BOK Financial Corp (BOKF) 2020 Q3 法說會逐字稿

Greetings. I would now like to turn the presentation over to Steven Nell, Chief Financial Officer for BOK Financial Corporation. Please proceed.

Good morning, and thanks for joining us. Today, our CEO, Steve Bradshaw, will provide opening comments; and Stacy Kymes, Executive Vice President of Corporate Banking, will cover our loan portfolio and credit metrics. Lastly, I'll provide third quarter details regarding net interest income, net interest margin, fee revenues, 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 loan deferral status; and also Scott Grauer, Executive Vice President of Wealth Management, who can expand on our differentiating capabilities within wealth management, which have led to another fantastic quarter for the company.

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 as it pertains to any forward-looking statements we make during this call. I'll now turn the call over to Steve Bradshaw.

Thanks for joining us to discuss the third quarter 2020 financial results. This quarter was another in which our fee business has highlighted the effectiveness of our diversified revenue strategy as we eclipsed $150 million of net income for the first time in the history of our company.

Shown on Slide 4. Third quarter net income was $154 million or $2.19 per diluted share that represents EPS growth of 9% from the same quarter a year ago, a remarkable outcome given today's very different economic environment. The key items that drove our success this were a fourth consecutive record revenue quarter from our wealth management business, another exceedingly strong production and margin quarter from our mortgage team, no credit loss provision was needed this quarter, net interest margin was stable due primarily to an accretion acceleration that we will detail momentarily, with additional support from highly disciplined deposit pricing and an increase in the effectiveness of floors in our commercial loan book. And lastly, we have diligently controlled expenses from the outset of the business impact brought about by COVID-19.

Turning to Slide 5. While average loans were flat this quarter, average deposits were up over 6% linked quarter and up nearly 35% from the same quarter a year ago, due primarily to customers retaining higher balances in this current economic environment. Assets under management or in custody were up nearly 4% linked quarter and 2% year-over-year, again topping $80 billion. We attribute the growth to positive market movement, along with better results in the quarter from active sales and asset retention efforts.

I will provide some additional perspective of the results before the start of the QA session, but now Stacy Kymes will review the loan portfolio and our credit metrics in more detail. I will turn the call over now to Stacy.

Thanks Steve. Turning to slide 7, period-end loans were $23.8 billion, down 1.5% for the quarter. Small pockets of growth in our health care book was offset by paydowns in energy and across our core commercial and industrial loan book. Some of this was continued repayment of defensive draws, and some of this was through the organic decline in economic activity and purposeful deleveraging by our customers. Looking specifically at energy loans, they contracted 6.5% for the quarter. Commodity prices, while improving, still make new deals difficult to source in the current environment, though we remain optimistic about our ability to enhance market share long term.

Energy borrowers continue to pay down debt to reduce leverage at this point in the cycle. Despite these factors, we remain open for business and continue to support our customers in the energy industry. This business is more than just lending activities, as evidenced by the record energy derivatives revenue this quarter as customers continue to aggressively manage their commodity risks.

Commercial real estate loan balances were up 3.1% from the previous quarter, largely due to continued friction in the permanent financing market slowing the level of paydown activity. Looking forward, our outlook for loan growth for the rest of the year remains tempered. The speed and shape of the broader economic recovery will be the determining factor in restarting loan growth. We are optimistic that once pre-COVID normalcy returns to the economy, we are well positioned in our commercial lending portfolio to grow loans.

Turning to Slide 8. It's a wider look into the loan deferral status across BOKF portfolio. As you can see, just 1.2% of total loans remain in the deferral status of any type. At the peak, that figure was 7.5% of total loans. So we are happy to say that more than 80% of the loans that were deferred have now moved back to regular payment status. Of the loans that remain in deferral status, roughly half are in the commercial real estate portfolio. These are being closely monitored, but short term, the credit quality has held in better than our original expectations. Long-term outcomes will be dependent on the pace of economic recovery and the impact of any additional physical stimulus.

Also on Slide 8, we've again compiled the list of loan segments we consider more exposed to the economic impact of the pandemic. This group of loans is highly diversified with over 550 loans for an average loan size of less than $3 million. Clearly, the $596 million retail portion of this portfolio remains the most vulnerable today, and we'll continue monitoring these exposures closely in the coming months. While office and multifamily may see impacts here, we believe our geographic footprint will help us in these segments in the long-term because of the strong in migration over time.

