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BOKF BOK Financial

Filed: 5 May 21, 11:16am

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 March 31, 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: 69,557,873 shares of common stock ($.00006 par value) as of March 31, 2021.

BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2021

Index
Part I.  Financial Information
Management’s Discussion and Analysis (Item 2)        
Market Risk (Item 3)                                                                                              
Controls and Procedures (Item 4)
Consolidated Financial Statements – Unaudited (Item 1)
Quarterly Financial Summary – Unaudited (Item 2)
Quarterly Earnings Trend – Unaudited
  
Part II.  Other Information
Item 1.  Legal Proceedings
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.  Exhibits
Signatures



Management’s Discussion and Analysis of Financial Condition and Results of Operations
Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $146.1 million or $2.10 per diluted share for the first quarter of 2021. Net income was $62.1 million or $0.88 per diluted share for the first quarter of 2020 and $154.2 million or $2.21 per diluted share for the fourth quarter of 2020. Forecasts for improving macroeconomic factors as the pace of COVID-19 vaccinations accelerates and energy prices stabilize resulted in a negative provision for expected credit losses of $25.0 million and $6.5 million in the first quarter of 2021 and fourth quarter of 2020, respectively. A provision for expected credit losses of $93.8 million was recorded in the first quarter of 2020.

Pre-provision net revenue ("PPNR"), a non-GAAP measure, was $163.4 million for the first quarter of 2021, $173.2 million for the first quarter of 2020, and $192.9 million for the fourth quarter of 2020. The decrease in PPNR for the first quarter of 2021 compared to the previous periods was due to lower combined net interest revenue and fees and commission revenue. This was largely driven by a shift in average earning assets from loans to trading securities, narrowing net interest margin, and compressed margins on mortgage loans and mortgage-backed trading assets.

Highlights of the first quarter of 2021 included:

Net interest revenue totaled $280.4 million, an increase of $19.1 million over the first quarter of 2020. Average earning assets were $44.2 billion for the first quarter of 2021 compared to $38.4 billion for the first quarter of 2020, largely driven by growth in trading securities. Net interest margin was 2.62 percent for the first quarter of 2021 compared to 2.80 percent for the first quarter of 2020. The Federal Reserve reduced the federal funds rate to near zero in March 2020. Other short-term market interest rates followed, reducing the yield on floating-rate assets by more than the amount by which funding costs could be reduced, compressing the margin. Net interest revenue decreased $16.8 million compared to the fourth quarter of 2020. Net interest margin decreased 10 basis points.
Fees and commissions revenue totaled $162.2 million, a decrease of $30.6 million compared to the first quarter of 2020. Brokerage and trading revenue decreased $30.0 million, largely due to a shift from trading revenue to net interest revenue on trading securities. Fees and commissions revenue decreased $18.9 million compared to the fourth quarter of 2020, including a $15.4 million reduction in trading revenue due to lower volumes and margin compression.
Other operating expense totaled $282.6 million, an increase of $14.0 million over the first quarter of 2020. Personnel expense increased $16.8 million due to growth in incentive compensation expense and deferred compensation costs. Non-personnel expense decreased $2.8 million compared to the first quarter of 2020. A gain on the sale of repossessed oil and gas assets and lower business promotion costs were largely offset by an increase in charitable contributions, data processing and mortgage banking expenses. Operating expense decreased $18.0 million compared to the fourth quarter of 2020. Personnel expense decreased $3.2 million, primarily due to lower incentive compensation costs, partially offset by a seasonal increase in employee benefits expense. Non-personnel expense decreased $14.8 million compared to the fourth quarter of 2020, primarily due to the $14.1 million gain on the sale of repossessed oil and gas assets.
Period-end outstanding loan balances totaled $22.5 billion at March 31, 2021, a decrease of $474 million compared to December 31, 2020, largely due to paydowns of energy loans and commercial real estate loans. Loans originated as part of the Small Business Administration's Paycheck Protection Program ("PPP") increased $166 million to $1.8 billion. Average loan balances decreased $691 million to $22.8 billion compared to December 31, 2020.
The allowance for loan losses totaled $352 million or 1.70 percent of outstanding loans, excluding PPP loans, at March 31, 2021. The allowance for loan losses was $389 million or 1.82 percent of outstanding loans, excluding PPP loans, at December 31, 2020.
Nonperforming assets not guaranteed by U.S. government agencies decreased $39 million compared to December 31, 2020. Potential problem loans decreased $55 million while other loans especially mentioned decreased $90 million. Net charge-offs were $14.5 million or 0.28 percent of average loans on an annualized basis for the first quarter of 2021, excluding PPP loans. Net charge-offs were 0.31 percent of average loans, excluding PPP loans, over the last four quarters. Net charge-offs were $16.7 million or 0.31 percent of average loans on an annualized basis for the fourth quarter of 2020, excluding PPP loans.
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Period-end deposits were $37.9 billion at March 31, 2021, a $1.7 billion increase compared to December 31, 2020, largely due to growth in commercial balances. Average deposits increased $1.0 billion, including a $715 million increase in interest-bearing transaction deposits. Clients across all of our business segments continued to maintain higher deposit balances during this period of economic uncertainty, supplemented by inflows from government stimulus.
The common equity Tier 1 capital ratio at March 31, 2021 was 12.14 percent. Other regulatory capital ratios were Tier 1 capital ratio, 12.21 percent, total capital ratio, 13.98 percent, and leverage ratio, 8.42 percent. At December 31, 2020, the common equity Tier 1 capital ratio was 11.95 percent, the Tier 1 capital ratio was 11.95 percent, total capital ratio was 13.82 percent, and leverage ratio was 8.28 percent.
The Company repurchased 260,000 shares of common stock at an average price of $77.20 per share in the first quarter of 2021 and 665,100 shares at an average price of $63.82 in the fourth quarter of 2020. We view share buybacks opportunistically but within the context of maintaining our strong capital position.
The Company paid a regular cash dividend of $36.0 million or $0.52 per common share during the first quarter of 2021. On May 4, 2021, the board of directors approved a quarterly cash dividend of $0.52 per common share payable on or about May 27, 2021 to shareholders of record as of May 17, 2021.

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Results of Operations
Net Interest Revenue and Net Interest Margin

Net interest revenue is the interest earned on debt securities, loans and other interest-earning assets less interest paid for interest-bearing deposits and other borrowings. The net interest margin is calculated by dividing tax-equivalent net interest revenue by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest spread due to interest income earned on assets funded by non-interest bearing liabilities such as demand deposits and equity.

Tax-equivalent net interest revenue totaled $282.7 million for the first quarter of 2021 and $264.1 million in the first quarter of 2020. Net interest revenue decreased $20.7 million due to changes in interest rates and increased $39.3 million from growth in earning assets, largely due to the increase in trading securities balances. 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 2.62 percent for the first quarter of 2021, compared to 2.80 percent for the first quarter of 2020. In response to the anticipated impact to the economy from the COVID-19 pandemic, the Federal Reserve reduced the federal funds rate to near zero in March, 2020. Other short-term market interest rates followed, reducing the yield on floating-rate assets by more than the amount by which funding costs could be reduced, compressing the margin. The tax-equivalent yield on earning assets was 2.78 percent, a decrease of 95 basis points compared to the first quarter of 2020. Loan yields decreased 95 basis points to 3.55 percent, largely due to the decrease in short-term interest rates partially offset by the addition of PPP loan fees. PPP loan fees of $11.2 million were recognized in the first quarter of 2021 and $34.2 million remains to be recognized in future periods. The available for sale securities portfolio yield decreased 64 basis points to 1.84 percent as principal cash flows received from maturities of the available for sale securities portfolio continue to be reinvested at lower rates. Cash flows received from these securities are currently being reinvested at 95-105 basis points. The yield on trading securities decreased 83 basis points to 2.06 percent.

Funding costs decreased 95 basis points compared to the first quarter of 2020. The cost of other borrowed funds decreased 117 basis points and the cost of interest-bearing deposits decreased 81 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 8 basis points for the first quarter of 2021, a decrease of 18 basis points compared to the first quarter of 2020.
Average earning assets for the first quarter of 2021 increased $5.8 billion or 15 percent over the first quarter of 2020, largely due to an increase in our trading of U.S. government issued mortgage-backed securities, the expansion of the available for sale securities portfolio, and PPP loans. Average trading securities increased $5.3 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 $1.8 billion. We purchase securities to supplement earnings and to manage interest rate risk. Average loans, net of allowance for loan losses, increased $682 million, largely due to the inflow of PPP loans, partially offset by purposeful deleveraging by our customers as borrowers continue to pay down during this time of economic uncertainty. Fair vale option securities that we hold as an economic hedge against changes in the fair value of mortgage servicing rights decreased $1.7 billion.

Average deposits increased $8.3 billion compared to the first 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 $5.2 billion while demand deposit balances increased $3.1 billion.
Tax-equivalent net interest revenue decreased $16.9 million compared to the fourth quarter of 2020. Net interest margin was 2.62 percent compared to 2.72 percent in the fourth quarter of 2020. The decrease in net interest revenue was primarily driven by lower average outstanding loan balances. Reinvestment of cash flows from the available for sale securities portfolio to current interest rates and timing of PPP and other loan fees also contributed to a decrease in net interest revenue and net interest margin in the first quarter.
Average earning assets decreased $178 million compared to the fourth quarter of 2020. Average loan balances decreased $691 million, primarily from commercial and commercial real estate loan pay downs. Available for sale securities increased $484 million. Average interest-bearing deposits grew by $823 million, primarily due to higher interest-bearing transaction deposits in the wake of the most recent government stimulus program. Other borrowings decreased $1.8 billion while funds purchased and repurchase agreements increased $677 million.
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The yield on average earning assets was 2.78 percent, a 14 basis point decrease from the prior quarter. The yield on the available for sale securities portfolio decreased 14 basis points to 1.84 percent and the loan portfolio yield decreased 13 basis points to 3.55 percent.
Funding costs were 0.24 percent, down 4 basis points. The cost of interest-bearing deposits decreased 2 basis points to 0.17 percent. The cost of other borrowed funds was down 8 basis points to 0.30 percent. The benefit to net interest margin from assets funded by non-interest liabilities was 8 basis points for the first quarter of 2021, consistent with 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 76% 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
Mar. 31, 2021 / 2020
  
Change Due To1
ChangeVolumeYield/Rate
Tax-equivalent interest revenue:   
Interest-bearing cash and cash equivalents$(2,219)$(33)$(2,186)
Trading securities24,114 32,760 (8,646)
Investment securities(445)(505)60 
Available for sale securities(11,048)8,149 (19,197)
Fair value option securities(11,212)(9,487)(1,725)
Restricted equity securities(4,535)(3,470)(1,065)
Residential mortgage loans held for sale257 577 (320)
Loans(46,024)7,204 (53,228)
Total tax-equivalent interest revenue(51,112)35,195 (86,307)
Interest expense:
Transaction deposits(29,534)6,360 (35,894)
Savings deposits(40)40 (80)
Time deposits(6,735)(818)(5,917)
Funds purchased and repurchase agreements(9,490)(1,661)(7,829)
Other borrowings(23,673)(8,040)(15,633)
Subordinated debentures(286)(13)(273)
Total interest expense(69,758)(4,132)(65,626)
Tax-equivalent net interest revenue18,646 39,327 (20,681)
Change in tax-equivalent adjustment(414)
Net interest revenue$19,060 
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 $163.9 million for the first quarter of 2021, a decrease of $16.4 million compared to the first quarter of 2020, largely due to a shift of trading revenue to interest income from trading securities.

Other operating revenue decreased $32.9 million compared to the fourth quarter of 2020. Brokerage and trading revenue decreased $18.7 million. Margin compression and reduced residential mortgage-backed securities trading volumes have negatively affected our brokerage and trading revenue.

