BOK Financial Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 24, 2024

There are 13 speakers on the call.

Operator

Greetings. Welcome to BOK Financial Corporation's First Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded. And I would now like to turn the presentation over to Heather Worley, Director of Investor Relations for BOK Financial Corporation. Please proceed.

Operator

Good morning,

Speaker 1

and thank you for joining us to discuss BOK Financial's Q1 2024 financial results. Our CEO, Stacey Kimes, will provide opening comments Mark Long, 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. Our CFO, Marty Grunst will then discuss financial performance for the quarter and our forward guidance. The slide presentation and press release are available on our website atboks.com. We refer you to the disclaimers on Slide 2 regarding any forward looking statements made during this call.

Speaker 1

I will now turn the call over to Stacy Kimes, who will begin on Slide

Speaker 2

Thank you, Heather. We're excited to welcome Heather to our team. We are pleased to report earnings in the Q1 of 83,700,000 dollars or EPS of $1.29 per diluted share. Adjusting for notable items such as AFS repositioning and FDIC special assessment, net income would have been $123,200,000 and EPS would have been $1.91 per share. Before I discuss the highlights from the Q1, I would like to talk about our strategy.

Speaker 2

At BOKF, our approach is based on the long term. We are focused on driving profitability and performance that creates sustainable value for our shareholders. BOK Financial is a full service financial services company with a diversified loan portfolio, unwavering discipline and credit quality, top tier fee income businesses that produce attractive returns and a solid core deposit franchise. Our footprint is located in dynamic high growth markets and our strong risk management culture allows us to remain open for business, actively growing our portfolio during times when others are pulling back. We have a seasoned management team with deep bench strength.

Speaker 2

Our executive leadership team has an average of 34 years of industry experience and 24 years at this organization. Through market cycles, we consistently invest in our company's growth. Our ample levels of capital and liquidity allow us to expand client relationships and take market share when others pull back. A clear example of this is our investment in the San Antonio market, which is progressing more favorably than business generation. As a further part of our expansion in Central Texas, we also have 12 wealth employees and 7 mortgage employees in the Austin market.

Speaker 2

We also added 13 team members for our institutional sales team with our Memphis expansion which will complement our existing fixed income trading activities. Talent acquisition is a fundamental part of our strategy. We proactively recruit for our future knowing that our greatest asset is our people. I'm thrilled to announce that we were recognized as one of only 60 organizations to receive the 2024 Gallup Exceptional Workplace Award. This is independent validation of our culture of inspiration, ambition, collaboration and tenacity.

Speaker 2

Discipline is key to generating value and one differentiator I wanted to highlight for us is our credit culture. If you look back to the great financial crisis, while our credit costs were well above our own average, we materially outperformed our peers. This and our holistic risk management focus contributed to us being the largest traditional bank not to participate in TARP. Industry wide credit costs have been very low over the last several years, but with growing concerns in the regional banking space, there is renewed focus on credit and particularly commercial real estate. We never lost sight of managing credit prudently and believe this is an area where we will continue to outperform on a relative basis.

Speaker 2

We have maintained the same credit standards with a consistent credit management team that led to better credit losses versus peers historically. We've added a slide to our presentation that shows our historical credit performance by line of business to highlight our impressive long term performance. Combining strong historical credit performance with an ongoing commitment around concentration limits should give investors further confidence in our ability to perform well in this area moving forward. We have a commercial real estate concentration limit of 185 percent of total commitments versus Tier 1 capital and reserves. And today, we have approximately 22% of outstanding balances in commercial real estate.

Speaker 2

Over the years, we have focused on growing our specialty lines of business like energy and healthcare, which has increased our core commercial and industrial relationships. We've made investments in our core commercial businesses over the last several years and we see those returns evident in the Q1 with 9% annualized growth in commercial loans. Another way you see us taking the long view is in the retention of our Visa Class B stock. Many have fully monetized their shares since 2008 at a considerable discount. We held on to this position and now expect to receive full value for the shares we hold.

Speaker 2

Moving to Slide 5, period end loan balances increased 268,000,000 or 1% linked quarter with growth driven by commercial loans and our teams remain confident in our pipelines as we move forward. Both period end and average deposits continue to grow this quarter. Our loan to deposit ratio declined slightly to 68%, remaining well below our peers and providing significant on balance sheet liquidity to meet future loans or other liquidity demands. We have now seen 2 consecutive quarters with a slowing pace of net interest margin declines and we believe we are at the trough. Our credit remains very strong and we have a combined reserve of $329,000,000 or 1.36 percent of outstanding loans at quarter end, which is above the median of our peer group.

