Companies: 10,660     total market cap: $138.230 T
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BOK Financial
BOKF
#2248
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 FY2020 Q1

BOK Financial - 10-Q quarterly report FY2020 Q1


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 endedMarch 31, 2020
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: 70,308,532 shares of common stock ($.00006 par value) as of March 31, 2020.




BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2020

Index

Part I.  Financial Information
Management’s Discussion and Analysis (Item 2)        
1
Market Risk (Item 3)                                                                                              
38
Controls and Procedures (Item 4)
41
Consolidated Financial Statements – Unaudited (Item 1)
43
Quarterly Financial Summary – Unaudited (Item 2)
94
Quarterly Earnings Trend – Unaudited
96
 
 
Part II.  Other Information
Item 1.  Legal Proceedings
97
Item 1A. Risk Factors
97
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
98
Item 6.  Exhibits
98
Signatures
100



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

BOK Financial Corporation (“the Company”) reported net income of $62.1 million or $0.88 per diluted share for the first quarter of 2020. Net income was $110.6 million or $1.54 per diluted share for the first quarter of 2019 and $110.4 million or $1.56 per diluted share for the fourth quarter of 2019. The Company recorded a pre-tax provision for expected credit losses of $93.8 million in the first quarter of 2020. Pre-tax provisions for incurred losses of $19.0 million and $8.0 million were recorded in the fourth quarter of 2019 and the first quarter of 2019, respectively. The Company adopted the current expected credit loss ("CECL") model on January 1, 2020.

We incurred $12.7 million of CoBiz integration costs in the first quarter of 2019 resulting in a 13 cent per share reduction. The discussion below excludes the impact of these costs. Highlights of the first quarter of 2020 included:

COVID-19 Coronavirus Pandemic Response

•
We implemented our cross-functional crisis management team led by our Chief Human Resources Officer and Chief Risk Officer. This team has focused on ensuring employee and customer safety while continuing to meet customer needs. We have implemented social distancing measures within our internal and external operations. Employees are working from home as able, we have split remaining employees across multiple locations, and we have closed banking center lobbies and converted to drive-thru and by appointment only.
•
We have implemented programs to help our customers through this uncertain time. We are actively participating in programs initiated by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), including the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") that began on April 3, 2020 and Mortgage Forbearance program. As of April 17, 2020, we have processed approximately 4,700 PPP applications and currently have SBA approval for $1.8 billion. We have the ability to fund PPP loans through the Federal Reserve's PPP liquidity facility. We are also evaluating participating in the Main Street Lending Program. We are waiving fees on excessive savings and money market account withdrawals as well as overdraft protection transfer fees for automatic transfers between linked accounts at BOKF through May 31, 2020. Further, we waived loan payment late fees on consumer loan payments, mortgage accounts and small business loans in April 2020.
•
We have enhanced our benefits to support our employees as they navigate changes in their working environment. We are providing a temporary child care reimbursement program for those employees that need assistance because of school closures and have also added incremental paid time off hours for employees. We expanded our telemedicine options to deliver medical and behavioral health services at no cost. Further, we have enacted premium pay for certain non-exempt employees who must remain in the office.
•
We are closely monitoring our loan portfolio for effects related to COVID-19. Exposure to highly affected industries include, but are not limited to, oil and gas, entertainment and leisure, and senior housing. Energy loan balances comprise 18 percent of total loans, senior housing comprises 11 percent, and entertainment and leisure comprises approximately 8 percent. While our liquidity remains strong, given the extraordinary impact of the pandemic on the capital markets, we've taken a number of precautionary measures to ensure it remains so, including enhanced daily monitoring of liquidity by tracking deposit inflows and outflows by customer, analyzing loan advances by segment, optimizing our borrowing capacity at the Federal Home Loan Bank, and increasing our collateral at the Federal Reserve Discount Window, among other things.
Financial Highlights

•
Net interest revenue totaled $261.4 million, a decrease of $16.7 million compared to the first quarter of 2019. Net interest margin was 2.80 percent for the first quarter of 2020 compared to 3.30 percent for the first quarter of 2019. The Federal Reserve decreased the federal funds rate a total of 225 basis points since the middle of 2019. Three 25 basis point cuts were made in the second half of 2019 and an additional 150 basis points in emergency cuts were made in March 2020 in response to the economic environment resulting from the COVID-19 pandemic. Average earning assets were $38.4 billion for the first quarter of 2020 compared to $34.4 billion for the first quarter of 2019. Net interest revenue decreased $8.9 million compared to the fourth quarter of 2019 while net interest margin decreased 8 basis points.

