Q2 2024 BOK Financial Corp Earnings Call
Greetings and welcome to the B O K financial Corporation's second quarter 2024 earnings Conference call.
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After the Speakers' remarks, there'll be a question answer session if you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one again.
Thank you.
As a reminder, this conference is being recorded.
I would now like to turn the presentation over to Heather King <unk>.
Rector of Investor Relations for B O K Financial Corporation.
Speaker Change: Please proceed.
Good afternoon, and thank you for joining our discussion of <unk> financial second quarter 2024 financial results, our CEO Stacy counter who will provide opening comments, Marc Maun executive Vice President of retail banking, who will cover our <unk>.
Portfolio and related credit metrics, and Scott Grauer Executive Vice President of wealth management, and we'll have a RFP base resolve our CFO Mardi Gras will then discuss the need for the quarter and our forward guidance slide presentation and press release are available on our website at B O K F. Dotcom, we refer you to the disc.
Fone bought two regarding any forward looking statements made during this call I'll now turn the call over to Stacy kinds, who will begin on slide four.
Thank you Heather.
We are pleased to report earnings in the second quarter of $163 7 million or EPS of $2.54 per diluted share adjusting for notable items such as the visa gain and related charitable contribution net income would've been $131 1 million and EPS would have been $2 and <unk> <unk> per.
Sure.
Last quarter I shared an overview of our strategy, which is based on driving long term shareholder value by focusing on a well diversified loan portfolio, including one of the lowest levels of commercial real estate concentration among peers at 21% of total loans.
Disciplined credit quality, which has produced attractive net charge offs versus peers for more than 20 years. Indeed.
Industry, leading fee income business mix.
<unk> tier risk management practices with a disciplined focus on capital and liquidity with a loan to deposit ratio below 70% and asset liability management practices that have led to well controlled levels of tangible common equity or TCE, all of which together allowed us to welcome new business during periods when others were on hold all.
Paired with an attractive geographic footprint and dynamic high growth market.
These core 10 days of our operating philosophy have enabled us to produce attractive returns over time and given our resilience to market stresses that are unmatched.
Every time you have seen the strength of it in the market, we outperform as credit issues surfaced during the great financial crisis, we performed incredibly well compared to others in our industry being the largest traditional bank not to participate in tar.
Our loan book performance was also strong with energy prices move lower in 2014, and 2015 and again during Covid.
When interest rate risk management issues arose in March of last year. After an almost 500 basis point increase in rates in one year.
We were positioned well with one of the higher levels of TCE and more than ample liquidity.
And now again as the market shows concern over commercial real estate concentrations <unk>, because one of the lowest levels of exposure with less than 21% total loans of.
158% as a percentage of tier one capital and reserves on a committed basis and 122% of tier one capital and reserves on an outstanding basis.
Accordingly for our shareholders, we are well positioned for growth and to produce attractive returns as you see on slide five we meaningfully outgrown EPS versus the K Rx index over the last 30 years.
Over that time, we've had an eight 6% CAGR versus the index only growing at a median rate of four 3%.
In fact, there were only three banks that grew EPS at a faster rate than be okay at.
This graph illustrates our ability to profitably grow at an attractive rate, while also having a top flight risk management culture that provides stability during diverse market conditions.
It can be tempting to put banks into one of two group base that makes our high growth and higher risk and others are lower growth and lower risk we've proven over a long history that we can be both a strong stable company and produce a higher long term growth profile.
So as I spent some time last quarter talking about our longer term strategy. This quarter I want to highlight opportunities we see in the market and how we intend to capitalize on them.
Moving to slide six our loan portfolio and credit quality is a good starting point looking at the federal Reserve's H eight data you will see that loans for the broader industry were generally flat during the quarter.
However, <unk> loans increased $381 million or one 6% linked quarter with growth driven by commercial loans, despite payoff activity in commercial real estate.
CRE payoffs, while they may slow loan growth are nonetheless are part of a healthy portfolio.
All of our payoff activity has been in the normal course of that lending activity.
The C&I portfolio grew at approximately 13% annualized or nine 5% annualized excluding certain seasonal advances.
This didn't happen by accident.
And our sales process is a long one and our process wasn't created this quarter or last but is rather a reflection of the fruits of our last few years of concentrated efforts to grow this portfolio.
