Good day, ladies and gentlemen, and welcome to the Bank OZK First Quarter 2019 Earnings Conference Call. As a reminder, today's conference is being recorded. I would now like to turn the call over to Tim Hicks. Sir, you may begin.
Good afternoon. I am Tim Hicks, Chief Administrative Officer and Executive of Investor Relations for Bank Ozk. Thank you for joining our call this morning or this afternoon, excuse me, and participating in our question and answer session. In today's Q and A discussion, we make forward looking statements about our expectations, estimates and outlook for the future. Please refer to our earnings release, management comments and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward looking statements.
Joining me on the call to take your questions are George Gleason, Chairman and CEO and Greg McKinney, Chief Financial Officer and Chief Accounting Officer. We are very pleased to report our Q1 results, and we'll begin by opening up the lines for your questions. Let me ask our operator, Chelsea, to remind our listeners how to queue in for questions.
Certainly. Thank you. And our first question will come
you guys could provide just
a little more color commentary on the net interest margin outlook. There was some text in the management commentary, which of course we appreciate. That this seemed a little more negative. And I was just trying to get a sense of where you're expecting them to trend over the course of the year? And is it fair to assume even core spread compression is likely given a flat yield curve?
Ken, there are a lot of variables there obviously in core spread and even more in net interest margin. So I think we gave some very detailed commentary regarding deposit cost, which we reiterated our prior guidance that we expect those to be down for the year or the full year of 2019 or not increase as much for the full year of 2019 as in 2018. We also gave guidance that we thought our Q1 increase in deposit cost would be the highest quarter of the year and that the other three quarters should all be down from that. So, I don't know that we have a lot more intel to give on the deposit side. Certainly, you're correct that the slight downturn in LIBOR rates since the last week or 2 of December put a little pressure on loan yields and deposits.
About 78% of our variable rate loans, I think, are tied to 1 month LIBOR. That's down 2 or 3 basis points from the end of the year or from the high near the end of the year. So that's a little bit negative and certainly the flat yield curve puts pressure on a lot of our fixed rate loan offerings. Most of our loans are variable rate, but fixed rate consumer and small business loan products tend to price given the duration of the product of the 2, 3, 5, 7, 10 year part of the curve and the flattening of that curve takes a little bit of the juice out of those yields. And we continue to be in a very competitive pricing environment.
Notwithstanding that, we're working very hard to maximize the yield on every new loan we originate. So I don't know that we have a precise guidance that we can give you on that except to tell you that there are are forces that challenge our net interest margin. There's a lot of hard work being done to maintain it or improve it. And we just have to see how those forces play out. We don't there are too many variables to give you precise guidance on that.
Yes. Ken, this is Tim. The other thing I would point out is, obviously, as we showed on Figure 11, this was the Q1 in which our non purchased loan yield is actually higher than our purchased loan yield. So that's been a factor in putting pressure on our margin for many quarters now that so that factor is assuming that continues, that factor is less is not a headwind where it has been before. And the other thing I'll point out is we do have an industry leading net interest margin of 4.53%.
So I think that's we're very proud of that margin and going to work, as George said, work really hard to maintain that industry leading margin that we've had for many years now.
Understood. It is one of the best or the best of any bank that I cover. I guess maybe switching gears just slightly, George, if you can talk just a little bit about the landscape for RESG. I think it looks like pay downs were I believe it was a little bit less this quarter, but obviously your commentary that you gave that, RESG was going to be a smaller percentage of the total growth as the sort of non RSG loans grew. Is that more a function that the non RSG loans are growing?
Or is it a function that you still see very competitive sort of payoffs and paydown environment for the RESG loans?
It's a combination of all those factors, Ken. We said in our January conference call that we expected our RESG pay downs to be at an elevated level again in 2019 and that those would likely exceed the level of repayments that we had in 2018 for the full year. We reiterated that guidance in the management comments that we issued yesterday. The $1,130,000,000 in RESG pay downs in Q1 was just fractionally more than the level of pay downs in Q4 of last year. So still experiencing strong pay downs.
We still think that that's going to be a headwind to RESG's growth this year. We did have a really good quarter of originations in RESG, dollars 1,860,000,000 which was our best quarter out of the last 5. You have to go back to the Q4 of 2017 to have a better quarter of RESG originations. We continue to think that we'll beat last year's level of originations for the full year and hopefully we'll beat it by a nice margin. Time will tell on that.
