BOK Financial Corp
NASDAQ:BOKF
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BOK Financial Corp
Earnings Call Analysis
Q3-2023 Analysis
BOK Financial Corp
While addressing economic uncertainties, the company emphasized its diversified mix of fee income as a differentiating strength against peers. This diversification, which includes 43% fixed income, 32% equities, 16% cash, and 9% alternatives, has helped them achieve top decile performance for fee income as a percentage of total net interest revenue and non-interest fee income, sustaining revenue streams across various economic cycles. The revenue mix, averaging 37% from fee income over the past year, supports a consistent and sustainable revenue model.
The company reported a $21 million decrease in net interest revenue to $301 million and a decline in net interest margin by 31 basis points to 2.69% from the previous quarter. Notably, 8 basis points of this margin decrease were attributed to the dilutive effect of growth in trading securities. The net interest margin, factoring out the impact of trading assets, decreased to 3.14% from 3.36%. Margin pressures were primarily due to rising deposit costs in a competitive environment, with a notable increase in interest-bearing deposit costs by 61 basis points. The loan-to-deposit ratio slightly increased to 70.5%, reflecting a balanced growth between deposits and loans.
The company's capital ratios remained solid, with a tangible common equity ratio at 7.74%, marginally lower by 5 basis points linked quarter, and a CET1 ratio at 12.1%. Regulatory capital proposals mostly affect larger banks, meaning the company retains substantial capital for organic growth and continuation of its share repurchase program, having bought back 700,500 shares at an average of $84.17 per share in the last quarter.
Total expenses rose by $5.6 million to 1.8% quarter over quarter, with personnel expenses remaining flat and non-personnel operating expenses rising by $5.5 million. The increase in operating expenses was driven by cost investments in technology, network upgrades, and strategic growth initiatives, including recent expansions in San Antonio and Memphis. While efficiency ratio isn't a primary management metric due to the heavy influence of the revenue mix, the company expects it to rise with net interest margin changes before gradually decreasing as growth from recent investments materializes.
The company predicts upper single-digit annualized loan growth supported by strong economic conditions and an absence of liquidity and capital constraints that affect rivals. Fee and commissions revenue is expected to grow at a mid-single digit rate year-over-year. They continue to invest in strategic growth and technology initiatives, with an emphasis on long-term sustainability over short-term earnings. Share repurchase activities will potentially persist, capitalizing on opportunities to buy back shares at attractive prices given recent market valuations.
Credit quality remains robust with criticized loan levels standing at half of their pre-pandemic figures. The loan growth is not concentrated in any particular area but instead spans across multiple sectors such as C&I, healthcare, and real estate, though real estate growth is expected to be modest due to internal limits on exposure to certain percentages of capital. The company’s disciplined growth strategy focuses on direct customer relationships and full relationships with shared national credits as opposed to purely syndicated transactions. This approach reinforces its franchise value and long-term sustainability.
The company has made substantial investments in its treasury platform and continues to invest in the wealth platform to enhance customer experience and maintain competitive technology offerings. These technological advancements are part of a broader long-term growth strategy, which aims to set the company apart in efficiency and service quality.
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Greetings, and welcome to BOK Financial Corporation Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Marty Grunst, Chief Financial Officer for BOK Financial Corporation. Thank you, Mr. Grunst, you may begin.
Good morning, and thank you for joining us. Today, our CEO, Stacy Kymes, provide opening comments; Marc Maun, Executive Vice President for Regional Banking, will cover our loan portfolio and related credit metrics; and Scott Grauer, Executive Vice President of Wealth Management, will cover our fee-based results. I will then discuss financial performance for the quarter and our forward guidance. PDF of the slide presentation and third quarter press release are available on our website at bokf.com.
We refer you to the disclaimers on Slide 2 regarding any forward-looking statements we make during the call. I will now turn the call over to Stacy Kymes.
Good morning, and thanks for joining us to discuss BOK Financial's third quarter financial results. Starting on Slide 4, third quarter net income was $134 million, or $2.04 per diluted share. Our team had another solid quarter of earnings, driven by our diverse business model, which prudently balances interest revenue with noninterest revenues and allows us to perform well in a variety of business climates.
