BOK Financial Corporation (NASDAQ:BOKF) Q4 2022 Earnings Call Transcript

BOK Financial Corporation (NASDAQ:BOKF) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Greetings. Welcome to BOK Financial Corporation Fourth Quarter 2022 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to Steven Nell, Chief Financial Officer for BOK Financial Corporation. Thank you. You may begin.

Steven Nell: Good morning and thanks for joining us. Today, 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 provide details regarding the key financial performance metrics. And Marty Grunst, our recently named incoming CFO, will provide our forward guidance. PDF 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 our forward-looking statements we make during the call. I’ll now turn the call over to Stacy Kymes.

Stacy Kymes: Good morning. Thanks for joining us to discuss BOK Financial’s fourth quarter and 2022’s full-year financial results. Starting on Slide 4, fourth quarter net income was $168 million or $2.51 per diluted share. The strong results of the fourth quarter continued to build on the earnings momentum we have been developing throughout 2022. This quarter was the highest pre-provision net revenue in our history. Through the fourth quarter, we’ve now put together 5 straight quarters with solid core loan growth, with annualized core loan growth of 13%. Our fee business has remained strong for the quarter and for the year, despite the worst combined equity and fixed income markets since the late 1960s. As short-term interest rates continued to rise during the quarter, the combination of our asset-sensitive balance sheet and growth in earning assets drove a $36 million increase in net interest revenue and a 30 basis point linked-quarter increase in the net interest margin.

Credit also goes to our diverse fee base, with linked quarter fees stable despite the full-quarter impact of implementation of previously announced changes to our customer overdraft program, as well as the continued effects of the mortgage origination market downturn. We did experience an increase in linked quarter net charge-offs. However, our asset quality trends remain unsustainably good. In recognition of the strong growth in loans and unfunded commitments during the quarter, we did add to our credit loss reserve. The uncertainty in the economic outlook remained high, with slightly less favorable key economic factors this quarter. Turning to Slide 5. Period-end core loan balances increased $773 million or 3.5% linked quarter, with growth spread across C&I and commercial real estate.

Unfunded loan commitments grew $839 million linked quarter and have increased $2.9 billion over the last 12 months. Utilization rates remained slightly below historical norms, so capacity exists for continued growth in outstanding balances. Average deposit volumes continue to remain high compared to pre-pandemic levels. We did experience a decrease of $1.6 billion or 4% this quarter, with attrition in both interest-bearing and noninterest-bearing balances. These declines were consistent with industry trends in response to the continued efforts of the Federal Reserve to move short-term rates higher to slow inflation trends. Assets under management or administration grew $4.3 billion or 4.5% linked quarter and were down $5.2 billion or 4.9% compared to last year.

The market impact on equity this year which comprise approximately 1/3 of the total, was partially offset with new sales driving the performance. 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’ll turn the call over to Marc.

Marc Maun: Thanks, Stacy. Turning to Slide 7. Period-end loans in our core loan portfolio were $22.5 billion, up 3.5% linked quarter. Total C&I loans increased $591 million or 4.3% linked quarter and have increased $1.7 billion or 13.5% for the year, with growth across all sectors. Unfunded C&I commitments increased 7.4% linked quarter. Commercial real estate loans increased $133 million or 3% linked quarter and have increased $775 million or 20% for the year. This effectively returns those balances to our 2020 level after experiencing significant paydown activity in 2021. The annual increase was primarily driven from loans secured by multifamily residential properties and industrial facilities. Unfunded commercial real estate commitments increased 4.9% linked quarter.

We take a disciplined approach to our CRE lending by allocating 185% of Tier 1 capital and reserves to total CRE commitments. We are presently at the upper limit of that commitment range but do expect outstanding CRE balances to grow in 2023 as construction loans fund up. Health care balances increased slightly this quarter, up $18 million or 0.5% but have increased $430 million or 12.6% for the year, primarily driven by our senior housing sector. Health care unfunded commitments increased 16% linked quarter which we expect will produce additional balance growth. Energy balances increased $53 million or 1.6% linked quarter and have increased $418 million or 13.9% year-over-year. Unfunded commitments increased 9.6% linked quarter, resulting in an average utilization rate of approximately 49%, creating more capacity for continued balance sheet growth.

