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BOK Financial Corporation (NASDAQ:BOKF)
Q3 2021 Earnings Call
Oct 20, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the BOK Financial Corporation Third Quarter 2021 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Steven Nell, Chief Financial Officer for BOK Financial Corporation. Thank you, sir. You may begin.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Good morning and thanks for joining us. Today, our CEO, Steve Bradshaw, will provide opening comments and Stacy Kymes, our Chief Operating Officer, will cover our loan portfolio, credit metrics and fee income businesses. Lastly, I'll provide details regarding net interest income, net interest margin, expenses and our overall balance sheet position from a liquidity and capital standpoint. Joining us for the question-and-answer session are Marc Maun, our Chief Credit Officer, who can answer detailed questions regarding credit metrics and Scott Grauer, Executive Vice President of Wealth Management, who can expand on our wealth management activities.

PDFs of the slide presentation and third quarter press release are available on our website at bokf.com. We refer you to the disclaimers on Slide 2 regarding any forward-looking statements we make during this call.

I'll now turn the call over to Steve Bradshaw.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning. Thanks for joining us to discuss the third quarter 2021 financial results. This quarter was another in which our diversified revenue strategy was a key differentiator for us as we grew pre-tax pre-provision earnings by 22% linked quarter and eclipsed the $180 million in net income for the first time in the history of our Company.

Shown on Slide 4, third quarter net income was a record $188.3 million or $2.74 per diluted share. That represents growth in net income of 13% from the record set last quarter, a result of our long-term commitment to our balanced earnings model and breadth of business capabilities.

The key items that drove our success this quarter were, first, our fee-based business units continue to perform well with total fees and commissions up $21 million or 12% from last quarter. The contribution from our wealth management team continues to grow and impact results, achieving a new quarterly record for total revenues of $153 million for this quarter. This accounts for 30% of total revenues for the Company and 51% of total fees and commissions for the quarter.

Mortgage fees also increased $5.1 million or 24% linked quarter, primarily driven by a rebound in our reported margins from the lows recognized last quarter. Net interest revenue was unchanged on a linked quarter basis with a slight improvement in loan fees, primarily due to non-use fees from low utilization levels and our interest-bearing deposit cost of funds fell one more basis point this quarter. We continue to experience some compression in yields on our available for sale portfolio. However, that impact was more than offset by improved yields on our trading portfolio. Improving market conditions and credit trends allowed us to release $23 million of our loan loss reserve this quarter and $83 million for the year.

Expense management remains excellent. Total expense was flat on a linked quarter basis. We've managed expense growth to just slightly above 2% over the last two trailing 12-month periods, despite significant technology and cyber-related investments reflecting our disciplined approach.

Turning to Slide 5. Total loans were down $1.1 billion for the quarter. The PPP loan forgiveness accounts for $586 million of that contraction. Core loan growth continues to remain a challenge this quarter as our energy and commercial real estate customers continued to pay down debt or refinance in the long-term markets. Loans attributed to our wealth segment grew $32 million this quarter, allowing them to surpass $2 billion in outstanding balances for the first time.

Our core C&I book decreased at a pace similar to last quarter as our overall line utilization levels are at five-year lows. We believe this positions us for growth as the economy continues to rebound and supply chain disruptions are resolved. Average deposits increased another $344 million this quarter and are 9% higher than the same quarter a year ago.

Assets under management or in custody in our wealth management business grew 2.3% linked quarter to $98.8 billion, approaching the $100 billion milestone, largely due to new business acquisition and favorable market activity in the quarter.

I'll provide additional perspective on the results before starting the question-and-answer session. But now Stacy Kymes will review the loan portfolio, our credit metrics and the fee businesses in more detail.

I'll turn the call over to Stacy.

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

Thanks, Steve. Turning to Slide 7. Period-end loans in our core loan portfolio were $19.8 billion, down just over 2% for the quarter as we continue to see borrowers in some specialty lending areas continue to reduce leverage. Overall commercial and specialized lending line utilization levels were down again this quarter. Their lowest level of over the last five years with the exception to that trend being our private wealth space, which grew at a 6% annualized clip on a linked quarter basis and 12% during the last 12 months.

