BOK Financial Corp
NASDAQ:BOKF
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BOK Financial Corp
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Greetings and welcome to BOK Financial Corporation Second Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I’d now like to turn the conference over to Joe Crivelli, Senior Vice President, Investor Relations. Please go ahead.
Good morning, and thanks for joining us. Today, we’ll hear remarks about the quarter from Steve Bradshaw, CEO; Steven Nell, CFO; and Stacy Kymes, EVP, Corporate Banking. Marc Maun, EVP and Chief Credit Officer has also joined us for the Q&A session. Marc and Steven are both part of the executive leadership team managing the CoBiz acquisition. PDFs of the slide presentation and press release are available on our website at www.bokf.com.
We refer you to the disclaimers on Slide 2 as it pertains to any forward-looking statements we make during this call.
I’ll now turn the call over to Steve Bradshaw.
Good morning. Thanks for joining us to discuss the second quarter 2018 financial results. As shown on Slide 4, this was the best quarterly performance in the history of BOK Financial, breaking a record that’s stood for six years and performance was strong across all operating units.
Net income was $114.4 million, or $1.75 per diluted share, up 8% from the previous quarter, and up 30% from the same quarter a year ago. Loan growth was strong and deposit pricing remains relatively stable in our footprint, which has resulted in continued NIM expansion and growth in net interest income. And we’re carefully managing our expenses to ensure that we continue to drive earnings leverage.
In addition, the credit environment continues to be stable and there was no provision for loan losses this quarter. All in all, a very good performance from our entire BOK Financial team.
In light of the strong financial performance thus far in 2018, our expectation for continued earnings growth this year and our desire to continue to optimize our capital base, the company’s Board of Directors approved an 11% increase in the regular quarterly dividend to $0.50 per share.
Turning to Slide 5. This quarter was also a record quarter for loan growth with an increase of over $665 million in period-end loan outstanding. It was also the highest increase on a percentage basis in recent memory.
We ended the quarter with over $18 billion in loans outstanding for the first time in company history. More important, we saw broad-based strength across all major loan categories. We continue to feel optimistic about loan growth for the balance of the year due to the strong commitment growth we’ve seen over the past several quarters and continued momentum, particularly in energy and commercial real estate.
Assets under management was relatively flat on a sequential basis as asset flows and market fluctuations largely offset each other. I’ll provide additional perspective on the quarterly results at the conclusion of the prepared remarks.
But now I’ll turn the call over to Steven Nell to cover the financial results in more detail. Steven?
Thanks, Steve. On Slide 7, net interest income for the quarter was $238.6 million, up $18.8 million, or 8.6% from the first quarter. Non-accrual interest recoveries were $5.3 million in the quarter, compared to $1 million in the first quarter. But the bulk of the growth in net interest revenue was driven by a strong loan growth, along with some margin expansion.
Net interest margin was 3.17%, up 18 basis points from the first quarter. Loan yields increased 35 basis points and deposit cost increased 9 basis points. Non-accrual interest recoveries accounted for 7 basis points of the margin increase and the unwinding of the Federal Home Loan Bank/Fed trade accounted for another 4 basis points.
Non-accrual interest recoveries impacted first quarter net interest margin by 1 basis point. A benign credit environment, along with declines in non-accrual and potential problem loans led to our decision to take no loan loss provision this quarter. We did not release reserves in the second quarter because of the strong loan growth.
On Slide 8, fees and commissions were $158 million, relatively flat on a sequential basis and down 5.6% compared to last year second quarter. Brokerage and trading revenue was down sequentially and year-over-year. We attribute this primarily to the decline in mortgage production environment, leading to a decrease in our typically robust mortgage-backed trading activity.
Transaction card revenue, which is seasonal in nature was up 4.8% compared to the second quarter of 2017. The majority of this increase was due to strong growth in transaction volumes, which in turn was driven by higher customer account. Fiduciary and asset management revenue was down slightly on a sequential basis as the second quarter seasonal increase in tax preparation fees was largely offset by lower trust fees.
