BOK Financial Corporation (BOKF) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the BOK Financial Corporation Fourth Quarter Earnings Conference Call and Webcast. [Operator Instructions]. I would now like to turn the conference call over to Mr. Joe Crivelli, Investor Relations for BOK Financial Corporation. Mr. Crivelli, the floor is yours sir.

Good morning everyone and thank you for joining us to discuss BOK Financial Corporation's fourth quarter 2015 financial results. Today, we'll hear remarks about the financial results and outlook from Steve Bradshaw, CEO; Steven Nell, CFO; Stacy Kymes, EVP Corporate Banking; and Marc Maun, Chief Credit Officer. In addition, PDFs of the slide presentation and press release that accompanies this call are available on our website at www.bokf.com. Before we begin, I'd like to remind everyone that during this conference call, management will make certain forward-looking statements about its outlook for 2016 and beyond, that involve risks and uncertainties. Forward-looking statements are generally preceded by words such as believes, plans, intends, expects, anticipates or similar expressions. Forward-looking statements are protected by the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ from expectations include, but are not limited to, those factors set forth in our filings with the SEC. BOK Financial is making these statements as of January 27, 2016. And assumes no obligation to publicly update or revise any of the forward-looking information in this announcement. I will now turn the call over to Steve Bradshaw.

Thanks Joe. Good morning everyone, thanks for joining us. I trust everyone has seen our earnings release from the fourth quarter which was issued earlier this morning. As shown on slide 4, for the full year the company earned $288.6 million or $4.21 per share down slightly from $292.4 million or $4.22 per share in 2014. For the fourth quarter, the Company earned $59.6 million or $0.89 per share compared to $64.3 million or $0.93 per share in the fourth quarter of 2014. Lost in the higher loan-loss provision that we announced earlier this month, is the fact that 2015 was a very good year for the Company. Profitability was solid. We grew loans assets under management and revenue from fee-generated businesses. And expense growth was well-controlled all year long. I am proud of the hard work that all of our employees put in their jobs every day which made this possible. While I'm disappointed we didn't grow our earnings as we had anticipated, I am circumspect about the reasons for that. The increased loan-loss provision in the fourth quarter was necessitated by issues related to a single large borrower. Considering the persistent low-energy price environment, this was a prudent step on our part. Mortgage banking revenue also was down compared to the third quarter, in line with industry trends. And some line items of expenses increased in Q4 which Steven will discuss in a moment. However, to date we have yet to see material spill over from the energy downturn. The business environment remains reasonably good all across our footprint. Even in oil-dependent geographies and we continue to see growth opportunities. Demonstrating that view, during the quarter we bought back over 1.8 million shares at an average price of $63.91 per share. For the year 2015, we deployed over $230 million of capital in our buyback program. With over 3.6 million shares purchased at an average price of $63.15. Turning to slide 5, both loan growth and fiduciary asset growth was stronger in Q4 which, I believe, demonstrates the strength of our underlying franchise. In addition, this bodes well for future revenue growth opportunities. As both of these metrics are important precursors to revenue growth. Loans grew 3.7 percent sequentially or 14 per nine Loans grew 3.7% sequentially or 14.9% annualized. And we're up 12.2% for the full year. As Stacy will discuss in a moment, loan growth all throughout the year was well diversified across our footprint and across our various lineage lines of business. Fiduciary assets were up a healthy 1.5% for the quarter and 6.5% for the year. And overall assets under management or in custody, were up $4 billion in the fourth quarter or 6%, as we landed a large new account in the municipal segment. For the year, assets under management or in custody were up a very strong 10%. The Wealth Management Division's ability to grow assets under management in what was a challenging market environment all throughout the year, is a strong indicator of our differentiated business approach. And also bodes well for future revenue growth. We've also announced three acquisitions since our last earnings conference call. MBT Bancshares or mobank, is $645 million financial institution in Kansas City, Missouri. MBT has long been on our target list in Kansas City, as it is a high-quality organization that has demonstrated discipline organic growth and developed a unique approach to customer service that differentiates the bank in the market. Mobank fits well with our legacy Kansas City operation. And its unique consumer-banking strategy and proven expertise in business banking augments Bank of Kansas City's commercial banking, wealth management and mortgage banking presence in the market. We also expect to drive higher organic growth from our existing Bank of Kansas City franchise, as this visible investment in the market will be viewed positively by prospective customers and potential new hires. While at first [indiscernible] the mobank acquisition may seem modest from an EPS contribution standpoint, it is consistent with how we have built BOK Financial by acquiring high-quality operations that either established a beachhead or provide additional scale in the desired market and then building by delivering the entirety of BOK's product suite to new customers that result from the acquisition. We're very optimistic that the sum of the parts in Kansas City is a game changer for us in a market where we have demonstrated strong organic growth. But have the opportunity to capture significant additional share from established competitors. Weaver Wealth Management which we announced after quarter close, will increase BOK Financial's assets under management and administration by approximately $340 million. And expand the Company's wealth management reach in Texas. Weaver Wealth Management brings to BOK Financial an experienced team with a solid client base of executives and families in the important North Texas market. It will become part of BOK Financial's subsidiary, The Milestone Group which focuses on providing investment management and strategic financial planning services to ultra-high-net-worth customers. And E-Spectrum Advisors which we also announced after quarter close, is a boutique energy investment banking firm based in Dallas that offers a broad range of oil and natural gas property sales and strategic advisory services to clients and has closed more than 150 transactions with an aggregate value of more than $10 billion since 1997. This brings a new product line of revenue opportunity to BOKF which we believe will be in high demand in that coming years. Steven Nell will now cover the financials in more detail. Steven?