Speaker 2

Finally, we repurchased over 600 and 16,000 shares this quarter to reflect our long term confidence in the company and to take advantage of attractive repurchase valuations. I'm proud of the quarter that this team has put together and appreciate the time to review it with you this morning. With that, I'll turn the call over to Mark.

Speaker 3

Thanks, Stacy. I wanted to take a moment to reference Slide 7 and reinforce Stacy's comments regarding credit. Our credit culture is fundamental to the way we do business. We have strong underwriting standards that are calibrated to our experience in each of our lines of business, which involves not only a base evaluation of credit, but also stress testing during the underwriting process, including all loans being subjected to interest rate shocks. Our process is a consistent, disciplined approach designed to avoid fluctuating standards based on economic conditions.

Speaker 3

Approximately 81% of our commercial and CRE loans are floating rate or reprice in the next year, so this variable has always been a principal factor for us. The current credit performance you're seeing in our loan book is already reflective of higher borrowing rates. We don't have a significant concern over payment shocks. As we actively manage the book, we monitor credit to identify issues. We are quick to downgrade any loans that we are concerned with, which can on occasion make our criticized ratios look higher than peers.

Speaker 3

We believe this proactive management results in better long term outcomes. If an issue with credit arises, we collaborate with clients to rehabilitate, exit with full repayment or minimize loss via cooperative effort with management, line bankers and our special assets team. Combining our prudent standards on the front end during the underwriting process and active management throughout the life of the loan has historically resulted in very modest credit losses, which is illustrated on Slide 7. Turning to Slide 8. Overall loans increased 1.1% linked quarter with commercial loans up 2 point 2% and CRE down 1.9%.

Speaker 3

Portfolio yields increased 4 basis points during the quarter. Loan balances in the energy business increased 0.2% linked quarter. As a reminder, our energy book is composed of approximately 70% oil weighted borrowers and 30% natural gas weighted borrowers. 92% of the book is 1st lien senior secured production with lending evaluated and stress tested by our in house engineering staff of 17 full time employees. Our energy customers are very well hedged for at least the next year, which meaningfully lowers our commodity pricing risk on the collateral.

Speaker 3

Combined services and general business loans, our core C and I loans grew 3% linked quarter. Our focus in this market is on developing full banking relationships through cash flow lending, while structuring our credits with adequate secondary sources of repayment to minimize our risk. Our healthcare business loans increased 2.5% linked quarter. Roughly 2 thirds of the portfolio is in senior housing, combining a diversified mix of skilled nursing facilities that are Medicare and Medicaid based, stabilized private pay senior living, integrated health systems predominantly with investment grade equivalent ratings and other specialized providers. The healthcare line of business has a national footprint, but it is focused on regional operators with multiple locations for diversity and deep knowledge of their markets.

Speaker 3

We have a long history of strong underwriting in this space. Our CRE business decreased 1.9% quarter over quarter. As Stacy mentioned, we managed a strict concentration. Loans are subjected to multiple stress tests in the underwriting process, including those that stress interest rate and payment shocks. Setting aside our disciplined underwriting standards, we believe that there are 2 key factors that will differentiate our credit performance in this cycle.

Speaker 3

First is guarantor support. We have meaningful support in over 90% of our CRE loans with counterparties that we have known for a long time and have demonstrated commitment to supporting their transactions. 2nd is geographic location. This portfolio is geographically diverse, but importantly with most exposure within strong economies in our footprint and very little exposure in the areas of the country that have seen the largest pullback in prices such as New York City and Los Angeles, which is shown on the following slide. On Slide 9, you will notice credit quality remains exceptional across the loan portfolio and well below historical norms and pre pandemic levels.

Speaker 3

Non performing assets, excluding those guaranteed by U. S. Government agencies decreased $25,000,000 this quarter. The resulting non performing assets, the period end loans and repossessed assets Committed criticized assets continue to remain well below pre pandemic levels as a percentage of capital. Net charge offs were 5 point $5,000,000 or 9 basis points annualized for the Q1 and have averaged 10 basis points over the last 12 months, extending the trend of performance far beyond our historic loss range of 30 to 40 basis points.

Speaker 3

Looking forward, we expect net charge offs to remain below historical norms. We remain well reserved with a combined allowance for credit losses of $329,000,000 or 1.36 percent of outstanding loans at quarter end with the $8,000,000 provision reflecting a stable operating environment and loan growth expectations. The reserve is sufficient to cover our non performing assets by 3 times. We believe the combined reserve is the most appropriate metric to consider if you want a holistic view of comparative credit reserve levels. We expect to continue to maintain an appropriate reserve supporting loan growth and reflective of the economic conditions.