Turning to Slide 9. You can see that credit quality remains stable as witnessed by our lack of credit loss provision this quarter. As we mentioned last quarter, we felt the material reserve build would be largely complete, assuming our economic forecast is in line going forward. Looking at the underlying components, a $1.7 million provision related to lending activities was offset by a decrease in the accrual for expected credit losses for mortgage banking activities and allowance for credit losses from investment securities. Changes in our reasonable and supportable forecast of macroeconomic variables, primarily due to an improved economic outlook related to the anticipated impact of the ongoing COVID-19 pandemic and other assumptions resulted in a $12.8 million decrease in the provision for credit losses from lending activities.

Changes in the loan portfolio characteristics, including specific impairment and losses, loan balances and risk ratings, resulted in a $14.5 million increase in the provision for credit losses from lending activities. Net charge-offs of $22.4 million or 37 basis points annualized is slightly above last quarter. Excluding PPP loans, net charge-offs were 41 basis points annualized. Year-to-date net charge-offs totaled $53.7 million or 30 basis points annualized, well within our company's historical loss experience. The combined allowance for loan losses totaled $448 million or 1.88% of outstanding loans at September 30 compared to $469 million or 1.94% of outstanding loans last quarter. The combined allowance for credit losses attributed to energy was 4.3% of outstanding energy loans at September 30.

Nonaccruing energy loans decreased $34 million this quarter, attributed almost entirely to a decrease in nonaccruing energy loans. Potential problem loans totaled $623 million at quarter end, down slightly from $626 million at June 30. A decrease in potential problem energy loans was partially offset by an increase in general business loans and commercial real estate loans.

Just a quick note on energy credit as that is currently the largest driver of overall asset quality for the company. The second quarter of 2020 was an imperfect storm for the semiannual borrowing base redetermination process given the impacts to supply from OPEC+ and demand from COVID-19 all hit in the midst of this process before borrowers even had time to react to manage their response. The result was a higher level of negative credit migration. While commodity prices rose in the third quarter to a level that we expect to improve the credit outlook, we do not upgrade credit in a wholesale manner, solely based on commodity price changes. As we go through the semiannual redetermination process in the fourth quarter, we would expect positive credit migration if prices remained stable at these levels.

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

Thanks, Stacy. With record net income this quarter it is clearly another fantastic one for the company. Preprovision net revenue topped $200 million for the second consecutive time, demonstrating the full earnings power of the company. Net interest revenue strength, net interest margin defense, outsized fee revenue and diligent expense management all contributed to our success this quarter.

As noted on Slide 11, net interest income was $272 million, down just over $6 million from last quarter. PPP loan fee recognition contributed $11 million this quarter versus $13 million last quarter. Additionally, due to loan payoffs and adjustments for acquired loans, discount accretion was $13 million this quarter versus only $3 million last quarter. Net interest margin was 2.81% compared to 2.83% in the previous quarter. Lower loan yields in the near 0 rate environment were offset primarily by the acceleration of discount accretion from CoBiz acquired loans, which supported net interest margin by 11 basis points versus last quarter and is expected to normalize next quarter. Additional support was provided by an 8 basis point reduction in interest-bearing deposit costs, down to 26 basis points and increased effectiveness of floors in our commercial loan book as average LIBOR continued to fall in the current quarter.

Turning to Slide 12. Clearly, earnings this quarter was bolstered dramatically by $223 million in revenues from our fee businesses, as our wealth management and mortgage teams have continued their momentum to post outstanding quarters. Elevated margin in mortgage reflect the continued lack of industry capacity, given the strong demand in the current low rate environment. Mortgage production revenue remains high, it is slightly below the prior quarter. Refinances accounted for 54% of total originated this quarter, down from 71%.

Our wealth management team put together a fourth consecutive record total revenue quarter, predating the low rate environment we find ourselves in today. This quarter, with a host of complementary business units, we saw incredible deposit growth of over 8% linked quarter, significant financial market-based investment management fees and risk management revenues and great synergies with commercial banking through the insurance arm acquired by CoBiz, altogether, exceptional performance, and Scott can provide additional detail during the question-and-answer session.