Thanks Steve. Turning to slide 8, pre-provision net interest revenue was $181.3 million, up $2.6 million during the quarter largely driven by continued strong loan growth, as well as a three basis point increase in net interest margins. The modest net interest margin expansion was driven by higher yields on the available for sales securities portfolio. We continued to see relative stability in net interest margin all throughout 2015. On slide 9, fees and commissions were $155.8 million for the fourth quarter down 5.4% on a sequential basis and down 1.3% year-over-year. For the 12 month period, fees and commissions revenue were up healthy 6.1%, in line with our mid-single digit guidance. For the quarter, brokerage and trading was down 4.2% sequentially. And down 1.1% year-over-year. The investment banking business had another challenging quarter due to lower underwriting and advisory fees. Other businesses, including institutional brokerage, retail brokerage and hedging risk management were an aggregate flat on a sequential basis. Transaction Card was down 0.6% sequentially, but up 2.7% year-over-year. Consistent with prior quarters as bank card fees, TransFund network revenues and check card revenue were all up nicely year-over-year on increased customer activation and usage. Fiduciary and asset management revenue was up 1.2% per sequentially and 1.7% year-over-year, due to an increase in assets under management which in turn was driven by new customer wins. Mortgage banking was down 25% sequentially and 17% year-over-year. A number of factors contributing here. Lower production volume due to normal seasonality, as well as higher overall interest rates during the quarter which suppressed refinancing volumes. A bit of a slower production pipeline as the new disclosure rules known as TRID, continue to work their way through the system. And hedge mark-to-market volatility also contributed. The issues related to our loan production system that we noted on the third quarter call were largely resolved during September and did not contribute meaningfully to the sequential revenue decrease. Deposit service charges and fees were down slightly, compared to the third quarter, but essentially flat year-over-year. Expenses are highlighted on slide 10. Total operating expenses were $232.6 million up 3.6% on a link quarter basis and 3% year-over-year. As we noted in our press release on January 13, this is higher than our forecasted range of $225 million to $230 million. Personnel expense was $133.2 million, up 4.1% or 3.2% from the third quarter. This was driven by $1.1 million increase in regular compensation, a $757,000 increased employee benefits as we're slightly under accrued for our final 2015 expenses. And a $2.3 million increase in incentive compensation's. Of this $1.4 million is share-based compensation based on the Company's forecasted EPS growth, relative to peers over a three-year period. Other operating expenses were $99.4 million 4.1% sequentially. The most significant driver here was a $2.5 million increase in business promotion expense due to seasonality. And a $2.4 million increase in mortgage banking costs driven by revisions of assumption related to our default servicing portfolio. These were partially offset by lower legal expenses and charitable expense in the quarter. Turning to the balance sheet on slide 11, the available for sale securities portfolio was $9 billion, up $242 million in the fourth quarter due to temporary repositioning of the portfolio at year-end. Liability sensitivity is .97% at quarter end. Period-end deposits were $21.1 billion at quarter end up 2.3% or $469 million from the end of September due to normal year-end seasonality and customer activity. BOK Financial continues to be extremely well capitalized, as evidenced by the metrics shown here on slide 11. Since the beginning of the year, we have deployed $230 million of capital in our stock buyback. Another $116 million in regular quarterly dividends and $102.5 million is committed to the mobank acquisition later in 2016. Turning to slide 12, our guidance assumptions for 2016 are as follows mid-single-digit loan growth down slightly from mid to high-single digits, reflecting the longer than expected commodities downturn. And approximately $200 million to $250 million per quarter decrease in the bond portfolio during the year, as we continue to migrate toward interest rate neutral. Stable to increasing net interest margin and increasing net interest income based on our expectations for loan growth, historical credit factors by loan type and other qualitative and environmental factors. And including results for energy stress testing, we estimated a loan-loss provision range of $60 million to $80 million will be necessary to maintain an appropriate loan-loss reserve in 2016. This may be unevenly spread throughout the year and difficult to predict on a quarter-by quarter basis. We're expecting continued mid-single-digit growth from fee businesses on a trailing 12 month basis. We expect to continue to manage expense growth, at or below the rate of revenue growth. We expect to close the MBT Bancshares acquisition at midyear and to incur $6 million to $8 million of pre-tax consolidation related charges after the deal closes in the second half of the year. And we'll continue to allocate capital to organic growth, regular quarterly dividends, mergers and acquisitions activity and more limited stock buybacks. I will turn the call over to Stacy to review the loan portfolio in more detail. Stacy?

