Bank of the Ozarks, Inc. (NASDAQ:OZRK)
Q1 2016 Earnings Conference Call
April 12, 2016 11:00 AM ET
Susan Blair – Executive Vice President
George Gleason – Chairman & Chief Executive Officer
Gregory McKinney – Chief Financial & Accounting Officer
Tyler Vance – Chief Operating Officer, Director & Chief Banking Officer
Catherine Mealor – Keefe, Bruyette & Woods, Inc.
Michael Rose – Raymond James
Jennifer Demba – SunTrust Robinson Humphrey, Inc.
Matt Olney – Stephens
Joe Gladue – MCG Securities
Peyton Green – Piper Jaffray & Co.
Brian Martin – FIG Partners
William Waller – M3 Funds
Daniel Oxman – Jacobs Asset Management
Welcome to the Bank of the Ozarks, Inc. First Quarter Earnings Conference Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this conference is being recorded.
And I will now turn it over to Susan Blair. Susan, you may begin.
Good morning. I'm Susan Blair, Executive Vice President in charge of Investor Relations for Bank of the Ozarks. The purpose of this call is to discuss the company's results for the quarter just ended and our outlook for upcoming quarters. Our goal is to make this call as useful as possible to you in understanding our recent operating results and outlook for the future. A transcript of today's call, including our prepared remarks and the Q&A, will be posted on bankozarks.com under the Investor Relations tab.
During today's call and in other disclosures and presentations, we may make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates and outlook, including statements about economic, competitive, real estate, credit and interest rate conditions, including expectations for further changes in monetary and interest rate policy by the Federal Reserve; revenue growth; net income and earnings per share; net interest margin; net interest income; non-interest income, including service charge income, mortgage lending income, trust income, bank-owned life insurance income, other income from purchased loans and gains on sales of foreclosed and other assets; non-interest expense, including acquisition-related, systems conversion and contract termination expenses; our efficiency ratio, including our long-term goal for achieving a sub-30% efficiency ratio; asset quality; our various asset quality ratios; our expectations for net charge-offs and our net charge-off ratios; our allowance for loan and lease losses; loan and lease growth, including growth from unfunded closed loans and growth from loans currently in the underwriting and closing processes; deposit growth, including growth from existing offices and acquisitions; growth in earning assets; expected cash flows of our purchased loan portfolio; changes in the value and volume of our securities portfolio; the opening, relocating and closing of banking offices; expectations regarding our pending acquisitions, including our belief that such acquisitions will enhance our community banking, loan administration and other business functions and provide capabilities and technology and innovation, which will be transformational to customer experiences and operational efficiency; our goals and expectations for additional acquisitions or expectations regarding capital adequacy and growth; changes in growth in our staff; the timing and expected impact of the Durbin Amendment on non-interest income; and expenses with regard to regulatory compliance, including the impact on non-interest expense from our total assets reaching $10 billion.
You should understand that our actual results may differ materially from those projected in the forward-looking statements due to a number of risks and uncertainties, some of which we'll point out during the course of this call. For a list of certain risks which may impact any of these forward-looking statements and other risks associated with our business, you should refer to the Forward-Looking Information section of our periodic public reports, the FORWARD-LOOKING STATEMENTS caption of our most recent earnings release, and the description of certain risk factors contained in our most recent Annual Report on Form 10-K, all as filed with the SEC.
Forward-looking statements made by the company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise.
Any references to non-GAAP financial measures are intended to provide meaningful insight and are reconciled with GAAP in our earnings press release.
I'd like to apologize for the fact that Business Wire, who distributes our news releases, expected – experienced a power outage yesterday just before the market closed. This delayed distribution of our earnings news release as well as [indiscernible] of other companies with early quarterly earnings announcements. We regret that this outage of Business Wire impacted our news release being distributed at our scheduled time.
Now, let me turn the call over to our Chairman and Chief Executive Officer, George Gleason.
Thank you, Susan, and thank you for joining our call today. I want to briefly discuss four subjects before I turn the call over to Greg and Tyler. First, it was a great start to 2016. Our first quarter net income of $51.7 million was a quarterly record, providing a strong start to what we expect to be another record-breaking year. In fact, our first quarter net income was a 29.6% increase over last year's first quarter, and included quarterly records for both net interest income and service charge income as well as a 4.92% net interest margin, a 35.5% efficiency ratio, great loan growth and some record asset quality ratios.
That's a good segue to my second subject, which is asset quality. It is always a key focus for us. Our long-standing focus on conservative underwriting standards and credit quality is well-known. Since the Great Recession, we have focused even more than ever before on loan transactions with various combinations of four attributes: great properties, strong and capable sponsors, very low leverage, and defensive loan structures.
The rewards of our discipline and focus were clearly evident in our credit quality metrics for the quarter just ended. At March 31, 2016 excluding purchased loans, our nonperforming loans and leases as a percent of total loans and leases were 0.15%. Our nonperforming assets as a percent of total assets were 0.29%; and our loans and leases past due 30 days or more, including past due non-accrual loans and leases to total loans and leases were 0.23%. These ratios of nonperforming loans and leases and past due loans and leases are our best ever as a public company.
All these ratios reflect the pristine nature of our asset quality. The raw numbers may be even more illuminating. For example, excluding purchased loans, our non-accrual loans and leases have declined from $21.1 million at year-end 2014 to $13.2 million at year-end 2015 and most recently to $11.4 million at March 31, 2016. Similarly, our foreclosed assets have declined from $37.8 million at year-end 2014 to $22.9 million at year-end 2015 and $22.2 million at March 31, 2016. These trends have been excellent and these absolute numbers are extremely low relative to the size for our balance sheet.
During the quarter just ended, we continue to focus on high-quality loans at very low leverage. You can see this in the leverage levels of our construction loans with interest reserves, which is the vast majority of our construction loans. While we don't yet have the March 31, 2016 data compiled, at December 31 2015, our average loan-to-cost was a conservative 50%, and our average loan-to-appraised value was even lower at just 44%. The low leverage of this portfolio exemplifies our very conservative credit culture.
Certainly, these asset quality ratios, combined with the low leverage of so many of our loans, justify our confidence in the quality and durability of our loan and lease portfolio. This portfolio has been built to withstand another Great Recession. While we don't expect another Great Recession and we don't even expect we are on the verge of a recession, we believe we are superbly prepared if one occurs.
In our January conference call, we introduced a guidance range of 10 basis points to 25 basis points for our 2016 net charge-off ratio for loans and leases. In the quarter just ended, our annualized net charge-off ratio for total loans and leases was just 5 basis points, which was below the low end of that guidance range. Based on our excellent first quarter results and our current outlook on credit quality in our portfolio, we are slightly revising our guidance for our 2016 net charge-off ratio for total loans and leases to a range of 5 basis points to 20 basis points.
At this point, we are not seeing any signs that suggest to us that our ratio of net charge-offs of loans and leases to total average loans and leases in 2016 will differ greatly from our favorable ratios of 16 basis points in 2014 and 17 basis points in 2015. In fact, we think we may be likely to achieve a total net charge-off ratio slightly better than the 2014-2015 levels.