Energy balances declined in the third quarter as energy borrowers have significant liquidity with current oil and natural gas prices and have been generally paying down debt. We continue to grow new customers in this space, but paydowns have outpaced new loans. Our current belief is that the fourth quarter will be the inflection point and we expect growth from this segment in 2022. Should drilling activity materially increase, the Company is well positioned to have strong growth in this sector given our long-term expertise and continuing strong commitment to the energy sector. Ancillary business from customer hedging, investment banking and treasury for this segment set a new record for fee revenue this quarter, 9% above the previous high set in the third quarter last year.

Healthcare balances fell slightly, down $34 million or 1% linked quarter, primarily driven by our senior housing assisted living sector. Looking forward, we remain very confident in our ability to perform from both a growth and credit standpoint in this portfolio as it remains a leader for us.

Core middle market C&I today is at the lowest level of utilization as any measured period back to March of 2015 dropping below 50% for the first time. This illustrates the significant capacity we have to move up as demand starts to come back online without it being predicated on any new customer acquisition. A return to more normal utilization levels organically adds about $600 million of core C&I loans outside the anticipated growth in the specialty areas. While the balances declined again this quarter, the broad C&I portfolio is beginning to stabilize and is reason for optimism heading into next year.

Commercial real estate balances contracted 3% this quarter. We continue to see borrowers use this low rate environment to refinance to the long-term fixed rate non-recourse market. 2020 was one of real estate's lowest years for portfolio turnover as many of the permanent markets were cautious. As those have opened up, we see some catch-up activity that is inherently a sign of a healthy portfolio, but continues to create quarter-to-quarter volatility. I would expect balances to stabilize in the fourth quarter and resume a more normal growth pattern in 2022.

PPP loan balance forgiveness was substantial again this quarter with $586 million forgiven, shrinking the portfolio by 52%. Of the remaining PPP balances, only 4% of the 2020 vintage and 66% of the 2021 vintage remains. We expect the forgiveness process on the remaining balances to slow considerably. We believe we are well positioned for a more normal loan growth cycle as we look ahead into 2022. We believe that once supply chain constraints ease and we experience the full impact of fiscal stimulus, BOKF will be well positioned for accelerated loan growth.

Turning to Slide 8 you can see that credit quality continues to improve as we move further out from the pandemic. We continue to experience meaningful credit quality improvement across the broader loan portfolio with non-performing assets and potential problem loans both down significantly again this quarter.

Based on total commitments, this quarter ranks the first time that we returned to a level below the pre-pandemic fourth quarter of 2019 for total criticized assets from lending-related activities. These factors, coupled with continued strength in commodity prices and a continued optimistic outlook for economic growth in GDP and the labor markets, led us to release $23 million in reserves this quarter.

Net charge-offs were $7.8 million or 16 basis points annualized, excluding PPP loans in the third quarter. That's a decline from last quarter's $15.4 million or 30 basis points annualized. Net charge-offs have dropped to an average of 26 basis points over the past four trailing quarters, which is at the lower end of our historic loss range. As we look forward to the next quarter, we expect net charge-offs will be at the lower end of our historical range.

The combined allowance for loan losses totaled $306 million or 1.54% of outstanding loans at quarter-end, excluding PPP loans. Non-accruing loans decreased $38 million from last quarter, primarily due to a reduction in non-occurring energy loans. Potential problem loans totaled $333 million at quarter-end, down significantly from $384 million on June the 30th. Potential problem energy, services and general business loans all decreased compared to the prior quarter.

Turning to Slide 9. A highlight is the record-setting third quarter the wealth management team produced. Total wealth management revenues were $153 million for the quarter, up nearly 17% from the linked quarter and 14% above the previous record set in the third quarter of 2020. This includes the fee income lines that investors see in our corporate income statement, brokerage and trading, and fiduciary and asset management, as well as net interest income from loans and deposits in our private wealth group and net interest income generated as part of the brokerage and institutional trading group.

Banking products and services for private wealth clients continue to be a particular area to highlight. The total loan portfolio surpassed $2 billion in balances this quarter and is up 12% or $221 million compared to the same quarter a year ago. The deposit portfolio ending the quarter at $3.9 billion, grew 3% linked quarter and was up 12% compared to the same quarter a year ago. Total net interest income continues to grow, up 3% linked quarter.

