BOK Financial Corporation (BOKF) Q3 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the BOK Financial Corporation Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host Mr. Steven Nell, Chief Financial Officer for BOK Financial Corporation. Thank you, sir. You may begin.

Good morning and thanks for joining us. Today, our CEO, Steve Bradshaw, will provide opening comments; and Stacy Kymes, our Chief Operating Officer, will cover our loan portfolio, credit metrics and fee income businesses. Lastly, I'll provide details regarding net interest income, net interest margin, expenses and our overall balance sheet position from a liquidity and capital standpoint. Joining us for the question-and-answer session are Marc Maun, our Chief Credit Officer, who can answer detailed questions regarding credit metrics; and Scott Grauer, Executive Vice President of Wealth Management, who can expand on our wealth management activities. PDFs of the slide presentation and third quarter press release are available on our website at bokf.com. We refer you to the disclaimers on Slide two, regarding any forward-looking statements we make during this call. I'll now turn the call over to Steve Bradshaw.

Good morning and thanks for joining us to discuss the third quarter 2021 financial results. This quarter was another which our diversified revenue strategy was a key differentiator for us as we grew pre-tax, pre-provisioned earnings by 22% linked quarter and eclipsed $180 million in net income for the first time in the history of our company. Shown on Slide 4, third quarter net income was a record $188.3 million or $2.74 per diluted share. That represents growth in net income of 13% from the record set last quarter, a result of our long-term commitment to our balanced earnings model and breadth of business capabilities. The key items that drove our success this quarter were first, our fee-based business units continue to perform well with total fees and commissions up 21 million or 12% from last quarter. The contribution from our wealth management team continues to grow and impact results, achieving a new quarterly record for total revenues of 153 million for this quarter. This accounts for 30% of total revenues for the company and 51% of total fees and commissions for the quarter. Mortgage fees also increased 5.1 million or 24% linked quarter, primarily driven by a rebound in our reported margins from the lows recognized last quarter. Net interest revenue was unchanged on a linked quarter basis with a slight improvement in loan fees primarily due to non-used fees from low utilization levels and our interest bearing deposit cost of funds fell one more basis point this quarter. We continue to experience some compression in yields on are available for sale portfolio. However, that impact was more than offset by improved yields on our trading portfolio. Improving market conditions and credit trends allowed us to release 23 million of our loan loss reserve this quarter an $83 million for the year. Expense management remains excellent, total expense is flat on a linked quarter basis. We've managed expense growth to just slightly above 2% over the last two trailing 12-month periods despite significant technology and cyber-related investments, reflecting our disciplined approach. Turning to Slide 5, total loans are down 1.1 billion for the quarter the PPP loan forgiveness accounts for 586 million of that contraction. Core loan growth continues to remain a challenge this quarter as our energy and commercial real estate customers continue to pay down debt or refinance in the long-term markets. Loans attributes our wealth segment grew to $32 million this quarter, allowing them to surpass 2 billion in outstanding balances for the first time. Our core CNI book decreased at a pace similar to last quarter as our overall line utilization levels are at five-year lows. We believe this position is just for growth as the economy continues to rebound and supply chain disruptions are resolved. Average deposits increased another 344 million this quarter and are 9% higher than the same quarter a year ago. Assets under management are in custody and our wealth manager business grew 2.3% linked quarter to 98.8 billion approaching the $100 billion milestone. Largely due to new business acquisition and favorable market activity in the quarter. I'll provide additional perspective on the results before starting the question-and-answer session. But now Stacy Kymes will review the loan portfolio, our credit metrics and the fee business is in more detail. I'll turn the call over to Stacy.

