Good day and thank you for standing by. Welcome to the Bank OZK Second Quarter 2025 Earnings Conference Call. 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, Managing Director of Investor Relations. Please go ahead.

Good morning. I'm Jay Staley, Managing Director of Investor Relations and Corporate Development for Bank OZK. Thank you for joining our call this morning and participating in our question-and-answer session. In today's Q&A session, we may make forward-looking statements about our expectations, estimates and outlook for the future. Please refer to our earnings release, management comments, financial supplement and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements. Joining me on the call to take your questions are George Gleason, Chairman and CEO; and Brannon Hamblen, President; Tim Hicks, Chief Financial Officer; Cindy Wolfe, Chief Operating Officer; and Jake Munn, President, Corporate and Institutional Banking. We will now open up the lines for your questions. Let me now ask our operator, Gigi, to remind our listeners how to queue in for questions.

Our first question comes from Stephen Scouten from Piper Sandler.

So obviously, growth was pretty phenomenal here this quarter and it looks like I think the number was 109 new FTEs in the quarter. I'm curious if there's any sort of composition of those new hires that you have that you could kind of key us in on that are related to production hires? And anything on the NRG team as you guys build that out? Just kind of trying to think about the opportunity for CIB and NRG and these sort of verticals to continue to grow with the new hire activity.

Yes. Great question, Stephen. Thank you for it and thank you for being on the call today. The new hires were spread broadly across our company. As we mentioned in the conference call, we've opened, I think, 11 branches so far this year. We've got about 14 more that we expect to open in the remainder of the year. A lot of those openings will occur in the current quarter, the third quarter. So we would expect continued hiring related to those branches as we go through the remainder of the year and that will continue into next year as we plan to open about 25 branches more or less next year. So branch count is probably the largest single number. We've also been growing our CIB group, which is, obviously, a well-telegraphed and articulated plan. We continue to add people there. We'll continue to add people as their business grows and that is a very well-planned and choreographed addition of staff that really occurs commensurate with their continued portfolio growth and opportunities. The Natural Resource Group, as you mentioned, is part of that. We're growing out business banking teams that we built out with the initial team last year in Florida. Earlier this year, a business banking team in Texas. We're now building out a business banking team in Georgia. So there's a fair amount of development of staff with those teams. And then just lenders and staff additions in our existing network of branches because if a branch that was handling $70 million of deposits is now handling $100 million, it needs another FTE, for example, to continue to deliver the quality of service with our customers. And of course, that growth across all those production lines of business, whether it's deposits or loans, also leads to growth in your customer care center, your call center, leads to additional growth in risk and model and data and technology and all across the board. So it's a few people everywhere but all of it is being driven by growth in our loans, growth in our deposits and growth in the production teams that are interacting with our customers. I could talk about trust and wealth. I can talk about private banking. We've got a lot of initiatives going very well. And we're thrilled at the quality of talent that we're able to hire in this environment.

That's really good information, George. I wasn't aware of the business banking expansion to that extent, so that's useful. Regarding the ability to attract talent, we've noticed an increase in M&A activity in your markets. Do you think this will enhance your capacity to continue adding more talent in the near term? Will the hiring activity increase? Additionally, considering that your growth and diversification strategy is progressing well, could M&A be part of your story again as an acquirer, especially given your stock's recent performance? You certainly have a strong track record in M&A.

Let me answer your first question, then I'm going to ask Tim to answer your question about M&A opportunities. Clearly, we are focused on hiring very high-quality, high-performing talent. And obviously, all of us in the industry know that, a lot of times, M&A transactions at other banks free up some high-quality talent that's not as enthused about the merger, the combination or perhaps their new teammates or new reporting structures as they were before. So yes, to your question, M&A will create additional opportunities. But our ability to acquire really talented people that have deep relationships with customers and deep relationships, I think, is more driven by our culture and the track record of performance and achievement and the reputation that our company has in the industry than it is by what our competitors are doing. We are adding a lot of team members that are leaving really highly regarded banks and big jobs at larger institutions to come join OZK because they realize that we have a long track record of high achievement, high performance and doing things with a level of excellence that's commensurate with the way they want to pursue their jobs. So I think our reputation is more important than hiring the talent that we're hiring, the really high-performing, high-octane people, than what's going on in other banks. So Tim, I'll ask you to address his M&A opportunity question.

