BOK Financial Corporation (NASDAQ:BOKF) Q4 2023 Earnings Call Transcript

BOK Financial Corporation (NASDAQ:BOKF) Q4 2023 Earnings Call Transcript January 24, 2024

BOK Financial Corporation 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 Fourth 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. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the presentation over to Martin Grunst, Chief Financial Officer for BOK Financial Corporation. Please proceed.

Martin Grunst: Good morning, and thank you for joining us to discuss BOK Financial’s fourth quarter 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. I will then discuss financial performance for the quarter and our forward guidance. PDFs of the slide presentation and fourth quarter press release are available on our website at bokf.com. We refer you to the disclaimers on Slide 2 regarding any forward-looking statements we make during this call. I’ll now turn the call over to Stacy Kymes.

Stacy Kymes: Thank you, Marty, and good morning everyone. Beginning on Slide 4, we reported net income of $82.6 million or $1.26 per diluted share for the fourth quarter, which includes a $0.52 per share impact from the FDIC special assessment. I am exceptionally proud of the BOKF team and our results this year. Our focus at BOKF has always been on providing long-term shareholder value driven by our diverse business model and talented team, both of which empower us to perform well relative to our industry during any economic environment. This was once again proven when the industry faced stress in the first half of the year and our company was well prepared. Our disciplined risk management, which extends beyond the credit risk management that has long been a strength, resulted in strong levels of capital and liquidity at an important time.

We took advantage of this position to thoughtfully grow when others are pulling back. We’ve made real investments in growing our core C&I, while also investing in people and new markets like Central Texas. While the fourth quarter was exceptionally noisy with numerous non-recurring items, our core results were very strong, resulting in a great starting point for 2024. We continue to make strategic decisions to deploy our capital where growth and returns are highest. This was reflected in our decision to exit our insurance brokerage and consulting business in the fourth quarter. This resulted in a pre-tax gain of $28 million after transaction expense, which we used to opportunistically restructure a small portion of our available for sale securities portfolio, which will be accretive to net interest revenue and the margin in the months ahead.

Staying on this slide, our efficiency ratio was 72% for the quarter. This falls to 67% excluding the impact of the FDIC special assessment and the activity related to the sale of our insurance brokerage and consulting business, which Marty will highlight later. Let me briefly diverge and comment on the FDIC special assessment, which I understand most will see as non-recurring and normalized for the period. The FDIC methodology was flawed and did not use the root cause of the issue which was at low levels of fully-loaded tangible capital caused by poor asset-liability risk management decisions. The final rule was disappointing as they ignored many thoughtful comment letters, including our own. They announced the public hearing, subsequently canceled the public hearing before voted three-two along partisan lines to adapt the final rule.

This continues a disconcerting trend of increasing partisanship in banking regulations. U.S. is the only country that has allowed partisanship to invade banking regulatory process. Banking is a noble profession. We are well-aligned with our customers. Collaboration with our industry is necessary and a missing element today. Moving on, we believe the strategic decisions and investments we’ve made this year have us well-positioned for success in the long-term, and our diverse operating model will continue to operate successfully in any market environment going forward. Turning to Slide 5, period-end loan balances increased $181 million or approximately 1% linked quarter with growth in both C&I and commercial real estate. Loan growth did slow in the fourth quarter, but our teams remain confident in our pipelines as we move forward.

Both period-end and average deposits continued to grow this quarter. Our loan-to-deposit ratio was stable at 70.3%, remaining well below our peers and providing significant on-balance sheet liquidity to meet future loan or other liquidity demand. While our cost of deposits continued to increase this quarter, the pace was less than half the level we’ve experienced the previous three quarters, allowing our net interest margin to stabilized. Marty will comment more about net interest revenue, but we believe we are very close to the trough. Our credit remains very strong and we have a combined reserve of $326 million or 1.36% of outstanding loans at quarter-end, which is considerably above the median of our peer group. Finally, we repurchased 700,237 shares this quarter to reflect our long-term confidence in the company and to take advantage of attractive repurchase valuations.

