BOK Financial Corporation (BOKF) Earnings Call Transcript

Greetings. Welcome to BOK Financial Corporation's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the presentation over to Heather King, Director of Investor Relations for BOK Financial Corporation. Please proceed.

Good afternoon, and thank you for joining our discussion of BOK Financial's Second Quarter 2026 Financial Results. Our CEO, Stacy Kymes, will provide opening comments, cover the loan portfolio and related credit metrics. Scott Grauer, Executive Vice President of Wealth Management, will cover our fee-based results. And our CFO, Marty Grunst, will then discuss financial performance for the quarter as well as our forward guidance. Slide presentation and press release are available on our website at bokf.com. We refer you to the disclaimers on Slide 2 regarding any forward-looking statements made during this call. . I will now turn the call over to Stacy Kymes, who will begin on Slide 4.

Thank you, Heather. We appreciate you joining the call this afternoon. We are pleased to report earnings of $176.5 million or EPS of $2.92 per diluted share for the second quarter. Adjusted for the net gain related to the exchange of the VISA B shares and a small amount of repositioning in the securities portfolio, earnings were $156.5 million or $2.59 per share. . This was an excellent quarter and one that reflects how we are positioning the franchise for continued growth. We delivered strong results, including record quarterly loan growth, record quarterly fiduciary and asset management revenue. continued expense discipline with credit remaining outstanding. During the quarter, total loans grew 3.4% sequentially or 13.7% on an annualized basis. This resulted in a quarterly increase of $896 million, representing record new loan production in a single quarter of the company's history. Year-over-year, loans have grown an impressive 11.5%. Importantly, nearly 70% of year-over-year growth has been in our C&I portfolio. This reflects both the strength of our customer activity and the benefits of the investments we've made over time. Our fee-based businesses contributed meaningfully with record quarterly revenue in our fiduciary and asset management business. During the last call, we discussed aligning expenses with market opportunities and customer needs. Expenses this quarter remained well controlled with total operating expenses, excluding deferred compensation being down slightly. Notably, this was achieved while making significant investments in talent during the quarter. Capital levels remain very strong, with tangible common equity at 9.6% and CET1 at 12.9%. Finally, we've talked over the past year about disruptions in the markets we serve. Periods like this tend to create opportunities for organizations like ours, those that are strong, stable and focused on long-term growth. Historically, these environments have represented some of our best opportunities. The current period represents another such opportunity. We've added more than 25 new teammates as a result of the disruption across our markets. More than 20 of those additions were in Texas, a market where we've been deeply involved for decades. We also saw success hiring in our Colorado and Arizona markets. This talent acquisition strengthens our ability to serve customers across the spectrum from large corporate relationships to small business. Importantly, the loan activity this quarter was independent of these additions. As we've discussed, C&I is a longer sales cycle, and we expect to see the benefit build over time. We're excited to welcome this talent, and we are confident in the role they will play in driving future results. And now I will cover our loan portfolio in more detail, starting on Slide 6. As I mentioned before, total outstanding loans grew nearly $900 million or 3.4% this quarter and were up 11.5% year-over-year. This growth was broad-based across our business lines and our footprint. Our core C&I loan portfolio, which represents our combined services and general business portfolios grew 3.9% sequentially and is up 11.1% year-over-year. This level of growth in core C&I loans doesn't happen by accident. Our growth is a result of a disciplined long-term strategy centered on investing in top talent and deepening customer relationships. As we've often said, growth powers relationships, the momentum we're seeing today is a direct reflection of the trust we've earned from our customers. Healthcare loans increased 3.2%. As we indicated last quarter, activity levels and pipeline strength in this segment were exceptionally strong entering the second quarter. The growth we're reporting today reflects the successful execution of opportunities that have been building for some time. Energy loans grew again this quarter, increasing 1.6%. Mortgage finance also contributed meaningfully to loan growth during the quarter, with current outstanding balances of $452 million, an increase of $224 million. As of quarter end, we had active warehouse facilities of $870 million in commitments. This business continues to build momentum and achieved an important milestone during the quarter by reporting its first month above breakeven. Operating at a net profit less than a year after funding our first loan is a notable accomplishment by the team. Our CRE portfolio grew marginally compared to the prior quarter. but is up 6.6% year-over-year. Moving to Slide 7. Once again, credit quality remains excellent. NPA is not guaranteed by U.S. government increased $2.8 million to $55 million. The resulting nonperforming assets to period end loans and repossessed assets was consistent with the prior quarter at 20 basis points. Committed criticized assets decreased this quarter, remaining very low relative to historical standards. We had net charge-offs of just $500,000 during the quarter, averaging 3 basis points over the last 12 months. Once again, the limited charge-offs we've seen show no patterns or concentrations that raised concerns around specific business lines or geographies, and we continue to have no exposure to private credit facilities. In the long term, we expect credit metrics to normalize. However, we expect net charge-offs to remain below historical averages in the near term. Consistent with the prior quarter, no provision was required. Improvement in economic forecast assumptions were offset by the impact of loan growth. Our combined allowance for credit losses is a healthy $323 million or 1.1% of outstanding loans. Overall credit performance this quarter remains very strong. And with that, I'll turn the call over to Scott.