- 1 -


•
Fees and commissions revenue totaled $192.7 million, an increase of $32.2 million over the first quarter of 2019. Brokerage and trading revenue increased $19.2 million and mortgage banking revenue increased $13.3 million as lower mortgage interest rates have increased mortgage production and related trading activity. Fees and commissions revenue increased $13.3 million over the fourth quarter of 2019, largely due to increases in brokerage and trading and mortgage banking revenue.
•
Other operating expense totaled $268.6 million, a $5.8 million decrease compared to the first quarter of 2019. Personnel expense decreased $9.8 million, largely due to a decrease in deferred compensation costs. Non-personnel expense increased $4.0 million over the first quarter of 2019, primarily due to increases in data processing and communications expense and professional fees and services. Operating expense decreased $20.2 million compared to the fourth quarter of 2019. Personnel expense decreased $12.2 million with a decrease in deferred compensation and incentive compensation partially offset by a seasonal increase in employee benefits. Non-personnel expense decreased $7.9 million compared to the fourth quarter of 2019, led by decreases in mortgage banking and business promotion expenses.
•
The allowance for loan losses totaled $315 million or 1.40 percent of outstanding loans and 199 percent of nonaccruing loans at March 31, 2020, excluding residential mortgage loans guaranteed by U.S. government agencies. The combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was $344 million or 1.53 percent of outstanding loans at March 31, 2020. At December 31, 2019, the allowance for loan losses was $211 million or 0.97 percent of outstanding loans and 121 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was $212 million or 0.98 percent of outstanding loans.
•
Nonperforming assets not guaranteed by U.S. government agencies were relatively consistent compared to December 31, 2019. Potential problem loans increased $132 million while other loans especially mentioned increased $56 million. Net charge-offs were $17.2 million or 0.31 percent of average loans on an annualized basis for the first quarter of 2020, compared to $12.5 million or 0.22 percent of average loans on an annualized basis for the fourth quarter of 2019.
•
Period-end outstanding loan balances totaled $22.5 billion at March 31, 2020, an increase of $713 million over December 31, 2019. Average loan balances decreased $293 million to $21.9 billion at March 31, 2020.
•
Period-end deposits were $29.2 billion at March 31, 2020, a $1.6 billion increase compared to December 31, 2019. Interest-bearing transaction deposits increased $1.2 billion while demand deposit balances increased $360 million. Average deposits increased $1.1 billion, including a $1.5 billion increase in interest-bearing deposits partially offset by a $380 million decrease in demand deposits. Strong deposit growth was driven by a combination of our continued focus on growing core customer deposits, inflows from external money funds and seasonal inflows.
•
The common equity Tier 1 capital ratio at March 31, 2020 was 10.98 percent. Other regulatory capital ratios were Tier 1 capital ratio, 10.98 percent, total capital ratio, 12.65 percent, and leverage ratio, 8.15 percent. We have elected to implement relief afforded by the CARES Act, which allows us to defer a portion of the impact to regulatory capital impact resulting from our adoption of CECL over the next two years, followed by a phase out of that deferral over the following three years. At December 31, 2019, the common equity Tier 1 capital ratio was 11.39 percent, the Tier 1 capital ratio was 11.39 percent, total capital ratio was 12.94 percent, and leverage ratio was 8.40 percent.
•
The company repurchased 442,000 shares at an average price of $75.52 per share in the first quarter of 2020 and 280,000 shares at an average price of $81.59 in the fourth quarter of 2019. We view share buybacks opportunistically, but within the context of maintaining our strong capital position.
•
The Company paid a regular cash dividend of $35.9 million or $0.51 per common share during the first quarter of 2020. On April 28, 2020, the board of directors approved a quarterly cash dividend of $0.51 per common share payable on or about May 27, 2020 to shareholders of record as of May 11, 2020.

- 2 -


Critical Accounting Policies & Estimates

The Consolidated Financial Statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The Company's accounting policies are more fully described in Note 1 of the Consolidated Financial Statements included in the 2019 Form 10-K. Management makes significant assumptions and estimates in the preparation of the Consolidated Financial Statements and accompanying notes in conformity with GAAP that may be highly subjective, complex and subject to variability. Actual results could differ significantly from these assumptions and estimates. The following discussion represents significant changes to critical accounting policies and estimates during 2020 in the most critical areas where these assumptions and estimates could affect the financial condition, results of operations and cash flows of the Company. Significant changes to critical accounting policies and estimates have been discussed with the appropriate committees of the Board of Directors.

Allowance for Loan Losses and Accrual for Off-Balance Sheet Credit Risk from Loan Commitments

The allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments represent the portion of amortized cost basis of loans and related unfunded commitments we do not expect to collect over the asset’s contractual life, considering past events, current conditions, as well as reasonable and supportable forecasts of future economic conditions. Determining appropriateness of the allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments requires management judgment about effects of uncertain matters, resulting in a subjective calculation which contains a certain amount of imprecision. Because of the subjective forward-looking nature of the calculation, changes in these measures may not directly correlate with actual economic events. In future periods, management judgment may consider new or changed information which may cause significant changes in these allowances in those future periods.

