Companies: 10,660     total market cap: $138.071 T
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BOK Financial
BOKF
#2243
Rank
$8.49 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$134.37
Share price
-0.18%
Change (1 day)
23.30%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. BOK Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q2

BOK Financial - 10-Q quarterly report FY2019 Q2


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

FORM 10-Q
(Mark One) 
☒
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 2019
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 CORP ET AL
(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: 71,193,770 shares of common stock ($.00006 par value) as of June 30, 2019.




BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2019

Index

Part I.  Financial Information
Management’s Discussion and Analysis (Item 2)        
1
Market Risk (Item 3)                                                                                              
37
Controls and Procedures (Item 4)
41
Consolidated Financial Statements – Unaudited (Item 1)
42
Quarterly Financial Summary – Unaudited (Item 2)
100
Quarterly Earnings Trend – Unaudited
103
 
 
Part II.  Other Information
Item 1.  Legal Proceedings
103
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
103
Item 6.  Exhibits
103
Signatures
104



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

BOK Financial Corporation (“the Company”) reported net income of $137.6 million or $1.93 per diluted share for the second quarter of 2019. Net income was $114.4 million or $1.75 per diluted share for the second quarter of 2018 and $110.6 million or $1.54 per diluted share for the first quarter of 2019. 

On October 1, 2018, the Company acquired CoBiz Financial, Inc. ("CoBiz"). We incurred $12.7 million of integration costs in the first quarter of 2019, resulting in a per share reduction of 13 cents. No meaningful integration costs were incurred in the second quarter. The fluctuation discussion in the highlights below excludes the impact of these items.

Highlights of the second quarter of 2019 included:
•
Net interest revenue totaled $285.4 million, up $46.9 million over the second quarter of 2018. CoBiz added $44.8 million to net interest revenue. The remaining increase in net interest revenue over the prior year was driven by both growth in average earning assets and improving yields. Net interest margin was 3.30 percent for the second quarter of 2019 compared to 3.17 percent for the second quarter of 2018. Average earning assets were $35.4 billion for the second quarter of 2019 compared to $30.3 billion for the second quarter of 2018. Net interest revenue increased $7.3 million compared to the first quarter of 2019 largely due to a recovery of foregone interest and an increase in loan discount accretion. Net interest margin was consistent with the first quarter of 2019.
•
Fees and commissions revenue totaled $176.1 million, an increase of $18.9 million over the second quarter of 2018. Brokerage and trading revenue increased $14.0 million and mortgage banking revenue increased $1.8 million as lower mortgage interest rates have increased mortgage production and related trading activity. Fiduciary and asset management revenue also increased $3.3 million. Fees and commissions revenue increased $15.6 million over the first quarter of 2019 led by increases in brokerage and trading and mortgage banking revenue.
•
Other operating expense totaled $277.1 million, a $30.7 million increase over the second quarter of 2018. Expenses related to CoBiz operations added $23.0 million in the second quarter of 2019. Excluding CoBiz operations, personnel expense increased $7.1 million, primarily due to an increase in regular compensation. Non-personnel expense remained relatively consistent with the second quarter of 2018. Operating expense increased $2.7 million over the first quarter of 2019. Personnel expense decreased $5.6 million, as efficiencies are realized from the CoBiz acquisition. Non-personnel expense increased $8.3 million led by increases in business promotion expense, professional fees and services, deposit insurance and mortgage banking costs.
•
The Company recorded a provision for credit losses of $5.0 million in the second quarter of 2019 and $8.0 million in the first quarter of 2019. No provision was recorded in the second quarter of 2018. Nonperforming assets not guaranteed by U.S. government agencies increased $31 million compared to March 31, 2019. Potential problem loans decreased $7.8 million while other loans especially mentioned decreased $54 million. Net charge-offs were $7.7 million or 0.14 percent of average loans for the second quarter of 2019, compared to net charge-offs of $10.1 million or 0.19 percent of average loans for the first quarter of 2019. The combined allowance for credit losses totaled $204 million or 0.92 percent of outstanding loans at June 30, 2019 compared to $207 million or 0.95 percent of outstanding loans at March 31, 2019.
•
Period-end outstanding loan balances totaled $22.3 billion at June 30, 2019, an increase of $497 million over March 31, 2019. Average loan balances grew $238 million to $22.0 billion at June 30, 2019.
•
Period-end deposits were $25.3 billion at June 30, 2019, a $27 million decrease compared to March 31, 2019. Interest-bearing transaction deposits increased $375 million while demand deposit balances decreased $429 million. Average deposits increased $548 million including a $581 million increase in interest-bearing deposits partially offset by a $104 million decrease in demand deposits.
•
The common equity Tier 1 capital ratio at June 30, 2019 was 10.84 percent. Other regulatory capital ratios were Tier 1 capital ratio, 10.84 percent, total capital ratio, 12.34 percent, and leverage ratio, 8.75 percent. At March 31, 2019, the common equity Tier 1 capital ratio was 10.71 percent, the Tier 1 capital ratio was 10.71 percent, total capital ratio was 12.24 percent, and leverage ratio was 8.76 percent.

- 1 -


•
The Company repurchased 250,000 shares at an average price of $80.50 per share during the second quarter of 2019 and 705,609 shares at an average price of $85.85 in the first quarter of 2019.
•
The company paid a regular cash dividend of $35.6 million or $0.50 per common share during the second quarter of 2019. On July 30, 2019, the board of directors approved a quarterly cash dividend of $0.50 per common share payable on or about August 27, 2019 to shareholders of record as of August 12, 2019.

- 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.

Tax-equivalent net interest revenue totaled $288.9 million for the second quarter of 2019, up from $240.5 million in the second quarter of 2018. CoBiz added $44.8 million to net interest revenue, including $13.4 million of net purchase accounting discount accretion in the second quarter of 2019. Recoveries of forgone interest added $3.4 million to net interest revenue in the second quarter of 2019 and $5.3 million in the second quarter of 2018. 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.

Net interest margin was 3.30 percent for the second quarter of 2019, compared to 3.17 percent for the second quarter of 2018. Recoveries of forgone interest and loan discount accretion added 19 basis points to net interest margin in the second quarter of 2019. Recoveries of forgone interest added 7 basis points to net interest margin in the second quarter of 2018. Excluding these items, the tax-equivalent yield on earning assets was 4.31 percent, up 47 basis points over the second quarter of 2018. Loan yields increased 41 basis points to 5.09 percent primarily due to an increase in short-term interest rates. The yield on interest-bearing cash and cash equivalents increased 71 basis points to 2.57 percent. The available for sale securities portfolio yield increased 33 basis points to 2.63 percent and the yield on fair value option securities was up 18 basis points to 3.34 percent.

Funding costs were up 59 basis points over the second quarter of 2018. The cost of interest-bearing deposits increased 47 basis points and the cost of other borrowed funds increased 69 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 49 basis points for the second quarter of 2019, up 12 basis points over the second quarter of 2018.
 
Average earning assets for the second quarter of 2019 increased $5.1 billion or 17 percent over the second quarter of 2018. Average loans, net of allowance for loan losses, increased $4.3 billion, including acquired loans. The legacy BOKF portfolio grew $1.6 billion mainly due to growth in commercial and commercial real estate loans. Available for sale securities increased $1.3 billion and fair value option securities increased $412 million. Trading securities increased $275 million. Interest-bearing cash and cash equivalent balances decreased $1.1 billion. The Company reduced excess cash balances held at the Federal Reserve, including cash used in our purchase of CoBiz.

Average deposits increased $3.1 billion compared to the second quarter of 2018, including $3.1 billion related to CoBiz. Excluding acquired deposits, interest bearing deposits increased $891 million while demand deposit balances decreased $903 million. Average borrowed funds increased $2.2 billion over the second quarter of 2018, primarily due to funds purchased and repurchase agreement balances.
Tax-equivalent net interest revenue increased $8.3 million over the first quarter of 2019. Recoveries of foregone interest on non-accruing loans added $3.4 million to the second quarter of 2019. Recoveries were insignificant in the first quarter of 2019. The second quarter of 2019 included $13.4 million of purchase accounting discount accretion while the first quarter of 2019 included $7.8 million.
Net interest margin was 3.30 percent, consistent with the previous quarter. Excluding recoveries of forgone interest and increase in loan discount accretion noted above, the yield on average earning assets decreased 6 basis points while the yield on the loan portfolio decreased 2 basis points. The yield on the available for sale securities portfolio increased 6 basis points and the yield on the trading securities portfolio, which moves with long term interest rates because it turns over rapidly, was down 29 basis points.
Funding costs increased 4 basis points. The cost of interest-bearing deposits increased 9 basis points and the cost of other borrowed funds decreased 1 basis point to 2.53 percent. The benefit to net interest margin from assets funded by non-interest liabilities was relatively unchanged at 49 basis points.


- 3 -


Average earning assets increased $933 million compared to the first quarter of 2019. Average available for sale securities increased $553 million. Average loan balances were up $238 million. Average fair value option securities balances increased $304 million. Average trading securities balances decreased $211 million. Average interest-bearing deposit balances increased $652 million and average borrowed funds increased $169 million compared to the first quarter of 2019.

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 78% 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. In the second quarter of 2019 we increased our portfolio of available for sale securities by $1.4 billion as a measure to protect for a down rate environment.

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.

Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
June 30, 2019 / 2018
 
Six Months Ended
June 30, 2019 / 2018
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
(4,308
)
 
$
(6,273
)
 
$
1,965

 
$
(8,893
)
 
$
(14,071
)
 
$
5,178

Trading securities
 
2,525

 
2,672

 
(147
)
 
13,506

 
11,878

 
1,628

Investment securities
 
(320
)
 
(579
)
 
259

 
(622
)
 
(1,354
)
 
732

Available for sale securities
 
12,425

 
5,058

 
7,367

 
23,298

 
7,905

 
15,393

Fair value option securities
 
3,576

 
3,258

 
318

 
3,994

 
2,678

 
1,316

Restricted equity securities
 
1,108

 
1,035

 
73

 
2,336

 
1,828

 
508

Residential mortgage loans held for sale
 
(579
)
 
(256
)
 
(323
)
 
(760
)
 
(795
)
 
35

Loans
 
83,712

 
54,249

 
29,463

 
176,466

 
108,107

 
68,359

Total tax-equivalent interest revenue
 
98,139

 
59,164

 
38,975

 
209,325

 
116,176

 
93,149

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
18,547

 
4,642

 
13,905

 
34,757

 
7,332

 
27,425

Savings deposits
 
78

 
19

 
59

 
150

 
38

 
112

Time deposits
 
3,595

 
281

 
3,314

 
6,511

 
283

 
6,228

Funds purchased and repurchase agreements
 
9,922

 
4,788

 
5,134

 
19,756

 
9,377

 
10,379

Other borrowings
 
15,875

 
3,845

 
12,030

 
37,402

 
7,620

 
29,782

Subordinated debentures
 
1,754

 
1,830

 
(76
)
 
3,495

 
3,641

 
(146
)
Total interest expense
 
49,771

 
15,405

 
34,366

 
102,071

 
28,291

 
73,780

Tax-equivalent net interest revenue
 
48,368

 
43,759

 
4,609

 
107,254

 
87,885

 
19,369

Change in tax-equivalent adjustment
 
1,498

 
 
 
 
 
2,018

 
 
 
 
Net interest revenue
 
$
46,870

 
 
 
 
 
$
105,236

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

- 4 -


Other Operating Revenue

Other operating revenue was $172.1 million for the second quarter of 2019, a $15.7 million increase over the second quarter of 2018 and a $14.8 million increase over the first quarter of 2019. Lower mortgage interest rates have positively affected both our brokerage and trading and mortgage banking revenue leading to increases of $14.0 million and $1.8 million over the second quarter of 2018, respectively, and $8.9 million and $4.3 million over the first quarter of 2019, respectively.

Table 2 – Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Mar. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Brokerage and trading revenue
 
$
40,526

 
$
26,488

 
$
14,038

 
53
 %
 
$
31,617

 
$
8,909

 
28
 %
Transaction card revenue
 
21,915

 
20,975

 
940

 
4
 %
 
20,738

 
1,177

 
6
 %
Fiduciary and asset management revenue
 
45,025

 
41,692

 
3,333

 
8
 %
 
43,358

 
1,667

 
4
 %
Deposit service charges and fees
 
28,074

 
27,834

 
240

 
1
 %
 
28,243

 
(169
)
 
(1
)%
Mortgage banking revenue
 
28,131

 
26,346

 
1,785

 
7
 %
 
23,834

 
4,297

 
18
 %
Other revenue
 
12,437

 
13,923

 
(1,486
)
 
(11
)%
 
12,762

 
(325
)
 
(3
)%
Total fees and commissions revenue
 
176,108

 
157,258


18,850

 
12
 %
 
160,552


15,556

 
10
 %
Other gains (losses), net
 
3,480

 
4,578

 
(1,098
)
 
N/A

 
2,976

 
504

 
N/A

Gain (loss) on derivatives, net
 
11,150

 
(3,057
)
 
14,207

 
N/A

 
4,667

 
6,483

 
N/A

Gain (loss) on fair value option securities, net
 
9,853

 
(3,341
)
 
13,194

 
N/A

 
9,665

 
188

 
N/A

Change in fair value of mortgage servicing rights
 
(29,555
)
 
1,723

 
(31,278
)
 
N/A

 
(20,666
)
 
(8,889
)
 
N/A

Gain (loss) on available for sale securities, net
 
1,029

 
(762
)
 
1,791

 
N/A

 
76

 
953

 
N/A

Total other operating revenue
 
$
172,065

 
$
156,399

 
$
15,666

 
10
 %
 
$
157,270

 
$
14,795

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 38 percent of total revenue for the second quarter of 2019, 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.

Brokerage and Trading Revenue

Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage and investment banking, increased $14.0 million or 53 percent compared to the second quarter of 2018.


- 5 -


Trading revenue includes net realized and unrealized gains and losses primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies, municipal securities and asset-backed securities to institutional customers and related derivative instruments. Trading revenue was $21.9 million for the second quarter of 2019, a $15.5 million or 245 percent increase compared to the second quarter of 2018. Average trading securities increased $275 million compared to the second quarter of 2018. Lower mortgage interest rates have led to increased trading activity in the second quarter of 2019.

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 $5.3 million for the second quarter of 2019, a $4.5 million or 45 percent decrease compared to the second quarter of 2018. The decrease is primarily due to a shift in the mix of our to-be-announced residential mortgage backed securities contracts from our customer hedging program to our U.S. government agency residential mortgage-backed trading program. The resulting increased activity remains within our established market risk limits as discussed further in Management's Discussion & Analysis – Market Risk section following.

Insurance brokerage fees increased $3.6 million compared to the second quarter of 2018 due to the addition of CoBiz.
Brokerage and trading revenue increased $8.9 million compared to the previous quarter, primarily due to increased trading activity as a result of lower mortgage interest rates.

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 90 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 increased $3.3 million or 8 percent over the second quarter of 2018 largely due to asset increases and increased $1.7 million or 4 percent over the first quarter of 2019, primarily due to seasonal tax fees collected in the second quarter.

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, 2019
 
June 30, 2018
 
March 31, 2019
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
Managed fiduciary assets:
Personal
$
8,516,076

 
$
26,134

 
1.23
%
 
$
7,791,094

 
$
23,307

 
1.20
%
 
$
8,428,218

 
$
23,276

 
1.10
%
Institutional
14,286,046

 
6,283

 
0.18
%
 
13,448,068

 
5,596

 
0.17
%
 
14,026,020

 
6,138

 
0.18
%
Total managed fiduciary assets
22,802,122

 
32,417

 
0.57
%
 
21,239,162

 
28,903

 
0.54
%
 
22,454,238

 
29,414

 
0.52
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-managed assets:
Fiduciary
26,494,774

 
12,275

 
0.19
%
 
25,292,738

 
12,426

 
0.20
%
 
23,946,911

 
13,528

 
0.23
%
Non-fiduciary
15,894,874

 
333

 
0.01
%
 
16,422,810

 
370

 
0.01
%
 
16,215,999

 
416

 
0.01
%
Safekeeping and brokerage assets under administration
16,582,832

 
—

 
—
%
 
15,918,736

 
—

 
—
%
 
16,235,136

 
—

 
—
%
Total non-managed assets
58,972,480

 
12,608

 
0.09
%
 
57,634,284

 
12,796

 
0.09
%
 
56,398,046

 
13,944

 
0.10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets under management or administration
$
81,774,602

 
$
45,025

 
0.22
%
 
$
78,873,446

 
$
41,699

 
0.21
%
 
$
78,852,284

 
$
43,358

 
0.22
%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Annualized revenue divided by period-end balance.

- 6 -


A summary of changes in assets under management or administration for the three months ended June 30, 2019 and 2018 follows:

Table 4 -- Changes in Assets Under Management or Administration
 
 
Three Months Ended
June 30,
 
 
2019
 
2018
Beginning balance
 
$
78,852,284

 
$
78,878,989

Net inflows (outflows)
 
1,075,070

 
(746,477
)
Net change in fair value
 
1,847,248

 
740,934

Ending balance
 
$
81,774,602

 
$
78,873,446


Mortgage Banking Revenue

Mortgage banking revenue increased $1.8 million or 7 percent compared to the second quarter of 2018. Mortgage loan production volumes increased $84 million or 12 percent as average primary mortgage interest rates have decreased.

Mortgage banking revenue increased $4.3 million or 18 percent compared to the first quarter of 2019. Lower mortgage interest rates during the quarter led to an increase in mortgage production.

Table 5 – Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Mar. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
Mortgage production revenue
 
$
11,869

 
$
9,915

 
$
1,954

 
20
 %
 
$
7,868

 
$
4,001

 
51
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
729,841

 
$
773,910

 


 


 
$
510,527

 
 
 
 
Add: Current period end outstanding commitments
 
344,087

 
251,231

 
 
 
 
 
263,434

 
 
 
 
Less: Prior period end outstanding commitments
 
263,434

 
298,318

 
 
 
 
 
160,848

 
 
 
 
Total mortgage production volume
 
$
810,494

 
$
726,823

 
$
83,671

 
12
 %
 
$
613,113

 
$
197,381

 
32
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loan refinances to mortgage loans funded for sale
 
31
%
 
22
%
 
900
 bps
 
 
 
30
%
 
100
 bps
 
 
Gains on sale margin
 
1.46
%
 
1.36
%
 
10
 bps
 
 
 
1.28
%
 
18
 bps
 
 
Primary mortgage interest rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
4.01
%
 
4.54
%
 
(53
) bps
 
 
 
4.37
%
 
(36
) bps
 
 
Period end
 
3.73
%
 
4.55
%
 
(82
) bps
 
 
 
4.06
%
 
(33
) bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue
 
$
16,262

 
$
16,431

 
$
(169
)
 
(1
)%
 
$
15,966

 
$
296

 
2
 %
Average outstanding principal balance of mortgage loans serviced for others
 
21,418,690

 
21,986,065

 
(567,375
)
 
(3
)%
 
21,581,835

 
(163,145
)
 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average mortgage servicing revenue rates
 
0.30
%
 
0.30
%
 
—

 
 
 
0.30
%
 
—

 
 

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


- 7 -


Net gains on other assets, securities and derivatives

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. The increase in the total economic cost of changes in the fair value of mortgage servicing rights, net of economic hedges is due to the combination of unhedgeable factors and significant mortgage interest rate volatility during the year.

Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2019
 
Mar. 31, 2019
 
June 30, 2018
Gain (loss) on mortgage hedge derivative contracts, net
 
$
11,128

 
$
4,432

 
$
(3,070
)
Gain (loss) on fair value option securities, net
 
9,853

 
9,665

 
(3,341
)
Gain (loss) on economic hedge of mortgage servicing rights, net
 
20,981

 
14,097

 
(6,411
)
Gain (loss) on change in fair value of mortgage servicing rights
 
(29,555
)
 
(20,666
)
 
1,723

Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue
 
(8,574
)
 
(6,569
)
 
(4,688
)
Net interest revenue on fair value option securities1
 
1,296

 
1,129

 
1,203

Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges
 
$
(7,278
)
 
$
(5,440
)
 
$
(3,485
)
1 
Actual interest earned on fair value option securities less internal transfer-priced cost of funds.


- 8 -


Other Operating Expense

Other operating expense for the second quarter of 2019 totaled $277.1 million, up $30.7 million compared to the second quarter of 2018. Operating expenses in the second quarter of 2019 included $23.0 million of CoBiz operating expenses. CoBiz added $12.7 million in integration costs and $26.6 million in operating costs during the first quarter of 2019.

Table 7 – Other Operating Expense
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended Mar. 31, 2019
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Regular compensation
 
$
98,247

 
$
86,231

 
$
12,016

 
14
 %
 
$
100,650

 
$
(2,403
)
 
(2
)%
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
33,155

 
31,933

 
1,222

 
4
 %
 
32,137

 
1,018

 
3
 %
Share-based
 
2,734

 
(1,361
)
 
4,095

 
(301
)%
 
5,162

 
(2,428
)
 
47
 %
Deferred compensation
 
1,534

 
900

 
634

 
N/A

 
3,911

 
(2,377
)
 
N/A

Total incentive compensation
 
37,423

 
31,472

 
5,951

 
19
 %
 
41,210

 
(3,787
)
 
(9
)%
Employee benefits
 
24,672

 
21,244

 
3,428

 
16
 %
 
27,368

 
(2,696
)
 
(10
)%
Total personnel expense
 
160,342

 
138,947

 
21,395

 
15
 %
 
169,228

 
(8,886
)
 
(5
)%
Business promotion
 
10,142

 
7,686

 
2,456

 
32
 %
 
7,874

 
2,268

 
29
 %
Charitable contributions to BOKF Foundation
 
1,000

 
—

 
1,000

 
N/A

 
—

 
1,000

 
N/A

Professional fees and services
 
13,002

 
14,978

 
(1,976
)
 
(13
)%
 
16,139

 
(3,137
)
 
(19
)%
Net occupancy and equipment
 
26,880

 
22,761

 
4,119

 
18
 %
 
29,521

 
(2,641
)
 
(9
)%
Insurance
 
6,454

 
6,245

 
209

 
3
 %
 
4,839

 
1,615

 
33
 %
Data processing and communications
 
29,735

 
27,739

 
1,996

 
7
 %
 
31,449

 
(1,714
)
 
(5
)%
Printing, postage and supplies
 
4,107

 
4,011

 
96

 
2
 %
 
4,885

 
(778
)
 
(16
)%
Net losses and operating expenses of repossessed assets
 
580

 
2,722

 
(2,142
)
 
(79
)%
 
1,996

 
(1,416
)
 
(71
)%
Amortization of intangible assets
 
5,138

 
1,386

 
3,752

 
271
 %
 
5,191

 
(53
)
 
(1
)%
Mortgage banking costs
 
11,545

 
12,890

 
(1,345
)
 
(10
)%
 
9,906

 
1,639

 
17
 %
Other expense
 
8,212

 
7,111

 
1,101

 
15
 %
 
6,129

 
2,083

 
34
 %
Total other operating expense
 
$
277,137

 
$
246,476

 
$
30,661

 
12
 %
 
$
287,157

 
$
(10,020
)
 
(3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
5,123

 
4,875

 
248

 
5
 %
 
5,291

 
(168
)
 
(3
)%
Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

Personnel expense increased $21.4 million over the second quarter of 2018. CoBiz operating expenses added $14.3 million to the second quarter of 2019. The remaining increase of $7.1 million is largely attributed to standard annual merit increases in regular compensation and incentive compensation.
Personnel expense decreased $8.9 million compared the first quarter of 2019. CoBiz integration costs added $3.3 million to the first quarter of 2019. The remaining $5.6 million decrease is primarily due to the realization of efficiencies related to the CoBiz acquisition.


- 9 -


Non-personnel operating expense

Non-personnel operating expense increased $9.3 million over the second quarter of 2018. CoBiz operating expenses added $8.6 million to the second quarter of 2019. Business promotion expense increased $2.1 million as we increase our brand marketing in Arizona and Colorado. Data processing and communications expense increased $1.7 million and occupancy and equipment expense increased $1.3 million, primarily related to increased project costs and data processing transaction activity. Professional fees and services decreased $2.1 million largely due to CoBiz acquisition costs in the second quarter of 2018. Net losses and expenses on repossessed assets decreased $2.1 million due to decreased expenses on certain oil and gas properties. Mortgage banking costs decreased $1.3 million, primarily due to reduced lead buying costs as we have exited the online lead buying business combined with a decrease in accruals related to default servicing and loss mitigation costs on loans serviced for others.
Non-personnel expense decreased $1.1 million compared to the first quarter of 2019. CoBiz integration costs added $9.4 million to the first quarter of 2019, which is excluded from the following fluctuations. Business promotion expense increased $2.9 million largely due to brand recognition advertising in our Arizona and Colorado markets. Insurance expense is up $1.9 million largely due to adjustments to deposit insurance expense related to CoBiz. Increases in professional fees and services of $1.7 million and mortgage banking costs of $1.6 million were partially offset by a decrease in net losses and expenses of repossessed assets of $1.4 million. The second quarter of 2019 also included a $1.0 million charitable donation to the BOKF Foundation.
Income Taxes

The effective tax rate was 21.4% for both the first and second quarter of 2019, down from 22.4% for the second quarter of 2018. Increased tax-exempt revenue from CoBiz was the primary driver of the decrease.
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.

