BOK Financial Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 11 speakers on the call.

Operator

Greetings and welcome to BOK Financial Corporation Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Marty Glanst, Chief Financial Officer for BOK Financial Corporation.

Operator

Thank you, Mr. Kwanz. You may begin.

Speaker 1

Good morning and thank you for joining us. Today, our CEO, Stacey Kymes, will provide opening comments Mark Mahn, Executive Vice President for Regional Banking, will cover our loan portfolio and related credit metrics and Scott Brauer, Executive Vice President of Wealth Management, will cover our fee based results. I will then discuss financial performance for the quarter and our forward guidance. PDFs of the slide presentation and 3rd quarter press release are available on our website at eokf.com. We refer you to the disclaimers on Slide 2 regarding any forward looking statements we make during the call.

Speaker 1

I will now turn the call over to Stacy Kymes.

Speaker 2

Good morning and thanks for joining us to discuss BOK Financial's 3rd quarter financial results. Starting on Slide 4, 3rd quarter net income was $134,000,000 or $2.04 per diluted share. Our team had another solid quarter of earnings driven by our diverse Business model, which prudently balances interest revenue with non interest revenues and allows us to perform well in a variety of business climates. Fee and commission revenues were 40% of total revenue for the quarter. This quarter, our public and corporate finance group established new record for investment banking fees, which materially offset last quarter's record high derivative fees.

Speaker 2

Additionally, we continue to focus on opportunities for growth Given the economic vitality of our core geographic footprint, as we take advantage of our capital and liquidity strength, Total loans have increased almost 9% from last year and our core commercial and industrial loans were up 8%. We are poised to introduce our full service banking model into the same Antonio market. With the addition of a fixed income sales and trading office in Memphis, We are confident both will drive long term shareholder value. Turning to Slide 5, period end loan balance This increased $486,000,000 or 2.1 percent linked quarter with growth in both C and I and commercial real estate. Both period end and average deposits continue to grow during the quarter.

Speaker 2

Our loan to deposit ratio increased just slightly to 70.5% at the end of the quarter As loan growth outpaced deposit growth, our cost per deposits did increase 1 quarter. However, the pace did slow. As Marty will detail later, our reported net interest margin continues to be diluted by the expanding trading activity this quarter with our core margin excluding the trading activity at 3.14%. Although it will take a few quarters to become Clear, we are seeing early signs of loan spreads increasing in our footprint as credit tightened and deposit costs remain high. The pressure on our net interest margin from increased funding costs resulted in a $21,000,000 lien quarter decline in net interest revenue, resulting in an efficiency ratio above 60%, which is more typical for us given the mix of non interest revenue.

Speaker 2

Credit quality is still strong and we have a combined reserve of $325,000,000 or 1.37 percent of outstanding loans at quarter end, which is notably above the median of our peer group. Finally, we repurchased 700,500 shares this to reflect our long term confidence in the company and attractive repurchase valuations. I'll provide additional perspective on the results We're starting the Q and A session. But now, Mark Mahon will review the loan portfolio and our credit metrics in more detail. I'll turn the call over to him.

Speaker 3

Thanks, Stacy. Turning to Slide 7. Period end loans were $23,700,000,000 up 2.1% linked quarter. Total C and I loans increased $185,000,000 or 1.3 percent linked quarter with year over year growth of $1,100,000,000 or 8%. Commercial real estate loans increased $270,000,000 or 5.4 percent linked quarter and have increased 767,000,000 17% year over year.

Speaker 3

Compared to December 31, 2020, CRE balances have grown at a modest 3.8 percent annualized growth The commitment is up 5.8% during that same period. Growth this quarter was primarily driven by multifamily properties with an increase of $232,000,000 or 13.4 percent linked quarter. Industrial facility loans grew $83,000,000 or 6.1% linked quarter, which was offset by a $24,000,000 or 2.4% linked quarter decline in loans secured by office facilities. The $982,000,000 in outstanding office loans is at its lowest point since June 2020 and is only 4% of total outstanding loan balances. The year over year CRE growth of $767,000,000 was predominantly driven by multifamily and industrial loans.