Brokerage and trading revenue increased $7.5 million, with commissions increasing $3 million. We continue to see elevated mortgage-backed security trading activity out of our Connecticut office.

Derivative fees and commissions increased $2.4 million, primarily due to increased hedging activity from our energy clients, a result of our expertise in that lending vertical. Investment banking revenue increased $1.8 million primarily due to increased syndication fees. As we look forward to 2021, the team is adjusting strategy to overcome the decline in fees from traditional cash investments that are now paying close to 0 providing further optimism for continued growth.

Fee revenue now represents 45% of total revenue, up from 40% in the same quarter last year. This once again demonstrates an important differentiating characteristic of BOK Financial. We have long had a diverse revenue mix that provides an earnings buffer in economic downturns because of the countercyclical nature of some of these fee revenue streams.

The net economic benefit of changes in the fair value of mortgage servicing rights and related economic hedges was $6.5 million during the quarter, including a $3.4 million increase in the fair value of mortgage servicing rights, $1.5 million increase in the fair value of securities and derivative contracts held as an economic hedge and $1.6 million of related net interest revenue.

Turning to Slide 13. Expense management remains prudent, with an increase of just under $6 million. We have managed personnel cost by holding the line on adding new positions and challenge the need to fill open positions. Together, these actions work to decrease regular compensation by $2.6 million this quarter. While this will moderate a bit as our branch network has now opened, we have revised our branch strategy to a hybrid model. This new model will continue to meet the needs of our client but recognizes that the pandemic has accelerated customer behavior adoption of technology, and we will need fewer staff and locations to meet future needs. This is the change we recognized early in the pandemic, and we were able to make real steps towards efficiency. In fact, looking at headcount, we have absorbed approximately 140 positions company-wide. We're almost 3% of our personnel based since March, simply through attrition and increased efficiency.

Elsewhere in personnel expense, incentive compensation increased $5.6 million due to a $3.1 million increase in cash-based incentive compensation resulting from higher fee revenues and $5.9 million, largely related to vesting assumptions regarding the company's earnings per share growth relative to a defined peer group. These increases were offset partially by a $3.5 million increase in deferred compensation. Looking at the $2.3 million increase in nonpersonnel expense, there were several offsetting components. Write-downs on a set of oil and gas properties and a retail commercial real estate property, professional fees and data processing expense were partially offset by decreases in occupancy and equipment expense and other expenses. In addition, the second quarter included a charitable contribution to the BOKF Foundation of $3 million.

On Slide 14, our liquidity position remains very strong, given the continued inflow of deposit balances. Our loan-to-deposit ratio is now 68% compared to 71% at June 30, providing significant on balance sheet liquidity to meet future customer needs. Our capital position levels remain strong as well, with a common equity tier 1 ratio of 12.1%, an improvement from 11.4% last quarter and well ahead of our internal operating range minimum.

On Slide 15, I'll leave you with some general outlook for the near and midterm that might be helpful. Our loan growth is expected to be soft in the near term. However, as we put together our budget with the expectation of economic recovery, we'll be looking for opportunities to grow loans once again in 2021.

Our available for sale securities portfolio, which is largely agency mortgage-backed securities yielded 2.11% during the third quarter. Given the sustained low rate environment, prepayments could reach approximately $750 million per quarter. We can currently reinvest those cash flows at rates around 70 to 90 basis points. As we noted, we have had success during the third quarter, driving deposit costs down further. We are now below the low point reached during the last near 0 rate environment.

We believe there is room to push a bit lower over the next couple of quarters, though we feel we are nearing a bottom to deposit costs. The combination of the normalization of elevated discount accretion, pressure on asset yields and less room to lower deposit costs will put some pressure on net interest margin. Our diverse portfolio of fee revenue streams should continue to provide some mitigating impact to overall revenue pressure being felt in the spread businesses. We expect our brokerage and trading activity to continue at elevated levels given our ability to monetize every part of the fixed income space.

Our mortgage business should remain solid from continued low rates and housing demand, with perhaps some normal seasonal slowdown in the fourth quarter. Our disciplined approach to controlling personnel and nonpersonnel costs will continue. As noted earlier, we've made good progress through the pandemic. We have no plans for a direct reduction of workforce or any corporate-wide program to cut existing capabilities or products for our customers. We will, however, look for all opportunities to gain efficiency through automation and process improvement. Although there remains uncertainty in the economic environment, we continue to believe the loan loss reserve building is behind us.

