BOK Financial Corporation (BOKF) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the BOK Financial First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today's presentation there will be an opportunity to ask questions [Operator Instructions] Please note, this event is being recorded. I would now like to turn the presentation over to Joe Crivelli, Investor Relations for BOK Financial Corporation. Please proceed.

Good morning, everyone, and thank you for joining us to discuss BOK Financial Corporation's first quarter 2015 financial results. Today, we will hear remarks about the financial results and outlook from Steve Bradshaw, CEO, Steven Nell, CFO; and Stacy Kymes, EVP Corporate Banking. 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 would like to remind everyone that during this conference call management will make certain forward-looking statements about its outlook for 2015 and beyond that involve risks and uncertainties. Forward-looking statements are generally preceded by word such as believes, plans, intents, 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 Securities and Exchange Commission. BOK Financial is making these statements as of April 29, 2015 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 and thanks for joining us. I trust everyone has seen our earnings release for the first quarter, which was issued earlier this morning. The first quarter was a great start to 2015. We earned $74.8 million or $1.8 per share with strength all across the business. Loan growth was well into the low double digits on an annualized basis our fee businesses led by mortgage all performed extremely well and posted a new quarterly record for fees and commissions and expenses were held largely in checks. Our capital base remained strong and thus far our credit quality is holding up extremely well, all-in-all, a good solid performance from the entire company. Keep in mind when you look at the year-over-year earnings comparison, the Q1 2014 included a reversal of accruals for our long-term executive compensation program that positively impacted pre-tax earnings by $15.5 million or $0.15 per share after-tax. Normalizing that out, we delivered 12.5% EPS growth year-over-year. Turning to Slide 5, the strong momentum on loan growth continues, we posted 3.4% sequential growth for the quarter or 13.4% annualized and the loan book is up 12.3% compared to the same time a year ago. Stacy will talk more about the loan growth in a moment, but strength was evident all throughout the business. Unlike the last few quarters when energy was the primary driver of growth, this quarter it was the general C&I book and commercial real estate that set the pace further evidence that the diversity of our business is a powerful differentiator for us as a company. Fiduciary assets continue to grow in total $38 billion at quarter end. That is up 4% from year end, with very little contribution from overall market growth. Our Fiduciary and asset management business continues to grow organically by expanding business with existing customers and bring in new clients. Again, here the diversity of our business is a significant benefit to customers as we have a full-service of wealth management business that can meet the investment needs of any one from a traditional retail brokerage customer to the most sophisticated high network or institutional investor. I will now turn the call over to Steven Nell, who will provide a comprehensive update on financial results for the quarter. Steven?

