Bank Ozk (OZK) 2026 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Bank OZK second-quarter 2026 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would like to turn the conference over to Jay Staley, Managing Director of Investor Relations and Corporate Development. Please go ahead.

Good morning. I'm Jay Staley, Managing Director of Investor Relations and Corporate Development for Bank OZK. Thank you for joining our call this morning and participating in our question-and-answer session.

In today's Q&A session, we may make forward-looking statements about our expectations, estimates and outlook for the future. Please refer to our earnings release, management comments, financial supplement and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.

Joining me on the call to take your questions are George Gleason, Chairman and CEO; Brannon Hamblen, President; Tim Hicks, Chief Financial Officer; and Jake Munn, President, Corporate and Institutional Banking.

We'll now open up the lines for your questions. Let me now ask our operator, Michelle, to remind our listeners how to queue in for questions.

(Operator Instructions)

Stephen Scouten, Piper Sandler.

Yeah, good morning. Thanks, everyone. I guess I'd love to start kind of with some updated thoughts around CIB, if you could, and kind of walking us through some of the comments you made in the management commentary about the internal diversification within CIB.

And just kind of how you think that will -- now that we've progressed a bit down the path, how you expect to see CIB impact loan loss reserves in the future if we should continue to see that come down as a percentage of the loans given their lower credit risk seemingly and just the impact that they've had on fees to date and projected moving forward?

Thank you for the question, Stephen. We appreciate it. I'm going to turn it straight over to Jake Munn. This is his area. I'll preface Jake's remarks by saying that CIB is a very important and rapidly growing and developing part of our franchise. We're investing a lot in it and hiring really talented experienced people to lead it. We are looking forward and enjoying the diversification now of our loan portfolio with CIB's addition and the CRE concentration coming down and significantly from RESG.

And we want to make sure that we're not trading one concentration for another. So the diversification within CIB's portfolio, which it has a lot of different business lines to a lot of different types of customers, is a very important long-term franchise value enhancement, we believe, for Bank OZK. So Jake, I'm going to let you take some of the other points there that need addressing in response to Stephen's question.

Yes. I appreciate that, George. And Stephen, it's good to hear from you. We're excited about the growth of CIB that we continue to make across these diversified business segments, and George hit the nail on the head there. Currently, we have over seven business lines or major business lines.

If you want to call them, our corporate banking and Sponsor Finance group, our fund finance, our lender finance group, our Natural Resources Group, our recently launched Franchise Capital Solutions group, which focuses on multiunit franchises across our footprint. Our asset-based lending group, one of our older business units and then our recently reconfigured equipment finance group.

In addition to that, we're excited and we shared in our management comments, the introduction of our emerging middle market group, which is going to be an exciting bridge between our legacy Community Bank and the area that our CBSF group, in particular, was playing in. So that will fill that $15 million to $100 million, call it, revenue size, family-owned, non-enterprise value business, which is really going to be a nice addition and true franchise grower for us with a focus on our core footprint, I'm really complementing again, our community bank and our branch network.

And so we're excited about that growth. Again, all of these business lines continued to contribute to our quarter-over-quarter and year-over-year growth for CIB. And to George's point, it allows us to have diversification and the underlying loan base. So we represent over 42 different specific and unique [mix] currently.

But in addition to that, it allows us to have different levers to pull depending on the seasons that we're in. Whether those are macroeconomic changes, microeconomic changes, tightening and compression of margins in one group. It allows us to focus on continuously building but building in a way that's beneficial to our bottom line and in a way where we don't take on any undue credit risk.

And so you'll see our CBSF group in the case of this last quarter as well as our NRG group really be the shining stars of growth. ABLG, a little bit less just because we've seen some tightening in pricing within that group over the last quarter or two, and we've also seen in that market a little bit more aggressive advance rates.

And so we'll pull out of one of those segments a little bit or back away, I should say, while we lean into another depending on current market terms, but it's allowing us to have a very diversified engine to continue to grow our C&I coverage in concert with our community bank to really add franchise value. And what we love about these different CIB business units is that, it's not just the loan book, right? We're talking about deposit opportunities.

We're talking about working with Chad Parramore and his team on the treasury management side that Cindy is doing a fantastic job really building out. In addition to that, it gives the opportunity to cross-sell our private wealth management, our private client, commodity hedging, interest rate hedging, our capital market solutions. And so it's a true relationship-focused, one relationship at a time build, which is allowing for some nice scaling in that diversified C&I side.

