Greetings and welcome to BOK Financial Corporation Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I would now like to turn the presentation over to Steven Nell, Chief Financial Officer for BOK Financial Corporation. Please proceed.

Good morning, and thanks for joining us. Today our CEO, Steve Bradshaw, will provide opening comments, and Stacy Kymes, Executive Vice President of Corporate Banking, will cover our loan portfolio and credit metrics. Lastly, I'll provide details regarding net interest income, net interest margin, fee revenues, expenses, and our overall balance sheet position from a liquidity and capital standpoint. Joining us for the question-and-answer session are Marc Maun, our Chief Credit Officer, who can answer detailed questions regarding credit metrics, and also Scott Grauer, Executive Vice President of Wealth Management, who can expand on our wealth management capabilities, which have led to another fantastic quarter for the company. PDFs 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 two pertaining to any forward-looking statements we make during the call. I'll now turn the call over to Steve Bradshaw.

Good morning, and thanks for joining us to discuss the fourth quarter and full year 2020 financial results. In summary, despite a year punctuated with hurdles, it would be difficult to overstate the flexibility and persistence our organization demonstrated this past year. A record $786.4 million in pretax pre-provision revenue for 2020 proved once again the strength of our diversified revenue strategy and the stability it provides during times of economic stress. More importantly, it underscores the breadth of our service capabilities and the value that we provide our customers. Start on slide four, full year net income was $435 million or $6.19 per diluted share. Looking specifically at the fourth quarter, net income was a record $154.2 million or $2.21 per diluted share, represented EPS growth of 1% on a linked quarter basis and more than 40% from the same quarter a year ago. The key items that drove our success this quarter were starting another outstanding broad-based earnings quarter from our wealth management business, continued elevated production from our mortgage team, though at a decreased level from the last two quarters as seasonality and modest margin compression materialized following the summer's mortgage boom, but mortgage margins remain strong relative to the first half of 2020. No credit loss provision was needed this quarter. And in fact, the improving economic outlook combined with improving credit trends allowed us to release $6.5 million of our reserve. Lastly, the proactive measures we took to control expense levels at the outset of the pandemic in March served us well in the fourth quarter as they did for all of 2020.

Thanks, Steve. Turning to slide seven, period-end loans in our core loan portfolio were $21.3 billion, down 1.8% for the quarter. As Steve mentioned, quality borrowers reduced leverage in times of economic uncertainty, which has been the case with our borrowers again this quarter. Looking at the energy portfolio, balances contracted by 6.7% for the quarter and 12.7% for the year. While commodity prices have improved considerably over the last few months, sourcing new deals sufficient to offset paydowns in the current environment remains a challenge as the existing borrowers continue to pay down debt to reduce leverage. Despite these factors, we remain optimistic about lending and energy-related revenue growth heading into the New Year as we continue to support our customers in this space. Remember, our diversified revenue strategy allows us to look at clients holistically. And the energy business is far more than just lending as witnessed by the record level of energy hedging revenue this year. Treasury, retirement plan services, and personal wealth management are all businesses that continue to grow and serve our energy client base. Healthcare balances were down slightly this quarter as growth in senior housing loans was offset by a decrease in hospital system loans. For the year, healthcare loans were up 9% year-over-year, primarily due to growth imbalances from our hospital systems clients who demonstrate a strong credit profile.

Thanks, Stacy. With a second consecutive record net income quarter, our diversified revenue strategy is clearly providing a differentiated outcome in this low rate environment. Outsize contributions from our wealth management team, coupled with diligent expense management, contributed to our success this quarter, mitigating the impact of the current low rate environment. Turning to slide 11, fourth quarter net interest revenue was $297 million, up more than $25 million from last quarter. The increase relates largely to net interest revenue earned on a $5.1 billion increase in trading securities from our brokerage and trading customer transactions. I'll describe in a moment the shift in net interest revenue from fee revenue from our brokerage and trading business this quarter. Net interest margin was 2.72%, down 9 basis points from the previous quarter. I provided on the slide a roll-forward of net interest margin and net interest revenue from the third quarter to the fourth quarter, highlighting some more significant items. PPP fees were higher in the fourth quarter as more loans were forgiven, and CoBiz discount accretion was lower this quarter from an elevated level in the third quarter. The shift in brokerage and trading customer transaction revenue from fees to net interest revenue this quarter had a diluted impact on net interest margin but increased the dollars recorded in net interest revenue. Other infrequently occurring loan fees and interest recoveries are also noted in the slide to emphasize a core net interest margin of 2.67%. Reinvestment at cash flows from our available for sale securities portfolio continues, with the portfolio yield declining 13 basis points to 1.98%. Additionally, we continue to have success driving interest-bearing deposit costs down from 26 basis points last quarter to 19 basis points this quarter. While there are many moving parts to consider, including the continued recognition of PPP interest and fees, the combination of continued re-pricing of the AFS portfolio and the limited room to move interest-bearing deposit costs down further will apply pressure to net margin in future quarters. Turning to slide 12, you can see the impact of the shift of brokerage and trading fee revenues to net interest revenue that I mentioned earlier. This is largely from the record volume and timing of settlement in our mortgage-backed trading securities, which resulted in the customer transaction revenue being earned and accounted for as interest versus fees.