General business loans recorded a strong quarter, with balances increasing $368 million or 11.8% linked quarter. Loans in the general business category are mainly from our wholesale and retail sectors. Loans in our services sector also increased, with balances up $151 million or 4.6% linked quarter. Service sector loans consist of a large number of loans to a variety of businesses, including Native American, tribal and state and local governments as well as tribal casino operations, foundations, not-for-profit organizations, educational services and specialty trade contractors. Combined services and general business loans have increased $844 million or 13.9% year-over-year. Unfunded commitments in the combined services and general business categories increased 4.4% linked quarter, slightly lowering utilization rate.

Utilization rates continue to run below pre-COVID levels, so we remain well positioned to increase outstanding loan balances without it being predicated on any new customer acquisition. Over the last 12 months, core loans have grown $2.6 billion or 13%, the largest annual dollar increase in our history, excluding acquisitions and PPP loans. Although we don’t expect loan growth to continue at this pace, we believe that the momentum we’ve experienced over the past 5 quarters will continue as we enter 2023 and customers increase their line utilizations. Turning to Slide 8, you can see that credit quality continues to be exceptionally good across the loan portfolio. Nonperforming assets, excluding those guaranteed by U.S. government agencies, decreased $22 million this quarter.

Nonaccrual loans decreased $9 million and repossessed assets fell $15 million . In consideration of strong growth in outstanding loan balances and unfunded commitments this quarter, we added $15 million to our provision for expected credit losses. The level of uncertainty and the economic outlook of our reasonable and supportable forecast remained high and key economic factors were slightly less favorable to economic growth across all scenarios, with our downside forecast probability weighting unchanged linked quarter at 40%. Given our solid credit position today, a ratio of capital allocated to commercial real estate that’s substantially less than our peers and a history of outperformance during past credit cycles, we believe we are well positioned, should an economic slowdown materialize in the quarters ahead.

We realized net charge-offs of $15.5 million during the fourth quarter, essentially all related to a single credit. For the full year, net charge-offs averaged 10 basis points which is far below our historic loss range of 30 to 40 basis points. Looking forward, we expect net charge-offs to continue to be low. The combined allowance for credit losses was $297 million or 1.31% of outstanding loans at quarter end. We expect to maintain this ratio or to migrate slightly upward as we expect strong loan growth to continue as we — as well as continued economic uncertainty due to market conditions as the Fed pursues their goal of reducing inflation. Both of these conditions support credit provisions going forward. Now, I’ll turn the call over to Scott.

Scott Grauer: Thanks, Marc. Turning to Slide 10. Total fees and commissions were $194 million for the fourth quarter, relatively unchanged from last quarter. However, the third quarter included record-high results for our commodity and hedging activities as well as our bank-wide investment banking activities. Trading fees increased $9 million linked quarter as we took advantage of favorable market conditions and increased market volatility. Our commodity and hedging activities declined $4.7 million from last quarter’s record high, with linked quarter declines in both energy and interest rate derivatives. Bank-wide investment banking activities fell $2.4 million from last quarter’s record high. Commercial loan syndication fees increased $2.3 million linked quarter, offset by a $4.7 million decrease in other investment banking fees, primarily fees from our municipal investment banking segment.