Total brokerage and trading revenues increased $15.4 million or 25% linked quarter. This is largely due to a shift in product strategy made during the second quarter in our institutional trading and sales business coupled with adding new financial institution clients. This confirms our expectation last quarter that this shift in product focus and expanded customer base is sustainable. We feel confident that we will maintain a robust level of activity and revenue generation in our MBS activities firmwide. Our capital commitment is expected to remain relatively stable for the foreseeable future in this segment.

Also in the wealth management space, fiduciary and asset management fees were up almost 1% linked quarter and 13% compared to the same quarter a year ago. It's important to note that the second quarter includes the annual tax preparation fees. So growth on top of that is significant and related to our strong growth in assets under management, which now total $98.8 billion.

While we have seen the benefit of favorable equity markets increasing customer account balances, sales activity remains strong in this space as well. Our current mix of assets under management are 41% fixed income, 39% equities, 12% cash and 8% alternatives. Our relationship driven business model is perfectly in touch with clients' needs today as we continue to see institutions and individuals retain the increased depreciation for financial advice gained throughout the past 18 months.

Transaction card revenue was relatively unchanged this quarter, but up 5% compared to the same quarter last year. This is largely due to stimulus measures and the broader reopening of the US economy. Deposit service charges were up $1.6 million or 6% this quarter as we've experienced improvements in customer spending patterns.

Mortgage banking revenue increased $5.1 million or 24% linked quarter, primarily from an improved quarter-over-quarter valuation of our mortgage commitments. Overall mortgage commitment volumes were relatively stable in the third quarter, but valuations compared favorably to second quarter valuations, which were largely driven by a decline in industry refinance production volumes. Despite this change in the unrealized mark-to-market between the quarters, actual settlement margins are down slightly, a trend we've seen all year and expect to carry forward into the fourth quarter.

Industrywide housing inventory constraints continue to impact the market. However, there was some good news on the housing front as Fannie and Freddie both reversed their position on preferred stock purchase agreement, delivery limits on second homes and investment properties, which should possibly benefit us in our Colorado and Arizona markets.

Other revenue declined $4.3 million linked quarter due to the sale of repossessed asset related to oil and gas properties. Although not included on Slide 9, I'll also note that the net economic changes in the fair value of the mortgage servicing rights and related economic hedges were positive $7.3 million during the quarter.

Also included in our total other operating revenue, but not reflected on Slide 9, is a $31 million net gain from our activity in our alternative investment group. This area of focus is on providing equity and debt capital to growing businesses, many of whom have been strong customers of BOK Financial. This is a very long-term business with a portfolio that has grown to $75 million invested in 11 portfolio companies. We expect this area to contribute its earnings going forward, albeit in a somewhat episodic manner.

I'll now turn the call over to Steven to highlight our NIM dynamics and the important balance sheet items for the quarter. Steven?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Thanks, Stacy. Turning to Slide 11. Third quarter net interest revenue was $280 million, largely unchanged compared to last quarter. Average earning assets decreased $892 million compared to the second quarter and average loan balances decreased $1.3 billion with $875 million of that attributable to PPP balances.

Average core loan balances fell $443 million. Average available for sale securities increased $203 million as we continue to reinvest most of the quarterly cash flows from the portfolio. Average trading securities grew by $187 million to support our brokerage and trading business and average total deposits grew $344 million with non-interest deposits up $480 million this quarter, which supports net interest income. We successfully redeemed our $150 million sub-debt during the quarter, which will save approximately $8 million annually in interest expense.

Net interest margin was 2.66%, up 6 basis points from the previous quarter with the increase primarily driven by PPP forgiveness activity that's occurred during the second and third quarters. PPP loans supported net interest margin by 2 basis points in the second quarter and 7 basis points in the third quarter. Excluding all PPP impact to the margins, both quarters' net interest margin would be approximately 2.58%.

