BOK Financial - Q4 2022

Transcript

Operator (participant)

Greetings. Welcome to BOK Financial Corporation Q4 2022 earnings conference call.

At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 (CFO)

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. 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 Martin Grunst, our recently named incoming CFO, will provide our forward guidance. PDF of the slide presentation and Q4 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 (President and CEO)

Good morning. Thanks for joining us to discuss BOK Financial's Q4 and 2022's full year financial results.

Starting on slide 4, Q4 net income was $168 million or $2.51 per diluted share. The strong results of the Q4 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 Q4, we've now put together five straight quarters with solid core loan growth with annualized core loan growth of 13%. Our fee businesses 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. 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 remain 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 non-interest-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 equities this year, which comprise approximately a third 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. 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 (EVP and Regional Banking)

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. Healthcare 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. Healthcare 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 rates. Utilization rates continue to run below pre-COVID levels. 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 in 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 five 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. Non-performing assets, excluding those guaranteed by US government agencies, decreased $22 million this quarter.

Non-accrual 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 in 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 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 a net charge-off of $fifteen and a half million during the Q4, 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 30-40 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 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 (Executive VP of Wealth Management)

Thanks, Marc. Turning to slide 10. Total fees and commissions were $194 million for the Q4, relatively unchanged from last quarter. The Q3 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 Q4, 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 Q4 last year. Over the past 18 months, we've 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 (CFO)

Thanks, Scott. Turning to slide 12, Q4 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 30th. 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 demands.

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 three major rating agencies.

With such strong capital levels, we once again were active with share repurchase, opportunistically repurchasing 314,000 shares 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 expense is from cash-based compensation due to increased sales activity, combined with a one-time 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 (EVP and CFO)

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 in 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 Q4 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 2023.

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 toward 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 2023.

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. We expect to continue our quarterly share repurchases, as Steven noted earlier. I'll now turn the call back over to Stacy Kymes for closing commentary.

Stacy Kymes (President and CEO)

Thank you, Marty. The strong Q4 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 worked very hard to deliver these strong results. As we conclude, I'd be remiss not to acknowledge my friend and our longtime 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?

Operator (participant)

Thank you.

If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question is from Jared Shaw with Wells Fargo Securities. Please proceed.

Jared Shaw (Analyst)

Good morning.

Stacy Kymes (President and CEO)

Good morning, Jared.

Jared Shaw (Analyst)

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

Martin Grunst (EVP and CFO)

Thank you.

Jared Shaw (Analyst)

Yeah. 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? On the funding for that, was that match funded, or what's the duration on funding on that positioning?

Martin Grunst (EVP and CFO)

Yeah. Jared, we're pretty happy with the neutral position that we got out of that increase. 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. That's all funded with variable rate funding. It has to be to generate the impact of the rate risk position. That's how that played out.

Jared Shaw (Analyst)

Okay. 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 (EVP and CFO)

Yeah. Those are our typical Mortgage-Backed Securities. that's kind of in that three-year, a little longer than that duration territory.

Jared Shaw (Analyst)

Okay. Thanks. Beyond 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? 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?

Stacy Kymes (President and CEO)

Yeah. Okay, Jared, this 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 and stayed fairly consistent. We haven't really seen any significant change in that. As far as utilization rates go, I mean, focusing on the C&I side, the CRE will go up naturally just from construction loans. 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. I think from their cash positions and liquidity positions that.

Steven Nell (CFO)

They are going to expend some of that first before we start to see utilization rise. 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.

Stacy Kymes (President and CEO)

Okay, thanks. Then just finally on capital, where would you like what 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 (CFO)

Well, this is Steven. We've ranged somewhere in between 11.5%-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 think we'll continue to do that opportunistically, use capital in that fashion, pay a a good dividend. We raised that just a little bit in the quarter. The rest we'll allocate towards loan growth and balance sheet growth to support our businesses. That's generally how we think about it.

Jared Shaw (Analyst)

Great. Thank you.

Operator (participant)

Our next question is from Brady Gailey with KBW. Please proceed.

Brady Gailey (Managing Director)

Hey, thank you. Good morning, guys.

Steven Nell (CFO)

Good morning.

Good morning.