Thanks, Steve. Turning to Slide 7, period end loans and our core loan portfolio were 19.8 billion down just over 2% for the quarter as we continue to see borrowers in some specialty lending areas continue to reduce leverage. Overall commercial and specialized lending line utilization levels were down again this quarter, their lowest level of over the last five years, with exception to that trend being our private wealth space, which grew at a 6% annualized clip on a linked quarter basis and 12% during the last 12 months. Energy balances declined in the third quarter, as energy borrowers have significant liquidity with current oil and natural gas prices and have been generally paying down debt. We continue to grow new customers in this space but pay downs have outpaced new loans. Our current belief is that the fourth quarter will be the inflection point and we expect growth from this segment in 2022. Should drilling activity materially increase the company is well positioned to have strong growth in this sector given our long-term expertise and continuing strong commitment to the energy sector. Ancillary business from customer hedging, investment banking and treasury for this segment set a new record for fee revenue this quarter 9% above the previous highs set in the third quarter last year. Healthcare balances fell slightly down 34 million or 1% linked quarter primarily driven by our senior housing assisted living sector. Looking forward we remain very confident in our ability to perform from both a growth and credit standpoint in this portfolio as it remains a leader for us. Core middle market CNI today is at the lowest level of utilization as any measured period back to March of 2015, dropping below 50% for the first time. This illustrates the significant capacity we have to move up as demand starts to come back online without it being predicated on any new customer acquisition. Return to more normal utilization levels organically as about 600 million of core CNI loans outside the anticipated growth in the specialty areas. Our balances declined again this quarter, the broad CNI portfolio is beginning to stabilize and is reason for optimism heading into next year. Commercial real estate balances contracted 3% this quarter. We continue to see borrowers use this low rate environment to refinance to the long-term fixed rate non-recourse market. 2020 was one of Real Estate's lowest years for portfolio turnover, as many of the permanent markets were cautious. As those have opened up, we see some catchup activity that is inherently a sign of a healthy portfolio but continues to create quarter-to-quarter volatility. I would expect balances to stabilize in the fourth quarter and resume a more normal growth pattern in 2022. PPP loan balance forgiveness was substantial again this quarter, with 586 million forgiven, shrinking the portfolio by 52%. Of the remaining PPP balances only 4% of the 2020 vintage and 66% of the 2021 vintage remains. We expect the forgiveness process on the remaining balances to slow considerably. We believe we are well positioned for a more normal loan growth cycle as we look ahead into 2022. We believe that once supply chain constraints ease and we experience a full impact of fiscal stimulus, BOKF will be well positioned for accelerated loan growth. Turning to Slide 8, you can see that credit quality continues to improve as we further out from the pandemic. We continue to experience meaningful credit quality improvement across the broader loan portfolio with non-performing assets and potential problem loans bode down significantly again this quarter. Based on total commitment, this quarter ranks the first time that we returned to a level below the pre-pandemic fourth quarter of 2019 for total criticized assets from lending related activities. These factors, coupled with continued strength in commodity prices and a continued optimistic outlook for economic growth in GDP and the labor markets led us to release 23 million in reserves this quarter. Net charge offs were 7.8 million or 16 basis points annualized excluding PPP loans in the third quarter. That's the decline from last quarter's 15.4 million or 30 basis points annualized. Net charge offs have dropped to an average of 26 basis points over the past four trailing quarters, which is at the lower end of our historic loss range. As we look forward to the next quarter, we expect net charge offs will be at the lower end of our historical range. The combined allowance for loan losses totaled 306 million, or 1.54% of outstanding loans at quarter end, excluding PPP loans. Non-accruing loans decreased 38 million from last quarter, primarily due to a reduction in non-occurring energy loans. Potential problem loans totaled 333 million at quarter end down significantly from 384 million on June the 30th. Potential