Bank OZK Q1 2026 Earnings Call Transcript

Note: This is a preliminary transcript and may contain inaccuracies. It will be updated with a final, fully-reviewed version soon.

Bank OZK (NASDAQ: OZK) Q1 2026 Earnings Call dated Apr. 22, 2026

Presentation

Operator

Good day and thank you for standing by. Welcome to the Bank OZK first quarter 2026 earnings conference call. At this time, all participants are in a listen only mode. After the speaker’s presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. 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 and 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 Hamblin, President, Cindy Wolf, 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

Certainly, as a reminder to ask a question, you will need to press Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q and A roster. And one moment for our first question which will come from Manon Gosalia of Morgan Stanley. Your line is open.

Question & Answers

Manan Gosalia

Hi, good morning. Thanks for taking my question. The first one is just around the cib. Strong growth again this quarter, I guess. 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?

Jake Munn — President, Corporate and Institutional Banking

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

Unidentified Participant

Yeah, good morning, Manon. Great to catch up with you and hear you. Good question. You know, 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 nearly two dozen new relationships, upsizing nearly a dozen legacy relationships. And so we continue to see some nice growth across all of those. You know, you have a good point there. What we’re really building here, and you need to remember is it’s a diversified cni, so it is not a CIB business that’s focused in one 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 an increased competition or decreased 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

And are you seeing any spread compression in certain businesses that is causing a pivot into others?

Unidentified Participant

We are, exactly, yeah. So in our ABLG 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 a pullback a little bit in our capital call subscription facilities just due to increased pressure there, specifically from non bank 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, our EFG and our NRG business lines. And so again, the diversification and the nature of 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

Got it. And then just in terms of helping us model out nim, you know, we saw some material securities growth, Q on Q, any color you can provide there on what you’re putting on. And I guess, how should we be modeling yields in that portfolio beyond the 460 to 470 that you’ve guided to for next quarter.

Jake Munn — President, Corporate and Institutional Banking

Tim, do you want to jump in there?

Tim Hicks — Chief Financial Officer

Tim, go ahead. Yeah, sure. Thanks Manon. Yeah, 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 muni housing bonds and 60% are in mortgage backed securities. Those both have favorable yields. The muni housing bonds are 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, 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 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.

Manan Gosalia

Great, thank you.

Operator

And our next question will be coming from the line of Stephen Skelton of Piper Sandler. Your line is open.

Stephen Scouten — Analyst, Piper Sandler

Yeah, thanks everyone. Good morning. I guess first question would be around commentary within the management comments document around 2027. You guys seem pretty upbeat about the potential for the bank in 27 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 kind of driving that confidence, whether anecdotal or more concrete, that would kind of give us a view into that progression.

Jake Munn — President, Corporate and Institutional Banking

Yeah, Stephen, happy to address that. Obviously Jake’s already spoken about CIB and the diversification, the new areas we’re pushing into there. 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, you know, to continue to grow nicely. It stayed steady at 12 and sort of pushed up to about 13% of our portfolio. That portfolio is, 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 non interest income in subsequent quarters this year and really hit a good pace in 2027. So we’re fairly optimistic about 2027.

Stephen Scouten — Analyst, Piper Sandler

Got it. Really helpful color George and I guess my other question would be maybe similar to Manon’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 that 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.

Jake Munn — President, Corporate and Institutional Banking

Great question. Thank you for that. I’m going to let Jake answer part of that question, but before he does, I’m going to tell you a couple of things. Number one 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 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.

Unidentified Participant

Yeah, George, I appreciate that. And Steven, good morning. A good question as usual. You know, 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 and fashion to resg, it 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 four 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 a products and capabilities standpoint. George mentioned that answering your last question about fee income. But if you go back a couple 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 non interest 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, or 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 a company and scale with a company over the long term horizon within the CNI space. 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 belly 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 operations team and then we’ve sat here and developed and bolted on complementary business lines. 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 pricing driven pass. 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, Piper Sandler

Got it. That’s extremely helpful. Color and positioning it like Resg was built is something I wasn’t fully aware of. So thank you for going into that detail.

Unidentified Participant

I appreciate you. Thank you.

Operator

And our next question will be coming from the line of Brian Martin of Marine Capital. Your line is open. Brian.

Brian Martin — Analyst, Marine Capital

Hi. Good morning guys.

Jake Munn — President, Corporate and Institutional Banking

Good morning Brian.

