BOK Financial's (BOKF) CEO Steve Bradshaw on Q1 2016 Results - Earnings Call Transcript

| About: BOK Financial (BOKF)

BOK Financial Corporation (NASDAQ:BOKF)

Q1 2016 Results Earnings Conference Call

April 27, 2016 10:00 a.m. ET

Executives

Joe Crivelli - Senior Vice President, Director-Investor Relations

Steve Bradshaw - President and Chief Executive Officer

Steven Nell - Executive Vice President, Chief Financial Officer

Stacy Kymes - Executive Vice President, Corporate Banking

Marc Maun - Executive Vice President, Chief Credit Officer

Analysts

Brady Gailey - KBW

Jared Shaw - Wells Fargo Securities

Brett Rabatin - Piper Jaffray

John Moran - Macquarie Capital

Peter Winter - Sterne, Agee & Leach

Operator

Good morning and welcome to the BOK Financial Corporation First Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over, Jim Crivelli. Please go ahead, sir.

Joe Crivelli

Good morning everyone and thank you for joining us to discuss BOK Financial Corporation's first quarter 2016 financial results. Today, we'll hear remarks about the financial results and outlook from Steve Bradshaw, CEO; Steven Nell, CFO; and Stacy Kymes, EVP, Corporate Banking. Marc Maun, Chief Credit Officer will also join us for the Q&A. In addition, PDFs of the slide presentation and press release that accompany this call are available on our Web site 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 April 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.

Steve Bradshaw

Thanks, Joe. Good morning, everyone, thanks for joining us. Earlier this morning we announced earnings for the first quarter of 2016. We earned $42.6 million or $0.64 per diluted share in the first quarter, down from $60 million and $0.89 per share in the fourth quarter of 2015. It was obviously a very challenging quarter as we faced a number of headwinds.

Our first quarter loan loss provision of $35 million was necessitated by continued credit migration in the energy portfolio as we are now well in to the second year of the commodities price downturn that began back in November of 2014. We had internally forecasted a front-end loaded loan loss provision in 2016 so this was not outside our own expectations and we are now forecasting provision for the year at the high-end of our $60 million to $80 million guidance.

The significant decrease in primary mortgage interest rates during the first quarter had a positive impact on production revenue in our mortgage business but the flips side of that was a much larger than normal mark-to-market on our mortgage servicing right asset. This included a change in our MSR asset valuation assumptions which resulted in a downward adjustment of $7.4 million. For the quarter, the MSR negatively impacted net income by $11 million net of hedges.

Of those who have followed us for a long time now, we don’t hedge 100% of our MSR valuation like some other banks do. While this didn’t create earnings volatility as it did in the first quarter, over the past three years MSR valuation has contributed $2.6 million to earnings. As a result, we continue to believe this is the right strategy for creation of long-term shareholder value. Finally, we had an inordinate number of unusual items impact earnings during the first quarter including legal accruals, fair value adjustments for credit quality in the derivatives business, increased deposit insurance and purchase accounting adjustment, among other items.

These items totaled about $0.12 per share and are detailed on Slide 7 and 8 of the presentation accompanying this call. Steven will also discuss these in more detail shortly. On the positive side of the equation, the core business continues to perform very well. Net interest income and net interest margin were both up this quarter and we are growing loans and have full new business pipelines which should bode well for the rest of 2016.

Revenue growth in our fee generating businesses remains on track and the fact that our wealth management business can continue to grow assets under management in the extremely challenging current market environment, speak volumes for our franchise. We are extremely well capitalized and liquid and made great progress towards interest rate neutrality in this quarter. We continue to carefully manage expenses and while there is a lot of noise in the expense line items this quarter, over the past three years personnel expenses increased at a very manageable 3% compound annual growth rate despite the significant building staff we have accomplished in risk, compliance and audit related functions and the personnel expense as a percent of revenue has remained stable.

Outside the risk and compliance spend and expenses that are directly tied to revenues, controllable non-personnel expense items have only increased at 0.4% compound annual rate during the same time period. We continue to believe that we can manage expense growth lower than revenue growth to drive earnings leverage. As shown on Slide 5 we surpassed $16 billion in loan outstandings for the first time in our company's history with 0.5% sequential loan growth for the quarter or 2% annualized. The loan book is up 9.1% compared to the same time last year.

