Good day, ladies and gentlemen, and welcome to the Bank OZK's Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce your host for this conference call, Mr. Tim Hicks. You may begin, sir..

Good morning. I'm Tim Hicks, Chief Administrative Officer and Executive Director of Investor Relations for Bank OZK. Thank you for joining our call this morning and participating in our question-and-answer session. In today's Q&A discussion, we are going to make forward-looking statements about our expectations, estimates and outlook for the future.

Please refer to our earnings release, management comments, and other public filings for more information on the various factors and risk that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.

Joining me on the call to take your questions are George Gleason, Chairman and CEO; and Greg McKinney, Chief Financial Officer and Chief Accounting Officer. We will now open up the lines for your questions. Let me ask our operator, Kevin, to remind our listeners how to queue in for questions..

[Operator Instructions] Our first question comes from Ken Zerbe of Morgan Stanley..

I was hoping we could start off with expenses. Looks like expenses ticked up a little bit versus what I thought was a seasonally higher quarterback in first quarter.

Could you just talk about what drove the higher expenses this quarter, and more specifically or more importantly, what is the outlook for expenses on a go-forward basis?.

Hi, Ken. This is Greg. Let me start about that, then George and Tim can chime in too. But we're continuing to build our infrastructure as we've been doing now for a number of quarters. We are in the late innings on that. I think we're getting close to having that built out.

We are hiring individuals to really come in and the take the place of third-party consultants that we've been using to help us get some of these programs up and stood up. There's a little bit of a transition in some of that if you bring individuals in, and then begin to exit consultants out the bank. That process is ongoing.

We expect that to continue over the next quarter or two. I think you'll probably see a little bit of a continued increase in overhead in the next couple of quarters as we continue to make that transition and get the remaining infrastructure in place, although we think that you can get beyond kind of the seasonally challenging Q1 of 2020.

I think there's a pretty good opportunity today to keep the overhead. I'm going to say a little more in shade, is say I want to going to continue to have some increase, but I think you'll see the rate of increase, as we get to that point in time, much more likely to be muted at least relative to what you've seen in the last two or three quarters.

That's really the biggest driver in overhead, as we think about overhead in the last four quarters, five quarters, six quarters and that continues to be probably one of the biggest drivers, as we think about overhead for the next two or three quarters..

Maybe switching gears, in terms of the North Carolina credit, I understand you're trying to sell the South Carolina credit, but with the North Carolina credit, it almost sounds like you're taking on the responsibility of finishing the project or the build.

Could you just expand on that a little bit more, like what exactly is happening and what's the time frame of that? Thanks..

Yes. Good question, Ken. As you are aware from previous calls, the sponsor there developed a lot of houses and there was ongoing development of lot. Some of those houses were not fully completed. There's a custom home buyer that's being built for a custom buyer.

So we're completing those sort of construction elements in lot development activities, and expect to sell those homes and lots have developed. There is some remaining work to be done on that project.

And then, the question will come at some point in time, how you continue development? Do you just sell lot, do we need to develop some more inventory? So we're going to try to operate that in a way to maximize our proceeds and hopefully recover some monies that we have written-off.

We're not going to get into a massive development project, but there is work to be completed and it is an ongoing operating project with amenities that operate and so forth. So we're going to operate it and work our way out of it in an orderly manner..

Is there any - go ahead..

Yes. The South Carolina property is obviously a much simpler project to sell, because it's flat for someone to acquire a great position and redevelop it in a major way. I will comment a couple of the analysts noted in their write-ups, commented that we had foreclosed on these properties but we actually did not foreclose on either one of them.

We acquired title [inaudible] transactions and that took a little while, because we had to do all of our redo and recheck all of our environmental due-diligence and insurance and get certain permits and operating licenses transferred and so forth.

So both transactions were transferred to us in a cooperative very demand transaction with the cooperation of the sponsor..

I see.

And with the North Carolina project, is there any risk of additional write-downs in terms of your exposure, if you don't complete the projects and you sell just the lots, or any other - basically any other risks to you guys?.

Well, there's always a risk of additional write-downs, but I think that's extremely low in both transactions, given the conservative nature of the appraisals that we received. In fact, we wrote the assets down when we received those appraisals in the third quarter of last year to 80% of appraised value.

And of course, we've previously mentioned on the South Carolina projects that in the couple of quarters, after we put it on non-accrual, we captured $0.5 million or so of cash flow that went to reduce the balance on that. So I think write-downs are unlikely, but our practice is to re-appraise OREO properties on an annual basis.

So as long as they are in foreclosed assets, they're subject to re-appraisal and if those appraisals came in more adverse, then we would have a write-down from that. The reality is, I think it's very unlikely..

