Q2 2025 Bank OZK Earnings Call
Good day and thank you for standing by. Welcome to the bank ozk, second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question answer session to ask a question during the session. You will need to press star 1, 1 on your telephone. You will then hear an automated message. Advising. Your hand is raised to withdraw your question. Please 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 your speaker today. J. Staley managing director of investor relations. Please go ahead.
Good morning, I'm Jay Staley, managing 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 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 Financial supplement, and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.
Speaker Change: Joining me on the call, to take your questions are George Gleason, chairman and CEO. Brandon, Hamlin president, Tim Hicks Chief Financial Officer, Cindy wolf, Chief, Operating Officer and Jake Munn, president corporate, and institutional banking. We will now open up the lines for your questions. Let me now, ask our operator Gigi to remind our listeners how to queue in for questions.
Speaker Change: As a reminder to ask a question. Please press star 1, 1 on your telephone and wait for your name to be announced to withdraw your question. Please. Press star 1 1 again.
Gigi: Please stand by while we compile the Q&A roster.
Our first question comes from the line of Steven Scout from Piper Sandler.
Steven Scout: Yeah, good morning everyone. Thanks for the time here. Um, so obviously growth was uh, pretty phenomenal here. This quarter and it looks like I think the number was 109 new ftes in the quarter. I'm curious. Um, if there's any sort of composition of those new hires that you have
Steven Scout: um, that you could kind of key Us in on that are related to production hires and and anything on the NRG team, as you guys build that out, just kind of
Steven Scout: Trying to think about the um opportunity for CIB and energy in these sort of verticals to continue to grow with um with the new higher activity.
Yeah, great question, Stephen. Thank you for it, and thank you for being on the call today. Uh, the new hires were spread, broadly, you know, across our company. As, as uh, we mentioned in the, uh, conference call. We've opened I think 11 branches so far this year. We've got 14 more more or less that we expect to open in the remainder of the year. Uh, a lot of those openings will occur in the, the current quarter of the third quarter. So we would expect, uh, you know, continued, hiring related to those branches as we go through the remainder of the Year and that will continue in the next year, as we plan to open about 25, branches more or less next year. So, uh, Branch County is probably the, the largest single number, uh, We've also been, uh, you know, growing our CIB Group, which is
Steven Scout: People there will continue to add people there as their business growth. And that is a very uh well planned and choreographed edition of Staff uh that really occurs commensurate with their uh continued portfolio growth and growth and opportunities. The natural resource Group. As you mentioned as part of that we're growing out uh business banking teams that we uh built out the initial team last year and uh Florida.
Earlier this year, a business banking team in Texas. Uh, we're now building out a business banking team in Georgia. So a fair amount of, uh, uh, development of Staff with those teams. Um, and, you know, then just lenders and staff additions in our existing network of branches because I A, A branch that was handling 70 million dollars of deposits. That's now handling, a 100 million needs another FTE. For example to uh,
Continue to deliver the quality of service with our customers. And, of course, that growth across all those production lines of business, whether its deposits or loans also leads to growth, uh, in your, your customer care center, your call center leads to additional growth and risk and
Steven Scout: Model and data and, uh, technology and, you know, all across the board. So it it's, it's a few people everywhere. But all of it is being driven by growth in our loans growth, in our deposits and growth in the production teams that are interacting with our customers there. I could talk about trust and wealth. I can talk about private banking there. We've got a lot of initiatives going going very well, and we're thrilled at the quality of talent that we're able to hire in this environment.
Yeah, that's a really good color, George. Thank you. It wasn't aware of the, the business banking buildout, so that degree. So, that's helpful. And, and, and in regards to the ability to bring in Talent, obviously we've seen a bit of a pickup in m&a activity in and around your markets. Do you think that that will add in the near-term, your ability to, to continue to add more Talent? Could that, um, the new higher activity, increase and, and maybe along with that?
Steven Scout: The growth growth and diversification strategies playing out. Well, could could m&a now for you guys as an acquirer, once again be part of the story um given the way your your stock has, you know, been performing lately and and obviously you have a great track record record there on an m&a front.
11. Let me answer your first question then I'm going to ask Tim to answer your question about m&a opportunities. Uh,
Steven Scout: you know, clearly uh,
Steven Scout: we are focused on hiring very high quality, High performing talent, and obviously, uh, all of us in the industry, know that, a lot of times m&a transactions at other Banks,
Freeze up, uh, some high quality talent, that that's not as enthused about the uh, uh the uh, merger the combination, or perhaps their new teammates, or new reporting structures as as they were before. So, yes, to your question, uh, m&a will create additional opportunities.
Steven Scout: But our, our ability to acquire really, uh, talented people that have deep relationships with customers and deep relationships, I think is, is more driven by our culture.
Steven Scout: And the the track record of performance and achievement and the reputation that our company has in the industry and it is by what our competitors are doing. You know, we're we're adding a lot of team members that are leaving really highly regarded Banks, and big jobs at bigger institutions.
Steven Scout: Opportunity question. Yeah. Hey, Stephen, um, on m&a, you know, we've had such a great track record over the last several years of being able to grow organically. That sets a really high bar um for us in evaluating m&a opportunities. We do uh see opportunities um, that we look at, um, but they are in the context of um the organic growth that we're going, we're having and the success we're having growing organically and um, whether an m&a transaction, you know, will take away from that momentum is part of the consideration. So, um, I can't tell you if it's going to be part of our story, long term. Um, you know, we do we do have a very high high, high bar. For looking at that we've been very even when we're doing Acquisitions and 2010 through 2016. We were very
Steven Scout: Um, very conservative and how we looked in evaluated those Acquisitions. And you remember very well, all those were very accretive to our, uh, our bank. And and um, those are the type of opportunities that we're looking for. Does it add uh, additional business lines, and does it add? Um, some some um, part of our business that can accelerate our strategy. Um, so we could
Continue to evaluate that. Uh, but really pleased with our organic, uh, growth story. Um and the momentum we have their
Great, appreciate that. And 1 last Quick 1 for me. If I could, I noticed there was 1 loan that got added in the 375 to 500 million. Um bucket.
