BOK FINANCIAL CORP - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the quarterly period ended September 30, 2021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the transition period from _____________ to ______________
Commission File No. 0-19341
BOK FINANCIAL CORP
(Exact name of registrant as specified in its charter)
| Oklahoma | 73-1373454 | ||||||||||
| (State or other jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | ||||||||||
| Bank of Oklahoma Tower | |||||||||||
| Boston Avenue at Second Street | |||||||||||
| Tulsa, | Oklahoma | 74192 | |||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
(918) 588-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 68,596,764 shares of common stock ($.00006 par value) as of September 30, 2021.
BOK Financial Corporation
Form 10-Q
Quarter Ended September 30, 2021
Index
| Part I. Financial Information | |||||
| Management’s Discussion and Analysis (Item 2) | |||||
| Market Risk (Item 3) | |||||
| Controls and Procedures (Item 4) | |||||
| Consolidated Financial Statements – Unaudited (Item 1) | |||||
| Quarterly Financial Summary – Unaudited (Item 2) | |||||
| Quarterly Earnings Trend – Unaudited | |||||
| Part II. Other Information | |||||
| Item 1. Legal Proceedings | |||||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |||||
| Item 6. Exhibits | |||||
| Signatures | |||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Performance Summary
BOK Financial Corporation (“the Company”) reported net income of $188.3 million or $2.74 per diluted share for the third quarter of 2021. Net income was $154.0 million or $2.19 per diluted share for the third quarter of 2020 and $166.4 million or $2.40 per diluted share for the second quarter of 2021. Continued improvement in credit quality metrics and lower loan balances coupled with strength in commodity prices and a continued optimistic outlook for growth in gross domestic product and the labor markets resulted in a $23.0 million negative provision for expected credit losses in the third quarter of 2021. A $35.0 million negative provision for expected credit losses was recorded in the second quarter of 2021 and no provision for expected credit losses was recorded in the third quarter of 2020.
Pre-provision net revenue ("PPNR"), a non-GAAP measure, was $219.4 million for the third quarter of 2021 compared to $204.6 million for the third quarter of 2020. A $31.1 million gain on sale of an alternative investment and reduced operating expenses during the third quarter of 2021 were partially offset by a $25.7 million decrease in mortgage banking revenue. PPNR improved $39.5 million over the second quarter of 2021 largely due to growth in much of our fee-based business, led by brokerage and trading and mortgage banking revenues.
Highlights of the third quarter of 2021 included:
•Net interest revenue totaled $280.2 million, an increase of $8.5 million over the third quarter of 2020. Average earning assets were $43.0 billion for the third quarter of 2021 compared to $39.6 billion for the third quarter of 2020, largely driven by growth in trading securities. Net interest margin was 2.66 percent for the third quarter of 2021 compared to 2.81 percent for the third quarter of 2020, largely due to a shift in earning asset mix and investment of cash flows received from maturities in the available for sale securities portfolio at lower current market rates. Net interest revenue was consistent with the second quarter of 2021. Net interest margin increased 6 basis points.
•Fees and commissions revenue totaled $190.4 million, a decrease of $32.4 million compared to the third quarter of 2020. Mortgage banking revenue decreased $25.7 million due to a combination of lower mortgage production volume and margin compression. Brokerage and trading revenue decreased $21.6 million, largely due to a shift from trading revenue to net interest revenue on trading securities. These decreases were partially offset by growth in fiduciary and asset management revenue, operating revenue from repossessed oil and gas assets and deposit service charges. Fees and commissions revenue increased $21.0 million compared to the second quarter of 2021, including an $11.1 million increase in trading revenue due to higher margin market opportunities and a $5.1 million increase in customer hedging revenue, primarily attributed to energy customers. Mortgage banking revenue also increased $5.1 million.
•Other operating expense totaled $291.3 million, a decrease of $5.8 million compared to the third quarter of 2020. Personnel expense decreased $4.0 million, due to a reduction in incentive compensation expense. Non-personnel expense decreased $1.8 million compared to the third quarter of 2020 as lower mortgage banking costs and FDIC insurance expense were largely offset by increased data processing and communications expense and operating expenses on repossessed oil and gas properties. Operating expense was consistent with the second quarter of 2021 as a $3.8 million increase in personnel expense was offset by a $3.7 million decrease in non-personnel expense, primarily due to a reduction of expenses related to oil and gas properties sold during the quarter.
•Period-end outstanding loan balances totaled $20.3 billion at September 30, 2021, a decrease of $1.1 billion compared to June 30, 2021. Loans originated as part of the Small Business Administration's Paycheck Protection Program ("PPP") decreased $586 million to $536 million. The remaining decrease was primarily attributed to paydowns of commercial energy loans and commercial real estate loans. Average loan balances decreased $1.3 billion compared to the prior quarter to $20.8 billion.
•The combined allowance for credit losses totaled $306 million or 1.54 percent of outstanding loans, excluding PPP loans, at September 30, 2021. The combined allowance for credit losses was $336 million or 1.66 percent of outstanding loans, excluding PPP loans, at June 30, 2021.
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•Nonperforming assets not guaranteed by U.S. government agencies decreased $66 million compared to June 30, 2021. Potential problem loans decreased $51 million while other loans especially mentioned increased $4.6 million. Net charge-offs were $7.8 million or 0.16 percent of average loans on an annualized basis for the third quarter of 2021, excluding PPP loans. Net charge-offs were 0.26 percent of average loans, excluding PPP loans, over the last four quarters. Net charge-offs were $15.4 million or 0.30 percent of average loans on an annualized basis for the second quarter of 2021, excluding PPP loans.
•Period-end deposits were $38.5 billion at September 30, 2021, a $1.1 billion increase compared to June 30, 2021. Average deposits increased $344 million, including a $481 million increase in demand deposits and a $137 million decrease in interest bearing deposits. Clients continued to maintain higher deposit balances during this period of economic uncertainty.
•The common equity Tier 1 capital ratio at September 30, 2021 was 12.26 percent. Other regulatory capital ratios were Tier 1 capital ratio, 12.29 percent, total capital ratio, 13.38 percent, and leverage ratio, 8.77 percent. At June 30, 2021, the common equity Tier 1 capital ratio was 11.95 percent, the Tier 1 capital ratio was 12.01 percent, total capital ratio was 13.61 percent, and leverage ratio was 8.58 percent.
•The Company repurchased 478,141 shares of common stock at an average price of $85.00 per share in the third quarter of 2021 and 492,994 shares at an average price of $88.84 in the second quarter of 2021. We view share buybacks opportunistically, but within the context of maintaining our strong capital position.
•On August 23, 2021, the Company exercised its option to redeem all $150 million of its 5.375 percent Subordinated Notes using existing capital. The repayment of the Notes resulted in a realized loss on extinguishment of debt of $5.2 million. Redemption of the Notes will reduce annual interest expense by approximately $8.0 million.
•The Company paid a regular cash dividend of $35.7 million or $0.52 per common share during the third quarter of 2021. On November 2, 2021, the board of directors approved an increase in the quarterly cash dividend to $0.53 per common share payable on or about November 24, 2021 to shareholders of record as of November 15, 2021.
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Results of Operations
Net Interest Revenue and Net Interest Margin
Net interest revenue is the interest earned on debt securities, loans and other interest-earning assets less interest paid for interest-bearing deposits and other borrowings. The net interest margin is calculated by dividing tax-equivalent net interest revenue by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest spread due to interest income earned on assets funded by non-interest bearing liabilities such as demand deposits and equity.
Tax-equivalent net interest revenue totaled $282.4 million for the third quarter of 2021 and $274.2 million for the third quarter of 2020. Net interest revenue increased $4.0 million from growth in average earning assets and $4.2 million from changes in interest rates. Table 1 shows the effect on net interest revenue from changes in average balances and interest rates for various types of earning assets and interest-bearing liabilities.
Net interest margin was 2.66 percent for the third quarter of 2021, compared to 2.81 percent for the third quarter of 2020. The tax-equivalent yield on earning assets was 2.78 percent, a decrease of 26 basis points. The available for sale securities portfolio yield decreased 31 basis points to 1.80 percent as principal cash flows received from maturities of the available for sale securities portfolio continue to be reinvested at lower current market rates. Loan yields increased 8 basis points to 3.68 percent, largely due to increased non-use fees related to lower credit line utilization. As discussed in the Management's Discussion and Analysis - Loan section following, $15.1 million of deferred PPP loans fees remain to be recognized in future periods. The yield on trading securities increased 12 basis points to 2.04 percent. The yield on fair value option securities was up 70 basis points to 2.62 percent.
Funding costs decreased 12 basis points compared to the third quarter of 2020. The cost of other borrowed funds decreased 1 basis point and the cost of interest-bearing deposits decreased 13 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 7 basis points for the third quarter of 2021, a decrease of 1 basis point compared to the third quarter of 2020.
Average earning assets for the third quarter of 2021 increased $3.3 billion or 8 percent over the third quarter of 2020. This increase was largely due to growth in our trading of U.S. government issued mortgage-backed securities and the expansion of the available for sale securities portfolio, partially offset by a decrease in loans and fair value option securities. Average trading securities increased $5.8 billion. The average balance of available for sale securities, which consists largely of residential and commercial mortgage-backed securities guaranteed by U.S. government agencies, increased $865 million. We purchase securities to supplement earnings and to manage interest rate risk. Average loans, net of allowance for loan losses, decreased $3.3 billion, largely due to purposeful deleveraging by our customers as borrowers continue to pay down during this time of economic uncertainty combined with the reduction in PPP loans. Fair value option securities that we hold as an economic hedge against changes in the fair value of mortgage servicing rights decreased $331 million.
Average deposits increased $3.2 billion compared to the third quarter of 2020. Deposit growth is largely due to customers retaining elevated balances in the current economic environment, supplemented by the most recent government stimulus payments. Interest-bearing deposits increased $1.5 billion while demand deposit balances increased $1.7 billion. Other borrowed funds decreased $2.2 billion.
Tax-equivalent net interest revenue was $282.4 million, largely unchanged compared to the second quarter of 2021. Net interest margin was 2.66 percent compared to 2.60 percent in the second quarter of 2021.
Average earning assets decreased $892 million compared to the second quarter of 2021. Average loan balances decreased $1.3 billion, primarily from the payoff of PPP loans combined with energy and commercial real estate loan paydowns. Available for sale securities increased $203 million. Average trading securities grew by $187 million. Other borrowed funds decreased $1.4 billion.
The yield on average earning assets was 2.78 percent, a 3 basis point increase from the prior quarter. The loan portfolio yield increased 14 basis points to 3.68 percent, largely due to non-use fees related to lower credit line utilization. The yield on the available for sale securities portfolio decreased 5 basis points to 1.80 percent.
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Funding costs were 0.19 percent, down 2 basis points. The cost of interest bearing deposits decreased 1 basis point to 0.13 percent. The cost of other borrowed funds was down 2 basis points to 0.30 percent. The cost of subordinated debentures decreased 24 basis points due to the redemption of $150 million in the third quarter. The benefit to net interest margin from assets funded by non-interest liabilities was 7 basis points for the third quarter of 2021, an increase of 1 basis point compared to the prior quarter.
Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately 74% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally reprice more quickly than liabilities. One of the strategies that we use to manage toward a relative rate-neutral position is to purchase fixed rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market-rate-sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk.
The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 1 and in the interest rate sensitivity projections as shown in the Market Risk section of this report.
Table 1 -- Volume/Rate Analysis
(In thousands)
| Three Months Ended Sept. 30, 2021 / 2020 | Nine Months Ended Sept. 30, 2021 / 2020 | |||||||||||||||||||||||||||||||||||||
Change Due To1 | Change Due To1 | |||||||||||||||||||||||||||||||||||||
| Change | Volume | Yield/Rate | Change | Volume | Yield/Rate | |||||||||||||||||||||||||||||||||
| Tax-equivalent interest revenue: | ||||||||||||||||||||||||||||||||||||||
Interest-bearing cash and cash equivalents | $ | 78 | $ | 45 | $ | 33 | $ | (2,095) | $ | 151 | $ | (2,246) | ||||||||||||||||||||||||||
| Trading securities | 30,240 | 28,907 | 1,333 | 79,583 | 92,699 | (13,116) | ||||||||||||||||||||||||||||||||
Investment securities | (401) | (486) | 85 | (1,285) | (1,546) | 261 | ||||||||||||||||||||||||||||||||
Available for sale securities | (5,042) | 4,763 | (9,805) | (25,459) | 17,156 | (42,615) | ||||||||||||||||||||||||||||||||
| Fair value option securities | (1,644) | (2,060) | 416 | (16,564) | (16,228) | (336) | ||||||||||||||||||||||||||||||||
Restricted equity securities | 652 | 643 | 9 | (4,012) | (2,110) | (1,902) | ||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale | (311) | (335) | 24 | (625) | (229) | (396) | ||||||||||||||||||||||||||||||||
| Loans | (25,008) | (29,734) | 4,726 | (92,892) | (41,589) | (51,303) | ||||||||||||||||||||||||||||||||
| Total tax-equivalent interest revenue | (1,436) | 1,743 | (3,179) | (63,349) | 48,304 | (111,653) | ||||||||||||||||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||||||||||||||
| Transaction deposits | (3,197) | 754 | (3,951) | (36,513) | 6,435 | (42,948) | ||||||||||||||||||||||||||||||||
| Savings deposits | 8 | 24 | (16) | (20) | 85 | (105) | ||||||||||||||||||||||||||||||||
| Time deposits | (3,804) | (842) | (2,962) | (16,089) | (3,063) | (13,026) | ||||||||||||||||||||||||||||||||
| Funds purchased and repurchase agreements | (477) | (629) | 152 | (11,287) | (5,029) | (6,258) | ||||||||||||||||||||||||||||||||
| Other borrowings | (1,313) | (854) | (459) | (26,856) | (7,025) | (19,831) | ||||||||||||||||||||||||||||||||
| Subordinated debentures | (890) | (733) | (157) | (1,362) | (776) | (586) | ||||||||||||||||||||||||||||||||
| Total interest expense | (9,673) | (2,280) | (7,393) | (92,127) | (9,373) | (82,754) | ||||||||||||||||||||||||||||||||
| Tax-equivalent net interest revenue | 8,237 | 4,023 | 4,214 | 28,778 | 57,677 | (28,899) | ||||||||||||||||||||||||||||||||
| Change in tax-equivalent adjustment | (240) | (964) | ||||||||||||||||||||||||||||||||||||
| Net interest revenue | $ | 8,477 | $ | 29,742 | ||||||||||||||||||||||||||||||||||
1 Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
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Other Operating Revenue
Other operating revenue was $229.8 million for the third quarter of 2021, consistent with the third quarter of 2020. Mortgage production revenue was negatively impacted by a decline in mortgage production volumes and margin compression. Brokerage and trading revenue decreased, largely due to a shift from trading revenue to interest income from trading securities.
Other operating revenue increased $38.4 million compared to the second quarter of 2021. Higher margin market opportunities and increased customer hedging combined to grow brokerage and trading revenue by $18.5 million. Other gains, net, which consist primarily of gains and losses on repossessed assets and alternative investments, increased $14.6 million over the previous quarter. A gain on sale of an alternative investment was partially offset by subordinated debt extinguishment costs and a loss on the sale of a repossessed oil and gas property.
Table 2 – Other Operating Revenue
(In thousands)
| Three Months Ended September 30, | Increase (Decrease) | % Increase (Decrease) | Three Months Ended June 30, 2021 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
Brokerage and trading revenue | $ | 47,930 | $ | 69,526 | $ | (21,596) | (31) | % | $ | 29,408 | $ | 18,522 | 63 | % | ||||||||||||||||||||||||||||||
| Transaction card revenue | 24,632 | 23,465 | 1,167 | 5 | % | 24,923 | (291) | (1) | % | |||||||||||||||||||||||||||||||||||
Fiduciary and asset management revenue | 45,248 | 39,931 | 5,317 | 13 | % | 44,832 | 416 | 1 | % | |||||||||||||||||||||||||||||||||||
Deposit service charges and fees | 27,429 | 24,286 | 3,143 | 13 | % | 25,861 | 1,568 | 6 | % | |||||||||||||||||||||||||||||||||||
| Mortgage banking revenue | 26,286 | 51,959 | (25,673) | (49) | % | 21,219 | 5,067 | 24 | % | |||||||||||||||||||||||||||||||||||
| Other revenue | 18,896 | 13,698 | 5,198 | 38 | % | 23,172 | (4,276) | (18) | % | |||||||||||||||||||||||||||||||||||
Total fees and commissions revenue | 190,421 | 222,865 | (32,444) | (15) | % | 169,415 | 21,006 | 12 | % | |||||||||||||||||||||||||||||||||||
| Other gains, net | 31,091 | 2,044 | 29,047 | N/A | 16,449 | 14,642 | N/A | |||||||||||||||||||||||||||||||||||||
| Gain (loss) on derivatives, net | (5,760) | 2,354 | (8,114) | N/A | 18,820 | (24,580) | N/A | |||||||||||||||||||||||||||||||||||||
| Loss on fair value option securities, net | (120) | (754) | 634 | N/A | (1,627) | 1,507 | N/A | |||||||||||||||||||||||||||||||||||||
Change in fair value of mortgage servicing rights | 12,945 | 3,441 | 9,504 | N/A | (13,041) | 25,986 | N/A | |||||||||||||||||||||||||||||||||||||
| Gain (loss) on available for sale securities, net | 1,255 | (12) | 1,267 | N/A | 1,430 | (175) | N/A | |||||||||||||||||||||||||||||||||||||
Total other operating revenue | $ | 229,832 | $ | 229,938 | $ | (106) | — | % | $ | 191,446 | $ | 38,386 | 20 | % | ||||||||||||||||||||||||||||||
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.
Fees and commissions revenue
Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 40 percent of total revenue for the third quarter of 2021, excluding provision for credit losses and gains and losses on other assets, securities and derivatives and the change in the fair value of mortgage servicing rights. We believe that a variety of fee revenue sources provides an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors such as rising interest rates resulting in growth in net interest revenue or fiduciary and asset management revenue may also decrease mortgage banking production volumes and related trading. We expect growth in other operating revenue to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, including the recent impact of the COVID-19 pandemic, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.
Brokerage and Trading Revenue
Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage and investment banking, decreased $21.6 million or 31 percent compared to the third quarter of 2020.
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Trading revenue includes net realized and unrealized gains and losses primarily related to sales of residential mortgage-backed securities guaranteed by U.S. government agencies and related derivative instruments that enable our mortgage banking customers to manage their production risk. Trading revenue also includes net realized and unrealized gains and losses on municipal securities and other financial instruments that we sell to institutional customers, along with changes in the fair value of financial instruments we hold as economic hedges against market risk of our trading securities. Trading revenue was $24.1 million for the third quarter of 2021, a $22.8 million or 49 percent decrease compared to the third quarter of 2020, primarily due to a shift from fee revenue to net interest revenue on trading securities. See additional discussion in "Lines of Business" section of Management's Discussion and Analysis.
Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $6.9 million for the third quarter of 2021, a $1.7 million or 20 percent decrease compared to the third quarter of 2020, primarily attributed to energy customers. Customer hedging revenue includes credit valuation adjustments of the fair value of derivatives to reflect the risk of counterparty default.
Revenue earned from retail brokerage transactions totaled $4.9 million for the third quarter of 2021, an increase of $1.1 million compared to the third quarter of 2020 due to increased trading activity.
Investment banking, which includes fees earned upon completion of underwriting, financial advisory services and loan syndication fees, totaled $9.0 million for the third quarter of 2021, an increase of $1.9 million or 27 percent compared to the third quarter of 2020, related to the timing and volume of completed transactions.
Brokerage and trading revenue increased $18.5 million compared to the previous quarter. Higher margin market opportunities led to an $11.1 million increase in trading revenue. Customer hedging revenue increased $5.1 million, primarily attributed to energy customers. Investment banking revenue increased $1.9 million, largely due to the timing of financial advisory fees.
Transaction Card Revenue
Transaction card revenue totaled $24.6 million for the third quarter of 2021, an increase of $1.2 million over the third quarter of 2020, largely due to stimulus measures and the broader reopening of the U.S. economy. Transaction card revenue for the third quarter of 2021 was relatively consistent with the prior quarter.
Fiduciary and Asset Management Revenue
Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 90 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships. Fiduciary and asset management revenue increased $5.3 million or 13 percent compared to the third quarter of 2020. An increase in trust and managed account fees from higher client asset balances was partially offset by a decrease in mutual fund fees as the low rate environment has put pressure on our mutual fund revenue streams. We had approximately $2.9 million in fee waivers during the third quarter of 2021 compared to approximately $1.7 million in the third quarter of 2020. We have voluntarily waived certain administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current short-term interest rate environment. Fiduciary and asset management revenue was up slightly compared to the second quarter of 2021 as growth in trust and managed account fees from higher client asset balances more than offset the decrease from seasonal tax preparation fees earned in the second quarter.
A distribution of assets under management or administration and related fiduciary and asset management revenue follows:
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Table 3 -- Assets Under Management or Administration
(In thousands)
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance | Revenue1 | Margin2 | Balance | Revenue1 | Margin2 | Balance | Revenue1 | Margin2 | |||||||||||||||||||||||||||||||||||||||||||||
| Managed fiduciary assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Personal | $ | 12,259,320 | $ | 28,176 | 0.92 | % | $ | 10,238,728 | $ | 23,008 | 0.90 | % | $ | 11,973,758 | $ | 28,634 | 0.96 | % | |||||||||||||||||||||||||||||||||||
| Institutional | 16,589,660 | 7,675 | 0.19 | % | 14,210,768 | 6,572 | 0.18 | % | 16,339,627 | 7,257 | 0.18 | % | |||||||||||||||||||||||||||||||||||||||||
Total managed fiduciary assets | 28,848,980 | 35,851 | 0.50 | % | 24,449,496 | 29,580 | 0.48 | % | 28,313,385 | 35,891 | 0.51 | % | |||||||||||||||||||||||||||||||||||||||||
| Non-managed assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiduciary | 31,648,595 | 6,070 | 0.08 | % | 24,438,017 | 9,904 | 0.16 | % | 30,341,404 | 6,643 | 0.09 | % | |||||||||||||||||||||||||||||||||||||||||
| Non-fiduciary | 19,187,028 | 3,327 | 0.07 | % | 16,794,986 | 447 | 0.01 | % | 19,480,250 | 2,298 | 0.05 | % | |||||||||||||||||||||||||||||||||||||||||
Safekeeping and brokerage assets under administration | 19,158,186 | — | — | % | 16,737,433 | — | — | % | 18,497,709 | — | — | % | |||||||||||||||||||||||||||||||||||||||||
Total non-managed assets | 69,993,809 | 9,397 | 0.05 | % | 57,970,436 | 10,351 | 0.07 | % | 68,319,363 | 8,941 | 0.05 | % | |||||||||||||||||||||||||||||||||||||||||
Total assets under management or administration | $ | 98,842,789 | $ | 45,248 | 0.18 | % | $ | 82,419,932 | $ | 39,931 | 0.19 | % | $ | 96,632,748 | $ | 44,832 | 0.19 | % | |||||||||||||||||||||||||||||||||||
1 Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 Annualized revenue divided by period-end balance.
A summary of changes in assets under management or administration for the three months ended September 30, 2021 and 2020 follows:
Table 4 -- Changes in Assets Under Management or Administration
(In thousands)
| Three Months Ended September 30, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Beginning balance | $ | 96,632,748 | $ | 79,452,502 | ||||||||||
| Net inflows (outflows) | 1,551,832 | 287,132 | ||||||||||||
| Net change in fair value | 658,209 | 2,680,298 | ||||||||||||
| Ending balance | $ | 98,842,789 | $ | 82,419,932 | ||||||||||
Assets under management as of September 30, 2021 consist of 41 percent fixed income, 39 percent equities, 12 percent cash, and 8 percent alternative investments.
Deposit Service Charges and Fees
Deposit service charges and fees increased $3.1 million compared to the third quarter of 2020 and $1.6 million over the second quarter of 2021. Commercial accounts where lower earnings credit rates caused by the low interest rate environment have resulted in higher service charges and consumer activity has increased following the pandemic shut downs.
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Mortgage Banking Revenue
Mortgage banking revenue decreased $25.7 million or 49 percent compared to the third quarter of 2020. Mortgage loan production volume decreased $431 million or 41 percent largely due to industry-wide housing inventory constraints and overall market conditions. Production revenue as a percentage of production volume, which includes unrealized gains and losses on our mortgage commitment pipeline and related hedges, was 2.50 percent in the third quarter of 2021, 117 basis points lower than the third quarter of 2020.
Mortgage banking revenue increased $5.1 million or 24 percent over the second quarter of 2021. While mortgage production volume decreased $28 million to $615 million, production revenue as a percentage of production volume increased 95 basis points.
Table 5 – Mortgage Banking Revenue
(In thousands)
| Three Months Ended September 30, | Increase (Decrease) | % Increase (Decrease) | Three Months Ended June 30, 2021 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
Mortgage production revenue | $ | 15,403 | $ | 38,431 | $ | (23,028) | (60) | % | $ | 10,004 | $ | 5,399 | 54 | % | ||||||||||||||||||||||||||||||
| Mortgage loans funded for sale | $ | 652,336 | $ | 1,032,472 | $ | 754,893 | ||||||||||||||||||||||||||||||||||||||
Add: Current period end outstanding commitments | 239,066 | 560,493 | 276,154 | |||||||||||||||||||||||||||||||||||||||||
Less: Prior period end outstanding commitments | 276,154 | 546,304 | 387,465 | |||||||||||||||||||||||||||||||||||||||||
Total mortgage production volume | $ | 615,248 | $ | 1,046,661 | $ | (431,413) | (41) | % | $ | 643,582 | $ | (28,334) | (4) | % | ||||||||||||||||||||||||||||||
Mortgage loan refinances to mortgage loans funded for sale | 48 | % | 54 | % | (600) | bps | 48 | % | — | bps | ||||||||||||||||||||||||||||||||||
| Realized margin on funded mortgage loans | 2.48 | % | 3.52 | % | (104) | bps | 2.75 | % | (27) | bps | ||||||||||||||||||||||||||||||||||
| Production revenue as a percentage of production volume | 2.50 | % | 3.67 | % | (117) | bps | 1.55 | % | 95 | bps | ||||||||||||||||||||||||||||||||||
Primary mortgage interest rates: | ||||||||||||||||||||||||||||||||||||||||||||
Average | 2.87 | % | 2.95 | % | (8) | bps | 3.00 | % | (13) | bps | ||||||||||||||||||||||||||||||||||
Period end | 3.01 | % | 2.90 | % | 11 | bps | 3.02 | % | (1) | bps | ||||||||||||||||||||||||||||||||||
Mortgage servicing revenue | $ | 10,883 | $ | 13,528 | $ | (2,645) | (20) | % | $ | 11,215 | $ | (332) | (3) | % | ||||||||||||||||||||||||||||||
Average outstanding principal balance of mortgage loans serviced for others | 14,899,306 | 17,434,215 | (2,534,909) | (15) | % | 15,065,173 | (165,867) | (1) | % | |||||||||||||||||||||||||||||||||||
Average mortgage servicing revenue rates | 0.29 | % | 0.31 | % | (2) | bp | 0.30 | % | (1) | bp | ||||||||||||||||||||||||||||||||||
Primary rates disclosed in Table 5 above represent rates generally available to borrowers on 30 year conforming mortgage loans.
Other Revenue
Other revenue increased $5.2 million over the third quarter of 2020, primarily due to higher production revenue from repossessed oil and gas properties; however, this was partially offset by increased operating expenses on these properties. Other revenue decreased $4.3 million compared to the second quarter of 2021 due to the sale of a repossessed oil and gas property which resulted in lower operating revenue and expenses.
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Net gains on other assets, securities and derivatives
Other gains, net increased $29.0 million compared to the third quarter of 2020 and $14.6 million over the second quarter of 2021. The sale of an alternative investment resulted in a $31.1 million gain, net of non-controlling interest, which was partially offset by a $5.2 million loss on the extinguishment of subordinated debentures and a $3.9 million loss on the sale of a repossessed oil and gas asset. The prior quarter included net gain on oil and gas repossessed assets.
As discussed in the Market Risk section following, the fair value of our mortgage servicing rights ("MSRs") changes in response to changes in primary mortgage loan rates and other assumptions. We attempt to mitigate the earnings volatility caused by changes in the fair value of MSRs by designating certain financial instruments as an economic hedge. Changes in the fair value of these instruments are generally expected to partially offset changes in the fair value of MSRs.
Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
| Three Months Ended | ||||||||||||||||||||
| Sept. 30, 2021 | June 30, 2021 | Sept. 30, 2020 | ||||||||||||||||||
| Gain (loss) on mortgage hedge derivative contracts, net | $ | (5,829) | $ | 18,764 | $ | 2,295 | ||||||||||||||
| Loss on fair value option securities, net | (120) | (1,627) | (754) | |||||||||||||||||
| Gain (loss) on economic hedge of mortgage servicing rights, net | (5,949) | 17,137 | 1,541 | |||||||||||||||||
| Gain (loss) on change in fair value of mortgage servicing rights | 12,945 | (13,041) | 3,441 | |||||||||||||||||
| Gain on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue | 6,996 | 4,096 | 4,982 | |||||||||||||||||
Net interest revenue on fair value option securities1 | 286 | 341 | 1,565 | |||||||||||||||||
| Total economic benefit of changes in the fair value of mortgage servicing rights, net of economic hedges | $ | 7,282 | $ | 4,437 | $ | 6,547 | ||||||||||||||
1 Actual interest earned on fair value option securities less internal transfer-priced cost of funds.
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Other Operating Expense
Other operating expense for the third quarter of 2021 totaled $291.3 million, a decrease of $5.8 million compared to the third quarter of 2020 and consistent with the second quarter of 2021.
Table 7 – Other Operating Expense
(In thousands)
| Three Months Ended September 30, | Increase (Decrease) | % Increase (Decrease) | Three Months Ended June 30, 2021 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
Regular compensation | $ | 95,808 | $ | 96,703 | $ | (895) | (1) | % | $ | 96,081 | $ | (273) | — | % | ||||||||||||||||||||||||||||||
| Incentive compensation: | ||||||||||||||||||||||||||||||||||||||||||||
| Cash-based | 54,437 | 49,484 | 4,953 | 10 | % | 45,668 | 8,769 | 19 | % | |||||||||||||||||||||||||||||||||||
| Share-based | 1,272 | 9,596 | (8,324) | (87) | % | 251 | 1,021 | (407) | % | |||||||||||||||||||||||||||||||||||
| Deferred compensation | 1,549 | 2,450 | (901) | N/A | 3,906 | (2,357) | N/A | |||||||||||||||||||||||||||||||||||||
| Total incentive compensation | 57,258 | 61,530 | (4,272) | (7) | % | 49,825 | 7,433 | 15 | % | |||||||||||||||||||||||||||||||||||
| Employee benefits | 22,797 | 21,627 | 1,170 | 5 | % | 26,129 | (3,332) | (13) | % | |||||||||||||||||||||||||||||||||||
| Total personnel expense | 175,863 | 179,860 | (3,997) | (2) | % | 172,035 | 3,828 | 2 | % | |||||||||||||||||||||||||||||||||||
| Business promotion | 4,939 | 2,633 | 2,306 | 88 | % | 2,744 | 2,195 | 80 | % | |||||||||||||||||||||||||||||||||||
Professional fees and services | 12,436 | 14,074 | (1,638) | (12) | % | 12,361 | 75 | 1 | % | |||||||||||||||||||||||||||||||||||
| Net occupancy and equipment | 28,395 | 28,111 | 284 | 1 | % | 26,633 | 1,762 | 7 | % | |||||||||||||||||||||||||||||||||||
| Insurance | 3,712 | 5,848 | (2,136) | (37) | % | 3,660 | 52 | 1 | % | |||||||||||||||||||||||||||||||||||
Data processing and communications | 38,371 | 34,751 | 3,620 | 10 | % | 36,418 | 1,953 | 5 | % | |||||||||||||||||||||||||||||||||||
| Printing, postage and supplies | 3,558 | 3,482 | 76 | 2 | % | 4,285 | (727) | (17) | % | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 4,488 | 5,071 | (583) | (12) | % | 4,578 | (90) | (2) | % | |||||||||||||||||||||||||||||||||||
| Mortgage banking costs | 8,962 | 15,803 | (6,841) | (43) | % | 11,126 | (2,164) | (19) | % | |||||||||||||||||||||||||||||||||||
| Other expense | 10,553 | 7,411 | 3,142 | 42 | % | 17,312 | (6,759) | (39) | % | |||||||||||||||||||||||||||||||||||
| Total other operating expense | $ | 291,277 | $ | 297,044 | $ | (5,767) | (2) | % | $ | 291,152 | $ | 125 | — | % | ||||||||||||||||||||||||||||||
Average number of employees (full-time equivalent) | 4,794 | 4,926 | (132) | (3) | % | 4,817 | (23) | — | % | |||||||||||||||||||||||||||||||||||
Certain percentage increases (decreases) are not meaningful for comparison purposes.
Personnel expense
Personnel expense decreased $4.0 million compared to the third quarter of 2020. Incentive compensation decreased $4.3 million. Share-based compensation expense decreased $8.3 million based on changes in assumptions of certain performance-based equity awards. This was partially offset by a $5.0 million increase in cash based incentive compensation expense related to strong revenue growth. Employee benefits increased $1.2 million primarily due to increased healthcare costs.
Personnel expense increased $3.8 million over the second quarter of 2021. Cash based incentive compensation expense increased $8.8 million, primarily in relation to increased trading revenue. Deferred compensation expense, which is largely offset by a decrease in the value of related investments included in Other gains (losses), net, decreased $2.4 million. Employee benefits expense decreased $3.3 million due to reduced payroll taxes and employee healthcare costs.
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Non-personnel operating expense
Non-personnel operating expense decreased $1.8 million compared to the third quarter of 2020. Mortgage banking costs decreased $6.8 million, due to a decrease in accruals related to default servicing and loss mitigation costs on loans serviced for others combined with a decrease in prepayments. Expense associated with FDIC insurance decreased $2.1 million as the Company's risk profile and liquidity improved. Professional fees and services expense decreased $1.6 million. These expense decreases were offset by a $3.6 million increase in data processing and communications expense, primarily due to continued investment in technology upgrades, an increase of $3.1 million in other expense, largely due to operating expenses on repossessed oil and gas properties, and a $2.3 million increase in business promotion expense.
Non-personnel expense decreased $3.7 million compared to the second quarter of 2021. Other expense decreased $6.8 million as a result of lower operating expenses on repossessed assets. Mortgage banking costs decreased $2.2 million due to slower repayments. These decreases were partially offset by a $2.2 million increase in business promotion costs, a $2.0 million increase in data processing and communications expense and a $1.8 million increase in occupancy and equipment expense.
Income Taxes
The effective tax rate was 22.4 percent for the third quarter of 2021, 24.7 percent for the third quarter of 2020 and 22.5 percent for the second quarter of 2021. The effective rate for the third quarter of 2020 was higher compared to third quarter of 2021, primarily due to an increase in forecasted pre-tax income for third quarter of 2020 and the completion of 2019 tax returns. Income tax expense for the third quarter of 2021 increased $5.6 million compared to the second quarter of 2021, primarily due to the increase in net income before tax for the third quarter of 2021.
Lines of Business
We operate three principal lines of business: Commercial Banking, Consumer Banking and Wealth Management. Commercial Banking includes lending, treasury and cash management services and customer risk management products for small businesses, middle market and larger commercial customers. Commercial Banking also includes the TransFund EFT network. Consumer Banking includes retail lending and deposit services, lending and deposit services to small business customers served through our consumer branch network and all mortgage banking activities. Wealth Management provides fiduciary services, private banking services, insurance and investment advisory services in all markets. Wealth Management also underwrites state and municipal securities and engages in brokerage and trading activities.
In addition to our lines of business, we have a Funds Management unit. The primary purpose of this unit is to manage our overall liquidity needs and interest rate risk. Each line of business borrows funds from and provides funds to the Funds Management unit as needed to support their operations. Operating results for Funds Management and other include the effect of interest rate risk positions and risk management activities, securities gains and losses including impairment charges, the provision for credit losses in excess of net loans charged off, tax planning strategies and certain executive compensation costs that are not attributed to the lines of business.
We allocate resources and evaluate the performance of our lines of business using the net direct contribution, which includes the allocation of funds, actual net credit losses and capital costs. In addition, we measure the performance of our business lines after allocation of certain indirect expenses and taxes based on statutory rates.
The cost of funds borrowed from the Funds Management unit by the operating lines of business is updated annually at the beginning of the year and transfer priced at rates that approximate market rates for funds with similar repricing and cash flow characteristics. Market rates are generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment and liquidity risk. This method of transfer-pricing funds that supports assets of the operating lines of business tends to insulate them from interest rate risk.
The value of funds provided by the operating lines of business to the Funds Management unit is updated annually at the beginning of the year and is based on rates that approximate wholesale market rates for funds with similar repricing and cash flow characteristics. Market rates are generally based on LIBOR or interest rate swap rates. The funds credit formula applied to deposit products with indeterminate maturities is established based on their repricing characteristics reflected in a combination of the short-term LIBOR rate and a moving average of an intermediate-term swap rate, with an appropriate spread applied to both. Shorter duration products are weighted towards the short-term LIBOR rate and longer duration products are weighted towards the intermediate-term swap rates. The expected duration ranges from 30 days for certain rate-sensitive deposits to five years.
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Economic capital is assigned to the business units by a capital allocation model that reflects management’s assessment of risk. This model assigns capital based upon credit, operating, interest rate and other market risk inherent in our business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line, based on its actual exposures and calibrated to its own loss history where possible. Average invested capital includes economic capital and amounts we have invested in the lines of business.
As shown in Table 8, net income attributable to our lines of business increased $23.4 million compared to the third quarter of 2020. Net interest revenue increased by $10.5 million compared to the prior year, primarily driven by the shift from fee revenue to net interest revenue on trading securities. Net charge-offs decreased $19.0 million compared to the third quarter of 2020. Other operating revenue increased by $3.8 million. An increase in other gains (losses), net, primarily from the $31.1 million gain recognized on the sale of an alternative investment, positively impacted other operating revenue. This was partially offset by a $25.6 million decrease in mortgage banking revenue. Operating expense decreased $3.7 million compared to the third quarter of 2020, mainly from reduced mortgage banking costs in Consumer Banking.
Net interest revenue increased $8.4 million compared to the second quarter of 2021, primarily due to favorable costs on funds borrowed from the Funds Management unit. Other operating revenue increased $52.7 million. Growth in our fee-based business, led by brokerage and trading and mortgage banking revenues, was supplemented by the gain on sale of a merchant banking alternative investment in the third quarter of 2021. Net income attributable to our Funds Management unit was positively impacted by lower interest rates on the transfer pricing of funds provided by the operating segments.
Table 8 -- Net Income by Line of Business
(In thousands)
| Three Months Ended September 30, | Increase (Decrease) | % Increase (Decrease) | Three Months Ended June 30, 2021 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
Commercial Banking | $ | 102,694 | $ | 75,097 | $ | 27,597 | 37 | % | $ | 72,632 | $ | 30,062 | 41 | % | ||||||||||||||||||||||||||||||
| Consumer Banking | 12,432 | 26,855 | (14,423) | (54) | % | 1,698 | 10,734 | 632 | % | |||||||||||||||||||||||||||||||||||
| Wealth Management | 41,406 | 31,212 | 10,194 | 33 | % | 31,061 | 10,345 | 33 | % | |||||||||||||||||||||||||||||||||||
| Subtotal | 156,532 | 133,164 | 23,368 | 18 | % | 105,391 | 51,141 | 49 | % | |||||||||||||||||||||||||||||||||||
| Funds Management and other | 31,790 | 20,870 | 10,920 | N/A | 61,030 | (29,240) | N/A | |||||||||||||||||||||||||||||||||||||
| Total | $ | 188,322 | $ | 154,034 | $ | 34,288 | 22 | % | $ | 166,421 | $ | 21,901 | 13 | % | ||||||||||||||||||||||||||||||
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.
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Commercial Banking
Commercial Banking contributed $102.7 million to consolidated net income in the third quarter of 2021, an increase of $27.6 million or 37 percent compared to the third quarter of 2020. Other gains, net, increased $34.1 million, primarily from the gain recognized on the sale of a merchant banking alternative investment in the third quarter of 2021.