Thank you, Steven. We often share that we have intentionally built BOK Financial to mitigate downside risk and earnings volatility in times of economic uncertainty. Discipline credit underwriting throughout the cycle and investing in growth for fee-based businesses has been a lasting point of pride for our company for many years. 2020 was the ultimate test of that strategy. The pressures of such a challenging year should be detrimental to the areas potential of most regional financial institutions, but I'm very proud to say that we delivered a differentiated outcome for our customers, our communities, our employees, and our shareholders. Looking ahead to 2021, we expect that strategy to continue to deliver solid results. We see an opportunity to further our market share with select fee business segments along with a return of lending opportunities as our clients' confidence rebounds with the economy, motivating them to resume capital investments. While 2020 proved that early year economic forecasts can change abruptly, it also showcased the value of our diversified revenue model along with the experience and leadership of our management team, as we worked through the challenges brought by the pandemic. With that, we are pleased to take your questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

All right. Great. Thanks. Good morning, guys.

Good morning.

Good morning.

I just wanted to clarify my understanding of the additional trading securities in the NII line. Did you all initiate this? And should we consider this the appropriate level for both brokerage and NII? I'm trying to understand how everything fits together. Thank you.

Yeah. Ken, this is Steven. I think it was market dynamics. There was a record trading in Ginnie Mae securities from all of the summertime activity. And we facilitated those trades with our clients and those securities settled on our balance sheet more so than some of the previous securities that we traded with our clients. And so, we earned that transaction revenue through net interest income versus the fee revenue. So, it was a market dynamic shift for the most part, with our trading securities up over $5 billion on average in our earning assets for the quarter. So, I don't know, Scott may know what in the future may occur. But I would suspect that a lot of those trading securities will be maintained in that kind of fashion at least going into the first part of this year.

Gotcha. Okay. So, if that keeps your net interest income elevated, should we also assume that brokerage and trading revenues will remain at this lower level in the first quarter? Then it sounds like you mentioned that since it's only going into the first quarter, things may return to normal in the second and third quarters. Is that the right way to think about the dynamics?

I believe the fee revenues will remain at this level. I expect that trading activity with our clients will be reflected more in net interest income this quarter. Our approach in brokerage and trading involves looking at the overall revenue stream, rather than distinguishing whether a transaction is recorded as net interest income or fees. In this quarter, it has shifted more towards net interest income. I anticipate that this trend may continue at least through the first part of the year, possibly into 2021, as we monitor how it evolves with our clients and how we classify it.

Got it. Okay. I think that makes sense. And then just one last question for me. Excluding all the trading securities, right? Obviously, your guidance for the net interest margin is lower. Sounds like you expect very modest loan growth, maybe picking up in the back half of the year. On average, it sounds like NII, excluding the trading, should sort of be under a fairly sizable amount of pressure. I was wondering if you can kind of quantify the impact on NII based on those factors. Thanks.

Well, I tried to give you a little bit more of a core kind of NIM number to start off with in the year. We put that on the chart at about 2.67%. Again, it's hard to say how much that will migrate down. I do think it will because of the re-pricing of our available-for-sale securities portfolio. If you look at the charts that we provide, you can see a pretty natural decline in AFS securities yields. I think it was 18 basis points a couple of quarters ago, 13 basis points this quarter. It's going to continue to roll down. Now, we've been very successful in pushing down our interest-bearing deposit costs. And again this quarter. In fact, it was 19 basis points average for this quarter. And I think the month of December was down to about 17 basis points. Can we continue pushing that downwards? Perhaps we can. But I don't think there's significant room to offset some of the AFS securities re-pricing. So, I just think there's a natural kind of migration downward of net interest margin. Of course, we focus more on net interest revenue than anything else. And to your point, loans beginning to grow we hope sometime in 2021, particularly in the second half of the year, is going to certainly help stabilize the margin and bring it back forward.

All right. Thank you very much.