Yes. Stephen, on M&A, we've had such a great track record over the last several years of being able to grow organically, that sets a really high bar for us in evaluating M&A opportunities. We do see opportunities that we look at, but they are in the context of the organic growth that we're having and the success we're having growing organically and whether an M&A transaction will take away from that momentum is part of the consideration. So I can't tell you if it's going to be part of our story long term. We do have a very high bar for looking at that. We've been very, even when we're doing acquisitions from 2010 through 2016, we were very conservative in how we looked and evaluated those acquisitions. And as you remember very well, all of those were very accretive to our bank. And those are the type of opportunities we're looking for. Does it add additional business lines? And does it add some part of our business that can accelerate our strategy? So we continue to evaluate that but we're really pleased with our organic growth story and the momentum we have there.

Great. Appreciate that. And one last quick one for me, if I could. I noticed there was 1 loan that got added in the $375 million to $500 million bucket. Was any portion of that loan potentially above $500 million? Have you syndicated out any portion of any loans as of yet?

We are syndicating loans in our CIB group. We've not yet had a $500 million-plus opportunity in RESG that we've syndicated. But we're certainly open and looking forward to the day when that opportunity presents itself.

Our next question comes from the line of Michael Rose from Raymond James.

Just wanted to start on deposits. Obviously, you added a bunch of time deposits. I think you opened 8 branches in the quarter. But it was nice to see the interest-bearing deposit costs come down a little bit. Can you just speak to kind of the expectation for near-term deposit growth, branch openings? I think you have some more slated. And then if we can see some further reduction in deposit costs, are we kind of at or near the bottom at this point?

Thank you for the question. Our deposit costs are likely to remain stable until the Fed makes a move. In June, our deposit costs were 3.68%, compared to 3.7% for the quarter, which indicates they will remain mostly unchanged. We'll increase deposits as necessary to grow our balance sheet. If we need another quarter of $1.6 billion, it will come at a higher cost than if we only require a few hundred million. However, we have the ability to grow within our current branch network. We are also adding branches, which, as George mentioned earlier, will support our growth in 2027, 2028, and 2029.

Perfect. I appreciate the color. And I'm sorry if I missed this, I got on a little late but just wanted to better appreciate, the loan growth outlook for the back half of the year does imply some deceleration. I know you've talked about paydowns. But if you can just walk us through kind of maybe by bucket, what the expectations could be CIB versus RESG? I assume that will be a headwind, and then marine, RVs, things like that.

Yes, I’m happy to provide that information, Michael. CIB has been our biggest source of growth so far this year, and we expect that trend to continue with strong growth anticipated in Q3 and Q4, extending into next year. However, as you mentioned, RESG may pose a bit of a challenge to overall growth. I'm not certain whether that means a decline for RESG or if it will just remain flat. We'll have to wait and see how prepayments develop. We are forecasting significantly higher prepayments in this quarter. In our press release, we noted that we recorded about $0.47 billion in RESG paydowns in the first 15 days. If we had updated that number through the close of business yesterday, it would have reached $0.54 billion due to an additional paydown. The paydowns we are experiencing, which we look forward to seeing accelerate in the second half of this year, are widespread. Our largest paydown so far was in New York multifamily, along with a payoff in Dallas multi, our largest land loan in Miami, a multifamily in Washington State, a mixed-use property in Chicago, and another multi in Chicago just yesterday; these are varied across different products and locations, and we anticipate this will persist. Ultimately, the guidance we provided at the beginning of the year, which we reiterated in our last call in April, projected mid-teens to high single-digit growth in loans for this year. We have surpassed that with a non-annualized growth of 10.1% in the first half of the year. Therefore, we have already exceeded our original growth guidance, which was high single digits. Although we expect continued growth, it will likely be significantly impacted by paydowns. Consequently, we have adjusted our annual guidance to an 11% to 13% range for the full year.

