Bank OZK Q1 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to Bank OZK's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jay Staley, Director of Investor Relations and Corporate Development. Please go ahead, sir.

Good morning. I am Jay Staley, Director of Investor Relations and Corporate Development for Bank OZK. Thank you for joining our call this morning and participating in our question-and-answer session. 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; Brannon Hamblen, President; Tim Hicks, Chief Financial Officer; and Cindy Wolfe, Chief Operating Officer. We will now open up the lines for your questions. Let me now ask our operator, Norma, to remind our listeners how to queue in for questions.

Thank you. Our first question comes from Timur Braziler with Wells Fargo. Your line is open.

Hi. Good morning, everyone.

Good morning.

Starting on the land loan that was moved into OREO, I guess, what's the price at which that loan could be sold at today? And I'm wondering, putting it in OREO with the appraised value of 100, why not use the sale value today as kind of the basis for that loan?

Brannon, do you want to talk about that credit?

Sure. Timur, thanks for the question. We've talked about the credit last quarter and described the credit for you. In specific answer to your question, we obviously had the appraisal originally at 139 in June of '21, had another one more recently at a 100.4. As to where we book it, look at the end of the day, the basis is known by our notices out there. So in terms of where we come in there, that's going to be affected by that. It's a great site. We feel very good about our ability to market that site over the next year or two. And as we said, we feel good that we'll have little if any loss associated with that.

Okay. Thanks for that. And then maybe looking at the continued strength on the lending side, would just love to hear your thoughts on the plan for funding in the rest of the year and then maybe just talk through what the incremental spread on the loan production in 2023 looks like.

The outlook for continued loan growth appears promising. We reaffirmed our guidance for RESG originations that we provided in the first quarter, and our results were aligned with that guidance from January. We anticipate ongoing diversification and growth, with contributions from all our units to the positive loan growth in the last quarter. While not all units may show positive growth every quarter, I expect positive contributions from each over the year. Our underwriting, application, and origination processes remain steady, with no changes made in response to economic conditions. We continue to work with quality sponsors on strong projects under sensible terms and structures, always ready to support our customers. We expect robust origination volume throughout the year, likely surpassing last year's record pace for RESG originations and aligning with the 2021 levels, complemented by contributions from other groups. On the deposit front, we experienced a 3.6% organic growth in deposits this past quarter, primarily from our 229 branches across Arkansas, Texas, Georgia, Florida, and North Carolina. We anticipate these branches will sustain this growth for the rest of the year. Our deposit gathering strategies remain unchanged, and we do not plan to rely more on wholesale deposit sources; we are focused on organic branch deposit growth and are optimistic about those prospects. Our deposit costs increased due to the growth through our branches, contrasting with many banks experiencing negative deposit growth. We achieved significant positive deposit growth, necessitating increased costs, likely placing us in the upper range of banks for deposit costs this quarter. However, our net interest margin improved significantly, and we maintain a well-balanced balance sheet between variable-rate loans and deposit costs, allowing us to offset costs while still generating excellent returns. We boast an industry-leading net interest margin, significantly higher than our competitors, which is a great advantage.

Great. Thanks for that color. I'll step back.

Thank you. One moment for our next question. Our next question comes from the line of Stephen Scouten with Piper Sandler. Your line is now open.

Hey, good morning.

Good morning, Stephen.

George, you looked good on Bloomberg yesterday. Well done.

Thank you. Not to be there. Although, I don't think I probably look good anywhere. I'm a little old to be good.

Well, it sounded good either way.

Thanks.

Well, I'm curious as you think about your new loan production, I mean, you just spoke to having to pay up for deposits because you guys are in the enviable position of having some good growth. But how do you think about the spread you manage to on that kind of marginal cost of deposits in your new loan growth and kind of how you think about that marginal spread versus your current NIM?

