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BOK FINANCIAL CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
Table 1 - Consolidated Selected Financial Data
December 31,
2022 2021 2020
Selected Financial Data
Earnings per share (based on average equivalent shares):
Basic
$ 7.68 $ 8.95 $ 6.19 Diluted 7.68 8.95 6.19 Percentages (based on daily averages): Return on average assets 1.11 % 1.23 % 0.89 % Return on average shareholders' equity 10.81 % 11.59 % 8.55 % Dividend payout ratio 27.65 % 23.29 % 33.04 % Allowance for loan losses to loans, excluding PPP loans1 1.05 % 1.29 % 1.82 %
Combined allowance for credit losses to loans, excluding PPP
loans1,2
1.32 % 1.45 % 2.00 % 1 Metric meaningful due to theU.S. government agency guarantee and short-term nature of the Paycheck Protection Program ("PPP") loans. 2 Includes allowance for loan losses and accrual for off-balance sheet credit risk.
Management's Assessment of Operations and Financial Condition
Overview
The following discussion is management's analysis to assist in the understanding and evaluation of the financial condition and results of operations ofBOK Financial Corporation ("BOK Financial" or "the Company"). This discussion should be read in conjunction with the Consolidated Financial Statements and footnotes and selected financial data presented elsewhere in this report. This section and other sections provide information about our recent financial performance. For information about results of operations for 2021 compared with 2020, see the respective sections in Management's Discussion and Analysis included in our 2021 Form 10-K filedFebruary 23, 2022 . Economic conditions have been volatile in 2022 with soaring inflation, fluctuating oil prices caused by theRussia -Ukraine conflict and the lingering effects of the COVID-19 pandemic. In order to combat rising inflation, theFederal Reserve began increasing the Federal Funds rate in March and continued to do so through the end of the year for a total 425 basis point increase. Consumer spending has remained high through 2022, and unemployment remains low at 3.5% forDecember 2022 . See "Summary of Credit Loss Experience" section of Management's Discussion and Analysis for additional discussion around our economic forecast. 21 --------------------------------------------------------------------------------
Performance Summary
Net income for the year endedDecember 31, 2022 totaled$520.3 million or$7.68 per diluted share compared with net income of$618.1 million or$8.95 per diluted share for the year endedDecember 31, 2021 . Pre-provision net revenue ("PPNR"), a non-GAAP measure, was$690.1 million for 2022 compared to$697.9 million in the prior year. Highlights of 2022 included: •Net interest revenue totaled$1.2 billion for 2022, an increase of$93.3 million over the prior year. Net interest margin was 2.98% for 2022 compared to 2.60% for 2021. In response to rising inflation, theFederal Reserve increased the federal funds rate 425 basis points since the beginning of the year. The resulting impact on market interest rates has increased net interest margin as our earning assets, led by our significant percentage of variable-rate commercial loans, reprice at a higher rate and faster pace than our interest-bearing liabilities. Average earning assets were$40.1 billion for 2022, down$3.7 billion compared to 2021, largely due to decreased trading securities. •Fees and commissions revenue was$657.2 million for 2022, a decrease of$11.1 million compared to 2021. Mortgage banking revenue decreased$56.5 million due to a decrease in mortgage production volume caused by rising mortgage interest rates and continued housing inventory shortages. Other revenue decreased$14.3 million , primarily due to lower production revenue on repossessed oil and gas properties sold in 2021. Brokerage and trading revenues grew$28.0 million , largely due to increased customer hedging and investment banking revenues. Fiduciary and asset management revenue increased$18.1 million with growth in mutual fund fees and decreased fee waivers.
•Other gains and losses, net decreased
alternative investment and repossessed assets in the prior year.
•Other operating expense totaled$1.2 billion , a$13.2 million decrease compared to 2021. Personnel expense decreased$24.5 million , primarily driven by lower incentive compensation costs, partially offset by higher regular compensation. Non-personnel expense increased$11.2 million , largely due to additional business promotion fees, project-related data processing and communications and professional fees. These were partially offset by lower mortgage banking costs and expenses on repossessed assets. •The net economic cost of the changes in the fair value of mortgage servicing rights and related economic hedges was$12.5 million during 2022 compared to an economic benefit of$21.0 million during 2021 due to increased market volatility throughout 2022. •We recorded a$30.0 million provision for expected credit losses in 2022, primarily due to strong growth in loans and loan commitments, partially offset by improvement in credit quality metrics. The uncertainty in our economic forecast increased and some key economic factors were less favorable to growth across all scenarios. A negative$100.0 million provision for expected credit losses was recorded in 2021. The combined allowance for credit losses totaled$296.6 million or 1.31% of outstanding loans atDecember 31, 2022 . The combined allowance for credit losses was$289.4 million or 1.43% of outstanding loans atDecember 31, 2021 . •Nonperforming assets not guaranteed byU.S. government agencies decreased$23.7 million compared toDecember 31, 2021 . Potential problem loans decreased$128 million and other loans especially mentioned increased$5.5 million . Net charge-offs were$21.1 million or 0.10% of average loans in 2022. Net loans charged-off were$37.0 million or 0.17% of average loans in 2021. •Period-end outstanding loan balances increased$2.4 billion to$22.6 billion atDecember 31, 2022 . Of this increase, commercial loans increased$1.7 billion , commercial real estate loans increased$775 million , and loans to individuals grew by$146 million . Paycheck Protection Program loans decreased$262 million . Average outstanding loan balances were$21.3 billion , a$216 million decrease.
•Average deposits decreased
decreased
clients moving to off-balance sheet alternatives seeking higher yields.
•The Company's common equity Tier 1 capital ratio was 11.69% atDecember 31, 2022 . In addition, the Tier 1 capital ratio was 11.71%, total capital ratio was 12.67% and leverage ratio was 9.91% atDecember 31, 2022 . AtDecember 31, 2021 , the Tier 1 capital ratio was 12.25%, the total capital ratio was 13.29% and the leverage ratio was 8.55%. •The Company repurchased 1,632,401 common shares at an average price of$94.88 per share during 2022 and 1,359,657 common shares at an average price of$86.74 during 2021. 22 --------------------------------------------------------------------------------
•The Company paid cash dividends of
per common share in 2021.
Net income for the fourth quarter of 2022 totaled$168.4 million or$2.51 per diluted share, compared to$156.5 million or$2.32 per diluted share for the third quarter of 2022.
Highlights of the fourth quarter of 2022 included:
•Net interest revenue totaled$352.6 million for the fourth quarter of 2022, an increase of$36.3 million compared to the prior quarter. Net interest margin was 3.54% compared to 3.24%. In response to rising inflation, theFederal Reserve increased the federal funds rate another 125 basis points in the fourth quarter. The resulting impact on market interest rates increased our net interest margin. •Fees and commissions revenue was relatively consistent with the prior quarter at$193.6 million . Increased brokerage and trading revenue, transaction card revenue, and other revenue was offset by lower revenue from mortgage banking and deposit service charges.
•Operating expense increased
increased
expense. Non-personnel expense increased
project-related professional fees and data processing and communications costs.
•We recorded a$15.0 million provision for expected credit losses in the fourth quarter of 2022, primarily due to strong growth in loans and loan commitments. The level of uncertainty in the economic outlook remained high and key economic factors in the base case were slightly less favorable to economic growth. We also recorded a$15.0 million provision for expected credit losses in the third quarter of 2022, primarily as a result of growth in loans and loan commitments during the quarter. 23 --------------------------------------------------------------------------------
Critical Accounting Policies & Estimates
The Consolidated Financial Statements and accompanying notes are prepared in accordance with generally accepted accounting principles inthe United States of America ("GAAP"). The Company's accounting policies are more fully described in Note 1 of the Consolidated Financial Statements. Management makes significant assumptions and estimates in the preparation of the Consolidated Financial Statements and accompanying notes in conformity with GAAP that may be highly subjective, complex and subject to variability. Actual results could differ significantly from these assumptions and estimates. The following discussion addresses the most critical areas where these assumptions and estimates could affect the financial condition, results of operations and cash flows of the Company. These critical accounting policies and estimates have been discussed with the appropriate committees of the Board of Directors.
Allowance for Loan Losses and Accrual for Off-Balance Sheet Credit Risk from
Loan Commitments
The allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments represent the portion of amortized cost basis of loans and related unfunded commitments we do not expect to collect over the asset's contractual life, considering past events, current conditions, as well as reasonable and supportable forecasts of future economic conditions. Appropriateness of the allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments is determined by a senior management Allowance Committee which requires judgment about effects of uncertain matters, resulting in a subjective calculation which is inherently imprecise. Because of the subjective forward-looking nature of the calculation, changes in these measures may not directly correlate with actual economic events. In future periods, management judgment may consider new or changed information which may cause significant changes in these allowances in those future periods. OnJanuary 1, 2020 ,BOK Financial's accounting policies changed significantly with the adoption ofFinancial Accounting Standards Board ("FASB") Accounting Standards Update No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Assets Measured at Amortized Cost ("ASU 2016-13" or "CECL"). Prior years were not restated. Prior toJanuary 1, 2020 , general allowances and nonspecific allowances were based on incurred credit losses. See Note 4 to the Consolidated Financial Statements for the description of the expected credit losses calculation of the allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments. For the majority of risk-graded loans, the accruing loan's expected credit loss estimate is sensitive to management judgment, particularly probability of default and loss given default assumptions, changes in specific macroeconomic factor forecasts and the probability weight assigned to each economic scenario, and appropriate adjustments.
Significant assumptions and estimates affecting the allowance for loan losses
and accrual for off-balance sheet credit risk include:
•Probability of default and loss given default measurements are based on
historical data that may not be a good predictor of future performance or actual
losses.
•Probability of default is based on risk grades, a subjective measurement of the
risk of a loan. This subjective assessment of risk may not reflect actual risk
of loss.
•The forecast for each relevant economic loss driver and the probability
weighting of economic scenarios are overseen by a senior management Economic
Forecast Committee which includes members independent of the allowance process.
•The Allowance Committee may increase or decrease the allowance to reflect risks
not captured in the quantitative component. Examples of circumstances that may
result in adjustments include, but are not limited to, new lines of business,
market conditions that have not been previously encountered, observed changes in
credit risk that are not yet reflected in macroeconomic factors, or economic
conditions that impact loss given default assumptions.
Although the resulting expected credit loss estimate represents management's
best estimates at the time, actual credit losses will differ from management's
estimate. Portfolio composition will change over time, actual economic
conditions will differ from probability-weighted assumptions, borrower-specific
circumstances will change, as well as other factors. Differences between actual
losses and management's estimates may materially affect the Company's results of
operations.
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We describe critical elements affecting our estimate of expected credit loss in
the "Summary of Credit Loss Experience" section of Management's Discussion and
Analysis. While it is challenging to evaluate the allowance impact for a change
in a particular input, results of such an analysis demonstrate how the
quantitative element of the allowance behaves under different conditions. The
sensitivity to management's economic scenario weighting may be quantified by
comparing the results of weighting each economic scenario at 100%. For example,
compared to a 100% Base Case scenario, a 100% Downside case would result in an
additional $117 million in quantitative reserve, while a 100% Upside Case would
result in $18 million less in quantitative reserve at December 31, 2022 . Such
sensitivity calculations do not necessarily reflect the nature and extent of
future changes in the related allowance for a number of reasons including (1)
management's weighting of multiple forecasted economic scenarios in estimating
expected credit losses; (2) management's predictions of future economic trends
and relationships among the scenarios may differ from actual events; and (3)
management's application of subjective measures to modeled results when
appropriate.
Fair Value Measurement
Certain assets and liabilities are recorded at fair value in the Consolidated
Financial Statements. Fair value is defined by applicable accounting guidance as
the price to sell an asset or transfer a liability in an orderly transaction
between market participants in the principal markets for the given asset or
liability at the measurement date based on market conditions at that date. An
orderly transaction assumes exposure to the market for a customary period for
marketing activities prior to the measurement date and not a forced liquidation
or distressed sale.
A hierarchy for fair value has been established that prioritizes the inputs of
valuation techniques used to measure fair value into three broad categories:
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1), other observable inputs that can be observed either directly or
indirectly (Level 2) and unobservable inputs for assets or liabilities (Level
3). Fair value may be recorded for certain assets and liabilities every
reporting period on a recurring basis or under certain circumstances on a
non-recurring basis. Fair value measurements of significant assets or
liabilities that are based on unobservable inputs (Level 3) are considered
Critical Accounting Policies and Estimates. Additional discussion of fair value
measurement and disclosure is included in Notes 7 and 19 of the Consolidated
Financial Statements.
Mortgage Servicing Rights
We have a significant investment in mortgage servicing rights ("MSRs"). Our MSRs
are primarily retained from sales in the secondary market of residential
mortgage loans we have originated or purchased from correspondent lenders. MSRs
may be purchased from other lenders. Both originated and purchased MSRs are
initially recognized at fair value. We carry all MSRs at fair value. Changes in
fair value are recognized in earnings as they occur.
MSRs are not traded in active markets. The fair value of MSRs is determined by
discounting the projected cash flows. Certain significant assumptions and
estimates used in valuing MSRs are based on current market sources including
projected prepayment speeds, assumed servicing costs, earnings on escrow
deposits, ancillary income and discount rates. Assumptions used to value our
MSRs are considered significant unobservable inputs and represent our best
estimate of assumptions that market participants would use to value this asset.
A separate third party model is used to estimate prepayment speeds based on
interest rates, housing turnover rates, estimated loan curtailment, anticipated
defaults and other relevant factors. The prepayment model is updated
periodically for changes in market conditions and adjusted to better correlate
with actual performance of our servicing portfolio. The discount rate is based
on benchmark rates for mortgage loans plus a market spread expected by investors
in servicing rights. Significant assumptions used to determine the fair value of
our MSRs are presented in Note 7 to the Consolidated Financial Statements. At
least quarterly, we request estimates of fair value from outside sources to
corroborate the results of the valuation model.
The assumptions used in this model are primarily based on mortgage interest
rates. Evaluation of the effect of a change in one assumption without
considering the effect of that change on other assumptions is not meaningful.
Considering all related assumptions, we expect a 50 basis point increase in
primary mortgage interest rates to increase the fair value of our servicing
rights by $6.1 million . We expect an $8.2 million decrease in the fair value of
our MSRs from a 50 basis point decrease in primary mortgage interest rates.