The operations of CoBiz were allocated to the operating segments in the second quarter of 2019. Prior to April 1, 2019, CoBiz operations were included in Funds Management and other.

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.


- 10 -


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. During 2018 the funds transfer pricing rates for non–maturity deposits became inverted due to the flattening of the yield curve. Short term rates continued to increase while long term rates remained relatively flat. In order to appropriately reflect the organizational value of these deposits to the lines of business, effective January 1, 2019, we made adjustments that push more deposit credit value to the business lines, with the offset to Funds Management and other.

Economic capital is assigned to the business units by a capital allocation model that reflects management’s assessment of risk. This model assigns capital based upon credit, operating, interest rate and other market risk inherent in our business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line, based on its actual exposures and calibrated to its own loss history where possible. Average invested capital includes economic capital and amounts we have invested in the lines of business.

As shown in Table 8, net income attributable to our lines of business was up $35.3 million or 31 percent over the second quarter of 2018. Net interest revenue grew by $52.0 million over the prior year, primarily due to the CoBiz acquisition combined with growth in average loan balances. Net charge-offs decreased $2.6 million. Other operating revenue increased by $16.4 million and operating expense increased by $18.1 million compared to the second quarter of 2018.

Table 8 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Mar. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Commercial Banking
 
$
106,932

 
$
87,577

 
$
19,355

 
22
%
 
$
86,143

 
$
20,789

 
24
%
Consumer Banking
 
16,344

 
5,793

 
10,551

 
182
%
 
15,337

 
1,007

 
7
%
Wealth Management
 
25,545

 
20,119

 
5,426

 
27
%
 
23,719

 
1,826

 
8
%
Subtotal
 
148,821

 
113,489

 
35,332

 
31
%
 
125,199

 
23,622

 
19
%
Funds Management and other
 
(11,258
)
 
883

 
(12,141
)
 
N/A

 
(14,587
)
 
3,329

 
N/A

Total
 
$
137,563

 
$
114,372

 
$
23,191

 
20
%
 
$
110,612

 
$
26,951

 
24
%
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.


- 11 -


Commercial Banking

Commercial Banking contributed $106.9 million to consolidated net income in the second quarter of 2019, an increase of $19.4 million or 22 percent over the second quarter of 2018. Growth in net interest revenue was partially offset by decreased operating revenue and increased operating expense.

Table 9 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Mar. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Net interest revenue from external sources
 
$
251,080

 
$
182,127

 
$
68,953

 
38
 %
 
$
204,209

 
$
46,871

 
23
 %
Net interest expense from internal sources
 
(65,470
)
 
(37,102
)
 
(28,368
)
 
76
 %
 
(52,562
)
 
(12,908
)
 
25
 %
Total net interest revenue
 
185,610

 
145,025

 
40,585

 
28
 %
 
151,647

 
33,963

 
22
 %
Net loans charged off
 
6,823

 
10,108

 
(3,285
)
 
(32
)%
 
11,245

 
(4,422
)
 
(39
)%
Net interest revenue after net loans charged off
 
178,787

 
134,917

 
43,870

 
33
 %
 
140,402

 
38,385

 
27
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
41,105

 
42,874

 
(1,769
)
 
(4
)%
 
38,046

 
3,059

 
8
 %
Other gains, net
 
506

 
173

 
333

 
N/A

 
(434
)
 
940

 
N/A

Other operating revenue
 
41,611

 
43,047

 
(1,436
)
 
(3
)%
 
37,612

 
3,999

 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
42,268

 
29,584

 
12,684

 
43
 %
 
31,217

 
11,051

 
35
 %
Non-personnel expense
 
20,679

 
19,802

 
877

 
4
 %
 
18,960

 
1,719

 
9
 %
Other operating expense
 
62,947

 
49,386

 
13,561

 
27
 %
 
50,177

 
12,770

 
25
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
157,451

 
128,578

 
28,873

 
22
 %
 
127,837

 
29,614

 
23
 %
Gain on financial instruments, net
 
20

 
9

 
11

 
N/A

 
18

 
2

 
N/A

Loss on repossessed assets, net
 
—

 
(67
)
 
67

 
N/A

 
(346
)
 
346

 
N/A

Corporate expense allocations
 
11,384

 
9,366

 
2,018

 
22
 %
 
10,148

 
1,236

 
12
 %
Income before taxes
 
146,087

 
119,154

 
26,933

 
23
 %
 
117,361

 
28,726

 
24
 %
Federal and state income tax
 
39,155

 
31,577

 
7,578

 
24
 %
 
31,218

 
7,937

 
25
 %
Net income
 
$
106,932

 
$
87,577

 
$
19,355

 
22
 %
 
$
86,143

 
$
20,789

 
24
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
22,910,071

 
$
18,072,155

 
$
4,837,916

 
27
 %
 
$
19,936,895

 
$
2,973,176

 
15
 %
Average loans
 
18,812,800

 
14,900,918

 
3,911,882

 
26
 %
 
15,988,843

 
2,823,957

 
18
 %
Average deposits
 
10,724,206

 
8,379,584

 
2,344,622

 
28
 %
 
8,261,543

 
2,462,663

 
30
 %
Average invested capital
 
2,222,032

 
1,352,679

 
869,353

 
64
 %
 
2,121,699

 
100,333

 
5
 %
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Net interest revenue increased $40.6 million or 28 percent over the prior year, primarily due to the allocation of CoBiz to the business lines. Additional growth in net interest revenue was due to increased yields and an 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 decreased $3.3 million.

Fees and commissions revenue decreased $1.8 million or 4 percent primarily due to a decrease in revenue earned on certain repossessed assets compared to the prior year while operating expense increased $13.6 million or 27 percent compared to the second quarter of 2018. Personnel expense increased $12.7 million primarily due to the incorporation of CoBiz employees combined with standard annual merit increases. Corporate expense allocations increased $2.0 million or 22 percent compared to the prior year.


- 12 -


The average outstanding balance of loans attributed to Commercial Banking were up $3.9 billion or 26 percent over the second quarter of 2018 to $18.8 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 $10.7 billion for the second quarter of 2019, a 28 percent increase compared to the second quarter of 2018. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.
Net interest revenue increased $34.0 million or 22 percent over the first quarter of 2019 largely as a result of the allocation of acquired loans to the business line. Fees and commissions revenue increased $3.1 million, primarily due to an increase in loan syndication fees based on the timing of completed transactions and increased transaction card revenues related to a seasonal increase in transaction volume. Operating expense increased $12.8 million or 25 percent compared to the first quarter of 2019 primarily due to an $11.1 million increase in personnel expense largely due to the addition of CoBiz employees.
Average loan balances increased $2.8 billion or 18 percent and average customer deposits increased $2.5 billion or 30 percent, both largely impacted by acquired loans and deposits.




- 13 -


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. In the first quarter of 2019, the strategic decision was made to exit our online lead buying business, HomeDirect, to focus more on our high margin, core competency of developing complete, long-term relationships with our clients through our traditional mortgage origination channel.

Consumer Banking contributed $16.3 million to consolidated net income for the second quarter of 2019, an increase of $10.6 million over the second quarter of 2018. Improved performance by Consumer Banking was largely due to the effect of changes in pricing of funds sold to the Funds Management unit, partially offset by net changes in the fair value of mortgage servicing rights. The addition of CoBiz operations in the second quarter of 2019 did not significantly affect net income the Consumer Banking segment.

Table 10 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Mar. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Net interest revenue from external sources
 
$
24,203

 
$
21,747

 
$
2,456

 
11
 %
 
$
21,595

 
$
2,608

 
12
 %
Net interest revenue from internal sources
 
28,514

 
17,548

 
10,966

 
62
 %
 
29,507

 
(993
)
 
(3
)%
Total net interest revenue
 
52,717

 
39,295

 
13,422

 
34
 %
 
51,102

 
1,615

 
3
 %
Net loans charged off
 
1,728

 
1,140

 
588

 
52
 %
 
1,085

 
643

 
59
 %
Net interest revenue after net loans charged off
 
50,989

 
38,155

 
12,834

 
34
 %
 
50,017

 
972

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
48,830

 
46,332

 
2,498

 
5
 %
 
42,821

 
6,009

 
14
 %
Other losses, net
 
(19
)
 
(12
)
 
(7
)
 
N/A

 
(73
)
 
54

 
N/A

Other operating revenue
 
48,811

 
46,320

 
2,491

 
5
 %
 
42,748

 
6,063

 
14
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
24,377

 
25,203

 
(826
)
 
(3
)%
 
24,336

 
41

 
—
 %
Non-personnel expense
 
33,317

 
35,943

 
(2,626
)
 
(7
)%
 
29,485

 
3,832

 
13
 %
Total other operating expense
 
57,694

 
61,146

 
(3,452
)
 
(6
)%
 
53,821

 
3,873

 
7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
42,106

 
23,329

 
18,777

 
80
 %
 
38,944

 
3,162

 
8
 %
Gain (loss) on financial instruments, net
 
20,981

 
(6,411
)
 
27,392

 
N/A

 
14,097

 
6,884

 
N/A

Change in fair value of mortgage servicing rights
 
(29,555
)
 
1,723

 
(31,278
)
 
N/A

 
(20,666
)
 
(8,889
)
 
N/A

Gain on repossessed assets, net
 
92

 
174

 
(82
)
 
N/A

 
103

 
(11
)
 
N/A

Corporate expense allocations
 
11,695

 
11,042

 
653

 
6
 %
 
11,900

 
(205
)
 
(2
)%
Income before taxes
 
21,929

 
7,773

 
14,156

 
182
 %
 
20,578

 
1,351

 
7
 %
Federal and state income tax
 
5,585

 
1,980

 
3,605

 
182
 %
 
5,241

 
344

 
7
 %
Net income
 
$
16,344

 
$
5,793

 
$
10,551

 
182
 %
 
$
15,337

 
$
1,007

 
7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
9,212,667

 
$
8,353,558

 
$
859,109

 
10
 %
 
$
8,371,683

 
$
840,984

 
10
 %
Average loans
 
1,796,823

 
1,716,259

 
80,564

 
5
 %
 
1,750,642

 
46,181

 
3
 %
Average deposits
 
6,998,677

 
6,579,635

 
419,042

 
6
 %
 
6,544,665

 
454,012

 
7
 %
Average invested capital
 
304,990

 
284,798

 
20,192

 
7
 %
 
291,846

 
13,144

 
5
 %
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

- 14 -


Net interest revenue from Consumer Banking activities grew by $13.4 million or 34 percent over the the second quarter of 2018, primarily due to increased rates received on deposit balances sold to the Funds Management unit. Average consumer deposits grew $419 million over the second quarter of 2018 with demand deposit balances up by $371 million or 20 percent, largely due to the allocation of acquired deposits.

Fees and commissions revenue increased $2.5 million or 5 percent compared to the second quarter of 2018. Lower mortgage interest rates increased mortgage loan origination volumes. Operating expense decreased by $3.5 million. Occupancy and equipment expense decreased $1.8 million. Mortgage banking costs decreased $1.3 million primarily due to a decrease in lead costs driven by the strategic decision to exit the lead buying space in the first quarter of 2019. Corporate expense allocations were $653 thousand or 6 percent higher than the prior year.

Changes in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income for the second quarter of 2019 by $8.6 million compared to a $4.7 million decrease in pre-tax net income in the second quarter of 2018.
Net interest revenue from Consumer Banking activities increased $1.6 million or 3 percent over the first quarter of 2019, primarily due to an increase in interest earned on the fair value option portfolio combined with increased deposits sold to our Funds Management unit.
Revenues from mortgage banking activities increased $4.3 million over the prior quarter due to lower interest rates. Mortgage production volume increased $197 million or 32 percent and gain on sale margins climbed to 1.46 percent from 1.28 percent. Deposit service charges also increased $1.1 million due to two more days in the quarter compared to the previous quarter.
Operating expenses increased $3.9 million, nearly all related to non-personnel expenses. Mortgage banking costs increased $1.6 million related to increased payoffs as mortgage interest rates declined during the quarter. Business promotion expense increased $1.6 million primarily due to additional brand marketing.
Average consumer loans increased $46 million or 3 percent. Average deposits increased $454 million or 7 percent primarily due to the allocation of acquired deposits.



- 15 -


Wealth Management

Wealth Management contributed $25.5 million to consolidated net income in the second quarter of 2019, up $5.4 million or 27 percent over the second quarter of 2018, primarily due to increased brokerage and trading revenue, partially offset by decreased net interest revenue and increased operating expense. The addition of CoBiz operations in the second quarter of 2019 did not significantly affect net income the Wealth Management segment.

Table 11 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Mar. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Net interest revenue from external sources
 
$
17,224

 
$
18,754

 
$
(1,530
)
 
(8
)%
 
$
21,486

 
$
(4,262
)
 
(20
)%
Net interest revenue from internal sources
 
9,719

 
10,232

 
(513
)
 
(5
)%
 
6,770

 
2,949

 
44
 %
Total net interest revenue
 
26,943

 
28,986

 
(2,043
)
 
(7
)%
 
28,256

 
(1,313
)
 
(5
)%
Net loans charged off (recovered)
 
(48
)
 
(105
)
 
57

 
(54
)%
 
(119
)
 
71

 
(60
)%
Net interest revenue after net loans charged off (recovered)
 
26,991

 
29,091

 
(2,100
)
 
(7
)%
 
28,375

 
(1,384
)
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
85,925

 
70,489

 
15,436

 
22
 %
 
73,256

 
12,669

 
17
 %
Other gains (losses), net
 
92

 
153

 
(61
)
 
N/A

 
158

 
(66
)
 
N/A

Other operating revenue
 
86,017

 
70,642

 
15,375

 
22
 %
 
73,414

 
12,603

 
17
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
50,080

 
45,653

 
4,427

 
10
 %
 
43,991

 
6,089

 
14
 %
Non-personnel expense
 
19,372

 
15,838

 
3,534

 
22
 %
 
17,516

 
1,856

 
11
 %
Other operating expense
 
69,452

 
61,491

 
7,961

 
13
 %
 
61,507

 
7,945

 
13
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
43,556

 
38,242

 
5,314

 
14
 %
 
40,282

 
3,274

 
8
 %
Corporate expense allocations
 
9,168

 
11,142

 
(1,974
)
 
(18
)%
 
8,360

 
808

 
10
 %
Income before taxes
 
34,388

 
27,100

 
7,288

 
27
 %
 
31,922

 
2,466

 
8
 %
Federal and state income tax
 
8,843

 
6,981

 
1,862

 
27
 %
 
8,203

 
640

 
8
 %
Net income
 
$
25,545

 
$
20,119

 
$
5,426

 
27
 %
 
$
23,719

 
$
1,826

 
8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
9,849,396

 
$
8,495,557

 
$
1,353,839

 
16
 %
 
$
9,328,986

 
$
520,410

 
6
 %
Average loans
 
1,647,680

 
1,413,170

 
234,510

 
17
 %
 
1,448,718

 
198,962

 
14
 %
Average deposits
 
6,220,848

 
5,834,669

 
386,179

 
7
 %
 
5,659,771

 
561,077

 
10
 %
Average invested capital
 
274,050

 
249,827

 
24,223

 
10
 %
 
255,948

 
18,102

 
7
 %

Net interest revenue decreased $2.0 million or 7 percent compared the second quarter of 2018. Average loans attributed to the Wealth Management segment increased $235 million or 17 percent and average deposits increased $386 million or 7 percent largely due to the allocation of acquired loans. Growth in interest-bearing transaction account balances of $511 million was offset by an $89 million decrease in demand deposit balances and $43 million decrease in time deposit balances.

Fees and commissions revenue increased $15.4 million or 22 percent over the second quarter of 2018 primarily due to a $12.6 million increase in brokerage and trading revenue. Lower mortgage interest rates have led to an increase in related trading activity boosting brokerage and trading revenue. Operating expense increased $8.0 million or 13 percent compared to the second quarter of 2018. Personnel expense increased $4.4 million primarily due to standard annual merit increases. Non-personnel expense increased $3.5 million or 22 percent compared to the second quarter of 2018 largely related to occupancy and equipment expense. Corporate expense allocations decreased $2.0 million or 18 percent compared to the prior year.


- 16 -


Net income for Wealth Management increased $1.8 million or 8 percent compared to the first quarter of 2019. An increase in brokerage and trading revenue was partially offset by a decrease in net interest revenue and an increase in operating expenses.
Brokerage and trading revenue increased $8.4 million due to an increase in trading activity and volumes due to favorable interest rate changes. This increase was partially offset by a decrease in interest received on trading securities and an increase in funding costs. Fiduciary and asset management revenue increased $3.4 million largely due to a seasonal increase related to tax fees collected in the second quarter as well as increased assets under management. Operating expenses increased $7.9 million, including $6.1 million related to personnel expenses and $1.9 million related to other operating expenses.

Average loans increased $199 million or 14 percent to $1.6 billion and average deposits increased $561 million or 10 percent to $6.2 billion, primarily due to the allocation of CoBiz operations to the business lines.
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, 2019 and December 31, 2018.

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 decreased $240 million to $1.9 billion during the second quarter of 2019. 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, 2019, the carrying value of investment (held-to-maturity) securities was $328 million and the fair value was $347 million. Investment securities consist primarily of residential mortgage-backed securities issued by U.S. government agencies, long-term, fixed rate Oklahoma and Texas municipal bonds, and taxable Texas school construction bonds.

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 $10.4 billion at June 30, 2019, a $1.4 billion increase compared to March 31, 2019 as a measure to protect for a down rate environment. At June 30, 2019, 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, 2019 is 3.1 years. Management estimates the duration extends to 3.9 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.5 years assuming a 100 basis point decline in the current low rate environment.

The aggregate gross amount of unrealized losses on available for sale securities totaled $19 million at June 30, 2019, compared to $69 million at March 31, 2019. 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 2019.

- 17 -


Loans

The aggregate loan portfolio before allowance for loan losses totaled $22.3 billion at June 30, 2019, up $497 million over March 31, 2019, primarily due to growth in commercial and commercial real estate loans.

Table 12 -- Loans
(In thousands)
 
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
 
June 30, 2018
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,921,353

 
$
3,705,099

 
$
3,590,333

 
$
3,294,867

 
$
3,147,219

Services
 
3,309,458

 
3,287,563

 
3,258,192

 
2,603,862

 
2,516,676

Healthcare
 
2,926,510

 
2,915,885

 
2,799,277

 
2,437,323

 
2,353,722

Wholesale/retail
 
1,793,118

 
1,706,900

 
1,621,158

 
1,650,729

 
1,699,554

Public finance
 
795,659

 
803,083

 
804,550

 
418,578

 
433,408

Manufacturing
 
761,357

 
742,374

 
730,521

 
660,582

 
647,816

Other commercial and industrial
 
829,453

 
801,071

 
832,047

 
510,160

 
550,644

Total commercial
 
14,336,908

 
13,961,975

 
13,636,078

 
11,576,101

 
11,349,039

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Multifamily
 
1,300,372

 
1,210,358

 
1,288,065

 
1,120,166

 
1,056,984

Office
 
1,056,306

 
1,033,158

 
1,072,920

 
824,829

 
820,127

Industrial
 
828,569

 
767,757

 
778,106

 
696,774

 
653,384

Retail
 
825,399

 
890,685

 
919,082

 
759,423

 
768,024

Residential construction and land development
 
141,509

 
149,686

 
148,584

 
101,872

 
118,999

Other commercial real estate
 
557,878

 
549,007

 
558,056

 
301,611

 
294,702

Total commercial real estate
 
4,710,033

 
4,600,651

 
4,764,813

 
3,804,675

 
3,712,220

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,088,370

 
1,098,481

 
1,122,610

 
1,094,926

 
1,068,412

Permanent mortgages guaranteed by U.S. government agencies
 
195,373

 
193,308

 
190,866

 
180,718

 
169,653

Home equity
 
887,079

 
900,831

 
916,557

 
696,098

 
704,185

Total residential mortgage
 
2,170,822

 
2,192,620

 
2,230,033

 
1,971,742

 
1,942,250

 
 
 
 
 
 
 
 
 
 
 
Personal
 
1,037,889

 
1,003,734

 
1,025,806

 
996,941

 
1,000,187

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
22,255,652

 
$
21,758,980

 
$
21,656,730

 
$
18,349,459

 
$
18,003,696


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 $14.3 billion or 64 percent of the loan portfolio at June 30, 2019, an increase of $375 million over March 31, 2019. Energy loan balances grew by $216 million. Wholesale/retail sector loans increased $86 million. Other commercial and industrial loans increased $28 million and services sector loans were up $22 million. Manufacturing and healthcare sector loans also increased over March 31.


- 18 -


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
 
$
819,979

 
$
2,105,298

 
$
57,153

 
$
122

 
$
483,286

 
$
548

 
$
100,035

 
$
354,932

 
$
3,921,353

Services
 
633,245

 
779,445

 
173,946

 
16,513

 
622,318

 
448,033

 
261,699

 
374,259

 
3,309,458

Healthcare
 
235,561

 
390,596

 
136,658

 
84,456

 
328,166

 
227,487

 
242,652

 
1,280,934

 
2,926,510

Wholesale/retail
 
309,597

 
663,003

 
38,280

 
31,792

 
179,169

 
109,027

 
64,481

 
397,769

 
1,793,118

Public finance
 
73,892

 
167,025

 
40,973

 
—

 
169,482

 
120,198

 
—

 
224,089

 
795,659

Manufacturing
 
88,827

 
191,733

 
575

 
5,693

 
187,014

 
148,551

 
63,605

 
75,359

 
761,357

Other commercial and industrial
 
157,211

 
165,549

 
3,150

 
48,630

 
117,124

 
40,547

 
63,914

 
233,328

 
829,453

Total commercial loans
 
$
2,318,312

 
$
4,462,649

 
$
450,735

 
$
187,206

 
$
2,086,559

 
$
1,094,391

 
$
796,386

 
$
2,940,670

 
$
14,336,908

 
The majority of the collateral securing our commercial loan portfolio is located within our geographical footprint with 31 percent concentrated in the Texas market, 16 percent concentrated in the Oklahoma market and 15 percent in the Colorado market. At June 30, 2019, the Other category is primarily composed of California - $587 million or 4 percent of the commercial loan portfolio, Florida - $269 million or 2 percent of the commercial loan portfolio, Louisiana - $168 million or 1 percent of the commercial loan portfolio, Pennsylvania - $164 million or 1 percent of the commercial loan portfolio and Ohio - $163 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 $3.9 billion or 18 percent of total loans at June 30, 2019. Unfunded energy loan commitments were $3.2 billion at June 30, 2019, a $222 million decrease compared to March 31, 2019 primarily due to increased utilization in the second quarter. Approximately $3.1 billion of energy loans were to oil and gas producers, growing $107 million over March 31, 2019. 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 59 percent of the committed production loans are secured by properties primarily producing oil and 41 percent of the committed production loans are secured by properties primarily producing natural gas. Loans to midstream oil and gas companies totaled $569 million at June 30, 2019, up $106 million over March 31, 2019. Loans to borrowers that provide services to the energy industry totaled $183 million at June 30, 2019, an increase of $10 million. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $53 million, a $7.4 million decrease compared to the prior quarter.

The services sector of the loan portfolio totaled $3.3 billion or 15 percent of total loans and consists of a large number of loans to a variety of businesses, including commercial services, Native American tribal governments, financial services, entertainment & recreation and consumer services. Services sector loans increased by $22 million over March 31, 2019. Approximately $1.6 billion of the services category is made up of loans with individual balances of less than $10 million. Services 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. 


- 19 -


The healthcare sector of the loan portfolio totaled $2.9 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.

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, 2019, the outstanding principal balance of these loans totaled $4.6 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 18 percent of our shared national credits, based on dollars committed. We hold shared national credits to the same standard of analysis and perform the same level of review as internally originated credits. Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. In addition to management’s quarterly assessment of credit risk, banking regulators annually review a sample of shared national credits for proper risk grading.