A large pay down in the services portfolio negatively impacted growth rates this quarter but new business development pipelines are very strong and we continue to forecast mid-single digit growth for the full year. We have grown our loan portfolio at a double digit compounded rate since 2013 and we believe we are taking share for both large national competitors and smaller regional competitors because of our differentiated business model.

Fiduciary assets were up 2% during the quarter. Concerning the market environment in the first quarter, this was no small feat. I am very proud of our wealth management team which continues to win new business against a wide range of competitors. Fiduciary assets have likewise grown at a double-digit rate since 2013. I will provide additional perspective on the quarterly results of the conclusion of the prepared remarks but now I will turn the call over to Steven Nell, who will cover the financial results in more detail. Steven?

Steven Nell

Thanks, Steve. As Steve mentioned there are a number of noteworthy items that impacted net income this quarter so I would like to begin by walking through them and providing some explanation so that you can normalize our quarterly earnings performance against prior quarters.

The loan loss provision of $35 million for the quarter was necessitated by credit migration in the energy portfolio due to the continued extended commodity price downturn and represents almost half of the expected total provision for the year. The MSR impact of $0.11 per share was exacerbated this quarter by the extremely volatility interest rate environment. The 10-year treasury ended the quarter nearly 50 basis points lower compared to 12-31-15, which had an outsize impact on our mark-to-market. As you know, we have historically hedged less than 100% of our mortgage servicing right interest rate exposure as we believe this approach provides the best economics over the long-term as interest rates rise and fall.

Additionally, as Steve mentioned, we adjusted mortgage spread assumptions in our MSR valuation model to better reflect future prepayments and related cash flows. This adjustment should provide better information for hedging purposes going forward as well. We realized $5.3 million of accruals and settlements in the first quarter related to legal matters in our corporate trust, consumer banking and commercial lending areas. Deposit insurance was $1.9 million higher on a sequential basis, one of the primary determinants of our deposit insurance premium is the magnitude of criticized assets. So the credit migration in energy is driving the increase along with the surcharge for banks greater than $10 billion in size to replenish the deposit insurance fund.

All told, we expect deposit insurance expense to run approximately $8 million higher in 2016 versus 2015. Turning to Slide 8. The next item is a $1.6 million purchase price accounting adjustment related to an investment in our merchant banking portfolio, approximately $2.7 million of this was included in the other expense line item of our income statement, offset by $1.1 million benefit in the non-controlling interest line item. This by the way is a non-cash adjustment that has no impact on future cash flows of the true value of the merchant banking investment.

We continue to adjust our assumptions for default servicing cost in our mortgage servicing business and this led to a $1.4 million repurchase reserve build in the first quarter which is included in the mortgage banking cost line item. Finally, these negative expense variances were partially offset by $4 million gain on sale benefit in our securities portfolio which I will discuss in a little more detail in a moment. Turning to Slide 9, net interest revenue and net interest margin benefitted in the first quarter from loan growth as well as better yields on earning assets.

Net interest revenue for the first quarter was $182.6 million, up $1.3 million or 0.7% compared to the fourth quarter despite one less day in the quarter. On a year-over-year basis net interest revenue was up $14.8 million or 8.9%. Net interest margin was 2.65% during the quarter and has steadily increased over the past five quarters largely due to the remix of earning asset combined with slightly higher yields on loans and available for sale securities.

On Slide ten, fees and commissions were $165.6 million for the first quarter, up 6.3% on a sequential basis and flat year-over-year. Brokerage and trading was up 6.9% sequentially. Growth drivers included institutional brokerage revenue, retail brokerage fees and investment banking revenue, partially offset by lower derivative fees and commissions. Transaction card was essentially flat on a sequential basis but up 4.3% year-over-year. There was solid year-over-year growth in all categories of transaction card revenue. Bank card fees, TransFund network revenues, as well as check card revenues.

Fiduciary and asset management was up 2.9% sequential and 1.9% year-over-year due to continued growth in assets under management. Mortgage banking revenue was up 37.5% sequentially as the same decrease in mortgage interest rates that negatively impacted the mortgage servicing right valuation had a significant benefit to refinancing volumes. Mortgage commitments of $902 million at the end of the first quarter were the highest level in the company's history.

