Q2 2023 BOK Financial Corporation Earnings Call
Greetings and welcome to the B O K financial Corporation's second 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 Marty Klein Chief Financial Officer for B O K Financial Corporation. Thank you. Sir you may begin good morning, and thank you for joining us today, our CEO Stacy kinds will provide opening comments, Marc Maun executive Vice President for regional banking will cover our loan portfolio.
Polio and related credit metrics, and Scott Grauer Executive Vice President of wealth management, who will cover our fee based results.
I will then discuss financial performance for the quarter and our forward guidance P.
P D F of the slide presentation and second quarter press release are available on our website at <unk> Dot com.
We refer you to the disclaimers on slide two regarding any forward looking statements. We make during this call I'll now turn the call over to Stacy times. Good morning, Thanks for joining us to discuss B O K financials second quarter financial results.
Starting on slide four second quarter, net income was 151 million or $2.27 per diluted share.
I'm proud of the exceptional second quarter financial results delivered across the board by our team.
<unk> segment revenues set another record this quarter in core loans reached an all time high led by the commercial and multifamily segments.
Our growth efforts are supported by the vitality of our geographic footprint as well as our diverse business model noninterest revenues were almost 40% of total revenues for the quarter.
Using our capital and liquidity strength, we are taking advantage of market and economic uncertainty to prudently grow.
Our full service banking market expansion into San Antonio and the addition of a fixed income sales and trading opposite in Memphis are.
Just two more examples of how we are investing to build long term shareholder value.
That discipline long view approach has consistently been a distinct advantage for B O K financial.
Turning to slide five period end core loan balances increased 488 million or two 1% linked quarter with growth spread across C&I and commercial real estate.
The deposit trajectory flattens and turned positive during the quarter our loan to deposit ratio remained below 70% at the end of the quarter.
Across the industry deposit cost of accelerated for all banks, including us as reported in our results.
As Marty will detail later, our reported net interest margin is diluted by the increased trading activity this quarter and our margin excluding the trading activities remained healthy at 336%.
What are you seeing early signs of loan spreads increasing as banks seek to contract and also work through the impact of higher deposit cost and anticipated higher capital requirements for some.
This impact will take many quarters to become meaningfully apparent.
Our efficiency ratio came in just below 59%, even with the shift in mix of noninterest revenue.
Credit quality remains very strong as we continue to grow our allowance and have a combined reserve of $1 three 9%, which.
Which is notably above the median of our peer group.
Assets under management or administration grew $1 3 billion or one 3% linked quarter and were up $7 6 billion or 8% compared to last year.
The market impact on cash equities and fixed income combined with a growth in new relationships is providing a tailwind we did not have for this area in 2022.
Finally, we repurchased 266000 shares this quarter as we balance opportunities for growth with attractive repurchase valuations.
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 were $23 2 billion or up two 1% linked quarter total C&I loans increased 317 million or two 2% linked quarter with year over year growth of 913 million or six 7% commercial real estate loans increased 155 million.
Or three 2% linked quarter and have increased $865 million or 21% year over year.
This effectively returns those balances to their twenty-twenty level after experiencing significant pay down activity in 2021 compared to December 31, 'twenty 'twenty CRE balances have grown at a modest 2% annualized growth rate.
Growth. This quarter was primarily driven by multifamily residential properties was an increase of 139 million or 10, 2% linked quarter industrial facility loans grew $40 million or three 1% linked quarter, which was offset with a $40 million or three 8% linked quarter decline in loans.
Secured by office facilities.
The year over year CRE growth of 865 million was primarily driven from loans secured by multifamily residential properties and industrial facilities, we have.
Have an internal limit of 185% of tier one capital and reserves to total CRE commitments and were presently at the upper limit of that range. We do expect continued growth in outstanding CRE balances as construction loans fund up as of June 30th CRE balances represented 21% of total outstanding of them.
Balances are ratio well below peers.
Health care balances increased $92 million or two 4% linked quarter and have grown 294 million or 8% year over year, primarily driven by our senior housing sector healthcare sector loans represented 17% of total loans at quarter end.
