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Bank OZK (OZK) Q2 2019 Earnings Call Transcript

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Bank OZK (NASDAQ: OZK)
Q2 2019 Earnings Call
Jul 19, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Bank OZK's Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

I would now like to introduce your host for this conference call, Mr. Tim Hicks. You may begin, sir.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Good morning. I'm Tim Hicks, Chief Administrative Officer and Executive Director of Investor Relations for Bank OZK. Thank you for joining our call this morning and participating in our question-and-answer session. In today's Q&A discussion, we are going to forward-looking statements about our expectations, estimates and outlook for the future. Please refer to our earnings release, management comments, and other public filings for more information on the various factors and risk that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.

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

Questions and Answers:

Operator

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

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thanks. Good morning.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Good morning, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

I was hoping we could start off with expenses. Looks like expenses ticked up a little bit versus what I thought was a seasonally higher quarterback in first quarter. Could you just talk about what drove the higher expenses this quarter, and more specifically or more importantly, what is the outlook for expenses on a go-forward basis?

Greg McKinney -- Chief Financial Officer and Chief Accounting Officer.

Hi, Ken. This is Greg. Let me start about that, then George can chime in too. But we're continuing to build our infrastructure as we've been doing now for a number of quarters. We are in the late innings on that. I think we're getting close to having that built out. We are hiring individuals to really come in and take the place of third-party consultants that we've been using to help us get some of these programs up and stood up. There's a little bit of a transition in some of that if you bring individuals in, and then begin to exit consultants out the bank. That process is ongoing. We expect that to continue over the next quarter or two.

I think you'll probably see a little bit of a continued increase in overhead in the next couple of quarters as we continue to make that transition and get the remaining infrastructure in place, although we think that you could -- can get beyond kind of the seasonally challenging Q1 of 2020. I think there's a pretty good opportunity today to keep the overhead. I must say a little more in check, that's to say it's not going to continue to have some increase, but I think you'll see the rate of increase, as we get to that point in time, much more likely to be muted at least relative to what you've seen in the last two or three quarters. That's really the biggest driver in overhead, as we think about overhead in the last four quarters, five quarters, six quarters. And that continues to be probably one of the biggest drivers, as we think about overhead for the next two or three quarters.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay. That does help. Maybe switching gears, in terms of the North Carolina credit, I understand you're trying to sell the South Carolina credit, but with North Carolina credit, it almost sounds like you're taking on the responsibility of finishing the project or the build. Could you just expand on that a little bit more, like what exactly is happening and what's the time frame of that? Thanks.

George Gleason -- Chairman and Chief Executive Officer

Yeah. Good question, Ken. As you are aware from previous calls, the sponsor there developed a lot of houses and there was ongoing development of lot. Some of those houses were not fully completed. There's a custom home buyer that's being built for a custom buyer. So we're completing those sort of construction elements in lot development area -- activities, and expect to sell those homes and lots have developed. There is some remaining work to be done on that project.

And then, the question will come at some point in time, how you continue development? Do you just sell lot, do we need to develop some more inventory? So we're going to try to operate that in a way to maximize our proceeds and hopefully recover some monies that we have written-off. We're not going to get into a massive development project, but there is work to be completed and it is an ongoing operating project with amenities that operate and so forth. So we're going to operate it and work our way out of it in an orderly manner.

The --

Ken Zerbe -- Morgan Stanley -- Analyst

Is there any -- go ahead.

George Gleason -- Chairman and Chief Executive Officer

Yeah. The South Carolina property is obviously a much simpler project to sell, because it's flat for someone to acquire a rate position and redevelop it in a major way. I will comment a couple of the analysts noted in their write-ups, commented that we had foreclosed on these properties. But we actually did not foreclose on either one of them. We acquired [Indecipherable] transactions and that took a little while, because we had to do all of our redo and recheck all of our environmental due diligence and insurance and get certain permits and operating licenses transferred and so forth. So both transactions were transferred to us in a cooperative agreed-upon transaction with the cooperation of the sponsor.

Ken Zerbe -- Morgan Stanley -- Analyst

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

George Gleason -- Chairman and Chief Executive Officer

Well, there's always a risk of additional writedowns, but I think that's extremely low in both transactions, given the conservative nature of the appraisals that we received. In fact, we wrote the assets down when we received those appraisals in the third quarter of last year to 80% of appraised value. And of course, we've previously mentioned on the South Carolina projects that in the couple of quarters, after we put it on non-accrual, we captured $0.5 million or so of cash flow that went to reduce the balance on that.

So I think writedowns are unlikely, but our practice is to reappraise OREO properties on an annual basis. So as long as they are in foreclosed assets, they're subject to reappraisal and if those appraisals came in more adverse, then we would have a writedown from that. The reality is, I think it's very unlikely.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay. And then just one more question, if I could. I understand how hard it is to forecast repayments on the loan portfolio, the RESG portfolio. But is there a way of kind of quantifying the lower bound of potential loan growth? I did notice that you did reduce your loan growth guidance for the year due to even more elevated payoffs. I'm just wondering how bad could it be within sort of a reasonable expectation, like if you go through like loan-by-loan of your portfolio to try to examine what could pay off like, where is the lower bound of loan growth this year?

