BOK Financial Corporation (BOKF) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the BOK Financial Corporation Second Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [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. Mr. Crivelli, you may proceed.

Good morning, everyone, and thank you for joining us to discuss BOK Financial Corporation's second quarter 2015 financial results. Today, we will hear remarks about the financial results and outlook from Steve Bradshaw, CEO; Marty Grunst, EVP and Treasurer; Norman Bagwell, EVP, Regional Banks; and Stacy Kymes, EVP, Corporate Banking. In addition, PDFs of the slide presentation and press release that accompanies the call are available on our website at www.bokf.com. Steven Nell, CFO, is unable to join us on the call today. 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 2015 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 29, 2015, and assumes no obligation to publicly update or revise any of the forward-looking information in this announcement. I'll now turn the call over to Steve Bradshaw.

Thanks, Joe. Good morning, everyone. Thanks for joining us. I trust everyone has seen our earnings release for the second quarter, which was issued earlier this morning. We had another exceptionally strong quarter in Q2. As shown on slide four, the company earned $79.2 million, or $1.15 per share and across the business, we executed well and drove favorable results. Net interest income was up 5% sequentially, driven by continued double-digit loan growth, combined with net interest margin expansion during the quarter. In addition, for the second consecutive quarter, we generated record quarterly fees and commissions with all of our key fee generating businesses posting solid results. Credit quality remained extremely strong across our loan portfolio and we continue to be disciplined on the spending front and maintained expense growth at rates below revenue growth. Turning to slide five, our loan growth remained strong. We posted 3% sequential growth for the quarter or 12% annualized, and the loan book is up 12.6% compared to the same time last year. And for the first time in company history, our total loan portfolio exceeded 15 billion. Norm and Stacy will both cover loan growth in detail later in the call, but we are seeing growth across the business on a geographic basis, and industry as well. We believe our growth is attributable to two key factors. First, we're taking market share from the large national banks through greater execution without sacrificing on proven credit underwriting standards. Secondly, our business model, which emphasizes solutions across a broad set of lending, deposit and fee businesses, creates a competitive advantage over similar-sized and smaller banks. We continue to see growth of fiduciary assets, which totaled 39 billion at quarter end, up 3% sequentially in a quarter where market returns were actually negative. This demonstrates our continued expertise in asset gathering and growing this important fee business organically, one new customer we want to expand a relationship at a time. We see our ability to effectively compete for discretionary investment assets as a key long-term growth strategy for the company as wealth demographics continue to reshape our economy since baby boomers exit the workforce and require greater investment products and services. I think it's worth addressing the overall health of the economy in our footprint as this has been an ongoing concern of investors during this time of low oil and gas commodity prices. Since commodity prices started to decline in November of 2014, we have said that we did not expect a significant spillover effect on the Texas and Oklahoma economies because these economies are much more diversified today than would appear to those who live and work outside the region. To date, this has proven to be the case as the financial results we delivered today are a leading indicator of the health of the economy in our footprint. But the most recently announced employment figures show in even greater detail the health, diversity and robustness of the economy in our primary markets of Oklahoma and Texas. As noted on slide six, at June 30, 2015, unemployment in Oklahoma was 4.5%, that's exactly the same as it was one year ago. At June 30, unemployment in Texas was 4.2%, where a year ago, it was 5%. Both states continue to track well below the national average, which was 5.3% on June 30, 2015, and 6.1% a year ago. What's most informative about these numbers is that employment in the mining and logging category, where oil and gas jobs are reflected, is down over 9% year-over-year in Oklahoma and 3% year-over-year in Texas. So, job growth in other industries is absorbing all of the job losses in oil and gas and then some. Other states are still growing net employment as non-farm payrolls were up about 0.5% in Oklahoma and 2.3% in Texas, compared to one year ago. Net-net, we continue to be very optimistic about our growth opportunities for the foreseeable future. The business environment is excellent; the consumer remains strong and is benefiting from lower gasoline cost, low interest rates and the excellent employment opportunities in our part of the world; and the diversity of both our business and the economy across our footprint enables us to absorb any bumps in the road from specific lines of business such as the current energy downturn. I'll now turn the call over to Marty Grunst, who will provide a comprehensive update on financial results for the quarter. Marty?

