Good day,
ladies and gentlemen, and welcome to the Bank OCK Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, today's conference is being recorded. I would 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 and A discussion, we will 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 Gleeson, Chairman and CEO Greg McKinney, Chief Financial Officer and Chief Accounting Officer and Tyler Vance, Chief Operating Officer. Now let me ask our operator, Kevin, to remind our listeners how to queue in for questions. Kevin? Kevin?
My apologies, my headset was muted. Our first question comes from Catherine Mealor with KBW.
Thanks. Good morning.
Good morning, Catherine.
I just wanted to start with a couple of questions on the 2 credits that had deterioration this quarter. I guess my first question is just can you give us a little color about when the credits went substandard? And then how and then when the $19,000,000 reserve was originally built into these credits?
Yes, be happy to do so. The South Carolina credit went substandard in the Q2 of 2017. The North Carolina credit went substandard in the Q4 of 2017. And of course, our substandard and watch assets and other ratings on our assets are reported in the notes in our Qs and Ks. So those were disclosed in those numbers, not specifically referenced, but disclosed in those numbers.
The reserves for them, the $19,000,000 were accumulated over that period of time. Each of those credits was a watch rated credit before it became substandard. So when it was a watch rated credit, they had a 2.5% allowance allocation for them. And then as they became watch rated credits, those allowance allocations were increased based on the appraisals on the properties at the time. The 2 properties have both been appraised in the last 2 years, one I think about 2 years ago and one about a year ago.
And then of course as the performance of those deteriorated this year, we obtained new appraisals on both properties in the quarter just ended. Obviously, the property performance had deteriorated significantly on both that poor recent performance was factored into the assumptions in the appraisal that led to a significant divergence in the most recent appraisals from the 2 appraisals done just 1 or 2 years ago on those properties. And hence, that's why the additional provision was needed over and above the 19,100,000 that was previously reserved for these.
Got it. Okay. So, I guess the big question with these credits and trying to figure out is, are these kind of one offs or is there more risk in the rest of the portfolio? I mean, that's the big question here today. And I think your chart on Page 4 of the management comments is super helpful in showing that you don't have a lot else that's in this vintage or these types of credit.
So that's super helpful. But I think the question is, it still was a very sudden and very large decline in the value and in the lower appraisal. And so what can you tell us about the rest of your portfolio that can give us comfort that there isn't risk in the accuracy of appraisals for the rest of your RSG book? And particularly maybe they're newer vintage credits, but they are significantly larger credits.
Yes. I can give you quite a bit of color on that and probably some additional color that would be helpful as well. Let me return to the 2 properties that we wrote down, the two credits we wrote down in the quarter and give you a little color on those. So South Carolina property is an enclosed shopping mall and one of a tiny number of enclosed shopping malls that we have in the portfolio and I'll discuss the others on those. The prior appraisal on that had assumed that the mall would continue to gain tenants and fill vacant space with tenants and reach a stabilized condition.
As it turned out over the course of the year, several more small tenants exited the space. There was until just a few months ago, a very active negotiation going on to refill some of that space and replace that lost rent with a new tenant. That negotiation collapsed And when we ordered the appraisal based on the lack of leasing velocity, the new appraisal essentially assumes no leasing of vacant space and a continued erosion of the tenant base as leases expire and so forth. So the appraisals focus changed significantly from an operating property that will continue to replace tenants and go forward to a property that would just essentially melt down and that's reflected in the extreme change in the valuation on it. The North Carolina property, which is a multi phase lot and land and residential home facility, Those guys have done a really good job improving the club operations and the sentiment around the property.
And as a result of those improvements, there's been a significant number of homeowners who have previously bought lots began to construct custom homes in the subdivision. So there's a nice tone about it. That increased level of activity and improved sentiment around the club also resulted in a lot of people who bought homes over the last 20 years in that subdivision, bringing properties to market. And the new properties coming to market undercut the pricing on the new product that our borrower was developing. And as a result, these, I think, sold 1 or 0 homes this year and 2 lots this year.
So there's just been no sales philosophy this year of our borrowers newly developed product. Despite the improved sentiment around the project. So when we ordered the new appraisal, the appraiser assumed based on the sales velocity that our borrower was experiencing this year that the homes and the inventory would sell out over 5 years and the lots would sell out over 15 years. And I might not be exactly right on this, but I believe the discount rate on the homes was 18% per annum discount rate on that net cash flow from the 5 year sellout. And the discount rate applied to the lots was a 24%, 24.5% discount rate on those lots.
So when you assume very long sellout periods as the appraiser did and you can't necessarily argue with his assumptions given the lack of sales velocity this year, and you use those extremely high discount rates, you get a very wide delta from the previous appraisal that assumed a more typical discount rates and a more normal sales velocity. So those appraisals had very wide variances from the previous appraisals. That is fairly unusual in our experience to see that. So if you look as you referenced, Catherine, at Page 4 of the management comments that bubble chart there. Clearly, there are 6 assets in that portfolio that were originated prior to 2011.
These two loans that we charged down, 1 loan that is on watch status and then 3 older loans that are all in the 30 something percent loan to value range. So the vintage old stuff in the portfolio, we don't consider an issue at all. The if you set aside these 2 credits or charge down in the watch credit, the 4th highest leverage loan in the RESG portfolio is 73% and every other loan in the RESG portfolio is less than 67% of appraised value. Properties are regularly and frequently appraised. So we feel very confident in the quality of the portfolio and the fact that there's not another shooter drop or another issue in the portfolio beyond the substandard and watch credit.
I would also address one of the folks writing a comment on our report suggested incorrectly, they misread the color here that the watch credit is another retail credit. It is not. It is a lot development and vertical construction. Land development credit is not a retail credit. And I'll give you a little color on the other retail parts of our portfolio, specifically enclosed shopping malls.
In addition to the enclosed shopping mall that we have that was charged down in South Carolina, We have one other enclosed shopping mall in the portfolio. And interestingly enough, it is the retail loan that is 73% loan to value in the RESG portfolio. That loan is $5,700,000 It is 131 months remaining on the amortization. It has a positive debt service coverage. It has full recourse guarantee to an exceptionally strong individual borrower that we've done lots of business with over the years.
So we consider that absolutely not an issue at all. Interestingly, that is a JCPenney anchored shopping center with Sears in a shadow anchor position. Those are the only other exposures that we have to a JCPenney or Sears tenancy in the portfolio. So one other enclosed shopping mall. We do have one loan in our purchased book that is on a retail strip center about 290 something 1,000 feet.