Okay. Fantastic. I appreciate all that color, Jake and -- and I guess maybe kind of pivoting to the legacy RESG book. Is there any update you can give as we obviously continue to move toward August on that IQHQ property? And just kind of any color in terms of what you might expect next quarter upon that maturity, if there's any commentary that you can give there as we reach that maturity date?

Brannon, do you want to take that?

Yes, sure, Stephen, great to hear from you again. And as has been discussed, we do have a maturity upcoming actually next month. We are engaged in conversations around the multiyear extension and recapitalization of that project with both the sponsor and the mezz lender engaged on that.

Terms haven't been fully developed, but we're pleased with the constructive nature of the conversations. And look forward to the evolution of that extension. I can't really say more about it now, but hopefully, in around 92 days, we'll have more to report.

Okay. Great. That's encouraging. So I guess, I mean, really goes along with what you guys have been trying to do with all these projects, which is continuing to engage sponsors, get more capital when needed and work through the resolution as quickly as possible, right? I mean kind of more of the same, right?

Very much so. Very much so and the sponsors have been supportive, and we're encouraged about the conversations so far.

Fantastic. Appreciate it. Thanks for the time, guys.

Thank you.

Matt Olney, Stephens.

Hey, thanks, good morning. I want to ask about the RESG repayments that were elevated in the second quarter. I think the commentary calls for RESG repayments to remain elevated the balance of this year and into '27. And I wanted to focus on '27. I think that's a little bit newer commentary. Any more color you can share on expectations of these repayments in the back half of the year into next year?

Yes. Thank you, Matt. Appreciate the question. I'll take that and then Brannon can add any color he wants to add to that. Obviously, the quarter just ended was a big quarter of repayments with that number approaching $3 billion if you look across the last four quarters -- trailing four quarters, we've averaged about $2.5 billion a quarter.

So -- all of that is consistent with our guidance that repayments will vary somewhat from quarter-to-quarter and that they're going to be elevated as we work through that big origination year of 2022, a record origination year there. Those were all cycling through.

We do expect continued repayments this year and into next year. Our sense is that will taper off a bit next year. but still be at an elevated level based on our current projections elevated, but slightly less elevated than 2027. I think that's the guidance we can give you on that. Obviously, this is a natural phenomenon given the cadence of originations and the typical life of these loans on our RESG book. Brannon may want to add something to that.

I don't know that I can add a whole lot to that last point. It's really important to understand and why we've included that our RESG repayment cadence in a report after report and sort of follow what's left. And these things move around, as George said, the market conditions, market factors, and even our sponsor sort of strategy around refinancing key for sale and the impact of cap rate changes on those things. So -- but no, I think we're -- a lot of it is just the natural cadence of the portfolio moving through the pipe.

Okay. Appreciate the commentary. And I guess sticking with the loan growth discussion, I think the guidance still calls for the mid-single-digit loan growth for the full year, that would imply a nice improvement in the back half of the year. Any more color you can share about expectations for loan growth over the next two quarters?

I think the guidance we gave at the beginning of the year, and we've reiterated it in the management comments here of mid-single digits is a good number. In the quarter just ended, we got a wave of repayments early, which had us significantly down on loan volume early in the quarter, and we were chasing volume all quarter trying to catch up with that early wave of repayments.

So I think that some useful perspective on the color. Notwithstanding that, we were able to improve our margin 4 basis points in the quarter and still put up higher net interest income in Q2 than Q1, but we were battling that prepayment wave really hard on in Q2. So hopefully, those prepayments will be a little more levelized in Q3 and Q4. As Brannon mentioned, these repayments move around. But when you get a big slug of them right off the bat early in the quarter, it's just -- it's hard to catch up on the average earning assets.

Thank you.

Manan Gosalia, Morgan Stanley.

Hey, good morning. So maybe just a follow-up to the question that you just responded to. I guess with the changes in the NII commentary in the management comments, is that largely a function of the payoff activity? Because as we think about -- we came into this year with a few rate cuts in the forward curve, it is a more asset-sensitive balance sheet with the prospect of rate hike that should be a little bit more beneficial. But is paydowns really the only reason that the NII commentary is changing a little bit?

