Q4 2020 BOK Financial Corp Earnings Call
Yeah.
Greetings and welcome to be OK Financial Corporation fourth quarter 2020 earnings Conference call. At this time, all participants are in a listen only mode.
And that's the session will follow the formal presentation.
For anyone should require operator assistance during the call price. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn on a presentation over to even though chief financial officer for B O K Financial Corporation. Please proceed.
Good morning, and thanks for joining us today, our CEO, Steve Bradshaw will provide opening comments and Stacy <unk> executive Vice President of corporate banking will cover our loan portfolio and credit metrics.
Lastly, I'll provide details regarding net interest income net interest margin fee revenues expenses, and our overall balance sheet position from a liquidity and capital standpoint.
Joining us for the question and answer session or Martin on our Chief Credit Officer, who can answer detailed questions regarding credit metrics and Scott Grauer Executive Vice President of wealth management, who can expand on our wealth management capabilities that have led to another fantastic quarter for the company.
For the slide presentation at fourth quarter press release are available on our website.
Okay on Dot com.
We refer you to the disclaimers on slide two pertaining to any forward looking statements we make during the call.
I'll now turn the call over to Steve Bradshaw.
Good morning, and thanks for joining us to discuss the fourth quarter and full year 2020 financial results.
In summary, despite a year punctuated with hurdles it would be difficult to overstate the flexibility and persistence. Our organization demonstrated this past year, a record $786 4 million in pre tax pre provision revenue for 2020 proved once again the strength of our diversified revenue strategy and the stability. It provides during <unk>.
<unk> of economic stress more importantly, it underscores the breadth of our service capabilities and the value that we provide our customers.
Starting on slide for full year, net income was $435 million or $6 19 per diluted share looking specifically at the fourth quarter net income was a record $154 2 million for $2 21 per diluted share representing EPS growth of 1% in the linked quarter.
This is up more than 40% from the same quarter a year ago.
The key items that drove our success this quarter, we're starting another outstanding broad based earnings quarter from our wealth management business.
Continued elevated production from our mortgage team, though on a decreased level from the last two quarters as seasonality and modest margin compression materialized following the summers mortgage bad.
But mortgage margins remained strong relative to the first half of 2020.
No credit loss provision was needed this quarter and in fact, the improving economic outlook combined with improving credit trends allowed us to release $6 $5 million of our reserve.
And lastly, the proactive measures we took to control expense levels at the outset of the pandemic in March served as well on the fourth quarter as it did for all of 2020.
Turning to slide five loan growth remained a challenge this quarter as our borrowers understandably reduce leverage and the challenging economic environment.
Stacy will cover this in more detail momentarily, but we do believe growth opportunities will resume in 2021 as the economy continues to rebound.
Deposit growth remains excellent up over 3% linked quarter and up over 30% from the same quarter a year ago.
Those figures do not include the second wave of stimulus enacted late in 2020. So we anticipate this trend to continue in the near term.
Assets under management or in custody were up over 11% for the quarter topping 90 billion for the first time on our company's history on very strong new client sales and favorable market impact.
Dive a little deeper in the record year, our wealth management team produced in 2020 as well as a shift of some brokerage and trading fee revenue to net interest revenue due to an increase in trading securities balances and settlement timing in the fourth quarter.
Needless to say, we are incredibly proud of our wealth management Division.
I'll provide additional perspective on our results before starting the Q&A session, but now Stacy <unk> will review the loan portfolio and our credit metrics in more detail I'll turn the call over to Stacy Thanks, Steve.
Turning to slide seven period end loans on our core loan portfolio were $21 3 billion down one 8% for the quarter as Steve mentioned quality borrowers reduce leverage in times of economic uncertainty, which has been the case with our borrowers again this quarter looking at the energy portfolio balances contract to six.
Seven per cent for the quarter and 12, 7% for the year, while commodity prices have improved considerably over the last few months sourcing new deals sufficient to offset pay downs on the current environment remains a challenge as existing borrowers continue to pay down debt to reduce leverage. Despite these factors we remain.
And optimistic for lending and energy related revenue growth heading into the new year as we continue to support our customers in this space.
Remember our diversified revenue strategy allows us to look at clients Holistically in the energy business is far more than just lending as witnessed by the record level of energy hedging revenue this year.
<unk> retirement plan services and personal wealth management are all businesses that continue to grow and serve our energy client base.
Health care balances were down slightly this quarter as growth in senior housing loans was offset by a decrease in hospital system loans.
