BOK Financial Corp (BOKF) 2014 Q1 法說會逐字稿

Good morning everyone, and welcome to the BOK Financial Corporation's first quarter 2014 financial results conference call. (Operator Instructions) Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to Mr. Joe Crivelli, Investor Relations for BOK Financial Corporation. Please go ahead.

Good morning, everyone, and thank you for joining us to discuss BOK Financial Corporation's first quarter 2014 financial results. Today we'll hear remarks about the quarter and outlook from Steve Bradshaw, CEO, Dan Ellinor, COO, and Steven Nell, CFO.

Before we begin, I'd like to remind everyone that during this conference call, management will make certain forward-looking statements about the outlook for 2014 and beyond that involve risks and uncertainties. Forward-looking statements are generally preceded by words such as believes, plans, intends, expects, anticipates, or similar expressions.

Forward-looking statements are protected by the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ from expectations include, but are not limited to, those factors set forth in our filings with the SEC. BOK Financial is making these statements as of April 30, 2014, and assumes no obligation to publicly update or revise any of the forward-looking information in this announcement. I will now turn the call over to Steve Bradshaw. Steve?

Thanks, Joe. Good morning, everyone, and thanks for joining us on our first ever quarterly earnings conference call. I trust everyone has seen our earnings release for the first quarter which was issued earlier this morning.

As I have outlined in my letter to shareholders, we launched a five-point strategic plan to deliver shareholder value. This includes, one, exceed customer expectations; two, actively manage risk; three, accelerate revenue growth; four, control internal expense growth; and five, enhance the employee experience.

Our first quarter results represents a solid first step towards these objectives as financial results were quite good. We earned $76.6 million or $1.11 per share; that's up 5% from $73 million and $1.06 per share in the fourth quarter of 2013. While there were some puts and takes in each of these two quarters, which Steven Nell will discuss in a moment, business trends are very good. We saw very strong loan growth, delivered revenue growth from key lines of business, including brokerage and trading, asset management and mortgage, and we carefully controlled expenses while making a significant investment in our risk and compliance infrastructure.

At the same time, we closed on two important acquisitions in the Wealth Management space. Net-net, we are very pleased with the first quarter results. The strong loan growth we saw late in quarter four has been sustainable thus far in 2014. Dan Ellinor will provide more details, but we are seeing strong demand from borrowers across substantially all of our lines of business and markets. First quarter loan growth was just under 9% annualized, within the mid-to-high single digit range we forecasted, and average loan growth was an even more robust 3.9% in the quarter, or 15.6% annualized.

Most importantly, despite the strong loan growth, the credit quality of our lending portfolio continues to see consistent improvement from quarter to quarter, indicating that this growth is being driven without sacrificing our historically prudent and disciplined credit culture. Investment assets under management were $59.1 billion at quarter end compared to $57.1 billion at year end, and $53.7 billion a year ago.

In the first quarter, the closing of GTRUST added $630.5 million to the total, with the balance due to growth in new and existing customer relationships as well as an increase in overall asset values due to market movement.

Our fee generating businesses are improving as well. Revenues in the brokerage and trading business increased 3.5% from a tough fourth quarter. And while that business still has a ways to go before getting back to its historical run rate, the pipeline in our municipal investment banking business is extremely strong right now. In addition, we are carefully managing expenses in brokerage and trading operations in light of lower volumes.

Transaction card revenue was flat on a sequential basis but up 5.2% year over year. The asset management business continued its steady growth track record with a 2.6% sequential increase, and the mortgage business is back on an upward trajectory with a 4% sequential increase. The year-over-year decline is steep, but keep in mind that quarter one of 2013 was in the heart of the refinance boom which ended when long-term rates spiked in the second half of 2013. We will have one more tough comparison in this business in quarter two as a result.

Our mortgage business leadership has done a great job of building the infrastructure needed for sustained, ongoing profitability, including consistently building a servicing portfolio to grow recurring revenues, building a strong correspondent network in the purchase origination market, and expanding distribution capabilities online.

To this last point, the home direct mortgage origination channel, which was launched in quarter four, had a great first quarter out of the box and grew to 7% of total originations in the first quarter. Mortgage volume in the direct channel and the correspondent channel were both up sequentially, and origination revenue and servicing revenue were likewise both up sequentially, so this business seems to have stabilized.

