BOK Financial Corp (BOKF) 2016 Q1 法說會逐字稿

Good morning and welcome to the BOK Financial Corporation first-quarter earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference call over to [Jim] Crivelli. Please go ahead, sir.

Good morning, everyone, and thank you for joining us to discuss BOK Financial Corporation's first-quarter 2016 financial results. Today, we'll hear remarks about the financial results and outlook from Steve Bradshaw, CEO; Steven Nell, CFO; and Stacy Kymes, EVP Corporate Banking. Marc Maun, Chief Credit Officer, will also join us for the Q&A. In addition, PDFs of the slide presentation and press release that accompany this call are available on our website at www.bokf.com.

Before we begin, I'd like to remind everyone that during this conference call, Management will make certain forward-looking statements about its outlook for 2016 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 27, 2016, 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.

Thanks, Joe. Good morning, everyone. Thanks for joining us.

Earlier this morning we announced our earnings for the first quarter of 2016. We earned $42.6 million, or $0.64 per diluted share, in the first quarter, down from $60 million and $0.89 per share in the fourth quarter of 2015. It was obviously a very challenging quarter as we faced a number of headwinds.

Our first-quarter loan loss provision of $35 million was necessitated by continued credit migration in the energy portfolio, as we are now well into the second year of the commodities price downturn that began back in November of 2014. We had internally forecast a front-end-loaded loan loss provision in 2016, so this was not outside our own expectations. And we are now forecasting provision for the year at the high end of our $60 million to $80 million guidance.

The significant decrease in primary mortgage interest rates during the first quarter had a positive impact on production revenue in our mortgage business, but the flip side of that was a much larger than normal mark to market on our mortgage servicing right asset. This included a change in our MSR asset valuation assumptions, which resulted in a downward adjustment of $7.4 million. For the quarter, the MSR negatively impacted net income by $11 million net of hedges.

As those who have followed us for a long time know, we don't hedge 100% of our MSR valuations like some other banks do, so this can create earnings volatility as it did in the first quarter. Over the past three years MSR valuation has contributed $2.6 million to earnings. As a result, we continue to believe this is the right strategy for creation of long-term shareholder value.

Finally, we had an inordinate number of unusual items impact earnings during the first quarter, including legal accruals, fair value adjustments for credit quality in the derivatives business, increased deposit insurance and purchase accounting adjustments, among other items. These items totaled about $0.12 per share and are detailed on slides 7 and 8 of the presentation accompanying this call. Steven will also discuss these in more detail shortly.

On the positive side of the equation, the core business continues to perform very well. Net interest income and net interest margin were both up this quarter. And we are growing loans and have full new business pipelines which should bode well for the rest of 2016.

Revenue growth in our fee-generating businesses remains on track and the fact that our wealth management business can continue to grow assets under management in the extremely challenging current market environment speaks volumes for our franchise.

We are extremely well capitalized and liquid, and made great progress towards interest rate neutrality this quarter. We continue to carefully manage expenses and, while there was a lot of noise in the expense line items this quarter, over the past three years personnel expense has increased at a very manageable 3% compound annual growth rate, despite the significant build in staff we've accomplished in risk, compliance and audit-related functions. And personnel expense as a percent of revenue has remained stable.

Outside the risk and compliance spend and expenses that are directly tied to revenues, controllable non-personnel expense items have only increased at a 0.4% compound annual rate during the same time period. We continue to believe that we can manage expense growth lower than revenue growth to drive earnings leverage.

As shown on slide 5, we surpassed $16 billion in loan outstandings for the first time in our company's history, with 0.5% sequential loan growth for the quarter, or 2% annualized. The loan growth is up 9.1% compared to the same time last year.

A large paydown in the services portfolio negatively impacted growth rate this quarter, but new business development pipelines are very strong and we continue to forecast mid-single digit growth for the full year. We've grown our loan portfolio at a double-digit compounded rate since 2013, and we believe we are taking share from both large national competitors and smaller regional competitors because of our differentiated business model.

Fiduciary assets were up 2% during the quarter. Considering the market environment in the first quarter, this was no small feat. I'm very proud of our wealth management team, which continues to win new business against a wide range of competitors. Fiduciary assets have likewise grown at a double-digit rate since 2013.