Thank you, Stacy. Turning to our operating results for the quarter on Slides 9 and 10. Fee income was a solid contributor to total revenue again this quarter. While total fee income was lower than the prior quarter, results remained healthy and reflected the strength and diversity of our fee-based businesses. Total fee income was $202 million, declining $7.8 million sequentially. Total trading revenue, which includes trading-related net interest income decreased $9.7 million to $25 million. As a reminder, we saw some mix shift from trading fee income into trading net interest income during the quarter as the yield curves steepened. . From an activity standpoint, results in our fixed income business were impacted by lower customer activity, particularly as longer-term rates increased from March through May. As market conditions began to stabilize, activity improved and we saw better trading performance in June. Overall, our activity levels were consistent with broader industry trends. which also saw a decline in MBS trading volumes during the quarter. Elevated long-term rates are also affecting our mortgage banking business with revenue down $2 million compared to the prior quarter. Syndication revenue grew $3 million sequentially, supported by robust activity and continued customer demand, resulting in a record second quarter for the business. Turning to Slide 10 to discuss our asset management and transactions businesses. As you can see, these businesses continue to serve as consistent fee generators, delivering steady, long-term growth and diversification to our revenue base. The biggest standout this quarter was fiduciary and asset management revenue, which delivered record-setting quarterly results, growing $4.5 million over the prior quarter. This reflects higher trust fees along with seasonal tax preparation fees. AUMA grew $5.7 billion during the quarter to $129.3 billion led by increased market valuations and continued customer expansion. Looking at annual growth, which is not affected by seasonality, AUMA increased $11.4 billion compared to the same period last year. representing an annual growth rate of nearly 10% and highlighting the strength of customer activity. Overall, our fee-based businesses continue to demonstrate the value of diversity. While individual categories may fluctuate from quarter-to-quarter, the underlying franchise remains strong and capable of generating consistent long-term growth. With that, I'll hand the call over to Marty to cover the financials.