Fee and commission revenues were 40% of total revenue for the quarter. This quarter, our public and corporate finance group established new record for investment banking fees, which materially offset last quarter's record high derivative fees. Additionally, we continue to focus on opportunities for growth, given the economic vitality of our core geographic footprint as we take advantage of our capital and liquidity strength. Total loans have increased almost 9% from last year and a core commercial and industrial loans were up 8%.
We are poised to introduce our full-service banking model into the [indiscernible] with the addition of a fixed income sales and trading office in Memphis, we are confident both will drive long-term shareholder value.
Turning to Slide 5. Period-end loan balances increased $486 million or 2.1% linked quarter with growth in both C&I and commercial real estate. Both period end and average deposits continued to grow during the quarter. Our loan-to-deposit ratio increased just slightly to 70.5% at the end of the quarter as loan growth outpaced deposit growth. Our cost for deposits did increase in the quarter. However, the pace did slow. As Marty will detail later, our reported net interest margin continues to be diluted by the expanding trading activity this quarter with our core margin, excluding the trading activities at 3.14%. Although it will take a few quarters to be unclear, we are seeing early signs of loan spreads increasing in our footprint as credit tightens and deposit costs remain high.
The pressure on our net interest margin from increased funding costs resulted in a $21 million linked quarter decline in net interest revenue, resulting in an efficiency ratio above 60%, which is more typical for us given the mix of noninterest revenue. Credit quality is still strong, and we have a combined reserve of $325 million or 1.37% of outstanding loans at quarter end, which is notably above the median of our peer group.
Finally, we repurchased 700,500 shares this quarter to reflect our long-term confidence in the company and attractive repurchase valuations. I'll provide additional perspective on the results before starting the Q&A session, but now Marc Maun will review the loan portfolio and our credit metrics in more detail. I'll turn the call over to him.
Thanks, Stacy. Turning to Slide 7. Period-end loans were $23.7 billion, up 2.1% linked quarter. Total C&I loans increased $185 million or 1.3% linked quarter with year-over-year growth of $1.1 billion or 8%. Commercial real estate loans increased $270 million or 5.4% linked quarter and have increased $767 million or 17% year-over-year. Compared to December 31, 2020, CRE balances have grown at a modest 3.8% annualized growth with commitments up 5.8% during that same period.
Growth this quarter was primarily driven by multifamily properties with an increase of $232 million or 15.4% linked quarter. Industrial facility loans grew $83 million or 6.1% linked quarter, which was offset by a $24 million or 2.4% linked quarter decline in loans secured by office facilities. The $982 million in outstanding office loans is at its lowest point since June 2020 and is only 4% of total outstanding loan balance.
The year-over-year CRE growth of $767 million was predominantly driven by multifamily and industrial loans. We have an internal limit of 185% of Tier 1 capital and reserves to total CRE commitment and we're presently at the upper end of that limit. We do expect continued modest growth in outstanding CRE balances as construction loans fund up. As of September 30, CRE balances represented 22% of total outstanding loan balances, a ratio well below our peers.
Combined services and general business loans, our core C&I loans increased $112 million or 1.6% linked quarter with year-over-year growth of $716 million or 11%. These combined categories are 30% of our total loan portfolio. Health care balances increased $92 million or 2.3% linked quarter and have grown $257 million or 6.7% year-over-year, primarily driven by our senior housing sector.
Healthcare sector loans represented 17% of total loans at quarter end. Energy balances decreased $18 million linked quarter and have increased $119 million or 3.5% year-over-year with period-end balances at 15% total period-end loans. Year-over-year, loans have grown $1.9 billion or 8.9%. Excluding BBB loans, Q3 2023 extends the linked-quarter loan growth to 8 consecutive quarters. Our current pipeline is strong, and we're confident we have momentum to drive additional growth in our loan portfolio well into next year.
Turning to Slide 8, you can see that credit quality continues to be exceptionally good across the loan portfolio, and well below historical norms and pre-pandemic levels. Nonperforming assets, excluding those guaranteed by U.S. government agencies, decreased $12 million this quarter. Non-accruing loans decreased $13 million linked quarter, primarily driven by a decrease in commercial real estate loans. The provision for credit losses of $7 million in the third quarter reflects strong asset quality, continued loan growth and modest changes in our economic forecast.
