BOK Financial Corporation (BOKF) Q4 2022 Earnings Call Transcript

BOK Financial Corporation (NASDAQ:BOKF) Q4 2022 Earnings Conference Call January 25, 2023 10:00 AM ET

Company Participants

Steven Nell - Chief Financial Officer

Stacy Kymes - President and Chief Executive Officer

Marc Maun - Executive Vice President, Regional Banks

Scott Grauer - Executive Vice President, Wealth Management

Martin Grunst - Incoming Chief Financial Officer

Conference Call Participants

Jared Shaw - Wells Fargo Securities

Brady Gailey - KBW

Jon Arfstrom - RBC Capital Markets

Matt Olney - Stephens Inc.

Operator

Greetings. Welcome to BOK Financial Corporation Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to Steven Nell, Chief Financial Officer for BOK Financial Corporation. Thank you. You may begin.

Steven Nell

Good morning and thanks for joining us. Today, our CEO, Stacy Kymes will 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 provide details regarding the key financial performance metrics and Marty Grunst, our recently named incoming CFO will provide our forward guidance. PDF of the slide presentation and fourth quarter press release are available on our website at bokf.com. We refer you to the disclaimers on slide two regarding our forward-looking statements we make during the call.

I'll now turn the call over to Stacy Kymes.

Stacy Kymes

Good morning. Thanks for joining us to discuss BOK Financial's fourth quarter and 2022's full-year financial results.

Starting on slide four, fourth quarter net income was $168 million or $2.51 per diluted share. The strong results of the fourth quarter continued to build on the earnings momentum we have been developing throughout 2022. This quarter was the highest pre-provision net revenue in our history. Through the fourth quarter, we've now put together five straight quarters with solid core loan growth, with annualized core loan growth of 13%.

Our fee business has remained strong for the quarter and for the year, despite the worst combined equity and fixed income markets since the late 1960s. As short-term interest rates continued to rise during the quarter, the combination of our asset-sensitive balance sheet and growth in earning assets drove a $36 million increase in net interest revenue and a 30 basis point linked-quarter increase in the net interest margin.

Credit also goes to our diverse fee base, with linked-quarter fees stable despite the full-quarter impact of implementation of previously announced changes to our customer overdraft program as well as the continued effects of the mortgage origination market downturn. We did experience an increase in linked-quarter net charge-offs. However, our asset quality trends remain unsustainably good. In recognition of the strong growth in loans and unfunded commitments during the quarter, we did add to our credit loss reserve. The uncertainty in the economic outlook remained high, with slightly less favorable key economic factors this quarter.

Turning to slide five. Period-end core loan balances increased $773 million or 3.5% linked quarter, with growth spread across C&I and commercial real estate. Unfunded loan commitments grew $839 million linked-quarter and have increased $2.9 billion over the last 12 months. Utilization rates remained slightly below historical norms, so capacity exists for continued growth in outstanding balances.

Average deposit volumes continue to remain high compared to pre-pandemic levels. We did experience a decrease of $1.6 billion or 4% this quarter with attrition in both interest-bearing and noninterest-bearing balances. These declines were consistent with industry trends in response to the continued efforts of the Federal Reserve to move short-term rates higher to slow inflation trends.

Assets under management or administration grew $4.3 billion or 4.5% linked-quarter and were down $5.2 billion or 4.9% compared to last year. The market impact on equity this year which comprise approximately 1/3 of the total, was partially offset with new sales driving the performance.

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 Marc.

Marc Maun

Thanks, Stacy. Turning to slide seven. Period-end loans in our core loan portfolio were $22.5 billion, up 3.5% linked-quarter. Total C&I loans increased $591 million or 4.3% linked-quarter and have increased $1.7 billion or 13.5% for the year, with growth across all sectors. Unfunded C&I commitments increased 7.4% linked-quarter. Commercial real estate loans increased $133 million or 3% linked-quarter and have increased $775 million or 20% for the year. This effectively returns those balances to our 2020 level after experiencing significant paydown activity in 2021.

The annual increase was primarily driven from loans secured by multifamily residential properties and industrial facilities. Unfunded commercial real estate commitments increased 4.9% linked-quarter. We take a disciplined approach to our CRE lending by allocating 185% of Tier 1 capital and reserves to total CRE commitments. We are presently at the upper limit of that commitment range but do expect outstanding CRE balances to grow in 2023 as construction loans fund up.