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Results of Operations
Net Interest Revenue and Net Interest Margin
2022 Net Interest Revenue
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$1.2 billion for 2022, an increase of$92.9 million over the prior year. This includes$7.3 million of PPP loan fees for 2022 and$42.7 million for 2021. Net interest revenue increased$100.8 million due to changes in interest rates and decreased$7.9 million from a decrease in earning assets, partially offset by a decrease in interest-bearing liabilities. Table 3 shows the effects on net interest revenue due to changes in average balances and interest rates for the various types of earning assets and interest-bearing liabilities. In addition, see the Annual Financial Summary of consolidated daily average balances, yields and rates as shown in Table 2. Net interest margin was 2.98% for 2022 and 2.60% for 2021. The tax-equivalent yield on earning assets was 3.42% for 2022 compared to 2.74% in 2021. During 2022, theFederal Reserve increased the federal funds rate 425 basis points in response to rising inflation. The resulting impact on market interest rates has increased net interest margin as our earning assets, led by our significant percentage of variable-rate commercial loans, reprice at a higher rate and faster pace than our interest-bearing liabilities. Loan yields increased 100 basis points to 4.62%. The available for sale securities portfolio yield increased 27 basis points to 2.07%. The yield on trading securities grew 26 basis points to 2.24% and the yield on interest-bearing cash and cash equivalents increased 131 basis points to 1.44%. Funding costs increased 49 basis points compared to 2021. The cost of interest-bearing deposits increased 39 basis points. The cost of other short-term borrowings increased 144 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 26 basis points for 2022, up from 7 basis points for 2021. Average earning assets for 2022 decreased$3.7 billion or 9% compared 2021. Average trading securities balances decreased$3.1 billion in response to lower origination volumes in the residential mortgage industry driven by increases in mortgage interest rates. The average balance of available for sale securities, which consists largely of residential and commercial mortgage-backed securities guaranteed byU.S. government agencies, decreased$1.7 billion , while investment securities increased$1.3 billion . In the second quarter 2022, we transferred$2.4 billion ofU.S. government agency mortgage-backed securities from available for sale to the investment securities portfolio to limit the effect of future rate increases on the tangible common equity ratio. Average loans, net of allowance for loan losses, decreased$136 million . Total average deposits decreased$70 million compared to the prior year. Average interest-bearing transaction account balances decreased$1.1 billion while average demand deposit balances increased$1.4 billion . Average time deposits also decreased$430 million . Average short-term borrowings decreased$1.9 billion . Our overall objective is to manage the Company's balance sheet in such a way as to limit exposure to changes in interest rates. These strategies are further described in the Market Risk section of this report. Approximately 79% of our commercial and commercial real estate loan portfolios are either variable rate loans or fixed rate loans that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing or that reprice more slowly than the loans. The result is a balance sheet that would be asset-sensitive which means that assets generally reprice more quickly than liabilities. One of the strategies that we use to manage toward a relative rate-neutral position is to purchase fixed rate residential mortgage-backed securities issued primarily byU.S. government agencies and fund them with market rate sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 3 and in the interest rate sensitivity projections as shown in the Market Risk section of this report. 26 -------------------------------------------------------------------------------- Table 2 - Annual Financial Summary Consolidated Daily Average Balances, Average Yields and Rates (Dollars in thousands, except per share data) Year Ended December 31, 2022 Average Revenue/ Yield/ Balance Expense Rate Assets Interest-bearing cash and cash equivalents$ 801,180 $ 11,552 1.44 % Trading securities 4,723,130 115,295 2.24 % Investment securities 1,493,322 24,490 1.64 % Available for sale securities 11,643,103 249,361 2.07 % Fair value option securities 64,776 2,145 3.40 % Restricted equity securities 180,760 8,282 4.58 % Residential mortgage loans held for sale 139,553 6,027 4.31 % Loans 21,279,187 983,413 4.62 % Allowance for loan losses
(245,915)
Loans, net of allowance 21,033,272 983,413 4.68 % Total earning assets 40,079,096 1,400,565 3.42 % Receivable on unsettled securities sales 310,974 Cash and other assets 6,634,566 Total assets$ 47,024,636 Liabilities and equity Interest-bearing deposits: Transaction$ 20,550,624 $ 108,956 0.53 % Savings 969,279 489 0.05 % Time 1,446,613 12,304 0.85 % Total interest-bearing deposits 22,966,516 121,749 0.53 % Funds purchased and repurchase agreements 1,265,045 13,158 1.04 % Other borrowings 1,628,972 39,325 2.41 % Subordinated debentures 131,206 6,490 4.95 % Total interest-bearing liabilities 25,991,739 180,722 0.70 % Non-interest bearing demand deposits
14,884,765
Due on unsettled securities purchases 451,530 Other liabilities 879,691 Total equity 4,816,911 Total liabilities and equity$ 47,024,636 Tax-equivalent net interest revenue$ 1,219,843 2.72 % Tax-equivalent net interest revenue to earning assets 2.98 % Less tax-equivalent adjustment 8,463 Net interest revenue 1,211,380 Provision for credit losses 30,000 Other operating revenue 643,257 Other operating expense 1,164,480 Net income before taxes 660,157 Federal and state income taxes 139,864 Net income 520,293 Net income attributable to non-controlling interests 20
Net income attributable to
shareholders
$ 520,273 Earnings Per Average Common Share Equivalent: Net income: Basic$ 7.68 Diluted$ 7.68 Yield calculations are shown on a tax equivalent at the statutory federal and state rates for the periods presented. The yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income and the unrealized gains and losses. The yield calculation also includes average loan balances for which the accrual of interest has been discontinued and are net of unearned income. Yield/rate calculations are generally based on the conventions that determine how interest income and expense is accrued. 27 -------------------------------------------------------------------------------- Table 2 - Annual Financial Summary (continued) Consolidated Daily Average Balances, Average Yields and Rates (Dollars in thousands, Except Per Share Data) Year Ended December 31, 2021 December 31, 2020 Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate Assets Interest-bearing cash and cash equivalents$ 816,425 $ 1,060 0.13 %$ 634,401 $ 2,830 0.45 % Trading securities 7,823,705 156,214 1.98 % 3,078,075 67,942 2.75 % Investment securities 222,426 11,065 4.97 % 265,455 12,760 4.81 % Available for sale securities 13,342,526 230,698 1.80 % 12,420,678 261,404 2.21 % Fair value option securities 67,881 1,542 2.38 % 769,760 18,475 2.39 % Restricted equity securities 195,488 5,703 2.92 % 281,594 10,963 3.89 % Residential mortgage loans held for sale 188,888 5,465 2.93 % 215,296 6,397 3.05 % Loans 21,495,156 777,124 3.62 % 23,402,195 898,445 3.84 % Allowance for loan losses (326,121) (368,820) Loans, net of allowance 21,169,035 777,124 3.67 % 23,033,375 898,445 3.90 % Total earning assets 43,826,374 1,188,871 2.74 % 40,698,634 1,279,216 3.24 % Receivable on unsettled securities sales 667,149 3,329,727 Cash and other assets 5,658,180 4,676,029 Total assets$ 50,151,703 $ 48,704,390 Liabilities and equity Interest-bearing deposits: Transaction$ 21,673,472 $ 21,961 0.10 %$ 18,676,146 $ 60,424 0.32 % Savings 865,245 374 0.04 % 666,549 385 0.06 % Time 1,876,901 11,149 0.59 % 2,220,749 29,187 1.31 % Total interest-bearing deposits 24,415,618 33,484 0.14 % 21,563,444 89,996 0.42 % Funds purchased and repurchase agreements 2,238,702 8,084 0.36 % 3,635,541 15,605 0.43 % Other borrowings 2,599,861 9,793 0.38 % 4,659,453 41,011 0.88 % Subordinated debentures 224,058 10,535 4.70 % 275,965 13,944 5.05 % Total interest-bearing liabilities 29,478,239 61,896 0.21 % 30,134,403 160,556 0.53 % Non-interest bearing demand deposits 13,505,359 11,201,554 Due on unsettled securities purchases 800,667 1,081,674 Other liabilities 1,013,050 1,193,445 Total equity 5,354,388 5,093,314 Total liabilities and equity$ 50,151,703 $ 48,704,390 Tax-equivalent net interest revenue$ 1,126,975 2.53 %$ 1,118,660 2.71 % Tax-equivalent net interest revenue to earning assets 2.60 % 2.83 % Less tax-equivalent adjustment 8,942 10,216 Net interest revenue 1,118,033 1,108,444 Provision for credit losses (100,000) 222,592 Other operating revenue 755,775 842,320 Other operating expense 1,177,708 1,164,308 Net income before taxes 796,100 563,864 Federal and state income taxes 179,775 128,793 Net income 616,325 435,071 Net income (loss) attributable to non-controlling interests (1,796) 41 Net income attributable to BOK Financial Corporation shareholders$ 618,121 $ 435,030 Earnings Per Average Common Share Equivalent: Net income: Basic$ 8.95 $ 6.19 Diluted$ 8.95 $ 6.19 28
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Table 3 - Annual Volume/Rate Analysis
(In thousands)
Year Ended Year Ended
December 31, 2022 / 2021 December 31, 2021 / 2020
Change Due To1 Change Due To1
Yield / Yield /
Change Volume Rate Change Volume Rate
Tax-equivalent interest revenue:
Interest-bearing cash and cash
equivalents $ 10,492 $ (111) $ 10,603 $ (1,770) $ 540 $ (2,310)
Trading securities (40,919) (58,095) 17,176 88,272 128,039 (39,767)
Investment securities 13,425 43,575 (30,150) (1,695) (2,018) 323
Available for sale securities 18,663 (14,377) 33,040 (30,706) 20,115
(50,821)
Fair value option securities 603 (50) 653 (16,933) (16,899)
(34)
Restricted equity securities 2,579 (476) 3,055 (5,260) (3,286)
(1,974)
Residential mortgage loans held for sale 562 (1,696) 2,258 (932) (694) (238) Loans 206,289 (8,240) 214,529 (121,321) (71,533) (49,788) Total tax-equivalent interest revenue 211,694 (39,470) 251,164 (90,345) 54,264 (144,609) Interest expense: Transaction deposits 86,995 (3,662) 90,657 (38,463) 6,108 (44,571) Savings deposits 115 35 80 (11) 121 (132) Time deposits 1,155 (3,132) 4,287 (18,038) (3,277) (14,761) Funds purchased and repurchase agreements 5,074 (6,827) 11,901 (7,521) (5,491) (2,030) Other borrowings 29,532 (13,467) 42,999 (31,218) (13,023) (18,195) Subordinated debentures (4,045) (4,485) 440 (3,409) (2,532) (877) Total interest expense 118,826 (31,538) 150,364 (98,660) (18,094) (80,566) Tax-equivalent net interest revenue 92,868 (7,932) 100,800 8,315 72,358
(64,043)
Change in tax-equivalent adjustment (479) (1,274) Net interest revenue$ 93,347 $ 9,589
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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Fourth Quarter 2022 Net Interest Revenue
Tax-equivalent net interest revenue totaled$354.9 million for the fourth quarter of 2022, an increase of$36.4 million compared to the third quarter of 2022. The rapid increase in interest rates combined with our strong loan growth and our asset-sensitive position drove a linked quarter increase in net interest revenue and a 30 basis point increase in net interest margin. Net interest margin was 3.54% for the fourth quarter of 2022 compared to 3.24% for the third quarter of 2022. TheFederal Reserve increased the federal funds rate 125 basis points in the fourth quarter in response to rising inflation. The resulting impact on market interest rates increased the net interest margin. The tax-equivalent yield on earning assets was 4.53% for the fourth quarter of 2022, an increase of 82 basis points compared to the third quarter of 2022. Loan yields increased 110 basis points to 5.99%. The yield on trading securities was up 98 basis points to 3.70% while the yield on available for sale securities increased 33 basis points to 2.54%. The yield on interest-bearing cash and cash equivalents increased 219 basis points to 4.06%. Funding costs increased 81 basis points compared to the third quarter of 2022. The cost of other short-term borrowings increased 171 basis points while the cost of interest-bearing deposits increased 59 basis points. The cost of other borrowings was up 175 basis points to 4.08%. The cost of funds purchased and repurchase agreements increased 133 basis points to 2.05%. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 58 basis points in the fourth quarter of 2022 and 29 basis points in the third quarter of 2022. Average earning assets for the fourth quarter of 2022 increased$757 million over the third quarter of 2022. Average loans, net of allowance for loan losses, increased$375 million , largely due to growth in commercial and commercial real estate loans. Available for sale securities increased$648 million as we repositioned our balance sheet to a more rate-risk neutral position. Average interest bearing cash and cash equivalents decreased$180 million while average trading securities balances decreased$91 million . Average deposits decreased$1.6 billion compared to the third quarter of 2022 as customers redeploy resources following the savings trend during the height of the COVID-19 pandemic. Average demand deposit balances decreased$929 million . Average interest-bearing transaction accounts decreased$658 million . Other borrowings increased$994 million while funds purchased and repurchase agreements increased$246 million . 30 -------------------------------------------------------------------------------- Table 4 - Quarterly Financial Summary Consolidated Daily Average Balances, Average Yields and Rates (In thousands, except per share data) Three Months Ended December 31, 2022 September 30, 2022 Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate Assets Interest-bearing cash and cash equivalents$ 568,307 $ 5,822 4.06 %$ 748,263 $ 3,520 1.87 % Trading securities 3,086,985 28,473 3.70 % 3,178,068 22,772 2.72 % Investment securities 2,535,305 9,223 1.46 % 2,593,989 9,207 1.42 % Available for sale securities 10,953,851 73,317 2.54 % 10,306,257 59,144 2.21 % Fair value option securities 92,012 931 4.40 % 36,846 286 2.98 % Restricted equity securities 216,673 3,088 5.70 % 173,656 2,703 6.23 % Residential mortgage loans held for sale 98,613 1,390 5.56 % 132,685 1,684 5.05 % Loans 21,976,004 331,649 5.99 % 21,599,232 265,997 4.89 % Allowance for loan losses (242,450) (241,136) Loans, net of allowance 21,733,554 331,649 6.06 % 21,358,096 265,997 4.94 % Total earning assets 39,285,300 453,893 4.53 % 38,527,860 365,313 3.71 % Receivable on unsettled securities sales 194,996 219,113 Cash and other assets 5,729,322 6,372,229 Total assets$ 45,209,618 $ 45,119,202 Liabilities and equity Interest-bearing deposits: Transaction$ 18,898,315 $ 60,893 1.28 %$ 19,556,806 $ 31,266 0.63 % Savings 969,275 205 0.08 % 978,596 135 0.05 % Time 1,417,606 4,476 1.25 % 1,409,069 3,314 0.93 % Total interest-bearing deposits 21,285,196 65,574 1.22 % 21,944,471 34,715 0.63 % Funds purchased and repurchase agreements 1,046,447 5,407 2.05 % 800,759 1,445 0.72 % Other borrowings 2,523,195 25,961 4.08 % 1,528,887 8,988 2.33 % Subordinated debentures 131,180 2,038 6.16 % 131,199 1,677 5.07 % Total interest-bearing liabilities 24,986,018 98,980 1.57 % 24,405,316 46,825 0.76 % Non-interest bearing demand deposits 14,176,189 15,105,305 Due on unsettled securities purchases 575,957 331,428 Other liabilities 853,134 501,731 Total equity 4,618,320 4,775,422 Total liabilities and equity$ 45,209,618 $ 45,119,202 Tax-equivalent net interest revenue$ 354,913 2.96 %$ 318,488 2.95 % Tax-equivalent net interest revenue to earning assets 3.54 % 3.24 % Less tax-equivalent adjustment 2,287 2,163 Net interest revenue 352,626 316,325 Provision for credit losses 15,000 15,000 Other operating revenue 197,086 189,698 Other operating expense 318,456 294,751 Net income before taxes 216,256 196,272 Federal and state income taxes 47,864 39,681 Net income 168,392 156,591 Net income (loss) attributable to non-controlling interests (37) 81 Net income attributable to BOK Financial Corp. shareholders$ 168,429 $ 156,510 Earnings Per Average Common Share Equivalent: Basic$ 2.51 $ 2.32 Diluted$ 2.51 $ 2.32 Yield calculations are shown on a tax equivalent at the statutory federal and state rates for the periods presented. The yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income and the unrealized gains and losses. The yield calculation also includes average loan balances for which the accrual of interest has been discontinued and are net of unearned income. Yield/rate calculations are generally based on the conventions that determine how interest income and expense is accrued 31 -------------------------------------------------------------------------------- Table 4 - Quarterly Financial Summary (continued) Consolidated Daily Average Balances, Average Yields and Rates
