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BOK FINANCIAL CORP - Quarter Report: 2018 June (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One) 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

BOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
Oklahoma
 
73-1373454
(State or other jurisdiction
of Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
 
Bank of Oklahoma Tower
 
 
Boston Avenue at Second Street
 
 
Tulsa, Oklahoma
 
74192
(Address of Principal Executive Offices)
 
(Zip Code)
 
(918) 588-6000
(Registrant’s telephone number, including area code)

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 65,439,090 shares of common stock ($.00006 par value) as of June 30, 2018.





BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2018

Index

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




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

BOK Financial Corporation (“the Company”) reported net income of $114.4 million or $1.75 per diluted share for the second quarter of 2018, compared to $88.1 million or $1.35 per diluted share for the second quarter of 2017 and $105.6 million or $1.61 per diluted share for the first quarter of 2018

On June 18, 2018, the Company announced the signing of a definitive merger agreement with CoBiz Financial Inc. CoBiz is headquartered in Denver with a presence in Colorado and Arizona and has approximately $3.8 billion in assets. Upon completion of the merger, CoBiz shareholders will receive 0.17 shares of BOK Financial common stock and $5.70 in cash for each share of CoBiz common stock. The merger is subject to customary closing conditions including regulatory approval.

Highlights of the second quarter of 2018 included:
Net interest revenue totaled $238.6 million, up from $205.2 million in the second quarter of 2017 and $219.7 million in the first quarter of 2018. The increase in net interest revenue over the prior year was driven by both improving yields and growth in average earning assets. Net interest margin was 3.17 percent for the second quarter of 2018. Net interest margin was 2.89 percent for the second quarter of 2017 and 2.99 percent for the first quarter of 2018. Average earning assets were $30.3 billion for the second quarter of 2018 compared to $29.2 billion for the second quarter of 2017.
Fees and commissions revenue totaled $157.9 million. Adoption of the new revenue recognition accounting standard in the first quarter of 2018 resulted in interchange fees we pay to issuing banks being netted against transaction card revenue. Previously these fees were included in data processing and communications expense. Excluding this impact, fees and commissions revenue decreased $9.4 million compared to the second quarter of 2017. Brokerage and trading revenue decreased $5.3 million while mortgage banking revenue decreased $3.9 million, both affected by rising interest rates. Fees and commissions revenue decreased $1.1 million compared to the first quarter of 2018. Modest changes in revenue from other business lines was offset by decreased brokerage and trading revenue.
Other operating expense totaled $246.5 million, a $5.8 million or 2 percent increase over the second quarter of 2017 on a comparable basis. Personnel expense decreased $4.8 million, primarily due to decreased incentive compensation expense. Non-personnel expense increased $10.6 million due largely to an increase in deposit insurance expense as a result of credits in the second quarter of 2017 along with increased project and acquisition costs. Operating expense increased $2.0 million compared to the first quarter of 2018 on a comparable basis. Personnel expense decreased $1.0 million and non-personnel expense increased $3.0 million. Professional fees and services expense and mortgage banking costs were higher in the second quarter.
Income tax expense was $33.3 million or 22.4 percent of net income before taxes for the second quarter of 2018 compared to $47.7 million or 34.9 percent for the second quarter of 2017. Beginning January 1, 2018, the Tax Cuts and Jobs Act ("the Act") decreased the corporate income tax rate from 35% to 21%.
The Company recorded no provision for credit losses in the second quarter of 2018. A $5.0 million negative provision for credit losses was recorded in the first quarter of 2018. Net charge-offs totaled $10.5 million or 0.24 percent of average loans on an annualized basis in the second quarter of 2018 compared to net charge-offs of $1.3 million or 0.03 percent of average loans on an annualized basis for the first quarter of 2018. Net charge-offs were $26.9 million or 0.16 percent of average loans over the last four quarters.
The combined allowance for credit losses totaled $218 million or 1.21 percent of outstanding loans at June 30, 2018 compared to $228 million or 1.32 percent of outstanding loans at March 31, 2018.
Nonperforming assets that are not guaranteed by U.S. government agencies totaled $186 million or 1.04 percent of outstanding loans and repossessed assets at June 30, 2018 and $195 million or 1.13 percent of outstanding loans and repossessed assets at March 31, 2018. Potential problem loans decreased $82 million to $140 million at June 30, 2018.
Average loan balances grew by $490 million over the previous quarter, primarily due to growth in commercial and commercial real estate loan balances. Period-end outstanding loan balances totaled $18.0 billion at June 30, 2018, an increase of more than $665 million over March 31, 2018.

- 1 -



Average deposits were largely unchanged compared to the previous quarter. Average demand deposit balances increased $72 million, while interest-bearing transaction deposit balances decreased $155 million. Period-end deposits were $22.2 billion at June 30, 2018, a $36 million decrease compared to March 31, 2018.
The common equity Tier 1 capital ratio at June 30, 2018 was 11.92 percent. Other regulatory capital ratios were Tier 1 capital ratio, 11.92 percent, total capital ratio, 13.26 percent, and leverage ratio, 9.57 percent. At March 31, 2018, the common equity Tier 1 capital ratio was 12.06 percent, the Tier 1 capital ratio was 12.06 percent, total capital ratio was 13.49 percent, and leverage ratio was 9.40 percent.
The company paid a regular cash dividend of $29.3 million or $0.45 per common share during the second quarter of 2018. On July 24, 2018, the board of directors approved an increase in the quarterly cash dividend to $0.50 per common share payable on or about August 27, 2018 to shareholders of record as of August 13, 2018.
The company repurchased 8,257 common shares at an average price of $99.84 per share during the second quarter of 2018. The company repurchased 82,583 common shares at an average price of $91.83 per share during the first quarter of 2018.

- 2 -



Results of Operations
Net Interest Revenue and Net Interest Margin

Net interest revenue is the interest earned on debt securities, loans and other interest-earning assets less interest paid for interest-bearing deposits and other borrowings. The net interest margin is calculated by dividing tax-equivalent net interest revenue by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest spread due to interest income earned on assets funded by non-interest bearing liabilities such as demand deposits and equity.

Net interest revenue totaled $238.6 million for the second quarter of 2018, up from $205.2 million in the second quarter of 2017 and $219.7 million in the first quarter of 2018. Net interest margin was 3.17 percent for the second quarter of 2018, 2.89 percent for the second quarter of 2017 and 2.99 percent for the first quarter of 2018. Recoveries of foregone interest on nonaccruing loans added $5.3 million or 7 basis points to net interest margin in the second quarter of 2018. Recoveries of foregone interest were not significant in the first quarter of 2018 or the second quarter of 2017. The discussion following excludes the impact of recoveries of foregone interest in the second quarter of 2018 on net interest margin.

In addition to the impact of foregone interest recoveries on the second quarter of 2018, net interest margin was 4 basis points lower in the second quarter of 2018 compared to the second quarter of 2017 due to the impact of lower effective tax rates from the implementation of the Tax Cut and Jobs Act on the tax-equivalent yield of our tax-exempt loans and securities. However, net interest margin was 4 basis points higher in the second quarter of 2018 as we reduced our excess cash balances at the Federal Reserve. Beginning in 2014, the Company increased borrowings from the Federal Home Loan Banks, depositing the excess cash balances in the Federal Reserve to earn a spread. In conjunction with the Federal Reserve's monetary policy normalization, this spread narrowed in the second quarter of 2018.

Tax-equivalent net interest revenue increased $31.0 million over the second quarter of 2017. Table 1 shows the effect on net interest revenue from changes in average balances and interest rates for various types of earning assets and interest-bearing liabilities. Changes in interest rates and yields increased net interest revenue by $20.5 million. The benefit of an increase in short-term interest rates on the floating-rate earning assets was partially offset by higher borrowing costs. Tax-equivalent net interest revenue increased $10.5 million due to growth in average assets. Growth in the average balances of trading securities and loans was partially offset by decreases in interest-bearing cash and cash equivalents.

The tax-equivalent yield on earning assets was 3.84 percent, up 54 basis points over the second quarter of 2017, primarily due to increases in short-term interest rates resulting from three 25 basis point increases in the federal funds rate by the Federal Reserve. Loan yields increased 65 basis points to 4.68 percent. The yield on interest-bearing cash and cash equivalents increased 82 basis points. The available for sale securities portfolio yield was up 19 basis points to 2.30 percent. Funding costs were up 48 basis points over the second quarter of 2017. The cost of interest-bearing deposits increased 26 basis points and the cost of other borrowed funds increased 82 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 37 basis points for the second quarter of 2018, up 15 basis points over the second quarter of 2017.

Average earning assets for the second quarter of 2018 increased $1.1 billion or 4 percent over the second quarter of 2017. The average balance of trading securities grew by $1.0 billion, primarily due to expansion of U.S. agency residential mortgage-backed securities trading activities. Average loans, net of allowance for loan losses, increased $650 million, due primarily to growth in commercial loans. Restricted equity security balances were up $53 million. Interest-bearing cash and cash equivalent balances decreased $334 million. Available for sale securities decreased $221 million. Investment securities balances decreased $100 million.

Average deposits decreased $37 million compared to the second quarter of 2017. Demand deposit balances decreased $115 million and time deposit balances decreased $66 million. Interest-bearing transaction account balances increased $102 million and savings account balances increased $42 million. Average borrowed funds increased $1.0 billion over the second quarter of 2017, primarily due to the net impact of increased borrowings from the Federal Home Loan Banks. Funds purchased and repurchase agreement balances also increased over the prior year.


- 3 -



The yield on average earning assets was 3.84 percent, a 23 basis point increase over the prior quarter. The loan portfolio yield also increased 23 basis points to 4.68 percent. The yield on the available for sale securities portfolio increased 7 basis points to 2.30 percent. The yield on interest-bearing cash and cash equivalents increased 29 basis points. Funding costs were 1.11 percent, up 18 basis points. The cost of interest-bearing deposits increased 9 basis points to 0.66 percent. The cost of other borrowed funds was up 34 basis points to 1.84 percent. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 6 basis points over the prior quarter.
Average earning assets increased $423 million over the first quarter of 2018. Trading securities balances increased $549 million. Average loan balances grew by $490 million. Average interest-bearing cash and cash equivalents balances decreased $386 million. Fair value option securities held as an economic hedge of our mortgage servicing rights decreased $139 million. Available for sale securities decreased $74 million.
Average deposits decreased $72 million compared to the previous quarter. Interest-bearing transaction account balances decreased by $155 million. Demand deposit balances increased $72 million. The average balance of borrowed funds increased $231 million over the first quarter of 2018, primarily due to increased borrowings from the Federal Home Loan Banks and funds purchased and repurchase agreement balances.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately 82% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally reprice more quickly than liabilities. One of the strategies that we use to manage toward a relative rate-neutral position is to purchase fixed-rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market-rate-sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. For the remainder of 2018, we expect low-to-mid single digit expansion in net interest margin for each 25 basis point increase in the federal funds rate.

The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 1 and in the interest rate sensitivity projections as shown in the Market Risk section of this report.

- 4 -




Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
June 30, 2018 / 2017
 
Six Months Ended
June 30, 2018 / 2017
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
2,542

 
$
(1,215
)
 
$
3,757

 
$
6,280

 
$
(1,190
)
 
$
7,470

Trading securities
 
9,567

 
8,625

 
942

 
12,007

 
12,203

 
(196
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(86
)
 
(24
)
 
(62
)
 
(143
)
 
45

 
(188
)
Tax-exempt securities
 
(661
)
 
(609
)
 
(52
)
 
(1,346
)
 
(1,160
)
 
(186
)
Total investment securities
 
(747
)
 
(633
)
 
(114
)
 
(1,489
)
 
(1,115
)
 
(374
)
Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
4,402

 
247

 
4,155

 
7,290

 
(1,009
)
 
8,299

Tax-exempt securities
 
(584
)
 
(354
)
 
(230
)
 
(1,119
)
 
(681
)
 
(438
)
Total available for sale securities
 
3,818

 
(107
)
 
3,925

 
6,171

 
(1,690
)
 
7,861

Fair value option securities
 
388

 
93

 
295

 
2,827

 
1,725

 
1,102

Restricted equity securities
 
1,009

 
817

 
192

 
1,817

 
1,376

 
441

Residential mortgage loans held for sale
 
(53
)
 
(260
)
 
207

 
(45
)
 
(438
)
 
393

Loans
 
40,127

 
6,745

 
33,382

 
65,682

 
8,062

 
57,620

Total tax-equivalent interest revenue
 
56,651

 
14,065

 
42,586

 
93,250

 
18,933

 
74,317

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
7,556

 
164

 
7,392

 
13,836

 
(29
)
 
13,865

Savings deposits
 

 
4

 
(4
)
 
1

 
9

 
(8
)
Time deposits
 
785

 
(193
)
 
978

 
1,369

 
(492
)
 
1,861

Funds purchased and repurchase agreements
 
618

 
81

 
537

 
1,044

 
39

 
1,005

Other borrowings
 
16,637

 
3,532

 
13,105

 
29,831

 
5,223

 
24,608

Subordinated debentures
 
45

 
(1
)
 
46

 
23

 
1

 
22

Total interest expense
 
25,641

 
3,587

 
22,054

 
46,104

 
4,751

 
41,353

Tax-equivalent net interest revenue
 
31,010

 
10,478

 
20,532

 
47,146

 
14,182

 
32,964

Change in tax-equivalent adjustment
 
(2,348
)
 
 
 
 
 
(4,766
)
 
 
 
 
Net interest revenue
 
$
33,358

 
 
 
 
 
$
51,912

 
 
 
 
1 
Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

- 5 -



Other Operating Revenue

Other operating revenue was $156.4 million for the second quarter of 2018, a $15.6 million decrease compared to the second quarter of 2017 and largely unchanged compared to the first quarter of 2018. Fees and commissions revenue decreased $9.4 million compared to the second quarter of 2017 and was very consistent compared to the prior quarter. 

Table 2Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Mar 31, 2018
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
 
Brokerage and trading revenue
 
$
26,488

 
$
31,764

 
$
(5,276
)
 
(17
)%
 
$
30,648

 
$
(4,160
)
 
(14
)%
Transaction card revenue1
 
20,975

 
20,009

 
966

 
5
 %
 
20,990

 
(15
)
 
 %
Fiduciary and asset management revenue
 
41,699

 
41,808

 
(109
)
 
 %
 
41,832

 
(133
)
 
 %
Deposit service charges and fees
 
27,827

 
28,422

 
(595
)
 
(2
)%
 
27,161

 
666

 
2
 %
Mortgage banking revenue
 
26,346

 
30,276

 
(3,930
)
 
(13
)%
 
26,025

 
321

 
1
 %
Other revenue
 
14,518

 
14,984

 
(466
)
 
(3
)%
 
12,330

 
2,188

 
18
 %
Total fees and commissions revenue
 
157,853

 
167,263


(9,410
)
 
(6
)%
 
158,986


(1,133
)
 
(1
)%
Other gains (losses), net
 
3,983

 
6,108

 
(2,125
)
 
N/A

 
(664
)
 
4,647

 
N/A

Loss on derivatives, net
 
(3,057
)
 
3,241

 
(6,298
)
 
N/A

 
(5,685
)
 
2,628

 
N/A

Loss on fair value option securities, net
 
(3,341
)
 
1,984

 
(5,325
)
 
N/A

 
(17,564
)
 
14,223

 
N/A

Change in fair value of mortgage servicing rights
 
1,723

 
(6,943
)
 
8,666

 
N/A

 
21,206

 
(19,483
)
 
N/A

Gain (loss) on available for sale securities, net
 
(762
)
 
380

 
(1,142
)
 
N/A

 
(290
)
 
(472
)
 
N/A

Total other operating revenue
 
$
156,399

 
$
172,033

 
$
(15,634
)
 
(9
)%
 
$
155,989

 
$
410

 
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Reconciliation:1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transaction card revenue on income statement
 
$
20,975

 
$
30,228

 
N/A

 
N/A

 
$
20,990

 
N/A

 
N/A

Netting adjustment
 

 
(10,219
)
 
N/A

 
N/A

 

 
N/A

 
N/A

Transaction card revenue after netting adjustment
 
$
20,975

 
$
20,009

 
966

 
5
 %
 
$
20,990

 
(15
)
 
 %
1 
Non-GAAP measure to net interchange charges from prior quarters between transaction card revenue and data processing and communications expense. This measure has no effect on net income or earnings per share.

Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 40 percent of total revenue for the second quarter of 2018, excluding provision for credit losses and gains and losses on other assets, securities and derivatives and the change in the fair value of mortgage servicing rights. We believe that a variety of fee revenue sources provides an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors such as rising interest rates resulting in growth in net interest revenue or fiduciary and asset management revenue, may also decrease mortgage production volumes. We expect growth in other operating revenue to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.


- 6 -



Brokerage and Trading Revenue

Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage and investment banking, decreased $5.3 million or 17 percent compared to the second quarter of 2017.

Trading revenue includes net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers and related derivative instruments. Trading revenue was $6.3 million for the second quarter of 2018, a $3.7 million or 37 percent decrease compared to the second quarter of 2017. Rising mortgage interest rates narrowed trading margins and slowed turnover of our trading inventory. However, the longer average hold time of trading securities increased net interest revenue by $3.1 million.

Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $9.8 million for the second quarter of 2018, a $1.8 million or 16 percent decrease compared to the second quarter of 2017.

Revenue earned from retail brokerage transactions decreased $1.2 million or 20 percent compared to the second quarter of 2017 to $4.8 million. Retail brokerage revenue includes 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 product type. The implementation of the new Department of Labor ("DOL") fiduciary rule in the second quarter of 2017 has negatively impacted retail brokerage revenue.

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $5.5 million for the second quarter of 2018, a $1.5 million or 37 percent increase over the second quarter of 2017. Changes in investment banking revenue are primarily related to the timing and volume of completed transactions.

Brokerage and trading revenue decreased $4.2 million compared to the first quarter of 2018, largely driven by a decrease in trading revenue due primarily to customer reaction to higher interest rates.

Transaction Card Revenue

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 increased $966 thousand or 5 percent over the second quarter of 2017, primarily due to increases in transaction volumes. Transaction card was largely unchanged compared to the first quarter of 2018. The increase in transaction card revenue from the first quarter of 2018 due to an early customer termination fee was matched in the second quarter of 2017 with a seasonal increase in the volume of transactions processed.

Fiduciary and Asset Management Revenue

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 80 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships. Fiduciary and asset management revenue was largely unchanged compared to the second quarter of 2017 and the first quarter of 2018.


- 7 -



A distribution of assets under management or administration and related fiduciary and asset management revenue follows:

Table 3 -- Assets Under Management or Administration
 
Three Months Ended
 
June 30, 2018
 
June 30, 2017
 
Mar. 31, 2018
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
Managed fiduciary assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
$
7,791,094

 
$
23,307

 
1.20
%
 
$
7,581,555

 
$
21,698

 
1.14
%
 
$
7,577,717

 
22,632

 
1.19
%
Institutional
13,448,068

 
5,596

 
0.17
%
 
12,265,037

 
5,475

 
0.18
%
 
13,322,472

 
5,469

 
0.16
%
Total managed fiduciary assets
21,239,162

 
28,903

 
0.54
%
 
19,846,592

 
27,173

 
0.55
%
 
20,900,189

 
28,101

 
0.54
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-managed assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiduciary
25,292,738

 
12,426

 
0.20
%
 
25,242,561

 
14,049

 
0.22
%
 
25,748,101

 
12,997

 
0.20
%
Non-fiduciary
16,422,810

 
370

 
0.01
%
 
16,579,586

 
586

 
0.01
%
 
16,321,458

 
734

 
0.02
%
Safekeeping and brokerage assets under administration
15,918,736

 

 
%
 
16,143,023

 

 
%
 
15,909,241

 

 
%
Total non-managed assets
57,634,284

 
12,796

 
0.09
%
 
57,965,170

 
14,635

 
0.10
%
 
57,978,800

 
13,731

 
0.09
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets under management or administration
$
78,873,446

 
$
41,699

 
0.21
%
 
$
77,811,762

 
$
41,808

 
0.21
%
 
$
78,878,989

 
$
41,832

 
0.21
%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Annualized revenue divided by period-end balance.

A summary of changes in assets under management or administration for the three months ended June 30, 2018 and 2017 follows:

Table 4 -- Changes in Assets Under Management or Administration
 
 
Three Months Ended
June 30,
 
 
2018
 
2017
Beginning balance
 
$
78,878,989

 
$
77,418,956

Net inflows (outflows)
 
(746,477
)
 
(918,076
)
Net change in fair value
 
740,934

 
1,310,882

Ending balance
 
$
78,873,446

 
$
77,811,762


Mortgage Banking Revenue

Mortgage banking revenue decreased $3.9 million or 13 percent compared to the second quarter of 2017 due to a decrease in mortgage production revenue. Mortgage loan production volumes decreased $157 million or 18 percent. Production volumes decreased compared to the prior year as average primary mortgage interest rates were up 56 basis points over the second quarter of 2017. Mortgage servicing revenue was relatively consistent compared to the second quarter of 2017. The outstanding principal balance of mortgage loans serviced for others totaled $22.0 billion, consistent with the second quarter of 2017.



- 8 -



Table 5Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Mar. 31, 2018
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
Mortgage production revenue
 
$
9,915

 
$
13,840

 
$
(3,925
)
 
(28
)%
 
$
9,452

 
$
463

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
773,910

 
$
902,978

 


 


 
$
664,958

 
 
 
 
Add: Current period end outstanding commitments
 
251,231

 
362,088

 
 
 
 
 
298,318

 
 
 
 
Less: Prior period end outstanding commitments
 
298,318

 
381,732

 
 
 
 
 
222,919

 
 
 
 
Total mortgage production volume
 
$
726,823

 
$
883,334

 
$
(156,511
)
 
(18
)%
 
$
740,357

 
$
(13,534
)
 
(2
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loan refinances to mortgage loans funded for sale
 
22
%
 
33
%
 
(1,100
) bps
 
 
 
42
%
 
(2,000
) bps
 
 
Gains on sale margin
 
1.36
%
 
1.57
%
 
(21
) bps
 
 
 
1.28
%
 
8
 bps
 
 
Primary mortgage interest rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
4.54
%
 
3.98
%
 
56
 bps
 
 
 
4.28
%
 
26
 bps
 
 
Period end
 
4.55
%
 
3.88
%
 
67
 bps
 
 
 
4.44
%
 
11
 bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue
 
$
16,431

 
$
16,436

 
$
(5
)
 
 %
 
$
16,573

 
$
(142
)
 
(1
)%
Average outstanding principal balance of mortgage loans serviced for others
 
21,986,065

 
22,055,127

 
(69,062
)
 
 %
 
22,027,726

 
(41,661
)
 
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average mortgage servicing revenue rates
 
0.30
%
 
0.30
%
 

 
 
 
0.31
%
 
(1
) bp
 
 
1 
Actual interest earned on fair value option securities less internal transfer-priced cost of funds.

Primary rates disclosed in Table 5 above represent rates generally available to borrowers on 30 year conforming mortgage loans.

Net gains on other assets, securities and derivatives

Other net gains totaled $4.0 million in the second quarter of 2018 compared to net gains of $6.1 million in the second quarter of 2017. The second quarter of 2017 included the sale of a merchant banking investment. Other net losses totaled $664 thousand in the first quarter of 2018.

As discussed in the Market Risk section following, the fair value of our mortgage servicing rights ("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 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.


- 9 -



Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2018
 
Mar. 31, 2018
 
June 30, 2017
Gain (loss) on mortgage hedge derivative contracts, net
 
$
(3,070
)
 
$
(5,698
)
 
$
3,241

Gain (loss) on fair value option securities, net
 
(3,341
)
 
(17,564
)
 
1,984

Gain (loss) on economic hedge of mortgage servicing rights, net
 
(6,411
)
 
(23,262
)
 
5,225

Gain (loss) on change in fair value of mortgage servicing rights
 
1,723

 
21,206

 
(6,943
)
Loss on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue
 
(4,688
)
 
(2,056
)
 
(1,718
)
Net interest revenue on fair value option securities1
 
1,203

 
1,800

 
1,965

Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges
 
$
(3,485
)
 
$
(256
)
 
$
247

1 Actual interest earned on fair value option securities less internal transfer-priced cost of funds.
During the second quarter of 2018, we changed certain assumptions used in our prepayment speed model to better align with current market expectations. During the second quarter of 2018 the fair value of our mortgage servicing rights was reduced by $3.7 million due primarily to an update of assumptions in our prepayment model designed to better align our model with current market behavior and observed portfolio performance.


- 10 -



Other Operating Expense

Other operating expense for the second quarter of 2018 totaled $246.5 million, an increase of $5.8 million or 2 percent compared to the second quarter of 2017. Personnel expense decreased $4.8 million or 3 percent. Non-personnel expense increased $10.6 million or 11 percent compared to the prior year.

Other operating expense increased $2.0 million over the previous quarter. Personnel expense decreased $1.0 million and non-personnel expense increased $3.0 million.

Table 7Other Operating Expense
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended Mar. 31, 2018
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
 
Regular compensation
 
$
86,231

 
$
83,630

 
$
2,601

 
3
 %
 
$
84,991

 
$
1,240

 
1
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
31,933

 
29,954

 
1,979

 
7
 %
 
29,549

 
2,384

 
8
 %
Share-based
 
(1,361
)
 
7,380

 
(8,741
)
 
(118
)%
 
2,902

 
(4,263
)
 
(147
)%
Deferred compensation
 
900

 
1,000

 
(100
)
 
N/A

 
44

 
856

 
N/A

Total incentive compensation
 
31,472

 
38,334

 
(6,862
)
 
(18
)%
 
32,495

 
(1,023
)
 
(3
)%
Employee benefits
 
21,244

 
21,780

 
(536
)
 
(2
)%
 
22,461

 
(1,217
)
 
(5
)%
Total personnel expense
 
138,947

 
143,744

 
(4,797
)
 
(3
)%
 
139,947

 
(1,000
)
 
(1
)%
Business promotion
 
7,686

 
7,738

 
(52
)
 
(1
)%
 
6,010

 
1,676

 
28
 %
Professional fees and services
 
14,978

 
12,419

 
2,559

 
21
 %
 
10,200

 
4,778

 
47
 %
Net occupancy and equipment
 
22,761

 
21,125

 
1,636

 
8
 %
 
24,046

 
(1,285
)
 
(5
)%
Insurance
 
6,245

 
689

 
5,556

 
806
 %
 
6,593

 
(348
)
 
(5
)%
Data processing and communications1
 
27,739

 
26,111

 
1,628

 
6
 %
 
27,817

 
(78
)
 
 %
Printing, postage and supplies
 
4,011

 
4,140

 
(129
)
 
(3
)%
 
4,089

 
(78
)
 
(2
)%
Net losses (gains) and operating expenses of repossessed assets
 
2,722

 
2,267

 
455

 
20
 %
 
7,705

 
(4,983
)
 
(65
)%
Amortization of intangible assets
 
1,386

 
1,803

 
(417
)
 
(23
)%
 
1,300

 
86

 
7
 %
Mortgage banking costs
 
12,890

 
12,072

 
818

 
7
 %
 
10,149

 
2,741

 
27
 %
Other expense
 
7,111

 
8,558

 
(1,447
)
 
(17
)%
 
6,574

 
537

 
8
 %
Total other operating expense
 
$
246,476

 
$
240,666

 
$
5,810

 
2
 %
 
$
244,430

 
$
2,046

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,875

 
4,910

 
(35
)
 
(1
)%
 
4,899

 
(24
)
 
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Reconciliation:1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Data processing and communications expense on income statement
 
27,739

 
36,330

 
N/A

 
N/A

 
27,817

 
N/A

 
N/A

Netting adjustment
 

 
(10,219
)
 
N/A

 
N/A

 

 
N/A

 
N/A

Data processing and communications expense after netting adjustment
 
27,739

 
26,111

 
N/A

 
N/A

 
27,817

 
N/A

 
N/A

1 
Non-GAAP measure to net interchange charges from prior quarters between transaction card revenue and data processing and communications expense. This measure has no effect on net income or earnings per share.

Certain percentage increases (decreases) are not meaningful for comparison purposes.


- 11 -



Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs, increased $2.6 million or 3 percent over the second quarter of 2017. The average number of employees was relatively unchanged compared to the prior year. Standard annual merit increases in regular compensation were effective for the majority of our staff on March 1.

Incentive compensation decreased $6.9 million or 18 percent compared to the second quarter of 2017, primarily due to decreased share-based compensation expense based on changes in assumptions of certain performance-based equity awards. Share-based compensation expense represents expense for equity awards based on grant-date fair value. Non-vested shares generally cliff vest in 3 years and are subject to a two year holding period after vesting. The number of shares that will ultimately vest is determined by BOKF's change in earnings per share relative to a defined group of peer banks. In addition, compensation costs related to certain shares are variable based on changes in the the fair value of BOK Financial common shares.

Cash-based incentive compensation plans 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. Cash-based incentive compensation expense increased $2.0 million or 7 percent over the second quarter of 2017.

Employee benefits expense decreased $536 thousand or 2 percent compared to the second quarter of 2017.
Personnel expense decreased $1.0 million compared to the first quarter of 2018. Incentive compensation expense decreased $1.0 million. Regular compensation expense increased $1.2 million. A $2.3 million seasonal decrease in payroll tax expense was partially offset by a $1.3 million increase in employee healthcare costs. The Company is self-insured and these costs may be volatile.

Non-personnel operating expense

Non-personnel operating expense increased $10.6 million or 11 percent compared to the second quarter of 2017.

Deposit insurance expense increased $5.6 million over the second quarter of 2017. The second quarter of 2017 included $5.1 million in credits related to the revision of certain inputs to the assessment calculation filed for years 2013 through 2016.

Professional fees and services expense increased $2.6 million or 21 percent mainly due to the inclusion of CoBiz acquisition costs and an increase in Consumer Banking related project costs in the second quarter of 2018.

Data processing and communications expense increased $1.6 million or 6 percent. Occupancy and equipment expense increased $1.6 million or 8 percent. These increases were primarily related to increased project costs and data processing transaction activity.
Non-personnel expense increased $3.0 million compared to the first quarter of 2018. Professional fees and services expense increased $4.8 million mainly due to expenses related to project costs of $1.8 million, CoBiz acquisition expenses of $1.0 million and $953 thousand in seasonal tax preparation charges from trust operations. Mortgage banking costs increased $2.7 million primarily due to a $1.9 million increase in accruals related to default servicing and loss mitigation costs on loans serviced for others.
Net losses and operating expenses of repossessed assets decreased $5.0 million, primarily due to a write-down of a set of repossessed oil and gas properties in the first quarter of 2018.


- 12 -



Income Taxes

The Company's income tax expense was $33.3 million or 22.4 percent of net income before taxes for the second quarter of 2018 compared to $47.7 million or 34.9 percent of net income before taxes for the second quarter of 2017 and $30.9 million or 22.7 percent of net income before taxes for the first quarter of 2018.

The Tax Cut and Jobs Act ("the Act") enacted on December 22, 2017 reduced the federal corporate tax rate from 35 percent to 21 percent beginning January 1, 2018. The Company continues to evaluate the impact the Act will have on its financial position and results of operations, including recognition and measurement of deferred tax assets and liabilities and the determination of effective current and deferred federal and state income tax rates. We initially recorded provisional adjustments of $11.7 million as a charge to income tax expense in the fourth quarter of 2017. We recorded an additional $1.9 million of net income tax expense for changes in provisional adjustments identified in the first quarter of 2018. No adjustments to provisional amounts were made during the second quarter of 2018.

The Company's effective tax rate is affected by recurring items such as tax-exempt income, net amortization related to its investments in low-income housing tax credit investments and share-based compensation. The effective tax rate is also affected by items that may occur in any given period but are not consistent from period to period. Accordingly, the comparability of the effective tax rate from period to period may be impacted.

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. The reserve for uncertain tax positions was $20 million at June 30, 2018, $20 million at March 31, 2018 and $17 million at June 30, 2017.


- 13 -



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 banking activities. Wealth Management provides fiduciary services, private banking services 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 including impairment charges, 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.

We allocate resources and evaluate the performance of our lines of business using the net direct contribution, which includes the allocation of funds, actual net credit losses and capital costs. In addition, we measure the performance of our business lines after allocation 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 LIBOR or interest rate swap rates, adjusted for prepayment and liquidity risk. This method of transfer-pricing funds that supports 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 LIBOR 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 LIBOR 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 LIBOR rate and longer duration products are weighted towards the intermediate-term swap rates. The expected duration ranges from 30 days for certain rate-sensitive deposits to five years.

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.


- 14 -



As shown in Table 8, net income attributable to our lines of business was up $20.4 million or 22% percent over the second quarter of 2017. Net interest revenue grew by $25.6 million over the prior year, primarily due to loan growth. Other operating revenue decreased by $12.4 million primarily due to decreased mortgage banking revenue and brokerage and trading revenue. The second quarter of 2017 included a gain on a merchant banking investment. Operating expense decreased by $153 thousand. Income tax expense attributable to the lines of business was down $23 million, primarily due to lower corporate tax rates related to tax reform.

Table 8 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Commercial Banking
 
$
87,577

 
$
71,345

 
$
166,822

 
$
139,756

Consumer Banking
 
6,102

 
6,332

 
15,478

 
9,577

Wealth Management
 
20,119

 
15,689

 
39,728

 
29,848

Subtotal
 
113,798

 
93,366

 
222,028

 
179,181

Funds Management and other
 
574

 
(5,219
)
 
(2,094
)
 
(2,678
)
Total
 
$
114,372

 
$
88,147

 
$
219,934

 
$
176,503


- 15 -



Commercial Banking

Commercial Banking contributed $87.6 million to consolidated net income in the second quarter of 2018, an increase of $16.2 million or 23 percent over the second quarter of 2017. Growth in net interest revenue was partially offset by higher net charge-offs. In addition, the second quarter of 2017 included a $5.6 million gain on the sale of a merchant banking investment.

Table 9 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Six Months Ended
 
Increase (Decrease)
 
 
June 30,
 
 
June 30,
 
 
 
2018
 
2017
 
 
2018
 
2017
 
Net interest revenue from external sources
 
$
182,127

 
$
154,377

 
$
27,750

 
$
342,541

 
$
301,753

 
$
40,788

Net interest expense from internal sources
 
(37,102
)
 
(21,715
)
 
(15,387
)
 
(65,445
)
 
(39,831
)
 
(25,614
)
Total net interest revenue
 
145,025

 
132,662

 
12,363

 
277,096

 
261,922

 
15,174

Net loans charged off (recovered)
 
10,108

 
1,228

 
8,880

 
10,735

 
(236
)
 
10,971

Net interest revenue after net loans charged off (recovered)
 
134,917

 
131,434

 
3,483

 
266,361

 
262,158

 
4,203

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue1
 
42,874

 
40,303

 
2,571

 
82,891

 
76,303

 
6,588

Other gains (losses), net
 
173

 
5,831

 
(5,658
)
 
(169
)
 
7,473

 
(7,642
)
Other operating revenue
 
43,047

 
46,134

 
(3,087
)
 
82,722

 
83,776

 
(1,054
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
29,584

 
28,271

 
1,313

 
58,505

 
55,633

 
2,872

Non-personnel expense1
 
17,899

 
21,021

 
(3,122
)
 
35,445

 
37,361

 
(1,916
)
Other operating expense
 
47,483

 
49,292

 
(1,809
)
 
93,950

 
92,994

 
956

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
130,481

 
128,276

 
2,205

 
255,133

 
252,940

 
2,193

Gain on financial instruments, net
 
9

 
3

 
6

 
16

 
41

 
(25
)
Gain (loss) on repossessed assets, net
 
(67
)
 
1,403

 
(1,470
)
 
(4,232
)
 
1,398

 
(5,630
)
Corporate expense allocations
 
11,269

 
8,955

 
2,314

 
23,776

 
17,674

 
6,102

Income before taxes
 
119,154

 
120,727

 
(1,573
)
 
227,141

 
236,705

 
(9,564
)
Federal and state income tax
 
31,577

 
49,382

 
(17,805
)
 
60,319

 
96,949

 
(36,630
)
Net income
 
$
87,577

 
$
71,345

 
$
16,232

 
$
166,822

 
$
139,756

 
$
27,066

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
18,072,155

 
$
17,791,671

 
$
280,484

 
$
17,933,756

 
$
17,716,738

 
$
217,018

Average loans
 
14,900,918

 
14,390,452

 
510,466

 
14,665,144

 
14,297,634

 
367,510

Average deposits
 
8,379,584

 
8,696,691

 
(317,107
)
 
8,521,231

 
8,688,028

 
(166,797
)
Average invested capital
 
1,345,840

 
1,290,167

 
55,673

 
1,352,648

 
1,313,997

 
38,651

1 
Fees and commission revenue for 2017 has been adjusted on a comparable basis with 2018 (Non-GAAP measure) to net $10.2 million and $19.4 million of interchange fees paid to issuing banks on card transactions processed by our TransFund merchant processing services for the three and six months ended June 30, 2017, respectively. The discussion following is based on this comparable basis.