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. Our larger concentrations are in Texas, Colorado and Oklahoma representing 26 percent, 12 percent and 11 percent of the total commercial real estate portfolio at June 30, 2019, 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 $4.7 billion or 21 percent of the loan portfolio at June 30, 2019. The outstanding balance of commercial real estate loans increased $109 million compared to March 31, 2019. Loans secured by multifamily residential properties increased $90 million. Loans secured by industrial facilities grew by $61 million. Loans secured by office buildings increased $23 million. Loans secured by retail facilities decreased $65 million. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 19 percent to 22 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
 
$
176,285

 
$
435,006

 
$
34,799

 
$
42,256

 
$
67,954

 
$
145,652

 
$
182,302

 
$
216,118

 
$
1,300,372

Office
 
109,007

 
261,076

 
97,769

 
17,419

 
117,713

 
72,103

 
35,118

 
346,101

 
1,056,306

Industrial
 
113,000

 
204,789

 
17,684

 
87

 
84,471

 
37,315

 
42,672

 
328,551

 
828,569

Retail
 
54,396

 
270,837

 
146,366

 
5,362

 
102,345

 
62,012

 
7,356

 
176,725

 
825,399

Residential construction and land development
 
6,616

 
15,800

 
12,985

 
246

 
54,304

 
14,122

 
9,855

 
27,581

 
141,509

Other commercial real estate
 
48,151

 
38,572

 
10,387

 
2,328

 
148,659

 
80,421

 
47,299

 
182,061

 
557,878

Total commercial real estate loans
 
$
507,455

 
$
1,226,080

 
$
319,990

 
$
67,698

 
$
575,446

 
$
411,625

 
$
324,602

 
$
1,277,137

 
$
4,710,033


The Other category is primarily composed of California - $275 million or 6 percent of the commercial real estate portfolio, Utah - $165 million or 4 percent of the commercial real estate portfolio, Nevada - $119 million or 3 percent of the commercial real estate portfolio, Georgia - $101 million or 2 percent of the commercial real estate portfolio and Virginia - $95 million or 2 percent of the commercial real estate portfolio. All other states represent less than 2% 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.

- 20 -


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 $2.2 billion, a decrease of $22 million compared to March 31, 2019. 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 92% 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 to100 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, 2019, $195 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 increased $2.1 million over March 31, 2019.

Home equity loans totaled $887 million at June 30, 2019, a $14 million decrease compared to March 31, 2019. 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, 2019 by lien position and amortizing status follows in Table 15.

Table 15 -- Home Equity Loans
(In thousands)
 
 
Revolving
 
Amortizing
 
Total
First lien
 
$
89,399

 
$
495,512

 
$
584,911

Junior lien
 
187,872

 
114,296

 
302,168

Total home equity
 
$
277,271

 
$
609,808

 
$
887,079




- 21 -


The distribution of residential mortgage and personal loans at June 30, 2019 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
 
$
166,762

 
$
428,793

 
$
63,403

 
$
13,039

 
$
201,900

 
$
103,739

 
$
59,363

 
$
51,371

 
$
1,088,370

Permanent mortgages  guaranteed by U.S. government agencies
 
47,020

 
31,317

 
32,239

 
10,070

 
5,320

 
1,332

 
16,036

 
52,039

 
195,373

Home equity
 
355,348

 
139,910

 
78,037

 
7,408

 
152,769

 
38,751

 
51,545

 
63,311

 
887,079

Total residential mortgage
 
$
569,130

 
$
600,020

 
$
173,679

 
$
30,517

 
$
359,989

 
$
143,822

 
$
126,944

 
$
166,721

 
$
2,170,822

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
$
321,274

 
$
416,424

 
$
11,443

 
$
11,352

 
$
79,045

 
$
69,464

 
$
56,074

 
$
72,813

 
$
1,037,889



- 22 -


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, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
 
June 30, 2018
Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
3,762,234

 
$
3,551,054

 
$
3,491,117

 
$
3,609,109

 
$
3,465,407

Commercial real estate
 
717,970

 
665,190

 
700,756

 
651,315

 
662,665

Residential mortgage
 
1,403,398

 
1,417,381

 
1,440,566

 
1,429,843

 
1,403,658

Personal
 
382,764

 
374,807

 
375,543

 
376,201

 
362,846

Total Oklahoma
 
6,266,366

 
6,008,432

 
6,007,982

 
6,066,468

 
5,894,576

 
 
 
 
 
 
 
 
 
 
 
Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
5,877,265

 
5,754,018

 
5,438,133

 
5,115,646

 
4,922,451

Commercial real estate
 
1,341,609

 
1,344,810

 
1,341,783

 
1,354,679

 
1,336,101

Residential mortgage
 
272,878

 
265,927

 
266,805

 
253,265

 
243,400

Personal
 
400,585

 
396,794

 
394,743

 
381,452

 
394,021

Total Texas
 
7,892,337

 
7,761,549

 
7,441,464

 
7,105,042

 
6,895,973

 
 
 
 
 
 
 
 
 
 
 
New Mexico:
 
 

 
 

 
 

 
 

 
 

Commercial
 
350,520

 
342,915

 
340,489

 
325,048

 
305,167

Commercial real estate
 
385,058

 
371,416

 
383,670

 
392,494

 
386,878

Residential mortgage
 
82,390

 
85,326

 
87,346

 
88,110

 
90,581

Personal
 
10,236

 
11,065

 
10,662

 
11,659

 
11,107

Total New Mexico
 
828,204

 
810,722

 
822,167

 
817,311

 
793,733

 
 
 
 
 
 
 
 
 
 
 
Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
87,896

 
79,286

 
111,338

 
102,237

 
93,217

Commercial real estate
 
149,300

 
142,551

 
141,898

 
106,701

 
90,807

Residential mortgage
 
7,463

 
7,731

 
7,537

 
7,278

 
6,927

Personal
 
11,208

 
11,550

 
11,955

 
12,126

 
12,331

Total Arkansas
 
255,867

 
241,118

 
272,728

 
228,342

 
203,282

 
 
 
 
 
 
 
 
 
 
 
Colorado:
 
 

 
 

 
 

 
 

 
 

Commercial
 
2,325,742

 
2,231,703

 
2,275,069

 
1,132,500

 
1,165,721

Commercial real estate
 
1,023,410

 
957,348

 
963,575

 
354,543

 
267,065

Residential mortgage
 
241,780

 
241,722

 
251,849

 
68,694

 
64,839

Personal
 
72,537

 
65,812

 
72,916

 
56,999

 
60,504

Total Colorado
 
3,663,469

 
3,496,585

 
3,563,409

 
1,612,736

 
1,558,129

 
 
 
 
 
 
 
 
 
 
 
Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
1,330,415

 
1,335,140

 
1,320,139

 
621,658

 
681,852

Commercial real estate
 
761,243

 
791,466

 
889,903

 
666,562

 
710,784

Residential mortgage
 
91,684

 
98,973

 
97,959

 
44,659

 
47,010

Personal
 
76,335

 
61,875

 
68,546

 
67,280

 
65,541

Total Arizona
 
2,259,677

 
2,287,454

 
2,376,547

 
1,400,159

 
1,505,187

 
 
 
 
 
 
 
 
 
 
 
Kansas/Missouri:
 
 

 
 

 
 

 
 

 
 

Commercial
 
602,836

 
667,859

 
659,793

 
669,903

 
715,224

Commercial real estate
 
331,443

 
327,870

 
343,228

 
278,381

 
257,920

Residential mortgage
 
71,229

 
75,560

 
77,971

 
79,893

 
85,835

Personal
 
84,224

 
81,831

 
91,441

 
91,224

 
93,837

Total Kansas/Missouri
 
1,089,732

 
1,153,120

 
1,172,433

 
1,119,401

 
1,152,816

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
22,255,652

 
$
21,758,980

 
$
21,656,730

 
$
18,349,459

 
$
18,003,696


- 23 -


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 18 – Off-Balance Sheet Credit Commitments
(In thousands)
 
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
 
June 30, 2018
Loan commitments
 
$
11,411,819

 
$
12,243,886

 
$
11,944,524

 
$
10,715,964

 
$
10,294,211

Standby letters of credit
 
698,527

 
720,451

 
582,196

 
671,844

 
659,867

Mortgage loans sold with recourse
 
93,606

 
94,938

 
98,623

 
101,512

 
116,269

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, 2019, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $389 million compared to $354 million at March 31, 2019. At June 30, 2019, the net fair value of our derivative contracts included $251 million for foreign exchange contracts, $77 million for energy contracts, $49 million for interest rate swaps and $8.4 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 $369 million at June 30, 2019 and $343 million at March 31, 2019.

At June 30, 2019, total derivative assets were reduced by $34 million of cash collateral received from counterparties and total derivative liabilities were reduced by $54 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.

- 24 -



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, 2019 follows in Table 19.

Table 19 -- Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
172,485

Banks and other financial institutions
 
156,279

Exchanges and clearing organizations
 
25,525

Fair value of customer risk management program asset derivative contracts, net
 
$
354,289

 
At June 30, 2019, our largest derivative exposure was to an exchange for energy contracts, net of cash margin, of $26 million.

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 $28.87 per barrel of oil would not be great enough to create a scenario in which we are owed by our customers. An increase in prices equivalent to $71.81 per barrel of oil would increase the fair value of derivative assets by $113 million. Further increases in price to the equivalent of $88.03 per barrel of oil would increase the fair value of our derivative assets by $330 million with lending customers comprising the bulk of the assets. Liquidity requirements of this program may also be affected by our credit rating. At June 30, 2019, a decrease in our credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $10 million. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of June 30, 2019, 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, 2019, the combined allowance for loan losses and off-balance sheet credit losses totaled $204 million or 0.92 percent of outstanding loans and 115 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. Excluding acquired loans measured at acquisition date fair value, the combined allowance for loan losses was 1.03 percent of outstanding loans and 126 percent of nonaccruing loans. The allowance for loan losses was $203 million and the accrual for off-balance sheet credit losses was $1.9 million. At March 31, 2019, the combined allowance for credit losses was $207 million or 0.95 percent of outstanding loans and 142 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. Excluding acquired loans measured at acquisition date fair value, the combined allowance for loan losses was 1.09 percent of outstanding loans and 159 percent of nonaccruing loans. The allowance for loan losses was $205 million and the accrual for off-balance sheet credit losses was $1.8 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 trends in nonaccruing loans, potential problem loans and net charge-offs, the Company determined that $5.0 million provision for credit losses was appropriate for the second quarter of 2019. The Company recorded $8.0 million provision for credit losses in the first quarter of 2019.



- 25 -


Table 20 -- Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
 
June 30, 2018
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
205,340

 
$
207,457

 
$
210,569

 
$
215,142

 
$
223,967

Loans charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
(11,385
)
 
(10,468
)
 
(12,940
)
 
(9,602
)
 
(13,775
)
Commercial real estate
 
(118
)
 
—

 
—

 
—

 
—

Residential mortgage
 
(94
)
 
(42
)
 
(52
)
 
(91
)
 
(135
)
Personal
 
(1,630
)
 
(1,265
)
 
(1,523
)
 
(1,380
)
 
(1,195
)
Total
 
(13,227
)
 
(11,775
)
 
(14,515
)
 
(11,073
)
 
(15,105
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
434

 
711

 
1,267

 
1,263

 
298

Commercial real estate
 
4,345

 
112

 
232

 
40

 
3,097

Residential mortgage
 
149

 
154

 
71

 
229

 
505

Personal
 
575

 
712

 
598

 
560

 
678

Total
 
5,503

 
1,689

 
2,168

 
2,092

 
4,578

Net loans recovered (charged off)
 
(7,724
)
 
(10,086
)
 
(12,347
)
 
(8,981
)
 
(10,527
)
Provision for loan losses
 
4,918

 
7,969

 
9,235

 
4,408

 
1,702

Ending balance
 
$
202,534

 
$
205,340

 
$
207,457

 
$
210,569

 
$
215,142

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 
 
 

Beginning balance
 
$
1,821

 
$
1,790

 
$
2,025

 
$
2,433

 
$
4,135

Provision for off-balance sheet credit losses
 
82

 
31

 
(235
)
 
(408
)
 
(1,702
)
Ending balance
 
$
1,903

 
$
1,821

 
$
1,790

 
$
2,025

 
$
2,433

Total combined provision for credit losses
 
$
5,000

 
$
8,000

 
$
9,000

 
$
4,000

 
$
—

Allowance for loan losses to loans outstanding at period-end
 
0.91
%
 
0.94
%
 
0.96
%
 
1.15
%
 
1.19
%
Net charge-offs (recoveries) (annualized) to average loans
 
0.14
%
 
0.19
%
 
0.23
%
 
0.20
%
 
0.24
%
Total provision for credit losses (annualized) to average loans
 
0.09
%
 
0.15
%
 
0.17
%
 
0.09
%
 
—
%
Recoveries to gross charge-offs
 
41.60
%
 
14.34
%
 
14.94
%
 
18.89
%
 
30.31
%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.02
%
 
0.01
%
 
0.01
%
 
0.02
%
 
0.02
%
Combined allowance for credit losses to loans outstanding at period-end
 
0.92
%
 
0.95
%
 
0.97
%
 
1.16
%
 
1.21
%
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, 2019, impaired loans totaled $372 million, including $9.3 million with specific allowances of $4.0 million and $363 million with no specific allowances. At March 31, 2019, impaired loans totaled $339 million, including $8.0 million of impaired loans with specific allowances of $3.5 million and $331 million with no specific allowances.

- 26 -


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 $182 million at June 30, 2019, largely unchanged compared to March 31, 2019. A decrease in general allowances related to commercial real estate loans was largely offset by an increase in general allowances related to the commercial loan 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 $17 million at June 30, 2019, a $2.3 million decrease compared to March 31, 2019.

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 $161 million at June 30, 2019 and were primarily composed of $62 million or 1.58 percent of energy loans, $27 million or less than 1 percent of service sector loans, $20 million or 2.47 percent of other commercial and industrial loans, $14 million or 1.87 percent of manufacturing sector loans, $13 million or less than 1 percent of healthcare sector loans and $12 million or less than 1 percent of wholesale/retail sector loans. Potential problem loans totaled $169 million at March 31, 2019.

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 $141 million at June 30, 2019 and were composed primarily of $51 million or 1.53 percent of service sector loans, $29 million or 3.82 percent of manufacturing sector loans, $15 million or 0.52 percent healthcare sector loans, $13 million or 0.73 percent of wholesale/retail sector loans and $13 million or 0.33 percent of energy sector loans. Other loans especially mentioned totaled $196 million at March 31, 2019.
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 $7.7 million in the second quarter of 2019, compared to net charge-offs of $10.1 million in the first quarter of 2019 and net charge-offs of $10.5 million in the second quarter of 2018. The ratio of net loans charged off to average loans on an annualized basis was 0.14 percent for the second quarter of 2019, compared with 0.19 percent for the first quarter of 2019 and 0.24 percent for the second quarter of 2018. 

Net charge-offs of commercial loans were $11.0 million in the second quarter of 2019, primarily related to two energy production borrowers and a single healthcare sector borrower. Net commercial real estate loan recoveries were $4.2 million in the second quarter of 2019. Net recoveries of residential mortgage loans were $55 thousand and net charge-offs of personal loans were $1.1 million for the second quarter. Personal loan net charge-offs include deposit account overdraft losses.

- 27 -


Nonperforming Assets

Table 21 -- Nonperforming Assets
(In thousands)
 
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
 
June 30, 2018
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
123,395

 
$
90,358

 
$
99,841

 
$
109,490

 
$
120,978

Commercial real estate
 
21,670

 
21,508

 
21,621

 
1,316

 
1,996

Residential mortgage
 
38,477

 
40,409

 
41,555

 
41,917

 
42,343

Personal
 
237

 
302

 
230

 
269

 
340

Total nonaccruing loans
 
183,779

 
152,577

 
163,247

 
152,992

 
165,657

Accruing renegotiated loans guaranteed by U.S. government agencies
 
95,989

 
91,787

 
86,428

 
83,347

 
75,374

Real estate and other repossessed assets
 
16,940

 
17,139

 
17,487

 
24,515

 
27,891

Total nonperforming assets
 
$
296,708

 
$
261,503

 
$
267,162

 
$
260,854

 
$
268,922

Total nonperforming assets excluding those guaranteed by U.S. government agencies
 
$
193,976

 
$
162,770

 
$
173,602

 
$
169,717

 
$
185,981

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio segment and class:
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
71,632

 
$
35,332

 
$
47,494

 
$
54,033

 
$
65,597

Healthcare
 
16,148

 
18,768

 
16,538

 
15,704

 
16,125

Manufacturing
 
8,613

 
9,548

 
8,919

 
9,202

 
2,991

Services
 
10,087

 
9,555

 
8,567

 
4,097

 
4,377

Wholesale/retail
 
1,390

 
1,425

 
1,316

 
9,249

 
14,095

Public finance
 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
15,525

 
15,730

 
17,007

 
17,205

 
17,793

Total commercial
 
123,395

 
90,358

 
99,841

 
109,490

 
120,978

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 

 
 

Retail
 
20,057

 
20,159

 
20,279

 
777

 
1,068

Residential construction and land development
 
350

 
350

 
350

 
350

 
350

Multifamily
 
275

 
—

 
301

 
—

 
—

Office
 
855

 
855

 
—

 
—

 
275

Industrial
 
—

 
—

 
—

 
—

 
—

Other commercial real estate
 
133

 
144

 
691

 
189

 
303

Total commercial real estate
 
21,670

 
21,508

 
21,621

 
1,316

 
1,996

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
21,803

 
22,937

 
23,951

 
22,855

 
23,105

Permanent mortgage guaranteed by U.S. government agencies
 
6,743

 
6,946

 
7,132

 
7,790

 
7,567

Home equity
 
9,931

 
10,526

 
10,472

 
11,272

 
11,671

Total residential mortgage
 
38,477

 
40,409

 
41,555

 
41,917

 
42,343

Personal
 
237

 
302

 
230

 
269

 
340

Total nonaccruing loans
 
$
183,779

 
$
152,577

 
$
163,247

 
$
152,992

 
$
165,657

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses to nonaccruing loans1
 
114.40
%
 
141.00
%
 
132.89
%
 
145.02
%
 
136.09
%
Accruing loans 90 days or more past due1
 
$
2,698

 
$
610

 
$
1,338

 
$
518

 
$
879

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

- 28 -


Nonperforming assets totaled $297 million or 1.33 percent of outstanding loans and repossessed assets at June 30, 2019. Nonaccruing loans totaled $184 million, accruing renegotiated residential mortgage loans totaled $96 million and real estate and other repossessed assets totaled $17 million. All accruing renegotiated residential mortgage loans and $6.7 million of nonaccruing loans are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets increased $31 million over the first quarter of 2019, primarily due to an increase in nonaccruing energy loans, partially offset by a decrease in nonaccruing healthcare 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. Generally 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.

Accruing renegotiated loan guaranteed by U.S. government agencies represent residential mortgage loans 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, 2019 follows in Table 22.

Table 22 -- Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2019
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, March 31, 2019
 
$
152,577

 
$
91,787

 
$
17,139

 
$
261,503

Additions
 
53,941

 
12,495

 
—

 
66,436

Payments
 
(7,128
)
 
(573
)
 
—

 
(7,701
)
Charge-offs
 
(13,227
)
 
—

 
—

 
(13,227
)
Net gains (losses) and write-downs
 
—

 
—

 
82

 
82

Foreclosure of nonperforming loans
 
(1,574
)
 
—

 
1,574

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(810
)
 
(2,894
)
 
—

 
(3,704
)
Proceeds from sales
 
—

 
(5,169
)
 
(1,855
)
 
(7,024
)
Return to accrual status
 
—

 
—

 
—

 
—

Other, net
 
—

 
343

 
—

 
343

Balance, June 30, 2019
 
$
183,779

 
$
95,989

 
$
16,940

 
$
296,708


- 29 -


 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
June 30, 2019
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, December 31, 2018
 
$
163,247

 
$
86,428

 
$
17,487

 
$
267,162

Additions
 
80,809

 
26,811

 
—

 
107,620

Payments
 
(29,303
)
 
(1,206
)
 
—

 
(30,509
)
Charge-offs
 
(25,002
)
 
—

 
—

 
(25,002
)
Net gains (losses) and write-downs
 
—

 
—

 
(163
)
 
(163
)
Foreclosure of nonperforming loans
 
(2,606
)
 
—

 
2,606

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(1,490
)
 
(5,418
)
 
—

 
(6,908
)
Proceeds from sales
 
—

 
(11,223
)
 
(2,990
)
 
(14,213
)
Return to accrual status
 
(1,876
)
 
—

 
—

 
(1,876
)
Other, net
 
—

 
597

 
—

 
597

Balance, June 30, 2019
 
$
183,779

 
$
95,989

 
$
16,940

 
$
296,708


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 $123 million or 0.86 percent of total commercial loans at June 30, 2019 compared to $90 million or 0.65 percent of commercial loans at March 31, 2019. There were $49 million in newly identified nonaccruing commercial loans during the quarter, offset by $4.6 million in payments and $11 million of charge-offs of nonaccruing commercial loans during the second quarter.

Nonaccruing commercial loans at June 30, 2019 were primarily composed of $72 million or 1.83 percent of total energy loans, $16 million or 0.55 percent of total healthcare sector loans, $16 million or 1.87 percent of total other commercial and industrial sector loans and $10 million or 0.30 percent of other commercial and industrial loans.
Commercial Real Estate

Nonaccruing commercial real estate loans totaled $22 million or 0.46 percent of outstanding commercial real estate loans at June 30, 2019, largely unchanged compared to March 31, 2019 of $22 million or 0.47 percent of outstanding commercial real estate loans. 

Nonaccruing commercial real estate loans were primarily composed of $20 million or 2.43 percent of loans secured by retail facilities.

Residential Mortgage and Personal

Nonaccruing residential mortgage loans totaled $38 million or 1.77 percent of outstanding residential mortgage loans at June 30, 2019, a $1.9 million decrease compared to March 31, 2019. Newly identified nonaccruing residential mortgage loans totaling $2.9 million were offset by $2.8 million of payments and $1.2 million of foreclosures. 

Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans, which totaled $22 million or 2.00 percent of outstanding non-guaranteed permanent residential mortgage loans at June 30, 2019. Nonaccruing home equity loans totaled $9.9 million or 1.12 percent of total home equity loans.


- 30 -


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 decreased $4.5 million in the second quarter to $5.0 million at June 30, 2019. Residential mortgage loans 60 to 89 days past due increased by $385 thousand. Personal loans past due 30 to 59 days increased by $2.2 million and personal loans 60 to 89 days increased $72 thousand.

Table 23 -- Residential Mortgage and Personal Loans Past Due
(In thousands)
 
 
June 30, 2019
 
March 31, 2019
 
 
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
 
$
37

 
$
—

 
$
3,641

 
$
—

 
$
—

 
$
5,394

Home equity
 
—

 
553

 
1,380

 
—

 
168

 
4,118

Total residential mortgage
 
$
37

 
$
553

 
$
5,021

 
—

 
$
168

 
$
9,512

 
 
 

 
 
 
 

 
 

 
 
 
 

Personal
 
$
10

 
$
88

 
$
2,509

 
$
—

 
$
16

 
$
347

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 $17 million at June 30, 2019, composed primarily of $6.0 million of oil and gas properties, $4.1 million of 1-4 family residential properties, $3.3 million of developed commercial real estate and $2.9 million of undeveloped land primarily zoned for commercial development. Real estate and other repossessed assets totaled $17 million at March 31, 2019.


- 31 -


Liquidity and Capital

Based on the average balances for the second quarter of 2019, approximately 62 percent of our funding was provided by deposit accounts, 23 percent from borrowed funds, less than 1 percent from long-term subordinated debt and 11 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 2019 totaled $25.2 billion, a $548 million increase over the first quarter of 2019. Interest-bearing transaction account balances increased $581 million and time deposits increased $54 million. Demand deposits decreased $104 million compared to the first quarter of 2019.
Table 24 - Average Deposits by Line of Business
(In thousands)
 
Three Months Ended
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
 
June 30, 2018
Commercial Banking
$
10,724,206

 
$
8,261,543

 
$
8,393,016

 
$
8,633,204

 
$
8,379,584

Consumer Banking
6,998,677

 
6,544,665

 
6,542,188

 
6,580,395

 
6,579,635

Wealth Management
6,220,848

 
5,659,771

 
5,483,455

 
5,492,048

 
5,834,669

Subtotal
23,943,731

 
20,465,979

 
20,418,659

 
20,705,647

 
20,793,888

Funds Management and other
1,218,645

 
4,148,500

 
4,676,736

 
1,230,648

 
1,261,344

Total
$
25,162,376

 
$
24,614,479

 
$
25,095,395

 
$
21,936,295

 
$
22,055,232


Acquired deposits were allocated to the lines of business from funds management and other in the second quarter of 2019. The fluctuations following include those deposits. Average Commercial Banking deposit balances increased $2.5 billion compared to first quarter of 2019. Demand deposit balances increased $992 million and interest-bearing transaction account balances increased $1.4 billion. Despite the series of federal funds rate increases from the Federal Reserve, as well as modest increases in our earnings credit, 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 if short-term rates continue to move higher, enhancing their investment alternatives. As short-term rates move higher, related increases to the earnings credit rate may be appropriate, which will reduce the amount of deposits required to offset service charges.

Average Consumer Banking deposit balances increased $454 million over the prior quarter. Demand deposit balances increased $322 million and interest-bearing transaction deposit balances increased $75 million. Time deposit balances increased $32 million.

Average Wealth Management deposits increased $561 million over the first quarter of 2019. Interest-bearing transaction account balances were up $483 million. Demand deposit balances increased $38 million, and time deposits balances were up $36 million.

