Greetings and welcome to BOK Financial Corporation First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Steven Nell. Thank you. You may begin.

Good morning and thanks for joining us. Today our President and CEO, Stacy Kymes, will provide opening comments and Marc Maun, Executive Vice President for Regional Banking, will cover our loan portfolio and related credit metrics. Scott Grauer, Executive Vice President of Wealth Management, will cover our fee-based results, and I'll provide details regarding net interest income, net interest margin, expenses, and our overall balance sheet position from a liquidity and capital standpoint. A PDF of the slide presentation and first quarter press release are available on our website at bokf.com. We refer you to the disclaimers on slide two regarding any forward-looking statements we make during the call. I'll now turn the call over to Stacy Kymes.

Good morning and thanks for joining us to discuss BOK Financial's first quarter financial results. Starting on slide four, first quarter net income was $62 million or $0.91 per diluted share, a $55 million decline from last quarter. The first quarter ushered in dramatic changes in the economic and geopolitical environment resulting in extreme interest rate volatility. This volatility negatively impacted our mortgage-related businesses, especially our mortgage trading activities. On a pretax basis, our net contribution from our institutional trading group decreased $43 million linked quarter. Demand for lower coupon, US government agency residential mortgage-backed securities was constrained as investors reacted to interest rate volatility and market uncertainty. Interest rate volatility also negatively impacted outcomes in our mortgage servicing right hedging results, creating a $13 million pretax decline in performance compared to the fourth quarter. Finally, the other material component driving the linked quarter decline was the $17 million pretax reserve release recognized last quarter. The most impressive story for this quarter has been the loan growth experienced. Excluding PPP loans, our core loan portfolio increased $608 million or 3% linked quarter. The credit quality of our loan book continues to be outstanding. We determined the current reserve for loan losses was appropriate; therefore, no reserve release this quarter. Continued strength in commodity prices and improved credit metrics were sufficient to offset this quarter's loan growth and changes in the economic outlook. Our forecast for GDP growth and unemployment, while consistent with pre-pandemic levels, are tempered compared to the prior quarter. Turning to slide five. Total loans grew $469 million or 2.3% linked quarter. But that is net of an additional $139 million in PPP loan forgiveness during the first quarter. Core C&I loan balances are up 12% annualized. C&I commitments grew as well with relatively no change in the core utilization rate which positions us well for plenty of growth capacity as the economy continues to rebound. As expected, our Commercial Real Estate Group returned to positive growth this quarter with period-end commercial real estate balances increasing $270 million. Loans attributed to our Wealth segment were materially consistent with the fourth quarter. Average deposits increased $560 million this quarter. However, period-end balances were down $1.8 billion. We experienced a significant seasonal inflow of deposits during the fourth quarter in our Commercial and Wealth business lines with over 65% of that increase off the balance sheet by the end of the first quarter. Compared to March 31st, 2021, period-end balances are now $1.6 billion or 4.2% higher than last year. Assets under management or in custody in our Wealth Management fell slightly this quarter, down 3.7% to $101.1 billion. More than half of that change was market-value driven. Compared to March 31st, 2021, assets under management or in custody are up $9.1 billion or almost 10%. I'll provide additional perspective on the results before starting the Q&A session, but now Marc Maun will review the loan portfolio and our credit metrics in more detail. I'll turn the call over to Marc.