Greg McKinney -- Chief Financial Officer and Chief Accounting Officer.

Well, we do go -- we base our projections based on a loan-by-loan analysis. And as you know, in our RESG portfolio, we average about 14 loans per asset manager. So our asset managers are very close to those transactions. These tend to be larger, complicated transactions, so sometimes a sponsor says, we expect to pay this off in May, and for some reason or another, negotiation was with their partners, negotiations with the lender on the other side, that moves forward to or moves back to August or October for some reason.

And then, as we've experienced quite a bit recently, projects -- we've had a few projects that were pretty sizable that had been pulled forward on the spectrum. And we had at least one pretty sizable project in Q2, and we've got a couple more coming in the second half of the year that we've been notified or repaid down that have not even reached a CO status. It's historically been very rare for us to get paid off and refinanced mid-construction or before a project is -- at least has a temporary certificate of occupancy. But we've got several of those examples that have accelerated repayments this year.

So we're giving the best guidance we can give on that, but there are things to cause those payoffs, repayments to be sometimes delayed, sometimes accelerated. And you can do your very best to predict that, and you're usually right within a quarter two, but sometimes you get surprised.

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Thank you very much.

Greg McKinney -- Chief Financial Officer and Chief Accounting Officer.

Thank you.

Operator

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

Timur Braziler -- Wells Fargo Securities -- Analyst

Hi, good morning. Maybe looking at the deposit side, and some of the commentary around cost of interest-bearing deposits, what's being done that gives you guys optimism that you can lower the potential costs of interest-bearing deposits ex a rate cut in the third quarter?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Yeah, Timur. It is Tim. Good morning. I think we're actively managing that deposit book. We really started on July 1 with a lot of our institutional public fund customers talking about the rate we pay on those. Obviously, LIBOR went down 10 basis points in Q2. So rates -- even though Fed hadn't moved, rates have decreased and we've had those conversations with some of our larger deposit customers. And so, we really started that really early in the quarter. So we're trying to stay ahead of what the Fed is doing. And even though the Fed hasn't moved yet, some of those rates have already come down. And even our promotional CD rates, we brought down in early July as well. You've seen many in the industry also bringing down their deposit rate.

So I think between that and the moderated loan growth guidance that we've outlined here, allows us some flexibility to help, replace some of our higher deposit customers with some lower deposit customers. And we're working hard to do that and feel like we've got the ability to be slightly, as we said in our management comments, to be slightly down on cost of interest-bearing deposits, even in a flat rate environment for this quarter.

Timur Braziler -- Wells Fargo Securities -- Analyst

Okay. And then maybe just looking at broader deposit growth, you guys have historically looked out at loan growth projections and then backfilled that kind of with deposit-gathering objectives. Is the linked quarter decline in deposits an indication of kind of the lending outlook, or I guess, what's the goal for growing deposits in an environment where loan growth is going to be pressured?

George Gleason -- Chairman and Chief Executive Officer

Yeah. We feel like we have the ability to grow deposits to match our loan-earning asset growth. So we do model that and project that on a monthly basis. And so we're really comfortable in that mid-90% loan-to-deposit ratio. I mean, sometimes there are timing differences that move that 1 percentage point at the end of the quarter one way or the other. So we're really -- very comfortable in mid-90% loan-to-deposit ratio and feel like we've done that for the last several quarters, have been in that range and would expect to continue to be in that range as we just project out what our deposit growth needs are based on what our earning asset needs are.

Timur Braziler -- Wells Fargo Securities -- Analyst

Okay, understood. And then just one last one for me. Looking at the Indirect RV & Marine portfolio, the number of dealer relationships has seemed to kind of find a level here between 1,300 and 1,400 and the growth continues to accelerate. I know there's some seasonality in 2Q, but I guess, just looking at the existing dealer footprint, what's the remaining potential out of that footprint, meaning should we -- is there opportunity to continue seeing accelerated growth from that existing footprint, or do you need to actually grow the dealer network in order to further accelerate that growth?

George Gleason -- Chairman and Chief Executive Officer

That's a good question. If you're following the Marine and RV manufacturer stocks and their reports, you'll notice that Marine and RV manufacturers are shipping less, selling less to dealers than they were a year ago. So there's a bit of a slowdown in the manufacturing side, and that it would imply that your average dealer is selling less as well. So we've been able to maintain good volume this year, and that's in part due to the fact that we have had modest growth in our dealer network over the last year. There's not been a time the capability to grow that dealer network is dire, and as we continue to monitor this portfolio and the performance of this portfolio, and get more and more history with the data on that, we would expect to expand that dealer network. That dealer network could probably go to 1,700 or 1,800 dealers in a more mature state for that unit.

Over the last several quarters, we've been adding dealers every quarter and you remove dealers every quarter. Our program is very focused on monitoring the performance of our dealers and the quality of paper we're getting from our dealers and various other dealer performance metrics we're monitoring. So we routinely terminate relationships with dealers and routinely add dealers. But the capability is there as we get more seasoning on this portfolio to add another significant tranche of growth in the future.

