BOK Financial Corporation (BOKF) Q1 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the BOK Financial Corporation First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Crivelli, Senior Vice President, Investor Relations. Thank you, sir. You may begin.

Good morning, and thanks for joining us. Today we’ll hear remarks about the quarter from Steve Bradshaw, CEO; Steven Nell, CFO; Stacy Kymes, EVP, Corporate Banking; and Norm Bagwell, EVP-Regional Banking. Scott Grauer, EVP, Wealth Management has also joined us for the Q&A session. PDFs of the slide presentation and first quarter press release are available on our website at www.bokf.com. We refer you to the disclaimers on Slide 2 as it pertains to any forward-looking statements we make during this call. I'll now turn the call over to Steve Bradshaw.

Good morning. Thanks for joining us to discuss the first quarter 2018 financial results. As shown on Slide 4, the first quarter represented a strong start to 2018 for BOK Financial with excellent execution across all operating units. Net income was $105.6 million or $1.61 per diluted share, up 46% from the previous quarter, and up 19% from the same quarter a year ago. This strong financial performance was driven by a number of factors. We continue to see modest net interest margin expansion, which in combination with the higher level of Average earning assets drove the strong increase in net interest income. Our wealth management business, which includes the private bank, BOK Financial Securities, Institutional Wealth Management, and the Cavanal Hill Funds continues to build on this momentum and post to one of the best quarters in its history eclipsing $100 million in quarterly revenue for the first time. We continue to be extremely disciplined regarding expense growth. Overall expense levels are down substantially from the fourth quarter. Steven Nell will discuss the factors driving the reduction here in a moment. In total, expenses declined by 4%, compared to the previous quarter. Fee income was up 2.5% year-over-year, driven by transaction processing, mortgage banking, and wealth management. And finally, a lower tax rate due to the implementation of the Tax Cuts and Jobs Act coupled with the release of $5 million of loan loss reserves, positively impacting our earnings for the quarter. Turning to Slide 5, we saw strong loan growth in the first quarter led by energy, health care, and general commercial and industrial. In addition, our commercial real estate business returned to growth in the first quarter as the paydown headwinds we faced in 2017 subsided. We feel optimistic about loan growth for the balance of the year, due to the strong commitment growth we’ve seen over the past several quarters. Stacy and Norm will provide more details momentarily. Assets under management were down from the fourth quarter, largely due to typical seasonal outflows combined with timing of new money inflows. I’ll provide additional perspective on the quarterly results of the conclusion of the prepared remarks, but now I’ll turn the call over to Steven Nell to cover the financial results in more detail. Steven?