Mortgage banking revenue was up 1.2% sequentially due to relatively steady production volume combined with higher gain on sale margins. Once again this quarter, the increase in the margin was due to a shift – a mix shift from our online channel to our direct channel, higher originated mortgage servicing rights values in the current higher-rate environment, as well as the internal changes we’ve made to better manage and monetize our production pipelines.
Turning to Slide 9, we continue to carefully manage operating expenses to deliver earnings leverage. In fact, with the second quarter efficiency ratio of 61.68%, we’re closing in on our 60% efficiency ratio target ahead of expectations. Non-personnel expense was up slightly due to higher professional fees and mortgage costs. This was largely offset by a decrease in personnel expense due to the decrease in a stock option compensation expense and lower payroll taxes.
We have about $1 million of acquisition-related expenses in the quarter and about $700,000 in severance associated with a right-sizing initiative in the mortgage business, which will generate about $3 million a year in cost savings.
On Slide 10, has our guidance for the balance of 2018. We are increasing our loan growth forecast to high single-digit growth for the year. If you remember, coming into the year, we thought it would be the second-half before general C&I and commercial real estate contributed to growth in a meaningful way. But the first-half of this year played out better than we expected, with growth in both of these businesses ahead of schedule, combined with continued strength in energy and private banking. So we’re now comfortable calling up our loan growth forecast to high single digits.
With the pace of growth in the second quarter and continued momentum through the early part of the third quarter, it’s not out of the question that we can get to double-digit loan growth, but we’re choosing to be conservative in our guidance at this time. We expect available for sale securities to be flat to slightly down as they were in the first and second quarters.
We expect continued modest growth in net interest margin through the rest of the year with rate hikes in September and December embedded within our forecast and assuming continued active management and control of deposit pricing. We’re increasing our net interest revenue forecast to low double-digit growth for the full-year, reflecting the acceleration of loan growth and continued net interest margin expansion.
We now expect revenue from fee-generating businesses to be flat to slightly down for the year. The mortgage production environment is obviously challenged right now and we’re holding our own and benefiting from higher gain on sale margins. The impact of our mortgage trading business in brokerage and trading has been noticeable.
We continue to expect low single-digit expense growth for the full-year. Provision levels moving forward will be influenced by loan growth and any changes in asset quality. We are forecasting a blended state and federal effective tax rate in the 22% to 23% range for 2018.
Now, a word on CoBiz’s integration costs. As we mentioned in the merger announcement, we expect $61 million of pre-tax costs associated with the CoBiz deal. The largest component of these expenses such as change in control payments and advisory fees will be recognized at closing, which we expect in the fourth quarter. Most of the balance will be realized at conversion in the first quarter of 2019.
As you’re thinking about your modeling, we think it’s reasonable to expect approximately 70% of the merger-related cost to fall in the fourth quarter and 30% in the first quarter of 2019. There will be some modest amounts in the third quarter of this year, probably along the same lines as the amount we recognize this quarter.
Stacy Kymes will now review the loan portfolio in more detail. I’ll turn the call over to Stacy.
Thanks, Steven. As you can see on Slide 12, total loans were up 3.8% compared to the first quarter, or over 15% annualized. This is the first time in our organization’s history that we surpassed $18 billion in loans outstanding and represents the strongest dollar volume of loan growth ever achieved in a quarter.
Looking at some of the items in this table, you can see the strength was broad-based. Energy was up 6% sequentially and 10.5% year-over-year. General C&I, which includes services, wholesale/retail, manufacturing and other C&I, was up 4.6% sequentially, or over 18% annualized. CRE was up 5.9% sequentially and personal or private banking was up 3.6% sequentially and 9% year-over-year.
