Q2 2022 BOK Financial Corp Earnings Call
Ladies and gentlemen, and welcome to <unk> financial Corporation's second quarter 2022 earnings.
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A question and answer session will follow the formal presentation.
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I would now like to turn the conference over to your host persist, even though chief.
Financial Officer, if there'd be a cousin of Corporation. Please go ahead Sir.
Good morning, and thanks for joining us today, our CEO Stacy kinds will provide opening comments and Marc Maun Executive Vice President for regional banking will cover our loan portfolio and related credit metrics.
Got Grauer executive Vice President of wealth management will cover our fee based results.
Then I'll provide details regarding net interest income net interest margin expenses and our overall balance sheet position from a liquidity and capital standpoint.
Pdfs of the slide presentation, and second quarter press release are available on our website at B O K S Dot com.
We refer you to the disclaimers on slide two regarding any forward looking statements we make during the call I'll now turn the call over to Stacy times.
Good morning, and thanks for joining us to discuss be okay financials second quarter financial results.
Starting on slide four second quarter net income was 133 million or a dollar in 96 cents per diluted share in the quarter represented strong earnings performance from across the company demonstrating with our diversity and breadth.
Core average loan balances grew 714 million during the quarter with gross spread among geography and loan types.
More impactful to this quarter's result was a 35 basis point increase in our average loan yields our loan portfolio has begun to reprice. Our response to the recent increases in short term rates.
As we've noted previously our balance sheet is asset sensitive with the majority of our commercial and commercial real estate loans repricing in a year or less.
Brokerage and trading revenues increased led by institutional trading fees, and a new quarterly high and energy hedging and the second best quarter historically from commercial loan syndication fees.
Do you share in asset management fees grew $3 4 million as our waivers and or money market funds decline in short term rates increased cranes.
Transaction card and deposit service charges, both grew linked quarter, $2 7 million and one and a half million respectively.
Our period end core loan balances grew $711 million or three 5% linked quarter, but even more impressive where there are growth in unfunded loan commitments those grew 979 million or seven 8% linked quarter.
The overall credit quality of our loan book continues to be outstanding with additional improvement again this quarter.
Turning to slide five C&I.
C&I loan balances increased five 4% linked quarter.
With an increase in C&I commitments of four 4%.
Average deposits decreased $1 8 billion this quarter with virtually all of that in interest bearing balances.
These declines were consistent with our expectations given the actions of the federal reserve to increase short term rates.
Compared to June 32021 period end balances are still $1 2 billion or three 1% higher than last year with a favorable mix shift to non interest bearing balances.
Yeah.
Assets under management or in custody in our wealth management group fell slightly this quarter down 5% to 96 billion.
The change was market value driven primarily due to equities, which account for a third of the assets under management or administration.
I'll provide additional perspective on our results before starting the Q&A session, but now Marc Maun will review the loan portfolio and our credit metrics in more detail I'll turn the call over to Mark.
Thanks Stacy.
Turning to slide seven period end loans in our core loan portfolio were up were $21 2 billion up three 5% linked quarter midway through the year core loans have now grown 1.3 billion or 13% annualized.
Total C&I loans grew 696 million or five 4% linked quarter with growth spread across our footprint.
Our Texas and Oklahoma markets produced combined core C&I growth of six 8% linked quarter across the markets health care energy and services were the primary sectors driving this quarter's solid C&I result.
Although commercial real estate growth was quiet this quarter linked quarter commitments grew seven 5%. So we expect that to translate into balance sheet growth over the next several quarters.
Loans in the energy space continued their recent linked quarter growth trend period end balances grew $195 million and have increased 386 million since December 31st.
Linked quarter outstanding balances grew 6%, while unfunded commitments increased 11% linked quarter, creating more opportunity for balanced growth as we look to the quarters ahead.
Health care balances increased $255 million or seven 4% linked quarter, primarily driven by our senior housing sector.
Excluding energy and health care core middle market C&I realized positive growth again, this quarter with linked quarter growth of $245 million or three 9%.
<unk> utilization rates did increase slightly this quarter, but have yet to return to pre COVID-19 levels.
Still have significant capacity to increase outstanding loan balances as demand continues to come back online without it being predicated on any new customer acquisition.
A return to more normal utilization levels organically add $600 million of core C&I loans outside the anticipated growth in our specialty areas based on the growth in balances and commitments over the last two quarters.
Combined with the geographic and loan type diversity, we are very confident in our ability to produce continued growth throughout the remainder of this year.
Commercial real estate period end balance growth slowed this quarter following the strong first quarter performance.
Through June balances have increased 275 million in annualized rate of 14% commitments grew $460 million or 775% linked quarter with year to date commitments up $855 million.
We have plenty of capital allocated for this space to grow balances this year and given the low current utilization level.
Turn to more normal funding levels could add several hundred million dollars in outstanding loan balances within the next two to four quarters.
