Bok Financial Corp Q4 FY2023 Earnings Call

Greetings. Welcome to BOK Financial Corporation Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the presentation over to Martin Grunst, Chief Financial Officer for BOK Financial Corporation. Please proceed.

Good morning, and thank you for joining us to discuss BOK Financial's fourth quarter financial results. Our CEO, Stacy Kymes, will provide opening comments; Marc Maun, Executive Vice President for Regional Banking, will cover our loan portfolio and related credit metrics; and Scott Grauer, Executive Vice President of Wealth Management, will cover our fee-based results. I will then discuss financial performance for the quarter and our forward guidance. PDFs of the slide presentation and fourth quarter press release are available on our website at bokf.com. We refer you to the disclaimers on Slide 2 regarding any forward-looking statements we make during this call. I'll now turn the call over to Stacy Kymes.

Thank you, Marty, and good morning everyone. Beginning on Slide 4, we reported net income of $82.6 million or $1.26 per diluted share for the fourth quarter, which includes a $0.52 per share impact from the FDIC special assessment. I am exceptionally proud of the BOKF team and our results this year. Our focus at BOKF has always been on providing long-term shareholder value driven by our diverse business model and talented team, both of which empower us to perform well relative to our industry during any economic environment. This was once again proven when the industry faced stress in the first half of the year and our company was well prepared. Our disciplined risk management, which extends beyond the credit risk management that has long been a strength, resulted in strong levels of capital and liquidity at an important time. We took advantage of this position to thoughtfully grow when others are pulling back. We've made real investments in growing our core C&I while also investing in people and new markets like Central Texas. While the fourth quarter was exceptionally noisy with numerous non-recurring items, our core results were very strong, resulting in a great starting point for 2024. We continue to make strategic decisions to deploy our capital where growth and returns are highest. This was reflected in our decision to exit our insurance brokerage and consulting business in the fourth quarter. This resulted in a pre-tax gain of $28 million after transaction expenses, which we used to opportunistically restructure a small portion of our available-for-sale securities portfolio, which will be accretive to net interest revenue and the margin in the months ahead. Staying on this slide, our efficiency ratio was 72% for the quarter. This falls to 67% excluding the impact of the FDIC special assessment and the activity related to the sale of our insurance brokerage and consulting business, which Marty will highlight later. Let me briefly diverge and comment on the FDIC special assessment, which I understand most will see as non-recurring and normalized for the period. The FDIC methodology was flawed and did not use the root cause of the issue, which was low levels of fully-loaded tangible capital caused by poor asset-liability risk management decisions. The final rule was disappointing as they ignored many thoughtful comment letters, including our own. They announced the public hearing, subsequently canceled the public hearing before voting three-to-two along partisan lines to adapt the final rule. This continues a disconcerting trend of increasing partisanship in banking regulations. The U.S. is the only country that has allowed partisanship to invade the banking regulatory process. Banking is a noble profession. We are well-aligned with our customers. Collaboration with our industry is necessary and a missing element today. Moving on, we believe the strategic decisions and investments we've made this year have us well-positioned for success in the long term, and our diverse operating model will continue to operate successfully in any market environment going forward. Turning to Slide 5, period-end loan balances increased $181 million or approximately 1% linked quarter with growth in both C&I and commercial real estate. Loan growth did slow in the fourth quarter, but our teams remain confident in our pipelines as we move forward. Both period-end and average deposits continued to grow this quarter. Our loan-to-deposit ratio was stable at 70.3%, remaining well below our peers and providing significant on-balance sheet liquidity to meet future loan or other liquidity demand. While our cost of deposits continued to increase this quarter, the pace was less than half the level we've experienced in the previous three quarters, allowing our net interest margin to stabilize. Marty will comment more about net interest revenue, but we believe we are very close to the trough. Our credit remains very strong and we have a combined reserve of $326 million or 1.36% of outstanding loans at quarter-end, which is considerably above the median of our peer group. Finally, we repurchased 700,237 shares this quarter to reflect our long-term confidence in the company and to take advantage of attractive repurchase valuations. I'll provide additional perspective on the results before starting the Q&A session. But now, Marc Maun will review the loan portfolio and our credit metrics in more detail. I will turn the call over to him.