Part of that is a strip center and part of it has a small portion of enclosed mall space as one part of it. That is a $10,000,000 loan that's on a was originally on a 20 year amortization, several years of that it burned off. It's at about a 63% loan to value and generating about 180 debt service coverage. And that credit also has strong personal guarantor recourse for the full amount of the loan. So given that that's partially enclosed space in retail, I would tell you, we have 1.5 other enclosed shopping malls, both very low dollar loans and both with very strong personal guarantors.
If you look back at our RESG portfolio 20 or 10 years ago, 20 plus percent of that portfolio was retail. Today, retail accounts for 1.4% of the RESG portfolio. So obviously, the retail sector has been a very challenging sector for landlords and developers. There's not been a lot of need for new space, and we have steadily reduced our exposure to the sector just based on conditions in the retail sector. We're not concerned about any of our other RESG credits.
We're not concerned about any of either of those 2 other shopping facilities that I discussed.
What's the size of the watch the full watch list credit?
The credit that is shown on the RESG bubble chart here?
Yes.
That credit is a revolver and it's a revolver for lot development. It's a revolver for vertical home construction. The total outstanding balance on that today is about $49,000,000 and change and the total committed balance on that is $57,500,000 total committed. And I saw one of the commentators who suggested that was $100,000,000 credit, that's not accurate. It's fully funded, it would be 57,500,000 dollars That is a very high end project.
Sales velocity and pricing trends are stable to positive on that. In the last 12 months, they've sold 16 lots and have 4 under contract to close between now and the end of the year. They've sold 4 townhomes out of the vertical inventory and have 6 more under contract expected to close before the end of the year. And those sales velocity numbers are consistent to improve with prior years. That credit, we expect to continue to operate as it is and continue to generate accretive pay downs and we expect that as that project liquidates out through normal sales of inventory that they either have or will be creating, that we'll have more than enough proceeds from those sales to repay our principal and interest in full without any sort of delinquencies and so forth.
Our current loan to value on that project is right at 97%. It is a watch credit, so we have 2.5% reserve allocation for it, which we think is quite adequate given the sales trends and pricing trends on the project.
And one more on that, Craig, and then I'll pop out of the queue. What market is that credit
in? That is California. Okay.
All right. I'll pop out. Thanks for all the color.
Okay. Thank you.
Our next question comes from Stephen Scout with Sandler O'Neill.
Hey, George. Good morning.
Hey, good morning, Steve.
I was curious about the frequency of appraisals. I know you spoke to the fact that they were relatively frequent, but can you give an idea about how many of those appraisals, if you know this number might be over 2 years old at this point in time? And then assuming they're from what I hear, dollars 25,000 a piece on average, I mean, could that be an incremental cost that has to come through if we need to reappraise all these things?
Well, number 1, we don't need to reappraise them and the costs vary quite a bit from project to project depending on the complexity of the project. Of course, that drives the complexity of the appraisal. Obviously, what we do is get a loan at origination on these credits. If our loan is more than 6 months old at the time we do a modification, renewal, extension of the credit, we get an appraisal there. Most of our loans, as you know, are around 3 years before the maturity, some are 24 months or 18 months, some are 42 months.
But the kind of the median and mean probably on that is 36 months. If a project is experiencing any sort of unusual circumstances, difficulty, delays, problems, we will get a new appraisal part and our RESG loan documents, I think almost universally, if not universally, require that if we have to or deem it appropriate to get a new appraisal, our customer pays for that. So the appraisals are as current as they need to be to give us an accurate view of property values to make sure that we're operating off of relevant current market information. And if we find ourselves in a situation where we need to get another appraisal, that expense is almost always borne by the customer under the loan structure.
Okay, fair enough. And what would happen, I guess, if you were to stress the discount rate on your book as a whole and on those appraisals, I mean, have you guys done kind of math around that to see what downside would be from a stress discount rate if that was part of the issue here?
Well, every loan is stress tested if it's an income producing property four ways and one is a series of economic stress based on vacancy and rental rates. 1 is an interest rate sensitivity stress test as to how much our loan could increase and still have amortizing debt service coverage at stabilization. 1 is a sale exit stress test based on where secondary market pricing is for permanent loans, how much could rates go up and our sponsors still exit with enough proceeds to pay our loan off. And then the 4 stress test is a sale exit stress test that is based on current cap rates and projected NOI and how much could that go up. So these loans were stress tested in a lot of ways and we feel extremely good about the quality of this portfolio.
We acknowledge that the fact that we had 2 charge offs in the RESG portfolio this quarter will unnerve some people and some will think the wheels are falling off. But in reality, we've had 5 losses in that portfolio in 15 years on there's at any point in time in recent years 300 to 400 credits in the portfolio. And we've had 5 cumulative losses in the life of the portfolio, we feel extremely confident in the quality of the portfolio and that there's no significant risk beyond the 2 credits that we've written down. The watch credit we've discussed in detail, it has an elevated risk profile, which is why it carries a watch status. But based on our analysis of that project and so forth, watch as opposed to sub standards, the appropriate rating.
So we think it's relatively low, albeit elevated risk associated with that. All the other credits we believe are clearly past credits with significant margins for ARRIS on all sorts of stress metrics regarding the performance of those credits.
Okay, that's helpful. And one last one for me, I guess. I mean, you sound still pretty confident about the whole of the book and obviously, I see in this bubble chart, I can see why based on where the LTVs are today. But I guess given the kind of sentiment around the business, do you guys reconsider your risk appetite at all? I see in the largest bubble here, I assume can you talk to maybe the risk appetite for those largest size loans?
And if just overall sentiment and market conditions make you rethink how you approach this business moving forward?
We are a commercial real estate and construction and development lender. We are very conservative in the way we do that. When this year is over, I'm confident that once again this year for the 22nd or however many years, it's more than 22 years in a row, our losses will be below the industry's loss ratio. So we're going to continue to execute our business strategy and it's not going to change our underwriting, our analytics or our structure or pricing on deals. We will have an occasional loss in the RESG portfolio.
We're in the lending business. Anybody that's in the lending business is going to incur occasionally some losses in your portfolio. But just as we've had 5 losses in the last 15 years in the portfolio, my expectation is that even though the portfolio is a lot bigger, we'll probably have a similar volume of losses over the next 15 years. We will occasionally, in a quarter here and there, in a year here and there, have a loss in the RESG portfolio. But we're not changing our business model at all because we believe it is very, very sound and very, very conservative.
So it's business as usual for us and we still are originating loans. The credits you mentioned that we originated right at the end of the Q3, it is the largest credit we've ever originated. And it is a condominium loan credit in Miami. It is a great project and it is a great sponsorship and we're very excited and pleased to be the senior lender on that project, in fact, the sole lender on that project. The project is 1 we've been working on for over a year and Buildings 12 at this project have long since been built and very successfully sold and operated.