Timur Braziler -- Wells Fargo Securities -- Analyst

Thanks for the questions.

George Gleason -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Jennifer Demba with SunTrust.

Steve -- SunTrust Robinson Humphrey -- Analyst

Hey, guys, it's actually Steve [Phonetic] on for Jennifer. There's been a lot of talk about condo sales in New York and Miami. How are your projects there filling up and are you guys becoming more cautious in future projects in these areas?

George Gleason -- Chairman and Chief Executive Officer

Steve, I would tell you, we're not changing our underwriting standards at all, and our projects are doing very well. Nine quarters ago, we probably had 13 or 14 active condo construction projects in the Greater Miami area. That's probably seven or six now. So we've had, I think, at least six or seven of those projects that CO'd and very quickly paid up. We think that number of projects based on sales that are in place and construction progress probably by the end of the year is two, Tim?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Two to three.

George Gleason -- Chairman and Chief Executive Officer

Two to three.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Yeah.

George Gleason -- Chairman and Chief Executive Officer

So, our Miami condo exposure is paying down a ton through selling of condos, and we've got a lot of sales and a lot of sales activity on the projects. So we're feeling extremely good. About the credit profile of those projects, we're deeply regretting that we've been unable to replace it with new volume. We would love to have 14 more projects of the same credit profile, presale deposit profile of the ones that we had. At September 30th last year that -- half of them more or less have paid off in the interim.

Our New York product portfolio continues to perform without any issues. We've gotten paid down on several projects there and paid off on several projects there in the last quarter. Our new originations in New York are not as large as they were a year ago. There's less new product being created. Interestingly, if you look at the 2Q originations for our RESG unit in Washington D.C, MSA was Number 1; Boston MSA was Number 2; Philadelphia was Number 3; and New York was Number 4, right in line with Orlando, Florida, MSA, so -- and San Diego.

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

Steve -- SunTrust Robinson Humphrey -- Analyst

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

George Gleason -- Chairman and Chief Executive Officer

It's a combination of all of that. We've commented for a number of quarters now that we've seen a lot of competition in there. There are lenders that are willing to be more aggressive on credit and leverage than we're willing to be, and there are lenders in certain markets on certain product types that are being very aggressive on price. And, I think we've been just clear without exception, that we are not going to sacrifice our credit standards. We've got credit standards that are high. We expect to continue to be very disciplined and only do transactions that meet our credit standards. We're not going to do transactions that get so cheap that we don't generate an appropriate risk adjusted return.

So we're negotiable to some extent on price, but not beyond a limit. And the result is that growth is the tertiary consideration and the variable that adjusts. So because we're being disciplined without exception on credit, and we're being reasonably disciplined on our return standards, we've seen less growth. And that is a result of two things. As you say, one is computation, and two, is the fact that there are just fewer deals that made our credit standards today than they were a year or two or three years ago when there was a lot more room to build product in most markets.

Steve -- SunTrust Robinson Humphrey -- Analyst

Thanks.

George Gleason -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Stephen Scouten -- Sandler O'Neill -- Analyst

Hey guys, good morning.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Hey, Stephen.

Stephen Scouten -- Sandler O'Neill -- Analyst

So, thanks again for all the color you guys gave in the management comments. Very helpful. I'm kind of curious how you guys are thinking about average earning asset trends through '19 and into '20, given the lower loan growth outlook and some of the details that you gave, like configurate around RESG potential repayments over the next couple of years. And wondering if it's possible to -- the average earning assets are relatively flat on a net basis or if that's too punitive of you in your minds?

George Gleason -- Chairman and Chief Executive Officer

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

So that coupled with the -- just the ongoing paydowns in our purchase loan portfolio, certainly provides a headwind of growth in total loans, and yeah, a headwind of growth in average earning asset. We have a strategy that we articulated in the management comments document to address that and the impact of that on net interest income. One is, we're working very hard in our real estate specialties group with -- without sacrificing our credit quality or our pricing standards to just work really hard to generate a good volume of new originations. And through the first half of this year, we've generated about $3 billion in round numbers of origination. So we're running a little bit ahead of the average pace for last year. We would hope that, that origination trend would continue for the back half of the year and hopefully even accelerate a bit end next year.

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

Thirdly, we hope to get some significant increases in volume, from our different verticals, specialty lending verticals in our community banking part. And then, we helped to also reduce our cost of funds, Tim sort of addressed that, by more effectively managing our mix and pricing of deposits. So it's a battle to grow earning assets when you've got as many repayments as we do, but we've got a strategy to attack that. Hopefully, that strategy will be successful.

We also hope that we can get some lift to our net interest income from this -- from both growing earning assets and mitigating that cost of deposits. But it's a work we've got to do, and it's not going to be easy, but our team is very committed, and I think if we can be -- if market conditions will allow us to be successful, I think we will, because our team is are working hard to do that.