Brady Gailey (Managing Director)

I just wanted to ask the buyback question a little differently. 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? I mean, you guys clearly have excess capital, so it feels like you could do more than that potentially.

Steven Nell (CFO)

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, then we'll be a little more active. If the price runs up, we'll slow down a bit. That's why you see it variable across those various quarters. I would anticipate a similar level of buybacks in 2023 than in 2022. Again, it's all contingent on what the market looks like.

Brady Gailey (Managing Director)

Okay. All right. then BOKF has for a long time been a very experienced energy and healthcare lender, and it's a meaningful amount of your loan book. I know energy is doing great just given the pricing backdrop. you start to hear of some weakness within healthcare. Now, 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 healthcare borrowers.

Steven Nell (CFO)

Brady, this is Mark. We certainly are keeping our eye on the healthcare portfolios, significantly because, probably the headwinds there 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 their Medicare and Medicaid reimbursement rates and which hasn't completely got there. We're seeing we're seeing a little bit of issues with that, but it's something we're going to keep our eye on.

Over time, we have been. 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.

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.

Stacy Kymes (President and CEO)

Yeah. I might just add, if you think about that sector from my perspective over the last 20 years, it's probably our lowest net charge-off segment in our entire loan portfolio. We do have criticized classified risk where because of the timing of cash flows between when operating expenses are incurred versus when they may be reimbursed from private or public payers, there can be some mismatches that create some short-term criticized or classified levels.

If you think about it over a longer period of time, the loss rates in this portfolio are exceptionally low. It's actually probably our best performing asset quality segment in our entire portfolio over the last 20 years.

Brady Gailey (Managing Director)

All right. That's helpful. Finally for me BOKF has done a great job of growing fiduciary and asset management fees. I mean, if I look at it over multiple years, it's just been a great source of revenue growth for you guys. How should, I mean, not necessarily next quarter or even next year, but as we look out for the next couple of years, should we continue to expect BOKF to see this nice revenue growth in that segment?

Steven Nell (CFO)

Sure. This is Scott. we feel good about really the fact that not just our asset mix, which is very well diversified between fixed income, equity, alternatives, but a healthy mid-teen percentage of cash, which now is obviously serving us well in terms of fee generation off money market funds, both our proprietary and others that we utilize. That's been nice to get that momentum and revenue generation back.

Martin Grunst (EVP and CFO)

We're really seeing significant progress in growing assets across all the various business lines inside of Wealth Management, as well as in the various customer segments that we serve. We continue to be optimistic and feel good about how we're positioned to continue to see that segment grow given our account new account attraction of assets with probably less market exposure and decline than many others do that have a more skewed asset mix than us. We're very optimistic about it. Yes.

Stacy Kymes (President and CEO)

One of the other things that differentiates us there a little bit is if you think about both the pandemic and the decline in asset values during that period of time, and then last year were both fixed income and equity markets declined really for the first time since 1969. The way we deliver into that segment, through a very personalized approach, people value that.

As some in the market are moving more toward automated approaches or things like that, the ability to have a touch point, to talk to an advisor, to talk about strategy, and to reassure folks in difficult market circumstances, the value of that is much higher today than perhaps in previous periods because of the volatility that's been experienced.

We think that's a differentiator for us in the long term to help us grow this asset base.

Brady Gailey (Managing Director)

All right, great. Well, thanks for the color. Steven, great working with you. Good luck in retirement.

Scott Grauer (Executive VP of Wealth Management)

Thank you very much, Brady.

Operator (participant)

Our next question is from Jon Arfstrom with RBC Capital Markets. Please proceed.

Jon Arfstrom (Managing Director, Financial Services Equity Research, U.S.)

Hey, good morning.

Scott Grauer (Executive VP of Wealth Management)

Good morning.

Martin Grunst (EVP and CFO)

Morning, Jon.

Jon Arfstrom (Managing Director, Financial Services Equity Research, U.S.)

Congraulation, Steven.

Scott Grauer (Executive VP of Wealth Management)

Thank you.

Jon Arfstrom (Managing Director, Financial Services Equity Research, U.S.)

Marty, it's been a while, but looking forward to it.

Martin Grunst (EVP and CFO)

Right. Yes. Me as well.

