BOK Financial's (BOKF) CEO Steve Bradshaw on Q2 2016 Results - Earnings Call Transcript

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BOK Financial Corporation (NASDAQ:BOKF)

Q2 2016 Earnings Conference Call

July 27, 2016 4:00 PM ET

Executives

Joe Crivelli – Investor Relations

Steve Bradshaw – Chief Executive Officer

Steven Nell – Chief Financial Officer

Stacy Kymes – Executive Vice President-Corporate Banking

Marc Maun – Chief Credit Officer

Analysts

Jared Shaw – Wells Fargo Securities

Brett Rabatin – Piper Jaffray

Jon Arfstrom – RBC Capital Markets

Michael Rose – Raymond James

Brady Gailey – KBW

Matt Olney – Stephens

Gary Tenner – D.A. Davidson

Operator

Good afternoon. My name is Nichole and I will be your conference operator today. At this time, I’d like to welcome everyone to the BOK Financial Second Quarter Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. Mr. Joe Crivelli, you may begin your conference.

Joe Crivelli

Thank you, Nichole. Good afternoon, everyone, and thanks for joining us to discuss BOK Financial Corporation’s second quarter 2016 financial results. I want to apologize personally for the technical issues on our call this morning and thank you all for your flexibility.

Today, we’ll hear remarks about the 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 website at www.bokf.com.

Before we begin, I’d like to remind everyone that during this 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 July 27, 2016 and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call.

I’ll now turn the call over to Steve Bradshaw.

Steve Bradshaw

Thanks, Joe. Good afternoon, everyone. Thanks for joining us. This morning we announced earnings for the second quarter of 2016. We are in $65.8 million or $1 per diluted share in the second quarter, a meaningful increase from the $42.6 million and $0.64 per share in the first quarter.

There was a lot of good news in the second quarter results. Net interest income continued to be strong and margins remained relatively stable. We set another new record for quarterly fee income. The energy credit outlook improved more we were 90 days ago. We had much improved results from our MSR hedging program.

Our core business continues to perform extremely well and our team remains focused on taking share from competitors and expanding relationships with our customers. In addition, the spillover impact or the contagion that we’ve all worried about from the energy downturn still is not materialized in a meaningful way and the business environment across our footprint is healthy.

The biggest quarterly swing was in our loan loss provision, which was $20 million in the second quarter compared to $35 million in the first quarter. As Stacy will discuss in detail in a moment, the relatively stability in commodity prices over the past 90 days had a very positive impact on credit quality in our energy portfolio.

We saw very little additional deterioration in the portfolio and charge-offs were down considerably when you compare it to the first quarter. We even had a handful of energy credits move from criticized to past due to actions taken by those borrowers’ management teams during the quarter. Our customers are feeling a bit more optimistic and we’re seeing new companies formed to acquire property sets, and increase in the acquisition and divestiture of property sets, and most importantly improved hedging activity, which helps to mitigate the potential impact if we have another dip in commodity prices.

Fee income was very strong in the second quarter as well. Three of our primary fee generating businesses posted record results for the quarter including brokerage and trading, fiduciary and asset management and transaction processing. Steven Nell will go through each line of business in his remarks also. Expenses were a bit higher than we would have liked and there were a modest amount of notable non-operating items, but the biggest driver of expense is higher revenue levels, which impacts incentive compensation and certain variable expenses.

So while expenses were elevated in the second quarter, we believe this is in large part due to the record revenue we posted. Net, net I’m very proud of the team here at BOK Financial. Across the company, they are executing well, staying very focused on the long-term, gaining market share, delivering results in a tough operating environment. Reflecting our confidence in that business, we repurchased 305,000 shares during the second quarter.

As shown on Slide 5, we have posted excellent loan growth in the quarter with period-end loans of $16 billion, up 2.4% on a sequential basis or 9.6% annualized and up 8.5% compared to the same period a year ago. As we will discuss in a moment, the growth was very nicely spread across both lines of business and geographies. Fiduciary assets were up 2.1% during the quarter and 3% year-over-year as our wealth management team continues to grow its book of business faster than the overall market.

