BOK Financial Corporation (BOKF) Q4 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the BOK Financial Corporation Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Chief Financial Officer, Steven Nell. Mr. Nell, you may begin.

Good morning and thanks for joining us. Today, our CEO Steve Bradshaw will provide opening comments; Stacy Kymes, Executive Vice President of Corporate Banking will cover our loan portfolio and credit metrics and then I’ll provide some details regarding our income statement items for the fourth quarter and provide high level guidance for 2020. At the end of the call, we’ll have Scott Grauer, Executive Vice President of Wealth Management, as well as Marc Maun, Executive Vice President and Chief Credit Officer available for questions. PDF of the slide presentation and fourth quarter press release are available on our website at bokf.com. We refer you to the disclaimers on Slide 2 as it pertains to any forward-looking statements we make during the call. I’ll now turn the call over to Steve Bradshaw.

Good morning. Thanks for joining us to discuss our fourth quarter and full year 2019 financial results. The fourth quarter concluded a second consecutive record year for BOK Financial, both from a net income and in earnings per share perspective. For the full year, net income was $501 million, up over 12% from 2018. Diluted earnings per share were $7.03 for 2019 that compares to $6.63 last year. 2019 was a broad base for each year with significant expansion of our fee businesses and continues to strengthen our specialty lending channels, while we also had accelerated growth in quarter – in our core deposit franchise. Additionally, 2019 saw us achieve our business integration and financial goals for our acquisition of CoBiz, which will help drive momentum in two of our most critical high growth markets going forward. Looking at the fourth quarter specifically, net income was $110.4 million or $1.56 per diluted share, down from our record third quarter, but up 2% from the same quarter a year ago. And as a reminder, we closed on CoBiz at the start of the fourth quarter of 2018, so the light quarter comparison is appropriate. Fee and commission revenue was up 12% year-over-year, those seasonal slowdowns and mortgage volumes along with slightly lower consumer service charges left our fee and commission revenue down 4% from the previous quarter. Expense management remains prudent though expenses did increase 3% this quarter due to elevated severance expenses as we work to right-size our business units heading into 2020 coupled with our annual charitable contribution to the BOK Foundation, which provides support to many non-profit partners in the communities that we serve. Our loan loss provision was $19 million this quarter, due to some migration in our energy portfolio and Stacy will cover that in more detail here in a moment. Turning the Slide 5, average loans were $22.2 billion, that’s up 3% year-over-year, though down from last quarter due to general pay downs in energy and commercial real estate and two anticipated large year-end pay down in our CI portfolio. Having said that, we feel good about our pipeline opportunity in the early start here in 2020. Average deposits were up 8% from the previous year, and that’s over 5% on a linked-quarter basis. Even with the strong growth this quarter, we were able to bring overall interest-bearing deposit costs down from 1.17% in third quarter to 1.09% in the fourth quarter. Growing deposits to fund loan growth was a significant area of emphasis for BOKF in 2019, and you can see that in our results. This focus will continue into 2020, allowing us to fund future loan growth. Assets under management or in custody were up over 2% for the quarter and more than 8% year-over-year, strong sales activity coupled with favorable equity markets were really the key drivers of that expansion. And we saw an opportunity to further invest in our company at a favorable price this quarter as we bought back 280,000 BOKF shares at $81.59 per share in the open market. I’ll provide additional perspective on the results at the conclusion of our remarks, but now Stacy Kymes will review the loan portfolio and credit in more detail. I’ll turn the call over now to Stacy.