Brian Martin — Analyst, Marine Capital

Say maybe just one on the margin. I know you gave a little commentary in the management comments, but just thinking about if we don’t see a change, any changes in rates here in the near term. Just thinking about kind of the comments in the release about the pressure that you maybe 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.

Jake Munn — President, Corporate and Institutional Banking

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

Cindy 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 Adi 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 Harper.

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, we’re going to continue to do that and we’re cheering RESG and CIB and our other bankers on in their growth and will continue to perform really well.

Jake Munn — President, Corporate and Institutional Banking

Jake, you want to talk about CIB pricing?

Unidentified Participant

Yeah. 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 non interest 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 Manon 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. 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 12bp 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 raw spread on these opportunities that we’re looking at, if we go back to the comments earlier about our loan syndications and corporate services and the various business lines and non interest 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 non interest 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 are either single lender 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, two 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’s seat or the passenger seat, 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.

We want an opportunity to provide additional products and services beyond just a loan. So as a result we’re starting to see some really nice movement there with fee income but also the opportunity to, to augment and impact the structure and the actual pricing of these loans long term.

Jake Munn — President, Corporate and Institutional Banking

Brian, I would close up with this thought. You know 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, 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, Marine Capital

No, that’s helpful. 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 seemed 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 quarters, if we see a bit more resolutions and just given it seems the tenor is a bit more positive.

Jake Munn — President, Corporate and Institutional Banking

Brian, what I would tell you is that the, you know, economy in which we’re operating has been surprisingly resilient in my view, given all the noise. I mean there’s a lot going on in the world today and yet the US economy continues to chug along at a pretty decent rate. And I’ve already mentioned our indirect lending business, which is 13% of our business, but that’s a, you know, consumer business. Now granted it’s at the higher end of the consumer space, but I mean we’re seeing very, very stable and favorable credit results from that business.

Jake in his business is, and of course he’s very carefully selecting what we do. But we’re seeing very favorable results on credit and looking through to the customers in that the trends of those customers, by and large, very favorable trends on their net income, EBITDA, cash flow coverages and so forth. Our resg book, if you look at multifamily, if you look at industrial, you look at condos wherever you are in the country and those categories of business, they are very solid and you know, we’re experiencing really good results on that.

Where you run into some issues and where we’ve had some issues is in the land, the office and the life science parts of the portfolio and that is very transaction specific and region specific. If you go to the parts of the country that are pro business and low tax and having significant in migration and we’re in a lot of those markets, a lot of our franchise rest in those markets, those assets, office, whatever land are doing very well in those markets. It’s the markets where you’ve had increasing tax burden and developing less friendly business, pro business environment and out migration of population or a churn in population that’s kind of kept the population neutral and eliminated the prospects for growth, that’s where those transactions are struggling.

So the economy generally in our view is pretty solid and the challenges are basically limited to a couple of property types in more adversely affected regions of the country. And I think we’re doing a good job working through those. You know, we’ve, we’ve got five resg loans that we talked about in detail that you know, the sponsors are working on. Two of them recapitalization opportunities. One of those has reached the point they’ve got a signed letter of intent to recap the deal. We’ve got two of those five that are actively engaged in a sale process and the Fifth, one of those five is a transaction that has a lot of activity from multiple partial or full buyers of the land that secures that credit.

So those five assets account for the vast majority of our past due loans and the mass majority of our non accrual loans. And you know, do all five of those deals that are working get closed? Probably not. Do zero of them get closed? Probably not, but some combination of those transactions probably get closed this quarter or next quarter. And if the transaction doesn’t close, you’re onto the next opportunity to get those closed. So at the basis we’re in those assets, there seems to be pretty good interest and ability for us to put together access from those.

So yes, I would tell you we know there are going to be a few more of those bumps in the road on asset quality in that office Life science space and we’ll work through those. But we’re feeling like we’re late in this stage of the cycle. We’re working through what is going to have to be worked through and we’re doing it in a very constructive way. Brandon, you want to add anything on that or

Brannon Hamblen — President

You might want to talk about

Jake Munn — President, Corporate and Institutional Banking

What you’re seeing on leasing and so forth?

Brannon Hamblen — President

Yeah, no, I would just throw in there that great summary of how we view the world, what we’re seeing. We are, you know, the property types George mentioned, condo, multifamily, industrial. We’ve got a lot of industrial and you know, boy, a lot of industrial leasing is coming through our projects. Really happy to see that. But I would even say on the office side we’re. And again, great, great summary there of how market specific this activity is. But we’re really encouraged on the office leasing side as well.