In energy, we’re clearly benefiting from our commitment to the industry during a downturn, which differentiated us from other banks. As a result of that commitment, we’re getting the first call and first look at the strongest opportunities in the energy space. We’ve definitely seen renewed momentum in general C&I, which we attribute to clarity on the tax reform front, a better overall business environment in a more business-friendly regulatory environment.
However, we’re carefully watching the impact of tariffs on our middle-market business, especially in Texas. Our commercial real estate team has now been back in production mode with capacity under our internal concentration limits and it’s delivering good growth across the board.
Healthcare has produced good growth for us over the past few quarters, but was flat in the second quarter. We wouldn’t read too much into this as we have a very healthy pipeline and are optimistic about growth in this business for the balance of the year. In each of these lines of business, we’ve seen dramatic commitment growth and a strong start to the third quarter, which pertains well for continued loan growth in 2018.
On Slide 13, credit quality remains strong. Non-accruals were down 8% during the quarter. Annualized net charge-offs were 24 basis points, an uptick from the previous quarter, but over half of the second quarter charge-offs were from one MG deal that has been on non-accrual since March 2016 and for which we had previously booked a specific reserve.
Year-to-date, net charge-offs were 14 basis points. Our loan loss reserve remains appropriate at 1.21% of period-end loans and leases.
I’ll now turn the call back over to Steve Bradshaw for closing comments.
Thanks, Stacy. I believe that the quarter’s results really speak for themselves. The broad-based earnings power of BOK Financial and the strength of our business model was really on full display in this record quarter. We’re delivering strong loan growth, net interest margin continues to increase as does net interest income, our expense discipline is driving earnings leverage and credit quality remained strong.
As evidenced by the revisions to our 2018 guidance, we continue to be optimistic about earnings growth for the year. We’re seeing record loan commitment growth across the business, margin expansion and low deposit rates are driving growth in net interest margin and net interest income, combined with continued strong execution and expense management from where we sit today, 2018 looks even better than what we had originally forecasted.
We’re very excited about the acquisition of CoBiz that we announced in June and we have long viewed CoBiz as the premiere franchise to buy in our footprint. And believe that when we combine BOK Financial strong Denver and Phoenix teams with those of CoBiz, we will be an even greater force to be reckoned within those markets.
In addition, the ability to spread the investment we’ve made in systems and technology across a larger base of customers and revenue will drive continued earnings leverage even as we’re approaching our 60% efficiency ratio goal on a standalone basis.
We discussed the financial merits of the transaction at length back in June, but it really bears repeating. The CoBiz acquisition drives high single-digit EPS accretion in 2019 and 2020 and is accretive to return on equity, return on assets, efficiency ratio and net interest margin. It drives an internal rate of return of greater than 20%, and does all of that with very manageable earn back of tangible book value dilution.
We expect the transaction again to close in the fourth quarter, with integration in the first quarter of 2019. We think that culturally, BOK Financial and CoBiz are very similar organizations, which certainly gives us the leg up as cultural integration is the most important factor in the long-term M&A success.
This has been evident in our early meetings and discussions about integration with the broader CoBiz team. All told, this was an excellent quarter for BOK Financial. We remain committed that BOK Financial is in the sweet spot of the industry, both from a business mix and geographic standpoint.
I think this quarter really demonstrates some compelling reasons to support our view. Our loan growth was a record for the company, the growth is diverse and momentum is continuing thus far in the third quarter.
While we’re not immune to rising deposit cost, to date, deposit costs have remained stable in our footprint. This is driving strong growth in net interest margin and net interest income. And while deposit dollars have been relevantly flat for BOKF over the past several quarters, this is because of our enviable liquidity position.
Our loan and deposit ratio of 81% at quarter end provides us with the flexibility to not have to price up to chase deposits. Expenses are well controlled at BOK Financial and we continue to deliver excellent earnings leverage by sticking to our discipline of ensuring that expense growth remains less than half of revenue growth. And our loan portfolio is in excellent shape with no signs of credit weakness in our portfolio.