Net interest revenue increased $12.4 million or 9 percent over the prior year. Growth in net interest revenue was primarily due to yields on commercial loans rising in excess of funding costs and a $510 million or 4 percent increase in average loan balances. Yields on deposits sold to the funds management unit also went up due to the increase in short-term interest rates. Net loans charged-off increased $8.9 million. Over half of 2018 net charge-offs was from an energy loan previously identified as impaired and appropriately reserved.

Fees and commissions revenue increased $2.6 million or 6 percent over the second quarter of 2017, primarily due to increases in transaction card volumes. In addition, loan syndication fees and commercial deposit service charges and fees were up over the prior year.

- 16 -



Operating expenses decreased $1.8 million or 4 percent percent compared to the second quarter of 2017. Personnel expense increased $1.3 million or 5 percent, primarily due to incentive compensation expense. Non-personnel expense decreased $3.1 million or 15 percent.

Corporate expense allocations were up $2.3 million or 26 percent over the prior year, primarily due to enhancements of activity based costing drivers to better reflect services being utilized by the Commercial Banking line of business.

The average outstanding balance of loans attributed to Commercial Banking were up $510 million or 4 percent over the second quarter of 2017 to $14.9 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 $8.4 billion for the second quarter of 2018, a 4% decrease compared to the second quarter of 2017. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.



- 17 -



Consumer Banking

Consumer Banking provides retail banking services 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 of our consumer banking markets and through Home Direct Mortgage, an online origination channel.

Consumer Banking contributed $6.1 million to consolidated net income for the second quarter of 2018, a decrease of $230 thousand compared to the second quarter of 2017. Growth in net interest revenue was partially offset by decreased mortgage banking revenue. Changes in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income for second quarter of 2018 $4.7 million compared to a $1.7 million decrease in pre-tax net income in the second quarter of 2017.

Table 10 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Six Months Ended
 
Increase (Decrease)
 
 
June 30,
 
 
June 30,
 
 
 
2018
 
2017
 
 
2018
 
2017
 
Net interest revenue from external sources
 
$
21,746

 
$
20,756

 
$
990

 
$
43,499

 
$
39,348

 
$
4,151

Net interest revenue from internal sources
 
17,548

 
13,447

 
4,101

 
32,772

 
25,864

 
6,908

Total net interest revenue
 
39,294

 
34,203

 
5,091

 
76,271

 
65,212

 
11,059

Net loans charged off
 
1,139

 
926

 
213

 
2,440

 
2,199

 
241

Net interest revenue after net loans charged off
 
38,155

 
33,277

 
4,878

 
73,831

 
63,013

 
10,818

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
46,332

 
50,745

 
(4,413
)
 
91,296

 
95,939

 
(4,643
)
Other losses, net
 
(12
)
 
(1
)
 
(11
)
 
(27
)
 
(60
)
 
33

Other operating revenue
 
46,320

 
50,744

 
(4,424
)
 
91,269

 
95,879

 
(4,610
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
24,995

 
25,133

 
(138
)
 
49,336

 
50,052

 
(716
)
Non-personnel expense
 
30,911

 
29,992

 
919

 
56,424

 
57,939

 
(1,515
)
Total other operating expense
 
55,906

 
55,125

 
781

 
105,760

 
107,991

 
(2,231
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
28,569

 
28,896

 
(327
)
 
59,340

 
50,901

 
8,439

Gain (loss) on financial instruments, net
 
(6,411
)
 
5,224

 
(11,635
)
 
(29,672
)
 
3,557

 
(33,229
)
Change in fair value of mortgage servicing rights
 
1,723

 
(6,943
)
 
8,666

 
22,929

 
(5,087
)
 
28,016

Gain (loss) on repossessed assets, net
 
174

 
98

 
76

 
66

 
(39
)
 
105

Corporate expense allocations
 
15,867

 
16,912

 
(1,045
)
 
31,897

 
33,658

 
(1,761
)
Income before taxes
 
8,188

 
10,363

 
(2,175
)
 
20,766

 
15,674

 
5,092

Federal and state income tax
 
2,086

 
4,031

 
(1,945
)
 
5,288

 
6,097

 
(809
)
Net income
 
$
6,102

 
$
6,332

 
$
(230
)
 
$
15,478

 
$
9,577

 
$
5,901

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
8,353,558

 
$
8,441,831

 
$
(88,273
)
 
$
8,410,513

 
$
8,360,022

 
$
50,491

Average loans
 
1,716,259

 
1,733,165

 
(16,906
)
 
1,731,115

 
1,736,870

 
(5,755
)
Average deposits
 
6,579,635

 
6,618,958

 
(39,323
)
 
6,558,980

 
6,576,664

 
(17,684
)
Average invested capital
 
293,420

 
298,165

 
(4,745
)
 
284,797

 
300,990

 
(16,193
)

Net interest revenue from Consumer Banking activities grew by $5.1 million or 15 percent over the the second quarter of 2017, primarily due to increased rates received on deposit balances sold to the Funds Management unit.


- 18 -



Fees and commissions revenue decreased $4.4 million or 9 percent compared to the second quarter of 2017. Higher interest rates in the second quarter of 2018 decreased mortgage loan production volumes and gains on sale margin were lower compared to the prior year.

Operating expenses increased $781 thousand or 1 percent over the second quarter of 2017. Personnel expenses were largely unchanged compared to the second quarter of 2017. Non-personnel expenses increased $919 thousand or 3 percent over the prior year. Professional fees increased $904 thousand. Mortgage banking costs were up $818 thousand, primarily due to a decrease in accruals related to default servicing and loss mitigation costs on loans serviced for others. These increases were partially offset by lower data processing and communications expense and miscellaneous expense.

Corporate expense allocations were $1.0 million or 6 percent lower than the prior year.

Average consumer deposits were largely unchanged compared to the second quarter of 2017. Demand deposit balances grew by $126 million or 7 percent and savings deposit balances were up $42 million or 10 percent. Higher-costing time deposit balances decreased $129 million or 13 percent and interest-bearing transaction account balances decreased $79 million or 2 percent.



- 19 -



Wealth Management

Wealth Management contributed $20.1 million to consolidated net income in the second quarter of 2018, up $4.4 million or 28 percent over the second quarter of 2017. Growth in net interest revenue was partially offset by a decrease in brokerage and trading revenue.

Table 11 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Six Months Ended
 
Increase (Decrease)
 
 
June 30,
 
 
June 30,
 
 
 
2018
 
2017
 
 
2018
 
2017
 
Net interest revenue from external sources
 
$
18,754

 
$
10,475

 
$
8,279

 
$
34,161

 
$
21,960

 
$
12,201

Net interest revenue from internal sources
 
10,232

 
10,325

 
(93
)
 
20,164

 
19,181

 
983

Total net interest revenue
 
28,986

 
20,800

 
8,186

 
54,325

 
41,141

 
13,184

Net loans charged off (recovered)
 
(105
)
 
(92
)
 
(13
)
 
(153
)
 
(53
)
 
(100
)
Net interest revenue after net loans charged off (recovered)
 
29,091

 
20,892

 
8,199

 
54,478

 
41,194

 
13,284

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
70,489

 
75,553

 
(5,064
)
 
145,296

 
149,474

 
(4,178
)
Other gains, net
 
153

 
16

 
137

 
113

 
253

 
(140
)
Other operating revenue
 
70,642

 
75,569

 
(4,927
)
 
145,409

 
149,727

 
(4,318
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
45,653

 
45,477

 
176

 
92,600

 
90,264

 
2,336

Non-personnel expense
 
15,838

 
15,139

 
699

 
31,695

 
30,761

 
934

Other operating expense
 
61,491

 
60,616

 
875

 
124,295

 
121,025

 
3,270

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
38,242

 
35,845

 
2,397

 
75,592

 
69,896

 
5,696

Corporate expense allocations
 
11,142

 
9,947

 
1,195

 
22,097

 
20,619

 
1,478

Income before taxes
 
27,100

 
25,898

 
1,202

 
53,495

 
49,277

 
4,218

Federal and state income tax
 
6,981

 
10,209

 
(3,228
)
 
13,767

 
19,429

 
(5,662
)
Net income
 
$
20,119

 
$
15,689

 
$
4,430

 
$
39,728

 
$
29,848

 
$
9,880

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
8,495,557

 
$
6,960,872

 
$
1,534,685

 
$
8,296,780

 
$
6,960,872

 
$
1,335,908

Average loans
 
1,413,170

 
1,289,846

 
123,324

 
1,401,613

 
1,289,846

 
111,767

Average deposits
 
5,834,669

 
5,556,680

 
277,989

 
5,749,045

 
5,556,680

 
192,365

Average invested capital
 
248,367

 
230,228

 
18,139

 
249,827

 
230,228

 
19,599


Net interest revenue increased $8.2 million or 39 percent over the second quarter of 2017. Average trading securities increased $1.0 billion and average loans attributed to the Wealth Management segment increased $123 million or 10 percent. Average deposit balances increased by $278 million or 5 percent over the second quarter of 2017, primarily due to a $217 million or 6 percent increase in interest-bearing transaction account balances and a $75 million or 10 percent increase in time deposit balances.

Fees and commissions revenue decreased $5.1 million or 7 percent compared to the second quarter of 2017. Rising mortgage interest rates narrowed margins on securities and slowed turnover of our trading inventory.


- 20 -



Fees and commissions revenue above includes fees earned from state and municipal bond and corporate debt underwritings and financial advisory services, primarily in the Oklahoma and Texas markets. In the second quarter of 2018, the Wealth Management division participated in 93 state and municipal bond underwritings that totaled $1.3 billion. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $493 million of these underwritings. The Wealth Management division also participated in 6 corporate debt underwritings that totaled $3.0 billion. Our interest in these underwritings was $55 million. In the second quarter of 2017, the Wealth Management division participated in 74 state and municipal bond underwritings that totaled approximately $1.4 billion. Our interest in these underwritings totaled approximately $397 million. The Wealth Management division also participated in 6 corporate debt underwritings that totaled $2.3 billion. Our interest in these underwritings was $47 million.

Operating expense increased $875 thousand or 1 percent over the second quarter of 2017. Personnel expense was largely unchanged compared to the prior year. Non-personnel expense increased $699 thousand or 5 percent.

Corporate expense allocations were up $1.2 million or 12 percent over the prior year.
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 of June 30, 2018, December 31, 2017 and June 30, 2017.

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 increased $617 million to $1.9 billion during the second quarter of 2018 in response to expanded relationships with mortgage loan originator clients as well as slower inventory turnover rates. As discussed in the Market Risk section of this report, trading activities involve risk of loss from adverse price movement. We mitigate this risk within board-approved limits through the use of derivative contracts, short-sales and other techniques. These limits remain unchanged from levels set before our expanded trading activities.

At June 30, 2018, the carrying value of investment (held-to-maturity) securities was $392 million and the fair value was $403 million. Investment securities consist primarily of long-term, fixed rate Oklahoma and Texas municipal bonds, taxable Texas school construction bonds and residential mortgage-backed securities issued by U.S. government agencies. The investment security portfolio is diversified among issuers. The largest obligation of any single issuer is $30 million. Substantially all of these bonds are general obligations of the issuers. Approximately $92 million of the $199 million portfolio of Texas school construction bonds is also guaranteed by the Texas Permanent School Fund Guarantee Program supervised by the State Board of Education for the State of Texas.

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. The amortized cost of available for sale securities totaled $8.3 billion at June 30, 2018, a $54 million decrease compared to March 31, 2018. At June 30, 2018, the available for sale securities portfolio consisted primarily of U.S. government agency residential mortgage-backed securities and U.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 by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans.
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 duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at June 30, 2018 is 3.5 years. Management estimates the duration extends to 4.2 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 3.2 years assuming a 50 basis point decline in the current low rate environment.


- 21 -



The aggregate gross amount of unrealized losses on available for sale securities totaled $205 million at June 30, 2018, compared to $177 million at March 31, 2018. 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 other-than-temporary impairment charges were recognized in earnings during the second quarter of 2018.

BOK Financial is required to hold stock as members of the Federal Reserve system and the Federal Home Loan Banks ("FHLB"). These restricted equity securities are carried at cost as these securities do not have a readily determined fair value because the ownership of these shares is restricted and they lack a market. We are required to hold stock in the FHLB in proportion to our borrowings with the FHLB.

- 22 -



Loans

The aggregate loan portfolio before allowance for loan losses totaled $18.0 billion at June 30, 2018, up more than $665 million over March 31, 2018, primarily due to growth in commercial and commercial real estate loan balances. Personal loan balances grew slightly while residential mortgage loans were largely unchanged.

Table 12 -- Loans
(In thousands)
 
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,147,219

 
$
2,969,618

 
$
2,930,156

 
$
2,867,981

 
$
2,847,240

Services
 
2,944,499

 
2,928,294

 
2,986,949

 
2,967,513

 
2,958,827

Healthcare
 
2,353,722

 
2,359,928

 
2,314,753

 
2,239,451

 
2,221,518

Wholesale/retail
 
1,699,554

 
1,531,576

 
1,471,256

 
1,658,098

 
1,543,695

Manufacturing
 
647,816

 
559,695

 
496,774

 
519,446

 
546,137

Other commercial and industrial
 
556,229

 
570,556

 
534,087

 
543,445

 
520,538

Total commercial
 
11,349,039

 
10,919,667

 
10,733,975

 
10,795,934

 
10,637,955

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Multifamily
 
1,056,984

 
1,008,903

 
980,017

 
999,009

 
952,380

Office
 
820,127

 
737,144

 
831,770

 
797,089

 
862,973

Retail
 
768,024

 
750,396

 
691,532

 
725,865

 
722,805

Industrial
 
653,384

 
613,608

 
573,014

 
591,080

 
693,635

Residential construction and land development
 
118,999

 
117,458

 
117,245

 
112,102

 
141,592

Other commercial real estate
 
294,702

 
279,273

 
286,409

 
292,997

 
315,207

Total commercial real estate
 
3,712,220

 
3,506,782

 
3,479,987

 
3,518,142

 
3,688,592

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,068,412

 
1,047,785

 
1,043,435

 
1,013,965

 
989,040

Permanent mortgages guaranteed by U.S. government agencies
 
169,653

 
177,880

 
197,506

 
187,370

 
191,729

Home equity
 
704,185

 
720,104

 
732,745

 
744,415

 
758,429

Total residential mortgage
 
1,942,250

 
1,945,769

 
1,973,686

 
1,945,750

 
1,939,198

 
 
 
 
 
 
 
 
 
 
 
Personal
 
1,000,187

 
965,632

 
965,776

 
947,008

 
917,900

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
18,003,696

 
$
17,337,850

 
$
17,153,424

 
$
17,206,834

 
$
17,183,645


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 ongoing 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 $11.3 billion or 63 percent of the loan portfolio at June 30, 2018, an increase of $429 million over March 31, 2018. Energy loan balances grew by $178 million. Wholesale/retail sector loan balances grew by $168 million. Manufacturing sector loan balances were up $88 million. Service sector loans increased $16 million, mostly offset by a $14 million decrease in other commercial and industrial loans.


- 23 -



Table 13 presents the commercial sector of our loan portfolio distributed primarily by collateral location. Loans for which collateral location is less relevant, such as unsecured loans and reserve-based energy loans, are distributed by the borrower's primary operating location.

Table 13 -- Commercial Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Energy
 
$
632,907

 
$
1,709,471

 
$
40,449

 
$
2,926

 
$
340,671

 
$
3,966

 
$
72,024

 
$
344,805

 
$
3,147,219

Services
 
716,767

 
781,431

 
169,346

 
9,984

 
346,505

 
235,767

 
303,911

 
380,788

 
2,944,499

Healthcare
 
247,040

 
344,481

 
112,149

 
79,734

 
161,539

 
109,858

 
259,972

 
1,038,949

 
2,353,722

Wholesale/retail
 
403,298

 
598,929

 
41,197

 
29,880

 
92,243

 
63,295

 
80,879

 
389,833

 
1,699,554

Manufacturing
 
86,310

 
197,925

 
157

 
4,638

 
95,007

 
91,147

 
90,100

 
82,532

 
647,816

Other commercial and industrial
 
107,355

 
142,321

 
2,504

 
61,951

 
8,341

 
1,288

 
61,947

 
170,522

 
556,229

Total commercial loans
 
$
2,193,677

 
$
3,774,558

 
$
365,802

 
$
189,113

 
$
1,044,306

 
$
505,321

 
$
868,833

 
$
2,407,429

 
$
11,349,039

 
The majority of the collateral securing our commercial loan portfolio is located within our geographical footprint with 33 percent concentrated in the Texas market and 19 percent concentrated in the Oklahoma market. At June 30, 2018, the Other category is primarily composed of California - $287 million or 3 percent of the commercial loan portfolio, Florida - $228 million or 2 percent of the commercial loan portfolio, Louisiana - $160 million or 1 percent of the commercial loan portfolio, Pennsylvania - $142 million or 1 percent of the commercial loan portfolio, Ohio - $125 million or 1 percent of the commercial loan portfolio and North Carolina - $111 million or 1 percent of the commercial loan portfolio. All other states individually represent less than one percent of total commercial loans.

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 a semi-annual engineering review by our internal staff of petroleum engineers. This review is utilized 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 $3.1 billion or 17 percent of total loans at June 30, 2018. Unfunded energy loan commitments were $3.0 billion at June 30, 2018, up $80 million over March 31, 2018. Approximately $2.6 billion of energy loans were to oil and gas producers, growing $104 million over March 31, 2018. 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 56 percent of the committed production loans are secured by properties primarily producing oil and 44 percent of the committed production loans are secured by properties primarily producing natural gas. Loans to midstream oil and gas companies totaled $370 million at June 30, 2018, an increase of $71 million over March 31, 2018. Loans to borrowers that provide services to the energy industry totaled $139 million at June 30, 2018, up $26 million over the prior quarter. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $36 million, a $23 million decrease compared to the prior quarter.

The services sector of the loan portfolio totaled $2.9 billion or 16 percent of total loans and consists of a large number of loans to a variety of businesses, including governmental, educational services, consumer services, financial services and loans to entities providing services for real estate and construction. Service sector loans increased by $16 million over March 31, 2018. Loans to governmental entities totaled $537 million at June 30, 2018. Approximately $1.4 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. 

The healthcare sector of the loan portfolio totaled $2.4 billion or 13 percent of total loans and consists primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Healthcare also includes loans to hospitals and other medical service providers.

- 24 -



 
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. At June 30, 2018, the outstanding principal balance of these loans totaled $3.9 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 16 percent of our shared national credits, based on dollars committed. We hold shared 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.

Commercial Real Estate

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, with larger concentrations in Texas and Oklahoma which represent 33% and 12% of the total commercial real estate portfolio at June 30, 2018, respectively. 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.

Commercial real estate loans totaled $3.7 billion or 21% of the loan portfolio at June 30, 2018. The outstanding balance of commercial real estate loans increased $205 million during the second quarter of 2018. Loans secured by office buildings increased $83 million. Multifamily residential loans increased $48 million. Loans secured by industrial properties grew by $40 million. Loans secured by retail facilities and other commercial real estate loans increased $18 million and $15 million, respectively. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 19 percent to 23 percent over the past five years. 

The commercial real estate sector of our loan portfolio distributed by collateral location follows in Table 14.

Table 14 -- Commercial Real Estate Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Multifamily
 
$
127,373

 
$
485,735

 
$
26,653

 
$
26,641

 
$
81,571

 
$
66,414

 
$
129,248

 
$
113,349

 
$
1,056,984

Office
 
106,169

 
222,686

 
88,374

 
12,870

 
31,988

 
72,274

 
40,348

 
245,418

 
820,127

Retail
 
56,301

 
284,347

 
121,079

 
7,338

 
42,941

 
29,617

 
15,620

 
210,781

 
768,024

Industrial
 
71,500

 
180,920

 
23,278

 
104

 
9,087

 
7,142

 
43,777

 
317,576

 
653,384

Residential construction and land development
 
18,049

 
20,601

 
18,216

 
2,102

 
23,817

 
2,026

 
12,908

 
21,280

 
118,999

Other commercial real estate
 
51,810

 
35,019

 
10,956

 
1,580

 
12,102

 
24,035

 
20,183

 
139,017

 
294,702

Total commercial real estate loans
 
$
431,202

 
$
1,229,308

 
$
288,556

 
$
50,635

 
$
201,506

 
$
201,508

 
$
262,084

 
$
1,047,421

 
$
3,712,220


The Other category is primarily composed of California - $203 million or 5 percent of the commercial real estate portfolio, Florida - $114 million or 3 percent of the commercial real estate portfolio and Utah - $103 million or 3 percent of the commercial real estate portfolio. All other states represent less than 3% individually.

While recent changes nationally in consumer purchasing trends from brick-and-mortar stores to online has created concern with regards to retail lending, our credit quality remains very good. The portfolio is highly diversified with no material exposure to a single borrower or tenant.

- 25 -



Residential Mortgage and Personal

Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. Residential mortgage 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. Residential mortgage and personal 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.

Residential mortgage loans totaled $1.9 billion, a decrease of $3.5 million compared to March 31, 2018. In general, we sell the majority of our conforming fixed rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. We have no concentration in sub-prime residential 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. Collateral for 95% of our residential mortgage loan portfolio is located within our geographical footprint.

The majority of our permanent mortgage loan portfolio is composed of various non-conforming mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals or certain professionals. Jumbo loans may be fixed or variable rate and are fully amortizing. The size of jumbo loans exceeds maximums set under government sponsored entity standards, but otherwise generally conform to those standards. These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38 percent. Loan-to-value ratios (“LTV”) are tiered from 60 percent to 100 percent, depending on the market. Special mortgage programs include fixed and variable rate fully amortizing loans tailored to the needs of certain healthcare professionals. Variable rate loans are fully indexed at origination and may have fixed rates for three to ten years, then adjust annually thereafter.

At June 30, 2018, $170 million of permanent residential mortgage loans are guaranteed by U.S. government agencies. We have limited credit exposure on loans guaranteed by the agencies. 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. Permanent residential mortgage loans guaranteed by U.S. government agencies decreased $8.2 million compared to March 31, 2018.

Home equity loans totaled $704 million at June 30, 2018, a $16 million decrease compared to March 31, 2018. Our home equity loan portfolio is primarily composed of first-lien, fully amortizing home equity loans. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 50 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 10 year revolving period followed by a 15 year term of amortizing repayment. Interest-only home equity loans have a 5 year revolving period followed by a 15 year term of amortizing repayments and may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term subject to an update of certain credit information. A summary of our home equity loan portfolio at June 30, 2018 by lien position and amortizing status follows in Table 15.

Table 15 -- Home Equity Loans
(In thousands)
 
 
Revolving
 
Amortizing
 
Total
First lien
 
$
69,587

 
$
363,904

 
$
433,491

Junior lien
 
149,676

 
121,018

 
270,694

Total home equity
 
$
219,263

 
$
484,922

 
$
704,185




- 26 -



The distribution of residential mortgage and personal loans at June 30, 2018 is as follows in Table 16. Residential mortgage loans are distributed by collateral location. Personal loans are generally distributed by borrower location.

Table 16 -- Residential Mortgage and Personal Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
$
170,130

 
$
434,582

 
$
52,890

 
$
13,430

 
$
186,125

 
$
100,536

 
$
61,394

 
$
49,325

 
$
1,068,412

Permanent mortgages  guaranteed by U.S. government agencies
 
42,443

 
31,875

 
33,138

 
7,374

 
3,781

 
843

 
11,065

 
39,134

 
169,653

Home equity
 
373,250

 
132,689

 
85,643

 
5,794

 
39,189

 
9,921

 
55,093

 
2,606

 
704,185

Total residential mortgage
 
$
585,823

 
$
599,146

 
$
171,671

 
$
26,598

 
$
229,095

 
$
111,300

 
$
127,552

 
$
91,065

 
$
1,942,250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
$
316,308

 
$
420,736

 
$
11,251

 
$
12,480

 
$
62,136

 
$
59,626

 
$
64,596

 
$
53,054

 
$
1,000,187



- 27 -



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 the Bank of Oklahoma.

Table 17 -- Loans Managed by Primary Geographical Market
(In thousands)
 
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
3,465,407

 
$
3,265,013

 
$
3,238,720

 
$
3,408,973

 
$
3,369,967

Commercial real estate
 
662,665

 
668,031

 
682,037

 
712,915

 
667,932

Residential mortgage
 
1,403,658

 
1,419,281

 
1,435,432

 
1,405,900

 
1,398,021

Personal
 
362,846

 
353,128

 
342,212

 
322,320

 
318,016

Total Bank of Oklahoma
 
5,894,576

 
5,705,453

 
5,698,401

 
5,850,108

 
5,753,936

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
4,922,451

 
4,715,841

 
4,520,401

 
4,434,595

 
4,339,634

Commercial real estate
 
1,336,101

 
1,254,421

 
1,261,864

 
1,236,702

 
1,360,164

Residential mortgage
 
243,400

 
229,761

 
233,675

 
229,993

 
232,074

Personal
 
394,021

 
363,608

 
375,084

 
375,173

 
354,222

Total Bank of Texas
 
6,895,973

 
6,563,631

 
6,391,024

 
6,276,463

 
6,286,094

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 

 
 

 
 

 
 

 
 

Commercial
 
305,167

 
315,701

 
343,296

 
367,747

 
369,370

Commercial real estate
 
386,878

 
348,485

 
341,282

 
319,208

 
324,405

Residential mortgage
 
90,581

 
93,490

 
98,018

 
101,983

 
103,849

Personal
 
11,107

 
11,667

 
11,721

 
12,953

 
12,439

Total Bank of Albuquerque
 
793,733

 
769,343

 
794,317

 
801,891

 
810,063

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
93,217

 
94,430

 
95,644

 
91,051

 
85,020

Commercial real estate
 
90,807

 
88,700

 
87,393

 
80,917

 
73,943

Residential mortgage
 
6,927

 
7,033

 
6,596

 
6,318

 
6,395

Personal
 
12,331

 
9,916

 
9,992

 
10,388

 
11,993

Total Bank of Arkansas
 
203,282

 
200,079

 
199,625

 
188,674

 
177,351

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 

 
 

 
 

 
 

 
 

Commercial
 
1,165,721

 
1,180,655

 
1,130,714

 
1,124,200

 
1,065,780

Commercial real estate
 
267,065

 
210,801

 
174,201

 
186,427

 
255,379

Residential mortgage
 
64,839

 
64,530

 
63,350

 
63,734

 
63,346

Personal
 
60,504

 
63,118

 
63,115

 
60,513

 
56,187

Total Colorado State Bank & Trust
 
1,558,129

 
1,519,104

 
1,431,380

 
1,434,874

 
1,440,692

 
 
 
 
 
 
 
 
 
 
 
Bank of Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
681,852

 
624,106

 
687,792

 
634,809

 
617,759

Commercial real estate
 
710,784

 
672,319

 
660,094

 
706,188

 
705,858

Residential mortgage
 
47,010

 
39,227

 
41,771

 
40,730

 
37,034

Personal
 
65,541

 
57,023

 
57,140

 
55,050

 
55,528

Total Bank of Arizona
 
1,505,187

 
1,392,675

 
1,446,797

 
1,436,777

 
1,416,179

 
 
 
 
 
 
 
 
 
 
 
Mobank (Kansas City):
 
 

 
 

 
 

 
 

 
 

Commercial
 
715,224

 
723,921

 
717,408

 
734,559

 
790,425

Commercial real estate
 
257,920

 
264,025

 
273,116

 
275,785

 
300,911

Residential mortgage
 
85,835

 
92,447

 
94,844

 
97,092

 
98,479

Personal
 
93,837

 
107,172

 
106,512

 
110,611

 
109,515

Total Mobank (Kansas City)
 
1,152,816

 
1,187,565

 
1,191,880

 
1,218,047

 
1,299,330

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
18,003,696

 
$
17,337,850

 
$
17,153,424

 
$
17,206,834

 
$
17,183,645


- 28 -



Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business as shown in Table 18. 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.

Table 18Off-Balance Sheet Credit Commitments
(In thousands)
 
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
Loan commitments
 
$
10,294,211

 
$
10,249,729

 
$
9,958,080

 
$
9,693,489

 
$
9,632,911

Standby letters of credit
 
659,867

 
664,342

 
647,653

 
665,513

 
614,852

Mortgage loans sold with recourse
 
116,269

 
121,197

 
125,127

 
128,681

 
133,896


We have off-balance sheet commitments related to certain residential mortgage loans originated under community development loan programs that were sold to a U.S. government agency with full recourse. These mortgage loans were underwritten to standards approved by the agencies, including full documentation and originated under programs available only for owner-occupied properties. The Company no longer sells residential mortgage loans with recourse. 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. Substantially all of these loans are to borrowers in our primary markets including $70 million to borrowers in Oklahoma, $12 million to borrowers in Arkansas and $12 million to borrowers in New Mexico. An accrual related to this off-balance sheet risk is included in Other liabilities in the Consolidated Balance Sheets and totaled $3.5 million at June 30, 2018 and 3.7 million at March 31, 2018 and $3.9 million at June 30, 2017.

We also have an off-balance sheet obligation to repurchase residential mortgage loans sold to government sponsored entities through our mortgage banking activities due to standard representations and warranties made under contractual agreements and to service loans in accordance with investor guidelines. The Company has established accruals for losses related to these obligations that are included in Other liabilities in the Consolidated Balance Sheets and in Mortgage banking costs in the Consolidated Statements of Earnings. 

For the period from 2010 through the second quarter of 2018 combined, approximately 17% of repurchase requests have currently resulted in actual repurchases or indemnification by the Company. There were no loans repurchased from the agencies during the second quarter of 2018. There were no loans with indemnification paid during the second quarter of 2018

A summary of unresolved deficiency requests from the agencies follows (in thousands, except for number of unresolved deficiency requests):
 
June 30,
 
2018
 
2017
Number of unresolved deficiency requests
179

 
206

Aggregate outstanding principal balance subject to unresolved deficiency requests
$
8,394

 
$
13,370

Unpaid principal balance subject to indemnification by the Company
4,741

 
5,074


The accrual for potential loan repurchases under representations and warranties totaled $1.1 million at June 30, 2018, $1.2 million at March 31, 2018, and $1.6 million at June 30, 2017.

- 29 -



Customer Derivative Programs
 
We offer programs that permit our customers to hedge various risks, including fluctuations in energy, cattle and other agricultural product prices, interest rates and foreign exchange rates. 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 to minimize market risk due to 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 scenarios 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 between BOK Financial and each of the counterparties. Individual limits are established by management, approved by Credit 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 in BOK 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 deteriorated such that either the fair value of underlying collateral no longer supported the contract or the customer or the counterparty’s ability to provide margin collateral was impaired. Credit losses on customer derivatives reduce brokerage and trading revenue in the Consolidated Statements of Earnings.

Derivative contracts are carried at fair value. At June 30, 2018, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $382 million compared to $292 million at March 31, 2018. At June 30, 2018, the net fair value of our derivative contracts included $171 million for foreign exchange contracts, $131 million for energy contracts, $41 million for interest rate swaps and $35 million of to-be-announced residential mortgage-backed securities. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $364 million at June 30, 2018 and $280 million at March 31, 2018.

At June 30, 2018, total derivative assets were reduced by $13 million of cash collateral received from counterparties and total derivative liabilities were reduced by $150 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement.

A table showing the notional and fair value of derivative assets and liabilities on both a gross and net basis is presented in Note 3 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 at June 30, 2018 follows in Table 19.

Table 19 -- Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
253,096

Banks and other financial institutions
 
96,206

Exchanges and clearing organizations
 
19,724

Fair value of customer risk management program asset derivative contracts, net
 
$
369,026

 
At June 30, 2018, our largest derivative exposure was to an exchange for interest rate swap derivative contracts of $19 million.


- 30 -



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 equivalent to $34.26 per barrel of oil would decrease the fair value of derivative assets by $106 million. An increase in prices equivalent to $84.27 per barrel of oil would increase the fair value of derivative assets by $118 million as current prices move further away from the fixed prices embedded in our existing contracts. Liquidity requirements of this program may also be affected by our credit rating. At June 30, 2018, a decrease in our credit rating to below investment grade did not have a significant impact on our obligation to post cash margin on existing contracts. 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 of June 30, 2018, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.
Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. At June 30, 2018, the combined allowance for loan losses and off-balance sheet credit losses totaled $218 million or 1.21 percent of outstanding loans and 138 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $215 million and the accrual for off-balance sheet credit losses was $2.4 million. At March 31, 2018, the combined allowance for credit losses was $228 million or 1.32 percent of outstanding loans and 133 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $224 million and the accrual for off-balance sheet credit losses was $4.1 million

The provision for credit losses is the amount necessary to maintain the allowance for loan losses and an accrual for off-balance sheet credit risk at an amount determined by management to be appropriate based on its evaluation. The provision includes the combined charge to expense for both the allowance for loan losses and the accrual for off-balance sheet credit risk. All losses incurred from lending activities will ultimately be reflected in charge-offs against the allowance for loan losses following funds advanced against outstanding commitments. Based on an evaluation of all credit factors, including overall loan growth, the continued trend of improvements in nonaccruing and potential problem loans, and net charge-offs, the Company determined that no provision for credit losses was appropriate for the second quarter of 2018. The Company recorded a $5.0 million negative provision for the first quarter of 2018.



- 31 -



Table 20 -- Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
223,967

 
$
230,682

 
$
247,703

 
$
250,061

 
$
248,710

Loans charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
(13,775
)
 
(1,563
)
 
(13,254
)
 
(4,429
)
 
(1,703
)
Commercial real estate
 

 

 

 

 
(76
)
Residential mortgage
 
(135
)
 
(100
)
 
(205
)
 
(168
)
 
(40
)
Personal
 
(1,195
)
 
(1,227
)
 
(1,290
)
 
(1,228
)
 
(1,053
)
Total
 
(15,105
)
 
(2,890
)
 
(14,749
)
 
(5,825
)
 
(2,872
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
298

 
488

 
1,982

 
1,014

 
283

Commercial real estate
 
3,097

 
183

 
258

 
739

 
208

Residential mortgage
 
505

 
242

 
229

 
134

 
169

Personal
 
678

 
663

 
592

 
550

 
554

Total
 
4,578

 
1,576

 
3,061

 
2,437

 
1,214

Net loans recovered (charged off)
 
(10,527
)
 
(1,314
)
 
(11,688
)
 
(3,388
)
 
(1,658
)
Provision for loan losses
 
1,702

 
(5,401
)
 
(5,333
)
 
1,030

 
3,009

Ending balance
 
$
215,142

 
$
223,967

 
$
230,682

 
$
247,703

 
$
250,061

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 
 
 

Beginning balance
 
$
4,135

 
$
3,734

 
$
5,401

 
$
6,431

 
$
9,440

Provision for off-balance sheet credit losses
 
(1,702
)
 
401

 
(1,667
)
 
(1,030
)
 
(3,009
)
Ending balance
 
$
2,433

 
$
4,135

 
$
3,734

 
$
5,401

 
$
6,431

Total combined provision for credit losses
 
$

 
$
(5,000
)
 
$
(7,000
)
 
$

 
$

Allowance for loan losses to loans outstanding at period-end
 
1.19
%
 
1.29
 %
 
1.34
 %
 
1.44
%
 
1.46
%
Net charge-offs (recoveries) (annualized) to average loans
 
0.24
%
 
0.03
 %
 
0.27
 %
 
0.08
%
 
0.04
%
Total provision for credit losses (annualized) to average loans
 
%
 
(0.12
)%
 
(0.16
)%
 
%
 
%
Recoveries to gross charge-offs
 
30.31
%
 
54.53
 %
 
20.75
 %
 
41.84
%
 
42.27
%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.02
%
 
0.04
 %
 
0.04
 %
 
0.05
%
 
0.06
%
Combined allowance for credit losses to loans outstanding at period-end
 
1.21
%
 
1.32
 %
 
1.37
 %
 
1.47
%
 
1.49
%
Allowance for Loan Losses

The appropriateness of the allowance for loan losses is assessed by management based on an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio. The allowance consists of specific allowances attributed to certain impaired loans, general allowances based on estimated loss rates by loan class and non-specific allowances based on general economic conditions, concentration in loans with large balances and other relevant factors.