I’ll provide additional perspective on the results before starting the Q&A session. But now, Marc Maun, will review the loan portfolio and our credit metrics in more detail. I will turn the call over to him.

Marc Maun: Thanks, Stacy. Turning to Slide 7, period-end loans were $23.9 billion, growing $181 million or almost 1% linked quarter. Total C&I loans increased $84 million or 0.6% linked quarter with year-over-year growth of $591 million or 4.2%. Commercial real estate loans grew $96 million, or 1.8% linked quarter and have increased $731 million or 15.9% year-over-year. Compared to December 31, 2020, CRE balances have grown at a modest 4.1% annualized growth rate. Growth this quarter was primarily driven by multifamily properties with an increase of $138 million, and industrial facility loans with an increase of $43 million. This growth was partially offset by a decrease in $72 million in office loans, bringing the total office loan portfolio to its lowest point since 2018.

The year-over-year CRE growth of $731 million was also driven by multifamily and industrial loans, and again, partially offset by a decline in office loans. We have an internal limit of 185% of Tier 1 capital and reserves to total CRE commitments, and we’re presently at 172%. That limit is based on total commitments, so we do have ample room for continued modest growth in outstanding CRE balances as construction loans fund up. As of December 31, CRE balances represented 22% of total loan, consistent with the prior quarter, a ratio well below our peers. Combined services and general business loans, our core C&I loans increased $77 million or 1.1% with year-over-year growth of $281 million or 4%. These combined categories are 30% of our total loan portfolio.

Healthcare balances increased $60 million or 1.5% linked quarter, and have grown $298 million or 7.8% year-over-year, primarily driven by our senior housing sector. Healthcare loans represented 17% of total. Energy loan balances decreased $53.5 million linked quarter and have increased $12 million or 0.4% year-over-year, with period-end balances at 14% of total period-end loans. Year-over-year, loans have grown $1.3 billion or 6%. Excluding PPP loans, Q4 2023 extends the linked-quarter loan growth to nine consecutive quarters. Our current pipeline is strong, and combined C&I and CRE commitments increased 2% linked quarter. We expect continued strong momentum to drive additional loan growth in 2024. Turning to Slide 8, you can see that our credit quality continues to be exceptionally good across the loan portfolio with credit metrics well below historical norms and pre-pandemic levels.

Non-performing assets, excluding those guaranteed by U.S. government agencies, increased $26 million this quarter. The resulting non-performing assets to period-end loans and repossessed assets did increase 10 basis points to 0.62%. Non-accruing loans increased $26 million linked quarter, primarily driven by an increase in healthcare loans. The increase is consistent with non-accrual fluctuations in a narrow range experienced over the past two years with no indication of systemic issues. Committed criticized assets were 10.2% of Tier 1 capital and reserves at year-end 2023, the second consecutive year below 10.5% and the third below 13% compared to an 18% ratio pre-pandemic. The provision for credit losses of $6 million in the fourth quarter reflects a stable economic forecast and continued loan growth as well as continued low net charge-offs.

Net charge-offs were $4.1 million or 7 basis points annualized for the fourth quarter and have averaged 8 basis points over the last 12 months, continuing the trend of performance far below our historical loss range of 30 basis points to 40 basis points. Looking forward, we expect net charge-offs to remain below historical norms. The markets continue to be focused on the office segment of real estate given the trends in workforce preferences. Our exposure to loans secured by office CRE continues to decline as we intentionally manage that segment down, now representing less than 4% of our total loan portfolio. Our office maturities are generally rateable over the next three to four years and we have a mini-perm option if the markets are not conducive to long-term finance.

The combined allowance for credit losses was $326 million or 1.36% of outstanding loans at quarter-end. The reserve is sufficient to cover our non-performing assets by 2.2 times. The total combined allowances available for all losses and any apples-to-apples industry comparison should include the combined reserves. We expect to maintain an appropriate reserve supporting loan growth and reflect economic conditions. Overall, we remain in a solid credit position today with a stable economic outlook. While our current credit metrics may be unsustainable in weaker economic environment, we have a history of outperformance during past credit cycles and are well-positioned should an economic slowdown materialize in the quarters ahead. I’ll turn the call over to Scott.

