BOK Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the BOK Financial Corporation's 2nd 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. I would now like to turn the presentation over to Marty Gruntz, Chief Financial Officer for BOK Financial Corporation.

Operator

Thank you, sir. You may begin.

Speaker 1

Good morning and thank you for joining us. Today, our CEO, Stacy Kymes, will provide opening comments Mark Maun, Executive Vice President for Regional Banking, will cover our loan portfolio and related credit metrics and Scott Grauer, 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 second quarter press release are available on our website atbokf.com. We refer you to the disclaimers on Slide regarding any forward looking statements we make during this call.

Speaker 1

I'll now turn the call over to Stacy Kymes.

Speaker 2

Good morning. Thanks for joining us to discuss BOK Financial's Or $2.27 per diluted share. I'm proud of the exceptional second quarter financial results delivered across the board by our team. Wealth segment revenues set another record this quarter and core loans reached an all time high led by the commercial and multifamily segments. Our growth efforts are supported by the vitality of our geographic footprint as well as our diverse business model.

Speaker 2

Non interest revenues were almost 40% of total revenues for the quarter. Using our capital and liquidity strength, we are taking advantage of market and economic uncertainty to prudently grow. Our full service banking market expansion into San Antonio and the addition of a fixed income sales and training office in Memphis are just two more examples of how we are investing to build long term shareholder value. That disciplined long view approach has consistently been a distinct advantage for BOK Financial. Turning to Slide 5, period end core loan balances increased $488,000,000 or 2.1% linked quarter With growth spread across C and I and commercial real estate, the deposit trajectory flattened and turned positive during the quarter.

Speaker 2

Our loan to deposit ratio remained below 70% at the end of the quarter. Across the industry, deposit costs Margin is diluted by the increased trading activity this quarter and our margin excluding the trading activities remained healthy at 3.36%. We're seeing early signs of loan spreads increasing as banks seek to contract and also work through the impact of higher deposit costs And anticipated higher capital requirements for some. This impact will take many quarters to become meaningfully apparent. Our efficiency ratio came in just below 59% even with the shift in mix of non interest revenue.

Speaker 2

Credit quality remains very strong We continue to grow our allowance and have a combined reserve of 1.39%, which is notably above the median of our peer group. Assets under management or administration grew $1,300,000,000 or 1.3% linked quarter We're up $7,600,000,000 or 8% compared to last year. The market impact on cash, Equity and fixed income combined with the growth in new relationships is providing a tailwind we did not have for this area in 2022. Finally, we repurchased 266,000 shares this quarter as we balance opportunities for growth with attractive repurchase valuations. I'll provide additional perspective on the results before starting the Q and A session.

Speaker 2

But now Mark Mahn will review the loan portfolio and our credit metrics in more detail. I'll turn the call over to Mark.

Speaker 3

Thanks, Stacey. Turning to Slide 7, period end loans were $23,200,000,000 or up 2.1% linked quarter. Total C and I loans increased $317,000,000 or 2.2% linked quarter Year over year growth of $913,000,000 or 6.7 percent. Commercial real estate loans increased $155,000,000 or 3.2 percent linked quarter And have increased $865,000,000 or 21 percent year over year. This effectively returns those balances to their 2020 level after Experiencing significant pay down activity in 2021.

Speaker 3

Compared to December 31, 2020, CRE balances have grown at a modest 2% annualized growth rate. Growth this quarter was primarily driven by multifamily residential properties with an Increase of $139,000,000 or 10.2 percent linked quarter. Industrial facility loans grew $40,000,000 or 3.1 percent linked quarter, Which was offset with a $40,000,000 or 3.8 percent linked quarter decline in loans secured by office facilities. The year over year CRE growth of $865,000,000 was primarily driven from loans secured by multifamily residential properties and industrial facilities. We have an internal limit of 185 percent of Tier 1 capital and reserves to total CRE commitments and we're presently at the upper limit of that range.

Speaker 3

We do expect continued growth in outstanding CRE balances as construction loans fund up. As of June 30, CRE balances represented 21% of total outstanding loan balances, a ratio well below our peers. Healthcare balances increased $92,000,000 or 2.4 percent linked quarter and have grown $294,000,000 or 8% year over year, primarily driven by our senior housing sector. Healthcare sector loans represented 17% of total loans at quarter end. Energy balances increased $111,000,000 or 3.3 percent linked quarter and have increased $116,000,000 or 4% year over year with period end balances representing 15% of total period end loans.