Table 2 – Other Operating Revenue 
(In thousands)
 Three Months Ended March 31,Increase (Decrease)% Increase (Decrease)Three Months Ended
 Dec. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20212020
Brokerage and trading revenue$20,782 $50,779 $(29,997)(59)%$39,506 $(18,724)(47)%
Transaction card revenue22,430 21,881 549 %21,896 534 %
Fiduciary and asset management revenue41,322 44,458 (3,136)(7)%41,799 (477)(1)%
Deposit service charges and fees24,209 26,130 (1,921)(7)%24,343 (134)(1)%
Mortgage banking revenue37,113 37,167 (54)— %39,298 (2,185)(6)%
Other revenue16,296 12,309 3,987 32 %14,209 2,087 15 %
Total fees and commissions revenue162,152 192,724 (30,572)(16)%181,051 (18,899)(10)%
Other gains (losses), net(3,036)(10,741)7,705 N/A5,383 (8,419)N/A
Gain (loss) on derivatives, net(27,650)18,420 (46,070)N/A(339)(27,311)N/A
Gain (loss) on fair value option securities, net(1,910)68,393 (70,303)N/A68 (1,978)N/A
Change in fair value of mortgage servicing rights33,874 (88,480)122,354 N/A6,276 27,598 N/A
Gain (loss) on available for sale securities, net467 464 N/A4,339 (3,872)N/A
Total other operating revenue$163,897 $180,319 $(16,422)(9)%$196,778 $(32,881)(17)%
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 37 percent of total revenue for the first 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 $30.0 million or 59 percent compared to the first 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 $3.7 million for the first quarter of 2021, a $30.7 million or 89 percent decrease compared to the first 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 $2.6 million for the first quarter of 2021, a $631 thousand or 20 percent decrease compared to the first quarter of 2020.

Investment banking, which includes fees earned upon completion of underwriting, financial advisory services and loan syndication fees, totaled $6.8 million for the first quarter of 2021, an increase of $1.8 million or 35 percent compared to the first quarter of 2020, related to timing and volume of completed transactions.
Brokerage and trading revenue decreased $18.7 million compared to the previous quarter, including a $15.4 million decrease in trading revenue, largely due to margin compression and reduction of residential mortgage-backed securities trading volumes from record levels in the fourth quarter of 2020. Customer hedging revenue also decreased $2.1 million as energy customers decreased hedging activities. Investment banking revenue decreased $2.1 million mainly due to timing of loan syndication activity.

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 decreased $3.1 million or 7 percent compared to the first quarter of 2020. The low rate environment has put pressure on our mutual fund revenue streams. We also had approximately $2.8 million in fee waivers during the first quarter of 2021 that did not exist in the first 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. These decreases were partially offset by increased trust and managed account fees from higher client asset balances. 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
March 31, 2021March 31, 2020December 31, 2020
 Balance
Revenue1
Margin2
Balance
Revenue1
Margin2
Balance
Revenue1
Margin2
Managed fiduciary assets:
Personal$11,369,467 $23,608 0.83 %$8,796,030 $23,606 1.07 %$11,172,457 $25,349 0.91 %
Institutional15,144,797 6,818 0.18 %12,186,588 6,654 0.22 %15,364,387 7,200 0.19 %
Total managed fiduciary assets26,514,264 30,426 0.46 %20,982,618 30,260 0.58 %26,536,844 32,549 0.49 %
Non-managed assets:
Fiduciary29,713,004 9,286 0.13 %22,705,419 12,379 0.22 %28,949,648 7,585 0.10 %
Non-fiduciary18,421,279 1,610 0.03 %16,541,786 1,819 0.04 %18,599,156 1,665 0.04 %
Safekeeping and brokerage assets under administration17,307,641   %15,554,006 — — %17,506,599 — — %
Total non-managed assets65,441,924 10,896 0.07 %54,801,211 14,198 0.10 %65,055,403 9,250 0.06 %
Total assets under management or administration$91,956,188 $41,322 0.18 %$75,783,829 $44,458 0.23 %$91,592,247 $41,799 0.18 %
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 March 31, 2021 and 2020 follows:

Table 4 -- Changes in Assets Under Management or Administration
(In thousands)
Three Months Ended March 31,
20212020
Beginning balance$91,592,247 $82,740,961 
Net inflows (outflows)(1,328,296)(1,846,865)
Net change in fair value1,692,237 (5,110,267)
Ending balance$91,956,188 $75,783,829 

Mortgage Banking Revenue

Mortgage banking revenue was consistent with the first quarter of 2020. Mortgage loan production volumes decreased $198 million or 19 percent as average primary mortgage interest rates began to increase in the first quarter of 2021. The gain on sale margin was 2.98 percent in the first quarter of 2021, 92 basis points higher than first quarter of 2020.

Mortgage banking revenue decreased $2.2 million or 6 percent compared to the fourth quarter of 2020. While mortgage production volume remained consistent with prior quarter, mortgage interest rates began to increase and margins compressed. While still elevated, industry-wide capacity constraint is beginning to wane, which is putting pressure on margin.

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Table 5 – Mortgage Banking Revenue 
(In thousands)
 Three Months Ended March 31,Increase (Decrease)% Increase (Decrease)Three Months Ended
 Dec. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20212020
Mortgage production revenue$25,287 $21,570 $3,717 17 %$26,662 $(1,375)(5)%
Mortgage loans funded for sale$843,053 $548,956 $998,435 
Add: Current period end outstanding commitments387,465 657,570 380,637 
Less: Prior period end outstanding commitments380,637 158,460 560,493 
Total mortgage production volume$849,881 $1,048,066 $(198,185)(19)%$818,579 $31,302 %
Mortgage loan refinances to mortgage loans funded for sale65 %57 %800  bps58 %700  bps
Gains on sale margin2.98 %2.06 %92  bps3.26 %(28) bps
Primary mortgage interest rates:
Average2.88 %3.51 %(63) bps2.76 %12  bps
Period end3.17 %3.33 %(16) bps2.67 %50  bps
Mortgage servicing revenue$11,826 $15,597 $(3,771)(24)%$12,636 $(810)(6)%
Average outstanding principal balance of mortgage loans serviced for others15,723,231 20,416,546 (4,693,315)(23)%16,518,208 (794,977)(5)%
Average mortgage servicing revenue rates0.31 %0.31 %—  bp0.30 % bp

Primary rates disclosed in Table 5 above represent rates generally available to borrowers on 30 year conforming mortgage loans.

Deposit Service Charges and Fees

Deposit service charges and fees decreased $1.9 million compared to the first quarter of 2020.The stimulus programs enacted as a result of the pandemic have led to customers retaining higher cash balances. This, combined with lower levels of spending during the pandemic, has resulted in decreased overdraft fees compared to the prior year. Deposit service charges were relatively consistent with the fourth quarter of 2020.

Net gains on other assets, securities and derivatives

Other net losses totaled $3.0 million in the first quarter of 2021 compared to other net losses of $10.7 million in the first quarter of 2020 and other net gains of $5.4 million in the fourth quarter of 2020. These fluctuations are primarily related to changes in the fair value of investments related to deferred compensation that are largely offset in deferred compensation expense. The first quarter of 2021 included a $3.6 million impairment of a merchant banking investment. The first quarter of 2020 included a $3.1 million impairment of an energy fund investment.

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.

Historically low mortgage rates in 2020 and early 2021 resulted in a favorable risk profile for our MSRs that supported hedge performance during that time period. A sharp increase in longer-term interest rates during the first quarter has returned the risk profile of our MSRs to a more balanced profile, as can be seen in Table 25 of the Market Risk section.
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Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 Three Months Ended
 Mar. 31, 2021Dec. 31, 2020Mar. 31, 2020
Gain (loss) on mortgage hedge derivative contracts, net$(27,705)$(385)$18,371 
Gain (loss) on fair value option securities, net(1,910)68 68,393 
Gain (loss) on economic hedge of mortgage servicing rights, net(29,615)(317)86,764 
Gain (loss) on change in fair value of mortgage servicing rights33,874 6,276 (88,480)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue4,259 5,959 (1,716)
Net interest revenue on fair value option securities1
393 550 4,268 
Total economic benefit of changes in the fair value of mortgage servicing rights, net of economic hedges$4,652 $6,509 $2,552 
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 first quarter of 2021 totaled $282.6 million, an increase of $14.0 million over the first quarter of 2020 and a decrease of $18.0 million compared to the fourth quarter of 2020.

Table 7 – Other Operating Expense
(In thousands)
Three Months Ended March 31,Increase (Decrease)%
Increase (Decrease)
Three Months Ended
 Dec. 31, 2020
Increase (Decrease)%
Increase (Decrease)
 20212020
Regular compensation$97,211 $97,760 $(549)(1)%$96,552 $659 %
Incentive compensation:
Cash-based42,259 36,465 5,794 16 %51,351 (9,092)(18)%
Share-based4,570 2,832 1,738 61 %2,344 2,226 (95)%
Deferred compensation2,263 (5,673)7,936 N/A5,692 (3,429)N/A
Total incentive compensation49,092 33,624 15,468 46 %59,387 (10,295)(17)%
Employee benefits26,707 24,797 1,910 %20,259 6,448 32 %
Total personnel expense173,010 156,181 16,829 11 %176,198 (3,188)(2)%
Business promotion2,154 6,215 (4,061)(65)%3,728 (1,574)(42)%
Charitable contributions to BOKF Foundation4,000 — 4,000 N/A6,000 (2,000)N/A
Professional fees and services11,980 12,948 (968)(7)%14,254 (2,274)(16)%
Net occupancy and equipment26,662 26,061 601 %27,875 (1,213)(4)%
Insurance4,620 4,980 (360)(7)%4,006 614 15 %
Data processing and communications37,467 32,743 4,724 14 %35,061 2,406 %
Printing, postage and supplies3,440 4,272 (832)(19)%3,805 (365)(10)%
Net losses and operating expenses of repossessed assets(6,588)1,531 (8,119)(530)%1,168 (7,756)(664)%
Amortization of intangible assets4,807 5,094 (287)(6)%5,088 (281)(6)%
Mortgage banking costs13,943 10,545 3,398 32 %14,765 (822)(6)%
Other expense7,132 8,054 (922)(11)%8,713 (1,581)(18)%
Total other operating expense$282,627 $268,624 $14,003 %$300,661 $(18,034)(6)%
Average number of employees (full-time equivalent)4,902 5,075 (173)(3)%4,915 (13)— %
Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

Personnel expense increased $16.8 million compared to the first quarter of 2020. Incentive compensation increased $15.5 million. Cash based incentive compensation expense increased $5.8 million, largely attributed to incentives on lending and trading activity. Deferred compensation expense increased $7.9 million; however, this is largely offset by an increase in the value of related investments included in Other gains (losses), net. Employee benefits increased $1.9 million primarily due to increased healthcare costs. Regular compensation was relatively consistent with the first quarter of 2020 as the impact of annual standard merit increases was dampened by a decrease in the number of employees.
Personnel expense decreased $3.2 million compared to the fourth quarter of 2020. Cash based incentive compensation expense decreased $9.1 million, primarily in relation to decreased trading activity. Deferred compensation, which is largely offset by a decrease in the value of related investments included in Other gains (losses), net, decreased $3.4 million. Employee benefits increased $6.4 million as a seasonal increase in payroll taxes and retirement plan expenses was partially offset by a decrease in employee healthcare costs.
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Non-personnel operating expense

Non-personnel operating expense decreased $2.8 million compared to the first quarter of 2020. Net losses and expenses on repossessed assets decreased $8.1 million due to a $14.1 million gain on the sale of an equity interest received as part of the workout of a defaulted energy loan, partially offset by additional operating expenses and a write-down of a repossessed oil and gas property. Business promotion expense decreased $4.1 million primarily related to decreased travel and entertainment expense due to the pandemic. These decreases were partially offset by an increase of $4.7 million in data processing and communications expense, primarily due to technology project costs, and a $3.4 million increase in mortgage banking costs due to an increase in prepayments.
Non-personnel expense decreased $14.8 million compared to the fourth quarter of 2020. Net losses and expenses of repossessed assets decreased $7.8 million due to a gain on sale of repossessed oil and gas assets, partially offset by additional expenses and a write-down on repossessed oil and gas properties. Smaller reductions in expenses in professional fees and services, business promotion, and occupancy and equipment were partially offset by an increase in data processing and communications expense as we continue to invest in technology. We also made a charitable contribution of $4.0 million in the first quarter of 2021 and a contribution of $6.0 million in the prior quarter to the BOKF Foundation.
Income Taxes

The effective tax rate was 22.7 percent for the first quarter of 2021, 21.8 percent for the first quarter of 2020 and 22.6 percent for the fourth quarter of 2020. Income tax expense for the first quarter of 2021 decreased $2.8 million compared to the fourth quarter of 2020, primarily due to the decrease in net income before tax for the first 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.