Scott Grauer: Thanks, Marc. Turning to Slide 10. Total fees and commissions were $196.8 million, relatively consistent with the previous quarter. However, the previous quarter included record high results for our wealth management segment, with fourth quarter’s wealth results still representing their third highest fee income quarter ever. Trading fees increased $1.1 million as sales activities related to our institutional customers continued to improve, with some lift provided by our recent Memphis expansion, partially offset by a linked-quarter decline in our MBS trading activities. Our bank-wide investment banking activities fell $2.4 million linked quarter as the third quarter benefited from a record quarter for wealth, public and corporate finance group.

Although down from their third quarter record high, the public and corporate finance group recorded their largest single transaction in their history during the fourth quarter. Wealth Management had a record year in 2023, achieving total revenue of $656 million, which eclipsed the prior record set in 2020 by $140 million, resulting in an annualized three year growth rate of 8.4%. This was driven by record 2023 revenue in the majority of our business units, including corporate trust, retirement plan and asset services, private wealth, customer hedging and investment banking. Transaction card revenue increased $2.5 million and all other fee-generating categories remained relatively unchanged compared to the previous quarter, demonstrating the consistent positive results we see from these business lines.

Our assets under management or administration were $104.8 billion at the end of the year, including an asset mix of 43% fixed income, 33% equities, 16% cash and 8% alternatives. Our diverse mix of fee income continues to be a strategic differentiator for us and allows us to perform well in a variety of economic environments. We consistently rank in the top decile for fee income as a percentage of total net interest revenue and noninterest fee income. Our revenue mix has averaged 38% during the last twelve months. With that, I’ll turn the call over to Marty.

Martin Grunst: Thank you, Scott. I’d like to start by describing a few of this quarter’s unusual items as some of them impact multiple line items. The sale of our insurance brokerage and consulting business resulted in a one-time pre-tax gain of $31 million, which is included in the other gains net line item and income statement. There were also two components of transaction-related expenses recorded in NIE: $2.5 million reflected in professional fees and services; and $925,000 included in personnel expense, which produce a net gain of $28 million. We took advantage of that opportunity to reposition our available for sale portfolio, resulting in pre-tax losses of $28 million, which is reported in the loss on available for sale securities line item.

The total of $40.5 million reported in the other gains net line item includes the $31 million insurance sale gain as well as $5.9 million of gain related to market value increases on deferred compensation assets, which is effectively offset with $5.4 million of increased personnel expense this quarter. The fourth quarter also included $3.1 million of accelerated recognition of tax expense as the result of exiting three low income housing tax credit investments. Without that item, the effective tax rate for the quarter would have been 23.1%. Turning to Slide 12, fourth quarter net interest revenue was $296.7 million, a $4.2 million decrease linked quarter. Net interest margin was 2.64%, a 5 basis point decrease compared to Q3. This quarter reflected a significant easing of deposit pricing pressure compared to recent quarters.

Interest-bearing deposit costs increased 26 basis points in the current quarter, however, this is the slowest pace we have realized since the Federal Reserve started raising fed funds rate in early ’23. Our cumulative interest-bearing deposit beta increased to 63% for the fourth quarter. DDA as a percent of total deposits came down to 27% as of December 31. 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 fourth quarter, net interest margin excluding the impact of trading assets was 3.03% versus 3.14% in the third quarter. I expect to see a small decline in net interest margin going into Q1, followed by relative stability after that.

Growth in earning assets during the quarter was driven primarily by C&I and CRE loans. Turning to Slide 13, liquidity and capital continued to be very strong on an absolute basis and versus peers. Total deposits grew $367 million on a period-end basis and the loan-to-deposit ratio decreased just slightly to 70.3%. This is stronger than our pre-pandemic level, well below the median of our peer banks, and positions us well for future loan growth. Average total deposits increased $388 million linked quarter with average interest-bearing deposits up $1.2 billion, partially offset by a $779 million decline in demand deposits. Brokered CDs remained an insignificant amount of our funding and decreased slightly in the fourth quarter. Our tangible common equity ratio is 8.29%, up 55 basis points due in large part to term interest rates falling late in the fourth quarter.