For the year, though health care loans were up 9% year over year, primarily due to growth in balances from our hospital systems clients, who demonstrate a strong credit profile.
Looking forward, we remain confident in our health care portfolio of long term growth and credit outlook and expect it to be a growth leader once again after the health and economic conditions and migrate to a more normal state.
In the near term it should be pointed out that the second stimulus bill passed last month.
The original cares Act has multiple revenue enhancement measures for both hospitals and skilled nursing facilities as they manage through the current environment.
Paycheck protection program for Triple P balances declined nearly 20% as just over $470 million of balances were for given in the quarter.
The forgiveness process initially was more complex than we believed it would be at the beginning of Triple B in April of 2020. However.
However, additional guidance from the small business administration or SBA clarifying our requirements and continued refinement of our processes has significantly reduced the time required per application. The largest hurdle in recent months has been client's reluctance to apply for forgiveness. They were hopeful of legislative action that would re.
<unk> for requirements.
The recent economic aid act will provide substantial forgiveness process relief, especially for those clients with existing triple P loans of less than 150000, which represents more than 70% of our total triple P volume.
We will participate in the newest round of Triple P with largely the same strategy of focusing on our existing client base. This will allow us to leverage additional resource capacity to meet our existing clients' needs in an extremely timely manner, thereby increasing client engagement loyalty and retention looking ahead.
We are optimistic on our outlook for loan growth for 2021, the speed and shape of the broader economic recovery will be the determining factor in restarting loan growth.
However, we are well positioned to serve clients and believe confidence and resulting capital investment will return in 2021.
Turning to slide eight you'll see an updated view of the loan deferral status across the <unk> portfolio. As you can see just 6% of total loans remain in a deferral status of any type down from one 2% last quarter.
Of the loans that remain in deferral status very few 12 loans totaling $24 million or an extended deferral.
This increasingly small portfolio of loans is closely monitored but short term the credit quality has continued to migrate positively.
Long term outcomes will be dependent on the pace of economic recovery and the impact of additional physical stimulus.
Also on slide eight we begin compiled the list of loans segment for the markets originally considered more exposed to ongoing economic headwinds due to the pandemic.
This group of loans is highly diversified with over 550 loans for an average loan size of less than $3 million.
574 million retail portion of this portfolio remains the most volatile today and we'll continue monitoring these exposures closely.
That said the retail portion of our loan portfolio has held up better than expectations as our borrowers have proved resilient.
Significant portions of this with where originally considered more vulnerable are performing very well, including gaming convenience stores religious organizations and colleges.
Turning to slide nine you can see that credit quality has improved significantly since the first half of 2020 non.
Not only were we able to release a portion of the loan loss reserve, but we also saw significant credit quality improvement in our energy portfolio as we completed our borrowing base redetermination process in the quarter the rebound in near term stability in commodity prices resulted in reduced criticized and potential problem loan numbers, along with our needed re.
<unk> allocation to energy loans.
Net charge offs were down from $22 4 million or 37 basis points annualized in the third quarter to $16 7 million or 28 basis points annualized this quarter 2020, net charge offs totaled 32 basis points well within our company's historical loss experience.
The combined allowance for loan losses totaled $389 million or 2% of outstanding loans at quarter end, excluding triple P loans.
The combined allowance for loan losses attributed to energy was 361% of outstanding energy loans on December 31.
Non accruing loans increased slightly by $14 million this quarter, primarily due to an increase in non accrual commercial real estate loans.
Potential problem loans totaled $478 million at quarter end down significantly from $623 million on September the 30th.
Looking ahead from a credit perspective, there is still a lot of uncertainty in the current environment. So it remains difficult to predict too far out bad.
That said based on what we know today and assuming our economic forecast is in line as we advance. We believe 2021 net charge offs will remain on the lower end of the range of our historical average of 30% to 50 basis points.
We will continue to set our reserve at the appropriate level as we always have we are generally positive about the credit outlook in 2021, allowing us to begin a reserve release this quarter.
Once we have more clarity around the speed of COVID-19 case, count reductions vaccine distribution and a broad resumption of regular economic activity in 2021, we could potentially see additional opportunity for reserve release this year.
Now I will turn the call over to Steven to highlight our NIM dynamics fee revenues and the important balance sheet items for the quarter Steven.
Thanks, Stacy with a second consecutive record net income quarter, our diversified revenue strategy is clearly providing a differentiated outcome in this low rate environment.
Outsize contributions from our wealth management team, coupled with diligent expense management contributed to our success this quarter mitigating the impact of the current low rate environment.
