Q3 2021 BOK Financial Corp Earnings Call
Greetings and welcome to the B O K Financial Corporation third quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I'd like to turn the conference over to your host Mr. Stephen Though chief financial Officer for be OK Financial Corporation.
Sir you may begin.
Good morning, and thanks for joining us today, our CEO, Steve Bradshaw will provide opening comments and Stacy times, our chief operating officer will cover our loan portfolio credit metrics.
Tricks in fee income businesses.
Lastly, I'll provide details regarding net interest income net interest margin expenses and our overall balance sheet position from a liquidity and capital standpoint.
Joining us for the question and answer session or Marc Maun, 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 activities.
The slide presentation and third quarter press release are available on our website at <unk> Dot com.
We refer you to the disclaimers on slide two regarding any forward looking statements we make during this call.
I'll now turn the call over to Steve Bradshaw.
Good morning, Thanks for joining us to discuss the third quarter 2021 financial results. This quarter was another in which our diversified revenue strategy was a key differentiator for us as we grew pre tax pre provision earnings by 22% linked quarter and eclipsed one.
So $80 million and net income for the first time in the history of our company.
Shown on slide four third quarter net income was a record $188 3 million or $2 74 per diluted share that.
That represents growth in net income of 13% from the record set last quarter, a result of our long term.
102, our balanced earnings model and breath of business capabilities.
He items that drove our success this quarter were burst our fee based business units continue to perform well with total fees and commissions up $21 million or 12% from last quarter.
Contribution from our wealth management team continues to grow and impact results.
Term commit achieving a new quarterly record for total revenues of $153 million for this quarter. This accounts for 30% of total revenues for the company and 51% of total fees and commissions for the quarter.
Mortgage fees also increased $5 1 million or 24% linked quarter, primarily driven by a rebound.
Our reported margins from the lows recognized last quarter.
Net interest revenue was unchanged on a linked quarter basis with a slight improvement in loan fees, primarily due to non use fees from low utilization levels and our interest bearing deposit cost of funds fell one more basis point this quarter.
We continue to experience some compression.
And yields on our available for sale portfolio, However that impact was more than offset by improved yields on our trading portfolio.
Improving market conditions and credit trends allowed us to release $23 million of our loan loss reserve this quarter.
And $83 million for the year the expense management remains excellent total expenses.
And our return on linked quarter basis, we've managed expense growth to just slightly above 2% over the last two trailing 12 month periods, despite significant technology and cyber related investments.
Second our disciplined approach.
Turning to slide five total loans are down $1 1 billion for the quarter, but triple.
<unk> loan forgiveness accounts for $586 million of that contraction.
Core loan growth continues to remain a challenge this quarter as our energy and commercial real estate customers continue to pay down debt or refinance in the long term markets.
Loans attribute to our wealth segment grew $32 million this quarter, allowing them to surpassed two.
Why don't we then outstanding balances for the first time.
Our core C&I book decreased at a pace similar to last quarter as our overall line utilization levels are at five year lows.
We believe this positions us for growth as the economy continues to rebound and supply chain disruptions are resolved average deposits increased another.
<unk> hundred $44 million this quarter and are 9% higher than the same quarter a year ago.
Assets under management or in custody and our wealth management business grew two 3% linked quarter to $98 8 billion approaching the $100 billion milestone.
Largely due to new business acquisition.
The portable market activity in the quarter.
I'll provide additional perspective on our results before starting the question and answer session, but now Stacy <unk> will review the loan portfolio, our credit metrics and our fee businesses in more detail I'll turn the call over to Stacy.
Thanks, Steve.
Turning to slide seven period end loans.
And favored loan portfolio were $19 8 billion down just over 2% for the quarter as we continue to see borrowers and some specialty lending areas continued to reduce leverage.
Overall commercial and specialized lending line utilization levels were down again this quarter the lowest level of over the last five years with the exception.
In our trend being our private wealth space, which grew at a 6% annualized clip on a linked quarter basis and 12% during the last 12 months.
Energy balances declined in the third quarter as energy borrowers have significant liquidity with current oil and natural gas prices and have been generally paying down debt we continue.
To that growth new customers in this space, but paydowns have outpaced new loans. Our current belief is that the fourth quarter will be the inflection point and we expect growth from this segment in 2022.
Should drilling activity to materially increase the company is well positioned to have strong growth in this sector given our long term expertise.
And continuing strong commitment to the energy sector ancillary business from customer hedging investment banking and Treasury for this segment set a new record for fee revenue this quarter, 9% above the previous high set in the third quarter last year.