Adjusted TCE, including the impact of unrealized losses on held to maturity securities, is 8.02%. CET1 is 12.1% and if adjusted for AOCI, would be 10.5%. We have sufficient capital to support continued organic growth and opportunistic share buyback with a high degree of certainty knowing that the recent regulatory capital proposal is primarily focused on banks over $100 billion. Turning to Slide 14, linked-quarter expenses increased $59.8 million, up 18.4%, driven primarily by the $43.8 million FDIC special assessment. Personnel expense grew $12.2 million due to four primary factors. Regular compensation increased $3.2 million, due to salaries related to business expansion and expenses related to the sale of the insurance business. Sales-related activities led to a $4.0 million increase in cash-based incentive compensation.

Deferred compensation expense, which is driven by market valuations, increased $5.4 million linked quarter. And lastly, employee benefits increased $1.1 million linked quarter due to seasonal increases in health insurance costs. Non-personnel operating expenses grew $3.3 million, excluding the increase in FDIC insurance expense, with $2.5 million related to expenses on the sale of our insurance brokerage and consulting business. We also made a $1.5 million contribution to the BOKF Foundation in our continuing efforts to support the communities we serve. Turning to Slide 15, I’ll cover our expectations for 2024. We expect mid to upper single-digit annualized loan growth. Economic conditions in our geographic footprint remain favorable and continue to be supported by business in migration from other markets.

The competitive environment for loans should be a tailwind for us. We expect to continue holding our available for sale securities portfolio flat and to maintain a neutral interest rate risk position. We expect total deposits to grow modestly and the loan to deposit ratio to remain near 70%. Currently, we are assuming no additional rate changes by the Federal Reserve in 2024. We believe the margin will migrate slightly lower in Q1 of 2024 and expect net interest income to be near $1.2 billion for full year ’24. In aggregate, we expect total fees and commissions revenue in a range of $825 million to $850 million for 2024. Excluding the FDIC special assessment, we expect expenses to increase at a mid-single-digit growth rate as we continue to invest in strategic growth and technology initiatives, with revenue growth following at a slight lag.

As revenue growth is realized in 2024, we expect the efficiency ratio to migrate downward to approximately 65%. Our combined allowance level is above the median of our peers and we expect to maintain a strong credit reserve. Given our expectations for loan growth and the strength of our credit quality, we expect near-term provision expense to remain low and trend towards our normal credit costs in the second half of 2024. Changes in the economic outlook will impact our provision expense. Additionally, we expect to continue opportunistic share repurchase activity. I’ll now turn the call back over to Stacy Kymes for closing commentary.

Stacy Kymes: Thanks, Marty. This quarter puts a period on the end of the year with the second highest earnings BOK Financial has ever achieved. As many banks struggled in the turbulent economic environment, we proved once again that our strategically diverse revenue mix is built to withstand any storm. While other banks may be pulling back, we have positioned ourselves to be in a great liquidity and capital position to organically grow our business and perform very well in 2024. We have strong pipelines going into 2024. We’ve expanded our market reach. Our credit quality remains very strong, and our fee income businesses are positioned for solid growth. I’m very proud of the entire BOK Financial team who have worked so hard to deliver these strong results. With that, we are pleased to take your questions. Operator?

Operator: Thank you. [Operator Instructions] Our first question is from Jon Arfstrom with RBC Capital Markets. Please proceed.

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Q&A Session

Jon Arfstrom: Thanks. Good morning.

Martin Grunst: Good morning, Jon.

Stacy Kymes: Good morning, Jon.

Jon Arfstrom: Hey. Question for you, Marty. This is the question I’ve had a few times this morning on your numbers. Just some banks are assuming zero rate cuts, others assuming two to four, others are saying six. What is your net interest income and margin outlook look like with a few cuts and then maybe as much as six cuts? And I want to follow up and ask on fees as well, but maybe just net interest income first.