Speaker 3

As I mentioned in my opening comments, we have traditionally outperformed during challenging credit cycles and are well positioned should an economic slowdown materialize. And now I'll turn the call over to Scott.

Speaker 4

Thank you, Mark. Turning to Slide 11. I'm excited to speak to our Wealth Management, Mortgage and Trans Fund businesses. These are businesses that we have been committed to for a long time and run as deep as our roots. In 1918, we launched the 1st trust company in Oklahoma and added asset management in 1949, demonstrating our commitment to innovative financial services for our clients.

Speaker 4

Today, BOKF provides a rock solid foundation of stability, knowledge and experience that individuals, families and institutions can rely on. We operate these fee income businesses at scale, which gives us strong operational leverage and the ability to compete well with larger organizations. We made the strategic decision to invest in these and other high ROE fee income businesses that provide revenue diversity, which has played out well for us. 41% of BOKF's revenue comes from fee income businesses, which is a peer leading contribution to earnings and provides stability, especially when net interest income exhibits volatility. To mention a few stats that demonstrate the scale and strength of these businesses, we are a top 10 dealer of agency mortgage backed securities, the number one underwriter and financial advisor of Texas Independent School District Bonds for 2023 the 8th largest corporate trustee bank ranked by number of trusteeships, a top 10 electronic funds transfer processor in the United States through our Transfund business, which provides debit and credit issuing processing or EFT for almost 500 banks and credit unions throughout the U.

Speaker 4

S, representing close to 1,000,000,000 transactions last year alone. And finally, we're a top 50 U. S. Mortgage originator and service over $21,000,000,000 in mortgage loans, representing more than 122,000 accounts. Turning to this quarter.

Speaker 4

Total fee income contributed 200,600,000 dollars of revenue, representing 41 percent of total revenue. I'll first cover the detail of our Markets and Securities businesses, again on Slide 11. Our trading fees, which are constituted primarily in fixed income trading increased by 5.4% to $37,500,000 during the quarter driven by slightly higher trading volumes and spreads versus the prior quarter. Mortgage Banking revenue increased 48 percent to $19,000,000 This was driven by improvement in the mortgage origination market and positive seasonal trends resulting in increased volume. Margins have also increased as the pooling of COVID-nineteen forbearance loans we previously repurchased continues to migrate lower now reaching some of their lowest historical levels.

Speaker 4

As a reminder, brokerage and insurance was down 24% to $4,700,000 This was due to the exit of BOK Financial Insurance in the Q4 last year. Turning to slide 12 to cover our Asset Management and Transaction businesses. Asset Management revenue has also increased 8% to $55,300,000 driven by an increase in AUMA of just under $800,000,000 with spreads increasing slightly. Transaction card revenue decreased by 11.6% to $25,500,000 driven by normalized activity following elevated levels experienced in Q4. Fee based businesses tend to have a higher return on capital versus traditional net interest income related businesses, but also a higher efficiency ratio as you must build scale and cost structure to operate them effectively.

Speaker 4

Therefore, as you see with the percentage of fee income increase, you should expect to see a higher efficiency ratio and a higher return on capital. And now I'll hand the call over to Marty to cover the financials.

Speaker 5

Thank you, Scott. Let me start by covering 2 items in the quarter. First, we accrued $6,500,000 as an estimate of the additional special assessment we expect from the FDIC in June of this year. 2nd, as previously disclosed, we've repositioned a portion of our securities portfolio in March, taking a $45,000,000 pretax charge for the quarter, which will improve net interest income going forward. We hold visavishairs that are currently equivalent to 400,420 common shares.

Speaker 5

Visa's exchange program was initiated on April 8 and should allow us to monetize 50% of RB shares in the 2nd quarter. The anticipated gain from this exchange in Q2 should more than offset the $45,000,000 securities loss we took in Q1, leaving a residual amount that we expect to contribute to our charitable foundation in Q2. And one last observation on this topic. When it comes to portfolio restructuring, our focus is on generating incremental economic value and we look for the earn back period to be shorter than the weighted average life of the securities involved. For the Q1 transaction, the payback period was roughly 2 years versus a weighted average life of 3.4 years for the securities sold indicating a very good economic pickup.

Speaker 5

Turning to slide 14. Capital and liquidity continue to be robust driven by our risk management framework which recognizes that capital liquidity and interest rate risk management are all interconnected disciplines. Our adjusted tangible common equity ratio inclusive of all securities portfolio losses stands at 7.92%. When comparing this capital metric to that of the 20 largest banks in the U. S.