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

Hey, thanks. Good morning guys.

Good morning.

I thought to follow-up on the inventory of trading securities. So, I mean, we're up at $7 billion now that. Looking back over the last couple of years, that's ranged between $1.5 billion to $2 billion, and we're now at $7 billion. So, it sounds like it's going to stay around $7 billion in the near term, but longer term, does that normalize back to that $2 billion-ish level? Or is this here to stay?

Hi, this is Scott. When you examine the trend throughout 2020, it increased from $4.6 billion in the first quarter to $6.2 billion by the end of the third quarter, and then reached just over $7 billion in the fourth quarter. We expect that level to be sustained, though this will depend on the overall volume and activity in the mortgage markets. However, we do not anticipate it reverting back to the lower levels you mentioned.

Okay. All right. That's helpful. And then if you look at loan balances excluding PPP, it seems like for the last three quarters or so, those kind of core loan balances have been down in between 5% to 8% annualized. I think this quarter was down 8% linked quarter annualized. What gives you the confidence that you can see a reversal away from the shrinkage and towards seeing some modest loan growth here?

The main point is that annualized energy loans, which are a significant part of our lending, have decreased nearly 13% year-over-year, and when looking at the linked quarter, it's down 6.7%. We believe that if we achieve stability with the energy balances, which we feel is within reach, we'll see some paydowns. There may be a bit more runoff in the first quarter, but we hope to stabilize and grow afterward. We're seeing new deals, though they aren't yet outpacing the current level of deleveraging or paydowns. We've had positive outcomes from our efforts with the PPP program, placing us in a strong position. However, economic growth is necessary, and we need some liquidity to clear from the balance sheet before we can expect core loan growth. The projections we provided indicate low single-digit loan growth for the year, with greater activity anticipated in the second half, and we feel very optimistic about these numbers, assuming we can achieve stability and growth in the energy sector.

A lot of people are expecting 2021 to be a fairly active year for bank mergers and acquisitions. I know BOKF has been selectively active in acquiring banks and fee income businesses over the years. Do you think BOKF will engage in M&A this year?

Well, this is Steve. I think your assumption is accurate that we're going to see more M&A opportunities. If you go back in time, when you see a low rate environment and revenue headwinds, that obviously leads to a desire among some sellers to be open to conversation. So, that's an opportunity that we see coming as well. And we'll continue to look at selective opportunities that may present themselves throughout the 2021, primarily prioritizing those things that would be within our deferral.

All right. Great. Thanks, guys.

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

Good morning.

Good morning.

So, obviously, you guys are doing really well on the credit front and with the outlook, the economy improving. Do you see that the reserve to loan ratio could get back to the January 1 level, which was about 1.2%? Do you see it heading that way towards the end of this year?

Peter, this is Marc Maun. If I'm looking at that, what I'm seeing is if you see continued improvement, and you see the economic outlook improve, you see pandemic cases drop dramatically, and the vaccine results be achieved along with the energy prices continuing to be stable, like we've seen in the recent months. And essentially you recover back to January 2020 outlook; that was our day one adjustment amount is 1.2%. And that would seem likely if all those things occur. Of course, there's still a lot of ifs in that forecast.

Okay. And then, Steven, if you achieve that loan growth in the second half of the year, do you think it would contribute to a more stable margin as we approach that period?

Yeah. I mean, it would. Certainly when you remix your earnings assets away from securities or more into the loan balances, certainly it's going to help support NIM going forward.

If I could ask one more question, mortgage banking had an excellent year this year. While it is expected to decrease slightly, the mortgage sector will remain robust. Looking ahead, have you observed that this business has gained market share, suggesting that growth should continue to be higher than in 2019, despite the gradual decline in the mortgage banking sector?

Yeah. Peter, this is Steve. I believe our outlook for 2021 indicates that the mortgage market will likely be stable in the fourth quarter. We can expect an increase in refinancing activity in the first quarter, as is usual, and the purchase market should strengthen after that. We have gained market share by expanding beyond Oklahoma and building a stronger team in states like Colorado, Texas, Arizona, New Mexico, and Kansas City, which has proven beneficial for us. This expansion mirrors our overall company strategy, as we have a relatively small market share with significant growth potential in those markets. I think the mortgage sector reflects this more accurately today than it did three to five years ago.

Okay. Thanks for taking my questions.

Thanks, Peter.

Our next question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your questions.

Hi. Good morning, everybody.

Good morning.

I guess, sticking with the provision reserve level, what type of qualitative overlays did you use this quarter on the energy book or on the overall book? And did that really help, I guess, slow reserve releases? And as we go through the year, we should just expect that that qualitative overlay reduces to get back to that lower allowance level?