I will provide some additional perspective on the quarterly results at the conclusion of our prepared remarks, but now I will turn the call over to Steven Nell to cover the financial results in more detail. Steven?

Steven Nell

Thanks, Steve. Turning to Slide 7, net interest revenue was flat, compared to the first quarter, and net interest margin was down slightly. Lower yields on available for sale securities reduced net interest income by approximately $1 million. The full quarter’s impact of non-accrual energy loans reduced net interest income by $300,000.

Deposit costs were approximately $285,000 higher and we realized about $800,000 lower revenue on our restricted equity securities, primarily are Federal Reserve Bank stock. Loan yields were up slightly from the first quarter 3.58% and interest revenue from loans was up $400,000. On a year-over-year basis, net interest income was up $6.9 million and net interest margin was up 2 basis points.

On Slide 8, as Steve mentioned, fees and commissions were a record $183.5 million for the second quarter, up 10.8% on a sequential basis and 6.3% year-over-year, trailing 12 month growth was 2.2%, slightly below our mid single-digit target. Brokerage and trading was up 22.2% sequentially, 9.8% year-over-year, and 0.1% on a trailing 12 month basis. Growth drivers included strong customer hedging revenue from energy and mortgage banking customers as well as higher syndication fees in our investment banking group.

Transaction card was up 8%, compared to the first quarter, 6.6% year-over-year, and 4.2% on a trailing 12 month basis. This business is benefiting from geographic expansion and expansion of the sales force and sales channels as well as the transition to chip and PIN security standards. The hallmark of this business is when there are disruptions or technological changes that impact the industry, the team is able to aggressively develop new customer relationships through its consultant sales approach.

TransFund also had the best first half of the year in the history for new sales. Fiduciary and asset management was up 8.6% sequentially, 6.4% year-over-year and 3.4% on a trailing 12 month basis. The seasonal tax business added $1.8 million in revenue this quarter and the acquisition of Weaver Wealth Management added $500,000. Mortgage banking revenue was up 11% sequentially, 3.7% year-over-year, but was down 1.7% on a trailing 12 month basis. Seasonal strength and refi volume from the significant decrease in primary interest rates were the main sales drivers here for this business. Deposit service charges and fees were up 0.3% sequentially and 1.3% year-over-year, 2.8% on a trailing 12 month basis.

Turning to Slide 9, total operating expenses were up 4% sequentially and 12.2% year-over-year. Personnel expense was $142.5 million, up $6.6 million or 4.9% from the first quarter. The biggest driver here was incentive compensation expense, which increased $6.3 million, compared to the first quarter due to higher revenue levels. Other operating expenses were $112.2 million, up $3.2 million or 2.8% sequentially and 18.9% year-over-year. The thick charts in the bottom of Slide 9 showed that both personnel expense and non-personnel expense are highly correlated to revenue.

While we’re not growing revenue faster than expenses at the moment, which is our goal to generate earnings leverage, this is largely because of a number of notable items. Expenses in the first six months of 2016 included $1.6 million for the Mobank acquisition, most of which fell in the second quarter, $5.3 million in legal accruals and sentiments that occurred in the first quarter, higher FDIC assessment due to higher levels of criticized assets and accounting adjustments totaling $3.8 million related to a merchant banking acquisition.

In addition we continue to incur additional mortgage banking expenses as we analyze, risks related to our default servicing portfolio as well as the impact of increased pre-payments on our MSR asset. As a result, we’ve heightened a sense of urgency around this line item, deployed additional management resources to tackle the problem, and are also investing in new systems to better manage the default servicing. We believe expenses here could be elevated for another a another quarter or two and are hopeful that this will be behind us in 2017. We are working hard to hold the reins on controllable expenses and believe we’re making good progress despite the noise and expenses over the past two quarters.

Turning to the balance sheet on Slide 10, the available for sale securities portfolio was down $55 million in the second quarter and is down $169 million from the same period last year. At quarter end, we are effectively neutral from an interest risk perspective. As you know our decision to not shift aggressively to an asset sensitive position like most other banks and to stay more fully invested over the past few years was one that went against conventional wisdom in the banking industry. It was also one that drove several hundred millions of dollars of net interest income over the past several years for us.