Speaker 5

As of Q4 'twenty three, ours is the 3rd highest. Additionally, we have strong capital ratios across each of the regulatory capital metrics. Our current loan to deposit ratio stands at 68% and our coverage of uninsured and non collateralized deposits has remained robust at 179% with this quarter's deposit growth of $1,400,000,000 Being very well positioned in capital and liquidity has enabled us to actively pursue organic growth opportunities as well as share buybacks. During the Q1, we repurchased just over 6 116,000 shares of common stock at an average price of $83.89 per share. We will continue to be opportunistic about share repurchase over the coming quarters.

Speaker 5

Turning to Slide 15. 1st quarter net interest income was $293,600,000 and the pace of decline continued to subside as expected. The linked quarter decrease was $3,100,000 with $1,000,000 of that due to day count. The interest margin was 2.61 percent, a 3 basis point decrease compared to Q4, primarily driven by DDA migration and to a lesser extent by deposit repricing. At the end of the Q1, our through the cycle deposit beta was 68% and DDA was 24% of total deposits.

Speaker 5

Turning to Slide 16, linked quarter total expenses decreased $43,700,000 or 11.4 percent, mostly attributable to the FDIC special assessment in the prior quarter. We recognized the initial assessment of $43,800,000 in the 4th quarter and another 6 $500,000 in the Q1. This results in a linked quarter decline of $37,300,000 and explains most of the total expense decline in the quarter. All remaining expenses were largely consistent with prior quarter activity. Turning to Slide 17, this provides our outlook for 2024.

Speaker 5

We have good momentum in commercial loan growth and expect total loan growth on a period end basis to be 5% to 7%. We've provided a numeric range on this item, but our outlook is basically the same as it was last quarter. We believe net interest margin has reached a trough and total net interest income for 2024 will be just over $1,200,000,000 We did assume 2 rate cuts by the Federal Reserve in 2024 consistent with the forward curve as of a couple of weeks ago. We expect 2024 provision expense to be similar to 2023 levels and the combined reserves to total loans ratio to remain steady as we grow outstandings and economic conditions persist. With that, I would like to hand the call back to the operator for Q and A, which will be followed by closing remarks from Stacy.

Operator

Thank We'll take our first question from Jon Arfstrom from RBC Capital Markets.

Speaker 2

You hear me all right? We can now, Jon. Good to hear from you. Okay.

Speaker 6

Good. On Slide 8, I don't know if it's for you, Stacy or Mark, but can you touch a little bit on the general business trends you're seeing in terms of the pipelines? I know, Mark, you combined services and general business, but I'm just curious, what you're seeing in terms of the pipelines and if they're changing at all?

Speaker 3

Yes. So far, when we're looking at our C and I pipelines, we still see pretty good strength. I mean, our effort has been out to take advantage of opportunities, given our liquidity position, our credit metrics and so forth to be open for business and active calling efforts. And when some of our competitors have pulled back a little, have been able to build the pipeline pretty well. When you are looking at healthcare, it's been growing pretty well also.

Speaker 3

Energy is just more reflective of just some of the things that are going on in the economy right now. So overall, we expect to continue to see the kind of growth on the commercial side that we experienced in the Q1.

Speaker 2

John, this is Stacy. I mean, I think if you think about kind of how we think about it, I mean, commercial growth broadly, given our footprint, given kind of our liquidity and capital position, we're really optimistic about that. I mean, the business lines are very excited about kind of their pipelines and what they see coming over time. I think the only real headwind that we don't know how to forecast particularly well is how commercial real estate will behave, whether we get pay downs there. If we do, it takes time to kind of replace those over time.

Speaker 2

We have plenty of headroom in commercial real estate to make loans today, but it takes a little while there. And so that I think I mentioned on the call last quarter that was really the only wildcard we had I think from our guidance. And I still think that's true today. I think we're very optimistic about commercial. I think commercial real estate, we're optimistic about our ability to grow the commitments there, but the timing of when those will fund will be the wildcard relative to payoffs there.

Speaker 6

Okay. Good. That's helpful. And then just one for you, Marty. Not a lot to pick on here, but you talked about DDA migration.

Speaker 6

And curious how you're feeling about that. And is the pressure burning out there? Are there any themes you'd like to call out on the DDA migration?

Speaker 5

Sure. Yes. And we do think that the pretty much leveled out. And then even as you look

Speaker 7

into April, we saw a little bit of a decline in

Speaker 5

the quarter. So February March were pretty much leveled out. And then even as you look into April, we saw a little bit of build in April pre tax season. And then April 16 that came out and get us where that all landed was still consistent with where we were in February March. So that gives us pretty good confidence that, that is reaching a burnout point there.

