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 June 30, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ______________                 

Commission File No. 0-19341

BOK FINANCIAL CORP

(Exact name of registrant as specified in its charter) 

Oklahoma		73-1373454
(State or other jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)
Bank of Oklahoma Tower
Boston Avenue at Second Street
Tulsa,	Oklahoma	74192
(Address of Principal Executive Offices)		(Zip Code)

(918) 588-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes  ý  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  ý  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  ý                                               Accelerated filer           ¨            Non-accelerated filer   ¨ (Do not check if a smaller reporting company)     Smaller reporting company ☐

                                    Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  ☐  No  ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 69,078,458 shares of common stock ($.00006 par value) as of June 30, 2021.

BOK Financial Corporation

Form 10-Q

Quarter Ended June 30, 2021

Index

Part I.  Financial Information
Management’s Discussion and Analysis (Item 2)	1
Market Risk (Item 3)	39
Controls and Procedures (Item 4)	42
Consolidated Financial Statements – Unaudited (Item 1)	43
Quarterly Financial Summary – Unaudited (Item 2)	99
Quarterly Earnings Trend – Unaudited	101
Part II.  Other Information
Item 1.  Legal Proceedings	102
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	102
Item 6.  Exhibits	102
Signatures	103

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

Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $166.4 million or $2.40 per diluted share for the second quarter of 2021. Net income was $64.7 million or $0.92 per diluted share for the second quarter of 2020 and $146.1 million or $2.10 per diluted share for the first quarter of 2021. Forecasts for improving macroeconomic factors, including stabilizing energy prices, and improving credit quality metrics resulted in a negative provision for expected credit losses of $35.0 million and $25.0 million in the second quarter of 2021 and first quarter of 2021, respectively. A provision for expected credit losses of $135.3 million was recorded in the second quarter of 2020.

Pre-provision net revenue ("PPNR"), a non-GAAP measure, was $179.9 million for the second quarter of 2021 compared to $215.8 million for the second quarter of 2020. The decrease in PPNR was due to lower combined net interest revenue and fees and commission revenue. This was largely driven by lower average loan balances due to customer deleveraging during the current economic uncertainty, narrowing net interest margin and compressed margins from our mortgage banking activities. PPNR improved $16.5 million over the first quarter of 2021. Growth in much of our fee-based business, led by brokerage and trading and fiduciary and asset management revenues, was partially offset by lower mortgage banking revenue.

Highlights of the second quarter of 2021 included:

•Net interest revenue totaled $280.3 million, an increase of $2.2 million over the second quarter of 2020. Average earning assets were $43.9 billion for the second quarter of 2021 compared to $40.3 billion for the second quarter of 2020, largely driven by growth in trading securities. Net interest margin was 2.60 percent for the second quarter of 2021 compared to 2.83 percent for the second 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 was consistent with the first quarter of 2021. Net interest margin decreased 2 basis points.

•Fees and commissions revenue totaled $169.4 million, a decrease of $44.3 million compared to the second quarter of 2020. Mortgage banking revenue decreased $32.7 million due to a combination of lower mortgage production volume and margin compression. Brokerage and trading revenue decreased $32.6 million, largely due to a shift from trading revenue to net interest revenue on trading securities. These decreases were partially offset by higher operating revenue from repossessed oil and gas assets and smaller increases in deposit service charges revenue, fiduciary and asset management fees, and transaction card revenue. Fees and commissions revenue increased $7.3 million compared to the first quarter of 2021, including a $9.3 million increase in trading revenue due to an increase in higher margin residential mortgage trading volume.

•Other operating expense totaled $291.2 million, a decrease of $4.8 million compared to the second quarter of 2020. Personnel expense decreased $4.2 million, due to decreases in regular compensation expense, incentive compensation expense and deferred compensation costs. These decreases were partially offset by an increase in employee insurance costs. Non-personnel expense was relatively consistent compared to the second quarter of 2020. Operating expense decreased $4.6 million compared to the first quarter of 2021. The first quarter of 2021 included a $4.0 million charitable contribution to the BOKF Foundation that did not recur in the second quarter.

