BOK Financial Corp (BOKF) 2024 Q2 法說會逐字稿

Greetings, welcome to the BOK Financial Corporation second quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the presentation over to Heather King, Director of Investor Relations for BOK Financial Corporation. Please proceed.

Good afternoon and thank you for joining our discussion of BOK Financial Second Quarter 2024 financial results. Our CEO, Stacy Kymes, will provide opening comments; Marc Maun, Executive Vice President of Regional Banking, will cover our loan portfolio and related credit metrics; and Scott Grauer, our Executive Vice President of Wealth Management and cover our fee-based results; our CFO, Marty Graham, will then discuss financial performance for the quarter and our forward guide.

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.

Thank you, Heather. We are pleased to report earnings in the second quarter of $163.7 million, or EPS of $2.54 per diluted share. Adjusting for notable items such as the Visa gain and related charitable contribution, net income would have been $131.1 million and EPS would have been $2.2 per share.

Last quarter, I shared an overview of our strategy, which is based on driving long-term shareholder value by focusing on a well-diversified loan portfolio, including one of the lowest levels of commercial real estate concentration among peers, at 21% of total loans.

Disciplined credit quality, which has produced attractive net charge-offs versus peers, for more than 20 years, industry-leading fee income, business mix, top-tier risk management practices with a disciplined focus on capital and liquidity with a loan-to-deposit ratio below 70% and asset liability management practices that have led to well-controlled levels of tangible common equity or TCE, all of which together allowed us to welcome new business during periods when others were on hold.

All paired with an attractive geographic footprint and dynamic high-growth markets. These core tenets of our operating philosophy have enabled us to produce attractive returns over time and given us a resilient to market stresses that are unmatched.

Every time you've seen a stress event in the market, we outperform has credit issues surfaced during the great financial crisis. We performed incredibly well compared to others in our industry being the largest traditional bank not to participate in time.

Our loan book performance was also strong when energy prices move lower in 2014 and 2015. And again, during COVID, when interest rate risk management issues arose in March of last year after an almost 500 basis points increase in rates in one year, we were positioned well with one of the higher levels of TCE and more than ample liquidity.

And now again, as the market shows concern over commercial real estate concentrations, BOKF has one of the lowest levels of exposure with less than 21%. Total loans, 158% as a percentage of Tier 1 capital and reserves on a committed basis at 122% of Tier 1 capital and reserves on an outstanding basis. Importantly, for our shareholders, we are well positioned for growth and to produce attractive returns.

As you see on slide 5, we've meaningfully outgrown EBS versus the KRX index over the last 30 years. Over that time, we've had an 8.6% CAGR versus the index only growing at a median rate of 4.3%. In fact, there were only three banks that grew EPS at a faster rate than BOKF.

This graph illustrates our ability to profitably grow at an attractive rate while also having a top-flight risk management culture that provides stability during diverse market conditions. It can be tempting to put banks into one of two groupings. Banks are high growth and higher risk and others are lower growth and lower risk.

We've proven over our long history that we can be both a strong, stable company and produce a higher long-term growth profile. Because I spent some time last quarter talking about our longer-term strategy this quarter, I want to highlight opportunities we see in the market and how we intend to capitalize on them.

Moving to slide 6, our loan portfolio and credit quality is a good starting point. Looking at the Federal Reserve's [H8] data, you will see that loans for the broader industry were generally flat during the quarter. However, BOKF loans increased $381 million or 1.6% linked quarter with growth driven by commercial loans despite payoff activity in commercial real estate.

CRE payoffs, while they may slow loan growth are nonetheless a part of a healthy portfolio. All of our payoff activity had been in the normal course of that lending activity. The C&I portfolio grew at approximately 13% annualized or 9.5% annualized, excluding certain seasonal advances that didn't happen by accident. The C&I sales process is a long line and our process wasn't created this quarter or last, but is rather a reflection of the fruits of our last few years of concentrated efforts to grow this portfolio.

As you'll see from our credit metrics, we haven't done this at the expense of our disciplined credit underwriting profile. Net charge-offs are still very low. Non-performing loans have again moved lower and our criticized classified levels are 11.2% of Tier 1 and reserves, which is among the lowest of the largest banks and well below pre-pandemic levels.