Loans are considered to be impaired when it is probable that we will not collect all amounts due according to the original contractual terms of the loan agreement. This includes all nonaccruing loans, all loans modified in troubled debt restructurings and all government guaranteed loans repurchased from GNMA pools. A specific allowance is required when the outstanding principal balance of the loan is not supported by either the discounted cash flows expected to be received from the borrower or the fair value of collateral for collateral dependent loans. At June 30, 2018, impaired loans totaled $328 million, including $60 million with specific allowances of $15 million and $268 million with no specific allowances. At March 31, 2018, impaired loans totaled $349 million, including $74 million of impaired loans with specific allowances of $13 million and $275 million with no specific allowances.

- 32 -



General allowances for unimpaired loans are based on an estimated loss rate by loan class. Estimated loss rates for risk-graded loans are either increased or decreased based on changes in risk grading for each loan class. Estimated loss rates for both risk-graded and non-risk graded loans may be further adjusted for inherent risk identified for the given loan class which have not yet been captured in the loss rate.

The aggregate amount of general allowances for all unimpaired loans totaled $184 million at June 30, 2018. The general allowance for unimpaired loans decreased $6.2 million compared to March 31, 2018, primarily related to the commercial loan segment, partially offset by an increase related to the commercial real estate segment.

Nonspecific allowances are maintained for risks beyond factors specific to a particular portfolio segment or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors. Nonspecific allowances totaled $15 million at June 30, 2018, a $4.5 million decrease compared to March 31, 2018. The nonspecific allowance decreased related to the reversal of the nonspecific allowance related to the estimated long-term impact of Hurricane Harvey in 2017 on the Houston, Texas market as this impact is now fully reflected in estimated loss rates.

An allocation of the allowance for loan losses by portfolio segment is included in Note 4 to the Consolidated Financial Statements.

Our loan monitoring process also identified certain accruing substandard loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in nonperforming assets. Known information does, however, cause management concern as to the borrowers’ ability to comply with current repayment terms. These potential problem loans totaled $140 million at June 30, 2018 and were primarily composed of $93 million or 3 percent of energy loans, $17 million or 3 percent of manufacturing sector loans and $17 million or 1 percent of healthcare sector loans. Potential problem loans totaled $222 million at March 31, 2018.

Based on regulatory guidelines, other loans especially mentioned are in compliance with the original terms of the agreement but may have a weakness that deserves management's close attention. Other loans especially mentioned totaled $124 million at June 30, 2018 and were composed primarily of $52 million or 2 percent of outstanding energy loans, $31 million or 1 percent of service sector loans and $21 million or 3 percent of commercial real estate loans secured by retail facilities. Other loans especially mentioned totaled $78 million at March 31, 2018.

We updated our semi-annual energy loan portfolio stress test at June 30, 2018 to estimate how the energy portfolio may respond in a prolonged low-price environment. Stress test assumptions applied the five year forward pricing curve which decreases from a starting price of $2.29 per million BTUs for natural gas and $51.70 per barrel of oil to $2.17 per million BTUs for natural gas and $43.37 per barrel of oil in year 5 and then escalated 3 percent annually for years six through ten to a maximum of $2.50 and $49.99, respectively. Results of the stress test were considered in conjunction with the determination of the allowance for credit losses.
Net Loans Charged Off

Loans are charged off against the allowance for loan losses when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value. Internally risk graded loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Non-risk graded loans are generally charged off when payments are between 60 days and 180 days past due, depending on loan class. In addition, non-risk graded loans are generally charged-down to collateral value within 60 days of being notified of a borrower's bankruptcy filing, regardless of payment status.

BOK Financial had net charge-offs of $10.5 million in the second quarter of 2018, compared to net charge-offs of $1.3 million in the first quarter of 2018 and a net charge-offs of $1.7 million in the second quarter of 2017. The ratio of net loans charged off to average loans on an annualized basis was 0.24 percent for the second quarter of 2018, compared with 0.03 percent for the first quarter of 2018 and 0.04 percent for the second quarter of 2017

Net charge-offs of commercial loans were $13.5 million in the second quarter of 2018, primarily related to a single energy production borrower and single healthcare sector borrower. Net commercial real estate loan recoveries were $3.1 million in the second quarter of 2018. Net charge-offs of residential mortgage loans were $370 thousand and net charge-offs of personal loans were $517 thousand for the second quarter. Personal loan net charge-offs include deposit account overdraft losses.

- 33 -



Nonperforming Assets

Table 21 -- Nonperforming Assets
(In thousands)
 
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
120,978

 
$
131,460

 
$
137,303

 
$
176,900

 
$
197,157

Commercial real estate
 
1,996

 
2,470

 
2,855

 
2,975

 
3,775

Residential mortgage
 
42,343

 
45,794

 
47,447

 
45,506

 
44,235

Personal
 
340

 
340

 
269

 
255

 
272

Total nonaccruing loans
 
165,657

 
180,064

 
187,874

 
225,636

 
245,439

Accruing renegotiated loans guaranteed by U.S. government agencies
 
75,374

 
74,418

 
73,994

 
69,440

 
80,624

Real estate and other repossessed assets
 
27,891

 
23,652

 
28,437

 
32,535

 
39,436

Total nonperforming assets
 
$
268,922

 
$
278,134

 
$
290,305

 
$
327,611

 
$
365,499

Total nonperforming assets excluding those guaranteed by U.S. government agencies
 
$
185,981

 
$
194,833

 
$
207,132

 
$
249,280

 
$
275,823

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio segment and class:
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
65,597

 
$
89,942

 
$
92,284

 
$
110,683

 
$
123,992

Services
 
4,377

 
2,109

 
2,620

 
1,174

 
7,754

Healthcare
 
16,125

 
15,342

 
14,765

 
24,446

 
24,505

Wholesale/retail
 
14,095

 
2,564

 
2,574

 
1,893

 
10,620

Manufacturing
 
2,991

 
3,002

 
5,962

 
9,059

 
9,656

Other commercial and industrial
 
17,793

 
18,501

 
19,098

 
29,645

 
20,630

Total commercial
 
120,978

 
131,460

 
137,303

 
176,900

 
197,157

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 

 
 

Multifamily
 

 

 

 

 
10

Retail
 
1,068

 
264

 
276

 
289

 
301

Office
 
275

 
275

 
275

 
275

 
396

Industrial
 

 

 

 

 

Residential construction and land development
 
350

 
1,613

 
1,832

 
1,924

 
2,051

Other commercial real estate
 
303

 
318

 
472

 
487

 
1,017

Total commercial real estate
 
1,996

 
2,470

 
2,855

 
2,975

 
3,775

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
23,105

 
24,578

 
25,193

 
24,623

 
23,415

Permanent mortgage guaranteed by U.S. government agencies
 
7,567

 
8,883

 
9,179

 
8,891

 
9,052

Home equity
 
11,671

 
12,333

 
13,075

 
11,992

 
11,768

Total residential mortgage
 
42,343

 
45,794

 
47,447

 
45,506

 
44,235

Personal
 
340

 
340

 
269

 
255

 
272

Total nonaccruing loans
 
$
165,657

 
$
180,064

 
$
187,874

 
$
225,636

 
$
245,439

 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 

 
 

Allowance for loan losses to nonaccruing loans1
 
136.09
%
 
130.84
%
 
129.09
%
 
114.28
%
 
105.78
%
Accruing loans 90 days or more past due1
 
$
879

 
$
90

 
$
633

 
$
253

 
$
1,414

1 
Excludes residential mortgages guaranteed by agencies of the U.S. Government.


- 34 -



Nonperforming assets totaled $269 million or 1.49 percent of outstanding loans and repossessed assets at June 30, 2018. Nonaccruing loans totaled $166 million, accruing renegotiated residential mortgage loans totaled $75 million and real estate and other repossessed assets totaled $28 million. All accruing renegotiated residential mortgage loans and $7.6 million of nonaccruing loans are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets decreased $8.9 million compared to the first quarter, primarily due to a decrease in nonaccruing energy and wholesale/retail sector loans. The Company generally retains nonperforming assets to maximize potential recovery, which may cause future nonperforming assets to decrease more slowly.

Loans are generally classified as nonaccruing when it becomes probable that we will not collect the full contractual principal and interest. As more fully discussed in Note 4 to the Consolidated Financial Statements, we may modify loans in troubled debt restructurings. Modifications may include extension of payment terms and rate concessions. We generally do not forgive principal or accrued but unpaid interest. All loans modified in troubled debt restructurings, except for residential mortgage loans guaranteed by U.S. government agencies, are currently classified as nonaccruing. We may also renew matured nonaccruing loans. All nonaccruing loans, including those renewed or modified in troubled debt restructurings, are charged off when the loan balance is no longer covered by the paying capacity of the borrower based on a quarterly evaluation of available cash resources and collateral value. Nonaccruing loans generally remain on nonaccrual status until full collection of principal and interest in accordance with the original terms, including principal previously charged off, is probable. We generally do not voluntarily modify personal loans to troubled borrowers. Personal loans modified at the direction of bankruptcy court orders are identified as troubled debt restructurings and classified as nonaccruing.

Renegotiated loans currently consist solely of accruing residential mortgage loans guaranteed by U.S. government agencies that have been modified in troubled debt restructurings. See Note 4 to the Consolidated Financial Statements for additional discussion of troubled debt restructurings. Generally, we modify residential mortgage loans primarily by reducing interest rates and extending the number of payments in accordance with U.S. government agency guidelines. Generally, no unpaid principal or interest is forgiven. Interest continues to accrue based on the modified terms of the loan. Modified loans guaranteed by U.S. government agencies under residential mortgage loan programs may be sold once they become eligible according to U.S. government agency guidelines.

A rollforward of nonperforming assets for the three and six months ended June 30, 2018 follows in Table 22.

Table 22 -- Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2018
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, March 31, 2018
 
$
180,064

 
$
74,418

 
$
23,652

 
$
278,134

Additions
 
41,728

 
13,600

 

 
55,328

Payments
 
(31,099
)
 
(707
)
 

 
(31,806
)
Charge-offs
 
(15,105
)
 

 

 
(15,105
)
Net gains, losses and write-downs
 

 

 
180

 
180

Foreclosure of nonperforming loans
 
(6,587
)
 

 
6,587

 

Foreclosure of loans guaranteed by U.S. government agencies
 
(1,658
)
 
(1,964
)
 

 
(3,622
)
Proceeds from sales
 

 
(10,362
)
 
(3,069
)
 
(13,431
)
Net transfers to nonaccruing loans
 
153

 
(153
)
 

 

Return to accrual status
 
(1,839
)
 

 

 
(1,839
)
Other, net
 

 
542

 
541

 
1,083

Balance, June 30, 2018
 
$
165,657

 
$
75,374

 
$
27,891

 
$
268,922


- 35 -



 
 
Six Months Ended
 
 
June 30, 2018
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, December 31, 2017
 
$
187,874

 
$
73,994

 
$
28,437

 
$
290,305

Additions
 
52,148

 
30,621

 

 
82,769

Payments
 
(43,538
)
 
(1,375
)
 

 
(44,913
)
Charge-offs
 
(17,995
)
 

 

 
(17,995
)
Net gains, losses and write-downs
 

 

 
(4,006
)
 
(4,006
)
Foreclosure of nonperforming loans
 
(8,743
)
 

 
8,743

 

Foreclosure of loans guaranteed by U.S. government agencies
 
(3,186
)
 
(3,791
)
 

 
(6,977
)
Proceeds from sales
 

 
(24,085
)
 
(5,516
)
 
(29,601
)
Net transfers to nonaccruing loans
 
936

 
(936
)
 

 

Return to accrual status
 
(1,839
)
 

 

 
(1,839
)
Other, net
 

 
946

 
233

 
1,179

Balance, June 30, 2018
 
$
165,657

 
$
75,374

 
$
27,891

 
$
268,922


We foreclose on loans guaranteed by U.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 the U.S. government, subject to limitations and credit risk is limited. These properties will be conveyed to the agencies once applicable criteria have been met. 
Commercial

Nonaccruing commercial loans totaled $121 million or 1.07 percent of total commercial loans at June 30, 2018 and $131 million or 1.20 percent of commercial loans at March 31, 2018. There were $36 million in newly identified nonaccruing commercial loans during the quarter, offset by $26 million in payments $14 million of charge-offs and $4.9 million foreclosures of nonaccruing commercial loans during the second quarter.

Nonaccruing commercial loans at June 30, 2018 were primarily composed of $66 million or 2.08 percent of total energy loans, $18 million or 3.20 percent of total other commercial and industrial sector loans, $16 million or 0.69 percent of total healthcare sector loans and $14 million or 0.83 percent of total wholesale/retail sector loans.
Commercial Real Estate

Nonaccruing commercial real estate loans totaled $2.0 million or 0.05 percent of outstanding commercial real estate loans at June 30, 2018, compared to $2.5 million or 0.07 percent of outstanding commercial real estate loans at March 31, 2018. Newly identified nonaccruing commercial real estate loans of $902 thousand were offset by $1.3 million of cash payments received and $1.8 million of loans returned to accruing status. There were no charge-offs or foreclosures of nonaccruing commercial real estate loans during the second quarter.

Nonaccruing commercial real estate loans were primarily composed of $1.1 million or 0.14 percent of loans secured by retail facilities.

Residential Mortgage and Personal

Nonaccruing residential mortgage loans totaled $42 million or 2.18 percent of outstanding residential mortgage loans at June 30, 2018, a $3.5 million decrease compared to March 31, 2018. Newly identified nonaccruing residential mortgage loans totaling $3.2 million were offset by $3.3 million of foreclosures, $3.3 million of payments and $135 thousand of loans charged off during the quarter. 

Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans, which totaled $23 million or 2.16 percent of outstanding non-guaranteed permanent residential mortgage loans at June 30, 2018. Nonaccruing home equity loans totaled $12 million or 1.66 percent of total home equity loans.


- 36 -



Payments of accruing residential mortgage loans and personal loans may be delinquent. The composition of residential mortgage loans and personal loans past due but still accruing is included in the following Table 23. Substantially all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 59 days past due increased $481 thousand in the second quarter to $4.2 million at June 30, 2018. Residential mortgage loans 60 to 89 days past due increased by $504 thousand. Personal loans past due 30 to 59 days decreased by $616 thousand and personal loans 60 to 89 days increased $136 thousand.

Table 23 -- Residential Mortgage and Personal Loans Past Due
(In thousands)
 
 
June 30, 2018
 
March 31, 2018
 
 
90 Days or More
 
60 to 89 Days
 
30 to 59 Days
 
90 Days or More
 
60 to 89 Days
 
30 to 59 Days
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
   Permanent mortgage1
 
$
84

 
$
796

 
$
2,568

 
$

 
$

 
$
2,322

Home equity
 
65

 
94

 
1,612

 
22

 
386

 
1,377

Total residential mortgage
 
$
149

 
$
890

 
$
4,180

 
22

 
$
386

 
$
3,699

 
 
 

 
 
 
 

 
 

 
 
 
 

Personal
 
$

 
$
150

 
$
178

 
$
62

 
$
14

 
$
794

1 
Excludes past due residential mortgage loans guaranteed by agencies of the U.S. government.

Real Estate and Other Repossessed Assets

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.

Real estate and other repossessed assets totaled $28 million at June 30, 2018, composed primarily of $12 million of oil and gas properties, $6.0 million of 1-4 family residential properties, $5.4 million of developed commercial real estate and $4.5 million of undeveloped land primarily zoned for commercial development. Real estate and other repossessed assets totaled $24 million at March 31, 2018.


- 37 -



Liquidity and Capital

Based on the average balances for the second quarter of 2018, approximately 65 percent of our funding was provided by deposit accounts, 21 percent from borrowed funds, less than 1 percent is from long-term subordinated debt and 10 percent from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

Subsidiary Bank

Deposits and borrowed funds are the primary sources of liquidity for BOKF, NA, the wholly owned subsidiary bank of BOK Financial. 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.

Average deposits for the second quarter of 2018 totaled $22.1 billion, largely unchanged compared to the first quarter of 2018. Demand deposit balances increased $72 million and saving account balances were up $24 million. This growth was offset by a $155 million decrease in interest-bearing transaction account balances and a $12 million decrease in time deposits.
Table 24 - Average Deposits by Line of Business
(In thousands)
 
Three Months Ended
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
Commercial Banking
$
8,379,584

 
$
8,664,452

 
$
8,799,166

 
$
8,727,221

 
$
8,696,691

Consumer Banking
6,579,635

 
6,538,096

 
6,622,149

 
6,663,969

 
6,618,958

Wealth Management
5,834,669

 
5,662,470

 
5,457,566

 
5,495,250

 
5,531,091

Subtotal
20,793,888

 
20,865,018

 
20,878,881

 
20,886,440

 
20,846,740

Funds Management and other
1,261,344

 
1,261,877

 
1,282,179

 
1,232,881

 
1,245,591

Total
$
22,055,232

 
$
22,126,895

 
$
22,161,060

 
$
22,119,321

 
$
22,092,331


Average Commercial Banking deposit balances decreased $285 million compared to the first quarter of 2018. Interest-bearing transaction account balances decreased $231 million and demand deposit balances decreased $55 million. Commercial customers continue to retain large cash reserves 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 service 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. Commercial deposit balances may decrease as the economic outlook continues to improve and customers deploy cash or related earnings credit rates rise, reducing the amount of deposits required to offset service charges.

Average Consumer Banking deposit balances increased $42 million over the prior quarter. Demand deposit balances grew by $81 million and savings deposit balances were up $22 million. This growth was offset by a $55 million decrease in time deposits. Interest-bearing transaction deposit balances were largely unchanged.

Average Wealth Management deposits increased $172 million over the first quarter of 2018. Interest-bearing transaction account balances grew by $90 million, time deposits balances were up $45 million, and demand deposit balances increased $36 million.

Average time deposits for the second quarter of 2018 included $252 million of brokered deposits, a decrease of $406 million compared to the first quarter of 2018. Average interest-bearing transaction accounts for the second quarter included $828 million of brokered deposits, a decrease of $783 million compared to the first quarter of 2018. The decrease in average brokered deposits balances was largely driven by a change in the regulatory definition of brokered deposits in the second quarter of 2018.

The distribution of our period end deposit account balances among principal markets follows in Table 25.



- 38 -



Table 25 -- Period End Deposits by Principal Market Area
(In thousands)
 
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
3,867,933

 
$
4,201,842

 
$
3,885,008

 
$
4,061,612

 
$
4,353,421

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
5,968,460

 
6,051,302

 
5,901,293

 
5,909,259

 
5,998,787

Savings
 
289,202

 
289,351

 
265,870

 
265,023

 
263,664

Time
 
1,207,471

 
1,203,534

 
1,092,133

 
1,131,547

 
1,170,014

Total interest-bearing
 
7,465,133

 
7,544,187

 
7,259,296

 
7,305,829

 
7,432,465

Total Bank of Oklahoma
 
11,333,066

 
11,746,029

 
11,144,304

 
11,367,441

 
11,785,886

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
3,317,656

 
3,015,869

 
3,239,098

 
3,094,184

 
3,121,890

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
2,168,488

 
2,208,480

 
2,397,071

 
2,272,987

 
2,272,185

Savings
 
97,809

 
98,852

 
93,620

 
93,400

 
91,491

Time
 
445,500

 
475,967

 
502,879

 
521,072

 
502,128

Total interest-bearing
 
2,711,797

 
2,783,299

 
2,993,570

 
2,887,459

 
2,865,804

Total Bank of Texas
 
6,029,453

 
5,799,168

 
6,232,668

 
5,981,643

 
5,987,694

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 
 
 
 
 
 
 
 
 
Demand
 
770,974

 
695,060

 
663,353

 
659,793

 
612,117

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
586,593

 
555,414

 
552,393

 
551,884

 
558,523

Savings
 
59,415

 
60,596

 
55,647

 
53,532

 
54,136

Time
 
212,689

 
216,306

 
216,743

 
224,773

 
229,616

Total interest-bearing
 
858,697

 
832,316

 
824,783

 
830,189

 
842,275

Total Bank of Albuquerque
 
1,629,671

 
1,527,376

 
1,488,136

 
1,489,982

 
1,454,392

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
39,896

 
35,291

 
30,384

 
31,442

 
40,511

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
143,298

 
94,206

 
85,095

 
126,746

 
129,848

Savings
 
1,885

 
1,960

 
1,881

 
1,876

 
2,135

Time
 
10,771

 
11,878

 
14,045

 
14,434

 
14,876

Total interest-bearing
 
155,954

 
108,044

 
101,021

 
143,056

 
146,859

Total Bank of Arkansas
 
195,850

 
143,335

 
131,405

 
174,498

 
187,370

 
 
 
 
 
 
 
 
 
 
 

- 39 -



 
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
Colorado State Bank & Trust:
 
 
 
 
 
 
 
 
 
 
Demand
 
529,912

 
521,963

 
633,714

 
540,300

 
577,617

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
701,362

 
687,785

 
657,629

 
628,807

 
626,343

Savings
 
38,176

 
37,232

 
35,223

 
34,776

 
35,651

Time
 
208,049

 
215,330

 
224,962

 
231,927

 
228,458

Total interest-bearing
 
947,587

 
940,347

 
917,814

 
895,510

 
890,452

Total Colorado State Bank & Trust
 
1,477,499

 
1,462,310

 
1,551,528

 
1,435,810

 
1,468,069

 
 
 
 
 
 
 
 
 
 
 
Bank of Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
387,952

 
330,196

 
334,701

 
335,740

 
366,866

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
194,353

 
248,337

 
274,846

 
174,010

 
154,457

Savings
 
3,935

 
4,116

 
3,343

 
4,105

 
3,638

Time
 
22,447

 
21,009

 
20,394

 
20,831

 
19,911

Total interest-bearing
 
220,735

 
273,462

 
298,583

 
198,946

 
178,006

Total Bank of Arizona
 
608,687

 
603,658

 
633,284

 
534,686

 
544,872

 
 
 
 
 
 
 
 
 
 
 
Mobank (Kansas City):
 
 
 
 
 
 
 
 
 
 
Demand
 
459,636

 
505,802

 
457,080

 
462,410

 
496,473

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
401,545

 
381,447

 
382,066

 
361,391

 
346,996

Savings
 
13,052

 
13,845

 
13,574

 
12,513

 
13,603

Time
 
20,805

 
22,230

 
27,260

 
27,705

 
31,119

Total interest-bearing
 
435,402

 
417,522

 
422,900

 
401,609

 
391,718

Total Mobank (Kansas City)
 
895,038

 
923,324

 
879,980

 
864,019

 
888,191

Total BOK Financial deposits
 
$
22,169,264

 
$
22,205,200

 
$
22,061,305

 
$
21,848,079

 
$
22,316,474


In addition to deposits, liquidity 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 largest single source of wholesale federal funds purchased totaled $200 million at June 30, 2018. Securities repurchase agreements generally mature within 90 days and are secured by certain 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 agency 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 $6.5 billion during the quarter, up from $6.3 billion in the first quarter of 2018.

At June 30, 2018, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $6.5 billion.

A summary of other borrowings for BOK Financial on a consolidated basis follows in Table 26.


- 40 -



Table 26 -- Borrowed Funds
(In thousands)
 
 
 
 
Three Months Ended
June 30, 2018
 
 
 
Three Months Ended
March 31, 2018
 
 
Jun 30,
2018
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
Mar 31,
2018
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company and Other Non-Bank Subsidiaries:
Subordinated debentures
 
144,697

 
144,692

 
5.67
%
 
$
144,697

 
144,687

 
144,682

 
5.61
%
 
144,687

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BOKF, NA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
305,668

 
133,064

 
1.44
%
 
305,668

 
130,561

 
106,362

 
1.20
%
 
160,087

Repurchase agreements
 
574,359

 
460,186

 
0.26
%
 
574,359

 
415,763

 
426,051

 
0.20
%
 
415,763

Other borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
 
5,900,000

 
6,470,330

 
1.96
%
 
6,500,000

 
5,700,000

 
6,295,556

 
1.58
%
 
5,700,000

GNMA repurchase liability
 
14,386

 
11,658

 
4.47
%
 
14,386

 
12,020

 
16,434

 
4.64
%
 
15,011

Other
 
15,059

 
15,032

 
2.35
%
 
15,059

 
15,005

 
14,977

 
2.33
%
 
15,005

Total other borrowings
 
5,929,445

 
6,497,020

 
1.96
%
 


 
5,727,025

 
6,326,967

 
1.60
%
 


Total BOKF, NA
 
6,809,472

 
7,090,270

 
1.84
%
 
 
 
6,273,349

 
6,859,380

 
1.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other borrowed funds and subordinated debentures
 
$
6,954,169

 
$
7,234,962

 
1.92
%
 
 
 
$
6,418,036

 
$
7,004,062

 
1.59
%
 
 
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.
Parent Company

At June 30, 2018, cash and interest-bearing cash and cash equivalents held by the parent company totaled $241 million. The primary sources of liquidity for BOK Financial are cash on hand and dividends from BOKF, NA. Dividends from the 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. At June 30, 2018, based upon the most restrictive limitations as well as management's internal capital policy, the bank could declare up to $248 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 at the bank could affect its ability to pay dividends to the parent company.

Our equity capital at June 30, 2018 was $3.6 billion, a $58 million increase over March 31, 2018. Net income less cash dividends paid increased equity $85 million during the second quarter of 2018. Changes in interest rates resulted in an increase in the accumulated other comprehensive loss to $135 million at June 30, 2018, compared to $111 million at March 31, 2018. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings including expected benefits from lower federal income tax rates, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt or perpetual preferred stock issuance, share repurchase and stock and cash dividends.

On October 27, 2015, the board of directors authorized the Company to purchase up to five million common shares, subject to market conditions, securities law and other regulatory compliance limitations. As of June 30, 2018, a cumulative total of 3,050,083 shares have been repurchased under this authorization. The Company repurchased 8,257 shares in the second quarter of 2018 at an average of $99.84 per share. The Company repurchased 82,583 shares in the first quarter of 2018 at an average price of $91.83 per share.


- 41 -



BOK Financial and BOKF, NA are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have a material impact on operations. 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.
Regulatory capital rules establish a 7 percent threshold for the common equity Tier 1 ratio consisting of a minimum level plus capital conservation buffer. The Company has elected to exclude unrealized gains and losses from available for sale securities from its calculation of Tier 1 capital. Components of the capital rules effective January 1, 2015 for the Company will phase in through January 1, 2019, with certain exceptions.

A summary of minimum capital requirements, including capital conservation buffer follows in Table 27. A bank which falls below these levels, including the capital conservation buffer, would be subject to regulatory restrictions on capital distributions (including but not limited to dividends and share repurchases) and executive bonus payments.

The capital ratios for BOK Financial on a consolidated basis are presented in Table 27.

Table 27 -- Capital Ratios
 
 
Minimum Capital Requirement
 
Capital Conservation Buffer
 
Minimum Capital Requirement Including Capital Conservation Buffer
 
June 30, 2018
 
Mar. 31, 2018
 
June 30, 2017
Risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1
 
4.50
%
 
2.50
%
 
7.00
%
 
11.92
%
 
12.06
%
 
11.76
%
Tier 1 capital
 
6.00
%
 
2.50
%
 
8.50
%
 
11.92
%
 
12.06
%
 
11.76
%
Total capital
 
8.00
%
 
2.50
%
 
10.50
%
 
13.26
%
 
13.49
%
 
13.36
%
Tier 1 Leverage
 
4.00
%
 
N/A

 
4.00
%
 
9.57
%
 
9.40
%
 
9.27
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average total equity to average assets
 
 
 
 
 
 
 
10.36
%
 
10.31
%
 
10.53
%
Tangible common equity ratio
 
 
 
 
 
 
 
9.21
%
 
9.18
%
 
9.24
%

At March 31, 2018, the company exceeded the $1 billion regulatory capital rules threshold for trading assets plus liabilities. This subjects the company to the market risk rule, which imposes additional modeling, systems, oversight and reporting requirements effective for the second quarter of 2018 and results in an increase in risk weighted assets associated with trading.

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”) 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.

Table 28 provides a reconciliation of the non-GAAP measures with financial measures defined by GAAP.


- 42 -



Table 28 -- Non-GAAP Measure
(Dollars in thousands)
 
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
3,553,431

 
$
3,495,029

 
$
3,495,367

 
$
3,488,814

 
$
3,422,469

Less: Goodwill and intangible assets, net
 
481,366

 
477,088

 
476,088

 
485,710

 
487,452

Tangible common equity
 
3,072,065

 
3,017,941

 
3,019,279

 
3,003,104

 
2,935,017

Total assets
 
33,833,107

 
33,361,492

 
32,272,160

 
33,005,515

 
32,263,532

Less: Goodwill and intangible assets, net
 
481,366

 
477,088

 
476,088

 
485,710

 
487,452

Tangible assets
 
$
33,351,741

 
$
32,884,404

 
$
31,796,072

 
$
32,519,805

 
$
31,776,080

Tangible common equity ratio
 
9.21
%
 
9.18
%
 
9.50
%
 
9.23
%
 
9.24
%

Off-Balance Sheet Arrangements

See Note 7 to the Consolidated Financial Statements for a discussion of the Company’s significant off-balance sheet commitments.
Market Risk

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. Market risk excludes changes in fair value due to credit of the individual issuers of financial instruments.

BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy and agricultural product derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed.

The Asset/Liability Committee is responsible for managing market risk in accordance with policy limits established by the Board of Directors. The Committee monitors projected variation in net interest revenue, net income and economic value of equity due to specified changes in interest rates. These limits also set maximum levels for short-term borrowings, short-term assets, public funds and brokered deposits and establish minimum levels for un-pledged assets, among other things. Further, the Board approved market risk limits for fixed income trading, mortgage pipeline and mortgage servicing assets inclusive of economic hedge benefits. Exposure is measured daily and compliance is reviewed monthly. Deviations from the Board approved limits, which periodically occur throughout the reporting period, may require management to develop and execute plans to reduce exposure. These plans are subject to escalation to and approval by the Board.

The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, models cannot precisely estimate or precisely predict the impact of higher or lower interest rates. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors.


- 43 -



Interest Rate Risk – Other than Trading
 
As previously noted in the Net Interest Revenue section of this report, management has implemented strategies to manage the Company’s balance sheet to have relatively limited exposure to changes in interest rates over a twelve-month period. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue. A simulation model is used to estimate the effect of changes in interest rates on our performance across multiple interest rate scenarios. Our current internal policy limit for net interest revenue variation due to a 200 basis point parallel change in market interest rates over twelve months is a maximum decline of 5%. The results of a 200 basis point decrease in interest rates in the current low-rate environment are not meaningful. Until such time as it becomes meaningful, we will instead report the effect of a 50 basis point decrease in interest rates.

The Company’s primary interest rate exposures include the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable rate loan pricing. Additionally, residential mortgage rates directly affect the prepayment speeds for residential mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. In addition, the impact on the level and composition of demand deposit accounts and other core deposit balances resulting from a significant increase in short-term market interest rates and the overall interest rate environment is likely to be material. The simulation incorporates assumptions regarding the effects of such changes based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. 

Table 29 -- Interest Rate Sensitivity
(Dollars in thousands)
 
 
200 bp Increase
 
50 bp Decrease
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Anticipated impact over the next twelve months on net interest revenue
 
$
1,118

 
$
(104
)
 
$
(17,227
)
 
$
(17,632
)
 
 
0.11
%
 
(0.01
)%
 
(1.75
)%
 
(2.07
)%

BOK Financial is also subjected to market risk through changes in the fair value of mortgage servicing rights. Changes in the fair value of mortgage servicing rights are highly dependent on changes in primary mortgage rates offered to borrowers, intermediate-term interest rates that affect the value of custodial funds, and assumptions about servicing revenues, servicing costs and discount rates. As primary mortgage rates increase, prepayment speeds slow and the value of our mortgage servicing rights increases. As primary mortgage rates fall, prepayment speeds increase and the value of our mortgage servicing rights decreases.

We maintain a portfolio of financial instruments, which may include debt securities issued by the U.S. government or its agencies and interest rate derivative contracts held as an economic hedge of the changes in the fair value of our mortgage servicing rights. Composition of this portfolio will change based on our assessment of market risk. Changes in the fair value of residential mortgage-backed securities are highly dependent on changes in secondary mortgage rates required by investors, and interest rate derivative contracts are highly dependent on changes in other market interest rates. While primary and secondary mortgage rates generally move in the same direction, the spread between them may widen and narrow due to market conditions and government intervention. Changes in the forward-looking spread between the primary and secondary rates can cause significant earnings volatility.

Management performs a stress test to measure market risk due to changes in interest rates inherent in its MSR portfolio and hedges. The stress test shocks applicable interest rates up and down 50 basis points and calculates an estimated change in fair value, net of economic hedging activity, that may result. The Board has approved a $20 million market risk limit for mortgage servicing rights, net of economic hedges.



- 44 -



Table 30 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
 
 
June 30,
 
 
2018
 
2017
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
MSR Asset
 
$
22,858

 
$
(25,967
)
 
$
25,977

 
$
(31,851
)
MSR Hedge
 
(23,730
)
 
21,281

 
(31,507
)
 
32,312

Net Exposure
 
(872
)
 
(4,686
)
 
(5,530
)
 
461


Trading Activities

The Company bears market risk by originating residential mortgages held for sale ("RMHFS"). RMHFS are generally outstanding for 60 to 90 days, which represents the typical period from commitment to originate a loan to sale of the closed loan to an investor. Primary mortgage interest rate changes during this period affect the value of RMHFS commitments and loans. We use forward sale contracts to mitigate market risk on all closed mortgage loans held for sale and on an estimate of mortgage loan commitments that are expected to result in closed loans.

A variety of methods are used to monitor market risk of mortgage origination activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and revenue sensitivity limits.

Management performs a stress test to measure market risk due to changes in interest rates inherent in the mortgage production pipeline. The stress test shocks applicable interest rates up and down 50 basis points and calculates an estimated change in fair value, net of economic hedging activity that may result. The Board has approved a $7 million market risk limit for the mortgage production pipeline, net of forward sale contracts.

Table 31 -- Mortgage Pipeline Sensitivity Analysis
(Dollars in thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
Average1
 
$
663

 
$
(1,240
)
 
$
(3
)
 
$
(1,439
)
 
$
422

 
$
(932
)
 
$
117

 
$
(1,316
)
Low2
 
2,077

 
(567
)
 
1,030

 
(679
)
 
2,077

 
699

 
1,030

 
(398
)
High3
 
(374
)
 
(2,447
)
 
(810
)
 
(2,377
)
 
(1,015
)
 
(2,447
)
 
(810
)
 
(2,377
)
Period End
 
216

 
(678
)
 
(263
)
 
(1,025
)
 
216

 
(678
)
 
(263
)
 
(1,025
)
1 
Average represents the simple average of each daily value observed during the reporting period.
2 
Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 
High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.

BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, we take positions in securities, generally residential mortgage-backed securities, government agency securities and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. On a limited basis, we may also take trading positions in U.S. Treasury securities, residential mortgage-backed securities, and municipal bonds to enhance returns on securities portfolios. Both of these activities involve interest rate, liquidity and price risk. BOK Financial has an insignificant exposure to foreign exchange risk and does not take positions in commodity derivatives.

A variety of methods are used to monitor the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and position limits for each trading activity. Economic hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs.


- 45 -



Management performs a stress test to measure market risk from changes in interest rates on its trading portfolio. The stress test shocks applicable interest rates up and down 50 basis points and calculates an estimated change in fair value, net of economic hedging activity that may result. The Board has approved an $8 million market risk limit for the trading portfolio, net of economic hedges.

Table 32 -- Trading Sensitivity Analysis
(Dollars in thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
Average1
 
$
(1,566
)
 
$
1,405

 
$
(1,359
)
 
$
1,592

 
$
(1,062
)
 
$
874

 
$
(1,991
)
 
$
2,241

Low2
 
1,518

 
4,333

 
(219
)
 
3,833

 
1,518

 
4,333

 
86

 
5,210

High3
 
(4,242
)
 
(2,472
)
 
(2,916
)
 
91

 
(4,242
)
 
(2,472
)
 
(4,386
)
 
2

Period End
 
(2,602
)
 
2,719

 
(1,842
)
 
1,727

 
(2,602
)
 
2,719

 
(1,842
)
 
1,727

1 
Average represents the simple average of each daily value observed during the reporting period.
2 
Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 
High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.
Controls and Procedures
 
As required by Rule 13a-15(b), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not limited to, CoBiz Financial Inc.’s and BOK Financial Corporation’s expectations or predictions of future financial or business performance or conditions. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “target,” “estimate,” “continue,” “positions,” “plan,” “predict,” “project,” “forecast,” “guidance,” “goal,” “objective,” “prospects,” “possible” or “potential,” by future conditional verbs such as “assume,” “will,” “would,” “should,” “could” or “may”, or by variations of such words or by similar expressions. These forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made and we assume no duty to update forward-looking statements. Actual results may differ materially from current projections.