Speaker 3

Combined services and general business loans, our Core C and I loans increased $114,000,000 or 1.7 percent linked quarter with year over year growth of $503,000,000 or 7.7 percent. These combined categories represent 30% of our total loan portfolio. Year over year, loans have grown $1,900,000,000 or 9%. Excluding PPP loans, Q2 2023 extends the linked quarter loan growth to 7 consecutive quarters. Our pipeline suggests we have the current momentum to drive continued growth in the loan portfolio throughout 2023 near our current pace.

Speaker 3

Turning to Slide 8, you can see that credit quality continues to be exceptionally good across the loan portfolio, Well below historical norms and pre pandemic levels. Non performing assets excluding those guaranteed by U. S. Government increased $6,000,000 this quarter. Non accruing loans increased $12,000,000 driven by an increase in energy related non accruals, While repossessed assets fell $8,000,000 The level of uncertainty in the economic outlook of our reasonable and supportable forecast remained high and the assumptions for commercial real estate vacancy rates increased during the forecast period.

Speaker 3

Those economic factors Combined with 2nd quarter loan growth supported a $17,000,000 credit loss provision for the quarter. We remain in a solid credit position today With a ratio of capital allocated to commercial real estate that substantially less than our peers and a history of outperformance during the past credit cycles, We believe we are well positioned should an economic slowdown materialize in the quarters ahead. The markets are more focused On the office segment of real estate, given the recent trends in workforce preferences, though it remains an open question as to whether this will be sustained as employers continue to require more time in the physical office. Our 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 the most recent semiannual review at the end of 2022.

Speaker 3

Net charge offs were $6,700,000 or 12 basis points for the Q2 and have averaged 10 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 continue to be low. The combined allowance for credit losses was $323,000,000 or 1.39 percent of outstanding loans at quarter end. The total combined allowance is available for losses and any apples to apples industry comparison should include the combined reserves. We expect to maintain this ratio or to migrate slightly upward as we expect loan growth to continue and economic uncertainty to persist.

Speaker 3

I'll turn the call over to Scott.

Speaker 4

Thanks, Mark. Turning to slide 10. Total fees and commissions were $200,000,000 for the 2nd quarter, up $14,500,000 or 7.8 percent linked quarter. Our Wealth segment set a new quarterly high for fees and commissions at $123,000,000 this quarter, With the last 4 consecutive quarters representing 4 of the 5 highest quarters on record, trading fees and customer hedging revenues We're the primary drivers of the linked quarter increase, up $9,300,000 $5,300,000 respectively. Fiduciary and asset management fees increased $2,300,000 largely due to seasonal tax service fees.

Speaker 4

The trading fee increase was primarily driven by a $7,900,000 improvement in our MBS trading activities. Trading activity and margins improved coming off exceptionally low volume and high volatility in the Q1. The desk has been able to increase volume by expanding coverage to downstream accounts as mortgage originations slowly increase And market volatility returns to more normal levels. The 5,300,000 Customer hedging revenue increase was driven by a record quarter for energy customer hedging fees with linked quarter fees up 4,700,000 Fees from other institutional trading activities increased $1,400,000 linked quarter. Fiduciary and asset management fees were $53,000,000 for the 2nd quarter, a 4.6% linked quarter increase.

Speaker 4

Our assets under management or administration were $103,600,000,000 an increase of $1,300,000,000 or 1.3 percent Growth was spread across most categories and primarily driven by improved asset values. Our asset mix for assets under management or administration moved slightly this quarter with 43% fixed income, 33% equities, 15% cash and 9% alternatives. We believe our diversified mix of fee income 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 a percentage of total net interest revenue and non interest fee income, our revenue mix averaged just over 36% during the last 12 months. That consistently supports a revenue stream that is sustainable through a wide array of economic cycles. I'll now turn the call over to Marty.