Steven Scout: Was was any portion of that loan potentially above 500 million? Have you syndicated out any any portion of any loans as of yet?
Steven Scout: uh we we are sending loans in our CIB group, we've not yet, had a 500 million plus opportunity in rasg that we've syndicated, but we're certainly open and looking forward to the day when that opportunity presents itself,
Speaker Change: Got it. Very helpful. Congrats on all the successes. Appreciate it.
Steven Scout: Thank you.
Thank you. 1 moment for our next question.
Speaker Change: Our next question comes from the line of Michael Rose from Raymond James.
Michael Rose: Hey, uh, good morning. Thanks for taking my questions. Um, just wanted to start on on deposits. Um, obviously added a bunch of time deposits. I think you opened a branches in the quarter, but it was nice to see the, uh, interesting deposit costs come down a little bit. Can you just speak to kind of the, you know, the expectation for for near-term deposit growth. Uh, Branch openings, I think you have some more slated. And then, um, you know, if we can see, uh, some further reductions,
And deposit costs. Are we we kind of add or near our bottom at this point. Thanks.
Michael Rose: Sandy, you want to take that? Sure, thank you for the question. Um, our deposit costs are roughly going to be where they are until the FED moves. We did see, I can tell you that in June deposit costs were 3.68 compared to the 3.7 per quarter. So you can see, uh, they're going to be where they they, they are more or less and we'll grow deposits to the extent, necessary to grow, our balance sheet, I mean, if if uh, obviously we need another quarter of 1.6 billion it, it'll cost more than if we only need a few hundred million. Um,
Michael Rose: But we have the capacity to grow within our current Branch Network and yes, we're adding branches.
Michael Rose: Um, as George mentioned earlier and those will serve us well for our growth in uh 2027 2028 2029.
Speaker Change: Perfect, I appreciate the caller and um, I'm sorry if I missed this, I got on a little late, but um, just wanted to, um, you know, better appreciate the the loan growth Outlook, you know, for the backup of the year, does imply. Some deceleration? I know you've talked about pay downs, but if you can just walk us through kind of Maybe by bucket, um what the expectations, you know, could be uh CIB versus resi, I assume that'll be a headwind and then, you know marine, RV things like that. Thanks.
Speaker Change: See somewhat of a headwind to growth. Uh, I don't know if that's a negative number for rasg or just a flat number. We'll see how the prepaids shape out, but we are expecting much higher. Uh, prepayments in the uh, current quarter. We mentioned in the, uh, uh, press release that we had had, you know, uh, I think, uh, 0.47 billion in rossj, Pay Downs in the first 15 days. Uh, if we had pulled that through close of business yesterday, that number would have been 0.54 billion as we had a another pay down yesterday
Speaker Change: and those, uh, pay Downs were seen we which we expect to, uh, uh,
Speaker Change: See, you know an accelerated volume of uh in the second half of this year. Our broad-based, you know, so far, our biggest pay down was a New York multi family. Uh, we've had a Dallas multi payoff, uh, uh, our largest, I think land loan and and
Speaker Change: Which was in Miami paid off a Washington state multi family of Chicago, mixed use and then yesterday a Chicago multi. So uh, you know, very broad-based, uh, range of payoffs across product types and geographies and we expect, uh, we expect that we'll continue
Speaker Change: the bottom line of that is the guidance we gave that, you know, we had, we had given guidance at the beginning of the year and reiterated that uh, uh last um,
Speaker Change: Call.
April that we expected mid teens to high single digit growth and Loans. This year. Obviously, uh, we blew that, uh, away, uh, with 10.1% in the, uh, 9 annualized in the first half of the year. So, we exceeded our growth guidance for the year, uh, which I may have
Speaker Change: Missed it high single digits, I'm sorry, High single digits, uh, was our guidance uh, and we exceeded that um uh, you know already. So we do expect further growth but we expect it's going to be significantly muted by pay down. So we've increased that annual guidance to an 11% to 13% range for the full year.
Perfect, I appreciate you. Taking my questions. I'll step back.
Speaker Change: All right. Thank you.
Speaker Change: Thank you. 1 moment for our next question.
Speaker Change: Our next question comes from the line of Manan gosalia from Morgan Stanley.
Manan Gosalia: Hey good morning. Um George. I was wondering if you could just expand on your uh uh the the comments you just made on on the repayments in the in the areas G book um
Speaker Change: Can you expand on on what drove those? Uh, pay Downs because I guess as long as the curve is still higher, um, is it just that Capital markets are opened up? Are they uh finding more opportunities to refi away from you? Can you maybe expand a little bit more on that?
Michael Rose: Yes. Uh, you know, it's a, it's a combination of factors Manan. You're you're seeing uh, uh, particularly on the uh, multi-product that I mentioned, that was included in the pay down, uh, you know, a lot of those or or reaching a stabilization level.
That uh, they're able to get uh, to a reasonably favorable, probably not as good as they would like. But a reinstatement, believe, favorable permanent exit. You're seeing some projects that are, uh, rape financing with a different lender with more, uh, liberal, uh, uh terms and, uh, higher uh, proceeds.
Michael Rose: That, uh, give them a longer Runway to, uh, stabilize their project, and get to an ultimate permanent Aboriginal under situation. If you will, uh, a lot of those are driven by property.
Michael Rose: Sales or, uh, enhanced leasing activity. So it, it's, it's all the normal factors that uh, uh,
Michael Rose: Drive folks to refinance out of our construction loan into a bridge loan, a permanent loan.