Yes, Manan. I think that's the principal reason it's average earning assets. And not so much the volume of paydowns as just the sequence and timing of those. When we started the year, we had expected a little bit more sort of linear growth and not the pullback in growth in Q2, we were up 2% roughly after Q1 and then had negative growth in Q2. So we went backwards.

We had expected that to be a little more linear through the year, and that's tamped down our average earning assets. So again, as Brannon mentioned, it's a very valid comment. A lot of these loans are chunkier loans. So a loan pulling forward two months ahead of schedule or something moves the projections there. So cautious guidance on being able to equal or beat last year's net interest income number just simply as product of average earning assets.

Got it. So it's nothing related to, I guess, funding competition, anything else on the liability side?

Well, we have projected a pretty competitive deposit gathering environment in the beginning of the year. So it has been a competitive deposit gathering environment, but there's nothing new about that. I think if you look at analyst consensus estimates on net interest margin, I think the consensus numbers, they are more or less correct on where we think.

And our guidance that we're likely to be a little bit under the first quarter's 4.20% NIM is consistent with what the consensus number has got built in. So I think the Street pretty much has this on consensus about right.

Got it. And then maybe on the loan loss reserves. I know there are some specific reserves that you're releasing as you take some charge-offs. But maybe if you can talk about how you're thinking about reserves relative to the prospect of higher rates in the forward curve and maybe some of the pressure that you're seeing on the special mention loan category this quarter?

Yes. Let me comment on special mention. And then we'll let Tim talk about the reserve. We did have an increase in our volume of special mention loans, but we made a -- I wouldn't read too much into that. Loans come into special mention. Some of them, as we saw a couple of examples of in the quarter just ended, become more severely graded and move into classified asset category.

But a lot of loans coming to special mention extensions, recapitalizations get accomplished in the ordinary course of business, and they move back to pass-rated credit. We put a sentence in the management comments this time commenting that several of those loans are in special mention, we're in really good discussions and good activities that would result in those loans moving back to pass status.

So they're in there because those discussions are going on, and we've got to get to a final conclusion on those discussions. But I think there are several of them that look like they're going to work out favorably and be candidates for upgrade over the next couple of quarters, if not the next month or two. So Tim, you want to comment on the ACL.

Yes. Manan, certainly, you've seen our comments over the last several years about growing our ACL in anticipation of charge-offs that would be realized at a later time. As those charge-offs are actually now being realized, we felt it appropriate to decrease our ACL over the last couple of quarters. And as those charge-offs have been recognized.

For instance, in the previous quarter, we had built a pretty sizable ACL on the 2 Seattle buildings that went into ORE this quarter included a charge-off of $22 million on the office and $3.7 million in the life science building. Those were already reserved for in the previous quarter. So I mean, I think we take a very cautious prudent approach to building the ACL at the appropriate time.

As we're working through some of these problem assets in the life science and office portfolios, that we've seen over the last few quarters, that provision has come -- the ACL has come down, and that provision has, I think, over the last several quarters, the provision number that we put up has been less than what the consensus number was.

And so I think -- I think you'll probably see that continue to drift down, assuming the economy maintains some of the resiliency and strength that we've seen over the last several years. We are in the later stages of working through some of these additional assets that are -- that we've outlined on Pages 24 and 25 and -- or 23 and 24. So I think the trends that you've seen in the last few quarters are consistent with what my thoughts would be moving forward.

Thanks, George. Thanks, Dan.

Thank you.

Catherine Mealor, KBW.

Thanks. Good morning.

Good morning.

Maybe one question just to serve back on credit and the direction of the reserve. Can you just give us an update on any trends that you're seeing in your life science portfolio? It feels like that's been where a lot of the negative migration has been and you're working through that.

And so any comfort that you can give us that you've worked through maybe some of the more stressed projects within that portfolio, and that would lead you to believe that the reserve might be able to come down over the next few quarters?

We have a pretty healthy ACL for that portfolio, reflecting the general challenges on that sector. We've got several of these life science assets that do have good leasing. And we're -- they're no issues at all with those. They're well leased. We got one of our really nice paydowns that we got in the quarter just ended was a big paydown on well-leased life science project that we extended the term on. So that was a nice win.

