Bank OZK Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Bank OZK Second Quarter 2020 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference to your speaker today, Mr. Tim Hicks. Thank you, please go ahead, sir.

Good morning. I am Tim Hicks, Chief Administrative Officer and Executive Director of Investor Relations 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 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. Joining me on the call to take your questions are George Gleason, Chairman and CEO; Greg McKinney, Chief Financial Officer; and Brannon Hamblen, President and COO of our Real Estate Specialties Group. We will now open up the lines for your questions. Let me ask our operator, Daniel, to remind our listeners how to queue in for questions.

Our first question comes from Ken Zerbe with Morgan Stanley. Your line is now open.

I guess, first of all, starting off, I think it’s absolutely great that you saw stronger loan growth in the quarter, and I get that it was really driven by lower repayments to some extent. I guess, given some of the commentary that you made about repayments picking up in fourth quarter and the bridge and permanent lenders coming back into the market, that part seems a bit cautious. Can you just elaborate a little bit about how you see sort of that loan growth trending over the next few quarters?

Ken, I would tell you, first off, we don’t know what the exact numbers are going to be. There are a lot of moving parts to that. We feel pretty positive about our pipeline going forward. Of course, a good pipeline is a good thing, but you still got to get those loans approved and closed and executed. And we are seeing, as we indicated in the management comments, document some of the bridge lenders and permanent lenders stepping back into the market. That's certainly not a tidal wave, but it is noteworthy that those guys are coming back as we expected they would. They’re getting their bearings and figuring out where everything is settling out. So, we're seeing that activity. It's hard to know how that plays out. There's uncertainty. So, we're cautiously optimistic about our ability to continue to put up some nice growth numbers in RESG portfolio and not get totally undercut by repayments in the second half of the year. But we still got to get that growth put on the books and recorded and those transactions closed. And we'll see where the repayment numbers settle out over the course of this year and early next year. We're pleased with the way it's working out so far. We're getting good origination volume on really quality deals with quality sponsorship. And, as you and I’ve talked about for several years, desire to see a slower rate of pay-downs on our loans at completion or say near completion. So, that is working out very favorably. And we're very pleased about that. And of course, that was one of the critical factors in translating to the improvement in net interest income in Q2 versus Q1.

Okay, perfect. I have a different question regarding NIM compression. I appreciated your comments about NIM potentially being stable or increasing from here. However, considering that 92% of your variable rate loans are already at their floors and the substantial amount of CD repricing you have, it seems that your NIM should be rising. Can you discuss what factors might actually lead to NIM compression, given the floors and CDs? Thanks.

A couple of factors contributed to the decrease in our net interest margin for the recently ended quarter. First, our PPP loans have a 1% coupon and yield in the high 2s; when we amortize the fees over the life of the loans, this impacts our net interest margin by 1 or 2 basis points. Additionally, we are building liquidity in a challenging yield environment, which also reduced our margin by another 6 to 8 basis points, leaving us with an impact of about 5 or 6 basis points for the quarter. The continued liquidity build and the full quarter of PPP loans on our books mean that the timing of forgiveness and repayments will depend on government programs. This factor could slightly affect our margin. However, looking ahead, we believe we have a solid opportunity to reduce our cost of interest-bearing deposits as CD maturities come up. We are optimistic about reducing CD rates further as they roll over, following the prevailing trend. Moreover, while competition in the market varies, we are experiencing wider spreads on our new originations in the RESG space compared to loans from six or nine months ago. This is due to the need to hold more reserves, which justifies higher compensation for these loans. We are cautiously optimistic with two main aspects driving our margin improvement. One is decreasing interest-bearing deposit costs in the upcoming quarters, and the other is the loans we are currently closing in the RESG sector. These loans, primarily construction loans, are expected to provide wider spreads as they fund in 2021 and 2022, contributing positively to margin expansion. While there are other factors like balance sheet mix and investment yields, we have two significant elements aligned for positive margin movement, and we maintain a cautious optimism in this outlook.

All right, perfect. Thank you very much for the answers.

Thank you.

Thank you. Our next question comes from Jennifer Demba with SunTrust. Your line is now open.

Thank you. Good morning.

Good morning.