Healthcare balances fell slightly down $34 million or 1% linked quarter.
Quarter, primarily driven by our senior housing assisted living sector.
Going forward, we remain very confident in our ability to perform from both a growth and credit standpoint in this portfolio as it remains a leader for us.
Core middle market C&I today is at the lowest level of utilization is any measured period back to March of.
2015, dropping below 50% for the first time.
Illustrates the significant capacity, we have to move up as demand starts to come back online without it being predicated on any new customer acquisition.
A return to more normal utilization levels organically adds about $600 million of core C&I loans.
Outside the anticipated growth in the specialty areas.
Balances declined again this quarter the broad C&I portfolio is beginning to stabilize and there's reason for optimism heading into next year.
Commercial real estate balances contracted 3% this quarter, we continue to see borrowers use this low rate environment to re.
Refinance to the long term fixed rate nonrecourse market 2020 was one of real estates lowest years portfolio turnover is many of the permanent markets we're cautious.
As those have opened up we see some catch up activity that is inherently a sign of a healthy portfolio, but continues to create quarter to quarter volatile.
I would expect balances to stabilize in the fourth quarter and resume a more normal growth pattern in 2022.
Triple B loan balance forgiveness was substantial again this quarter with 586 million forgiven shrinking the portfolio by 52%.
Of the remaining.
<unk> will be balances only 4% of the 2020 vintage and 66% of the 2021 vintage remains.
We expect the forgiveness process on the remaining balances to slow considerably.
We believe we are well positioned for a more normal loan growth cycle as we look ahead into 2020.
Two we believe that once supply chain constraints ease and we experienced the full impact of fiscal stimulus.
<unk> will be well positioned for accelerated loan growth.
Turning to slide eight you can see that credit quality continues to improve as we move further out from the pandemic.
We continue to experience mean.
<unk> tried to quality improvement across the broader loan portfolio with nonperforming assets and potential problem loans, both down significantly again this quarter.
On total commitments this quarter ranked the first time that we've returned to a level below the pre pandemic fourth quarter of 2019 for total criticized assets.
<unk> related activities.
These factors coupled with continued strength in commodity prices and a continued optimistic outlook for economic growth in GDP and the labor markets led us to released $23 million in reserves this quarter.
Net charge offs were $7 8 million or 16 basis points annualized.
From when excluding Triple P loans in the third quarter.
That's a decline from last quarter's $15 4 million or 30 basis points annualized net charge offs have dropped to an average of 26 basis points over the past four trailing quarters.
Which is at the lower end of our historic loss range.
We look forward to the next quarter, we expect net charge offs will be at the lower end of our historical range that.
The combined allowance for loan losses totaled $306 million or 154% of outstanding loans at quarter end, excluding triple P loans.
Non accruing loans decreased 38.
As we last quarter, primarily due to a reduction in non occurring energy loans.
Potential problem loans totaled 333 million at quarter end down significantly from $384 million on June 30.
Potential problem energy services, and general business loans, all decreased compared to the prior.
Million.
Turning to slide nine our highlight is their record setting third quarter the wealth management team produced.
Total wealth management revenues were $153 million for the quarter up nearly 17% from the linked quarter and 14% above the previous record set in the third quarter of 2020.
This includes the fee income lines that investors see on a corporate income statement brokerage and trading and fiduciary and asset management as well as net interest income from loans and deposits in our private wealth group and net interest income generated as part of the brokerage and institutional trading group.
Banking products and services for private.
Quarter clients continue to be a particular area to highlight.
Total loan portfolio surpassed 2 billion in balances this quarter and is up 12% or $221 million compared to the same quarter a year ago.
The deposit portfolio ending the quarter at $3 9 billion grew 3% linked quarter and was.
12% compared to the same quarter a year ago.
Total net interest income continues to grow up 3% linked quarter.
Total brokerage and trading revenues increased $15 4 million or 25% linked quarter.
This is largely due to a shift in product strategy made during the second quarter and our institutions.
Divot web trading and sales business, coupled with adding new financial institution clients.
This confirms our expectation last quarter that this shift in product focus and expanded customer base is sustainable we feel confident that we will maintain a robust level of activity and revenue generation and our MBS activities for.
Firm wide our capital commitment is expected to remain relatively stable for the foreseeable future in this segment.
Also in the wealth management space fiduciary and asset management fees were up almost 1% linked quarter and 13% compared to the same quarter a year ago. It is important to note that the second quarter includes.