Speaker 3

We have an internal limit of 185 percent of Tier 1 capital and reserves to total CRE commitment and we're presently at the upper end of that limit. We do expect continued modest growth in outstanding CRE balances as construction loans fund up. As of September 30, CRE balances represented 22% of total outstanding loan balances, a ratio well below our peers. Combined services and general business loans, our core C and I loans increased $112,000,000 or 1.6% linked quarter with year over year growth of $716,000,000 or 11%. These combined categories are 30% of our total loan portfolio.

Speaker 3

Healthcare balances increased $92,000,000 or 2.3 percent linked quarter and have grown $257,000,000 or 6.7 percent year over year, primarily driven by our senior housing sector. Healthcare sector loans represented 17% of total loans at quarter end. Energy balances decreased $18,000,000 linked quarter and have increased $119,000,000 or 3.5 percent year over year with period end balances at 15% of total period end loans. Year over year loans have grown $1,900,000,000 or 8.9%. Excluding BBB loans, Q3 2023 extends the linked quarter loan growth to 8 consecutive quarters.

Speaker 3

Our current pipeline is strong and we're confident we have momentum to drive additional growth in the loan portfolio well into next year. Turning to Slide 8, you can see that credit quality continues to be exceptionally good across the loan portfolio and well below historical norms and pre pandemic levels. Non performing assets excluding those guaranteed by U. S. Government agencies decreased $12,000,000 this quarter.

Speaker 3

Non accruing loans decreased $13,000,000 linked quarter primarily driven by a decrease in commercial real estate loan. The provision for credit losses of $7,000,000 in the 3rd quarter reflects strong asset quality, continued loan growth and modest changes in our economic forecast. We remain in a solid credit position today. With a ratio of capital allocated to commercial real estate that is substantially less than our peers And a history of outperformance during past credit cycles, we believe we are well positioned should an economic slowdown materialize in the quarters ahead. The markets continue to be focused on the office segment of real estate given the trends in workforce preferences.

Speaker 3

Although the verdict is still out as to whether That will be sustained as the pendulum seems to be shifting back to more time in the physical office. Our office segment maturities are generally ratable over the next 3 to 4 years and we have a mini perm option if the markets are not conducive to long term permanent financing. The average loan to value ratio in the office space is below 65% and average cash flow coverage exceeds 1.3 times Based on our most recent review at the end of 2022, net charge offs were $6,500,000 or 11 basis points annualized for the 3rd quarter And have averaged 13 basis points over the last 12 months, far below our historic loss range of 30 basis points to 40 basis points. Looking forward, we expect net charge offs to remain low. The combined allowance for credit losses was $325,000,000 or 1.37 percent outstanding loans at quarter end.

Speaker 3

The total combined allowance is available for losses and any apples to apples industry comparison should include the combined reserves. We expect this ratio to remain stable as loan growth continues and economic conditions persist. I'll turn the call over to Scott.

Speaker 4

Thanks, Mark. Turning to Slide 10. Total fees and commissions were $198,000,000 for the Q3, down slightly linked quarter. Our Wealth segment continues to set new quarterly highs for fees and commissions at $123,600,000 this quarter, Eclipsing the previous high set last quarter, fees and commissions for the Q2 included record results for energy customer hedging as well as annual tax Service fees. Although energy hedging customer and tax service fees were down linked quarter, these were partially offset by record results this quarter in our public and corporate finance groups, driving a $5,300,000 increase in other investment banking fees.

Speaker 4

The $2,500,000 linked quarter decline in trading fees was primarily related to fees from our municipal bond trading portfolio, down $3,500,000 linked quarter, which was influenced by rising interest rate environment and evolving market expectations during the Q3. This We are also partially offset by $1,100,000 increase in our MBS trading activities. Fiduciary and asset management fees were $52,000,000 for the 3rd quarter, 1.4% linked quarter decrease due to the 2nd quarter's annual tax service fees. Our assets Under management or administration were $99,000,000,000 at quarter end. Our asset mix for assets under management or administration moved slightly this quarter With 43% fixed income, 32% equities, 16% cash and 9% alternatives.