Michael Rose: Or sell a property. So you know, we we've
Michael Rose: given guidance for
Michael Rose: a significant uptick in payments that was a little more muted probably than we'd expected at the outset of the year in q1 and Q2, um, you know, there there's been a lot of, uh,
Michael Rose: Uncertainty and volatility in markets in the economy, over the first 6 months of the year. So I think that uh, um, glad perhaps to a little slower execution, on some of those refinances than what we expected in December,
Michael Rose: the the flip side of that, though, is that, uh, you know,
People seem to be getting a, a sort of sense of where the world is going in the midst of the uncertain environment today and that's leading to a execution on a lot of transactions.
Speaker Change: Got it. Very helpful. Um, and then um, you know, as always you guys give some great granular disclosure on the uh, new appraisals. Um, I was wondering if you could comment on the uh 2 or 3 loans where the ltvs moved up, uh, significantly this quarter. You know, any common threads there or anything specific you were seeing their
Speaker Change: Well, you know, we we gave you 3, footnotes on those 3 highest uh, loan to value reappraisals. And uh, the footnotes are, are pretty good disclosure the, uh, you know, the first item out there is a very small office, building loan, 10 million, uh, the reappraisal on that is our highest loan to value at at 129% loan to value. That would normally be a, uh,
You know very disturbing sign that kind of a loan to value. Even though it's very small loan but the sponsor recently executed the 12-month extension made a million 5 pay down uh
Speaker Change: Curtailed the 10.1 million of unfunded proceeds in that loan, put up another 1.1 million and carry reserves paid.
And extension fee and closing cost for that all customary.
Charges and you know they're evaluating how to reposition uh that property looking at alternatives for how to extract value from that.
Speaker Change: um, the other is a second 1 is a uh,
Multi-family project that was leasing well, but below proformer rents. Uh, the sponsors had built that to condo standards. They've elected to uh,
Proceed with a conversion uh to a condo project. And we had it reappraised at such in connection with that conversion, they added another 6.5 million dollars of cash equity.
Speaker Change: To the project. So again, sponsor continues to be engaged.
Speaker Change: Uh working on that project. And then the uh third 1 was uh uh a land loan and that was extended during the quarter.
Speaker Change: The uh, that's a substandard rated loan. Substandard crew of the borrower deposited another 4.1 million and carry reserves for a short-term extension of 3 months while they're working to, uh,
Speaker Change: Align a recapitalization partner with them in that project. So
You know, that's that's pretty much the story on those. I think. Uh, even though these loans are challenged from a loan to value perspective, uh, they're good examples of, uh, guarantor sponsor, support and engagement. We talked about that a lot in our management comments and have talked about that a lot for gosh, a couple of years now, uh, about how important guarantor support is particularly in this uh,
Speaker Change: Uh see market and those are just good examples of projects that have had a really um you know significant change in loan to value. And yet the sponsors uh
Speaker Change: are staying engaged to putting in additional money and continue to work toward a successful resolution.
Speaker Change: Great, thank you so much.
Speaker Change: Thank you. 1 moment for our next question.
Speaker Change: Our next question comes from the line of Matt alni from stevens.com.
Speaker Change: Uh long growth guidance for 2026, but appreciate any kind of commentary. You can provide around a, a framework for for loan growth for next year. If we just assume the pace of loan growth in the back, half of this year continues in next year, is that a reasonable framework for us to assume or are there other considerations? We should keep in mind for for next year.
Speaker Change: um,
Speaker Change: Matt, I would, um, I would agree with you. It's it's a quarter early for us to give loan growth guidance for next year. But I certainly understand the question and and I realize that 2026 Model results are gaining an importance and and the minds of our analysts and investors. So Jake and Brandon, if, if you would uh, Jake, I'm gonna since sorry since CIB is the uh,
Speaker Change: You know, the king of growth in our company. At the moment I'm going to ask Jake to take the lead on that and resg is is the uh uh still the champion in outstanding balances. I'll ask Brandon to follow up and talk about arsg and
Speaker Change: You know, without giving specific Guidance, just talking generally about where we think we're going in 2026 with those 2 units.
Speaker Change: That are very important. So Jake
Jake Munn: Perfect. Thank you, George. I appreciate and good question. I'll take a a c if you getting called the king of growth for as long as I possibly can. So I appreciate that compliment.
Uh pipelines remain strong for CIB. Uh at least going into the third quarter to say the least. We can continue to track good talent across the footprint for CIB as we discussed previously in the call. I do want to reiterate to everyone that typical Trends are what we're seeing with the cni growth here at ozk specifically with CIB where our first quarter is going to typically be our weakest, our second and fourth quarter should mimic 1. Another and our third quarter is usually our strongest first quarter being the weakest because of coming out of the holiday season and also CFOs and like are focused on their audits and other reporting items.
Jake Munn: We do have strong Tailwind coming out of second quarter and the third quarter. So I do want to mention that and highlight it. We had a number of good deals that were approved pending closed. That ended up closing and funding early in this month. And so we're excited that those are going to contribute into our third quarter growth. And in addition to that, George mentioned didn't touched on it earlier, but we have some nice Tailwind from the launch of our Natural Resources Group, that's going to be taking flight and third quarter. And so we should see a nice pick up and growth and third, and fourth quarter from George and Monty in that team as they continue.
Speaker Change: Continue to grow and develop and add some substantial growth then into 2026 as well. In addition to that, CIB is really focused on the cbsf business unit as a reminder that's our corporate Banking and sponsor Finance, business unit. Truly focused on Diversified CN islanding and that Middle Market to large corporate space. Both, uh, traditional asset back lending, as well as our Enterprise Value based lending. And so, I do want to highlight cbss growth, we continue to see that, we'll see that push into third and fourth quarter, um, as we start to expand and start markets or start presences in the Greater Atlanta market and the Nashville markets as well, we identified some nice Talent, we're going to start putting those offices together, which should contribute to additional loan growth across the the broader platform. Uh going into 2026 though. We're feeling like we're just now starting to hit a nice stride and so I I'm cautiously optimistic about overall CIB performance, is this business lines continue to grow as well as our Legacy business line.