Thanks, Stacy. Turning to Slide 7, period-end loans were $23.9 billion, growing $181 million or almost 1% linked quarter. Total C&I loans increased $84 million or 0.6% linked quarter with year-over-year growth of $591 million or 4.2%. Commercial real estate loans grew $96 million, or 1.8% linked quarter and have increased $731 million or 15.9% year-over-year. Compared to December 31, 2020, CRE balances have grown at a modest 4.1% annualized growth rate. Growth this quarter was primarily driven by multifamily properties with an increase of $138 million, and industrial facility loans with an increase of $43 million. This growth was partially offset by a decrease of $72 million in office loans, bringing the total office loan portfolio to its lowest point since 2018. The year-over-year CRE growth of $731 million was also driven by multifamily and industrial loans, and again, partially offset by a decline in office loans. We have an internal limit of 185% of Tier 1 capital and reserves to total CRE commitments, and we're presently at 172%. That limit is based on total commitments, so we do have ample room for continued modest growth in outstanding CRE balances as construction loans fund up. As of December 31, CRE balances represented 22% of total loan, consistent with the prior quarter, a ratio well below our peers. Combined services and general business loans, our core C&I loans increased $77 million or 1.1% with year-over-year growth of $281 million or 4%. These combined categories are 30% of our total loan portfolio. Healthcare balances increased $60 million or 1.5% linked quarter, and have grown $298 million or 7.8% year-over-year, primarily driven by our senior housing sector. Healthcare loans represented 17% of total. Energy loan balances decreased $53.5 million linked quarter and have increased $12 million or 0.4% year-over-year, with period-end balances at 14% of total period-end loans. Year-over-year, loans have grown $1.3 billion or 6%. Excluding PPP loans, Q4 2023 extends the linked-quarter loan growth to nine consecutive quarters. Our current pipeline is strong, and combined C&I and CRE commitments increased 2% linked quarter. We expect continued strong momentum to drive additional loan growth in 2024. Turning to Slide 8, you can see that our credit quality continues to be exceptionally good across the loan portfolio with credit metrics well below historical norms and pre-pandemic levels. Non-performing assets, excluding those guaranteed by U.S. government agencies, increased $26 million this quarter. The resulting non-performing assets to period-end loans and repossessed assets did increase 10 basis points to 0.62%. Non-accruing loans increased $26 million linked quarter, primarily driven by an increase in healthcare loans. The increase is consistent with non-accrual fluctuations in a narrow range experienced over the past two years with no indication of systemic issues. Committed criticized assets were 10.2% of Tier 1 capital and reserves at year-end 2023, the second consecutive year below 10.5% and the third below 13% compared to an 18% ratio pre-pandemic. The provision for credit losses of $6 million in the fourth quarter reflects a stable economic forecast and continued loan growth as well as continued low net charge-offs. Net charge-offs were $4.1 million or 7 basis points annualized for the fourth quarter and have averaged 8 basis points over the last 12 months, continuing the trend of performance far below our historical loss range of 30 basis points to 40 basis points. Looking forward, we expect net charge-offs to remain below historical norms. The markets continue to be focused on the office segment of real estate given the trends in workforce preferences. Our exposure to loans secured by office CRE continues to decline as we intentionally manage that segment down, now representing less than 4% of our total loan portfolio. Our office maturities are generally rateable over the next three to four years and we have a mini-perm option if the markets are not conducive to long-term finance. The combined allowance for credit losses was $326 million or 1.36% of outstanding loans at quarter-end. The reserve is sufficient to cover our non-performing assets by 2.2 times. The total combined allowances available for all losses and any apples-to-apples industry comparison should include the combined reserves. We expect to maintain an appropriate reserve supporting loan growth and reflect economic conditions. Overall, we remain in a solid credit position today with a stable economic outlook. While our current credit metrics may be unsustainable in weaker economic environments, we have a history of outperformance during past credit cycles and are well-positioned should an economic slowdown materialize in the quarters ahead. I'll turn the call over to Scott.