•Period-end outstanding loan balances totaled $21.4 billion at June 30, 2021, a decrease of $1.1 billion compared to March 31, 2021. Loans originated as part of the Small Business Administration's Paycheck Protection Program ("PPP") decreased $727 million to $1.1 billion. Paydowns of energy loans and commercial real estate loans were partially offset by an increase in healthcare and personal loans. Average loan balances decreased $590 million to $22.2 billion compared to the previous quarter.

•The combined allowance for credit losses totaled $336 million or 1.66 percent of outstanding loans, excluding PPP loans, at June 30, 2021. The combined allowance for credit losses was $385 million or 1.86 percent of outstanding loans, excluding PPP loans, at March 31, 2021.

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•Nonperforming assets not guaranteed by U.S. government agencies decreased $51 million compared to March 31, 2021. Potential problem loans decreased $38 million while other loans especially mentioned decreased $134 million. Net charge-offs were $15.4 million or 0.30 percent of average loans on an annualized basis for the second quarter of 2021, excluding PPP loans. Net charge-offs were 0.32 percent of average loans, excluding PPP loans, over the last four quarters. 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.

•Period-end deposits were $37.4 billion at June 30, 2021, a $413 million decrease compared to March 31, 2021. Average deposits increased $968 million, including an $877 million increase in demand 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 June 30, 2021 was 11.95 percent. Other regulatory capital ratios were Tier 1 capital ratio, 12.01 percent, total capital ratio, 13.61 percent, and leverage ratio, 8.58 percent. At March 31, 2021, the common equity Tier 1 capital ratio was 12.14 percent, the Tier 1 capital ratio was 12.21 percent, total capital ratio was 13.98 percent, and leverage ratio was 8.42 percent.

•The Company repurchased 492,994 shares of common stock at an average price of $88.84 per share in the second quarter of 2021 and 260,000 shares at an average price of $77.20 in the first quarter of 2021. We view share buybacks opportunistically but within the context of maintaining our strong capital position.

•On July 23, 2021, the Company notified holders that it will exercise its option to redeem all $150 million of its 5.375 percent Subordinated Notes on August 23, 2021. The Company will use existing capital for the redemption. The Notes carried an unamortized discount at June 30, 2021 of $4.0 million which will be recognized at redemption. Redemption of the Notes will reduce annual interest expense by approximately $8.0 million.

•The Company paid a regular cash dividend of $35.9 million or $0.52 per common share during the second quarter of 2021. On August 3, 2021, the board of directors approved a quarterly cash dividend of $0.52 per common share payable on or about August 26, 2021 to shareholders of record as of August 16, 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 $282.6 million for the second quarter of 2021 and $280.7 million for the second quarter of 2020. Net interest revenue increased $13.9 million from growth in average earning assets and decreased $12.0 million due to changes in interest rates. An increase in trading securities balances was partially offset by a decrease in loan 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 2.60 percent for the second quarter of 2021, compared to 2.83 percent for the second 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 2.75 percent, a decrease of 37 basis points compared to the second quarter of 2020. The available for sale securities portfolio yield decreased 44 basis points to 1.85 percent as principal cash flows received from maturities of the available for sale securities portfolio continue to be reinvested at lower rates. Loan yields decreased 9 basis points to 3.54 percent, largely due to the decrease in short-term interest rates partially offset by the addition of PPP loan fees. PPP loan fees of $11.1 million were recognized in the second quarter of 2021. As discussed in the Management's Discussion and Analysis - Loan section following, $27.8 million of deferred loans fees remain to be recognized in future periods, including $3.8 million related to loans originated in 2020 that mature in 2022. The yield on trading securities decreased 51 basis points to 1.95 percent.

Funding costs decreased 16 basis points compared to the second quarter of 2020. The cost of other borrowed funds decreased 2 basis points and the cost of interest-bearing deposits decreased 20 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 6 basis points for the second quarter of 2021, a decrease of 2 basis points compared to the second quarter of 2020.

