Q3 2024 BOK Financial Corp Earnings Call

Greetings and welcome to be OK Financial Corporation's third quarter 2024 earnings Conference call.

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Speaker Change: I would now like to turn the presentation over to Heather King Director of Investor Relations for D O K Financial Corporation.

Please proceed.

Heather King: Good afternoon, and thank you for joining our discussion of the O K financial third quarter 2024 financial result, our CEO Stacy carriage will provide I think Connie Hartmann executive Vice President of regional banking will cover our land portfolio and related credit metrics and Scott Grauer executive.

Heather King: Vice President wealth management will cover our fee base resolve our CFO Marty Brent will then discuss financial performance for the quarter and our forward guidance.

Speaker Change: My presentation and press release are available on our website at B O K S. Dot com, we refer you to the disclaimers on slide two regarding any forward looking statements made during this call I will now turn the call over to Stacy Cats, who will begin on slide four thank.

Thank you Heather.

Stacy Cats: Pleased to report earnings of 140 million or EPS of $2.18 per diluted share for the third quarter.

Stacy Cats: As we've mentioned previously we are a strong and growing company that is prioritized generating attractive long term results.

Stacy Cats: We have demonstrated that again this quarter during the quarter net interest income and net interest margin have stabilized and started an upward trend consistent with prior expectations. We're also on track to capturing the down rate deposit betas, we communicated.

Stacy Cats: The credit performance of our loan portfolio remains excellent we had net recoveries during the quarter criticized classified levels remain below normalized pre pandemic levels and a combined allowance that remains robust at 139% of outstanding loans, given our strong credit profile and performance.

Stacy Cats: Loan commitments remained stable, although as Mark will cover later robust capital markets activity during the quarter impacted growth in outstanding loan balances.

We are encouraged by current sales activity and the trajectory that sets up going forward.

Our fee income segment performed particularly well and contributed significantly to our overall results Scott will talk more about those details shortly but I wanted to note that we're proud of surpassing the 110 billion Mark for assets under management or administration and for the first time in our history.

Stacy Cats: These results were achieved while preserving strong levels of liquidity with continued growth in our deposit portfolio showcasing the strength of our franchise, we remain well positioned for growth, while maintaining regulatory intangible capital levels that are attractive versus peers.

Stacy Cats: Our performance is reflective of solid operational execution and the strength of the economic conditions in our markets, we remain focused on delivering value to our customers and shareholders.

Stacy Cats: During the quarter. We also saw the first cut in rates from the Federal reserve and I'm happy with the proactive steps our team is working through to adapt quickly to this change.

Stacy Cats: Marty will discuss this in more detail later.

Stacy Cats: It's also important to consider that for the first time in more than two years. The yield curve is no longer inverted as of the end of the quarter when.

Stacy Cats: While we may be neutral to the level of rates. There is certainly upside to our operating model when the yield curve as normal an upward sloping.

Stacy Cats: Bodes well for us moving forward.

Stacy Cats: I am pleased with the results that <unk> produced this quarter and are optimistic about the trajectory of our team is established.

Stacy Cats: The economic backdrop that we're operating and should allow us to continue generating attractive returns moving forward and with that I'll turn the call over to Mark.

Mark: Thanks, Stacy turning to slide seven overall period end loans decreased two 3% linked quarter with commercial loans down four 8% and CRE up two 1%. However, average loan balances contracted only $80 million or 3%. Despite the slight pullback in outstandings this quarter.

Mark: We continue to grow new commitments and relationships.

Mark: If you look at core C&I, which is reflective of our general business and services Outstandings in those segments increased six 4% year over year rate and total commitments have grown at a five 7% year over year rate.

Mark: Okay financial experienced 11 consecutive quarters of loan growth until the third quarter, while the unique nature of the markets in our specialty lending areas impacted this consistent loan growth. This quarter, we remain optimistic about our loan growth for future periods.

Mark: Portfolio yields increased six basis points during the quarter. The majority of that increase was due to growth in loan fees, which I will break down in more detail as we walk through our loan segments.

Mark: Loan balances in the energy business decreased nine 4% linked quarter. Most of this was driven by broader trends in the public debt market appetite for this sector.

Mark: In Q3, we saw a more accommodating bond market with issuance in that domestic energy debt transactions, increasing significantly on a linked quarter basis.