As you'll see from our credit metrics, we haven't done that at the expense of our disciplined credit underwriting profile net.
Net charge offs are still very low nonperforming loans have again moved lower and our criticized classified levels are at 11, 2% of tier one and reserves, which is among the lowest of the largest banks and well below pre pandemic levels.
Mark will elaborate on this but we believe that strong guarantors and geography play a critical role in the performance of our CRE portfolio.
As part of our underwriting process, we stress each loan at origination for a rising interest rate environment.
We understand the overall credit metrics are below their long term sustainable levels, and we'll revert toward normal as economic conditions change.
Our fee income businesses remained strong at 40% of total revenue.
You cannot find another regional bank that has the same level of fee income businesses that have been built over many decades and are all operating at scale.
These businesses produced attractive returns and offer a diversifying or counter cyclical benefit to our net interest income streams, regardless of challenging market conditions.
You also saw us monetize 50% of our visa stock in their recent exchange program.
Any other bank liquidated this asset well before now at deep discounts. However, given our long term focus we held on to this investment and achieve full value for these assets.
The gain generated offset the <unk> repositioning losses, you saw taken the first quarter, which produced a $22 million a year benefit to NII with less than two year payback period.
We remain impressed by the progress we are seeing in San Antonio in Central Texas, which are still operating ahead of their pro forma projections.
We continue to look for opportunities to add talent in all of our markets.
Finally, we repurchased over 400000 shares this quarter to reflect our long term confidence in the company and to take advantage of attractive repurchase valuations on.
I am proud of the quarter that <unk> team has put together and appreciate the time to review with you. This afternoon and with that I'll turn the call over to Mark.
Thanks, Stacy turning to slide eight overall loans increased one 6% linked quarter with commercial loans up three 2% and CRE down by two 9% portfolio yields increased one basis point during the quarter I wanted to spend just a moment expanding on some of Stacy is opening commentary.
C&I loans grew three 2% over Q1.
Even after adjusting for certain seasonal advances, we still experienced solid C&I loan growth of two 4% or nine 5% annualized.
The sales cycle for C&I is a longwall permitting there is a greater emphasis on growing C&I. Then there was a few quarters ago, especially with the market concern about the CRE space.
This isn't what youre seeing from US we've been focused on for the last several years on growing the C&I business segment in our view. This is one of our most profitable businesses. When we think about growing C&I, we know that coming with that credit relationship will be deposits. It oftentimes core operational accounts Treasury management revenue and <unk>.
Many other opportunities the results you see reflect our intentional commitment to this effort we feel good about our performance to date and our ability to sustain this growth through the remainder of the year.
Overall loan growth was muted slightly by CRE payoffs. This is a good outcome the normal lifecycle of our CRE portfolio involved the bank providing funding while project is under construction and then the sponsor selling the property. Once it has been developed this payoff activity reflects the health of this book of business.
And importantly, all of this payout activity within the normal course of business.
Previous payoff levels were somewhat dampened during the rise in the overall rate environment as well as the limited activity in the permanent lending space, which is sponsored primarily by agencies life insurance companies and at the MBS market.
However, our recent payoff activity has returned to normal historical levels with elevated activity in the permanent space at stable valuations within the bulk of CRE asset classes.
Turning to our different loan segments loan balances in the energy business increased 2% linked quarter.
As a reminder, our energy book is composed of approximately 70% oil weighted borrowers and 30% natural gas weighted borrowers.
Our energy customers are well hedged for at least the next year, which meaningfully lowers our commodity pricing risk on the collateral of these law.
We've continued to grow commitments over the last several years in this business, but are still seeing customers use lower levels of leverage in this space, which is kept outstandings at current levels.
Our combined general business and service loans grew six 7% linked quarter and four 9% adjusted for seasonal advances. This remains a core focus from a loan growth perspective for us.
Our healthcare business loans decreased 4% linked quarter.
Quality in this portfolio remains strong.
As a reminder, roughly two thirds of the portfolios in senior housing combining a diversified mix of skilled nursing facilities that are Medicare Medicaid based stabilized private pay senior living integrated health systems predominantly with investment grade equivalent ratings and other specialized providers to.
The healthcare line of business has a national footprint, but is focused on regional operators with multiple locations to diversity and deep knowledge of their markets. We have a long history of strong underwriting in this space.
Our CRE business decreased two 9% quarter over quarter.