And then just one more question, if I could. I understand how hard it is to forecast repayments on the loan portfolio, the RESG portfolio. But is there a way of kind of quantifying the lower bound of potential loan growth? I did notice that you did reduce your loan growth guidance for the year due to even more elevated payoffs.

I'm just wondering how bad could it be within sort of a reasonable expectation, like if you go through like loan-by-loan of your portfolio to try to examine what could pay off like, where is the lower bound of loan growth this year?.

Well, we do go - we base our projections based on a loan-by-loan analysis. And as you know, in our RESG portfolio, we average about 14 loans per asset manager. So our asset managers are very close to those transactions.

These tend to be larger, complicated transactions, so sometimes a sponsor says, we expect to pay this off in May, and for some reason or another, negotiation was with their partners, negotiations with the lender on the other side, that moves forward to or moves back to August or October for some reason.

And then, as we've experienced quite a bit recently, projects - we've had a few projects that were pretty sizable that had been pulled forward on the spectrum.

And we had at least one pretty sizable project in Q2, and we've got a couple more coming in the second half of the year that we've been notified or repaid down that, we've not even reached a CEO status.

It's historically been very rare for us to get paid now and refinanced mid construction or before a project is at least as a temporary certificate of occupancy. But we've got several of those examples that have accelerated repayments this year. So we're giving the best guidance we can give on that.

But there are things to call those payouts rate payments to be sometimes delayed, sometimes accelerated. And you can do your very best to predict that, and you're usually right within a quarter or two. But, sometimes you get surprised..

Our next question comes from Timur Braziler of Wells Fargo Securities..

Maybe looking at the deposit side and some of the commentary around cost of interest bearing deposits.

What's being done that gives you guys optimism that you can lower the potential costs of interest bearing deposits extra rate cut in the third quarter?.

Timur, it is Tim. Good morning. Yes. I think, we're actively managing that deposit book. We really started on July, 1 with a lot of our institutional public fund customers talking about the rate we pay on those. Obviously, LIBOR went down 10 basis points in Q2.

So rates even the Fed hadn't moved rates have decreased and we've had those conversations with some of our larger deposit customers. And so we really started that really early in the quarter. So trying to stay ahead of what the Fed is doing. And even though the Fed hasn't moved yet, some of those rates have already come down.

And even our promotional CD rates we brought down in early July as well. You've seen many in the industry also bringing down their deposit rate. So I think between that and the moderated loan growth guidance that we've outlined here allows us some flexibility to help, replace some of our higher deposit customers with some lower deposit customers.

And we'll work hard to do that and feel like or we've got the ability to be slightly, as we said in our management comments, to be slightly down on cost of interest bearing deposits, even in a flat rate environment for this quarter..

And then maybe just looking at broader deposit growth, you guys have historically looked out at loan growth projections and then backfilled that kind of with deposit-gathering objectives.

Is the linked quarter decline in deposits an indication of kind of the lending outlook, or I guess, what's the goal for growing deposits in an environment where loan growth is going to be pressured?.

Yes. We feel like we have the ability to grow deposits to match our loan-earning asset growth. So we do model that and project that on a monthly basis. And so we're really comfortable in that mid-90% loan-to-deposit ratio. I mean, sometimes there are timing differences that move that 1 percentage point at the end of the quarter one way or the other.

So we're really - very comfortable in mid-90% loan-to-deposit ratio and feel like we've done that for the last several quarters, have been in that range and would expect to continue to be in that range as we just project out what our deposit growth needs are based on what our earning asset needs are..

And then just one last one for me. Looking at the Indirect RV & Marine portfolio, the number of dealer relationships has seemed to kind of find a level here between 1,300 and 1,400 and the growth continues to accelerate.

I know there's some seasonality in 2Q, but I guess, just looking at the existing dealer footprint, what's the remaining potential out of that footprint, meaning should we - is there opportunity to continue seeing accelerated growth from that existing footprint, or do you need to actually grow the dealer network in order to further accelerate that growth?.

That's a good question. If you're following the Marine and RV manufacturer stocks and their reports, you'll notice that Marine and RV manufacturers are shipping less, selling less to dealers than they were a year ago. So there's a bit of a slowdown in the manufacturing side, and that it would imply that your average dealer is selling less as well.

So we've been able to maintain good volume this year, and that's in part due to the fact that we have had some modest growth in our dealer network over the last year, that's not been a ton.

The capability to grow that dealer network is dire, and as we continue to monitor this portfolio and the performance of this portfolio, and get more and more history with the data on that, we would expect to expand that dealer network. That dealer network could probably go to 1,700 or 1,800 dealers in a more mature state for that unit.