That's a great question, Stephen. It's a constant debate on every transaction. I've got an opportunity that landed in my inbox late last night or early this morning that I was looking at what kind of work this morning that certainly has a question. One of those questions, it's a piece of business you'd love to do and the quality is great, but you're looking at it and the spread is just not what you would want to see versus our marginal cost of deposits. So I'm going to sit down with Brannon and the lenders involved in that transaction after this meeting and we're going to parse that out, looking at the other opportunities that that relationship will generate the deposits that will come with it if there is any cost on those deposits, the magnitude of that, and just go through and do that got rich thing you do a thousand times a quarter of making a value judgment is there enough returns and long-term relationship building value to that relationship to do that. So we do that all the time. I think we parse that out pretty well for our shareholders and our customers as well because we have a lot of customers that want to do business with us as evidenced by the fact that our loans are growing and our deposits are growing and we generate a really good return for our shareholders as shown by our industry-leading net interest margin and return on average assets and efficiency ratio. So I think we're parsing those decisions well. But it's very much a case-by-case basis. On every credit, we've got some guidelines and some principles. We won't go below this or beyond that, but there are nuances in every situation, what's the historical relationship with the customer, what's the prospects for additional business, what's the deposits, what's the other ancillary fees, treasury, and other services you get with it, and we try to factor all those together and make good decisions. And I think our wonderful team of bankers have a good track record of doing that as reflected in our numbers.

Yeah. Okay. Definitely, George. Appreciate that. And I guess, you guys are transparent as always, which I appreciate in your management commentary here, and if I'm looking at that figure 22, you show the deposit composition and kind of where you are from a broker deposit perspective. How high could that 9.5% go, I guess, within your internal guidance or regulatory or what have you? Because I'm assuming that the duration of the RESG book is extended in this environment, and maybe I'm wrong, but I would presume that some of these loans would stay on your books a little bit longer than they would have two years ago, which should be a positive to your earnings and capital build, but might put some pressure on deposit gathering and the size of the balance sheet. So just kind of curious how big that could get and what other ways you might fund that unfunded book as it moves over?

Yes, RESG is experiencing loans remaining on the books longer. This is partly due to ongoing shortages of various materials, particularly HVAC and electronic components, which are causing significant delays. Overall, everything seems to be progressing more slowly compared to the pre-COVID period. As a result, projects are taking longer to complete, and because of fluctuations in interest rates, these loans are remaining on the books longer, which is beneficial and increases our earning assets. It's important to note that while the pace is slower, we have seen several loans pay off this quarter. Regarding brokered deposits, we have no regulatory cap on the amount we can have. Internally, our limits are based on target tolerance and capacity, with our current capacity well above our current levels. While our working assumption is to keep brokered deposits under 10%, we have room to increase that if necessary. We currently have almost $10 billion in unpledged cash, investment securities, and borrowing capacity that does not utilize the Fed's resources, and we don't plan to draw from the new bank term funding program either. We believe we can support the growth of our balance sheet this year through our existing network of branches.

That's great. Fantastic color, George. Appreciate it. And congrats on all the record results here this quarter.

All right. Thanks, Stephen.

Thank you. One moment for our next question. Our next question comes from the line of Manan Gosalia with Morgan Stanley. Your line is now open.

Hi. Good morning.

Good morning, Manan.

Just given the general concerns around the credit and CRE, I was hoping you could give us some more color on the special mention loan you discussed in the release. If you can, what drove the potential buyer to withdraw? And why did the sponsor choose to surrender rather than look for another buyer? And I guess, the question for you is if the recent appraised value is above your loan basis, why not sell now, why wait for macro conditions to change?

Well, Manan, let me answer that, and then part of that, and why not. So now you're talking about selling a piece of land. It's a great site. But people who buy pieces of land are a little bit different than people who buy office buildings or apartments or hotels or condo buildings. They've got to conceive a project, go out and design, build that project, do all the development work for that. And you don't typically buy a piece of land until you're ready to start that process and have some visibility going forward. So the comment was made in one of our research reports that was issued over the night that land deals tend to be more variable in value and tend to be more variable in the marketability than other types of properties, and that was a very good observation. So the time to sell this and to get our maximum value out of it is probably when conditions stabilize and people are coming back to the market to start incubating new deals and really looking forward to the opportunity to develop it. Buying a piece of land to hold in an environment that has as much economic turbulence as the environment today is not something a lot of people will do, just because there's uncertainty and there's holding cost, carry cost, interest cost and so forth with acquiring a track of land. So we think the best strategy is to wait to actively market this property until the Fed's kind of stopped raising rates and the dust is settling on current economic conditions and people sort of have a view of the future of where they have enough certainty they're going to go out and incubate on new project on this piece of land. It is a great site, and I will tell you that market in it, we are having some unsolicited inquiries and interest in the site. But again, our intent is to not actively go out and market the site until economic conditions stabilize at some level.