Thanks, Steve. As you can see on Slide 7, period-end loans were $21.8 billion, down more than 2% for the quarter, while pay downs impacted our quarter-end numbers 2019 was a growth year for BOKF from a loan perspective, up 3% on average year-over-year. Total C&I expanded nearly 3% in 2019, though pay downs in our two largest growth engines, energy and healthcare left total C&I down 2.7% linked-quarter. Energy had a fantastic year in 2019, growing nearly 11%, while the segment was down $141 million for the quarter, the trends in the industry we’ve discussed remain true and pipelines remain full. I expect our energy growth to return to a positive level as we head into 2020. Our healthcare channel also had an exceptional 2019, growing over 8%. Though the quarter was flat, steady growth and commitment levels and our expertise in the senior housing space bodes well for another great year for healthcare in 2020. A slowdown in general C&I seems to point to increase cautiousness in the general middle market business community. Tariffs, trade disputes and the questions that arise heading into a new election cycle seems to have caused pause for some of our clients. Future clarity around the regulatory trade in an economic environment should help reenergize the middle market segment. Continued discipline around concentration limits in commercial real estate, coupled with late quarter pay downs left the segment down 4.2% for the quarter. Commitment volume is still solid in the space and we will continue to high grade through stringent customer selection as we manage the portfolio. On Slide 8, you can see that credit quality overall remains good. Non-accruing loans increased $8.5 million this quarter, primarily due to $6.6 million increase in a non-accruing community development credit. Net charge-offs were $12.5 million or 22 basis points on an annualized basis from $10.6 million or 19 basis points in the previous quarter, all relatively consistent with what we’ve seen over the past 18 months. Potential problem loans, which are defined as performing loans, that based on known information cause management concern as to the borrower’s ability to continue to perform totaled $160 million at December 31st up from $143 million at September the 30th. This increase largely comes from the energy portfolio as the capital markets environment is requiring certain customers to work through their liquidity needs. This situation may lead to additional non-accruals and some impairments. However, as we’ve discussed previously, our senior secured collateral position should protect us from material loss content. Based on evaluation of all credit factors, including changes in non-accruing and potential problem loans, as well as specific impairments of two shared national energy credits, which one we are not the lead agent, the company determined that a $19 million provision for credit losses was appropriate for the fourth quarter of 2019. I’ll turn the call over to Steven Nell to cover the income statement in more detail. Steven?

Thanks, Stacy. As noted on Slide 10, net interest income for the quarter was $270.2 million, down $8.8 million from the third quarter, as the full realization of the last two Federal Reserve interest rate cuts were felt in the quarter. Net interest margin was 2.88% down from 3.01% the previous quarter, I provided on the slide a roll-forward to highlight significant items impacting the NIM calculation. First, accretion levels were $5.1 million less this quarter due to the lower CoBiz loan payoffs, which reducing NIM by 6 basis points. Second, higher loan fees in the fourth quarter improved NIM by 3 basis points. Third, there was a 9 basis point decline in our non interest-bearing funding profile with a decrease in demand deposits and an increase in receivables from our trading activity. In addition, our earning asset yield declined, excluding accretion and fees of 29 basis points was effectively offset by 28 basis point decline in funding costs. While net interest income and margin have moved down over the past few quarters, the projected flat interest rate environment in 2020 should allow some stability going forward. On Slide 11, fees and commissions were $179.4 million, an increase of 12% quarterly and year-over-year, fueled largely by our strength in our brokerage and trading business. Brokerage and trading increased over 56% from the same quarter a year ago, while overall brokerage and trading was relatively flat in the quarterly comparison, growth and trading revenue was up $5.6 million, but was offset by lower customer hedging revenue and loan syndication fees. Mortgage banking revenue was down 16% from an expected seasonal slowdown. However, 2019 was a great year for the mortgage channel, as the favorable rate environment allowed us to grow the business 16% compared to 2018. As we enter 2020, we remain confident in our origination capabilities, even in an expected flat rate environment. Fiduciary and asset management revenue was up over 3% linked-quarter and year-over-year as strong sales gathering activities and favorable equity markets have fueled steady growth. Other revenue was down due to the variable nature of repossessed asset revenues from certain oil and gas properties that are contained in that line item. Turning to Slide 12, total operating expenses increased $9.5 million to $288.8 million. Personnel expense increased $5.8 million for the quarter; incentive compensation increased $2.6 million linked quarter due to an increase in cash based incentive compensation primarily from the sales activity and wealth management and commercial banking. Regular compensation increased $3 million, largely due to the severance cost from a realignment of personnel for the operating environment headed into 2020. Non-personnel expense was up $3.7 million from the third quarter, largely due to our typical year-end charitable contribution to the BOKF Foundation of $2 million. The mentioned pressure on net interest revenues moved our efficiency ratio back over 60% this quarter. While a 60% or lower efficiency ratio is still our long-term goal, it will be influenced by the mix of revenue going forward. Slide 13 has our current outlook for 2020. Average security balances remain comparable to current levels as we manage to a relatively neutral interest rate risk position. Average loan growth around the 3% to 4% with lower growth in energy compared to 2019. Average deposits are expected to cover loan growth for the year. Net interest revenue is expected to remain relatively flat compared to 2019, given overall lower interest rates for the year. Stable net interest margin from the current level, with a bias towards slight improvement if the overall net interest rate environment remains flat. Fee revenues grow mid-single digits with continued growth in brokerage and trading and assets under management and wealth. Efficiency ratio slightly above 60% as fee revenues grow faster than net interest revenue. Day 2 CECL provision levels will provide for loan growth and will be influenced by changing economic outlooks. We’re not expecting any meaningful changes in the historic loss rates during 2020 that drive our models. Tax rates approximately 21% of pre-tax income. We will continue to provide sufficient capital for loan and balance sheet growth, a competitive dividend payment and a modest level of optimistic – share repurchases. Capital ratios are expected to improve slightly over the course of 2020. And lastly, I want to share the updated transition impact of CECL that we expect to book on day 1. After many test runs, we expect the pre-tax transition adjustment to range between $60 million and $65 million, which is in the middle of the range we provided last quarter. We have elected to phase in the impact of CECL transition on regulatory capital over a three-year period. I’ll now turn the call back over to Steve Bradshaw for closing commentary.

