Greetings, and welcome to the BOK Financial Corporation Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Joe Crivelli, Senior Vice President, Investor Relations, for BOK Financial Corporation. Thank you. You may begin.

Good morning, and thanks for joining us. Today, we'll hear remarks about the quarter from Steve Bradshaw, CEO; Steven Nell, CFO; and Stacy Kymes, EVP, Corporate Banking. PDFs of the slide presentation and third quarter press release are available on our website at www.bokf.com. We refer you to the disclaimers on Slide 2 as it pertains to any forward-looking statements we make during this call. I'll now turn the call over to Steve Bradshaw.

Good morning. It was another strong quarter for BOK Financial. As noted on Slide 4, net income was $85.6 million or $1.31 per share, up 15% compared to last year's third quarter. For the first 9 months of the year, net income was $262 million, up 44% compared to the first 9 months of 2016. Recent positive trends continued, including continued strong growth in net interest margin and net interest income. No provision for loan losses for the fourth consecutive quarter due to our sound underwriting discipline combined with a very stable credit environment. Record results from our Wealth Management division. Through the first 9 months of 2017, total Wealth Management revenue, including net interest income and other operating revenue is up almost 10% and net income is up over 70% due to careful operating expense management. And our MSR hedging strategy continues to deliver good results in 2017, with much lower earnings volatility. Fee revenue was mixed in the third quarter. Mortgage revenue declined in the quarter due to lower refinancing volume combined with lower gain on sale margins. However, these headwinds were partially offset by relative strength in Wealth Management and transaction processing. Expenses were a bit higher than we had planned. But as noted on the slide, there were a handful of unusual expense items. With our strong financial performance this year, we have had to adjust upwards our assumptions for equity incentive vesting. We took a $5.9 million charge in the third quarter related to our equity compensation. $4 million of this is due to increased equity vesting assumptions, which is in turn driven by our strong performance this year. Another $1.9 million of this is due to the increase in our stock price. In addition, an OREO property was written down by $4.7 million. Finally, recent weather events, including Hurricane Harvey and a tornado which struck one of our Tulsa facilities, had a negative impact on operating results, totaling $2.4 million in the quarter. As shown on Slide 5, period-end loans were essentially flat for the quarter. Commercial and Industrial had a strong quarter, but this was offset by higher paydown levels in our commercial real estate business. Fiduciary assets and total assets under management or in custody were flat. I'll have some additional remarks to add later in the call, but Steven Nell will now cover the financial results in more detail. Steven?

Thanks, Steve. As noted on Slide 7, strong growth in net interest margin resulted in record net interest revenue of $218.5 million in the quarter. Net interest margin was 3.01%, up 12 basis points sequentially due to a full quarter's impact of the June Fed rate hike on loan and securities yields combined with a modest increase in cost of interest-bearing liabilities. We also had $4.7 million of nonaccrual interest recoveries during the quarter, which had a 6 basis point positive impact on net interest margin and 11 basis point positive impact on loan yields. We're still seeing very little deposit pricing pressure. On Slide 8, fees and commissions were $173.5 million, down 2.3% on a sequential basis and down 4.3% compared to last year's third quarter. On a trailing 12-month basis, revenues were essentially flat. Brokerage and trading fees were up 4.4% sequentially based on strength in the institutional trading business. Investment banking also had a strong quarter, while retail brokerage and customer hedging revenues were down sequentially. Transaction card was up 7.2% sequentially due to the typical summer seasonality and higher levels of customer activity. Fiduciary and asset management was down 2.7% sequentially but up 19.4% year-over-year and 17.8% on a trailing 12-month basis. Excluding the seasonal tax return business that generated $1 million of revenue in the second quarter, revenue would have been flat. Mortgage banking was down 17.8% in the third quarter. This was due to lower production volumes as well as the impact of increased competition on loan pricing. Turning to Slide 9, operating expenses were $265.9 million in the quarter, up from $250.9 million last quarter. This increase can largely be attributed to 3 line items. As Steve noted, there was $5.9 million of charges related to equity compensation due to our strong performance…