Mark: This activity does reduce outstanding loan balances. However, we have the ability to capture some of the bond economics of these transactions, which are accretive to earnings and led to a quarterly record in our investment banking revenue.

Mark: We realized additional early payoff fees, which contributed to the yield increase I noted previously.

Further energy balances this quarter were affected by M&A activity with the acquisition of several of our customers, resulting in the pay off of their loans in many cases, we also participate <unk> leave the credit facilities of the acquiring institutions, but are seeing lower levels of leverage after the business combination. This has contributed to utilize.

Mark: <unk> rates in energy falling from 45% to 42% during the quarter, we've grown energy commitments over the last several years, but temporary factors can moderate growth in outstandings in any given period.

Mark: Our combined general business and service loans fell four 3% linked quarter, which was given back some of the seasonal advances that were outlined last quarter.

Mark: Looking more broadly these segments are continuing to post strong growth being up six 4% on a year over year basis with loan pipelines remaining stable.

Mark: Our health care business loans decreased one 9% linked quarter payoffs increased as longer term rates and spreads made it attractive for some borrowers to refinance and the fixed rate HUD market, our pipeline remains robust driven by potential new acquisition activity.

Mark: Our CRE business increased two 1% quarter over quarter as we've discussed previously we were very close to our concentration limits several quarters ago as paydowns have reduced CRE levels, we are gathering new commitments and rebuilding outstandings as new loans fund up during the construction phase of these projects.

Mark: We are committed to our strict concentration limit, which is 185% of tier one capital and reserves on a committed basis, but is currently at a 157% which gives us plenty of room for growth that should continue to build over time.

Mark: I won't cover slide eight in detail, but this remains a good testament to the attractive long term performance of our credit.

Transitioning to slide nine credit quality remains exceptional across the loan portfolio, extending our trend of outperformance versus peers in this area.

Mark: NPA is not guaranteed by the U S government fell again this quarter decreasing $6 million, the resulting nonperforming assets to period end loans and repossessed assets decreased one basis point to 34 basis points.

Mark: Committed criticized assets remained very low relative to historical standards.

Mark: Further we had net recoveries of $54000 during the quarter and net charge offs have averaged seven basis points over the last 12 months looking forward, we expect net charge offs to remain below historical norms.

Mark: We are well reserved with a combined allowance for credit losses of $332 million or $1, 39% of outstanding loans and now I will turn the call over to Scott.

Scott Grauer: Thank you Mark.

Scott Grauer: Turning to our operating results for the quarter total fee income grew $2 5 million contributing $202 $5 million of revenue and representing 40% of total revenue, which continues to differentiate us from our peers and represents another strong contribution from these lines of business.

Scott Grauer: I'd like to begin by covering our markets and securities businesses on slide 11.

Scott Grauer: Both our trading and mortgage banking businesses can be volatile and fluctuate significantly in any given quarter based on current market conditions and expectations from the markets, but have shown very positive risk adjusted returns.

Scott Grauer: Consistent with the industry trends are trading fees decreased 14, 6% to $23 6 million during the quarter, which was driven by lower MBS volumes as client demand ahead of anticipated rate cuts was relatively muted.

Scott Grauer: This was partially offset by strong activity in the municipal sector.

Scott Grauer: Our trading volumes and spreads are greatly influenced by the mortgage origination market, while showing improvement compared to 2023 industry mortgage origination volumes remained significantly below historical norms, given the recent rate cut and anticipated cuts ahead, we expect those volumes to continue to return to more new.

Scott Grauer: Normal levels, which aligns with the current industry viewpoint.

Scott Grauer: On that topic mortgage banking revenue has remained relatively unchanged for the past three quarters coming in at $18 4 million for the third quarter the mortgage origination market remains relatively soft.

Scott Grauer: As origination volumes increase and the environment normalizes, both trading revenues and mortgage banking revenues should be positively impacted while we faced some headwinds in this space over the past two years, we believe the outlook has improved from current levels.

Scott Grauer: Our other markets and securities businesses continued to produce solid results, we recognized a record quarter for investment banking fees coming in at $10 8 million led by our Texas Municipal bond underwriting team and bond economics related to the energy pay offs that Mark noted in his comments.

Speaker Change: Turning to slide 12 asset management revenue was consistent with the second quarter at $57 4 million.