<unk> annual tax preparation fees, so growth on top of that is significant and related to our strong growth in assets under management, which now totaled $98 8 billion.
While we have seen the benefit of favorable equity markets, increasing customer account balances sales activity remained strong in this space as well.
Our current mix of assets under management are 41% fixed income, 39% equities, 12% cash and 8% alternatives are.
Our relationship driven business model is perfectly in touch with clients needs today, as we continue to see institutions and individuals retain the increased depreciate.
<unk> for financial advice gained throughout the past 18 months.
Transaction card revenue was relatively unchanged this quarter, but up 5% compared to the same quarter last year.
This is largely due to stimulus measures and the broader reopening of the U S economy.
Deposit service charges were up one.
<unk> million dollars or 6% this quarter as we've experienced improvements in customer spending patterns.
Mortgage banking revenue increased $5 1 million or 24% linked quarter, primarily from an improved quarter over quarter valuation of our mortgage commitments.
Overall mortgage commitment volumes relatively soon.
Six in the third quarter.
Valuations compared favorably to second quarter valuations, which were largely driven by a decline in industry refinanced production volumes.
Despite this change in the unrealized mark to market between the quarters actual settlement margins are down slightly a trend we've seen all year and expect to carry forward.
Stable to the fourth quarter.
Industry wide housing inventory constraints continue to impact the market. However, there was some good news on the housing front as Fannie and Freddie both reverse their position on preferred stock purchase agreement.
Delivery limits on second homes, and investment properties, which had positively benefit us and.
In Colorado, and Arizona markets.
Other revenue declined $4 3 million linked quarter due to the sale of repossessed asset related to oil and gas properties.
Although not included on slide nine I will also note that the net economic changes in the fair value of the mortgage servicing rights and related economic hedges.
A positive $7 3 million during the quarter.
Also included in our total other operating revenue, but not reflected on slide nine is a $31 million net gain from our activity and our alternative investment group.
Area of focus is on providing equity and debt capital to growing businesses.
Many of whom have been strong customers of <unk> financial.
This is a very long term business with a portfolio that has grown to $75 million invested in 11 portfolio companies.
We expect this area to contribute to earnings going forward, albeit in a somewhat episodic manner I will now turn the call over to Steven.
And to highlight our NIM dynamics in the important balance sheet items for the quarter Steven Thanks Stacy.
Turning to slide 11 third quarter net interest revenue was 280 million largely unchanged compared to last quarter average, earning assets decreased $892 million compared to the second quarter and average loan balance.
<unk> decreased $1 3 billion with $875 million of that attributable to Triple P balances.
Average core loan balances fell $443 million.
Average available for sale Securities increased $203 million as we continue to reinvest most of the quarterly cash flows.
From the portfolio.
Average trading securities grew by $187 million to support our brokerage and trading business.
Average total deposits grew 344 million with non interest deposits up $480 million this quarter, which supports net interest income we.
We successfully redeemed our one.
Balanced with $50 million sub debt during the quarter, which will save approximately $8 million annually in interest expense.
Net interest margin was 266% up six basis points from the previous quarter with the increase primarily driven by Triple P. Forgiveness activity that's occurred during the second and third.
100 years Triple P loans supported net interest margin by two basis points in the second quarter and seven basis points in the third quarter exclude.
Excluding all triple P impact to the margins both quarters net interest margin would be approximately two 5% to 8%.
They're going to reinvestment of cash flows from our available.
Third quarter sales Securities portfolio did result in a five basis point linked quarter decline in average yields.
Additionally, we had continued success driving interest bearing deposit costs down one additional basis points to 13 basis points on an app on average for the quarter.
We believe the core margin as <unk>.
And next quarter will include a full quarter's benefit from the sub debt call. This past quarter, so with that and excluding all tripathi impact we expect a net interest margin of approximately two 6%.
We do not expect any upward migration in net interest margin until rates begin to rise again with anticipated.
Table eight hikes potentially on the horizon within a year or so it is important to recall how well we performed during the last rate hike cycle from 2015 to 2019 in the upper or the top quartile of regional banks.
While we can't be assured to repeat that experience we don't.
Don't see much that would lead us to believe the experience will be materially different in fact, there's even more liquidity in the system today than before the last rate increase cycle, which should diminish the need for the market to move rates up quickly.
Turning to slide 12 expense management remains prudent.
<unk> total expenses flat linked quarter and down 2% compared to the same quarter last year.