Thanks, Steven. 2019 was an outstanding year for the organization and one that’s really a testament to the diversity of our revenue model. 2019 proved more challenging for the industry as a whole compared to 2018, as we faced some pretty significant revenue headwinds when interest rates moved lower starting in mid year. While this pressure typically contracts the earnings potential of regional financial institutions, we saw a strong surge of revenue from our fee-based business units that perform exceedingly well when rates declined. This was no accident. We are purposefully building to perform under any economic cycle. And that we remain optimistic in our ability to continue to grow our business in 2020, the headwinds of lower rates and the economic uncertainty there’s always exaggerated in a national election year may well prove challenging. However, we have always taken a long-term approach to building shareholder value and that focus will continue to guide our decisions on how and where we invest in the company going forward. With that, we’re very pleased to take your questions. Operator?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

Great, thanks. Good morning.

Good morning.

Good morning.

Good morning Ken.

Just wanted to start off with expenses, you know hoping to get a little more clarity in terms of maybe $1 amount of expenses, because it looks like this quarter was certainly higher than expected, even backing out the severance and the charitable contribution. And I know your guidance is, that it’s going to be above 60% on the efficiency ratio, but can you just provide a little more guidance in terms of like what dollar amount is the right number to be thinking about here?

Well, I think when you look at 2020 and the kind of revenue that we think will create in the fee businesses, I think that’s one of the reasons I feel like the efficiency ratio is going to be a little higher than 60% is because our fee business revenue growth is going to be more than our net interest income growth. And when you have fee revenue growth, it comes with a little bit higher expense base, commissions and other activities there that just drive a little bit higher efficiency business in terms of the percentage. And so, I think a level you know, you want me to point to the exact dollar level. I think it’s, you know, adding the 2020 is going to be closer to you know, where we are here at this one $288.8 million, somewhere you know plus or minus in that area I think going forward for 2020 is probably a pretty good expense level to use.

Yeah, and Ken, this is – this Steve Bradshaw. One thing that’s always a bit of an anomaly in fourth quarter is that, you know, there we have a number of people now and just in the fee businesses, but also in a lot of our lending areas that have annual incentive targets and it becomes while we accrue for those throughout the year as we track it, it becomes more certain when again in the fourth quarter. So we always feel a little bit of lumpiness on the incentive comp side as we’re accruing for the year-end bonuses. So I don’t disagree with the way Steven characterized that, but I do think Q4 always has a little bit of incremental incentive comp cost in it.