Table 9 -- Commercial Banking
(Dollars in thousands)
| Three Months Ended September 30, | Increase (Decrease) | % Increase (Decrease) | Three Months Ended June 30, 2021 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
Net interest revenue from external sources | $ | 150,211 | $ | 173,248 | $ | (23,037) | (13) | % | $ | 151,942 | $ | (1,731) | (1) | % | ||||||||||||||||||||||||||||||
Net interest expense from internal sources | (16,107) | (23,302) | 7,195 | (31) | % | (21,041) | 4,934 | (23) | % | |||||||||||||||||||||||||||||||||||
Total net interest revenue | 134,104 | 149,946 | (15,842) | (11) | % | 130,901 | 3,203 | 2 | % | |||||||||||||||||||||||||||||||||||
Net loans charged off | 2,807 | 22,599 | (19,792) | (88) | % | 16,268 | (13,461) | (83) | % | |||||||||||||||||||||||||||||||||||
Net interest revenue after net loans charged off | 131,297 | 127,347 | 3,950 | 3 | % | 114,633 | 16,664 | 15 | % | |||||||||||||||||||||||||||||||||||
Fees and commissions revenue | 56,452 | 50,085 | 6,367 | 13 | % | 63,368 | (6,916) | (11) | % | |||||||||||||||||||||||||||||||||||
| Other gains, net | 36,059 | 1,936 | 34,123 | N/A | 1,901 | 34,158 | N/A | |||||||||||||||||||||||||||||||||||||
Other operating revenue | 92,511 | 52,021 | 40,490 | 78 | % | 65,269 | 27,242 | 42 | % | |||||||||||||||||||||||||||||||||||
Personnel expense | 41,942 | 40,963 | 979 | 2 | % | 39,848 | 2,094 | 5 | % | |||||||||||||||||||||||||||||||||||
Non-personnel expense | 26,359 | 25,883 | 476 | 2 | % | 31,503 | (5,144) | (16) | % | |||||||||||||||||||||||||||||||||||
Other operating expense | 68,301 | 66,846 | 1,455 | 2 | % | 71,351 | (3,050) | (4) | % | |||||||||||||||||||||||||||||||||||
Net direct contribution | 155,507 | 112,522 | 42,985 | 38 | % | 108,551 | 46,956 | 43 | % | |||||||||||||||||||||||||||||||||||
Gain on financial instruments, net | 44 | 38 | 6 | N/A | 34 | 10 | N/A | |||||||||||||||||||||||||||||||||||||
| Gain (loss) on repossessed assets, net | (3,945) | (4,332) | 387 | N/A | 3,565 | (7,510) | N/A | |||||||||||||||||||||||||||||||||||||
Corporate expense allocations | 11,769 | 5,172 | 6,597 | 128 | % | 12,512 | (743) | (6) | % | |||||||||||||||||||||||||||||||||||
Income before taxes | 139,837 | 103,056 | 36,781 | 36 | % | 99,638 | 40,199 | 40 | % | |||||||||||||||||||||||||||||||||||
Federal and state income tax | 37,143 | 27,959 | 9,184 | 33 | % | 27,006 | 10,137 | 38 | % | |||||||||||||||||||||||||||||||||||
Net income | $ | 102,694 | $ | 75,097 | $ | 27,597 | 37 | % | $ | 72,632 | $ | 30,062 | 41 | % | ||||||||||||||||||||||||||||||
Average assets | $ | 28,474,182 | $ | 28,000,183 | $ | 473,999 | 2 | % | $ | 28,160,594 | $ | 313,588 | 1 | % | ||||||||||||||||||||||||||||||
Average loans | 16,588,875 | 18,677,401 | (2,088,526) | (11) | % | 16,981,888 | (393,013) | (2) | % | |||||||||||||||||||||||||||||||||||
Average deposits | 17,881,673 | 15,375,450 | 2,506,223 | 16 | % | 17,049,772 | 831,901 | 5 | % | |||||||||||||||||||||||||||||||||||
Average invested capital | 2,091,844 | 2,230,707 | (138,863) | (6) | % | 2,156,566 | (64,722) | (3) | % | |||||||||||||||||||||||||||||||||||
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.
Net interest revenue decreased $15.8 million compared to the third quarter of 2020, primarily due to reduced loan balances. Net loans charged-off decreased $19.8 million.
Fees and commissions revenue increased $6.4 million or 13 percent while operating expenses increased $1.5 million or 2 percent. An increase in production revenue from repossessed oil and gas properties of $2.8 million was partially offset by an increase in related operating expenses. Deposit service charges and fees and transaction card revenues were also up over the third quarter of 2020. Corporate expense allocations increased $6.6 million or 128 percent compared to the prior year.
The average outstanding balance of loans attributed to Commercial Banking decreased $2.1 billion or 11 percent compared to the third quarter of 2020 to $16.6 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans, which are primarily attributed to the Commercial Banking segment.
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Average deposits attributed to Commercial Banking were $17.9 billion for the third quarter of 2021, a $2.5 billion or 16 percent increase over the third quarter of 2020. Continued deposit growth is primarily due to higher balance retention by customers in the current economic environment. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.
Net interest revenue increased $3.2 million over the second quarter of 2021, primarily due to favorable yields on deposits sold to our Funds Management unit. Fees and commissions revenue decreased $6.9 million and operating expense decreased $3.1 million or 4 percent compared to the second quarter of 2021. A decrease in operating revenue from repossessed oil and gas assets due to the sale of a property was partially offset by a decrease in related operating expenses. The property sale resulted in a net loss on repossessed assets of $3.9 million in the third quarter of 2021. Net gain (loss) on repossessed assets in the second quarter of 2021 included a $7.3 million gain on sale of repossessed oil and gas assets, partially offset by an impairment of an oil and gas property.
Average loan balances decreased $393 million or 2 percent and average customer deposits increased $832 million or 5 percent over the second quarter of 2021.
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Consumer Banking
Consumer Banking provides retail banking services through four primary distribution channels: traditional branches, the 24-hour ExpressBank call center, Internet banking and mobile banking. Consumer Banking also conducts mortgage banking activities through offices located outside of our Consumer Banking markets.
Consumer Banking contributed $12.4 million to consolidated net income for the third quarter of 2021, a decrease of $14.4 million compared to the third quarter of 2020, largely due to lower mortgage production volumes and compression of production revenue as a percentage of production volume combined with lower spreads on deposits sold to our Funds Management unit.
Table 10 -- Consumer Banking
(Dollars in thousands)
| Three Months Ended September 30, | Increase (Decrease) | % Increase (Decrease) | Three Months Ended June 30, 2021 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
Net interest revenue from external sources | $ | 16,967 | $ | 15,821 | $ | 1,146 | 7 | % | $ | 17,552 | $ | (585) | (3) | % | ||||||||||||||||||||||||||||||
Net interest revenue from internal sources | 10,255 | 17,309 | (7,054) | (41) | % | 7,393 | 2,862 | 39 | % | |||||||||||||||||||||||||||||||||||
| Total net interest revenue | 27,222 | 33,130 | (5,908) | (18) | % | 24,945 | 2,277 | 9 | % | |||||||||||||||||||||||||||||||||||
| Net loans charged off | 928 | 79 | 849 | 1,075 | % | 425 | 503 | 118 | % | |||||||||||||||||||||||||||||||||||
Net interest revenue after net loans charged off | 26,294 | 33,051 | (6,757) | (20) | % | 24,520 | 1,774 | 7 | % | |||||||||||||||||||||||||||||||||||
| Fees and commissions revenue | 44,405 | 67,974 | (23,569) | (35) | % | 37,714 | 6,691 | 18 | % | |||||||||||||||||||||||||||||||||||
Other losses, net | (4) | (166) | 162 | N/A | — | (4) | N/A | |||||||||||||||||||||||||||||||||||||
| Other operating revenue | 44,401 | 67,808 | (23,407) | (35) | % | 37,714 | 6,687 | 18 | % | |||||||||||||||||||||||||||||||||||
| Personnel expense | 21,284 | 22,794 | (1,510) | (7) | % | 21,108 | 176 | 1 | % | |||||||||||||||||||||||||||||||||||
| Non-personnel expense | 28,199 | 36,361 | (8,162) | (22) | % | 31,345 | (3,146) | (10) | % | |||||||||||||||||||||||||||||||||||
| Total other operating expense | 49,483 | 59,155 | (9,672) | (16) | % | 52,453 | (2,970) | (6) | % | |||||||||||||||||||||||||||||||||||
| Net direct contribution | 21,212 | 41,704 | (20,492) | (49) | % | 9,781 | 11,431 | 117 | % | |||||||||||||||||||||||||||||||||||
| Gain (loss) on financial instruments, net | (5,949) | 1,540 | (7,489) | N/A | 17,137 | (23,086) | N/A | |||||||||||||||||||||||||||||||||||||
Change in fair value of mortgage servicing rights | 12,945 | 3,441 | 9,504 | N/A | (13,041) | 25,986 | N/A | |||||||||||||||||||||||||||||||||||||
| Gain on repossessed assets, net | — | 41 | (41) | N/A | — | — | N/A | |||||||||||||||||||||||||||||||||||||
| Corporate expense allocations | 11,516 | 10,691 | 825 | 8 | % | 11,599 | (83) | (1) | % | |||||||||||||||||||||||||||||||||||
| Income before taxes | 16,692 | 36,035 | (19,343) | (54) | % | 2,278 | 14,414 | 633 | % | |||||||||||||||||||||||||||||||||||
| Federal and state income tax | 4,260 | 9,180 | (4,920) | (54) | % | 580 | 3,680 | 634 | % | |||||||||||||||||||||||||||||||||||
| Net income | $ | 12,432 | $ | 26,855 | $ | (14,423) | (54) | % | $ | 1,698 | $ | 10,734 | 632 | % | ||||||||||||||||||||||||||||||
| Average assets | $ | 10,083,593 | $ | 9,898,112 | $ | 185,481 | 2 | % | $ | 10,087,488 | $ | (3,895) | — | % | ||||||||||||||||||||||||||||||
| Average loans | 1,763,705 | 1,825,865 | (62,160) | (3) | % | 1,786,242 | (22,537) | (1) | % | |||||||||||||||||||||||||||||||||||
| Average deposits | 8,516,942 | 7,940,973 | 575,969 | 7 | % | 8,469,043 | 47,899 | 1 | % | |||||||||||||||||||||||||||||||||||
| Average invested capital | 249,061 | 258,558 | (9,497) | (4) | % | 256,188 | (7,127) | (3) | % | |||||||||||||||||||||||||||||||||||
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.
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Net interest revenue from Consumer Banking activities declined by $5.9 million or 18 percent compared to the third quarter of 2020, primarily due to a decrease in the spread on deposits sold to our Funds Management unit. Average consumer deposits grew $576 million over the third quarter of 2020 with interest-bearing transaction deposit balances increasing $378 million or 11 percent and demand deposit balances increasing $193 million or 7 percent.
Fees and commissions revenue decreased $23.6 million or 35 percent compared to the third quarter of 2020. Mortgage banking revenue decreased $25.6 million due to lower mortgage production volume and compression in production revenue as a percentage of production volume. Deposit service charges increased $1.5 million. Customer spending levels increased with the broader reopening of the U.S. economy, which resulted in increased overdraft fees and check card revenue compared to the prior year. Operating expense decreased $9.7 million due to a decrease in mortgage banking costs and personnel expense. Corporate expense allocations were consistent with the third quarter of 2020.
Changes in the fair value of mortgage servicing rights, net of economic hedges, increased pre-tax net income for the third quarter of 2021 by $7.0 million compared to a $5.0 million increase in pre-tax net income in the third quarter of 2020.
Net interest revenue from Consumer Banking activities increased $2.3 million or 9 percent compared to the second quarter of 2021, mainly due to favorable spreads on deposits sold to our Funds Management unit. Operating revenue increased $6.7 million compared the second quarter of 2021. While mortgage production volume decreased $28 million to $615 million, production revenue as a percentage of production volumes increased 95 basis points resulting in a $5.1 million increase in mortgage banking revenues. Operating expense decreased $3.0 million, primarily due to a decrease in mortgage banking costs.
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Wealth Management
Wealth Management contributed a record $41.4 million to consolidated net income in the third quarter of 2021, an increase of $10.2 million or 33 percent over the third quarter of 2020. Revenue attributed to the Wealth Management segment totaled $153.2 million for the third quarter of 2021, an $18.5 million or 14 percent increase compared to the third quarter of 2020. Growth in agency residential mortgage trading volumes and higher margin market opportunities led to an increase in trading related revenue.
Table 11 -- Wealth Management
(Dollars in thousands)
| Three Months Ended September 30, | Increase (Decrease) | % Increase (Decrease) | Three Months Ended June 30, 2021 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
Net interest revenue from external sources | $ | 55,697 | $ | 34,098 | $ | 21,599 | 63 | % | $ | 52,966 | $ | 2,731 | 5 | % | ||||||||||||||||||||||||||||||
Net interest revenue from internal sources | (501) | (11,113) | 10,612 | (95) | % | (673) | 172 | (26) | % | |||||||||||||||||||||||||||||||||||
| Total net interest revenue | 55,196 | 22,985 | 32,211 | 140 | % | 52,293 | 2,903 | 6 | % | |||||||||||||||||||||||||||||||||||
| Net loans charged off (recovered) | (70) | (51) | (19) | 37 | % | (54) | (16) | 30 | % | |||||||||||||||||||||||||||||||||||
Net interest revenue after net loans charged off (recovered) | 55,266 | 23,036 | 32,230 | 140 | % | 52,347 | 2,919 | 6 | % | |||||||||||||||||||||||||||||||||||
| Fees and commissions revenue | 97,966 | 111,655 | (13,689) | (12) | % | 78,841 | 19,125 | 24 | % | |||||||||||||||||||||||||||||||||||
| Other gains (losses), net | (78) | (503) | 425 | N/A | 308 | (386) | N/A | |||||||||||||||||||||||||||||||||||||
| Other operating revenue | 97,888 | 111,152 | (13,264) | (12) | % | 79,149 | 18,739 | 24 | % | |||||||||||||||||||||||||||||||||||
| Personnel expense | 65,802 | 62,508 | 3,294 | 5 | % | 58,721 | 7,081 | 12 | % | |||||||||||||||||||||||||||||||||||
| Non-personnel expense | 21,615 | 20,360 | 1,255 | 6 | % | 20,708 | 907 | 4 | % | |||||||||||||||||||||||||||||||||||
| Other operating expense | 87,417 | 82,868 | 4,549 | 5 | % | 79,429 | 7,988 | 10 | % | |||||||||||||||||||||||||||||||||||
| Net direct contribution | 65,737 | 51,320 | 14,417 | 28 | % | 52,067 | 13,670 | 26 | % | |||||||||||||||||||||||||||||||||||
| Corporate expense allocations | 10,101 | 9,397 | 704 | 7 | % | 10,343 | (242) | (2) | % | |||||||||||||||||||||||||||||||||||
| Income before taxes | 55,636 | 41,923 | 13,713 | 33 | % | 41,724 | 13,912 | 33 | % | |||||||||||||||||||||||||||||||||||
| Federal and state income tax | 14,230 | 10,711 | 3,519 | 33 | % | 10,663 | 3,567 | 33 | % | |||||||||||||||||||||||||||||||||||
| Net income | $ | 41,406 | $ | 31,212 | $ | 10,194 | 33 | % | $ | 31,061 | $ | 10,345 | 33 | % | ||||||||||||||||||||||||||||||
| Average assets | $ | 19,109,700 | $ | 16,204,510 | $ | 2,905,190 | 18 | % | $ | 19,201,041 | $ | (91,341) | — | % | ||||||||||||||||||||||||||||||
| Average loans | 1,971,380 | 1,777,008 | 194,372 | 11 | % | 1,968,513 | 2,867 | — | % | |||||||||||||||||||||||||||||||||||
| Average deposits | 9,120,446 | 9,090,116 | 30,330 | — | % | 9,695,319 | (574,873) | (6) | % | |||||||||||||||||||||||||||||||||||
| Average invested capital | 312,148 | 295,245 | 16,903 | 6 | % | 313,355 | (1,207) | — | % | |||||||||||||||||||||||||||||||||||
Combined net interest revenue and fee revenue from our agency mortgage-backed securities trading activities increased by $9.7 million or 14 percent compared to the prior year. Fiduciary and asset management revenue increased $5.3 million. Growth in trust fees and managed account fees as a result of higher client asset balances, was partially offset by a combination of lower mutual fund fees and increased fee waivers. Operating expense increased $4.5 million largely due to higher trading related incentive compensation expense.
Average loans attributed to the Wealth Management segment increased $194 million or 11 percent.
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Net income for Wealth Management increased $10.3 million or 33 percent compared to the second quarter of 2021. Combined net interest revenue and fee revenue increased $22.0 million. Revenue primarily from agency residential mortgage trading activity increased $15.4 million to $77.3 million due to higher margin market opportunities. Operating expense increased $8.0 million, primarily due to incentive compensation costs related to increased trading activity.
Average loans were consistent compared to the prior quarter and average deposits decreased $575 million or 6 percent.
Financial Condition
Securities
We maintain a securities portfolio to enhance profitability, manage interest rate risk, provide liquidity and comply with regulatory requirements. Securities are classified as trading, held for investment, or available for sale. See Note 2 to the Consolidated Financial Statements for the composition of the securities portfolio as of September 30, 2021 and December 31, 2020.
We hold an inventory of trading securities in support of sales to a variety of customers, including banks, corporations, insurance companies, money managers and others. Trading securities decreased $145 million to $5.6 billion during the third quarter of 2021. As discussed in the Market Risk section of this report, trading activities involve risk of loss from adverse price movement. We mitigate this risk within board-approved limits through the use of derivative contracts, short-sales and other techniques. These limits remain relatively unchanged from levels set before our expanded trading activities.
At September 30, 2021, the carrying value of investment (held-to-maturity) securities was $216 million, including a $470 thousand allowance for expected credit losses compared to $221 million at June 30, 2021 with a $493 thousand allowance for expected credit losses. The fair value of investment securities was $238 million at September 30, 2021 and $246 million at June 30, 2021. Investment securities consist primarily of residential mortgage-backed securities issued by U.S. government agencies, long-term, fixed rate Oklahoma and Texas municipal bonds, and taxable Texas school construction bonds.
Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $13.1 billion at September 30, 2021, a $100 million increase compared to June 30, 2021. At September 30, 2021, the available for sale securities portfolio consisted primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Both residential and commercial mortgage-backed securities have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans.
A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. Our best estimate of the duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at September 30, 2021 is 3.0 years. Management estimates the duration extends to 4.0 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.0 years assuming a 100 basis point decline in the current low rate environment.
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Loans
The aggregate loan portfolio before allowance for loan losses totaled $20.3 billion at September 30, 2021, a $1.1 billion decrease compared to June 30, 2021, primarily due to a decrease in PPP loan balances and to a lesser extent, paydowns of energy and commercial real estate loans.
Table 12 -- Loans
(In thousands)
| Sept. 30, 2021 | June 30, 2021 | Mar. 31, 2021 | Dec. 31, 2020 | Sept. 30, 2020 | ||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||
| Healthcare | $ | 3,347,641 | $ | 3,381,261 | $ | 3,290,758 | $ | 3,305,990 | $ | 3,325,790 | ||||||||||||||||||||||
| Services | 3,323,422 | 3,389,756 | 3,421,948 | 3,508,583 | 3,545,825 | |||||||||||||||||||||||||||
| Energy | 2,814,059 | 3,011,331 | 3,202,488 | 3,469,194 | 3,717,101 | |||||||||||||||||||||||||||
| General business | 2,690,018 | 2,690,559 | 2,742,590 | 2,793,768 | 2,976,990 | |||||||||||||||||||||||||||
| Total commercial | 12,175,140 | 12,472,907 | 12,657,784 | 13,077,535 | 13,565,706 | |||||||||||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||||||||||
| Office | 1,030,755 | 1,073,346 | 1,094,060 | 1,085,257 | 1,099,563 | |||||||||||||||||||||||||||
| Industrial | 890,316 | 824,577 | 789,437 | 810,510 | 792,389 | |||||||||||||||||||||||||||
| Multifamily | 875,586 | 964,824 | 1,227,915 | 1,328,045 | 1,387,461 | |||||||||||||||||||||||||||
| Retail | 766,402 | 784,445 | 787,648 | 796,223 | 786,211 | |||||||||||||||||||||||||||
Residential construction and land development | 118,416 | 128,939 | 119,079 | 119,394 | 121,258 | |||||||||||||||||||||||||||
| Other commercial real estate | 435,417 | 470,861 | 485,208 | 559,109 | 506,818 | |||||||||||||||||||||||||||
| Total commercial real estate | 4,116,892 | 4,246,992 | 4,503,347 | 4,698,538 | 4,693,700 | |||||||||||||||||||||||||||
| Paycheck protection program | 536,052 | 1,121,583 | 1,848,550 | 1,682,310 | 2,097,325 | |||||||||||||||||||||||||||
| Loans to individuals: | ||||||||||||||||||||||||||||||||
| Residential mortgage | 1,747,243 | 1,772,627 | 1,797,478 | 1,863,003 | 1,849,144 | |||||||||||||||||||||||||||
Residential mortgage guaranteed by U.S. government agencies | 376,986 | 413,806 | 420,051 | 408,687 | 384,247 | |||||||||||||||||||||||||||
| Personal | 1,395,623 | 1,388,534 | 1,306,637 | 1,277,447 | 1,213,178 | |||||||||||||||||||||||||||
| Total loans to individuals | 3,519,852 | 3,574,967 | 3,524,166 | 3,549,137 | 3,446,569 | |||||||||||||||||||||||||||
| Total | $ | 20,347,936 | $ | 21,416,449 | $ | 22,533,847 | $ | 23,007,520 | $ | 23,803,300 | ||||||||||||||||||||||
Commercial
Commercial loans represent loans for working capital, facilities acquisition or expansion, purchases of equipment and other needs of commercial customers primarily located within our geographical footprint. These loans are underwritten individually and represent ongoing relationships based on a thorough knowledge of the customer, the customer’s industry and market. While commercial loans are generally secured by the customer’s assets including real property, inventory, accounts receivable, operating equipment, interests in mineral rights and other property and may also include personal guarantees of the owners and related parties, the primary source of repayment of the loans is the ongoing cash flow from operations of the customer’s business. In addition, revolving lines of credit are generally governed by a borrowing base. Inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with commercial lending policies.
Commercial loans totaled $12.2 billion or 60 percent of the loan portfolio at September 30, 2021, a $298 million decrease compared to June 30, 2021, primarily due to paydowns in the energy loan portfolio. Services and healthcare loan balances also decreased while general business loans were largely unchanged.
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Approximately 76 percent of loans in this segment are located within our geographic footprint, based on collateral location. Loans for which the collateral location is less relevant, such as unsecured loans and reserve-based energy loans are categorized by the borrower's primary operating location. The largest concentration of loans in this segment outside of our footprint is California, totaling 4 percent of the segment.
Supporting the energy industry with loans to producers and other energy-related entities has been a hallmark of the Company since its founding and represents a large portion of our commercial loan portfolio. In addition, energy production and related industries have a significant impact on the economy in our primary markets. Loans collateralized by oil and gas properties are subject to a semi-annual engineering review by our internal staff of petroleum engineers. This review is used as the basis for developing the expected cash flows supporting the loan amount. The projected cash flows are discounted according to risk characteristics of the underlying oil and gas properties. Loans are evaluated to demonstrate with reasonable certainty that crude oil, natural gas and natural gas liquids can be recovered from known oil and gas reservoirs under existing economic and operating conditions at current pricing levels and with existing conventional equipment and operating methods and costs. As part of our evaluation of credit quality, we analyze rigorous stress tests over a range of commodity prices and take proactive steps to mitigate risk when appropriate.
Outstanding energy loans totaled $2.8 billion or 14 percent of total loans at September 30, 2021, a $197 million decrease compared to June 30, 2021. Approximately $2.0 billion of energy loans were to oil and gas producers, a $192 million decrease compared to June 30, 2021. While commodity prices have continued to improve, sourcing new loans sufficient to offset paydowns remains a challenge as existing borrowers continue to reduce leverage. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest risk form of energy lending. Approximately 67 percent of the committed production loans are secured by properties primarily producing oil and 33 percent of the committed production loans are secured by properties primarily producing natural gas.
Loans to midstream oil and gas companies totaled $613 million at September 30, 2021, a $32 million decrease compared to June 30, 2021. Loans to borrowers that provide services to the energy industry totaled $129 million at September 30, 2021, an increase of $26 million. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $27 million, largely unchanged compared to the prior quarter.
Unfunded energy loan commitments were $2.8 billion at September 30, 2021, a $109 million increase over June 30, 2021.
The healthcare sector of the loan portfolio totaled $3.3 billion or 16 percent of total loans. Healthcare loans decreased $34 million compared to June 30, 2021, primarily driven by our senior housing sector. This was partially offset by growth in balances to hospital systems and other medical practices over the prior quarter. Healthcare sector loans consist primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Generally we loan to borrowers with a portfolio of multiple facilities that serves to help diversify risks specific to a single facility.
The services sector of the loan portfolio totaled $3.3 billion or 16 percent of total loans, a $66 million decrease compared to the prior quarter. Service sector loans consist of a large number of loans to a variety of businesses, including Native American tribal and state and local governments, Native American tribal casino operations, foundations and not-for-profit organizations, educational services and specialty trade contractors. Approximately $1.7 billion of the services category is made up of loans with individual balances of less than $10 million. Services sector loans are generally secured by the assets of the borrower with repayment coming from the cash flows of ongoing operations of the customer’s business.
General business loans totaled $2.7 billion or 13 percent of total loans, largely unchanged compared to the prior quarter. General business loans consist of $1.4 billion of wholesale/retail loans and $1.3 billion of loans from other commercial industries.
We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of $100 million or more and with three or more non-affiliated banks as participants. At September 30, 2021, the outstanding principal balance of these loans totaled $3.5 billion, including $1.4 billion of energy loans. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 22 percent of our shared national credits, based on dollars committed. We hold shared national credits to the same standard of analysis and perform the same level of review as internally originated credits. Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. In addition to management’s quarterly assessment of credit risk, banking regulators annually review a sample of shared national credits for proper risk grading.
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Commercial Real Estate
Commercial real estate represents loans for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes generally within our geographical footprint. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.
The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 20 percent to 22 percent over the past five years. The outstanding balance of commercial real estate loans decreased $130 million compared to June 30, 2021. Borrowers continue to use this low interest rate environment to refinance to long-term, non-recourse markets. Multifamily residential loans, decreased $89 million to $876 million at September 30, 2021. Loans secured by office facilities decreased $43 million to $1.0 billion. Loans secured by other commercial real estate properties decreased $35 million to $435 million. Loans secured by industrial facilities increased $66 million to $890 million.
Approximately 69 percent of loans in this segment are in our geographic footprint based on collateral location. The largest concentration of loans in this segment outside our footprint is Utah, totaling 7 percent of the segment, followed by California at 5 percent. All other states represent less than 5 percent individually.
Paycheck Protection Program
We actively participate in programs initiated by the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), including the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") that began on April 3, 2020. PPP provides fully forgivable loans when utilized for qualified expenditures, including to help small businesses maintain payrolls during the COVID-19 pandemic. These loans have a contractual term of two years, though most are expected to be forgiven prior to maturity after completion of a compliance period. Loans are guaranteed and amounts forgiven will be reimbursed to the Company by the SBA. The loans carry a fixed interest rate of 1 percent. Interest plus loan fees, which vary depending on loan size, are accrued over the contractual life of the loan. Any unaccreted origination fees will be recognized when the loan is paid. The pace of forgiveness activity for the initial rounds of PPP loans has been slower than initially anticipated. At September 30, 2021, approximately $85 million of PPP loans from the initial rounds remain outstanding, with an unaccreted origination fee balance of $480 thousand.
The Company also participated in the most recent round of PPP. Approximately $451 million of PPP loans from this round remain outstanding. The newest round of loans have a fixed interest rate of 1 percent and a contractual term of five years, but are expected to be forgiven prior to maturity. Unaccreted origination fees related to the 2021 vintage of PPP loans totaled $15 million at September 30, 2021.
Loans to Individuals
Loans to individuals include residential mortgage and personal loans. Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. These loans are secured by a first or second mortgage on the customer's primary residence. These loans are made in accordance with underwriting policies we believe to be conservative and are fully documented. Loans may be individually underwritten or credit scored based on size and other criteria. Credit scoring is assessed based on significant credit characteristics including credit history, residential and employment stability.
In general, we sell the majority of our conforming fixed rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. Our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or adjustable rate mortgage loans with initial rates that are below market. Home equity loans are primarily first-lien and fully amortizing.
Residential mortgage, which includes home equity loans, and personal loans are made in accordance with underwriting policies we believe to be conservative and are fully documented. Loans may be individually underwritten or credit scored based on size and other criteria. Credit scoring is assessed based on significant credit characteristics including credit history, residential and employment stability.
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Personal loans consist primarily of loans to Wealth Management clients secured by the cash surrender value of insurance policies and marketable securities. It also includes direct loans secured by and for the purchase of automobiles, recreational and marine equipment as well as unsecured loans.
Approximately 91 percent of the loans in this segment are secured by collateral located within our geographical footprint. Loans for which the collateral location is less relevant, such as unsecured loans are categorized by the borrower’s primary operating location.
Residential mortgage loans guaranteed by U.S. government agencies have limited credit exposure because of the agency guarantee. This amount includes residential mortgage loans previously sold into GNMA mortgage pools that the Company may repurchase when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet.
The Company secondarily evaluates loan portfolio performance based on the primary geographical market managing the loan. Loans attributed to a geographical market may not represent the location of the borrower or the collateral. All permanent mortgage loans serviced by our mortgage banking unit and held for investment by the Company are centrally managed by the Oklahoma market.
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Table 13-- Loans Managed by Primary Geographical Market
(In thousands)
| Sept. 30, 2021 | June 30, 2021 | Mar. 31, 2021 | Dec. 31, 2020 | Sept. 30, 2020 | ||||||||||||||||||||||||||||
| Texas: | ||||||||||||||||||||||||||||||||
| Commercial | $ | 5,815,562 | $ | 5,690,901 | $ | 5,748,345 | $ | 5,926,534 | $ | 6,135,471 | ||||||||||||||||||||||
| Commercial real estate | 1,383,871 | 1,403,751 | 1,511,714 | 1,519,217 | 1,523,226 | |||||||||||||||||||||||||||
| Paycheck protection program | 115,623 | 342,933 | 537,899 | 501,079 | 614,970 | |||||||||||||||||||||||||||
| Loans to individuals | 901,121 | 885,619 | 848,194 | 855,410 | 794,055 | |||||||||||||||||||||||||||
| Total Texas | 8,216,177 | 8,323,204 | 8,646,152 | 8,802,240 | 9,067,722 | |||||||||||||||||||||||||||
| Oklahoma: | ||||||||||||||||||||||||||||||||
| Commercial | 2,590,887 | 2,840,560 | 2,975,477 | 3,144,782 | 3,332,244 | |||||||||||||||||||||||||||
| Commercial real estate | 552,184 | 552,673 | 597,840 | 597,733 | 608,448 | |||||||||||||||||||||||||||
| Paycheck protection program | 192,474 | 242,880 | 468,002 | 413,108 | 487,247 | |||||||||||||||||||||||||||
| Loans to individuals | 2,014,099 | 2,063,419 | 2,043,705 | 2,052,784 | 2,034,576 | |||||||||||||||||||||||||||
| Total Oklahoma | 5,349,644 | 5,699,532 | 6,085,024 | 6,208,407 | 6,462,515 | |||||||||||||||||||||||||||
| Colorado: | ||||||||||||||||||||||||||||||||
| Commercial | 1,874,613 | 1,904,182 | 1,910,826 | 1,929,320 | 1,993,364 | |||||||||||||||||||||||||||
| Commercial real estate | 526,653 | 656,521 | 777,786 | 879,648 | 893,626 | |||||||||||||||||||||||||||
| Paycheck protection program | 140,470 | 299,712 | 436,540 | 377,111 | 494,910 | |||||||||||||||||||||||||||
| Loans to individuals | 249,298 | 262,796 | 264,759 | 264,295 | 257,832 | |||||||||||||||||||||||||||
| Total Colorado | 2,791,034 | 3,123,211 | 3,389,911 | 3,450,374 | 3,639,732 | |||||||||||||||||||||||||||
| Arizona: | ||||||||||||||||||||||||||||||||
| Commercial | 1,194,801 | 1,239,270 | 1,207,089 | 1,219,072 | 1,218,769 | |||||||||||||||||||||||||||
| Commercial real estate | 734,174 | 705,497 | 667,766 | 726,111 | 702,291 | |||||||||||||||||||||||||||
| Paycheck protection program | 42,815 | 104,946 | 208,481 | 211,725 | 272,114 | |||||||||||||||||||||||||||
| Loans to individuals | 182,506 | 178,481 | 179,031 | 177,948 | 166,203 | |||||||||||||||||||||||||||
| Total Arizona | 2,154,296 | 2,228,194 | 2,262,367 | 2,334,856 | 2,359,377 | |||||||||||||||||||||||||||
| Kansas/Missouri: | ||||||||||||||||||||||||||||||||
| Commercial | 336,414 | 388,291 | 421,974 | 455,914 | 493,606 | |||||||||||||||||||||||||||
| Commercial real estate | 408,001 | 406,055 | 395,590 | 366,821 | 352,663 | |||||||||||||||||||||||||||
| Paycheck protection program | 6,920 | 41,954 | 60,741 | 56,011 | 80,230 | |||||||||||||||||||||||||||
| Loans to individuals | 100,920 | 103,092 | 104,954 | 105,995 | 96,598 | |||||||||||||||||||||||||||
| Total Kansas/Missouri | 852,255 | 939,392 | 983,259 | 984,741 | 1,023,097 | |||||||||||||||||||||||||||
| New Mexico: | ||||||||||||||||||||||||||||||||
| Commercial | 287,695 | 304,804 | 307,395 | 303,833 | 288,374 | |||||||||||||||||||||||||||
| Commercial real estate | 437,302 | 437,996 | 448,298 | 473,204 | 473,697 | |||||||||||||||||||||||||||
| Paycheck protection program | 31,444 | 86,716 | 124,059 | 109,881 | 133,244 | |||||||||||||||||||||||||||
| Loans to individuals | 66,651 | 68,177 | 70,491 | 75,665 | 79,890 | |||||||||||||||||||||||||||
| Total New Mexico | 823,092 | 897,693 | 950,243 | 962,583 | 975,205 | |||||||||||||||||||||||||||
| Arkansas: | ||||||||||||||||||||||||||||||||
| Commercial | 75,168 | 104,899 | 86,678 | 98,080 | 103,878 | |||||||||||||||||||||||||||
| Commercial real estate | 74,707 | 84,499 | 104,353 | 135,804 | 139,749 | |||||||||||||||||||||||||||
| Paycheck protection program | 6,306 | 2,442 | 12,828 | 13,395 | 14,610 | |||||||||||||||||||||||||||
| Loans to individuals | 5,257 | 13,383 | 13,032 | 17,040 | 17,415 | |||||||||||||||||||||||||||
| Total Arkansas | 161,438 | 205,223 | 216,891 | 264,319 | 275,652 | |||||||||||||||||||||||||||
| Total BOK Financial loans | $ | 20,347,936 | $ | 21,416,449 | $ | 22,533,847 | $ | 23,007,520 | $ | 23,803,300 | ||||||||||||||||||||||
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Off-Balance Sheet Commitments
We enter into certain off-balance sheet arrangements in the normal course of business as shown in Table 14. Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower’s financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
We have off-balance sheet commitments related to certain residential mortgage loans sold into mortgage-backed securities as part of our mortgage banking activities. We retain off-balance sheet credit risk related to losses in excess of amounts guaranteed by the U.S. Department of Veteran's Affairs ("VA").
We also have off-balance sheet credit risk related to certain residential mortgage loans primarily originated under community development loan programs that were sold to a U.S. government agency with full recourse prior to 2007. We are obligated to repurchase these loans for the life of these loans in the event of foreclosure for the unpaid principal and interest at the time of foreclosure. The majority of our conforming fixed rate loan originations are sold in the secondary market and we only retain repurchase obligations under standard underwriting representations and warranties.
Table 14 – Off-Balance Sheet Credit Commitments
(In thousands)
| Sept. 30, 2021 | June 30, 2021 | Mar. 31, 2021 | Dec. 31, 2020 | Sept. 30, 2020 | ||||||||||||||||||||||||||||
| Loan commitments | $ | 12,044,695 | $ | 11,518,158 | $ | 11,151,650 | $ | 10,967,546 | $ | 10,430,160 | ||||||||||||||||||||||
| Standby letters of credit | 638,067 | 671,878 | 713,834 | 681,467 | 678,136 | |||||||||||||||||||||||||||
Unpaid principal balance of residential mortgage loans sold with recourse | 57,988 | 63,545 | 68,393 | 73,055 | 77,225 | |||||||||||||||||||||||||||
Unpaid principal balance of residential mortgage loans transferred into mortgage-backed securities guaranteed by U.S. Dept. of Veteran's Affairs | 1,150,124 | 1,225,100 | 1,326,300 | 1,442,504 | 1,574,272 | |||||||||||||||||||||||||||
Customer Derivative Programs
We offer programs that permit our customers to hedge various risks, including fluctuations in energy, cattle and other agricultural product prices, interest rates and foreign exchange rates. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and the Company. Offsetting contracts are executed between the Company and selected counterparties to minimize market risk due to changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to us as compensation for administrative costs, credit risk and profit.
The customer derivative programs create credit risk for potential amounts due to the Company from our customers and from the counterparties. Customer credit risk is monitored through existing credit policies and procedures. The effects of changes in commodity prices, interest rates or foreign exchange rates are evaluated across a range of possible scenarios to determine the maximum exposure we are willing to have individually to any customer. Customers may also be required to provide cash margin or other collateral in conjunction with our credit agreements to further limit our credit risk.
Counterparty credit risk is evaluated through existing policies and procedures. This evaluation considers the total relationship between BOK Financial and each of the counterparties. Individual limits are established by management, approved by Credit Administration and reviewed by the Asset/Liability Committee. Margin collateral is required if the exposure between the Company and any counterparty exceeds established limits. Based on declines in the counterparties’ credit ratings, these limits may be reduced and additional margin collateral may be required.
A deterioration of the credit standing of one or more of the customers or counterparties to these contracts may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This occurs if the credit standing of the customer or counterparty deteriorated such that either the fair value of underlying collateral no longer supported the contract or the customer or the counterparty’s ability to provide margin collateral was impaired. Credit losses on customer derivatives reduce brokerage and trading revenue in the Consolidated Statements of Earnings.
- 24 -
Derivative contracts are carried at fair value. At September 30, 2021, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $1.7 billion compared to $1.6 billion at June 30, 2021. At September 30, 2021, the net fair value of our derivative contracts included $1.3 billion for energy contracts, $299 million for foreign exchange contracts and $63 million for interest rate swaps. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $1.7 billion at September 30, 2021 and $1.6 billion at June 30, 2021.
At September 30, 2021, total derivative assets were reduced by $932 thousand of cash collateral received from counterparties and total derivative liabilities were reduced by $1.2 billion of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement. Derivative contracts executed with customers may be secured by non-cash collateral in conjunction with a credit agreement with that customer, such as proven producing oil and gas properties. Access to this collateral in event of default is reasonably assured.
A table showing the notional and fair value of derivative assets and liabilities on both a gross and net basis is presented in Note 3 to the Consolidated Financial Statements.
The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor at September 30, 2021 follows in Table 15.
Table 15 -- Fair Value of Derivative Contracts
(In thousands)
| Customers | $ | 1,514,871 | ||||||
| Banks and other financial institutions | 179,560 | |||||||
| Fair value of customer risk management program asset derivative contracts, net | $ | 1,694,431 | ||||||
At September 30, 2021, our largest derivative exposure was to an energy customer for $90 million.
Our customer derivative program also introduces liquidity and capital risk. We are required to provide cash margin to certain counterparties when the net negative fair value of the contracts exceeds established limits. Also, changes in commodity prices affect the amount of regulatory capital we are required to hold as support for the fair value of our derivative assets. These risks are modeled as part of the management of these programs. Based on current prices, a decrease in market prices equivalent to $60.83 per barrel of oil would decrease the fair value of derivative assets by $494 million, with energy producers comprising the bulk of the assets. An increase in prices equivalent to $88.83 per barrel of oil would increase the fair value of derivative assets by $304 million as margin received falls faster than the asset values. Liquidity requirements of this program may also be affected by our credit rating. At September 30, 2021, a decrease in our credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $10 million. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of September 30, 2021, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.