Thanks, Stacy. Turning to slide seven. Period-end loans in our core loan portfolio were $20.5 billion, a linked quarter increase of $608 million. That represents the largest linked quarter balance increase since the first quarter of 2020. Total C&I loans grew $377 million or 3% linked quarter with growth largely from general C&I and energy. As expected, the payoff trend in real estate abated, resulting in commercial real estate growth of $270 million or 7% linked quarter. Loans to individuals contracted $39 million linked quarter with most of the decline from the resale of loans previously sold into Ginnie Mae mortgage pools that the company repurchased when certain delinquency criteria were met. We continue to see loans repurchased during the pandemic being cured and meeting the resale qualifications. Loans in the energy space recorded back-to-back quarters with period-end outstandings increasing $191 million in the first quarter, following last quarter's $193 million increase. Commitments grew slightly less than outstanding this quarter, so utilization levels increased, but remain low compared to pre-pandemic levels. A return to those utilization levels on our existing customer base would provide an additional $300 million in outstanding balances. Ancillary business from customer hedging, investment banking, and treasury for this segment set another new record for fee revenue this quarter, topping last quarter's previous high with linked quarter growth just below 14%. Healthcare balances also increased up $27 million or 0.8% linked quarter, primarily driven by our acute care and specialty hospital sector. Healthcare line utilization levels were consistent with last quarter. Looking forward, we remain very confident in our ability to perform from both a growth and credit standpoint in our healthcare portfolio, as it remains a leader for us. Excluding energy and healthcare, core middle market C&I realized positive growth again this quarter with linked quarter growth of $159 million or 2.6%. C&I utilization levels continue to run at historic lows, but increased slightly this quarter. Given such low utilization levels, we still have significant capacity to increase outstanding loan balances, as demand continues to come back online without being predicated on any new customer acquisition. A return to more normal utilization levels organically adds about $500 million of core C&I loans outside the anticipated growth in the specialty areas. Based on fourth quarter lending trends, we were optimistic heading into the first quarter and the results did not disappoint. We remain confident in our ability to produce solid growth throughout the remainder of this year. We're optimistic that the payoff trend we've experienced since the fourth quarter of 2020 in commercial real estate balances has finally turned this quarter, as period-end balances grew $270 million or 7% linked quarter. Industrial, multifamily, and office were the segments driving this quarter's results. We expect these balances to continue to grow throughout the year, as we have plenty of capital allocated for this space to grow in 2022 and beyond. PPP loan balance forgiveness was $139 million this quarter, reducing outstandings to only $137 million. Of the remaining PPP balances, less than $24 million or 1% are of the 2020 vintage. We continue to work with our clients through the forgiveness process and expect any future remaining balances to be minimal. We believe we can leverage the momentum we've experienced in the first quarter and extend that trend to produce a more normal loan growth cycle as we move through 2022. Turning to slide eight. You can see that as we move further out from the pandemic, credit quality continues to improve significantly. We continue to experience meaningful credit quality improvement across the broader loan portfolio. And excluding loans guaranteed by US government agencies, nonperforming assets totaled $13 million linked quarter to $132 million. Over the last 12 months, nonperforming assets are down $147 million or 53%. Overall, asset quality is better than pre-pandemic levels. Our overall credit quality metrics, combined with continued strength in commodity prices, as well as an outlook for moderate growth in GDP and labor markets, provided a favorable offset to the significant loan growth realized this quarter, so that no increase in the reserve for loan losses was required. We realized net charge-offs of $6 million for the first quarter, an increase of $6.7 million compared to only $714,000 in net recoveries for the fourth quarter. Excluding PPP loans, net charge-offs have dropped to an average of 14 basis points over the past four trailing quarters, which is below our historic loss range. As we look forward to the next quarter, we expect net charge-offs will continue to be at or below the lower end of our historical range. Excluding PPP loans, the combined allowance for loan losses totaled $283 million or 1.38% of outstanding loans and unfunded commitments at quarter end. Having come through the pandemic, the allowance is now migrating towards our post-CECL level of 1.2% back in early first quarter 2020. Non-accruing loans decreased $9.8 million from last quarter, primarily due to a reduction in non-accruing general business and energy loans. Potential problem loans totaled $169 million at quarter end, down from $222 million on December 31. Potential problem energy, commercial real estate, and service loans all decreased compared to the prior quarter. With that, I’ll now turn the call over to Scott Grauer.

