Yahoo Finance

Scott Grauer

Thank you, Stacy. Turning to our operating results for the quarter on slides 9 and 10. Total fee income decreased $22.8 million on a linked-quarter basis, contributing $184.1 million to revenue. As Stacy mentioned, market volatility resulting from uncertainty surrounding US domestic and foreign policy affected our trading business this quarter, but this business is designed to produce solid long-term results.
To give you a sense of the composition of our trading portfolio, more than 97% is residential mortgage-backed securities issued by US government agencies. Even in more challenging environments, the credit quality of this portfolio is high and comes with limited basis risk. This quarter, you started to see the transition from fee income to the trading-related net interest income that we discussed in our last call.
During the quarter, total trading revenue was $23.3 million, which was down from $37.7 million in the prior quarter, $10.6 million of fee revenue shifted from fees to net interest income as the yield curve steepened. The remainder of the decline in trading revenue reflects lower MBS trading volumes and tightened spreads as client demand was muted towards the end of the first quarter.
We also experienced seasonally weaker pipelines in our municipal desk. We've provided a table on slide 9 to allow you to see this dynamic. Mortgage banking revenue grew $1.7 million linked quarter, coming in at $19.8 million, driven by higher mortgage production as client demand begins to increase and inventory constraints eased slightly.
Turning to slide 10. Our asset management and transactions businesses were very consistent with the prior quarter, contributing $133.2 million in revenue. Importantly, there is diversification within this portfolio with 43% fixed income, 34% equities, 15% cash and the remainder in alternatives. AUMA decreased $659 million linked quarter, reflecting the volatile market conditions during Q1.
And now I'll hand the call over to Marty to cover the financials.

Martin Grunst

Thank you, Scott. Turning to slide 12. Net interest income was up $3.2 million and headline net interest margin expanded 3 basis points, reflecting growth in trading-related net interest income. Core net interest margin, excluding trading, decreased 4 basis points and was driven by several factors. The securities and fixed rate loan portfolios continue to reinvest cash flows at higher current market yields.
The upward repricing in the securities portfolio was dampened this quarter from lower accretion of purchase discount. Non-interest-bearing DDA balances declined slightly coming off seasonal highs of Q4. While these balances were sequentially lower, both the average balance and the trends within the quarter were aligned with our expectations.
Loan fees declined during the quarter after being elevated for the prior two quarters, which negatively impacted effective loan yields. Loan fees are now in line with our typical historical and seasonal patterns. Loan spreads were pressured due to a mix shift within the loan portfolio with higher spread energy loans being replaced with narrower spread core C&I loan. And of course, the lower day count impacted Q1 versus Q4.
Each of these factors vary in terms of their predictability and stability of trends. Fixed rate asset repricing has clear drivers and an established supportive trend. DDA mix shift seems to have largely run its course and normal seasonality and customer usage variability have been more visible lately. Over time, we have demonstrated the ability to generate very good loan growth in our specialty lines of business, and we believe that represents future loan yield opportunity.
Turning to slide 13. Total expenses were consistent with the prior quarter. Personnel expenses grew $3.5 million, largely driven by annual merit increases in the first quarter. Seasonally higher employee benefits costs driven by payroll taxes were offset by lower incentive compensation costs resulting from reduced trading activity. Non-personnel expense decreased $3.6 million, led by a reduction in mortgage banking costs.
Slide 14 provides an update on our outlook for full year 2025. Loan balance projections reflect continued fund up activity on construction loans in the CRE portfolio, continued growth in core C&I and the successful launch of our mortgage finance business later in the year. We recognize the economic policy uncertainty adds some risk to this guidance.
Our net interest income expectations remain unchanged. This assumes 225 basis points rate cuts with a small amount of upside should additional cuts materialize. I will note that trading-related net interest income will be impacted by rate levels and curve steepness, which would largely be offset by trading-related fee income. We widened the range of our guidance for fees and commissions given the impact of economic and market uncertainty on activity within our fixed income trade business.
Lastly, on credit. Non-performing assets are remarkably low and portfolio credit quality is very strong, all of which supports our expectation that charge-offs will remain well controlled for the foreseeable future. With that, I would like to hand the call back to the operator for Q&A, which will be followed by closing remarks from Stacy.

Question and Answer Session

Operator

(Operator Instructions)
Jared Shaw, Barclays.

Jared Shaw

Hi, thanks a lot. Good afternoon.

Stacy Kymes

Hi, Jared. Welcome.