Thanks, Marc. Turning to Slide 10. Total fees and commissions were $196.8 million, relatively consistent with the previous quarter. However, the previous quarter included record high results for our wealth management segment, with fourth quarter's wealth results still representing their third-highest fee income quarter ever. Trading fees increased $1.1 million as sales activities related to our institutional customers continued to improve, with some lift provided by our recent Memphis expansion, partially offset by a linked-quarter decline in our MBS trading activities. Our bank-wide investment banking activities fell $2.4 million linked quarter as the third quarter benefited from a record quarter for wealth, public and corporate finance group. Although down from their third-quarter record high, the public and corporate finance group recorded their largest single transaction in their history during the fourth quarter. Wealth Management had a record year in 2023, achieving total revenue of $656 million, which eclipsed the prior record set in 2020 by $140 million, resulting in an annualized three-year growth rate of 8.4%. This was driven by record 2023 revenue in the majority of our business units, including corporate trust, retirement plan and asset services, private wealth, customer hedging and investment banking. Transaction card revenue increased $2.5 million and all other fee-generating categories remained relatively unchanged compared to the previous quarter, demonstrating the consistent positive results we see from these business lines. Our assets under management or administration were $104.8 billion at the end of the year, including an asset mix of 43% fixed income, 33% equities, 16% cash, and 8% alternatives. Our diverse mix of fee income continues to be a strategic differentiator for us and allows us to perform well in a variety of economic environments. We consistently rank in the top decile for fee income as a percentage of total net interest revenue and noninterest fee income. Our revenue mix has averaged 38% during the last twelve months. With that, I'll turn the call over to Marty.

Thank you, Scott. I'd like to start by describing a few of this quarter's unusual items as some of them impact multiple line items. The sale of our insurance brokerage and consulting business resulted in a one-time pre-tax gain of $31 million, which is included in the other gains net line item in the income statement. There were also two components of transaction-related expenses recorded in NIE: $2.5 million reflected in professional fees and services; and $925,000 included in personnel expense, which produced a net gain of $28 million. We took advantage of that opportunity to reposition our available-for-sale portfolio, resulting in pre-tax losses of $28 million, which is reported in the loss on available-for-sale securities line item. The total of $40.5 million reported in the other gains net line item includes the $31 million insurance sale gain as well as $5.9 million of gain related to market value increases on deferred compensation assets, which is effectively offset with $5.4 million of increased personnel expense this quarter. The fourth quarter also included $3.1 million of accelerated recognition of tax expense as the result of exiting three low income housing tax credit investments. Without that item, the effective tax rate for the quarter would have been 23.1%. Turning to Slide 12, fourth quarter net interest revenue was $296.7 million, a $4.2 million decrease linked quarter. Net interest margin was 2.64%, a 5 basis point decrease compared to Q3. This quarter reflected a significant easing of deposit pricing pressure compared to recent quarters. Interest-bearing deposit costs increased 26 basis points in the current quarter; however, this is the slowest pace we have realized since the Federal Reserve started raising fed funds rates in early '23. Our cumulative interest-bearing deposit beta increased to 63% for the fourth quarter. DDA as a percent of total deposits came down to 27% as of December 31. This slide shows net interest margin and net interest revenue with and without the impact of the trading business to better highlight trends and comparability. For the fourth quarter, net interest margin excluding the impact of trading assets was 3.03% versus 3.14% in the third quarter. I expect to see a small decline in net interest margin going into Q1, followed by relative stability after that. Growth in earning assets during the quarter was driven primarily by C&I and CRE loans. Turning to Slide 13, liquidity and capital continued to be very strong on an absolute basis and versus peers. Total deposits grew $367 million on a period-end basis and the loan-to-deposit ratio decreased just slightly to 70.3%. This is stronger than our pre-pandemic levels, well below the median of our peer banks, and positions us well for future loan growth. Average total deposits increased $388 million linked quarter with average interest-bearing deposits up $1.2 billion, partially offset by a $779 million decline in demand deposits. Brokered CDs remained an insignificant amount of our funding and decreased slightly in the fourth quarter. Our tangible common equity ratio is 8.29%, up 55 basis points due in large part to term interest rates falling late in the fourth quarter. Adjusted TCE, including the impact of unrealized losses on held to maturity securities, is 8.02%. CET1 is 12.1%, and if adjusted for AOCI, would be 10.5%. We have sufficient capital to support continued organic growth and opportunistic share buybacks with a high degree of certainty knowing that the recent regulatory capital proposal is primarily focused on banks over $100 billion. Turning to Slide 14, linked-quarter expenses increased $59.8 million, up 18.4%, driven primarily by the $43.8 million FDIC special assessment. Personnel expenses grew $12.2 million due to four primary factors. Regular compensation increased $3.2 million due to salaries related to business expansion and expenses related to the sale of the insurance business. Sales-related activities led to a $4.0 million increase in cash-based incentive compensation. Deferred compensation expense, which is driven by market valuations, increased $5.4 million linked quarter. And lastly, employee benefits increased $1.1 million linked quarter due to seasonal increases in health insurance costs. Non-personnel operating expenses grew $3.3 million, excluding the increase in FDIC insurance expenses, with $2.5 million related to expenses on the sale of our insurance brokerage and consulting business. We also made a $1.5 million contribution to the BOKF Foundation in our continuing efforts to support the communities we serve. Turning to Slide 15, I'll cover our expectations for 2024. We expect mid to upper single-digit annualized loan growth. Economic conditions in our geographic footprint remain favorable and continue to be supported by business migration from other markets. The competitive environment for loans should be a tailwind for us. We expect to continue holding our available-for-sale securities portfolio flat and to maintain a neutral interest rate risk position. We expect total deposits to grow modestly and the loan-to-deposit ratio to remain near 70%. Currently, we are assuming no additional rate changes by the Federal Reserve in 2024. We believe the margin will migrate slightly lower in Q1 of 2024 and expect net interest income to be near $1.2 billion for the full year '24. In aggregate, we expect total fees and commissions revenue in a range of $825 million to $850 million for 2024. Excluding the FDIC special assessment, we expect expenses to increase at a mid-single-digit growth rate as we continue to invest in strategic growth and technology initiatives, with revenue growth following at a slight lag. As revenue growth is realized in 2024, we expect the efficiency ratio to migrate downward to approximately 65%. Our combined allowance level is above the median of our peers and we expect to maintain a strong credit reserve. Given our expectations for loan growth and the strength of our credit quality, we expect near-term provision expense to remain low and trend towards our normal credit costs in the second half of 2024. Changes in the economic outlook will impact our provision expense. Additionally, we expect to continue opportunistic share repurchase activity. I'll now turn the call back over to Stacy Kymes for closing commentary.