We entered the year with a focus on growing topline revenue in the second quarter demonstrates the progress we are making on the lending front. We are confident that the momentum we've experienced up to this point, we will continue and the resulting loan growth for 2022 will be one of the best in our recent history.
Turning to slide eight you can see that we continue to experience meaningful credit quality improvement across the broader loan portfolio.
Overall credit quality is the best we've seen in quite some time far better than pre pandemic levels, excluding loans guaranteed by U S government agencies nonperforming assets fell $13 million this quarter to $118 million.
Excluding those guaranteed by U S government agencies non accrual loans are now $96 million.
As a percentage of tangible equity and loan loss reserves. Our criticized assets are at levels not seen in the last 10 years.
Our sustained trend of improving credit quality metrics was enough to offset any need for a credit loss provision this quarter, which would have resulted from the strong loan growth and changes in our reasonable and supportable forecasts primarily related to the economic outlook from the federal reserve actions to control inflation.
Given our solid credit position today, our ratio of capital allocated to commercial real estate that substantially less than our peers.
A history of outperformance during past credit cycles. We believe we are well positioned should another economic slowdown materialize in the quarters ahead.
We realized net recoveries of 799000 during the second quarter, excluding Triple P loans net charge offs dropped to an average of six basis points over the past four trailing quarters, which is far below our historic loss range of 30 to 40 basis points.
Looking forward, we expect net charge offs to continue to be low.
Excluding triple P loans, the combined allowance for credit losses was $283 million or 133% of outstanding loans at quarter end. We expect this ratio to migrate downward, though continued strong loan growth will increasingly influenced the prospect of resuming a provision in future quarters.
I'll now turn the call over to Scott.
Thanks Marc.
Turning to slide 10, total fees and commissions were $173 million for the second quarter of $76 million increase from the first quarter.
Institutional trading fees increased 66 million linked quarter as we move past last quarter's volatility returning us to more sustainable trading levels and revenues.
Driven by increased activity from our energy customers are commodity and hedging activities had a record quarter with fees of 13 million or $2 $2 million increase from the record set last quarter <unk>.
Commercial syndication fees recorded their second best quarter ever with fees of $6 4 million, an increase of $3 3 million linked quarter.
Fiduciary and asset management fees increased $3 4 million linked quarter, primarily due to seasonal tax preparation fees and growth in mutual fund fees and revenues largely driven by increases in short term interest rates.
Our assets under management or administration fell 5% linked quarter to 96 billion.
This was primarily driven by a 15% decline in the equity portion of the portfolio with equities representing about a third of the total assets. Despite the decline related to current market valuations. Our strong sales activity in this space provided an offset to that change with total assets under management or administration.
Relatively flat to this time last year.
Our current mix of assets under management is 44% fixed income, 34% equities, 14% cash and 8% alternatives.
Our relationship centric business model is perfectly in touch with clients needs today as we continue to navigate through this market volatility.
We believe the confidence and appreciation for financial advice, we've earned from institutions and individuals positions us well to serve our clients in this period of market uncertainty.
Transaction card revenue increased $2 7 million or 11% linked quarter as transaction volumes improved.
Year to date card revenues are up 8% compared to 2021. This is largely due to broader reopening of the U S economy, driving transaction volume as well as some impact from inflation.
Deposit service charges increased $1 5 million in this quarter with birth once again equally split between our commercial and consumer segments.
Compared to second quarter last year total service charges have grown $2 6 million or 10%.
Year to date, approximately 23% of the deposit service charges and fees were consumer related overdraft fees.
We expect to make changes.
In the fourth quarter this year that will reduce consumer overdraft fees by approximately $2 5 million per quarter.
Mortgage banking revenue decreased $5 3 million or 32% linked quarter with production revenues down $5 $6 million due to lower production volumes combined with narrowing margins.
Mortgaging servicing fees increased 277000, this quarter and our 6% higher than the second quarter last year.
During the last 12 months, we have strategically acquired servicing for approximately $6 billion of unplaced unpaid principal balances.
Mortgage production volume decreased $102 million during the quarter to $306 million as the industry continues to face housing inventory constraints and rising mortgage rates.
The rise in mortgage rates has significantly impacted the refinance market, resulting in only 19% of mortgage loans funded for sale this quarter down from 45% in the first quarter.
I'll now turn the call over to Steven to highlight our net interest margin dynamics and the important balance sheet items for the quarter Steven.
Thanks, Scott turning to slide 12 second quarter net interest revenue was 274 million a $5 6 million increase from last quarter interest and fees on loans increased $25 8 million linked quarter, largely due to a 35 basis point increase in loan yields.
Average loan balances increased 594 million loan yields increased as our variable loan rates.
Began to reprice in response to the recent increase in short term interest rates our balance sheet is asset sensitive with the majority of our commercial and commercial real estate loans re pricing in a year or less intra.
Interest on our trading securities fell $18 million as we reduced average trading securities four 4 billion linked quarter.
While interest income on trading Securities fell this quarter. This was more than offset with an increase in institutional trading fees recognized in fees and commissions.