I'll provide additional perspective on the quarterly results at the conclusion of the prepared remarks, but now I'll turn the call over to Steven Nell, who will cover the financial results in more detail. Steven?

Steven Nell: Thanks, Steve.

As Steve mentioned, there are a number of noteworthy items that impacted net income this quarter. So I'd like to begin by walking through them and providing some explanation so that you can normalize our quarterly earnings performance against prior quarters.

The loan loss provision of $35 million for the quarter was necessitated by credit migration in the energy portfolio due to the continued extended commodity price downturn, and represents almost half the expected total provision for the year.

The MSR impact of $0.11 per share was exacerbated this quarter by an extremely volatile interest rate environment. The 10-year treasury ended the quarter nearly 50 basis points lower compared to 12/31/15, which had an outsized impact on our mark to market. As you know, we've historically hedged less than 100% of our mortgage servicing interest rate exposure, as we believe this approach provides the best economics over the long term as interest rates rise and fall.

Additionally, as Steve mentioned, we adjusted mortgage spread assumptions in our MSR valuation model to better reflect future prepayments and related cash flows. This adjustment should provide better information for hedging purposes going forward as well.

We realized $5.3 million of accruals and settlements in the first quarter related to legal matters in our corporate trust, consumer banking, and commercial lending areas.

Deposit insurance was $1.9 million higher on a sequential basis. One of the primary determinants of our deposit insurance premium is the magnitude of criticized assets, so the credit migration in energy is driving the increase, along with the surcharge for banks greater than $10 billion in size to replenish the deposit insurance fund. All told, we expect deposit insurance expense to run approximately $8 million higher in 2016 versus 2015.

Turning to slide 8, the next item is a $1.6 million purchase price accounting adjustment related to an investment in our merchant banking portfolio. Approximately $2.7 million of this was included in the other expense line item of our income statement, offset by a $1.1 million benefit in the non-controlling interest line item.

This, by the way, is a noncash adjustment and has no impact on future cash flows or the true value of the merchant banking investment.

We continue to adjust our assumptions for default servicing costs in our mortgage servicing business. And this led to a $1.4 million repurchase reserve build in the first quarter, which is included in the mortgage banking cost line item.

Finally, these negative expense variances were partially offset by a $4 million gain on sale benefit in our securities portfolio, which I'll discuss in a little more detail in a moment.

Turning to slide 9, net interest revenue and net interest margin benefited in the first quarter from loan growth, as well as better yields on earning assets. Net interest revenue for the first quarter was $182.6 million, up $1.3 million, or 0.7%, compared to the fourth quarter, despite one less day in the quarter. On a year-over-year basis, net interest revenue was up $14.8 million, or 8.9%.

Net interest margin was 2.65% during the quarter and has steadily increased over the past five quarters, largely due to the remix of earning assets combined with slightly higher yields on loans and available-for-sale securities.

On slide 10, fees and commissions were $165.6 million for the first quarter, up 6.3% on a sequential basis and flat year over year.

Brokerage and trading was up 6.9% sequentially. Growth drivers included institutional brokerage revenue, retail brokerage fees and investment banking revenue, partially offset by lower derivative fees and commissions.

Transaction card was essentially flat on a sequential basis, but up 4.3% year over year. There was solid year-over-year growth in all categories of transaction card revenue -- bank card fees, TransFund network revenues, as well as check card revenues.

Fiduciary and asset management was up 2.9% sequentially and 1.9% year over year due to continued growth in assets under management.

Mortgage banking revenue was up 37.5% sequentially, as the same decrease in mortgage interest rates that negatively impacted the mortgage servicing right valuation had a significant benefit to refinancing volumes. Mortgage commitments of $902 million at the end of the first quarter were the highest level in the Company's history.

Deposit service charges and fees were down 1.2% sequentially and up 4% year over year.

Turning to slide 11, total operating expenses were up 5.3% sequentially and 11.2% year over year.

Personnel expense was $135.8 million, up $2.7 million, or 2%, from the fourth quarter. Payroll tax was $4.2 million higher, partially offset by a decrease in incentive compensation expense of $2.5 million. Regular compensation expense increased by just under $1 million.