We've got a good pipeline on RESG today for new transactions transactions that we're working on. But it's interesting too of the more significant transactions we closed in Q1 had been transactions on which we had been working really more than a year to get those transactions to a successful closing. So the fact that you've got a good pipeline in this day and time doesn't necessarily translate into instant gratification. For example, we had a loan in committee yesterday that we reapproved for closing. It was originally improved for closing in July of last year when the sponsor got their pricing on it, their pricing came in cost came in way over the top end of their estimate range.
So the sponsors spent the last 9 months basically value engineering the project and has really come up with a much better and more profitable project, which we were thrilled to get reapproved yesterday. But by the time we get that closed in a month or 2, that will have been in here 10 or 11 months. So the lead time to get some of these things to fruition sometime is longer than you would expect. But we do have a good pipeline. We did have a good Q1, and we're excited about that.
All right, perfect.
And then
just one last question. In terms of the non RESG loan growth, obviously, it was a little weaker this quarter. Is there any seasonality that we may have missed or forgotten about? Or and I guess well, I guess the other part of the question is, I guess what gives you confidence that, that accelerates towards the later part of the year?
Well, I feel very confident in the job that our teams are doing there. We did have about $70,000,000 of pay downs in the last week or 2 of the quarter on subscription lines that we had. They just several of those credits made their periodic calls on their investors to fund their subscriptions and that resulted in pay downs in those lines. So our community bank growth was looking better until the last week or 2 of the quarter when we got a lot of pay downs on that. So I think we are making good progress there.
I feel very good about what we're doing. I, along with Cindy Wolf, our Chief Banking
of all of our offices. We're visiting my goal
is to visit of all of our offices. We're visiting my goal is to visit every office in the company starting December of last year through the end of September of this year, basically a 10 month project. And we've been in 115 offices so far meeting with the team, looking for ways to improve what we're doing and we've got about 100 and 40 something offices to go. But from that experience being in the field with our teams, I am very, very positive about our prospects to continue to grow and advance our businesses across our footprint. This is Tim.
You had mentioned seasonality. I will point out that indirect RV and Marine typically has a pretty strong Q2. So that's one of our business units that has a little bit of seasonality where second quarter tends to be their strongest quarter.
All right. Very helpful. Thank you very much for your answers.
Thank you. Our next question comes from the line of Catherine Mealor with KBW. Your line is open.
Thanks. Good afternoon.
Hi. Good morning, Catherine.
One thing you mentioned also in the management comments was that there were other verticals within your community bank that you may bring to a national scale. Any insight there or not ready to disclose that yet?
Well, yes, our business aviation group certainly falls into that category. We think we've got some good room to grow that. Our GG and L, our government guaranteed, which is primarily SBA lending platform, I think, has the ability to scale quite a bit. We have some expertise and it runs small, more regional successful operations and affordable housing and charter school finance. Our subscription line commence is really is a national business And we're looking to expand the breadth of that into some other more complex non real estate lending opportunities.
So I think there are a lot of verticals that we have that have quite a bit of room to scale.
Great. Thank you. And then
I will follow-up on any update on the watch credit that, I mean, when you look at your bubble chart, that's kind of hovering in the upper left corner there? Any update on that credit this quarter?
No change. They continue to have good townhome sales. They've got the and I'll say final phase of lot development in process now and entitled and they've started selling lots in that final phase. And I think they're off to a decent start given the amount of snow that they've had on the ground that has kept people from seeing some of those lots as much as might be desirable. So we're feeling as positive about that certainly as we were 3 months ago.
Okay, great. Thank you.
Thank you.
And our next question comes from the line of Stephen Scouten with Sandler O'Neill. Your line is open.
Hey, good afternoon, everyone. Curious guys on the discussion around floors in your variable rate loan book. Can you talk a little bit about how many of your loans might be near or at their floors or how close to being at the floors? Is there any kind of color you can give around that as an impediment to lower loan yields if LIBOR is to continue to decline a little bit?
Yes, we can give you some color on that. As of March 31, 9.93% of our variable loans were at their floor. If rates dropped a quarter, that number would go to a little over 14% would be at their floor. If rates drop 0.5 point, about 19% would be at their floor. If rates go down 3 quarters of a point, almost 23% would be at their floor, down 100 basis points, it's 26% of the variable rate loans would be at their floor.