Great. And maybe if I can push you a little bit on that just given all the concerns around credit. If the appraised value is dated from December, at what point would you need to re-appraise this or mark this down? What would you need to see for that to happen?

We conduct appraisals at least once a year and will re-evaluate if we believe there is a significant chance of a change in value. Our policy for OREO properties is to have annual appraisals. When this appraisal took place, our appraisal team challenged the appraiser on the value, but the appraiser insisted that he couldn’t adopt a more conservative estimate. This reflects the nature of our OREO asset and the situation; the sponsor had a buyer lined up, but when the Signature and Silicon Valley Bank deals fell through, the buyer withdrew from the transaction. Without the economic turbulence, I believe this asset would have already been sold.

Great. I appreciate all the information. I would like to ask for some general comments on credit. As you're aware, investor concerns have increased following the bank failures. How much do you share these concerns given your unique perspective in the commercial real estate market? Additionally, could you discuss how you are managing in light of this situation? Thank you.

We feel very good about our credit position. Our RESG portfolios have a weighted average of 54% loan to cost and 43% loan to value, which provides us with a significant cushion even if values decline further than what is currently being discussed in commercial real estate. We have reiterated the guidance that Tim provided in the January call, expecting our net charge-offs this year to be between 6 and 16 basis points, with Q1 already in that range. We remain confident in this guidance, or we wouldn't have repeated it. There is considerable discussion around commercial real estate, and I want to highlight two points. First, our portfolio consists of new construction, as noted in our management comments. These properties feature the latest state-of-the-art amenities that tenants and buyers desire. Consequently, our properties tend to be among the most desirable in the market. We continue to pursue office buildings despite the noise surrounding them, and we are witnessing good leasing activity in that segment of our portfolio. While it is true that leasing is slower than it was three to five years ago, we are experiencing reasonable leasing velocity with office loans being paid off because these buildings are leasing up. Second, there is much talk about CMBS and a wave of maturities across different property types, particularly offices. However, that is not our market or type of property. I recognize there will be challenges due to maturing CMBS loans with lower interest rates now needing refinancing at much higher rates, which could lead to difficulties for those projects. Many of those older properties will struggle since they aren’t benefiting from the quality and features that new properties offer. In the current labor climate, employers are eager to bring employees back to the office, and the quality of the office environment plays a crucial role. If an office has appealing features and a pleasant atmosphere, it becomes a valuable asset for attracting talent. Our sponsors building these high-quality modern office buildings understand this well. On the other hand, if you're in an outdated B-grade building, you’re likely seeking to move to a better environment, even at a higher cost per square foot. We believe we are very well positioned in the current market.

Great. I appreciate the detailed answer. Thank you.

Thank you.

Thank you. One moment for our next question, please. Our next question comes from the line of Brody Preston with UBS. Your line is now open.

Hey. Good morning, everyone. Thanks for taking the questions. I’ve got a handful of them, but I’ll just ask a few and then hop back into the queue and maybe ask them at the end. I did just want to follow up maybe with Brannon on the loan that’s been repossessed. I wanted to ask if you could give us any color as to geographically, where it’s located. And then secondarily, is it a straight land loan or has it been developed to any extent where a potential buyer might have to think about repurposing anything that’s been done to suit their needs for a new project?

Brannon?