Other operating expenses were $109.1 million, up $9.7 million or 9.7% sequentially and 18.9% year over year. As noted earlier, there are a number of noteworthy items in the operating expense this quarter that impacted our results.

Now turning to the balance sheet on slide 12, the available-for-sale securities portfolio was down $157 million in the first quarter. It was down $272 million for the same period last year.

We made good progress toward interest rate neutrality and ended the quarter with just 0.28% liability sensitivity.

Our credit department saw the opportunity to optimize our securities portfolio when interest rates were low during January and early February. This is what led to the $4 million gain on sale this quarter. They replaced these securities with adjustable rate securities which significantly improved our interest liability since disposition.

Period-end deposits were $20.4 billion at quarter end, down $670 million from the end of December, due to reductions from commercial customers, as well as seasonal reduction in municipal and educational public deposits.

BOK Financial continues to be extremely well capitalized as evidence by the capital ratios on this slide.

Turning to slide 13, our guidance assumptions for the balance of 2016 are as follows:

Mid-single-digit loan growth for the full year.

Continued gradual decline in the securities portfolio of $200 million to $250 million per quarter.

Stable to increasing net interest margin and increasing net interest income.

And as Steve noted, we expect loan loss provision for the full year at the high end of our forecasted $60 million to $80 million range. If you use the $80 million top of the range, this implies $45 million for the next three quarters. And it's reasonable to expect the provision will continue to be front-end loaded, with the majority of this falling in the second quarter. Obviously, the provision could be modestly higher if borrowing base redeterminations, the oil and gas market, and other factors prove more negative over the next several months.

On a rolling-12-month basis we continue to expect mid-single-digit revenue growth in fees and commissions.

We expect expense growth lower than the rate of revenue growth for the full year, excluding the unusual one-time items we mentioned earlier.

We expect continued capital deployment through organic growth, acquisitions, dividends, and limited stock buybacks.

We expect the MBT Bancshares acquisition in Kansas City to close in the third quarter.

Stacy Kymes will now review the loan portfolio in more detail. I'll turn the call over to Stacy.

Thanks, Steven.

Slide 15 shows our loan portfolio on a market-by-market basis.

The lower loan growth this quarter was largely a result of a large paydown of nearly $100 million in the Oklahoma services portfolio. And, as you can see, our Oklahoma portfolio was down 3% this quarter. Our new business development pipelines remain very strong across the footprint, and we believe that growth should rebound to our mid-single-digit target, as Steven mentioned.

Arizona continues to perform very well, with 11% growth for the quarter. Over the past couple of years we've used our presence in Arizona as a springboard to selectively diversify into California and Utah, and this effort continues to bear fruit. We are making strong inroads with very high quality commercial real estate borrowers in these markets, and this provides added balance across our portfolio into non-energy-dependent markets.

Kansas City continued its recent strong track record with its fourth consecutive quarter of double-digit annualized growth. And we continue to see good traction there in both the private bank and the commercial bank.

New Mexico contributed to growth this quarter. And Colorado, arguably our third most energy-exposed market, remained strong this quarter.

Texas was essentially flat this quarter, but this is due to paydowns in our heavy equipment business, which in turn were driven by liquidity [events]. Our pipelines in Texas were strong in all three primary markets -- Dallas, Fort Worth, and Houston. So we are optimistic about the balance of the year.

As indicated on slide 16 of the presentation, commercial loans were essentially flat this quarter at $10.3 billion. As expected, the energy portfolio was down sequentially, impacted by paydowns, as well as charge-offs.

Healthcare continued to grow nicely, up 5.9% sequentially. As we've discussed, this is a business where we compete nationally, and it provides good portfolio diversification on both an industry and geographic basis.

On a year-over-year basis commercial loans are up 9.6%, led by healthcare, manufacturing, and wholesale/retail.

Slide 17 shows our energy portfolio as of March 31. At quarter end our energy portfolio was $3 billion and E&P line utilization was 64%. 54% of the energy commitment and 45% of energy outstandings are shared national credits. Energy outstandings are down $68 million sequentially, as expected. In addition, unfunded energy commitments are down about $200 million compared to fourth quarter from $2.4 billion to $2.2 billion.

Over the past several quarters we've talked at length about the importance of portfolio composition relative to loss history and loss severity in the energy business. And it bears repeating that our portfolio is comprised primarily of senior secured, first lien, reserve-based loans, which is the best performing subset of our loan portfolio across the credit cycle.

