Good day, everyone, and thank you for standing by. Welcome to Bank OZK Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. Please be advised that today's conference is recorded. I would now like to hand the conference over to the Director of Investor Relations, Jay Staley.

Good morning. I'm Jay Staley, Director of Investor Relations and Corporate Development for Bank OZK. Thank you for joining our call this morning and participating in our question-and-answer session. 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, Carmen, to remind our listeners how to queue in for questions.

Thank you. Yes. One moment for our first question. And it comes from the line of Matt Olney. Please proceed.

Hey, thanks. Good morning, everybody.

Morning, Matt.

So, I want to start off, I guess, on that San Diego life science project and the additional capital that you disclosed in the management commentary. Any color on why the amount of the $87 million that was included? I mean, presumably, I guess, that new capital partners have some type of intrinsic value. They're assuming the project. Any color on how we arrived at $87 million?

Matt, our loans all include reserve replenishment requirements that are subject to a calculation in our reasonable judgment. And that was simply a mathematical calculation based on our judgment per the loan document. So, it was a regularly scheduled reserve replenishment that was required to come from additional equity. There was no magic to it. It was just a mathematical calculation.

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

The original equity sponsors fully engaged in the transaction and pursuing it. The MEZ partner is fully engaged in the transaction and pursuing it, came in the form of cash by wire transfer as almost all capital contributions due into an account in the bank where it's held as a reserve for future interest and expenses on the deal. I mean, very standard deal. There was no drama or nothing unique about it. It was a standard replenishment of reserves. If the analyst had written the research report on this, had bothered to ask us any questions about it, regarding what your capital structure, like who's in it, are they going to continue to support it and so forth, we could have explained we have two very strong parties in this transaction. We've done a lot of business with the MEZ lender in this, who is the strongest of the two partners by far. Their capability to support the project financially as well as execute it if they had to is clear cut. But the sponsor is fully engaged in this. They're proceeding with the transaction. The MEZ partner is there if needed. But this thing should have never gotten the attention it deserved. It's a great asset. Five great buildings and probably one of the best locations on the West Coast with a very strong, very capable sponsor, capital partner group supporting it. And if it takes two years to lease or three years to lease or five years to lease, those guys will get to the finish line on it, I'm confident. That's certainly our view of it. If we had been asked questions about it, I think we could have avoided all the drama and unnecessary publicity about this project because it's an excellent asset. As we said in our management comments, we've given full disclosure on it there. We consider it a high-quality asset and we don't expect to discuss it again.

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

Well, Matt, it's going to depend on a totality of circumstances. Number one, we're always looking at the strength and quality of sponsorship and capital partners and their investment and their commitment to continue to support a project that may be maturing a little more slowly than was originally expected. So, sponsorship, quality of sponsorship, capabilities of sponsorship are certainly number one. And number two is just the long-term expected prognosis and outcome on that project. It's not particularly alarming to us that a project delivers without leasing. The question that really drives our evaluation of a project is, number one, do the sponsors have the will and the capability to support a project until you have a successful outcome? And number two, is the project of the quality in nature that you're going to have a successful outcome, whether it's this year or next year or three or four years down the road? And if you've got sponsors who have the motivation and the capacity to carry it, and the project is going to ultimately have a successful outcome, then you certainly have a positive view of the project. The San Diego project certainly fits that criteria.

Okay. Thanks for all the color. I will back in the queue.

All right, thank you, Matt.

Thank you. One moment for our next question. And it's from Catherine Mealor with KBW. Please proceed.

Hi, thanks. Good morning.

Hi. Good morning, Cath.

I want to start on paydowns which were accelerated this quarter. I know that you mentioned there were two larger loans that paid down, but just any thoughts on what you think that will look like for the back half of the year? Are there any larger credits that you foresee coming in, or was this kind of level an anomaly? Will we get back to more like the $800 to $1 billion kind of pace that we've seen recently in the back half of the year?