Thanks, Steve. Let's talk about the first quarter in a little bit more detail. Slide 7 shows net interest revenue and net interest margin for the first five quarters. As you can see, net interest revenue for the first quarter was down 1.1% on a sequential basis, approximately $2.1 million of the decline was due two fewer days in the quarter and the fourth quarter 2014 also included approximately $2.4 million of non-accrual interest recoveries. On a year-over-year basis, net interest revenue was up $5.1 million or 3.1%. Net interest margin decreased 6 basis points, sequentially and 16 basis points year-over-year. The sequential decrease was largely due to lower overall loan yields, which Stacy will discuss in a moment. The year-over-year decrease as you can see was largely driven by the Federal Reserve, Federal Home Loan Bank trade, which we have discussed on previous earnings call. On Slide 8, fees and commissions were $166 million for the first quarter, up 5.2% on sequential basis and 17.8% year-over-year. As noted earlier, this is a quarterly record exceeding the previous record set in the third quarter 2012. Mortgage banking had an exceptionally strong quarter. Refinancing volume rose to 56% of the total volume this quarter from 37% in the fourth quarter as average primary mortgage rates were down 24 basis points in the first quarter. We also saw a continued strong volume growth from our correspondent and home direct sales channels. In addition, gain on sale margin remained very steady in the first quarter. The second quarter is likewise off to a good start for mortgage with very strong volume thus far in April. Brokerage and trading had a nice quarter, up 3.6%, sequentially, and 7.4% year-over-year and we have discussed with the investors this tends to be our most challenging business to forecast. Revenues can be less predictable depending on market factors, but a nice start to the year driven mainly by the fixed income trading and traditional brokerage businesses. Fiduciary and asset management was up 2.7%, sequentially, and 22.3% year-over-year. Keep in mind that the first quarter of last year included only a partial contribution from the GTRUST acquisition and no contribution from the MBM Advisors acquisition. These acquisitions added approximately $2.8 million to the year-over-year increase in revenues. Transaction card revenue was likewise strong in the first quarter posting 6.4% year-over-year growth. This is a seasonal business where the sequential comparison is not as meaningful. The low interest rate environment, which drove higher refinancing volume and revenue for the mortgage business during the quarter, also resulted in a negative change in fair value of our mortgage servicing rights. As shown on Slide 9, mortgage servicing rights valuation adjustment, net of economic hedges reduced pre-tax earnings by just under $5 million in the first quarter. This compares to $6.1 million reduction of net income in the fourth quarter and $908,000 in the first quarter of 2014. Expenses are highlighted on Slide 10. On this chart, we have normalized out the $15.5 million true-up planned reversal in the first quarter of '14 as well as the branch closure expenses in the fourth quarter of 2014, which included $800,000 in personnel expense and $4.1 million within the other operating expense. Personnel was up, sequentially, largely due to seasonal increases as associated with employment taxes. The higher level of revenue also impacted personnel expense as well as other line items. Highlighting this point, you will see that total operating expenses as a percent of total revenues was down 1.5 percentage points from the fourth quarter and revenue growth outpaced expense growth in the first quarter, which is an important strategic objective for the company in 2015. Turning to the balance sheet, as shown on Slide 11, the securities portfolio was up slightly in the first quarter. We press the pause button on our efforts to reduce securities as all indications point to the first Fed actions to increase short-term rates later in the year than originally predicted. Combined with growth in deposits during the quarter, liability sensitivity did not change meaningful from year-to-year and remains less than 1% at quarter end. Notwithstanding first quarter actions, we expect to continue to migrate towards interest rate-neutral throughout 2015. Period end deposits were $21.2 billion at quarter end, largely unchanged from December 31, 2014 and bank in the U.S. switched to Basel III regulatory capital standards this quarter, BOK Financial continues to be extremely well capitalized. The company and its subsidiary bank exceeded the regulatory definition of well capitalized at March 31, 2015, with the Tier 1 common equity ratio of 13.1%, total capital ratio of 14.4% and leverage ratio of 9.7%. Turning to Slide 12, our guidance assumptions for 2015 remained unchanged. Our commercial lending pipeline remained strong as Stacy will discuss in a moment and we continue to expect low double-digit loan growth in 2015. Net interest income will continue to increase modestly in 2015 from the remix of earning asset composition and stable-to-improving net interest margin. We have now gone 13 quarters with either no provision or negative provision. With our continued strong loan growth, we will likely resume loan loss provisioning in the second quarter and are forecasting $15 million to $20 million of provisioning for the full year. As we have noted previously, while there may be lumpiness from quarter-to-quarter in the fee generating businesses, especially in brokerage and trading and mortgage line items, which are subject to various market forces and they are transactional in nature. On a rolling 12-month basis, we continue to expect mid-single digit revenue growth in fees and commissions. We continue to expect expense growth in 2015, mainly due to the full-year impact of 2015 risk and compliance investment. In addition, as noted in previous calls, we are investing approximately $10 million in strengthening our IT infrastructure in 2015, which will be partially offset by the expected $8 million of savings from the in-store branch closures, which would be recognized beginning in the second quarter. We will continue to focus on cost reduction and efficiency efforts across the organization to control expense growth as we did in 2014. Stacy Kymes will now review the loan portfolio in more detail. Stacy?

