Q1 2023 BOK Financial Corporation Earnings Call
Greetings and welcome to the B O K Financial Corporation first quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
A brief 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 would now like to turn the presentation over to Murray Wright, Chief Financial Officer for B O K Financial Corporation. Please proceed.
And thanks for joining us today, our CEO Stacy kinds will provide opening comments I will highlight current capital and liquidity strength, Marc Maun Executive Vice President for our regional banking will cover our loan portfolio and related credit metrics and Scott Grauer Executive Vice President of wealth management will cover our fee based results I will then.
Provide details regarding financial performance metrics for the quarter and comments regarding our full guidance.
Pdfs of the slide presentation, and first 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 will now turn the call over to Stacy kinds.
Good morning, Thanks for joining us to discuss <unk> financials first quarter financial results.
Starting on slide four first quarter net income was $162 million or $2 43 per diluted share the.
The strong results of the first quarter continuing the earnings momentum we developed throughout 2022.
This quarter was the second highest pre provision net revenue in our history and would've been higher absent the extraordinary market volatility impacting the net mortgage servicing results.
Strong financial results in the first quarter are a testament to our diverse business model strong operating geographies and disciplined approach to risk management that has long been critical to our ability to sustain success.
Our peer leading tangible capital ratio paired with our balance sheet liquidity have served us well over the last 45 days with the disruption in our sector.
The disruptions and almost unprecedented level of rate volatility in the quarter have demonstrated our ability to both manage critical risk well, while also continuing to post strong financial results for our shareholders.
First quarter showed sustained revenue and our noninterest income businesses continued loan growth and an efficiency ratio below 57%.
Well no bank can be totally immune from the macro economy.
We believe this is precisely the environment that positively differentiates our diversified business model robust risk management framework and strong financial performance.
Our interest rate liquidity and credit risk management are strong and we remain focused on increasing top line revenue and exceptional growth markets.
We had very strong financial results during the first quarter that were proud to discuss but today, we'll break our prepared comment in two sections in the first section will focus on many of the key metrics around capital liquidity and deposit diversity that had been in the focus for the market over the last 45 days.
In the second section, we will focus on our core results for the quarter, which was the second best pre provision net revenue quarter in <unk> history.
We want to address the issues that are top of mind early so that the good financial results do not get lost in the noise of the recent market disruptions.
Well for Marty walks us through the metrics that are top of mind for you I'd like to make a few broader comments.
The failures of Silicon Valley Bank and signature bank were idiosyncratic and do not represent broad weakness in the banking sector Bank.
Banks are better capitalized than at any time in my banking career.
Regional banks, specifically paying an important role in our communities and play a broad role in our business and economic activity that cannot be filled by the largest U S banks.
At Bofa financial we take managing interest rate liquidity and credit risk seriously and those in risk management roles rightfully create natural tension with those and risk taking roles to ensure the proper balance to exist.
We ended the quarter with a neutral interest rate risk posture, our loan to deposit ratio of less than 70% compared to a pre pandemic loan to deposit mean in the 80% range and high capital levels.
In fact as of December 31, our tangible common equity inclusive of tax effected unrealized securities net losses.
Placed us in the top 17% a publicly traded bank with assets greater than 25 billion.
That measure we ended the first quarter with an adjusted ratio of eight 2% versus seven 4% last quarter.
While liquidity and rate risks have come to the forefront managing credit risk is also a core competency.
We are the largest traditional bank that did not participate in TARP during the financial crisis, because of our disciplined approach to credit risk management and.
In good times, we have remained disciplined to the same credit fairway that allowed us to meaningfully outperformed the last time, there was a credit cycle.
We have an internal limit of 185% of tier one capital and reserves for our commercial real estate exposure that we take seriously.
While our asset quality levels, including net charge offs potential problem loans and nonperforming loans remained near historic lows. We are building a strong combined reserve for credit losses at 137%.
Our earnings performance is even more impressive considering our current earnings include meaningful provision expense.
Finally, our diverse business model is unique for a bank our size.
While the market focused on net interest revenue and related margins. Our operating revenue is very diverse and it's a big reason for both the resiliency of our earnings and a key driver of growth for the company.
I will now turn the call over to Marty to discuss key aspects of our liquidity and capital before we review the first quarter results.