In addition to factors previously disclosed in CoBiz Financial Inc.’s and BOK Financial Corporation’s reports filed with the SEC and those identified elsewhere in this communication, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: the ability to obtain regulatory approvals and meet other closing conditions to the merger, including approval by CoBiz Financial Inc.’s shareholders on the expected terms and schedule, including the risk that regulatory approvals required for the merger are not obtained or are obtained subject to conditions that are not anticipated; delay in closing the merger; difficulties and delays in integrating CoBiz Financial Inc.’s business or fully realizing cost savings and other benefits; business disruption following the merger; changes in asset quality and credit risk; the inability to sustain revenue and earnings growth; changes in interest rates and capital markets; inflation; customer acceptance of BOK Financial Corporation’s products and services; customer borrowing, repayment, investment and deposit practices; customer disintermediation; the introduction, withdrawal, success and timing of business initiatives; competitive conditions; the inability to realize cost savings or revenues or to implement integration plans and other consequences associated with mergers, acquisitions and divestitures; economic conditions; and the impact, extent and timing of

- 46 -



technological changes, capital management activities, and other actions of the Federal Reserve Board and legislative and regulatory actions and reforms.

Annualized, pro forma, projected and estimated numbers are used for illustrative purpose only, are not forecasts and may not reflect actual results.

In this report we may sometimes use non-GAAP Financial information. 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. If applicable, we provide GAAP reconciliations for non-GAAP financial measures.

IMPORTANT ADDITIONAL INFORMATION AND WHERE TO FIND IT

In connection with the proposed merger, BOK Financial Corporation has filed with the SEC a Registration Statement on Form S-4 that will include the Proxy Statement of CoBiz Financial Inc. and a Prospectus of BOK Financial Corporation, as well as other relevant documents concerning the proposed transaction. This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. INVESTORS AND SHAREHOLDERS ARE URGED TO READ THE REGISTRATION STATEMENT AND THE PROXY STATEMENT/PROSPECTUS REGARDING THE MERGER E AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.

A free copy of the Proxy Statement/Prospectus, as well as other filings containing information about BOK Financial Corporation and CoBiz Financial Inc., may be obtained at the SEC’s Internet site (http://www.sec.gov). You will also be able to obtain these documents, free of charge, from CoBiz Financial Inc. at ir.cobizfinancial.com or from BOK Financial Corporation by accessing BOK Financial Corporation’s website at www.bokf.com. Copies of the Proxy Statement/Prospectus can also be obtained, free of charge, by directing a request to CoBiz Financial Inc. Investor Relations at CoBiz Financial Inc. Investor Relations, 1401 Lawrence Street, Suite 1200, Denver, CO, by calling (303) 312-3412, or by sending an e-mail to info@cobizfinancial.com or to BOK Financial Corporation Investor Relations at Bank of Oklahoma Tower, Boston Avenue at Second Street, Tulsa, Oklahoma, by calling (918) 588-6000 or by sending an e-mail to investorrelations@bokf.com.

CoBiz Financial Inc. and BOK Financial Corporation and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders of CoBiz Financial Inc. in respect of the transaction described in the Proxy Statement/Prospectus. Information regarding CoBiz Financial Inc.’s directors and executive officers is contained in CoBiz Financial Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017 and its Proxy Statement on Schedule 14A, dated March 9, 2018, which are filed with the SEC.  Information regarding BOK Financial Corporation’s directors and executive officers is contained in BOK Financial Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017 and its Proxy Statement on Schedule 14A, dated March 15, 2018, which are filed with the SEC. Additional information regarding the interests of those participants and other persons who may be deemed participants in the transaction may be obtained by reading the Proxy Statement/Prospectus regarding the proposed merger when it becomes available. Free copies of this document may be obtained as described in the preceding paragraph.


- 47 -



     
Consolidated Statements of Earnings (Unaudited)
 
 
 
 
 
 
 
 
(In thousands, except share and per share data)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Interest revenue
 
2018
 
2017
 
2018
 
2017
Loans
 
$
210,694

 
$
168,952

 
$
398,785

 
$
329,847

Residential mortgage loans held for sale
 
2,333

 
2,386

 
4,177

 
4,222

Trading securities
 
12,988

 
3,339

 
20,726

 
8,522

Investment securities
 
3,663

 
4,005

 
7,520

 
8,176

Available for sale securities
 
47,427

 
43,363

 
93,386

 
86,735

Fair value option securities
 
3,927

 
3,539

 
8,746

 
5,919

Restricted equity securities
 
5,408

 
4,399

 
10,525

 
8,708

Interest-bearing cash and cash equivalents
 
7,740

 
5,198

 
15,722

 
9,442

Total interest revenue
 
294,180

 
235,181

 
559,587

 
461,571

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
20,963

 
12,622

 
39,182

 
23,976

Borrowed funds
 
32,607

 
15,352

 
58,056

 
27,181

Subordinated debentures
 
2,048

 
2,003

 
4,051

 
4,028

Total interest expense
 
55,618

 
29,977

 
101,289

 
55,185

Net interest revenue
 
238,562

 
205,204

 
458,298

 
406,386

Provision for credit losses
 

 

 
(5,000
)
 

Net interest revenue after provision for credit losses
 
238,562

 
205,204

 
463,298

 
406,386

Other operating revenue
 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
26,488

 
31,764

 
57,136

 
65,387

Transaction card revenue
 
20,975

 
30,228

 
41,965

 
57,608

Fiduciary and asset management revenue
 
41,699

 
41,808

 
83,531

 
80,439

Deposit service charges and fees
 
27,827

 
28,422

 
54,988

 
56,199

Mortgage banking revenue
 
26,346

 
30,276

 
52,371

 
55,467

Other revenue
 
14,518

 
14,984

 
26,848

 
26,736

Total fees and commissions
 
157,853

 
177,482

 
316,839

 
341,836

Other gains, net
 
3,983

 
6,108

 
3,319

 
9,735

Gain (loss) on derivatives, net
 
(3,057
)
 
3,241

 
(8,742
)
 
2,791

Gain (loss) on fair value option securities, net
 
(3,341
)
 
1,984

 
(20,905
)
 
844

Change in fair value of mortgage servicing rights
 
1,723

 
(6,943
)
 
22,929

 
(5,087
)
Gain (loss) on available for sale securities, net
 
(762
)
 
380

 
(1,052
)
 
2,429

Total other operating revenue
 
156,399

 
182,252

 
312,388

 
352,548

Other operating expense
 
 

 
 

 
 

 
 

Personnel
 
138,947

 
143,744

 
278,894

 
280,169

Business promotion
 
7,686

 
7,738

 
13,696

 
14,455

Professional fees and services
 
14,978

 
12,419

 
25,178

 
23,836

Net occupancy and equipment
 
22,761

 
21,125

 
46,807

 
42,749

Insurance
 
6,245

 
689

 
12,838

 
7,093

Data processing and communications
 
27,739

 
36,330

 
55,556

 
71,232

Printing, postage and supplies
 
4,011

 
4,140

 
8,100

 
7,991

Net losses and operating expenses of repossessed assets
 
2,722

 
2,267

 
10,427

 
3,276

Amortization of intangible assets
 
1,386

 
1,803

 
2,686

 
3,605

Mortgage banking costs
 
12,890

 
12,072

 
23,039

 
25,075

Other expense
 
7,111

 
8,558

 
13,685

 
16,115

Total other operating expense
 
246,476

 
250,885

 
490,906

 
495,596

Net income before taxes
 
148,485

 
136,571

 
284,780

 
263,338

Federal and state income taxes
 
33,330

 
47,705

 
64,278

 
85,808

Net income
 
115,155

 
88,866

 
220,502

 
177,530

Net income attributable to non-controlling interests
 
783

 
719

 
568

 
1,027

Net income attributable to BOK Financial Corporation shareholders
 
$
114,372

 
$
88,147

 
$
219,934

 
$
176,503

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.75

 
$
1.35

 
$
3.36

 
$
2.70

Diluted
 
$
1.75

 
$
1.35

 
$
3.36

 
$
2.69

Average shares used in computation:
 
 
 
 
 
 
 
 
Basic
 
64,901,975

 
64,729,752

 
64,874,567

 
64,722,744

Diluted
 
64,937,226

 
64,793,134

 
64,912,552

 
64,788,322

Dividends declared per share
 
$
0.45

 
$
0.44

 
$
0.90

 
$
0.88


See accompanying notes to consolidated financial statements.

- 48 -



Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
 
(In thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
115,155

 
$
88,866

 
$
220,502

 
$
177,530

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(33,117
)
 
21,958

 
(130,523
)
 
33,369

Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
Loss (gain) on available for sale securities, net
 
762

 
(380
)
 
1,052

 
(2,429
)
Other comprehensive income (loss) before income taxes
 
(32,355
)
 
21,578

 
(129,471
)
 
30,940

Federal and state income taxes
 
(8,241
)
 
8,393

 
(33,049
)
 
12,009

Other comprehensive income (loss), net of income taxes
 
(24,114
)

13,185


(96,422
)

18,931

Comprehensive income
 
91,041

 
102,051

 
124,080

 
196,461

Comprehensive income attributable to non-controlling interests
 
783

 
719

 
568

 
1,027

Comprehensive income attributable to BOK Financial Corp. shareholders
 
$
90,258

 
$
101,332

 
$
123,512

 
$
195,434


See accompanying notes to consolidated financial statements.

- 49 -



Consolidated Balance Sheets
(In thousands, except share data)
 
 
June 30, 2018
 
Dec. 31, 2017
 
June 30, 2017
 
 
(Unaudited)
 
(Footnote 1)
 
(Unaudited)
Assets
 
 
 
 
 
 
Cash and due from banks
 
$
585,801

 
$
602,510

 
$
561,587

Interest-bearing cash and cash equivalents
 
872,999

 
1,714,544

 
2,078,831

Trading securities
 
1,909,615

 
462,676

 
441,414

Investment securities (fair value:  June 30, 2018 – $403,384; December 31, 2017 – $480,035 ; June 30, 2017 – $515,675)
 
392,013

 
461,793

 
490,426

Available for sale securities
 
8,162,866

 
8,321,578

 
8,341,041

Fair value option securities
 
482,227

 
755,054

 
445,169

Restricted equity securities
 
347,721

 
320,189

 
311,033

Residential mortgage loans held for sale
 
223,301

 
221,378

 
287,259

Loans
 
18,003,696

 
17,153,424

 
17,183,645

Allowance for loan losses
 
(215,142
)
 
(230,682
)
 
(250,061
)
Loans, net of allowance
 
17,788,554

 
16,922,742

 
16,933,584

Premises and equipment, net
 
320,810

 
317,335

 
321,038

Receivables
 
212,893

 
178,800

 
170,094

Goodwill
 
453,093

 
447,430

 
446,697

Intangible assets, net
 
28,273

 
28,658

 
40,755

Mortgage servicing rights
 
278,719

 
252,867

 
245,239

Real estate and other repossessed assets, net of allowance (June 30, 2018 – $17,656; December 31, 2017 – $12,648; June 30, 2017 – $8,576)
 
27,891

 
28,437

 
39,436

Derivative contracts, net
 
373,373

 
220,502

 
280,289

Cash surrender value of bank-owned life insurance
 
321,024

 
316,498

 
312,774

Receivable on unsettled securities sales
 
604,552

 
340,077

 
158,125

Other assets
 
447,382

 
359,092

 
358,741

Total assets
 
$
33,833,107

 
$
32,272,160

 
$
32,263,532

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
$
9,373,959

 
$
9,243,338

 
$
9,568,895

Interest-bearing deposits:
 
 

 
 

 
 

Transaction
 
10,164,099

 
10,250,393

 
10,087,139

Savings
 
503,474

 
469,158

 
464,318

Time
 
2,127,732

 
2,098,416

 
2,196,122

Total deposits
 
22,169,264

 
22,061,305

 
22,316,474

Funds purchased and repurchase agreements
 
880,027

 
574,964

 
464,323

Other borrowings
 
5,929,445

 
5,134,897

 
5,232,343

Subordinated debentures
 
144,697

 
144,677

 
144,658

Accrued interest, taxes and expense
 
160,568

 
164,895

 
133,198

Derivative contracts, net
 
234,856

 
171,963

 
285,819

Due on unsettled securities purchases
 
571,034

 
338,745

 
31,214

Other liabilities
 
167,171

 
162,380

 
205,958

Total liabilities
 
30,257,062

 
28,753,826

 
28,813,987

Shareholders' equity:
 
 

 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2018 – 75,313,559; December 31, 2017 – 75,147,686; June 30, 2017 – 75,089,152)
 
4

 
4

 
4

Capital surplus
 
1,040,202

 
1,035,895

 
1,017,495

Retained earnings
 
3,212,653

 
3,048,487

 
2,942,447

Treasury stock (shares at cost:  June 30, 2018 – 9,874,469; December 31, 2017 – 9,752,749;  June 30, 2017 – 9,672,749)
 
(564,123
)
 
(552,845
)
 
(545,441
)
Accumulated other comprehensive gain (loss)
 
(135,305
)
 
(36,174
)
 
7,964

Total shareholders’ equity
 
3,553,431

 
3,495,367

 
3,422,469

Non-controlling interests
 
22,614

 
22,967

 
27,076

Total equity
 
3,576,045

 
3,518,334

 
3,449,545

Total liabilities and equity
 
$
33,833,107

 
$
32,272,160

 
$
32,263,532


See accompanying notes to consolidated financial statements.

- 50 -



Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 
 
Common Stock
 
Capital
Surplus
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interests
 
Total Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
74,993

 
$
4

 
$
1,006,535

 
$
2,823,334

 
9,656

 
$
(544,052
)
 
$
(10,967
)
 
$
3,274,854

 
$
31,503

 
$
3,306,357

Net income
 

 

 

 
176,503

 

 

 

 
176,503

 
1,027

 
177,530

Other comprehensive income
 

 

 

 

 

 

 
18,931

 
18,931

 

 
18,931

Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
 
41

 

 
1,977

 

 

 

 

 
1,977

 

 
1,977

Non-vested shares awarded, net
 
55

 

 

 

 

 

 

 

 

 

Vesting of non-vested shares
 

 

 

 

 
17

 
(1,389
)
 

 
(1,389
)
 

 
(1,389
)
Share-based compensation
 

 

 
8,983

 

 

 

 

 
8,983

 

 
8,983

Cash dividends on common stock
 

 

 

 
(57,390
)
 

 

 

 
(57,390
)
 

 
(57,390
)
Capital calls and distributions, net
 

 

 

 

 

 

 

 

 
(5,454
)
 
(5,454
)
Balance, June 30, 2017
 
75,089

 
$
4

 
$
1,017,495

 
$
2,942,447

 
9,673

 
$
(545,441
)
 
$
7,964

 
$
3,422,469

 
$
27,076

 
$
3,449,545

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
75,148

 
$
4

 
$
1,035,895

 
$
3,048,487

 
9,753

 
$
(552,845
)
 
$
(36,174
)
 
$
3,495,367

 
$
22,967

 
$
3,518,334

Transition adjustment of net unrealized gains on equity securities
 

 

 

 
2,709

 

 

 
(2,709
)
 

 

 

Balance, December 31, 2017, Adjusted
 
75,148


4


1,035,895


3,051,196


9,753


(552,845
)

(38,883
)

3,495,367


22,967


3,518,334

Net income (loss)
 

 

 

 
219,934

 

 

 

 
219,934

 
568

 
220,502

Other comprehensive loss
 

 

 

 

 

 

 
(96,422
)
 
(96,422
)
 

 
(96,422
)
Repurchase of common stock
 

 

 

 

 
90

 
(8,408
)
 

 
(8,408
)
 

 
(8,408
)
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
 
46

 

 
2,426

 

 

 

 

 
2,426

 

 
2,426

Non-vested shares awarded, net
 
120

 

 

 

 

 

 

 

 

 

Vesting of non-vested shares
 

 

 

 

 
31

 
(2,870
)
 

 
(2,870
)
 

 
(2,870
)
Share-based compensation
 

 

 
1,881

 

 

 

 

 
1,881

 

 
1,881

Cash dividends on common stock
 

 

 

 
(58,477
)
 

 

 

 
(58,477
)
 

 
(58,477
)
Capital calls and distributions, net
 

 

 

 

 

 

 

 

 
(921
)
 
(921
)
Balance, June 30, 2018
 
75,314


4


1,040,202


3,212,653


9,874


(564,123
)

(135,305
)

3,553,431


22,614


3,576,045


See accompanying notes to consolidated financial statements.

- 51 -



Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

 
Six Months Ended
 
 
June 30,
 
 
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
220,502

 
$
177,530

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 

 
 

Provision for credit losses
 
(5,000
)
 

Change in fair value of mortgage servicing rights due to market changes
 
(22,929
)
 
5,087

Change in the fair value of mortgage servicing rights due to principal payments
 
16,797

 
16,261

Net unrealized losses (gains) from derivative contracts
 
6,674

 
(5,928
)
Share-based compensation
 
1,881

 
8,983

Depreciation and amortization
 
27,459

 
25,864

Net amortization of securities discounts and premiums
 
12,855

 
15,377

Net losses (gains) on financial instruments and other losses (gains), net
 
4,530

 
(4,351
)
Net gain on mortgage loans held for sale
 
(19,314
)
 
(25,229
)
Mortgage loans originated for sale
 
(1,438,868
)
 
(1,613,997
)
Proceeds from sale of mortgage loans held for sale
 
1,456,312

 
1,651,018

Capitalized mortgage servicing rights
 
(19,720
)
 
(19,514
)
Change in trading and fair value option securities
 
(1,174,526
)
 
(472,682
)
Change in receivables
 
(335,369
)
 
479,774

Change in other assets
 
1,737

 
(17,548
)
Change in accrued interest, taxes and expense
 
(4,327
)
 
(19,703
)
Change in other liabilities
 
334,765

 
27,420

Net cash provided by (used in) operating activities
 
(936,541
)
 
228,362

Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
71,722

 
71,654

Proceeds from maturities or redemptions of available for sale securities
 
819,596

 
899,096

Purchases of investment securities
 
(3,968
)
 
(18,802
)
Purchases of available for sale securities
 
(1,020,018
)
 
(1,242,070
)
Proceeds from sales of available for sale securities
 
187,533

 
700,412

Change in amount receivable on unsettled available for sale securities transactions
 
38,075

 
(25,989
)
Loans originated, net of principal collected
 
(847,351
)
 
(159,924
)
Net payments on derivative asset contracts
 
(70,987
)
 
420,996

Acquisitions, net of cash acquired
 
(13,870
)
 

Proceeds from disposition of assets
 
97,027

 
127,699

Purchases of assets
 
(121,889
)
 
(106,362
)
Net cash provided by (used in) investing activities
 
(864,130
)
 
666,710

Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
78,643

 
(405,943
)
Net change in time deposits
 
29,316

 
(25,678
)
Net change in other borrowed funds
 
1,057,118

 
64,833

Net proceeds on derivative liability contracts
 
64,144

 
(422,016
)
Net change in derivative margin accounts
 
(118,628
)
 
27,327

Change in amount due on unsettled available for sale securities transactions
 
(100,847
)
 
26,128

Issuance of common and treasury stock, net
 
(444
)
 
588

Repurchase of common stock
 
(8,408
)
 

Dividends paid
 
(58,477
)
 
(57,390
)
Net cash provided by (used in) financing activities
 
942,417

 
(792,151
)
Net increase (decrease) in cash and cash equivalents
 
(858,254
)
 
102,921

Cash and cash equivalents at beginning of period
 
2,317,054

 
2,537,497

Cash and cash equivalents at end of period
 
$
1,458,800

 
$
2,640,418

 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
Cash paid for interest
 
$
100,532

 
$
54,881

Cash paid for taxes
 
$
29,623

 
$
60,654

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
3,886

 
$
2,049

Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period
 
$
42,493

 
$
59,171

Conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
23,845

 
$
22,602

See accompanying notes to consolidated financial statements.

- 52 -



Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of BOK Financial Corporation (“BOK Financial” or “the Company”) have been prepared in accordance with accounting principles for interim financial information generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The unaudited consolidated financial statements include accounts of BOK Financial and its subsidiaries, principally BOKF, NA (“the Bank”), BOK Financial Securities, Inc., The Milestone Group, Inc. and Cavanal Hill Investment Management Inc. Operating divisions of the Bank include Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust, Mobank, BOK Financial Mortgage and the TransFund electronic funds network.

Certain reclassifications have been made to conform to the current period presentation.

The financial information should be read in conjunction with BOK Financial’s 2017 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2017 have been derived from the audited financial statements included in BOK Financial’s 2017 Form 10-K but do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the six-month period ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09")

On May 28, 2014, the FASB issued ASU 2014-09 to clarify the principles for recognizing revenue by providing a more robust framework that will give greater consistency and comparability in revenue recognition practices. In the new framework, an entity recognizes revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services. The new model requires the identification of performance obligations included in contracts with customers, a determination of the transaction price and an allocation of the price to those performance obligations. The entity recognizes revenue when performance obligations are satisfied. Revenue from financial assets and liabilities is explicitly excluded from the scope of ASU 2014-09. Management adopted the standard in the first quarter of 2018 using the modified retrospective transition method. There were no significant cumulative effect adjustments as a result of implementation as of January 1, 2018 as our current revenue recognition policies generally conform with the principals in ASU 2014-09.

FASB Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU 2016-08")

On March 17, 2016, the FASB Issued ASU 2016-08 to amend the principal versus agent implementation guidance in ASU 2014-09. The ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. Management adopted the standard in the first quarter of 2018. Interchange fees paid to issuing banks for card transactions processed related to its merchant processing services previously included in data processing and communication expense are now netted against the amounts charged to the merchant in transaction card processing revenue.


- 53 -



FASB Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01")

On January 5, 2016, the FASB issued ASU 2016-01 over the recognition and measurement of financial assets and liabilities. The update requires equity investments, in general, to be measured at fair value with changes in fair value recognized in earnings. It also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, requires entities to use the exit price notion when measuring fair value, requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the fair value option has been elected, requires separate presentation of financial assets and liabilities by measurement category and form on the balance sheet or accompanying notes, clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets, and simplifies the impairment assessment of equity investments without readily determinable fair values. Management adopted the standard in the first quarter of 2018. Upon adoption, net unrealized gains of $2.7 million from equity securities were reclassified from other comprehensive income to retained earnings.

FASB Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASU 2016-02")

On February 25, 2016, the FASB issued ASU 2016-02 to increase transparency and comparability by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Lessees will be required to recognize an obligation for future lease payments measured on a discounted basis and a right-of-use asset. The ASU is effective for the Company for interim and annual periods beginning after December 15, 2018 and requires transition through a modified retrospective approach for leases existing at or entered into after January 1, 2017. The Company currently estimates that implementation of ASU 2016-02 will increase reported right of use assets and liabilities by approximately $100 million to $150 million.
 
FASB Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Assets Measured at Amortized Cost ("ASU 2016-13")

On June 16, 2016, the FASB issued ASU 2016-13 in order to provide more timely recording of credit losses on loans and other financial instruments. The ASU adds an impairment model (known as the current expected credit loss ("CECL") model) that is based on expected credit losses rather than incurred credit losses. It requires measurement of all expected credit losses for financial assets carried at amortized cost, including loans and investment securities, based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 also changes the recognition of other-than-temporary impairment of available for sale securities to an allowance methodology from a direct write-down methodology. ASU 2016-13 will be effective for the Company for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for annual reporting periods beginning after December 15, 2018. ASU 2016-13 will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

The Company has established a CECL implementation team in order to evaluate the impact the adoption of ASU 2016-13 will have on the Company's financial statements. The CECL implementation team, overseen by the Chief Credit Officer, Chief Financial Officer, and Chief Risk Officer, has developed a project plan that incorporates input from various departments within the bank including Credit, Financial Reporting, Risk, and Information Technology among others. Key implementation activities for 2018 include portfolio segmentation, model development, as well as process and information systems enhancements.
FASB Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15")

On August 26, 2016, the FASB issued ASU 2016-15, which amends guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The amendments address eight cash flow issues. Management adopted the standard in first quarter of 2018. Adoption of ASU 2016-15 did not have a material impact on the Company's financial statements.


- 54 -



FASB Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12")

On August 28, 2017, the FASB issued ASU 2017-12, which amends the hedge accounting recognition and presentation requirements in ASC 815 in order to improve transparency and understandability of information and reduce the complexity. The update expands the types of transactions eligible for hedge accounting, eliminates the requirement to separately measure and present hedge ineffectiveness, simplifies hedge effectiveness assessments and updates documentation and presentation requirements. The update allows the reclassification of certain debt securities from held to maturity to available for sale if the debt security is eligible to be hedged under the last-of-layer method. ASU 2017-12 is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods therein; however, early adoption is permitted. The Company is evaluating the impact the adoption of ASU 2017-12 will have on the Company's financial statements.

FASB Accounting Standards Update No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SAB 118).

On March 13, 2018, the FASB issued ASU 2018-05, which adds SEC guidance related to SAB 118 - Income Tax Accounting Implications of the Tax Cuts and Jobs Act. ASU 2018-05 was effective upon issuance.

 

- 55 -



(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities are as follows (in thousands):
 
 
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. government agency debentures
 
$
28,750

 
$
10

 
$
21,196

 
$
8

 
$
20,954

 
$
(9
)
U.S. government agency residential mortgage-backed securities
 
1,605,001

 
1,923

 
392,673

 
(517
)
 
365,171

 
(1,032
)
Municipal and other tax-exempt securities
 
70,606

 
231

 
13,559

 
83

 
45,444

 
230

Asset-backed securities
 
193,271

 
250

 
23,885

 
(26
)
 

 

Other trading securities
 
11,987

 
32

 
11,363

 
4

 
9,845

 
(175
)
Total trading securities
 
$
1,909,615

 
$
2,446

 
$
462,676

 
$
(448
)
 
$
441,414

 
$
(986
)
Investment Securities
 
The amortized cost and fair values of investment securities are as follows (in thousands):

 
 
June 30, 2018
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
173,097

 
$
174,205

 
$
1,779

 
$
(671
)
U.S. government agency residential mortgage-backed securities
 
13,989

 
13,984

 
232

 
(237
)
Other debt securities
 
204,927

 
215,195

 
12,259

 
(1,991
)
Total investment securities
 
$
392,013

 
$
403,384

 
$
14,270

 
$
(2,899
)
 
 
December 31, 2017
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
228,186

 
$
230,349

 
$
2,967

 
$
(804
)
U.S. government agency residential mortgage-backed securities
 
15,891

 
16,242

 
446

 
(95
)
Other debt securities
 
217,716

 
233,444

 
17,095

 
(1,367
)
Total investment securities
 
$
461,793

 
$
480,035

 
$
20,508

 
$
(2,266
)
 
 
June 30, 2017
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
267,375

 
$
270,531

 
$
3,384

 
$
(228
)
U.S. government agency residential mortgage-backed securities
 
18,035

 
18,642

 
668

 
(61
)
Other debt securities
 
205,016

 
226,502

 
22,040

 
(554
)
Total investment securities
 
$
490,426

 
$
515,675

 
$
26,092

 
$
(843
)



- 56 -



The amortized cost and fair values of investment securities at June 30, 2018, by contractual maturity, are as shown in the following table (dollars in thousands):
 
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 
Total
 
Weighted
Average
Maturity²
Municipal and other tax-exempt:
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
60,535

 
$
62,005

 
$
28,117

 
$
22,440

 
$
173,097

 
4.02

Fair value
 
60,487

 
61,736

 
29,038

 
22,944

 
174,205

 
 
Nominal yield¹
 
2.07
%
 
2.58
%
 
5.81
%
 
5.12
%
 
3.25
%
 
 
Other debt securities:
 
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
 
14,877

 
52,170

 
123,762

 
14,118

 
204,927

 
5.99

Fair value
 
15,023

 
54,233

 
132,912

 
13,027

 
215,195

 
 
Nominal yield
 
3.99
%
 
4.69
%
 
5.67
%
 
4.34
%
 
5.21
%
 
 
Total fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
 
$
75,412

 
$
114,175

 
$
151,879

 
$
36,558

 
$
378,024

 
5.08

Fair value
 
75,510

 
115,969

 
161,950

 
35,971

 
389,400

 
 

Nominal yield
 
2.45
%
 
3.54
%
 
5.69
%
 
4.82
%
 
4.31
%
 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
13,989

 
³

Fair value
 
 

 
 

 
 

 
 

 
13,984

 
 

Nominal yield4
 
 

 
 

 
 

 
 

 
2.76
%
 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
392,013

 
 

Fair value
 
 

 
 

 
 

 
 

 
403,384

 
 

Nominal yield
 
 

 
 

 
 

 
 

 
4.26
%
 
 

1 
Calculated on a taxable equivalent basis using a 25 percent effective tax rate.
2 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
3 
The average expected lives of residential mortgage-backed securities were 5.0 years based upon current prepayment assumptions.
4 
The nominal yield on residential mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary - Unaudited for current yields on the investment securities portfolio.


- 57 -



Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
June 30, 2018
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI
U.S. Treasury
 
$
494

 
$
490

 
$

 
$
(4
)
 
$

Municipal and other tax-exempt
 
10,590

 
10,697

 
111

 
(4
)
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
3,088,585

 
3,007,885

 
2,774

 
(83,474
)
 

FHLMC
 
1,580,185

 
1,538,582

 
738

 
(42,341
)
 

GNMA
 
772,785

 
758,093

 
915

 
(15,607
)
 

Total U.S. government agencies
 
5,441,555

 
5,304,560

 
4,427

 
(141,422
)
 

Private issue
 
65,376

 
83,224

 
18,221

 

 
(373
)
Total residential mortgage-backed securities
 
5,506,931


5,387,784


22,648


(141,422
)

(373
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,799,953

 
2,738,451

 
1,815

 
(63,317
)
 

Other debt securities
 
25,500

 
25,444

 
12

 
(68
)
 

Total available for sale securities
 
$
8,343,468

 
$
8,162,866

 
$
24,586

 
$
(204,815
)
 
$
(373
)

 
 
December 31, 2017
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI
U.S. Treasury
 
$
1,000

 
$
1,000

 
$

 
$

 
$

Municipal and other tax-exempt
 
27,182

 
27,080

 
181

 
(283
)
 

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
3,021,551

 
2,997,563

 
11,549

 
(35,537
)
 

FHLMC
 
1,545,971

 
1,531,009

 
3,148

 
(18,110
)
 

GNMA
 
787,626

 
780,580

 
1,607

 
(8,653
)
 

Total U.S. government agencies
 
5,355,148

 
5,309,152

 
16,304

 
(62,300
)
 

Private issue
 
74,311

 
93,221

 
19,301

 

 
(391
)
Total residential mortgage-backed securities
 
5,429,459


5,402,373


35,605


(62,300
)

(391
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,858,885

 
2,834,961

 
1,963

 
(25,887
)
 

Other debt securities
 
25,500

 
25,481

 
50

 
(69
)
 

Perpetual preferred stock
 
12,562

 
15,767

 
3,205

 

 

Equity securities and mutual funds
 
14,487

 
14,916

 
515

 
(86
)
 

Total available for sale securities
 
$
8,369,075

 
$
8,321,578

 
$
41,519

 
$
(88,625
)
 
$
(391
)


- 58 -



 
 
June 30, 2017
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI
U.S. Treasury
 
$
1,000

 
$
998

 
$

 
$
(2
)
 
$

Municipal and other tax-exempt
 
32,885

 
32,765

 
293

 
(413
)
 

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
3,005,920

 
3,008,531

 
24,213

 
(21,602
)
 

FHLMC
 
1,412,376

 
1,412,472

 
7,785

 
(7,689
)
 

GNMA
 
938,086

 
936,365

 
3,641

 
(5,362
)
 

Other
 
25,000

 
25,009

 
52

 
(43
)
 

Total U.S. government agencies
 
5,381,382

 
5,382,377

 
35,691

 
(34,696
)
 

Private issue
 
86,656

 
103,383

 
16,727

 

 

Total residential mortgage-backed securities
 
5,468,038


5,485,760


52,418


(34,696
)


Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,788,543

 
2,782,070

 
7,804

 
(14,277
)
 

Other debt securities
 
4,400

 
4,152

 

 
(248
)
 

Perpetual preferred stock
 
12,562

 
16,568

 
4,006

 

 

Equity securities and mutual funds
 
17,572

 
18,728

 
1,219

 
(63
)
 

Total available for sale securities
 
$
8,325,000

 
$
8,341,041

 
$
65,740

 
$
(49,699
)
 
$



- 59 -



The amortized cost and fair values of available for sale securities at June 30, 2018, by contractual maturity, are as shown in the following table (dollars in thousands):
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 
Total
 
Weighted
Average
Maturity4
U.S. Treasuries:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$

 
$
494

 
$

 
$

 
$
494

 
1.59

Fair value

 
490

 

 

 
490

 
 
Nominal yield
%
 
1.99
%
 
%
 
%
 
1.99
%
 
 
Municipal and other tax-exempt:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
4,574

 
$
2,303

 
$

 
$
3,713

 
$
10,590

 
6.53

Fair value
4,580

 
2,401

 

 
3,716

 
10,697

 
 
Nominal yield¹
3.45
%
 
6.27
%
 
%
 
3.98
%
5 
4.25
%
 
 
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
8,070

 
$
987,244

 
$
1,548,520

 
$
256,119

 
$
2,799,953

 
6.89

Fair value
8,041

 
968,540

 
1,512,106

 
249,764

 
2,738,451

 
 
Nominal yield
1.67
%
 
1.96
%
 
2.17
%
 
2.20
%
 
2.10
%
 
 
Other debt securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$

 
$

 
$

 
$
25,500

 
$
25,500

 
14.18

Fair value

 

 

 
25,444

 
25,444

 
 
Nominal yield
%
 
%
 
%
 
1.59
%
5 
1.59
%
 
 
Total fixed maturity securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
12,644

 
$
990,041

 
$
1,548,520

 
$
285,332

 
$
2,836,537

 
6.95

Fair value
12,621

 
971,431

 
1,512,106

 
278,924

 
2,775,082

 
 
Nominal yield
2.31
%
 
1.97
%
 
2.17
%
 
2.17
%
 
2.10
%
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
 

 
 

 
 

 
 

 
$
5,506,931

 
2 

Fair value
 

 
 

 
 

 
 

 
5,387,784

 
 
Nominal yield3
 

 
 

 
 

 
 

 
2.16
%
 
 
Total available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 

Amortized cost
 

 
 

 
 

 
 

 
$
8,343,468

 
 

Fair value
 

 
 

 
 

 
 

 
8,162,866

 
 

Nominal yield
 

 
 

 
 

 
 

 
2.14
%
 
 

1 
Calculated on a taxable equivalent basis using a 25 percent effective tax rate.
2 
The average expected lives of mortgage-backed securities were 4.3 years years based upon current prepayment assumptions.
3 
The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary –– Unaudited following for current yields on available for sale securities portfolio.
4 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
5 
Nominal yield on municipal and other tax-exempt securities and other debt securities with contractual maturity dates over ten years are based on variable rates which generally are reset within 35.

Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Proceeds
$
142,743

 
$
460,402

 
$
187,533

 
$
700,412

Gross realized gains
257

 
2,763

 
450

 
4,855

Gross realized losses
(1,019
)
 
(2,383
)
 
(1,502
)
 
(2,426
)
Related federal and state income tax expense (benefit)
(194
)
 
148

 
(268
)
 
945



- 60 -



A summary of investment and available for sale securities that have been pledged as collateral for repurchase agreements, public trust funds on deposit and for other purposes, as required by law was as follows (in thousands):
 
June 30, 2018
 
Dec. 31, 2017
 
June 30, 2017
Investment:
 
 
 
 
 
Amortized cost
$
172,906

 
$
226,852

 
$
251,684

Fair value
174,240

 
229,429

 
255,097

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
Amortized cost
6,821,287

 
7,151,468

 
6,327,666

Fair value
6,653,875

 
7,089,346

 
6,317,623


The secured parties do not have the right to sell or repledge these securities.

At June 30, 2018, trading securities and receivables collateralized by securities with a fair value of $889 million were pledged as collateral at the Federal Home Loan Bank (FHLB) for the trading activities. No trading securities were pledged as collateral as of December 31, 2017 and no trading securities were pledged as collateral at June 30, 2017.

