Bok Financial Corp Q1 FY2025 Earnings Call

Greetings. Welcome to BOK Financial Corporation's First Quarter 2025 Earnings Conference Call. All lines have been muted to prevent background noise. Following the speakers' remarks, there will be a question-and-answer session. 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 first quarter 2025 financial results. Our CEO, Stacy Kymes, will provide opening comments and cover our loan portfolio and related credit metrics. Scott Grauer, Executive Vice President of Wealth Management, will cover our fee-based results. Our CFO, Marty Grunst, will then discuss financial performance for the quarter and our forward guidance. Slide presentation and press release are available on our website at bokf.com. We refer you to the disclaimers on Slide 2 regarding any forward-looking statements made during this call. I will now turn the call over to Stacy Kymes, who will begin on Slide 4.

Thank you, Heather. We appreciate you joining the call this afternoon. We are pleased to report earnings of $119.8 million or EPS of $1.86 per diluted share for the first quarter. At BOK Financial, we worked hard over the years to build a reputation as a strong, stable and growing financial services provider. In today's volatile market environment, the stability of our franchise is apparent. We have a consistent risk management framework built to weather many different economic and market cycles. Our capital levels remain strong and in fact, improved yet again this quarter with TCE reaching 9.5% and CET1 reaching 13.3%. These strong capital levels not only helped insulate us from market disruptions but also allow us to confidently and strategically plan for future growth. Another insulator is our liquidity position. At 62%, our loan-to-deposit ratio is one of the lowest in our peer group. Additionally, part of our stability story is a disciplined approach to credit that doesn't change over cycles. That consistency has driven solid performance in our loan portfolio with low criticized classified levels and the combined allowance at a healthy 1.4% of outstanding loans. Our long-term credit performance of 26 basis points of charge-offs is peer leading and we believe in our ability to continue outperforming the market in this area. Commercial real estate is another area that can be sensitive to market conditions. Our CRE concentration is currently well below limits which at 185% limit on Tier 1 capital plus reserves in itself is low compared to peers. Our financial performance this quarter reflects our ability to navigate through times of extraordinary market volatility. Despite recent market disruptions and geopolitical events, our diverse business model has performed well. Our strategy at BOK Financial is to produce long-term sustainable value for our shareholders and we base our decisions on that strategy. While we may see fluctuating results in some of our business lines during unstable conditions as we did this quarter, these businesses are built for long-term success. During the quarter, net interest income was strong and we continue to see net interest margin expansion for the third quarter in a row as we recognize the down rate deposit betas with continued lower repricing. We are already showing a total liability beta of 74% which is one of the highest in our peer group. The lack of clarity and volatility in the financial markets impacted our fee income, specifically in our trading business. Trading fees in January were in line with our expectations. The trading volumes and spread were compressed during February and March as uncertainty in the market slowed fixed income trading. However, as we mentioned last quarter, we expected a mix shift in trading revenue to net interest income as the yield curve steepened and we saw that come to fruition in Q1 with some of our fee income decline recaptured in net interest income growth. Scott will talk more about this in his commentary. Consistent with the rest of the industry, loan growth in the first quarter has been challenging. As you can see on Slide 6, we experienced contraction in our loan portfolio, mainly driven by pullback in our energy book. Excluding energy, our total loan portfolio was relatively consistent with the prior quarter. Loan balances in the energy business decreased 12.1% linked quarter. Our appetite for adding new energy transactions is unchanged and we're proactive in supporting our customers in this space. Over the last few quarters, the energy industry has been consolidating which has generated payoffs in the portfolio. We expect these balances will rebound over time as the market adjusts. Our core C&I loan portfolio which represents our combined services and general business portfolios, was relatively stable linked quarter, contracting only 0.7%. On a year-over-year basis, these portfolios are still showing positive results, growing 4.2%. Our healthcare business loans decreased 4.5% linked quarter. We set a new record for healthcare commitment production in Q1. However, pay-up levels have remained elevated relative to historical standards and more than offset the increased outstandings. Payoff activity is a normal component of this business and was driven by increases in asset sales by sponsors and refinancing into nonbank long-term nonrecourse loan options. We expect payoff activity, especially related to refinances to moderate and pipelines to remain robust. Our commercial real estate business increased 2.1% quarter-over-quarter with the majority of the growth coming from multifamily housing and industrial projects. We are starting to see the loans that we originated in 2024 fund up as they move through the construction phase as we signaled the past couple of quarters. We expect to see further growth in outstandings in the second half of the year. As I mentioned last quarter, we are expanding into the mortgage finance and warehouse lending business. This initiative is progressing nicely with the system implementation well underway and the talent already in place. This lays the foundation for a launch of this new line of business in the September to October time frame. This won't be a monoline offering and we believe that this will unlock value across our existing lines of business and allow us to better support and engage with the more than 500 independent mortgage originators that we do business with today. Transitioning to Slide 7. Credit quality remains exceptional across the loan portfolio. This is a new story for us. We've consistently shown peer-leading credit outcomes over the last 30 years across good and challenging market cycles. Nonperforming assets not guaranteed by the U.S. government increased $36 million to $79 million. However, this is coming off the lowest levels in the last 20 years and remains exceptionally low. The resulting nonperforming assets to period end loans and repossessed assets increased 15 basis points to 33 basis points. Committed criticized assets also remained very low relative to historical standards. In addition, we had minimal net charge-offs of $1.1 million during the quarter and net charge-offs have averaged 4 basis points over the last 12 months. We expect net charge-offs to remain below historical norms in the future. Our combined allowance for credit losses is $331 million or 1.4% of outstanding loans which is a healthy reserve level. Overall, I'm pleased with the results this quarter. We are focused on people and processes. Our exceptional team demonstrates the grit and determination it takes to succeed in a very dynamic and fast-changing market. We continue to add revenue-generating team members and our sales process continues to produce opportunities for us going forward. And now I'll turn the call over to Scott.