Turning to slide 11 fourth quarter net interest revenue was $297 million up more than $25 million from last quarter. The increase relates largely to net interest revenue earned on a $5 $1 billion increase in trading securities from our brokerage and trading customer transactions on.
I'll describe in a moment the shift to net interest revenue from fee revenue from our brokerage and trading business this quarter.
Net interest margin was 272% down nine basis points from the previous quarter.
I provided on the slide a roll forward on net interest margin and net interest revenue from the third quarter to the fourth quarter, highlighting more significant items PPP fees were higher in the fourth quarter as more loans were forgiven and kobe's discount accretion was lower this quarter from an elevated level in the third quarter.
Shift in brokerage and trading customer transaction revenue from fees to net interest revenue. This quarter had a dilutive impact to net interest margin, but increase the dollars recorded in net interest revenue.
Other infrequently occurring.
Loan fees and interest recoveries are also noted in the slides to emphasize a core net interest margin of 267%.
Reinvestment of cash flows from our available for sales securities portfolio continues with the portfolio yield declining 13 basis points to 198%. Additionally, we continue to have success driving interest bearing deposit costs down from 26 basis points last quarter to 19 basis points this quarter.
While there are many moving parts to consider including the continued recognition of PPP interest and fees. The combination of continued repricing on the <unk> portfolio and the limited room to move interest bearing deposit costs down further will apply pressure to net interest margin in future quarters.
Turning to slide 12, you can see the impact of the shift of brokerage and trading fee revenues to net interest revenue that I mentioned earlier. This was largely from the record volume and timing of settlement on mortgage back trading securities, which resulted in the customer transaction revenue being earned and accounted for as interest.
Versus fees.
Additionally, energy hedging fees, while a record for the year were down $5 million linked quarter from third quarter's record level.
When viewed holistically, our wealth management team put together another outstanding quarter with total revenue of $131 5 million off slightly from the third quarter, but still represents the third highest quarter on record and for the full year surpassed $500 million in total revenue for the first time.
On.
Transaction card revenue was down six 7% this quarter, primarily due to the lower transaction volumes driven by slowing consumer spending that said our transplant team had a banner year for new financial institution customer contracts in 2020, which should help mitigate the decline we saw this quarter.
Conversion times are lengthy we expect to see a rebound in 2021 consistent with improvement in economic activity.
Fiduciary and asset management revenue increased $1 $9 million this quarter, primarily driven by the increase in fair value of assets under management related to both sales activity and favorable markets.
Service charges were flat for the quarter, though down $15 7 million for the year as we waived certain fees in the midst of the pandemic.
Mortgage banking revenue decreased $12 7 million linked quarter due to a combination of fourth quarter seasonality and some margin compression following elevated margins due to industry capacity constraints the past few quarters.
That said this was still a top 10 quarter of all time for our mortgage business, which is significant given the typical seasonal declines in the last quarter of the year.
In total 2020 and mortgage banking revenue was a record for the company, increasing $74 8 million from last year and acting as a significant offset to margin pressure on the protracted low rate environment.
Although not included on slide 12, I will note that the net economic changes in fair value of mortgage servicing rights and related economic hedges was positive $6 5 million for the quarter.
The fees and commissions were down this quarter, partially due to the shift in revenue geography on the income statement. It is important to remember the unprecedented production levels from our fee businesses. The past few quarters. These.
These businesses operating at record levels has clearly been fundamental and the success. We've had this year, we will continue to allocate capital and re skilled employee resources to key fee areas to maximize our revenue opportunities.
Turning to slide 13.
Since management remains prudent with total expenses, mostly flat linked quarter.
While total expenses were up 4% year over year should be noted that the increased incentive compensation related to record annual production in our wealth management and mortgage businesses more than accounts for the total increase in expenses this year.
Personnel expense was down linked quarter by just over 2% incentive compensation decreased $2 1 million as a $5 3 million increase in combined cash based and deferred compensation was more than offset by a $7 $4 million decrease in stock based incentive compensation.
<unk> from last quarter's elevated level. Additionally, there was a $1 4 million decrease in employee benefit expense due to the typical seasonal decline in retirement costs and payroll taxes.
Non personnel expense was up two 5% from the third quarter, we made a $6 million charitable contribution to the <unk> Foundation in the quarter as we continue to focus on the communities, we serve and the extreme needs created by the pandemic.
Business promotion expense increased by just over 1 million largely due to increased advertising expense, while other expenses increased $3 3 million due to loss contingencies and recruiting expenses.