The life science loan that we took a charge-off on this quarter that was previously special mention that we took a short payoff on to exit. That was, I think, probably our least desirable, in my view, single asset in the portfolio. Now other folks might disagree with that. But we're focused on asset-by-asset basis, looking at these, and I thought that was probably a more challenging asset from a long-term value and future perspective than some of the others.

So we got a chance to exit that at a discounted payoff, we thought that was a nice improvement to the portfolio to move that out. There is a fair amount of leasing activity ongoing on several of the life science projects, a lot of it is not for life science, it's for technology, AI or office purposes, but there is some activity there. So Brannon, I'll let you share any additional thoughts you want to share about life science.

Well, you hit most of the bullet points that would have hit there, George, in talking about portfolio. I mean, look, we've shared, it's been a challenged market. It's had its hurdles with respect to the macro picture with respect to specific funding pictures in the industry. But generally speaking, this year, we've seen a pickup in venture capital focus that way. And we've seen an increase in just tenant activity in certain markets and specifically around some of these projects that we have.

George mentioned the AI influence. That continues to be the case. We continue to see tenants in the market that are operating from that perspective that are looking at these uses. But there are also very life science-focused tenants in the market as well. So we still have, as they say, some wood to chop and working with the sponsors to continue to support these through lease-up. But I would say that generally, the first half of the year has had a more positive flavor to it just broadly in markets with tenant activity in space.

Okay. Great. Very helpful. And then my follow-up is just on the margin trajectory. Can you give us an update on just kind of how -- what trends you're seeing in incremental deposit costs? I feel like -- and you've mentioned in your prepared remarks or your management comments that this is probably a bottom in deposit cost and move through the year, that will trickle up just with higher rates.

But just any kind of incremental data on where your CDs kind of are coming on and -- and then any benefit that we'll get just from kind of some four to five from CIB, where it's just the incremental deposit costs coming on today?

Yes. We are probably 10 basis points higher than our low point on our CD specials across the board. We have increased that really in the last probably about four to six weeks ago. I don't remember the exact timing of that, but that is a reflection of the fact that we expect to need to grow more deposits in Q3 and Q4 based on moderately increased volume of outstanding loans. So we're ramping up a little bit for that.

We said in the management comments, Catherine, that we thought the Q2 cost of interest-bearing deposits was probably an inflection point and we go higher from there. I don't think we're expecting to run off the rails going higher. I think it's just somewhat of a slight increase higher from where we were on COIBD in Q2.

So modest increases in that cost as we go forward. And part of that is driven by the need to generate more deposit volume simply because we expect more loan growth in Q3 and Q4. We commented and managed some comments, we were really pleased with the good work that our funding team, deposit-generating teams did in Q2, getting that 5 basis points reduction in our cost of COIBD which combined with the work our investment team did on the investment portfolio, let us actually improve net interest margin 4 bps during the quarter.

I don't think anybody probably or not many people expected that improvement. It was a nice result for the quarter, particularly given the high level of paydowns early in the quarter that beat our average earning assets down for the quarter. So that was a nice offset. We'll benefit less from that ability in Q3 and Q4 as we grow loans more, we'll have to be a little more aggressive on deposit generation.

And when we were getting a lot of loan payoffs early in the quarter, our deposit guys were able to adjust their deposit gathering strategy and squeeze a little bit of margin benefit out as a result of the higher level of loan payoffs. So there's a give and take there that plays. We would rather have the volume. But if you don't get the volume, you like the way our team responded to that, and they were able to grind some margin improvement out in a lower volume environment.

All right. Very helpful. Thank you.

Thank you.

Brian Martin, Brean.

Hey, good morning, everyone. Maybe just one question for whomever, just on the progress you made this quarter and just recent quarters, George, on the shift to CIB and away from real estate, given the payoffs continue and the momentum continues at CIB. The drop this quarter seems a little bit more given the payoffs were a little bit higher.

But should it just be a more gradual decline, all else being equal, I know your comments about the payoffs being volatile. But kind of from this 48% level. Just give us some update as you look out over the next four to eight quarters, kind of how that -- where that ends or just maybe the trajectory. If you can give any color on that or any help on that?

Yes. The RESG origination volume, as we've reported in management comments has been pretty muted. We're working hard to find volume. But a lot of these cities where we've originated a lot of volume in the past are raising taxes and adopting policies that are not specifically pro business and a really anti-business and that is affecting the need for new product in those markets.