Stephen Scouten -- Sandler O'Neill -- Analyst

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

George Gleason -- Chairman and Chief Executive Officer

I'm now turning that back to Tim.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Hi, Steve. No, I think it will act fairly similar to our bid on the REIT, and we had a high deposit beta on the way up, I think we're gonna have a high deposit beta on the way down. We are actively managing it. So, as I said earlier, we started out this quarter trying to actively manage it ahead of any move. So hopefully, that'll get us ahead of it. But deposits will lag a little bit from LIBOR, specifically LIBOR moves pretty quickly and -- but I think over a several quarter of period, it'll catch up and we -- have a little bit of a lag to it, but we're working hard really early on in this quarter to offsetting that and feel good about the efforts we're making in.

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

Stephen Scouten -- Sandler O'Neill -- Analyst

Perfect. It all makes sense. And maybe one last kind of clarifying question. I noticed the loan-to-cost for the RESG portfolio as a whole went up maybe a couple of -- 51% from 49.5% or something like that. Is that possibly due to that $300 million credit that appears to have gone away? Was that really a low loan-to-cost loan and that leaving pull didn't average up, or can you give any commentary as to what pulled that number up slightly?

George Gleason -- Chairman and Chief Executive Officer

Well, I'll give you -- it's a change in -- a constant change in the mix of that portfolio. One comment I will tell you, probably the lowest loan-to-cost pieces of our portfolio were our Miami condos. Those, if I recall, average amount of 37% loan-to-cost. So, when those get paid off, that tends to cause the average to go up. So, it's the change in mix and, there's probably a slight tendency, I would say, for that loan-to-cost number to go up. I don't think it goes up a lot, but it wouldn't surprise me, if in a quarter or two, we saw that at 52% or 53% .

I think, one of the keys is to look at the loan-to-value number, and the loan-to-value moved very little and pretty flat down there, around 43%. So we continue to feel very good about that. And the reality is, most of the guys or a lot of the guys that we compete with are 15 points plus or minus higher leverage or 20 points higher leverage than we are. So we continue to think we're probably the most conservatively leveraged guys in the space.

Stephen Scouten -- Sandler O'Neill -- Analyst

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

George Gleason -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Brock Vandervliet with UBS.

Brock Vandervliet -- UBS Investment Bank -- Analyst

Thank you. George, I wanted to circle back to that comment you made, which I think could be really telling in terms of the competitive environment. You're seeing some refinancings from pre-CO credits. I mean, that just seems amazing to me because I would think as a developer at that point of, you're on the final approach to a CO, the last thing you're thinking of is, is refi, because you want to get over the line so you can lock in the permanent financing. Are these borrowers that are able to just bring that forward and get permanent financing even ahead of a CO?

George Gleason -- Chairman and Chief Executive Officer

We have seen some -- a few competitors being very aggressive in acquiring some assets. And the -- usually when the sponsors in the middle of construction, they are focused on completing the project and selling or leasing and not refinancing and...

Brock Vandervliet -- UBS Investment Bank -- Analyst

Yeah.

George Gleason -- Chairman and Chief Executive Officer

And our typical working premise has been, as the earliest we would get paid off on an asset would be at TCO, Temporary Certificate of Occupancy or [Indecipherable] and that would be the earliest. In most cases, it would be somewhat after that. But what is encouraging our sponsors to pay us off is a combination of lower rates and higher leverage. So we've seen competitors come in and basically refinance out all or a large part of the equity or miss [Phonetic] that plus us, and do it at a compellingly lower cost of capital to the sponsors. So I don't think that's a trend that is going to affect a lot of deals, but it is affecting enough deals that it's moving our repayment numbers faster than we expected.

The reality is and Tim put a really nice little chart in there on page 8 of our management comments document. It's the figure -- number 8 in the management comments document that just shows on an annual basis each year what the repayments have been from the loans we originated and what's still outstanding for those. And we've talked for a long time that our RESG portfolio is construction and development portfolio. And these loans are going to pay out three years, more or less after they originate. So if it's a really simple, small, non-complex project, they might pay off in 24 months. If it's an average deal, they might pay off in three years. If it's a project that's really big, complicated, mixed-use, hard to construct project, it may be a four-year timeline. And the reality is, our three biggest years of RESG originations ever were '15, '16 and '17. So you can jump forward from that '18, '19 and '20 is kind of the natural cadence for those loans to pay off more or less a year or so.

And seeing that natural cadence unfold and get accelerated just to touch by the fact that you're getting loans that are paying off even before TCO and CO is creating some headwinds to our growth. We work through that big junk of payoffs and hopefully successfully diversify our portfolio and get more earning asset engines and get a reasonable uptrend toward RESG originations as compared to the $4.8 million or $1 billion [Phonetic] or so from last year. We ought to be able to get back into a decent positive growth story, but we've got to work our way through this season of payoffs.

Brock Vandervliet -- UBS Investment Bank -- Analyst

And in terms of the competition you're seeing among the banks, it seems like if they haven't backed out of the business years ago, they're tapering down construction. So it can't be coming from there. Are these credit funds that have always been in the space or is it new players? What do you see from the deals that you're losing or they're refinancing early?

George Gleason -- Chairman and Chief Executive Officer

Brock, it's combination of big banks, foreign banks, debt funds. There are a lot of players in this space and those players who have been in this space for the last year plus in large numbers, and if you go back to '16 and '17, you saw a lot of banks pull out of this space, that created a -- the formation in the raising of a lot of money and a lot of debt funds, credit funds that are targeting this space. And then a lot of banks have come back into this space. So it's crowded space right now.