Over the last several quarters, we've been adding dealers every quarter and you remove dealers every quarter. Our program is very focused on monitoring the performance of our dealers and the quality of paper we're getting from our dealers and various other dealer performance metrics we're monitoring.

So we routinely terminate relationships with dealers and routinely add dealers. But the capability is there as we get more seasoning on this portfolio to add another significant tranche of growth in the future..

Our next question comes from Jennifer Demba with SunTrust..

It's actually Steve [ph] on for Jennifer. There's been a lot of talk about condo sales in New York and Miami.

How are your projects there filling up and are you guys becoming more cautious in future projects in these areas?.

Steve, I would tell you, we're not changing our underwriting standards at all, and our projects are doing very well. Nine quarters ago, we probably had 13 or 14 active condo construction projects in the Greater Miami area. That's probably seven or six now.

So we've had, I think, at least six or seven of those projects that see out and very quickly paid up.

We think that number of projects based on sales that are in place and construction progress probably by the end of the year is two, Tim?.

Two to three..

Two to three..

Yes..

So, our Miami condo exposure is paying down a ton through selling of condos, and we've got a lot of sales and a lot of sales activity on the projects. So we're feeling extremely good. About the credit profile of those projects, we're deeply regretting that we've been unable to replace it with new volume.

We would love to have 14 more projects of the same credit profile, resale deposit profile of the ones that we had. At September 30 last year that - half of them more or less have paid off in the interim. Our New York product portfolio continues to perform without any issues.

We've gotten paid down on several projects buyer and paid off on several projects buyer in the last quarter. Our new originations in New York are not as large as they were a year ago. There's less new product being created.

Interestingly, if you look at the 2Q originations for our RESG unit in Washington D.C, MSA was Number 1; Boston MSA was Number 2; Philadelphia was Number 3; and New York was Number 4, right in line with Orlando, Florida, MSA, so - and San Diego.

So New York, Orlando and San Diego were four, five and six, but just separated by a couple of million dollars. So we're - we feel very good about our New York portfolio and the way it's holding that. But you're not seeing as much new product production there. So our New York growth is slowing a bit..

Has that been kind of the limiting factor then on portfolio growth, just not enough product or projects out there, is it competition, other things, structure, pricing?.

It's a combination of all of that. We've commented for a number of quarters now that we've seen a lot of competition in there. There are lenders that are willing to be more aggressive on credit and leverage than we're willing to be, and there are lenders in certain markets on certain product types that are being very aggressive on price.

And, I think we've been just clear without exception, that we are not going to sacrifice our credit standards. We've got credit standards that are high. We expect to continue to be very disciplined and only do transactions that meet our credit standards.

We're not going to do transactions that get so cheap that we don't generate an appropriate risk adjusted return. So we're negotiable to some extent on price, but not beyond a limit. And the result is that growth is the tertiary consideration and the variable that adjusts.

So because we're being disciplined without exception on credit, and we're being reasonably disciplined on our return standards, we've seen less growth. And that is a result of two things.

As you say, one is computation, and two, is the fact that there are just fewer deals that made our credit standards today than they were a year or two or three years ago when there was a lot more room to build product in most markets..

Our next question comes from Stephen Scouten with Sandler O'Neill..

So, thanks again for all the color you guys gave in the management comments. Very helpful. I'm kind of curious how you guys are thinking about average earning asset trends through '19 and into '20, given the lower loan growth outlook and some of the details that you gave, like configurate around RESG potential repayments over the next couple of years.

And wondering if it's possible to - the average earning assets are relatively flat on a net basis or if that's too punitive of you - in all of your minds..

Great question, Stephen. What I would tell you in that regard is that the accelerating trend of repayments of loans in our RESG portfolio, as well as community banking and portfolio, we're having a lot of repayments and refinances in community banking portfolio, so it's a very competitive environment in that world as well.

So that coupled with the - just the ongoing paydowns in our purchase loan portfolio, certainly provides a headwind of growth in total loans, and yeah, a headwind of growth in average earning asset. We have a strategy that we articulated in the management comments document to address that and the impact of that on net interest income.

One is, we're working very hard in our real estate specialties group with - without sacrificing our credit quality or our pricing standards to just work really hard to generate a good volume of new originations. And through the first half of this year, we've generated about $3 billion in round numbers of origination.

So we're running a little bit ahead of the average pace for last year. We would hope that, that origination trend would continue for the back half of the year and hopefully even accelerate a bit end next year. Secondly, we are getting good volume out of our Indirect Marine and RV business.

