Bok Financial Corp Q2 FY2024 Earnings Call

Greetings. Welcome to the BOK Financial Corporation Second Quarter 2024 Earnings Conference Call. All lines are being placed on mute to prevent any background noise. After the speakers’ remarks, there'll be a question-and-answer session. 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's 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, Executive Vice President of Wealth Management will cover our fee-based results. Our CFO, Martin Grunst 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 will 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've been $131.1 million and EPS would've been $2.02 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 in dynamic high growth markets. These core tenets of our operating philosophy have enabled us to produce attractive returns over time and given us resilience to market stresses that are unmatched. Every time you've seen a stress event in the market, we outperform. As 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 TARP. Our loan book's performance was also strong when energy prices moved 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 point 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% of total loans, 158% as a percentage of Tier 1 capital and reserves on a committed basis and 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 EPS 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, the banks of high growth and higher risk, and others are lower growth and lower risk. We've proven over a long history that we can be both a strong, stable company and produce a higher long-term growth profile. Since 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 H.8 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 made slow loan growth, are nonetheless a part of a healthy portfolio. All of our payoff activity has 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. This didn't happen by accident. The C&I sales process is a long one, 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 at 11.2% of Tier 1 in reserves, which is among the lowest of the largest banks and well below pre-pandemic levels. Mark 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 and 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 produce attractive returns and offer a diversifying or countercyclical benefit to our net interest income stream regardless of challenging market conditions. You also saw us monetize 50% of 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 achieved full value for these assets. The gain generated offsets the AFS repositioning losses you saw us take in the first quarter, which produced a $22 million a year benefit to NII with less than a 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 performance 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 the BOKF team has put together and appreciate the time to review it with you this afternoon. And with that, I'll turn the call over to Marc.

Thanks, Stacy. Turning to Slide 8. Overall loan increased 1.6% late quarter with commercial loans up 3.2% and CRE down by 2.9%. Portfolio yields increased 1 basis point during the quarter. I wanted to spend 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. The sales cycle for C&I is a long one. For many, there is a greater emphasis on growing C&I than there was a few quarters ago, especially with the market's concern about the CRE space. This isn't what you are 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 today and our ability to sustain this growth for the remainder of the year. Overall loan growth was moved slightly by CRE payoffs. This is a good outcome. The normal lifecycle of our CRE portfolio involves the bank providing funding while a project is under construction and then the sponsor selling the property once it has been developed. This payoff activity reflects the health of this book of business. And importantly, all of this payoff activity is 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 base 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 outstanding at current levels. Our combined general business and service loans grew 6.7% linked quarter or 4.9% adjusted for seasonal advances. This remains a core focus from a loan growth perspective for us. Our healthcare 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, Medicaid-based stabilized private pay senior living, integrated health systems predominantly with investment-grade equivalent ratings, and other specialized providers. 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 and 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 with a lower CRE concentration. We do not have the outsized exposure that others do in this space. And while we have capacity, we 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 or repriced 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. Non-performing assets, excluding those guaranteed by U.S. government agencies, decreased $27 million this quarter, an exceptional outcome. The resulting non-performing assets to period-end loans and repossessed assets decreased 12 basis points to 0.35%, and non-accruing 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 9 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 a 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 levels. We expect to maintain 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, Marc. 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 was 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 and 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 are at very low levels of origination volume, and we are 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 is driven by our energy customers hedging their oil and natural gas production. In many cases, energy 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. Another example is when rates decreased substantially during COVID in 2020. Our customers perceived that it was an attractive time to participate in interest rate hedging and engage with our desk to use interest rate swaps to convert floating rate loans to fixed. The brokerage fee line item previously included insurance business that we sold in the 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 earned 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 the volume of transactions processed during the quarter. This business is a top 10 electronic funds transfer business that 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 offsets a $45 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 8.6%. 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 68% 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 enables our opportunistic approach to share buyback. 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 by $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 increased 7 basis points for this quarter, which was less than one-third of what it was in the prior quarter. The DDA average balance decline was also less than one-third of what it was in the prior quarter. Net interest margin was sequentially lower by 5 basis points, but 4 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 expenses fell by $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 benefits expense. In addition to the $10 million Visa share donation mentioned earlier on the call, we also made a $3.6 million contribution to the BOKF Foundation this quarter. We recognized $1.2 million of expenses 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's activity. Turning to Slide 18. This provides our outlook for 2024. Our net interest income guidance of $1.2 billion presumes 1 rate cut for 2024 in November. We expect fees and commissions to be in the neighborhood of $825 million. We are assuming recent securities trading revenue trends persist into Q3, and RMBS 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 non-performing 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.