Thanks, Marc. Turning to slide 10. Total fees and commissions were $98 million for the first quarter, a $49 million decline from the fourth quarter. As Stacy noted earlier, the first quarter experienced a disruption of fixed income markets caused by a combination of factors, such as rising inflation, the recent federal funds rate increase expectations of future increases, as well as the conflict in Ukraine. These events dramatically altered the MBS trading environment, which reduced demand for our short duration, low coupon US government agency residual mortgage-backed securities. The result was a $43 million linked quarter decline in the pretax contribution from our institutional trading group. Apart from the institutional trading activity, all other brokerage and trading revenues were down $1.3 million linked quarter, primarily due to the record fourth quarter we experienced in syndication deals within our Commercial segment, which are irregular in nature. Regarding our MBS trading activities, we expect the balance sheet usage to moderate through the next several quarters, as the mortgage origination market reacts to higher interest rates and continued shortage of housing supply. Trading volumes and related revenues will react to those market conditions, with margins expected to remain under pressure. Fiduciary and asset management fees were relatively flat linked quarter, but up 12.3% compared to the same quarter a year ago. Despite a decrease from market valuations, assets under management finished the quarter at $101 billion, down just 3.7% linked quarter. Compared to this time last year, assets under management have grown $9.1 billion or 9.9%. While we've seen the benefit of favorable equity markets increasing customer account balances over the past year, sales activity remains strong in this space as well. Our current mix of assets under management is 41% fixed income, 38% equities, 13% cash, and 8% alternatives. Our relationship-driven business model is perfectly in touch with clients' needs today, as we move forward in this new phase of market volatility. For example, our Cavanal Hill Investment Management mutual funds were recently ranked number 26 on Barron's Best Fund Families of 2021. This is out of 849 asset managers in the Lipper database. We believe that confidence and appreciation for financial advice we've earned during the pandemic from institutions and individuals positions us well to serve our clients in this period of market uncertainty. Transaction card revenue decreased 3.1% linked quarter, with seasonal factors impacting the linked-quarter comparison. Compared to the first quarter of 2021, card revenues are up 8%. This is largely due to stimulus measures and the broader reopening of the US economy. Deposit service charges increased $286,000 this quarter, with growth equally spread between our Commercial and Consumer segments. Compared to the first quarter last year, total service charges have grown $2.8 million or 11.5%. Approximately 23% of deposit service charge fees in the first quarter were consumer-related NSF fees. We continue to monitor the current regulatory environment in this space, evaluating various alternatives to arrive at our strategy going forward. Mortgage banking revenue decreased $4.6 million or 21.8% linked quarter, primarily due to lower production volumes combined with narrowing margins. Mortgage production volume decreased $93 million to $408 million, as the industry continues to face not only housing inventory constraints, but rising mortgage rates as well. Other revenue declined $1.1 million or 9.8% linked quarter, primarily the result of lower domestic letter of credit fees and reduced repossession revenues. I'll now turn the call over to Steven to highlight our net interest margin dynamics and the important balance sheet items for the quarter.