Thanks Steve. As noted on Slide 7, net interest income for the quarter was $219.7 million and tax equivalent net interest margin was 2.99%, up 2 basis points from the fourth quarter and in line with our guidance for modest growth in net interest margin. Most of the reduction in corporate tax rates negatively impacted net interest margin by approximately 3 basis points in the first quarter, due to the impact on tax-exempt loans and securities. We reversed $5 million of loan loss reserves in the first quarter as we are seeing no signs of weakness from a credit standpoint and meaningful declines in both non-accrual loan and potential problem loan balances. This was also in-line with our expectations. On Slide 8, fees and commissions were 159 million, relatively flat on a sequential basis and 2.5%, compared to last year's first quarter. Note, that this quarter we began netting certain data processing and communication expenses from transaction card revenue in accordance with the new revenue recognition guidance. Brokerage and trading revenue was down sequentially and year-over-year. The sequential decrease was largely driven by decrease in investment banking revenue as many of our municipal and public school, district customers completed offerings in the fourth quarter in advance to the Tax Law change, which prohibits pre-funding of debt issuance. The year-over-year decrease was a result of lower institutional trading, hedging, and retail brokerage revenue compared to the first quarter of 2017. The last of these in large part due to the implementation of the fiduciary rule, which we’ve discussed in past quarters. We have one more quarter of negative comparables in the retail brokerage business before we lapsed an implementation of the fiduciary rule. Transaction card revenue was up 15.5%, compared to the first quarter of 2017, but half the increase was due to contract cancellation payment with the other half due to strong growth in transaction volumes, which in-turn was driven by a higher customer count. Fiduciary and asset management revenue was up 8.3% year-over-year due to higher assets under management and administration, strong equity markets, and continued overall growth in the business. Mortgage banking revenue was up 6.8% sequentially and 3.3% year-over-year. While production volume was relatively flat compared to the fourth quarter, gain on sale margins were up substantially from 1.07% to 1.28% as noted on page 13 of our earnings release. This was due to a mix shift from our online channel to our direct channel, high originated mortgage servicing rights to values in the current higher rate environment, as well as internal changes we’ve made to better manage and monetize our production pipelines. Turning to Slide 9, we continue to carefully manage operating expenses to deliver earnings leverage. The $10 million sequential decrease in operating expenses was largely driven by two factors. First, as we noted on last quarters call, we accelerated spending to complete certain customer facing IT projects into the fourth quarter of 2017 and this spending return to more normalized levels in the first quarter. And second, incentive compensation expense in the first quarter was lower than expected. Expenses were also helped by lower mortgage banking cost, which in turn was driven by declining delinquency rates and lower levels of on-balance-sheet government backed loans. Note that these positive variances were partially offset by an OREO property write-down of $5 million. Slide 10 has our current guidance for the balance of 2018. We expect mid-single-digit loan growth. The first quarter played out pretty much as we expected with C&I accelerating, the paydown headwinds from commercial real estate subsiding, and continued strength in energy and healthcare. If you take our mid-single-digit forecast as meaning something between 4% and 6% then we should be at the low end of that range in the first half of the year as we were in the first quarter and build towards the high-end of that range in the second half when the commitments we booked in energy, healthcare and commercial real estate begin to fund. We expect available for sale securities to be flat to slightly down as they were in the first quarter. We expect continued modest growth in net interest margin with two additional rate hikes in June and September embedded within our forecast, and assuming continued active management control of deposit pricing. Note that we were originally anticipating two rate hikes in 2018. Now consensus is that we will have – we will see three, so we’ve added a June hike to our internal forecast. We expect mid-single-digit net interest revenue growth reflecting the additional rate hikes combined with loan growth. We expect revenue from fee generating businesses to be up low single digits for the year. And we expect low-single-digit expense growth for the full year after adjusting for the 2018 accounting change. Note that 2017 GAAP operating expenses was $1.02 billion and the amount of data processing expense that was moved to contract [ph] revenue was approximately $40 million or $10 million per quarter. As noted, given the current credit environment and the quality of our loan portfolio we are biased towards additional releases of loan loss reserves to the first half of 2018. We are forecasting a blended state and federal effective tax rate in the 22% to 23% range for 2018. Stacy Kymes and Norm Bagwell will now review the loan portfolio in more detail. I’ll turn the call over to Stacy.

Thanks Steven. As you can see on Slide 12, total loans were up 1.1%, compared to the fourth quarter or 4.3% annualized. The quarter played out as we expected and growth was broad with energy healthcare and middle market C&I all showing gains. Energy was up 1.3% for the quarter and up 17% year-over-year, which is a testament to the commitment to the industry that we maintained during the recent downturn, which clearly differentiated us against other energy banks. As we noted on last quarter's call, once the question of healthcare reform was resolved in mid-2017, our health care customers began executing on their growth plans, and we saw reenergized momentum in the business as we exited the year. This continued in the first quarter with healthcare outstanding’s up 1.9% or 7.8% annualized. Our CRE team has plenty of capacity under our internal concentration limits. The CRE paydowns we faced in 2017 subsided this quarter. CRE outstanding’s were up 0.8% for the quarter or 3.1% annualized. In each of the specialty lines of businesses, we’ve seen dramatic commitment growth, which puts in well for accelerating loan growth later in 2018. Total unfunded commitment in the specialty lines of business are $750 million higher today than they were a year ago. Norm Bagwell will now touch on regional banking. Norm?