Got it, and understood. And then two really quick questions for you. The first question is, when you see your capital ratios are going to improve, I guess whose perspective is that? I mean, they go up or they go down over the course of the year?

Well I you know, I think what we’re trying to do is just improve those ratios just modestly okay you know –

Meaning that you’ll go higher?

They go higher.

Okay.

The percentages go just a little bit, you know, we’re not talking about a lot of capital accumulation here you know, I think will continue as I mentioned to pay a good strong competitive dividend, we’ll take advantage of the market where we can opportunistically and stock buybacks. But I would like to see the ratio go up just slightly over the –

Okay, perfect. And then just the last quick question, how many energy credits I mean, what percentage of your energy portfolio are you not the lead on in the – particularly in the SNCs?

It’s about 65% of the portfolio on the SNC portfolio that we are not the agent on.

And SNCs as a percentage of total?

As a percentage of total energy – it’s going to be a relatively high percentage.

49%.

Yeah, half.

Perfect. Okay, thank you very much.

Our next questions come from the line of Brady Gailey of KBW. Please proceed with your question.

Hey, good morning, guys.

Good morning.

Good morning.

Good morning Ken.

When you look at the guidance for 2020, you say stable NIM from current level, I’m assuming that means, a stable NIM from the fourth quarter level of $288 million. Is that the way to read that?

That's correct. That's what we think.

Okay and then how – when you look at accretable yield levels, here the $5.8 million in the fourth quarter was the lowest level you had in all of ‘19. I know that is a shrinking bucket, but how do you think yield accretion will trend in 2020?

You know, I think that $5.8 million was a little bit lower than I honestly expected. And I really think 2020 will fall somewhere in the kind of $25 million to $30 million range of accretable yield. You know, I don’t know how it’s going to fall by quarter, but I think that’s the level that you should probably expect.

Okay. And then finally just on deposit costs. I know when we spoke 90 days ago, you guys were saying deposit cost could be flat, if not up a little bit. You saw deposit costs down in the fourth quarter. Maybe talk about you know, the option of continuing to reduce deposit costs from here or do you think you know, that kind of bottomed at this 4Q level?

This is Stacy. I mean I think if you look at what we did in the fourth quarter, where we increased deposits about $1.5 billion, but yet reduced overall deposit cost, as you mentioned, I think that was a huge win for us in terms of continuing to move deposit costs down as we look forward. I still think you’re going to find opportunity to continue to lower deposit costs. LIBOR moved immediately as the Fed move deposit cost lag, they lag going up, they’re going to lag going down. That gives us some opportunity as we move into 2020 to continue to improve our deposit costs as part of our funding, and hopefully that translate into improvement in the NIM as we move into 2020 as well.

Got it, thanks guys.

Our next questions come from the line of Michael Rose with Raymond James. Please proceed with your questions.

Hey, guys. Just wanted to touch on the loan growth outlook, it looks like 3% to 4% full year average to full your average. I guess I’m trying to reconcile that with the difference between the period-end balance and the average balance for the quarter looks like there might have been some pay downs or some charge-offs obviously at the end of the year. And trying to reconcile that with some of the comments around you know, some softness around the middle market and you know, energy not growing as much as we move forward. So if you can just help me square that, I’d appreciate it. Thanks.

Absolutely. Well we had really pretty good loan growth throughout the quarter it was really in the last couple weeks of the quarter that we saw pay downs in both energy and commercial real estate. We’ve seen a nice rebound in outstanding balances early in January, so we’re hopeful that some of those pay downs that you saw are revolving in nature and will come back. If you look at where we grew last year, you know, energy grew a 11%. We’re clearly not forecasting energy to grow at that level as we move forward. We don’t you’ll have – you will have some lumpiness as we’ve had in previous periods around quarter-over-quarter growth, but if you look at long-term growth being in that 3% to 4% range, it’s something that we feel very good about. We don’t think that the fourth quarter was a trend in any respect as we looked at the nature of some of those declines there was seasonality and some of the businesses that we have on the C&I side, they tend to fund up in the middle of the year and then pay down at the end of the year, energy had paid downs, we had pay down in the commercial real estate, we don’t think that’s really representative of what we’re going to see as we move forward and certainly that has held to be true here very early admittedly in the – in this new year. So I think – I feel very good about the guidance that we’ve provided in that you know 3% to 4% range and certainly don't see anything today that would make me think that that’s not achievable.