problem energy, services and general business loans all decreased compared to the prior quarter. Turning to Slide 9, highlight is the record setting third quarter the wealth management team produced. Total wealth management revenues were 153 million for the quarter, up nearly 17% from the linked quarter and 14% above the previous record set in the third quarter of 2020. This includes the fee income lines that investor see in our corporate income statement, brokerage and trading and fiduciary and asset management as well as net interest income from loans and deposits in our private wealth group. And then interest income generated as part of the brokerage and institutional trading group. Banking products and services for private wealth clients continue to be a particular area to highlight. The total loan portfolio surpassed 2 billion in balances this quarter and is up 12% or 221 million compared to the same quarter a year ago. The deposit portfolio, ending the quarter at 3.9 billion grew 3% linked quarter and was up 12% compared to the same quarter a year ago. Total net interest income continues to grow up 3% linked quarter. Total brokerage and trading revenues increased 15.4 million or 25% linked quarter. This is largely due to a shift in product strategy made during the second quarter in our institutional trading and sales business coupled with adding new financial institution clients. This confirms our expectation last quarter that this shift in product focus and expanded customer base is sustainable. We feel confident that we will maintain a robust level of activity and revenue generation in our NBS activities firmwide. Our capital commitment is expected to remain relatively stable for the foreseeable future in this segment. Also in the wealth management space, fiduciary and asset management fees were up almost 1% linked quarter and 13% compared to the same quarter a year ago. It's important to note that the second quarter includes the annual tax preparation fees. But growth on top of that is significant and related to our strong growth and assets under management, which now total 98.8 billion. While we have seen the benefit of favorable equity markets, increasing customer account balances, sales activity remained strong in this space as well. Our current mix of assets under management are 41% fixed income, 39% equities, 12% cash and 8% alternatives. Our relationship driven business model is perfectly in touch with client's needs today as we continue to see institutions and individuals retain the increased appreciation for financial advice gained throughout the past 18 months. Transaction card revenue was relatively unchanged this quarter, but at 5% compared to the same quarter last year. This is largely due to seamless measures and the broader reopening of the U.S. economy. Deposit service charges were up 1.6 million or 6% this quarter, as we've experienced improvements in customer spending patterns. Mortgage banking revenue increased 5.1 million or 24% linked quarter, primarily from an improved quarter-over-quarter valuation of our mortgage commitments. Overall, mortgage commitment volumes are relatively stable in the third quarter but valuations compared favorably the second quarter valuations which were largely driven by a decline in industry refinance production volumes. Despite this change in the unrealized mark-to-market between the quarters, actual settlement margins are down slightly, a trend we've seen all year and expect to carry forward into the fourth quarter. Industry-wide housing inventory constraints continue to impact the market. However, there was some good news on the housing front as Fannie & Freddie both reversed their position on preferred stock purchase agreement, delivery limits on second homes and investment properties which could possibly benefit us in our Colorado and Arizona markets. Other revenue declined 4.3 million linked quarter due to the sale of repossessed asset related to oil and gas properties. Although not included on Slide 9, I will also note that the net economic changes in the fair value of the mortgage servicing rights and related economic hedges were positive 7.3 million during the quarter. Also included in our total other operating revenue but not reflected on Slide 9 is at $31 million net gain from our activity and our alternative investment group. This area of focus is on providing equity and debt capital to growing businesses, many of whom have been strong customers of BOK Financial. This is a very long-term business with a portfolio that has grown to 75 million invested in 11 portfolio companies. We expect this area to contribute to earnings going forward, albeit in a somewhat episodic manner. I'll now turn the call over to Steven to highlight our NIM dynamics and the important balance sheet items for the quarter. Steven?