Speaker Change: That our fund Finance group, led by parole, uh, Mike leaving the helmet, our ablg shop, and Jim running, our efcs as well as all Market income generating Services, through lscs. And so, uh, you know, we feel blessed with the, the quarter performance that we have here. Uh, and we feel very optimistic or cautiously optimistic. I should say about growth and third and fourth quarter. And then of the 2026,
Speaker Change: Uh Jake. Uh, am I correct in in summarizing that is that we expect CIB to accelerate not slow down.
Jake Munn: That'd be a correct statement.
Jake Munn: No. Yeah.
Speaker Change: Brandon, you want to give a little color on resg? Yeah. Well first of all, they're all very thankful that Jake guidance is acceleration and not deceleration. So thank you, Jay. Uh, Matt, appreciate the question, good, good to hear from you this morning. So, when you think about RSG growth, I want to, you know, obviously make the distinction between originations and and funded balanced growth. I'll kind of start on the origination side because certainly as we look forward, that's an important piece.
Speaker Change: For about 12 months after loan, closing? Because we as, you know, have all our sponsors funding their Equity, uh, in advance of our loan closing, um, we're we're pleased uh, with the uh, job that our guys have done on the origination side modestly, increasing volume each quarter this year and
Speaker Change: Highest level since the second quarter of 2024 and that's you know, in an environment, whereas we've noted for several quarters.
Speaker Change: Our sponsors are remaining cautious with respect to moving forward on new projects and the volume new new deals that can be bid on. In the market has has clearly been suppressed relative to history. Um, conversely. The number of lenders, whether it's bank or alternative lenders, has has been elevated during that time period. You know, a lot of a lot of, um, lenders have had, uh, suppress origination but but are out there, um, hovering around and I said to your deal. So the result of that.
Uh, is a healthy challenge for our origination team. Um, it won't be easy, but these guys as you see in the quarterly numbers uh keep pressing that forward um as as the market will allow and they're originating every loan that they can that fits our stringent leverage structure and pricing criteria.
Speaker Change: On the funded balance side. Um you know the plus side of the equation. We still have unfunded balances to advance um off. You know, uh the last couple of years origination uh so so we do have that but as we've got it, we expect significantly higher payments is coming quarters and and um in the 2026. So as as George noted, not sure if that's a that's a negative or a positive impact. Um
Speaker Change: Clearly, we've got headwinds to that funded balanced growth in our ASG, and thankful to Jake's teams here and and uh picking up picking up picking us up there.
Speaker Change: you know, I'm a add a, a few comments there, you know, we we've talked for a long time about our growth growth and diversification strategy and and
Speaker Change: People have misunderstood that to mean that we were deemphasized resg or that re SG was, you know, we were trying to shrink or pull back from CRA. We are not the emphasizing our ESG, we're not trying to pull back, we're not trying to shrink it and and growing resg is 1 of those
Speaker Change: Elements of the growth growth and diversification strategy. So we were very pleased to see an uptick in origination volume in the quarter. Just ended in what was a very challenging, uh, origination environment. I was on the
Speaker Change: phone yesterday, just taking a call to uh do kind of a channel check with 1 of our longtime sponsors. Who said they're not looking at any new deals right now because they just can't make them pencil from the equity perspective, in the current, uh, interest rate and economic environment. So it's a, it's a uh uh challenging uh environment to uh make new deals work from an equity perspective, which is slowed down the uh,
Speaker Change: Bill opportunities we're looking at. And yet we had as Brandon pointed out, the best resg, origination quarter since the second quarter of last year, so best out of the last 4. So that we take that as a win and
Speaker Change: And certainly reflective of the fact we want to continue to grow our ESG the the other element of that growth is CIB indirect lending and Commercial Banking, Our Community Bank business, everything else basically and we want those to grow even faster than our ESG. So we achieve diversification, the third work
Speaker Change: In that growth growth and diversification strategy, and you're seeing that re SG in the quarter, just ended hit the highest funded balances they've ever hit. And yet they, they have grown over the last couple of years. They've grown from 70%.
Speaker Change: When the price growth growth and diversification strategy. And of course, the the strategy existed in our minds and in our strategic plan long before we gave it a name. But we decided we needed to give it a name. So this is all uh, playing out exactly as uh, as we expected, we've talked a lot about CIB. We've talked a lot about rehg, I'll just give you a little, the other pieces of it. Uh, you know, uh, indirect lending has grown this year. It's
Speaker Change: Still static. Roughly a 12% of our outstanding balances are articulated. Goal is 10 to 12 of our loans. It's been for the last several years, right? In that 123% range, we expect it will continue to grow and stay in that, uh, sort of middle of our target range there of 10 to 15% and our, uh, Commercial Banking Community banking teams. We're, we're doing more consumer, uh, through our Branch Network. We're excited about that. And I mentioned the business banking teams that we launched last year in Florida, earlier this year, in Texas, and now building in Georgia and those should be meaningful sources of of, uh, loan and deposit growth for us as we deal with a, uh, a
Speaker Change: Smaller.
Speaker Change: Uh commercial customer than what we would deal with in our CIB group or deal with with our typical.
Commercial lenders in our community banking organization. So, uh, we're we're expecting to hit growth next year on all categories. You know, whether or not prepayments just neutralize our esg's growth for a quarter or 2 or 3, that's certainly plausible. We could have very chunky quarter prepayments. But um,
Speaker Change: Long term. We expect our ESG will continue to be an important contributor. But we also think that
Speaker Change: That growing from 70 to 60 will continue. And that ESG is, is growing toward 50% of our balance sheet, at some point, in the future, and then less because CIB and other groups are going to grow faster.
Speaker Change: Okay, that's all great, commentary. Appreciate your help.
Speaker Change: All right. Thank you.
