Earnings Call Transcript - OZK Q3 2022

Jay Staley, Director of Investor Relations and Corporate Development

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 the lines for your questions. Let me now ask our operator, Kevin, to remind our listeners how to queue in for questions.

Operator, Operator

Our first question comes from Stephen Scouten with Piper Sandler. Your line is open.

Stephen Scouten, Analyst

I guess maybe if we could start with the repayments seen this quarter, obviously, down about $1 billion quarter-over-quarter and I know that can be somewhat episodic and hard to predict, but I took the commentary in the management comments as somewhat of a positive that you don’t think it will necessarily be the highest year on record. So can you tell me what you guys are seeing there and what might be driving the reduction in repayments? Is it less opportunity for your customers to refinance out? Or what kind of dynamics are going on there?

George Gleason, Chairman and CEO

Brannon, do you want to take that?

Brannon Hamblen, President

Absolutely, Stephen. It's good to talk to you. You have identified one of the issues; the finance markets, including both bridge and permanent lending, have been impacted by rising interest rates. While we are seeing repayments from various sources, such as the sale of condos and, to a lesser extent, single-family home lots, the refinance market plays a significant role in repaying our loans. However, this market has slowed down. We did experience a substantial payoff quarter, but it wasn't as strong as we anticipated. As mentioned in our comments, we expect that repayment volumes may not be as high in the near future. The nature of these loans can be inconsistent quarter-to-quarter, but there remains a possibility that Q4 could still bring substantial repayments. At this moment, it's difficult to predict. Overall, I believe the trend is somewhat slower.

George Gleason, Chairman and CEO

And Kevin, your assumption that we view this generally as a positive was accurate.

Stephen Scouten, Analyst

Okay, great. Great. And then the biggest positive I thought in the quarter, to me, at least, was the relatively low deposit beta. I think that's a testament to the changes and mix changes that you've seen over the years. How are you thinking about deposit betas moving forward even as you've had to start tapping back a little bit into the brokered deposit realm? And kind of what are you seeing on new CD yields and where we could see those moving?

George Gleason, Chairman and CEO

Cindy, do you want to take that?

Cindy Wolfe, Chief Operating Officer

Sure. Thank you. Yes, we were relatively pleased as well. In the first quarter, we had a low of 23 basis points, and even though we've seen increases of 300 basis points since then, we are up 36 basis points overall. We're pleased with that progress, but we don't believe it's sustainable. We expect the cost of our interest-bearing deposits to increase, as we mentioned on Page 14. However, we will remain very strategic and disciplined in how we manage the funding of our balance sheet. I'll reiterate what we've said previously – we are still early in the cycle, and towards the end, our ability to avoid exceeding loan yield increases may begin to diminish. Nevertheless, we will continue to maintain our course and be both disciplined and opportunistic.

George Gleason, Chairman and CEO

Yes, and I would add to that. Our view is that deposit costs will increase faster in the current quarter and may ultimately surpass loan yields as we approach the end of the Fed tightening cycle, as we've mentioned for a couple of quarters. We are cautiously optimistic that we will experience another quarter of positive core spread and net interest margin expansion before a slowdown occurs. However, the key takeaway was the strong growth in our outstanding loan balances, which increased by almost $800 million, along with record growth in our unfunded loan commitments reaching $20 billion. As margins normalize towards the end of the Fed tightening cycle, the main factor for continuously improving net interest income is growth. This quarter demonstrated strong growth following three previous quarters of substantial growth in the unfunded loan number, and despite some abatement and paydowns, we are starting to see that translate into funded balance growth. The outlook for meaningful loan growth in 2023 and 2024 looks very promising, which I believe is the highlight of the quarter. This, however, did lead to an earnings per share miss compared to consensus because we needed to build reserves for that growth, but we would accept that kind of miss every single quarter.

Stephen Scouten, Analyst

Absolutely. Yes, that’s a great story. Just to clarify, do you have a number for what percentage of your RESG loans you have required to put caps on? I'm interested in understanding how you are protected from experiencing too much impact from higher rates with those numbers.

George Gleason, Chairman and CEO

Yes. We have no loans that have caps on our interest rates, but we do require our customers to purchase caps on their interest rate. So Brannon, you might comment on that.