And this loan started out to build Building 3, which was part of Building 3, 4, the next big phase of this. And the common areas that served Building 3 and Building 4 run underneath the bottom floors of Building 3 and bottom floors of Building 4 and in between those buildings. So we were working on a loan to finance Building 3. We had worked extensively on the structure of that for over a year. Their sales continued to be good throughout that time.
And in fact, the sales velocity was accelerating. So as we were approaching closing on that, they were nearing 60% sold out. I don't remember the exact number, maybe a little higher, a little lower, but around 60 percent in sales, which is essentially enough to fully repay our loan. So as we did that, we were working with the sponsor on the challenge and the cost of building the amenities for both buildings and building Tower 3, but not building Tower 4. And there's certainly a considerable amount of cost and inefficiency in building it that way.
So we suggested to the sponsor, I believe, that they go ahead and consider Building 4. And the sponsor like that idea because with the amenities all associated with Building 3, the cost per square foot in Building 4 is lower and the inefficiencies of having to stop at a certain point and then restart construction on building for later were compelling. So given the sales velocity and the quality of sales and the deposits that are up on the sales on this, the quality of sponsorship and quality of product, it looked to us to be an absolute no brainer to do the transaction. So we were very honored and very pleased to be selected as the lender on that.
Great. Thanks for the color, George. Appreciate you taking the time.
All right. Thank you.
Our next question comes from Arren Cyganovich with Citi.
Thanks. Question on the portfolio management. I was surprised to see that you still had credits that were 10 years plus old. To me, I would think that those credits would just naturally be somewhat problematic and maybe you need to take reserves for something just given that these projects typically don't last that long. So maybe just talk a little bit about why they stayed in the portfolio, why they weren't sold, why they weren't reserved for in a larger manner prior to these recent credit issues?
Yes, very happy to do so. And I don't think there's any negativity associated with the fact that older loans are in portfolio. I'm sure most banks have multiyear old loans in their portfolio. So I don't know that there's any correlation there between any quality issues. In the pre Great Recession era of RESG, we tended to originate more loans that were sort of transitional or semi stabilized sort of properties or stabilized properties for that matter.
And that also meant we were doing loans at higher leverage. So this South Carolina credit on the shopping center that really is the only income producing property there in the sense of having tenants and paying rent. That is the only vestige from that era of the RESG portfolio when we were doing more of those sorts of loans and doing them at higher leverage than we do credits in the RESG portfolio today. As you'll notice from the color of dots on the little bubble chart there on Page 4 of the management comments, the other 5 are either land and lot and vertical construction revolvers, which were intended to be long term projects and that would be the North Carolina credit and the watch credit are the other 3 loans that are down in the 30% loan to value range. Those are land or land development loans.
And those in some cases, a couple of those particularly were intended to be long term landhold plays that were done at 50% or less leverage and they amortize every year and they were expected to be longer term credits. So given the very low leverage of those and the quality of our sponsorship on those, we're quite comfortable with that book of business. So I think to really kind of drill in, I think, on where you're going even among the 6 older credits in the portfolio, the 2 substandard and one watch credits are appropriately rated. The others are excellent.
Okay, thanks.
In your prepared commentary or your commentary yesterday that you mentioned the pay downs being accelerated and likely to accelerate or remain high in 2019. So it sounds as though that prior year's very high growth is now going to be much slower than it had been, if not flat going forward. And the question is, if your credit does continue to perform as you expect, you should be generating pretty nice capital. And would you consider now, particularly with your stock down so much, instituting a relatively large stock buyback plan?
Well, that's a great question. And that question, of course, was asked on our conference call 3 months ago. Our Board took up that issue in the August Board meeting. And I would tell you that senior management and the Board have a more constructive view of our growth projects or growth prospects over the next 3 to 5 years, that I think is probably typical among the listeners on our call today. We've had a tough year of growth because we've had just such large paydowns as detailed in Figure 20 on Page 15 of our management comments, which you alluded to.
And we do think that, that growth paydown continues. As we wrote in the management comments, we are expecting a record level of loan repayments in this current Q4 of 2018, so much so that our growth in non purchase loans is probably going to be 0 or negative and could be quite a bit negative if all those pay downs materialize. We do expect to continue to have another high level of pay downs next year based on projects that we expect to see out in the sales on projects that will be reaching certificate of occupancy status next year. So I think we'll be dealing with a high level of pay downs again in 2019. We are encouraged, as shown in Figure 21, by the fact that without giving any ground or diluting the quality of what we're originating or the return on equity on what we're originating that our originations in Q3 were $1,470,000,000 I think we've got a real good shot of having the best origination quarter of the year in Q4 if we can get everything closed that's in the pipe.
So I think if you look at Q4, we're going to have a really good origination quarter. We're going to have that overwhelmed by a high volume of pay downs. And we think in 2019, our origination volume plus funding on loans we've already got on the books will allow us to achieve some decent growth better than this year's growth in non purchase loans. And we believe that the trajectory is more positive after that. To look at the potential stock repurchase issues from time to time.
I would suspect that our Board will want to get our 4th quarter results in the books, look at that again in the February Board meeting. I'm not going to prejudge what we're going to do there because that's going to depend solely upon our expectations for growth and so forth. We are not holding on to capital because of any concern about additional credit quality issues or so forth. We expect our net charge off ratios to return to very normal levels for us after this unusual quarter. But we also want to make sure that we retain enough capital to take advantage of future growth opportunities and particularly growth opportunities that might occur if we had an economic slowdown because we've been very opportunistic to very prudently capitalize on unusual opportunities in prior times of economic stress.
And we think we'll be in a great position to do that the next time that occurs, and we want to make sure we've got the capital to do that. So the Board will take all those factors into consideration. And if we feel like we've got more than enough capital that we need or if we feel it's prudent to change some common equity for sub debt or some other form of capital, the Board will make that decision at the appropriate time. This is going to be something that's going to continue to get discussed. But I don't think given the Board's discussion of it extensively in August that it's probably going to come up in the November agenda.
Okay. Thank you.
Our next question comes from Ken Zerbe with Morgan Stanley.
Great. Good morning, George.
Hi. Good morning, Ken.
I guess maybe let's talk about your margin or your core spread just a little bit. Obviously, it was a pretty sizable decline down 19 basis points in core spread and margin, I guess. Can you just help us understand, I hear the stat about the 77% of the non purchase loans are variable rate. It feels it seems that your course rate has been under pressure for a couple of quarters. It was down obviously this quarter because LIBOR didn't go up very much, but it was also down last quarter when LIBOR did go up quite a bit.