Our treasury team has done exceptional job managing our interest rate position and now we have the balance sheet back in its historical neutral position. Period end deposits were $20.8 billion at quarter end, up from $20.4 billion at the end of March, while average deposits were down slightly. BOK Financial continues to be very well capitalized, as evidenced by the capital ratios on this slide.

During the second quarter, we completed $150 million subordinated debt offering, which was structured as a 40 year fixed rate at 5.375%. The debt is callable anytime after five years and the proceeds from the debt offering positively impacted our total capital ratio by 60 basis points.

Now turning to Slide 11, our 2016 assumptions are as follows, mid single-digit loan growth for the full year. As mentioned, since we are now neutral from an interest rate perspective, we have no plans to significantly reduce the securities portfolio at this time. Stable net interest margin and increasing net interest income, we expect loan loss provision of $8 million to $12.5 million per quarter and third quarter and the fourth quarter, which implies full year provision in the range of $70 million to $80 million. On rolling 12 basis, we expect mid single-digit revenue growth in fees and commissions.

We expect expense growth lower than the rate of revenue for the full year excluding unusual one-time items. We expect continued capital deployment through organic growth, acquisitions, dividends and stock buybacks. We expect the MBT Bancshares or Mobank acquisition in Kansas City close before the end of the year.

Stacy Kymes will now review the loan portfolio in more detail. I’m turning the call over to Stacy.

Stacy Kymes

Thanks, Steven. Slide 13 shows our loan portfolio on a market-by-market basis. Loan growth rebounded nicely this quarter with end of period loans up 2.4% compared to the fourth quarter or nearly 10% on an annualized basis, which includes of the headwind of energy pay downs. The growth was spread all across the footprint with seven of our eight markets contributing very healthy growth on both the sequential basis and a year-over-year basis.

As Steve noted earlier, we are really seeing no significant signs of a slowdown anywhere in the footprint, even in more oil-dependent market like Houston, Oklahoma City and Denver. As indicated on Slide 14 of the presentation, commercial loans were up 0.7% to $10.4 billion. As expected energy loans were down 7% to $2.8 billion. However, the rest of the C&I book posted healthy growth and our healthcare portfolio surpassed $2 billion for the first time.

The healthcare team continues to execute very well and was our fastest growing segment on a year-over-year basis. Based on the pipeline, we expect this strong growth to continue and for healthcare to be our fastest growing segment in 2017 as well. We are now in 28 states with our healthcare client base, which provides diversification from a geographic basis.

Slide 15 shows our energy portfolio as of June 30. At quarter end, our energy portfolio was $2.8 billion, unfunded energy commitments are down about $161 million, compared to the first quarter from $2.1 billion to $1.9 billion. E&P line utilization was 60%, down from 64% in the first quarter. Energy borrowers are paying down debt to reduce leverage at this point in the cycle. We remain comfortable with our loan loss reserve, which represents 3.58% of energy outstandings, energy charge-offs were $7.1 million in the second quarter and $28.9 million year-to-date.

Despite the increase in energy outstandings commitments during the second quarter, we remain open for business and continue to support our customers in the energy industry. During the quarter, we provided $172 million of new loan commitments for 20 borrowers and year-to-date have provided $254 million of new loan commitments to 35 borrowers. Energy lending is core to our DNA and our experience in previous commodity cycles has shown that this is a profitable business and when approached in a consistent and disciplined manner, losses during the down cycles are very manageable.

This long-term view has served us well. And today, we remain well positioned in the industry with a complete service offering, which includes our recently acquired acquisition and divestiture business, E-Spectrum Advisors. We also have seasoned and hardworking energy bankers and an enviable customer base. We continue to see great opportunity for our energy franchise over the next several years as several banks have retrenched from the space entirely or in part. There’s a lot of very positive movement in the energy portfolio during the second quarter. And while we are cognizant of macroeconomic factors that have the potential to disrupt markets again, we feel good about where our portfolio is positioned today.