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The value of funds provided by the operating lines of business to the Funds Management unit is also 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.

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 decreased $25.3 million compared to the first quarter of 2020. Net interest revenue decreased by $14.9 million compared to the prior year, primarily driven by lower average outstanding loan balances and lower yields on deposits sold to the Funds Management unit. Net charge-offs decreased $3.0 million compared to the first quarter of 2020. Other operating revenue decreased by $26.2 million primarily due to a shift from trading revenue from our agency residential mortgage trading activities to net interest revenue. Operating expense increased $8.5 million compared to the first quarter of 2020, primarily in Commercial Banking.

Net interest revenue decreased $21.9 million compared to the fourth quarter of 2020, primarily due to lower loan balances and lower earnings from deposits sold to the Funds Management unit. Other operating revenue decreased $21.0 million primarily related to a reversion of our agency mortgage trading volumes from elevated levels experienced in the fourth quarter of 2020 and narrowing margins. Other operating expense decreased $10.4 million.

Net income attributable to our Funds Management unit was impacted by the negative provision for credit losses in the first quarter of 2021, compared to a provision for credit losses in excess of charge-offs in the first quarter of 2020.

Table 8 -- Net Income by Line of Business
(In thousands)
 Three Months Ended March 31,Increase (Decrease)% Increase (Decrease)Three Months Ended
 Dec. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20212020
Commercial Banking$69,673 $74,975 $(5,302)(7)%$74,941 $(5,268)(7)%
Consumer Banking6,849 23,701 (16,852)(71)%14,768 (7,919)(54)%
Wealth Management19,382 22,573 (3,191)(14)%28,435 (9,053)(32)%
Subtotal95,904 121,249 (25,345)(21)%118,144 (22,240)(19)%
Funds Management and other50,156 (59,170)109,326 N/A36,080 14,076 N/A
Total$146,060 $62,079 $83,981 135 %$154,224 $(8,164)(5)%
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 $69.7 million to consolidated net income in the first quarter of 2021, a decrease of $5.3 million or 7 percent compared to the first quarter of 2020.

Table 9 -- Commercial Banking
(Dollars in thousands)
 Three Months Ended March 31,Increase (Decrease)% Increase (Decrease)Three Months Ended
 Dec. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20212020
Net interest revenue from external sources$155,799 $201,902 $(46,103)(23)%$165,468 $(9,669)(6)%
Net interest expense from internal sources(25,794)(50,495)24,701 (49)%(23,442)(2,352)10 %
Total net interest revenue130,005 151,407 (21,402)(14)%142,026 (12,021)(8)%
Net loans charged off13,985 16,880 (2,895)(17)%16,234 (2,249)(14)%
Net interest revenue after net loans charged off116,020 134,527 (18,507)(14)%125,792 (9,772)(8)%
Fees and commissions revenue49,847 41,459 8,388 20 %49,060 787 %
Other gains (losses), net(3,268)(3,239)(29)N/A162 (3,430)N/A
Other operating revenue46,579 38,220 8,359 22 %49,222 (2,643)(5)%
Personnel expense39,252 37,020 2,232 %41,311 (2,059)(5)%
Non-personnel expense27,727 23,732 3,995 17 %27,061 666 %
Other operating expense66,979 60,752 6,227 10 %68,372 (1,393)(2)%
Net direct contribution95,620 111,995 (16,375)(15)%106,642 (11,022)(10)%
Gain on financial instruments, net33 49 (16)N/A58 (25)N/A
Gain on repossessed assets, net12,737 12,728 N/A1,455 11,282 N/A
Corporate expense allocations12,734 8,905 3,829 43 %5,348 7,386 138 %
Income before taxes95,656 103,148 (7,492)(7)%102,807 (7,151)(7)%
Federal and state income tax25,983 28,173 (2,190)(8)%27,866 (1,883)(7)%
Net income$69,673 $74,975 $(5,302)(7)%$74,941 $(5,268)(7)%
Average assets$28,047,052 $24,687,976 $3,359,076 14 %$27,693,742 $353,310 %
Average loans17,522,520 18,812,015 (1,289,495)(7)%18,100,333 (577,813)(3)%
Average deposits16,130,168 11,907,386 4,222,782 35 %15,373,673 756,495 %
Average invested capital2,157,062 2,188,242 (31,180)(1)%2,209,648 (52,586)(2)%
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 $21.4 million compared to the first quarter of 2020. Net interest revenue from external sources decreased due to a reduction in loan volumes and lower loan yields. Net interest expense from internal sources decreased due to the impact of deposit growth, partially offset by lower yields paid for deposits sold to the Funds Management unit. Net loans charged-off decreased $2.9 million.

Fees and commissions revenue increased $8.4 million or 20 percent while operating expenses increased $6.2 million or 10 percent. An increase in production revenue from repossessed assets was largely offset by higher operating expenses on those assets. Customer hedging revenue and incentive compensation expense were also up over the first quarter of 2020.

During first quarter of 2021, a gain of $14.1 million was realized on the sale of an equity interest received as part of the workout of a defaulted energy loan. Corporate expense allocations increased $3.8 million or 43 percent compared to the prior year primarily due to PPP loan activity.

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The average outstanding balance of loans attributed to Commercial Banking decreased $1.3 billion or 7 percent to $17.5 billion compared to the first quarter of 2020. 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. 
 
Average deposits attributed to Commercial Banking were $16.1 billion for the first quarter of 2021, a $4.2 billion or 35 percent increase over the first 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 decreased $12.0 million or 8 percent compared to the fourth quarter of 2020, largely due to a reduction in loan volumes and lower loan yields. Fees and commissions revenue was relatively consistent with fourth quarter of 2020. Operating expense decreased $1.4 million or 2 percent compared to the fourth quarter of 2020, primarily due to incentive compensation costs. Net gain on repossessed assets also increased $11.3 million due to the gain on sale of repossessed oil and gas assets.

Average loan balances decreased $578 million or 3 percent and average customer deposits increased $756 million or 5 percent over the fourth quarter of 2020.



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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 $6.8 million to consolidated net income for the first quarter of 2021, a decrease of $16.9 million compared to the first quarter of 2020. Net interest revenue decreased by $23.0 million.

Table 10 -- Consumer Banking
(Dollars in thousands)
 Three Months Ended March 31,Increase (Decrease)% Increase (Decrease)Three Months Ended
 Dec. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20212020
Net interest revenue from external sources$16,686 $25,876 $(9,190)(36)%$17,512 $(826)(5)%
Net interest revenue from internal sources4,288 18,056 (13,768)(76)%13,160 (8,872)(67)%
Total net interest revenue20,974 43,932 (22,958)(52)%30,672 (9,698)(32)%
Net loans charged off1,136 1,256 (120)(10)%935 201 21 %
Net interest revenue after net loans charged off19,838 42,676 (22,838)(54)%29,737 (9,899)(33)%
Fees and commissions revenue52,300 55,062 (2,762)(5)%55,326 (3,026)(5)%
Other losses, net(18)— (18)N/A(1,669)1,651 N/A
Other operating revenue52,282 55,062 (2,780)(5)%53,657 (1,375)(3)%
Personnel expense22,026 23,044 (1,018)(4)%22,904 (878)(4)%
Non-personnel expense33,717 30,800 2,917 %36,402 (2,685)(7)%
Total other operating expense55,743 53,844 1,899 %59,306 (3,563)(6)%
Net direct contribution16,377 43,894 (27,517)(63)%24,088 (7,711)(32)%
Gain (loss) on financial instruments, net(29,616)86,764 (116,380)N/A(316)(29,300)N/A
Change in fair value of mortgage servicing rights33,874 (88,480)122,354 N/A6,276 27,598 N/A
Gain on repossessed assets, net41 13 28 N/A195 (154)N/A
Corporate expense allocations11,487 10,389 1,098 11 %10,428 1,059 10 %
Income before taxes9,189 31,802 (22,613)(71)%19,815 (10,626)(54)%
Federal and state income tax2,340 8,101 (5,761)(71)%5,047 (2,707)(54)%
Net income$6,849 $23,701 $(16,852)(71)%$14,768 $(7,919)(54)%
Average assets$9,755,539 $9,850,853 $(95,314)(1)%$9,700,428 $55,111 %
Average loans1,823,732 1,711,703 112,029 %1,840,492 (16,760)(1)%
Average deposits8,082,443 6,869,481 1,212,962 18 %7,993,971 88,472 %
Average invested capital256,188 274,384 (18,196)(7)%260,108 (3,920)(2)%
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 from Consumer Banking activities declined by $23.0 million or 52 percent compared to the first quarter of 2020, primarily due to a decrease in the yield on deposits sold to our Funds Management unit and a decrease in volume of securities held as an economic hedge of our mortgage servicing rights. Average consumer deposits grew $1.2 billion over the first quarter of 2020 with demand deposit balances increasing $720 million or 34 percent.

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Fees and commissions revenue decreased $2.8 million or 5 percent compared to the first quarter of 2020. Mortgage banking revenue was unchanged from the first quarter of 2020. Production revenue increased due to widened gain on sale margins due to industry-wide capacity constraints. Servicing revenue was lower due to a decrease in servicing volume. The outstanding principal balance of loans serviced was lower due to increased prepayment rates and the impact of servicing rights sold last summer. Deposit service charges decreased $2.7 million. The stimulus programs enacted as a result of the pandemic have led to customers retaining higher cash levels. This, combined with lower spending levels, has decreased overdraft fees compared to the prior year. Operating expense increased $1.9 million due to increased mortgage banking costs, partially offset by lower personnel expense. Corporate expense allocations were $1.1 million or 11 percent higher than the prior year.

Changes in the fair value of mortgage servicing rights, net of economic hedges, increased pre-tax net income for the first quarter of 2021 by $4.3 million compared to a $1.7 million decrease in pre-tax net income in the first quarter of 2020.

Net interest revenue from Consumer Banking activities decreased $9.7 million or 32 percent compared to the fourth quarter of 2020, largely due to lower yields on deposits sold to our Funds Management unit. Operating revenue decreased $1.4 million compared to the fourth quarter of 2020. A decrease in mortgage banking revenue was partially offset by an increase in other income. Operating expense decreased $3.6 million, primarily due to decreases in regular compensation expense, business promotion expense and mortgage banking costs.

Average consumer loans decreased $17 million or 1 percent. Average deposits increased $88 million or 1 percent.

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Wealth Management

Wealth Management contributed $19.4 million to consolidated net income in the first quarter of 2021, a decrease of $3.2 million or 14 percent compared to the first quarter of 2020. Revenue attributed to the Wealth Management segment totaled $114.5 million for the first quarter of 2021, a $2.3 million or 2 percent decrease compared to the first quarter of 2020. Revenue from our agency mortgage trading activities grew by $5.2 million or 15 percent over the prior year. This growth was offset by lower revenue from deposits sold to our Funds Management unit, loan yields and decreased fiduciary and asset management revenue.