Thank you, Stacy. Turning to our operating results for the quarter on Slides 9 and 10. Total fee income decreased $22.8 million on a linked-quarter basis, contributing $184.1 million to revenue. As Stacy mentioned, market volatility resulting from uncertainty surrounding U.S. domestic and foreign policy affected our trading business this quarter but this business is designed to produce solid long-term results. To give you a sense of the composition of our trading portfolio, more than 97% is residential mortgage-backed securities issued by U.S. government agencies. Even in more challenging environments, the credit quality of this portfolio is high and comes with limited basis risk. This quarter, you started to see the transition from fee income to the trading-related net interest income that we discussed in our last call. During the quarter, total trading revenue was $23.3 million which was down from $37.7 million in the prior quarter. $10.6 million of fee revenue shifted from fees to net interest income as the yield curve steepened. The remainder of the decline in trading revenue reflects lower MBS trading volumes and tightened spreads as client demand was muted towards the end of the first quarter. We also experienced seasonally weaker pipelines in our municipal desk. We've provided a table on Slide 9 to allow you to see this dynamic. Mortgage banking revenue grew $1.7 million linked quarter, coming in at $19.8 million, driven by higher mortgage production as client demand begins to increase and inventory constraints eased slightly. Turning to Slide 10. Our asset management and transactions businesses were very consistent with the prior quarter, contributing $133.2 million in revenue. Importantly, there is diversification within this portfolio with 43% fixed income, 34% equities, 15% cash and the remainder in alternatives. AUMA decreased $659 million linked quarter, reflecting the volatile market conditions during Q1. And now, I'll hand the call over to Marty to cover the financials.