As your balances increased $111 million or three 3% linked quarter and have increased 116 million or three 4% year over year with period end balances representing 15% of total period end loans.
Buying services and general business loans, our core C&I loans increased 114 billion or one 7% linked quarter with year over year growth of 503 million or seven 7%.
These combined categories represent 30% of our total loan portfolio.
Year over year loans have grown 1.9 billion or 9%, excluding triple P loans Q2, 2023 extending the linked quarter.
Quarter loan growth to seven consecutive quarters.
Our pipeline suggests we have the current momentum to drive continued growth in the loan portfolio throughout 2023 near our current pace.
Turning to slide eight you can see that credit quality continues to be exceptionally good across the loan portfolio well below historical norms and pre pandemic levels nonperforming assets, excluding those guaranteed by U S. Government agencies increased 6 million this quarter non accruing loans increased $12 million driven by an increase in <unk>.
Energy related non accruals, while repossessed assets fell $8 million.
The level of uncertainty in the economic outlook of our reasonable and supportable forecast remained high in the assumptions for commercial real estate vacancy rates increased during the forecast period, those economic factors combined with second quarter loan growth supported a $17 million credit loss provision for the quarter we.
We remain in a solid credit position today with a ratio of capital allocated to commercial real estate is substantially less than our peers.
A history of outperformance during the past credit cycles. We believe we are well positioned should an economic slowdown and materialize in the quarters ahead.
The markets are more focused on the office segment of real estate given the recent trends in workforce preferences. So it remains an open question as to whether this will be sustained as employers continue to require more time than a physical office.
Our maturities are generally ratable over the next three to four years and we have a mini perm option. If the markets are not conducive to long term permanent financing.
The average loan to value ratio in the office space is below 65% and average cash flow coverage exceeds 1.3 times based on the most recent semiannual review at the end of 2022.
Net charge offs were $6 7 million or 12 basis points for the second quarter and have averaged 10 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 323 million or $1 three 9% of outstanding loans at quarter end. The total combined allowance is available for losses in any apples to apples industry comparisons should include the combined reserves, we expect to maintain this ratio or to migrate slightly upward as we expect loan.
To continue and economic certain uncertainty to persist I'll turn the call over to Scott.
Thanks, Marc turning to slide 10, total fees and commissions were 200 million for the second quarter up $14 5 million or seven 8% linked quarter. Our wealth segment set a new quarterly high for fees and commissions at $123 million this quarter with the last four.
Consecutive quarters, representing for the five highest quarters on record.
<unk> fees and customer hedging revenues were the primary drivers of the linked quarter increase up $9 3 million and $5 3 million respectively.
Fiduciary and asset management fees increased $2 3 million largely due to seasonal tax service fees.
The trading rep, they're trading fee increase was primarily driven by a $7 9 million improvement in our MBS trading activities.
Trading activity and margins improved coming off exceptionally low volume and high volatility in the first quarter.
The desk has been able to increase volume by expanding coverage to downstream accounts as mortgage originations slowly increase and market volatility returns to more normal levels.
The 5.3 million customer hedging revenue increase was driven by a record quarter for energy customer hedging fees with linked quarter fees up $4 7 million.
Fees from other institutional trading activities increased $1 4 million linked quarter.
Fiduciary and asset management fees were $53 million for the second quarter, a 4.6% linked quarter increase.
Our assets under management or administration were $103 6 billion, an increase of $1 3 billion or one 3% linked quarter.
Growth was spread across most categories and primarily driven by improved asset values.
Our asset mix for assets under management or administration moves slightly this quarter with 43% fixed income, 33% equities, 15% 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 percentage of total net interest revenue and noninterest fee income or.
Our revenue mix has averaged just over 36% during the last 12 months that consistently supports a revenue stream that is sustainable through a wide array of economic cycles.
I'll now turn the call over to Marty.
Thank you Scott turning to slide 12 second quarter net interest revenue was $322 million or $30 million decrease linked quarter.
Net interest margin was 3% a 45 basis point decrease versus Q1.