Deposit service charges and fees were down 1.2% sequentially and up 4% year-over-year. Turning to Slide 11. Total operating expenses were up 5.3% sequentially and 11.2% year-over-year. Personnel expense was $135.8 million, up $2.7 million or 2% from the fourth quarter. Payroll tax was $4.2 million higher, partially offset by a decrease in incentive compensation expense of $2.5 million. Regular compensation expense increased by just under $1 million.

Other operating expenses were $109.1 million, up $9.7 million or 9.7% sequentially and 18.9% year-over-year. As noted earlier, there are a number of noteworthy items in the operating expense this quarter that impacted our results. Now turning to the balance sheet on Slide 12. The available for sale securities portfolio was down $157 million in the first quarter, it is down $272 million for the same period last year. We made good progress towards interest rate neutrality and ended the quarter with just 0.28% liability sensitivity.

Our treasury department saw the opportunity to optimize our securities portfolio when interest rates were low during January and early February. This was what led to the $4 million gain on sale this quarter. They replaced these securities with adjustable rate securities which significantly improved our interest liability since [disposition] [ph]. Period-end deposits were $24 billion at quarter end, down $670 million from the end of December due to reductions from commercial customers as well as seasonal reduction in municipal and educational deposits, public deposits.

BOK Financial continues to be extremely well capitalized as evidenced by the capital ratios on this Slide. Turning to Slide 13, our guidance assumptions for the balance of 2016 are as follows. Mid-single digit loan growth for the full year, continued gradual decline in the securities portfolio of $200 million to $250 million per quarter. Stable to increasing net interest margin and increasing net interest income and as Steve noted, we expect loan loss provision for the full year at the high end of our forecasted $60 million to $80 million range. If you use the $80 million top of the range, this implies $45 million for the next three quarters and it is reasonable to expect the provision will continue to be front-end loaded with the majority of this falling in the second quarter.

Obviously, the provision could be modestly higher if borrowing base redeterminations, the oil and gas market and other factors prove more negative over the next several months. On a rolling 12-month basis we continue to expect mid-single digit revenue growth in fees and commissions. We expect expense growth lower than the rate of revenue growth for the full year excluding the unusual one time items we mentioned earlier. We expect continued capital deployment through organic growth, acquisitions, dividends and limited stock buybacks.

We expect the MBT Bancshares acquisition in Kansas City to close in the third quarter. Stacy Kymes will now review the loan portfolio in more detail. I will turn the call over to Stacy.

Stacy Kymes

Thanks, Steven. Slide 15 shows our loan portfolio on a market by market basis. The lower loan growth this quarter was largely a result of a large pay down of nearly $100 million in the Oklahoma services portfolio and as you can see our Oklahoma portfolio was down 3% this quarter.

Our new business development pipelines remain very strong across the footprint and we believe that growth should rebound to our mid-single digit target as Steven mentioned. Arizona continues to perform very well with 11% growth for the quarter. Over the past couple of years we have used our presence in Arizona as a springboard to selectively diversify in the California and Utah and this effort continues to bear fruit.

We are making strong in roads with very high quality commercial real estate borrowers in these markets and this provides added balance across our portfolio into non-MMG dependent markets. Kansas City continues its recent strong track record with its fourth consecutive quarter of double digit annualized growth and we continue to see good traction there in both the private bank and the commercial bank. New Mexico contributed to growth this quarter and Colorado, arguably our third most energy exposed market remains strong this quarter. Texas was essentially flat this quarter but this is due to pay downs in our heavy equipment business which in turn were driven by liquidity events.

Our pipelines in Texas are strong in all three primary markets, Dallas, Fort Worth and Houston. So we are optimistic about the balance of the year. As indicated on Slide 16 of the presentation, commercial loans were essentially flat this quarter at $10.3 billion. As expected, the energy portfolio was down sequentially impacted by pay downs as well as charge-offs. Healthcare continued to grow nicely, up 5.9% sequentially. As we have discussed, this is a business where we can compete nationally and it provides good portfolio diversification on both an industry and geographic basis.

On a year-over-year basis, commercial loans are up 9.6%, led by healthcare, manufacturing and wholesale retail. Slide 17 shows our energy portfolio as of March 31. At quarter end our energy portfolio was $3 billion and E&P line utilization was 64%. 54% of energy commitments and 45% of energy outstandings are shared national credit. The energy outstandings are down $68 million sequentially as expected. In addition, unfunded energy commitments are down about $200 million compared to fourth quarter from $2.4 billion to $2.2 billion.