We continue to manage to a strict concentration which is a 185% of tier one capital and reserves on a committed basis. We know there's ebbs and flows over time and this quarter. We were down to 158% you have to look back to the fourth quarter of 2021 final time that the lower CRE concentration with.
We did not have the outsized exposure that others do in this space and while we have capacity and are not afraid to lend in this space. We are not chasing deal put numbers on the board.
We believe client selection plays a leading role in the performance of this product.
Loans are subjected to multiple stress tests, and the underwriting process, including those that stress interest rate and payment shock.
We also believe a few key factors over and above the standard underwriting play a critical role in the performance of this product first as guarantor support we have meaningful support and over 90% of all CRE loans with Counterparties that we have known for a long time and have demonstrated commitment to supporting their transaction.
Second is geographic location. This portfolio is geographically diverse, but importantly, with most exposure within the strong economies in our footprint and very little exposure in the areas of the country that we have seen the largest pullback in prices.
As we discussed last quarter, our credit culture is fundamental to the way that we do business. Our strong underwriting standards are calibrated to our experienced in each of our lines of business and our process is a consistent disciplined approach designed to avoid fluctuating standards based on economic conditions.
Approximately 81% of our commercial and CRE loan portfolios are floating rate or repriced into next year. So this variable has always been a principal factor for us.
On Slide 10, you will notice credit quality remains exceptional across the loan portfolio and well below historical norms.
Nonperforming assets, excluding those guaranteed by U S government agencies decreased $27 million this quarter, an exceptional outcome.
The resulting nonperforming assets to period end loans, and repossessed assets decreased 12 basis points to three 5% and non accruing loans decreased $29 million linked quarter.
Committed criticized assets remained well below pre pandemic levels as a percentage of capital.
Net charge offs were $6 9 million or 11 basis points annualized for the second quarter and have averaged nine basis points over the last 12 months extending the trend of performance fall below our historic loss range of 30 to 40 basis points.
Looking forward, we expect net charge offs to remain below historical norms.
We remain well reserved with combined allowance for credit losses of $330 million or 134% of outstanding loans at quarter end with the $8 million provision, reflecting a stable operating environment and loan growth expectations. We believe the combined reserve is the most appropriate metric to consider if you.
Want a holistic view of comparative credit reserve levels.
We expect to maintain an appropriate reserves for a loan growth and reflective of economic conditions.
We have traditionally outperformed during challenging credit cycles and are well positioned should an economic slowdown materializes and now I will turn the call over to Scott.
Scott: Now turning to slide 12, I'm proud of both the results we posted this quarter and the strategic initiatives. Our excellent team has accomplished after years of planning and organizational readiness, we successfully launched a modernized wealth management platform on July one.
Initial results have been very encouraging and the client experience with the transition has been positive.
This is a complicated project that required much planning and thought we didn't rush to find a solution that patiently orchestrated a positive outcome for the company our employees and most importantly, our customers and I would like to thank everyone who is involved.
Now turning to our operating results for the quarter total fee income contributed $200 million of revenue. This quarter that represents 40% of total revenue, which is a peer leading contribution from these businesses and reflects the strength of our franchise in this space.
I'll begin by covering our markets and securities businesses again on slide 12, our trading fees decreased 26, 1% to $27 7 million during the quarter consistent with broader industry trends for this activity driven by slightly lower trading spreads versus the prior quarter.
This business is primarily composed of our fixed income trading business and mortgage backed securities and to a lesser extent municipal bond trading.
We found a unique franchise in this business as we facilitate the hedging and production of mortgages for more than 500 mortgage originators.
This line item will be most influenced by changes in mortgage origination volume when volume is higher both our trading spreads and volume will increase.
Importantly, we are at a very low levels of origination volume and we are still seeing attractive results in this business.
While this may be volatile, it's often counter cyclical with our net interest income businesses and produces good diversification of our existing revenue streams.
Mortgage banking revenue remained relatively consistent this quarter at $18 6 million, reflecting continued improvement in the mortgage origination market and increased volumes from 2023.
Customer hedging has remained steady at $6 $8 million. This quarter. This revenue stream is associated with the hedging activity, we facilitate on behalf of customers.
We offer our customers the ability to hedge commodities interest rates and foreign exchange.
The largest component of this revenue driven by our energy customers hedging their oil and natural gas production in many cases energy customers are required to hedge as part of their loan agreement.