As I mentioned a moment ago, we feel good about our capital strength. We will maintain our quarterly cash dividends and have plans to restart opportunistic share buybacks.

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

Thank you. The differentiated earnings outcome and our strict credit discipline and heavily fee-based revenue model produces during times of uncertainty can't be overstated here. As you've seen, our fee income streams have produced over $600 million in revenue so far this year, and we believe that strength will continue as we have never seen clients with a higher appreciation for advice than in today's uncertain economy. Business owners, mortgage holders, wealth management clients, corporations, all are facing significant financial decisions as they plan for 2021. Our relationship-driven business model is really in the sweet spot between the high-touch and high-tech and is perfectly in touch with the needs of clients today.

We continue to expand existing relationships and acquire new customers as we believe individuals and companies are clearly evaluating how well their financial partners did or did not help them in the last 8 months. BOK Financial is uniquely positioned to win incremental market share, and that will be our focus heading into 2021. With that, we are pleased to take your questions. Operator?

(Operator Instructions) Our first questions come from the line of Ken Zerbe with Morgan Stanley.

My first question is for Stacy. If you do see positive credit migration in the fall redetermination process, as you expect, would that actually lead to a release of reserves? Or is that already in your CECL expectations?

There's so many different assumptions that go into how that -- I mean part of that would be what our updated economic outlook look like, what other credit migration may be happening in other aspects of the portfolio. I think it's difficult at this point to try to have conjecture around what we think positive credit migration would do to reserve levels as we think about the fourth quarter. I think generally speaking, as you think about the allowance, you probably want to get into some level of post COVID or vaccine environment where you have a lot more transparency around what the environment is going to look like because you think it would be difficult to try to do something there and then have the economic environment turn against you. I think we feel very good about where we are today, obviously. But I think it would be early to surmise what could happen with a positive credit migration in energy.

Got it. Okay. That helps. And then in terms of the brokerage and trading side, obviously, your fee income guidance implies the fees are going to remain strong. I think Steven, you mentioned that brokerage is going to remain high. I guess that's been kind of going straight up over the last couple of quarters. There's been very strong results. What is it about brokerage and trading that keeps it high at this level going forward?

Ken, this is Scott Grauer. So let me take a stab at that. We're -- when you think about our trading and brokerage activity, while we get probably a lot of headline attention to our mortgage back securities piece, which is a significant component. It's roughly 1/3 of that revenue. That being said, our activity with mortgage originators is really only about -- it's 25% or so. We've had real strong activity in our downstream correspondent financial institution business. Our activity to asset managers has been very strong. And then our other component pieces, we've had significant momentum building in our CMO activity from a product set standpoint, we've had good activity with our investment banking, our municipal underwriting.

And as Stacy mentioned, our hedging activity has been very strong. So it's been really across the board in all of our activities in the brokerage and trading piece. And our asset values have rebounded since the recovery in the equity markets. Our recurring fee business, which is roughly 50-50, even on the brokerage side, are back to pre-March levels. So it's strong across the board.

All right, great. And then just one really quick last question. In terms of your expense guidance, you said it's going to be roughly at the same level over the last few quarters. If I got my numbers right, it looks like expenses are kind of going up quite a bit over the last few quarters. Are you talking more in line with 3Q or in line sort of with the average, which is lower than 3Q?

Given the kind of change in revenue mix, more towards the fee side relative to the spread businesses, you're just going to have a slightly higher expense base to support that revenue stream. So I think going forward, you'll see it similar to what we had in the third quarter here, Ken. We did have 1 item where we caught up, if you will, our incentive compensation accruals because of our positioning around where we fall within the peer group. So we needed to catch that accrual up but also, we didn't put any dollars into our community foundation. And so we may do that in the fourth quarter. You may not have the catch-up on the incentive comp component for the stock-based compensation, but you may have a little bit higher contribution to our foundation. So all those things may wash out and end up at an expense level similar to what you had in the third quarter.

Our next question has come from the line of Brady Gailey with KBW.