Thanks, Steve. Let's talk about the second quarter numbers in more detail. Slide eight shows net interest revenue and net interest margin for the past five quarters. Net interest revenue for the second quarter was 175.7 million, up 8 million, or 4.8% compared to the first quarter. As noted in the press release, we realized 2.3 million in non-accrual interest recoveries in the second quarter and there was one additional day compared to the first quarter, which added 1.3 million to net interest revenue. On a year-over-year basis, net interest revenue was up 9.6 million, or 5.8%. As expected, we recorded a 4 million provision for credit losses in the second quarter. This is the first loan loss provision we've recorded in four years, since the second quarter of 2011 and it's driven by the significant double-digit loan growth we've consistently achieved since the beginning of 2014 rather than as a result of any explicit concerns about our energy-lending portfolio or other aspects of our credit book. Net interest margin, excluding the impact of the FHLB/Fed trade we put on late last year, increased 5 basis points sequentially and was relatively stable year-over-year. The interest recoveries mentioned a moment ago added 3 basis points to net interest margin during the quarter. On slide nine, fees and commissions were 172.5 million for the second quarter, up 4.0% on a sequential basis and 5.2% year-over-year. This is our second consecutive record quarter for fees and commissions. All lines of business contributed to the strong results in Q2. Brokerage and trading was up 13.6% sequentially. The improvement was driven by strong results from investment banking, which included a good quarter for commercial loan syndication fees as well as seasonal strength and improvement in trading and derivatives activity, which we saw a spike when oil prices were above $60 per barrel. In addition, our mortgage TDA group posted strong second quarter as a result of increased refinance activity. Transaction card was up 5.7% sequentially and 4% year-over-year, continuing its recent track record of consistent mid-single-digit growth. Trust was up 4% sequentially and 10.7% year-over-year. The sequential improvement was largely driven by revenue from our seasonal tax business, which is billed and collected in the second quarter. The year-over-year improvement was a result of consistent success in new business development, especially in our corporate trust group as well as a full quarter of MBM Advisors revenue in Q2 2015 compared to a partial quarter in Q2 2014. Mortgage banking was up 25.6% year-over-year as a result of ongoing growth in our correspondent and HomeDirect sales channels. HomeDirect now accounts for nearly 20% of our origination volume from startup just over 18 months ago. HomeDirect currently scores 4.93 out of 5 stars from customers on Zillow, one of its main sales channels, placing it among the highest-rated mortgage lenders on the site. And on LendingTree, 100% of its customers would recommend HomeDirect to other potential customers. Mortgage revenue was down sequentially due to a number of factors, including lower refi volume in the second half of the quarter when long-term interest rates rose notably, as well as mix shift to the lower-margin correspondent channel and lower overall gain on sales margins. Even deposit service charges and fees, a line item that's been under pressure for several quarters, was up 3% sequentially, due largely to seasonality. Expenses are highlighted on slide ten. Total operating expenses were up 3.1% sequentially compared to revenue growth, which was 4.3% sequentially. Personnel expenses were 132.7 million, up 4.1 million or 3.2% from the first quarter. Incentive compensation due to higher sales increased personnel expense by 6.3 million, which was partially offset by decreases in healthcare costs and lower payroll taxes. Other operating expenses were 94.4 million, up 2.7 million or 2.9% sequentially. Business promotion expenses were up 2.0 million; largely due to timing related to our advertising spend. Data processing and communications were up 843,000 as a result of variable expenses related to higher sales in our TransFund business. Other expenses were up 2.5 million, with the largest single driver being approximately 900,000 of expenses related to an ATM theft and wire fraud losses. Turning to the balance sheet on slide 11, the securities portfolio was down 158 million in the second quarter and is down 699 million from the same period last year. Liability sensitivity is 0.88% at quarter-end and we expect to continue to migrate towards interest rate neutral throughout 2015. Period end deposits were 21.1 billion at quarter-end, down slightly from the end of the first quarter. BOK Financial continues to be extremely well capitalized. The Company and its subsidiary bank exceeded the regulatory definition of well-capitalized at June 30, 2015, with the Tier 1 common ratio of 13.01%, total capital ratio of 14.11% and a leverage ratio of 9.75%. Turning to slide 12, our guidance assumptions for the balance of 2015 are as follows. As noted in our press release, we expect mid-to-high single-digit loan growth for the third and fourth quarter and to finish with double-digit loan growth for the full year. We've had a very strong first half of the year and just simply don't believe that the current pace of loan growth is sustainable, especially considering the expected slowdown in the energy book. Stacy will talk a little bit more about this in a moment. 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 continue to expect loan loss provisions for the full year to fall within our forecasted 15 million to 20 million range. On a rolling 12-month basis, we continue to expect mid-single-digit revenue growth in fees and commissions. We continue to expect expenses to run in the 225 million to 230 million per quarter range for the balance of 2015. Norm Bagwell and Stacy Kymes will now review the loan portfolio in more detail. I'll turn the call over to Norm.