When markets become more volatile income tends to increase.
To give you a few examples when oil prices increased in the first half of 2022, we saw energy customers take advantage of those higher prices and lock in protection on more of their production by putting on hedges with us as a result, our income in this segment increased at that time. Another example is when rates decrease substantially during <unk>.
Covid and 2020, our customers perceive that it was an attractive time to participate in interest rate hedging and engaged with our desk to use interest rate swaps to convert floating rate loans to fixed.
The brokerage fee line item previously included insurance business that we sold fourth quarter of last year, which explains most of the year over year decrease in this line item, however, and looking specifically at brokerage excluding insurance, we've experienced solid growth in this segment.
Turning to slide 13 to cover our asset management and transactions businesses.
Asset management revenue increased 4% to $57 6 million.
This is primarily driven by seasonal tax preparation fee income.
<unk> increased by $1 9 billion as valuations increased there.
There are a couple of primary factors that drive results in this business. The first is the amount of assets under management and administration. This can change as the valuations of our clients' bond and equity portfolios increase or decrease in value as a result of our sales team growing new accounts second is the spread we earn on assets under.
Management this quarter, we earned 21 basis points on total <unk>.
For managed funds, we've earned 49 basis points and for funds under administration, we earned 10 basis points within each of these segments. The type of customer will also influence the amount of fees earned are revenue will change as you see migration within our business mix.
Transaction card revenue increased by six 9% to $27 2 million driven by an increase in volume of transactions processed during the quarter. This business is a top 10 electronic funds transfer business, which provides debit and credit issuing processing or FTE.
Solutions for almost 500 financial institutions in merchant processing solutions for over 4000 businesses throughout the United States and Virgin Islands.
Again, I'm proud of the results for this quarter and now I'll hand, the call over to Marty to cover the financials.
Thank you Scott, let me start by commenting on the visa exchange program, we covered in our last earnings call. This program allows us to monetize 50% of our visa b shares in the second quarter and recognize a $54 million pre tax gain this gain of $35 million Securities loss, we took in the first quarter and enabled us to do.
A $10 million worth of those converted shares to the <unk> Foundation to further invest in the communities we serve.
Turning to slide 15 capital and liquidity continue to be very strong CET. One is 12, 1% in TCE is $8 38.
<unk> adjusted for all Securities portfolio losses is eight 6%.
Our capital strength, we have displayed over the years and in the most recent year. In particular is the result of capital planning and stress testing processes that include TCE as well as the regulatory ratios and serves us well in all economic environments.
Our current loan to deposit ratio stands at 68% and our coverage of uninsured and non collateralized deposits increased to 188% with this quarter's deposit growth of $858 million, our strong capital position enables our opportunistic approach to share buyback during the second quarter, we repurchased just over 400.
<unk> thousand shares at an average price of $90 38 per share.
Turning to slide 16, you will see that net interest income grew $2 4 million versus the prior quarter demonstrating that the trough in this line item is behind us strong loan growth and asset pricing continued to support NII growth and deposit headwinds continued to abate the interest bearing deposit cost increase of seven basis points for this.
Quarter was less than a third of what it was in the prior quarter.
The DTA average balance decline will also less than a third of what it was in the prior quarter.
Net interest margin was sequentially lower by five basis points, but four of the five basis points was driven by the denominator effect of higher average balances for the trading portfolio and the <unk> securities portfolio.
That securities related growth was larger than neutral to net interest income.
We remain confident that net interest income will continue to grow sequentially driven by our loan growth and the repricing of the fixed rate portion of our balance sheet with a stable or modestly increasing net interest margin.
Turning to slide 17 linked quarter total expenses decreased $3 $7 million or one 1%.
Personnel expense fell $11 6 million driven by a number of factors some of which were more timing related such as the incentive compensation items and some are not such as the payroll taxes and the benefits expense.
In addition to the 10 million visa share donation mentioned earlier on the call. We also made a $3 6 million contribution to the <unk> Foundation. This quarter, we recognized $1 2 million of expense related to the FDIC Special assessment estimate in Q2 compared to $6 5 million in Q1 all.
All remaining expenses were consistent with the prior quarter activity.
Turning to slide 18, this provides our outlook for 2024.
Our net interest income guidance of $1 2 billion presumes one rate cut for 2024 in November we.