Thank you, Scott. Turning to slide 12. First quarter net interest revenue was $268 million, an $8.7 million decline from last quarter. That was primarily due to an $8.9 million linked quarter decline in loan fees, with $3.8 million of that decline directly related to PPP fee recognition. Business line non-used fees fell $2.3 million linked quarter largely due to higher utilization levels. The fourth quarter also had the seasonal benefit of $2.8 million in fees from the sales of transferable tax credits, which largely occur in the fourth quarter each year. Interest on our trading securities fell $3.5 million, as the effective yield decreased 18 basis points linked quarter. The decline in trading securities interest income was materially offset by increased interest on our available-for-sale securities portfolio as the average yield on those securities increased five basis points. Average earning assets decreased $744 million compared to last quarter, primarily due to the $723 million decline in the trading securities portfolio used to support our brokerage and trading business. Average loans increased $221 million linked quarter. Excluding the $194 million linked quarter decline in PPP loans, average balances increased $415 million. Interest-bearing cash decreased $158 million. Average total deposits grew $560 million, with non-interest-bearing balances up $243 million and interest-bearing balances up $317 million this quarter. Net interest margin was 2.44%, down eight basis points from the previous quarter, with the decrease materially driven by the linked quarter decrease in loan fees. Excluding loan fees, core loan yields increased four basis points as we began to benefit from rising short-term interest rates. Our average cost of interest-bearing deposits fell flat for the quarter at 12 basis points. We believe the core margin is at a low point. We saw increased yields on our available-for-sale securities portfolio and our loan portfolio this quarter, as short-term rates begin to move higher. Our current asset-sensitive position has us poised to benefit, as we expect the Fed to aggressively move short-term rates higher throughout 2022. Turning to slide 13. I'll briefly highlight our current levels of asset sensitivity, which we discussed in detail last quarter. We continue to maintain an asset-sensitive balance sheet position and expect our performance in a rising rate environment to be similar to that experienced during the last rate hike cycle from 2015 to 2019. Using our standard modeling, assuming a parallel shift up 200 basis points gradually over 12 months, net interest revenue would increase 7.5% or approximately $85 million. Over the following 12 months, the total benefit increase is 16% or $196 million. With a flatter yield curve expected versus the parallel shift up, our estimates for up 200 basis points would be approximately half those levels. I'll provide more color in a moment when I talk about our specific forward guidance for net interest income. On slide 14, you can see that our liquidity position remains very strong. Our loan-to-deposit ratio increased to 52.4% this quarter from 49% at December 31, due to the combined impact of a $1.8 billion decrease in total deposits and a $469 million increase in loan balances this quarter. Our significant on-balance sheet liquidity leaves us very well positioned to meet future increasing customer loan demand. Our capital position remains strong as well, with a common equity Tier 1 ratio of 11.3%, well above regulatory thresholds. With such strong capital levels, we once again were active with share repurchases, opportunistically repurchasing 476,000 shares at an average price of $101.02 per share in the open market. Turning to slide 15. Linked quarter total expenses decreased $22 million, primarily due to decreased personnel expense this quarter, and a $5 million contribution to our foundation last quarter. Personnel expense decreased $15 million linked quarter, with cash-based incentive compensation down $11 million from elevated levels in the fourth quarter. Deferred compensation expense, which is largely offset by a decrease in the value of related investments included in other gains and losses net decreased $4.2 million. Share-based incentive compensation decreased $3.8 million, resulting from changes in vesting assumptions relative to performance versus our peer group. These decreases were partially offset by a $3.2 million net increase in employee benefits expense, due to a seasonal increase in payroll taxes and retirement plan costs, partially offset with a seasonal decrease in medical expense costs. Regular compensation expense continues to run fairly flat as it has for the last four quarters. We expect to continue to manage personnel costs effectively going forward, but realize that inflation in the tight labor market pose a risk. Non-personnel expense decreased $6.6 million this quarter, with $5 million of that from the fourth quarter contribution to the foundation. Most expense categories had similar spend levels for both quarters. The exception being increased occupancy and equipment, which was offset with declines in professional fees and recruiting expenses. On slide 16, I'll provide guidance in a few key areas for the remainder of 2022. Loan growth gained momentum this quarter as we expected. And we continue to see solid overall loan pipelines and improvement in line utilization, both of which support an overall point-to-point growth in the upper single-digit range. We expect growth to come from all of our regional markets and continued growth in our wealth division. With much higher interest rates likely during 2022 than originally assumed, we expect some declines in deposit balances. Deposits could decline point-to-point mid-single digits by the end of the year. However, even with accelerating loan growth and some deposit runoff, our liquidity position is expected to remain strong. Modeling a 200 basis point interest rate increase for the remainder of 2022 and taking into consideration the flatness of the forward curve, deposit beta assumptions similar to previous rate cycles, loan growth guidance, and holding the available-for-sale securities portfolio flat, we expect an increase in year-over-year core net interest income of 9%, which excludes $40 million of PPP revenue differential between the two years. Based on the modeling just described, our net interest margin should migrate close to 3% by the end of the year. The expected increase in market interest rates has and will have a significant negative impact on our mortgage and brokerage and trading activities. On the other hand, increasing interest rates improve a portion of our money management and fiduciary fees. Given the market uncertainty, I will provide guidance for our individual diversified fee revenue line items. But I will say that, in total fee revenues could dip slightly below 35% of total revenues at least for 2022. Given the drop-off in fee revenues and related variable expenses, our goal is to maintain total operating expenses relatively flat for 2022. Our current loan loss reserve as a percentage of loan balances is 1.37%. We expect that percentage to migrate towards 1.2% by the end of 2022 very close to day one CECL levels. We expect to continue opportunistic quarterly share repurchases within the total dollar ranges spent over the past several quarters. I'll now turn the call back over to Stacy Kymes for closing commentary.

Thanks, Steven. The overall results this quarter did not meet our expectations as the market experienced extraordinary interest rate volatility. The markets had to digest high levels of inflation, changing sentiment around the magnitude of interest rate hikes, and the first meaningful geopolitical conflict in Europe since World War 2. Our mortgage-focused business lines were materially impacted as the markets appeared to reset. Apart from that reset, our core operating business model performed well this quarter. As we move forward, we believe we are well positioned for this new environment. We have strong momentum growing our loan portfolio with both actual results and loan pipeline strong. We've been intentional about positioning our balance sheet to benefit from rising interest rates with evidence this quarter as core loan and available-for-sale securities yields improved. As the Federal Reserve moves aggressively to increase short-term interest rates, we will see expanding margins and revenue. Credit quality has long been a differentiator for BOK Financial. And we are well positioned should the credit markets begin to show weakness though there is no sign of that today. We operate in a fast-growing regional footprint that we expect to provide stronger growth than the national economy over time. Looking ahead, I'm excited about the outlook for BOK Financial. With that, we are pleased to take your questions.

Thank you. Our first question comes from Jared Shaw with Wells Fargo. Please proceed with your question.

Hey, good morning.

Good morning.

Good morning.

Maybe just starting quickly with the guidance and the rate assumptions. Do you have any major change to your deposit beta assumptions sort of from the end of last year as we look out over that updated guidance?