Despite our very conservative underwriting, our extreme discipline and our fourfold focus on great properties, strong and capable sponsors, very low leverage and defensive loan structures, we are achieving exceptionally good loan and lease growth. Clearly, we are providing our borrowers a compelling value equation in which our expertise and our ability to reliably execute transactions with both speed and excellence more than justifies our borrowers accepting our conservative loan structures.
In the quarter just ended, our non-purchased loans and leases grew $1.06 billion, only slightly less than the record $1.08 billion growth we achieved in last year's fourth quarter. Our unfunded balance of closed loans also increased by $0.58 billion during the quarter just ended and at March 31, 2016 totaled a record $6.38 billion.
In our January conference call, we increased our guidance for our full-year 2016 growth in non-purchased loans and leases to at least $3.0 billion. We are not revising our 2016 loan and lease growth guidance at this time. But based on our excellent first quarter non-purchased loan and lease growth, the growth in our customer base, our top line of transactions currently in underwriting and closing, and our largest ever unfunded balance of closed loans, we think we should emphasize the phrase at least while restating our guidance for growth of at least $3 billion in non-purchased loans and leases in 2016.
Real Estate Specialties Group or RESG under the expert leadership of Dan Thomas continue to be the primary driver of our loan growth in the quarter just ended as it has been in most quarters in recent years. Dan started this thing for us 13 years ago. Its priorities have always been first on asset quality, second on profitability, and third on growth. As a result of their emphasis on quality, RESG has had only two loans result in losses in 13 years.
If you total the charge-offs in subsequent OREO write-downs on those loans, RESG's total credit losses since inception are just $10.4 million. That's an 11 basis point annualized loss ratio over the entire history of RESG.
In recent years, RESG has tended to be even more conservative. You can see this in the leverage ratio on our construction loans with interest reserves. These are primarily RESG loans. Recently, our leverage on these loans, as we previously mentioned, is approximately 50% loan-to-cost and 44% loan-to-appraised value. That compares to the 2005-2007 timeframe when our loan-to-cost on such loans was typically in the low 70%s, and our loan-to-appraised value percentage was typically in the high 60%s. Or to state it another way, our leverage today is more than 20 percentage points lower than our leverage on loans at this time and the years preceding Great Recession.
Obviously, our RESG portfolio held up extremely well during the Great Recession with only two loans resulting in losses, and the leverage of our current RESG portfolio more than 20 points lower. There is substantial reason to believe that our current portfolio will perform equally well or even better if we were to incur a comparable economic downturn in the future.
At March 2016, RESG accounted for the majority, specifically 69% of our total non-purchased loans and leases and an even higher 90% of the unfunded balance of closed loans. Given the exceptional track record of this division and the low leverage of its current loan portfolio, you can see why we are so confident in how well our asset quality will hold up under a broad array of economic and real estate market scenarios.
Another benefit of RESG accounting for a greater percentage of our total non-purchased loans is RESG's consistency in collecting loan origination fees and the corresponding increase in our level of net deferred loan fees. As we've discussed in previous calls in accordance with generally accepted accounting principles, we defer both loan origination fees and loan origination costs.
At March 31, 2016, we had $32.3 million in net deferred credits, meaning we have $32.4 million more on amortized deferred loan origination fees than on amortized deferred loan origination cost. This net deferred credit increase during the quarter just ended from $27.7 million at year-end 2015. This larger net deferred credit along with the $83.0 million valuation discount on our purchased loans at March 31, 2016 has positive implications for future earnings.
Throughout my 37 years as Chairman and Chief Executive Officer, our focus has always been on real estate lending. When bank regulators first issued their CRE concentration guidelines in 2006, our CRE ratios were well over the guidelines, approximately where our CRE ratios are today. We were comfortable then with our level of CRE lending. And because of all the factors we've just discussed, we are even more comfortable with the quality of our portfolio, our exceptional rate of portfolio growth and our CRE levels today.
The regulatory guidelines mandate that if you have a CRE concentration, extra safeguards should be in place. We totally agree with that. And we have robust policies, procedures, and processes in place to assure the quality of our CRE portfolio, as well as the extensive measures to effectively measure, monitor, and manage our CRE concentrations.
Of course, our specialized expertise in CRE and the conservatism we employ in our CRE lending are among our most critical safeguards. Our track record, including our track record through the Great Recession, speaks for itself.
Third, during the quarter just ended, our total assets grew 15.7% and that number is not annualized. In this year's January conference call, we mentioned that we had carefully managed our balance sheet growth and last year's fourth quarter to maintain total assets under $10 billion. To achieve this goal, we delayed some deposit and loan growth that would have otherwise occurred in last year's fourth quarter.
By staying below $10 billion in total assets at last year-end, we deferred the impact of the Durbin Amendment on our interchange revenue by one year from July 1, 2016 until July 1, 2017, saving us an estimated $5.35 million.
Immediately after year-end, we allowed our balance sheet growth to resume. As a result, our total assets increased from $9.88 billion at December 31, 2015 to $11.43 billion at March 31, 2016. Several of our financial ratios, including our loan-to-deposit ratio and our liquidity ratio, also returned to more typical levels at March 31, 2016 after having been temporarily skewed somewhat at year-end by our actions to limit fourth quarter growth.
Fourth, we think our two pending acquisitions, which we announced in the fourth quarter of 2015, are of particular strategic importance and value. Our pending acquisitions of Community & Southern Bank, which we announced on October 19, 2015, will be our largest acquisition to date. Community & Southern provides us 46 strategically located and highly complementary Georgia banking offices and one Florida banking office; a large number of very talented bankers, particular expertise in both direct and indirect to consumer lending; an important loan operations group; two important loan and business analytic groups; and numerous other team members and capabilities which will enhance our community banking, loan administration and other business functions.
Our pending acquisition of C1 Bank, which we announced on November 9, 2015, will provide us 33 strategically located and highly complementary Florida offices, including offices in some of Florida's highest growth and strongest economic markets. We believe that C1's unique culture and leadership in technology and innovation will be transformational in our quest to be an industry leader and best-of-class customer experiences and operational efficiency. We expect to close both transactions this quarter.
While we have been working on the typical things needed to close these transactions, we've also been very focused on accelerating the effective integration of these two acquired entities. For example, teams from all three banks have been working intensely for several months to fully synchronize all aspects of our consumer and small business lending products, pricing, policies, procedures and documentation.
As a result, even before we close, all three banks should have synchronized and adopted each other's best practices in regard to consumer and small business lending. This is just one example of many. Achieving this level of synchronization prior to closing should greatly enhance our outcomes post-closing.
Let me turn the call over to our Chief Financial Officer, Greg McKinney.
We often talk about our company's focused on three disciplines, those being net interest margin, efficiency and asset quality. George covered asset quality, so let me discuss net interest margin and efficiency.
Net interest income is traditionally our largest source of revenue and is a function of both the volume of average earning assets and net interest margin. Our first quarter 2016 net interest income was a record $112.5 million. We enjoyed a very positive trend in net interest income in the quarter just ended as a result of excellent growth in average earning assets, namely our growth of $1.06 billion in non-purchased loans and leases.
This robust growth more than offset the 6 basis point reduction in our net interest margin from 4.98% in last year's fourth quarter to 4.92% in this year's first quarter. As a result, net interest income increased $6.0 million in the quarter just ended compared to last year's fourth quarter.
