BANK OZK (OZK) Q1 2019 Earnings Call Transcript
BANK OZK (NASDAQ: OZK)Q1 2019 Earnings CallApril 18, 2019, 4:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Bank OZK First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference is being recorded.
I would now like to turn the call over to Tim Hicks. Sir, you may begin.
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
Good afternoon. I am Tim Hicks, Chief Administrative Officer and Executive Director of Investor Relations for Bank OZK. Thank you for joining our call this morning or this afternoon, excuse me and participating in our question and answer session.
In today's Q&A discussion, we may make forward-looking statements about our expectations, estimates and outlook for the future. Please refer to our earnings release, management comments and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.
Joining me on the call to take your questions are George Gleason, Chairman and CEO; and Greg McKinney, Chief Financial Officer and Chief Accounting Officer. We're very pleased to report our first quarter results, and we'll begin by opening up the lines for your questions. Let me ask our operator Chelsea [ph] to remind our listeners how to queue in for questions.
Questions and Answers:
Operator
Certainly. (Operator Instructions) Thank you. And our first question will come from the line of Ken Zerbe with Morgan Stanley. Your line is open.
Ken Zerbe -- Morgan Stanley -- Analyst
Great. Thanks, good afternoon.
George Gleason -- Chairman and Chief Executive Officer
Good afternoon, Ken.
Ken Zerbe -- Morgan Stanley -- Analyst
I was hoping you guys could provide just a little more color commentary on the -- the net interest margin outlook. There were some text in the management commentary, which of course, we appreciate. This seem to a little more negative. And I'm just trying to get a sense of where you expect NIM to trend over the course of the year and is it fair to assume even core spread compression is likely given the flat yield curve?
Catherine Mealor -- KBW -- Analyst
Ken, there are a lot of variables there obviously in core spread and even more in net interest margin. So I think we gave some very detailed commentary regarding deposit costs, which we reiterated our prior guidance that we expect those to be down for the year -- for the full year 2019 are not increase as much for the full year of 2019 as in 2018. We also gave guidance that we thought our first quarter increase in deposit cost would be the highest quarter of the year and that the other three quarters should all be down from that.
So I don't know that we have a lot more intel to give on the deposit side. And certainly, you're correct that the flat downturn in LIBOR rates since the last week or two of December put a little pressure on loan yields and deposits, about 78% of our variable rate loans, I think are tied to one month LIBOR. That's down 2 or 3 basis points from the end of the year or from the high near the end of the year. So that's a little bit negative. And certainly the flat yield curve puts pressure on a lot of our fixed-rate loan offerings. Most of our loans are variable rate but fixed rate consumer and small business loan products tend to price given the duration of the product of 2,3,5,7 and 10 year [ph] part of the curve and the flattening of that curve takes a little bit of the juice out of those yields. And we continue to be in a very competitive pricing environment.
Notwithstanding that, we're working very hard to maximize the yield on every new loan we originate. So I don't know that we have a precise guidance that we can give you on that, except to tell you that there are forces that challenge our net interest margin, there is a lot of hard work being done to maintain it or improve it. And we just have to see how those forces play out. We don't -- there are too many variables to give you precise guidance on that.
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
Yeah, Ken, it's Tim. The other thing I would point out is, is obviously, as we've shown on figure 11, this was the first quarter in which our non-purchased loan yield is actually higher than our purchased loan yield, so that's been a factor in putting pressure on our margin for many quarters now that, so that factor is -- assuming that, that continues, that factor is less -- is not a headwind, where it has been before.
And the other thing I'll point out is we do have a industry-leading net interest margin of 4.53%. So I think that's -- we're very proud of that margin. And we're going to work, as George said, work really hard to maintain that industry-leading margin that we've had for many years now.
Ken Zerbe -- Morgan Stanley -- Analyst
No. Understood. It is one of the best or the best if there is any bank that I cover. I guess maybe switching gears to slightly, George, if you can talk just a little bit about the landscape for RESG, I think it looks like paydowns were I believe it was a little less this quarter, but obviously, your commentary that you gave that RESG was going to be a smaller percentage of the total growth as the sort of non-RESG loans grew. Is that more a function of the non-RESG loans are growing or is it a function that you still see very competitive sort pf pay off and paydown environment for the RESG loans?
George Gleason -- Chairman and Chief Executive Officer
No. It's a combination of all those factors, Ken. We said in our January conference call that we expected our RESG paydowns to be at an elevated level again in 2019. And those would likely exceed the level of repayments that we had in 2018 for the full year, we've reiterated that guidance in the management comments that we issued yesterday, the $1.13 billion RESG paydowns in Q1 was just fractionally more than the the level of paydowns in Q4 of last year. So still experiencing strong paydowns, we still think that, that's going to be a headwind to RESG's growth this year. We did have a really good quarter of originations in RESG, $1.86 billion, which was our best quarter out of the last five, that you have to go back to the fourth quarter of 2017 to have a better quarter of RESG originations.
We continue to think that we'll beat last year's level of originations for the full year and hopefully, we'll beat it by less [ph] margin, time will tell on that. We've got a good pipeline on RESG today for new transactions that we're working on. But it's interesting two of the more significant transactions we closed in Q1 had been transactions on which we have been working really more than a year to get those transactions to a successful closing.