Sure, I'm happy to address that, Brody. The loan is located on the West Coast, specifically in LA. As George mentioned, it is an exceptional site located at the center of the entertainment culture there. We all believe that one day, there will be an impressive vertical development on that plot of land. Regarding your question about repurposing, not much effort is being made to undo anything. The previous sponsor acquired the site in 2012 and has spent nearly a decade working on entitlements and pre-development. However, they invested a significant amount of equity late in the process, approximately $105 million. They dedicated a lot of time to it but reached a point where, as we've discussed, costs and interest rates were rising, leading them to decide against moving forward with a vertical development. There will definitely be plans for a great vertical development on that site, but not much work is being done at the moment. As we mentioned, we feel confident about marketing that site; it's just a matter of choosing the right time when conditions are a bit more certain and stable under the new owner's influence.

Got it. Do all the permits and other arrangements made by the previous owner remain in effect, and do they enhance the appeal for a potential buyer?

I think so. And of course, you can't make promises about what ultimately they put there and whether they have to do some things. But as George said, we've had some unsolicited interest in the site. There is no question in our mind about its viability for a great development going forward.

Thanks for that. Could you help me understand what the loan yield is? I'm trying to assess the slight loss to earnings related to this loan.

I don't know the exact rate we had on that one. It was an older loan and it's a floating rate, so it's been elevated, but all the loans we're replacing it with today.

Brody, I assume 8% right on it, that's kind of the norm. So that would be $4.8 million a year, $1.2 million a quarter in interest income.

Thank you very much. I wanted to ask about the updated appraisals for the 15 properties. I have a couple of questions about that. First, what prompted the re-appraisals? Could you help us understand the main reason behind it? Secondly, should we anticipate more appraisals in the future? I think many of us are particularly concerned about the office segment, as there was only one office reappraisal. Should we expect more reappraisals in light of the challenging office market?

Sure. Good question.

Go ahead, Brannon.

Yes, let me address that, George. In terms of what influences these appraisals, we closely monitor our risk migration within the portfolio, and it naturally evolves over time. These appraisals are primarily driven by their position in the lifecycle. Typically, we have a standard three-year loan term, with renewal options that often come with certain economic criteria to allow the borrower to extend the loan. Almost every deal includes an appraisal requirement. These situations usually occur at the point of maturity and extension. While there may be other factors at play, this is the general trend we observe, and these were customary appraisals. Regarding future appraisals, you can expect more of these standard appraisals as loans reach their initial maturity and seek extensions. I would anticipate that the velocity of appraisals will align with historic origination trends from about three years ago. If there is a need to increase a loan, we would certainly conduct another appraisal to assess the loan-to-value at that time. This provides the background for the appraisals you've seen in this figure and those we’ll discuss moving forward.

And that's just an extension because they're still in the construction phase, correct?

They may be in construction, they may have just completed construction and entering the lease-up phase, it varies depending on the situation.

Got it. Okay. And then I'll just ask one more before I hop back in the queue. George, for the last few years, RESG has been a subject of discussion within the investment community. So, I’m asking, while you never want to see a loan go bad, considering this loan is relatively small compared to some other RESG loans, do you view this as an opportunity to demonstrate to those who have been skeptical about the RESG strategy that we can take a land loan, underwrite it effectively, and potentially avoid any loss in a challenging environment? Do you think this situation could actually end up being beneficial to the overall story moving forward?

Brody, I find it remarkable that there is ongoing debate regarding the merits of RESG and the quality of that portfolio. After 20 years, we've maintained an annualized loss ratio of just 8 basis points. We've successfully managed projects worth tens of billions of dollars. The industry recognizes that our real estate credit model offers some of the best risk-adjusted returns. We consistently operate as a senior secured lender, maintaining low loan-to-value and low loan-to-cost ratios. Our track record across various economic conditions demonstrates that we face only occasional minor challenges in the portfolio, with losses amounting to an impressive 8 basis points over two decades. Those who remain negative and stubborn in their views may be hard to convince, but we have a strong business model that produces high-quality assets and yields, resulting in an industry-leading net interest margin and return on assets. If people wish to debate this, that’s their choice. We will continue to execute our business plan effectively and consistently. Eventually, the critics will come around.

Great. Thank you.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Matt Olney with Stephens. Your line is now open.

Hi. Thanks for taking my question. I want to follow up on the OREO property. Just curious, if you hold that property into 2024 and wait till conditions stabilize and improve, I would assume you need to take or get another appraisal by December of '23, if not earlier. Is that fair?