Jon Arfstrom (Managing Director, Financial Services Equity Research, U.S.)

Yeah. back to the Midwest, I guess. Can you guys help us a little bit, on the cadence of the margin? I know you're focused more on NII, but you're saying modestly lower until maybe some of the deposit rate and flow pressures ease. What kind of erosion are you talking about early in the year? Do you think it can maybe stabilize and float higher later in the year?

Martin Grunst (EVP and CFO)

Yeah. Jon, this is Marty, I'll take that. our rate risk position is now pretty neutral to a rate increase. We do think we'll get a rate increase or 2 early in the year. That might be modestly beneficial, just at least initially.

The securities portfolio will continue to reprice higher. Those are kind of the positives there. Deposit mix shift is, of course, going to be the counterbalance, as that kind of plays out. Loan growth, that'll be supportive for Net Interest Revenue, but just ever so slightly dilutive to margin. it's not at all clear exactly how that shakes out timing-wise, but that should result in some modest decline in margin, and nothing that's really significant one way or the other.

Jon Arfstrom (Managing Director, Financial Services Equity Research, U.S.)

Okay. Okay. Got it. That's helpful. Not material changes. Maybe Marc or Stacy, I wrote down a couple of quotes. Marc, you said, "Should an economic slowdown materialize," and Stacy, you said, "Credit is unsustainably good." Help us understand where your heads are at in terms of what you're seeing on credit. It doesn't feel like you're signifying any kind of material slowdown in loan growth, or am I wrong on that?

Stacy Kymes (President and CEO)

This is Stacy. I think it's interesting to listen to the market pundits over the last six months from there's a deep recession coming to, uh, a soft recession to now a soft landing. Yeah, I don't think any of us know with any level of precision what the future holds. We've got a deeply inverted yield curve, but we're also coming off a pandemic that's unprecedented.

All of the economic metrics that people are accustomed to trying to use to predict those types of, uh, economic outcomes are probably not as reliable. Our viewpoint is, if you think that we're going to have a soft landing and we're going to grow, we've demonstrated our ability to grow. We grew loans organically 13% this year, $2.6 billion.

We're in a great footprint and we're well-positioned for growth if the economy does achieve a soft landing. Our footprint is much better than most. If your, if your view is that there will be a recession and there will be more likely credit deterioration, then we're one of the best-performing credit banks in the regional bank space. Largest bank in the United States that didn't participate in TARP. Our credit performance through the last meaningful downturn materially outperformed our peers. Credit's hard to forecast. We typically will say the next six months are pretty easy to see. After about six months, the lens gets really foggy.

As we look forward from here our classified loans are down, our potential problem loans are down, and our accrual loans are down. We're starting from an incredibly low point. Even some migration up wouldn't necessarily even indicate a deterioration really in long-term credit trends, really just a movement from abnormally low levels.

I don't know that any of us want to forecast exactly what we think is going to happen because nobody really knows. If it's a growth scenario, we're going to perform well. If it's a credit event that people are worried about, then I think our credit history and our discipline around that will serve us very well if that is the scenario that has people concerned.

Scott Grauer (Executive VP of Wealth Management)

The view from Tulsa is not Armageddon. It's just-

Stacy Kymes (President and CEO)

Not in the least.

Scott Grauer (Executive VP of Wealth Management)

Yeah.

Stacy Kymes (President and CEO)

I mean, I think our view, even when people were forecasting a recession, was that it's entirely likely that our footprint. Think about Dallas, Houston, Denver, Phoenix, what's happening in those markets, that there may be a level of material outperformance in our core markets than there may be in the rest of the country if there is a recession because the level of immigration into these markets is significant.

The economic growth that's happening is far outpacing the national economy. Even when the general consensus was there's going to be a recession, we thought that we would be in a much better position just because of that footprint. We're not seeing anything today in discussions with our borrowers and our own data that would indicate that we think there's a recession that's imminent.

Scott Grauer (Executive VP of Wealth Management)

Okay. All right. Thanks, guys. I appreciate it. Good luck, Steven.

Jon Arfstrom (Managing Director, Financial Services Equity Research, U.S.)

Thank you.

Operator (participant)

As a reminder, just star one on your telephone keypad if you would like to ask a question. Our next question is from Matt Olney with Stephens Inc. Please proceed.