Speaker 4

We are proud of our diversified mix of fee income, which we believe is a strategic differentiator for us when compared to our peers, Especially during times of economic uncertainty, we consistently rank in the top decile for fee income as percentage of total net interest revenue and non interest fee income. Our revenue mix averaged 37% during the last 12 months. That consistently supports a revenue stream that is sustainable through a wide variety of economic cycles. I'll now turn over the call to Marty.

Speaker 1

Thank you, Scott. Turning to Slide 12, 3rd quarter net interest revenue was $301,000,000 a $21,000,000 decrease linked quarter. Net interest margin was 2.69%, a 31 basis point decrease versus Q2. I will note that 8 basis points of the 31 basis point margin decline was due to growth in the trading securities. As the trading securities grow, it is dilutive to the net interest margin as it grows earning assets at a narrower spread compared to the rest of the balance sheet.

Speaker 1

Net of the 8 basis point impact from trading, the remaining 23 basis point decline was driven by the competitive deposit environment As average interest bearing deposit costs increased by 61 basis points linked quarter, our cumulative interest bearing deposit beta increased to 58% for the 3rd quarter and non interest DDA continued to shift into interest bearing. DDA as a Percent of total deposits was 29.6 percent as of September 30. This slide shows net interest margin and net interest revenue with and without the to better highlight trends and comparability. For the Q3 of 2023, the net interest margin, Excluding the impact of trading assets was 3.14% versus 3.36% in the 2nd quarter. Growth in earning assets during the quarter was driven by trading securities and loans, partially offset by a decline in our On an absolute basis and versus peers, total deposits grew $358,000,000 on a period end basis And the loan to deposit ratio was 70.5%, up slightly from the previous quarter.

Speaker 1

Average total deposits increased $918,000,000 linked quarter with average interest bearing deposits up $1,800,000,000 partially offset by an $840,000,000 decline in demand deposits. Broker CDs have recently been a topic for our industry and we note that our usage of that funding source over time is generally low, but not 0. Urkard PDs were $688,000,000 or less than 2% of total funding at quarter end and declined $72,000,000 versus the prior quarter end. Our tangible common equity ratio was 7.74 percent, down 5 basis points linked quarter due to balance sheet growth and increases in interest rates, but up 11 basis points from year end 2022. Adjusted TCE, including the impact of unrealized on held to maturity securities is 7.35 percent consistent with year end too.

Speaker 1

CET1 is 12.1% and if adjusted for AOCI would be 9.7%. As the recent regulatory capital proposal As largely focused on banks over $100,000,000,000 we have ample capital to support continued organic growth while at the same time allowing for continued share buyback. During the Q3, we repurchased 700,500 shares at an average price of $84.17 per share. Turning to Slide 14, linked quarter total expenses increased by $5,600,000 or 1.8%. Personnel expense was flat linked quarter As increases related to our San Antonio and Memphis expansions were mostly offset by a decrease in employee benefits.

Speaker 1

Non personnel operating expense grew $5,500,000 Occupancy and equipment increased $2,500,000 driven by the retirement of certain ATMs as we up Our network. FDIC insurance expense increased $1,000,000 Combined, all other expense categories increased $3,300,000 much of that related to an accrual for certain disputed matters. Year over year total operating expense increased $30,000,000 or 10%. Personnel expense increased $20,000,000 or 12%. However, dollars 3,000,000 of the year over year increase was related to a one time benefit during the Q2 of 2022 from the dissolution of our pension plan, combined with linked quarter market adjustments for deferred compensation.

Speaker 1

Q3 2023 also includes 2 $600,000 of expansion related personnel costs. Cash based compensation related to new business production increased 6,800,000 The remaining $8,000,000 year over year increase was primarily regular salaries and benefits with that directly related to annual merit increases and a much lower level of open position. Year over year, other operating expense increased $9,000,000 or 7.3 percent. Occupancy and equipment increased $3,300,000 with $2,500,000 related to the ATM retirements. FDIC insurance increased $3,700,000 As both the assessment base and the rate increase and data processing increased $3,900,000 primarily due to continued investments in technology.