Thank you, Scott. Turning to Slide 12. Net interest income increased $9.3 million and reported net interest margin grew 1 basis point. Excluding trading, core net interest income increased $6.5 million and core margin decreased 2 basis points. Core margin and NII benefited from loan and deposit growth as well as fixed rate asset repricing. However, the offset was a 3 basis point negative impact related to cash margin we posted on behalf of our energy derivative customers as oil prices moved higher. This impact is temporary in nature. As energy prices have declined, the majority of that margin has already been returned. This item is, of course, market sensitive. During the quarter, we recognized a pretax gain of $30.9 million on the exchange of our VISA B shares. We used a portion of this gain to reposition a small amount of the securities portfolio, realizing $4.6 million of pretax losses. This will improve yields on the $268 million of reinvested securities going forward. Turning to Slide 13. Total expenses increased $7.5 million during the quarter. The increase was driven by an $8.9 million rise in deferred compensation expense, which was offset by gains recorded in other gains and losses. Excluding deferred compensation, total expenses declined $1.4 million, reflecting a $6 million decrease in personnel expense partially offset by a $4.6 million increase in nonpersonnel expense. The decline in personnel expense was primarily driven by lower cash-based incentive compensation, reflecting reduced trading activity as well as seasonally lower employee benefits costs. The increase in non-personnel expense was largely attributable to higher business promotion costs. Slide 14 provides our outlook for full year 2026. Similar to last quarter, our guidance assumes no rate changes from the Federal Reserve and longer-term rates aligned with the current forward curve. Loan growth in the first half of 2026 has been strong and well diversified across the portfolio. We are increasing our guidance as we now expect full year 2026 loan growth to be over 10%. On total revenue, our guidance of mid-single-digit growth is unchanged. However, we now expect to be in the upper portion of that range. As a reminder, with this somewhat steeper rate curve versus a quarter ago, we will see the mix of trading-related revenue shift from fees to net interest income. Consequently, we expect net interest income to be in the upper half of our range of $1.42 billion to $1.45 billion, and we expect fee income to be in the lower half of our range of $820 million to $845 million. On expenses, we continue to anticipate growth in the low single digits and likely towards the lower end of that range. The Visa gain we recognized in the second quarter will impact the full year efficiency ratio, and we now expect that metric to be approximately 62%. If adjusted for the Visa gain, our guidance for that ratio would be near 63%, unchanged from the prior quarter. Turning to credit. Portfolio quality remains very strong. We continue to see very low levels of nonperforming assets and no tangible evidence of broad-based normalization at this point. We believe provision expense will be below $20 million for full year 2026. 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.

[Operator Instructions] And your first question comes from the line of David Chiaverini with Jefferies.

So to start on the net interest margin, up a basis point here in the second quarter. How should we think about the go forward on the NIM? .

Yes. Thanks for the question, David. So we feel good about see-- we're happy with the basically stable margin in the quarter. We see drivers to see some margin expansion for the back half of the year, kind of the typical drivers that have been long-standing positive securities portfolio, fixed rate asset repricing. -- for both securities and fixed rate loans. And then that derivative margin piece, that was a negative 3 basis points going into Q2, and we're going to get that back over the next quarter or 2, a lot of that margin has been returned to customers already or returned to us already. So those are high confidence items. And then typically, we have DDA growth in the back half of the year as well. So there's some pretty good support to see margin expansion back half of '26.

Great. And related to that, deposit pricing is a hot topic this quarter. Can you talk about the competitive environment and where deposit costs could trend going forward?

Yes. So deposits are always competitive. There's really never where deposits aren't highly competitive. They are today. They have been previously. I would note that the barometric pressure is probably rising there rather than falling. But within our market, we're really not seeing anything irrational. I mean, there are some areas that have a rational, but we're not seeing a rational in our markets. And just as we think about deposit pricing and the guidance, we're not relying on any improvements in that rate. We'll seek it to get improvements in that cost of funds. But we're not relying on improvements there to drive our guidance.

Just a reminder, we still have relative to others, low loan-to-deposit ratio. So that gives us a lot of flexibility in managing rate-seeking deposits. .

Next question comes from the line of Peter Winter with D.A. Davidson. .

Just on loan growth. If I think about loan growth for the industry, it's been coming in better than expected, but a lot of the banks that are giving updated guidance, it does assume growth to moderate in the second half of the year. But when I look at your updated guidance of period-end loans over 10% and pipeline consistent with the first half of the year, it doesn't seem like you're expecting a slowdown in the second half of the year.

This is Stacy. I think -- look, we grew loans 11.5% year-over-year, very diverse with not a big contribution from real estate and energy, 2 big drivers for us historically. They're hard to forecast. So it's hard to know exactly what those numbers are in the last half of the year. We still have a lot of tailwind to come from mortgage finance. I think that's going to help us out. There's some seasonality there that could make some of that a little bit lumpy. But if you look kind of straight through to the end of the fourth quarter, I think you've got really positive tailwind there. . But we're not -- we feel comfortable with the guidance that we provided based on some things that are intrinsic to us. If I look at sales pipelines and frankly, at this point, they're not as strong as they were heading into the second quarter, but they're stronger than they were heading into the first quarter. And so obviously, we had a record second quarter loan production the pipelines remain very strong, and we remain very confident in our ability to grow even absent the talent acquisitions we've done, which should only add to that in some future period.