Question about what kind of transactions you're seeing in your pipeline now and what kind of projects developers are moving forward with right now in this environment? Can you give us some thoughts on what you are seeing using your clientele as a proxy?

Brannon Hamblen is President of our Real Estate Specialties Group. So, Brannon may be in the best position to answer that. He's in the details of that every minute of every day. So, Brannon?

Sure, sure. Happy to answer that. Good morning. I would say, you probably won't be surprised to learn that a fairly significant number of the deals that we're seeing are multifamily. We're still seeing and looking at seriously considering all the other property types, but most of what we're moving forward on, the majority of that would be in the multifamily space. So, and as you look out at the landscape about what’s easy to understand in terms of what the future looks like, certainly that category would fall in line there. But again, we're seeing all types, even folks working on hotel deals and office deals, notwithstanding some of the near-term uncertainty. But, as you know, most of what we close on today won't deliver for 24 to 36 months. So, we're looking at all the options there, as sponsors bring those to market.

I assume you're evaluating your office and hotel deals on a case-by-case basis. You guys have always prided yourself on being very consistent, not coming totally away from different asset classes or geographies or whatever.

Absolutely. As has always been the case and certainly continues to be, absolutely the same way today. We try very hard to go into every deal we do with the best sponsorship out there and in the best markets. Some of the things that make the best market today change tomorrow. So, staying on top of that with folks that are developing in multiple markets across the country and learning and exploring what's going on out there is very helpful to our business. Yes. We're every bit as diligent today in that regard as we have been since our ESG began over 17 years ago.

What kind of pricing and loan to value and equity can you demand now versus maybe six months ago?

On the leverage side, we've pushed that and are attempting to move. In some cases, we've been able to move from LTC of maybe if you were 55 before you're going to 45. It really depends on the product type and the market and the size and who's chasing the deal as to how far you can get. But, we're trying to win 5% to 10% there on the leverage side. And obviously, that translates into the equity. On the pricing side, as George mentioned, we're really we immediately, as I think we probably told you guys, following Q1 began to reprice, and we’re pricing 75 to 100 bps wide in terms of spread from where we were, 6, 9, 12 months ago. And as in the last answer, it'll be a while before we see that, because it does take a while to fund these large loans up with all the equity in front of us. In '21 and '22, we'll definitely start to see the benefit of those wider spreads.

Our next question comes from Timur Braziler with Wells Fargo.

Sticking to the spread question, as some of the competitors step back into their arena and as construction begins to ramp up and normalize. Is the expectation of those spreads tightened here in the not too distant future or is there something else going on that you think wider spreads are going to be here to stay?

It’s impossible to know that. How soon will competitors step back into the space, how aggressive will those competitors be? It's hard to know that. Certainly in an environment where you have more competitors, your spreads will get tighter. In an environment where you have less competitors, your spreads will get wider. Hopefully, the competitors when they do come back into the space will do the same math that we do and that is under CECL, here you got to put up and allocate reserves for the entire life of a loan. You've got higher reserve costs that have to be associated with every loan and prudence would dictate that you get paid a higher spread, cover those reserve costs to generate the same return on equity or return on assets there. So, it's hard to know how all those factors play out and the timing of all that. But, we're committed to get an appropriate return on every loan we make. And as you guys saw late last year and the first quarter of this year in our indirect space where competition got really aggressive, we just let our business volume dwindle down because competition was going too far. And we've shown that same discipline in RESG. So, I think one of the key things you got to understand about our Company is we're going to be disciplined on credit, we're going to be disciplined on pricing, and we're not going to follow competitors and do crazy things because other people are doing crazy things. And that certainly has us in a fantastic position in the current environment. Our discipline on pricing still got us at a margin that's well above the industry, even though it's tighter than it was a couple of years ago. And now, we're in a good position to begin to improve that margin. Our discipline on credit has us in an excellent position in what’s going to be a very challenging economic environment, probably for some time to come. So, we feel really good about discipline, and we're certainly not going to give up that discipline in the future.

Maybe switching over to the color you provide updated appraisals. That's all very useful. Imagining it's quite hard to get into enough granularity and enough visibility in examining current financials to cash flows. In this environment, is that what you are looking at? Are you looking at current financials or is there some sort of embedded recovery assumption that you're layering into the new appraisals?