Speaker 1

These were partially offset by a $1,100,000 decrease in mortgage banking costs as MSR amortization slowed. Turning to Slide 15, I will note that we are in the middle of our 2024 financial planning process, so we are not ready to provide forward looking assumptions with the Same level of detail as we have for the last few quarters. However, I will provide the following higher level expectations for the next 15 months. We continue to expect upper single digit annualized loan growth. Economic conditions in our geographic footprint remain favorable and continue to be supported by business in migration from other markets.

Speaker 1

The competitive environment for loans should be a tailwind for us. We expect to continue holding our available for sale securities portfolio flat and to maintain a neutral interest rate risk position. We expect total deposits to be stable or grow modestly and the loan to deposit ratio to remain in the low 70s. Currently, we are assuming no additional rate changes by the Federal Reserve in 2023 or 2024. We believe the margin will migrate modestly lower over the next couple of quarters as interest bearing deposit betas level out and demand deposit balance attrition runs its course.

Speaker 1

In aggregate, we expect total fees and commissions revenue to grow at a mid single digit growth rate on a year over year basis and our strategic expansion initiatives to positively impact growth rates for 2024. We expect expenses to increase modestly as we continue to invest in strategic growth and technology initiatives with revenue growth following at a slight lag. We expect the efficiency ratio to increase with net interest margin changes, then migrate downward as revenue growth is realized. This does not include the impact of the FDIC special assessment, which could be finalized in the Q4 of 2023. Our combined allowance level is above the median of our peers and we expect to maintain a strong credit reserve.

Speaker 1

Given our expectations for loan growth and the strength of our credit quality, We expect quarterly provision expense near recent levels to continue and an eventual move towards normal credit costs later in 2024. Changes in the economic outlook will affect our provision expense. Additionally, we expect to continue our opportunistic share repurchase activity. I'll now turn the call back over to Stacy Kymes for closing commentary.

Speaker 2

Thanks, Marty. This quarter highlights the benefits of our diverse revenue mix And our strong risk management culture as we and the industry experienced pressure on the margin from increased funding costs. While margin pressure is a reality for us and our peers, our diverse fee based businesses supply a strong core revenue base that sets us apart. Excluding the volatile mortgage refinance fees during the 2nd and third quarters of 2020, the last 5 consecutive Orders are the highest for fee income in the company's history. We continue to grow and invest in our fee businesses as shown by our recent expansion into Memphis And our talented teams collaborate well to ensure we grow our company the right way, a way that is sustainable through all the economic cycles.

Speaker 2

While the market continues to focus on capital, liquidity and credit, I see this as a unique opportunity to use our strength in these areas to grow organically and invest in new markets while other financial institutions may be more internally focused. We are focused on using the strength of our geographic footprint to grow, both in today's climate and in the years ahead. With that, we are pleased to take your questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. One moment please while we poll for questions. The first question comes from the line of Brady Gailey with KBW. Please go ahead.

Speaker 5

Yes, it's Brady. Good morning, guys.

Speaker 2

Good morning.

Speaker 1

Good morning, Brady.

Speaker 5

I was just wondering your guidance for some continued Net interest margin pressure, we saw a big move in the Q3. How do you think about the magnitude of how much the margin Could decline over the next quarter or 2.

Speaker 1

Yes. Good question, Brady. So I think the way to think about the next quarter or 2, maybe give you Little context. So number 1, I kind of set aside the trading impacts. There's really no reason to think that that would be any different.

Speaker 1

It will react to the market Even if it's different, that's really denominator effects and don't really drive the numerator so much. So Q3 margin decline ex trading was 23 basis points. And so the positive drivers there were the bond portfolio repricing up, The fixed rate portion of the loan book repricing up and loan growth. The negatives were the DDA mix shift And the deposit beta piece. So Q4 should basically see the same positives at very similar magnitudes, But the negatives in aggregate will be smaller.