Thanks, Steven. It was another busy quarter for commercial lending team as reflected in the robust loan growth, which highlights some of the key areas of strength. Slide 14 shows our portfolio on a geographic market basis. As you can see, the lending environment has been very strong across the footprint in the first quarter and over the last 12 months. In the first quarter, Texas, Arizona and Colorado posted especially strong results while on a year-over-year basis, Arizona, Colorado, Texas and Arkansas, all posted double-digit growth. At March 31, our Arizona portfolio crossed $1 billion in loan outstandings for the first time in our history, a nice achievement for market that we worked hard to build and grow since the downturn of 2008 and 2009. We are very pleased with our results there and we believe we have a nice C&I and CRE portfolio of very high-quality borrowers in that market. As indicated on Slide 15 of the presentation, commercial loans were up 3.2% for the quarter from $9.1 billion to $9.4 billion. There was strength across the portfolio with services leading the charge at 8.3% sequential loan growth followed by manufacturing at 5.3% and healthcare 3.9%. On a year-over-year basis, commercial loans are up a healthy 16.6%. As noted on the Slide, every single segment of the C&I portfolio posted strong year-over-year growth, led by manufacturing, energy and services. Turning to the next slide, the commercial real estate book grew 7.6% in the first quarter and is up 11.6% year-over-year. You will see good growth across the portfolio both, in the quarter and in the last 12 months. Keep in mind that most of the loan growth is being driven by deals booked in the prior year that just now beginning to fund as borrow equity goes in the project before debt. As mentioned on last quarter's call, we had been stress testing all new commercial real estate loans that loan origination fifth 2009. The scenarios we use include a 500 basis point increase in interest rates over 24 months, second, normalized cap raise. Third, normalized occupancy rates despite limited vacancy in the book and our markets. We are continuing to believe that our real estate loan portfolio is in very good shape relative to the stress test. The next slide shows the overall loan portfolio for the company. Commercial real estate grew at 7.6% pace in the first quarter, while C&I as noted grew 3.2%. Residential mortgage, which for BOK financial represents floating-rate jumbo mortgages that we choose to retain for our portfolio, continues to decline quarter-on-quarter as expected. Consumer lending declined modestly in the quarter. On a year-over-year basis, the C&I portfolio was up 16.6%, while the CRE portfolio was up 11.6%, consumer lending was up 14.5% and residential mortgage was down 4.5%. We are having good success both, in expanding relationships with the existing borrowers and we believe we are taking share and gaining new customers on the competitive front. The business environment ranks good across the footprint and as Steven mentioned, we continue to believe we can grow our loan portfolio at double-digit rates for the foreseeable future. Let us move on to loan yields. Loan yields were down 14 basis points in the quarter approximately seven basis points of the decline was due to the non-recurrence of interest recoveries compared to the fourth quarter. Of the remaining seven basis point decline, four basis points were due to lower loan fees in the quarter, with the remaining three basis points representing the actual sequential decline in loan yields. The biggest driver of the decrease is due to payoffs and pay downs of loans from the 2008 two 2012 vintage that had higher spreads and are being refinanced the competitive environment range relatively stable across the footprint from a pricing standpoint. Slide 19 shows our energy portfolio as of 3/31/15, at quarter end, our energy portfolio was $2.9 billion. Of this, 85.6% or $2.5 billion was exploration and production, 7.8% or $226 million was energy services, 3.7% was midstream and 2.9% was wholesale and retail energy. The utilization rate on the energy portfolio was 56.4%, slightly higher than year-end, largely driven by borrowing base reductions as we make our way through the redetermination process. It is still early in the spring redetermination cycle, but on average we are seeing borrowing base has come down in the 12% to 15% range for customers who have gone through the process. However, on a borrower-by-borrower basis, we are seeing a range of outcomes. Some borrowers who were bringing new production on stream are actually seeing a modest increase in their borrowing base. Floor prices have appeared to stabilize and show improvement over the last few weeks. There may well be more volatility comp, but we continue to believe that the current downturn will behave much like other downturns we have experienced over the last 20 years. We still expect oil prices to stabilize at a new equilibrium late in 2015. To that end, our view on energy has not changed at all since we last spoke. We continue to believe that our energy portfolio is sound from a credit standpoint and this is supported by another update of our stress test at quarter end, which revealed only a handful of customers who would demonstrate weakness in a highly stressed environment. We modified our assumption slightly, with oil starting at $40 a barrel for year one and escalating gradually to $60 per barrel in year five. Our natural gas stress test starts at 250 in year one and escalates gradually to $350 in year five. The main question remains the time element. If oil prices rebound to normalized level in next 12 months, we expect to see migration of credits, but no significant credit losses. If the current pricing environment extends beyond 12 months, we believe we are extremely well positioned to navigate the downturn. In the fourth quarter earnings conference call in January, we provided a deep dive in our energy portfolio and additional perspective on our underwriting methodology, our history in energy lending business and our view of the current commodity price downturn compared to others over the last 20 years. If you are interested in reviewing any of that material, the presentation remains on our investor relations website at www.bokf.com under the Presentations tab. Credit quality remained strong at quarter end. As shown on Slide 20, the allowance for loan losses ticked up to 1.35% of period end loans and represented 245% of non-accrual loans, both very healthy metrics. Non-performing assets excluding those guaranteed by government agencies were 0.85% of period end loans and repossessed assets. Net annualized recoveries to average loans were 23 basis points this quarter, driven by a significant recovery in the commercial real estate portfolio. This is the fifth time in the last six quarters that we posted net recoveries. Steve Bradshaw will now make them closing statement before we open the call for Q&A. Steve?