Thanks, Stacy. Turning to the Slide 11, third quarter net interest revenue was 280 million largely unchanged compared to last quarter. Average earning assets decreased 892 million compared to the second quarter, and average loan balances decreased 1.3 billion, with 875 million of that attributable to PPP balances. Average core loan balances fell 443 million. Average available for sale securities increased 203 million as we continue to reinvest most of the quarterly cash flows from the portfolio. Average trading securities grew by 187 million to support our brokerage and trading business. And average total deposits grew 344 million with non-interest deposits up 480 million this quarter, which supports net interest income. We successfully redeemed our $150 million sub-debt during the quarter which will save approximately $8 million annually in interest expense. Net interest margin was 2.66% up six basis points from the previous quarter, with the increase primarily driven by PPP forgiveness activity that's occurred during the second and third quarters. PPP loans supported net interest margin by two basis points in the second quarter and 7 basis points in the third quarter. Excluding all PPP impact to the margins both quarters net interest margin would be approximately 2.58%. The reinvestment of cash flows from our available for sale securities portfolio did result in a 5 basis point linked quarter decline in average yield. Additionally, we had continued success driving interest bearing deposit cost down one additional basis point, the 13 basis points on average for the quarter. We believe the core margin is stable and next quarter will include full quarters benefit from the sub debt call this past quarter. So with that, and excluding all PPP impact, we expect the net interest margin of approximately 2.6%. We did not expect any upward migration in net interest margin until rates begin to rise again. With anticipated rate hikes potentially on the horizon within a year or so, it is important to recall how well we performed during the last rate hike cycle from 2015 to 2019. In the upper, or the top quartile of regional banks. While we can't be assured to repeat that experience, we don't see much that would lead us to believe the experience will be materially different. In fact, there's even more liquidity in the system today than before the last rate increase cycle, which should diminish the need for the market to move rates up quickly. Turning to the Slide 12, expense management remains prudent with total expenses flat linked quarter and down 2% compared to the same quarter last year. Personnel expense increased 3.8 million or 2% linked quarter. However, this was driven by sales related compensation, which was more than offset by the strong revenue gains overall. And additional offset was due to seasonal decline in payroll taxes. Regular compensation expense was flat. Also we're very happy with our ability to hold a personnel cost efficiencies earned through the pandemic and expect to do so going forward. Non-personnel expenses down 3.7 million this quarter. Operating expenses related to repossessed properties fell 6 million this quarter as we sold the oil and gas properties driving this expense. Mortgage banking costs decreased 2.2 million due to a decrease in pre-payments, combined with lower accruals related to default servicing and loss mitigation costs on loans service for others. Data processing and communication expense increased $2 million as a result of various project investments. On Slide 13, our liquidity position remains very strong. Our loan to deposit ratio declined from 57% last quarter to just below 53% at September 30, largely due to the significant decline in PPP balances again this quarter. This significant on balance sheet liquidity leaves us well positioned to meet future customer needs. Our capital position remains very strong as well with a common equity Tier-1 ratio of 12.3%, well ahead of our internal operating range. With such strong capital levels, we once again were active with share repurchase, opportunistically repurchasing 478,000 shares and an average price of $85 per share in the open market. On Slide 14, I'll leave you with a few thoughts as we move into our budget season for 2022. We believe net activity and loan growth will improve with our company positioned for positive growth once bar demand returns, and our line utilization levels return to normal. We expect the overall loan loss reserves as a percentage of loan balances to continue to migrate towards pre-pandemic levels. Core net interest margin has stabilized. We may see slight downward pressure as are available for sale securities portfolio continues to reprise. But the significant pressure on net interest margin experienced the past year is largely behind us. Our diverse portfolio of fee revenue streams are expected to remain solid and will continue to provide strong support to total revenue. We'll continue our disciplined approach to controlling the personnel and non-personnel costs, with total expense levels expected at similar levels seen in the past few quarters. Our focus will be holding the line on manageable expenses without sacrificing multi-year technology commitments to improve customer service and our competitive position. As I mentioned a moment ago, we feel good about our capital strength, we will continue looking for share buyback opportunities and plan to maintain our quarterly cash dividend level. I'll now turn the call back to Steve Bradshaw for closing commentary.