Reinvestment of cash flows from our available for sale securities portfolio did result in a 5 basis point linked quarter decline in average yields. Additionally, we had continued success driving interest-bearing deposit costs down 1 additional basis point to 13 basis points on average for the quarter. We believe the core margin is stable and next quarter will include a full quarter's benefit from the sub-debt call this past quarter. So with that and excluding all PPP impact, we expect a net interest margin of approximately 2.6%.

We do not expect any upward migration in net interest margin until rates begin to rise again. With anticipated rate hikes potentially on the horizon within a year or so, it is important to recall how well we performed during the last rate hike cycle from 2015 to 2019 in the upper or the top quartile regional banks. While we can't be assured to repeat that experience, we don't see much that would lead us to believe the experience will be materially different. In fact, there is even more liquidity in the system today than before the last rate increase cycle, which should diminish the need for the market to move rates up quickly.

Turning to Slide 12. Expense management remains prudent with total expenses flat linked quarter and down 2% compared to the same quarter last year. Personnel expense increased $3.8 million or 2% linked quarter. However, this was driven by sales related compensation, which was more than offset by the strong revenue gains overall. An additional offset was due to seasonal decline in payroll taxes. Regular compensation expense was flat. Also, we're very happy with our ability to hold the personnel cost efficiencies earned through the pandemic and expect to do so going forward.

Non-personnel expense was down $3.7 million this quarter. Operating expenses related to repossessed properties fell $6 million this quarter as we sold the oil and gas properties driving this expense. Mortgage banking costs decreased $2.2 million, due to the decrease in prepayments combined with lower accruals related to default servicing and loss mitigation costs on loans serviced for others. Data processing and communication expense increased $2 million as a result of various project investments.

On Slide 13, our liquidity position remains very strong. Our loan to deposit ratio declined from 57% last quarter to just below 53% at September 30th, largely due to the significant decline in PPP balances again this quarter. This significant on-balance sheet liquidity leaves us well positioned to meet future customer needs.

Our capital position remains very strong as well with a common equity Tier 1 ratio of 12.3%, well ahead of our internal operating range. With such strong capital levels we, once again, were active with share repurchase, opportunistically repurchasing 478,000 shares at an average price of $85 per share in the open market.

On Slide 14, I'll leave you with a few thoughts as we move into our budget season for 2022. We believe net activity on loan growth will improve with our Company positioned for positive growth once borrower demand returns and our line utilization levels return to normal. We expect the overall loan loss reserve as a percentage of loan balances to continue to migrate toward pre-pandemic levels.

Core net interest margin has stabilized. We may see slight downward pressure as our available for sale securities portfolio continues to reprice, but the significant pressure on net interest margin experienced in the past year is largely behind us. Our diverse portfolio of fee revenue streams are expected to remain solid and will continue to provide strong support to total revenue. We'll continue our disciplined approach to controlling personnel and non-personnel costs with total expense levels expected at similar levels seen in the past few quarters. Our focus will be holding the line on manageable expenses without sacrificing multi-year technology commitments to improve customer service and our competitive position.

As I mentioned a moment ago, we feel good about our capital strength. We'll continue looking for share buyback opportunities and plan to maintain our quarterly cash dividend level.

I'll now turn the call back to Steve Bradshaw for closing commentary.

Steven G. Bradshaw -- President and Chief Executive Officer

Thank you, Steven. As I mentioned at the top of the call, it was a record quarter for BOK Financial. We continue to do the right things the right way for the benefit of our long-term investors, adding shareholder value without compromising credit discipline or forgoing investment that might hinder the Company's future. And as witnessed by our credit outcomes, the benefit from our alternative investment strategy and the new record wealth management contribution this quarter, we continue to do this in a prudent diversified way.

While this quarter was once again about the contribution from our fee-based businesses, the vastly improving outlook for growth in our footprint as we emerge from the pandemic is driving customer confidence in a way we haven't seen for quite some time. While supply chain and workforce disruptions might be hampering some areas in the near term, economic indicators remain strong which portends well for the future. We are cautiously optimistic about the restart of some of our largest growth drivers in the Company.

With that, we're pleased to take your questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Brady Gailey with KBW. Please proceed with your question.

Will Jones -- Keefe, Bruyette & Woods -- Analyst

Hey. This is Will Jones on for Brady. Good morning, guys.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning.