Thank you. 1 moment for our next question.
Speaker Change: Our next question comes from the line of Katherine Miller from KBW.
Katherine Miller: Thanks, good morning.
Speaker Change: Good morning.
Speaker Change: George. Can we go back to the appraisal chart? Which I, I actually was really encouraged by a few things that I saw on that chart that showed a notice there were 3 life science projects that had ltvs up but only by, you know, 10 to 12%. So still at levels that you know, feel feel good. So we're just kind of curious on the left science. There's just a lot of, you know, chatter on that space and just curious if you could provide any insight into trends that you're seeing in that asset class right now,
Speaker Change: Yeah I'm going to ask Brandon since those are rehg loans to comment on that. But before we does I you know we're we're pleased at where we are in the appraisal process. We've now, depending on whether you're looking at loan, count or dollar volume,
Speaker Change: 98% of our loans and number and 99% in dollar volume have appraisals dated on or after.
Speaker Change: December 15th 2022. And that's that was when the FED reached Peak interest rates, or reached this interest rate where they are now, they went on and increased rates of 100 bucks higher and then cut a 100 bucks but all those appraisals from December 15th 2022. I
Have been done in the current or a higher interest rate environment we only have 6 loans that haven't been reappraised in this environment. Now, our weighted average, uh, loan to value has gone up 2% as a result of that, from 43 to 45. Now, if you have been following the monthly or the quarterly scorecard, we've been giving you on appraisals. You'll note that
Speaker Change: uh,
Speaker Change: And and not R but and the new loans that we've originated over the last couple of years and you can see this in the bubble chart are at much lower loan to value numbers. So we've kept averaging down the loan to value the portfolio.
With the new originations such that uh, you know, the in the aggregate, the portfolios, only gone up 2%. Uh, learned the value over that entire cycle. We think that's a significant uh, accomplishment and reflects very well on the uh, RSG teams job of portfolio management. So, Brandon, uh, I'm going to turn it over to you with that intro. And uh let you talk about uh, what you guys are saying on uh, life science. In particular, you may want to talk about other product types as well.
Yeah, thanks George, Katherine. Thanks for the question. Um, you know, just reiterate, uh,
What what George alluded to, and, and note that, you know, when we, when we underwrite these loans, we we stress them, uh, you know, a number of different categories. Whether it's rental rates, or vacancy rates, interest rates, but also cap rates. And, um, obviously when you go through a Fed rate, tightening cycle, like we've sent in, um, you, you do get impact on the on the interest rate and cap rate side. But
Speaker Change: Um, uh, there's also been, you know, other macroeconomic factors that have influenced different property types and Life Sciences is, is, is certainly, uh, not not Escape that situation. But I, I think, as it relates to our portfolio, we we are seeing in in certain Pockets, increased leasing activity. Uh, on you know, we we've served signed our first lab deal, uh, out in San Diego. Um, very, very pleased with that and there have been other announcements um in terms of of of large leases taking place. The sector as a whole has been has certainly been muted over the last
Uh, year or so. And, and we are thankful that our sponsors as was pointed out, have, uh, appreciated, the quality of the projects that they've, they've built and and the the massive Equity that they've put in, in it and they continue to protect as these projects, you know, as we've said, are going to take longer to lease up. So, uh, seeing seeing some leaking there in life science, I would say
Speaker Change: Yeah, you know, to George's point about other sectors. Uh, it was an encouraging quarter, uh, in the office, uh, portfolio as we looked across at the really, a a number of projects that that we're seeing Leasing. And, you know, not just, you know, big spaces, uh, singular tenants. But, um, singles and doubles, that, that I think is interesting as it speaks to, uh, what's going on in the broader economy? And and I would also make a plug that it's speaks to the quality of the projects that we finance and their desirability. Um, so those those were encouraging signs, our, you know, apartment leasing, uh, has been strong, uh, industrial actually seeing some industrial, uh, leases get signed and some that are very near signing across the portfolio and, um, of course, the strength of the multi and and Industrial, uh, projects or very evident. Uh, when you look at, uh, the, you know, sort of the composition of re
Speaker Change: Payments across the portfolio. Uh, we've seen, uh, the, the, the dominance, uh, predominant, uh, repayment strength has been in that multi family and Industrial portfolio, but yours points in in that, in that particular topic has been broad across segments. So, yeah, that's, that's kind of our view of the of the tenant movement and and Capital Market view of of the uh, various property types.
Speaker Change: Great helpful, thank you. And maybe 1 by 1. Follow-up is just, um, can you give us any insight into the step up and special mention lens? We saw this quarter. It was up about 176 million. I know that's bounced around, but just curious if there's any, you know, 1 large property in there to be aware of or if it's just
Speaker Change: lots of things.
Speaker Change: Thank you. Um, yeah as as uh,
Speaker Change: You noted, we disclosed that um, we're really kind of back to um, the uh, level. We were at the December 31st last year. So we had a
Speaker Change: um,
um,
Speaker Change: A lot of meaning to that downtick. We don't ascribe a lot of meaning to this uptick. It's just the uh, the normal, a and flow of, uh,
Speaker Change: um,
Speaker Change: Loans as we re restrict them from quarter to quarter and, and, uh, maturities and upcoming maturities and negotiations with sponsors, have a lot to do that. So, you know, in in December we had quite a few loans that we were in some fairly uh,
um,
Speaker Change: challenging negotiations, or serious negotiations with sponsors that, uh, led us to a special mentioned, some of those loans. Uh, those
Speaker Change: negotiations went well by and large and resulted in those loans. Um,
Speaker Change: coming out of the special mention category at 3:31 very. Similarly, we've got some negotiations upcoming that are serious negotiations. So, we moved some loans to special mention reflective of that. We'll see how that plays out. Hopefully it'll play out as well as uh, in in the uh, last cycle.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. 1 moment for our next question.
Our next question comes from the line of Brian, Martin from Janie.