Interest income on the available for sale and investment portfolios increased 2 million linked quarter, primarily due to a seven basis point increase in the average yield on the available for sale portfolio due to higher reinvestment rates.
During the second quarter, we moved $2 4 billion in securities from available for sale to held for investment.
This is the primary driver 416 million linked quarter increase in the investment portfolio and the $834 million decrease in the available for sale portfolio.
Due to the timing of those transfers the balance sheet impact of that repositioning will become more apparent when we report third quarter results.
Total interest expense increased $5 5 million during the second quarter, primarily due to a 10 basis point increase in the average rate of interest bearing liabilities, while those related average balances fell $2 5 billion.
The average effective rate of interest bearing deposits increased 12 basis points this quarter.
Average, earning assets decreased $4 4 billion compared to the last quarter, primarily due to the intentional decline in the trading securities portfolio used to support our brokerage and trading business. We just noted.
Excluding the 120 million linked quarter decline in Triple P loans average loan balances increased $714 million.
Interest bearing cash decreased 207 million.
Average total deposits declined $1 8 billion with noninterest bearing deposits, increasing $140 million in interest bearing balances decreasing $1 9 billion this quarter, which was consistent with our expectations given the movement in short term interest rates.
Net interest margin was 276% a 32 basis point increase from the previous quarter with the increase the combination of the $4 4 billion linked quarter decline in earning assets and the 35 basis point increase in loan yields.
The yield on our trading portfolio increased 29 basis points as we repositioned that portfolio with higher coupon bonds.
With our current asset sensitive sensitive position and given expectations for further increases in short term rates as the fed continues their aggressive posture against inflation, we expect to capture significant benefit throughout the remainder of 2022.
If the fed moves at least 25 basis points to July then we will materially move beyond the impact of loan floors and wouldn't anticipate topping a 3% margin in late third or early fourth quarter.
Turning to slide 13, we highlight further our asset sensitive balance sheet position and expect our performance in a rising rate environment to be similar to that experienced during the last rate hiking cycle from 2015 to 2019.
Using our standard model.
Assuming a parallel shift up 200 basis points gradually over 12 months net interest revenue would increase five 2% or approximately $67 million.
Over the following 12 months the total benefit increase is 12, 1% or $167 million.
However, with a flatter yield curve expected versus a parallel shift up our estimates for up 200 basis points would be approximately half those levels I'll provide more color in a moment when I talk about our specific guidance for net interest income.
On slide 14, you can see that our liquidity position remains very strong our loan to deposit ratio increased to 55% this quarter for 52% at March 31, due to the combined impact.
$807 million decrease in total deposits and a $617 million increase in loan balances this quarter or.
Our significant on balance sheet liquidity leaves us well positioned to meet future increasing customer loan demand.
Our capital position remains strong as well with a common equity tier one ratio of 11, 6% well above regulatory thresholds with such strong capital levels. We once again were active with share repurchase Opportunistically repurchasing 294000 shares at an average price of 82.
<unk> 98 per share in the open market.
At the current price level, we will continue to be active in repurchasing shares during the third quarter.
Turning to slide 15 linked quarter total expenses decreased $4 million all of that decline is coming from personnel expense and variable compensation expense decreased $3 7 million in employee benefit expenses decreased $2 4 million due to seasonal decrease in payroll taxes. These deep.
Creases were partially offset by $1 8 million increase in regular compensation expense as we recognize a full quarter of expense related to annual merit increases.
We have been successful in managing staffing costs during the tight labor market, but realize that current market conditions continued to present a risk going forward.
Non personal expense was flat linked quarter with most expense categories, having slight increases compared to the first quarter offset by lower occupancy expense.
On slide 16, I'll provide guidance in a few areas as we begin the second half of 2022.
We expect loan growth to continue the solid performance seen in the first and second quarters with period end point to point total loan growth for the year approaching a double digit rate.
We expect a continued reduction in deposit balances with the point to point decline in the upper single digit range for 2022.
Considering accelerated loan growth and moderate pressure on deposits our liquidity position is expected to remain strong with a loan to deposit ratio of approximately 60% by year end.
Considering the items noted above and modeling an additional 175 basis point increase in short term rates during 2022, consistent with a flattening yield curve forward curve. We expect core net interest income excluding the impact of triple P loans year over year to grow approximately 7%.
The prior year.
Core net interest margin should expand throughout the remainder of 2022 and given this environment should exceed 3% before year yet.
In fact, our June margin was two 9%.
We expect to maintain the available for sale securities portfolio flat for the major of the year and reinvest cash flows at current rates no additional transfers to held to maturity or anticipated.
Total fee revenues are expected to be 5% to 10% lower than second quarter results as we saw record derivative activity seasonality attacks. These and we will continue pressure with mortgage banking into the third quarter.
Total fee revenues as a percent of total revenues is expected to remain near 35% during 2022.