Brannon, do you want to address the appraisal question?

Sure. It's important to note that most of what RESG is financing involves new construction. Therefore, nearly every appraisal on the loans in our portfolio is looking ahead. While there may be some preleasing or early-stage leasing for properties, such as our operational hotels, which allows for an analysis of current income, most appraisals focus on understanding the project's market impact leading up to its opening. If appraisers anticipate a longer timeline for the ramp-up and see lower rates along with a reduced stabilized net operating income, this could result in a lower property value. We have seen some valuations decrease, but many markets remain robust, and while values may have softened, they are still close to what they were. Our underwriting process for these deals is rigorous, concentrating on the stress that can be tolerated while still ensuring service coverage, and allowing for refinance debt or sale values that exceed our loan amounts. Appraisers, while working under uncertain conditions, strive to provide accurate assessments. The deals we structure are designed to withstand stress, maintaining strong loan-to-value ratios, and have the potential to be financed again or sold for significantly higher prices than our initial loan amounts.

Let me provide some additional details. At the bottom of page 31 of our management comments, we included a table showing the 36 loans in the RESG portfolio that underwent reappraisals. Overall, there wasn’t much change for most of them, and in total, our loan-to-value ratio increased by 0.8%. Specifically focusing on hotel loans, which are quite sensitive to economic fluctuations, we had 13 reappraisals. At March 31, the loan-to-value ratio for those properties was 46.4%, which then rose by 2% to 48.4%. This is a favorable outcome that provides protection for the bank regardless of the scenario. While it's true that the hotel industry has faced significant challenges and that future projections for hotel operations anticipate lower RevPar, occupancy, and daily rental rates compared to previous expectations, there are several factors at play. The original appraisal may have been two to three years old. For instance, if the loan was initially appraised at 46.4% just before the COVID-19 pandemic, it might have been reappraised at 40% due to increased rental rates and more optimistic future expectations at that time. Now, however, we are receiving a new appraisal based on less favorable future assumptions, resulting in a loan-to-value of 48%. Along with renewals of many of these loans, we've reduced balances not required for budgeting and received pay-downs on several loans too. Therefore, the 48.4% loan-to-value reflects these principal reductions and curtailments. In many cases, such as land and other loans that were reappraised, the sponsors have created substantially more entitlement rights than were originally projected, leading to a lower loan-to-value ratio. Overall, when accounting for curtailments, pay-downs, value creation where sponsors have exceeded expectations, and the negative impacts of the COVID-19 pandemic on valuations, we find that we are not very far from where we started when we underwrote these loans—within 1%. This is a positive result. Brannon, do you have any thoughts on this or anything else you would like to add?

No, no, no. George, you hit the nail on the head. One might expect more change in some of these numbers. But, the fact of the matter is, they hadn't fully captured the value that was inherent there from the market build-up, subsequent to our closing. So, we're comparing to a lower number. And while the values are down, they were against a benchmark that was already below where the market was. Our underwriting on these things is stressing even the levels that the appraisers are using often. And so, we feel very good about these results. We’ll have a number of reappraisals every quarter. 2020 is three years after 2017, which was a significant year in terms of volumes. So, we'll continue to gain further insight into how valuations are holding up, in the quarters to come.

Great color. Thank you.

Thank you. Our next question comes from Michael Rose with Raymond James. Your line is now open.

Hey. Thanks for taking my questions. George, I just wanted to get some color on why you are deciding to pull back a little bit marine and RV, when the trends in that market are fairly strong. Is it just a competitive dynamic or pricing et cetera? Because it’s been a good source of growth for you guys over the past couple of years. Thanks.