As we have previously stated, we expect our net interest margin to decline in 2016. But, as in the quarter just ended, we expect substantial loan and lease growth to continue to drive significant quarter-to-quarter increases in net interest income.
Achieving a superb net interest margin continues to be one of our key goals and although there has been pressure on our net interest margin in recent years at 4.92%, we continue to be among the best in the industry.
In recent years, we have focused on decreasing our loan-to-cost and loan-to-value on loans to reduce credit risks, and we have focused on originating more variable rate loans and fewer fixed rate loans to reduce interest rate risk.
While we believe these actions have given our portfolio a very favorable credit and interest risk profile, they have also lowered our average yield on new loans. But we believe being more conservatively positioned is worth giving up some margin.
At March 31, we increased variable rate loans to 81% of our total non-purchased loans and leases, and we had floors 91% of our variable rate loans. No matter which direction interest rate moves or if they don't move at all, we are well-positioned.
If interest rates increase, our half percentage of variable rate loan should result in a mass increase in our net interest income compared to our baseline scenario. If interest rates decrease and even in the unlikely scenario where we would have negative sovereign debt yields in the U.S., our having floors in 91% of our variable rate loan should protect our yield on our current portfolio.
Let me switch subject to efficiency. Traditionally, we have been among the most efficient bank holding company in the U.S. and our 35.5% efficiency ratio in the quarter just ended further enhances our excellent standing among the nation's most efficient banks.
While our efficiency ratio will vary from quarter-to-quarter, especially in quarters where we have significant unusual items of income and non-interest expense, we have stated in recent conference calls that we expect to see a generally improving trend in our efficiency ratio in the coming years.
This is predicated upon a number of factors, including our expectation that we will ultimately utilize a large amount of the current excess capacity of our extensive branch network and our expectation that we will achieve significant efficiencies over time from our pending acquisitions, including efficiency from the adoption of Community & Southern Bank's consumer lending platform and the deployment of numerous technology applications from the C1 Labs technology and innovation group within C1 Bank.
By fully leveraging these factors, among others, we hope to achieve our goal of a sub-30% efficiency ratio over the next several years. Clearly, with a 35.5% efficiency ratio in the quarter just ended, ultimately reaching a sub-30% efficiency ratio seems achievable.
We will incur additional unusual items of non-interest expense in future quarters, including non-interest expense related to the closing and core systems conversions of acquisitions.
As for our two pending acquisitions, Community & Southern Bank and C1 Bank, we expect acquisition-related and systems conversion expenses to be incurred in each remaining quarter of 2016. We expect both transactions will close in the second quarter of 2016, and we anticipate core system conversions for C1 Bank in June and for Community & Southern Bank in late August.
These acquisitions will likely increase our efficiency ratio for the remainder of 2016, especially considering the acquisition-related and system conversion expenses. But as already noted, we believe these acquisitions will help us achieve an improving efficiency ratio longer term. Our guidance regarding an improving efficiency ratio in future years considers the impact of our exceeding $10 billion in total assets and the two pending mergers, but it does not consider the potential impact of any future acquisitions.
Before I turn the call over to Tyler, I want to discuss our strong capital position. Even after our tremendous balance sheet growth in recent years and including our excellent growth in the quarter just ended, we continue to be well-capitalized by all applicable regulatory standards. In fact, we are well-capitalized even as measured by the future requirements of Basel III, which will be fully in effect on January 1, 2019. Our internal policies mandate that we maintain well-capitalized status in accordance with the fully phased-in 2019 Basel III standards, including the capital conservation buffer.
We currently have excess capital to support continued growth, but if our growth continues at the pace of recent quarters, we may raise additional capital. Considering the excellent quality and favorable yield from the assets generating our growth, we think raising capital to support continued high-quality growth would be favorably received.
At this point, we believe the most efficient and accretive manner for raising additional capital may be the issuance of subordinated debt by our parent holding company. We will continue to monitor our capital position in line with our significant growth opportunities.
Now, let me turn the call over to our Chief Operating Officer and Chief Banking Officer, Tyler Vance.
Organic growth of loans, leases and deposits continues to be our top growth priority, and we have clearly demonstrated our ability to achieve substantial growth apart from acquisitions. With that said, M&A activity continues to be another focus for us as we believe M&A provides significant opportunities to augment our robust organic growth.
We will continue to be active in identifying and analyzing M&A opportunities, and we believe an active and disciplined M&A strategy will allow us to continue to create significant shareholder value. While our two pending transactions have been our primary M&A focus over the last few months, once we have those two transactions closed, we expect to become more active in looking at future opportunities.
Since 2010, we have added many new offices with our 13 acquisitions already closed, and these new offices had given us significant capacity for future deposit growth. As a result, we have opened fewer de novo offices in recent years. However, we continue to add new offices from time to time when favorable opportunities arise. For example, in the quarter just ended, we added a new Community Banking branch in Siloam Springs in Northwest Arkansas and a new Real Estate Specialties Group office in San Francisco. Today, we have 176 offices in nine states, and that total will increase to over 250 offices upon completion of our two pending acquisitions.
Let me make a few comments about the excellent deposit growth we achieved in the first quarter. We have long expected that within reasonable limits, we could accelerate deposit growth as needed to fund our loan and lease growth. In the first quarter of 2016, our deposits grew $1.65 billion, providing sufficient funds to pay off our short-term borrowings outstanding at year-end, support our near-record loan and lease growth, and accumulate surplus cash of approximately $524 million at the end of the quarter.
Currently, we have 46 offices in 29 cities in spin-up mode, offering various deposit specials along with a higher level of marketing activity. We believe that our existing branch network continues to have substantial untapped deposit generation capacity to fund our loan and lease growth over the next several years.
Our pending and any possible future acquisitions in conjunction with future de novo branch office additions should provide additional sources of liquidity and deposit growth capacity to fund even further growth. We consider net growth in core checking accounts as our most important deposit metric. Last year, we achieved record annual growth in our number of net new core checking accounts with approximately 12,232 net new accounts added, and that does not include the addition of accounts from acquisitions.
In the quarter just ended, net core account growth accelerated with approximately 4,099 net new core checking accounts added. This increased net new core checking account growth was an important contributor to our record service charge income for both the full-year of 2015 and the quarter just ended.
In our January conference call, we said we expected our cost of interest bearing deposits would increase between 3 basis points and 7 basis points in each quarter of 2016 due to accelerated deposit gathering activities to fund expected loan and lease growth. In the quarter just ended, our cost of interest bearing deposits increased 9 basis points from the fourth quarter of last year. This increase was higher than our guidance and reflects the emphasis placed on deposit growth during the first quarter.
We continue to believe that, notwithstanding the higher increase in the first quarter, our average quarterly increase in cost of interest bearing deposits in 2016 will be in line with the previous guidance, although toward the upper end of the guidance range. Now, let me turn the call back to George Gleason.
Let me close by thanking our very talented and hard-working team of bankers across our company for achieving our excellent first quarter results. This is a truly a championship team with the skills, discipline, work ethic and commitment we need to deliver outstanding results for our customers and shareholders. As strong as our team is today, it only gets better with the addition of many outstanding team members from the Community & Southern Bank and C1 Bank acquisitions. We look forward to officially welcoming these new team members to Bank of the Ozarks team later this quarter.