Total operating expense should be approximately 280 to 285 million per quarter for the remainder of 2022, bringing total expenses for the year, 5% below 2021, and our efficiency ratio below our corporate goal of 60% by the end of the year.
Our current combined loan loss reserve as a percentage of loan balances is 133%. We expect this ratio to migrate downward though continued loan growth at the current pace will increase the probability of resuming our provision in future quarters.
We expect to continue opportunistic quarterly share repurchases at the upper level of the dollar range span over the past several quarters.
I'll now turn the call back over to Stacy for closing commentary.
Thanks Steven.
I'm very excited about this quarter's results. We ended the year with a focus on growing top line revenue and our team is delivering those results across the board or.
Our lending teams have really hit their stride not only growing our balance sheet. This quarter, but also creating opportunities for future growth as commitment growth outpaced loan fundings. This is especially impressive given our commercial lending group and their support teams completed significant transformational projects during the quarter, we successfully implemented.
Our new loan origination platform significantly updated our treasury platform and introduced a commercial portal.
From an operational and efficiency standpoint, this positions us well to leverage those investments going forward.
Other revenues from our mortgage focused business lines have slowed as markets adjust to rising mortgage rates, we've taken appropriate steps to adapt to the new environment.
We've reset our balance sheet strategy for mortgage related trading securities.
And we've done some surgical right sizing of our expenses within our mortgage origination space.
Despite the impact from equity markets, our fiduciary fees continue to grow as rising rates eliminate fee waivers and our salesforce generate new business.
Transaction card revenues continued to grow.
As well as our ancillary lending fees related to commodity hedging and syndication activity.
We achieved all of this with a continued emphasis on expense control.
We've been intentional about positioning our balance sheet to benefit from rising rates with evident this quarter as core loan yields increased materially and we expect that to continue.
As the Federal reserve music aggressively to increase short term interest rates, we will see expanding margins and revenue.
Credit quality, just keeps getting better and is the best we've experienced in a long time, though it is likely unsustainable.
The business profile of our geographic footprint remains exceptional and when combined with <unk> long held credit discipline will serve us well if the economy slows in future periods.
With that we're pleased to take your questions operator.
Thank you very much.
Ladies and gentlemen at this time, we will be conducting a question answer session.
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Our first question is from Brady Gailey of <unk>.
Please go ahead.
Hey, Thank you good morning, guys.
Morning morning Brady.
But I just wanted to start with the guidance for spread income, which is now 7% growth I think before it was 9% growth. So it was it was revised a little lower.
Which is just a little surprised and it seems like you know with rates doing what they're doing on the NII commentary.
Better so I just wanted to see kind of why the change there I know you're expecting deposit balances to be a little lower so maybe that has something to do with it but you know loan growth is still robust so maybe just.
Dynamics that went into kind of the lower NII got.
Yeah, let me clarify that a little bit because really the dynamics of what's going on we've really not changed we just lowered the trading portfolio.
From the first quarter second to the second quarter and then on into our forecast. So we had I think in the first quarter about $8 billion average in our trading portfolio and going forward, it's going to be about 4 billion, so that trading portfolio earns.
A nice spread and contributes to net interest income. So we dropped that balance that's what went from the why it went from 9% to 7%, but my expectation for the third quarter is that NII should grow somewhere between 15 and $20 million for the next couple of quarters. Each you only saw it grow about six.
Million dollars this quarter because of that drop in the trading portfolio. So now that we've reset that position for that portfolio within the dynamics of improvement in loan spreads and yields are continued control in deposit cost and you know overall asset sensitivity.
We're going to grow net interest income, 15% to $20 million for the next couple of quarters.
Alright, great.
It clarifies a little bit.
Thank you.
And then just next on the provision I mean, you guys have had a negative to zero provision for a while now.
It sounds like you could have something in that line item going forward.
But I was just really wondering about the reserve and reserves of 133 basis points in percentage terms. I think you said that could continue to go down from here I was just wondering how you think about kind of the floor on where that reserve with land overtime.
Yeah, well, it's hard to anticipate a floor, but I do I do see it migrating down.
Towards that kind of day, one seasonal level, which is $1 20, now whether we get there I don't know I think.
What we wanted to share is that we likely will need to provide at some point in the future for the loan growth that we've got I mean that loan growth is significant and who knows what the economic outlook will be the next quarter or two but the loan growth itself will drive likely some need for provisioning.
Just because of the size of it.
But all of that dynamic together I still believe the 133 slides downward a bit.
Okay, and then finally for me I mean, I heard your comments about overdraft.
Some overdraft changes being implemented in the fourth quarter, which will take you know two and a half million dollars a quarter away from fee income are you thinking about anything on the NSF side or are there any other.
Changes that youre thinking about that would impact our service charges beyond that two and a half million per quarter.
That's pretty encompassing.
We'll announce those as we get into the late third early fourth quarter, but we wanted to signal that they will have an impact it's not a huge number for us the consumer overdraft NSF charges arent.