Thanks, Steven. First, let's look at the loan portfolio on a market-by-market basis. Loan growth was a healthy 3.7% in the fourth quarter. As we mentioned in the press release, a single customer advance to a well-secured borrower in the energy portfolio positively impacted loan growth. So we will attempt to normalize this out for you. Even adjusting for the single customer advance referenced in our press release, growth would've been 2.3% or nearly 10% annualized. As you can see on slide 14, growth remains nicely balanced on a geographic basis with Kansas City, Oklahoma, Arizona and Texas all posting nice sequential increases. Oklahoma's loan growth was positively impacted by drawdowns a by single large borrower in the energy portfolio. But it would've been positive even excluding this advance. And the 2% sequential growth in Texas is a bit lighter than recent quarters, due to a large paydown in the Texas CRE portfolio. In Kansas City we're seen good growth across the business including food and commodities, commercial real estate, healthcare and private banking. This is the third consecutive quarter of strong loan growth in Kansas City. So clearly the team there is doing a nice job of reaching new customers and expanding relationships with existing customers. More to come there as we believe the acquisition of mobank will open more doors for the combined organization in the coming years. On a year-over-year basis, loan growth was 12.2%. 10.7% excluding the single customer advance, with Arizona and Kansas City, two markets not at all energy dependent showing the strongest growth of 25% and 25.4% respectively. We believe this is a clear demonstrator of the diversity and strength of our business across the entire BOKF footprint. As indicated on slide 15 of the presentation, commercial loans were up 4.6% this quarter. Or 18.6% annualized. Within energy, we had a mix of new borrower originations and the previously mentioned advance from single borrower. Excluding this borrower, the energy portfolio would've been up 1.4% sequentially. Our growth in energy demonstrates that BOKF remains highly committed to the energy industry. And we're continuing to find new business opportunities with high-quality, seasoned, well-capitalized borrowers, even in the current downturn. Healthcare had another strong quarter, up 8.1% sequentially and leading our lines of business up 29.4% year-over-year. This is a business that can continue to grow for us, even if the energy downturn does eventually spill over into the broader economy in a noticeable way. It is a differentiate line of business for us in a growing market. And it enjoyed strong traction all year long as it continues to benefit from our decision to structure and manage it is a line of business back in early 2014. In addition, healthcare has a solid pipeline for 2016 as well as geographic expansion opportunities. On a year-over-year basis, commercial loans are up 12.7% with each segment contributing growth, led by healthcare, manufacturing and services. Slide 16 provides more detail on our energy portfolio as of 12/31. At quarter end, our energy portfolio was $3.1 billion and E&P line utilization was 62% which is up from 57% at the end of the third quarter. At year end, 52% of energy commitments and 46% of energy outstandings are shared national credits. As we mentioned in past calls, 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. I believe the loan we moved to nonaccrual, as reflected in the Q4 results is a stark example of this fact and demonstrates our differentiated and conservative approach to shared national credits. When our internal engineering team reviewed the Agent [ph] Bank's suggested borrowing base on the subject line of credit in late December and early January, it flagged a steeper decline curve, lower production volumes and higher operating expenses than reflected in the Agent's suggested borrowing base. As a result of this analysis, we booked a $14.2 million impairment on the loan and moved the entire $33.4 million balance to nonaccrual. To reflect what we believe is a result in collateral shortfall. It is noteworthy that we took a more conservative approach to the borrowing-based valuation than the Agent Bank or any of the Bank Group Participants. We chose to impair instead of charge off this loan because there remains uncertainty around how the Bank Group will choose to address the collateral shortfall. Also, given the timing of this the borrower has not yet been presented with a deficiency or an opportunity cure as is industry practice. While the borrower may have several options, it is premature to conclude one way or the other as to whether the borrower has the capacity to adequately resolve the shortfall, thus we chose to impair. The impaired loan is reflected in the increased, nonaccrual energy loans in the table at the bottom of the slide 16. Overall, credit migration remains manageable. It's criticized loans were $325 million at 12/31 or 10.5% of the portfolio. Potential problem loans were $129.8 million or 4.2%. And nonaccrual loans were $61.2 million or 2% of the energy portfolio. Energy charge-offs were $2.1 million in Q4 and $5.3 million for the 12 month ended, December 31, 2015. I continue to believe that our energy portfolio is well constructed to be resilient in this commodities downturn. And that our under writings and credit management are prudent. We believe that our 2.89% loan-loss reserve to outstanding energy loans at year end is appropriate at this point in the cycle. Our Chief Credit Officer, Marc Maun, will provide additional details to support this view in a moment. I do want to take a moment to recognize the strength of our Energy Bankers, led by Mickey Coats and how hard they have worked and how well they have performed through this down cycle. The energy team has a strong partnership with our credit group and have worked together as one team to manage through this down cycle. On slide 17, the commercial real estate book was essentially flat this quarter. But has grown 19.5% compared to last year, with strong growth across the board by product type. At the end of the fourth quarter, our total CRE exposure in Houston, our most energy exposed market, was $320 million or 2% of our total loan portfolio. Approximately 51% of our Houston exposure was retail, 19% industrial, 9% multi-family and 9% in office. With the balance in other CRE's. We continue to have no downtown office exposure in Houston. In general, we feel the real estate portfolio is holding up well. And we have not seen significant spillover impact of the energy downturn on our portfolio. I'll turn the car over to Marc Maun, Chief Credit Officer. Marc?