We expect fees and commissions to be in the neighborhood of $825 million.
We are assuming recent securities trading revenue trends persist into Q3 and MBS trading is the primary driver of potential variability in that element of guidance.
We expect the efficiency ratio for the full year to be near 64%.
We anticipate 2020 for provision expense to be similar to or somewhat lower than 2023 levels, given our very low level of nonperforming assets and our stable economic outlook.
With that I would like to hand, the call back to the operator for Q&A, which will be followed by closing remarks from Stacy.
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Our first question comes from the line of Michael Rose with Raymond James. Please go ahead.
Hey, good afternoon, everyone. Thanks for taking my questions.
Scott maybe for you we can start off I appreciate all the color on the the fee businesses. It looks like maybe the take down the guidance really just relates to.
Second quarter results in brokerage and trading line item can you just talk.
As we hopefully get a few rate cuts here or at least we bake in the forward curve and then whats into next year, how you would expect that business.
To perform and it seems to me just based on some of your explanations around some of the fee businesses, especially that in mortgage debt.
We're probably at or near a low point in those businesses.
It looked like they have some tailwind as we move into next year, if we do get some cuts. Thanks.
You bet.
So in essence, you answered your question exactly how I would.
As I mentioned I agree with you I think that we have settled into.
The current rate environment, and the current mortgage production levels. So what.
What we're seeing there we think as it has in essence bottomed.
What will stimulate further activity in the MBS piece, specifically, which is the biggest variable there that Marty mentioned.
Is whether or not we get a fed rate cut which will stimulate greater mortgage production, which picks up that the TBA piece the mortgage originator hedging activity for us that increased volume will help us there. Additionally.
Our downstream activity to our financial intermediaries that we actively serve with MBS product on managing their portfolios will move out the curve once we get some clarity out of the fed move. So we do think that as we move into an environment, where fed cuts we will see.
A pickup in activity in that mortgage production will increase the volume in the flows.
I appreciate it and then maybe just as a follow up for Mark It sounds like loan pipelines are pretty good at this point I would expect some of those CRE paydowns.
To slow as we move into the back half of the year, but we are seeing.
C&I companies generally delever, a little bit, particularly in the clients that you would serve in just given this quarters strong growth how do you kind of.
Speaker Change: Our reconcile the two just based on what we're seeing at some other banks.
Would just love some color there thanks.
Well.
I think the main thing here, we've been doing on the C&I side as we have been actively doing this for quite some time C&I loans take a while to obtain because it's more of a relationship oriented business and not driven by transactions around capital and asset acquisition.
So it's not been a matter of lower usage by our existing customer, but we've been able to obtain new customers and so we've actually had a broader growth pattern than we've had in for quite some time until we think we can continue to sustain that not at the kind of maybe not at the level we.
Saw in the second quarter, but excluding the seasonal advances we expect to see something similar to that for the rest of the year and on CRE. You are right. We do expect payoffs to slow, but we will be as we look we have the opportunity to look for the right kind of deals to add.
New deals.
Mostly be in the construction phase so it will take some time for those to fund.
Fund up we'd expect to see that over the next 12 months.
Michael This is Stacy I think are our geographic footprint here is awfully helpful. But go back to your original thesis here. We've been we've been focused on this but at the same time, we were really gearing up our sales effort here is when a year ago last spring was when the market's felt disruption and so on.
Others, who may not be seeing that there are those who are ostensibly pulling back to manage their liquidity and capital in a different way and so part of the growth that we're seeing is.
Adding talent, adding market share and being in really great markets to grow from and so it's kind of a confluence of all those that are creating the outsized growth for us this quarter.
Very helpful. I appreciate all the color and Mark congratulations on your upcoming retirement. Thanks al. Thank you.
Our next question comes from the line of Brett Rabbeting with hub Degroup. Please go ahead.
Hey, good afternoon, everyone.
Hey, Brian to start with.
Hey, guys I wanted to start with I know you don't give explicit margin guidance, but wanted to just take a look at the NII guide for the full year and it basically implies that the margin is up about 10 basis points for.
For the back half.
Of 24 is there.
Hi.
Just wanted to see if I'm thinking about that right and if there was anything to that.
Mike: Mike <unk>.
That outlook and maybe the variables that are going into that.
Thesis that that you guys are focused on.
Yes, let me just talk about the <unk>.