Personnel expense increased $3 8 million or 2% linked quarter. However, this was driven by sales related compensation, which was more than offset by the strong revenue gains overall.
An additional offset.
<unk> was due to a seasonal decline in payroll taxes.
Regular compensation expense was flat all told we're very happy with our ability to hold a personnel cost efficiencies earned through the pandemic and expect to do so going forward.
Non personnel expense was down $3 7 million this quarter.
Offset operating expenses related to repossessed properties fell $6 million this quarter as we sold the oil and gas properties driving this expense.
Mortgage banking costs decreased $2 $2 million due to a decrease in prepayments combined with lower accruals related to default servicing and loss mitigation costs on loans.
<unk> service for others.
Data processing and communication expense increased $2 million as a result of various project investments.
On slide 13, our liquidity position remains very strong our loan to deposit ratio declined from 57% last quarter to just below 53% at September.
<unk>.
Largely due to the significant decline in Triple P balances again this quarter. This significant on balance sheet liquidity leaves us well positioned to meet future customer needs are.
Our capital position remains very strong as well with a common equity tier one ratio of 12, 3% well ahead of our.
Timber thermal operating range.
With such strong capital levels. We once again were active with share repurchase Opportunistically repurchasing 478000 shares at an average price of $85 per share in the open market.
On slide 14, I'll leave you with a few thoughts as we move into our budget season.
Our into our 2022.
We believe net activity and loan growth will improve with our company positioned for positive growth once bar demand returns and our line utilization levels return to normal.
We expect the overall loan loss reserve as a percentage of loan balances to continue to migrate towards pre pandemic levels.
Core net interest margin has stabilized.
We may see slight downward pressure as our available for sale securities portfolio continues to reprice, but the significant pressure on net interest margin experienced the past year is largely behind us.
Our diverse portfolio of fee revenue streams are expected to remain solid.
<unk> continue to provide strong support to total revenue.
We will continue our disciplined approach to controlling personnel and non personnel costs with total expense levels expected at similar levels seen in the past few quarters.
Our focus will be holding the line on manageable expenses without sacrificing.
Multiyear.
And will the technology commitments to improve customer service and our competitive position.
As I mentioned, a moment ago, we feel good about our capital strength.
We will continue looking for share buyback opportunities and plan to maintain our quarterly cash dividend level.
I'll now turn the call back to Steve Bradshaw for closing commentary.
<unk>. Thank you Steven as I mentioned at the top of the call. It was a record quarter for <unk> financial we continue to do the right things the right way for the benefit of our long term investors, adding shareholder value without compromising credit discipline or foregoing investment that might hinder the company's future.
And as witnessed by our credit outcomes.
Outcomes the benefit from our alternative investment strategy and a new record wealth management contribution this quarter. We continue to do this in a prudent diversified way.
While this quarter was once again about the contribution from our fee based businesses the vastly improving outlook for growth in our footprint as we emerge from the pandemic is driving.
We're confident in a way we haven't seen for quite some time, while supply chain and workforce disruptions might be hampering some areas in the near term economic indicators remain strong, which which portends well for the future. We are cautiously optimistic about the restart of some of our largest growth drivers and the little guys with that we're pleased.
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Our first question comes from the line of Brady Gailey with <unk>. Please proceed with your question.
Hey, This is will genzyme for Brady good morning, guys. Good morning, good morning.
Hey, guys. So I just wanted to sort of loan growth I know loans are down a bit again this.
We were hoping for an inflection in <unk>, but.
I hear you guys on your optimism moving into next quarter and into 2022.
Walk us through some of the drivers that.
Giving you this confidence in your growth outlook.
It kind of feels like a low single digit growth rate may be achievable you guys next year.
Would you say, that's a fair assessment.
Yes, we're not ready to talk about our 2000 22022 projections at this point, but I'll certainly talk about why we would be optimistic about higher levels of loan growth as we move into next year. If you look at the big drivers of the decline this quarter you clearly have the triple.
Quarterly Paydowns worried about 80% of those.
That we that we originated have paid down.
Year to date.
Energy and commercial real estate or the two are other areas that really drove the biggest declines this quarter and those are the two areas that we probably have the least amount of concerns about them growing in <unk>.
2022.
Energy is very well positioned.
We've added in excess of 40, new customers and almost $1 billion of commitments associated with those in 2021 because of our continued commitment to that space and we're very confident that as we move into next year that we'll see growth there same with commercial real estate you.