Okay, thanks for the color. And then maybe just switching gears to energy, maybe for Marc. You know, where – can you just give some greater color on you know, maybe what caused some of these issues for these two energy SNCs, I assume it probably has to do with the company’s running out of cash. If you can just give some color there and then whether they were gas related or oil related? And then has anything changed as it relates to your thoughts around energy lending, you know, as we move forward as an asset class? Thanks.

Well, first on the tracking energy as a class, what’s, you know nothing’s really changed on how we’re approaching it. What we’re seeing in the market is really, there is an impact from the capital markets and the A&D market being a bit closed in certain circumstances and natural gas prices and the NGL prices are lower right now. So that is causing some issues for certain credits. But again we’re continuing to be 78% E&P first lien secured deals from a gas price perspective, 95% of our customers have some form of hedging. You know, we don’t really look at it on a portfolio basis, but we are pleased that we’ve seen our customer base pursue hedging as a way of protecting their downside risk, you know, so it relates to specific credit you know, we kind of monitor those on an individual basis and don’t really get too detailed about what’s going on on particular deals. And well I can tell you that, you know, we feel very strongly that our workout team is in certain circumstances is taking all steps necessary to minimize whatever exposure we have and minimize the amount of loss such that we really feel like going forward in 2020, we will continue to have, you know, our 12-month loss in the 25 base - 20 basis points to 25 basis points, which is consistent with what we’ve had in the past. Maybe a little lumpy in the first quarter, but going forward, we don’t see it getting out of whack with what we’ve had historically.

Okay, thanks for taking my questions.

Our next questions come from the line of Peter Winter of Wedbush Securities. Please proceed with your question.

Good morning.

Good morning, Peter.

I was wondering can you talk about some of the drivers to the 3% to 4% average loan growth, because especially with energy which was the main driver for 2019 is going to slow and just general middle market a little bit of cautious – caution there?

This is Stacy, Peter. Certainly energy will continue to be a driver for us. I certainly don’t want to indicate that it’s going to not grow next year, we think there’s going to be opportunity there, we grew at 11% I don’t think we’ll grow at 11%, but I think we can grow mid-to-high single digits inside of energy, which is obviously a large portfolio for us. We have ample room under our commercial real estate limits to continue to grow there. Our teams there are continuing to see opportunities that we think are positive and reasonable from a credit risk to take at this point in cycle. So we think we’ll see growth there. Healthcare has been an area that we continue to grow and invest in and we see – you see that good growth for the year in healthcare, we have high expectations for that team in 2020 and we think will continue to grow there. Where some of the softness is, is maybe on the lower end of C&I, where you may have a sole proprietor or a single business owner who is kind of a little bit more cautious about the macro environment. But we think that clearly, if you think about what we’ve done on the wealth side, we grew our lending side in the wealth space, you know, strong double-digits last year and we think that will be a growth driver for us in 2020 as well. So as you kind of add the pieces together and roll that forward into 2020, we certainly feel very confident that something in the 3% to 4% range is very achievable for us.

Okay. And on the fee income side, you talked about brokerage and trading and wealth. I’m just wondering, can you talk a little bit, Steven about the outlook for mortgage banking in 2020?

Yeah, so I think we have good origination capability across our footprint, we feel very confident with the purchase market there and our ability to serve that market. And so, I do think it’ll be a little lower in total for the year of 2020, but I think we’ve got a great approach and a good process and we’re pricing pretty well, we’ve got good discipline there. And so I feel confident that we can achieve some pretty good results in mortgage, it may not be at the same revenue level that we achieved in 2019, given the different, you know, rate environment. But I do feel pretty good about the continued growth in that sector.