Average earning assets for the second quarter of 2021 increased $3.5 billion or 9 percent over the second quarter of 2020. This increase was largely due to growth in our trading of U.S. government issued mortgage-backed securities and the expansion of the available for sale securities portfolio, partially offset by a decrease in loans and fair value option securities. Average trading securities increased $5.6 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 $763 million. We purchase securities to supplement earnings and to manage interest rate risk. Average loans, net of allowance for loan losses, decreased $1.9 billion, largely due to purposeful deleveraging by our customers as borrowers continue to pay down during this time of economic uncertainty. Fair value option securities that we hold as an economic hedge against changes in the fair value of mortgage servicing rights decreased $722 million.

Average deposits increased $4.8 billion compared to the second 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 $3.1 billion while demand deposit balances increased $1.7 billion. Other borrowed funds decreased $3.9 billion.

Tax-equivalent net interest revenue was $282.6 million, largely unchanged compared to the first quarter of 2021. Net interest margin was 2.60 percent compared to 2.62 percent in the first quarter of 2021.

Average earning assets decreased $354 million compared to the first quarter of 2021. Average loan balances decreased $590 million, primarily from energy and commercial real estate loan paydowns. Available for sale securities decreased $190 million. Average trading securities grew by $467 million. Other borrowed funds decreased $824 million.

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The yield on average earning assets was 2.75 percent, a 3 basis point decrease from the prior quarter. The yield on the available for sale securities portfolio increased 1 basis point to 1.85 percent and the loan portfolio yield decreased 1 basis point to 3.54 percent.

Funding costs were 0.21 percent, down 3 basis points. The cost of interest-bearing deposits decreased 3 basis points to 0.14 percent. The cost of other borrowed funds was down 2 basis points to 0.28 percent. The benefit to net interest margin from assets funded by non-interest liabilities was 6 basis points for the second quarter of 2021, a decrease of 2 basis points compared to the prior quarter.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately 75% 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 June 30, 2021 / 2020						Six Months Ended June 30, 2021 / 2020
			Change Due To1						Change Due To1
	Change		Volume		Yield/Rate		Change		Volume		Yield/Rate
Tax-equivalent interest revenue:
Interest-bearing cash and cash equivalents	$	46	$	3	$	43	$	(2,173)	$	21	$	(2,194)
Trading securities	25,229		31,144		(5,915)		49,343		63,648		(14,305)
Investment securities	(439)		(552)		113		(884)		(1,059)		175
Available for sale securities	(9,369)		4,414		(13,783)		(20,417)		12,519		(32,936)
Fair value option securities	(3,708)		(4,363)		655		(14,920)		(13,985)		(935)
Restricted equity securities	(129)		(498)		369		(4,664)		(3,348)		(1,316)
Residential mortgage loans held for sale	(571)		(452)		(119)		(314)		114		(428)
Loans	(21,860)		(16,970)		(4,890)		(67,884)		(11,034)		(56,850)
Total tax-equivalent interest revenue	(10,801)		12,726		(23,527)		(61,913)		46,876		(108,789)
Interest expense:
Transaction deposits	(3,782)		1,486		(5,268)		(33,316)		6,882		(40,198)
Savings deposits	12		28		(16)		(28)		70		(98)
Time deposits	(5,550)		(1,274)		(4,276)		(12,285)		(2,191)		(10,094)
Funds purchased and repurchase agreements	(1,320)		(1,508)		188		(10,810)		(4,465)		(6,345)
Other borrowings	(1,870)		89		(1,959)		(25,543)		(6,366)		(19,177)
Subordinated debentures	(186)		7		(193)		(472)		(2)		(470)
Total interest expense	(12,696)		(1,172)		(11,524)		(82,454)		(6,072)		(76,382)
Tax-equivalent net interest revenue	1,895		13,898		(12,003)		20,541		52,948		(32,407)
Change in tax-equivalent adjustment	(310)						(724)
Net interest revenue	$	2,205					$	21,265

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 $191.4 million for the second quarter of 2021, a decrease of $41.8 million compared to the second quarter of 2020. Mortgage production revenue was negatively impacted by a decline in mortgage production volumes and margin compression. Brokerage and trading revenue decreased largely due to a shift of trading revenue to interest income from trading securities.

Other operating revenue increased $14.4 million compared to the first quarter of 2021. Brokerage and trading revenue increased $8.6 million. An increase in agency residential mortgage trading volumes and higher margin market opportunities combined to grow trading revenue.