Our next question comes from the line of Manan Gosalia from Morgan Stanley.

George, could you elaborate on your recent comments regarding the repayments in the RESG book? What factors contributed to those paydowns? Given that the long end of the curve remains elevated, is it simply that capital markets have opened up? Are borrowers finding more refinancing opportunities outside of your services? Please provide more detail on that.

Yes. It's a combination of factors, Manan. You're seeing, particularly on the multiproduct that I mentioned that was included in the paydown, a lot of those are reaching a stabilization level that they're able to get to a reasonably favorable, probably not as good as they would like but a reasonably favorable permanent exit. You're seeing some projects that are refinancing with a different lender with more liberal terms and higher proceeds, that give them a longer runway to stabilize their project and get to an ultimate permanent, a bridge lender situation, if you will. A lot of those are driven by property sales or enhanced leasing activity. So it's all the normal factors that drive folks to refinance out of our construction loan into a bridge loan, a permanent loan or sell a property. So we've given guidance for a number of quarters that somewhere in this time frame, we expected to see a significant uptick in payments. That was a little more muted probably than we had expected at the outset of the year in Q1 and Q2. There's been a lot of uncertainty and volatility in markets, in the economy over the first 6 months of the year. So I think that led perhaps to a little slower execution on some of those refinances than what we expected in December. The flip side of that, though, is that people seem to be getting a sort of sense of where the world is going in the midst of the uncertain environment today and that's leading to execution on a lot of transactions.

Got it. Very helpful. And then as always, you guys gave some great granular disclosure on the new appraisals. I was wondering if you could comment on the 2 or 3 loans where the LTVs moved up significantly this quarter. Any common threads there or anything specific you were seeing there?

We provided details on three loans with the highest loan-to-value reappraisals. The first is a small office building loan of $10 million, which has a reappraisal at 129% loan-to-value. Normally, such a high loan-to-value would raise concerns, despite the small size of the loan. However, the sponsor has recently secured a 12-month extension, made a $1.5 million paydown, reduced $10.1 million of unfunded proceeds, added $1.1 million in carry reserves, and covered the extension fee and closing costs. They are also exploring options for repositioning the property. The second loan is a multifamily project that has been leasing well but below the desired rents. The sponsors had constructed it to condo standards and decided to convert to a condo project, contributing an additional $6.5 million in cash equity for this conversion. The sponsor remains actively engaged. The third loan is a land loan, which was extended in the quarter and carries a substandard rating. The borrower deposited an additional $4.1 million in carry reserves for a short three-month extension while they seek a recapitalization partner. Overall, although these loans have significant challenges regarding loan-to-value, they exemplify strong support and engagement from the sponsors. We have emphasized the importance of guarantor support in the current commercial real estate market, and these cases demonstrate sponsors continuing to invest and work towards successful outcomes.

Our next question comes from the line of Matt Olney from Stephens.

George, I appreciate the commentary on the loan growth outlook for the back half of the year from the earlier question. And I'm sure it's a little bit early for loan growth guidance for 2026 but appreciate any kind of commentary you can provide around a framework for loan growth for next year. If we just assume the pace of loan growth in the back half of this year continues into next year, is that a reasonable framework for us to assume? Or are there other considerations we should keep in mind for next year?

Matt, I agree that it's too early for us to provide loan growth guidance for the next year. However, I understand the relevance of this question as the results for 2026 are becoming increasingly important to our analysts and investors. Jake, since CIB is currently leading growth within our company, I will ask you to take the lead on this topic. Brannon, since RESG still leads in outstanding balances, I will have you follow up to discuss that area. Without giving specific guidance, please share your general thoughts on where we see ourselves in 2026 with these two critical units. So, Jake?