A little bit. So the first 100 basis points, I think would be very similar to what we guided in the first quarter and then obviously the second 100 basis points that rises, I think close to a 30% beta kind of on average for the year is what's in our model.

So 30% sort of at the end of the 200 basis points cumulative beta?

Correct.

Okay. And then on the securities portfolio, the AFS portfolio, what's duration at March 31? And what do you expect for monthly cash flow from that?

Yeah. So the effective duration is about 3.6 years, I believe. And we are receiving in most rate environments about $1.8 billion annually from cash flow. So you can do the math there by quarter.

Okay. Regarding loan growth, I appreciate the details on the normalized utilization rate and its potential impact on balances. Are you assuming that to achieve that growth, you would need to return to a full normal utilization rate, or if you did, would there still be further upside?

Well, this is Marc Maun. We're not necessarily assuming we're going to get back to full utilization growth. We've had our commitments stay at a very stable level. And utilization has been only up very slightly. So a lot of the growth has come from new customer acquisition. We expect to continue to gain new customers throughout the year. And expect, if we get benefit from increased utilization that will help our overall growth rate.

Okay. That's great. Thanks. And then finally, I guess just for me on deposit fees. Any thoughts of changing sort of policy or procedure on NSF and other retail deposit fees, or is that something that's potentially further down the road?

Sure. Jared this is Stacy. We continue to look at that. We have about $5 million a quarter in consumer-related NSF fees. And we continue to take a really hard look at that over time. And I think you can expect over time that that line item for consumer will have some pressure on it in terms of getting smaller. But as a relative percent of our fee revenue, it's a very small percent. So, it's something we think we can replace over time. We did introduce a new deposit product this quarter, a bank on product that doesn't have the overdraft fees associated with it. And we're watching to see the adoption of that too which could also impact that line item. But we see as you do the regulatory pressure on that. It's not a big line item for us. We've previously made other changes ahead of this. So we feel we're well positioned there. But there'll be pressure on that item going forward.

Okay, great. Thanks for the color.

Our next question comes from Peter Winter with Wedbush Securities. Please proceed with your question.

Good morning.

Good morning.

You can see the benefits of the diversity of the business model. But I'm just wondering, with the pressure on fee income this year, do you think you can achieve positive operating leverage this year or possibly in the latter half of this year?

We expect the efficiency ratio to improve as the year progresses. The key point is that we are transitioning from a strong two years of fee income in our trading and mortgage segments. We have benefited more than other regional banks because of the investments we've made in these fee businesses. However, as the market shifts towards net interest revenue and some mortgage-related businesses become more challenging, this will lead to a more efficient revenue stream for the company. Therefore, we anticipate a shift towards more positive operating leverage and a lower efficiency ratio by the end of the year.

Okay. That's helpful. And then I saw that you reduced the size of the trading portfolio. I'm just wondering how you think about that going forward. Will that continue to shrink?

Yeah. This is Scott Grauer. We have reduced the size of the mortgage-backed securities trading portfolio by over 70% from its peak. We believe we have effectively minimized our exposure in this area. Given the current moderation in market volatility and uncertainty, we feel confident about our current portfolio and activity level.

So, Peter, think about it like inventory, I mean really that will accordion based on sales activity. So to the extent that there's lower sales activity then that trading portfolio will get smaller. And to the extent that there's accelerated trading activity it could grow. But generally speaking, we're probably pretty close to where we'll be there.

Okay. And just my final question. Stacy, you've had a long career at BOK. But as the new CEO, are there certain areas that you might be more focused on versus where Steve Bradshaw was, or is it kind of just business as usual?

Well, I think it's unlikely you picked the guy who's been at the company for 25 years if you're looking to make dramatic changes. I think the changes that you'll see from us really are more reflective of the changing environment. We've come through two years of pandemic and 2022 is the first kind of post-pandemic year. So we're awfully focused on top line revenue growth visibility with our clients, being in front and visible, being in their offices, being active calling. Top line revenue growth is our number one priority for this year. And that's really just a function of a different sales environment that we're coming into after a really tough couple of years from a sales perspective. You can sell deeper into an existing relationship virtually and we've done that successfully. But it's hard to bring new relationships across if you don't have a previous relationship. And so we think that's the opportunity. You're seeing the early fruits of that I think here in 2022. But our sales teams are very active. They're in front of customers and we're seeing the benefit of that.

Got it. Thanks for taking the questions.

Our next question is from Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

Thanks. Good morning, everyone.