Thanks, Stacy. As shown on slide 19, the combined allowance for loan losses was 1.43% period end loans and represented 181.5% of nonaccrual loans. NPAs, excluding those guaranteed by government agencies, were .99% of period end loans and repossessed assets. That annualized charge-offs average loans were eight basis points this quarter. The results of our Q4 stress test are on slide 20. We updated our assumptions, as demonstrated here, starting at $1.80 per million BTU's for natural gas. And $25 per barrel for oil and escalating over five years to $2.45 and $42 respectively. This is a rigorous stress test that essentially says we remain in this low price environment for the next decade. In this scenario, we obviously will see a great deal more stress in the energy portfolio in the out years. And losses will materialize. The results of the stress test are factored into our 2016 loan-loss provision guidance of $60 million to $80 million for the year. On slide 21, we provide some additional details around our energy portfolio that validate for us, that our 2.89% loan-loss reserve to outstandings in the energy portfolio is appropriate, given our loss history and portfolio composition. As Stacy showed, 82% of our energy portfolio is first lien senior secured reserve-based lending which we believe is a sweet spot in the energy sector. We have only two second lien facilities in the portfolio, representing $10 million of outstandings. We have no exposure to unsecured high-yield debt or equity positions in the E&P companies. Nor do we have any high-at-risk offshore relationships. Only 9% of the portfolio is in energy services, with another 6% in midstream. As further evidence of our underwriting discipline, in 2015 42 oil and gas companies with almost $18 billion in combined debt declared bankruptcy. We did not participate in any of these loans with the exception of one $175,000 cash-secured letter of credit. In fact, we exited two of the deals in 2014 and declined another two at origination. As a result, while many investors appear to have accepted a 5% loan-loss reserve to outstandings for energy exposure, as a de facto standard. We believe our reserve accurately reflects the risk profile of our energy portfolio. In fact, a much better predictor of loan-loss reserved percentage is emerging this earning season. As indicated in the chart on the right-hand side of slide 21. Of the eight major energy banks that have announced Q4 2015 earnings as of last night and provided the requisite detail, there is a high correlation between energy portfolio credit quality and energy loan-loss reserve percentage. We also believe this data validates that loan-loss provision amounts are driven by the underlying risk rating of the individual loans within the portfolio. There is some ability to book qualitative reserves, but under the incurred loss model required by current accounting regulations for all banks, reserves must be supported by analysis. Finally, we believe this data supports our relatively lower loan-loss reserves for energy loans, given our relatively better energy portfolio credit quality at 12/31/15. That being said, should commodity prices remain at current levels, we anticipate increased migration of credit grade and rising risk of loss. This is reflected in our loan-loss provision guidance provided earlier. Steve Bradshaw will now make some closing comments before we open the call for questions. Steve?