Yes, as I mentioned earlier, we will reassess it at least once a year since it's an OREO.

Okay. And I guess, on that note, I guess, what we typically see from other banks is once a property is taken into OREO, I think that action typically requires an updated appraisal at that time, but that wasn't the case here. Any more clarity for us as far as why there wasn't a new appraisal when it did come into the foreclosed assets for the bank?

It was essentially within 90 days. So a new appraisal by regulatory standards is anything that's a year or less old. So it was a new appraisal at that time.

Okay. That's helpful. And then I guess, thinking more about capital ratios, the unfunded balance at RESG was relatively flat, I think, in the first quarter. Do you think we've seen a peak in that unfunded balance, at least for the near term? Just looking for any kind of commentary on kind of where you think that could go over the next few quarters.

Tim, do you want to take?

Sure. Yes. Hey, Matt. I would agree with you that it is certainly at its peak or near its peak and is likely to trend down as we go throughout the year. Obviously, we had $14 billion of originations last year. We're not going to have that much this year.

$13.2 billion.

Not expecting to have that much this year at this point. So yes, to your point, I do think that will trend down as we go throughout the year.

And then, Tim, just to follow up on that as far as capital ratios. Any commentary on kind of where you expect capital ratios to go? I mean, the bank has done a good job of deploying some of the excess capital, but now you're sitting on a pretty sizable slug of the unfunded balance. Just curious kind of where you expect to see this go.

Yes, it's a good opportunity to discuss capital ratios, which have become quite significant over the last quarter. Our tangible common equity ratio ranks among the highest for the top 100 banks in the US, and even when adjusted for the fair value of held-to-maturity securities or other factors, it remains strong. We do not hold any held-to-maturity securities. We have consistently maintained a high level of tangible common equity and expect to continue doing so. Our risk-weighted assets grew considerably last year, but we do not anticipate such growth this year, and they might remain relatively flat. Given our earnings and a stable risk-weighted asset base, our capital ratios could remain flat or increase on a risk-weighted basis, and we will certainly maintain robust tangible common and Tier 1 leverage ratios throughout the year.

Okay. Thanks, everybody.

Thanks.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Brian Martin with Janney Montgomery Scott. Your line is now open.

Hey. Good morning, guys.

Good morning, Brian.

A lot of the questions have been addressed regarding real estate, but I have a couple more. For the payoffs this quarter for RESG, are you starting to see an increase? It seems like you had a few already this quarter, but are you noticing any acceleration in payoffs considering how low they've been? I understand the previous commentary, but are the sponsors beginning to show more confidence in the market, or is there still a lot of caution?

Brian, I don't know that I would say it's accelerating, but we are seeing a continued level of payoffs. It's not slowing or stopping. So we'll see where that goes. I think we reiterated our guidance for payoffs this year to be back in that same range as we had in '21 and '22, which was kind of $5.6 million to $6.2 million, plus or minus $1 billion. So I think we're going to see somewhat of a repeat of the last couple of years payoffs that has some nice implications given the substantial origination volume last year for us to continue to have good growth in our funded balance of loans over the course of this year and next year, and that plays back into Tim's response to the capital question. We expect to continue to have industry-leading total tangible common equity and CET 1, sort of capital ratios, but those ratios are going to support the expected growth that we expect this year and next year.

Got you. Okay. And then just last two, could you just touch a little bit, George, there's a lot of good momentum on the lending groups outside of RESG. But just kind of where you think the momentum and given kind of the recessionary outlook here, just how much momentum do you think can continue there on some of those areas, just kind of from a high level, just give a little perspective, it would be helpful.

We are cautiously optimistic about the performance of our other business units and their ability to maintain momentum. This optimism is partly due to the expectation that some banks will be retreating. Some of these banks do not have the strong capital levels or the diverse, stable deposit base that we possess. We have already seen banks announce that they are halting loan growth and planning to reduce their balance sheets or limit new originations. However, at Bank OZK, business continues as usual as we seek out good customers and strong relationships. Despite potential macroeconomic headwinds that could limit volume, we believe there may be opportunities to capture a larger share of the market that we wouldn't have accessed previously. We will have to see how this unfolds, but we remain cautiously positive as we look ahead to the rest of the year.