Health care balances increased slightly this quarter, up $18 million or 0.5% but have increased $430 million or 12.6% for the year, primarily driven by our senior housing sector. Health care unfunded commitments increased 16% linked-quarter which we expect will produce additional balance growth.

Energy balances increased $53 million or 1.6% linked-quarter and have increased $418 million or 13.9% year-over-year. Unfunded commitments increased 9.6% linked-quarter, resulting in an average utilization rate of approximately 49%, creating more capacity for continued balance sheet growth.

General business loans recorded a strong quarter, with balances increasing $368 million or 11.8% linked-quarter. Loans in the general business category are mainly from our wholesale and retail sectors. Loans in our services sector also increased, with balances up $151 million or 4.6% linked-quarter.

Service sector loans consist of a large number of loans to a variety of businesses, including native American, tribal and state and local governments as well as tribal casino operations, foundations, not-for-profit organizations, educational services and specialty trade contractors. Combined services and general business loans have increased $844 million or 13.9% year-over-year. Unfunded commitments in the combined services and general business categories increased 4.4% linked-quarter slightly lowering utilization rate.

Utilization rates continue to run below pre-COVID levels, so we remain well positioned to increase outstanding loan balances without it being predicated on any new customer acquisition. Over the last 12 months, core loans have grown $2.6 billion or 13%, the largest annual dollar increase in our history, excluding acquisitions and PPP loans. Although we don't expect loan growth to continue at this pace, we believe that the momentum we've experienced over the past five quarters will continue as we enter 2023 and customers increase their line utilizations.

Turning to slide eight, you can see that credit quality continues to be exceptionally good across the loan portfolio. Nonperforming assets, excluding those guaranteed by U.S. government agencies, decreased $22 million this quarter. Nonaccrual loans decreased $9 million and repossessed assets fell $15 million. In consideration of strong growth in outstanding loan balances and unfunded commitments this quarter, we added $15 million to our provision for expected credit losses.

The level of uncertainty and the economic outlook of our reasonable and supportable forecast remained high and key economic factors were slightly less favorable to economic growth across all scenarios, with our downside forecast probability weighting unchanged linked-quarter at 40%. Given our solid credit position today, a ratio of capital allocated to commercial real estate that's substantially less than our peers and a history of outperformance during past credit cycles, we believe we are well positioned, should an economic slowdown materialize in the quarters ahead.

We realized net charge-offs of $15.5 million during the fourth quarter essentially all related to a single credit. For the full year, net charge-offs averaged 10 basis points which is far below our historic loss range of 30 basis points to 40 basis points. Looking forward, we expect net charge-offs to continue to be low.

The combined allowance for credit losses was $297 million or 1.31% of outstanding loans at quarter end. We expect to maintain this ratio or to migrate slightly upward as we expect strong loan growth to continue as well as continued economic uncertainty due to market conditions as the Fed pursues their goal of reducing inflation. Both of these conditions support credit provisions going forward.

Now I'll turn the call over to Scott.

Scott Grauer

Thanks, Marc. Turning to slide 10. Total fees and commissions were $194 million for the fourth quarter, relatively unchanged from last quarter. However, the third quarter included record-high results for our commodity and hedging activities as well as our bank-wide investment banking activities. Trading fees increased $9 million linked-quarter as we took advantage of favorable market conditions and increased market volatility.

Our commodity and hedging activities declined $4.7 million from last quarter's record-high, with linked-quarter declines in both energy and interest rate derivatives. Bank-wide investment banking activities fell $2.4 million from last quarter's record-high. Commercial loan syndication fees increased $2.3 million linked-quarter, offset by a $4.7 million decrease in other investment banking fees, primarily fees from our municipal investment banking segment.

The combination of our investment banking and customer hedging activities from our wealth and commercial segments generated $91 million in fee income for the year, an increase of $36 million or 67% compared to 2021. Fiduciary and asset management fees were $50 million for the fourth quarter relatively flat linked-quarter.

For the year, these fees increased $18 million or 10% primarily due to reduced fund fee waivers driven by the increase in short-term interest rates as well as market-driven increases to our oil and gas fees. Our assets under management or administration finished the year at $99.7 billion, an increase of $4.3 billion or 4.5% linked-quarter with growth across all categories.

Our asset mix for assets under management or administration was relatively unchanged this quarter, with 45% fixed income, 32% equities, 14% cash and 9% alternatives. Deposit service charges decreased $2.3 million this quarter, primarily related to the changes we implemented during the quarter to our overdraft program.