Thank you, Steven. As I mentioned at the top of the call, it was a record quarter for BOK Financial. We continue to do the right things the right way for the benefit of our long-term investors, adding shareholder value without compromising credit discipline, or forgoing investment that might hinder the company's future. And as witnessed by our credit outcomes, the benefit from our alternate investment strategy and the new record wealth management contribution this quarter, we continue to do this in a prudent diversified way. While this quarter was once again about the contribution from our fee-based businesses, the vastly improving outlook for growth in our footprint as we emerged from the pandemic is driving customer confidence in a way we haven't seen for quite some time. While supply chain and workforce disruptions might be hampering some areas in the near term economic indicators remain strong which portends well for the future. We are cautiously optimistic about the restart of some of our largest growth drivers in the company. With that we're pleased to take your questions. Operator?

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brady Gailey with KBW. Please proceed with your question.

Hey, this is Will Jones on for Brady. Hey guys, so I just wanted to start on loan growth, I know loans are down a bit again this quarter where we were hoping for an inflection 3Q but I hear you guys on your optimism moving into the next quarter into 2022. Could you just walk us through some of the drivers that are giving you this confidence and your growth outlook and it kind of feels like a low single digit growth rate may be achievable for you guys next year? Would you say that's a fair assessment?

Yes. We're not ready to talk about our 2022 projections at this point. But I'll certainly talk about why we would be optimistic about higher levels of loan growth as we move into next year. If you look at the big drivers of the decline this quarter, you clearly had the PPP pay downs, we're at about 80% of those that we originated have paid down year-to-date. Energy and commercial real estate are the two other areas that really drove the biggest declines this quarter. And those are the two areas that we probably have the least amount of concerns about them growing in 2022. Energy is very well positioned. We've added in excess of 40 new customers and almost $1 billion of commitments associated with those in 2021 because of our continued commitment to that space, and we're very confident that as we move into next year that we'll see growth there. Same with commercial real estate, you really have an anomaly because of the kind of continuous circumstances of the pandemic. You had borrowers who didn't refinance. So we didn't have the portfolio turnover in 2020 that we historically have. So it kind of doubled up on that a little bit this year. You may see a little bit of that continue into the fourth quarter. But certainly, our commercial real estate team has done a great job of continuing to add commitments to the book. And we expect to see that as an area of growth. So the two biggest areas that grow the decline this quarter in our core portfolio are the two areas that we have the most confidence in as we move into 2022. So I think that's a big part of that. And certainly our healthcare sector continues to do very well. Good growth, they have been very strong, consistent growth over a long period of time. Of course, now really is the open question that really depends on when line utilizations began to move up, there's a lot of factors involved there, we alluded to the supply chain issues that impact some of that the liquidity that's in the market is a part of that as well. But we're very well positioned, good activity in our pipelines on the commercial and corporate banking side. So we remain very optimistic about that.

Great. That's super helpful. And maybe just turning specifically to energy, just thinking longer term about that portfolio, have you seen a nice recovery in energy prices. And demand as it eventually returns, what is the ultimate expectation as to where energy loans, as a percentage of your whole portfolio trends, I noticed historically and that 18% to 20% range and are closer to 14% today. How do you think about your overall energy exposure, longer term in relation to the total portfolio? Is that something you managed to a particular capital level? Or is it a specific loan concentration?

Yes. We manage it both through the percent of capital and as a percent of the loan portfolio. And that we have significant capacity under both measures to grow that portfolio today. And neither of those metrics, even approaches any kind of potential headwind for growth in that sector. We obviously remain very optimistic about growth there. I think as you get into next year, at these price levels, we're hopeful that there'll be more drilling activity and then that would certainly drive borrowing demand and obviously, loan demand that goes with that. So we're excited about that space, we think that continues to be an area that we have great expertise, and great consistency in our delivery of that into the market. And we've been recognized for that with the new customers that we've acquired during the year. And, in fact, I think, in the third quarter in the league tables, we were the number one originator in the energy space for the loan sizes that kind of fit our and less than 500 million in total loan size. So we're excited about where we're positioned there. And we think that's going to be a driver for us well into the future. I think the other point to that, if we get awfully focused on the loan balance piece of that business, but I mentioned it in my prepared remarks and want to reference it again, that area also had a record quarter in fee revenue, both in treasury revenue, investment, making revenue and derivatives revenue, it's a big part of the nature of that relationship. It is not just a lending relationship. It's a very full and whole relationship that has other profitable aspects of the business that is important to the bank and important to our shareholders.

Awesome, all very helpful. Last for me, just more sort of housekeeping. Would you remind us what your percent utilization is today? My apologies, if you said that during your prepared remarks, and I missed that?

Yes. When you look at the overall portfolio, it's hard to give an absolute number. We're in kind of about 64% overall, but that's probably not the absolute best way to look at it. Because some of those commitments like an energy kind of [accordion] [ph] up and down depending on prices over time. I think, what in our core CNI -- kind of our corporate CNI area, we're below 50% for the first time, in any recent history, in that particular segment, we believe just a return to a more normal, loan growth would enhance the loan balances by about $600 million. That's just for that more corporate CNI group. It doesn't impact the specialty areas and others, that also would benefit from growth and increase in utilization as well.

Thank you. Our next question comes from line of Matt Olney with Stephens Inc. Please proceed with your question.

Sticking with some of the energy questions here, I think Stacy, you mentioned adding 40 new customers in that business this year. That's helpful. What are existing energy customers saying with respect to their strong cash flows from our commodity prices? Is there talk about more joint activity or they still expect to pay off more debt? Thanks.