Our first question comes from Michael Rose with Raymond James.

Scott, maybe for you, we can start off. I appreciate all the color on the fee businesses. It looks like maybe 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 and those businesses look like they have some tailwind as we move into next year if we do get some cuts.

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 has, in essence, bottomed. What will stimulate further activity in the MBS piece specifically, which is the biggest variable there that Marty mentioned, is whether or not we get a Fed rate cut, which will stimulate greater mortgage production, which picks up 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 products on managing their portfolios will move out of 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, and then that mortgage production will increase the volume and the flows.

And then maybe just as a follow-up for Mark. It sounds like loan pipelines are pretty good at this point. I would expect some of those CRE paydowns 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 the two just based on what we're seeing at some other banks? And would just love some color there.

We've been actively working on the C&I side for quite some time. Obtaining C&I loans takes longer because it's more focused on building relationships rather than just transactions related to capital and asset acquisition. It’s not that our existing customers are using less; we’ve managed to bring in new customers as well. This has led to a broader pattern of growth than we’ve experienced in a long time. We believe we can maintain this, although perhaps not at the level we achieved in the second quarter. Excluding seasonal advances, we anticipate something similar for the rest of the year. As for CRE, we do expect payoffs to slow down, but we’re looking for the right types of deals to add new projects, mostly in the construction phase, which will take some time to fund. However, we expect to see progress on this in the next 12 months.

Michael, this is Stacy. I mean, I think our geographic footprint here is awfully helpful. But come back to the original thesis here, 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 a 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.

Our next question comes from the line of Brett Rabatin with Hovde Group.

I wanted to start by noting that I understand you don't provide specific margin guidance. However, if we look at the NII guide for the full year, it suggests that the margin could increase by about 10 basis points for the second half of '24. I wanted to confirm if my understanding is correct and if there are any factors that might alter that outlook, as well as the variables you are currently considering in your analysis.

Yes. Let me address the net interest income guidance and how we view margin and its connection to variability. We made two minor adjustments to our outlook, with one being significant. We removed the anticipated rate cut for Q3 and accounted for the commercial real estate payoffs from Q2. We believe that the margin remained relatively stable this quarter, with the decrease primarily resulting from the denominator effect of the available-for-sale portfolio and the trading account, indicating a stable underlying position. We expect that as both demand deposit account and deposit rate trends gradually slow down from what we observed in Q2, this will provide a tailwind for our net interest margin percentage, accounting for the usual quarter-to-quarter fluctuations. Regarding the factors influencing this trajectory, it seems favorable for our net interest income outlook with the Q3 rate cut and could improve further with stronger loan growth than we currently expect. Conversely, higher commercial real estate payoffs or unexpected trends in the demand deposit accounts or interest-bearing deposits could pose risks to this outlook.

I was a little surprised that you didn't adjust the expense growth for the full year considering the second quarter. I wanted to revisit that and understand if there were specific factors, aside from potential salary inflation from merit raises in the second half of the year, that were keeping that mid-single-digit estimate unchanged from the previous 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'd just note that some of the incentive comp decline quarter-over-quarter. That's not really a run rate you should probably add a little bit of that back. But we do feel good about being able to have good expense control through the rest of the year. Now we've got some IT projects that are going to bring the data processing line up just a bit.

Our next question comes from the line of Jon Arfstrom with RBC Capital.

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 a fair way to look at it?

Yes. I think that's the right way to look at it.

John, and if you go back to January, I mean, we were really outperforming our loan growth expectations from a C&I perspective. 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 it's 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.

Yes, you can sure see that on Slide 8. I guess another question I think 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. Do you continue to grow deposits faster than loans? Or do you somehow try to bring that ratio back up over time?

Let me answer it a couple of ways, Jon. I think one is we typically think about deposits funding the loan book and the securities portfolio being largely self-funded through wholesale funding, and that's the way we 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.

Our next question comes from the line of Peter Winter with D.A. Davidson.