Three Months Ended
June 30, 2022 March 31, 2022
Revenue Revenue /
Revenue /
Average Balance /Expense Yield / Rate Average Balance Expense Yield / Rate Average Balance Expense Yield / Rate$ 843,619 $ 1,737 0.83 %$ 1,050,409 $ 473 0.18 %$ 1,208,552 $ 483 0.16 % 4,166,954 23,009 2.00 % 8,537,390 41,041 1.71 % 9,260,778 44,537 1.89 % 610,983 3,585 2.35 % 195,198 2,475 5.07 % 213,188 2,661 4.99 % 12,258,072 58,882 1.84 % 13,092,422 58,018 1.77 % 13,247,607 55,638 1.72 % 54,832 437 2.92 % 75,539 491 2.81 % 46,458 302 2.71 % 167,732 1,384 3.30 % 164,484 1,107 2.69 % 137,874 1,028 2.98 % 148,183 1,559 4.22 % 179,697 1,394 3.11 % 163,433 1,242 3.06 % 21,057,714 205,694 3.92 % 20,463,662 180,073 3.57 % 20,242,653 188,547 3.70 % (246,064) (254,191) (271,794) 20,811,650 205,694 3.96 % 20,209,471 180,073 3.61 % 19,970,859 188,547 3.75 % 39,062,025 296,287 2.96 % 43,504,610 285,072 2.58 % 44,248,749 294,438 2.66 % 457,165 375,616 585,901 7,769,208 6,680,848 5,769,406$ 47,288,398 $ 50,561,074 $ 50,604,056 $ 21,037,294 $ 11,454 0.22 %$ 22,763,479 $ 5,343 0.10 %$ 22,326,401 $ 5,097 0.09 % 981,493 76 0.03 % 947,407 73 0.03 % 909,131 96 0.04 % 1,373,036 2,332 0.68 % 1,589,039 2,182 0.56 % 1,747,715 2,351 0.53 % 23,391,823 13,862 0.24 % 25,299,925 7,598 0.12 % 24,983,247 7,544 0.12 % 1,224,134 1,608 0.53 % 2,004,466 4,698 0.95 % 2,893,128 5,292 0.73 % 1,301,358 3,286 1.01 % 1,148,440 1,090 0.38 % 880,837 1,091 0.49 % 131,219 1,473 4.50 % 131,228 1,302 4.02 % 131,224 1,330 4.02 % 26,048,534 20,229 0.31 % 28,584,059 14,688 0.21 % 28,888,436 15,257 0.21 % 15,202,597 15,062,282 14,818,841 380,332 519,097 629,642 924,605 1,247,785 898,848 4,732,330 5,147,851 5,368,289$ 47,288,398 $ 50,561,074 $ 50,604,056 $ 276,058 2.65 %$ 270,384 2.37 %$ 279,181 2.45 % 2.76 % 2.44 % 2.52 % 2,040 1,973 2,104 274,018 268,411 277,077 - - (17,000) 168,617 87,856 157,443 273,655 277,618 299,495 168,980 78,649 152,025 36,122 16,197 34,836 132,858 62,452 117,189 12 (36) (129)$ 132,846 $ 62,488 $ 117,318 $ 1.96 $ 0.91 $ 1.71 $ 1.96 $ 0.91 $ 1.71 32
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Table 5 - Quarterly Volume/Rate Analysis
(In thousands)
Three Months Ended
Dec. 31, 2022 / Sep. 30, 2022
Change Due To1
Yield /
Change Volume Rate
Tax-equivalent interest revenue:
Interest-bearing cash and cash equivalents $ 2,302 $ (1,338) $ 3,640
Trading securities 5,701 (2,207) 7,908
Investment securities 16 (230) 246
Available for sale securities 14,173 5,012 9,161
Fair value option securities 645 427 218
Restricted equity securities 385 619 (234)
Residential mortgage loans held for sale (294) (445) 151
Loans 65,652 5,205 60,447
Total tax-equivalent interest revenue 88,580 7,043 81,537
Interest expense:
Transaction deposits 29,627 (1,730) 31,357
Savings deposits 70 (3) 73
Time deposits 1,162 23 1,139
Funds purchased and repurchase agreements 3,962 862 3,100
Other borrowings 16,973 8,034 8,939
Subordinated debentures 361 - 361
Total interest expense 52,155 7,186 44,969
Tax-equivalent net interest revenue 36,425 (143) 36,568
Change in tax-equivalent adjustment 124
Net interest revenue $ 36,301
1 Changes attributable to both volume and yield/rate are allocated to both
volume and yield/rate on an equal basis.
33 --------------------------------------------------------------------------------
Other Operating Revenue
2022 Other Operating Revenue
Other operating revenue was$643.3 million for 2022, a decrease of$112.5 million or 15% compared to 2021. A decline in mortgage banking revenue and other gains, net was partially offset by increased brokerage and trading revenue and fiduciary and asset management revenue. Table 6 - Other Operating Revenue (Dollars in thousands) 2022 2022 Year Ended vs. vs. Year Ended December 31, 2021 2021 December 31, 2021 vs. 2020 2021 vs. 2020 Increase % Increase Increase % Increase 2022 2021 (Decrease) (Decrease) 2020 (Decrease) (Decrease)
Brokerage and trading revenue
27,989 25 %$ 221,833 $ (108,844) (49) % Transaction card revenue 104,266 96,983 7,283 8 % 90,182 6,801 8 % Fiduciary and asset management revenue 196,326 178,274 18,052 10 % 167,445 10,829 6 % Deposit service charges and fees 110,636 104,217 6,419 6 % 96,805 7,412 8 % Mortgage banking revenue 49,365 105,896 (56,531) (53) % 182,360 (76,464) (42) % Other revenue 55,642 69,950 (14,308) (20) % 51,695 18,255 35 % Total fees and commissions revenue 657,213 668,309 (11,096) (2) % 810,320 (142,011) (18) % Other gains, net 123 63,742 (63,619) N/A 6,046 57,696 N/A Gain (loss) on derivatives, net (73,011) (19,378) (53,633) N/A 42,320 (61,698) N/A Gain (loss) on fair value option securities, net (20,358) (2,239) (18,119) N/A 53,248 (55,487) N/A Change in fair value of mortgage servicing rights 80,261 41,637 38,624 N/A (79,524) 121,161 N/A Gain (loss) on available for sale securities, net (971) 3,704 (4,675) N/A 9,910 (6,206) N/A Total other operating revenue$ 643,257 $ 755,775 (112,518) (15) %$ 842,320 $ (86,545) (10) %
Fees and commissions revenue
Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 35% of combined net interest revenue before provision for credit losses and fees and commission revenue. 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. Many of these economic factors, such as rising interest rates, that we expect will result in growth in net interest revenue or fiduciary and asset management revenue may also decrease mortgage banking production volumes and related trading. The velocity of changes in market conditions and interest rates may result in timing differences between when offsetting impacts and benefits are realized. As interest rates are expected to move higher, we expect to experience increased benefits to our net interest margin, which provides an offset to reduced mortgage-related fee income. Generally, for operating revenues not as directly related to movement in interest rates, we expect growth 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, which includes revenues from trading, customer hedging, retail brokerage and investment banking, increased$28.0 million or 25% over the prior year. 34 -------------------------------------------------------------------------------- Trading revenue includes net realized and unrealized gains and losses primarily related to sales of residential mortgage-backed securities guaranteed byU.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$20.3 million for 2022, a decrease of$7.3 million compared to 2021. Trading revenue was negatively affected by the disruption of the fixed income markets early in 2022. This was largely offset by favorable market conditions and increased market volatility, which led to higher margins and increased trading activity in the second half of the year. 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 6 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Derivative contracts executed with customers are offset with contracts between selected counterparties and exchanges to minimize market risk from changes in commodity prices, interest rates or foreign exchange rates. Customer hedging revenue, which is largely volume driven, totaled$45.7 million for 2022, an increase of$25.3 million or 124% compared to 2021 and was primarily attributed to our energy and interest rate derivative customers. Customer hedging revenue includes credit valuation adjustments of the fair value of derivatives to reflect the risk of counterparty default. Investment banking, which includes fees earned upon completion of underwriting, financial advisory services and loan syndication fees, totaled$45.6 million for 2022, an increase of$11.2 million or 33% compared to 2021, largely related to the timing and volume of commercial loan syndication fees and municipal bond transactions.
Revenue earned from retail brokerage transactions totaled
2022, a decrease of
revenue is primarily based on fees and commissions earned on sales of fixed
income securities, annuities, mutual funds and other financial instruments to
retail customers. Revenue is primarily based on the volume of customer
transactions and applicable commission rate for each type of product.
Insurance brokerage fees were
million
Transaction card revenue depends largely on the volume and amount of
transactions processed, the number of TransFund automated teller machine ("ATM")
locations and the number of merchants served. Transaction card revenue totaled
$104.3 million for 2022, a $7.3 million or 8% increase over 2021. Revenues from
the processing of transactions on behalf of the members of our TransFund
electronic funds transfer ("EFT") network totaled $84.6 million , up $4.5 million
or 6% over 2021. The number of TransFund ATM locations totaled 2,774 at December
31, 2022 compared to 2,593 at December 31, 2021 . Corporate card revenue totaled
$7.2 million , up $2.3 million or 45% over 2021 due to increased transactions
from the broader reopening of the economy. Merchant services fees paid by
customers for account management and electronic processing of card transactions
totaled $12.4 million , relatively consistent with the prior year.
Fiduciary and asset management revenue is earned through managing or holding of
assets for customers and executing transactions or providing related services.
Approximately 80% of fiduciary and asset management revenue is primarily based
on the fair value of assets. Rates applied to those asset values vary based on
the nature of the relationship. Fiduciary and managed asset relationships
generally have a higher fee rate than non-fiduciary and/or managed
relationships.
Fiduciary and asset management revenue increased $18.1 million or 10% compared
to 2021. Higher mutual fund fees and a reduction in fee waivers was partially
offset by lower trust fees. During the height of the COVID-19 pandemic, we
voluntarily waived certain administration fees on the Cavanal Hill money market
funds in order to maintain positive yields on these funds in the low short-term
interest rate environment. This practice subsided in 2022. We had approximately
$3.1 million in fee waivers during 2022 compared to approximately $11.7 million
in fee waivers during 2021.
35
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A distribution of assets under management or administration and related
fiduciary and asset management revenue follows:
Table 7 - Assets Under Management or Administration
(Dollars in thousands)
Year Ended December 31,
2022 2021 2020
Balance1 Revenue2 Margin3 Balance1 Revenue2 Margin3 Balance1 Revenue2 Margin3
Managed fiduciary assets:
Personal $ 10,317,729 $ 107,325 1.04 % $ 12,739,289 $ 110,052 0.86 % $ 11,172,457 $ 96,094 0.86 %
Institutional 17,229,041 33,482 0.19 % 17,477,280 29,286 0.17 % 15,364,387 26,555 0.17 %
Total managed fiduciary
assets 27,546,770 140,807 0.51 % 30,216,569 139,338 0.46 % 26,536,844 122,649 0.46 %
Non-managed assets:
Fiduciary 28,513,725 43,220 0.15 % 34,320,264 28,645 0.08 % 28,949,648 38,899 0.13 %
Non-fiduciary 19,467,202 12,299 0.06 % 20,253,072 10,291 0.05 % 18,599,156 5,897 0.03 %
Safekeeping and brokerage assets under administration 24,207,343 - - % 20,127,816 - - % 17,506,599 - - % Total non-managed assets 72,188,270 55,519 0.08 % 74,701,152 38,936 0.05 %
65,055,403 44,796 0.07 % Total assets under management or administration$ 99,735,040 $ 196,326 0.20 %$ 104,917,721 $ 178,274 0.17 %$ 91,592,247 $ 167,445 0.18 % 1 Assets under management or administration balance excludes certain assets under custody held by a sub-custodian where minimal revenue is recognized.$17 billion ,$22 billion and$21 billion of such assets are excluded from the 2022, 2021 and 2020 assets under management or administration balances, respectively. 2 Fiduciary and asset management revenue includes asset-based and other fees associated with the assets. 3 Revenue divided by period-end balance.
A summary of changes in assets under management or administration for the year
ended
Table 8 - Changes in Assets Under Management or Administration
(In thousands)
Year Ended December 31,
2022 2021 2020
Beginning balance $ 104,917,721 $ 91,592,247 $ 82,740,961
Net inflows (outflows) 572,812 4,786,237 1,859,868
Net change in fair value (5,755,493) 8,539,237 6,991,418
Ending balance $ 99,735,040 $ 104,917,721 $ 91,592,247
Assets under management as of December 31, 2022 consist of 45% fixed income, 32%
equities, 14% cash and 9% alternative investments. Net inflows to assets under
management increased during 2022 as new financial institution client
relationships were gained and existing clients added to their asset balances.
The decrease in fair value of $5.8 billion mainly resulted from declines in both
the fixed income and equity markets in 2022.
Deposit service charges and fees totaled $110.6 million for 2022, a $6.4 million
or 6% increase over 2021, largely affected by transaction volumes as customer
activity resumed following the height of the COVID-19 pandemic. Service charges
earned primarily on commercial deposit accounts totaled $56.6 million , a $2.3
million or 4% increase over the previous year. Overdraft fees and non-sufficient
fund fees earned primarily on consumer deposit accounts totaled $25.4 million
for 2022, an increase of $3.8 million or 18% over 2021. Changes were implemented
in the fourth quarter of 2022 to eliminate non-sufficient funds fees
36
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and reduce consumer overdraft fees, which is expected to reduce total deposit
service charges by approximately $10 million in 2023. Check card revenue totaled
$23.3 million , relatively unchanged from 2021.