And then moving in quarter increments 29%, 40%, so down 150 basis points, 40% of them hit their floor. Down 200 basis points, 61 percent would be at their floor, down 225 basis points, 88 would be at their floor. So obviously, the floors have been installed on those loans. Almost all of our variable rate loans do have floors. The number, Tim, is 98 percent of our variable rate loans have floors.
Those floors have been installed over the growth and development of that portfolio. So we've had 9 Fed funds rate increases. So some of them were floors based on rates 9 moves ago and some were 8 moves ago and some 7. So if we stay in a period this year of relatively stable rates, that floor situation ought to improve significantly because we'll be rolling off loans that are older that were originated when the floors were much lower and replacing them with new loans at higher floors. So as long as we're in a stable rate environment, those percentages should get better every month and every quarter.
That's great color. Thanks, George. And then can I'm curious if you guys have expanded your parameters at all around RESG. Obviously, the 1.8 $6,000,000,000 was great this quarter. And I know you used to say 6% to 8% of the loans you looked at, you would actually book.
And I'm wondering if any of those numbers have changed or if you've had to widen the net at all to deliver that sort of growth in this environment?
I don't know about the pull through cashing ratio sort of metrics. I don't have those current and Tim's nodding that he doesn't either. But I can tell you our credit standards have not changed at all. And we're continuing to follow the very rigorous credit standards that have led us to 18 basis point historical loss ratio on that portfolio. I think the portfolio quality is good or better today than it's ever been.
So we have not weakened our credit standards at all to achieve growth.
Perfect. And then just last one for me. Can you talk a little bit about how you think about uses for your excess capital? I mean, I don't know what your view is there, but I would peg it at like somewhere north of $600,000,000 And obviously, you noted that the Board decided not to do a share buyback. But I'm wondering what the view is for the company on if you had to stack rank uses, is it just maintaining and is dry powder for behind the scenes in the thought process there possibly?
Well, we addressed that to some degree in the management comments. I think probably the only color worth adding to that is that the Board and senior management of the company are very optimistic about our medium and longer term organic growth abilities. And we believe that we've got a well demonstrated track record of being able to opportunistically capitalize on opportunities that occur in times of economic dislocation and distress. So I think the best way to characterize the Board's decision is and management's recommendations in that regard is that we believe we'll have opportunities to use that capital through organic growth, including opportunistic capitalization on opportunities that may arise at various times.
Perfect. That makes a lot of sense. And no doubt, the opportunistic
Thank you.
Thank you. Our next question comes from the line of Timur Braziler with Wells Fargo Securities. Your line is open.
Hi, good afternoon, everyone. Thanks for the question. Maybe starting on the deposits, nice quarter here. It looks like much of the end of period balances came on towards the end of the quarter. I'm just wondering what your thoughts are there on seasonality and how much of that will stick and what your general thoughts on deposit generation are for the remainder of the year?
Yes. Hey,
Timur. Obviously, there is a little bit of seasonality in when you think about just tax refunds coming in in late February March. Obviously, we had a really good amount of growth for the quarter in deposits. We had a good amount of growth in our non interest bearing deposits as well. Our I think our growth in the total deposits was $530 something 1,000,000 compared to growth in our total loan balance of $350,000,000 So good growth there.
We're excited about that. I mean, our Chief Banking Officer and Chief Deposit Officer, Cindy Wolf and Adi Kerley are very focused on maximizing the value of that portfolio. Obviously, April, we'll see some tax outflows as people make payments on taxes as well. So we feel really good about our ability to continue to grow our deposits as needed to fund our balance sheet growth and we'll work really to improve the mix of that as we continue throughout the year.
Okay. And then if I can follow-up on Stephen's question regarding RESG, maybe ask it a different way. It looks like in the Q3, you'd booked your largest credit within that portfolio. In the Q1 here, it looks like another top five credit was booked. Is there a conscious effort to move upstream with this larger balance sheet?
Or is this just the effect of being as successful as you have been in that space and sponsors wanting to do these larger deals with you?
Let me take that one, Tim. As shown in the management comments document, there is a table there that breaks down the RESG portfolio. It's figure, what is it, Tim? 32. 32.
That really breaks down the RESG portfolio by loan type. So yes, we have, as you correctly observed, originated over the last three quarters, our largest and second largest loans and at least one of the next group of large loans there. But the portfolio continues to be typified by very broad spectrum of loan sizes. We had a loan in committee recently that was a $20,000,000 loan, which is on the smaller side of RESG's business, but certainly something we want to do for established customers. The focus of the RESG portfolio has really always been on great properties in great locations with really top class sponsorship.