Thank you, Scott. Turning to Slide 12. Net interest income was up $3.2 million and headline net interest margin expanded 3 basis points, reflecting growth in trading-related net interest income. Core net interest margin, excluding trading, decreased 4 basis points and was driven by several factors. The securities and fixed rate loan portfolios continue to reinvest cash flows at higher current market yields. The upward repricing in the securities portfolio was dampened this quarter from lower accretion of purchase discounts. Noninterest-bearing DDA balances declined slightly coming off seasonal highs of Q4. While these balances were sequentially lower, both the average balance and the trends within the quarter were aligned with our expectations. Loan fees declined during the quarter after being elevated for the prior 2 quarters which negatively impacted effective loan yields. Loan fees are now in line with our typical historical and seasonal patterns. Loan spreads were pressured due to a mix shift within the loan portfolio with higher spread energy loans being replaced with narrower spread core C&I loans and, of course, the lower day count impacted Q1 versus Q4. Each of these factors vary in terms of their predictability and stability of trends. Fixed rate asset repricing has clear drivers and an established supportive trend. DDA mix shift seems to have largely run its course and normal seasonality and customer usage variability have been more visible lately. Over time, we have demonstrated the ability to generate very good loan growth in our specialty lines of business and we believe that represents future loan yield opportunity. Turning to Slide 13; total expenses were consistent with the prior quarter. Personnel expenses grew $3.5 million, largely driven by annual merit increases in the first quarter. Seasonally higher employee benefits costs driven by payroll taxes were offset by lower incentive compensation costs resulting from reduced trading activity. Non-personnel expenses decreased $3.6 million, led by a reduction in mortgage banking costs. Slide 14 provides an update on our outlook for full year 2025. Loan balance projections reflect continued fund up activity on construction loans in the CRE portfolio, continued growth in core C&I and the successful launch of our mortgage finance business later in the year. We recognize the economic policy uncertainty adds some risk to this guidance. Our net interest income expectations remain unchanged. This assumes 225 basis point rate cuts with a small amount of upside should additional cuts materialize. I will note that trading-related net interest income will be impacted by rate levels and curve steepness which would largely be offset by trading-related fee income. We widened the range of our guidance for fees and commissions given the impact of economic and market uncertainty on activity within our fixed income trading business. Lastly, on credit. Nonperforming assets are remarkably low and the portfolio of credit quality is very strong, all of which supports our expectation that charge-offs will remain well controlled for the foreseeable future. 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.

And your first question comes from the line of Jared Shaw with Barclays.

Maybe just first, looking at the dynamic with trading income and the trading fees versus the NII, when you look at total trading revenues still down, is all of that $14 million roughly due to the lower volume, as you said? And at some point, I guess, what's a normalized level would you say for total trading revenue? Is it closer to what we have this quarter? Or should we expect to see that start to trend higher?

Yes, Jared. The short answer to your first question is yes. That was entirely driven by volume with no other factors involved. We do expect to see trends improve, which is certainly dependent on the market, but we believe that trend will be upward in the second quarter for the trading business. In fact, in the first few weeks of the quarter, we've observed some recovery activity, which gives us confidence about the direction of that trend going forward.

And so, Jared, this is Scott. So I would add that so as Stacy mentioned early in the call, we, actually, on our trading activities, specifically in the mortgage-backed securities, we started the year very solid out of the gate. Our January was in line and actually growing versus our previous results in 2024. And then as the economic and trade uncertainties, I'll call them, were introduced into the market in both February and kind of climaxed in March, that activity suffered significantly. As you look forward into April, we believe that where we started the year and where we expected that activity to be absent that significant uncertainty is reasonable.

Okay, that's helpful. Given the ongoing pressure on balances in energy and healthcare, should we expect this dynamic to continue? In this current environment, can we assume that there will be consistent pressure and that incremental loan yields are likely to be under pressure from this point onward?

I don't think so. I find it challenging to pinpoint the absolute bottom on the energy loans, but we feel fairly confident that we are close to it. I don’t expect that to be a headwind for us as much as it has been over the last two quarters. In fact, if you examine April results, it's probably risky to discuss them, but we are actually seeing increases in all categories this month. Early indicators are very encouraging. Regarding both healthcare and energy, I anticipate that the headwind will not be as significant in the next three quarters as it was in the previous two. However, it's important to note that forecasting this accurately is challenging due to market dynamics and how things change over time, particularly in the M&A area. We have noticed a decrease in M&A activity, which contributes to our optimism about experiencing less of a headwind moving forward.

Okay. All right. Great. And then just finally for me, when we look at the provision guide with sort of the dynamic of the loan growth guide, should we assume that you're going to be growing the ACL as a ratio over the course of the year? And I guess, what are some of the dynamics you're using in terms of qualitative overlay and potentially a more risk or a more adverse scenario?