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

Good morning.

Will Jones -- Keefe, Bruyette & Woods -- Analyst

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

Steven G. Bradshaw -- President and Chief Executive Officer

Yeah. We're not ready to talk about our 2022 projections at this point, but I'll certainly talk about why we would be optimistic about higher levels of loan growth as we move into next year. If you look at the big drivers of the decline this quarter, you clearly had the PPP paydowns. We're at about 80% of those that we originated have paid down year-to-date.

Energy and commercial real estate are the two other areas that really drove the biggest declines this quarter and those are the two areas that we probably have the least amount of concerns about them growing in 2022. Energy is very well positioned. We've added in excess of 40 new customers and almost $1 billion of commitments associated with those in 2021 because of our continued commitment to that space and we're very confident that as we move into next year that we'll see growth there.

Same with commercial real estate. You really have an anomaly because of the kind of continuous circumstances of the pandemic, you had borrowers who didn't refinance. So we didn't have the portfolio turnover in 2020 that we historically have. So you kind of doubled up on that a little bit this year. You may see a little bit of that continue into the fourth quarter, but certainly our commercial real estate team has done a great job of continuing to add commitments to the book and we expect to see that as an area of growth.

So the two biggest areas that drove the decline this quarter in our core portfolio are the two areas that we have the most confidence in as we move into 2022. So I think that that's a big part of that and certainly our healthcare sector continues to do very well. Good growth there. Have been very strong consistent growth over a long period of time.

Core C&I really is the open question. It really depends on when line utilizations begin to move up. There is a lot of factors involved there. We've alluded to the supply chain issues that impact some of that. The liquidity that's in the market is a part of that as well. But we're very well positioned. Good activity in our pipelines on the commercial and corporate banking side. So we remain very optimistic about that.

Will Jones -- Keefe, Bruyette & Woods -- Analyst

All right. That's all super helpful. Maybe just turning specifically to energy. Just thinking longer term about that portfolio, we heard that we've seen [Phonetic] a nice recovery in energy prices and demand as it eventually returns. What is the ultimate expectation as to where energy loans as a percentage of your whole portfolio trends? I know it's historically in the 18% to 20% range and closer to 14% today. How do you think about your overall energy exposure longer term in relation to the total portfolio? Is it something you manage to a particular capital level or is it a specific loan concentration?

Steven G. Bradshaw -- President and Chief Executive Officer

Yeah. We manage it both through the percent of capital and as a percent of the loan portfolio and we have significant capacity under both measures to grow that portfolio today and neither of those metrics even approaches any kind of potential headwind for growth in that sector. We obviously remain very optimistic about growth there. I think as you get into next year, these price levels, we're hopeful that there'll be more drilling activity and then that would certainly drive borrowing demand and obviously loan demand that goes with that. So we're excited about that space.

We think that that continues to be an area that we have great expertise and great consistency in our delivery of that into the market. And we've been recognized for that with the new customers that we've acquired during the year. And, in fact I think in the third quarter in the league tables, we were the number one originator in the energy space for the loan sizes that kind of fit our kind of less than $500 million in total loan size. So we're excited about where we're positioned there and we think that that's going to be a driver for us well into the future.

I think the other point to that. We get awfully focused on the loan balance piece of that business, but I mentioned in my prepared remarks and want to reference it again that area also had a record quarter in fee revenue, both in treasury revenue, investment banking revenue and derivatives revenue. That's a big part of the nature of that relationship. It is not just a lending relationship. It's a very full and whole relationship that has other profitable aspects of the business that is important to the Bank and important to our shareholders.

Will Jones -- Keefe, Bruyette & Woods -- Analyst

Awesome. Very helpful. Last for me, just maybe more so housekeeping. Would you remind us what your percent utilization is today? And I apologize if you said that in your prepared remarks, I might have missed that.

Steven G. Bradshaw -- President and Chief Executive Officer

Yeah. When you look at the overall portfolio, it's hard to give an absolute number. We're in kind of about 64% overall, but that's probably not the absolute best way to look at it, because some of those commitments, like in energy, kind of, accordion [Phonetic] up and down depending on prices over time.