Okay. And then just my last question, I know you guys have done a lot of work on reducing expenses at the Bank. I’m just wondering, you know, with a tougher revenue environment are there still opportunities to cut expenses at the Bank?

Yeah, Peter, this is Steve. We actually really worked in earnest on that initiative really going back into the fall, when it became apparent that we were going to see further rate cuts and have more pressure on the net interest revenue side in ‘20, you saw us take a little over $2 million in severance costs in the fourth quarter. And that was really just to identify and where we thought we had some opportunities across the board. We’re also curtailing some of the expansion of new positions across the Bank as well. So well there’s always opportunities and we’re always seeking an opportunity to improve efficiency. We’re being careful not to do that on the backs of reducing our investment commitment from a technology perspective, that’s important to us competitively and we continue to make strides there, but no question will have a hyper focus on expenses really throughout 2020.

Okay. Thanks for taking my questions.

Yeah.

Thanks, Peter.

Our next questions come from the line of Gary Tenner of D.A. Davidson. Please proceed with your questions.

Thanks. Good morning, guys.

Good morning.

Hey, so two questions. One, on the deposit side, you gave obviously, Steven, the sequential quarter change in deposit costs. Could you give us any inter-quarter color in terms of deposit costs may be worth they were in December?

No, I mean I don’t have that in front of me exactly what they are in December. I just know you know the composite deposit costs for the quarter as Stacy mentioned earlier, we were happy to see that go down from 1.17% to 1.09%. As he mentioned, I think there’s opportunity there to continue to drive that down a bit. And – but, you know, beyond that I probably wouldn’t comment further.

Okay. And then broader perspective on the Oklahoma economy you know, we’re hearing you know that maybe is a bit of a slow down there, lower tax receipts there’s been some job cuts I think it’s some of the larger energy companies in the state. Can you talk about kind of the perspectives for the broader Oklahoma economy?

Oklahoma is doing well, I think the decline in tax receipts is largely driven by declines in growth production taxes as there’s been less drilling in the scoop and the stack here in Oklahoma, but kind of corporate taxes and personnel income taxes have held in very well and are actually slightly up a little bit. So I think the Oklahoma economy is doing well. We don’t see any weakness really the job cuts seem to be being able to be absorbed by the economy in a reasonable period of time. So we’re not seeing kind of inherent weakness there, understanding that there is some dislocation from time to time with certain companies, but there’s job growth here too that’s able to absorb that and states doing well.

All right, thank you.

Thank you.

Our next questions come from the line of Matt Olney of Stephens, Inc. please proceed with your questions.

Hey, thanks. Good morning guys.

Good morning, Matt.

I want to go back to, I think it was Peter’s first question on loan growth drivers in 2020. And Stacy, it sounds like energy will be a decent part of the driver, and I think energy is now around 18% of loans outstanding. Can you just remind us what’s your internal limits are on this asset class? And with the higher charge-offs that we saw this quarter from energy? Is there any pause or concern about growing this book in the future? Thanks.

Sure. You have ample room inside of our concentration limits. We don’t see anything that would be a constraint on our ability to grow it other than the opportunity to find good deals. If you look at, you know, actual net charge-offs, we’ve been in this $10 million to $12 million per quarter now for a while, I don’t see the fourth quarter as an anomaly from that perspective I think it’s very consistent actually, if you go back and look at the fourth quarter last year and net charge-offs fourth quarter-over-fourth quarter almost identical. So we’re, as Marc alluded to, we’re kind of providing some guidance that we think net charge-offs will be in that, you know, 20 basis point to 25 basis point range next year for the full calendar year. There could be some of that that’s front loaded earlier in the year as some of these near-term issues work themselves through the process. But we still feel very good about this space. You talk about net charge-offs in energy this year, they were higher than last year. They’re at about you know, 91 basis points or so in the E&P space, but if you think about the sector overall, we’re getting 100 basis points to 125 basis points additional spread on those loans, we think we’ll continue to see some opportunity to improve that in 2020, as others think about their exposure here, but we like this business through the cycle, we understand that this has been a longer-term ebb and flow in this industry than we’ve seen in a while, but we have a great team. The credit teams in the line are working great together. We have a great engineering staff. We think that we’re well positioned to be able to manage through this and do it in a way that is good for the shareholders and good for us. I think we’ve talked about there will be some happiness and criticized and classified and non-accruals and you see that a little bit, but even with all that our non-accrual loans are less at the end of the fourth quarter than they were at the end of the second quarter. So there’s a little bit where we’re going to go out, there’s a little bit where we’re going to go down, but it will ebb and flow and it’s at a level that we believe is very manageable. And you know, for the full year, we’re going to have 21 basis points in that charge-offs for the company, we think that’s going to compare very favorably to our peer group. And so it’s an asset class that clearly is in the media a lot, there is issues with around liquidity in the space to a large extent, but we’re working through that and think we’re very well positioned to manage that. We’re still as energized if you will, around energy as we ever have been, because we think that it’s an important part of our DNA as a company and we continue to want to emphasize that as a core product offering for BOK Financial.