Net losses and expenses on repossessed assets decreased $5 1 million largely due to the write downs on a set of oil and gas properties and retail commercial real estate properties in the third quarter.
Insurance expense also decreased $1 8 million, while mortgage banking costs dropped $1 million.
On slide 14, our liquidity position remains very strong given the continued inflow of deposit balances our loan to deposit ratio is now 64% compared to 68% at the end of last quarter, providing significant on balance sheet liquidity to meet future customer needs.
We expect to see a continued inflow of customer deposits in the near term as the end of year stimulus measures were not reflected in December 31 deposit figures.
Our capital levels remain healthy as well with a common equity tier one ratio of 12% well ahead of our internal operating range.
With such strong capital levels. We once again were active with share repurchase opportunistically buying back 665000 shares an average price of 60 382 per share in the open market. Additionally, we authorized an increase on our quarterly cash dividend in the fourth quarter to 52.
This is the 15th consecutive year of dividend increases for the company as we continue to reward our shareholders through various types of economic environments.
On slide 15, I'll leave you with a general outlook for the near and mid term as we look into 2021.
We believe loan growth will slowly accelerate in tandem with the broader economic recovery this year.
While mainly weighted towards third quarter and fourth quarter. We think we can grow loans in the low single digit range for the full year of 2021, excluding the impact of any PPP activity.
Our available for sales Securities portfolio, which is largely agency mortgage backed securities yielded $1, 98% during the fourth quarter, given the sustained low rate environment prepayments could reach approximately $800 million per quarter, we concurrently reinvest those cash flows at rates around 75.
On to 85 basis points.
As we noted we had success during the quarter driving deposit costs further and are well below the low point reached during the last near zero rate environment. We believe there could be room to push deposit cost a bit lower but we feel we are nearing bottom.
The combination of securities reinvestment at lower rate and minimal room to further lower deposit cost pressure net interest margin in coming quarters.
Our diverse portfolio of fee revenue stream should continue to provide some mitigating impact to overall revenue pressures being felt in our spread businesses. We expect most fee revenue categories to grow modestly in 2021, with the exception of brokerage and trading and mortgage businesses as the 2020.
A record year in those areas will be difficult to replicate.
We will continue our disciplined approach to controlling personnel and non personnel costs with growth budgeted at low single digits in 2021, our focus will be holding the line on manageable expenses without sacrificing multiyear technology commitments to improve customer service and our competitive.
<unk>.
If the economy continues to improve and we get further oil price stability in 2021 additional loan loss reserve release as possible.
As I mentioned, a moment ago, we feel good about our capital strength, we will continue looking for share buyback opportunities and will maintain our current quarterly cash dividend level.
Now I'll turn the call back over to Steve Bradshaw for closing commentary.
Thank you Steven.
Often the share that we have intentionally built <unk> financial to mitigate downside risk and earnings volatility in times of economic uncertainty.
Disciplined credit underwriting throughout the cycle and investing in growth for our fee based businesses has been a lasting point of price for our company for many years 2020 was the ultimate test of that strategy the pressures of such a challenging year should be detrimental to the area's potential of most regional financial institutions, but I am very proud to say that we delivered a <unk>.
<unk> outcome for our customers our communities our employees and our shareholders.
Looking ahead to 2021, we expect that strategy to continue to deliver solid results, we see an opportunity to further our market share with select <unk> business segments, along with a return of lending opportunities as our clients confidence rebounds, with the economy motivate them to resume capital investments.
While 2020 prove that early year economic forecast can change abruptly. It also showcase the value of our diversified revenue model along with the experience and leadership of our management team as we work through the challenges brought by the pandemic.
With that we were pleased to take your questions operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the true core participants using speaker equipment, it maybe necessary to pick up your handset.
Before pressing on Starkey.
Our first question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.
Alright, great. Thanks, Good morning, guys. Good morning good.
Good morning.
Just wanted to make sure I fully understood what was happening with the additional trading securities.
NII line I mean is this something that you guys initiated and is this something that is going like should we is this sort of at the right level for both brokerage and for NII.
I'm just trying to think about how to how this all comes together.
Yeah, Ken This is Steve and I think it was market dynamics you know there was a.
Record trading in Ginnie Mae Securities.
From all of the summertime activity and we facilitated those trades with our clients on those those securities settled on.
On our balance sheet more so than some of the previous securities that we trade with our clients and so we earned that transaction revenue through net interest income versus the fee revenue. So it was a market dynamic shift for the most part.
With our trading securities up over $5 billion on average and on.
Earning assets for the quarter so on.