In the second quarter, commitments and outstandings are down, when we continue to add good new business. Charge-offs were $7.1 million in the second quarter were down meaningfully compared to the first quarter and assuming commodity prices remain in recent ranges, we continue to expect charge-offs for the full-year well below our loan loss provisions for the year.

Credit migration stabilized and total criticized energy loans, which include special mention, potential problem and non-accrual loans were 27.9% of the portfolio at quarter end, essentially flat compared to 27.5% at the end of the first quarter. We even had a handful of credit migrate positively moving from criticized to past during the quarter, for first time we’re seeing that during this cycle. While we are positive in part due to the rebounding commodity prices, our optimism is also based on the quality of our underwriting during the $100 per barrel oil time period from just a few years ago. Our disciplined focus during rising price period and a detailed review of our borrowers under [indiscernible] levels that indicates even if low prices persists, we will farewell and have very manageable charge-offs.

Turning to Slide 16, the commercial real estate book grew 6.3% in the second quarter and is up 18.1% year-over-year. Our commercial real estate pipeline remains strong at quarter end and we’re seeing good deal flow, a very high quality lending opportunities across our market territory. Turning to Slide 17, the credit environment has stabilized considerably in the second quarter as a result of improved commodity price environment.

In the top left section of the Slide, you’ll see non-accrual loans for the last five quarters. You can see the migration of energy loans into non-accruals slowed considerably in the second quarter while non-accruals in the non-energy portfolio actually decreased by $3.1 million on a sequential basis. At the moment, there is simply no indication that there is contagion or spillover anywhere in the non-energy portfolio. Our combined allowance for credit losses to period-end-loans increased to 1.54% this quarter and it remains one of the highest in our peer group based on where we have seen in the earnings season thus far.

Trailing 12 month charge-offs, the average loans were 22 basis points, which is higher than it’s been over the past few years, but still remains much lower than our historic norm of 35 basis points to 50 basis points. It is noted in the lower right quadrant of the Slide, 61% of overall non-accrual borrowers and 74% of our energy non-accrual borrowers are current with respect to principal and interest payments. So, there is potential for future net interest recoveries as we continue to emerge from the commodity cycle.

I’ll now turn it back to the Steve Bradshaw for closing remarks. Steve?

Steve Bradshaw

Thanks, Stacy the second quarter represented a significant improvement for BOK Financial. We are pleased with the loan growth and the revenue trends, as well as the improvement in the credit outlook. Now, obviously we don’t control commodity markets, but the relative stability in commodity prices over the past months there’s certainly been a benefit to our business. We realize we have more work to do on expenses. We’ve seen as Steven said more noise in both the first and second quarter expense line items than we would like. We’re working hard to hold the line on core expense growth and those efforts should become more apparent to investors, we believe over the next few quarters.

We remain extremely well capitalized in liquid, and the sub debt offering completed this quarter provides a very long-term layer of cost effective capital on the balance sheet. And we continue to believe that our own shares represent a good investment for the Company and resumed our stock buyback this quarter. We would expect to continue to be active with our buyback in the latter half of the year.

So with that we’ll now take your questions, operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jared Shaw from Wells Fargo Securities.

Jared Shaw

Hi, good afternoon.

Steve Bradshaw

Good afternoon.

Steven Nell

Good afternoon.

Jared Shaw

Probably surprising a little bit here, you never thought I’d start with my energy. If you look at the growth of the new loans at energy this quarter, can you talk a little bit about what you’re seeing in terms of structural changes and what the yields are? And then as a corollary to that what you saw from the loans or from the borrowers that went back to being past rated loans, what did they do to have to change their balance sheets or their positions to make you feel more comfortable with it.

Steve Bradshaw

Well maybe start backwards, I think leverage is the key thing. I think when in this environment as loans are being upgraded having a leverage profile kind of less than four times the cash flow is really critical. And so those borrowers that we saw migrate positive, there’s really a function of doing things to manage our business, asset sales equity injections, but ultimately that resulted in lower leverage profile. And that really is key.