On the down side, deposit service charges and fees continued to decrease and other revenue was down sequentially as quarter four results included a $2 million favorable lawsuit resolution. I'm very encouraged by the progress we're making on incremental expense saves. As noted earlier, this is one of our key strategic objectives and the entire BOK Financial team is pulling together to make sure the investments we have to make in 2014 are offset as much as possible by expense reductions in other areas.

Personnel expense was down $21.2 million sequentially. About $15.5 million of this was a one-time event; the reversal of a previous accrual under our True-Up executive compensation program. As you know from disclosures in our proxy statement, the True-Up Plan, which came to a conclusion at the end of 2013, was keyed off of the bank's performance within our peer group combined with the average compensation of peer bank executives. When the final figures were tallied after all the peers filed their proxies, it was determined that we had over-accrued for this Plan.

There were some other puts and takes within the personnel expense line item but net-net, I believe the management team is doing an extremely good job of holding the line on incremental spending. Mortgage banking costs, professional fees, occupancy and equipment, and data processing and communications were all also down sequentially. Other expenses were down $2.6 million. These decreases were partially offset by a $2.4 million contribution of appreciated stock to the BOKF Foundation during the quarter.

All told, I'm very pleased with our progress in the first quarter. We are doing precisely what we said we would do, which is grow loans with high quality borrowers, remix the balance sheet to reduce the bond portfolio and prepare for a rising rate environment, grow our fee generating businesses, and keep a careful watch on expense growth while building out our regulatory and compliance infrastructure.

With that I will turn the call over to Dan Ellinor who will discuss the loan portfolio in more detail. Dan?

Thanks, Steve, and hello, everybody. I'd like to shed some additional light on the strong loan growth we are generating. As Steve noted, the total loan book increased 2.2% on a point-to-point basis, and average loans grew 3.9% over the fourth quarter. This was good strong loan growth in a very tough, competitive environment, and represents the hard work of our Commercial and Consumer lending teams, and the strong reputation our bank enjoys as a reliable source of credit throughout our footprint.

I'll go through the loan portfolio business-by-business, which is represented on page 16 of our earnings press release, and slide 9 of the presentation accompanying the earnings conference call.

The energy lending business was flat quarter-on-quarter and represented 18% of our portfolio. While at face value, this continues a trend we saw throughout 2013, I can tell you that there's palpable sense that the market is changing. Our exploration and production portfolio was up $46.3 million sequentially, offset by decreases in the select energy service companies we do business with. In addition, we're very encouraged by our loan pipelines which are the strongest we have seen in quite a while. The market feels like it's turning, and obviously this bodes well for the future because our energy lending has historically been one of our strongest growth contributors.

The healthcare lending business, which specializes in skilled nursing facilities, senior care and memory care, and specialty hospitals, among others, continues to be at the top of its game. Loan growth was nearly 10% in Q1 and deal flow continues to be robust, and usage of construction lines approved in 2013 should continue to feel growth throughout 2014.

Manufacturing was very strong in Q1 with 13% loan growth as the economy within our footprint continues to perform well. The $24 million decrease in integrated food services portfolio was unique to one borrower that exited the bank in the first quarter. Services, wholesale, retail, and other commercial and industrial loans were all largely flat quarter-on-quarter.

Our real estate lending portfolio grew 9% in the first quarter, or 36% annualized. Within this book, we continue to work down our construction and land development portfolio which was down 10% compared to Q4 and down 22% from a year ago. The retail, office, multi-family, and industrial portfolios all grew substantially quarter-on-quarter.

From the outside looking in it may appear that real estate is getting overheated, but I can assure you that we continue to underwrite to the same conservative standards we have for many years and all new construction is underwritten to the permanent market with stress testing around interest rates, occupancy rates, and lease revenue. We have the tight controls in place to mitigate risk and ensure the portfolio meets our traditional disciplined underwriting standards. I believe the credit quality of this portfolio is the best I have seen since I arrived at BOK in 2003. The residential mortgage portfolio was down slightly quarter-on-quarter as was total consumer loans. We're down to the last $3.5 million of indirect auto loans, a business we exited when it was at $700 million in 2008.

I'll touch on a few geographic trends. At first blush, the Oklahoma market was down from $5.2 billion to $5.1 billion sequentially. But our commercial lending pipeline is very strong in Oklahoma so I'm not troubled by this one quarter anomaly.