Matt Olney (Managing Director)

Thanks. Good morning. On the brokerage and trading line, I think the slide deck attributed higher levels of trading from elevated margins. Any more color on the drivers of that higher margin and how sustainable is that into 2023?

Stacy Kymes (President and CEO)

Well, this is Scott. We saw in all of the fixed income markets with the market volatility that Stacy alluded to we saw unprecedented volatility in the Q4. We continue to see, with the level of rate uncertainty that's out there in the marketplace, good spread capability. we're nimble and have a reasonably well-diversified product mix inside of the fixed income arena. We think that, until there's an abatement of the uncertainty in the market volatility, we'll continue to enjoy, better margins there.

Matt Olney (Managing Director)

Okay, appreciate that. Going back to deposits and funding, pretty big material outflow of demand deposits in Q4, and we're seeing this across the industry. It sounds like the guidance you put out there assumes continued pressure here. I'm curious what your expectations are and within the guidance, when do you expect that to stabilize?

Martin Grunst (EVP and CFO)

Yeah, this is Marty. Let me give you a little color there. Yeah, our guidance does presume our Loan-to-Deposit Ratio comes up some over 23, and it presumes that our cumulative beta on deposits continues to increase somewhat over 23 to accommodate the retention of our interest-bearing deposits. The DDA attrition, we see that more in the first part of the year. any of these attrition factors, they either burn out or conditions change and it's no longer relevant. That's kinda how we think about the the outlook there.

Stacy Kymes (President and CEO)

Matt, this is Stacy. I think that we've seen commentary in the markets around the deposit attrition in the industry broadly. I think a couple of things that are unique about us that I think need to be brought out. Number one is we're starting from a much lower Loan-to-Deposit Ratio than most of our peers in this space. We end the Q4 at low 60% Loan-to-Deposit Ratio. Steven and I were talking, we've run this bank at upper 70s, low 80s for a long time. That's typically much more normal. that starting point gave us the ability to manage this liquidity and margin, and we are actively doing that.

We also have a lot of stored liquidity that's effectively off balance sheet through our broker-dealer and our wealth group, where, funds that have left our balance sheet have gone to other sources that are controlled through our broker-dealer or our wealth group, that in the event that we need liquidity in a future period could be brought back at the right price. it's not something that we see as necessarily problematic. It's something that we're actually actively managing and watching to optimize for our shareholders.

Matt Olney (Managing Director)

Yep. Okay. Appreciate that, Stacy. I guess just kinda staying on this topic here. In the Q4, I mean, the funding plan was obviously some borrowings to kinda plug the hole. Stacy, you mentioned some of the stored liquidity that you could use at some time, but it didn't sound like that's a near-term event. What is the plan, I guess, for funding, at least for the first half of the year?

Martin Grunst (EVP and CFO)

Yeah. We would see both a stabilization in the overall deposit trends and some usage of wholesale really throughout the year. on the wholesale side, as the vast majority of our securities portfolio is US government agencies, which are ideal for pledging to FHLB. It's really normal for us to have FHLB funding as a core part of our overall funding base. I mean, that goes back 25, 30 years. It's really the recent couple years that are the anomaly. eventually we're all going to get to normal balance sheet profiles at some point.

Stacy Kymes (President and CEO)

Remember, Matt, I mean, pre-pandemic we always viewed deposits funded the loan book and the securities book was self-funding through other mechanisms, whether it be FHLB or repo or other activities. That's the way we ran the bank for 25 years. We're just kind of coming back to that. Deposits didn't fund loans and securities historically. It's only been in the last really couple, three years where that's happened. We're still $6 billion higher in deposits today than we were December of 2019. We've got to put some of this in perspective based upon the long-term perspective, not just based on a pandemic viewpoint.

Matt Olney (Managing Director)

Yes. Yes. Fully agree. Okay. Thanks, guys.

Martin Grunst (EVP and CFO)

Thank you.

Operator (participant)

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Steven for closing comments.

Martin Grunst (EVP and CFO)

Well, thanks again, everyone, for joining us today. If you have any additional questions, please call us at 918-595-3030, or you can email us at [email protected]. Have a great day. Thank you.

Operator (participant)

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.