Over the past several quarters, we have talked at length about the importance of portfolio composition relative to loss history and loss severity in the energy business. And it bears repeating that our portfolio is comprised primarily of senior secured first lean reserve base loans which is the best performing subset of our loan portfolio across the credit cycle. We have only two second lien facilities totaling $20 million of the commitments and $10 million of outstandings and both of these facilities are DFAST rated credits. We have no exposure to mezzanine debt, capital markets debt or high-yield debt to our borrowers. Our energy services portfolio is very high quality and represents a modest 9% of or total energy outstandings.

As a result of these factors, we are comfortable with our loan loss reserve which represents 3.19% of energy outstandings. The continued credit migration in the portfolio demonstrated at the bottom of this Slide is a function of another quarter of depressed commodity prices and to a lesser extent the results of the recent shared national credit examination. As I mentioned in my remarks at the RBC conference last month, the regulators export a number of approaches to risk rating energy credits during the exam process. The most severe approach would have led to more of our energy portfolio being downgraded to criticized and the less severe would have led to very few downgrades.

I would categorize the final results as still a bit of a work in progress as the industry grapples with implementing the most recent guidance consistently. First quarter energy charge-offs were $22.1 million and included $15 million for the shared national credit we discussed on last quarter's call which we pro-actively downgraded and impaired in the fourth quarter based on lower than expected production volumes and higher than expected production cost.

Turning to Slide 18. The commercial real estate grew 3.4% and is at 14.8% year-over-year. Our commercial real estate pipelines remain strong at quarter-end and we are seeing good deal flow of very high quality renting opportunities across our market territory. We are also seeing an active permanent market for our product types. At the end of the first quarter, our total CRE exposure in Houston was $326 million. All of these credits are pass rated as present.

As we have noted on past calls, we have minimal office and multifamily exposure and no downtown exposure. As shown on Slide 19, the combined allowance for loan losses was 1.5% of period in loans and represented 105% of non-accrual loans. Non-performing assets, excluding those guaranteed by government agencies, were 1.59% of period-end loans and repossessed assets up from 0.99% last quarter due to energy credit migration.

Net annualized charge-offs to average loans were 56 basis points this quarter. I will now turn it back to Steve Bradshaw for closing remarks. Steve?

Steve Bradshaw

Thanks, Stacy. All told, quarterly earnings did not meet our management team's expectations. We are working through the impact of the lower pro-longer commodity price cycle and we encountered some unrelated expense items as well. But our focus remains on effectively managing the bank and our expense levels appropriately, not taking from our ability to continue to grow revenue, manage risk and provide exceptional customer service to our customers.

It's now been 17 months since the infamous post thanksgiving OPEC meeting that precipitated the energy downturn. We are seeing credit migration in the energy portfolio as expected and we believe we are reserving appropriately for the risk of loss in the portfolio. While these loan loss reserves negatively impacted earnings this quarter and maybe an earnings drag throughout 2016, we can't lose sight of the fact that energy lending is a successful, profitable and differentiated specialty lending business for us that has been significant source of profit for shareholders across the credit cycle.

We will take our loss as anyone in this business will during an extended downturn but our energy lending team has done the right things to manage and mitigate risk in the portfolio. Chief among these was sticking to our corporate loans and lending discipline and remaining focused on first lien senior secured reserve based lending during the boom times even when oil was $100 per barrel. We believe the absence of second lien loans, mezzanine debt, high yield debt and other riskier asset classes in the energy lending arena will serve us well and enable us to outperform our peers over the credit cycle.

We acknowledge that our MSR mark-to-market valuation was more negative than anyone expected and we made changes to better reflect future valuation drivers which should provide better information for hedging going forward. The other elevated expense items incurred in the first quarter shouldn’t reoccur and we expect to generate more normalized expense levels going forward. As I noted at the start of the call, we are holding the line on core expense growth and remain focused on holding expense growth below the rate of revenue growth. We are reevaluating trends quarterly and are committed to adjusting expenses in areas that experience softness or a decline in revenue growth going forward.

However, as I noted, the core business is sound with net interest income, net interest margin, loan, assets under management and fee income, all up this quarter. We are extremely well-capitalized and liquid and made great progress towards interest rate neutrality during the quarter. Most importantly, we continue to see little spillover impact on the broader economy in our footprint outside of some early signs of softness in the Houston real estate. Shallow commercial office inventory, price concessions on luxury multi-family housing and the like.