Texas, New Mexico, Colorado and Arizona all grew nicely during the quarter with Colorado pacing the market with 12% growth. Arkansas and Kansas City, both smaller markets for BOKF, were down slightly, although Kansas City grew 11% in the fourth quarter and had a tough act to follow.

Loan yields, net of allowance, decreased 12 basis points sequentially to 3.95% from 4.07% in Q4 as we saw competitive price pressures across the business and across the footprint for both new and existing deals. Another factor that drives loan spreads is the credit quality of the underlying borrower. We've seen both existing borrowers continue to improve and qualify for better rates under their loan agreements. And in total, the new borrowers we're bringing on are also of higher quality than the average of the existing portfolio. While this is good news for our credit quality and credit culture, obviously price competition for these borrowers is tightest.

I will now turn the call over to Steven Nell to discuss our financial results in more detail. Steven?

Thanks, Dan. I'll highlight a few items from the first quarter 2014 financial results then I'll describe how we see the remainder of the year.

As Steve noted, we earned $76.6 million in the quarter, $1.11 per share, up from $73 million and $1.06 per share in the fourth quarter of 2013. For the first quarter of 2013, net income was $88 million or $1.28 per share.

During the quarter there were a couple of unusual items to talk about, most notably the reversal of $15.5 million of accruals under the True-Up executive compensation plan. This positively impacted EPS by $0.15. We also made a contribution to the BOKF Foundation of $2.4 million which negatively impacted EPS by $0.02. Net interest revenue was $162.6 million in the quarter compared to $166.2 million in the fourth quarter.

As Dan noted, we saw lower margins on loans in the quarter. In addition approximately $2 million or $0.02 per share of this delta was due to there being two fewer days in the first quarter compared to the fourth quarter.

Other operating revenue was $140.9 million in the quarter compared to $142.4 million in the fourth quarter. As Steve noted, our key fee generating lines of business all had good quarters from a growth standpoint, and the sequential decrease was largely attributable to $3.2 million decrease in the other line item where we had a $2 million one-time lawsuit settlement in the fourth quarter of 2013.

Personnel expense was down $21.2 million in the first quarter to $104.4 million. In addition to the $15.5 million True-Up adjustment, we revised our 2013 bonus accrual downward by $1.6 million after amounts were paid in March. We also reported a $1.7 million reduction in executive deferred compensation to coincide with a loss in value of the assets underlying the deferred comp program. The two of those net to zero impact total P&L. Normalizing for these three non-recurring items puts personnel expense at just shy of $123 million in the first quarter.

Mortgage banking costs totaled $3.6 million compared to $7.1 million in the previous quarter with $2.2 million of the decrease due to lower provisions for repurchase risk on loans we sell to the government agencies as we get further from the 2006 and 2007 vintage loans, as well as the slowing in the rate of pre-payments as interest rates have climbed. We believe this $2.2 million reduction is sustainable in future quarters. The balance of the decrease was due to the release of an aged acquisition hold back of $1.3 million.

Professional fees were $7.6 million compared to $10 million in the fourth quarter, largely due to the timing of the expenses related to regulatory and compliance projects last year. Net occupancy and equipment expense was $16.9 million compared to $19.1 million in the fourth quarter, where there were a number of items including storm related repairs in Oklahoma City, and branch closure costs at the end of 2013. Other expense also decreased to $6.8 million in the first quarter compared to $9.4 million in the fourth quarter due to timing of recruiting and employee relocation costs last year. On a year-over-year basis you can see that professional fees, occupancy and equipment, and data processing and communications are all running higher than last year, largely reflecting our investment in the compliance and risk management infrastructure.

Turning to the balance sheet, as Steve mentioned, we are making progress towards our goal of reducing the bond portfolio. The portfolio was $9.9 billion at March 31 compared to $10.2 billion at year end, a decrease of $213 million. Our current expectation is to reduce the portfolio in total by roughly $1 billion over the 12 months of 2014.

Average deposits increased $360 million over the previous quarter, and period-end deposits decreased -- excuse me, increased by $120 million. Obviously, the interest rate environment continues to work in our favor here. Given the lack of yield available on the short end of the yield curve, customers continue to grow deposits. The Corporation remains extremely well capitalized. The Company and its subsidiary bank exceeded the regulatory definition of well-capitalized at March 31, 2014, with a Tier 1 capital ratio of 13.77%, total capital ratio of 15.45%, and a leverage ratio of 10.17%.

