BOK Financial Corp (BOKF) 2016 Q2 法說會逐字稿

Welcome everyone to the BOK Financial Second Quarter Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Mr. Joe Crivelli, you may begin your conference.

Thank you, Nicole.

Good afternoon, everyone and thanks for joining us to discuss BOK Financial Corporation's second quarter 2016 financial results.

I want to apologize personally for the technical issues on our call this morning and thank you all for your flexibility. Today, we'll hear remarks about the results and outlook from Steve Bradshaw, our 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 the call are available on our website at www.bokf.com.

Before we begin, I'd like to remind everyone that during this 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 July 27, 2016 and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call.

I'll now turn the call over to Steve Bradshaw.

Thanks, Joe.

Good afternoon, everyone. Thanks for joining us.

This morning, we announced earnings for the second quarter of 2016. We earned $65.8 million or $1 per diluted share in the second quarter, a meaningful increase from the $42.6 million and $0.64 per share in the first quarter.

There was a lot of good news in the second quarter results. Net income continued to be strong and margins remained relatively stable. We set another new record for quarterly fee income. The energy credit outlook improved from where we were 90 days ago, and we had much improved results from our MSR hedging program. Our core business continues to perform extremely well and our team remains focused on taking share from competitors and expanding relationships with our customers.

In addition, the spillover impact or the contagion that we've all worried about from the energy downturn still has not materialized in a meaningful way and the business environment across our footprint is healthy. The biggest quarterly swing was in our loan loss provision which was $20 million in the second quarter compared to $35 million in the first quarter. As Stacy will discuss in detail in a moment, the relative stability in commodity prices over the past 90 days set a very positive impact on credit quality in our energy portfolio. We saw very little additional deterioration in the portfolio and charge-offs were down considerably when you compare it to the first quarter. We even had a handful of energy credits move from criticized to past due to actions taken by those borrowers' management teams during the quarter.

Our customers are feeling a bit more optimistic and we're seeing new companies formed to acquire property sets, and increase in the acquisition and divestiture of property sets and most importantly, improved hedging activity which helps to mitigate the potential impact if we have another dip in commodity prices.

Fee income was very strong in the second quarter as well. Three of our primary fee generating businesses posted record results for the quarter, including brokerage and trading, fiduciary and asset management, and transaction processing. Steven Nell will go through each line of business in his remarks also.

Expenses were a bit higher than we would have liked, and there were a modest amount of notable non-operating items, but the biggest driver of expense is higher revenue levels which impacts incentive compensation and certain variable expenses. So while expenses were elevated in the second quarter, we believe this is in large part due to the record revenue we posted.

Net, net, I'm very proud of the team here at BOK Financial. Across the Company, they are executing well, staying very focused on the long-term, gaining market share, delivering results in a tough operating environment. Reflecting our confidence in that business, we repurchased 305,000 shares during the second quarter.

As shown on slide 5, we posted excellent loan growth in the quarter with period-end loans of $16 billion, up 2.4% on a sequential basis or 9.6% annualized and up 8.5% compared to the same period a year ago. As we will discuss in a moment, the growth was very nicely spread across both lines of business and geographies. Fiduciary assets were up 2.1% during the quarter and 3% year-over-year, as our wealth management team continues to grow with book of business faster than the overall market.

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

Thanks, Steve.

Turning to slide 7. Net interest revenue was flat compared to the first quarter and net interest margin was down slightly. Lower yields on available-for-sale securities reduced net interest income by approximately $1 million. The full quarter's impact on non-accrual energy loans reduced net interest income by $300,000. Deposit costs were approximately $285,000 higher, and we realized about $800,000 lower revenue on our restricted equity securities, primarily our Federal Reserve Bank stock. Loan yields were up slightly from the first quarter 3.58% and interest revenue from loans was up $400,000.

On a year-over-year basis, net interest income was up $6.9 million and net interest margin was up 3 basis points.