I'm just trying to help you can help us understand the dynamics of why we've seen sort of a couple of quarters a week margin and spread? Thanks.
That's a great question, Ken. And what I was most surprised about and most disappointed about in the quarter on the spread front was the fact that our yield on non purchase loans actually went down one basis point. That we I had to really dig into the minutiae to come to the conclusion that, that was correct. A lot of factors played into that. And one was that we had what I think was a lower than average number of credits generated by loan prepayments this quarter.
Now we had a record level of loan prepayments, so you would think that would generate a lot of credits. But the loans that paid off for the most part were past any sort of yield protection that we had on them. They were at a point where most of the near maturity or at maturity, so all are substantially all of the deferred credits from the origination fees had already been earned in income on those as they approach maturity. And we just didn't get the extra bumps from minimum interest prepayment exit fees and so forth that we've gotten in some prior quarters. So it was a light quarter there.
We had the charge off of the accrued interest on the two loans that we put on non accrual that was about 570,010 was $572,000 $572,000 I mean that's not a huge number, but it was in there. We had more loans pay off in our community bank and indirect portfolios that those loans, a lot of those have net deferred debits instead of credit. So we sort of got dinked on the debit. You mentioned the LIBOR issue and the fact that on a period end to period end or an average basis that was up 14 or 17 basis points when we have 25 basis point move in the fed funds rate that you would have expected to filter through there. And you could just go through all of the things.
And normally, in a typical quarter, some of these things kind of lean to a positive side and some lean to a negative. Everything just leaned negative on that NIM this quarter. So we think based on the expectation of another Fed rate increase at the end of this quarter and what we think will be a normalization of some of those kind of unusual little things that go to and fro and push your yield up or down, we think we'll have a much more normal result this quarter. We believe that, that quarter where our yield on non purchase loans went down is an anomaly. We think we'll see a return to a more normal pattern this quarter and in future quarters as long as the federal reserve continues to raise the Fed funds target rate.
Now in regard to the second quarter of this year and the core spread, yes, we were disappointed with that. To some extent, LIBOR didn't give us as much boost in Q2 as it did in Q4 of last year or Q1 of this year. So there was a bit of a LIBOR impact there. And of course, our deposit beta was about 21 basis points in Q2. Is that right, Tim?
The deposit beta was higher, but the average cost went up 21 basis points. Yes, average cost went up 21 basis points. I'm sorry, I said that wrong. And we really started trying to work on the deposit cost in the quarter just ended. We got a little bit of improvement there, the 18 basis points.
That's still not satisfactory, but it's going in the right direction. And we've got a fairly detailed and comprehensive effort that a lot of folks are working on to really improve the data, the analytics, the pricing, the strategies and structures around deposit pricing and deposit price optimization. I think we'll see continued improvement in that, particularly as we get more of the technology and more sophisticated parts of that rolled out in 2019. So yes, we were disappointed as you were and as everyone was in the negative move in core spread over the last two quarters. We're working really hard to flip that back to a positive.
I do think the yield on non purchase loans in the quarter just ended was an anomaly and we'll get to a more normal pattern of behavior there going forward.
And are you able
to quantify them? I think points number 1 through 3 that you mentioned seem like they're just they have almost nothing to do with sort of the loan yields or sorry, the interest rates. Like if Q4 went back to normal and you had better credits on the prepays and other things like in the community banks, How much what are we I mean, can you size that for us? Like are we talking that your core spread actually jumps up by X basis points because of a normalization? I'm just trying to get size there.
Tim, go ahead. Yes. Hey Ken, this is Tim. Really look at Page 1718 of our management comments, we enumerate and George explained a lot of those points. I think we've got 5 different bullet points there.
Just that $572,000,000 write off is worth 2 basis points on the margin. And you can kind of go through all of those different points that we have there and they're worth a couple of basis points each. And so I'm not going to try to size what that would be, but you could then look at our Figure 24, which shows all of our increases on our non purchased loan yield, that trend over a several quarter period. And if you start with 4Q 2016 and go through 2Q 2018, it averages 16 basis points of increase per quarter. And even if you throw in this past Q3, which we think was an anomaly, that's still 13 basis points of average increase every quarter.
So I do think to George's point, this is an anomaly. We feel like we'll get back to a normal range in the Q4 on non purchase yields. And then as George mentioned, obviously, we're showing improvement on the deposit cost side. So we hope to continue to show that improvement. That sets us up for a much better result for Q4 core spread.
So again, we've got some things that all of which move kind of against us during the quarter, and we've got those kind of outlined in our management comments.
Got you. Okay. That's helpful. And then just one last question in terms of rates or specifically the deposit beta and your deposit gathering strategies. Given the expectation for no loan growth next quarter and 2019 obviously is a little bit weaker than probably what we had expected.
Are you able to roll back some of the spin up markets or I guess I'm trying to think of like, can you stop paying up for deposits since you, I guess, technically don't need them as much to fund the business?
Yes. I'm going to let Tyler answer that, but I'm going to intro Tyler's answer to that by saying, spin up is not so much term we're using. And if you think about how we've described spin up in the past, it's been a very geographic focused market segmentation strategy. And in reality, it's Georgia's old strategy. And it's worked well for us for a number of decades.
But that strategy has not worked as well for us this year and this cycle as it has in the past because the competitive world has changed with a lot of online competitors and consolidation that's occurred in the banking industry means that we're in some of the markets we're in now means we're up against much more regional competitors, some of who are very aggressive on pricing. So our strategies needed to change. So what we've tried to do is start a process of evolving to a much more sophisticated strategy that's focused on customer, product and geography. So we're really not doing what under our old rules of engagement strategies was spin up. We're moving to a much more nuanced and sophisticated strategy.
And this is the Tyler Vance, Cindy Wolf, New World of dealing with this issue for our company, and I think it's very timely. And Tyler, you may want to add some comments on that. Yes. The only comment I would add is that certainly we are focused on these additional analytical capabilities. And those in the Q3 started to give us much more visibility in terms of our deposit activity in various markets, as George mentioned.
Market segments from a geography product and also a competitor standpoint. So this analytical data and modeling enhancements that are underway or planned, we think will continue to contribute to better performance in terms of beta. Deposit specials are a continuing part of our deposit acquisition strategy, as George mentioned, and we do expect to continue to offer various CD or other specials from time to time in certain of our pricing regions, but our deposit team's prime focus is on increasing our volume of core deposit customers. And the management commentary, you saw some of those results in terms of net checking, which has once again been excellent at 22,099 net new accounts through the 1st 9 months of this year. And of course, that number is already in excess of last year's full year number of 22,013.