That concludes our prepared remarks. At this time, we will entertain questions. Let me ask our operator to once again remind the listeners how to queue in for questions. Operator?
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And from KBW, we have Catherine Mealor online. Please go ahead.
Thank you. Good morning.
Good morning, Catherine.
So, clearly, credit metrics are very, very good. And so maybe a follow-up to that is how comfortable are you bringing the reserve from here? You've guided to 5 bps to 20 bps of net charge-offs, but can you give us any thoughts to how we should look at provisioning given the strong level of growth that we're seeing?
Well, being the conservative banker that I am, I like to have more reserves instead of less, just philosophically always inclined that direction. However, we went through some detail with the fact that in the entire history of our Real Estate Specialties Group, even if you include OREO losses, OREO write-downs, as well as charge-offs, our loss history on that portfolio over 13 years has been 11 basis points.
That loss history, as I noted in my prepared remarks, was predominantly incurred on two loans, totally incurred on two loans which were underwritten in a period where our predominant loan value and loan costs were about 20 points higher, 20 points to 25 points higher than our leverage on loans in that portfolio today.
So given the fact that we haven't had a loss in almost five years in that portfolio, that our leverage is 20 points to 25 points lower, and that even looking back all the way through the history of that portfolio, the loss ratios were only 11 basis points, it gets mathematically very difficult to maintain a lot of allowance for that portfolio, which now constitutes 69% of our total non-purchased loans and leases.
Now, the ALLL is, by GAAP accounting standards, supposed to be forward-looking, and we think ours is. But it also is validated by looking at historical and other normative standards to validate it. And the farther those charge-offs get in the rear-view mirror, the lower the leverage of that portfolio is, the more years we have without losses, the more difficult it becomes to justify a higher or even the current allowance allocation percentage for that portfolio.
So, given our expectations that no matter what happens to the economy, that portfolio is going to perform extremely well, my sense is that our allowance for loan and lease losses probably has a downward bias in future quarters. Of course, we'll follow the math wherever the math takes us, but our sense is that, that ratio will come down and not go up, and it's just because of the excellent credit quality and the underlying loans and the loss history metrics that you would use to validate your allowance calculation.
Great. Thanks. That's helpful. And then maybe as one follow-up, switching over to the margin. Can you give us any thoughts around NIM guidance for the rest of the year or maybe including the impact of the two deals and the revised guidance for deposit cost to increase kind of on the upper end of that range?
Again, as Tyler said on the deposit cost question, we did go up 9 basis points in Q1 versus the 3 basis points to 7 basis points guidance that we had given in the January conference call. And we think that over the course of the year, that rate of increase will come back in line so that we'll be within the original 3 basis points to 7 basis points guidance range. Although as Tyler noted probably for the year, we'll average closer toward the upper end of that range than the lower end of that range. There was a little bit of a maybe unnecessary push to get deposits.
The deposit guys started on a hold because in managing our balance sheet at year-end, we were borrowed overnight. They didn't like us being borrowed overnight. It ran or fell of our normal goal of having $100 million to $200 million of spare cash on the balance sheet at any time. And they looked at our loan pipeline and projected loan fundings for January, February, March and said, wow, there's a lot of growth coming. So naturally, they hit the ball pretty hard on the deposit side through our spin-up offices and with great effect, as Tyler mentioned, I think we have $524 million of excess cash at the end of the quarter. So, we don't have to hit the ball quite as hard in future quarters on the deposit side. So, we do think that comes back in toward the upper end of that 3 basis point to 7 basis point guidance range in January albeit we acknowledge that the first quarter was higher than that.
I'm going to decline again to give specific net interest margin guidance for the year, and we didn't give guidance specifically for the year in the January call. And there were a number of reasons for that. One is we weren't sure how many times the Fed was going to raise interest rates, whether that was going to be zero or four times over the course of the year. We're now wondering if that's one or two or what. So, there's still some uncertainty about Fed action.
Obviously, Fed rate increases would be helpful to us. And more significantly though, until we value out, do the final valuations on these CSB and C1 portfolios, we're not going to know the yields on those portfolios, and that makes it difficult to give really meaningful guidance with those two rather substantial transactions looming in front of us and expected to close some time in the month of May.
So, we'll – when we finish the valuation on those loans, we will have a little better handle on where that margin is going to be. So, we may be able to give some guidance going forward in the July call, but I'm reluctant to do so at this time.
Okay. That's fair. Thank you, and congrats on a great quarter.
From Raymond James, we have Michael Rose online. Please go ahead.
Hi. Good morning, Michael.
Hey, George. How are you doing?
Doing great. Thank you. How are you?
Good. Hey, just wanted to start off with digging into the pipeline a little bit. Obviously, another really good quarter of growth in the pipeline.
Not as strong on a dollar basis or percentage basis the past two quarters, but maybe the way to think about it is maybe the growth in the pipeline as a percentage of the asset base, which really didn't change all that much, how should we think about the opportunity in the RESG group? I know you previously talked about kind of an $8 billion funded, $8 billion unfunded opportunity, but that may have changed a little bit.
Maybe if you can just kind of talk about how we should think about future growth in that unfunded balance and if there's any seasonality as it relates to the earlier part of the year versus the middle quarter since it looks like the growth tends to be a little bit stronger in the second and third quarters over the past few years in the unfunded balance. Thanks.
Yeah. Great question. The comments about RESG having its limitations at $8 billion funded and $8 billion unfunded, we probably talked about that a lot in 30 months to 24 months ago or 18 months ago. I can't remember the exact timeframe, but clearly, that is no longer a relevant number. And the reason that is no longer relevant is historically, we have closed 6% to 8% of the loans we look at in RESG.
That number is probably going to be that percentage or lower this year because the volume is so significant that we're looking at. The pipelines are huge. So, we probably won't even hit the 6% number this year in what we close out of what we actually see. But a couple of – a few years ago when we were talking about the limits of RESG being $8 billion funded, $8 billion unfunded, it was because the business we were getting from our customers that required higher rates, lower labor or tariff fees and so forth, were great assets but they were typically assets that had complexity to them.
So, we would turn down all the deals that would fit in all the big banks' normal credit boxes and tell our sponsors, you can get much higher leverage than we'll give and much better rates than we'll give on that, keep sending us your deals, we'll find the transactions where you need our help or you need us to help you solve the complexity or deal with complexity in a transaction.
So, we were sort of calculating what we thought were the most complex deals and what the volume of those is in the country. And presuming that, that was the business that we would get, because that was the business we could get and are very low leverage, super tight deal structures that we're very defensive and protective with the bank and also get paid really well.
But what has happened over the last couple of years is more and more of our sponsors have come to us and says, look, we know – you're right, you're a little higher than the other guys. Your fees are higher, our legal costs are higher, your documents are a little tougher and your leverage requirements are lower, but you guys are so good at executing, you take so much transactional risk out of the transactions we do with you, and your speed of execution is so much better, we're willing to let you do all of our deals if you could do them all or any of our deals you want to do.