Commercial service charges also decreased slightly as we increased the earnings credit rate for our customers. Mortgage banking revenue was $10 million for the quarter, down slightly linked-quarter, with production revenues down $1.6 million due to a $119 million decline in production volumes combined with narrowing margins.

Mortgage servicing fees increased slightly this quarter and are 25% higher than fourth quarter last year. Over the past 18 months, we strategically acquired servicing of approximately $6 billion of unpaid principal balances that will add $15 million of annual servicing revenue.

I'll now turn over the call to Steven to highlight our net interest margin dynamics and the important balance sheet items for the quarter. Steven?

Steven Nell

Thanks, Scott. Turning to slide 12, fourth quarter net interest revenue was $353 million, a $36 million increase linked-quarter.

The rapid increase in interest rates, combined with our strong loan growth and our asset-sensitive position resulted in linked-quarter net interest margin expansion from 3.24% to 3.54%. This was partially offset by the expansion of our securities portfolio which slightly dilutes the margin but increases net interest revenue.

The average effective rate on interest-bearing deposits increased 59 basis points this quarter, bringing our total deposit beta to 32% for the year. Average earning assets increased $757 million compared to the last quarter. The average available-for-sale securities portfolio increased $648 million this quarter as we increased that portfolio $1.5 billion linked-quarter to pivot back towards a more neutral interest rate position. Average loans increased $377 million, while cash and cash equivalents fell $180 million.

On slide 13, you can see that our liquidity position remains very strong. Our loan-to-deposit ratio increased to 65.4% this quarter from 59.8% at September 30th. Total deposits decreased $1.9 billion and loan balances increased $767 million this quarter, although increasing our current loan-to-deposit ratio remains well below the pre-pandemic level of 78.7% at year-end 2019, providing sufficient on-balance sheet liquidity to meet future customer loan demand. Our capital position remains strong as well with a common equity Tier 1 ratio of 11.7% well above regulatory thresholds.

It is notable that even with our strong loan growth and material unrealized losses in our available-for-sale securities portfolio, our tangible common equity ratio remains strong at 7.63%. Both the holding company and the bank hold investment-grade ratings from all three major rating agencies. With such strong capital levels, we once again were active with share repurchase, opportunistically repurchasing 314,000 shares at an average price of $103.14 per share in the open market. We expect to be active in repurchasing shares over the next four quarters.

Turning to slide 14. Linked-quarter total expenses increased $24 million, $16 million from personnel and $8 million from non-personnel expense. $10 million of the personnel expenses from cash-based compensation due to increased sales activity combined with a onetime employee incentive. Deferred compensation expense which is directly influenced by market valuations, increased $5 million. The linked-quarter increase in non-personnel expense was primarily driven by increased professional fees and business promotion spend as well as a contribution to the BOKF Charitable Foundation.

I'll now turn over the call to Marty Grunst, our Incoming CFO, who will provide our forward guidance. Marty?

Martin Grunst

Thanks, Steven. Turning to slide 16, I'll cover our expectations for 2023. We expect mid to upper single-digit annualized loan growth. The economy and our geographic footprint remains very strong and may outperform in this cycle, given the high level of business in migration from other markets. Sizable increases in unfunded commitments during 2022 and low levels of line utilization should be an additional tailwind for loan growth.

During the fourth quarter of 2022, we added $1.5 billion to our available-for-sale securities portfolio to move us closer to an interest rate neutral position. We expect to hold the portfolio at this higher level in '23. With a strong base of core deposits and expect modest attrition in interest-bearing and demand deposits to move our loan-to-deposit ratio somewhat higher while still remaining below historical levels.

Currently, we are assuming 25 basis point increases in February and March before the Federal Reserve pauses. We believe the margin will migrate modestly lower in the first half of 2023 as interest-bearing deposit betas increase, demand deposit balance attrition runs its course and our interest rate position is more balanced.

The December net interest margin was 3.57%. Net interest income is expected to approach $1.4 billion, in total, for 2023. In aggregate, we expect total fees and commissions revenue to approach $750 million for 2023. We expect expenses to be below Q4 2022 levels in the short-term, migrating back towards this level throughout 2023.

We continue to expect revenue growth to outpace expense growth, resulting in an efficiency ratio which remains below 60%, nearing 57% by year-end '23. Our allowance level is slightly 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 provisions similar to the second half of 2022.