Speaker Change: And our trust fee income nearly offset last quarter's seasonal tax preparation fees.

Speaker Change: Assets under management and administration grew $3 2 billion with increased market valuations as Stacy mentioned in his opening commentary, we eclipsed the $110 billion Mark for the first time and we're proud of the decades of work that have contributed to building this platform <unk>.

Speaker Change: Transaction card revenue grew by four 6% to $28 5 million driven by a higher volume of transactions processed.

These businesses produced attractive peer leading returns and give us a resilience to market stresses contributing greatly to the strength of our franchise. They are core to our business model and were built over decades of investment we're thrilled with the strong financial results. These teams are producing and the outlook for growth.

And now I'll hand, the call over to Marty to cover financials.

Marty Brent: Thank you Scott turning to slide 14, net interest income was up $12 1 million and net interest margin was up 12 basis points with core net interest margin, excluding trading up eight basis points within the eight basis points three were due to unusually high loan fees in Q3, driven by the increased level of loan payoffs, which is.

Speaker Change: Not expected to recur.

Speaker Change: The remaining five basis points are on track with the drivers we have talked about over the last couple of quarters, causing asset repricing to exceed liability repricing, including securities and fixed rate loan repricing.

Speaker Change: And less deposit mix shift out of DDA, the strong interest bearing deposit growth in Q3 also supported both net interest margin and net interest income.

Speaker Change: Deposit repricing activity, resulting from the 50 basis point fed rate cut is also on track with our expectations both.

Speaker Change: Both the index deposits and the high beta portions of our commercial and wealth deposit book were repriced lower in conjunction with the fed rate cut. These actions were largely completed by quarter end and give us a high degree of confidence that we will realize our deposit beta expectations as market rates decline.

Speaker Change: Overall deposit betas on the way down should be similar in magnitude debated on the way out if we see continued interest bearing deposit growth in Q4 that may impact the calculated deposit beta a bit but not the liability beta as that growth would replace wholesale borrowings and be incrementally beneficial to margin and NII.

Speaker Change: Turning to slide 15 linked quarter total expenses increased $4 3 million or one 3% personnel expenses grew $15 7 million largely driven by incentive compensation expense, which is primarily timing related looking at the average of the last two quarters personnel expense may be useful.

Speaker Change: That increase was offset by lower non personnel expenses, which included a decrease related to the $13 6 million charitable contribution made to the <unk> Foundation in the second quarter.

Slide 16 provides our view on full year 2024, and I will note a couple of changes loan growth expectations were revised to reflect this quarter's specialized lending path activity that mark covered in his commentary.

Speaker Change: Deposit growth has remained strong with new balances being added below the cost of wholesale borrowings.

Speaker Change: We expect net interest income to be slightly higher than $1 2 billion.

Fees and commissions were adjusted to reflect recent and current conditions and MBS trading and provision expense was also adjusted to reflect the very strong credit quality results, we continue to experience.

Speaker Change: We are in the midst of our budgeting process for next year, so consistent with our normal practice, we will provide 2025 guidance when we announce Q4 results in January.

Speaker Change: 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.

Speaker Change: Thank you the floor is now open for questions. If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue.

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Speaker Change: And your first question comes from the line of Michael Rose with Raymond James. Please go ahead.

Hey, good afternoon, everyone. Thanks for taking my questions.

Michael Rose: If I could just start on some of the loan pay offs commentary certainly understand some of the specialized segments in energy, but when I look at the kind of the market breakdown. It looks like you experienced declines and even some of the.

Michael Rose: The smaller markets that you guys are in so I know you talked positively about.

Michael Rose: Future loan growth pipeline being full.

Michael Rose: Can you just give us some some color there as to maybe what pipelines look like now versus.

Michael Rose: Order a couple of quarters ago do you think.

Michael Rose: Some of the headwinds around the election.

Michael Rose: What will actually cause people actually borrow just some color there would be great. Thanks.

Speaker Change: Well tell you that last part first it's Mark I'll, just say that obviously uncertainty will cause people to delay decisions.

Speaker Change: So it's likely that some of the decisions will be resolved by the election or views on tax policy going forward.

Speaker Change: In the short term, but we do expect that that will have an impact later this year, but we're looking at our pipelines overall.