Thanks, Steven. As you can see on Slide 12, loans were flat compared to the second quarter. Commercial and industrial was up a very healthy 1.5%. However, commercial real estate was down sharply due to higher-than-expected paydown activity at quarter end. Within commercial real estate, we are seeing borrowers increasingly tap the permanent market in the current rate environment. The spreads between the 10-year and short-term rates are as narrow as they have been in quite some time. Within the industrial portfolio, we've even seen deals go to the permanent market before they are stabilized. The personal loans category, which as you know, largely represents our private bank inside the wealth division, continues to execute well with sequential growth of 3.2%. On Slide 13, credit quality remained strong. Nonaccruals were down substantially during the quarter. Net charge-offs were a very modest 8 basis points. And our loan loss reserve remains near or at the top of our peer group. On Slide 14, there was no change in the mix of our energy loans as oil and gas producers continue to represent 83% of total energy outstanding. In the third quarter, E&P line utilization was 55%. As we get further from the oil and gas downturn of 2014 to 2016, the portfolio continues to improve. Net charge-offs were $4.1 million. And it was the sixth consecutive quarter that criticized and classified energy loans decreased. In addition, loan growth has been outstanding in this sector, with end-of-period loans up nearly 15% from year-end. I'll now turn the call back over to Steve Bradshaw for closing commentary.

Thanks, Stacy. We are on track to post very strong financial results in 2017. The entire BOK Financial team is executing well, and the results are a testimony to their hard work. Obviously, the interest environment has helped 2017 earnings as margin expansion and the resulting increase in net interest income has been substantial. The disciplined credit culture of BOK Financial, combined with a good credit environment and economic backdrop has kept credit cost to a minimum this year. Our diverse portfolio of fee-generating businesses has helped offset weakness in the mortgage market, and expense management all year has been strong, even with the handful of unusual items that impacted expenses this quarter. We expect to build on our net income growth in 2018. Obviously, we won't see another significant leap forward in earnings like we did this year, but we are confident that we can continue to manage expense growth and drive continued earnings leverage and another year of meaningful earnings growth. Before we close, I would like to say a word about our Houston market. The market was challenged this quarter with the aftermath of Hurricane Harvey. We have 300 employees in Houston, and several of them were displaced from their homes. We quickly formed an Employee Assistance Fund, and over 600 BOK employees from across the footprint contributed over $88,000, which was then matched by the BOKF Foundation to help their colleagues recover from the storm. In addition, several employees reported that teammates arrived at their homes the weekend following the storm to roll up their sleeves and work shoulder to shoulder to remove debris, pull down damaged drywall and just lend a helping hand. And even though a few facilities were damaged by the storm, we were back up and running at full strength within a few days without really missing a beat. It was one of my proudest moments as CEO of this company and demonstrated the resiliency of our organization and the can-do spirit of our employees. We will take your questions now. Operator?

[Operator Instructions]. Our first question comes from the line of Jared Shaw with Wells Fargo.

As we go through the rest of this year and go into 2018 and like we see some more rate hikes, should we expect to see any change in the balance sheet structure, whether that's seeing declines in interest-earning cash or any changes in the borrowing structure? And would you be comfortable with the loan-to-deposit ratio going higher if we see deposit beta come in higher than expected?

Yes. This is Steven. I really don't expect that much of a shift on what we're currently doing given the scenario you painted. And yes, we would certainly entertain a higher loan-to-deposit ratio. I think we're around 78% or so now. This company historically has been in the upper 80s. We've even reached into the 90% range before. So we're definitely comfortable going higher. But I don't see any real wholesale change in the way we're managing the balance sheet at this point.

Okay. And then looking at the margin with the 6 basis point benefit this quarter from the interest recovery, was that really a one-off opportunity? Or do you think that as we go forward in the year, some of the - as we see improvement in the energy market, should there be additional significant recoveries there?

Well, I think it was a little larger than it normally is. I mean, we do have interest recoveries from time to time, not always in energy, but certainly, this quarter was higher than we had expected, and it's probably higher than it will be in future quarters, because we just don't have a pipeline. It looks like we'll gather that much in, in subsequent quarters. So that's why we wanted to call it out. It's a little bit bigger than normal.