Thanks Stacy. It was a good quarter for the regional banking group with annualized loan growth rebounding to 7.4% as the strongest growth rate in several quarters, but more importantly, I had chances to spend two days last week in on-site with all of our market CEOs and we feel very good about loan growth in regional banks for the balance of 2018. We are seeing strength in several markets most notably Dallas, Fort Worth, and Arizona. Our Native American specialty lending business has been selectively expanding outside of our traditional footprint and has good traction with several significant closings in the next few months. Heavy equipment lending, a specialty group managed our Dallas office that focuses on heavy equipment dealers is benefiting from the strong economy and rebounding oil prices and seeing broad-based pickup across its business. There are some new growth objectives that I would like to highlight as well. We recently hired a very strong head of lease finance from a competitive bank and she is travelling across the footprint, meeting with all of our commercial lending groups and customers and reenergizing this business for BOK Financial. And a new franchise finance initiative is underway and it’s yielding good results with every market working on at least one deal currently. Unrelated [ph] loan growth, I'm also pleased that we have been able to hold our deposit base steady in the regional bank with very manageable attrition in deposit baiters. This has been a significant benefit to profitability in a regional bank. On Slide 13, credit quality remains strong. Nonaccruals were down 4.2%, during the quarter. Net charge-offs were minimum at 3 basis points, down substantially from Q4 in which we recognized charge-offs substantially all loans for which we had allocated a specific reserve. Our loan loss reserve remains appropriate at 1.32% a period in loan balance as in leases. I’ll now turn the call back over to Steve Bradshaw for closing commentary. Steve?

Thanks Norm. We are very pleased with the first quarter results and a strong start to the year. Every aspect of our business is performing very well. We’re delivering loan growth and growth in wealth management revenue, net interest margin continues to increase as does net interest income, our fee generating businesses overall are delivering growth, our expense discipline is driving earnings leverage, and credit quality remains strong. We certainly benefited in the first quarter from clarity in action from Washington. So, I believe that the quarter's results are a demonstration of the true broad-based earnings power BOK Financial improves the strength of our business model. Our differentiated wealth management business is really the MD [ph] of the industry. There are few mid-size regional banks who have a wealth management practice with our breath of products, depth of services, and quality of team. As we noted, the first quarter was our first 100 million revenue in quarter for wealth management in our company's history. We expect 2018 to be another year of record financial performance for the wealth team. As evidenced by the 2018 guidance, we continue to be optimistic about earnings growth in 2018. First, as I noted earlier, we are seeing strong loan commitment growth across the business. Second, we now expect three rate hikes in 2018 instead of two, and this should drive continued margin expansion and growth in net interest income. Finally, the stable credit environment is sustainable, there is a potential from additional release of loan loss reserves. Combined with continued strong execution and expense management in the rest of the business from where we sit today 2018 looks like it will be a very good year for BOK Financial. One final note, in my letter to shareholders on the 2017 annual report, I introduced a goal to improve our efficiency ratio to 60% over the next three years. While our mix of fee revenue to margin revenue will generally cause us to have a higher efficiency ratio then peers with less revenue from fees, I believe this is a very achievable goal. This won't be branded and complex efficiency program, but rather a continuation of our internal efforts dating back to 2016 for quarterly reviewed expenses to ensure that we deliver on our goal of keeping expense growth to less than half of that of revenue growth. This will walk a great deal of earnings growth potential from the BOK Financial business model going forward. We will take your questions now. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Brady Gailey with KBW. Please proceed with your question.

Hi, good morning. This is Mike [indiscernible] on for Brady.

Hi, good morning.

So, you guys had some nice loan growth this quarter, it sounds like commitments are ticking up and sounds very encouraging, may be if you could maybe give some color, has outlook changed since we last visited last quarter and are things kind of tracking better than what you had initially expected?