Thanks, Marc. Again I think the solid results and strong progress we've made this year have been somewhat discounted due to investor concerns about energy. This is unfortunate, because we have a diversified business that was intentionally constructed to withstand downturns in the overall economy. Or even in certain sectors of the economy. We have a broad portfolio of fee businesses that drive 50% of our revenue. Many of which have little correlation to energy crisis. These businesses posted very healthy growth in 2015 greater than the overall growth for the economy. We have a balanced lending portfolio including a fast-growing healthcare specialty lending business. And we benefit from a footprint that includes desirable growth markets in non-energy areas such as Arizona and Kansas City. So while investors are rightfully concerned about the potential impact of an extended downturn, as we're. We believe the impact will be manageable because of our diversity and careful approach to risk management. We continue to invest in our business. Each of the acquisitions announced since our last earnings call fits with our long-term strategy to supplement core organic growth with acquired businesses that strength in market, provide access to new customers and bring new lines of business. We believe each of these transactions will make a stronger as a bank and fuel revenues energies as we deliver the entirety of the bank to our newly acquired customers. We're confident about our future notwithstanding the current commodity price environment. We're well aware that an extended downturn will mean increased credit migration, loan-loss reserves and potential credit losses. But as a team, we have been through numerous commodity cycles previously. And we're confident we have the depth of expertise to manage through them. With that, will now open the call for questions. Operator?

[Operator Instructions]. The first question we have comes from Ken Zerbe of Morgan Stanley. Please go ahead.

Just looking at slide 20, I want to make sure the $60 million to $80 million of provision guidance, the slide title is called stress test. I want to be really clear. This is your base case provision expense expectation for 2016? Granted, I know, apparently it's based on $25 oil this year but just trying to get a sense. Because that seems, I'll say reasonable. But is that really a stress test? Could be meaningfully higher if oil does fall? I don't know if that makes sense.

Basically, the stress test is one of the components we took into account in establishing our loan-loss provision guidance. We have looked at our overall portfolio composition which includes mostly the 82% of which is the first lien secured E&P loans. Versus, we have very little in the second lien, only $10 million outstanding in second lien notes and none in some of the other categories. So, that we included the stress test, but we also included the history that we have had in the energy portfolio. So, the stress test is really not our base case establishing the loan provision.

The other I might point out on the stress test. It's the duration of that decline that creates the stress. Not necessarily the prompt dollar amount. You look at the balance of 2016 on the strip, it's at $36. Oil is a $25. That is still a pretty nice decline, but it is really the duration of that low commodity price that creates the stress.

Understood. Do you need oil to go to $25 before the $60 million to $80 million is likely? Or is $60 million to $80 million likely at $30 oil?

We think that the provision guidance we provided is representative of both the current environment and our view about how the near-term would play out, even in a stress case that we outline in our slide deck. It's a combination of multitude of factors. The composition of our portfolio, how the stress test looks like over the next 12 months as well as the current price environment. All of those were input into the guidance that we provided.

Okay. And on the reserve levels, again I appreciate slide 21. That you have a fairly low reserve, given the low criticized classified loans. Given the $60 million to $80 million of provision expense, do you anticipate charge-offs in the year to largely match that number? Such that your energy reserves won't increase? Or does this imply some noticeable increase in energy reserves over the year?

Well it's a function of several things. Including, we're also disputing paydowns in the energy portfolio over the course of the year as well. All of those factors are part of how we put together our provision guidance for 2016. Including, what we anticipate to be potential impairments or charge-offs related to the portfolio. As well as declining balances. And the results of our base case stress work that we have done as well.

Okay. Last question, this quarter's $200 million plus growth in the energy portfolio is more of an aberration than something you anticipate to continue over the course of the year?

That is correct. We have about $218 million that is attributable to a single well-secured well-rated borrower. We had about $50 million of new loans, new customers to the bank that were included in that as well. We're obviously still interested in growing the portfolio for strong energy borrowers. We're still in this business. We're still looking to grow the business. But on the whole, our guidance around energy would be the -- we expect the portfolio to decline over the course of the year. But in the fourth quarter there were some anomalies around the growth that were different than what we expect going forward.

Next we have Brady Gailey of KBW.

The $218 million that was drawndown for the single borrower, can you just give us some color on what that is? Is it hedged? Where is it located? And then there $218 million to one borrower, can you walk through, looking at your largest energy credits how lumpy are those towards the top?