So the fact you've got a good pipeline in this day in time doesn't necessarily translate into instant gratification. For example, we had a loan in committee yesterday that we reapproved for closing. It was originally approved [ph] for closing in July of last year when the sponsor got there pricing on it. Their pricing came in -- cost came in way over the top end of their estimate range. So the sponsor spent the last nine months basically value engineering the project and it's really come up with a much better and more profitable project, which we were thrilled to get reapproved yesterday, but by the time we get that closed in a month or two that will open in here, 10 or 11 months.
So the lead time to get some of these things to fruition some time is longer than you would expect, but we do have a good pipeline, we did have good first quarter and we're excited about that.
Ken Zerbe -- Morgan Stanley -- Analyst
All right, perfect. And then just one last question, in terms of the non-RESG loan growth, obviously, it's a little weaker this quarter. Is there any seasonality that we may have missed or forgotten about or -- and I guess, it looks -- and I guess, and the part of the question is, I guess, what gives you confidence that accelerates toward the later part of the year?
George Gleason -- Chairman and Chief Executive Officer
Well, I feel very confident in the job that our teams are doing there. We did have about $70 million of paydowns in the last week or two of the quarter on subscription lines that we had in they're just several of those credits, might their periodic calls on the investors to fund their subscriptions and that results in paydowns and those lines. So our Community bank growth was looking better until the last week or two of the quarter when we got lot of paydowns on that. So I think we are making good progress there. I feel very good about what we're doing. I along with Cindy Wolfe, our Chief Banking Officer and Alan Jessup, our Director of Community Banking and John Carter, our Chief Credit Officer have been making tour of all of our offices. We're visiting -- my goal was to visit every office in the Company starting December of last year through the end of September of this year basically 10 month project. And we've been in a 115 offices so far, meeting with the team looking for ways to improve what we're doing. And we've got about 140 something offices to go. But from that experience being in the field with our teams, I'm very, very positive about our prospects to continue to grow and advance our businesses across our footprint.
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
Hey, Ken. This is Tim, you had mentioned seasonality. I will point out the Indirect RV & Marine typically has a pretty strong second quarter. So that's one, one of our business units that has a little bit of seasonality where second quarter tends to be their strongest quarter.
Ken Zerbe -- Morgan Stanley -- Analyst
All right. Very helpful. Thank you very much for your answers.
Operator
Thank you. Our next question comes from the line of Catherine Mealor with KBW. Your line is open.
Catherine Mealor -- KBW -- Analyst
Thanks. Good afternoon.
George Gleason -- Chairman and Chief Executive Officer
Hi, good morning, Catherine.
Catherine Mealor -- KBW -- Analyst
One thing you did mention also in the management comments was that there were other verticals within your Community Bank that you may bring to a national scale, any insight there or are you not ready to disclose that yet?
George Gleason -- Chairman and Chief Executive Officer
Well, yes, our business aviation group certainly falls into that category. We think we've got some good room to grow that. Our GG&L [ph] our government guarantee, which is primarily SBI lending platform I think has the ability to scale quite a bit. We have some expertise and it runs small more regional successful operations in affordable housing and charter school finance, our subscription line finance is really -- is a national business and we're looking to expand the breadth of that into some other more complex non-real estate lending opportunities. So I think there are lot of verticals that we have that have quite a bit of room to scale.
Catherine Mealor -- KBW -- Analyst
Great. Thank you. And then I will follow-up on any update on the watch credit, that with your bubble chart that's kind of hovering in the upper left corner there. Any update on that credit this quarter.
George Gleason -- Chairman and Chief Executive Officer
No change. They continue to have good townhome sales, they've got the -- and I'll say final phase of lot development in process now and entitled and they started selling lots in that final phase. And I think they're off to a decent start, given the amount of snow that they've had the ground that has kept people from seeing some of those lots as much as not be desirable. So we're feeling as positive about that, certainly as we were three months ago.
Catherine Mealor -- KBW -- Analyst
Okay, great. Thank you.
George Gleason -- Chairman and Chief Executive Officer
Thank you.
Operator
And our next question comes from the line of Stephen Scouten with Sandler O'Neill. Your line is open.
Stephen Scouten -- Sandler O'Neill -- Analyst
Hey, good afternoon, everyone. Curious guys on the discussion around floors near variable rate loan book. Can you talk little bit about how many of your loans might be near or at their floors or how close to being at the floors? Is there any kind of color you can give around that as an impediment to lower loan yields if LIBOR is to continue to decline a little bit?
George Gleason -- Chairman and Chief Executive Officer
Yes. We can give you some color on that. As of March 31, 9.93% of our variable loans were at their floor. If rates dropped a 0.25%, that number would go to a little over 14% would be at their floor. If rates drop 0.5%, about 19% would be at their floor. If rates go down 0.75%, almost 23% would be at their floor, down a 100 basis points, it's 26% of the variable rate loans would be at their floor. And then moving in quarter increments 29%, 40%, so down 150 basis points, 40% at their floor, down 200 basis points, 61% would be at their floor, down 225 basis points, 88% would be at their floor.