Martin Grunst: Yeah. Great question, Jon. And yeah, our exposure to rate declining is actually very small, it’s actually de minimis. But more importantly, if you get the forward curve with four, six or cuts in that range, that winds up with a steeper curve, and that’s actually better for us. So, in those scenarios where you’ve got the Fed cutting this year, it actually be marginally better for us.

Jon Arfstrom: Okay. And you’re referring to the $1.2 billion guide…

Martin Grunst: Exactly.

Jon Arfstrom: So, you’re saying if we get more cuts, that could go higher. Okay. Good to hear. And then, I guess a question for Scott as well. I’m assuming some of the fee guidance that you’re giving us assumes flat rates, what does lower — what would lower short-term rates do to some of your trading businesses and other fee income businesses?

Scott Grauer: Right. So, the two big beneficiaries of that decline would be in our mortgage entity itself with our mortgage originations in the mortgage group and then a pretty immediate increase in our mortgage trading, our MBS activity, both as they have historically, with lower rates have outperformed significantly in those lower rate environments. So, we’d get significant benefit from both of that market backdrop if rates were to rise — I mean, to decrease, I’m sorry.

Jon Arfstrom: Okay. You guys would actually welcome some cutting on the short end?

Stacy Kymes: There’s no doubt about that.

Jon Arfstrom: Yeah. Okay.

Stacy Kymes: The mortgage is performing very well for the environment, but it’s really at an all-time kind of low in terms of where we’re at from a production perspective. And so, any kind of movement downward in rates is really going to help that. And then that correspondingly is also going to help create more inventory, if you will, for the mortgage trading aspect of our business as well.

Scott Grauer: And so that level of production and activity revenue generation on the institutional trading group has maintained that flattish level with the pickup in other categories. So, our municipal trading activity has offset the declines in the MBS. But we would see that pick up in MBS, which we think would give us a lift overall.

Jon Arfstrom: Okay. Good. I’ll step back. But thank you guys. I appreciate it.

Stacy Kymes: Thank you, Jon.

Operator: Our next question is from Peter Winter with D.A. Davidson. Please proceed.

Peter Winter: Good morning.

Stacy Kymes: Good morning, Peter.

Peter Winter: I had a question on the — good morning, Stacy. I had a question on the loan side. Can you just talk about borrower sentiment today versus 90 days ago? And then just if you could elaborate on that point that the competitive environment should be actually a tailwind for you guys.

Marc Maun: Yeah. This is Marc. You’re absolutely right about it being a tailwind for us. Given our situation with liquidity, and capital position, and solid credit quality, we feel very comfortable that we are out-pursuing loan opportunities across our footprint and across our — all our lines of business. And we’re trying to take advantage of some of the peer banks that are cutting back a little bit or pulling back for their various reasons. So that is the effort as the focus of all our sales teams. And I don’t think there’s any particular area that we’re shying away from right now. As far as borrower sentiment goes, that’s — we’ve always been focused on customer selection. So we’re going to be focused on ones that are well positioned to grow or to expand during this timeframe and we’ll support those companies as we see appropriately.

Stacy Kymes: And Peter, the footprint gives us a lot of tailwind, too. When you think about just the economic expansion that’s happening in Texas, broadly, the new market we opened with San Antonio and Austin. Phoenix is doing very, very well. Denver’s hanging in there really well. So the footprint is going to give us some tailwind there too just by having better economic growth in the footprint states, and I think you’re going to get nationally as well. I think the only real concern I have — the risk to our guidance on loan growth really is commercial real estate. There’s some risk that as the year goes along, we get a higher elevated level of payoffs which could mute the total loan growth a little bit. But overall, we feel very good about the guidance that we provided given our footprint.

Peter Winter: Got it. Thank you. And then on credit, Marc, you mentioned the healthcare. Could you just give a little bit more color about the $40 million increase in healthcare non-performing loans?