So that, plus the fact that there is a lot of capital out there chasing debt in the CRE space. It's very competitive on new deals, that's keeping that volume muted and probably is going to do so for some number of quarters farther. My crystal ball doesn't go too far out on that.

But it's a challenging environment to originate volume, and of course, because of the high level of originations in '22 and to a lesser extent, '23, we're in the heart of a big payoff wave. So RESG is going to continue to drop. And we don't talk about it a lot, but we're now, I think, at our second quarter end where we're under 300%.

So we're below the regulatory concentration guidelines for total CRE and probably by the end of the year, we'll be under -- or early next year, we'll be under the 100% guideline for construction and development. So that portfolio is going to continue to shrink for the remainder of this year and into next year.

We commented in the management comments that we expect CIB and RESG portfolios will be equal in size next year, and that -- at some point next year. That gives you a real indication because CIB is $7 billion plus now and RESG is $15 billion-plus, and we're expecting those are going to equalize and cross at some point in 2027, which means we're going to continue to see strong growth in CIB and strong paydowns in RESG.

I think what we don't talk about a lot that is important as is I think over the next 6 quarters through 2027, you're going to see more positive momentum out of our community banking group and continued positive momentum out of our indirect and RV group. That group was in the 12-something percent. It's now 13.7% of our portfolio in the indirect.

Our community banking portfolio is pretty much languished around its current balance more or less for a couple of years now. We have reorganized some of the reporting structures there, took a little more straight line and clean-cut set of reporting structures we've implemented there. I think the team is really excited about that. I think we're going to get some positive growth out of that.

If you look at the portfolio as really being kind of three parts, the community banking indirect being one part, RESG being one part, CIB being one part. I think you get to more or less equal sized to a very diversified portfolio in 2027. I think being below the regulatory CRE concentrations, having that portfolio very diversified is really accretive to our long-term shareholder comfort and franchise value. That's part of this multiyear design and strategy we've been pursuing of getting more diversified.

I do think you will see RESG being an important contributor to our growth and portfolio long term. I think you will see it grow again. But it may get into the 20% of portfolio range before it hits that inflection point where origination of fundings exceed payoffs and it turns back to a more positive contributor to growth. So I don't think we're going to see a lot of change in the paydown volume for a number of quarters.

Got you. That's super helpful, George. And maybe just one follow-up, just on the credit front, given your comments about special mention and kind of some more positive movement there than negative, it normally would be anticipated in and the fact that most of the nonperforming issues are concentrated with a handful of credits.

Can you just give any big picture kind of resolution on the credit path. It feels like your bias or your outlook is a bit more positive, particularly with maybe not as much concern on the special mention. The other credits identified, the reserve coming down.

I just kind of want to understand if we're hearing that right? And just if that's more kind of how we should think about it if we do see some path for resolution here in the next couple of quarters, that's what it sounds as though.

Brian, what I would say on that is the RESG portfolio is recycling in a constructive and healthy and normal way. We mentioned there, we've had $9.95 billion, almost $10 billion of that portfolio pay off over the last four quarters. If you think about that in the context of the entire -- and those are funded balance. If you think about that in the context of the entire commitments in the portfolio, I mean that's a massive recycling of those assets.

It has been a very long and very tough CRE cycle for a lot of our customers. The quality of our sponsors and customers has shown up really well because we went through several years of that challenging environment with no problems to speak of, and we've had a handful of problems. We'll have a few more assets that will emerge as problems over the next year, 1.5 years as we work through this kind of final stages of that cycle.

But the portfolio is recycling really quickly with $2 billion to $3 billion a quarter in payoffs and the vast majority of our sponsors, as we have said all the way through, the vast majority of our sponsors are continuing to support their transactions in a very positive way. You saw that in the quarter just ended, we had $91.5 million of unscheduled paydowns in the RESG portfolio, $19.5 million of additional reserve deposits posted in connection with extensions of loans.

We had $37.5 million of unfunded balances curtailed in connection with the modification extension or loans and collected $5.4 million modification fees. So the vast majority of our sponsors continue to support their loans. There have been -- obviously, we've got 10, 12 assets that we're -- we've identified that are either in foreclosed assets or classified assets that we didn't get the support we needed. There will be a few more of those as we go forward.