Okay. And then finally for me. Just on the expenses with the increase in the incentive comp this quarter, was that more catch-up? Or is that reflecting a new level as we go forward here?

Well, two components. Most of it is a catch-up. I think Steve mentioned in his comments, about $4 million or so was really a catch-up adjustment based on higher probabilities and better performance. The other piece was our stock price went up almost $5 for the quarter, and that drove a portion of that increase as well. So that piece could be variable going forward, but I think the majority of that was a catch-up.

Our next question comes from the line of Brady Gailey with KBW.

So when you look at fee income, one of the big deltas to expectations, I believe, was in the mortgage line. $25 million of mortgage fees, that's kind of in line with the seasonally weak first quarter kind of notably below the $30 million you all did last quarter. Could you just provide maybe a little bit more color on why mortgage fees might have been down in the third quarter? And do you expect a rebound in that line item in 4Q?

Well, it's been very competitive. I think the pricing has been competitive in the market. We really had good performance in the second quarter, and we were able to price up a little bit. Our hedging activity behaved pretty well in the second quarter. So I would say we gave a little of that back in the third quarter. Of course, volumes tailed off a little bit as well, but I would say competitive pricing is the biggest driver of that. And as we look into the fourth quarter here, I don't see that changing much. I don't see us gaining a lot of momentum in terms of the volumes that we saw in the third quarter. And from what I'm seeing right now, the pricing's still pretty competitive. So that ought to give you a little bit of color on how to treat the fourth quarter for mortgage.

Yes, and Brady, this is Steve Bradshaw. I'll kind of add to that. We're seeing a 20-plus-percent decline in originations across the country. And to Steven's point, I think we're seeing much sharper pricing response from competitors, somewhat in the banking sector, but clearly in the nonbank mortgage sector. There's not been as much effort there yet to take out capacity, so they're using pricing to be able to fill that. You might recall we took out a significant amount of capacity this time last year as we exited the correspondent business. So from our perspective, that's not sustainable. But we believe that we'd see the next few quarters still being very tight from a pricing and competitive standpoint before that really shakes out. So that, in my mind, really explains kind of what's going on in the mortgage business today and why we saw some softness in the third quarter.

All right. That's helpful. And then my second question is on guidance. If you look at the 2018 guidance kind of versus 2017, a couple of the categories are down. Like you go from mid-single-digit loan growth in '17 to low single-digit loan growth in '18. Fee income growth was low single digits, and now you're saying it's flat. So it feels like revenue growth could come at a slower pace than maybe what we saw last year. Is that more of a function of 2017 just being a good year? What are the dynamics behind kind of the lower fee income and loan growth assumptions?

You want to - maybe we'll let Stacy talk just a little bit about the loan growth piece, and then we'll talk about kind of our budgeting effort as we move kind of later in the year and towards '18.

So if you look at - the original guidance we provided for '17 was kind of mid-single-digit loan growth, and we felt very good about that. Really you had kind of a market anomaly, to some extent, where here in the third quarter we had spreads tighten between short-term and long-term rates that created kind of a push for folks to move commercial real estate out to the permanent market. If you look at our C&I loan growth from third quarter at 1.5%, so 6% annualized that's kind of in line with that. And so as we begin kind of in this initial guidance that we provided to The Street, we began to look at what can we do there. Probably some effort to be a little bit conservative given it's early in the process, given our color is probably influenced by the real estate paydowns and trying to get a handle on the duration of that, when will that kind of begin to subside. And we do think that there is pent-up borrow demand really waiting for some level of resolution to tax reform. Whether it's going to happen or not going to happen, I think the resolution of that will probably provide some impetus there. And so as we look forward, we'll continue to revise that, look at that loan growth guidance. But I think that in a normal operating environment, you can expect us to grow loans between 2 and 3x what GDP is growing. We've looked at that over a long period of time. And so depending on your estimate of what the market is going to grow, we tend to correlate pretty heavily there. And so I think next year will be no different than that, normalizing for the real estate paydown activity.