Brock Vandervliet -- UBS Investment Bank -- Analyst

Got it. Okay. Thanks for the color.

George Gleason -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Matt Olney with Stephen.

Matt Olney -- Stephens Inc. -- Analyst

Yeah. Thanks. Good morning. And just to piggyback off that last point about the early payoffs and RESG, I believe you now have the early prepayment fees and most, if not all of your RESG projects that allow the bank to capture at least a portion of the interest income, the bank would have received. So given the heavy paydowns in 2Q, are we seeing more fees in 2Q and should we continue to expect higher fees the next few quarters?

George Gleason -- Chairman and Chief Executive Officer

Well, of course, those prepayment fees you're alluding to Matt, come through the interest line item, as minimum interest on those loans. So they show up as interest. We commented at the last couple of quarters and in the -- not this management comments document, the last two, that we've had some positive lift, a basis point or two or three or four, I don't remember the numbers, to our NIM in those quarters from higher levels of loan fees related to prepayment. We didn't specifically comment on that in this management comments document. We did have several loans that had minimum interest in them when they paid off. We would expect that to continue.

You know, some of our sponsors are very attentive to that minimum interest number, and don't want to pay it. So they will grab the loan to the day the minimum interest is earned, and then pay it off very shortly after that. Some sponsors take a broader view of interest savings. They might get it from a lower rate refinance or savings that they might get from cashing out a much larger loan with another sponsor that would let them cash out mezz debt or our higher cost equity and factor that in.

So sometimes we get minimum interest paid. Sometimes the sponsors wait us out on the transaction. My guess is that the experience we've had in the last couple of quarters is probably, reasonably likely to be consistent with the experience we would expect the next several quarters, which is why we made no comment about it in the management comments document. But those are chunky, prepayment minimum interest numbers and they're hard to predict, but we think there's not a big delta between what we've experienced the last several quarters in that regard and what we would experience in the next several quarters.

Matt Olney -- Stephens Inc. -- Analyst

Okay. That's helpful, George.

And then, I also want to shift over to -- get your updated thoughts on your stock repurchase plan. I think it's not something you've done previously in the Company history, but with the updated loan growth guidance a little bit softer, I guess, capital will just continue to build. So would you reconsider the stance around stock repurchase activity?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Hey, Matt. This is Tim. It's an active dialog with our Board. At each quarterly meeting, we've got -- obviously given updated guidance on loan growth. But to your point earlier, we have never done a stock buyback in our 22-year history as a public company. We would prefer to utilize that and leverage that capital to grow our bank. And whether that's in the short term, or medium term or long term, we feel really good, over the long term about being able to utilize that capital. And I think our Board would prefer us over the long term to utilize and leverage that capital. They'll continue to discuss it. I would guess their next major discussion regarding it would be early next year when they add an updated financial projection and budget and strategic planning process that we do typically in early part of it. I would not anticipate much more of a change in their stance between now and then. And even then, they're going to have to evaluate what they think are long-term prospects are for a buyback. So that's basically where we are today.

Matt Olney -- Stephens Inc. -- Analyst

Okay, great. Thanks, Tim. Thanks for the color.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Thanks.

Operator

Our next question comes from Cathy Mealor with KBW.

Cathy Mealor -- Keefe Bruyette and Woods -- Analyst

Thanks. Good morning.

George Gleason -- Chairman and Chief Executive Officer

Hi, good morning.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Good morning.

Cathy Mealor -- Keefe Bruyette and Woods -- Analyst

Tim, you mentioned that you've already lowered your promotional CD rate. Can you give us any -- I mean, can you quantify maybe where promotional rates have peaked and maybe where you are currently?

George Gleason -- Chairman and Chief Executive Officer

Katherine, let me address that. I don't think for competitive reasons we're going to -- want to quantify that. We made a comment in the management comments document that competition in regard to deposits and our ability to moderate that pricing just was really not evident in the first quarter and half of the year, as the second quarter worn on and particularly, as expectations regarding the direction of Fed action really finally began to settle in on the deposit guys. And I guess, some of that CEOs probably looked at what was happening with their loan yields, with LIBOR and so forth and we began to see some moderation in deposit pricing in the second quarter, and particularly, the back half of the second quarter. So we tried to get right in very actively and aggressively in that, and continued that into the start of the first quarter. So we're optimistic we're going to be able to get the cost funds down, but for competitive reasons, I don't want to discuss details of that.

Cathy Mealor -- Keefe Bruyette and Woods -- Analyst

That's fair. That's fair. And then just kind of specifically back on the RESG growth, I mean, we -- you've talked a lot in the past about where we are in the cycle and that while we may be at peak commercial real estate values, which may squeeze your sponsors, but from a return perspective, from a first lien perspective, you're still in a great spot in terms of credit quality and credit risk.