So, our business with a lot of our big sponsors has evolved from doing their one or two most complicated deals every year to doing three or four, five deals a year, and that's created this tremendous surge in the growth of our portfolio, both funded and unfunded, over the last several years. Our extreme expertise in commercial real estate, lending adds value to our customers, and more and more customers are willing to accept our conservative deal structures and accept our pricing and terms in order to gain access to our expertise and the benefits that affords them.
So, the $8 billion-$8 billion deal is definitely no longer anywhere near relevant. We don't talk about limits on our growth anymore because we are seeing such massive volumes that if I had more teams in RESG, we could do a lot more business than we do. But to build the team correctly, it takes 12 months to 24 months to build a team. And we're doing that as quickly as we can do it, and do it in our extremely disciplined, cautious, conservative way. We won't do it any faster than we can do it in our disciplined and cautious way. But if I had another team or two more teams or three more teams at RESG today, our volume would be 20%, 40% or 60% more than the volume you're seeing just because we're constrained by manpower.
Since we are seeing so much more deals than we can do that are super high-quality deals, clearly, the seasonality of that business has gone by the wayside to a large degree because we've got a full pipeline at all points now, it seems. And that's tended to mitigate what used to be seasonal factors that moved our deal flow around. And you can see that with our $1.60 billion of growth in the quarter just ended, and that's – to clarify, that's growth in non-purchased funded loans. So I don't think seasonality is as much a factor.
Now, with that said, we will bounce around quite a bit from quarter to quarter because of payoffs more than fundings at this point. We will have orders and Q2 is likely to be one of those quarters where we have a bit more payoffs than we will on an average quarter, and it just has to do with the timing of some of these deals ripening. But notwithstanding that, we expect excellent growth in Q2. And then we'll have quarters where we have lesser payoffs, and it will appear that our growth is swelling a little more there.
So our goal long term is to build team number five at RESG, and then to build team number six and then to build team number seven. Team number five probably gets built by – sometime in 2017 and team number six probably in 2018, and the next team, probably 2019, 2020. So it just takes time to build people with the skill sets that it takes to do what we do.
That's really helpful commentary, George. And maybe if we can go back to credit quality real quick. So I've heard a lot in the news, media, from investors about Miami Brickell Condo exposure and maybe some of your exposure in Manhattan condos and obviously, Texas is an area of focus. Can you give us an update on kind of each of those three exposures and maybe what we might expect in terms of credit quality and maybe where the loan-to-cost is for kind of each of those areas on those projects? Thanks.
Yes. I'd be happy to. I'll take Miami first. I was in Miami, oh, I guess it's been a month ago now, and spent several days down there and went from Brickell, to specifically address your question, out to Doral, all the way up to Fort Lauderdale and back down and looked at every asset we've got in that market.
We have a number of condo projects in that market. The projects that we've got are, I think, 65% to 85% pre-sold. They are pre-sold. They've – contracts that I think the worst contract we've got has 30% non-refundable cash down at contract signing and nothing else until closing. Most of the contracts we've got are 20% cash down at contract signing, 20% cash down at groundbreaking, and 50% cash down at top off.
So, these are not your old-fashioned 20% or 10% or 5% or some nominal some down contract. They're real contracts that have real earnings money up. And again, we're 65% to 85% pre-sold on the projects that we got down there. Our average leverage on the condo deals that we had on the books, when I was down there, we had one that was about 30% leveraged, one that was about 35%, and one that was about 40%. So, I think, our leverage on those projects were about 35%. So, even if massive – even if I sell no more condos in massive quantities, afford more of the condos – the contracts that were existent fell out, we're still paid out.
We've got several more deals, one we closed since I was down there, one has been approved since we were down there. Those had been predicated based on 65% presales, again, using those same sort of either 30% cash down, contract signing of the 20%, 20%, 10% cash down contract. And similar levels of leverage, very low leverage. So, we're doing very conservative stuff down there. It is heavily pre-sold with real contracts, with big deposits up and at very, very low leverage. So, as long as we can continue to find transactions with that risk profile in Miami, which is essentially a no-risk profile, we'll continue to do projects down there. And we are looking at others down there.
Certainly, the velocity of sales on condo units has slowed there. I would – from the data I've seen and talking with folks, probably sales velocity is about half what it was. But if you got presales and you've got the deposits up and you're very low leverage, the deals work and may work with massive margins for [indiscernible]. And it's hard to see any of those loans ever becoming a problem loan.
Similarly, in New York, yes, I know there's been a lot of publicity about the New York condo market and we don't really deal on that $5 million and up, that really high-end condo space player. We're in much more the moderate price condo loans. The projects in the high-end space, my gut instinct – I will not run the numbers on them – my gut instinct is there's a massive oversupply of really high-dollar condos there. But again, that's instinct and intuition and a little bit of data and not much research, so I could be wrong on that.
But what I can tell you is we've had three condo deals in committee in the last few weeks in different spaces in New York, and if you look at the – if you take the submarkets and you look at the price per unit that – from the last quarter versus the prior quarter to that versus a year ago, the prices were up.
You look at price per square foot, last quarter versus the previous quarter versus a year ago, the price per square foot is up. You look at days on the market, days on the market are down. You look at inventory, inventory is down, again, compared to previous quarters.
Now, those – the last several deals we looked at were positive in all those metrics. We've got a couple of other deals that are not positive in all those metrics. But you've got a couple of metrics that are better than they were a quarter ago and a year ago, a couple of metrics that are little worse than they were a quarter ago and a year ago. And on average, there's pretty good supply-demand balance in the market.
So, I don't know about the really high-end condos. I would guess there's a problem there with the stuff we're doing. The supply-demand metrics seem to be very good. And again, we're in these at very low leverage. Our typical leverage on those is probably 50% of the sales price of the condos. So we've got a huge margin for error on those if our supply-demand assumptions about the market prove to be wrong.
And similarly, I would tell you Texas, we view Texas as a market of great opportunity right now. A lot of lenders have pulled out of Texas, a lot of the banks that have a lot of oil and gas exposure and we're fortunate to have virtually none. A lot of those banks have pulled back to the market.
So, we're suddenly after not getting a lot of Texas business in 2012, 2013, 2014, we're suddenly getting a lot of opportunities in Texas on really great projects with really great sponsors at very low leverage and very defensive loan structures. Deals that are structured in ways that they will absolutely work and perform because of the preleasing or presale of whatever requirements we have in it. So, we're seeing no deterioration at this point in any of our assets in Texas and really finding an increasing volume of new opportunities there because so many lenders have pulled back that I can give an example.
We did a deal in Houston that a year or two ago would have been done by other lenders at 75% leverage and we did it at about 40%, so almost half the leverage. We structured it in a manner where to get from one phase to the other, you have preleasing in place on the prior phase that would cover the debt service coverage on the next phase even if you didn't achieve any leasing or sales on the next phase, so very defensive structures on great properties in great markets with great sponsors at very low leverage. So, it’s just luck when we were the only lender in the country doing a lot of the business we were doing in 2009 or 2010, 2011, that timeframe. We never quit doing business in any product in those – in any type, in any market in those days and that's when we got some of our lowest leverage, best priced, best structured transactions because competition was not out there doing a bunch of pricey stuff.
