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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)			1
Market Risk (Item 3)			38
Controls and Procedures (Item 4)			41
Consolidated Financial Statements – Unaudited (Item 1)			42
Quarterly Financial Summary – Unaudited (Item 2)			98
Quarterly Earnings Trend – Unaudited			100
Part II.  Other Information
Item 1.  Legal Proceedings			101
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds			101
Item 6.  Exhibits			101
Signatures			102

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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.

- 2 -

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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.

- 3 -

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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						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.

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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.

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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.

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(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)

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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.

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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.

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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.

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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.

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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.

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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.

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(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.

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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.

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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

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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

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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

32Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 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.

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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

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