Marc, will elaborate on this, but we believe that strong guarantors and geography play a critical role in the performance of our CRE portfolio. As part of our underwriting process, we stress each loan at origination for a rising interest rate environment. We understand the overall credit metrics are below their long-term sustainable levels and will revert toward normal as economic conditions change.

Our fee income businesses remain strong at 40% of total revenue. You cannot find another regional bank that has the same level of fee income businesses that have been built over many decades and are all operating at scale. These businesses produced attractive returns and offer a diversifying or countercyclical benefit to our net interest income streams regardless of challenging market conditions.

You also saw it monetized 50% our Visa stock in their recent exchange program. Many other banks liquidated this asset well before now at deep discounts. However, given our long-term focus, we held onto this investment and achieve full value for these assets, the gains generated offset by AFF repositioning losses.

You saw us take in the first quarter, which produced a $22 million a year benefit to NII with less than two-year payback period. We remain impressed by the progress we are seeing in [San Antonio] and Central Texas, which are still operating ahead of their pro forma projections. We continue to look for opportunities to add talent in all of our markets.

Finally, we repurchased over 400,000 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 BOKF team has put together and appreciate the time to review with you this afternoon.

And with that, I'll turn the call over to Marc.

Thanks, Stacy. Turning to slide 8. Overall loans increased 1.6% linked quarter, with commercial loans up 3.2% and CRE down by 2.9%. Portfolio yields increased one basis point during the quarter I wanted to spend just a moment expanding on some of Stacy's opening commentary. C&I loans grew 3.2% over Q1, even after adjusting for certain seasonal advances. We still experienced solid C&I loan growth of 2.4% or 9.5% annualized for sales cycle for C&I is a long one for many.

There is a greater emphasis on growing C&I than there were a few quarters ago, especially with the market's concern about the CRE space. This is and what you're seeing from us, we've been focused for the last several years on growing the C&I business segment.

In our view, this is one of our most profitable businesses. When we think about growing C&I, we know that coming with that credit relationship will be deposits and oftentimes core operational accounts, treasury management revenue and many other opportunities. The results you see reflect our intentional commitment to this effort.

We feel good about our performance to date and our ability to sustain this growth through the remainder of the year. Overall loan growth was muted slightly by CRE payoffs. This is a good outcome the normal lifecycle of our CRE portfolio involves the bank providing funding while project is under construction and other sponsors selling the property once it has been developed, this payoff activity reflects the health of the book of business.

Importantly, all of this payoff activity within the normal course of business. Previous payoff levels were somewhat dampened during the rise in the overall rate environment as well as the limited activity in the permanent lending space, which is sponsored primarily by agencies, life insurance companies and the CMBS market.

However, recent payoff activity has returned to normal historical levels with elevated activity in the permanent space and stable valuations within the bulk of CRE asset classes.

Turning to our different loan segments. 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. Our energy customers are well hedged for at least the next year, which meaningfully lowers our commodity pricing risk on the collateral of these loans.

We've continued to grow commitments over the last several years in this business, but are still seeing customers use lower levels of leverage in this space, which has kept outstandings at current level.

Our combined general business and service loans grew 6.7% linked quarter and 4.9% adjusted for seasonal advances. This remains a core focus from a loan growth perspective for our health care business. Loans decreased 0.4% linked quarter. Credit quality in this portfolio remains strong.

As a reminder, roughly two 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 specialty providers.

The health care line of business has a national footprint that 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 2.9% quarter over quarter.

We continue to manage to a strict concentration limit, which is 185% of Tier 1 capital in reserves on a committed basis. We know that ebbs and flows over time. And this quarter we were down to 158%. You have to look back to the fourth quarter of 2021 to find a time that the lower CRE concentration.

We did not have the outsized exposure that others do in this space. And while we have capacity and are not afraid to lend in this space. We are not chasing deals but numbers on the board. We believe client selection plays a leading role in the performance of this product loans are subjected to multiple stress tests in the underwriting process, including those that stress interest rates and payment shock.