Yes, that's an excellent question, Michael. We scaled back in Q4 and early Q1 due to the competitive landscape. Last year, we noticed competitors becoming quite aggressive with pricing and credit. We chose not to adjust our price and credit standards, which led to a decrease in volume that persisted into the first half of Q1. As the pandemic situation began to clarify towards the end of Q1 and into early Q2, especially with notably high weekly jobless claims, we decided to reduce our activity further to assess how our portfolio would perform. We increased our pricing, and interestingly, our competitors did the same. We aimed to limit volume, and we found ourselves raising prices three or four times, as competitors often matched our moves. The market currently presents some good opportunities, and we're closely monitoring our portfolio, which has performed well. Our annualized loss ratio is in the mid-30s basis points, approximately 33 to 35 basis points, and the proportion of our loans that required deferrals has been relatively low compared to most banks' consumer loan portfolios. We are keeping an eye on this, and I'm very pleased with our portfolio's performance in this challenging environment. I believe it will continue to perform well as we transition into a post-deferral phase, which we are approaching now. So far, less than 10% of our loans that had one 90-day deferral have required a second deferral. We are still early in that process. Tim, I think the number is around 8%.

That's right.

Yes, 8% of the loans that received one deferral and have since matured and received a second deferral. I'm not sure that many of those borrowers truly needed the deferrals. It seems to be more of a case where people opted in because the program was available. With uncertainty in the environment and a free benefit offered, many were inclined to take advantage of it. We are optimistic about the portfolio as it could serve as a growth source for us. While other parts of our portfolio weren't experiencing significant growth, this indirect portfolio was expanding considerably, which caused me some concern regarding balance as I wanted to avoid it reaching 20% of our loan book. It approached levels that I found undesirable from a mix perspective. We will continue to explore opportunities and aim to make informed decisions about reengaging that market more actively. Our team is ready, and we look forward to getting them back to originating. We'll provide updates in future quarterly reports.

That's great information. Following up on the RESG business, considering its history, when participants such as nonbanks or bank competitors pull back, there often lies an opportunity to gain market share, as seen in the last cycle. I’m unsure of your current approval rate, but historically, it has been around 5% or 6% of all the deals you've evaluated that meet your criteria. With fewer opportunities available, does this mean there is potential to capture more market share and possibly achieve better growth than expected at this time?

The number of viable deals has definitely decreased. We've experienced a prolonged period of real estate construction across the nation, resulting in a reduced need for many product types compared to three or five years ago. Additionally, the impact of COVID-19 has further diminished these opportunities. While I can't specify the percentage of loans we are currently processing, I am confident that our market share relative to competitors has increased. Our originations are similar to last year's, but with a smaller overall market. This suggests we are gaining market share. Our sponsors have always valued our expertise and ability to execute, and I believe their appreciation has grown lately. They've recognized our commitment throughout different market cycles and our consistent presence. This heightened appreciation is advantageous for building our market share, customer loyalty, and future business. We have established a reputation for reliability and discipline, focusing on sustainable transactions regardless of market conditions. Therefore, I believe our ability to expand this business in the future has been positively impacted by recent developments.

Our next question comes from Catherine Mealor with KBW.

I want to see if you could talk about the geographic distribution of some of your new originations right now. I think you've got an interesting perspective for us, given that you operate across the country in all different metro markets that I think have all been impacted differently from COVID. So, maybe where are you seeing the biggest impact of construction delays and maybe a pullback in new interest? And where are you maybe seeing a more stable and more promising market opportunities?

Construction delays have been quite common in many of the major markets across the country. However, most of these markets have begun to reopen from a construction standpoint. At this point, we don't have many, if any, projects affected by shelter-in-place orders. It appears that projects are returning to normal or near-normal levels of development and construction activity. This is a positive development for both our customers and us. Our loan originations remain well-distributed nationwide. Tim, I believe you have the information on the top markets where we originated loans in the last quarter.

I do. Brannon, do you want to take that or you want me to?

I thought you might give, Tim, the markets that were one, two, and three and so forth...

Yes.

And then let Brannon provide more color on what the pipeline looks like.

Yes. As I assess our potential conversions in the upcoming quarters, we have a notable presence in the Southwest and Southern California, as well as in Arizona, indicating activity in some less urban areas, which isn't entirely unexpected. Additionally, we are still identifying opportunities in many of our top historical markets, although there appears to be less activity in New York. This is largely due to various factors we've discussed, including a more cautious environment in denser urban settings. However, we are witnessing strong activity in the Southeast and throughout the central region of the country. Overall, the interest is widespread, though it seems slightly more concentrated in less populated urban areas. We are still engaging in beneficial deals with sponsors in places like Philadelphia and the Washington, D.C. area, maintaining our focus on markets where we have previously established a presence and where we continue to see potential.