On slide 8, as Steve mentioned, fees and commissions were a record $183.5 million for the second quarter, up 10.8% on a sequential basis and 6.3% year-over-year. Trailing 12-month growth was 2.2%, slightly below our mid-single digit target. Brokerage and trading was up 22.2% sequentially, 9.8% year-over-year and 0.1% on a trailing 12 month basis. Growth drivers included strong customer hedging revenue from energy and mortgage banking customers as well as higher syndication fees in our investment banking group.

Transaction card was up 8% compared to the first quarter, 6.6% year-over-year and 4.2% on a trailing 12-month basis. This business is benefiting from geographic expansion and expansion of its sales force and sales channels, as well as the transition to chip and PIN security standards. A hallmark of this business is when there is disruptions or technological changes that impact the industry, the team is able to aggressively develop new customer relationships through its consultants sales approach. TransFund also had the best first half of the year in the history for new sales.

Fiduciary and asset management was up 8.6% sequentially, 6.4% year-over-year, and 3.4% on a trailing 12-month basis. The seasonal tax business added $1.8 million in revenue this quarter and the acquisition of Weaver Wealth Management added $500,000. Mortgage banking revenue was up 11% sequentially, 3.7% year-over-year, but it was down 1.7% on a trailing 12-month basis. Seasonal strength and refi volume from the significant decrease in primary interest rates were the main sales drivers here for this business. Deposit service charges and fees were up 0.3% sequentially, and 1.3% year-over-year, 2.8% on a trailing 12-month basis.

Turning to slide 9, total operating expenses were up 4% sequentially and 12.2% year-over-year. Personnel expense was $142.5 million, up $6.6 million or 4.9% from the first quarter. The biggest driver here was incentive compensation expense, which increased $6.3 million compared to the first quarter due to higher revenue levels. Other operating expenses were $112.2 million, up $3.2 million or 2.8% sequentially and 18.9% year-over-year. The two charts in the bottom of slide 9 show that both personnel expense and non-personnel expense are highly correlated to revenue. While we're not growing revenues faster than expenses at the moment, which is our goal to generate earnings leverage, this is largely because of a number of notable items. Expenses in the first six months of 2016 included $1.6 million for the mobank acquisition, most of which fell in the second quarter; $5.3 million in legal accruals and settlements that occurred in the first quarter; higher FDIC assessment due to higher levels of criticized assets and accounting adjustments totaling $3.8 million related to a merchant banking acquisition.

In addition, we continue to incur additional mortgage banking expenses as we analyze risks related to our default servicing portfolio, as well as the impact of increased pre-payments on our MSR asset. As a result, we've heightened the sense of urgency around this line item, deployed additional management resources to tackle the problem, and are also investing in new systems to better manage default servicing. We believe expenses here could be elevated for another quarter or two, and are hopeful that this will be behind us in 2017. We are working hard to hold the reins on controllable expenses and believe we're making good progress despite the noise in expenses over the past two quarters.

Turning to the balance sheet on slide 10, the available-for-sale securities portfolio was down $55 million in the second quarter and is down $169 million from the same period last year. At quarter end, we are effectively neutral from an interest rate risk perspective. As you know, our decision to not shift aggressively to an asset sensitive position like most other banks and stay more fully invested over the past few years was one that went against the conventional wisdom in the banking industry. It was also one that drove several hundred millions of dollars of net interest income over the past several years for us. Our treasury team has done an exceptional job managing our interest rate position and now we have the balance sheet back in its historical neutral position. Period-end deposits were $20.8 billion at quarter-end, up from $20.4 billion at the end of March, while average deposits were down slightly.

BOK Financial continues to be very well capitalized, as evidenced by the capital ratios on this slide. During the second quarter, we completed $150 million subordinated debt offering, which was structured as a 40-year fixed rate at 5.375%. The debt is callable any time after five years, the proceeds from the debt offering positively impacted our total capital ratio by 60 basis points.