Thank you, George, I appreciate it. That's a good question. I'm happy to be recognized as the king of growth for CIB. Our pipelines remain robust for CIB as we approach the third quarter. We are continuing to attract strong talent across our footprint, as we've mentioned earlier in the call. It's important to note that we are experiencing challenging trends with C&I growth here at OZK, particularly with CIB. Typically, our first quarter is the weakest due to the post-holiday period when CFOs are focused on audits and reporting. Our second and fourth quarters should show similar performance, while the third quarter is usually our strongest. We have positive momentum moving from the second quarter into the third, which I want to highlight. Several solid deals that were approved have closed and funded early this month, and we are excited about their contribution to our third quarter growth. Additionally, we are anticipating benefits from our newly launched Natural Resources Group, which is set to grow in the third quarter and should enhance our performance through 2026. CIB is concentrating on the CBSF business unit, which focuses on diversified C&I lending for middle-market to large corporations, including traditional asset-backed lending and enterprise value-based lending. I want to emphasize CBSF's growth, which we expect will continue into the third and fourth quarters as we establish a presence in the Greater Atlanta and Nashville markets. We've found good talent and are working on setting up these offices, which should drive additional loan growth across our platform. Heading into 2026, we feel like we're beginning to find our rhythm. I am cautiously optimistic about CIB's overall performance as these business lines continue to expand, along with our legacy business lines. Our Fund Finance Group, led by Parul, Mike at our ABLG shop, and Jim overseeing EFCS, along with our income-generating services through LSCS, all contribute to our positive outlook. We feel grateful for the quarter's performance and cautiously optimistic about growth in the third and fourth quarters and into 2026.

So Jake, am I correct in summarizing that we expect CIB to accelerate, not slow down?

That would be a correct statement.

Brannon, do you want to give a little color on RESG?

Yes, we’re grateful that Jake's guidance indicates acceleration rather than deceleration. Thank you, Jake. Matt, it’s great to hear from you this morning. When considering RESG growth, I want to differentiate between originations and funded balance growth. I'll begin with originations, which are crucial as we look ahead. However, it's important to note that our originations do not contribute significantly to balance growth for about 12 months after a loan closes since our sponsors fund their equity before we close the loans. We’re pleased with our team’s performance on the origination side, showing a modest increase in volume each quarter this year, reaching the highest level since the second quarter of 2024. This occurs in a climate where sponsors have been cautious about starting new projects, and the number of new deals available in the market has been lower than historical averages. In contrast, the number of lenders, both traditional and alternative, has been high during this period. Many lenders are facing lower origination rates but are still present, competing for fewer deals. This presents a challenging but healthy environment for our origination team. It won’t be easy, but our team continues to push forward as the market allows, originating every loan that meets our strict leverage and pricing standards. On the funded balance side, the good news is that we still have unfunded balances from the last couple of years of origination. However, as we have stated, we expect to see significantly higher repayments in the coming quarters, extending into 2026. As George mentioned, it’s unclear if that will be a negative or positive factor. Nonetheless, we recognize the challenges to funded balance growth in RESG, and we’re grateful that Jake's team is here to support us.

I want to make a few comments. We've discussed our growth and diversification strategy for some time, and there seems to be a misunderstanding that we are scaling back on RESG or commercial real estate. In reality, we are not reducing our focus on RESG, and growing it is a key part of our strategy. We were pleased to see an increase in origination volume in the last quarter, despite a challenging environment. Recently, I spoke with a long-time sponsor who mentioned that they are not pursuing new deals due to the current interest rates and economic conditions, which has limited new opportunities. Nevertheless, as Brannon noted, we recorded the best RESG origination quarter since last year’s second quarter, making it the best in the past four quarters. We see this as a win and a sign that we are committed to growing RESG. Another important area of growth is CIB, indirect lending, and our community banking activities, which we aim to grow even more rapidly than RESG to enhance our diversification. In the most recent quarter, RESG reached its highest funded balances ever, even though its share of our total funded loan balances decreased from 70% to 60% over the last couple of years. While this might seem like a decline, it reflects the growth of CIB and our community banking segments, which have contributed more to our overall volume. This is exactly what we wanted to achieve with our growth and diversification strategy. Although we've extensively discussed CIB and RESG, I want to highlight the progress in indirect lending, which remains stable at around 12% of our outstanding balances. Our goal is for it to stay between 10% and 12% of our loans, and we anticipate it will continue to prosper within this range. Our commercial banking teams are also increasing consumer engagement through our branch network, and we're excited about the potential from our business banking teams that we initiated last year in Florida and Texas, and are now establishing in Georgia. These initiatives should significantly contribute to our growth in loans and deposits as we serve smaller commercial customers. We expect to see growth next year across all categories, although prepayment activity may temporarily offset RESG's growth at times. Over the long term, we are confident that RESG will remain a significant contributor, and we believe that its proportion of our balance sheet will continue to decrease as CIB and other sectors expand more rapidly.