Average time deposits for the second quarter of 2019 included $254 million of brokered deposits, a $16 million decrease compared to the first quarter of 2019. Average interest-bearing transaction accounts for the second quarter included $1.1 billion of brokered deposits, a $214 million increase over the first quarter of 2019.


- 32 -


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

Table 25 -- Period End Deposits by Principal Market Area
(In thousands)
 
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
 
June 30, 2018
Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
3,279,359

 
$
3,432,239

 
$
3,610,593

 
$
3,564,307

 
$
3,867,934

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
7,020,484

 
6,542,548

 
6,445,831

 
6,010,972

 
5,968,459

Savings
 
307,785

 
309,875

 
288,210

 
288,080

 
289,202

Time
 
1,253,804

 
1,217,371

 
1,118,643

 
1,128,810

 
1,207,471

Total interest-bearing
 
8,582,073

 
8,069,794

 
7,852,684

 
7,427,862

 
7,465,132

Total Oklahoma
 
11,861,432

 
11,502,033

 
11,463,277

 
10,992,169

 
11,333,066

 
 
 
 
 
 
 
 
 
 
 
Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
2,974,005

 
2,966,743

 
3,291,433

 
3,357,669

 
3,321,980

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
2,453,619

 
2,385,305

 
2,295,169

 
2,182,114

 
2,169,155

Savings
 
103,125

 
101,849

 
99,624

 
97,909

 
97,809

Time
 
425,253

 
419,269

 
423,880

 
453,119

 
445,500

Total interest-bearing
 
2,981,997

 
2,906,423

 
2,818,673

 
2,733,142

 
2,712,464

Total Texas
 
5,956,002

 
5,873,166

 
6,110,106

 
6,090,811

 
6,034,444

 
 
 
 
 
 
 
 
 
 
 
New Mexico:
 
 
 
 
 
 
 
 
 
 
Demand
 
630,861

 
662,362

 
691,692

 
722,188

 
770,974

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
557,881

 
573,203

 
571,347

 
593,760

 
586,593

Savings
 
62,636

 
61,497

 
58,194

 
57,794

 
59,415

Time
 
232,569

 
228,212

 
224,515

 
221,513

 
212,689

Total interest-bearing
 
853,086

 
862,912

 
854,056

 
873,067

 
858,697

Total New Mexico
 
1,483,947

 
1,525,274

 
1,545,748

 
1,595,255

 
1,629,671

 
 
 
 
 
 
 
 
 
 
 
Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
29,176

 
31,624

 
36,800

 
36,579

 
39,896

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
148,485

 
147,964

 
91,593

 
128,001

 
143,298

Savings
 
1,783

 
1,785

 
1,632

 
1,826

 
1,885

Time
 
7,810

 
8,321

 
8,726

 
10,214

 
10,771

Total interest-bearing
 
158,078

 
158,070

 
101,951

 
140,041

 
155,954

Total Arkansas
 
187,254

 
189,694

 
138,751

 
176,620

 
195,850

 
 
 
 
 
 
 
 
 
 
 

- 33 -


 
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
 
June 30, 2018
Colorado:
 
 
 
 
 
 
 
 
 
 
Demand
 
1,621,820

 
1,897,547

 
1,658,473

 
593,442

 
529,912

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
1,800,271

 
1,844,632

 
1,899,203

 
622,520

 
701,362

Savings
 
57,263

 
58,919

 
57,289

 
40,308

 
38,176

Time
 
246,198

 
261,235

 
274,877

 
217,628

 
208,049

Total interest-bearing
 
2,103,732

 
2,164,786

 
2,231,369

 
880,456

 
947,587

Total Colorado
 
3,725,552

 
4,062,333

 
3,889,842

 
1,473,898

 
1,477,499

 
 
 
 
 
 
 
 
 
 
 
Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
700,480

 
695,238

 
707,402

 
365,878

 
383,627

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
560,429

 
621,735

 
575,567

 
130,105

 
193,687

Savings
 
11,966

 
12,144

 
10,545

 
3,559

 
3,935

Time
 
43,099

 
44,004

 
43,051

 
23,927

 
22,447

Total interest-bearing
 
615,494

 
677,883

 
629,163

 
157,591

 
220,069

Total Arizona
 
1,315,974

 
1,373,121

 
1,336,565

 
523,469

 
603,696

 
 
 
 
 
 
 
 
 
 
 
Kansas/Missouri:
 
 
 
 
 
 
 
 
 
 
Demand
 
431,856

 
410,799

 
418,199

 
423,560

 
459,636

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
310,774

 
361,590

 
327,866

 
322,747

 
401,545

Savings
 
13,125

 
13,815

 
13,721

 
13,125

 
13,052

Time
 
19,205

 
19,977

 
19,688

 
20,635

 
20,805

Total interest-bearing
 
343,104

 
395,382

 
361,275

 
356,507

 
435,402

Total Kansas/Missouri
 
774,960

 
806,181

 
779,474

 
780,067

 
895,038

Total BOK Financial deposits
 
$
25,305,121

 
$
25,331,802

 
$
25,263,763

 
$
21,632,289

 
$
22,169,264


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 $575 million at June 30, 2019. 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 $7.2 billion during the quarter, compared to $7.0 billion in the first quarter of 2019.

At June 30, 2019, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $7.8 billion.

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


- 34 -


Table 26 -- Borrowed Funds
(In thousands)
 
 
 
 
Three Months Ended
June 30, 2019
 
 
 
Three Months Ended
March 31, 2019
 
 
June 30, 2019
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
Mar. 31, 2019
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company and Other Non-Bank Subsidiaries:
Other borrowings
 
5,578

 
6,593

 
3.22
%
 
$
6,593

 
25,946

 
5,877

 
1.25
%
 
25,946

Subordinated debentures
 
275,892

 
275,887

 
5.53
%
 
$
275,893

 
275,880

 
275,882

 
5.51
%
 
275,880

Total parent company and other non-bank subsidiaries
 
281,470

 
282,480

 
5.47
%
 
 
 
301,826

 
281,759

 
5.43
%
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BOKF, NA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
1,975,086

 
1,650,046

 
2.46
%
 
1,975,086

 
1,018,117

 
1,622,580

 
2.47
%
 
1,862,316

Repurchase agreements
 
356,861

 
416,904

 
0.56
%
 
388,760

 
421,556

 
410,456

 
0.46
%
 
421,556

Other borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
 
7,800,000

 
7,153,846

 
2.65
%
 
7,800,000

 
7,300,000

 
7,013,333

 
2.67
%
 
7,300,000

GNMA repurchase liability
 
14,499

 
10,755

 
4.44
%
 
14,499

 
11,466

 
17,413

 
4.51
%
 
19,581

Other
 
3,732

 
4,423

 
4.62
%
 
3,732

 
3,681

 
3,656

 
5.55
%
 
3,681

Total other borrowings
 
7,818,231

 
7,169,024

 
2.67
%
 


 
7,315,147

 
7,034,402

 
2.67
%
 


Total BOKF, NA
 
10,150,178

 
9,235,974

 
2.53
%
 
 
 
8,754,820

 
9,067,438

 
2.54
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other borrowed funds and subordinated debentures
 
$
10,431,648

 
$
9,518,454

 
2.62
%
 
 
 
$
9,056,646

 
$
9,349,197

 
2.63
%
 
 
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, 2019, cash and interest-bearing cash and cash equivalents held by the parent company totaled $149 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, 2019, based upon the most restrictive limitations as well as management's internal capital policy, BOKF, NA could declare up to $125 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, 2019 was $4.7 billion, an $187 million increase over March 31, 2019. Net income less cash dividends paid increased equity $102 million during the second quarter of 2019. Changes in interest rates resulted in an accumulated other comprehensive gain of $99 million at June 30, 2019, compared to an accumulated other comprehensive loss of $3.5 million at March 31, 2019. 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.


- 35 -


On June 16, 2016, the FASB issued FASB Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Assets Measured at Amortized Cost ("ASU 2016-13" or "CECL") to provide more-timely recording of credit losses on loans and other financial assets measured at amortized cost, effective for the Company’s annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company will adopt the standard on January 1, 2020 through a cumulative-effect adjustment to retained earnings. The ASU broadens the scope of the allowance for credit losses to include acquired loans and certain serviced loans, among others. Specifically, CECL requires recognition of an allowance for credit losses on acquired loans that were initially recognized at fair value, which included an estimate of expected credit losses. This requirement will result in duplicate recognition of an allowance for expected credit losses on approximately $2.5 billion of acquired loans. The principles of CECL also apply to expected credit losses on residential mortgage loans the company has transferred into mortgage-backed securities, primarily expected losses on approximately $3.5 billion of residential mortgage loans that exceed amounts guaranteed by the U.S. Department of Veterans Affairs. We do not expect a significant change in our existing allowance for credit losses due primarily to our loan portfolio’s relatively short average life. Currently, we do not expect that the cumulative-effect adjustment to retained earnings from adoption of the CECL accounting standard will materially affect the company’s regulatory capital or liquidity. The ultimate impact will depend on the composition of our portfolio of assets measured at amortized cost as well as economic conditions and forecasts at adoption.

On April 30, 2019, 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. The Company repurchased 250,000 shares during the second quarter of 2019 under this new authorization at an average price of $80.50 per share.

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.

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, 2019
 
Mar. 31, 2019
 
June 30, 2018
Risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1
 
4.50
%
 
2.50
%
 
7.00
%
 
10.84
%
 
10.71
%
 
11.92
%
Tier 1 capital
 
6.00
%
 
2.50
%
 
8.50
%
 
10.84
%
 
10.71
%
 
11.92
%
Total capital
 
8.00
%
 
2.50
%
 
10.50
%
 
12.34
%
 
12.24
%
 
13.26
%
Tier 1 Leverage
 
4.00
%
 
N/A

 
4.00
%
 
8.75
%
 
8.76
%
 
9.57
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average total equity to average assets
 
 
 
 
 
 
 
11.26
%
 
11.29
%
 
10.36
%
Tangible common equity ratio
 
 
 
 
 
 
 
8.69
%
 
8.64
%
 
9.21
%

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.


- 36 -


Table 28 -- Non-GAAP Measure
(Dollars in thousands)
 
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
 
June 30, 2018
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
4,709,438

 
$
4,522,873

 
$
4,432,109

 
$
3,615,032

 
$
3,553,431

Less: Goodwill and intangible assets, net
 
1,172,564

 
1,177,573

 
1,184,112

 
480,800

 
481,366

Tangible common equity
 
3,536,874

 
3,345,300

 
3,247,997

 
3,134,232

 
3,072,065

Total assets
 
41,893,073

 
39,882,962

 
38,020,504

 
33,289,864

 
33,833,107

Less: Goodwill and intangible assets, net
 
1,172,564

 
1,177,573

 
1,184,112

 
480,800

 
481,366

Tangible assets
 
$
40,720,509

 
$
38,705,389

 
$
36,836,392

 
$
32,809,064

 
$
33,351,741

Tangible common equity ratio
 
8.69
%
 
8.64
%
 
8.82
%
 
9.55
%
 
9.21
%

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.

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 100 basis point decrease in interest rates.

- 37 -


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
 
100 bp Decrease1
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
Anticipated impact over the next twelve months on net interest revenue
 
$
(15,527
)
 
$
1,118

 
$
(32,930
)
 
$
(35,335
)
 
 
(1.38
)%
 
0.11
%
 
(2.93
)%
 
(3.59
)%
1 The results of a 200 basis point decrease in interest rates in the low-rate environment are not meaningful, therefore we will instead report the effect of a 100 basis point decrease in interest rates.

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.


Table 30 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
 
 
June 30,
 
 
2019
 
2018
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
MSR Asset
 
$
32,153

 
$
(41,160
)
 
$
22,858

 
$
(25,967
)
MSR Hedge
 
(36,192
)
 
33,383

 
(23,730
)
 
21,281

Net Exposure
 
(4,039
)
 
(7,777
)
 
(872
)
 
(4,686
)


- 38 -


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,
 
 
2019
 
2018
 
2019
 
2018
 
 
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
 
$
(229
)
 
$
(190
)
 
$
663

 
$
(1,240
)
 
$
(104
)
 
$
(490
)
 
$
422

 
$
(932
)
Low2
 
189

 
330

 
2,077

 
(567
)
 
436

 
330

 
2,077

 
699

High3
 
(664
)
 
(1,163
)
 
(374
)
 
(2,447
)
 
(664
)
 
(1,343
)
 
(1,015
)
 
(2,447
)
Period End
 
(278
)
 
(169
)
 
216

 
(678
)
 
(278
)
 
(169
)
 
216

 
(678
)
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 engages in trading activities both as an intermediary for customers and for its own account. As an intermediary, we take positions in securities, generally U.S. government agency 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.

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.

- 39 -



Table 32 -- Trading Sensitivity Analysis
(Dollars in thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
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
 
$
(2,436
)
 
$
2,503

 
$
(1,566
)
 
$
1,405

 
$
(2,080
)
 
$
2,051

 
$
(1,062
)
 
$
874

Low2
 
(202
)
 
5,378

 
1,518

 
4,333

 
857

 
5,378

 
1,518

 
4,333

High3
 
(5,153
)
 
267

 
(4,242
)
 
(2,472
)
 
(5,153
)
 
(729
)
 
(4,242
)
 
(2,472
)
Period End
 
(629
)
 
936

 
(2,602
)
 
2,719

 
(629
)
 
936

 
(2,602
)
 
2,719

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.

We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. In 2017, the U.K. Financial Conduct Authority announced that it would no longer persuade or compel banks to submit to LIBOR after 2021. U.S. regulatory authorities have voiced similar support for phasing out LIBOR. The Federal Reserve Bank of New York’s Alternative Reference Rate Committee has recommended the Secured Overnight Financing Rate (“SOFR”) as an alternative for LIBOR. However, for two key reasons, SOFR is a secured rate while LIBOR is an unsecured rate and SOFR is an overnight rate while LIBOR is published for different maturities, SOFR is not the economic equivalent of LIBOR. The impact of SOFR or other alternatives to LIBOR on the valuations, pricing and operation of our financial instruments is not yet known.
Management has established a LIBOR Transition Working Group (the “Group”) whose purpose is to guide the overall transition process for the company. The Group is an internal, cross-functional team with representatives from all business lines, support and control functions and legal counsel. Key loan provisions have been modified to ensure that new and renewed loans include appropriate LIBOR fallback language to ensure the smoothest possible transition from LIBOR to the new benchmark when such transition occurs. All existing financial contracts, primarily focusing on loans that mature after 2021, are being assessed for direct exposure to LIBOR. Remediation will begin once this assessment is completed. The Group is also preparing for a risk assessment for indirect LIBOR exposures such as financial risk models. The results of this assessment will drive development and prioritization of actions.


- 40 -


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 that are based on management's beliefs, assumptions, current expectations, estimates and projections about BOK Financial, the financial services industry and the economy generally. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “plans,” “projects,” “will,” “intends,” variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and allowance for credit losses, allowance for uncertain tax positions, accruals for loss contingencies and valuation of mortgage servicing rights involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial's acquisitions, including its latest acquisition of CoBiz Financial, Inc., and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events based in part on information provided by others which BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions which are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expected, implied or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to changes in commodity prices, interest rates and interest rate relationships, inflation, demand for products and services, the degree of competition by traditional and nontraditional competitors, changes in banking regulations, tax laws, prices, levies and assessments, the impact of technological advances, and trends in customer behavior as well as their ability to repay loans. There may also be difficulties and delays in integrating CoBiz Financial Inc.'s business or fully realizing cost savings and other benefits including, but not limited to, business disruption and customer acceptance of BOK Financial Corporation's products and services. BOK Financial and its affiliates undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

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

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.



- 41 -


     
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
 
2019
 
2018
 
2019
 
2018
Loans
 
$
293,332

 
$
210,694

 
$
573,204

 
$
398,785

Residential mortgage loans held for sale
 
1,754

 
2,333

 
3,417

 
4,177

Trading securities
 
15,498

 
12,988

 
34,193

 
20,726

Investment securities
 
2,905

 
3,663

 
6,939

 
7,520

Available for sale securities
 
59,880

 
47,427

 
116,711

 
93,386

Fair value option securities
 
7,503

 
3,927

 
12,740

 
8,746

Restricted equity securities
 
6,516

 
5,408

 
12,861

 
10,525

Interest-bearing cash and cash equivalents
 
3,432

 
7,740

 
6,829

 
15,722

Total interest revenue
 
390,820

 
294,180

 
766,894

 
559,587

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
43,183

 
20,963

 
80,600

 
39,182

Borrowed funds
 
58,404

 
32,607

 
115,214

 
58,056

Subordinated debentures
 
3,801

 
2,048

 
7,546

 
4,051

Total interest expense
 
105,388

 
55,618

 
203,360

 
101,289

Net interest revenue
 
285,432

 
238,562

 
563,534

 
458,298

Provision for credit losses
 
5,000

 
—

 
13,000

 
(5,000
)
Net interest revenue after provision for credit losses
 
280,432

 
238,562

 
550,534

 
463,298

Other operating revenue
 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
40,526

 
26,488

 
72,143

 
57,136

Transaction card revenue
 
21,915

 
20,975

 
42,653

 
41,965

Fiduciary and asset management revenue
 
45,025

 
41,692

 
88,383

 
83,524

Deposit service charges and fees
 
28,074

 
27,834

 
56,317

 
54,994

Mortgage banking revenue
 
28,131

 
26,346

 
51,965

 
52,371

Other revenue
 
12,437

 
13,923

 
25,199

 
26,882

Total fees and commissions
 
176,108

 
157,258

 
336,660

 
316,872

Other gains (losses), net
 
3,480

 
4,578

 
6,456

 
3,286

Gain (loss) on derivatives, net
 
11,150

 
(3,057
)
 
15,817

 
(8,742
)
Gain (loss) on fair value option securities, net
 
9,853

 
(3,341
)
 
19,518

 
(20,905
)
Change in fair value of mortgage servicing rights
 
(29,555
)
 
1,723

 
(50,221
)
 
22,929

Gain (loss) on available for sale securities, net
 
1,029

 
(762
)
 
1,105

 
(1,052
)
Total other operating revenue
 
172,065

 
156,399

 
329,335

 
312,388

Other operating expense
 
 

 
 

 
 

 
 

Personnel
 
160,342

 
138,947

 
329,570

 
278,894

Business promotion
 
10,142

 
7,686

 
18,016

 
13,696

Charitable contributions to BOKF Foundation
 
1,000

 
—

 
1,000

 
—

Professional fees and services
 
13,002

 
14,978

 
29,141

 
25,178

Net occupancy and equipment
 
26,880

 
22,761

 
56,401

 
46,807

Insurance
 
6,454

 
6,245

 
11,293

 
12,838

Data processing and communications
 
29,735

 
27,739

 
61,184

 
55,556

Printing, postage and supplies
 
4,107

 
4,011

 
8,992

 
8,100

Net losses and operating expenses of repossessed assets
 
580

 
2,722

 
2,576

 
10,427

Amortization of intangible assets
 
5,138

 
1,386

 
10,329

 
2,686

Mortgage banking costs
 
11,545

 
12,890

 
21,451

 
23,039

Other expense
 
8,212

 
7,111

 
14,341

 
13,685

Total other operating expense
 
277,137

 
246,476

 
564,294

 
490,906

Net income before taxes
 
175,360

 
148,485

 
315,575

 
284,780

Federal and state income taxes
 
37,580

 
33,330

 
67,530

 
64,278

Net income
 
137,780

 
115,155

 
248,045

 
220,502

Net income attributable to non-controlling interests
 
217

 
783

 
(130
)
 
568

Net income attributable to BOK Financial Corporation shareholders
 
$
137,563

 
$
114,372

 
$
248,175

 
$
219,934

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.93

 
$
1.75

 
$
3.47

 
$
3.36

Diluted
 
$
1.93

 
$
1.75

 
$
3.46

 
$
3.36

Average shares used in computation:
 
 
 
 
 
 
 
 
Basic
 
70,887,063

 
64,901,975

 
71,135,414

 
64,874,567

Diluted
 
70,902,033

 
64,937,226

 
71,151,558

 
64,912,552

Dividends declared per share
 
$
0.50

 
$
0.45

 
$
1.00

 
$
0.90


See accompanying notes to consolidated financial statements.

- 42 -


Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
 
(In thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
137,780

 
$
115,155

 
$
248,045

 
$
220,502

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
135,417

 
(33,117
)
 
228,156

 
(130,523
)
Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
Loss (gain) on available for sale securities, net
 
(1,029
)
 
762

 
(1,105
)
 
1,052

Other comprehensive income (loss) before income taxes
 
134,388

 
(32,355
)
 
227,051

 
(129,471
)
Federal and state income taxes
 
32,288

 
(8,241
)
 
55,897

 
(33,049
)
Other comprehensive income (loss), net of income taxes
 
102,100


(24,114
)

171,154


(96,422
)
Comprehensive income
 
239,880

 
91,041

 
419,199

 
124,080

Comprehensive income attributable to non-controlling interests
 
217

 
783

 
(130
)
 
568

Comprehensive income attributable to BOK Financial Corp. shareholders
 
$
239,663

 
$
90,258

 
$
419,329

 
$
123,512


See accompanying notes to consolidated financial statements.

- 43 -


Consolidated Balance Sheets
(In thousands, except share data)
 
 
June 30, 2019
 
Dec. 31, 2018
 
 
(Unaudited)
 
(Footnote 1)
Assets
 
 
 
 
Cash and due from banks
 
$
739,109

 
$
741,749

Interest-bearing cash and cash equivalents
 
596,382

 
401,675

Trading securities
 
1,900,395

 
1,956,923

Investment securities (fair value:  June 30, 2019 – $347,015; December 31, 2018 – $367,298)
 
327,677

 
355,187

Available for sale securities
 
10,514,414

 
8,857,120

Fair value option securities
 
1,138,819

 
283,235

Restricted equity securities
 
461,017

 
344,447

Residential mortgage loans held for sale
 
193,570

 
149,221

Loans
 
22,255,652

 
21,656,730

Allowance for loan losses
 
(202,534
)
 
(207,457
)
Loans, net of allowance
 
22,053,118

 
21,449,273

Premises and equipment, net
 
468,368

 
330,033

Receivables
 
213,608

 
204,960

Goodwill
 
1,048,091

 
1,049,263

Intangible assets, net
 
124,473

 
134,849

Mortgage servicing rights
 
208,308

 
259,254

Real estate and other repossessed assets, net of allowance (June 30, 2019 – $12,499; December 31, 2018 – $13,665)
 
16,940

 
17,487

Derivative contracts, net
 
415,221

 
320,929

Cash surrender value of bank-owned life insurance
 
384,193

 
381,608

Receivable on unsettled securities sales
 
583,421

 
336,400

Other assets
 
505,949

 
446,891

Total assets
 
$
41,893,073

 
$
38,020,504

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Liabilities:
 
 
 
 
Noninterest-bearing demand deposits
 
$
9,667,557

 
$
10,414,592

Interest-bearing deposits:
 
 

 
 

Transaction
 
12,851,943

 
12,206,576

Savings
 
557,683

 
529,215

Time
 
2,227,938

 
2,113,380

Total deposits
 
25,305,121

 
25,263,763

Funds purchased and repurchase agreements
 
2,331,947

 
1,018,411

Other borrowings
 
7,823,809

 
6,124,390

Subordinated debentures
 
275,892

 
275,913

Accrued interest, taxes and expense
 
181,413

 
192,826

Derivative contracts, net
 
381,454

 
362,306

Due on unsettled securities purchases
 
565,268

 
156,370

Other liabilities
 
309,694

 
183,480

Total liabilities
 
37,174,598

 
33,577,459

Shareholders' equity:
 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2019 – 75,756,056; December 31, 2018 – 75,711,492)
 
5

 
5

Capital surplus
 
1,343,082

 
1,334,030

Retained earnings
 
3,548,907

 
3,369,654

Treasury stock (shares at cost:  June 30, 2019 – 4,562,286; December 31, 2018 – 3,588,560)
 
(281,125
)
 
(198,995
)
Accumulated other comprehensive gain (loss)
 
98,569

 
(72,585
)
Total shareholders’ equity
 
4,709,438

 
4,432,109

Non-controlling interests
 
9,037

 
10,936

Total equity
 
4,718,475

 
4,443,045

Total liabilities and equity
 
$
41,893,073

 
$
38,020,504


See accompanying notes to consolidated financial statements.

