BOK Financial Corp (BOKF) 2016 Q3 法說會逐字稿

Greetings and welcome to the BOK Financial Third Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Joe Crivelli. Thank you, you may begin.

Good morning everyone and thank you for joining us to discuss BOK Financial Corporation's third quarter 2016 financial results. Today, we'll hear remarks about the financial results and outlook from Steve Bradshaw, 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 accompanies this call are available on our website at www.bokf.com.

Before we begin, I'd like to remind everyone that during this call, management will make certain forward-looking statements about its outlook for 2016 and beyond, that involve risks and uncertainties. Forward-looking statements are generally preceded by words such as believes, plans, intends, 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 will 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 are at $74.3 million or $1.13 per diluted share that was up from $65.8 million and $1 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 4, a $5 million unplanned legal settlement, higher amortization of 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 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 an 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 home direct 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.

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 position us well to deliver on this goal in 2017.

As Stacy Kymes will discuss in some detail, the ongoing stability and commodity prices continues to have a positive impact on credit quality in our energy portfolio, whereas we were continuing with ongoing negative migration in energy book over the past 18 months, that trend has now reversed and we are seeing meaningful positive migration from criticized 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 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 for quarter.

As shown on slide 5, loan growth was 0.4% for the quarter, a 1.4% annualized. This is a bit lower than recent quarters and it was due to a single large paid 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?

Thanks, Steve. Turning to slide 7, net interest revenue was $187.8 million, up $5.2 million from the second quarter, and net interest margin was 2.64%, up 1 basis point. This was driven mainly by higher loan yields, which offset lower yields on available for sales securities, and the dilutive impact of our subordinated debt offering, which was completed at the end of June.

Loan yields were in turn driven by a combination of factors, including higher 30-day and 90-day LIBOR rates, higher yields on energy loans, an increased mix of commercial real estate loans, which provides better yield than the corporate average, as well as a strong quarter for loan fees. On a year-over-year basis, net interest income was up $9.2 million and net interest margin was up 3 basis points.

On slide 8, as Steve mentioned, fees and commissions were a record $185.3 million for the third quarter, up 1% on a sequential basis and 12.5% year-over-year. Trailing 12-month growth was 4.4%, in line with our mid-single digit target. Brokerage and trading was down 3.9% sequentially, but up 20.3% year-over-year and 7.9% on a trailing 12-month basis. Lower syndication fees and municipal investment banking revenue in the third quarter was the primary driver of sequential decrease, while stronger derivative fees and commission is driving the year-over-year growth. Transaction card was down 2.9% compared to the second quarter, but up 4.4% year-over-year and 4.5% on a trailing 12-month basis.

As we've noted in the past, the year-over-year comparison is more appropriate for this business which has seasonal aspects to it. Transaction card revenue continues to benefit from geographic expansion and expansion of its sales force and sales channels as well as the transition to chip and PIN security standards.

Fiduciary and asset management revenue was down 2.1% sequentially due to the seasonal tax revenue in the second quarter, but up 10.6% year-over-year and 5.1% on a trailing 12-month basis due to continued growth in assets under management, as well as the impact of the Weaver acquisition earlier this year.

Mortgage banking revenue was up 11.3% sequentially, 28.3% year-over-year and 0.6% on a trailing 12-month basis. Continued seasonal strength, refinanced volume and expansion of the home direct channel were the main sales drivers here, offsetting in part the exit of our correspondent channel, which was effective on September 1. Deposit service charges and fees were up 4.6% sequentially and 0.3% year-over-year and 1.6% on a trailing 12-month basis due to increased overdraft volumes and higher commercial account service charge revenue.

Expenses were $262.1 million in the third quarter, up 6% compared to the second quarter and 24.5% year-over-year. Personnel expense was $143.2 million in the third quarter and other operating expense was $118.9 million. Within personnel, there is a modest impact from acquisition and lift-outs, as well as higher sales-related incentive compensation expense, and higher benefit costs in 2016.

Professional fees are higher in part due to Mobank-related expenses, which were $1.2 million in the third quarter. FDIC insurance continues to run about $2 million to $3 million per quarter higher in 2016, due to higher levels of classified loans, and the surcharges on banks over $10 billion in assets. We expect FDIC expense to begin to abate in the latter part of 2017, as classified energy loans continue to decline. Data processing and communication costs are higher, but much of this is revenue-related, and a portion of it is due to higher depreciation expense, which is running about $500,000 per quarter higher in 2016.

Mortgage banking cost increased this quarter but this was largely due to our mortgage servicing right amortization, which was up $1.7 million from the second quarter, and is up $4.7 million year-over-year. This line item is driven by the active refinance market we saw during the third quarter. Excluding mortgage servicing right amortization, mortgage banking expense was actually down $1.4 million compared to the second quarter. The largest driver of the increase in other expense category is a $5 million charge associated with a legal settlement in the third quarter.