You really have an anomaly.
Cause of the kind of continuous circumstances of the pandemic you had.
Borrowers who didnt refinance.
So we didn't have the portfolio turnover in 2020.
We historically have so you can kind of doubled up on that a little bit. This year, you may see a little bit that continue.
<unk> into the fourth quarter, but certainly our commercial real estate team has done a great job of continuing to add commitments to the book and we expect to see that as an area of growth. So the two biggest areas that drove the decline this quarter in our core portfolio are the two areas that we have the most confidence in as we move into 2022, so I.
I think that that's a big part of that and certainly our healthcare sector continues to do very well.
Good good growth there have been very strong consistent growth over a long period of time.
We're seeing I really is that as the open question that really depends on.
When line Utilizations began to move up.
There's a lot of factors involved there we've alluded to the supply chain issues that impact some of that.
The liquidity that's in the market as a part of that as well, but we're very very well positioned good activity in our pipelines on the commercial and corporate banking side. So we remain very optimistic about that.
That's all Super helpful and maybe just turning specifically to energy.
Just thinking longer term about that portfolio, we've seen a nice recovery in energy prices.
Demand is it eventually returns.
What is the ultimate expectation as to where energy loans as a percent.
Okay whole portfolio trends I noticed historically in that 18% to 20% range and.
Closer to 14% today, how do you think about your overall energy exposure longer term in relation to the total portfolio is it something you manage.
Capital level or is it a specific loan concentration.
Synergy, but we manage it both to the percent of capital and as a percent of the loan portfolio and we have significant capacity under both measures to grow that portfolio today.
And neither of those metrics.
Even approaches any kind of potential headwind for growth in that sector.
We obviously remain.
Very optimistic about growth there I think as you get into next year at these price levels, we're hopeful that there'll be more drilling activity.
And that would certainly drive borrowing demand.
Obviously loan demand that goes with that so we're we're excited about that space, we think that.
That continues to be an area.
We have great expertise and great consistency in our delivery of that into the market and we've been.
Our recognized for that with the new customers that we've acquired during the year and in fact I think in the third quarter in the league tables, we were the number one originator.
In the energy space.
That we have for the loan sizes that kind of fit our kind of less than $500 million in total loan size. So we're excited about where we're positioned there and we think that that's going to be a driver for us well into the future I think the other point of that and we get awfully focused on the.
The loan balance piece of that business, but I mentioned in my prepared.
And when I referenced it again that area also had a record quarter and fee revenue both in Treasury revenue investment banking revenue and derivatives revenue. That's a big part of the nature of that relationship. It is not just a lending relationship is a very full and whole relationship that has other profitable.
Profitable aspects of the business that is.
Remarks into the bank and important to our shareholders.
Awesome very helpful. Last from me, just maybe Marcel housekeeping would you remind us what your percent utilization is today.
And I apologize if you said that in your prepared remarks, and I missed that.
Yes.
As important when you look at the overall portfolio.
To give an absolute number.
Kind of about 64% overall, but that's.
Probably not the absolute best way to look at it because some of those commitments like in energy can accordion up and down depending on prices over time, I think what what.
And our core C&I kind of our corporate C&I area, we're below 50% for the first time.
Any recent history and in that particular segment and we believe just a return to a more normal.
Loan growth would would enhance the loan balances by about $600 million.
That's just for that more corporate C&I group it doesn't impact the specialty areas and others that also would benefit from.
From growth and an increase in utilization as well.
Alright Thats it from me thanks for taking my questions.
Thank you our next.
It comes from the line of Matt Olney with Stephens Inc. Please proceed with your question.
Hey, Thanks, Good morning, guys good morning.
Hey, Matt.
Sticking with some of the energy questions here Stacy you mentioned, adding 40, new customers in that business. This year.
That's helpful what are existing energy customers.
Question with respect to their strong cash flows from high commodity prices is there is there talk about more drilling activity or they still expect to pay off more.
More debt.
There is modest discussion the discussions really you think about as an energy producer.
Kind of what they've lived in the last 18 months I mean, they've seen a day, where oil price was negative in natural gas was.
Clearly depressed to now today oil is above 75% natural gas at one point hit $6, an mcf, so very different environment than they've seen a lot of volatility associated with that.
<unk> they are much more disciplined around hedging and so they're much more focused on that I think today, the biggest conversations around free cash flow and being able to have cash flow to demonstrate the returns to their investors. I think is really important to them. So I think what what the early discussions that we are.
At about really is.