As of January 1, 2020 BOK Financial’s accounting policies have changed significantly with the adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Update No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Assets Measured at Amortized Cost ("ASU 2016-13" or "CECL"). Prior years are not restated. Prior to January 1, 2020, general allowances and nonspecific allowances were based on incurred credit losses. See Note 4 to the Consolidated Financial Statements for the description of the expected credit losses calculation of the allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments.

For the majority of risk-graded loans, the accruing loan’s expected credit loss estimate is sensitive to management judgment, particularly probability of default and loss given default assumptions, changes in specific macroeconomic factor forecasts, the probability weight assigned to each economic scenario, and judgmental allocations for risks otherwise not captured in the calculation.

Probability of default and loss given default measurements are based on historical data that may not be a good predictor of future performance or actual losses. Probability of default is based on risk grades, a subjective measurement of the risk of a loan. This subjective assessment of risk may not reflect actual risk of loss.

Other subjective measures include the forecast for each relevant economic loss driver and the probability weighting of economic scenarios, both of which are overseen by a senior management committee with members independent of the allowance process. Determining appropriateness of the allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments requires management judgment about effects of uncertain matters which may be reflected as industry or product judgmental allocations or nonspecific allowances. This results in a subjective calculation which is inherently imprecise.

Although the resulting expected credit loss estimate represents management’s best estimates at the time, actual credit losses will differ from management’s estimate. Portfolio composition will change over time, actual economic conditions will differ from probability-weighted assumptions, borrower-specific circumstances will change, as well as other factors. Differences between actual losses and management's estimates may materially affect the Company's results of operations.

- 3 -


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 $264.1 million for the first quarter of 2020 and $280.6 million in the first quarter of 2019. Net purchase accounting discount accretion was $4.1 million in the first quarter of 2020 and $7.8 million in the first quarter of 2019. 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 2.80 percent for the first quarter of 2020, compared to 3.30 percent for the first quarter of 2019. The tax-equivalent yield on earning assets was 3.73 percent, a decrease of 73 basis points compared to the first quarter of 2019. The Federal Reserve decreased the federal funds rate a total of 225 basis points since the middle of 2019. Three 25 basis point cuts were made in the second half of 2019 and an additional 150 basis points in emergency cuts were made in March 2020 in response to the economic environment resulting from the COVID-19 pandemic. The latest reductions reduced the federal funds rate to nearly zero. The impact from these latest cuts will more fully be felt in the second quarter. Loan yields decreased 76 basis points to 4.50 percent, primarily as a result of the decrease in short-term interest rates. The yield on trading securities decreased 99 basis points to 2.89 percent. The yield on interest-bearing cash and cash equivalents decreased 123 basis points to 1.33 percent. The available for sale securities portfolio yield decreased 9 basis points to 2.48 percent and the yield on fair value option securities decreased 95 basis points to 2.67 percent.

Funding costs decreased 47 basis points compared to the first quarter of 2019. The cost of other borrowed funds decreased 107 basis points and the cost of interest-bearing deposits decreased 6 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 26 basis points for the first quarter of 2020, a decrease of 24 basis points compared to the first quarter of 2019.
 
Average earning assets for the first quarter of 2020 increased $4.0 billion or 12 percent over the first quarter of 2019. The average balance of available for sale securities, which consists largely of residential and commercial mortgage-backed securities guaranteed by U.S. government agencies, increased $2.8 billion. We purchase securities to supplement earnings and to manage interest rate risk. We have increased the size of our bond portfolio in order to reduce our exposure to falling short-term interest rates. Fair value option securities, which we hold as an economic hedge against changes in the fair value of our mortgage servicing rights, increased $1.2 billion. Average loans, net of allowance for loan losses, increased $133 million. Interest-bearing cash and cash equivalent balances increased $184 million. Trading securities balances decreased $278 million. Receivables from unsettled securities sales, primarily related to our U.S. agency residential mortgage-backed trading operations, increased $1.8 billion. Growth in average earning assets and non-interest bearing receivables was primarily funded by an increase in average deposits and other borrowed funds.

Average deposits increased $3.6 billion compared to the first quarter of 2019 as we have focused on acquiring and growing deposits to enhance liquidity and support balance sheet growth. Interest-bearing deposits increased $4.3 billion while demand deposit balances decreased $755 million. Average borrowed funds increased $1.3 billion over the first quarter of 2019, primarily from federal funds purchased and repurchase agreements.
Tax-equivalent net interest revenue decreased $8.9 million compared to the fourth quarter of 2019. The first quarter of 2020 included $4.1 million of purchase accounting discount accretion while the fourth quarter of 2019 included $5.8 million.