Current asset quality is very strong and does not foreshadow material deterioration. Changes in the economic outlook will, of course, impact our provision expense. And we expect to continue our quarterly share repurchases as Steven noted earlier.

I'll now turn the call back over to Stacy Kymes for closing commentary.

Stacy Kymes

Thank you, Marty. The strong fourth quarter results, in fact, earnings for the year demonstrate how the bank was positioned for earnings growth in this rising rate environment.

We leaned in to becoming more asset sensitive, given the unique nature of the events causing rates to drop precipitously. We chose this approach and have now moderated back to our more neutral interest rate risk profile. We materially benefited from our asset-sensitive balance sheet position in 2022 as well as our focus on top line revenue growth.

We recorded the strongest annual loan growth in our history with loan growth across the geographic footprint and across business line sectors. As a result of our diverse fee base, we came very close to covering the 53% year-over-year decline in mortgage banking fees, establishing new records in our commodities and investment banking businesses.

Last year included loan loss reserve releases of $100 million compared to actual provision of $30 million in 2022. Our broad selection of products to our client base produced the top line revenue growth we set our focus on at the beginning of the year and has us well positioned as we start the new year. Credit quality continues to be very stable and better than pre-pandemic levels, though it is likely unsustainable. We continue to maintain a combined allowance above the median of our peers.

We are in a stage where investing in strong banks versus trading the sector are expected to matter. Banks with thoughtful growth, a diverse business mix, meaningful core deposits and proven credit discipline should outperform. We are well positioned for however the economy should shift, favorable or negatively, as we move through the incoming year.

I am proud of my teammates here at BOK Financial, who work very hard to deliver these strong results. As we conclude, I'd be remiss not to acknowledge my friend and our long-time CFO, Steven Nell, as this will be his last earnings call. Steven has been an asset to our company and served with great character. We will miss his contributions.

We are fortunate to have such strong talent with Marty Grunst stepping in to fill the CFO role. Many of you know Marty from his time as our Treasurer before he became our Chief Risk Officer.

With that we are pleased to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Jared Shaw with Wells Fargo Securities. Please proceed.

Jared Shaw

Good morning.

Stacy Kymes

Good morning, Jared.

Jared Shaw

First, I'd like to just echo Stacy's comments and Steve, congratulations on your pending retirement. And Marty, congratulations on the new role and looking forward to working with you in that role going forward.

Martin Grunst

Thank you.

Jared Shaw

Maybe just looking at the asset sensitivity and the steps you took this quarter, are you where you want to be in terms of now being more fully neutral? Or should we expect to see some additional moves to the securities portfolio to get there? And then on the funding for that, was that match funded or what's the duration on funding on that positioning?

Martin Grunst

Yes. So, Jared, we're pretty happy with the neutral position that we got out of that increase and we'll continue to look at that position as the year progresses. I mean, that's something that we look at on a continuous basis. But that's all funded with variable rate funding. It has to be to generate the impact of the rate risk position. So that's how that played out.

Jared Shaw

Okay. So, on that trade, we can expect to see maybe spread expansion as rates start to move back down later on. What's the duration on the securities purchases?

Martin Grunst

Yes. So those are our typical mortgage-backed securities and so that's kind of in that three-year, a little longer than that duration territory.

Jared Shaw

Okay. Thanks. And then on the loan growth, it seems like there's, like you said, good momentum going into the year. Are you seeing better spreads on loans now? And then also, what would have to happen, I guess, for customers to come back in and reengage and see that utilization rate move higher as we go forward?

Marc Maun

Yes. Jared, this is Marc Maun. The spread really hasn't, I wouldn't say, expanded but it hasn't contracted either. It's really just tracked along all year long, I'd say, fairly consistent. So we haven't really seen any significant change in that.

As far as utilization rates go, I mean, focusing on the C&I side because CRE will go up naturally just from construction loans. But the C&I side, it's more just, I think, a reflection of our customers have been expanding commitments at a faster rate than they've been borrowing. And I think from their cash positions and liquidity positions, that they're going to expend some of that first before we start to see utilization rise. But we would expect that to continue as you progress through time. It's still some of that, that just has to be used up in the business.

Jared Shaw

Okay. Thanks. And then just finally on capital, where would you like -- are you focusing primarily on the TCE ratio here in terms of looking at how you want to control excess capital? Is that the right thing for us to be focusing on? And where do you think ultimately that should flow out or stabilize?