Brannon Hamblen, President

Yes, Stephen, I don't know the percentage off the top of my head. It's definitely a majority and we have been very busy making sure those are documented as these rates have risen. And obviously, we have those in place. We have an assignment of that as collateral. So an important issue that we have been focused on in the past so that we’re prepared for the present as it relates to these rate rises. Again, not an exact percentage for you, but it’s the majority of our loans.

Operator, Operator

Our next question comes from Timur Braziler with Wells Fargo.

Timur Braziler, Analyst

Starting bigger picture, we heard from some other companies that they’re increasing caution on spaces like office, while OZK clearly see record originations and new office projects. Are we in or entering an environment where you’re starting to see some competition falling off? And I mean, it seems like that’s the time when OZK typically does best. So maybe just talk a little bit about the broader CRE markets today?

George Gleason, Chairman and CEO

Brannon, why don't you take that?

Brannon Hamblen, President

I'd be happy to. Thanks for the question. I would say that's an accurate depiction. Even last quarter, we discussed the same topic and noted that there are increasingly fewer competitors. I will also mention that our average loan sizes are strong and growing, and our capability to handle larger loans gives us a significant competitive advantage in any environment, but especially in the current situation. We are capitalizing on this opportunity, not only to engage in deals that we might not have been able to pursue before with strong sponsorship, but also, as I mentioned in the past, we are working with sponsors we've not previously transacted with. Additionally, in this kind of environment, we are improving our leverage and pricing as we operate in what is, to your point, a somewhat less competitive market.

Timur Braziler, Analyst

Okay, that's helpful. And then maybe on the expense front, as we look for accelerating pace of our ESG balances to kind of fund up over the next 2 years, is that infrastructure already in place? Or does the personal nature of the lending vertical or kind of accelerated hiring through the next couple of years?

Brannon Hamblen, President

Let me take that as well, George. I would say and we've talked about this quarter-to-quarter, obviously, our job in keeping, retaining and attracting new talent has been harder this year than ever. But I just want to give a tip of the cap to my team that has done an absolutely phenomenal job in actually improving the infrastructure at RESG. We've moved some things around, strengthened certain key departments and I would say that this year, we're in better shape than we have ever been. And to your underlying question, our ability to scale that is better than it's ever been. I mean we have yet another quarter of record number of loans that we closed in the quarter. So we have been historically and continue to look for ways to adjust and build the team such that it can continue to scale to deploy this good capital build that we've had over the years.

Timur Braziler, Analyst

Okay. And then maybe just lastly for me. How are valuations holding up for projects that are coming up for renewal? It seems like the pages in the management comments that kind of highlight that information were not included in this iteration?

George Gleason, Chairman and CEO

Yes. We took that out more because we just didn't feel like it was that material anymore as it was in the pandemic. We had that commentary in the management comments for a period of time. You saw as we have seen in the past, values going up and down on properties as they're reappraised. And Brannon, you may want to provide a little more color on that.

Brannon Hamblen, President

Yes. As with every quarter, we have reappraisals conducted. Some values increase, and some decrease. Overall, those changes were mostly within the range we've historically observed. Our hospitality sector is the area we monitor most closely. However, the results across other categories were quite similar to what we've seen previously, where most properties experienced a loan-to-value change of about 5% in either direction.

George Gleason, Chairman and CEO

We did have one hospitality loan that rose to a low 80s percentage loan to value, which is our highest loan-to-value loan. Conversely, we had three hotel loans that were cross-collateralized and featured in our previous chart, which were among our highest loan-to-values, but now they have improved in performance and their appraisals reflect better pricing. This illustrates the individual performance of those properties. As Brannon mentioned, most of the results are approximately plus or minus 5% from their original appraisals. In the hotel sector, some results are more extreme since certain hotel properties are recovering quickly, while business-oriented hotels reliant on business travel are recovering more slowly towards a normalized level. However, there is nothing material to report on that front.

Operator, Operator

Our next question comes from Catherine Mealor with KBW.

Catherine Mealor, Analyst

I wanted to follow up on the prepayment discussion we had with Stephen earlier. Looking at the bigger picture, how do you view the risks associated with balance sheet movements if paydowns increase from this point? Additionally, with a significant increase in origination volumes, there is a possibility that your balance sheet could expand considerably. I am not particularly concerned about this from a capital standpoint since you have ample capital. However, from a funding perspective, this could create additional pressure to increase deposits across your franchise. I am interested in how you plan to manage funding if your balance sheet ends up being much larger than anticipated next year.