NII guidance and then how we think about margin and how that connects to it and the variability I think thats a good question. So yes, we just made two small changes to our outlook and our neither one was very large and we took out the Q3 rate cut and reflected the CRE payoffs that we saw in Q2.
And and yes, we do view that the margin was really pretty stable this quarter because of the decline was really only driven by a denominator effect of the.
The <unk> portfolio and the trading account.
So underlying that really the pretty good stability there.
And.
Yes, we do if we do expect that as.
Both DDA and the deposit rate trends continue to just slow down incrementally even from what we saw in Q2.
Debt and debt, giving us a tailwind on net interest margin percentage and a plus or minus the usual quarter to quarter noise that you just naturally get but the underlying trend we do see that as an.
And then on your question of.
Kind of what are the pluses and minuses around how we think about that trajectory.
It would be certainly positive relative to how we're thinking about the NII outlook. The positive when we get the Q3 rate cut could.
Could be positive if we have better loan growth than we've got.
And our thinking about that guidance.
Then on the.
The negative side of CRE payoffs end up being higher or the DTA or the interest bearing trends don't pan out quite as we as we expect.
Those could be pluses or minuses.
Okay.
Helpful and then.
Just sticking on guidance I was a little surprised that you didn't tweak down the expense growth for the full year, just kind of given the second quarter.
Speaker Change: And just wanted to go back to that line and just see what.
Theres, obviously, probably some.
Inflation on salary in the back half of the year from Merit raises but wanted to see if there was anything else in particular that was keeping that mid single digit number unchanged from the prior guidance.
Well, Brett keep in mind, we did bring down the efficiency ratio guide from last quarter. It was 65 and this quarter 64, So I'd focus on that as you think through the guide I mean, we did have a good quarter.
I would just note that some of the.
Incentive comp.
<unk> declined quarter over quarter Thats, not really run rate is probably at a little bit of that back but.
But we do feel good about being able to.
Have a good expense control through the rest of the year and we've got to look we've got some it projects there that are.
Kind of bring the data processing line up just a bit.
Okay. That's helpful. Appreciate the color.
Our next question comes from the line of John are strong with RBC capital. Please go ahead.
Great. Thanks, good afternoon.
John again.
Just.
I want to make sure I understand your loan growth guide back on Michael's question, but I think.
What youre, saying is.
When I look at the guidance suggest a pretty consistent pace of net growth from here to get to the middle of the guidance range is that a fair way to look at it.
Yes, I think thats, the right way to look at it.
Yes, John and if you go back to January I mean, we're really outperforming our loan growth expectations from a C&I perspective.
We said back in January that the real question for US was commercial real estate Paydowns and we didn't know exactly what was going to happen there.
I'd still say that's still the case I think we're getting closer to the trough there, but we don't know if thats second quarter third quarter in terms of net pay downs, there, but on the C&I side.
We're very optimistic we feel very good about the pipeline there and if it was just C&I only guidance that we provided we probably guided up a little bit but it's the CRE uncertainty that really is the headwind in the near term, although that will create a tailwind for 2025 and 2026 as we begin to rebuild that portfolio.
Okay.
Yes, you can see that on slide eight.
I guess.
Another question would be on the other side on deposits.
Can you talk a little bit more about the drivers of deposit growth this quarter in <unk>.
Stacy earlier in your comments you talked about your low loan to deposit ratio. So I'm just.
Curious philosophically, how you look at that.
To grow deposits faster than loans or do you somehow try to bring that ratio back up overtime.
And answered a couple of waves John I think one is we typically think about deposits funding the loan book and the securities portfolio is largely self funded through wholesale fundings and Thats. The way we run the bank for most of my career here. However, we will look for opportunities, where we can incrementally fund the.
<unk> booked cheaper than we can from a wholesale perspective with deposits and so we're seeing incremental opportunities to grow the deposits that are.
Incrementally better than wholesale funding and so we'll continue to do that.
Where it makes sense, but but I think as gcs, where we think we're positioned from a growth perspective, we want to maintain ample liquidity, we're comfortable letting that loan to deposit ratio slide up but but in the context of other incremental deposit funding opportunities to displace wholesale.
We've allowed those to continue to happen and to grow in.
Good about that we are well positioned in our marketplace people see us as strong and capable and so that's created opportunities for us and so we're continuing to take advantage of that where those opportunities exist for us.