We remain in a solid credit position today. With a ratio of capital allocated to commercial real estate that is substantially less than our peers and the history of outperformance during past credit cycle, we believe we are well positioned to an economic slowdown materialize in the quarters ahead.
The markets continue to be focused on the office segment of real estate, given the trends in workforce preferences. Although the verdict is still out as to whether that will be sustained as the pendulum seems to be shifting back to more time in the physical office. Our office segment maturities are generally ratable over the next 3 to 4 years, and we have a mini-perm option if the markets are not conducive to long-term permanent finance. The average loan-to-value ratio in the office space is below 65% and average cash flow coverage exceeds 1.3x based on our most recent review at the end of 2022.
Net charge-offs were $6.5 million or 11 basis points annualized for the third quarter and have averaged 13 basis points over the last 12 months, far below our historic loss range of 30 to 40 basis points. Looking forward, we expect net charge-offs to remain low. The combined allowance for credit losses was $325 million or 1.37% of outstanding loans at quarter end. The total combined allowance is available for loss and any apples-to-apples industry comparison should include the combined reserves. We expect this ratio to remain stable as loan growth continues and economic conditions persist. I'll turn the call over to Scott.
Thanks, Marc. Turning to Slide 10. Total fees and commissions were $198 million for the third quarter, down slightly linked quarter. Our wealth segment continues to set new quarterly highs for fees and commissions at $123.6 million this quarter, eclipsing the previous high set last quarter. .
Fees and commissions for the second quarter included record results for energy customer hedging as well as annual tax service fees. Although energy hedging customer and tax service fees were down linked quarter, these were partially offset by record results this quarter in our public and corporate finance groups, driving a $5.3 million increase in other investment banking fees. The $2.5 million linked quarter decline in trading fees was primarily related to fees from our municipal bond trading portfolio, down $3.5 million linked quarter, which was influenced by a rising interest rate environment and evolving market expectations during the third quarter. This was partially offset by a $1.1 million increase in our MBS trading activities.
Fiduciary and asset management fees were $52 million for the third quarter, a 1.4% linked quarter decrease due to the second quarter's annual tax service fees. Our assets under management and administration were $99 billion at quarter end.
Our asset mix for assets under management or administration moved slightly this quarter with 43% fixed income, 32% equities, 16% cash and 9% alternatives. We are proud of our diversified mix of fee income, which we believe is a strategic differentiator for us when compared to our peers, especially during times of economic uncertainty. We consistently ranked in the top decile for fee income as a percentage of total net interest revenue and noninterest fee income. Our revenue mix averaged 37% during the last 12 months that consistently supports a revenue stream that is sustainable through a wide variety of economic cycles. I'll now turn over the call to Marty.
Thank you, Scott. Turning to Slide 12. Third quarter net interest revenue was $301 million, a $21 million decrease linked quarter. Net interest margin was 2.69%, a 31 basis point decrease versus Q2. I will note that 8 basis points of the 31 basis point margin decline was due to growth in the trading securities. As the trading securities grow is dilutive to the net interest margin as it grows earning assets at a narrower spread compared to the rest of the balance sheet. Net of the 8 basis point impact from trading, the remaining 23 basis point decline was driven by the competitive deposit environment as average interest-bearing deposit costs increased by 61 basis points linked quarter. .
Our cumulative interest-bearing deposit beta increased to 58% for the third quarter and noninterest DDA continued to shift into interest bearing. DDA as a percent of total deposits was 29.6% as of September 30.
This slide shows net interest margin and net interest revenue with and without the impact of the trading business to better highlight trends and comparability. For the third quarter of 2023, the net interest margin, excluding the impact of trading assets, was 3.14% versus 3.36% in the second quarter. Growth in earning assets during the quarter was driven by trading securities and loans, partially offset by a decline in our fair value option securities used to hedge our mortgage servicing asset.
Turning to Slide 13. Liquidity and capital continue to be very strong on an absolute basis and versus peers. Total deposits grew $358 million on a period-end basis and the loan-to-deposit ratio was 70.5%, up slightly from the previous quarter. Average total deposits increased $918 million linked quarter with average interest-bearing deposits up $1.8 billion, partially offset by an $840 million decline in demand deposits.