We also believe a few key factors over and above the standard underwriting play a critical role in the performance of this product. First is guarantor support. We have meaningful support in over 90% of all CRE loans with counterparties that we have known for a long time and have demonstrated commitment to supporting their transaction, second is geographic location.

This portfolio is geographically diverse, but importantly, with most exposure within the strong economies in our footprint and very little exposure in the areas of the country that we have seen the largest pullback in prices.

As we discussed last quarter, our credit culture is fundamental to the way that we do business. Our strong underwriting standards are calibrated to our experience in each of our lines of business. And our process is a consistent, disciplined approach designed to avoid fluctuating standards based on economic conditions.

Approximately 81% of our commercial and CRE loan portfolios are floating rate all reprice in the next year. So this variable has always been a principal factor for us.

On slide 10, you will notice credit quality remains exceptional across the loan portfolio and well below historical norms. Nonperforming assets, excluding those guaranteed by US government agencies decreased $27 million this quarter, an exceptional outcome. The resulting nonperforming assets to period end loans and repossessed assets decreased 12 basis points to 0.35% and nonaccruing loans decreased $29 million linked quarter.

Committed criticized assets remain well below pre-pandemic levels. As a percentage of capital, net charge-offs were $6.9 million or 11 basis points annualized for the second quarter and have averaged nine basis points over the last 12 months, extending the trend of performance far below our historic loss range of 30 basis points to 40 basis points.

Looking forward, we expect net charge-offs to remain below historical norms. We remain well reserved with combined allowance for credit losses of $330 million or 1.34% of outstanding loans at quarter end with the $8 million provision, reflecting a stable operating environment and loan growth expectations.

We believe the combined reserve is the most appropriate metric to consider. If you want a holistic view of comparative credit reserve level, we expect to maintain an appropriate reserves for loan growth and reflective of economic conditions, we have traditionally outperformed during challenging credit cycles and are well positioned should an economic slowdown material.

And now I'll turn the call over to Scott.

Thank you. Are now turning to slide 12. I'm proud of both the results we posted this quarter and the strategic initiatives our excellent team has accomplished after years of planning and organizational readiness. We successfully launched a modernized wealth management platform on July 1.

Initial results have been very encouraging and the client experience with the transition has been positive. This is a complicated project that required much planning and thought we didn't rush to find a solution, but patiently orchestrated a positive outcome for the company, our employees and most importantly, our customers. And I'd like to thank everyone who is in involved.

Now turning to our operating results for the quarter, total fee income contributed $200 million of revenue this quarter. That represents 40% of total revenue which is a peer-leading contribution from these businesses and reflects the strength of our franchise in this space.

I'll begin by covering our markets and securities businesses again on slide 12. Our trading fees decreased 26.1% to $27.7 million during the quarter, consistent with broader industry trends for this activity, driven by slightly lower trading spreads versus the prior quarter.

This business is primarily composed of our fixed income trading business in mortgage-backed securities and to a lesser extent, municipal bond trading. We found a unique franchise in this business as we facilitate the hedging and production of mortgages for more than 500 mortgage originators.

This line item will be most influenced by changes in mortgage origination volume when volume is higher. Both our trading spreads and volume will increase. Importantly, we're at a very low levels of origination volume, and we're still seeing attractive results in this business. While this may be volatile. It's often countercyclical with our net interest income businesses and produces good diversification of our existing revenue streams.

Mortgage banking revenue remained relatively consistent this quarter at $18.6 million, reflecting continued improvement in the mortgage origination market and increased volumes from 2023. Customer hedging has remained steady at $6.8 million this quarter. This revenue stream is associated with the hedging activity we facilitate on behalf of customers, we offer our customers the ability to hedge commodities, interest rates and foreign exchange.

The largest component of this revenue driven by our energy customers hedging their oil and natural gas production. In many cases, Intergy customers are required to hedge as part of their loan agreement when markets become more volatile income tends to increase to give a few examples when oil prices increased in the first half of 2022, we saw energy customers take advantage of those higher prices and lock in protection on more of their production by putting on hedges with us.