Thanks, Stacy. It was a breakthrough quarter for the bank in many ways and I am pleased to see so many years of the bank growing customers and revenue in tandem. While we are always identifying areas for performance improvements, there were no obvious weak spots in our lines of business or the geography we operate within. Loan growth continued to be at or slightly above our own expectations as we posted our fifth consecutive quarter of double-digit loan growth. We set a record for quarterly fee income, led by mortgage which is once again benefiting from as well as the investments we previously made to build multiple sales channels over the past several years. Expense growth was well-controlled and revenue growth outpaced expense growth. It was one of our objectives for 2015 as Stephen previously mentioned. We are carefully monitoring spending, keeping the lid on further increases and looking for opportunities to improve efficiency and reduce costs throughout the organization. It is an organized effort and includes every aspect of the company's operations. Credit quality remained sound and I believe that the metrics Stacy just shared with place us near the top of our peer group. The balance sheet remained strong, well-capitalized, providing us with the flexibility to fund organic growth, deploy capital and accretive growth opportunities and return capital to shareholders through dividends and share buybacks. As you heard from Stacy, we entered the energy downturn with a very high quality portfolio and we continue to see the benefits of that as companies work through the changes necessary in recognition of lower commodity prices. While we remain cautious and watchful, to-date the local economies in Texas and Oklahoma are holding up well. I am especially pleased to announce some changes to our executive team during the quarter. I think investors recognize that we have a very deep bench at BOKF, which is evidenced by the fact that we were able to backfill our COO vacancy internally by providing the Stacy-kinds and Norm Bagwell with additional responsibilities. Many of you have met Stacy and Norm and now that they are experienced improving in our organization over multiple operating cycles and will fill their new roles capably. In turn, we were able to promote Marc Maun to fill Stacy's former role as Chief Credit Officer. Marc is a 30-year veteran of BOK Financial and knows are credit culture extremely well. He has been successful everywhere he has been at the Bank, most recently in launching Arkansas City operation from a de novo startup to nearly 700 million assets today and then reinvigorating our Oklahoma City operation for the past two-and-a-half years. Marc's role in Oklahoma City was then filled by his second in command, John Higginbotham, also a longtime employee of the Bank, with a great track record of success. We have a superb team at this bank with deep experience in all phases of the operation. That is why we have been able to perform for investors across the entire economic cycle and deliver total shareholder return over the long haul in the upper quartile of the peer group. I am pleased with the first quarter results. I am excitement that we are off to such a good start in 2015. With that, we will open the call for your questions. Operator?

[Operator Instructions] Our first question comes from Brady Gailey at KBW.

Hey, good morning guys.

Good morning, Brady.

I just wonder, I know the spring season is when you all get into the redetermination and it sounds like you are just kind of beginning on, but what percentage are you through redetermination the base for all your energy guys.

Brady, this is Stacy. As of last week, we were probably around 50% to 55% through the redetermination process with E&P borrowers.

Okay. Then the buybacks, you had a nice quarter of buybacks. When I look at the last couple of quarters, it looks like you have been repurchasing it kind of in the high 50s to low 60s, the stock is now 65. Do you think the buyback activity will cost low with the stock being where it is?