[indiscernible] have recently been a topic for our industry, and we know that our usage of that funding source over time is generally low but not zero. [indiscernible] were $688 million or less than 2% of total funding at quarter end and declined $72 million versus the prior quarter end. Our tangible common equity ratio was 7.74%, down 5 basis points linked quarter due to balance sheet growth and increase in interest rates put up 11 basis points from year-end 2022.
Adjusted TCE, including the impact of unrealized losses on held to maturity securities is 7.35%, consistent with year-end too. CET1 is 12.1% and if adjusted for AOCI, would be 9.7%. As the recent regulatory capital proposal is largely focused on banks over $100 million, we have ample capital to support continued organic growth while at the same time allowing for continued share buyback. During the third quarter, we repurchased [ 700,500 ] shares at an average price of $84.17 per share.
Turning to Slide 14. Linked quarter total expenses increased by $5.6 million or 1.8%. Personnel expense was flat linked quarter as increases related to our San Antonio and Memphis expansions were mostly offset by a decrease in employee benefits. Non-personnel operating expense grew $5.5 million, occupancy and equipment increased $2.5 million, driven by the retirement of certain ATMs as we upgrade our network. FDIC insurance expense increased $1 million. Combined, all other expense categories increased $3.3 million, much of that related to an accrual for certain disputed matters.
Year-over-year total operating expense increased [indiscernible] million or 10%. Personnel expense increased $20 million or 12%. However, $3 million of the year-over-year increase was related to a onetime benefit during the second quarter of '22 from the dissolution of our pension plan, combined with linked quarter market adjustments for deferred compensation. Third quarter 2023 also includes $2.6 million of expansion related personnel costs.
Cash-based compensation related to new business production increased $6.8 million. The remaining $8 million year-over-year increase was primarily regular salaries and benefits with that directly related to annual merit increases and a much lower level of open position. Year-over-year, other operating expense increased $9 million or 7.3%. Occupancy and equipment increased $3.3 million with $2.5 million related to the ATM retirements, FDIC insurance increased $3.7 million as both the assessment base and the rate increase, and data processing increased $3.9 million, primarily due to continued investments in technology. These were partially offset by a $1.1 million decrease in mortgage banking costs as MSR amortization flow.
Turning to Slide 15. I will note that we are in the middle of our 2024 financial planning process, so we are not ready to provide forward-looking assumptions with the same level of detail as we have for the last few quarters. However, I will provide the following higher level expectations for the next 15 months.
We continue to expect upper single-digit annualized loan growth. Economic conditions in our geographic footprint remain favorable and continue to be supported by business and migration from other markets. The competitive environment for loans should be a tailwind for us. We expect to continue holding our available-for-sale securities portfolio flat and to maintain a neutral interest rate risk position. We expect total deposits to be stable or grow modestly and the loan-to-deposit ratio to remain in the low 70s. Currently, we are assuming no additional rate changes by the Federal Reserve in 2023 or 2024. We believe the margin will migrate modestly lower over the next couple of quarters as interest-bearing deposit betas level out and demand deposit balance attrition runs its course.
In aggregate, we expect total fees and commissions revenue to grow at a mid-single-digit growth rate on a year-over-year basis, and our strategic expansion initiatives to positively impact growth rates for [indiscernible]. We expect expenses to increase modestly as we continue to invest in strategic growth and technology initiatives with revenue growth following out a slight lag. We expect the efficiency ratio to increase with net interest margin changes then migrate downward as revenue growth is realized. This does not include the impact of the FDIC special assessment, which could be finalized in the fourth quarter of 2023.
Our combined allowance level is above the median of our peers, and we expect to maintain a strong credit reserve. Given our expectations for loan growth and the strength of our credit quality, we expect quarterly provision expense near recent levels to continue and an eventual move towards normal credit costs later in 2024. Changes in the economic outlook will affect our provision expense. Additionally, we expect to continue our opportunistic share repurchase activity. I'll now turn the call back over to Stacy Kymes for closing commentary.