We hope to continue to get good volume and growth out of that as I responded to Timur's question where that is a business that perhaps we can scale up even a little more by adding another meaningful addition of dealers to our relationships there.

Thirdly, we hope to get some significant increases in volume, from our different verticals, specialty lending verticals in our community banking part. And then, we helped to also reduce our cost of funds, Tim sort of addressed that, by more effectively managing our mix and pricing of deposits.

So it's a battle to grow earning assets when you've got as many repayments as we do, but we've got a strategy to attack that. Hopefully, that strategy will be successful. We also hope that we can get some lift to our net interest income from this - from both growing earning assets and mitigating that cost of deposits.

But it's a work we've got to do, and it's not going to be easy, but our team is very committed, and I think if we can be - if market conditions will allow us to be successful, I think we will, because our team is are working hard to do that..

And maybe on that funding side, on the deposit side, obviously I heard Tim's comments earlier, but I'm curious how you think your deposit betas may react on the way down, if we get two or three or four rate cuts here? If you think, the first couple of cuts would have a minimal kind of beta and then it would ramp, as we saw in the reverse, or kind of how we can think about that potential improvement on funding costs with each theoretical rate cut?.

I'm now turning that back to Tim..

No, I think it will act fairly similar to how it did in the rate and we had a high deposit beta on the way up, I think we're going have a high deposit beta on the way down. We are actively managing it. So, as I said earlier, we started out this quarter trying to actively manage it ahead of any move. So hopefully, that'll get us ahead of it.

But deposits will lag a little bit from LIBOR, specifically LIBOR moves pretty quickly and - but I think over a several quarter of period, it'll catch up and we - have a little bit of a lag to it, but we're working hard really early on in this quarter to offsetting that and feel good about the efforts we're making in.

I think you pointed out in your note as well, our reduced or moderated loan growth. And I said it earlier, it should allow some us flexibility in writing away some of our higher cost deposit to customers..

Perfect. It all makes sense. And maybe one last kind of clarifying question. I noticed the loan-to-cost for the RESG portfolio as a whole went up maybe a couple of - 51% from 49.5% or something like that.

Is that possibly due to that $300 million credit that appears to have gone away? Was that really a low loan-to-cost loan and that leaving pulled an average up, or can you give any commentary as to what pulled that number up slightly?.

Well, I'll give you - it's a change in - a constant change in the mix of that portfolio. One comment I will tell you, probably the lowest loan-to-cost pieces of our portfolio were our Miami condos. Those, if I recall, average amount of 37% loan-to-cost. So, when those get paid off, that tends to cause the average to go up.

So, it's the change in mix and, there's probably a slight tendency, I would say, for that loan-to-cost number to go up. I don't think it goes up a lot, but it wouldn't surprise me, if in a quarter or two, we saw that at 52% or 53%.

I think, one of the keys is to look at the loan-to-value number, and the loan-to-value moved very little and pretty flat down there, around 43%. So we continue to feel very good about that.

And the reality is, most of the guys or a lot of the guys that we compete with are 15 points plus or minus higher leverage or 20 points higher leverage than we are. So we continue to think we're probably the most conservatively leveraged guys in the space..

Yes, for sure. Well, thank you guys for all the color and the transparency as always..

Thank you..

Our next question comes from Brock Vandervliet with UBS..

I wanted to circle back to that comment you made, which I think could be really telling in terms of the competitive environment. You're seeing some refinancings from pre-CO credits.

I mean, that just seems amazing to me because I would think as a developer at that point of, you're on the final approach to a CO, the last thing you're thinking of is, is refi, because you want to get over the line so you can lock in the permanent financing.

Are these borrowers that are able to just bring that forward and get permanent financing even ahead of a CO?.

We have seen some - a few competitors being very aggressive in acquiring some assets.

And the - usually when the sponsors in the middle of construction, they are focused on completing the project and selling or leasing and not refinancing and our typical working premise has been, as the earliest we would get pay down from on an asset would be at TCO, Temporary Certificate of Occupancy or [inaudible] other than that would be the earliest.

In most cases, it would be somewhat after that. But what is encouraging our sponsors to pay us off is a combination of lower rates and higher leverage. So we've seen competitors come in and basically refinance out all or a large part of the equity or mezz that plus us, and do it at a compellingly lower cost of capital to the sponsors.

So I don't think that's a trend that is going to affect a lot of deals, but it is affecting enough deals that it's moving our repayment numbers faster than we expected. The reality is and Tim put a really nice little chart in there on page 8 of our management comments document.

It's the figure - number 8 in the management comments document that just shows on an annual basis each year what the repayments have been from the loans we originated and what's still outstanding for those. And we've talked for a long time that our RESG portfolio is construction and development portfolio.