And so I wanted to ask about share buybacks. It sounds like you guys will be active in that, headed into year-end. I mean the stocks at 1x tangible, you have a decent amount of excess capital. I mean I'm looking back at where you guys have repurchased stock in the past, and it's over $80 a share. The stock is now sub-60. So how aggressive do you think you'll be on the buyback front this quarter and into next year?

Yes. Well, you're exactly right, Brady. When I look back the 3 quarters preceding the last 2 where we didn't buy any stock back, and we averaged about 350,000 shares at $78. So you would have to expect we would be as aggressive, if not more, given the current stock price. And given the capital levels are stronger now than they were back then, and we feel pretty comfortable with the credit side, as Stacy mentioned. So I think you would expect us to be at that level or more aggressive in the fourth quarter. And then we'll just see where we roll out into 2021. I don't want to make any -- provide any guidance around what we would do in 2021. But certainly, I think you'll see us back in the market.

Okay. And then moving on to the margin. I mean you talked about seeing some pressure on the margin, obviously, with the accretable yield from CoBiz normalizing, that will push the margin down on its own. But excluding any sort of movements from accretable yield, how much pressure would you expect on the net interest margin going forward?

Well, let me just take a few of the components. I really think our loan pricing is kind of adjusted. I mean I don't expect that to be -- to go down any further. Also, our lending groups, Stacy, Norm Bagwell, others have been able to get some floors in on about 10% to 15% or so of our portfolio, and that's supporting the margins some. So I feel pretty good about where our loan pricing is. I mentioned deposit costs. I think we can push those down a little bit more. I don't know how far I wouldn't commit that we could pass-through 20 basis points. But we're at 26 average for the third quarter. The last month of the quarter was a little better than that. I think we can keep pushing there some.

I think where you'll see the margin pressure is from our available-for-sale securities portfolio where you've got, as you would expect, some pretty sizable cash flows from that portfolio. I mentioned, I think, $750 million a quarter that will come out of a portfolio yield of 2.11% and roll into securities that we reinvest between 70 and 90 basis points. So you can kind of do the math around that and figure out that you've got some roll down of net interest margin in the next few quarters. So that -- maybe I'll leave it at that.

Okay. That's helpful. And then finally for me, I just wanted to ask about the expense base. I'm guessing at some point, all the success you are having on the fee income side will start to decline. So maybe next year, as you start to see fees not be as strong, what -- are there continued opportunities you have on the expense base to help offset any pressure on profitability? I know you mentioned you've already allowed the workforce to be reduced by 3%. Do you think there's more work to be done on the expense side next year?

Yes. Brady, this is Steve Bradshaw. I'd say that, that's an absolute focus for us. And it became significant for us, really going all the way back to mid-March when we returned to a near 0 rate environment. We understand the implications of that. We have a playbook from that in the not-too-distant past when we had the same scenario. And you're right, we've used attrition to bring that workforce down. We've done some targeted reductions where we've seen efficiencies, currently doing that in our branch network. There's other areas that we're focused on as well. So that is going to be critical, I think, for us in 2021.

And the good work we've done has been a little bit masked because to Steven's point, when you see outsized performance for mortgage, you see outsized performance from brokerage and trading, those are both commission-based compensation businesses. You're going to pay for that and we would be happy to pay for that, and that's going to be reflected in personnel costs. When you strip that away, and we've got a very positive trend line in reducing some of our costs in that fashion, and we're going to continue that into 2021. So it's not like we're just waking up today to address that. This is something that we've been working on as a management team for 7 months.

Our next question is coming from the line of John Arfstrom of RBC Capital Markets.

Stacy, for you, back on Slide 9. Can you talk a little bit about how granular that energy nonaccruals are and also some of the potential problem loans? Is it a handful of larger credits? Or is it more broad-based than that?

No. I mean energy overall tends to key to a higher average loan size. And so there is probably a higher average loan size embedded in both potential problem loans. To a lesser extent, the nonaccruals, generally, by the time they make it that far, you've had a couple of borrowing base reductions, and they tend to be a little bit smaller by the time they get to that point. But we're very optimistic about kind of this fall redetermination season. We feel good about potential loss content embedded here.

We fared exceptionally well. If you look at, I think, year-to-date, we're -- last 5 quarters, we've kind of been in that 27 basis point range, and that feels very good, particularly given what we've been through. But even without that, that would be a good number for us. So I feel good about kind of where we are from a loss content perspective there. Doesn't mean there won't be more, certainly would expect there to be some level of additional loss content embedded there as we work through those problems, but feel good about the outlook for sure.