This is Stacy Kymes and I’ll start and Norm can provide some additional color as well, but what I would tell you is, we’re maintaining our guidance of kind of mid-single-digit growth for the full-year. I would tell you that we are more optimistic now as the year begins to unfold then probably we were in the fourth quarter as it relates to loan growth. I think as the year progresses you will see us move towards the higher end of that loan growth range. We’re very encouraged by what we're seeing because of the commitment growth, as well as early results in the second quarter. So, I think that as we progress throughout the year, I think we should trend more towards the higher end of that range, but certainly for the full-year the guidance that we provided in the fourth quarter we’re maintaining.

The only thing I would add Stacy would be that it feels more broad-based than it has in previous quarters from the standpoint that we have seen not only geographic strength, but also across multiple businesses and that bodes well for a more solid loan outcome.

Got you. Appreciate the color and then I guess on the NIM, saw some nice NIM expansion, but did not notice that interest-bearing transaction costs ticked up a little more than usual, are you seeing anything different on that front?

Yes, this is Steven Nell. Not a whole lot different. We’re still not seeing broad-based competition. It is really driving deposit cost too much higher, but they are a little bit more than we had seen in previous quarters. Again, the deposit data you can calculate is roughly 35%. It is a little higher than it was in some of the previous increases. We are seeing a little bit more exception pricing in some of our corporate client balances that maybe we saw in previous quarters. So, I’d say it’s elevated just a tick, but again not broad-based competition that’s unmanageable.

Got you. And I guess just one last one from me. I know you highlighted in your comments that energy continues to be a tailwind and credit quality continues to be good, but if you could just provide some color on maybe on the OREO write-downs you guys incurred this quarter?

Sure. This is Stacy Kymes. So, as you know, as we work-through the downturn, I think we were a bit unique and that we were willing to foreclose on producing oil and gas properties as part of our work-out resolution. As we’ve gone through on those same properties, we’ve recognized gains over time. We do have semi-annual determination related to the value of those assets and so we did have a write-down related to those, although we’ve had roughly $4.3 million in games or revenue, previously associated with those assets. So, the net of that activity is negative of about $500,000. So, a little lumpy from period-to-period, but overall, it’s worked out roughly the way we anticipated.

Got you. Congrats on the quarter and thanks for taking my questions.

Thank you.

Our next question comes from the line of Brett Rabatin with Piper Jaffray. Please proceed with your question.

Hi, good morning guys.

Good morning, Brett.

Wanted just to first go back to deposits and geography wise Oklahoma was a lot stronger versus Texas and I didn’t know if there was anything fundamental there geographic, can you maybe comment a little bit on just the strength in one market versus weakness in another?

Yes, this is Steven, Norm may want to weigh in on this a little bit too from his perspective, but I’m not seeing anything that’s really different across all of our markets on the deposit front. I mean there is, perhaps there is a few pockets are a little more competitive than others, but it is not to the point where you are freely moving the needle differently across our markets, at least from my perspective. I don't know if Norm has any view on the Texas component.

Yes, this is Steve Bradshaw, I might comment about that too. I would always expect us to have a price leader or pricing capability and influence in Oklahoma where we have such a strong market share, we do not enjoy the same level of market share in our regional markets. So, proportionately cost should be lower for us in Oklahoma because of our leadership position, and I think you see that in some pockets across the state versus the regional banks.

Yes, this is Norm. The add to that would be that our approach has been to really customize solutions for individual clients and so on a case-by-case basis, you could see flows in and out, but one of the areas that we’re not as focused on today might be public deposits. They are not as a value to the ones we are in, so some of those may leave the bank, but we are very focused on traditional commercial client balances and those have held pretty steady.

Okay. Great. Appreciate the color there. And then the other thing was, just thinking about the expense guide, low-single-digit expense growth for the year, obviously expenses were, a kind of a net positive in 1Q, so I'm thinking about the kind of the low-single-digit expense growth, do we see a build here in personnel well what’s kind of going to drive the expense growth from here and then will there be potential for that to maybe be muted kind of given 1Q numbers?