George Gleason, Chairman and CEO

Yes. Well, Catherine, first, I would comment that I don't think we're going to see a huge drop-off in prepayments. Obviously, it was $1 billion something this quarter versus $2 billion something. But I think we're going to see a pretty regular stream of prepayments on loans. Secondly, I think we're very comfortable with our ability to fund our expected loan growth, even variations and cushions on that expected loan growth from deposits. And thirdly, we've got about almost $10 billion in unpledged securities, FHLB borrowing capacity and various other miscellaneous secondary sources of liquidity to tap into. So we've got a lot of liquidity sources. Our deposit guys are doing an excellent job and repayments will continue to be a source of cash flow. It will vary from quarter-to-quarter, but I think those are going to continue to be pretty meaningful.

Catherine Mealor, Analyst

Great. Can you provide any insights on where new CDs are currently being issued and what trends you're observing? Typically, your strategy involves adjusting rates across different markets at varying times. Can you generally discuss the new funding sources at the end of the quarter and give us an idea of the deposit betas we might expect in the coming months?

George Gleason, Chairman and CEO

That's a tough. I'm going to jump in for Cindy on that and just say it's all over the board, Catherine. So we are getting more aggressive on deposits, obviously which is in line with our comment that we expect deposit costs to rise more in Q3. And we're adding some duration and have been adding some duration in there that is helping in the management of those costs. But we are going to see higher deposit betas than the whatever it is, '21 beta we've seen over the last 2 quarters, Cindy, is that right? Is that a 2-quarter number, 2-quarter net? So that's coming there. And you also might have noted in our noninterest expense, an increase in advertising cost. We've got good momentum in adding core accounts and we're putting some money in the ad budget and expect to continue to hammer that. And it's brand awareness advertising, it's deposit specific product and pricing advertising as well as we've done a lot of advertising designed to enhance our ability to increase employment. The guys did some great work on that. And that has really helped us reduce our unfilled positions and get our retail branch infrastructure close to fully staffed. We're never fully staffed but we're a lot closer than we were less than half the number of openings that we had a couple of quarters ago. And that is really helping us serve customers and open new accounts and bring in deposits.

Catherine Mealor, Analyst

I have one more question regarding loan yields. The loan beta was very high, which is expected due to your variable portfolio. Is this a reliable indicator of how loan yields might increase with future rate hikes? I also want to confirm that there aren’t any significant prepayment fees or other factors in that figure that we should be aware of.

George Gleason, Chairman and CEO

Tim, do you want to take that?

Tim Hicks, Chief Financial Officer

Yes, Catherine. To your point, on the minimum interest and other fees that we get from time to time for payoff, that was a fairly average number within a range for the quarter. So nothing outsized there. And to your point, we've got 78% of our loans that are variable and the vast majority of those are off their floor. So it depends on the timing of when we get Fed increases, the timing of when LIBOR moves and SOFR moves and the timing of when our loans reprice, most of our RESG loans reprice in the first 10 or 11 days of each month. So all those kind of go into the equation of what would result in an increase in the loan yields. But there was nothing outsized from a minimum interest or any other type fee that was in this quarter.

Operator, Operator

Our next question comes from Matt Olney with Stephens.

Matt Olney, Analyst

I guess my question is similar to Catherine’s question around loan yields and loan betas. I guess, different perspectives. It seems like we’re probably now sitting above and beyond all the floors that we had a few months ago. So it seems like we could see even stronger loan betas in 4Q and 1Q than we saw in the third quarter. Any thoughts on kind of where we sit today versus perhaps earlier in the third quarter?

George Gleason, Chairman and CEO

Matt, I would like to comment on this, and Tim can add to it. Most of our loans in RESG have monthly repricing, occurring predominantly on the 1st, 10th, or 11th of each month. While there are some loans that reprice at different times, the majority follow this schedule. When we reported Q2 data as of June 30, a small number of loans were at their floors, but with repricing on July 1, 10, or 11, most of them moved above those floors. By the 11th of July, we could have stated that most of our loans were no longer at their floors, and by August, nearly all of them had effectively moved off their floors. So, we experienced nearly a full quarter's impact in Q3 without the floors limiting the adjustability and variability of that portfolio. Therefore, the Q3 loan betas are likely reflective of what we will see in Q4. Tim, do you agree with that?

Tim Hicks, Chief Financial Officer

Yes, I would. Yes.