And we expect it to grow further in the 4th quarter. Now to your original question, I do think some of the slower growth that we're describing obviously should translate through to a lower beta in Q4 or that's certainly our hope. It gives us an opportunity to continue to take out some of our highest cost deposits as we move through the quarter. So we're hopeful about that.
All right, great. Thank you very much.
Our next question comes from Michael Rose with Raymond James.
Hey guys, thanks for taking my questions.
Good morning, Michael. Just wanted to go back
Good morning. Just wanted to go to that figure 21 that you referenced earlier and the originations clearly are down. Now George, in past calls, you've talked about a lot more of the markets and submarkets being balanced from a supply demand dynamic and now not only are pay downs seemingly structurally elevated, but you're seeing more competition from traditional bank lenders that have come into the to the space that you guys operate in with RESG. I guess my question is, I mean, have we peaked in terms of originations or
do you think this is
the right time to continue to try and gain market share perhaps at the expense of cost and rate? Thanks.
Well, what I would repeat, Michael, is what we've said for my 39.5 years as Chairman and CEO and that is that quality is non negotiable. We're not going to do things that don't need our very stringent asset quality standards. And we're secondly only going to do things that give us a satisfactory return on equity for the capital invested. So we are not going to try to gain market share in a highly competitive market by cutting our credit standards or getting too aggressive on pricing. That discipline is the singular reason that our volume of originations in Q1 and Q2 of this year were half the volume of originations in Q1 and Q2 of 2016 or 2017 in round numbers, about half the volume.
We maintained and I spent a lot of time talking with our lenders over the course of Q1 and Q2 that if we would hold to our standards and continue to work hard and call on customers and turn over rocks for opportunities that we would be able to get our volume back to a better level without giving up credit quality or giving up pricing. And I'm very gratified. It's a big win for us even though it's lost in all the noise of the quarter that our volume came back up to $1,470,000,000 of originations in Q3 without us giving up our credit or our pricing standards. Again, as I mentioned, we think we're well positioned to potentially have our largest origination volume for the year in Q4. We've certainly got the deals lined up to close.
We've got to get them closed, but we've got good volume there. And we seem to have good pipelines going into next year. So I think that we've held to our principles, we've held to our standards and some of our customers and some market opportunities are coming back to us. Now it may be a while before we see the origination volume that we saw in 2016 2017. There are two reasons for that.
One, they're just fewer real estate transactions that meet our standards for credit quality and so forth today. And 2, it is a very competitive market and you mentioned a number of banks coming back into the space. As you well know, there are also a number of non banks in the space. So if you've got pure real estate transactions being created that makes sense and you've got extreme competition, then it may be a couple of years or more before we get back to the 2016 or 2017 volumes of origination for RESG. What I'm very pleased to report and we talk about this in management comments is that that cyclicality and volume in the real estate business was not unanticipated.
We've been working really hard to diversify our growth engines to originate indirect marine and RV and consumer loans and small business loans and business aviation loans and poultry loans and SBA loans, all sorts of other loan types. And last year and so far this year, those other loan types have been a larger contributor to our growth in RESG. And that diversification is healthy by providing us volume when the opportunities aren't there in the real estate sector at the same level that they were in 20 16 or 2017. It's also healthy and that I think it just gives us a lot more balance in our portfolio as a company. So while we acknowledge where we are in the cycle, And I hate to use that term, but I will because it's often used.
While we acknowledge where we are in the real estate cycle as far as where the volume opportunities are, and we acknowledge competitive condition. We think we've got a lot of other ways to generate good quality, good yield and earning assets to augment the growth that we get in RESG.
Okay. So I guess the follow-up to that so you built out a couple of these other businesses. It's really contributed to the overall growth of the company. I would suspect that those verticals just from a holistic point of view and what they could contribute to growth relative to your national RESG business are smaller. So I guess what I'm struggling with is, if the headwinds in RESG accelerate and you peaked in terms of or at least it's going to be really origination volume in RESG.
I mean, are we looking at a period where, especially with the runoff portfolio, where you could actually see little to no loan growth for the next few years?
I don't think so, Michael. I mean, it may be in percentage terms less loan growth than we've experienced over the last several years, but I think we'll generate a very healthy positive growth rate in non purchase loans going forward. And the diversification is a big part of that as well as the fact that our confidence in RESG has never been higher than it is today. Yes. Michael, this is Tim.
I mean our purchase portfolio is $2,300,000,000 right now. Obviously, it's a lot less of a headwind than it has been in previous years. I think it ran off 38% year over year. So even if you took that 38% or somewhere around that, obviously, that headwind is a lot less. We said in the comments that we would have they would expect 20 nineteen's growth to be better than 20 eighteen's growth.
So from our standards, it's not as high growth as we've had, but still pretty good growth. And it's got a good mix. So I just I point you to those data points. I think we will see, as Tim referenced in the management comments, we will see volatility in payoffs and originations from quarter to quarter. But we're pretty constructive on our opportunities to grow in 2019.
I will also I want to acknowledge because I don't want anybody to be surprised by it. We're going to have a lot of payoffs and pay downs in the portfolio in this current Q4 of 2018. And it is very possible that we'll have 0 to negative growth in the portfolio this quarter. So no one should be surprised by that. But I think when we get past this quarter, I think we've got a pretty decent loan growth trajectory going forward.
All right. Thanks for taking my questions.
Hey, thank you.
Our next question comes from Matt Olney with Stephens.
Hey, thanks. Good morning.
Good morning, Matt.
George, I appreciate the details on underwriting construction loans. And one of the items that you mentioned was the Yes.
I don't think I did mention the use of interest reserves, but I'm happy to address that question. In most complex or large construction loans, you have reserves built into the loan structure for interest, for taxes, for insurance, for everything that's going to every cost that's going to be incurred during the construction and development period to stabilization. So that's not just an RESG deal or a bank OCK deal. It's a standard practice throughout the industry and we adhere to that practice. So you'd say, wow, you're including in your loan a reserve for the interest on the loan.
But in reality, we're calculating all that into the required equity of the borrower. So we want the borrower to put their equity in before we fund our loan. So the borrower's money, if they're putting in 50% of the cost of the project and we're putting in 50%, that is our average in the portfolio, then they're going to pay for the land and pay for the closing costs and pay for the loan fees and they're going to pay for construction and development and other cost until their 50% of the money is in the project. And then when that's in, if the budget is in balance for the project, we will start funding our loan. So that typically means that we are funding the interest out of our loan proceeds, but that was just factored in as a total cost of the development and it just is the sequencing, the interest is due later in the project and that's when we're funding after all the equity is in the project.