Well, Catherine, we were happy this quarter to have included in all of our prior quarterly discussions about paydowns, comments that paydowns may vary significantly from quarter to quarter and may have a significant impact in one quarter or another. So, true to that form, you've seen a wide dispersion in paydowns in the first two quarters of this year: $790 million in Q1, about $1.840 billion in Q2. We have telegraphed for some time that we expected a higher level of RESG repayments in the future, and that future showed its first signs of manifesting in the quarter just ended. I think when we really see a greater acceleration of paydowns, quarter to quarter, will be when the Fed starts reducing rates and probably a couple of cuts into that initiative, you'll really begin to see some projects move. My best guess, and I'm going to lean heavily on our longstanding comment that repayments can vary significantly from quarter to quarter. But my best guess is that Q1 and Q2 of this year sort of frame a range within which our Q3 and Q4 repayments will fall. I'd be very surprised if we had over $1.84 billion in repayments in Q3 or Q4, because I don't think the Fed's going to move rates until September or December. And I think really getting more big quarters of paydowns is probably going to be dependent upon getting some rate movement. So, I think Q1 was low, Q2 was high, and Q3 and Q4 probably fall somewhere in the middle of those, as our current best guess.

That makes sense. And then as we think about paydowns accelerating next year and trying to refill that bucket, I know there's a lot of momentum in your CIB business, and that's now $2 billion, or about 7% of loans. Can you just talk a little bit about your outlook for that business? What size loans are you typically doing or you expect to do? And maybe how fast would you expect this business to grow over the next couple of years to refill potentially a decline in RSG balances?

Yeah. I'm going to ask Brannon Hamblen, who's on the line with us, to comment on CIB and the importance of that handoff for continued growth in our balance sheet future year. So, Brannon.

Sure, Catherine. Thank you for the question. It's a great topic that we will discuss more in the future. As George mentioned, we are on the verge of a significant transition with RESG repayments beginning to come in. This has been in the works for some time. Our recent hires and team expansion are the latest steps in a strategy we've been developing. The CIB team consists of several sub-business lines, and three have been established: ABLG and equipment finance, which have gained traction recently. We've also added new team members who are exceptionally talented, well-connected, and have already demonstrated great performance in their careers. They have a credit-focused mindset aligned with our priorities of maintaining quality and yield over growth, although they have shown their capability to achieve all three. In terms of loan sizes, similar to RESG, we have a good variety. While our loans aren't as large as some of those in RESG, we typically operate in the range of $30 million to $150 million, with some larger loans as well. These are strong, closely monitored credits, and we expect them to maintain high credit quality. As you mentioned, 7% of the funded portfolio, amounting to $2.1 billion, was originated, with over $500 million in the most recent quarter. We anticipate repayments will likely increase soon, and we believe we have effectively arranged for a smooth transition of loan growth from RESG to CIB, which we see as beneficial. We're optimistic about timing this transition optimally, and we are very excited about the opportunity to grow and diversify our portfolio.

Great. Thank you.

Thank you. One moment for our next question. And it's from Manan Gosalia with Morgan Stanley. Please proceed.

Hi, good morning.

Morning, Manan.

You noted that sponsors have a lot of motivation to support the properties, given how much they've invested at the bottom of the cap stack. I'm assuming that if the property is taking time to lease, it also stays on your books for longer. So, I guess, my question is, what does a borrower do in the meantime? Is it an interest-only loan until it repays? Do they bring in more reserves? Can you explain what risk mitigants you bake in when loans are extended and they essentially stay on the books for longer?

Yes. Happy to do so. Manan, what I would tell you is our portfolio management to date through this cycle has not resulted in any concessions by us on any of those loans. That would constitute one of those loans having been a trouble, debt restructuring, if we were in the old accounting world where there were TDRs. So, we're sensitive to make sure that we're not becoming equity-like in our handling of the transaction if it takes time to work these things out. So, we continue to maintain market rates on those, current rates on those. In many cases, we're improving the terms. The sponsors typically have to pay standard or upsized fees to extend those loans. And we require replenishment of reserves as we deem appropriate and in many cases are getting principal paydowns on those loans. So, equity is equity. Equity has equity responsibilities. We're the senior secured loan. We don't have equity responsibilities. So, the equity has to do the equity lifting on these things. But as I said, we're needed. Our sponsors have done that, with the exception of the two sponsorship groups that we have those OREO properties in there. So, yes, loans may stay on the books longer, but those loans are structured in a way that we feel good about them staying on the books longer. We're making substantial profits on those. And as long as the sponsors are doing the right thing on those credits, we're happy to have those loans on the book.