As a result, our income in this segment increased at that time. And another example is when rates decreased substantially during COVID in 2020, our customers perceive that it was an attractive time to participate in interest rate hedging and engage with our desks to use interest rate swaps to convert floating rate loans to fixed the brokerage fee line item previously included insurance business that we sold fourth quarter of last year, which explains most of the year-over-year decrease in this line item.

However, in looking specifically at brokerage, excluding insurance, we've experienced solid growth in this segment.

Turning to slide 13, to cover our asset management and transactions businesses. Asset management revenue increased 4% to $57.6 million. This is primarily driven by seasonal tax-preparation fee income. [AUMA] increased by $1.9 billion as valuations increased. There are a couple of primary factors that drive results in this business.

The first is the amount of assets under management and administration. This can change at the valuations of our clients' bond and equity portfolios increase or decrease in value as a result of our sales team growing new accounts.

Second is the spread we earn on assets under management. This quarter, we earned 21 basis points on total AUMA for managed funds, we've earned 49 basis points. And for funds under administration, we earn 10 basis points within each of these segments. The type of customer will also influence the amount of fees earned.

Our revenue will change as you see migration within our business mix. Transaction card revenue increased by 6.9% to $27.2 million, driven by an increase in volume of transactions processed during the quarter. This business is a top 10 electronic funds transfer business, which provides debit and credit issuing processing or EFT solutions for almost 500 financial institutions and merchant processing solutions for over 4,000 businesses throughout the United States and Virgin Islands. Again, I'm proud of the results for this quarter.

And now I'll hand the call over to Marty to cover the financials.

Thank you, Scott. Let me start by commenting on the Visa exchange program. We covered in our last earnings call. This program allowed us to monetize 50% of our Visa B shares in the second quarter and recognized a $54 million pretax gain. This gain of $35 million securities loss we took in the first quarter and enabled us to donate $10 million worth of those converted shares to the BOKF Foundation to further invest in the communities we serve.

Turning to slide 15, capital and liquidity continue to be very strong. CET1 is 12.1% and TCE is [838%]. PCE adjusted for all securities portfolio losses is 8.06%. The capital strength we have displayed over the years and in the most recent year in particular is the result of capital planning and stress testing processes that include TCE as well as the regulatory ratios and serves us well in all economic environments.

Our current loan to deposit ratio stands at 58% and our coverage of uninsured and non-collateralized deposits increased to 188%. With this quarter's deposit growth of $858 million. Our strong capital position enabled our opportunistic approach to share buybacks. During the second quarter, we repurchased just over 400,000 shares at an average price of $90.38 per share.

Turning to slide 16, you will see that net interest income grew $2.4 million versus the prior quarter, demonstrating that the trough in this line item is behind us. Strong loan growth and asset pricing continued to support NII growth and deposit headwinds continue to abate.

The interest-bearing deposit cost increase of 7 basis points for this quarter was less than a third of what it was in the prior quarter. The DDA average balance decline was also less than a third of what it was in the prior quarter. Net interest margin was sequentially lower by 5 basis points, but 4 basis points of the 5 basis points were driven by the denominator effect of higher average balances for the trading portfolio and the AFS securities portfolio.

That securities related growth was largely neutral to net interest income. We remain confident that net interest income will continue to grow sequentially driven by loan growth and the repricing of the fixed rate portion of our balance sheet with a stable or modestly increasing net interest margin.

Turning to slide 17. Linked quarter, total expenses decreased $3.7 million or 1.1%. Personnel expense $11.6 million, driven by a number of factors, some of which were more timing related such as the incentive compensation items and some were not such as the payroll taxes and the benefits expense.

In addition to the $10 million Visa share donation mentioned earlier in the call, we also made a $3.6 million contribution to the BOKF Foundation. This quarter, we recognized $1.2 million of expense related to the FDIC special assessment estimate in Q2 compared to $6.5 million in Q1. All remaining expenses were consistent with the prior quarter activity.