Well the 1Q numbers did benefit from a reversal of some executive cash and equity compensation once we got the final results for 2017, so we lowered, we took a reversal of some of that. That won't recur certainly. And we had some pretty nice benefits and medical expense, which I suspect was timing, so that will probably catch up, but if you kind of flow all that through the expenses, the number you see in the first quarter is probably a tad lower than what we will see in some of the subsequent quarters, but again if you add all that together for the year compared to last year, after you account for the change in accounting or the change in revenue recognition on data processing, you're going to see about – we think about a 1% growth.

Okay. Great. I appreciate the color.

Our next question comes from the line of Peter Winter with Wedbush. Please proceed with your question.

Good morning.

Good morning, Peter.

Steve, can you give a little bit more color about the comments about driving the efficiency ratio down to 60%, is it more revenue driven versus expenses? And secondly, is there any type of compensation long-term incentive comp for management tied to that number?

I’ll be happy to take that Peter. It’s really, it’s both. You’re going to have to see some acceleration of revenue, which we believe we will have, especially as we see additional better rate hikes, we would expect some margin expansion there as well. So, I think revenue is a part of that equation, but I think we’ve got a process in place that we’ve really been executing since 2016 to help keep our expense growth level at roughly half were our revenue growth level is. And if you play that out over time, it makes our 60% efficiency ratio in three years and ambitious, but achievable target for us. So that’s the way that we’re trying to approach that.

Okay. And then secondly, just on our separate question, with the additional outlook for another rate hike this year, is it reasonable to assume like 2 basis points to 3 basis points margin expansion and for a quarter?

I think it is. Peter, this is Steven. So long as we can maintain close control on our deposit pricing. I think each 25-basis point increase for us and you saw it happen this quarter is going to amount to somewhere in that 3 basis points to 5 basis point improvement in margin, so long as we can maintain reasonable deposit pricing.

Peter, this is Steve. I think you asked two-part question, you asked about is management incentive from an efficiency ratio perspective? Not specific to efficiency ratio, but we do have expense targets embedded in our plan and then every member of the executive team has that as a specific objective and it does factor in to their compensation on a year-over-year basis.

Great. Thanks. Solid quarter.

Thank you.

Our next question comes from the line of Jennifer Demba with SunTrust. Please proceed with your question.

Thank you. Sorry, if I missed this before, but you've raised your Fed funds hike outlook to one more hike and you say you are optimistic on loan growth, why not increase your net interest income guidance?

Well, you know Stacy talked about loan growth. We are hopeful that that will come and continue to strengthen, and if that happens, and we get to the very upper edge of that mid-single digit guidance on loans and perhaps if we overachieved that then you probably could your NII guidance up, but I wasn’t comfortable doing that at this point. And you know the other wild card again is deposit pricing. We’re getting a nice benefit as the whole industry is at this point, and we’re not assuming that’s going to revert to the mean or to the historical levels anytime soon, but if that – if loan growth begins to climb, you're going to see deposit pressures, deposit pricing pressures to fund that growth across the industry. So, we’re just maintaining that NII at that kind of mid-single-digit at this point.

Okay. Thank you.

Our next question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your question.

Hi good morning.

Good morning.

Maybe just touch on capital management and your thoughts currently around M&A opportunities and maybe growth – non-organic growth at this point?

Well, we are going to evaluate, I think as we move into the third and fourth quarter or the second half of the year, what we will do from a dividend perspective, you know historically we have raised our dividend annually for a dozen years. We’ll take a look at that level and perhaps raise a higher percentage given the increase in earnings from tax reform, we will look at that. We really haven’t changed kind of our stack at how we look at the capital allocation. Obviously, organic growth is what we’re going to focus. So, we’re going to give the capital to Stacy and Norm and Scott and others across the company and leverage for organic loan growth first. Then we’re going to pay out, you know regular dividend that’s appropriate. We will buy back stock opportunistically when we see it is appropriate. And then again, we’re, as Steve mentioned last quarter, we’re still interested in the merger and acquisition game, both on a bank and non-bank basis, and we will continue to look for those appropriate opportunities to build our franchise. So, we haven’t really shifted our philosophy around capital allocation and usage in the way we think about it from my perspective.