As we look at new deals, I think one of the benefits we see of being active in this environment is we’re seeing increases in the pricing grid associated with current activity. So maybe at the peak of the cycle, maybe the grade was L plus 150 to 250. Today the grid is L plus 250 to 350 in general. And you’re not going to see that kind of wide improvement in energy spreads immediately, but as new deals come on and older deals reprise there’s opportunity there. But clearly the risk reward trade-off is being recognized in this environment, and is accepted by borrowers, still very favorable rate, if you think about long-term capital being provided to this space.

Structurally, really kind of down the middle from a collateral perspective more of the traditional 55% to 60% loan to value and leverage profiles that are in the two to three times cash flow leverage. So very straightforward, the market and borrowers are cognizant of the environment and we’re able to be compensated for the risk that we take in this environment.

Jared Shaw

Thank you. And then on the expenses shifting over there a little bit. Could you break out what expenses this quarter in terms of dollars were actually from the incentive compensation on the mortgage and brokerage side and if you could break it out between mortgage and brokerage.

Steven Nell

Yes, so with the increase in personnel, I think was $6.6 million, about $4.5 million related to commissions. Now the majority of that would be in the broker-dealer, because generally the mortgage commissions are offset because of the revenues in our accounting. But majority of that would be over on the broker-dealer activity.

Jared Shaw

Okay, okay. So that delta is really more driven by the volume on the broker-dealer side.

Steven Nell

That’s correct.

Jared Shaw

Okay. Great, thank you very much.

Steve Bradshaw

Thank you.

Operator

Our next question is from Brett Rabatin from Piper Jaffray.

Brett Rabatin

Hi, good afternoon.

Steve Bradshaw

Hi, Brett.

Brett Rabatin

Wanted to go just back to expenses to make sure I understand, you just mentioned the commissions and I think if I heard it correctly the $1.6 million non-recurring owing [ph] to the acquisition. Just trying to backout – if you backout the commissions and the bank expenses, kind of what that or were there other things have also would have affected it.

Steven Nell

We had about little over $1 million related to the Mobank acquisition or integration cost that we’re prepping for that integration. We had elevated mortgage servicing right, amortization as you would expect as rates went down. We had about $1.6 million related to the merchant banking really it was a goodwill calculation entry that we had to correct has nothing – has no impact on the value of the merchant banking investment going forward in terms of their cash flows. Those are the key items, I think that you’ll find in expense is maybe we didn’t expect.

Brett Rabatin

Okay. And then, just wanted to talk about loan growth for a second. Given the results you had in 2Q, are you guys seeing increased pay-off activity in the third quarter, does that somewhat mitigate your expectations or the pipeline that you have currently or any thoughts on the back half growth trends not being quite a strong as 2Q with your maintained mid-single-digit guidance on loan growth for the year?

Steve Bradshaw

Well keep in mind, we’re maintaining that guidance in the first half, in the second quarter we had $211 million of energy paid out. And so we’re still in light of that, still maintaining that guidance. I think we’re hopeful that the level of pay-downs in the energy book will abate a bit in the third quarter and continue to have good growth across our C&I sectors across the market. So we’re not seeing additional paydown activity that would make us think that full-year guidance that we previously provided we ought to modify that. I think we still are also really good about that, even including the impact of the energy paydown.

Brett Rabatin

Okay. And then just lastly, I’m a little confused, on the provisioning for the year you didn’t really change the number too much, but it sounds like you feel a lot better about the loan book on the energy side, are there…

Steve Bradshaw

I mean, I think we said from the beginning Brett, that we would – the provisioning would be front-end loaded in the year.

Brett Rabatin

Yes.

Steve Bradshaw

We were just $35 million, first quarter $20 million so we expect that to tail off and still fall within the upper-end of the guidance that we gave early in the year of the $60 million to $80 million. I think we now say upper end $70 million to $80 million.

Brett Rabatin

Okay.

Steve Bradshaw

So we still feel comfortable with that.