But is there any -- is there any thing that you can point to with the higher prepayments or the -- kind of lower origination volume that is kind of a OZK-driven effort, and you know, take the foot off the gas a little bit to avoid certain credits or certain market? Or is it really -- or are you seeing kind of just -- what -- is it more that you're seeing less deal flow and it really is kind of just the competitive dynamics that are really driving this mode of growth? I guess, I'm trying to figure out how much of it is, is there any part that is OZK-driven versus just really kind of responding to the macro?

George Gleason -- Chairman and Chief Executive Officer

Yeah, I would tell you, I don't think any of it is OZK-driven. We have always had very conservative credit policy standards and practices. Those continue, we've not tightened them up. We have not liberalized those in the face of increased competition. I think all of the volume impacts that you are results of the fact of two things, as we said earlier and as you articulated. One is, it's more competitive environment with more players in the space. And number two, we're at a point in the cycle where there's just less transaction that make sense to sponsors from an equity point of view to pursue. So there are less opportunities to do business.

And the opportunities that are getting done are percolating longer before they get closing sponsors, are very cautious. And transactions that three or four years ago might have gotten closed in 60 days after you first saw it, sometimes might take a year-and-a-half now or a year or three quarters to get done. Sponsors are taking their time and being cautious appropriately so in the economic environment we are in, such that it's had an impact on our volume and we -- you don't want to force the volume. A lot of our competitors are doing that. They might get away with it and be richly rewarded for jumping in there and being more aggressive on credit. But that's just not our style of doing business. We keep our discipline all the time.

Cathy Mealor -- Keefe Bruyette and Woods -- Analyst

Okay. And maybe one final question just on loan yields. Thinking about the margin, how much of the change in loan yield would you say is driven just by the impact of LIBOR versus the mix shift from going from RESG into the other verticals, in Indirect Marine and RV and your other vertical?

George Gleason -- Chairman and Chief Executive Officer

Well, I think you can pretty much gauge the LIBOR impact. Just like LIBOR 6/30 versus 3/31 and look at that difference in one month LIBOR and multiply that times the percent of our variable rate loans times LIBOR and you can derive a pretty reasonable tight estimate of the impact of LIBOR, LIBOR being down during the quarter, and we put a LIBOR chart in there on figure 16, I think it is in our management comment document that shows that downturn in one month and three month LIBOR during the quarter and that weighed on our margins.

There is also some impact from the change in mix of our portfolio. As we mentioned in the management comments document, our RESG portfolio being all variable rate loans has become our best-yielding portfolio, whereas our community bank and Indirect Marine and RV portfolios, the Indirect Marine and RV is all fixed rate, the community bank, a mixture of fixed and variable rate. Those portfolios are right behind in their yield as the Fed funds rate has gone up because of a fixed rate component of those portfolios.

If you go back to the time right before the Feds started raising rates, our community bank portfolio, the Marine portfolio, the RESG portfolios all had very similar yields. But obviously, they performed differently because of the changing mix of variable and fixed rate loans in those portfolios.

Cathy Mealor -- Keefe Bruyette and Woods -- Analyst

And then one more, if I may, just really quickly on -- I saw substandard loans were down this quarter, do you know what the direction of the watch list credit this quarter versus last?

George Gleason -- Chairman and Chief Executive Officer

Could you repeat that, you broke up a little bit?

Cathy Mealor -- Keefe Bruyette and Woods -- Analyst

So substandard loans, looked like they were down linked quarter, but you have the direction of watch list credit this quarter versus last?

George Gleason -- Chairman and Chief Executive Officer

I don't know that all.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

I don't know and I don't envision changing much. Obviously, we have one watch credited at RESG, that's still a watch credit, that's our -- obviously our largest watch credit. But I don't know the direction of the watch category, either. I would not expect it to have a material difference from what it was at 3/31. Obviously, our substandard went down because we've moved to substandard loans at RESG to OREO during the quarter.

Cathy Mealor -- Keefe Bruyette and Woods -- Analyst

Great. So, it's fair to say no large RESG watch credit within this quarter?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Yes, RESG had no new watch credits. So RESG is still -- only has that one watch credit that we've talked about extensively for the last several quarters.

Cathy Mealor -- Keefe Bruyette and Woods -- Analyst

Got it. Okay. That's great. Thank you.

Operator

The next question comes from Matthew Breese with Piper Jaffray.

Matthew Breese -- Piper Jaffray -- Analyst

Hey, good morning.

George Gleason -- Chairman and Chief Executive Officer

Good morning.

Matthew Breese -- Piper Jaffray -- Analyst

Just thinking about the variable nature of your loan portfolio juxtaposed with some of the early actions you've taken on the deposit side, with the Fed seemingly likely to cut at the end of the month or at least by the end of the year, I was hoping for some color or expectations around the margin as we potentially go into a Fed-cutting environment. How do you expect it to behave?

George Gleason -- Chairman and Chief Executive Officer

Well, I think Tim included lines within the management comments document that suggested that over multiple quarters, we expect a roughly parallel move. And our core spread there from a decline in right. And he points to the fact that in our nine quarters of Fed increases, I think our cost of interest-bearing deposits were up 4 basis points more than our yield on non-purchased loans.