Jared Shaw

Thanks. Good to be back on the call. Maybe just first, looking at the dynamic with trading income and the trading fees versus the NII. When you look at total trading revenues still down, is all of that $14 million roughly due to the lower volume, as you said? And at some point, I guess, what's a normalized level would you say for total trading revenue? Is it closer to what we have this quarter? Or should we expect to see that start to trend higher?

Stacy Kymes

Yes, Jared. So the short answer to your first question is, yes. That was just all volume driven. There's nothing else within there. And yes, we do expect to see trends come back about -- it's certainly market dependent, but our view is that, that trend is back up here over the second quarter in the trading business. As a matter of fact, the first few weeks of the quarter, we've seen some rebound activity there. So that gives us confidence about how that trends going forward.

Scott Grauer

And so, Jared, this is Scott. So I would add that so as Stacy mentioned early in the call, we, actually, on our trading activities, specifically in the mortgage-backed securities, we started the year very solid out of the gate. Our January was in line and actually growing versus our previous results in 2024.
And then as the economic and trade uncertainties, I'll call them, were introduced into the market in both February and kind of climaxed in March, that activity suffered significantly as you look forward into April. We believe that where we started the year and where we expected that activity to be absent that significant uncertainty is reasonable.

Jared Shaw

Okay. All right. That's good color. And looking at the pressure on balances in energy and healthcare, is that dynamic continuing through -- should we assume that, that's just sort of a -- in this current environment, that's going to be a consistent pressure? And going back to like the loan yields, that we should think that incremental loan yields are under pressure from here?

Stacy Kymes

Yes. I don't think so. I think the calling the absolute bottom on the energy loans is difficult, but I think we feel pretty confident that if we're not there, we're close to there. I don't think that's going to be a headwind for us to the extent it has been in the last two quarters going forward. Actually, if you look -- it's always dangerous to talk about April results, but we're up in all categories really in April across the Board.
So early trends there are very positive with respect to both healthcare and energy. I don't think you're going to see the headwind there in the next three quarters like you saw in the last two quarters. But understand, it's a difficult one for us to forecast with great accuracy as well, just given the market dynamics and what the shape of the curve is at any point in time and particularly in the M&A space, acquisitions, mergers and acquisitions have played a significant role there. We do see that falling down a bit, which is part of the optimism about the lack of headwind going forward.

Jared Shaw

Okay. Alright. Great. And then just finally for me, when we look at the provision guide with sort of the dynamic of the loan growth guide. Should we assume that you're going to be growing the ACL as a ratio over the course of the year? And I guess, what are some of the dynamics you're using in terms of qualitative overlay and potentially a more risk or a more adverse scenario?

Stacy Kymes

Yes. So Jared, so we would not expect to need to grow the coverage ratio over the course of the year. If you look at how we closed out the first quarter, the increase that we saw in credit quality on our portfolio combined with where the actual balance levels came.
So when we ran our reserve calc, it actually suggested that we could do a reserve release. However, when we looked at current circumstances, that just didn't make any sense to us. So we obviously provided at 0. But that just gives you a sense for the fact that there is some judgmental addition in there on top of what it would normally be.

Jared Shaw

Great. Thank you.

Operator

Jon Arfstrom, RBC Capital Markets.

Jon Arfstrom

Guys, good afternoon.

Stacy Kymes

Hello, Jon.

Jon Arfstrom

Just I wanted to ask a little bit about the loan growth outlook. But can you give us an update as to what you're hearing on pipelines in general? And then, Stacy, maybe give us an update on the expected size of the mortgage finance business, maybe by the end of the year?

Scott Grauer

Yes. So pipelines are good. We actually track our pipeline to salesforce. Marty and I review those every month. And those are very strong. I think that the color that's hard to weave in, that is how will borrower uncertainty play out. Will the deal that they've agreed to, will they go ahead and close that in the face of a less certain economic environment.
I think that's the piece that's hard for us to put our finger on exactly. And so I think when Marty alluded to the loan growth guidance, acknowledge that there's some uncertainty around that. But based on what we know today, that we still feel confident in that.
So I'm not worried about the pipeline. I feel really good about where we're at there and how we're building those and how we're growing those. The piece that's the wildcard that we can't really discern well is how will the borrower response be? Will they advance on the line of credit? Will they go ahead with the new piece of equipment or the -- whatever is driving the capital need, I think that's a harder one for us to deal with, with great certainty today because as we've learned what are the conditions today, they could be very different tomorrow.
And so we're very hesitant to kind of extrapolate kind of what happens in late first quarter, early second quarter and say, well, that's going to be the conditions for the rest of the year. It's likely to change in some way, shape or form, and so we felt more comfortable kind of sticking with what we knew, which was the pipeline that we have.
On the mortgage warehouse side, I'm not ready to give volume estimates there yet when we haven't even made our first loan. But it did give us confidence to reaffirm the kind of point-to-point loan guidance we provided in our forward-looking guidance. And so we still feel very good about that and frankly are excited about the team that we've put on Board as well as their ability to attract business.
Like we said, this is -- this fits so well with the rest of our businesses with -- we have the core mortgage business. We've got the mortgage hedging, the pipeline hedging. We've got the structured finance business. And now we're going to have the warehouse business here as well.
And so really, integrates well into the 500-plus mortgage finance companies that are already our customers today. And so that's not going to just be about loans. It's also going to be about deposits as well. So we're probably more excited about that than we were even 90 days ago. So it just helps us feel more confident in believing that we'll achieve our point-to-point on guidance that we provided.