Thanks, Stacy recent events have focused the market on a couple of specific metrics within capital liquidity and I will cover our position on each within capital that metric is tangible common equity adjusted to include unrealized net losses on held to maturity securities.
That is in addition to unrealized net losses on available for sale securities that are already captured in the TCE ratio.
The chart on slide six shows our December 22, adjusted TCE versus that same metric for the top 20 banks in the U S. At seven 4% <unk> level was higher than 18 of those 20 largest banks and notably higher than each of the four largest banks.
Okay.
This level of capital strength, which is easy to see by investors and depositors alike has made our recent discussions with clients and prospects relatively easy.
That same metric for <unk> as of March $31, 23 was eight 2%, which will compare favorably to March 31 levels of peers and very large banks.
Our strong TCE levels are the result of our disciplined approach to risk management across the organization, but in particular within the investment portfolio.
We monitor and limit TCE exposure to market rate increases.
We maintain a relatively short duration securities portfolio, which increases flexibility when rates increase.
Slide seven shows the duration of both RFS and HTM Securities.
And the low level of extension risk in 2020, and 2021, we understood that a portion of Covid era of deposit growth was not permanent and reflected that fact and the size of our portfolio.
The vast majority of our securities our U S government agency mortgage backs.
And 96% can be pledged to secured borrowing sources, which supports liquidity.
I will note that we actually have $1 8 billion of securities with an unrealized gain in our <unk> portfolio, mostly due to a repositioning of the balance sheet in Q4 of 'twenty two.
Moving to liquidity our loan to deposit ratio ended the quarter at 69, 8%, which is strong relative to peers and our own history.
Standing behind the ratio is a diverse deposit franchise as demonstrated on slide eight.
Even within our larger industry vertical the largest single industry concentration as energy at only 7% of total deposits corporate banking represents many industries all more granular than that.
The uninsured deposit metric has received new attention across the industry and slide eight shows important context for our level.
On the surface, our uninsured deposits totaled 57% as of March 31, However, an important adjustment needs to be made to that metric to make it more meaningful.
It is appropriate to adjust for collateralized deposits since those are effectively no different than insured deposits.
Municipalities Native American tribes and certain trust related deposits are all required to be collateralized relative.
Relative to our asset size all three of those are large business segments for us and result in aggregate collateralized deposit balances of $4 5 billion or 14% of total deposits.
With that adjustment are effectively uninsured level is $14 2 billion or 44% of total deposits.
The next liquidity assessment that is commonly being made is to compare available liquidity sources versus that net effectively uninsured deposit number.
Slide nine shows our available liquidity from collateralized sources as a sub total of $23 7 billion.
And then a grand total of $27 6 billion, including fed funds lines.
Both of those figures exceed the effectively uninsured deposit total of $14 2 billion.
Which is one more way to conclude that our liquidity position is indeed strong.
Three pieces of context on that slide first the number we show under the federal Reserve's, New Bts P program represents the incremental secured borrowing capacity, we will be able to produce due to the favorable collateral haircuts. If we were to move security collateral from <unk> into the Bts P program.
Second the secured borrowing capacity, we show for Unpledged loans reflects the net borrowing capacity, we would get after applying collateral haircuts to those specific loan categories.
And third our wealth management business has 17 billion of customer investments held in money market mutual funds, which are not on our balance sheet. We.
We believe a large portion of this could be attracted onto our balance sheet, albeit at a market rate and in some cases with a form of insurance enhancement.
The net result of the disruptive March events to our deposit portfolio was not significant total deposit attrition in Q1 of 2023 was the same amount as in Q4 of 2022 and generally consistent with our guidance provided in January for.
For the subset of customers, who inquired about how well prepared <unk> is for the present circumstances. The discussions will remain very easy by the strong message we have to share when I talk about our outlook you will notice that our forward looking guidance on late 'twenty three loan to deposit ratio has not changed lastly, I will note that our wholesale borrowing.
Activity during the quarter was all business as usual activity for US no usage of the federal reserve, either the new program or otherwise.
We have increased usage of <unk>, although it is still lower than what is historically normal for us.
Now, let's move to our performance in the quarter, we delivered solid financial results with earnings per share of $2 43.
And net income of $162 million.
Period end loan growth was $193 million and asset quality remains very strong and well positioned for potential headwinds.