Scott May know what in the future.
It may occur, but I would suspect.
Debt a lot of those trading securities will be maintained.
In that kind of fashion at least going into the first part of this year.
Okay.
Gotcha, Okay. So.
I guess by definition should we all so if that keeps your NII elevated does that mean that we should also assume brokerage and trading revenue stay at this much more depressed level in the first quarter and then it sounds like you said census, only going into first quarter, then maybe things go back to normal in second and third it means is that just the right way of thinking about.
The dynamics.
Well.
I really think the the fee revenues excuse me will stay down at this level I really think the trading activity with our clients, we will show up more in.
At least in this like this quarter in NII, but what we do in the brokerage and trading is look at the entire revenue stream together, we don't really care for transactions recorded as net interest income or fees and in this particular quarter. It shifted more to the NII side and that may be what occurs.
I would suspect at least the first part of the year maybe on into into 2021, we just follow kind of how it settles with our clients and how we reported.
In which bucket.
Got it Okay, I think that that makes sense and then just one last question for me.
Excluding all the trading securities.
Obviously your guidance for the net interest margin as lower sounds like you expect very modest loan growth, maybe picking up on the back half for the year.
On on average it sounds like NII ex trading should sort of be under a fairly sizable amount of pressure I was wondering if you can kind of quantify the impact on NII based on those factors.
Well I tried to give you a little bit more of a core kind of NIM number to start off with in the year would put that on the chart at about $2 67.
Again, it's hard to say how much that will migrate down I do think it will because of the repricing of our available for sales securities portfolio. I mean, if you look at the chart.
That we provide you could see a pretty natural decline in securities yields.
I think it was 18 basis points, a couple of quarters ago 13 basis points. This quarter. It is going to continue to roll down now we've been very successful in pushing down on interest bearing deposit cost and again this quarter. In fact, it was 19 basis points average for this quarter and I think the month of December was down to about 17 basis.
Points can we continue pushing that downward, perhaps we can but I don't think theres significant room to offset some of the <unk> securities repricing. So I just think there's a natural kind of migration downward of net interest margin of course, we focus more on net interest revenue than anything else and to <unk>.
Your point.
Loans.
Beginning to grow we hope sometime in 2021, particularly in the second half of the year is going to certainly help.
Stabilize the margin and bring it back board.
Alright, Thank you very much.
Our next question comes from the line of Brady Gailey with <unk>. Please proceed with your question.
Hey, Thanks, good morning, guys.
Morning.
I had a follow up on the inventory of trading securities. So I mean, we're up at $7 billion now.
Looking back over the last couple of years, that's range of between $1 2 billion for now at 7%.
Sounds like it's going to stay around $7 billion.
In the near term flow.
Longer term does that normalize back to that $2 billion ish dollar level or is this.
Just here to stay.
Hi, This is Scott so I would.
When you look at the trend throughout 2020 that built from $4 6 billion end of Q1 to six two to $6. Two at the end of Q3, and then the seven little bit over $7 billion in the fourth quarter. So.
We look for that to remain at a higher level that will obviously depend upon the total volume and flow inside of the mortgage markets themselves, but we don't look at that reverting back as you indicated to those low levels that you were referencing.
Okay, Alright, that's helpful.
Then if you look at.
Loan balances ex PPP.
It seems like for the last three quarters or so.
As those kind of core loan balances have been down in between kind of 5% to 8% annualized I think this quarter was down 8% linked quarter annualized.
What gives you the confidence that you can see.
A reversal away from the shrinkage in towards seeing some modest loan growth here.
Well I think the biggest piece of that as you look annualized energy loans, which are one of our largest segments of lending is down almost 13% year over year and linked quarter annualized it was down six points or six 7%.
So not annualized just linked quarter so.
If you get stability with those energy balances, which we think we're close to.
Youre going to get some pay downs I think it may be we may see a little bit more runoff in the first quarter. Then hopefully we begin to plateau and grow from there we are seeing new deals there.
It's just not out pacing the level of deleveraging or.
Pay downs that are happening within that book, but.
A lot of good activity, but we've gotten out of the work that we did around the triple program.
We're well positioned there, but I think you see you need economic growth and I think you also need some of this liquidity to work its way off the balance sheet before you really get to core loan growth.
But I think the numbers that we gave you in terms of low single digit loan growth for the year back weighted to the second half of the year I think we feel very confident about assuming we get stability and then growth in the energy book.
Alright, that's helpful. And then finally for me a lot of people are expecting 2021 to be a fairly active year related to bank M&A on OBO cap has been.