Average earning assets increased $291 million compared to the fourth quarter of 2019. Average available for sale securities increased $331 million as we repositioned the balance sheet for the current rate environment. Fair value option securities balances increased $272 million. Interest-bearing cash and cash equivalents increased $148 million. Average loan balances decreased $293 million. In addition, receivables from unsettled securities sales that support our mortgage trading activities increased $1.1 billion. Growth in average earning assets and non-interest bearing receivables was largely funded by a $1.5 billion increase in average interest-bearing deposits.

- 4 -


Net interest margin was 2.80 percent compared to 2.88 percent in the previous quarter. While the Federal Reserve reduced the federal funds rate in multiple rates cuts in the latter half of 2019 and first quarter of 2020, LIBOR has remained elevated relative to the rate cuts. This, combined with our ability to move deposits costs down, preserved a large portion of our margin.
The yield on average earning assets decreased 20 basis points and the yield on the loan portfolio decreased 25 basis points. The yield on the available for sale securities portfolio decreased 4 basis points and the yield on interest-bearing cash and cash equivalents was down 29 basis points.
Funding costs decreased 21 basis points. The cost of interest-bearing deposits decreased 11 basis points and the cost of other borrowed funds decreased 36 basis points. The benefit to net interest margin from assets funded by non-interest bearing liabilities decreased 9 basis points to 26 basis points, which is the primary component of the 8 basis point decline in net interest margin from the prior quarter.

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. 

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
March 31, 2020 / 2019
 
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
(1,004
)
 
$
905

 
$
(1,909
)
Trading securities
 
(6,935
)
 
(2,534
)
 
(4,401
)
Investment securities
 
(524
)
 
(622
)
 
98

Available for sale securities
 
12,847

 
14,976

 
(2,129
)
Fair value option securities
 
6,471

 
9,205

 
(2,734
)
Restricted equity securities
 
(451
)
 
211

 
(662
)
Residential mortgage loans held for sale
 
(540
)
 
(171
)
 
(369
)
Loans
 
(36,815
)
 
3,314

 
(40,129
)
Total tax-equivalent interest revenue
 
(26,951
)
 
25,284

 
(52,235
)
Interest expense:
 
 
 
 
 
 
Transaction deposits
 
8,153

 
9,759

 
(1,606
)
Savings deposits
 
(34
)
 
7

 
(41
)
Time deposits
 
623

 
424

 
199

Funds purchased and repurchase agreements
 
482

 
7,180

 
(6,698
)
Other borrowings
 
(19,507
)
 
(2,485
)
 
(17,022
)
Subordinated debentures
 
(112
)
 
13

 
(125
)
Total interest expense
 
(10,395
)
 
14,898

 
(25,293
)
Tax-equivalent net interest revenue
 
(16,556
)
 
10,386

 
(26,942
)
Change in tax-equivalent adjustment
 
186

 
 
 
 
Net interest revenue
 
$
(16,742
)
 
 
 
 
1 
Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

- 5 -


Other Operating Revenue

Other operating revenue was $180.3 million for the first quarter of 2020, a $23.0 million increase over the first quarter of 2019 and a $1.7 million increase over the fourth quarter of 2019. Lower mortgage interest rates have positively affected both our brokerage and trading and mortgage banking revenue, leading to increases of $19.2 million and $13.3 million over the first quarter of 2019, respectively, and $6.9 million and $11.8 million over the fourth quarter of 2019, respectively.

Table 2 – Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Dec. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2020
 
2019
 
 
 
 
 
Brokerage and trading revenue
 
$
50,779

 
$
31,617

 
$
19,162

 
61
 %
 
$
43,843

 
$
6,936

 
16
 %
Transaction card revenue
 
21,881

 
20,738

 
1,143

 
6
 %
 
22,548

 
(667
)
 
(3
)%
Fiduciary and asset management revenue
 
44,458

 
43,358

 
1,100

 
3
 %
 
45,021

 
(563
)
 
(1
)%
Deposit service charges and fees
 
26,130

 
28,243

 
(2,113
)
 
(7
)%
 
27,331

 
(1,201
)
 
(4
)%
Mortgage banking revenue
 
37,167

 
23,834

 
13,333

 
56
 %
 
25,396

 
11,771

 
46
 %
Other revenue
 
12,309

 
12,762

 
(453
)
 
(4
)%
 
15,283

 
(2,974
)
 
(19
)%
Total fees and commissions revenue
 
192,724

 
160,552


32,172

 
20
 %
 
179,422


13,302

 
7
 %
Other gains (losses), net
 
(10,741
)
 
2,976

 
(13,717
)
 
N/A

 
(1,649
)
 
(9,092
)
 
N/A

Gain (loss) on derivatives, net
 
18,420

 
4,667

 
13,753

 
N/A

 
(4,644
)
 