We have only two second-lien facilities totaling $20 million of the commitments and $10 million of outstandings, and both of these facilities are to pass-rated credits. We have no exposure to mezzanine debt, capital markets debt, or high yield debt to our borrowers. Our energy services portfolio is very high quality and represents a modest 9% of our total energy outstandings. As a result of these factors, we are comfortable with our loan loss reserve, which represents 3.19% of energy outstandings.

The continued credit migration within the portfolio demonstrated at the bottom of this slide is a function of another quarter of depressed commodity prices and, to a lesser extent, the result of the recent Shared National Credit examination.

As I mentioned in my remarks at the RBC conference last month, the regulators explored a number of approaches to risk rating energy credits during the exam process. The most severe approach would have led to more of our energy portfolio being downgraded to criticized, and the less severe would have led to very few downgrades. I would categorize the final result of still a bit of a work in progress, as the industry grapples with implementing the most recent guidance consistently.

First-quarter energy charge-offs were $22.1 million, and included $15 million for the Shared National Credit we discussed on last quarter's call, which we proactively downgraded and impaired in the fourth quarter based on lower than expected production volumes and higher than expected production costs.

Turning to slide 18, the commercial real estate book grew 3.4% and is up 14.8% year over year. Our commercial real estate pipelines remained strong at quarter end, and we were seeing good deal flow of very high quality lending opportunities across our market territory. We are also seeing an active permanent market for all product types.

At the end of the first quarter, our total CRE exposure in Houston was $326 million. All of these credits are pass rated at present. As we have noted on past calls, we have minimal office and multifamily exposure and no downtown office exposure.

As shown on slide 19, the combined allowance for loan losses was 1.5% of period-end loans, and represented 105% of nonaccrual loans. Nonperforming assets, excluding those guaranteed by government agencies, were 1.59% of period-end loans, and repossessed assets up from 0.99% last quarter, due to energy credit migration. Net annualized charge-offs to average loans were 56 basis points this quarter.

I'll now turn it back to Steve Bradshaw for closing remarks. Steve?

Thanks, Stacy.

All told, quarterly earnings did not meet our management team's expectations. We were working through the impact of the lower-for-longer commodity price cycle and we encountered some unrelated expense items as well.

But our focus remains on effectively managing the Bank and our expense levels appropriately, not [taking] from our ability to continue to grow revenue, manage risk, and provide exceptional customer service to our customers.

It's now been 17 months since the infamous post-Thanksgiving OPEC meeting that precipitated the energy downturn. We are seeing credit migration in the energy portfolio as expected, and we believe we are reserving appropriately for the risk of loss in the portfolio.

While these loan loss reserves negatively impacted earnings this quarter and may be an earnings drag throughout 2016, we can't lose sight of the fact that energy lending is a successful, profitable, and differentiated specialty lending business for us, and has been a significant source of profits for shareholders across the credit cycle.

We will take our lumps as anyone in this business will during an extended downturn. But our energy lending team has done the right things to manage and mitigate risk in the portfolio. Chief among these was sticking to our core principles and lending disciplines and remaining focused on first lien, senior secured, reserve bank lending during the boom times, even when oil was $100 per barrel.

We believe the absence of second-lien loans, mezzanine debt, high-yield debt, and other riskier asset classes in the energy lending arena will serve us well and enable us to outperform our peers over the credit cycle.

We acknowledge that our MSR mark to market valuation was more negative than anyone expected, but we've made changes to better reflect future valuation drivers, which should provide better information for hedging going forward.

The other elevated expense items incurred in the first quarter shouldn't reoccur, and we expect to generate more normalized expense levels going forward. As I noted at the start of the call, we are holding the line on core expense growth and remain focused on holding expense growth below the rate of revenue growth. We are reevaluating trends quarterly and are committed to adjusting expenses in areas that experience softness or a decline in revenue growth going forward.

However, as I noted, the core business is sound, with net interest income, net interest margin, loans, assets under management, and fee income all up this quarter. We are extremely well capitalized and liquid, and made great progress towards interest rate neutrality during the quarter.