It is important to note that nine basis points of the 45 basis point margin decline was due to growth in trading assets are trading business grew revenue and grew profitability as you can see in the fee income trends, but was dilutive to net interest margin is trading assets grew at narrower spreads relative to the rest of the balance sheet.
When trading assets are higher or the yield curve is flatter or inverted both of which we experienced this quarter the dilutive impact to net interest margin is more significant.
Net of the nine basis point impact from trading and the remaining 36 basis point decline was driven by the competitive deposit environment as average interest bearing deposit costs increased 73 basis points. The accumulative net interest bearing deposit beta increased to 54% and.
And DDA continued to shift into interest bearing although at a reduced pace.
DDA was 32% of total deposits at June 30th.
This slide shows net interest margin and net interest revenue with and without the impact of the trading business to better highlight trends and comparability.
For the second quarter of 2023, the net interest margin, excluding the impact of trading assets was 336% versus $3 seven 2% in the first quarter.
Growth in earning assets during the quarter was driven by loans and trading assets as the securities portfolio remains stable to maintain our balanced interest rate risk position.
Turning to slide 13 liquidity and capital continue to be very strong on an absolute basis and versus peers total deposits grew $714 million on a period end basis and the loan to deposit ratio was 70% unchanged from the prior quarter.
Early in the second quarter, we saw a continued downward trend driven by April tax payments and some price sensitive.
The slower pace than the prior two quarters.
Balanced trends rebounded in early May and we grew $2 billion in deposits in the back half of the quarter. This was consistent with our expectations and we are happy with the result in such a competitive environment.
Tangible common equity ratio was 779% down 67 basis points linked quarter due to balance sheet growth and increases in interest rates, but up 16 basis points from year end.
Adjusted TCE, including the impact of unrealized losses on held to maturity securities at 749%.
CET, one is 12, 1% and if adjusted for a O C I would be nine 9%.
As regulatory capital changes are being proposed for the industry, we believe that across the array of plausible outcomes for banks in our size range, we have ample capital to support additional organic growth while at the same time, allowing for continued share buyback during.
During the second quarter, we repurchased 266000 shares an average price of $84.08 per share.
Turning to slide 14 linked quarter total expenses increased by $12 9 million or four 2% personnel expense grew $8 5 million with $4 1 million due to the full quarter effect of annual Merit increases implemented on March 1st while cash based incentive compensation grew $6 6 million due to new business.
Production.
These were partially offset by a $2 5 million a seasonal decrease in payroll taxes.
Other operating expense grew $4 4 million, primarily due to a two and a half million dollars increase in mortgage banking costs, driven by a seasonal increase in prepayments and a $1 1 million increase due to the donation of a depreciated asset to the B O K I Foundation.
Year over year total operating expense increased 16, 5%. However, this includes the impact of market value driven swings in deferred compensation and changes in the best thing assumptions for stock related compensation. Excluding those two factors total operating expense increased 11% compared to Q2 2022.
With a 13% increase in total personnel expense do you regular compensation and increased cash based compensation related to new business production.
Other operating expense increased 8%, primarily due to continued investments in technology facilities and increased FDIC expense.
Turning to slide 15, I'll cover our expectations for 2023.
We expect upper single digit annualized loan growth economic conditions in our geographic footprint remain favorable and continue to be supported by business in migration from other markets.
Changes in the competitive environment for loans should be a tailwind.
We expect to continue holding our available for sale securities portfolio flat in 2023 to maintain a neutral interest rate risk position.
We expect total deposits to be stable or grow modestly and the loan to deposit ratio to remain in the low seventies.
Currently we are sending one additional 25 basis point increase here in July before the Federal Reserve pauses.
We believe that the margin will migrate lower throughout 'twenty three.
As interest bearing deposit betas increase and demand deposit balance attrition runs its course Ned.
Net interest income is expected to be near $1 3 billion for 2023.
In aggregate, we expect total fees and commissions revenue to approach $800 million for 2023.
We expect expenses to be near or slightly above Q2, 2023 levels and the efficiency ratio to migrate slightly above 60% throughout the remainder of 'twenty three as our revenue mix shifts in our strategic market expansion as ramp up.