Speaker 1

So we expect to see a smaller decline than that 23 basis points in the core margin Q3 to Q4, but still probably in the low double digits of basis points. And it's really the beta slowing down that's going to be the component that helps there. Going into Q1, we still think that the positives are about the same in magnitude, Yes. But the negatives will still outweigh those positives to a lesser degree and we'll see another but probably smaller margin decline. And then after that, It's increasingly likely that the balances the positives balance out or outweigh the negatives.

Speaker 1

But we'll give you some more color on that in January. Okay.

Speaker 5

And then loan growth at a high single digit pace is pretty robust Today, I mean relative to your peers, there's not many banks growing at that level. So how are you able to Kind of grow at that elevated pace relative to your peers in the industry today?

Speaker 6

Yes, Brady, this is Mark Baughn. Fundamentally, our balance sheet is well positioned to allow us to grow with the liquidity loan to deposit ratio of 70%. We have the liquidity Our credit metrics are as good as they've ever been. I mean, we've criticized levels of half where they were pre pandemic. We don't see any significant issues on the horizon.

Speaker 6

So we've been able to focus on our sales efforts and getting out And getting our teams out in the field, working with companies to generate loan growth and while some of our Peers are pulling back in that space. That has allowed us to grow not just in one particular area, but pretty broadly across our C and I portfolio, Healthcare and Energy. Real Estate, we are expecting some modest growth just because of our own internal limits. But We don't we have no reason to discontinue that effort and we're going to be very focused on that in the this quarter and in 2024.

Speaker 2

Brady, this is Stacy, I just might add that I think that Mark really hit on and it's been a real focal point for us as we've seen the disruption in the industry is Others are having to manage the liquidity and capital constraints. We're not. This is a really unique opportunity we have that you get once every 15 years or so to definitely take market share and grow when others are less able to do that. And so that's been a real Significant focus for us and what I like about the growth is how it's been core C and I growth. We're really over the last year energy an important part of our business, but energy hasn't driven that.

Speaker 2

Historically, a lot of times when we have strong C and I growth, energy is the big driver. We've had huge growth in commitments there, But the outstandings have not. And so if you think about by market, it's really been across our footprint. Each of the markets has really had a strong year in terms of growth in C and I particularly and it's been a focus for us. And so I think that We're optimistic that we can maintain that.

Speaker 5

Okay. All right. And then finally for me is just on the fee income side. It's been such a great story for BOK this year growing fee income. Is there any pieces of your fee income that you think are Over earning right now that could normalize lower or is all this growth real And you have mid single digit fee growth is great for this year.

Speaker 5

Like is that the way we should kind of think about fee income growth longer Term for BOK in this mid single digit level?

Speaker 1

Yes, Brady, this is Marty. Yes, we do think That is good solid franchise growth that we've been able to generate and if you look out over any 12 month or so period, we're able to grow that consistently at that mid single digit level and we feel the same about that today that we did a quarter ago.

Speaker 4

And Brady, this is Scott. I would add that if you look at the components, Q2 to Q3, we had Record highs in the 2nd quarter in a couple of different lines. So our energy we had different pieces that We're at the top of the list in the 2nd quarter. That's alternated in the 3rd quarter where we have investment banking And other areas. So it's not coming from any one particular segment or piece.

Speaker 4

So you've got diversification of those feed and commission revenue Just like we do at the top of the house from a revenue perspective. So we feel good about the fact that the various business lines Have the ability to generate fees and commissions just all types of fee revenues regardless of what cycle we're in.

Speaker 5

Okay. Got it. Thanks guys.

Operator

Thank you. Next question comes from the line of Peter Winter with D. A. Davidson. Please go ahead.

Speaker 7

Good morning. I was wondering, Can you provide some guidance, Marty, how you're thinking about net interest income in the 4th quarter? Just There's so many moving parts and how you're thinking about the trading portfolio and where you think net interest income would bottom. Do you think it's kind of the 2nd quarter we

Speaker 1

Yes. So Peter, let me just give you a little bit of color on the net interest revenue kind of the components. So loan growth, that will give you something like we had about $450,000,000 of Loan growth and that's coming on at a 2.50 spread, that's one of your positives. Bond portfolio reprice, That averages $450,000,000 a quarter and you kind of get a runoff rate around 2.75 basis And a reinvestment yield that's whatever current market rates were, but in the Q3, we're able to do that at 5.50. Fixed rate loan reprice, that's about another $350,000,000 that's repricing up each quarter 300 basis points.