Speaker Change: We are.

Speaker Change: We feel pretty strongly that in the C&I world that our pipelines are in good shape.

Speaker Change: Fundamentally we're looking at the C&I portfolio that as we've said in the second quarter, we were at a seasonal high during that quarter and then we have seen is that.

Speaker Change: Come down in the third quarter in line with what our pattern has been in the past. This is not an unusual and development, but if we look at the that's why we concentrate on year over year growth and so we had six 4% and year over year growth in C&I at five 7% growth in commitments and utilization.

Speaker Change: <unk> is only down from 57%, 56% so.

Speaker Change: Pattern has existed but we actually have raised the overall level of our commercial and industrial loan.

Speaker Change: Throughout the year not just looking at third quarter to second quarter. So I would say when we then look at our experience in the smaller markets with all the different markets, we've been very actively acquiring.

Speaker Change: Acquiring talent in those markets and we've been actively increasing our calling and pursuing.

Speaker Change: Business, because we are in good position from a capital standpoint from a credit standpoint to pursue business.

Speaker Change: And we feel comfortable that barring any significant change in the economy that we're going to be able to generate.

Future loan growth and we're in a good position going forward with that over the next.

Speaker Change: 12 months, plus micro laser safety just to pile on I think we've had 11 consecutive quarters of loan growth and so you had a really unique circumstance this quarter around energy and healthcare that that impacted the totals overall.

Speaker Change: You've got lots of tailwind I think as we look into the next 18 months around commercial real estate, because we were well below our concentration limits and so we've got room to find out there we feel really good we track through Salesforce, we track our pipelines monthly quarterly everything we're looking at there still feels very good to us.

Speaker Change: Mark's right there can be some uncertainty that happens around election season or for next year do you think about tax policy, but if you just look on the surface.

Speaker Change: Core C&I areas are growing 6% year over year, we're really happy with that we've strung together up until this quarter 11 consecutive quarters of loan growth. We still feel confident there has not been here inherently it's changed our confidence in our ability to grow the portfolio. In fact, we're continuing to add significant talent some of which we haven't even announced yet in some of our markets. So.

Speaker Change: We're confident that we will continue to grow loans as we move forward.

Speaker Change: Very helpful. Thanks for that and maybe just one.

Speaker Change: For Scott.

Speaker Change: Certainly understand some of the near term headwinds as it relates to the maybe mortgage banking and some of the broker brokerage trading.

Speaker Change: Softness.

Speaker Change: Sequentially this quarter, but it sounds like the outlook and what you guys are trying to put forward is relatively.

Positive.

Speaker Change: What do you see as kind of the greatest opportunities among fees.

Speaker Change: As we think about the next couple of quarters, and where could there still be some headwinds and maybe how would the.

Speaker Change: The impact of lower rates.

Speaker Change: Meaning if we if we get more cuts in the forward curve or maybe less than the forward curve how would that.

Speaker Change: In your view impact.

Some of the large business. Thanks.

Right so.

Speaker Change: Great question I think that when you when you look in.

Speaker Change: Detail at the trading line item.

Speaker Change: It is entirely limited to the mortgage backed securities sector, where.

Speaker Change: Where we saw we've seen significant headwinds and so.

Speaker Change: When you when you.

Speaker Change: Parse that out and eliminate the MBS, we actually saw increases in all of our other product set so municipals corporates treasuries.

Speaker Change: All of our fixed income activity was actually up absent the MBS. So.

We did and have seen.

Speaker Change: Beginning in mid September with the fed move we have seen an uptick.

In the activity on the MBS side.

Speaker Change: The question that remains is.

Speaker Change: The degree to which we will see continued momentum and activity, but we have seen an inflection point in terms of the activity and the volumes there on even the MBS side, but we continue to have.

Speaker Change: Constructive.

Speaker Change: Sure.

Speaker Change: Belief about our positioning inside of the municipal bond space, both from an underwriting and a trading perspective on the asset management side, we've got consistent.

Speaker Change: Sources of inflows to offset R. R.

Speaker Change: Our general churn in our assets with disbursements et cetera.

Speaker Change: We like our allocation of our assets.

Speaker Change: In terms of our MA with 13% in cash, 40% fixed income 39, equities and 8% alternatives. So we're well balanced and I think poised to continue to benefit and asset growth from the market perspective, but probably more significantly more importantly on our flows.