Mortgage banking revenue totaled $49.4 million for 2022, a $56.5 million or 53%
decrease compared to 2021. Rising mortgage interest rates, low inventory, and
home price affordability have placed pressure on mortgage loan originations and
margins in 2022. Mortgage production revenue decreased $62.6 million . Production
volume was down $1.6 billion and production revenue as a percentage of
production volume also decreased 250 basis points to (0.17)%. Mortgage
refinancing activity was 24% of total production in 2022 compared to 54% in
2021. Mortgage servicing revenue was $51.2 million , a $6.0 million increase
compared to the prior year. The average outstanding principal balance of
mortgage loans serviced for others totaled $17.9 billion at December 31, 2022 , a
$2.5 billion increase compared to December 31, 2021 . During 2022, we acquired
$3.8 billion in unpaid principal balance of mortgage servicing rights. This,
combined with a purchase in the fourth quarter of 2021 with an unpaid principal
balance of $2.0 billion , led to the higher mortgage servicing revenue in 2022.
Table 9 - Mortgage Banking Revenue
(Dollars in thousands)
Year Ended December 31,
2022 2021 2020
Mortgage production revenue $ (1,838) $ 60,712 $ 125,848
Mortgage loans funded for sale $ 1,180,403 $ 2,818,789 $ 3,764,112
Add: Current year end outstanding commitments 45,492 171,412 380,637
Less: Prior year end outstanding commitments 171,412 380,637 158,460
Total mortgage production volume 1,054,483 2,609,564 3,986,289
Production revenue as a percentage of production volume (0.17) % 2.33 % 3.16 %
Realized margin on funded mortgage loans 0.63 % 2.71 % 2.87 %
Mortgage loan refinances to mortgage loans funded for sale 24 % 54 % 58 %
Primary mortgage interest rates:
Average 5.34 % 2.96 % 3.10 %
Period end 6.41 % 3.11 % 2.67 %
Mortgage servicing revenue $ 51,203
Average outstanding principal balance of mortgage loans
serviced for others
17,871,306 15,404,548 18,422,210 Average mortgage servicing fee rates 0.29 % 0.29 % 0.31 %
Primary rates disclosed in Table 9 above represent rates generally available to
borrowers on 30 year conforming mortgage loans.
Other revenue totaled$55.6 million for 2022, a decrease of$14.3 million or 20% compared to 2021, primarily due to lower production revenue from repossessed oil and gas properties sold in 2021; however, this impact was also partially offset by lower operating expenses related to these properties.
Other gains, net and net gains on securities and derivatives
Other gains, net decreased$63.6 million compared to 2021. In 2021, the sale of an alternative investment and sale of an equity interest received as part of the workout of a defaulted energy loan resulted in a$45.2 million gain. In addition, we experienced a$15.7 million decrease in the value of deferred compensation investments, which are held to offset the cost of various employee benefit programs in 2022. As discussed in the Market Risk section following, the fair value of our 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, generallyU.S. government agency residential mortgage-backed securities for which we have elected the fair value option, 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. 37 -------------------------------------------------------------------------------- Table 10 - Gain (Loss) on Mortgage Servicing Rights, Net of Economic Hedge (In thousands) Year Ended December 31, 2022 2021 2020
Gain (loss) on mortgage hedge derivative contracts, net
$ (19,632) $ 42,096 Gain (loss) on fair value option securities, net (20,358) (2,239) 53,248
Gain (loss) on economic hedge of mortgage servicing rights (93,345)
(21,871) 95,344
Gain (loss) on change in fair value of mortgage servicing rights 80,261
41,637 (79,524)
Gain (loss) on changes in fair value of mortgage servicing
rights, net of economic hedges included in other operating
revenue
(13,084) 19,766 15,820 Net interest revenue on fair value option securities1 569 1,279 9,085
Total economic benefit (cost) of changes in the fair value of
mortgage servicing rights, net of economic hedges
$ (12,515)
1 Actual interest earned on fair value option securities less internal
transfer-priced cost of funds.
Fourth Quarter 2022 Other Operating Revenue
Table 11 - Fourth Quarter 2022 Other Operating Revenue
(Dollars in thousands)
Three Months Ended
Increase % Increase
Dec. 31, 2022 Sep. 30, 2022 (Decrease) (Decrease)
Brokerage and trading revenue $ 63,008 $ 61,006 $ 2,002 3 %
Transaction card revenue 27,136 25,974 1,162 4 %
Fiduciary and asset management revenue 49,899 50,190 (291) (1) %
Deposit service charges and fees 26,429 28,703 (2,274) (8) %
Mortgage banking revenue 10,065 11,282 (1,217) (11) %
Other revenue 17,034 15,479 1,555 10 %
Total fees and commissions revenue 193,571 192,634 937 - %
Other gains, net 8,427 979 7,448 N/A
Gain (loss) on derivatives, net 4,548 (17,009) 21,557 N/A
Loss on fair value option securities, net (2,568) (4,368) 1,800 N/A
Change in fair value of mortgage servicing rights (2,904) 16,570 (19,474) N/A
Gain (loss) on available for sale securities, net (3,988) 892 (4,880) N/A
Total other operating revenue 197,086 189,698 7,388 4 %
Other operating revenue was
Brokerage and trading revenue increased$2.0 million to$63.0 million . Trading revenue grew$9.5 million , largely due to an increase in volume and higher margins onU.S. agency residential mortgage-backed securities trading activity driven by favorable market conditions and increased market volatility. A decline from heightened energy derivative activity in the third quarter led to a$4.7 million decrease in customer hedging revenue. Investment banking revenue decreased$2.4 million , following record levels in the third quarter driven primarily by municipal bond transaction growth. Other revenue increased$1.6 million , largely due to higher revenue on repossessed assets while transaction card revenue grew$1.2 million along with a rise in seasonal transaction volumes.
Deposit service charges decreased
implemented changes to eliminate non-sufficient funds fees and reduce consumer
overdraft fees.
38 -------------------------------------------------------------------------------- Mortgage banking revenue was$10.1 million for the fourth quarter of 2022, a decrease of$1.2 million compared to the third quarter of 2022, as rising mortgage interest rates and continued inventory constraints place pressure on mortgage loan originations. Mortgage loan production volumes were$111 million for the fourth quarter of 2022 compared to$230 million in the third quarter of 2022. Production revenue as a percentage of production volume, which includes unrealized gains and losses on our mortgage commitment pipeline and related hedges, decreased 254 basis points to (3.59)%. Other gains, net, increased$7.4 million compared to the prior quarter primarily driven by the sale of a repossessed entity combined with a change in the value of deferred compensation investments which are held to offset the cost of various employee benefit programs. We also recognized a$4.0 million loss on the sale of available for sale securities in the fourth quarter as we repositioned our balance sheet for the current rate environment.
Other Operating Expense
2022 Other Operating Expense
Other operating expense for 2022 totaled$1.2 billion , a$13.2 million or 1% decrease compared to the prior year. Personnel expense decreased$24.5 million or 4%. Non-personnel expense increased$11.2 million or 2%. Table 12 - Other Operating Expense (Dollars in thousands) 2022 2022 Year Ended vs. vs. Year Ended December 31, 2021 2021 December 31, 2021 vs. 2020 2021 vs. 2020 Increase % Increase Increase % Increase 2022 2021 (Decrease) (Decrease) 2020 (Decrease) (Decrease) Regular compensation$ 399,107 $ 384,808 $ 14,299 4 %$ 390,282 $ (5,474) (1) % Incentive compensation: Cash-based compensation 172,595 187,974 (15,379) (8) % 183,868 4,106 2 % Share-based compensation 9,565 13,246 (3,681) (28) % 18,228 (4,982) (27) % Deferred compensation (6,235) 9,789 (16,024) (164) % 8,401 1,388 17 % Total incentive compensation 175,925 211,009 (35,084) (17) % 210,497 512 - % Employee benefits 95,886 99,565 (3,679) (4) % 87,695 11,870 14 % Total personnel expense 670,918 695,382 (24,464) (4) % 688,474 6,908 1 % Business promotion 26,435 16,289 10,146 62 % 14,511 1,778 12 % Charitable contributions to BOKF Foundation 2,500 9,000 (6,500) (72) % 9,000 - - % Professional fees and services 56,342 50,906 5,436 11 % 53,437 (2,531) (5) % Net occupancy and equipment 116,867 108,587 8,280 8 % 112,722 (4,135) (4) % Insurance 17,994 15,881 2,113 13 % 19,990 (4,109) (21) % Data processing & communications 165,907 151,614 14,293 9 % 135,497 16,117 12 % Printing, postage and supplies 15,857 14,218 1,639 12 % 15,061 (843) (6) % Amortization of intangible assets 15,692 18,311 (2,619) (14) % 20,443 (2,132) (10) % Mortgage banking costs 35,834 42,698 (6,864) (16) % 56,711 (14,013) (25) % Other expense 40,134 54,822 (14,688) (27) % 38,462 16,360 43 % Total other operating expense$ 1,164,480 $ 1,177,708 $ (13,228) (1) %$ 1,164,308 $ 13,400 1 % Average number of employees (full-time equivalent) 4,759 4,816 (57) (1) % 5,011 (195) (4) % 39
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Personnel expense
Personnel expense decreased$24.5 million in 2022. Cash-based incentive compensation plans, which are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions, decreased$15.4 million or 8% compared 2021, primarily related to a decline in institutional trading activity, partially offset by increased incentives from growth in loans and loan commitments in the current year. Deferred compensation expense, which is offset by deferred compensation investments in other revenue, decreased$16.0 million or 164%, directly related to market movements. Regular compensation increased$14.3 million or 4%, largely due to employee merit increases received in the first quarter. Changes in assumptions of certain performance-based equity awards led to a$3.7 million or 28% decrease in share-based compensation expense. Employee benefits expense decreased$3.7 million or 4% primarily due to reduced employee healthcare costs.
Non-personnel expense
Non-personnel expense increased
Data processing and communications expense increased$14.3 million or 9% and professional fees and services increased$5.4 million or 11%, both largely affected by on-going technology project costs. Higher travel costs following a lull in travel during the COVID-19 pandemic and increased advertising costs led to a$10.1 million or 62% increase in business promotion expense. Occupancy and equipment expense was also up$8.3 million or 8% driven largely by higher operating costs on leases. Other expense decreased$14.7 million or 27%, primarily due to lower operating expenses on repossessed assets sold in 2021; however, this was offset by lower operating revenue on these properties. Mortgage banking costs decreased$6.9 million or 16%, primarily due to a decrease in prepayments. Charitable contributions to theBOKF Foundation were$2.5 million in the current year compared to$9.0 million in the prior year. During the height of the COVID-19 pandemic and the extreme needs it created in the communities we serve, we increased our charitable contributions to theBOKF Foundation during 2021. 40 --------------------------------------------------------------------------------
Fourth Quarter 2022 Operating Expenses
Table 13 - Fourth Quarter 2022 Other Operating Expense
(Dollars in thousands)
Three Months Ended
Increase % Increase
Dec. 31, 2022 Sep. 30, 2022 (Decrease) (Decrease)
Regular compensation $ 102,943 $ 101,368 $ 1,575 2 %
Incentive compensation:
Cash-based compensation 54,295 44,376 9,919 22 %
Share-based compensation 3,107 3,744 (637) (17) %
Deferred compensation 3,864 (1,005) 4,869 (484) %
Total incentive compensation 61,266 47,115 14,151 30 %
Employee benefits 22,210 21,865 345 2 %
Total personnel expense 186,419 170,348 16,071 9 %
Business promotion 7,470 6,127 1,343 22 %
Charitable contributions to BOKF Foundation 2,500 - 2,500 N/A
Professional fees and services 18,365 14,089 4,276 30 %
Net occupancy and equipment 29,227 29,296 (69) - %
Insurance 4,677 4,306 371 9 %
Data processing & communications 43,048 41,743 1,305 3 %
Printing, postage and supplies 3,890 4,349 (459) (11) %
Amortization of intangible assets 3,736 3,943 (207) (5) %
Mortgage banking costs 9,016 9,504 (488) (5) %
Other expense 10,108 11,046 (938) (8) %
Total other operating expense 318,456 294,751 23,705 8 %
Other operating expense for the fourth quarter of 2022 totaled
an increase of
Personnel expense increased$16.1 million or 9% compared to the third quarter of 2022. Cash-based incentive compensation increased$9.9 million or 22% due to increased sales activity combined with a one-time incentive given to all employees in the fourth quarter. Deferred compensation expense, which is offset by deferred compensation investments in other revenue, increased$4.9 million or 484%. Non-personnel expense increased$7.6 million or 6% compared to the third quarter of 2022. A$4.3 million or 30% increase in professional fees and services and$1.3 million or 3% increase in data processing and communications expense was largely attributed to ongoing technology projects. The fourth quarter of 2022 included a$2.5 million charitable donation to theBOKF Foundation as we continue to focus on the communities we serve.
Income Taxes
Income tax expense was
2022 and
Net deferred tax assets totaled$321.3 million atDecember 31, 2022 compared to net deferred tax assets of$34.5 million atDecember 31, 2021 . We have evaluated the recoverability of our deferred tax assets based on the generation of future taxable income during the periods in which those temporary differences become deductible and determined that no valuation allowance was required in 2022 or 2021. Income tax expense was$47.9 million or 22.1% of net income before taxes for the fourth quarter of 2022 compared to$39.7 million or 20.2% of net income before taxes for the third quarter of 2022. 41 --------------------------------------------------------------------------------
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 loan origination and servicing activities. Wealth Management provides fiduciary services, private bank 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, 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. The Funds Management unit also initially recognizes accruals for loss contingencies when losses become probable. Actual losses are recognized by the lines of business if the accruals are settled. We allocate resources and evaluate the performance of our lines of business using the net direct contribution, which includes the allocation of funds and capital costs. Credit costs are attributed to the lines of business based on net loans charged off or recovered. The difference between credit costs attributed to the lines of business and the consolidated provision for credit losses is attributed to Funds Management. In addition, we measure the performance of our business lines after allocations 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 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 wholesale borrowing rates or interest rate swap rates, adjusted for prepayment risk and liquidity risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the Funds Management unit is also based on rates that approximate wholesale market rates for funds with similar repricing and cash flow characteristics. Market rates are generally based on a proxy of wholesale borrowing rates 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 wholesale funding 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 wholesale funding rates and longer duration products are weighted towards the intermediate swap rates. The expected duration ranges from 30 days for certain rate-sensitive deposits to five years. In order to appropriately reflect the organizational value of these deposits to the lines of business, methodology adjustments are made each January that attribute more or less deposit credit value to the business lines dependent upon historical and forward-looking interest rate expectations with the offset to Funds Management and other. After several years of decreased funding credits provided to business lines from a sustained low interest rate environment, increases in short-term and long-term rates in response to theFederal Reserve's actions to control inflation caused a commensurate increase in funding credits to business lines in 2022. 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 14 following, net income attributable to our lines of business increased$103.0 million or 22% compared to the prior year. Net interest revenue grew by$211.0 million over the prior year, primarily due to increases in the short-term interest rate related to a 425 basis point increase in the federal funds rate by theFederal Reserve during 2022. Net charge-offs decreased$12.1 million compared to the prior year. Other operating revenue decreased$31.8 million . The prior year included the sale of an alternative investment that resulted in a$31.1 million pre-tax gain, net of non-controlling interest. Other operating expense was consistent with prior year. The decrease in net income attributed to Funds Management and other is largely due to the excess provision for expected credit losses over net charge-offs recorded in 2022 compared to a release of provision recorded in the prior year. 42 -------------------------------------------------------------------------------- Table 14 - Net Income by Line of Business (In thousands) Year Ended December 31, 2022 2021 2020 Commercial Banking$ 460,361 $ 328,516 $ 306,005 Consumer Banking 5,889 27,643 97,974 Wealth Management 106,173 113,246 115,302 Subtotal 572,423 469,405 519,281 Funds Management and other (52,150) 148,716 (84,251) Total$ 520,273 $ 618,121 $ 435,030 2022 Commercial Banking
Commercial Banking contributed
2022, an increase of
Table 15 - Commercial Banking
(In thousands)
2022 2022 2021 2021
Year Ended vs. vs. Year Ended vs. vs.