With that, we will take your questions. Operator?
Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Brady Gailey with KBW. Please proceed with your question.
Hey, good morning, guys.
Good morning.
Good morning.
So can we start off just with mortgage? If you look at the headwinds from mortgages for you guys, is it more volume-driven? Is it more of gain on sale-driven? And then, you took a little bit off costs out of there this quarter. Do you think there will be additional costs taken out in the future?
This is Steven, Brady. It’s probably volume-oriented. I mean, with rising interest rates, we were able to hold volume relatively flat. It was down just a little bit. And usually, the second quarter is a pretty good quarter for mortgage originations. So I think it’s going to be volume-driven more than anything else. The margin was actually better this quarter. It improved for a number of reasons. I mean, a little bit higher interest rates.
So our own MSR values were a little higher. We had better execution in our secondary marketing activities. We had a little bit better mix relative to retail versus HomeDirect. Retail carries a better margin. So, I think we can manage that piece of it. I think it’s going to be more volume-driven than anything else.
In terms of expenses, I mean, we’re always looking for ways to become more efficient. You saw that this quarter, we were able to take some expense out, which will have a nice run rate benefit on an annualized basis of about $3 million. We’ll continue to look for ways, nothing specific at this point, but we’re always managing that business based on what kind of volumes and activities you see in the market.
All right. And then in your guidance, the slightly lower forecast for fee income, was that really just associated with mortgage, or was there other fee income businesses that brought that number down a little bit?
Well, you saw some softness in our trading and brokerage activity. I think, a lot of that was market-driven. You kind of have to break that down a bit. I mean, some of our mortgage-backed trading activity was softer in the second quarter. I don’t know what that will look like in the third and fourth quarter. With continued rising interest rates, that may be soft or softer than we’ve seen in previous years. That’s the nature of our business.
We built our bank around diversity of revenue. Two or three years ago, the whole fee business categories were carrying our bank, so to speak. Now you’ve got great loan growth that we’ll talk about, I’m sure, and that kind of rebalances some of our revenue stream.
So, again, it just depends on what the market gives us. And I look at – I look out in the future and think that we can grow fee revenue just not as fast as our lending activity is at this point in the cycle.
All right. And then finally for me, the reserve, if you look at a year-over-year, it’s come down from about 1.5%, down about 1.2%. Is there any reason to think that, that won’t go lower going forward, even at 1.2%, you’re still above the average related to your peers. I know it will optically come down with CoBiz in the mix. But outside of that shift in reserve continue to drift down from here?
I think it will. I mean, when you look at the drivers of what the inputs into that model, I mean, you’ve got potential problem loans that are down 37% this quarter. You’ve got class – other classified and criticized categories down. You’ve got non-accruals down. But you did have a little bit higher charge-off level, but I think it related to one credit that we had already impaired and had covered in our reserves. So I think, we expect that to drift down largely through loan growth.
All right, great. Thanks for the color.
The next question is from the line of Jennifer Demba with SunTrust. Please proceed with your question.
Thank you. You guys are producing good loan growth. Can you just talk about the level of competition you’re seeing? We’ve seen some companies’ loan growth hampered by increased competition. Can you just talk about what you’re seeing within your markets and within the asset classes you’re growing?
Jennifer, this is Stacy. Obviously, competition is extraordinary strong depending on the segment. Clearly, one of the areas that has been outsized for us, I think, relative to peers is energy that can – should continue to be a benefit to us, not everybody is competing in that space. There’s still enough time, not enough time. It’s probably past for people to get as comfortable, although competitors are coming back into that space.
I think that’s a differentiator for us relative to peers in terms of growth outlook going forward. Otherwise across C&I categories and even inside of CRE, there’s very strong competition, both in terms of pricing and we are seeing some structure pressure come in as well and being more selective there as we look at those types of opportunities.
