Earnings Call Transcript - OZK Q1 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to the Bank OZK First Quarter 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jay Staley, Managing Director of Investor Relations and Corporate Development. Please go ahead.

Jay Staley, Managing Director of Investor Relations and Corporate Development

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; Brandon Hamlin, President; Cindy Wolfe, Chief Operating Officer; Tim Hicks, Chief Financial 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, Tanya, to remind our listeners how to queue in for questions.

Operator, Operator

And 1 moment for our first question, which will come from Manan Gosalia of Morgan Stanley.

Manan Gosalia, Analyst

Hi, good morning. The first one is just around the CIB, strong growth again this quarter. And I guess I appreciate that you guys are growing in attractive markets. You're building teams. But at the same time, we continue to hear across the board that competition is growing. I guess the question is, how do you assess risk in that business? And I guess, what, if anything, would cause you to pull back there?

George Gleason, Chairman and CEO

All right. Jake, do you want to take that? Thank you for the question, Manan.

Jake Munn, President, Corporate and Institutional Banking

Great to catch up with you and hear you. Good question. We continue to grow at a steady clip, as you mentioned, within CIB. Across all of our major business lines this quarter, we had really some nice success in generating over or nearly 2 dozen new relationships, upsizing nearly a dozen legacy relationships. And so we continue to see some nice growth across all of those. You have a good point there. What we're really building here, and you need to remember is it's a diversified C&I. And so it is not a CIB business that's focused in on niche. These verticals encompass over 42 different industry niches in particular. And so it's allowing us, whether that's through ABLG, CBSF, EFG, fund finance, LFG, NRG our franchise capital solutions that we mentioned, we launched this last quarter. We're creating a really diversified book within CIB that allows us to take advantage of opportunities within those specific industries and push into them. So if we see a slowdown or increased competition, or increase or decrease pricing, let's say, in ABLG, it affords us the opportunity to push more into our CBSF or NRG business lines. And so that diversification that we're building within CIB is allowing us to continue to grow at a nice clip in a way where we're not taking on any undue credit risk.

Manan Gosalia, Analyst

And are you seeing any spread compression in certain businesses that has caused to pivot into others?

George Gleason, Chairman and CEO

We are exactly, yes. So in our ABL G are some of our large corporate opportunities there, we have seen some pricing compression. And so we've switched that and moved downstream a little bit more towards the middle market, single lender opportunities, in particular, if we look at our fund finance business line, we've had to pull back a little bit in our capital call subscription facilities just due to increased pressure there, specifically from nonbank lenders and then insurance companies who have really entered that market and pushed down a little bit on pricing. And then if we're looking at our lender finance group, too, in our lender finance group. We've seen some pricing and structure compression there, too. So again, there's been some competition in those business lines. But as a result, it's allowed us to push in a little bit more within our CBSF, EFG, and our NRG business lines. And so again, the diversification and the nature in which we're building CIB is affording us the opportunity to continue to grow without giving up yield and without sacrificing credit quality.

Manan Gosalia, Analyst

In terms of modeling out NIM, we noticed significant growth in securities quarter-on-quarter. Can you provide insights on what you're adding and how we should project yields in that portfolio beyond the guidance of $460 million to $470 million for the next quarter?

George Gleason, Chairman and CEO

Tim, do you want to jump in there? Jim, go ahead.

Tim Hicks, Chief Financial Officer

Yes, sure. Manan, we early in the quarter, took the opportunity to use some of our excess liquidity and buy a decent amount of investments during the quarter and enhance our yield. About 40% of those are in municipal housing bonds and 60% are in mortgage-backed securities. Those both have favorable yields. The municipal housing bonds have a tax equivalent yield of around 6% and the mortgage-backed securities are somewhere around the 460 range or better. So these are agency mortgage-backed. So we saw good growth there. We gave you some guidance on where we thought the range would be for yields for that portfolio. We had a nice pickup in Q1, and we'll see another nice pickup in Q2 and then from there, we'll see what the market brings to us on opportunities. But the team did a great job of finding good yielding attractive high-quality investments, and that's going to certainly help us on NII during the quarter and will continue to help us throughout the year.

Operator, Operator

And our next question will be coming from the line of Stephen Scouten of Piper Sandler.