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

Thank you. Our first question is from Jon Arfstrom with RBC Capital Markets. Please proceed.

Thanks. Good morning.

Good morning, Jon.

Good morning, Jon.

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

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

Okay. And you're referring to the $1.2 billion guide...

Exactly.

So, you're saying if we get more cuts, that could go higher. Okay, good to hear. I also have a question for Scott. I'm assuming some of the fee guidance you provided assumes flat rates. What impact would lower short-term rates have on your trading businesses and other fee income businesses?

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

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

There's no doubt about that.

Yeah. Okay.

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

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

Okay. Good. I'll step back. But thank you guys. I appreciate it.

Thank you, Jon.

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

Good morning.

Good morning, Peter.

I had a question about borrower sentiment today compared to 90 days ago. Could you also elaborate on how the competitive environment could actually be a tailwind for your team?

This is Marc. You’re absolutely right that it’s a positive factor for us. Given our liquidity and capital situation, along with strong credit quality, we feel confident in pursuing loan opportunities across our areas and all lines of business. We’re looking to take advantage of some peer banks that are reducing their activity for various reasons. This is the main focus of all our sales teams, and there isn’t any specific area we’re avoiding right now. Regarding borrower sentiment, we have always prioritized customer selection. We’ll concentrate on those well-positioned to grow or expand during this time and we’ll support those companies as appropriate.

Peter, our footprint provides us with significant advantages. With the economic expansion underway in Texas and the new markets we've entered in San Antonio and Austin, along with strong performance in Phoenix and stable results in Denver, we expect to benefit from the economic growth in these areas. However, I do have some concerns regarding our loan growth guidance, primarily related to commercial real estate. There is a possibility that as the year progresses, we might see a higher level of payoffs, which could slightly dampen overall loan growth. Nevertheless, we are optimistic about the guidance we've provided considering our footprint.