Yes. I mean, I think, to Stacy's point, I mean, this is initial guidance. We got a lot of work to do. We were talking about this yesterday in terms of our budgeting effort. We've got meetings lined out in the month of November - would spend most of our time doing that trying to put together a 2018 plan that we can be proud of. But we expect net interest income to grow. We expect fee business to grow. And we'll work pretty hard on the expense side of the equation to ensure that we meet that operating leverage guidance that Steve has set our path on. So this is our initial take.

Our next question comes from the line of Brett Rabatin with Piper Jaffray.

I wanted just to, I guess, stick on the guidance and thinking about the expense growth guidance for the fourth quarter. Can you maybe give us - your essentially kind of looking at flattish expenses for the full year, which would imply a down rate in 4Q. Can you give us some - a little more color around just the personnel, especially kind of given the noise in 3Q? And then are there other buckets that are going to be lower in 4Q that are going to impact the fourth quarter?

Well, I don't expect a recurrence of the catch-up performance-based equity award compensation expense that we had in the third quarter. I don't think that will recur in the fourth quarter. Other than that, in the personnel line item, I don't really see much change there. I don't expect down in the other nonpersonnel categories, particularly the write-down of the oil and gas property that we had that was $4.7 million. I don't feel like that will recur. We've got $2.4 million scattered around different categories related to our weather events that we had in the third quarter. I don't expect that to play out again. So yes, I do think, you're just - expense level for the fourth quarter is going to be off a good bit compared to - much lower compared to what you saw in the third quarter.

Okay. And then just thinking about deposit betas and the cost of funds, your margin keeps moving up. You're a little more asset sensitive, I think, than maybe people realize. But I'm just curious on your thoughts on deposit betas in 3Q and kind of what you see happening from a funding pressure perspective mitigating the core margin moving higher from here and what your response is going to be as people look to maybe move from DDA to interest-bearing sources of deposits?

Well, for the third quarter, again, compared - the same experience we had in the second quarter and the first quarter. We just have not seen deposit pricing move higher, very little. You saw total interest-bearing deposit costs go from 40 basis points to 45 basis points this quarter. So it's - the market's pretty benign in terms of the pressures that we're feeling on our deposit categories. Certainly, it could happen in '18 as rates begin to continue to move higher, we think. But as of now and our projection for '18 is that we'll be able to maintain not completely, but similar kind of performance in '18 than we've seen in '17. Certainly, if that changes, then it's going to move - if you have nonmaterial deposits runoff or reprice more quickly than what we've modeled in our forecast, then we'll have to take some action. We'll have to ensure that we perhaps back off our securities portfolio to stay more - to stay towards asset-sensitive position. So yes, we'll just have to watch it over time. But today, we're not seeing much change in the deposit pricing.

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets.

A couple of things here. Stacy, the provision guidance, obviously, credit has been unbelievably strong. But how do you want us to think about that? Is this just a decision over whether or not it's 0 or $10 million to $15 million? Or is there something else you're thinking about in terms of holding off in the provision guidance?

Look, I think that it's very fluid. I think that there's a lot of things that go into determining provision levels. Loan growth is a big factor. Credit quality, continued improvement in criticized and classified levels. Charge-offs last year, in the peak of the energy downturn, we charged off 22 basis points. This year, that number is going to be probably less than 10 basis points for sure. So I think all ranges of possibilities exist there. But we're - it's too premature from our perspective to begin to provide some guidance for '18 around that until we get another quarter or so behind us, with stability in commodity prices and kind of begin to get our hands around a little bit our firmer estimates about loan growth for next year.

Okay. Okay. Feels to me like there's some tailwinds there, but I understand what you're saying on that. Back on the loan growth, you talked a little bit about that with Brady's question, but where are you the most optimistic. We've heard you on CRE, but where are you more optimistic for 2018?