Turning to the balance sheet on slide 10. The available for sale securities portfolio was down $32 million in the second quarter, and is down $61 million for the same period last year. Period-end deposits were $21.1 billion at quarter-end, up from $21 billion at the end of March, while average deposits were down slightly. BOK Financial continues to be extremely well-capitalized as evidenced by the capital ratios on this slide.

Turning to slide 11. The only change to the assumptions we have outlined for 2016 is the expectation for approximately $4 million in one-time expenses related to our cost reduction actions in the fourth quarter. We also expect to make a contribution of approximately $2 million to the BOKF Foundation in the fourth quarter. We're nearing the finish line on regulatory approvals from Mobank acquisition and expect to close the transaction during the fourth quarter. We are providing preliminary 2017 guidance as follows:

Continued mid-single-digit loan growth, stable to increasing net interest margin and net interest income. We expect loan loss provision of $20 million 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 $0.04 to $0.06 contribution to EPS from Mobank; note this a little bit higher than our original $0.03 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. Turning 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, or 1.4% annualized. As noted in the press release and in Steve's remarks, a single large paydown in the Oklahoma energy book had a negative impact on loan growth. You may remember that borrower advance had a positive impact on our loan growth in the fourth quarter of 2015. This borrower repaid its advances substantially in the third quarter in excess of $200 million of outstanding.

Excluding this paydown, 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 paydown just mentioned, balances would have been essentially flat. We don't read too much into the lower commercial loan growth in the third quarter, as it seems to be a combination of seasonal summer issues as well as a pre-election pause. Our plans remain 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 outstanding. Energy charge-offs were $6.3 million in the third quarter, down from $7.1 million last quarter. This loan charge-off was due to a single borrower that 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 dollar terms and on a percentage basis and 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 before this impacts loan growth as several deals closed over the past 18 months are entering the drawdown base. 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 quarters. The migration of the energy portfolio to non-accrual has a reversed course, and as noted earlier, non-accrual energy loans are down 15% this quarter. The uptick in non-energy non-accruals was due to a single borrower in the marine transportation portfolio.

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

Thanks Stacy. I'm proud of 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 received OCC approval last week and expect to receive the Federal Reserve's decision shortly. This will 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 City's operations expertise in commercial banking, wealth management and mortgage. This all-cash transaction deploys 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'll take your questions now. Operator?

Thank you, ladies and gentlemen. We will now be conducting a question-and-answer session. (Operator Instructions) Brady Gailey, KBW.

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, didn't have any revenue impact.

Yes, 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 it percentage of loans, is it 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, we measure that based on committed, not based on outstanding. So, that's why we -- as we look forward, we can kind of see, kind of second half of next year is when that outstandings will actually start to grow as a result of our effort to slow down a little bit in that space.

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

Yes, Brad, 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 presence, we can -- and we'll close the transaction hopefully here by the end of November. From an 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.

Brett Rabatin, Piper Jaffray.

I guess first just go back to the expense reduction, make sure I'm clear on the $20 million reduction from 2016. I'm assuming that's 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?

The $20 million is run rate benefit from those actions and we'll have approximately $4 million to $5 million of severance that will 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.

The net $20 million is related entirely to personnel and contract labor. We will still continue to look for opportunities to reduce non-personal expenses we work 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 Tier 1 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, I mean, 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. 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.

Yeah Brett, this is Marc Maun. We are looking at, that our reserve level is appropriate right now, but as things stabilize and start 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 will be affected by loan growth and we'll assess it each quarter and make sure that it's appropriate level.

Okay, great. Thanks and congrats on getting Mobank into the fold.

Thank you.

Jared Shaw, Wells Fargo.

Just to put the $20 million debate. 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 will also get the corresponding quarterly benefit of a $20 million run rate in 4Q core 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 severances I mentioned, but starting in 2017, you should get the full benefit each quarter throughout 2017.

Okay. 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 you see is the 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 state that we have, I think that you see really stable to growing economies and I think that as 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 modest growth, increasing consistent with the growth and improvement in commodity prices.

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

As we think about energy pricing, obviously we underwrite to the current strips, so we're -- 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 gas as we end 2016 and go into 2017. What price range that would be typically, certainly we have our first-year strip price in the $51-$52 place today. I think being there in the $50 to $55 range over the course of the next year certainly is something that we feel very comfortable with. Gas has rebounded very sharply over the last six months or so, very strong improvement there. And 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.

Thanks. And thanks for all the color around the energy credit, but if you look at the non-energy side, it looks like there is a pretty big jump up in potential problem loans that due to a handful of individual (technical difficulty), are there any broader trends we can look to?