Speaker Change: On our asset management side. So we're constructive on all of those and continue to see positive turns develop really across the board on those spaces and then I think Marty you want to comment a little bit on mortgage production, yes, Michael So I would say mortgage production, we feel like there is good opportunity in the future.

Speaker Change: There I mean.

Marty Brent: Current period production levels are still a little depressed but.

Marty Brent: I think as time moves forward and we see the rate declines continue we'll see both volume come back up and.

Marty Brent: Gain on sale production.

Marty Brent: That percentage is a little bit lower Q3, you'll see it go back to more like what you saw in Q2, So I think that there's opportunity in that line item as well.

Marty Brent: But theres no doubt theres pressure there I think think about other areas. We've got Mike We don't talk about our ATM business transfer on our transaction card business up 4% four 6% very steady and as these guys have really turned to growth corner.

Marty Brent: I am excited about kind of where they're headed over the next 12 to 18 months from their perspective. They went through a really difficult system conversion a couple of years ago, and really kind of got through that Madison and have turned the corner in a meaningful way there are businesses arent all designed to go up into the right and so some of these businesses like the trading was impacted by.

Speaker Change: MBS or the mortgage businesses are going to be softer when others are performing very well I mean, Scott mentioned the fiduciary business.

Speaker Change: $110 billion of assets under management lots of tailwind from the markets today, we're awfully excited about the opportunities there over the next year or so.

Speaker Change: Not all going to go and turn them together as it goes up into the right, but the mix is very good and we like how it all works together over different cycles.

Speaker Change: That's great well everyone. Thank you so much I'll step back.

Speaker Change: Yes.

Speaker Change: Your next question comes from the line of Jon <unk> with RBC capital markets. Please go ahead, hey, thanks.

Speaker Change: Good morning, or good afternoon, I guess.

Yes, yes.

Speaker Change: Marty you credit clarification question for you on expenses.

Speaker Change: Do you expect the incentive comp number to come back down in <unk>.

Speaker Change: Two.

Kind of a.

Speaker Change: A more normalized level I guess and I think you said the average of last two quarters is a run rate for comp is that Q1, and Q2 or Q2 and Q3.

Marty Brent: Yes, John if you look at Q2 at $191 million for personnel expense, that's low versus kind of a run rate level in Q3 at $206 eight at that time.

Easy way to do it is to just average those two and that gives you a much better sense for kind of what a what a run rate is for that line item. There is just.

Marty Brent: The way you have to recognize incentive comp that's not always sometimes there's a little noise quarter to quarter.

Speaker Change: Yes, okay. Thank you on that.

Marty Brent: And then on deposits.

Marty Brent: Slide five that you guys had.

Speaker Change: Youre talking about almost $1 billion in growth for the quarter curious, where you're finding the opportunities to grow deposits in general is this.

Speaker Change: Client movement or is it market share gains or what's driving that.

Speaker Change: Yes, it's more commercial and wealth broadly, but a little bit more skewed towards <unk>.

Towards commercial and.

Speaker Change: It's a combination of new clients, we are bringing to the bank, probably a little bit more of that.

Speaker Change: As existing clients, but it's broad based across the business, yes, John some of that is mix change we have customers that are moving from from DDA and they're taking advantage of the opportunity and moving it we're not losing them as deposits. We're just changing the mix from a DVA to more of our interest bearing option.

Speaker Change: Okay. Okay.

I would say we have added a number of new customers over this last 18 month period.

Speaker Change: Okay.

Speaker Change: Just back on the <unk>.

Speaker Change: Specialty businesses and energy growth.

Speaker Change: G pressures in terms of balances what what do you think changes that.

Speaker Change: <unk>.

Speaker Change: Is it just as simple as the bond market is open and there's M&A happening or what what changes some of those.

Speaker Change: Heavy payoffs in those businesses.

Stacy Cats: Okay. This is stacy.

There's a lot that could change that.

Stacy Cats: That that I don't think that what what happened in the third quarter I think is unique.

Stacy Cats: For energy, we just had a bonds that kind of coincidentally all happened at the same time, it tended to be a little bit more ratable over.

Stacy Cats: These types of periods I think you would be doing if you look just today, which doesn't mean that the way to land at the end of the year, but energy is up relatively materially from from where it was at the end of September.