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

Yeah. I mean, healthcare loans now account for 17% of our overall loan portfolio. And we have an occasional loan here or there that we've had good management support of inside it, but things haven't progressed as they expected, and we had to put those into more of a workout situation. One of them is more of an ongoing senior housing, and one of them is more of a private pay situation. So, they're not even in the same sides of the business. It's just we will have one-off non-performing credits like that. This is not a reflection of anything we see systemic in the healthcare business. And I guess if I'm going to add anything, if you look at our non-performing loans over time, they have operated for the last numerous quarters in a very narrow range. And if we go back and look, some quarters, it's one of our other portfolios that adds to it. Another quarter, it's a different portfolio. And this quarter just happened to be a couple of one-off deals in healthcare, and we'll address those and be able to manage that, we believe, ongoing in a very narrow range with low charge-offs as we've had for a number of years now.

Peter, credit remains a strength for us. When we compare our current situation to pre-pandemic levels, our criticized and classified levels are still below half, and our non-performing levels are strong. This quarter, our charge-offs amounted to $4 million, which clearly isn't sustainable. However, given our position and historical performance, it's clear that credit is a strong point right now. Looking ahead, we feel optimistic about the guidance Marty provided, and we don't anticipate charge-offs to be significantly elevated in the next few quarters.

Got it. Thanks, Stacy. Appreciate it.

Thank you.

Our next question is from Ben Gerlinger with Citi. Please proceed.

Hey, good morning.

Good morning, Ben.

I was curious about the growth side, which looks pretty good, even a bit better than I had anticipated. Are you noticing any hesitation from people or adjustments in risk-based spreads that might influence your willingness to pursue growth? Additionally, can you share any insights on the rates you're observing?

No, I think, generally speaking. I mean, it depends on what segment you're looking at from a spread perspective. I would say on the larger corporate deals, there is some spread enhancement that's coming as a result of maybe a liquidity premium in the marketplace that the larger banks are requiring from that perspective. On the commercial banking at the lower end, there's probably not a lot of spread enhancement that's happening. There's still more competition there. Part of it is mix. As the mix shift is around over time that can change our spreads just a little bit because there are higher spreads than the specialty lines of business than there are in traditional C&I. But I think what we saw is the fact that we're not just open for business, but we're actively prospecting, looking for new customers, trying to use this opportunity to grow very thoughtfully; it's creating opportunities for us. And really, we had several deals that kind of pushed into the first quarter. We were hopeful, it would have closed in the fourth quarter. So, we're optimistic about our loan pipelines and what we're hearing from our customers and prospects as we think about loan growth in 2024.

Got you. That's a helpful color. And then, I know the trading business is kind of the front end of the curve. Do you need consistent Fed cuts to really see that start to work, or is it just kind of the implications? Any kind of thoughts on what you might expect in terms of a cadence if, say, the forward curve is correct?

I think in the trading business, even without changes in rates, that business has momentum given the investments we've made in expanding into Memphis, et cetera. And so, it would be incremental on top of what we already expect to be a growth trend if the forward curve plays out.

Ben, were you talking about NIR or the fee businesses?

The fee business.

Yeah. I think Marty answered that as it relates to the fee businesses for sure.

Yeah. That's helpful. Thank you, guys.

Thank you, Ben.

Our next question is from Matt Olney with Stephens Inc. Please proceed.

Hey, great. Thanks. Good morning, everybody.

Good morning.

Good morning, Matt.

Going back to the fee discussion, and I think Scott touched on this briefly with Jon's question. But just take a step back and help us appreciate the drivers of that $24 million guidance for fees and commissions. Various components of that through each one of your fee businesses. I think that guidance implies like a high-single-digit growth in '24. What are the major drivers and detractors of that guidance?