Stephen Scouten, Analyst

I guess the first question would be around commentary within the management document around 2027. You guys seem pretty upbeat about the potential for the bank in 2027, both in terms of growth and maybe even resolution progress within RESG and the resumption of growth within that book. So I'm wondering if you could give any additional color as to what kind of driving that confidence, whether anecdotal or more concrete that would kind of give us a view into that progression?

George Gleason, Chairman and CEO

Yes, Stephen, happy to address that. Obviously, Jake's already spoken about CIB and diversification, the new areas we're pushing into their CIB will be the predominant growth engine we would expect in 2027 as it has been last year and will be this year. So we expect that leadership to continue from the CIB group. We're continuing to add people. We're continuing to push into other verticals there. RESG may not be a great source of growth in 2027, but we're looking for a slowing of the headwinds from RESG repayments in 2027. It may be 2028 before we actually see significant growth there. We would expect our indirect lending group to continue to grow nicely. It stayed steady at 12% and sort of pushed up to about 13% of our portfolio. That portfolio is a very high-end prime, high prime, super prime consumer portfolio, and it has continued to just perform very well and very consistently. And we expect to get some more growth out of our commercial banking, community banking group next year. So we think the headwinds from RESG repayments ease quite a bit in '27. We expect these other business lines to actually accelerate a touch more in '27 contributing to that better incremental growth we're seeing that year. The other thing that I think is important is we're building a number of other and investing to build a number of other fee-generating businesses. We're putting increased emphasis on trust and wealth. We've got a mortgage group that we've been building for a couple of years now that continues to gain scale. Although the mortgage business is not a hot business right now, we think it will improve, and that unit will gain more scale. We're continuing to grow our fee income through treasury management and improving what we're doing there a lot and probably the biggest source of fee income opportunity just as far as growth is in our CIB group, where there are a number of fee-based businesses and opportunities we're tapping into. And I think you'll begin to see that incrementally add some noninterest income in subsequent quarters this year and really hit a good pace in 2027. So we're fairly optimistic about 2027.

Stephen Scouten, Analyst

Got it. Really helpful color, George. And then I guess my other question would be maybe similar to Manan's question in a way, but thinking about CIB, I mean, with RESG, we've all known you guys to have a best-in-class platform for the last 20 years or so you've shown a differentiated model. How do you give investors confidence around the pace of growth within CIB and that there is a more differentiated model there as well that we should have the same level of confidence as you grow that this rapidly similar to the results you've delivered in RESG over the life of that business?

George Gleason, Chairman and CEO

Yes. Great question. Thank you for that. I'm going to let Jay answer part of that question. But before he does, I'm going to tell you a couple of things. Number 1 is talent and leadership are critically important in our company. And Jake will talk a little bit about talent as he answers your question. And the other thing is we've really built CIB aligned with the way we have built and approached RESG, and that is you're going to look at a whole universe of opportunities all over the country. You're going to focus on a very narrow subset of that universe that meets your criteria for quality of credit, profitability and relationship building, and then you're going to close those transactions with very intentional bank protective documentation, you're going to service and manage those assets in a very engaged way so that you see early warning signs you're able to influence behaviors and move those transactions in a way that is conducive with bank standards and objectives. So Jake, I'm going to let you talk about your team and why, given the growth you're experiencing and projecting to experience you're comfortable with what we're doing.