23,064

 
N/A

Gain (loss) on fair value option securities, net
 
68,393

 
9,665

 
58,728

 
N/A

 
(8,328
)
 
76,721

 
N/A

Change in fair value of mortgage servicing rights
 
(88,480
)
 
(20,666
)
 
(67,814
)
 
N/A

 
9,297

 
(97,777
)
 
N/A

Gain on available for sale securities, net
 
3

 
76

 
(73
)
 
N/A

 
4,487

 
(4,484
)
 
N/A

Total other operating revenue
 
$
180,319

 
$
157,270

 
$
23,049

 
15
 %
 
$
178,585

 
$
1,734

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 42 percent of total revenue for the first quarter of 2020, 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 falling interest rates resulting in compression in net interest revenue or fiduciary and asset management revenue, may also increase mortgage related trading activities and 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, including the recent impact of the COVID-19 pandemic, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and Trading Revenue

Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage and investment banking, increased $19.2 million or 61 percent compared to the first quarter of 2019.


- 6 -


Trading revenue includes net realized and unrealized gains and losses primarily related to sales of residential mortgage-backed securities guaranteed by U.S. government agencies and related derivative instruments that enable our mortgage-banking customers to manage their market risk. Trading revenue also includes net realized and unrealized gains and losses on municipal securities, asset-backed securities and other financial instruments that we sell to institutional customers, along with changes in the fair value of financial instruments we hold as economic hedges against market risk of our trading securities. Trading revenue was $34.4 million for the first quarter of 2020, a $21.5 million or 166 percent increase compared to the first quarter of 2019. Lower mortgage interest rates increased customer mortgage-backed trading activities. In addition, trading revenue growth reflects a shift in the mix of our to-be-announced residential mortgage-backed securities contracts from our customer hedging program to our trading program.

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 $3.2 million for the first quarter of 2020, a $3.5 million or 52 percent decrease compared to the first quarter of 2019.

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $5.0 million, a $1.2 million increase compared to the first quarter of 2019. Changes in investment banking revenue are primarily related to the timing and volume of completed transactions.
Brokerage and trading revenue increased $6.9 million compared to the previous quarter. Increased revenue of $15.0 million from mortgage trading activity was partially offset by a decrease in the fair value of asset-backed and municipal securities due to widened spreads.

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 $1.1 million or 3 percent compared to the first quarter of 2019. Fiduciary and asset management revenue was relatively consistent with the fourth quarter of 2019. The decline in the fair value of assets was primarily related to the final month in the quarter. As a result, revenues remained strong relative to the decrease in assets. Further, there has been a change in mix from corporate trust to a greater percentage invested in retirement plans, which yields higher margins.

- 7 -


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

Table 3 -- Assets Under Management or Administration
 
Three Months Ended
 
March 31, 2020
 
March 31, 2019
 
December 31, 2019
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
Managed fiduciary assets:
Personal
$
8,796,030

 
$
23,609

 
1.07
%
 
$
8,428,218

 
$
23,276

 
1.10
%
 
$
10,441,048

 
$
24,498

 
0.94
%
Institutional
12,186,588

 
7,347

 
0.24
%
 
14,026,020

 
6,138

 
0.18
%
 
13,512,904

 
7,336

 
0.22
%
Total managed fiduciary assets
20,982,618

 
30,956

 
0.59
%
 
22,454,238

 
29,414

 
0.52
%
 
23,953,952

 
31,834

 
0.53
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-managed assets:
Fiduciary
26,070,483

 
13,132

 
0.20
%
 
23,946,911

 
13,528

 
0.23
%
 
28,398,182

 
12,767

 
0.18
%
Non-fiduciary
13,176,722

 
370

 
0.01
%
 
16,215,999

 
416

 
0.01
%
 
14,250,586

 
420

 
0.01
%
Safekeeping and brokerage assets under administration
15,554,006

 
—

 
—
%
 
16,235,136

 
—

 
—
%
 
16,138,240

 
—

 
—
%
Total non-managed assets
54,801,211

 
13,502

 
0.10
%
 
56,398,046

 
13,944

 
0.10
%
 
58,787,008

 
13,187

 
0.09
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets under management or administration
$
75,783,829

 
$
44,458

 
0.23
%
 
$
78,852,284

 
$
43,358

 
0.22
%
 
$
82,740,960

 
$
45,021

 
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.