And these loans are going to pay out three years, more or less after they originate. So if it's a really simple, small, non-complex project, they might pay off in 24 months. If it's an average deal, they might pay off in three years. If it's a project that's really big, complicated, mixed-use, hard to construct project, it may be a four-year timeline.

And the reality is our three biggest years of RESG originations they go with 15, 16, and 17. So we’ve jumped over from that 18, 19 and 20 is kind of the natural cadence for those loans to the pay-off more or less a year or so.

And seen that natural cadence unfold and get accelerated just to touch by the fact that you're getting loans that are paying off even before TCO and CO is creating some headwinds to our growth.

We work through that big chunk of payoffs and hopefully successfully diversify our portfolio and get more earning asset engines and get reasonable up trend toward RESG originations as compared to the 4.8 million or billion or so from last year we ought to be able to get back into decent posture growth story but we've got work our way through this season of payoffs..

And in terms like competition we are seeing and among the banks it seems like you haven't back out of the business years ago they are tapering down construction.

So it can't be coming from there are these credit funds that have always been in the space or is it new players what do you see from the deals that you're losing or they’re refinancing early?.

Brock well as you know it’s a combination of big banks, foreign banks, debt funds there are a lot of players in this space and those players have been in the space the last year twice in large numbers.

And you go back to 16 and 17 you saw a lot of banks pullout of the space that created a formation and the raising of a lot of money and a lot of debt funds, credit funds that are targeting the space. And then a lot of banks that come back into the space so it’s crowded space rather..

Our next question comes from Matt Olney with Stephens..

And just a piggy back off that last point about the early payoffs in RESG. I believe you now have the early prepayment fees in most if not all of your all RESG projects that allow the bank to capture at least a portion of the interest income the bank would have received.

So given the heavy paydowns in 2Q are we seeing more fees in 2Q and should we continue to expect higher fees the next few quarters?.

Well of course those prepayment fees relating to Matt come through the interest line item as minimum interest on those loans.

So they show up as interest you know we commented the last couple of quarters and not this management comments but the last two that we had some positive lift basis point two or three quarter I don’t know number two are near in those quarters from higher levels of loan fees related to prepayment.

We didn’t specifically comment on that in this management comments document. We did have several loans that had minimum interest in them when they paid off. We would expect that to continue you know some of our sponsors are very attentive to that minimum interest number and don't want to pay it.

So they will add the loan to the day the minimum interest is earned didn’t pay it off very shortly after that some sponsors take a broader view of interest savings they might get it from a lower rate refinance or savings that they might get from cashing out a much larger loan with another sponsor that would let them cash out mezz debt or higher cost equity and factor that.

And so sometimes we get minimum interest paid, sometimes the sponsors wait us out on the transaction.

My guess is that the experience we've had the last couple of quarters is probably reasonably likely to be consistent with the experience we would expect the next several quarters, which is why we made no comment about it in the management comments documents, but those are chunky prepayment minimum interest numbers and they are hard to predict but we think there's not a big delta between what we’ve experienced the last several quarters in that regard and what we would experience the next several quarters..

And then also want to shift over to its get your better thoughts around a stock repurchase plan. I think it’s not something you’ve done previously in the company history but were the updated loan growth guidance little bit softer I guess - continue to build.

So would you reconsider the stance around stock repurchase activity?.

Matt, this is Tim. It’s an active dialogue with our board at each quarterly meeting. We’ve got obviously, given updated guidance on loan growth. To your point earlier, we've never done a stock buyback in our 22 year history of the public company.

We would prefer to utilize and leverage that capital to grow our bank and whether that's in the short-term and long-term we feel really good over the long-term about being able to utilize that capital and I think our board would prefer over the long term to utilize and leverage that capital. They will continue to discuss it.

I would guess, their next major discussion regarding it would be early next year when they had an updated financial projection and budget and strategic planning process that we do typically in early part of it.

I would not anticipate much more of a change in their stance between now and then and even then they are going to have to evaluate what they think our long-term prospects are for buyback. So that basically where we are today..

Our next question comes from Cathy Mealor with KBW..

Tim, you mentioned that you’ve already lowered some of your promotional CD rates, can you give us any - I mean, can you quantify maybe where promotional rates have peaked in maybe where you are currently?.

Catherine let me address that. I don’t think for competitive reasons we’re going to want to quantify that.

You know, we made a comment in the management comments document that competition in regard to deposits and our ability to moderate that pricing just was really not evident in the first quarter and a half of the year as the second quarter were on and particularly as expectations regarding the direction of Fed action really finally began to settle in on the deposits and I guess some of the CEOs probably looked at what was happening with their loan yields with LIBOR and so forth and we began to see some moderation in deposit pricing in the second quarter and particularly the back half of the second quarter.