Table 11 -- Wealth Management
(Dollars in thousands)
 Three Months Ended March 31,Increase (Decrease)% Increase (Decrease)Three Months Ended
 Dec. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20212020
Net interest revenue from external sources$48,554 $14,366 $34,188 238 %$47,995 $559 %
Net interest revenue from internal sources(200)4,538 (4,738)(104)%526 (726)(138)%
Total net interest revenue48,354 18,904 29,450 156 %48,521 (167)— %
Net loans charged off (recovered)(29)(48)19 (40)%(21)(8)38 %
Net interest revenue after net loans charged off (recovered)48,383 18,952 29,431 155 %48,542 (159)— %
Fees and commissions revenue65,684 97,881 (32,197)(33)%82,936 (17,252)(21)%
Other gains, net439 — 439 N/A191 248 N/A
Other operating revenue66,123 97,881 (31,758)(32)%83,127 (17,004)(20)%
Personnel expense57,414 56,443 971 %62,600 (5,186)(8)%
Non-personnel expense21,151 21,749 (598)(3)%21,400 (249)(1)%
Other operating expense78,565 78,192 373 — %84,000 (5,435)(6)%
Net direct contribution35,941 38,641 (2,700)(7)%47,669 (11,728)(25)%
Corporate expense allocations9,887 8,265 1,622 20 %9,465 422 %
Income before taxes26,054 30,383 (4,329)(14)%38,201 (12,147)(32)%
Federal and state income tax6,672 7,810 (1,138)(15)%9,766 (3,094)(32)%
Net income$19,382 $22,573 $(3,191)(14)%$28,435 $(9,053)(32)%
Average assets$18,645,865 $12,723,412 $5,922,453 47 %$18,101,182 $544,683 %
Average loans1,917,973 1,705,735 212,238 12 %1,839,695 78,278 %
Average deposits9,706,295 7,623,986 2,082,309 27 %9,589,814 116,481 %
Average invested capital313,355 288,264 25,091 %306,475 6,880 %

Net interest revenue increased $29.5 million, largely due to growth in U.S. agency mortgage-backed trading volumes. The growth in net interest revenue due to increased earning assets was muted by a reduction in the value of deposits sold to our Funds Management unit. Fees and commissions revenue decreased $32.2 million. Trading revenue decreased $30.7 million, largely due to a shift in the timing of settlements, which results in more interest revenue, but less fee revenue, accompanied by margin compression.

Fiduciary and asset management revenue declined $3.2 million related to a combination of lower mutual fund fees and $2.8 million in waived administration fees on the Cavanal Hill money market funds as a result of the significant decline in short-term interest rates. These were partially offset by increases in trust fees and managed account fees from high client asset balances.
Operating expense and corporate expense allocations were relatively consistent compared to the first quarter of 2020.
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Average loans attributed to the Wealth Management segment increased $212 million or 12 percent. Average deposits increased $2.1 billion or 27 percent, largely due to core growth as customers are retaining higher balances in the current economic environment.

Net income for Wealth Management decreased $9.1 million or 32 percent compared to the fourth quarter of 2020. Combined net interest revenue and fee revenue decreased $17.4 million. Net interest revenue was relatively consistent with the previous quarter. However, brokerage and trading revenue decreased $15.0 million due to narrowing margins and a reduction in trading volumes.

Average loans grew 4 percent to $1.9 billion and average deposits increased $116 million or 1 percent to $9.7 billion.
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 March 31, 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 increased $378 million to $5.1 billion during the first 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 March 31, 2021, the carrying value of investment (held-to-maturity) securities was $226 million, including a $617 thousand allowance for expected credit losses compared to $245 million at December 31, 2020 with a $688 thousand allowance for expected credit losses. The fair value of investment securities was $253 million at March 31, 2021 and $272 million at December 31, 2020. 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 March 31, 2021, a $510 million increase compared to December 31, 2020. At March 31, 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 March 31, 2021 is 3.3 years. Management estimates the duration extends to 4.5 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.3 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 $22.5 billion at March 31, 2021, a $474 million decrease compared to December 31, 2020, primarily due to paydowns in the commercial and commercial real estate portfolios, partially offset by an increase in PPP loans.

Table 12 -- Loans
(In thousands)
Mar. 31, 2021Dec. 31, 2020Sept. 30, 2020Jun. 30, 2020Mar. 31, 2020
Commercial: 
Energy$3,202,488 $3,469,194 $3,717,101 $3,974,174 $4,111,676 
Services3,421,948 3,508,583 3,545,825 3,779,881 3,955,748 
Healthcare3,290,758 3,305,990 3,325,790 3,289,343 3,165,096 
General business2,742,590 2,793,768 2,976,990 3,115,112 3,563,455 
Total commercial12,657,784 13,077,535 13,565,706 14,158,510 14,795,975 
Commercial real estate:
Multifamily1,227,915 1,328,045 1,387,461 1,407,107 1,282,457 
Office1,094,060 1,085,257 1,099,563 973,995 962,004 
Retail787,648 796,223 786,211 780,467 774,198 
Industrial789,437 810,510 792,389 723,005 728,026 
Residential construction and land development119,079 119,394 121,258 136,911 138,958 
Other commercial real estate485,208 559,109 506,818 532,659 564,442 
Total commercial real estate4,503,347 4,698,538 4,693,700 4,554,144 4,450,085 
Paycheck protection program1,848,550 1,682,310 2,097,325 2,081,428 — 
Loans to individuals: 
Residential mortgage1,797,478 1,863,003 1,849,144 1,813,442 1,844,555 
Residential mortgage guaranteed by U.S. government agencies420,051 408,687 384,247 322,269 197,889 
Personal1,306,637 1,277,447 1,213,178 1,226,097 1,175,466 
Total loans to individuals3,524,166 3,549,137 3,446,569 3,361,808 3,217,910 
Total$22,533,847 $23,007,520 $23,803,300 $24,155,890 $22,463,970 
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 $12.7 billion or 56 percent of the loan portfolio at March 31, 2021, a $420 million decrease compared to December 31, 2020, primarily due to continued paydowns as borrowers continue to reduce leverage in this time of economic uncertainty.

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Approximately 77 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 5 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 $3.2 billion or 14 percent of total loans at March 31, 2021, a $267 million decrease compared to December 31, 2020. Approximately $2.4 billion of energy loans were to oil and gas producers, a $239 million decrease compared to December 31, 2020. While commodity prices have continued to improve and stabilize, 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 66 percent of the committed production loans are secured by properties primarily producing oil and 34 percent of the committed production loans are secured by properties primarily producing natural gas.

Loans to midstream oil and gas companies totaled $648 million at March 31, 2021, a decrease of $52 million compared to December 31, 2020. Loans to borrowers that provide services to the energy industry totaled $135 million at March 31, 2021, an increase of $26 million. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $34 million, a $1.7 million decrease compared to the prior quarter.

Unfunded energy loan commitments were $2.4 billion at March 31, 2021, a $34 million decrease compared to December 31, 2020.

The healthcare sector of the loan portfolio totaled $3.3 billion or 15 percent of total loans. Healthcare loans decreased $15 million compared to December 31, 2020. 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. Healthcare also includes loans to hospitals and other medical service providers impacted by a deferral of elective procedures. The CARES Act includes multiple revenue enhancement measures for both hospitals and skilled nursing facilities as they manage through the risks of the virus.
The services sector of the loan portfolio decreased $87 million to $3.4 billion or 15 percent of total loans. 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 $1.8 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 decreased $51 million to $2.7 billion or 12 percent of total loans. General business loans consist of $1.5 billion of wholesale/retail loans and $1.2 billion of loans from other commercial industries.

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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 March 31, 2021, the outstanding principal balance of these loans totaled $3.8 billion, including $1.6 billion of energy loans. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 20 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.

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 $195 million compared to December 31, 2020. Multifamily residential loans, our largest exposure in commercial real estate, decreased $100 million to $1.2 billion at March 31, 2021. Loans secured by other commercial real estate properties decreased $74 million to $485 million. Loans secured by industrial facilities decreased $21 million to $789 million. Loans secured by retail facilities and office buildings were largely unchanged compared to December 31, 2020.

Approximately 68 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 8 percent of the segment, followed by California at 6 percent. All other states represent less than 5 percent individually.
Paycheck Protection Program
We are actively participating 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 provided 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 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 has been slower than initially anticipated.
The Company participated in the current round of PPP, originating $544 million of new PPP loans this quarter, maintaining a focus on our existing client base to timely support their needs. The newest round of loans has a contractual term of five years, but are expected to be forgiven prior to maturity.
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.
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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.

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)
Mar. 31, 2021Dec. 31, 2020Sept. 30, 2020June 30, 2020Mar. 31, 2020
Texas:
Commercial$5,748,345 $5,926,534 $6,135,471 $6,359,206 $6,350,690 
Commercial real estate1,511,714 1,519,217 1,523,226 1,413,108 1,296,266 
Paycheck protection program537,899 501,079 614,970 612,133 — 
Loans to individuals848,194 855,410 794,055 749,531 756,634 
Total Texas8,646,152 8,802,240 9,067,722 9,133,978 8,403,590 
Oklahoma:
Commercial2,975,477 3,144,782 3,332,244 3,489,259 3,886,086 
Commercial real estate597,840 597,733 608,448 596,419 593,473 
Paycheck protection program468,002 413,108 487,247 442,518 — 
Loans to individuals2,043,705 2,052,784 2,034,576 1,966,032 1,788,518 
Total Oklahoma6,085,024 6,208,407 6,462,515 6,494,228 6,268,077 
Colorado:
Commercial1,910,826 1,929,320 1,993,364 2,085,294 2,181,309 
Commercial real estate777,786 879,648 893,626 940,622 955,608 
Paycheck protection program436,540 377,111 494,910 488,279 — 
Loans to individuals264,759 264,295 257,832 265,359 268,674 
Total Colorado3,389,911 3,450,374 3,639,732 3,779,554 3,405,591 
Arizona:
Commercial1,207,089 1,219,072 1,218,769 1,346,037 1,396,582 
Commercial real estate667,766 726,111 702,291 698,818 714,161 
Paycheck protection program208,481 211,725 272,114 318,961 — 
Loans to individuals179,031 177,948 166,203 177,155 181,821 
Total Arizona2,262,367 2,334,856 2,359,377 2,540,971 2,292,564 
Kansas/Missouri:
Commercial421,974 455,914 493,606 481,162 556,255 
Commercial real estate395,590 366,821 352,663 314,926 310,799 
Paycheck protection program60,741 56,011 80,230 76,724 — 
Loans to individuals104,954 105,995 96,598 102,577 116,734 
Total Kansas/Missouri983,259 984,741 1,023,097 975,389 983,788 
New Mexico:
Commercial307,395 303,833 288,374 308,090 327,164 
Commercial real estate448,298 473,204 473,697 458,230 434,150 
Paycheck protection program124,059 109,881 133,244 128,058 — 
Loans to individuals70,491 75,665 79,890 83,470 87,110 
Total New Mexico950,243 962,583 975,205 977,848 848,424 
Arkansas:
Commercial86,678 98,080 103,878 89,462 97,889 
Commercial real estate104,353 135,804 139,749 132,021 145,628 
Paycheck protection program12,828 13,395 14,610 14,755 — 
Loans to individuals13,032 17,040 17,415 17,684 18,419 
Total Arkansas216,891 264,319 275,652 253,922 261,936 
Total BOK Financial loans$22,533,847 $23,007,520 $23,803,300 $24,155,890 $22,463,970 
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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)
 Mar. 31, 2021Dec. 31, 2020Sept. 30, 2020June 30, 2020Mar. 31, 2020
Loan commitments$11,151,650 $10,967,546 $10,430,106 $10,298,572 $9,960,678 
Standby letters of credit713,834 681,467 678,136 693,177 683,516 
Unpaid principal balance of residential mortgage loans sold with recourse68,393 73,055 77,225 82,305 86,336 
Unpaid principal balance of residential mortgage loans transferred into mortgage-backed securities guaranteed by U.S. Dept. of Veteran's Affairs1,326,300 1,442,504 1,574,272 1,715,025 3,217,567 
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 March 31, 2021, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $880 million compared to $625 million at December 31, 2020. At March 31, 2021, the net fair value of our derivative contracts included $466 million for energy contracts, $343 million for foreign exchange contracts and $70 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 $865 million at March 31, 2021 and $600 million at December 31, 2020.

At March 31, 2021, total derivative assets were reduced by $840 thousand of cash collateral received from counterparties and total derivative liabilities were reduced by $504 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement.

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 March 31, 2021 follows in Table 15.