Okay. Okay. That helps. And then, Steven, maybe another way of getting back at Ken's earlier question. But what would have to happen to drive a higher provision or to get you back into positive territory? It seems like loan balances are maybe a little flattish in the near term, and we've got some credit improvement. But what would have to happen for you guys to go back to a positive provision?

Well, I think you'd have to have an economic outlook that deteriorates more than -- we have a base case, upside case and a downside case. And I think you would have to have much more of the downside case out in expectation for next year or early part of next year that would throw you back into a scenario where you needed to provide for expected losses in a scenario like that. Perhaps some more deterioration on the energy side, but we're not seeing that at this stage. So I think it really drives more around the economic outlook, backing up and deteriorating significantly from what we have in our estimates today.

Okay. That's helpful. And then one last small one. I don't know if you touched on it, but do you have the mortgage pipeline and maybe how that looks today?

No. I don't have that in front of me. I've got what the origination activity was third quarter versus second. It was just slightly lower, not much, but a little bit lower. There's always some seasonality even in these very low rates that have driven a lot of origination activity. You still have a slowdown in the fourth quarter generally. That's what we've seen in the past. That's why I noted that we think mortgage will stay relatively strong, but with some seasonal kind of slowdown. The margins have held up very, very well. In fact, they were up 2 basis points, all the way to 3.67%, I believe, for this quarter. I don't know if that will hold up forever, but certainly, we're seeing still very good activity in the mortgage company during the fourth quarter here.

Our next question has come from the line of Jennifer Demba with Truist Securities.

This is Brandon King on for Jennifer. So most of my questions have been answered, but I wanted to touch on loan growth. And I saw that there was growth in the health care, senior housing as indicated. And I was wondering if you could provide more details and the underlying terms of that and your expectations in the fourth quarter and possibly even in 2021?

Sure. So health care has been obviously a strong focus for our company for a long time. We got a fantastic team that's focused there. The 2 -- really 3 areas that we focus on are hospital systems, and that's generally large, high end credit hospital systems, medical and physicians practice groups, and senior housing. And we see opportunity for growth, really, particularly in the latter two. We saw growth in hospital systems in the first half of the year as they work to obtain additional liquidity to work through the pandemic. I think what we would expect to see over the next year or so is that need lessens, that their need for liquidity would lessen and so their need for credit would probably lessen as well or at least their drawdowns.

We see good opportunity inside of our health care group, both the medical physicians group as well as the senior housing group. I think that what we've seen in the growth in the near term has been, as we've talked about in the past, some of the large REITs that have struggled, may divest to certain property sets. And so we have some clients who are the operators of those properties. Maybe they sold them the REIT originally many years ago. They continue to operate them. They know the facility. They know the health dynamics of that facility. So they're very comfortable purchasing that facility out of the REIT.

And so that's created some opportunities for growth from us with existing clients -- with existing properties that they operate and so that's been part of the growth that we've seen here in the third quarter. And we think, particularly once we get through the pandemic, that will continue to be a very strong opportunity for growth for us, and we're very happy with our growth in our medical physicians practice group. We really -- that was a big part of the acquisition from CoBiz for us on the health care front, and they really exceeded expectations and continue to have high expectations from that team as we move forward.

Awesome. And other than health care, are there any other areas of growth that you could be looking to capitalize on going into next year? I know loan demand is pretty soft right now, but are there any particular areas outside of health care that you could be looking to take any market share opportunity there?

Look, I think that from our perspective, growth will be tempered until such time is people are very comfortable in the economic environment. And I think that probably is into a widely available vaccine. But I will tell you, I think that the response that we've seen from our customer base around our customer service and responsiveness, particularly around PPP. I think our opportunity is to grow in all aspects of our lending once the economy begins to grow, I mean, if we were growing loans in a big way right now, you guys would probably be questioning and challenging how we were doing that and where that growth was coming from. But I think when the economy turns, we are exceptionally well positioned because our customers have realized that having a trusted adviser and having a person they can talk to when they need credit and when they need to work through an issue, is worth a lot to them. And so I'm very opportunistic about our growth prospects once we get to the kind of proverbial other side of this pandemic.