Jake Munn, President, Corporate and Institutional Banking

Yes. George, I appreciate that. And Steve, good question as usual. It's really about building an infrastructure that's scalable to George's point. So when we got over here and we started to develop CIB in a very similar form in fashion, RESG has started with building out a really strong portfolio management and operations team. And so our portfolio management, our underwriting, our quarterly status reporting on every single credit we do within this book of business, our operations teams that sit within PMO that ensure from beginning to end it's a clean and crisp process for our clients as they're onboarded and serviced through the life of their relationship with us. And then it's also building out something that's scalable from a cross-sell and product and capability standpoint. George mentioned that answering your last question about fee income. But if you go back a couple of years ago, to where we are now. We've really developed some nice additional business lines that support the needs of our clients and our communities, but also will assist in generating some really nice noninterest income. So whether that's our syndications desk that's afforded us and blessed us with the opportunity to now lead more deals as admin agent, whether that's our interest rate hedging capabilities, our foreign exchange capabilities, whether that's our capital markets program that we have that allows companies to access the capital markets with our partnership that we have there for whether that's our great treasury management platform that Cindy and Chad continue to develop and build out, we really have the products and the capabilities now to grow with the company and scale with the company over the long-term horizon within the C&I space. And then to top it all off and really the most important part that George hit on, it's all about talent. At the end of the day, we're in the business of people. We're banking people, we're banking communities, we're banking businesses. And so attracting the right talent who has a like mind for credit who has the fire in their bellies to say, to get in here and roll up their sleeves and make a difference. That talent is really what's been differentiating us. And so put it all together, we've developed all the products and capabilities that are needed to scale this business. We have a great foundation with our portfolio management and operations team. And then we've sat here and developed and bolted on complementary business lines. So whether it's our asset-based lending or corporate banking and sponsor finance, our equipment finance, our lender finance, our fund finance, our Natural Resources Group and now our franchise capital solutions. We're just getting started. There's a great market out there. We're being highly selective in what we're doing to George's point, our pull-through rate on our more mature businesses is still around 14%, 15%. And so we are passing on 80%, 85% of the deals we see in the market, whether it's a credit or a pricing-driven path but being highly selective in who we bring on, being highly selective in the products and services that we're launching into the market to ensure that they're best in class. It's all really working out well for us, and we're seeing nice continued growth and true franchise growth, really built one relationship at a time.

Stephen Scouten, Analyst

That's extremely helpful color. And positioning it like RSG was built is something I wasn't fully aware of. So thank you for going into that detail. I appreciate you.

Operator, Operator

And our next question will be coming from the line of Brian Martin of Bain Capital.

Brian Martin, Analyst

Sam, maybe just 1 on the margin. I know you gave a little commentary in the management comments, but just thinking about if we don't see any changes in rates here in the near term, just thinking about kind of the comments in the release about the pressure that you may be upward pressure you may be seeing on the deposit side? And then secondly, just trying to understand with the growth in CIB, how much of that is variable rate versus fixed rate? Just kind of how to think about the margin in the stable environment, given kind of the changes here on the loan mix and then just maybe what funding pressure you're seeing?

George Gleason, Chairman and CEO

Cindy, you want to talk about deposit pricing, and then we'll jump to Jake on his CIB pricing.

Cynthia Wolfe, Chief Operating Officer

Sure. Thanks, Brian. Well, we did see competition increase last quarter. We've seen that before. So I'm just really proud of Audi Curley, our Chief Banking Officer and his team for actually reducing rates by 18 basis points in spite of that and growing we have an incredibly talented machine that manages to synchronize our deposit growth right along with our loan growth, which you can see remains a good kind of challenge with CIB and their success. So we're poised to continue to do that. And we also have a veteran leader of government and institutional banking, Drew Harbor. So we have a great mix of very large depositors and yet we remain average balances of our depositors of $52,000, which really, when you do the math of just under $2 billion in growth over the last year, it just represents an incredible amount of hard work every day by our retail bankers and our commercial bankers in our 255 offices. So we're going to continue to do that. And we're cheering RESG and CIB and our other bankers on in their growth, and we'll continue to perform really well.

George Gleason, Chairman and CEO

Jake, do you want to talk about CIB pricing?