No, we had one in the marine transportation space, but there is no broader kind of look through in our portfolio. Actually, we've all been kind of looking for the trickle down impact of lower commodity prices to the rest of the portfolio, and it hasn't surfaced anywhere really, particularly we've been focused in commercial real estate, but other commercial segments as well.

The portfolio has held up extremely well, and we're proud of the energy performance. We're proud of the energy growth, we had $200 million new commitments in the third quarter. Just a lot of headwind around paydowns 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 it's 30-day LIBOR is tied to more the loans than 90-day. And I know that three quarters of the loans that are variable are tied to LIBOR, and only one quarter to primary.

John Moran, Macquarie.

Just a quick question on the NIM outlook, wonder if you could walk us through the puts and takes were sort of stable or increasing next year? And then maybe in context of 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 reprice slightly downward 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 a continued remix of loans to securities in terms of earning assets, you should see stable to slightly improving net 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 maybe trending and obviously 2Q, 3Q has been really good there? And then the second one is just on the decision to exit correspondent, could you remind us what changed in that business in terms of the economics and why do you expect that that's going to be kind of like a permanent feature?

Well, your first question in terms of mortgage revenue, we do think it'll 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 break down the margins in that business relative to retail and our home direct Internet product, they're just abysmal compared to those other two categories.

To give you an example, we have over a 3% margin when you count the gain on sale and OMSR for retail and home direct, and it's less than 50 basis points for the 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 you 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.

So, it's relative return you get, you get way more bang for the buck in retail than you would in corresponding versus correspondent completely deteriorating or --

That's exactly right, it's just we'll focus our attention on retail and home direct and move away from the very low margin of correspondent business.

And the last one I had was just if you could give a quick outlook on fall redetermination, do you expect that those are going to be down and can energy -- it sounds like you -- I mean, you put on $200 million of new commitments this quarter. Can that actually chip into growth in 4Q and beyond?

Yes, with regard to the fall borrowing base redetermination, what we're seeing so far is really most of our customers are reaffirming their borrowing basis to slight increases. The price deck at this time is higher than it's been from the previous redetermination. So, what we're really seeing the impact is a decline in the advance rates, in the borrowing basis, as opposed to actual reductions in the borrowing basis and I think we are going to be committed to growth in the energy space and there's opportunity for that, just like it was in the third quarter.

The issue really is we're 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 deleveraging. 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 borrowers creating headroom inside of their facilities.

So, the harder thing to predict is how much deleveraging will continue to occur that will create kind of a headwind, if you will against the new commitment growth that we're able to put on the books. But this is an area that is core to us, we're excited about opportunities we see in the space today and want to continue to do more of this. We are not making any efforts to consciously reduce exposure in the space. Energy lending is important to us and has been for a very long time.

Great. Thanks very much for taking the questions.

Gary Tenner, D.A. Davidson.

Good morning, guys, it's actually (technical difficulty). Just a quick housekeeping thing, I may have missed this, but the legal settlement was that tax deductible?

Yes, it would be.

Alright. And the rest of that I guess $2.8 million, is that going to hit in 4Q?

No, we took care of $2 million of that. If you go back and look in the first quarter of 2016 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.

Jennifer Demba, SunTrust.

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 there maybe something else?

Well, I think from our perspective, we've always focused on organic growth, and Mobank is a great fill-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're 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.

(Operator Instructions) Michael Rose, Raymond James.

Just a couple quick questions on energy. Can you talk about the SNC exam that just went on. And then if you can talk about kind of a targeted size for the energy book, I think it slips about a little over 15% of loans, and where that may bottom out? Where are the right sizes? And then finally, talk about the pricing and competition for new energy credits? Thanks.

This is Marc Maun. I'll take the SNC question, and I'll turn it over to Stacy on that. We did get our results from the SNC exam. We really saw only a minimal amount of change in our criticized classified portfolio from that. 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 paydowns, and how you work through that. I'm 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 into next year, because we have a very active team in energy, it is actively looking for new deal and new deal flow. And so I'm confident that we'll continue to find those opportunities once the paydown 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 are very strong. And so, we continue to look for new opportunities and we think that spreads and energy as we get the portfolio effect over time should continue to improve, as we work through loans that were re-priced prior to the downturn versus current pricing, you should see some benefit there. So, we are in a good space because others are not as active in energy today, so we're 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 your assumptions in, that are baked in, in terms of paydowns into the loan growth guidance for the fourth quarter of next year?

Certainly the guidance that we've given around mid-single digit growth incorporates our assumptions around paydowns 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 paydowns as part of that.

Okay. But would you expect the pace of paydowns to slow next year relative to this year?

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

Great, 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 our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.