Table 15 -- Fair Value of Derivative Contracts
(In thousands)
Customers$659,036 
Banks and other financial institutions220,462 
Exchanges and clearing organizations116 
Fair value of customer risk management program asset derivative contracts, net$879,614 
 
At March 31, 2021, our largest derivative exposure was to a customer for an energy contract of $56 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 $47.17 per barrel of oil would decrease the fair value of derivative assets by $230 million, with dealer counterparties comprising the bulk of the assets. An increase in prices equivalent to $73.93 per barrel of oil would increase the fair value of derivative assets by $711 million as margin received falls faster than the asset values. Liquidity requirements of this program may also be affected by our credit rating. At March 31, 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 March 31, 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
Mar. 31, 2021Dec. 31, 2020Sept. 30, 2020June 30, 2020Mar. 31, 2020
Allowance for loan losses:  
Beginning balance$388,640 $419,777 435,597 315,311 210,759 
CECL transition adjustment1
 — — — 25,809 
Beginning balance, adjusted388,640 419,777 435,597 315,311 236,568 
Loans charged off(16,905)(18,251)(26,661)(15,570)(18,917)
Recoveries of loans previously charged off2,437 1,592 4,232 1,491 1,696 
Net loans charged off(14,468)(16,659)(22,429)(14,079)(17,221)
Provision for credit losses(21,770)(14,478)6,609 134,365 95,964 
Ending balance$352,402 $388,640 419,777 435,597 315,311 
Accrual for off-balance sheet credit risk from unfunded loan commitments:
Beginning balance$36,921 $27,969 32,919 28,514 1,585 
CECL transition adjustment — — — 23,552 
Beginning balance, adjusted36,921 27,969 32,919 28,514 25,137 
Provision for credit losses(4,044)8,952 (4,950)4,405 3,377 
Ending balance$32,877 $36,921 27,969 32,919 28,514 
Accrual for off-balance sheet credit risk associated with mortgage banking activities:
Beginning balance$4,282 $5,246 6,041 9,660 4,820 
CECL transition adjustment — — — 10,915 
Beginning balance, adjusted4,282 5,246 6,041 9,660 15,735 
Loans charged off(32)(41)(25)(44)(55)
Provision for credit losses885 (923)(770)(3,575)(6,020)
Ending balance$5,135 $4,282 5,246 6,041 9,660 
Allowance for credit losses related to held-to-maturity (investment) securities:
Beginning balance$688 $739 $1,628 $1,502 $— 
CECL transition adjustment — — — 1,052 
Beginning balance, adjusted688 739 1,628 1,502 1,052 
Provision for credit losses(71)(51)(889)126 450 
Ending balance$617 $688 $739 $1,628 $1,502 
Total provision for credit losses$(25,000)$(6,500)$— $135,195 $93,321 
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Three Months Ended
Mar. 31, 2021Dec. 31, 2020Sept. 30, 2020June 30, 2020Mar. 31, 2020
Net charge-offs (annualized) to average loans0.25 %0.28 %0.37 %0.23 %0.31 %
Net charge-offs (annualized) to average loans excluding PPP loans2
0.28 %0.31 %0.41 %0.25 %0.31 %
Recoveries to gross charge-offs14.42 %8.72 %15.87 %9.58 %8.97 %
Provision for loan losses (annualized) to average loans(0.38)%(0.25)%0.11 %2.23 %1.75 %
Allowance for loan losses to loans outstanding at period-end1.56 %1.69 %1.76 %1.80 %1.40 %
Allowance for loan losses to loans outstanding at period-end excluding PPP loans2
1.70 %1.82 %1.93 %1.97 %1.40 %
Accrual for unfunded loan commitments to loan commitments0.29 %0.34 %0.27 %0.32 %0.29 %
Combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments to loans outstanding at period-end1.71 %1.85 %1.88 %1.94 %1.53 %
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 loans2
1.86 %2.00 %2.06 %2.12 %1.53 %
1    Included $1.3 million related to measurement changes to the allowance attributed to outstanding loan balances and $24.5 million related to recognition of expected credit losses on acquired loans.
2    Metric meaningful due to the unique characteristics and short-term nature of the PPP loans.

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 $25.0 million negative provision for credit losses was recorded the first quarter of 2021. Changes in our reasonable and supportable forecasts of macroeconomic variables, primarily due to an improved economic outlook related to the anticipated impact of the on-going COVID-19 pandemic, and other assumptions, resulted in a $31.1 million decrease in the allowance for credit losses from lending activities. Changes in the loan portfolio characteristics, including specific impairment and losses, loan balances and risk grading resulted in a $5.2 million increase in the allowance for credit losses from lending activities.

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Our reasonable and supportable forecast of macroeconomic variables are significantly influenced by the COVID-19 pandemic developments and related government stimulus policies, which remain highly uncertain. A summary of macroeconomic variables considered in developing our estimate of expected credit losses at March 31, 2021 follows:

BaseDownsideUpside
Scenario probability weighting60%30%10%
COVID-19 trajectoryCOVID-19 case levels continue to improve as virus immunity becomes more widespread and proves effective against new virus strains. Vaccine distribution continues to accelerate through the first half of 2021, with large share of U.S. population vaccinated by end of third quarter of 2021.Trajectory of COVID-19 pandemic worsens as country experiences additional surges stemming from new virus strains; hotspots emerge throughout the second and third quarter of 2021 resulting in state/regional shutdowns, though a nation-wide shutdown is not re-implemented. The pace of vaccine distribution slows from current levels with widespread vaccination in the U.S. by the end of 2021.COVID-19 case levels continue to improve as virus immunity becomes more widespread and proves effective against new virus strains. Vaccine distribution continues to accelerate through the first half of 2021, with large share of U.S. population vaccinated by end of third quarter of 2021.
Economic recovery (driven by COVID-19 trajectory)Continued easing of restrictions and the release of pent-up consumer demand results in GDP growth above historical averages, recovering to pre-COVID levels in the second quarter of 2021.Deteriorated COVID-19 situation, slow vaccine distribution and lack of additional fiscal stimulus in 2021 cause the economy to fall back into recession. GDP does not recover to pre-COVID-19 levels until second quarter of 2022.Continued easing of restrictions and the release of pent-up consumer demand results in GDP growth above historical averages, recovering to pre-COVID levels in the second quarter of 2021.
Fiscal stimulus (driven by economic recovery)No additional major COVID-focused relief packages are enacted in 2021.No additional major COVID-focused relief packages are enacted in 2021.No additional major COVID-focused relief packages are enacted in 2021.
Macro-economic factors
GDP is forecasted to grow by 5.6 percent over the next 12 months.
Civilian unemployment rate of 6.0 percent in the second quarter of 2021 improves to 5.0 percent by the first quarter of 2022.
WTI oil prices are projected to generally follow the NYMEX forward curve that existed at the end of March 2021 and are expected to average $57.87 per barrel over the next 12 months.
No GDP growth is forecasted over the next 12 months.
Civilian unemployment rate of 6.8 percent in the second quarter of 2021 increases in the next two quarters then improving to 7.8 percent by the first quarter of 2022.
WTI oil prices are projected to average $44.15 over the next 12 months.
GDP is forecasted to grow by 7.1 percent over the next 12 months.
Civilian unemployment rate of 5.7 percent in the second quarter of 2021 improves to 4.3 percent by the first quarter of 2022.
WTI oil prices are projected to average $63.28 per barrel over the next 12 months.
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Net charge-offs and changes in specific impairments attributed to certain credits required a $12.1 million provision during the first quarter of 2021. This provision was partially offset by a decrease in allowance related to lower outstanding loan balances. There was a slight increase in the provision for credit losses related to risk grading during the quarter. 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 $860 million at March 31, a $164 million decrease from December 31. Non-pass graded loans were primarily composed of $524 million or 16 percent of energy loans, $108 million or 3 percent of services loans, $76 million or 3 percent of general business loans and $60 million or 1 percent of commercial real state loans.

The allowance for loan losses totaled $352 million or 1.56 percent of outstanding loans and 170 percent of nonaccruing loans at March 31, 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 $385 million or 1.71 percent of outstanding loans and 186 percent of nonaccruing loans at March 31, 2021. Excluding PPP loans, the allowance for loan losses was 1.70 percent of outstanding loans and the combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was 1.86 percent.

The allowance for credit losses attributed to energy was 3.29 percent of outstanding energy loans at March 31. Our semi-annual borrowing base redeterminations during the fourth quarter of 2020 were based on forward pricing curves that existed at that time, which resulted in credit quality migration at that time. While forward prices subsequently improved, the pricing environment remains fragile and tied to the continued economic recovery from the impact of the COVID-19 pandemic. We believe the duration of the downturn is a more significant factor affecting performance than the level of prices.

The company recorded a $6.5 million negative provision for credit losses in the fourth quarter of 2020. The allowance for loan losses was $389 million or 1.69 percent of outstanding loans and 171 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies at December 31, 2020. The combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was $426 million or 1.85 percent of outstanding loans and 188 percent of nonaccruing loans. Excluding PPP loans, the allowance for loan losses was 1.82 percent of outstanding loans and the combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was 2.00 percent.

Net Loans Charged Off

Net charge-offs of commercial loans were $13.7 million in the first quarter of 2021, primarily related to two energy production borrowers. Net commercial real estate loan charge-offs were $233 thousand and net charge-offs of loans to individuals were $566 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)
Mar. 31, 2021Dec. 31, 2020Sept. 30, 2020June 30, 2020Mar. 31, 2020
Nonaccruing loans:    
Commercial:  
Energy$101,800 $125,059 $126,816 $162,989 $96,448 
Healthcare3,187 3,645 3,645 3,645 4,070 
Services28,033 25,598 25,817 21,032 8,425 
General business14,053 12,857 13,675 14,333 9,681 
Total commercial147,073 167,159 169,953 201,999 118,624 
Commercial real estate27,243 27,246 12,952 13,956 8,545 
Loans to individuals:  
Residential mortgage32,884 32,228 31,599 33,098 30,721 
Residential mortgage guaranteed by U.S. government agencies8,564 7,741 6,397 6,110 5,005 
Personal255 319 252 233 277 
Total loans to individuals41,703 40,288 38,248 39,441 36,003 
Total nonaccruing loans216,019 234,693 221,153 255,396 163,172 
Accruing renegotiated loans guaranteed by U.S. government agencies154,591 151,775 142,770 114,571 91,757 
Real estate and other repossessed assets70,911 90,526 52,847 35,330 36,744 
Total nonperforming assets$441,521 $476,994 $416,770 $405,297 $291,673 
Total nonperforming assets excluding those guaranteed by U.S. government agencies$278,366 $317,478 $267,603 $284,616 $194,911 
Allowance for loan losses to nonaccruing loans1
169.87 %171.24 %195.47 %174.74 %199.35 %
Nonperforming assets to outstanding loans and repossessed assets1.95 %2.07 %1.75 %1.68 %1.30 %
Nonperforming assets to outstanding loans and repossessed assets excluding residential mortgage and PPP loans guaranteed by U.S. government agencies1,2
1.37 %1.51 %1.25 %1.31 %0.87 %
Nonaccruing commercial loans to outstanding commercial loans1.16 %1.28 %1.25 %1.43 %0.80 %
Nonaccruing commercial real estate loans to outstanding commercial real estate loans0.60 %0.58 %0.28 %0.31 %0.19 %
Nonaccruing loans to individuals to outstanding loans to individuals1
1.07 %1.04 %1.04 %1.10 %1.03 %
1     Excludes residential mortgages guaranteed by U.S. government agencies.
2     Excludes residential mortgage and PPP loans guaranteed by U.S. government agencies.

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Excluding assets guaranteed by U.S. government agencies, nonperforming assets decreased $39 million from December 31, 2020, primarily due to a $23 million decrease in nonaccruing energy loans and a $20 million decrease in real estate and other repossessed assets. Newly identified nonaccruing loans totaled $25 million, offset by $26 million of payments and $17 million of charge-offs. The Company generally retains nonperforming assets to maximize potential recovery, which may cause future nonperforming assets to decrease more slowly.

A rollforward of nonperforming assets for the three months ended March 31, 2021 follows in Table 18.