I think what -- in our core C&I, kind of our corporate C&I area, we're below 50% for the first time in any recent history. In that particular segment, we believe just a return to a more normal loan growth would enhance the loan balances by about $600 million. That's just for that more corporate C&I group. It doesn't impact the specialty areas and others that also would benefit from growth and increase in utilization as well.

Will Jones -- Keefe, Bruyette & Woods -- Analyst

Great. That's it for me. Thanks for taking my questions.

Operator

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

Matt Olney -- Stephens Inc. -- Analyst

Hi. Thanks. Good morning, guys.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Hey, Matt.

Matt Olney -- Stephens Inc. -- Analyst

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

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

There is modest discussion. I mean, the discussion is really think about as an energy producer, kind of what they've lived in the last 18 months. I mean, they have seen a day where oil price was negative and natural gas was clearly depressed to now today. Oil is above $75 and natural gas at one point hit $6 an MCF. So very different environment and they've seen a lot of volatility associated with that. They are much more disciplined around hedging and so they're much more focused on that. I think today the biggest conversation is around free cash flow. And being able to have cash flow to demonstrate the returns to their investors, I think, is really important to them.

So I think what -- the early discussions that we are learning about really is, at this stage probably much more modest drilling activity than you might expect, given the significant run-up in commodity prices over the last six months or so. But that doesn't mean that won't change.

We're kind of in that capital budgeting season for those energy customers. So we'll learn more about that as we move [Phonetic] throughout this quarter. But, certainly, my expectation is for modest, not significant, but modest increases in drilling activity as we move into next year. Certainly, that could change depending on a lot of factors, including if commodity prices continue to increase.

Matt Olney -- Stephens Inc. -- Analyst

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

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

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

Matt Olney -- Stephens Inc. -- Analyst

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

Steven E. Nell -- Executive Vice President, Chief Financial Officer

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

Matt Olney -- Stephens Inc. -- Analyst

Okay. Okay. Thanks, guys.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

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

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Hey. Thanks. Good morning.

Steven G. Bradshaw -- President and Chief Executive Officer

Hi.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Good morning.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

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

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

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

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

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

Steven G. Bradshaw -- President and Chief Executive Officer

We're very bullish. Lots of reasons. We stand to disproportionately benefit from commodity prices rising. We've got an energy book that will benefit from a growth perspective. We've got a footprint that will benefit, that is growing. Steve and I have been in Texas last couple of weeks and, man, you just -- you cannot do anything down there without seeing just the enormous in-migrations.

I have been in Phoenix. A lot of things going on in Phoenix and Denver. I mean the in-migration from the coastal areas is significant. Our footprint is just perfect for that. I think that you've seen borrower sentiment be exceptionally strong. There are some economic headwinds that -- whether it's supply chain or labor shortages that will resolve themselves at some level, I think, in the next quarter or two. And most of the stimulus dollars have been allocated to states and local governments haven't even been spent yet. And so I think that there is an enormous level of growth kind of pent up and I think we're in the very early stages of beginning to see that.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

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

Steven G. Bradshaw -- President and Chief Executive Officer

We think -- as we kind of have had the beginnings of some of our internal discussions about how we should think about for next year, we actually aren't seeing from the -- say, the current level that you see today, we're not seeing material declines. We're not forecasting material declines in the deposit levels.

We think that the liquidity that's in the market is going to be here because even if the current liquidity is used, there's going to be additional liquidity that hasn't been pushed through the system yet that will replace that. So certainly for the foreseeable 12 months or so, we believe that the deposit levels you see today are likely in the range of what you will see going forward.

The other question that kind of gets asked related to that, if you've got that much liquidity in the system how can you have loan growth? It's a fair question. We've kind of looked at that back in '08, '09, 2010, the last time you had a significant downturn and then a recovery. You can have loan growth with strong liquidity in the system. Often it's in the different sectors. So the total may have a lot of liquidity, but different sectors have -- are growing at different paces. So it creates loan demand. So those aren't mutually exclusive. They are related, but they're not mutually exclusive either.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Yeah. Okay. All right. Thanks for the help on those questions.