Yeah. Again, this is Marc Maun. Yes, we took a hard look at the qualitative overlays with regard to our reserves. We certainly looked at more reallocation than we did reduction in certain areas, energy obviously improved. And we did reduce that reserve down to 3.4% from the 4.2% last quarter. But we still have concerns in certain other areas where stimulus has been a key factor in a number of areas, particularly in CRE and smaller businesses that may or may not have mass some issues that could occur. We want to make sure we're thoughtful about how we're looking at the performance of the credits in the short term, and then evaluate them on a quarter-by-quarter basis, depending on how economic activity evolves.

But your general thesis is on point. And I think our view is that given where we are in the cycle, it was premature to do much more than what we did. But certainly, as we get more visibility into the economic recovery, the pace of vaccinations, and see declines in case counts and improvement in economic activity, that could change.

Okay, that's helpful. Regarding the energy sector, do you believe that energy prices must increase further to facilitate additional growth? Or is it mainly about absorbing the existing liquidity, and once that is done, it can lead to organic growth?

We are in a decent position right now. If you consider oil prices between 50 and 55, that's a stable range, and particularly in the Permian, that’s a region where people continue to grow and do so profitably. From our viewpoint, this price level indicates that once we establish a stable position, we can start to grow. New deals are being made, and we are actively participating in many of them, leading several of these initiatives. We see solid opportunities ahead. Eventually, the pace of deleveraging among energy borrowers will slow down, allowing the hard work of our energy team to become more evident. I believe we will witness this, although I can't specify if it will be in the first or second quarter, but we will see it by 2021.

Okay. And then just finally for me. The second round of PPP has started. How should we think about the potential size of that for you as well as the potential maybe average loan size compared to what we saw in the first round?

Well, just by nature of it, it's going to be lower. I mean, I think the maximum loan size generally speaking is about $2 million or caveats around revenue declines and things like that. So, it won't be to the size that the original PPP program was. We certainly are going to be active, participating, and working very hard to help our customers who can avail themselves of that to participate in that. But we don't foresee that it will be the size of the original program as much because of the constraints around loan size and other factors.

I mean, should we be thinking if you were just over $2 billion the first time around $1 billion or too early to say?

It's too early to determine. Just yesterday, new rules were announced that govern the program from the SBA. Therefore, it's quite difficult to predict with any precision at this moment.

Okay. Great. Thank you.

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

Thanks. Good morning guys.

Good morning, Jon.

Question for you, Stacy, on slide seven. You touched on loan growth, maybe picking up later in the year, and it sounds like a big factor in that is energy. But can you touch a little bit more on if we roll this thing forward 12 months, what you think the biggest contributors to growth might be in terms of the other loan categories?

I believe all loan categories will contribute to growth. If we look 12 months forward with stable commodity prices, we expect energy to grow in the mid-single digits, possibly even better. Our healthcare segment is performing well, and I'm proud of that team. While we saw a slight decrease this quarter due to significant paydowns in health system loans, this actually masked strong growth in senior housing. Our commercial and industrial businesses are also well-positioned to excel. One major advantage we've gained from the original PPP is our effective execution, allowing us to establish new treasury relationships. Once the market stabilizes, we anticipate opportunities in the commercial and industrial sector due to our strong performance and the ability to maintain relationships during challenging times. We are optimistic that, once things return to normal, achieving growth at a rate of two to three times GDP is quite feasible, given our business mix. Additionally, our geographic presence is advantageous, especially in states like Texas, Arizona, and Colorado, which are expected to grow faster than the national economy.

I'll add one thing to that. It's just from the C&I perspective that you did see reduced utilization as a big part of the decline in economic activity. And we would expect that improves, and that we'll see increased utilization on the lines of credit, etc., which will contribute to that.

Are you seeing any signs of improvement in the market overall, aside from energy? I would imagine that there is some activity, especially in stronger markets, but are you noticing early indications of optimism and an increase in pipeline development?

I believe that until we start to address some of this liquidity, we are unlikely to experience significant growth in C&I loans. We are observing some activity in healthcare, particularly in senior housing. However, until we begin to reduce the core liquidity that has accumulated among our borrowers, it will be difficult to see that growth in the short term. Therefore, from our perspective, it seems premature to expect an imminent increase in core C&I loan growth as we have not yet observed any significant rise in economic activity.

And then just one quick one on credit. At the energy NPLs that you show on slide nine, what is the path to resolution with some of those credits and particularly against the lower end of the charge offerings that you're expecting for the full year?