Thanks, Marty. This quarter highlights the benefits of our diverse revenue mix and our strong risk management culture as we and the industry experienced pressure on the margin from increased funding costs. While margin pressure is a reality for us and our peers, our diverse fee-based businesses supply a strong core revenue base that sets us apart. .
Excluding the volatile mortgage refinance fee during the second and third quarters of 2020, the last 5 consecutive quarters are the highest for fee income in the company's history. We continue to grow and invest in our fee businesses, as shown by our recent expansion into Memphis and our talented teams collaborate well to ensure we grow our company the right way, a way that is sustainable through all economic cycles.
While the market continues to focus on capital, liquidity and credit, I see this as a unique opportunity to use our strength in these areas to grow organically and invest in new markets while other financial institutions may be more internally focused. We are focused on using the strength of our geographic footprint to grow both in today's climate and in the years ahead. With that, we are pleased to take your questions. Operator?
[Operator Instructions] The first question comes from the line of Brady Gailey with KBW.
Yes, it's Brady. I was just wondering, your guidance for some continued net interest margin pressure, we saw a big move in the third quarter. How do you think about the magnitude of how much the margin could decline over the next quarter or 2?
Yes. Good question, Brady. So I think the way to think about the next quarter or 2, maybe give you a little context. So number one, I kind of set aside the trading impacts. There's really no reason to think that, that would be any different. It will react to the markets. And even if it's different, that's really denominator effects and don't really drive the numerator so much. .
So Q3 margin decline ex-trading was 23 basis points. And so the positive drivers there were the bond portfolio repricing up, the fixed rate portion of the loan book repricing up and loan growth. The negatives were the DDA mix shift and the deposit beta piece. So Q4 should basically see the same positives at very similar magnitude, but the negative in aggregate will be smaller. So we expect to see a smaller decline than that 23 basis points in the core margin in Q3 to Q4, but still probably in the low double digits to basis points. And it's really the beta slowing down. That's going to be the component that helps there.
Going into Q1, we still think the positives are about the same in magnitude, but the negatives will still outweigh those positives to a lesser degree, and we'll see another but probably smaller margin decline. And then after that, it's increasingly likely that the balance -- is the positives balance out or outweigh the negatives. But we'll give you some more color on that in January.
Okay. And then loan growth at a high single-digit pace is pretty robust today. I mean, relative to your peers, there's not many banks growing at that level. So how are you able to kind of grow at that elevated pace relative to your peers in the industry today?
Yes, Brady, this is Marc Maun. Fundamentally, our balance sheet is well positioned to allow us to grow with the liquidity -- the loan-to-deposit ratio of 70%. We have the liquidity and capacity to grow. Our credit metrics are as good as they've ever been. I mean with criticized levels at half where they were pre-pandemic. And we don't see any significant issues on the horizon. So we've been able to focus on our sales efforts and getting out and giving our teams out in the field, working with companies to generate loan growth. And while some of our peers are pulling back in that space. That has allowed us to grow not just in 1 particular area, but pretty broadly across our C&I portfolio, health care and energy -- real estate, we are expecting some modest growth just because of our own internal limits. But we have no reason to discontinue that effort, and we're going to be very focused on that in this quarter and in 2024.
Brady, this is Stacy. I just might add. I think that Marc really hit on it and it's been a real focal point for us as we've seen the disruption in the industry is others are having to manage the liquidity and capital constraints. We're not. This is a really unique opportunity we have that maybe you get once every 15 years or so to definitely take market share and grow when others are less able to do that. And so that's been a real significant focus for us.
And what I like about the growth is how it's been core C&I growth. We really over the last year, energy is such an important part of our business, but energy hasn't driven that. Historically, a lot of times when we have strong C&I growth, Energy is the big driver. We've had huge growth in commitments there, but the outstandings have not. And so if you think about by market, it's really been across our footprint. Each of the markets has really had a strong year in terms of growth in C&I, particularly and it's been a focus for us. And so I think that we're optimistic that we can maintain that.
Okay. All right. And then finally for me is just on the fee income side. It's been such a great story for BOK this year, growing fee income. Is there any pieces of your fee income that you think are over-earning right now that could normalize lower? Or is all this growth real and mid-single-digit fee growth is great for this year. Like is that -- is that the way we should kind of think about fee income growth longer term for BOK in this mid-single-digit level? .