Speaker 5

I do think there is still just a little bit more to go. So don't think that it's absolutely done, but we feel pretty good about the outlook.

Speaker 6

Okay. Thank you. I'll step back. Thanks.

Operator

We'll take our next question from Peter Winter with D. A. Davidson.

Speaker 8

Good morning.

Speaker 9

Hi, Peter.

Speaker 8

Your credit trends have been outstanding. I think you guys are one of the few banks to see a decline in non performing assets. Could you just provide a little bit more color on the criticized and problem loans? And then secondly, I just guess based on the provision expense guidance, you're still expecting that higher net charge offs in the second half of the year?

Speaker 3

Well, I'll take the second part of that first. With regards to provision, we don't really anticipate higher net charge offs for the balance of the year. Our indications are based on criticized classified level, non performing improvement that we'll see something more consistent with what we have experienced in the last few quarters. The higher provision would come about through loan growth and that would be the driver for it and the desire to keep our percentage reserve relatively flat to the overall loan portfolio. With regards to the individual criticized assets and so forth, We don't see anything that is systemic in any particular portfolio.

Speaker 3

And in fact, our some of our CRE has come down and we've been able to exit a number of our non performing loans, which was one of the results of why we had reduction last quarter as opposed to charge offs. So we've been able to manage our criticized and classified effectively. And we just think that is going to be continued to be reflected in the future based on

Speaker 2

what we're seeing today. Peter, we're awfully good about the credit quality here. I think that you rightfully pointed out that's a big part of our story this quarter. I think that we differentiated ourselves here in terms of how we underwrite and how we think about that. We can have strong asset quality and good growth and I think we're doing both of those here.

Speaker 2

Our kind of forecasting in asset quality is good for about 6 months and then it gets real hazy. And so the reason we kind of talked about maybe in the back half of the year is mostly just the expectation at some point that there'll be a reversion to the mean and things will start to look like they did pre COVID. We thought maybe we were heading that direction in the Q4. We had modest deterioration in criticized and classified In South Carolina, we were starting to begin that migration, but that did not play out in the Q1 and our outlook here is very positive based on what we know about the book and how we see the current criticized classified non performing behaving today. And so we feel really good.

Speaker 2

Understand at some point, I've been teased a lot internally about I keep saying it's unsustainably good, but it is, but it feels like it's going to stay that way for at least the next 6 months or so.

Speaker 8

Got it. That's really helpful. And then on a separate question, you did maintain the fee income guidance despite the updated outlook for 2 rate cuts. The previous guidance was no rate cuts and you had mentioned like lower rates would actually benefit fee income. So would you lean more towards maybe the upper end of the range now that you've got some rate cuts built into your forecast?

Speaker 5

Yes, Peter, I'd say that we do feel good about the trajectory within that business. Mortgage is certainly even saw a lift in mortgage and that will be sustainable. That's certainly helped by that. The trading businesses are supported by that kind of environment. And then the fiduciary businesses are also supported by that environment just given the asset that the impact on asset valuation.

Speaker 5

So yes, we feel great about that line item.

Speaker 8

And any sense on maybe if it comes in towards the upper end of the range just given now some of the benefits with freight cuts?

Speaker 5

Yes. I don't know. I don't want to put a pinpoint on any particular part of the range, but we've certainly got good momentum in those businesses and we expect that to carry forward through the year.

Speaker 4

The only thing I would add, this is Scott, is that on the trading front, we've settled into kind of an uncertainty period whether we're going to be looking at rate cuts or not. And as you can see from the Q1, the business levels and the activities continue to be slightly elevated even without the cut. So we feel good about where we're positioned really regardless of the direction that the Fed might take there.

Speaker 8

Got it. Thanks, Scott.

Operator

We'll take our next question from Ben Gurlinger with Citi.

Speaker 8

Hi. Good morning.

Speaker 10

Good morning, Ben.

Speaker 11

I was just curious in terms

Speaker 12

of just the I get the growth kind of numerical fine tuning. Some of your competitors have kind of indicated the back half of the year or as others in the same footprint have also said kind of more linear. Just if you exclude the CRE kind of noise and pay downs potential, like should we expect growth to be fairly linear from here and through the end of the year or is it a little bit more weighted towards the back half?

Speaker 2

That's a tough question to answer. I think generally speaking, it's going to be linear more so than weighted in the back half. I think that's my expectation. But as you know, loan growth is lumpy. You have a month where it's flat and you have a month where it's bigger, but over time that trajectory should be pretty steady and more linear from my perspective than back loaded.

Speaker 12

Got you. That's helpful. And then I know that you now have 2 cuts in the guidance.