Yeah. Why don't I start on that, Matt? So, I think that the businesses that probably have the greatest opportunity are in the brokerage and trading where we've made investments there, and we've got great momentum in that business. Fiduciary asset management, I think we'll have customary growth in that business, plus we think that asset valuations are going to give us a little bit of wind at our backs from an AUM perspective, and that will flow through to new growth rates. And then, mortgage actually has opportunity there, both on the production side and on the servicing side. And so, we expect to see good numbers out of that line of business on a percentage growth perspective.

Matt, this is Scott. When we examine the overall category, I'm pleased to note that no single component is solely responsible for our success. Over multiple quarters and for the year overall, we have achieved record revenue generation across all areas of Wealth Management. This sector is well diversified in terms of products, customers, and geographic reach, particularly in the international market. We have observed positive outcomes from our historical investments in Corporate Trust, asset management, and trading, as Marty pointed out. All these factors combined give us confidence that we are not reliant on Fed rate cuts to sustain momentum and growth in our business lines. While rate cuts are less of a concern for us, an increase in curve steepness would benefit our trading businesses, as we have been in a long period without any slope. Should the curve steepen, we believe we are exceptionally well positioned to take advantage of that shift.

Okay. Appreciate the thoughts there, Scott. And then, I guess shifting back over to the rate sensitivity, you provided some good commentary being relatively neutral as far as on the NII. What are your early thoughts on deposit betas in a falling rate scenario, whether it's back half of the year or next year, whatever that would be? And how would those betas you think compare on the way down versus what we just saw on the way up at the bank?

Yeah. So given the fact that over the last couple of quarters, you've seen betas be higher, you're going to see a mirror image of that more or less as we see rates come down in that kind of environment. I mean, as you know, those are not linear, and so you're not going to get the same exact beta at each rate hike. But you'll see relatively high betas on the way down, given that you've got a lot of that beta on the driven upside was the larger corporate and wealth balances.

Yeah. Okay. Fingers crossed. And then, just lastly on the expense side, I know that the expenses can be lumpy quarter to quarter. And I see the full year guidance. But any color on where we could start off earlier in the year in the first quarter on the expense side?

Yeah. If you take the fourth quarter number, the $384 million and then adjust that for the FDIC special assessment, you get to a $340 million number. So, coming out of the gate next quarter, we'd expect to be a little below that.

Yeah. And as Marty pointed out, Matt, I think it's important, there's some BOKFI transaction costs that are embedded in some of those line items in the fourth quarter, particularly related to personnel expense and professional fees that you got to think about is really being part of that sale of that business, not really part of the core run rate of the company.

Yeah. So if you think through some of those unusual items and filter some of those out, you'll get taxes on wages coming up in the first quarter, but that will net down to just a little bit lower.

Okay. Thanks, everybody.

Thank you, Matt.

Our next question is from Will Jones with KBW. Please proceed.

Hey, great. Good morning, guys.

Good morning.

Good morning, Will.

Marty, just hoping you could help us unpack the margin story. What it looks like in both this flat rate environment that your guidance is kind of predicated off of? And then maybe what the margin does if we do see two, three, four, even six rate cuts this coming year? I know you talked about compression next quarter, but then maybe a stable NIM in this flat rate environment, but can you see expansion in that scenario? And I guess just to confirm, you all will certainly see NIM expansion if we do get rate cuts. Thanks.

Yeah. So, the basic trajectory that we're expecting is margins basically leveled out a little bit down in the first quarter level and then actually just a little bit up at the end of the year is how we think about it for a flat rate scenario. Of course, plus or minus the usual drivers of noise around that trend. And then, if you've got a forward curve kind of scenario playing out, that would be modestly supportive of the margin percentage in those later quarters when that would play out, what the steepness would start to play out.

Got you. That's helpful. And then, where do you feel like we are in the noninterest-bearing remix story? I know balances took another step down this quarter, but do you feel like we're getting close to kind of a leveling out there? Or how do you think about noninterest-bearing deposits into this year?

The decline we experienced in the fourth quarter was mostly in line with our expectations, which we discussed during our Q3 call. For the first quarter, we anticipate another decline, though slightly smaller than what we saw in the fourth quarter. It's still significant and will be influenced by a combination of rate-driven movements and typical seasonal declines we face as we enter Q1. Therefore, you can expect Q1 to show another decrease, and after that, we expect only minor shifts from noninterest-bearing to interest-bearing deposits over the next few quarters as we move into the later phase of this trend.

