Bank Ozk
NASDAQ:OZK
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Bank Ozk
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Good day, ladies and gentlemen, and welcome to the Bank OZK First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded.
I now like to turn the conference over to Tim Hicks. Sir, you may begin.
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 or this afternoon, excuse me, and participating in our question-and-answer session. In today's Q&A discussion, we may make forward-looking statements about our expectations, estimates and outlook for the future. Please refer to our earnings release, management comments and other public filings for more information on the various factors and risk that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.
Joining me on the call to take the questions are George Gleason, Chairman and CEO; and Greg McKinney, Chief Financial Officer and Chief Accounting Officer;
We're very pleased to report our first quarter results and we'll begin by opening up lines for your questions.
Let me ask our operator, Chelsea, to remind our listeners how to queue in for questions.
[Operator Instructions] Thank you. And our first quarter comes will come from the line of Ken Zerbe with Morgan Stanley. Your line is open.
I was hoping you guys could provide just a little more color or commentary on the net interest margin outlook. There was some text in the management commentary, which of course we appreciate. This seemed a little more negative and I'm 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've got some very detailed commentary regarding deposit cost, which we reiterated our prior guidance that we expect those to be down for the year for the full year 2019 or not increase as much for the full year 2019 as in 2018. We also get guidance that we thought our first quarter increase and deposit cost would be 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 flat downturn in LIBOR rates since the last week or two of December put a little pressure on loan yields and deposits. About 78% of our variable rate loans I think are tied to one month LIBOR that's down 2 or 3 basis points from the end of the year from the high near the end of the year.
So, that's a little bit negative and certainly the flat yield curve puts the 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 perhaps given the duration of the product of the 2, 3, 5, 17 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 are 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 forces that challenge our net interest margin, there is a lot of hard work being done to maintain it or improve it, and we just have to see all those forces play out. We don’t -- there are too many variables to give you precise guidance on that.
Yes, Ken, it's Tim. The other thing I would point out is, obviously, as we've shown on figure 11. This was the first quarter in which our non-purchased loan yield is actually higher than our purchase 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, that continues that factor is less, is not a headwind where it has been before. Then the other thing I would point out is that, we do have an industry-leading net interest margin 453. So, I think that's were very proud of that margin and doing work, as George said, work very hard to maintain that industry-leading margins that we've had for many years now.
Understood. It is one of the best or the best, if there is anything that I cover. I guess may be switching gears just slightly. George, if you can talk to us a little about the landscape for RESG? I think it looks like pay-downs were I believe as 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-RESG loans grew. Is that more a function of the non-RESG loans are growing? Or is it a function that you still see a very competitive sort of pay-off and pay-down environment for the RESG loans?
It's a combination of all those factors, Ken. We've said in our January conference call that we expected our RESG pay-downs to be it 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 have reiterated that guidance in the management comments that we issued yesterday. The 1.13 billion in RESG pay-downs in Q1 was just fractionally lower 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 RESGs growth this year.
We did have a really good quarter of originations in RESG at 1.86 billion, which was our best quarter out of the last five. You have to go back to the fourth quarter of 2017 to have a better quarter of RESG originations. We continue to think that we will beat last year's level of originations for the full-year and hopefully we will beat it by a nice margin, time will tell on that. We got to a good pipeline on RESG today for new transactions that we're working on.
But you know it's interesting too, the more significant transactions we closed in Q1, had been transactions on which we have been working really more than a year, to get those transactions to a successful closing. So, the fact that you got a good pipeline in this day and time doesn't necessarily translate into instant gratification. For example, we had loan and 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 -- calls came in way over the top end of their estimate range.
So, the sponsor spent last nine 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 two, that will have been in here 10 or 11 months. So, the lead time to get some of these things to fruition sometimes is longer than you would expect, but we do have a good pipeline. We did have good first quarter and we're excited about that.
And just one last question. In terms of the non-RESG loan growth, obviously, it is a little weaker this quarter. Is there any seasonality that we may have missed or forgotten about? Or -- and I guess a part of the question is, what gives you confidence 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 million of pay-downs in the last week or two of the quarter on subscription lines that we had you know just several of those credits made their periodic calls on the 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 two of the quarter when we got a lot of pay-downs on that. So, I think we are making good progress. I feel very good about what we're doing.