Most importantly, we continue to see little spillover impact on the broader economy in our footprint, outside of some early signs of softness in the Houston real estate market -- shadow commercial office inventory, price concessions on luxury multifamily housing, and the like. When we meet with investors from outside the region, they are surprised to hear this, as well as skeptical. To be honest, we would have expected to see more (inaudible) at this point ourselves.

But I believe this clearly demonstrates how diversified the economies in our footprint really are. For example, since the start of the commodities downturn, employment in the energy sector is down 21% in both Oklahoma and Texas, but the unemployment rate in both states is actually lower today than it was two years ago. Unemployment in Oklahoma is 4.4% today. It was 4.8% two years ago. It's 4.3% today in Texas and it was 5.3% two years ago. In both states unemployment continues to track well below the national rate of 5%.

The diverse economy across our footprint is one of the reasons why I have a lot of optimism for the long-term view of this franchise, despite the challenges we endure in the current quarter. The robust collection of businesses at BOKF is another. We're built to outperform our peer group across the cycle, and we remain very confident in our business model and our operating strategy.

We will take your questions now. Operator?

Thank you, sir. (Operator Instructions) Brady Galey; KBW.

So, the energy reserve was [built] a little bit; it's now 3.2%. Can you just remind us why that level is so much below some of your peers?

Well, I can't compare from a peer perspective. I don't look inside their portfolio and know exactly what they have. But I think when you look at our portfolio and the composition of it and our understanding of each and every one of those credits, we feel very comfortable that our reserve at the end of the quarter was appropriate and one we're all comfortable with.

I think one of the other things that is important is if you look at the totality of our loan loss reserve relative to our total loans, we're at 1.5% which, particularly for regional peers, compares pretty favorably.

And so the entirety of the reserve is available and I think we were reticent early on to try to break out the energy piece, because that's not traditionally how reserve methodologies are looked at. But I think if you look at it in totality in particular our reserve is very appropriate and one that we're very comfortable with. And it really goes back to our knowledge of our own portfolio and the composition thereof.

Okay. And then, if you take the energy reserve and the energy loans out and look at kind of what's left I think your reserve on non-energy loans is around 110 basis points. Do you think that as the local economy feels the impact of lower economic activity in oil, do you think that you'll end up building that non-energy reserve as well as we progress through 2016 and 2017?

We'll react to the circumstances as they present themselves. But as Steve alluded to in his remarks, we're not seeing much in the way of spillover impact. I've been in our major markets here all in the last six weeks or so. Houston is showing some softness.

Dallas there is zero softness that is apparent to me. The market is performing extremely well. It's much more diverse. If you look at that North Texas corridor, you've got a lot of in-migration of new businesses, Dallas is performing very well.

Denver is still performing very well. They have some energy exposure. And Oklahoma has held up very nicely. There's some diversity in business in Oklahoma City in particular that has been able to absorb some of the higher priced talent in that workforce that has been laid off from the energy sector.

So those markets have held in better than what we would have expected. So we'll evaluate the adequacy of the allowance in totality based on the facts and circumstances that present themselves at the time we make that evaluation.

Okay. And then lastly, the net charge-offs, I realize they're all energy related, but they ticked up. Basically you've been running close to zero and they're now around 60 basis points. You mentioned the $15 million related to the specific energy SNC we talked about last quarter.

Do you think going forward the net charge-offs will go back to around zero or a little above? Or do you think that we'll start to see something in that line item going forward?

Brady, this is Marc Maun. We would expect to see the amount of our charge-offs be accounted for in the overall provision. We expect basically if the loan gap stays at these levels the charge-offs for the full year will still be comfortably within that loan loss guidance of $60 million to $80 million.

Yes, okay. All right, great. Thanks for the color.

Jared Shaw; Wells Fargo Securities.

Just following up a little bit on the energy side, did you change any of your assumptions on the stress case going into the end of the quarter here?

Yes, we did. We actually ran our stress case with the oil starting at $34, going to $40 over a five-year period and holding firm there. Gas price started at $1.65 and rose to $2.50 over that five-year period and held firm. It's a much flatter scenario than we've used in the past, although it's a little higher priced than was used in the first quarter, reflecting the change in the market. But I think the flatness helps us assess based on what we see in the forwards [drip] currently.