- 25 -
Summary of Credit Loss Experience
Table 16 -- Summary of Credit Loss Experience
(In thousands)
| Three Months Ended | |||||||||||||||||||||||||||||
| Sept. 30, 2021 | June 30, 2021 | Mar. 31, 2021 | Dec. 31, 2020 | Sept. 30, 2020 | |||||||||||||||||||||||||
| Allowance for loan losses: | |||||||||||||||||||||||||||||
| Beginning balance | $ | 311,890 | $ | 352,402 | 388,640 | 419,777 | 435,597 | ||||||||||||||||||||||
| Loans charged off | (9,584) | (18,304) | (16,905) | (18,251) | (26,661) | ||||||||||||||||||||||||
| Recoveries of loans previously charged off | 1,769 | 2,856 | 2,437 | 1,592 | 4,232 | ||||||||||||||||||||||||
| Net loans charged off | (7,815) | (15,448) | (14,468) | (16,659) | (22,429) | ||||||||||||||||||||||||
Provision for credit losses | (27,395) | (25,064) | (21,770) | (14,478) | 6,609 | ||||||||||||||||||||||||
| Ending balance | $ | 276,680 | $ | 311,890 | $ | 352,402 | $ | 388,640 | $ | 419,777 | |||||||||||||||||||
| Accrual for off-balance sheet credit risk from unfunded loan commitments: | |||||||||||||||||||||||||||||
| Beginning balance | $ | 24,287 | $ | 32,877 | 36,921 | 27,969 | 32,919 | ||||||||||||||||||||||
Provision for credit losses | 4,952 | (8,590) | (4,044) | 8,952 | (4,950) | ||||||||||||||||||||||||
| Ending balance | $ | 29,239 | $ | 24,287 | $ | 32,877 | $ | 36,921 | $ | 27,969 | |||||||||||||||||||
Accrual for off-balance sheet credit risk associated with mortgage banking activities: | |||||||||||||||||||||||||||||
Beginning balance | $ | 3,828 | $ | 5,135 | 4,282 | 5,246 | 6,041 | ||||||||||||||||||||||
Loans charged off | (30) | (85) | (32) | (41) | (25) | ||||||||||||||||||||||||
Provision for credit losses | (534) | (1,222) | 885 | (923) | (770) | ||||||||||||||||||||||||
Ending balance | $ | 3,264 | $ | 3,828 | $ | 5,135 | $ | 4,282 | $ | 5,246 | |||||||||||||||||||
Allowance for credit losses related to held-to-maturity (investment) securities: | |||||||||||||||||||||||||||||
Beginning balance | $ | 493 | $ | 617 | $ | 688 | $ | 739 | $ | 1,628 | |||||||||||||||||||
Provision for credit losses | (23) | (124) | (71) | (51) | (889) | ||||||||||||||||||||||||
| Ending balance | $ | 470 | $ | 493 | $ | 617 | $ | 688 | $ | 739 | |||||||||||||||||||
Total provision for credit losses | $ | (23,000) | $ | (35,000) | $ | (25,000) | $ | (6,500) | $ | — | |||||||||||||||||||
| Net charge-offs (annualized) to average loans | 0.15 | % | 0.28 | % | 0.25 | % | 0.28 | % | 0.37 | % | |||||||||||||||||||
Net charge-offs (annualized) to average loans excluding PPP loans1 | 0.16 | % | 0.30 | % | 0.28 | % | 0.31 | % | 0.41 | % | |||||||||||||||||||
Recoveries to gross charge-offs | 18.46 | % | 15.60 | % | 14.42 | % | 8.72 | % | 15.87 | % | |||||||||||||||||||
Provision for loan losses (annualized) to average loans | (0.53) | % | (0.45) | % | (0.38) | % | (0.25) | % | 0.11 | % | |||||||||||||||||||
Allowance for loan losses to loans outstanding at period-end | 1.36 | % | 1.46 | % | 1.56 | % | 1.69 | % | 1.76 | % | |||||||||||||||||||
Allowance for loan losses to loans outstanding at period-end excluding PPP loans1 | 1.40 | % | 1.54 | % | 1.70 | % | 1.82 | % | 1.93 | % | |||||||||||||||||||
Accrual for unfunded loan commitments to loan commitments | 0.24 | % | 0.21 | % | 0.29 | % | 0.34 | % | 0.27 | % | |||||||||||||||||||
Combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments to loans outstanding at period-end | 1.50 | % | 1.57 | % | 1.71 | % | 1.85 | % | 1.88 | % | |||||||||||||||||||
Combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments to loans outstanding at period-end excluding PPP loans1 | 1.54 | % | 1.66 | % | 1.86 | % | 2.00 | % | 2.06 | % | |||||||||||||||||||
1 Metric meaningful due to the unique characteristics of the PPP loans.
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Allowance for Loan Losses and Accrual for Off-Balance Sheet Credit Risk from Unfunded Loan Commitments
Expected credit losses on assets carried at amortized cost are recognized over their expected lives based on models that measure the probability of default and loss given default over a 12-month reasonable and supportable forecast period. Models incorporate base case, downside and upside macroeconomic variables such as real gross domestic product ("GDP") growth, civilian unemployment rate and West Texas Intermediate ("WTI") oil prices on a probability weighted basis. See Note 4 to the consolidated financial statements for additional discussion of methodology of allowance for loan losses.
A $23.0 million negative provision for credit losses was recorded in the third quarter of 2021. Changes in our reasonable and supportable forecasts of macroeconomic variables, primarily due to strength in commodity prices and a continued optimistic outlook for growth in gross domestic product and the labor markets resulted in a $12.3 million decrease in the allowance for credit losses related to lending activities. Changes in loan portfolio characteristics, primarily related to improving credit quality metrics and lower loan balances resulted in a $10.1 million decrease in the allowance for credit losses related to lending activities.
- 27 -
The probability weighting of our base case reasonable and supportable forecast decreased to 65 percent in the third quarter of 2021 compared to 70 percent in the second quarter of 2021 as the level of uncertainty in the current economic outlook worsened slightly. Our reasonable and supportable forecast of macroeconomic variables is significantly influenced by the COVID-19 pandemic developments, which remains highly uncertain. A summary of macroeconomic variables considered in developing our estimate of expected credit losses at September 30, 2021 follows:
| Base | Downside | Upside | |||||||||
| Scenario probability weighting | 65% | 25% | 10% | ||||||||
| COVID-19 trajectory | COVID-19 case levels continue to improve from Delta variant wave as global virus immunity becomes more widespread and proves effective against severe virus outcomes as well as new virus strains. | New COVID-19 variants such as the recent Delta variant continue to emerge and spread in areas of the country with lower vaccination rates as the U.S. enters the fall and winter months. The severity of the situation is compounded by uncertainty around vaccine durability and many states/regions are forced to reinstate restrictions. | COVID-19 case levels continue to improve from Delta variant wave as global virus immunity becomes more widespread and proves effective against severe virus outcomes as well as new virus strains. | ||||||||
| Economic recovery (driven by COVID-19 trajectory) | Increased labor participation, elevated consumer consumption and the need for inventory restocking produces above historical average GDP growth through mid-2022, but begins to moderate thereafter. | Deteriorated COVID-19 situation, slow vaccine distribution and lack of Congressional support for additional fiscal stimulus results in a mild recession with conditions beginning to improve in the summer of 2022. | Increased labor participation, elevated consumer consumption and the need for inventory restocking produces above historical average GDP growth through late 2022, but begins to moderate thereafter. | ||||||||
| Macro-economic factors | –GDP is forecasted to grow by 4.1 percent over the next 12 months. –Civilian unemployment rate of 4.9 percent in the fourth quarter of 2021 improves to 4.5 percent by the third quarter of 2022. –WTI oil prices are projected to generally follow the NYMEX forward curve that existed at the end of September 2021 and are expected to average $68.38 per barrel over the next 12 months. | –GDP is forecasted to grow 2.0 percent in the fourth quarter of 2021, then contract in the first and second quarters of 2022 and return to growth of 1.0 percent in the third quarter of 2022. –Civilian unemployment rate of 5.6 percent in the fourth quarter of 2021 increases in the next two quarters then levels off at 6.9 percent in the third quarter of 2022. –WTI oil prices are projected to average $54.12 over the next 12 months. | –GDP is forecasted to grow by 4.8 percent over the next 12 months. –Civilian unemployment rate of 4.6 percent in the fourth quarter of 2021 improves to 4.0 percent by the third quarter of 2022. –WTI oil prices are projected to average $74.28 per barrel over the next 12 months. | ||||||||
Net charge-offs and changes in specific impairments attributed to certain credits required a $4.2 million provision during the third quarter of 2021. This provision was offset primarily by a $5.6 million decrease in allowance related to lower outstanding loan balances. Improved risk grading during the quarter resulted in a $9.6 million decrease in the allowance for lending activities. Significant improvement in energy loans credit risk grading, as well as improvements in risk grading in services and residential mortgage and commercial real estate loans was partially offset by credit risk grade migration in the healthcare loan portfolio. A summary of outstanding loan balances by risk grade is included in Note 4 to the Consolidated Financial Statements. Non-pass grade loans include other loans especially mentioned, defined by regulatory guidelines as loans that are currently performing in compliance with original terms but may have a potential weakness that deserves management’s close attention, accruing substandard loans, and nonaccruing loans. Non-pass grade loans totaled $568 million at September 30, 2021, an $84 million decrease compared to June 30. Non-pass graded loans were primarily composed of $242 million or 9 percent of energy loans, $86 million or 3 percent of services loans, $74 million or 2 percent of healthcare loans, $68 million or 2 percent of commercial real estate loans and $55 million or 2 percent of general business loans.
- 28 -
The allowance for loan losses totaled $277 million or 1.36 percent of outstanding loans and 208 percent of nonaccruing loans at September 30, 2021, excluding residential mortgage loans guaranteed by U.S. government agencies. The combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was $306 million or 1.50 percent of outstanding loans and 230 percent of nonaccruing loans at September 30, 2021. Excluding PPP loans, the allowance for loan losses was 1.40 percent of outstanding loans and the combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was 1.54 percent.
The allowance for credit losses attributed to energy was 2.51 percent of outstanding energy loans at September 30, 2021. Our semi-annual borrowing base redeterminations during the second quarter of 2021 were based on forward pricing curves that existed at that time and resulted in improved credit risk grading in our energy loan portfolio. Although energy prices have continued to improve, the pricing environment remains sensitive and tied to the continued economic recovery from the impact of the COVID-19 pandemic and other factors.
The Company recorded a $35.0 million negative provision for credit losses in the second quarter of 2021. The allowance for loan losses was $312 million or 1.46 percent of outstanding loans and 183 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies at June 30, 2021. The combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was $336 million or 1.57 percent of outstanding loans and 197 percent of nonaccruing loans. Excluding PPP loans, the allowance for loan losses was 1.54 percent of outstanding loans and the combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was 1.66 percent.
Net Loans Charged Off
Net charge-offs of commercial loans were $6.1 million in the third quarter of 2021, primarily related to two general business borrowers and a single energy production borrower. Net commercial real estate loan charge-offs were $1.2 million and net charge-offs of loans to individuals were $474 thousand. Net charge-offs of loans to individuals include deposit account overdraft losses.
Accrual for Off-Balance Sheet Credit Risk Associated with Mortgage Banking Activities
The accrual for off-balance sheet credit risk associated with mortgage banking activities includes consideration of credit risk related to certain residential mortgage loans sold into mortgage-backed securities in excess of amounts guaranteed by the U.S. Department of Veteran's Affairs ("VA") and mortgage loans originated under community development loan programs that were sold to a U.S. government agency with full recourse.
We use publicly available long-term national data to estimate total loss given default for our off-balance sheet credit risk related to losses in excess of amounts guaranteed by the VA. This result is combined with probability of default output from our mortgage servicing rights model to estimate total expected loss. Then, we estimate the VA's guarantee percentage to determine our portion of the credit risk. Qualitative adjustment may be used, if necessary.
Allowance for Credit Losses Related to Held-to-Maturity (Investment) Securities
The expected credit losses principles apply to all financial assets measured at cost, including our held-to-maturity (investment) debt securities portfolio. Our investment portfolio includes municipal and other tax-exempt securities and other debt securities. Expected credit losses for these assets is based on probability of default and loss given default assumptions that align with similarly graded loans. Qualitative adjustment may be used, if necessary.
- 29 -
Nonperforming Assets
As more fully described in Note 4 to the Consolidated Financial Statements, loans are generally classified as nonaccruing when it becomes probable that we will not collect the full contractual principal and interest. Accruing renegotiated loans guaranteed by U.S. government agencies represent residential mortgage loans that have been modified in troubled debt restructurings. Interest continues to accrue based on the modified terms of the loan and loans may be sold once they become eligible according to U.S. government agency guidelines. Real estate and other repossessed assets are assets acquired in partial or total forgiveness of loans. The assets are carried at the lower of cost as determined by fair value at the date of foreclosure or current fair value, less estimated selling costs. A summary of nonperforming assets follows in Table 17:
Table 17 -- Nonperforming Assets
(In thousands)
| Sept. 30, 2021 | June 30, 2021 | Mar. 31, 2021 | Dec. 31, 2020 | Sept. 30, 2020 | ||||||||||||||||||||||||||||
| Nonaccruing loans: | ||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||
| Energy | $ | 45,500 | $ | 70,341 | $ | 101,800 | $ | 125,059 | $ | 126,816 | ||||||||||||||||||||||
| Healthcare | 509 | 527 | 3,187 | 3,645 | 3,645 | |||||||||||||||||||||||||||
| Services | 25,714 | 29,913 | 28,033 | 25,598 | 25,817 | |||||||||||||||||||||||||||
| General business | 8,951 | 11,823 | 14,053 | 12,857 | 13,675 | |||||||||||||||||||||||||||
| Total commercial | 80,674 | 112,604 | 147,073 | 167,159 | 169,953 | |||||||||||||||||||||||||||
| Commercial real estate | 21,223 | 26,123 | 27,243 | 27,246 | 12,952 | |||||||||||||||||||||||||||
| Loans to individuals: | ||||||||||||||||||||||||||||||||
| Residential mortgage | 30,674 | 31,473 | 32,884 | 32,228 | 31,599 | |||||||||||||||||||||||||||
Residential mortgage guaranteed by U.S. government agencies | 9,188 | 9,207 | 8,564 | 7,741 | 6,397 | |||||||||||||||||||||||||||
| Personal | 188 | 229 | 255 | 319 | 252 | |||||||||||||||||||||||||||
| Total loans to individuals | 40,050 | 40,909 | 41,703 | 40,288 | 38,248 | |||||||||||||||||||||||||||
| Total nonaccruing loans | 141,947 | 179,636 | 216,019 | 234,693 | 221,153 | |||||||||||||||||||||||||||
Accruing renegotiated loans guaranteed by U.S. government agencies | 178,554 | 171,324 | 154,591 | 151,775 | 142,770 | |||||||||||||||||||||||||||
| Real estate and other repossessed assets | 28,770 | 57,337 | 70,911 | 90,526 | 52,847 | |||||||||||||||||||||||||||
| Total nonperforming assets | $ | 349,271 | $ | 408,297 | $ | 441,521 | $ | 476,994 | $ | 416,770 | ||||||||||||||||||||||
Total nonperforming assets excluding those guaranteed by U.S. government agencies | $ | 161,529 | $ | 227,766 | $ | 278,366 | $ | 317,478 | $ | 267,603 | ||||||||||||||||||||||
Allowance for loan losses to nonaccruing loans1 | 208.41 | % | 183.00 | % | 169.87 | % | 171.24 | % | 195.47 | % | ||||||||||||||||||||||
Nonperforming assets to outstanding loans and repossessed assets | 1.71 | % | 1.90 | % | 1.95 | % | 2.07 | % | 1.75 | % | ||||||||||||||||||||||
Nonperforming assets to outstanding loans and repossessed assets1,2 | 0.83 | % | 1.14 | % | 1.37 | % | 1.51 | % | 1.25 | % | ||||||||||||||||||||||
Nonaccruing commercial loans to outstanding commercial loans | 0.66 | % | 0.90 | % | 1.16 | % | 1.28 | % | 1.25 | % | ||||||||||||||||||||||
Nonaccruing commercial real estate loans to outstanding commercial real estate loans | 0.52 | % | 0.62 | % | 0.60 | % | 0.58 | % | 0.28 | % | ||||||||||||||||||||||
Nonaccruing loans to individuals to outstanding loans to individuals1 | 0.98 | % | 1.00 | % | 1.07 | % | 1.04 | % | 1.04 | % | ||||||||||||||||||||||
1 Excludes residential mortgages guaranteed by U.S. government agencies.
2 Excludes residential mortgage and PPP loans guaranteed by U.S. government agencies.
Excluding assets guaranteed by U.S. government agencies, nonperforming assets decreased $66 million from June 30, 2021, primarily due to a $25 million decrease in nonaccruing energy loans and a $29 million decrease in real estate and other repossessed assets. Newly identified nonaccruing loans totaled $21 million, offset by $42 million of payments and $10 million of charge-offs. The Company generally retains nonperforming assets to maximize potential recovery, which may cause future nonperforming assets to decrease more slowly.
- 30 -
A rollforward of nonperforming assets for the three and nine months ended September 30, 2021 follows in Table 18.
Table 18 -- Rollforward of Nonperforming Assets
(In thousands)
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Nonaccruing Loans | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Commercial Real Estate | Loan to Individuals | Total | Renegotiated Loans | Real Estate and Other Repossessed Assets | Total Nonperforming Assets | ||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | 112,604 | $ | 26,123 | $ | 40,909 | $ | 179,636 | $ | 171,324 | $ | 57,337 | $ | 408,297 | ||||||||||||||||||||||||||||||
| Additions | 16,569 | — | 4,826 | 21,395 | 19,273 | — | 40,668 | |||||||||||||||||||||||||||||||||||||
| Transfers from premises and equipment | — | — | — | — | — | 217 | 217 | |||||||||||||||||||||||||||||||||||||
| Payments | (34,009) | (3,478) | (4,058) | (41,545) | (983) | — | (42,528) | |||||||||||||||||||||||||||||||||||||
| Charge-offs | (6,979) | (1,422) | (1,183) | (9,584) | — | — | (9,584) | |||||||||||||||||||||||||||||||||||||
| Net gains (losses) and write-downs | — | — | — | — | — | (3,871) | (3,871) | |||||||||||||||||||||||||||||||||||||
Foreclosure of nonperforming loans | (7,511) | — | (375) | (7,886) | — | 7,886 | — | |||||||||||||||||||||||||||||||||||||
Foreclosure of loans guaranteed by U.S. government agencies | — | — | (672) | (672) | (131) | — | (803) | |||||||||||||||||||||||||||||||||||||
| Proceeds from sales | — | — | — | — | (10,646) | (32,799) | (43,445) | |||||||||||||||||||||||||||||||||||||
| Net transfers to nonaccruing loans | — | — | 603 | 603 | (603) | — | — | |||||||||||||||||||||||||||||||||||||
| Return to accrual status | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Other, net | — | — | — | — | 320 | — | 320 | |||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | 80,674 | $ | 21,223 | $ | 40,050 | $ | 141,947 | $ | 178,554 | $ | 28,770 | $ | 349,271 | ||||||||||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Nonaccruing Loans | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Commercial Real Estate | Loan to Individuals | Total | Renegotiated Loans | Real Estate and Other Repossessed Assets | Total Nonperforming Assets | ||||||||||||||||||||||||||||||||||||||
| Balance, Dec. 31, 2020 | $ | 167,159 | $ | 27,246 | $ | 40,288 | $ | 234,693 | $ | 151,775 | $ | 90,526 | $ | 476,994 | ||||||||||||||||||||||||||||||
| Additions | 42,363 | 327 | 16,431 | 59,121 | 55,825 | 8,688 | 123,634 | |||||||||||||||||||||||||||||||||||||
| Transfers from premises and equipment | — | — | — | — | — | 217 | 217 | |||||||||||||||||||||||||||||||||||||
| Payments | (82,511) | (3,865) | (12,079) | (98,455) | (2,611) | — | (101,066) | |||||||||||||||||||||||||||||||||||||
| Charge-offs | (38,826) | (2,485) | (3,482) | (44,793) | — | — | (44,793) | |||||||||||||||||||||||||||||||||||||
| Net gains (losses) and write-downs | — | — | — | — | — | 12,911 | 12,911 | |||||||||||||||||||||||||||||||||||||
Foreclosure of nonperforming loans | (7,511) | — | (664) | (8,175) | — | 8,175 | — | |||||||||||||||||||||||||||||||||||||
Foreclosure of loans guaranteed by U.S. government agencies | — | — | (1,892) | (1,892) | (253) | — | (2,145) | |||||||||||||||||||||||||||||||||||||
| Proceeds from sales | — | — | — | — | (25,391) | (91,747) | (117,138) | |||||||||||||||||||||||||||||||||||||
| Net transfers to nonaccruing loans | — | — | 1,741 | 1,741 | (1,741) | — | — | |||||||||||||||||||||||||||||||||||||
| Return to accrual status | — | — | (293) | (293) | — | — | (293) | |||||||||||||||||||||||||||||||||||||
| Other, net | — | — | — | — | 950 | — | 950 | |||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | 80,674 | $ | 21,223 | $ | 40,050 | $ | 141,947 | $ | 178,554 | $ | 28,770 | $ | 349,271 | ||||||||||||||||||||||||||||||
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We foreclose on loans guaranteed by U.S. government agencies in accordance with agency guidelines. Generally these loans are not eligible for modification programs or have failed to comply with modified loan terms. Principal is guaranteed by agencies of the U.S. government, subject to limitations and credit risk is limited. At foreclosure, these amounts are transferred to claims receivable accounts. These properties will be conveyed to the agencies once applicable criteria have been met.
Real Estate and Other Repossessed Assets
Real estate and other repossessed assets totaled $29 million at September 30, 2021, composed primarily of $17 million of developed commercial real estate, $7.1 million of oil and gas properties, $1.9 million of undeveloped land primarily zoned for commercial development and $1.7 million of equipment. Real estate and other repossessed assets totaled $57 million at June 30, 2021. The decrease compared to June 30 was primarily due to the sale of certain repossessed oil and gas properties.
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Liquidity and Capital
Based on the average balances for the third quarter of 2021, approximately 76 percent of our funding was provided by deposit accounts, 8 percent from borrowed funds, less than 1 percent from long-term subordinated debt and 11 percent from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.
Subsidiary Bank
Deposits and borrowed funds are the primary sources of liquidity for BOKF, NA, the wholly owned subsidiary bank of BOK Financial. We compete for retail and commercial deposits by offering a broad range of products and services and focusing on customer convenience. Retail deposit growth is supported through personal and small business checking, online bill paying services, mobile banking services, an extensive network of branch locations and ATMs and our ExpressBank call center. Commercial deposit growth is supported by offering treasury management and lockbox services. We also acquire brokered deposits when the cost of funds is advantageous to other funding sources.
Average deposits for the third quarter of 2021 totaled $37.8 billion, a $344 million increase over the second quarter of 2021. Continued deposit growth was primarily due to customers maintaining higher balances in the current economic environment, supplemented by inflows from government stimulus payments. Demand deposits grew by $481 million and savings account balances were up $15 million. Interest-bearing transaction account balances decreased $55 million while certificate of deposit balances decreased $97 million.
Table 19 - Average Deposits by Line of Business
(In thousands)
| Three Months Ended | |||||||||||||||||||||||||||||
| Sept. 30, 2021 | June 30, 2021 | Mar. 31, 2021 | Dec. 31, 2020 | Sept. 30, 2020 | |||||||||||||||||||||||||
| Commercial Banking | $ | 17,881,673 | $ | 17,049,772 | $ | 16,130,168 | $ | 15,373,673 | $ | 15,375,450 | |||||||||||||||||||
| Consumer Banking | 8,516,942 | 8,469,043 | 8,082,443 | 7,993,971 | 7,940,973 | ||||||||||||||||||||||||
| Wealth Management | 9,120,446 | 9,695,319 | 9,706,295 | 9,589,814 | 9,090,116 | ||||||||||||||||||||||||
| Subtotal | 35,519,061 | 35,214,134 | 33,918,906 | 32,957,458 | 32,406,539 | ||||||||||||||||||||||||
| Funds Management and other | 2,315,325 | 2,276,093 | 2,603,210 | 2,565,171 | 2,233,394 | ||||||||||||||||||||||||
| Total | $ | 37,834,386 | $ | 37,490,227 | $ | 36,522,116 | $ | 35,522,629 | $ | 34,639,933 | |||||||||||||||||||
Average Commercial Banking deposit balances increased $832 million over the second quarter of 2021. Demand deposit balances were up $395 million. Interest-bearing transaction account balances increased $443 million. Commercial customers continue to retain large cash reserves due to a combination of factors including uncertainty about the economic environment and potential for growth, lack of preferable liquid alternatives and a desire to minimize deposit service charges through the earnings credit. The earnings credit is a non-cash method that enables commercial customers to offset deposit service charges based on account balances. Commercial deposit balances may decrease as the economic outlook improves and if short-term rates move higher, enhancing their investment alternatives.
Average Consumer Banking deposit balances increased $48 million over the prior quarter. A $58 million increase in interest-bearing transaction deposit balances and a $14 million increase in savings account balances were partially offset by a $31 million decrease in time deposit balances. Demand deposit balances were largely unchanged compared to prior quarter.
Average Wealth Management deposits decreased $575 million compared to the second quarter of 2021. A $561 million decrease in interest bearing transaction accounts and a $58 million decrease in time deposit balances was partially offset by a $43 million increase in demand deposit balances.
Average time deposits for the third quarter of 2021 included $56 million of brokered deposits, a $10 million decrease compared to the second quarter of 2021. Average interest-bearing transaction accounts for the third quarter included $2.0 billion of brokered deposits, a $48 million increase over the second quarter of 2021.
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The distribution of our period end deposit account balances among principal markets follows in Table 20.
Table 20 -- Period End Deposits by Principal Market Area
(In thousands)
| Sept. 30, 2021 | June 30, 2021 | Mar. 31, 2021 | Dec. 31, 2020 | Sept. 30, 2020 | ||||||||||||||||||||||||||||
| Oklahoma: | ||||||||||||||||||||||||||||||||
| Demand | $ | 5,080,162 | $ | 4,985,542 | $ | 4,823,436 | $ | 4,329,205 | $ | 4,493,978 | ||||||||||||||||||||||
| Interest-bearing: | ||||||||||||||||||||||||||||||||
| Transaction | 11,692,679 | 12,065,844 | 12,828,070 | 12,603,658 | 12,586,449 | |||||||||||||||||||||||||||
| Savings | 510,906 | 500,344 | 487,862 | 420,996 | 401,062 | |||||||||||||||||||||||||||
| Time | 1,039,866 | 1,139,980 | 1,197,517 | 1,134,453 | 1,081,176 | |||||||||||||||||||||||||||
| Total interest-bearing | 13,243,451 | 13,706,168 | 14,513,449 | 14,159,107 | 14,068,687 | |||||||||||||||||||||||||||
| Total Oklahoma | 18,323,613 | 18,691,710 | 19,336,885 | 18,488,312 | 18,562,665 | |||||||||||||||||||||||||||
| Texas: | ||||||||||||||||||||||||||||||||
| Demand | 3,987,503 | 3,752,790 | 3,592,969 | 3,449,882 | 3,152,106 | |||||||||||||||||||||||||||
| Interest-bearing: | ||||||||||||||||||||||||||||||||
| Transaction | 4,985,465 | 4,335,113 | 4,257,234 | 3,800,427 | 3,482,555 | |||||||||||||||||||||||||||
| Savings | 165,043 | 160,805 | 154,406 | 139,173 | 136,787 | |||||||||||||||||||||||||||
| Time | 337,389 | 346,577 | 368,086 | 383,062 | 438,337 | |||||||||||||||||||||||||||
| Total interest-bearing | 5,487,897 | 4,842,495 | 4,779,726 | 4,322,662 | 4,057,679 | |||||||||||||||||||||||||||
| Total Texas | 9,475,400 | 8,595,285 | 8,372,695 | 7,772,544 | 7,209,785 | |||||||||||||||||||||||||||
| Colorado: | ||||||||||||||||||||||||||||||||
| Demand | 2,158,596 | 1,991,343 | 2,115,354 | 2,168,404 | 2,057,603 | |||||||||||||||||||||||||||
| Interest-bearing: | ||||||||||||||||||||||||||||||||
| Transaction | 2,337,354 | 2,159,819 | 2,100,135 | 2,170,485 | 1,861,763 | |||||||||||||||||||||||||||
| Savings | 79,873 | 73,990 | 73,446 | 69,384 | 68,230 | |||||||||||||||||||||||||||
| Time | 184,002 | 193,787 | 204,973 | 208,778 | 226,780 | |||||||||||||||||||||||||||
| Total interest-bearing | 2,601,229 | 2,427,596 | 2,378,554 | 2,448,647 | 2,156,773 | |||||||||||||||||||||||||||
| Total Colorado | 4,759,825 | 4,418,939 | 4,493,908 | 4,617,051 | 4,214,376 | |||||||||||||||||||||||||||
| New Mexico: | ||||||||||||||||||||||||||||||||
| Demand | 1,222,895 | 1,197,412 | 1,131,713 | 941,074 | 964,908 | |||||||||||||||||||||||||||
| Interest-bearing: | ||||||||||||||||||||||||||||||||
| Transaction | 837,630 | 723,757 | 736,923 | 733,007 | 713,418 | |||||||||||||||||||||||||||
| Savings | 107,615 | 105,837 | 103,591 | 91,646 | 85,463 | |||||||||||||||||||||||||||
| Time | 168,879 | 174,665 | 181,863 | 186,307 | 200,525 | |||||||||||||||||||||||||||
| Total interest-bearing | 1,114,124 | 1,004,259 | 1,022,377 | 1,010,960 | 999,406 | |||||||||||||||||||||||||||
| Total New Mexico | 2,337,019 | 2,201,671 | 2,154,090 | 1,952,034 | 1,964,314 | |||||||||||||||||||||||||||
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| Sept. 30, 2021 | June 30, 2021 | Mar. 31, 2021 | Dec. 31, 2020 | Sept. 30, 2020 | ||||||||||||||||||||||||||||
| Arizona: | ||||||||||||||||||||||||||||||||
| Demand | 1,110,884 | 943,511 | 915,439 | 905,201 | 928,671 | |||||||||||||||||||||||||||
| Interest-bearing: | ||||||||||||||||||||||||||||||||
| Transaction | 784,614 | 820,901 | 835,795 | 768,220 | 771,319 | |||||||||||||||||||||||||||
| Savings | 16,468 | 13,496 | 13,235 | 12,174 | 11,498 | |||||||||||||||||||||||||||
| Time | 30,862 | 30,012 | 30,997 | 32,721 | 36,929 | |||||||||||||||||||||||||||
| Total interest-bearing | 831,944 | 864,409 | 880,027 | 813,115 | 819,746 | |||||||||||||||||||||||||||
| Total Arizona | 1,942,828 | 1,807,920 | 1,795,466 | 1,718,316 | 1,748,417 | |||||||||||||||||||||||||||
| Kansas/Missouri: | ||||||||||||||||||||||||||||||||
| Demand | 488,595 | 463,339 | 478,370 | 426,738 | 405,360 | |||||||||||||||||||||||||||
| Interest-bearing: | ||||||||||||||||||||||||||||||||
| Transaction | 965,757 | 978,160 | 991,510 | 960,237 | 616,797 | |||||||||||||||||||||||||||
| Savings | 17,303 | 17,539 | 18,686 | 16,286 | 15,520 | |||||||||||||||||||||||||||
| Time | 13,040 | 13,509 | 13,898 | 14,610 | 16,430 | |||||||||||||||||||||||||||
| Total interest-bearing | 996,100 | 1,009,208 | 1,024,094 | 991,133 | 648,747 | |||||||||||||||||||||||||||
| Total Kansas/Missouri | 1,484,695 | 1,472,547 | 1,502,464 | 1,417,871 | 1,054,107 | |||||||||||||||||||||||||||
| Arkansas: | ||||||||||||||||||||||||||||||||
| Demand | 41,594 | 46,472 | 45,889 | 45,834 | 44,712 | |||||||||||||||||||||||||||
| Interest-bearing: | ||||||||||||||||||||||||||||||||
| Transaction | 149,611 | 195,125 | 141,207 | 122,388 | 164,439 | |||||||||||||||||||||||||||
| Savings | 3,289 | 3,445 | 3,000 | 2,333 | 2,389 | |||||||||||||||||||||||||||
| Time | 6,677 | 6,819 | 7,022 | 7,197 | 7,796 | |||||||||||||||||||||||||||
| Total interest-bearing | 159,577 | 205,389 | 151,229 | 131,918 | 174,624 | |||||||||||||||||||||||||||
| Total Arkansas | 201,171 | 251,861 | 197,118 | 177,752 | 219,336 | |||||||||||||||||||||||||||
| Total BOK Financial deposits | $ | 38,524,551 | $ | 37,439,933 | $ | 37,852,626 | $ | 36,143,880 | $ | 34,973,000 | ||||||||||||||||||||||
In addition to deposits, liquidity is provided primarily by federal funds purchased, securities repurchase agreements and Federal Home Loan Bank borrowings. Federal funds purchased consist primarily of unsecured, overnight funds acquired from other financial institutions. Funds are primarily purchased from bankers’ banks and Federal Home Loan banks from across the country. The Company has no wholesale federal funds purchased at September 30, 2021. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale and trading securities. Federal Home Loan Bank borrowings are generally short-term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and agency mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $1.9 billion during the quarter, compared to $2.1 billion in the second quarter of 2021.
At September 30, 2021, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $17.4 billion.
A summary of other borrowings for BOK Financial on a consolidated basis follows in Table 21.
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Table 21 -- Borrowed Funds
(In thousands)
| Three Months Ended September 30, 2021 | Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sept. 30, 2021 | Average Balance During the Quarter | Rate | Maximum Outstanding At Any Month End During the Quarter | June 30, 2021 | Average Balance During the Quarter | Rate | Maximum Outstanding At Any Month End During the Quarter | |||||||||||||||||||||||||||||||||||||||||||
| Funds purchased | 253,557 | 377,436 | 0.57 | % | 326,176 | 185,315 | 591,112 | 0.40 | % | 395,416 | ||||||||||||||||||||||||||||||||||||||||
| Repurchase agreements | 589,716 | 1,071,364 | 0.07 | % | 611,488 | 544,868 | 1,199,378 | 0.05 | % | 544,868 | ||||||||||||||||||||||||||||||||||||||||
Other borrowings: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank advances | — | 1,908,152 | 0.26 | % | 700,000 | 500,000 | 2,138,462 | 0.27 | % | 2,600,000 | ||||||||||||||||||||||||||||||||||||||||
GNMA repurchase liability | 6,495 | 7,286 | 4.14 | % | 7,618 | 7,625 | 11,306 | 3.73 | % | 10,895 | ||||||||||||||||||||||||||||||||||||||||
Paycheck protection program liquidity facility | — | 599,747 | 0.34 | % | 672,850 | 1,010,560 | 1,430,522 | 0.35 | % | 1,529,788 | ||||||||||||||||||||||||||||||||||||||||
| Other | 30,931 | 30,898 | 5.33 | % | 31,322 | 28,046 | 28,079 | 5.53 | % | 28,757 | ||||||||||||||||||||||||||||||||||||||||
| Total other borrowings | 37,426 | 2,546,083 | 0.37 | % | 1,546,231 | 3,608,369 | 0.34 | % | ||||||||||||||||||||||||||||||||||||||||||
Subordinated debentures1 | 131,220 | 214,654 | 4.63 | % | 276,049 | 276,043 | 276,034 | 4.87 | % | 276,043 | ||||||||||||||||||||||||||||||||||||||||
Total other borrowed funds and subordinated debentures | $ | 1,011,919 | $ | 4,209,537 | 0.53 | % | $ | 2,552,457 | $ | 5,674,893 | 0.50 | % | ||||||||||||||||||||||||||||||||||||||
1 Parent Company only.
BOKF, NA also has a liability related to the repurchase of certain delinquent residential mortgage loans previously sold in GNMA mortgage pools. Interest is payable monthly at rates contractually due to investors.
Parent Company
At September 30, 2021, cash and interest-bearing cash and cash equivalents held by the parent company totaled $159 million. The primary sources of liquidity for BOK Financial are cash on hand and dividends from BOKF, NA. Dividends from the bank are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the two preceding years. Dividends are further restricted by minimum capital requirements. At September 30, 2021, based upon the most restrictive limitations as well as management's internal capital policy, BOKF, NA could declare up to $401 million of dividends without regulatory approval. Dividend constraints may be alleviated through increases in retained earnings, capital issuances or changes in risk weighted assets. Future losses or increases in required regulatory capital at the bank could affect its ability to pay dividends to the parent company.
Our equity capital at September 30, 2021 was $5.4 billion, a $42 million increase over June 30, 2021. Net income less cash dividends paid increased equity $153 million during the third quarter of 2021. Changes in interest rates resulted in a $58 million decrease in accumulated other comprehensive gain compared to June 30, 2021. We also repurchased $41 million of common stock during the third quarter of 2021. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings including expected benefits from lower federal income tax rates, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt or perpetual preferred stock issuance, share repurchase and stock and cash dividends.
On April 30, 2019, the board of directors authorized the Company to purchase up to five million common shares, subject to market conditions, securities law and other regulatory compliance limitations. As of September 30, 2021, 3,204,948 shares have been repurchased under this authorization. The Company repurchased 478,141 shares of common stock at an average price of $85.00 a share in the third quarter of 2021. We view share buybacks opportunistically, but within the context of maintaining our strong capital position.
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BOK Financial and BOKF, NA are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have a material impact on operations. These capital requirements include quantitative measures of assets, liabilities and off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators.
A summary of minimum capital requirements, including capital conservation buffer follows in Table 22. A bank which falls below these levels, including the capital conservation buffer, would be subject to regulatory restrictions on capital distributions (including but not limited to dividends and share repurchases) and executive bonus payments.
In March 2020, in response to the impact on the financial markets by the COVID-19 pandemic, the banking agencies issued an interim final rule permitting banking organizations that implement CECL the option to delay for two years an estimate of the CECL methodology's effect on regulatory capital, followed by a three-year transition period. The estimate includes the implementation date adjustment as of January 1, 2020 plus an estimate of the impact of the change for a two year period following implementation of CECL. We have elected to delay the regulatory capital impact of the transition in accordance with the interim final rule. Deferral of the impact of CECL added 20 basis points to the Company's Common equity Tier 1 capital at September 30, 2021.
The capital ratios for BOK Financial on a consolidated basis are presented in Table 22.
Table 22 -- Capital Ratios
| Minimum Capital Requirement | Capital Conservation Buffer | Minimum Capital Requirement Including Capital Conservation Buffer | Sept. 30, 2021 | June 30, 2021 | Sept. 30, 2020 | |||||||||||||||||||||||||||||||||
| Risk-based capital: | ||||||||||||||||||||||||||||||||||||||
| Common equity Tier 1 | 4.50 | % | 2.50 | % | 7.00 | % | 12.26 | % | 11.95 | % | 12.07 | % | ||||||||||||||||||||||||||
| Tier 1 capital | 6.00 | % | 2.50 | % | 8.50 | % | 12.29 | % | 12.01 | % | 12.07 | % | ||||||||||||||||||||||||||
| Total capital | 8.00 | % | 2.50 | % | 10.50 | % | 13.38 | % | 13.61 | % | 14.05 | % | ||||||||||||||||||||||||||
| Tier 1 Leverage | 4.00 | % | N/A | 4.00 | % | 8.77 | % | 8.58 | % | 8.39 | % | |||||||||||||||||||||||||||
| Average total equity to average assets | 11.00 | % | 10.62 | % | 10.55 | % | ||||||||||||||||||||||||||||||||
| Tangible common equity ratio | 9.28 | % | 9.09 | % | 9.02 | % | ||||||||||||||||||||||||||||||||
Capital resources of financial institutions are also regularly measured by the tangible common shareholders’ equity ratio. Tangible common shareholders’ equity is shareholders’ equity as defined by generally accepted accounting principles in the United States of America (“GAAP”) less intangible assets and equity which does not benefit common shareholders. Equity that does not benefit common shareholders includes preferred equity. This non-GAAP measure is a valuable indicator of a financial institution’s capital strength since it eliminates intangible assets from shareholders’ equity and retains the effect of unrealized losses on securities and other components of accumulated other comprehensive income in shareholders’ equity.
Table 23 provides a reconciliation of the non-GAAP measures with financial measures defined by GAAP.