Temporarily Impaired Securities as of June 30, 2018
(in thousands):
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
84

 
$
98,325

 
$
484

 
$
5,007

 
$
187

 
$
103,332

 
$
671

U.S. government agency residential mortgage-backed securities
 
3

 
6,979

 
110

 
2,809

 
127

 
9,788

 
237

Other debt securities
 
80

 
36,131

 
1,795

 
3,324

 
196

 
39,455

 
1,991

Total investment securities
 
167

 
$
141,435

 
$
2,389

 
$
11,140

 
$
510

 
$
152,575

 
$
2,899


 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
1

 
$
490

 
$
4

 
$

 
$

 
$
490

 
$
4

Municipal and other tax-exempt
 
10

 
4,784

 
3

 
495

 
1

 
5,279

 
4

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 
 
 

 
 

 
 

 
 

 


 


FNMA
 
174

 
2,049,432

 
44,860

 
710,962

 
38,614

 
2,760,394

 
83,474

FHLMC
 
93

 
1,116,337

 
26,663

 
339,515

 
15,678

 
1,455,852

 
42,341

GNMA
 
33

 
275,104

 
5,611

 
220,740

 
9,996

 
495,844

 
15,607

Total U.S. government agencies
 
300


3,440,873


77,134


1,271,217


64,288


4,712,090


141,422

Private issue1
 
8

 
5,409

 
373

 

 

 
5,409

 
373

Total residential mortgage-backed securities
 
308

 
3,446,282

 
77,507

 
1,271,217

 
64,288

 
4,717,499

 
141,795

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
211

 
1,675,839

 
42,732

 
554,819

 
20,585

 
2,230,658

 
63,317

Other debt securities
 
2

 

 

 
20,434

 
68

 
20,434

 
68

Total available for sale securities
 
532

 
$
5,127,395


$
120,246


$
1,846,965


$
84,942


$
6,974,360


$
205,188

1 
Includes securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income.


- 61 -



Temporarily Impaired Securities as of December 31, 2017
(In thousands)
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
100

 
$
145,960

 
$
643

 
$
5,833

 
$
161

 
$
151,793

 
$
804

U.S. government agency residential mortgage-backed securities
 
1

 

 

 
3,356

 
95

 
3,356

 
95

Other debt securities
 
49

 
20,091

 
1,238

 
3,076

 
129

 
23,167

 
1,367

Total investment securities
 
150

 
$
166,051

 
$
1,881

 
$
12,265

 
$
385

 
$
178,316

 
$
2,266


 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


U.S. Treasury
 

 
$

 
$

 
$

 
$

 
$

 
$

Municipal and other tax-exempt
 
19

 
12,765

 
18

 
4,802

 
265

 
17,567

 
283

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
113

 
1,203,041

 
9,618

 
824,029

 
25,919

 
2,027,070

 
35,537

FHLMC
 
69

 
863,778

 
7,297

 
385,816

 
10,813

 
1,249,594

 
18,110

GNMA
 
27

 
201,887

 
1,452

 
248,742

 
7,201

 
450,629

 
8,653

Total U.S. government agencies
 
209

 
2,268,706

 
18,367

 
1,458,587

 
43,933

 
3,727,293

 
62,300

Private issue1
 
8

 
5,898

 
391

 

 

 
5,898

 
391

Total residential mortgage-backed securities
 
217

 
2,274,604

 
18,758

 
1,458,587

 
43,933

 
3,733,191

 
62,691

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
185

 
1,465,703

 
11,824

 
652,296

 
14,063

 
2,117,999

 
25,887

Other debt securities
 
2

 
19,959

 
41

 
472

 
28

 
20,431

 
69

Perpetual preferred stocks
 

 

 

 

 

 

 

Equity securities and mutual funds
 
111

 
911

 
7

 
2,203

 
79

 
3,114

 
86

Total available for sale securities
 
534

 
$
3,773,942


$
30,648


$
2,118,360


$
58,368


$
5,892,302


$
89,016

1 
Includes securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income.


- 62 -



Temporarily Impaired Securities as of June 30, 2017
(In thousands)
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
82

 
$
111,078

 
$
149

 
$
3,000

 
$
79

 
$
114,078

 
$
228

U.S. government agency residential mortgage-backed securities
 
1

 
3,810

 
61

 

 

 
3,810

 
61

Other debt securities
 
22

 
8,384

 
554

 

 

 
8,384

 
554

Total investment securities
 
105

 
$
123,272

 
$
764

 
$
3,000

 
$
79

 
$
126,272

 
$
843


 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


U.S. Treasury
 
1

 
$
997

 
$
2

 
$

 
$

 
$
997

 
$
2

Municipal and other tax-exempt
 
13

 
1,957

 
1

 
4,655

 
412

 
6,612

 
413

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
75

 
1,381,687

 
20,288

 
87,371

 
1,314

 
1,469,058

 
21,602

FHLMC
 
42

 
731,853

 
7,213

 
16,388

 
476

 
748,241

 
7,689

GNMA
 
21

 
291,806

 
3,766

 
76,605

 
1,596

 
368,411

 
5,362

Other
 
1

 
19,957

 
43

 

 

 
19,957

 
43

Total U.S. government agencies
 
139

 
2,425,303

 
31,310

 
180,364

 
3,386

 
2,605,667

 
34,696

Private issue1
 

 

 

 

 

 

 

Total residential mortgage-backed securities
 
139

 
2,425,303

 
31,310

 
180,364

 
3,386

 
2,605,667

 
34,696

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
121

 
1,388,406

 
12,690

 
78,828

 
1,587

 
1,467,234

 
14,277

Other debt securities
 
2

 

 

 
4,152

 
248

 
4,152

 
248

Perpetual preferred stocks
 

 

 

 

 

 

 

Equity securities and mutual funds
 
91

 
1,668

 
22

 
887

 
41

 
2,555

 
63

Total available for sale securities
 
367

 
$
3,818,331

 
$
44,025

 
$
268,886

 
$
5,674

 
$
4,087,217

 
$
49,699

1 
Includes securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income.

Based on evaluations of impaired securities as of June 30, 2018, the Company does not intend to sell any impaired available for sale debt securities before fair value recovers to the current amortized cost and it is more-likely-than-not that the Company will not be required to sell impaired securities before fair value recovers, which may be maturity.
 
 
 

- 63 -



Fair Value Option Securities
 
Fair value option securities represent securities which the Company has elected to carry at fair value and are separately identified on the Consolidated Balance Sheets. Changes in the fair value are recognized in earnings as they occur. Certain securities are held as an economic hedge of the mortgage servicing rights. 

The fair value and net unrealized gain (loss) included in fair value option securities is as follows (in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. government agency residential mortgage-backed securities
 
$
482,227

 
$
(5,509
)
 
$
755,054

 
$
(1,877
)
 
$
445,169

 
$
1,247



Restricted Equity Securities

Restricted equity securities primarily include stock we are required to hold as members of the Federal Reserve system and the Federal Home Loan Banks. Restricted equity securities are carried at cost as these securities do not have a readily determined fair value because ownership of these shares are restricted and they lack a market. A summary of restricted equity securities follows (in thousands):
 
June 30, 2018
 
Dec. 31, 2017
 
June 30, 2017
Federal Reserve stock
$
41,178

 
$
40,746

 
$
36,676

Federal Home Loan Bank stock
306,543

 
279,200

 
274,113

Other

 
243

 
244

Total
$
347,721


$
320,189


$
311,033


- 64 -



(3) Derivatives
 
Derivative instruments may be used by the Company as part of its internal risk management programs or may be offered to customers. All derivative instruments are carried at fair value and changes in fair value are reported in earnings as they occur. Credit risk is also considered in determining fair value. Deterioration in the credit rating of customer or other counterparties reduced the fair value of asset contracts. Deterioration of our credit rating could decrease the fair value of our derivative liabilities.

When bilateral netting agreements or similar arrangements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by derivative contract type by counterparty basis.

Derivative contracts may require the Company to provide or receive cash margin as collateral for derivative assets and liabilities. Derivative assets and liabilities are reported net of cash margin when certain conditions are met. In addition, derivative contracts executed with customers under Customer Risk Management Programs may be secured by non-cash collateral in conjunction with a credit agreement with that customer. Access to collateral in the event of default is reasonably assured.
 
None of these derivative contracts have been designated as hedging instruments for accounting purposes.

Customer Risk Management Programs
 
BOK Financial offers programs to permit its customers to manage various risks, including fluctuations in energy, cattle and other agricultural products, interest rates and foreign exchange rates with derivative contracts. Customers may also manage interest rate risk through interest rate swaps used by borrowers to modify interest rate terms of their loans or to-be-announced securities used by mortgage banking customers to hedge their loan production. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize the risk of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in Other operating revenue – Brokerage and trading revenue in the Consolidated Statements of Earnings.
 
Internal Risk Management Programs
 
BOK Financial may use derivative contracts in managing its interest rate sensitivity, as part of its economic hedge of the change in the fair value of mortgage servicing rights and to mitigate the market risk of holding trading securities. Changes in the fair value of derivative instruments used in managing interest rate sensitivity and as part of the economic hedge of changes in the fair value of mortgage servicing rights are included in Other operating revenue – Gain (loss) on derivatives, net in the Consolidated Statements of Earnings. Changes in the fair value of derivative instruments used to mitigate the market risk of holding trading securities are included in Other operating revenue – Brokerage and trading revenue.

As discussed in Note 6, certain derivative contracts not designated as hedging instruments related to mortgage loan commitments and forward sales contracts are included in Residential mortgage loans held for sale on the Consolidated Balance Sheets. See Note 6 for additional discussion of notional, fair value and impact on earnings of these contracts.

- 65 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2018 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
15,027,678

 
$
52,681

 
$
(17,382
)
 
$
35,299

 
$

 
$
35,299

Interest rate swaps
 
1,745,237

 
43,040

 
(2,193
)
 
40,847

 
(11,737
)
 
29,110

Energy contracts
 
1,465,826

 
200,640

 
(69,991
)
 
130,649

 

 
130,649

Agricultural contracts
 
23,508

 
1,164

 
(181
)
 
983

 
(741
)
 
242

Foreign exchange contracts
 
174,851

 
170,556

 

 
170,556

 
(290
)
 
170,266

Equity option contracts
 
93,943

 
4,121

 

 
4,121

 
(660
)
 
3,461

Total customer risk management programs
 
18,531,043

 
472,202

 
(89,747
)
 
382,455

 
(13,428
)
 
369,027

Internal risk management programs
 
9,672,639

 
14,760

 
(10,413
)
 
4,347

 

 
4,347

Total derivative contracts
 
$
28,203,682

 
$
486,962

 
$
(100,160
)
 
$
386,802

 
$
(13,428
)
 
$
373,374

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional¹
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
14,443,478

 
$
49,343

 
$
(17,382
)
 
$
31,961

 
$
(31,808
)
 
$
153

Interest rate swaps
 
1,745,237

 
43,043

 
(2,193
)
 
40,850

 
(4,946
)
 
35,904

Energy contracts
 
1,434,980

 
199,119

 
(69,990
)
 
129,129

 
(112,481
)
 
16,648

Agricultural contracts
 
23,496

 
1,142

 
(181
)
 
961

 

 
961

Foreign exchange contracts
 
161,567

 
157,174

 
(1
)
 
157,173

 
(517
)
 
156,656

Equity option contracts
 
93,943

 
4,121

 

 
4,121

 

 
4,121

Total customer risk management programs
 
17,902,701

 
453,942

 
(89,747
)
 
364,195

 
(149,752
)
 
214,443

Internal risk management programs
 
11,648,514

 
30,826

 
(10,413
)
 
20,413

 

 
20,413

Total derivative contracts
 
$
29,551,215

 
$
484,768

 
$
(100,160
)
 
$
384,608

 
$
(149,752
)
 
$
234,856

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.



- 66 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2017 (in thousands):

 
 
Assets
 
 
Notional 1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
12,347,542

 
$
23,606

 
$
(18,096
)
 
$
5,510

 
$

 
$
5,510

Interest rate swaps
 
1,478,944

 
28,278

 

 
28,278

 
(4,964
)
 
23,314

Energy contracts
 
1,190,067

 
103,044

 
(47,873
)
 
55,171

 
(196
)
 
54,975

Agricultural contracts
 
53,238

 
1,576

 
(960
)
 
616

 

 
616

Foreign exchange contracts
 
132,397

 
129,551

 

 
129,551

 
(448
)
 
129,103

Equity option contracts
 
99,633

 
5,503

 

 
5,503

 
(920
)
 
4,583

Total customer risk management programs
 
15,301,821

 
291,558

 
(66,929
)
 
224,629

 
(6,528
)
 
218,101

Internal risk management programs
 
4,736,701

 
9,494

 
(7,093
)
 
2,401

 

 
2,401

Total derivative contracts
 
$
20,038,522

 
$
301,052

 
$
(74,022
)
 
$
227,030

 
$
(6,528
)
 
$
220,502

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional 1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
11,537,742

 
$
20,367

 
$
(18,096
)
 
$
2,271

 
$
(704
)
 
$
1,567

Interest rate swaps
 
1,478,944

 
28,298

 

 
28,298

 
(12,896
)
 
15,402

Energy contracts
 
1,166,924

 
101,603

 
(47,873
)
 
53,730

 
(42,767
)
 
10,963

Agricultural contracts
 
48,552

 
1,551

 
(960
)
 
591

 

 
591

Foreign exchange contracts
 
126,251

 
123,321

 

 
123,321

 
(53
)
 
123,268

Equity option contracts
 
99,633

 
5,503

 

 
5,503

 

 
5,503

Total customer risk management programs
 
14,458,046

 
280,643

 
(66,929
)
 
213,714

 
(56,420
)
 
157,294

Internal risk management programs
 
5,728,421

 
21,762

 
(7,093
)
 
14,669

 

 
14,669

Total derivative contracts
 
$
20,186,467

 
$
302,405

 
$
(74,022
)
 
$
228,383

 
$
(56,420
)
 
$
171,963

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.





- 67 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2017 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
16,174,687

 
$
57,948

 
$
(29,034
)
 
$
28,914

 
$

 
$
28,914

Interest rate swaps
 
1,450,193

 
29,932

 

 
29,932

 
(2,206
)
 
27,726

Energy contracts
 
891,480

 
56,824

 
(20,546
)
 
36,278

 
(21,267
)
 
15,011

Agricultural contracts
 
45,250

 
3,541

 
(1,027
)
 
2,514

 

 
2,514

Foreign exchange contracts
 
169,529

 
162,429

 

 
162,429

 
(7
)
 
162,422

Equity option contracts
 
100,159

 
4,437

 

 
4,437

 
(920
)
 
3,517

Total customer risk management programs
 
18,831,298

 
315,111

 
(50,607
)
 
264,504

 
(24,400
)
 
240,104

Internal risk management programs
 
10,680,498

 
40,185

 

 
40,185

 

 
40,185

Total derivative contracts
 
$
29,511,796

 
$
355,296

 
$
(50,607
)
 
$
304,689

 
$
(24,400
)
 
$
280,289

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
16,174,687

 
$
53,829

 
$
(29,034
)
 
$
24,795

 
$

 
$
24,795

Interest rate swaps
 
1,450,193

 
29,982

 

 
29,982

 
(15,396
)
 
14,586

Energy contracts
 
874,625

 
53,895

 
(20,546
)
 
33,349

 

 
33,349

Agricultural contracts
 
45,262

 
3,538

 
(1,027
)
 
2,511

 
(2,511
)
 

Foreign exchange contracts
 
169,553

 
162,276

 

 
162,276

 
(3,188
)
 
159,088

Equity option contracts
 
100,159

 
4,437

 

 
4,437

 

 
4,437

Total customer risk management programs
 
18,814,479

 
307,957

 
(50,607
)
 
257,350

 
(21,095
)
 
236,255

Internal risk management programs
 
8,310,950

 
49,564

 

 
49,564

 

 
49,564

Total derivative contracts
 
$
27,125,429

 
$
357,521

 
$
(50,607
)
 
$
306,914

 
$
(21,095
)
 
$
285,819

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.







- 68 -



The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):
 
 
Three Months Ended
 
 
June 30, 2018
 
June 30, 2017
 
 
Brokerage
and Trading Revenue
 
Gain (Loss) on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)on Derivatives, Net
Customer risk management programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
7,586

 
$

 
$
9,205

 
$

Interest rate swaps
 
683

 

 
665

 

Energy contracts
 
1,416

 

 
1,666

 

Agricultural contracts
 
15

 

 
11

 

Foreign exchange contracts
 
96

 

 
90

 

Equity option contracts
 

 

 

 

Total customer risk management programs
 
9,796

 

 
11,637

 

Internal risk management programs
 
(981
)
 
(3,057
)
 
6,485

 
3,241

Total derivative contracts
 
$
8,815

 
$
(3,057
)
 
$
18,122

 
$
3,241

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
June 30, 2018
 
June 30, 2017
 
 
Brokerage
and Trading Revenue
 
Gain (Loss) on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss) on Derivatives, Net
Customer risk management programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
14,405

 
$

 
$
17,232

 
$

Interest rate swaps
 
1,439

 

 
1,124

 

Energy contracts
 
4,556

 

 
4,539

 

Agricultural contracts
 
30

 

 
20

 

Foreign exchange contracts
 
272

 

 
360

 

Equity option contracts
 

 

 

 

Total customer risk management programs
 
20,702

 

 
23,275

 

Internal risk management programs
 
(2,864
)
 
(8,742
)
 
6,018

 
2,791

Total derivative contracts
 
$
17,838

 
$
(8,742
)
 
$
29,293

 
$
2,791



- 69 -



(4) Loans and Allowances for Credit Losses

Loans

Loans are either secured or unsecured based on the type of loan and the financial condition of the borrower. Repayment is generally expected from cash flow or proceeds from the sale of selected assets of the borrower. BOK Financial is exposed to risk of loss on loans due to the borrower’s difficulties, which may arise from any number of factors, including problems within the respective industry or local economic conditions. Access to collateral, in the event of borrower default, is reasonably assured through adherence to applicable lending laws and through sound lending standards and credit review procedures. Accounting policies for all loans, excluding residential mortgage loans guaranteed by U.S. government agencies, are as follows.

Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccruing status when, in the opinion of management, full collection of principal or interest is uncertain. Internally risk graded loans are individually evaluated for nonaccruing status quarterly. Non-risk graded loans are generally placed on nonaccruing status when more than 90 days past due or within 60 days of being notified of the borrower's bankruptcy filing. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccruing status. Payments on nonaccruing loans are applied to principal or recognized as interest income, according to management’s judgment as to the collectability of principal. Loans may be returned to accruing status when, in the opinion of management, full collection of principal and interest, including principal previously charged off, is probable based on improvements in the borrower’s financial condition or a sustained period of performance.

Loans to borrowers experiencing financial difficulties may be modified in troubled debt restructurings ("TDRs"). All TDRs are classified as nonaccruing, excluding loans guaranteed by U.S. government agencies. Modifications generally consist of extension of payment terms or interest rate concessions and may result either voluntarily through negotiations with the borrower or involuntarily through court order. Generally, principal and accrued but unpaid interest is not voluntarily forgiven.

Performing loans may be renewed under the current collateral value, debt service ratio and other underwriting standards. Nonaccruing loans may be renewed and will remain classified as nonaccruing. 

Occasionally, loans, other than residential mortgage loans, may be held for sale in order to manage credit concentration. These loans are carried at the lower of cost or fair value with gains or losses recognized in other gains (losses), net in the Statements of Earnings.

All loans are charged off when the loan balance or a portion of the loan balance is no longer supported by the paying capacity of the borrower or when the required cash flow is reduced in a TDR. The charge-off amount is determined through a quarterly evaluation of available cash resources and collateral value and charge-offs are taken in the quarter in which the loss is identified. Non-risk graded loans that are past due between 60 days and 180 days, based on the loan product type, are charged off. Loans to borrowers whose personal obligation has been discharged through Chapter 7 bankruptcy proceedings are charged off within 60 days of notice of the bankruptcy filing, regardless of payment status.

Loan origination and commitment fees and direct loan acquisition and origination costs are deferred and amortized as an adjustment to yield over the life of the loan or over the commitment period, as applicable. Amortization does not anticipate loan prepayments. Net unamortized fees are recognized in full at time of payoff.

Qualifying residential mortgage loans guaranteed by U.S. government agencies have been sold into GNMA pools. Under certain performance conditions specified in government programs, the Company may have the right, but not the obligation to repurchase loans from GNMA pools. These loans no longer qualify for sale accounting and are recognized in the Consolidated Balance Sheets. Guaranteed loans are considered impaired because we do not expect to receive all principal and interest based on the loan's contractual terms. The principal balance continues to be guaranteed; however, interest accrues at a curtailed rate as specified in the programs. The carrying value of these loans is reduced based on an estimate of the expected cash flows discounted at the original note rate plus a liquidity spread. Guaranteed loans may be modified in TDRs in accordance with U.S. government agency guidelines. Interest continues to accrue based on the modified rate. Guaranteed loans may either be resold into GNMA pools after a performance period specified by the programs or foreclosed and conveyed to the guarantors.


- 70 -



Loans are disaggregated into portfolio segments and further disaggregated into classes. The portfolio segment is the level at which the Company develops and documents a systematic method for determining its allowance for credit losses. Classes are a further disaggregation of portfolio segments based on the risk characteristics of the loans and the Company’s method for monitoring and assessing credit risk. 

Portfolio segments of the loan portfolio are as follows (in thousands):

 
 
June 30, 2018
 
December 31, 2017
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
2,206,735

 
$
9,021,326

 
$
120,978

 
$
11,349,039

 
$
2,217,432

 
$
8,379,240

 
$
137,303

 
$
10,733,975

Commercial real estate
 
583,782

 
3,126,442

 
1,996

 
3,712,220

 
548,692

 
2,928,440

 
2,855

 
3,479,987

Residential mortgage
 
1,567,216

 
332,691

 
42,343

 
1,942,250

 
1,608,655

 
317,584

 
47,447

 
1,973,686

Personal
 
168,171

 
831,676

 
340

 
1,000,187

 
154,517

 
810,990

 
269

 
965,776

Total
 
$
4,525,904

 
$
13,312,135

 
$
165,657

 
$
18,003,696

 
$
4,529,296

 
$
12,436,254

 
$
187,874

 
$
17,153,424

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
879

 
 

 
 

 
 

 
$
633

 
 
June 30, 2017
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
2,198,066

 
$
8,242,732

 
$
197,157

 
$
10,637,955

Commercial real estate
 
594,542

 
3,090,275

 
3,775

 
3,688,592

Residential mortgage
 
1,597,587

 
297,376

 
44,235

 
1,939,198

Personal
 
150,728

 
766,900

 
272

 
917,900

Total
 
$
4,540,923

 
$
12,397,283

 
$
245,439

 
$
17,183,645

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
1,414

1 
Excludes residential mortgage loans guaranteed by agencies of the U.S. government

At June 30, 2018, $6.0 billion or 33 percent of our total loan portfolio is to businesses and individuals attributed to the Texas market and $3.5 billion or 20 percent of the total loan portfolio is to businesses and individuals attributed to the Oklahoma market. These geographic concentrations subject the loan portfolio to the general economic conditions within these areas.

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, interest 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 ongoing cash flow from operations of the customer’s business. Inherent lending risk is centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with commercial lending policies.

At June 30, 2018, commercial loans attributed to the Texas market totaled $3.8 billion or 33 percent of the commercial loan portfolio segment and commercial loans attributed to the Oklahoma market totaled $2.2 billion or 19 percent of the commercial loan portfolio segment.


- 71 -



The commercial loan portfolio segment is further divided into loan classes. The energy loan class totaled $3.1 billion or 17 percent of total loans at June 30, 2018, including $2.6 billion of outstanding loans to energy producers. Approximately 56 percent of committed production loans are secured by properties primarily producing oil and 44 percent are secured by properties producing natural gas. The services loan class totaled $2.9 billion or 16 percent of total loans at June 30, 2018. Approximately $1.4 billion of loans in the services category consist of loans with individual balances of less than $10 million. Businesses included in the services class include governmental, educational services, consumer services, financial services and loans to entities providing services for real estate and construction. The healthcare loan class totaled $2.4 billion or 13 percent of total loans at June 30, 2018. The healthcare loan class consists primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Healthcare also includes loans to hospitals and other medical service providers.

Commercial Real Estate

Commercial real estate loans are for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes primarily 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.

At June 30, 2018, 33 percent of commercial real estate loans are secured by properties primarily located in the Dallas and Houston areas of Texas. An additional 12 percent of commercial real estate loans are secured by properties located primarily in the Tulsa and Oklahoma City metropolitan areas of Oklahoma. 

Residential Mortgage and Personal

Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. Residential mortgage loans are secured by a first or second mortgage on the customer’s primary residence. Personal loans consist primarily of loans 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. Residential mortgage and personal 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. Residential mortgage loans retained in the Company’s portfolio are primarily composed of various mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals and certain professionals. Jumbo loans may be fixed or variable rate and are fully amortizing. Jumbo loans generally conform to government sponsored entity standards, except that the loan size exceeds maximums required under these standards. These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38 percent.  Loan-to-value (“LTV”) ratios are tiered from 60 percent to 100 percent, depending on the market. Special mortgage programs include fixed and variable fully amortizing loans tailored to the needs of certain healthcare professionals. Variable rate loans are fully indexed at origination and may have fixed rates for three to ten years, then adjust annually thereafter. 

At June 30, 2018, residential mortgage loans included $170 million of loans guaranteed by U.S. government agencies previously sold into GNMA mortgage pools. These loans either have been repurchased or are eligible to be repurchased by the Company when certain defined delinquency criteria are met. Although payments on these loans generally are past due more than 90 days, interest continues to accrue based on the government guarantee.

Home equity loans totaled $704 million at June 30, 2018. Approximately 62 percent of the home equity loan portfolio is comprised of first lien loans and 38 percent of the home equity portfolio is comprised of junior lien loans. Junior lien loans are distributed 45 percent to amortizing term loans and 55 percent to revolving lines of credit. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 5 year revolving period followed by a 15 year term of amortizing repayments. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term, subject to an update of certain credit information.


- 72 -



Credit Commitments
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At June 30, 2018, outstanding commitments totaled $10.3 billion. Because some commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans.

The amount of collateral obtained, if deemed necessary, is based upon management’s credit evaluation of the borrower.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At June 30, 2018, outstanding standby letters of credit totaled $660 million

Allowances for Credit Losses

BOK Financial maintains an allowance for loan losses and an accrual for off-balance sheet credit risk. The accrual for off-balance sheet credit risk is maintained at a level that is appropriate to cover estimated losses associated with credit instruments that are not currently recognized as assets such as loan commitments, standby letters of credit or guarantees. As discussed in greater detail in Note 6, the Company also has separate accruals for off-balance sheet credit risk related to residential mortgage loans previously sold with full or partial recourse and for residential mortgage loans sold to government sponsored agencies under standard representations and warranties.

The appropriateness of the allowance for loan losses and accrual for off-balance sheet credit losses (collectively "allowance for credit losses") is assessed by management based on an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio, including probable losses on both outstanding loans and unused commitments.

The allowance for loan losses consists of specific allowances attributed to impaired loans that have not yet been charged down to amounts we expect to recover, general allowances for unimpaired loans based on estimated loss rates by loan class and nonspecific allowances based on general economic conditions, risk concentration and related factors. There have been no material changes in the approach or techniques utilized in developing the allowance for loan losses and the accrual for off-balance sheet credit losses for the three and six months ended June 30, 2018.

Loans are considered to be impaired when it becomes probable that BOK Financial will be unable to collect all amounts due according to the contractual terms of the loan agreements. Internally risk graded loans are evaluated individually for impairment. Substantially all commercial and commercial real estate loans and certain residential mortgage and consumer loans are risk graded based on evaluation of the borrowers' ability to repay. Certain commercial loans and most residential mortgage and consumer loans are small balance, homogeneous pools of loans that are not risk graded. Non-risk graded loans are identified as impaired based on performance status. Generally, non-risk graded loans 90 days or more past due or modified in a TDR or in bankruptcy are considered to be impaired.

Specific allowances for impaired loans are measured by an evaluation of estimated future cash flows discounted at the loans’ initial effective interest rate or the fair value of collateral for certain collateral dependent loans. Collateral value of real property is generally based on third party appraisals that conform to Uniform Standards of Professional Appraisal Practice, less estimated selling costs. Appraised values are on an "as-is" basis and are generally not adjusted by the Company. Updated appraisals are obtained at least annually or more frequently if market conditions indicate collateral values have declined. Collateral value of mineral rights is generally determined by our internal staff of engineers based on projected cash flows under current market conditions. Collateral values and available cash resources that support impaired loans are evaluated quarterly. Historical statistics may be used as a practical way to estimate impairment in limited situations, such as when a collateral dependent loan is identified as impaired at the end of a reporting period, until an updated appraisal of collateral value is received or a full assessment of future cash flows is completed. Estimates of future cash flows and collateral values require significant judgments and may be volatile.


- 73 -



General allowances for unimpaired loans are based on estimated loss rates by loan class. The gross loss rate for each loan class is determined by the greater of the current gross loss rate based on the most recent twelve months or a ten-year gross loss rate. Recoveries are not directly considered in the estimation of loss rates. Recoveries generally do not follow predictable patterns and are not received until well after the charge-off date as a result of protracted legal actions. For risk graded loans, gross loss rates are adjusted for changes in risk grading. For each loan class, the current weighted average risk grade is compared to the long-term average risk grade. This comparison determines whether credit risk in each loan class is increasing or decreasing. Loss rates are adjusted upward or downward in proportion to changes in average risk grading. General allowances for unimpaired loans also consider inherent risks identified for each loan class. Inherent risks consider loss rates that most appropriately represent the current credit cycle and other factors attributable to specific loan classes which have not yet been represented in the gross loss rates or risk grading. These factors include changes in commodity prices or engineering imprecision, which may affect the value of reserves that secure our energy loan portfolio, construction risk that may affect commercial real estate loans, changes in regulations and public policy that may disproportionately impact health care loans and changes in loan products.

Nonspecific allowances are maintained for risks beyond factors specific to a particular loan or loan class. These factors include trends in the economy of our primary lending areas, concentrations in large balance loans and other relevant factors.

An accrual for off-balance sheet credit losses is included in Other liabilities in the Consolidated Balance Sheets. The appropriateness of this accrual is determined in the same manner as the allowance for loan losses.

A provision for credit losses is charged against or credited to earnings in amounts necessary to maintain an appropriate allowance for credit losses. Recoveries of loans previously charged off are added to the allowance when received.

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended June 30, 2018 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
120,083

 
$
57,070

 
$
18,431

 
$
8,408

 
$
19,975

 
$
223,967

Provision for loan losses
 
7,116

 
(1,409
)
 
(257
)
 
755

 
(4,503
)
 
1,702

Loans charged off
 
(13,775
)
 

 
(135
)
 
(1,195
)
 

 
(15,105
)
Recoveries
 
298

 
3,097

 
505

 
678

 

 
4,578

Ending balance
 
$
113,722

 
$
58,758

 
$
18,544

 
$
8,646

 
$
15,472

 
$
215,142

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
4,027

 
$
44

 
$
62

 
$
2

 
$

 
$
4,135

Provision for off-balance sheet credit losses
 
(1,666
)
 
(27
)
 
(9
)
 

 

 
(1,702
)
Ending balance
 
$
2,361

 
$
17

 
$
53

 
$
2

 
$

 
$
2,433

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
5,450

 
$
(1,436
)
 
$
(266
)
 
$
755

 
$
(4,503
)
 
$



- 74 -



The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the six months ended June 30, 2018 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
124,269

 
$
56,621

 
$
18,451

 
$
9,124

 
$
22,217

 
$
230,682

Provision for loan losses
 
4,005

 
(1,143
)
 
(419
)
 
603

 
(6,745
)
 
(3,699
)
Loans charged off
 
(15,338
)
 

 
(235
)
 
(2,422
)
 

 
(17,995
)
Recoveries
 
786

 
3,280

 
747

 
1,341

 

 
6,154

Ending balance
 
$
113,722

 
$
58,758

 
$
18,544

 
$
8,646

 
$
15,472

 
$
215,142

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
3,644

 
$
45

 
$
43

 
$
2

 
$

 
$
3,734

Provision for off-balance sheet credit losses
 
(1,283
)
 
(28
)
 
10

 

 

 
(1,301
)
Ending balance
 
$
2,361

 
$
17

 
$
53

 
$
2

 
$

 
$
2,433

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
2,722

 
$
(1,171
)
 
$
(409
)
 
$
603

 
$
(6,745
)
 
$
(5,000
)

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended June 30, 2017 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
137,616

 
$
58,343

 
$
18,177

 
$
7,247

 
$
27,327

 
$
248,710

Provision for loan losses
 
1,546

 
105

 
(47
)
 
1,358

 
47

 
3,009

Loans charged off
 
(1,703
)
 
(76
)
 
(40
)
 
(1,053
)
 

 
(2,872
)
Recoveries
 
283

 
208

 
169

 
554

 

 
1,214

Ending balance
 
$
137,742

 
$
58,580

 
$
18,259

 
$
8,106

 
$
27,374

 
$
250,061

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
9,288

 
$
106

 
$
40

 
$
6

 
$

 
$
9,440

Provision for off-balance sheet credit losses
 
(2,987
)
 
(22
)
 
(2
)
 
2

 

 
(3,009
)
Ending balance
 
$
6,301

 
$
84

 
$
38

 
$
8

 
$

 
$
6,431

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(1,441
)
 
$
83

 
$
(49
)
 
$
1,360

 
$
47

 
$



- 75 -



The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the six months ended June 30, 2017 is summarized as follows (in thousands):

 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
140,213

 
$
50,749

 
$
18,224

 
$
8,773

 
$
28,200

 
$
246,159

Provision for loan losses
 
(1,809
)
 
6,964

 
(86
)
 
570

 
(826
)
 
4,813

Loans charged off
 
(2,127
)
 
(76
)
 
(276
)
 
(2,546
)
 

 
(5,025
)
Recoveries
 
1,465

 
943

 
397

 
1,309

 

 
4,114

Ending balance
 
$
137,742

 
$
58,580

 
$
18,259

 
$
8,106

 
$
27,374

 
$
250,061

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
11,063

 
$
123

 
$
50

 
$
8

 
$

 
$
11,244

Provision for off-balance sheet credit losses
 
(4,762
)
 
(39
)
 
(12
)
 

 

 
(4,813
)
Ending balance
 
$
6,301

 
$
84

 
$
38

 
$
8

 
$

 
$
6,431

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(6,571
)
 
$
6,925

 
$
(98
)
 
$
570

 
$
(826
)
 
$


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at June 30, 2018 is as follows (in thousands):
 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
11,228,061

 
$
98,522

 
$
120,978

 
$
15,200

 
$
11,349,039

 
$
113,722

Commercial real estate
 
3,710,224

 
58,758

 
1,996

 

 
3,712,220

 
58,758

Residential mortgage
 
1,899,907

 
18,544

 
42,343

 

 
1,942,250

 
18,544

Personal
 
999,847

 
8,646

 
340

 

 
1,000,187

 
8,646

Total
 
17,838,039

 
184,470

 
165,657

 
15,200

 
18,003,696

 
199,670

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 

 

 

 

 

 
15,472

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
17,838,039

 
$
184,470

 
$
165,657

 
$
15,200

 
$
18,003,696

 
$
215,142


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 2017 is as follows (in thousands):
 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,596,672

 
$
115,438

 
$
137,303

 
$
8,831

 
$
10,733,975

 
$
124,269

Commercial real estate
 
3,477,132

 
56,621

 
2,855

 

 
3,479,987

 
56,621

Residential mortgage
 
1,926,239

 
18,451

 
47,447

 

 
1,973,686

 
18,451

Personal
 
965,507

 
9,124

 
269

 

 
965,776

 
9,124

Total
 
16,965,550

 
199,634

 
187,874

 
8,831

 
17,153,424

 
208,465

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 

 

 

 

 

 
22,217

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,965,550

 
$
199,634

 
$
187,874

 
$
8,831

 
$
17,153,424

 
$
230,682


- 76 -



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at June 30, 2017 is as follows (in thousands):
 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,440,798

 
$
128,049

 
$
197,157

 
$
9,693

 
$
10,637,955

 
$
137,742

Commercial real estate
 
3,684,817

 
58,580

 
3,775

 

 
3,688,592

 
58,580

Residential mortgage
 
1,894,963

 
18,259

 
44,235

 

 
1,939,198

 
18,259

Personal
 
917,628

 
8,106

 
272

 

 
917,900

 
8,106

Total
 
16,938,206

 
212,994

 
245,439

 
9,693

 
17,183,645

 
222,687

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 

 

 

 

 

 
27,374

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,938,206

 
$
212,994

 
$
245,439

 
$
9,693

 
$
17,183,645

 
$
250,061

Credit Quality Indicators

The Company utilizes loan class and risk grading as primary credit quality indicators. Substantially all commercial and commercial real estate loans and certain residential mortgage and consumer loans are risk graded based on a quarterly evaluation of the borrowers’ ability to repay the loans. Certain commercial loans and most residential mortgage and consumer loans are small, homogeneous pools that are not risk graded. 