Okay, thanks. And then, just I guess a follow-up on the question that Brady just had, so as we look at the high (inaudible) provision at $80 million and with the reserve you feel is adequate, most of that $45 million then we should assume is for increased charge-offs through the course of the year?

I think you'll also have increased criticized and classified levels, at least through the second quarter as we go through the borrowing base redetermination process. So part of our internal thinking around that is not just to account for net charge-offs, but also to account for additional migration to criticized and classified as we go through the redetermination process.

Keep in mind it's been six months since we've seen some of these credits. From an engineering perspective we don't know how much reserve they've added during that period of time. You have seen a price decline subsequent to their last redetermination, so we do think that there is a likelihood of increased criticized and classified migration during this second quarter.

So both that factor as well as anticipating a level of charge-offs all factor into where we landed with our provision guidance.

Okay. And what portion of the energy book has made it through the spring redetermination period as of March 31? How much (multiple speakers) that?

Really at this point we're about 40% of our way through the borrowing base redeterminations in the spring, and we've seen not only -- for the most part we have seen decreases. About 75% have had this decrease in their borrowing base. Some have been reaffirmed and even a couple have increased. But overall average net decline is about 23%.

Okay, thanks. And then just finally, shifting over to the deposit side, deposits were weaker than we've seen in the last few quarters, even given the seasonality that we've seen in first quarter for a little while. What's the thoughts there? Do you think that you're able to recover some of that decline early on in second quarter? Or is that going to be more of a rebuilding process through the course of the year?

We in fact have recovered some of that in the first part of this quarter. We were down point to point about $670 million. $150 million or so of that was public funds. Some came out of our wealth area. And then part of it is out of our energy customers. But we've seen about a little over $300 million, almost $350 million, improvement in the first part of this quarter so far. So that's good.

Great. Thank you.

Brett Rabatin; Piper Jaffray.

Wanted to make sure I understood -- there was discussion in the press release and you maybe talked a little bit about it, but how much of the increase in criticized assets was a function of kind of how you look at the energy portfolio versus the updated OCC Lending Handbook debt versus collateral position? How should we think about the impact of that on criticized assets this quarter in the energy portfolio?

Well, there was an impact from the SNC exam and the OCC guidance. A little over half of the commitments that we had reviewed in the SNC exam were downgraded based on the global debt repayment structure that was going on with the OCC. We would say that those are at the lower end of the risk spectrum from our perspective. But overall the balance was -- we evaluated them on our basis overall and established the criticized/classified levels on that basis, too.

Okay. And then wanted to just talk about expenses for a second. Obviously a lot of noise in the first quarter, and appreciate the guidance of revenue higher than expenses. Can you give us an idea of would a $235 million run rate -- is that a fair number? Or could you give us some idea of a starting base point for the third quarter, absent the noise that you saw in 1Q --

Yes, I can do that, Brett. $235 million is a pretty decent normalized number. When you come in at $244 million, $245 million this particular quarter, you've got roughly $8 million or so of kind of unusual but hopefully nonrecurring type items that can come out of that. Last year we gave guidance in the $225 million to $230 million range. I think we made a comment on one of the calls that that would be a bit higher going into 2016 because of some of the smaller acquisitions we've done, some of the IT onboarding of some systems that we've put in place. So we thought it would be up in the kind of $235 million range. And I think that's a decent place to start as we continue to move through 2016.

And, you know, they'll be some growth over time as we grow our business. We have some variable cost businesses that certainly will be reflected in the expense line item as we grow. But I think that's a pretty good place to start.

Okay. And then, maybe just lastly, thinking about capital. And you've got an acquisition you're closing in 3Q, but any thoughts on capital? And you're obviously shrinking the securities portfolio a little bit, but you guys are still obviously really well capitalized and it doesn't look like there's a catalyst for that to change much. Have you thought about capital this year in terms of your plans?

Well, we'll continue to grow organically to the extent we can with our loan growth activity. We'll close on the MBT Bancshares deal we think the third quarter. That will utilize some capital. There's a possibility that we could buy back stock if it's opportunistic to do it. We'll continue to pay a regular dividend. So it's kind of all across those fronts that we'll look at capital and determine the appropriate usage.