Okay. That's helpful. Thank you very much.
Our next question comes from the line of Peter Winter with D. A Davidson. Please go ahead.
Good afternoon.
I'm just wondering on the deposit beta.
It's been at the upper end of peers with the increase in rates, but what's the outlook for the the downright data because it does look like we're finally going to get some rate cuts.
Yes, Peter and Youre right, our deposit beta just simply reflects the fact that we've got a more commercial and wealth.
And our mix and our deposit base and so you saw the effect when rates went up youre going to see the same effect on rates come down.
We're going to be able to have a deposit beta that that's easily in the mid fifties in down rate scenarios. We are very confident and know exactly how that will play out.
So that'll be that'll be helpful for us once we start to see rate cuts coming through.
Would it be in the high <unk>.
A downrate data.
As we've all learned those arent necessarily just linear from the get go and they stay flat I think that using something thats in the in the mid <unk> to start with and as rate increases continue that might migrate up that's definitely possible.
Higher beta so.
As rates decline and that that beta can increase just as we saw on the.
Yes.
Got it.
And then just just wanted deposit strength. So period end deposits were up 9% year over year in the second quarter certainly.
A lot stronger than I would have thought but you maintain that deposit outlook for modest growth and just how you're thinking about deposit growth in the.
Back half of the year.
Hey, Peter one thing that you should pay attention to the DTA the ending balance of DTA was high just.
Customer activity right at the end of the quarter drove that App.
Pay attention to the average balance in DTA as Youre thinking about looking forward.
I think that'll help clear up here.
Question.
Yes, that's the right answer Peter you want to focus on averages on the deposit side Theres a lot of volatility that happens in any one period. So averages are better way to look at deposits from our perspective.
Okay.
You'll get period end.
Your guidance, but I hear you.
And then just on the if I could just get one more follow up question just the outlook on.
Expenses mid single digit growth.
Do you exclude the FDA assessment and charitable contributions I'm just wondering.
Whats the base Youre using for 'twenty three.
Yes, so we are leaving in the as weeks, especially when we think about.
The efficiency ratio, we're leaving all of that and just as it was.
And I think that the.
<unk>.
The same is true on the.
That growth rate.
So the growth rate for expenses is really on a reported basis.
That's correct, we're not normalizing for the special assessment or four.
The charity contributions for the whole year efficiency ratio.
Got it thank you.
Our next question comes from the line of Woody lay with <unk>. Please go ahead.
Hey art gun.
A quick question on deposits just just looking at the deposits broken out by market. It looks like you saw really strong growth in your in your Texas markets, but on the demand side and the interest bearing side and maybe there is some volatility with that between average and period end, but could you just give some color on what youre seeing in the Texas market specifically.
Specifically on deposits.
If you think of this as Stacy I mean, one of our key growth objectives for our company for the last several years have been a grow taxes and so.
You saw with the expansion in St.
San Antonio and on the wealth side, we're in Austin, So really the focus on central Texas.
We've added talent in Dallas, and Fort worth and Houston were very focused on that market and part of how we're growing as through deposit acquisition and so.
Youre seeing kind of the fruits of that.
Labor, there and clearly from our perspective.
That we expect.
Got it and then maybe lastly, just shifting over to capital capital remains really strong the buybacks were good to see but obviously, we've seen the stock price move up from here just further appetite.
For buybacks with with the current stock price.
Yes, I would just note that as you well know we're price sensitive in how we think about share buyback. Our goal is to add shareholder value through that activity and the share buyback that we've done over the past year has been very accretive to shareholder value, we're very happy about that but with <unk>.
Incrementally higher prices Youll see us.
You should expect to see us incrementally scale back and have a cooling effect from higher prices.
Alright, thanks for taking my questions.
Thank you.
Our next question comes from the line of Matt Olney with Stephens Inc. Please go ahead.
Thanks for taking the question.
Most of mine have been addressed I'll just ask about M&A.
A handful of transactions kind of in around the footprint would just love so much.
They had thoughts around the bank's appetite for.
M&A and the opportunities you see in and around your footprint.
Sure.
Yes.
We've talked before I mean, M&A is something that we would be interested in but we're going to spend our capital is going to be for the right opportunity and it's really hard to find the type of franchise that would be a good fit with us both culturally which is significantly important but even.