Now, turning to slide 11, our 2016 assumptions are as follows. Mid single-digit loan growth for the full year. As mentioned, since we are now neutral from an interest rate perspective, we have no plans to significantly reduce the securities portfolio at this time. Stable net interest margin and increasing net interest income. We expect loan loss provision of $8 million to $12.5 million per quarter in the third quarter and the fourth quarter, which implies full year provision in the range of $70 million to $80 million.

On a rolling 12-month basis, we 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 unusual and one-time items. We expect continued capital deployment through organic growth, acquisitions, dividends and stock buybacks. We expect the MBT Bancshares or mobank acquisition in Kansas City to close before the end of the year.

Stacy Kymes will now review the loan portfolio in more detail. Turn the call over to Stacy.

Thanks, Steven.

Slide 13 shows our loan portfolio on a market-by-market basis. Loan growth rebounded nicely this quarter with end-of-period loans up 2.4% compared to the first quarter, or nearly 10% on an annualized basis which included the headwind of energy pay-downs. The growth was spread all across the footprint with seven of our eight markets contributing very healthy growth on both a sequential basis and a year-over-year basis. As Steve noted earlier, we are really seeing no significant signs of a slowdown anywhere in the footprint, even in more oil-dependent markets like Houston, Oklahoma City and Denver.

As indicated on slide 14 of the presentation, commercial loans were up 0.7% to $10.4 billion. As expected, energy loans were down 7% to $2.8 billion. However, the rest of the C&I book posted healthy growth and our healthcare portfolio surpassed $2 billion for the first time. The healthcare team continues to execute very well and was our fastest growing segment on a year-over-year basis. Based on the pipeline, we expect this strong growth to continue and for healthcare to be our fastest growing segment in 2017 as well. We are now in 28 states with our healthcare client base, which provides diversification from a geographic basis.

Slide 15 shows our energy portfolio as of June 30. At quarter end, our energy portfolio was $2.8 billion. Unfunded energy commitments are down about $161 million compared to the first quarter from $2.1 billion to $1.9 billion. E&P line utilization was 60%, down from 64% in the first quarter. Energy borrowers are paying down debt to reduce leverage at this point in the cycle. We remain comfortable with our loan loss reserve, which represents 3.58% of energy outstandings. Energy charge-offs were $7.1 million in the second quarter and $28.9 million year-to-date.

Despite the increase in energy outstanding as a commitment during the second quarter, we remain open for business and continue to support our customers in the energy industry. During the quarter, we provided $172 million of new loan commitments to 20 borrowers and year-to-date have provided $254 million of new loan commitments to 35 borrowers.

Energy lending is core to our DNA and our experience in previous commodity cycles has shown that this is a profitable business and when approached in a consistent and disciplined manner, losses during the down cycles are very manageable. This long-term view has served us well and today, we will remain well positioned in the industry with a complete service offering, which includes our recently acquired acquisition and divestiture business, E-Spectrum Advisors. We also have seasoned and hardworking energy bankers and an enviable customer base. We continue to see great opportunity for our energy franchise over the next several years, as several banks have retrenched from this space entirely or in part.

There was a lot of very positive movement in the energy portfolio during the second quarter. And while we are cognizant of macroeconomic factors that have the potential to disrupt markets again, we feel good about where our portfolio is positioned today. In the second quarter, commitments and outstandings are down while we continued to add good new business. Charge-offs of $7.1 million in the second quarter were down meaningfully compared to the first quarter and assuming commodity prices remain in recent ranges, we continue to expect charge-offs for the full year well below our loan loss provision for the year.

Credit migration stabilized in total criticized energy loans which includes special mention, potential problem and non-accrual loans were 27.9% of the portfolio at quarter-end essentially flat compared to 27.5% at the end of the first quarter. We even had a handful of credits migrate positively moving from criticized to past during the quarter, the first time we've seen that during this cycle. While we are positive in part due to rebound in commodity prices, our optimism is also based on the quality of our underwriting during $100 per barrel oil time period from just a few years ago. Our disciplined focus during rising price periods and a detailed review of our borrowers under stress pricing levels indicate even if low prices persist, we will fare well and have very manageable charge-offs.