A terribly large number for us I think for the year.
It's about 21 or $22 million a year in fee revenue, so will impact that about two and a half a million a quarter with some changes starting in the fourth quarter.
But that.
That will largely be related to overdraft NSF fees.
Okay, Okay, great. Thanks for the color guys.
Thank you.
The next question is from Jared Shaw of Wells Fargo Securities. Please go ahead.
Hey, good morning.
I guess, maybe looking at loan growth, especially C&I growth.
I think I've seen some great numbers there.
When we look at that growth in commitments is that new customers and taking market share or is that your customers just feeling more optimistic in June .
And creating new lines, and creating new projects to add to look for.
Yeah. This is Marc Maun, I would say, it's a combination of both.
We've been successful in acquiring new customers in.
As well as seeing some of our customers expand take it take advantage of the opportunities now with the economy and put all take on some of the projects. They may have put off for a while.
And I think what the key here is that the breadth of our growth is across all our geographies and really all of our lines of business.
On the commercial side and especially on the C&I side. So.
We've just seen an overall positive impact.
I'm going for the last six months nine months and we expect that to continue.
This is Stacy and I think Mark said that well what and what I was most encourage about was how widespread the growth was across the geographies.
And loan types, even it wasn't one particular segment that was kind of carrying the day, but really widespread across all of our geographies and different loan types and so that was really encouraging and we're encouraged about the pipeline that we see going into the last half of this year as well.
When you look at that pipeline or that that growth outlook for the year does that assume that the utilization rate normalizes. This year or starts to normalize or is that just you know.
Looking at the pipeline and in a similar light utilization rate.
No we're not assuming that the utilization is going to normalize we're looking at just general growth from our customer base, new customer relationships as well as expansion opportunities to add to the portfolio. If we are able to get increased utilization. It will just benefit us further.
Okay, and then I guess shifting on to the deposit side.
How should we think about that deposit mix with the overall balance deposit balances going down.
Are you still able to to grow DDA going forward and is that also coming from <unk>.
And ships.
Well it appears that way I mean, we've seen growth in DDA every quarter, even in the consumer portfolio. This quarter. It grew.
So I don't anticipate that that drops that significantly I think you'll have migration with some of your wealth customers and maybe some of your commercial customers who find.
Somewhere else to put their dollars to earn a little bit higher with higher rates.
So that's why we've kind of guided to an overall decline in deposits by the end of the year, but the DTA and the mix has held.
Exceptionally strong and I don't know that I see that changing.
No. This is Stacy I think that the.
Our commercial Treasury platform continues to perform very well and our sales team there are exceptional.
Our DDA growth has been very good and we don't see how about.
Materially changes here as we move forward.
And this is Mario I'll only add one thing here one of the things. We've also seen is our treasury services revenue stream on a P times V basis has been growing at double digit rate for the last 18 months, so that could be driving some of that DDA growth as well.
Because our service charges are partially covered by some of those balances.
Okay, and then I guess, just finally for me when you look at the deposit rate deposit beta.
I know you highlighted 30% through the last cycle. If we if we see I guess, what could cause that to go higher than 30% and you know if we if we do get to the next 75 or higher basis won't move because we get to that level.
In short order here.
Yes, So let me kind of clarify so the first 150 basis point increase which we've already seen our beta was about 14%.
The next 175 basis point increase that we have built in our forecast.
Beta is closer to 40% so the average for the year is close to that 30 that we're talking about but to your point.
Future rate increases, which we have built in our forecast do carry a higher beta.
Up to that 40% level is what we're anticipating.
And we'll just see if that plays.
It plays out, but we think that that should be pretty close to what happens.
Okay. Thank you.
Yeah.
Thank you.
The next question is from Britain Robertson.
Please go ahead.
Hey, guys good morning, Hello, Brad.
Wanted to first ask it was good to see the rebound in all the fee income lines of business and I guess I was a little surprised that the wealth management fee.
Fees were up despite the decline in the AUM can you talk about the dynamics there and then.
Maybe just a little better outlook on that line item in particular.
Sure I'll take first stab at that this is Scott.
Couple of factors that moved the needle probably most significantly in the quarter.
We talked about a bit one is when you think about 14% of our total UMH being in cash.
We started to we.
We were able to stop waiving fees on our money market funds.
We increased our revenue share on the outside money market funds. So that gave us lift in the quarter. Additionally, we had a significant tax <unk>.
Seasonal inflow in the quarter.
Which helped and aided and so I think all of that coupled with as Stacy mentioned, we had very strong new sales.
New relationships really across the various lines of wealth management for the quarter.
And then the only drag on that was the roughly one third that experienced the most significant market decline in the quarter, which were the equity components.
So really that's kind of the dynamic that we saw.
Playing out in the course of the quarter.
Okay, Great that's helpful. Scott.
And then wanted just to make sure I understood the loan growth guidance. It sounds like you're talking about loan growth being somewhere in the back half to the first half but given.