But there’s no shortage of competition, lot of competition, particularly around funded debt. And when you can get immediate outstandings on your balance sheet, that is hypercompetitive from our perspective. But I wouldn’t say, it’s – I mean, it’s always competitive. The market is rewarding loan growth. We had a very strong quarter for loan growth. Everybody sees that and wants that, and so competition is very strong.
Thanks, Stacy.
Our next question is from the line of Michael Rose with Raymond James. Please proceed with your questions.
Hey, good morning, guys. Just a…
Good morning, Michael.
Good morning. Just a follow-up on the loan growth question. So this quarter there was a couple healthcare-related credits that came into the fold, and it looks like growth there was relatively flat, maybe down a little bit quarter-to-quarter. Can you just talk about A, what segments of the healthcare business that you’re in, if you can just remind us? And then, B, kind of what the outlook is for that portfolio? Would you expect to see some growth as competition waned in anyway and just general outlook there? Thanks.
Sure. As it relates to healthcare, keep in mind, both fourth quarter of 2017 and first quarter of 2018 were really strong growth for healthcare. Second quarter, we stalled just a little bit. Really, I think in some respect related to kind of what’s happening in the large space for large national operators an area that we don’t do business in.
So what’s happened is, there has been a lot of aggregation at the very top of senior housing, in particular among the national operators. They’ve seen some struggles. It’s created a little bit of disruption in this space. Actually, I think that will be positive for us as we move into the second-half of the year and into next year as perhaps some of those national operators have the best properties. What we’re really focused is regional operators in senior housing and on the hospital side, but primarily regional operators on the senior housing side.
And we think going forward, the growth opportunity there’s very strong. We like the regional operators traditionally a little more than the national operators, because they’re closer to the properties. They understand the importance of a local administrator. And frankly, the dynamics of reimbursement in the state that they’re doing business in. So we’re still very optimistic, very excited about our growth opportunities inside of healthcare. It’s very much a growth business for us, coming off two very strong quarters in healthcare, we stalled there just a little bit.
But even on the credit quality side, you see non-accruals down – are basically flat, but down from a year ago. It’s – when we got into the healthcare business, there were a couple of areas that we kind of dabbled in to understand a little bit better and it didn’t work out as well for us. But we worked through most of that at this point and really focused on continued growth in the portfolio.
That’s a great color, Stacy, I appreciate it. And then maybe just one more on the NIM. So you guys unwound the FHLB trade that you put on a couple of years ago 4 basis points there. You had some non-accrual recoveries, appreciate the NII guide. But how should we think about the starting point for the margin in the third quarter and then the impact from the June hike? Thanks.
Yes. So we did carve those out. So that you could normalize for that. I mean, that’s about 11 basis points of the improvement, but we still had improvement. And we kind of guided to modest improvement in the NIM as rates rise. I think we’re still in that camp. I mean, I really see anything that’s changing from a deposit beta perspective. I mean, it creeps up, but there’s not. We’ve not seen any kind of inflection point at this stage and really don’t anticipate one in the September and December hikes. So I think modest improvement in NIM as long as we can hold fairly true on those deposit betas.
Okay. Just to be clear that the modest improvement that’s off of the 317 minus the 11 basis points that you called out. Is that the way we should read it?
Correct, that’s right.
Okay, perfect. Thank you.
The next question comes from the line of Peter Winter with Wedbush. Please proceed with your questions.
Good morning.
Good morning, Peter.
Can I just follow-up on that last question on the 4 basis point benefit from the unwind? When is that – that’s a one-time benefit, it wouldn’t be part of the core?
Well. Yes, let me clarify a little bit. 4 basis points is not the full impact of that. So you’re going to get a little bit of improvement, because we took that trade off towards the end of the quarter. And you’ll get a full benefit of that trade being off not from the NII, because there isn’t any benefit any longer that’s why we’re rolling it off, but it did dilute our margin as much as 12 basis points over time.