Hi.

Hi there. Scott or Steven, can you help us deconstruct the brokerage and trading line a bit just so we kind of understand what's going on underneath? Obviously you talked about a loss before, but just help us understand what's underneath that?

It relates to the basis point exposure we had in our mortgage-backed securities during our trading activity run rate for these securities. As we entered the fourth quarter, trading slowed, especially towards the year's end. We did see some improvement in the first couple of weeks of January, but following an apparent accelerated action from the Fed, inflation numbers rose, energy costs spiked, and the situation in Ukraine halted activity. As Stacy mentioned, our inventory was appropriate based on our volume and activity rates up to that point. With activity muted and uncertainty in the marketplace, we decided to reduce our basis point risk exposure, which we have addressed, and we believe it's largely behind us now.

But Jon, if you think about the line items that typically make up that whether it's investment-making revenue on the syndication side, retail, brokerage, energy, derivatives, trading, those other core areas were very solid this quarter or very strong. It really was the kind of what we call the mortgage trading activity that drove that revenue category down. But the other elements of that line item were good this quarter. We're seeing exceptionally strong activity from our energy customers wishing to hedge in this environment. Retail brokerage has been very stable. And investment banking revenue was down a little bit in the first quarter, but it's seasonably down. So we have a really strong syndication pipeline and expect that the second and third quarters are going to be very strong for that category.

But the big difference is that was that a $50 million number? I guess, I'm just trying to get back to what you think is a more normal...

Yeah. And frankly it was a $50 million. I mean, it was slightly below $49 million. So we put $50 million certainly in the 8-K because we still had open positions there. We still have a few there that we didn't know what the market would do. And I wanted to make sure that we cover kind of what the downside there would be. But we did not end up booking of losses there. It was lower.

Yes. That's what I was looking for. And then Steven, on slide 13, on your disclosure, I just want to make sure I understand it. The second scenario the up 200 gram, months 13 to 24, that assumes 200 basis points up from the first 12 months and then 13 through 24 was I don't know what the term residual without any further.

Yeah. Yeah. The second year, so you go up along the way the first one through 12 months and then you stay at up 200 parallel for the next year. And that's the kind of net interest income or revenue you would pick up from that scenario on a parallel shift. And so I'm trying to highlight that there is a forward curve that's flatter than a parallel shift. And that does cut into that number some if the forward curve and the flatness of the curve were to play out. That's kind of how you have to interpret that.

Yeah. But it's the second...

Yeah. It's the second full year of going up that full 200 and then, it stays at that level. That's the kind of pickup you would have that second year.

Right. And then maybe, Marc or Stacy, just the comment on commercial real estate and just kind of the permanent market alternatives easing a bit. Do you view that as permanent or temporary? And if you could comment a little bit on overall CRE expectations with higher rates.

Yeah. What I would say about commercial real estate, there's always inherent lumpiness from quarter to quarter. I've always kind of looked at commercial real estate over a 12-month continuum because you may have an outsized growth in one quarter, an outsized paydown in another quarter. But I think the more extreme paydowns headwind that we saw is largely behind us. I think that that was really a function of the pandemic and kind of the economic freeze, if you will, that happened. So you'll have a lot that was eligible to move to the permanent market. It did. We'll still have and we've got a healthy portfolio. So you're still going to have things that move there over time. But disproportionate to new activity I think it will be much more stable moving forward.

Okay. Thanks guys.

Our next question comes from Jennifer Demba with Truist Securities. Please proceed with your question.

Thank you. Good morning.

Good morning.

Steven, thank you for all the detailed fundamental guidance for 2022. It's really helpful. In terms of the loan loss reserve probably going back down to around 120 basis points, do you feel like that's the biggest risk in the guidance you've given? We don't know exactly how the macro environment is going to turn out over the next several quarters with all these rate hikes and the geopolitical risk?

Yes. Jennifer, this is Marc. No, I don't think that that's a significant risk for us in terms of the guidance simply because we're starting from a level right now that is probably the best we've seen since pre Great Recession, not just pre-pandemic in terms of our asset quality. And if we experience the loan growth, it will help us balance out that loan growth by managing that reserve to that 1.2. So I think loan growth will support that decline as well as asset quality. And whether it results in provisions will depend a lot on that loan growth number.

Okay. Thanks so much. Appreciate it.

Our next question comes from Brady Gailey with KBW. Please proceed with your question.

Yes. It's Brady. Good morning, guys.

Good morning, Brady.