The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at June 30, 2018 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
11,323,917

 
$
112,842

 
$
25,122

 
$
880

 
$
11,349,039

 
$
113,722

Commercial real estate
 
3,712,220

 
58,758

 

 

 
3,712,220

 
58,758

Residential mortgage
 
250,081

 
3,082

 
1,692,169

 
15,462

 
1,942,250

 
18,544

Personal
 
917,620

 
6,621

 
82,567

 
2,025

 
1,000,187

 
8,646

Total
 
16,203,838

 
181,303

 
1,799,858

 
18,367

 
18,003,696

 
199,670

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 

 

 

 

 

 
15,472

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,203,838

 
$
181,303

 
$
1,799,858

 
$
18,367

 
$
18,003,696

 
$
215,142

 

- 77 -



The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at December 31, 2017 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,706,035

 
$
123,383

 
$
27,940

 
$
886

 
$
10,733,975

 
$
124,269

Commercial real estate
 
3,479,987

 
56,621

 

 

 
3,479,987

 
56,621

Residential mortgage
 
234,477

 
2,947

 
1,739,209

 
15,504

 
1,973,686

 
18,451

Personal
 
877,390

 
6,461

 
88,386

 
2,663

 
965,776

 
9,124

Total
 
15,297,889

 
189,412

 
1,855,535

 
19,053

 
17,153,424

 
208,465

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 

 

 

 

 

 
22,217

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,297,889

 
$
189,412

 
$
1,855,535

 
$
19,053

 
$
17,153,424

 
$
230,682


The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at June 30, 2017 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,612,477

 
$
136,819

 
$
25,478

 
$
923

 
$
10,637,955

 
$
137,742

Commercial real estate
 
3,688,592

 
58,580

 

 

 
3,688,592

 
58,580

Residential mortgage
 
216,007

 
2,976

 
1,723,191

 
15,283

 
1,939,198

 
18,259

Personal
 
824,318

 
5,742

 
93,582

 
2,364

 
917,900

 
8,106

Total
 
15,341,394

 
204,117

 
1,842,251

 
18,570

 
17,183,645

 
222,687

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 

 

 

 

 

 
27,374

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,341,394

 
$
204,117

 
$
1,842,251

 
$
18,570

 
$
17,183,645

 
$
250,061


Loans are considered to be performing if they are in compliance with the original terms of the agreement and currently exhibit no factors that cause management to have doubts about the borrowers' ability to remain in compliance with the original terms of the agreement, which is consistent with the regulatory guideline of “pass.” Performing loans also include past due residential mortgages that are guaranteed by agencies of the U.S. government that continue to accrue interest based on criteria of the guarantors' programs. Other loans especially mentioned are currently performing in compliance with the original terms of the agreement but may have a potential weakness that deserves management’s close attention, consistent with regulatory guidelines. 

The risk grading process identified certain loans that have a well-defined weakness (e.g. inadequate debt service coverage or liquidity or marginal capitalization; repayment may depend on collateral or other risk mitigation) that may jeopardize liquidation of the debt and represent a greater risk due to deterioration in the financial condition of the borrower. This is consistent with the regulatory guideline for “substandard.” Because the borrowers are still performing in accordance with the original terms of the loan agreements, these loans were not placed in nonaccruing status. 

Nonaccruing loans represent loans for which full collection of principal and interest is uncertain. This is substantially the same criteria used to determine whether a loan is impaired and includes certain loans considered “substandard” and all loans considered “doubtful” by regulatory guidelines.


- 78 -



The following table summarizes the Company’s loan portfolio at June 30, 2018 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
 
 
 
 
 
 
 
 
 
Pass
 
Other Loans Especially Mentioned
 
Accruing Substandard
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,936,184

 
$
52,350

 
$
93,088

 
$
65,597

 
$

 
$

 
$
3,147,219

Services
 
2,903,168

 
30,564

 
6,390

 
4,377

 

 

 
2,944,499

Wholesale/retail
 
1,679,834

 
900

 
4,725

 
14,095

 

 

 
1,699,554

Manufacturing
 
620,687

 
7,559

 
16,579

 
2,991

 

 

 
647,816

Healthcare
 
2,319,035

 
2,030

 
16,532

 
16,125

 

 

 
2,353,722

Other commercial and industrial
 
513,027

 
400

 

 
17,680

 
25,009

 
113

 
556,229

Total commercial
 
10,971,935

 
93,803

 
137,314

 
120,865

 
25,009

 
113

 
11,349,039

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
116,821

 
1,828

 

 
350

 

 

 
118,999

Retail
 
745,691

 
21,173

 
92

 
1,068

 

 

 
768,024

Office
 
812,848

 
7,004

 

 
275

 

 

 
820,127

Multifamily
 
1,056,953

 

 
31

 

 

 

 
1,056,984

Industrial
 
653,384

 

 

 

 

 

 
653,384

Other commercial real estate
 
294,399

 

 

 
303

 

 

 
294,702

Total commercial real estate
 
3,680,096

 
30,005

 
123

 
1,996

 

 

 
3,712,220

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
246,470

 

 
2,555

 
1,056

 
796,282

 
22,049

 
1,068,412

Permanent mortgages guaranteed by U.S. government agencies
 

 

 

 

 
162,086

 
7,567

 
169,653

Home equity
 

 

 

 

 
692,514

 
11,671

 
704,185

Total residential mortgage
 
246,470

 

 
2,555

 
1,056

 
1,650,882

 
41,287

 
1,942,250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
917,459

 
48

 
34

 
79

 
82,306

 
261

 
1,000,187

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,815,960

 
$
123,856

 
$
140,026

 
$
123,996

 
$
1,758,197

 
$
41,661

 
$
18,003,696



- 79 -



The following table summarizes the Company’s loan portfolio at December 31, 2017 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
 
 
 
 
 
 
 
 
 
Pass
 
Other Loans Especially Mentioned
 
Accruing Substandard
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,632,986

 
$
60,288

 
$
144,598

 
$
92,284

 
$

 
$

 
$
2,930,156

Services
 
2,943,869

 
13,927

 
26,533

 
2,620

 

 

 
2,986,949

Wholesale/retail
 
1,443,917

 
19,263

 
5,502

 
2,574

 

 

 
1,471,256

Manufacturing
 
472,869

 
6,653

 
11,290

 
5,962

 

 

 
496,774

Healthcare
 
2,253,497

 
3,186

 
43,305

 
14,765

 

 

 
2,314,753

Other commercial and industrial
 
478,951

 
7

 
8,161

 
19,028

 
27,870

 
70

 
534,087

Total commercial
 
10,226,089

 
103,324

 
239,389

 
137,233

 
27,870

 
70

 
10,733,975

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
113,190

 
1,828

 
395

 
1,832

 

 

 
117,245

Retail
 
686,915

 
4,243

 
98

 
276

 

 

 
691,532

Office
 
824,408

 
7,087

 

 
275

 

 

 
831,770

Multifamily
 
979,969

 

 
48

 

 

 

 
980,017

Industrial
 
573,014

 

 

 

 

 

 
573,014

Other commercial real estate
 
285,506

 
145

 
286

 
472

 

 

 
286,409

Total commercial real estate
 
3,463,002

 
13,303

 
827

 
2,855

 

 

 
3,479,987

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
232,492

 

 
822

 
1,163

 
784,928

 
24,030

 
1,043,435

Permanent mortgages guaranteed by U.S. government agencies
 

 

 

 

 
188,327

 
9,179

 
197,506

Home equity
 

 

 

 

 
719,670

 
13,075

 
732,745

Total residential mortgage
 
232,492

 

 
822

 
1,163

 
1,692,925

 
46,284

 
1,973,686

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
875,696

 
1,548

 
63

 
83

 
88,200

 
186

 
965,776

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,797,279

 
$
118,175

 
$
241,101

 
$
141,334

 
$
1,808,995

 
$
46,540

 
$
17,153,424



- 80 -



The following table summarizes the Company’s loan portfolio at June 30, 2017 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
 
 
 
 
 
 
 
 
 
Pass
 
Other Loans Especially Mentioned
 
Accruing Substandard
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,376,368

 
$
120,473

 
$
226,407

 
$
123,992

 
$

 
$

 
$
2,847,240

Services
 
2,921,510

 
12,452

 
17,111

 
7,754

 

 

 
2,958,827

Wholesale/retail
 
1,507,063

 
16,224

 
9,788

 
10,620

 

 

 
1,543,695

Manufacturing
 
513,442

 
6,540

 
16,499

 
9,656

 

 

 
546,137

Healthcare
 
2,130,339

 
33,554

 
33,120

 
24,505

 

 

 
2,221,518

Other commercial and industrial
 
453,712

 
2,961

 
17,861

 
20,526

 
25,374

 
104

 
520,538

Total commercial
 
9,902,434

 
192,204

 
320,786

 
197,053

 
25,374

 
104

 
10,637,955

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
138,790

 

 
751

 
2,051

 

 

 
141,592

Retail
 
720,730

 
1,774

 

 
301

 

 

 
722,805

Office
 
859,722

 
2,855

 

 
396

 

 

 
862,973

Multifamily
 
947,950

 

 
4,420

 
10

 

 

 
952,380

Industrial
 
693,635

 

 

 

 

 

 
693,635

Other commercial real estate
 
314,187

 

 
3

 
1,017

 

 

 
315,207

Total commercial real estate
 
3,675,014

 
4,629

 
5,174

 
3,775

 

 

 
3,688,592

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
212,563

 
1,693

 
478

 
1,273

 
750,891

 
22,142

 
989,040

Permanent mortgages guaranteed by U.S. government agencies
 

 

 

 

 
182,677

 
9,052

 
191,729

Home equity
 

 

 

 

 
746,661

 
11,768

 
758,429

Total residential mortgage
 
212,563

 
1,693

 
478

 
1,273

 
1,680,229

 
42,962

 
1,939,198

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
823,304

 
49

 
877

 
88

 
93,398

 
184

 
917,900

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,613,315

 
$
198,575

 
$
327,315

 
$
202,189

 
$
1,799,001

 
$
43,250

 
$
17,183,645




- 81 -



Impaired Loans

Loans are considered to be impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. This generally includes all nonaccruing loans, all loans modified in a TDR and all loans repurchased from GNMA pools.

A summary of impaired loans follows (in thousands):
 
As of
 
For the
 
For the
 
June 30, 2018
 
Three Months Ended
 
Six Months Ended
 
 
 
Recorded Investment
 
 
 
June 30, 2018
 
June 30, 2018
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
84,285

 
$
65,597

 
$
19,735

 
$
45,862

 
$
9,460

 
$
77,770

 
$

 
$
78,940

 
$

Services
7,211

 
4,377

 
4,296

 
81

 
79

 
3,243

 

 
3,498

 

Wholesale/retail
14,523

 
14,095

 
2,822

 
11,273

 
4,075

 
8,329

 

 
8,334

 

Manufacturing
2,995

 
2,991

 
2,734

 
257

 
257

 
2,996

 

 
4,476

 

Healthcare
26,212

 
16,125

 
13,583

 
2,542

 
1,329

 
15,734

 

 
15,445

 

Other commercial and industrial
26,983

 
17,793

 
17,793

 

 

 
18,147

 

 
18,446

 

Total commercial
162,209

 
120,978

 
60,963

 
60,015

 
15,200

 
126,219

 

 
129,139

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
1,764

 
350

 
350

 

 

 
982

 

 
1,091

 

Retail
8,134

 
1,068

 
1,068

 

 

 
666

 

 
672

 

Office
287

 
275

 
275

 

 

 
275

 

 
275

 

Multifamily

 

 

 

 

 

 

 

 

Industrial

 

 

 

 

 

 

 

 

Other commercial real estate
509

 
303

 
303

 

 

 
311

 

 
387

 

Total commercial real estate
10,694

 
1,996

 
1,996

 

 

 
2,234

 

 
2,425

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
28,402

 
23,105

 
23,105

 

 

 
23,841

 
322

 
24,149

 
628

Permanent mortgage guaranteed by U.S. government agencies1
174,589

 
169,653

 
169,653

 

 

 
170,856

 
1,574

 
180,671

 
3,422

Home equity
13,362

 
11,671

 
11,671

 

 

 
12,002

 

 
12,373

 

Total residential mortgage
216,353

 
204,429

 
204,429

 

 

 
206,699

 
1,896

 
217,193

 
4,050

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
387

 
340

 
340

 

 

 
340

 

 
305

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
389,643

 
$
327,743

 
$
267,728

 
$
60,015

 
$
15,200

 
$
335,492

 
$
1,896

 
$
349,062

 
$
4,050

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At June 30, 2018, $7.6 million of these loans were nonaccruing and $162 million were accruing based on the guarantee by U.S. government agencies.

Generally, no interest income is recognized on impaired loans until all principal balances, including amounts charged-off, are recovered.


- 82 -



A summary of impaired loans at December 31, 2017 follows (in thousands): 
 
 
 
 
Recorded Investment
 
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
111,011

 
$
92,284

 
$
40,968

 
$
51,316

 
$
8,814

Services
 
5,324

 
2,620

 
2,620

 

 

Wholesale/retail
 
9,099

 
2,574

 
2,574

 

 

Manufacturing
 
6,073

 
5,962

 
5,962

 

 

Healthcare
 
25,140

 
14,765

 
14,765

 

 

Other commercial and industrial
 
27,957

 
19,098

 
19,080

 
18

 
17

Total commercial
 
184,604

 
137,303

 
85,969

 
51,334

 
8,831

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
3,285

 
1,832

 
1,832

 

 

Retail
 
509

 
276

 
276

 

 

Office
 
287

 
275

 
275

 

 

Multifamily
 

 

 

 

 

Industrial
 

 

 

 

 

Other commercial real estate
 
670

 
472

 
472

 

 

Total commercial real estate
 
4,751

 
2,855

 
2,855

 

 

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
30,435

 
25,193

 
25,193

 

 

Permanent mortgage guaranteed by U.S. government agencies1
 
203,814

 
197,506

 
197,506

 

 

Home equity
 
14,548

 
13,075

 
13,075

 

 

Total residential mortgage
 
248,797

 
235,774

 
235,774

 

 

 
 
 
 
 
 
 
 
 
 
 
Personal
 
307

 
269

 
269

 

 

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
438,459

 
$
376,201

 
$
324,867

 
$
51,334

 
$
8,831

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At December 31, 2017, $9.2 million of these loans were nonaccruing and $188 million were accruing based on the guarantee by U.S. government agencies.


- 83 -



A summary of impaired loans at June 30, 2017 follows (in thousands): 
 
 
 
For the
 
For the
 
As of June 30, 2017
 
Three Months Ended
 
Six Months Ended
 
 
 
Recorded Investment
 
 
 
June 30, 2017
 
June 30, 2017
 
Unpaid Principal Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
141,091

 
$
123,992

 
$
56,988

 
$
67,004

 
$
8,874

 
$
117,209

 
$

 
$
128,246

 
$

Services
11,209

 
7,754

 
7,754

 

 

 
7,734

 

 
7,964

 

Wholesale/retail
17,392

 
10,620

 
10,620

 

 

 
10,855

 

 
11,013

 

Manufacturing
10,223

 
9,656

 
9,656

 

 

 
7,781

 

 
7,293

 

Healthcare
24,795

 
24,505

 
18,883

 
5,622

 
802

 
12,707

 

 
12,665

 

Other commercial and industrial
28,933

 
20,630

 
20,609

 
21

 
17

 
20,706

 

 
20,874

 

Total commercial
233,643

 
197,157

 
124,510

 
72,647

 
9,693

 
176,992

 

 
188,055

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Residential construction and land development
3,676

 
2,051

 
2,051

 

 

 
2,334

 

 
2,742

 

Retail
518

 
301

 
301

 

 

 
308

 

 
314

 

Office
499

 
396

 
396

 

 

 
404

 

 
411

 

Multifamily
1,000

 
10

 
10

 

 

 
17

 

 
24

 

Industrial

 

 

 

 

 
38

 

 
38

 

Other commercial real estate
1,212

 
1,017

 
1,017

 

 

 
1,024

 

 
1,119

 

Total commercial real estate
6,905

 
3,775

 
3,775

 

 

 
4,125

 

 
4,648

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Permanent mortgage
28,603

 
23,415

 
23,415

 

 

 
23,801

 
307

 
23,135

 
598

Permanent mortgage guaranteed by U.S. government agencies1
197,659

 
191,729

 
191,729

 

 

 
202,946

 
2,021

 
205,159

 
3,925

Home equity
13,064

 
11,768

 
11,768

 

 

 
11,776

 

 
11,643

 

Total residential mortgage
239,326

 
226,912

 
226,912

 

 

 
238,523

 
2,328

 
239,937

 
4,523

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
307

 
272

 
272

 

 

 
253

 

 
281

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
480,181

 
$
428,116

 
$
355,469

 
$
72,647

 
$
9,693

 
$
419,893

 
$
2,328

 
$
432,921

 
$
4,523

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At June 30, 2017, $9.1 million of these loans were nonaccruing and $183 million were accruing based on the guarantee by U.S. government agencies.


- 84 -



Troubled Debt Restructurings

At June 30, 2018 the Company had $152 million in troubled debt restructurings (TDRs), of which $75 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $80 million of TDRs were performing in accordance with the modified terms.

At December 31, 2017, the Company had $126 million in TDRs, of which $74 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $48 million of TDRs were performing in accordance with the modified terms.

At June 30, 2017, TDRs totaled $169 million, of which $81 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $71 million of TDRs were performing in accordance with the modified terms.

TDRs generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. During the three and six months ended June 30, 2018, $19 million and $32 million of loans were restructured and $5.5 million and $5.6 million of loans designated as TDRs were charged off. During the three and six months ended June 30, 2017, $34 million and $53 million of loans were restructured and $10 thousand and $42 thousand of loans designated as TDRs were charged off.




- 85 -



Nonaccrual & Past Due Loans

Past due status for all loan classes is based on the actual number of days since the last payment was due according to the contractual terms of the loans.

A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of June 30, 2018 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,081,622

 
$

 
$

 
$

 
$
65,597

 
$
3,147,219

Services
 
2,937,699

 
1,619

 
106

 
698

 
4,377

 
2,944,499

Wholesale/retail
 
1,685,175

 
284

 

 

 
14,095

 
1,699,554

Manufacturing
 
644,825

 

 

 

 
2,991

 
647,816

Healthcare
 
2,322,580

 

 
15,017

 

 
16,125

 
2,353,722

Other commercial and industrial
 
538,269

 
52

 
105

 
10

 
17,793

 
556,229

Total commercial
 
11,210,170

 
1,955

 
15,228

 
708

 
120,978

 
11,349,039

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
118,649

 

 

 

 
350

 
118,999

Retail
 
766,956

 

 

 

 
1,068

 
768,024

Office
 
819,852

 

 

 

 
275

 
820,127

Multifamily
 
1,056,984

 

 

 

 

 
1,056,984

Industrial
 
653,384

 

 

 

 

 
653,384

Other commercial real estate
 
294,377

 

 

 
22

 
303

 
294,702

Total commercial real estate
 
3,710,202

 

 

 
22

 
1,996

 
3,712,220

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
1,041,859

 
2,568

 
796

 
84

 
23,105

 
1,068,412

Permanent mortgages guaranteed by U.S. government agencies
 
38,717

 
14,757

 
12,878

 
95,734

 
7,567

 
169,653

Home equity
 
690,743

 
1,612

 
94

 
65

 
11,671

 
704,185

Total residential mortgage
 
1,771,319

 
18,937

 
13,768

 
95,883

 
42,343

 
1,942,250

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
999,519

 
178

 
150

 

 
340

 
1,000,187

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
17,691,210

 
$
21,070

 
$
29,146

 
$
96,613

 
$
165,657

 
$
18,003,696



- 86 -



A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of December 31, 2017 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,833,668

 
$

 
4,204

 
$

 
$
92,284

 
$
2,930,156

Services
 
2,983,222

 
514

 
486

 
107

 
2,620

 
2,986,949

Wholesale/retail
 
1,468,284

 
398

 

 

 
2,574

 
1,471,256

Manufacturing
 
490,739

 

 
73

 

 
5,962

 
496,774

Healthcare
 
2,284,770

 
15,218

 

 

 
14,765

 
2,314,753

Other commercial and industrial
 
514,701

 
85

 
78

 
125

 
19,098

 
534,087

Total commercial
 
10,575,384

 
16,215

 
4,841

 
232

 
137,303

 
10,733,975

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
115,213

 
200

 

 

 
1,832

 
117,245

Retail
 
691,256

 

 

 

 
276

 
691,532

Office
 
831,118

 
254

 

 
123

 
275

 
831,770

Multifamily
 
979,625

 
22

 
370

 

 

 
980,017

Industrial
 
573,014

 

 

 

 

 
573,014

Other commercial real estate
 
285,937

 

 

 

 
472

 
286,409

Total commercial real estate
 
3,476,163

 
476

 
370

 
123

 
2,855

 
3,479,987

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
1,014,588

 
3,435

 
219

 

 
25,193

 
1,043,435

Permanent mortgages guaranteed by U.S. government agencies
 
22,692

 
18,978

 
13,468

 
133,189

 
9,179

 
197,506

Home equity
 
717,007

 
2,206

 
440

 
17

 
13,075

 
732,745

Total residential mortgage
 
1,754,287

 
24,619

 
14,127

 
133,206

 
47,447

 
1,973,686

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
964,374

 
681

 
191

 
261

 
269

 
965,776

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,770,208

 
$
41,991

 
19,529

 
$
133,822

 
$
187,874

 
$
17,153,424



- 87 -



A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of June 30, 2017 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,723,248

 
$

 

 
$

 
$
123,992

 
$
2,847,240

Services
 
2,949,562

 
50

 
180

 
1,281

 
7,754

 
2,958,827

Wholesale/retail
 
1,532,986

 
89

 

 

 
10,620

 
1,543,695

Manufacturing
 
536,481

 

 

 

 
9,656

 
546,137

Healthcare
 
2,196,088

 
925

 

 

 
24,505

 
2,221,518

Other commercial and industrial
 
499,743

 
45

 
119

 
1

 
20,630

 
520,538

Total commercial
 
10,438,108

 
1,109

 
299

 
1,282

 
197,157

 
10,637,955

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
139,070

 
471

 

 

 
2,051

 
141,592

Retail
 
722,504

 

 

 

 
301

 
722,805

Office
 
862,577

 

 

 

 
396

 
862,973

Multifamily
 
952,370

 

 

 

 
10

 
952,380

Industrial
 
693,635

 

 

 

 

 
693,635

Other commercial real estate
 
314,187

 
3

 

 

 
1,017

 
315,207

Total commercial real estate
 
3,684,343

 
474

 

 

 
3,775

 
3,688,592

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
962,443

 
2,024

 
1,026

 
132

 
23,415

 
989,040

Permanent mortgages guaranteed by U.S. government agencies
 
36,867

 
18,416

 
13,581

 
113,813

 
9,052

 
191,729

Home equity
 
744,735

 
1,564

 
362

 

 
11,768

 
758,429

Total residential mortgage
 
1,744,045

 
22,004

 
14,969

 
113,945

 
44,235

 
1,939,198

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
916,852

 
487

 
289

 

 
272

 
917,900

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,783,348

 
$
24,074

 
15,557

 
$
115,227

 
$
245,439

 
$
17,183,645


- 88 -



(5) Acquisitions

On June 18, 2018, the Company announced the signing of a definitive merger agreement with CoBiz Financial Inc. CoBiz is headquartered in Denver with a presence in Colorado and Arizona and has approximately $3.8 billion in assets. Upon completion of the merger, CoBiz shareholders will receive 0.17 shares of BOK Financial common stock and $5.70 in cash for each share of CoBiz common stock. The merger is subject to customary closing conditions including regulatory approval.

On May 1, 2018, the Company acquired a majority voting interest in Switchgrass Holdings, LLC, a restaurant franchise owner and operator, pursuant to merchant banking regulations and restrictions. The purchase price for this acquisition was $14 million. The preliminary purchase price allocation included $6.1 million of goodwill.
(6) Mortgage Banking Activities

Residential Mortgage Loan Production

The Company originates, markets and services conventional and government-sponsored residential mortgage loans. Generally, conforming fixed rate residential mortgage loans are held for sale in the secondary market and non-conforming and adjustable-rate residential mortgage loans are retained for investment. Residential mortgage loans originated for sale by the Company are carried at fair value based on sales commitments and market quotes. Changes in the fair value of mortgage loans held for sale are included in Other operating revenue – Mortgage banking revenue. Residential mortgage loans held for sale also includes the fair value of residential mortgage loan commitments and forward sales commitments, which are considered derivative contracts that have not been designated as hedging instruments for accounting purposes. The volume of mortgage loans originated for sale and secondary market prices are the primary drivers of originating and marketing revenue.

Residential mortgage loan commitments are generally outstanding for 60 to 90 days, which represents the typical period from commitment to originate a residential mortgage loan to when the closed loan is sold to an investor. Residential mortgage loan commitments are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. These latter contracts set the price for loans that will be delivered in the next 60 to 90 days.

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loan commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid
Principal
 Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
214,717

 
$
216,983

 
$
212,525

 
$
215,113

 
$
269,772

 
$
275,179

Residential mortgage loan commitments
 
251,231

 
7,473

 
222,919

 
6,523

 
362,088

 
10,993

Forward sales contracts
 
440,735

 
(1,155
)
 
380,159

 
(258
)
 
587,595

 
1,087

 
 
 

 
$
223,301

 
 

 
$
221,378

 
 

 
$
287,259


No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of June 30, 2018, December 31, 2017 or June 30, 2017. No credit losses were recognized on residential mortgage loans held for sale for the six month period ended June 30, 2018 and 2017.

- 89 -




Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Production revenue:
 
 
 
 
 
 
 
 
Net realized gains on sale of mortgage loans
 
$
10,718

 
$
11,787

 
$
19,636

 
$
20,402

Net change in unrealized gain on mortgage loans held for sale
 
1,047

 
985

 
(322
)
 
4,827

Net change in the fair value of mortgage loan commitments
 
(1,124
)
 
(3,274
)
 
950

 
1,260

Net change in the fair value of forward sales contracts
 
(726
)
 
4,342

 
(897
)
 
(4,106
)
Total production revenue
 
9,915

 
13,840

 
19,367

 
22,383

Servicing revenue
 
16,431

 
16,436

 
33,004

 
33,084

Total mortgage banking revenue
 
$
26,346

 
$
30,276

 
$
52,371

 
$
55,467


Production revenue includes gain (loss) on residential mortgage loans held for sale and changes in the fair value of derivative contracts not designated as hedging instruments for accounting purposes related to residential mortgage loan commitments and forward sales contracts. Servicing revenue includes servicing fee income and late charges on loans serviced for others.

Residential Mortgage Servicing

Mortgage servicing rights may be originated or purchased. Both originated and purchased mortgage servicing rights are initially recognized at fair value. The Company has elected to carry all mortgage servicing rights at fair value. Changes in the fair value are recognized in earnings as they occur. The unpaid principal balance of loans serviced for others is the primary driver of servicing revenue.

The following represents a summary of mortgage servicing rights (Dollars in thousands):
 
 
June 30,
2018
 
December 31, 2017
 
June 30,
2017
Number of residential mortgage loans serviced for others
 
134,868

 
136,528

 
138,335

Outstanding principal balance of residential mortgage loans serviced for others
 
$
21,963,309

 
$
22,046,632

 
$
22,095,232

Weighted average interest rate
 
3.96
%
 
3.94
%
 
3.95
%
Remaining term (in months)
 
295

 
297

 
299


The following represents activity in capitalized mortgage servicing rights (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Beginning Balance
$
274,978

 
$
249,403

 
$
252,867

 
$
247,073

Additions, net
10,820

 
11,078

 
19,720

 
19,514

Change in fair value due to principal payments
(8,802
)
 
(8,299
)
 
(16,797
)
 
(16,261
)
Change in fair value due to market assumption changes
1,723

 
(6,943
)
 
22,929

 
(5,087
)
Ending Balance
$
278,719

 
$
245,239

 
$
278,719

 
$
245,239


Changes in the fair value of mortgage servicing rights due to market assumption changes are included in Other operating revenue in the Consolidated Statements of Earnings. Changes in fair value due to principal payments are included in Mortgage banking costs. 


- 90 -



Mortgage servicing rights are not traded in active markets. Fair value is determined by discounting the projected net cash flows. Significant market assumptions used to determine fair value based on significant unobservable inputs were as follows:
 
 
June 30,
2018
 
December 31, 2017
 
June 30,
2017
Discount rate – risk-free rate plus a market premium
 
9.91%
 
9.84%
 
9.84%
Prepayment rate - based upon loan interest rate, original term and loan type
 
8.12% - 15.08%
 
8.72% - 15.16%
 
8.61%-15.91%
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
 
 
Performing loans
 
$65 - $88
 
$65 - $88
 
$65-$120
Delinquent loans
 
$150 - $500
 
$150 - $500
 
$150-$500
Loans in foreclosure
 
$1,000 - $4,000
 
$1,000 - $4,000
 
$1,000-$4,250
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
2.88%
 
2.24%
 
1.95%
Primary/secondary mortgage rate spread
 
105 bps
 
105 bps
 
105 bps

Changes in primary residential mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights. 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 BOK Financial’s servicing portfolio.

The aging status of our mortgage loans serviced for others by investor at June 30, 2018 follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89
Days
 
90 Days or More
 
Total
FHLMC
 
$
7,932,832

 
$
68,996

 
$
9,405

 
$
25,129

 
$
8,036,362

FNMA
 
6,491,492

 
77,424

 
9,118

 
20,918

 
6,598,952

GNMA
 
6,624,862

 
198,852

 
47,791

 
15,204

 
6,886,709

Other
 
433,830

 
4,989

 
221

 
2,246

 
441,286

Total
 
$
21,483,016

 
$
350,261

 
$
66,535

 
$
63,497

 
$
21,963,309


- 91 -



(7)  Commitments and Contingent Liabilities

Litigation Contingencies

As a member of Visa, BOK Financial is obligated for a proportionate share of certain covered litigation losses incurred by Visa under a retrospective responsibility plan. A contingent liability was recognized for the Company’s share of Visa’s covered litigation liabilities. Visa funded an escrow account to cover litigation claims, including covered litigation losses under the retrospective responsibility plan, with proceeds from its initial public offering in 2008 and from available cash.
BOK Financial currently owns 252,233 Visa Class B shares which are convertible into 411,089 shares of Visa Class A shares after the final settlement of all covered litigation. Class B shares may be diluted in the future if the escrow fund is not adequate to cover future covered litigation costs. Therefore, no value has been currently assigned to the Class B shares and no value may be assigned until the Class B shares are converted into a known number of Class A shares.
On June 24, 2015, the Bank received a complaint alleging that an employee had colluded with a bond issuer and an individual in misusing revenues pledged to municipal bonds for which the Bank served as trustee under the bond indenture. The Company conducted an investigation and concluded that employees in one of its Corporate Trust offices had, with respect to a single group of affiliated bond issuances, violated Company policies and procedures by waiving financial covenants, granting forbearances and accepting without disclosure to the bondholders, debt service payments from sources other than pledged revenues. The relationship manager was terminated. The Company reported the circumstances to, and cooperated with an investigation by, the Securities and Exchange Commission ("SEC"). On December 28, 2015, in an action brought by the SEC, the United States District Court for the District of New Jersey entered a judgment against the principals involved in issuing the bonds, precluding the principals from denying the alleged violations of the federal securities laws and requiring the principals to pay all outstanding principal, accrued interest, and other amounts required under the bond documents (now estimated to be approximately $40 million, less the value of the facilities securing repayment of the bonds), subject to oversight by a court appointed monitor. On September 7, 2016, the Bank agreed, and the SEC entered, a consent order finding that the Bank had violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and requiring the Bank to disgorge $1,067,721 of fees and pay a civil penalty of $600,000. The Bank has disgorged the fees and paid the penalty. 
On August 26, 2016, the Bank was sued in the United States District Court for New Jersey by two bondholders in a putative class action on behalf of all holders of the bonds alleging the Bank participated in the fraudulent sale of securities by the principals. On September 14, 2016, the Bank was sued in the District Court of Tulsa County, Oklahoma by 19 bondholders alleging the Bank participated in the fraudulent sale of securities by the principals. Two separate small groups of bondholders have filed arbitration complaints with the Financial Institutions Regulatory Association respecting the bonds and other bonds for which the Bank served as indenture trustee. Management has been advised by counsel that the Bank has valid defenses to the claims.
On September 15, 2017, the principal of the bond issuances filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Georgia. The principal subsequently sought and obtained an order dismissing the Chapter 11 proceeding. The obligation of the principal to pay all principal and interest on the bonds is non-dischargeable in bankruptcy. The Bank expects the Court ordered payment plan will result in the payment of the bonds by the principals. Accordingly, no loss is probable at this time and no provision for loss has been made. If the payment plan does not result in payment of the bonds, a loss could become probable. A reasonable estimate cannot be made at this time though the amount could be material to the Company. 
On March 5, 2018, the Bank was sued in the Fulton, Georgia County District Court by the administratrix of a deceased resident who had sued for and obtained a judgment for wrongful death against one of the operators of a nursing home financed by one of the bonds which are the subject of the litigation discussed above. The judgment is alleged to total approximately $8 million in principal and interest at this time. Plaintiff alleges that BOKF, in its capacity as indenture trustee for the bonds, colluded with the borrower and others to defraud creditors of the nursing home by misleading the public about the solvency of the nursing home. Plaintiff alleges that this conduct has prevented her from collecting on her judgment. The Bank is advised by counsel that the Bank has valid defenses to the plaintiffs’ claims and no loss is probable.

- 92 -



On March 14, 2017, the Bank was sued in the United States District Court for the Northern District of Oklahoma by bondholders in a second putative class action representing a different set of municipal securities. The bondholders in this second action allege two individuals purchased facilities from the principals who are the subject of the SEC New Jersey proceedings by means of the fraudulent sale of $60 million of municipal securities for which the Bank also served as indenture trustee. The bondholders allege the Bank failed to disclose that the seller of the purchased facilities had engaged in the conduct complained of in the New Jersey action. The Bank properly performed all duties as indenture trustee of this second set of municipal securities, timely commenced proceedings against the issuer of the securities when default occurred, is cooperating with the SEC in actions against the two principals, is not a target of the SEC proceedings, and has been advised by counsel that the Bank has valid defenses to the claims of these bondholders. It is the opinion of management that no loss is probable at this time.
On March 7, 2017, a plaintiff filed a putative class action in the United States District Court for the Northern District of Texas alleging an extended overdraft fee charged by the Bank is interest and exceeds permitted rates. The Bank was previously sued in a class action in the United States District Court for the Northern District of Oklahoma making the same allegations. Pursuant to a motion to dismiss, the Northern District of Oklahoma Court action was dismissed. Other courts considering the question whether extended overdraft fees are interest have likewise determined such fees are not interest. The Bank has moved to dismiss the action. The Northern District of Texas Action was dismissed upon motion by the Bank with leave granted the plaintiff to file an amended complaint. The plaintiff filed an amended complaint. The Bank has again moved to dismiss the complaint, which motion to dismiss is pending before the Court. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.
On July 6, 2018, a plaintiff served a petition in a putative class action in the Oklahoma District Court for Tulsa County Oklahoma alleging BOKF NA breached its Demand Deposit Agreements by charging overdraft and not sufficient funds fees to deposit accounts on the day of the transaction triggering the fee and by the bank's debit hold process causing overdraft fees. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.

In the ordinary course of business, BOK Financial and its subsidiaries are subject to legal actions and complaints. Management believes, based upon the opinion of counsel, that the actions and liability or loss, if any, resulting from the final outcomes of the proceedings, will not have a material effect on the Company’s financial condition, results of operations or cash flows.
                        
Alternative Investment Commitments

The Company sponsors two private equity funds and invests in several tax credit entities and other funds as permitted by banking regulations. Consolidation of these investments is based on the variable interest model determined by the nature of the entity. Variable interest entities are generally defined as entities that either do not have sufficient equity to finance their activities without support from other parties or whose equity investors lack a controlling financial interest. Variable interest entities are consolidated based on the determination that the Company is the primary beneficiary including the power to direct the activities that most significantly impact the variable interest's economic performance and the obligation to absorb losses of the variable interest or the right to receive benefits of the variable interest that could be significant to the variable interest.

BOKF Equity, LLC, an indirect wholly-owned subsidiary, is the general partner of two consolidated private equity funds (“the Funds”). The Funds provide alternative investment opportunities to certain customers, some of which are related parties, through unaffiliated limited partnerships. These unaffiliated limited partnerships generally invest in distressed assets, asset buy-outs or venture capital companies. As general partner, BOKF Equity, LLC has the power to direct activities that most significantly affect the Funds' performance and contingent obligations to make additional investments totaling $3.4 million at June 30, 2018. Substantially all of the obligations are offset by limited partner commitments. The Company does not accrue its contingent liability to fund investments. The Volcker Rule in Title VI of the Dodd-Frank Act will limit both the amount and structure of these types of investments.