Yes, Brady, this is Marty. Yes, we do think that is good solid franchise growth that we've been able to generate. And if you look out over any 12-month or so period, we're able to grow that consistently at that mid-single-digit level and we feel the same about that today than we did a quarter ago.
And Brady, this is Scott. I would add that if you look at the components, second quarter to third quarter, we had record highs in the second quarter in a couple of different lines. So our energy -- we have different pieces that were at the top of the list in the second quarter, that's alternated in the third quarter where we have investment banking and other areas. So it's not coming from any 1 particular segment or piece. So you've got diversification of those fee and commission revenue sources just like we do at the top of the house from a revenue perspective.
So we feel good about the fact that the various business lines have the ability to generate fees and commissions, just all types of fee revenues regardless of what cycle we're in.
Next question comes from the line of Peter Winter with D. A. Davidson.
I was wondering, can you provide some guidance Marty, how you're thinking about net interest income in the fourth quarter. Just there's so many moving parts and how you're thinking about the trading portfolio and where you think net interest income would bottom? Do you think it's kind of the second quarter, we could get to the bottom?
Yes. So Peter, let me just give you a little bit of color on the net interest revenue kind of the components. So loan growth, that will give you something like -- we had about $450 million of loan growth, and that's coming on at a $250 spread. That's 1 of your positives. Bond portfolio reprice, that averages $450 million a quarter and you kind of get a runoff rate around 275 basis points and a reinvestment yield that's what our current market rates were. But in the third quarter, we were able to do that at [ $550 ]. Fixed-rate loan reprice, that's about another $350 million that's repricing up each quarter, 300 basis points. And so those are the positives.
Deposit betas were still a pretty large impact in Q3. We saw a nice slowdown in the pace of increase in September. And so we ended the quarter with 58% cumulative beta. So we could see that slowing. And so that slowdown will benefit Q4 and forward. And then the DDA mix shift, we still see that as a higher number in Q4 with likely slowdown after that .
Peter, this is Stacy. I think the answer to be specific, I think that Marty has kind of provided the pieces there. But our view is that you'll have more margin deterioration in the fourth quarter, less in the first quarter. And our current view is that it's likely in the first quarter that both margin and net interest revenue are kind of where they trough and then we begin to build back from there, plus or minus, with not a high degree of precision around the absolute numbers, but certainly, directionally, we think that we likely bottom somewhere around the first quarter.
Okay. Got it. And then, Stacy, just expenses. If I think about the company and the strategy, and I understand with competitors pulling back and you're taking advantage of this opportunity and investing. Is there any thought of maybe slowing down some of these investments spending next year just given somewhat of a challenging revenue environment? .
No. I mean if you think about -- I mean, Peter, you followed us for most of my career, it feels like, I mean, our view is we're running this company not for the next quarter or for the next year, but for the next 5 years or 10 years or 15 years. And so you get these opportunities like this, you have to take advantage of it.
And I understand the optics, but because of our mix of fee revenue, we're not a sub-60% efficiency ratio company, we've never been. And so having a low 60s efficiency ratio doesn't bother us at all because we've got 40% to 50% of our revenues from fee-based businesses that carry a higher efficiency ratio. And so we're going to be prudent about expenses. We're not going to do anything that's imprudent there, but we're going to grow the company, and we're going to think about things from a long-term perspective, not a short-term perspective. That's may be the most distinctive advantage we have as a financial institution, and we're going to take advantage of that.
Okay. And just my last question, just deposit betas, I guess, the outlook was 64% by year-end. I'm just wondering if you could update that and how you're thinking about it next year?
Yes. We are thinking about that still as 64%, 65% for the end of this year. And then we do expect that to slow quite a bit next year. .
Any idea where it kind of settles out at?
Yes. It's probably a little too early to tell, but quite a bit lower. I mean we saw some nice slowdown in September, and we expect to see that slowdown continue.
Next question comes from the line of Jon Arfstrom with RBC Capital Markets.