And a follow-up on that on just appraisals that you talk about, were any of those in New York? I would imagine that would be a market where you may have maybe a bigger stress on your LTVs? And so, is that reflected in some of these numbers?

Yes, it is. There were a number of those reappraisals I think in the New York market.

Okay, great. And then, one more question just on your reserve. I mean, you've been really aggressive in building the ACL the past two quarters. You went from 50 basis points now almost to 2. And so, I know this is a hard question, but do you feel like you're at a peak provision or at a peak reserve now where economic outlook is kind of factored into your reserve now and moving forward, it'll be more of a balance between growth and pay-downs, or do you see more economic kind of driven reserve build in the back half of the year?

Catherine, you're asking us to predict something that is very uncertain. I appreciate your question. I've discussed this with Tim and Greg as well. The fact is, we are working with Moody’s models, and like everyone else, they're trying to predict an event that has no historical reference. We have never experienced a pandemic of this magnitude in modern history, especially with such a globally interconnected economy. The level of rapid fiscal and monetary response to this situation is unprecedented, along with the significant global tension, political uncertainty, and other factors. There are many variables at play in the current environment. We feel confident in our position and the strength of our balance sheet. We're following the Moody's models, specifically using the July base case as our primary model, which is slightly more negative than what we saw in late June. We've opted for the most conservative base case model available from Moody’s. We also incorporated their S3 model as our secondary model, which focuses on a more severe downside scenario, giving it a higher weight compared to any upside scenario we considered. This inclination towards a downside scenario stems from observing the rising COVID-19 cases in many states and the potential for a worsening health crisis impacting the economic environment. We've made various adjustments to account for factors we believe may not have been fully captured in those models, particularly regarding our purchased and non-purchased portfolios where we identified potential additional risk. We aim to be both prudent and conservative, and I believe we have succeeded in doing so based on the current information. If the economy is impacted more severely than we anticipated in early July when we were finalizing these models, we may need to increase our reserves. However, if the economy follows our projections, our reserve build should only account for growth. Should the economy perform better than expected, we might even see zero or negative provisioning in future quarters. I've been in this industry for a long time, and this is an unusual and unprecedented situation. It is challenging to predict how things will evolve in the upcoming quarters and years. Nonetheless, we feel positively about our portfolio’s performance and our approach to the allowance for credit losses, despite the many uncertainties as we are modeling scenarios based on unprecedented circumstances without a solid foundation of historical data. This makes it considerably difficult to provide precise forecasts today.

I appreciate it. And I know that was a tough question, but I appreciate you’re taking a crack at it. Thanks so much.

What do you mean taking a crack at it? That was the answer, Catherine. Thank you for the good question.

Thank you. Our next question comes from Brock Vandervliet with UBS. Your line is now open.

Hey, good morning, guys. Hey, Brannon, I wondered if you could start with kind of an elevator pitch on interest reserves, and what that means for the RESG credits. I know that number’s been material in the past. Maybe you could talk about where it is now at 6/30 versus, say year-end, and how that sort of is a structural buffer to uncertainty that’s part of these loans?

Sure, Brock. That's a great question and something we focus on heavily. This illustrates why we've taken a conservative approach in structuring our loans, starting with significant equity that sponsors are motivated to protect. We’re facing an uncertain period that could last longer than expected, which may lead us to utilize more of those allocations for interest payments. There are various scenarios depending on the project's stage. For projects closer to completion or opening, there are greater expenses and higher interest costs to cover. Over the past quarter, we’ve worked with our sponsors, and their strong character and financial capabilities have allowed them to replenish interest reserves when needed. We've implemented some loan modifications to extend timelines and give them more time to ramp up properties, which include additional deposits to cover interest during those extended periods, and sometimes even pay-downs on our loans. While these situations can be challenging, there are also projects still in the equity phase where interest costs haven't been affected, so no concerns there. Additionally, some projects may be entering the debt funding stage but with lower interest costs and sufficient contingency plans for future delays. All our loans are structured with robust contingencies to address not just hard costs but also potential operating losses and interest costs. We anticipate delays in our underwriting, as they're common in construction, and we would never approach a deal without considering that. Our sponsors also account for this in their budgeting. They often set aside considerable contingencies which they rarely use, funding more equity as part of their conservative approach, which reflects our lending philosophy. This aspect is a vital part of our lending strategy.