So we had quarters in there where the loans gained and core spread improved, quarters in there where COIBD increased more and core spread decreased. But over that 15 quarter period of time, nine Fed increases, there was about 4 basis point difference. So we would expect a similar sort of movement going down that in the long term over multiple quarters, by probably -- move pretty close to hand them.

In the short run, you'll see a quarter's both directions we would expect. And certainly, we included in the management comments this time in figure 10 to 14, you know, all the floor rate in our loans, stratification of the floor rates in our loans. And we commented at the -- in the paragraph below that, that is we have months where older variable rate loans with floors that were set at the time, those loans were originated. As those pay off with their lower floors and we replace those with newly originated loans that are half floors at or near the current rate, we get -- we build more protection into the variable right loan portfolio.

So I suspect the Fed will cut right at the -- based on recent commentary at the end of this month, we would require that -- in another few months to do that because the evolving defensive nature of our loan portfolio to protect us and down rate improves every month as we roll off older loans and add on newer loans with lower -- closer to current rate.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. Yeah, I was just trying to think and stepping back and thinking about the slower loan growth outlook and the margin, combined with the efforts to really increase net interest income growth, just trying to gauge or get an idea of when we can see that inflection point higher on net interest income growth and if you have an idea of over the next 12 months or 18 months when we can start to see that?

George Gleason -- Chairman and Chief Executive Officer

Well, I think that is going to depend really on two things, average earning assets, which will depend on the effectiveness of our programs to increase RESG origination without sacrificing credit quality, to continue to scale up Marine and RV, without sacrificing credit quality or pricing; and community bank verticals going up. And then, the other important component, as we said in management comments, is our ability to better manage our cost of funds and get that down.

So I think, though -- I think those are the variables that hopefully we've got to solve to get a positive net interest income number sooner rather than later. If we're very effective at solving those variables then we can generate more average earning assets and get our cost of funds down, I think that will help us get to a positive net interest income scenario much sooner if we languish in our efforts to achieve those goals, and that's going to push that out farther.

Matthew Breese -- Piper Jaffray -- Analyst

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

George Gleason -- Chairman and Chief Executive Officer

Well, let me -- I don't want to speak for my competitors. I'll just say we look at, we look at a lot of transactions that we lose and a lot of transactions that get refied right from us and we make the comment that we would never do that loan at that leverage around those credit terms. And oftentimes we also make the comment, we would never do that loan at that pricing for that duration. So we scratch our heads a lot at how aggressive some of our competitors are on both credit and pricing terms at times. Yet, despite the very competitive environment, our lenders are doing a very good job of generating positive loan growth in a crazy competitive environment.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. Okay. Just last one for me. Thinking about the New York City construction portfolio, and the exposure there across the different asset classes, just wanted to gain a sense for that given the new multifamily rent laws and whether or not that would or would not have a real impact on you.

George Gleason -- Chairman and Chief Executive Officer

We don't think that has any real impact on us at all. We've never been an active lender in that space on rent-regulated, rent-stabilized property. Now, Tim mentioned in the management comments document that a lot of our multifamily loans, I think it's about a half dozen of them in the New York area, have 421-a tax abatement provision. So the way that works is a sponsor can enter into a contractual agreement with the City or Housing Authority, I'm not sure who the counter-party to that agreement is, but the sponsor might be doing a 200-unit apartment project and they may agree to make 15% of those units, 60% of them available at below market rate to individuals that are making some percentage of the median income, it maybe 85% of the median income.

So in exchange for a contractual agreement to make those units that part of the project available at below market rates for 25 years, say, the sponsor might get a 25-year abatement reduction in the taxes on the project. So it's simply a mathematical calculation from the sponsor's point of view, how much of a saving in taxes versus how much are they giving up in rental income to make a portion of the project available to people who made a certain percentage of the median income threshold. Our sense is, and it's not absolutely clear, but our sense is that the new legislation that was passed for the state would limit those increases, rental increases on those below-market rate units which again is, 10% to 20% of the project. Typically would limit that to the 2% annual increase. That has no effect on us because we didn't underwrite any increases in rents either the below-market rate or the market rate rent in our economic analysis of the projects. We are seeing flat rent with no increases.

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

And then we had a tiny handful -- and I'm going to ask Tim to you the numbers.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

$23 million.

George Gleason -- Chairman and Chief Executive Officer

We have $23 million of loans left over from our Enervest acquisition $25 million of loans. I'm sorry -- not $23 million, but $25 million left over from our Enervest acquisition. And these are small multi-family projects that have one or more rent-stabilized units in them. And typically, these have more market rate units than rent stabilized. But there is one or more rent stabilized or rent subsidized units, and they each of the -- but we think that's a very old seasoned portfolio, very little leverage to leverage, and...

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

29% loan to value today.

George Gleason -- Chairman and Chief Executive Officer

29% loan to value and the debt service coverage on them is 20% [Phonetic] plus I think. So the impact of the law on that relatively tiny bit of our portfolio is negligible, and we don't think really there's any impact there given the low leverage and high debt service coverage and seasoned nature of that portfolio.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. Very helpful. I appreciate it. Thank you.

George Gleason -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Brian Martin with Janney Montgomery.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Hey, good morning.