Turning to slide 16, the commercial real estate book grew 6.3% in the second quarter and is up 18.1% year-over-year. Our commercial real estate pipelines remained strong at quarter-end, and we're seeing good deal flow of very-high quality lending opportunities across our market territory.

Turning to slide 17, the credit environment has stabilized considerably in the second quarter as a result of the improved commodity price environment. In the top left section of the slide, you'll see non-accrual loans for the last five quarters. You can see that migration of energy loans into non-accruals slowed considerably in the second quarter, while non-accruals in the non-energy portfolio actually decreased by $3.1 million on a sequential basis. At the moment, there is simply no indication that there's contagion or spillover anywhere in the non-energy portfolio.

Our combined allowance for credit losses to period-end loans increased to 1.54% this quarter, and remains one of the highest in our peer group based on where we have seen in the earnings season last quarter. Trailing 12-month charge-offs to average loans were 22 basis points, which is higher than it's been over the past few years, but still remains much lower than our historic norm of 35 basis points to 50 basis points. As noted in the lower right quadrant of the slide, 61% of overall non-accrual borrowers and 74% of our energy non-accrual borrowers are current with respect to principal and interest payments. So, there is potential for future net interest recoveries as we continue to emerge from the commodity cycle.

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

Thanks, Stacy.

The second quarter represented a significant improvement for BOK Financial. We are pleased with the loan growth and the revenue trends, as well as the improvement in the credit outlook. Now, obviously we don't control the commodity markets, but the relative stability in commodity prices over the past few months has certainly been a benefit to our business. We realize we have more work to do on expenses, and we've seen as Steven said more noise in both the first and second quarter expense line items than we would like. We're working hard to hold the line on core expense growth and those efforts should become more apparent to investors, we believe, over the next few quarters.

We remain extremely well capitalized and liquid and the sub-debt offering completed this quarter provides a very long-term layer of cost effective cash flow on the balance sheet. And we continue to believe that our own shares represent a good investment for the Company and resumed our stock buyback this quarter. We would expect to continue to be active with our buyback in the latter half of the year.

So with that, we'll now take your questions. Operator?

(Operator Instructions)

Jared Shaw, Wells Fargo Securities.

Probably, surprising a little bit here, but I'd start with energy. If you look at the growth of the new loans in energy this quarter, can you talk a little bit about what you're seeing in terms of structural changes and what the yields are, and then as a corollary to that, what you saw from the loans or from the borrowers that went back to being past-rated loans, what did they do to change their balance sheets or their positions to make you feel more comfortable with it?

Maybe start backwards, I think leverage is the key thing. I think when in this environment as loans are being upgraded, having a leverage profile kind of less than 4 times, the cash flow is really critical. And so those borrowers that we saw migrate positive, it's really a function of doing things to manage their business, asset sales, equity injections, but ultimately, they resulted in lower leverage profile and that really is key.

As we look at new deals, I think, one of the benefits we see of being active in this environment is we're seeing increases in the pricing grids associated with current activity. So maybe at the peak of the cycle, maybe the grid was [L plus 150 to 250]. Today, the grid is [L plus 250 to 350] in general and you're not going to see that kind of wide improvement in energy spreads immediately. But as new deals come on and older deals reprise, there is opportunity there, but clearly the risk reward tradeoff is being recognized in this environment, and is accepted by borrowers, still very favorable rate, if you think about long-term capital being provided to this space.

Structurally, really kind of down the middle from a collateral perspective more the traditional 55% to 60% loan to value and leverage profiles that are in the 2 times to 3 times cash flow leverage. So very, very straightforward, the market and borrowers are cognizant of the environment and we're able to be compensated for the risk that we take in this environment.

And then on the expenses, shifting over there a little bit. Could you break out what expenses this quarter in terms of dollars were actually from the incentive compensation on the mortgage and brokerage side and if you could break it out between mortgage and brokerage?

So with the increase in personnel, I think was $6.6 million, about $4.5 million related to commissions. Now, the majority of that would be in the broker dealer, because generally the mortgage commissions offset I'd guess the revenues in our accounting, but majority of that would be over on the broker dealer activity.