Yes. So Jared, so we would not expect to need to grow the coverage ratio over the course of the year. If you look at how we closed out the first quarter, the increase that we saw in credit quality on our portfolio combined with where the actual balance levels came. So when we ran our reserve calculation, it actually suggested that we could do a reserve release. However, when we looked at current circumstances that just didn't make any sense to us. So we obviously provided at zero but that just gives you a sense for the fact that there is some judgmental addition in there on top of what it would normally be.

And your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Just I wanted to ask a little bit about the loan growth outlook. But can you give us an update as to what you're hearing on pipelines in general? And then, Stacy, maybe give us an update on the expected size of the mortgage finance business, maybe by the end of the year?

Pipelines are looking strong. We track them through Salesforce and review them monthly, which gives us confidence. However, the uncertainty among borrowers is a concern. It's difficult to predict if they will close deals given the uncertain economic climate. When Marty discussed loan growth guidance, he recognized this uncertainty but still felt positive based on current information. I’m not worried about our pipeline; we’re building and growing well. The unpredictable element is how borrowers will respond—whether they will utilize their lines of credit or proceed with new equipment purchases. This unpredictability makes it challenging to forecast accurately, especially given that conditions may change unexpectedly. We’re cautious about extrapolating first quarter trends into the rest of the year. On the mortgage warehouse side, I can’t provide volume estimates yet since we haven't closed our first loan, but we are reaffirming our point-to-point loan guidance and feel excited about our new team and their ability to attract business. This new area integrates well with our existing mortgage-related services, enhancing our connection to the 500-plus mortgage finance companies that are our current customers. We're looking forward to both loan and deposit growth and are more optimistic now than we were three months ago, which supports our confidence in meeting our loan guidance.

And Jon, just to be clear, we've got leadership in place. We've got operations folks, credit folks and producers all in place today. So we have everything we need to begin.

Okay. Good. That's helpful. And then just, Scott, one follow-up for you. The trading NII line, is that unusual? I mean, it looks like it's a big jump but at the same time, you guys are flagging maybe a steeper curve as a driver.

Yes, that is the reason for the mix shift as the yield curve returned to steepness last year. We discussed this in the fourth quarter, particularly because the steepness of the curve is a more traditional revenue mix compared to the flat or inverted curve we experienced for 24 to 26 months. We don't anticipate this being a one-time event; instead, we believe that the mix between fees and net interest income is more indicative of that business in a normally shaped curve.

And Jon, it's Marty. I would add that to understand the trends in the business, it's better to look at the total trading revenue line at the very bottom of Page 9 on the slides, as it provides a more subdued level of change. This perspective is a more insightful way to think about the trends in that business unit.

And recognizing that our trading business is largely MBS in that category and then municipals. So there is no equities, increased volume due to chaotic markets offset to that. So ours is going to reflect that curve and the MBS activity overall, most predominantly.

Yes. Okay. Yes, I was just curious if we get a couple of cuts and we have a steeper curve if, in aggregate, those numbers can move higher. That's...

Yes, you can see that shift go even further if what you just described laid out but the total revenue of the business would remain unaffected.

And historically, when we have that steeper curve, more traditional curve prior to the flattening and inversion, that was the composition of our business and it was more predominantly NII than fees than where it is at the end of this quarter.

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

I just had 2 questions. Just digging a little bit deeper into the outlook. First, you didn't lower the expense forecast given somewhat of a weaker fee income outlook but can you talk about your flexibility to manage expenses if revenues come in weaker?

Yes. So we've got a little bit of flexibility in kind of a couple of different areas. So number one, as you know, Peter, you've got a couple of lines where the compensation is heavily variable. And so both in the trading and investment banking and mortgage areas, that will just naturally ebb and flow with the revenue streams. And then number two, we're always looking for efficiencies throughout our business. That's just a constant look for us. And so that's something that we can find more things from time to time. And then third, most of our expense growth is really about strategic initiatives and investments in our future, whether that's technology, et cetera. And by and large, those are decisions that we make thinking through a long-term lens and we're convicted about doing and largely make those on their merits. If the world changes and IRRs for those investments change as a result, that's something you might delay just based on the economics of it and something might be worth doing later. But largely, those are made through the lens of the decision that the long-term returns of that investment. So that kind of gives you a sense for how we think about the expense base.