Our next question has come from the line of Gary Tenner with D.A. Davidson.

I wanted to ask a question on energy. And I appreciate the positive comments regarding the upcoming redetermination season. But I was curious, in terms of borrowers that may have had shortfalls after the spring redetermination, how successful have they been in correcting those? Or is really maybe some increase in the borrowing base in the fall going to be the more positive driver of that?

Well, I mean, it's hard to answer that because we've probably only been through about 15% to 20% of the redeterminations at this point. And so in many cases, the last time we saw them was in the spring when the prices were significantly lower. In the meantime, they've done things to manage their business, reduce cost. In some cases, they've shut in wells in the early stages that they'll bring back online.

So I think it's a little bit premature to answer that with a lot of clarity until we've been through this fall redetermination cycle. But based on the credits that we have seen through that process, I think we're optimistic that between a positive price movement and actions of the borrower that we're going to work through this in a very positive manner. And we don't see loss content in that portfolio that's inconsistent with what you've seen from us in the past.

Okay. And then just on PPP, unless I missed it in the press release anywhere. Can you tell us what the fees were -- that were recognized in the third quarter?

Yes. Gary, this is Steven. The fees were $11.3 million that we recognized in the third quarter for PPP.

Our next question has come from the line of Peter Winter with Wedbush Securities.

Obviously, credit is a good story. I was just wondering if you could give a little bit more color on the retail side, what you guys called out that you're watching a little bit more closely.

Yes. Certainly invite Marc to provide color here as well. To date, we're not seeing real big issues there. We're calling it out as a risk area because it's intuitive and we see that from that perspective. But I think in my comments, I mentioned that it's held up better than we would have expected, knowing what we know now and given the depth of the pandemic in various markets. So we're not necessarily seeing credit migration there today as much as we are calling it out as a potential risk area. In fact, as we dig through that, and as you can imagine, we spent a lot of time in the last 90 days doing that. We actually feel much better about it than we did when this all kind of started, and we began to call out some of these higher risk areas.

Yes, this is Marc. What I'd only add is that from a loan deferral standpoint, we've had 2/3 of our consumer loans and mortgage loans exit from that deferral program. So and they tend to have a little longer request and a little longer ability than most. So we've had very good success in having those migrate back to regular payments.

Got it. And then if I can just confirm on the provision expense outlook, Steven. So the way to think about it is kind of 0 provision for the next several quarters, assuming no further deterioration in the economy?

Well, that's kind of what we see. I mean I -- we've made the statement that we feel like the reserve build is behind us. We made that statement last quarter. That if the economic environment stayed relatively stable, which it did, in fact, improved a little bit, that we felt like we wouldn't have to build a reserve anymore. That's kind of the stance we have. Now who knows what will change? And I answered the question earlier in the call that if the economic environment and outlook deteriorates significantly, then, yes, we got to go back and run our models and determine if there's more expected loss there. But today, we're not seeing that.

Got it. And just my final question, for Steve, I was just wondering if you can give an update on what your thoughts of M&A, bank M&A in this environment?

Yes, Peter, I don't think our stance really changes there. We're always interested in quality organizations, especially areas that we can expand within our existing footprint.

We -- as you know, we like the markets that we're in very much. We've got some good growth markets where we don't have substantial market share, and we can benefit from extra scale. I think realistically, in this environment, high-quality banks are not as likely to be sellers with uncertain credit outlook with low rates and maybe falling margin. If you were an owner of a good quality bank, you probably don't see that as the greatest opportunity to maximize the value of your bank. You're probably going to see more scratch and dent type transactions. And while we look at those from time to time, we've typically not gone down that route because our belief and I'd say this was confidence and not arrogance, is that I'd rather have the management team focused on growing our own organization, which we've had great success doing and trying to turn around a bad situation in an uncertain environment. So we remain interested and focused on that as we think about going forward. But I think that the opportunity that we have will probably be limited here near term.

There are no further questions at this time. I would like to hand the call back over to Steven now for any closing comments.

Okay. Thank you. Thanks, everyone, for joining us. I appreciate all your questions and interest in BOKF. If you have any further questions, you can call me at (918) 595-3030, or you can e-mail us at ir@bokf.com. Everybody, have a great day. Thank you.

This does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time. I hope everyone has a great day.