This is one of our largest energy borrowers for sure. It's a diversified collateral base. And then all the collateral is energy driven per se. It is very well secured. And it is a well-rated credit inside of our past classification. It's a borrower that we're very comfortable with.

All right. And then looking at your top handful of energy credits, are they around this $200 million to $250 million? Or do you have some that are greater than that to a single borrower?

No, we do not have any that are greater than that in the energy space to a single borrower. Typically, our average loan size, if you think about where we're from the energy perspective. We've got about 600 borrowers that we have. So it's a pretty granular portfolio other than this particular credit.

Okay. And then you bought back I think a little under 3% of the Company in the fourth quarter. The stock is now 25% to 35% below the level you all repurchased it in 4Q. Are you all going to be aggressive in buying back the stock here?

Well we will buy back some, certainly at these prices. But I would not say aggressive. Because honestly Brady, we used a good bit of our capital available for stock buyback in the third fourth quarter last year. As you know, we spent over $200 million that direction. We certainly have additional capital available in this upcoming quarters to look at that and it will be part of the way we use our capital. But I would say it will be a bit more limited going out in the future than it was in the past couple of months. Past couple of quarters.

All right and lastly, on M&A. You all are pretty active in 4Q to fee income deals and the bank deal. Do you think that you will continue to remain on the offensive and look for other banks to acquire?

We will. We have got a great calling effort. We have for the past couple of years. We like our region, we want to continue to find the right partner to invest. And so yes, we have given guidance around the size, the area that we're looking in. And we will continue to move that direction to try to continue to build our franchise out and build revenue streams in the future.

Next we have Jared Shaw of Wells Fargo Securities.

Could you spend a little time talking about the impaired loan, the shared national credit that you spoke about? How you've taken a more conservative view of that than the Agent Bank. Is that a trend you think that is happening with other shared national credits? Or is this a more one-off situation where you saw something that they didn't? If you could maybe get into how you were looking at that differently than the rest of the syndicate?

Sure. This was a difficult one because it really occurred toward the last week of December and into the first week of January. I think everyone involved with getting information late and trying to make decisions around the quarter end and year end. From my perspective, the relative difference here between us and others in the Bank Group is one-off. We're not seeing, generally speaking, that stark of difference between how we see a credit and others in the Bank Groups are doing that. From my perspective, that is more one-off. Generally speaking, as we have gone through the borrowing base redeterminations, I would tell you that the larger Agent Banks perhaps haven't been as severe as we would be if you will or curtailed. The borrowing base is as much as we would have left to our own devices. But it's not an significant difference. Not enough that it makes a huge difference from how we feel about our collateral position or things like that. Maybe it's 3% to 5% difference on a borrowing base which in the grand scheme is pretty small. I really don't see this being representative of a trend going forward. There are some peculiarities around this particular credit that make it distinctive and unique. The timing of it was difficult, because we were trying to work through that with limited information right at the end of the year and even into the beginning of the year.

And then on the asset management side, that was good growth in assets under management. This is a two-part question. How much of the growth is from new customers that have their wealths away from the energy space? And then, the secondary part of that is, what is the correlation to assets under management and energy pricing?

In terms of the first question and new customers coming in. There is no doubt you are not seeing the level of wealth creation in the energy space that we would've seen maybe over the last five to seven years. So, virtually none of that is coming from that side. We're seeing good broad asset growth coming across the footprint especially through our private bank and our mutual fund complex. So, it's not necessarily dependent upon wealth creation in that aspect.

Okay. And then this one and the last follow-up on that large $218 million advance. Is that the total exposure to that relationship? Or was at the increase in the exposure to the relationship?

The total exposure's around $220 million. So that represents substantially all of the exposure.

Jon Arfstrom, RBC Capital.

A question on the provision guidance . Curious if that encompasses any change in your view of the rest of the portfolio outside of energy? Or is that entirely 100% energy driven?

Is not entirely 100% energy driven we did take into account how we would provide under normal circumstances for the balance of the loan portfolio.

Then, so far you haven't seen any pressure in areas outside of energy? Is basically what you're saying?

No. Today we haven't seen any pressure. The employment statistics stayed pretty good in Texas and they remained relatively flat in Oklahoma.

Jon, the area that we're most keenly watching is Houston real estate. Commercial real estate. We think that is the area that will probably show the most stressed the earliest. We only grew Houston real estate, commercial real estate in 2015, by about a little less than $14 million. It wasn't a strong area of growth for there. The opportunities that we saw did necessarily fit our underwriting guidelines and criteria. But also, it is a little early too, to see exactly how that's going to play out there. But Houston will be, probably the area most impacted, should we see continued low and sustained low commodity prices. I do think it's important to point out too, we don't have a significant amount of consumer retail exposure. We have no indirect lending portfolio as well. So those are some areas that could potentially see stress. But we either don't have that as part of our lending platform or have limited amounts of it.