Steven Nell

We've ranged -- this is Steven. We've ranged somewhere in between 11.5% to 12% of tangible common equity and that's a range that we like. That's what we look at primarily. Sometimes we are constrained by total capital. But we've got a nice level of buybacks that you've seen over the last several quarters. We continue to -- we think we'll continue to do that, opportunistically use capital in that fashion, pay a good dividend. We raised that just a little bit in the quarter. And then the rest, we'll allocate towards loan growth and balance sheet growth to support our businesses. So that's generally how we think about it.

Jared Shaw

Great. Thank you.

Operator

Our next question is from Brady Gailey with KBW. Please proceed.

Brady Gailey

Thank you. Good morning, guys.

Steven Nell

Good morning.

Brady Gailey

I just wanted to ask the buyback question a little different. I mean, if you look at 2022, you repurchased around 2.5% of the company. It was about $155 million of stock. Should we expect something similar for 2023? Or -- I mean, you guys clearly have excess capital so it feels like you could do more than that potentially.

Steven Nell

I would say, probably similar. I think that kind of range that you've seen quarterly which has been anywhere from $30 million to $50 million, fits kind of the capital profile. We feel like we've got that level of dollars to buy back stock and it depends on the quarter. Scott executes that for us and we opportunistically find a good price and we'll be a little more active. If the price runs up, we'll slow down a bit. So that's why you see it variable across those various quarters. But I would anticipate a similar level of buybacks in 2023 than 2022. But again, it's all contingent on what the market looks like.

Brady Gailey

Okay. And then BOKF has, for a long time, been a very experienced energy and health care lender and it's a meaningful amount of your loan book. I know energy is doing great, just given the pricing backdrop. But yes, you start to hear of some weakness within health care. We're not seeing it in y'all's numbers at all, but maybe just an update on how you're thinking about your credit quality for the next couple of years out of your health care borrowers.

Marc Maun

Yes. Brady, this is Marc. We certainly are keeping our eye on the health care portfolio significantly because probably the headwinds there are around the labor costs associated with the senior housing industry which is the primary area we focus on. And the catch-up that has to happen with Medicare and Medicaid reimbursement rates and which hasn't completely got there. So we're seeing a little bit of issues with that but it's something we want to keep our eye on. But over time -- we've been in this business a long time.

We've been very selective about who we're focused on. Demographics favor the industry. We've focused on regional operators, not major chains and large operators, people that have an understanding of the industry. And so we've been through cycles before and we think we're comfortable with our customer selection. But certainly, that's the one we're going to keep probably our strongest attention to in 2023.

Stacy Kymes

I might just add, if you think about that sector, from my perspective, over the last 20 years, it's probably our lowest net charge-off segment in our entire loan portfolio. We do have criticized classified risk, where because of the timing of cash flows between when operating expenses are incurred versus when they may be reimbursed from private or public payers, there can be some mismatches that create some short-term criticized or classified levels. But if you think about it over a longer period of time, the loss rates in this portfolio are exceptionally low. It's actually probably our best-performing asset quality segment in our entire portfolio over the last 20 years.

Brady Gailey

All right. That's helpful. And then finally for me, BOKF has done a great job of growing fiduciary and asset management fees. I mean, if I look at it over multiple years, it's just been a great source of revenue growth for you guys. How should -- I mean, not necessarily next quarter or even next year but as we look out for the next couple of years, should we continue to expect BOKF to see this nice revenue growth in that segment?

Scott Grauer

Sure. So this is Scott. We feel good about really the fact that not just our asset mix which is very well diversified between fixed income, equity alternatives but a healthy mid-teen percentage of cash which now is obviously serving us well in terms of fee generation off money market funds, both our proprietary and others that we utilize. So that's been nice to get that momentum and revenue generation back.

But we're really seeing significant progress in growing assets across all the various business lines inside of Wealth Management as well as in the various customer segments that we serve. So we're -- we continue to be optimistic and feel good about how we're positioned to continue to see that segment grow, given our account, new account attraction of assets with probably less market exposure and decline than many others do that have a more skewed asset mix than us. So we're very optimistic about it, yes.

Stacy Kymes

One of the other things that differentiates us there a little bit is, if you think about both the pandemic and the decline in asset value during that period of time and then last year where both fixed income and equity markets declined really for the first time since 1969, the way we deliver into that segment through a very personalized approach, people value that.