At this stage, probably much more modest drilling activity than you might expect given the significant run up in commodity prices over the last six months or so that doesn't mean that won't change we're kind of in that capital budgeting season for those.
Energy customers, so we will learn more.
Learning that throughout this quarter, but certainly my expectation is for modest.
Not significant but modest increases in drilling activity as we move into <unk>.
Moving into next year certainly.
That could change depending on a lot of factors, including if commodity prices continue to increase.
Okay. That's really helpful. Stacy and then I guess the other data point you gave us was that the energy commitment balances have grown by about a $1 billion. So far this year from those newer customers I'm trying to appreciate the baseline of that number. So you had the overall levels of energy commitment.
At the bank or just approximate number.
Yet at the end of September.
<unk>.
If you look at energy commitments, we were at about $5 4 billion.
Yes.
And.
That number ebbs and flows probably more than any other committed amount.
Thats, because you get borrowing bases that expand and contract semi annually. So.
The utilization there is lower than it has been historically as well it's in the low 50% utilization so.
Combination of I think we're going to see commitment of growth there.
Hopefully higher utilization as we go into next year.
Okay Perfect and then just lastly for me I guess on the PPP side do you have the dollar amount of the fees that were recognized in.
In the third quarter and how much left do you expect to recognize.
As well over the next few quarters. Thanks.
Yes, Matt this is Stephen.
Fees, we recognized in the third quarter was $12 7 million.
That's a little bit higher than the second quarter, which was $11 1 million.
And we have 15 million left to recognize but most of that is associated with kind of this.
2021 vintage loans, and so that's going to spread out.
I think over a longer period of time, so you won't see the.
At the same level of fee recognition in the fourth quarter and on an early parts of 2022 that you've seen so far with that.
At 2020 vintage that that's almost all gone.
Okay.
Okay. Thanks, guys.
Thank you.
Thank you. Our next question comes from the line of John <unk>.
RBC capital markets. Please proceed with your question.
Hey, Thanks, good morning.
Hi, good morning.
Stacy.
Can you touch on.
The commercial real estate balances do you expect that.
Move to the permanent market to accelerate or is this just kind of a nagging thing thats going to be.
With you for a while and potentially slow at some point.
We certainly expect it to slow I mean.
You've got really that we.
We really saw that begin to accelerate in the second quarter third quarter I think.
I'd like to see it stabilize a little bit before I call. The bottom there I think it's likely that the fourth quarter.
But you had no movement to the permanent market last year.
The nature of our portfolio as they tend to get to through construction and stabilization and then refinance.
To a non recourse permanent financing source so.
You've kind of got a couple of years that we are doubling up on here, but I think that will stabilize likely in the fourth quarter.
Could stretch into the first quarter next year, but.
My Best guess is that it would be late fourth quarter. This year.
Then we'd.
Finance position to grow from there.
Okay. Okay. Good.
And then on loan growth again, I know you don't want to talk about 2022, but just a couple of things.
You are talking about increased borrower demand line utilization returning to normal.
I think Stephen Steve.
Well Bill you talked about restart of growth drivers does it.
Does it feel like we're just getting started on call. It non stimulus driven growth in the economy, if that makes sense. It just it just feels like things are lining up.
For better growth.
Plus not to mention the energy piece.
<unk>.
I guess are you guys bullish are you more and more and more bullish on growth for.
Q4 in 2022.
We're very bullish.
The reasons, we stand to disproportionately benefit benefit from.
Commodity prices rising you got it we've got an energy book that will benefit.
A growth perspective, we've got a footprint that will benefit that is growing.
Steve and I have been in Texas.
Last couple of weeks and then you just you cannot do anything down there without saying just the enormous and migration I've been in Phoenix, a lot of things going on in Phoenix and Denver.
The in migration.
<unk> from the coastal areas is significant our footprint is just perfect for that I think that that you've seen borrower sentiment be exceptionally strong there are some economic headwinds that whether it's supply chain or labor shortages that will resolve themselves at some level I think in the next quarter or two.
And most of the stimulus dollars have been allocated to states and local governments haven't even been spent yet and so I think that there is an enormous level of growth kind of pent up and I think we're in the very early stages of beginning to see that.
Yeah, Okay. Yeah, it's interesting it's like we skipped the credit cycle and now were.
<unk> bridging to grow so it sets up pretty well.
Just one more thing on deposit flows.
You used the term I think there are abating a bit but it's still very very strong.