I along with Cindy Wolfe, our Chief Banking Officer; and Alan Jessup, our Director of Community Banking; and John Carter, our Chief Credit Officer have been making a tour 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 this year, basically a 10-month project. And we've been in a 116 offices so far, meeting with the team, looking for ways to improve what we're doing and we got about a 140 something offices to go. But from that experience being in the field with our teams, I'm very-very positive about our prospects for continued grow and advance our businesses across our footprint.
This is Tim. You had mention seasonality, I will point out that indirect RV and Marine typically has a pretty strong second quarter. So that's one of our business units that has a little bit of seasonality where second quarter tends to be their strongest quarter.
Thank you. Our next question comes from the line of Catherine Mealor with KBW. Your line is open.
What do you envision, also in the management comments with -- there were other verticals within your community bank that you may bring to a national scale. Any insight there or you're not ready to disclose that yet?
Well, yes, our business aviation growth certainly falls into that category. We think we've got some good room to grow that. Our [GG&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 if it runs small, more regional successful operations and affordable housing and charter school finance. Our subscription line finance is -- really is a national business. And we're looking to expand the threats of that into some other more complex non-real estate lending opportunity. So, I think there are a lot of verticals that we have that have quite a bit of room to scale.
And then, I will follow up on any update on the watch credit that we view 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 townhomes sales. They've got the -- and I'll say, final phase of life development in progress now and entitled then 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 is 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 three months ago.
And our next question comes from the line of Stephen Scouten with Sandler O'Neill. Your line is open.
I'm curious guys on the discussion around floors and your variable rate loan book. Can you talk a little bit about how many of your loans might be near 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 a 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 to quarter that number would go to a little over 14% would be at their floor. If rates drop half point about 19% would be as at their floor. If rates go down three quarters of a point almost 23% would be at their floors, down a 100 basis point. 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% on meet their floor, down 200 basis points 61% would be at their lower, 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% of our billable rate loans have floors. Those floors have been installed over the growth and development of that portfolio. So, we've had 9 fed fund rate increases, so some of them were at 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 all improved significantly because we will 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.
And then, I am curious if you guys have expanded your parameters at all around RESG? Obviously, the 1.86 billion was great this quarter and I know you used to say, 6% to 8% of loans you looked at, you would actually book. And I’m wondering, if any of those numbers have changed because you have widened, the netted all to deliver that sort of growth in this environment?
I don't know about the pull-through cash in ratio sort of metrics. I don’t have those current and Tim not in the -- 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 points 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 standard at all to achieve growth.
And then just last one for me. Can you talk a little bit about how you think about uses for your excess capital? I don’t know what your view is there, but I would pick it like somewhere north of 600 million, 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 add stack rank uses, is it just maintaining? It is dry powder for opportunistic endeavors. Is M&A on the table, share buybacks? Is that kind of at the bottom of the stack? Or can you give us a little bit behind the things in the thought process there possibly?
Well, we address that to some degree in the management comment. 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 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 will have opportunities to use that capital through organic growth including opportunistic capitalization on opportunities that might arise at various times.
Perfect. Now, that makes a lot of sense and no doubt, the opportunistic behavior has been a gang-gone, gangbuster for you guys overtime, so appreciate all the color.
Our next question comes from the line of Timur Braziler with Wells Fargo Securities. Your line is now open.
Maybe starting on the deposits, it's 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?
Hey, Timur. Obviously, there is a little bit of seasonality in when you think about this tax refunds coming in, in the late February and March. Obviously, we had a really good amount of growth for the year and deposits. We had a good amount of growth in our non-interest bearing deposits as well. I think our growth in total deposits was $530 million something compared to the growth in our total loan balance of $350 million.
So, good growth there, we're excited about that. I mean our Chief Banking Officer and Chief Deposit Officer, Cindy Wolfe and Ottie Kerley are very focused on maximizing the value of that portfolio. Obviously, April will 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 deposit 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.
And then if I could follow up on Stephen's question regarding RESG, maybe ask it a different way. It looks like in the third quarter you've booked your largest credit within that portfolio. In the first quarter 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 successful as you have been in that phase and sponsors wanting to do these larger deals with you?
Well, 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 a figure, what is it Tim?
32.