Got it. Very helpful. And then on credit, what can you say? It's been excellent. You've got peer-leading low net charge-offs consistently. And rightly so, you've taken a 0 provision 6 out of the 7 quarters. But the ACL ratio at [ 119 ], it has reached the CECL day 1 level. If we assume a stable economy, stable credit trends, would you let the ACL ratio continue to fall? .

Peter, this is Stacy. Look, we're -- our credit metrics are better than CECL day 1. If you look at criticized levels and classified levels, nonperforming levels and things like that. And so given what we know about credit today, then the percentage could continue to fall.

Okay. And then just one quick housekeeping. Does the fee income outlook include the $31 million is a gain and thus the total revenue comment likely coming in at the upper end of mid-single digit range. Does that include the $31 million?

Yes. So Peter, in for the total revenue guide that does include both that gain, and there was another gain last year. So both in the '25 number and the '26 number, we both have those in there. That's correct. .

Your next question comes from the line of Jon Arfstrom with RBC. .

Okay. Scott, maybe a question for you. There's been maybe some hand-wringing over the trading fees this quarter. How unusual is that environment in your mind? And can you help us a little bit with what June and maybe July look like? Is it -- does the business in aggregate total trading revenue kind of trend back to that mid-30s type level?

Yes, sure. So good question. So as we -- as I commented, really where we got off to a solid start quarter 1, we saw in March and mostly in April and May, we saw a significant dislocation. And as I mentioned, we saw an improvement in June. So really the kind of the key contributors there when you think about our trading activity, it's nearly 100% fixed income. So it's mortgage-backed securities, munis corporates and treasuries in that order with mortgage-backed securities being at the dominant chunk of that. So as the dislocation and uncertainty has occurred in the markets, -- that's what causes the challenges there with that segment. But we did see an improvement in June versus the previous 2 months.

Okay. So may potentially back to normal or an improvement from what you saw earlier in the quarter, certainly. Okay. .

Jon, I can add. We've been in the fixed income trading business for decades. And every once in a while, you get 1 of these dips and they're inevitably followed by a bounce back. It's a solid customer base that we've got a long history with.

Yes. Okay. Good. On the expense outlook, I see the guidance it looks good. Marty, can you maybe talk a little bit about where you're finding opportunities to hold the line on expenses and then maybe touch a little bit on the hiring that you're doing if there's more to come and kind of the profile of what you're looking for and who you're hiring?

Yes, I'd just say on expenses, if you -- let me give you a little bit of color on the expenses and talk a little bit about deferred comp and then kind of get back to that question. As a reminder, there's 2 components in deferred comp and they're inextricably linked because they come from the same source. They are -- there's actually specifically invested deferred compensation. Those investments are mark-to-market every quarter and that gain or loss shows up in the other gains and losses item that we call out on Slide 13 in the footnote, $8.89 million in gain to. That gain plus some trivial administrative impacts is how the $9.1 million of deferred comp expense number is determined. So by definition, those must net effectively to 0 or something close to 0 each quarter. . So to get an accurate understanding of the core run rate of the company, you've got to adjust for both those impacts or neither of them which I appreciate the fact that, John, you did this quarter. But to understand the core trends in NIE, sorry for that long preamble, but you need to understand that context as well. So personnel expense, was down excluding deferred comp by $6 million, 2 drivers there, though, with trading revenue down, trading commissions were commensurately down. And then a seasonal decline in payroll taxes is the other piece that explains that $6 million decline quarter-over-quarter. So basically, kind of the base regular compensation was really steady quarter-over-quarter. Now as you start from kind of that starting place, when you look over the next couple of quarters, you will see some expense increase within the personal items just due to the ads. And -- but importantly, that's contemplated in the expense guidance that we provided.

Okay. And Stacy, this is middle market commercial lenders, that's who you're after?

No, we're -- we've hired kind of a range from commercial to corporate to small business. substantially all revenue producers, not exclusively, but substantially all our revenue producers. Obviously, the disruption in our key markets has created an opportunity, and it's a playbook we've used many times in the past. And -- we've got a great brand and excited to welcome new teammates to help us grow the company. .

Next question comes from the line of Matt Olney with Stephens.