Levels of concentrations in real estate strength of core deposits and things like that you start to run the filter we don't want to we want to expand outside our footprint we want those.
Strong characteristics of the banks that we've acquired so that we don't have to diminish the value by running loans off that don't fit our profile. So the practical answer is theyre, just not a lot that really fits.
The filters that we would look for there and so it's unlikely that you would see us do something like that in the near term, we do have an appetite, but it's got to fit our profile.
For what fits for us.
Okay.
Okay.
Send it sounds consistent with kind of the past and I.
I guess, just lastly on capital if if the buyback is potentially less attractive. These current valuations it sounds like you'd be you'd be okay, with allowing capital levels to build in the near term or are there. Other uses of capital we shouldn't we should think about.
Okay.
Yes, we've got a history of being patient and making sure that we're thoughtful about when and where we deploy capital so.
Yes, I'd to continue to recognize that we're happy to be patient and watch for.
The right opportunities.
Okay. Thanks, guys.
Thank you Matt.
Again as a reminder, the floor is now open for your questions to ask a question Press Star then the number one on your telephone keypad.
Our next question comes from the line of Teamer, Brazil.
Wells Fargo. Please go ahead.
Hi, good afternoon.
Hi tumor.
Maybe circling back to the line of questioning around deposits.
Maybe if you can quantify just the linked quarter and flow into DDA and whether the average kind of down 3%.
Is the right way to be thinking about it and maybe just when you see some of those DTA pressures starting to abate.
Yes, Tomorrow, I think an easy way to think about that is.
Sure.
The Q2 average for DTA was $8 387. The June average was almost exactly the same number.
So we've really seen a nice leveling off of activity there and while we may not be exactly at the bottom we're feeling pretty good about.
The trajectory we've seen really since February.
Okay great.
And then just looking at bond cash flows and reinvestment is kind of with all the work being done on the bond, but can you give us a sense of where those yields ended the quarter kind of what's the.
What's the bond yield looking like in <unk>, given both the reinvestment opportunities in some of the restructuring activities.
Yes, I think if you.
You look at the average yield for the bond portfolio in Q3, I mean, that's fairly representative because the restructuring activity that was all right at the end of Q1, So Q2 is fairly clean.
So the.
Probably the important thing to think about is we're still getting.
$500 million average at quarter this quarter of 600 million bad kind of Durably $500 million a quarter of cash flows they get reinvested each quarter and this quarter, we were able to gain of 170 <unk> hundred 60, 570 basis points between what the cash flows came off at and what we're able to reinvest in and so.
That trend will just keep continuing and that's going to be an important driver of margin expansion over the coming multiple quarters.
Great and then just last from me your comments around.
Uncertainty.
With CRE Paydowns.
Messaging has been a little bit mixed throughout the industry, but I'm just wondering what's driving the elevated paydowns in your book.
Is your maybe CRE exposure, a little bit insulated from what we're seeing in other geographies in other asset classes or I guess what are the.
But what are the categories that are driving the payoff activity and Im wondering if theres anything lumpy or in the back end of the year.
B driving here to offer you tell you that it is.
Really just a function of.
We have a portfolio that largely starts with construction and once there is a level of occupancy that it can be refinanced in the permanent nonrecourse market. It is and Thats whats happening some mark in his prepared comments talked about it's going to <unk>, it's going to seem be assets go into agency permanent.
Permanent nonrecourse financing and Thats the way that portfolio is worth what it's just slower to rebuild behind it to some of those borrowers that we have are slower to start a new project or being a little bit more cautious and so the rebuild behind that but the portfolio.
Paydowns is really very healthy and very typical of our portfolio. You just don't have the advances that are kind of offsetting that today.
Thank you will see in future periods as more confidence around this.
Sector begins to emerge.
Great.
Thanks for the color.
That concludes our Q&A session I will now turn the call back over to Stacy kinds for closing remarks.
Thank you everyone for joining our discussion today were strong favorable growing organization and an example of these concepts not being mutually exclusive we're proud of what we've achieved in the past we're optimistic about the future.
Cited about capitalizing on opportunities. We have ahead of us, which we think are menu. We always appreciate your interest in <unk> financial and spending time with us This afternoon.
Please reach out to Heather King if you have any questions at <unk> dot King at <unk> Dot com.
This concludes today's call you may now disconnect.
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