Speaker 9

At the beginning of

Speaker 12

the year, we talked about how this quarter is probably the margin trough and it seems like it should be. But you kind of look at a little bit of a mosaic here in terms of rate cut potential, if there are no rate cuts, do you have any sense of where the margin might be at the end of the year assuming your normal mix shift or flows that you're anticipating?

Speaker 5

Yes, Ben, so whether we do get those 2 rate cuts or not, we still think that our margin troughs here and see some stability here in the middle of the year and then you get an uptick later in the year. Our benefit that we get out of rate cuts is more from the fact that you get a steeper curve and that's something that builds over time. You don't get a gigantic benefit in 1 quarter from that. So either way, we see the margin coming up towards the end of the year.

Speaker 2

I mean, I think that's the important point that as you think about us on a go forward basis, think less about rate movements impacting net interest revenue or margin absolutely, because we tend to be pretty neutral from a rate risk perspective. But think more about a steepening of the yield curve. To the extent that there's a steepening, we're going to materially benefit from that over time. And so the steepening effect has a much bigger impact to us than the absolute whether rates go up or down on the short end.

Speaker 12

Got it. That's helpful. I appreciate it. Thanks for your time guys.

Operator

We'll take our next question from Will Jones with KBW.

Speaker 8

Hey, great. Good morning.

Speaker 2

Good morning, Will.

Speaker 9

Hey, guys. So I wanted to touch on the deposit growth you guys saw this quarter. I mean, it was obviously fairly notable. I was just hoping you could maybe just touch on what went right for you guys in the quarter. I know you call out as well trying to maybe swap some borrowings and replace with the deposits.

Speaker 9

Could you just talk us through some of the dynamics that you saw in the quarter and maybe what drove that nice growth?

Speaker 5

Yes. So Will that was us making offers to our existing customer base. And as we've talked about before, we have a large portion of our customer base that has both money held on balance sheet of their liquid assets. Some of it's held on balance sheet and some of that's held in our broker dealer or the wealth business and that we're able to toggle that back and forth with calling efforts. And so we just did some of that and that was very fruitful and that just worked out exactly as designed for us.

Speaker 9

Okay. And then just with respect to the deposit growth guidance, it feels like maybe a lot of that growth is just pulled forward in the 1st part of the year here. And is the thought that deposit balances may be just kind of level out and flat line for the remainder of the year?

Speaker 5

Yes. As a general rule, we want to keep deposit growth and loan growth more or less lined up. We're very comfortable with that 70% loan to deposit ratio area defining that as a broader area. And so, yes, it's reasonable to think that those are going to be kind of in line the rest of the year.

Speaker 9

Yes. Okay, great. And then back to the margin discussion, I hear it. So maybe margin trough this quarter, we see stability and then up margin at the end of the year. Does that kind of imply that deposit cost will peak maybe in the Q3 or late in

Speaker 8

Q2? Yes. So I don't

Speaker 5

know that I'd say deposit costs peak in particular, but the couple of drivers that are positive for margin are the fixed rate securities portfolio. Each quarter $500,000,000 or a little more will reprice from the lower existing rate to reprice up to current rates. The same dynamic happens in the loan book, a little smaller dollar amount, but the same dynamic of pricing up that fixed rate portion of the loan book. And those continue for a while in multiple quarters. And then on the deposit side, you're just seeing each quarter the deposit pressure just gets less and less and so that gets much smaller.

Speaker 5

It might not go to actual 0, but the lines cross here we believe this quarter.

Speaker 9

Okay. That's helpful. Thanks guys.

Operator

We'll take our next question from Tamir Braziler with Wells Fargo.

Speaker 10

Hi, good morning.

Speaker 5

Good morning, Timur.

Speaker 10

Following up on that last line of commentary, just looking at time deposits of 4th 5th bar was the average rate for the quarter. What's kind of the terminal rate there and what is the offer that's currently being promoted in your markets?

Speaker 5

Yes. So if you just look at our highest offer, let's see, Depending on term, it's kind of $485,000,000 to $510,000,000 would be the highest particular offer. And that's not every market has the same offer, but that's the high point. And we actually brought those down versus a quarter ago by 5 or 10 basis points. And so that gives you a sense for a little bit of the easing pressure that we are seeing.

Speaker 5

It's hard to say exactly what the endpoint is because it's not everything goes to that high offer because that's particular terms with particular specials. So the terminal point is certainly lower than that. And it will just kind of depend on the mix within that portfolio. But you're right, that does kind of asymptotically slow down, if you will, over time.