And we've always said that the larger the credit, the better the quality has got to be. So the large credits that you mentioned, we're extremely proud of because we believe they are great assets in great locations and have A plus sponsorship involved in them. So we were thrilled to do those. We'd be thrilled to do a bunch more like them because we've got great confidence in those properties, locations and sponsorship.
Okay, great. And if I could just ask one more question on the RV and Marine portfolio, 3rd year really running that book. Has that portfolio now normalized where you're starting to see kind of a normal level of payoff and pay downs? And how much of a headwind is that going to be to potentially seeing that similar type of growth rate as you had in the past year over year and a half?
Well, certainly as portfolio has gotten bigger, we're seeing more prepayments and pay downs in that portfolio. We believe there's considerable upside over time to that portfolio's growth and the portfolio grew net non purchase growth in that portfolio last year, Tim, was $1,032,000,000 Is that right? That's right. Something close to that, if that's not it. So we think we've got a potential for another great year of growth this year, very similar to last year's and probably another great year of growth in 2020 and hopefully for several years to come at those sort of growth rates before we reach a point that the portfolio has the ability to grow it and the payoffs have reached a velocity that it would impede our ability to grow it.
So we think we've got several more years of really strong growth in that at this point.
Great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Brody Preston with Piper Jaffray. Your line is open.
Good afternoon, everyone. How are you?
Hey, Brody.
I just wanted to, I guess, go back to the pricing on your deposits. In your commentary, you mentioned some abatement in deposit competition towards the end of year 1. And I'm expecting you can you expect some of that to continue a little bit throughout the rest of the year given your commentary on deposit cost trending. Just wanted to get a sense of which markets you're seeing that in or if it's across the entire footprint?
Yes. Let me clarify the comment and I'm going to decline to give you specific market details on that, but let me clarify the comment. After the Fed's rate increase in December, there seemed to be a particularly aggressive fervor for rate increases on deposits and people seem to be very aggressive on that. And of course, at that time, the sentiment was that the Fed was going to be raising 3 or 4 more times the Fed funds target rate this year. And so you saw deposit prices reset over the course of December and early January.
And even as there was a significant shift in sentiment regarding the likelihood of Fed funds rate increases in 2019, we didn't really see any meaningful abatement on anybody's part on deposit rates until probably in the month of March and mostly later in the month of March. So we've made adjustments. We've seen in the last few weeks, a number of competitors make adjustments downward in deposit rates, which we think is very prudent. Obviously, as we talked about earlier, LIBOR rolled over really at the beginning of the quarter and you saw a 2 or 3 basis point downtick in 1 month LIBOR and 20 or so 20 to 30 basis points downtick in 3 month and 6 month LIBOR. So you're and with flattening of the yield curve early in the quarter, pricing on loans tended to adjust
early in the quarter and pricing on
deposits didn't seem to on deposits didn't seem to abate much until the end of the quarter, which I think was detrimental to some degree to our Q1 results. And hopefully, the deposit price and adjustments will catch up with the loan pricing adjustments in the current quarter.
Okay, great. Thank you. I guess sticking with deposits maybe in terms of growth, can you give a breakdown where you show the percent of branches within cities versus the percent of deposits within cities? And it seems like there's a little bit of a disparity there. Just wanted to get a sense for growing deposits in cities as a strategic point of emphasis.
And if it is, do you see that maybe negatively impacting overall deposit costs, just given the disparity between the cost of urban deposits versus rural deposits?
Well, the objective that our deposit guys pursue is to take this funding forecast that we mentioned on Page 20, what is that, Tim? Page 28. Yes. Page 28 of our management comments, we describe a 36 month forward funding forecast as a very detailed projection of our needs for deposit growth and liquidity month by month for 36 months. We constantly are updating that at least monthly and often more often than monthly.
And the deposit guys are charged with generating those funds at the lowest cost of funds while adhering to a whole bunch of parameters regarding liquidity and concentrations and balance sheet risk and so forth. So it's not a preference for urban deposits or rural deposits. It's a preference for the best lowest cost deposits we can get.
Okay. Okay. And then I guess I wanted to go back to the res g, the SOL Watch credit. It looks like it's moved up a bit in LTV since the Q3 when you guys first sort of addressed it. And I wanted to get a sense for what the current LTV was.
And I know the $57,500,000 was the full commitment that you had, but I wanted to get a sense for what the total funded portion was right now?