Our next question comes from the line of Catherine Mealor from KBW.

George, can we come back to the appraisal chart, which I actually was really encouraged by a few things that I saw on that chart that showed, I noticed there were 3 life science projects that had LTVs up but only by 10% to 12%, so still at levels that feel good. So I was just kind of curious on the life science, there's just a lot of chatter on that space. I'm just curious if you could provide any insight into trends that you're seeing in that asset class right now.

Yes. I'm going to ask Brannon, since those are RESG loans, to comment on that. But before he does, we're pleased at where we are in the appraisal process. We've now, depending on whether you're looking at loan count or dollar volume, 98% of our loans in number and 99% in dollar volume have appraisals dated on or after December 15, 2022. And that was when the Fed reached peak interest rates or reached this interest rate where they are now. They went on and increased rates of 100 bps higher and then cut 100 bps. But all those appraisals from December 15, 2022 on have been done in the current or a higher interest rate environment. We only have 6 loans that haven't been reappraised in this environment. Now our weighted average loan-to-value has gone up 2% as a result of that from 43% to 45%. Now if you have been following the monthly or the quarterly scorecard we've been giving you on appraisals, you'll note that our loan-to-values as we've reappraised loans have gone up much more than 2%. But the portfolio as a whole has only gone up 2% because, after a lot of these loans have been appraised, we've gotten accrued paydowns and the new loans that we've originated over the last couple of years, and you can see this in the bubble chart, are at much lower loan-to-value numbers. So we've kept averaging down the loan-to-value of the portfolio with the new originations such that, in the aggregate, the portfolio has only gone up 2% loan-to-value over that entire cycle. We think that's a significant accomplishment and reflects very well on the RESG team's job of portfolio management. So Brannon, I'm going to turn it over to you with that intro and let you talk about what you guys are seeing on life science, in particular, you may want to talk about other product types as well.

Thank you, George, and Catherine, I appreciate your question. I want to emphasize what George mentioned about our loan underwriting process, where we assess various factors including rental rates, vacancy rates, and interest rates, as well as cap rates. During a Fed rate tightening cycle, interest rates and cap rates are affected, and life sciences have certainly been impacted by broader economic factors. However, in our portfolio, we are noticing increased leasing activity in certain areas, such as signing our first lab deal in San Diego, which we are very pleased about. There have also been announcements regarding large leases. While the sector has been quiet over the past year, we are grateful that our sponsors recognize the quality of their projects and the significant equity they have invested, and they are continuing to protect these projects, which we expect will take longer to lease out. In life sciences, we are observing some leasing progress. Regarding our office portfolio, it was a positive quarter with various leasing activities, including smaller spaces, which is a promising sign in the context of the broader economy and reflects the desirability of the projects we finance. Our apartment leasing has also been robust, and we are seeing some new industrial leases signed and others close to being signed. The strength of our multifamily and industrial projects is evident in the repayment composition across the portfolio, with the strongest repayments coming from those sectors. Overall, the performance has been broad across different segments.

Great. Helpful. And maybe my one follow-up is just, can you give us any insight into the step-up in special mention loans we saw this quarter? I think it was up about $176 million. I know it's bounced around but just curious if there's any one large property there to be aware of? Or is it just kind of a mix of lots of things?

Yes. As you noted, we disclosed that. We're really kind of back to the level we were at December 31 of last year. So we had a small downtick in that number at March 31. We didn't really ascribe a lot of meaning to that downtick. We don't ascribe a lot of meaning to this uptick. It's just the normal ebb and flow of loans as we rerisk rate them from quarter-to-quarter. And maturities and upcoming maturities and negotiations with sponsors have a lot to do with that. So in December, we had quite a few loans that we were in some fairly challenging negotiations or serious negotiations with sponsors that led us to special mention some of those loans. Those negotiations went well by and large and resulted in those loans coming out of the special mention category at 3/31. Very similarly, we've got some negotiations upcoming that are serious negotiations. So we moved some loans to special mention, reflective of that. We'll see how that plays out. Hopefully, it will play out as well as in the last cycle.