It may a bit. This is Steven. Certainly, we took advantage when the stock cross down to $60 and had a nice round of buy back in the first quarter. We will run the model and determine what we want to do going forward, but I would suggest as you said that it would slowdown some at this price.

Okay. Then you have targeted a bank deal by the end of the year hopefully, maybe an update on how things are progressing there?

Yes. Brady, this is Steve Bradshaw. I would not say that the climate from sellers has materially changed at this point. I would not say the activity is higher. I would say the activity on our side is higher. We have been very active really the last four to five months in terms of our call effort and being received pretty well from organizations that we have identified that we think have great customer relationships and great management, because that's really our focus. From our standpoint, M&A to us is not necessarily a consolidation or expense takeout game plan. It's really about trying to expand, especially in the markets that we are in today that we like, that we have relatively small share, so our activity is higher. I think the market at this point kind of feels about the same as it did maybe six to eight months or so ago.

Okay. Then lastly any update on the SNC balances I think they are around $3.2 billion at the end of the year. Did that change at all and I noticed the tax rate was up a little bit, so any color for tax rate?

Well, with respect to shared national credit volume, it is a consistent part of the portfolio. It has not moved as a percent of our total loans much. Actually it was about 22% of our outstanding volume at the end of the year and just a little over 22.5%, at the end of the first quarter, so it has been pretty consistent.

Even with regard to the tax rate, there was a change in classification of some of our low income tax credit expenses that shifted out of gain on sale of other assets down to the tax line item, it is about $2.8 million. We did restate retroactively or reapply that change in accounting across the rest of the periods that you will see in the press release, so the tax rate that we calculate for this quarter should be pretty decent tax rate going forward.

Okay. Great. Thanks for the color guys.

The next question comes from Brett Rabatin at Piper Jaffrey.

Hi, guys. Good morning.

Good morning.

Good morning.

I wanted to ask about the loan portfolio. You mentioned that you were taking share. I guess, can you talk about maybe your thoughts on hiring efforts this year for new lenders to keep, the loan growth growing at a double-digit pace. Then just thinking about the existing portfolio, you talked about loans re-pricing down having a bit of an effect. Have you guys run any kind of analysis to look at what you have in the portfolio at higher spreads than what you are putting on today and kind of how much is above 4.5% or 5% level?

Yes. I guess, I will start with the loan growth piece first. What I would tell you substantially all of that is coming from officers who have tenure with the organization. We have not done any kind of team lift outs or anything like that that is creating kind of abnormal growth rate. These are all core BOKF employees who have been with us and who are operating under our established credit policy and parameters and they are just having good momentum with the calling effort and increasing borrowings to the existing customers and adding some new customers to the portfolio as well. With respect to the loan spread question, there is a lot of moving parts. Obviously, it is hard to look at. I think that one of the components really that is driving that too is earlier in the cycle, we were doing a little bit more fixed rate on the lending side, the preponderance of the new origination has migrated toward floating rate, so is that mix shift happens that is also creating a little bit of pressure on the loan spreads, not significantly. As we are looking at kind of period end March, it really does appear reasonably stable there. You have the called month or two, kind of trend, you would like to see kind of longer term, but I do feel like loan spreads are reasonably stable at this point. Look, it is a very competitive environment. One of the ways that everybody competes is on price, so I think there will continue to be some pressure there, but thus far the kind of the migration there, the decline in loan spread, I would not expect it to be significant as we move forward.

Brett, let me just add a couple of details. Loan yields were down 14 basis points, four basis points is related to loan fees, which can move around from quarter-to-quarter, seven basis points were due to interest recoveries from the previous quarter that we did not have this quarter and then three basis points is really more your regular kind of competitive environment, so just keep that in mind when you look at the 14 basis point drop in loan yields from last quarter to this quarter.

Okay. No. I heard some of that earlier. I guess the other thing is I was just curious about thinking and ALCO and being neutral to higher interest rates. Would you guys think about reaccelerating or thinking about the securities portfolio maybe later this year in terms of improving, you know, I know you are not going to necessarily manage for higher rates, per se, but have you guys thought about if your loan growth does remain double-digit, potentially trying to move towards more of an asset-sensitive position?