That's great color. Thank you. Maybe as a follow up on NII. Notice the proportion of NII coming from interest reserves has been picking up slightly. Can you talk a little bit more about that dynamic? Is that indicative of more stress in general in the CRE market? Or is it just a function of loans staying on the books for a longer time while rates are higher? Can you just walk us through how that works?

It is not a function of any stress at all whatsoever. Money coming from interest reserves sounds like, oh my gosh, you're burning down your reserves. But here's the deal. When you put together a loan, Manan, you have a capital stack on that loan and a sources and uses funds on that loan from day one. So, interest over the period of construction, the life of the construction of the loan is built into that. You've got your land costs, you've got your hard construction cost, you've got your closing cost and fees, your tenant improvement and leasing commissions, your interest reserve, your tax reserve, all the costs that go into the cap stack. We want the sponsors to put all of their equity in before we put in. So, if we say to the sponsor, okay, you're going to fund 50% of the cost of this $200 million project, we want all your $100 million to come in first. Well, there's no interest at the beginning, so all the sponsors' money is going to come into the land and the architect's fees and the closing costs and the title policy and the beginning initial construction. And then we start funding the last hundred million dollars of the loan. Well, that's kind of complete construction, but that's when all of your interest is going to occur. So, all of the interest on these loans is typically in our budget, not because we're subsidizing the project by carrying the interest, but we made the sponsor put in all of their equity upfront. Now, we could be really stupid and not structure the loan in an intelligent manner and say, okay, sponsor, you put in $85 million of your $100 upfront. And then when it comes time to pay the interest rate checks for the other $15 million, that's the interest. But then what if the sponsor doesn't write the checks? Or what if he doesn't have the $15 million? So, we get all the sponsor money upfront because that's the smart, safe way to do it. And that means all the interest reserve is in our loan. So as all those loans, that big record volume of originations we have in 2022 funds up, more interest is being funded from interest reserves than before. It doesn't mean anything about weakness in those credits. It just means that we're smart in the way we structure these loans. We make sure we've got the equity or the equity in first so that there's no doubt about the equity coming in later. And that means the interest reserve is built on our loan. It is not in any way a sign of weakness. Our loan is also structured so that if we get to the end of construction and the project's not leasing or selling or refinancing as quickly, then the sponsor has an obligation to replenish those interest reserves. And that's happening with virtually every loan extension, modification, and renewal. Those sponsors having to put more equity into the project to replenish those reserves to carry it longer. Because we've got built into our budget enough interest typically to carry it through construction and what was expected to be stabilization of the project. If it takes longer to get to stabilization, then the sponsor has to write additional checks to carry it. And that's an equity responsibility, not a lender responsibility.

Got it. That's very helpful. Thanks so much.

Okay, thank you.

Thank you. One moment for our next question. And it's from the line of Michael Rose with Raymond James. Please proceed.

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

No, I don't think it's a concern you should be worried about at all. And it's not any sort of change in our business strategy. Large parts of what we have done over the 23-year history of RESG are unleased properties. The very first loan that we made was on a totally unleased property. So, it's inherent in our business model and it's reflected in the eight-basis point annualized net charge-off ratio of that portfolio over the 23-year history. Now we love leasing and we love it when transactions come to us and have preleasing. But the vast majority of the transactions we've always done have not had significant preleasing in them. Now, back when we did retail, and retail was, if you go back to 2010 or so, retail was probably 20% or 30% of our portfolio. Preleasing was inheriting all of those deals because you don't build a shopping center spec, you've got leases lined up. Condos in Miami, you almost always have a high level of presales. And in most cases, when you close the loan, enough presales to repay your loan with 30% to 50% deposits down. Condos in New York, since your offering circular has to be approved and go through a process with the state government there, that process typically doesn't happen until you're midway through construction or farther. You typically have zero presales on a New York condo project. If you do get to a point of having presales, you've typically got 10% or 20% deposits instead of the 30% to 50% deposits in Miami. These things vary all over the country by product type and geography. We know what the market is, we know how business is done in all these markets across the country. And our loans, sponsorship structure, capitalization, leverage points are all designed to be appropriate mitigants to those risks. So, there's no degradation or shift in the way we're underwriting or thinking about things. This is what we've always done and we feel very good about that.