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Table 23 -- Non-GAAP Measure
(Dollars in thousands)
| Sept. 30, 2021 | June 30, 2021 | Mar. 31, 2021 | Dec. 31, 2020 | Sept. 30, 2020 | ||||||||||||||||||||||||||||
| Tangible common equity ratio: | ||||||||||||||||||||||||||||||||
| Total shareholders' equity | $ | 5,388,973 | $ | 5,332,977 | $ | 5,239,462 | $ | 5,266,266 | $ | 5,218,787 | ||||||||||||||||||||||
| Less: Goodwill and intangible assets, net | 1,140,935 | 1,153,785 | 1,158,676 | 1,161,527 | 1,166,615 | |||||||||||||||||||||||||||
| Tangible common equity | 4,248,038 | 4,179,192 | 4,080,786 | 4,104,739 | 4,052,172 | |||||||||||||||||||||||||||
| Total assets | 46,923,409 | 47,154,375 | 47,442,513 | 46,671,088 | 46,067,224 | |||||||||||||||||||||||||||
| Less: Goodwill and intangible assets, net | 1,140,935 | 1,153,785 | 1,158,676 | 1,161,527 | 1,166,615 | |||||||||||||||||||||||||||
| Tangible assets | $ | 45,782,474 | $ | 46,000,590 | $ | 46,283,837 | $ | 45,509,561 | $ | 44,900,609 | ||||||||||||||||||||||
| Tangible common equity ratio | 9.28 | % | 9.09 | % | 8.82 | % | 9.02 | % | 9.02 | % | ||||||||||||||||||||||
| Pre-provision net revenue: | ||||||||||||||||||||||||||||||||
| Net income before taxes | $ | 241,782 | $ | 215,603 | $ | 186,690 | $ | 199,847 | $ | 204,644 | ||||||||||||||||||||||
| Provision for expected credit losses | (23,000) | (35,000) | (25,000) | (6,500) | — | |||||||||||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | (601) | 686 | (1,752) | 485 | 58 | |||||||||||||||||||||||||||
| Pre-provision net revenue | $ | 219,383 | $ | 179,917 | $ | 163,442 | $ | 192,862 | $ | 204,586 | ||||||||||||||||||||||
Pre-provision net revenue is a measure of revenue less expenses, and is calculated before provision for credit losses and income tax expense. This financial measure is frequently used by investors and analysts to enable them to assess a company's ability to generate earnings to cover credit losses through a credit cycle. It also provides an additional basis for comparing the results of operations between periods by isolating the impact of the provision for credit losses, which can vary significantly between periods.
Off-Balance Sheet Arrangements
See Note 4 to the Consolidated Financial Statements for a discussion of the Company’s significant off-balance sheet commitments.
Market Risk
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. Market risk excludes changes in fair value due to the credit of the individual issuers of financial instruments.
BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy and agricultural product derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed.
The Asset/Liability Committee is responsible for managing market risk in accordance with policy limits established by the Board of Directors. The Committee monitors projected variation in net interest revenue, net income and economic value of equity due to specified changes in interest rates. These limits also set maximum levels for short-term borrowings, short-term assets, public funds and brokered deposits and establish minimum levels for un-pledged assets, among other things. Further, the Board approved market risk limits for fixed income trading, mortgage pipeline and mortgage servicing assets inclusive of economic hedge benefits. Exposure is measured daily and compliance is reviewed monthly. Deviations from the Board approved limits, which periodically occur throughout the reporting period, may require management to develop and execute plans to reduce exposure. These plans are subject to escalation to and approval by the Board.
The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, models cannot precisely estimate or precisely predict the impact of higher or lower interest
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rates. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors.
Interest Rate Risk – Other than Trading
As previously noted in the Net Interest Revenue section of this report, management has implemented strategies to manage the Company’s balance sheet to have relatively limited exposure to changes in interest rates over a twelve-month period. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue. A simulation model is used to estimate the effect of changes in interest rates on our performance across multiple interest rate scenarios. Our current internal policy limit for net interest revenue variation due to a 200 basis point parallel change in market interest rates over twelve months is a maximum decline of 5 percent. The results of a decrease in interest rates in the current low-rate environment are not meaningful. Management also reviews alternative rate changes and time periods.
The Company’s primary interest rate exposures include the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable rate loan pricing. Additionally, residential mortgage rates directly affect the prepayment speeds for residential mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. In addition, the impact on the level and composition of demand deposit accounts and other core deposit balances resulting from a significant increase in short-term market interest rates and the overall interest rate environment is likely to be material. The simulation incorporates assumptions regarding the effects of such changes based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model.
The interest rate sensitivity in Table 24 indicate management’s estimation of the impact of rate changes on net interest revenue. Should deposit costs be 10 percent more sensitive to changes in rates, the variation in net interest revenue over the next twelve months would be 5.97 percent, or $67.2 million for the 200 basis point increase scenario. Alternatively, should deposit funding costs be 10 percent less sensitive to changes in rates, the variation in net interest revenue over the next twelve months would be 7.37 percent, or $82.8 million for the 200 basis point increase scenario.
Table 24 -- Interest Rate Sensitivity
(Dollars in thousands)
| 200 bp Increase | 100 bp Increase | |||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Anticipated impact over the next twelve months on net interest revenue | $ | 74,998 | $ | 27,973 | $ | 47,528 | $ | 24,941 | ||||||||||||||||||
| 6.67 | % | 2.69 | % | 4.23 | % | 2.40 | % | |||||||||||||||||||
| Anticipated impact over months twelve through twenty-four | $ | 168,932 | $ | 114,156 | $ | 118,942 | $ | 87,910 | ||||||||||||||||||
| 15.01 | % | 11.15 | % | 10.57 | % | 8.90 | % | |||||||||||||||||||
BOK Financial is also subjected to market risk through changes in the fair value of mortgage servicing rights. Changes in the fair value of mortgage servicing rights are highly dependent on changes in primary mortgage rates offered to borrowers, intermediate-term interest rates that affect the value of custodial funds, and assumptions about servicing revenues, servicing costs and discount rates. As primary mortgage rates increase, prepayment speeds slow and the value of our mortgage servicing rights increases. As primary mortgage rates fall, prepayment speeds increase and the value of our mortgage servicing rights decreases.
We maintain a portfolio of financial instruments, which may include debt securities issued by the U.S. government or its agencies and interest rate derivative contracts, held as an economic hedge of the changes in the fair value of our mortgage servicing rights. Composition of this portfolio will change based on our assessment of market risk. Changes in the fair value of residential mortgage-backed securities are highly dependent on changes in secondary mortgage rates required by investors, and interest rate derivative contracts are highly dependent on changes in other market interest rates. While primary and secondary mortgage rates generally move in the same direction, the spread between them may widen and narrow due to market conditions and government intervention. Changes in the forward-looking spread between the primary and secondary rates can cause significant earnings volatility.
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Management performs a stress test to measure market risk due to changes in interest rates inherent in its MSR portfolio and hedges. The stress test shocks applicable interest rates up and down 50 basis points and calculates an estimated change in fair value, net of economic hedging activity, that may result. The Board has approved a $20 million market risk limit for mortgage servicing rights, net of economic hedges.
Table 25 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
| September 30, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Up 50 bp | Down 50 bp | Up 50 bp | Down 50 bp | |||||||||||||||||||||||
| MSR Asset | $ | 29,105 | $ | (35,405) | $ | 26,917 | $ | (11,991) | ||||||||||||||||||
| MSR Hedge | (36,540) | 33,489 | (18,361) | 17,534 | ||||||||||||||||||||||
| Net Exposure | (7,435) | (1,916) | 8,556 | 5,543 | ||||||||||||||||||||||
Trading Activities
The Company bears market risk by originating residential mortgages held for sale ("RMHFS"). RMHFS are generally outstanding for 60 to 90 days, which represents the typical period from commitment to originate a loan to sale of the closed loan to an investor. Primary mortgage interest rate changes during this period affect the value of RMHFS commitments and loans. We use forward sale contracts to mitigate market risk on all closed mortgage loans held for sale and on an estimate of mortgage loan commitments that are expected to result in closed loans.
A variety of methods are used to monitor market risk of mortgage origination activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and revenue sensitivity limits.
Management performs a stress test to measure market risk due to changes in interest rates inherent in the mortgage production pipeline. The stress test shocks applicable interest rates up and down 50 basis points and calculates an estimated change in fair value, net of economic hedging activity that may result. The Board has approved a $7 million market risk limit for the mortgage production pipeline, net of forward sale contracts.
Table 26 -- Mortgage Pipeline Sensitivity Analysis
(Dollars in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Up 50 bp | Down 50 bp | Up 50 bp | Down 50 bp | Up 50 bp | Down 50 bp | Up 50 bp | Down 50 bp | |||||||||||||||||||||||||||||||||||||||||||
Average1 | $ | (354) | $ | (403) | $ | (407) | $ | (696) | $ | (487) | $ | (498) | $ | (339) | $ | (308) | ||||||||||||||||||||||||||||||||||
Low2 | (81) | (216) | 344 | 314 | (17) | 13 | 582 | 998 | ||||||||||||||||||||||||||||||||||||||||||
High3 | (603) | (676) | (1,044) | (1,160) | (1,244) | (1,097) | (1,344) | (1,483) | ||||||||||||||||||||||||||||||||||||||||||
| Period End | (393) | (449) | (543) | (705) | (393) | (449) | (543) | (705) | ||||||||||||||||||||||||||||||||||||||||||
1 Average represents the simple average of each daily value observed during the reporting period.
2 Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.
BOK Financial engages in trading activities both as an intermediary for customers and for its own account. As an intermediary, we take positions in securities, generally U.S. government agency residential mortgage-backed securities, government agency securities and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. On a limited basis, we may also take trading positions in U.S. Treasury securities, residential mortgage-backed securities, and municipal bonds to enhance returns on securities portfolios. Both of these activities involve interest rate, liquidity and price risk. BOK Financial has an insignificant exposure to foreign exchange risk and does not take positions in commodity derivatives.
A variety of methods are used to monitor the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and position limits for each trading activity. Economic hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs.
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Management performs a stress test to measure market risk from changes in interest rates on its trading portfolio. The stress test shocks applicable interest rates up and down 50 basis points and calculates an estimated change in fair value, net of economic hedging activity that may result. The Board has approved an $11 million market risk limit for the trading portfolio, net of economic hedges.
Table 27 -- Trading Sensitivity Analysis
(Dollars in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Up 50 bp | Down 50 bp | Up 50 bp | Down 50 bp | Up 50 bp | Down 50 bp | Up 50 bp | Down 50 bp | |||||||||||||||||||||||||||||||||||||||||||
Average1 | $ | (1,133) | $ | 4,444 | $ | (178) | $ | 1,461 | $ | (1,503) | $ | 3,983 | $ | (2,280) | $ | 3,965 | ||||||||||||||||||||||||||||||||||
Low2 | 7,271 | 10,424 | 7,893 | 8,762 | 7,271 | 13,323 | 7,893 | 15,309 | ||||||||||||||||||||||||||||||||||||||||||
High3 | (6,701) | (5,392) | (7,371) | (4,058) | (9,345) | (5,392) | (12,490) | (4,058) | ||||||||||||||||||||||||||||||||||||||||||
| Period End | (1,288) | 2,423 | (5,837) | 5,698 | (1,288) | 2,423 | (5,837) | 5,698 | ||||||||||||||||||||||||||||||||||||||||||
1 Average represents the simple average of each daily value observed during the reporting period.
2 Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.
We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. In 2017, the U.K. Financial Conduct Authority announced that it would no longer persuade or compel banks to submit to LIBOR after 2021. U.S. regulatory authorities have voiced similar support for phasing out LIBOR. The Federal Reserve Bank of New York’s Alternative Reference Rate Committee has recommended the Secured Overnight Financing Rate (“SOFR”) as an alternative for LIBOR. However, for two key reasons, SOFR is a secured rate while LIBOR is an unsecured rate and SOFR is an overnight rate while LIBOR is published for different maturities, SOFR is not the economic equivalent of LIBOR.
On March 5, 2021, the Financial Conduct Authority officially confirmed the adoption of recommendations made in November of 2020 by the ICE Benchmark Administration (IBA), the FCA-regulated and authorized administrator of LIBOR. At that time, the IBA had announced its intention to cease USD LIBOR for one-week and two-month tenors at the end of 2021, but to extend the anticipated cessation date for the remaining USD LIBOR tenors to the end of June 2023. Regulators were supportive and issued a joint statement that communicated their expectation for banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.
Management has established a LIBOR Transition Working Group (the “Group”) whose purpose is to guide the overall transition process for the Company. The Group is an internal, cross-functional team with representatives from all business lines, support and control functions and legal counsel. Key loan provisions have been modified to ensure that new and renewed loans include appropriate LIBOR fallback language to ensure the smoothest possible transition from LIBOR to the new benchmark when such transition occurs. All direct exposures resulting from existing financial contracts that mature after planned cessation dates have been inventoried and are monitored on an ongoing basis. Remediation of these exposures will be consistent with industry timing. The Group has also inventoried indirect LIBOR exposures within the Company's systems, models and processes, and remediation of critical items is nearing completion.
Consistent with the regulatory guidance, the Company plans and is well positioned to cease originating loans indexed to LIBOR no later than December 31, 2021. There are currently several viable alternative reference rates that we plan to make available to serve our customers' needs, but the Company expects its primary LIBOR replacement index to be SOFR. The Company’s LIBOR Transition Working Group continues to monitor the market and adapt the Company’s approach based on market conditions. We do not currently expect there to be a material financial impact to the Company or our customers regardless of which index or indices the Company selects to replace LIBOR later this year.
Controls and Procedures
As required by Rule 13a-15(b), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial’s management, including the Chief Executive
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Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
Forward-Looking Statements
This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about BOK Financial Corporation, the financial services industry, the economy generally and the expected or potential impact of the novel coronavirus (COVID-19) pandemic, and the related responses of the government, consumers, and others, on our business, financial condition and results of operations. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “plans,” “projects,” “will,” “intends,” variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and allowance for credit losses, allowance for uncertain tax positions, accruals for loss contingencies and valuation of mortgage servicing rights involve judgments as to expected events and are inherently forward-looking statements. Assessments that acquisitions and growth endeavors will be profitable are necessary statements of belief as to the outcome of future events based in part on information provided by others which BOK Financial has not independently verified. These various forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions which are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expected, implied or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to changes in government, consumer or business responses to, and ability to treat or prevent further outbreak of, the COVID-19 pandemic, changes in commodity prices, interest rates and interest rate relationships, inflation, demand for products and services, the degree of competition by traditional and nontraditional competitors, changes in banking regulations, tax laws, prices, levies and assessments, the impact of technological advances, and trends in customer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
Annualized, pro forma, projected and estimated numbers are used for illustrative purpose only, are not forecasts and may not reflect actual results.
In this report we may sometimes use non-GAAP financial measures. Please note that although non-GAAP financial measures provide useful insight to analysts, investors and regulators, they should not be considered in isolation or relied upon as a substitute for analysis using GAAP measures. If applicable, we provide GAAP reconciliations for non-GAAP financial measures.
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| Consolidated Statements of Earnings (Unaudited) | ||||||||||||||||||||||||||
| (In thousands, except share and per share data) | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||
| Interest revenue | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Loans | $ | 191,206 | $ | 215,977 | $ | 582,621 | $ | 674,633 | ||||||||||||||||||
| Residential mortgage loans held for sale | 1,274 | 1,585 | 4,223 | 4,848 | ||||||||||||||||||||||
| Trading securities | 38,941 | 8,723 | 111,518 | 31,890 | ||||||||||||||||||||||
| Investment securities | 2,580 | 2,939 | 7,914 | 9,060 | ||||||||||||||||||||||
| Available for sale securities | 57,310 | 62,369 | 174,827 | 200,386 | ||||||||||||||||||||||
| Fair value option securities | 342 | 1,986 | 1,240 | 17,804 | ||||||||||||||||||||||
| Restricted equity securities | 1,565 | 913 | 4,675 | 8,687 | ||||||||||||||||||||||
| Interest-bearing cash and cash equivalents | 245 | 167 | 577 | 2,672 | ||||||||||||||||||||||
| Total interest revenue | 293,463 | 294,659 | 887,595 | 949,980 | ||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Deposits | 7,665 | 14,658 | 25,940 | 78,562 | ||||||||||||||||||||||
| Borrowed funds | 3,066 | 4,856 | 11,494 | 49,637 | ||||||||||||||||||||||
| Subordinated debentures | 2,505 | 3,395 | 9,205 | 10,567 | ||||||||||||||||||||||
| Total interest expense | 13,236 | 22,909 | 46,639 | 138,766 | ||||||||||||||||||||||
| Net interest revenue | 280,227 | 271,750 | 840,956 | 811,214 | ||||||||||||||||||||||
| Provision for credit losses | (23,000) | — | (83,000) | 229,092 | ||||||||||||||||||||||
Net interest revenue after provision for credit losses | 303,227 | 271,750 | 923,956 | 582,122 | ||||||||||||||||||||||
| Other operating revenue | ||||||||||||||||||||||||||
| Brokerage and trading revenue | 47,930 | 69,526 | 98,120 | 182,327 | ||||||||||||||||||||||
| Transaction card revenue | 24,632 | 23,465 | 71,985 | 68,286 | ||||||||||||||||||||||
| Fiduciary and asset management revenue | 45,248 | 39,931 | 131,402 | 125,646 | ||||||||||||||||||||||
| Deposit service charges and fees | 27,429 | 24,286 | 77,499 | 72,462 | ||||||||||||||||||||||
| Mortgage banking revenue | 26,286 | 51,959 | 84,618 | 143,062 | ||||||||||||||||||||||
| Other revenue | 18,896 | 13,698 | 58,364 | 37,486 | ||||||||||||||||||||||
| Total fees and commissions | 190,421 | 222,865 | 521,988 | 629,269 | ||||||||||||||||||||||
| Other gains (losses), net | 31,091 | 2,044 | 57,661 | (1,347) | ||||||||||||||||||||||
| Gain (loss) on derivatives, net | (5,760) | 2,354 | (14,590) | 42,659 | ||||||||||||||||||||||
| Gain (loss) on fair value option securities, net | (120) | (754) | (3,657) | 53,180 | ||||||||||||||||||||||
| Change in fair value of mortgage servicing rights | 12,945 | 3,441 | 33,778 | (85,800) | ||||||||||||||||||||||
| Gain on available for sale securities, net | 1,255 | (12) | 3,152 | 5,571 | ||||||||||||||||||||||
| Total other operating revenue | 229,832 | 229,938 | 598,332 | 643,532 | ||||||||||||||||||||||
| Other operating expense | ||||||||||||||||||||||||||
| Personnel | 175,863 | 179,860 | 520,908 | 512,276 | ||||||||||||||||||||||
| Business promotion | 4,939 | 2,633 | 9,837 | 10,783 | ||||||||||||||||||||||
| Charitable contributions to BOKF Foundation | — | — | 4,000 | 3,000 | ||||||||||||||||||||||
| Professional fees and services | 12,436 | 14,074 | 36,777 | 39,183 | ||||||||||||||||||||||
| Net occupancy and equipment | 28,395 | 28,111 | 81,690 | 84,847 | ||||||||||||||||||||||
| Insurance | 3,712 | 5,848 | 11,992 | 15,984 | ||||||||||||||||||||||
| Data processing and communications | 38,371 | 34,751 | 112,256 | 100,436 | ||||||||||||||||||||||
| Printing, postage and supplies | 3,558 | 3,482 | 11,283 | 11,256 | ||||||||||||||||||||||
| Amortization of intangible assets | 4,488 | 5,071 | 13,873 | 15,355 | ||||||||||||||||||||||
| Mortgage banking costs | 8,962 | 15,803 | 34,031 | 41,946 | ||||||||||||||||||||||
| Other expense | 10,553 | 7,411 | 41,566 | 26,571 | ||||||||||||||||||||||
| Total other operating expense | 291,277 | 297,044 | 878,213 | 861,637 | ||||||||||||||||||||||
| Net income before taxes | 241,782 | 204,644 | 644,075 | 364,017 | ||||||||||||||||||||||
| Federal and state income taxes | 54,061 | 50,552 | 144,939 | 83,655 | ||||||||||||||||||||||
| Net income | 187,721 | 154,092 | 499,136 | 280,362 | ||||||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | (601) | 58 | (1,667) | (444) | ||||||||||||||||||||||
| Net income attributable to BOK Financial Corporation shareholders | $ | 188,322 | $ | 154,034 | $ | 500,803 | $ | 280,806 | ||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||
| Basic | $ | 2.74 | $ | 2.19 | $ | 7.23 | $ | 3.99 | ||||||||||||||||||
| Diluted | $ | 2.74 | $ | 2.19 | $ | 7.23 | $ | 3.99 | ||||||||||||||||||
| Average shares used in computation: | ||||||||||||||||||||||||||
| Basic | 68,359,125 | 69,877,866 | 68,768,044 | 69,958,944 | ||||||||||||||||||||||
| Diluted | 68,360,871 | 69,879,290 | 68,770,663 | 69,962,053 | ||||||||||||||||||||||
| Dividends declared per share | $ | 0.52 | $ | 0.51 | $ | 1.56 | $ | 1.53 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
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| Consolidated Statements of Comprehensive Income (Unaudited) | ||||||||||||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net income | $ | 187,721 | $ | 154,092 | $ | 499,136 | $ | 280,362 | ||||||||||||||||||
| Other comprehensive income (loss) before income taxes: | ||||||||||||||||||||||||||
| Net change in unrealized gain (loss) | (74,525) | (6,783) | (216,176) | 347,985 | ||||||||||||||||||||||
| Reclassification adjustments included in earnings: | ||||||||||||||||||||||||||
| Loss (gain) on available for sale securities, net | (1,255) | 12 | (3,152) | (5,571) | ||||||||||||||||||||||
| Other comprehensive income (loss) before income taxes | (75,780) | (6,771) | (219,328) | 342,414 | ||||||||||||||||||||||
| Federal and state income taxes | (18,184) | (1,625) | (52,632) | 82,167 | ||||||||||||||||||||||
| Other comprehensive income (loss), net of income taxes | (57,596) | (5,146) | (166,696) | 260,247 | ||||||||||||||||||||||
| Comprehensive income | 130,125 | 148,946 | 332,440 | 540,609 | ||||||||||||||||||||||
| Comprehensive income (loss) attributable to non-controlling interests | (601) | 58 | (1,667) | (444) | ||||||||||||||||||||||
| Comprehensive income attributable to BOK Financial Corp. shareholders | $ | 130,726 | $ | 148,888 | $ | 334,107 | $ | 541,053 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
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Consolidated Balance Sheets
(In thousands, except share data)
| Sept. 30, 2021 | Dec. 31, 2020 | |||||||||||||
| (Unaudited) | (Footnote 1) | |||||||||||||
| Assets | ||||||||||||||
| Cash and due from banks | $ | 729,285 | $ | 798,757 | ||||||||||
| Interest-bearing cash and cash equivalents | 1,162,477 | 381,816 | ||||||||||||
| Trading securities | 5,554,040 | 4,707,975 | ||||||||||||
Investment securities, net of allowance (fair value: September 30, 2021 – $238,489; December 31, 2020 – $272,431) | 215,592 | 244,843 | ||||||||||||
| Available for sale securities | 13,342,113 | 13,050,665 | ||||||||||||
| Fair value option securities | 51,019 | 114,982 | ||||||||||||
| Restricted equity securities | 77,542 | 171,391 | ||||||||||||
| Residential mortgage loans held for sale | 176,813 | 252,316 | ||||||||||||
| Loans | 20,347,936 | 23,007,520 | ||||||||||||
| Allowance for loan losses | (276,680) | (388,640) | ||||||||||||
| Loans, net of allowance | 20,071,256 | 22,618,880 | ||||||||||||
| Premises and equipment, net | 558,126 | 551,308 | ||||||||||||
| Receivables | 171,505 | 245,880 | ||||||||||||
| Goodwill | 1,044,749 | 1,048,091 | ||||||||||||
| Intangible assets, net | 96,186 | 113,436 | ||||||||||||
| Mortgage servicing rights | 133,308 | 101,172 | ||||||||||||
Real estate and other repossessed assets, net of allowance (September 30, 2021 – $6,105; December 31, 2020 – $15,060) | 28,770 | 90,526 | ||||||||||||
| Derivative contracts, net | 1,901,136 | 810,688 | ||||||||||||
| Cash surrender value of bank-owned life insurance | 403,369 | 398,758 | ||||||||||||
| Receivable on unsettled securities sales | 215,755 | 62,386 | ||||||||||||
| Other assets | 990,368 | 907,218 | ||||||||||||
| Total assets | $ | 46,923,409 | $ | 46,671,088 | ||||||||||
| Liabilities and Equity | ||||||||||||||
| Liabilities: | ||||||||||||||
| Noninterest-bearing demand deposits | $ | 14,090,229 | $ | 12,266,338 | ||||||||||
| Interest-bearing deposits: | ||||||||||||||
| Transaction | 21,753,110 | 21,158,422 | ||||||||||||
| Savings | 900,497 | 751,992 | ||||||||||||
| Time | 1,780,715 | 1,967,128 | ||||||||||||
| Total deposits | 38,524,551 | 36,143,880 | ||||||||||||
| Funds purchased and repurchase agreements | 843,273 | 1,662,386 | ||||||||||||
| Other borrowings | 37,426 | 1,882,970 | ||||||||||||
| Subordinated debentures | 131,220 | 276,005 | ||||||||||||
| Accrued interest, taxes and expense | 220,266 | 323,667 | ||||||||||||
| Derivative contracts, net | 739,641 | 405,779 | ||||||||||||
| Due on unsettled securities purchases | 614,598 | 257,627 | ||||||||||||
| Other liabilities | 415,986 | 427,213 | ||||||||||||
| Total liabilities | 41,526,961 | 41,379,527 | ||||||||||||
| Shareholders' equity: | ||||||||||||||
Common stock ($0.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: September 30, 2021 – 76,254,190; December 31, 2020 – 75,995,205) | 5 | 5 | ||||||||||||
| Capital surplus | 1,374,688 | 1,368,062 | ||||||||||||
| Retained earnings | 4,366,779 | 3,973,675 | ||||||||||||
Treasury stock (shares at cost: September 30, 2021 – 7,657,426; December 31, 2020 – 6,357,605) | (521,671) | (411,344) | ||||||||||||
| Accumulated other comprehensive gain | 169,172 | 335,868 | ||||||||||||
| Total shareholders’ equity | 5,388,973 | 5,266,266 | ||||||||||||
| Non-controlling interests | 7,475 | 25,295 | ||||||||||||
| Total equity | 5,396,448 | 5,291,561 | ||||||||||||
| Total liabilities and equity | $ | 46,923,409 | $ | 46,671,088 | ||||||||||
See accompanying notes to consolidated financial statements.
- 45 -
Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
| Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | Non- Controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 76,258 | $ | 5 | $ | 1,373,101 | $ | 4,214,130 | 7,179 | $ | (481,027) | $ | 226,768 | $ | 5,332,977 | $ | 21,574 | $ | 5,354,551 | |||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 188,322 | — | — | — | 188,322 | (601) | 187,721 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (57,596) | (57,596) | — | (57,596) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | 478 | (40,644) | — | (40,644) | — | (40,644) | |||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation plans: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Non-vested shares awarded, net | (4) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of non-vested shares | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 1,587 | — | — | — | — | 1,587 | — | 1,587 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends on common stock | — | — | — | (35,673) | — | — | — | (35,673) | — | (35,673) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | — | (13,498) | (13,498) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 76,254 | $ | 5 | $ | 1,374,688 | $ | 4,366,779 | 7,657 | $ | (521,671) | $ | 169,172 | $ | 5,388,973 | $ | 7,475 | $ | 5,396,448 | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 75,995 | $ | 5 | $ | 1,368,062 | $ | 3,973,675 | 6,358 | $ | (411,344) | $ | 335,868 | $ | 5,266,266 | $ | 25,295 | $ | 5,291,561 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 500,803 | — | — | — | 500,803 | (1,667) | 499,136 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | (166,696) | (166,696) | — | (166,696) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | 1,231 | (104,512) | — | (104,512) | — | (104,512) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation plans: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | 17 | — | 949 | — | — | — | — | 949 | — | 949 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Non-vested shares awarded, net | 242 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of non-vested shares | — | — | — | — | 68 | (5,815) | — | (5,815) | — | (5,815) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 5,677 | — | — | — | — | 5,677 | — | 5,677 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends on common stock | — | — | — | (107,699) | — | — | — | (107,699) | — | (107,699) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | — | (16,153) | (16,153) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 76,254 | $ | 5 | $ | 1,374,688 | $ | 4,366,779 | 7,657 | $ | (521,671) | $ | 169,172 | $ | 5,388,973 | $ | 7,475 | $ | 5,396,448 | |||||||||||||||||||||||||||||||||||||||||
- 46 -
| Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | Non- Controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 75,999 | $ | 5 | $ | 1,357,706 | $ | 3,737,862 | 5,693 | $ | (368,894) | $ | 370,316 | $ | 5,096,995 | $ | 7,428 | $ | 5,104,423 | |||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 154,034 | — | — | — | 154,034 | 58 | 154,092 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | (5,146) | (5,146) | — | (5,146) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation plans: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Non-vested shares awarded, net | (1) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of non-vested shares | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 8,754 | — | — | — | — | 8,754 | — | 8,754 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends on common stock | — | — | — | (35,850) | — | — | — | (35,850) | — | (35,850) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | — | (164) | (164) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 75,998 | $ | 5 | $ | 1,366,460 | $ | 3,856,046 | 5,693 | $ | (368,894) | $ | 365,170 | $ | 5,218,787 | $ | 7,322 | $ | 5,226,109 | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 75,759 | $ | 5 | $ | 1,350,995 | $ | 3,729,778 | 5,179 | $ | (329,906) | $ | 104,923 | $ | 4,855,795 | $ | 8,124 | $ | 4,863,919 | |||||||||||||||||||||||||||||||||||||||||
| Transition adjustment - CECL | — | — | — | (46,696) | — | — | — | (46,696) | — | (46,696) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2020, Adjusted | 75,759 | 5 | 1,350,995 | 3,683,082 | 5,179 | (329,906) | 104,923 | 4,809,099 | 8,124 | 4,817,223 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 280,806 | — | — | — | 280,806 | (444) | 280,362 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 260,247 | 260,247 | — | 260,247 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | 442 | (33,380) | — | (33,380) | — | (33,380) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation plans: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | 10 | — | 586 | — | — | — | — | 586 | — | 586 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Non-vested shares awarded, net | 229 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of non-vested shares | — | — | — | — | 72 | (5,608) | — | (5,608) | — | (5,608) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 14,879 | — | — | — | — | 14,879 | — | 14,879 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends on common stock | — | — | — | (107,842) | — | — | — | (107,842) | — | (107,842) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | — | (358) | (358) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 75,998 | $ | 5 | $ | 1,366,460 | $ | 3,856,046 | 5,693 | $ | (368,894) | $ | 365,170 | $ | 5,218,787 | $ | 7,322 | $ | 5,226,109 | |||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
- 47 -
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Nine Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Cash Flows From Operating Activities: | ||||||||||||||
| Net income | $ | 499,136 | $ | 280,362 | ||||||||||
| Adjustments to reconcile net income to net cash provided (used in) operating activities: | ||||||||||||||
| Provision for credit losses | (83,000) | 229,092 | ||||||||||||
| Change in fair value of mortgage servicing rights due to market assumption changes | (33,778) | 85,800 | ||||||||||||
| Change in the fair value of mortgage servicing rights due to principal payments | 30,949 | 28,971 | ||||||||||||
| Net unrealized (gains) losses from derivative contracts | 81,667 | (51,323) | ||||||||||||
| Share-based compensation | 5,677 | 14,879 | ||||||||||||
| Depreciation and amortization | 76,196 | 74,330 | ||||||||||||
| Net amortization of discounts and premiums | 14,286 | 1,921 | ||||||||||||
| Net losses (gains) on financial instruments and other losses (gains), net | (57,467) | (4,216) | ||||||||||||
| Net gain on mortgage loans held for sale | (56,423) | (77,039) | ||||||||||||
| Mortgage loans originated for sale | (2,250,282) | (2,773,686) | ||||||||||||
| Proceeds from sale of mortgage loans held for sale | 2,376,479 | 2,757,412 | ||||||||||||
| Capitalized mortgage servicing rights | (29,307) | (21,330) | ||||||||||||
| Change in trading and fair value option securities | (782,380) | 338,992 | ||||||||||||
| Change in receivables | 97,430 | (936,428) | ||||||||||||
| Change in other assets | 206 | (8,574) | ||||||||||||
| Change in other liabilities | 27,285 | 421,364 | ||||||||||||
| Net cash provided by (used in) operating activities | (83,326) | 360,527 | ||||||||||||
| Cash Flows From Investing Activities: | ||||||||||||||
| Proceeds from maturities or redemptions of investment securities | 28,970 | 35,967 | ||||||||||||
| Proceeds from maturities or redemptions of available for sale securities | 2,682,934 | 1,813,057 | ||||||||||||
| Purchases of available for sale securities | (3,704,636) | (3,238,556) | ||||||||||||
| Proceeds from sales of available for sale securities | 488,274 | 206,979 | ||||||||||||
| Change in amount receivable on unsettled available for sale securities transactions | (176,600) | 3,988 | ||||||||||||
| Loans originated, net of principal collected | 2,690,611 | (1,894,663) | ||||||||||||
| Net payments on derivative asset contracts | 33,183 | (96,109) | ||||||||||||
| Net change in restricted equity securities | 93,849 | 348,896 | ||||||||||||
| Proceeds from disposition of assets | 141,006 | 62,677 | ||||||||||||
| Purchases of assets | (130,146) | (116,800) | ||||||||||||
| Net cash provided by (used in) investing activities | 2,147,445 | (2,874,564) | ||||||||||||
| Cash Flows From Financing Activities: | ||||||||||||||
| Net change in demand deposits, transaction deposits and savings accounts | 2,567,084 | 7,561,708 | ||||||||||||
| Net change in time deposits | (186,413) | (209,876) | ||||||||||||
| Net change in other borrowed funds | (2,734,198) | (4,839,524) | ||||||||||||
| Repayment of subordinated debentures | (150,000) | — | ||||||||||||
| Net proceeds on derivative liability contracts | (32,591) | 102,064 | ||||||||||||
| Net change in derivative margin accounts | (834,108) | (260,949) | ||||||||||||
| Change in amount due on unsettled available for sale securities transactions | 234,589 | 54,408 | ||||||||||||
| Issuance of common and treasury stock, net | (4,866) | (5,022) | ||||||||||||
| Repurchase of common stock | (104,512) | (33,380) | ||||||||||||
| Dividends paid | (107,699) | (107,842) | ||||||||||||
| Net cash provided by (used in) financing activities | (1,352,714) | 2,261,587 | ||||||||||||
| Net increase (decrease) in cash and cash equivalents | 711,405 | (252,450) | ||||||||||||
| Cash and cash equivalents at beginning of period | 1,180,573 | 1,258,821 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 1,891,978 | $ | 1,006,371 | ||||||||||
| Supplemental Cash Flow Information: | ||||||||||||||
| Cash paid for interest | $ | 52,304 | $ | 138,877 | ||||||||||
| Cash paid for taxes | $ | 120,879 | $ | 91,977 | ||||||||||
| Net loans and bank premises transferred to repossessed real estate and other assets | $ | 8,175 | $ | 42,099 | ||||||||||
Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period | $ | 69,541 | $ | 239,200 | ||||||||||
| Conveyance of other real estate owned guaranteed by U.S. government agencies | $ | 4,956 | $ | 9,165 | ||||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | 14,551 | $ | 9,481 | ||||||||||
See accompanying notes to consolidated financial statements.
- 48 -
Notes to Consolidated Financial Statements (Unaudited)
(1) Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of BOK Financial Corporation (“BOK Financial” or “the Company”) have been prepared in accordance with accounting principles for interim financial information generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
The unaudited consolidated financial statements include accounts of BOK Financial and its subsidiaries, principally BOKF, NA (“the Bank”), BOK Financial Securities, Inc., and BOK Financial Private Wealth, Inc. Operating divisions of the Bank include Bank of Albuquerque, Bank of Oklahoma, Bank of Texas, BOK Financial in Arizona, Arkansas, Colorado and Kansas/Missouri, BOK Financial Mortgage and the TransFund electronic funds network.
Certain reclassifications have been made to conform to the current period presentation.
The financial information should be read in conjunction with BOK Financial’s 2020 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2020 have been derived from the audited financial statements included in BOK Financial’s 2020 Form 10-K but do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the nine-month period ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Newly Adopted and Pending Accounting Policies
Financial Accounting Standards Board (“FASB”)
FASB Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04")
On March 12, 2020, the FASB issued ASU 2020-04 which provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued, subject to meeting certain criteria. Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform as a continuation of the existing contract, if certain conditions are met. In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met. A one-time election to sell and/or transfer held-to-maturity debt securities that reference a rate affected by reference rate reform is also allowed. ASU 2020-04 became effective for all entities as of March 12, 2020 and will apply to all LIBOR reference rate modifications through December 31, 2022. Adoption of ASU 2020-04 is not expected to have a material impact on the Company's financial statements.
FASB Accounting Standards Update No. 2021-01, Reference Rate Reform (Topic 848): Scope ("ASU 2021-01")
On January 7, 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The amendments in this update are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments also optionally apply to all entities that designate receive-variable rate, pay-variable-rate cross-currency interest rate swaps as hedging instruments in net investment hedges that are modified as a result of reference rate reform. ASU 2021-01 is effective immediately for all entities and amendments may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. Adoption of ASU 2021-01 is not expected to have a material impact on the Company's financial statements.
- 49 -
(2) Securities
Trading Securities
The fair value and net unrealized gain (loss) included in trading securities are as follows (in thousands):
| September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| Fair Value | Net Unrealized Gain (Loss) | Fair Value | Net Unrealized Gain (Loss) | |||||||||||||||||||||||
| U.S. government securities | $ | 8,863 | $ | (6) | $ | 9,183 | $ | — | ||||||||||||||||||
Residential agency mortgage-backed securities | 5,469,676 | (24,868) | 4,669,148 | (3,624) | ||||||||||||||||||||||
| Municipal securities | 35,894 | (261) | 19,172 | 42 | ||||||||||||||||||||||
| Other debt securities | 39,607 | (73) | 10,472 | 22 | ||||||||||||||||||||||
| Total trading securities | $ | 5,554,040 | $ | (25,208) | $ | 4,707,975 | $ | (3,560) | ||||||||||||||||||
Investment Securities
The amortized cost and fair values of investment securities are as follows (in thousands):
| September 30, 2021 | ||||||||||||||||||||||||||
| Amortized | Fair | Gross Unrealized | ||||||||||||||||||||||||
| Cost | Value | Gain | Loss | |||||||||||||||||||||||
| Municipal securities | $ | 207,393 | $ | 229,149 | $ | 21,778 | $ | (22) | ||||||||||||||||||
Residential agency mortgage-backed securities | 7,412 | 8,084 | 672 | — | ||||||||||||||||||||||
| Other debt securities | 1,257 | 1,256 | — | (1) | ||||||||||||||||||||||
| Total investment securities | 216,062 | 238,489 | 22,450 | (23) | ||||||||||||||||||||||
| Allowance for credit losses | (470) | |||||||||||||||||||||||||
| Investment securities, net of allowance | $ | 215,592 | $ | 238,489 | $ | 22,450 | $ | (23) | ||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Amortized | Fair | Gross Unrealized | ||||||||||||||||||||||||
| Cost | Value | Gain | Loss | |||||||||||||||||||||||
| Municipal securities | $ | 229,245 | $ | 255,270 | $ | 26,169 | $ | (144) | ||||||||||||||||||
Residential agency mortgage-backed securities | 8,913 | 9,790 | 877 | — | ||||||||||||||||||||||
| Other debt securities | 7,373 | 7,371 | — | (2) | ||||||||||||||||||||||
| Total investment securities | 245,531 | 272,431 | 27,046 | (146) | ||||||||||||||||||||||
| Allowance for credit losses | (688) | |||||||||||||||||||||||||
| Investment securities, net of allowance | $ | 244,843 | $ | 272,431 | $ | 27,046 | $ | (146) | ||||||||||||||||||
- 50 -
The amortized cost and fair values of investment securities at September 30, 2021, by contractual maturity, are as shown in the following table (dollars in thousands):
| Less than One Year | One to Five Years | Six to Ten Years | Over Ten Years | Total | Weighted Average Maturity1 | |||||||||||||||||||||||||||||||||
| Fixed maturity debt securities: | ||||||||||||||||||||||||||||||||||||||
| Amortized cost | $ | 23,860 | $ | 106,035 | $ | 72,476 | $ | 6,279 | $ | 208,650 | 4.61 | |||||||||||||||||||||||||||
| Fair value | 24,270 | 121,113 | 78,661 | 6,361 | 230,405 | |||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
| Amortized cost | $ | 7,412 | 2 | |||||||||||||||||||||||||||||||||||
| Fair value | 8,084 | |||||||||||||||||||||||||||||||||||||
| Total investment securities: | ||||||||||||||||||||||||||||||||||||||
| Amortized cost | $ | 216,062 | ||||||||||||||||||||||||||||||||||||
| Fair value | 238,489 | |||||||||||||||||||||||||||||||||||||
1Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
2The average expected lives of residential mortgage-backed securities were 4.2 years based upon current prepayment assumptions.