The guidance for it to be approaching double digit it. It does assume somewhat of a slowdown are we I assume we are expecting a bit of.
Slow down relative to the second quarter, and <unk> or I'm not sure if I understand the specific guidance around the back half of the year.
Well we've experienced.
12% to 13% annualized growth the last two quarters and Thats very strong.
<unk>.
I'm, a little reluctant to put 12% out there I do think our commercial portfolio likely grows that that level, our wealth portfolio has grown well, but not at that level are likely not at that level going forward. So I don't know you take all of it together.
I think our guidance is around that double digit mark, but I was a little reluctant to put 13% loan growth out not knowing exactly what the economy is going to do in the third and fourth quarter.
That's really hard.
That's really where the conservatism is I think that there's a lot of momentum there and the pipelines are very good and I think you know as we as we looked at that we just kind of wanted to think about that with a little bit of conservatism, just because particularly as you get into the fourth quarter. It's hard to know exactly what borrower behavior will be in.
So we're awfully optimistic about what we've done and what the pipeline looks like going forward.
Okay. That's that's helpful. And then just lastly for me on.
Expenses in the guidance for 280 to $2 85 for the back half of the year.
That are a collection of all personnel expenses bumping back up.
Owing lower.
Compensation related.
Expenses in <unk>, well I can give a little color on.
I think youre likely going to see our stock price, a little higher which is going to drive some variable comp in our in our stock equity.
Hurdles.
It also has an impact on our deferred compensation.
Those two items that you saw that we benefited from in the second quarter will likely turn the other direction.
<unk>.
Be a little bit higher than that $2 73, that's why I'm pointing towards the $2 80 number or a little more I don't think it's going to be general general.
Regular salaries or part time type salaries, you saw $1 8 million increase because of merit increases in the second quarter and Thats, our timing for that so you won't you won't have that recur in the third and fourth quarter.
So I think it is personnel cost that drives.
It's a little bit higher in the third and fourth quarter, but it's mostly variable comp and deferred comp related.
Okay, Great. That's helpful. I appreciate all the color guys.
Yeah.
Thank you very much. The next question is from Peter Winter of Wedbush Securities. Please go ahead.
Thanks, Good morning, I had.
Two questions on on the yields.
First could you just tell us how much is cash flowing each.
Each quarter on the securities portfolio, and what the reinvestment rates is versus.
Yields on the securities running off.
Yes, so where have we got about $600 million.
Hum.
Cash flow quarterly from the available for sale portfolio that we will reinvest.
And they're going to be at at.
Just normal mortgage backed security rates, which I don't know what those guys are getting exactly today, but they're up.
Close to 3%.
I'd say that I can give you more of an exact answer.
And versus stuff that's rolling off.
Yes, yes, I mean definitely the 184 that you see are.
In the available for sale, that's actually that's going to migrate up.
<unk>.
Maybe it gets closer to 2% or so in the next quarter or so.
Okay.
That loan yield increase is very impressive 35 basis points or is there anything like interest recoveries that elevated that that might revert a little bit next quarter.
No theres not theres nothing inside there that really boosted it.
Kind of artificially if you will that's a pretty normal right.
And I think you'll expect that to go higher we'll see what the fed does today.
But most of these price relatively quickly.
Upward and so.
So yeah I expect good response.
And that overall portfolio yield as we move into the third quarter.
Okay.
And just my last question.
Obviously that I've covered you guys for a while.
And if you've never done it in the past, but I'm just wondering if there was any thoughts on maybe adding swaps to manage the asset sensitivity and maybe protect the margin.
When the fed starts to cut rates, just given the asset sensitive balance sheet.
You know historically, we've not done that we've really used on balance sheet cash positions and our securities portfolio. There may be a point, where we decided we want to grow the portfolio.
And take off some asset sensitivity, we're not at that point today.
But no were not contemplating putting on any flop just at the moment.
Okay. Thanks.
Yeah.
Thank you very much.
The next question is from John Austin of RBC. Please go ahead.
Good morning, guys.
Good morning, John .
This probably for Stacy and Mark.
Just on energy.
Sometimes we love it sometimes we hate it I think we'd love it right now.
And I'm, just if you guys could give us an overall view of how you feel about the energy markets today, I know you're pretty consistent on it but.
The more cautiousness on underwriting and any changes in your appetite there and just generally what are you seeing from clients.
This has been a really historic opportunity for <unk> financial to take market share.
Really strong growth in syndication, we're leading a high percentage of the deals that we're involved with today customers understand risk management practices. So that's why you saw a record second quarter hedging revenue with commodity prices spiking from an underwriting perspective, we feel very good about what we're doing we have a cap on oil at $85 in it.
Cap on natural gas at $5.50. So while we traditionally use the forward markets and the forward strip to price. The collateral we have kept that at a level well below the current strip price. So we feel very good about that and we're always better.
<unk> portfolio for us.
Even in even in the downtime that we've been through we performed exceptionally well and actually as people begin to think about.