So obviously, the floors have been installed on those loans almost all of our variable rate loans do have floors, the number Tim is
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
98%
George Gleason -- Chairman and Chief Executive Officer
98% of our variable rate loans have floors. Those floors remain installed over the growth and development of that portfolio. So we've had nine Fed funds rate increases. So some of them were floors based on rates nine months [ph] go, and some were eight months ago and some seven. So as the -- if we stay in a period this year of relatively stable rates that floor situation are to improve significantly because we'll be rolling off loans that are older that were originated when the floors were much lower and replacing them with new loans at higher floors.
So as long as we're in a stable rate environment, those percentages should get better every month and every quarter.
Stephen Scouten -- Sandler O'Neill -- Analyst
Okay. That's great color. Thanks, George. And then can -- I'm curious if you guys have expanded your parameters at all around our RESG, obviously, the $1.86 billion was great this quarter. And I know you used to say 6% to 8% of the loans you looked at, you would actually book, and I'm wondering if any of those numbers have changed or if you had to widen the net at all to deliver that sort of growth in this environment?
George Gleason -- Chairman and Chief Executive Officer
I don't know about the the pull through cashing [ph] ratio sort of metrics. I don't have those current, and Tim's not and he doesn't either, but I can tell you our credit standards have not changed at all. And we're continuing to follow the very rigorous credit standards that have led us to 18 basis point historical loss ratio on that portfolio. I think the portfolio quality is good or better today than it's ever been. And so we have not weakened our credit standards at all to achieve growth.
Stephen Scouten -- Sandler O'Neill -- Analyst
Perfect. And then just last one from me. Can you talk a little bit about how you think about uses for your excess capital. I mean, I don't know what your view is there, but I would peg it at like somewhere north of $600 million, and obviously, you noted that the Board decided not to do a share buyback. But I'm wondering what the view is for the Company on, if you had to stack rank uses. Is it just maintaining it is dry powder for opportunistic endeavors, is M&A on the table, share buybacks, is that kind of at the bottom of the stack or can you give us a little bit behind the scenes and the thought process there possibly?
George Gleason -- Chairman and Chief Executive Officer
Well, we address that to some degree in the management comments. I think probably the only color worth adding to that is that the Board and senior management of the Company are very optimistic about our medium and longer-term organic growth abilities. And we believe that we've got a well demonstrated track record of being able to opportunistically capitalize on opportunities that occur in times of economic dislocation and distress. So I think the best way to characterize the Board's decision is and management's recommendations in that regard is that we believe we'll have opportunities to use that capital through organic growth, including opportunistic capitalization on opportunities that may arise at various times.
Stephen Scouten -- Sandler O'Neill -- Analyst
Perfect, now that makes lot of sense. And no doubt their opportunistic behavior has been a game gone gangbusters for you guys over time. So appreciate all the color.
George Gleason -- Chairman and Chief Executive Officer
Thanks.
Operator
Thank you. Our next question comes from the line of Timur Braziler with Wells Fargo Securities. Your line is open.
Timur Braziler -- Wells Fargo Securities -- Analyst
Hi, good afternoon, everyone. Thanks for the question. Maybe starting on the deposits some nice quarter here, it looks like much of the end of period balances came on toward the end of the quarter. I'm just wondering what your thoughts are there on seasonality? And how much of that is will stick and what your general thoughts on deposit generation are for the remainder of the year?
George Gleason -- Chairman and Chief Executive Officer
Yeah. Hey, Timur. Obviously, there is a little bit of seasonality in when you think about just tax refunds coming in late February, and March. Obviously, we had a really good amount of growth for the quarter in deposits. We had a good amount of growth in our non-interest bearing deposits as well. I think our growth in the total deposits was 530 something million dollars compared to growth in our total loan balance of $350 million. So good growth there. We're excited about that. I mean, our Chief Banking Officer and Chief Deposit Officer, Cindy Wolfe and Ottie Kerley are very focused on maximizing the value of that portfolio. Obviously April, we'll some tax outflows as people make payments on taxes as well. So we feel really good about our ability to continue to grow our deposits as needed to fund our balance sheet growth and we'll work really to improve the mix of that as we continue throughout the year.
Timur Braziler -- Wells Fargo Securities -- Analyst
Okay. And then if I can follow-up on Stephen's question regarding RESG maybe ask it a different way. It looks like in the third quarter you booked your largest credit within that portfolio. In the first quarter here, it looks like another top five credit was booked. Is there a conscious effort to move upstream with this larger balance sheet or is this just the fact of being as successful as you have been in that space and sponsors wanting to do these larger deals with you?
George Gleason -- Chairman and Chief Executive Officer
Well, let me take that Tim. As shown in the management comments document, there is a table there that breaks down the RESG portfolio, it's figure what is it Tim?
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
32
George Gleason -- Chairman and Chief Executive Officer
32. That really breaks down the RESG portfolio by loan type. So yes, we have as you correctly observed originated over the last three quarters our largest and second largest loans and at least one of the next group of large loan player.
But the portfolio continues to -- they typified by a very broad spectrum of loan sizes. We had a loan in committee recently, that was a $20 million loan, which is on the smaller side of RESG business, but that's certainly something we want to do for established customer.