Turning to slide 18. This provides our outlook for 2024 our net interest income guidance of $1.2 billion, presumes one rate cut for 2024. In November, we expect fees and commissions to be in the neighborhood of $825 million. We're assuming recent securities trading revenue trends persist into Q3 and MBS trading is the primary driver of potential variability in that element of guidance.

We expect the efficiency ratio for the full year to be near 64%. We anticipate 2024 provision expense to be similar to or somewhat lower than 2023 levels, given our very low level of nonperforming assets and our stable economic outlook.

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.

(Operator instructions) Michael Rose, Raymond James.

Good afternoon, everyone. Thanks for taking my questions. And Scott, maybe for you, we can sort of appreciate all the color on the fee businesses. It looks like maybe that the takedown in the guidance really just relates to the second quarter results in brokerage and trading line item.

Can you just talk as we hopefully get a few rate cuts here, at least if we bake in the forward curve and then what's into next year, how you would expect that business really to perform?

And it seems to me just based on some of your explanations around some of the fee businesses especially that in mortgage that we're probably at or near a low point in those businesses, it looks like they have some tailwind as we move into next year. If we do get some cuts?

Thanks.

You bet. And so in essence, you answered your question exactly how I would. As I mentioned, I agree with you. I think that we have settled into the current rate environment and the current mortgage production levels. So what we're seeing there, we think is it has in essence bottomed and what will stimulate further activity in the MBS specifically, which is the biggest variable there that Martin mentioned is whether or not we get a Fed rate cut, which will stimulate greater mortgage production, which picks up that the TBA piece, the mortgage originator hedging activity for us that increased volume will help us there.

Additionally, our downstream activity to our financial intermediaries that we actively serve with MBS product on managing their portfolios will move out the curve once we get some clarity out of the Fed move. So we do think that as we move into an environment where Fed cuts, we'll see a pickup in activity then that mortgage production will increase the volume and the flows.

Appreciate it. And then maybe just as a follow-up for Marc, it sounds like loan pipelines are pretty good at this point. And I would expect some of those CRE paydowns, yes, to slow as we move into the back half of the year. But we are seeing C&I companies generally delever a little bit, particularly in the clients that you would serve.

And just given this quarter's strong growth, how do you kind of reconcile that to just based on what we're seeing at some other banks? And I would just love some color there. Thanks

I'm I think the main thing here we've been doing on the C&I side is we have been actively doing this for quite some time. C&I loans take a while to obtain because it's more of a relationship-oriented business, not driven by transactions around capital and asset acquisition. And so it's not been a matter of lower usage by our existing customer, but we've been able to obtain new customers.

And so we've actually had a broader growth pattern than we've had for quite some time. So we think we can continue to sustain. That's not at the kind of maybe not at the level we saw in the second quarter. But excluding the seasonal advances, we expect to see something similar to that for the rest of the year.

And on CRE, you're right, we do expect payoffs to slow, but we will be adding and we look, we have the opportunity to look for the right kind of deals to add new deals until mostly be in the construction phase will take some time for those to fund up, but we expect to see that over the next 12 months.

Michael, this is Stacy. I mean, I think our geographic footprint here is awfully helpful, but go back to the original thesis here. We've been we've been focused on this, but at the same time, we were really gearing up our sales effort here is when a year ago last spring was when the markets felt disruption.

And so others who may not be seeing that there are those who are ostensibly pulling back to manage their liquidity and capital in the different way. And so part of the growth that we're seeing is adding talent, adding market share and being in really great markets to grow from.

And so it's kind of the confluence of all those that are creating the outsized growth for us this quarter.

Very helpful. I appreciate all the color and Marc, congratulations on your upcoming retirement. Thanks.

Thank you.

Brett Rabatin, Hovde Group.

Hey, good afternoon, everyone, and I wanted to start with the guys wanted to start with I know you don't give explicit margin guidance, but wanted this to you take a look at the NII guide for the full year. It basically implies that the margin is up about 10 basis points for the back half of '24. Is there I just wanted to see if I'm thinking about that right. And if there was anything to that might change that outlook and maybe the variables that are going into that thesis that you guys were focused on?

Yes.