Jake Munn, President, Corporate and Institutional Banking

Yes, sir. So on the CIB side, it's predominantly a variable floating rate book. Very rarely do we balance fix outside of our equipment finance group. If a client has a desire to fix rate, we offer them through our interest rate hedging solutions desk, the opportunity to swap their loan and then artificially fix as a result, which would generate additional noninterest income for the bank. It continues to be a bit of hand-to-hand combat out there on these deals as it relates to pricing. I know Manan had a question earlier about pricing and any compression we're seeing in specific business lines. Again, the beauty of what we're building is the nature of the diversification though, so we can pull on the levers and push into the business lines where we can get a little bit better yield. If we look at our legacy book versus the new deals generated this last quarter, there was actually about, call it, a 12 basis point uptick on the average spread and so we're actually leaning into the market and pushing on pricing. I know I'm actively challenging the teams. The business line heads are challenging the teams. For sure, George and Brandon are challenging the teams to go out there and try to really get the best yield possible for the bank. And then the final thing I'll say there, aside from the rough spread on these opportunities that we're looking at, if we go back to the comments earlier about our loan syndications and corporate services, in the various business lines and noninterest fee income that they can generate. If we go back to our treasury management platform and all the hard work and time that Cindy and Chad are putting into that. We talked about our trust and wealth it goes on and on the products and services that we're building to be best-in-class out there that will allow us to continue to drive and really ramp up that noninterest income over the long term, which makes us even more competitive in the market. And then lastly, I'll just say it's important to remember that this is true relationship lending that we're doing within CIB. If we look across the CIB book of business, over 97% of those relationships or either single under direct deals where we get 100% of the wallet. So everything from deposit accounts to treasury management to interest rate hedging, et cetera, or it's club deals, 2 bank club deals, where we're splitting that wallet or in the case of broad syndications, over 95% of all the syndications we're in, we're either in the driver seat or the passenger meaning we're an admin agent or a JLA or like title. We really have no interest in going out there. We're not buying books of business within CIB. We're not going in as participants. We really want to be a thought partner for these relationships. So as a result, we're starting to see some really nice movement there with fee income, but also the opportunity to augment and impact the structure and the actual pricing of these loans long term.

George Gleason, Chairman and CEO

Brian, I would close up with this thought. Our long history is to be very profitable and that profitability is driven by margin. And while it's a very competitive deposit environment now, a very competitive loan environment, if you look around our peers in the industry, that 420 net interest margin we have is really strong. And that focus as Jake described, and as Cindy described on both sides of the balance sheet on really, really trying to get every basis point of yield or reduce every basis point of cost is just inherent in our culture and that drives our profitability metrics well above the industry.

Brian Martin, Analyst

No, that's helpful. So yes, I think I've got your message there. So thank you for the insight there. And then maybe just my follow-up just would be in terms of credit quality, just looking at the reserve maybe coming down a touch this quarter, but just your NPAs and criticized were up a touch in the quarter. But I guess, more importantly, the commentary seems to suggest that you're a bit more optimistic on just the environment. So just kind of trying to think about how you're thinking about credit here as you go over the next couple of quarters if we see a bit more resolutions and just given it seems the tender is a bit more positive.

George Gleason, Chairman and CEO

The economy we're currently navigating has shown unexpected resilience despite the surrounding noise. There is a lot occurring globally, yet the U.S. economy continues to perform well. Our indirect lending business constitutes 13% of our overall business and, while it focuses on higher-end consumers, we are observing very stable and positive credit results. Jake's area is also performing well in terms of credit, with favorable trends in net income, EBITDA, and cash flow coverages from our customers. Our RESG portfolio, which includes multifamily, industrial, and condos across the country, is solid and yielding promising results. However, we have encountered challenges in land, office, and life science segments, which vary by transaction and region. In pro-business areas with low taxes and incoming migration, those assets are thriving. Conversely, regions facing increased tax burdens and less business-friendly conditions, along with population out-migration, are seeing struggles. Overall, we perceive the economy as quite stable, with challenges mainly limited to certain property types in affected areas. We have five RESG loans that we’ve discussed, and the sponsors are actively working on two recapitalization opportunities, one of which already has a signed letter of intent. Two out of the five are engaged in a sales process, and the fifth is seeing interest from several potential buyers. These five loans account for most of our past due and non-accrual loans. While it’s uncertain how many of these transactions will close, we believe that at least some will close soon. If they don’t, we’ll move to the next opportunities. We remain optimistic about the interest in these assets and believe we will encounter some bumps in asset quality within the office and life science sectors. Nevertheless, we feel we are nearing the end of this cycle and are addressing these challenges effectively.

Jake Munn, President, Corporate and Institutional Banking

Brandon, do you have anything to add on that or would you like to discuss what we're observing in leasing and related areas?

Paschall Hamblen, Executive

Yes. I want to emphasize the great summary of our perspective on various property types like condos, multifamily, and industrial. We have a significant amount of industrial space, and we're seeing a lot of industrial leasing activity in our projects, which is encouraging. On the office side, although it's market-specific, I'm also optimistic about office leasing as we're starting to see some positive signs. Life science is indeed facing challenges, but in specific markets like the Bay Area, the AI sector is creating opportunities for our life science product, which can be adapted for life science or traditional office use. We have two projects that are attracting tech and AI users, showcasing how this trend is developing within our portfolio. Overall, while there are various challenges ahead, we're seeing resilience in our portfolio, particularly in the office sector, and I'm pleased to see some progress there. That's what I wanted to add.