Selectively active in acquiring banks in fee income businesses over the years, how do you think.
Do you think it will be active in M&A this year.
Well. This is Steve I think your assumption is accurate that we're going to see more M&A opportunities. If you go back in time.
When you see low rate environment and revenue headwinds that obviously leads to.
On a desire among some sellers.
To be open to conversations so bad.
So the opportunity that we see coming as well.
And we will continue to look at selective opportunities that may present themselves throughout the 21, primarily prioritizing those things that would be within footprint.
Alright, great. Thanks, guys.
Our next question comes from the line on Peter Winter with Wedbush Securities. Please proceed with your question.
Good morning.
Good morning.
So obviously you guys are doing really well on the credit front and what's the outlook.
On.
The economy improving.
You see that the reserve to loan ratio could get back to that.
On the January one level, which was about one 2%.
Do you see it heading that way.
Towards the end of this year.
Peter This is mark more on that.
I'm looking at that.
Im seeing is if you see continued improvement and you see the economic outlook.
Improved you see pandemic.
<unk> dropped dramatically in the vaccine for.
<unk> achieved along with the energy prices continuing to be stable like we've seen in the recent months.
And essentially you recover back to a January 2020 outlook.
That was our day, one adjustment amount is one 2% and that would seem.
Likely if all of those things occur of course, there is still a lot of <unk>.
And that that forecast.
Okay.
And then Steve.
Even.
If we get that loan growth.
In the second half of the year with that.
Oh.
Do you think need to more of a stable margin.
Close for the second half of this year.
Yeah, I mean, it would <unk>.
Certainly when you remix your earning assets.
Away from securities or in more into the loan balances certainly it's going to help support NIM.
NIM going forward.
Well thank you for.
Steve sneak in one more question.
Mortgage banking had a record year this year.
It's expected to decline a little but.
Mortgage will still be strong as we look out into the outer years.
You've seen that this business has.
Taken market share and so therefore, you should still see growth above like a 2019 level, even with the mortgage banking business slowing.
Yes, Peter this is Steve I think our outlook in 'twenty, one is mortgage kind of in a steady state for quarter, probably a pretty good proxy.
Although we will see some.
Probably an increase in refi activity in quarter, one as we typically do in purchase market kind of kicks in a little stronger after that.
I do think that there has been market share.
Share gain for us because we've invested more outside of Oklahoma.
On a much stronger.
Group of producers in Colorado, and Texas, and Arizona, New Mexico et cetera that in Kansas City that have really paid off for us. So that's where our expansion has been and I think it's kind of a mirror in my mind to the company and that we have relatively small market share with good upside in all of those markets and I think.
Mortgage better reflects that today than it probably did three to five years ago.
Okay.
Thanks for taking my questions.
Thanks Peter.
Our next question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your question.
Hi, good morning, everybody.
Good morning.
I guess sticking with the the provision reserve level, what type of qualitative overlays did you use this quarter on the energy book or on the overall book.
Did that really helping a slow reserve releases and and as we go through the year.
We should just expect with that qualitative overlays.
Reduces to get back to that lower allowance level.
Yes again this is Marc Maun, Yes, we took a hard look at the qualitative overlays with from.
Guard to our reserves.
Certainly.
And did look at more reallocation than we did a reduction in certain areas energy, obviously improved and we did reduce debt reserve down to three 4% from the for 2% was last quarter.
But we still have concerns in certain other areas, where stimulus has been a key factor in a number of areas, particularly in CRE and smaller businesses that may or may not have masked some issues that could occur and so we want to make sure. We're thoughtful about how we're looking at the performance of the crew.
<unk>.
In the short term and then evaluate them on a quarter by quarter basis, depending on how economic activity.
But your general thesis is on point and I think our view is that given where we are in the cycle. It was premature.
Due to do much more than what we did but certainly as we get more visibility into the economic recovery the pace of vaccinations in seed.
The declines in case counts on improvement in economic activity that that could change.
Okay. That's good.
Good color. Thanks, and then looking at the Energy book do you really do you think that energy prices need to go higher from here to drive additional growth or is it really just absorbing that existing liquidity. That's that's out there and once that's absorbed that can that can start driving organic growth.
I mean, we're in a decent spot here I mean, if you think about oil, particularly that kind of between 50 55 is not a bad spot to be in in terms of kind of being stable.
Certainly.
The Permian and that's an area that people could continue to grow.
And do that profitably.
But from our perspective this is a <unk>.
Price area, where we once we can find kind of stable on a spot then I think we can grow from here there are new deals being done.