Yes. Let me just talk about the NII guidance and then how we think about margin and how that connects to it and the variability? I think that's a good question. So we just made two small changes to our outlook and neither one is very large. We took out the Q3 rate cuts and reflected the CRE payoffs that we saw in Q2.

And yes, we do view that the margin was really pretty stable this quarter because the decline was really only driven by denominator effect of the AFS portfolio and the trading accounts. And so underlying that really the pretty good stability there.

And we do we do expect that as the both DDA and the deposit rate trends continue to just slow down incrementally, even from what we saw in Q2 that that ends up giving us a tailwind on net interest margin percentage plus or minus the usual quarter-to-quarter noise that you just naturally get. But the underlying trend. We do see that as a.

And then on your question of kind of what the pluses and minuses are around how we think about that trajectory would be certainly positive relative to how we're thinking about the NII outlook would be positive. If we get the Q3 rate cut could be positive if we have better loan growth than we've got incorporated in our thinking about that guidance.

And then on the on the negative side of CRE payoffs end up being higher or the DDA or the interest bearing trends don't pan out quite as we as we expected, those could be worldly pluses or minuses.

Okay. That's helpful. And then sticking on guidance, I was a little surprised that you didn't tweak down the expense growth for the full year, just kind of given the second quarter and just wanted to go back to that line and just see what I know, there's obviously probably some inflation on salary in the back half of the year from merit raises.

But wanted to see if there was anything else in particular that was keeping that mid-single digit number unchanged from the prior guidance?

Well, Brett, keep in mind, we did bring down the efficiency ratio guide from last quarter it was [65] in this quarter, [64]. So I'd focus on that. As you think through the guide, I mean, we did have a good quarter. I would just note that some of the incentive comp declined quarter-over-quarter.

That's not really run rate, which probably had a little bit of that back. But we do feel good about being able to and good expense control through the rest of the year. And I've got to look, we've got some IT projects there that are going to bring that data processing line up just a bit.

Okay. That's helpful. Appreciate the color.

Jon Arfstrom, RBC Capital.

Great. Thanks. Good afternoon, -- I'm just want to make sure I understand your loan growth guide back on Michael's question, but I think what you're saying is when I look at the guidance, it suggests a pretty consistent pace of net growth from here to get to the middle of the guidance range. Is that fair way to look at it?

Yes, I think that's the right way to look at it, John mean, if you go back to January, I mean, we were really outperforming our loan growth expectations from a C&I perspective. And we said back in January that the real question for us was commercial real estate paydowns. We didn't know exactly what was going to happen there.

And I would still say that's still the case. I think we're getting closer to the trough there, but we don't know if that's second quarter or third quarter in terms of net paydowns there. But on the C&I side, we're very optimistic. We feel very good about the pipeline there.

And if it was just C&I only guidance that we provided, we probably guided up a little bit, but the CRE uncertainty that really is the headwind in the near term, although that will create a tailwind for 2025 and 2026 as we begin to rebuild that portfolio.

But yes, you can see that on slide 8 some, I guess some other question. I would be on the other side on deposits. Can you talk a little bit more about the drivers of deposit growth this quarter? And Stacy, earlier in your comments, you talked about your low loan to deposit ratio.

So I'm just curious, philosophically, how you look at that you continue to grow deposits faster than loans, or do you somehow tried to bring that ratio back up over time.

And you answered a couple of ways, John, I think one is we typically think about deposits funding. The loan book in the securities portfolio is largely self-funded through wholesale funding is, and that's the way we've run the bank for most of my career here.

However, we will look for opportunities where we can incrementally fund the securities book cheaper than we can from a wholesale perspective with deposits. And so we're seeing incremental opportunities to grow the deposits that are incrementally better than wholesale funding. And so we'll continue to do that where it makes sense.

But I think as you see us where we think we're positioned from a growth perspective, we want to maintain ample liquidity. We're comfortable letting that loan-to-deposit ratio slide up. But in the context of other incremental deposit funding opportunities to displace wholesale, we've allowed those to continue to happen and to grow and feel good about that.

We're well-positioned in the marketplace. People see us as strong and capable. And so that's created opportunities for us. And so we're continuing to take advantage of that where those opportunities exist for us.