Yes, I agree that the positioning looks favorable. Tim, could you provide some insight regarding the margin? I know you mentioned it in your prepared remarks, but given the rapid increase we've seen over the last year, how quickly do you anticipate it may decrease as funding costs catch up? Additionally, could you share your thoughts on the expected margin percentage or margin dollars? Any information on that would be appreciated.

Yes. Thanks, Brian. Certainly, what the Fed does throughout the year is going to impact my answer. But assuming the Fed increases once more in May and holds for the rest of the year, then certainly, our loan yields will go up slightly more, based on that may increase. But our deposit costs are going to go up more than that. We've got good growth opportunities in RESG and our other business lines. We will fund that, as George said previously, through our retail branch network primarily, and that's primarily going to be CDs. We, obviously, are always working on grabbing core deposits, and we'll continue to do that and ramp up those efforts. And we're supporting those efforts with enhanced marketing and advertising that will help all of the deposit raising efforts that we've got. We are adding additional staff in our retail network, which we've talked about for the last few quarters. That will help with gathering core deposits and opening time deposits as well. But it's likely that our margin will continue to decrease each quarter this year. But as we said in our comments, we think the average balance of earning assets will help offset any decline we see in margin. And as we look at net interest income for the year, obviously, we had a great quarter, record quarter of net interest income in Q1. I think we'll have other great quarters as we go throughout this year on net interest income. And if you certainly look at our net interest income year-over-year, really strong growth there as well. So hopefully, that provides you some commentary, Brian, and certainly, willing to answer any more questions you may have.

Yes, I think that's good. It seems that net interest income will likely decrease sequentially over the next three quarters as that develops.

Not necessarily. I don't know that the NII will be down. NIM will be down, but NII has the opportunity to increase in one or more quarters this year based on our average balance.

Got you. Okay. Understood. All right. Thanks for the questions, and great quarter, guys.

Thanks, Brian.

Thank you. One moment for our next question. Next question comes from the line of Catherine Mealor with KBW. Your line is now open.

Thanks. Good morning.

Good morning, Cath.

I wanted to take a moment to discuss deposits. Can you share where new deposit rates are headed and what your average deposit costs were at the end of the quarter?

Sure. Okay. I think this will give you an idea, Catherine. So the quarter cost of interest-bearing deposits was 220. March was 237. Does that give you an indication of what you're looking for?

That's great. Yes, that's helpful. And then, I mean, I was looking at some of your offerings online. It looked like you've got a 13-month special CD at 5%, seven-month at 4.40%, does that feel like kind of on average range of where you're seeing new CDs coming on?

Yeah. Those rates went into effect on March 10 and continuing. In fact, we have one exception to that, which for competitive reasons, I'll not talk about. But yes, that's the general rate out there today.

Okay. Great. And it seems like you still feel like you have capacity in your branch network to grow your funding through core CDs, not having to really tap the brokered market yet, even if your loan growth kind of continues at this $1 billion, $1.5 billion per quarter pace, is that a fair conclusion from what you were saying earlier?

We have a mix of branches in both small and metro markets. As a result, our total deposits per branch tend to be slightly lower than our competitors, which is not what we desire. Our goal is to maximize deposits for each branch. However, this situation indicates that there is potential for growth in any given market. We believe we can improve our competitiveness and are continuously working on increasing our core deposits. Therefore, we are confident that we have the capacity to continue growing.

Were there any specific markets where you found more success in growing these core CDs?

Well, sure. I mean, to me, it's a function of talent primarily, and culture is a culture of being the best and winning in every market. So we focus a lot on our talent as a way to win. And another huge focus is service quality. Consumers really do care about service quality in any retail business. So we're extremely focused on that. I know the story is mostly about pricing, but I spend most of my time on talent and service.

Was there a market where you noticed more dislocation due to the events in March, which gave you better traction in a specific study or market?