Yes, Brody, I think the funded portion is roughly $50,000,000 The current LTV is, I think, 102 right now. And again, it's a revolving facility. They're building product, obviously, and then as that product sells, it pays down as well. So $57,500,000 is the total commitment with about a little over $50,000,000 currently outstanding as well.
Okay. Okay. So the value that you guys are pegging on that product then is roughly $49,000,000
That's correct.
Okay. All right. When was the last appraisal on this property done?
It's been within the last year. What we do is appraise it on an annual basis and obviously it's a revolver. So we use the parameters, the holding periods, the discount rates, the other parameters from the appraisal and readjust the appraisal on a recalculate our loan to value using the appraiser's methodology applied to a constantly changing pool of collateral. As Tim mentioned, we're building vertical properties there, our sponsor is. They're selling those.
They're developing lots. They're selling those. So the pool of collateral is constantly changing. So you could get an appraisal today and it would technically be dated tomorrow because you sold a unit and you built another unit. So what we do is get an annual appraisal, use the appraiser's precise methodology, applying that methodology to constantly evolving pool of underlying collateral.
Okay. Okay. So that's so you guys are sort of coming up with your own appraised value Well,
you could say we're coming up with our own appraised value, but we're using the appraiser's methodology and just applying it to the collateral.
So if
he's saying, okay, we're going to assume a 2 year holding period on lots and a discount rate of 15%, then we're assuming a 2 year holding period and a discount rate of 15%. And if he's assuming that houses are going to sell for this price per square foot, we're making that same assumption as houses sell and new ones come in. Obviously, if the sales prices are not in line or consistent with what's in the appraisal, then we get a new appraisal. But as long as the sales prices are at or consistent with what's in the appraisal or above it, then we're only going to get an appraisal on an annual basis. But if you say that we're making up our own appraisal on it, that's not really accurate.
We're using very precisely following the appraiser's methodology on
Yes. I guess what I meant is that you guys are sort of reassessing the appraised value on a quarterly basis then just given the change in the underlying collateral?
Exactly. Exactly.
All right. And are these primarily secondary homes?
It is a mixture of primary and secondary homes.
Okay. All right. And I guess I wanted to get a sense for when you get paid back on this loan, is it primarily through the sale of the plots or is it through the sale of the developed homes?
Both. There's a lot development feature of the line and a vertical construction feature. So it's a combination. Some parties buy a lot and do their own home construction for cash or with their own financing. There is property that townhomes that are developed by the sponsor and settled, hence completed townhomes as part of the structure.
Okay. And did this loan have an interest reserve account associated with it when you guys originated the loan?
When the loan originated 10 years ago, yes, it did. It does not now.
Okay, great. That's all I had. I really appreciate the questions guys.
All right. Thanks.
Thank you. Our next question comes from the line of Brock Vandervliet with UBS. Your line is open.
Thank you. Okay. Following up on that last question, I was just going to ask generally about interest reserves. Is it general policy within RESG or within construction commercial construction in general to set up an interest reserve at the outset of a loan?
That's a general policy in commercial construction lending industry wide. And our practices are very conservative in that regard because our leverage points are so low. At March 31, our average loan to cost was about 49.5%, which meant that the sponsor, the pref equity, the mezz subordinated pieces of the capital stack had over half the project cost invested, and our average loan to value was around 43%. So yes, there are interest reserves built in our loans, but it's not like we're financing a high percentage of cost and loaning on the interest. We're financing a very low percentage of cost of the project that includes a reserve for interest during the construction period.
Now you could say, oh gosh, we would prefer that the sponsor pay the interest out of pocket. Well, the sponsor is paying the interest in effect because they're putting a lot of equity into the project. We would rather have the sponsor put in all their equity before we fund anything than for us to say, well, we'll let the sponsor put in 10% less equity and we'll let them keep that equity and pay interest over the life of the project as it's incurred. So getting the sponsor to put all their money in first and then including the interest in our loan is actually a more conservative, not a less conservative strategy.
Yes. I absolutely understand. On that credit, so this has been in the bank for a while. What was the issue? Was it the sell through rate initially was slower than pro form
a? In the aftermath of the Great Recession, this property suffered a great downturn in value on lots and homes and development slowed for a while as a lot of things did in the Great Recession. That reset of values lower kind of permanently reset the value of the project. And as a result, the project has more debt on it than you would want to see. It's our highest loan to value loan.