This does not include the impact of the FDIC special assessment, which could be finalized in the second half of 2023.
Our combined allowance level is above the median of our peers and we expect to maintain a strong credit reserve.
Given our expectation expectations for loan growth and the strength of our credit quality, we expect quarterly provision expense similar to that in recent quarters.
Changes in the economic outlook will impact our provision expense.
We expect to continue opportunistic share repurchases in the second half of the year.
I'll now turn the call back over to Stacy kinds for closing commentary.
Thanks Marty.
As we have again 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.
This sustainable through all economic cycles.
While the market is more focused on capital and liquidity I see this as a unique opportunity to use our strength in these areas to both organically grow and invest in new markets, while others may be more internally focused.
Continuing to assert that we are in a stage where investing in strong banks versus trading this sector matters banks with thoughtful growth a diverse business mix meaningful core deposits improving credit discipline should outperform.
That certainly continues to play out for us in 2023.
We are focused on using the fantastic geographic footprint to grow both in the current environment and in the years to come with that we are pleased to take your questions operator.
Okay.
Thank you we will now be conducting a question and answer session. If you would.
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One moment, please while we poll for questions.
Our first question comes from Jared Shaw with Wells Fargo Securities. Please proceed with your question.
Hey, good morning.
Good morning Garrett.
Maybe starting with the with credit you know with the expectation that provision could go higher based on growth and the economic outlook you call out the expectation.
Expectation for vacancy changes maybe can you send a little timeline on where you think I guess, specifically office vacancy.
Is it could go and how your markets are holding up.
With that returned to work in your outlook on office.
And I guess you know it should we assume that office continues to decline and that provides some opportunity to find new CRE loans that are not in office.
Yes, Jerry this is mark.
The office portfolio that we have we've been reducing our office exposure over the last several years. So this is not new and we would expect to continue it to continue to decline.
If we look at our footprint. Our overall markets. We think are in great shape I mean looking at.
Markets that have performed very well in multiple economic downturn.
When we're looking at the economic outlook, we're looking at its effect on the overall economy as opposed specifically to our portfolio.
We would expect that we can maintain this level.
The level of performance on the CRE portfolio going forward is where our focus has been on multifamily and industrial which have held up very well.
Yes, if you are looking at the forward guidance and trying to intimate maybe that there could be higher provision expenses.
Not how we see it I think that.
We think that we've reflected.
Future potential outlook in CRE in how we formulated our allowance methodology.
The forward looking aspect of potential higher levels of <unk>.
Office Vacancies is really how we supported the allowance this quarter, we're not trying to foreshadow that provision levels could be higher in future periods. In fact, our guidance was kind of near.
Current levels, depending on the economic outlook, certainly you should the economic outlook improves.
Then provision levels could even come down from here. So it's really just a function of how we see the economy playing out in future periods.
Okay, that's great color, thanks, and I guess shifting to deposits and funding.
You highlighted that there was strong.
Trends in deposits in the second half of the quarter.
How how sustainable you know squaring that with with the broader view of lower growth on deposits for the year should we assume that that.
That growth helps you remix deposits or how should we think about deposit mix going through the rest of the year with that growth outlook.
Yeah, I think that.
Deposit growth should remain on an upward trend here with some noise within there I think.
On the mix side DTA is probably the more interesting question and we really saw the DDA mix shifts slowed down appreciably in May and June in fact June average in June ending DDA balances were about the same so.
So that trend actually turn.
Reasonably favorable in the back half of the quarter.
And do you think that that could that.
We've sort of found the bottom here on DDA then.
Yes.
I don't know if I'd call. It precisely the bottom. It's certainly those trends are very favorable you could have just a little bit more given another fed hike here give you a little bit more but those trends looked very good.
Last two months.
Okay.
I guess finally for me when we when you look at the buyback and you know your comments about opportunistic buyback is that really more opportunistic based on price or is that opportunistic based on alternative uses of capital.
Given sort of a point in the quarter.
Yes. Those are those are the two factors I mean, we're just trying to maximize shareholder value with how we do that and price is a factor and to the extent that our outlook is for.