Thanks, Marty. First, let's look at the loan portfolio on a market-by-market basis. As you can see on slide 14, seven or eight markets grew nicely in the second quarter. The Arizona market continued its strong recent performance, posting 9.4% sequential growth, with growth balanced between C&I, which is up 10.1% and CRE, which is up 9.2%. Kansas City also had very strong second quarter, up 7.6% sequentially, driven by four new deals that we've been working on for some time that happen to close in the quarter. On a year-over-year basis, you can see that again, seven or eight markets generated healthy growth compared to the same time last year, with Arizona and Texas showing the highest year-over-year growth percentage at 38.9% and 17.3% respectively. As indicated on slide 15 of the presentation, commercial loans were up 4.1% for the quarter from 9.4 billion to 9.8 billion. Healthcare was our strongest commercial lending sector in the second quarter, posting 8.9% sequential growth and wholesale and retail was right behind with 8.4% growth. As expected, the energy loan growth flattened out in the second quarter. On a year-over-year basis, commercial loans are up healthy 16.8%. As noted on the slide, every single segment of the C&I portfolio posted strong year-over-year growth, led by manufacturing, energy, services and healthcare. Slide 16 shows the overall loan portfolio for the company. Commercial real estate grew at a 3.3% pace in Q2, while C&I as noted grew 4.1%. Residential Mortgage declined 2.2% and Consumer Lending declined modestly in the quarter. On a year-over-year basis, the C&I portfolio was up 16.8%, while the CRE portfolio was up 14.3%. Consumer Lending was up 8.6% and Residential Mortgage was down 6.1%. Thus far in 2015, we are having good success in both expanding relationships with our existing customers and we believe we are taking share and gaining new customers on the competitive front. As Marty noted, we do see loan growth moderating in the second half of 2015. We've had significant growth since the beginning of 2014 and while the pipelines in our commercial real estate, healthcare and general C&I businesses remain very strong at the quarter end. We think the current portfolio growth rate is unsustainable, given an expected reduction of our energy outstandings between now and year-end. On slide 17, loan yields were up 6 basis points in the quarter, largely due to interest recoveries in the quarter, as the competitive environment remained relatively stable throughout the quarter. Stacy will now discuss energy lending, commercial real-estate and credit quality. Stacy?