The combination of our investment banking and customer hedging activities from our wealth and commercial segments generated $91 million in fee income for the year, an increase of $36 million or 67% compared to 2021. Fiduciary and asset management fees were $50 million for the fourth quarter, relatively flat linked quarter. For the year, these fees increased $18 million or 10%, primarily due to reduced fund fee waivers driven by the increase in short-term interest rates as well as market-driven increases to our oil and gas fees. Our assets under management or administration finished the year at $99.7 billion, an increase of $4.3 billion or 4.5% linked quarter, with growth across all categories. Our asset mix for assets under management or administration was relatively unchanged this quarter, with 45% fixed income, 32% equities, 14% cash and 9% alternatives.

Deposit service charges decreased $2.3 million this quarter, primarily related to the changes we implemented during the quarter to our overdraft program. Commercial service charges also decreased slightly as we increased the earnings credit rate for our customers. Mortgage banking revenue was $10 million for the quarter, down slightly linked quarter, with production revenues down $1.6 million due to a $119 million decline in production volumes combined with narrowing margins. Mortgage servicing fees increased slightly this quarter and are 25% higher than fourth quarter last year. Over the past 18 months, we strategically acquired servicing of approximately $6 billion of unpaid principal balances that will add $15 million of annual servicing revenue.

I’ll now turn over the call to Steven to highlight our net interest margin dynamics and the important balance sheet items for the quarter. Steven?

Steven Nell: Thanks, Scott. Turning to Slide 12, fourth quarter net interest revenue was $353 million, a $36 million increase linked quarter. The rapid increase in interest rates, combined with our strong loan growth and our asset-sensitive position, resulted in linked quarter net interest margin expansion from 3.24% to 3.54%. This was partially offset by the expansion of our securities portfolio which slightly dilutes the margin but increases net interest revenue. The average effective rate on interest-bearing deposits increased 59 basis points this quarter, bringing our total deposit beta to 32% for the year. Average earning assets increased $757 million compared to the last quarter. The average available-for-sale securities portfolio increased $648 million this quarter as we increased that portfolio $1.5 billion linked quarter to pivot back towards a more neutral interest rate position.

Average loans increased $377 million, while cash and cash equivalents fell $180 million. On Slide 13, you can see that our liquidity position remains very strong. Our loan-to-deposit ratio increased to 65.4% this quarter from 59.8% at September 30. Total deposits decreased $1.9 billion and loan balances increased $767 million this quarter, although increasing our current loan-to-deposit ratio remains well below the pre-pandemic level of 78.7% at year-end 2019, providing sufficient on-balance sheet liquidity to meet future customer loan demand. Our capital position remains strong as well, with a common equity Tier 1 ratio of 11.7%, well above regulatory thresholds. It is notable that even with our strong loan growth and material unrealized losses in our available-for-sale securities portfolio, our tangible common equity ratio remains strong at 7.63%.

Both the holding company and the bank hold investment-grade ratings from all 3 major rating agencies. With such strong capital levels, we once again were active with share repurchase, opportunistically repurchasing 314,000 shares at an average price of $103.14 per share in the open market. We expect to be active in repurchasing shares over the next 4 quarters. Turning to Slide 14. Linked quarter total expenses increased $24 million, $16 million from personnel and $8 million from non-personnel expense. $10 million of the personnel expenses from cash-based compensation due to increased sales activity combined with a onetime employee incentive. Deferred compensation expense which is directly influenced by market valuations, increased $5 million.

The linked quarter increase in non-personnel expense was primarily driven by increased professional fees and business promotion spend as well as a contribution to the BOKF Charitable Foundation. I’ll now turn over the call to Marty Grunst, our incoming CFO, who will provide our forward guidance. Marty?

Martin Grunst: Thanks, Steven. Turning to Slide 16, I’ll cover our expectations for 2023. We expect mid- to upper single-digit annualized loan growth. The economy and our geographic footprint remains very strong and may outperform in this cycle, given the high level of business in migration from other markets. Sizable increases in unfunded commitments during 2022 and low levels of line utilization should be an additional tailwind for loan growth. During the fourth quarter of 2022, we added $1.5 billion to our available-for-sale securities portfolio to move us closer to an interest rate-neutral position. We expect to hold the portfolio at this higher level in ’23. With a strong base of core deposits and expect modest attrition in interest-bearing and demand deposits to move our loan-to-deposit ratio somewhat higher while still remaining below historical levels.