Our next question comes from the line of Brian Martin from Janney.

Did I hear this right, George? I realize I was on a different call. But just the acceleration for Jake's group in terms of when you were talking about the acceleration, was that in dollar terms? I know this quarter was a strong quarter, around $900 million in growth. But that level is going to accelerate from the $900 million level, is that what you guys said?

I think in general, we've got an accelerating trend of business in CIB, Brian. So I'm not going to tell you that $900 million is going to accelerate in Q3. I don't know that. It may slow in Q3. It may accelerate in Q3. It might be the same. I don't know that. But over the next, say, 6 quarters, we would expect a larger and larger contribution from CIB to our growth, and it being a larger part of our total portfolio over that time. As I mentioned last quarter, when I was talking about CIB, I think I mentioned that they're really just getting started with achieving their potential. And they've got a number of verticals built there but they're expanding geographies to capitalize on more verticals. And as evidenced by our Natural Resources Group, they're expanding into new verticals. And within some of the verticals, they'll be adding some niche products as well. All right. So that's a very important part of our growth and we feel really good about the prospects there.

I'll just piggyback real quick, George, off of that, Brian, just for your benefit. I mean we're still seeing great opportunities in the market. We're being highly selective. We're taking a credit-first approach to what we're doing and what we're pursuing across CIB. I'll give you a perfect example. CIB looked at over $7 billion worth of opportunities in the second quarter. Our pull-through rate was effectively 12%, a little more than that. And so that's a telltale sign right there that we're being selective on opportunities, on the structure, on pricing to ensure that we're really sourcing and cherry-picking the best opportunities for Bank OZK and our shareholders. And so I wanted to reiterate that for you. So we're cautiously optimistic. I think the third quarter is going to be great. And we're hopeful that the momentum we have, we can continue to build upon, as George mentioned, with these new business lines and the expansion of existing.

Our next question comes from the line of Nicholas Holowko from UBS.

So clearly, a lot of success on the CIB build-out. And alongside that, you noted all the branch openings that you have planned, which are some great momentum as well. I'm curious, though if the CIB build-out has begun to contribute on the deposit side of the house as you're starting to collect those relationships and establish those for the franchise, excuse me.

I will say yes, both on the deposit and begin to contribute on the fee income side. Jake, I'm going to let you give a little color on how we're approaching deposits and the relationships and also where we are in beginning to harvest ancillary fee opportunities from that business. It's early being, but we're seeing some good progress.

I appreciate the question, Nick. We're beginning to see some positive relationship opportunities across CIB. At the end of the second quarter, 96.4% of our relationships on a commitment basis within CIB were either single lender clubs or, if we were in a broader SNC, we acted as the admin JLA or another titled agent. This is important because it shows that we are focused on building relationships rather than just getting involved in deals as participants or concentrating on purchasing paper. We aim for true relationship banking, which allows us to provide insights on structuring, optimize our yield and economics with these deals, and enables cross-selling and access to management. As a result, we’ve seen significant growth. Our deposits for CIB grew nearly 20% quarter-over-quarter, although our strong loan growth somewhat offset that. We anticipate continued deposit growth from CIB and are excited about it. Our treasury management capabilities and product offerings at OZK are top-notch, making it easy to approach customers for both single lender and admin opportunities. Our loan syndications and corporate services within CIB are also gaining momentum. Our interest rate hedging services, led by Ryan Frette, have seen success, including a recent cap and swap deal. Our capital markets programs are starting to perform well, and our loan syndications team, led by Rachel and Stephanie, is doing an excellent job, leading more deals as admin agents and enhancing our economics. We remain cautiously optimistic as we advance, and I believe you are starting to see the results of our efforts.