Speaker 1

Thank you, Scott. Turning to Slide 12, 2nd quarter net interest Revenue was $322,000,000 a $30,000,000 decrease linked quarter. Net interest margin was 3%, a forty five basis point decrease versus Q1. It is important to note that 9 basis points of the 45 basis point margin decline was due to growth in trading assets. Our trading business grew revenue and grew profitability as you can see in the fee income trends, but was dilutive to net interest margin As trading assets grew at narrower spreads relative to the rest of the balance sheet.

Speaker 1

When trading assets are higher or the yield curve is Ladder or inverted, both of which we experienced this quarter, the dilutive impact to net interest margin is more significant. Net of the 9 basis point impact from trading, the remaining 36 basis point decline was driven by the competitive deposit environment As average interest bearing deposit costs increased 73 basis points, the cumulative net interest bearing deposit beta increased to 54% And DDA continued to shift into interest bearing, although at a reduced pace. DDA was 32% of total deposits at June 30. This slide shows net interest margin and net interest revenue with and without the impact of the trading business to better highlight trends and comparability. For the Q2 of 2023, the net interest margin excluding the impact of trading assets was 3.36% versus 3.72% in the first Quarter.

Speaker 1

Growth in earning assets during the quarter was driven by loans and trading assets as the securities portfolio remained stable to maintain our balanced interest rate risk position. Turning to Slide 13. Liquidity and capital continue to be very strong on an absolute basis and versus peers. Total deposits grew $714,000,000 on a period end basis and the loan to deposit ratio was 70% unchanged from the prior quarter. Early in the Q2, we saw a continued downward trend driven by April tax payments and some price sensitive movements, though at a slower pace in the prior two quarters.

Speaker 1

Balance trends rebounded in early May and we grew $2,000,000,000 in deposits in the back half of the quarter. This was consistent with our And we are happy with the results in such a competitive environment. Our tangible common equity ratio was 7.79%, Down 67 basis points linked quarter due to balance sheet growth and increases in interest rates, but up 16 basis points from year end. Adjusted TCE, including the impact of unrealized losses on held to maturity securities is 7.49%. CET1 is 12.1 percent and if adjusted for AOCI would be 9.9%.

Speaker 1

As regulatory capital Changes are being proposed for the industry. We believe that across the array of plausible outcomes for banks in our size range, we have ample Capital to support additional organic growth, while at the same time allowing for continued share buyback. During the second quarter, we repurchased 200 and 66,000 shares at an average price of $84.08 per share. Turning to Slide 14. Linked quarter total Expenses increased by $13,900,000 due to the full quarter effect of annual merit increases implemented on March 1, while cash based incentive compensation grew $6,600,000 due to new business These were partially offset by a $2,500,000 seasonal decrease in payroll taxes.

Speaker 1

Other operating expense Grew $4,400,000 primarily due to a $2,500,000 increase in mortgage banking costs driven by a seasonal increase in prepayments And a $1,100,000 increase due to the donation of an appreciated asset to the BOKF Foundation. Year over year, total operating expense increased 16.5%. However, this includes the impact of market value driven swings in deferred compensation and changes in the vesting assumptions for stock related compensation. Excluding those two factors, total operating expense increased 11% compared to Q2 2022 with a 13% increase in total personnel expense due to regular compensation and increased cash Related to new business production. Other operating expense increased 8%, primarily due to continued investments in technology, facilities And increased FDIC expense.

Speaker 1

Turning to Slide 15, I'll cover our expectations for 2023. We expect upper single digit annualized loan growth. Economic conditions in our geographic footprint remain favorable and continue to be supported by business Changes in the competitive environment for loans should be a tailwind. We We expect to continue holding our available for sale securities portfolio flat in 2023 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.

Speaker 1

Currently, we are assuming one additional 25 basis point increase here in July before the Federal Reserve pauses. We believe that the margin will migrate lower throughout 2023 as interest bearing deposit betas increase and demand deposit balance attrition runs its course. Net interest income is expected to be near $1,300,000,000 for 2023. In aggregate, we expect total fees and commissions revenue to approach $800,000,000 for 2023. We expect expenses to be near or slightly above q2223levels and the efficiency ratio to migrate slightly above 60% throughout the remainder of 2023 As our revenue mix shifts and our strategic market expansions ramp up, this does not include the impact of the FDIC special which could be finalized in the second half of twenty twenty three.