Consolidated tax credit investment entities represent the Company's interest in entities earning federal new market tax credits related to qualifying loans. The Company has the power to direct the activities that most significantly impact the variable interest's economic performance of the entity including being the primary beneficiary of or the obligation to absorb losses of the variable interest that could be significant to the variable interest.

Other consolidated alternative investments include entities held under merchant banking authority. While the Company owns a majority of the voting interest in these entities, its ability to manage daily operations is limited by applicable banking regulations. Consolidated other assets includes total tangible assets, identifiable intangible assets and goodwill held by these entities.

- 93 -



The Company also has interests in various unrelated alternative investments generally consisting of unconsolidated limited partnership interests in or loans to entities for which investment return is primarily in the form of tax credits or that invest in distressed real estate loans and properties, energy development, venture capital and other activities. The Company is prohibited by banking regulations from controlling or actively managing the activities of these investments and the Company's maximum exposure to loss is restricted to its investment balance. The Company's obligation to fund alternative investments is included in Other liabilities in the Consolidated Balance Sheets.

A summary of consolidated and unconsolidated alternative investments as of June 30, 2018, December 31, 2017 and June 30, 2017 is as follows (in thousands):

 
 
June 30, 2018
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$

 
$
14,150

 
$

 
$

 
$
10,747

Tax credit entities
 
10,000

 
10,964

 

 
10,964

 
10,000

Other
 

 
17,608

 
1,871

 

 
1,867

Total consolidated
 
$
10,000

 
$
42,722

 
$
1,871

 
$
10,964

 
$
22,614

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
62,188

 
$
147,071

 
$
49,472

 
$

 
$

Other
 

 
45,070

 
19,786

 

 

Total unconsolidated
 
$
62,188

 
$
192,141

 
$
69,258

 
$

 
$


 
 
December 31, 2017
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$

 
$
14,783

 
$

 
$

 
$
11,927

Tax credit entities
 
10,000

 
10,964

 

 
10,964

 
10,000

Other
 

 
1,040

 

 

 
1,040

Total consolidated
 
$
10,000

 
$
26,787

 
$

 
$
10,964

 
$
22,967

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
52,852

 
$
153,506

 
$
47,859

 
$

 
$

Other
 

 
38,397

 
22,968

 

 

Total unconsolidated
 
$
52,852

 
$
191,903

 
$
70,827

 
$

 
$



- 94 -



 
 
June 30, 2017
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$

 
$
16,905

 
$

 
$

 
$
14,199

Tax credit entities
 
10,000

 
11,274

 

 
10,964

 
10,000

Other
 

 
15,894

 
1,621

 
878

 
2,877

Total consolidated
 
$
10,000

 
$
44,073

 
$
1,621

 
$
11,842

 
$
27,076

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
59,744

 
$
148,525

 
$
63,822

 
$

 
$

Other
 

 
33,155

 
13,680

 

 

Total unconsolidated
 
$
59,744

 
$
181,680

 
$
77,502

 
$

 
$



- 95 -



(8) Shareholders' Equity

On July 24, 2018, the Company declared a quarterly cash dividend of $0.50 per common share payable on or about August 27, 2018 to shareholders of record as of August 13, 2018.

Dividends declared were $0.45 and $0.90 per share during the three and six months ended June 30, 2018 and $0.44 and $0.88 per share during the three and six months ended June 30, 2017.

Accumulated Other Comprehensive Income (Loss)

AOCI includes unrealized gains and losses on available for sale ("AFS") securities and non-credit related unrealized losses on AFS securities for which an other-than-temporary impairment has been recorded in earnings. Unrealized losses on employee benefit plans will be reclassified into income as pension plan costs are recognized over the remaining service period of plan participants. Gains and losses in AOCI are net of deferred income taxes.

A rollforward of the components of accumulated other comprehensive income (loss) is included as follows (in thousands):
 
 
Unrealized Gain (Loss) on
 
 
 
 
Available for Sale Securities
 
Employee Benefit Plans
 
Total
Balance, December 31, 2016
 
$
(9,087
)
 
$
(1,880
)
 
$
(10,967
)
Net change in unrealized gain (loss)
 
33,369

 

 
33,369

Reclassification adjustments included in earnings:
 
 
 
 
 

Gain on available for sale securities, net
 
(2,429
)
 

 
(2,429
)
Other comprehensive income (loss), before income taxes
 
30,940

 

 
30,940

Federal and state income taxes1
 
12,009

 

 
12,009

Other comprehensive income (loss), net of income taxes
 
18,931

 

 
18,931

Balance, June 30, 2017
 
$
9,844

 
$
(1,880
)
 
$
7,964

 
 
 
 
 
 

Balance, December 31, 2017
 
$
(35,385
)
 
$
(789
)
 
$
(36,174
)
Transition adjustment for net unrealized gains on equity securities
 
(2,709
)
 

 
(2,709
)
Net change in unrealized gain (loss)
 
(130,523
)
 

 
(130,523
)
Reclassification adjustments included in earnings:
 
 
 
 
 

Loss on available for sale securities, net
 
1,052

 

 
1,052

Other comprehensive income (loss), before income taxes
 
(129,471
)
 

 
(129,471
)
Federal and state income taxes2
 
(33,049
)
 

 
(33,049
)
Other comprehensive income (loss), net of income taxes
 
(96,422
)
 

 
(96,422
)
Balance, June 30, 2018
 
$
(134,516
)

$
(789
)
 
$
(135,305
)
1 
Calculated using a 39 percent blended federal and state statutory tax rate.
2 
Calculated using a 25 percent blended federal and state statutory tax rate.

- 96 -



(9)  Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to BOK Financial Corp. shareholders
 
$
114,372

 
$
88,147

 
$
219,934

 
$
176,503

Less: Earnings allocated to participating securities
 
956

 
926

 
1,978

 
1,929

Numerator for basic earnings per share – income available to common shareholders
 
113,416

 
87,221

 
217,956

 
174,574

Effect of reallocating undistributed earnings of participating securities
 
1

 
1

 
1

 
1

Numerator for diluted earnings per share – income available to common shareholders
 
$
113,417

 
$
87,222

 
$
217,957

 
$
174,575

 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 

 
 

Weighted average shares outstanding
 
65,448,035

 
65,416,274

 
65,463,671

 
65,436,909

Less:  Participating securities included in weighted average shares outstanding
 
546,060

 
686,522

 
589,104

 
714,165

Denominator for basic earnings per common share
 
64,901,975

 
64,729,752

 
64,874,567

 
64,722,744

Dilutive effect of employee stock compensation plans1
 
35,251

 
63,382

 
37,985

 
65,578

Denominator for diluted earnings per common share
 
64,937,226

 
64,793,134

 
64,912,552

 
64,788,322

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.75

 
$
1.35

 
$
3.36

 
$
2.70

Diluted earnings per share
 
$
1.75

 
$
1.35

 
$
3.36

 
$
2.69

1  Excludes employee stock options with exercise prices greater than current market price.
 

 

 

 



- 97 -



(10)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2018 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
182,127

 
$
21,746

 
$
18,754

 
$
15,935

 
$
238,562

Net interest revenue (expense) from internal sources
 
(37,102
)
 
17,548

 
10,232

 
9,322

 

Net interest revenue
 
145,025

 
39,294

 
28,986

 
25,257

 
238,562

Provision for credit losses
 
10,108

 
1,139

 
(105
)
 
(11,142
)
 

Net interest revenue after provision for credit losses
 
134,917

 
38,155

 
29,091

 
36,399

 
238,562

Other operating revenue
 
43,047

 
46,320

 
70,642

 
(3,610
)
 
156,399

Other operating expense
 
47,483

 
55,906

 
61,491

 
81,596

 
246,476

Net direct contribution
 
130,481

 
28,569

 
38,242

 
(48,807
)
 
148,485

Gain (loss) on financial instruments, net
 
9

 
(6,411
)
 

 
6,402

 

Change in fair value of mortgage servicing rights
 

 
1,723

 

 
(1,723
)
 

Gain (loss) on repossessed assets, net
 
(67
)
 
174

 

 
(107
)
 

Corporate expense allocations
 
11,269

 
15,867

 
11,142

 
(38,278
)
 

Net income before taxes
 
119,154

 
8,188

 
27,100

 
(5,957
)
 
148,485

Federal and state income taxes
 
31,577

 
2,086

 
6,981

 
(7,314
)
 
33,330

Net income
 
87,577

 
6,102

 
20,119

 
1,357

 
115,155

Net income attributable to non-controlling interests
 

 

 

 
783

 
783

Net income attributable to BOK Financial Corp. shareholders
 
$
87,577

 
$
6,102

 
$
20,119

 
$
574

 
$
114,372

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
18,072,155

 
$
8,353,558

 
$
8,495,557

 
$
(1,015,235
)
 
$
33,906,035



- 98 -



Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2018 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
342,541

 
$
43,499

 
$
34,161

 
$
38,097

 
$
458,298

Net interest revenue (expense) from internal sources
 
(65,445
)
 
32,772

 
20,164

 
12,509

 

Net interest revenue
 
277,096

 
76,271

 
54,325

 
50,606

 
458,298

Provision for credit losses
 
10,735

 
2,440

 
(153
)
 
(18,022
)
 
(5,000
)
Net interest revenue after provision for credit losses
 
266,361

 
73,831

 
54,478

 
68,628

 
463,298

Other operating revenue
 
82,722

 
91,269

 
145,409

 
(7,012
)
 
312,388

Other operating expense
 
93,950

 
105,760

 
124,295

 
166,901

 
490,906

Net direct contribution
 
255,133

 
59,340

 
75,592

 
(105,285
)
 
284,780

Gain on financial instruments, net
 
16

 
(29,672
)
 

 
29,656

 

Change in fair value of mortgage servicing rights
 

 
22,929

 

 
(22,929
)
 

Gain (loss) on repossessed assets, net
 
(4,232
)
 
66

 

 
4,166

 

Corporate expense allocations
 
23,776

 
31,897

 
22,097

 
(77,770
)
 

Net income before taxes
 
227,141

 
20,766

 
53,495

 
(16,622
)
 
284,780

Federal and state income taxes
 
60,319

 
5,288

 
13,767

 
(15,096
)
 
64,278

Net income
 
166,822

 
15,478

 
39,728

 
(1,526
)
 
220,502

Net income attributable to non-controlling interests
 

 

 

 
568

 
568

Net income attributable to BOK Financial Corp. shareholders
 
$
166,822

 
$
15,478

 
$
39,728

 
$
(2,094
)
 
$
219,934

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
17,933,756

 
$
8,410,513

 
$
8,296,780

 
$
(825,055
)
 
$
33,815,994


Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2017 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
154,377

 
$
20,756

 
$
10,475

 
$
19,596

 
$
205,204

Net interest revenue (expense) from internal sources
 
(21,715
)
 
13,447

 
10,325

 
(2,057
)
 

Net interest revenue
 
132,662

 
34,203

 
20,800

 
17,539

 
205,204

Provision for credit losses
 
1,228

 
926

 
(92
)
 
(2,062
)
 

Net interest revenue after provision for credit losses
 
131,434

 
33,277

 
20,892

 
19,601

 
205,204

Other operating revenue
 
56,353

 
50,744

 
75,569

 
(414
)
 
182,252

Other operating expense
 
59,511

 
55,125

 
60,616

 
75,633

 
250,885

Net direct contribution
 
128,276

 
28,896

 
35,845

 
(56,446
)
 
136,571

Gain (loss) on financial instruments, net
 
3

 
5,224

 

 
(5,227
)
 

Change in fair value of mortgage servicing rights
 

 
(6,943
)
 

 
6,943

 

Gain (loss) on repossessed assets, net
 
1,403

 
98

 

 
(1,501
)
 

Corporate expense allocations
 
8,955

 
16,912

 
9,947

 
(35,814
)
 

Net income before taxes
 
120,727

 
10,363

 
25,898

 
(20,417
)
 
136,571

Federal and state income taxes
 
49,382

 
4,031

 
10,209

 
(15,917
)
 
47,705

Net income
 
71,345

 
6,332

 
15,689

 
(4,500
)
 
88,866

Net income attributable to non-controlling interests
 

 

 

 
719

 
719

Net income (loss) attributable to BOK Financial Corp. shareholders
 
$
71,345

 
$
6,332

 
$
15,689

 
$
(5,219
)
 
$
88,147

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
17,791,671

 
$
8,441,831

 
$
6,960,872

 
$
(825,803
)
 
$
32,368,571


- 99 -




Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2017 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
301,753

 
$
39,348

 
$
21,960

 
$
43,325

 
$
406,386

Net interest revenue (expense) from internal sources
 
(39,831
)
 
25,864

 
19,181

 
(5,214
)
 

Net interest revenue
 
261,922

 
65,212

 
41,141

 
38,111

 
406,386

Provision for credit losses
 
(236
)
 
2,199

 
(53
)
 
(1,910
)
 

Net interest revenue after provision for credit losses
 
262,158

 
63,013

 
41,194

 
40,021

 
406,386

Other operating revenue
 
103,198

 
95,879

 
149,727

 
3,744

 
352,548

Other operating expense
 
112,416

 
107,991

 
121,025

 
154,164

 
495,596

Net direct contribution
 
252,940

 
50,901

 
69,896

 
(110,399
)
 
263,338

Gain (loss) on financial instruments, net
 
41

 
3,557

 

 
(3,598
)
 

Change in fair value of mortgage servicing rights
 

 
(5,087
)
 

 
5,087

 

Gain (loss) on repossessed assets, net
 
1,398

 
(39
)
 

 
(1,359
)
 

Corporate expense allocations
 
17,674

 
33,658

 
20,619

 
(71,951
)
 

Net income before taxes
 
236,705

 
15,674

 
49,277

 
(38,318
)
 
263,338

Federal and state income taxes
 
96,949

 
6,097

 
19,429

 
(36,667
)
 
85,808

Net income
 
139,756

 
9,577

 
29,848

 
(1,651
)
 
177,530

Net income attributable to non-controlling interests
 

 

 

 
1,027

 
1,027

Net income attributable to BOK Financial Corp. shareholders
 
$
139,756

 
$
9,577

 
$
29,848

 
$
(2,678
)
 
$
176,503

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
17,716,738

 
$
8,360,022

 
$
6,960,872

 
$
(377,472
)
 
$
32,660,160


- 100 -



(11) Fees and Commissions Revenue

Fees and commissions revenue is generated through the sales of products, consisting primarily of financial instruments, and the performance of services for customers under contractual obligations. Revenue from providing services for customers is recognized at the time services are provided in an amount that reflects the consideration we expect to be entitled to for those services. Revenue is recognized based on the application of five steps:
Identify the contract with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations in the contract
Recognize revenue when (or as) the Company satisfies a performance obligation

For contracts with multiple performance obligations, individual performance obligations are accounted for separately if the customer can benefit from the good or service on its own or with other resources readily available to the customer and the promise to transfer goods and services to the customer is separately identifiable in the contract. The transaction price is allocated to the performance obligations based on relative standalone selling prices.

Revenue is recognized on a gross basis whenever we have primary responsibility and risk in providing the services or products to our customers and have discretion in establishing the price for the services or products. Revenue is recognized on a net basis whenever we act as an agent for products or services of others. 
 
Brokerage and trading revenue includes revenues from trading, customer hedging, retail brokerage and investment banking. Trading revenue includes net realized and unrealized gains primarily related to sales of securities to institutional customers and related derivative contracts. Customer hedging revenue includes realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs including credit valuation adjustments, as necessary. We offer commodity, interest rate, foreign exchange and equity derivatives to our customers. These customer contracts are offset with contracts with selected counterparties and exchanges to minimize changes in market risk from changes in commodity prices, interest rates or foreign exchange rates. Retail brokerage revenue represents fees and commissions earned on sales of fixed income securities, annuities, mutual funds and other financial instruments to retail customers. Investment banking revenue includes fees earned upon completion of underwriting and financial advisory services. Investment banking revenue also includes fees earned in conjunction with loan syndications.
 
Transaction card revenue includes merchant discount fees and electronic funds transfer network fees, net of interchange fees paid to card issuers and assessments paid to card networks. Merchant discount fees represent fees paid by customers for account management and electronic processing of card transactions. Merchant discount fees are recognized at the time the customer’s transactions are processed or other services are performed. The Company also maintains the TransFund electronic funds transfer network for the benefit of its members, which includes the Bank. Electronic funds transfer fees are recognized as electronic transactions processed on behalf of its members. 
 
Fiduciary and asset management revenue includes fees from asset management, custody, recordkeeping, investment advisory and administration services. Revenue is recognized on an accrual basis at the time the services are performed and may be based on either the fair value of the account or the service provided.
 
Deposit service charges and fees include commercial account service charges, overdraft fees, check card fee revenue and automated service charge and other deposit service fees. Fees are recognized at least quarterly in accordance with published deposit account agreements and disclosure statements for retail accounts or contractual agreements for commercial accounts. Item charges for overdraft or non-sufficient funds items are recognized as items are presented for payment. Account balance charges and activity fees are accrued monthly and collected in arrears. Commercial account activity fees may be offset by an earnings credit based on account balances. Check card fees represent interchange fees paid by a merchant bank for transactions processed from cards issued by the Company. Check card fees are recognized when transactions are processed.  

Mortgage banking revenue includes revenues recognized in conjunction with the origination, marketing and servicing of conventional and government-sponsored residential mortgage loans. Mortgage production revenue includes net realized gains (losses) on sales of residential mortgage loans in the secondary market and the net change in unrealized gains (losses) on residential mortgage loans held for sale. Mortgage production revenue also includes changes in the fair value of derivative contracts not designated as hedging instruments related to residential mortgage loan commitments and forward sales contracts. Mortgage servicing revenue includes servicing fee income and late charges on loans serviced for others.


- 101 -



Fees and commissions revenue by reportable segment and primary service line is as follows for the three months ended June 30, 2018.
 
Commercial
 
Consumer
 
Wealth Management
 
Funds Management & Other
 
Consolidated
 
Out of Scope1
 
In Scope2
Trading revenue
$

 
$

 
$
6,338

 
$

 
$
6,338

 
$
6,338

 
$

Customer hedging revenue
2,892

 

 
7,611

 
(708
)
 
9,795

 
9,795

 

Retail brokerage revenue

 

 
4,886

 
(75
)
 
4,811

 

 
4,811

Investment banking revenue
2,903

 

 
2,641

 

 
5,544

 
2,300

 
3,244

Brokerage and trading revenue
5,795

 

 
21,476

 
(783
)
 
26,488

 
18,433

 
8,055

TransFund EFT network revenue
18,048

 
1,009

 
(21
)
 
2

 
19,038

 

 
19,038

Merchant services revenue
1,921

 
16

 

 

 
1,937

 

 
1,937

Transaction card revenue
19,969

 
1,025

 
(21
)
 
2

 
20,975

 

 
20,975

Personal trust revenue

 

 
20,558

 

 
20,558

 

 
20,558

Corporate trust revenue

 

 
4,935

 

 
4,935

 

 
4,935

Institutional trust & retirement plan services revenue

 

 
11,039

 

 
11,039

 

 
11,039

Investment management services and other

 

 
5,217

 
(50
)
 
5,167

 

 
5,167

Fiduciary and asset management revenue

 

 
41,749

 
(50
)
 
41,699

 

 
41,699

Commercial account service charge revenue
10,912

 
362

 
610

 

 
11,884

 

 
11,884

Overdraft fee revenue
98

 
8,768

 
32

 
7

 
8,905

 

 
8,905

Check card revenue

 
5,343

 

 

 
5,343

 

 
5,343

Automated service charge and other deposit fee revenue
38

 
1,633

 
24

 

 
1,695

 

 
1,695

Deposit service charges and fees
11,048

 
16,106

 
666

 
7

 
27,827

 

 
27,827

Mortgage production revenue

 
9,915

 

 

 
9,915

 
9,915

 

Mortgage servicing revenue

 
16,902

 

 
(471
)
 
16,431

 
16,431

 

Mortgage banking revenue

 
26,817

 

 
(471
)
 
26,346

 
26,346

 

Other revenue
6,062

 
2,384

 
6,619

 
(547
)
 
14,518

 
9,372

 
5,146

Total fees and commissions revenue
$
42,874

 
$
46,332

 
$
70,489

 
$
(1,842
)
 
$
157,853

 
$
54,151

 
$
103,702

1  
Out of scope revenue generally relates to financial instruments or contractual rights and obligations within the scope of other applicable accounting guidance.
2 
In scope revenue represents revenue subject to FASB ASC Topic 606, Revenue from Contracts with Customers.


- 102 -



Fees and commissions revenue by reportable segment and primary service line is as follows for the six months ended June 30, 2018.
 
Commercial
 
Consumer
 
Wealth Management
 
Funds Management & Other
 
Consolidated
 
Out of Scope1
 
In Scope2
Trading revenue
$

 
$

 
$
16,732

 
$

 
$
16,732

 
$
16,732

 
$

Customer hedging revenue
4,914

 

 
14,576

 
1,212

 
20,702

 
20,702

 

Retail brokerage revenue

 

 
9,738

 
(173
)
 
9,565

 

 
9,565

Investment banking revenue
3,964

 

 
6,173

 

 
10,137

 
3,361

 
6,776

Brokerage and trading revenue
8,878

 

 
47,219

 
1,039

 
57,136

 
40,795

 
16,341

TransFund EFT network revenue
36,250

 
1,996

 
(40
)
 
3

 
38,209

 

 
38,209

Merchant services revenue
3,725

 
31

 

 

 
3,756

 

 
3,756

Transaction card revenue
39,975

 
2,027

 
(40
)
 
3

 
41,965

 

 
41,965

Personal trust revenue

 

 
40,658

 

 
40,658

 

 
40,658

Corporate trust revenue

 

 
10,576

 

 
10,576

 

 
10,576

Institutional trust & retirement plan services revenue

 

 
22,489

 

 
22,489

 

 
22,489

Investment management services and other

 

 
9,906

 
(98
)
 
9,808

 

 
9,808

Fiduciary and asset management revenue

 

 
83,629

 
(98
)
 
83,531

 

 
83,531

Commercial account service charge revenue
21,856

 
721

 
1,215

 

 
23,792

 

 
23,792

Overdraft fee revenue
188

 
17,252

 
66

 
10

 
17,516

 

 
17,516

Check card revenue

 
10,261

 

 

 
10,261

 

 
10,261

Automated service charge and other deposit fee revenue
75

 
3,292

 
50

 
2

 
3,419

 

 
3,419

Deposit service charges and fees
22,119

 
31,526

 
1,331

 
12

 
54,988

 

 
54,988

Mortgage production revenue

 
19,367

 

 

 
19,367

 
19,367

 

Mortgage servicing revenue

 
33,929

 

 
(925
)
 
33,004

 
33,004

 

Mortgage banking revenue

 
53,296

 

 
(925
)
 
52,371

 
52,371

 

Other revenue
11,919

 
4,447

 
13,157

 
(2,675
)
 
26,848

 
17,727

 
9,121

Total fees and commissions revenue
$
82,891

 
$
91,296

 
$
145,296

 
$
(2,644
)
 
$
316,839

 
$
110,893

 
$
205,946

1  
Out of scope revenue generally relates to financial instruments or contractual rights and obligations within the scope of other applicable accounting guidance.
2 
In scope revenue represents revenue subject to FASB ASC Topic 606, Revenue from Contracts with Customers.


- 103 -



(12) Federal and State Income Taxes

The Tax Cuts and Jobs Act (the "Act") enacted on December 22, 2017, reduced the federal corporate income tax rate from 35% to 21% beginning January 1, 2018. Provisions of the Act are broad and complex, and we continue to evaluate its effect on the Company's financial statements. Results of this evaluation did not significantly impact the Company's financial position or results of operations for the three and six months ended June 30, 2018.

The reconciliations of income attributable to continuing operations at the U.S. federal statutory tax rate to income tax expense are as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Amount:
 
 
 
 
 
 
 
Federal statutory tax
$
31,182

 
$
47,800

 
$
59,804

 
$
92,168

Tax exempt revenue
(1,653
)
 
(3,224
)
 
(3,465
)
 
(6,335
)
Effect of state income taxes, net of federal benefit
3,288

 
2,944

 
6,945

 
5,389

Utilization of tax credits, net of proportional amortization of low-income housing limited partnership investments
(1,334
)
 
(889
)
 
(2,667
)
 
(2,976
)
Share-based compensation
(424
)
 
1,636

 
(2,044
)
 
(2,301
)
Adjustment to provisional amounts related to tax reform

 

 
1,895

 

Other, net
2,271

 
(562
)
 
3,810

 
(137
)
Total income tax expense
$
33,330

 
$
47,705

 
$
64,278

 
$
85,808


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Percent of pretax income:
 
 
 
 
 
 
 
Federal statutory tax
21.0
 %
 
35.0
 %
 
21.0
 %
 
35.0
 %
Tax exempt revenue
(1.1
)
 
(2.4
)
 
(1.2
)
 
(2.4
)
Effect of state income taxes, net of federal benefit
2.2

 
2.2

 
2.4

 
2.0

Utilization of tax credits, net of proportional amortization of low-income housing limited partnership investments
(0.9
)
 
(0.7
)
 
(0.9
)
 
(1.1
)
Share-based compensation
(0.3
)
 
1.2

 
(0.7
)
 
(0.9
)
Adjustment to provisional amounts related to tax reform

 

 
0.7

 

Other, net
1.5

 
(0.4
)
 
1.3

 

Total
22.4
 %
 
34.9
 %
 
22.6
 %
 
32.6
 %

- 104 -



(13) Fair Value Measurements

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 market 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. Certain assets and liabilities are recorded in the Company’s financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis.

For some assets and liabilities, observable market transactions and market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. A hierarchy for fair value has been established which categorizes into three levels the inputs to valuation techniques used to measure fair value. The three levels are as follows:

Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) - Fair value is based on unadjusted quoted prices in active markets for identical assets or liabilities.

Significant Other Observable Inputs (Level 2) - Fair value is based on significant other observable inputs which are generally determined based on a single price for each financial instrument provided to us by an applicable third-party pricing service and is based on one or more of the following:

Quoted prices for similar, but not identical, assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in inactive markets;
Inputs other than quoted prices that are observable, such as interest rate and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates;
Other inputs derived from or corroborated by observable market inputs.

Significant Unobservable Inputs (Level 3) - Fair value is based upon model-based valuation techniques for which at least one significant assumption is not observable in the market.

Transfers between levels are recognized as of the end of the reporting period. There were no transfers in or out of quoted prices in active markets for identical instruments to significant other observable inputs or significant unobservable inputs during the six months ended June 30, 2018 and 2017, respectively. Transfers between significant other observable inputs and significant unobservable inputs during the six months ended June 30, 2018 and 2017 are included in the summary of changes in recurring fair values measured using unobservable inputs.

The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. Management has evaluated the methodologies employed by the third-party pricing services by comparing the price provided by the pricing service with other sources, including brokers' quotes, sales or purchases of similar instruments and discounted cash flows to establish a basis for reliance on the pricing service values. Significant differences between the pricing service provided value and other sources are discussed with the pricing service to understand the basis for their values. Based on all observable inputs, management may adjust prices obtained from third-party pricing services to more appropriately reflect the prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market. No significant adjustments were made to prices provided by third-party pricing services at June 30, 2018, December 31, 2017 or June 30, 2017.


- 105 -



Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial assets and liabilities measured on a recurring basis was as follows as of June 30, 2018 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
$
28,750

 
$

 
$
28,750

 
$

U.S. government agency residential mortgage-backed securities
 
1,605,001

 

 
1,605,001

 

Municipal and other tax-exempt securities
 
70,606

 

 
70,606

 

Asset-backed securities
 
193,271

 

 
193,271

 

Other trading securities
 
11,987

 

 
11,987

 

Total trading securities
 
1,909,615

 

 
1,909,615

 

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
490

 
490

 

 

Municipal and other tax-exempt securities
 
10,697

 

 
8,667

 
2,030

U.S. government agency residential mortgage-backed securities
 
5,304,560

 

 
5,304,560

 

Privately issued residential mortgage-backed securities
 
83,224

 

 
83,224

 

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,738,451

 

 
2,738,451

 

Other debt securities
 
25,444

 

 
24,973

 
471

Total available for sale securities
 
8,162,866

 
490

 
8,159,875

 
2,501

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
482,227

 

 
482,227

 

Residential mortgage loans held for sale
 
223,301

 

 
209,058

 
14,243

Mortgage servicing rights1
 
278,719

 

 

 
278,719

Derivative contracts, net of cash collateral2
 
373,373

 
21,056

 
352,317

 

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
234,856

 
17,214

 
217,642

 

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type. Derivative contracts in asset positions that were valued based on quoted prices in active markets for identical instruments (Level 1) are primarily exchange-traded interest rate and agricultural derivative contacts, net of cah margin. Derivative contacts in liability positions that were valued using quoted prices in active markets for identical instruments are exchange-traded energy and interest rate derivative contracts, net of cash margin.


- 106 -



The fair value of financial assets and liabilities measured on a recurring basis was as follows as of December 31, 2017 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
$
21,196

 
$

 
$
21,196

 
$

U.S. government agency residential mortgage-backed securities
 
392,673

 

 
392,673

 

Municipal and other tax-exempt securities
 
13,559

 

 
13,559

 

Asset-backed securities
 
23,885

 

 
23,885

 

Other trading securities
 
11,363

 

 
11,363

 

Total trading securities
 
462,676

 

 
462,676

 

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,000

 
1,000

 

 

Municipal and other tax-exempt securities
 
27,080

 

 
22,278

 
4,802

U.S. government agency residential mortgage-backed securities
 
5,309,152

 

 
5,309,152

 

Privately issued residential mortgage-backed securities
 
93,221

 

 
93,221

 

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,834,961

 

 
2,834,961

 

Other debt securities
 
25,481

 

 
25,009

 
472

Perpetual preferred stock
 
15,767

 

 
15,767

 

Equity securities and mutual funds
 
14,916

 

 
14,916

 

Total available for sale securities
 
8,321,578

 
1,000

 
8,315,304

 
5,274

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
755,054

 

 
755,054

 

Residential mortgage loans held for sale
 
221,378

 

 
209,079

 
12,299

Mortgage servicing rights1
 
252,867

 

 

 
252,867

Derivative contracts, net of cash collateral2
 
220,502

 
8,179

 
212,323

 

Liabilities:
 


 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
171,963

 

 
171,963

 

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type. Derivative contracts based on quoted prices in active markets for identical instruments (Level 1) are exchange-traded interest rate, energy and agricultural derivative contacts. Derivative contracts in liability positions that were valued using quoted prices in active markets for identical instruments (Level 1) are exchange-traded interest rate and energy derivative contracts, fully offset by cash margin.


- 107 -



The fair value of financial assets and liabilities measured on a recurring basis was as follows as of June 30, 2017 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
$
20,954

 
$

 
$
20,954

 
$

U.S. government agency residential mortgage-backed securities
 
365,171

 

 
365,171

 

Municipal and other tax-exempt securities
 
45,444

 

 
45,444

 

Other trading securities
 
9,845

 

 
9,845

 

Total trading securities
 
441,414

 

 
441,414

 

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
998

 
998

 

 

Municipal and other tax-exempt securities
 
32,765

 

 
28,110

 
4,655

U.S. government agency residential mortgage-backed securities
 
5,382,377

 

 
5,382,377

 

Privately issued residential mortgage-backed securities
 
103,383

 

 
103,383

 

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,782,070

 

 
2,782,070

 

Other debt securities
 
4,152

 

 

 
4,152

Perpetual preferred stock
 
16,568

 

 
16,568

 

Equity securities and mutual funds
 
18,728

 
3,516

 
15,212

 

Total available for sale securities
 
8,341,041

 
4,514

 
8,327,720

 
8,807

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
445,169

 

 
445,169

 

Residential mortgage loans held for sale
 
287,259

 

 
274,524

 
12,735

Mortgage servicing rights1
 
245,239

 

 

 
245,239

Derivative contracts, net of cash collateral2
 
280,289

 
46,366

 
233,923

 

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
285,819

 
20,915

 
264,904

 

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type. Derivative contracts based on quoted prices in active markets for identical instruments (Level 1) are exchange-traded energy and interest rate derivative contacts. Derivative contracts in liability positions that were valued using quoted prices in active markets for identical instruments (Level 1) are exchange-traded interest rate and agricultural derivative contracts, net cash margin.


- 108 -



Following is a description of the Company's valuation methodologies used for assets and liabilities measured on a recurring basis:
Securities
The fair values of trading, available for sale and fair value option securities are based on quoted prices for identical instruments in active markets, when available. If quoted prices for identical instruments are not available, fair values are based on significant other observable inputs such as quoted prices of comparable instruments or interest rates and credit spreads, yield curves, volatilities, prepayment speeds and loss severities.

The fair value of certain available for sale municipal and other debt securities may be based on significant unobservable inputs. These significant unobservable inputs include limited observed trades, projected cash flows, current credit rating of the issuers and, when applicable, the insurers of the debt and observed trades of similar debt. Discount rates are primarily based on references to interest rate spreads on comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies adjusted for a lack of trading volume. Significant unobservable inputs are developed by investment securities professionals involved in the active trading of similar securities. A summary of significant inputs used to value these securities follows. A management committee composed of senior members from the Company's Capital Markets, Risk Management and Finance departments assesses the appropriateness of these inputs quarterly.

Derivatives

All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, commodity and foreign exchange contracts are based on valuations provided either by third-party dealers in the contracts, quotes provided by independent pricing services, or a third-party provided pricing model that uses significant other observable market inputs.

Credit risk is considered in determining the fair value of derivative instruments. Management determines fair value adjustments based on various risk factors including but not limited to current fair value, probability of default and loss given default.

We also consider our own credit risk in determining the fair value of derivative contracts. Changes in our credit rating would affect the fair value of our derivative liabilities. In the event of a credit downgrade, the fair value of our derivative liabilities would increase.

Residential Mortgage Loans Held for Sale

Residential mortgage loans held for sale are carried on the balance sheet at fair value. The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments and forward sales contracts. The fair value of mortgage loans that were unable to be sold to U.S. government agencies were determined using quoted prices of loans that are sold in securitization transactions with a liquidity discount applied.


- 109 -



The following represents the changes for the three and six months ended June 30, 2018 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt securities
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, March 31, 2018
 
$
1,891

 
$
472

 
$
13,871

Transfer to Level 3 from Level 21
 

 

 
687

Purchases
 

 

 

Proceeds from sales
 

 

 
(488
)
Redemptions and distributions
 

 

 

Gain (loss) recognized in earnings:
 
 
 
 
 
 
Mortgage banking revenue
 

 

 
173

Other comprehensive income:
 
 
 
 
 
 
Net change in unrealized gain
 
139

 
(1
)
 

Balance, June 30, 2018
 
$
2,030

 
$
471

 
$
14,243

1  
Recurring transfers to Level 3 from Level 2 consist of residential mortgage loans intended for sale to U.S. government agencies that fail to meet conforming standards.
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, December 31, 2017
 
$
4,802

 
$
472

 
$
12,299

Transfer to Level 3 from Level 21
 

 

 
2,843

Purchases
 

 

 

Proceeds from sales
 

 

 
(812
)
Redemptions and distributions
 
(3,045
)
 

 

Gain (loss) recognized in earnings:
 
 
 
 
 
 
Mortgage banking revenue
 

 

 
(87
)
Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
273

 
(1
)
 

Balance, June 30, 2018
 
$
2,030

 
$
471

 
$
14,243

1  
Recurring transfers to Level 3 from Level 2 consist of residential mortgage loans intended for sale to U.S. government agencies that fail to meet conforming standards.


- 110 -



The following represents the changes for the three and six months ended June 30, 2017 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt securities
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, March 31, 2017
 
$
5,722

 
$
4,153

 
$
12,679

Transfer to Level 3 from Level 21
 

 

 
853

Purchases
 

 

 

Proceeds from sales
 

 

 
(1,030
)
Redemptions and distributions
 
(1,100
)
 

 

Gain (loss) recognized in earnings:
 
 
 
 
 
 
Mortgage banking revenue
 

 

 
233

Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
33

 
(1
)
 

Balance, June 30, 2017
 
$
4,655

 
$
4,152

 
$
12,735

1 
Recurring transfers to Level 3 from Level 2 consist of residential mortgage loans intended for sale to U.S. government agencies that fail to meet conforming standards.