There's modest discussion I mean that the discussions really, if you think about as an energy producer, kind of what they've lived in the last 18 months. I mean, they've seen a day where oil price was negative and natural gas was -- is clearly depressed to now today. Oil is above 75. And natural gas at one point, hit $6 an MCF. So very different environment. And they've seen a lot of volatility associated with that. They're much more disciplined around hedging. And so they're much more focused on that. I think, today, the biggest conversations around free cash flow. And being able to have cash flow to demonstrate the returns to their investors, I think is really important to them. So I think what, the early discussions that we are learning about really is, at this stage, probably much more modest drilling activity than you might expect, given the significant run up and commodity prices over the last six months or so that doesn't mean that won't change, we're kind of in that capital budgeting season for those energy customers. So we'll learn more about that throughout this quarter. But certainly, my expectation is for modest, not significant, but modest increases in drilling activity, as we move into next year. Certainly, that could change depending on a lot of factors, including if commodity prices continue to increase.

Okay. That's really helpful, Stacy. And then, I guess the other data point you gave us was that the energy commitment balances have grown by about $1 billion so far, this year from those newer customers. I'm trying to appreciate the baseline of that number. So do you have the overall levels of energy commitments at the bank or just an approximate number.

At the end of September, if you look at energy commitments, we were at about 5.4 billion. And that number ebbs and flows, probably more than any other committed amount, because you get borrowing bases that expand and contract, semiannually. So the utilization there is lower than it has been historically as well. It's in the low 50% utilization. So combination of, I think we're going to see commitment growth there as well as hopefully higher utilization as we go into next year.

Okay, perfect. And then, just lastly, for me, I guess, on the PPP side, do you have the dollar amount of the fees that were recognized in the third quarter and how much left you expect to recognize over the next few quarters? Thanks.

Yes, Matt, this is Steven. The fees we recognized in the third quarter was 12.7 million. That's a little bit higher than the second quarter, which is 11.1 million. And we have 15 million left to recognize, but most of that's associated with the kind of this 2021 vintage loans. And so that's going to spread out, we think over a longer period of time. So you won't see the same level of the recognition in the fourth quarter and on in early parts of the 2022 that you've seen so far with that 2020 vintage that's almost all gone.

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

Steve, can you touch on the commercial real estate balances? Do you expect that move to the permanent market to accelerate or is this just kind of a nagging thing that's going to be with you for a while and potentially slow at some point?

We certainly expect it to slow. I mean you've got really that -- we really saw that begin to accelerate in the second quarter or third quarter. I think I'd like to see it stabilize a little bit before I call the bottom there. I think it's likely that's the fourth quarter. But you had no movement to the permanent market last year, you've got the nature of our portfolios, they tend to get to after construction and stabilization and then refinance to a non-recourse permanent financing source. So you've kind of got a couple years that we're doubling up on here, but I think that will stabilize likely in the fourth quarter. Could stretch into the first quarter of next year but my best guess is that it would be late fourth quarter this year. And then that would be well positioned to grow from there.

Okay. Okay, good. And on long growth again, I know you don't want to talk about 2022. But just a couple of things. You're talking about increased borrower demand line utilization, returning to normal. I think, Steve Bradshaw, you talked about restart of growth drivers, does it feel like we're just getting started on call it non stimulus driven growth in the economy? If that makes sense. It just feels like things are lining up for better growth plus not to mention the energy piece of this. I guess, are you as bullish? Are you more and more bullish on growth for Q4 and 2022?

We're very bullish. Lots of reasons, we stand to disproportionately benefit from commodity prices rising;, we've got an energy book that will benefit from a growth perspective; we've got a footprint that will benefit that is growing. Steve and I have been in Texas last couple of weeks, and man, you just -- you cannot do anything down there without seeing just the enormous in migration. I have been in Phoenix. A lot of things going on in Phoenix and Denver. I mean, the in migration from the coastal areas is significant. Our footprint is just perfect for that. I think that that you've seen borrower sentiment be exceptionally strong. There are some, economic headwinds that, whether it's supply chain, or labor shortages, that will resolve themselves at some level, I think in the next quarter or two. And most of the stimulus dollars have been allocated to states and local governments haven't even been spent yet. And so I think that there is an enormous level of growth kind of pin up. And I think we're in the very early stages of beginning to see that.