So we try to get right in very actively and aggressively in that and continue that into the start of first quarter. So we’re optimistic, we’re going to be able to get cost funds down but for competitive reasons I don't want to discuss details of that..

And then just kind of circling back on the ISG costs.

I mean, you’ve talked a lot in the past about where we are in the cycle and that while we needed a peak commercial fair values and that which makes lease your sponsors little bit from the return perspective from a first lien perspective you’re still in a great spot in terms of credit quality and credit risks.

But is there anything that you can point to with the higher prepayments with the kind of loan origination volume that is kind of a OZK driven efforts and I think sort of cost a little bit to avoid certain credits for certain market or is it really or are you seeing kind of just what - is it more what you're seeing less deal flow and really is kind of just the competitive dynamics that are really driving this loan growth.

I guess, I am trying to figure out how much of it is, is there any part of OZK driven versus just really kind of responding to the macro?.

Yes. I would tell you I don’t think any of it is OZK driven, you know we have always had very conservative credit policy standards and practices those continue. We've not have member we have not liberalized though in place of increase competition.

I think all of the volume impact that you see our result in fact of two things as we said earlier as you articulated one is that’s more competitive environment with more players in the space. And number two we are in the cycle where there just less transaction that might trend to sponsors from an equity point of view to pursue.

So they're less opportunities to do business. And the opportunities that are getting done or are percolating longer before they get closing.

Sponsors are very cautious and transactions that three or four years ago might have gotten close in the 60 days after you first saw it sometimes may take a year and a half year now or a year or three quarters to get done.

Sponsors are taking their time and being cautious appropriately so and the economic environment we’re in so it’s had an impact on our volume and you know weren’t force the volume.

A lot of our competitors are doing that they may get away with it and be richly rewarded for jumping there and being more aggressive on credit that’s just not our power doing business. We keep our discipline all the time..

And we found questions just on loan yields to thinking about the margin how much of the change in loan yield would you say is true and just by the impact of LIBOR versus the mid shift from going from RESG into either other vertical in direct Marine and RV and other verticals?.

Well I think you pretty much guides the LIBOR impact just take LIBOR 630 versus 331 and look at that difference in one-month LIBOR and multiply that times the percent of our variable rate loans tied to LIBOR and you can derive a pretty reasonable kind estimate of the impact of LIBOR.

LIBOR being down during the quarter and we put a LIBOR chart in their on the figure 16 I think it is in our management comments document that shows that downturn in one-month and three month LIBOR during the quarter. And that weighed on our margin.

There is also some impact from the changing mix of our portfolio as we mentioned in management comments document our RESG portfolio being all variable rate loan – has become our best yielding portfolio where is our community bank and indirect Marine and RV portfolio.

And our Marine and RV is all fixed rate the community bank the mixture of fixed and variable rates those portfolios have lagged behind and their yield as Fed fund rate has gone up because of the fixed rate loans in those portfolios. If you go back to the time right before the Fed started raising rate our community bank portfolio the Marine portfolio.

The RESG portfolio well had very similar yields but obviously they performed differently because of the changing mix of variable fixed rate loans in those portfolios..

And then one more if I may real quickly on substandard loans were down this quarter either with the direction of watchlist credit to this quarter versus last?.

Could you repeat that you break a little bit?.

So substandard loans were down this quarter but do you have the direction of what watchlist credit gave this quarter versus last verbal right lung protection of box with whatever way you be the key broke up a little bit substandard loans are linked quarter that you have had the direction of light watchlist credit this quarter versus last?.

I don't know and I don't know envision it changing much obviously we have one large credit in RESG that still a watch credit that’s obviously our largest watch credit. I don't know the direction of the large category either we’re not expect to have a material difference from what was at 331.

Obviously our substandard went down because we moved to substandard loans at RESG to OREO during the quarter..

Great, sense there is no large RESG watch credit within this quarter?.

Yes RESG had no new watch credits because RESG is still only has that one watch credit that we talked about extensively in the last several quarters..

Our next question comes from Matthew Breese of Piper Jaffray..

Just thinking variable nature of your loan portfolio just opposed with some the early actions you’ve taken on the deposit side with the Fed seemingly likely to cut at the end of the month or at least by the end of the year. I was hoping for some color or expectations around the margin as we potentially go into a Fed cutting environment.

How do you expect it to behave?.

So I think Tim has included lines with your management comments document has suggested that you know over multiple quarters we expect a roughly parallel move in our core spread – from a decline in rates.