Brett Rabatin

Okay. All right, so my point is that number hasn’t, changed much, but the body language you guys seem to be exiting it feels more positive to me, am I reading something wrong, are there few loans that are coming, that you had the provision for because you see some charge-offs coming or what…

Steven Nell

Brett if you look at the stabilization and criticized and classified, really not a lot of new activity on the nonperforming side. Charge-offs were down materially from the first quarter. Those all really create a little bit of a tailwind and create that kind of positive body language, if you will, around reaffirming the provision guidance that we already had out there.

Marc Maun

Yes and remember Brett, that $60 million to $80 million was to cover our entire loan portfolio, it wasn’t just the energy book. And so we’ve had significant loan growth. And so you would expect to continue to add just kind of to your normal migration calculates for the rest of the book, not just the energy book.

Brett Rabatin

Okay. Fair enough. I appreciate the color. Thanks guys.

Steve Bradshaw

Thank you.

Steven Nell

Thank you. Brett.

Operator

Our next question is from Jon Arfstrom from RBC Capital Markets.

Jon Arfstrom

Thanks, good afternoon guys.

Steve Bradshaw

Good afternoon, Jon.

Steven Nell

Hi.

Jon Arfstrom

Good, couple of follow-up questions. Just on the brokerage and trading you guys talked about capital markets revenue in hedging. Is this a repeatable level or is this something where you just saw a lot of hedging when energy prices perked up during the quarter. I guess help us understand that – did you expect that to tail off there.

Steve Bradshaw

Well, that’s part of I mean – I mean it depends on what the interest rate environment, does. It depends on what energy price is, certainly this quarter was more driven and the delta was more driven by the opportunity on the energy hedging activity than what we’ve seen in some of the previous quarters. But if you have interest rate volatility in future quarters then you may make up part of that with your institutional trade activities. So it just depends on what business inside of our broker-dealer might get stimulated by what by movements in the market factors.

Stacy Kymes

Its kind of a consistent theme, they kind of diverse case in the revenue base things react differently in different environment so if you think about the lower interest rate environment the mortgage TBA business how to do – awfully well in this environment while oil retrenching here a little bit, makes it a more difficult environment from the customer hedging on the energy side. If you look in kind of when does the hedging begin to pick back up $50 seems to be a magic mark in the eyes of many and so, certainly, that’s an important milestone across that makes a difference in customer activity related to the energy hedging but the rate environment impacts other areas of hedging as well, most notably the mortgage TBA business.

Steven Nell

Yes, I think, Jon, this is Steven. One other note on the mortgage TBA business, we did pick up a team in the latter part of the second quarter that delivers additional services into that particular space. So Stacy is right this rate environment should drive some increased activity there and we were opportunistic to pick up some additional trading capability there as well. So that could be an offset.

Jon Arfstrom

Okay, good. And what are you seeing so far quarter-to-date in mortgage in terms of volumes and trends?

Steve Bradshaw

I think it’s been steady, relative to kind of where we ended the quarter.

Jon Arfstrom

Okay.

Steve Bradshaw

I think it’s still pretty steady, both on the retail side and the home direct side of our sales channels.

Stacy Kymes

Yes, we’ve been seeing application volume trend up I think we are really for the last two to three trailing 12-month, I think Steven try to continues to do that.

Jon Arfstrom

Okay. And then just one follow-up on growth may refer you Stacy. You talked about potentially seeing some more paydowns in Q3 in energy, on the flip side, you’ve got some new commitments are you essentially saying another quarter or two of paydowns and then we might see some stabilization in that books?

Stacy Kymes

That’s a big question. I wish, I can give you an intelligent answer. I mean our current forecast for the third quarter in energy hasn’t staying pretty flat. But on the paydown side there is activity that’s happening that creates paydown the customer selling properties and we’ve got borrowers that are criticized and classified that may have big things happen to them and so those balances may come down, my best guess today is staying flat but I wouldn’t make it clear how to making that guess here. We still got them from a balance perspective.

Jon Arfstrom

Okay, good. Thank you.

Stacy Kymes

Thank you.

Operator

And our next question is from Michael Rose from Raymond James.

Michael Rose

Hey, good afternoon, guys. How are you?

Steve Bradshaw

Good.

Steven Nell

Good.