Operator

And

Speaker 1

so those are the positives. Deposit betas were still pretty large impact in Q3. We saw a nice slowdown in the pace Of increase in September. And so we ended the quarter with 58% cumulative Beta, so we can see that slowing and so that slowdown will benefit Q4 and forward. Then the DDA mix shift, we still see that as a higher number in Q4 with likely slowdown after that.

Speaker 2

Peter, this is Stacy. I think to answer to be specific, I think that Marty has kind of provided the pieces there. Our view is that you'll have more margin deterioration in the 4th quarter, less in the Q1. And our current view is that it's likely in the first Both margin and net interest revenue are kind of where they trough and then we begin to build back from there plus or minus With not a high degree of precision around the absolute numbers, but certainly directionally we think that we likely bottom somewhere around the

Speaker 7

Okay, got it. Thank you. And then Stacy, just expenses, if I

Speaker 1

think about

Speaker 7

The company and the strategy, and I understand with competitors pulling back and you're taking advantage of this opportunity and investing. Is there any thought of maybe slowing down some of these investment spending next year just given somewhat of a challenging revenue environment?

Speaker 2

No. I mean, if you think about I mean, Peter, you followed us for most of my career here, it feels like. I mean, our view is we're running this company not for the next quarter or for the next year, but For the next 5 years or 10 years or 15 years. And so you get these opportunities like this, you have to take advantage of it. And I understand the optics, but Because of our mix of fee revenue, we're not a sub-sixty percent efficiency ratio company.

Speaker 2

We've never been. And so having a low-60s efficiency ratio doesn't bother us at all because we've got 40% to 50% of our revenues from fee based businesses that carry a higher efficiency ratio. And so we're going to be prudent about expenses. We're not going to do anything that's imprudent there, but we're going to grow the company We're going to think about things from a long term perspective, not a short term perspective. That's maybe the most distinctive advantage we have as a financial And we're going to take advantage of that.

Speaker 7

Okay. And just my last question, just Deposit betas, I guess the outlook was 64% by year end. I'm just wondering if you could update that and how you're thinking about it next year?

Speaker 1

Yes. We are thinking about that still as 64, 65 for the end of this year and then we do expect that to slow quite a bit next year.

Speaker 7

Any idea where it kind of settles out at?

Speaker 1

Yes. It's probably a little too early to tell, but quite a bit lower. I mean, we saw some nice slowdown in September, and We expect to see that slowdown continue.

Speaker 7

Got it. Thank you.

Operator

Thank you. Next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

Speaker 8

Hey, thanks. Good morning.

Speaker 2

Good morning.

Speaker 5

Good morning, John.

Speaker 8

Mark, maybe a question for you. In your prepared comments, you talked about some limits on commercial real estate concentrations. And I'm just curious What that means for overall commercial real estate growth? And I'm particularly interested in the multifamily and industrial because they've been Such big drivers of growth for you guys?

Speaker 6

Right. What I talked about was we do try to manage our Exposure in real estate to a certain percentage of capital and we are at the upper end of that range. So we have seen growth. A lot of the growth that we've seen this year has been funding up of existing deals and construction loans and the number of payoffs have slowed due to the situation in long term markets. So we expect that we still have room for modest growth in that next year, but it's not going Be it the double digit rate that we've seen year over year in CRE so far.

Speaker 6

We are focused on multifamily and industrial. That's where the growth has been. We don't see those markets slowing down too much. We're not focused on retail and certainly not on the office piece. So we again, it will be something modest.

Speaker 6

It won't be in the same kind of growth rate we had overall this year.

Speaker 8

Okay. Okay. Also on that same slide, talk about what you're doing in office. I know it's not huge Exposure for you, but I do see it's down. And you talked you made a comment about a mini perm option to solve some potential issues.