Operator

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

Gary Tenner -- D.A. Davidson & Co. -- Analyst

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

Steven G. Bradshaw -- President and Chief Executive Officer

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

Gary Tenner -- D.A. Davidson & Co. -- Analyst

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

Steven E. Nell -- Executive Vice President, Chief Financial Officer

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

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Yeah. All right. Great. Thanks for taking the questions.

Operator

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

Matt Olney -- Stephens Inc. -- Analyst

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

Steven E. Nell -- Executive Vice President, Chief Financial Officer

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

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

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

Matt Olney -- Stephens Inc. -- Analyst

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

Steven E. Nell -- Executive Vice President, Chief Financial Officer

There is just shy of $4 billion of our loans have floors embedded in them. Right now it's supporting net interest income of about $20 million a year and so it supports NIM of about 5 basis points. So that kind of give you an idea of what you would have to push through and the support that we're getting there now.

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

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

Matt Olney -- Stephens Inc. -- Analyst

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

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Yeah. I mean if you look at the portfolio yield itself is 1.80%. I looked this morning, we added some securities in fact yesterday at 1.35%. So those are four to five-year duration securities. So we do have a little bit -- there is room there for that to continue to reprice down. That's why I mentioned it. But I don't think it's an overall huge drag on net interest margin. I really think that's -- we've overall stabilized the margin pretty well. But there is a little bit left there if rates stay low and between the portfolio yield and what we're adding in terms of the cash flow that we get back and reinvest.

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

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

Matt Olney -- Stephens Inc. -- Analyst

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

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

That's a true statement.

Matt Olney -- Stephens Inc. -- Analyst

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

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

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

Matt Olney -- Stephens Inc. -- Analyst

Okay. Perfect. All right. Last one, guys. Brokerage and trading, you guys hit a home run this quarter. Looks like it was mostly on trading and then customer hedging. I know is tough to predict kind of quarter-on-quarter, but just talk more about the sustainability of these levels in the third quarter?

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

Yeah. Let me hit a couple of things there and then ask Scott if he wants to add anything to that. We are really proud of our Wealth Group. We're just right at $100 billion in assets under management and sometimes whether it's energy on the lending side or the trading businesses on the wealth side, those types of things kind of overshadow what core is happening inside the Company.

And looking -- certainly, the trading businesses create volatility, but if you look at wealth revenues overall, there is intra-quarter volatility. But we've grown wealth total revenue year-over-year for over 10 consecutive years now and that wealth revenue CAGR is in excess of 9%.

And so there is volatility in some of these trading businesses, but there is core growth that's happening and I think the market is missing inside of our wealth business. And so as we think about the fourth quarter, we think the trading aspect of that business will be probably somewhere between what we saw in the second quarter and the third quarter, probably not as strong as the third quarter, probably, maybe, a little bit better than what we saw in the second quarter.

But if you think about the business and how we think about that business, total wealth revenue has been a significant driver of our Company and it's not just the trading business. It's the assets under management that we're providing counsel for our customers and institutions around. You typically will see assets that are managed, they are half the size of the core bank, ours are over twice the size of the core bank in almost $100 billion. So we're proud of that business and we are excited about what we've done on the trading side, but the core wealth business has been a key growth driver for our Company for a long time.

Scott, anything you want to add to that?

Scott B. Grauer -- Executive Vice President, Wealth Management; CEO, BOK Financial Securities, Inc.

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

Matt Olney -- Stephens Inc. -- Analyst

Okay. Great stuff, guys. Thanks again.

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

Thank you, Matt.

Steven G. Bradshaw -- President and Chief Executive Officer

Thank you, Matt.

Operator

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

Steven E. Nell -- Executive Vice President, Chief Financial Officer

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

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Steven G. Bradshaw -- President and Chief Executive Officer

Stacy C. Kymes -- Executive Vice President, Chief Operating Officer

Scott B. Grauer -- Executive Vice President, Wealth Management; CEO, BOK Financial Securities, Inc.

Will Jones -- Keefe, Bruyette & Woods -- Analyst

Matt Olney -- Stephens Inc. -- Analyst

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Gary Tenner -- D.A. Davidson & Co. -- Analyst

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