So we’re starting to, to see some green shoots there. Life Science as you noted, has had its challenges, but even on a market specific basis, and we’ve mentioned this before, in the Bay Area, the AI sort of boom is generating opportunities for our Life Science product which as we’ve noted is flexible to go live science or go more traditional office. And we’ve got two projects that are in serious contention for more of your tech AI type users. Just as examples of how that’s playing out not just generally but in our portfolio.

Great summary, George. A lot of noise, a lot of headwinds in various shapes and forms. But we’re seeing some good resilience in our portfolio and I would say office particular. I’m just glad to see it starting to pick up and move. We’re getting some progress there. That’s the detail I would add. George.

Jake Munn — President, Corporate and Institutional Banking

Yeah. Thank you, Brandon. Thanks, guys. I appreciate

Brannon Hamblen — President

It.

Operator

And our next question will be coming from the line of Michael Rose of Raymond James. Your line is open, Michael.

Michael Rose — Analyst, Raymond James

Hey, good morning, guys. Thanks for taking my questions. Maybe just a bigger picture question. Just on a lot of the efforts that you guys have ongoing, specifically in cib, you notice 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 understand the expense guide, but George, I just wanted you to frame this kind of longer term. At some point, the significant build out will probably begin to slow.

And it seems like that could be in 2028, which would be at the same time that RESG balances begin to inflect higher after heavy pay downs. 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 just thinking about it conceptually. So we’d just love some longer reaching thoughts on all the efforts that you guys have done to date. And as we look forward. Thanks.

Jake Munn — President, Corporate and Institutional Banking

Hey, 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, you know, 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, you know, 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 you know, if we add three verticals in a year or two verticals in a year and three years from now we had the same two or three 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 a 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. And in the early conversations that Brandon and I had with Jake, Jake understood that we didn’t want to go out and spend $20 million 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 CIB’s 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 positive operating leverage from the continued growth and expansion of cib, I would hope. And our goal is that as 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 leverages as we go forward. And to the earlier question of, you know, where does our efficiency ratio go? You know, I hate to apologize for a 39% efficiency ratio. That’s a pretty good number. But we would like to see that, you know, in future years begin to work back down to our more accustomed 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 a 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 will even those things out and let us get to a longer term, slightly improving efficiency ratio.

Unidentified Participant

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 this year have a lower average base salary and expense carry 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, we’ll 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.

Jake Munn — President, Corporate and Institutional Banking

Good comment. Thank you.

Michael Rose — Analyst, Raymond James

No, that’s helpful color and I wasn’t looking for specific guidance, just trying to frame the narrative. But it seems like based on the answer that you guys have many years to come of kind of continuing to build out the business. So maybe the best way to characterize it. I don’t want to put words in your mouth, but would you characterize that the build out is still kind of in the early, earlier to mid innings versus the later innings? It seems like based on the commentary, that’s where we’d be.

Jake Munn — President, Corporate and Institutional Banking

Well, Jake made the comment in his earlier remarks that we were just beginning. I’ve written enough checks to hire 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 you know, we commented, I think we commented in the management comments, didn’t we 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, you know, 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.

Unidentified Participant

And a reminder too 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 and our non interest income in future periods.

Michael Rose — Analyst, Raymond James

Yeah. All right. I appreciate you taking my question. I’ll step back

Operator

And our next question will be coming from the line of Matt Olney Stevens. Your line is open. Matt.

Matt Olney

Hey, thanks. Good morning. Want to go back to the discussion around credit trends at rasg And I think investors are looking for this inflow of newly identified subs loans at Resheath to slow. I counted three new loans identified in the first quarter from your management commentary. Thanks to two in Seattle University, one 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 Reggie loans into that substandard bucket?

Jake Munn — President, Corporate and Institutional Banking

That’s a great question. What I would tell you, Matt, and I want Brandon to weigh in on this is 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. You know, last year we had four properties and foreclosed assets at some point during the year from Resg. We sold three 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, you know, 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 MES debt, 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, you know, 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. You know, 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 may want to add color on that

Brannon Hamblen — President

Again. Great summary, George. I mean, I would also point out that we’ve been very diligent in our reappraisal process within the portfolio. We pointed that out in our comments. We’ve kept those appraisals current. You may note that there were a fewer appraisals that resulted in LTV increases over 10% and most within that plus or minus 10%. So the market, as we said in our comments, we feel like we’re in the later stages of the cycle. There’s always an interesting new element to consider as we go from quarter to quarter with our conflict in the Mid east being the most recent add to that and uncertainty.