So that delta was really more driven by the volume on the broker dealer side.

That's right.

Brett Rabatin, Piper Jaffray.

Wanted to go just back to expenses to make sure I understand, you just mentioned the commissions and I think if I heard it correctly. So $1.6 million non-recurring related to the acquisition. Just trying to back out -- if we back out the commissions in the bank expenses kind of what that or are there other things that also would have affected it?

We had about a little over $1 million related to the mobank acquisition or integration cost that we're prepping for that integration. We had elevated mortgage servicing right, amortization as you would expect as rates went down. We had about $1.6 million related to the merchant banking, really it was a goodwill calculation entry that we had to correct. It has nothing -- has no impact on the value of the merchant banking investment going forward in terms of their cash flows. Those are the key items, I think, that you'll find in expense that maybe didn't expect.

And then, just wanted to talk about loan growth for a second. Given the results you had in 2Q, are you guys seeing increased pay-off activity in the third quarter, is that somewhat mitigate your expectations or the pipeline that you have currently or any thoughts on the back half growth trends not being quite as strong as 2Q with your maintained mid-single-digit guidance on loan growth for the year?

Keep in mind, we're maintaining that guidance in the first half, in the second quarter we had $211 million of energy pay-outs and so we're still in light of that, still maintaining that guidance. I think we're hopeful that the level of pay-downs in the energy book will abate a bit in the third quarter and continue to have good growth across our C&I sectors across the market. So we're not seeing additional pay-down activity that would make us think that the full year guidance that we previously provided, we ought to modify that. I think we still really good about that, even including the impact of the energy pay-down.

And then just lastly, [also continues] on the provisioning for the year, it changed the number too much, but it sounds like you feel a lot better about the loan book on the energy side, are there?

We said from the beginning, Brett, that we would -- the provisioning would be front-end loaded in the year. We took $35 million, first quarter $20 million. So we expect that to tail off and still fall within the upper-end of the guidance that we gave early in the year of the $60 million to $80 million. I think, we now say upper end $70 million to $80 million, but we still feel comfortable.

So my point is that number hasn't changed much, but the body language you guys seem to be exiting -- it feels more positive to me, am I reading something wrong, are there few loans that are coming that you've had to provision for because you see some charge-offs coming or what's (multiple speakers)?

Brett, if you look at the stabilization in criticized and classified, really not a lot of new activity on the non-performing side. Charge-offs were down materially from the first quarter, those all really create a little bit of a tailwind and create that kind of positive body language, if you will, around reaffirming the provision guidance that we already had out there.

Remember, Brett, that $60 million to $80 million was to cover our entire loan portfolio, it wasn't just the energy book. And so we've had significant loan growth, and so you would expect to continue to add just kind of your normal migration that lays for the rest of the book, not just the energy book.

Jon Arfstrom, RBC Capital Markets.

Couple of follow up questions. Just on the brokerage and trading, you guys talked about capital markets revenue in hedging, is this a repeatable level or is this something where you just saw a lot of hedging when energy prices perked up during the quarter? I guess help us understand that. (multiple speakers).

It depends on what the interest rate environment does. It depends on what energy price is, certainly this quarter was more driven -- the delta was more driven by the opportunity on the energy hedging activity than what we had seen in some of the previous quarters. But if you have interest rate volatility in future quarters, then you may make up part of that with your institutional trade activities. So it just depends on what business inside of our broker dealer might get stimulated by what -- by movements in the market factors.

It's kind of a consistent theme, the kind of diversification, the revenue base, things react differently in different environment. So if you think about the lower interest rate environment, the mortgage TBA business ought to do awfully well in this environment, while oil retrenching here a little bit, makes it a more difficult environment from the customer hedging on the energy side. If you look and kind of when does the hedging begin to pick back up, $50 seems to be a magic mark in the eyes of many and so, certainly, that's an important milestone across that makes a difference in customer activity related to the energy hedging, but the rate environment impacts other areas of hedging as well most notably the mortgage TBA business.