Temporarily Impaired Investment Securities
(in thousands):
| September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Number of Securities | Less Than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||||||||||||||||||||||
| Investment: | ||||||||||||||||||||||||||||||||||||||||||||
| Municipal securities | 2 | $ | 942 | $ | 2 | $ | 582 | $ | 20 | $ | 1,524 | $ | 22 | |||||||||||||||||||||||||||||||
| Other debt securities | 2 | 275 | 1 | — | — | 275 | 1 | |||||||||||||||||||||||||||||||||||||
| Total investment securities | 4 | $ | 1,217 | $ | 3 | $ | 582 | $ | 20 | $ | 1,799 | $ | 23 | |||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Number of Securities | Less Than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||||||||||||||||||||||
| Investment: | ||||||||||||||||||||||||||||||||||||||||||||
| Municipal securities | 6 | $ | 2,451 | $ | 40 | $ | 2,043 | $ | 104 | $ | 4,494 | $ | 144 | |||||||||||||||||||||||||||||||
| Other debt securities | 2 | 250 | 1 | 25 | 1 | 275 | 2 | |||||||||||||||||||||||||||||||||||||
| Total investment securities | 8 | $ | 2,701 | $ | 41 | $ | 2,068 | $ | 105 | $ | 4,769 | $ | 146 | |||||||||||||||||||||||||||||||
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Available for Sale Securities
The amortized cost and fair value of available for sale securities are as follows (in thousands):
| September 30, 2021 | ||||||||||||||||||||||||||
| Amortized | Fair | Gross Unrealized | ||||||||||||||||||||||||
| Cost | Value | Gain | Loss | |||||||||||||||||||||||
| U.S. Treasury | $ | 500 | $ | 502 | $ | 2 | $ | — | ||||||||||||||||||
| Municipal securities | 464,368 | 461,619 | 1,396 | (4,145) | ||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||||
| Residential agency | 7,988,834 | 8,168,025 | 217,045 | (37,854) | ||||||||||||||||||||||
| Residential non-agency | 11,875 | 26,072 | 14,197 | — | ||||||||||||||||||||||
| Commercial agency | 4,654,549 | 4,685,423 | 60,223 | (29,349) | ||||||||||||||||||||||
| Other debt securities | 500 | 472 | — | (28) | ||||||||||||||||||||||
| Total available for sale securities | $ | 13,120,626 | $ | 13,342,113 | $ | 292,863 | $ | (71,376) | ||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Amortized | Fair | Gross Unrealized | ||||||||||||||||||||||||
| Cost | Value | Gain | Loss | |||||||||||||||||||||||
| U.S. Treasury | $ | 500 | $ | 508 | $ | 8 | $ | — | ||||||||||||||||||
| Municipal securities | 165,318 | 167,979 | 2,666 | (5) | ||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||||
| Residential agency | 9,019,013 | 9,340,471 | 328,183 | (6,725) | ||||||||||||||||||||||
| Residential non-agency | 17,563 | 32,770 | 15,207 | — | ||||||||||||||||||||||
| Commercial agency | 3,406,956 | 3,508,465 | 103,590 | (2,081) | ||||||||||||||||||||||
| Other debt securities | 500 | 472 | — | (28) | ||||||||||||||||||||||
| Total available for sale securities | $ | 12,609,850 | $ | 13,050,665 | $ | 449,654 | $ | (8,839) | ||||||||||||||||||
The amortized cost and fair values of available for sale securities at September 30, 2021, by contractual maturity, are as shown in the following table (dollars in thousands):
| Less than One Year | One to Five Years | Six to Ten Years | Over Ten Years | Total | Weighted Average Maturity1 | ||||||||||||||||||||||||||||||
| Fixed maturity debt securities: | |||||||||||||||||||||||||||||||||||
| Amortized cost | $ | 62,357 | $ | 2,015,024 | $ | 2,495,766 | $ | 546,770 | $ | 5,119,917 | 6.89 | ||||||||||||||||||||||||
| Fair value | 62,773 | 2,055,544 | 2,475,406 | 554,293 | 5,148,016 | ||||||||||||||||||||||||||||||
| Residential mortgage-backed securities: | |||||||||||||||||||||||||||||||||||
| Amortized cost | $ | 8,000,709 | 2 | ||||||||||||||||||||||||||||||||
| Fair value | 8,194,097 | ||||||||||||||||||||||||||||||||||
| Total available for sale securities: | |||||||||||||||||||||||||||||||||||
| Amortized cost | $ | 13,120,626 | |||||||||||||||||||||||||||||||||
| Fair value | 13,342,113 | ||||||||||||||||||||||||||||||||||
1Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
2The average expected lives of residential mortgage-backed securities were 3.6 years based upon current prepayment assumptions.
- 52 -
Sales of available for sale securities resulted in gains and losses as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Proceeds | $ | 94,128 | $ | 1,034 | $ | 488,274 | $ | 206,979 | |||||||||||||||
| Gross realized gains | 1,572 | 54 | 3,812 | 5,637 | |||||||||||||||||||
| Gross realized losses | (317) | (66) | (660) | (66) | |||||||||||||||||||
| Related federal and state income tax expense (benefit) | 301 | (3) | 756 | 1,419 | |||||||||||||||||||
The fair value of debt securities pledged as collateral for repurchase agreements, public trust funds on deposit and for other purposes, as required by law was $8.8 billion at September 30, 2021 and $11.6 billion at December 31, 2020. The secured parties do not have the right to sell or repledge these securities.
Temporarily Impaired Available for Sale Securities
(in thousands)
| September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Number of Securities | Less Than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||||||||||||||
| Municipal securities | 140 | $ | 362,508 | $ | 4,145 | $ | — | $ | — | $ | 362,508 | $ | 4,145 | |||||||||||||||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||||||||
| Residential agency | 100 | 2,384,362 | 29,149 | 429,246 | 8,705 | 2,813,608 | 37,854 | |||||||||||||||||||||||||||||||||||||
| Commercial agency | 147 | 2,117,039 | 26,802 | 406,327 | 2,547 | 2,523,366 | 29,349 | |||||||||||||||||||||||||||||||||||||
| Other debt securities | 1 | — | — | 472 | 28 | 472 | 28 | |||||||||||||||||||||||||||||||||||||
| Total available for sale securities | 388 | $ | 4,863,909 | $ | 60,096 | $ | 836,045 | $ | 11,280 | $ | 5,699,954 | $ | 71,376 | |||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Number of Securities | Less Than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||||||||||||||
| Municipal securities | 1 | $ | 6,166 | $ | 5 | $ | — | $ | — | $ | 6,166 | $ | 5 | |||||||||||||||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||||||||
Residential agency | 38 | 786,890 | 6,605 | 160,747 | 120 | 947,637 | 6,725 | |||||||||||||||||||||||||||||||||||||
Commercial agency | 37 | 350,506 | 1,587 | 277,627 | 494 | 628,133 | 2,081 | |||||||||||||||||||||||||||||||||||||
| Other debt securities | 1 | — | — | 472 | 28 | 472 | 28 | |||||||||||||||||||||||||||||||||||||
Total available for sale securities | 77 | $ | 1,143,562 | $ | 8,197 | $ | 438,846 | $ | 642 | $ | 1,582,408 | $ | 8,839 | |||||||||||||||||||||||||||||||
Based on evaluations of impaired securities as of September 30, 2021, the Company does not intend to sell any impaired available for sale debt securities before fair value recovers to the current amortized cost and it is more-likely-than-not that the Company will not be required to sell impaired securities before fair value recovers, which may be maturity.
- 53 -
Fair Value Option Securities
Fair value option securities represent securities which the Company has elected to carry at fair value and are separately identified on the Consolidated Balance Sheets. Changes in the fair value are recognized in earnings as they occur. Certain securities are held as an economic hedge of the mortgage servicing rights.
The fair value and net unrealized gain (loss) included in fair value option securities is as follows (in thousands):
| September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| Fair Value | Net Unrealized Gain (Loss) | Fair Value | Net Unrealized Gain (Loss) | |||||||||||||||||||||||
Residential agency mortgage-backed securities | $ | 51,019 | $ | 2,220 | $ | 114,982 | $ | 4,463 | ||||||||||||||||||
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(3) Derivatives
Derivative instruments may be used by the Company as part of its internal risk management programs or may be offered to customers. All derivative instruments are carried at fair value and changes in fair value are reported in earnings as they occur. Credit risk is also considered in determining fair value. Deterioration in the credit rating of customer or other counterparties reduced the fair value of asset contracts. Deterioration of our credit rating could decrease the fair value of our derivative liabilities.
When bilateral netting agreements or similar arrangements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by derivative contract type by counterparty basis.
Derivative contracts may require the Company to provide or receive cash margin as collateral for derivative assets and liabilities. Derivative assets and liabilities are reported net of cash margin when certain conditions are met. In addition, derivative contracts executed with customers under Customer Risk Management Programs may be secured by non-cash collateral in conjunction with a credit agreement with that customer. Access to collateral in the event of default is reasonably assured.
None of these derivative contracts have been designated as hedging instruments for accounting purposes.
Customer Risk Management Programs
BOK Financial offers programs to permit its customers to manage various risks, including fluctuations in energy, cattle and other agricultural products, interest rates and foreign exchange rates with derivative contracts. Customers may also manage interest rate risk through interest rate swaps used by borrowers to modify interest rate terms of their loans. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize the risk of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in Other operating revenue – Brokerage and trading revenue in the Consolidated Statements of Earnings.
Trading
BOK Financial may offer derivative instruments such as to-be-announced securities to mortgage banking customers to enable them to manage their market risk or to mitigate the Company's market risk of holding trading securities. Changes in the fair value of derivative instruments for trading purposes or used to mitigate the market risk of holding trading securities are included in Other operating revenue – Brokerage and trading revenue.
Internal Risk Management Programs
BOK Financial may use derivative contracts in managing its interest rate sensitivity, as part of its economic hedge of the change in the fair value of mortgage servicing rights. Changes in the fair value of derivative instruments used in managing interest rate sensitivity and as part of the economic hedge of changes in the fair value of mortgage servicing rights are included in Other operating revenue – Gain (loss) on derivatives, net in the Consolidated Statements of Earnings.
As discussed in Note 5, certain derivative contracts not designated as hedging instruments related to mortgage loan commitments and forward sales contracts are included in Residential mortgage loans held for sale on the Consolidated Balance Sheets. See Note 5 for additional discussion of notional, fair value and impact on earnings of these contracts.
- 55 -
The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2021 (in thousands):
| Assets | ||||||||||||||||||||||||||||||||||||||
Notional1 | Gross Fair Value | Netting Adjustments | Net Fair Value Before Cash Collateral | Cash Collateral | Fair Value Net of Cash Collateral | |||||||||||||||||||||||||||||||||
| Customer risk management programs: | ||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | 3,010,596 | $ | 70,372 | $ | (6,971) | $ | 63,401 | $ | — | $ | 63,401 | ||||||||||||||||||||||||||
| Energy contracts | 5,901,682 | 1,743,938 | (412,176) | 1,331,762 | — | 1,331,762 | ||||||||||||||||||||||||||||||||
| Agricultural contracts | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | 301,216 | 299,335 | — | 299,335 | (666) | 298,669 | ||||||||||||||||||||||||||||||||
| Equity option contracts | 48,713 | 865 | — | 865 | (266) | 599 | ||||||||||||||||||||||||||||||||
| Total customer risk management programs | 9,262,207 | 2,114,510 | (419,147) | 1,695,363 | (932) | 1,694,431 | ||||||||||||||||||||||||||||||||
| Trading | 66,331,907 | 589,601 | (383,764) | 205,837 | (1,126) | 204,711 | ||||||||||||||||||||||||||||||||
| Internal risk management programs | 270,877 | 7,606 | (5,612) | 1,994 | — | 1,994 | ||||||||||||||||||||||||||||||||
| Total derivative contracts | $ | 75,864,991 | $ | 2,711,717 | $ | (808,523) | $ | 1,903,194 | $ | (2,058) | $ | 1,901,136 | ||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||||||||
Notional1 | Gross Fair Value | Netting Adjustments | Net Fair Value Before Cash Collateral | Cash Collateral | Fair Value Net of Cash Collateral | |||||||||||||||||||||||||||||||||
| Customer risk management programs: | ||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | 3,010,596 | $ | 70,612 | $ | (6,971) | $ | 63,641 | $ | (56,405) | $ | 7,236 | ||||||||||||||||||||||||||
| Energy contracts | 5,787,366 | 1,778,045 | (412,176) | 1,365,869 | (1,096,209) | 269,660 | ||||||||||||||||||||||||||||||||
| Agricultural contracts | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | 300,212 | 298,208 | — | 298,208 | — | 298,208 | ||||||||||||||||||||||||||||||||
| Equity option contracts | 48,713 | 865 | — | 865 | — | 865 | ||||||||||||||||||||||||||||||||
| Total customer risk management programs | 9,146,887 | 2,147,730 | (419,147) | 1,728,583 | (1,152,614) | 575,969 | ||||||||||||||||||||||||||||||||
| Trading | 61,791,246 | 562,083 | (383,764) | 178,319 | (16,046) | 162,273 | ||||||||||||||||||||||||||||||||
| Internal risk management programs | 1,303,792 | 15,419 | (5,612) | 9,807 | (8,408) | 1,399 | ||||||||||||||||||||||||||||||||
| Total derivative contracts | $ | 72,241,925 | $ | 2,725,232 | $ | (808,523) | $ | 1,916,709 | $ | (1,177,068) | $ | 739,641 | ||||||||||||||||||||||||||
1 Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.
- 56 -
The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2020 (in thousands):
| Assets | ||||||||||||||||||||||||||||||||||||||
Notional 1 | Gross Fair Value | Netting Adjustments | Net Fair Value Before Cash Collateral | Cash Collateral | Fair Value Net of Cash Collateral | |||||||||||||||||||||||||||||||||
| Customer risk management programs: | ||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | 3,212,469 | $ | 113,524 | $ | (144) | $ | 113,380 | $ | — | $ | 113,380 | ||||||||||||||||||||||||||
| Energy contracts | 3,791,565 | 386,008 | (211,468) | 174,540 | — | 174,540 | ||||||||||||||||||||||||||||||||
| Agricultural contracts | 14,765 | 3,859 | — | 3,859 | — | 3,859 | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | 337,001 | 332,257 | — | 332,257 | (420) | 331,837 | ||||||||||||||||||||||||||||||||
| Equity option contracts | 70,199 | 1,222 | — | 1,222 | (285) | 937 | ||||||||||||||||||||||||||||||||
| Total customer risk management programs | 7,425,999 | 836,870 | (211,612) | 625,258 | (705) | 624,553 | ||||||||||||||||||||||||||||||||
| Trading | 84,997,593 | 440,627 | (240,655) | 199,972 | (26,958) | 173,014 | ||||||||||||||||||||||||||||||||
| Internal risk management programs | 995,123 | 17,352 | (4,231) | 13,121 | — | 13,121 | ||||||||||||||||||||||||||||||||
| Total derivative contracts | $ | 93,418,715 | $ | 1,294,849 | $ | (456,498) | $ | 838,351 | $ | (27,663) | $ | 810,688 | ||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||||||||
Notional 1 | Gross Fair Value | Netting Adjustments | Net Fair Value Before Cash Collateral | Cash Collateral | Fair Value Net of Cash Collateral | |||||||||||||||||||||||||||||||||
| Customer risk management programs: | ||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | 3,212,469 | $ | 113,900 | $ | (144) | $ | 113,756 | $ | (104,202) | $ | 9,554 | ||||||||||||||||||||||||||
| Energy contracts | 3,617,678 | 361,334 | (211,468) | 149,866 | (114,070) | 35,796 | ||||||||||||||||||||||||||||||||
| Agricultural contracts | 14,781 | 3,844 | — | 3,844 | (3,844) | — | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | 336,223 | 331,035 | — | 331,035 | (1,165) | 329,870 | ||||||||||||||||||||||||||||||||
| Equity option contracts | 70,199 | 1,222 | — | 1,222 | — | 1,222 | ||||||||||||||||||||||||||||||||
| Total customer risk management programs | 7,251,350 | 811,335 | (211,612) | 599,723 | (223,281) | 376,442 | ||||||||||||||||||||||||||||||||
| Trading | 88,929,916 | 414,801 | (240,655) | 174,146 | (145,692) | 28,454 | ||||||||||||||||||||||||||||||||
| Internal risk management programs | 145,256 | 5,529 | (4,231) | 1,298 | (415) | 883 | ||||||||||||||||||||||||||||||||
| Total derivative contracts | $ | 96,326,522 | $ | 1,231,665 | $ | (456,498) | $ | 775,167 | $ | (369,388) | $ | 405,779 | ||||||||||||||||||||||||||
1 Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.
- 57 -
The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):
| Three Months Ended | ||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | |||||||||||||||||||||||||
| Brokerage and Trading Revenue | Gain (Loss) on Derivatives, Net | Brokerage and Trading Revenue | Gain (Loss) on Derivatives, Net | |||||||||||||||||||||||
| Customer risk management programs: | ||||||||||||||||||||||||||
| Interest rate contracts | $ | 1,283 | $ | — | $ | 1,014 | $ | — | ||||||||||||||||||
| Energy contracts | 5,528 | — | 7,460 | — | ||||||||||||||||||||||
| Agricultural contracts | (1) | — | 6 | — | ||||||||||||||||||||||
| Foreign exchange contracts | 120 | — | 162 | — | ||||||||||||||||||||||
| Equity option contracts | — | — | — | — | ||||||||||||||||||||||
| Total customer risk management programs | 6,930 | — | 8,642 | — | ||||||||||||||||||||||
Trading1 | 9,952 | — | (468) | — | ||||||||||||||||||||||
| Internal risk management programs | — | (5,760) | — | 2,354 | ||||||||||||||||||||||
| Total derivative contracts | $ | 16,882 | $ | (5,760) | $ | 8,174 | $ | 2,354 | ||||||||||||||||||
1 Represents changes in fair value of to-be-announced securities and other derivative instruments held to mitigate market risk of trading securities portfolio, which is offset by changes in fair value of trading securities also included in Brokerage and Trading Revenue in the Consolidated Statements of Earnings.
| Nine Months Ended | ||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | |||||||||||||||||||||||||
| Brokerage and Trading Revenue | Gain (Loss) on Derivatives, Net | Brokerage and Trading Revenue | Gain (Loss) on Derivatives, Net | |||||||||||||||||||||||
| Customer risk management programs: | ||||||||||||||||||||||||||
| Interest rate contracts | 3,687 | — | 2,702 | — | ||||||||||||||||||||||
| Energy contracts | 7,142 | — | 14,850 | — | ||||||||||||||||||||||
| Agricultural contracts | 27 | — | 27 | — | ||||||||||||||||||||||
| Foreign exchange contracts | 471 | — | 527 | — | ||||||||||||||||||||||
| Equity option contracts | — | — | — | — | ||||||||||||||||||||||
| Total customer risk management programs | 11,327 | — | 18,106 | — | ||||||||||||||||||||||
Trading1 | (1,976) | — | (8,546) | — | ||||||||||||||||||||||
| Internal risk management programs | — | (14,590) | — | 42,659 | ||||||||||||||||||||||
| Total derivative contracts | $ | 9,351 | $ | (14,590) | $ | 9,560 | $ | 42,659 | ||||||||||||||||||
1 Represents changes in fair value of to-be-announced securities and other derivative instruments held to mitigate market risk of trading securities portfolio, which is offset by changes in fair value of trading securities also included in Brokerage and Trading Revenue in the Consolidated Statements of Earnings.
- 58 -
(4) Loans and Allowances for Credit Losses
Loans
Loans are either secured or unsecured based on the type of loan and the financial condition of the borrower. Repayment is generally expected from cash flow or proceeds from the sale of selected assets of the borrower. BOK Financial is exposed to risk of loss on loans due to the borrower’s difficulties, which may arise from any number of factors, including problems within the respective industry or local economic conditions. Access to collateral, in the event of borrower default, is reasonably assured through adherence to applicable lending laws and through sound lending standards and credit review procedures. Accounting policies for all loans, excluding residential mortgage loans guaranteed by U.S. government agencies, are as follows.
Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccruing status when, in the opinion of management, full collection of principal or interest is uncertain. Internally risk graded loans are individually evaluated for nonaccruing status quarterly. Non-risk graded loans are generally placed on nonaccruing status when more than 90 days past due or within 60 days of being notified of the borrower's bankruptcy filing. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccruing status. Accrued but not paid interest receivable is included in Receivables in the Consolidated Balance Sheets. Payments on nonaccruing loans are applied to principal or recognized as interest income, according to management’s judgment as to the collectability of principal. Loans may be returned to accruing status when, in the opinion of management, full collection of principal and interest, including principal previously charged off, is probable based on improvements in the borrower’s financial condition or a sustained period of performance.
For loans acquired with no evidence of credit deterioration, discounts are accreted on either an individual basis for loans with unique characteristics or on a pool basis for groups of homogeneous loans. Accretion is discontinued when a loan with an individually attributed discount is placed on nonaccruing status.
Loans to borrowers experiencing financial difficulties may be modified in troubled debt restructurings ("TDRs"). Primarily all TDRs are classified as nonaccruing, excluding loans guaranteed by U.S. government agencies. Modifications generally consist of extension of payment terms or interest rate concessions and may result either voluntarily through negotiations with the borrower or involuntarily through court order. Payment deferrals up to six months are generally considered to be short-term modifications. Generally, principal and accrued but unpaid interest is not voluntarily forgiven.
Performing loans may be renewed under the current collateral value, debt service ratio and other underwriting standards. Nonaccruing loans may be renewed and will remain classified as nonaccruing.
Occasionally, loans, other than residential mortgage loans, may be held for sale in order to manage credit concentration. These loans are carried at the lower of cost or fair value with gains or losses recognized in Other gains (losses), net in the Consolidated Statements of Earnings.
All loans are charged off when the loan balance or a portion of the loan balance is no longer supported by the paying capacity of the borrower or when the required cash flow is reduced in a TDR. The charge-off amount is determined through a quarterly evaluation of available cash resources and collateral value. Internally risk graded loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Non-risk graded loans that are past due between 60 days and 180 days, based on the loan product type, are charged off. Loans to borrowers whose personal obligation has been discharged through Chapter 7 bankruptcy proceedings are charged off within 60 days of notice of the bankruptcy filing, regardless of payment status.
Loan origination and commitment fees and direct loan acquisition and origination costs are deferred and amortized as an adjustment to yield over the life of the loan or over the commitment period, as applicable. Amortization does not anticipate loan prepayments. Net unamortized fees are recognized in full at time of payoff.
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Qualifying residential mortgage loans guaranteed by U.S. government agencies have been sold into GNMA pools. Under certain performance conditions specified in government programs, the Company may have the right, but not the obligation to repurchase loans from GNMA pools. These loans no longer qualify for sale accounting and are recognized in the Consolidated Balance Sheets. We do not expect to receive all principal and interest based on the loan's contractual terms. A portion of the principal balance continues to be guaranteed; however, interest accrues at a curtailed rate as specified in the programs. The carrying value of these loans is reduced based on an estimate of the expected cash flows discounted at the original note rate plus a liquidity spread. Guaranteed loans may be modified in TDRs in accordance with U.S. government agency guidelines. Interest continues to accrue based on the modified rate. Guaranteed loans may either be resold into GNMA pools after a performance period specified by the programs or foreclosed and conveyed to the guarantors.
Loans are disaggregated into portfolio segments and further disaggregated into classes. The portfolio segment is the level at which the Company develops and documents a systematic method for determining its allowance for credit losses. Classes are a further disaggregation of portfolio segments based on the risk characteristics of the loans and the Company’s method for monitoring and assessing credit risk.
Portfolio segments of the loan portfolio are as follows (in thousands):
| September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed Rate | Variable Rate | Non-accrual | Total | Fixed Rate | Variable Rate | Non-accrual | Total | |||||||||||||||||||||||||||||||||||||||||||
| Commercial | $ | 3,337,034 | $ | 8,757,432 | $ | 80,674 | $ | 12,175,140 | $ | 3,174,203 | $ | 9,736,173 | $ | 167,159 | $ | 13,077,535 | ||||||||||||||||||||||||||||||||||
Commercial real estate | 968,223 | 3,127,446 | 21,223 | 4,116,892 | 1,047,486 | 3,623,806 | 27,246 | 4,698,538 | ||||||||||||||||||||||||||||||||||||||||||
| Paycheck protection program | 536,052 | — | — | 536,052 | 1,682,310 | — | — | 1,682,310 | ||||||||||||||||||||||||||||||||||||||||||
| Loans to individuals | 2,086,645 | 1,393,157 | 40,050 | 3,519,852 | 2,174,874 | 1,333,975 | 40,288 | 3,549,137 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 6,927,954 | $ | 13,278,035 | $ | 141,947 | $ | 20,347,936 | $ | 8,078,873 | $ | 14,693,954 | $ | 234,693 | $ | 23,007,520 | ||||||||||||||||||||||||||||||||||
Credit Commitments
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At September 30, 2021, outstanding commitments totaled $12.0 billion. Because some commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans.
The amount of collateral obtained, if deemed necessary, is based upon management’s credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At September 30, 2021, outstanding standby letters of credit totaled $638 million.
Allowances for Credit Losses and Accrual for Off-balance Sheet Credit Risk from Unfunded Loans Commitments
The allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments represent the portion of the amortized cost basis of loans that we do not expect to collect over the asset’s contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions. The appropriateness of the allowance for credit losses, including industry and product adjustments, is assessed quarterly by a senior management Allowance Committee. This review is based on an on-going evaluation of the estimated expected credit losses in the portfolio and on unused commitments to provide financing. A well-documented methodology has been developed and is applied by an independent Credit Administration department to assure consistency across the Company.
The allowance for loan losses consists of specific allowances attributed to certain individual loans, generally nonaccruing loans, with dissimilar risk characteristics that have not yet been charged down to amounts we expect to recover and general allowances for estimated credit losses on pools of loans that share similar risk characteristics.
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When full collection of principal or interest is uncertain, the loan’s risk characteristics have changed, and we exclude the loan from the general allowance pool, typically designating it as nonaccruing. For these loans, a specific allowance reflects the expected credit loss.
We measure specific allowances for loans excluded from the general allowance pool by an evaluation of estimated future cash flows discounted at the loan's initial effective interest rate or the fair value of collateral for certain collateral dependent loans. For a non-collateral dependent loan, the specific allowance is the amount by which the loan’s amortized cost basis exceeds its net realizable value. We measure the specific allowance for collateral dependent loans as the amount by which the loan’s amortized cost basis exceeds its fair value. When repayment is expected to be provided substantially through the sale of collateral, we deduct estimated selling costs from the collateral’s fair value. Generally, third party appraisals that conform to Uniform Standards of Professional Appraisal Practice serve as the basis for the fair value of real property held as collateral. These appraised values are on an “as-is” basis and generally are not adjusted by the Company. We obtain updated appraisals at least annually or more frequently if market conditions indicate collateral values may have declined. For energy loans, our internal staff of engineers generally determines collateral value of mineral rights based on projected cash flows from proven oil and gas reserves under existing economic and operating conditions. For real property held as collateral for other loans, third party appraisals that conform to Uniform Standards of Professional Appraisal Practice generally serve as the basis for the fair value. These appraised values are on an “as-is” basis and generally are not adjusted by the Company. We obtain updated appraisals at least annually or more frequently if market conditions indicate collateral values may have declined. Our special assets staff generally determines the value of other collateral based on projected liquidation cash flows under current market conditions. We evaluate collateral values and available cash resources quarterly. Historical statistics may be used to estimate specific allowances in limited situations, such as when a collateral dependent loan is removed from the general allowance pool near the end of a reporting period until an appraisal of collateral value is received or a full assessment of future cash flows is completed.
General allowances estimate expected credit losses on pools of loans sharing similar risk characteristics that are expected to occur over the loan’s estimated remaining life. The loan’s estimated remaining life represents the contractual term adjusted for amortization, estimates of prepayments, and borrower-owned extension options. Approximately 90 percent of the committed dollars in the loan portfolio is risk graded loans with general allowance model inputs that include probability of default, loss given default, and exposure at default. Probability of default is based on the migration of loans from performing to nonperforming using historical life of loan analysis periods. Loss given default is based on the aggregate losses incurred, net of estimated recoveries. Exposure at default represents an estimate of the outstanding amount of credit exposure at the time a default may occur.
Charge-off migration is used to calculate the general allowance for the majority of non-risk graded loans to individuals. The expected credit loss on less than 10 percent of the committed dollars in the portfolio is calculated using charge-off migration.
The expected credit loss on approximately 1 percent of the committed dollars in the portfolio is calculated using a non-modeled approach. Specifically, the calculation applies a long-term net charge-off rate to the loan balances, adjusted for the weighted average remaining maturity of each portfolio.
In estimating the expected credit losses for general allowances on performing risk-graded loans, each portfolio class is assigned relevant economic loss drivers which best explain variations in portfolio net loss rates. The probability of default estimates for each portfolio class are adjusted for current and forecasted economic conditions. The result is applied to the exposure at default and loss given default to calculate the lifetime expected credit loss estimate. Selection of relevant economic loss drivers is re-evaluated periodically and involves statistical analysis as well as management judgment. The unemployment rate factors significantly in the allowance for loan losses calculation, affecting commercial and loans to individuals segments. Other primary factors impacting the commercial portfolio include BBB corporate spreads, real gross domestic product growth rate, and energy commodity prices. The primary commercial real estate variables are vacancy rate and BBB corporate spreads. In addition to the unemployment rate, the forecast for loans to individuals is tied to home price index. The forecasts may include regional economic factors when localized conditions diverge from national conditions.
An Economic Forecast Committee, consisting of senior management with members largely independent of the allowance process develops a twelve-month forward-looking forecast for the relevant economic loss drivers. Management develops these forecasts based on external data as well as a view of future economic conditions, which may include adjustments for regional conditions. The forecast includes three economic scenarios and probability weights for each scenario. The base forecast represents management's view of the most likely outcome, while the downside forecast reflects reasonably possible worsening economic conditions, and the upside forecast projects reasonably possible improving conditions.
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At the end of the one-year reasonable and supportable forecast period, we transition from shorter-term expected losses to long-term loss averages for the loan’s estimated remaining life. The difference between short-term loss forecasts and long-term loss averages is run-off over the reversion horizon, up to three years, depending on the forecasted economic scenarios.
General allowances also consider the estimated impact of factors that are not captured in the modeled results or historical experience. These factors may increase or decrease modeled results by amounts determined by the Allowance Committee. Factors not captured in modeled results or historical experience may include for example, new lines of business, market conditions that have not been previously encountered, observed changes in credit risk that are not yet reflected in macro-economic factors, or economic conditions that impact loss given default assumptions.
The accrual for off-balance sheet credit risk is maintained at a level that is appropriate to cover estimated losses associated with credit instruments that are not currently recognized as assets such as loan commitments, standby letters of credit or guarantees that are not unconditionally cancelable by the bank. This accrual is included in other liabilities in the Consolidated Balance Sheets. The appropriateness of the accrual is determined in the same manner as the allowance for loan losses, with the added consideration of commitment usage over the remaining life for those loans that the bank can not unconditionally cancel.
A provision for credit losses is charged against or credited to earnings in amounts necessary to maintain an appropriate Allowance for Credit Losses. Recoveries of loans previously charged off are added to the allowance when received.
The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit is summarized as follows (in thousands):
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||||||||||||||||
| Commercial | Commercial Real Estate | Paycheck Protection Program | Loans to Individuals | Nonspecific Allowance | Total | |||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 198,303 | $ | 70,540 | $ | — | $ | 43,047 | $ | — | $ | 311,890 | ||||||||||||||||||||||||||
| Provision for loan losses | (15,996) | (9,418) | — | (1,981) | — | (27,395) | ||||||||||||||||||||||||||||||||
| Loans charged off | (6,979) | (1,422) | — | (1,183) | — | (9,584) | ||||||||||||||||||||||||||||||||
Recoveries of loans previously charged off | 832 | 228 | — | 709 | — | 1,769 | ||||||||||||||||||||||||||||||||
| Ending Balance | $ | 176,160 | $ | 59,928 | $ | — | $ | 40,592 | — | $ | 276,680 | |||||||||||||||||||||||||||
Allowance for off-balance sheet credit risk from unfunded loan commitments: | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 10,094 | $ | 12,348 | $ | — | $ | 1,845 | $ | — | $ | 24,287 | ||||||||||||||||||||||||||
Provision for off-balance sheet credit risk | 2,772 | 2,294 | — | (114) | — | 4,952 | ||||||||||||||||||||||||||||||||
| Ending Balance | $ | 12,866 | $ | 14,642 | $ | — | $ | 1,731 | $ | — | $ | 29,239 | ||||||||||||||||||||||||||
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| Nine Months Ended | ||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||||||||||||||||
| Commercial | Commercial Real Estate | Paycheck Protection Program | Loans to Individuals | Nonspecific Allowance | Total | |||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 254,934 | $ | 86,558 | $ | — | $ | 47,148 | $ | — | $ | 388,640 | ||||||||||||||||||||||||||
| Provision for loan losses | (44,331) | (24,579) | — | (5,319) | — | (74,229) | ||||||||||||||||||||||||||||||||
| Loans charged off | (38,826) | (2,485) | — | (3,482) | — | (44,793) | ||||||||||||||||||||||||||||||||
| Recoveries | 4,383 | 434 | — | 2,245 | — | 7,062 | ||||||||||||||||||||||||||||||||
| Ending balance | $ | 176,160 | $ | 59,928 | $ | — | $ | 40,592 | $ | — | $ | 276,680 | ||||||||||||||||||||||||||
Allowance for off-balance sheet credit risk from unfunded loan commitments: | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 14,422 | $ | 20,571 | $ | — | $ | 1,928 | $ | — | $ | 36,921 | ||||||||||||||||||||||||||
| Transition adjustment | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Beginning balance, adjusted | 14,422 | 20,571 | — | 1,928 | — | 36,921 | ||||||||||||||||||||||||||||||||
Provision for off-balance sheet credit losses | (1,556) | (5,929) | — | (197) | — | (7,682) | ||||||||||||||||||||||||||||||||
| Ending balance | $ | 12,866 | $ | 14,642 | $ | — | $ | 1,731 | $ | — | $ | 29,239 | ||||||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||||||||||||||||||||
| Commercial | Commercial Real Estate | Paycheck Protection Program | Loans to Individuals | Nonspecific Allowance | Total | |||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 310,422 | $ | 68,756 | $ | — | $ | 56,419 | $ | — | $ | 435,597 | ||||||||||||||||||||||||||
| Provision for loan losses | 2,108 | 3,118 | — | 1,383 | — | 6,609 | ||||||||||||||||||||||||||||||||
| Loans charged off | (25,319) | (413) | — | (929) | — | (26,661) | ||||||||||||||||||||||||||||||||
Recoveries of loans previously charged off | 3,066 | 114 | — | 1,052 | — | 4,232 | ||||||||||||||||||||||||||||||||
| Ending Balance | $ | 290,277 | $ | 71,575 | $ | — | $ | 57,925 | — | $ | 419,777 | |||||||||||||||||||||||||||
Allowance for off-balance sheet credit risk from unfunded loan commitments: | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 14,582 | $ | 16,419 | $ | — | $ | 1,918 | $ | — | $ | 32,919 | ||||||||||||||||||||||||||
| Transition adjustment | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Beginning balance, adjusted | 14,582 | 16,419 | — | 1,918 | — | 32,919 | ||||||||||||||||||||||||||||||||
Provision for off-balance sheet credit risk | (2,618) | (2,426) | — | 94 | — | (4,950) | ||||||||||||||||||||||||||||||||
| Ending Balance | $ | 11,964 | $ | 13,993 | $ | — | $ | 2,012 | — | $ | 27,969 | |||||||||||||||||||||||||||
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| Nine Months Ended | ||||||||||||||||||||||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||||||||||||||||||||
| Commercial | Commercial Real Estate | Paycheck Protection Program | Loans to Individuals | Nonspecific Allowance | Total | |||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 118,187 | $ | 51,805 | $ | — | $ | 23,572 | $ | 17,195 | $ | 210,759 | ||||||||||||||||||||||||||
| Transition adjustment | 33,681 | (4,620) | — | 13,943 | (17,195) | 25,809 | ||||||||||||||||||||||||||||||||
| Beginning balance, adjusted | 151,868 | 47,185 | — | 37,515 | — | 236,568 | ||||||||||||||||||||||||||||||||
| Provision for loan losses | 190,984 | 25,454 | — | 20,500 | — | 236,938 | ||||||||||||||||||||||||||||||||
| Loans charged off | (56,421) | (1,300) | — | (3,427) | — | (61,148) | ||||||||||||||||||||||||||||||||
| Recoveries of loans previously charged off | 3,846 | 236 | — | 3,337 | — | 7,419 | ||||||||||||||||||||||||||||||||
| Ending Balance | $ | 290,277 | $ | 71,575 | $ | — | $ | 57,925 | — | $ | 419,777 | |||||||||||||||||||||||||||
| Allowance for off-balance sheet credit risk from unfunded loan commitments: | ||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 1,434 | $ | 107 | $ | — | $ | 44 | $ | — | $ | 1,585 | ||||||||||||||||||||||||||
| Transition adjustment | 10,144 | 11,660 | — | 1,748 | — | 23,552 | ||||||||||||||||||||||||||||||||
| Beginning balance, adjusted | 11,578 | 11,767 | — | 1,792 | — | 25,137 | ||||||||||||||||||||||||||||||||
| Provision for off-balance sheet credit risk | 386 | 2,226 | — | 220 | — | 2,832 | ||||||||||||||||||||||||||||||||
| Ending Balance | $ | 11,964 | $ | 13,993 | $ | — | $ | 2,012 | — | $ | 27,969 | |||||||||||||||||||||||||||
Changes in our reasonable and supportable forecasts of macroeconomic variables, primarily due to continued strength in commodity prices and a continued optimistic outlook for economic growth in GDP and labor markets resulted in a $12.3 million negative provision for credit losses related to lending activities during the third quarter of 2021. Changes in the loan portfolio characteristics, including specific impairment and losses, loan balances, risk grading and changes in payment profile resulted in a $10.1 million negative provision for credit losses related to lending activities.
The allowance for loan losses and recorded investment of the related loans by portfolio segment for each measurement method at September 30, 2021 is as follows (in thousands):
| Collectively Measured for General Allowances | Individually Measured for Specific Allowances | Total | ||||||||||||||||||||||||||||||||||||
| Recorded Investment | Related Allowance | Recorded Investment | Related Allowance | Recorded Investment | Related Allowance | |||||||||||||||||||||||||||||||||
| Commercial | $ | 12,094,466 | $ | 168,325 | $ | 80,674 | $ | 7,835 | $ | 12,175,140 | $ | 176,160 | ||||||||||||||||||||||||||
| Commercial real estate | 4,095,669 | 57,579 | 21,223 | 2,349 | 4,116,892 | 59,928 | ||||||||||||||||||||||||||||||||
| Paycheck protection program | 536,052 | — | — | — | 536,052 | — | ||||||||||||||||||||||||||||||||
| Loans to individuals | 3,479,802 | 40,592 | 40,050 | — | 3,519,852 | 40,592 | ||||||||||||||||||||||||||||||||
| Total | $ | 20,205,989 | $ | 266,496 | $ | 141,947 | $ | 10,184 | $ | 20,347,936 | $ | 276,680 | ||||||||||||||||||||||||||
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The allowance for loan losses and recorded investment of the related loans by portfolio segment for each measurement method at December 31, 2020 is as follows (in thousands):
| Collectively Measured for General Allowances | Individually Measured for Specific Allowances | Total | ||||||||||||||||||||||||||||||||||||
| Recorded Investment | Related Allowance | Recorded Investment | Related Allowance | Recorded Investment | Related Allowance | |||||||||||||||||||||||||||||||||
| Commercial | $ | 12,910,376 | $ | 235,882 | $ | 167,159 | $ | 19,052 | $ | 13,077,535 | $ | 254,934 | ||||||||||||||||||||||||||
| Commercial real estate | 4,671,292 | 83,169 | 27,246 | 3,389 | 4,698,538 | 86,558 | ||||||||||||||||||||||||||||||||
| Paycheck protection program | 1,682,310 | — | — | — | 1,682,310 | — | ||||||||||||||||||||||||||||||||
| Loans to individuals | 3,508,849 | 47,148 | 40,288 | — | 3,549,137 | 47,148 | ||||||||||||||||||||||||||||||||
| Total | $ | 22,772,827 | $ | 366,199 | $ | 234,693 | $ | 22,441 | $ | 23,007,520 | $ | 388,640 | ||||||||||||||||||||||||||
Credit Quality Indicators
The Company utilizes risk grading as primary credit quality indicators as it influences the probability of default which is a key attribute in the expected credit losses calculation. Substantially all commercial as well as commercial real estate loans and certain loans to individuals are risk graded based on a quarterly evaluation of the borrowers’ ability to repay the loans. Certain commercial loans and most loans to individuals are small, homogeneous pools that are not risk-graded. The credit quality of these loans is based on past due days in accordance with regulatory guidelines.