Yes, I want to reiterate that we are still in the early stages of this. Expanding our Corporate and Investment Banking function to include various fee-related opportunities is a new development. We are experiencing some positive initial successes, and we anticipate that this will become a much more significant aspect of our Corporate and Investment Banking narrative in the upcoming quarters and especially in the next few years. Achieving full potential in this area will likely take until 2027 or 2028, but we expect to see consistent progress on a quarterly basis.

That's helpful and great to hear. You mentioned how early days it is for the business and you're going to be on this growth path for a long time coming ahead. But maybe just in terms of early indications and any relationships that have been around longer, how satisfied are you with the credit performance from the CIB businesses that you've experienced so far?

I would say we're very satisfied. We've got a couple of the legacy assets there that are either substandard assets. I think we've got 2 small substandard assets but those are legacy assets that predate Jake's ascension to leadership of the team. And they're small normal things you're going to have in the course of lending money. You make loans. They're not all going to work as per the original plan. So nothing is adversely surprising there to us at all and we are thrilled with the new production that we're getting. I'll give you a data point and Jake may want to comment on this. But our CIB growth, had we closed what we had approved in loan committee on club and syndicated transactions, would have been much higher than what we actually achieved in the quarter just ended because the quality of transactions, Jake mentioned our pull-through rate of about 12%. But the quality of transactions that we're working on is leading to these things being significantly oversubscribed. So we and all the other members of the loan syndicates here are getting scaled down on investments on most transactions. So we're approving a larger hold position than we're actually getting allocated at the end as everybody allocates down to deal with the oversubscription. If these were not high-quality assets, you wouldn't have a lot of banks fighting for pieces of them.

Yes, that’s correct, George. It's certainly a significant data point. If we hadn't experienced final allocation cutbacks, our position would be much larger, which is an interesting thought. To reiterate, we prioritize credit first, yield second, and growth third. With a 12% pull-through rate, we are actively exploring opportunities and engaging with sponsors. However, we are not aiming to be a bank for everyone. We prefer to have substantial equity in these deals and maintain strong balance sheets. We are steering clear of highly leveraged transactions and selectively choosing our investments, as noted in previous calls. We are not actively seeking opportunities in the consumer discretionary retail sector within CIB. We are also being strategic about avoiding venture capital, technology, restaurant financing, and smaller franchise financing, given the challenges those industries are currently facing. Therefore, we are taking a cautious approach to the sectors we enter, ensuring we maintain favorable loan-to-value (LTV) and loan to expected value (LTEV) metrics. We continue to experience solid success while growing in a measured manner.

If I can just add a little bit to that and as an objective observer, Jake and his team have just been phenomenal around the quality side. And we talk a lot about the extra FTEs on the origination side, we talk about it on the deposit gathering side but you've got in there a number of folks on the risk vertical side as well. And Jake is hiring, not just the origination side but the portfolio management side to ensure that quality really is job #1. And the way his team has integrated with our existing and growing second and third lines in this institution has been absolutely phenomenal such that we're getting quality with speed and certainty of execution in the standup of the new business lines that he's putting in place. So it's getting there quickly but it's getting there with phenomenal coordination, collaboration with the second and third line to make sure our governance, make sure our risk rating scorecards and all those sorts of things that you have to do to ensure that quality are set up. So Jake and CIB really do exemplify all the characteristics that RESG built its platform and portfolio around.

Yes, Brannon, I appreciate that. I must mention our portfolio management and operations team within CIB. As we continue to hire, as George and Brannon can confirm, they represent more than 50% of our new hires. It is crucial for us to have sufficient staffing that is also knowledgeable and experienced in portfolio management, compliance, and oversight. This ensures we can be the best stewards of capital for our shareholders, regulators, and the communities we serve.

Our next question comes from the line of Timur Braziler from Wells Fargo.

I'd like to start on the condo loan that had previously been multifamily that was issued the extension with the borrower contributing some more funds there. I'm just wondering kind of the internal mechanics that keep this a pass-rated credit given the extension and kind of the change in asset class. Is it the borrower contribution with new equity that helped to maintain that status? And just if there's any reserves that have been set aside against that project?