Speaker 10

Okay. And then maybe just your broader appetite for time deposits here. So loan to deposit ratio now below 70%. You have plenty balance sheet liquidity. Is your appetite still the same for time deposits or can we actually see some of those maturities maybe roll off during the course of the year?

Speaker 5

Those are all core customers. I mean, none of that is anything that's like brokered or any of that. So it's not like there's a piece that is just going to roll off and go away. We're going to serve what customers are after. So a fair amount of that's in the consumer book.

Speaker 5

And so that's just kind of natural how a consumer book matures over a rate this part of the rate cycle. So we would expect that to continue to grow slowly as that consumer book just naturally makes that trend.

Speaker 2

And if you're concerned that we're adding to CDs at the time when the market is beginning to see rate declines. And so does that lock you into some higher cost of funds because of the growth there? We're set up. We can swap those back to floating through our treasury function as we begin to have a view around that so that we're not necessarily locked into that from a fixed rate perspective. We think that's a core deposit gathering operation that we need to have consistently going on.

Speaker 2

And so how we think about that will toggle with whether we swap it back to floating or not really around our interest rate risk profile and how we think about that. But you have to think about it more holistically than just that particular line item.

Speaker 5

And those maturities are within a year and some go a little bit longer in a year. Those line up well with the fixed rate portion of the loan book. And like Stacy said, to the extent that they don't line up well, we very easily swap those. And so that will work out well.

Speaker 10

Great. That's good color. And then maybe just a couple around the credit side. So looking at healthcare specifically, and I'm referring to Slide 10, we're seeing broader issues kind of pop up across the industry within that sector. And then you look at your healthcare portfolio pre pandemic and post pandemic and the results are pretty stark.

Speaker 10

I guess what changed in your maybe underwriting or anything else that's driving such outperformance post pandemic in that portfolio versus higher levels of charge off activities in 2017, 2018 2019?

Speaker 2

Yes. I don't know that our I don't see our performance is materially different here. I mean healthcare over a broad range of time has been a very strong asset quality portfolio for us. It's always had more volatility around criticizing classified level because the risk in that portfolio that we see is typically classification risk, not loss risk. And so our historical performance from a loss perspective in the healthcare book has been very strong.

Speaker 2

We had a couple of non core type healthcare loans several years ago that we had some losses around. But the portfolio is structured today around senior housing and healthcare systems and doctor practice groups and things like that. That portfolio has been around for a long time and has been a very strong credit performer for us. And how we underwrite it's consistent and we feel really good about that. I don't I think you're always vulnerable to having some classification risk in the healthcare book just because of the nature of it.

Speaker 2

But the loss history which is really what we focus on has been very stable in the core businesses that we're in today. Yes. And the

Speaker 3

only thing I'll add is there was just a segment of healthcare that we were in early or mid-twenty 10 that we exited like in 2017, 2018 that is no longer part of the portfolio. The core portfolio has always been the senior housing, which has been the stable

Speaker 10

portfolio. And just last for me, and I know it's a small cut comment, but maybe the NPL inflows from commercial real estate, what asset classes were those in and any kind of underlying thread between some of those migrations?

Speaker 2

Could you ask that again? You cut out for us just a second.

Speaker 10

Sure. So the NPL migration this quarter for commercial real estate, what sectors those were in and if there's any kind of underlying thread that tied those loans?

Speaker 2

Yes, I mean if you look at non performing loans for commercial real estate really modest increase, it's mostly attributable to a single office facility. We took a modest charge off on it this quarter and we expect it to be sold for no additional loss content by the end of the quarter. So we don't have any specific concerns around loss content today. It really was a single largely comprised of a single loan there, which is the increase there.

Speaker 10

Great. Thanks for the questions.

Operator

We'll take our next question from Matt Olney with Stephens.

Speaker 11

Hey, thanks. Good morning, everybody.

Speaker 2

Good morning, Matt. Good morning, Matt.

Speaker 11

Just a general question. I want to ask about the overall level of competition within your core lending businesses. I think over the last few quarters, we've talked about competitors pulling back and providing some opportunities for the bank to add new customers. I'm just curious if there's any change here. Are these competitors kind of still on their back seat?

Speaker 11

And then just kind of any update on loan spreads? Thanks.

Speaker 2

I think what you saw really was some of the regional banks and the larger regional banks trying to manage their capital levels and liquidity levels. And so we're less aggressive particularly on the larger end of the corporate side. And we've seen some benefit from that. I would say generally speaking, they're starting to put their toe back in the water a little bit not maybe like they were before last spring, but starting to come back into the market a little bit there. I think that I think spreads generally on the larger end of corporate side are going to be stable.