But as George noted, the underlying economy seems to be really resilient. We’re seeing good leasing. As I noted before, we will have projects where ultimately the sponsor does get to the point that they’re not able or willing to continue to support the deal. But our team does a great job of being on top of where these projects are and making sure we’re on top of the valuations and making sure we’re on top of ratings. So George’s comments are spot on with respect to how we see the future.

Jake Munn — President, Corporate and Institutional Banking

Brenna, I’m glad you pointed out the appraisal and for those on the call that didn’t focus on it, figure 28 and the narrative around figure 28 in our management comments, 50% of the total resg commitments have been appraised within the last four quarters and 92% have been appraised in the last eight quarters. So the only pre2023 appraisal is a loan that has a $1,500 nominal balance on a project that is sort of stalled and will Never fund beyond $1,500. So that’s the only pre2023 appraisal in 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

I appreciate the commentary on that. And just as a follow up, kind of a similar question, but more on the Oreo foreclosed asset bucket. I think that balance is $150 million, mostly three res G 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 three properties to move off the balance sheet?

Jake Munn — President, Corporate and Institutional Banking

You know, 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. You know, I repeat what I said earlier. Last year we had four in that category. We moved three 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 forfeited earnest money off the last contract we had on that. It never closed so, you know, 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.

Manan Gosalia

Thank you.

Jake Munn — President, Corporate and Institutional Banking

Thank you.

Operator

And our next question will be coming from the line of Catherine Mehler of kbw. Your line is open, Katherine.

Catherine Mealor — Analyst, Kbw

Thanks. Good morning.

Jake Munn — President, Corporate and Institutional Banking

Good morning.

Catherine Mealor — Analyst, Kbw

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 two 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 view on that moving forward, especially given the new rate environment and then also in just credits and appraisal activities. To your point, the appraisals feel like they’re coming in better than we’ve seen in some past quarters.

But just kind of an update on the health of the multifamily book. Thanks.

Jake Munn — President, Corporate and Institutional Banking

Yeah, I’m going to let Brandon take the multifamily and yes, you know, the degree the rate of change in the appraisals is less significant than some of the earlier appraisal 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 two years ago or three years ago.

So Brandon, you want to take the multifamily story and talk that.

Brannon Hamblen — President

Absolutely. Kathryn, good to hear from you. You are correct. A lot of the payoff story that we’re seeing in our portfolio is a direct answer to your question. Both the health of the multifamily product in terms of its lease up to the point of being attractive obviously for refi or sale or other takeout. And so what we see there is that and part of it is that that’s our largest property type by concentration. So by definition they’re going to have an outsize ratio of the repayments. But that’s absolutely been the case and some of the headwinds that we’ve talked about in resg repayments are are driven in large part by the multifamily project.

And you’ll continue to see that as we go forward. That was the case. And the quarter just ended. It’s been the case. And you can look back 612 months, that’s going to be the case. They’re the heaviest part of our payoff. It’s a healthy portfolio. And as the valuations, those cap rates, that product type probably started out lower and moved as much as anything. But again, going back to our tried and true rules of having a lot of equity in these deals and being at a low basis even with those cap rate moves that again, talking about appraisals, they sort of, the changes have slowed and everything seems to be sort of landing where it’s going to be.

It’s a healthy portfolio, but it will, as you noted, result in a number of payoffs as we move forward.

Catherine Mealor — Analyst, Kbw

And then one other just asked this question last quarter, but just to get an update on the IQHQ San Diego Life Science credit, I know last quarter you talked about new leadership that came in that you were excited about. I know there was a lawsuit that got a lot of press recently. So just any update on that project that you can provide for us would be helpful. Thanks.

Brannon Hamblen — President

Yeah, sure. Yeah, yeah. Appreciate the question. And litigation, Kathryn, you know, that’s really, can’t provide any meaningful commentary there on that. I mean that’s for IQ H2Q to address. But to your point, we were excited, we are excited. We continue to be engaged with the new leadership there. Very, very excited about the energy that they’re bringing and the traffic they’re driving, the strategy that they’re taking with respect to the different sort of segments of tenant that they’re pursuing.

You know, it’s not just the life science in market life science and office use, but you know, clinical research, big pharma tech, AI, even, you know, defense. So they’re, they’re the demand that they’re tracking for the project is it was good in December. It’s better as we sit here today in terms of the tours they’re giving, the RFPs, LOIs and lease negotiations that they’re having, I would tell you the office demand, office user, the non life science user is the bigger part of that traffic and demand that they’re tracking.