Stacy Cats: That could change, but I don't think there is some fundamental shift here that's happened with energy that there is going to continue to be pressure on balances.

Stacy Cats: I think that there may still be some leftover capital markets activity or M&A activity that could impact the balances for a quarter or two here, but I think the bulk of that should be behind us and I would expect those balances to grow as we move forward, particularly over the next if you think about when I think about things over kind of a 12 to 15 months or longer time.

Stacy Cats: And I think youll see those balances grow from the end of the third quarter over the next 12 months for sure.

Speaker Change: Yes, and I would only add that the clearly this is one of the more stable markets. We've had in a long long time I mean, it's been consistently.

Speaker Change: Good pricing in the oil market and customers are going to still have two.

Speaker Change: Invest in order to maintain their borrowing bases and continue the production and so forth. So we do expect and we've been in this business a long time, and we will get our share of those opportunities.

Speaker Change: They come about.

Speaker Change: Okay, Alright, thank you for the help.

Speaker Change: Your next question comes line of Peter Winter with D. A Davidson. Please go ahead.

Peter Winter: Thank you.

Peter Winter: Our expense growth, it's kind of been running high.

Peter Winter: Last two years, even excluding FDIC and channel contributions are there opportunities to lower that expense growth and what do you think a more normalized growth rate is for the company.

Yes, Peter I would say a couple of things so efficiency is super important to us we're always looking to manage to appropriate efficiency ratios at each mine and it's more important that the line of business level. Then then all rolled up actually as we think about it.

Peter Winter: And those numbers will move around just as margin moves around.

But you're right the expense growth.

Peter Winter: Something that we pay attention to and want to make sure that every line of business is doing so in a prudent way. However, we are also very focused on investing in our business and growing our business and so that takes the form of.

Peter Winter: Adding producers.

Peter Winter: And adding technological capability to serve customers.

Peter Winter: And so youll see that a couple of line items. So we feel good about what we've delivered this year, but I'll just note that data processing and communications and we've got investments that are really good investments for long term growth in the company and and so what you saw just looking at this quarter for example.

Peter Winter: That's.

Peter Winter: Couple of important projects include wealth line of business that have gone in really well and we're very excited about what that means for the company, but youll see that step up in that that's not going to come back down to be sure.

And then as we people add people Youll see.

Occupancy as a step function for our growth in people until Youll see that come up over time, if thats <unk>.

Peter Winter: Part of what your question was.

Speaker Change: But Peter if you look at the overall efficiency I mean I think to.

Speaker Change: To be where we are with the <unk>.

Speaker Change: Rate environment, where it's been looking at it by line of business, we feel really good about kind of managing from an efficient perspective.

Speaker Change: I think youll see us make some investments here, but and I think youll see us work real hard to maintain the efficiency ratio where we're at today.

But I also think that that you've got a couple of businesses that are not not funding not not operating at a high revenue level, where they've been in the past that dragged out efficiency, a little bit and so we're going to we like those businesses. They help us through a long cycle, but.

Speaker Change: Do impacted and so we're not not too worried about that right. Marty said, it's more important for us to look at it on a line of business level and we're very comfortable with their with our efficiency when we look at it through that lens.

Speaker Change: Okay.

Speaker Change: And then if I can ask.

Speaker Change: The deposit growth.

Speaker Change: Sure.

Speaker Change: I think John mentioned was very strong it has been very strong it's been outpacing.

Speaker Change: So the loan growth.

Speaker Change: So with the loan to deposit ratio just 64%.

Speaker Change: Are there opportunities maybe to push down deposit costs more aggressively than you thought maybe a quarter ago.

And is there kind of a certain level you don't want to see that loan to deposit ratio go about.

Speaker Change: Yes, we're not managing to a loan to deposit ratio per se, but you are right, having a loan to deposit ratio as we do does give us the ability to manage deposits.

Speaker Change: Very well.

Speaker Change: What we did in the third quarter, we're very happy about the progress we made in being able to bring down deposit rates as a result of.

Speaker Change: The fed move and and got a good bit of that done before the end of the quarter was still a little bit more left to go and all of that gives us the confidence that we're going to continue to expand margin as we go from Q3 into Q4.