Table 18 -- Rollforward of Nonperforming Assets
(In thousands)
 Three Months Ended
March 31, 2021
Nonaccruing Loans
 CommercialCommercial Real EstateLoan to IndividualsTotal
 
Renegotiated Loans
Real Estate and Other Repossessed AssetsTotal Nonperforming Assets
Balance, December 31, 2020$167,159 $27,246 $40,288 $234,693 $151,775 $90,526 $476,994 
Additions18,928 327 5,330 24,585 12,700 8,688 45,973 
Payments(23,669)(67)(2,522)(26,258)(699)— (26,957)
Charge-offs(15,345)(263)(1,297)(16,905)— — (16,905)
Net gains (losses) and write-downs— — — — — 13,158 13,158 
Foreclosure of nonperforming loans— — (147)(147)— 147 — 
Foreclosure of loans guaranteed by U.S. government agencies— — (226)(226)(122)— (348)
Proceeds from sales— — — — (8,914)(41,608)(50,522)
Net transfers to nonaccruing loans— — 424 424 (424)— — 
Return to accrual status— — (147)(147)— — (147)
Other, net— — — — 275 — 275 
Balance, March 31, 2021$147,073 $27,243 $41,703 $216,019 $154,591 $70,911 $441,521 

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 $71 million at March 31, 2021, composed primarily of $48 million of oil and gas properties, including a consolidated limited liability corporation that is 60% owned by the Company and 40% owned by an unrelated financial institution. The remaining balance of real estate and repossessed assets included $18 million of developed commercial real estate, $2.4 million of undeveloped land primarily zoned for commercial development, $1.7 million of equipment and $498 thousand of 1-4 family residential properties. Real estate and other repossessed assets totaled $91 million at December 31, 2020. The decrease compared to December 31 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 first quarter of 2021, approximately 73 percent of our funding was provided by deposit accounts, 12 percent from borrowed funds, less than 1 percent from long-term subordinated debt and 10 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 first quarter of 2021 totaled $36.5 billion, a $1.0 billion increase over the fourth quarter of 2020. Continued deposit growth was primarily due to customers maintaining higher balances in the current economic environment, supplemented by inflows from government stimulus payments. Interest-bearing transaction account balances increased $715 million. Demand deposits increased $177 million while certificate of deposit balances increased $56 million.

Table 19 - Average Deposits by Line of Business
(In thousands)
Three Months Ended
 Mar. 31, 2021Dec. 31, 2020Sept. 30, 2020June 30, 2020Mar. 31, 2020
Commercial Banking$16,130,168 $15,373,673 $15,375,450 $14,599,225 $11,907,386 
Consumer Banking8,082,443 7,993,971 7,940,973 7,587,246 6,869,481 
Wealth Management9,706,295 9,589,814 9,090,116 8,385,681 7,623,986 
Subtotal33,918,906 32,957,458 32,406,539 30,572,152 26,400,853 
Funds Management and other2,603,210 2,565,171 2,233,394 2,078,802 1,794,715 
Total$36,522,116 $35,522,629 $34,639,933 $32,650,954 $28,195,568 

Average Commercial Banking deposit balances increased $756 million over the fourth quarter of 2020. Interest-bearing transaction account balances increased $472 million. Demand deposit balances were up $134 million. Time deposits increased $152 million compared to the prior quarter. Commercial customers continue to retain large cash reserves primarily 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 $88 million over the prior quarter. A $64 million increase in interest-bearing transaction deposit balances and a $52 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 the prior quarter.

Average Wealth Management deposits increased $116 million over the fourth quarter of 2020, primarily due to interest-bearing transaction accounts. Demand deposit balances were also up, offset by lower time deposit balances.

Average time deposits for the first quarter of 2021 included $91 million of brokered deposits, an $8.4 million increase compared to the fourth quarter of 2020. Average interest-bearing transaction accounts for the first quarter included $2.3 billion of brokered deposits, a $37 million decrease compared to the fourth quarter of 2020.

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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)
Mar. 31, 2021Dec. 31, 2020Sept. 30, 2020June 30, 2020Mar. 31, 2020
Oklahoma:  
Demand$4,822,895 $4,328,619 $4,493,691 $4,378,559 $3,669,558 
Interest-bearing:
Transaction12,827,914 12,603,603 12,586,401 11,438,489 9,955,697 
Savings487,862 420,996 401,062 387,557 329,631 
Time1,197,517 1,134,453 1,081,176 1,330,619 1,137,802 
Total interest-bearing14,513,293 14,159,052 14,068,639 13,156,665 11,423,130 
Total Oklahoma19,336,188 18,487,671 18,562,330 17,535,224 15,092,688 
Texas:
Demand3,593,510 3,450,468 3,152,393 3,070,955 2,767,399 
Interest-bearing:
Transaction4,257,390 3,800,482 3,482,603 3,358,090 2,874,362 
Savings154,406 139,173 136,787 128,892 115,039 
Time368,086 383,062 438,337 476,867 505,565 
Total interest-bearing4,779,882 4,322,717 4,057,727 3,963,849 3,494,966 
Total Texas8,373,392 7,773,185 7,210,120 7,034,804 6,262,365 
Colorado:
Demand2,115,354 2,168,404 2,057,603 2,096,075 1,579,764 
Interest-bearing:
Transaction2,100,135 2,170,485 1,861,763 1,816,604 1,759,384 
Savings73,446 69,384 68,230 67,477 58,000 
Time204,973 208,778 226,780 254,845 279,105 
Total interest-bearing2,378,554 2,448,647 2,156,773 2,138,926 2,096,489 
Total Colorado4,493,908 4,617,051 4,214,376 4,235,001 3,676,253 
New Mexico:
Demand1,131,713 941,074 964,908 965,877 750,052 
Interest-bearing:
Transaction736,923 733,007 713,418 752,565 563,891 
Savings103,591 91,646 85,463 80,242 67,553 
Time181,863 186,307 200,525 222,370 235,778 
Total interest-bearing1,022,377 1,010,960 999,406 1,055,177 867,222 
Total New Mexico2,154,090 1,952,034 1,964,314 2,021,054 1,617,274 
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Mar. 31, 2021Dec. 31, 2020Sept. 30, 2020June 30, 2020Mar. 31, 2020
Arizona:
Demand915,439 905,201 928,671 985,757 665,396 
Interest-bearing:
Transaction835,795 768,220 771,319 780,500 729,603 
Savings13,235 12,174 11,498 15,669 8,832 
Time30,997 32,721 36,929 42,318 47,081 
Total interest-bearing880,027 813,115 819,746 838,487 785,516 
Total Arizona1,795,466 1,718,316 1,748,417 1,824,244 1,450,912 
Kansas/Missouri:
Demand478,370 426,738 405,360 427,795 318,985 
Interest-bearing:
Transaction991,510 960,237 616,797 526,635 537,552 
Savings18,686 16,286 15,520 15,033 12,888 
Time13,898 14,610 16,430 17,746 19,137 
Total interest-bearing1,024,094 991,133 648,747 559,414 569,577 
Total Kansas/Missouri1,502,464 1,417,871 1,054,107 987,209 888,562 
Arkansas:
Demand45,889 45,834 44,712 67,147 70,428 
Interest-bearing:
Transaction141,207 122,388 164,439 177,535 175,803 
Savings3,000 2,333 2,389 2,101 1,862 
Time7,022 7,197 7,796 7,995 8,005 
Total interest-bearing151,229 131,918 174,624 187,631 185,670 
Total Arkansas197,118 177,752 219,336 254,778 256,098 
Total BOK Financial deposits$37,852,626 $36,143,880 $34,973,000 $33,892,314 $29,244,152 

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 March 31, 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 $1.8 billion during the quarter, compared to $3.2 billion in the fourth quarter of 2020.

On April 13, 2020, the banking agencies published an interim final rule which permits banking organizations to exclude from regulatory capital requirements PPP covered loans pledged to the Federal Reserve's Paycheck Protection Program Liquidity Facility ("PPLF"). The Company initially funded PPP loans from deposits and Federal Home Loan Bank borrowings, but transitioned to the PPLF in June 2020 in order to realize this regulatory capital relief.

At March 31, 2021, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $17.6 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
March 31, 2021
 Three Months Ended
Dec. 31, 2020
Mar. 31, 2021Average
Balance
During the
Quarter
RateMaximum
Outstanding
At Any Month
End During
the Quarter
Dec. 31, 2020Average
Balance
During the
Quarter
RateMaximum
Outstanding
At Any Month
End During
the Quarter
Funds purchased236,151 874,576 0.39 %542,465 769,365 1,270,485 0.40 %916,171 
Repurchase agreements559,010 1,955,801 0.11 %1,073,237 893,021 882,769 0.11 %893,021 
Other borrowings:
Federal Home Loan Bank advances 1,836,667 0.29 %1,400,000 200,000 3,240,217 0.35 %1,500,000 
GNMA repurchase liability14,044 20,979 4.08 %23,856 19,500 26,096 3.98 %27,482 
Paycheck protection program liquidity facility1,662,598 1,505,930 0.35 %1,662,598 1,635,963 1,897,932 0.35 %1,995,322 
Other31,875 28,771 5.59 %31,875 27,507 29,411 5.99 %30,907 
Total other borrowings1,708,517 3,392,347 0.39 %1,882,970 5,193,656 0.42 %
Subordinated debentures1
276,024 276,015 4.92 %276,024 276,005 275,998 4.87 %276,005 
Total other borrowed funds and subordinated debentures$2,779,702 $6,498,739 0.50 %$3,821,361 $7,622,908 0.54 %
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 March 31, 2021, cash and interest-bearing cash and cash equivalents held by the parent company totaled $140 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 March 31, 2021, based upon the most restrictive limitations as well as management's internal capital policy, BOKF, NA could declare up to $474 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 March 31, 2021 was $5.3 billion, a $29 million decrease compared to December 31, 2020. Net income less cash dividends paid increased equity $110 million during the first quarter of 2021. Changes in interest rates resulted in a $114 million decrease in accumulated other comprehensive gain compared to December 31, 2020. We also repurchased $20 million of common stock during the first 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 March 31, 2021, 2,233,813 shares have been repurchased under this authorization. The Company repurchased 260,000 shares of common stock at an average price of $77.20 a share in the first 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 23 basis points to the Company's Common equity Tier 1 capital at March 31, 2021.

The capital ratios for BOK Financial on a consolidated basis are presented in Table 22.

Table 22 -- Capital Ratios
Minimum Capital RequirementCapital Conservation BufferMinimum Capital Requirement Including Capital Conservation BufferMar. 31, 2021Dec. 31, 2020Mar. 31, 2020
Risk-based capital:
Common equity Tier 14.50 %2.50 %7.00 %12.14 %11.95 %10.98 %
Tier 1 capital6.00 %2.50 %8.50 %12.21 %11.95 %10.98 %
Total capital8.00 %2.50 %10.50 %13.98 %13.82 %12.65 %
Tier 1 Leverage4.00 %N/A4.00 %8.42 %8.28 %8.15 %
Average total equity to average assets10.48 %10.38 %10.73 %
Tangible common equity ratio8.82 %9.02 %8.39 %

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)
Mar. 31, 2021Dec. 31, 2020Sept. 30, 2020June 30, 2020Mar. 31, 2020
Tangible common equity ratio:     
Total shareholders' equity$5,239,462 $5,266,266 $5,218,787 $5,096,995 $5,026,248 
Less: Goodwill and intangible assets, net1,158,676 1,161,527 1,166,615 1,171,686 1,169,898 
Tangible common equity4,080,786 4,104,739 4,052,172 3,925,309 3,856,350 
Total assets47,442,513 46,671,088 46,067,224 45,819,874 47,119,162 
Less: Goodwill and intangible assets, net1,158,676 1,161,527 1,166,615 1,171,686 1,169,898 
Tangible assets$46,283,837 $45,509,561 $44,900,609 $44,648,188 $45,949,264 
Tangible common equity ratio8.82 %9.02 %9.02 %8.79 %8.39 %
Pre-provision net revenue:
Net income before taxes$186,690 $199,847 $204,644 $80,089 $79,284 
Provision for expected credit losses(25,000)(6,500)— 135,321 93,771 
Net income (loss) attributable to non-controlling interests(1,752)485 58 (407)(95)
Pre-provision net revenue$163,442 $192,862 $204,586 $215,817 $173,150 

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
- 37 -


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.

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. 

Table 24 -- Interest Rate Sensitivity
(Dollars in thousands)
 200 bp Increase
100 bp Decrease1
March 31,March 31,
 2021202020212020
Anticipated impact over the next twelve months on net interest revenue$27,784 $(10,523)N/AN/A
 2.64 %(1.02)%N/AN/A
1 The results of a decrease in the current low-rate environment are not meaningful.

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.

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.