Now I will turn the call over to Mark to talk more about the loan growth and credit trends.
Thanks Marni.
Total C&I loans have increased $1 2 billion or nine 2% year over year with growth across all sectors commercial real.
Real estate loans increased $209 million or four 5% linked quarter and have increased $714 million or 17% year over year.
This effectively returns those balances to their 2020 level after experiencing significant pay down activity in 2021.
The annual increase was primarily driven from loans secured by multifamily residential properties and industrial facilities.
Unfunded commercial real estate commitments decreased 13% linked quarter.
You have an internal limit of 185% of tier one capital and reserves to total CRE commitment and we're presently at the upper limit of that range. We do expect continued growth in outstanding CRE balances as construction loans fund up.
As of March 31st CRE balances represented 21% of total outstanding loan balances of ratio well below our peers.
Health care balances increased $54 million or one 4% linked quarter and have grown $458 million or 13% year over year, primarily driven by our senior housing sector.
Healthcare sector loans represented 17% of total loans at quarter end.
Energy balances decreased $27 million or 8% linked quarter and have increased $200 million or 6% year over year with period end balances representing 15% of total period end loans.
Combined services and general business loans, our core C&I loans were relatively flat linked quarter with a year over year growth of $539 million or eight 4%. These.
These combined categories represent 30% of our total loan portfolio.
Unfunded commitments in these categories fell slightly linked quarter with utilization rates up slightly.
Utilization rates continue to run below pre COVID-19 levels. So we have capacity to generate balanced growth apart from any new customer acquisition.
Year over year loans have grown $2 1 billion or 10%, excluding triple P. Loans Q1, 2023 extends the linked quarter loan growth to six consecutive quarters.
Although we don't expect loan growth to continue at this pace. We do believe we have the momentum to drive continued growth in the loan portfolio throughout 2023, consistent with our guidance unless the macro economy negatively impacts borrower sentiment.
Turning to slide 12, you can see that credit quality continues to be exceptionally good across the loan portfolio and well below historical norms and pre pandemic levels now.
Nonperforming assets, excluding those guaranteed by U S government agencies decreased $2 5 million this quarter non accrual loans decreased $1 $5 million in repossessed assets fell $1 7 million.
A level of uncertainty in the economic outlook of our reasonable and supportable forecast remained high and key economic factors were less favorable to economic growth across all scenarios, including WTO high oil prices and projected commercial real estate vacancy rates those combined economic factors supported a 16 billion.
Dollar credit loss provision for the quarter.
With a ratio of capital allocated to commercial real estate are substantially less than our peers and our history of outperformance during past credit cycles. We believe we are well positioned should an economic slowdown materialize in the quarters ahead.
The markets are more focused on the office segment of real estate given the recent trends in workforce preferences, though it remains an open question as to whether that will be sustained as employers continue to require more time than the physical office.
Our maturities are generally ratable over the next three to four years and we always have a mini perm option. If the markets are not conducive to long term permanent financing.
The average loan to value ratios in the office space, our sub 65% along with average cash flow coverage in excess of one four times based on our most recent semiannual review at the end of 2022.
Net charge offs were less than $1 million for the first quarter and have averaged seven basis points over the last 12 months far below our historic loss range of 30 to 40 basis points.
Looking forward, we expect net charge offs to continue to be low.
The combined allowance for credit losses was $312 million or $1, 37% of outstanding loans at quarter end.
We have noticed many analysts are not using the combined allowance when evaluating and strength of loan loss reserves. The total combined allowance is available for losses in the industry adoption of the unfunded versus funded reserves is mixed any apples to apples comparison should include the combined reserves.
We expect to maintain this ratio or to migrate slightly upwards as we expect loan growth to continue as well as continued economic uncertainty due to current market conditions. Both of these conditions support credit provisions going forward.
I'll turn the call now over to Scott.
Thanks Mark.
Turning to slide 14, total fees and commissions were $186 million for the first quarter down $7 6 million or three 9% linked quarter trading.
Trading and syndication fees were the primary drivers of the linked quarter decline down.
Down $8 3 million and $4 $7 million respectively.
These were partially offset by a $4 3 million linked quarter increase in mortgage banking fees.