Okay. That's helpful. Thank you very much.

Peter Winter, DA Davidson.

Good afternoon. I'm just wondering on the deposit beta and it's been at the upper end appears with the increase in rates, but what's the outlook for that? The down rate beta because it does look like we're finally going to get some rate cuts.

Yes, Peter, and you're right, our deposit beta just simply reflects the fact that we've got a more commercial and well and a mix in our deposit base. And so you saw the effect when rates went up, you're going to see the same effect on rates come down.

We're going to be able to have a deposit beta that's easily in the mid-50's and down rate scenarios. We're very confident and know exactly how that will play out. And so that will be that will be helpful for us once we start to see rate cuts coming through.

Would it be in the high-60's, you think a downright beta?

We've all learned those aren't necessarily just linear from the get-go and they stay flat. So I think that using something that's in the mid-50's to start with and as rate increases continue that might migrate up. It's definitely possible, I mean higher beta. So as rates decline that that beta can increase. Just as we saw on the on the way US government spending just wanted deposits.

Right. So period end deposits were up 9% year-over-year in the second quarter. Certainly a lot stronger than I would have thought. But you maintain that deposit outlook for it, modest growth and just how you're thinking about deposit growth in the back half of the year?

Peter, one thing that you should pay attention to the DDA, the ending balance of DDA was high. Just that customer activity right at the end of the quarter drove that up. I pay attention to the average balance and EBITDA as you're thinking about looking forward. I think that will help clear up your question.

Yes, that's the right answer. But Peter, you want to focus on averages on the deposit side there's a lot of volatility that happens in any one period. So averages are a better way to look at deposits from our perspective.

Okay. It's just you give period end as your guidance, but I hear you on. And then just on the if I could just get one more follow-up question. Just the outlook on our expenses, mid-single digit growth of do you exclude the FDA assessment and charitable contributions? And I'm just wondering what's the base you're using for '23?

Yes. So we are leaving in the weeks, especially when we think about the efficiency ratio, we're leaving all that and just as it was and I think that the and I think that's true on the growth rate.

So the growth rate for expenses is really on a reported basis?

That's correct. We're not normalizing for the special assessment or for the charitable contributions for the whole year efficiency ratio guidance.

Thank you.

Woody Lay, KBW.

I've got a quick question on deposits. Just looking at the deposits broken out by market it looks like you saw really strong growth in your in your Texas markets, both on the demand side and interest-bearing side. And maybe there's some volatility with that between average and period end.

But could you just give some color on what you're seeing in the Texas market specifically on deposits, if you think of this is basically I mean, one of the our key growth objectives for our company for the last several years has been to grow taxes. And so you saw with the expansion in Central San Antonio and on the wealth side, we're in Austin.

So really the focus on Central Texas, but we've added talent in Dallas and Fort Worth and Houston. We are very focused on that market and part of how we're growing is through deposit acquisition. And so you're seeing kind of the fruits of that labor there. And clearly, from our perspective, something that we expect.

Got it. And then maybe lastly, just shifting over to capital. Capital remains really strong. The buybacks were good to see, but obviously, we've seen the stock price move up from here. Just further appetite for buybacks with the current stock price?

Yes, I'd just note that as you well know, we're price sensitive and how we think about share buyback. Our goal is to add shareholder value through that activity and the share buyback that we've done over the past year has been very accretive to shareholder value. We're very happy about that.

But with incrementally higher prices, you'll see us do that. So you should expect to see us incrementally scale back and have a cooling effect from higher prices.

All right. Thanks for taking my questions.

Thank you.

Matt Olney, Stephens, Inc.

Thanks for taking the question. Most of mine have been addressed. I'll just ask about M&A. We've seen a handful of transactions kind of in around the footprint. Would just love some updated thoughts around the bank's appetite for M&A and the opportunities you see in and around your footprint?

Matt, you know we we've talked before. I mean, M&A is something that we would be interested in, but we're going to spend our capital is going to be for the right opportunity and it's really hard to find the type of franchise that would be a good fit with us, both culturally, which is significantly important, but even levels of concentrations in real estate strength, the core deposits and things like that.