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Table 25 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
March 31,
 20212020
Up 50 bpDown 50 bpUp 50 bpDown 50 bp
MSR Asset$26,731 $(33,289)$36,430 $(18,051)
MSR Hedge(31,621)29,949 (27,134)26,900 
Net Exposure(4,890)(3,340)9,296 8,849 

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 March 31,
 20212020
Up 50 bpDown 50 bpUp 50 bpDown 50 bp
Average1
$(647)$(612)$(211)$(166)
Low2
(17)(58)582 998 
High3
(1,244)(1,097)(1,344)(1,483)
Period End(564)(422)(758)(262)
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.

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.
- 39 -



Table 27 -- Trading Sensitivity Analysis
(Dollars in thousands)
Three Months Ended March 31,
 20212020
Up 50 bpDown 50 bpUp 50 bpDown 50 bp
Average1
$(2,572)$3,553 $(4,663)$7,326 
Low2
5,818 8,801 (638)15,309 
High3
(7,054)(4,618)(11,506)2,891 
Period End(6,548)7,756 (5,987)6,400 
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 well underway.
Consistent with the regulatory guidance, the Company plans to cease originating loans indexed to LIBOR later this year, and in any event, no later than December 31, 2021. There are currently several viable alternative reference rates that we are evaluating to replace LIBOR. 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 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
- 40 -


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.

- 41 -



Consolidated Statements of Earnings (Unaudited)
(In thousands, except share and per share data)Three Months Ended
 March 31,
Interest revenue20212020
Loans$197,574 $243,218 
Residential mortgage loans held for sale1,380 1,123 
Trading securities35,922 11,760 
Investment securities2,726 3,121 
Available for sale securities58,608 69,720 
Fair value option securities496 11,708 
Restricted equity securities1,359 5,894 
Interest-bearing cash and cash equivalents174 2,393 
Total interest revenue298,239 348,937 
Interest expense  
Deposits9,850 46,159 
Borrowed funds4,622 37,785 
Subordinated debentures3,347 3,633 
Total interest expense17,819 87,577 
Net interest revenue280,420 261,360 
Provision for credit losses(25,000)93,771 
Net interest revenue after provision for credit losses305,420 167,589 
Other operating revenue  
Brokerage and trading revenue20,782 50,779 
Transaction card revenue22,430 21,881 
Fiduciary and asset management revenue41,322 44,458 
Deposit service charges and fees24,209 26,130 
Mortgage banking revenue37,113 37,167 
Other revenue16,296 12,309 
Total fees and commissions162,152 192,724 
Other gains (losses), net(3,036)(10,741)
Gain (loss) on derivatives, net(27,650)18,420 
Gain (loss) on fair value option securities, net(1,910)68,393 
Change in fair value of mortgage servicing rights33,874 (88,480)
Gain on available for sale securities, net467 
Total other operating revenue163,897 180,319 
Other operating expense  
Personnel173,010 156,181 
Business promotion2,154 6,215 
Charitable contributions to BOKF Foundation4,000 
Professional fees and services11,980 12,948 
Net occupancy and equipment26,662 26,061 
Insurance4,620 4,980 
Data processing and communications37,467 32,743 
Printing, postage and supplies3,440 4,272 
Net losses (gains) and operating expenses of repossessed assets(6,588)1,531 
Amortization of intangible assets4,807 5,094 
Mortgage banking costs13,943 10,545 
Other expense7,132 8,054 
Total other operating expense282,627 268,624 
Net income before taxes186,690 79,284 
Federal and state income taxes42,382 17,300 
Net income144,308 61,984 
Net loss attributable to non-controlling interests(1,752)(95)
Net income attributable to BOK Financial Corporation shareholders$146,060 $62,079 
Earnings per share:  
Basic$2.10 $0.88 
Diluted$2.10 $0.88 
Average shares used in computation:
Basic69,137,375 70,123,685 
Diluted69,141,710 70,130,166 
Dividends declared per share$0.52 $0.51 

See accompanying notes to consolidated financial statements.
- 42 -


Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands, except share and per share data)
 Three Months Ended
March 31,
 20212020
Net income$144,308 $61,984 
Other comprehensive income (loss) before income taxes:  
Net change in unrealized gain (loss)(150,131)297,843 
Reclassification adjustments included in earnings:
Gain on available for sale securities, net(467)(3)
Other comprehensive income (loss) before income taxes(150,598)297,840 
Federal and state income taxes(36,139)71,471 
Other comprehensive income (loss), net of income taxes(114,459)226,369 
Comprehensive income29,849 288,353 
Comprehensive loss attributable to non-controlling interests(1,752)(95)
Comprehensive income attributable to BOK Financial Corp. shareholders$31,601 $288,448 

See accompanying notes to consolidated financial statements.
- 43 -


Consolidated Balance Sheets
(In thousands, except share data)
 Mar. 31, 2021Dec. 31, 2020
 (Unaudited)(Footnote 1)
Assets  
Cash and due from banks$723,983 $798,757 
Interest-bearing cash and cash equivalents695,213 381,816 
Trading securities5,085,949 4,707,975 
Investment securities, net of allowance (fair value: March 31, 2021 – $252,707; December 31, 2020 – $272,431)
226,121 244,843 
Available for sale securities13,410,057 13,050,665 
Fair value option securities72,498 114,982 
Restricted equity securities139,614 171,391 
Residential mortgage loans held for sale284,447 252,316 
Loans22,533,847 23,007,520 
Allowance for loan losses(352,402)(388,640)
Loans, net of allowance22,181,445 22,618,880 
Premises and equipment, net555,455 551,308 
Receivables250,852 245,880 
Goodwill1,048,091 1,048,091 
Intangible assets, net110,585 113,436 
Mortgage servicing rights132,915 101,172 
Real estate and other repossessed assets, net of allowance (March 31, 2021 – $15,507; December 31, 2020 –
         $15,060)
70,911 90,526 
Derivative contracts, net1,289,156 810,688 
Cash surrender value of bank-owned life insurance401,320 398,758 
Receivable on unsettled securities sales67,759 62,386 
Other assets696,142 907,218 
Total assets$47,442,513 $46,671,088 
Liabilities and Equity
Liabilities:
Noninterest-bearing demand deposits$13,103,170 $12,266,338 
Interest-bearing deposits:  
Transaction21,890,874 21,158,422 
Savings854,226 751,992 
Time2,004,356 1,967,128 
Total deposits37,852,626 36,143,880 
Funds purchased and repurchase agreements795,161 1,662,386 
Other borrowings1,708,517 1,882,970 
Subordinated debentures276,024 276,005 
Accrued interest, taxes and expense290,328 323,667 
Derivative contracts, net719,556 405,779 
Due on unsettled securities purchases106,835 257,627 
Other liabilities431,122 427,213 
Total liabilities42,180,169 41,379,527 
Shareholders' equity:  
Common stock ($0.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: March 31, 2021 – 76,244,164; December 31, 2020 – 75,995,205)
5 
Capital surplus1,371,735 1,368,062 
Retained earnings4,083,543 3,973,675 
Treasury stock (shares at cost: March 31, 2021 – 6,686,291; December 31, 2020 – 6,357,605)
(437,230)(411,344)
Accumulated other comprehensive gain221,409 335,868 
Total shareholders’ equity5,239,462 5,266,266 
Non-controlling interests22,882 25,295 
Total equity5,262,344 5,291,561 
Total liabilities and equity$47,442,513 $46,671,088 

See accompanying notes to consolidated financial statements.
- 44 -


Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 Common StockCapital
Surplus
Retained
Earnings
Treasury StockAccumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Non-
Controlling
Interests
Total Equity
 SharesAmountSharesAmount
Balance, December 31, 202075,995 $5 $1,368,062 $3,973,675 6,358 $(411,344)$335,868 $5,266,266 $25,295 $5,291,561 
Net income (loss)   146,060    146,060 (1,752)144,308 
Other comprehensive loss      (114,459)(114,459) (114,459)
Repurchase of common stock    260 (20,071) (20,071) (20,071)
Share-based compensation plans:
Stock options exercised17  949     949  949 
Non-vested shares awarded,
     net
232  0        
Vesting of non-vested
     shares
    68 (5,815) (5,815) (5,815)
Share-based compensation  2,724     2,724  2,724 
Cash dividends on common
     stock
   (36,192)   (36,192) (36,192)
Capital calls and distributions,
     net
        (661)(661)
Balance, March 31, 202176,244 $5 $1,371,735 $4,083,543 6,686 $(437,230)$221,409 $5,239,462 $22,882 $5,262,344 
Balance, December 31, 201975,759 $$1,350,995 $3,729,778 5,179 $(329,906)$104,923 $4,855,795 $8,124 $4,863,919 
Transition adjustment - CECL— — — (46,696)— — — (46,696)— (46,696)
Balance, January 1, 202075,759 $$1,350,995 $3,683,082 5,179 $(329,906)$104,923 $4,809,099 $8,124 $4,817,223 
Net income (loss)— — — 62,079 — — — 62,079 (95)61,984 
Other comprehensive income— — — — — — 226,369 226,369 — 226,369 
Repurchase of common stock— — — — 442 (33,380)— (33,380)— (33,380)
Share-based compensation
     plans:
Stock options exercised10 — 586 — — — — 586 — 586 
Non-vested shares awarded,
     net
232 — — — — — — — — 
Vesting of non-vested
     shares
— — — — 71 (5,608)— (5,608)— (5,608)
Share-based compensation— — 3,245 — — — — 3,245 — 3,245 
Cash dividends on common
     stock
— — — (36,142)— — — (36,142)— (36,142)
Capital calls and distributions,
     net
— — — — — — — — (117)(117)
Balance, March 31, 202076,001 $$1,354,826 $3,709,019 5,692 $(368,894)$331,292 $5,026,248 $7,912 $5,034,160 
See accompanying notes to consolidated financial statements.
- 45 -


Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Three Months Ended
 March 31,
 20212020
Cash Flows From Operating Activities:  
Net income$144,308 $61,984 
Adjustments to reconcile net income to net cash provided used in operating activities:
Provision for credit losses(25,000)93,771 
Change in fair value of mortgage servicing rights due to market assumption changes(33,874)88,480 
Change in the fair value of mortgage servicing rights due to principal payments11,961 8,019 
Net unrealized (gains) losses from derivative contracts92,502 15,369 
Share-based compensation2,724 3,245 
Depreciation and amortization24,918 23,198 
Net amortization of discounts and premiums4,853 2,013 
Net losses (gains) on financial instruments and other losses (gains), net(10,587)10,742 
Net gain on mortgage loans held for sale(19,045)(13,278)
Mortgage loans originated for sale(843,053)(548,956)
Proceeds from sale of mortgage loans held for sale836,209 548,077 
Capitalized mortgage servicing rights(9,830)(5,441)
Change in trading and fair value option securities(335,624)(1,092,249)
Change in receivables15,650 (1,107,130)
Change in other assets(24,991)(24,503)
Change in other liabilities(49,998)193,857 
Net cash used in operating activities(218,877)(1,742,802)
Cash Flows From Investing Activities:  
Proceeds from maturities or redemptions of investment securities18,624 19,079 
Proceeds from maturities or redemptions of available for sale securities877,257 394,205 
Purchases of available for sale securities(1,451,909)(1,552,914)
Proceeds from sales of available for sale securities56,037 26,894 
Change in amount receivable on unsettled available for sale securities transactions(26,130)(22,113)
Loans originated, net of principal collected498,667 (729,881)
Net payments on derivative asset contracts(7,016)(98,215)
Net change in restricted equity securities31,777 70,510 
Proceeds from disposition of assets43,739 15,282 
Purchases of assets(63,110)(40,295)
Net cash used in investing activities(22,064)(1,917,448)
Cash Flows From Financing Activities:  
Net change in demand deposits, transaction deposits and savings accounts1,671,518 1,608,360 
Net change in time deposits37,228 14,624 
Net change in other borrowed funds(1,078,174)1,747,640 
Net proceeds on derivative liability contracts8,437 82,126 
Net change in derivative margin accounts2,995 (163,911)
Change in amount due on unsettled available for sale securities transactions(101,311)160,211 
Issuance of common and treasury stock, net(4,866)(5,022)
Repurchase of common stock(20,071)(33,380)
Dividends paid(36,192)(36,142)
Net cash provided by financing activities479,564 3,374,506 
Net increase (decrease) in cash and cash equivalents238,623 (285,744)
Cash and cash equivalents at beginning of period1,180,573 1,258,821 
Cash and cash equivalents at end of period$1,419,196 $973,077 
Supplemental Cash Flow Information:
Cash paid for interest$16,743 $87,468 
Cash paid for taxes$852 $853 
Net loans and bank premises transferred to repossessed real estate and other assets$147 $18,474 
Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period$36,496 $20,277 
Conveyance of other real estate owned guaranteed by U.S. government agencies$1,448 $5,694 
Right-of-use assets obtained in exchange for operating lease liabilities$1,191 $7,108 