When we meet with investors from outside the region, they are surprised to hear this as well as skeptical. To be honest, we would have expected to see more spillover at this point ourselves. But I believe this clearly demonstrates how diversified the economies in our footprint really are. For example, since the start of the commodities downturn, employment in the energy sector is down 21% in both Oklahoma and Texas but the unemployment rate in both states is actually lower today than it was two years ago. Unemployment in Oklahoma is 4.4% today, it was 4.8% two years ago. It's 4.3% today in Texas and it was 5.3% two years ago. In both states unemployment continues to track well below the national rate of 5%.

The diverse economy across our footprint is one of the reasons why I have a lot of optimism for the long term view of this franchise despite the challenges we endure in the current quarter. The robust collection of businesses at BOKF is another. We have both outperformed our peer group across the cycle and we remain very confident in our business model and our operating strategy.

We will take your questions now. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from Brady Gailey from KBW. Please go ahead.

Brady Gailey

So the energy reserve was build a little bit, it's now 3.2%. Can you just remind us why that level is so much below some of your peers?

Stacy Kymes

Well, I can't compare from a peer perspective. I don’t look inside their portfolio and know exactly what they have. But I think when you look at our portfolio and the composition of it and our understanding of each and every one of those credits, we feel very comfortable that our reserve at the end of the quarter was appropriate and one we are all comfortable with. I think one of the other things that is important is if you look at totality of our loan loss reserve relative to our total loans, we are at 1.5%, which particularly for regional peers compares pretty favorably. And so the entirety of the reserve is available and I think we were ready than early on to try to breakout the energy piece because that’s not traditionally how reserve methodologies are looked at. But I think if you look at it in totality in particular, our reserve is very appropriate and one that we are very comfortable with. And it really goes back to our knowledge of our own portfolio and the composition there.

Brady Gailey

Okay. And then if you take the energy reserve and the energy loans out and look at kind of what's left, I think your reserve on non-energy loans is around 110 basis points. Do you think that as the local economy feels the impact of lower economic activity in oil, do you think that you will end up building that non-energy reserve as well as we progress through '16 and '17?

Stacy Kymes

We will react to the circumstances as they present themselves but as Steve alluded to in his remarks, we are not seeing much in the way of spillover impact. I was in, have been in our major markets here all in the last six weeks or so. Houston is showing some softness, Dallas, there is zero softness, it's apparent to me. That market is performing extremely well. It's much more diverse and if you look at that North Texas furor you have got a lot of migration of new businesses. Dallas is performing very well. Denver is still performing very well. They have some energy exposure. And Oklahoma has held up very nicely. There is some diversity in business in Oklahoma City in particular that has been able to absorb some of the higher priced talent in that workforce that has been laid off from the energy sector.

So those markets have held in better than what we would have expected. And so we will evaluate the adequacy of the allowance in totality based on the facts and circumstances that present themselves at the time we make that evaluation.

Brady Gailey

Okay. And then lastly, the net charge-offs. I realize they are all energy related but they ticked up, you all basically have been running close to zero, they are now around 60 basis points. You mentioned the $15 million related to the specific energy snick we talked about last quarter. Do you think going forward, the net charge-offs will go back to around zero or a little above or do you think that we will start to see something in that line item going forward.

Marc Maun

Yes. Brady, this is Marc Maun. We would expect to see the amount of our charge-offs be accounted for in the overall provision. We expect basically if the oil and gas stays at these levels, the charge-offs for the full year will still be comfortably within that loan loss guidance of $60 million to $80 million.

Operator

And our next question comes from Jared Shaw from Wells Fargo Securities. Please go ahead.

Jared Shaw

Just following up a little bit on the energy side. Did you change any of your assumptions on the stress case going into the end of the quarter here?

Stacy Kymes

Yes, we did. We actually ran our stress case with the oil starting at $34 going to $40 over a five year period and holding firm there. Gas price started at $1.65 and rose to $2.50 over that five year period and held firm. It's a much flatter scenario than we have used in the past although it's a little higher price than was used in the first quarter, reflecting the change in the market. But I think the flatness helps us assess based on what we see in the forward strip currently.