The trading fee decline was primarily driven by a $7 $4 million reduction in our MBS trading activities as mortgage originations remain at historically low levels as our trading volumes for both originations and sales.
Market volatility in response to recent bank failures has also restrained trading activity <unk>.
Commercial loan syndication fees decreased $4 7 million linked quarter.
Largely due to significant activity in energy and CRE during the fourth quarter.
Fees from our municipal investment banking segment increased $2 1 million linked quarter.
The $4 3 million increase in mortgage banking fees is driven by increased servicing revenue and improved mortgage origination pipeline volumes coming off the seasonally low fourth quarter.
Fiduciary and asset management fees were $50 7 million for the first quarter of one 5% linked quarter increase.
Our assets under management or administration were $102 3 billion, an increase of $2 6 billion or two 6% linked quarter with growth across all categories, our asset mix of assets under management or administration was relatively unchanged this quarter with 45%.
First income, 32% equities, 14% cash and 9% alternatives.
We believe our diversified mix of fee income as a strategic differentiator for us when compared to our peers, especially during times of economic uncertainty.
We consistently rank in the top decile for fee income as a percent of total net interest revenue and noninterest fee income.
That revenue mix has averaged just over 36% during the last 12 months that consistently supports a revenue stream that is sustainable through most economic cycles.
I'll now turn it over the call to Marty to highlight our net interest margin dynamics and the important balance sheet items for the quarter.
Marty.
Thanks, Scott turning to slide 16 first quarter net interest revenue was $352 million consistent with the prior quarter. Despite two fewer days in the quarter.
As expected the net interest margin decreased nine basis points linked quarter to 345% due to modestly higher deposit betas and lower demand deposit levels due to the rate environment.
The average effective rate on interest bearing deposits increased 61 basis points this quarter, bringing our cumulative deposit beta to 39% since the fed began tightening.
Average, earning assets increased $1 5 billion compared to the last quarter.
The average available for sale portfolio increased $785 million this quarter, reflecting the full quarter impact of purchases made during Q4 <unk>.
Average loans increased $500 million with growth in both commercial and commercial real estate loans.
Turning to slide 18.
We highlight our relatively neutral interest rate risk position, assuming a gradual increase of 100 basis points over 12 months net interest revenue will decrease only 2% or approximately $2 8 million.
Assuming a gradual decrease of 100 basis points over 12 months net interest revenue will decrease by approximately one 9% we expect to maintain a position, which is neither materially asset or liability sensitive for the near term.
Turning to slide 19 linked quarter total expenses decreased to $12 6 million $4 3 million from personnel and $8 4 million from other operating expense.
Personnel expense decline was driven by a $12 $6 million reduction in cash based compensation, partially offset by a $6 1 million seasonal increase in employee benefits primarily payroll taxes.
And a $2 3 million increase in staffing costs due to annual merit increases.
The linked quarter decrease in other operating expense was primarily driven by reduced professional fees and accruals for mortgage loss mitigation costs as well as a contribution to the <unk> charitable foundation made in the fourth quarter.
Turning to slide 20, I'll cover our expectations for 2023.
We continue to expect mid to upper single digit annualized loan growth economic conditions in our geographic footprint remained very strong and continue to be supported by business in migration from other markets.
Strong growth in unfunded commitments during 2022 and current low levels of line utilization should be an additional tailwind for loan growth.
Evolving borrower sentiment given the macro economy could impact our assumption if they pull back expecting a slower economic environment.
We expect to continue holding our available for sale securities portfolio flat in 2023 and to maintain a neutral interest rate risk position.
We have a strong base of core deposits and expect attrition in total deposits to taper off moving our loan to deposit ratio slightly higher while still remaining below historical levels.
Currently we are assuming one additional 25 basis point increase in May before the federal reserve deposits.
We believe the margin will migrate lower throughout 2023.
Interest bearing deposit betas increase in demand deposit balance attrition runs its course net.
Net interest income is expected to be in the range of 1.35 to $1 4 billion for 2023.
In aggregate, we expect total fees and commissions revenue to approach $750 million for 2023.
We expect expenses to be near or slightly below Q4, 2022 levels and the efficiency ratio near 57 or 58% throughout the remainder of 2023.
Our allowance level is slightly above the median of our peers and we expect to maintain a strong credit reserve.