Speaker Change: And that's a sustainable trend for us.

Speaker Change: And then expansion on the margin that's on our core five basis points right not the record it.

Speaker Change: I think you will see that I think youll see that in both as we go from Q3 to Q4.

Speaker Change: So even above the $2 68.

That's right.

Speaker Change: Okay, that's great.

Speaker Change: Great. Thanks Marty.

Speaker Change: Okay.

Speaker Change: Your next question comes from the line of Brett Robertson with hub group. Please go ahead.

Brett Robertson: Hey, good afternoon wanted to just to follow up on that $2 68, and talk about the margin from here and I know you had I believe it was three basis points due to payoffs and core and expansion of eight basis points can you talk maybe a little bit more about the drivers that you expect in <unk> and then it sounded.

Brett Robertson: Like you were pretty comfortable with deposit betas, and just wanted to dive in a little bit more on.

Brett Robertson: Youre lowering deposit rates post that first fed cut.

Speaker Change: Sure, Yes, so keep in mind that so far actually terms, so far actually had a rate cut in it by September 1st I mean, it was 15 basis points down from our early partners. So we actually saw some impact in the loan book in September and then we were able to get both wholesale and <unk>.

Speaker Change: Deposits down through the end of the quarter.

Speaker Change: And still ended up with a really good result at the end of the quarter and so that only gets a little bit better when you get into the fourth quarter.

Speaker Change: So those repricing dynamics, we understand very well and are very comfortable with with how that plays through.

Speaker Change: There's always some denominator effects that can happen if.

Speaker Change: Yes.

Speaker Change: Overall trading moves around but we feel very confident about how that will play out over the next over the next quarter.

Speaker Change: Brian we talked a lot about the loan to deposit book, but don't forget we've got a fixed rate security portfolio. That's got a three and a half year plus or minus duration. That's funded with floating rate liabilities, that's going to move down commensurate with every fed staff and so that's part of what's behind the confidence of what's going to happen with net interest margin.

Speaker Change: Interest income so everything I just talked about is still on top of.

Speaker Change: The fixed rate securities are still repricing up a portion of the fixed rate loan book, that's still repricing up.

Speaker Change: That stuff still happening as it has for the last couple of quarters. So that will continue to be supportive.

Speaker Change: Okay. That's helpful.

Speaker Change: And then the other thing was just I'm curious.

Speaker Change: I think people kind of are you guys is very selective M&A players and.

Speaker Change: And maybe there'd be some others that might be more aggressive.

Speaker Change: And you and I am just curious to hear your thoughts on what you see playing out in the environment conversations.

Speaker Change: What youre seeing activity wise or.

Or maybe chatter wise with with some of your potential partners.

Speaker Change: Yeah, just I mean, just broadly I think that we're interested in the right opportunity.

It's been difficult to find we're not interested in somebody who has got a large concentration in commercial real estate because of our discipline there.

Speaker Change: We value core deposits, we value deposit franchises.

Speaker Change: I think those are really key to banking.

Speaker Change: And there's just not a lot to kind of fit the size profile and exactly what we're looking for and so.

Speaker Change: That remains.

Speaker Change: Possibility to extent that theres something available, but that's not how that really we've always view that as kind of a cherry on top of the Sunday, we're not our strategy isn't to buy something to achieve the next level of growth. We're so focused on organic growth.

Speaker Change: We have nothing we're never successful buying another bank, we still think we're going to perform very well because of our emphasis on organic growth.

Speaker Change: But we are not.

Speaker Change: Out of the market as it relates to things that could happen from an acquisition perspective. They are just low probability events and for which there is not a lot that really fits our criteria today.

Speaker Change: Okay.

Speaker Change: Fair enough I appreciate all the color.

Speaker Change: Thank you.

Speaker Change: Yes.

Speaker Change: Your next question comes from the line of Woody lay with <unk>. Please go ahead.

Speaker Change: Hey, Thanks for taking my question I wanted to do.

Speaker Change: On the deposit side and more specifically the time deposit portfolio, which just curious how much of that portfolio re prices in the fourth quarter and and if you could sort of walk through the repricing dynamics there.

Speaker Change: Yes, that's largely a consumer book and so that's got a tail that goes out well over a year or so so it's not a huge amount.

Speaker Change: On any given months because it's so granular.