But they’re seeing material demand there. And then they continue to work on the retail with some large block retail opportunities that they started to really get the project activated at the street level. And they’re working some exciting opportunities that will continue to add to that energy and activation around the project. So yes, we continue to be pleased with, with their focus and the demand they’re generating and we’ve noted in the past the material financial commitments they’ve made. And that was in 24, early 25.

Some of this new leadership came in after that. And we really take their engagement with this project at that point in time as a clear sign of their belief in the opportunity there. So, yes, we continue to track the project and are excited. They’re in the driver’s seat and working hard on it.

Catherine Mealor — Analyst, Kbw

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 prevent this loan from negatively migrating at maturity? If, if you don’t see a meaningful improvement in the leasing trends?

Jake Munn — President, Corporate and Institutional Banking

Let me comment on that. And then Brandon, you can add some additional color. You know, 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. You know, August is in some respects not too far away, but in the world we live in today, August is an eternity 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. You know, 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 IQHQs 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.

You know, there’s room for disagreement and hurt feelings between earlier investors who may get diluted out in subsequent capital raises. So. So that’s a matter for IQ and their investor to deal with. I don’t think that has any significant bearing on our project with IQ HQ or any other project with IQ hq. That’s an inter family squabble between the different tiers of investors in this transaction. Brandon, you want to add anything to that?

Brannon Hamblen — President

No, you covered it well. George,

Catherine Mealor — Analyst, Kbw

Great. Thank you for providing commentary on that credit. It’s really helpful. Thanks.

Operator

And our next question will be coming from the line of Janet Lee of TD Cohen. Your line is open. Janet,

Catherine Mealor — Analyst, Kbw

Good morning. Good

Jake Munn — President, Corporate and Institutional Banking

Morning.

Unidentified Participant

I would expect that the prospect of no rate cuts is incrementally benefit benefiting 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?

Jake Munn — President, Corporate and Institutional Banking

Yeah, Janet, you know our view on that at this point is we’re relatively agnostic as to whether rates go up 25 or 50 basis points or rates go down 25 or 50 basis points or stay the same. Obviously if if rates go up, given our highly variable rate loan portfolio, we will get a couple of quarters probably of improved margin. But increasing rates would adversely affect a few of our customers on the bubble and that increased margin would probably be more or less offset with incremental provision expense and credit costs.

Conversely, if rates go down 25 or 50 basis points, you know we that’s going to be a bit of relief to a handful of customers that are on the on the margin there and probably lower some credit costs but cut into our margin for a couple of quarters as our loan book reprices faster than deposit. So we’ve sort of reached the point with our balance sheet that we’re agnostic about which way rates go, which is probably a good place to be today since nobody can really develop a firm thesis about which way they are going to go.

You know, our margin will move around a little bit. We’ve talked about the competition on the loan side. We’ve talked about the competition on the deposit side side. We’ve talked about the little bit of lift we’re going to get from the securities book. So we’ll just see where that plays out on the net interest margin in coming quarters.

Unidentified Participant

Thank you and really appreciate the new guidance around your NC net charge off expectations for the full year, which looks like it’s pointing to around 50 basis points. Point 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 this NCO expectation assumes 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 on certain five resg credits that you called out at the management commentary, et cetera?

Thanks

Jake Munn — President, Corporate and Institutional Banking

Janet. I think we probably touched on all that to put a little more definition around it. Again, as we’ve said it a couple of times on this call, in the management comments and in prior quarters, we expect that there will be a small number of our customers that in this economy with these interest rates, will just become unable or unwilling to continue with their project. So I think there will be some inflows of assets, you know, small numbers into that special asset, substandard asset, foreclosed asset category.

Over the course of the year. We’ve had a good history of resolution. We’ve got some pretty meaningful activity toward resolving five of those assets. As we’ve discussed, not all five probably make, but some portion of those do. So, you know, whether that number goes up or down, I think our guidance is good guidance. It’s the best we can give you right now. And I think we’ll have things come in and things go out of classification categories as the year goes on, and we’ll just have to see how that unfolds.

Unidentified Participant

Thank you.

Jake Munn — President, Corporate and Institutional Banking

Thank you.

Operator

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

Jake Munn — President, Corporate and Institutional Banking

All right, guys, I think we’re out of questions, so thank you so much for your time and attention today. We appreciate it. 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

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