We'll work through those as each one will work themselves out. I think that what I would tell you is a couple of things. Number one, I think we're very comfortable with the net charge-off guidance we've provided, which is kind of the low end of that historical range. If you look at what we charged off in 2020, that would be a decent benchmark to try to achieve in 2021. The difference too is we've got a rising commodity price on those energy loans. Trying to resolve and work out an energy loan in a stable and rising price environment is a totally different story than when prices continue to fall. I think we're relatively optimistic that as we work through those, the guidance we've provided you will be one that we can certainly achieve. Certainly, our hope is to outperform that because I think the environment is providing us a bit of an opportunity to work some of those outs in a way that's to our benefit. There will be losses that come from those non-performing loans. But the question is, will the environment stable and even slightly rising price environment really helps mitigate those? And I think we're optimistic about that.

Got it. Okay. Thank you.

Our next question comes from the line of Matt Olney with Stephens. Please proceed with your question.

Yeah. Good morning. And thanks for taking the question. I want to ask about operating expenses and the guidance that you guys put out there. Sounds really good. Trying to keep that to low single-digit growth in 2021. Any more details on how you expect to achieve that? And I want to make sure we're apples-to-apples in the right starting point. I'm looking at $1.166 billion of operating expenses in 2020. Is that right?

Yeah. So, this is Steven. We just worked hard, I think, in our budgeting efforts over the fall, and mainly in November, working with each line of business and trying to determine what is the right level of expense and how can we maintain control over that in the face of a little bit more difficult revenue environment. It comes all across the board. It addresses personnel and addresses business promotion, spending on IT, we want to maintain because we want to maintain our competitiveness with our products and services that we provide to our clients. But it's just a lot of detailed work to try to maintain that expense discipline.

Okay. I'm curious about the interest in the buyback now that the stock price is significantly higher than where it was during the third or fourth quarter.

Yeah. I mean, we were happy with our execution in the fourth quarter. I mean, we bought the shares at about a 25% discount to today's market. We'll look at it closely. I'm not going to put a price out there that says we'll buy at this level and then we won't buy below that or above that. So, I think we look at it relative to our capital levels, relative to opportunities for capital. But I still think we have an appetite and we have the capital wherewithal to take advantage across the market when we see there is a good opportunity.

Okay. On the PPP, can you tell me the amount of PPP fees recognized in the fourth quarter and what the remaining fees are to recognize going forward?

Yeah. So, we recognized in the fourth quarter $3.3 million in net revenue from PPP and $13.5 million in fees. So, a total of $16.8 million on the fee side. And we have about $25 million roughly remaining on the fee side.

Got it. Okay. Thank you, guys.

Thank you.

Thank you, Matt.

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

Hi. Good morning. The questions were mostly addressed, but regarding loan growth, a stabilization in the energy sector would definitely be beneficial for loan growth this year. In terms of overall business, are you experiencing any increase in pipelines? Are there specific geographical areas where you are noticing more activity than others?

Not particularly, not at this point. I think that the point that Marc made earlier, which I think is the best one on the C&I portfolio is. Keep in mind most of our C&I portfolio is borrowing-based driven. So, it's accounts receivable, inventory, those types of things. Our utilization is really pretty low in that, particularly on a relative basis to where we were pre-pandemic. So there's an opportunity for growth there organically just from higher utilization as those receivable and inventory balances began to come back up as people grow again, then that's an opportunity for growth organically. But also think, as I've mentioned earlier that the work that we've done with our borrowers and with others who may have multiple banking relationships around the PPP has opened a really opportunistic pipeline for us to grow broadly as well. I think that we're well-positioned once the economy begins to turn around to grow that core C&I portfolio.

Okay. And just briefly on the energy book. You talked about, there are new deals out there, they are participating in or leading. Can you give us a sense for the quarter of originations in that segment versus paydowns?

I don't have that today. Certainly, the paydowns far exceeded the new originations, but we've done more than a handful of deals in the fourth quarter that were new deals in the marketplace. And many of those we lead and receive fee revenue associated with that. So, we're optimistic. I think the real question is when do we get to the bottom of the deleveraging? And I think we're close. I just don't know if that's the first quarter or second quarter. But I think we can see it from here.

All right. Thanks for taking my questions.

Thank you.

There are no further questions in the queue. I'd like to hand the call back over to Mr. Nell for closing remarks.

Okay. Thanks everyone again for joining us this morning. We appreciate your interest in BOK Financial. If you have any further questions, please call us at (918) 595-3030. Or you can email us at [email protected]. Have a great day. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.