The focus of the RESG portfolio was really always been on great properties in great locations with really top class sponsorship. And we've always said that the larger the credit, the better the quality has got today. So the large credits that you mentioned, we're extremely proud of because we believe they are great assets and great locations and have A plus sponsorship involved in them. So we were thrilled to do those, we'd be thrilled to do a bunch more like them, because we've got great confidence in those properties, locations and sponsorship.
Timur Braziler -- Wells Fargo Securities -- Analyst
Okay, great. And if I could just ask one more question on RV & Marine portfolio, third year really running that book. Has that portfolio now normalized, where you're starting to see kind of a normal level of payoff and paydowns and how much of a headwind does that going to be to potentially seeing that's a similar type of growth rate as you had in the past year, year and a half?
George Gleason -- Chairman and Chief Executive Officer
Well, certainly as portfolios gotten bigger, we are seeing more prepayments and paydowns in that portfolio. We believe there is considerable upside over time to that portfolio growth and the portfolio grew net non-purchased growth in that portfolio last year, Tim was $1.32 billion, is that right?
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
That's right.
George Gleason -- Chairman and Chief Executive Officer
Something close to that if that's not at. [ph] So we think we've got a potential for another great year of growth this year, very similar to last year's and probably another great year of growth in 2020 and hopefully for several years to come at those sort of growth rates before we reach a point that the portfolio has the ability to grow and the payoffs have reached a philosophy that it would impede our ability to grow it. So we think we've got several more years of really strong growth in that at this point.
Timur Braziler -- Wells Fargo Securities -- Analyst
Great. Thank you.
George Gleason -- Chairman and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Brody Preston with Piper Jaffray. Your line is open.
Brody Preston -- Piper Jaffray -- Analyst
Good afternoon, everyone. How are you?
George Gleason -- Chairman and Chief Executive Officer
Good afternoon.
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
Hey, Brody.
Brody Preston -- Piper Jaffray -- Analyst
I just wanted to I guess go back to the pricing on your deposits in your commentary you mentioned some abatement in deposit competition toward the end of year one. And I'm expecting you can -- you expect some of that to continue a little bit throughout the rest of the year, given your commentary on deposit costs trending. Just wanted to get a sense of which markets you're seeing that and/or if it's across the entire footprint.
George Gleason -- Chairman and Chief Executive Officer
Yeah. Let me clarify the comment and I'm going to decline to give you specific market details on that. But let me clarify that comment. After the Fed's rate increase in December, there seem to be particularly aggressive fervor for rate increases on deposits and people seem to be very aggressive on that. And of course with that -- and the sentiment was that the Fed was going to be raising 3 or 4 more times the Fed funds target rate this year.
And so you saw deposit prices reset over the course of December and early January. And even as there was a significant shift in sentiment regarding the likelihood of Fed funds rate increases in 2019. We didn't really see any meaningful abatement on anybody's part on deposit rates until probably in the month of March and mostly lighter in the month of march. So we've made adjustments, we've seen in the last few weeks, a number of competitors make adjustments downward in deposit rates, which we think is very prudent.
Obviously, as we talked about earlier, LIBOR rolled over really at the beginning of the quarter and you saw a 2 or 3 basis point downtick in one month LIBOR and 20 or so -- 20 to 40 basis points downtick in three month and six-month LIBOR. So you're -- and with flattening of the yield curve early in the quarter, pricing on loans tend to adjust early in the quarter and pricing on deposits didn't seem to abate much until the end of the quarter, which I think was detrimental to some degree to our first quarter results and hopefully the deposit pricing adjustments will catch up with the loan pricing adjustments in the current quarter.
Brody Preston -- Piper Jaffray. -- Analyst
Okay, great. Thank you. I guess, sticking with deposits, maybe in terms of growth. Can you give a breakdown or you show the of percent of branches within cities versus the percent of deposits within the cities and it seems like there's a little bit of a disparity there. Just wanted to get a sense for growing deposits in cities as a strategic point of emphasis, and if it is, do you see that maybe negatively impacting overall deposit cost just given the disparity between the cost of urban deposits versus rural deposits?
George Gleason -- Chairman and Chief Executive Officer
Well, the objective that our deposit guys pursue is to take this funding forecast that we mentioned on page 20, what is that Tim?
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
Page 28.
George Gleason -- Chairman and Chief Executive Officer
Yeah. Page 28 of our management comments, we described a 36-month forward funding forecast, it's a very detailed projection of our needs for deposit growth and liquidity month by month for 36 months. We constantly are updating that at least monthly and often -- more often than monthly.
And the deposit guys are charged with generating those funds at the lowest possible cost of funds while adhering to a whole bunch of of parameters regarding liquidity and concentrations and balance sheet risk and so forth. So it's not a preference for urban deposits or rural deposits, it's a preference for the best lowest cost deposits we can get.
Brody Preston -- Piper Jaffray. -- Analyst
Okay. And then I guess I wanted to go back to the RESG, you sold watch credit. It looks like it's moved up a bit in LTV since the third quarter when you guys first sort of addressed it. And I wanted to get a sense for what the current LTV was? And I know the $57.5 million was the full commitment that you had, but I wanted to get a sense for what the total -- what the total funded portion was right now?
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
Yeah, Brody, I think the funded portion is roughly $50 million, the current LTV is I think $102 million right now. And again it's a revolving facility, they're building product obviously and then as that product sells, it pays down as well. So the $57.5 million [ph] is the total commitment with about a little over $50 million currently outstanding as well.