Speaker 1

Our combined allowance level is above the median of expense similar to that in recent quarters. Changes in the economic outlook will impact our provision expense. We expect to continue opportunistic share repurchases in the second half of the year. I'll now turn the call back over to Stacy Kymes for closing commentary.

Speaker 2

Thanks, Marty. As we have again demonstrated this quarter, strong risk management and strong financial results are not mutually We expect to do both well. Our talented teams collaborate well to ensure we grow our company the right way, a way that is Through all economic cycles. While the market is more focused on capital and liquidity, I see this as a unique opportunity to use our strength in these areas to both organically grow and invest in new markets while others may be more internally focused. I continue to assert that we are in a stage where investing in strong banks versus trading the sector matters.

Speaker 2

Thanks with thoughtful growth, diverse business mix, meaningful core deposits, improving credit discipline should outperform. That certainly continues to play out for us in 2023. We are focused on using the fantastic geographic footprint to grow, both in the current environment and in the years to come. With that, we are pleased to take your questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Jared Shaw with Wells Fargo Securities. Please proceed with your question.

Speaker 5

Hey, good morning.

Speaker 1

Good morning, Jared.

Speaker 5

Maybe starting with credit, With the expectation that provision could go higher based on growth and the economic outlook, you call out the Expectation for vacancy changes, maybe can you spend a little time on where you think, I guess, specifically office vacancy Is and could go and how your markets are holding up, with that return to work and your outlook on office. And I guess, should we assume that office continues to decline and that provides some opportunity to fund new CRE loans that are not in office?

Speaker 3

Yes, Jared, this is Mark. The office portfolio that we have, we've been reducing our office exposure over the last Several years. So this is not new and we would expect to continue it to continue to decline. If we look at our footprint, Our overall markets, we think, are in great shape. I mean, you're looking at markets that have performed very well in multiple economic downturns.

Speaker 3

When we're looking at the economic outlook, we're looking at its effect on the overall economy as opposed specifically to our portfolio. And we would expect that we can maintain this level of performance on the CRE portfolio going Forward is where focus has been on multifamily and industrial, which have held up very well.

Speaker 2

Yes. If you're looking at the Forward guidance and trying to intimate maybe that there There could be higher provision expenses. That's not how we see it. I think that we've reflected the Future potential outlook in CRE and how we formulated our allowance methodology. So the Forward looking aspect of potential higher levels of office vacancies is really how we supported The allowance this quarter, we're not trying to foreshadow that provision levels could be higher in future periods.

Speaker 2

In fact, our guidance was kind of near current levels depending on the economic outlook. Certainly, should the economic outlook Improve, then provision levels could even come down from here. So it's really just a function of how we see the economy playing out in future periods.

Speaker 5

Okay. That's great color. Thanks. I guess shifting to deposits and funding, you highlighted that there was Strong trends in deposits in the second half of the quarter. How sustainable squaring that with the broader view of Lower growth on deposits for the year.

Speaker 5

Should we assume that that growth helps To remix deposits or how should we think about deposit mix going through the rest of the year with that growth outlook?

Speaker 1

Yes. I think that deposit growth should remain on an upward trend here with some noise within there. I On the mix side, DDA is probably the more interesting question. And we really saw the DDA Mix shift slowed down appreciably in May June. In fact, June average and June ending DDA balances were about the same.

Speaker 1

So that trend actually turned reasonably favorable in the back half of the quarter.

Speaker 6

And do

Speaker 5

you think that that could that we've sort of found the bottom here on DDA then?

Speaker 1

Yes. I don't know if I'd call it precisely the bottom. It's certainly those trends are very favorable. You could have just a little At the bottom, it's certainly those trends are very favorable. You could have just a little bit more given another Fed hike here.

Speaker 1

You can have a little bit more, but Yes, those trends look very good in the last 2 months.

Speaker 5

Okay. And then I guess finally for me, when we look at the buyback and Your comments about opportunistic buyback, is that really more opportunistic based on price or is that opportunistic based on alternative uses Of capital at any given sort of point in the quarter?