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

The aim is to diversify our balance sheet. I appreciate your question. We have developed a strong level of expertise in commercial real estate within our real estate specialties group that stands out from how most others perceive and approach this sector. We have established ourselves as a leader in this area among banks and other lenders, including debt funds. We receive a considerable amount of respect for our work and the real estate community recognizes that we operate differently and take a very conservative stance, yet we provide a level of execution and expertise that justifies the investment, even with our cautious view on projects. We've built a high-performing business in our real estate specialties group, and we intend to continue its growth and seize opportunities that align with our rigorous, high-quality underwriting standards. Moreover, we are aware that our performance metrics—such as return on assets, efficiency, return on equity, and overall financial figures—suggest that we should be trading at a premium multiple compared to our peers. Historically, our financial performance has consistently ranked among the top in the industry since going public, yet we are not receiving that premium. This discrepancy is due to many who do not fully comprehend our unique expertise and conservative approach to commercial real estate. The sector is indeed complicated and can be risky without disciplined strategies, and we maintain that discipline diligently. We want to preserve our exceptional business while also understanding that if we allow RESG to reach its full potential and grow high-quality businesses alongside it, we could shift our loan funding balance from a peak of 70% down to around 50% in the coming years. This growth in indirect marine, RV, commercial and industrial banking, consumer segments, and community banking will help us achieve the premium multiple that our performance warrants, as opposed to facing a discount simply due to being highly involved in commercial real estate, even though our approach is distinct. So, to answer your question, yes, we aim to diversify. We are not specifically targeting the 300% and 100% thresholds; these will likely result naturally from our diversification efforts. Our main goal is to diversify our balance sheet to secure the multiple that our shareholders deserve for our strong performance.

Thanks for all the comments. I appreciate it.

All right. Thank you, Michael.

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

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

Yeah. Well, I would tell you on the indirect marine, we've targeted that to be between 10% and 15% of our portfolio. We were bouncing along for a while, long while about 11% of total portfolio. I think it bounced up to, like, 12% in the quarter just ended. So, that's going to stay in that 10% to 15% range. It may get to 13%, who knows? But we're not adding a lot of people there. We are adding a few, but they're just marginal, incremental staff additions.

We had, as Brannon mentioned, a nucleus of folks in fund finance and asset-based lending and equipment financing that was around eight or 10 people who were doing those lines of business for us before. And I would guess our headcount in the last six months is approaching 30 or so people in those areas.

I believe it's likely a bit higher than that. They have been effectively identifying excellent opportunities to bring in talent not only in origination but, as I mentioned, they maintain a very thoughtful approach to credit. They strategically assess their lending criteria, their borrowers, and how these can lead to cross-selling opportunities across the organization, while also managing the senior loans effectively. Regarding the RESG, there are many parallels in how infrastructure is being developed, focusing on strong defensive structuring and thorough underwriting processes. The portfolio is closely monitored rather than being a passive platform; there is a detailed examination throughout the entire loan lifecycle. They have indeed made impressive hires in origination and also in portfolio management. As you know, since George acquired RESG, our emphasis has been on maintaining high quality. We ensure the portfolio consists of the right credits and is managed properly for sustainability and scalability, and these individuals are making significant progress towards those goals.

Okay. And so just to clarify, has that kind of significant expansion you guys mentioned in the major comments kind of already occurred, or is it kind of ongoing, like it's expanded a lot already, but it will continue to expand from a headcount perspective?

Yeah. We've gone from the original nucleus of folks. We had probably around eight or 10 people in that area. Eight or 10 high-quality people. I would tell you that we're building in and around, under and over that group, because it is a great group that we had. But there were, I don't know, eight or 10 people, maybe 12 at the max. As Brannon said, probably north of 30 people now. And that group will continue to grow. We'll end up with 40 and then 50 and then 60 and then more people there, probably by this time next year, I would guess we will have continued to grow that and be in the 50 to 60 person range there. And these are highly skilled people that are not cheap. And that's why Tim, as we're having success hiring people and more, frankly, we're having more success hiring more highly skilled quality people than we thought possible. And that's why Tim's having to catch his expense guidance up a couple of percent growth rate, because we're finding more high-quality people than we thought we could. And you guys have heard me speak at length about people being critical to our business and high-quality, talented, smart, experienced people being essential to our business. And we're in an unusual window here with a lot of banks having pulled back to add a lot of talent. So, it's a time to harvest that talent, get those guys on the team and mature those businesses further while we can.