Brody Preston -- Piper Jaffray. -- Analyst
Okay. So the value that you guys are pegging on that product, then is roughly $49 million?
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
That's correct.
Brody Preston -- Piper Jaffray. -- Analyst
Okay, all right. When was the last appraisal on this property done?
George Gleason -- Chairman and Chief Executive Officer
It's been within the last year. What we do is we price it on an annual basis and obviously it's a revolver. So we use the the parameters, the holding periods, the discount rates, the other parameters from the appraisal and readjust the appraisal on a -- recalculate our loan to value using the appraisers methodology applied to a constantly changing pool of collateral, as Tim mentioned, we are building vertical properties there, our sponsor is they're selling those, they are developing lots or selling those, so the pool of collateral is constantly changing.
So you get an appraisal today and it would technically be dated tomorrow, because you sold the unit and you should build another unit. So what we do is get an annual appraisal, use the appraiser's precise methodology, applying that methodology to a constantly evolving pool of underlying collateral.
Brody Preston -- Piper Jaffray. -- Analyst
Okay. Okay. So that's, so you guys are sort coming up with your own appraised value...
George Gleason -- Chairman and Chief Executive Officer
Well, you can say we're coming up with our own appraised value, but we're using the appraiser's methodology and just applying it to the, to the collateral. So these saying OK, we're going to assume a two year holding period on lots and a discount rate of 15% then we are assuming a two year holding period and a discount rate of 15%. And if he's assuming that houses we're going to sell for this price per square foot, we're making that same assumption is how's the sale of new ones come in. Obviously, if the sales prices are not in line or consistent with what's in the appraisal and we get a new appraisal, but as long as the sales prices are at or consistent with what's in the appraisal or above it, then we're only going to get an appraisal on an annual basis, but if you say that we're making up our own appraisal on it. That's not really accurate. We're using very precisely following the appraiser's methodology.
Brody Preston -- Piper Jaffray. -- Analyst
Yeah. I guess what I meant is that you guys are sort of reassessing the appraised value on a quarterly basis than just given the change in the underlying collateral?
George Gleason -- Chairman and Chief Executive Officer
Exactly, exactly.
Brody Preston -- Piper Jaffray -- Analyst
Okay. All right. Are these primarily secondary homes?
George Gleason -- Chairman and Chief Executive Officer
It is a mixture of primary and secondary homes.
Brody Preston -- Piper Jaffray. -- Analyst
Okay. All right. And I guess I wanted to get a sense for, when you get paid back on this loan is it primarily through the sale of the plots or is it through the sale of the developed homes?
George Gleason -- Chairman and Chief Executive Officer
Both. There's a lot of development feature of the line and a vertical construction feature, so it's a combination.
Brody Preston -- Piper Jaffray. -- Analyst
Okay.
George Gleason -- Chairman and Chief Executive Officer
Some parties buy lots and do their own home construction for cash or with around financing. There is a property that town homes that are developed by the sponsor and so -- hence completed town homes as part of the structure.
Brody Preston -- Piper Jaffray. -- Analyst
Okay. Did this loan have an interest reserve account associated with it when you guys originated the loans?
George Gleason -- Chairman and Chief Executive Officer
When the loan originated 10 years ago, yes, it did, it does not now.
Brody Preston -- Piper Jaffray. -- Analyst
Okay, great. That's all I had. I really appreciate the questions guys.
George Gleason -- Chairman and Chief Executive Officer
All right. Thanks.
Operator
Thank you. Our next question comes from the line of Brock Vandervliet with UBS. Your line is open.
Brock Vandervliet -- UBS -- Analyst
Thank you. Okay. Following up on that last question, I was just going to ask generally about interest reserves. Is it -- general policy within RESG or within construction -- commercial construction in general to set up an interest reserve at the outset of the -- at the outset of loan?
George Gleason -- Chairman and Chief Executive Officer
That's a general policy and commercial construction lending industrywide. And our practices are very conservative in that regard, because our leverage points or so loud. At March 31, our average loan to cost was about 49.5%, which means that the -- the sponsor, the pref equity, the mass subordinated pieces of capital stack had over half the project cost invested and our average loan to value was around 43%. So yes, there are interest reserves built in our loans, but it's not like we're financing a higher percentage of cost and loaning on the interest we're financing a very low percentage of cost of the project that includes a reserve for interest during the construction period.
And you could say, oh gosh, we would prefer that the sponsor pay the interest out of pocket. Well, the sponsors paying the interest in effect because they're putting a lot of equity into the project. We would rather have the sponsor put in all their equity before we find anything then for us to say we'll let the sponsor put in 10% less equity and we'll let him keep that equity and pay the interest over the last project as it's incurred. So, getting the sponsor to put all their money in first and then including the interest in our loan is actually a more conservative, not a less conservative strategy.
Brock Vandervliet -- UBS -- Analyst
Yeah, I absolutely understand. On that credit -- and so this has been in the bank for a while, what I'm -- what was the issue, was it the sell-through rate initially was slower than pro format?