Jared Shaw

Okay thanks. And then just, I guess, on the follow up on the question that Brady just had. So as we look at the high-end of [indiscernible] provision of $80 million and with the reserve you feel is adequate. Most of that 45 than we should assume is for increased charge-offs through the course of the year?

Steven Nell

I think you also have increased criticized and classified levels, at least through the second quarter as we go through the borrowing base redetermination process. So part of our internal thinking around that is not just to account for net charge-offs but also to account for additional migration to criticizing classified as we go through the redetermination process. Keep in mind, it's been six months since we have seen some of these credits from an engineering perspective. We don’t know how much engineers they have -- or how much reserves they have added during that period of time. You have seen a price decline subsequent to the last redetermination, so we do think that there is a likelihood of increased criticized and classified migration during the second quarter.

So both that factor as well as anticipating a level of charge-offs, all factor in where we landed with our provision guidance.

Jared Shaw

Okay. And what portion of the energy book has made it through the spring re-determination period as of March 31? How much of the...

Stacy Kymes

Really at this point, we are about 40% of our way through the borrowing base redeterminations in the spring. And we have seen not only, for the most part, we have seen decreases by 75% have had this decrease in their borrowing base. Some have been reaffirmed and even a couple have increased. But overall, average net decline is about 23%.

Jared Shaw

Okay. Thanks. And then just finally, shifting over to the deposit side. Deposits were weaker than we have seen in the last few quarters. You have been given the seasonality that we have seen in the first quarter for a little while. What's the thoughts there? Do you think that you are able to recover some of that decline early on in second quarter or is that going to be more of a rebuilding process through the course of the year?

Stacy Kymes

We in fact have recovered some of that in the first part of this quarter. It went down point to point about $670 million. A $150 or so of that was public funds. Some came out of our wealth area and then part of it is out of our energy customers. But we have seen about a little over $300 million, almost $350 million improvement in the first part of this quarter so far. So that’s good.

Operator

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

Brett Rabatin

I wanted to make sure I understood, there was discussion on the press release and you maybe talked a little bit about it. But how much of the increase in criticized assets was a function of kind of how you look at the energy portfolio versus the updated OCC lending handbook, debt versus collateral position. How should we think about the impact of that on criticized assets this quarter in the energy portfolio?

Stacy Kymes

Well, there was an impact from the SNIC exam and the OCC guidance. A little over half of the commitments that we have reviewed in the SNIC exam, were downgraded based on the global debt repayment structure that was going on with the OCC. We would say that those have -- are at the lower end of the risk spectrum from our perspective. But overall the balance was, we evaluated them on our basis overall and established the criticized, classified levels on that basis too.

Brett Rabatin

Okay. And then wanted just to talk about expenses for a second. Obviously a lot of noise in the first quarter and I appreciate the guidance on revenue higher than expenses. Can you give us an idea of what $235 million run rate, is that a fair number or can you give us some idea of a starting base point for the third quarter, absent the noise that you saw in 1Q?

Steven Nell

Yes. I can do that, Brett. 235 is a pretty decent normalized number. When you come in an at 244-245 this particular quarter, you have got roughly $8 million or so of kind of unusual, hopefully non-recurring type items that can come out of that. Last year we gave guidance in the $225 million to $230 million range, I think we made a comment on one of the calls that it would be a bit higher going into '16 because of some of the smaller acquisitions we have done, some of the IT on-boarding of some systems that we have put in place. So we thought it would be up in kind of 235 range and I think that’s a decent place to start as we continue to move through '16. And there will be some growth over time as we grow our business. We have some variable cost businesses that certainly will be reflected in the expense line item as we grow but I think that’s a pretty good place to start.

Brett Rabatin

Okay. And then maybe just lastly, thinking about capital. You have got an acquisition and you are closing in 3Q, but any thoughts on capital and you are obviously shrinking the securities portfolio a little bit but you guys are still obviously really well capitalized and it doesn’t look like there is a catalyst for that to change much. Have you guys thought about capital this year in terms of your plans?

Stacy Kymes

Well, we will continue to grow organically to the extent we can with our loan growth activity. We will close on the MBT Bancshares deal, we think in the third quarter. That will utilize some capital. There is a possibility that we could buy back stock, if it's opportunistic to us. We will continue to pay regular dividend. So it's kind of all across those fronts that we will look at capital and determine the appropriate usage. We may take the opportunity sometime in the future to more optimize our capital stack. We are sub-debt that’s part of our total capital, has really run its course and so there may be a time in the future where we want to issue a sub-debt issuance to bolster total capital and then provide the opportunity to free up, if you will, some additional capital on other ratios.