So you’ve got 4 of that back this quarter. You’ll see a little bit of that coming back additional amount in the third and fourth quarter as we move forward. So maybe back to the previous questions, you’ll see modest improvement, but you’ll also see a little bit of improvement continue in the third and fourth quarter because of that that trade rolling off full impact of that pulling that trade off.
Okay. And is it – and in terms of the impact to net income, is there an impact to net income?
Well, that had diminished. So maybe we got a little bit of NII in the second quarter, but not much. As rates have risen, that arbitrage has gone away. And so we weren’t booking much in terms of NII benefits, that’s why we rolled it off.
Okay. And if I can ask a big question – big picture question for Steve. Obviously, the net interest income is coming in really strong. But on the fee income side, it’s going to be the second year now, but you’ve lowered guidance on fee income. And I’m just wondering what are some things that maybe you can do differently as you think about fee income next year?
Yes, Peter, this is Steve. I’d go back to maybe an earlier comment that Steven made. I mean, you know, how we built the organization. We’re going to have some countercyclical businesses. Mortgage is really the culprit in terms of revising that guidance and it impacts us not just in mortgage origination, but also we have a pretty robust trading operation inside the broker dealer that MBS related as well.
So when that market pulls back and you lose some liquidity, you’re going to see that impact. For – from my perspective, since our outlook for mortgage origination is somewhat muted in both this rate environment and the lack of credible inventory growth of housing, including labor shortages, it’s hard to forecast originations up. So our focus is on making the operation much more efficient.
You saw $700,000 of expense take out or cost to us rather in the second quarter, which Steven said, will generate $3 million run rate. We’ll continue to look at our opportunities to consolidate and improve our execution in the way we hedge that pipeline, we think there’s some incremental benefit there. So that’s more of a bottom line work for me from that perspective.
I think that, that the growth engine for fees going forward is – continues to be our card business. We like that business and we see growth prospects there and our fiduciary business. We would expect kind of mid single-digit growth for that business kind of in the second-half of the year, not necessarily to fully offset what we might see as an impact from mortgage.
So the businesses that we continue to invest in for top line revenue growth are really in that wealth management space and in our card business. And we need a little bit of market tailwind to help us there perhaps. We’re not seeing much in the way of AUM value going up at this point, which obviously is an engine for that. But we would expect to see that levels out kind of in the second-half of the year.
So it’s more of an efficiency play, I think, in our mortgage space, recognizing some of the constraints on origination that business and then continued investment in product development on our asset management side, that’s really the focus today.
Great. Thank you.
The next question is from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.
Great, thanks. My question is on commercial real state. You guys obviously saw a good growth this quarter. It seemed that you have positive comments about commercial real estate in your remarks. But in the broader context, I think, you’re probably the only firm or only bank that I’ve heard this entire quarter speak at all positively about commercial real estate and a lot of the negativity stems around the non-bank lenders and very aggressive pricing and even weakness in terms of structures a little bit.
Can you just address like why is CRE a good asset class for you guys? How does your CRE differ from the market? I’m just trying to reconcile, it seems like very different perspectives? Thanks.
Sure. Well, keep in mind, I think, relative to the market, our limits around commercial real estate internally are lower than our peers. So this is not been an area that we’ve traditionally allowed to grow without a governor or a limits on it. And we are below those today and have remained below those.
If you look at our year-over-year growth in commercial real estate, we’re basically flat. Recall that in the third quarter and fourth quarter last year, we had pretty material paydowns in this portfolio. What you see coming through on a growth side today is commitments largely originated towards the very end of last year as they begin to fund up and we get the benefit of that.
The hyper competition in commercial real estate is particularly peers around the term debt. We looked at something there obviously we’re interested in outstanding there too that has not been an area that we found both pricing or structure that makes sense for us. There are other competitors in the space. A competition moves in and out.