George Gleason -- Chairman and Chief Executive Officer
In the aftermath of the great recession, this property suffered a great downturn in value on lots and homes and development slowed for a while as -- a lot of things did in the great recession that reset of values lower -- kind of permanently reset the value of the project. And as a result, the project has more data on it than you would want to see, it's our highest loan to value line.
But the project has continued to be successfully executed by continue to sell town homes, by continue to sell lots, by continue to improve the amenities of the project and values have a stable to positive trend buyer.
So it's project that because values went down a lot during the great recession, they never fully come back, where they were to have before that, it just has too much debt on it. But our projections are that the property will sell out of lots and town homes with net proceeds especially cover all of our principle all of our interest in return some equity to the sponsor.
So for that reason it's a performing credi and most likely scenario in our view is it continues to develop and payoff and that we never lose a penny of principal or interest on it.
Brock Vandervliet -- UBS -- Analyst
Got it, OK. And separately on the figure 11 the chart showing the intersection of purchased and non-purchased loan yields. Does the purchase loan yield continue to drift lower as that portfolio runs off or should it hang around here at the six [ph] and change yield?
George Gleason -- Chairman and Chief Executive Officer
I think we made a comment in the management comments document that portfolio yield -- as that portfolio has season has seasoned, has tended to drift down even though 40 something percent of the loans in that portfolio are variable. So I would expect that it will continue to drift down, although, if you look at that chart, you can see that, there are a quarter or two, when it's down and then there's a bounce and then and another quarter or two, where it's down and then another bounce for quarter or two. So it varies quite a bit from quarter to quarter, because there are marks on that portfolio and net present value discounts, purchased accounting discounts on that portfolio and depending on the mix and volume of paydowns and which particular loans paydown in various quarters are payoff, they tend to be some chunky recognition of those purchased accounting marks on that portfolio.
So it will vary, I think, is that chart shows, we were rewarded 685 2Q (inaudible) yeah, but all the way back at the 3Q of '15 we were 685 and it's now at 629. So it's tended to go down, but not precipitously and certainly not in a linear fashion.
Brock Vandervliet -- UBS -- Analyst
Got it, OK. Thanks for the color, George.
George Gleason -- Chairman and Chief Executive Officer
Okay. Thank you.
Operator
Thank you. And our next question comes from the line of Michael Rose with Raymond James. Your line is open.
Michael Rose -- Raymond James -- Analyst
Hey guys, good afternoon. Hope you're doing well. I don't know if Tyler is in the room, but just wanted to say congrats on your career choice and just wanted to see George, if you guys have thought about replacement for that role and if you do plan to replace Tyler once he moves on.?
George Gleason -- Chairman and Chief Executive Officer
Tyler is not in the room today, Tim,do you want to take that?
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
Yeah. No, I mean obviously, Tyler, it's been a very important part of our organization for over 13 years, and we wish him well. He has done a terrific job for us, we've got it. One of the great things he has done is it helped mentor and coach and higher really great folks underneath him, so we've got a great team underneath him. We have a Chief -- Jeff Starke here, Chief Technology Officer. Chad Necessary, our Chief Information Officer will report to me going forward. Marcio Delaware given his really strategic nature of what he does leading OZK labs is going to report to George and then you've seen over the last couple of quarters taking over Chief Banking Officer role she has been with us for over 20 years and of is doing a terrific job. And as a Company George and all 254 -- 260 locations on their tour. And of course, we've hired Ottie Kerley as our Chief Deposit Officer in the recent quarters. So again, we've got a great team and have built depth over the years and feel great. So no immediate plans to replace that role of taking a couple of physicians direct reports. George has and then the increased responsibility that Cindy and Ottie have had over the last several quarters. We feel like we're in a terrific position.
George Gleason -- Chairman and Chief Executive Officer
And Tyler, I'll add to that, Tyler lays with our great gratitude for all those contributions he has made to our company and as I've told him yesterday, he and I had a visit and I told in my great admiration for his courage and conviction to leave a really great job and with the great salaries to go full time in ministry work.
I don't know what is going to be making, but it's probably not what he was making as a banker. And it's a calling he has, and he felt very strongly about it. We have great respect for his conviction and calling their his courage to go pursue that. I think he'll be very successful at that. I think Tyler's type of guy would be successful whatever he does.
Brock Vandervliet -- UBS -- Analyst
Now he will certainly be missed. Just moving on the CRE concentration has certainly come down, thinking around 313% now Just in deploying that with the decision to maybe not go to buyback route, which it seems like many would like to see you do, I mean, is the goal in keeping the capital growing an elevated here and desire to potentially bring that CRE concentration down below 300%.
George Gleason -- Chairman and Chief Executive Officer
Michael, there are lot of factors in the Board's decision, certainly our CRE concentration is one of many factors that weighed into that consideration. Given our strong earnings and our capital retention and given the diversification that's occurring in the portfolio and the paydown of CRE and purchased loan book and the paydown of so many of our loans in our RESG book. We think there is a decent possibility that both the total CRE and construction and land development ratios continue to drift lower. That's not a specifically articulated purpose or goal of our Company for them to do so, but I just think market conditions combined with our strong earnings will do that. And there's some benefits to that too, if we can generate significantly more growth in other parts of our Company, and have a more diversified portfolio, which we think we can do.