What do you expect that to slow deposit growth to continue to slow and what do you think could eventually.
Reverse the growth and maybe.
See deposits start to come down.
We think.
We kind of have had the beginnings of some of our internal discussions about how we should think about for next year, we actually aren't seeing.
From the save the current level that you see today, we're not seeing material declines were not.
Forecasting material declines in the pilot deposit levels.
We think that the liquidity that's in the market is going to be here because even if that the current liquidity is used theres going to be additional liquidity that that hasn't been pushed through the system yet that will replace that so certainly for the foreseeable 12 months or so we believe that.
The deposit levels you see today are likely.
In the range of what you will see going forward.
The other question that kind of gets asked related if you get that much liquidity in the system. How can you have loan growth. It's a fair question, we've kind of looked at that back in a way to nine 2010. The last time you had a significant.
In a recovery.
You can have loan growth.
With strong liquidity in the system often it's in the different sectors. So the total.
May have a lot of liquidity, but different sectors are growing at different paces. So it creates loan demand. So those aren't mutually exclusive there they are related but they are not mutually exclusive.
Lucid either.
Okay, alright, thanks for the sort of help on those questions.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Gary Tenner with D. A Davidson. Please proceed with your question.
Thanks. Good morning, just a couple of questions here in terms of mortgage gain on sale as you pointed out was quite a bit higher than it was last quarter and if I understood correctly is because the commitment levels kind of stabilized after a big drop off.
In <unk>. So I was just wondering if you could give.
Any thoughts on how you see gain on sale.
<unk>.
Migrating because you're still well above where the kind of pre 2020 gain on sale.
<unk> levels were.
Again without being specific to kind of gain on sale just looking at the business. Overall, we think that that will likely what you see in the fourth quarter the mortgage business from a revenue perspective.
It's going to be pretty.
Pretty close to in line with what you saw in the second quarter.
From a from a mortgage revenue perspective, there may be some opportunities on the expense side.
Weighted to MSR amortization that may benefit, it's a little bit more in the fourth quarter. So our overall contribution from mortgage.
Would expect to be kind of consistent.
<unk> with the second quarter, maybe a little bit better when you look at pretax contribution for mortgage but the revenue levels. We think we'll be much more consistent with what we saw in the second quarter.
Okay. Thank you and then Steven I know you mentioned that you expect PPP forgiveness to kind of be stretched out from here.
But can you just remind us what the remaining PPP fees are to be recognized.
Yes $15 million.
We have remaining.
And I think the balance of the PPP loans is 500.
80 million something like that and again, it's that kind of second round or 2021 vintage which will.
<unk>.
We will be forgiven over a longer period of time, then you saw the first round. So thats why we think the $15 million will be spread out.
Many of the upcoming quarters.
Yes.
Great. Thanks for taking the questions.
Thank you. Our next question comes from the line of Matt Olney with Stephens Inc. Please proceed with your question.
Yeah, Hey, guys just a few more here on the follow up side.
I'm looking at the average balance sheet.
It looks like the investment securities balances are now around 50% of average earning assets.
Which I think is the highest level. We think we can find going back several years at the bank is there any appetite to move that higher in the near term.
Wait for loan growth or do you think this has now peaked at this point.
Yes, I think just generally peaked.
There's two components of that I think $13 million.
Failure and roughly as <unk> on the other $7 billion or so we have for our trading portfolio, but the $13 billion.
It's pretty close to where we want it to be it is up a couple of $100 million this quarter, but we don't really have any initiatives to drive that higher not.
Our base of what we think will ultimately be some increasing rate.
By the end of 2020, twos, we're pretty comfortable with our interest rate risk position and that asset portfolios I think at the right level at least.
The way we are thinking about today, Matt if you think about being positioned for rising rates I think if you look.
In the face of performance through the last rising rate cycle, we were kind of a top quartile bank from our perspective and certainly the the language coming out of the fed the various governors over the last month or so has certainly been.
<unk> indicated <unk>.
<unk> then the continued loose monetary policy.
So we currently are forecasting our first increase in December next year, I think there is probably more pressure that happens sooner than later than that.
We're awfully well positioned to benefit from rising rates and would want to be well positioned for that if it comes sooner than later.
Yes, that's a great point Stacy thanks for bringing.
Look it up and I guess, what about on the loan floor side, what's the what's the level of loan floors. You have at this point and then what's the.
How many rate increases do you have to see to get above some of those floors.
So there is there is just shy of $4 billion of our loans have floors embedded in them right.