32. That really breaks down the RESG portfolio by loan type. So, yes, we have as you've correctly observed originated, over the last three quarters our largest and second largest loans and at least one of the next growth of large loans there. But the portfolio continues to be typified by very broad spectrum of loan sizes. We had a loan in committee where recently there was a $20 million loan, which is almost smaller side of RESG business, but certainly something we want to do for established customers.
The focus of the RESG portfolio has really always been on great properties and great locations with really top class sponsorships. And we've always have that the larger 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 and great locations and have A plus sponsorship involved in. And then so, we were thrilled to do those, we've been thrilled to do a bunch of more like them because we've got great confidence in those properties, locations and sponsorships.
And if I could just ask one more question on the RV and marine portfolio, third year really running that book. Has that portfolio now normalized where you are starting to see kind of a normal level of pay-off and paydowns? And how much of a headwind is that going to potentially seeing that similar type of growth rate as you had in the past year, year and a half?
Well, certainly, as portfolio has gotten bigger, we are seeing more prepayments and paydowns in that portfolio. We believe there is considerable upside over time to that portfolio's growth. And the portfolio grew. Net non-purchased growth in that portfolio last year, Tim, was $1.032 billion. Is that 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 regular growth in 2020, and hopefully for several years to come if those sort of growth rates before we reach a point that the portfolio has the ability to grow it and the playoffs have reached the 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.
Thank you. Our next question comes from the line of Brody Preston with Piper Jaffray. Your line is open.
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 one. And I'm expecting 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 on which markets you're seeing that in or if it's across the entire footprint?
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, the sentiment was that Fed was going to be raising three or four more times the Fed funds target rate this year. And so, you saw deposit prices reset over course of December and early January. And even as so 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 one-month LIBOR and 20 or so -- 20 to 30 points downtick in three months and six months LIBOR. So, your -- 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 abate much until the end of the quarter, which I think was detrimental to some degree through our post quarter results and hopefully the deposit pricing 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, you give a breakdown where you show the percent of branches within the cities versus the percent of deposits within the 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 it, Tim?
Page 28.
Yes. Page 28 of our management comments. We describe a 36-month forward funding forecast. It's a very detailed projection of our needs for deposit growth and liquidity month on 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 possible cost of funds while adhering to a whole bunch of parameters regarding liquidity and concentrations and balance sheet risk and so forth. So, it is not a preference for urban deposits or rural deposits, it's a preference for the best lowest cost deposits we can get.
Okay. And then, I guess, I wanted to go back to the RESG, this whole watch credit. It looks like it moved up a bit in LTV since the third quarter 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 $57.5 million 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 million. The current LTV is I think $102 million right now. And again it's a revolving facility. They're building product obviously and as that product sells, it pays down as well. So, the $57.5 million is the total commitment with about a little over $50 million currently outstanding as well.
Okay. So, the value that you guys are pegging on that product then is roughly $49 million?
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 period, the discount rates, other parameters from the appraisal and readjust the appraisal on a -- recalculate our loan value using the appraiser's methodology applied to a constantly changing collateral. As Tim mentioned, we're building vertical properties, they're our sponsor as they're selling those, they're developing lots, they're selling those. So, the pool of collateral is constantly changing. So, you can get an appraisal today and it would technically be dated tomorrow, because you sold the unit, you’ve 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. So, you guys are sort of coming up with your own appraised value…
Well, you can 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, I've been saying okay, we're going to assume, to your holding period on lots and discount rate of 15%, then we're assuming a two-year holding period and a discount rate of 15%. And if he's assuming that how those are going to sell for this price per square foot, we're making that same assumption as how the sale of 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 it.
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.
Okay, all right. And are these primarily secondary homes?
It is a mixture of primary and secondary homes.
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 of development feature of the line and a vertical construction feature. So, it's a combination?
Okay.
Some parties by 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. So, it's completed townhomes as part of the structure.
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. It does not now.
Our next question comes from the line of Brock Vandervliet with UBS. Your line is open.
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. 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 [ph] the mezz, subordinated pieces of capital stack had over half project costs 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 higher percentage of cost and loaning in the interest, we’re commencing a very low percentage of cost of the project that includes a reserve for interest in construction period.