Michael Rose -- Raymond James -- Analyst
All right. So I know you have a kind of a targeted upper limit range, but is there, is there a optimal range you'd like to maybe get to on the CRE and construction concentration over the intermediate to long-term?
George Gleason -- Chairman and Chief Executive Officer
No.
Michael Rose -- Raymond James -- Analyst
Okay. Final one from me, some of the banks have thrown out initial day one CECL estimates and what the capital impact might be and movement some loans from PCI to PCD just wanted to see if you were ready to at least give some initial guidance around that? Thanks.
Hey Michael It's Greg. I'll take that. We are still have a plan of working through our CECL implementation. We are making good progress with that, it's really kind of a two-phased project we're developing scorecards across the entirety of our portfolio. That project is really getting close to being completed that will allow us to do some initial testing and validation with net project parallel. We're also developing our seasonal platform.We are still online or in on time -- on a timeline to have that done probably either late Q2 or early in Q3, the goal being to be able to run parallel runs using June 30 data during the third quarter. So at this point, we still don't have a day one number or even an estimate that we can throw out or we'd be comfortable throwing out, but we do think that probably in the next 90 days or so next 120 days, we'll be getting pretty close to that point, so as we continue to move forward down the path of of finalizing both those projects and make its parallel runs. We will certainly provide some some day one feedback. But at this point we're still a little too early.
I think you guys clearly you mean feedback or right in there.
Okay, helpful. Thanks guys. Appreciate it.
George Gleason -- Chairman and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Matt Olney with Stephens. Your line is open.
Matt Olney -- Stephens -- Analyst
Hi. Thanks for taking my question. I just wanted to circle back on loan growth and with your expectations of paydowns being elevated for the rest of 2019. I'm curious if you'd be surprised if 1Q results represented the high watermark for your quarterly loan growth for 2018. I'm trying to better idea of the pace of growth throughout 2019 since you guys have pretty good visibility, when you expect to funds some to be your larger loans.
George Gleason -- Chairman and Chief Executive Officer
Matt, we articulated in our January call or management comments and reiterated exactly the same guidance and the management comments just issued that for the full year of 2019. We expect non-purchased loans to grow in a low to mid-teens percentage range and that continues to be our expectation.
I think we also reiterated that we expect significant variation in that growth from quarter to quarter. So I think the guidance we gave in January, we still like it's very good guidance. So let me leave it at that.
Matt Olney -- Stephens -- Analyst
Okay. And then on I guess digging back on the margin, it sounds like there were some miscellaneous fees that were once again a nice tailwind for your loan yields in 1Q. I think this is also the case in the fourth quarter and I know there's many things that going out at those fees that you've described previously. Is there anything unique about the current loan production or the current loan payoffs that you expect that 2019 you could maintain those fees a higher level or should we just conclude that back-to-back quarters is not quite a trend and this will eventually move lower.
George Gleason -- Chairman and Chief Executive Officer
We commented I think in October of last year in regard to our third quarter earnings that are unusual or not unusual, but our items such as minimum interest and exit fees and prepayment penalties those sort of things that, push that run rate of loan yield up or down, but they were unusually low for Q3, they were better and above average in Q4 and better and above average in Q1 now, it's a little bit hard to describe sometimes what is the average you're measuring against because it's a fairly variable component and it moves around quite a bit from quarter to quarter. So we would hope that every quarter would be a good quarter, but our experience has told us that last some quarters that are below par and some quarters that are above par in that regard. We're glad to have had a above par Q1. I don't think, to your question specifically, there's anything unique about what we're doing today, we did start adding minimum interest figures into our loans and the majority of our loans, almost all of them now have a minimum interest requirement in them, we've been doing that for a couple of years now. So we're beginning to harvest some pretty good benefits from that, for example, we had a condo loan in New York that paid off yesterday it completed about I don't know -- probably a month ago. So, yeah and then immediately started selling condos, and they paid our loan off yesterday and the sales velocity on my project was so brisk, that the loan was underwritten to have $7 million of minimum interest in it. We had only collected through payout $5.6 million, so we booked a $1.4 million minimum interest number. Yesterday is income payout of that condo projects. So as long as projects continue to pay off much more rapidly than you would have thought that tends to generate some of those extra income items.
Matt Olney -- Stephens -- Analyst
Okay, that's helpful. George. Thanks for that color. And then just lastly from me, over the last few years, you've ramped up investments in several areas from compliance to audit, enterprise risk management and a few more. Can you just talk about where the bank is within this ramp? And we'd now at a more steady state in the world. So is that now in the run rate or is there still some ramp that we'll overcome.
George Gleason -- Chairman and Chief Executive Officer
I like the big builders done by our -- and the comments that we put the management comments stock I think said, we'll continue to build that infrastructure commensurate with our growth in the increases in the size and complexity of our organization over time. And certainly our expectation and regulatory expectation and I hope our stockholders expectations is that we would, we'd make sure we've got appropriate infrastructure in place and built to run the Company. But the big lift there has been down over the last several years, and I don't know that wherever at a steady state, because I think it always improves and always evolves. But the big left is behind us.
Matt Olney -- Stephens -- Analyst
Great. Thanks for taking my question.
George Gleason -- Chairman and Chief Executive Officer
All right. Thank you.