Currently, we are assuming 25 basis point increases in February and March before the Federal Reserve pauses. We believe the margin will migrate modestly lower in the first half of 2023 as interest-bearing deposit betas increase, demand deposit balance attrition runs its course and our interest rate position is more balanced. The December net interest margin was 3.57%. Net interest income is expected to approach $1.4 billion, in total, for 2023. In aggregate, we expect total fees and commissions revenue to approach $750 million for 2023. We expect expenses to be below Q4 2022 levels in the short term, migrating back towards this level throughout 2023. We continue to expect revenue growth to outpace expense growth, resulting in an efficiency ratio which remains below 60%, nearing 57% by year-end ’23.

Our allowance level is slightly 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 quarterly provisions similar to the second half of 2022. Current asset quality is very strong and does not foreshadow material deterioration. Changes in the economic outlook will, of course, impact our provision expense. And we expect to continue our quarterly share repurchases as closing commentary.

Stacy Kymes: Thank you, Marty. The strong fourth quarter results, in fact, earnings for the year demonstrate how the bank was positioned for earnings growth in this rising rate environment. We leaned in to becoming more asset sensitive, given the unique nature of the events causing rates to drop precipitously. We chose this approach and have now moderated back to our more neutral interest rate risk profile. We materially benefited from our asset-sensitive balance sheet position in 2022 as well as our focus on top line revenue growth. We recorded the strongest annual loan growth in our history, with loan growth across the geographic footprint and across business line sectors. As a result of our diverse fee base, we came very close to covering the 53% year-over-year decline in mortgage banking fees, establishing new records in our commodities and investment banking businesses.

Last year included loan loss reserve releases of $100 million compared to actual provision of $30 million in 2022. Our broad selection of products to our client base produced the top line revenue growth we set our focus on at the beginning of the year and has us well positioned as we start the new year. Credit quality continues to be very stable and better than pre-pandemic levels, though it is likely unsustainable. We continue to maintain a combined allowance above the median of our peers. We are in a stage where investing in strong banks versus trading the sector are expected to matter. Banks with thoughtful growth, a diverse business mix, meaningful core deposits and proven credit discipline should outperform. We are well positioned for however the economy should shift, favorable or negatively, as we move through the incoming year.

I am proud of my teammates here at BOK Financial, who work very hard to deliver these strong results. As we conclude, I’d be remiss not to acknowledge my friend and our long-time CFO, Steven Nell, as this will be his last earnings call. Steven has been an asset to our company and served with great character. We will miss his contributions. We are fortunate to have such strong talent with Marty Grunst stepping in to fill the CFO role. Many of you know Marty from his time as our Treasurer before he became our Chief Risk Officer. With that, we are pleased to take your questions. Operator?

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Q&A Session

Operator: Our first question is from Jared Shaw with Wells Fargo Securities.

Jared Shaw: First, I’d like to just echo Stacy’s comments and Steve, congratulations on your pending retirement. And Marty, congratulations on the new role and looking forward to working with you in that role, going forward.

Martin Grunst: Thank you.

Jared Shaw: Maybe just looking at the asset sensitivity and the steps you took this quarter, are you where you want to be in terms of now being more fully neutral? Or should we expect to see some additional moves to the securities portfolio to get there? And then on the funding for that, was that match funded or what’s the duration on funding on that positioning?

Martin Grunst: Yes. So Jared, we’re pretty happy with the neutral position that we got out of that increase and we’ll continue to look at that position as the year progresses. I mean, that’s something that we look at on a continuous basis. But that’s all funded with variable rate funding. It has to be to generate the impact of the rate risk position. So that’s how that played out.