Strong organic growth opportunities to be present in a couple of quarters, we want to make sure that we've got.
Sufficient wherewithal to support that and that's obviously first in the pecking order.
Right.
Kind of how we do the calculus.
Jerry before.
Kind of a first quarter event in the industry. The most common question was what are you going to do with all your excess capital so.
We're obviously.
Think that long term, we probably do have a little bit of excess capital to deploy share buybacks are part of that but we're being a little bit.
Careful maybe in this environment.
At least for the near term.
Okay. Thanks, I guess, maybe just circling back on the deposits.
And in terms of your expectations for beta.
Hum.
How should we be thinking about cumulative data going through with you know with the potential or the expectation for one more one more hike.
Yes, we do think that cumulative beta it does keep moving up here, yes, we were at 54 this quarter and our assumption that's within our guide is that that cross the 16 gets up into the $63 64 territory by the end of the year.
Yes, I would agree with Marty, but I think the cumulative beta over the life of the cycle is going to be kind of where we said it was going to be all along somewhere in that 40% to 50% range.
Okay.
Thanks very much.
Our next question comes from Jon <unk> with RBC capital markets. Please proceed with your question. Thanks.
Thanks, Good morning.
Good morning, John .
Maybe a question for you Marty.
When when I do the math on the margin it seems like there's a little bit of <unk>.
Pressure coming, but maybe not not that material.
Can you confirm that just how much pressure do you think is ahead in the net interest margin and what what do you think the cadence might look like for the next couple of quarters, assuming the fed's done today.
Yeah, that's right and that is our base assumption and maybe the best way to work through that is to talk through net interest revenue is kind of what the pluses and minuses are from here because I like June net interest revenue for the month of June was $106 million and so if you kind of start from that run rate loan growth.
It's going to be a plus obviously.
Bond portfolio, where pricing is going to be a plus in Q2, we saw a $420 million of principal cash flows run off at about a $2 78 runoff yield and we're reinvesting that around 485 for the second quarter and Youll see that trend continue through future quarters.
And even within the fixed rate part of the loan portfolio that was small you have got the same dynamic going on there that provides.
Left and we'll continue to provide lift.
The deposit betas.
At 54 cumulative right now that will continue to bleed up here as you're getting out of the rate hike and then.
Just get a little bit of residual.
Carryforward.
And the July rate hike, probably doesn't really independently moved the needle that much and then as you were talking about before the DDA mix shift that's that's really slowed down a fair amount.
That impact.
It's a lot smaller so.
If you look at those pieces, the DDA and the deposit reprice, our declining effects that are kind of getting close to the pending running their course here and then the loan growth is a growing effect over time in the bond portfolio reprice, that's a declining effect over time, but it lasts a while so.
Is that kind of gives you a little bit of color around how that plays out over the next couple of quarters.
We're focusing on net interest revenue versus net interest margin because the trading side of the trading portfolio will greatly influence that margin and so it's easier for us to think about it in terms of net interest revenue because.
If the activity is strong in the trading portfolio expands obviously.
Net interest margin impact that is very dilutive.
And so it could it could be influenced by that but that's going to benefit us on the beef side should that trading portfolio continued to perform as it has been.
Okay that makes sense.
I do want to ask a question on that but just one comment you made was you grew 2 billion in deposits later in the quarter.
What was the driver of that and was it higher.
Higher rate deposits or was it.
More client driven or help us understand what that was yes.
And mostly commercial end well driven.
To a lesser extent consumer but.
Largely our.
We talked about last quarter, just making sure that we've got price competitive offerings throughout the footprint.
That compete with the alternatives that our customer base have in those segments.
So we're just.
Making sure that our price points are at market at all price points and that's what drove it.
Okay got it.
On the fee side, and the consumer book as well on top of that.
Okay.
Okay.
Then Scott last one for you.
You talked about volumes and volatility.
Helping.
Your brokerage and trading and you talked about extending the reach of the sales force can you talk about that a little bit more.
That's a better environment.
What makes for more favorable favorable environments. So we can kind of understand.