Matt Olney, Analyst

Okay, that's helpful. And then I guess on the stock buyback plan, it was mentioned in the comment section that expires here in a few weeks. And I'm sure there's going to be a board discussion around the buyback. Any commentary, George, about what you'll be recommending to the Board with respect to the buyback next time?

George Gleason, Chairman and CEO

I’m going to defer that to Tim. He’s, as Chief Financial Officer, he’s in charge of capital. So Tim, that’s yours.

Tim Hicks, Chief Financial Officer

Thank you, Matt. As mentioned in our management comments, we have been quite active with this program, having repurchased over 12 million shares, which was more than 9% of the outstanding shares when we initiated it. While we've been very active overall, our activity in the current quarter has been limited, with only a few minor share repurchases. The program is set to expire on November 4, and we will need to discuss it with our Board later this quarter. We have not yet had that conversation, but we will engage with them to determine their preferences. As stated in our management comments in previous quarters, our main focus for capital usage is on organic growth. This quarter, we saw strong funded and unfunded loan balances, which allowed us to utilize some capital. We will continue to assess our program and our strategy with the Board as the quarter progresses.

George Gleason, Chairman and CEO

Yes. I want to emphasize Tim's point about organic growth. The positive aspect of our growth right now is RESG, which has consistently performed exceptionally well over the last four quarters, achieving record numbers of originations. While I can't predict if there will be more records, the pipeline appears to be looking good. More importantly, as noted in the management comments, all our other lending teams are also positively contributing to loan growth. We believe they are gaining momentum now, and we expect this trend to continue. Therefore, we are very pleased with the progress and traction we are finally achieving in diversifying our contributions to loan growth, in addition to RESG.

Matt Olney, Analyst

And George, just following up on your commentary on loan growth. It seems like in the past, the bank has been hesitant to give specific loan growth guidance given the variability of the paydowns, the originations and some of these can be quite large, obviously. As we move into 2023 and you feel better about the loan growth pipelines, do you expect to be able to provide more guidance around loan growth?

George Gleason, Chairman and CEO

Matt, I’m not sure. We want to ensure that the information we provide is reliable and accurate. We tend to discuss general direction rather than offering specific figures. As we head into 2023, I honestly can’t recall a time in my 43 years as CEO of this company when I’ve seen such an environment filled with variables and uncertainties across political, geopolitical, interest rate, and economic factors. Therefore, I don’t believe it’s appropriate to start giving specific growth guidance during such an unprecedented period. However, we feel very confident about what our RESG team has accomplished. Typically, we can anticipate about 3 to 6 months into the future based on their pipeline. We are also optimistic about the progress our other lending teams are making, as they are increasingly contributing to our growth. Just a couple of years ago, RESG accounted for over 70% of our non-purchased loans, but now it’s at 60%, which reflects the rising capacity of the other teams.

Operator, Operator

Our next question comes from Jennifer Demba with Truist.

Jennifer Demba, Analyst

Interesting comment you just made, George, about you don’t believe you’ve been in an environment where there’s more uncertainties. So I’m curious, banking industry is expecting more normal charge-offs in the next couple of years. What do you think a normal range of charge-offs is for OZK with your current business model and business mix?

George Gleason, Chairman and CEO

We've generally maintained an annualized net charge-off ratio in the high single digits to very low double digits for around 7 to 9 years, with one exception. If you take a look at the chart on Page 16, you'll see the specific number.

Tim Hicks, Chief Financial Officer

Figure 15.

George Gleason, Chairman and CEO

Figure 15 in the management comments, I think you can sort of do a regression analysis on the last decade and decide where you think our net charge-off ratio normalized is.

Jennifer Demba, Analyst

Do you think the recession that we face in ‘23 is going to be a garden variety of recession? Or do you think it’s going to be worse than many think?

George Gleason, Chairman and CEO

Jennifer, I studied economics but I don't see myself as a practicing economist. However, it's difficult to envision a significant recession when employment levels are so high. Our indirect marine and RV business makes up around 12% of our non-purchased loan book, and I constantly monitor the past due and charge-off numbers from that portfolio. They have remained stable, showing minimal fluctuation. Other banks that have reported their earnings have indicated that their consumer portfolios are holding strong, and we share that view. Our RESG portfolio is also performing well. Regarding the office sector, we received news recently that a project we financed has signed a second large lease of 108,000 square feet. Business transactions are still occurring, and companies are hiring and expanding into new office spaces, largely due to the high-quality modern office buildings we finance. I'm hesitant to invest in lower-grade office spaces in this climate, but business is still thriving. From both consumer and business perspectives, it's challenging to predict a significant downturn. The Federal Reserve is raising interest rates at an unprecedented speed, amidst various global challenges such as supply chain issues and geopolitical tensions. Despite these risks, the U.S. economy appears to be performing well. The Fed seems committed to increasing rates until some negative consequence arises, and many of us are curious about what that might be. I hope they can implement a few more rate hikes and then pause early next year to assess the effects of their actions on the economy. If they continue to raise rates to 6% or 7% due to persistent inflation, they may cause harm unnecessarily, though it's unclear what that might entail. We'll observe how this all unfolds.