Yeah. That's fantastic. On the capital side, I mean, I know some of these larger repayments obviously open up some capital. And you announced the share repurchase. I would presume that this is meant to be more opportunistic, and then can you talk about how that would maybe stand against potential M&A as another ability to deploy capital and also diversify the balance sheet? It feels like we might be on the precipice of a big pickup in M&A. So just kind of wondering how you guys are thinking about that, given your strong track record there.

Well, first, if any FDIC transactions occur, we would love to have an opportunity on those. And you probably noted the one sizable deal that's occurred this year. We were in the bidder group on that, and we'll continue to look very favorably on opportunities to acquire failed bank transactions, if there are any. And that is always a preferred way. We've got a great track record and history doing that, so that would be the preferred way. But Tim, you want to comment a little more on stock repurchases, capital, and regular M&A?

Thanks, Stephen. This quarter has shown many positive developments related to capital. We haven't really highlighted how strong our earnings were this quarter. It's impressive to note that this marks the seventh consecutive quarter of record earnings. With additional repayments during this period, our unfunded balance decreased, showcasing the strength of our earnings on capital. Even with slower growth compared to previous quarters, our risk-based capital ratios improved by nearly 30 basis points, creating new opportunities. Having a share repurchase authorization in place seemed wise, allowing us to utilize it during periods of lower growth. M&A is another avenue for capital use, and we've been proactive in exploring it while remaining disciplined. There are many banks currently facing mark-to-market adjustments that we must consider in any M&A discussions. As George mentioned, we've actively pursued FDIC deals this year and will continue to do so if more opportunities arise. We prioritize careful capital management, and it's encouraging to see our earnings power and growth in risk-based capital ratios. Additionally, our tangible common equity ratio increased this quarter, and our tangible book value has risen by $5.18 over the past year, reflecting another strong performance. Overall, there are many positive developments this quarter.

Great. That's all super helpful. Appreciate the time.

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

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

That's a great question. The answer is yes. Reassessments or internal evaluations of loans indicate shifts in leasing expectations. If leasing is anticipated to take longer and happen at lower rates or with higher tenant improvements costs, this is factored into the net operating income of those projects. These elements influence risk ratings. Over the past eight quarters, as the Federal Reserve raised rates and maintained high levels, we've observed changes in risk ratings within our portfolio. We currently have 72 risk ratings, many of which are pass ratings or low pass ratings, along with a few special mention and substandard ratings. We've seen shifts from one pass category to another, reflecting the challenges that high rates pose for our sponsors and projects. This migration is evident in our reserve for credit losses, which has almost doubled from $300 million to $574 million over the last eight quarters. This increase includes $274 million after modest charge-offs. While some of this is due to portfolio growth, it demonstrates qualitative migration, with the reserve percentage rising from 0.83% to 1.19% of total loans and commitments. This 36 basis point increase shows the changes in risk ratings within the portfolio. We feel confident about the portfolio. As we mentioned in January, we expect charge-offs to be higher this year than last, but still below the industry average. This is not a sign of significant weakness in the portfolio, rather it reflects the stress caused by high interest rates, which may lead to some losses. In the first six months, our charge-off ratio has slightly increased compared to last year, but it may rise further in the second half of the year. To prepare for potential credit deterioration, we've built an additional $274 million in ACL over the past eight quarters.

Great, thanks. And I guess, as a follow up. Looking at the life science sector specifically, I think some of the cyclical pressures there and some of the recent projects that have come online have been widely noted. I guess maybe, what are your expectations for broader life sciences? Do you need a reversal of some of these cyclical trends in order to lease up some of these projects? Or I guess, what's the availability to convert some of the existing office space to suit other industries outside of life sciences?