Yes, it's interesting. It's like we skipped the credit cycle, and now we're emerging to grow. So it sets up pretty well. Just one more thing on deposit flows. You use the term, I think they're abating a bit, but it's still very, very strong. Do you expect that to slow, deposit growth to continue to slow? And what do you think could eventually reverse the growth and maybe see deposit start to come down?

We think, as we kind of have had the beginnings of some of our internal discussions about how we should think about for next year. We actually aren't seeing from the save the current level that you see today, we're not seeing material declines, we're not forecasting material declines in the deposit levels. We think that the liquidity that's in the market is going to be here, because if even that the current liquidity is used, there's going to be additional liquidity that hasn't been pushed through the system yet that will replace that. So certainly, for the foreseeable 12 months or so, we believe that the deposit levels you see today are likely in the range of what you will see going forward. The other question that kind of gets asked related as well, if you've got that much liquidity in the system, how can you have loan growth? It's a fair question. We've kind of looked at that back in 08, 09, 2010, the last time you had a significant downturn and then a recovery. You can have loan growth, with strong liquidity in the system, often it's in different sectors. So you need the total may have a lot of liquidity, but different sectors have are growing at different paces. So it creates loan demand. So those aren't mutually exclusive. They are related, but they're not mutually exclusive either.

Thank you. [Operator Instructions] Our next question comes from line of Gary Tenner with DA Davidson. Please proceed with your questions.

Just a couple of questions here, in terms of mortgage began on sale as you pointed out was quite a bit higher than it was last quarter. And if I understood correctly, it was because the commitment levels kind of stabilized after a big drop off in 2Q. So I just wonder how if you can give any thoughts on how you see gain on sale, migrating because you're still well above where the kind of pre-2020 gain on sale levels were.

Yes. Without being specific to kind of gain on sale just looking at the business, overall, we think that likely what you see in the fourth quarter from the mortgage business from a revenue perspective, is going to be pretty close to in line with what you saw in the second quarter from a mortgage revenue perspective. There may be some opportunities on the expense side related to MSR amortization, that may benefit us a little bit more in the fourth quarter. So our overall contribution from what we would expect to be kind of consistent with the second quarter may be a little bit better when you look at pre-tax contribution for mortgage, but the revenue levels we think will be much more consistent with what we saw in the second quarter.

Okay. Thank you. And then, Steven, I know you mentioned that you expect PPP forgiveness to kind of be stretched out from here. But you just remind us what the remaining PPP fees are to be recognized?

Yes, 15 million that's what we have remaining. I think the balance of the PPP loans is 580 million, something like that. And again, it's that kind of second round or 2021 vintage, which will be forgiven over a longer period of time, then you saw the first round. So that's why we think the 15 million will be spread out over many coming quarters.

Thank you. Our next question comes from line of Matt Olney with Stephens Inc. Please proceed with your question.

Yes. Hey, guys. Just a few more here on the follow up side. I'm looking at the average balance sheet. It looks like the investment securities balances are now around 50% of average earning assets which I think is the highest level we can find going back several years at the bank. Is there any appetite to move that higher in the near term as we wait for loan growth? Or do you think this has now peaked at this point?

Yes. I think it's generally peaked. I mean, there's two components to that, I think 13 billion roughly as AFS and the other 7 billion or so we have for our trading portfolio. But the 13 billion AFS, I think, is pretty close to where we want it to be. It is up a couple of 100 million this quarter. But we don't really have any initiatives to drive that higher, not in the face of what we think will ultimately be some increasing rate, hopefully, by the end of 2022. We're pretty comfortable with our interest rate risk position. And that AFS portfolio, I think at the right level, at least, the way we're thinking about today.

Matt, if you think about being positioned rising rates, I think if you look at our performance to the last rising rate cycle, we were kind of a top quartile bank from that perspective and certainly the language coming out of the Fed, the various governors over the last month or so has certainly been more indicative of tightening than the continued loose monetary policy. So we currently are forecasting our first increase in December next year, I think there's probably more pressure that happens sooner than later than that. And we're awfully well positioned to benefit from rising rates and would want to be well positioned for that if it comes sooner than later.