Operator

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

John Moran

Really nice fee outcome which want to take, kind of get a little bit more color on. Just if you could give us any insight in terms of what the mortgage pipeline looks like kind of going into 2Q? Obviously you get some seasonal help but? Yes. And then trust brokerage, both sort of outperformed given volatile markets and kind of what might be going on inside of some of your footprint. So wondering if you could give us some color in terms of what's driving that outperformance?

Steve Bradshaw

Sure, John. This is Steve Bradshaw. On the mortgage side, obviously we had some increases in production as well as pipeline increase relative to the drop in mortgage rates in the first quarter. That’s continuing strong channel for us. We are especially seeing growth coming out of our home direct channel, our consumer direct channel which continues to be a growth engine in mortgage. On the trust and brokerage side, we actually had a very strong first quarter in terms of assets under management acquisition. It was a $10 billion quarter for us. It is fully reflected in the revenue because obviously it was one of the worse starts to the equity market in modern times.

So as that continues to recover, we will see some expansion and benefit there. But that particular group in the organization is really having a lot of success pulling business in many cases from larger competitors. Brokerage and trading was enhanced because we have a pretty strong mortgage-backed TBA group. So as you see increased activity in terms of mortgage origination, than the services they provide to mortgage lenders to hedge their pipeline, that increases as well. So that was the benefit to us and a bit contrary into a lot of other folks in the fixed income business.

John Moran

Got it, thank you. And then the repurchase reserve built in the mortgage business. Is that just a change in assumption and kind of like something that we should see kind of staying a little bit elevated here for the rest of this year? Or is that really kind of like one time catch up in 1Q?

Stacy Kymes

I wish it was a one time catch up. It seems like we have been talking about this for a few quarters. I think you are going to have a little bit more cleanup in that area and so I would expect a bit elevated to a similar extent to what you saw this quarter. Maybe for one more quarter and then I think we will be through the cleanup effort in that area.

John Moran

Okay. Got it. And then the only -- I had kind of one other energy related one. Just with the volatility in gas versus oil and I think I had asked you guys a couple of quarters back what the split was and if you thought about those credits that were kind of gassier? In any kind of way differently than you did something that was more kind of pure liquid and if you had any thoughts on that

Steven Nell

Yes. The kind of the split is around 60:40, oil versus gas. You know gas has actually had a pretty nice rebound here in the last six weeks or so, which has been helpful and will be helpful as we go through the redetermination process. But most borrowers have a mix. You do have some borrowers who are all one or all the other but typically they will have a mix of both in their production. And so we have been more concerned with oil than gas because gas has already been down. Borrowers have adjusted to that. Rig counts and drilling for gas are down even more dramatically than they are for oil. So it's not something that we have had more concern about because borrowers have had a chance to adjust to that really for the most part. And so oil has really been where we have been focused but we obviously look at both when we do our stress test or our redeterminations or evaluate the borrower credit grade.

Operator

[Operator Instructions] Our next question comes from Peter Winter from Sterne, Agee. Please go ahead.

Peter Winter

The decline in the securities portfolio was probably a little bit less than what I was expecting and I am just wondering, I guess you are assuming that that would start to increase. And I am wondering if you would think about making the balance sheet maybe even a little bit, slightly asset sensitive.

Marc Maun

The number you are looking at, Peter, I think dropped about $100 million. And if you -- that’s a mark-to-market or fair value number. If you look at just the amortized cost, we actually did go down about $200 million to $250 million like we guided. But the improvement in the rate during the quarter kind of improved the fair value of those, so it looks like it went down less than it actually did, that we actually got it to. But to your point, we did guide that we will continue to shrink the securities portfolio in that $200 million to $250 million range. I don’t know that we will venture to asset sensitivity. I think we will get to neutral first. Certainly part of this depends on what happens in the deposit categories as rates begin to rise because if we have some movement out of your non-rated fund than you certainly will -- you will actually backtrack to a more liability sensitive position.

So we will watch it closely. We are going to continue to move towards a neutral position and then we will make decisions about possibly leaning asset sensitive. But we really haven't talked so much about that. Just working our way to neutral at this point.