Speaker 2

I think until we get more clarity around Basel III Endgame and then maybe they widen a little bit there as folks figure out what the capital structure has to be. But generally speaking, I would say, corporate spreads have remained relatively flat. And that's our expectation that we see today, even with some being less aggressive perhaps than they've been in the past.

Speaker 11

Okay. Appreciate that, Stacy. And then on the expense side, I appreciate that the guidance here that you gave, no real change. But just remind me of the variability of that expense base. And if we were to assume the higher end of fees for the year, is it also reasonable that we should be assuming the higher end of the expense guidance?

Speaker 5

Yes. So on 2 businesses in particular, mortgage and brokerage and trading, those have a pretty direct link into the expense base. But those are really the 2 that you see that tight connectivity. And then just generally on expenses, we'll continue to make investments in the IT space and so the fees and the third party fees and the data processing costs, you might see some variability there. And then as you kind of know, the mortgage expenses, those are seasonally low in the Q1 and those are predictably a little higher than the other three quarters.

Speaker 5

But those are the only things I'd point out.

Speaker 8

Okay. Thank you.

Speaker 2

Thanks,

Operator

We'll take our next question from Brandon King with Truist Securities.

Speaker 8

Hey, good morning. Good

Speaker 10

morning. Good morning.

Speaker 7

So I noticed that unfunded commitments ticked down in the quarter. So I was wondering if you could provide us any context behind that?

Speaker 3

The only thing we've really seen is we've been able to generate new business and a lot of it is not being actively used yet versus construction piece of it that has to fund up over time. And on the commercial side, we've just seen utilization stay flat while we've added new customers. So the unfunded commitments is a reflection of just increased commitments overall and stable utilization rates.

Speaker 5

Other than the commercial real estate where they're not using theirs over time. And so that's where you see one of the decline factors.

Speaker 7

Okay. That's helpful. And then lastly for me, just in regards to commercial real estate, could you give us an update on what you're seeing in regards to extensions for loans that come up for maturity and just where customers are as far as the request?

Speaker 2

Yes. I think it's kind of business as usual for the most part. I mean, I think that as loans mature or come close to maturity, we work through that just like we have in any typical cycle. I think that at least thus far, it this doesn't appear a whole lot different than any kind of normal course of business. Borrowers have the option for us to do some kind of mini perm financing.

Speaker 2

So where you would put it on the amortization schedule if it's through the construction phase. And if the permanent market isn't accepting at that particular point in time, they can do what we call a mini perm with us. The loan amortizes and typically a 3 year type term and then they can kind of wait for the capital markets or the permanent financing markets to get in a better place. But really what we've seen, I mean we've had a very healthy portfolio. I mean the Q1 we had really good payoffs in the commercial real estate book which we really attribute to kind of having a healthy portfolio.

Speaker 2

And so it doesn't we're not seeing anything that's kind of out of the ordinary there.

Speaker 5

Yes. The payoff levels that we saw this quarter were much higher than the last couple of quarters. It almost felt like just normal course of business repayment rates in that portfolio, which like Stacy said indicates just a pretty healthy underlying portfolio.

Speaker 7

Yes, very helpful. Thank you for taking my questions.

Speaker 2

We said from the very beginning in commercial real estate, there's 2 things that matter, geography and recourse. And I think that that's really bearing out. And so the fact that we have 90% of our commercial real estate loans have some form of guarantor support and recourse is a differentiator here and we're really seeing that show up in our portfolio.

Speaker 8

Great. Thank you.

Operator

Thanks, Frida. And we have a follow-up question from Timur Braziler with Wells Fargo.

Speaker 10

Hi, thanks for the just a quick one on that line of comments. Who was taking you guys out on the payoff activity? Was it other banks, insurance companies? I guess where were those pay downs going to?

Speaker 2

Largely permanent financing sources. So Lifeco's anywhere that you typically see a longer term non recourse financing in commercial real estate is kind of where those takeouts are coming from. It's not coming from other banks.

Speaker 8

Great. Thanks.

Operator

Thank you. And that does conclude the question and answer session. I'd like to turn the call back over to Stacy Kymes for any additional or closing remarks.

Speaker 2

Thank you to everyone for the questions and discussion and spending time hearing about the unique story we believe we have to tell this morning. We've always predicated our decisions on generating long term value for shareholders, while effectively managing our risk and I think that was on full display this quarter. We remain focused on these core values and are excited about the opportunities ahead of us. We appreciate your interest in BOK Financial and would encourage you to reach out to Heather if you have any questions at hwerleybokf.com.

Operator

Thank you. And that does conclude today's presentation. Thank you for your participation today and you may now disconnect.

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Earnings Conference Call
BOK Financial Q1 2024
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