December 31, 2021 2021 December 31, 2020 2020
Increase % Increase Increase % Increase
2022 2021 (Decrease) (Decrease) 2020 (Decrease) (Decrease)
Net interest revenue from external
sources $ 818,213 $ 606,902 $ 211,311 35 % $ 714,932 $ (108,030) (15) %
Net interest expense from internal
sources (73,764) (71,167) (2,597) 4 % (126,444) 55,277 (44) %
Total net interest revenue 744,449 535,735 208,714 39 % 588,488 (52,753) (9) %
Net loans charged off 17,726 31,128 (13,402) (43) % 69,475 (38,347) (55) %
Net interest revenue after net loans
charged off 726,723 504,607 222,116 44 % 519,013 (14,406) (3) %
Fees and commissions revenue 233,873 227,081 6,792 3 % 187,119 39,962 19 %
Other gains, net 7,721 35,321 (27,600) (78) % 242 35,079 14495 %
Other operating revenue 241,594 262,402 (20,808) (8) % 187,361 75,041 40 %
Personnel expense 174,505 168,285 6,220 4 % 159,165 9,120 6 %
Non-personnel expense 116,212 112,804 3,408 3 % 99,738 13,066 13 %
Other operating expense 290,717 281,089 9,628 3 % 258,903 22,186 9 %
Net direct contribution 677,600 485,920 191,680 39 % 447,471 38,449 9 %
Gain on financial instruments, net 1 154 (153) N/A 193 (39) N/A
Gain (loss) on repossessed assets, net (1,903) 13,001 (14,904) N/A (2,677) 15,678 N/A
Corporate expense allocations 67,337 49,941 17,396 35 % 24,862 25,079 101 %
Income before taxes 608,361 449,134 159,227 35 % 420,125 29,009 7 %
Federal and state income taxes 148,000 120,618 27,382 23 % 114,120 6,498 6 %
Net income $ 460,361 $ 328,516 $ 131,845 40 % $ 306,005 $ 22,511 7 %
Average assets $ 29,084,957 $ 28,536,881 $ 548,076 2 % $ 26,994,075 $ 1,542,806 6 %
Average loans 17,553,398 16,853,006 700,392 4 % 18,711,372 (1,858,366) (10) %
Average deposits 18,323,412 17,659,695 663,717 4 % 14,319,729 3,339,966 23 %
Average invested capital 2,057,560 2,082,488 (24,928) (1) % 2,220,177 (137,689) (6) %
43
--------------------------------------------------------------------------------
Net interest revenue increased
primarily due to an increase in the spread on deposits sold to our Funds
Management unit. Net loans charged-off decreased
Fees and commissions revenue increased$6.8 million or 3%. Customer hedging revenue grew$11.3 million , primarily attributed to our energy and interest rate derivative customers. Syndication fees increased$7.5 million due to the timing and volume of completed transactions during the year. Transaction card revenue was also up$7.0 million due to growth in revenues from the processing of transactions on behalf of the members of our TransFund EFT network combined with increased transactions from the broader reopening of the economy. These were partially offset by a decline in production revenue from repossessed oil and gas properties sold in 2021. Operating expense increased$9.6 million or 3% over 2021. Personnel expense increased$6.2 million or 4%, primarily due to incentive compensation costs associated with growth in loans and deposit balances. Non-personnel expense increased$3.4 million or 3%, primarily due to project related data processing and communications fees, occupancy expenses and business promotion fees. These were partially offset by decreased operating expenses on repossessed oil and gas properties sold in 2021. The prior year also included the sale of an alternative investment that resulted in a$31.1 million pre-tax gain, net of non-controlling interest. Corporate expense allocations increased$17.4 million or 35% compared to the prior year due to growth in lending activity. The average outstanding balance of loans attributed to Commercial Banking increased$700 million or 4% compared to 2021 to$17.6 billion . See the Loans section of Management's Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans, which are primarily attributed to the Commercial Banking segment. Average deposits attributed to Commercial Banking were$18.3 billion for 2022, a$664 million or 4% increase over the prior year. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital for further discussion of this change. 44 --------------------------------------------------------------------------------
Fourth Quarter 2022 Commercial Banking
Table 16 - Commercial Banking - Fourth Quarter 2022
(Dollars in thousands)
Three Months Ended
%
Dec. 31, Sep. 30, Increase Increase
2022 2022 (Decrease) (Decrease)
Net interest revenue from external sources $ 271,615 $ 226,016 $ 45,599 20 %
Net interest expense from internal sources (38,781) (17,951) (20,830) (116) %
Total net interest revenue 232,834 208,065 24,769 12 %
Net loans charged off (recovered) 14,411 (526) 14,937 2840 %
Net interest revenue after net loans charged off
(recovered) 218,423 208,591 9,832 5 %
Fees and commissions revenue 58,881 58,147 734 1 %
Other gains, net 3,213 2,239 974 N/A
Other operating revenue 62,094 60,386 1,708 3 %
Personnel expense 48,366 44,998 3,368 7 %
Non-personnel expense 31,356 30,874 482 2 %
Other operating expense 79,722 75,872 3,850 5 %
Net direct contribution 200,795 193,105 7,690 4 %
Gain on financial instruments, net 140 4 136 N/A
Gain (loss) on repossessed assets, net 978 (158) 1,136 N/A
Corporate expense allocations 18,007 16,451 1,556 9 %
Income before taxes 183,906 176,500 7,406 4 %
Federal and state income taxes 44,532 42,670 1,862 4 %
Net income $ 139,374 $ 133,830 $ 5,544 4 %
Average assets $ 28,373,856 $ 28,890,429 $ (516,573) (2) %
Average loans 18,254,559 17,904,779 349,780 2 %
Average deposits 16,832,244 17,966,661 (1,134,417) (6) %
Average invested capital 2,107,241 2,059,149 48,092 2 % Commercial Banking contributed$139.4 million to consolidated net income in the fourth quarter of 2022, an increase of$5.5 million compared to the third quarter of 2022. Net interest revenue increased$24.8 million over the prior quarter, largely due to an increase in the spread on deposits sold to our Funds Management unit. Net loans charged off increased$14.9 million . Personnel expense increased$3.4 million driven by incentive compensation costs associated with growth in revenue. 45 --------------------------------------------------------------------------------
2022 Consumer Banking
Consumer Banking services are provided 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 our Consumer Banking markets.
Net income attributed to Consumer Banking totaled$5.9 million for 2022 compared to$27.6 million in the prior year. This decrease is largely due to lower mortgage loan production volumes as rising mortgage interest rates and continued inventory constraints place pressure on mortgage loan originations. Table 17 - Consumer Banking (In thousands) 2022 2022 2021 2021 Year Ended vs. vs. Year Ended vs. vs. December 31, 2021 2021 December 31, 2020 2020 Increase % Increase Increase % Increase 2022 2021 (Decrease) (Decrease) 2020 (Decrease) (Decrease) Net interest revenue from external sources$ 69,646 $ 67,856 $ 1,790 3 %$ 78,004 $ (10,148) (13) % Net interest revenue from internal sources 88,603 35,671 52,932 148 % 69,000 (33,329) (48) % Total net interest revenue 158,249 103,527 54,722 53 % 147,004 (43,477) (30) % Net loans charged off 5,260 4,009 1,251 31 % 2,805 1,204 43 % Net interest revenue after net loans charged off 152,989 99,518 53,471 54 % 144,199 (44,681) (31) % 0 Fees and commissions revenue 121,926 173,364 (51,438) (30) % 245,554 (72,190) (29) % Other losses, net (107) (23) (84) 365 % (1,835) 1,812 (99) % Other operating revenue 121,819 173,341 (51,522) (30) % 243,719 (70,378) (29) % Personnel expense 87,183 85,989 1,194 1 % 91,903 (5,914) (6) % Other non-personnel expense 122,027 123,607 (1,580) (1) % 138,499 (14,892) (11) % Total other operating expense 209,210 209,596 (386) - % 230,402 (20,806) (9) % Net direct contribution 65,598 63,263 2,335 4 % 157,516 (94,253) (60) % Gain (loss) on financial instruments, net (93,346) (21,871) (71,475) N/A 95,344 (117,215) N/A Change in fair value of mortgage servicing rights 80,261 41,637 38,624 N/A (79,524) 121,161 N/A Gain on repossessed assets, net 139 85 54 N/A 276 (191) N/A Corporate expense allocations 44,965 46,010 (1,045) (2) % 42,155 3,855 9 % Net income before taxes 7,687 37,104 (29,417) (79) % 131,457 (94,353) (72) % Federal and state income taxes 1,798 9,461 (7,663) (81) % 33,483 (24,022) (72) % Net income$ 5,889 $ 27,643 $ (21,754) (79) %$ 97,974 $ (70,331) (72) % Average assets$ 10,230,437 $ 10,029,687 $ 200,750 2 %$ 9,842,114 $ 187,573 2 % Average loans 1,688,697 1,769,384 (80,687) (5) % 1,764,682 4,702 - % Average deposits 8,763,046 8,439,577 323,469 4 % 7,599,937 839,640 11 % Average invested capital 250,546 250,554 (8) - % 259,333 (8,779) (3) % Net interest revenue from Consumer Banking activities increased by$54.7 million or 53% compared to 2021, primarily due to an increase in the spread on deposits sold to our Funds Management unit. Average consumer deposits grew$323 million or 4%. 46 -------------------------------------------------------------------------------- Fees and commissions revenue decreased$51.4 million or 30% compared to the prior year, largely attributed to reduced mortgage loan production volume combined with narrowing margins. Mortgage production volume decreased$1.6 billion or 60% and production revenue as a percentage of production volume, which includes unrealized gains and losses on our mortgage commitment pipeline and related hedges, decreased 250 basis points to (0.17)%. Operating expense was consistent with the prior year. Corporate expense allocations decreased$1.0 million or 2% compared to the prior year. The net cost of change in fair value of mortgage servicing rights and related economic hedges, as more fully presented in Table 10, was$12.5 million for 2022 compared to a net benefit of$21.0 million in 2021.
Fourth Quarter 2022 Consumer Banking
Table 18 - Consumer Banking - Fourth Quarter 2022
(Dollars in thousands)
Three Months Ended
%
Dec. 31, Sep. 30, Increase Increase
2022 2022 (Decrease) (Decrease)
Net interest revenue from external sources $ 18,464 $ 17,482 $ 982 6 %
Net interest revenue from internal sources 34,838 26,469 8,369 32 %
Total net interest revenue 53,302 43,951 9,351 21 %
Net loans charged off 1,544 1,408 136 10 %
Net interest revenue after net loans charged off 51,758 42,543 9,215 22 %
Fees and commissions revenue 27,618 30,230 (2,612) (9) %
Other losses, net (35) (44) 9 N/A
Other operating revenue 27,583 30,186 (2,603) (9) %
Personnel expense 22,446 22,243 203 1 %
Non-personnel expense 32,080 30,993 1,087 4 %
Other operating expense 54,526 53,236 1,290 2 %
Net direct contribution 24,815 19,493 5,322 27 %
Gain (loss) on financial instruments, net 1,805 (21,395) 23,200 N/A
Change in fair value of mortgage servicing rights (2,904) 16,570 (19,474) N/A
Corporate expense allocations 11,972 10,792 1,180 11 %
Income before taxes 11,744 3,876 7,868 203 %
Federal and state income taxes 2,748 906 1,842 203 %
Net income $ 8,996 $ 2,970 $ 6,026 203 %
Average assets $ 10,078,381 $ 10,233,401 $ (155,020) (2) %
Average loans 1,725,555 1,686,498 39,057 2 %
Average deposits 8,617,085 8,812,884 (195,799) (2) %
Average invested capital 256,905 250,256 6,649 3 % Consumer Banking contributed$9.0 million to net income in the fourth quarter of 2022, an increase of$6.0 million compared to the third quarter of 2022. Net interest revenue increased$9.4 million , mainly due to improved spreads on deposits sold to our Funds Management unit. Fees and commissions revenue decreased$2.6 million . Deposit service charges decreased$1.5 million from reduced consumer overdraft charges as expected from changes implemented in the fourth quarter of 2022. Mortgage banking revenue decreased$1.2 million due to reduced mortgage production volume combined with narrowing margins. Other operating expense increased$1.3 million over the third quarter of 2022 due to increases in professional fees and other expenses. 47 --------------------------------------------------------------------------------
2022 Wealth Management
Wealth Management contributed
a decrease of
Table 19 - Wealth Management
(In thousands)
2022 2022 2021 2021
Year Ended vs. vs. Year Ended vs. vs.