And then just on slide 20 again. On the stress test for Marc or Stacy, I think what you said is the $60 million to $80 million is what you factored in for the current year. But if we stay here it's almost like a repeat again in 2017. You're not saying the $60 million to $80 million captures it all. It just captures it all for 2016, the way we said today 2017 is still likely to be relatively high if we stay here. Is that right?

That is absolutely correct. The one thing I would like to point out, is if you look at that provision level relative to basis points of loans outstanding, we're coming off the year with net recoveries and multiple years of net recoveries. And we have said for a long time, that normalized charge-offs for us are in that provision levels to match that are in that 35 to 50 basis point range. So even though they are elevated over the most recent couple of years, they are still from a long-range perspective, very reasonable for a loan portfolio our size.

And one final one for Marc or Stacy, what should we expect from spring redeterminations? Are you expecting draws on energy lines and commitments to go up? And some of the nasty stuff that gets floated around? Or you are expecting something that is more manageable and tame? Can you walk us through that?

For my perspective, that the industry has worked well were to work through the cycle together. All of the core energy banks, a group of probably 10 of us who have who are in some combination of loans together. And I expect perhaps in the spring season that there will be a little less optimism around. Perhaps with a forward price will be. There will be a little bit more view around getting the borrowing bases down. You will see utilization go up as much because commitment levels are coming down, not necessarily because outstandings are coming up. I think you're going to see pricing pressure. I think you'll begin to see we haven't seen thus far much in the way of repricing for the risk relative to the return. I do think that there is a merging pricing pressure, pricing power if you will from the bank side. That will help balance the equation a little bit. But, I don't see a disastrous spring borrowing base redetermination season. I think you'll see folks work through them like they work through the last spring and fall. I think if there has been a little bit of a lag as prices have fallen, you may see a little bit of that get caught up here the spring. But I don't see it as a particularly tumultuous borrowing base redetermination season.

The next question we have from Matt Olney of Stephens.

A question on the shared national credits within the energy book, within your portfolio, is there any variance as far as criticizing classified loans SNCs [ph] versus non-SNCs?

No. We underwrite our SNC portfolio the same we underwrite the rest of the portfolio. We maintain a consistent approach. We're about 52% SNCs in the energy portfolio, versus ones that we originate directly.

Credit outcomes are largely similar, Matt.

Okay. And then secondly, as far as the margin, more on deposit costs. I'm curious if there's been any change of deposit costs in last few weeks. Since the Fed movement and obviously you're in a number of markets, so I'm most curious if there is any pricing pressure in certain markets versus others.

No. Not particularly, Matt at this point. We saw deposit costs pretty level honestly. We haven't seen much movement there. We talked about that in our asset liability committee meeting earlier in the week and not a lot of movement at this point.

John Moran of Macquarie Capital.

A real quick follow-up circling back on energy, actually two of them so criticized today just up 17%. Can you give us a sense of where that migrated to in the last downturn? And I know this data is tough and clearly the 80s cycle was different in terms of how these loans were structured. But anything you have long-term in terms of where it gets to in a real stressed environment ?

I think the criticized levels are at or above where they have been in previous cycles since the 80s. Given we're now depending on how you count time, 13 months plus into this particular downturn. The data and the quality of the data going back to the 80s around criticizing classified levels. It's such a different environment for lots of different reasons. We don't have the granularity of the data to be able to give you a good data point going back to that time period.

And, clearly it's different. Things have changed since then. I don't know if it's worth reminding folks how the energy lending business has changed since that--?

There are a lot of things that are different about the 80s than today. One of which is customer hedging. The availability of customers and their ability to price protect. At this point and as we get into the latter half of next year and particularly you are going to have the good hedges that will have begun to roll off. But you still have those same borrowers who are able to buy time through the cycle and allow supply demand in the industry to come in balance. You didn't have that in the 80s at all. In this part of the country, there were two other factors that were pretty significant. Commercial real estate was a much bigger and more relevant factor in that time period than energy and energy production, particularly. And so the Tax Reform Act of 1986 had a material impact. Combined with the downturn in commodity prices really impacted this part of the country. You don't have those same times of stresses going on along with the downturn in commodity price. That is part of the reason why you see our portfolio is only 9% services. That was one of the lessons we learned in the downturn. Is that those areas tend to be most pro-cyclical and more susceptible when there is an extended commodity price downturn. So we have tried to be very circumspect and more limited in our view of energy services. And that is why we continue to emphasize portfolio composition as a differentiator. Because we think that is one of the things that represents a higher risk element in the energy space. And if you just throw all energy into one bucket you may not see that and that is a differentiated way we have approached the business. And that is a lesson learned from the 80s.