Marc, maybe a question for you. In your prepared comments, you talked about some limits on commercial real estate concentrations. And I'm just curious, what that means for overall commercial real estate growth. And I'm particularly interested in the multifamily and industrial because they've been such big drivers of growth for you guys?
Right. What I talked about was we do try to manage our exposure in real estate to a certain percentage of capital, and we are at the upper end of that range. So we have seen growth -- a lot of the growth that we've seen this year has been funding up of existing deals and construction loans and the number of payoffs that have slowed due to the situation in long-term markets.
So we expect that we still have room for modest growth in that next year, but it's not going to be at the double-digit rate that we've seen year-over-year in CRE so far. We are focused on multifamily and industrial. That's where the growth has been. We don't see those markets slowing down too much. We're not focused on retail and certainly not on the office piece. So again, it will be something modest. It won't be in the same kind of growth rate we had overall this year.
Okay. Also, on that same slide, talk about what you're doing in office. I know it's not huge exposure for you, but I do see it's down. And you talked -- you made a comment about a mini-perm option to solve some potential issues. Can you talk a little bit about that?
Well, right currently, our office portfolio is very strong from a credit standpoint. If we reach a maturity with 1 of the office loans, at this point in time, they're all in good shape, and we would have the ability to extend that loan for a short period of time until longer-term markets may open up. But we really have no significant credit issues at all in the office portfolio at this time.
So Jon, for us, a mini perm would be some kind of 20-year amortization on a 3-year term, a 3-year maturity based on the property continuing to perform as agreed. And so the borrower doesn't have to find a permanent refinancing source, we can give them a short maturity but a longer am consistent with the permanent markets to bridge them until when the permanent markets are more healthy.
Yes. Okay. Makes sense. And then your stock is getting beat up a little bit this morning, and it's on the NII and margin guide, I think, primarily, but you've been active in the buyback. I'm just curious, and you bought a lot higher, quite frankly. So I'm just curious, you kind of buyback appetite and capacity, especially where the stock is?
Yes, I think you can assume that given where the stock is today and given where we bought it in the third quarter, we would have a very high appetite for repurchasing shares.
And capacity in general?
Yes, we have very strong capital ratios, and we've got the capacity we need to do that. .
Next question comes from the line of Brandon King with Truist Securities.
Good morning. Yes. So I wanted to get more context around how you're thinking about the efficiency ratio trends over the next year or so or maybe beyond a year, just giving you initiatives and you know how the [indiscernible] income is trending in fee income. Just when do you think that efficiency ratio finally peaks and you finally see maybe some stability or maybe it's coming down?
Brandon, the efficiency ratio has never been a metric that we manage to. And so we're obviously in the middle of our budget preparations for next year. So we're not going to provide guidance around that today. But what I can tell you is every business that we have has a target kind of efficiency ratio that we think about. And so what changes our efficiency ratio over time more than anything else is the mix of fee businesses. When fee businesses are a higher percent of total revenue, the efficiency ratio comes up. And when net interest revenue is a higher percentage, then the efficiency ratio will go down.
But we'll continue to look at that by line of business and manage each line of business inside of our kind of implied expectations for efficiency. We'll continue to look for opportunities as we go through this fall season to look for opportunities for efficiency. But we don't run our company that way because so much of the mix of revenue guides that efficiency ratio. So that's not how we think about nor how we run the company.
Okay. And just to follow up on that with these initiatives and your expectations for when that revenue growth will be realized. And I know there's a lot of moving parts around that. But could you just give us more context on how you're thinking about when and the timing of that, which is based off of preliminary plans.
Yes. Just to give you a couple of examples, Brandon. So if you think about our Memphis expansion as 1 of those, that's sales and trading producers. So that has a fairly rapid ramp up, just given the nature of that business. Our San Antonio investment, that's commercial and wealth primarily. And so those all have longer sales cycles. And so that will take a little bit longer to ramp that up than when compared to the Memphis expansion. So it's kind of individual investment centric. So hopefully, that helps.
Okay. Okay. And then on the technology initiatives, could you just give us more color on kind of what you're planning on doing that you're currently not doing now? And how you expect that to ramp as you try to manage the company over the next 5 years?