So I think we have a very standard and very conservative approach to using interest reserves. If we have a loan that is matured, part of the renewal or extension of that loan as the sponsors got to rebalance the reserve. So for example, we were talking about some of these land loans that go all the way back to 2,000 and 6, 2,007 and 2,008 that are 30 some percent loan to value. Our typical approach on those loans is that they are renewed every year or every 2 years. When we renew them, we'll get a new appraisal, make sure that our loan to value is still going down.
We'll get amortizing annual payments on those. And at the modification, the borrower will have to deposit with us an interest and operating cost reserve that will cover the renewal period. So the sponsor on renewals, we just don't keep putting interest up on loans. The sponsors after the original period have to rebalance and replenish the reserves in a manner to our satisfaction. So I think our use of interest reserves is very prudent, very conservative, and it's consistent with the highest standards that the industry follows.
Okay. Thanks for that, George. And then going back to RESG, I think historically, you've said that many of your borrowers have paid RESG a premium price due to the higher quality service and the faster execution. But now you've got increased competition. So I'm curious if you still believe that you get paid a premium price for RESG?
That's a great question, Matt. And if you've listened to our calls for a number of years, so you'll recall in early 2016 and 2016 and so forth when we said because a lot of competitors have pulled back from the space, we were getting more premium pricing than we had in say 2014 or 2015. And certainly as competitors have come back in, in large numbers, both bank and non bank competitors into the space, our ability to get a premium price has diminished. But I think there are still a large number of our customers who value the quality of execution, the speed of execution, the quality of our asset management capabilities. And that helps us in 2 ways.
In some cases, I think we get a premium price, albeit probably not as much as we were getting 2 or 3 years ago premium from those customers. And 2, a lot of times when you're in a competitive situation, you may have competitor who's sitting right on top of your price and deal structure. And yes, we get the nod in many cases because of our track record and proven capability to execute and service the assets and work with customer in a very intelligent and understanding way. So I think, yes, it's still an important part of our story. It's still an important part of our business model.
It's not getting us paid as high a premium as it would in a less competitive environment.
Okay. Thank you.
Our next question comes from Jennifer Demba with SunTrust.
Thank you. George, just following up on the question from before about share repurchase appetite. I'm assuming you anticipated that question today, but I'm just surprised you wouldn't look at share repurchases now given the stock is at such a cheap valuation. I don't know if you expected it to go down this much or the sector to go down this much in the last several weeks.
Jennifer, I don't have anything really to add on that comment other than what I've already said. I don't think the Board will look at it in November. I think we're very anxious to get our Q4 numbers out there, which we expect will be really good numbers. I would expect as part of our annual strategic planning and budgeting process at the end of the year and going into the February Board meeting that that will be a subject that gets looked at and the Board will look at it again in February. And again, I'm not going to prejudge their conclusion.
That will depend in large part on our expectations for future growth opportunities.
Okay. Appreciate that. One more thing. You have obviously in RESG, you have the biggest exposures in New York City and Miami or South Florida, residential real estate. Could you remind us of I know you have a variety of properties, I'm sure at different price points, but can you just remind us of kind of some standard metrics, if you can, of what kind of projects you have within those two portfolios?
Well, and Tim, what page are you on there? Page 11? Figure 13 and 14. Yes. Figure 13 and 14 really talks about the product diversity in our RESG portfolio and the product diversity by geography in our RESG portfolio.
And you're correct, as shown in Figure 14, New York and Miami are our largest markets, followed by LA, Chicago and Dallas and Denver. Condos are the largest multifamily is second followed by office, hotel and mixed use projects as far as product type. You can see the numbers and the leverage points on all of that. The New York metro area portfolio has a lot of condos in it. It has a lot of multifamily in it.
It has a fair amount of office, a fair amount of hotel and they had a fair amount of mixed use and then a smattering of other things from land to some miscellaneous sort of industrial commercial. The Miami portfolio is much more concentrated in condominium loans. We've got 13 or 14 projects there. I don't know the exact number now, but I think we're about 80% sold on those projects. The typical contract for sale either has 30% or 50% non refundable earnest money up.
So we've got, Tim, 6 or 7 of those projects that are CO ing this quarter and 1st and second quarter of next year that sales are already 80 something percent on them. They're going to pay off and as soon as they see, we'll get paid off on those condos. So the Miami portfolio is very low leverage as you can see, 42% loan to value, 37% I'm sorry, 42% loan to calls, 37% loan to value. And that just reflects the very low leverage we do those condo loans at.
Thanks so much.
Thank you.
Our next question comes from Matthew Keating with Barclays.
Great. Thanks for the question. So I guess what I'm curious about, it does seem on the loan growth side, we've obviously talked in this call and in the prepared remarks how non purchase loan growth in your view should improve next year. If you harken back to earlier this year, the bank was forecasting record non purchase loan growth this year and then record non purchase loan growth next. However, on the July conference call, you kind of said there were too many variables at stake to really have a lot of visibility on 2019.
So I'm just curious like what variables have changed or do you have more clarity on now? And what level of comfort obviously that's your expectation, but what level of comfort do you have with that expectation for non purchase loan growth next year to be better given that we are expecting record near term repayments? Thanks.
Yes. That's a fair question. And I will apologize to our listeners for the fact that on the call 90 days ago, I said I don't know or we don't know that several times in response to different questions. You'll notice we have delayed our call several days from the schedule that we previously operated on. And the reason that we delayed the call is we wanted to produce more informed management comments document and have the time to produce that so we could give much more detail and written material to our listeners.
And also, we wanted to make sure that we had time to really bet some of the questions that we had not had time to fully bet in preparation for the call last quarter. So I apologize for saying we don't know several times last quarter. There are always, of course, things we don't know. But we've done a fair bit of analysis on expected payments on loans next year, prepayments, payments from sales of condos and lots and land and projects stabilizing. We've got some visibility.
I think it's pretty good into the pipeline early in the year next year. So we're feeling fairly well informed and fairly constructive when we say that we think we'll do better on non purchase loan growth next year than we've done this year. Obviously, having missed in our guidance this year, I'm not going to say any more than that. And we feel good about that. We're optimistic about that.
And I apologize that we didn't hit our growth numbers this year. We did not fully project or expect the level of prepayment velocity that we've had in the RESG portfolio.