Yeah, this is Steve Bradshaw. I would just reiterate what we talked about a little bit on our call after the fourth quarter of last year that we are raising what we believe is an appropriate target size of M&A opportunities for us, generally within our footprint. We are handicapping that the stiffy threshold will move higher than the 50 billion thresholds as you well know that has not happened, it still could happen and we believe still has a very good chance of happening. So, if you make the assumption that does occur than we would expect to be in the conversations for some attractive opportunities within our foot print.

Okay thanks and then with the paydown actually slowing on commercial real estate this quarter, any thoughts updating the internal limit on CRE as a percentage of capital?

That lame add has been the same for a long period of time and there’s no current discussions to change that, but we have plenty of capacity under that limit, certainly through the end of this year and as we look into next year things are early that we're going to have plenty of capacity there as well. So, we expect to see growth there, strong commitment growth there, which obviously in real estate disproportionate amount are construction driven and so you will see that funding in the latter half of the year, but we’re very pleased with the growth that’s coming there. We think that that will show up in a pretty good way as we move throughout the year, but no contemplated changes to the risk limits there.

Thanks, and just finally from me, you had mentioned the transaction card revenue, did you say half of that was due to fees from terminations and if that’s the case, any change serving the growth expectation there as you lose on those relationships?

No, the nature of the TransFund business, particularly on the ATM side of the business really is, you're going to have smaller institutions or going to be acquired – that’s a recurring part of the business. Those relationships are secured with long-term contract and so when those banks are acquired, we get a termination payment as a result of that. Those happen every year. We were just trying to point that out as you look at linked-quarter going in the second quarter, obviously that’s non-recurring and wanted to be transparent about that, but we don't expect it to have a significant impact on the run rate in revenue or the growth of the business. Actually, the last two years in TransFund have been two of the best years in terms of new client acquisition that they’ve had in many years. So, we’re very excited about that business in the loss of the client relationship and the first quarter was really driven by an acquisition not by movement to a different processor.

Great, thank you.

Our next question comes from the line of Gary Tenner with D.A. Davidson. Please proceed with your question.

Thanks, good morning.

Good morning.

I just had a follow-up question, I think on Norm’s comments on regional bank, I think you had highlighted Norm Texas and Arizona as two markets of strength and you know the Texas markets are pretty self-explanatory in the numbers carried out, but in the Arizona market loan’s down year-over-year and sequentially just hoping you could connect the dots on what you're seeing there?

I think it’s a little bit of a shift in portfolio mix. We have a variety of businesses there that have kind of had some good outcomes or potential outcomes in the next 120 days, I think that is going to change for us just Native American business is taking place there, obviously real estate has been good for us there. So, I think Arizona is picking up more to its traditional growth rate. I think just we had some payoffs and some mix issues that may have given a sequential downturn that you see, but optimistic that we’re headed there.

Okay. And on the flip side, are there any markets that maybe have slowed or stagnated relative to expectations in the last two quarters.

Well, I think that, you know when you have a broad geographic area that we cover, it’s actually going to see different pluses and minuses, one of them I would tell you that Houston had been relatively flat over time as we dealt with Hurricane Harvey et cetera and then also we’ve intentionally reduced some of our OFS [ph] exposure, and it is now starting to pick-up again. So, it might have been one that it had been had less than traditional growth and starting to pick up as well. And I think the Oklahoma markets may not have the growth rate that the rest of our franchise has, but even those markets are starting to show some potential strength there as well.

Thank you.

Our next question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

Great thanks. Just had a question on your thoughts about deposit beta over time, so obviously we did see the tick up in deposit cost this quarter, we did see your NIM guidance unchanged despite the additional rate hike [ph], we understand the deposit beta is still fairly low currently, but as you think about for the rest of the year 2019, at what point do deposit costs start ticking up as much or if not more so than potential loan or asset repricing? I know it’s a hard question to answer, but I’m trying to get a sense of kind of what you’re building in and what you’re thinking about guidance for higher deposit cost? Thanks.