Speaker 1

Yes, those are the two factors. I mean, we're just To be present in a couple of quarters, we want to make sure that we've got sufficient wherewithal to support that. And that's obviously first in the pecking order, But that's kind of how we do the calculus.

Speaker 2

Jerry, before the kind of first quarter events In the industry, the most common question was, what are you going to do with all your excess capital? So we're obviously I think that long term we probably do have a little bit of excess capital to deploy. Share buybacks are part of that, but we're being a little bit Careful maybe in this environment, at least for the near term.

Speaker 6

Okay.

Speaker 5

Thanks. I guess maybe just circling back on the deposits. In terms of your expectation for beta, how should we be thinking about cumulative beta going through With the potential or the expectation for one more hike?

Speaker 1

Yes. We do think that cumulative beta does keep moving up here. We were At 54 this quarter and our assumption that's within our guide is that that crosses 60 and gets Up into the 60 three-sixty four territory by the end of the year.

Speaker 3

Yes. I would agree with Marty, but I think the cumulative beta over the life of the cycle It's going to be kind of where we said it was going to be all along somewhere in that 40% to 50% range.

Speaker 5

Thanks very

Speaker 6

much.

Operator

Our next question comes from Jon Arfstrom with RBC Capital Markets.

Speaker 7

Maybe a question for you, Marty.

Speaker 2

When I

Speaker 7

do the math on the margin, it seems like there's a little bit of pressure coming, but maybe not that material. Can you confirm that just how much pressure do you think is ahead in the net interest margin? And what do you think the cadence might look like for the next couple of quarters assuming the Fed's done today?

Speaker 1

Yes, that's right. And that is our base assumption. And maybe the best way to walk through that is to talk through Net interest revenue, kind of what the pluses and minuses are from here because like June, net interest revenue for the month of June was 100 and And so if you kind of start from that run rate, loan growth is going to be a plus obviously. Bond portfolio repricing is going to be a plus. In Q2, we saw $420,000,000 of principal cash flows, runoff at about a $278,000,000 runoff yield and we're reinvesting that around It's $485,000,000 for the Q2.

Speaker 1

And you'll see that trend continue through future quarters. And even within the fixed rate part of the loan portfolio, though small, you've got the same dynamic going on there that provides Lift and we'll continue to provide lift. The deposit betas, we're at 54 cumulative right now. That will Continue to bleed up here as you get another rate hike and then you just get a little bit of residual carry forward. The July rate hike probably doesn't really independently move the needle that much.

Speaker 1

And then as you're talking about before, the DDA mix shift, that's Really slowed down a fair amount. So that impact gets a lot smaller. So If you look at those pieces, the DDA and the deposit reprice are declining effects that are getting close to Pending running their course here. And then the loan growth is a growing effect over time and the bond portfolio reprice, that's a declining effect over time, but it lasts a So that kind of gives you a little bit of a color around how that plays out over the next couple of quarters.

Speaker 2

And John, we're focusing on net interest In terms of net interest revenue because if the activity is strong and the trading portfolio expands, obviously, the Net interest margin impact that is very dilutive. And so it could be influenced by that, but that's going to benefit us on the B side should that trading Folio continue to perform as it has been.

Speaker 7

Yes. Okay. That makes sense. I do want to ask Scott a question on that, Just one comment you made was you grew $2,000,000,000 in deposits later in the quarter. What was the driver of that?

Speaker 7

And was it Higher rate deposits or was it more client driven or help us understand what that was?

Speaker 1

Yes. So that's mostly commercial and wealth driven to a lesser extent consumer. But Largely our what we talked about last quarter, just making sure that we've got price competitive Offerings throughout the footprint that compete with the alternatives that our customer base have in those segments. And so we're just making sure that our price points are at market at all price points and that's what drove it.

Speaker 3

Okay. Got it.

Speaker 1

Yes. Some of the success on the fee side and the consumer book as well on top of that.

Speaker 6

Okay. Okay.

Speaker 7

Then, Scott, last one for you. You talked about volumes and volatility Helping your brokerage and trading, you talked about extending the reach of the sales force. Can you talk about that a little bit more And about the better environment, what makes for more favorable environment, so we can kind of understand How the balance sheet might flex when there's a better environment or worse environment?