- 44 -


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, March 31, 2019
75,762

 
$
5

 
$
1,340,323

 
$
3,447,076

 
4,312

 
$
(261,000
)
 
$
(3,531
)
 
$
4,522,873

 
$
8,836

 
$
4,531,709

Net income
—

 
—

 
—

 
137,563

 
—

 
—

 
—

 
137,563

 
217

 
137,780

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
102,100

 
102,100

 
—

 
102,100

Repurchase of common stock
—

 
—

 
—

 
—

 
250

 
(20,125
)
 
—

 
(20,125
)
 
—

 
(20,125
)
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 


Stock options exercised
—

 
—

 
24

 
—

 
—

 
—

 
—

 
24

 
—

 
24

Non-vested shares awarded, net
(6
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation
—

 
—

 
2,735

 
—

 
—

 
—

 
—

 
2,735

 
—

 
2,735

Cash dividends on common stock
—

 
—

 
—

 
(35,732
)
 
—

 
—

 
—

 
(35,732
)
 
—

 
(35,732
)
Capital calls and distributions, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(16
)
 
(16
)
Balance, June 30, 2019
75,756


$
5


$
1,343,082


$
3,548,907


4,562


$
(281,125
)

$
98,569


$
4,709,438


$
9,037


$
4,718,475

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
75,711

 
$
5

 
$
1,334,030

 
$
3,369,654

 
3,589

 
$
(198,995
)
 
$
(72,585
)
 
$
4,432,109

 
$
10,936

 
$
4,443,045

Transition adjustment - Leasing standard
—

 
—

 
—

 
2,862

 
—

 
—

 
—

 
2,862

 
—

 
2,862

Balance, January 1, 2019, Adjusted
75,711

 
5

 
1,334,030

 
3,372,516

 
3,589

 
(198,995
)
 
(72,585
)
 
4,434,971

 
10,936

 
4,445,907

Net income (loss)
—

 
—

 
—

 
248,175

 
—

 
—

 
—

 
248,175

 
(130
)
 
248,045

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
171,154

 
171,154

 
—

 
171,154

Repurchase of common stock
—

 
—

 
—

 
—

 
955

 
(80,702
)
 
—

 
(80,702
)
 
—

 
(80,702
)
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 


Stock options exercised
18

 
—

 
903

 
—

 
—

 
—

 
—

 
903

 
—

 
903

Non-vested shares awarded, net
27

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
—

 
—

 
—

 
—

 
18

 
(1,428
)
 
—

 
(1,428
)
 
—

 
(1,428
)
Share-based compensation
—

 
—

 
8,149

 
—

 
—

 
—

 
—

 
8,149

 
—

 
8,149

Cash dividends on common stock
—

 
—

 
—

 
(71,784
)
 
—

 
—

 
—

 
(71,784
)
 
—

 
(71,784
)
Capital calls and distributions, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,769
)
 
(1,769
)
Balance, June 30, 2019
75,756

 
$
5

 
$
1,343,082

 
$
3,548,907

 
4,562

 
$
(281,125
)
 
$
98,569

 
$
4,709,438

 
$
9,037

 
$
4,718,475

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

- 45 -


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, March 31, 2018
75,318

 
$
4

 
$
1,041,242

 
$
3,127,575

 
9,859

 
$
(562,601
)
 
$
(111,191
)
 
$
3,495,029

 
$
22,313

 
$
3,517,342

Net income
—

 
—

 
—

 
114,372

 
—

 
—

 
—

 
114,372

 
783

 
115,155

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
(24,114
)
 
(24,114
)
 
—

 
(24,114
)
Repurchase of common stock
—

 
—

 
—

 
—

 
7

 
(824
)
 
—

 
(824
)
 
—

 
(824
)
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 


Stock options exercised
3

 
—

 
152

 
—

 
—

 
—

 
—

 
152

 
—

 
152

Non-vested shares awarded, net
(7
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
—

 
—

 
—

 
—

 
8

 
(698
)
 
—

 
(698
)
 
—

 
(698
)
Share-based compensation
—

 
—

 
(1,192
)
 
—

 
—

 
—

 
—

 
(1,192
)
 
—

 
(1,192
)
Cash dividends on common stock
—

 
—

 
—

 
(29,294
)
 
—

 
—

 
—

 
(29,294
)
 
—

 
(29,294
)
Capital calls and distributions, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(482
)
 
(482
)
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
—

 
—

 
—

 
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.

- 46 -


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

 
Six Months Ended
 
 
June 30,
 
 
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
248,045

 
$
220,502

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Provision for credit losses
 
13,000

 
(5,000
)
Change in fair value of mortgage servicing rights due to market changes
 
50,221

 
(22,929
)
Change in the fair value of mortgage servicing rights due to principal payments
 
15,664

 
16,797

Net unrealized losses (gains) from derivative contracts
 
(17,095
)
 
6,674

Share-based compensation
 
8,149

 
1,881

Depreciation and amortization
 
45,926

 
27,459

Net amortization of discounts and premiums
 
(10,913
)
 
12,855

Net losses (gains) on financial instruments and other losses (gains), net
 
564

 
4,530

Net gain on mortgage loans held for sale
 
(16,735
)
 
(19,314
)
Mortgage loans originated for sale
 
(1,240,368
)
 
(1,438,868
)
Proceeds from sale of mortgage loans held for sale
 
1,215,756

 
1,456,312

Capitalized mortgage servicing rights
 
(14,939
)
 
(19,720
)
Change in trading and fair value option securities
 
(799,241
)
 
(1,174,526
)
Change in receivables
 
(228,973
)
 
(335,369
)
Change in other assets
 
(4,965
)
 
1,737

Change in accrued interest, taxes and expense
 
(41,866
)
 
(4,327
)
Change in other liabilities
 
100,731

 
334,765

Net cash used in operating activities
 
(677,039
)
 
(936,541
)
Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
26,513

 
71,722

Proceeds from maturities or redemptions of available for sale securities
 
704,542

 
819,596

Purchases of investment securities
 
—

 
(3,968
)
Purchases of available for sale securities
 
(2,510,271
)
 
(1,020,018
)
Proceeds from sales of available for sale securities
 
367,357

 
187,533

Change in amount receivable on unsettled available for sale securities transactions
 
(28,580
)
 
38,075

Loans originated, net of principal collected
 
(569,075
)
 
(847,351
)
Net payments on derivative asset contracts
 
(10,838
)
 
(70,987
)
Acquisitions, net of cash acquired
 
—

 
(13,870
)
Proceeds from disposition of assets
 
116,163

 
97,027

Purchases of assets
 
(250,911
)
 
(121,889
)
Net cash used in investing activities
 
(2,155,100
)
 
(864,130
)
Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
(73,200
)
 
78,643

Net change in time deposits
 
114,377

 
29,316

Net change in other borrowed funds
 
2,968,697

 
1,057,118

Net proceeds on derivative liability contracts
 
6,140

 
64,144

Net change in derivative margin accounts
 
(152,533
)
 
(118,628
)
Change in amount due on unsettled available for sale securities transactions
 
313,736

 
(100,847
)
Issuance of common and treasury stock, net
 
(525
)
 
(444
)
Repurchase of common stock
 
(80,702
)
 
(8,408
)
Dividends paid
 
(71,784
)
 
(58,477
)
Net cash provided by financing activities
 
3,024,206

 
942,417

Net increase (decrease) in cash and cash equivalents
 
192,067

 
(858,254
)
Cash and cash equivalents at beginning of period
 
1,143,424

 
2,317,054

Cash and cash equivalents at end of period
 
$
1,335,491

 
$
1,458,800

 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
Cash paid for interest
 
$
203,513

 
$
100,532

Cash paid for taxes
 
$
54,722

 
$
29,623

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
2,606

 
$
3,886

Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period
 
$
44,258

 
$
42,493

Conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
15,484

 
$
23,845

Right-of-use assets obtained in exchange for operating lease liabilities
 
$
12,754

 
$
—

See accompanying notes to consolidated financial statements.

- 47 -


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., and BOK Financial Private Wealth, Inc. Operating divisions of the Bank include Bank of Albuquerque, Bank of Arkansas, Bank of Oklahoma, Bank of Texas, BOK Financial in Colorado and Arizona, 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 2018 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2018 have been derived from the audited financial statements included in BOK Financial’s 2018 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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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 are required to recognize an obligation for future lease payments measured on a discounted basis and a right-of-use asset. The Company adopted the new standard January 1, 2019 through a cumulative effect adjustment to retained earnings. Prior periods were not restated. BOKF elected to apply all practical expedients other than the lessee’s practical expedient to combine lease and non-lease components which would further gross up lease liability and the related right-of-use asset. The implementation of ASU 2016-02 increased the reported right-of-use asset and lease liability by $137 million. The effect on retained earnings was immaterial.

FASB Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Assets Measured at Amortized Cost ("ASU 2016-13" or "CECL")

On June 16, 2016, the FASB issued ASU 2016-13 to provide more timely recording of credit losses on loans and other financial assets measured at amortized cost, effective for the Company's annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years.

The company has established a CECL implementation team to evaluate the impact to 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. The Audit Committee and Credit Committee of the Board of Directors is periodically updated on project progress. Key implementation activities for 2019 include model validation and quarterly parallel runs with development of governance, control, and disclosure frameworks. The company will adopt the standard on January 1, 2020 through a cumulative-effect adjustment to retained earnings.


- 48 -


FASB Accounting Standards Update No. 2019-01, Leases (Topic 842): Codification Improvements ("ASU 2019-01")

On March 5, 2019, the FASB issued ASU 2019-01 which amends certain aspects of leasing standard ASU 2016-02. ASU 2019-01 provides guidance for determining fair value of the underlying asset by lessors that are not manufacturers or dealers. The ASU also requires depository and lending lessors within the scope of ASC 942 to classify principal payments received from sales-type and direct financing leases within "investing activities" on the statement of cash flows. For the two issues above, the ASU is effective for the Company for fiscal years beginning after December 15, 2019, and interim periods therein; however early adoption is permitted. Additionally, ASU 2019-01 also clarifies interim disclosure requirements during transition and is effective with the original transition requirements in Topic 842. Adoption of ASU 2019-01 is not expected to have a material impact on the Company's financial statements.

FASB Accounting Standards Update No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ("ASU 2019-04")

On April 25, 2019, the FASB issued ASU 2019-04 which clarifies certain aspects of the accounting for credit losses, hedging activities, and financial instruments addressed by ASUs 2016-13, 2017-12, and 2016-01, respectively. Significant amendments made to the provisions of ASU 2016-13 by ASU 2019-04 include providing certain alternatives for the measurement of the allowance for credit losses on accrued interest receivable and clarifying steps entities should take when recording the transfer of loans or debt securities between measurement classification or categories. ASU 2019-04 further clarifies the expectation that entities include recoveries of financial assets in the calculation of the current expected credit losses allowance for both pools of financial assets and individual financial assets. Significant amendments made to the provisions of ASU 2017-12 by ASU 2019-04 include clarification on partial-term fair value hedges of interest rate risk, amortization of fair value hedge basis adjustments and disclosure of fair value hedge basis adjustments. Significant amendments made to provisions of ASU 2016-01include clarification of the measurement alternative practice for equity securities and remeasurement of equity securities at historical exchange rates. ASU 2019-04 includes other amendments which clarify various provisions within the codification. ASU 2019-04 is effective for the Company for fiscal years beginning after December 15, 2019 and interim periods therein. Adoption of ASU 2019-04 is not expected to have a material impact on the Company's financial statements.

FASB Accounting Standards Update No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief ("ASU 2019-05")

On May 15, 2019, the FASB issued ASU 2019-05 which provides transition relief for entities adopting the Board's credit losses standard, ASU 2016-13. ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that meet specific requirements and is effective for the Company for annual reporting periods beginning after December 15, 2019. Adoption of ASU 2019-05 is not expected to have a material impact on the Company's financial statements.

- 49 -


(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities are as follows (in thousands):
 
 
 
June 30, 2019
 
December 31, 2018
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
U.S. government agency debentures
 
$
83,148

 
$
127

 
$
63,765

 
$
254

U.S. government agency residential mortgage-backed securities
 
1,620,613

 
7,558

 
1,791,584

 
9,966

Municipal and other tax-exempt securities
 
49,718

 
191

 
34,507

 
(1
)
Asset-backed securities
 
93,546

 
548

 
42,656

 
685

Other trading securities
 
53,370

 
202

 
24,411

 
65

Total trading securities
 
$
1,900,395

 
$
8,626

 
$
1,956,923

 
$
10,969


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

 
 
June 30, 2019
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
124,822

 
$
128,009

 
$
3,221

 
$
(34
)
U.S. government agency residential mortgage-backed securities
 
11,599

 
12,099

 
500

 
—

Other debt securities
 
191,256

 
206,907

 
16,312

 
(661
)
Total investment securities
 
$
327,677

 
$
347,015

 
$
20,033

 
$
(695
)

 
 
December 31, 2018
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
137,296

 
$
138,562

 
$
1,858

 
$
(592
)
U.S. government agency residential mortgage-backed securities
 
12,612

 
12,770

 
293

 
(135
)
Other debt securities
 
205,279

 
215,966

 
12,257

 
(1,570
)
Total investment securities
 
$
355,187

 
$
367,298

 
$
14,408

 
$
(2,297
)




- 50 -


The amortized cost and fair values of investment securities at June 30, 2019, 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
Maturity1
Fixed maturity debt securities:
 
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
 
$
51,600

 
$
104,247

 
$
144,405

 
$
15,826

 
$
316,078

 
5.03

Fair value
 
51,791

 
108,001

 
159,416

 
15,708

 
334,916

 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
11,599

 
2 
Fair value
 
 

 
 

 
 

 
 

 
12,099

 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
327,677

 
 

Fair value
 
 

 
 

 
 

 
 

 
347,015

 
 

1 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
2 
The average expected lives of residential mortgage-backed securities were 4.6 years based upon current prepayment assumptions.

Temporarily Impaired Investment Securities
(in thousands):
 
 
June 30, 2019
 
 
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
 
25

 
$
—

 
$
—

 
$
16,433

 
$
34

 
$
16,433

 
$
34

Other debt securities
 
24

 
25

 
1

 
13,607

 
660

 
13,632

 
661

Total investment securities
 
49

 
$
25

 
$
1

 
$
30,040

 
$
694

 
$
30,065

 
$
695


 
 
December 31, 2018
 
 
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
 
72

 
$
18,255

 
$
69

 
$
66,141

 
$
523

 
$
84,396

 
$
592

U.S. government agency residential mortgage-backed securities
 
2

 
—

 
—

 
5,633

 
135

 
5,633

 
135

Other debt securities
 
72

 
13,372

 
64

 
23,028

 
1,506

 
36,400

 
1,570

Total investment securities
 
146

 
$
31,627

 
$
133

 
$
94,802

 
$
2,164

 
$
126,429

 
$
2,297





- 51 -


Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
June 30, 2019
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
U.S. Treasury
 
$
1,887

 
$
1,889

 
$
3

 
$
(1
)
Municipal and other tax-exempt
 
2,386

 
2,470

 
84

 
—

Mortgage-backed securities:
 
 

 
 

 
 

 
 

Residential agency
 
7,280,092

 
7,354,741

 
90,111

 
(15,462
)
Residential non-agency
 
31,327

 
47,057

 
15,730

 
—

Commercial agency
 
3,066,442

 
3,107,785

 
44,783

 
(3,440
)
Other debt securities
 
500

 
472

 
—

 
(28
)
Total available for sale securities
 
$
10,382,634

 
$
10,514,414

 
$
150,711

 
$
(18,931
)

 
 
December 31, 2018
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
U.S. Treasury
 
$
496

 
$
493

 
$
—

 
$
(3
)
Municipal and other tax-exempt
 
2,782

 
2,864

 
82

 
—

Mortgage-backed securities:
 
 
 
 

 
 

 
 

Residential agency
 
5,886,323

 
5,804,708

 
16,149

 
(97,764
)
Residential non-agency
 
40,948

 
59,736

 
18,788

 
—

Commercial agency
 
2,986,297

 
2,953,889

 
7,955

 
(40,363
)
Other debt securities
 
35,545

 
35,430

 
12

 
(127
)
Total available for sale securities
 
$
8,952,391

 
$
8,857,120

 
$
42,986

 
$
(138,257
)


The amortized cost and fair values of available for sale securities at June 30, 2019, 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
Maturity1
Fixed maturity debt securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
90,708

 
$
968,503

 
$
1,571,395

 
$
440,609

 
$
3,071,215

 
7.35

Fair value
90,536

 
974,073

 
1,600,106

 
447,901

 
3,112,616

 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
7,311,419

 
2 
Fair value
 
 
 
 
 
 
 
 
7,401,798

 
 
Total available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
10,382,634

 
 
Fair value
 
 
 
 
 
 
 
 
10,514,414

 
 
1 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
2 
The average expected lives of residential mortgage-backed securities were 4.0 years based upon current prepayment assumptions.


- 52 -


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,
 
2019
 
2018
 
2019
 
2018
Proceeds
$
122,098

 
$
142,743

 
$
367,357

 
$
187,533

Gross realized gains
1,029

 
257

 
6,327

 
450

Gross realized losses
—

 
(1,019
)
 
(5,222
)
 
(1,502
)
Related federal and state income tax expense (benefit)
262

 
(194
)
 
281

 
(268
)


The fair value of debt securities pledged as collateral for repurchase agreements, public trust funds on deposit and for other purposes, as required by law was $10.3 billion at June 30, 2019 and $9.1 billion at December 31, 2018. The secured parties do not have the right to sell or repledge these securities.

Temporarily Impaired Available for Sale Securities
(in thousands)
 
 
June 30, 2019
 
 
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

 
$
—

 
$
—

 
$
498

 
$
1

 
$
498

 
$
1

Mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


Residential agency
 
125


267,481


898


1,317,121


14,564


1,584,602


15,462

Commercial agency
 
78

 
440,095

 
895

 
595,351

 
2,545

 
1,035,446

 
3,440

Other debt securities
 
1

 
—

 
—

 
472

 
28

 
472

 
28

Total available for sale securities
 
205

 
$
707,576


$
1,793


$
1,913,442


$
17,138


$
2,621,018


$
18,931



 
 
December 31, 2018
 
 
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

 
$
—

 
$
—

 
$
493

 
$
3

 
$
493

 
$
3

Mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


Residential agency
 
289

 
510,824

 
1,158

 
3,641,370

 
96,606

 
4,152,194

 
97,764

Commercial agency
 
197

 
179,258

 
394

 
1,969,504

 
39,969

 
2,148,762

 
40,363

Other debt securities
 
3

 
9,982

 
63

 
20,436

 
64

 
30,418

 
127

Total available for sale securities
 
490

 
$
700,064


$
1,615


$
5,631,803


$
136,642


$
6,331,867


$
138,257



Based on evaluations of impaired securities as of June 30, 2019, 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.

- 53 -


(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.

- 54 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2019 (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
 
$
1,303,659

 
$
11,707

 
$
(3,352
)
 
$
8,355

 
$
—

 
$
8,355

Interest rate swaps
 
2,254,122

 
51,177

 
(2,168
)
 
49,009

 
(42
)
 
48,967

Energy contracts
 
1,849,474

 
153,514

 
(76,562
)
 
76,952

 
(33,847
)
 
43,105

Agricultural contracts
 
16,662

 
788

 
(103
)
 
685

 
—

 
685

Foreign exchange contracts
 
252,272

 
250,527

 
—

 
250,527

 
(384
)
 
250,143

Equity option contracts
 
86,124

 
3,034

 
—

 
3,034

 
—

 
3,034

Total customer risk management programs
 
5,762,313

 
470,747

 
(82,185
)
 
388,562

 
(34,273
)
 
354,289

Internal risk management programs
 
52,977,229

 
352,808

 
(291,876
)
 
60,932

 
—

 
60,932

Total derivative contracts
 
$
58,739,542

 
$
823,555

 
$
(374,061
)
 
$
449,494

 
$
(34,273
)
 
$
415,221

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
1,298,129

 
$
11,596

 
$
(3,352
)
 
$
8,244

 
$
(8,232
)
 
$
12

Interest rate swaps
 
2,254,122

 
51,271

 
(2,168
)
 
49,103

 
(43,288
)
 
5,815

Energy contracts
 
1,794,912

 
145,442

 
(76,562
)
 
68,880

 
(1,836
)
 
67,044

Agricultural contracts
 
16,678

 
776

 
(103
)
 
673

 
(629
)
 
44

Foreign exchange contracts
 
240,406

 
238,625

 
—

 
238,625

 
(309
)
 
238,316

Equity option contracts
 
86,124

 
3,034

 
—

 
3,034

 
—

 
3,034

Total customer risk management programs
 
5,690,371

 
450,744

 
(82,185
)
 
368,559

 
(54,294
)
 
314,265

Internal risk management programs
 
54,628,959

 
359,065

 
(291,876
)
 
67,189

 
—

 
67,189

Total derivative contracts
 
$
60,319,330

 
$
809,809

 
$
(374,061
)
 
$
435,748

 
$
(54,294
)
 
$
381,454

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



- 55 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2018 (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
 
$
10,671,151

 
$
92,231

 
$
(26,787
)
 
$
65,444

 
$
—

 
$
65,444

Interest rate swaps
 
1,924,131

 
36,112

 
(6,688
)
 
29,424

 
(7,934
)
 
21,490

Energy contracts
 
1,472,209

 
206,418

 
(60,983
)
 
145,435

 
(106,752
)
 
38,683

Agricultural contracts
 
21,210

 
842

 
(201
)
 
641

 
—

 
641

Foreign exchange contracts
 
184,990

 
183,759

 
—

 
183,759

 
—

 
183,759

Equity option contracts
 
89,085

 
2,021

 
—

 
2,021

 
(648
)
 
1,373

Total customer risk management programs
 
14,362,776

 
521,383

 
(94,659
)
 
426,724

 
(115,334
)
 
311,390

Internal risk management programs
 
15,909,988

 
50,410

 
(40,871
)
 
9,539

 
—

 
9,539

Total derivative contracts
 
$
30,272,764

 
$
571,793

 
$
(135,530
)
 
$
436,263

 
$
(115,334
)
 
$
320,929

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
10,558,151

 
$
90,388

 
$
(26,787
)
 
$
63,601

 
$
(63,596
)
 
$
5

Interest rate swaps
 
1,924,131

 
36,288

 
(6,688
)
 
29,600

 
(4,110
)
 
25,490

Energy contracts
 
1,434,247

 
202,494

 
(60,983
)
 
141,511

 
(1,490
)
 
140,021

Agricultural contracts
 
21,214

 
812

 
(201
)
 
611

 
—

 
611

Foreign exchange contracts
 
177,423

 
175,922

 
—

 
175,922

 
—

 
175,922

Equity option contracts
 
89,085

 
2,021

 
—

 
2,021

 
—

 
2,021

Total customer risk management programs
 
14,204,251

 
507,925

 
(94,659
)
 
413,266

 
(69,196
)
 
344,070

Internal risk management programs
 
19,634,642

 
66,422

 
(40,871
)
 
25,551

 
(7,315
)
 
18,236

Total derivative contracts
 
$
33,838,893

 
$
574,347

 
$
(135,530
)
 
$
438,817

 
$
(76,511
)
 
$
362,306

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












- 56 -


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, 2019
 
June 30, 2018
 
 
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
 
$
2,212

 
$
—

 
$
7,586

 
$
—

Interest rate swaps
 
942

 
—

 
683

 
—

Energy contracts
 
2,086

 
—

 
1,416

 
—

Agricultural contracts
 
4

 
—

 
15

 
—

Foreign exchange contracts
 
100

 
—

 
96

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
5,344

 
—

 
9,796

 
—

Internal risk management programs
 
8,030

 
11,150

 
(981
)
 
(3,057
)
Total derivative contracts
 
$
13,374

 
$
11,150

 
$
8,815

 
$
(3,057
)


 
 
Six Months Ended
 
 
June 30, 2019
 
June 30, 2018
 
 
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
 
$
7,912

 
$
—

 
$
14,405

 
$
—

Interest rate swaps
 
1,535

 
—

 
1,439

 
—

Energy contracts
 
2,312

 
—

 
4,556

 
—

Agricultural contracts
 
8

 
—

 
30

 
—

Foreign exchange contracts
 
254

 
—

 
272

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
12,021

 
—

 
20,702

 
—

Internal risk management programs
 
735

 
15,817

 
(2,864
)
 
(8,742
)
Total derivative contracts
 
$
12,756

 
$
15,817

 
$
17,838

 
$
(8,742
)



- 57 -


(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"). Primarily 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 original principal guarantee remains; 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.


- 58 -


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, 2019
 
December 31, 2018
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
3,264,990

 
$
10,948,523

 
$
123,395

 
$
14,336,908

 
$
2,251,188

 
$
11,285,049

 
$
99,841

 
$
13,636,078

Commercial real estate
 
1,008,236

 
3,680,127

 
21,670

 
4,710,033

 
1,477,274

 
3,265,918

 
21,621

 
4,764,813

Residential mortgage
 
1,751,803

 
380,542

 
38,477

 
2,170,822

 
1,830,224

 
358,254

 
41,555

 
2,230,033

Personal
 
181,855

 
855,797

 
237

 
1,037,889

 
190,687

 
834,889

 
230

 
1,025,806

Total
 
$
6,206,884

 
$
15,864,989

 
$
183,779

 
$
22,255,652

 
$
5,749,373

 
$
15,744,110

 
$
163,247

 
$
21,656,730

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
2,698

 
 

 
 

 
 

 
$
1,338

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


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, 2019, outstanding commitments totaled $11 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, 2019, outstanding standby letters of credit totaled $699 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, 2019.