You start to run the filter. We don't want to we want to expand outside our footprint. We want those strong characteristics of the bank that we acquire so that we don't have to diminish the value by running loans off that don't fit our profile. So the practical answer is there's just not a lot that really fits the filters that we would look for there.

And so it's unlikely that you would see us do something like that in the near term. We do have an appetite, but it's got to fit our profile for what fits for us.

Okay. Makes sense. Sounds consistent with kind of the past. And I guess just lastly on capital, if the buyback is potentially less attractive. These current valuations on it sounds like you'd be you'd be okay with allowing capital levels to build in the near term or are there other uses of capital, we should we should think about?

We've got a history of being patient and making sure that we're thoughtful about when and where we deploy capital. So you've got to continue to recognize that we're happy to be patient and watch first for us, the right opportunities.

Okay. Thanks, guys.

Thank you Matt.

(Operator Instructions) Timur Braziler, Wells Fargo.

Good afternoon.

Hey Timur.

Hey, maybe circling back to the line of questioning around deposits. Maybe if you can quantify just the late quarter inflow into DDA and whether the average kind of down 3% is the right way to be thinking about it? And maybe just when you see some of those DDA pressures are starting to abate.

Yes, Timur, I think an easy way to think about that is the Q2 average for DDA was [$8.387 billion]. The June average was almost exactly the same number. So we've really seen a nice leveling off of activity there. And while we may not be exactly at the bottom, we're feeling pretty good about, just the trajectory we've seen really since February.

Okay, great. And then just looking at the bond cash flows and reinvestments, kind of with all the work being done on the bond book, can you give us a sense of where those yield ended the quarter, kind of what's the what's the bond yield looking like in 3Q, given both the reinvestment opportunities and some of the restructuring activities?

Yes. I think the if you look at the average yield for the bond portfolio in Q3, I mean that's fairly representative because the restructuring activity that was all right at the end of Q1. So Q2 was fairly clean. And so the probably the important thing to think about is we're still getting So $500 million average a quarter. This quarter, it was $600 million but kind of durably $500 million a quarter of cash flows that get reinvested each quarter.

And this quarter, we were able to gain 170 basis points, 165 basis points, 170 basis points between what the cash flows came off at and what we would reinvest in. And so that trend will just keep continuing. And that's going to be an important driver of margin expansion over the coming multiple quarters.

Great. And then just last for me, your comments around uncertainty just with CRE paydowns and I guess that messaging has been a little bit mixed throughout the industry, but I'm just wondering what's driving the elevated paydowns in your book on is your maybe CRE exposure a little bit insulated from what we're seeing in other geographies and other asset classes?

Or I guess what are the options? What are the categories that are driving the payoff activity? And I'm wondering if there's anything lumpy or in the back end of the year that might be driving your advertising to offer users with uncertainty there?

It's really just a function of we have a portfolio that largely starts with construction and ag once there's a level of occupancy that it can be refinanced and the permanent nonrecourse market is and that's what's happening. Some Marc in his prepared comments talked about, it's going to lifecos.

It's going to CMBS. It's going to agency permanent nonrecourse financing. And that's the way that portfolio is worth what it's just slower to rebuild behind that is some of those borrowers that we have are slower to start than new project or being a little bit more cautious. And so the rebuild behind that.

But the portfolio paydowns is really very healthy and very typical of our portfolio. You just don't have the advances that are kind of offsetting that today that I think you'll see in future periods as more confidence around this sector, it begins to emerge.

Great. Thanks for the color.

That concludes our Q&A session. I will now turn the call back over to Stacy Kymes, for closing remarks.

Thank you, everyone, for joining our discussion today. We're strong, stable, growing organization and an example of these concepts not being mutually exclusive.

We're proud of what we've achieved in the past, we're optimistic about the future and excited about capitalizing on the opportunities we have ahead of us, which we think are many.

We always appreciate your interest in BOK Financial and spending time with us this afternoon, please reach out to Heather King, if you have any questions at hking@bokf.com.

This concludes today's call. You may now disconnect.