Understood. Earlier you talked about, I guess, one
of the larger credits or the largest credit the
bank has was over $500,000,000 but that was just recently, I guess, provided or taken out. What's the largest credit that's outstanding within the RSG portfolio at the moment? Thanks.
Well, that is it. It's not significantly advanced at this time, but that's the largest credit in the RESG portfolio that was closed on the in the last week of September. So it's newly minted and just starting to fund. There was a it's a 2 tranche funding. We already had the land loan on the project at about 40% or 50% loan to cost, loan to value on the land loan.
So we when we rolled from the land loan into the vertical construction loan, we did a tranche funding, 1st tranche funding that was the land part and rolled our loan balance in to that and then the sponsor puts in all their money and we're the last guys to fund on the vertical construction. So it's a 2 tranche funded deal on that project.
Okay. That's helpful. And my final question would be on deposits. It's great to hear that Cynthia and Tyler are looking at new data analytics to make more informed decisions, etcetera. It is though our understanding that the company has been pretty data intensive in the past.
And so maybe you can provide a practical example of some of the potential changes like so we can understand how that might improve deposit beta performance. I understand you're now not just targeting geography, but also product type and end consumer. But maybe if you could provide at least one example of how that might ultimately improve the bank's deposit costs over time? Thanks.
Well, I think you guys are just going to have to take our general comments on that. I mean, I'm not going to get into the details of strategy or the details of what we're doing and how we're doing. We are making significant changes. Those have started to be implemented in a simplified version, the degree of sophistication and analytics and algorithms that go along with that will steadily increase as we build up that modeling capability, which we're already working on. And we've already significantly increased our data analytics capability.
So we're just trying to be much more sophisticated and intelligent about what we do there than we have in the past. And that will be a multi quarter evolution. It probably won't be fully rolled in until late in 2019. But we hope that as we roll it in each quarter, we hope you'll see a few basis points or a couple of basis points quarter improvement in that deposit beta as we do a better job managing that.
Thank you. And just one last question on deposits. I think in previous quarters, you've given out the New York City deposit balances. I'm not sure if I saw that this quarter. So I think those deposits stood at about $1,800,000,000 at the end of the second quarter.
Could you update us on where those were at the end of the third?
That's a pretty close number. I think it was down maybe ever so slightly from that. But obviously, that will be in our public filing.
Our next question comes from Brock Vandervliet with UBS.
Great. Thanks for taking my question. What's the average loan size within RESG?
Go ahead. Brock, it's Tim. Yes, average size is $58,000,000 assuming full funding. So total commitment is $58,000,000
Okay.
What's the
top 10 loan exposure as a percentage of the total portfolio?
I don't have that number. I don't have that either. Rock, what I can tell you is every few quarters or at least annually at the longest RESG staff comes and takes a lengthy time in our Board meeting and goes through their 50 largest credits. When we did the 50 largest credits at the August Board meeting, the 50th credit was $102,500,000
Okay. I think it would be really reassuring to get some better sense of granularity on that.
We can provide some data on that in the Q or perhaps in the investor deck. We're going to be updating the investor deck shortly.
Okay. And going back to these two credits, what I guess I don't understand is, I can we see charge offs quite frequently where there's a storm or some sort of economic change and the business models just evaporates and there's a charge off. I think everyone can understand that. But these credits you lived with for a long time and could you walk through kind of how many were there any off ramps to either offload risk and sell pieces of these loans or get claw more equity out of the borrower or the borrowing syndicate? What was done short of this?
Well, good question. And yes, there probably were opportunities where we could have sold these whole loans in the past at higher prices. That was not a strategy we were pursuing. And obviously, despite the outcome on these two credits, we have a good working relationship with the sponsors in these transactions and we think highly of them and they've worked hard and made really good efforts to make these projects successful. So the shopping center credit obviously has just suffered from the general malaise and negativity around shopping centers and particularly shopping centers that are not the super prime, super high end shopping centers that are your kind of destination event sort of shopping centers.
And we continued to work with the sponsor on these. They were never TDRs. They were never restructured. We were always getting the market rate of interest on these loans that have had amortizations on the shopping center loan up until now. And the shopping center loan is not even past due now.
It will go past due in October, but it's not it was not a delinquent credit at the end of the quarter. So it's been amortizing and been paying down. Yes, if our crystal ball had been better and we've been able to see the future and so forth, we would have probably put these loans out for sale and sold them when it was a better environment to sell them, but we didn't do that. And in regard to the lot and home development loan, a decision strategic decision was made to try to accelerate the sale of lots and the progress in that development by developing a significant amount of vertical home inventory to sell. That strategy seemed prudent to us.
It seemed prudent to our sponsor. Everybody was on board. That was a good idea. No one foresaw that when that product came to market and the other improvements and enhancements were made to the club and kind of just the general sentiment around that development that it would create a wave of resales from existing homeowners that would undercut our sponsors product in price. So that didn't turn out the way we expected.
We make a lot of good decisions. Those were not good decisions.
Going forward, would you be more aggressive in selling pieces of larger loans? I don't think that's been a strategy in the past.
I don't think that the outcome on these two properties in any way is changing our strategy. I mean, we view these as very much isolated issues. And we feel very good about the strategy with which we have built and operated that portfolio and our bank in general for decades. So no, I don't think this will change our thought in that regard.
Okay. Thanks for the questions.
Thank you.
Next question comes from Brian Martin with FIG Partners.
Hey, guys.
Hey, good morning, Brian.
Hey, George, just one comment, just going back to the buyback for a minute and that was, I mean, if you even if you wait to evaluate it at this point, I guess, do you have a sense since you've already done some work, it sounds like after last quarter, I mean, the capacity you'd have to do that based on capital levels, just existing capital levels without potentially adding some to do a buyback, but just if you kind of frame that or is that not something you can give a little color on?
Brian, anything I would say there would just be speculative and it's not an issue that's on the table today. So I have prefer to not comment on that and just let the board continue to make its evaluation of that. And we get ready to do something, we'll clearly quantify that.
Yes. Okay. I got you. And then just one thing going back to the margin for a minute. I guess if I appreciate the commentary you guys have kind of given and the factors you laid out.
But I mean if you get some better alignment between LIBOR and Fed funds and to Tim's point, you get some normalization in those multiple items that you kind of identified, Ann, the deposit betas do moderate some just given a less growth and the recent initiatives you're talking about, I guess, are we understanding it right? At least your hope would be that the margin or the core spread, however you want to look at it, should be have a bit of an upward bias from where we are today assuming the rate forecast where we get a couple more rate increases in I just kind of I know you don't give guidance, but just in general, is that a fair characterization of how you guys would be thinking about the margin today?