Brian Martin: Hey, good morning.
Good morning.
Brian Martin: Hey uh, did I hear this that right? George realized I was
Speaker Change: Operation for Jake's group. In terms of when you were talking about the acceleration was that in in dollar terms, I know this quarter was a strong quarter you know around 900 million in growth. But that's the that level is going to xcelerate from the 900 million dollar level. Is that uh what you guys said
Speaker Change: Well, I think in general uh we've got an accelerating trend of business in CIB, uh, Brian. So I'm I'm not going to tell you that 900 million is going to accelerate in Q3. I don't know that it may slow in Q3 it may accelerate in Q3, it may be the same. I don't, I don't know that but over the next say, 6 quarters, we would expect a a larger and larger contribution from CIB uh, to our growth and it being a larger part of our, our total portfolio.
Speaker Change: Over that time. Uh you know, as as I mentioned last quarter, when I was talking about the idea, I think I mentioned
Speaker Change: That, uh, um, they're really just getting started, uh, with with, uh, achieving their potential. And they've got a number of verticals built there, but they're, they're expanding geographies to capitalize on more verticals. And, uh, as evidenced by our Natural Resources Group, they're expanding into new verticals. And within some of the verticals, they'll be adding some some Niche products as well. We need to hold during this brief delay.
Speaker Change: but we own, I
Speaker Change: We're getting some background noise, or are we on guys? We're we're on. Okay. All right. So, um, um, you know, that that's a very important part of our growth and we feel
Speaker Change: Really good about the prospects there.
Speaker Change: No, just piggyback real quick. George off of that. Brian just for your benefit. I mean, we're still seeing, you know, great opportunities in the market. We're being highly selective. We're taking the credit first, uh, uh um, um, approach to what we're doing, and what we're pursuing across CIB, I give you a perfect example. CIB looked at over 7 billion dollars worth of opportunities. In second quarter, our pull through rate was effectively 12%, a little more than that.
So that's a Telltale sign right there, that we're being selective on opportunities on the structure on pricing to ensure that we're really sourcing and cherry-picking the best opportunities for bank ozk and our shareholders. And so I wanted to really
Speaker Change: Reiterate that for you. So we're we're, we're cautiously optimistic, I think third quarter is going to be great. Uh, and we're we're hopeful that the the momentum we have we can continue to build upon as George mentioned with these new business lines and the expansion of existing.
Speaker Change: Thank you. 1 moment for our next question.
Our next question comes from the line of Nicholas Holo from UPS.
Speaker Change: I'm curious though, if the CIB build out has begun to contribute, uh, on the deposit side of the house as your, um, starting to collect those relationships and, um, and establish those for the, for the franchise, excuse me.
Speaker Change: Um, I will say yes, uh, both on the deposit and begin to contribute on the fee income side. Jake, I'm gonna let you give a little color on how we're approaching deposits and the, the relationships and also uh, where we are in beginning to harvest ancillary the opportunities from that business. It's early. But yeah, seeing some good progress,
Jake: Yeah, I love the question Nick. I appreciate that. Uh, you know what? We're starting to see some great full relationship opportunities across CIB a number that I know, Brandon and I are very proud of at the end of second quarter, 96.4 of all the relationships on a commitment basis within CIB. We were either single lender club or if we were in a broader snyk we were the admin JLA or another uh titled agent. So why that's important is it demonstrates. The fact that we are relationship focused, we're not out there just getting into deals as participants or or focused in on on buying paper we want true relationship Banking and so it provides us with the opportunity to not only opine on structuring and and optimize
Jake: Our yield and economics with these deals. Uh, but it also allows us to cross-sell and have access to management. So, um, as a result we're seeing some nice upticks, our deposits, uh, for CIB, uh, Brandon and I Joe grew nearly 20% quarter over quarter. Uh, the problem is or not. The problem with the blessing is our loan growth. Grew so much that it basically neutralized it uh, to a degree. So, we're going to continue to see some nice deposit growth from CIB. We're excited about it, our treasury management partners and our product offerings at ozk are really Best in Class. And, and so, it really makes for a nice easy sell to our customers when we're approaching them, uh, for single lender opportunities, but also for admin opportunities too. And so, um, you know, we're focused on relationship banking, we're not focused on just buying paper or anything of that nature. And as a result, you're going to see a continued improvements on on those metrics that you mentioned our loan syndications and Corporate Services business line within CIB is also starting to hit a nice stride as George alluded to our
Jake: Interest rate hedging Services, it's run by Ryan. Freddy a Ryan's having nice success. I think we saw a cap and a swap. Get done just last week which was exciting through loan committee. Um our our Capital markets programs are starting to see some success. We're starting to see some nice Bond tips and other economics role in. Uh then of course our loan syndications group as well, led by Rachel, she's doing a phenomenal job her and Stephanie and we're starting to see the opportunity to lead more and more deals as admin agent and as such those economics are further enhanced for us. So again,
Consciously optimistic, as we continue forward, but we're putting together a great team and I think you all are starting to see, uh, the, uh, the fruits of that labor.
Speaker Change: Yeah, and I would just um um, Echo, all that. And and just, you know, acknowledge that we're just, we're just early in this. It's, you know, uh, the broadening of our CIB function to include all these, uh, fee related. Uh,
Speaker Change: Uh, opportunities is is new. We're we're having some nice early wins but we expect this to become a much more important part of the CIB story. Uh, incoming quarters and particularly in coming years to really hit full stride in this and really fully capitalize on the opportunities is probably a 2728 Dale, but we expect steady progression uh, of uh, progress here uh, on a quarter to quarter basis.
That's helpful and great to hear. Um, you know, you mentioned how early days it is for the business and you know you're going to be on this growth path uh for a long time, coming ahead. Um but maybe just in terms of early indications and any relationships that have been around longer, how satisfied with are you with the credit performance from the CIB businesses, um, that you've experienced so far?