Given our expectations for loan growth and the strength of our credit quality, we expect quarterly provision expense similar to that in Q1 of 2023 changes in the economic outlook will impact our provision expense.
And we expect to continue our quarterly share repurchases I'll now turn the call back over to Stacy for closing commentary.
Thanks Marty.
As we have demonstrated this quarter strong risk management and strong financial results are not mutually exclusive.
We expect to do both well our talented teams collaborate well to ensure we grow our company the right way a way that is sustainable through all economic cycles.
While the market is more focused on capital and liquidity strong metrics for us don't lose sight of the strong earnings performance in the first quarter.
For the last two quarters I've concluded my prepared remarks by saying that we are in this stage, we're investing in strong banks versus trading this sector is expected to matter banks.
Banks with thoughtful growth a diverse business mix meaningful core deposits improving credit discipline should outperform.
That certainly played out in the first quarter.
We are an organic growth company with a fantastic geographic footprint and believe we are well positioned to outperform both in the current environment and in the years to come.
With that we are pleased to take your questions operator.
Thank you we will now be conducting a question and answer session if.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question comes from the line of John Armstrong with RBC. Please proceed with your question.
Thanks, Good morning.
Good morning, John .
You may have touched on some of this and answered it but just can you talk about deposit flows kind of pre mid March and post mid March if they changed at all for you guys.
Yes, John this is Marty yet, we really did not see much of a change at all if you look pre post I mean, it's hard to really discern a difference in the trend there we were able to get talking points out to our customer base really the same day and further information the following day and the message was.
And so you saw certainly a little bit event, and a little bit about because really no discernible impact for us.
Okay fair enough.
And you use the term deposit attrition running its course Marty and.
Help us understand that.
Where do these balances eventually go and how long does it take to run its course.
Yes, I think youll see the demand deposit attrition kind of run its course, and so demand deposit really that's a shift between the demand and the interest bearing and so youll see that kind of run its course over.
The next couple of quarters, I think but in terms of total deposits. Our expectation is that that levels off here in Q2, and we kind of land at a loan to deposit ratio in the low seventies.
Okay. Good and then one for you Mark.
What's the message on the.
The commitment numbers youre, giving us and what are you seeing in your loan pipeline in terms of what is what is growing and whats maybe contracting or slowing.
Well, we're actively out meeting with customers being with prospects. We are trying to generate additional loan business. We're open.
We have good strong credit quality in place in our credit culture is one that we tend to.
We tend to be consistent we try not to loosen standards or tightened the standards, but to evaluate each deal or on an ongoing basis and the economies in our markets have been pretty strong and so what we are seeing is were still seeing some growth in pipeline.
We see opportunities that are existing and we're comfortable with that.
Consistent with the type of of guidance, we're getting around loan growth.
We have slowed our.
Additions of commercial real estate commitments, because we are close to our upper limit from in terms of capital.
But we expect outstandings to grow as our construction loans fund up.
The rest of our verticals and lines of business General C&I are still progressing forward.
Energy continues to be pretty strong and the outlook is good in that market.
And like I said, our C&I, we're going to be selective, but we're also going to continue to identify opportunities.
This is Stacy John I think one of the points, we're making with with our teams is that you know these are the types of environments, where we can be most differentiated because of our strong capital and liquidity levels. We don't have to be inwardly focused and kind of concentrating on things that more optically driven that allows us to continue to be externally focused and continue to.
Our focus on customer acquisition, and new business development, and I think the ability to be externally focused at a time like this I think is to our long term best interest and I think a par.
Part of part of our history has been this is when we generally can differentiate yourself the most in the marketplace.
Okay, Alright, thanks, guys I appreciate the help.
Our next question comes from the line of Brady Gailey with K B W. Please proceed with your question.
Thank you good morning, guys.
Good morning Bernie.
So the share buyback has been relatively consistent over time, but you know you repurchased stock at about 100 Bucks a share in the first quarter. The stocks now at 80, so about about one four of tangible book value. So the so the valuation of your stock is more compelling.
Do you think about increasing the size of the buyback just given where the stock's trading going forward.
Yes.
Brady, we see that the same way and so we are enthusiastic about.
Our share buyback opportunity here in the second quarter.
Disappointed if you get the opportunity, but we see it the same way you do.
Yeah Yeah.