I think Jon and Steven, one other note on the mortgage TBA business, we did pick up a team in the latter part of the second quarter that delivers additional services into that particular space. So Stacy is right and this rate environment should drive some increased activity there and we were opportunistic and picked up some additional trading capability there as well. So that could be an answer.

And what you've seen so far quarter-to-date in mortgage in terms of volumes and trends?

I think it's been steady relative to kind of where we ended the quarter. I think it's still pretty steady, both on the retail side, the home direct side of our sales channels.

We've been seeing application volume trend up, I think, really for the last two to three trailing 12 month, I think Steven try to continues to do that.

And then just one follow-up on growth maybe for you, Stacy. You talked about potentially seeing some more pay-downs in Q3 in energy. On the flip side, you've got some new commitments. Are you essentially saying another quarter or two of pay-downs and then we might see some stabilization in that book?

That's the big question. I wish I could give you an intelligent answer. My current forecast for the third quarter in energy has stayed pretty flat. But on the pay-down side, there is activity that is happening that creates pay-down, customer selling property sets, we've got borrowers that aren't criticized and classified that may have good things happen too, and so those balances may come down. My best guess today is staying flat, but I wouldn't make a career out of making that guess here. (multiple speakers) from a balance perspective.

Michael Rose, Raymond James.

Jon just asked my question on mortgage, but maybe just broadly speaking, outside of the acquisition that's of course you're pursuing, we would see what's kind of the outlook for M&A for you guys at this point, now that capital start to build here a little bit in over 9% to CDI. I know you guys been very clear about what to expect, or what's your target going forward, but has -- the stabilization of the environment maybe lower for longer environment creates new opportunities for you guys?

I think, first and foremost, we're really focused on getting our deal closed in Kansas City, looking forward to having mobank be part of the organization and managing that integration. So that's really job one for us. I would say that right now we don't have anything that's particularly targeted or that we think is near term in the queue. So, it's really not as big an emphasis for us right now. We're going to focus on making sure we get that acquisition well integrated and then we'll move on to (inaudible). I don't think, from my perspective, we really haven't seen a change in maybe potential sellers at this point in time, as everybody's trying to digest kind of what this lower for longer impact are really be for them. So, from my standpoint, nothing has terribly changed about that dialog, but it's not a strong emphasis for us at that moment.

And then maybe for Stacy, just thinking about the more recent focus on commercial real estate, obviously, that's been a nice area of growth for you guys on any sort of -- I know your levels are below the concentration limits, but any sort of feedback from regulators, more recently, we've obviously seen some commentary from some other banks in similar size and interest to you guys.

We've not got any feedback from regulators about the growth in our commercial real estate book. We are very disciplined about that, we're very focused on how we do that. I think clearly the growth number is year-over-year, linked quarter annualize, we want to look at that. It's not a sustainable growth for that line of business, but we guys have done a good job, developed the kind of business that really fits within our cultural profile and so we've had some good opportunities there.

Brady Gailey, KBW.

So you raised $150 million of sub debt, you have some excess capital, you talked about the buyback and sounds like you're going to be a little more active in the buyback going forward. But at the same time, your stock at $67 is a little higher than it's been when you repurchased shares in the past. But are you going to be price sensitive or do you want to use this excess capital to buy back stock regardless?

We've always been price sensitive. I mean, we don't have an absolute set formula that says this is the exact form in which we are in and out of the market. But we certainly run the calculations, look at what we think the long-term investment opportunity there is and we get together and then make decisions about when and how much we're going to buy back stock, and that's the way we'll continue to approach it going forward. (multiple speakers) 305,000 shares at $58 certainly, given where price is today, but we'll just look at it as time goes by.

And then from an interest rate point of view, you've gone from being liability sensitive, which was the right call to now being neutral. Do you expect for the foreseeable future to remain in a neutral position or your longer-term are you thinking about becoming more asset sensitive?