I would tell you that we have not compromised our underwriting. We have a lot of factors that we use and underwrite, too, including our own internal cap rate that we think are more long-term representative of valuations in the industry. So we still feel very good about what we do. Our fairway is known to our team. We stay within that fairway and we had good growth there and really see good growth there throughout the remainder of the year. But it is not an area that we have allowed to grow unchecked or allowed to grow in a way that is not sustainable or not healthy for the corporation for the long-term.
Most of what I’ve seen this quarter around commercial real estate has been continued paydown and the headwind that that’s created around new originations around net loans in the space. And so we had pretty strong paydowns in the third and fourth quarter last year. We’ve had some of that in the first-half of this year, but not nearly to the extent that we saw in the latter-half of last year.
So while it is an area for growth, we’re very proud of what we’ve done there. It is an area that we traditionally overemphasize and we have a pretty stable growth there over time.
Gotcha. So I just want to make sure I fully understand it. So your end of period growth in CRE was up 6% in the quarter, where most of the banks were down. You did say commitments at the end of last year, or is this a blip because of what you put on at the end of last year or to some extent?
No, I mean, we’re forecasting continued growth in commercial real estate outstandings throughout the last-half of this year.
Okay. And that’s what I’m trying to be…
Yes, keep in mind, Ken, when you book a construction loan in commercial real estate, you don’t fund it day one. So you have a period of fund up as equity comes into the project and then over time those periods generally have about a 12 to 18-month period of funding up.
So what you’re seeing show up an outstandings here is maybe different than when the loan was committed. So most of what you’re seeing show up in outstandings today is based on commitments that we made in the latter-half of last year as those loans began to fund. We’re still – I think, we’re about 158% to 60% of Tier 1 capital and reserves for commercial real estate.
So well below internal our limits and frankly, well below peers with respect to our concentration in commercial real estate. So we’re not doing anything different here in the near-term to try to generate growth. We haven’t changed policy. We haven’t changed underwriting. We haven’t changed risk appetite in anyway, shape or form.
Okay. Thank you.
[Operator Instructions] The next question is from the line of Jared Shaw with Wells Fargo. Please proceed with your question.
Hi, good morning.
Good morning.
Maybe just following up a little bit on the CRE. So on the construction sites, could you remind us on where your appetite is either geographically or the type of projects, and how the pipeline for bringing in new originations is going right now?
Sure. We’re seeing a lot of opportunities. We’re probably turning down more opportunities we have historically, but we are seeing a lot of opportunities as well at the same time. I mean, our view is, obviously, we’re focused in areas that we believe have the right risk return profile. So we’ve talked about retail in the past. We will do some retail, but it’s an area we put a lot of emphasis on in terms of the underwriting to make sure we understand the nature of it.
Industrial is an area that have gotten very competitive. It is an area that we like. As the economy transitions away from retail to more delivery at home, industrial sites tended to be more in demand, fulfillment centers, things like that, that more and more companies are building those. And so that’s been an area that we have focused on and we really like.
We’ve grown in Opus this quarter. And when we look at Opus, we’re not doing anything, that’s got a spec nature to it. Typically looking at a very strong anchor tenant that we can underwrite their financials distinctly from the real estate, and that’s how we’ll do an Opus project. But the predominance of our growth really has been in footprint states that we feel very good about their dynamics. Some cases, there are some barriers to entry around entitlement and getting permitting and things like that. So which helps there to be some score stability in the market.
But we like what we’re doing there. We haven’t changed how we think about it, and we’re just kind of continue to stick to what we’ve always done with respect to commercial real estate.
Great, thanks. And then on the broader commercial portfolio, the C&I portfolio, you had mentioned that you decided to do a little bit of work around on the exposure to tariffs for companies with exposure to tariffs. How – as we look at that overall portfolio, can you sort of scope that out for us? Some other companies have talked sort of in terms of like what percentage of their portfolio maybe or customers maybe and businesses that could be exposed to that? Is that a relatively small number, or what are we looking at in terms of size there?