How the balance sheet might flex when theres, a better environment and a worse environment.
Absolutely so.
In the in the first quarter when we saw.
A lot of kind of external shocks to the fixed income market, we had a very.
The fed was in the midst of a very active rate hikes.
We saw a bid ask spreads really widened out in the first quarter and we saw.
Dwindling to very very historically low mortgage origination.
So as we've moved into the second quarter as we mentioned we've seen a pick up.
As the reality of five per cent, 6% plus mortgage rates settles into the market.
For homebuyers, albeit still a shortage of inventory we're seeing rate.
End of expectation settle in which has increased mortgage origination.
We've seen it.
The moves whether the announcement today is one more or two more rate hikes were clearly further into the fed rate hike cycle, which creates a better appetite of our institutional buyers of mortgage backed securities and all fixed income products to position their poor.
Folios, so we've seen kind of the culmination of better outlook and certainty in the fixed income markets, coupled with a little bit better flow on the mortgage backed security side. So those factors have given us a better confidence and kind of resuming our previous level.
So the securities inventory levels.
If you think about it from our investment portfolio management position. If you know you are towards the end of the hiking cycle.
With us today are today, plus one more you begin to get more confident in repositioning your portfolio. Because you you don't think I'm, just going to keep happening and so on.
Just going to keep trading into that.
Could that could optimistically helped us out in the second half of the year given the market participants believe the fed is done or near done okay.
Okay.
Clearly the first quarter was abnormal but is this.
Maybe an impossible question does this feel more normal.
And I think that the as Marty indicated our levels of trading securities our balances there appear to be.
More business as usual so we look for these levels to be sustainable.
Given the current rate environment, and the appetite for repositioning on the curve.
Okay.
Alright, guys. Thanks, Let me tell you sometimes we tell you don't use the end of quarter trading level is the way to think about the future this quarter, its probably better than the average.
Okay very helpful guys. Thank you.
Our next question comes from Brady Gailey with <unk>. Please proceed with your question.
Hey, Thank you good morning, guys good morning, Greg.
But I understand the dynamics of the <unk>.
Having a net interest margin that moves a little lower in the back half of this year. So I'm wondering as we look to next year. The fed it'll be done deposit costs will probably have peaked could you see an expanding net interest margin.
Into next year, just because your asset re prices higher in the NIM could be actually headed higher next year.
Yeah. So that's part one item I would again focus on net interest revenues the way to think about next year and if you play out.
Comments that I made earlier, you can see that the <unk>.
<unk> trend.
And the percentage.
Sure, it's possible to see that higher, especially if you get <unk>.
Less of an inverted curve that's going to help.
Help as well.
You've got a couple of factors there I think marty's reinvestment rate, we're getting what roughly $400 million a quarter in cash.
Cash flow from our securities portfolio is reinvesting at 250 to 300 basis points higher than what we're receiving today, that's going to help you a little bit.
The trepidation in answering the question is really just understanding how deposit behavior is going to be as we grind higher for longer.
If we're through the worst of that from a industry perspective, then I think.
Youre right Theres upward opportunity on the margin deposit pricing continues to grind higher.
In a more meaningful way than that.
BV offset to some of the favorable benefits that we see.
Alright, and then intra quarter you guys had a couple of announcements expanding into San Antonio also expanding into Memphis, maybe just the rationale behind those new markets and is this something we should expect to see going forward, you know putting new markets on the map.
Organically.
Yes, I think there are probably a little bit two different stories, San Antonio is a market that we buy for a long time.
We have a strong presence in Dallas Fort worth and Houston.
Central Texas has been a gap for us and we've just been looking for kind of the right way to enter that market.
We're excited about the team we've acquired there and we will have.
Corporate commercial treasury wealth, both in San Antonio and Austin will have a complement of between 15 and 20 folks there in central Texas that will be an opportunity for us to meaningfully expand our presence there and so that's going to be full service banking and in the beginning of another key market for us in Texas.
I think Memphis really was an opportunistic.
Chance for us to grow our fixed income sales and trading platform.