Michael Rose

Jon just asked my question on mortgage, but may be just broadly speaking, outside of the acquisition that’s close to pretty soon – what’s kind of the outlook for M&A, for you guys at this point now that capital started to go here a little bit in over 9% TCE I know you guys have been very clear about what should expect or what’s your target going forward, but has – the stabilization of the environment maybe a lower for longer environment creates new opportunities for you guys?

Steve Bradshaw

Well, I think first and foremost, we’re really focused on getting our deal closed in Kansas City looking forward to having Mobank to be part of the organization and managing the integration. So that’s really job one for us. I would say that right now we don’t have anything that’s particularly targeted or that we think is near-term in the queue. So, it’s really not as bigger emphasis for us right now. We’re going to focus on making sure we get that acquisition well integrated. And then we’ll move on down the road. I don’t think from my perspective, we really haven’t seen a change in may be potential sellers at this point in time, as our buyers trying to digest kind of what this lower for longer impact or will it be for them. So from my standpoint nothing is terribly changed about that dialog, but it’s not a strong emphasis for us at the moment.

Michael Rose

Okay, that’s helpful. And then maybe for safety just thinking about that the more recent focus on a commercial real estate obviously, that’s been a nice area of growth for you guys on any sort of – I know your levels are below the concentration limits, but any sort of feedback from regulators more recently we’ve obviously seeing some commentary from some other banks in similar size of industry, guys. Thanks.

Steve Bradshaw

We’ve not got any feedback from regulators about the growth in our commercial real estate book. We are very disciplined about that, we’re very focused on how we do that, I think clearly the growth number is year-over-year, when quarter annualized, how we want to look at that it’s not a sustainable growth for that line of business, but these guys have done a good job develop the kind of business that really fit within our cultural profile and so we’ve had some good opportunities there.

Michael Rose

Okay. Thanks for taking my questions, guys.

Steve Bradshaw

Thank you.

Operator

Our next question is from Brady Gailey from KBW.

Brady Gailey

Hey good afternoon, guys.

Steve Bradshaw

Good afternoon.

Brady Gailey

So you raised the $115 million of sub debt, you have some excess capital, you’ve talked about the buyback its sounds like you’re going to – you’re little more active in the buyback going forward. But at the same time your stock at $67 is a little higher than it’s been when you repurchase shares in the past. Are you going to be price sensitive or do you want to use this excess capital to buyback stock regardless.

Steve Bradshaw

Well, I mean, we’ve always been price sensitive, I mean we don’t have any absolute set formula that says, this is the exact point at which we are in or out in the market but we certainly run the calculations, look at what we think over the long-term investment opportunity there is and we get together and make decisions about when and how much we’re going to buyback stock, and that’s the way we’ll continue to approach it going forward.

Brady Gailey

All right, and then…

Steve Bradshaw

And I would add together 305,000 shares at $0.58 certainly.

Brady Gailey

Yes.

Steve Bradshaw

Given what prices today, but we just look at it as time goes by.

Brady Gailey

Okay. And then from an interest rate point of view, you are going from being liability sensitive, which was the right call to not being neutral?

Steve Bradshaw

Yes.

Brady Gailey

Do you expect for the foreseeable future to remain in a neutral position or your longer term are you thinking about becoming more asset sensitive.

Steve Bradshaw

Probably remain in a neutral position. I think as rates begin to rise over time certainly if you have a portion of your deposits, I think your demand deposits that perhaps re-price in a different way. I think you’ll quickly find yourself moving back towards liability sensitive. And so you’ll need to take some action over time I think to maintain that neutrality. But today as we see it, we don’t think we need to be aggressive in terms of selling down our securities portfolio, we’re at neutral. I think we can maintain that for the foreseeable future given once in our outlook for rates are today.

Brady Gailey

All right. And then finally for me the FHLB leverage trades that you’ll put on last year, the year before, I know that the dividend has been reduced there. Is that still something that you expect to continue with that…

Steve Bradshaw

I think the dividend was reduced on the Federal reserves stock, but not on the Federal Home Loan Bank component at this point. So that trade is still very viable, we still have it on and have that built in the next several quarters. It may not last forever, certainly it’s opportunistic, but as of now we expect that to be there for some time to come.