So, we feel incredibly good about our asset quality. We feel incredibly good about the assets we got in New York. We feel incredibly good about the assets we've got in Texas. We feel incredible good about the assets we've got in Miami because they're very low leveraged asset with high-quality sponsors on high-quality projects with very defensive structures, whether that's preleasing or presales and deposit, very defensively structured. So, we think all those things work without a hitch.
George, thanks for all the color. I really appreciate it.
All right. Thank you, Mike.
From SunTrust, we have Jennifer Demba online. Please go ahead.
Hi. Good morning.
Hey. Good morning.
Tax rate was a bit higher this quarter. Are we expecting that to continue for the foreseeable future?
That got skewed a little bit in Q1 due to some adjustments in our state tax accruals. Particularly, we intended to underestimate our New York State and City Tax allocation. So, that got hit a little bit. Going forward, the effective average rate we're guessing is about...
36%, 36.5%, yeah, going forward. So, it'll be down from where it was in Q1, most likely.
A little bit. And we keep – that may tend to grind up over the course of the year depending on munis that we buy or BOLI that we buy. But if we don't add tax-exempt assets, and particularly if New York continues to grow as a percentage of our loans because of the city and state taxes being higher in New York, that will tend to grind that up from probably where it is in Q2, all other things being equal. But we may add some other tax-exempt bonds and there may be some additional BOLI purchases post acquisitions, post-closing these two acquisitions that will move it back down. So, 36% to 36.5%. Effective rate is your...
And just one follow-up, George, can you just talk to us about as you – what kind of acquisition targets will you look at moving forward now that you're working off a larger balance sheet?
That's a great question. I think the answer is going to be nothing has really changed from where we've been. We like our acquisition strategy. It's working well for us. I think we're going to be relatively agnostic on size.
It probably gets hard to justify a deal less than, say, $500 million in total assets unless it just happened to be a deal sitting right on top of an existing branch network where you could get near 100% cost saves or something that might work. But probably in – except in an extreme isolated case, $500 million would be the minimum size.
Certainly, we would look at much larger transactions than we have in the past with a combined balance sheet. By the time we get to the end of this quarter, we – our balance sheet is probably going to be $17 million, $18 billion in size with the acquisitions closed. So, that certainly gives us the latitude to look upstream size-wise from where we have in the past.
We'll still be agnostic on geography. It's all going to be driven by numbers, wherever we can get the best return for our shareholders, and we'll be agnostic on product profile. Is it a deposit bank? Yes, that works for us. Is it a bank that has specialty lending capabilities like Community & Southern Bank have with their consumer small business loan portfolio that we basically largely adopted as the company standard or their indirect RV and Marine business which is very interesting to us? It could be a bank that brought real technology or some other skill set like C1 brought with their C1 Labs innovation, technology-driven culture that they have.
So, it could be many different profiles of banks, many different sizes of banks totally agnostic on geography. We are looking for value. If it's accretive day one to book value per share, accretive day one to tangible book value per share, it will be accretive to earnings per share in the first 12 months following the acquisition based on our projected run rate of earnings excluding day one transaction cost, and if it meets the fourth test of generating at or near [indiscernible] on the shrunk-down balance sheet that we will – results that we will have after we shrink it down to what we want, keep what we want, lose what we don't want, then it's going to meet our test and would be a serious candidate for acquisition.
Okay. Thanks very much, George.
From Stephens, we have Matt Olney online. Please go ahead.
Hey. Thanks for taking my question.
Hey, George. George, any more commentary on the expected closing date of those pending deals? I know you've mentioned expect to close these deals in 2Q, but would you expect to see a material impact this quarter or would it be more towards the back end of the quarter where there's less material impact?
Our best guess and – is probably that we're going to get these things closed in the first half of May. We had a CRA protest on the Community & Southern Bank deal. Community & Southern Bank had had a previous CRA protest on their acquisition of the Florida branches of CertusBank, and this was the same protest or basically with the same sort of team to the protest. So, we have inherited CSB's protest and issue here.
We've been working, responding to the Federal Reserve and the FDIC on this, been having a lot of dialogue with the FDIC. We expect that they will condition an approval on – with conditions very similar to the conditions that were in the CSB approval of the Certus acquisition. We've been going very slowly in our dialogue with them because we want to make sure that we understand exactly what those conditions mean for us going forward. And I think we're making really good progress on that. Our sense is we will get those issues very thoroughly fleshed out on mutually agreeable terms in the very near future and get these deals announced soon and get them closed.
Okay. Great. That's helpful. And then going back to the...
To express to you our confidence in that, we're already working toward a June 13 conversion on C1 and have already scheduled a last weekend in August conversion on CSB. So, we're going full speed ahead on the deals in every respect, confident that we're going to get the approvals pretty soon on these deals.
Okay. Thanks for that, George. And then going back to the RESG segment, it's pretty clear you like the risk award here at the segment, lots of good momentum. But I'm just curious to hear your take as far as the RESG loans and the impact they have on the capital base, especially considering the closed unfunded loans. So can you talk about longer term how comfortable you are with this group being the dominant source of growth given the capital impact at the bank?
I am profoundly 100% utterly totally confident in RESG getting as big as it can get following the business model they're executing today. They're our best underwritten loans. They're our best documented and closed loans. They're our best structured loans.
They're our best service loans through the RESG asset management team post-closing. They're on average our best sponsors, our best projects, our lowest leverage. They're all but one at loan in RESG is variable rate. All of the variable rate loans have flourished. None of them, I don't think, have caps.
It is the highest quality portfolio in our entire bank as evidenced by the fact that over 13 years, they've averaged in 11 basis point net charge-off ratio and the quality is massively better now on a leverage basis than it was when they incurred the two losses they incurred. So, it can get as big as it gets and we're very, very confident and comfortable with that
From a capital perspective, as Greg mentioned, if they can continue to grow and the total balance sheet continues to grow at a rate that it did in Q4 last year and Q1 of this year, that growth rate will necessitate us adding some capital. At the current time, we think the most accretive, effective way to do that is issuing subordinated debt at the holding company.
We're carefully monitoring their growth rates and net capital position. But getting high-quality good-yielding loan growth through RESG commensurate with what we booked over the last couple of years and then in the most recent quarter and capitalizing that with sub debt is in our view highly accretive to our shareholders and would be tremendously beneficial growth.
Thank you, Matt.
From Merion Capital Group, we have Joe Gladue. Please go ahead.
Yeah. Thanks. I think I just have one question left. Just wanted to touch on the salary and benefits line, I know there was accrual about $1.8 million, $1.9 million over the fourth quarter, but that's following some consolidation of groups and some staff reductions in the prior quarter. I know there's normally first quarter seasonal increases in salaries, but just wondering if you could give a little more color on was that all the normal seasonal effect there or was there anything else going on.
Well, there's a lot of things going on there and I'm glad you asked that question, Joe. As we mentioned in the January call, we spent a couple of million dollars, I think it was $2.2 million in severance benefits in Q4 to reduce some staff members and some teams that we didn't feel like we're being as productive as we needed them to be. And as I said on the January call, we pretty much immediately re-spent that money to hire new team members in geographies, lines of business, offices where we felt like there were much better growth opportunity. So, we tried to basically trade up there on opportunity levels with the new hires.