Has the percentage of net interest income from capitalized interest increased since it was around 25% in Q1? Can you provide a specific figure for that?

Brock and Tim, you may have those numbers.

Yes. I’ll let Tim answer.

Brock, it’s is a very similar percentage. It's roughly the same, 25%, 26% that came in, in a quarter.

Okay. I take that to be a positive sign and that it hasn't increased significantly.

I don't view it as either positive or negative. The notion that having interest included in the construction loan capital stack is a weakness is a misguided perspective. The reality is that it requires the sponsor to invest all their equity upfront. Therefore, funding interest as part of the loan is a conservative approach, rather than omitting it and depending on the sponsor to cover it as the project progresses. If a sponsor needs to contribute $10 million to cover interest, I would prefer them to invest that amount upfront in hard costs, thereby allowing us to fund the interest, rather than having to rely on them to manage the interest payments. Our strategy is to ensure all the sponsor's money is in place before we allocate our funds. Since interest is paid later in the project, we plan to cover it from the loan rather than having the sponsor issue a check for it. In a project costing $100 million, would you prefer the sponsor to contribute $45 million and pay $5 million in interest while we provide $50 million, or would you rather have them invest the entire $50 million upfront and us cover the interest from our reserves? It's a more conservative and protective strategy for the bank to fund the interest from our loan while requiring the sponsor to place all their money upfront. I've had philosophical discussions with multiple people who fail to grasp these dynamics. To Brannon's point, we generally maintain substantial interest reserves because we cannot predict whether interest rates will increase or decrease throughout the project’s duration, nor can we foresee delays that may result in additional interest costs. That is one reason we typically fund only about 85% of our loan commitments at RESG. We include hard cost contingencies, soft cost contingencies, interest reserves, and operational loss reserves for properties like apartments and hotels that will require a ramp-up to operations; this is integrated into the capital stack. This setup compels the sponsors to invest funds upfront, even if those elements are factored into our loans.

Our last question is from Matt Olney with Stephens.

Yes. Thank you. I want to circle back on the new RESG appraisal discussion. And, I'm curious, were these appraisals ordered under normal policy or were these appraisals ordered and evaluated in a post-COVID-19 valuation check just to ensure the LTVs were stable on new environment? Part two of the question is, looking at figure 39, there were a handful of LTVs that did increase by more than 10% or more. So, implies a pretty good drop of value in some cases. And I know this is a very small handful of loans. But in that case, what is the solution if the LTVs have increased by that much?

Well, let me tell you first that they were all ordered in the normal course of business. Loans were coming up, maturity for renewal and so forth. Yes, there were three loans for the loan-to-value went up by more than 10%. If you look back at the figure before that, Matt, which is figure 30, which is our bubble chart that shows all of our loan-to-values, you'll notice that it says that other than the one credit, the mortgage credit, that’s high loan-to-value, all of our loan-to-value ratios were less than 69%. And if you look at that lead-in sentence to that table, last quarter, it would have said all of our loan-to-values were less than 65%. So, we did have a couple of loans, three loans where the loan to values went up more than 10%, and that bumps our highest loan-to-value in the portfolio to just under 69%, as opposed to just under 65%, as a result of that. I think all three of the loans that have had a significant increase in loan-to-value were hotel loans. Is that right, Brannon?

Actually, two of the loans were hotel loans and one was a multifamily loan. There was a modification related to the multifamily loan, where the loan amount increased as part of the sponsor’s redesign of the project, which was very favorable. This situation was not viewed negatively regarding the loan-to-value increase. So, it really only involved two hotel loans that experienced over a 10% increase in loan-to-value due to stress.

And those two examples, I guess on the hotel side. Did you add to more equity or did you view the new LTVs as satisfactory?