Now you could say, oh, gosh, we would prefer that the sponsor pay the interest out-of-pocket. Well, the sponsors is paying the interest in effect because they are putting lot of equity in this project. We would rather have the sponsor put in all their equity before we fund anything than for us to say well, we will let the sponsor put in 10% less activity and we will let them keep that equity and pay interest over the lot of 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.
I absolutely understand. On that credit, so this has been in the bank for a while. What was the issue, was is it the sell through rate initially was slower than pro forma?
In the aftermath of the great recession, this property suffered a great downturn in value on lots and homes, and development slowed for while as a lot of things did in 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, project is continued to be successfully executed, they continue to sell townhomes, they continue to sell lots, they continue to improve the amenities as the projects and values have a stable to positive trend. So, it’s project that because values went down a lot during the great recession, they never fully come back. Where they were at the high before that, it just had 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 sponsors. So, for that reason, it’s a performing credit, the most likely scenario in our views, it continues to develop and payoff and that we never lose a penny of principal interest on it.
Okay. Separately on the figure 11, that chart showing the intersection of purchase and non-purchase loan yields, does the purchase loan yield continue to drift, lowers 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's comments document is that portfolio yield, is that portfolio has season, has tended to drift down even though 40 something percent of the ones in that portfolio are variable. So, I would expect that it will continue to drift down. Although, if you if you look at that chart, you can say that there is a quarter or two when it's down and then there's a bounce and then another quarter or two where it’s down and then another bounce per quarter or two. 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 paydowns and which particular loans play down in various quarters or playoff, 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 at 685 2Q, but all that back at 3Q ‘15, we were 635 and it's not 629.
So, it's tended to go down but not precipitously and certainly not in a linear fashion.
Thank you. And our next question comes from the line of Michael Rose with Raymond James. Your line is open.
Hey, guys, good afternoon. I hope you're doing well. I don't know if Tyler's in the room, but just I 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 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 an very important part of our organization for over 13 years, and we wish him well. He's done a terrific job for us. We got -- one of the great things he's done is helped mentor and coach and hire really great folks underneath him. So, we've got a great team underneath him. We have Jeff Starke, our Chief Technology Officer; Chad Necessary, our Chief Information Officer will report to me going forward. Marcio deOliveira, 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 Wolfe taking over Chief Banking Officer roles. She's been with us for over 20 years and is doing a terrific job. And is accompanying George on all 254 -- 260 locations on their tour. Of course we’ve hired Ottie Kerley as our Chief Deposit Officer in the recent quarter. So, again, we've got a great team and has built depth over the years and feel great.
So no, 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 Ottie 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've told him yesterday, he and I had a visit and I tell 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 and manage through work. I don't know what he is going to be making. But it's probably not what's making as a bank group. And it's a calling he have and he felt very strongly about it, and we have great respect for his conviction in calling there and his courage to go pursue that. And I think he'll be very successful at that. I think Tyler is kind of the guys who'd be successful in whatever he does.
He will certainly be missed. Just moving on the CRE concentration has just certainly come down. I think you're around 313% now. Just into playing 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 and 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 pay down of so many of our loans and our RESG book, we think there is a descent 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 this but I would think market conditions combined with our strong earnings will do that. And there is some benefits to that to it 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.
So I know you have a targeted upper limit range. But is there a optimal range and like to maybe get to on the CRE and construction concentration over the intermediate to long-term?
No.
Final one from me, some of the banks have thrown out initial day one CECL estimates and what 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? Thanks.
We still have a play and are working through our system implementation. We are making good progress with that. It's really the kind of the two phased project. We're developing score card across the entirety of our portfolio, that project is really getting close to be completed that will allow us to do some initial testing and validation with that project. In parallel, we're also developing our CECL platform. We are still on a time line to have that done probably late Q2 or early in Q3, the goal being to be able to run parallel runs, use the June 30 data during the third quarter. So at this point, we still don't have a date, number or even an estimate that we can throw out or we'd be comfortable throwing out. But we do think that probably in the next 90 days or so, next 120 days we will be getting pretty close to that point. So as we continue to move forward down the path of finalizing both those projects and like a parallel run, we will certainly provide some feedback but at this point, we're still a little too early to give you guys any feedback or ranges there.
Thank you. Our next question comes from the line of Matt Olney with Stephens. Your line is open.