Okay. Great. Thanks for that. And it feels like maybe it's been a while since you've updated thoughts on bank M&A. It feels like there could be some pushes and pulls on M&A into the coming year. Could you just update us on how you feel or how you generally think about M&A, in terms of end-market transactions or out-of-market or size? Just any kind of context you could give would be great.

I believe two main factors are at play. I think interest rates need to decrease before bank mergers and acquisitions become more feasible. There are still accounting issues to address until some of the securities portfolios and banks looking to be acquired are in a better position, which will create headwinds until that's sorted out. For us, pursuing large bank acquisitions will be challenging. There aren't many that align with our desired profile. We prefer to remain within our current geographic footprint, as we are focused on growth in fast-growing markets like Texas. Any potential acquisition would need to be significant enough to impact us positively, but options are limited. We're more inclined toward technology or product acquisitions that could provide immediate benefits without diverting our attention from regulatory approvals and integration processes. Therefore, I think the probability of us finding a whole bank acquisition in the next year is quite low. We are still on the lookout for product or technology opportunities that could add value in the long term, although there isn't anything promising in sight at the moment.

Yeah. Makes sense. That's it from me. Great year, guys.

Thank you.

Our next question is from Timur Braziler with Wells Fargo Securities. Please proceed.

Hi. Good morning.

Good morning.

Starting on the deposit side, do you have what the deposit spot rate was at the end of the year?

Yeah. We don't really have deposit spot rate per se, but our cumulative beta was 63% for the quarter, and for the month of December, it's 64%. So really not a lot different than the full quarter average.

Okay. And then looking at expenses and trying to take into consideration some of the comments around what happens on the fee income side, if we do get rate cuts, is the expectation that the expenses grow in an environment where you see some higher revenues from fees? And if that is the case, is the 65% efficiency ratio in a down rate environment still a good base? Or could you actually see some improvement as some of these fee-income businesses pick up some more momentum?

Yeah, I think broadly speaking, the 65% is good, but you could see some incremental improvement from just a higher revenue lift overall that would just accelerate that trend.

If you think about mortgage, particularly, I mean, mortgage is probably running 90% plus efficiency today. So, if you got any lift there, you're going to get a better efficiency ratio out of that line of business. So, Marty is right; I think we're very comfortable with the forward guidance we provided there. But any benefit that we get from a lower rate environment should be incrementally positive to our efficiency ratio.

Got it. Thank you.

Our next question is from Brandon King with Truist Securities. Please proceed.

Hey, good morning. Thanks for taking my questions.

Hi, Brandon.

Yeah. So I wanted to follow up on trading NIR. And what are you expecting kind of implied in your NII forecast? And if you could kind of give us the puts and takes on how that could play out, just given better rate cut potentially occurring in the year?

We are assuming that it remains roughly constant throughout the year, and if there is some steepening, it could positively impact that line item.

Okay. And then, just another follow-up on credit. So, in your guidance, you expect an increase in credit costs more towards the latter part of 2024 and then you also mentioned kind of a normalized range of 30 basis points to 40 basis points. So, is it fair to assume that maybe back half of 2024, we approach that 30 basis points of net charge-offs? Is that how you're thinking about it?

No. I think our guidance focuses on provision levels rather than charge-off levels. However, you might notice an uptick in charge-off levels in the latter half of the year due to some reversion. Marc mentioned our historical charge-offs, and we typically guide for a range of 30 basis points to 40 basis points, but it's been quite a while since we've reached 40 basis points.

We have maintained net charge-offs below 30 basis points since 2013, with the last instance being that year. For the past 10 to 11 years, our range has mostly been under 10 basis points to 20 basis points. Currently, based on our credit situation, we do not anticipate an increase in net charge-offs. However, as we expand and the economic landscape shifts, this will influence the provision and reserve levels we need. We will ensure that our reserve appropriately reflects these factors, which will be more significant than net charge-offs themselves.

Okay. Very helpful. Thanks for the details.

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

Thanks again, everyone, for joining us this morning. If you have any questions, please email us at ir@bokf.com. Have a great day.

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