BOK Financial's Tier 1 common equity ratio, based on the existing Basel I standards, was 13.59% as of March 31, 2014, and based on our interpretation of the new capital rules, our estimated Tier 1 common equity ratio would be approximately 12.6%, nearly 560 basis points above the 7% regulatory threshold.

Credit quality remains pristine. The combined allowance for credit losses was 1.45% of period-end loans and represented 181.5% of non-accrual loans. Non-performing assets, excluding those guaranteed by government agencies, were 1.18% of period-end loans and repossessed assets and we continue to recognize net recoveries instead of net charge-offs.

In the first quarter, we recorded $5.4 million of recoveries compared to $2.8 million of charge-offs. Our efficiency ratio calculates to 61.13% this quarter, but if you normalize for the $15.5 million True-Up adjustment, it's around 66%. We paid a regular quarterly dividend of $0.40 per share or $28 million in the first quarter. And the Board of Directors approved a quarterly dividend of $0.40 per share payable on or about May 30, 2014, to shareholders of record on May 16, 2014.

Now I will spend a little time talking about how we see the balance of the year unfolding. As Dan mentioned, we continue to expect mid- to high-single digit loan growth rates. We expect continued nominal pressure on net interest margin. We expect continued reduction of the bond portfolio, offset by growth in the loan portfolio, and as noted, expect to reduce the bond portfolio by $1 billion over the full year.

Net of all these factors, we expect net interest income to be flat to slightly down for the balance of the year. We're expecting low single digit growth from fee generating businesses in aggregate. There will be some expense growth through the balance of the year as we continue to ramp up regulatory and compliance projects but this will be manageable. We've made a lot of progress in this area over the last couple of quarters. Our risk and compliance department is, for the most part, fully staffed as of the end of the first quarter.

We expect to see some incremental depreciation expense as new systems come online. And there will be several million dollars of professional fees towards the middle of the year. Of course the regulatory environment changes every day, so don't rule out additional objectives. Lastly, we expect continued loan growth to reduce the likelihood of any release of loan loss reserves.

With that, we'll give you a chance to ask any questions you may have. Operator, can you please compile the question-and-answer queue?

(Operator Instructions) Our first question comes from Brady Gailey from KBW. Please go ahead with your question.

Hey, good morning, guys.

Good morning.

Good morning.

I guess I'll start with the $1 billion shrinkage in the bond portfolio. Do you think that that decline will be done at year end or would you expect this trend to continue into 2015?

Probably continues into 2015. Certainly the $1 billion we're confident will get down that level during 2014. But we likely will continue to move a little bit lower through 2015. Right now we're just slightly at liability sensitive. In fact, it's 1.66% liability sensitive. So we want to move towards that neutral position by mid-2015.

Okay. And do you think 2015 will be the same magnitude, maybe $1 billion less, or do you think it'll be something a little more scaled back from that?

I haven't fully made that determination, but likely scaled back a little.

Okay. And the balance of your Shared National Credit portfolio, I think at year end it was around $2.4 billion, did that change much in the first quarter?

Hey, Brady, this is Dan. It actually didn't. In fact, the SNC portfolio has been around 19% of our total loan portfolio for many years. It grew $67 million on a link quarter basis, around 23% of the total loan growth.

Okay. And then lastly, TCE is now a little over 10%. You all still have excess capital in the bank. Maybe give us an update on the acquisition outlook. Do you all remain active in trying to acquire -- and I know you all have acquired some wealth management companies -- but something more meaningful like a larger, nice-sized bank?

Yes, Brady. This is Steve Bradshaw. I'll take that one. You're right; we did have two acquisitions in the quarter, GTRUST and MBM in Houston. They both fit our profile for acquisitions in that they brought in additional assets under management in two markets that we really do want to grow, our overall business in Houston and the Kansas City market, but they also provided some strategic benefit.

GTRUST actually brought in a fee-based planning platform that we see benefit across all Wealth Management. And then MBM brings us some expertise in the 401K plan, administration and consulting business that we think will benefit as well. So I can see us continuing to look for opportunities like that.

On the bank front, we're absolutely engaged. Our target really hasn't changed over time. We would love to see opportunities both within the footprint and perhaps in some select areas adjacent to the footprint. It's really about looking for banks that have weathered the storm well, that would be accretive from a management perspective that would add to us in terms of market presence; bring us asset generation capabilities, which is a big priority for us today. And we're actively engaged in that kind of dialogue and that kind of a view.