But the project has continued to be successfully
but project has continued to be successfully executed. They continue to
sell townhomes. They continue to sell lots. They continue to improve the amenities of the project. And values have a stable to positive trend there. So it's a project that because values went down a lot during the Great Recession, they've never fully come back to where they were at the high before that.
It just has too much debt on it. But our projections are that the property will sell out of lots and townhomes with net proceeds sufficient to cover all of our principal, all of our interest and return some equity to the sponsor. So for that reason, it's a performing credit. The most likely scenario in our view is it continues to develop and pay off and that we never lose a penny of principal or interest on it.
Got it. Okay. And separately on the Figure 11, that chart showing the intersection of purchase and non purchased loan yields. Does the purchase loan yield continue to drift lower as that portfolio runs off or should it hang around here at the 6 and change yield?
I think we made a comment in the management comments document that that portfolio yield as that portfolio has seasoned, has tended to drift down even though 40 something percent of the loans in that portfolio are variable. So I would expect that it will continue to drift down. Although if you look at that chart, you can see that there a quarter or 2 when it's down and then there's a bounce and then another quarter or 2 where it's down and then another bounce for a quarter or 2. So it varies quite a bit from quarter to quarter because there are marks on that portfolio and net present value discounts, purchase accounting discounts on that portfolio. And depending on the mix and volume of pay downs and which particular loans pay down in various quarters or pay off, there tend to be some chunky recognition of those purchase accounting marks on that portfolio.
So it will vary. I think as that chart shows, we were, what, at 685 dollars 2Q. Well, let's see. Yes. But all the way back at 3Q of 2015, we were 685 dollars and it's now at 629.
So it's tended to go down, but not precipitously and certainly not in a linear fashion.
Got it. Okay. Thanks for the color, George.
Okay. Thank you.
Thank you. And our next question comes from the line of Michael Rose with Raymond James. Your line is open.
Hey, guys. Good afternoon. Hope you're doing well.
Hi, Brian.
I don't know if Tyler is in the room, but I just wanted to say congrats on your career choice. And just wanted to see, George, if you guys have thought about replacement for that role and if you do plan to replace Tyler once he moves on.
Tyler is not in the room today. Tim, do you want to take that? Yes. No, I mean, obviously, Tyler has been a very important part of our organization for over 13 years and we wish him well. He's done a terrific job for us.
We've got it. One of the great things he's done is helped mentor and coach and hire really great folks underneath them. So we've got a great team underneath them. We have a Chief Jeff Starkey, our Chief Technology Officer Chad Nasseri, our Chief Information Officer will report to me going forward. Marcio de lavera, given his really strategic nature of what he does leading Ozk Labs is going to report to George.
And then you've seen over the last couple of quarters, Cindy Wolf taking over Banking Officer role. She's been with us for over 20 years and is doing a terrific job and is accompanying George on all 254, two sixty locations on their tour. And of course, we've hired Adi Kirley as our Chief Deposit Officer in the recent quarter. So again, we've got a great team and have built depth over the years and feel great. So no immediate plans to replace that role.
I've taken a couple of positions, direct reports George has and then the increased responsibility that Cindy and Adi have had over the last several quarters. We feel like we're in a terrific position. And Tyler, I'll add to that. Tyler leaves with our great gratitude for all the contributions he's made to our company. And as I told him yesterday, he and I had a visit and I told him I had great admiration for his courage and conviction to leave a really great job and with a great salary to go full time in ministry work.
I don't know what he's going to be making, but it's probably not what he was making as a banker. And it's a calling he has, and he felt very strongly about it. And we have great respect for his conviction and calling there and his courage to go pursue that. And I think he'll be very successful at that. I think Tyler's type of guy will be successful at whatever he does.
No, he'll certainly be missed. Just moving on, the CRE concentration has certainly come down. I think you're around 3 13% now. Just interplaying that with the decision to maybe not go the buyback route, which it seems like many would like to see you do. I mean, is the goal in keeping the capital growing and elevated here, a desire to potentially bring that CRE concentration down below 300%?
Michael, there are a lot of factors in the Board's decision. Certainly, our CRE concentration is one of many factors that weighed into that consideration. Given our strong earnings and our capital retention and given the diversification that's occurring in the portfolio and the pay down of CRE in the purchase loan book and the pay down of so many of our loans in our RESG book, we think there is a decent possibility that both the total CRE and Construction and Land Development ratios continue to drift lower. That's not a specifically articulated purpose or goal of our company for them to do so, but I just think market conditions combined with our strong earnings will do that. And there's some benefits to that too if we can generate significantly more growth in other parts of our company and have a more diversified portfolio, which we think we can do.