Operator, Operator

Our next question will be coming from the line of Michael Rose of Raymond James.

Michael Rose, Analyst

Maybe just a bigger picture question just on a lot of the efforts that you guys have ongoing, specifically in CIB. You noticed in the management comments that the headcount is up from 18 to 97 new vertical this quarter, you're building out some of the fee income verticals. Certainly, I understand the expense guide. But George, I just wanted you to frame this kind of longer term. At some point, the significant buildout will probably begin to slow. It seems like that could be in 2028, which could be at the same time that RESG balances begin to inflect higher after heavy paydowns. So I guess my question is, when do you expect to see the higher levels of expense build decelerate? And then it seems like 2028 could be a pretty significant year for operating leverage from just thinking about it conceptually. So would just love some longer-reaching thoughts on all the efforts that you guys have done to date and as we look forward?

George Gleason, Chairman and CEO

I appreciate the question, Michael. I'm reluctant to give a lot of guidance on 2028. That seems like a long time into the future. But I think your premise is correct that we will reach a point with CIB where the percentage increase in their headcount and the percentage increase in their expense base will decline. Now Jake mentioned, we've got right now access into 42 different business and industry groups with CIB. If you look at the broad breadth of CIB that number of business and industry groups could be 100 or 200. I mean there are a lot of places we're not in. And I think the expectation is that, that business is going to continue to grow, continue to grow and continue to grow. But if we had 3 verticals in a year, or 2 verticals in a year. And 3 years from now, we had the same 2 or 3 verticals every year. The percentage increase from that subsequent addition is going to be less. There are also a lot of geographies that we're not in that we would like to be in with the CIB platform in the markets that we already serve on our commercial community banking business. So there's a lot of room to build out. And CIB is designed so that the speed of that build-out is geared to their volume of business and the profit margins generated by that business. In the early conversations that Brandon and I had with Jake understood that we didn't want to go out and spend of expense and have a dead start on that, that we needed to take the teams that we had incorporate them into CIB and get them really lined up with the CIB vision, and we needed to add people incrementally as the business was growing, and we were paying for those and creating more profits in CIB. And that will continue to be the approach going forward. So if I overhead grows 20% per annum. That's going to mean that their revenue is growing more than 20% per annum. So there's going to be a positive operating leverage from the continued growth an expansion of CIB. I would hope and our goal is that is we're building out more infrastructure and treasury management, more infrastructure and trust and wealth, more infrastructure and mortgage that you're going to see the same things. Now we're earlier in the real build-out and expansion of those. But I would expect you would see those gain positive operating leverage as we go forward. And to the earlier question of where does our efficiency ratio go I hate to apologize for a 39% efficiency ratio, that's a pretty good number. But we would like to see that in future years. Begin to work back down to our more custom ratio over the last decade. But it will stay in that high 30s range this year and maybe into next year, while we're building out some of these businesses. But they are designed long term to achieve positive operating leverage. Now there's no way we're going to run a much expanded trust and wealth business that doesn't have a 50-something percent efficiency ratio or mortgage business that doesn't have a 60% or 70% efficiency ratio. But the operating leverage that we will get in other businesses, I think we'll even those things out and let us get to a longer-term slightly improving efficiency ratio.

Jake Munn, President, Corporate and Institutional Banking

And George, real quick, just to run off of your thought there on CIB. I think it's important to note, too, as we continue to grow and expand CIB, again, the beauty of what we've built. We've got a credit analyst training program as an example in there. So over the long term, you'll see us hiring less portfolio managers as we have analysts and associates coming out of our in-house training. And so when you kind of put all that together, we ran this analysis at the end of last year, the folks on average we're hiring in this year have a lower average base salary and expense carried than the year before, and we can make the assumption that next year, that will continue to reduce in theory, right, as we're building CIB will need less chiefs and more Indians for lack of a better term. And so we'll continue to staff in that way in a very thoughtful and strategic fashion where we hope to continue to improve the efficiency ratio within CIB itself.

George Gleason, Chairman and CEO

Good comment. Thank you.