Stacy Kymes

And Jon, just to be clear, we've got leadership in place. We've got operations folks, credit folks and producers all in place today. So we have everything we need to begin.

Jon Arfstrom

Okay. Good. That's helpful. And then just, Scott, one follow-up for you. The trading NII line, is that unusual? I mean, it looks like it's a big jump, but at the same time, you guys are flagging maybe a steeper curve as a driver.

Scott Grauer

Yes. So that is why that mix shift as we -- the curves returned to steepness and an actual yield curve last year while we talked about that in the fourth quarter, in particular, as we do have steepness to the curve, that is a more traditional mix of the revenues as opposed to the flat or inverted curve we experienced for 24 months, 26 months. So we don't expect that to be a onetime occurrence. We think that mix between fees and NII are more reflective of that business in a normal shaped curve.

Martin Grunst

And Jon, it's Marty. I would add on the bottom of page 9 on the slides, it's -- to understand the trends in the business, it's better to look at that total trading revenue line at the very bottom, and that gives you a much more muted level of change there. And that's really the insightful way to think about the trends in that business unit.

Scott Grauer

And recognizing that our trading business is largely MBS in that category and then municipals. So there is no equities, increased volume due to chaotic markets offset to that. So ours is going to reflect that curve and the MBS activity overall most predominantly.

Jon Arfstrom

Yes. Okay. Yes, I was just curious if we get a couple of cuts and we have a steeper curve if, in aggregate, those numbers can move higher.

Stacy Kymes

It can. Yes, you can see that shift go even further if what you just described laid out. But the total revenue of the business would remain unaffected.

Scott Grauer

And historically, when we have that steeper curve, more traditional curve prior to the flattening and inversion, that was the composition of our business, and it was more predominantly NII than fees than where it is at the end of this quarter.

Jon Arfstrom

Okay. Very helpful. Thanks, guys.

Operator

Peter Winter, D.A. Davidson.

Peter Winter

Thanks. Good afternoon. I just had two questions. Just digging a little bit deeper into the outlook. First, you didn't lower the expense forecast given somewhat of a weaker fee income outlook. But can you talk about your flexibility to manage expenses if revenues come in weaker?

Stacy Kymes

Yes. So we've got a little bit of flexibility in kind of a couple of different areas. So number one, as you know, Peter, you've got a couple of lines where the compensation is heavily variable. And so both in the trading and investment banking and mortgage areas, that will just naturally ebb and flow with the revenue streams.
And then number two, we're always looking for efficiencies throughout our business. That's just a constant look for us. And so that's something that we can find more things from time to time. And then third, most of our expense growth is really about strategic initiatives and investments in our future, whether that's technology, et cetera. And by and large, those are decisions that we make thinking through a long-term lens, and we're convicted about doing and we'll largely make those on their merits.
If the world changes and IRRs for those investments change as a result, that's something you might delay just based on the economics of it and something might be worth doing later. But largely, those are made through the lens of the decision that have a long-term returns of that investment. So that kind of gives you a sense for how we think about the expense base.
Yes. Let me clarify, Peter. I think really two things. One, obviously, on the trading revenue side, there's a lot of variability with that expense to the extent that the revenue is there, the expenses will be there. And to the extent that it's not in that associated expense will decline.
But I think I would be careful to characterize softness in fee revenue, I think softness in trading revenues. But if you look at mortgage banking, up year-over-year 4.5%, hedging fees up 33% year-over-year, brokerage fees up 6% year-over-year, fiduciary and asset management fees up 10% year-over-year, transaction card up over 6% year-over-year.
So the core fee businesses are humming. You're really talking about one category, trading fees that were soft this quarter, and they were soft because of a really difficult macro environment. And from my perspective in trading, the risk were very asymmetric this quarter.
I'm really proud of the team and how we worked through that in the manner that we did with spreads moving wider and then contracting and moving in ways that aren't historical norms with treasuries. Our risk management team did a fantastic job keeping that portfolio well hedged and managing through that in a very positive way.
And so the trading revenue was clearly volatile and underperformed. There's no doubt about that. But the rest of the fee businesses are really performing well and very proud of that and don't want that to get lost in the noise of the trading revenue.