All right. So I know you have kind of a targeted upper limit range, but is there an optimal range you'd like to maybe get to on the CRE construction concentration over the intermediate to long term?
No.
Okay. Final one for me. Some of the banks have thrown out initial day 1 CECL estimates and what the capital impact might be in moving some of the loans from PCI to PCD. Just wanted to see if you were ready to at least give some initial guidance around that. Michael,
this is Greg. I'll take that. We still have a plan of working through our CECL implementation. We are making good progress with that. It's really kind of a 2 phased project.
We're developing scorecards across the entirety of our portfolio. That project is really getting close to being completed that will allow us to do some initial testing and validation with that project. Parallel, we're also developing our CECL platform. We are still online on a time line to have that done, probably in late Q2 or early in Q3. The goal being to be able to run parallel runs using June 30 data during the Q3.
So at this point, we still don't have a day one number or even an estimate that we can throw out or we'd be comfortable to throw it out. But we do think that probably in the next 90 days or so, next 120 days, we'll be getting pretty close to that point. So as we continue to move forward down the path of finalizing both those projects and making some parallel runs, we will certainly provide some day one feedback. But at this point, we're still a little too early to give you guys any feedback or ranges there.
Okay, helpful. Thanks guys. Appreciate it. Thank you.
Thank you. Our next question comes from the line of Matt Olney with Stephens. Your line is open.
Hey, thanks for taking my question. I just wanted to circle back on loan growth and with your expectations of pay downs being elevated for the rest of 2019. I'm curious if you'd be surprised if 1Q results represented the high watermark for your quarterly loan growth for 2019. I'm trying to get a better idea of the pace of growth throughout 2019 since you guys have pretty good visibility when you expect to fund some of your larger loans?
Matt, we articulated in our January call, our management comments and reiterated exactly the same guidance and the management comments just issued that for the full year of 2019, we expect non purchased loans to grow in a lowtomidteens percentage range. And that continues to be our expectation. I think we also reiterated that we expect significant variation in that growth from quarter to quarter. So I think that's the guidance we gave in January, we still think it's very good guidance. So let me leave it at that.
Okay.
And then on I guess digging back on the margin, it sounds like there were some miscellaneous fees that were once again a nice tailwind for your loan yields in 1Q. I think this was also the case in the Q4. And I know there's many things that go into those fees that you've described previously. Is there anything unique about the current loan production or the current loan payoffs that you expect that 2019 you could maintain those fees at a higher level? Or should we just conclude that back to back quarters is not quite a trend and this will eventually move lower?
We commented, I think, in October of last year in regard to our Q3 earnings that are unusual or not unusual, but our items such as minimum interest and exit fees and prepayment penalties, those sort of things that push that run rate of lung yield up or down as they were unusually low for Q3. They were better and above average in Q4 and better and above average in Q1. Now it's a little bit hard to describe sometimes what is the average you're measuring against because it is a fairly variable component and it moves around quite a bit from quarter to quarter. So we would hope that every quarter would be a good quarter, but our experience has told us that we'll have some quarters that are below par and some quarters that are above par in that regard. And we're glad to have had a above par Q1.
I don't think to your question specifically there's anything unique about what we're doing today. We did start adding minimum interest figures into our loans and the majority of our loans, almost all of them now have a minimum interest requirement in them. We've been doing that for a couple of years now. So we're beginning to harvest some pretty good benefits from that. For example, we had a condo loan in New York that paid off yesterday.
It completed about, I don't know, probably a month ago. CO, and they immediately started selling condos and they paid our loan off yesterday. And the sales velocity on my project was so brisk that the loan was underwritten to have $7,000,000 of minimum interest in it. We had only collected through payoff $5,600,000 So we booked a $1,400,000 minimum interest number yesterday as income from the payoff of that condo project. So as long as projects continue to pay off much more rapidly than you would have thought, that tends to generate some of those extra income items.
Okay. That's helpful, George. Thanks for that color. And then just lastly from me, over the last few years, you've ramped up investments in several areas from compliance to audit, enterprise risk management and a few more. Can you just talk about where the bank is within this ramp?
And are we now at a more steady state? In other words, is that now in the run rate? Or is there still some ramp that will on the come?