It's not an easy game, as you well know. Prices are still somewhat disconnected in that market, but we're interested in that, and we have an active group internally that's identifying opportunities as we speak. We remain very interested in acquisitions, obviously, at the right price and with the right kind of organization that we think adds to us culturally.

Okay. Great. Thank you for the color, guys.

Our next question comes from Michael Rose from Raymond James. Please go ahead with your question.

Good morning, guys. How are you?

Good morning.

Just wanted to get a sense -- on the loan growth front, obviously a good quarter. You're about 9% annualized. What are the puts and takes going forward as it relates to the complexion of the loan growth that goes into your mid-to-high single digit outlook?

Thanks for the question, Michael. This is Dan. Yes, we're really excited about completing two very strong quarters of accelerated loan growth which, if you look back on a linked quarter basis for the first three quarters of 2013, is pretty impressive. What's more impressive is it's really diversified.

As you know from our earnings release we had decent growth in the C&I book over the last two quarters as well as commercial real estate. Candidly, we're disappointed that the energy book has gone flat on us but we are optimistic on the pipelines across all asset classes for the rest of the year. We still feel like mid-to-single -- excuse me, single -- mid-to-single high digit growth will still play out for 2014.

We've got good diversification across all the geographies; particularly pleased with our small business lending growth which is low double digit in the first quarter on an annualized basis. So it feels like we have got all the different asset classes growing in the right way and we're looking for some help on the energy side.

Any commentary on the sequential quarter growth in Colorado?

Colorado has been a great market for us. We have been there for a number of years and we've got a phenomenal Commercial Banking team as well as all of our fee-based businesses. We've got a nice niche in Colorado around public finance which had some nice year-end closings towards the end of Q4 2013, and also good C&I growth in 2014 Q1.

Okay. Then just one question on expenses; how much of the expected regulatory build or compliance costs that you talked about is in the first quarter run rate? Thanks.

Well, as I mentioned -- this is Steven -- I think we're close to being fully staffed in the BSA area, in our compliance and risk management groups. We continue to add a few people on the audit front, but for the most part, our personnel costs were there in the first quarter. I do think there will be some systems type expense that will come on board as we continue to stand up and build some infrastructure around technology. And, of course, there's space and other things that comes along with the personnel that will ultimately be an increase in the next few quarters. So there will be some expense that will come on, but the personnel side of it, which is the most costly, is generally there in the first quarter.

Great. Thanks for taking my questions.

Our next question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead with your question. Mr. Arfstrom, is it possible your phone is on mute?

I'm here. Good morning, guys. Thanks for holding the call. This is helpful. Dan, maybe a just a question for you, you talked a little bit about pricing pressure and competition. Just curious how much more you think there is, just gut feel and maybe an idea of new loan yields versus what's running off, as a way to gauge that as well?

Okay. Thanks, Jon. It's a good question. Certainly there's continued pricing pressure on high quality credit, which is really our main target. If you look at the growth over Q4 and Q1 sequentially, you see that we were over-weighted in commercial real estate versus our historical trends. We have purposefully high-graded that portfolio over the last several years; we're essentially done repositioning at this point, and yields have come down in the commercial real estate side.

They've also come down in the healthcare portfolio, both year over year and link quarter basis. Between those two, it was the bulk of our book growth. We have seen some abatement in spread declines in some of the other areas, and actually on a per market basis we have seen some flattening, but our sense is that we're not done yet, and you're going to see continued pressure on net interest margin and yield in the loan portfolio for the remainder of 2014.

Okay. And then anything you're seeing on erosion in structure that bothers you, is that persistent yet, or is it still not part of the theme?

Well, we certainly saw the start of erosion in the structuring around credit early last year. I would identify two primary areas that seemed over-weighted, was both ABL, asset based lending, and highly leveraged transactions, neither of which we really participate in, frankly. But there's still some degradation in structure. I would say that it slowed. The pressure for us remains on pricing; not so much on structure.

The fact is, we have got a lot of leverage we can pull to generate revenue versus trying to go down that path. Most of us on the senior management team have been in the business for 30-plus years and we know how that film ends and we're not going to go down the path of weakening our structure. It's really part of our core DNA and we look back at historical charge-offs and let that tell the story.