Speaker 1

Right.

Speaker 4

Absolutely. So in the Q1, When we saw a lot of kind of external shocks to the fixed income market, we had a very The Fed was in the midst of very active rate hikes. We saw bid ask spreads really widen out in the Q1 And we saw dwindling to very, very historically low mortgage origination. So as we've moved into the second Order, as we mentioned, we've seen a pickup, as the reality of 5%, 6% plus mortgage rate settles into the market. For homebuyers, albeit still a shortage of inventory, we're We're seeing rate kind of expectations settle in, which has increased mortgage origination.

Speaker 4

We've seen The moves, whether the announcement today is 1 more or 2 more rate hikes, we're clearly further into the Fed Rate hike cycle which creates a better appetite of our institutional buyers of mortgage backed securities and all fixed income products to position their portfolios. So we've seen kind of the culmination of better outlook Uncertainty in the fixed income markets coupled with a little bit better flow on the mortgage backed security side. So those factors have given us Better confidence in kind of resuming our previous levels of securities inventory levels.

Speaker 2

And if you think about it from an investment portfolio manager position, if you know you're toward the end of the hiking cycle, Whether it's today or today plus one more, you begin to get more confident in repositioning your portfolio because you don't one just this is going to keep happening. And so I'm just going to keep trading into that. That could optimistically help us out in The market participants believe the Fed is done or near done.

Speaker 7

Okay. Clearly, Q1 was abnormal, but is this Maybe an impossible question. Does this feel more normal?

Speaker 4

It does. And I think that the as Marty indicated, our Levels of trading securities, our balances there appear to be, more business as usual. So we look for these levels to be Sustainable, given the current rate environment and the appetite, for repositioning on the curve. Okay.

Speaker 7

All right, John.

Speaker 2

Okay.

Speaker 1

John, sometimes we tell you don't use the end of quarter trading level as the way to think about the future. This quarter, Probably better than the average.

Speaker 7

Okay. Very helpful, guys. Thank you.

Operator

Our next question comes from Brady Gailey with KBW. Please proceed with your question.

Speaker 8

Hey, thank you. Good morning, guys.

Speaker 9

Good morning. Good morning, Brady.

Speaker 8

I understand the dynamics of having a net interest margin that moves a little lower in the back half of this year. I'm wondering as we look to next year, the Fed will be done, deposit costs will probably have peaked. Could you see an expanding Net interest margin into next year just because asset reprice is higher and the NIM could be actually headed higher next year?

Speaker 1

Yes. So that's possible. And I would again focus on net interest revenues the way to think about next year. And if you play out The comments that I made earlier, you can see that be on a growth trend. And the percentage Sure.

Speaker 1

It's possible to see that higher, especially if you get less of an inverted curve. That's going to help as well.

Speaker 2

You've got a couple of factors there. I think Marty's reinvestment We're getting roughly $400,000,000 a quarter in cash flow from the securities portfolio that's reinvesting at 250 to 300 basis points higher Then what we're receiving today, that's going to help you a little bit. The trepidation in answering the question is really just understanding how deposit behavior is going to be as we grind higher for longer. If We're through the worst of that from an industry perspective, then I think you're right. There's upward on the margin.

Speaker 2

If deposit pricing continues to grind higher in a more meaningful way, then that could be the offset to

Speaker 4

All right.

Speaker 8

And then intra quarter, You guys had a couple of announcements expanding into San Antonio, also expanding into Memphis. Maybe just the rationale behind Those new markets and is this something we should expect to see going forward putting new markets on the map organically?

Speaker 2

Yes. I think they're probably a little bit 2 different stories. San Antonio is a market that we buy for a long time. We have a strong presence in Dallas Fort Worth and Houston. Central Texas has been a gap for us and we've just been looking for kind of the right way to enter that We're excited about the team we've acquired there and we'll have corporate, commercial, Treasury, wealth, both in San Antonio and Austin will have a complement of between 15 20 folks They're in Central Texas.