That are supporting net interest income of about $20 million a year and so it supports NIM about five basis points. So that kind of give you an idea of what you would have to.
Pushed through.
And the support that we're getting there now.
And those will roll off we are.
Competitively.
Now, we're able to get fewer floors and deals today than we were 12 months ago.
So if you assume kind of a three year roll off of that.
And then there'll be less than 12 months and there are today for sure yes.
And going back to the.
The securities portfolio it sounds like there.
There can.
Be a little bit more pressure on the yields there, but we're getting close to close to <unk>.
Bottoming is that is that fair Stephen.
Yes, I mean, if you look at the portfolio yield itself is $1 80.
This morning, we added some securities in fact yesterday at $1 35.
So those are four to five year duration securities. So we do have a little bit of there is room there for that to continue to reprice down and Thats why I mentioned, it but I don't think its an overall huge drag on net interest margin I really think thats. We've overall stabilize the margin pretty well, but there is a little bit less there.
If rates stay low.
And.
Between the portfolio yield and what were adding in terms of the cash flow that we get back and reinvest.
We did pay off Steven alluded to this we did pay off the sub debt in the third quarter and the.
That was a partial impact of that so we still have a full quarter impact in the fourth quarter.
<unk>.
Of around $2 million that should be beneficial overall to the margin as well.
Yes.
Okay, and then on the loan yield side I think we're trying to separate the PPP impact and look at just.
The core yields and I think you mentioned the two loan categories, where you have strong conviction that could grow.
Next year would be energy and then commercial real estate did I get that right and is it fair to say those two categories have.
Higher yields on average than most other parts of the portfolio at the bank that's true statement.
And Stacy how would you characterize.
<unk> energy loan spreads today.
Historically, and then versus the rest of the portfolio or are they still relatively higher they are.
The.
As folks have decided to leave the space clearly the spreads they have been very stable there are fewer competitors there today.
And we're we're still getting the appropriate spreads for the risk that we're taking that space.
Okay perfect.
Alright last one guys brokerage and trading you guys hit a home run this quarter.
It looks like it was mostly on trading and then customer hedging I know, it's tough to predict kind of quarter to quarter.
More about the sustainability of these levels in the third quarter.
Yeah, Let me hit a couple of things there and then ask Scott if he wants to add anything to that.
We are really proud of our wealth group.
We're just right at a $100 billion in assets under management and sometimes.
Whether it's energy.
<unk> on the lending side or the trading businesses on the wealth side those types of things kind of overshadow what core is happening inside the company.
Looking certainly the trading businesses create volatility, but if you look at wealth revenues overall, there is intra quarter volatility, but we've grown wealth total revenue year.
But just tucker for over 10 consecutive years now and that wealth revenue CAGR is in excess of 9% and so there is volatility in some of these trading businesses, but there is there is there is core growth that's happening I think the market's missing inside of our wealth business.
And so as we think about the fourth quarter, we think.
Over year, the trading aspect of that business will be probably somewhere between what we saw in the second quarter in the third quarter.
Not as strong as the third quarter, probably maybe a little bit better than what we saw in the second quarter.
But if you think about the business and how we think about that business total wealth revenue has been a significant driver of our company.
And it's not just the trading business, it's the assets under management that we're providing counsel for our customers and institutions around.
You typically will see asset or manage that are half the size of the core bank ours are over twice the size of the core bank and almost a 100 billion.
So we're proud of that business and we are excited about what we've.
We've done on the trading side, but the core wealth business has been a key growth driver for our company for a long time, Scott anything you want to add to that nothing Stacy said, it well I think that.
In addition to the.
Probably more volatile.
Quarter to quarter result on the institution.
Small trading side, we have.
Kind of quietly manage to.
Grow our retail brokerage revenues as well.
At a healthy rate both on a linked quarter basis and versus last year.
And also in our investment banking.
Business has been very strong.
He said earlier in <unk>.
Prepared comments.
We're really coupled that with the continued momentum that we're getting both on the mortgage backed security side.
That is that large components, but coupled with investment banking retail brokerage and then on our hedging activities.
As Dave just energy related but also in our FX business and our interest rate derivative activity. All of those components are we think very well positioned for continued momentum.
Okay, Great staff guys. Thanks again.
Thank you Matt.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Now for any final comments.
Okay. Thanks again, everyone for joining us if you have further questions. Please call me at 908, 590, 53030, or you can E mail us at IR at <unk>.
<unk> Dot com.
Have a great day. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.