We have included in the credit quality indicator “pass” loans that are in compliance with the original terms of the agreement and currently exhibit no factors that cause management to have doubts about the borrowers’ ability to remain in compliance with the original terms of the agreement, which is consistent with the regulatory guideline of “pass.” This also includes past due residential mortgages that are guaranteed by agencies of the U.S. government that continue to accrue interest based on criteria of the guarantors’ programs.
Other loans especially mentioned ("Special Mention") are currently performing in compliance with the original terms of the agreement but may have a potential weakness that deserves management’s close attention, consistent with regulatory guidelines. Non-graded loans 30 to 59 days past due are categorized as Special Mention.
The risk grading process identified certain loans that have a well-defined weakness (for example, inadequate debt service coverage or liquidity or marginal capitalization; repayment may depend on collateral or other risk mitigation) that may jeopardize liquidation of the debt and represent a greater risk due to deterioration in the financial condition of the borrower. This is consistent with the regulatory guideline for “substandard.” Because the borrowers are still performing in accordance with the original terms of the loan agreements, these loans remain on accruing status. Non-graded loans 60 to 89 days past due are categorized as Accruing Substandard.
Nonaccruing loans represent loans for which full collection of principal and interest is uncertain. This includes certain loans considered “substandard” and all loans considered “doubtful” by regulatory guidelines. Non-graded loans 90 or more days past due are categorized as Nonaccrual.
Probability of default is lowest for pass graded loans and increases for each credit quality indicator, Special Mention, and Accruing Substandard.
Vintage represents the year of origination, except for revolving loans which are considered in aggregate. Loans that were once revolving but have converted to term loans without additional underwriting appear in a separate vintage column.
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The following table summarizes the Company’s loan portfolio at September 30, 2021 by the risk grade categories and vintage (in thousands):
| Origination Year | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans | Revolving Loans Converted to Term Loans | Total | |||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||
| Energy | |||||||||||||||||||||||||||||
| Pass | $ | 154,735 | $ | 38,019 | $ | 33,135 | $ | 14,559 | $ | 4,987 | $ | 19,327 | $ | 2,306,845 | $ | — | $ | 2,571,607 | |||||||||||
| Special Mention | 565 | 1,607 | — | — | — | — | 750 | — | 2,922 | ||||||||||||||||||||
Accruing Substandard | — | 23,065 | 1,230 | 1,100 | — | 6 | 168,629 | — | 194,030 | ||||||||||||||||||||
| Nonaccrual | — | 20,722 | 1,570 | — | — | 9,409 | 13,799 | — | 45,500 | ||||||||||||||||||||
Total energy | 155,300 | 83,413 | 35,935 | 15,659 | 4,987 | 28,742 | 2,490,023 | — | 2,814,059 | ||||||||||||||||||||
Healthcare | |||||||||||||||||||||||||||||
| Pass | 383,462 | 593,123 | 576,153 | 521,156 | 329,791 | 720,489 | 149,119 | — | 3,273,293 | ||||||||||||||||||||
| Special Mention | 6,883 | — | 15,746 | — | 5,834 | — | 5 | — | 28,468 | ||||||||||||||||||||
Accruing Substandard | — | — | 27,292 | 7,304 | — | 10,775 | — | — | 45,371 | ||||||||||||||||||||
| Nonaccrual | — | — | — | — | — | — | 509 | — | 509 | ||||||||||||||||||||
| Total healthcare | 390,345 | 593,123 | 619,191 | 528,460 | 335,625 | 731,264 | 149,633 | — | 3,347,641 | ||||||||||||||||||||
Services | |||||||||||||||||||||||||||||
| Pass | 430,099 | 501,607 | 334,009 | 298,665 | 240,892 | 847,065 | 584,197 | 415 | 3,236,949 | ||||||||||||||||||||
| Special Mention | 453 | 412 | 2,779 | 49 | 3,318 | 11,085 | 2,027 | 203 | 20,326 | ||||||||||||||||||||
Accruing Substandard | 26 | 76 | 10,575 | 16,418 | 1,839 | 5,603 | 5,896 | — | 40,433 | ||||||||||||||||||||
| Nonaccrual | — | 4,529 | — | 230 | 14,220 | 6,232 | 503 | — | 25,714 | ||||||||||||||||||||
| Total services | 430,578 | 506,624 | 347,363 | 315,362 | 260,269 | 869,985 | 592,623 | 618 | 3,323,422 | ||||||||||||||||||||
General business | |||||||||||||||||||||||||||||
| Pass | 457,490 | 246,333 | 295,089 | 212,899 | 188,407 | 230,442 | 1,002,036 | 2,025 | 2,634,721 | ||||||||||||||||||||
| Special Mention | 232 | 1,380 | 66 | 1,469 | 3,937 | 318 | 8,697 | — | 16,099 | ||||||||||||||||||||
Accruing Substandard | 365 | 1,230 | 2,458 | 7,961 | 8,694 | 6,906 | 2,633 | — | 30,247 | ||||||||||||||||||||
| Nonaccrual | — | 1,582 | 4,235 | 1,240 | 770 | 531 | 462 | 131 | 8,951 | ||||||||||||||||||||
Total general business | 458,087 | 250,525 | 301,848 | 223,569 | 201,808 | 238,197 | 1,013,828 | 2,156 | 2,690,018 | ||||||||||||||||||||
Total commercial | 1,434,310 | 1,433,685 | 1,304,337 | 1,083,050 | 802,689 | 1,868,188 | 4,246,107 | 2,774 | 12,175,140 | ||||||||||||||||||||
Commercial real estate: | |||||||||||||||||||||||||||||
| Pass | 374,519 | 805,102 | 1,104,404 | 466,778 | 336,206 | 822,068 | 140,050 | 33 | 4,049,160 | ||||||||||||||||||||
| Special Mention | — | — | — | 6,683 | 10,943 | 6,760 | — | — | 24,386 | ||||||||||||||||||||
Accruing Substandard | — | — | — | 13,288 | 4,480 | 4,355 | — | — | 22,123 | ||||||||||||||||||||
| Nonaccrual | — | — | 8,244 | — | — | 12,979 | — | — | 21,223 | ||||||||||||||||||||
Total commercial real estate | 374,519 | 805,102 | 1,112,648 | 486,749 | 351,629 | 846,162 | 140,050 | 33 | 4,116,892 | ||||||||||||||||||||
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| Origination Year | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans | Revolving Loans Converted to Term Loans | Total | |||||||||||||||||||||
| Paycheck protection program: | |||||||||||||||||||||||||||||
| Pass | 450,844 | 85,208 | — | — | — | — | — | — | 536,052 | ||||||||||||||||||||
| Total paycheck protection program | 450,844 | 85,208 | — | — | — | — | — | — | 536,052 | ||||||||||||||||||||
Loans to individuals: | |||||||||||||||||||||||||||||
Residential mortgage | |||||||||||||||||||||||||||||
| Pass | 325,951 | 478,460 | 93,556 | 67,648 | 80,208 | 333,932 | 313,255 | 22,305 | 1,715,315 | ||||||||||||||||||||
| Special Mention | — | — | 82 | 13 | — | 283 | 248 | — | 626 | ||||||||||||||||||||
Accruing Substandard | — | — | — | — | — | 126 | 479 | 23 | 628 | ||||||||||||||||||||
| Nonaccrual | 758 | 1,446 | 341 | 1,051 | 688 | 23,457 | 2,097 | 836 | 30,674 | ||||||||||||||||||||
Total residential mortgage | 326,709 | 479,906 | 93,979 | 68,712 | 80,896 | 357,798 | 316,079 | 23,164 | 1,747,243 | ||||||||||||||||||||
Residential mortgage guaranteed by U.S. government agencies | |||||||||||||||||||||||||||||
| Pass | 348 | 10,308 | 24,350 | 30,941 | 35,341 | 266,510 | — | — | 367,798 | ||||||||||||||||||||
| Nonaccrual | — | — | 82 | 244 | 143 | 8,719 | — | — | 9,188 | ||||||||||||||||||||
Total residential mortgage guaranteed by U.S. government agencies | 348 | 10,308 | 24,432 | 31,185 | 35,484 | 275,229 | — | — | 376,986 | ||||||||||||||||||||
| Personal: | |||||||||||||||||||||||||||||
| Pass | 154,436 | 199,604 | 183,461 | 69,075 | 97,119 | 136,837 | 553,702 | 887 | 1,395,121 | ||||||||||||||||||||
| Special Mention | 14 | 15 | 23 | 10 | — | 45 | 5 | — | 112 | ||||||||||||||||||||
Accruing Substandard | — | — | 180 | 1 | — | — | 21 | — | 202 | ||||||||||||||||||||
| Nonaccrual | 19 | 9 | 10 | 25 | 38 | 61 | 26 | — | 188 | ||||||||||||||||||||
Total personal | 154,469 | 199,628 | 183,674 | 69,111 | 97,157 | 136,943 | 553,754 | 887 | 1,395,623 | ||||||||||||||||||||
Total loans to individuals | 481,526 | 689,842 | 302,085 | 169,008 | 213,537 | 769,970 | 869,833 | 24,051 | 3,519,852 | ||||||||||||||||||||
Total loans | $ | 2,741,199 | $ | 3,013,837 | $ | 2,719,070 | $ | 1,738,807 | $ | 1,367,855 | $ | 3,484,320 | $ | 5,255,990 | $ | 26,858 | $ | 20,347,936 | |||||||||||
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The following table summarizes the Company’s loan portfolio at December 31, 2020 by the risk grade categories and vintage (in thousands):
| Origination Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Revolving Loans Converted to Term Loans | Total | |||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||
| Energy | |||||||||||||||||||||||||||||
| Pass | $ | 112,614 | $ | 51,863 | $ | 89,346 | $ | 7,178 | $ | 1,148 | $ | 7,956 | $ | 2,548,663 | $ | — | $ | 2,818,768 | |||||||||||
| Special Mention | — | — | — | — | — | — | 202,590 | — | 202,590 | ||||||||||||||||||||
Accruing Substandard | 24,000 | 1,363 | 1,453 | — | 12,667 | — | 283,294 | — | 322,777 | ||||||||||||||||||||
| Nonaccrual | 21,076 | 2,607 | — | — | — | 21,064 | 80,312 | — | 125,059 | ||||||||||||||||||||
Total energy | 157,690 | 55,833 | 90,799 | 7,178 | 13,815 | 29,020 | 3,114,859 | — | 3,469,194 | ||||||||||||||||||||
Healthcare | |||||||||||||||||||||||||||||
| Pass | 536,745 | 615,221 | 638,302 | 422,834 | 234,399 | 658,286 | 147,132 | — | 3,252,919 | ||||||||||||||||||||
| Special Mention | — | 27,500 | — | — | — | 8,282 | 5 | — | 35,787 | ||||||||||||||||||||
Accruing Substandard | — | — | 1,191 | 929 | 132 | 11,387 | — | — | 13,639 | ||||||||||||||||||||
| Nonaccrual | — | 18 | 183 | — | — | 2,935 | 509 | — | 3,645 | ||||||||||||||||||||
| Total healthcare | 536,745 | 642,739 | 639,676 | 423,763 | 234,531 | 680,890 | 147,646 | — | 3,305,990 | ||||||||||||||||||||
Services | |||||||||||||||||||||||||||||
| Pass | 534,853 | 436,384 | 372,867 | 307,374 | 373,785 | 683,936 | 665,491 | 682 | 3,375,372 | ||||||||||||||||||||
| Special Mention | 150 | 9,057 | 389 | 291 | 2,038 | 2,000 | 3,063 | — | 16,988 | ||||||||||||||||||||
Accruing Substandard | 429 | 6,380 | 26,008 | 6,027 | 5,030 | 7,954 | 38,797 | — | 90,625 | ||||||||||||||||||||
| Nonaccrual | 4,833 | 448 | — | 12,590 | 1,049 | 6,138 | 540 | — | 25,598 | ||||||||||||||||||||
| Total services | 540,265 | 452,269 | 399,264 | 326,282 | 381,902 | 700,028 | 707,891 | 682 | 3,508,583 | ||||||||||||||||||||
General business | |||||||||||||||||||||||||||||
| Pass | 419,756 | 394,985 | 310,273 | 236,222 | 103,987 | 186,600 | 1,055,878 | 2,316 | 2,710,017 | ||||||||||||||||||||
| Special Mention | 197 | 4,519 | 9,713 | 7,803 | 2,511 | 3,159 | 2,483 | 19 | 30,404 | ||||||||||||||||||||
Accruing Substandard | 1,432 | 3,069 | 6,694 | 10,935 | 10,042 | 3,729 | 4,449 | 140 | 40,490 | ||||||||||||||||||||
| Nonaccrual | 1,675 | 3,728 | 4,863 | 1,436 | 530 | 107 | 477 | 41 | 12,857 | ||||||||||||||||||||
Total general business | 423,060 | 406,301 | 331,543 | 256,396 | 117,070 | 193,595 | 1,063,287 | 2,516 | 2,793,768 | ||||||||||||||||||||
Total commercial | 1,657,760 | 1,557,142 | 1,461,282 | 1,013,619 | 747,318 | 1,603,533 | 5,033,683 | 3,198 | 13,077,535 | ||||||||||||||||||||
Commercial real estate: | |||||||||||||||||||||||||||||
| Pass | 725,577 | 1,211,338 | 954,226 | 489,193 | 314,899 | 722,475 | 223,131 | 38 | 4,640,877 | ||||||||||||||||||||
| Special Mention | — | — | 259 | 12,311 | 2,725 | 5,831 | — | — | 21,126 | ||||||||||||||||||||
Accruing Substandard | — | — | — | 4,410 | — | 4,852 | 27 | — | 9,289 | ||||||||||||||||||||
| Nonaccrual | — | 8,300 | — | 232 | 7,468 | 11,246 | — | — | 27,246 | ||||||||||||||||||||
Total commercial real estate | 725,577 | 1,219,638 | 954,485 | 506,146 | 325,092 | 744,404 | 223,158 | 38 | 4,698,538 | ||||||||||||||||||||
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| Origination Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Revolving Loans Converted to Term Loans | Total | |||||||||||||||||||||
| Paycheck protection program: | |||||||||||||||||||||||||||||
| Pass | 1,682,310 | — | — | — | — | — | — | — | 1,682,310 | ||||||||||||||||||||
| Total paycheck protection program | 1,682,310 | — | — | — | — | — | — | — | 1,682,310 | ||||||||||||||||||||
Loans to individuals: | |||||||||||||||||||||||||||||
Residential mortgage | |||||||||||||||||||||||||||||
| Pass | 564,325 | 149,832 | 120,875 | 124,930 | 158,801 | 348,292 | 335,259 | 24,553 | 1,826,867 | ||||||||||||||||||||
| Special Mention | 33 | 11 | 2,094 | — | 59 | 318 | 950 | 10 | 3,475 | ||||||||||||||||||||
Accruing Substandard | — | — | 51 | — | — | 34 | 272 | 76 | 433 | ||||||||||||||||||||
| Nonaccrual | 648 | 104 | 1,658 | 784 | 2,010 | 22,415 | 3,835 | 774 | 32,228 | ||||||||||||||||||||
Total residential mortgage | 565,006 | 149,947 | 124,678 | 125,714 | 160,870 | 371,059 | 340,316 | 25,413 | 1,863,003 | ||||||||||||||||||||
Residential mortgage guaranteed by U.S. government agencies | |||||||||||||||||||||||||||||
| Pass | 4,859 | 33,880 | 34,464 | 43,099 | 58,264 | 226,380 | — | — | 400,946 | ||||||||||||||||||||
| Nonaccrual | — | — | 545 | — | 309 | 6,887 | — | — | 7,741 | ||||||||||||||||||||
Total residential mortgage guaranteed by U.S. government agencies | 4,859 | 33,880 | 35,009 | 43,099 | 58,573 | 233,267 | — | — | 408,687 | ||||||||||||||||||||
| Personal: | |||||||||||||||||||||||||||||
| Pass | 219,873 | 200,580 | 76,246 | 100,229 | 64,104 | 102,126 | 510,571 | 1,510 | 1,275,239 | ||||||||||||||||||||
| Special Mention | 39 | 55 | 66 | — | 469 | 31 | 965 | — | 1,625 | ||||||||||||||||||||
Accruing Substandard | 11 | 214 | 10 | — | — | — | 29 | — | 264 | ||||||||||||||||||||
| Nonaccrual | 28 | 17 | 57 | 73 | 50 | 49 | 45 | — | 319 | ||||||||||||||||||||
Total personal | 219,951 | 200,866 | 76,379 | 100,302 | 64,623 | 102,206 | 511,610 | 1,510 | 1,277,447 | ||||||||||||||||||||
Total loans to individuals | 789,816 | 384,693 | 236,066 | 269,115 | 284,066 | 706,532 | 851,926 | 26,923 | 3,549,137 | ||||||||||||||||||||
Total loans | $ | 4,855,463 | $ | 3,161,473 | $ | 2,651,833 | $ | 1,788,880 | $ | 1,356,476 | $ | 3,054,469 | $ | 6,108,767 | $ | 30,159 | $ | 23,007,520 | |||||||||||
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Nonaccruing Loans
A summary of nonaccruing loans at September 30, 2021 follows (in thousands):
| As of September 30, 2021 | |||||||||||||||||||||||
| Total | With No Allowance | With Allowance | Related Allowance | ||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||
| Energy | $ | 45,500 | $ | 40,998 | $ | 4,502 | $ | 2,417 | |||||||||||||||
| Healthcare | 509 | 509 | — | — | |||||||||||||||||||
| Services | 25,714 | 18,512 | 7,202 | 4,918 | |||||||||||||||||||
| General business | 8,951 | 5,526 | 3,425 | 500 | |||||||||||||||||||
| Total commercial | 80,674 | 65,545 | 15,129 | 7,835 | |||||||||||||||||||
| Commercial real estate | 21,223 | 12,979 | 8,244 | 2,349 | |||||||||||||||||||
| Loans to individuals: | |||||||||||||||||||||||
| Residential mortgage | 30,674 | 30,674 | — | — | |||||||||||||||||||
Residential mortgage guaranteed by U.S. government agencies | 9,188 | 9,188 | — | — | |||||||||||||||||||
| Personal | 188 | 188 | — | — | |||||||||||||||||||
| Total loans to individuals | 40,050 | 40,050 | — | — | |||||||||||||||||||
| Total | $ | 141,947 | $ | 118,574 | $ | 23,373 | $ | 10,184 | |||||||||||||||
A summary of nonaccruing loans at December 31, 2020 follows (in thousands):
| As of December 31, 2020 | |||||||||||||||||||||||
| Total | With No Allowance | With Allowance | Related Allowance | ||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||
| Energy | $ | 125,059 | $ | 76,633 | $ | 48,426 | $ | 16,478 | |||||||||||||||
| Healthcare | 3,645 | 3,645 | — | — | |||||||||||||||||||
| Services | 25,598 | 20,810 | 4,788 | 2,574 | |||||||||||||||||||
| General business | 12,857 | 12,857 | — | — | |||||||||||||||||||
| Total commercial | 167,159 | 113,945 | 53,214 | 19,052 | |||||||||||||||||||
| Commercial real estate | 27,246 | 13,645 | 13,601 | 3,389 | |||||||||||||||||||
| Loans to individuals: | |||||||||||||||||||||||
| Residential mortgage | 32,228 | 32,228 | — | — | |||||||||||||||||||
Residential mortgage guaranteed by U.S. government agencies | 7,741 | 7,741 | — | — | |||||||||||||||||||
| Personal | 319 | 319 | — | — | |||||||||||||||||||
| Total loans to individuals | 40,288 | 40,288 | — | — | |||||||||||||||||||
| Total | $ | 234,693 | $ | 167,878 | $ | 66,815 | $ | 22,441 | |||||||||||||||
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Troubled Debt Restructurings
At September 30, 2021 the Company had $241 million in troubled debt restructurings ("TDRs"), of which $179 million were accruing residential mortgage loans guaranteed by U.S. government agencies, $16 million were nonaccruing residential mortgage loans with no specific allowance necessary and $14 million were commercial real estate loans with a related specific allowance of $2.3 million. Approximately $133 million of TDRs were performing in accordance with the modified terms.
At December 31, 2020, the Company had $187 million in TDRs, of which $152 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $95 million of TDRs were performing in accordance with the modified terms.
TDRs generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. During the three and nine months ended September 30, 2021, $18 million and $81 million of loans were restructured and $712 thousand and $994 thousand of loans designated as TDRs were charged off. During the three and nine months ended September 30, 2020, $36 million and $76 million of loans were restructured and $6.4 million and $16.1 million of loans designated as TDRs were charged off.
Past Due Loans
Past due status for all loan classes is based on the actual number of days since the last payment was due according to the contractual terms of the loans, as modified for short-term payment deferral forbearance.
A summary of loans currently performing and past due as of September 30, 2021 is as follows (in thousands):
| Past Due | Past Due 90 Days or More and Accruing | |||||||||||||||||||||||||||||||||||||
| Current | 30 to 59 Days | 60 to 89 Days | 90 Days or More | Total | ||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||
| Energy | $ | 2,803,488 | $ | — | $ | — | $ | 10,571 | $ | 2,814,059 | $ | — | ||||||||||||||||||||||||||
| Healthcare | 3,346,740 | 404 | — | 497 | 3,347,641 | — | ||||||||||||||||||||||||||||||||
| Services | 3,309,658 | 3,092 | 1,648 | 9,024 | 3,323,422 | — | ||||||||||||||||||||||||||||||||
| General business | 2,678,878 | 1,732 | 1,821 | 7,587 | 2,690,018 | 200 | ||||||||||||||||||||||||||||||||
| Total commercial | 12,138,764 | 5,228 | 3,469 | 27,679 | 12,175,140 | 200 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 4,105,791 | 1,505 | — | 9,596 | 4,116,892 | — | ||||||||||||||||||||||||||||||||
| Paycheck protection program | 536,052 | — | — | — | 536,052 | — | ||||||||||||||||||||||||||||||||
| Loans to individuals: | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 1,731,942 | 6,147 | 2,269 | 6,885 | 1,747,243 | 23 | ||||||||||||||||||||||||||||||||
Residential mortgage guaranteed by U.S. government agencies | 204,901 | 35,894 | 18,028 | 118,163 | 376,986 | 111,835 | ||||||||||||||||||||||||||||||||
| Personal | 1,395,445 | 74 | 37 | 67 | 1,395,623 | — | ||||||||||||||||||||||||||||||||
| Total loans to individuals | 3,332,288 | 42,115 | 20,334 | 125,115 | 3,519,852 | 111,858 | ||||||||||||||||||||||||||||||||
| Total | $ | 20,112,895 | $ | 48,848 | $ | 23,803 | $ | 162,390 | $ | 20,347,936 | $ | 112,058 | ||||||||||||||||||||||||||
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A summary of loans currently performing and past due as of December 31, 2020 is as follows (in thousands):
| Past Due | Past Due 90 Days or More and Accruing | |||||||||||||||||||||||||||||||||||||
| Current | 30 to 59 Days | 60 to 89 Days | 90 Days or More | Total | ||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||
| Energy | $ | 3,410,995 | $ | 12,735 | $ | 4,050 | $ | 41,414 | $ | 3,469,194 | $ | — | ||||||||||||||||||||||||||
| Healthcare | 3,302,345 | — | — | 3,645 | 3,305,990 | — | ||||||||||||||||||||||||||||||||
| Services | 3,489,423 | 3,278 | 177 | 15,705 | 3,508,583 | 326 | ||||||||||||||||||||||||||||||||
| General business | 2,776,038 | 1,206 | 6,277 | 10,247 | 2,793,768 | 4,495 | ||||||||||||||||||||||||||||||||
| Total commercial | 12,978,801 | 17,219 | 10,504 | 71,011 | 13,077,535 | 4,821 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 4,672,279 | 276 | 5,310 | 20,673 | 4,698,538 | 5,126 | ||||||||||||||||||||||||||||||||
| Paycheck protection program | 1,682,310 | — | — | — | 1,682,310 | — | ||||||||||||||||||||||||||||||||
| Loans to individuals: | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 1,849,304 | 5,812 | 837 | 7,050 | 1,863,003 | 181 | ||||||||||||||||||||||||||||||||
Residential mortgage guaranteed by U.S. government agencies | 262,102 | 41,389 | 22,041 | 83,155 | 408,687 | 78,349 | ||||||||||||||||||||||||||||||||
| Personal | 1,273,702 | 3,317 | 90 | 338 | 1,277,447 | 241 | ||||||||||||||||||||||||||||||||
| Total loans to individuals | 3,385,108 | 50,518 | 22,968 | 90,543 | 3,549,137 | 78,771 | ||||||||||||||||||||||||||||||||
| Total | $ | 22,718,498 | $ | 68,013 | $ | 38,782 | $ | 182,227 | $ | 23,007,520 | $ | 88,718 | ||||||||||||||||||||||||||
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(5) Mortgage Banking Activities
Residential Mortgage Loan Production
The Company originates, markets and services conventional and government-sponsored residential mortgage loans. Generally, conforming fixed rate residential mortgage loans are held for sale in the secondary market and non-conforming and adjustable-rate residential mortgage loans are retained for investment. Residential mortgage loans originated for sale by the Company are carried at fair value based on sales commitments and market quotes. Changes in the fair value of mortgage loans held for sale are included in Other operating revenue – Mortgage banking revenue. Residential mortgage loans held for sale also includes the fair value of residential mortgage loan commitments and forward sales commitments, which are considered derivative contracts that have not been designated as hedging instruments for accounting purposes. The volume of mortgage loans originated for sale and secondary market prices are the primary drivers of originating and marketing revenue.
Residential mortgage loan commitments are generally outstanding for 60 to 90 days, which represents the typical period from commitment to originate a residential mortgage loan to when the closed loan is sold to an investor. Residential mortgage loan commitments are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. These latter contracts set the price for loans that will be delivered in the next 60 to 90 days.
The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loan commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):
| September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| Unpaid Principal Balance/ Notional | Fair Value | Unpaid Principal Balance/ Notional | Fair Value | |||||||||||||||||||||||
| Residential mortgage loans held for sale | $ | 163,924 | $ | 166,670 | $ | 227,161 | $ | 236,444 | ||||||||||||||||||
| Residential mortgage loan commitments | 239,066 | 8,249 | 380,637 | 20,435 | ||||||||||||||||||||||
| Forward sales contracts | 355,961 | 1,894 | 549,414 | (4,563) | ||||||||||||||||||||||
| $ | 176,813 | $ | 252,316 | |||||||||||||||||||||||
No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of September 30, 2021 or December 31, 2020. No credit losses were recognized on residential mortgage loans held for sale for the nine month period ended September 30, 2021 and 2020.
Mortgage banking revenue was as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Production revenue: | ||||||||||||||||||||||||||
| Net realized gains on sale of mortgage loans | $ | 16,177 | $ | 36,300 | $ | 62,960 | $ | 70,126 | ||||||||||||||||||
| Net change in unrealized gain (loss) on mortgage loans held for sale | (1,365) | (1,672) | (6,537) | 6,913 | ||||||||||||||||||||||
| Net change in the fair value of mortgage loan commitments | (1,953) | 1,593 | (12,186) | 23,991 | ||||||||||||||||||||||
| Net change in the fair value of forward sales contracts | 2,544 | 2,210 | 6,457 | (1,844) | ||||||||||||||||||||||
| Total production revenue | 15,403 | 38,431 | 50,694 | 99,186 | ||||||||||||||||||||||
| Servicing revenue | 10,883 | 13,528 | 33,924 | 43,876 | ||||||||||||||||||||||
| Total mortgage banking revenue | $ | 26,286 | $ | 51,959 | $ | 84,618 | $ | 143,062 | ||||||||||||||||||
Production revenue includes gain (loss) on residential mortgage loans held for sale and changes in the fair value of derivative contracts not designated as hedging instruments for accounting purposes related to residential mortgage loan commitments and forward sales contracts. Servicing revenue includes servicing fee income and late charges on loans serviced for others.
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Residential Mortgage Servicing
Mortgage servicing rights may be originated or purchased. Both originated and purchased mortgage servicing rights are initially recognized at fair value. The Company has elected to carry all mortgage servicing rights at fair value. Changes in the fair value are recognized in earnings as they occur. The unpaid principal balance of loans serviced for others is the primary driver of servicing revenue.
The following represents a summary of mortgage servicing rights (dollars in thousands):
| September 30, 2021 | December 31, 2020 | |||||||||||||
| Number of residential mortgage loans serviced for others | 97,425 | 106,201 | ||||||||||||
| Outstanding principal balance of residential mortgage loans serviced for others | $ | 14,907,736 | $ | 16,228,449 | ||||||||||
| Weighted average interest rate | 3.68 | % | 3.84 | % | ||||||||||
| Remaining term (in months) | 278 | 280 | ||||||||||||
The following represents activity in capitalized mortgage servicing rights (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Beginning Balance | $ | 117,629 | $ | 97,971 | $ | 101,172 | $ | 201,886 | ||||||||||||||||||
| Additions | 11,540 | 7,424 | 29,307 | 21,330 | ||||||||||||||||||||||
| Disposals | — | — | — | (10,801) | ||||||||||||||||||||||
| Change in fair value due to principal payments | (8,806) | (11,192) | (30,949) | (28,971) | ||||||||||||||||||||||
| Change in fair value due to market assumption changes | 12,945 | 3,441 | 33,778 | (85,800) | ||||||||||||||||||||||
| Ending Balance | $ | 133,308 | $ | 97,644 | $ | 133,308 | $ | 97,644 | ||||||||||||||||||
Changes in the fair value of mortgage servicing rights due to market assumption changes are included in Other operating revenue in the Consolidated Statements of Earnings. Changes in fair value due to principal payments are included in Mortgage banking costs.
Mortgage servicing rights are not traded in active markets. Fair value is determined by discounting the projected net cash flows. Significant market assumptions used to determine fair value based on significant unobservable inputs were as follows:
| September 30, 2021 | December 31, 2020 | |||||||||||||
| Discount rate – risk-free rate plus a market premium | 8.46% | 9.14% | ||||||||||||
| Prepayment rate - based upon loan interest rate, original term and loan type | 13.57% | 19.73% | ||||||||||||
| Loan servicing costs – annually per loan based upon loan type: | ||||||||||||||
| Performing loans | $69 - $85 | $69 - $94 | ||||||||||||
| Delinquent loans | $150 - $500 | $150 - $500 | ||||||||||||
| Loans in foreclosure | $1,000 - $4,000 | $1,000 - $4,000 | ||||||||||||
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life | 1.08% | 0.43% | ||||||||||||
Primary/secondary mortgage rate spread | 105 bps | 105 bps | ||||||||||||
Delinquency rate | 2.36% | 3.54% | ||||||||||||
Changes in primary residential mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated periodically for changes in market conditions and adjusted to better correlate with actual performance of BOK Financial’s servicing portfolio.
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(6) Commitments and Contingent Liabilities
Litigation Contingencies
On June 24, 2015, BOKF, NA received a complaint that an employee had colluded with a bond issuer and an individual in misusing revenues pledged to municipal bonds for which BOKF, NA served as trustee under the bond indenture. The Company conducted an investigation and concluded that employees in one of its Corporate Trust offices had, with respect to a single group of affiliated bond issuances, violated Company policies and procedures by waiving financial covenants, granting forbearances and accepting without disclosure to the bondholders, debt service payments from sources other than pledged revenues. The relationship manager was terminated. The Company reported the circumstances to, and cooperated with an investigation by, the Securities and Exchange Commission ("SEC"). On September 7, 2016, BOKF, NA agreed, and the SEC entered, a consent order finding that BOKF, NA had violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and requiring BOKF, NA to disgorge $1,067,721 of fees and pay a civil penalty of $600,000. BOKF, NA disgorged the fees and paid the penalty.
On August 26, 2016, BOKF, NA was sued in the United States District Court for New Jersey by two bondholders in a putative class action alleging BOKF, NA participated in the fraudulent sale of securities by the principals. The action remains stayed with no current deadlines pending. On September 14, 2016, BOKF, NA was sued in the District Court of Tulsa County, Oklahoma by 19 bondholders also alleging BOKF, NA participated in the fraudulent sale of securities by the principals. The Tulsa County District Court action is pending on BOKF, NA’s motion to dismiss the plaintiff's Third Amended Petition.
On December 28, 2015, in an action brought by the SEC, the New Jersey District Court entered a judgment against the principals involved in issuing the bonds, precluding them from denying the alleged violations of the federal securities laws and requiring the principals to pay all outstanding bond amounts. On January 8, 2020, the Court entered judgment against the principal individual and his wife for $36,805,051 in principal amount and $10,937,831 in pre-judgment interest. The SEC continues to aggressively pursue collection of the judgment. If the individual principal and his wife cannot pay the bonds, a bondholder loss could become probable. Management has been advised by counsel that BOKF, NA has valid defenses to claims of bondholders and that no loss to the Company is probable. No provision for losses has been made at this time. BOKF, NA estimates that, upon sale of all remaining collateral securing payment of the bonds, approximately $20 million will remain outstanding. A reasonable estimate cannot be made of the amount of any bondholder loss, though the amount of bondholder loss could be material to the Company in the event a loss to the Company becomes probable.
The previously reported action in Fulton, Georgia County District Court brought against BOKF, NA by a Wrongful Death Judgment Creditor has been dismissed by the Court and the time for appeal has expired.
On September 29, 2021, The United States Court of Appeals for the Fifth Circuit affirmed the dismissal of the previously reported putative class action in the United States District Court for the Northern District of Texas alleging an extended overdraft fee charged by BOKF, NA was interest. The dismissal by the United States District Court for New Mexico of a second putative class action in which the plaintiff made the same allegations as were made in the Texas action remains on appeal to the United States Court of Appeals for the Tenth Circuit. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.
On March 7, 2020, three former employees sued BOKF, NA, the Plan Committee of the BOKF, NA 401k Plan, and Cavanal Hill Investment Management, Inc., a subsidiary of BOKF, NA, alleging that the defendants included proprietary investment products as investment options in the BOKF, NA 401k Plan, whose fees were too high and performance too low, for the purpose of earning fees. The action is brought as a putative class action on behalf of all Plan Participants. The action is pending on the defendants' motion to dismiss. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.
In 2019, a limited liability partnership sued BOKF, NA in Colorado District Court alleging that the Bank breached various fiduciary duties as trustee of a trust that was a co-general partner of the partnership and claiming in excess of $60 million in damages. From 2000 to 2009, BOKF was serving as personal representative of the estate of the creator of the trust. In 2009, BOKF moved to close the probate of the estate in the Colorado Probate Court. The members of the partnership who now sue BOKF objected to the closing of the estate and made the same allegations in the 2009 probate hearing as they now make in the 2019 Colorado District Court action. In 2009, the Colorado Probate Court entered summary judgment against the beneficiaries and the estate was closed. In the 2019 action, the Colorado District Court denied BOKF’s motions for summary judgment and discovery has proceeded. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.
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In the ordinary course of business, BOK Financial and its subsidiaries are subject to legal actions and complaints. Management believes, based upon the opinion of counsel, that the actions and liability or loss, if any, resulting from the final outcomes of the proceedings, will not have a material effect on the Company’s financial condition, results of operations or cash flows.
Alternative Investment Commitments
The Company sponsors a private equity fund and invests in several tax credit entities and other funds as permitted by banking regulations. Consolidation of these investments is based on the variable interest model.
At September 30, 2021, the Company has $353 million in interests in various alternative investments generally consisting of unconsolidated limited partnership interests in entities for which investment return is in the form of low income housing tax credits or other investments in merchant banking activities. This investment balance also includes $122 million of unfunded commitments included in Other liabilities on the Consolidated Balance Sheets.
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(7) Shareholders' Equity
On November 2, 2021, the Company declared a quarterly cash dividend of $0.53 per common share payable on or about November 24, 2021 to shareholders of record as of November 15, 2021.
Dividends declared were $0.52 and $1.56 per share during the three and nine months ended September 30, 2021 and $0.51 and 1.53 per share during the three and nine months ended September 30, 2020.
Accumulated Other Comprehensive Income (Loss)
AOCI includes unrealized gains and losses on available for sale ("AFS") securities and non-credit related unrealized losses on AFS securities for which an other-than-temporary impairment has been recorded in earnings. Unrealized losses on employee benefit plans will be reclassified into income as pension plan costs are recognized over the remaining service period of plan participants. Gains and losses in AOCI are net of deferred income taxes.