The potential for a recession or.
A downturn in the economy, its really hard for us to envision a dramatic downturn in our footprint states given the support that commodities will have in Oklahoma, and Texas, Colorado, and New Mexico in particular.
The likelihood that you could have a.
Better regional outcome in this footprint that we are in the other parts of the country is very high with commodity prices at the level that they are today, we've had six years of underinvestment in the energy space and so this isn't something that is likely resolved in a short period of time I think commodity prices are going to stay higher.
On a relative basis, they could they could go lower than they are today, particularly natural gas, but still on a relative basis would be much higher than they've been in the last several years and support our local economy at a high level.
And John I'll, just add that as we've continued through this cycle our hedging program continues to be substantial so.
Both are oil weighted and gas weighted customers still.
Our overweight at our are hedged in excess of 50% as much as 90% into 'twenty throughout 2023.
So.
That gives us further comfort when we're looking at if theres a potential drop in prices.
Beyond our underwriting ability. So we've maintained that kind of level going forward and as we ran our stress test we ran a 40% discount to our entire to.
Two the price deck in total and still saw very little impact to the overall portfolio quality.
Okay, that's very helpful.
And then just Stephen though one for you on slide 13.
On your asset sensitivity.
Yeah.
Help me understand that a little bit more.
I think what you're saying is.
That 13 to 24 months number is in addition.
The 1% to 12 month number is that that's right way to look at it okay, that's right, but all of them.
You know look at the <unk>.
He asked strict there too because I don't want to over.
I don't want to overestimate, what it could be that that is our normal parallel shift that we put in our 10-Q, but.
I'm being conservative here, because I think.
The flattening curve scenario is probably more likely than they would cut that number in half, but it is additive.
To the previous year, but the relative ratio holds as I guess, what I'm kind of getting correct.
And I guess I guess bigger picture. If you just look at the last few months and assuming we get 75 today that that's a little over 200 basis points, So you're saying.
Yes, you're getting benefits today, but.
Just on the repricing of your portfolio the benefits would really start to come.
Third quarter of 23, even though we see the benefits today, you're saying, there's even more to come as that well I think that is true I think that's correct. Yeah, we're set up to benefit significantly in the third and fourth quarter. If rates continue to rise, we think thats going to happen today.
<unk>.
That's our expectation that's why I wanted to highlight earlier I did in the call. We only grew $6 million between the two quarters, but that wasn't because some dynamic with our sensitivity that was more just the size of our trading book and if you right size that and carry that on out for the rest of the quarters then you've got it.
<unk> bump in NII.
To that 15% to $20 million a quarter level.
As long as loans continue to grow in the rates continue to rise that's how we're set up.
Alright, so it all makes sense. Thank you guys.
Thank you very much. The next question is from Matt Olney of Stephens, Inc. Please go ahead.
Hello, Matt.
Hey, good morning.
I want to start on the the NII guidance, 7% for the year.
I think that excludes the impact of P. P. P F.
That's what you were talking to about the same thing do you have what the dollar amount of the PPP fees where last.
Last year starting point.
Yeah. So so in 2021, we had a benefit of about $48 million roughly.
Of NII and fees related to PPP that would would be in NII and then this year, it's about $8 million. So there's a $40 million differential.
Between the two years.
And if you account for that and look at what our NII forecast is I think will grow 7% over last year.
Now that's down from nine.
That we said last quarter in our guidance, but we had not adjusted our trading portfolio downward like we have today and I think in the I think in the second quarter that trading portfolio was $18 million different and the NII.
Interest revenue.
Then what we had had in our previous forecast. So that's why I modified that.
That guidance.
Okay, and that guidance should get us to that $15 million to $20 million incremental improvement in each of the next two quarters is that right. Yes, that's correct.
Okay got it I think you said within that it assumes the trading portfolio maintains around that 4 billion dollar level that I hear that right and I guess that would be an increase from the end of period level. So you're at around four to five.
A billion.
Average for those two quarters off of an $8 billion to $9 billion average that we had previously so that guidance adjusts for that.
Portfolio being smaller.
Okay.
Okay. That's helpful and then I guess on the on the fees good to see the rebound in the brokerage and trading line I want make sure I appreciate kind of what's going on here I think the trading line last quarter was a loss of 54 million.
What the dollar amount and put that line was in an <unk> and then I guess, how confident are you that you've captured all the potential losses from moving some of those lower coupon bonds off the well that we talked about last April I can address that that latter question I know that.
We ended up selling.
Out of all of those bonds in the quarter for about $4 million to $5 million more than we had marked those bonds.
In the in the first quarter, So we came out better.
Certainly in the sale of the tail of those bonds than what we had marked them.
When we closed last quarter.
The answer for the latter part of the question.
To your first part Matt page 10 in the Investor deck really breaks out in more granular detail that brokerage and trading line item.
So you can see in the second quarter, it was $12 million in trading fees for the second quarter of 2022.
Got it.