Uh, I would, I would say we're very satisfied. Uh, you know, we've got a couple of the Legacy assets there that are that are either, uh, substandard, uh,
Speaker Change: Normal.
Speaker Change: Things you're going to have in the course of lending money, you you make loans, they're not all going to work per the original plan. So nothing is adversely. Surprising there to us at all and and we are we are thrilled uh with the uh new production that we're getting, I'll give you a data point. Jake may want to comment on this but uh our CIB growth.
Speaker Change: Had we closed?
What we had approved in loan committee uh on on club and uh syndicated transactions would have been much higher.
Than what, uh, we actually achieved in the quarter. Just ended because, uh, the quality of transactions J mentioned, our Jake mentioned, our pull through rate of about 12%, but the quality of transactions that, uh, we're working on is leading to these things being significantly oversubscribed. So we and all the other uh members of the uh the loan syndicates here are getting scaled down on investments on most transactions.
Um so we're approving a larger hold uh position than we're actually getting allocated. At the end. Is everybody allocates down?
Speaker Change: To uh, uh, deal with the upper subscription. If these were not high quality assets, you wouldn't have a lot of banks fighting for pieces of them.
Speaker Change: Yeah. Now, that's right. Georgian? And a good data point to say the least. If we had, if we hadn't had final allocation cutbacks, you know, we'd be in a much larger position, which is, uh, always fun to think about. But, you know, just reiterating its a credit for first approach yields second growth. Third with that 12%, pull through rate. You know, we are we're looking closely at opportunities talking to sponsors, you know, we're not necessarily as a result going to be a bank for all we've like nothing, you know, plenty of equity into these deals, we like Ironclad, balance sheets. Um, we're staying away from actively away from, you know, highly leveraged transactions and we're ALS picking our plays as we've mentioned on prior calls. You know, we're not actively pursuing opportunities in the consumer discretionary retail space within CIB. We're staying a bit away from venture capital and Tech. Uh restaurant Finance smaller franchise Finance Etc. Strategically by just giving some of the headwinds in those Industries. And so we're we're being cautious about the industry's we're pushing in
Speaker Change: We're being cautious to ensure that we have a favorable LTV and LTE metrics as well. And and uh, you know, we continue to see nice success even uh growing in a fruit and fashion.
if I can just add,
To that as a, uh, objective Observer, Jake and his team have just been phenomenal around the quality side. And, you know, we, we talked a lot about the extra FTS on the origination side. We talked about it on the deposit Gathering side. But you know, you've got in there, a number of, of, of folks on the, on the, the wrist, vertical side as well. And Jake Jake is is hiring not just the origination side, but the portfolio management side to ensure that. That quality really is job number 1, and the way his team has integrated with our existing and growing. Uh, second and third lines, in this institution has been absolutely phenomenal. Such that we're getting
You know, quality with speed and certainty of execution in the stand up of the new business lines that he's putting in place. So it's it's getting there quickly, but it's getting there with phenomenal coordination. Uh, collaboration with the second and third line to make sure our governance. Make sure our risk rating, uh, scorecards and all those sorts of things that you have to do to ensure that quality are set up. So, just Jake and CIB really do exemplify all the characteristics that RSG uh built. It's it's it's a platform and portfolio around. So just the tip of the cap to Jake and that team
Speaker Change: Conducted themselves there.
Speaker Change: Yeah. Brandon I appreciate that and I'd be remissed your point if I didn't miss our portfolio management and operations team within CIB. You know, as we continue to hire here as George and brick and a test, they're they're making, you know, taking up more than 50% of our new hires. Because it's vitally important to us that we have ample Staffing but also knowledgeable and experienced Staffing. As it relates to the portfolio, management, compliance and oversight. That way, we can be uh, the best stewards of capital possible for, for both our shareholders or Regulators uh, in the communities, we serve
Speaker Change: Very helpful, guys, thanks for taking my questions.
Speaker Change: Thank you.
Timur Brazil: Our next question comes from the line of Timur. Brazil from Wells Fargo.
Hi, good morning, everyone.
Timur Brazil: Good morning.
Um, I'd like to start on the um on the condo loan that had previously been multi-family. Um that was issued the extension with the with the borrower contributing some more funds there. I'm just wondering kind of the internal mechanics that keep this a pass rated credit given the extension and kind of the the change in asset classes. Is it the borrower contribution with new Equity that that helped at maintain that status. And just if there's any reserves that have been set aside against that project
Timur Brazil: Well, they're reserved on on every loan in our portfolio to more and, uh, yes, the, the borrower's contribution their commitment to the project and the soundness of their business plan are all factors and the, uh, uh, continued, uh, carrying of that credit, as I pass rated credit.
Timur Brazil: Okay, that's helpful. Thanks. And maybe just a bigger picture on allowance methodology with CIB comprising, a a bigger portion of the, the future growth rate. I guess, how should we think about the
Timur Brazil: Allowance level for CIB versus arsg, that's part 1. And then I guess part 2, just thinking about the allowance build that we've seen over the last couple of years relative to still very light charge off. How do you see that ultimately playing out? Is this something that you're expecting to, uh, release those reserves should the environment? Uh, improve over time, is there an expectation for some higher losses on the cam? And that's why the, the reserving was done in advance. I was just love to think about, or to hear about how you guys are thinking about the, uh, allowance relative to charge Ops and how they gets resolved.
Timur Brazil: Yeah, good. Good question. Thank you. Um,
Speaker Change: Obviously every uh CIB loan just like every resg loan, has an ACL model.