Wasn't necessarily on the radar screen as we began the year, but as things unfolded and opportunities presented themselves. We really saw is additive to the current operations, we have in little rock Milwaukee in Stanford, Connecticut. It fits very cleanly, you have very little sales overlap with our existing portfolio and we're excited for the team there.
Gonna come onboard there to help us in that area.
Alright, and just lastly for me the price of oil is still very strong, but the price of Nat gas is depressed and we have seen a little bit of noise in that space, but maybe just talk about how you think I know Nat gas I think its only about a third of your energy, but do you expect.
To see some issues in Nat gas over time.
And not not at this point, we have like right now 93% of our gas heavy borrowers are hedged in.
Over 50% of their PDP in 2023, and 76% of their PDP hedged at prices in 2024 exceeding $3 50.
So, they're well positioned to receive price well above what we're seeing in the spot market plus todays market you can hedge out all the way into 2025 at almost $4.
An mcf so we.
To push hedging as a way to protect their portfolio as well as to improve our credit risk and our customers have been responding. So we actually are in a really strong position that we expect our natural gas producers to perform well.
Okay, great. Thanks for the color guys.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. Our next question comes from Brandon King with Trust Securities. Please proceed with your question.
Hey, good morning, Thanks for taking my questions.
Good morning, good morning.
But yes, so so I wanted to touch on.
The outlook as far as loan growth in the prior quarter U.
Detailed that economic conditions were very strong again in this quarter and now it's kind of been downgraded to favorable. So just wanted to know if you could provide more color.
Taken details around that and what you're seeing in your markets with your customers.
Yeah I guess.
Yeah.
Maybe we didn't communicate well, but we certainly don't see unfavorable economic conditions for loan growth I mean, our footprint markets.
The south southwest and Midwest are performing exceptionally well I mean, there's no signs of.
Kind of economic slowdown or early signs of.
Any any economic issues in fact, the long term and short term that footprint in Texas, and Colorado and Arizona.
Clearly our high growth markets infill from.
And migration from from other <unk>.
Markets I think has been going to really benefit them long term. So we're very bullish and in fact, we've signaled.
Signaled in our guidance upper single digit loan growth.
For the year and we're very confident that we will be able to achieve that objective.
I think our year over year growth is about 9% and we're.
We're in a range to continue that pace. So we still see good pipelines.
We still see good opportunities and frankly the.
The opportunity we have in front of us is a little bit unique in that in that others are trying to manage capital ratios or other things like that so there may be less aggressive in the marketplace and so from a sales perspective, we're endeavoring to be very active in front of customers and prospects to try to.
Add to our customer in.
Loan deposit and.
Asset under management book, we want to grow all of those areas at a time, where we've got lots of capital in great liquidity and we're in business and we're not having to kind of.
Meter that growth will take call that we can get in this environment.
The only thing I'll add is the key here is that this has been a very broad base of growth I mean, we've had all our lines of business experiencing growth not just concentrated in one particular sector or another or CRE.
<unk> kind of at our upper end of our range of our concentration, but the construction loans have continued to fund up so we're seeing it in C&I, we're seeing health care energy and CRE all experienced growth. So we expect that reflects a lot of things that Stacy was talking about and.
And Brandon if you look through to the state level GDP at state level unemployment for our footprint. That's still remains very strong and there is no downturn there at all.
Okay.
In.
And within that and the tailwind from the competitive environment.
With these opportunities that you are gaining are you able to get kind of a higher loan spreads.
<unk> some of these deals you are getting today.
There is no doubt I alluded to that in my prepared comments that we are seeing.
Particularly on the higher end of the corporate space and deals are pricing upward.
Whether it's from a fewer participants in the market are those beginning to price for higher capital requirements on the higher end of the banking.
Segment, we are seeing that 25 to 50 basis point increase in loan spreads I think that that will take some time to work through the portfolio effect, but clearly that's an opportunity as we move forward.
Okay.
And then just lastly from me is there any way, but kind of the spot cost of deposits at the end of the quarter.
Yes, there is not really weighted to.
That in particular.
No.
Yeah.