This is Steven, we will continue that process. We have been working the last roughly a year so, moving towards a more assets-sensitive position. We stayed roughly the same between the fourth quarter and the first quarter because of the pause that we mentioned on the securities portfolio, but I still think we will migrate our way during 2015 towards that asset-neutral position. I do not know that we will get to an asset-sensitive position by the end of year. I doubt it. I think if we just get to a neutral position towards the end of '15 that will be probably the point at which we end the year.

Okay. Great. Thanks for the color.

Our next question comes from Jon Arfstrom at RBC Capital Markets.

Good morning.

Good morning.

Just a few questions here, follow-up on pricing, have you seen any change in pricing in the energy book?

Not specifically for deals that are new to the market. What I will tell you, though is I would expect some upward expansion of spreads as we go through the redetermination cycle both, now in the fall. Generally speaking, energy loans are great priced based on one or two factors either line utilization or borrower leverage. Borrower leverage is generally measured on a trailing 12-month basis. To the extent it is based on line utilization, we are going to get some bump within the grid as we go to this spring redetermination cycle to the extent that it is based on leverage and it is trailing 12-month leverage. It more likely that we will see that bump later in the fall, but I do think you are going to see some opportunity for some improved loan spreads in the energy book just strictly based on the grid pricing and kind of things that are happening organically with the borrower that will improve that spread on a go forward basis.

Okay. Good. Have you seen any retreat in terms of competitors?

Not specifically at this point. I mean, I think the retreat would happen from the smaller end of the credit spectrum, we tend not to compete there. We are kind of in the middle market in higher end and so there may be some smaller competitors reconsider the impact of volatility in their portfolio with respect to energy or how to proceed but I have not seen specifically today anybody exit the business that had previously been in the business.

Okay. Good. Then a couple more as long as you have the mike, Stacy, you use the word normalized level in the release and then you also talked about the downturn if it extends more than a year, crude is up about 20% since the last call and it looks like you have lowered some of your stress test, places, so I guess, I am just curious downturn the in normalized level, what do you think is a normalized level?

Yes. I wish I had a perfect answer there. Three months ago, I would have probably told you probably told you $70 is probably normalized. I think it can be less than that now, maybe in the $65 range. One of the things that has changed a little bit and the calculus there has been, there is very significant decrease in cost with the drillers of the services portion of their business so, pretty much across the board we are hearing from the production subs that the service cost to drill a well completed et cetera, is about 35%, plus or minus less than what it was say 120 days ago, so that math is going to change the breakeven price and where profitability comes into play for the borrowers, which may mean that you get to see a little bit more activity a little bit sooner. One of the things we are watching for a little bit and trying to be reasonably aggressive with our borrowers is around hedging. You can hedges 2016 today at around $63, $64, which is not a bad price and that is the price that works for most folks, and so what you have to watch for here a little bit is some kind of a dub year [ph] yet as opposed to the has been talked about, where you get prices coming back up and in drillers coming back in and drilling their best prospects and operating a surge and supply again that did not cause us another second step in the fall of the commodity price, so we are trying to be aggressive with our borrowing base to say, hey, you need to be hedging, layering on hedging. This is a risk. We have had good luck actually as prices have come up, borrowers are seeing the benefits of being hedged, they are not hedging 100%, but they are layering on hedges that are prudent and obviously you have seen a good recovery here in the last 30 days in particular they may well still be some volatility, we are not trying to predict the bottom or where necessarily the end is, but certainly it has behaved consistent with our expectations and kind of how we have outline it for the street.

Okay. Good. That helps. Then Steven, just a question for you on sustainability of brokerage and trading and in terms of the run rate and with anything, larger unusual in the number this quarter?

Not really. No it was a fairly steady and of course that is the most one of the more unpredictable line items in our company, but if you look back over time, we have had really good growth in the brokerage and trading over the past several years and in fact we are well above last year in that comparison, so there could be some volatility there, but I think the sustainability of their overall position in the market and the ability to generate revenues is good going forward.

Okay. All right. Thank you.

The next question comes from Jennifer Demba of SunTrust Robinson Humphrey. Ms. Demba, please go ahead.

Hi. It is Jennifer Demba. Curious about if you could give us some more details on what you are seeing in the economy in the metro markets in Texas and Oklahoma particularly Houston, right now. You said they were holding up just want to get more color there?