Michael Rose, Analyst

No, that's helpful information. I wasn’t looking for specific guidance, just trying to understand the situation better, but it seems like you all have many years ahead to continue building the business. So, perhaps the best way to put it is, would you describe the build-out as still in the earlier to mid-stages rather than the later stages? It seems like based on what you've said, that's where we stand.

George Gleason, Chairman and CEO

Well, Jake made the comment in his earlier remarks that we were just beginning. I've written enough checks to our expensive people that I don't feel like we're at the beginning. But yes, we're in the early stages of achieving CIB's potential. And we've commented I think we commented in the management comments in me, Tim, that we expected in 2027 that CIB would pull up even with RESG as far as portfolio size. And given the momentum it has it's expected here that it's going to pull ahead of RESG, at least until RESG gets that next wave and wind of origination opportunities that come from a more stable commercial real estate, more balanced commercial real estate market.

Jake Munn, President, Corporate and Institutional Banking

In mind or 2, that headcount in CIB includes services that are enterprise-wide. So the syndications desk, interest rate hedging, et cetera, we're adding people that don't just benefit the growth of CIB but are going to benefit the growth of the institution as a whole in our noninterest income in future periods.

Operator, Operator

And our next question will be coming from the line of Matt Olney.

Matt Olney, Analyst

I want to go back to the discussion around credit trends at RESG. And I think investors are looking for this inflow of newly identified substandard loans to slow? I counted 3 new loans identified in the first quarter from your management commentary. Thank the 2 in Seattle University, 1 in Boston Life. As you look at the RESG portfolio and recent upcoming appraisals and considering the conversations with sponsors, what are your expectations for the incremental inflow of new RESG loans into that substandard bucket?

George Gleason, Chairman and CEO

That's a great question. What I would tell you, Matt, and I want Brandon to weigh in on this is we as we've said multiple times, we will probably have a few more sponsors who just reach a point they cannot or will not continue to support their transaction. So I would expect there will be some further inflow we've done a real good job of liquidating. Last year, we had 4 properties in foreclosed assets at some point during the year from RESG, we sold 3 of those last year. So we've done a good job of liquidating. We've had several substandard loans that we liquidated out with the collaboration of our sponsors. So I think you'll see assets come in and assets go out of that. The other thing I would tell you is, and you mentioned appraisals, we are at a low leverage point on these loans. And for us to take a loss on the loans, all of the common equity, all of the prep equity, all of the mess that you got to burn through all of that to get to a point that we take a loss on these loans. So a lot of the assets that we've had resolution on, we've had no loss and the losses have been fairly well contained given the size of credits on the ones that we have had losses on. So I think you'll see assets come in and assets go out of that group. We'll do a lot of very collaborative work with our sponsors to help them work through this environment. I think our guidance we've given on net charge-offs and so forth is good guidance, given the loss content in those loans that are likely to pop in and out of classified status. Brandon, you might want to add color on that.

Unknown Executive, Executive

Great summary, George. I want to emphasize that we have been very careful with our reappraisal process within the portfolio, as mentioned in our comments. We have kept these appraisals up to date. You may have noticed that there were fewer appraisals leading to increases in loan-to-value ratios, most of which remained within a range of plus or minus 10%. As we stated, we believe we are in the later stages of the cycle. There are always new factors to consider each quarter, with the recent conflict in the Middle East adding to the uncertainty. However, as George pointed out, the underlying economy appears to be quite resilient. We're observing strong leasing activity. While there may be projects where the sponsor ultimately cannot or chooses not to continue supporting the deal, our team excels at monitoring the status of these projects and ensuring we stay updated on ratings. George’s comments reflect our perspective on the future accurately.

George Gleason, Chairman and CEO

Brandon, I'm glad you pointed out the appraisal and for those on the call that didn't focus on a figure 28 and the narrative around Figure 28 in our management comments, 50% of the total RESG commitments have been appraised within the last 4 quarters and 92% have been appraised in the last 8 quarters. So the only appraisal is a loan that has a $1,500 nominal balance on a project that is sort of stalled and we'll never fund beyond $1,500. So that's the only pre-2023 appraisal on the book. So we're very current on the appraisals and continue to recycle those and renew those, keep them up. So we feel pretty good about that.