Very optimistic in energy. We have great momentum there right now. We continue to see lots of very strong opportunities there. Our team stayed diligent and very proactive during the downturn. That dividend is being paid today. We expect to see continued strong double-digit growth in energy as we look forward. That area continues to have good risk adjustment spreads, and we're very favorable and constructive there. That's one of the opportunities that we see most prevalent as we move forward. I think that you can't ignore the great results we've seen in private banking either. Those guys have done a very strong job developing new business, and you've seen them continue to grow that personal loan category. You look at their growth over the last 12 months there, in particular, a lot of strong momentum there as they build out and continue to enhance that delivery.

Okay. Good. That helps. Steve, a question for you. If we kind of roll forward the expectations you guys have laid out, it seems like capital will start to stack up again, and I know you love the capital plan question. But just help us understand what you want to do with your capital in 2018.

Yes, I think from our standpoint, our view of M&A is probably a bit muted at the moment. Not that we're not still interested in expansion in some of our selected markets. Valuations appear to be pretty high. And I think given the - as Stacy mentioned, kind of given the uncertainty around tax reform, I think that's having an impact in terms of the - expect to be natural consolidation going on. So from our standpoint, we'd be in increasing capital mode in '18 but still open to select opportunities around our footprint.

Okay. Your buyback was - the last time you bought back stock was 20% lower. Any appetite at all for buyback?

Well, not at the moment. But as we get into '18 and consider what our organic growth is going to be, of course, we'll obviously look at our dividend level. And to Steve's point, what M&A opportunities might come around in '18, and certainly stock buyback is one of the options that we have to allocate and utilize some of our capital build.

[Operator Instructions]. Our next question comes from the line of Peter Winter with Wedbush Securities.

When I think about BOK, one of the differentiating factors is the fee income businesses. And if I look, it's going to be flat to slightly down this year and maybe just flat, just slightly up next year. And I'm just wondering what are some of the challenges that you can overcome to do a little bit better on the fee income side?

Yes, Peter, this is Steve. It's colored, I think, by the margin compression and the impact that's having on mortgage. As I mentioned earlier, we see that playing out over the next couple of quarters, while we would expect competitors to shed some capacity, which could then at least firm up current margins as opposed to declining. We haven't worked through all of our strategies yet for the other-related businesses. Wealth Management has had a phenomenal year this year. We would expect continued growth there. We'd also see that from our TransFund business and some of our other fee areas. So we certainly have work to do between now and year-end to set ourselves up for good growth in that category. But it is absolutely colored by what we're seeing going on in the mortgage business today.

Okay. And then just a follow-up. On the expense side, just given some of the weaker outlook - weak outlook on the fee income side, but you expect expense growth mid-single-digit. What are some of the drivers to the higher expense growth versus 2017?

Well, some of that is the carryover of investments we've made in our information technology space, cybersecurity, disaster recovery capabilities, modernizing some of our database bases across the company. There's some investments we've made over the past couple of years, Peter, that I think will flow out through expense over the next year or so. And so some of the categories of growth that you'll see higher than kind of single-digit growth would be in that equipment and data processing activity, just as we absorb some of those investments we made over the past year or two.

Okay. And if the revenues come in a little bit lighter than expected, do you think there's opportunities maybe to pull back some of the expense growth for next year?

Well, again, as Steve mentioned, we got work to do in budgeting. We've got that all kind of lined out for November. We'll take a hard look at every expense category, business promotion, professional fees, all those categories that are more controllable in nature. We'll certainly take a very hard look at those as we go into and develop our budget.

Yes. And Peter, this is Steve. I think the balance - the balancer there really is the multiyear increase we've had in technology spend. Some of that is related to infrastructure and business resiliency. Some of it is critical in terms of maintaining our competitive position within business lines. And so that elevated spend for the last few years is still there. There are some things you can do to moderate that if your revenue expansion is not as strong perhaps as you'd like. But those are critical investments to be made for the company. And so to Steven's point, we would tend to look at the other expense categories to try and get ourselves in better alignment.

Thank you. Mr. Crivelli, there are no further questions at this time. I'll turn the floor back to you for any final remarks.

Thanks, everybody, for joining us this morning. I'll be around all day today if you follow-up questions. You can reach me at 918-595-3027. Have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.