I'm just wondering on the deposit beta, it's been at the upper end of peers with the increase in rates. But what's the outlook for 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 simply reflects the fact that we've got a more commercial and wealth mix in our deposit base. And so you saw the effect when rates went up, you're going to see the same effect when rates come down. We're going to be able to have a deposit beta that's easily in the mid-50s in down rate scenarios. We're very confident and know exactly how that will play out. So that will be helpful for us once we start to see rate cuts coming through.

Would it be in the high 60s, you think, a down rate beta?

As 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-50s 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 beta can increase just as we saw on the way out.

And then just on deposits, right? So period-end deposits, they're up 9% year-over-year in the second quarter. Certainly a lot stronger than I would have thought. But you maintained that deposit outlook for modest growth. And just how you're thinking about deposit growth then in the back half of the year?

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

That's the right answer. 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.

It's good to have the period end as your guidance, but I understand. I just have one more follow-up question about the outlook on expenses, which is expected to grow in the mid-single digits. Do you exclude the FDIC assessment and charitable contributions from that? I'm curious about what base you're using for 2023.

Yes. We are maintaining our approach regarding the efficiency ratio as it was. I believe the same applies to 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's efficiency ratio.

Our next question comes from the line of Woody Lay with KBW.

A quick question on deposits. Just looking at the deposits broken out by market, it looks like you saw a really strong growth 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?

This is Stacy. One of our key growth objectives for the company in recent years has been to expand our presence in Texas. We have been focused on Central Texas, evident in our expansion in San Antonio and our activities in Austin on the wealth side. We also recognize the talent pools in Dallas, Fort Worth, and Houston, which are important markets for us. Part of our growth strategy is centered around deposit acquisition, and we are starting to see the results of those efforts. From our perspective, we anticipate continued success in this area.

Yes. I want to highlight that we are mindful of pricing when it comes to share buybacks. Our objective is to enhance shareholder value through these actions, and the share buybacks we executed over the past year have significantly contributed to that. We are pleased with the results. However, as prices increase, you should anticipate that we will moderately reduce our activities, which will have a dampening effect due to the higher costs.

Our next question comes from the line of Matt Olney with Stephens Inc.

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

Yes, we've previously discussed that mergers and acquisitions are of interest to us, but we will only invest our capital in the right opportunities. It's challenging to find a franchise that aligns well with our culture, which is very important to us. We also consider factors like real estate concentration and the strength of core deposits. We are looking to expand beyond our current footprint and want to acquire banks that possess strong characteristics, so we don't have to compromise value by taking on loans that don't meet our profile. In practical terms, there aren't many options that meet our criteria, so it's improbable that we'll pursue something like this in the short term. While we are open to the idea, it must align with our specific profile.

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

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

Our next question comes from Timur Braziler with Wells Fargo.

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 starting to abate?

Yes, Timur, I think an easy way to think about that is the Q2 average for DDA was approximately 8 billion 387. 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.

And then just looking at 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 yields ended the quarter? Kind of what's the bond yield looking like in Q3, given both the reinvestment opportunities and some of the restructuring activities?

Yes. The average yield for the bond portfolio in Q3 is fairly representative because the restructuring activity occurred at the end of Q1. Q2 was relatively straightforward. It's important to note that we're consistently obtaining $500 million on average each quarter. This quarter, it was $600 million, but generally it’s around $500 million in cash flows that are reinvested each quarter. This quarter, we were able to achieve 170 basis points, around 165 to 170 basis points between the cash flows and what we reinvested. This trend will continue, and it's going to be a significant factor in margin expansion over the next several quarters.

And then just last for me. Your comments around uncertainty just with CRE paydowns, 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. 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 categories that are driving the payoff activity? And I'm wondering if there's anything lumpier in the back end of the year that might be driving your indiscernible.

We have a portfolio that primarily begins with construction. Once a project reaches a certain occupancy level, it can be refinanced through the permanent non-recourse market, and that's currently taking place. Marc mentioned that financing is being directed to Life Companies, CMBS, agencies, and permanent non-recourse options, which reflects how our portfolio operates. The slowdown in new projects has made rebuilding behind some of our borrowers more gradual, as they are exercising caution. However, the paydowns in our portfolio remain robust and consistent with our expectations; it's just that there aren't many advances offsetting that at this time. I anticipate that as confidence in this sector grows, we will see more activity in future periods.

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

Thank you, everyone, for joining our discussion today. We're a 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.

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