A rollforward of the components of accumulated other comprehensive income (loss) is included as follows (in thousands):
| Unrealized Gain (Loss) on | ||||||||||||||||||||
| Available for Sale Securities | Employee Benefit Plans | Total | ||||||||||||||||||
| Balance, Dec. 31, 2019 | $ | 104,996 | $ | (73) | $ | 104,923 | ||||||||||||||
Net change in unrealized gain (loss) | 347,985 | — | 347,985 | |||||||||||||||||
Reclassification adjustments included in earnings: | ||||||||||||||||||||
Gain on available for sale securities, net | (5,571) | — | (5,571) | |||||||||||||||||
Other comprehensive income, before income taxes | 342,414 | — | 342,414 | |||||||||||||||||
| Federal and state income taxes | 82,167 | — | 82,167 | |||||||||||||||||
| Other comprehensive income, net of income taxes | 260,247 | — | 260,247 | |||||||||||||||||
| Balance, September 30, 2020 | $ | 365,243 | $ | (73) | $ | 365,170 | ||||||||||||||
| Balance, Dec. 31, 2020 | $ | 335,032 | $ | 836 | $ | 335,868 | ||||||||||||||
Net change in unrealized gain (loss) | (216,176) | — | (216,176) | |||||||||||||||||
Reclassification adjustments included in earnings: | ||||||||||||||||||||
Gain on available for sale securities, net | (3,152) | — | (3,152) | |||||||||||||||||
Other comprehensive income, before income taxes | (219,328) | — | (219,328) | |||||||||||||||||
| Federal and state income taxes | (52,632) | — | (52,632) | |||||||||||||||||
| Other comprehensive income (loss), net of income taxes | (166,696) | — | (166,696) | |||||||||||||||||
| Balance, September 30, 2021 | $ | 168,336 | $ | 836 | $ | 169,172 | ||||||||||||||
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(8) Earnings Per Share
| (In thousands, except share and per share amounts) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Net income attributable to BOK Financial Corp. shareholders | $ | 188,322 | $ | 154,034 | $ | 500,803 | $ | 280,806 | ||||||||||||||||||
| Less: Earnings allocated to participating securities | 1,351 | 938 | 3,458 | 1,678 | ||||||||||||||||||||||
Numerator for basic earnings per share – income available to common shareholders | 186,971 | 153,096 | 497,345 | 279,128 | ||||||||||||||||||||||
| Effect of reallocating undistributed earnings of participating securities | — | — | — | — | ||||||||||||||||||||||
Numerator for diluted earnings per share – income available to common shareholders | $ | 186,971 | $ | 153,096 | $ | 497,345 | $ | 279,128 | ||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Weighted average shares outstanding | 68,852,688 | 70,306,233 | 69,243,562 | 70,375,628 | ||||||||||||||||||||||
Less: Participating securities included in weighted average shares outstanding | 493,563 | 428,367 | 475,518 | 416,684 | ||||||||||||||||||||||
| Denominator for basic earnings per common share | 68,359,125 | 69,877,866 | 68,768,044 | 69,958,944 | ||||||||||||||||||||||
Dilutive effect of employee stock compensation plans1 | 1,746 | 1,424 | 2,619 | 3,109 | ||||||||||||||||||||||
| Denominator for diluted earnings per common share | 68,360,871 | 69,879,290 | 68,770,663 | 69,962,053 | ||||||||||||||||||||||
| Basic earnings per share | $ | 2.74 | $ | 2.19 | $ | 7.23 | $ | 3.99 | ||||||||||||||||||
| Diluted earnings per share | $ | 2.74 | $ | 2.19 | $ | 7.23 | $ | 3.99 | ||||||||||||||||||
1 Excludes employee stock options with exercise prices greater than current market price. | — | 19,227 | — | — | ||||||||||||||||||||||
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(9) Reportable Segments
Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2021 is as follows (in thousands):
| Commercial | Consumer | Wealth Management | Funds Management and Other | BOK Financial Consolidated | ||||||||||||||||||||||||||||
Net interest revenue from external sources | $ | 150,211 | $ | 16,967 | $ | 55,697 | $ | 57,352 | $ | 280,227 | ||||||||||||||||||||||
Net interest revenue (expense) from internal sources | (16,107) | 10,255 | (501) | 6,353 | — | |||||||||||||||||||||||||||
| Net interest revenue | 134,104 | 27,222 | 55,196 | 63,705 | 280,227 | |||||||||||||||||||||||||||
Provision for credit losses | 2,807 | 928 | (70) | (26,665) | (23,000) | |||||||||||||||||||||||||||
Net interest revenue after provision for credit losses | 131,297 | 26,294 | 55,266 | 90,370 | 303,227 | |||||||||||||||||||||||||||
| Other operating revenue | 92,511 | 44,401 | 97,888 | (4,968) | 229,832 | |||||||||||||||||||||||||||
| Other operating expense | 68,301 | 49,483 | 87,417 | 86,076 | 291,277 | |||||||||||||||||||||||||||
| Net direct contribution | 155,507 | 21,212 | 65,737 | (674) | 241,782 | |||||||||||||||||||||||||||
| Gain (loss) on financial instruments, net | 44 | (5,949) | — | 5,905 | — | |||||||||||||||||||||||||||
| Change in fair value of mortgage servicing rights | — | 12,945 | — | (12,945) | — | |||||||||||||||||||||||||||
| Gain (loss) on repossessed assets, net | (3,945) | — | — | 3,945 | — | |||||||||||||||||||||||||||
| Corporate expense allocations | 11,769 | 11,516 | 10,101 | (33,386) | — | |||||||||||||||||||||||||||
| Net income before taxes | 139,837 | 16,692 | 55,636 | 29,617 | 241,782 | |||||||||||||||||||||||||||
| Federal and state income taxes | 37,143 | 4,260 | 14,230 | (1,572) | 54,061 | |||||||||||||||||||||||||||
Net income | 102,694 | 12,432 | 41,406 | 31,189 | 187,721 | |||||||||||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | — | — | — | (601) | (601) | |||||||||||||||||||||||||||
Net income attributable to BOK Financial Corp. shareholders | $ | 102,694 | $ | 12,432 | $ | 41,406 | $ | 31,790 | $ | 188,322 | ||||||||||||||||||||||
| Average assets | $ | 28,474,182 | $ | 10,083,593 | $ | 19,109,700 | $ | (8,168,326) | $ | 49,499,149 | ||||||||||||||||||||||
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Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2021 is as follows (in thousands):
| Commercial | Consumer | Wealth Management | Funds Management and Other | BOK Financial Consolidated | ||||||||||||||||||||||||||||
| Net interest revenue from external sources | $ | 457,953 | $ | 51,205 | $ | 157,217 | $ | 174,581 | $ | 840,956 | ||||||||||||||||||||||
| Net interest revenue (expense) from internal sources | (62,941) | 21,936 | (1,375) | 42,380 | — | |||||||||||||||||||||||||||
| Net interest revenue | 395,012 | 73,141 | 155,842 | 216,961 | 840,956 | |||||||||||||||||||||||||||
Provision for credit losses | 33,061 | 2,489 | (153) | (118,397) | (83,000) | |||||||||||||||||||||||||||
Net interest revenue after provision for credit losses | 361,951 | 70,652 | 155,995 | 335,358 | 923,956 | |||||||||||||||||||||||||||
| Other operating revenue | 204,358 | 134,396 | 243,160 | 16,418 | 598,332 | |||||||||||||||||||||||||||
| Other operating expense | 206,630 | 157,558 | 245,411 | 268,614 | 878,213 | |||||||||||||||||||||||||||
| Net direct contribution | 359,679 | 47,490 | 153,744 | 83,162 | 644,075 | |||||||||||||||||||||||||||
| Gain (loss) on financial instruments, net | 111 | (18,427) | — | 18,316 | — | |||||||||||||||||||||||||||
| Change in fair value of mortgage servicing rights | — | 33,778 | — | (33,778) | — | |||||||||||||||||||||||||||
| Gain (loss) on repossessed assets, net | 12,355 | 41 | — | (12,396) | — | |||||||||||||||||||||||||||
| Corporate expense allocations | 37,015 | 34,590 | 30,330 | (101,935) | — | |||||||||||||||||||||||||||
| Net income before taxes | 335,130 | 28,292 | 123,414 | 157,239 | 644,075 | |||||||||||||||||||||||||||
| Federal and state income taxes | 90,130 | 7,214 | 31,565 | 16,030 | 144,939 | |||||||||||||||||||||||||||
Net income | 245,000 | 21,078 | 91,849 | 141,209 | 499,136 | |||||||||||||||||||||||||||
Net income (loss) attributable to non-controlling interests | — | — | — | (1,667) | (1,667) | |||||||||||||||||||||||||||
Net income attributable to BOK Financial Corp. shareholders | $ | 245,000 | $ | 21,078 | $ | 91,849 | $ | 142,876 | $ | 500,803 | ||||||||||||||||||||||
| Average assets | $ | 28,228,840 | $ | 9,976,742 | $ | 18,987,234 | $ | (7,193,554) | $ | 49,999,262 | ||||||||||||||||||||||
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Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2020 is as follows (in thousands):
| Commercial | Consumer | Wealth Management | Funds Management and Other | BOK Financial Consolidated | ||||||||||||||||||||||||||||
| Net interest revenue from external sources | $ | 173,248 | $ | 15,821 | $ | 34,098 | $ | 48,583 | $ | 271,750 | ||||||||||||||||||||||
| Net interest revenue (expense) from internal sources | (23,302) | 17,309 | (11,113) | 17,106 | — | |||||||||||||||||||||||||||
| Net interest revenue | 149,946 | 33,130 | 22,985 | 65,689 | 271,750 | |||||||||||||||||||||||||||
Provision for credit losses | 22,599 | 79 | (51) | (22,627) | — | |||||||||||||||||||||||||||
Net interest revenue after provision for credit losses | 127,347 | 33,051 | 23,036 | 88,316 | 271,750 | |||||||||||||||||||||||||||
| Other operating revenue | 52,021 | 67,808 | 111,152 | (1,043) | 229,938 | |||||||||||||||||||||||||||
| Other operating expense | 66,846 | 59,155 | 82,868 | 88,175 | 297,044 | |||||||||||||||||||||||||||
| Net direct contribution | 112,522 | 41,704 | 51,320 | (902) | 204,644 | |||||||||||||||||||||||||||
| Gain (loss) on financial instruments, net | 38 | 1,540 | — | (1,578) | — | |||||||||||||||||||||||||||
| Change in fair value of mortgage servicing rights | — | 3,441 | — | (3,441) | — | |||||||||||||||||||||||||||
| Gain (loss) on repossessed assets, net | (4,332) | 41 | — | 4,291 | — | |||||||||||||||||||||||||||
| Corporate expense allocations | 5,172 | 10,691 | 9,397 | (25,260) | — | |||||||||||||||||||||||||||
| Net income before taxes | 103,056 | 36,035 | 41,923 | 23,630 | 204,644 | |||||||||||||||||||||||||||
| Federal and state income taxes | 27,959 | 9,180 | 10,711 | 2,702 | 50,552 | |||||||||||||||||||||||||||
Net income | 75,097 | 26,855 | 31,212 | 20,928 | 154,092 | |||||||||||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | — | — | — | 58 | 58 | |||||||||||||||||||||||||||
| Net income attributable to BOK Financial Corp. shareholders | $ | 75,097 | $ | 26,855 | $ | 31,212 | $ | 20,870 | $ | 154,034 | ||||||||||||||||||||||
| Average assets | $ | 28,000,183 | $ | 9,898,112 | $ | 16,204,510 | $ | (5,171,050) | $ | 48,931,755 | ||||||||||||||||||||||
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Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2020 is as follows (in thousands):
| Commercial | Consumer | Wealth Management | Funds Management and Other1 | BOK Financial Consolidated | ||||||||||||||||||||||||||||
| Net interest revenue from external sources | $ | 549,464 | $ | 60,492 | $ | 82,823 | $ | 118,435 | $ | 811,214 | ||||||||||||||||||||||
| Net interest revenue (expense) from internal sources | (103,002) | 55,840 | (14,054) | 61,216 | — | |||||||||||||||||||||||||||
| Net interest revenue | 446,462 | 116,332 | 68,769 | 179,651 | 811,214 | |||||||||||||||||||||||||||
Provision for credit losses | 53,241 | 1,870 | (188) | 174,169 | 229,092 | |||||||||||||||||||||||||||
Net interest revenue after provision for credit losses | 393,221 | 114,462 | 68,957 | 5,482 | 582,122 | |||||||||||||||||||||||||||
| Other operating revenue | 138,139 | 190,062 | 315,707 | (376) | 643,532 | |||||||||||||||||||||||||||
| Other operating expense | 190,531 | 171,172 | 241,627 | 258,307 | 861,637 | |||||||||||||||||||||||||||
| Net direct contribution | 340,829 | 133,352 | 143,037 | (253,201) | 364,017 | |||||||||||||||||||||||||||
| Gain (loss) on financial instruments, net | 135 | 95,660 | 7 | (95,802) | — | |||||||||||||||||||||||||||
| Change in fair value of mortgage servicing rights | — | (85,800) | — | 85,800 | — | |||||||||||||||||||||||||||
| Gain (loss) on repossessed assets, net | (4,132) | 81 | — | 4,051 | — | |||||||||||||||||||||||||||
| Corporate expense allocations | 19,514 | 31,749 | 25,866 | (77,129) | — | |||||||||||||||||||||||||||
| Net income before taxes | 317,318 | 111,544 | 117,178 | (182,023) | 364,017 | |||||||||||||||||||||||||||
| Federal and state income taxes | 86,254 | 28,411 | 29,999 | (61,009) | 83,655 | |||||||||||||||||||||||||||
Net income | 231,064 | 83,133 | 87,179 | (121,014) | 280,362 | |||||||||||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | — | — | — | (444) | (444) | |||||||||||||||||||||||||||
Net income attributable to BOK Financial Corp. shareholders | $ | 231,064 | $ | 83,133 | $ | 87,179 | $ | (120,570) | $ | 280,806 | ||||||||||||||||||||||
| Average assets | $ | 26,759,150 | $ | 9,889,687 | $ | 14,887,947 | $ | (3,397,414) | $ | 48,139,370 | ||||||||||||||||||||||
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(10) Fees and Commissions Revenue
Fees and commissions revenue is generated through the sales of products, consisting primarily of financial instruments, and the performance of services for customers under contractual obligations. Revenue from providing services for customers is recognized at the time services are provided in an amount that reflects the consideration we expect to be entitled to for those services. Revenue is recognized based on the application of five steps:
•Identify the contract with a customer
•Identify the performance obligations in the contract
•Determine the transaction price
•Allocate the transaction price to the performance obligations in the contract
•Recognize revenue when (or as) the Company satisfies a performance obligation
For contracts with multiple performance obligations, individual performance obligations are accounted for separately if the customer can benefit from the good or service on its own or with other resources readily available to the customer and the promise to transfer goods and services to the customer is separately identifiable in the contract. The transaction price is allocated to the performance obligations based on relative standalone selling prices.
Revenue is recognized on a gross basis whenever we have primary responsibility and risk in providing the services or products to our customers and have discretion in establishing the price for the services or products. Revenue is recognized on a net basis whenever we act as an agent for products or services of others.
Brokerage and trading revenue includes revenues from trading, customer hedging, retail brokerage and investment banking. Trading revenue includes net realized and unrealized gains primarily related to sales of securities to institutional customers and related derivative contracts. Customer hedging revenue includes realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs including credit valuation adjustments, as necessary. We offer commodity, interest rate, foreign exchange and equity derivatives to our customers. These customer contracts are offset with contracts with selected counterparties and exchanges to minimize changes in market risk from changes in commodity prices, interest rates or foreign exchange rates. Retail brokerage revenue represents fees and commissions earned on sales of fixed income securities, annuities, mutual funds and other financial instruments to retail customers. Investment banking revenue includes fees earned upon completion of underwriting and financial advisory services. Investment banking revenue also includes fees earned in conjunction with loan syndications. Insurance brokerage revenues represents fees and commissions earned on placement of insurance products with carriers for property and casualty and health coverage.
Transaction card revenue includes merchant discount fees and electronic funds transfer network fees, net of interchange fees paid to card issuers and assessments paid to card networks. Merchant discount fees represent fees paid by customers for account management and electronic processing of card transactions. Merchant discount fees are recognized at the time the customer’s transactions are processed or other services are performed. The Company also maintains the TransFund electronic funds transfer network for the benefit of its members, which includes the Bank. Electronic funds transfer fees are recognized as electronic transactions processed on behalf of its members.
Fiduciary and asset management revenue includes fees from asset management, custody, recordkeeping, investment advisory and administration services. Revenue is recognized on an accrual basis at the time the services are performed and may be based on either the fair value of the account or the service provided.
Deposit service charges and fees include commercial account service charges, overdraft fees, check card fee revenue and automated service charge and other deposit service fees. Fees are recognized at least quarterly in accordance with published deposit account agreements and disclosure statements for retail accounts or contractual agreements for commercial accounts. Item charges for overdraft or non-sufficient funds items are recognized as items are presented for payment. Account balance charges and activity fees are accrued monthly and collected in arrears. Commercial account activity fees may be offset by an earnings credit based on account balances. Check card fees represent interchange fees paid by a merchant bank for transactions processed from cards issued by the Company. Check card fees are recognized when transactions are processed.
Mortgage banking revenue includes revenues recognized in conjunction with the origination, marketing and servicing of conventional and government-sponsored residential mortgage loans. Mortgage production revenue includes net realized gains (losses) on sales of residential mortgage loans in the secondary market and the net change in unrealized gains (losses) on residential mortgage loans held for sale. Mortgage production revenue also includes changes in the fair value of derivative contracts not designated as hedging instruments related to residential mortgage loan commitments and forward sales contracts. Mortgage servicing revenue includes servicing fee income and late charges on loans serviced for others.
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Fees and commissions revenue by reportable segment and primary service line is as follows for the three months ended September 30, 2021.
| Commercial | Consumer | Wealth Management | Funds Management & Other | Consolidated | Out of Scope1 | In Scope2 | |||||||||||||||||||||||||||||||||||
| Trading revenue | $ | — | $ | — | $ | 24,067 | $ | 1 | $ | 24,068 | $ | 24,068 | $ | — | |||||||||||||||||||||||||||
Customer hedging revenue | 6,720 | — | 26 | 184 | 6,930 | 6,930 | — | ||||||||||||||||||||||||||||||||||
Retail brokerage revenue | — | — | 4,887 | — | 4,887 | — | 4,887 | ||||||||||||||||||||||||||||||||||
Insurance brokerage revenue | — | — | 3,061 | — | 3,061 | — | 3,061 | ||||||||||||||||||||||||||||||||||
Investment banking revenue | 4,386 | — | 5,341 | (743) | 8,984 | 3,045 | 5,939 | ||||||||||||||||||||||||||||||||||
Brokerage and trading revenue | 11,106 | — | 37,382 | (558) | 47,930 | 34,043 | 13,887 | ||||||||||||||||||||||||||||||||||
| TransFund EFT network revenue | 19,280 | 920 | (18) | 1 | 20,183 | — | 20,183 | ||||||||||||||||||||||||||||||||||
| Merchant services revenue | 3,051 | 12 | — | — | 3,063 | — | 3,063 | ||||||||||||||||||||||||||||||||||
| Corporate card revenue | 1,260 | — | 45 | 81 | 1,386 | — | 1,386 | ||||||||||||||||||||||||||||||||||
| Transaction card revenue | 23,591 | 932 | 27 | 82 | 24,632 | — | 24,632 | ||||||||||||||||||||||||||||||||||
| Personal trust revenue | — | — | 24,624 | — | 24,624 | — | 24,624 | ||||||||||||||||||||||||||||||||||
| Corporate trust revenue | — | — | 3,814 | — | 3,814 | — | 3,814 | ||||||||||||||||||||||||||||||||||
Institutional trust & retirement plan services revenue | — | — | 13,040 | — | 13,040 | — | 13,040 | ||||||||||||||||||||||||||||||||||
Investment management services and other revenue | — | — | 3,815 | (45) | 3,770 | — | 3,770 | ||||||||||||||||||||||||||||||||||
Fiduciary and asset management revenue | — | — | 45,293 | (45) | 45,248 | — | 45,248 | ||||||||||||||||||||||||||||||||||
Commercial account service charge revenue | 12,795 | 463 | 621 | (2) | 13,877 | — | 13,877 | ||||||||||||||||||||||||||||||||||
| Overdraft fee revenue | 29 | 6,098 | 17 | 1 | 6,145 | — | 6,145 | ||||||||||||||||||||||||||||||||||
Check card revenue | — | 6,293 | — | 1 | 6,294 | — | 6,294 | ||||||||||||||||||||||||||||||||||
Automated service charge and other deposit fee revenue | 24 | 1,068 | 21 | — | 1,113 | — | 1,113 | ||||||||||||||||||||||||||||||||||
Deposit service charges and fees | 12,848 | 13,922 | 659 | — | 27,429 | — | 27,429 | ||||||||||||||||||||||||||||||||||
| Mortgage production revenue | — | 15,403 | — | — | 15,403 | 15,403 | — | ||||||||||||||||||||||||||||||||||
| Mortgage servicing revenue | — | 11,347 | — | (464) | 10,883 | 10,883 | — | ||||||||||||||||||||||||||||||||||
| Mortgage banking revenue | — | 26,750 | — | (464) | 26,286 | 26,286 | — | ||||||||||||||||||||||||||||||||||
| Other revenue | 8,907 | 2,801 | 14,605 | (7,417) | 18,896 | 13,092 | 5,804 | ||||||||||||||||||||||||||||||||||
Total fees and commissions revenue | $ | 56,452 | $ | 44,405 | $ | 97,966 | $ | (8,402) | $ | 190,421 | $ | 73,421 | $ | 117,000 | |||||||||||||||||||||||||||
1 Out of scope revenue generally relates to financial instruments or contractual rights and obligations within the scope of other applicable accounting guidance.
2 In scope revenue represents revenue subject to FASB ASC Topic 606, Revenue from Contracts with Customers.
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Fees and commissions revenue by reportable segment and primary service line is as follows for the nine months ended September 30, 2021.
| Commercial | Consumer | Wealth Management | Funds Management & Other | Consolidated | Out of Scope1 | In Scope2 | |||||||||||||||||||||||||||||||||||
| Trading revenue | $ | — | $ | — | $ | 40,785 | $ | — | $ | 40,785 | $ | 40,785 | $ | — | |||||||||||||||||||||||||||
Customer hedging revenue | 16,620 | — | 172 | (5,465) | 11,327 | 11,327 | — | ||||||||||||||||||||||||||||||||||
Retail brokerage revenue | — | — | 14,156 | — | 14,156 | — | 14,156 | ||||||||||||||||||||||||||||||||||
Insurance brokerage revenue | — | — | 8,973 | — | 8,973 | — | 8,973 | ||||||||||||||||||||||||||||||||||
Investment banking revenue | 10,579 | — | 13,735 | (1,435) | 22,879 | 7,815 | 15,064 | ||||||||||||||||||||||||||||||||||
Brokerage and trading revenue | 27,199 | — | 77,821 | (6,900) | 98,120 | 59,927 | 38,193 | ||||||||||||||||||||||||||||||||||
| TransFund EFT network revenue | 57,097 | 2,678 | (48) | 4 | 59,731 | — | 59,731 | ||||||||||||||||||||||||||||||||||
| Merchant services revenue | 8,751 | 45 | — | — | 8,796 | — | 8,796 | ||||||||||||||||||||||||||||||||||
| Corporate card revenue | 3,127 | — | 110 | 221 | 3,458 | — | 3,458 | ||||||||||||||||||||||||||||||||||
| Transaction card revenue | 68,975 | 2,723 | 62 | 225 | 71,985 | — | 71,985 | ||||||||||||||||||||||||||||||||||
| Personal trust revenue | — | — | 71,757 | (1) | 71,756 | — | 71,756 | ||||||||||||||||||||||||||||||||||
| Corporate trust revenue | — | — | 11,038 | — | 11,038 | — | 11,038 | ||||||||||||||||||||||||||||||||||
Institutional trust & retirement plan services revenue | — | — | 38,478 | — | 38,478 | — | 38,478 | ||||||||||||||||||||||||||||||||||
Investment management services and other revenue | — | — | 10,261 | (131) | 10,130 | — | 10,130 | ||||||||||||||||||||||||||||||||||
| Fiduciary and asset management revenue | — | — | 131,534 | (132) | 131,402 | — | 131,402 | ||||||||||||||||||||||||||||||||||
Commercial account service charge revenue | 37,493 | 1,366 | 1,809 | (2) | 40,666 | — | 40,666 | ||||||||||||||||||||||||||||||||||
| Overdraft fee revenue | 77 | 15,649 | 53 | 3 | 15,782 | — | 15,782 | ||||||||||||||||||||||||||||||||||
Check card revenue | — | 17,650 | — | — | 17,650 | — | 17,650 | ||||||||||||||||||||||||||||||||||
Automated service charge and other deposit fee revenue | 75 | 3,260 | 64 | 2 | 3,401 | — | 3,401 | ||||||||||||||||||||||||||||||||||
Deposit service charges and fees | 37,645 | 37,925 | 1,926 | 3 | 77,499 | — | 77,499 | ||||||||||||||||||||||||||||||||||
| Mortgage production revenue | — | 50,694 | — | — | 50,694 | 50,694 | — | ||||||||||||||||||||||||||||||||||
| Mortgage servicing revenue | — | 35,292 | — | (1,368) | 33,924 | 33,924 | — | ||||||||||||||||||||||||||||||||||
| Mortgage banking revenue | — | 85,986 | — | (1,368) | 84,618 | 84,618 | — | ||||||||||||||||||||||||||||||||||
| Other revenue | 35,848 | 7,785 | 31,148 | (16,417) | 58,364 | 46,276 | 12,088 | ||||||||||||||||||||||||||||||||||
Total fees and commissions revenue | $ | 169,667 | $ | 134,419 | $ | 242,491 | $ | (24,589) | $ | 521,988 | $ | 190,821 | $ | 331,167 | |||||||||||||||||||||||||||
1 Out of scope revenue generally relates to financial instruments or contractual rights and obligations within the scope of other applicable accounting guidance.
2 In scope revenue represents revenue subject to FASB ASC Topic 606, Revenue from Contracts with Customers.
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Fees and commissions revenue by reportable segment and primary service line is as follows for the three months ended September 30, 2020.
| Commercial | Consumer | Wealth Management | Funds Management & Other | Consolidated | Out of Scope1 | In Scope2 | |||||||||||||||||||||||||||||||||||
| Trading revenue | $ | — | $ | — | $ | 46,890 | $ | (1) | $ | 46,889 | $ | 46,889 | $ | — | |||||||||||||||||||||||||||
Customer hedging revenue | 7,999 | — | 123 | 520 | 8,642 | 8,642 | — | ||||||||||||||||||||||||||||||||||
Retail brokerage revenue | — | — | 3,787 | — | 3,787 | — | 3,787 | ||||||||||||||||||||||||||||||||||
Insurance brokerage revenue | — | — | 3,124 | — | 3,124 | — | 3,124 | ||||||||||||||||||||||||||||||||||
Investment banking revenue | 2,314 | — | 4,770 | — | 7,084 | 2,280 | 4,804 | ||||||||||||||||||||||||||||||||||
Brokerage and trading revenue | 10,313 | — | 58,694 | 519 | 69,526 | 57,811 | 11,715 | ||||||||||||||||||||||||||||||||||
| TransFund EFT network revenue | 18,840 | 913 | (14) | 2 | 19,741 | — | 19,741 | ||||||||||||||||||||||||||||||||||
| Merchant services revenue | 3,019 | 19 | — | — | 3,038 | — | 3,038 | ||||||||||||||||||||||||||||||||||
| Corporate card revenue | 583 | — | 21 | 82 | 686 | — | 686 | ||||||||||||||||||||||||||||||||||
| Transaction card revenue | 22,442 | 932 | 7 | 84 | 23,465 | — | 23,465 | ||||||||||||||||||||||||||||||||||
| Personal trust revenue | — | — | 20,130 | — | 20,130 | — | 20,130 | ||||||||||||||||||||||||||||||||||
| Corporate trust revenue | — | — | 4,613 | — | 4,613 | — | 4,613 | ||||||||||||||||||||||||||||||||||
Institutional trust & retirement plan services revenue | — | — | 11,030 | — | 11,030 | — | 11,030 | ||||||||||||||||||||||||||||||||||
Investment management services and other revenue | — | — | 4,198 | (40) | 4,158 | — | 4,158 | ||||||||||||||||||||||||||||||||||
Fiduciary and asset management revenue | — | — | 39,971 | (40) | 39,931 | — | 39,931 | ||||||||||||||||||||||||||||||||||
Commercial account service charge revenue | 11,209 | 419 | 572 | — | 12,200 | — | 12,200 | ||||||||||||||||||||||||||||||||||
| Overdraft fee revenue | 32 | 5,411 | 16 | 4 | 5,463 | — | 5,463 | ||||||||||||||||||||||||||||||||||
Check card revenue | — | 5,565 | — | — | 5,565 | — | 5,565 | ||||||||||||||||||||||||||||||||||
Automated service charge and other deposit fee revenue | 27 | 1,007 | 24 | — | 1,058 | — | 1,058 | ||||||||||||||||||||||||||||||||||
Deposit service charges and fees | 11,268 | 12,402 | 612 | 4 | 24,286 | — | 24,286 | ||||||||||||||||||||||||||||||||||
| Mortgage production revenue | — | 38,431 | — | — | 38,431 | 38,431 | — | ||||||||||||||||||||||||||||||||||
| Mortgage servicing revenue | — | 13,952 | — | (424) | 13,528 | 13,528 | — | ||||||||||||||||||||||||||||||||||
| Mortgage banking revenue | — | 52,383 | — | (424) | 51,959 | 51,959 | — | ||||||||||||||||||||||||||||||||||
| Other revenue | 6,062 | 2,257 | 12,371 | (6,992) | 13,698 | 10,427 | 3,271 | ||||||||||||||||||||||||||||||||||
Total fees and commissions revenue | $ | 50,085 | $ | 67,974 | $ | 111,655 | $ | (6,849) | $ | 222,865 | $ | 120,197 | $ | 102,668 | |||||||||||||||||||||||||||
1 Out of scope revenue generally relates to financial instruments or contractual rights and obligations within the scope of other applicable accounting guidance.
2 In scope revenue represents revenue subject to FASB ASC Topic 606, Revenue from Contracts with Customers.
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Fees and commissions revenue by reportable segment and primary service line is as follows for the nine months ended September 30, 2020.
| Commercial | Consumer | Wealth Management | Funds Management & Other3 | Consolidated | Out of Scope1 | In Scope2 | |||||||||||||||||||||||||||||||||||
| Trading revenue | $ | — | $ | — | $ | 125,189 | $ | — | $ | 125,189 | $ | 125,189 | $ | — | |||||||||||||||||||||||||||
Customer hedging revenue | 17,417 | — | 321 | 368 | 18,106 | 18,106 | — | ||||||||||||||||||||||||||||||||||
Retail brokerage revenue | — | — | 11,524 | — | 11,524 | — | 11,524 | ||||||||||||||||||||||||||||||||||
Insurance brokerage revenue | — | — | 10,066 | — | 10,066 | — | 10,066 | ||||||||||||||||||||||||||||||||||
Investment banking revenue | 5,325 | — | 12,117 | — | 17,442 | 4,959 | 12,483 | ||||||||||||||||||||||||||||||||||
Brokerage and trading revenue | 22,742 | — | 159,217 | 368 | 182,327 | 148,254 | 34,073 | ||||||||||||||||||||||||||||||||||
| TransFund EFT network revenue | 56,699 | 2,300 | (42) | 4 | 58,961 | — | 58,961 | ||||||||||||||||||||||||||||||||||
| Merchant services revenue | 7,554 | 46 | — | — | 7,600 | — | 7,600 | ||||||||||||||||||||||||||||||||||
| Corporate card revenue | 1,588 | — | 55 | 82 | 1,725 | — | 1,725 | ||||||||||||||||||||||||||||||||||
| Transaction card revenue | 65,841 | 2,346 | 13 | 86 | 68,286 | — | 68,286 | ||||||||||||||||||||||||||||||||||
| Personal trust revenue | — | — | 62,460 | — | 62,460 | — | 62,460 | ||||||||||||||||||||||||||||||||||
| Corporate trust revenue | — | — | 15,579 | — | 15,579 | — | 15,579 | ||||||||||||||||||||||||||||||||||
Institutional trust & retirement plan services revenue | — | — | 33,510 | — | 33,510 | — | 33,510 | ||||||||||||||||||||||||||||||||||
Investment management services and other revenue | — | — | 14,220 | (123) | 14,097 | — | 14,097 | ||||||||||||||||||||||||||||||||||
Fiduciary and asset management revenue | — | — | 125,769 | (123) | 125,646 | — | 125,646 | ||||||||||||||||||||||||||||||||||
Commercial account service charge revenue | 33,317 | 1,218 | 1,715 | — | 36,250 | — | 36,250 | ||||||||||||||||||||||||||||||||||
| Overdraft fee revenue | 101 | 16,223 | 54 | 7 | 16,385 | — | 16,385 | ||||||||||||||||||||||||||||||||||
Check card revenue | — | 15,916 | — | — | 15,916 | — | 15,916 | ||||||||||||||||||||||||||||||||||
Automated service charge and other deposit fee revenue | 285 | 3,572 | 54 | — | 3,911 | — | 3,911 | ||||||||||||||||||||||||||||||||||
Deposit service charges and fees | 33,703 | 36,929 | 1,823 | 7 | 72,462 | — | 72,462 | ||||||||||||||||||||||||||||||||||
| Mortgage production revenue | — | 99,186 | — | — | 99,186 | 99,186 | — | ||||||||||||||||||||||||||||||||||
| Mortgage servicing revenue | — | 45,158 | — | (1,282) | 43,876 | 43,876 | — | ||||||||||||||||||||||||||||||||||
| Mortgage banking revenue | — | 144,344 | — | (1,282) | 143,062 | 143,062 | — | ||||||||||||||||||||||||||||||||||
| Other revenue | 15,773 | 6,609 | 29,471 | (14,367) | 37,486 | 27,805 | 9,681 | ||||||||||||||||||||||||||||||||||
Total fees and commissions revenue | $ | 138,059 | $ | 190,228 | $ | 316,293 | $ | (15,311) | $ | 629,269 | $ | 319,121 | $ | 310,148 | |||||||||||||||||||||||||||
1 Out of scope revenue generally relates to financial instruments or contractual rights and obligations within the scope of other applicable accounting guidance.
2 In scope revenue represents revenue subject to FASB ASC Topic 606, Revenue from Contracts with Customers.
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(11) Fair Value Measurements
Fair value is defined by applicable accounting guidance as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market for the given asset or liability at the measurement date based on market conditions at that date. An orderly transaction assumes exposure to the market for a customary period for marketing activities prior to the measurement date and not a forced liquidation or distressed sale. Certain assets and liabilities are recorded in the Company’s financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis.
For some assets and liabilities, observable market transactions and market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. A hierarchy for fair value has been established which categorizes into three levels the inputs to valuation techniques used to measure fair value. The three levels are as follows:
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) - Fair value is based on unadjusted quoted prices in active markets for identical assets or liabilities.
Significant Other Observable Inputs (Level 2) - Fair value is based on significant other observable inputs which are generally determined based on a single price for each financial instrument provided to us by an applicable third-party pricing service and is based on one or more of the following:
•Quoted prices for similar, but not identical, assets or liabilities in active markets;
•Quoted prices for identical or similar assets or liabilities in inactive markets;
•Inputs other than quoted prices that are observable, such as interest rate and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates;
•Other inputs derived from or corroborated by observable market inputs.
Significant Unobservable Inputs (Level 3) - Fair value is based upon model-based valuation techniques for which at least one significant assumption is not observable in the market.
Transfers between levels are recognized as of the end of the reporting period. There were no transfers in or out of quoted prices in active markets for identical instruments to significant other observable inputs or significant unobservable inputs during the nine months ended September 30, 2021 and 2020, respectively. Transfers between significant other observable inputs and significant unobservable inputs during the nine months ended September 30, 2021 and 2020 are included in the summary of changes in recurring fair values measured using unobservable inputs.
The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. Management has evaluated the methodologies employed by the third-party pricing services by comparing the price provided by the pricing service with other sources, including brokers' quotes, sales or purchases of similar instruments and discounted cash flows to establish a basis for reliance on the pricing service values. Significant differences between the pricing service provided value and other sources are discussed with the pricing service to understand the basis for their values. Based on all observable inputs, management may adjust prices obtained from third-party pricing services to more appropriately reflect the prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market. No significant adjustments were made to prices provided by third-party pricing services at September 30, 2021 or December 31, 2020.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value of financial assets and liabilities measured on a recurring basis was as follows as of September 30, 2021 (in thousands):
| Total | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Trading securities: | ||||||||||||||||||||||||||
| U.S. government securities | $ | 8,863 | $ | 4,999 | $ | 3,864 | $ | — | ||||||||||||||||||
| Residential agency mortgage-backed securities | 5,469,676 | — | 5,469,676 | — | ||||||||||||||||||||||
| Municipal securities | 35,894 | — | 35,894 | — | ||||||||||||||||||||||
| Other trading securities | 39,607 | — | 39,607 | — | ||||||||||||||||||||||
| Total trading securities | 5,554,040 | 4,999 | 5,549,041 | — | ||||||||||||||||||||||
| Available for sale securities: | ||||||||||||||||||||||||||
| U.S. Treasury | 502 | 502 | — | — | ||||||||||||||||||||||
| Municipal securities | 461,619 | — | 461,619 | — | ||||||||||||||||||||||
| Residential agency mortgage-backed securities | 8,168,025 | — | 8,168,025 | — | ||||||||||||||||||||||
| Residential non-agency mortgage-backed securities | 26,072 | — | 26,072 | — | ||||||||||||||||||||||
Commercial agency mortgage-backed securities | 4,685,423 | — | 4,685,423 | — | ||||||||||||||||||||||
| Other debt securities | 472 | — | — | 472 | ||||||||||||||||||||||
| Total available for sale securities | 13,342,113 | 502 | 13,341,139 | 472 | ||||||||||||||||||||||
| Fair value option securities – Residential agency mortgage-backed securities | 51,019 | — | 51,019 | — | ||||||||||||||||||||||
Residential mortgage loans held for sale1 | 176,813 | — | 170,338 | 6,475 | ||||||||||||||||||||||
Mortgage servicing rights2 | 133,308 | — | — | 133,308 | ||||||||||||||||||||||
Derivative contracts, net of cash collateral3 | 1,901,136 | 1,109 | 1,900,027 | — | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
Derivative contracts, net of cash collateral3 | 739,641 | 233,266 | 506,375 | — | ||||||||||||||||||||||
1Residential mortgage loans held for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) consist of residential mortgage loans intended for sale to U.S. government agencies that fail to meet conforming standards and are valued at 95.57% of the unpaid principal balance.
2A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 5, Mortgage Banking Activities.
3See Note 3 for detail of fair value of derivative contracts by contract type. Fair values based on quoted prices in active markets for identical instruments (Level 1) are primarily exchange-traded derivative contracts, net of cash margin.
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The fair value of financial assets and liabilities measured on a recurring basis was as follows as of December 31, 2020 (in thousands):
| Total | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Trading securities: | ||||||||||||||||||||||||||
| U.S. government securities | $ | 9,183 | $ | 4,999 | $ | 4,184 | $ | — | ||||||||||||||||||
| Residential agency mortgage-backed securities | 4,669,148 | — | 4,669,148 | — | ||||||||||||||||||||||
| Municipal securities | 19,172 | — | 19,172 | — | ||||||||||||||||||||||
| Other trading securities | 10,472 | — | 10,472 | — | ||||||||||||||||||||||
| Total trading securities | 4,707,975 | 4,999 | 4,702,976 | — | ||||||||||||||||||||||
| Available for sale securities: | ||||||||||||||||||||||||||
| U.S. Treasury | 508 | 508 | — | — | ||||||||||||||||||||||
| Municipal securities | 167,979 | — | 167,979 | — | ||||||||||||||||||||||
| Residential agency mortgage-backed securities | 9,340,471 | — | 9,340,471 | — | ||||||||||||||||||||||
| Residential non-agency mortgage-backed securities | 32,770 | — | 32,770 | — | ||||||||||||||||||||||
Commercial agency mortgage-backed securities | 3,508,465 | — | 3,508,465 | — | ||||||||||||||||||||||
| Other debt securities | 472 | — | — | 472 | ||||||||||||||||||||||
| Total available for sale securities | 13,050,665 | 508 | 13,049,685 | 472 | ||||||||||||||||||||||
| Fair value option securities — Residential agency mortgage-backed securities | 114,982 | — | 114,982 | — | ||||||||||||||||||||||
Residential mortgage loans held for sale1 | 252,316 | — | 245,299 | 7,017 | ||||||||||||||||||||||
Mortgage servicing rights2 | 101,172 | — | — | 101,172 | ||||||||||||||||||||||
Derivative contracts, net of cash collateral3 | 810,688 | 10,780 | 799,908 | — | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
Derivative contracts, net of cash collateral3 | 405,779 | — | 405,779 | — | ||||||||||||||||||||||
1Residential mortgage loans held for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) consist of residential mortgage loans intended for sale to U.S. government agencies that fail to meet conforming standards and are valued at 94.57% of the unpaid principal balance.
2A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 5, Mortgage Banking Activities.
3See Note 3 for detail of fair value of derivative contracts by contract type. Fair values based on quoted prices in active markets for identical instruments (Level 1) are primarily exchange-traded derivative contracts, net of cash margin.
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Following is a description of the Company's valuation methodologies used for assets and liabilities measured on a recurring basis:
Securities
The fair values of trading, available for sale and fair value option securities are based on quoted prices for identical instruments in active markets, when available. If quoted prices for identical instruments are not available, fair values are based on significant other observable inputs such as quoted prices of comparable instruments or interest rates and credit spreads, yield curves, volatilities, prepayment speeds and loss severities. The Company has elected to carry all residential mortgage-backed securities guaranteed by U.S. government agencies held as economic hedges against changes in the fair value of mortgage servicing rights at fair value with changes in the fair value recognized in earnings.
The fair value of certain available for sale municipal and other debt securities may be based on significant unobservable inputs. These significant unobservable inputs include limited observed trades, projected cash flows, current credit rating of the issuers and, when applicable, the insurers of the debt and observed trades of similar debt. Discount rates are primarily based on references to interest rate spreads on comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies adjusted for a lack of trading volume. Significant unobservable inputs are developed by investment securities professionals involved in the active trading of similar securities. A summary of significant inputs used to value these securities follows. A management committee composed of senior members from the Company's Capital Markets, Risk Management and Finance departments assesses the appropriateness of these inputs quarterly.
Derivatives
All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, commodity and foreign exchange contracts are based on valuations provided either by third-party dealers in the contracts, quotes provided by independent pricing services, or a third-party provided pricing model that uses significant other observable market inputs.
Credit risk is considered in determining the fair value of derivative instruments. Management determines fair value adjustments based on various risk factors including but not limited to current fair value, probability of default and loss given default.
We also consider our own credit risk in determining the fair value of derivative contracts. Changes in our credit rating would affect the fair value of our derivative liabilities. In the event of a credit downgrade, the fair value of our derivative liabilities would increase.