Peter Winter

No, I appreciate that color. Just can you talk maybe about the outlook for deposit growth? And can you talk about maybe further opportunities to lower the cost, deposit costs and funding costs if the Fed doesn't cut rates? And how you think the deposit beta trends from here?

Stacy Kymes

Yes. So Peter, we're really proud of the activity that we did during the quarter on deposit pricing. So we had a 75% deposit beta for Q1, which is a great result. And kudos to our teams for managing that well. I think when you look at -- it's price smarter to look at the cumulative interest-bearing liability beta, that cumulatives are generally more insightful and our cumulative interest-bearing beta is 74, which is right on top of our cycle cumulative up beta, just almost within a percentage point. So we're very happy about that.
And we do think that given the strong loan-to-deposit ratio we have, it's really one of the strongest out there, that gives us the ability to continue to work on deposit pricing over time. In fact, we did some of that at the end of the first quarter and some benefit rolling into Q2 as a result, and we'll continue to work on that throughout the course of the year. So yes, you can do some of that without Fed moves. We'll just look at the competitive environment, but certainly makes it easier if you do get some Fed moves.

Peter Winter

And just could you just mention how you're doing -- the outlook on deposit growth?

Martin Grunst

Yes. So we do expect deposits to grow throughout the rest of the year. But given the loan-to-deposit ratio that we have, if we were to turn the dial some on deposit pricing and we saw a different trend line there, that would ultimately be fine for us because of how luxurious that level of loan-to-deposit ratio is. And at the end of the day, doing so would be something that would be net interest income accretive.

Peter Winter

Got it. Thanks, Marty.

Operator

Michael Rose, Raymond James.

Michael Rose

Hey, good afternoon. Thanks for taking my questions. Just wanted to start going back to the energy portfolio. Can you just help us better appreciate what's going on with energy prices now and if they were to continue to fall versus what happened during the energy downturn from late '14 through '17?
I know the percentage is lower. Energy companies are generally operating within cash flows, which is a big difference now versus then. But wouldn't there be some further delevering if energy prices remained under pressure if we did move closer to a recession? Just trying to better appreciate what those balances could look like over time, understanding that it is a bigger proportion for you versus many others. Thanks.

Stacy Kymes

Yes. Good question. A lot of differences between 2014 and today. I think the biggest one is leverage. I mean, leverage in the core portfolio was probably in excess of 3 times, somewhere between 3 times and 3.5 times. In 2014, today, the leverage in our energy production portfolio is less than 1 time.
A part of the problem we have getting outstanding is we've had great commitment growth. The team has done a great job there. The borrowers are just not using the leverage today. And so that singularly is the biggest difference. The other one is hedging as a risk management tool is very different today. And so in 2014, borrowers were largely under-hedged, and that's not an issue today at all.
So I don't know that lower commodity prices for the short term here are going to have a lot of headwind on energy loans. We do a lot of stress testing. We've stressed all the way down to $44, which is really the stress point today. Don't see a lot of loss there. And really, that's because of the extensive amount of hedging and the very low leverage. So our average leverage is less than 1 time on energy production and less than 1.5 times on midstream. And so those are very low levels of leverage from where we are today.

Michael Rose

Very helpful, Stacy. I appreciate it. And maybe one for Marty. I understand that you have to -- cuts baked into your forecast. I don't think it's the biggest driver, but can you just give us a sense for -- if we did assume the forward curve, which I think is around 4 cuts or what the impact on NII could be if we did get no cuts? Thanks.

Martin Grunst

Yes. So either way, it would not make much of a difference and certainly not enough to make us think about changing guidance. So basically, an additional cut or 2, it would be a little bit helpful in the later part of the year, but nothing material. And by the same token, if we don't get those rate cuts, that would be virtually no impact to revenue. Now you'd see a little bit of a different shift between trading fees and trading NII, but total revenue would be basically unchanged.

Michael Rose

Got it. Thanks for taking my questions.

Operator

Woody Lay, KBW.