We may take the opportunity sometime in the future to more optimize our capital stack. Our sub debt that's part of our total capital has really its course and so there may be a time in the future where we want to issue a sub debt issuance to bolster total capital and then provide the opportunity to free up, if you will, some additional capital on the other ratios.

Okay, great. Thanks for all the color.

John Moran; Macquarie Capital.

Really nice fee outcome, which I wanted to kind of get a little bit more color on. Just if you could give us any insight in terms of what the mortgage pipeline looks like kind of going into 2Q. Obviously you get some seasonal help.

Yes.

Yes. And then trust, brokerage, both sort of outperformed given volatile markets and kind of what might be going on inside of your footprint. So wondered if you could give us some color in terms of what's driving that outperformance.

Sure, John. This is Steve Bradshaw. On the mortgage side, obviously we have some increase in production as well as pipeline increase relative to the drop in mortgage rates in the first quarter. That's a continuing strong channel for us. We're especially seeing growth coming out of our home direct channel, our consumer direct channel, which continues to be a growth engine in mortgage.

On the trust and brokerage side, we actually had a very strong first quarter in terms of assets under management acquisition. It was a $10 billion quarter for us. We didn't fully reflect it in the revenue because obviously it was one of the worst starts to the equity market in modern times. So as that continues to recover we'll see some expansion and benefit there. But that particular group, the organization is really having a lot of success pulling business in many cases from larger competitors.

Brokerage and trading was enhanced because we have a pretty strong mortgage back at [TBA] Group. So as you see increased activity in terms of mortgage origination, then the services they provide to mortgage lenders to hedge their pipeline, that increases as well. So that was a benefit to us, and a bit contrarian to a lot of other folks in the fixed income business.

Got it. Thank you. And then, the repurchase reserve build in the mortgage business, is that just a change in assumption and kind of like something that we should see kind of staying a little bit elevated here for the rest of this year? Or is that really kind of one-time catch-up in 1Q?

I wish it was a one-time catch-up. It seems like we've been talking about this for a few quarters. I think you're going to have a little bit more cleanup in that area. And so I would expect a bit elevated, to a similar extent what you saw this quarter, maybe for one more quarter. And then I think we'll be through the cleanup effort in that area.

Okay. Got it. And then I had one other energy-related one. Just with the volatility in gas versus oil. And I think I had asked you guys a couple quarters back what the split was and if you thought about those credits that were kind of gassier in any kind of way differently than you did something that was more kind of pure liquid and if you had any thoughts on that.

Yes. Kind of the split is around 64/40 oil versus gas. Gas has actually had a pretty nice rebound here in the last six weeks or so, which has been helpful and will be helpful as we go through the redetermination process. But most borrowers have a mix. You do have some borrowers who are all one or all the other. But you typically will have a mix of both in their production. And so we've been more concerned with oil than gas because gas has already been down. Borrowers have adjusted to that. Rig counts and drilling for gas are down even more dramatically than they are for oil.

So it's not something that we've had more concern about because borrowers have had a chance to adjust to that, really for the most part. And so oil has really been where we've been focused but we obviously look at both when we do our stress test or our redeterminations or evaluate the borrower credit grade.

Got you. Thanks very much for taking the questions.

(Operator Instructions) Peter Winter; Sterne, Agee.

The decline in the securities portfolio was probably a little bit less than what I was expecting. And I'm just wondering -- I guess you're assuming that starts to increase and I'm wondering if you would think about making the balance sheet maybe even a little bit slightly asset sensitive?

The number you're looking at, Peter, I think dropped about $100 million. And that's a mark to market or fair value number. If you look at just the amortized cost we actually did go down about $200 million to $250 million like we guided. But the improvement in the rate during the quarter kind of improved fair value of those, so it looks like it went down less than it actually did, that we actually guided to.

But to your point, we did guide that we'll continue to shrink the securities portfolio in that $200 million to $250 million range. I don't know that we'll venture to asset sensitivity. I think we'll get to neutral first. Certainly part of this depends on what happens in the deposit categories as rates begin to rise. Because if we have some movement out of your [non-rate] funds then you certainly will -- you'll actually backtrack to more liability since [disposition].

So we'll watch it closely. We're going to continue to move towards a neutral position and then we'll make decisions about possibly leaning asset sensitive. But we really haven't talked so much about that. Just working our way to neutral at this point.