George Gleason -- Chairman and Chief Executive Officer

Good morning, Brian.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Hey, just a couple of things for me and to keep it short, the -- maybe I don't know if it's Tim or George, said on the deposit side. What percentage of the deposits are kind of rate sensitive that move without you guys doing anything versus where the opportunity is to take action, like Tim mentioned, where you've kind of been active already this quarter this far. But you know what's the rate sensitive deposit, to a day one change?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Well, Brian, the deposit book falls into two categories. One is CDs that have a fixed rate for the duration of the CD contract. Those will move and will move based on rates that we set, when buying mature and then the others are administered rate products that the -- we make conscious decision to change the rate on it, such as the savings account or money market account or whatever, and make the rate change on those administered rate product. So, they are all -- none of them are or very few, I guess, we have a couple of deposit relationships that actually float with the -- a small number, more than a couple, but a small number that actually float with Fed funds target rate, or Fed funds effective rate or something like that.

But the vast majority of our deposits are either administered or fixed CD maturity deposit. And you know that the equation or higher bound there is, how much can you just raise and not meaningfully impair your relationship with the [Indecipherable].

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Got you. Okay, that's helpful. And just on the loan side, just kind of the community banking verticals, I mean I know that outside of the boat -- RV Indirect portfolio, where the biggest opportunity to scale up in some of the other areas to help maybe offset some of the payoff scenarios to which areas are you seeing more traction in today or more optimistic about?

George Gleason -- Chairman and Chief Executive Officer

We've got several areas there that we're getting some traction in and some will be more meaningful than others. We would really like to expand our government guaranteed SBA lending business organically in our local markets through our local branches, using our GGL theme. We think we can do that. One of the increases in our overhead is we've been trying to staff up in that unit to get more volume out of that. We think that helps to serve our communities in a very proactive way and provide good quality, good yielding loans for us at the same time.

Our Business Aviation group, we've added a couple more origination people buyer, and we think we've got some good opportunities there. In fact, that group is coming to see may right after this call to discuss a transaction they're working on that they would like me to look at. Where we're trying to get more traction and affordable housing and charter school verticals, our subscription finance and kind of specialty C&I business, we've got a really good transaction that we're excited about. I know that it would be almost a $100 million dollar transaction that we're working on. I've been working on it for a number of months, couple of quarters now that seems to be coming to fruition.

They've got a couple of other things to close there. So, none of these is going to be in RESG or Indirect Marine RV type of volume business. But collectively, we're hoping that we can get just every quarter a little bit more scale and volume out of these and that, over the course of 2020, they'll become much more significant contributors to our growth and the diversification of our portfolio.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Okay, that's helpful. And just the last items. The -- maybe I missed it, I joined a little bit late. I know -- it felt like they were talking about the expenses. But just, is it fair to assume from the comments I heard in the tail-end that the expense growth, the next several quarters, particularly through 1Q, is kind of similar type of pace give or take and then it maybe moderates a little bit thereafter? Is that kind of what I heard on that?

Greg McKinney -- Chief Financial Officer and Chief Accounting Officer.

Brian, that's what we've said earlier. Yes, we do think that it will still have some growth in that expressed time over [Phonetic] the next two or three quarters. But we are hopeful that as we get into 2020 that we can get our field out of some of these areas we've been focused on. It will allow us to see -- do less the increase quarter-on-quarter basis that we just said in the last two or three quarters.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Okay. Thanks, Greg. And then just the -- and the last one. Just on the on the margin and kind of core spread, I guess, is your outlook, I guess, George just, or Tim on core margin, so I guess -- just the margin versus the core spread, I guess that those will kind of follow one another. Meaning I guess maybe your, there's not a lot of risk toward the margins at today over time, similar to what you're seeing on the core spread. I mean, those are, I guess, pretty connected. Is that how you guys are thinking about or how we should be thinking about it?

George Gleason -- Chairman and Chief Executive Officer

Yeah, I mean, they are going to be mostly connected. I mean, obviously purchase loan is another big component of our margin and securities too, so how those move will impact margin. Obviously today, the loan yields are non-purchased and purchased, are fairly similar. So that's -- those are the other two variables in the margin.

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

Okay. All right. That's all I had guys. I appreciate it.

George Gleason -- Chairman and Chief Executive Officer

Thanks.

Operator

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

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

All right. There being no further questions, we will conclude the call. Thank you very much. We look forward to talking with you guys about 91 or 92 days, something like that. Have a great quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Greg McKinney -- Chief Financial Officer and Chief Accounting Officer.

George Gleason -- Chairman and Chief Executive Officer

Ken Zerbe -- Morgan Stanley -- Analyst

Timur Braziler -- Wells Fargo Securities -- Analyst

Steve -- SunTrust Robinson Humphrey -- Analyst

Stephen Scouten -- Sandler O'Neill -- Analyst

Brock Vandervliet -- UBS Investment Bank -- Analyst

Matt Olney -- Stephens Inc. -- Analyst

Cathy Mealor -- Keefe Bruyette and Woods -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

Brian Martin -- Janney Montgomery Scott LLC -- Analyst

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