Well, there are reserves on every loan in our portfolio, Timur. And yes, the borrower's contribution, their commitment to the project and the soundness of their business plan are all factors in the continued carrying of that credit as a pass-rated credit.

Okay. That's helpful. Can you provide a broader perspective on the methodology for allowances? With Corporate and Investment Banking making up a larger share of future growth, how should we think about the allowance levels for CIB compared to Risk Evaluations and Solutions Group? That's the first part. For the second part, considering the allowance build we've experienced over the past couple of years despite low charge-offs, how do you see this developing? Are you anticipating that reserves will be released if the economic environment improves? Is there an expectation of higher losses in the future, which is why reserves were established ahead of time? I would like to understand how you are approaching the allowance in relation to charge-offs and how that will be resolved.

Thank you for your question. Every loan in our Commercial and Investment Banking (CIB) and Real Estate Services Group (RESG) portfolios has an Allowance for Credit Losses (ACL) model associated with it that assesses potential losses, including expected loss, probability of default, and loss given default. These cumulative figures for each loan, regardless of the type, are incorporated into our ACL calculations. As Tim noted in our management comments, we have maintained a focus on downside scenarios. Specifically, our calculations currently give more weight to the Moody's S4, which depicts a recession scenario, and Moody's S6, which represents stagflation, compared to the baseline scenario. Throughout this period of Fed tightening, we have taken a cautious stance concerning economic uncertainty and maintain that view. We hope for a future with more certainty, ideally economic stability instead of recession or stagflation. Should the outlook clarify that we are not heading into a recession or stagflation, we expect to adjust our risk ratings, which would lead to a reduction in our ACL allocations and a shift towards a more favorable baseline scenario. We have built a $366 million allowance over the last 12 quarters, and in nearly all those quarters, we achieved record net income and earnings per share, highlighting the strength of our business model. Essentially, we've allocated about $4 into reserves for every $1 of losses during this time. If we move past this economic uncertainty without incurring significant losses, our reserve levels will decrease. However, if challenges arise, we believe we are well-prepared. While no one can predict the future of the economy, we are maintaining a prudent approach as we navigate this uncertainty. Our portfolio is performing well, evidenced by our net charge-off ratio being significantly lower than the industry's, which has been consistent since we went public in 1997. The main reason for our portfolio's strong performance is the active engagement of our sponsors with their projects. Most sponsors are expected to continue supporting their projects until normal economic conditions resume. However, we have encountered some exceptions, including four cases in foreclosures and one involving the Arts District Los Angeles office loan, where the sponsor stopped making payments but still facilitated a successful sale, allowing us to recover most of our principal and some post-default interest. While we may face additional challenges ahead, we do not foresee significant disruptions to our earnings that would necessitate an extraordinary increase in reserves. Overall, we believe our portfolio is performing exceptionally well.

Okay. That's good color there. Maybe just, if I could just one more follow-up on your comments about the sponsor support and the optionality. Just maybe within life science specifically, can you just talk to some of the trends in occupancy that you're seeing there and the appetite to maybe convert those to traditional office, if those conversations have started to pick up and just generally what your thoughts are on that asset class here?

Well, as Brannon mentioned, we've seen some life science leasing in the first half of the year and in the last quarter. It is slower than we would like. It's slower than our sponsors would like. But there is some positive momentum, it seems, around that. We are aware that our sponsors on a number of projects have active RFPs that they're in negotiation with on potential tenants. We'll have to see how that plays out. Obviously, there are challenges surrounding that asset class. We acknowledge it. It's part of the reason for the reserve build. It's certainly an area that merits us continuing to give close attention. But to date, our sponsors have continued to support those assets. We expect the majority of our sponsors will continue to support those assets. And we're in a good basis in those assets, we feel like. So we'll continue to monitor that and give you ongoing reports.

Thank you. At this time, I'm showing no further questions.

All right. Well, thank you, guys, for joining the call today. We're really pleased to report a great quarter to you. We thank you for sharing that and we look forward to talking with you in about 90 days about the next quarter. Have a great day. Thank you. That concludes our call.

This concludes today's conference call. Thank you for participating. You may now disconnect.