BOK Financial Corporation (NASDAQ:BOKF) Q1 2024 Earnings Call Transcript

BOK Financial Corporation (NASDAQ:BOKF) Q1 2024 Earnings Call Transcript April 24, 2024

BOK Financial Corporation beats earnings expectations. Reported EPS is $1.91, expectations were $1.72. BOKF isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Heather Worley: Good morning and thank you for joining us to discuss BOK Financial’s first quarter 2024 financial results. Our CEO, Stacy Kymes, will provide opening comments; Marc 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. Our CFO Martin Grunst will then discuss financial performance for the quarter and our forward guidance. A slide presentation and press release are available on our website at bokf.com. We refer you to the disclaimers on Slide 2 regarding any forward-looking statements made during this call. I’ll now turn the call over to Stacy Kymes who will begin on Slide 4.

Stacy Kymes: Thank you, Heather. We’re excited to welcome Heather to our team. We are pleased to report earnings in the first quarter of $83.7 million 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 $123.2 million and EPS would have been $1.91 per share. Before I discuss the highlights from the first quarter, I would like to talk about our strategy. 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. 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 anticipated. We’ve now added 13 employees in that market and are already seeing meaningful new business generation.

As a further part of our expansion in Central Texas, we also have twelve wealth employees and seven mortgage employees in the Austin market. 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. 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. 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% of total commitments versus tier one capital and reserves, and today we have approximately 22% of outstanding balances in commercial real estate. 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 first quarter 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 our 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. Moving to Slide 5, period end loan balances increased $268 million 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 two 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 million or 1.36% of outstanding loans at quarter end, which is above the median of our peer group. Finally, we repurchased over 616,000 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 Marc.

Marc Maun: 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. Approximately 81% of our commercial and CRE loans are floating rate or repricing 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. 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 a 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 2.2% and CRE down 1.9%. 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 first 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. Combined services and general business loans, our core C&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 two thirds of the portfolio is in senior housing, combining a diversified mix of skilled nursing facilities that are Medicare-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 is focused on regional operators with multiple locations for diversity and deep knowledge of their markets. 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 rates and payment shocks. Setting aside our disciplined underwriting standards, we believe that there are two key factors that will differentiate our credit performance in this cycle. First is guarantor [ph] 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. Second 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. Non-performing assets, excluding those guaranteed by U.S. Government agencies, decreased $25 million this quarter. The resulting non-performing assets to period end loans and repossessed assets decreased 11 basis points to 51 basis points. Non-accruing loans decreased $26 million linked quarter. Committed criticized assets continue to remain well below pre-pandemic levels as a percentage of capital. Net charge-offs were $5.5 million or 9 basis points annualized for the first quarter 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.

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 million or 1.36% of outstanding loans at quarter end with the $8 million provision reflecting a stable operating environment and loan growth expectations. The reserve is sufficient to cover our non-performing assets by three 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 economic conditions. 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.

Scott Grauer:

TransFund: 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 ten dealer of agency mortgage backed securities, the number one underwriter and financial advisor of Texas independent school district bonds for 2023, the eight largest corporate trustee bank ranked by number of trusteeships, a top ten 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.S., representing close to 1 billion transactions last year alone.

And finally, we’re a top 50 U.S. mortgage originator and service over $21 billion in mortgage loans representing more than 122,000 accounts. Turning to this quarter, total fee income contributed $200.6 million of revenue, representing 41% 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 $37.5 million during the quarter, driven by slightly higher trading volumes and spreads versus the prior quarter. Mortgage banking revenue increased 48% to $19 million. 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-19 forbearance loans we previously repurchased continues to migrate lower, now reaching some of their lowest historical levels.

As a reminder, brokerage and insurance was down 24% to $4.7 million. This was due to the exit of BOK Financial Insurance in the fourth quarter last year. Turning to Slide 12 to cover our asset management and transaction businesses. Asset management revenue has also increased 8% to $55.3 million, driven by an increase in AUMA of just under $800 million with spreads increasing slightly. Transaction Card revenue decreased by 11.6% to $25.5 million, 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.

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.

Martin Grunst: Thank you, Scott. Let me start by covering two items in the quarter. First, we accrued $6.5 million as an estimate of the additional special assessment we expect from the FDIC in June of this year. Second, as previously disclosed, we repositioned a portion of our securities portfolio in March, taking a $45 million pretax charge for the quarter, which will improve net interest income going forward. We hold Visa B shares that are currently equivalent to 400,420 common shares. Visa’s exchange program was initiated on April 8 and should allow us to monetize 50% of our B shares in the second quarter. The anticipated gain from this exchange in Q2 should more than offset the $45 million 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 two years versus a weighted average life of 3.4 years for the securities sold, indicating a very good economic pick-up. Turning to Slide 14, capital and liquidity continued 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., as of Q 423, ours is the third 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 $1.4 billion. Being very well positioned in capital and liquidity has enabled us to actively pursue organic growth opportunities as well as share buybacks. During the first quarter, we repurchased just over 616,000 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. Turning to Slide 15. First quarter net interest income was $293.6 million and the pace of decline continued to subside as expected.

The linked quarter decrease was $3.1 million, with $1 million of that due to day count. Net interest margin was 2.61% 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 first quarter, our through the cycle deposit beta was 68% and DDA was 24% of total deposits. Turning to Slide 16, linked quarter total expenses decreased $43.7 million or 11.4%, mostly attributable to the FDIC special assessment in the prior quarter. We recognized the initial assessment of $43.8 million in the fourth quarter and another $6.5 million in the first quarter. This results in a linked quarter decline of $37.3 million 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. 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 the trough and total net interest income for 2024 will be just over $1.2 billion. We did assume two 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&A, which will be followed by closing remarks from Stacy.

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Q&A Session

Operator: Thank you. [Operator Instructions] We’ll take our first question from Jon Arfstrom from RBC Capital Markets.

Jon Arfstrom: Hear me all right?

Stacy Kymes: We can now, Jon, good to hear from you.

Jon Arfstrom: Okay, good. On Slide 8, I don’t know if it’s for you, Stacy or Marc, but can you touch a little bit on the general business trends you’re seeing in terms of the pipelines? I know, Marc 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?

Marc Maun: Yes, still far when we’re looking at our C&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, we’ve been able to build a pipeline pretty well. When you’re looking at healthcare, it’s been growing pretty well. Also, 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 first quarter.

Stacy Kymes: Jon, this is Stacey. I mean, 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. 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.

Jon Arfstrom: 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 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?

Martin Grunst: Sure, yes. And we do think that the pressure is burning out, as you say. So if you look just within the quarter, the declines we saw were pretty much all in January. So February and 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 where that all landed was still consistent with where we were in February and March. So that gives us pretty good confidence that that is reaching a burnout point there. 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.

Jon Arfstrom: Okay. Thank you. I’ll step back, thanks.

Operator: We’ll take our next question from Peter Winter with D.A. Davidson.

Peter Winter: Good morning.

Stacy Kymes: Hey, Peter.

Peter Winter: 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.

Martin Grunst: 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 levels, 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. And in fact, 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 a 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 reflective in the future based on what we’re seeing today.

Stacy Kymes: Peter, we’re awfully kind of feel good about the credit quality here. I think that you rightfully point out that’s a big part of our story this quarter. I think that, we’ve 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. Our kind of forecasting and asset quality is good for about six 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 in that direction in the fourth quarter.

We had modest deterioration in criticized and classified and thought kind of we were starting to begin that migration, but that did not play out in the first quarter. 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. 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 six months or so.