Operator
(Operator Instructions). Our next question comes from the line of Brian Martin with FIG Partners. Your line is open.
Brian Martin -- FIG Partners -- Analyst
Hey guys, good afternoon.
George Gleason -- Chairman and Chief Executive Officer
Hi, good afternoon.
Brian Martin -- FIG Partners -- Analyst
Hey, George. Just one question -- one or two questions that haven't been covered or just the quarterly loan originations for RESG the quarter you talked about in 1Q being a bit stronger. Can you -- I guess is there anything to read into that number. I guess, whether it as other more projects are looking at there. You're looking at here they contributed to that is, it's bigger projects like you mentioned earlier or just any more color on what was driving that this quarter?
George Gleason -- Chairman and Chief Executive Officer
Brian, part of it's just the timing that these things close on. One of the projects, I guess, the largest loan that we closed in Q1 could have easily been a closing in Q4 of last year. But various details and nuances of that project and the evolution of it from approval in October to closing in Q1 of this year just resulted in that sliding couple of much farther than we would have considered that, but our sponsor use that time very advantageously to continue to enhance their profitability and prospects with projects. So sometimes these things as I said earlier, just take a long time to incubate, particularly the larger more complex transactions, sometimes, it's not unusual to work on it three or four or five or even six quarters before you get approved transaction closed and actually begin to execute the project.
So part of it's just the timing of these things and how long it takes to get them done.
Brian Martin -- FIG Partners -- Analyst
I got you. Okay. And then you talked -- you spent a lot of time talking about the deposits and kind of trends you're seeing there. Just is there more opportunity George to increase loan yields from where they are today as you're booking new credits. I mean outside of, obviously with the rate sensitivity, if rates don't go up and the tight -- they variable rate in nature, but just with the new loans you're booking, is there opportunity to have some benefit there going forward, are you seeing any of that today?
George Gleason -- Chairman and Chief Executive Officer
Well, Brian, that's what I said, it's all about execution. And we're certainly trying to do that, but it's a very competitive environment, as I said, the slight down drift in LIBOR rate and flat yield curve are couple of factors that make it harder to get loan yields competition makes it harder to get loan yields up. The challenge that our lenders are everyday as go out and find great quality assets that we can get paid a fair return on and work hard to maximize our returns. So it's a battle out there and we fought it every day as our 4.53% net interest margin suggest, we've done a pretty good job over the long term of getting good yields on our assets and we expect to continue to try to do that.
Brian Martin -- FIG Partners -- Analyst
Okay. Perfect. And maybe one for Greg was just on the expenses, it sounds as though if that must -- much of that build is done the expense run rate is a pretty good level heading into 2Q and maybe on the fee side, the fees are bit on the lower side, given some of the seasonality in first quarter, is that kind of makes sense Greg or if someone else wants to answer?
Greg McKinney -- Chief Financial Officer and Chief Accounting Officer
Yeah, Brian, on the fee side, I mean we've given guidance to people over the last four, five quarters, I think they have talked around between roughly $24 million to $28 million and we think that's a pretty good range from the standpoint of what we are expect on a go forward base. Obviously there's -- those things have a tendency to bounce a little bit quarter-to-quarter, but we certainly feel like that's an appropriate range.
On the expense side, I mean, as George talked about the build out there and yes we are. Probably from that, so that build we'll probably bottom (inaudible) and just to build out there, there are still key positions and your audit BSA as they we're looking to add, the Boards of IT, but really has to become more of a maintenance and type of add as we go forward. We are continuing to try to bring in resources as part of our team and reduce our reliance on third parties and consultants. So our hope is that over the next several quarters, we can continue to push those consultants out of the bank and bring in skill sets and expertise we need to handle those technical aspect whether it's in BSA or whether it's in audit or technology or elsewhere of the bank
So yeah, we feel pretty good about those run rates, I think a pretty clean. We did have a salary fee from a reversal related to the tower but we put the buck options that was a small amount, but they really had no impact on on salaries.
Brian Martin -- FIG Partners -- Analyst
Okay. All right. I appreciate it guys. Thanks so much.
George Gleason -- Chairman and Chief Executive Officer
Thanks, Brian.
Operator
Thank you. And I'm showing no further questions at this time.
George Gleason -- Chairman and Chief Executive Officer
All right. Thank you very much. We appreciate all of you being on the call today and we've enjoyed talking about our first quarter results. We look forward to talking with you in about 90 days. Thank you very much. Have a great rest of the day. That concludes our call.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
Duration: 61 minutes
Call participants:
Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations
Ken Zerbe -- Morgan Stanley -- Analyst
George Gleason -- Chairman and Chief Executive Officer
Catherine Mealor -- KBW -- Analyst
Stephen Scouten -- Sandler O'Neill -- Analyst
Timur Braziler -- Wells Fargo Securities -- Analyst
Brody Preston -- Piper Jaffray -- Analyst
Brody Preston -- Piper Jaffray. -- Analyst
Brock Vandervliet -- UBS -- Analyst
Michael Rose -- Raymond James -- Analyst
Matt Olney -- Stephens -- Analyst
Brian Martin -- FIG Partners -- Analyst
Greg McKinney -- Chief Financial Officer and Chief Accounting Officer
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