Okay. I mean we anticipated somewhere in that 30% kind of data for this March move. I mean that’s really what we had modeled originally and we had a March move and a September move. We were thinking somewhere in the 30s or so, migrating even higher for the September perhaps in the 50-data range. So, we saw this first move, which did hit dead on where we thought it would be. I suspect June it will be higher. And as we mentioned earlier, it is hard to predict. September may be even a little bit higher. Part of it depends on loan growth in the market, and it depends on how competitive it gets. People that need the funding for increased loan growth. So, we have built in an increasing data across more forecast, but with the loan growth and with continued movement there, we are – 70% of our loans are variable rate, and of course we’ve had a nice pickup, I think we’re 16 basis points pick up in our loan yields and that’s with 3 basis points drag from timing of fees. So, your real pickup in loan yields was about 19 basis points, compared to the 25. So, you’ve got 75% data there on your lending activity followed by a 30 to 40 and then increasing across the year on the deposit base. So, we still see net interest margin expansion across this year anyway, and again continued growth in net interest income at least at that mid-single-digit level across the year. Beyond that, I don't think I can answer your question on when it may cross over. There is a point at which it may, but a lot of factors will contribute to that. I’m not sure I can point that out at this point. Does that help?

I think that’s fair. It does help. And then just really quickly, the gain on sale margins and mortgage bank that you referenced, obviously they are higher this quarter, the fee guidance is on change, I just want to make sure that gain on sales more of FYI fees for us this quarter and because it does not noticeably change any kind of outlook, is that the right way of thinking about it?

Yes, I – you know you break mortgage down in a couple of pieces, two-thirds of that revenue is servicing and it is solid at that $16 million to $17 million a quarter kind of level and then you’ve got the origination fees. This quarter's originations were generally flat from a volume perspective, but we did improve our margins from really kind of three areas. One, a little bit of a shift between our home direct product up to our retail product, which is a little bit higher margin. We had much better secondary marketing execution. We think that’s the continuation. We’ve made some changes there and have tightened up our execution and are pretty confident that we can maintain that better execution across subsequent quarters, and then of course OMS, our values we book are better in a higher rate environment. So, those latter two, I really think we can maintain in the mortgage business. We’re coming into a little bit better season from a home selling perspective and buying perspective in the second quarter. So, I’m upbeat about origination activity margins there and then of course you have the underlying servicing component, which is two thirds of that line item, which will continue to be good going forward.

All right. Great. Thank you.

Our next question comes from the line of Kevin O'Keefe with Stephen Capital Advisors. Please proceed with your question.

Hi, good morning everyone, how are you?

Good morning.

Excellent quarter. I just had a question around the efficiency ratio target, you know it is admirable target, but it seems like you are – maybe just softening expectations a little bit by saying it’s not main brand or anything like that, but it is in your annual report so, just kind of curious as we look for proof point if the expectation is that it’s just sort of growing down in the linear manner over the next three years or just sort of backend waited just around the timing of the efficiency improvement? Thanks.

Well our objective would be to be linear. And to see continuous improvement there. We were a bit elevated in our efficiency ratio because we had done a number of wealth management acquisition roll ups over a three or four-year period and we were still digesting those and pulling out some of the efficiencies that was available to us. So, we knew that we would get some benefit there and we’re seeing that and have been seeing that now for about six quarters. That will continue. So that’s part of our optimism around it, but we do have a number of initiatives in place internally in terms of the discipline to maintain control of expenses. We just, we wanted to differentiate for you that this isn’t a start of a new process or an engagement of a consultant or something of that. There is nothing wrong with that approach, that’s not a great fit for our culture. We’ve focused on something and we want to create a desired outcome. We have a great track record of being able to do that. So, this has become a bigger area of emphasis inside of the company now for the last 18 months or so, and we're seeing that benefit. But we will, as I mentioned earlier, expense control alone will not get us to that 50%, we're going to have to see some expansion of revenue and margin and obviously we think that that will be the case over time as well. So, it will be, I would say slow march to that number, not something that you would expect to naturally occur in a one or two quarter type scenario.