Peter Winter

Okay. And just as a follow-up. I think in the first quarter, in January, when oil prices were in the low 30s, you are thinking that if it stayed at this level, provision expense in '17 would be in that $60 million to $80 million range. So I am just wondering, with the improvement in oil prices, would you expect the provision expense to moderate in 2017?

Steve Bradshaw

In 2017, I think that’s a high likelihood Peter. If energy prices stay up and you look into 2017, I would expect the provision levels would be more moderate than they were in 2016.

Operator

And our next question comes from [Casey Nelson] [ph] from Treehouse Capital. Please go ahead, sir.

Unidentified Analyst

I had a couple of questions on the energy portfolio as well. First, on the syndicated loan side. Of loans that are publicly traded, do you track average prices of those loans and if so, could you comment on where they resided at the end of Q1?

Steve Bradshaw

You know, I get a list weekly from a couple of different parties on loans that are trading and I will tell you, for the most part we don’t have loans on that list that I am looking at because I am interested similarly to see and make sure we are thinking about it the way the market is. To date there has really only been one loan that I have seen that we have that’s been on the trade sheets that have been circulating to me. And so I think it speaks to kind of the nature of our portfolio that we don’t have much on that’s being traded outside certainly where we can see it how it's being valued.

Unidentified Analyst

Okay. And I know before you stated that you guys didn’t have any loans in default in the energy portfolio. Does that remain the case?

Steve Bradshaw

No, that’s not the case. I don’t know that we have indicated that we didn’t have any loans that were heading to default. Certainly as we work through the credit cycle we are going to have borrowers who fail to meet their covenant obligations and we work through as part of that process. But certainly we do have borrowers who are in default of their credit agreement. It's just the order of magnitude around gross exposure and things like that that come from that evaluation. So we are doing a monthly review of substantially all of our energy book and then quarterly we do an analysis around any kind of loan that maybe impaired and that analysis would indicate certainly to date that there is not significant loss exposure in that particular book.

Unidentified Analyst

Okay. And you have stated a few times that the preponderance of the portfolio is in secured first lien positions. Roughly, how many of those structures also have a second lien or a bond below. Do you happen to know that? I am just interested if in all of these exposures that you have where you occupy a secured first lien position. Is there anything else in the capital structure or are you the only security in the capital structure.

Steve Bradshaw

We don’t have that number to be able to give to you. Certainly we can work on that this week and have that number available to Joe. But I would say it's not an inconsequential number. I would say probably a third or so, just off the top of my head. Would have other debt in the capital stack where we have senior secured first lien debt. Certainly in terms of dollar amount. But we do have borrowers who have unsecured debt issued in the capital market and second lien debt as well. The more predominant of that is a debt issued in the capital market, unsecured bond debt, most of which because we are awfully acute to maturities, most of which have maturities, well outside the next couple of years which should be sufficient to let them work through the downturn from a bondholder perspective.

Unidentified Analyst

My last question, you mentioned a few months ago that you would likely be curbing the amount of growth in your energy portfolio. If prices stabilize, let's say between $40 and $50 a barrel on WTI, given the, it sounds like the success you are having, is that a decision you would reconsider?

Steve Bradshaw

Let me make sure, we communicated correctly. I think what we were trying to communicate in the fourth quarter was that, given borrowers desire to reduce debt, that outstandings and commitments would likely decline in the first and second quarter. But that’s not a result of our desire to retrench from the space in anyway. We are at our core an energy lender and we are very proud of that and we want to be therefore the borrowers in this space. Just this quarter we booked and included in the outstandings are almost $70 million of new loans. Commitments that haven't yet funded or in excess of that. So we continue to look for new business. We haven't changed the goals and objectives of our energy lending group. And so we are continuing to want to be a support where we can be prudently, for our energy borrowers and for new customers, but we are not retrenching from this space in anyway. Even given the markets concern about energy overall, we believe that this is opportunistically can be a great time to look for new borrowers and new opportunities.

Any declines would be a results of borrowers reducing debt. Not as a result of a conscious decision that we have made to retrench from this space.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Joe Crivelli for any closing remarks. Please go ahead.

Joe Crivelli

Thank you, and thanks everyone for joining us. If you have further questions, I will be available today at 918-595-3027, or you can email me at jcrivelli@bokf.com. Thanks for joining us today and we will talk to you later.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!