Operator, Operator

Our next question comes from Brian Martin with Janney.

Brian Martin, Analyst

Just wanted to touch maybe for Brannon or I guess you, George, just on the RESG, you talked about obviously firing on all cylinders since the last 4 quarters. But I mean, I guess, with the unfunded growth where it’s at, I guess, how are the pipelines there today? It sounds like they’re still pretty good, maybe not at record levels, like you’re saying. But I guess, are you still optimistic on that ability to continue to grow today, given kind of the conditions we’re seeing and what you’re looking forward at here? Just some perspective there given how strong it’s been the last couple of quarters?

George Gleason, Chairman and CEO

Yes. Brian, I'll give you my comment and then Brannon can give you the details. But the pipelines are off their peaks. And clearly, inflation is driving up the cost of construction and materials cost. We have seen some sponsors putting projects on hold because they believe that materials cost will come back down next year. Obviously, interest rates are adding to project cost and eating into cap rates and valuation. So I think there are projects that are getting put on hold just because of that. But notwithstanding that, the pipelines, I wouldn’t say are as robust as they were but I would say they’re still good by historical standards. Now Brannon is on pipeline calls every week and I’m on them occasionally. So Brannon give some additional color to Brian on that.

Brannon Hamblen, President

Sure, Brian. George has accurately captured the situation. It largely depends on the market. I often highlight our capability to handle larger loans compared to many of our competitors. This often comes with more significant and appealing sponsorship arrangements. These sponsors possess the endurance, long-term vision, and capital necessary for us to offer very attractive leverage loans. It's not just about leverage; it's about favorable conditions for our loans. Week-to-week during our pipeline calls, I sometimes think the volume will keep declining, but then in the next call, we find that the team has secured more appealing opportunities that are now ready to proceed. It’s taking longer for deals to progress these days, as sponsors are thoroughly evaluating costs and value engineering. As George mentioned, throughout this time, interest rates have been climbing. While we have moved away from our peak activity, there are still numerous attractive opportunities to secure some impressive loans nationwide. The pipeline may not be as strong as it has been historically, but we're approaching it one quarter and one deal at a time, and I believe we will uncover some significant origination opportunities.

Brian Martin, Analyst

That's helpful. Could you discuss the diversification benefits you've gained from other segments? Specifically, where do you see the most potential over the next 12 months in these businesses? Are there particular segments that you believe have greater upside as things progress?

George Gleason, Chairman and CEO

Our Corporate & Business Specialties Group and Asset Based Lending Groups are areas where we've got some good traction. We've made some good progress this year. We expect that to continue. Our indirect and marine business, I think, probably grows but at a fairly slow rate, I would guess that it kind of stays in that 10% to 15% target range of our total loans. And probably stays in that kind of 11% to 13% range. I could be wrong giving such tight guidance on that. But I think they replace what rolls off and add some and more or less grow in tandem with our balance sheet. The Community Banking business, we've got a lot of different teams there. Obviously our homebuilder finance team is probably going to see less volume. Some of our other lending teams there seem to be seeing more activity and some growth. So, I think all of these units contribute to our growth and contribute at a greater percentage to our growth starting in about '25, '26 and '27. And Catherine Mealor in her comments asked about the future repayments from the wave of RESG originations we've had. And I think we will have from this year's originations in late '24, '25 and '26, a lot of RESG repayments. But we believe in executing our strategy with the belief that over the next 2 years, these non-RESG units are going to contribute more and more originations in that there will be a bit of a handoff on momentum, not that RESG will not ever be our largest piece of business probably and largest team and most effective team. But I would think as we catch that next wave of RESG repayments that mute its growth for a year or two, that these other business units will really shine as our engines for growth in that period of time. Now I'm talking 3 and 4 years out and, Tim, gets nervous when I talked 3 and 4 years out because lots of things can change but that is our strategic plan on how we're going to handle that next wave of RESG repayments as have these other diversified business units continue to grow as they have done this year and contribute more and more to growth going forward. I think that balances out the growth trends of our portfolio and I think all of our investors would like to see a more diversified steady sort of growth rate to the portfolio.