- 59 -


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.

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.


- 60 -


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, 2019 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
103,577

 
$
58,134

 
$
15,668

 
$
8,783

 
$
19,178

 
$
205,340

Provision for loan losses
 
13,771

 
(8,173
)
 
1

 
1,660

 
(2,341
)
 
4,918

Loans charged off
 
(11,385
)
 
(118
)
 
(94
)
 
(1,630
)
 
—

 
(13,227
)
Recoveries
 
434

 
4,345

 
149

 
575

 
—

 
5,503

Ending balance
 
$
106,397

 
$
54,188

 
$
15,724

 
$
9,388

 
$
16,837

 
$
202,534

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
1,725

 
$
48

 
$
47

 
$
1

 
$
—

 
$
1,821

Provision for off-balance sheet credit losses
 
17

 
68

 
(3
)
 
—

 
—

 
82

Ending balance
 
$
1,742

 
$
116

 
$
44

 
$
1

 
$
—

 
$
1,903

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
13,788

 
$
(8,105
)
 
$
(2
)
 
$
1,660

 
$
(2,341
)
 
$
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 six months ended June 30, 2019 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
102,226

 
$
60,026

 
$
17,964

 
$
9,473

 
$
17,768

 
$
207,457

Provision for loan losses
 
24,879

 
(10,177
)
 
(2,407
)
 
1,523

 
(931
)
 
12,887

Loans charged off
 
(21,853
)
 
(118
)
 
(136
)
 
(2,895
)
 
—

 
(25,002
)
Recoveries
 
1,145

 
4,457

 
303

 
1,287

 
—

 
7,192

Ending balance
 
$
106,397

 
$
54,188

 
$
15,724

 
$
9,388

 
$
16,837

 
$
202,534

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
1,655

 
$
52

 
$
52

 
$
31

 
$
—

 
$
1,790

Provision for off-balance sheet credit losses
 
87

 
64

 
(8
)
 
(30
)
 
—

 
113

Ending balance
 
$
1,742

 
$
116

 
$
44

 
$
1

 
$
—

 
$
1,903

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
24,966

 
$
(10,113
)
 
$
(2,415
)
 
$
1,493

 
$
(931
)
 
$
13,000



- 61 -


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
)
 
$
—



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
)


- 62 -


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at June 30, 2019 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
 
$
14,213,513

 
$
102,359

 
$
123,395

 
$
4,038

 
$
14,336,908

 
$
106,397

Commercial real estate
 
4,688,363

 
54,188

 
21,670

 
—

 
4,710,033

 
54,188

Residential mortgage
 
2,132,345

 
15,724

 
38,477

 
—

 
2,170,822

 
15,724

Personal
 
1,037,652

 
9,388

 
237

 
—

 
1,037,889

 
9,388

Total
 
22,071,873

 
181,659

 
183,779

 
4,038

 
22,255,652

 
185,697

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
16,837

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
22,071,873

 
$
181,659

 
$
183,779

 
$
4,038

 
$
22,255,652

 
$
202,534


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 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
 
$
13,536,237

 
$
93,494

 
$
99,841

 
$
8,732

 
$
13,636,078

 
$
102,226

Commercial real estate
 
4,743,192

 
60,026

 
21,621

 
—

 
4,764,813

 
60,026

Residential mortgage
 
2,188,478

 
17,964

 
41,555

 
—

 
2,230,033

 
17,964

Personal
 
1,025,576

 
9,473

 
230

 
—

 
1,025,806

 
9,473

Total
 
21,493,483

 
180,957

 
163,247

 
8,732

 
21,656,730

 
189,689

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
17,768

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
21,493,483

 
$
180,957

 
$
163,247

 
$
8,732

 
$
21,656,730

 
$
207,457


 
 
 
 
 
 
 
 
 
 
 
 
 


- 63 -


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, 2019 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
14,307,867

 
$
105,435

 
$
29,041

 
$
962

 
$
14,336,908

 
$
106,397

Commercial real estate
 
4,710,033

 
54,188

 
—

 
—

 
4,710,033

 
54,188

Residential mortgage
 
279,905

 
3,318

 
1,890,917

 
12,406

 
2,170,822

 
15,724

Personal
 
949,413

 
7,074

 
88,476

 
2,314

 
1,037,889

 
9,388

Total
 
20,247,218

 
170,015

 
2,008,434

 
15,682

 
22,255,652

 
185,697

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
16,837

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
20,247,218

 
$
170,015

 
$
2,008,434

 
$
15,682

 
$
22,255,652

 
$
202,534

 
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, 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
 
$
13,586,654

 
$
101,303

 
$
49,424

 
$
923

 
$
13,636,078

 
$
102,226

Commercial real estate
 
4,764,813

 
60,026

 
—

 
—

 
4,764,813

 
60,026

Residential mortgage
 
505,046

 
3,310

 
1,724,987

 
14,654

 
2,230,033

 
17,964

Personal
 
948,890

 
6,633

 
76,916

 
2,840

 
1,025,806

 
9,473

Total
 
19,805,403

 
171,272

 
1,851,327

 
18,417

 
21,656,730

 
189,689

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
17,768

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
19,805,403

 
$
171,272

 
$
1,851,327

 
$
18,417

 
$
21,656,730

 
$
207,457

 
 
 
 
 
 
 
 
 
 
 
 
 


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. 


- 64 -


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.

The following table summarizes the Company’s loan portfolio at June 30, 2019 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
 
$
3,774,846

 
$
12,871

 
$
62,004

 
$
71,632

 
$
—

 
$
—

 
$
3,921,353

Services
 
3,221,580

 
50,662

 
27,129

 
10,087

 
—

 
—

 
3,309,458

Wholesale/retail
 
1,767,002

 
13,080

 
11,646

 
1,390

 
—

 
—

 
1,793,118

Manufacturing
 
709,460

 
29,056

 
14,228

 
8,613

 
—

 
—

 
761,357

Healthcare
 
2,882,190

 
15,089

 
13,083

 
16,148

 
—

 
—

 
2,926,510

Public finance
 
795,659

 
—

 
—

 
—

 
—

 
—

 
795,659

Other commercial and industrial
 
761,650

 
2,831

 
20,488

 
15,443

 
28,959

 
82

 
829,453

Total commercial
 
13,912,387

 
123,589

 
148,578

 
123,313

 
28,959

 
82

 
14,336,908

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
141,159

 
—

 
—

 
350

 
—

 
—

 
141,509

Retail
 
792,406

 
11,664

 
1,272

 
20,057

 
—

 
—

 
825,399

Office
 
1,048,029

 
4,197

 
3,225

 
855

 
—

 
—

 
1,056,306

Multifamily
 
1,293,248

 
1,200

 
5,649

 
275

 
—

 
—

 
1,300,372

Industrial
 
828,569

 
—

 
—

 
—

 
—

 
—

 
828,569

Other commercial real estate
 
557,038

 
547

 
160

 
133

 
—

 
—

 
557,878

Total commercial real estate
 
4,660,449

 
17,608

 
10,306

 
21,670

 
—

 
—

 
4,710,033

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
276,782

 
115

 
2,206

 
803

 
787,464

 
21,000

 
1,088,370

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
188,630

 
6,743

 
195,373

Home equity
 
—

 
—

 
—

 
—

 
877,148

 
9,931

 
887,079

Total residential mortgage
 
276,782

 
115

 
2,206

 
803

 
1,853,242

 
37,674

 
2,170,822

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
949,258

 
46

 
33

 
76

 
88,315

 
161

 
1,037,889

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
19,798,876

 
$
141,358

 
$
161,123

 
$
145,862

 
$
1,970,516

 
$
37,917

 
$
22,255,652




- 65 -


The following table summarizes the Company’s loan portfolio at December 31, 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
 
$
3,414,039

 
$
42,176

 
$
86,624

 
$
47,494

 
$
—

 
$
—

 
$
3,590,333

Services
 
3,167,203

 
49,761

 
32,661

 
8,567

 
—

 
—

 
3,258,192

Wholesale/retail
 
1,593,902

 
18,809

 
7,131

 
1,316

 
—

 
—

 
1,621,158

Manufacturing
 
668,438

 
30,934

 
22,230

 
8,919

 
—

 
—

 
730,521

Healthcare
 
2,730,121

 
14,920

 
37,698

 
16,538

 
—

 
—

 
2,799,277

Public finance
 
804,550

 
—

 
—

 
—

 
—

 
—

 
804,550

Other commercial and industrial
 
756,815

 
1,266

 
7,588

 
16,954

 
49,371

 
53

 
832,047

Total commercial
 
13,135,068

 
157,866

 
193,932

 
99,788

 
49,371

 
53

 
13,636,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
148,234

 
—

 
—

 
350

 
—

 
—

 
148,584

Retail
 
885,588

 
11,926

 
1,289

 
20,279

 
—

 
—

 
919,082

Office
 
1,059,334

 
10,532

 
3,054

 
—

 
—

 
—

 
1,072,920

Multifamily
 
1,287,471

 
281

 
12

 
301

 
—

 
—

 
1,288,065

Industrial
 
776,898

 
—

 
1,208

 
—

 
—

 
—

 
778,106

Other commercial real estate
 
555,301

 
1,188

 
876

 
691

 
—

 
—

 
558,056

Total commercial real estate
 
4,712,826

 
23,927

 
6,439

 
21,621

 
—

 
—

 
4,764,813

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
269,678

 
52

 
9,730

 
1,991

 
819,199

 
21,960

 
1,122,610

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
183,734

 
7,132

 
190,866

Home equity
 
223,298

 
—

 
296

 
—

 
682,491

 
10,472

 
916,557

Total residential mortgage
 
492,976

 
52

 
10,026

 
1,991

 
1,685,424

 
39,564

 
2,230,033

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
944,256

 
115

 
4,443

 
76

 
76,762

 
154

 
1,025,806

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
19,285,126

 
$
181,960

 
$
214,840

 
$
123,476

 
$
1,811,557

 
$
39,771

 
$
21,656,730

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




- 66 -


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 at June 30, 2019 follows (in thousands):
 
As of
 
For the
 
For the
 
June 30, 2019
 
Three Months Ended
 
Six Months Ended
 
 
 
Recorded Investment
 
 
 
June 30, 2019
 
June 30, 2019
 
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
$
118,959

 
$
71,632

 
$
64,066

 
$
7,566

 
$
1,175

 
$
58,185

 
$
—

 
$
59,074

 
$
—

Services
13,343

 
10,087

 
10,061

 
26

 
26

 
10,309

 
—

 
7,156

 
—

Wholesale/retail
1,600

 
1,390

 
1,126

 
264

 
101

 
1,407

 
—

 
1,030

 
—

Manufacturing1
8,896

 
8,613

 
8,383

 
230

 
236

 
9,080

 
—

 
8,384

 
—

Healthcare
30,255

 
16,148

 
14,972

 
1,176

 
2,500

 
17,441

 
—

 
13,632

 
—

Public finance
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
25,838

 
15,525

 
15,525

 
—

 
—

 
15,627

 
—

 
16,113

 
—

Total commercial
198,891

 
123,395

 
114,133

 
9,262

 
4,038

 
112,049

 
—

 
105,389

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
1,306

 
350

 
350

 
—

 
—

 
350

 
—

 
350

 
—

Retail
20,380

 
20,057

 
20,057

 
—

 
—

 
20,108

 
—

 
20,168

 
—

Office
855

 
855

 
855

 
—

 
—

 
855

 
—

 
427

 
—

Multifamily
275

 
275

 
275

 
—

 
—

 
138

 
—

 
288

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
293

 
133

 
133

 
—

 
—

 
139

 
—

 
412

 
—

Total commercial real estate
23,109

 
21,670

 
21,670

 
—

 
—

 
21,590

 
—

 
21,645

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
26,434

 
21,803

 
21,803

 
—

 
—

 
22,370

 
316

 
22,877

 
614

Permanent mortgage guaranteed by U.S. government agencies2
201,217

 
195,373

 
195,373

 
—

 
—

 
191,537

 
1,938

 
193,958

 
3,843

Home equity
11,728

 
9,931

 
9,931

 
—

 
—

 
10,228

 
—

 
10,202

 
—

Total residential mortgage
239,379

 
227,107

 
227,107

 
—

 
—

 
224,135

 
2,254

 
227,037

 
4,457

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
289

 
237

 
237

 
—

 
—

 
269

 
—

 
234

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
461,668

 
$
372,409

 
$
363,147

 
$
9,262

 
$
4,038

 
$
358,043

 
$
2,254

 
$
354,305

 
$
4,457

1 
Impaired manufacturing sector loans included $4.7 million of loans from an affiliated entity, with no allowance as the fair value of the collateral exceeded the outstanding principal balance at June 30, 2019.
2 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, 2019, the majority were accruing based on the guarantee by U.S. government agencies.



- 67 -


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

A summary of impaired loans at December 31, 2018 follows (in thousands): 
 
 
 
 
Recorded Investment
 
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
79,675

 
$
47,494

 
$
18,639

 
$
28,855

 
$
5,362

Services
 
13,437

 
8,567

 
8,489

 
78

 
74

Wholesale/retail
 
1,722

 
1,316

 
1,015

 
301

 
101

Manufacturing
 
10,055

 
8,919

 
8,673

 
246

 
246

Healthcare
 
24,319

 
16,538

 
10,563

 
5,975

 
2,949

Public finance
 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
26,955

 
17,007

 
17,007

 
—

 
—

Total commercial
 
156,163

 
99,841

 
64,386

 
35,455

 
8,732

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
1,306

 
350

 
350

 
—

 
—

Retail
 
27,680

 
20,279

 
20,279

 
—

 
—

Office
 
—

 
—

 
—

 
—

 
—

Multifamily
 
301

 
301

 
301

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

Other commercial real estate
 
851

 
691

 
691

 
—

 
—

Total commercial real estate
 
30,138

 
21,621

 
21,621

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
28,716

 
23,951

 
23,951

 
—

 
—

Permanent mortgage guaranteed by U.S. government agencies1
 
196,296

 
190,866

 
190,866

 
—

 
—

Home equity
 
12,196

 
10,472

 
10,472

 
—

 
—

Total residential mortgage
 
237,208

 
225,289

 
225,289

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Personal
 
278

 
230

 
230

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
423,787

 
$
346,981

 
$
311,526

 
$
35,455

 
$
8,732

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, 2018, the majority were accruing based on the guarantee by U.S. government agencies.




- 68 -


Troubled Debt Restructurings

At June 30, 2019 the Company had $169 million in troubled debt restructurings (TDRs), of which $96 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $70 million of TDRs were performing in accordance with the modified terms.

At December 31, 2018, the Company had $166 million in TDRs, of which $86 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, 2019, $21 million and $38 million of loans were restructured. During the three and six months ended June 30, 2018, $19 million and $32 million of loans were restructured.





- 69 -


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, 2019 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,849,711

 
$
10

 
$
—

 
$
—

 
$
71,632

 
$
3,921,353

Services
 
3,297,119

 
1,045

 
759

 
448

 
10,087

 
3,309,458

Wholesale/retail
 
1,787,095

 
2,954

 
189

 
1,490

 
1,390

 
1,793,118

Manufacturing
 
750,517

 
197

 
2,030

 
—

 
8,613

 
761,357

Healthcare
 
2,909,249

 
383

 
609

 
121

 
16,148

 
2,926,510

Public finance
 
795,659

 
—

 
—

 
—

 
—

 
795,659

Other commercial and industrial
 
811,129

 
2,037

 
762

 
—

 
15,525

 
829,453

Total commercial
 
14,200,479

 
6,626

 
4,349

 
2,059

 
123,395

 
14,336,908

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
140,555

 
604

 
—

 
—

 
350

 
141,509

Retail
 
805,342

 
—

 
—

 
—

 
20,057

 
825,399

Office
 
1,055,034

 
—

 
353

 
64

 
855

 
1,056,306

Multifamily
 
1,299,665

 
131

 
301

 
—

 
275

 
1,300,372

Industrial
 
827,660

 
—

 
909

 
—

 
—

 
828,569

Other commercial real estate
 
556,562

 
111

 
544

 
528

 
133

 
557,878

Total commercial real estate
 
4,684,818

 
846

 
2,107

 
592

 
21,670

 
4,710,033

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
1,062,889

 
3,641

 
—

 
37

 
21,803

 
1,088,370

Permanent mortgages guaranteed by U.S. government agencies
 
49,015

 
23,742

 
21,619

 
94,254

 
6,743

 
195,373

Home equity
 
875,215

 
1,380

 
553

 
—

 
9,931

 
887,079

Total residential mortgage
 
1,987,119

 
28,763

 
22,172

 
94,291

 
38,477

 
2,170,822

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
1,035,045

 
2,509

 
88

 
10

 
237

 
1,037,889

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
21,907,461

 
$
38,744

 
$
28,716

 
$
96,952

 
$
183,779

 
$
22,255,652



- 70 -


A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of December 31, 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
 
$
3,542,839

 
$
—

 
$
—

 
$
—

 
$
47,494

 
$
3,590,333

Services
 
3,237,578

 
6,009

 
6,038

 
—

 
8,567

 
3,258,192

Wholesale/retail
 
1,619,290

 
515

 
37

 
—

 
1,316

 
1,621,158

Manufacturing
 
721,204

 
392

 
6

 
—

 
8,919

 
730,521

Healthcare
 
2,781,944

 
241

 
—

 
554

 
16,538

 
2,799,277

Public finance
 
804,550

 
—

 
—

 
—

 
—

 
804,550

Other commercial and industrial
 
814,489

 
518

 
25

 
8

 
17,007

 
832,047

Total commercial
 
13,521,894

 
7,675

 
6,106

 
562

 
99,841

 
13,636,078

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
147,705

 
249

 
280

 
—

 
350

 
148,584

Retail
 
884,424

 
14,379

 
—

 
—

 
20,279

 
919,082

Office
 
1,072,920

 
—

 
—

 
—

 
—

 
1,072,920

Multifamily
 
1,287,483

 
281

 
—

 
—

 
301

 
1,288,065

Industrial
 
776,898

 
1,208

 
—

 
—

 
—

 
778,106

Other commercial real estate
 
556,239

 
412

 
—

 
714

 
691

 
558,056

Total commercial real estate
 
4,725,669

 
16,529

 
280

 
714

 
21,621

 
4,764,813

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
1,095,097

 
3,196

 
366

 
—

 
23,951

 
1,122,610

Permanent mortgages guaranteed by U.S. government agencies
 
37,459

 
24,369

 
16,345

 
105,561

 
7,132

 
190,866

Home equity
 
904,572

 
1,102

 
352

 
59

 
10,472

 
916,557

Total residential mortgage
 
2,037,128

 
28,667

 
17,063

 
105,620

 
41,555

 
2,230,033

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
1,024,298

 
479

 
796

 
3

 
230

 
1,025,806

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
21,308,989

 
$
53,350

 
$
24,245

 
$
106,899

 
$
163,247

 
$
21,656,730





 
 
 
 
 
 
 
 
 
 
 
 
 


- 71 -


(5) Leasing

Effective January 1, 2019, premises and equipment included right-of-use assets for leased office space and facilities. Leases are at market rates at inception and may contain escalations based on consumer price index or similar benchmarks and options to renew at then market rates. Renewal options, variable lease payments and residual value guarantees are included in the measurement of right-of-use assets when certain conditions are met. Lease component cash flows are discounted at the applicable FHLB advance rate.

At June 30, 2019, right-of-use assets were $139 million, the weighted-average remaining lease term was 10.0 years and the weighted average discount rate on operating leases was 3.50%. Operating lease costs recognized as occupancy and equipment expense were $5.7 million and $12.1 million for the three and six months ended June 30, 2019. Operating cash flows from operating leases were $5.5 million and $11.4 million for the three and six months ended June 30, 2019.

At June 30, 2019, un-discounted operating lease liabilities are scheduled to mature as follows: $17.7 million in 2019, $28.9 million in 2020, $26.1 million in 2021, $18.9 million in 2022, $16.5 million in 2023 and $104.2 million thereafter. Operating expense and short term lease costs total $3.7 million and $6.1 million for the three and six months ended June 30, 2019.

The Company may lease owned properties or sublease unoccupied leased facilities. Income on these leases is immaterial.

(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, 2019
 
December 31, 2018
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
185,536

 
$
188,318

 
$
145,057

 
$
146,971

Residential mortgage loan commitments
 
344,087

 
9,597

 
160,848

 
5,378

Forward sales contracts
 
492,216

 
(4,345
)
 
274,000

 
(3,128
)
 
 
 

 
$
193,570

 
 

 
$
149,221



No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of June 30, 2019 or December 31, 2018. No credit losses were recognized on residential mortgage loans held for sale for the six month period ended June 30, 2019 and 2018.

- 72 -



Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Production revenue:
 
 
 
 
 
 
 
 
Net realized gains on sale of mortgage loans
 
$
10,174

 
$
10,718

 
$
15,867

 
$
19,636

Net change in unrealized gain on mortgage loans held for sale
 
921

 
1,047

 
868

 
(322
)
Net change in the fair value of mortgage loan commitments
 
1,506

 
(1,124
)
 
4,219

 
950

Net change in the fair value of forward sales contracts
 
(732
)
 
(726
)
 
(1,217
)
 
(897
)
Total production revenue
 
11,869

 
9,915

 
19,737

 
19,367

Servicing revenue
 
16,262

 
16,431

 
32,228

 
33,004

Total mortgage banking revenue
 
$
28,131

 
$
26,346

 
$
51,965

 
$
52,371



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, 2019
 
December 31, 2018
Number of residential mortgage loans serviced for others
 
130,270

 
132,463

Outstanding principal balance of residential mortgage loans serviced for others
 
$
21,349,914

 
$
21,658,335

Weighted average interest rate
 
4.01
%
 
3.99
%
Remaining term (in months)
 
291

 
293



The following represents activity in capitalized mortgage servicing rights (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Beginning Balance
 
$
238,193

 
$
274,978

 
$
259,254

 
$
252,867

Additions, net
 
8,751

 
10,820

 
14,939

 
19,720

Change in fair value due to principal payments
 
(9,081
)
 
(8,802
)
 
(15,664
)
 
(16,797
)
Change in fair value due to market assumption changes
 
(29,555
)
 
1,723

 
(50,221
)
 
22,929

Ending Balance
 
$
208,308

 
$
278,719

 
$
208,308

 
$
278,719


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. 


- 73 -


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, 2019
 
December 31, 2018
Discount rate – risk-free rate plus a market premium
 
9.82%
 
9.90%
Prepayment rate - based upon loan interest rate, original term and loan type
 
8.28% - 17.32%
 
8.05% - 15.74%
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
Performing loans
 
$68 - $94
 
$67 - $93
Delinquent loans
 
$150 - $500
 
$150 - $500
Loans in foreclosure
 
$1,000 - $4,000
 
$1,000 - $4,000
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
1.75%
 
2.57%
Primary/secondary mortgage rate spread
 
109 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.



- 74 -


(7)  Commitments and Contingent Liabilities

Litigation Contingencies

On June 24, 2015, BOKF, NA 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 BOKF, NA 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, less the value of the facilities securing repayment of the bonds), subject to oversight by a court appointed monitor.

On September 7, 2016, BOKF, NA agreed, and the SEC entered, a consent order finding that BOKF, NA had violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and requiring BOKF, NA to disgorge $1,067,721 of fees and pay a civil penalty of $600,000. BOKF, NA disgorged the fees and paid the penalty. 

On August 26, 2016, BOKF, NA 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 BOKF, NA participated in the fraudulent sale of securities by the principals. On September 14, 2016, BOKF, NA was sued in the District Court of Tulsa County, Oklahoma by 19 bondholders alleging BOKF, NA participated in the fraudulent sale of securities by the principals. The New Jersey Federal District Action and the Tulsa County District Court Action have been stayed by the respective courts while the principals liquidate the facilities pledged to secure payment of the bonds. Four separate small groups of bondholders filed arbitration complaints with the Financial Institutions Regulatory Association respecting the bonds and other bonds for which BOKF, NA served as indenture trustee. BOKF, NA challenged the FINRA proceedings in the United States District Court of Nevada. On appeal, the United States Court of Appeals for the Ninth Circuit held BOKF, NA was not subject to FINRA jurisdiction. The four FINRA complaints were then dismissed.

On July 9, 2019, the New Jersey Federal District Court, upon motion of the SEC, entered an order terminating the plan for repayment of the bonds by the principals on July 31, 2019 unless the SEC and the principals consent to otherwise extend the plan before July 29, 2019. The SEC announced its intention to seek judgment against the principal individual and his wife for the amount remaining on the bonds. As a result of these actions, management is no longer able to conclude that the repayment plan will be successful in full. Management has been advised by counsel that BOKF, NA has valid defenses to claims of bondholders and that no loss to the company is probable. No provision for losses has been made at this time. BOKF, NA estimates that upon sale of all facilities securing payment of the bonds, including those currently under contract and those not currently under contract, approximately $20 million will remain outstanding. BOKF, NA is unable at this time to assess whether the individual principal and his wife will have the financial capacity to pay in full the balance due on the bonds. If the individual principal and his wife do not have the financial ability to pay the bonds in full, a bondholder loss could become probable. Under all circumstances, the obligation of the principals to repay the bonds continues as an obligation not dischargeable in bankruptcy. A reasonable estimate cannot be made of the amount of any bondholder loss, though the amount of bondholder loss could be material to the company in the event a loss to the company becomes probable.
 