Woody Lay

Hey, thanks for taking my question. I wanted to start with the loan growth guide and just a follow-up there. So was the addition of the mortgage finance vertical? Was that embedded in the one growth guidance the last quarter? Or is adding that vertical sort of helping bridge the gap after the loan shrink is this quarter?

Stacy Kymes

Woody, we did not have that in the guide that we had prior quarter. We just weren't far enough along to feel like we wanted to put it in. So we did put it in this quarter, just given that we've got all the groundwork laid. We feel very confident about where we are. So we felt good about putting that in.

Woody Lay

Got it. And then I know you're not ready to sort of guys [who wear] balances -- by the end of the year. But I mean longer term, how do you sort of think about the concentration of mortgage warehouse in the one portfolio?

Stacy Kymes

Yes. I mean we're not concerned with letting it grow. I mean we're going to walk before we run here. But we understand this portfolio can grow. And frankly, for us, it provides a diversification benefit across the broader portfolio.
The risk in mortgage finance is less credit risk and more about operating risk. We like that aspect of it, and we like the full relationship that we're going to have both on the depository side and on the hedging side and structured finance side.
So for us, it kind of completes the vertical in many respects for us, and it has really limited credit risk and then provide strong diversification benefit for the rest of the loan portfolio. So we expect to see it grow and be a meaningful number when we're sitting here, say, the end of '26, I expect it to be a meaningful number for BOKF.

Woody Lay

Okay. Got it. And then last for me. Capital remains strong and the stock price has seen a pullback here just alongside the broader market. How do you weigh buybacks in the current take given all the uncertainty on the macro side?

Stacy Kymes

Yes. So as you know, we do have a very strong capital position and are sitting on some excess capital. And as we look at the alternatives available to us, we do expect to be active share repurchasers in the second quarter.

Woody Lay

Alright. Thanks for taking my question.

Stacy Kymes

Thank you.

Operator

Matt Olney, Stephens.

Matt Olney

Hey, thanks, guys. Just a few cleanups here. Stacy, you mentioned that energy customers already have lots of hedging on future production. In the past, we've seen increased activity, which is volatility of the commodity prices. But it sounds like maybe we should not anticipate this given the existing customers already are fully hedged.

Stacy Kymes

Yes. The customers are well hedged. And because leverage is low, hedge coverage may not be at the same level as it was, say, even a year ago. But that hedge coverage is like an accordion, it grows as the leverage grows. And so with leverage less than 1 time, you're going to have -- I think, like 55% of our borrowers are hedged out for the next 12 months or so. And that may seem a little bit low because the leverage is so low. We're not acquiring the hedging when their leverage is that low, but that would grow to the extent that their leverage profile changed as well.

Matt Olney

I guess, asked a different way, Stacy, with lower commodity prices more recently, that may not represent a catalyst to see increased hedging activity for you, guys?

Stacy Kymes

Yes, that's a fair price. There's -- we had a really strong hedging activity in the first quarter, hedging quarter in the first quarter. Those guys will -- are opportunistic and will depend about -- of hedging when they see the opportunities. Obviously, oil is under pressure. And so this may not be the quarter that people want to hedge more oil.
But there's other ways they can do that with -- and still have a floor -- put a floor in without necessarily having a top end. So it can change. But you're right, at a $60 oil, not -- there's going to be less hedging activity in all likelihood during the second quarter.

Matt Olney

Okay. Perfect. And then, Marty, maybe another question on the trading interest revenue. I'd ask it a little bit differently. I think you disclosed in the press release that the trading activity spread was around 98 bps in the first quarter. Does the full year guidance assume that we just maintain these levels around 98 bps or with the May and September cut, could we see that spot actually improve?

Martin Grunst

Yes. So we do -- within the guidance, we expect that the spread improved some as you get those rate cuts later in the year. That's the right way to think about it.

Matt Olney

Okay. Great. Thank you.

Operator

That concludes our question-and-answer session. I will now hand it over to Stacy for closing remarks. Stacy?

Stacy Kymes

Thank you, everyone, for joining our discussion today. Our results this quarter are a testament to the strength and adaptability of our organization and our ability to operate successfully in any market cycle. Our exacting focus on our risk management framework and diverse business model work together and are core to our success. Credit quality remains excellent. We've got a strong loan pipeline and growing relationships.
Net interest income is expanding and our fee income businesses continue to work as designed. We appreciate your interest in BOK Financial and your willingness to spend time with us this afternoon. Please reach out to Heather King if you have any questions at h.king@bokf.com.

Operator

That concludes our conference call. You may now disconnect.