And you know it points to the fact that in our nine quarters of Fed increase as I think our cost of interest bearing deposits were up four basis points more than our yield on non-purchase loans.

So we had quarters and there were the loans gained and core spread improved to quarters and they were thought because they increased more in core spread decrease but over that 15 quarter period time nine Fed increases it was about four basis points difference.

So we would expect a similar sort of movement going down that in the long-term over multiple quarters by probably pretty close to random. In the short run you'll see quarters both directions we would expect and certainly we included in the management comments first time and figure the team is it 14.

All the floor rates in our loans stratification and floor rates in our loans and we commented at the – in the paragraph below that that is.

We have months where you know older variable rate loans with floors that were set at the time those loans were originated as those payoff with their lower floors and we replace those with newly originated loans that will have floors at or near the current rate. We built more protection into the variable rate loan portfolios.

So I suspect the Fed will cut rates at the based on rates and commentary at the end of this month.

We would prefer that they wait another few months to do that because the evolving defensive nature of our loan portfolio to protect us from down rates improves every month as we roll-off older loans and add on newer loans with floors closer to current rate..

Yes, just trying think and stepping back and thinking about slower loan growth outlook and the margin combined with the efforts to really increase net interest income growth just trying to gauge or get an idea when could see that that inflection point higher on net interest income growth.

And if you have idea or next 12 months or 18 months when we can start to see that?.

Well I think that the is going to depend really on two things average earning assets which will depend on the effectiveness of our programs to increase RESG originations without sacrificing credit quality to continue to scale up Marine and RV without sacrificing credit quality or pricing and community bank vertical scale in Europe.

And then the other important component as we said management comments as our ability to better manage our cost of funds and get that down. So I think those are the variables that hopefully we got a soft to get to a positive net interest income number sooner rather than later.

We’re very effective at solving those variables so we can generate more average earning assets and get our cost funds down, I think that will help us get to a positive net interest income scenario much sooner, if we languish in our efforts to achieve those goals and that kind of push that out farther..

And then just to get a better idea of how competitive things are, when you do lose your dealers, something is refinanced away from you and you look at the terms of the competitor, can you look at those and say, that individual or that funding sources really taking it on the profitability perspective or do you see a real building risk from a credit perspective on behalf of the new borrower?.

Well, I - let me - I don’t want to state from my competitors.

I’ll just say, we look at - we look at a lot of transactions that we lose and a lot of transactions that get reified away from us and we make the comment that we would never do that loan at that leverage or almost credit terms and often times, we also might comment, we would never do that loan at that pricing for that duration.

So we scratch our heads a lot at how aggressive some of our competitors are on both credit and pricing terms at times. Yet, despite, we’ve very competitive environment. Our lenders are doing a very good job of generating positive loan growth in a crazy competitive environment..

Just last one for me, thinking about the New York City construction portfolio on the exposure there across the different asset classes.

Just want to gain a sense for that given the new multifamily rent laws and whether or not that would or would not have a real impact on you?.

We don't think that has any real impact on us at all. You know, we've never been an active lender in that space on rent regulated, rent stabilized properties. Now, Tim mentioned in the management comments, document that a lot of our multifamily loans, I think it’s by about half dozen of them in the New York area, have 421-a tax abatement provision.

So the way that works as a sponsor can enter into a contractual agreement with the city or housing authority, I am not sure who the counterparty that that agreement is but the sponsor might be doing a 200 unit apartment project and they may have agreed to make 15% of those units, 60% of them available at below market rate to individuals that are making some percentage of the median income maybe 85% of the median income.

So in exchange for a contractual agreement to make those units that part of the project available at below market rates for 25 years say, the sponsor might get a 25 year abatement reduction in the taxes to own the project, so it simply a mathematical calculation.

From a sponsors point of view, how much of a saving in taxes versus how much has they given up in rental income can make a portion of the project available to people who made a certain percentage of the median income threshold.

Our sense is and it’s not absolutely clear, but our sense is that the new legislation that was passed for the state would limit those increases, rental increases on those below market rate units, which again is 10% to 20% of a project, typically would limit that to the 2% annual increase.

That has no effect on us, because we didn’t underwrite any increases in rents either the below market rate or the market rate rents in our economic analysis of the projects. We are seeing flat rents with no increase.

So we're not really affected by that and of course the - one of the more pernicious provisions of the new law is the fact that a landlord cannot recover capital expenditures more than 2% per annum and which makes it infeasible for people who need to renovate these properties to renovate and ever recover the renovation cost that doesn't come into play at all on our 421-a projects, because that's our new construction, there's no renovation at all.