We also mentioned in the January conference call that our health insurance increases occur at the beginning of January each year. Obviously, health insurance is a big cost item for us. We also mentioned that the majority of our raises for staff occur in the first quarter of the year. And we also gave guidance in the call that we would spend $3 million-plus this year in additional expenses related to building out our enterprise risk management team, starting work on our DFAST stress test and doing all those things that are incumbent on us now that we are over $10 billion in total assets.
So, you saw all of that. We've cut staff in Q4, but we rehired those staff in more favorable growth opportunity markets and units. We had our salary increases. We had our health insurance. We added other staff members. We added team members to the enterprise risk management group. And you sum up all those changes that number is where we ended up.
Okay. There'd be any more additions like that, particularly to groups like the enterprise risk or is most of that taken care of now?
A lot of it is taken care of, but there will be some additions. Now, some of those additions are coming in the CSB and the C1 acquisitions. So, when we calculated cost saves on those banks, we did not include those individuals in the cost saves because we expected they would fill permanent positions. Some portion of them would fill permanent positions in our company.
So, obviously, our non-interest expense is going to increase a lot when we closed CSB and C1 because we're picking up $6 billion in total assets in those two acquisitions and 70-something new offices and all of that, that goes with that. So, the numbers will be noisy in Q2. The numbers will be noisy in Q3. But after Q3, we ought to have the conversion on CSB done as well. We'll have everything converted. So, Q4, we ought to get back to kind of a clean run rate of number and so forth.
If you ignore the acquisitions, there will be some continued upward bias in our non-interest expense, our salary line item over the course of this year because we'll continue to grow and add people as we grow. But organically, that rate of growth will not be anything, I don't think, like what you saw in Q1. Greg, you agree with that?
Gregory is agreeing. Yeah.
Okay. Thanks. That's it for me.
From Piper Jaffray, we have Peyton Green online. Please go ahead.
Hi. Yes. Good morning. Thank you very much for the thorough answers, George. Just one question, what was your condo exposure in New York and Florida at year-end if you don't have the March 31?
Right now, I don't have those numbers. Sorry.
Okay. All right. And then how much of the deposit pricing change or the cost of interest-bearing deposit change in the quarter was due to any kind of movement by the change in overnight rates versus really just an effort to get the loan growth funded?
There was some movement in rates as a result of the Fed's 0.25% quarter point increase last year, just like that helped us on a chunk of our variable rate loans. There are certain very rate-sensitive deposits that we did have to adjust for that. So, that was a part of it.
I would say the bigger part was just the volume that Tyler and the team wanted to ramp up. They didn't want to get – by compressing our balance sheet to sub $10 billion at year-end, I'll put them behind starting the year and they came out of the gates lock, a shot out of cannon and we're determined to catch up immediately and get ahead of the loan growth curve instead of be behind it, which I totally applaud. I think it was the right strategy. But we might have hit the ball a little harder on pricing there than we had to, but that's okay. If we – cost us a basis point or two, it cost us a basis point or two and we certainly got a very liquid position by quarter-end that's very, very comfortable to have.
Okay. And then, George, just one more question. If you think about the overall makeup of the balance sheet once you get the two acquisitions closed, what would be a reasonable range for just the securities to earning assets number? I know you have been able to move it down quite a bit over the past several years, but how would you expect it to settle out?
I'm glad you asked that question. C1 doesn't have any securities. Community & Southern Bank, I think, has $600 million, $700 million. I think it's about $700 million. And we are going to keep probably $450 million to $500 million of that C1 securities book and – CSB, I'm sorry, CSB security book. My apology.
And the reason for that is we think that it's probably beneficial to us to maintain more on-balance sheet liquidity given the significant volume of unfunded funds we have. No one has told us that yet, but I don't want to wait until someone tells us that they think we ought to do that. We want to be proactive in addressing that.
So our securities book, which at the end of the current quarter, I think, was something like $627 million or something like that, it wouldn't surprise me if through the C1 acquisition and retention of a bunch of their bonds and then the addition of some more on-balance sheet liquidity ourselves, if that number wasn't nearly double that by midyear, by June 30. So, we are going to keep a little more on-balance sheet liquidity just for the optics of having that there.
We've got huge pools of secondary sources for liquidity. Our slide deck on our investor presentation showed that at year-end, we had over $3 billion in FHL, Federal Reserve, Fed funds lines of credit, other borrowing sources that we could tap literally on demand for either overnight or long-term news. And the C1 and CSB acquisitions, because their balance sheets will enhance that borrowing capacity, that number is going to go up significantly.
So, the combination of keeping more on balance sheet liquidity, whether that's $1 billion in securities or $1.250 billion, whatever it is in that range, combined with probably another – and I don't know, we haven't even calculated it, but just guessing, another $1 billion or more in borrowing capacity that, that larger balance sheet creates for us, gives us a very nice primary and a very nice secondary liquidity position. And that's sort of where we're targeting to be at June 30.
Okay. And then I came up with one more. You've referenced earlier in your comments that the payoff number would probably be higher relative to the first quarter and the second quarter. How do you think about the – how should we think about the payoff number in the second quarter and third quarter, which historically have been really good funded loan growth quarters for you? Would you still expect to have very strong funded loan growth, too?
Yes, we do. We expect we'll have very good growth. It -given the number of payoffs we're looking at even with the volume we've got, it wouldn't surprise me if Q2's growth was somewhat less than Q1's growth. But I think you're going to have a really respectable growth number in Q2, and likewise, better growth numbers in Q3 than Q2.
So, we're pretty positive on all of that
Okay. Great. Thank you very much for taking my questions.
All right. Thank you for your questions.
From FIG Partners, we have Brian Martin online. Please go ahead.
Say, just a couple last things here for you. Just the rates you're putting on new loans in the Real Estate Specialties Group, can you just give any color on just kind of what you're seeing these days and if that's changed given kind of the – doing some of these different deals with your sponsors kind of going outside, kind of the unusual ones to kind of more doing all of their businesses? Is that changing the yields you're getting there at all or is it pretty similar?
That is not changing the yields that we're getting, and I would tell you, we have seen in recent weeks, an ability to increase our rates somewhat. Now, I'm reluctant to talk about that a lot because since most of our loans closed and then don't fund for any months or quarters and maybe even a year. But I think we are getting some improvement in our pricing power that will help margins in the back half of 2017 and into 2018. And again, so many of these transactions that we do today have 36-month loans or 24-month loans or 48-month loans, and it takes 12 months or 18 months or 20-something months before we start planning because at our low leverage, everything else has got to come in first.
The traction we're getting in that regard on improving yields, you won't see much of that really translate through until late 2017. But we think that while margins will continue to contract over the next several quarters, as we get a little bit of Fed action, whether that be one or two this year and one or two or three more next year, and as the better pricing that we're getting, not just on our RESG loans, but our Community Banking loans begins to – become – flow through the numbers a little better, we think you could get an inflection point on margin out here in four quarters or five quarters, and these little quarterly declines turn into increases. So, we're thinking that is in the offing.