Residential Mortgage Loans Held for Sale
Residential mortgage loans held for sale are carried on the balance sheet at fair value. The Company has elected to carry all residential mortgage loans originated for sale at fair value. Changes in the fair value of these financial instruments are recognized in earnings. The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments and forward sales contracts. The fair value of mortgage loans that were unable to be sold to U.S. government agencies were determined using quoted prices of loans that are sold in securitization transactions with a liquidity discount applied.
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Fair Value of Assets and Liabilities Measured on a Non-Recurring Basis
Assets measured at fair value on a non-recurring basis include collateral for certain nonaccruing loans and real property and other assets acquired to satisfy loans, which are based primarily on comparisons to completed sales of similar assets.
The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at September 30, 2021 for which the fair value was adjusted during the nine months ended September 30, 2021:
| Fair Value Adjustments for the | |||||||||||||||||||||||||||||||||||||||||
| Carrying Value at September 30, 2021 | Three Months Ended Sept. 30, 2021 Recognized in: | Nine Months Ended Sept. 30, 2021 Recognized in: | |||||||||||||||||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Instruments | Significant Other Observable Inputs | Significant Unobservable Inputs | Gross charge-offs against allowance for loan losses | Other gains (losses), net | Gross charge-offs against allowance for loan losses | Other gains (losses), net | |||||||||||||||||||||||||||||||||||
| Nonaccruing loans | $ | — | $ | 63 | $ | 12,538 | $ | 6,929 | $ | — | $ | 17,466 | $ | — | |||||||||||||||||||||||||||
Real estate and other repossessed assets | — | 1,706 | — | — | — | — | (150) | ||||||||||||||||||||||||||||||||||
The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at September 30, 2020 for which the fair value was adjusted during the nine months ended September 30, 2020:
| Fair Value Adjustments for the | |||||||||||||||||||||||||||||||||||||||||
| Carrying Value at September 30, 2020 | Three Months Ended Sept. 30, 2020 Recognized in: | Nine Months Ended Sept. 30, 2020 Recognized in: | |||||||||||||||||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Instruments | Significant Other Observable Inputs | Significant Unobservable Inputs | Gross charge-offs against allowance for loan losses | Other gains (losses), net | Gross charge-offs against allowance for loan losses | Other gains (losses), net | |||||||||||||||||||||||||||||||||||
| Nonaccruing loans | $ | — | $ | 396 | $ | 13,001 | $ | 6,371 | $ | — | $ | 28,624 | $ | — | |||||||||||||||||||||||||||
Real estate and other repossessed assets | — | 16,828 | 2,993 | — | 4,370 | — | 4,452 | ||||||||||||||||||||||||||||||||||
The fair value of collateral-dependent nonaccruing loans secured by real estate and real estate and other repossessed assets and the related fair value adjustments are generally based on unadjusted third-party appraisals. Our appraisal review policies require appraised values to be supported by observed inputs derived principally from or corroborated by observable market data. Appraisals that are not based on observable inputs or that require significant adjustments or fair value measurements that are not based on third-party appraisals are considered to be based on significant unobservable inputs. Non-recurring fair value measurements of collateral-dependent nonaccruing loans and real estate and other repossessed assets based on significant unobservable inputs are generally due to estimates of current fair values between appraisal dates. Significant unobservable inputs include listing prices for the same or comparable assets, uncorroborated expert opinions or management's knowledge of the collateral or industry. Non-recurring fair value measurements of collateral dependent loans secured by mineral rights are generally determined by our internal staff of engineers on projected cash flows under current market conditions and are based on significant unobservable inputs. Projected cash flows are discounted according to risk characteristics of the underlying oil and gas properties. Assets are evaluated to demonstrate with reasonable certainty that crude oil, natural gas and natural gas liquids can be recovered from known oil and gas reservoirs under existing economic and operating conditions at current prices with existing conventional equipment, operating methods and costs. Significant unobservable inputs are developed by asset management and workout professionals and approved by senior Credit Administration executives.
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A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2021 follows (in thousands):
| Fair Value | Valuation Technique(s) | Unobservable Input | Range (Weighted Average) | |||||||||||||||||||||||
| Nonaccruing loans | $ | 12,538 | Discounted cash flows | Management knowledge of industry and non-real estate collateral including but not limited to recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs | 1% - 97% (23%)1 | |||||||||||||||||||||
1 Represents fair value as a percentage of the unpaid principal balance.
A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2020 follows (in thousands):
| Fair Value | Valuation Technique(s) | Unobservable Input | Range (Weighted Average) | |||||||||||||||||||||||
| Nonaccruing loans | $ | 13,001 | Discounted cash flows | Management knowledge of industry and non-real estate collateral including but not limited to recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs | —% - 73% (18%)1 | |||||||||||||||||||||
| Real estate and other repossessed assets | 2,993 | Discounted cash flows | Management knowledge of industry and non-real estate collateral including but not limited to recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs | N/A | ||||||||||||||||||||||
1 Represents fair value as a percentage of the unpaid principal balance.
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Fair Value of Financial Instruments
The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of September 30, 2021 (dollars in thousands):
| Carrying Value | Estimated Fair Value | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
| Cash and due from banks | $ | 729,285 | $ | 729,285 | $ | 729,285 | $ | — | $ | — | ||||||||||||||||||||||
| Interest-bearing cash and cash equivalents | 1,162,477 | 1,162,477 | 1,162,477 | — | — | |||||||||||||||||||||||||||
| Trading securities: | ||||||||||||||||||||||||||||||||
| U.S. government securities | 8,863 | 8,863 | 4,999 | 3,864 | — | |||||||||||||||||||||||||||
| Residential agency mortgage-backed securities | 5,469,676 | 5,469,676 | — | 5,469,676 | — | |||||||||||||||||||||||||||
| Municipal securities | 35,894 | 35,894 | — | 35,894 | — | |||||||||||||||||||||||||||
| Other trading securities | 39,607 | 39,607 | — | 39,607 | — | |||||||||||||||||||||||||||
| Total trading securities | 5,554,040 | 5,554,040 | 4,999 | 5,549,041 | — | |||||||||||||||||||||||||||
| Investment securities: | ||||||||||||||||||||||||||||||||
| Municipal securities | 207,393 | 229,149 | — | 61,682 | 167,467 | |||||||||||||||||||||||||||
| Residential agency mortgage-backed securities | 7,412 | 8,084 | — | 8,084 | — | |||||||||||||||||||||||||||
| Other debt securities | 1,257 | 1,256 | — | 1,256 | — | |||||||||||||||||||||||||||
| Total investment securities | 216,062 | 238,489 | — | 71,022 | 167,467 | |||||||||||||||||||||||||||
| Allowance for credit losses | (470) | — | — | — | — | |||||||||||||||||||||||||||
| Investment securities, net of allowance | 215,592 | 238,489 | — | 71,022 | 167,467 | |||||||||||||||||||||||||||
| Available for sale securities: | ||||||||||||||||||||||||||||||||
| U.S. Treasury | 502 | 502 | 502 | — | — | |||||||||||||||||||||||||||
| Municipal securities | 461,619 | 461,619 | — | 461,619 | — | |||||||||||||||||||||||||||
| Residential agency mortgage-backed securities | 8,168,025 | 8,168,025 | — | 8,168,025 | — | |||||||||||||||||||||||||||
| Residential non-agency mortgage-backed securities | 26,072 | 26,072 | — | 26,072 | — | |||||||||||||||||||||||||||
Commercial agency mortgage-backed securities | 4,685,423 | 4,685,423 | — | 4,685,423 | — | |||||||||||||||||||||||||||
| Other debt securities | 472 | 472 | — | — | 472 | |||||||||||||||||||||||||||
| Total available for sale securities | 13,342,113 | 13,342,113 | 502 | 13,341,139 | 472 | |||||||||||||||||||||||||||
| Fair value option securities – Residential agency mortgage-backed securities | 51,019 | 51,019 | — | 51,019 | — | |||||||||||||||||||||||||||
| Residential mortgage loans held for sale | 176,813 | 176,813 | — | 170,338 | 6,475 | |||||||||||||||||||||||||||
| Loans: | ||||||||||||||||||||||||||||||||
| Commercial | 12,175,140 | 12,054,326 | — | — | 12,054,326 | |||||||||||||||||||||||||||
| Commercial real estate | 4,116,892 | 4,085,030 | — | — | 4,085,030 | |||||||||||||||||||||||||||
| Paycheck protection program | 536,052 | 525,990 | — | — | 525,990 | |||||||||||||||||||||||||||
| Loans to individuals | 3,519,852 | 3,519,309 | — | — | 3,519,309 | |||||||||||||||||||||||||||
| Total loans | 20,347,936 | 20,184,655 | — | — | 20,184,655 | |||||||||||||||||||||||||||
| Allowance for loan losses | (276,680) | — | — | — | — | |||||||||||||||||||||||||||
| Loans, net of allowance | 20,071,256 | 20,184,655 | — | — | 20,184,655 | |||||||||||||||||||||||||||
| Mortgage servicing rights | 133,308 | 133,308 | — | — | 133,308 | |||||||||||||||||||||||||||
Derivative instruments with positive fair value, net of cash collateral | 1,901,136 | 1,901,136 | 1,109 | 1,900,027 | — | |||||||||||||||||||||||||||
| Deposits with no stated maturity | 36,743,836 | 36,743,836 | — | — | 36,743,836 | |||||||||||||||||||||||||||
| Time deposits | 1,780,715 | 1,783,165 | — | — | 1,783,165 | |||||||||||||||||||||||||||
| Other borrowed funds | 880,699 | 877,709 | — | — | 877,709 | |||||||||||||||||||||||||||
| Subordinated debentures | 131,220 | 143,381 | — | 143,381 | — | |||||||||||||||||||||||||||
Derivative instruments with negative fair value, net of cash collateral | 739,641 | 739,641 | 233,266 | 506,375 | — | |||||||||||||||||||||||||||
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The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of December 31, 2020 (dollars in thousands):
| Carrying Value | Estimated Fair Value | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
| Cash and due from banks | $ | 798,757 | $ | 798,757 | $ | 798,757 | $ | — | $ | — | ||||||||||||||||||||||
| Interest-bearing cash and cash equivalents | 381,816 | 381,816 | 381,816 | — | — | |||||||||||||||||||||||||||
| Trading securities: | ||||||||||||||||||||||||||||||||
| U.S. government securities | 9,183 | 9,183 | 4,999 | 4,184 | — | |||||||||||||||||||||||||||
| Residential agency mortgage-backed securities | 4,669,148 | 4,669,148 | — | 4,669,148 | — | |||||||||||||||||||||||||||
| Municipal securities | 19,172 | 19,172 | — | 19,172 | — | |||||||||||||||||||||||||||
| Other trading securities | 10,472 | 10,472 | — | 10,472 | — | |||||||||||||||||||||||||||
| Total trading securities | 4,707,975 | 4,707,975 | 4,999 | 4,702,976 | — | |||||||||||||||||||||||||||
| Investment securities: | ||||||||||||||||||||||||||||||||
| Municipal securities | 229,245 | 255,270 | — | 69,404 | 185,866 | |||||||||||||||||||||||||||
| Residential agency mortgage-backed securities | 8,913 | 9,790 | — | 9,790 | — | |||||||||||||||||||||||||||
| Other debt securities | 7,373 | 7,371 | — | 7,371 | — | |||||||||||||||||||||||||||
| Total investment securities | 245,531 | 272,431 | — | 86,565 | 185,866 | |||||||||||||||||||||||||||
| Allowance for credit losses | (688) | — | — | — | — | |||||||||||||||||||||||||||
| Investment securities, net of allowance | 244,843 | 272,431 | — | 86,565 | 185,866 | |||||||||||||||||||||||||||
| Available for sale securities: | ||||||||||||||||||||||||||||||||
| U.S. Treasury | 508 | 508 | 508 | — | — | |||||||||||||||||||||||||||
| Municipal securities | 167,979 | 167,979 | — | 167,979 | — | |||||||||||||||||||||||||||
| Residential agency mortgage-backed securities | 9,340,471 | 9,340,471 | — | 9,340,471 | — | |||||||||||||||||||||||||||
| Residential non-agency mortgage-backed securities | 32,770 | 32,770 | — | 32,770 | — | |||||||||||||||||||||||||||
Commercial agency mortgage-backed securities | 3,508,465 | 3,508,465 | — | 3,508,465 | — | |||||||||||||||||||||||||||
| Other debt securities | 472 | 472 | — | — | 472 | |||||||||||||||||||||||||||
| Total available for sale securities | 13,050,665 | 13,050,665 | 508 | 13,049,685 | 472 | |||||||||||||||||||||||||||
| Fair value option securities — Residential agency mortgage-backed securities | 114,982 | 114,982 | — | 114,982 | — | |||||||||||||||||||||||||||
| Residential mortgage loans held for sale | 252,316 | 252,316 | — | 245,299 | 7,017 | |||||||||||||||||||||||||||
| Loans: | ||||||||||||||||||||||||||||||||
| Commercial | 13,077,535 | 13,003,383 | — | — | 13,003,383 | |||||||||||||||||||||||||||
| Commercial real estate | 4,698,538 | 4,649,763 | — | — | 4,649,763 | |||||||||||||||||||||||||||
| Paycheck protection program | 1,682,310 | 1,669,461 | — | — | 1,669,461 | |||||||||||||||||||||||||||
| Loans to individuals | 3,549,137 | 3,563,199 | — | — | 3,563,199 | |||||||||||||||||||||||||||
| Total loans | 23,007,520 | 22,885,806 | — | — | 22,885,806 | |||||||||||||||||||||||||||
| Allowance for loan losses | (388,640) | — | — | — | — | |||||||||||||||||||||||||||
| Loans, net of allowance | 22,618,880 | 22,885,806 | — | — | 22,885,806 | |||||||||||||||||||||||||||
| Mortgage servicing rights | 101,172 | 101,172 | — | — | 101,172 | |||||||||||||||||||||||||||
Derivative instruments with positive fair value, net of cash collateral | 810,688 | 810,688 | 10,780 | 799,908 | — | |||||||||||||||||||||||||||
| Deposits with no stated maturity | 34,176,752 | 34,176,752 | — | — | 34,176,752 | |||||||||||||||||||||||||||
| Time deposits | 1,967,128 | 1,976,936 | — | — | 1,976,936 | |||||||||||||||||||||||||||
| Other borrowed funds | 3,545,356 | 3,542,489 | — | — | 3,542,489 | |||||||||||||||||||||||||||
| Subordinated debentures | 276,005 | 269,544 | — | 269,544 | — | |||||||||||||||||||||||||||
Derivative instruments with negative fair value, net of cash collateral | 405,779 | 405,779 | — | 405,779 | — | |||||||||||||||||||||||||||
Because no market exists for certain of these financial instruments and management does not intend to sell these financial instruments, the fair values shown in the tables above may not represent values at which the respective financial instruments could be sold individually or in the aggregate at the given reporting date.
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(12) Subsequent Events
The Company evaluated events from the date of the consolidated financial statements on September 30, 2021 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q. No events were identified requiring recognition in and/or disclosure in the consolidated financial statements.
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Nine-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
| (In Thousands, Except Per Share Data) | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | |||||||||||||||||||||||||||||||||||||
| Average Balance | Revenue/ Expense | Yield/ Rate | Average Balance | Revenue/ Expense | Yield/ Rate | |||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
| Interest-bearing cash and cash equivalents | $ | 684,279 | $ | 577 | 0.11 | % | $ | 631,203 | $ | 2,672 | 0.57 | % | ||||||||||||||||||||||||||
| Trading securities | 7,339,417 | 111,677 | 2.02 | % | 1,798,767 | 32,094 | 2.41 | % | ||||||||||||||||||||||||||||||
| Investment securities | 225,541 | 8,404 | 4.97 | % | 270,018 | 9,689 | 4.78 | % | ||||||||||||||||||||||||||||||
| Available for sale securities | 13,374,513 | 175,060 | 1.83 | % | 12,243,049 | 200,519 | 2.29 | % | ||||||||||||||||||||||||||||||
| Fair value option securities | 75,101 | 1,240 | 2.31 | % | 987,145 | 17,804 | 2.39 | % | ||||||||||||||||||||||||||||||
| Restricted equity securities | 214,903 | 4,675 | 2.90 | % | 281,986 | 8,687 | 4.11 | % | ||||||||||||||||||||||||||||||
| Residential mortgage loans held for sale | 197,466 | 4,223 | 2.89 | % | 210,484 | 4,848 | 3.15 | % | ||||||||||||||||||||||||||||||
| Loans | 21,917,244 | 588,577 | 3.59 | % | 23,386,976 | 681,469 | 3.89 | % | ||||||||||||||||||||||||||||||
| Allowance for loan losses | (344,429) | (353,574) | ||||||||||||||||||||||||||||||||||||
| Loans, net of allowance | 21,572,815 | 588,577 | 3.65 | % | 23,033,402 | 681,469 | 3.95 | % | ||||||||||||||||||||||||||||||
Total earning assets | 43,684,035 | 894,433 | 2.77 | % | 39,456,054 | 957,782 | 3.29 | % | ||||||||||||||||||||||||||||||
| Receivable on unsettled securities sales | 694,530 | 4,080,342 | ||||||||||||||||||||||||||||||||||||
| Cash and other assets | 5,620,697 | 4,602,974 | ||||||||||||||||||||||||||||||||||||
| Total assets | $ | 49,999,262 | $ | 48,139,370 | ||||||||||||||||||||||||||||||||||
| Liabilities and equity | ||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits: | ||||||||||||||||||||||||||||||||||||||
| Transaction | $ | 21,453,439 | $ | 16,864 | 0.11 | % | $ | 17,990,429 | $ | 53,377 | 0.40 | % | ||||||||||||||||||||||||||
| Savings | 850,455 | 278 | 0.04 | % | 642,773 | 298 | 0.06 | % | ||||||||||||||||||||||||||||||
| Time | 1,920,436 | 8,798 | 0.61 | % | 2,318,101 | 24,887 | 1.43 | % | ||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 24,224,330 | 25,940 | 0.14 | % | 20,951,303 | 78,562 | 0.50 | % | ||||||||||||||||||||||||||||||
| Funds purchased and repurchase agreements | 2,018,162 | 2,792 | 0.18 | % | 4,133,243 | 14,079 | 0.45 | % | ||||||||||||||||||||||||||||||
| Other borrowings | 3,179,166 | 8,702 | 0.37 | % | 4,480,085 | 35,558 | 1.06 | % | ||||||||||||||||||||||||||||||
| Subordinated debentures | 255,343 | 9,205 | 4.82 | % | 275,954 | 10,567 | 5.11 | % | ||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 29,677,001 | 46,639 | 0.21 | % | 29,840,585 | 138,766 | 0.62 | % | ||||||||||||||||||||||||||||||
| Non-interest bearing demand deposits | 13,062,720 | 10,887,775 | ||||||||||||||||||||||||||||||||||||
| Due on unsettled securities purchases | 858,302 | 1,123,319 | ||||||||||||||||||||||||||||||||||||
| Other liabilities | 1,051,535 | 1,239,723 | ||||||||||||||||||||||||||||||||||||
| Total equity | 5,349,704 | 5,047,968 | ||||||||||||||||||||||||||||||||||||
| Total liabilities and equity | $ | 49,999,262 | $ | 48,139,370 | ||||||||||||||||||||||||||||||||||
| Tax-equivalent Net Interest Revenue | $ | 847,794 | 2.56 | % | $ | 819,016 | 2.67 | % | ||||||||||||||||||||||||||||||
Tax-equivalent Net Interest Revenue to Earning Assets | 2.63 | % | 2.81 | % | ||||||||||||||||||||||||||||||||||
| Less tax-equivalent adjustment | 6,838 | 7,802 | ||||||||||||||||||||||||||||||||||||
| Net Interest Revenue | 840,956 | 811,214 | ||||||||||||||||||||||||||||||||||||
Provision for credit losses | (83,000) | 229,092 | ||||||||||||||||||||||||||||||||||||
| Other operating revenue | 598,332 | 643,532 | ||||||||||||||||||||||||||||||||||||
| Other operating expense | 878,213 | 861,637 | ||||||||||||||||||||||||||||||||||||
| Income before taxes | 644,075 | 364,017 | ||||||||||||||||||||||||||||||||||||
| Federal and state income taxes | 144,939 | 83,655 | ||||||||||||||||||||||||||||||||||||
| Net income | 499,136 | 280,362 | ||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to non-controlling interests | (1,667) | (444) | ||||||||||||||||||||||||||||||||||||
Net income attributable to BOK Financial Corp. shareholders | $ | 500,803 | $ | 280,806 | ||||||||||||||||||||||||||||||||||
Earnings Per Average Common Share Equivalent: | ||||||||||||||||||||||||||||||||||||||
| Net income: | ||||||||||||||||||||||||||||||||||||||
| Basic | $ | 7.23 | $ | 3.99 | ||||||||||||||||||||||||||||||||||
| Diluted | $ | 7.23 | $ | 3.99 | ||||||||||||||||||||||||||||||||||
Yield calculations are shown on a tax equivalent at the statutory federal and state rates for the periods presented. The yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income and the unrealized gains and losses. The yield calculation also includes average loan balances for which the accrual of interest has been discontinued and are net of unearned income. Yield / rate calculations are generally based on the conventions that determine how interest income and expense is accrued.
- 97 -
Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
| (In Thousands, Except Per Share Data) | Three Months Ended | |||||||||||||||||||||||||||||||||||||
| September 30, 2021 | June 30, 2021 | |||||||||||||||||||||||||||||||||||||
| Average Balance | Revenue/ Expense | Yield/ Rate | Average Balance | Revenue/ Expense | Yield/ Rate | |||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
| Interest-bearing cash and cash equivalents | $ | 682,788 | $ | 245 | 0.14 | % | $ | 659,312 | $ | 158 | 0.10 | % | ||||||||||||||||||||||||||
| Trading securities | 7,617,236 | 39,006 | 2.04 | % | 7,430,217 | 36,702 | 1.95 | % | ||||||||||||||||||||||||||||||
| Investment securities, net of allowance | 218,117 | 2,740 | 5.02 | % | 221,401 | 2,771 | 5.01 | % | ||||||||||||||||||||||||||||||
| Available for sale securities | 13,446,095 | 57,391 | 1.80 | % | 13,243,542 | 58,989 | 1.85 | % | ||||||||||||||||||||||||||||||
| Fair value option securities | 56,307 | 342 | 2.62 | % | 64,864 | 402 | 2.60 | % | ||||||||||||||||||||||||||||||
| Restricted equity securities | 245,485 | 1,565 | 2.55 | % | 208,692 | 1,751 | 3.36 | % | ||||||||||||||||||||||||||||||
| Residential mortgage loans held for sale | 167,620 | 1,274 | 3.06 | % | 218,200 | 1,569 | 2.91 | % | ||||||||||||||||||||||||||||||
| Loans | 20,848,608 | 193,117 | 3.68 | % | 22,167,089 | 195,871 | 3.54 | % | ||||||||||||||||||||||||||||||
| Allowance for loan losses | (306,125) | (345,269) | ||||||||||||||||||||||||||||||||||||
| Loans, net of allowance | 20,542,483 | 193,117 | 3.73 | % | 21,821,820 | 195,871 | 3.60 | % | ||||||||||||||||||||||||||||||
Total earning assets | 42,976,131 | 295,680 | 2.78 | % | 43,868,048 | 298,213 | 2.75 | % | ||||||||||||||||||||||||||||||
| Receivable on unsettled securities sales | 632,539 | 716,700 | ||||||||||||||||||||||||||||||||||||
| Cash and other assets | 5,890,479 | 5,612,174 | ||||||||||||||||||||||||||||||||||||
| Total assets | $ | 49,499,149 | $ | 50,196,922 | ||||||||||||||||||||||||||||||||||
| Liabilities and equity | ||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits: | ||||||||||||||||||||||||||||||||||||||
| Transaction | $ | 21,435,736 | $ | 5,002 | 0.09 | % | $ | 21,491,145 | $ | 5,539 | 0.10 | % | ||||||||||||||||||||||||||
| Savings | 888,011 | 96 | 0.04 | % | 872,618 | 96 | 0.04 | % | ||||||||||||||||||||||||||||||
| Time | 1,839,983 | 2,567 | 0.55 | % | 1,936,510 | 2,790 | 0.58 | % | ||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 24,163,730 | 7,665 | 0.13 | % | 24,300,273 | 8,425 | 0.14 | % | ||||||||||||||||||||||||||||||
| Funds purchased and repurchase agreements | 1,448,800 | 722 | 0.20 | % | 1,790,490 | 722 | 0.16 | % | ||||||||||||||||||||||||||||||
| Other borrowings | 2,546,083 | 2,344 | 0.37 | % | 3,608,369 | 3,084 | 0.34 | % | ||||||||||||||||||||||||||||||
| Subordinated debentures | 214,654 | 2,505 | 4.63 | % | 276,034 | 3,353 | 4.87 | % | ||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 28,373,267 | 13,236 | 0.19 | % | 29,975,166 | 15,584 | 0.21 | % | ||||||||||||||||||||||||||||||
| Non-interest bearing demand deposits | 13,670,656 | 13,189,954 | ||||||||||||||||||||||||||||||||||||
| Due on unsettled securities purchases | 957,538 | 701,495 | ||||||||||||||||||||||||||||||||||||
| Other liabilities | 1,054,247 | 1,000,662 | ||||||||||||||||||||||||||||||||||||
| Total equity | 5,443,441 | 5,329,645 | ||||||||||||||||||||||||||||||||||||
| Total liabilities and equity | $ | 49,499,149 | $ | 50,196,922 | ||||||||||||||||||||||||||||||||||
| Tax-equivalent Net Interest Revenue | $ | 282,444 | 2.59 | % | $ | 282,629 | 2.54 | % | ||||||||||||||||||||||||||||||
Tax-equivalent Net Interest Revenue to Earning Assets | 2.66 | % | 2.60 | % | ||||||||||||||||||||||||||||||||||
| Less tax-equivalent adjustment | 2,217 | 2,320 | ||||||||||||||||||||||||||||||||||||
| Net Interest Revenue | 280,227 | 280,309 | ||||||||||||||||||||||||||||||||||||
Provision for credit losses | (23,000) | (35,000) | ||||||||||||||||||||||||||||||||||||
| Other operating revenue | 229,832 | 191,446 | ||||||||||||||||||||||||||||||||||||
| Other operating expense | 291,277 | 291,152 | ||||||||||||||||||||||||||||||||||||
| Income before taxes | 241,782 | 215,603 | ||||||||||||||||||||||||||||||||||||
| Federal and state income taxes | 54,061 | 48,496 | ||||||||||||||||||||||||||||||||||||
| Net income | 187,721 | 167,107 | ||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to non-controlling interests | (601) | 686 | ||||||||||||||||||||||||||||||||||||
Net income attributable to BOK Financial Corp. shareholders | $ | 188,322 | $ | 166,421 | ||||||||||||||||||||||||||||||||||
Earnings Per Average Common Share Equivalent: | ||||||||||||||||||||||||||||||||||||||
| Basic | $ | 2.74 | $ | 2.40 | ||||||||||||||||||||||||||||||||||
| Diluted | $ | 2.74 | $ | 2.40 | ||||||||||||||||||||||||||||||||||
Yield calculations are shown on a tax equivalent at the statutory federal and state rates for the periods presented. The yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income and the unrealized gains and losses. The yield calculation also includes average loan balances for which the accrual of interest has been discontinued and are net of unearned income. Yield / rate calculations are generally based on the conventions that determine how interest income and expense is accrued.
- 98 -
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2021 | December 31, 2020 | September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Average Balance | Revenue /Expense | Yield / Rate | Average Balance | Revenue / Expense | Yield / Rate | Average Balance | Revenue / Expense | Yield / Rate | ||||||||||||||||||||||||||||||||||||||||||
| $ | 711,047 | $ | 174 | 0.10 | % | $ | 643,926 | $ | 158 | 0.10 | % | $ | 553,070 | $ | 167 | 0.12 | % | |||||||||||||||||||||||||||||||||
| 6,963,617 | 35,969 | 2.06 | % | 6,888,189 | 35,848 | 2.02 | % | 1,834,160 | 8,766 | 1.92 | % | |||||||||||||||||||||||||||||||||||||||
| 237,313 | 2,893 | 4.88 | % | 251,863 | 3,071 | 4.88 | % | 258,965 | 3,141 | 4.85 | % | |||||||||||||||||||||||||||||||||||||||
| 13,433,767 | 58,680 | 1.84 | % | 12,949,702 | 60,885 | 1.98 | % | 12,580,850 | 62,433 | 2.11 | % | |||||||||||||||||||||||||||||||||||||||
| 104,662 | 496 | 1.95 | % | 122,329 | 671 | 2.27 | % | 387,784 | 1,986 | 1.92 | % | |||||||||||||||||||||||||||||||||||||||
| 189,921 | 1,359 | 2.86 | % | 280,428 | 2,276 | 3.25 | % | 144,415 | 913 | 2.53 | % | |||||||||||||||||||||||||||||||||||||||
| 207,013 | 1,380 | 2.71 | % | 229,631 | 1,549 | 2.75 | % | 213,125 | 1,585 | 3.01 | % | |||||||||||||||||||||||||||||||||||||||
| 22,757,007 | 199,589 | 3.55 | % | 23,447,518 | 216,976 | 3.68 | % | 24,110,463 | 218,125 | 3.60 | % | |||||||||||||||||||||||||||||||||||||||
| (382,734) | (414,225) | (441,831) | ||||||||||||||||||||||||||||||||||||||||||||||||
| 22,374,273 | 199,589 | 3.62 | % | 23,033,293 | 216,976 | 3.75 | % | 23,668,632 | 218,125 | 3.67 | % | |||||||||||||||||||||||||||||||||||||||
| 44,221,613 | 300,540 | 2.78 | % | 44,399,361 | 321,434 | 2.92 | % | 39,641,001 | 297,116 | 3.04 | % | |||||||||||||||||||||||||||||||||||||||
| 735,482 | 1,094,198 | 4,563,301 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 5,353,538 | 4,893,605 | 4,727,453 | ||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 50,310,633 | $ | 50,387,164 | $ | 48,931,755 | |||||||||||||||||||||||||||||||||||||||||||||
| $ | 21,433,406 | $ | 6,323 | 0.12 | % | $ | 20,718,390 | $ | 7,047 | 0.14 | % | $ | 19,752,106 | $ | 8,199 | 0.17 | % | |||||||||||||||||||||||||||||||||
| 789,656 | 86 | 0.04 | % | 737,360 | 87 | 0.05 | % | 707,121 | 88 | 0.05 | % | |||||||||||||||||||||||||||||||||||||||
| 1,986,425 | 3,441 | 0.70 | % | 1,930,808 | 4,300 | 0.89 | % | 2,251,012 | 6,371 | 1.13 | % | |||||||||||||||||||||||||||||||||||||||
| 24,209,487 | 9,850 | 0.17 | % | 23,386,558 | 11,434 | 0.19 | % | 22,710,239 | 14,658 | 0.26 | % | |||||||||||||||||||||||||||||||||||||||
| 2,830,378 | 1,348 | 0.19 | % | 2,153,254 | 1,526 | 0.28 | % | 2,782,150 | 1,199 | 0.17 | % | |||||||||||||||||||||||||||||||||||||||
| 3,392,346 | 3,274 | 0.39 | % | 5,193,656 | 5,453 | 0.42 | % | 3,382,688 | 3,657 | 0.43 | % | |||||||||||||||||||||||||||||||||||||||
| 276,015 | 3,347 | 4.92 | % | 275,998 | 3,377 | 4.87 | % | 275,980 | 3,395 | 4.89 | % | |||||||||||||||||||||||||||||||||||||||
| 30,708,226 | 17,819 | 0.24 | % | 31,009,466 | 21,790 | 0.28 | % | 29,151,057 | 22,909 | 0.31 | % | |||||||||||||||||||||||||||||||||||||||
| 12,312,629 | 12,136,071 | 11,929,694 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 915,410 | 957,642 | 1,516,880 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 1,100,203 | 1,055,623 | 1,171,064 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 5,274,165 | 5,228,362 | 5,163,060 | ||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 50,310,633 | $ | 50,387,164 | $ | 48,931,755 | |||||||||||||||||||||||||||||||||||||||||||||
| $ | 282,721 | 2.54 | % | $ | 299,644 | 2.64 | % | $ | 274,207 | 2.73 | % | |||||||||||||||||||||||||||||||||||||||
| 2.62 | % | 2.72 | % | 2.81 | % | |||||||||||||||||||||||||||||||||||||||||||||
| 2,301 | 2,414 | 2,457 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 280,420 | 297,230 | 271,750 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (25,000) | (6,500) | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| 177,054 | 198,789 | 229,938 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 295,784 | 302,672 | 297,044 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 186,690 | 199,847 | 204,644 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 42,382 | 45,138 | 50,552 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 144,308 | 154,709 | 154,092 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (1,752) | 485 | 58 | ||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 146,060 | $ | 154,224 | $ | 154,034 | |||||||||||||||||||||||||||||||||||||||||||||
| $ | 2.10 | $ | 2.21 | $ | 2.19 | |||||||||||||||||||||||||||||||||||||||||||||
| $ | 2.10 | $ | 2.21 | $ | 2.19 | |||||||||||||||||||||||||||||||||||||||||||||
- 99 -
Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
| Three Months Ended | ||||||||||||||||||||||||||||||||
| Sept. 30, 2021 | June 30, 2021 | Mar. 31, 2021 | Dec. 31, 2020 | Sept. 30, 2020 | ||||||||||||||||||||||||||||
| Interest revenue | $ | 293,463 | $ | 295,893 | $ | 298,239 | $ | 319,020 | $ | 294,659 | ||||||||||||||||||||||
| Interest expense | 13,236 | 15,584 | 17,819 | 21,790 | 22,909 | |||||||||||||||||||||||||||
| Net interest revenue | 280,227 | 280,309 | 280,420 | 297,230 | 271,750 | |||||||||||||||||||||||||||
| Provision for credit losses | (23,000) | (35,000) | (25,000) | (6,500) | — | |||||||||||||||||||||||||||
Net interest revenue after provision for credit losses | 303,227 | 315,309 | 305,420 | 303,730 | 271,750 | |||||||||||||||||||||||||||
| Other operating revenue | ||||||||||||||||||||||||||||||||
| Brokerage and trading revenue | 47,930 | 29,408 | 20,782 | 39,506 | 69,526 | |||||||||||||||||||||||||||
| Transaction card revenue | 24,632 | 24,923 | 22,430 | 21,896 | 23,465 | |||||||||||||||||||||||||||
| Fiduciary and asset management revenue | 45,248 | 44,832 | 41,322 | 41,799 | 39,931 | |||||||||||||||||||||||||||
| Deposit service charges and fees | 27,429 | 25,861 | 24,209 | 24,343 | 24,286 | |||||||||||||||||||||||||||
| Mortgage banking revenue | 26,286 | 21,219 | 37,113 | 39,298 | 51,959 | |||||||||||||||||||||||||||
| Other revenue | 18,896 | 23,172 | 16,296 | 14,209 | 13,698 | |||||||||||||||||||||||||||
| Total fees and commissions | 190,421 | 169,415 | 162,152 | 181,051 | 222,865 | |||||||||||||||||||||||||||
| Other gains, net | 31,091 | 16,449 | 10,121 | 7,394 | 2,044 | |||||||||||||||||||||||||||
| Gain (loss) on derivatives, net | (5,760) | 18,820 | (27,650) | (339) | 2,354 | |||||||||||||||||||||||||||
| Gain (loss) on fair value option securities, net | (120) | (1,627) | (1,910) | 68 | (754) | |||||||||||||||||||||||||||
| Change in fair value of mortgage servicing rights | 12,945 | (13,041) | 33,874 | 6,276 | 3,441 | |||||||||||||||||||||||||||
| Gain (loss) on available for sale securities, net | 1,255 | 1,430 | 467 | 4,339 | (12) | |||||||||||||||||||||||||||
| Total other operating revenue | 229,832 | 191,446 | 177,054 | 198,789 | 229,938 | |||||||||||||||||||||||||||
| Other operating expense | ||||||||||||||||||||||||||||||||
| Personnel | 175,863 | 172,035 | 173,010 | 176,198 | 179,860 | |||||||||||||||||||||||||||
| Business promotion | 4,939 | 2,744 | 2,154 | 3,728 | 2,633 | |||||||||||||||||||||||||||
| Charitable contributions to BOKF Foundation | — | — | 4,000 | 6,000 | — | |||||||||||||||||||||||||||
| Professional fees and services | 12,436 | 12,361 | 11,980 | 14,254 | 14,074 | |||||||||||||||||||||||||||
| Net occupancy and equipment | 28,395 | 26,633 | 26,662 | 27,875 | 28,111 | |||||||||||||||||||||||||||
| Insurance | 3,712 | 3,660 | 4,620 | 4,006 | 5,848 | |||||||||||||||||||||||||||
| Data processing and communications | 38,371 | 36,418 | 37,467 | 35,061 | 34,751 | |||||||||||||||||||||||||||
| Printing, postage and supplies | 3,558 | 4,285 | 3,440 | 3,805 | 3,482 | |||||||||||||||||||||||||||
| Amortization of intangible assets | 4,488 | 4,578 | 4,807 | 5,088 | 5,071 | |||||||||||||||||||||||||||
| Mortgage banking costs | 8,962 | 11,126 | 13,943 | 14,765 | 15,803 | |||||||||||||||||||||||||||
| Other expense | 10,553 | 17,312 | 13,701 | 11,892 | 7,411 | |||||||||||||||||||||||||||
| Total other operating expense | 291,277 | 291,152 | 295,784 | 302,672 | 297,044 | |||||||||||||||||||||||||||
| Net income before taxes | 241,782 | 215,603 | 186,690 | 199,847 | 204,644 | |||||||||||||||||||||||||||
| Federal and state income taxes | 54,061 | 48,496 | 42,382 | 45,138 | 50,552 | |||||||||||||||||||||||||||
| Net income | 187,721 | 167,107 | 144,308 | 154,709 | 154,092 | |||||||||||||||||||||||||||
Net income (loss) attributable to non-controlling interests | (601) | 686 | (1,752) | 485 | 58 | |||||||||||||||||||||||||||
Net income attributable to BOK Financial Corporation shareholders | $ | 188,322 | $ | 166,421 | $ | 146,060 | $ | 154,224 | $ | 154,034 | ||||||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||||||||
| Basic | $2.74 | $2.40 | $2.10 | $2.21 | $2.19 | |||||||||||||||||||||||||||
| Diluted | $2.74 | $2.40 | $2.10 | $2.21 | $2.19 | |||||||||||||||||||||||||||
| Average shares used in computation: | ||||||||||||||||||||||||||||||||
| Basic | 68,359,125 | 68,815,666 | 69,137,375 | 69,489,597 | 69,877,866 | |||||||||||||||||||||||||||
| Diluted | 68,360,871 | 68,817,442 | 69,141,710 | 69,493,050 | 69,879,290 | |||||||||||||||||||||||||||
- 100 -
PART II. Other Information
Item 1. Legal Proceedings
See discussion of legal proceedings at Note 6 to the Consolidated Financial Statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2021.
Period | Total Number of Shares Purchased2 | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | Maximum Number of Shares that May Yet Be Purchased Under the Plans | ||||||||||||||||||||||
| July 1 to July 31, 2021 | 125,000 | $ | 83.45 | 125,000 | 2,148,193 | |||||||||||||||||||||
| August 1 to August 31, 2021 | 195,141 | $ | 86.13 | 195,141 | 1,953,052 | |||||||||||||||||||||
| September 1 to September 30, 2021 | 158,000 | $ | 84.84 | 158,000 | 1,795,052 | |||||||||||||||||||||
| Total | 478,141 | 478,141 | ||||||||||||||||||||||||
1On April 30, 2019, the Company's board of directors authorized the Company to repurchase up to five million shares of the Company's common stock. As of September 30, 2021, the Company had repurchased 3,204,948 shares under this plan. Future repurchases of the Company's common stock will vary based on market conditions, regulatory limitations and other factors.
2The Company may repurchase mature shares from employees to cover the exercise price and taxes in connection with employee equity compensation.
Item 6. Exhibits
31.1Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
101Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to Consolidated Financial Statements. The XBRL instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
104 Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)
Items 3, 4 and 5 are not applicable and have been omitted.
- 101 -
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BOK FINANCIAL CORPORATION
(Registrant)
Date: November 3, 2021
| /s/ Steven E. Nell | ||
| Steven E. Nell | ||
| Executive Vice President and | ||
| Chief Financial Officer | ||
| /s/ John C. Morrow | ||
| John C. Morrow | ||
| Senior Vice President and | ||
| Chief Accounting Officer | ||
- 102 -