Yes, I mean, it’s hard for us to – what – what’s not just the primary impact, but what would be a secondary or tertiary impact? I think, it’s very slippery slope to start trying to segment the portfolio to talk about it that way. In general, the businesses that are subject to tariffs, it’s still early. I think it’s way too early to determine if there will be credit weakness related to that. But it’s something that we’re watching for and we’re sensitive to many of the tariffs had only been talked about. They haven’t been implemented yet.
And so it’s something that, that we want to be thoughtful about. We want to make sure that market is aware of as we think about loan growth going forward. But I think it’s premature to try to talk about what we think in dollar terms is the impact of tariffs.
Okay, thanks. And then just finally for me, any update on your thoughts around CSAL as we’re getting incrementally closer to that and how your portfolio and allowance should potentially hold up in that analysis?
Yes, this is Marc Maun. We’re – our project on CSAL is underway. And we’re building our models and feel very comfortable that we’re well along the way to meeting that timeline. We’re still assessing kind of what the overall impact is going to be. We wouldn’t expect it to be a material change and how we’re looking at our overall reserve. But we will have more of that towards the end of this year as we kind of finalize some of our key models.
Great. Thank you.
The next question is from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Thanks. Good morning.
Good morning.
Good morning.
Hey, Stacy, just a follow-up for you. Earlier on you talked about renewed momentum in C&I, and then you also talked a little bit about stronger pipelines heading into Q3. Can you just give us a little bit more color on that kind of where and what are you seeing in general C&I?
Yes. I mean, if you think, as we look forward and kind of anticipate over the next 90 to 180 days, we feel more confident about that than we did frankly, going into the year. Really, the tariff issue is the only kind of uncertainty issue. You’ve got tax reform. You’ve got it fully implemented. I think, people feel good about the regulatory environment that whatever industry they’re part of that there’s some stability there.
I think, if you try to take the politics out of it, business people just want to know what the rules are. And then once they know what the rules are, they can work within those to maximize their business. And I think that after having a high level of uncertainty and people might know and when to invest and trying to miss an opportunity maybe related to tax reform, that’s done, it’s put to bed. And you’re seeing more business owner confidence in making investments, which we think pertains well.
I mean, if you think about energy in particular as we look forward, our commitment growth annualized in energy is up 25%. Outstandings don’t reflect that at this point, although they’re very strong. And so if you look forward and think that utilization and energy kind of buying some more normal pattern over the latter-half of the year, that should speak very well to energy growth, as well as we move forward.
So it’s kind of what we’re talking about when we look at commitment growth relative to outstandings or the macro environment. For general C&I, we see opportunity there and feel good about that. I mean, if you think about what we’ve talked about forever, which is loan growth is some modest multiple of GDP growth. Historically, we looked at it over 25, 30 years, somewhere between two and three times GDP growth is kind of where historical loan growth should be at if you’re doing it the right way not taking a necessary risk.
So if you think about GDP growth growing, that’s helping in positive for loan growth. There’s a strong correlation historically between broader economic growth and C&I growth, in particular. So I think that the economic outlook continues to be positive for the country. Certainly, our geographic footprint, as Steve mentioned in his prepared remarks, is better than the national footprint. We think that, that really positions us well for growth going forward.
Okay, good. And then either for you or Steve, you talked about potentially reaching low double-digit loan growth. Would the big driver of that be energy, strength in energy, or is there something else that you’re thinking about there?
Well, I think that and frankly commercial real estate paydown. I mean, I think that’s been an area that that they’ve become pretty lumpy. And so if you don’t have the lumpiness related to the paydowns and you have kind of continued momentum in your core C&I, including energy, then I think – feel more optimistic about that kind of stretch perspective that Steven mentioned in his prepared remarks.
Yes, okay. All right. Thank you.
Thank you.
Thank you. And I’ll turn the floor back to Joe Crivelli for closing remarks.
All right. Thanks, everybody. If you have any follow-up questions today, please give me a call at 918-588-6898.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.