That it is associated with that, uh, uh, calculates the loss and the the uh, expected loss and the loss given to Paul the probability of default, the loss, given default resulting in an expected loss.
uh, those
Speaker Change: Cumulative numbers for every loan in our portfolio. Whether it's re SG CIB or or something else is is factored into our ACO calculation. Uh, as Tim has mentioned in our management comments document. Tim and Jay, you know we uh have maintained
Speaker Change: Uh, our weightings very much to the downside scenario. So, we mentioned in our, in our management comments, in regard to our
Discussion about ACL that, uh, uh, our Moody's S4, which is a downside economic recession scenario. If you would and our Moody's S6, which is a stagflation scenario are currently weighted more highly in our calculation of losses than the Moody's, Baseline scenario. So, we've maintained a, you know, throughout this fed tightening cycle and I think we were fairly preemptive in the way we approached it. But we've maintained a fairly cautious Outlook, uh, regarding the uncertainty around the, uh, the economy. And, uh, we continue with that, you know, we, we hope we get to a period of of, uh, more certainty and that, that certainty is economic stability and not a recession or not of like state flation.
Scenario. And if we get to a point where it becomes uh, clear, that, you know, we're not going into a recession and we're not going into a stag place in scenario. Those risk, ratings will become tail risk, weightings, and those
Speaker Change: Uh, elements of our ACL allocations will come down in the Baseline would become the larger case. But we're continuing to take what I think is a a very prudent and appropriate approach and uh acknowledging that there's a lot of uncertainty uh, still out there around a host of issues in the economy. Uh, so, you know, that is resulted in a 3666 million dollar bill in our ACL over the last, uh,
Speaker Change: um,
Almost all of those quarters, not everyone of them, but almost all of them, we've still even without that big ACL build had record. Uh, net income and record earnings per share, which I think B speaks to the uh just the the uh strength of our, our business model and the strength of uh our franchise to uh to do that.
Speaker Change: Now that's resulted in us putting about $4 in the reserved for every dollar of losses uh more or less over that period of time. So we've had a huge Reserve Bill 366 million as I mentioned.
Speaker Change: and you know if if we get to the other side of this period of economic uncertainty and we don't incur losses, then obviously the
Speaker Change: reserve levels will come down. If we experience adversity, we feel like we're well reserved for uh that reflective of our allocation of um you know
Rest models there. So we feel like we're well prepared. Um, I can't predict exactly how this economy is going to turn out. I don't think anybody can. Everybody has a thesis about it but we're just being uh, appropriately prudent and cautious as we continue to work through this period of of uncertainty our portfolio.
Speaker Change: Is performing.
Speaker Change: very well as we would expect it to and and, you know, you you see this once again in our net charge, operatio being, you know, a third or a fourth of the industry's net charge operation, which it's been every year since
We went public in 1997. You know, we've, we've averaged about a third of the industry's charge, operatio, and
Speaker Change: We're continuing to, uh, run close to that metric. So uh we feel. We feel very, very good about the way, the portfolio is performing.
Speaker Change: The principal reason our portfolio is performing as well as it is. Is our sponsors.
Speaker Change: Continue to support and be engaged with their projects. And, you know, we've made the comment and the management comments that we expect. Most of our sponsors will continue to, uh, support their projects, until normal property, performance and economic conditions return, whenever that is now,
Speaker Change: We've obviously had, uh, I guess, I would say 5, except to sponsor support, uh, 4 of them are in foreclosed assets right now. And, uh, 1 of them, uh, was that, uh, um, arts district, Los Angeles office loan that we talked a lot about last year, the sponsor
Speaker Change: Quit supporting it in regard to making payments, but staying engaged and successfully sold that project. So that we had a full recovery of principal and, and most
Speaker Change: Are some of our post default interest. Actually we recovered, we lost just a, a bit of our post-default, interest on that. So I guess you could say the sponsor gave up and that they quit making payments, but they stayed engaged and helped, uh, achieve a very uh successful.
Speaker Change: Exit for that property. Given the fact that it was a distressed, uh, property. So we're we again think that just be speaks to, uh, the quality of most of our sponsors. Will we have uh additional bumps in the road? Probably it's a very uncertain economy. Will those be uh things that uh you know will be disruptive to our earnings or uh cause us to have to increase reserves. Even you know further in some extraordinary way we certainly don't expect that. We feel like we're adequately reserved and the portfolio is performing.
Speaker Change: Very, very well.
Speaker Change: Tomorrow, I might mention that that list of uh loans you've been uh, attaching to your, uh, research report. I think 5 of them paid off in the last quarter.
Okay. That's that's a good color there. Thank you, George, maybe. Um, just if I could just 1 more follow up on your um comments about the, the sponsor's support and the optionality just maybe within life science. Specifically, can you just talk to some of the the trends in occupancy that you're seeing there and the appetite to maybe convert those to, to traditional office of those conversations have started to, to pick up and just generally what your thoughts are on that asset class here?
Speaker Change: Some uh Live Science leasing uh in the uh in the first half of the year. Uh, and then the last quarter uh, it is slower than we would like it slower than our sponsors would like, but there is a uh, some positive momentum. Um, it seems around that we are aware that uh, our sponsors uh, on uh, a number of projects have active rfps that they're in negotiation with on potential tenants.
Speaker Change: Uh, we'll have to see how that plays out. Obviously, there are challenges surrounding that asset class, we acknowledge it. It's part of the reason for the reserve Bill, uh, it's certainly uh, uh, an area that merits us continuing to give it close attention. Uh, but uh today our sponsors have continued to support those assets. We expect the majority of our sponsors will continue to support those assets. And
Speaker Change: We're in a good. Uh uh, we're in a good uh basis in those assets. Uh, we feel like so um, we'll continue to monitor that and give you ongoing reports.
Great. Thank you.
Speaker Change: All right. Thank you.
Speaker Change: Thank you at this time. I'm showing no further questions.
Speaker Change: All right. Well thank you guys for joining the call today. We're really pleased to report a great quarter to you. We thank you for sharing that and we look forward to talking with you in about 90 days about the next quarter. Have a great day. Thank you. That concludes our call.
Speaker Change: This concludes today's conference call.
Speaker Change: For participating. You may now disconnect