Joe Crivelli - IR Steve Bradshaw - CEO Steven Nell - CFO Stacy Kymes - EVP, Corporate Banking Marc Maun - Chief Credit Officer Pat Piper - EVP, Consumer Banking.

Brady Gailey - KBW Brett Rabatin - Piper Jaffray Jared Shaw - Wells Fargo John Moran - Macquarie Michael Rose - Raymond James.

Good morning everyone, and thank you for joining us to discuss BOK Financial Corporation's Third Quarter 2016 Financial Results. Today we will hear remarks about the financial results and outlook from Steve Bradshaw, our CEO; Steven Nell, CFO; and Stacy Kymes, EVP, Corporate Banking.

Marc Maun, Chief Credit Officer; and Pat Piper, EVP, Consumer Banking, will join us for the Q&A. In addition, PDFs of the slide presentation and press release that accompany this call are available on our Web site at www.bokf.com.

Before we begin, I'd like to remind everyone that during this 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, anticipates, expects, 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 October 26, 2016, and assumes no obligation to publicly update or revise any of the forward-looking information in this announcement. I'll now turn the call over to Steve Bradshaw..

Thanks, Joe. Good morning everyone. Thanks for joining us. Earlier this morning we announced earnings for the third quarter of 2016. We earned $74.3 million or $1.13 per diluted share that was up from $65.8 million and $1.00 per share in the second quarter. Net interest income continued to accelerate and net interest margins were up.

We set another new record for quarterly fee income, and the energy credit outlook continued to stabilize leading to lower provision expense.

Operating expenses were higher than expected for the reasons outlined on slide four, a $5 million unplanned legal settlement, higher amortization on mortgage servicing rights given the strong refi market in the third quarter, higher FDIC expense, including the surcharge on banks greater than $10 billion in assets, and $1.2 million of Mobank-related expenses.

These were offset in part by a lower tax rate which is typical for our third quarter. Regarding expenses, as noted in our press release, we took action earlier this week to eliminate approximately $20 million of annual cost.

This was accomplished in part by not backfilling open positions, and in part by eliminating contract labor, but also through the reduction of our workforce of approximately 100 employees. This includes closing four underperforming branches.

This is in addition to the announcement you may recall during the summer when we made the strategic decision to exit the correspondent mortgage business.

That decision resulted in a reduction of 45 full-time employees, and allows management to focus on retail and HomeDirect where we have the opportunity to grow the relationship with the mortgage borrower.

Given declining margins in the mortgage correspondent business, the impact of mortgage banking revenues and earnings going forward should not be noticeable to investors. It's never easy to let employees go, but this was a necessary decision to position the company to drive earnings leverage and earnings growth in 2017.

Our goal for the company is to grow revenue at double the rate of expense growth to generate meaningful operating leverage, and this realignment of our expense base positions us well to deliver on this goal in 2017.

As Stacy Kymes will discuss in some detail, the ongoing stability in commodity prices continues to have a positive impact on credit quality in our energy portfolio.

Whereas we were continuing with ongoing negative migration in the energy book over the past 18 months, that trend has now reversed and we are seeing meaningful positive migration from criticized [ph] to pass, as our energy borrowers continue to pay down debt, reduce expenses and raise additional equity.

We expect lower credit costs in 2017, which should also contribute to earnings leverage. Steven Nell will provide more details in a moment. I continue to be proud of the team and believe that the third quarter results represent the quality of our organization, and the benefit of our very diversified business model.

As noted on the slide, while we did not buy back shares in the third quarter, we have announced our 11th consecutive dividend increase to $0.44 per share. As shown on slide five, loan growth was 0.4% for the quarter or 1.4% annualized. This is a bit lower than recent quarters and was due to a single large pay-down in the energy portfolio.

Stacy will provide details in his remarks on that. We continue to believe we are well-positioned to deliver mid single-digit loan growth at least through 2017.

Fiduciary assets were up 3.3% during the quarter, and 9% year-over-year as our wealth management team continues to bring in new customer relationships and expand existing customer relationships.

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

Steven?.

Continued mid single-digit loan growth, stable-to-increasing net interest margin and net interest income. We expect loan provision of 20 to $30 million for the year. On a rolling 12-month basis, we continue to expect mid single digit revenue growth in fees and commissions.

We expect continued capital deployment through organic growth, acquisitions, dividends, and stock buybacks. And we expect 4 to $0.6[ph] contribution to EPS for MoBank, note this is a little bit higher than our original $0.3 contribution we expected in year one when we announced the transaction as MoBank is outperforming our forecast.

Stacy Kymes will now review the loan portfolio in more detail. I turn the call over to you, Stacy..

Thanks, Steven. Slide 13 shows our loan portfolio on a market by market basis. Loan growth was a modest 0.4% on a sequential basis, 1.4% annualized. As noted in the press release and in Steve's remark, a single large pay down in the Oklahoma energy book had a negative impact on loan growth.

You may remember that a borrower advance had a positive impact on our loan growth in the fourth quarter of 2015. This borrower repaid this advances substantially in the third quarter, in excess of 200 million of outstanding.

Excluding this pay down, overall loan growth would have been over 1.5% for the quarter in line with our mid single digit annualized loan growth target. On a geographic basis, Arizona continues its recent strong performance with Texas and Arkansas also contributing strong loan growth in the third quarter.

On a year-over-year basis, seven of the eight geographic regions are contributing to growth. As indicated on slide 14 of the presentation, commercial loans were down 2.3% to 10.1 billion. Excluding the large pay downs just mentioned, balances would have been essentially flat.

We don't read too much into the lower commercial loan growth in the third quarter. It seems to be a combination of seasonal summer issues as well as a pre-election pause. Top line remained firm across the commercial business. And we continue to forecast mid single digit loan growth as Steven just noted.

Slide 15 shows our energy portfolio as of September 30. The trends remain very good, and assuming recent price ranges for oil and natural gas hold, we expect these trends to continue. At quarter end, our energy portfolio was 2.5 billion. E&P line utilization was 54%, down from 60% in the second quarter.

We remain comfortable with our loan loss reserve which represents 3.67% of energy outstandings. Energy charge-offs were $6.3 million in the third quarter, down from 7.1 million last quarter. This loan charge-off was due a single borrower has been in our workout group since last December.

Last quarter, we mentioned we were starting to see positive migration in the energy portfolio and this trend continued in the third quarter. There were meaningful decreases in both absolute dollars terms and on a percentage basis in special mention, potential problem and non-accrual energy loans.

Total criticized energy loans were 25.8% of the portfolio at quarter end, down from 27.9% at June 30. Despite the decrease in total energy outstandings, we continue to book new energy commitment. During the third quarter, new commitments totaled $200 million.

Turning to slide 16, the commercial real estate book grew 5.9% in the third quarter and is up 17.3% year-over-year. We are proceeding cautiously in commercial real estate as we are right around our internal concentration limit for this asset class.

But there should be a lag for this impact loan growth as several deals close over the past 18 months are entering the draw down phase. CRE growth should start to slow in the second half of 2017. Turning to slide 17, the broader credit environment continues to be relatively benign.

In the top left section of this slide, you'll see non-accrual loans for the last five quarter. The migration of the energy portfolio to non-accrual has reversed course. And as noted earlier, non-accrual energy loans are down 15% this quarter. The uptick in non-energy non-accurals was due to a single borrows in the marine transportation portfolio.

A combined allowance for credit losses to period end loans increased to 1.56% this quarter, and remains one of the highest in our peer group based on what we've seen in the earnings season thus far.

Net annualized charge offs to average loans were 15 basis points this quarter, down from 18 basis points the last quarter, and well below our historic norm of 35 to 50 basis points. I'll now turn it back to Steve Bradshaw for closing remarks.

Steve?.

Thanks Stacy. I'm proud how the entire BOKF team continues to execute well in a tough environment. Over the past several quarters we've navigated through a challenging commodity cycle and historically low interest rates while making continued investments in systems and technology, driving revenue growth, and positioning the company for the future.

There's also been some noise in the expense numbers in 2016, which has not only impacted profitability but our efficiency ratio and return on capital as well. This has included legal expenses, costs associated with the Mobank acquisition, an increase in mortgage banking costs associated with foreclosure, and loss mitigation, and higher FDIC expense.

We believe we have made the appropriate decisions to align future expense growth with revenue growth in a way that will produce meaningful operating leverage going forward. Obviously this is barring any unforeseen downturn in commodity prices or interest rates.

Regarding Mobank, as Steven mentioned, we are in the final stages of regulatory approval for the acquisition. We've received OCC approval last week, and expect to receive to Federal Reserve's decision shortly. This would put us on track to close the transaction in the fourth quarter.

We believe Mobank will significantly accelerate our strong momentum in the Kansas City market. As we noted when we announced the transaction, Mobank's expertise in consumer and business banking supplements our Bank of Kansas Cities operations expertise in commercial banking, wealth management, and mortgage.

This all-cash transaction deploys the excess capital in a way that immediately enhances earnings per share with no dilution to current shareholders, while enabling BOK Financial to remain extremely well-capitalized and liquid from a balance sheet standpoint. In addition, the acquisition provides significant revenue synergy opportunities as well.

So with that we will take your questions now.

Operator?.

Thank you ladies and gentlemen. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brady Gailey from KBW. Please go ahead..

Hey, good morning guys..

Good morning..

Good morning..

So I was just wondering about the $20 million of cost saves. It sounds like a lot of it was personnel-related, and you're closing four underperforming branches.

Will there be any revenue impact from those cost saves?.

No, the $20 million is just a compilation of all expense saves. It doesn't have any revenue impact..

Yes, and Brady, this is Steve. The branches are all in a situation where we have other branches generally in the area, or we think we can service them without significant attrition. So it will be a minimal impact at most..

Okay. And then you all mentioned commercial real estate and how the back half of next year you'll probably start to see CRE growth slow a little bit just as you kind of hit your targeted thresholds.

How do you guys look at commercial real estate, I mean, is that percentage alone, is that a percentage of risk-based capital, and how high would you let that concentration get?.

Hi, Brady, this is Stacy. We look at it two ways. We look at it as a percent of Tier 1 capital and reserves, as well as looking at it as a percent of the total portfolio.

And so -- and we measure that based on committed not based outstanding, so that's why as we look forward we can kind of see second-half of next year is when that outstandings will actually start to grow as a result of our effort to slowdown a little bit in that space..

Okay, and then lastly for me. I mean, you're about to close Mobank. How are you all thinking about additional M&A, if you're back out there chasing bank M&A what is the perfect target look like for you guys now? Thank you..

Yes, Brady, this is Steve. I think our focus right now will be on integrating Mobank. That's what we'll be working on as we hopefully do that over -- or in the first quarter over President's Weekend [ph], and we'll close the transaction hopefully here by the end of November.

From a M&A focus going forward, I'd say right now we're more focused on organic growth. It doesn't mean that we wouldn't consider opportunities within our footprint, but it's not a big focus for us today..

Thank you. Our next question comes from the line of Brett Rabatin from Piper Jaffray. Please go ahead..

To I guess first just go back to the expense reduction and make sure I'm clear on the $20 million reduction from 2016. I'm assuming that's net of any expense -- net of any spends you'll have to do in the coming year.

Can you give us a little more color on how you're thinking about what you'll need to do next year versus the actions you took this quarter?.

Excuse me. The $20 million is run rate benefit from those actions, and we'll have approximately $4 million to $5 million of severance that we'll need to accrue in the fourth quarter of this year. And then the $20 million will accrue to us as we go through 2017, and beyond..

And that $20 million is related entirely to personnel and contract labor.

We will still continue to look for opportunities to reduce non-personnel expenses, we were kind of through the remainder of this year, but it was apparent to us we would have to make some changes from a personnel standpoint in order to achieve a two-to-one operating leverage going into next year. So that's why we took the action now..

But that's not including anything you might have to spend on any additional technology, things like that.

How do we think about that?.

Well, there'll be normal expense levels in 2017, and we think quarterly expenses will come in somewhere around $260 million mark per quarter, including Mobank next year, as well as the benefit of the $20 million over the course of the year..

Okay. I appreciate the color there. And then the guidance on the provision, $20 million to $30 million for the year, that's only about 15 basis points. Does that mean that you're thinking about the reserve potentially coming down or does that mean you're thinking you're going to match charge offs.

Can you give us any idea on what the provision guidance is predicated on from a credit perspective?.

Yes, Brett, this is Marc Maun. We are looking at that our reserve level is appropriate right now, but as things have stabilized and started to trend positively we would expect that reserve to come down over the next few quarters. But we would be maintaining it based on whatever charge off levels we might have, but it'll be affected by loan growth.

And we'll then assess it each quarter, and make sure that it's appropriate level..

Okay, great. Congrats on getting Mobank into the fold [ph] soon..

Thank you..

Thank you. Our next question comes from the line of Jared Shaw from Wells Fargo. Please go ahead..

Hi, good morning..

Good morning..

Just to put the $20 million to bed, so those -- that headcount reduction is fully reflected as of October 1, and so we'll have that severance charge in fourth quarter but we'll also get the corresponding quarterly benefit of a $20 million run rate in 4Q quarter expenses, is that correct?.

I don't think you'll get the full proportionate share of that $20 million in the fourth quarter. You'll see the severance as I mentioned. But starting in '17 you should get the full benefit each quarter throughout 2017..

Okay.

And then as you look out into 2017 in your expectations for loan growth, what's the backdrop of the economic -- the general economic backdrop that you're looking at, and what do you see as a likely environment for energy pricing and energy growth?.

This is Stacy. I think if you look kind of at the broader macro environment in the footprint space that we have, I think that you see really stable to growing economies, and I think that that is energy prices began to stabilize and then hopefully modestly move up over time.

You'll see some of the markets that may be more impacted like Houston or Oklahoma City or Tulsa begin to show more of modest growth, increasing consistent with the growth and improvement in commodity prices.

Obviously just by the national economy, we don't see some broad expansion of GDP, but I think we're well positioned I think the states that we do business in are among the more robust nationally, and so we, expect to continue to grow consistent with the growth of our core markets.

As we think about energy pricing, obviously, we underwrite to the current strips that we don't try to make a living off prognosticating, but I do think that we feel more comfortable than we have in a very long time that prices should stay stable to increase here both for oil and natural gases as we in '16 and go into '17.

What price range that would be typically, certainly we have a burst to your strip price in the $51-$52 place today. I think being there in a 50-55 range over the course of the next year is certainly something that we feel very comfortable with. Gas has rebounded very sharply over the last six months or so, a very strong improvement there.

We do think that that is sustainable over the course of the next year and natural gas prices should remain pretty close to where they are today when you look at it kind of on a forward 12-month basis..

Yes, thanks, and thanks for all the color around the energy credit, but if you look at the non-energy side it looks like there's a pretty big jump up in potential problem loans.

Is that due to a handful of individual [technical difficulty] are any broader trends we can look at?.

No, we had one in the marine transportation space, but there's no broader kind of look through in our portfolio.

Actually we've all been kind of looking forward to trickle down impact of lower commodity prices to the rest of the portfolio, and it hasn't surfaced anywhere really, particularly been focused in commercial real estate, but other commercial segments as well. The portfolio held up extremely well. We're proud of the energy performance.

We're proud of the energy growth, we had 200 million in new commitments in the third quarter, just a lot of headwind around pay-downs there, but we haven't really seen kind of the overflow into some of the other segments.

And at this point while there may be some lagging sectors like energy services or other things like that, for the most part we feel pretty good about where we're positioned..

Okay, thanks. And then just finally you'd mentioned that you have the split between 30-day and 90-day LIBOR for loans tied to that.

What's more important for your book? Is it 30-day or 90-day LIBOR?.

I think its 30-day LIBOR is tied to more the loans than 90, and I know that three quarters of the loans that are bearable are tied to LIBOR and only one quarter to primary..

Okay, thank you very much..

Thank you. Our next question comes from the line of John Moran from Macquarie. Please go ahead..

Hey, how's it going?.

Good..

Hey, just a quick question on the NIM outlook, I wonder if you could walk us through the puts and takes for sort of stable or increasing next year, and then maybe in context to that I know sort of balance sheet remix has been part of the story this year if you have an outlook on securities book duration and kind of what you guys are thinking there in terms of reinvesting?.

I mean, assuming rates are relatively flat. I think you'll continue to see some re-price slightly downwards of our securities portfolio as you roll-off some higher yields and then put on in slightly lower yields. In terms of the loan pricing, it's actually benefit a little bit. It seems to have stabilized really well.

So, the combination of those two with the continued remix of loans to securities in terms of earning assets you should see stable to slightly improving that interest margin given a flat rate environment..

Okay, thanks. And then I've got two quick ones on mortgage.

One, if you could give us a quick sort of look into what 4Q may be trending, and obviously 2Q-3Q has been really good there? And then the second one it's just on the decision exit correspondent, could you remind me what changed in that business in terms of the economics and why do you expect that that's going to be kind of like permanent feature?.

Well, your first question in terms of mortgage revenue, we do think it will slow some in the fourth quarter. There is seasonality in the fourth quarter relative to the previous quarters, and also as you mentioned the exit of the correspondent business is going to impact revenue somewhere in the $4 million to $5 million range in the fourth quarter.

But if you look at the correspondent business and just breakdown the margins in that business relative to retail and our home-direct internet product, they are just abysmal compared to those other two categories.

To give you an example, we have over 3% margin when you cap the gain on sale and then when that saw for retail and home-direct, it is less than 50 basis points for correspondent business. So we just didn't see an outlook that would indicate that there was any improvement in that business.

The service release premium we have to pay to the correspondent bank is just really high and it drives those margins down to the point. We just felt like we couldn't make a good return on equity long term in that business, so that's the reason we exited..

Got you. So, it's really just relative return you get way more bang for the buck in retail than you would in correspondent versus correspondent completely deteriorating or….

That's exactly right. It's just we'll focus our attention on retail and HomeDirect -- and excuse me, move away from the very low margin of correspondent business..

Got you, got you.

And in the last one I had was just if you could give a quick outlook on fall re-determinations, do you expect that those are going to be down, and can energy -- it sounds like, I mean you put on $200 million of new commitments this quarter, can that actually chip in to growth in Q4 and even beyond?.

Yes. With regards to the fall bar and base re-determination, what we are seeing so far is really most of our customers are re-affirming their barring bases to slight increases. The price tag this time is higher than it's been from the previous re-determination.

So what we really see the impact is the client and the advanced rates in the barring bases, as opposed to actual reductions in the barring bases, and I think we are going to be committed to growth in the energy space and there opportunity for that, just like there was in the third quarter..

The issue really is we are doing a great job, our energy team is doing a fantastic job of identifying new opportunities in growing the business, but the core portfolio continues to be focused on paying down with excess cash flow in de-leveraging.

You saw that in the utilization rate this quarter, where utilization declined, which is a bad thing for outstandings, but a good thing for the bar where it's creating headroom inside of their facilities.

So, the harder thing to predict is how much de-leveraging will continue to occur that will create kind of headwind, if you will, against the new commitment growth that we are able to put on the books, but this is an area that is core to us. We are excited about opportunities we see in the space today and we want to continue to do more of this.

We are not making any effort to consciously reduce exposure in the space. Energy lending is important to us and has been for a very long time..

Great. Hey, thanks very much for taking the questions..

Thank you. Our next question comes from the line of Gary Tenner from D.A. Davidson. Please go ahead..

Hey, good morning guys. This is actually [indiscernible] in for Gary.

Just a quick housekeeping thing, I may have missed this, but the legal settlement, was that tax deductible?.

Yes, it would be.

All right.

And the rest of that, I guess, $2.8 million, is that going to hit in Q4?.

No. We took care of $2 million of that if you go back and look in the first quarter of '16, and then we had some additional reserves already set up for other items that we didn't need. And so, we shifted that over to cover the other $800,000. So you shouldn't see anymore accrual related to that matter going forward..

All right, perfect. Everything else has been answered, so thanks guys..

Thank you..

Thank you. Our next question comes from the line of Jennifer Demba from SunTrust. Please go ahead..

Hi, this is actually Kevin on for Jenny this morning.

Could you give a little more color around your focus on organic growth rather than deals after the Mobank integration? We just not see anything interesting out there, or is it -- or maybe something else?.

Well, I think you know, from our perspective, we've always focused on organic growth and MoBank is a great still in force in Kansas City. We have never made an acquisition in that market, so this is an opportunity for us to create more scale in a market that we are already doing well in. So that made sense to us.

There is not necessarily another natural target that would be as appealing to us right now. So, the focus is on organic growth. And we'll continue to evaluate M&A when we see opportunity..

Okay. Thank you..

Thank you. [Operator Instructions] Our next question comes from the line of Michael Rose from Raymond James. Please go ahead..

Hey, good morning, guys.

How are you?.

Good morning..

Good morning..

And just a couple of quick questions on energy, can you talk about the SNIC [ph] exam that just went on, and then if you can talk about kind of targeted size for the energy book.

I think it's about little over 15% of loans and where that may bottom out and where the right size is? And then finally, kind of talk about the pricing and competition for total energy credits? Thanks..

This is Marc Maun. I'll take the SNIC question, and I'll turn it over to Stacy on that. We did get our results from the SNIC exam. We really saw only a minimal amount of change in our criticized classified portfolio from that. And so overall the results were really good and not material to any changes in those criticized levels..

I think if we look forward, we're comfortable with energy being as much as 25% of our loan portfolio. Over time, we would even revisit that I think if needed, but the issue really is pay downs and how you work through that. I am hopeful that as we work through this fourth quarter that we can kind of tread water and find the bottom in terms of that.

And then begin to grow from that in the next year because we have a very active team in energy looking -- actively looking for new deal a new deal flow. And so I am confident that we'll continue to find those opportunities once the pay down began to stabilize.

I think part of the reason we love this space is we get paid for the risk and certainly that has happened. As we work through the cycle, pricing has improved over the last 12 months. Materially structures were very strong. And so, we continue to look for new opportunities.

And we think that spreads in energy as we get the portfolio in fact our time should continue to improve as we work through loans that re-priced prior to the downturn versus current pricing and you should see some benefits there. So, we're in a good space because others are not as active in energy today.

And so we are getting certainly more than our fair share of new deals as the market brings opportunities to us..

Okay, that's helpful.

And maybe just one quick follow-up on that, I mean what are you assumptions in -- that are baked in terms of pay downs into the loan growth guidance for the fourth quarter and next year?.

Certainly, the guidance that we've given around mid single digit growth in corporate our assumptions around pay downs inherent in the energy portfolio, so when we provided that guidance both for the fourth quarter and for 2017, we've also considered our assumptions around pay downs as a part of that..

Okay, but would you expect that the pace of pay downs to slow next year relative to this year?.

Absolutely. Particularly in energy obviously, but we would absolutely expect them slow relative to 2016..

Right. Thanks for taking my questions guys..

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to Mr. Joe Crivelli for closing comments..

Thanks everyone for joining us. If you have any further questions, please give me a call at 918-595-3027, or email me at jcrivelli@bokf.com. Thank you..

Thank you, ladies and gentlemen. This does conclude the teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day..