Then maybe just quickly I mean, two of your lending segments that are pretty notable health care, 17% lines energy is 15% alone.
Those two combined are about a third of your loan portfolio, but maybe just a quick update on what youre seeing in credit quality wise in both of those segments.
Well take this mark I'll take energy first I mean energy credit quality is about as good as it can possibly be.
With oil prices, even with gas prices, where they are we have strong borrowing base supported customers.
The thing that we have is very strong hedging activity in our energy portfolio. So most of our gas weighted customers. Our edge are hedged through 2024 at three and a half dollars versus the spot rate and if you look you can hedge out gas today, almost four 420 out.
In into 25, so the ability to look forward for our gas producers in good shape and oil continues to be a very flat curve down a little bit but overall, it's in good shape. So we expect to continue no credit issues in that portfolio.
For the foreseeable future.
The health care side continues to.
It would be a good portfolio for us.
The only material issues in that industry seem to be around Medicare and Medicaid reimbursements, which are just taking time to catch up but we're seeing some of the issues around staffing ease a little bit.
We see growth in that and opportunity in the senior housing segment, which is the primary part of our health care portfolio and no material issues.
Systemic on any credit quality issues.
Brady. This is Stacy I think on the healthcare side I think the market has made the mistake of little bit of looking at the performance of some of these health care Reits and things like that and trying to look through to the banks and see how that could impact the banks and I just think that that permanent financing market is so different than the bank finance market custom.
Customer selection is so critical and it's a portfolio for US has performed so well over such a long period of time.
That we don't have any near term concerns at all in over the long term, it's probably been our single best performing asset quality segment that we have on our books today at least over the last 20 years.
Alright, that's helpful. And then finally for me either T. Lac becomes partially effective for the banks are getting next year. The banks over 50 billion. I know you guys right now or a little under $50 billion, but as you, possibly grow over $50 billion.
You begin to become subject to T. Lack what will that be any impact would you have to raise any debt or any liquidity sources to become <unk> compliant.
Yes. So this is Marty I would say that the jury's still out on exactly which portions of that.
Systemic.
Clinically important bank set of regulations will flow down from the 700 billion to the $2 50 to 150 that the jury's still out on that.
And I'd, even say that <unk>, probably the less the least likely component of that to hit $50 billion. I think a OCI is actually more likely to affect the 50 to 100 crowd.
And for us because of the way, we're already managing our common equity that <unk> impact would be pretty negligible for us.
So we're not looking at that.
That regulatory waterfall as something that would be.
Can't really problematic for us at this point, but we will learn more about that over the next while we're in a little bit more in May and then a lot more over the next year, how thats really going to play out.
Alright Thats helpful. Thank you guys.
Our next question comes from the line of Brett Robertson, who is hardly group. Please proceed with your question.
Hey, guys. This is Brian calling in for Brett how are you guys.
Good.
Alright.
Want to go quickly back to deposits you guys are close to 40% cumulative beta just wanted to get your thoughts around the cadence on funding costs, and where you could see that terminal beta through the cycle or if you see it going much higher than 40 from here.
Yes, we're right we're right at 39, and we do think that that comes higher through the rest of the year, we're actually reflecting a number thats basically around 54.
For the at the end of the year in our assumption set.
So we've already got that baked in and that covers both the next rate hike in May and then.
Some amount of trickle up after that.
Naturally occur in the portfolio.
Oh, great. Thank you that's it for me thanks.
Yeah. Thank you thanks, Brian .
Our next question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your question.
Hi, Good morning, this is team or Brazil or filling in for Jared.
Just again circling back on deposits I appreciate the commentary about the expected continued attrition, albeit at a slower pace.
Specifically, our demand deposits, we're starting to approach the pre pandemic level.
I'm just wondering just the magnitude of rate hikes can we see that actually going below that 34% pre pandemic level or is there a good visibility that you know that's a good floor for demand deposits here.
I actually do think that it will come a little bit below that because you've got just a higher ultimate rate level than we saw pre pandemic and so just because of that I think our central case here internally, we're thinking that that does go.
Somewhat below the 34, but the range in the low thirties, that's our base case expectation there.
And all of these assumptions that we've talked about are really reflected in the net interest revenue guidance that we provided this quarter as well.
Yes.
Okay, and you know for the deposit outflows that we have been seeing how much of that is going to that money marketing.