Okay. And just as a follow-up, I think in the first quarter, or in January, when oil prices were in the low $30s, you were thinking that if it stayed at this level provision expense in 2017 would be in that $60 million to $80 million range. So I'm just wondering, with the improvement in oil prices, would you expect the provision expense to moderate in 2017?

I don't -- in 2017?

Yes.

I think that there's a high likelihood, Peter. If energy prices stay up and you look into 2017, I would expect the provision levels would be more moderate than they were in 2016.

Got it. Great. Thanks very much.

Casey Nelson; Treehouse Capital.

I had a couple questions on the energy portfolio as well. First, on the syndicated loan side of loans that are publicly traded, do you track average prices of those loans? And, if so, could you comment on where they resided at the end of Q1?

You know, I get a list weekly from a couple of different parties on loans that are trading. And I will tell you for the most part we don't have loans on that list that I'm looking at. Because I'm interested similarly to make sure we're thinking about it the way the market is. To date there's really only been one loan that I've seen that we have that's been on the trade sheets that have been circulating to me. And so I think it speaks to kind of the nature of our portfolio that we don't have much that's on -- that's being traded outside certainly where we can see how it's being valued.

Okay. And I know before you had stated that you guys didn't have any loans in default in the energy portfolio. Does that remain the case?

No, that's not the case. I don't know that we indicated that we didn't have any loans that were in default. Certainly as we work through the credit cycle we're going to have borrowers who fail to meet their covenant obligations and we work through as part of that process. But certainly we do have borrowers who are in default of their credit agreement. It's just the order of magnitude around loss exposure and things like that that come from that evaluation.

So we're doing a monthly review of substantially all of our energy book, and then quarterly we do an analysis around any kind of loan that may be impaired. And that analysis would indicate certainly to date that there's not significant loss exposure in that particular book.

Okay. And you've stated a few times that the preponderance of the portfolio is in secured first-lien positions. Roughly how many of those structures also have a second lien or a bond below you? Do you happen to know that? I'm just interested in all of these exposures that you have where you occupy a secured first-lien position, is there anything else in the capital structure? Or are you the only security in the capital structure?

We don't have that number to be able to give to you. Certainly we can work on that this week and have that number available to Joe. But I would say it's not an inconsequential number. I would say probably a third or so, just off the top of my head, would have other debt in the capital stack where we have senior secured first-lien debt, certainly in terms of dollar amount.

But we do have borrowers who have unsecured debt issued in the capital markets and second-lien debt as well. The more predominant of that is debt issued in the capital markets, unsecured bond debt, most of which, because we're (inaudible) [acute] to maturities, most of which have maturities well outside the next couple of years, which should be sufficient to let them work through the downturn from a bondholder perspective.

Okay. My last question, you mentioned a few months ago that you'd likely be curbing the amount of growth in your energy portfolio. If prices stabilize, let's say, between $40 and $50 a barrel on WTI, and given it sounds like the success you're having, is that a decision you'd reconsider?

Well, let me make sure we communicated correctly. I think what we were trying to communicate in the fourth quarter was that, given borrowers' desire to reduce debt, that outstandings and commitments would likely decline in the first and second quarter. But that's not a result of our desire to retrench from the space in any way. We are, at our core, an energy lender and we're very proud of that. And we want to be there for the borrowers in the space.

Just this quarter we booked and included -- in the outstandings are almost $70 million of new loans. The commitments that haven't yet funded are in excess of that. So we continue to look for new business. We haven't changed the goals and objectives of our energy lending group. And so we're continuing to want to be a support where we can be prudently for our energy borrowers and for new customers. But we are not retrenching from the space in any way. Even given the market's concern about energy overall, we believe that this is -- opportunistically can be a great time to look for new borrowers and new customers and new opportunities. Any declines would be a result of borrowers reducing debt, not as a result of a conscious decision that we've made to retrench from the space.

Okay. Thank you for the time.

This concludes our question-and-answer session. I'd now like to turn the conference back over to Joe Crivelli for any closing remarks. Please go ahead.

Thank you, and thanks, everyone, for joining us. If you have further questions I'll be available today at 918-595-3027, or you can email me at jcrivelli@bokf.com. Thanks for joining us today and we'll talk to you later.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.