Thanks, Norm. Let's talk first about energy lending. Slide 19 shows our energy portfolio as of 06/30/15. At quarter end, our energy portfolio was 2.9 billion and overall utilization was 52%. In addition, 52% of energy commitments and 48% of energy outstandings are Shared National Credits. We underwrite these credits exactly the same as we underwrite all of our other energy credits, including a review and analysis by our independent internal engineering staff. As mentioned, we do see energy loan balances coming down for the balance of the year. We've seen a great deal of capital markets and private equity activity in the first half of the year, and this has enabled some of our core borrowers to pay down bank debt. This activity is likely to continue as many borrowers are working hard to retool their balance sheet so they can enhance their financial flexibility. We updated our quarterly stress test during July and there were no changes to our assumptions, which start at $40 oil and $2.50 natural gas. The results of this stress test are not much different than previous results and our firms our view about potential loss content in the near-term. We typically disclose potential problem loans as part of our 10-Q, but given heightened concerns about energy exposures across the industry. We felt it prudent to discuss on the call. We define potential problem loans as loans having a well-defined weakness that may represent a greater risk due to deterioration in the financial condition of the borrower. This is consistent with the regulatory guideline for substandard. We review, we both regulate, evaluate the full collectability of principal and interest. If full collectability of principal and interest is uncertain, we place these loans on non-accrual. As noted on the slide, non-accrual loans totaled $6.8 million or less than one quarter of one percent of the portfolio at quarter-end. At June 30, 2015, we had 14 energy credits, totaling 124 million in outstandings rated as potential problem loans. This represents 4.3% of our energy outstandings at quarter-end and was up from 44.1 million at March 31 and 15.9 million at December 31, 2014. Only three of these credits, representing 52.2 million of outstandings, were downgraded to potential problem loans as a result of the recent Shared National Credit Exam. And it is worth noting that the largest of those three, and our single largest potential problem loan. with 34 million of outstandings, paid off in full after quarter-end. The increase in potential problem loans is very much in line with our expectations as we have said all along that we expected migration of energy credits through the downturn. We remain comfortable with our risk position and continue to believe that if this cycle behaves like their previous cycles over the past 20 years, we do not expect losses to be significant. In addition, we have consistently built our quantitative and qualitative loan loss reserve for energy over the past several quarters and we believe we are appropriately reserved for any losses inherent in the portfolio. The loan loss reserve allocated for energy is slightly higher than its overall percentage of our loan book as you would expect in this current period of commodity price volatility. At the bottom of this slide, we show the overall gross loss rate on the energy portfolio over the last 10 and 15 years which covers several commodity price cycles. As noted, the gross loss rate on E&P lending, which represent 85% of our energy portfolio, is 10 basis points over the last 10 years and 8 basis points over the last 15 years. The overall loss rate on energy, even including the significant power loss we realized in the second quarter of 2008 in the midstream book is 21 basis points over the last 10 years and 16 basis points over the last 15 years. We are now eight months removed from the late 2014 announcement by OPEC that set the downward trend in oil prices in motion and to date, the downturn has behaved very much like we expected it would. We continue to expect oil prices to reach a market equilibrium late in the fourth quarter or early in the first quarter of 2016. In addition, the most recent decline in oil prices may ultimately be a positive for the industry's long-term health, as it will likely to serve to suppress renewed drilling until prices stabilize at a new equilibrium. Turning to slide 20, the commercial real estate book grew 3.3% in the second quarter and is up 14.3% year-over-year. You will see good growth across the portfolio, both in the quarter and in the last 12 months. Our commercial real estate pipelines remained strong at quarter-end and we are seeing good deal flow of very high-quality lending opportunities across our market territory. Credit quality remained strong at quarter-end. As shown on slide 21, the allowance for loan losses was 1.33% of period-end loans and represented 221% of non-accrual loans, both very healthy metrics. Non-performing assets, excluding those guaranteed by government agencies were 0.82% of period-end loans and repossessed assets. Net annualized charge-offs to average loans were 2 basis points this quarter. The majority of the increase in non-performing loan was driven by loans in the services sector unrelated to the energy downturn. The small increase in nonaccrual energy loans is not expected to lead to any significant losses. Steve Bradshaw will now make some closing statements before we open the call for Q&A. Steve?

Thanks, Stacy. It was another very strong quarter for the Bank and it was hard to find a metric on the P&L or balance sheet that didn't go in the right direction during the second quarter. And I am pleased with how the team is performing. We continue to deliver healthy loan and fee income growth, while controlling the expense growth. Each and every one of our line of business managers is executing well, building our business with customers and prospects and working hard to continue BOK Financial heritage of strong financial performance, exceptional customer service and deep support of the communities we serve. A key goal of mine since assuming leadership of the company at the beginning of 2014 has been to navigate the company back to our historic track record of consistent earnings growth without depending on rising interest rates to accomplish the objective. The steps we've taken in the first half of the year have certainly put us on a path where our goal is now in sight. In fact the second quarter was the first since mid-2013, where we delivered GAAP earnings growth on a year-over-year basis. While we have moderated expense growth levels below our rate of revenue growth, reducing that rate of growth in the second half of the year and into 2016 remains a top priority. So, we have to accomplish this without disrupting our capabilities and operational risk management and our needed investment in technology. We remain motivated to efficiently deploy excess capital via share repurchase and M&A as long as prices for both support long-term shareholder value. While we did not buy back shares this quarter, we continue to see share buyback as a significant part of the equation to deploy our excess capital and have approximately 1.3 million shares remaining on our current Board authorization. We still have a lot of work to do and there are ongoing headwinds, including our continuing need to reduce operational risk and the potential for an extended downturn in energy. But today, I'm very pleased with the results our team is delivering and remain optimistic about our business for the foreseeable future. With that, we'll open the call for your questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Ken Zerbe from Morgan Stanley. Please go ahead.