Probably remain in a neutral position. I think as rates begin to rise over time, certainly, if you have a portion of your deposits, I think your demand deposits, that perhaps re-priced in a different way, I think you'll quickly find yourself moving back towards liability sensitive. And so you'll need to take some action over time I think to maintain that neutrality. But today as we see it we don't think we need to be aggressive in terms of selling down our securities portfolio. We're at neutral; I think we can maintain that for the foreseeable future and given where our outlook for rates are today.

And then finally from me, the FHLB leverage trades that you all put on last year, the year before I know that the dividend has been reduced there. Is that still something that you expect to continue with that?

I think the dividend was reduced from a Federal Reserve stock, but not on the Federal Home Loan Bank component at this point.

So and that trade is still very viable, we still have it on and have that built in the next several quarters, it may not last forever, certainly it's opportunistic, but as of now we expect that to be there for some time to come.

Matt Olney, Stephens.

I want to go back to the expense discussion. I think I understand the commentary Steven has (inaudible). Some of the expenses will remain and some of the expenses will kind of fallout in 3Q. But can you give us some kind of run rate going forward from here?

I really think, we're more in that kind of $245 million to $250 million range. I think we guided last year roughly in that $235 million and I think with our mobank acquisition kind of we're planning for that, I think with our continued higher FDIC expense levels because of classified criticized our mix of business, which as you can see this quarter is above 50% just barely in terms of fees, you generally pay more commissions related to that business. So there is continued on-boarding of IT systems, not a huge amount but certainly incrementally that adds. So I think our expense base has built up to a higher level than approaches that kind of $250 million mark on a quarterly basis depending on the mix of revenue you generate.

That helped?

Yes, that's helpful. And then sticking on this guidance discussion, as far as the revenue growth expecting to outpace expense growth, just to clarify, is that guidance for the full year 2016 or is that just for the last two quarters of 2016 because it looks like they've already may have changed probably from the previous quarter?

I think what we've said is, our intent is to grow revenues, to maintain expense growth below -- slightly below our revenue growth without these one-time kind of items that we've been dealing with in the first and second quarter, and they've certainly clouded the picture. There is -- we're disappointed in some of those. But I do think our core run rate operating expenses, we have every intent as we go through our budget cycle this fall to build a budget that contains expense growth inside revenue growth rates.

And just lastly, the energy allowance is now I think over $100 million, how much of that is allocated towards specific credits and secondly as you noted the cumulative energy charge-offs in that $34 million, how much would be thinking about remaining there as far as energy charge-offs?

We only have one credit with this specific impairment that would be considered in that kind of $100 million number. The rest of it is really a general allocation just based on the formula and the credit grade associated with the book. We're not in the habit of giving specific charge-off guidance, I think we'll stick with what we indicated in our press release, which is that, we certainly expect charge-offs to be below our provision guidance.

(Operator Instructions)

Gary Tenner, D.A. Davidson.

Quick question again on the expenses in terms of the mortgage banking costs you've highlighted in press release. Of course, there was some increased costs because of pre-payments on (inaudible) servicing for others. Was there any element of that in the first quarter as well over that first quarter number more of a clean number?

It's more of a clean number and then I think the mortgage amortization kicked up because of the rate decline in the second quarter and then the other element of that is our continued, if you want to call it, kind of clean up and getting our hands around some of the reserves that support our default mortgages. And we're working hard on that as we mentioned in our comments and you may see another $1.5 million, $2 million, hopefully, it's over the next quarter. But I'm not going to say it won't be and we continue to find areas there, where we need -- we have exposure and that we need to support with reserves. I think that will fade away over time. But that still has been an element of our expenses for the last couple of quarters and it will be probably for ongoing for at least another quarter. And that's $1.5 million to $1 million.

There are no further audio questions at this time.

Alright. Thanks, everybody for joining us. If you have any follow-up questions, you can give me a call either this evening or tomorrow at 918-595-3027. Thanks. Thanks for talking to us, and we'll catch you later. Bye, bye.

That concludes the conference. You may now disconnect.