Munn: and Associate with it there. Again, a lot of our additional yields will continue to come through fantastic cross-selling opportunities. And so we talked about our Chargery Management Platform that's been upgraded and renewed, and it's really something fantastic for the institution to our interest rate hedging services, all the way to private client and private banking services for the principles of these underlying firms. And so when you take all that into consideration, it allows us to really develop some deep relationships.
Unknown Executive: And so we talked about our Chargery Management platform that's been upgraded and renewed, and it's really something fantastic for the institution, to our interest rate hedging services, all the way to private client and private banking services for the principles of these underlying firms. And so when you take all that into consideration, it allows us to really develop some deep relationships that other institutions might lack. It allows us to feel like a better term. Mark's the most tells me this all the time on our team. We can out local, the nationals and out national, the local banks.
Unknown Executive: And so we have the product services and capabilities and also the credit shops to run with the big dogs with you, if you will.
Unknown Executive: But we also are nimble enough and competitive enough where we can compete with our local and regional peers.
Unknown Executive: Thank you. One moment for our next question.
Benjamin Tyson Gerlinger: Again, as a reminder, as a question, you'll need to press door one, one. Our next question comes from the line of Ben Gerlinger, a city you're not open.
Speaker Change #109: Our next question comes from the line of Ben Greenger of City, your line is not open.
Benjamin Gerlinger: Hey, more than one. Just curious, how do you guys think about some of the more stressed pockets of commercial real estate, specifically something like life science or office? I mean, general output of report recently that's a life science market, if you assume no new supply to take up to five years.
Ben Greenger: Hey, more and more.
Ben Greenger: I'm just curious, how do you guys think about some of the more stressed pockets with commercial real estate specifically something like life science or office? I mean, Jay will help put up a report recently that's a life science market if you assume no new supply to take up to five years.
Benjamin Gerlinger: Is there anything that we should be looking at in terms of like your sponsors that you might put in more ACLs towards those specific loans in general? Or how you guys are approaching just the credit standards of the more stressed pockets of construction?
Ben Greenger: Is there anything that we should be looking at in terms of your responses that you might put in more. If you have towards those specific ones in general, or how you guys are approaching just the credit standards of more stress, the pocket construction.
Unknown Executive: Ben, the key to our portfolio is really the fact that we have it designed on high quality assets with strong sponsors in a way that ensures strong sponsors' support in the vast majority of cases. So, as you know, even with the reappraisal process that we've been going on in an environment where cap rates have gone up and values have come down, our weighted average loan to value on the entire RISG portfolio is still 51% to him, is that right? And our weighted average or that's cost, loan to value is 43%, yeah, 43, 51, loan to cost, and 43, loan to value.
Ben Greenger: and the key to our portfolio.
Ben Greenger: is really the fact that we have it designed on high quality assets for strong sponsors in a way that
Ben Greenger: Insurance Strong Sponsor Support in the vast majority of cases. So as you know, even with the re-appraisal process that we've been going on in an environment where cap rates have gone up and values have come down, our weighted average loan to value on the entire RISG portfolio is still 50.
Ben Greenger: 51% of them is that right and our weighted average of...
Speaker Change #111: are that's loan to cost, loan to value is 43% yeah 43.51 loan to cost and 43 loan to value so those very low leverage points
Unknown Executive: So those very low leverage points, you know, mean that our sponsors and their capital partners have a ton of skin in the game that they need to protect.
Speaker Change #111: You know, mean that our sponsors and their capital partners have a ton of standing in the game that they need to protect. Now, if you've got...
Unknown Executive: Now, if you've got a crappy old office building from the 60s, or 70s, or 80s that has no future, you might not be willing to protect that even if you put 50% of the money in it. On the other hand, if you've got a high quality, you know, modern construction, both modern standards, very desirable property that, you know, is ultimately going to lease or ultimately going to sell, you've got an incentive to defend that. So the low leverage points of our assets and the fact that the vast majority of our loans are on the new construction, not all of them, but the vast majority of them are on the state-of-the-art new construction projects, ensures that our sponsors have a, in most cases, our sponsors and capital partners have a very high motivation to defend those assets.
Speaker Change #111: Crapial office building from the 60s or 70s or 80s that has no future, you might not be willing to protect that even if you put 50% of the money in it.