Great, thank you. Good morning, guys.

Good morning, Ken.

Good morning.

So I guess to start off, one of your, I'll call it Texas-based peers had a little bit of weakness in fee income, given the oil and gas-related fee line figures in my trust Investment Management. Do you guys have anything that could be indirectly impacted in the fee line when it comes to oil and gas?

Yeah. Ken, this is Steve Bradshaw. We do, we're actually a pretty sizable manager of mineral rights, which some of the pricing on that is based on the velocity of the royalty payments that are coming in, that's already kind of fully reflected in our numbers. So that's the area that's probably most impacted in the wealth space.

Got it, okay, but you're not seeing anything meaningful.

No, that area is clearly down, but we've been able to overcome that through our growth in other asset classes.

Got it. Understood. Okay. And then, on the energy loans, I think I heard you mention a couple times that you expect balances to be down. So did you quantify that or just directionally lower?

Just directionally lower, the borrowers kind of go through their process of kind of fixing their balance sheets, we think the result of that is going to be more pay downs and advances in the latter half of the year.

Okay. And then, last question I had just in terms of brokerage and trading, is there any seasonality involved in this because we think last year was actually pretty strong too?

There is some seasonality in that business, typically you see people in the second half of the year kind of repositioning their balance sheets for the coming year, but it's really more - at least from our perspective, it's much more rate driven and where we are in the right cycle and what - how people are positioned on the corporate side, how people are anticipating future rate moves. So, since rates have been trending upward a little bit, that has created a little bit of a bump in activity.

Okay, great. Alright, thank you very much.

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

Thank you. Good morning.

Good morning.

On the energy portfolio, I guess it was flat this quarter. Stacy, have you seen any opportunities to pick up market share in this area? You kind of indicated that's what you wanted to do a couple of quarters ago.

We're still very much open for business and we're still looking at new opportunities. We approved a new opportunity just last week that will be a nice opportunity for us to continue to grow that book. That's what makes kind of quantifying our expectation around energy in the latter half of the year difficult. We do anticipate paydowns, what's harder to anticipate is what new opportunities may be presented as a result of this environment that may offset that, but we're very much open for business. I was in Houston a week ago, visiting with customers and potential customers. And it is something that we understand, we're comfortable with and we're not even out of the market depending on the commodity price. And so to the extent that there are good opportunities in this commodity price environment, we're very interested in doing those.

Okay. And could you give us some more color on the increase in non-accrual loans, about $10 million this quarter?

Yeah, the biggest driver there was a single credit that is in the services sector that is wholly unrelated to the energy book and it is one that we don't believe that has lost potential at least in the near-term. Actually, it was a Shared National Credit that the examiners classified as an accruing troubled debt restructured loan, and we tend to shy away from that classification because of our view about what that looks like from a reporting perspective. And so, we chose to put that on non-accrual, which is a little bit more of an adverse classification than what the examiners classified it, but that's the way we choose to account for those.

Okay. And one more if I could. Are you guys still purchasing securities, Marty? Can you give us some color on that?

Yes, on the securities portfolio, we are down just a little bit on the quarter and we do expect to bring the securities portfolio down a bit in the third quarter. So, there is some net purchase, but not a huge amount.

Okay. Thank you.

The next question comes from Brett Rabatin from Piper Jaffray. Please go ahead.

Hi guys, good morning.

Good morning, Brett.