Speaker 2

That will be an opportunity for us to meaningfully expand our presence there. And so that's going to be full service banking And the beginning of another key market for us in Texas, I think Memphis really was an opportunistic Chance for us to grow our fixed income sales and trading platform that wasn't necessarily on the radar As we began the year, but as things unfolded and opportunities presented themselves, we really saw it as additive to the current operations we have in Little Rock, Milwaukee and Stanford, Connecticut, it fits very cleanly. You have very little sales overlap with our existing portfolio and we're excited for the team that is He's going to come on board there to help us in that area.

Speaker 8

All right. And just lastly for me, the price of oil is still very strong, But the price of nat gas is depressed and we have seen a little bit of noise in that space. Maybe just talk about how you think, I know nat gas, I think it's only about a third of your energy. But do you expect to see some issues in nat gas over

Speaker 3

Not at this point. We have like right now 93% of our gas heavy borrowers are hedged in They have over 50% of their PDP in 2023 and 76% of their PDP hedged at Prices in 2024 exceeding $3.50 So they're well positioned to receive Price well above what we're seeing in the spot market. Plus today's market, you can hedge out all the way into 2025 at almost $4 An MCF. So we continue to push hedging as a way to protect their portfolio as well as to improve our Credit risk and our customers have been responding. So we actually are in a really strong position that we expect our natural gas producers to

Operator

Our next question comes from Brandon King with Truist Securities, please proceed with your question.

Speaker 6

Hey, good morning. Thanks for taking my questions.

Speaker 9

Good morning, Brandon. Good

Speaker 6

morning. Yes. So I wanted to touch on the outlook As far as loan growth, in the prior quarter, you detailed that economic conditions were very strong and in this quarter now it's Kind of been downgraded to favorable. So just want to know if you could provide more context and details around that and what you're seeing in your markets and with

Speaker 2

your customers? Yes. I guess, maybe we didn't communicate well, but we certainly don't see unfavorable economic conditions for loan growth. I mean, our Footprint markets in the South, Southwest, Midwest are performing exceptionally well. I mean, there's no signs Economic slowdown are early signs of any economic issues.

Speaker 2

In fact, long term and short term that footprint of Texas and Arizona, clearly our high growth markets infill from in migration from other Markets, I think, is going to really benefit them long term. So we're very bullish. And in fact, we've signaled in our guidance, upper single digit loan growth for the year and we're very confident that we'll be able to achieve that objective. I think our year over year growth is about 9%. And we're in a range to continue that pace.

Speaker 2

So we still see good pipelines. We still see good opportunities. And frankly, the opportunity we have in front of us is a little bit unique in that Others are trying to manage capital ratios or other things like that. So they're maybe less aggressive in the marketplace. And so from a sales A perspective, we're endeavoring to be very active in front of customers and prospects to try to add to our customer and Loan deposit and asset under management book, we want to grow all those areas at a time where we've got lots of capital and great liquidity and We're in business and we're not having to kind of meter that growth.

Speaker 2

We'll take all that we can get in

Speaker 3

this environment. Yes. The only thing I will add is the key here is that this has been a very broad based growth. I mean, we have had all our lines of business experiencing growth, Not just concentrated in one particular sector or another. Our CRE, we are kind of at our Upper end of our range of our concentration, but the construction loans have continued to fund up.

Speaker 3

So we're seeing it in C and I, we're seeing healthcare, Energy and CRE all experienced growth. So we expect that reflects a lot of things that Stacy was talking about.

Speaker 1

And Brandon, if you look through to the state level GDP, state level unemployment for our footprint, that still remains very strong. There's no downturn there at all.

Speaker 6

Okay. And within that and the tailwind from the competitive environment, With these opportunities that you're getting, are you able to get kind of higher loan spreads or better economics on some of these deals you're getting today?

Speaker 2

There's no doubt. I alluded to that in my prepared comments that we are seeing particularly on the higher end of the corporate space Deals are pricing upward, whether it's from fewer participants in the market or those beginning to price for higher capital requirements on the higher end of the banking Segment, we are seeing that 25 to 50 basis point increase in loan spreads. I think that We'll take some time to work through the portfolio effect, but clearly that's an opportunity as we move forward.

Speaker 6

Okay. And then just lastly from me, is there any way to provide kind of the spot cost of deposits at the end of the quarter?

Speaker 1

Yes. There's not really a way to do that in particular. New production if you look at our CD rates that we're offering, we've got rates In the upper fours and fives as new production for that varies by market, but that's probably what we've got for you.