A couple of months ago, while I was on the West Coast visiting a client in the life science sector, I was shown an intriguing graph that highlighted the flow of venture capital and IPO money into the life science industry over the past two to three years. Initially, there was a consistent influx of funds into this sector, even as interest rates started to rise and venture capital funding began to decline. However, after the situation with Silicon Valley Bank, there was a notable decrease in venture capital funding and a slowdown in the IPO market. This decline was fueled by concerns about a potential banking crisis that could have systemic effects. Consequently, the IPO market experienced a significant drop, and for a while, there was very little new capital entering the life science sector. Beginning in late September and October of last year, we started to see an uptick in funding for the life science space, which was reflected in a steady monthly increase in investments from both venture capital and IPOs. Additionally, there have been several acquisitions of smaller life science companies by larger firms, which further demonstrates the demand for this sector. When I visited the West Coast recently, clients involved in the life sciences expressed optimism about an increase in tenant inquiries in recent months, as funding has begun to return to this sector after a challenging year. Consequently, I believe it is too early to consider repurposing life science spaces for conventional office use or other purposes. It is possible to convert life science buildings for conventional office use, as exemplified by a client I met with in San Francisco who had a high-quality tenant interested in occupying a building specifically designed for life sciences, which was not intended for that use. This shows that these spaces can be adaptable. Nevertheless, I anticipate significant leasing improvements in the life science sector over the next 12 months due to the resurgence of capital. Additionally, with the aging population both in the U.S. and worldwide, along with increased government focus on healthcare, there are numerous long-term favorable trends for the life science industry. I believe that leasing conditions in this space are set to improve.

Great. Thanks for the color, George.

Okay. Thank you. I appreciate it.

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

Good morning.

Good morning, Samuel.

I wanted to switch back to payoffs for a moment and delve into your perspective on the industry. When considering the permanent market in relation to these projects as they reach payoff, are there specific types of buildings or sectors that appear more prepared from a permanent market standpoint, or do you not see any clear trends at this time?

Let me take that, George. So, yeah, we've been tracking our repayments to try to understand, Samuel, exactly the answer to that question. And we're starting to actually see some movement there in terms of how much is being refinanced, how much is actually being paid off from sale, what's going on there. In the first quarter, all of our repayments were coming from refinance opportunities. But in the second quarter, we actually had a pretty good number. I think of the 17 payoffs that we had, we actually had a couple that sold. Of course, our condo projects sell out. Then we actually had, I don't know if it's permanent financing. I'm guessing it's temporary. But some folks just pay us off without debt. But we did have 11, I think, of those were refinanced by third-party. In most cases, it's going to be more of a bridge solution. The interest rate levels are still at a place where, as we said before, our sponsors are carefully monitoring what's going on there. Everyone realizes we've been strung along over the last eight, nine months around visions of rate reductions that would spur that refinance market. At the end of the day, we're still seeing good refinance activity in our projects. I think most of it, though, is going to be more at the bridge level, still floating rate, still short term, where they can move on to a more desirable and for them profitable long-term financing. There is long-term financing going on out there, but I don't think a lot of it is, is hitting our portfolio.

Thanks for the information. My follow-up question is about loan yields. I'm trying to understand the new originations that are currently being funded. Do the spreads approximately match the average spread over SOFR, or is there a difference? Additionally, regarding the indirect side, as you increase the loan book by an additional percentage point, what are the book yields for those loans, and are those also floating rates?

Go ahead, Brannon.

Well, I'll take the RESG, George, and you can dive into indirect. A lot of the yield, the spread data is going to be determined by what types of projects you're doing and how you're working hard. Market in, market out. The guys are doing a phenomenal job, really about the same time originating at lower leverage, still getting strong spreads. Of course, our condo loans, which George discussed earlier, we view as some of our safest lending opportunities given the strong presales, especially in the southeast, in Miami, where we continue to see a lot of opportunity.

Samuel?

Did we lose?

Sam, you there?

Yes, I'm here. Yep. Yeah. George, are you able to comment on indirect?

Now, do you have any further questions?

Yeah. I was just wondering if you can give some color around the indirect book yield and where those originations are coming in, are those also floating rates, or are there some fixed components there?

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

Understood. Thanks for the color.

All right. Thank you.