 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, December 31, 2016
 
$
5,789

 
$
4,152

 
$
11,617

Transfer to Level 3 from Level 21
 

 

 
2,740

Purchases
 

 

 

Proceeds from sales
 

 

 
(1,702
)
Redemptions and distributions
 
(1,100
)
 

 

Gain (loss) recognized in earnings
 
 
 
 
 
 
Mortgage banking revenue
 

 

 
80

Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(34
)
 

 

Balance, June 30, 2017
 
$
4,655

 
$
4,152

 
$
12,735

1 
Recurring transfers to Level 3 from Level 2 consist of residential mortgage loans intended for sale to U.S. government agencies that fail to meet conforming standards.


- 111 -



A summary of quantitative information about assets measured at fair value on a recurring basis using Significant Unobservable Inputs (Level 3) as of June 30, 2018 follows (in thousands):
 
 
Par
Value
 
Amortized
Cost/Unpaid Principal Balance
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
2,050

 
$
2,033

 
$
2,030

 
Discounted cash flows
1 
Interest rate spread
 
6.69%-6.69% (6.69%)
2 
99.00%-99.00% (99.00%)
3 
Other debt securities
 
500

 
500

 
471

 
Discounted cash flows
1 
Interest rate spread
 
6.32%-6.32% (6.32%)
4 
94.36% - 94.36 (94.36%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
N/A

 
15,025

 
14,252

 
Quoted prices of loans sold in securitization transactions, with a liquidity discount applied
 
Liquidity discount applied to the market value of mortgage loans qualifying for sale to U.S. government agencies.
 
94.86%
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 413 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value.
4 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 3 percent.

A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of December 31, 2017 follows (in thousands):
 
 
Par
Value
 
Amortized
Cost/Unpaid Principal Balance
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
5,095

 
$
5,068

 
$
4,802

 
Discounted cash flows
1 
Interest rate spread
 
6.60%-6.60% (6.60%)
2 
92.25%-94.76% (93.75%)
3 
Other debt securities
 
500

 
500

 
472

 
Discounted cash flows
1 
Interest rate spread
 
6.85%-6.85% (6.85%)
4 
94.39% - 94.39 (94.39%)
3 
Residential mortgage loans held for sale
 
N/A

 
12,981

 
12,299

 
Quoted prices of loans sold in securitization transactions, with a liquidity discount applied
 
Liquidity discount applied to the market value of mortgage loans qualifying for sale to U.S. government agencies.
 
94.75%
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 372 to 466 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value.
4 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 3 percent.


- 112 -



A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of June 30, 2017 follows (in thousands):
 
 
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
5,095

 
$
5,067

 
$
4,655

 
Discounted cash flows
1 
Interest rate spread
 
5.98%-5.98% (5.98%)
2 
90.00%-94.90% (92.93%)
3 
Other debt securities
 
4,400

 
4,400

 
4,152

 
Discounted cash flows
1 
Interest rate spread
 
5.41%-6.72% (6.57%)
4 
94.31% - 94.38 (94.37%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
N/A

 
13,274

 
12,735

 
Quoted prices of loans sold in securitization transactions, with a liquidity discount applied
 
Liquidity discount applied to the market value of a mortgage loans qualifying for sale to U.S. government agencies.
 
95.94%
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 360 to 446 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value.
4 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 3 percent.

Fair Value of Assets and Liabilities Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis include collateral for certain impaired loans and real property and other assets acquired to satisfy loans, which are based primarily on comparisons to completed sales of similar assets.

The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at June 30, 2018 for which the fair value was adjusted during the six months ended June 30, 2018:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at June 30, 2018
 
Three Months Ended
June 30, 2018
Recognized in:
 
Six Months Ended
June 30, 2018
Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
Impaired loans
$

 
$
1,045

 
$
11,763

 
$
6,701

 
$

 
$
7,198

 
$

Real estate and other repossessed assets

 
1,996

 
6,838

 

 
118

 

 
5,242

 

- 113 -



The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at June 30, 2017 for which the fair value was adjusted during the six months ended June 30, 2017:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at June 30, 2017
 
Three Months Ended
June 30, 2017
Recognized in:
 
Six Months Ended
June 30, 2017
Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
Impaired loans
$

 
$
464

 
$
3,570

 
$
232

 
$

 
$
676

 
$

Real estate and other repossessed assets

 
3,488

 
530

 

 
772

 

 
906


The fair value of collateral-dependent impaired loans secured by real estate and real estate and other repossessed assets and the related fair value adjustments are generally based on unadjusted third-party appraisals. Our appraisal review policies require appraised values to be supported by observed inputs derived principally from or corroborated by observable market data. Appraisals that are not based on observable inputs or that require significant adjustments or fair value measurements that are not based on third-party appraisals are considered to be based on significant unobservable inputs. Non-recurring fair value measurements of collateral-dependent impaired loans and real estate and other repossessed assets based on significant unobservable inputs are generally due to estimates of current fair values between appraisal dates. Significant unobservable inputs include listing prices for the same or comparable assets, uncorroborated expert opinions or management's knowledge of the collateral or industry. Non-recurring fair value measurements of collateral dependent loans secured by mineral rights are generally determined by our internal staff of engineers on projected cash flows under current market conditions and are based on significant unobservable inputs. Projected cash flows are discounted according to risk characteristics of the underlying oil and gas properties. Assets 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 prices with existing conventional equipment, operating methods and costs. Significant unobservable inputs are developed by asset management and workout professionals and approved by senior Credit Administration executives.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of June 30, 2018 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
11,763

 
Discounted cash flows
 
Management knowledge of industry and non-real estate collateral including but not limited to recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs
 
43% - 84% (53%)1
Real estate and other repossessed assets
 
6,838

 
Discounted cash flows
 
Recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs
 
N/A
1 
Represents fair value as a percentage of the unpaid principal balance.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of June 30, 2017 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
3,570

 
Discounted cash flows
 
Recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs
 
75% - 90% (83%)1
Real estate and other repossessed assets
 
530

 
Appraised value, as adjusted
 
Marketability adjustments off appraised value2
 
65% - 88% (80%)
1  
Represents fair value as a percentage of the unpaid principal balance.
2  
Marketability adjustments include consideration of estimated costs to sell which is approximately 10% of the fair value.


- 114 -



Fair Value of Financial Instruments

The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of June 30, 2018 (dollars in thousands):
 
 
Carrying
Value
 
Estimated
Fair
Value
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash and due from banks
 
$
585,801

 
$
585,801

 
$
585,801

 
$

 
$

Interest-bearing cash and cash equivalents
 
872,999

 
872,999

 
872,999

 

 

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
28,750

 
28,750

 

 
28,750

 

U.S. government agency residential mortgage-backed securities
 
1,605,001

 
1,605,001

 

 
1,605,001

 

Municipal and other tax-exempt securities
 
70,606

 
70,606

 

 
70,606

 

Asset-backed securities
 
193,271

 
193,271

 

 
193,271

 

Other trading securities
 
11,987

 
11,987

 

 
11,987

 

Total trading securities
 
1,909,615

 
1,909,615

 

 
1,909,615

 

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
173,097

 
174,205

 

 
174,205

 

U.S. government agency residential mortgage-backed securities
 
13,989

 
13,984

 

 
13,984

 

Other debt securities
 
204,927

 
215,195

 

 
215,195

 

Total investment securities
 
392,013

 
403,384

 

 
403,384

 

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
490

 
490

 
490

 

 

Municipal and other tax-exempt securities
 
10,697

 
10,697

 

 
8,667

 
2,030

U.S. government agency residential mortgage-backed securities
 
5,304,560

 
5,304,560

 

 
5,304,560

 

Privately issued residential mortgage-backed securities
 
83,224

 
83,224

 

 
83,224

 

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,738,451

 
2,738,451

 

 
2,738,451

 

Other debt securities
 
25,444

 
25,444

 

 
24,973

 
471

Total available for sale securities
 
8,162,866

 
8,162,866

 
490

 
8,159,875

 
2,501

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
482,227

 
482,227

 

 
482,227

 

Residential mortgage loans held for sale
 
223,301

 
223,301

 

 
209,058

 
14,243

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
11,349,039

 
11,116,828

 

 

 
11,116,828

Commercial real estate
 
3,712,220

 
3,639,121

 

 

 
3,639,121

Residential mortgage
 
1,942,250

 
1,917,099

 

 

 
1,917,099

Personal
 
1,000,187

 
990,419

 

 

 
990,419

Total loans
 
18,003,696

 
17,663,467

 

 

 
17,663,467

Allowance for loan losses
 
(215,142
)
 

 

 

 

Loans, net of allowance
 
17,788,554

 
17,663,467

 

 

 
17,663,467

Mortgage servicing rights
 
278,719

 
278,719

 

 

 
278,719

Derivative instruments with positive fair value, net of cash collateral
 
373,373

 
373,373

 
21,056

 
352,317

 

Deposits with no stated maturity
 
20,041,532

 
20,041,532

 

 

 
20,041,532

Time deposits
 
2,127,732

 
2,078,486

 

 

 
2,078,486

Other borrowed funds
 
6,809,472

 
6,571,762

 

 

 
6,571,762

Subordinated debentures
 
144,697

 
148,112

 

 
148,112

 

Derivative instruments with negative fair value, net of cash collateral
 
234,856

 
234,856

 
17,214

 
217,642

 


- 115 -



The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of December 31, 2017 (dollars in thousands):
 
 
Carrying
Value
 
Estimated
Fair
Value
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash and due from banks
 
$
602,510

 
$
602,510

 
$
602,510

 
$

 
$

Interest-bearing cash and cash equivalents
 
1,714,544

 
1,714,544

 
1,714,544

 

 

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
21,196

 
21,196

 

 
21,196

 

U.S. government agency residential mortgage-backed securities
 
392,673

 
392,673

 

 
392,673

 

Municipal and other tax-exempt securities
 
13,559

 
13,559

 

 
13,559

 

Asset-backed securities
 
23,885

 
23,885

 

 
23,885

 

Other trading securities
 
11,363

 
11,363

 

 
11,363

 

Total trading securities
 
462,676

 
462,676

 

 
462,676

 

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
228,186

 
230,349

 

 
230,349

 

U.S. government agency residential mortgage-backed securities
 
15,891

 
16,242

 

 
16,242

 

Other debt securities
 
217,716

 
233,444

 

 
233,444

 

Total investment securities
 
461,793

 
480,035

 

 
480,035

 

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
1,000

 
1,000

 
1,000

 

 

Municipal and other tax-exempt securities
 
27,080

 
27,080

 

 
22,278

 
4,802

U.S. government agency residential mortgage-backed securities
 
5,309,152

 
5,309,152

 

 
5,309,152

 

Privately issued residential mortgage-backed securities
 
93,221

 
93,221

 

 
93,221

 

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,834,961

 
2,834,961

 

 
2,834,961

 

Other debt securities
 
25,481

 
25,481

 

 
25,009

 
472

Perpetual preferred stock
 
15,767

 
15,767

 

 
15,767

 

Equity securities and mutual funds
 
14,916

 
14,916

 

 
14,916

 

Total available for sale securities
 
8,321,578

 
8,321,578

 
1,000

 
8,315,304

 
5,274

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
755,054

 
755,054

 

 
755,054

 

Residential mortgage loans held for sale
 
221,378

 
221,378

 

 
209,079

 
12,299

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
10,733,975

 
10,524,627

 

 

 
10,524,627

Commercial real estate
 
3,479,987

 
3,428,733

 

 

 
3,428,733

Residential mortgage
 
1,973,686

 
1,977,721

 

 

 
1,977,721

Personal
 
965,776

 
956,706

 

 

 
956,706

Total loans
 
17,153,424

 
16,887,787

 

 

 
16,887,787

Allowance for loan losses
 
(230,682
)
 

 

 

 

Loans, net of allowance
 
16,922,742

 
16,887,787

 

 

 
16,887,787

Mortgage servicing rights
 
252,867

 
252,867

 

 

 
252,867

Derivative instruments with positive fair value, net of cash collateral
 
220,502

 
220,502

 
8,179

 
212,323

 

Deposits with no stated maturity
 
19,962,889

 
19,962,889

 

 

 
19,962,889

Time deposits
 
2,098,416

 
2,064,558

 

 

 
2,064,558

Other borrowed funds
 
5,709,861

 
5,703,121

 

 

 
5,703,121

Subordinated debentures
 
144,677

 
148,207

 

 
148,207

 

Derivative instruments with negative fair value, net of cash collateral
 
171,963

 
171,963

 

 
171,963

 



- 116 -



The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of June 30, 2017 (dollars in thousands):
 
 
Carrying
Value
 
Estimated
Fair
Value
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash and due from banks
 
$
561,587

 
$
561,587

 
$
561,587

 
$

 
$

Interest-bearing cash and cash equivalents
 
2,078,831

 
2,078,831

 
2,078,831

 

 

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
20,954

 
20,954

 

 
20,954

 

U.S. government agency residential mortgage-backed securities
 
365,171

 
365,171

 

 
365,171

 

Municipal and other tax-exempt securities
 
45,444

 
45,444

 

 
45,444

 

Other trading securities
 
9,845

 
9,845

 

 
9,845

 

Total trading securities
 
441,414

 
441,414

 

 
441,414

 

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
267,375

 
270,531

 

 
270,531

 

U.S. government agency residential mortgage-backed securities
 
18,035

 
18,642

 

 
18,642

 

Other debt securities
 
205,016

 
226,502

 

 
226,502

 

Total investment securities
 
490,426

 
515,675

 

 
515,675

 

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
998

 
998

 
998

 

 

Municipal and other tax-exempt securities
 
32,765

 
32,765

 

 
28,110

 
4,655

U.S. government agency residential mortgage-backed securities
 
5,382,377

 
5,382,377

 

 
5,382,377

 

Privately issued residential mortgage-backed securities
 
103,383

 
103,383

 

 
103,383

 

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,782,070

 
2,782,070

 

 
2,782,070

 

Other debt securities
 
4,152

 
4,152

 

 

 
4,152

Perpetual preferred stock
 
16,568

 
16,568

 

 
16,568

 

Equity securities and mutual funds
 
18,728

 
18,728

 
3,516

 
15,212

 

Total available for sale securities
 
8,341,041

 
8,341,041

 
4,514

 
8,327,720

 
8,807

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
445,169

 
445,169

 

 
445,169

 

Residential mortgage loans held for sale
 
287,259

 
287,259

 

 
274,524

 
12,735

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
10,637,955

 
10,413,704

 

 

 
10,413,704

Commercial real estate
 
3,688,592

 
3,636,365

 

 

 
3,636,365

Residential mortgage
 
1,939,198

 
1,950,577

 

 

 
1,950,577

Personal
 
917,900

 
909,055

 

 

 
909,055

Total loans
 
17,183,645

 
16,909,701

 

 

 
16,909,701

Allowance for loan losses
 
(250,061
)
 

 

 

 

Loans, net of allowance
 
16,933,584

 
16,909,701

 

 

 
16,909,701

Mortgage servicing rights
 
245,239

 
245,239

 

 

 
245,239

Derivative instruments with positive fair value, net of cash collateral
 
280,289

 
280,289

 
46,366

 
233,923

 

Deposits with no stated maturity
 
20,120,352

 
20,120,352

 

 

 
20,120,352

Time deposits
 
2,196,122

 
2,164,115

 

 

 
2,164,115

Other borrowed funds
 
5,696,666

 
5,664,273

 

 

 
5,664,273

Subordinated debentures
 
144,658

 
147,204

 

 
147,204

 

Derivative instruments with negative fair value, net of cash collateral
 
285,819

 
285,819

 
20,915

 
264,904

 



- 117 -



Because no market exists for certain of these financial instruments and management does not intend to sell these financial instruments, the fair values shown in the tables above may not represent values at which the respective financial instruments could be sold individually or in the aggregate at the given reporting date.
Fair Value Election

As more fully disclosed in Note 2 and Note 6 to the Consolidated Financial Statements, the Company has elected to carry all residential mortgage-backed securities guaranteed by U.S. government agencies held as economic hedges against changes in the fair value of mortgage servicing rights and all residential mortgage loans originated for sale at fair value. Changes in the fair value of these financial instruments are recognized in earnings.
(14) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on June 30, 2018 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q. No events were identified requiring recognition in and/or disclosure in the consolidated financial statements.


- 118 -



Six-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Six Months Ended
 
 
June 30, 2018
 
June 30, 2017
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
1,865,385

 
$
15,722

 
1.70
%
 
$
2,047,633

 
$
9,442

 
0.93
%
Trading securities
 
1,209,369

 
20,893

 
3.53
%
 
517,447

 
8,886

 
3.59
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
222,299

 
5,801

 
5.22
%
 
220,528

 
5,944

 
5.39
%
Tax-exempt
 
197,733

 
2,304

 
2.33
%
 
294,539

 
3,650

 
2.48
%
Total investment securities
 
420,032

 
8,105

 
3.86
%
 
515,067

 
9,594

 
3.73
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
8,179,361

 
93,137

 
2.26
%
 
8,420,578

 
85,847

 
2.06
%
Tax-exempt
 
20,476

 
334

 
3.26
%
 
54,470

 
1,453

 
5.71
%
Total available for sale securities
 
8,199,837

 
93,471

 
2.26
%
 
8,475,048

 
87,300

 
2.08
%
Fair value option securities
 
556,337

 
8,746

 
3.05
%
 
446,478

 
5,919

 
2.62
%
Restricted equity securities
 
349,134

 
10,525

 
6.03
%
 
304,074

 
8,708

 
5.73
%
Residential mortgage loans held for sale
 
209,043

 
4,177

 
4.01
%
 
232,932

 
4,222

 
3.65
%
Loans
 
17,507,714

 
401,940

 
4.63
%
 
17,132,662

 
336,258

 
3.96
%
Allowance for loan losses
 
(225,909
)
 
 
 
 
 
(250,512
)
 
 
 
 
Loans, net of allowance
 
17,281,805

 
401,940

 
4.69
%
 
16,882,150

 
336,258

 
4.01
%
Total earning assets
 
30,090,942

 
563,579

 
3.76
%
 
29,420,829

 
470,329

 
3.23
%
Receivable on unsettled securities sales
 
807,470

 
 
 
 
 
373,022

 
 
 
 
Cash and other assets
 
2,917,582

 
 
 
 
 
2,866,309

 
 
 
 
Total assets
 
$
33,815,994

 
 
 
 
 
$
32,660,160

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
10,266,484

 
$
25,487

 
0.50
%
 
$
10,326,232

 
$
11,651

 
0.23
%
Savings
 
491,955

 
183

 
0.08
%
 
451,476

 
182

 
0.08
%
Time
 
2,144,928

 
13,512

 
1.27
%
 
2,231,526

 
12,143

 
1.10
%
Total interest-bearing deposits
 
12,903,367

 
39,182

 
0.61
%
 
13,009,234

 
23,976

 
0.37
%
Funds purchased and repurchase agreements
 
562,999

 
1,304

 
0.47
%
 
534,599

 
260

 
0.10
%
Other borrowings
 
6,412,463

 
56,752

 
1.78
%
 
5,654,534

 
26,921

 
0.96
%
Subordinated debentures
 
144,687

 
4,051

 
5.65
%
 
144,649

 
4,028

 
5.62
%
Total interest-bearing liabilities
 
20,023,516

 
101,289

 
1.02
%
 
19,343,015

 
55,185

 
0.58
%
Non-interest bearing demand deposits
 
9,187,499

 
 
 
 
 
9,220,877

 
 
 
 
Due on unsettled securities purchases
 
543,265

 
 
 
 
 
127,824

 
 
 
 
Other liabilities
 
566,248

 
 
 
 
 
599,806

 
 
 
 
Total equity
 
3,495,466

 
 
 
 
 
3,368,638

 
 
 
 
Total liabilities and equity
 
$
33,815,994

 
 
 
 
 
$
32,660,160

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
462,290

 
2.74
%
 
 
 
$
415,144

 
2.65
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
3.08
%
 
 
 
 
 
2.85
%
Less tax-equivalent adjustment
 
 
 
3,992

 
 
 
 
 
8,758

 
 
Net Interest Revenue
 
 
 
458,298

 
 
 
 
 
406,386

 
 
Provision for credit losses
 
 
 
(5,000
)
 
 
 
 
 

 
 
Other operating revenue
 
 
 
312,388

 
 
 
 
 
352,548

 
 
Other operating expense
 
 
 
490,906

 
 
 
 
 
495,596

 
 
Income before taxes
 
 
 
284,780

 
 
 
 
 
263,338

 
 
Federal and state income taxes
 
 
 
64,278

 
 
 
 
 
85,808

 
 
Net income
 
 
 
220,502

 
 
 
 
 
177,530

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
568

 
 
 
 
 
1,027

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
219,934

 
 
 
 
 
$
176,503

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
3.36

 
 

 
 

 
$
2.70

 
 

Diluted
 
 

 
$
3.36

 
 

 
 

 
$
2.69

 
 

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.

- 119 -



Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
June 30, 2018
 
March 31, 2018
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
1,673,387

 
$
7,740

 
1.86
%
 
$
2,059,517

 
$
7,982

 
1.57
%
Trading securities
 
1,482,302

 
13,084

 
3.63
%
 
933,404

 
7,809

 
3.40
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
217,770

 
2,845

 
5.23
%
 
226,877

 
2,956

 
5.21
%
Tax-exempt
 
181,318

 
1,096

 
2.42
%
 
214,330

 
1,208

 
2.25
%
Total investment securities
 
399,088

 
3,941

 
3.95
%
 
441,207

 
4,164

 
3.78
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
8,145,748

 
47,322

 
2.29
%
 
8,213,346

 
45,815

 
2.22
%
Tax-exempt
 
17,394

 
141

 
3.26
%
 
23,592

 
193

 
3.26
%
Total available for sale securities
 
8,163,142

 
47,463

 
2.30
%
 
8,236,938

 
46,008

 
2.23
%
Fair value option securities
 
487,192

 
3,927

 
3.16
%
 
626,251

 
4,819

 
2.95
%
Restricted equity securities
 
348,546

 
5,408

 
6.21
%
 
349,176

 
5,117

 
5.86
%
Residential mortgage loans held for sale
 
218,600

 
2,333

 
4.28
%
 
199,380

 
1,844

 
3.71
%
Loans
 
17,751,242

 
212,266

 
4.80
%
 
17,261,481

 
189,674

 
4.45
%
Allowance for loan losses
 
(222,856
)
 
 
 
 
 
(228,996
)
 
 
 
 
Loans, net of allowance
 
17,528,386

 
212,266

 
4.86
%
 
17,032,485

 
189,674

 
4.51
%
Total earning assets
 
30,301,191

 
296,162

 
3.91
%
 
29,878,358

 
267,417

 
3.61
%
Receivable on unsettled securities sales
 
618,240

 
 
 
 
 
998,803

 
 
 
 
Cash and other assets
 
2,986,604

 
 
 
 
 
2,847,791

 
 
 
 
Total assets
 
$
33,906,035

 
 
 
 
 
$
33,724,952

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
10,189,354

 
$
13,993

 
0.55
%
 
$
10,344,469

 
$
11,494

 
0.45
%
Savings
 
503,671

 
95

 
0.08
%
 
480,110

 
88

 
0.07
%
Time
 
2,138,880

 
6,875

 
1.29
%
 
2,151,044

 
6,637

 
1.25
%
Total interest-bearing deposits
 
12,831,905

 
20,963

 
0.66
%
 
12,975,623

 
18,219

 
0.57
%
Funds purchased and repurchase agreements
 
593,250

 
782

 
0.53
%
 
532,412

 
522

 
0.40
%
Other borrowings
 
6,497,020

 
31,825

 
1.96
%
 
6,326,967

 
24,927

 
1.60
%
Subordinated debentures
 
144,692

 
2,048

 
5.67
%
 
144,682

 
2,003

 
5.61
%
Total interest-bearing liabilities
 
20,066,867

 
55,618

 
1.11
%
 
19,979,684

 
45,671

 
0.93
%
Non-interest bearing demand deposits
 
9,223,327

 
 
 
 
 
9,151,272

 
 
 
 
Due on unsettled securities purchases
 
527,804

 
 
 
 
 
558,898

 
 
 
 
Other liabilities
 
575,865

 
 
 
 
 
556,524

 
 
 
 
Total equity
 
3,512,172

 
 
 
 
 
3,478,574

 
 
 
 
Total liabilities and equity
 
$
33,906,035

 
 
 
 
 
$
33,724,952

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
240,544

 
2.80
%
 
 
 
$
221,746

 
2.68
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
 
 
3.17
%
 
 
 
 
 
2.99
%
Less tax-equivalent adjustment
 
 
 
1,983

 
 
 
 
 
2,010

 
 
Net Interest Revenue
 
 
 
238,562

 
 
 
 
 
219,736

 
 
Provision for credit losses
 
 
 

 
 
 
 
 
(5,000
)
 
 
Other operating revenue
 
 
 
156,399

 
 
 
 
 
155,989

 
 
Other operating expense
 
 
 
246,476

 
 
 
 
 
244,430

 
 
Income before taxes
 
 
 
148,485

 
 
 
 
 
136,295

 
 
Federal and state income taxes
 
 
 
33,330

 
 
 
 
 
30,948

 
 
Net income
 
 
 
115,155

 
 
 
 
 
105,347

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
783

 
 
 
 
 
(215
)
 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
114,372

 
 
 
 
 
$
105,562

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.75

 
 

 
 

 
$
1.61

 
 

Diluted
 
 

 
$
1.75

 
 

 
 

 
$
1.61

 
 

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.

- 120 -



Three Months Ended
December 31, 2017
 
September 30, 2017
 
June 30, 2017
Average Balance
 
Revenue /Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,976,395

 
$
6,311

 
1.27
%
 
$
1,965,645

 
$
6,375

 
1.29
%
 
$
2,007,746

 
$
5,198

 
1.04
%
560,321

 
4,629

 
3.38
%
 
491,613

 
4,122

 
3.47
%
 
456,028

 
3,517

 
3.23
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
228,388

 
3,029

 
5.31
%
 
221,609

 
2,942

 
5.31
%
 
219,385

 
2,931

 
5.34
%
234,481

 
1,577

 
2.69
%
 
254,096

 
1,650

 
2.60
%
 
279,987

 
1,757

 
2.51
%
462,869

 
4,606

 
3.98
%
 
475,705

 
4,592

 
3.86
%
 
499,372

 
4,688

 
3.76
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,392,231

 
45,078

 
2.19
%
 
8,381,536

 
44,579

 
2.16
%
 
8,332,709

 
42,920

 
2.09
%
43,685

 
545

 
5.41
%
 
46,817

 
566

 
5.27
%
 
51,348

 
725

 
6.09
%
8,435,916

 
45,623

 
2.21
%
 
8,428,353

 
45,145

 
2.17
%
 
8,384,057

 
43,645

 
2.11
%
792,647

 
5,770

 
2.90
%
 
684,571

 
5,066

 
2.97
%
 
476,102

 
3,539

 
2.92
%
337,673

 
4,956

 
5.87
%
 
328,677

 
4,826

 
5.87
%
 
295,743

 
4,399

 
5.95
%
257,927

 
2,389

 
3.72
%
 
256,343

 
2,095

 
3.36
%
 
245,401

 
2,386

 
3.92
%
17,181,007

 
185,614

 
4.29
%
 
17,256,663

 
187,506

 
4.31
%
 
17,129,533

 
172,139

 
4.03
%
(246,143
)
 
 
 
 
 
(250,590
)
 
 
 
 
 
(251,632
)
 
 
 
 
16,934,864

 
185,614

 
4.35
%
 
17,006,073

 
187,506

 
4.38
%
 
16,877,901

 
172,139

 
4.09
%
29,758,612

 
259,898

 
3.49
%
 
29,636,980

 
259,727

 
3.50
%
 
29,242,350

 
239,511

 
3.30
%
821,275

 
 
 
 
 
608,412

 
 
 
 
 
372,894

 
 
 
 
2,872,228

 
 
 
 
 
2,762,778

 
 
 
 
 
2,753,327

 
 
 
 
$
33,452,115

 
 
 
 
 
$
33,008,170

 
 
 
 
 
$
32,368,571

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
10,142,744

 
$
8,914

 
0.35
%
 
$
10,088,522

 
$
8,062

 
0.32
%
 
$
10,087,640

 
$
6,437

 
0.26
%
466,496

 
87

 
0.07
%
 
464,130

 
90

 
0.08
%
 
461,586

 
95

 
0.08
%
2,134,469

 
6,296

 
1.17
%
 
2,176,820

 
6,378

 
1.16
%
 
2,204,422

 
6,090

 
1.11
%
12,743,709

 
15,297

 
0.48
%
 
12,729,472

 
14,530

 
0.45
%
 
12,753,648

 
12,622

 
0.40
%
488,330

 
340

 
0.28
%
 
411,286

 
256

 
0.25
%
 
490,616

 
164

 
0.13
%
6,209,903

 
21,242

 
1.36
%
 
6,162,641

 
20,105

 
1.29
%
 
5,572,031

 
15,188

 
1.09
%
144,673

 
2,025

 
5.55
%
 
144,663

 
2,070

 
5.68
%
 
144,654

 
2,003

 
5.55
%
19,586,615

 
38,904

 
0.79
%
 
19,448,062

 
36,961

 
0.75
%
 
18,960,949

 
29,977

 
0.63
%
9,417,351

 
 
 
 
 
9,389,849

 
 
 
 
 
9,338,683

 
 
 
 
332,155

 
 
 
 
 
145,977

 
 
 
 
 
162,348

 
 
 
 
600,604

 
 
 
 
 
539,641

 
 
 
 
 
497,158

 
 
 
 
3,515,390

 
 
 
 
 
3,484,641

 
 
 
 
 
3,409,433

 
 
 
 
$
33,452,115

 
 
 
 
 
$
33,008,170

 
 
 
 
 
$
32,368,571

 
 
 
 
 
 
$
220,994

 
2.70
%
 
 
 
$
222,766

 
2.75
%
 
 
 
$
209,534

 
2.67
%
 
 
 
 
2.97
%
 
 
 
 
 
3.01
%
 
 
 
 
 
2.89
%
 
 
4,131

 
 
 
 
 
4,314

 
 
 
 
 
4,330

 
 
 
 
216,863

 
 
 
 
 
218,452

 
 
 
 
 
205,204

 
 
 
 
(7,000
)
 
 
 
 
 

 
 
 
 
 

 
 
 
 
166,836

 
 
 
 
 
175,710

 
 
 
 
 
182,252

 
 
 
 
263,987

 
 
 
 
 
265,934

 
 
 
 
 
250,885

 
 
 
 
126,712

 
 
 
 
 
128,228

 
 
 
 
 
136,571

 
 
 
 
54,347

 
 
 
 
 
42,438

 
 
 
 
 
47,705

 
 
 
 
72,365

 
 
 
 
 
85,790

 
 
 
 
 
88,866

 
 
 
 
(127
)
 
 
 
 
 
141

 
 
 
 
 
719

 
 
 
 
$
72,492

 
 
 
 
 
$
85,649

 
 
 
 
 
$
88,147

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
1.11

 
 

 
 

 
$
1.31

 
 

 
 

 
$
1.35

 
 

 

 
$
1.11

 
 

 
 

 
$
1.31

 
 

 
 

 
$
1.35

 
 




- 121 -



Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
294,180

 
$
265,407

 
$
255,767

 
$
255,413

 
$
235,181

Interest expense
 
55,618

 
45,671

 
38,904

 
36,961

 
29,977

Net interest revenue
 
238,562

 
219,736

 
216,863

 
218,452

 
205,204

Provision for credit losses
 

 
(5,000
)
 
(7,000
)
 

 

Net interest revenue after provision for credit losses
 
238,562

 
224,736

 
223,863

 
218,452

 
205,204

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
26,488

 
30,648

 
33,045

 
33,169

 
31,764

Transaction card revenue1
 
20,975

 
20,990

 
20,028

 
22,929

 
20,009

Fiduciary and asset management revenue
 
41,699

 
41,832

 
41,767

 
40,687

 
41,808

Deposit service charges and fees
 
27,827

 
27,161

 
27,685

 
28,191

 
28,422

Mortgage banking revenue
 
26,346

 
26,025

 
24,362

 
24,890

 
30,276

Other revenue
 
14,518

 
12,330

 
11,762

 
13,670

 
14,984

Total fees and commissions
 
157,853

 
158,986

 
158,649

 
163,536

 
167,263

Other gains (losses), net
 
3,983

 
(664
)
 
552

 
(1,283
)
 
6,108

Gain (loss) on derivatives, net
 
(3,057
)
 
(5,685
)
 
(3,045
)
 
1,033

 
3,241

Gain (loss) on fair value option securities, net
 
(3,341
)
 
(17,564
)
 
(4,238
)
 
661

 
1,984

Change in fair value of mortgage servicing rights
 
1,723

 
21,206

 
5,898

 
(639
)
 
(6,943
)
Gain (loss) on available for sale securities, net
 
(762
)
 
(290
)
 
(488
)
 
2,487

 
380

Total other operating revenue
 
156,399

 
155,989

 
157,328

 
165,795

 
172,033

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
138,947

 
139,947

 
145,329

 
147,910

 
143,744

Business promotion
 
7,686

 
6,010

 
7,317

 
7,105

 
7,738

Charitable contributions to BOKF Foundation
 

 

 
2,000

 

 

Professional fees and services
 
14,978

 
10,200

 
15,344

 
11,887

 
12,419

Net occupancy and equipment
 
22,761

 
24,046

 
22,403

 
21,325

 
21,125

Insurance
 
6,245

 
6,593

 
6,555

 
6,005

 
689

Data processing and communications1
 
27,739

 
27,817

 
28,903

 
27,412

 
26,111

Printing, postage and supplies
 
4,011

 
4,089

 
3,781

 
3,917

 
4,140

Net losses (gains) and operating expenses of repossessed assets
 
2,722

 
7,705

 
340

 
6,071

 
2,267

Amortization of intangible assets
 
1,386

 
1,300

 
1,430

 
1,744

 
1,803

Mortgage banking costs
 
12,890

 
10,149

 
14,331

 
13,450

 
12,072

Other expense
 
7,111

 
6,574

 
6,746

 
9,193

 
8,558

Total other operating expense
 
246,476

 
244,430

 
254,479

 
256,019

 
240,666

Net income before taxes
 
148,485

 
136,295

 
126,712

 
128,228

 
136,571

Federal and state income taxes
 
33,330

 
30,948

 
54,347

 
42,438

 
47,705

Net income
 
115,155

 
105,347

 
72,365

 
85,790

 
88,866

Net income (loss) attributable to non-controlling interests
 
783

 
(215
)
 
(127
)
 
141

 
719

Net income attributable to BOK Financial Corporation shareholders
 
$
114,372

 
$
105,562

 
$
72,492

 
$
85,649

 
$
88,147

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$1.75
 
$1.61
 
$1.11
 
$1.31
 
$1.35
Diluted
 
$1.75
 
$1.61
 
$1.11
 
$1.31
 
$1.35
Average shares used in computation:
 
 
 
 
 
 
 
 
 
 
Basic
 
64,901,975

 
64,847,334

 
64,793,005

 
64,742,822

 
64,729,752

Diluted
 
64,937,226

 
64,888,033

 
64,843,179

 
64,805,172

 
64,793,134

1  
Non-GAAP measure to net interchange charges from prior quarters between transaction card revenue and data processing and communications expense. This measure has no effect on net income or earnings per share.


- 122 -



PART II. Other Information

Item 1. Legal Proceedings
 
See discussion of legal proceedings at Note 7 to the Consolidated Financial Statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended June 30, 2018.

 
Period
 
Total Number of Shares Purchased2
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans
April 1 to April 30, 2018
 
7,629

 
$
91.46

 

 
1,958,174

May 1 to May 31, 2018
 
8,257

 
$
99.84

 
8,257

 
1,949,917

June 1 to June 30, 2018
 

 
$

 

 
1,949,917

Total
 
15,886

 
 

 
8,257

 
 

1 
On October 1, 2015, the Company's board of directors authorized the Company to repurchase up to five million shares of the Company's common stock. As of June 30, 2018, the Company had repurchased 3,050,083 shares under this plan. Future repurchases of the Company's common stock will vary based on market conditions, regulatory limitations and other factors.
2 
The Company routinely repurchases mature shares from employees to cover the exercise price and taxes in connection with employee equity compensation.
Item 6. Exhibits

31.1

31.2

32

99.1

101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to Consolidated Financial Statements


Items 1A, 3, 4 and 5 are not applicable and have been omitted.



- 123 -



Signatures


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


BOK FINANCIAL CORPORATION
(Registrant)



Date:        July 31, 2018                                                                  



/s/ Steven E. Nell
Steven E. Nell
Executive Vice President and
Chief Financial Officer

    
/s/ John C. Morrow
John C. Morrow
Senior Vice President and
Chief Accounting Officer


- 124 -