Speaker 6

Okay. Thanks for taking my questions.

Speaker 1

Thanks.

Operator

Our next question comes from Matt Houle with Stephens, please proceed with your question.

Speaker 9

Thanks. Good morning. Just a few follow ups here from some previous questions. On the customer hedging activity, obviously, good quarter in 2Q. It sounds like this is mostly from energy customers.

Speaker 9

We'd love to appreciate if you think there's some good follow through there potential for the back half of the year.

Speaker 2

Yes. I think the hedging activity there, I mean, it was a record really in the Q2, but it's been strong for us, both on the energy side and the interest rate Both experienced really strong second quarters. I think the shape of the yield curve is going to help on the interest rate derivative side. I mean, it's Odd that you can go out and hedge out for years at a cheaper rate than the, SPIR rate, but that is the case today. And so that's helping a little bit on the interest rate derivative side.

Speaker 2

And as we talked about with natural gas, future prices and frankly oil prices, The market is in a good place to hedge and to swap future prices and do it in a way that's conducive to our customers. Whether it's the same level in the second quarter, it's hard to forecast that in a highly volatile Segment, but I think that there is good momentum to be able to still have that be a very strong segment for us.

Speaker 9

Okay. Appreciate that, Stacy. And then in the press release, there was a mention of the $8,100,000 gain from Merchant Services. Just remind me what line item this flows through?

Speaker 1

Yes. That flows through the other gains and losses Kind of right below the fee income.

Speaker 9

Okay. I see it. Perfect. And then on the trading securities, Marty, I heard your comment that the end of period balance could be a better starting point for 3Q than the average. I guess from a balance sheet standpoint on the other side of the balance sheet, remind me of how that's typically funded?

Speaker 9

Yes.

Speaker 1

So we can use either FHLB or repo, either one, whatever is cheaper. And so it's just the short term Wholesale.

Speaker 9

Okay. And then I guess along with that, FHLB and the repo line and other borrowing lines, if you're going to see some pretty strong loan growth, it sounds like this quarter, Should we see the FHLB and borrowing line come down? Is it a replacement? Or do you think There'll still be an increase there given the trade securities that you expect?

Speaker 1

Yes. So we'll have Good loan growth will have deposit growth that will fund a decent portion of that and then kind of whatever the net is from pluses or minuses In the trading portfolio that is what will really drive the changes in FHLB or repo.

Speaker 2

Yeah. But Matt, this really goes back to Re educating the investor community and how we fund the bank. Loans are funded by deposits. You saw a good loan growth this quarter. You saw good deposit growth this quarter.

Speaker 2

That loan to deposit ratio stayed relatively consistent and we see that as we move forward. On the security side, whether it's the available for sale, investment security or the trading portfolio, those are largely going to be funded wholesale, whether that's Repo or institutional or otherwise. And that's entirely consistent with how we funded the bank forever pre COVID. You're seeing higher levels of FHLB borrowings and things like that because that's we got down to none during COVID. So as things kind of revert to the mean, How we fund the bank is going to look like it did pre COVID and that includes how we think about loans and deposits and how we think about institutional funding or Funding or wholesale funding for our securities portfolio and trading activities.

Speaker 9

Yes. Okay. That's helpful, Stacy. And then just lastly, I guess, I I think you mentioned earlier on the call that the AFS security yields could continue to climb as you get some reinvest some of those cash flows. Any more color on just kind of the roll off or a long yield within AFS book?

Speaker 1

Yes. So we think about both AFS and held to maturity roll together because both have the same driver. And so the roll off yield is always going to be What the portfolio yield is, I think that was $2.74 if I'm right for this quarter. And then current coupon 15 year MBS or maybe a little bit less than that is kind of a good proxy for how to think about our repurchase yield on average over time. And So that gives you well over pretty good spread, 200 basis point plus spread pickup.

Speaker 9

Yes. Okay. Okay. Thanks guys. Appreciate your help.

Operator

There are no further questions at I would now like to turn the floor back over to Marty Gruntz for closing comments.

Speaker 1

Thanks again everyone for joining us. And if you have

Operator

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 Q2 2023
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