Money market account on the mutual funds and.
You know the ability to bring those.
Back on line.
Would there be any reason to kind of proactively bring those back online or are you comfortable with that much of those funds what kind of a tricky lead back to the balance sheet and once the rate environment starts turning in the other direction.
Yes, so I'll start and Scott may add to this but we.
Yes, we have.
<unk> seen a decent percentage of that.
And off the balance sheet go on balance sheet in our own broker dealer within.
As the various market based alternatives that we offer there and so.
That's really just been a function of.
A price and so that's something that can be relatively easily.
Stop to a reversed as we make sure that our price points and our attention to that particular side of the business is focused on retaining that and bringing it back on balance sheet.
So this is Scott.
The thing I would add on that just specific to the balances.
Balances that have migrated.
To various areas inside of our wealth management organization, it's really comprised not just institutional money market funds, but we've seen.
Significantly high levels of activity in treasuries, specifically short term T bills.
And we're starting to see the maturity of that.
Big move of liquid dollars that went on in late in the fourth quarter of last year and throughout the first quarter of this year. So.
We have.
A significant multibillion dollar a few billion dollars of treasury volumes.
That have migrated from our balance sheet and then also and those are handled by us and within the broker dealer and then significant balances totaling 17 billion in institutional and other types of varieties of money market funds. So to the point that Marty made.
When we have hit a price point and can price those at a level that we want and need those balances we feel confident that we can bring.
Values and amounts back that we're interested in putting back on the balance sheet.
But to your point earlier, the vast preponderance of the.
The liquidity of this left the balance sheet has flowed through our wealth.
Broker dealer platform.
We manage and that we help our customers manage and so that's what makes that easier in the event that.
At the right price point, we could bring it back.
Great. That's good color and then just one last one for me.
Looking at the unfunded commitments I guess, how much of that is formulaic and what starts to fund up this year or are you starting to see some of these construction deals pushed back just given some of the broader macro uncertainty and I guess on the other side of that what is your appetite right now.
To be legging in to funding up some of these construction deals in this environment.
This is Stacy I mean, we've made a commitment and where we're going to fund on the commitments that we make.
Regardless of what the environment is.
Our outstanding growth really if you look over the last.
Several years has really been focused in multifamily and industrial those are two segments that are still performing very well and are anticipated to continue to perform well.
Well, we've underweight in retail and office do you see that in the.
The lack of growth in those segments and in fact those areas of decline.
Over the last several periods as well so I don't.
Clearly there is concern about that at the end of the day we've got.
21% of our total loans and commercial real estate. So the fact that we have.
Institutionally really underway to that segment relative to other regional banks, we think will help us. In addition to the fact that we think we've done a good job with our underwriting and customer selection.
As well, but I think ultimately having.
Diversity in our lending portfolio will prove to be very valuable to us over time.
Okay.
Are you seeing any any clients kind of pushback that funding schedule or is it pretty much.
Alignment with our original plans.
We're not seeing any changes in borrower behavior at this point.
Yeah.
Thank you for that.
Yeah.
Our next question comes from the line of Thomas Wendler with Stephens. Please proceed with your question.
Hey, good morning, everyone.
Thanks Alan.
Just want to go back to the brokerage and trading fees driven mostly by trading fees last quarter can you give us an idea of the moving parts there moving forward, where you expect to.
Some growth and maybe some problems moving forward.
Yes. So this is Scott so.
When we when you look at the trend second half of last year.
As we were in the midst of consistent rate increases.
There's no question that we saw uncertainty in some volatility some widening of spreads in the in the fixed income markets and so our desks have done a good job of managing our risk positions.
And still staying active in the space and serving our customers with liquidity and we feel like as we built into the first quarter of this year we had.
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Back on a more.
Consistent and sustainable sustainable growth trend in our balances in our activities in the mortgage backed space.
The second half of March obviously saw some disruption and dislocation in the market.
But we've seen steady results out of that activity, we've seen an increase in flows and revenues associated with municipal bond activity, which have actually now.
Planted our mortgage backed securities revenues in some aspects of that revenue generation. So we feel like we're going to see as mortgage rates become acclimated mortgage borrowers acclimate.
The current rate environment, we're not.
Facing a steady stream of rate increases we will see those flows.