But we also have one of those OREO assets and 3 of the substandard loans that I feel pretty optimistic about our ability to work those out over the next few months. We're far along with the resolution liquidation plans on those assets. We're working through the problems. The problems have been fairly isolated in number. I think we're doing an excellent job working through them as they come up.

Lastly, I would say we built a big reserve in our ACL to deal with potential loss exposure on that, and we feel very good about the adequacy of the ACL to deal with that exposure across the entire portfolio.

Perfect. That's all helpful for me. I'll step back. Maybe in parting, maybe Tim could just comment if you've got one easy comment, Tim, on just the out your outlook on the buyback, but that'd be it. But thank you very much, George, for the comments and everyone else.

Thanks, Brian. Buyback, Tim.

Yes. Brian, certainly, I was pleased with the buyback activity over the last four quarters. I think we used about $175 million of the $200 million repurchase authorization. The average price there was below tangible book value. which was very accretive, not only to tangible book value but EPS.

Moving forward, I don't -- we have the brand new $200 million authorization for the next 4 quarters. How much we'll use of that will really be dependent on our stock price over that time period. I would anticipate we would use some of that, but how much, again, just really is going to depend on our stock price.

All right, thank you.

Thank you.

Timur Braziler, UBS.

Hi, good morning. In regards to the net charge-off language, it looks like the commentary of it being roughly in line with 2025 was removed. Just wondering if the current cadence that we are on is the right way to think about charge-offs here going forward?

And then maybe to use a baseball analogy, if you can provide what inning you think you're in, in terms of classifying kind of reappraisal of the current book? And then similarly on where we are with actually charging off and kind of dealing with those new appraisals?

Timur, I'm going to resist the temptation to use the baseball analogy. I'm not a huge baseball fan. Even though our Arkansas Razorbacks baseball team is a great college team. But what I will point you to is the language that we've had for several quarters now in our management comments document, that is, we think we're in the right stages of a long cycle that has been a challenging cycle for our customers for a number of years.

As that cycle has worn on the resilience of some of our customers to continue to withstand that cycle and support their assets is diminished and that's why you're seeing the handful of special mention and foreclosed assets and then classified assets that you're seeing.

So as I said in response to Brian's question, the RESG portfolio is recycling quickly the $10 billion in round numbers of payoffs over the last four quarters is a strong indication that, that portfolio is recycling and recycling quickly to current generation assets that are underwritten in a different environment.

We feel like we are adequately provisioned for that as I told, Brian, I think there'll be a few more bumps in the road, and we'll have a few more problem assets. But we're also resolving assets at a pretty diligent rate as well. So late stages, that probably continues this year and into next year. But I think we are we're feeling pretty good about where we are in the cycle.

Now as for the net charge-off number we are a little above the industry's Q1 number through 6 months. We have a long history of outperforming the industry, multi-decade history of outperforming the industry. I think we've got a good shot of getting back under the industry's number for the year. We'll see how that plays out.

It's a chunky mix of charge-offs, the vast majority of our charge-offs in the quarter just ended were on for credit. It tends to be a little chunky in the way those are recognized. It's not like we have 100,000 loans that there's an averaging effect on. But we're cautiously optimistic about our ability to get back under the industry number for the year. We'll see how that plays out.

Okay. Great. And then as a follow-up, maybe one more on RaDD in San Diego. Can you remind us, as IQHQ still making full cash payments? Or is that payment in kind? And then I'm just curious in terms of how you're thinking about risk migration with another extension coming up here in August. Maybe talk us through why pass rated from a risk kind of standpoint is still the right way to be here?

Yes. What I can tell you on payment and in-kind pick interest, we don't pick interest on any loans. The interest on that credit as all of our credits is being paid from reserves that were established for that purpose. You'll recall early last year and then previously in '24, there were two very large contributions to the reserve so that we were holding on those loans from the sponsorship group on that asset specifically, that have been paying operating cost and interest and other costs related to those projects.

We do not pick interest on loans. That's not relevant to that project or any other project. What I could tell you is this is a pass-rated credit there, and that's because of the very constructive dialogue that we've had with the sponsor and the mezz lender, both of whom, as Brannon alluded to, are working in what appears to be a very constructive and positive negotiation work out a multiyear extension of that asset. That really is a negotiation with us, but it's also a negotiation between those two parties.