Matt Olney, Analyst

I appreciate the commentary on that. And just as a follow-up, kind of a similar question, but more on the foreclosed asset bucket. I think that balance is $150 million, mostly 3 RESG properties. I get these properties are all unique, but it feels like there could be additional foreclosures this year. So trying to anticipate if we should see that balance move up throughout the year? Or do you expect those existing 3 properties to move off the balance sheet?

George Gleason, Chairman and CEO

We're working on all of those and there are discussions going on regarding all of those, particularly a lot of discussions around the oldest one of those and several discussions going around the Chicago property. So I would hope that we'll over the course of this year move some or all of those assets off the books. I repeat what I said earlier last year, we had 4 in that category. We moved 3 of them off during the year. One we didn't move off is that Los Angeles land. We've got a lot of activity on that right now. I would point out that we did make $12 million in contract extension fees and for earnest money off the last contract we had on that, that never closed. So we'll work those things actively. It's premature to try to project what the outcome will be on that. But I would be surprised if over the course of the year, we didn't move some of those assets.

Operator, Operator

And our next question will be coming from the line of Catherine Mealor of KBW.

Catherine Mealor, Analyst

We've spent a lot of time talking about the life science book and the office book. I wanted to see if we could get specific picture update on your multifamily book, maybe in 2 pieces. First, on just level of prepayments you're expecting in that book. It feels like that was the sector that was leading a lot of your prepayments over the past few quarters. And so our view on that moving forward, especially given the new rate environment. And then also in just credit and appraisal activities. To your point, the appraisals feel like they're coming in better than we've seen in some past quarters. So just kind of an update on the health of the multifamily book?

George Gleason, Chairman and CEO

Yes. I'm going to let Brandon take the multifamily. And yes, the degree the rate of change in the appraisals is less significant than some of the earlier appraisals were in the last couple of years. And that just reflects the fact that the market has moved over a number of years. A lot of these assets are getting reappraised on an annual basis. And as a result, the LTVs on those assets are moving less significantly with the newer appraisals than they might have moved as the market was adjusting 2 years ago or 3 years ago. So Brandon, do you want to take the multifamily story and talk about that?

Unknown Executive, Executive

Absolutely, Catherine, it's great to hear from you. You're right. Much of the positive performance we're observing in our portfolio directly relates to your question, particularly regarding the strength of the multifamily sector in terms of lease-up, making it appealing for refinancing, sales, or other exit strategies. Our largest property type by concentration is multifamily, so naturally, it contributes significantly to our repayments. This has been evident, and some challenges we've mentioned regarding RESG repayments are largely influenced by multifamily projects. You can expect this trend to continue as we move forward. This was evident in the last quarter, and it has been consistent for the past 6 to 12 months. Multifamily properties are our primary source of payoffs, resulting in a robust portfolio. As for valuations, earlier cap rates for this asset class started lower and have seen substantial shifts. However, adhering to our core principles of maintaining substantial equity in these deals and having a low basis, even with cap rate fluctuations, we observe that appraisal changes have diminished, and everything appears to be stabilizing. Overall, the portfolio is healthy, and, as you pointed out, we can anticipate numerous payoffs in the future.

Catherine Mealor, Analyst

And then 1 other has this question last quarter, but just to get an update on the IQHQ San Diego life science credit. And then last quarter, you talked about new leadership that came in that you were excited about. I know there was a lawsuit that's too press recently. So just any update on that project that you can provide for us would be helpful?

Unknown Executive, Executive

I appreciate the question about litigation, but that's something for IQHQ to address. We are excited about the new leadership there and the positive energy they are bringing along with the traffic they are driving. Their strategy covers a variety of tenant segments, including life sciences, clinical research, big pharma, tech, AI, and even defense. The demand they are tracking for the projects is strong; it was good in December and is even better now, with increasing tours, requests for proposals, letters of intent, and lease negotiations. The office sector, particularly non-life science users, is generating significant traffic and demand. Additionally, they are making progress on retail opportunities, with several large blocks activating at the street level, which contributes to the overall excitement around the project. We remain pleased with their focus and the demand they are generating. It's important to note the substantial financial commitments made for '24 and early '25, and the new leadership's engagement with the project indicates their belief in its potential. We are monitoring the project closely and are thrilled that they are leading the effort.