Migrate up and.
That activity and volume levels will normalize so we're optimistic about the activity in that space.
And just a reminder, this is stacy.
That segment is very volatile.
If you look at total fees and commissions and we've got those.
Broken out on slide 14 of the presentation.
Over a period of time, it's a very stable source of earnings so any individual category can move around a bit from quarter to quarter, but the total category total category is very stable and in fact, we haven't changed our guidance for this section.
For the full year.
Because as Stacy mentioned that if you look at the actual total revenues for our broker dealer aggregated were up slightly in the first quarter versus the fourth quarter, but then that takes into account. The fact, we're earning higher revenue streams on money market funds and other sources as balances have migrated.
Alright, I appreciate all the color guys. Thanks for answering my question.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Peter Winter with D. A Davidson. Please proceed with your question.
Thanks, Good morning.
Good morning, Peter.
Ask yes it was.
Very good presentation.
Just with the strong balance sheet and credit trends are you seeing opportunities to take market share.
In your markets and secondly are you seeing some of the competitors pull back with what's going on.
Yeah.
Yes, I think in the first exceed its probably a little bit too early to say definitively that we're seeing opportunities to take market share, but certainly anecdotally we're hearing.
Opportunities within the market both in terms of talent and a.
Customer opportunities, we can grow both ways, adding talented team members to our core here as well as adding customers and prospects as well and so I think we see both of those it's a little early.
To be definitive about that but clearly.
That's the case anecdotally.
Is.
As we look forward to kind of see the environment. It really will depend on how long that.
Market's perception of the weakness in this sector continues I think.
As long as it persists I think our strength will continue to allow us to create some disproportionate opportunities that we're working very hard to take advantage of even as we speak.
Got it.
Hi.
Marni I had a question about the net interest income outlook.
The assumption is that the fed pauses on rates, but if we look at the forward curve. It does assume two or three rate cuts and if we get that.
Is there a pressure on the net interest income range to come in below the low end of that range, if we get the rate cuts.
Yes, Peter were relatively balanced on our rate risk position and so.
The guidance ranges that we gave we know even if we saw that I think we'd still expect to be within that range.
Yes, we don't our internal forecast doesn't assume the rate cuts, but we have on slide 18 defined for the market what would happen in a down 100 ramp.
So you can see the impact that we forecasted net interest revenue should should that scenario play out over time.
It's not significant on a quarterly or annual basis at all recall that that we moved back in the fourth quarter to position ourselves to be more rate neutral.
You've followed us for a long time and know that we traditionally have been rate neutral in terms of how we manage interest rate risk, we did lean in asset sensitive to benefit from rising rates, but in the fall our views began to shift.
Risk, we're more balanced between up and down and so took action early to mitigate any interest rate risk and so we're really positioned to be much more neutral today and really back to the position we have been historically over most of my career here.
Got it.
Thanks, Jason nice quarter tough environment.
Thanks.
Our next question comes from the line of Brandon King with True Securities. Please proceed with your question.
Hey, good morning.
Morning, Brandon.
So could you help us quantify the level of deposit attrition you're expecting.
This year and kind of give us a sense of the trajectory of it.
The tapering and kind of when you expect deposit balances to stabilize.
Yes, Brandon our outlook there is that Youll see.
Tapering of the total deposit balances here in Q2, and then we kind of end up with a low seventies loan to deposit ratio.
Sure there is.
Hard to put a pin in exactly the decimal point, there, but but I think that gives you a pretty good outlook for how we see the rest of the year playing out.
Got it so so stabilization back half of the year correct Yep that's right.
Yes.
Okay and follow up on your comments on brokerage and trading is it fair to assume that the inventory of trading securities should kind of rise incrementally throughout the year just given those trends.
Yeah.
I think that a lot of that depends on mortgage.
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It depends on flows as a whole and then downstream customer appetite for mortgage backed securities, but we would expect that as we normalize.
And the rate outlook and the fed clarity sets in we would expect to.
Grow those balances and those levels back to more historic levels.
Got it got it well that answers my questions. Thank you very much.
Thank you we have no further questions at this time I would like to turn the floor back over to management for closing comments.
Well, thanks again, everyone for joining us and if you have any further questions. Please call or E mail us at IR at <unk> Dot com have a great day everyone.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.