So Brandon, over the last several years, we've made material investments in our treasury platform and our customer interface into our commercial and corporate interface into our existing technology systems. We have significant investments in our wealth platform that are underway that we're continuing to work through. And so as I mentioned previously, we're running the company for the long term, not the short term. And so we continue to make investments to ensure our technology platforms are competitive and providing our customers with a really positive experience when they interface with us.
Next question comes from the line of Matt Olney with Stephens Inc.
I want to go back to loan growth, and I think it's good to hear you guys talk about the bank taking advantage of some competition pulling back some as they manage their capital liquidity, any commentary about how much of the growth is from larger-sized deals or syndications. I just want to appreciate how much of the growth is larger deals, existing syndications versus taking on new customers?
Well, it's a combination of all that. Actually, we have not had any material increase like in the third quarter in the number of SNCs that we're involved with. Our leveraged loans are actually going down. So we're focused on businesses where we can develop a relationship that's broad-based. And so we're getting a mix of new customers as well as finding our way into some club deals, et cetera, but nothing -- we're not focused on just getting into syndicated deals and buying participation where we don't have a significant opportunity for relationships .
That's core middle market right down the middle of the fairway as we consistently are over time. .
Yes. As Marc mentioned, the numbers mix isn't different for us between second quarter and third quarter. To the extent that we're in a shared national credit, there is a direct relationship with the borrower. We typically have other business associated with them. I think the growth that we're seeing is really and why I'm excited about it is because it is core, it is direct relationships, people that we've been calling on opportunities - are being created. And so that's really important to us and its franchise building over the long term .
Okay. That's helpful, guys. My other questions have been addressed.
[Operator Instructions]. Next question comes from the line of Timur Braziler with Wells Fargo Securities.
Following up on that last line of commentary, do you have the total balance of shared national credits and participations in the quarter? .
Yes. The shared national credit volumes are about 24% of our total portfolio. And that's kind of mostly in the energy and C&I space that make those 2 areas make up about 80% of the total shared national credits. We do as [indiscernible] about 1/4 of those and about 80% of them are in our local markets. So we're not going outside of our footprint in tracking down those kinds of loans.
Okay. Switching to the deposit base. The decline linked quarter and demand deposits still is pretty elevated. Demand is now less than 30% of the total base and is below pandemic levels. I guess, what are you seeing from a liquidity standpoint from your borrowers? I know you said that, that pressure seems to be abating. I guess what's the outlook for demand deposits as we go into the fourth quarter and into '24.
Yes. So we saw DDA average balances down $840 million in Q2 to Q3. And when that happens, that's a shift from DDA to an interest-bearing within the firm. And so we'll see going from Q3 to Q4, we expect a decline to be near that amount going Q3 to Q4. And then in Q1, we expect to see that rate of decline slow quite a bit. So when we look at kind of deeper into the portfolio and look at size cohorts, we can see the rate of change slowing and that's what gives us some confidence that we'll see a slowdown here over the next 6 months. Q4 will still be a higher number.
Okay. And I guess, as you guys are thinking about funding the high single-digit loan growth, next year and pairing that with the comment for stable to maybe slightly growing deposits. How are you thinking about funding that growth? And I guess it appears that the spreads you're getting on that loan growth relative to the funding sources is shrinking.
And I'm just wondering obviously, you have the longer-term outlook, but why grow loans at such a fast pace when that spread is going to be shrinking and there is broader economic uncertainty out there right now?
Yes. So if you look at the incremental loan growth, the spread on that incremental loan volume is actually widening. So we've been able to see a widening of spreads on new production and the economics of that new production is strong. Not to mention the fact that, that's coming with full relationships, so there's deposits, et cetera. But that incremental loan growth does have incrementally positive and wider spreads. So the funding question, it's going to be a mix of some deposit growth and there may be some smaller amount of wholesale funding in there as well. But either way, it doesn't matter which side of the -- whether it's funded with wholesale or deposits that is incrementally profitable to be sure. .
This concludes today's question-and-answer session. I would like to turn the floor back over to Marty Grunst for closing comments.
Thanks, everyone, again, for joining us today. And if you have further questions, please e-mail us at ir@bokf.com. Have a great day, everyone. .
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.