So as some in the market are moving more toward automated approaches or things like that, the ability to have a touch point, to talk to an adviser, to talk about strategy and to reassure folks in difficult market circumstances that -- the value of that is much higher today than perhaps in previous periods because of the volatility that's been experienced. And we think that's a differentiator for us in the long-term to help us grow this asset base.

Brady Gailey

All right. Great. Well, thanks for the color. And Steven, great working with you. Good luck on retirement.

Steven Nell

Thank you very much, Brady.

Operator

Our next question is from Jon Arfstrom with RBC Capital Markets. Please proceed.

Jon Arfstrom

Hey, good morning.

Stacy Kymes

Good morning.

Steven Nell

Good morning, Jon.

Jon Arfstrom

Congrats, Steven.

Steven Nell

Thank you.

Jon Arfstrom

And Marty, it's been a while but looking forward to it.

Martin Grunst

Right, yes, that as well.

Jon Arfstrom

Yes. Back to the Midwest, I guess. But can you guys help us a little bit on the cadence of the margin? You kind of alluded to it a little bit in your guidance. And I know you're focused more on NII but you're saying modestly lower until maybe some of the deposit rate and flow pressures ease. But does it feel -- what kind of erosion are you talking about earlier in the year? And do you think it can maybe stabilize and float higher later in the year?

Martin Grunst

Yes. Jon, this is Marty, I'll take that. So our rate risk position is now pretty neutral to a rate increase. And we do think we'll get a rate increase or two early in the year and that might be modestly beneficial, just at least initially. The securities portfolio will continue to reprice higher. So those are kind of positives there. Deposit mix shift is, of course, going to be the counterbalance as that kind of plays out. And loan growth, that will be supportive for net interest revenue but just ever so slightly dilutive to margins. So it's not at all clear exactly how that shakes out timing-wise but that should result in some modest decline in margin and nothing that's really significant one way or the other.

Jon Arfstrom

Okay, okay. Got it. That's helpful. So not material changes. Maybe Marc or Stacy, I wrote down a couple of quotes, Marc. You said should an economic slowdown materialize and Stacy, you said credit is unsustainably good. So help us understand where your heads are at in terms of what you're seeing on credit. And it doesn't feel like you're signifying any kind of material slowdown in loan growth, or am I wrong on that?

Stacy Kymes

This is Stacy. I think it's interesting to listen to the market pundits over the last six months from there's a deep recession coming to a soft recession to now a soft landing. I don't think any of us know with any level of precision what the future holds. We've got a deeply inverted yield curve, but we're also coming off of pandemic that's unprecedented. And so all of the economic metrics that people are accustomed to trying to use to predict those types of economic outcomes are probably not as reliable. Our viewpoint is, if you think that we're going to have a soft landing and we're going to grow, we've demonstrated our ability to grow. We grew loans organically 13% this year, $2.6 billion.

We're in a great footprint and we're well positioned for growth if the economy does achieve a soft landing. Our footprint is much better than most. But if your view is that there will be a recession and there will be more likely credit deterioration, then we're one of the best-performing credit banks in the regional bank space. Largest bank in the United States that didn't participate in TARP. Our credit performance through the last meaningful downturn materially outperformed our peers.

Credit is hard to forecast. We typically will say, the next six months are pretty easy to see. After about six months, the lens gets really foggy. But as we look forward from here, our classified loans are down, our potential problem loans are down. Our nonaccrual loans are down. We're starting from an incredibly low point. And so even some migration up wouldn't necessarily even indicate a deterioration really in long-term credit trends, really just a movement from abnormally low levels.

And so I don't know that any of us want to forecast exactly what we think is going to happen because nobody really knows. But if it's a growth scenario, we're going to perform well. If it's a credit event that people are worried about, then I think our credit history and our discipline around that will serve us very well if that is the scenario that has people concerned.

Jon Arfstrom

Okay. So the view from Tulsa is not Armageddon, it's just.

Stacy Kymes

Not in the least. I mean, I think our view, even when people were forecasting a recession, was that it's entirely likely that our footprint -- think about Dallas, Houston, Denver, Phoenix, what's happening in those markets, that there may be a level of material outperformance in our core markets than there maybe in the rest of the country if there is a recession because the level of in-migration into these markets is significant.