On March 5, 2018, BOKF, NA 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. BOKF, NA is advised by counsel that BOKF, NA has valid defenses to the plaintiffs’ claims and no loss is probable.


- 75 -


On March 14, 2017, BOKF, NA 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 BOKF, NA also served as indenture trustee. The bondholders allege BOKF, NA failed to disclose that the seller of the purchased facilities had engaged in the conduct complained of in the New Jersey action. BOKF, NA 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 BOKF, NA has valid defenses to the claims of these bondholders. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.

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 BOKF, NA is interest and exceeds permitted rates. This action makes the same allegations as a putative class action that was dismissed by the United States District Court for the Northern District of Oklahoma on October 19, 2015. On August 22, 2018, a plaintiff filed a second putative class action in the United States District Court for New Mexico making the same allegations as the Texas action. On September 18, 2018, the District Court dismissed the Texas action. Management is advised by counsel that a loss is not probable in the New Mexico action or the Texas action 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.

At June 30, 2019, the Company has $234 million in interests in various alternative investments generally consisting of unconsolidated limited partnership interests in entities for which investment return is in the form of low income housing tax credits or other investments in merchant banking activities. This investment balance also includes $57 million of unfunded commitments included in Other liabilities on the Consolidated Balance Sheets.


- 76 -


(8) Shareholders' Equity

On July 30, 2019, the Company declared a quarterly cash dividend of $0.50 per common share payable on or about August 27, 2019 to shareholders of record as of August 12, 2019.

Dividends declared were $0.50 and $1.00 per share during the three and six months ended June 30, 2019 and $0.45 and $0.90 per share during the three and six months ended June 30, 2018.

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, 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 taxes1
 
(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
)
 
 
 
 
 
 

Balance, December 31, 2018
 
$
(70,999
)
 
$
(1,586
)
 
$
(72,585
)
Net change in unrealized gain (loss)
 
228,156

 
—

 
228,156

Reclassification adjustments included in earnings:
 
 
 
 
 

Gain on available for sale securities, net
 
(1,105
)
 
—

 
(1,105
)
Other comprehensive income (loss), before income taxes
 
227,051

 
—

 
227,051

Federal and state income taxes1
 
55,897

 
—

 
55,897

Other comprehensive income (loss), net of income taxes
 
171,154

 
—

 
171,154

Balance, June 30, 2019
 
$
100,155


$
(1,586
)
 
$
98,569


1 
Calculated using a 25 percent blended federal and state statutory tax rate.


- 77 -


(9) Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to BOK Financial Corp. shareholders
 
$
137,563

 
$
114,372

 
$
248,175

 
$
219,934

Less: Earnings allocated to participating securities
 
850

 
956

 
1,678

 
1,978

Numerator for basic earnings per share – income available to common shareholders
 
136,713

 
113,416

 
246,497

 
217,956

Effect of reallocating undistributed earnings of participating securities
 
—

 
1

 
—

 
1

Numerator for diluted earnings per share – income available to common shareholders
 
$
136,713

 
$
113,417

 
$
246,497

 
$
217,957

 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 

 
 

Weighted average shares outstanding
 
71,327,928

 
65,448,035

 
71,625,332

 
65,463,671

Less:  Participating securities included in weighted average shares outstanding
 
440,865

 
546,060

 
489,918

 
589,104

Denominator for basic earnings per common share
 
70,887,063

 
64,901,975

 
71,135,414

 
64,874,567

Dilutive effect of employee stock compensation plans1
 
14,970

 
35,251

 
16,144

 
37,985

Denominator for diluted earnings per common share
 
70,902,033

 
64,937,226

 
71,151,558

 
64,912,552

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.93

 
$
1.75

 
$
3.47

 
$
3.36

Diluted earnings per share
 
$
1.93

 
$
1.75

 
$
3.46

 
$
3.36

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

 
—

 
—

 
—




- 78 -


(10)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2019 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other1
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
251,080

 
$
24,203

 
$
17,224

 
$
(7,075
)
 
$
285,432

Net interest revenue (expense) from internal sources
 
(65,470
)
 
28,514

 
9,719

 
27,237

 
—

Net interest revenue
 
185,610

 
52,717

 
26,943

 
20,162

 
285,432

Provision for credit losses
 
6,823

 
1,728

 
(48
)
 
(3,503
)
 
5,000

Net interest revenue after provision for credit losses
 
178,787

 
50,989

 
26,991

 
23,665

 
280,432

Other operating revenue
 
41,611

 
48,811

 
86,017

 
(4,374
)
 
172,065

Other operating expense
 
62,947

 
57,694

 
69,452

 
87,044

 
277,137

Net direct contribution
 
157,451

 
42,106

 
43,556

 
(67,753
)
 
175,360

Gain (loss) on financial instruments, net
 
20

 
20,981

 
—

 
(21,001
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(29,555
)
 
—

 
29,555

 
—

Gain (loss) on repossessed assets, net
 
—

 
92

 
—

 
(92
)
 
—

Corporate expense allocations
 
11,384

 
11,695

 
9,168

 
(32,247
)
 
—

Net income before taxes
 
146,087

 
21,929

 
34,388

 
(27,044
)
 
175,360

Federal and state income taxes
 
39,155

 
5,585

 
8,843

 
(16,003
)
 
37,580

Net income
 
106,932

 
16,344

 
25,545

 
(11,041
)
 
137,780

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
217

 
217

Net income attributable to BOK Financial Corp. shareholders
 
$
106,932

 
$
16,344

 
$
25,545

 
$
(11,258
)
 
$
137,563

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
22,910,071

 
$
9,212,667

 
$
9,849,396

 
$
(1,127,357
)
 
$
40,844,777

1 
CoBiz operations were allocated to the respective segments in the second quarter of 2019.


- 79 -


Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2019 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other1
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
455,289

 
$
45,798

 
$
38,710

 
$
23,737

 
$
563,534

Net interest revenue (expense) from internal sources
 
(118,031
)
 
58,021

 
16,489

 
43,521

 
—

Net interest revenue
 
337,258

 
103,819

 
55,199

 
67,258

 
563,534

Provision for credit losses
 
18,069

 
2,813

 
(167
)
 
(7,715
)
 
13,000

Net interest revenue after provision for credit losses
 
319,189

 
101,006

 
55,366

 
74,973

 
550,534

Other operating revenue
 
79,223

 
91,559

 
159,431

 
(878
)
 
329,335

Other operating expense
 
113,124

 
111,515

 
130,959

 
208,696

 
564,294

Net direct contribution
 
285,288

 
81,050

 
83,838

 
(134,601
)
 
315,575

Gain on financial instruments, net
 
38

 
35,078

 
—

 
(35,116
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(50,221
)
 
—

 
50,221

 
—

Gain (loss) on repossessed assets, net
 
(346
)
 
195

 
—

 
151

 
—

Corporate expense allocations
 
21,532

 
23,595

 
17,528

 
(62,655
)
 
—

Net income before taxes
 
263,448

 
42,507

 
66,310

 
(56,690
)
 
315,575

Federal and state income taxes
 
70,373

 
10,826

 
17,046

 
(30,715
)
 
67,530

Net income
 
193,075

 
31,681

 
49,264

 
(25,975
)
 
248,045

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
(130
)
 
(130
)
Net income attributable to BOK Financial Corp. shareholders
 
$
193,075

 
$
31,681

 
$
49,264

 
$
(25,845
)
 
$
248,175

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
21,431,696

 
$
8,794,498

 
$
9,590,629

 
$
445,144

 
$
40,261,967

1 
CoBiz operations are included in Funds Management and Other for the first quarter of 2019 and subsequently allocated to the respective segments in the second quarter of 2019.


- 80 -


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

 
$
21,747

 
$
18,754

 
$
15,934

 
$
238,562

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

 
10,232

 
9,322

 
—

Net interest revenue
 
145,025

 
39,295

 
28,986

 
25,256

 
238,562

Provision for credit losses
 
10,108

 
1,140

 
(105
)
 
(11,143
)
 
—

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
 
49,386

 
61,146

 
61,491

 
74,453

 
246,476

Net direct contribution
 
128,578

 
23,329

 
38,242

 
(41,664
)
 
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
 
9,366

 
11,042

 
11,142

 
(31,550
)
 
—

Net income before taxes
 
119,154

 
7,773

 
27,100

 
(5,542
)
 
148,485

Federal and state income taxes
 
31,577

 
1,980

 
6,981

 
(7,208
)
 
33,330

Net income
 
87,577

 
5,793

 
20,119

 
1,666

 
115,155

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
783

 
783

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

 
$
5,793

 
$
20,119

 
$
883

 
$
114,372

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
18,072,155

 
$
8,353,558

 
$
8,495,557

 
$
(1,015,235
)
 
$
33,906,035



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

 
$
43,500

 
$
34,161

 
$
38,096

 
$
458,298

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

 
20,164

 
12,509

 
—

Net interest revenue
 
277,096

 
76,272

 
54,325

 
50,605

 
458,298

Provision for credit losses
 
10,735

 
2,441

 
(153
)
 
(18,023
)
 
(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

 
91,267

 
145,409

 
(7,010
)
 
312,388

Other operating expense
 
97,756

 
116,246

 
124,295

 
152,609

 
490,906

Net direct contribution
 
251,327

 
48,852

 
75,592

 
(90,991
)
 
284,780

Gain (loss) 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
 
19,969

 
22,246

 
22,097

 
(64,312
)
 
—

Net income before taxes
 
227,142

 
19,929

 
53,495

 
(15,786
)
 
284,780

Federal and state income taxes
 
60,319

 
5,076

 
13,767

 
(14,884
)
 
64,278

Net income
 
166,823

 
14,853

 
39,728

 
(902
)
 
220,502

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
568

 
568

Net income attributable to BOK Financial Corp. shareholders
 
$
166,823

 
$
14,853

 
$
39,728

 
$
(1,470
)
 
$
219,934

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
17,933,756

 
$
8,410,513

 
$
8,296,780

 
$
(825,055
)
 
$
33,815,994



- 81 -


(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. Insurance brokerage revenues represents fees and commissions earned on placement of insurance products with carriers for property and casualty and health coverage.
 
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.


- 82 -


Fees and commissions revenue by reportable segment and primary service line is as follows for the three months ended June 30, 2019.
 
Commercial
 
Consumer
 
Wealth Management
 
Funds Management & Other3
 
Consolidated
 
Out of Scope1
 
In Scope2
Trading revenue
$
—

 
$
—

 
$
21,879

 
$
—

 
$
21,879

 
$
21,879

 
$
—

Customer hedging revenue
2,385

 
—

 
1,906

 
1,054

 
5,345

 
5,345

 
—

Retail brokerage revenue
—

 
—

 
3,914

 
(13
)
 
3,901

 
—

 
3,901

Insurance brokerage revenue
—

 
—

 
3,309

 
513

 
3,822

 
—

 
3,822

Investment banking revenue
2,548

 
—

 
3,032

 
(1
)
 
5,579

 
2,198

 
3,381

Brokerage and trading revenue
4,933

 
—

 
34,040

 
1,553

 
40,526

 
29,422

 
11,104

TransFund EFT network revenue
18,504

 
997

 
(20
)
 
—

 
19,481

 
—

 
19,481

Merchant services revenue
2,223

 
15

 
—

 
(1
)
 
2,237

 
—

 
2,237

Corporate card revenue
190

 
—

 
5

 
2

 
197

 
—

 
197

Transaction card revenue
20,917

 
1,012

 
(15
)
 
1

 
21,915

 
—

 
21,915

Personal trust revenue
—

 
—

 
21,215

 
1

 
21,216

 
—

 
21,216

Corporate trust revenue
—

 
—

 
6,331

 
(1
)
 
6,330

 
—

 
6,330

Institutional trust & retirement plan services revenue
—

 
—

 
11,072

 
—

 
11,072

 
—

 
11,072

Investment management services and other revenue
—

 
—

 
6,449

 
(42
)
 
6,407

 
—

 
6,407

Fiduciary and asset management revenue
—

 
—

 
45,067

 
(42
)
 
45,025

 
—

 
45,025

Commercial account service charge revenue
10,625

 
429

 
538

 
—

 
11,592

 
—

 
11,592

Overdraft fee revenue
93

 
8,973

 
36

 
2

 
9,104

 
—

 
9,104

Check card revenue
—

 
5,586

 
—

 
1

 
5,587

 
—

 
5,587

Automated service charge and other deposit fee revenue
214

 
1,578

 
(2
)
 
1

 
1,791

 
—

 
1,791

Deposit service charges and fees
10,932

 
16,566

 
572

 
4

 
28,074

 
—

 
28,074

Mortgage production revenue
—

 
11,871

 
—

 
(2
)
 
11,869

 
11,869

 
—

Mortgage servicing revenue
—

 
16,741

 
—

 
(479
)
 
16,262

 
16,262

 
—

Mortgage banking revenue
—

 
28,612

 
—

 
(481
)
 
28,131

 
28,131

 
—

Other revenue
4,323

 
2,640

 
6,261

 
(787
)
 
12,437

 
8,123

 
4,314

Total fees and commissions revenue
$
41,105

 
$
48,830

 
$
85,925

 
$
248

 
$
176,108

 
$
65,676

 
$
110,432

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.
3  
CoBiz operations are included in Funds Management and Other for the first quarter of 2019.


- 83 -


Fees and commissions revenue by reportable segment and primary service line is as follows for the six months ended June 30, 2019.
 
Commercial
 
Consumer
 
Wealth Management
 
Funds Management & Other3
 
Consolidated
 
Out of Scope1
 
In Scope2
Trading revenue
$
—

 
$
—

 
$
34,799

 
$
—

 
$
34,799

 
$
34,799

 
$
—

Customer hedging revenue
3,960

 
—

 
7,634

 
428

 
12,022

 
12,022

 
—

Retail brokerage revenue
—

 
—

 
7,988

 
(65
)
 
7,923

 
—

 
7,923

Insurance brokerage revenue
—

 
—

 
3,688

 
4,242

 
7,930

 
—

 
7,930

Investment banking revenue
3,937

 
—

 
5,533

 
(1
)
 
9,469

 
3,427

 
6,042

Brokerage and trading revenue
7,897

 
—

 
59,642

 
4,604

 
72,143

 
50,248

 
21,895

TransFund EFT network revenue
36,158

 
1,955

 
(37
)
 
1

 
38,077

 
—

 
38,077

Merchant services revenue
4,148

 
29

 
—

 
122

 
4,299

 
—

 
4,299

Corporate card revenue
270

 
—

 
5

 
2

 
277

 
—

 
277

Transaction card revenue
40,576

 
1,984

 
(32
)
 
125

 
42,653

 
—

 
42,653

Personal trust revenue
—

 
—

 
40,789

 
1

 
40,790

 
—

 
40,790

Corporate trust revenue
—

 
—

 
12,532

 
(1
)
 
12,531

 
—

 
12,531

Institutional trust & retirement plan services revenue
—

 
—

 
22,179

 
—

 
22,179

 
—

 
22,179

Investment management services and other revenue
—

 
—

 
11,250

 
1,633

 
12,883

 
—

 
12,883

Fiduciary and asset management revenue
—

 
—

 
86,750

 
1,633

 
88,383

 
—

 
88,383

Commercial account service charge revenue
20,687

 
816

 
1,065

 
1,807

 
24,375

 
—

 
24,375

Overdraft fee revenue
167

 
17,368

 
63

 
(234
)
 
17,364

 
—

 
17,364

Check card revenue
—

 
10,578

 
—

 
165

 
10,743

 
—

 
10,743

Automated service charge and other deposit fee revenue
372

 
3,243

 
175

 
45

 
3,835

 
—

 
3,835

Deposit service charges and fees
21,226

 
32,005

 
1,303

 
1,783

 
56,317

 
—

 
56,317

Mortgage production revenue
—

 
19,739

 
—

 
(2
)
 
19,737

 
19,737

 
—

Mortgage servicing revenue
—

 
33,186

 
—

 
(958
)
 
32,228

 
32,228

 
—

Mortgage banking revenue
—

 
52,925

 
—

 
(960
)
 
51,965

 
51,965

 
—

Other revenue
9,452

 
4,737

 
11,518

 
(508
)
 
25,199

 
16,843

 
8,356

Total fees and commissions revenue
$
79,151

 
$
91,651

 
$
159,181

 
$
6,677

 
$
336,660

 
$
119,056

 
$
217,604

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.
3  
CoBiz operations are included in Funds Management and Other for the first quarter of 2019.


- 84 -


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
—

 
—

 
4,657

 
(75
)
 
4,582

 
—

 
4,582

Insurance brokerage revenue
—

 
—

 
229

 
—

 
229

 
—

 
229

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

Corporate card revenue
—

 
—

 
—

 
—

 
—

 
—

 
—

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 revenue
—

 
—

 
5,217

 
(57
)
 
5,160

 
—

 
5,160

Fiduciary and asset management revenue
—

 
—

 
41,749

 
(57
)
 
41,692

 
—

 
41,692

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

 
7

 
1,702

 
—

 
1,702

Deposit service charges and fees
11,048

 
16,106

 
666

 
14

 
27,834

 
—

 
27,834

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

 
(1,142
)
 
13,923

 
9,766

 
4,157

Total fees and commissions revenue
$
42,874

 
$
46,332

 
$
70,489

 
$
(2,437
)
 
$
157,258

 
$
54,545

 
$
102,713


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.


- 85 -


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
—

 
—

 
9,353

 
(173
)
 
9,180

 
—

 
9,180

Insurance brokerage revenue
—

 
—

 
385

 
—

 
385

 
—

 
385

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

Corporate card revenue
—

 
—

 
—

 
—

 
—

 
—

 
—

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 revenue
—

 
—

 
9,906

 
(105
)
 
9,801

 
—

 
9,801

Fiduciary and asset management revenue
—

 
—

 
83,629

 
(105
)
 
83,524

 
—

 
83,524

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

 
8

 
3,425

 
—

 
3,425

Deposit service charges and fees
22,119

 
31,526

 
1,331

 
18

 
54,994

 
—

 
54,994

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

 
(2,641
)
 
26,882

 
18,751

 
8,131

Total fees and commissions revenue
$
82,891

 
$
91,296

 
$
145,296

 
$
(2,611
)
 
$
316,872

 
$
111,917

 
$
204,955

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.


- 86 -


(12) 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 three and six months ended June 30, 2019 and 2018, respectively. Transfers between significant other observable inputs and significant unobservable inputs during the three and six months ended June 30, 2019 and 2018 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, 2019 or December 31, 2018.


- 87 -


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, 2019 (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
 
$
83,148

 
$
—

 
$
83,148

 
$
—

U.S. government agency residential mortgage-backed securities
 
1,620,613

 
—

 
1,620,613

 
—

Municipal and other tax-exempt securities
 
49,718

 
—

 
49,718

 
—

Asset-backed securities
 
93,546

 
—

 
93,546

 
—

Other trading securities
 
53,370

 
—

 
53,370

 
—

Total trading securities
 
1,900,395

 
—

 
1,900,395

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,889

 
1,889

 
—

 
—

Municipal and other tax-exempt securities
 
2,470

 
—

 
2,470

 
—

Residential agency mortgage-backed securities
 
7,354,741

 
—

 
7,354,741

 
—

Residential non-agency mortgage-backed securities
 
47,057

 
—

 
47,057

 
—

Commercial agency mortgage-backed securities
 
3,107,785

 
—

 
3,107,785

 
—

Other debt securities
 
472

 
—

 
—

 
472

Total available for sale securities
 
10,514,414

 
1,889

 
10,512,053

 
472

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
1,138,820

 
—

 
1,138,820

 
—

Residential mortgage loans held for sale
 
193,570

 
—

 
177,497

 
16,073

Mortgage servicing rights1
 
208,308

 
—

 
—

 
208,308

Derivative contracts, net of cash collateral2
 
415,221

 
29,352

 
385,869

 
—

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
381,454

 
—

 
381,454

 
—

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 energy and interest rate derivative contacts, net of cash margin. Derivative contacts in liability positions that were valued using quoted prices in active markets for identical instruments are exchange-traded interest rate and agricultural derivative contracts, fully offset by cash margin.


- 88 -


The fair value of financial assets and liabilities measured on a recurring basis was as follows as of December 31, 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
 
$
63,765

 
$
—

 
$
63,765

 
$
—

U.S. government agency residential mortgage-backed securities
 
1,791,584

 
—

 
1,791,584

 
—

Municipal and other tax-exempt securities
 
34,507

 
—

 
34,507

 
—

Asset-backed securities
 
42,656

 
—

 
42,656

 
—

Other trading securities
 
24,411

 
—

 
24,411

 
—

Total trading securities
 
1,956,923

 
—

 
1,956,923

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
493

 
493

 
—

 
—

Municipal and other tax-exempt securities
 
2,864

 
—

 
2,864

 
—

Residential agency mortgage-backed securities
 
5,804,708

 
—

 
5,804,708

 
—

Residential non-agency mortgage-backed securities
 
59,736

 
—

 
59,736

 
—

Commercial agency mortgage-backed securities
 
2,953,889

 
—

 
2,953,889

 
—

Other debt securities
 
35,430

 
—

 
34,958

 
472

Total available for sale securities
 
8,857,120

 
493

 
8,856,155

 
472

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
283,235

 
—

 
283,235

 
—

Residential mortgage loans held for sale
 
149,221

 
—

 
134,014

 
15,207

Mortgage servicing rights1
 
259,254

 
—

 
—

 
259,254

Derivative contracts, net of cash collateral2
 
320,929

 
44,074

 
276,855

 
—

Liabilities:
 


 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
362,306

 
—

 
362,306

 
—

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, net of cash margin. Derivative contracts in liability positions that were valued using quoted prices in active markets for identical instruments (Level 1) are exchange-traded interest rate contracts, fully offset by cash margin.




- 89 -


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 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 at fair value with changes in the fair value recognized in earnings.

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 Company has elected to carry all residential mortgage loans originated for sale at fair value. Changes in the fair value of these financial instruments are recognized in earnings. 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.


- 90 -


The following represents the changes for the three and six months ended June 30, 2019 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, 2019
 
$
—

 
$
472

 
$
15,776

Transfer to Level 3 from Level 21
 
—

 
—

 
907

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(998
)
Redemptions and distributions
 
—

 
—

 
—

Gain (loss) recognized in earnings:
 
 
 
 
 
 
Mortgage banking revenue
 
—

 
—

 
388

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

 
—

 
—

Balance, June 30, 2019
 
$
—

 
$
472

 
$
16,073

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, 2018
 
$
—

 
$
472

 
$
15,207

Transfer to Level 3 from Level 21
 
—

 
—

 
1,889

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(1,379
)
Redemptions and distributions
 
—

 
—

 
—

Gain (loss) recognized in earnings:
 
 
 
 
 
 
Mortgage banking revenue
 
—

 
—

 
356

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

 
—

 
—

Balance, June 30, 2019
 
$
—

 
$
472

 
$
16,073


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.

- 91 -


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 (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
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.



- 92 -


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, 2019 follows (in thousands):
 
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities – Other debt securities
 
472

 
Discounted cash flows
1 
Interest rate spread
 
7.26%-7.26% (7.26%)
3 
94.41%-94.41% (94.41%)
2 
Residential mortgage loans held for sale
 
16,073

 
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.
 
94.70%
 
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 
Represents fair value as a percentage of par value.
3 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding approximately 3 percent.

A summary of quantitative information about assets measured at fair value on a recurring basis using Significant Unobservable Inputs (Level 3) as of December 31, 2018 follows (in thousands):
 
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities – Other debt securities
 
472

 
Discounted cash flows
1 
Interest rate spread
 
7.88%-7.88% (7.88%)
3 
94.44%-94.44% (94.44%)
2 
Residential mortgage loans held for sale
 
15,207

 
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.
 
92.38%
 
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 
Represents fair value as a percentage of par value.
3 
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.




- 93 -


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, 2019 for which the fair value was adjusted during the six months ended June 30, 2019:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
 
 
 
 
Carrying Value at June 30, 2019
 
Three Months Ended
June 30, 2019
Recognized in:
 
Six Months Ended
June 30, 2019
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
$
—

 
$
—

 
$
29,187

 
$
11,335

 
$
—

 
$
20,917

 
$
—

Real estate and other repossessed assets
—

 
2,642

 
427

 
—

 
86

 
—

 
512

 
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



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.


- 94 -


A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of June 30, 2019 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
29,187

 
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
 
12% - 76% (47%)1
Real estate and other repossessed assets
 
427

 
Appraised value, as adjusted
 
Marketability adjustments off appraised value2
 
75% - 89% (88%)
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.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of December 31, 2018 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
17,401

 
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
 
35% - 80% (50%)1
Real estate and other repossessed assets
 
6,366

 
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.