Hey, Brian, this is Jim. Yes, I mean, to your point on the spread between LIBOR and Fed Funds or OIS, If you look at where LIBOR was a year ago and where it is at the end of September, it's up about 100 basis points. But if you look at that spread and how that spread operated throughout that 1 year period, it did kind of it did expand in kind of that 4Q, 1Q timeframe and it contracted down to a more normal range between that spread. So I think we're at a level that is a more normal level between the two. And so we would expect that our LIBOR and Fed funds and therefore our yield on non purchase loans to be more highly correlated in future quarters.
Okay. So I guess what I said, I guess at least I guess you're kind of are you I guess is the belief that the margin should go higher if all that happens, Tim? I guess I'm not saying it's going to happen, but I guess that would be the thought, I guess, where I'm understanding that correct?
Well, I mean, I think you got to take each component of margin by itself. You got the purchase homes that are running off. Obviously, those are higher yielding, but that's 654 with its yield and non purchase yields even at 607 is coming to a closer point where those could converge in the next several quarters. Deposit costs, we gave comments around deposit costs around that too. So I think you just got to do your math around all those specific components and look at the margins there.
And Brian, I would add to that. We expect to continue to add liquidity. Our liquidity ratio went up several points in the quarter just ended. When we get the call report data, people who files, people who calculate that will see that liquidity ratio went up quite a bit from June 30 to September 30. We added 88 $1,000,000 in securities that was part of that liquidity build, part of it was freeing up pledge collateral and so forth.
We expect to continue to build liquidity. There will be a cost of doing that to our margin. So if you're running the model on us, you ought to factor in a continued increase to some degree in that bond portfolio, dollars 100,000,000 or $200,000,000 whatever you want to put in something per quarter of growth in that bond portfolio at whatever that kind of short agency paper is at a 3 year average life, that stuff is yielding about 3.20 now, I think. So we're going to continue to put more liquidity on the balance sheet because we think that's prudent thing to do. So that will weigh on margin.
I would echo what Tim said. When we get a point, if we do, where our non purchase yields rise to the point that they cross over the line the yield line for the purchase loans, I think that is a positive point for our net interest margin because then you've got the higher yielding part of the loan book growing, the lower yielding part of the loan book shrinking. And obviously, the dynamic of that would all other things being equal and everything else is not equal, but all other things being equal that would have a positive implication for net interest margin.
Okay. That's helpful. I appreciate the color. And just last few things and I'll step back was just the expense base. George, if you can just comment on if this quarter is a pretty good level absent the one time items you guys called out?
And just lastly was the origination volume that you talked about picking up, if there's any reason you can point to, I guess, that you've seen that's taking that volume higher and giving it some optimism, the Q4 could be the best? Thanks.
Yes. On the origination volume, what I would tell you is our guys have been working really hard and they've been out working with a lot of customers on a lot of transactions and we've gained some new customers that we expect to close our first loans with that are really some marquee relationships we've never had before that we hope to close transactions with in Q4. So the origination volume has been garnered by hard work. Hopefully, we can get them all closed. Greg, do you want to comment on the non interest expense?
Yes. Obviously, Brian, the name change and the rebranding costs, you had a heavy impact on the Q3. Absent those, I think that the Q3 run rate from a non interest expense standpoint is fairly clean. We continue to work to finalize the build out of some of the infrastructure that we've been talking about for a number of quarters. We think we're getting certainly to the late innings there.
We currently still have a goal of continuing to reduce reliance on 3rd parties, consultants and all as we bring that expertise and hire that expertise and bring that in house. We're continuing to identify, recruit and hire those people. And that process is continuing, but it is getting towards the latter part of that field. So I guess I'd say that and just to basically circle back around and say, I think the Q3 run rate is fairly clean, particularly if you look at it over the last couple quarters, although we are continuing our efforts to bring some of that expertise on board in house and reduce our reliance on third
Okay. Thanks guys.
Thank you, Brian.
Our next question comes from Catherine Mealor with KBW.
Thanks. It's a long call. Thanks for having me back on. I just had 2 follow-up questions. The first was just on the growth and your confidence for growth for next year.
And George, do you believe that your confidence for better growth next year is based more on what you see in your pipeline for fundings of product that you've already committed or more of the pipeline of potentially new commitments that you're gathering right now?
Catherine, it's a mixture of both. I mean, obviously, if we don't originate any new loans, we will not have growth next year. But we do have a strong pipeline of loans already closed that are funding and we're getting into a good funding cycle on a number of those projects next year. So it's a mixture of both. We've got to continue to originate new volume if we're going to have growth.
So and that's nothing different from what it's always been.
Got it. But could you argue the funding cycle
comfortable data to know that. I know what's in our forward projection. I haven't looked at and compared that to where we were a year ago, but I know what's in our projection that Tim does. And Tim, you might have some color on that. Yes, Catherine.
I mean, the funding is from a quarter to quarter, it obviously increases slightly based on just the projects we have and varies slightly from quarter to quarter. But it's a fairly consistent funding per quarter as these projects are completing throughout their life cycle. So I would expect 20 nineteen's fundings to be on average slightly better than they were in 2018. But and then you've got originations that kind of come in there as well. And as we said earlier in the call, prepayments and things will vary quarter to quarter.
So you can have different results from those prepayments on a quarter to quarter basis.
Okay, got it. That's helpful. Thank you. And then my last question is just, as you think about the higher charge offs that we saw this quarter, how do you think that's going to change the regulators comfort in your commercial real estate to capital ratio over 300%? And could that impact your future growth or your capacity for future growth or even your capital ratios?
I think our regulators are informed and intelligent enough to look at this and realize these were 2 assets we had marked as substandard. We knew there was exposure in them. We didn't know how much exposure until we got the new appraisals, but we had those things adequately reserved for based on the appraisals that were within a year old at the time or 2 years old at the time. So I think the regulators know we're doing the right thing and hopefully a couple of one off credit issues that we had will not change their attitude. I would not expect it to do so.
One thing I would point out in that regard is that even with all the negativity and the anomaly that we had regarding our yield on non purchase loans and everything else, we still generated a 133 annualized ROA for the quarter. So when you have a really bad quarter and you generate a 133 percent return on assets for the quarter, that's not the end of the world sort of outcome. The credit issues this quarter were a black eye. They're not a malignant melanoma or anything. So keep it in perspective as we go forward.
Yes, makes sense. Thank you so much.
Thank you.
And I'm not showing any further questions at this time.
All right. Thank you guys for all joining our call today. We appreciate your questions and your attention and look forward to talking with you in about 90 days. Thank you so much.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.