Right, the slow march is fine. Just as long as the march actually moves forward, that’s an awesome goal. Just one other question for you. If you might clarify, on the press release, you noted optimistic about prospects for continued earnings growth to the remainder of 2018, how do you see about our earnings growth and I'm not trying to [indiscernible], but there is obviously a lot of earnings growth inherent in 2018 because of the Tax Act and I was just kind of curious if you are thinking about that on a free tax free provision basis or on a just sort of making a blank statement about 2018's prospects?

I think, this is Steve again. I’m not making that comment based on the comparable with last year because you're going to see that be favorable throughout the year for obviously for the reduction in tax cost for the company. I really think we have the opportunity to build on earnings throughout the year because of some of the expansion of margins that we’ve discussed on this call, in rate hikes. I think that we’re seeing some acceleration of loan growth, essentially a flat year-over-year experience last year, and so I would expect that to build as well. And to Steven's point earlier, we’re seeing some better gain on sale execution in our mortgage business and mortgage is a big business and an important one for us. And then, obviously wealth management have a lot of momentum. So, you add all those together and I believe we should build earnings growth throughout the remainder of the year, not just on a net tax basis.

Got it. Okay. Thanks guys. Excellent quarter.

Thank you.

Our next question comes from the line of Jon Arfstrom with RBC. Please proceed with your question.

Hi, thanks good morning.

Good morning, John.

I think almost everything has been handled, but maybe one for Norm, the comment on heavy equipment lending, you referenced energy was a driver about, I'm just curious how much of your energy is to that or do you feel like it’s more broad-based in nature?

I think it’s more broad-based in nature. The type of business we do is, we bank equipment dealers and equipment dealers have two types of activities. One is, they obviously sell equipment, but they also rent equipment. And so, anything that’s infrastructure-related is a positive, and so you think about the potential infrastructure spending that could be coming from the government side of things, but then also expansion in our geographic reach markets has all been pretty good from a building and things of that nature. And so, we’ve actually seen cautious optimism in that group, rental fleets or building, and it’s very well-positioned for an infrastructure play as the country invest more. So, it’s going to be a good business for us going forward. It’s not just energy dependent, but energy does help.

Okay, good. That’s all I had. Thanks Norm.

Our next question comes from the line of Matt Olney with Stephens. Please proceed with your question.

Hi, thanks. Good morning guys. I think most of my questions have been addressed. I just want to go back to the commercial real estate funding that you guys expect this year and looking at the press release, it does look like within that the multi-family asset class has seen quite a bit of growth over last year. I’m curious about some of these projects that you’re funding in terms of geography and you see overall underwriting, especially in light that some of your peers are trying to exit this asset class? Thanks.

Yes, there has been a lot of discussion about multi-family really going back. You know probably three or four years now in terms of how hard is that class. We have not strayed in any way from the discipline of underwriting, so we’ve not relaxed our underwriting standards there in order to accommodate growth. We look at the underwriting by market and buy submarkets, and it’s hard to ignore the lack of new homes that are available for sale. So, if you look at the counter to that you're not seeing a lot of new homes on the market that would create the opportunity for people to move from multi-family. I think that much of what we saw there certainly in the absence of big growth in home building is there to stay and so we are circumspect about it. Two, we think the market is right to look at it with a critical eye, but we’re very confident in the underwriting that we’re doing in the markets and some markets that we’re building multi-family and with the developers that we’re in business with. So, we’ve not seen any weakness there as with rent confessions or things like that in the projects that we’ve done. They’ve been on time on budget and generally exceeded the proforma that we underwrote to. So, we remain confident in our underwriting in that particular area.

Okay. Thanks Stacy. That’s all from me.

Thank you.

Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thanks everybody for joining us this morning. If you have follow-up questions throughout the day, feel free to reach out to me at 918-595-3027. Thanks, and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.