Speaker 8

Can you talk a little bit about that?

Speaker 6

Well, right, currently our office portfolio is very From a credit standpoint, if we reach a maturity with one of the office loans,

Speaker 2

there are at this point

Speaker 6

in time, they're all in good Okay. And we would have the ability to extend that loan for a short period of time until longer term markets It may open up. But we really have no significant credit issues at all in the office portfolio at this

Speaker 2

So John for us a mini perm would be some kind of 20 year amortization on a 3 year term, 3 year maturity Based on the property continuing to perform as agreed. And so the borrower doesn't Have to find a permanent refinancing source. We can give them a short maturity, but a longer am consistent with the permanent markets To bridge them until when the permanent markets are more healthy.

Speaker 8

Yes. Okay. Makes sense. And then your stocks It beat up a little bit this morning and it's on the NII and margin guide, I think primarily. But you've been active in the buyback.

Speaker 8

I'm just curious And you bought a lot higher, quite frankly. So I'm just curious your kind of buyback appetite and capacity, especially where the stock is? Thanks.

Speaker 2

Yes. I think you can assume that given where the stock is today and given where we bought it in the Q3, we would have a very high appetite for repurchasing shares.

Speaker 8

And capacity in general?

Speaker 1

Yes. We have very strong capital ratios and we've got the capacity we need to do that.

Speaker 8

Okay. Okay. Thank you.

Operator

Thank you. Next question comes from the line of Brandon King with Tuohy Securities. Please go ahead.

Speaker 9

Hey, good morning.

Speaker 1

Good morning, Brandon.

Speaker 9

Yes. So I wanted to get more context around how you're thinking about the efficiency ratio trends over next year or so or maybe beyond the year, just giving your initiatives and how the net interest income is trending and fee income. Just When do you think that efficiency ratio finally peaks and you finally see maybe some stability or maybe it's coming down?

Speaker 2

Brandon, the efficiency ratio has never been a metric that we manage to. And so we're obviously in Our budget preparations for next year, so we're not going to provide guidance around that today. But what I can tell you is every business that we have has a revenue, the efficiency ratio comes up. And when net interest revenue is a higher percentage, then the efficiency ratio will go down. But we'll continue to look at that by line of business And manage each line of business inside of our kind of implied expectations for efficiency.

Speaker 2

We'll continue to look for opportunities as we go through this fall season to look for opportunities for efficiency. But we don't run our company that way because so much of the mix of revenue guides that efficiency ratio. So that's not how we think about nor how we run the company.

Speaker 9

Okay. And just to follow-up on that, with these initiatives and Your expectations for when that revenue growth will be realized, and I know there's a lot of moving parts around that, But could you just give us some more context on how you're thinking about when and the timing of that just based off of preliminary plans?

Speaker 2

Yes. Just to give you

Speaker 1

a couple of examples, Brandon. So if you think about our Memphis expansion as one of those, That's sales and trading producers. So that has a fairly rapid ramp up just given the nature of that business. Our San Antonio investment, That's commercial and wealth primarily. And so those all Longer sales cycles, so that will take a little bit longer to ramp that up than when compared to the Memphis expansion.

Speaker 1

So It's kind of individual investment centric. So hopefully that helps.

Speaker 9

Okay. Okay. And then on the technology initiatives, could you just give us more color on kind of what you're planning on doing that you're currently not doing now? And how you expect that to ramp as you try to manage the company over next 5 years?

Speaker 2

So Brandon, over the last several years, we've made material investments in our treasury platform and our customer interface Into our commercial and corporate interface into our existing technology systems, we have significant investments in our wealth That are underway that we're continuing to work through. And so as I mentioned previously, we're running the For the long term, not the short term. And so we continue to make investments to ensure our technology platforms are competitive and providing our customers with a really positive experience

Operator

Thank you. Next question comes from the line of Matt Olney with Stephens Inc. Please go ahead.