Yes. Let me clarify, Peter. I think really 2 things. One, obviously, on the trading revenue side, there's a lot of variability with that expense to the extent that the revenue is there. The expenses will be there and to the extent that it's not in that associated expense will decline. But I think I would be careful to characterize softness in fee revenue, I think softness in trading revenues. But if you look at mortgage banking, up year-over-year 4.5%, hedging fees up 33% year-over-year, brokerage fees up 6% year-over-year, fiduciary and asset management fees up 10% year-over-year, transaction card up over 6% year-over-year. So the core fee businesses are humming. You're really talking about one category, trading fees that were soft this quarter and they were soft because of a really difficult macro environment. And from my perspective in trading, the risks were very asymmetric this quarter. I'm really proud of the team and how we worked through that in the manner that we did with spreads moving wider and then contracting and moving in ways that aren't historical norms with treasuries. Our risk management team did a fantastic job keeping that portfolio well hedged and managing through that in a very positive way. And so the trading revenue was clearly volatile and underperformed. There's no doubt about that. But the rest of the fee businesses are really performing well and I'm very proud of that and don't want that to get lost in the noise of the trading revenue.

I appreciate that information. Could you discuss the outlook for deposit growth? Additionally, are there further opportunities to reduce deposit and funding costs if the Federal Reserve does not lower rates? How do you anticipate the trends in deposit beta will unfold from this point?

Yes, Peter, we are very proud of our deposit pricing efforts during the quarter. We achieved a 75% deposit beta for Q1, which is an excellent outcome, and I commend our teams for effectively managing that. It's more insightful to consider the cumulative interest-bearing liability beta; ours stands at 74%, which closely aligns with our cycle cumulative up beta, just nearly a percentage point away. We are quite pleased with this. Given our strong loan-to-deposit ratio, one of the best available, we believe we can continue to enhance deposit pricing over time. In fact, we made some adjustments towards the end of the first quarter, and we expect to see some benefits rolling into Q2 as a result. We will continue to focus on this throughout the year. We can pursue some of these strategies without Federal Reserve moves, while also monitoring the competitive landscape; however, any Fed changes would certainly make this process easier.

Could you share your outlook on deposit growth?

Yes. So we do expect deposits to grow throughout the rest of the year. But given the loan-to-deposit ratio that we have, if we were to turn the dial some on deposit pricing and we saw a different trend line there, that would ultimately be fine for us because of how luxurious that level of loan-to-deposit ratio is. And at the end of the day, doing so would be something that would be net interest income accretive.

And your next question comes from the line of Michael Rose with Raymond James.

Just wanted to start going back to the energy portfolio. Can you just help us better appreciate what's going on with energy prices now and if they were to continue to fall versus what happened during the energy downturn from late '14 through '17? I know the percentage is lower. Energy companies are generally operating within cash flows which is a big difference now versus then. But wouldn't there be some further delevering if energy prices remained under pressure if we did move closer to a recession? Just trying to better appreciate what those balances could look like over time, understanding that it is a bigger proportion for you versus many others.

Yes. Good question. A lot of differences between 2014 and today, I think the biggest one is leverage. I mean, leverage in the core portfolio was probably in excess of 3x, somewhere between 3x and 3.5x. In 2014, today, the leverage in our energy production portfolio is less than 1x. A part of the problem we have getting outstanding is we've had great commitment growth. The team has done a great job there. The borrowers are just not using the leverage today. And so that singularly is the biggest difference. The other one is hedging as a risk management tool is very different today. And so in 2014, borrowers were largely under-hedged and that's not an issue today at all. So, I don't know that lower commodity prices for the short term here are going to have a lot of headwind on energy loans. We do a lot of stress testing. We've stressed all the way down to $44 which is really the stress point today. Don't see a lot of loss there. And really, that's because of the extensive amount of hedging and the very low leverage. So our average leverage is less than 1x on energy production and less than 1.5x on midstream. And so those are very low levels of leverage from where we are today.