Okay. We can probably all chime in a little bit on that and we were looking at some over the last three-month unemployment rates and in fact in Oklahoma's 3.9%. There has been a little bit of a drop in terms of the non-farm payroll, but the overall economy is still very good in the Oklahoma market and the same goes for Texas. They are still growing jobs, certainly not at the same pace that they were, but their overall unemployment rate is 4.2%, so the economies are diverse and yes we have seeing a little bit of an impact here from the slowdown in the oil and gas activity and it is something that will watch, but it is not been that big of a deal at this point.

At this point, I think, specifically Houston is probably the one that everybody is focused on. Obviously, there is going to be lag effect between when the timing of when employment reductions are announced and as they occurred and kind of roll through and trickle through the economy there. We have not seen any kind of dramatic pullback. Houston continues to be strong and have good pipeline for loan growth, but we have seen. There was a good article in Houston Chronicle, I do not know about six weeks ago that outlined, I think, 10 reasonably large commercial real estate projects that the developers had either paused or decided otherwise to put on hold to kind of see through this commodity price downturn. I think you see generally folks being very prudent in that market outside of the energy sector as well. Just because they have been through cycles, they understand the kind of boom bust issues associated with the cycling and are behaving extremely prudently at this point.

Thanks a lot.

The next question comes from John Moran, Macquarie.

Hey, guys.

Good morning, John.

I missed the percent of the redeterminations that you guys had gotten through and then I was wondering, you said that there was a kind of a spread on outcomes there. Some folks up, others down, but on average kind of down 10% to 15%, I am wondering if you could define the sort of upper and lower limit of that range.

Yes. As of kind of the end of last week, we were between 50% and 55% of the way through the spring redetermination cycle. I would say, it really just depends on the borrower, if they have been increases in the borrowing base, they have been very modest, generally based upon new production that has been added to the borrowing base. Keep in mind, when you go through to the redetermination cycle, you are not only readjusting the price deck, but you are also producing wells that weren't previously in the last borrowing base, so generally that provides a natural offset to the decline in the price of the commodity. We have seen some that have come down 25% to 30%, but that kind of the bandwidth there I think on average has been probably in that 12% to 15% range.

Okay. That is helpful. Thanks. Then just maybe a follow-up on the hedging question, how much is hedged through - I mean if you had to take a stab at it on '15 and '16 production and I think you sort of alluded to maybe not folks rushing out to hedge at 65 for '16, but certainly a desire to kind of layer some in?

Yes. We get that question a lot and I think the answer can be misleading, because to the extent that borrowers are hedges, it could be a small percentage or it could be for a short duration, so when you start looking at percent of the portfolio hedged it becomes a difficult question to answer. I prefer to look at it a little bit differently. When we do our stress testing which we currently doing quarterly, we assume that there are no hedges in place for the borrowers. Then we look at those that are most vulnerable to the price decline and then go back and layer on the hedges that they may have in place as a mitigant to the weakness from the stress test. From our perspective anyway, we think that is a better way to look at that, because averages can be awfully misleading and do not necessarily tell the complete story about the strengths or weaknesses in the portfolio.

Sure. Presumably that exercise then leads to sort of a better discussion when it comes time to sit down with the borrower?

Absolutely. In fact, we use that list with our hedging folks obviously energy hedging or services that we provide and one of our key service businesses and we use that list very actively to have discussions with our borrowers about the importance of layer on hedges to the extent that they are vulnerable and more steep price decline.

Perfect. There is cross-selling it. Yes. Then I just have a tacky-tack one on the OpEx guide I just want to make sure that I fully understood. It is inclusive of the branch status, right?

Well, what we said is that you talk about the IT expenses that we total expenses that we or just the overall?

Total expenses.

Yes. The total expense we accrued for the branch closures in the previous year, and then we have followed through with those closures I believe in February and March, and all of those are done at this point. Going forward, you should get the benefit that we mentioned as it relates to the in-store branches.

Yes. The personnel related costs would have really just been realized in partial in the first quarter, because we closed those at the end of February, some March, and you would have that they will be fully in the run rate for second quarter.