We're doing those deals were leading many of those deals so.
So we see good opportunity there is just.
At some point the pace of a day.
Deleveraging from energy borrowers will slow and we'll really see all the hard work that our energy team is doing to grow that really come to the surface.
I think you know.
I think we're going to see that I don't know if that first quarter or second quarter, but I think that we are going to see that in 2020.
2021, okay.
Okay and then just finally for me the second round of the P. P. P. You know has started.
How should we think about the potential size of that for you as well as the potential maybe average loan size compared to compared to what we saw on the first round.
Well just by nature of it it's going to be lower I mean, I think the maximum loan size.
Generally speaking it was about $2 million or caveat around revenue declines on things like that so it won't be to the size that you know the original Triple P program was we certainly youre going to be active participating working very hard to help our customers, who can avail themselves of that to participate in that but we don't.
Foresee that it will be the size of the original program as much because of the constraints around loan size is.
As other factors.
I mean should we be thinking if you were just over 2 billion in the first time around a $1 billion or too early to say, it's too early to say I mean, we're even just yesterday, there's new rules coming out.
Our governing the program from the SBA. So I think it's it's awfully hard to prognosticate with any level of clarity at this point.
Okay, great. Thank you.
Our next question comes from the line of John <unk> from RBC Capital markets. Please proceed with your question.
Thanks, Good morning, guys.
Morning, John.
Question for you Stacy on slide seven.
You touched on loan growth, maybe picking up later in the year on it sounds like a big factor in that is energy, but can you touch a little bit more on.
If we roll this thing forward 12 months, what do you think the biggest contributors to growth might be in terms of the other loan categories.
Well I think all of the loan categories. I mean, I think if you get if you roll. This thing forward 12 months, you've got stable commodity prices youre going to be growing energy.
Mid single digits, maybe a little bit better our health care book is really doing well really proud of that team you saw.
As back up just a hair there this quarter, but that was really from some large pay downs on health systems loans, which.
Given their liquidity situation that was there really masked some really good growth that we have there in senior housing and our C&I businesses. I think are poised to do very well I think one of the real benefits that we got from the original true Triple P is how strongly we executed and so we've really been able to turn on.
Net into new Treasury relationships, and we believe that once.
The market kind of looks normal again that thats going to really create some opportunities for us on the C&I side because of the level that which we executed in the ability to call a banker and have a relationship in times of need and have somebody you can call and help you out and so we're optimistic that once we get to normal that debt.
Growing at a pace, that's kind of a two to three times GDP. If you will which is kind of how we have bench market over a long time horizon is very reasonable for us with the mix of business that we have we also have a great footprint I mean, we're not we're in some footprint states that are going to grow faster than the rest of the United States. So if you think about Texas and Arizona.
Colorado.
We're well positioned from a geographic perspective to disproportionately benefit from growth as those core states economies are likely to grow faster than the national economy.
I'll add one thing to that is just from the C&I perspective is that you did see reduced utilization is a big part of the decline in economic activity and we would expect that that improves that will see increased utilization on the lines of credit et cetera, which will contribute to that.
You knocked a couple of my questions, there, but I guess the witches.
Which is good the book.
Just in general.
Aside from energy are you seeing signs of life in the footprint.
Yes, it is happening, particularly when some of those better markets, but are you seeing the early signs of optimism in pipelines building.
I think it's I think I mean, I think until we begin to work. Some of this liquidity off I don't think youre going to see huge C&I loan growth, we're seeing some in.
Health care around senior housing.
But really until you begin to work off some of.
For core liquidity, that's really built up among our borrowers.
Youre going to Youre going to struggle to see that in the near term. So I think it's premature from our perspective, we have not yet seen kind of a bubbling up of economic activity that would lead us to believe in the near term there are core C&I loan growth immanent.
From our perspective.
Okay.
And then just one quick one on on credit.
On the energy Npls that you show on slide nine what is what is the path for resolution.
With some of those credits and particularly against the.
The lower end of the charge off range that you're expecting for the full year.
You know, what we'll work through those as as.
Each one will work themselves I think that what I would tell you is a couple of things number one I think we're very comfortable with the net charge off guidance, we provided which kind of at the low end of that historical range. If you look at what we charged off in two.
2020, but certainly that would be a decent benchmark to try to beat in 'twenty one.
I think the difference too is we've got a rising commodity price on those energy loans and so trying to resolve it.
Workout energy loan in a stable and rising price environment is a totally different story than when prices continue to fall.