A summary of changes in assets under management or administration for the three months ended March 31, 2020 and 2019 follows:

Table 4 -- Changes in Assets Under Management or Administration
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
Beginning balance
 
$
82,740,961

 
$
76,279,777

Net inflows (outflows)
 
(1,846,865
)
 
(989,398
)
Net change in fair value
 
(5,110,267
)
 
3,561,905

Ending balance
 
$
75,783,829

 
$
78,852,284


Mortgage Banking Revenue

Mortgage banking revenue increased $13.3 million or 56 percent compared to the first quarter of 2019. Mortgage loan production volumes increased $435 million or 71 percent as average primary mortgage interest rates have decreased. The gain on sale margin increased 77 basis points to 2.06 percent in the first quarter of 2020 as a rapid decrease in interest rates has led to increased application demand and industry-wide capacity constraints.

Mortgage banking revenue increased $11.8 million or 46 percent compared to the fourth quarter of 2019. Lower mortgage interest rates during the quarter led to an increase in mortgage production of 65 percent. Gain on sale margin improved 61 basis points over the prior quarter.


- 8 -


Table 5 – Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Dec. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2020
 
2019
 
 
 
 
Mortgage production revenue
 
$
21,570

 
$
7,868

 
$
13,702

 
174
 %
 
$
9,169

 
$
12,401

 
135
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
548,956

 
$
510,527

 


 


 
$
855,643

 
 
 
 
Add: Current period end outstanding commitments
 
657,570

 
263,434

 
 
 
 
 
158,460

 
 
 
 
Less: Prior period end outstanding commitments
 
158,460

 
160,848

 
 
 
 
 
379,377

 
 
 
 
Total mortgage production volume
 
$
1,048,066

 
$
613,113

 
$
434,953

 
71
 %
 
$
634,726

 
$
413,340

 
65
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loan refinances to mortgage loans funded for sale
 
57
%
 
30
%
 
2,700
 bps
 
 
 
57
%
 
—

 
 
Gains on sale margin
 
2.06
%
 
1.28
%
 
78
 bps
 
 
 
1.44
%
 
62
 bps
 
 
Primary mortgage interest rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
3.51
%
 
4.37
%
 
(86
) bps
 
 
 
3.70
%
 
(19
) bps
 
 
Period end
 
3.33
%
 
4.06
%
 
(73
) bps
 
 
 
3.74
%
 
(41
) bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue
 
$
15,597

 
$
15,966

 
$
(369
)
 
(2
)%
 
$
16,227

 
$
(630
)
 
(4
)%
Average outstanding principal balance of mortgage loans serviced for others
 
20,416,546

 
21,581,835

 
(1,165,289
)
 
(5
)%
 
20,856,446

 
(439,900
)
 
(2
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average mortgage servicing revenue rates
 
0.31
%
 
0.30
%
 
1
 bp
 
 
 
0.31
%
 
—

 
 

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

Net gains on other assets, securities and derivatives

Other net losses totaled $10.7 million in the first quarter of 2020 compared to other net gains of $3.0 million in the first quarter of 2019. Other net losses were $1.6 million for the fourth quarter of 2019. These fluctuations are primarily related to changes in the fair value of investments related to deferred compensation of $8.5 million that are largely offset by a decrease in deferred compensation expense. The first quarter of 2020 also included a $3.1 million impairment of an energy fund investment.

As discussed in the Market Risk section following, the fair value of our mortgage servicing rights ("MSRs") changes in response to changes in primary mortgage loan rates and other assumptions. We attempt to mitigate the earnings volatility caused by changes in the fair value of MSRs by designating certain financial instruments as an economic hedge. Changes in the fair value of these instruments are generally expected to partially offset changes in the fair value of MSRs.


- 9 -


Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Mar. 31, 2019
Gain (loss) on mortgage hedge derivative contracts, net
 
$
18,371

 
$
(4,714
)
 
$
4,432

Gain (loss) on fair value option securities, net
 
68,393

 
(8,328
)
 
9,665

Gain (loss) on economic hedge of mortgage servicing rights, net
 
86,764

 
(13,042
)
 
14,097

Gain (loss) on change in fair value of mortgage servicing rights
 
(88,480
)
 
9,297

 
(20,666
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue
 
(1,716
)
 
(3,745
)
 
(6,569
)
Net interest revenue on fair value option securities1
 
4,268

 
1,544

 
1,129

Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges
 
$
2,552

 
$
(2,201
)
 
$
(5,440
)
1 
Actual interest earned on fair value option securities less internal transfer-priced cost of funds.


- 10 -


Other Operating Expense

Other operating expense for the first quarter of 2020 totaled $268.6 million, a decrease of $18.5 million compared to the first quarter of 2019 and $20.2 million compared to the fourth quarter of 2019. Operating expenses in the first quarter of 2019 included $12.7 million of CoBiz integration costs, primarily affecting professional fees and personnel compensation. The below fluctuation discussion excludes these costs.