In one instance, there was equity contributed as part of the usual process concerning loan modifications or maturities. Whenever we extend a loan, we obtain a new appraisal to determine its current value. Typically, we aim to meet specific loan-to-value thresholds. For one of these cases, the new loan-to-value is at 53%. Although the shift was significant, moving from 43% to 53% is still acceptable, which is why we start where we do. A 53% loan-to-value during COVID is considered very strong. Therefore, no additional equity was required in that case. However, in another situation, which we noted during the pandemic deferrals, our sponsors are contributing an equivalent or greater amount of new equity for interest or debt service payments in the future compared to what we are deferring. In this particular case, there was a deferral of six months, but the sponsor provided six months of debt service, resulting in a 12-month extension that is fully secured concerning our debt service.

Not only are the sponsors in those situations, that example that Brandon gave you, contributing six months of debt service, but in some cases where we're doing extensions like that, we're requiring them to pre-fund some portion of future op losses and carry the property through the pandemic, and tax and insurance reserves. So, we're being very disciplined and requiring our sponsors to be disciplined in the way they're approaching these.

Okay. That's helpful. I really appreciate you guys disclosing those new appraisals. I think that's helpful from our side.

We think it shows the quality of the portfolio. We're happy to give the information and happy that the information is showing pretty favorable results in a challenging environment.

Thank you. Our next question comes from Stephen Scouten with Piper Sandler. Your line is now open.

Hey. Thanks guys for taking the time here. Just one more question maybe on the reappraisal process. And again, I do think it was extremely helpful. There always seems to be a disconnect around that RESG book. I'm wondering if you guys would consider more proactive reappraisals moving forward as opposed to the ones in the normal course of business? Obviously, I know they’re expensive and arduous, but is that possibility?

We will consider an appraisal whenever it seems appropriate. For any loan that is maturing, being extended, modified, or upsized, we will always get reappraisals. If a loan becomes an issue, we will get it reappraised. Most of our loans have fairly short durations, with the majority being three-year loans, while some are 18 months and others are 42 or 48 months. Conducting appraisals as part of our regular business operations and when issues arise is the right approach. It would be inefficient and costly to reassess the entire portfolio wholesale, and we wouldn’t gain any additional insights beyond what we already have. We continuously monitor data related to all these loans and markets. Therefore, we are aware of any significant issues that may arise, and we will obtain an appraisal to confirm our assessments. However, it is not necessary to do it more frequently than our current practice. If there is a concern, we will take action.

Perfect. And then, any update by chance on the Lake Tahoe exposure? I've heard kind of anecdotal information that some of those markets are seeing some improvement and strength. I'm wondering if you're seeing that on your properties as well.

Yes. There's a footnote to the bubble chart. Tim, where is that?

Yes. Footnote...

That's about as detailed of an update as we can give you. It’s what closed in the last quarter, what was under contract at June 30 and what's already closed this quarter. Anecdotally, you are correct that the COVID-19 situation seems to be having a beneficial effect on projects, like this project that are second home projects or vacation sort of home projects are out in the open spaces sort of projects. I think if our sponsors had more inventory built, they would be selling more product. The sales velocity seems to be constrained by the fact that they've been judicious and not putting too much inventory on the ground. Suddenly, there was a lot of demand. I think if they can get more inventory built quickly, they can have better sales. Brannon, is that an accurate ...

Absolutely accurate. It is indeed. We have the happy circumstances, being low on inventory right now. So, we'll see if this holds and newly developed inventory is moving at the same rate. There's definitely been a drift towards the wide-open spaces and we benefited from that.

Perfect. Yes. I apologize for missing that footnote. That's good detail. As for my last question, you have a strong history of being opportunistic and effectively deploying your capital into valuable opportunities as they arise. Are you currently observing any emerging opportunities in the market that you might pursue in the coming months and quarters?

Well, as we talked about in the last call, we had a nice opportunity to add a few hundred million dollars of bonds that we got good pricing on. In late March, we also have had the opportunity to improve pricing pretty much across the loan portfolio, and to gain market share in the RESG part of the portfolio. So, those are the opportunities that I think are worth talking about so far. I believe as this thing grinds on, we'll see some additional opportunities. But, I don't know what those are at this point. So, we're scanning the horizon all the time looking to make sure we don't miss a good opportunity that really makes sense and would be a good investment.

Great. Thanks for the color and all the detail in the management comments, as always.

Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over George Gleason for any closing remarks.

All right. Guys, thanks for joining us. We look forward to talking with you in about 90 days. Have a great quarter. That concludes our call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.