If I could just circle back on point number one there, the hedging piece of it being significantly different. Could you guys tell us how much of the book on the reserve base side is hedged accretively through the end of this year? And you mentioned the real good, deep in the money hedges are rolling off. What kind of impact to think that could have later in 2016 and into 2017?

We get that question a lot. And it's a difficult one to answer. We hear others give answers and we find depending on how you define it and what level of hedging you have it can be misleading. We tended to fall back to how we do our stress test which is unhedged. So we assume none of our customers are hedged when we do our stress testing. And then as we go back and look at those that show weakness in that stress test, we do layer back on the hedges to see those who are mitigated. And so we tend to look at six to nine months to see who is going to be fine over that window of time. And then focus our efforts on those who may not have that ability. So, from our perspective, in fairness going into this, we would have liked to seen hedging at a little bit higher level. But it is hard to give you a number and feel good about the number. Because we have we may have a large number of customers who are hedged, but it may not be a large percentage of their production or maybe it -- prices that are not in the where the downturn originated from. We don't want to be misleading. Other than to say, we look at that as part of our stress testing. And focus on that. And that is a key mitigation factor when we look at those who show weakness in that stress test.

[Operator Instructions]. Next we have Peter Winter of Stern, Agee. Please go ahead.

I have two questions on the fee income lines. With a more cautious outlook on energy, I'm curious how that is going to impact brokerage and trading going forward?

You know brokerage and trading was just slightly off compared to September, but it was really due to more timing of underwriting and then municipal bonds. So it was not so much our other businesses. There is a component of brokerage and trading that is derivative revenue that is driven by energy and pending on what prices do, if they begin to go up then certainly you will see that activity escalate. Beyond that, not a lot of that line item would really move too much as it relates to the energy space.

I think that brokerage and trading has a greater correlation to what the outlook is for the equity markets and also where rates are. And the expectation there, you know that we've got a pretty substantial fixed income trading group. And the direction and sentiment around rates really is a much bigger determinant than energy. As Steven said we see it in our derivative training and then, in terms of our trust revenue. We're a pretty sizable manager of oil and gas properties both for individuals as well as institutions. And that revenue, as you would expect, has dropped off given commodity prices. So that is the two connection points. But it is not a huge determinant for brokerage and trading.

And, mortgage banking, you went through the reasons for the decline. I'm looking out for 2016. Could you give a bit little more color with your forecasting on that particular line?

We're forecasting modest growth in revenue there, Peter. We think we've got room to continue to advance our origination activity by hiring originators in our existing markets across our footprint. We've got pretty good momentum in our home direct channel. Which I think was about 16% of our originations in the 4th quarter and that continues. We've got continued maybe a little bit more modest growth in our correspondent business. But we think there is room to grow revenue in the mortgage space in 2016 and that is our outlook.

And one more big picture question for Steve. In the beginning you talked about how you are comfortable with the outlook on Texas, Oklahoma. That it's holding in. But on Monday, the Dallas Fed gave an update on the manufacturing and it really weakens quite a bit in Texas. I'm wondering what the business customers are saying about the outlook outside of energy?

Yes we saw the report as well, Peter. Our view really is shaped by the conversations we've been having with our customers over the last quarter, at least. Also, what our business activity pipelines look like. There is not a noticeable difference. Clearly, we're anticipating that as long as commodity prices stay down especially in the energy driven regions. And we're mindful of that. But we just can't point to anything specific right now that suggests that it's having a significant impact. We have seen their reports. For every bad one, there's generally a positive one that offsets it especially in Texas even more so than Oklahoma. Nothing conclusive at this point, but clearly it has our attention.

At this time we have no further questions. We'll go ahead and conclude today's question and answer session. I would now like to turn the conference call back over to Mr. Joe Crivelli for any closing remarks. Sir?

Thanks Mike. And thanks everyone for joining us today. I will be around the rest of the day. In fact, for the rest of the week if you have follow-up questions and feel free to give me a call at 918-595-3027. Thanks and we'll talk to later.

And we thank you sir and to rest of the management team for your time also today. Again the conference call is now concluded. At this time you may disconnect the lines. Thank you and take care everyone.