Speaker 1

Hey, thanks. Good morning. I want to go back to loan growth and I think it's good to hear You guys talk about the bank taking advantage of some competition pulling back some as they manage their capital liquidity. Any commentary about how much of the growth is from larger size deals or syndications? I just want to appreciate How much of the growth is larger deals, existing syndications versus taking on new customers?

Speaker 6

Well, it's a combination of all that. Actually, we have not had any material increase like in the Q3 in the number of SNCs that we're involved with. Our leverage loans are actually going down. So we're focused on businesses where we can develop a relationship That's broad based. And so we're getting a mix of new customers as well as Finding our way into some club deals, etcetera, but nothing we're not focused on just getting into syndicated deals and buying participation Where we don't have a significant opportunity for relationships.

Speaker 6

It's core middle market right down the middle of

Speaker 1

the fairway as we consistently are over time.

Speaker 2

Yes. As Mark mentioned, the number of SNCs isn't different for us between Q2 and Q3. To the extent that we're in Assured National Credit, there is a direct relationship with the borrower. We typically have other business I think the growth that we're seeing is really and why I'm excited about it is because it is core, it is direct relationships, People that we've been calling on, opportunities are being created. And so that's really important to us and it's franchise building over the long term.

Speaker 1

Okay. That's helpful guys. My other questions have been addressed. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Next question comes from the line of Timur Braziler with Wells Fargo Securities. Please go ahead.

Speaker 10

Hi, good morning. Following up on that last line of commentary, do you have the total balance of Shared National Credits and participations in the quarter?

Speaker 6

Yes. The Shared National Credit volumes are about 24% of our total portfolio. And that's kind of mostly in the energy and C and I space that make those two areas make up about 80% of the total Shared National Credit. We do Asia in about a quarter of those, and about 80% of them are in our local markets. So we're not going outside of our footprint in tracking down those kinds of loans.

Speaker 10

Okay. Switching to the deposit base, the decline linked quarter and demand deposits still is pretty elevated. Demand is now less than 30% of the total base and is below pandemic levels. I guess, what are you seeing From a liquidity standpoint from your borrowers, I know you said that that pressure seems to be abating. I guess what's The outlook for demand deposits, as we go into the Q4 and into 2024?

Speaker 1

Yes. So we saw DDA average balances down $840,000,000 Q2 to Q3. And when that happens, that's a shift from DDA to an interest bearing within the firm. And so we'll see going from Q3 to Q4, we expect the decline to be Near that amount going Q3 to Q4. And then in Q1, we expect to see that rate of decline slow quite a bit.

Speaker 1

So when we look at kind of deeper into the portfolio and look at size cohorts, we can see the rate of change slowing and that's what gives us Some confidence that we'll see a slowdown here over the next 6 months. Q4 will still be a higher number.

Speaker 10

Okay. And I guess as you guys are thinking about funding the high single digit loan growth Next year and pairing that with a comment for stable to maybe slightly growing deposits, How are you thinking about funding that growth? And I guess it appears that the spread you're getting on that loan growth relative to the funding sources is shrinking. And I'm just wondering, obviously, you have the longer term outlook, but why grow loans at such a fast pace when that Brad is going to be shrinking and there is broader economic uncertainty out there right now.

Speaker 1

Yes. So if you look at the incremental loan growth, the Bread on that incremental loan volume is actually widening. So we've been able to see a widening of spreads on new production And the economics of that new production is strong, not to mention the fact that that's coming with full relationships, so there's deposits, etcetera. But That incremental loan growth does have incrementally positive and wider spreads. So the funding question, it's going to be a mix of Some deposit growth and there may be some smaller amount of wholesale funding in there as well.

Speaker 1

But either way, it doesn't matter which side of Whether it's funded with wholesale or deposits that is incremental and profitable to be sure.

Speaker 10

Okay. Thanks for that color.

Operator

Thank you. This concludes today's question and answer session. I would like to turn the floor back over to Marty Grunst for closing comments.

Speaker 1

Thanks everyone again for joining us today. And if you have further questions, please email us at irbokfdot Tom, have a great day everyone.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
BOK Financial Q3 2023
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