I think the big build is done there. And the comments that we put in the management comments document, I think, said we'll continue build that infrastructure commensurate with our growth and the increases in the size and complexity of our organization over time. And certainly, our expectation and regulatory expectation, and I hope our stockholders' expectations is that we would we'd make sure we've got appropriate infrastructure in place and built to run the company. But the big lift there has been done over the last several years. And I don't know that we're ever at a steady state because I think it always improves and always evolves, but the big lift is behind us.
Great. Thanks for taking my question.
All right. Thank you.
Thank you. Our next question comes from the line of Brian Martin with FIG Partners. Your line is open.
Hey, guys. Good afternoon.
Hi, good afternoon.
Hey, George, just one question. 1 or 2 questions that haven't been covered. The quarterly loan originations for RESG, the quarter you talked about in 1Q being a bit stronger. Can you I guess, is there anything to read into that number? I guess, whether are there more projects you're looking at here that contributed to that?
Is it bigger projects like you mentioned earlier or just any more color on what was driving that this quarter?
Brian, part of it is just the timing that these things close on. 1 of the projects, I guess, the largest loan that we closed in Q1 could have easily been a closing in Q4 of last year. But various details and nuances of that project and the evolution of it from approval in October to closing in Q1 of this year just resulted in that sliding a couple of months farther than we would have considered Ideal. But our sponsor used that time very advantageously to continue to enhance their profitability and prospects with projects. So sometimes these things, as I said earlier, just take a long time to incubate, particularly the larger more complex transactions sometimes it's not unusual to work on it 3 or 4 or 5 or even 6 quarters before you get approved transaction closed and actually begin to execute the project.
So part of it is just the timing of these things and how long it takes to get them done.
I got you.
Okay. All right. And then you talked you spent a lot of time talking about the deposits and kind of trends you're seeing there. Just is there more opportunity, George, to increase loan yields from where they are today as you're booking new credits? I mean, outside of obviously, with the rate sensitivity, if rates don't go up and the variable rate nature, but just with the new loans you're booking, is there opportunity to have some benefit there going forward?
Are you seeing any of that today?
Well, Brian, that's what I said. It's all about execution and we're certainly trying to do that, but it's a very competitive environment. As I said, the slight down drift in LIBOR rate and flat yield curve are a couple of factors that make it harder to get loan yields up. Competition makes it harder to get loan yields up. But the challenge that our lenders are given every day is go out and find great quality assets that we can get paid a fair return on and work hard to maximize our return.
So it's a battle out there and we fight it every day and as our 4.53% net interest margin suggests, we've done a pretty good job over the long term of getting good yields on our assets and we expect to continue to try to do that.
Okay, perfect. And maybe one for Greg was just on the expenses. It sounds as though if that much of that build is done that the expense run rate is a pretty good level heading into 2Q and maybe on the fee side, the fees are a bit on the lower side given some of the seasonality in Q1. Does that kind of make sense, Greg, or if someone else wants to answer it?
Yes, Brian. On the fee side, I mean, we've given guidance that it was like over the last 4 or 5 quarters. I think they have bounced around between roughly $24,000,000 $28,000,000 We think that's a pretty good range from the standpoint of what we expect on a go forward base. Obviously, there's those things have a tendency to bounce a little bit from quarter to quarter, but we certainly feel like that's an appropriate range. On the expense side, I mean, as George talked about the build out there, and yes, we are probably from that build, we're probably bottom of the knife pending on that from just the field out there.
There are still a few positions in audit BSA, IT that we're looking to add over the course of 2019. But really it's going to become more of a maintenance and type of an add as we go forward. We are continuing to try to bring in resources as part of our team and reduce our reliance on third parties and consultants. So our hope is that over the next several quarters, we can continue to push those consultants out of the bank and bring in the skill sets and expertise we need to handle those technical aspects, whether it's in BSA or whether it's an audit or technology or elsewhere across the bank. So, yes, we feel pretty good about those run rates.
I think they're pretty clean. We did have them, but salary fees from a reversal related Tyler, but for the Buck option, that was a small number there. So it really had no impact on salaries either.
Okay. All right. I appreciate it guys. Thanks so much.
Thanks, Brian.
Thank you. And I'm showing no further questions at this time.
All right. Thank you very much. We appreciate all of you being on the call today and we've enjoyed talking about our Q1 results. We look forward to talking with you in about 90 days. Thank you very much.
Have a great rest of the day. That concludes our call.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.