Very helpful, Stacy. I appreciate it. And maybe one for Marty. I understand that you have 2 cuts baked into your forecast. I don't think it's the biggest driver but can you just give us a sense for if we did assume the forward curve which I think is around 4 cuts or what the impact on NII could be if we did get no cuts?

Yes. So either way, it would not make much of a difference and certainly not enough to make us think about changing guidance. So basically, an additional cut or 2, it would be a little bit helpful in the later part of the year but nothing material. And by the same token, if we don't get those rate cuts, that would be virtually no impact to revenue. Now you'd see a little bit of a different shift between trading fees and trading NII but total revenue would be basically unchanged.

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

I wanted to start with the loan growth guide and just a follow-up there. So was the addition of the mortgage finance vertical? Was that embedded in the loan growth guidance the last quarter? Or is adding that vertical sort of helping bridge the gap after the loan shrinkage this quarter?

Woody, we did not have that in the guide that we had prior quarter. We just weren't far enough along to feel like we wanted to put it in. So we did put it in this quarter, just given that we've got all the groundwork laid. We feel very confident about where we are. So felt good about putting that in.

Got it. And then I know you're not ready to sort of guide where balances could be at the end of the year. But I mean longer term, how do you sort of think about the concentration of mortgage warehouse in the loan portfolio?

Yes. I mean we're not concerned with letting it grow. I mean we're going to walk before we run here but we understand this portfolio can grow. And frankly, for us, it provides a diversification benefit across the broader portfolio. The risk in mortgage finance is less credit risk and more about operating risk. We like that aspect of it and we like the full relationship that we're going to have both on the depository side and on the hedging side and structured finance side. So for us, it kind of completes the vertical in many respects for us and it has really limited credit risk and then provides strong diversification benefit for the rest of the loan portfolio. So we expect to see it grow and be a meaningful number when we're sitting here, say, the end of '26, I expect it to be a meaningful number for BOKF.

Okay, got it. And then, last for me. Capital remains strong and the stock price has seen a pullback here just alongside the broader market. How do you weigh buybacks in the current take given all the uncertainty on the macro side?

Yes. So as you know, we do have a very strong capital position and are sitting on some excess capital. And as we look at the alternatives available to us, we do expect to be active share repurchasers in the second quarter.

And our final question comes from the line of Matt Olney with Stephens.

Just a few clean-ups here. Stacy, you mentioned that energy customers already have lots of hedging on future production. In the past, we've seen increased activity which is volatility of the commodity prices. But it sounds like maybe we should not anticipate this given the existing customers already are fully hedged.

Yes. The customers are well hedged. And because leverage is low, hedge coverage may not be at the same level it was, say, even a year ago. But that hedge coverage is like an accordion, it grows as the leverage grows. And so with leverage less than 1x, you're going to have, I think, like 55% of our borrowers are hedged out for the next 12 months or so. And that may seem a little bit low because the leverage is so low. We're not acquiring the hedging when their leverage is that low but that would grow to the extent that their leverage profile changed as well.

I guess, asked a different way, Stacy, with lower commodity prices more recently, that may not represent a catalyst to see increased hedging activity for you guys.

Yes, that's a fair point. We had very strong hedging activity in the first quarter. Those involved are opportunistic and will engage in hedging when they see the right opportunities. Obviously, oil prices are under pressure, so this may not be the quarter when people want to hedge more oil. However, there are other ways to manage this risk and still set a floor without having an upper limit. Things can change, but you're right, at $60 oil, there will likely be less hedging activity in the second quarter.

Yes. We expect that the spread will improve somewhat as the rate cuts happen later in the year. That's the right way to think about it.

That concludes our question-and-answer session. I will now hand it over to Stacy for closing remarks. Stacy?

Thank you everyone for joining our discussion today. Our results this quarter are a testament to the strength and adaptability of our organization and our ability to operate successfully in any market cycle. Our exacting focus on our risk management framework and diverse business model work together and are core to our success. Credit quality remains excellent. We've got a strong loan pipeline and growing relationships. Net interest income is expanding and our fee income businesses continue to work as designed. We appreciate your interest in BOK Financial and your willingness to spend time with us this afternoon. Please reach out to Heather King if you have any questions at h.king@bokf.com.

That concludes our conference call. You may now disconnect.