December 31, 2021 2021 December 31, 2020 2020
Increase % Increase Increase % Increase
2022 2021 (Decrease) (Decrease) 2020 (Decrease) (Decrease)
Net interest revenue from external
sources $ 155,974 $ 214,458 $ (58,484) (27) % $ 130,818 $ 83,640 64 %
Net interest revenue (expense) from
internal sources 5,623 (386) 6,009 (1557) % (13,528) 13,142 (97) %
Total net interest revenue 161,597 214,072 (52,475) (25) % 117,290 96,782 83 %
Net loans recovered (175) (223) 48 (22) % (209) (14) 7 %
Net interest revenue after net loans
recovered 161,772 214,295 (52,523) (25) % 117,499 96,796 82 %
Fees and commissions revenue 339,538 298,765 40,773 14 % 399,229 (100,464) (25) %
Other gains (losses), net (37) 197 (234) (119) % (395) 592 (150) %
Other operating revenue 339,501 298,962 40,539 14 % 398,834 (99,872) (25) %
Personnel expense 223,718 234,031 (10,313) (4) % 243,681 (9,650) (4) %
Other non-personnel expense 88,459 86,695 1,764 2 % 82,335 4,360 5 %
Other operating expense 312,177 320,726 (8,549) (3) % 326,016 (5,290) (2) %
Net direct contribution 189,096 192,531 (3,435) (2) % 190,317 2,214 1 %
Gain on financial instruments, net 4 - 4 N/A 4 (4) N/A
Corporate expense allocations 50,241 40,341 9,900 25 % 35,359 4,982 14 %
Net income before taxes 138,859 152,190 (13,331) (9) % 154,962 (2,772) (2) %
Federal and state income tax 32,686 38,944 (6,258) (16) % 39,660 (716) (2) %
Net income $ 106,173 $ 113,246 $ (7,073) (6) % $ 115,302 $ (2,056) (2) %
Average assets $ 16,209,684 $ 19,425,475 $ (3,215,791) (17) % $ 15,695,646 $ 3,729,829 24 %
Average loans 2,166,231 1,981,159 185,072 9 % 1,758,226 222,933 13 %
Average deposits 8,491,377 9,426,771 (935,394) (10) % 8,676,047 750,724 9 %
Average invested capital 279,939 310,627 (30,688) (10) % 300,860 9,767 3 %
Combined net interest revenue and fees and commission revenue attributed to the
Wealth Management segment totaled $501.1 million for 2022, a decrease of $11.7
million compared to the prior year. Total revenue from trading activities
decreased $89.5 million compared to 2021, largely due to disruption in the fixed
income markets due to economic uncertainty, primarily in the first quarter of
2022, combined with narrowing margins and lower trading volumes. This decrease
was partially offset by an increase in the spread on deposits sold to our Funds
Management unit. Fiduciary and asset management revenue increased $18.0 million .
Growth in mutual fund fees and decreased waivers were partially offset by lower
trust fees. Other revenue increased $26.7 million , largely due to higher
derivative margin use fees.
Average Wealth Management loans grew by
Average deposits attributed to Wealth Management decreased
to
Operating expense decreased
incentive compensation costs related to reduced trading activity. Corporate
expense allocations increased
48 --------------------------------------------------------------------------------
Fourth Quarter 2022 Wealth Management
Table 20 - Wealth Management - Fourth Quarter 2022
(Dollars in thousands)
Three Months Ended
%
Dec. 31, Sep. 30, Increase Increase
2022 2022 (Decrease) (Decrease)
Net interest revenue from external sources $ 25,585 $ 34,746 $ (9,161) (26) %
Net interest revenue (expense) from internal sources 8,913 (1,162) 10,075 867 %
Total net interest revenue 34,498 33,584 914 3 %
Net loans recovered (22) (22) - - %
Net interest revenue after net loans recovered 34,520 33,606 914 3 %
Fees and commissions revenue 114,630 113,113 1,517 1 %
Other losses, net (20) - (20) N/A
Other operating revenue 114,610 113,113 1,497 1 %
Personnel expense 59,041 56,939 2,102 4 %
Non-personnel expense 22,970 22,212 758 3 %
Other operating expense 82,011 79,151 2,860 4 %
Net direct contribution 67,119 67,568 (449) (1) %
Corporate expense allocations 12,733 12,934 (201) (2) %
Income before taxes 54,390 54,634 (244) - %
Federal and state income taxes 12,790 12,826 (36) - %
Net income $ 41,600 $ 41,808 $ (208) - %
Average assets $ 12,912,630 $ 13,818,299 $ (905,669) (7) %
Average loans 2,223,275 2,163,975 59,300 3 %
Average deposits 7,888,753 7,999,074 (110,321) (1) %
Average invested capital 292,689 284,681 8,008 3 % Wealth Management contributed$41.6 million to net income in the fourth quarter of 2022, consistent with the third quarter of 2022. Combined net interest and fee revenue totaled$149.1 million , an increase of$2.4 million compared to prior quarter, primarily due to higher volume ofU.S. government agency residential mortgage-backed securities trading activity. Other revenue decreased$2.3 million due to lower energy hedging in the fourth quarter. Operating expense increased$2.9 million , primarily due to increased volume-driven incentive compensation costs. 49 --------------------------------------------------------------------------------
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 ofDecember 31, 2022 andDecember 31, 2021 . 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 totaled$4.5 billion atDecember 31, 2022 , a decrease of$4.7 billion compared toDecember 31, 2021 . Our trading portfolio expanded during 2021 in order to provide greater liquidity in the housing market during a time of record mortgage loan production volumes and to meet demand of our growing institutional customer base. As inflation pressure increased throughout 2022 and the conflict inUkraine intensified, fixed income markets were disrupted reducing the demand for these securities. Consequently, we reduced our inventory of trading securities. As discussed in the Market Risk section of this report, trading activities involve risk of loss from adverse price movements. We mitigate this risk within board-approved value-at-risk 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. AtDecember 31, 2022 , the carrying value of investment (held-to-maturity) securities was$2.5 billion , including a$558 thousand allowance for expected credit losses, compared to$211 million atDecember 31, 2021 with a$555 thousand allowance for expected credit losses. The fair value of investment securities was$2.3 billion atDecember 31, 2022 and$231 million atDecember 31, 2021 . Investment securities consist primarily of residential mortgage-backed securities issued byU.S. government agencies, intermediate and long-term, fixed rateOklahoma andTexas municipal bonds, and taxableTexas school construction bonds. The investment security portfolio is diversified among issuers. During the second quarter of 2022, the Company transferred certainU.S. government agency mortgage-backed securities from the available for sale portfolio to the investment securities portfolio to limit the effect of future rate increases on the tangible common equity ratio. No gains or losses were recognized in the Consolidated Statements of Earnings at the time of the transfer. At the time of transfer, the fair value totaled$2.4 billion , amortized cost totaled$2.7 billion and the pretax unrealized loss totaled$268 million . Transfers of debt securities into the investment securities portfolio are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in Accumulated Other Comprehensive Income and in the carrying value of the investment securities portfolio. Such amounts are amortized over the estimated remaining lives of the securities as an adjustment to yield, offsetting the related amortization of the premium or accretion of the discount on the transferred securities. 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. AtDecember 31, 2022 , the fair value of available for sale securities was$11.5 billion , a decrease of$1.7 billion compared toDecember 31, 2021 . The amortized cost of available for sale securities totaled$12.4 billion atDecember 31, 2022 , a decrease of$705 million compared toDecember 31, 2021 . Available for sale securities consist primarily ofU.S. government agency residential mortgage-backed securities andU.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 byU.S. government agencies for which the principal and interest payments on the underlying loans are fully guaranteed. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans. AtDecember 31, 2022 , residential mortgage-backed securities represented 56% of total fair value of available for sale securities. 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 effective duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities portfolios atDecember 31, 2022 is 3.2 years. Management estimates the combined portfolios' duration extends to 3.7 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.9 years assuming a 100 basis point decline in the current rate environment. The aggregate gross amount of unrealized losses on available for sale securities totaled$894 million atDecember 31, 2022 , a$780 million increase compared toDecember 31, 2021 . On a quarterly basis, we perform an evaluation on debt securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. No credit impairment of available for sale securities was identified in 2022. 50 -------------------------------------------------------------------------------- Certain residential mortgage-backed securities issued byU.S. government agencies and included in Fair value option securities on the Consolidated Balance Sheets have been segregated and designated as economic hedges of changes in the fair value of our mortgage servicing rights. We have elected to carry these securities at fair value with changes in fair value recognized in current period income. These securities are held with the intent that gains or losses will offset changes in the fair value of mortgage servicing rights and related derivative contracts. Fair value option securities totaled$297 million , an increase of$253 million over 2021. See Market Risk section for further details.
Bank-Owned Life Insurance
We have approximately$407 million of bank-owned life insurance atDecember 31, 2022 . This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately$312 million is held in separate accounts and$95 million represents the cash surrender value of policies held in general accounts and other amounts due from various insurance companies. Our separate account holdings are invested in diversified portfolios of investment-grade fixed income securities and cash equivalents includingU.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio's investment guidelines. The cash surrender value of certain life insurance policies is further supported by a stable value wrap which protects against changes in the fair value of the investments. As ofDecember 31, 2022 , the fair value of investments held in separate accounts covered by the stable value wrap was approximately$282 million . Since the underlying fair value of the investments held in separate accounts atDecember 31, 2022 was below the net book value of the investments,$29 million of cash surrender value was supported by the stable value wrap. Future rate increases may cause write-downs in the short-term. The stable value wrap is provided by a domestic financial institution. 51 --------------------------------------------------------------------------------
Loans
The aggregate loan portfolio before allowance for loan losses totaled$22.6 billion atDecember 31, 2022 , an increase of$2.4 billion compared toDecember 31, 2021 , driven by growth in commercial loans, commercial real estate loans and loans to individuals. Table 21 - Loans (In thousands) December 31, 2022 2021 Commercial: Healthcare$ 3,845,017 $ 3,414,940 Services 3,431,521 3,367,193 Energy 3,424,790 3,006,884 General business 3,496,859 2,717,448 Total commercial 14,198,187 12,506,465 Commercial real estate: Industrial 1,221,501 766,125 Multifamily 1,212,883 786,404 Office 1,053,331 1,040,963 Retail 620,518 679,917 Residential construction and land development 95,684 120,016 Other commercial real estate 402,860 437,900 Total commercial real estate 4,606,777 3,831,325 Paycheck protection program 14,312 276,341 Loans to individuals: Residential mortgage 1,890,784 1,722,170 Residential mortgage guaranteed by U.S. government agencies 245,940 354,173 Personal 1,601,150 1,515,206 Total loans to individuals 3,737,874 3,591,549 Total$ 22,557,150 $ 20,205,680 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. Commercial 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 on-going cash flow from operations of the customer's business. 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$14.2 billion or 63% of the loan portfolio atDecember 31, 2022 , increasing$1.7 billion or 14% compared toDecember 31, 2021 , primarily related to growth in general business loan balances, with healthcare, energy and services loans also increasing. 52 -------------------------------------------------------------------------------- Approximately 73% of commercial loans 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 isCalifornia , totaling 5% 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 semi-annual engineering reviews by our internal staff of petroleum engineers. These reviews are 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$3.4 billion or 15% of total loans atDecember 31, 2022 . Approximately$2.7 billion or 78% of energy loans were to oil and gas producers, a$478 million increase compared toDecember 31, 2021 . 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 72% of the committed production loans are secured by properties primarily producing oil and 28% of the committed production loans are secured by properties primarily producing natural gas. Loans to midstream oil and gas companies totaled$575 million or 17% of energy loans, a decrease of$71 million compared to the prior year. Loans to borrowers that provide services to the energy industry totaled$157 million or 5% of energy loans, a$15 million increase during 2022. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled$26 million or less than 1% of energy loans, a$3.9 million decrease from the prior year.
Unfunded energy loan commitments were
million
provides ample capacity for growth from our current customer base.
The healthcare sector of the loan portfolio totaled$3.8 billion or 17% of total loans. Healthcare loans increased$430 million overDecember 31, 2021 , primarily due to growth in loans to senior housing and care facilities. Healthcare sector loans consist primarily of loans for the development and operation of senior housing and care facilities including independent living, assisted living and skilled nursing. Generally, we loan to borrowers with a portfolio of multiple facilities that serves to help diversify risks specific to a single facility. The services sector of the loan portfolio increased$64 million to$3.4 billion or 15% 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 municipal government entities, Native American tribal casino operations, educational services, foundations and not-for-profit organizations and specialty trade contractors. Approximately$1.6 billion of the services category is made up of loans with individual balances of less than$10 million . Service 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 increased
loans. General business loans primarily consist of
wholesale/retail loans and
industries.
We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than$100 million and with three or more non-affiliated banks as participants. AtDecember 31, 2022 , the outstanding principal balance of these loans totaled$5.3 billion , including$2.5 billion in the energy sector. Based on dollars committed, approximately 80% of shared national credits are to borrowers with local market relationships and we serve as the agent lender in approximately 22% of our shared national credits. 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. 53 --------------------------------------------------------------------------------
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 outstanding balance of commercial real estate loans totaled$4.6 billion or 20% of the loan portfolio, an increase of$775 million overDecember 31, 2021 . Loans secured by industrial facilities increased$455 million or 59%. Loans secured by multifamily real estate increased$426 million or 54%. Loans secured by retail facilities decreased$59 million or 9%. Other real estate loans decreased$35 million or 8%. Approximately 67% of commercial real estate loans are in our geographic footprint based on collateral location. The largest concentration of loans in this segment outside our footprint isUtah , totaling 10% of the segment. All other states represent less than 5% individually. Unfunded commercial real estate loan commitments were$3.1 billion atDecember 31, 2022 , a$1.2 billion increase over the prior year. We take a disciplined approach to managing our concentration of commercial real estate loan commitments as a percentage of Tier 1 Capital. While loan commitments are presently at the upper concentration limit, we expect continued growth in our outstanding commercial real estate balances as loans fund.
Paycheck Protection Program
We participated 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 business maintain payrolls during the
COVID-19 pandemic. The remaining loans in this portfolio generally have a
contractual term of five years, though most are expected to be forgiven prior to
maturity after completion of a compliance period. Loans are guaranteed, and
amounts forgiven will be reimbursed to the Company by the SBA. The loans carry a
fixed interest rate of 1%. Interest plus loan fees, which vary depending on loan
size, are accrued over the contractual life of the loan. The remaining
outstanding balance of PPP loans was $14 million or less than 1% of the loan
portfolio. Remaining unaccreted origination fees were not significant at
December 31, 2022 .