Okay. And then, Steven, maybe a question for you, just back on capital and balance sheet growth. With securities portfolio run off of $1 billion as the goal, and some loan growth, maybe you get a little bit of balance sheet growth, but you're still going to build some capital. Can you just refresh us on your -- I know you don't necessarily like buybacks but maybe the priorities for utilizing some of the excess capital. I know you touched on acquisitions, but what else can you do?

In terms of dividends, we continue to pay a nice regular dividend. We kicked off the dividend in 2005 and have increased it every year annually since that time. We haven't made a decision. You notice that we announced $0.40 a share again this quarter. We'll look at that towards the end of the year and see if there's an opportunity to elevate that a bit. But, yes, you're right, stock buybacks is not high on our list. We've worked real hard over the past decade on getting float out there for you guys to participate in, and for minority shareholders to benefit, and we want to make sure that we maintain that. Of course, organic growth is the primary usage right now, and then as Steve talked about, M&A and our potential there.

Okay. All right. Thank you.

Our next question comes from Brett Rabatin from Sterne Agee. Please go ahead with your question.

Hi, guys, good morning. Wanted to I guess first talk about the guidance around fee income and just thinking about the low single-digit increase. Can you maybe talk a little bit about the two acquisitions and how that factors into that guidance? And then just thinking about where you are on a year-over-year basis; you've obviously got some catching up to do due to the mortgage banking income last year. Maybe you could give some additional color just around the components that add up to that single-digit number this year.

Yes. This is Steve Bradshaw. I think on the GTRUST side, it was somewhat additive to our first quarter results since we closed that transaction in February, so that's part of the increase and what you would see under trust fees for the quarter. MBM will close in the second quarter; that will be additive as well. That will contribute to some of the fee income growth going through the year.

I think the bigger component is -- obviously is mortgage for us. It's a little bit of a tough comp relative to last year -- in the first half of last year anyway, when we were still engaged in the refi business. But I think what we see is that our efforts to build a correspondent network, and now our new HomeDirect channel are working as we had envisioned, which was to help mitigate the volatility that you get in the retail origination side of that business. We also migrated, I think, a little earlier than maybe what you might see nationally to purchase market.

We were -- last year in 2013, we were at about 60% in the purchase market. I think nationally the average was something less than 40%. And that was a concerted effort on our part to make sure that we were hiring originators that were connected to that purchase market, and also reflective of our geography. We had better equity throughout most of our footprint, so a lot of the refi business had already occurred. It wasn't dependent upon a recovery of housing prices for people to be able to qualify, so you kind of had both of those things working.

I think for us, we're -- if you look at first quarter 2014 versus first quarter of 2013, retail production is down around 28%. But we're seeing application volume up about 7% from fourth quarter up to the first quarter. So we're seeing that on the retail side. We think our forecast for the rest of the year is to be relatively flat on retail. We'll see some growth, we think, on the correspondent side and HomeDirect continues to gain some momentum.

So for us, I think on the fee side, it's really important that we create some sustainable revenue, obviously coming out of mortgage, so we're encouraged by what we saw in the first quarter. The other big contributor, I think, for us, is we've really been focused on our asset management business. And for us it's a matter of getting external distribution, working a little bit more strongly, relative to just distributing investment management internally. In the first quarter, we saw about 36% of our growth in -- or, I'm sorry, 36% in terms of new sales in our Wealth Management business coming from outside distribution.

Last year we averaged around 10%. So we made a concerted effort in the latter half of last year to build out distribution capabilities, to get on platforms with RIAs and other broker dealers. And we introduced a new World Energy Fund in February that closed out the quarter just shy of $15 million so that's all working for us. It's an area of big emphasis for us. We have a good track record from an investment management perspective.

So those are the things I think that are probably the big drivers for us on the fee revenue side. I think institutional trading will be a challenge for us. There's obviously not a lot of consensus at the moment around rate movements and so that has slowed, some of that trading revenue, even though we were up quarter-over-quarter. So I think that's an issue for us and we've been working to reduce some of the expenses in that group, recognizing the fact that we'll probably be flat throughout the rest of the year.

The other contributor that you see in that category is energy derivatives, and Dan could probably speak to this better than I could, but we've seen a decline in that as that book has slid sideways from a borrowing perspective. We've also seen less hedging activity coming out of that book, so that's also been a bit of a headwind there as well. So you're trading off a lot of different fee revenue categories within the quarter, but I think the focus is on maintaining the momentum that we have in mortgage and obviously are trying to increase assets under management in trust.