Sure. Maybe the answers to all of that we know which markets are doing well, and we talk on a very granular level to each individual leader in those markets. We have the same products, we have the same nice buildings, and we have the same general competitors. I mean, we have a good diversity in our competitor set, which I consider a strength. You don't want to line up 100% in every market against just big banks or just community banks. So the factors that go into it are pretty complex as to why you might be winning in one market versus another, and it's not just price driven. So I would take a way too much time in this meeting to go through why one market might be doing better than another. I'll just say, it's not necessarily price. And we work on all aspects of the equation all the time, not just pricing.

Okay. Great. And then back to the kind of credit conversation. As your construction loans continue to reprice up and they're now at about an 8% yield, can you talk about your ability for your borrowers to continue to afford that rate? And any impact you're seeing that it has on interest reserves and any stress you're seeing in your borrowers just with the higher rates on the construction loans today?

Yes, I'll take that. Obviously, Catherine, our sponsors, the equity in these transactions are the guys that are most impacted by those higher rates. And the continued increases in interest rates are cutting into their profit margins on projects that they're pursuing, which is frankly why you're seeing fewer new originations, new projects being created this year than you did last year the significant ramp up in interest rates over the last 14, 15 months has impacted the profitability and hence, desirability of a lot of those projects. Our sponsors and the quality of our sponsorship and the structure of our transactions is very protective of us in those situations. Almost all of our RESG loans would require sponsors to buy an interest rate hedge, an interest rate cap, and those are beneficial to protecting our sponsors and those are assigned to us as additional collateral for our loan. In addition, we’re very diligent and continuously monitoring in our asset management department every loan, evaluating the adequacy of reserves and adequacy of the cap stack our completion guarantees require as part of the guarantee structure that if a deficiency in the cap stack or any of the reserves develops, that the sponsors have to rectify that by putting in more equity. So that’s a fairly common occurrence and goes without a hitch in the normal course of managing these credits that as interest rates have risen, additional reserves are sometimes required and our sponsors have to put that up. And that’s a discussion that they would rather not have, but they honor that obligation and do that almost without exception. So yes, it’s a legitimate issue. It’s an issue for the sponsor of the equity as opposed to an issue for us if we manage and administer it right.

Okay. That's really helpful. And then my last question on credit is just I think pay downs have slowed, obviously, for the reasons we've talked about for the past hour. But you have seen some of your projects obviously pay down. So for those that you are seeing success in moving the project to the permanent financing market, can you just give us a flavor for what that looks like, what the pricing looks like, how active the market is, what type of buyer you're seeing just to kind of give us a sense as to what that process in market looks like today?

That's all over the place. I'm going to throw that to Brannon and see if we can harmonize an answer for you on that.

Yes, George, you're correct. Catherine, there are sales happening as well as refinances, and I would say the performance is fairly consistent across the board. In terms of the number of loans this past quarter, condos had the largest number fully paid off, not including those with partial pay downs. Given the current interest rates, you might expect otherwise, but many of our condo loans are secured by collateral in the southern Miami market, where buyers typically make high deposits and are likely to complete their transactions, unlike other markets with smaller deposits that are slower. Additionally, multifamily properties continue to be the most liquid. While cap rates have increased, they remain reasonable historically. I’ve also seen some attractive refinancing offers and discussions with agency-type lenders. Overall, it's slower, but we are still observing some payoffs. We had a notable life science loan refinance, some in industrial, and a hotel refinance as well. The sensitivity of our assets is noteworthy; improvements from our borrowers on their payment rates are a consideration. It's not an ideal market, but we are still seeing some transactions occur.

That's helpful. Thank you.

Thank you.

Thank you. One moment. And our next question comes from the line of Brody Preston with UBS. Your line is open.

Hey, I just had one follow-up on the office for the RESG projects that are office. They're obviously, Class A in nature. And I know that some of those buildings when they're under construction or at least I've read that they can have a pre-leasing that occurs. I wanted to ask if any of your office buildings that are under construction have pre-leasing in place. And if you could give us a sense for how much or how often that occurs?