And the economic growth that's happening is far outpacing the national economy. So even when the general consensus was there's going to be a recession, we thought that we would be in a much better position just because of that footprint. But we're not seeing anything today in discussions with our borrowers and our own data that would indicate that we think there's a recession that's imminent.

Jon Arfstrom

Okay. All right. Thanks, guys. I appreciate it. Good luck, Steven.

Steven Nell

Thank you.

Operator

[Operator Instructions] Our next question is from Matt Olney with Stephens Inc. Please proceed.

Matt Olney

Thanks. Good morning. On the brokerage and trading line, I think, the slide deck attributed higher levels of trading from elevated margins. Any more color on the drivers of that higher margin? And how sustainable is that into 2023?

Scott Grauer

Well, this is Scott. So we saw in all of the fixed income markets with the market volatility that Stacy alluded to, we saw unprecedented volatility in the fourth quarter. But we continue to see, with the level of rate uncertainty that's out there in the marketplace, good spread capability. We're nimble and have a reasonably well-diversified product mix inside of the fixed income arena. So we think that until there's an abatement of the uncertainty on the market volatility, we'll continue to enjoy better margins there.

Matt Olney

Okay. Appreciate that. And then going back to deposits and funding, pretty big material outflow of demand deposits in fourth quarter and we're seeing this across the industry. And it sounds like the guidance you put out there assumes continued pressure here. I'm curious what your expectations are. And within that guidance, when do you expect that to stabilize?

Martin Grunst

Yes, this is Marty. Let me give you a little color there. So yes, our guidance does presume our loan-to-deposit ratio comes up some over '23. And it presumes that our cumulative beta on deposits continues to increase somewhat over '23 to accommodate the retention of our interest-bearing deposits. The DDA attrition, we see that more in the first part of the year. Any of these attrition factors, they either burn out or conditions change and it's no longer relevant. That's kind of how we think about the outlook there.

Stacy Kymes

Matt, this is Stacy. I think that we've seen a commentary in the markets around the deposit attrition in the industry broadly. I think a couple of things that are unique about us that I think need to be brought out. Number one is we're starting from a much lower loan-to-deposit ratio than most of our peers in this space.

We end the fourth quarter at low 60% loan-to-deposit ratio. Steven and I were talking, we've run this bank at upper 70s, low 80s for a long time. That's typically much more normal. And so that starting point gave us the ability to manage this liquidity and margin and we are actively doing that.

We also have a lot of stored liquidity that's effectively off-balance sheet through our broker-dealer and our wealth group, where funds that have left our balance sheet have gone to other sources that are controlled through our broker-dealer or our wealth group, that in the event that we need liquidity in a future period, can be brought back at the right price. So it's not something that we see is necessarily problematic. It's something that we're actually actively managing and watching to optimize for our shareholders.

Matt Olney

Yes. Okay. I appreciate that, Stacy. And I guess just kind of staying on this topic here. In the fourth quarter, I mean, the funding plan was obviously some borrowings to kind of plug the hole. And Stacy, you mentioned some of the store liquidity that you could use at some time but it didn't sound like that's a near-term event. So what is the plan, I guess, for funding at least for the first half of the year?

Martin Grunst

Yes. So we would see both a stabilization in the overall deposit trends and some usage of wholesale really throughout the year on the wholesale side. As you know, the vast majority of our securities portfolio is U.S. government agencies which are ideal for pledging to FHLB. And it's really normal for us to have FHLB funding as a core part of our overall funding base. I mean, that goes back 25, 30 years. So it's really the recent couple of years that are the anomaly. And eventually, we're all going to get to normal balance sheet profile at some point.

Stacy Kymes

Remember, Matt, I mean, pre-pandemic, we always view deposits funded the loan book. And the securities book was self-funding through other mechanisms, whether it be FHLB or repo or other activities. That's the way we ran the bank for 25 years and so we're just kind of coming back to that. Deposits didn't fund loans and securities historically. It's only been in the last really couple of three years where that's happened. We're still $6 billion higher in deposits today than we were December of 2019. So we've got to put some of this in perspective, based upon the long-term perspective, not just based on a pandemic viewpoint.

Matt Olney

Yes, fully agree. Okay. Thanks, guys.

Martin Grunst

Thank you.

Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Steven for closing comments.

Steven Nell

Well, thanks again, everyone, for joining us today. If you have any additional questions, please call us at 918-595-3030 or you can e-mail us at [e-mail]. Have a great day. Thank you.

Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.