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. 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. 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 mortgage loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. Our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or adjustable rate mortgage loans with initial rates that are below market. Home equity loans are primarily first-lien and fully amortizing. Residential mortgage loans guaranteed byU.S. government agencies have limited credit exposure because of the underlying 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. 54 -------------------------------------------------------------------------------- Loans to individuals totaled$3.7 billion or 17% of the loan portfolio, growing$146 million overDecember 31, 2021 . Approximately 91% of loans to individuals are secured by collateral located within our geographical footprint. Loans for which the collateral location is less relevant, such as unsecured loans, are categorized by the borrower's primary operating location. The Company secondarily evaluates loan portfolio performance based on the primary geographical market managing the loan. Loans attributed to a geographical market may not represent the location of the borrower or the collateral. All permanent mortgage loans serviced by our mortgage banking unit and held for investment by the Company are centrally managed by theOklahoma market. 55 -------------------------------------------------------------------------------- Table 22 - Loans Managed by Primary Geographical Market (In thousands) December 31, 2022 2021 Texas: Commercial$ 6,869,979 $ 6,068,700 Commercial real estate 1,555,508 1,253,439 Paycheck protection program 8,639 81,654 Loans to individuals 982,700 942,982 Total Texas 9,416,826 8,346,775 Oklahoma: Commercial 3,379,468 2,633,014 Commercial real estate 582,109 546,021 Paycheck protection program 3,109 69,817 Loans to individuals 2,077,124 2,024,404 Total Oklahoma 6,041,810 5,273,256 Colorado: Commercial 2,147,969 1,936,149 Commercial real estate 613,912 470,937 Paycheck protection program 1,230 82,781 Loans to individuals 241,902 256,533 Total Colorado 3,005,013 2,746,400 Arizona: Commercial 1,123,569 1,130,798 Commercial real estate 860,947 674,309 Paycheck protection program 720 21,594 Loans to individuals 229,872 186,528 Total Arizona 2,215,108 2,013,229 Kansas/Missouri: Commercial 310,715 338,697 Commercial real estate 479,968 382,761 Paycheck protection program - 4,718 Loans to individuals 131,307 110,889 Total Kansas/Missouri 921,990 837,065 New Mexico: Commercial 262,735 306,964 Commercial real estate 417,008 442,128 Paycheck protection program 614 13,510 Loans to individuals 67,163 63,930 Total New Mexico 747,520 826,532 Arkansas: Commercial 103,752 92,143 Commercial real estate 97,325 61,730 Paycheck protection program - 2,267 Loans to individuals 7,806 6,283 Total Arkansas 208,883 162,423 Total BOK Financial loans$ 22,557,150 $ 20,205,680 56
-------------------------------------------------------------------------------- Table 23 - Loan Maturity and Interest Rate Sensitivity atDecember 31, 2022 (In thousands) Remaining Maturities of Selected Loans Total Within 1 Year 1-5 Years 5 - 15 Years After 15 Years Loan maturity: Commercial$ 14,198,187 $
2,218,916
Commercial real estate
4,606,777 1,532,618 2,767,611 281,275
25,273
Paycheck protection program 14,312 8,643 5,669 -
-
Loans to individuals 3,737,874 581,351 1,084,957 670,433 1,401,133 Total$ 22,557,150 $ 4,341,528 $ 13,766,032 $ 2,777,958 $ 1,671,632 Interest rate sensitivity for selected loans with: Predetermined interest rates$ 6,363,116 $
375,344
Floating or adjustable interest rates
16,194,034 3,966,184 11,234,586 633,726 359,538 Total$ 22,557,150 $ 4,341,528 $ 13,766,032 $ 2,777,958 $ 1,671,632 Off-Balance Sheet Commitments We enter into certain off-balance sheet arrangements in the normal course of business as shown in Table 24. 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 theU.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 aU.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 24 - Off-Balance Sheet Credit Commitments (In thousands) December 31, 2022 2021 Loan commitments$ 15,424,431 $ 12,471,482 Standby letters of credit 740,039 699,743
Unpaid principal balance of residential mortgage loans sold with recourse
44,742 54,619
Unpaid principal balance of residential mortgage loans transferred into
mortgage-backed securities guaranteed by
1,005,368 1,095,877
57
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Customer Derivative Programs
We offer programs that permit our customers to hedge various risks including fluctuations in energy, interest rates, foreign exchange rates, and other commodities. 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 or exchanges to minimize market risk to us from 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 options 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 betweenBOK Financial and each of the counterparties. Individual limits are established by management, approved byCredit 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 inBOK 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 deteriorates such that either the fair value of underlying collateral no longer supports the contract or the customer or counterparty's ability to provide margin collateral becomes impaired. Credit losses on customer derivatives reduce brokerage and trading revenue in the Consolidated Statements of Earnings. Derivative contracts are carried at fair value. AtDecember 31, 2022 , the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled$1.0 billion compared to$1.1 billion atDecember 31, 2021 . Derivative contracts carried as assets include energy contracts with fair values of$638 million , foreign exchange contracts with fair values of$217 million and interest rate swaps primarily sold to loan customers with fair values of$159 million . Before consideration of cash margin paid to counterparties, the aggregate net fair values of derivative contracts held under these programs reported as liabilities totaled$1.0 billion . AtDecember 31, 2022 , total derivative assets were reduced by$182 million of cash collateral received from counterparties, and total derivative liabilities were reduced by$484 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement. Derivative contracts executed with customers may be secured by non-cash collateral in conjunction with a credit agreement with that customer such as proven producing oil and gas properties. Access to this collateral in the event of default is reasonably assured.
A table showing the notional and fair value of derivative assets and liabilities
on both a gross and net basis is presented in Note 6 to the Consolidated
Financial Statements.
The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor atDecember 31, 2022 follows in Table 25. Table 25 - Fair Value of Derivative Contracts (In thousands) Customers$ 595,711 Banks and other financial institutions 136,134 Exchanges and clearing organizations 99,394
Fair value of customer hedge asset derivative contracts, net
The largest exposure to a single counterparty was to an exchange for
of net derivative positions and
58 -------------------------------------------------------------------------------- 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 down to an equivalent of$60.93 per barrel of oil would decrease the fair value of derivative assets by$328 million with lending customers comprising the bulk of the assets. An increase in prices up to the equivalent of$91.25 per barrel of oil would increase the fair value of derivative assets by$601 million . Liquidity requirements of this program are also affected by our credit rating. 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 ofDecember 31, 2022 , changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program. 59 --------------------------------------------------------------------------------
Summary of Credit Loss Experience
Table 26 - Summary of Credit Loss Experience
(In thousands)
Year Ended
Dec. 31, 2022 Dec. 31, 2021
Allowance for loan losses:
Beginning balance $ 256,421 $ 388,640
Loans charged off (28,746) (51,351)
Recoveries of loans previously charged off 7,601 14,334
Net loans charged off (21,145) (37,017)
Provision for credit losses 428 (95,202)
Ending balance $
235,704
Accrual for off-balance sheet credit risk from unfunded loan
commitments:
Beginning balance
$ 32,977 36,921 Provision for credit losses 27,942 (3,944) Ending balance $
60,919
Accrual for off-balance sheet credit risk associated with mortgage
banking activities:
Beginning balance
$ 3,382 $ 4,282 Loans charged off (105) (179) Provision for credit losses 1,627 (721) Ending balance $
4,904
Allowance for credit losses related to held-to-maturity (investment) securities: Beginning balance$ 555 $ 688 Provision for credit losses 3 (133) Ending balance$ 558 $ 555 Total provision for credit losses $
30,000
Average loans by portfolio segment : Commercial$ 13,393,796 $ 13,304,596 Commercial real estate 4,345,783 4,075,831 Paycheck protection program 13,501 293,976 Loans to individuals 3,526,107 3,820,753 Net charge-offs (annualized) to average loans 0.10 % 0.17 % Net charge-offs (annualized) to average loans by portfolio segment: Commercial 0.13 % 0.25 % Commercial real estate - % 0.04 % Paycheck protection program - % - % Loans to individuals 0.10 % 0.05 % Recoveries to gross charge-offs 26.44 % 27.91 % Provision for loan losses (annualized) to average loans - % (0.44) % Allowance for loan losses to loans outstanding at period-end 1.04 % 1.27 % Accrual for unfunded loan commitments to loan commitments 0.39 % 0.26 % Combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments to loans outstanding at period-end 1.31 % 1.43 % 60
--------------------------------------------------------------------------------
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 $30.0 million provision for credit losses was recorded for the year ended
December 31, 2022 , primarily due to strong growth in loans and loan commitments,
partially offset by improvement in credit quality metrics. The uncertainty in
our economic forecast increased resulting in an increase in the probability
weighting of the downside scenario. In addition, some key economic factors were
less favorable to growth across all scenarios.
Non-pass grade loans, which include loans especially mentioned, accruing
substandard and nonaccruing loans, decreased $135 million to $321 million at
December 31, 2022 . Non-pass grade loans were composed primarily of $98 million
or 3% of commercial healthcare loans, $58 million or 2% of commercial services
loans, $57 million or 2% of commercial general business loans, $31 million or 1%
of energy loans and $24 million or 1% of commercial real estate loans. A summary
of outstanding loan balances by risk grade is included in Note 4 to the
Consolidated Financial Statements.
We recorded a $15.0 million provision for credit losses in the fourth quarter of
2022, primarily due to strong growth in loans and loan commitments. The level of
uncertainty in the economic outlook remained high, and key economic factors in
the base case were slightly less favorable to economic growth.
At December 31, 2022 , the allowance for loan losses totaled $236 million or
1.04% of outstanding loans. Excluding residential mortgage loans guaranteed by
U.S. government agencies, the allowance for loan losses was 221% of nonaccruing
loans. The combined allowance for loan losses and accrual for off-balance sheet
credit risk from unfunded loan commitments was $297 million or 1.31% of
outstanding loans and 278% of nonaccruing loans at December 31, 2022 .
A $100.0 million negative provision for credit losses was recorded for the year
ended December 31, 2021 primarily related to improvements in our reasonable and
supportable forecasts of macroeconomic variables influenced by the anticipated
impact of the COVID-19 pandemic developments. Throughout 2021, energy commodity
prices strengthened and stabilized and the outlook of growth in GDP and the
labor markets improved. Changes from credit quality metrics, primarily from
changes in specific impairment, improving credit quality metrics and lower loan
balances resulted in a decrease in the allowance for loan losses.
At December 31, 2021 , the allowance for loan losses was $256 million or 1.27% of
outstanding loans. Excluding loans guaranteed by U.S. government agencies, the
allowance for loan losses was 213% of nonaccruing loans. The combined allowance
for loan losses and accrual for off-balance sheet credit risk from unfunded loan
commitments was $289 million or 1.43% of outstanding loans and 241% of
nonaccruing loans.
61
--------------------------------------------------------------------------------
A summary of macroeconomic variables considered in developing our estimate of
expected credit losses at
Base Downside Upside
Scenario probability 50% 40% 10%
weighting
Economic outlook The Russia-Ukraine conflict The Russia-Ukraine conflict The Russia-Ukraine conflict
remains isolated. remains isolated. remains isolated.
The Federal Reserve increases
the federal funds rate twice Higher levels of
inflation force The
in the first quarter of 2023, the Federal
Reserve to adopt a the federal funds rate once in
resulting in a target range of more aggressive
monetary policy the first quarter of 2023,
4.75% to 5.00%. No additional as compared to the base case resulting in a target range of
rate increases in 2023 are scenario. This results in a 4.50% to 4.75%. No additional
anticipated. Inflation federal funds
rate target range rate increases in 2023 are
pressures cause modest of 5.75% to
6.00% by December anticipated. Inflation continues
declines in real household 2023. Inflation moderates to improve from the peak
income compared to slightly from the peak experienced in the third quarter
pre-pandemic levels, resulting experienced in
the third quarter of 2022.
in below-trend GDP growth. of 2022, but
remains elevated
Job openings revert to more through the
forecast horizon. Labor force participants
normalized levels, and overall The United
States economy is continue to re-enter the job
hiring levels decline causing pushed into a
recession with a market to help fill the elevated
the national unemployment rate contraction in
economic activity level of job openings. This
to modestly increase over the and a sharp increase in the increase in employment helps
next four quarters. unemployment rate. maintain real household income
above its pre-pandemic trend.
This, coupled with a drawdown in
savings, supports consumer
spending and produces GDP growth
consistent with pre-pandemic
levels.
Macro-economic factors -GDP is forecasted to grow by -GDP is forecasted to contract -GDP is forecasted to grow by
0.9% over the next 12 months. 1.3% over the
next 12 months. 1.6% over the next 12 months.
-Civilian unemployment rate of -Civilian
unemployment rate of -Civilian unemployment rate of
3.9% in the first quarter of 4.8% in the
first quarter of 3.7% in the first quarter of
2023 increasing to 4.1% by the 2023 worsens to 6.0% by the 2023 increases slightly to 3.8%
fourth quarter of 2023. fourth quarter of 2023. by the fourth quarter of 2023.
-WTI oil prices are projected -WTI oil prices
are projected to -WTI oil prices are projected to
to generally follow the NYMEX average $65.87
per barrel over average
forward curve that existed at the next twelve
months, peaking the next 12 months.
the end ofDecember 2022 and at$70.78 in the first quarter are expected to average$75.05 of 2023 and falling 15% over the per barrel over the next 12 following three quarters. months. Net Loans Charged Off
In 2022, net loans charged off totaled
million
In 2022, net charge-offs of commercial loans were$17.7 million , primarily related to a single services borrower in the fourth quarter. Net commercial real estate loan charge-offs were$92 thousand and net loan charge-offs of loans to individuals were$3.4 million . Net charge-offs of loans to individuals include deposit account overdraft losses. 62 --------------------------------------------------------------------------------
Nonperforming Assets
As more fully described in Note 1 to the Consolidated Financial Statements, loans are generally classified as nonaccruing when it becomes probable that we will not collect the full contractual principal and interest. Accruing renegotiated loans guaranteed byU.S. government agencies represent residential mortgage loans that have been modified in troubled debt restructurings. Interest continues to accrue based on the modified terms of the loan and loans may be sold once they become eligible according toU.S. government agency guidelines. Real estate and other repossessed assets are assets acquired in partial or total forgiveness of loans. The assets are carried at the lower of cost, as determined by fair value at the date of foreclosure, or current fair value, less estimated selling costs. A summary of nonperforming assets follows in Table 27: Table 27 - Nonperforming Assets (Dollars in thousands) December 31, 2022 2021 Nonaccruing loans: Commercial Energy$ 1,399 $ 31,091 Healthcare 41,034 15,762 Services 16,228 17,170 General business 1,636 10,081 Total commercial 60,297 74,104 Commercial real estate 16,570 14,262 Paycheck protection program - - Loans to individuals Residential mortgage 29,791 31,574 Residential mortgage guaranteed by U.S. government agencies 15,005 13,861 Personal 134 258 Total loans to individuals 44,930 45,693 Total nonaccruing loans 121,797 134,059
Accruing renegotiated loans guaranteed by
210,618 Real estate and other repossessed assets 14,304 24,589 Total nonperforming assets $
299,636
Total nonperforming assets excluding those guaranteed by
government agencies
$
121,096
Allowance for loan losses to nonaccruing loans1
220.71 % 213.33 %
Combined allowance for loan losses and accrual for off-balance
sheet credit risk from unfunded loan commitments to nonaccruing
loans1
277.76 % 240.77 % Nonperforming assets to outstanding loans and repossessed assets 1.33 % 1.83 %
Nonperforming assets to outstanding loans and repossessed assets1
0.54 % 0.73 % Nonaccruing loans to outstanding loans 0.54 % 0.66 % Nonaccruing commercial loans to outstanding commercial loans 0.42 % 0.59 %
Nonaccruing commercial real estate loans to outstanding commercial
real estate loans
0.36 % 0.37 %
Nonaccruing loans to individuals to outstanding loans to
individuals1
0.86 % 0.98 % Accruing loans 90 days or more past due1$ 510 $ 313 1 Excludes residential mortgages guaranteed byU.S. government agencies. Excluding loans guaranteed byU.S. government agencies, nonperforming assets decreased$24 million compared toDecember 31, 2021 , primarily due to a$30 million decrease in nonaccruing energy loans, a$10 million decrease in real estate and other repossessed assets and an$8.4 million decrease in nonaccruing general business loans. These decreases were partially offset by a$25 million increase in nonaccruing healthcare sector loans. Newly identified nonaccruing loans totaled$97 million , offset by$55 million in payments,$29 million of charge-offs,$13 million of loans returning to accrual status and$12 million in foreclosures. The Company generally retains nonperforming assets to maximize potential recovery, which may cause future nonperforming assets to decrease more slowly. 63 --------------------------------------------------------------------------------
A rollforward of nonperforming assets for the years ended
Table 28 - Rollforward of Nonperforming Assets
(In thousands)
Year Ended December 31, 2022
Nonaccruing Loans
Real Estate and Total
Commercial Real Loan to Other Repossessed Nonperforming
Commercial Estate Individuals Total Renegotiated Loans Assets Assets
Balance,
$ 45,693 $ 134,059 $ 210,618$ 24,589 $ 369,266 Additions 58,822 20,683 17,372 96,877 38,644 - 135,521 Payments (42,484) (944) (12,049) (55,477) (6,382) - (61,859) Charge-offs (22,382) (269) (6,095) (28,746) - - (28,746) Net gains (losses) and write-downs - - - - - (1,194) (1,194) Foreclosure of nonaccruing loans (7,960) (3,956) (410) (12,326) - 12,326 - Foreclosure of loans guaranteed byU.S. government agencies - - (4,929) (4,929) (3,431) - (8,360) Proceeds from sales - - - - (71,520) (21,417) (92,937) Net transfers to nonaccruing loans - - 5,774 5,774 (5,774) - - Return to accrual status 197 (13,206) (426) (13,435) - - (13,435) Other, net - - - - 1,380 - 1,380
Balance,
$ 44,930 $ 121,797 $ 163,535$ 14,304 $ 299,636 Year Ended December 31, 2021 Nonaccruing Loans Real Estate and Total Commercial Real Loan to Other Repossessed Nonperforming Commercial Estate Individuals Total Renegotiated Loans Assets Assets
Balance,
$ 40,288 $ 234,693 $ 151,775$ 90,526 $ 476,994 Additions 61,129 327 25,241 86,697 105,535 8,688 200,920 Net transfer from premises and equipment - - - - - 217 217 Payments (102,717) (10,537) (17,443) (130,697) (3,948) - (134,645) Charge-offs (43,956) (2,485) (4,910) (51,351) - - (51,351) Net gains (losses) and write-downs - - - - - 13,842 13,842 Foreclosure of nonaccruing loans (7,511) - (809) (8,320) - 8,320 - Foreclosure of loans guaranteed byU.S. government agencies - - (2,435) (2,435) (866) - (3,301) Proceeds from sales - - - - (37,322) (97,004) (134,326) Net transfers to nonaccruing loans - - 6,081 6,081 (6,081) - - Return to accrual status - (289) (320) (609) - - (609) Other, net - - - - 1,525 - 1,525
Balance,
$ 45,693 $ 134,059 $ 210,618$ 24,589 $ 369,266 64
-------------------------------------------------------------------------------- We foreclose on loans guaranteed byU.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 theU.S. government, subject to limitations and credit risk is limited. These properties will be conveyed to the agencies and receivables collected once applicable criteria have been met.