So I think we're relatively optimistic that as we work through those that.
The guidance that we provided you will be one that we can.
Certainly achieve and certainly our hope is to outperform that because I think the environment is providing us a bit of on opportunity work. Some of those out and are weighted to our benefit there will be losses that come from those nonperforming loans.
But the question is will the environment for stable and even slightly rising price environment really help mitigate those.
And I think we're optimistic about that.
Got it okay. Thank you.
Our next question comes from the line of Matt Olney with Stephens. Please proceed with your question.
Yes, good morning, and thanks for taking the question I wanted to ask about operating expenses and the guidance that you guys put out there. It sounds really good trying to keep that to the low single digit growth in 2021 any more details on how you expect to achieve that and I want to make sure we're apples.
Apples on the right starting point I'm looking at 116 6 billion of operating expenses in 2010, and 2020 as that rate.
Okay.
Yes. So this is Steve we just worked hard and I think in our budgeting efforts over the fall and.
Mainly on November <unk>.
And with each line of business and trying to determine what is the right level of expense.
And how can we maintain control over that in the face of.
A little bit more difficult revenue environment and you know it comes all across the board.
<unk>.
It addresses personnel on addresses business promotion.
Spending on.
On <unk>, we want to maintain because we want to maintain our competitiveness with our products and services that we provide to our clients but.
It's just a lot of detailed work to try to maintain that expense discipline.
Okay.
And then on the debt.
Buyback I am curious what the appetite is for the buyback now that the stock prices well above levels, where you executed in the third quarter fourth quarter excuse me, yes, I mean, we were happy of our.
Our execution in the fourth quarter I mean, we bought the shares at about a 25% discount to today's market.
We'll look at it closely and I'm not going to put a price out there that says we will buy at this level and we won't buy it.
Below that or above that so I think we.
We look at it relative to our capital levels relative to the opportunities for capital and but I still think we have an appetite and we have the capital wherewithal to take advantage of.
Across the market when we see theres good opportunity.
Okay and then.
On the P. P. P. You've made disclosures I just missed it what was the amount that you recognized the PPP fees in the fourth quarter and and western remaining on the level of fees recognized from here.
Yeah, So we recognized.
In the fourth quarter of $3 $3 million on net interest revenue from PPP.
And $13 5 million in fees for a total of $16 8 million.
And then on the fee side, and we have about $25 million roughly remaining on the fee side.
Got it.
Okay. Thank you guys.
Thank you thank you Matt.
Our next question comes from the line of Gary Tenner with D. A Davidson. Please proceed with your question.
Good morning.
Our question is largely were answered, but just as it relates again to the loan growth side of things I understand obviously, a stabilization in the energy book.
You know certainly positive.
For loan growth next year or this year.
In terms of the general business.
And I think this was asked or answered to some degree but are you seeing any increase in pipelines. There are there any pockets geographically where you are seeing.
Activity perk up more than others.
Not particularly not at this point I think the appointed Mark made earlier, which I think is.
The best one on the C&I portfolio is keep in mind most of our C&I portfolio is borrowing based driven so it's.
Accounts receivable inventory of those types of things.
So our utilization is really pretty low and that particularly on a relative basis to where we were pre pandemic. So there is an opportunity for growth there organically just from higher utilization as those receivable and inventory balances begin to come back up as people.
So again, that's an opportunity for growth organically, but also as I've mentioned earlier that the work that we've done with our borrowers and with others, who may have multiple banking relationships around the triple P has opened a really opportunistic pipeline for us to grow.
Broadly as well and so I think that we're well positioned once the economy begins to turn around and grow that core C&I portfolio.
Okay, and just briefly on the energy book you talked about there are new deals out there or the or participating in leading can you give us a sense for the quarter of <unk>.
Originations in that segment versus versus pay down.
I don't have I don't have that today, certainly the paydowns far exceeded the new originations but.
We have done.
More than a handful of deals in the fourth quarter that were new deals in the marketplace and many of those we led and receive fee revenue associated with that so.
We're optimistic that it really question is when do we get to the bottom of the deleveraging and I think we're close I just don't know if thats first quarter second quarter, but I think.
We can see it from here.
Alright, thanks for taking my questions.
Thank you.
There are no further questions in the queue I'd like to hand, the call back over to Mr. <unk> for closing remarks.
Okay. Thanks, everyone again for joining us. This morning, we appreciate your interest in <unk> financial if you have any further questions. Please call us at 908, 595, 303 zero or you can E mail us at IR at <unk> Dot com.
Have a great day. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.
Yeah.