New production, but if you look at our CD rates that we're offering we've got.
Right.
In the upper fours and fives as new production for.
Is that fair.
By market, but thats, probably what we got for you.
Okay.
Taking my questions.
Thanks.
Our next question comes from Matt Olney with Stephens. Please proceed with your question.
Thanks, Good morning, just a few follow ups here from some previous questions.
On the customer hedging activity, obviously, good quarter into Q. It sounds like this is mostly from energy customers wed love to appreciate it. If you think there is some.
Some good fall through there a potential for the back half of the year.
Yes, I think the hedging activity there I mean, it was a record really in the second quarter, but it's been strong for us.
Both on the energy side and the interest rate derivative side, both experienced really strong second quarters, I think that the shape of the yield curve is going to help on the interest rate derivative side. I mean, it's odd that you can go out and hedge out three years at a cheaper rate than.
The <unk>.
Buy rate, but that is the case today and so that's helping a little bit on the interest rate derivative side and as we talked about with natural gas future prices and frankly oil prices.
But the market is in a good place to hedge and a swap future prices and do it in a way that is conducive to our customer so.
Whether it's the same level as the second quarters, it's hard to forecast that in a highly volatile segment, but I think that.
There is good momentum to be able to still have that would be a very strong segment for us.
Okay I appreciate that Stacy and then in the press release, there was a mention of the.
The $8 1 million dollar gain from merchant services.
Me what line item that flows through.
Yeah that flows through the other gains and losses.
Kind of right below the fee income.
Okay I see it perfect.
And then.
On the trading securities.
Marty I heard your comment that the end of period balance could be a better starting point for <unk> than the average.
I guess from a balance sheet standpoint on the other side of the balance sheet remind me of how that's typically funded.
And so we can use either <unk> or or repo, either one whatever's cheaper it too.
That was just the short term wholesale.
Okay.
And then I guess along with that.
At that FHA will be ended and the repo line. The other borrowing lines, if you're going to see some pretty strong loan growth it sounds like this quarter.
Should we see the FH youll be in borrowing line come down.
Is it a replacement or do you think there'll still be an increase there given the the trade securities, though that you expect.
And so we'll have.
Good loan growth, we'll have deposit growth that will fund.
Some portion of that and then kind of whatever the net is from pluses or minuses in the trading portfolio of that.
Really drive the changes in FHL beer repo, yes.
Yes, but the math is really goes back to kind of re educating the investor community and kind of how we fund the bank.
Loans funded.
Funded by deposits you saw good loan growth. This quarter you saw good deposit growth this quarter that loan to deposit ratio stayed relatively consistent and we see that as we move forward.
On the on the security side, whether it's the available for sale investment Securities trading portfolio. Those are largely going to be funded wholesale whether thats repo or institutional or otherwise and that's entirely consistent with how we fund the debate forever pre COVID-19.
Youre seeing higher levels of FHL, we borrowings and things like that because that's we got down to nine.
Covid, so if things kind of revert to the mean.
How we fund the bank is going to look like it did pre pre COVID-19 and that includes <unk>.
We think about loans and deposits and how we think about.
Institutional funding, our wholesale funding for our securities portfolio and trading activities.
Yep. Okay. That's helpful Safety and then just lastly, I guess I think you mentioned on the call that the security deals.
Could continue decline.
You get some reinvest some of those cash flows any more color on just kind of the roll off for a long yields within the <unk> book.
Yes, so we think about both PFS and held to maturity roll together because both have the same driver and the roll off yield is always going to be roughly what the portfolio yield is and I think that was $2 74.
<unk> rate for this quarter and then current coupon.
15 year, MBS or maybe a little bit less than that is kind of a good proxy for how to think about our repurchase yield on average over time and so that gives you well over pretty good pretty good spread 200 basis point plus spread pickup.
Okay.
Okay. Thanks, guys appreciate your help.
Okay.
Yes.
There are no further questions at this time I would now like to turn the floor back over to Marty.
For closing comments.
Thanks again, everyone for joining us and if you have further questions. Please email us at IR at <unk> Dot com.
Have a great day everyone.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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