Real Estate and Other Repossessed Assets
Real estate and other repossessed assets totaled$14 million atDecember 31, 2022 , composed primarily of$9.5 million of developed commercial real estate. Real estate and other repossessed assets decreased$10 million compared toDecember 31, 2021 , primarily related to the sale of developed commercial real estate and oil and gas properties.
Liquidity and Capital
BOK Financial has numerous material cash requirements in the normal course of business. These obligations include deposits and other borrowed funds, leased premises, commitments to extend credit to borrowers and to purchase securities, derivative contracts and contracts for services such as data processing that are integral to our operations. Additional information on loan commitments can be found in the "Loan Commitments" section of Management's Discussion and Analysis while the distribution of time deposit balances can be located in Note 8, "Deposits," and information related to Other Borrowings can be located in Note 9, "Other Borrowings." Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks, provide adequate liquidity to meet our operating needs. Based on the average balances for 2022, approximately 80% of our funding was provided by deposit accounts, 6% from borrowed funds, less than 1% from long-term subordinated debt and 10% from equity. The loan to deposit ratio increased to 65% atDecember 31, 2022 from 49% atDecember 31, 2021 , and continues to provide significant on-balance sheet liquidity to meet future loan demand and contractual obligations.BOK Financial , similar to the banking industry as a whole, saw deposits decline in 2022 as customers begin redeploying capital and moving to other off-balance sheet alternatives seeking higher yields in the rising interest rate environment. We are maintaining higher balances at theFederal Reserve to cover vital business obligations, to meet future asset growth opportunities and to stay nimble in a rising rate environment.
Deposits and borrowed funds are the primary sources of liquidity for the
subsidiary bank. Deposit accounts represent our largest funding source. 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.
Table 29 - Average Deposits by Line of Business
(In thousands)
Year Ended December 31,
2022 2021
Commercial Banking $ 18,323,412 $ 17,659,695
Consumer Banking 8,763,046 8,439,577
Wealth Management 8,491,377 9,426,771
Subtotal 35,577,835 35,526,043
Funds Management and other 2,273,446 2,394,934
Total
$ 37,851,281 $ 37,920,977
Average deposits for 2022 totaled
compared to the prior year, primarily driven by institutional clients moving to
off-balance sheet alternatives seeking higher yields. Interest-bearing
transaction deposit account balances decreased
deposits increased
million
65 -------------------------------------------------------------------------------- Average deposits attributed to Commercial Banking were$18.3 billion for 2022, a$664 million or 4% increase over 2021. Demand deposit balances increased$984 million or 11%. Time deposit balances decreased$227 million or 43% while interest-bearing transaction account balances decreased$94 million or 1%. Commercial customers continued to retain large cash reserves, especially in the first half of the year, 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 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. We anticipate that commercial deposit balances may contract as short-term rates continue to move higher enhancing other investment alternatives for commercial customers. Average Consumer Banking deposit balances increased$323 million or 4% over the prior year. Average interest-bearing transaction account balances increased$234 million or 6%. Average demand deposit account balances grew by$101 million or 3% while savings deposits increased$99 million or 12%. Time deposit balances decreased$110 million or 14%. Average Wealth Management deposit balances decreased by$935 million or 10% compared to the prior year. Interest-bearing transaction balances decreased$1.1 billion or 14%. Non-interest-bearing demand deposits increased$234 million or 17% and time deposit balances decreased$110 million or 19%.
Brokered deposits included in time deposits averaged
compared to
totaled
Average interest-bearing transaction accounts for 2022 included$1.9 billion of brokered deposits compared to$2.1 billion for 2021. Brokered deposits included in interest-bearing transaction accounts totaled$1.5 billion atDecember 31, 2022 and$2.1 billion atDecember 31, 2021 . 66 --------------------------------------------------------------------------------
The distribution of our period end deposit account balances among principal
markets follows in Table 30.
Table 30 - Period End Deposits by Principal Market Area
(In thousands)
December 31,
2022 2021
Oklahoma :
Demand $ 4,585,963 $ 5,433,405
Interest-bearing:
Transaction 9,475,528 12,689,367
Savings 555,407 521,439
Time 794,002 978,822
Total interest-bearing 10,824,937 14,189,628
Total Oklahoma 15,410,900 19,623,033
Texas:
Demand 3,873,759 4,552,983
Interest-bearing:
Transaction 4,878,482 5,345,461
Savings 178,356 178,458
Time 356,538 337,559
Total interest-bearing 5,413,376 5,861,478
Total Texas 9,287,135 10,414,461
Colorado:
Demand 2,462,891 2,526,855
Interest-bearing:
Transaction 2,123,218 2,334,371
Savings 77,961 78,636
Time 135,043 174,351
Total interest-bearing 2,336,222 2,587,358
Total Colorado 4,799,113 5,114,213
New Mexico:
Demand 1,141,958 1,196,057
Interest-bearing:
Transaction 691,915 858,394
Savings 112,430 107,963
Time 133,625 163,871
Total interest-bearing 937,970 1,130,228
Total New Mexico 2,079,928 2,326,285
67
--------------------------------------------------------------------------------
December 31,
2022 2021
Arizona :
Demand 844,327 934,282
Interest-bearing:
Transaction 739,628 834,491
Savings 16,496 16,182
Time 24,846 31,274
Total interest-bearing 780,970 881,947
Total Arizona 1,625,297 1,816,229
Kansas/Missouri:
Demand 436,259 658,342
Interest-bearing:
Transaction 694,163 1,086,946
Savings 20,678 18,844
Time 12,963 12,255
Total interest-bearing 727,804 1,118,045
Total Kansas/Missouri 1,164,063 1,776,387
Arkansas:
Demand 50,180 42,499
Interest-bearing:
Transaction 56,181 119,543
Savings 3,083 3,213
Time 4,825 6,196
Total interest-bearing 64,089 128,952
Total Arkansas 114,269 171,451
Total BOK Financial deposits $ 34,480,705 $ 41,242,059
Estimated uninsured deposits totaled $21.3 billion at December 31, 2022 and
$27.1 billion at December 31, 2021 . The portion of time deposits in excess of
the FDIC limit, as applied without regard to other deposit balances held by the
depositor, were $373 million at December 31, 2022 .
In addition to deposits, liquidity for the subsidiary bank 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 had no wholesale federal funds purchased at December 31,
2022 or December 31, 2021 . Securities repurchase agreements generally mature
within 90 days and are secured by certain trading or available for sale
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 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 $1.6 billion during 2022 and
$1.7 billion during 2021.
At
collateralized sources was approximately
68 --------------------------------------------------------------------------------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.
See Note 9 to the Consolidated Financial Statements for a summary of other
borrowings.
Parent Company and Other Non-Bank Subsidiaries
The primary sources of liquidity forBOK Financial are cash on hand and dividends from the subsidiary bank. Cash and cash equivalents totaled$165 million atDecember 31, 2022 . Dividends from the subsidiary 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. AtDecember 31, 2022 , based on the most restrictive limitations as well as management's internal capital policy,BOKF, NA could declare up to$227 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 could also affect its ability to pay dividends to the parent company. As a result of the acquisition of CoBiz Financial, we obtained$60 million of subordinated debt issued inJune 2015 that will mature onJune 25, 2030 . This debt bears interest at the rate of 5.625% throughJune 25, 2025 and thereafter, the notes will bear an annual floating rate equal to 3-month LIBOR plus 317 basis points. We also acquired$72 million of junior subordinated debentures. Interest is based on spreads over 3-month LIBOR ranging from 145 basis points to 295 basis points and matureSeptember 17, 2033 throughSeptember 30, 2035 . The junior subordinated debentures are subject to early redemption prior to maturity. These LIBOR-based subordinated debentures will be subject to transition onJuly 1, 2023 in conjunction with the Adjustable Interest Rate (LIBOR) Act as implemented by theBoard of Governors of theFederal Reserve System . Shareholders' equity atDecember 31, 2022 was$4.7 billion , a decrease of$681 million compared toDecember 31, 2021 . Net income less cash dividends paid increased equity$376 million during 2022. Changes in interest rates resulted in an accumulated other comprehensive loss of$837 million atDecember 31, 2022 , compared to accumulated comprehensive income of$72 million atDecember 31, 2021 . We also repurchased$155 million of common shares during 2022. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt issuance, share repurchase and stock and cash dividends. OnNovember 1, 2022 , the Company's board of directors authorized the Company to repurchase up to five million shares of the Company's common stock, subject to market conditions, securities laws and other regulatory compliance limitations. This authorization replaces the existing board authorization for the purchase of five million commons shares, under which 4,651,465 shares were repurchased. As ofDecember 31, 2022 , the Company had repurchased 314,406 shares under this new authorization. The Company repurchased 1,632,401 shares during 2022 at an average price of$94.88 per share. We view share buybacks opportunistically, but within the context of maintaining our strong capital position.BOK Financial and the subsidiary bank are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements, including a capital conservation buffer, can result in certain mandatory and additional discretionary actions by regulators that could have a material impact on operations including restrictions on capital distributions from dividends and share repurchases and executive bonus payments. 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 follows for
consolidated basis in Table 31.
69 --------------------------------------------------------------------------------
Table 31 - Capital Ratios
Minimum Capital
Requirement Including
Minimum Capital Capital Conservation Capital Conservation December 31,
Requirement Buffer Buffer 2022 2021
Risk-based capital:
Common equity Tier 1 4.50 % 2.50 % 7.00 % 11.69 % 12.24 %
Tier 1 capital 6.00 % 2.50 % 8.50 % 11.71 % 12.25 %
Total capital 8.00 % 2.50 % 10.50 % 12.67 % 13.29 %
Tier 1 Leverage 4.00 % N/A 4.00 % 9.91 % 8.55 %
Average total equity to average
assets 10.24 % 10.68 %
Tangible common equity ratio 7.63 % 8.61 %
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 elected to delay the
regulatory capital impact of the transition in accordance with the interim final
rule. Deferral of the impact of CECL added 8 basis points to the Company's
Common equity Tier 1 capital at December 31, 2022 .
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"), including unrealized gains and losses
on available for sale securities, 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.
70
--------------------------------------------------------------------------------
Non-GAAP Measures
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.
Table 32 following provides a reconciliation of the non-GAAP measures with
financial measures defined by GAAP.
Table 32 - Non-GAAP Measures
(Dollars in thousands)
December 31,
2022 2021
Tangible common equity ratio:
Total shareholders' equity $ 4,682,649 $ 5,363,732
Less: Goodwill and intangible assets, net 1,120,880 1,136,527
Tangible common equity 3,561,769 4,227,205
Total assets 47,790,642 50,249,431
Less: Goodwill and intangible assets, net 1,120,880 1,136,527
Tangible assets $ 46,669,762 $ 49,112,904
Tangible common equity ratio 7.63 % 8.61 %
Pre-provision net revenue:
Net income before taxes $ 660,157 $ 796,100
Add: Provision for expected credit losses 30,000 (100,000)
Less: Net income (loss) attributable to non-controlling interests
20 (1,796) Pre-provision net revenue $
690,137
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 that enables 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 14 to the Consolidated Financial Statements for a discussion of the
Company's significant off-balance sheet commitments.
Recently Issued Accounting Standards
See Note 1 of the Consolidated Financial Statements for disclosure of newly
adopted and pending accounting standards.
71 --------------------------------------------------------------------------------
Forward-Looking Statements
This 10-K contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections aboutBOK Financial , the financial services industry, the economy generally and the expected or potential impact of the 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 whichBOK 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, 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.
Legal Notice
As used in this report, the term "BOK Financial" and such terms as "the
Company," "the Corporation," "our," "we" and "us" may refer to one or more of
the consolidated subsidiaries or all of them taken as a whole. All these terms
are used for convenience only and are not intended as a precise description of
any of the separate companies, each of which manages its own affairs.
72
--------------------------------------------------------------------------------
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