Absolutely, Brody. Good question, and the answer is yes. We do some speculative projects and some with pre-leasing, and lately, more of them have had material pre-leasing in place or a requirement for it before we provide funding. Additionally, our office projects typically have an average loan-to-cost of 53%. We also have sequential funding, meaning we start funding before a project is complete. As leasing occurs, leasing commissions and tenant improvement costs are funded at that time. I would say about a third of our commitments are actually funded for office projects. Considering the pre-leasing requirements in some cases and the leasing activity in others, we are confident about our loan-to-cost and loan-to-value ratios and how they relate to future deliveries and funding for tenant improvements. Overall, we feel good about our office portfolio, as George discussed in detail earlier.

Thank you for that. My last question is regarding the 8% rate for the loan, George, which Catherine mentioned. Is that a reasonable rate to expect for the funding this quarter? Also, just a reminder that those loans typically have floors, so the interest rate should remain stable if the Fed were to make cuts in the next three to nine months.

Yes. I don't know the exact rate, but it's a good estimate. I believe our non-purchased yield was around 8%. Regarding the floors, we've discussed how, as we close loans today, and given the volume we closed last year, those floors are generally set at SOFR on the closing day. As we all know, SOFR has fluctuated significantly. Consequently, those floors have also adjusted quickly. We have a solid loan vintage chart, which I think is figure 11, showing the vintage of our loans, but figure nine provides an even more detailed look at quarterly originations. You can track SOFR's movement through those quarters, which indicates where the floors are being set. Beyond new originations, as George mentioned, our asset management group is actively engaged with interest reserves and allocations. They are also occupied with extending loans. Typically, after about three years, we anticipate maturity and potential extensions when borrowers request modifications, provided we can maintain a secure position. We will assess that rate and the floor rate to potentially increase the stability in our legacy portfolio. This is a crucial aspect of our operations, and we focus on it daily. However, much depends on the rapid changes in SOFR over the past six to nine months.

Got it. Thank you very much for taking my questions, everyone. I appreciate it.

Thank you. One moment. And our next question comes from the line of Timur Braziler with Wells Fargo. Your line is now open.

Hey, guys. Thanks for the follow-up. Just a couple of quick ones. First, on the allowance ratio, it looks like over the last two quarters, the incremental build to the allowance ratio has all been from the unfunded commitments. We started to see some incremental charge-off activity happening outside of RESG. I'm just wondering, as we enter into this period of incremental uncertainty, how you're feeling about the overall 1.01% allowance ratio and what that could trend like in the back end of the year?

Yes, Timur, this is Tim. We are quite pleased with the allowance ratio and have seen it build over the past few quarters. Our provision has been influenced by the growth in our funded balance. The outlook is contingent on the macroeconomic scenarios from Moody's and how we interpret them. There remains significant uncertainty in the current environment, which is evident in our scenario selections and weightings. However, our net charge-off ratio is historically low, and our nonperforming loans fall within the lower range of historical averages. Additionally, our past due ratio is low, indicating strong asset quality. Our substandard and special mention loans, except for one transfer to other real estate owned, have remained stable or even slightly decreased compared to the previous quarter. Overall, we are confident in our asset quality and the adequacy of our allowance for credit losses, with expectations tied to our funded growth and our economic outlook.

Great. Thanks. And then just lastly, on the buyback, you guys were pretty aggressive in the first quarter. I'm just wondering how much of that $85 million was bought back post-Silicon Valley? And then just how should we be thinking about the buyback for the rest of the year?

Timur, we were very active in March. So I'll leave it at that. And certainly, we expect to be active this quarter and in future quarters, we've got $200 million left in our current authorization. So that gives us an opportunity to remain active, and certainly as the valuation that we're seeing now, we feel like it's compelling to continue to be active in the current market. And obviously, a lot of things go into our consideration of when we buy and how much we buy, but certainly feel like we'll remain active this quarter and potentially in future quarters.

Great. And then just remind us when that $200 million authorization is through?

I think it's November 9th.

Got it. Great. Thanks for all the color. I appreciate it.

Thank you.

Thank you for your questions. At this time, I'd like to turn the conference back over to Mr. George Gleason, Chairman and Chief Executive Officer for closing remarks.

Thank you, guys, for joining the call today. We appreciate it. Appreciate all the questions. Have a great day. We'll see you in about three months. Thank you. That concludes our call.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.