Yes, that's a great point, Stacy, thanks for bringing that up. And I guess what about on the loan floor side? What's the level of loan fours you have at this point? And then what's the -- how many rate increases do you have to see to get above some of those fours?

So they are just shy of 4 billion [Audio Gap]

And those will roll off, we're competitively -- we're able to get fewer fours and deals today than we were 12 months ago. So if you assume kind of a three year roll off of that, then there'll be less than 12 months, than they are today for sure.

Yes. And going back to the AFS securities portfolio, it sounds like there could be a little bit more pressure on the yields there, but we're getting close to bottoming. Is that fair Steven?

Yes. I mean if you look at the portfolio yield itself is 180. I looked this morning, we added some securities, in fact, yesterday at 135. So, those are four to five year duration security. So we do have a little bit of -- there is room there for that to continue to reprice down that's why I mentioned it, but I don't think it's an overall huge drag on net interest margin. I really think that's we've overall stabilize the margin pretty well, but there is a little bit left there if rates stay low. And between the portfolio yield and what we're adding in terms of the cash flow that we get back and reinvest.

We did pay off Steven alluded to this. We did pay off the sub debt in the third quarter. And that was a partial impact of that. So we still have a full quarter impact in the fourth quarter of around $2 million, that should be beneficial overall to the margin as well.

Okay. And then on the loan yield side, I think we're trying to separate the PPP impact, we'll look at just the core yield. And I think you mentioned the two loan categories that you have strong conviction that could grow next year would be energy and then commercial real estate. Did I get that right? Is it fair to say those two categories have higher yields, on average than most other parts of the portfolio at the bank?

That's true statement.

And Stacy, how would you characterize energy loan spreads today, historically, and then versus the rest of portfolio? Are they still relatively higher?

They are. As folks have decided to leave the space. Clearly, the spreads, there have been very stable. There are fewer competitors there today. And we're still getting the appropriate spreads for the risk that we take in that space.

Okay, perfect. All right. Last one, guys, brokerage and trading, you guys hit a homerun this quarter. Looks like it was mostly on trading and then customer hedging. I know it's tough to predict kind of quarter-to-quarter, but talk more about the sustainability of these levels in the third quarter?

Yes. Let me hit a couple of things here and then ask Scott, he wants to add anything to that. We're really proud of our wealth group. We're just right at $100 billion in assets under management. And sometimes whether it's energy on the lending side, or the trading businesses on the wealth side, those types of things kind of overshadow what core is happening inside the company. And certainly the trading businesses create volatility, but if you look at wealth revenues, overall, there is inter-quarter volatility. But we've grown wealth, total revenue year-over-year for over 10 consecutive years now. And that wealth revenue CAGR is in excess of 9%. And so there's volatility in some of these trading businesses. But there's core growth that's happening, I think, the markets missing inside of our wealth business. And so, as we think about the fourth quarter, we think the trading aspect of that business will be probably somewhere between what we saw in the second quarter and the third quarter, probably not as strong as the third quarter probably maybe a little bit better than what we saw in the second quarter. But if you think about the business and how we think about that business, total wealth revenue has been a significant driver of our company. And it's not just the trading business, it's the assets under management that we're providing counsel for our customers and institutions around, you typically will see assets that are managed, they're half the size of the core bank, ours are over twice the size of the core bank and almost 100 billion. So we're proud of that business and we are excited about what we've done on the trading side, but the core wealth business has been a key growth driver for our company for a long time. Scott, anything you want to add to that?

No. I think Stacy said it well. I think that in addition to the probably more volatile, quarter-to-quarter result on the institutional trading side, we have kind of quietly managed to grow our retail brokerage revenues as well, at a healthy rate, both on a linked quarter basis and versus last year. And also on our investment banking business has been very strong, as Stacy said earlier in prepared comments, but really you've coupled that with the continued momentum that we're getting both on the mortgage backed security side that is that large component but coupled with investment banking, retail brokerage and then our hedging activities, not just energy related, but also in our FX business and our interest rate derivative activity. All those components are we think very well positioned for continued momentum.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Nell for any final comments.

Okay. Thanks again everyone for joining us. If you have further questions, please call me at 918-595-3030 or you can email us at ir@bokf.com. Have a great day and thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.