Catherine Mealor, Analyst

I know that credit matures in August of this year. Is there anything that you think you need to see in terms of leasing or equity payments or anything that would present this loan from negatively migrating at maturity if you don't see a meaningful improvement in the leasing trends?

George Gleason, Chairman and CEO

Let me comment on that, and then Brandon, you can add some additional color. Sponsor support for a transaction is a key element in the migration or not migration of these assets. So based on our dialogue with the sponsor, I think, at this point in time, we expect sponsor support to continue for that asset. We'll see August is in some respects, not too far away. But in the world we live in today, August is an alternate from now. So we will see if that realization and expectation of sponsors continued support contribution of reserves as needed for this project is there, and that's our current expectation that that's going to be the case. I will I agree with Brandon, we're not going to comment on their litigation with one of their investors. But it's well known and been widely publicized in the media that QHCs had multiple tranches of capitalization and recapitalization come into that project. And in regard to the litigation, I'll just note that a lot of times when you have 1, 2, 3 or 4 different capital raises in a transaction, and there are different rights and preferences between the investors that come in at different points in the transaction. there's room for disagreement and hurt feelings between earlier investors who may get diluted out in subsequent capital raises. So that's a matter for their investor to deal with. I don't think that has any significant bearing on our project with IQHQ or any other project with IQHQ. Brandon, do you want to add anything to that?

Unknown Executive, Executive

No. You covered it well, George.

Operator, Operator

Our next question will be coming from the line of Janet Lee of TD Co.

Sun Young Lee, Analyst

Good morning. I would expect that the prospect of rate cuts is incrementally benefitting for your net interest margin, generally speaking, given your variable rate loan rate component. But if the rates were to be relatively stable from here, is there any reason why your net interest margin would decrease further from here, whether that's because of the asset mix shift or the deposit competition? Or could we do stable NIM or potentially increasing from here?

George Gleason, Chairman and CEO

Yes, Janet, at this stage, we are indifferent to whether rates rise by 25 or 50 basis points, or fall by the same amounts, or remain unchanged. If rates do increase, we would likely see a few quarters of improved margins due to our variable rate loan portfolio, but this could negatively impact some of our customers who are already struggling. The enhanced margin would probably be counterbalanced by higher provision expenses and credit costs. On the other hand, if rates decrease by 25 or 50 basis points, it would provide some relief for a few customers and likely reduce credit costs, but it could also compress our margins for a couple of quarters as loans reprice faster than deposits. We have reached a point where we are neutral regarding the direction of rates, which is a favorable position to be in currently since it’s difficult to predict their movement. Our margin will fluctuate, and we have discussed competition in both the loan and deposit sectors, as well as the slight advantage we will gain from the securities book. We will just have to wait and see how this impacts our net interest margin in the upcoming quarters.

Sun Young Lee, Analyst

And really appreciate the new guidance around your net charge-off expectations for the full year, which looks like it's pointing to around 50 basis points-ish. You already gave us a lot of color on credit. And given your commentary around inflows on the classified and criticized assets earlier. Is it fair to say that does NCO expectation assume bakes in an assumption that classified and criticized assets will increase further from here? Or is there any other color you could provide on what kind of underlying assumptions are being used in this NCO expectations whether that you're assuming more losses than others and certain 5 RESG credits that you called out at the management commentary, et cetera?

George Gleason, Chairman and CEO

Janet, we've likely covered everything, but to clarify, as we've mentioned several times during this call and in previous quarters, we anticipate that a few of our customers might struggle to continue their projects due to the current economic climate and interest rates. We expect some minor inflows of assets into the categories of special, substandard, and foreclosed assets throughout the year. We have a solid track record of resolving these issues and are actively addressing five of those assets we've discussed. While it's unlikely all five will be resolved, we expect that a portion will be. Regardless of whether that number increases or decreases, we believe our guidance remains accurate. It reflects the best assessment we can provide at this time. As the year progresses, we will see assets move in and out of classification categories, and we’ll need to monitor how that develops.

Operator, Operator

And I would now like to turn the conference back to George Gleason for closing remarks.

George Gleason, Chairman and CEO

All right. Guys, I think we're out of questions. So thank you so much for your time and attention today. We appreciate that we've used all of our time. So have a great day. We look forward to talking with you in about 90 days. Thanks so much.

Operator, Operator

And this concludes today's program. Thank you for participating. You may now disconnect.