And then we had a tiny handful and I am going to ask Tim to give you a number..

$23 million..

Yes. $23 million of loans left over from our Intervest acquisition, $25 million of loans. I'm sorry, not 23, 25 left over from our Intervest acquisition and these are small multifamily projects that have one or more rent stabilized units in them. And typically these have more market rate units than rent stabilized.

So there’s one or more rent stabilized or rent subsidized units in each of the - that we think you know, that's a very old season portfolio, very low leverage, the leverage and….

29% loan-to-value today..

29% loan-to-value and the debt service coverage own is20 plus I think. So you know, the impact of the loan that relatively tiny bit of our portfolio is negligible and we don't think really there's any impact there, given the low leverage and hard debt service coverage and seasons nature of that portfolio..

Our next question comes from Brian Martin with Janney Montgomery..

Just a couple of things for me. I’ll keep this short.

The - maybe I don’t know if its Tim or George said on the deposit side, what percentage of the deposits are kind of rate-sensitive that move without you guys doing anything versus, where the opportunity is to take action like Tim mentioned, where you kind of been active already this quarter thus far but what's the rate-sensitive deposits to a day one change?.

Well, Brian, the deposit book falls into two categories, one is CDs, at ever fixed rate for the duration of the CD contract. Those will move then will move based on rates that we set when they mature.

And then the others are administered rate products that the - we make conscious decision to change the rate on it such as the savings accounts or money market account or whatever and might make the rate change on those administered rate products.

So they're all, none of them are very few I guess, we have a couple of deposit relationships that actually float with the small number more than couple, but a small number that actually float with Fed funds target rate or Fed funds effective rate or something like that.

But the vast majority of our deposits are either administered or fixed, CD maturity deposits and the equation paradigm there is how much can you adjust rates and not meaningfully impair your relationship with the task..

And just on the loan side, just kind of the community banking verticals, I mean, I know that outside of board now, the indirect portfolio, where is the biggest opportunity to scale up in some the other is to help maybe offset some of the payoffs scenarios.

Which areas are you seeing more traction in today are more optimistic about?.

We’ve got several areas there that where we’re getting some traction in and some were been more meaningful than others. We would really like to expand our government guaranteed SBA lending business organically in our local markets through our local branches using our GGL team.

We think we can do that, one of the increases in overhead as we've been trying to staff up in that unit to get more volume out that.

We think that helps to serve our communities in very proactive way and provides a good quality, good yielding loans for us at the same time, our business aviation group, we’ve added couple more origination people, our buyer and we think we’ve got some good opportunities there.

In fact, that group is coming to see me right after this call to discuss transaction they're working on that they would like to maybe look at where we're trying to get more traction and affordable housing and charter school particles. Our subscription finance and kind of specialty C&I business we got a really good transaction.

That we’re excited about that that would be almost a $100 million transaction that we're working on and have been working on for a number of months couple of quarters now. That seems to be coming to fruition they’ve got couple of other things to close there.

So, you know none of these is going to be and RESG or indirect Marine, RV type of volume business but collectively we're hoping that we can get this every quarter a little bit more scale and volume out of these and that over the course of 2020, they’ll become much more significant contributors to our growth and the diversification of our portfolio..

And just the last items - maybe I missed it I joined a little bit later. I know sound like they were talking about the expenses but just - is it fair to assume from the comment I heard in the tail-end that the expense growth the next several quarters in particular through 1Q is kind of similar type of pace give or take.

And then it may be moderates a little bit thereafter is that kind of what I heard on that?.

Brian that was just what we said early yes we do think that we will still have some growth in that expense line items like two or three quarters but we are hopeful that as we get into 2020 that we can - feel out some of these areas we've been focused that will allow us to see less increase on quarter-to-quarter basis that we will just see in last two or three quarters..

And just the - and the last one just on the margin, and kind of core spread I guess is your outlook I guess George or Tim on the core margin, should I guess just the margin versus the core spread.

I guess that those will kind of follow one and another meaning I guess maybe - there is not a lot of risk to where the margins at today over time you know similar to what you are seeing on the core spread.

I mean those I guess pretty connected is that how you guys are thinking about it or how we should be thinking about it?.

Yes, I mean they're going to be mostly connected and obviously purchase loans is another big component of our margin it carries a pace. So how those move will impact margin obviously today the loan yield on non-purchased and purchased are fairly similar..

Yes..

So those are the other two variables in the margin..

[Operator Instructions] And I'm not showing any further questions at this time. I turn the call back over to our host..

There have been no further questions. We'll conclude the call. Thank you very much. We look forward to talking to guys about 91 or 92 days something like that. Have a great quarter. Thank you..

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day..