Speaker Change: So that in and of itself is not going to have a large impact on.

Speaker Change: The pricing characteristics of the deposit book.

Speaker Change: Got it.

Speaker Change: And then maybe just one follow up on on CRE. It sounds like CRE activity is picking up a little bit and you have a clear advantage relative to competitors just given the concentration levels could you give us some color on what youre seeing in terms of the loan competition in this space.

Speaker Change: Yes, I mean, I think there is a little less competition, but there is a lot.

Speaker Change: There's also a few deals I mean, some of those customers that we've been with for a long time are moving more cautiously and slowly.

Speaker Change: So thats impacting that a little bit, but clearly there is there is some advantage that we have by being able to be in the market when others are still.

Speaker Change: Im trying to manage our concentration levels.

That's part of why we're confident that we've never had trouble filling that bucket and so we will continue to prospect and to grow existing customers, principally with an occasional new customer mix in there.

Speaker Change: But I am confident that over the next 12 to 18 months, we will we will refill that bucket that's never been an issue that we've worried about growing.

Speaker Change: Alright, it sounds good thanks for taking my questions.

Speaker Change: As a reminder, if you have dialed in and I would like to ask a question. Please press star one on your telephone keypad, you raise your hand and joined the queue.

Speaker Change: Your next question comes from the line of Matt Olney with Stephens. Please go ahead.

Matt Olney: Yes. Thanks for taking the question guys just wanted to go back on the investment Securities portfolio.

Matt Olney: Marty I think you mentioned that there's still pricing higher than near term any more details there as far as the cash flows in our portfolio.

Matt Olney: Which you have been buying more recently and then just the overall size of that portfolio any any plans to change the size of that.

Matt Olney: Yeah.

Speaker Change: Sure Yeah, we saw about $6 million to $760 million of cash flow come in this quarter and reprice and so that repriced up about 115 basis points during the quarter.

Speaker Change: And kind of that level is about where you can expect I expect that over the Q3 is a little bit higher more like $650 million a month, sorry at quarter per quarter over the next year is probably a good run rate to think about how much of that happens going forward and in terms of what.

Speaker Change: We're buying I mean, it's very similar to what we bought in the past sort of.

Speaker Change: Three four year duration paper that is kind of at the shorter end of the.

Speaker Change: The mortgage securities spectrum.

Speaker Change: Okay got it thanks for that Marty and then I guess I know some of the movements on the balance sheet at quarter end can be a little bit noisy, but I guess the borrowing position came down pretty hard at September 30th below $5 billion is that a good assumption.

Speaker Change: For the fourth quarter or any color on that line for <unk>.

Speaker Change: Yeah. So you got two things going on there that brought that down at the end so number one.

Speaker Change: That deposit growth that we had during the quarter I mean that was the big driver and so that should be durable.

And then.

Speaker Change: Second just are trading account is always up in the middle of the month and then lower at the end of the month, just because thats, how the mortgage backed security settlements that cycle works.

Speaker Change: So that will usually be a little bit lower ended months on average, but the big driver there is.

Speaker Change: As the deposit so that that may stay.

Speaker Change: That should grow you should seek loan growth and so that's the.

Speaker Change: Wholesale up a little bit.

Speaker Change: Over time as a trend but.

Speaker Change: I would say that thats materially a good starting place.

Speaker Change: Okay.

Speaker Change: That's all from me guys. Thank you.

Speaker Change: Thank you Matt.

There are no further questions at this time I will now turn the call back to Stacey <unk> for closing remarks.

Stacey: Thank you everyone for joining our discussion today again this quarter, we've maintained consistent earnings growth benefiting from the net interest margin expansion and exceptional asset quality we have.

Stacey: Proven over a long history that we have both strong risk management practices.

Stacey: Rates to credit interest rate and liquidity and capital.

Stacey: I'll also demonstrating a higher long term earnings profile, our diverse business model has proven resilient through many business cycles. We believe the economic resiliency of our <unk> footprint, coupled with our high levels of tangible capital and liquidity will be the raw material for our future growth. We appreciate your interest in <unk> financial and your willingness to spend time with us This afternoon.

Stacey: Please reach out to Heather King if you have any questions at <unk> at <unk> Dot com.

Speaker Change: Thank you. This concludes today's call you may now disconnect.

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