Okay. That's good color. The other thing I wanted to ask about -- if you gave any color around it and I missed it, I apologize, but just thinking about this decline in the securities portfolio, can you maybe walk through your thought on the duration that you're trying to achieve or what basically from an improvement in sensitivity to interest rates analysis, what goes into that billion dollar decline?

Sure. Well, the duration of the portfolio of today is about 3.2 years. If you look back a year ago, it was under 2 years. So it's already extended some to the 3.2 year category. If you shock the portfolio a couple hundred basis points up, it doesn't extend very much; a quarter or two is all it extends. So we've already bought securities and structures that really behave better in a rising rate environment with the securities that we have on the books. So part of what we've been doing is you saw us sell a few securities in the first quarter for a small gain. It's really repositioning some of those securities to securities that don't extend as much as the ones we've sold. We've been managing that for well over a year.

Okay. Great. Thanks for all the color.

Our next question from Jennifer Demba from SunTrust Robinson Humphrey. Please go ahead with your question.

Hi, good morning. I was wondering if you could quantify the revenue and expense impact in the first quarter from the GTRUST deal that closed I guess at the end of February?

Yes. This is Steven. It had, of course, one month in there. We booked $371,000 of revenue on GTRUST in the first quarter. So if you could take that and extrapolate that out for the remainder of the year, and of course, we expect some growth there too and come up with a pretty good revenue number for -- that's additive from GTRUST. Of course, expenses for that -- for the GTRUST, they'll be scattered across all categories. You can calculate what you feel is appropriate margin for that business.

Also, Steven, are there any loan categories where you guys feel like things are getting overheated and maybe you want to back off a little bit? Can you talk about that?

Sure, Jennifer, this is Dan. We're very granular in how we take a look at all the asset classes, both by product type and by geography. I guess the one that probably has my antenna up a little bit that we actually participate in is the multi-family market. We take a look at very specific demographics and we roll forward multiple years based on job growth and other factors that go into potential new renters. So there are some markets that appear to me to be a little bit overheated when you look at the required rent to produce a decent return.

Having said that, our real estate book is now about 20% of the total portfolio; that's probably about as high as it's been in a long time. I think we bottomed out close to 15%. We take a look at that multiple times during the year and make sure that we're not building something that we're not going to be really proud of for multiple years in advance.

I mentioned earlier, I think it was Brady's question or maybe it was Michael's, around asset-based lending and highly leveraged transactions. I think there's definitely worries out there, but we don't really participate in either of those markets. The rest of the book, you look at our credit quality, it's as clean as it's been in many, many years, and it feels like we have got a very high quality graded book right now.

Thank you.

Our next question from Gary Tenner from D.A. Davidson. Please go ahead with your question.

Good morning, everybody. A couple of questions. I guess just first on the mortgage business, it looks like the gain on sale there, if I am looking at it right, has sort of stabilized the last couple of quarters. Could you give any sense of what your outlook is for that for the remainder of the year?

Yes. This is Steve Bradshaw. You're right, it has stabilized. I think -- we're concerned that there's going to be some incremental pressure there. There's still, in our view, capacity out there in the marketplace especially from the larger lenders and there's still a significant number of independent players as well.

I think that the Mortgage Bankers Association is positioning a change in their forecast for new purchase sales in the second half of this year. They're revising it down, I think, rather substantially, so in our view, that excess capacity could translate into pricing pressure. We would expect margins to be somewhat less in the second half of the year because of that. But you're right, they have stabilized near term.

Great. Then just regarding the construction portfolio, and I may have missed this as Dan was running through the overview of the loan portfolio, but just the $20 million sequential decline in that book of business. Just thoughts around that and how is the secondary or the permanent financing market impacting the transition of the construction book to the term?

Sure. Let me give you some color on that. The way we classify construction in our earnings release is primarily single-family residential. There's certainly other construction categories in multi-family, industrial, and retail. But the decline you're seeing is in the single-family residential market as well as A&D where you're going to make land loans for future lot development. That's an asset class that we have been backing out of for almost five years now. It's down multiple $100 million. Not necessarily an asset class that we saw perform very well in the last cycle, so it's not one that we're focused on at all. And we're down to just a handful of clients in that base.