It will take a little while to negotiate that, but we're cautiously optimistic about the outcome of that and have every expectation that, that will be a successful outcome, and that will remain a pass-rated credit. Obviously, if our thoughts in that regard change will make appropriate adjustments to the classification of that asset.

Janet Lee, TD Securities.

Good morning. So your expectation around CIB and RESG being roughly equal in size in 2027, which is great for diversification purposes. My understanding was that CIB loans are slightly lower yielding than RESG. What is the implication on NIM perhaps in 2027 if CIB were to become a larger size?

Does it result in a structurally lower NIM? Or maybe it also brings in some lower cost deposits over a longer term, but I just want to understand the structural impact of larger CIB on your net interest margin?

I think a lot of that, Janet, is already in our net interest margin. Our RESG originations over the last couple of years have had -- because of the competitive environment for those assets and the fact that a larger and larger part of our RESG loans are multifamily loans where the spreads on those loans look very much like the CIB loans. The remixing of the RESG portfolio to be predominantly multifamily and really industrial is a big part of it. Those spreads look like CIB related spreads.

If you point back three or four or five years, we certainly were getting higher spreads on RESG loans than when we were doing more large complex mixed-use projects, more office, life science sort of projects than we are getting on that portfolio today. That differential has tended to somewhat diminish and the yields on those portfolios have tended to get closer and closer together. They're still -- there's still a delta, but it's a much smaller delta than it would have been in past years.

The second thing you're correctly surmised that we get a lot more deposits with our CIB loans, and we get a lot more contribution to non-interest fee income from CIB. Jake has talked about that in his comments and talked about the partnership with treasury management and the focus on those various service parts of their business that generate fees, whether it's on interest hedges or commodity hedges or syndication of debt or equity transactions or just other kind of loan-related but noninterest fees that they generate.

We think CIB is going to be as profitable for us as RESG long-term. And that the yield differential we expected is really no longer there. Jake mentioned the way he is managing that CIB book and the different types of loans we make there. There are sometimes that various categories of loans get very aggressive because you've got a few people really trying to put a lot of money into that space.

Jake mentioned one category where we've seen yields compressed and we're finding we get better yields in other categories with the same or better risk profiles than those other categories. So he's done an excellent job he and his, very capable, very veteran team doing an excellent job of decelerating growth in areas where spreads are getting compressed by competition and accelerating where we can get real good value on a risk-adjusted basis. So super proud of the job they're doing on managing that.

Yes. And George, I'll just piggyback quickly off of that. If you -- really to emphasize what you were saying, yes, if you were to go back 2019, the fund finance book was created. 2021, you had the legacy ABL and lender finance group. Since then, we've launched our CBSF, our FCS, our NRG, EMM, EFG. All that being said is those new business lines are really relationship focused to George's point.

You have the opportunity for this great cross-sell this additional noninterest fee income generating engine, whether it's the commodity hedging, interest rate hedging, capital markets fees, treasury management, you name it. A lot more single lender direct deals as a result of that relationship. As CIB has kind of grown and evolved over the last couple of years as part of the enterprise, the average return, the average spread has improved greatly for the CIB names, but also the average kind of all-in yield has improved greatly.

I think it's been quarter after quarter after quarter, if you were to look at for that most recent quarter's new loans originated, the average spread has actually increased over the historic book and quarter-over-quarter for this last quarter, it went up by over 25 bps on the average spread on these new loans that were originating in CIB just compared to the average across the legacy book.

We really are focused on relationship banking where we can harvest deposits where we have the opportunity to cross-sell products and services that are beneficial to our clients but results in a great return for the bank and for our shareholders. We're doing that without giving up any sort of credit or loosening terms or anything of that nature, too. So we're taking our time. We're picking our plays. We're doing it in a conservative and strategic manner.

Got it. And not to be on the dead horse, but on average earning assets, I just want to make sure that I'm understanding this correctly. So should we expect average earning assets in the second half to be relatively stable to the second quarter given the RESG repayment? So while you're still targeting mid-single-digit loan growth for the year. Or should it still step up in the second half of '26?

Tim?

Yes. Jan, I still expect it to step up each quarter in Q3 and Q4 from where we are in Q2.

Okay, thank you.

Thank you. I will now turn the call back over to George Gleason for closing remarks.

Thank you, guys, for being on the call today. We appreciate it. We look forward to talking to you again in about 92 days. Have a great day. Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect.