BOK Financial Corp (BOKF) 2014 Q4 法說會逐字稿

Good morning, and welcome to the BOK Financial Corporation fourth-quarter 2014 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Joe Crivelli, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us to discuss BOK Financial Corporation's fourth-quarter 2014 financial results.

Today, we'll hear remarks about the financial results and outlook from: Steve Bradshaw, CEO; Dan Ellinor, COO; Steven Nell, CFO; and Stacy Kymes, Chief Credit Officer, also joins us today to discuss the impact of the recent decrease in oil prices on our VOB energy lending business. In addition, PDFs of the slide presentation and press release that accompanies this call are available on our website at www.BOKF.com.

Before we begin, I'd like to remind everyone that, during this conference call, management will make certain forward-looking statements about its outlook for 2015 and beyond that involves risks and uncertainties. Forward-looking statements are generally preceded by words such as believes, plans, intends, expects, anticipates or similar expressions. Forward-looking statements are protected by the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995.

Factors that could cause actual results to differ from expectations include, but are not limited to, those factors set forth in our SEC filings. BOK Financial is making these statements as of January 28, 2015, 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. I trust everyone has seen our earnings release for the fourth quarter and full year, which was issued earlier this morning.

On slide 4, you'll see that 2014 earnings were $292.4 million or $4.22 per diluted share. That's down from $316.6 million and $4.59 in 2013. While there was some noise in the numbers, as we will discuss in a moment, in general this was a good year for the Bank in an extremely challenging environment.

At the start of 2014, we faced a number of headwinds. We were planning to make a significant investment in risk and compliance infrastructure to meet regulatory mandates. We were likewise planning to significantly reduce the size of our bond portfolio to position our balance sheet for an expected rising rate environment in 2015 and beyond.

The overall competitive market was extremely tough, with intense price competition, which really did not abate throughout the year, and we were coming off of a 2013 in which loan growth was muted in the low-single digits. We also faced a revenue headwind in our mortgage business, where production volume had fallen considerably after long-term rates spiked in mid-2013, and choked off the refinancing boom. Finally, in 2013, we realized $28 million of benefit from reversal of loan-loss reserves, something that we did not anticipate reoccurring in 2014.

In the face of these challenges, we're extremely proud of how our team and our Bank executed in 2014. We accomplished all of the strategic objectives outlined at the start of the year. Loan growth accelerated to the low-double digits, and we believe we gained market share with commercial borrowers. We completed two small, but important, acquisitions in the wealth-management business. We completed the build-out of our BSA/AML infrastructure on time and on budget.

We delivered strong revenue growth in key fee-generating businesses, including brokerage and trading, transaction card, and fiduciary and asset management, and we've regained revenue momentum in our mortgage business, where we launched a new online sales channel. We reduced the size of our bond portfolio by $1.3 billion, and reduced liability sensitivity to less than 1% by year end. We've made additional investments in our people, strengthening our team across the Company.

Our BSA/AML project was an eight-figure investment in 2014, but when you take a step back and look at overall expenses, the growth rate in 2014, as a whole, was less than 1% for the year. This reflects our promise to investors that we would make this investment while carefully managing expense growth in other areas of the Bank; a very busy and a very good year for the Company overall, and I'm certainly proud of our team and our results.

Turning to slide 5, at first blush the net income number in Q4 was below consensus. But when investors dig into the numbers a bit, it was actually a very impressive quarterly performance for the Company.

GAAP net income was $64.3 million, and earnings per diluted share was $0.93. But, as noted in the press release, a number of items impacted that number, notably a $0.05-per-share charge for the closure of our in-store branch channel.

In addition, mortgage rates dipped considerably at the end of the quarter, and the mark-to-market for mortgage servicing rights was a negative $11 million for the quarter, or $6.1 million net of hedges. This compares to a $4.8-million positive impact on earnings in Q3, net of hedges.

On an EPS basis, the impact was a negative $0.06 per share in the fourth quarter, compared to a $0.05-per-share positive impact in Q3. We also made a $1.8-million charitable contribution to the BOKF Foundation, which, net of taxes, reduced EPS by $0.01. Fiduciary and asset management in the mortgage banking businesses both posted impressive sequential growth. Transaction card continues to grow year over year, core expenses were down nicely from third-quarter levels, and we continue to reduce the size of our fixed income securities portfolio.

On slide 6, you'll note that fourth quarter was our strongest loan growth quarter of the year. In fact, it was our third strongest in the history of the Company. For the year, the loan portfolio grew 11.1% without sacrificing the overall excellent credit quality of our portfolio. Dan Ellinor will talk more in a moment about the loan portfolio; but this growth was realized across all of our lending businesses and all of our geographies. This enabled us to maintain a relatively flat net interest income throughout the year, while materially reducing the size of our bond portfolio.

Fiduciary assets continue to grow, and totaled $36 billion at quarter end. That was up 19.4% from last year. Part of this was due to the acquisitions of GTRUST and MBM Advisors, which added $2 billion in total. Both franchises are performing extremely well as part of BOK Financial, and are running ahead of the forecast we had in mind when we made those acquisitions.

Now, I'll turn the call over to Steven Nell, who will provide a comprehensive update on financial results for the quarter. Steven?

Thanks, Steve. Good morning, everyone. I'll highlight a few items from the full-year and fourth-quarter financial results, and then provide some details on our financial forecast.

Slide 8 highlights net interest revenue and net interest margin for the past five quarters. As you can see, net interest revenue for the fourth quarter was up 2.1% compared to the fourth quarter of 2013, and up 1.7% compared to the third quarter of 2014.

We indicated to shareholders in mid-2014 that we expected net interest income to begin to respond favorably to the ongoing remix of our earning assets. As we have continued to grow our loan book, and reduce the size of our securities portfolio, we are starting to see this benefit take hold. As indicated on this slide, when normalizing out the impact of the Federal Home Loan Bank, Federal Reserve trade that we put on the books in mid-third quarter, you can see that net interest margin has steadied, and actually climbed a bit from the third quarter to the fourth, up 2 basis points from 2.73% to 2.75%.

When looking at the last five quarters, you can see that, in fact, net interest margin has remained relatively stable. This is, in large part, due to the earning asset remix, as loan yields have continued to decline slightly due to the overall competitive environment. We do think the worst of the loan yield decline is behind us at this point. With more prudence industrywide around energy lending, and better pricing on new deals, we could see some benefit to loan yields over the next several quarters.

On slide 9, fees and commissions were $621.3 million for the full year, up 2.9% from 2013, reflecting strong growth in the brokerage and trading, transaction card, and fiduciary and asset-management businesses. In fact, growth from these businesses more than eclipsed the substantial decrease in mortgage banking, which was facing a tough year-over-year comparison due to the refinancing boom which occurred in the first half of 2013, as well as continued industry-wide pressure in deposit service charges and fees. Fiduciary and asset management includes approximately $7.8 million of revenue from acquisitions made earlier in the year.

For the fourth quarter, fees and commissions were $157.9 million in the quarter, down slightly from $158.5 million in the third quarter, but up 10.9% from the fourth quarter of 2013. As you can see, brokerage and trading was down sequentially, in line with the rest of the brokerage industry, which had a tough fourth quarter. Transaction card continues as strong year-over-year growth largely due to increased transaction volume with existing customers. Fiduciary and asset management was very strong in the fourth quarter, growing at double-digit annualized rates sequentially, and a healthy 20.4% year over year. Approximately half of this growth was due to acquisitions, with the remainder, in large part, driven by strength in our institutional wealth business.

Mortgage banking has continued to gain momentum from the expansion of its sales channels; posted its strongest revenue quarter since the second quarter of 2013, with strength in both production and servicing revenue. With the recent dip in interest rates, we are seeing signs that the refinancing market is moving up again. Refinancing, as a percent of total fundings, rose to 37% in the quarter; also the highest level since the second quarter of 2013.

Now, let's talk a little bit about mortgage servicing rights. As noted on slide 10, interest rates dipped considerably at the very end of the fourth quarter, with the 10-year treasury slipping below 2%. This, in turn, had a significant impact on the end-of-quarter value of our mortgage servicing portfolio.

Net of economic hedges, we recorded a $6.1-million loss on changes in fair value of mortgage servicing rights. This compares to a $4.8-million unrealized gain on changes in fair value of mortgage servicing rights, net of hedges, when interest rate rose in the third quarter of 2014. In essence, this line item alone contributed to a $10.9-million swing in pre-tax earnings from the third and fourth quarters.

We've long said to investors that while we like the long-term returns in the mortgage business, it does introduce some volatility in the quarterly GAAP earnings from time to time. With the significant changes in the MSR valuation in third and fourth quarter, this is clearly one of those times.

Expenses are highlighted on slide 11. We've talked a lot about expenses with investors throughout 2014. As Steve mentioned, we made a significant investment in BSA/AML, risk management, and compliance infrastructure during the year. All told, these investments added $16.7 million of expense in 2014. We've spent another $5.7 million in capital expenditure associated with these projects, so it will increase depreciation expense in future years. But when you step back and look over the full year, we really get an appreciation of how we've worked to manage this expense bill.

In total, operating expenses for the year are up less than 1%. And while expenses were up 1.8% sequentially in the fourth quarter, I'd like to call your attention to a number of items that contributed to that increase, resulting in a sequential quarterly decrease in EPS. The first item, $4.9 million associated with the closure of our in-store branches, $800,000 of which is in the personnel line item; and $4.1 million of which is in net occupancy and equipment line item.

Next, $1.8 million contribution of real property to the BOKF Foundation, which negatively impacted EPS by $0.01 per share, as Steve mentioned earlier. Then, $900,000 charged to write down capitalized software development costs in the data processing and communication expense line. Followed by $1.2 million fair value adjustment on repurchased loans in our mortgage portfolio, and a $1-million charge to adjust our accruals for mortgage loan repurchase obligations. Last, I'll mention a benefit to total expenses of about $1.5 million from the gain on sale of Other Real Estate Owned properties.

These items, in total, negatively impacted EPS by approximately $0.07 per share. The change in fair value of mortgage servicing rights, as noted earlier, impacted EPS by approximately $0.06 per share. So, net of these items, the fourth quarter was a pretty strong quarter for BOK Financial.

Turning to the balance sheet, as shown on slide 12, we accomplished our objective to reduce the securities portfolio in 2014. At year end, total available-for-sale securities were just under $9 billion, down from $10.1 billion at year-end 2013. This initiative has reduced our liability sensitivity to 0.7% of net interest income, as measured in an up-200-basis-points scenario. In 2015, we'll bleed down the securities portfolio at a similar pace that you've seen in recent quarters, which implies another $1 billion or so in securities. But we'll evaluate throughout the year, and adjust periodically as we see appropriate, given changing conditions.

Total deposits were $21.1 billion at year end, up from $20.3 billion at September 30, 2014. Average deposits were $20.7 billion for the fourth quarter, up from $20.2 billion in the third quarter and $19.9 billion a year ago.

The Corporation remains extremely well capitalized. The Company and its subsidiary bank exceeded the regulatory definition of well capitalized at December 31, 2014, with a Tier 1 capital ratio of 13.29%, a total capital ratio of 14.61%, and leverage ratio at 9.96%.

BOK Financial's Tier 1 common equity ratio, based on existing Basel I standards, was 13.13% as of December 31, 2014. Based on our interpretation of the new capital rules, our estimated Tier 1 common equity ratio would be approximately 12.25%, nearly 525 basis points above the 7% regulatory threshold.

We paid a regular quarterly cash dividend of $0.42 per share, or $29 million, in the fourth quarter. On January 27, 2015, the Board of Directors approved a quarterly cash dividend of $0.42 per share, payable on or about February 27 to shareholders of record as of February 13.

We also begin to buy back stock during the fourth quarter. We have a standing authorization from our Board of Directors, under which there is capacity to buy back approximately 1.7 million shares in the open market. While we haven't pulled the trigger on buybacks in several years, with the stock where it is today, we definitely intend to stay active in this regard. During the fourth quarter, we bought back 200,000 shares at an average weighted price of $61.68 before entering our earnings quiet period, which ends three days after we announce earnings.

Slide 13 shows some of our guidance assumptions for 2015. Our commercial lending pipelines remain strong, as Dan will discuss in a moment. We continue to expect low double-digit annualized loan growth in 2015. Net interest income will continue to increase modestly in 2015 with the remix of earning assets, and stable to improving net interest margin.

Given our continued expected loan growth, we're planning provision for loan losses of $15 million to $20 million for the full year, with provisioning likely to begin in the second quarter. While there may be some lumpiness from quarter to quarter in the fee-generating businesses, especially in the brokerage and trading, and mortgage line items, which are subject to various market forces and are transactional in nature, on a rolling 12-month basis, we continue to expect mid-single-digit revenue growth in fees and commissions.

There will be some expense growth in 2015, mainly due to a full year's impact of the 2015 risk and compliance investment, and a full year's impact of expenses from GTRUST and MBM Advisors. In addition, the IT investment we discussed with investors previously will likely be at the high end of the $5 million to $10 million range, which will be partially offset by the expected $8 million of savings from the in-store branch closures, which will be recognized beginning in the second quarter. We'll continue to focus on cost reduction and efficiency efforts across the Organization that aim to control expenses, just as we did in 2014.

Dan will now review the loan portfolio in more detail. Dan?

Thank you, Steven. It was a busy quarter and a year for the commercial lending team, as reflected in the robust loan growth. Let me highlight some of the key areas of strength.

As indicated on slide 15 of the presentation, commercial loans were up 6.1% for the quarter, from $8.6 billion to $9.1 billion. With the exception of services, all sectors registered double-digit annualized growth in the quarter. Energy was up 12.1% for the quarter; and given the recent dip in commodity prices, we executed a detailed credit review of the largest advancers in the portfolio -- those customers who were the top contributors to the energy loan growth.

Stacy will talk more about this review in a moment, but in a nutshell, we liked what we saw. About half the loan growth was due to net new business with new customers, with the remainder attributed to business-related draw-downs by existing customers with sound credit profiles.

For the year, commercial loan growth was 14.5%. With the exception of wholesale retail and other category, all our lines of business posted double-digit growth during the year. In short, it was a great year, and one of the most consistent production environments we've seen in our careers.

As shown on slide 16, commercial real estate lending was relatively flat the fourth quarter. Growth was centered in retail and industrial, which we are happy with. We had nice decreases in residential construction portfolio, a line of business we've been deemphasizing and reducing over the past several years.

However, the full-year picture tells a much different story. Excellent loan growth in 2014 of 13%, with strength in retail, multi-family and industrial, all great sectors of the market that performed better across the economic cycle.

As a reminder, we've been stress-testing all new commercial real estate loans at loan origination since 2009. The scenario we use includes the following assumptions: first, a 500-basis-point increase in interest rates over a 24-month period; second, normalized cap rates; and third, normalized occupancy rates, despite limited vacancy in the book in our markets. We believe that our real estate loan portfolio is in good shape relative to these stress tests.

Turning to slide 17, overall loan growth was 3.8% sequentially, or 15.3% annualized; the third strongest quarter in our history. For the year, we delivered on our low double-digit loan growth forecast, with 11.1% overall growth. Pipelines remained strong; in fact, as strong as they were throughout 2014. So, we continue to forecast low double-digit loan growth in 2015.

Slide 18 shows our portfolio on a geographic market basis. Texas and Arizona were the strongest performing markets in the fourth quarter, while Albuquerque was the only market that didn't post sequential loan growth.

For the year, we saw strength across all of our business areas. There were no markets that didn't grow; albeit, Kansas City, Albuquerque and Oklahoma were on the low end of the range. We had significant growth in Colorado and Arizona; well into the double digits.

On slide 19, loan yields were down 5 basis points in the quarter, but we're definitely seeing the tide turn from a competitive standpoint, as expected. With a dip in energy prices, and concerns about the overall economic health of our region, competitor banks are beginning to get more rational and price more appropriately, given where we are in the risk continuum.

As Joe noted, Stacy Kymes, our Chief Credit Officer, is joining us on the call today. There have been many questions about our energy lending portfolio since commodity prices began to decline in June of 2014, so Stacy is going to describe how we manage this credit risk in the portfolio during periods of commodity price volatility. He'll also provide some additional color on how we view the current commodity environment, and its impact on credit quality and economic growth in our footprint.

Thanks, Dan. I'm pleased to join all of you this morning. I'm happy to reengage in the Investor Relations effort, and give you an overview on credit and our perspective on the energy lending business.

First, let me address credit quality for the Bank as a whole. As shown on slide 21, credit quality continues to be very strong. The allowance for loan losses was 1.33% of period-end loans, and represented 234% of non-accrual loans. Non-performing assets, excluding those guaranteed by government agencies, were down to less than 1% of period-end loans and repossessed assets. We had annualized net charge-offs of 6 basis points, or $2.2 million, in the fourth quarter; and for the full year, had net recoveries of 2 basis points, or $2.8 million.

With that, let's discuss energy lending. You've all seen slide 22 before, which shows the composition of our energy lending portfolio, but it's worth reviewing to level set. At quarter end, our energy portfolio was $2.9 billion. Of this, 86%, or $2.5 billion, was exploration and production, or E&P; 8%, or $222 million, was energy services; 3% was midstream; and 3% was wholesale and retail energy.

We've long focused on E&P as the safest place to lend in the energy sector. As we have discussed with investors, we have a long track record of strong asset quality in this business. We typically advance only on proven producing reserves, not on undeveloped reserves. We have a team of nine reservoir engineers and four engineering techs on staff to perform our own independent analysis of the decline curves and the underlying collateral value. Our policy requires a minimum of 10 wells in the collateral package, and does not permit any single well to equal more than 20% of the total collateral.

During the run-up in oil to over $100 per barrel, we capped the pricing on the forward strip at $85. We revalue the collateral set every six months, in line with industry norms. For borrowers found to have inadequate collateral to support the loan at that time, they can either repay the over-advance over six months, or pledge additional collateral to support the loan. We also reset our price deck no less frequently than monthly, with mid-month revisions as necessary based on the movement in commodity prices.

Turning to slide 23, energy production lending has been the best performing portfolio in the Bank over the last 10- and 20-year time period. Gross charge-offs have averaged 9.9 basis points over the last 10 years, and 6.4 basis points over the last 20 years. This was during a time frame when oil and natural gas were every bit as volatile as they are today.

Over the past 20 years, natural gas has fluctuated from a low of $1.05 per MMBTU to a high of $15.38. Oil has similarly fluctuated from $10.72 per barrel to $145.29. Even the two years that gross charge-offs increased, the 2009 and 2010 time frame, the losses were very manageable, with a peak of $12.8 million in 2009, and $3.2 million in 2010.

As noted on slide 24, commodity price volatility is inherent in energy lending. As recently as 2008, oil prices decreased by 77% from $145.29 to $33.87 over a six-month period. The current price drop, which began on June 20, 2014, is, thus far, less steep and less severe. Oil has fallen a little over 55% from June 20 to January 6, a 200-day period. Gas has fallen 38% over the same time period. So, by recent historic norms, this price decline, thus far, is less severe.

We believe the highest near-term risk in energy lending is in two areas: energy services and second lien or B tranches of loans. Energy service companies are generally the first to suffer when commodity prices decline. Throughout our history, we've been disciplined about the energy service business we lend to, sticking with long-term players who are well capitalized and have a lower cash flow leverage profile. As noted on slide 24, we have a total of $222 million of energy services loans at 12/31/2014.

Second lien facilities and unsecured capital markets debt also got much play during the most recent run-up in commodity prices. This was a way for banks to differentiate themselves, and win new deals by being more aggressive lenders. BOK Financial has a very limited exposure here, with one second lien facility totaling $20 million in outstandings at year end.

Slide 25 and 26 show some of our perspective on energy. With the recent decrease in energy prices, we conducted a comprehensive credit review of those areas of the portfolio that we believe have the highest level of risk in an industry downturn: energy services companies, energy borrowers with high total leverage, and those energy customers who are the most susceptible to lower commodity prices in our most recent stress tests.

During the fourth quarter, the Bank conducted an updated stress test of its energy portfolio, assuming starting commodity prices of $45 per barrel of oil, and $2.50 per MMBTU for natural gas, with borrowers who were more than 50% advanced on their line. The comprehensive review and updated stress test did not alter our general view that our portfolio is well positioned to withstand a short-term correction in the price of the oil and gas commodity. This review did not identify material near-term losses that would result from falling prices. The Company did consider the increased inherent risk of the impact of falling commodity prices in the analysis of the allowance for loan and lease losses. We also reviewed the borrowers who comprise the majority of the loan growth from the energy segment during the fourth quarter, and [none of] the increases were either result of new customer acquisition or advances within the normal course of business activity.

Just to put a finer point on the inherently volatile nature of oil and gas markets, here on slide 26 we show six distinct periods just since 2000 when oil and natural gas prices fell by more than 50%, along with the time it took for prices to recover to a normalized level; not the price before the downturn, but a price at which the commodities exhibited relative stability in the following months. We also show the current downturn in oil and gas prices at the bottom of the chart. Oil since June is down 55% over the span of 200 days, and gas is down 38%.

We certainly are not trying to call a bottom in commodities, but simply to use this information to demonstrate that commodity price volatility is inherent in lending to energy companies. Thus far, this downturn in prices appears consistent with similar periods of price declines, during which our losses were not significant. So, for us, the key question is not: How low will prices go? But rather: How long will prices stay at these levels? We believe that if the current downturn behaves like these other six, things will turn to relative normalcy in the industry over the next 12 to 15 months.

To that end, we see two distinct risk periods, as shown on slide 27. If commodity prices take a year to return to a normalized, stable level, we will see some credits migrate to problem loans, but few, if any, material losses in the portfolio. The spill-over impact on the overall economy and our footprint will be manageable. There will be layoffs in the oil and gas industry, which, in fact, we've already started to see. And ancillary services businesses will underperform, but it will be manageable.

If the downturn does not behave like the previous six, longer-term outcomes are obviously more difficult to predict. At that point, we would be more likely to see loss content in the portfolio, and a greater impact on the overall economy; and in turn, lower loan demand across the Business.

However, if this is, in fact, a longer downturn, I really like where we are starting from. Our portfolio is strong. We are doing business with high-quality borrowers. We don't have a view that this commodity price decline is different from previous declines we've experienced.

Many investors are automatically drawing parallels between the current environment and the 1980s, when a decrease in commodity prices negatively impacted this region. However, from our perspective, these two time periods could not be more different, as noted on slide 28.

There is no question that the oil and gas downturn of the 1980s impacted the economy and real estate values, but there were two other key variables that exacerbated this impact. First, the savings and loan industry experienced a high number of failures, and was part of a regional financial crisis in the Southwest during this time. The commercial real estate industry was overheated in Oklahoma and Texas, and then the enactment of the Tax Reform Act of 1986 materially impacted the economics of commercial real estate during this time frame. In short, none of these factors appear to be in play today.

In any event, the Oklahoma and Texas economies are much more diversified than they were in the 1980s. Additionally, borrowers in the 1980s had limited, if any, capacity to hedge commodity risk. In today's environment, hedging is much more commonplace.

Turning to slide 29, we believe that our customers are already doing the right things to weather the downturn. We are seeing reductions in rig counts. Customers are coming to us proactively, and articulating their plans to reduce cost and reduce CapEx in the very near term. This will have a positive long-term impact on the industry. In particular, the oil and natural gas supply is expected to decline over time, as a result of these actions.

Oil and gas are depleting assets. Borrowers will continue to drill their best prospects, but will do so mindful of the current price environment and their desire to achieve appropriate economic returns. Energy companies will make rational business decisions during this period of falling prices. We believe the actions of energy producers will ultimately lead to price equilibrium, and that the current downturn will behave like the others shown on slide 26.

One last point: While oil and gas has been a growing business for us and the rest of the banking industry, at 12/31/2014 the portfolio is largely in line with where it was at 12/31/2009, which I consider to be the beginning point for the banking boom in energy lending. Energy commitments for us were 27% of total commitments in 2009; today they are 28%. As a percent of Tier 1 capital and loss reserves, energy commitments were 180% in 2009 versus 191% today.

Based on industry data we have reviewed, it appears that bank debt to the energy sector has more than doubled over this five-year period, while our growth has been a more disciplined 48% over that same time period. We've walked away from a lot of deals over the last several years because of our disciplined approach.

Steve Bradshaw will now make some closing statements before we open the call for Q&A. Steve?

Thanks, Stacy. 2014 was a busy and challenging year, but ultimately a very fulfilling one. We proved to ourselves that our business model is the right one for the long haul, that the diversity of our Business is of significant benefit to shareholders, that our Franchise is solid, and that our team, perhaps most importantly, can manage through any headwinds.

Net interest income was relatively stable throughout the year, and up nicely in the fourth quarter. NIM has now been steady for five quarters.

Fees and commissions were likewise up nicely for the full year. Some of our businesses are lumpier than others on a quarter-to-quarter basis, but we've delivered fee revenue growth in 2014, and overcome unfavorable year-over-year comps in the mortgage business.

From an expense standpoint, we made a significant eight-figure investment in risk and compliance, while doing the right things internally to manage expense growth. As a result, total expenses were only up 0.8% for the full year. We also made the necessary changes in our balance sheet to prepare for a rising rate environment, improved our risk and compliance capabilities, and refocused our M&A efforts to make acquisitions part of our future growth story.

We are confident in our energy business. If the cycle behaves like the past cycles that Stacy mentioned, and energy prices recover in the 6- to 12-month time frame to a new equilibrium price, there should be no material impact on our Business.

But we're also cognizant of the potential impact on the economy and our footprint if the downturn does extend beyond those 12 months. This could potentially reduce loan demand for companies tied to the energy industry, and have some impact on the consumer environment in Oklahoma and in Texas. In fact, we're already seeing some layoffs, as Stacy mentioned, by companies in the oil and gas industry. We do think this will be balanced, at least in part, by the positive impact of lower fuel prices on consumer spending and the overall business environment as well. In any event, if the recent commodity price declines are the start of a new long-term normal, then we certainly like how our portfolio is positioned to withstand any migration of credit.

The corporate objectives I shared with our Board of Directors earlier this week are designed to deliver a continued momentum for loan growth, drive improved profitability from key fee-generating lines of business, and reach steady-state expense growth in our operational areas. Longer term, our objectives are to be recognized as an effective and efficient risk manager among peer banks, investing in technology and talent and, where possible, making strategic acquisitions to drive sustainable growth over the long term, and improving the employee experience so we can continue to attract the brightest and the best talent. I look forward to keeping you updated on our progress on these initiatives throughout 2015.

With that, we'll open the call for your questions. Operator?

(Operator Instructions)

Jennifer Demba, SunTrust Robinson Humphrey.

Stacy, thanks for all that detail. So, follow-up on the energy book. What percentage of your energy lines in total are shared national credits, roughly?

Roughly 50% of the outstanding are shared national credits.

Okay. Can you talk to us, assuming price -- oil prices stay at roughly around the levels they are at now, can you talk to us about what you foresee, in terms of progression, in terms of down grades of credits? Would those likely come sometime this summer? After you get year-end financials? Perhaps, that coincides a little bit with the annual [SNC] exam?

Yes. Although, I would tell you that we make our own determination of the grade, independent from the SNC exam. So, if we think a loan should be downgraded, we don't wait until the SNC exam to identify it and downgrade it.

I think your timing is pretty close to right. If you think about when the fall of the price began, it was really the day after Thanksgiving in terms of the most precipitous amount of the fall. So, it's going to be probably during the borrowing base redetermination season early in the second quarter, as well as looking at financial statements that more fully reflect the revenue impact to energy borrowers from the price decline.

So your timing of how they will migrate is probably pretty close. I would suspect in the first quarter, there may be a few that are identified. But I would suspect the preponderance would be in the second quarter.

You may have covered this and I missed it, Stacy. But when we look at historical losses in energy services loans, oilfield services, can you talk about what the worst was that you've seen either for BOK or for players in the industry.

Sure. Well, our 10-year loss in kind of everything except energy production. So, energy, all other, including services and midstream, if you exclude the [Sim] Group loss that was, in my view, kind of more fraud related in the summer of 2008, our 10-year loss history in kind of all other energy is about 4 basis points. So it's pretty low, as well.

Okay. Would the downgrade timeline for energy services or the other non-E&P loans, would that be faster?

I would say so. I mean, we're hearing from many of our services borrowers that they're anticipating revenue declines or EBITDA declines associated with the downturn in the 35% to 40% range.

I suspect that we'll begin to see that reflective in financials as we look at that. As we get year-end financials, the discussion won't just be what the historical was, but what do you project? We'll tend to be more focused on the forward-looking projections than the trailing 12 months, because of different environment.

Brady Gailey, KBW.

So if you look at the energy portfolio in 4Q, you all are not aligned. It seems like most of the energy-related banks are seeing some pretty strong energy growth in the fourth quarter.

I thought that this might happen near-term, but longer-term, it would be a negative for energy balances. When do think the tables will turn and depressed oil pricing will be a negative for loan growth?

Brady, this is Dan. Thanks for the question. Just to step back a little bit, solicitations in this industry take years and years to develop. So, you actually saw great momentum building for our Company in 2014 on multi-year solicitations. If you look at the fundings in the fourth quarter, over half of that or roughly half of that was from new clients to the Bank -- very high-quality clients, by the way.

Our thoughts are that if you look over historically for BOKF, we roughly average 50% utilization. We ticked up just a little bit in the fourth quarter. We started the year at 51%. We finished the year at 53%. In all likelihood, you'd probably see the existing book start to shrink in the second half of 2015, as you do come in at reductions and borrowing base reductions in kind of a normal flow of business.

So the goal is to make sure we're bringing in sufficient new business so we kind of balance out that book. So leaving the year on a positive note.

Okay. Then on a separate topic, I know you all have been talking about being hopeful for announcing a bank deal by year end, which obviously did not happen, due to the oil issue and your stock is not as valuable, now. But when you look at bank M&A going forward, how does this oil issue affect that for 2015 and 2016?

Yes, Brady, this is Steve. Actually, what we had talked about last fall in our investor meeting was that we were really targeting 2015 as an opportunity to announce a deal. So, that's still in our sights and something that we're very focused on.

I think it's a little early to determine whether we'll see pricing in the energy driven space, Texas and Oklahoma, primarily, whether we see bank pricing come down and we see the gap narrowed between sellers and buyers. I think there's some anticipation that could occur, but I think it's extremely early to call that. So, from our standpoint, it's not changing the way that we're approaching M&A.

We're still actively discussing and working to identify organizations throughout our footprint that we think would be additive. We would expect those conversations to continue kind of throughout 2015, as well. We still believe, longer-term, that we'll be in a consolidation environment. We expect to be a player there.

Okay. Great. Thanks for the color.

I was just going to add, Brady, that you talked a little bit about stock price weakness. We generally, in terms of our acquisition preference, would be to use cash. We've got a significant amount of cash at our holding company available for M&A activity. Although we wouldn't, long-term, dismiss using our stock for currency, certainly, we'd rather use cash, I think, in 2015.

Okay. Thanks, Steven.

Ken Zerbe, Morgan Stanley.

First, quick clarification question. Right at the top of your press release you mentioned sort of unusual items as $0.16. But the way I calculate that, it looks like you're actually giving yourself credit for giving back to a $5 million positive change in the MSR as you had in third quarter.

I'm just trying to think -- I get a number that's less than the $0.16, if I really think about unusual items. I just want to make sure I'm thinking about that correctly.

Yes, if you read closely, that sentence says between the two quarters. So don't be confused that it's not $0.16 complete normalization -- just for this quarter, you're right, it's about $0.11 a share.

Between the two, you had a $0.05 positive over on the third quarter and then a negative $0.06 a share over on the fourth quarter. So, you add the two together, that's $0.11 just for the MSR plus the $0.05 a share on the in-store accruals. That gets you to the $0.16.

Sure. But you guys wouldn't expect to have a positive MSR change each quarter, would you?

Well the way we have our hedge is set up today, if rates rise some -- if longer-term rates rise in the first quarter or in second quarter, the way our hedge is set up, we would benefit from a write-up in the net MSR position.

Understood. If they stay the same, then you would expect roughly, zero, is my assumption.

Correct. That's exactly right.

Okay. Totally fine. Then the other question I had, just -- you're probably the first bank I've heard that actually has talked about competition getting more rational. Are you guys actually seeing higher loan yields than you did three months ago? Or was your commentary more that they're just not compressing as much as they were?

Yes. Ken, this is Dan. It's probably a little bit of both. It's tough to call a bottom on spread compression but we definitely saw some leveling out, specifically, in the last two months of the year.

So it would appear to us that pricing rationalization is starting to occur, which is going to be a good thing. Hopefully, that helps our NIM in 2015. Noticeably different than the first quarter of the year, in 2014.

Got it. Then, Steven, that comment you made on the benefit to NIM sometime in 2015. Is that just to simply from a remix and then stayed roughly stable --

Yes, it's largely from the remix from securities over to loans, with some hopeful stabilization of our loan yields -- loan spreads.

Okay, great. Okay. Thank you very much.

Jon Arfstrom, RBC Capital Markets.

A couple points of clarification on slide 13. When you talk about a provision of $15 million to $20 million for 2015, Stacy, how much of that is just for the expected growth in the portfolio? How much of that is for the potential downgrades or issues that you might see, as you get updated financials or changes in grades?

Yes. There is so many moving parts in the allowance methodology, it's hard to separate those two out cleanly. But I think as you look at the strength of the portfolio going into this price decline, and maybe some of the energy loans working themselves through problem loan status, I think that estimate does account for our view that there could be some downward pressure on asset quality a result of the energy price decline. But it also considers kind of the guidance that we're providing with respect to loan growth, as well.

Okay. That's helpful. I guess, so that's the variability, that's the $5 million variability you're talking about as potentially what happens when the numbers start to come in from clients, and how long this lasts?

That's right. I mean, it's just an estimate at this stage. Obviously, as we see how the year plays out in terms of both loan growth, loan growth by type, as well as what happens with the energy portfolio, that will influence what we actually provide as we go throughout the year.

Okay. Good. You had mentioned loan growth by type. I'm not sure if this is a Dan or Steve question. But things changed from late November, when you laid out your last guidance at the end of Q3 for low double-digit growth expectations, things obviously changed in terms of energy prices. Has the mixed change in terms of what you expect to drive that low double-digit loan growth?

Well, the beauty of our franchise, is that we are in multiple states. We've got significant business specialization across the sector. So, we still feel very good about the healthcare book. You saw a strong growth in the fourth quarter in year-over-year, almost 14%.

Manufacturing up almost 36%. Wholesale retail up 9%. Services up 10%. So the nice thing about our model, is it's very diversified both by asset class and by geography. Frankly, the momentum that -- we started out with a great first quarter, slow to bid in the second quarter. The momentum really started to build in the second half of the year, at the same time oil prices started to decline more rapidly.

So, we took a step back, actually and took a more granular look at the entire franchise from an economic standpoint. We looked at GDP drivers. We looked at employment growth. We looked at sectors that were moving with each of our states and how that might impact each one of the businesses that we operate.

Did that pretty thoroughly a couple of weeks ago. As you know, we've got a great chief investment officer, Jim Huntzinger, that keeps us on point on that. We feel pretty good about the rest of the book.

If you look at year-over-year growth for 2014, over two-thirds of it was non-energy related. So, there seems to be still a very strong pipelines, good momentum. We feel really good where we are geographically.

Okay. Great. Then just two more quick things. Steven, on slide 13, the mid single-digit fee growth, the mid single-digit expense growth, can you give us the baseline numbers we should be using for those?

Are you talking about the dollar numbers that we use --

Yes.

Well, let's start with expenses --

There's moving parts. I'm just wondering if it's the $621 million for non-interest income and the $847 million for expenses? That's the question.

It is close to that. Let's start with the expenses. Expenses were in the $225 million range per quarter. That's a little high because we had some unusual items, I think, that affected the fourth quarter.

I do think you'll see a little expense build through 2015 as some of the investments we've made in our infrastructure for risk management, compliance, some of those areas, you'll see some build there. So, I'm thinking somewhere in that $225 million to kind of building towards the $230 million level by the end of next year is probably a pretty good guidance.

I think the fee side is a little more volatile. I think you can expect some growth in most of the categories. I think we expect, actually, mortgage to grow some in 2015.

We feel like our broker-dealer, even though they had a soft fourth quarter, will -- we've got great capability there. They'll continue to grow. Our trust business in assets under management will continue to grow.

You'll still see softness in deposit service charges. So, most of those categories, I think, are going to do fairly well and contribute towards that mid single-digit.

Okay. Okay, then just last question. You've touched on it, I think Brady brought up the M&A comment. Why not just aggressively buy yourself, buy back your own stock? I know you have the float issues.

If you believe -- if we are supposed to believe what you're saying on energy. I think most of us give you the benefit of the doubt, why not just get aggressive here and use some of your cash?

Well, we have a little bit. You saw in the fourth quarter, we bought 200,000 shares. While it doesn't sound like a lot, it's still, in our minds, down the list because we want to use our capital for organic growth, first.

As Steve talked about, we think we have some opportunities in 2015 to utilize some of the cash on the balance sheet for M&A deals. We still want to grow the franchise and create revenue streams. You don't really do that buying back stock.

Now today, the internal rate of return calculation we do it at the stock price where at. It's pretty good return. We're going to be involved in that, I think, going forward, to the extent the price stays down. But, we've worked very hard for the last decade to try and get enough float out there for investors to participate in our stock.

We think that's important -- continues to be important going forward and ultimately, we will have other uses for that capital, either through organic growth or through an M&A deal. That's -- we continue to think, really, from a priority standpoint, in that manner going forward.

Okay. All right. Thanks for the help.

Brett Rabatin, Sterne Agee.

I wanted to -- I joined a little late, so you may have talked a little bit about this. But I just wanted to go back to the growth that you guys had in the energy book this quarter. Can you talk a little bit more about what drove the growth linked quarter? Was it new client adds?

Then within that, was any of it existing clients that drew down on lines of credit, where they kind of decided to do something else? Or was it because they wanted more cash? Can you go into a bit little more color?

Sure, Brett. This is Dan. I hope we will answer it the same way I did the first time. But it's a good question. I appreciate you asking it.

Half of the growth in the fourth quarter in energy book were new clients to the Bank. The other half were draw-downs for an existing client base? Then Stacey mentioned in his review comments, we actually took a big dive in each one of those draw-downs to make sure we still felt good, which we do feel good.

As a back drop to the question, solicitations in this business are multi-year in length. Many of the names that we brought in the Bank in the late third quarter, fourth quarter, were three, four, five-year solicitations.

So, a great culling effort, a great ability to bring in new clients. That's the goal for 2015, is that, as the portfolio might migrate downward in the second half of the year on energy, we want to make sure we bring in enough new clients to balance it out. So that's the strategy.

Okay. With existing clients, just curious, thinking about the portfolio. As you're looking at rebuilding your borrowing base with your clientele, how does that work if they have a line of credit and haven't drawn-down and looked to draw-down on the line, but you haven't rebuilt their borrowing base.

Can you talk a little bit more about that process? If they're able to do so even if you haven't done re-bill of their borrowing base?

Sure. This is Stacy. You have a committed line to that borrower. So they certainly have the ability to draw on that line. What's different about energy borrowers, is that generally semiannually, sometimes more frequently, you get an opportunity to re-examine that borrowing base.

In light of the price decline, in most cases going forward, that borrowing base will then be reduced as a result of the lower value associated with the reserves. In between borrowing base redeterminations, the Bank has a committed line and the borrower has the ability to draw-down on that line.

We did -- as Dan alluded to -- we obviously saw that the loan growth in the fourth quarter, we wanted to make sure we didn't have borrowers who were either window-dressing to show good liquidity on their balance sheets at year-end, or otherwise were concerned about folks drawing-down. Our review indicated that it looked, to us, like everything was either from a new customer or I draw-down in the ordinary course of business. But, that's something that we'll continue to watch as we move forward.

Okay. Great. Thanks for the color.

John Moran, Macquarie.

Maybe just a follow-up on that. We heard from another bank that has a sizable energy presence on Monday, that they've actually initiated some of these interim redeterminations. Have you guys done that? Or are you really kind of waiting to see what happens in the normal course come April?

Well, there is kind of a season, but there are also opportunities throughout, if the borrower has a new request or there are other things, acquisitions, things like that. We do get an opportunity to revisit that borrowing base.

Typically, absent an event of default or some other reason that you have to go back and revisit that, you can certainly have proactive discussions with your borrowers. We have absolutely done that. But your ability to go back and reduce that borrowing base, outside of a borrowing base redetermination as defined in your loan agreement is limited.

Okay. Got it. Then, Stacy, you guys stress-tested down to $45 and saw limited losses. Is it fair to say that barring any kind of recovery in the commodity between now and April, that the price deck itself, when you come into these redetermination periods, would be below that stressed level to give some kind of a cushion, again, all else equal [if you would imagine], WTI just kind of stays where it is.

No, I mean if you look today, our trading desk today, you can do swaps for 16 at $58 for oil and 17 at $62 for oil and execute that today. So, relative to what the curve is telling you, that $45 stress-test is pretty meaningful, particularly when you hold it low. We held it at $45 flat or the first two years. So we do think that gives us a very meaningful result when we perform that stress-test.

Got it. So the price deck would obviously incorporate at least 12 months worth of kind of forward curve -- it's sort of an average of that, right?

That's right. Our price curve -- I think one of the things that we're a little bit different -- we do redo our price deck no less frequently than monthly. In fact, we have some parameters where we will redo the price deck mid month if prices continue to fall. So that allows us to be pretty fluid with respect to moving prices and making sure that our price deck maps well and doesn't get out of date quickly.

Okay. Then just the other one kind of on the direct impact in the energy book. Going back to the last cycle, how many folks ended up overdrawn? Then my understanding of how you would cure that would be first, if the client had liquidity, you'd just pay down the line. If they didn't have liquidity they could pledge more assets.

Then lastly, and probably not all that common, would be to basically hyper amortize the overdrawn balance. I'm just kind of curious, if you -- this is probably a ticky-tack question. But if you have stats going back to the last kind of downturn in 2008, 2009, how many folks ended up overdrawn?

I don't know how many ended up over advanced. I'm sure that there were several. I think that you've identified correctly the actions that you take when you do a redetermination. If the borrower is then over advance, they can amortize the over advance, they can pay it down. They can provide additional collateral; often a borrower will have collateral that's not a part of our borrowing base that they will add to the borrowing base.

In addition, there's a lot of conservatism in how we comprise our borrowing base. Often there are assets embedded in the customer -- what the customer owns that we haven't provided any -- if any significant value to in the borrowing base, that they can sell more value in the market and we give them for in the borrowing base. Those are all things that the customer can do to right-size that borrowing base over a period of time.

Okay. That's really helpful. I've just got one more and then I'll pop out. But you guys sort of alluded to it, the second-order impacts. Can you tease out -- and it may be difficult to do, but what the fee impact could be from lower oil prices in some of the brokerage or trusts or anything like that?

Then the other one is really on commercial real estate, which grew a bunch this year. It was a good outcome for you up 13%, with multi-family up 22%. Some of those markets that you're in, we hear from others, are a little bit frothy. So just kind of thoughts around how you think about the multi-family exposure? Thanks very much, guys.

Yes. Sure, this is Dan. Let me address the fee-based tied to the energy book. I assume you're alluding to our derivatives book, which is -- on a grander scheme, it's strategic for us because we want to be able to provide risk mitigation to the loan book through hedging both on the single bank deal and then the multi-bank deal. But in the grand scheme of things, it is an insignificant line item in the energy book, decile, to be candid.

The real estate question is a good one. Back in 2009 when we all had a chance to step back and look at the performance in the real estate book, we designed a system that stress-tested each real estate loan at origination. The thesis here is that we didn't want to get fooled with valuations again with hyper inflated appraisals. We wanted to make sure we had equity in the portfolio.

So the last several years' originations have averaged just north of 30% cash equity in the portfolio. We stress-test interest rates 500 basis points over 24 months. We normalize vacancy. We use a normalized cap rate that we can expect to achieve over a long period of time.

Sometimes that could be upwards of 200 basis points delta to the current cap rates trading in the market. So we feel like we have embedded excellent discipline.

Further, we have concentration limits both by product type and by geography. Our strategy has been relatively limited to retail, multi-family, office and industrial. We deemphasize for the last four years single-family residential and A&D, which is where we experienced our worst performance.

So, we look at that several times during the year. We look forward two years in terms of employment growth and occupancy rates, things like that on a sub-market basis. When we look at each loan, we look at a sub-market basis.

So what that has created is a very well-diversified both geographically and product type real estate portfolio. The real estate group did have a good year. They originated over $1.4 billion in new commitments.

The portfolio has a high level of volatility to it, so we underwrite to the permanent market. It's been working really good for the last couple years. We see still -- see good growth in the portfolio.

Great. I really appreciated. Thanks, guys.

(Operator Instructions)

Jennifer Demba.

Sorry, if you covered it, because I did actually get cut off of the call for a couple minutes. Stacy, what level of energy loans to total loans are you comfortable taking -- taking it to for the Company, as you pick up new customers, as others retrench?

Sure. Today, we're at about 20% of total loans. We look at it really as a percent of capital and reserves. We tend to focus on somewhere around 200% of Tier 1 capital in reserves as our concentration limit.

We'll look at that as we approach that and make determinations around our comfort level. Certainly, the loss history here impacts our view of this lending segment. But we manage that. We report to the Board on a regular basis where we stand with respect to that and have historically been pretty disciplined about our approach to concentrations.

Without naming any names, obviously, when you're seeing others retrench, at least the larger banks, regional banks, community banks, foreign banks, what are you seeing? Is there a general trend there?

From my perspective, I think that the energy -- the core energy lending is a group of probably 10 to 12 banks who have been doing this for a long time. Those banks are not reacting much differently than we are. They're all doing the right things.

They're sensitive to what needs to be done and are reacting accordingly. I think, where you're beginning to see some retrenchment is maybe some of the smaller players who are new to the business, and have less stomach for the price volatility and the impact that it creates on their lending base.

Okay. Just a follow-up to a previous question from my first round. You said 50% of your energy loans are SNCs. How many of those are you agenting (inaudible)?

We agent 13% of those. If you include the club deals which are a little smaller, we agent almost 25%.

Okay. Thank you.

Thank you.

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

Thanks everybody for joining us this morning. As always, if you have any further questions, please give me a call at (918) 595-3027 or send me an email at JCrivelli@bokf.com. Look forward to talking to again. Thanks.

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