We're almost exclusively focused on income-producing properties, both large retail, office, industrial, and multi-family. That is really where we're trying to grow the business and where you have seen the growth over the last several quarters. Permanent market -- permanent market is pretty strong. We're not lulled to sleep by the aggressive cap rates that the permanent market's underwriting to right now. We're well above that. But so far, both on the agency side and [lifeco] side the permanent markets are very, very strong.

Thanks very much.

And our next question from Matt Olney from Stephens. Please go ahead with your question.

Hey, thanks. I want to go back to the discussion on expenses. Seems like the last few years you guys have been investing pretty heavily on some fee income businesses, brokerage and trading, mortgage comes to mind. Can you update us where you are on the incremental investments within these businesses going forward?

Yes, you're right. We have, we spent a good amount on mortgage originators over the past 18 months, in fact, or a couple of years really. And we're seeing the benefit of that certainly. I think if you looked at all of the industry statistics for 2013, you'll see that our origination activity was about 57% versus the average was about 40%. We focused our spending on mortgage originators that had a real purchase book. I think -- we do have in our budget some additional spend there that we could perhaps do in the third and fourth quarter of this year. I think on the brokerage and trading side, our institutional activities, we're pretty much fully staffed in that area. Steve talked a little bit about some of the trust and the assets under management focus. We have hired in that space a little bit, but I think that's pretty much on board.

Yes, this is Bradshaw. Let me tag on to that. On the mortgage side, we would certainly be interested in adding additional originators and be opportunistic about that, but we've also been realistic about our outlook on what the retail purchase market will look like. As I think I mentioned earlier, we're down about 30% in that channel versus the same quarter a year ago. Probably have a pretty similar comp versus second quarter of last year in the second quarter this year. So what we've done is we've taken out service and support related expense, recognizing that downturn in volume. I think the run rate of what's come out of that is somewhere around $1 million a month.

So we have reduced that and obviously we would scale that if we see an increase in production or we see an opportunity to add originators. But that's -- obviously we have had to recognize that the decrease in production on the retail side.

That's not dissimilar to what you see in the broker-dealer. Where we have been adding there really has been at the client-advisor level. These are people that are embedded in the private bank and provide advice and access to investments across both the broker-dealer platform as well as our investment management group. We continue to look for opportunities to add there.

On the institutional trading side, where volumes are down, we have been working through a similar process that we have with mortgage where we have reset some of the gearing ratio, if you will, between trading resources and the brokers, the producers in that space, to try to make sure that we keep the right kind of alignment in terms of expenses versus revenue. Those are both very fluid businesses and we're trying to manage them that way.

Thanks, guys.

(Operator Instructions) Our next question comes from Peter Winter, BMO Capital Markets. Please go ahead with your question.

Thanks, good morning. Steve, big picture question. Historically BOK has liked to keep a neutral balance sheet, doesn't like to take bets on interest rates. I'm just wondering, with rates so low today, is there more of a willingness to maybe make the balance sheet a little bit more asset sensitive going forward?

Yes. This is -- I think you meant that for me, Peter, Steve Bradshaw.

Yep.

Steven may want to join in as well. Our desire is to -- really is to remain neutral. We let ourselves get a little bit liability sensitive because we just didn't see a compelling case to be made that near term rates would be rising. So we felt like from a shareholder perspective it was better to generate that current income than to reposition.

Now we feel differently about that. We can see what we think would be some good indicators that you might see shorter term rates moving up in the second half of 2015 certainly into 2016. That's why we made a decision to begin remixing the balance sheet and pulling back on that securities portfolio. But our goal would not be to position ourselves significantly on the asset sensitive side. It would really be able to bring it back to neutral and obviously we're -- we want to see loan growth that helps us accomplish that and remix it.

And is there any thoughts about the use of swaps versus such a big securities portfolio?

We've thought about it. We always felt like it's most efficient just to hold a cash position in the actual securities. Government agency, guaranteed, very liquid market for that, and you get better execution long-term just with cash positioned securities.

Okay. And just one housekeeping question. With the guidance on net interest income, where you say flat to slightly down balance for the year, that's relative to the first quarter. Is that right?

That's correct.

Okay. Thanks, very much.

You bet.

And everyone at this time, I'm showing no further questions. I would like to turn the conference call back over to management for any closing remarks.

All right. Thanks, everyone, for joining us. If you have any further questions, you can feel free to call me today at 918-595-3027 or you can send an e-mail to IR@BOKF.com and we'll get back to you very quickly. Have a great day and we'll talk to you soon.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone line.