Okay, thanks for that color, Stacy. And then sticking on the prior discussion. The press release mentioned that non-accrual loans did pick up and I think it was point to a $7 million increase from a multifamily community development credit. Can you tell us more about this credit and is that part of the senior housing portfolio?

It is not a part of the senior housing portfolio. This is a low income housing tax credit deal that we made as part of our investment in the communities that we serve. It has demonstrated some weakness and since it has been slower to lease up, but leasing is commencing it’s just moving at a slower pace. We don’t perceive any real significant loss. I won’t say zero loss, but certainly not any that significant related to that new non-accrual loan in the fourth quarter.

Okay, guys, thank you.

Thank you.

Thank you.

Our next set of questions come from the line of Jon Arfstrom of RBC Capital Markets. Please proceed with your questions.

Thanks. Good morning all.

Good morning.

Hi, Jon.

Two follow-ups, Steven maybe for you early on when you talked about the NIM you said it was the full realization of the last two cuts. We talked a little bit about the deposit pricing, but I’m just curious are you saying that you feel like the earning asset yield pressure that we saw last quarter is essentially run its course, is that the message that you’re sending?

I think a good portion of it is, yeah. When you think about the number of – the percentage LIBOR based loans that we have re-priced effectively and so I think the majority of that is in the numbers.

Okay, good. And then Stacy or Steve maybe for you. This general slowdown in C&I that you talked about and I think you used the term pause and maybe it’s a confidence issue. Obviously, three months ago it was maybe a little bit more pessimistic and things are a little more optimistic today. Have you seen any of that positive confidence improve a bit in the last three months or is it just more the same?

I think the environment on the middle market and lower end middle market of C&I side has been relatively consistent over the last few months. I think as we began to get more certainty around some of these things, I think you’ll see continued opportunities for people to invest in their business, buy new piece of equipment, add a line, grow and expand the business, but today that’s not been an area that we’ve seen a lot of growth in, certainly outpacing GDP growth. You know, we talked for many years about kind of being able to outpace GDP growth, you can do it a little bit, but not a much and not consistently and if you do, then, you know, be careful. And so I think that’s kind of what we’re seeing is just kind of slow steady growth, not you know, high single digit kind of growth in that space.

Okay, good. Talked about two large year-end expected pay downs, can you give us an idea of the size of those material –

No we didn’t have, we had pay downs broadly in both – in really three areas in energy and commercial real estate and in our wholesale retail sector. Just portfolio pay downs, they weren’t large credits. They, you know, some of that cyclicality of one of those in the wholesale retail sector tends to fund up in the summer as they go through their kind of Christmas selling season and they buy inventory and they tend to sell down as cash flow comes in during that period of time. Energy and commercial real estate were, you know, just kind of the nature of the business, nothing unusual there particularly, but as I look at the early part of 2020, I see a nice rebound there and so I’m certainly optimistic as we move into 2020 that that was not a trend, but just kind of a late fourth quarter anomaly sometimes you see those kinds of things, Jon, and I don’t know if it’s, you know, balance sheet dressing at the you know, for some of those companies are not when dressing, but we’ll see that and tend not to react to that real strongly based on what we see late in the fourth quarter as we move forward.