Jared Shaw: Okay. So on that trade, we can expect to see maybe spread expansion as rates start to move back down later on. What’s the duration on the securities purchases?

Martin Grunst: Yes. So those are our typical mortgage-backed securities and so that’s kind of in that 3-year, a little longer than that, duration territory.

Jared Shaw: Okay. And then on the loan growth, it seems like there’s, like you said, good momentum going into the year. Are you seeing better spreads on loans now? And then also, what would have to happen, I guess, for customers to come back in and reengage and see that utilization rate move higher as we go forward?

Marc Maun: Yes. Jared, this is Marc Maun. The spread really hasn’t, I wouldn’t say, expanded but it hasn’t contracted either. It’s really just tracked along all year long, I’d say, fairly consistent. So we haven’t really seen any significant change in that. As far as utilization rates go, I mean, focusing on the C&I side because CRE will go up naturally just from construction loans. But the C&I side, it’s more just, I think, a reflection of our customers have been expanding commitments at a faster rate than they’ve been borrowing. And I think from their cash positions and liquidity positions, that they’re going to expend some of that first before we start to see utilization rise. But we would expect that to continue as you progress through time. It’s still some of that, that just has to be used up in the business.

Jared Shaw: Okay. And then just finally on capital, where would you like — are you focusing primarily on the TCE ratio here in terms of looking at how you want to control excess capital? Is that the right thing for us to be focusing on? And where do you think ultimately that should flow out or stabilize?

Steven Nell: We’ve ranged — this is Steven. We’ve ranged somewhere in between 11.5% to 12% of tangible common equity and that’s a range that we like. That’s what we look at primarily. Sometimes we are constrained by total capital. But we’ve got a nice level of buybacks that you’ve seen over the last several quarters. We continue to — we think we’ll continue to do that, opportunistically use capital in that fashion, pay a good dividend. We raised that just a little bit in the quarter. And then the rest, we’ll allocate towards loan growth and balance sheet growth to support our businesses. So that’s generally how we think about it.

Operator: Our next question is from Brady Gailey with KBW.

Brady Gailey: I just wanted to ask the buyback question a little different. I mean, if you look at 2022, you repurchased around 2.5% of the company. It was about $155 million of stock. Should we expect something similar for 2023? Or — I mean, you guys clearly have excess capital so it feels like you could do more than that potentially.

Steven Nell: I would say, probably similar. I think that kind of range that you’ve seen quarterly which has been anywhere from $30 million to $50 million, fits kind of the capital profile. We feel like we’ve got that level of dollars to buy back stock and it depends on the quarter. Scott executes that for us and we opportunistically find a good price and we’ll be a little more active. If the price runs up, we’ll slow down a bit. So that’s why you see it variable across those various quarters. But I would anticipate a similar level of buybacks in 2023 than 2022. But again, it’s all contingent on what the market looks like.

Brady Gailey: Okay. And BOKF has, for a long time, been a very experienced energy and health care lender and it’s a meaningful amount of your loan book. I know energy is doing great, just given the pricing backdrop. But yes, you start to hear of some weakness within health care. We’re not seeing it in y’all’s numbers at all but maybe just an update on how you’re thinking about your credit quality for the next couple of years out of your health care borrowers.

Marc Maun: Yes. Brady, this is Marc. We certainly are keeping our eye on the health care portfolio significantly because probably the headwinds there are around the labor costs associated with the senior housing industry which is the primary area we focus on. And the catch-up that has to happen with Medicare and Medicaid reimbursement rates and which hasn’t completely got there. So we’re seeing a little bit of issues with that but it’s something we want to keep our eye on. But over time — we’ve been in this business a long time. We’ve been very selective about who we’re focused on. Demographics favor the industry. We’ve focused on regional operators, not major chains and large operators, people that have an understanding of the industry. And so we’ve been through cycles before and we think we’re comfortable with our customer selection. But certainly, that’s the one we’re going to keep probably our strongest attention to in 2023.