So, I guess, I just wanted to clarify on the trading portfolio in total on an average point of view that went from $9 billion last quarter to about $8.5 billion this quarter. If you look at in the period, it finished a little under $5 billion. So are you guys saying kind of on a go-forward basis that volume should be kind of flat to kind of where it exited the quarter at around $5 billion?

I think, as Stacy mentioned, this will better reflect the opportunity in the market, including where flows and client activity are. We have observed significant sluggishness in the market, as many are hesitant to make commitments along the curve due to uncertainty regarding the pace and extent of the Federal Reserve's actions and other macroeconomic factors. However, this level won’t necessarily remain constant. It will be a reflection of the overall demand from our customers in the marketplace. Our mix is already showing some shifts as we've noticed a slight increase in yield availability with tax-exempt and municipal yields surpassing taxable equivalents. Consequently, we are experiencing higher demand and improved activity in other segments of fixed income markets, though not particularly in mortgage-backed securities.

Okay. And I think I heard you guys say you pre-released the $50 million loss there. But that actually came in less in the quarter. What was the actual loss there for 1Q?

Page 3 of the press release highlights I think it was $41.9 million.

Got you. All right. And then finally there's another Oklahoma Bank a lot smaller than you guys. But in their conference call last night they mentioned how ESG was really driving a lot of the capital providers for the energy sector away, and that they were seeing better terms. They were seeing better rates. It was actually a great time to get involved more actively in energy lending. Are you all seeing that dynamic with ESG pushing some people away and maybe now is a great time to get more involved in the energy business and potentially grow that portfolio for you guys?

Yes, this is Stacy. I believe our performance over the last two cycles in the past six years has set us apart. We have seen this in action, particularly with 19 new customer deals in the first quarter. In 2021, we ranked third in the energy deal tables, with the deals we led averaging under $750 million. Companies like BofA, JPMorgan, Wells Fargo, and BOK Financial were involved. In the first quarter, we moved up to second place in the energy space deal tables. There are clear opportunities here. Many have substantial cash flow and might not require debt for drilling, which contributes to our new deal activity. We are experiencing growth and strong opportunities, which reflect our consistent presence in this market. We have stayed committed to this sector through ups and downs, rather than withdrawing based on external conditions.

All right. Stacy, regarding my earlier question, you mentioned that the trading loss was $41.9 million, which is noted on the first page. It appears that brokerage and trading revenue has decreased from $41.9 million. Are we referring to the same matter?

A little bit different. He did quote the $41.9 million decrease in brokerage and trading. Part of that has other items in it like the investment banking revenue mentioned earlier. The real loss or the loss we took on those particular bonds was a little less than $40 million.

And again I think to Steven's point that is on specific securities that we identified at those levels. So when you look at the aggregate of the activity that is clearly less than that when we look at the total for the quarter.

Yes. We really kind of isolating the bonds.

Okay. Got it. Thanks for the color, guys.

Our next question is from Gary Tenner with D.A. Davidson. Please proceed with your question.

Thanks. Good morning, everybody. Just wanted to ask another follow-up on energy. Two straight quarters of growth in that book of business. There's been talk as to whether or not kind of the spike up in commodity prices with the situation in Ukraine would drive any increased activity here. Are you actually seeing increased activity, or is the kind of two quarters or this quarter's growth not demonstrably driven by that growth in the fourth quarter as well?

I believe it's due to a mix of new drilling activities and expectations for capital returns. Given the high prices, several stakeholders in these companies are looking to recoup some of their investments. As time goes on and they need to drill to sustain their collateral and reserves, we anticipate an uptick in activity throughout the year. We expect this will contribute to the growth of our portfolio, provided prices and demand remain stable.

Keep in mind rig counts nationally are below where they were pre-pandemic still even at these prices. So now production levels are more closer to that pre-pandemic level, but actual rig counts are below that. So we think that particularly if they can hedge into this two or three years forward and prices that are $75 or higher. I mean frankly gas prices are extremely high right now, natural gas prices. So if they can hedge forward at these levels, I think you'll see more drilling activity in the latter half of the year. But a lot of our growth has been new customer acquisition and deal flow from that. But drilling activity is to come and that's part of the upside I think.

Thank you. I have a follow-up question for Steven regarding the rates, sensitivity, and deposit beta outlook. Considering the expected pace of this tightening cycle and what we anticipate in the second and third quarters, do you believe that the cumulative beta will adjust quickly before the year ends, with only a slight increase in funding costs in 2023? Or do you think you will be able to keep those betas low on the front end?