Wanted to just first, kind of go back to the energy book and you mentioned, the stress test of the 40s and I'm just curious, oil obviously reached 60 and you're going through your spring borrowing base redetermination for your clients. What kind of price tag that you use for sort of the spring season? And I'm just kind of curious, you obviously have a lower level of potential problem loans, so to speak, vis-a-vis many of your Texas peers and I was just hoping to kind of get some thoughts on kind of how you view the difference there?

Well, let me start with, I guess, where we underwrote to the spring redetermination. Generally, we were in kind of 58 to 60 range for the preponderance of those redeterminations. Obviously, there kind of, there is a season, so to speak, but we do those throughout. I mean, there was a range of those. But typically, I would say, kind of in that 58 to 60 was where the preponderance of those were, so clearly at higher level than where we are today. But obviously, the stress test, we perform without hedging and so we look at in addition to the other things that we do, the head stress test we do excludes hedging so that we kind of have a good understanding of where we would be in a materially lower commodity price environment. And then look for weakness and then use hedging as mitigate to that. But, the stress test results were very positive and we've been fortunate in the first half of the year really that those that fared the most poorly in our stress testing have largely exited the bank, due largely to the health of private equity in the capital markets. And so, we feel like we're in awfully good position here, should commodity prices stay at this level.

Okay. That's some good color. And then, if I understand your loan guidance, I guess, I'm just trying to make sure I understand the back-half loan guidance, mid-to-high-single digit. Would it be fair to assume, like if I'm just thinking about if you axed out energy, would your loan growth guidance for the back half of the year be similar to 2Q or is essentially the guidance a reflection of some uncertainty about energy in the back half of the year in terms of balances?

It's clearly related to our uncertainty about the balances in energy in the latter half of the year. I think the other business lines are performing very well. Real estate, healthcare, the general C&I businesses are all performing well, have good healthy pipelines and absent energy, we would probably continue to have low double-digit loan growth that we would guide folks toward, it's really the uncertainty around energy is why in the latter half of the year, we've indicated that it's probably high-single-digits.

Okay. And then, just lastly if I could, the Mortgage Banking, would you guys expect a continued mix shift change towards the correspondent channel? Any thoughts on back half Mortgage Banking dues?

Yeah. I think that - this is Bradshaw. I think that we'll expect a little bit of a slowdown in mortgage in the second half the year, most of that just seasonality with a little bit of a headwind because price have moved up a little bit as you've seen here in the second quarter. But in terms of the mix, we're seeing probably the biggest percentage increase coming from our consumer direct channel, HomeDirect. So we would expect that to continue to accelerate and with correspondent and retail, probably maintain their respective positions.

Okay. Appreciate all the color. Thank you.

The next question comes from John Moran from Macquarie Capital. Please go ahead.

Hi, guys.

Hi John.

Good morning, John.

Hey, I'm sorry if I missed it, but did you guys give the number for how much of the production was hedged for "15 and "16? And I know it sounds like people kind of rushed for the '16 hedge when WTI kind of recovered into the 60s.

No, we have not historically disclosed that because we think it's misleading, how you identify that and how much of customers hedged and for how long are hedged, really can create very disparate results and so that's why we're really focused on our stress test, which would perform unhedged. We did see a nice increase in our customer hedging activity in the second quarter. There's an interesting kind of behavioral aspect to that when prices were $90 in the fall because of largely, probably because of backwardation. Customers we're hesitant to hedge when they saw prices fall. We did see an increase in activity in the second quarter when they rebounded back up into the low 60s. So we do have some benefit of that, but we think holistically, it's a little bit misleading to talk about percentage hedged and who's hedged and things like that, because it's an awfully difficult thing to quantify and provide a really full disclosure around, and so we really focus on talking about our stress test without the hedge because we think that's more meaningful.

Okay. Got it, thanks. And then, I've got kind of a, I don't know, maybe a strange one for you, but on the difference between how you would look at oil secured, sort of reserve-based stuff versus gas. Do you use a different advanced rate or is there a bigger haircut on gas in the price tag. I mean, gas has been cheap for a long time, but I mean, any change in kind of the analysis between the two?