Okay, that's helpful. And just two last things. Just in the – talking about the capital and the potential to add some here. I mean, last quarter, I think you talked about the growth capacity and the balance sheet being somewhere in the $1.2 billion, $1.3 billion type of range. I guess can you give any thoughts to where that is today? And then just the last question was just the loan growth this quarter, if you could give any thought as to geography, where maybe the greatest growth geographically came from and then maybe just any update quickly on the Community Banking Group and the growth there.
I think New York, and I'm not sure of this, but my sense is that New York was probably the biggest growth state for us in Q1. I don't have our updated model on how much capital growth capacity we have at the end of the quarter when you do your earnings release and your conference call as early in the cycle as Greg decided we were doing it this time. There are a couple of numbers that you don't have that you would normally have if you were two days or three days later in the cycle.
So, I don't have that. That number, I think, was about $1.4 billion at December 31. We've obviously consumed some of that with growth in Q1 outstripping our retained earnings in the quarter even though we had excellent retained earnings. So, that number is less than that. I don't know the exact number, though.
Okay. And then maybe just the last one, that Community Banking Group, any update there as far as the growth in the quarter, just how things are going?
And again, I don't have that data. And again, my apologies for...
Yes, that's okay. No worries, George. Thanks for all the color just – on the color earlier.
I can tell you, though, that about $950 million of the growth, I believe – and I'm speaking from memory, from data I saw earlier that I don't have at my fingertips here – but I think about $950 million of the Q1 funded growth and non-purchased loans was RESG.
Leasing was essentially flat. I don't think we did anything of consequence in Corporate Loan Specialties Group. So, the implication of that would be Community Banking would be roughly $100 million to $110 million of that – the difference, really, will be Community Banking.
Got you. Okay. Thanks for everything, George.
From M3 Funds, we have Will Waller online. Please go ahead.
Hi. What are your views on the FASB CECL model proposal?
Yeah. We've been monitoring that for a number of years. I think all the talking head that you listen to what they say, they expect that the CECL model will typically result in increases in allowance for a number of banks. It's certainly more forward-looking than the current allowance model is. We are actually right now in the process of building our data infrastructure so that when the CECL model is required, which I believe is 2018, we will have started tackling allowance on the CECL model that we'll be ready to go with that.
It wouldn't surprise me if we're fairly close to where we need to be based on the base model given our exceptionally low level of leverage in our RESG portfolio and that [indiscernible] to a large piece of the portfolio, as George has mentioned. So, yeah, we're building our infrastructure to comply with the CECL model, but we really don't anticipate that having a significant increase one way or the other on our allowance.
Okay. Great. And then one last question. There's been kind of a renewed focus by, it seems, a few of the different regulatory agencies on commercial real estate concentrations and construction concentrations that relates to a percent of capital and so on. Have you guys gotten any feedback on that type of stuff as it relates to your kind of regulatory communications? And do you see that being an issue at all or is everything fine on that front?
Let me take that one, Will. This is George Gleason here. We've not had any change in our dialogue at all with our regulators regarding this. As I said in the prepared remarks, the CRE guidelines were issued in Q4, I believe it was, of 2006. We were at about the same level or maybe even slightly higher on both ratios at June 30, 2007, which was the first data we got examined on that.
And our regulation – or our regulatory dialogue has basically all been on the premise that these are guidelines. They established standards for additional safeguards and additional monitoring, measuring, management of your portfolio that's required if you have a CRE concentration. And I think our regulators have always been very comfortable with that concentration.
And the evidence of that is in the historical fact that even though we were at our current levels or even slightly higher in 2007 and 2008, there was not one day that we weren't making new land loans, there was not one day we were not making new lot loans, commercial and residential lot [indiscernible] loans. There wasn't one day we weren't doing construction loans for offices, retail, hotel, industrial, warehouse, multi-family. There wasn't one day we weren't doing CRE loans and those types.
So we continued throughout the Great Recession to do business with our quality customers on quality projects and every product type. And I think the regulatory mindset is the regulators just want to make darn sure that if you have a concentration, that you're aware of it and what you're doing is fundamentally sound, and that you're taking all the extra precautions and extra steps to measure, monitor and manage that concentration, that you should whether it's a CRE concentration or any other type of concentration.
So our regulatory dialogue has never changed. It's always been, you've got a good process, don't let up, keep doing a great job. And if you do a great job, we're okay with it. So I think it all depends – I think the ball is in our court.
We just got to continue to do an excellent job in underwriting, documenting, closing our loans, being very conservative. We've gotten more conservative over the last decade in what we do there, and I think we do that well. We continue to have wide leeway to continue to operate our business.
Great, great. Thank you very much for taking my question.
Thank you. Let me respond here. Susan, can you get that back out? I actually have the data. Susan Blair, who's in the room with me, complements of her iPhone. Brian Martin, I can answer your question now. In the quarter just ended, community bank lending grew $129 million, a little more than I was guessing. Leasing shrank $7 million.
Corporate Loan Specialties Group shrank $8 million, and Real Estate Specialties Group, in my recollection, was good. They're $950 million in growth at RESG in the quarter just ended. So, it was all RESG with a now supporting role from Community Banking.
From Jacobs Asset Management, we have Dan Oxman. Please go ahead.
Hey, George. Thanks for taking my call.
Your leverage ratio at announcement of C&S was 15% compared to 12% at this quarter end. What is the pro forma leverage ratio pending the two deals and what minimum leverage ratio do you target internally?
Well, we're not targeting a minimum leverage ratio per se. That's not the...
Both – yeah. What's the most comfortable minimum leverage ratio you need?
Yeah. We're operating under all of the standards to the 1/1/19, the January 1, 2019 Basel III capital standards with the capital conservation buffer. So, the pinch point on our capital is not the leverage ratio. It's the total capital to total risk weighted assets. And at December 31, that was about a 12.12% ratio. I don't have that number exactly at March 31. We were – the Basel III standard that will go into effect January 1 of 2019, where the capital conservation buffer is 10.5%. So, at year-end, on that capital ratio, we had 162 basis points of margin. We have eroded that somewhat by using capital for our substantial growth, in the quarter just ended, I would guess we're in the mid-11% handle on that, probably somewhere around 11.5%. And again, we haven't calculated that, that requires a fairly detailed calculation of risk weighted assets that you've got to go further and bucket all those assets to figure out how it stacks up. So, we'll have that shortly, but don't have it today. But our guess is that number is around 11.5%, and pro forma with the acquisitions, that number probably goes down closer to 11%.
So, we still have a cushion there and will have retained earnings, but that cushion will be diminished in percentage terms as a result of continued growth in the acquisitions. That is why Greg said that if we continue to have balance sheet growth organically at the rate we did in Q4 and Q1, we will raise capital. And the most likely capital component is sub debt.
Understood. Thanks. And I'm not sure if you have this on the top of your head, but do you have that leverage ratio impact on a pro forma basis, like how many basis points it declines pro forma to two deals?
I'm so sorry, I do not.
Okay. That's fine. Well, thanks a lot for taking my questions.
And we have no further questions at this time.
All right. Thank you, guys, for all participating in the call today. There being no further questions that concludes our call. Thank you. We'll talk to you in about 90 days.
And this concludes today's conference. Thank you for joining. You may now disconnect.
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