Table 7 – Other Operating Expense
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended Dec. 31, 2019
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2020
 
2019
 
 
 
 
 
Regular compensation
 
$
97,760

 
$
100,650

 
$
(2,890
)
 
(3
)%
 
$
99,991

 
$
(2,231
)
 
(2
)%
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
36,189

 
32,137

 
4,052

 
13
 %
 
40,918

 
(4,729
)
 
(12
)%
Share-based
 
3,108

 
5,162

 
(2,054
)
 
(40
)%
 
3,689

 
(581
)
 
16
 %
Deferred compensation
 
(5,673
)
 
3,911

 
(9,584
)
 
N/A

 
2,630

 
(8,303
)
 
N/A

Total incentive compensation
 
33,624

 
41,210

 
(7,586
)
 
(18
)%
 
47,237

 
(13,613
)
 
(29
)%
Employee benefits
 
24,797

 
27,368

 
(2,571
)
 
(9
)%
 
21,194

 
3,603

 
17
 %
Total personnel expense
 
156,181

 
169,228

 
(13,047
)
 
(8
)%
 
168,422

 
(12,241
)
 
(7
)%
Business promotion
 
6,215

 
7,874

 
(1,659
)
 
(21
)%
 
8,787

 
(2,572
)
 
(29
)%
Charitable contributions to BOKF Foundation
 
—

 
—

 
—

 
N/A

 
2,000

 
(2,000
)
 
N/A

Professional fees and services
 
12,948

 
16,139

 
(3,191
)
 
(20
)%
 
13,408

 
(460
)
 
(3
)%
Net occupancy and equipment
 
26,061

 
29,521

 
(3,460
)
 
(12
)%
 
26,316

 
(255
)
 
(1
)%
Insurance
 
4,980

 
4,839

 
141

 
3
 %
 
5,393

 
(413
)
 
(8
)%
Data processing and communications
 
32,743

 
31,449

 
1,294

 
4
 %
 
31,884

 
859

 
3
 %
Printing, postage and supplies
 
4,272

 
4,885

 
(613
)
 
(13
)%
 
3,700

 
572

 
15
 %
Net losses and operating expenses of repossessed assets
 
1,531

 
1,996

 
(465
)
 
(23
)%
 
2,403

 
(872
)
 
(36
)%
Amortization of intangible assets
 
5,094

 
5,191

 
(97
)
 
(2
)%
 
5,225

 
(131
)
 
(3
)%
Mortgage banking costs
 
10,545

 
9,906

 
639

 
6
 %
 
14,259

 
(3,714
)
 
(26
)%
Other expense
 
8,054

 
6,129

 
1,925

 
31
 %
 
6,998

 
1,056

 
15
 %
Total other operating expense
 
$
268,624

 
$
287,157

 
$
(18,533
)
 
(6
)%
 
$
288,795

 
$
(20,171
)
 
(7
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
5,075

 
5,291

 
(216
)
 
(4
)%
 
5,107

 
(32
)
 
(1
)%
Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

Personnel expense decreased $9.8 million compared to the first quarter of 2019. Regular compensation decreased $2.3 million while we were still working to fully integrate CoBiz in the first quarter of 2019. Incentive compensation decreased $5.5 million. Deferred compensation decreased $9.6 million; however, this is largely offset by a decrease in the value of related investments included in Other gains (losses). Cash based incentive compensation increased $6.1 million due to increased sales activity.
Personnel expense decreased $12.2 million compared the fourth quarter of 2019. Incentive compensation decreased $13.6 million, led by a decrease in deferred compensation. Cash based incentive compensation decreased $4.7 million, primarily due to annual incentives incurred in the fourth quarter of 2019. Regular compensation decreased $2.2 million. The fourth quarter included approximately $2.0 million in severance costs due to realignment of personnel. Employee benefits increased $3.6 million as a seasonal increase in payroll taxes and retirement plan expenses was partially offset by a decrease in employee healthcare costs.

- 11 -


Non-personnel operating expense

Non-personnel operating expense increased $4.0 million over the first quarter of 2019. Data processing and communications expense increased $2.3 million, primarily due to technology project costs. Increases in professional fees and services and other expense were partially offset by a decrease in occupancy and equipment expense.
Non-personnel expense decreased $7.9 million compared to the fourth quarter of 2019. Mortgage banking costs decreased $3.7 million. Decreases in the fair value of mortgage servicing assets reduced the costs of actual payoffs. Business promotion expense decreased $2.6 million due to a seasonal decrease in advertising costs combined with reduced travel costs largely as a result of the current pandemic. The fourth quarter of 2019 included a $2.0 million charitable contribution to the BOKF Foundation, which provides support to many nonprofit partners in our communities.
Income Taxes

The effective tax rate was 21.8 percent for the first quarter of 2020, 21.4 percent for the first quarter of 2019 and 21.5 percent for the fourth quarter of 2019. Income tax expense decreased $13.0 million compared to the fourth quarter of 2019 primarily due to the decrease in net income before tax for the quarter.
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, insurance and investment advisory services in all markets. Wealth Management also underwrites state and municipal securities and engages in brokerage and trading activities.