Well, I think for the first 100 basis points clearly we can hold them down. I do think they accelerate some on the second 100 basis point increase. I think you average that together it's about 30. But the second piece of that is I think there's kind of an inflection point a bit at 100 basis points up where you'll see more activity. And you'll see us have to price up a bit more. But overall, I feel like we can hold for this 200 basis point move that we expect around that 30 mark for the average beta across the whole different product set.

Thank you.

The other piece of that that we haven't spent a lot of time talking about is on our money management area there will be some benefit from rising rates on the fee side because we've been waiving fees about Scott $5 million a quarter? And, yes, waiving or not receiving. So that will be to our benefit once we've moved up about 50 basis points. And so that's a benefit as we move forward to probably you'll see fully reflected in the third quarter but some benefit in the second quarter too.

And then that also has just an aggregate benefit on total AUMA, given that cash accounts for 14% at quarter end of our total asset allocation dollars of our $101 billion in AUM.

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

Thanks. Good morning, guys. I want to circle back to the trading securities portfolio that's on the balance sheet. I think it was around 20% of running assets in the first quarter. I guess the end of period closed to $5 billion suggests, it's closer to about 12% of earning assets by late 1Q. Just trying to appreciate Steven now on the NII guidance, what you're assuming for that trading securities portfolio?

It's at a similar level here than what it ended the quarter. I don't think we have it rising up. It's back to these guys' discussion around the inventory and the opportunity that I think we hold it relatively close to where we ended the quarter.

As we looked at our modeling going forward for the rest of the year, it could be better. But that's kind of what we used. And I guess a follow-up to that. On the guidance for the year Steven, what does it assume for the overall average earning assets for the year?

Well, I haven't – I don't have that in front of me. But if you look at the loan growth guidance that we gave, which is the upper single-digits you hold AFS flat. You hold the trading securities pretty flat. And then you take a look at the funding side, which is the mix doesn't change that much, although we do model in a slight decline in deposits before the end of the year. That's the inputs into the model that generates the NII guidance that I gave.

Okay. Okay. I guess going back to the trading inventory, help me think about how that's been funded on the liability side the last two years. And I guess with the expected average balance contraction of the trading inventory, what does that mean on the other side of the balance sheet?

Well it's the combination of all of our funding sources. I mean we don't isolate one to the other necessarily. We've been so flushed with liquidity that you don't have to isolate and say this one part of the balance sheet is funded by X. That's the way I think about it anyway.

Okay. And just lastly, I think Nell you mentioned there were still some open trading positions back in March when you disclosed the 8-K. Are there still any open positions that could generate incremental losses from here?

There is always that possibility. We still have some of the securities we were dealing with in the first quarter, and we have an inventory of those. However, as Scott mentioned, we have sold over 70% of that basket of securities, and in fact, we have sold even more since then. So there are some securities that might present that opportunity, but we don’t expect that to happen.

Given the reduction in inventory and the mark that we took, any future change would likely not be material as we move forward. I mean certainly nothing in the neighborhood of the magnitude that you saw in the first quarter.

Okay. Thanks, guys.

Thank you.

Our next question is from Taylor Brodarick with Hovde Group. Please proceed with your question.

Thanks. Just a couple of high-level ones for me. On fiduciary and asset management just down 1%, but obviously equity markets softer. I didn't know if there was any other color about customer acquisitions or just increased assets per customer flow again that maybe soften that decline this quarter.

In the first quarter, we experienced a net reduction in our AUMA due to market value changes and a decline in overall performance. However, we observed strong sales activity across all areas. We are confident in our fiduciary assets, safekeeping assets, and brokerage assets under administration. Additionally, we have strong pipelines and positive results from new asset acquisitions. This situation reflects the overall market adjustments leading to the decline.

Great. You may have mentioned this earlier, but regarding the buyback, has anything changed considering the current share price? Capital remains in a strong position, or is there more of a tendency to reserve it for other inorganic opportunities?

No. I think you can expect us to be active in the market at our current price level compared to what we acquired in the previous couple of quarters. The amount we plan to use for buybacks will likely be consistent with the average we've seen over the past year, aligning with our strategy for capital allocation towards buybacks. Therefore, you should anticipate our presence in the market.

Great. Thank you very much.

Sure.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Steven Nell for closing comments.

Okay. Well, thanks again everyone for joining us today. If you have further questions, call me. I'm at 918-595-3030 or you can e-mail at [email protected]. Thanks again. Have a great day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.