Brian Martin, Analyst

Yes, that's helpful. And then maybe just one last one for me, maybe for Tim. Just on the expenses, I know you kind of gave a little bit of color on just kind of how that trends look over the near term? But just broadly, as you look to next year on the expenses, Tim, just how should we be thinking about the growth and the inflation impact and additional hires, just kind of high level, just kind of the outlook there?

Tim Hicks, Chief Financial Officer

Yes, Brian, thank you for the question. We were pleased to increase our noninterest expense during the quarter while also improving our efficiency ratio, which was a highlight. As George mentioned, we had good momentum in hiring, bringing on over 120 new employees during the quarter. We expect to maintain this momentum into the fourth quarter and have more positions to fill, which we are optimistic about. I anticipate that our total noninterest expense will continue to increase by several million each quarter. Going back to our comments from the January call, we mentioned all year that our noninterest expense would likely rise by several million dollars each quarter, depending on our hiring pace. We didn't see that in the first half of the year due to challenges in increasing headcount, but now we have that momentum going into the third and fourth quarters. Thus, I believe we will keep seeing an increase in noninterest expenses. We are investing in our growth as a bank and in our people. We expect our advertising and marketing expenses to remain elevated at the levels seen in the third quarter to support our growth and brand recognition. Overall, our expense growth is designed to support the business's expansion, which we view positively.

Brian Martin, Analyst

Yes, that's helpful. A key point is that you are not expecting significant growth in 2023, just normal growth to support the business, and nothing unusual on that front as you mentioned. Thank you for the commentary and great quarters, everyone.

Operator, Operator

Our next question comes from Timur Braziler with Wells Fargo.

Timur Braziler, Analyst

Just maybe a couple of modeling questions. I was wondering if you have the spot rate on deposits exiting the quarter?

George Gleason, Chairman and CEO

I'm not sure I understand your question, Timur.

Timur Braziler, Analyst

The cost of deposits at quarter end versus the average that was provided?

Tim Hicks, Chief Financial Officer

You're talking about for the month of September?

Timur Braziler, Analyst

Yes, for the month of September, at the end of September.

Tim Hicks, Chief Financial Officer

Yes, I think we were 20-something basis points higher in the month of September than we were for the quarter as a whole. I can't remember if it was 20 or 22, somewhere in that range.

Timur Braziler, Analyst

Okay. Got it. And then just lastly, as we think about the allowance level for the funded RESG balances to start kind of growing in the next couple of years, it looks at the reserve on the unfunded loans is a little bit lower than what the total reserve is on kind of a reported basis. So as those loans fund up, is the expectation that additional reserves are added? Or are they kind of evaluated at that type of funding?

Tim Hicks, Chief Financial Officer

You're right that our RESG funded allowance percentage is lower than the overall allowance percentage unfunded balances. So it depends on the mix. I mean it depends on the mix of growth of whether that comes down or not. It also depends on the economic environment we're in as well. But as we said in our comments, the provision expense that we had during the quarter was primarily due to growth in the funded balance and unfunded balance and the view that the environment, macroeconomic environment has a lot of risks and uncertainties in it right now. So as the environment improves, that would be helpful to our reserve levels as well.

George Gleason, Chairman and CEO

I would like to mention that RESG constitutes the majority of the unfunded loans, and we previously disclosed that unfunded loans make up 60% of the funded loans.

Tim Hicks, Chief Financial Officer

87% of…

George Gleason, Chairman and CEO

RESG is 87% of the unfunded loan balances and 60% of the funded loan balances. Our allowance allocations on RESG loans because they are so much lower on average loan to value than other loans from other lending teams in our portfolio tends to be quite a bit lower. So that's part of that differential in the ratios there, Timur.

Operator, Operator

Okay. And I'm not showing any further questions at this time. I'd like to turn the call back over to management for any closing remarks.

George Gleason, Chairman and CEO

All right. Thank you, guys. We’re glad you were with us today. We enjoyed getting to report on what we thought was an excellent quarter. We look forward to talking with you in about 90 days. Thank you. That concludes our call.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference. You may now disconnect and have a wonderful day.