Thank you. Our next question comes from Brian Martin with Janney Montgomery Scott. Please proceed.

Hey, guys.

Hi, Brian.

Most of my questions have been answered, but I wanted to follow up on the last one. It seems that the yields on the RESG portfolio are similar to those on the CIB portfolio during this transition period. Is that correct? How should we think about these yields as you move from one to the other, depending on the circumstances? Are they generally consistent, or are there significant differences?

We expect a lower nominal yield on the CIB portfolio, along with reduced fees for that portfolio. However, we do gain substantial deposits from some CIB opportunities, treasury management, and other business ventures. If we consider purely the yield, it may appear that we are sacrificing a lot, which could dilute our yields. Yet, when looking at it through the lens of return on equity and accounting for all costs and benefits, including deposits and treasury management, we should end up in a similar position. Nevertheless, from a strictly nominal yield perspective, there will be some long-term dilution to our overall margin.

Got it. That’s helpful and makes sense. You also gain diversification with it. Additionally, I wanted to ask about the margin this quarter, which was slightly better than expected. I’m curious if we might see a potential rate cut in the latter half of the year. Could you share your near-term outlook for net interest margin over the next two to four quarters?

What I can share is that our increased repayments in the second quarter led to a slight rise in minimum interest and accelerated deferred fees. The first quarter was likely on the lower side compared to average, which is difficult to define. We believe it was around $2 million or $3 million low and Q2 was possibly a couple million dollars high. There is a bit of variability in those numbers, but not significantly so. The RESG portfolio operates on variable rates, and we've previously discussed the floor rates. In our management documentation, we outlined how those floor rates have evolved over the past six months with noteworthy progress. When the Federal Reserve reduces rates, all of RESG's variable-rate portfolio will begin to decrease within a month, most of which are tied to the one-month term SOFR, allowing for anticipation of the reduction. Most of these adjust on the first or the eleventh of the month, leading to a slight delay in the effects following a Fed rate cut. To address this, we’ve focused on raising the floor rates and shortening the duration of our deposit book, which Cindy and Ottie Kerley, our Chief Deposit Officer, have executed effectively. Had the Fed begun cutting rates a year back or shortly after they peaked, we would have seen a notable reversal in loan yields along with a longer duration shift in our deposit book over a few quarters. We've mostly adjusted our deposit book to align better with near-term needs, significantly throughout the second quarter. We anticipate that while we may give up some margin temporarily for a quarter or two, we've effectively mitigated that impact over the recent quarters.

Gotcha. That's super helpful. So, thank you for taking the questions.

All right. Thank you.

Thank you. One moment for our next question. And it's from Matt Olney from Stephens. Please proceed.

Yeah. Thanks for taking the follow-up. The two large RESG repayments in Q2 that were disclosed, I think you said one was in New York, one was in Chicago. I know that some of the larger projects at RESG have been published by local real estate publications, and some investors like to track these larger projects. So, curious if you care to disclose which two projects these are that were repaid in the second quarter.

Well, yeah, I think they've been pretty prominently disclosed in the market out there. So, while I'm always reticent about talking about specific projects, the big New York project was the Extell high-rise condo project on the Upper West Side there around 66th Street in New York. Gary Barnett's Extell Project, a group we've done a lot of business with, and they have just done a brilliant execution on that project. To give you an idea, that was an $840 million total commitment. We were funded up to $511 million, expecting to fund up close to the max 840. But then they were expected to TCO the bottom half of that building and start closing on condo sales and that. So, we would have had substantial paydowns on that project in Q3, probably in Q4 this year. That would have materially reduced our loan just from condo sales on the bottom half of the project. But they found a refinance opportunity that met some of their needs better than staying in our loans. So, they refinanced that away from us with our appreciation for having gotten to do the construction financing, appreciation for that long-term relationship. The project in Chicago was JDL's One Chicago project, which is a beautifully elegant project, expertly done, great execution. We had funded up to our maximum $475 million on that and that had begun to pay down from closing of condo sales. Another just excellent project with excellent execution from our customers there.

Appreciate that.

All right. Thank you.

Thank you. I will pass it back to George Gleason for final comments.

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

And thank you all for participating. And you may now disconnect.