Speaker Change #111: On the other hand, if you've got a high quality, you know, modern constructions built modern standards, very desirable property.
Speaker Change #111: That's...
Speaker Change #111: You know, it's ultimately going to leave, or ultimately going to sell, you've got an incentive to defend that.
Speaker Change #112: The low leverage points of our assets and the fact that the vast majority of our loans are on the...
Speaker Change #112: New Construction, not all of them, but the vast majority of them on a state of the art and new construction projects ensures that our sponsors have, in most cases, our sponsors have capital partners have a very high motivation to defend those assets. And, you know, we've seen that, those sponsor after sponsor who is.
Unknown Executive: And, you know, we've seen that a sponsor after a sponsor who has paid the loan down when we got an appraisal that showed the higher loan to value, posted additional reserves for one or two or three year extension, paid fees, and so forth to extend. So the sponsors, by and large, have been very committed to protect these assets.
Speaker Change #112: played the loan down when we got an appraisal that showed a higher loan to value post-ediditional reserves for 1 or 2 or 3-year extension, paid fees and so forth to extend. So the sponsors of Bionage have been very committed to protect these assets. The quality of the asset and the quality of the sponsors.
Unknown Executive: The quality of the asset and the quality of the sponsors. are the key differentiators in these loans, and we feel really good about the quality of our assets and the quality of our sponsors by and large across the portfolio. And that's why, even though we've got a heavy CRE book concentrated, it has performed very well throughout this period of rising rates on the heels of the COVID pandemic. And you know, the other challenges that have faced commercial real estate is because we got strong sponsors and quality assets, and the sponsors are motivated, willing, and in most cases capable of staying in there and depending these assets long time.
Speaker Change #112: are the key differentiators in these loans and we put a really good about the quality of our assets and the quality of our sponsors by and large across the portfolio. And that's why even though we've got a heavy-say-are-ebook.
Speaker Change #112: It is performed very well throughout the period of rising right from the hills of the...
Speaker Change #112: COVID pandemic and you know the other challenges that it faced commercial real estate is because we got strong sponsors and quality assets and sponsors are motivated, willing and in most cases, capable of staying in there and depending on these assets long term.
Unknown Executive: And then, in a prepared commentary, you guys gave some remarks towards NII for 2025. And then with the presumed paydown and payoffs of your RRC portfolio, I know you guys are front-loaded, some of the early payoff fees and all those great things with the temporarily boosted net interest income could be marked on that day. Is that included within your NII outlook? Yeah, our NII outlook includes everything that would normally be under GAAP accounting calculated as part of net interest income. It's all in accordance with Gap Accounting.
Speaker Change #112: and then in the prepared commentary, you guys give some of our stories to our AI.
Speaker Change #113: for 2025. And then with the presumed pay down and pay off, so there are a cheap portfolio. I know you guys want to load some of the broken pay off fees and all those great things. With the temporarily boost, that interesting come to the market on that day. Is that included within your NII outlook?
Speaker Change #114: Uh, yeah, our NI Outlook includes everything that would normally be under Gap Accounting calculated as part of net interest income. It's all in accordance with Gap Accounting.
Unknown Executive: Okay, appreciate it.
Unknown Executive: All right. Thank you.
Speaker Change #115: Thank you very much.
Unknown Executive: I'm showing no further questions at this time.
Speaker Change #116: All right, thank you.
George Gleason: I'd like to turn that to George Leeson, Chairman and CEO, for closer remarks.
Speaker Change #117: Thank you. I'm so I know further questions at this time. I'll not like to turn that to a torch fleece and tear me and see you all for closing our marks. All right. Thanks guys. Thanks for all the great questions. Thanks for your interest and by cause we carry with us forward to talking with you and reporting some good for quarter results and about mani guys. Thanks so much. Have a good one.
George Gleason: All right. Thanks, guys. Thanks for all the great questions. Thanks for your interest in Bank.
George Gleason: As we carry, we look forward to talking with you and reporting some good four quarter results on about many days. Thanks so much. Have a good one.
Unknown Executive: Thank you for your participation in today's conference.
Unknown Executive: This has concluded the program. You will now disconnect. Thank you.
Speaker Change #118: Thank you for your participation today's conference. This has conclude the program you will now disconnect.