Okay, all right. I may have misheard you – but that helps. And then last one, it sounds like you still – you have quite a bit of room in commercial real estate, but you mentioned concentration limits a couple of times. Can you just remind us of the themes and kind of the guardrails on that?

So, you know, commercial real estate’s a 100% - it’s based on both of our limits in energy and commercial real estate are based on committed, not outstanding, there are 175% of tier 1 capital and reserve for commercial real estate and it’s 225% of the joint capital reserves for energy, that we’ve got ample room to grow consistent with the guidance that we provided in both those spaces. So we’re not – we don’t have any overriding concerns that our internal concentration guidelines will be a constraint for growth in those areas in a meaningful way in 2020.

Okay, all right. Thank you.

Our final questions come from the line of Jared Shaw of Wells Fargo Securities. Please proceed with your questions.

Hi, good morning. This is actually Timur Braziler filling in for Jared. First question, I just want to circle back to some of the commentary on energy. I’m wondering at some of the weakness in the energy market is manifesting itself in other industries? And if so, how much of that is driving the commentary around the sluggishness in middle market C&I?

You’re talking just a broader spillover effect in the broader kind of Colorado, Texas and Oklahoma economy?

Correct.

You know, it’s a natural conclusion to see that and wonder about that. It’s not obvious to me at this stage, that that’s what we’re saying. If you think about really from my perspective, this is the kind of the tale of this original downturn that happened in you know, 2015-2016. I don’t – I think it was more pronounced in that period of time. I think where we are today, it’s not nearly as pronounced and it’s a little bit more steady state from that perspective. I’m not necessarily – you know, it’s a good question, but I’m not necessarily seeing a direct tie at this point to the slowdown in general C&I to the weakness – that some weakness has been demonstrated [technical difficulty] I think that was more obvious and pronounced you know several years ago, but as we’ve stabilized in this kind of $55 to $60 price for oil, particularly in our footprint markets, I think that that’s less of an issue.

Okay. And then maybe switching gears to the deposit growth this quarter. Pretty impressive. Was that just the culmination of the work that’s been going on that kind of all hit in the fourth quarter. And I guess looking at some of the initiatives that have been taking place, what still remaining and how should we think about deposit growth heading into 2020?

So you know deposit growth is something that Steve laid out for us is an important initiative to kind of try to grow deposits to fund the loan growth in 2019. And as you go through that process, it's a hard – it’s a ship that doesn’t turn immediately. It takes a lot of time and effort to begin to cultivate and identify the opportunities. If you look in the fourth quarter, Scott Grauer in our wealth team really did an exceptional job and bringing in great deposits prices that at reasonable levels. They were a big driver for the deposit growth in the fourth quarter. But the commercial businesses did a great job with that as well. Really just as a result of the long-term effort kind of the culmination of an effort that’s been going on for a while in terms of moving the deposit needle. As we think about 2020, I think our really desire is kind of growth at a reasonable price, we want to grow, to continue to fund the loan growth but we’re very mindful of ensuring that we’re paying attention to the cost of those deposits and doing everything we can to minimize the impact to our net interest margin as we think about growing deposits in 2020.

Okay, and then just last one for me looking at mortgage banking revenue versus expense and the disconnect there this quarter. Is that a timing issue or was that a true upon incentive for the strong year? And –

Yeah you know, the biggest driver of the revenue side is commitment levels and then the expense side is really tied more to loan fundings. And so, if you look at loan fundings, they’re pretty level. And so the work that had to take place to get loan funding is completed in the mortgage banking costs line item is there, but the revenue side is more influenced by the commitment levels at the end of the year, which did drop off. So that’s kind of the disconnect just timing.

Great, thank you.

We have reached the end of the question-and-answer session. I will now turn the call back over to Steven Nell for any closing remarks.

Okay, well thanks everyone for joining us today. We appreciate all your questions and interest in BOK Financial, and if you have any further questions, give me a call at 918-595-3030 or you can email us at IR@bokf.com. Have a great day.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.