I just want to circle back on loan growth and with your expectations of paydowns being elevated for the rest of 2019. I am curious if you'd be surprised if 1Q results represented the high watermark for your quarterly loan growth for 2019. I am trying to get a better idea of the pace of growth rate 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 in the management comments just issued that for the full year of 2019, we expect non-purchase loans to grow in a low to mid-teens 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 the guidance we gave in January, we still think it's very good guidance. So let me leave it at that.
And then 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 fourth quarter. And I know there's many things that go into those fees that you 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 higher level? Or should we just conclude that back-to-back orders is not quite a trend and this will eventually move lower?
We commented I think in October of last year in regard to our third quarter earnings that our unusual or -- not unusual, but are items such as minimum interest and exit fees and prepayment penalties, those are sort of things that push that run rate of loan 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 an 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 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 and it's completed about, I probably a month ago. And they immediately started selling condos and they paid our loan off yesterday. And the sales last year in my project was so brisk that the loan was underwritten to have $7 million of minimum interest and we had only collected through $5.6 million. So we booked $1.4 million minimum interest number yesterday as income from the pay off 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.
And then just lastly from me, over the last few years, you've ramped up investments in several areas from compliance to audits, enterprise risk management and a few more. Can you just talk about where the bank is within this ramp? And I'll lead now at a more steady state, in other words is that now in the run rate or is there still some ramp that will come?
I think the big build is done there. And the comments that we managed, the comments talking about things that we'll continue to build that infrastructure commensurate with our growth and the increases in the size and complexity of our organization overtime. And certainly, our expectation and regulatory expectation, and I hope our stockholders' expectation 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.
[Operator Instructions] Our next question comes from the line is Brian Martin with FIG Partners. Your line is open.
George, just one or two questions that haven't been covered, the quarterly loan origination 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 other more projects you're looking at here to contribute to that, is it's bigger projects, like you mentioned earlier? Or just any more color on what was driving that this quarter?
Brian, part of it was the timing that these things close on. One of the project, I guess the largest loan that we closed in our Q1 could have easily been a closing in Q4 of last year. But various details and nuances with that project and the evolution of it from approval in October to closing in Q1 of this year just resulted in that flatting a couple of months farther than we would have consider that there. But our sponsor use that time very advantageously to continue to enhance their profitability and prospects with project. So sometimes these things, as I said earlier, just taka a long time to incubate, particularly the larger more complex transactions. Sometimes it's not unusual to work on it, three or four, five or even six quarters before you get approved transaction closed and actually begin to execute the project. So part of it's just the timing of these things and how long it takes to get there.
And then you spend a lot of time talking about the deposits and 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 obviously with the rate sensitivity if rates don’t go up and the variable rate nature. But just the new loans you're booking, is there opportunity to have some benefits there going forward, or are you seeing any of that today?
Brian, that’s what I said. It's all about execution and we're certainly trying to do that, but it’s a very comparative environment. As I said, the slight down drift perhaps in LIBOR rates and slight yield curve or couple of factors that make it harder to get loan yields, competition makes it harder to get loan yields up. The challenge that our lenders are given every day is go out in time, great quality asset so we can get paid to fair return on and work hard to maximize our returns. So it's a battle out there and we fight it every day. And as our 4.3% net interest margin suggest, 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.
And maybe one for Greg, it's just on the expenses. It sounds as though most of that build is done. The expense run rate is pretty good level heading into 2Q and maybe on the fee side, the fees are bit on the lower side given some of the seasonality in first quarter. Is that make sense, Greg, or if someone else wants to answer?
Brian, in the fees side, we've given guidance the last four or five quarter, I think they've done between roughly $24 million to $28 million and we think that's a pretty good range from a stand point of what we expect on a go forward basis. Obviously, there is still the same tendency to bounce a little bit from quarter-to-quarter, and 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 -- that build looks probably bottom of the knife standing on [indiscernible] from just a field out there, there are still few positions in new audit BSA that we're looking to add, [indiscernible] but really it will become more of a maintenance and type of a add if 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. I think they're pretty clean. We did have them the salary paid from a reversal related to Tyler, for the buck option, that was a small number there, it really had no impact on salaries either.
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 first quarter results. We look forward to talking to 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.