See accompanying notes to consolidated financial statements.
- 46 -


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 three-month period ended March 31, 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. Management is currently evaluating the impact of ASU 2020-04 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. Management is currently evaluating the impact of ASU 2021-01 on the Company's financial statements.
- 47 -


(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities are as follows (in thousands):
 
 March 31, 2021December 31, 2020
 Fair ValueNet Unrealized Gain (Loss)Fair ValueNet Unrealized Gain (Loss)
U.S. government securities$33,613 $(239)$9,183 $
Residential agency mortgage-backed securities5,003,163 (10,647)4,669,148 (3,624)
Municipal securities27,047 (49)19,172 42 
Other debt securities22,126 (30)10,472 22 
Total trading securities$5,085,949 $(10,965)$4,707,975 $(3,560)
Investment Securities
 
The amortized cost and fair values of investment securities are as follows (in thousands):
 March 31, 2021
 AmortizedFairGross Unrealized
 CostValueGainLoss
Municipal securities$216,047 $241,278 $25,395 $(164)
Residential agency mortgage-backed securities8,477 9,216 739 0 
Other debt securities2,214 2,213 0 (1)
Total investment securities226,738 252,707 26,134 (165)
Allowance for credit losses(617)
Investment securities, net of allowance$226,121 $252,707 $26,134 $(165)
 December 31, 2020
 AmortizedFairGross Unrealized
 CostValueGainLoss
Municipal securities$229,245 $255,270 $26,169 $(144)
Residential agency mortgage-backed securities8,913 9,790 877 
Other debt securities7,373 7,371 (2)
Total investment securities245,531 272,431 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 March 31, 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$27,143 $76,456 $106,311 $8,351 $218,261 4.95 
Fair value27,866 85,490 121,763 8,372 243,491  
Residential mortgage-backed securities:      
Amortized cost    $8,477 2
Fair value    9,216  
Total investment securities:      
Amortized cost    $226,738  
Fair value    252,707  
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 4.4 years based upon current prepayment assumptions.

Temporarily Impaired Investment Securities
(in thousands):
March 31, 2021
 Number of SecuritiesLess Than 12 Months12 Months or LongerTotal
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Investment:       
Municipal securities6 $2,440 $51 $2,035 $113 $4,475 $164 
Other debt securities1 25 1 0 0 25 1 
Total investment securities7 $2,465 $52 $2,035 $113 $4,500 $165 

December 31, 2020
 Number of SecuritiesLess Than 12 Months12 Months or LongerTotal
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Investment:       
Municipal securities$2,451 $40 $2,043 $104 $4,494 $144 
Other debt securities250 25 275 
Total investment securities$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):
 March 31, 2021
 AmortizedFairGross Unrealized
 CostValueGainLoss
U.S. Treasury$500 $506 $6 $0 
Municipal securities248,016 245,657 1,422 (3,781)
Mortgage-backed securities:    
Residential agency9,483,601 9,705,314 266,968 (45,255)
Residential non-agency15,890 31,382 15,492 0 
Commercial agency3,371,333 3,426,727 74,722 (19,328)
Other debt securities500 471 0 (29)
Total available for sale securities$13,119,840 $13,410,057 $358,610 $(68,393)
 December 31, 2020
 AmortizedFairGross Unrealized
 CostValueGainLoss
U.S. Treasury$500 $508 $$
Municipal securities165,318 167,979 2,666 (5)
Mortgage-backed securities:   
Residential agency9,019,013 9,340,471 328,183 (6,725)
Residential non-agency17,563 32,770 15,207 
Commercial agency3,406,956 3,508,465 103,590 (2,081)
Other debt securities500 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 March 31, 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$71,119 $1,562,072 $1,379,950 $607,208 $3,620,349 7.76 
Fair value71,223 1,610,227 1,373,270 618,641 3,673,361 
Residential mortgage-backed securities:
Amortized cost$9,499,491 2
Fair value9,736,696 
Total available-for-sale securities:
Amortized cost$13,119,840 
Fair value13,410,057 
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 3.9 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 March 31,
 20212020
Proceeds$56,037 $26,894 
Gross realized gains473 
Gross realized losses(6)
Related federal and state income tax expense (benefit)119 

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 $11.2 billion at March 31, 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)
March 31, 2021
 Number of SecuritiesLess Than 12 Months12 Months or LongerTotal
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Available for sale:       
Municipal securities81 $186,267 $3,781 $0 $0 $186,267 $3,781 
Mortgage-backed securities:    
Residential agency90 3,005,975 44,828 139,714 427 3,145,689 45,255 
Commercial agency60 711,113 18,623 305,406 705 1,016,519 19,328 
Other debt securities1 0 0 471 29 471 29 
Total available for sale securities232 $3,903,355 $67,232 $445,591 $1,161 $4,348,946 $68,393 

December 31, 2020
 Number of SecuritiesLess Than 12 Months12 Months or LongerTotal
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Available for sale:     
Municipal securities$6,166 $$$$6,166 $
Mortgage-backed securities:     
Residential agency38 786,890 6,605 160,747 120 947,637 6,725 
Commercial agency37 350,506 1,587 277,627 494 628,133 2,081 
Other debt securities472 28 472 28 
Total available for sale securities77 $1,143,562 $8,197 $438,846 $642 $1,582,408 $8,839 

Based on evaluations of impaired securities as of March 31, 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):
 March 31, 2021December 31, 2020
 Fair ValueNet Unrealized Gain (Loss)Fair ValueNet Unrealized Gain (Loss)
Residential agency mortgage-backed securities$72,498 $3,233 $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 March 31, 2021 (in thousands):
Assets
 
Notional1
Gross Fair ValueNetting AdjustmentsNet Fair Value Before Cash CollateralCash CollateralFair Value Net of Cash Collateral
Customer risk management programs:   
Interest rate contracts$3,221,571 $79,353 $(9,135)$70,218 $0 $70,218 
Energy contracts3,930,367 618,401 (152,837)465,564 0 465,564 
Agricultural contracts32,893 1,629 (1,513)116 0 116 
Foreign exchange contracts346,897 343,101 0 343,101 (540)342,561 
Equity option contracts65,678 1,455 0 1,455 (300)1,155 
Total customer risk management programs7,597,406 1,043,939 (163,485)880,454 (840)879,614 
Trading67,796,867 785,765 (380,313)405,452 (774)404,678 
Internal risk management programs801,025 17,301 (12,437)4,864 0 4,864 
Total derivative contracts$76,195,298 $1,847,005 $(556,235)$1,290,770 $(1,614)$1,289,156 
Liabilities
 
Notional1
Gross Fair ValueNetting AdjustmentsNet Fair Value Before Cash CollateralCash CollateralFair Value Net of Cash Collateral
Customer risk management programs:   
Interest rate contracts$3,221,571 $79,619 $(9,135)$70,484 $(60,429)$10,055 
Energy contracts3,897,430 602,728 (152,837)449,891 (443,933)5,958 
Agricultural contracts32,893 1,609 (1,513)96 0 96 
Foreign exchange contracts347,166 343,134 0 343,134 (24)343,110 
Equity option contracts65,678 1,455 0 1,455 0 1,455 
Total customer risk management programs7,564,738 1,028,545 (163,485)865,060 (504,386)360,674 
Trading66,746,760 834,430 (380,313)454,117 (99,371)354,746 
Internal risk management programs1,064,473 21,036 (12,437)8,599 (4,463)4,136 
Total derivative contracts$75,375,971 $1,884,011 $(556,235)$1,327,776 $(608,220)$719,556 
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 ValueNetting AdjustmentsNet Fair Value Before Cash CollateralCash CollateralFair Value Net of Cash Collateral
Customer risk management programs:   
Interest rate contracts$3,212,469 $113,524 $(144)$113,380 $$113,380 
Energy contracts3,791,565 386,008 (211,468)174,540 174,540 
Agricultural contracts14,765 3,859 3,859 3,859 
Foreign exchange contracts337,001 332,257 332,257 (420)331,837 
Equity option contracts70,199 1,222 1,222 (285)937 
Total customer risk management programs7,425,999 836,870 (211,612)625,258 (705)624,553 
Trading84,997,593 440,627 (240,655)199,972 (26,958)173,014 
Internal risk management programs995,123 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 ValueNetting AdjustmentsNet Fair Value Before Cash CollateralCash CollateralFair 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 contracts3,617,678 361,334 (211,468)149,866 (114,070)35,796 
Agricultural contracts14,781 3,844 3,844 (3,844)
Foreign exchange contracts336,223 331,035 331,035 (1,165)329,870 
Equity option contracts70,199 1,222 1,222 1,222 
Total customer risk management programs7,251,350 811,335 (211,612)599,723 (223,281)376,442 
Trading88,929,916 414,801 (240,655)174,146 (145,692)28,454 
Internal risk management programs145,256 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
March 31, 2021March 31, 2020
 Brokerage
and Trading Revenue
Gain (Loss) on Derivatives, NetBrokerage
and Trading
Revenue
Gain (Loss)on Derivatives, Net
Customer risk management programs:    
Interest rate contracts$1,388 $0 $942 $
Energy contracts1,020 0 2,007 
Agricultural contracts18 0 15 
Foreign exchange contracts166 0 258 
Equity option contracts0 0 
Total customer risk management programs2,592 0 3,222 
Trading1
(71,259)0 (40,655)
Internal risk management programs0 (27,650)18,420 
Total derivative contracts$(68,667)$(27,650)$(37,433)$18,420 
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 include 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. Guaranteed loans are considered to be impaired because 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):
 March 31, 2021December 31, 2020
Fixed
Rate
Variable
Rate
Non-accrualTotalFixed
Rate
Variable
Rate
Non-accrualTotal
Commercial$3,264,973 $9,245,738 $147,073 $12,657,784 $3,174,203 $9,736,173 $167,159 $13,077,535 
Commercial real estate1,019,531 3,456,573 27,243 4,503,347 1,047,486 3,623,806 27,246 4,698,538 
Paycheck protection program1,848,550 0 0 1,848,550 1,682,310 1,682,310 
Loans to individuals2,146,671 1,335,792 41,703 3,524,166 2,174,874 1,333,975 40,288 3,549,137 
Total$8,279,725 $14,038,103 $216,019 $22,533,847 $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 March 31, 2021, outstanding commitments totaled $11.2 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 March 31, 2021, outstanding standby letters of credit totaled $714 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.

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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.

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.

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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.

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
March 31, 2021
 CommercialCommercial Real EstatePaycheck Protection ProgramLoans to IndividualsNonspecific AllowanceTotal
Allowance for loan losses:     
Beginning balance$254,934 $86,558 $0 $47,148 $0 $388,640 
Provision for loan losses(9,893)(4,579)0 (7,298)0 (21,770)
Loans charged off(15,345)(263)0 (1,297)0 (16,905)
Recoveries of loans previously charged off1,676 30 0 731 0 2,437 
Ending Balance$231,372 $81,746 $0 $39,284 0 $352,402 
Allowance for off-balance sheet credit risk from unfunded loan commitments:
Beginning balance$14,422 $20,571 $0 $1,928 $0 $36,921 
Provision for off-balance sheet credit risk(1,686)(2,273)0 (85)0 (4,044)
Ending Balance$12,736 $18,298 $0 $1,843 $0 $32,877 

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Three Months Ended
March 31, 2020
 CommercialCommercial Real EstatePaycheck Protection ProgramLoans to IndividualsNonspecific AllowanceTotal
Allowance for loan losses:     
Beginning balance$118,187 $51,805 $$23,572 $17,195 $210,759 
Transition adjustment33,681