Brady Gailey

Okay, great thanks for the color.

Steve Bradshaw

You got it.

Operator

Our next question is from Matt Olney from Stephens.

Matt Olney

Hey guys, good afternoon.

Marc Maun

Hey, Matt.

Steve Bradshaw

Hey, Matt.

Matt Olney

Hey, I want to go back to the expense discussion.

Steve Bradshaw

Okay.

Matt Olney

I think I understand the commentary Steven as far as the – some of the expenses will remain and some of the expenses will kind of fallout in 3Q. But can you give us some kind of run rate going forward from here.

Steve Bradshaw

Yes, I really think we’re more in that kind of $245 million to $250 million range. I mean, I think we guided last year roughly in that $235 million. And I think with our mobank acquisition kind of we’re planning for that. I think with our continued higher FDIC expense levels because of classified and criticized our mix of business which as you can see this quarter is above 50% just barely in terms of fees, you generally pay more commissions related to that business. So there is continued onboarding of IT systems. Not a huge amount but certainly incrementally that adds. So I think our expense base has built up to a higher level than approaches that kind of $250 million mark on a quarterly basis depending on the mix of revenue you generate. That help?

Matt Olney

Yes. That’s helpful. And then sticking on this guidance discussion, as far as the revenue growth, expecting to outpace expense growth, just to clarify is that guidance for the full year 2016 or is that just for the last two quarters of 2016 because it looks like the words may change probably from the previous quarter.

Steve Bradshaw

Well, I think what we’ve said is, our intent is to grow revenues to maintain expense growth below slightly below our revenue growth. Without these one-time items that we’ve been dealing with in the first and second quarter, and they’ve certainly clouded the picture. I mean there we’re disappointed in some of those, but I do think our core run rate operating expenses we have every intent as we go through our budget cycle this fall to build a budget that contains expense growth inside revenue growth rates.

Matt Olney

Okay, thanks. And just lastly, the energy allowances now think over $100 million.

Steve Bradshaw

Yes.

Matt Olney

How much of that is allocated towards specific credits? And secondly as you noted the cumulative energy charge-offs in that $34 million, how much would be thinking about remaining there as far as energy charge-off?

Steve Bradshaw

We only have one credit with specific impairment that would be considered in that kind of $100 million number. The rest of it is really a general allocation just based on the formula and the credit grade associated with the book, we’re not in the habit of giving a specific charge-off guidance, I think we’ll stick with what we indicated in our press release, which is that, we certainly expect charge-offs to be below our provision guidance.

Matt Olney

Thank you.

Operator

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

Gary Tenner

Thanks, good afternoon.

Steve Bradshaw

Hi.

Gary Tenner

Quick question again on the expenses in terms of the mortgage banking costs you’ve highlighted in press release of course, there was some increased costs because of the pre-payments on almost are servicing for others, was there any element of that in the first quarter as well or is that first quarter number more of a clean number?

Steve Bradshaw

That’s more of a clean number. And then I think the mortgage amortization kicked up because of the rate decline in the second quarter. And then the other element of that is our continued, if you want to call it kind of clean up and getting our hands around some of the reserves that support our default mortgages. And we’re working hard on that as we mentioned in our comments and you may see another $1.5 million to $1 million.

Hopefully it’s over the next quarter, but I’m not going to say it won’t be and we continue to find areas there where we need – where we have exposure and we need to support with reserves. I think that will fade away over time. But that’s still has been an element of our expenses for the last couple of quarters and it will be probably for ongoing for at least another quarter, and that’s $1.5 million to $1 million.

Gary Tenner

Right, thank you.

Operator

And there are no further audio questions at this time.

Joe Crivelli

All right. Well, thanks everybody for joining us. If you have any follow-up questions, you can give me a call either this evening or tomorrow at 918-595-3027. Thanks for talking to us, and we’ll catch you later. Bye-bye.

Operator

That concludes today’s conference. You may now disconnect.

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