- 95 -


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, 2019 (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
 
$
739,109

 
$
739,109

 
$
739,109

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
596,382

 
596,382

 
596,382

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
83,148

 
83,148

 
—

 
83,148

 
—

U.S. government agency residential mortgage-backed securities
 
1,620,613

 
1,620,613

 
—

 
1,620,613

 
—

Municipal and other tax-exempt securities
 
49,718

 
49,718

 
—

 
49,718

 
—

Asset-backed securities
 
93,546

 
93,546

 
—

 
93,546

 
—

Other trading securities
 
53,370

 
53,370

 
—

 
53,370

 
—

Total trading securities
 
1,900,395

 
1,900,395

 
—

 
1,900,395

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
124,822

 
128,009

 
—

 
128,009

 
—

U.S. government agency residential mortgage-backed securities
 
11,599

 
12,099

 
—

 
12,099

 
—

Other debt securities
 
191,256

 
206,907

 
—

 
8,197

 
198,710

Total investment securities
 
327,677

 
347,015

 
—

 
148,305

 
198,710

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
1,889

 
1,889

 
1,889

 
—

 
—

Municipal and other tax-exempt securities
 
2,470

 
2,470

 
—

 
2,470

 
—

Residential agency mortgage-backed securities
 
7,354,741

 
7,354,741

 
—

 
7,354,741

 
—

Residential non-agency mortgage-backed securities
 
47,057

 
47,057

 
—

 
47,057

 
—

Commercial agency mortgage-backed securities
 
3,107,785

 
3,107,785

 
—

 
3,107,785

 
—

Other debt securities
 
472

 
472

 
—

 
—

 
472

Total available for sale securities
 
10,514,414

 
10,514,414

 
1,889

 
10,512,053

 
472

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
1,138,820

 
1,138,820

 
—

 
1,138,820

 
—

Residential mortgage loans held for sale
 
193,570

 
193,570

 
—

 
177,497

 
16,073

Loans:
 
 

 
 

 
 
 
—

 
 
Commercial
 
14,336,908

 
14,282,197

 
—

 
—

 
14,282,197

Commercial real estate
 
4,710,033

 
4,703,587

 
—

 
—

 
4,703,587

Residential mortgage
 
2,170,822

 
2,190,665

 
—

 
—

 
2,190,665

Personal
 
1,037,889

 
1,028,526

 
—

 
—

 
1,028,526

Total loans
 
22,255,652

 
22,204,975

 
—

 
—

 
22,204,975

Allowance for loan losses
 
(202,534
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
22,053,118

 
22,204,975

 
—

 
—

 
22,204,975

Mortgage servicing rights
 
208,308

 
208,308

 
—

 
—

 
208,308

Derivative instruments with positive fair value, net of cash collateral
 
415,221

 
415,221

 
29,352

 
385,869

 
—

Deposits with no stated maturity
 
23,077,183

 
23,077,183

 
—

 
—

 
23,077,183

Time deposits
 
2,227,938

 
2,220,527

 
—

 
—

 
2,220,527

Other borrowed funds
 
10,155,756

 
10,115,711

 
—

 
—

 
10,115,711

Subordinated debentures
 
275,892

 
274,697

 
—

 
274,697

 
—

Derivative instruments with negative fair value, net of cash collateral
 
381,454

 
381,454

 
—

 
381,454

 
—



- 96 -


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, 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
 
$
741,749

 
$
741,749

 
$
741,749

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
401,675

 
401,675

 
401,675

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
63,765

 
63,765

 
—

 
63,765

 
—

U.S. government agency residential mortgage-backed securities
 
1,791,584

 
1,791,584

 
—

 
1,791,584

 
—

Municipal and other tax-exempt securities
 
34,507

 
34,507

 
—

 
34,507

 
—

Asset-backed securities
 
42,656

 
42,656

 
—

 
42,656

 
—

Other trading securities
 
24,411

 
24,411

 
—

 
24,411

 
—

Total trading securities
 
1,956,923

 
1,956,923

 
—

 
1,956,923

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
137,296

 
138,562

 
—

 
138,562

 
—

U.S. government agency residential mortgage-backed securities
 
12,612

 
12,770

 
—

 
12,770

 
—

Other debt securities
 
205,279

 
215,966

 
—

 
7,905

 
208,061

Total investment securities
 
355,187

 
367,298

 
—

 
159,237

 
208,061

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
493

 
493

 
493

 
—

 
—

Municipal and other tax-exempt securities
 
2,864

 
2,864

 
—

 
2,864

 
—

Residential agency mortgage-backed securities
 
5,804,708

 
5,804,708

 
—

 
5,804,708

 
—

Residential non-agency mortgage-backed securities
 
59,736

 
59,736

 
—

 
59,736

 
—

Commercial agency mortgage-backed securities
 
2,953,889

 
2,953,889

 
—

 
2,953,889

 
—

Other debt securities
 
35,430

 
35,430

 
—

 
34,958

 
472

Total available for sale securities
 
8,857,120

 
8,857,120

 
493

 
8,856,155

 
472

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
283,235

 
283,235

 
—

 
283,235

 
—

Residential mortgage loans held for sale
 
149,221

 
149,221

 
—

 
134,014

 
15,207

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
13,636,078

 
13,526,162

 
—

 
—

 
13,526,162

Commercial real estate
 
4,764,813

 
4,713,747

 
—

 
—

 
4,713,747

Residential mortgage
 
2,230,033

 
2,213,951

 
—

 
—

 
2,213,951

Personal
 
1,025,806

 
1,024,368

 
—

 
—

 
1,024,368

Total loans
 
21,656,730

 
21,478,228

 
—

 
—

 
21,478,228

Allowance for loan losses
 
(207,457
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
21,449,273

 
21,478,228

 
—

 
—

 
21,478,228

Mortgage servicing rights
 
259,254

 
259,254

 
—

 
—

 
259,254

Derivative instruments with positive fair value, net of cash collateral
 
320,929

 
320,929

 
44,074

 
276,855

 
—

Deposits with no stated maturity
 
23,150,383

 
23,150,383

 
—

 
—

 
23,150,383

Time deposits
 
2,113,380

 
2,073,538

 
—

 
—

 
2,073,538

Other borrowed funds
 
8,161,211

 
7,071,953

 
—

 
—

 
7,071,953

Subordinated debentures
 
275,913

 
261,977

 
—

 
261,977

 
—

Derivative instruments with negative fair value, net of cash collateral
 
362,306

 
362,306

 
—

 
362,306

 
—



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.



- 97 -


(13) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on June 30, 2019 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.


- 98 -


Six-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Six Months Ended
 
 
June 30, 2019
 
June 30, 2018
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
536,690

 
$
6,829

 
2.57
%
 
$
1,865,385

 
$
15,722

 
1.70
%
Trading securities
 
1,862,284

 
34,399

 
3.74
%
 
1,209,369

 
20,893

 
3.53
%
Investment securities
 
335,841

 
7,483

 
4.46
%
 
420,032

 
8,105

 
3.86
%
Available for sale securities
 
9,160,887

 
116,769

 
2.60
%
 
8,199,837

 
93,471

 
2.26
%
Fair value option securities
 
747,401

 
12,740

 
3.45
%
 
556,337

 
8,746

 
3.05
%
Restricted equity securities
 
404,673

 
12,861

 
6.36
%
 
349,134

 
10,525

 
6.03
%
Residential mortgage loans held for sale
 
168,702

 
3,417

 
4.05
%
 
209,043

 
4,177

 
4.01
%
Loans
 
21,885,894

 
578,406

 
5.33
%
 
17,507,714

 
401,940

 
4.63
%
Allowance for loan losses
 
(205,811
)
 
 
 
 
 
(225,909
)
 
 
 
 
Loans, net of allowance
 
21,680,083

 
578,406

 
5.38
%
 
17,281,805

 
401,940

 
4.69
%
Total earning assets
 
34,896,561

 
772,904

 
4.48
%
 
30,090,942

 
563,579

 
3.76
%
Receivable on unsettled securities sales
 
1,331,669

 
 
 
 
 
807,470

 
 
 
 
Cash and other assets
 
4,033,737

 
 
 
 
 
2,917,582

 
 
 
 
Total assets
 
$
40,261,967

 
 
 
 
 
$
33,815,994

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
12,223,515

 
$
60,244

 
0.99
%
 
$
10,266,484

 
$
25,487

 
0.50
%
Savings
 
550,204

 
333

 
0.12
%
 
491,955

 
183

 
0.08
%
Time
 
2,180,483

 
20,023

 
1.85
%
 
2,144,928

 
13,512

 
1.27
%
Total interest-bearing deposits
 
14,954,202

 
80,600

 
1.09
%
 
12,903,367

 
39,182

 
0.61
%
Funds purchased and repurchase agreements
 
2,050,087

 
21,060

 
2.07
%
 
562,999

 
1,304

 
0.47
%
Other borrowings
 
7,107,961

 
94,154

 
2.67
%
 
6,412,463

 
56,752

 
1.78
%
Subordinated debentures
 
276,245

 
7,546

 
5.51
%
 
144,687

 
4,051

 
5.65
%
Total interest-bearing liabilities
 
24,388,495

 
203,360

 
1.68
%
 
20,023,516

 
101,289

 
1.02
%
Non-interest bearing demand deposits
 
9,935,739

 
 
 
 
 
9,187,499

 
 
 
 
Due on unsettled securities purchases
 
638,829

 
 
 
 
 
543,265

 
 
 
 
Other liabilities
 
759,808

 
 
 
 
 
566,248

 
 
 
 
Total equity
 
4,539,096

 
 
 
 
 
3,495,466

 
 
 
 
Total liabilities and equity
 
$
40,261,967

 
 
 
 
 
$
33,815,994

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
569,544

 
2.80
%
 
 
 
$
462,290

 
2.74
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
3.30
%
 
 
 
 
 
3.08
%
Less tax-equivalent adjustment
 
 
 
6,010

 
 
 
 
 
3,992

 
 
Net Interest Revenue
 
 
 
563,534

 
 
 
 
 
458,298

 
 
Provision for credit losses
 
 
 
13,000

 
 
 
 
 
(5,000
)
 
 
Other operating revenue
 
 
 
329,335

 
 
 
 
 
312,388

 
 
Other operating expense
 
 
 
564,294

 
 
 
 
 
490,906

 
 
Income before taxes
 
 
 
315,575

 
 
 
 
 
284,780

 
 
Federal and state income taxes
 
 
 
67,530

 
 
 
 
 
64,278

 
 
Net income
 
 
 
248,045

 
 
 
 
 
220,502

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
(130
)
 
 
 
 
 
568

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
248,175

 
 
 
 
 
$
219,934

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
3.47

 
 

 
 

 
$
3.36

 
 

Diluted
 
 

 
$
3.46

 
 

 
 

 
$
3.36

 
 

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.

- 99 -


Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
June 30, 2019
 
March 31, 2019
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
535,491

 
$
3,432

 
2.57
%
 
$
537,903

 
$
3,397

 
2.56
%
Trading securities
 
1,757,335

 
15,609

 
3.59
%
 
1,968,399

 
18,790

 
3.88
%
Investment securities
 
328,482

 
3,621

 
4.41
%
 
343,282

 
3,862

 
4.50
%
Available for sale securities
 
9,435,668

 
59,888

 
2.63
%
 
8,883,054

 
56,881

 
2.57
%
Fair value option securities
 
898,772

 
7,503

 
3.34
%
 
594,349

 
5,237

 
3.62
%
Restricted equity securities
 
413,812

 
6,516

 
6.30
%
 
395,432

 
6,345

 
6.42
%
Residential mortgage loans held for sale
 
192,102

 
1,754

 
3.65
%
 
145,040

 
1,663

 
4.58
%
Loans
 
22,004,405

 
295,978

 
5.39
%
 
21,766,065

 
282,428

 
5.26
%
Allowance for loan losses
 
(205,532
)
 
 
 
 
 
(206,092
)
 
 
 
 
Loans, net of allowance
 
21,798,873

 
295,978

 
5.45
%
 
21,559,973

 
282,428

 
5.31
%
Total earning assets
 
35,360,535

 
394,301

 
4.51
%
 
34,427,432

 
378,603

 
4.46
%
Receivable on unsettled securities sales
 
1,437,462

 
 
 
 
 
1,224,700

 
 
 
 
Cash and other assets
 
4,046,780

 
 
 
 
 
4,020,549

 
 
 
 
Total assets
 
$
40,844,777

 
 
 
 
 
$
39,672,681

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
12,512,282

 
$
32,540

 
1.04
%
 
$
11,931,539

 
$
27,704

 
0.94
%
Savings
 
558,738

 
173

 
0.12
%
 
541,575

 
160

 
0.12
%
Time
 
2,207,391

 
10,470

 
1.90
%
 
2,153,277

 
9,553

 
1.80
%
Total interest-bearing deposits
 
15,278,411

 
43,183

 
1.13
%
 
14,626,391

 
37,417

 
1.04
%
Funds purchased and repurchase agreements
 
2,066,950

 
10,704

 
2.08
%
 
2,033,036

 
10,356

 
2.07
%
Other borrowings
 
7,175,617

 
47,700

 
2.67
%
 
7,040,279

 
46,454

 
2.68
%
Subordinated debentures
 
275,887

 
3,801

 
5.53
%
 
275,882

 
3,745

 
5.51
%
Total interest-bearing liabilities
 
24,796,865

 
105,388

 
1.70
%
 
23,975,588

 
97,972

 
1.66
%
Non-interest bearing demand deposits
 
9,883,965

 
 
 
 
 
9,988,088

 
 
 
 
Due on unsettled securities purchases
 
821,688

 
 
 
 
 
453,937

 
 
 
 
Other liabilities
 
744,216

 
 
 
 
 
775,574

 
 
 
 
Total equity
 
4,598,043

 
 
 
 
 
4,479,494

 
 
 
 
Total liabilities and equity
 
$
40,844,777

 
 
 
 
 
$
39,672,681

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
288,913

 
2.81
%
 
 
 
$
280,631

 
2.80
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
 
 
3.30
%
 
 
 
 
 
3.30
%
Less tax-equivalent adjustment
 
 
 
3,481

 
 
 
 
 
2,529

 
 
Net Interest Revenue
 
 
 
285,432

 
 
 
 
 
278,102

 
 
Provision for credit losses
 
 
 
5,000

 
 
 
 
 
8,000

 
 
Other operating revenue
 
 
 
172,065

 
 
 
 
 
157,270

 
 
Other operating expense
 
 
 
277,137

 
 
 
 
 
287,157

 
 
Income before taxes
 
 
 
175,360

 
 
 
 
 
140,215

 
 
Federal and state income taxes
 
 
 
37,580

 
 
 
 
 
29,950

 
 
Net income
 
 
 
137,780

 
 
 
 
 
110,265

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
217

 
 
 
 
 
(347
)
 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
137,563

 
 
 
 
 
$
110,612

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.93

 
 

 
 

 
$
1.54

 
 

Diluted
 
 

 
$
1.93

 
 

 
 

 
$
1.54

 
 

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.

- 100 -


Three Months Ended
December 31, 2018
 
September 30, 2018
 
June 30, 2018
Average Balance
 
Revenue /Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
563,132

 
$
3,170

 
2.23
%
 
$
688,872

 
$
3,441

 
1.98
%
 
$
1,673,387

 
$
7,740

 
1.86
%
1,929,601

 
19,636

 
4.10
%
 
1,762,794

 
17,419

 
3.98
%
 
1,482,302

 
13,084

 
3.63
%
364,737

 
3,887

 
4.26
%
 
379,566

 
3,856

 
4.06
%
 
399,088

 
3,941

 
3.95
%
8,704,963

 
55,085

 
2.51
%
 
8,129,214

 
48,916

 
2.37
%
 
8,163,142

 
47,463

 
2.30
%
277,575

 
2,578

 
3.56
%
 
469,398

 
3,881

 
3.25
%
 
487,192

 
3,927

 
3.16
%
362,729

 
5,798

 
6.39
%
 
328,842

 
5,232

 
6.36
%
 
348,546

 
5,408

 
6.21
%
179,553

 
1,795

 
4.00
%
 
207,488

 
2,151

 
4.27
%
 
218,600

 
2,333

 
4.28
%
21,579,331

 
276,711

 
5.09
%
 
18,203,785

 
220,245

 
4.80
%
 
17,751,242

 
212,266

 
4.80
%
(209,613
)
 
 
 
 
 
(214,160
)
 
 
 
 
 
(222,856
)
 
 
 
 
21,369,718

 
276,711

 
5.14
%
 
17,989,625

 
220,245

 
4.86
%
 
17,528,386

 
212,266

 
4.86
%
33,752,008

 
368,660

 
4.33
%
 
29,955,799

 
305,141

 
4.04
%
 
30,301,191

 
296,162

 
3.91
%
799,548

 
 
 
 
 
768,785

 
 
 
 
 
618,240

 
 
 
 
3,834,187

 
 
 
 
 
2,971,233

 
 
 
 
 
2,986,604

 
 
 
 
$
38,385,743

 
 
 
 
 
$
33,695,817

 
 
 
 
 
$
33,906,035

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
11,773,651

 
$
23,343

 
0.79
%
 
$
10,010,031

 
$
17,029

 
0.67
%
 
$
10,189,354

 
$
13,993

 
0.55
%
526,275

 
148

 
0.11
%
 
503,821

 
108

 
0.09
%
 
503,671

 
95

 
0.08
%
2,146,786

 
8,309

 
1.54
%
 
2,097,441

 
7,398

 
1.40
%
 
2,138,880

 
6,875

 
1.29
%
14,446,712

 
31,800

 
0.87
%
 
12,611,293

 
24,535

 
0.77
%
 
12,831,905

 
20,963

 
0.66
%
1,205,568

 
4,135

 
1.36
%
 
1,193,583

 
3,768

 
1.25
%
 
593,250

 
782

 
0.53
%
6,361,141

 
40,220

 
2.51
%
 
5,765,440

 
32,036

 
2.20
%
 
6,497,020

 
31,825

 
1.96
%
276,378

 
3,752

 
5.38
%
 
144,702

 
2,025

 
5.55
%
 
144,692

 
2,047

 
5.67
%
22,289,799

 
79,907

 
1.42
%
 
19,715,018

 
62,364

 
1.25
%
 
20,066,867

 
55,617

 
1.11
%
10,648,683

 
 
 
 
 
9,325,002

 
 
 
 
 
9,223,327

 
 
 
 
493,887

 
 
 
 
 
544,263

 
 
 
 
 
527,804

 
 
 
 
610,286

 
 
 
 
 
496,634

 
 
 
 
 
575,865

 
 
 
 
4,343,088

 
 
 
 
 
3,614,900

 
 
 
 
 
3,512,172

 
 
 
 
$
38,385,743

 
 
 
 
 
$
33,695,817

 
 
 
 
 
$
33,906,035

 
 
 
 
 
 
$
288,753

 
2.91
%
 
 
 
$
242,777

 
2.79
%
 
 
 
$
240,545

 
2.80
%
 
 
 
 
3.40
%
 
 
 
 
 
3.21
%
 
 
 
 
 
3.17
%
 
 
3,067

 
 
 
 
 
1,894

 
 
 
 
 
1,983

 
 
 
 
285,686

 
 
 
 
 
240,883

 
 
 
 
 
238,562

 
 
 
 
9,000

 
 
 
 
 
4,000

 
 
 
 
 
—

 
 
 
 
136,455

 
 
 
 
 
167,941

 
 
 
 
 
156,399

 
 
 
 
284,643

 
 
 
 
 
252,617

 
 
 
 
 
246,476

 
 
 
 
128,498

 
 
 
 
 
152,207

 
 
 
 
 
148,485

 
 
 
 
20,121

 
 
 
 
 
34,662

 
 
 
 
 
33,330

 
 
 
 
108,377

 
 
 
 
 
117,545

 
 
 
 
 
115,155

 
 
 
 
(79
)
 
 
 
 
 
289

 
 
 
 
 
783

 
 
 
 
$
108,456

 
 
 
 
 
$
117,256

 
 
 
 
 
$
114,372

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
1.50

 
 

 
 

 
$
1.79

 
 

 
 

 
$
1.75

 
 

 

 
$
1.50

 
 

 
 

 
$
1.79

 
 

 
 

 
$
1.75

 
 




- 101 -


Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
 
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
390,820

 
$
376,074

 
$
365,592

 
$
303,247

 
$
294,180

Interest expense
 
105,388

 
97,972

 
79,906

 
62,364

 
55,618

Net interest revenue
 
285,432

 
278,102

 
285,686

 
240,883

 
238,562

Provision for credit losses
 
5,000

 
8,000

 
9,000

 
4,000

 
—

Net interest revenue after provision for credit losses
 
280,432

 
270,102

 
276,686

 
236,883

 
238,562

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
40,526

 
31,617

 
28,101

 
23,086

 
26,488

Transaction card revenue
 
21,915

 
20,738

 
20,664

 
21,396

 
20,975

Fiduciary and asset management revenue
 
45,025

 
43,358

 
43,665

 
57,514

 
41,692

Deposit service charges and fees
 
28,074

 
28,243

 
29,393

 
27,765

 
27,834

Mortgage banking revenue
 
28,131

 
23,834

 
21,880

 
23,536

 
26,346

Other revenue
 
12,437

 
12,762

 
16,404

 
12,900

 
13,923

Total fees and commissions
 
176,108

 
160,552

 
160,107

 
166,197

 
157,258

Other gains (losses), net
 
3,480

 
2,976

 
(8,305
)
 
2,754

 
4,578

Gain (loss) on derivatives, net
 
11,150

 
4,667

 
11,167

 
(2,847
)
 
(3,057
)
Gain (loss) on fair value option securities, net
 
9,853

 
9,665

 
(282
)
 
(4,385
)
 
(3,341
)
Change in fair value of mortgage servicing rights
 
(29,555
)
 
(20,666
)
 
(24,233
)
 
5,972

 
1,723

Gain (loss) on available for sale securities, net
 
1,029

 
76

 
(1,999
)
 
250

 
(762
)
Total other operating revenue
 
172,065

 
157,270

 
136,455

 
167,941

 
156,399

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
160,342

 
169,228

 
160,706

 
143,531

 
138,947

Business promotion
 
10,142

 
7,874

 
9,207

 
7,620

 
7,686

Charitable contributions to BOKF Foundation
 
1,000

 
—

 
2,846

 
—

 
—

Professional fees and services
 
13,002

 
16,139

 
20,712

 
13,209

 
14,978

Net occupancy and equipment
 
26,880

 
29,521

 
27,780

 
23,394

 
22,761

Insurance
 
6,454

 
4,839

 
4,248

 
6,232

 
6,245

Data processing and communications
 
29,735

 
31,449

 
27,575

 
31,665

 
27,739

Printing, postage and supplies
 
4,107

 
4,885

 
5,232

 
3,837

 
4,011

Net losses (gains) and operating expenses of repossessed assets
 
580

 
1,996

 
2,581

 
4,044

 
2,722

Amortization of intangible assets
 
5,138

 
5,191

 
5,331

 
1,603

 
1,386

Mortgage banking costs
 
11,545

 
9,906

 
11,518

 
11,741

 
12,890

Other expense
 
8,212

 
6,129

 
6,907

 
5,741

 
7,111

Total other operating expense
 
277,137

 
287,157

 
284,643

 
252,617

 
246,476

Net income before taxes
 
175,360

 
140,215

 
128,498

 
152,207

 
148,485

Federal and state income taxes
 
37,580

 
29,950

 
20,121

 
34,662

 
33,330

Net income
 
137,780

 
110,265

 
108,377

 
117,545

 
115,155

Net income (loss) attributable to non-controlling interests
 
217

 
(347
)
 
(79
)
 
289

 
783

Net income attributable to BOK Financial Corporation shareholders
 
$
137,563

 
$
110,612

 
$
108,456

 
$
117,256

 
$
114,372

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$1.93
 
$1.54
 
$1.50
 
$1.79
 
$1.75
Diluted
 
$1.93
 
$1.54
 
$1.50
 
$1.79
 
$1.75
Average shares used in computation:
 
 
 
 
 
 
 
 
 
 
Basic
 
70,887,063

 
71,387,070

 
71,808,029

 
64,901,095

 
64,901,975

Diluted
 
70,902,033

 
71,404,388

 
71,833,334

 
64,934,351

 
64,937,226




- 102 -


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, 2019.

 
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, 2019
 
—

 
$
—

 
—

 
5,000,000

May 1 to May 31, 2019
 
250,000

 
$
80.50

 
250,000

 
4,750,000

June 1 to June 30, 2019
 
—

 
$
—

 
—

 
4,750,000

Total
 
250,000

 
 

 
250,000

 
 

1 
On April 30, 2019, 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, 2019, the Company had repurchased 250,000 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 may repurchase mature shares from employees to cover the exercise price and taxes in connection with employee equity compensation.
Item 6. Exhibits

31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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. The XBRL instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.


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



- 103 -


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:        August 9, 2019                                                                  



/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


- 104 -

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