Okay. Maybe one last one if I could speak it in just on the mortgage trends, I think in the prepared remarks you guys had referenced that April staying real strong, As spring kind of buying season gets underway, is there more purchase in the mix today or is it still kind of dominated on the re-fi side?

Yes. There is some re-fi in there. It is 56%, I believe, in the first quarter and you have might see that slide down a bit and so I would expect there to be a shift more towards purchase as you anticipated.

Perfect. Thanks for taking the question guys.

[Operator Instructions] Our next question comes from Gary Tenner at D.A. Davidson.

Good morning.

Good morning.

Good morning.

Sorry. My questions have been answered, but just as related to the energy portfolio and outstanding are up a bit on a period end basis. Could you kind of talk about whether there was a peak in outstandings during that quarter and a decline as time progressed and if you suspected that might continue to release the second quarter as you get through your redeterminations?

Yes. That was a phenomenon that we experienced. I think that energy balances have held relatively stable. As folks have opportunities or we have added borrowers during the quarter, there are some opportunities to increase those as you saw during this quarter. I do think we see some risk that in the latter half of the year you could see the outstandings begin to come down a bit. On the energy side, we think that to the extent that were to happened, it would largely be offset by increases in spread that we talked about earlier in that book, but it has always been a very difficult book to predict behavior in, prices up, prices down, particularly in the short-term but my view is that likely prices kind of stay around this level you are likely to begin to have some pay downs, we saw quite a bit of private equity and capital markets activities related to some of the borrowers during the first quarter that resulted in some pay downs. We expect those markets appear to be very healthy for folks you have access to them and that could be a little bit of a headwind as we go into the latter half of the year, but thus far that portfolio has been pretty stable.

Okay. As you think of your loan growth projections for the full year, does that assume energy is essentially stable from year end balances '14 or does it assume some modest growth this year in that portfolio?

Yes. I think there would be some modest growth there it is awfully hard to predict. I think would rather look at the portfolio commercial and commercial real estate portfolio on totaling kind of come back to that double-digit annualized growth rate that we provided guidance to that is a little more comfortable place for me to be and I think that within each of the various segments of the portfolios you can have some movement over time but I do think in total I feel very good about the guidance we provided with respect to total loans overall.

All right, thanks very much.

Our next question comes from Matt Olney of Stephens Inc.

Hey, thanks. Good morning guys.

Good morning.

Good morning.

First question, I think it is for Steven as far as the size of the security books looks like the end of period balances are up a little bit this quarter. Any change from expectations of running that down about a $1 billion this year?

I do not think we will quite make $1 billon honestly since we took a pause in the first quarter, but I do think the second, third and fourth quarter will get back on pace, generally back on pace with what we had guided to last quarter. We just took a pause this quarter, so perhaps it does not go down $1 billion, but still along that same path.

As far as the first quarter action was it just more of an opportunity you saw or any more color on kind of why you take that in the first quarter?

I just think it was an opportunity, we assess it regularly, each month and we just felt like the market was signaling that rates would rise perhaps further out, so we had indicated last quarter that we would look at it closely and make decisions along the way, so that is what we decided to do, just hold the balances a little bit higher in the first quarter.

Okay. Just going back to the outlook on expenses, I am just trying to clarify this still. I believe on the last call we talked about core expense run rate in the $225 million to $230 million quarterly run rate it was $220 million this quarter, so what should be the run rate from here?

I still think that range that we gave in the last quarter, I would reiterate that again this quarter, the $225 million to $230 million I think that is a good spot for our expenses.

Then lastly on loan growth, there were some pretty strong growth in the CRE office category and obviously it is a very small percent for you guys - overall book, but some of your peers, especially in Texas are pulling back on that assets class at CRE office, any strategy behind that?

No. I mean, obviously you get some lumpiness with CRE, because of the timing of when things happen there versus when they were committed, but we do not have any concerns about the borrowers that we have added and who were going to balance with respect to that particular segment. We have very defined concentration that we managed to around retail office multifamily and in industrial specifically aren't shying away from that class for good borrowers.

Okay. That is all for me. Thank you.

Thank you.

There are no other questions at this time.

Great. Well, thanks everybody for joining us this morning. If you have any further questions, you can feel free to give me a call at 918-595-3027 or you can email me at ir@bokf.com. Thanks, and we will talk to you soon.

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