No. We treat them the same. We obviously look at the oil and gas mix as part of the underwriting, but in terms of advanced rates, we do treat them the same and that's the market convention. Most of our borrowers have a mix of oil and gas, so it's not you have some percentage of your borrowers are oil only and some percentage of your borrowers are gas only. There are a few that focus on one or the other, but the vast preponderance have oil and gas as part of their mix in the borrowing base.

Okay, thanks. And then, just the last one from me, just sort of strategically big picture. I know, M&A is definitely been a focus for you guys. Any sense that you're getting closer? There's been, I guess a couple of smaller ones down in Texas, but the discussions or sort of where we stand in terms of the M&A pipeline?

Yes, I would say, there's certainly nothing imminent. But our focus really has been to look for the most part within the footprint at higher quality banks. And so, our discussions and identification processes has been strong, certainly over the last couple of quarters for sure. So, we remain very active and very interested but nothing imminent. Generally speaking the disconnect, if there is one between buyers and sellers is just the forward look at the rate curve. And what that will mean in terms of unleashing earnings for the seller and then you end up spending time determining their curve versus our curve. And I think that's probably inherent in all the M&A transactions that we've seen. So, it remains a big focus of ours, but nothing that I would try to suggest is imminent.

Okay. And then, market preference would still be kind of Texas, Colorado, Kansas City, first and foremost, I assume?

Yes. That's still true. We still believe that there is a big benefit for gaining scale in those markets. We like those markets. We are successful in delivering our branded banking there, so that would be the predominant areas that we're looking at.

Perfect. Thanks very much for taking the questions.

Thank you.

[Operator Instructions] Our next question comes from Jon Arfstrom from RBC Capital. Please go ahead.

Thanks. Good morning, guys.

Good morning, Jon.

Good morning, Jon.

A couple of questions here. Maybe Stacy for you, just back on energy lending, how is the pricing in energy lending? What are the pricing trends and how is the competitive environment changed at all in energy lending?

Yeah, I guess a couple of things. Certainly, there is some pricing opportunity within the pricing grid. So, to the extent that borrowers have higher utilization or to a lesser extent higher leverage, those generally are the two indicators of pricing within the pricing grid. So, there is some modest uptick in spreads related to that, just as borrowers move up within the pricing grid. I will tell you, with respect to new loans, I would expect the grid overall to move up 25 basis points to 50 basis points to reflect the higher risk environment. I think that - I think there are some likelihood that will happen, but we haven't seen that happen yet. That's not an area that we can lead on, certainly the very large banks are going to, kind of lead from that perspective, but do you think that hasn't happened yet, but I think it may will happen, if we stay in a lower price environment here for a while. With respect to the broader competitive environment, I think that the same folks, if you've been in this business for a long time and you have done it consistently or generally still in the business and still participating from a market perspective, I do think perhaps we'll see if prices stay down, the far redetermination will be another point, where the industry we'll take a hard look at the borrowers and what they can do to right size their collateral, but it's what's great about this industry is that, twice a year we get to right size of our collateral and re-margin our collateral relative to our loans. And so it's one of the reasons why the lost history here has been so strong and we've had such a positive outcome here over a long period of time.

Okay, good. It's helpful. May be question for you Stacy or Steve, just any impact at all on the Oklahoma economy. I mean we heard you loud and clear on your early comments, but anything outside of energy, where you're seeing some type of an impact, are you watching more carefully?

Yes, this is Steve. Jon, I'd say no. As I mentioned earlier, we've seen net job growth in Oklahoma, barring the downturn on the energy side. So, nothing else that us would be alarming. We certainly look at what's going on from a residential and commercial real estate perspective and it has typically been a good indication of deterioration in the economy and we don't see those metrics today. So we're watching carefully, but nothing to point to at least currently that would suggest that there's been an incremental impact on the economy.

Okay. Good. And then, maybe one, I think I'm later in the queue, so I'll ask another one here, maybe for Marty, relatively neutral from an asset sensitivity point of view, and you have a big C&I book, you have a big non-interest-bearing book and low-cost deposit base. Just remind us what it is that keeps you closer to neutral, you feel you're a little more conservative in your assumptions, or is there something else there to keep in mind?