Okay and then just lastly on this topic I guess help me appreciate just.
Increasing the size that train portfolio back up to that four $4 million to $5 million that we brought it down quite a bit over the last few quarters, just strategically kind of we've increasingly brought it back down and that we're bringing it back up just help me appreciate that.
Yeah. So this is Scott so I think that.
As we've talked about in terms of the factors that influenced the just precipitous.
A rise in short rates in the first quarter and the market volatility we had significant.
Challenges to liquidity in the in that mortgage backed security sector.
And as Steven Yeah detailed we liquidated our lowest coupon mortgage backed securities in the first quarter.
Because we believed and I think rightly so that we were going to be entering a period with not just.
Rising rates, but.
Significant amount of fixed income uncertainty so we feel like as we've adjusted the size of that trading securities portfolio to now to that $4 billion to $5 billion level that positions us for the current market conditions. So if we.
Over the course of the remainder of the year.
Again to see rate and fixed income clarity and confidence return then we'd consider.
Returning it to the larger <unk>.
Levels that it was previously but in the current market conditions, where we see a lot of uncertainty and volatility we feel very comfortable about that portfolio size.
To support our mortgage origination customer base and the current kind of outlook for rates and the flatness of the curve.
Matt This is Stacy I mean, if you think about just mortgage production overall, we're just the market's just not creating as much inventory with new paper being originated and so as a.
<unk> of that that activity is going to be at a lower level than it was when you saw.
No really strong mortgage markets overall in the third and fourth quarter last year. The other thing that we're starting to see some signs of life and is on the municipal trading side, that's picked up a little bit here.
In the second quarter and that might help us a little bit as we move forward as well.
Okay. Thanks, guys.
Thank you. The next question is from Gary Tenner of D. A Davidson. Please go ahead.
Thanks, Good morning, everybody.
So Gary.
Hey, I wanted to ask about the components of loan growth back half of the year I got on the call late so I apologize if you went through this but.
My sense is that the pipeline and growth expectations are remain pretty well weighted to commercial and I'm. Just curious about the commercial real estate side, we had a big kind of surge I guess in the first quarter and then were flat.
<unk> could you talk about what youre seeing in terms of pipelines transaction demand and if you're.
Maybe seeing more projects that maybe you don't pencil out at higher rates.
Well this is mark I would say first of all because the latter part of that.
We're certainly employing the same discipline, we've always employed and so we're trying to be selective and pick the best credits that we can the volume of opportunities is still there.
We just may be being a little bit more selective and then what we saw in the second quarter was a lot of new commitments.
We booked that are more construction related and will not fund immediately but we expect those to start to fund up for the remainder of the year. So that's when we'll see the loan growth in Outstandings as as those projects are funded going forward.
Yeah.
Yeah.
Okay. Thank you and.
In terms of the rate sensitivity I just.
Wonder if.
Stephen you could tell us in terms of the 78% of commercial and commercial real estate, that's variable rate or fixed the repricing here can you drill a little more into the variable rates either prime or one to three month LIBOR to be a little more specific on what how we're thinking about 90.
90% either LIBOR sulfur.
And it's most of it sooner at around 30 day.
It moves very quickly.
Okay.
Thank you very much.
You bet.
Thank you.
Question is from Kenneth Genesis timber Chris.
<unk> Securities. Please go ahead.
Thanks, Good morning, I'm, Jennifer question to Steve on the senior housing portfolio when I've asked some bankers over the last six months or so what kinds of loans they see as vulnerable if we go into them.
Oh recession.
Our bankers have sided that area I'm wondering what your thoughts are and what youre seeing in your portfolio.
Well I don't believe that the senior housing portfolio is as sensitive to recession as it is to more what the government does around Medicare and Medicaid rates and what we've seen in terms of COVID-19 and et cetera. Those have been the headwinds that had been experienced and they are in the.
The positive is that the Medicare and Medicaid rates have been improving while the COVID-19 situation is getting better too. So we would expect occupancy to start to improve.
So from that standpoint, I don't think the recession is going to change the demographics of the of the pop.
Population that would reduce the demand that would require senior housing.
This is not a new portfolio for us and we've had it through previous recessions, including the weight on nine more severe recession and the credit outcomes in that portfolio have been very very strong we haven't made any changes in our underwriting or or liberalized. How we look at that in any way. So I wouldn't expect a materially different performance.
Absent government changes in reimbursement for Medicare and Medicaid.
Great I appreciate that color and perspective, thanks a lot.
Youre welcome.
Thank you very much.
Ladies and gentlemen, it's reached the end of the question answer session. Another logical technical back to Steve Nelson judging remarks.
Okay. Thank you thanks to everyone for joining us today appreciate all the questions.
And if you have any additional questions. Please call me at 980, 590, 53030 or you can email.
IR at <unk> Dot com everybody have a great day. Thank you.
Thank you very much.
Ladies and gentlemen that concludes today's conference.
They may disconnect your lines at this time, thank you for your participation.
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