If they waited until September, that’s even better because we get another 6 months of floors reset. Those floors will hold on those loans for the duration of the loans, and they are 3-year loans and typically they’ll hold for any extension duration. So the fact that we’ve got – and we typically have minimum interest protection on these loans, so somebody is not going to refinance a construction loan typically mid construction because we’ve got an 8 floor in it and suddenly they can get 6% money. The minimum interest and other features and the complexity and cost of moving that loan will tend to keep them there. So those floors will hold and they are going to be an important part of hopefully us expanding NIM in 2025.
Manan Gosalia: That’s very helpful. So it sounds like your – the current interest rates matter more than the forward look. So I guess the floors are not going down just because the rate outlook has gone down over the last couple of months?
George Gleason: The fact that the rate outlook is – the forward curve is down, the rate outlook is down, is causing sponsors to, in some cases, negotiate harder and push more on our negotiation on the floor. But we know that’s a very important part of our business, so we’re pushing hard back to retain as much of that floor as possible. And if we can’t get a floor that we think gives us an appropriate risk-adjusted return in a dynamic rate environment, we’re just not going there. So we’re negotiating very hard on those floors, and it’s a very important part of our business model, and our origination team understands that and is very dialed in on it. We’ve really pressed that point with them. So they are doing a really good job of managing those negotiations to an acceptable better outcome for us.
Manan Gosalia: Got it. That’s very helpful. And then on capital, I know you have a high 10.8% CET1 ratio. You’re also looking forward at what loans you put on the balance sheet and what the loan growth eventually is. But as we think through 2024, how should we think about buybacks? Is it flex only about what the balance sheet growth is? Or given some of the uncertainties you mentioned in the environment, do you want to keep an extra capital buffer until the environment changes?
George Gleason: Tim, do you want to take that?
Tim Hicks: Yes. I mean, as you said, we’ve got really strong capital levels now. I think you’ve seen our risk-based capital levels really stabilize at current levels. The last three quarters I think we’ve been within 10 basis points of where we are this quarter, even with the substantial growth we had during those quarters. We feel like we will have good growth this year, good earnings retention as well. So feel like we will have risk-based capital ratios for this year staying relatively, give or take, where we are now or slightly above. And so moving from there on share repurchases, we’re going to focus on kind of where we are from our current capital levels, see where the growth is for this year and in a few years.
But know that that’s always an option, a lever that we can pull if need be. If our growth moderates in a certain year, we can certainly pull that lever and get a reauthorization to repurchase if our share price is depressed, we can also look at it for that purpose as well. But right now, our focus is growing the bank and finding ways to do that.
Manan Gosalia: Great. Appreciate all the color. Thank you.
Operator: Thank you. Our next question comes from the line of Brandon King of Truist. Please go ahead, Brandon.
Brandon King: Hey, good morning.
George Gleason: Good morning, Brandon.
Brandon King: So just a follow-up on the Chicago land credit. Being that such a strong sponsor is having some issues there with capitalization, does that give you more concern broadly when you think about your customer base and sponsor being able to support their projects when they run into issues?
George Gleason: Brandon, that’s a good question. And I think the answer that I would give you is, if I was answering it yes or no, is no, that doesn’t give me a lot of pause. Sponsors come in two different flavors, or really more. But you can kind of divide sponsors into a couple of groups. One is sponsors that invest their own money but also are dependent upon equity capital, pref equity, partners in their transactions, either as pref or co-joining them as common equity. And then sponsors who have a huge balance sheet themselves and their equity comes internally from their own balance sheet. The sponsor, in this case, while they have a tremendous track record, done a lot of transactions and a lot of big transactions, deploys mostly equity of third parties.
So when they are recapping a deal, they are out explaining their vision and their plan for the deal to a variety of potential equity partners to entice those equity partners into the deal. And as Brannon mentioned, it’s a challenging environment for equity in these transactions because it’s a high rate environment, a high-cost environment, the risk that the economy is going to slow. So it’s a challenging thing to raise equity. And these guys are good at it. They have done it. They are accustomed to doing it. They have got a good story for the project that makes sense. They just got to match all that up with an equity investor who likes that story. And they are working on that. So it doesn’t give me any pause about our portfolio. I think it’s unique thing to this asset that they are working on this.
There are other projects out there that we see every quarter that are making a lot of sense that are new projects that the very skilled, very experienced, knowledgeable sponsors are having trouble putting their equity together on. Listen, it is a tough environment for equity. Cost of delivering a project have gone up due to inflation, interest rates to carry that project during construction have gone up. You’ve had all the COVID delays and the impacts. You’ve had shifts in the demand side because of the concerns about the economy. It is a tough environment for our sponsors. And we see that thing and hear that pain from our sponsors on a regular basis. The reason that our portfolio metrics are so good and that our challenges on asset quality have been relatively benign and limited to a handful of transactions is because of the fact that we’ve got great sponsors, we focus on great projects that are new construction.
So they are state-of-the-art projects that have a quality advantage versus older product in the market that’s not as well designed or well located or well built. And the fact that we structure these transactions very carefully, and more than ever, the fact that we’re in these transactions at around 52%, 53% of cost and 42% to 43% of appraised value, that extreme low leverage of our portfolio makes sure that people who are inferior to us and the capital stack have a tremendous amount of money at risk in front of us to protect our position and to give them the incentive to protect their position. So the way we built this portfolio is really probably about the best constructed you could get for this kind of environment where it’s very, very challenging on the equity guys.
Brandon King: Got it. That’s very helpful color. And then my next question would be in regards to competitive dynamics in regards to lending. How has that trended lately? Are you still finding yourself maybe as the only lender competing for certain projects? Or are you seeing maybe more appetite from other lenders in the market?