Well, we think that we're particularly thoughtful in the way we've constructed our assumptions. And we're pretty comfortable with the position we have. We do expect to continue to bring the portfolio down modestly in the third quarter and perhaps in the fourth, but we continue to be data dependent just as the FOMC is in the pace that we do that and the level.

Okay. And 25 basis point, 50 basis point hike, what does that do to your loan yields?

Sure. The loan yields will come up because a fair amount of that's variable will have some funding cost come up and from our perspective, the first 25 basis points really isn't that big a deal. We're more focused on thinking about the timing of when the second and third and fourth rate hikes might be. So -

Okay. All right. That helps. Thanks, Marty.

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

Thanks, good morning.

Good morning, Gary.

I just had a quick question on multi-family portfolio looks like it retraced its steps after a nice growth in the first quarter. Can you talk about what you're seeing in that portfolio, whether there are any loan sales or kind of what the drivers were?

No, I mean the big driver there is those properties mature and get better occupancy, they're going to move to the permanent financing market and so that some level of churn in that portfolio is normal and to be expected. It's still multi-family, still doing well; it's still one that we pay a lot of attention to depending on the market because there's obviously been a lot of activity there in the last couple of years. But the decline there was really as the portfolio churns and the timing related to that, once they go to the permanent financing market.

Okay, it's really just sort of a timing issue between funding loans exiting first quarter?

That's right.

Okay. Great. That's helpful. Thank you.

Our next question comes from Brett Rabatin from Piper Jaffray. Please go ahead.

Yeah. Hi. I just want to follow-up to make sure I understood the margin guidance as it relates to the NII guidance. Essentially, it sounds like what you guys are saying is just the margin will take a bit of a step-back in the back half of the year. Obviously, maybe lower interest recoveries in 3Q. Can you maybe give a little color on the margin and just kind of how you view it, as you plan the securities purchases, et cetera?

Yes. Brett, here is the way I think about the margin. So, you'll see loan growth continue. You'll probably see the bond portfolio come down some, so that will be supportive of margin from a mix perspective. You're right. The interest recovery - I mean there's always pluses and minuses that are sort of non-run rate, but that was a bigger number than normal, so you might want to take that into consideration.

Okay. And then, I guess the other thing was just thinking about the growth that you guys experienced in 2Q from a geography perspective. Obviously, Oklahoma, Arizona, Kansas City, with - I assume Oklahoma, the growth there was healthcare. Would that be concentrated in the Oklahoma market?

Really that it was broad-based. I mean, energy was flat. But otherwise, I mean that's what we've been excited about now for the last nine months or so is how broad based the growth has been. All the markets, C&I, healthcare, CRE, I mean, energy has been strong; the last six months, I think were up about $42 million. So, we're kind of flattish in that time period. But it's really been the health of everything, the diversity and how it's all kind of done well for us. Norm, do you want to add some color to that?

Yes. I think the strength of the underlying pipeline has been solid across all geographies but also many of the specialty businesses that are embedded in the traditional C&I world. And so, as a result of that, one of the neat aspects of this is that we are in so many different geographies and we're getting contributions from each, so that gives us no reliance on any one area to produce our loan growth.

Okay. And then, just lastly, on the personnel costs for the quarter, if I'm just thinking about the incentive compensation, is the personnel run rate kind of a good number going forward or can you maybe comment on incentive comp, as you see it, or like into the personnel costs?

Yes, sure. I think that what you see there is a pretty good run rate on net. And obviously, performance in the various fee-based businesses that have material incentive comp components will be pluses and minuses as you go forward.

Okay, great. Thanks for the color.

Our next question comes from Matt Olney from Stephens. Please go ahead.

Hey, thanks, good morning, guys.

Good morning, Matt.

Hey, pretty much all my questions have been addressed except for one. Marty, any thoughts on the tax rate we should be looking at for the back half of 2015?

Yes, when you look at the tax rate for the last two quarters, that's been pretty stable and that's a pretty good run rate indication.

Okay. That's all from me. Thank you.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Joe Crivelli for any closing remarks.

Well, thanks, everyone, for joining us this morning. As always, if you have any further questions, you can give me a call at 918-595-3027 or email me at jcrivelli@bokf.com. Talk to you later.

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