Table 2 – Other Operating Revenue 

(In thousands)

	Three Months Ended June 30,				Increase (Decrease)		% Increase (Decrease)		Three Months Ended  Mar. 31, 2021		Increase (Decrease)		% Increase (Decrease)
	2021		2020
Brokerage and trading revenue	$	29,408	$	62,022	$	(32,614)	(53)	%	$	20,782	$	8,626	42	%
Transaction card revenue	24,923		22,940		1,983		9	%	22,430		2,493		11	%
Fiduciary and asset management revenue	44,832		41,257		3,575		9	%	41,322		3,510		8	%
Deposit service charges and fees	25,861		22,046		3,815		17	%	24,209		1,652		7	%
Mortgage banking revenue	21,219		53,936		(32,717)		(61)	%	37,113		(15,894)		(43)	%
Other revenue	23,172		11,479		11,693		102	%	16,296		6,876		42	%
Total fees and commissions revenue	169,415		213,680		(44,265)		(21)	%	162,152		7,263		4	%
Other gains, net	16,449		7,347		9,102		N/A		10,121		6,328		N/A
Gain (loss) on derivatives, net	18,820		21,885		(3,065)		N/A		(27,650)		46,470		N/A
Loss on fair value option securities, net	(1,627)		(14,459)		12,832		N/A		(1,910)		283		N/A
Change in fair value of mortgage servicing rights	(13,041)		(761)		(12,280)		N/A		33,874		(46,915)		N/A
Gain on available for sale securities, net	1,430		5,580		(4,150)		N/A		467		963		N/A
Total other operating revenue	$	191,446	$	233,272	$	(41,826)	(18)	%	$	177,054	$	14,392	8	%

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 38 percent of total revenue for the second 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 $32.6 million or 53 percent compared to the second 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 $13.0 million for the second quarter of 2021, a $30.9 million or 70 percent decrease compared to the second 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 $1.8 million for the second quarter of 2021, a $4.4 million or 71 percent decrease compared to the second quarter of 2020, primarily attributed to energy customers. Customer hedging revenue includes credit valuation adjustments of the fair value of derivatives to reflect the risk of counterparty default.

Revenue earned from retail brokerage transactions totaled $4.5 million for the second quarter of 2021, an increase of $1.1 million compared to the second quarter of 2020 due to increased trading activity.

Investment banking, which includes fees earned upon completion of underwriting, financial advisory services and loan syndication fees, totaled $7.1 million for the second quarter of 2021, an increase of $1.8 million or 33 percent compared to the second quarter of 2020, related to the timing and volume of completed transactions.

Brokerage and trading revenue increased $8.6 million compared to the previous quarter, including a $9.3 million increase in trading revenue, primarily due to the combination of an increase in agency residential mortgage trading volumes and higher margin market opportunities.

Transaction Card Revenue

Transaction card revenue increased $2.0 million over the second quarter of 2020 and $2.5 million over the previous quarter, largely due to stimulus measures and the broader reopening of the U.S. economy, as we saw both merchant and ATM transaction volume increase this quarter.

Fiduciary and Asset Management Revenue

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 90 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships. Fiduciary and asset management revenue increased $3.6 million or 9 percent compared to the second quarter of 2020. An increase in trust and managed account fees from higher client asset balances was partially offset by a decrease in mutual fund fees as the low rate environment has put pressure on our mutual fund revenue streams. We had approximately $2.9 million in fee waivers during the second quarter of 2021 compared to approximately $1.1 million in the second quarter of 2020. We have voluntarily waived certain administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current short-term interest rate environment.

Fiduciary and asset management revenue increased $3.5 million or 8 percent compared to the first quarter of 2021 due to seasonal tax preparation fees collected in the second quarter and 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
	June 30, 2021						June 30, 2020					March 31, 2021
	Balance		Revenue1		Margin2		Balance		Revenue1		Margin2	Balance	Revenue1	Margin2
Managed fiduciary assets:
Personal	$	11,973,758	$	28,634	0.96	%	$	9,786,686	$	24,131	0.99