In addition to our lines of business, we have a Funds Management unit. The primary purpose of this unit is to manage our overall liquidity needs and interest rate risk. Each line of business borrows funds from and provides funds to the Funds Management unit as needed to support their operations. Operating results for Funds Management and other include the effect of interest rate risk positions and risk management activities, securities gains and losses 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.

The value of funds provided by the operating lines of business to the Funds Management unit is also based on rates that approximate wholesale market rates for funds with similar repricing and cash flow characteristics. Market rates are generally based on LIBOR or interest rate swap rates. The funds credit formula applied to deposit products with indeterminate maturities is established based on their repricing characteristics reflected in a combination of the short-term LIBOR rate and a moving average of an intermediate-term swap rate, with an appropriate spread applied to both. Shorter duration products are weighted towards the short-term LIBOR rate and longer duration products are weighted towards the intermediate-term swap rates. The expected duration ranges from 30 days for certain rate-sensitive deposits to five years.

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


- 12 -


As shown in Table 8, net income attributable to our lines of business decreased $4.1 million compared to the first quarter of 2019. Net interest revenue decreased by $15.7 million compared to the prior year, primarily due to decreases in the federal funds rate by the Federal Reserve. Other operating revenue increased by $37.4 million and operating expense increased by $27.8 million compared to the first quarter of 2019. Net income attributed to Funds Management and other was affected by the provision for expected credit losses in excess of net charge-offs of $76.6 million in the first quarter of 2020.

Table 8 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Dec. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2020
 
2019
 
 
 
 
 
Commercial Banking
 
$
74,975

 
$
85,521

 
$
(10,546
)
 
(12
)%
 
$
82,019

 
$
(7,044
)
 
(9
)%
Consumer Banking
 
22,921

 
15,337

 
7,584

 
49
 %
 
8,287

 
14,634

 
177
 %
Wealth Management
 
22,573

 
23,719

 
(1,146
)
 
(5
)%
 
22,863

 
(290
)
 
(1
)%
Subtotal
 
120,469

 
124,577

 
(4,108
)
 
(3
)%
 
113,169

 
7,300

 
6
 %
Funds Management and other
 
(58,390
)
 
(13,965
)
 
(44,425
)
 
N/A

 
28,258

 
(86,648
)
 
N/A

Total
 
$
62,079

 
$
110,612

 
$
(48,533
)
 
(44
)%
 
$
141,427

 
$
(79,348
)
 
(56
)%
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.


- 13 -


Commercial Banking

Commercial Banking contributed $75.0 million to consolidated net income in the first quarter of 2020, a decrease of $10.5 million or 12 percent compared to the first quarter of 2019.

Table 9 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Dec. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2020
 
2019
 
 
 
 
 
Net interest revenue from external sources
 
$
201,902

 
$
204,209

 
$
(2,307
)
 
(1
)%
 
$
219,912

 
$
(18,010
)
 
(8
)%
Net interest expense from internal sources
 
(50,495
)
 
(53,638
)
 
3,143

 
(6
)%
 
(57,672
)
 
7,177

 
(12
)%
Total net interest revenue
 
151,407

 
150,571

 
836

 
1
 %
 
162,240

 
(10,833
)
 
(7
)%
Net loans charged off
 
16,880

 
11,246

 
5,634

 
50
 %
 
11,437

 
5,443

 
48
 %
Net interest revenue after net loans charged off
 
134,527

 
139,325

 
(4,798
)
 
(3
)%
 
150,803

 
(16,276
)
 
(11
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
41,459

 
38,046

 
3,413

 
9
 %
 
43,357

 
(1,898
)
 
(4
)%
Other losses, net
 
(3,239
)
 
(434
)
 
(2,805
)
 
N/A

 
(1,000
)
 
(2,239
)
 
N/A

Other operating revenue
 
38,220

 
37,612

 
608

 
2
 %
 
42,357

 
(4,137
)
 
(10
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
37,020

 
31,546

 
5,474

 
17
 %
 
44,900

 
(7,880
)
 
(18
)%
Non-personnel expense
 
23,732

 
19,081

 
4,651

 
24
 %
 
24,390

 
(658
)
 
(3
)%
Other operating expense
 
60,752

 
50,627

 
10,125

 
20
 %
 
69,290

 
(8,538
)
 
(12
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
111,995

 
126,310

 
(14,315
)
 
(11
)%
 
123,870

 
(11,875
)
 
(10
)%
Gain on financial instruments, net
 
49

 
18

 
31

 
N/A

 
39

 
10

 
N/A

Gain (loss) on repossessed assets, net
 
9

 
(346
)
 
355

 
N/A

 
(126
)
 
135

 
N/A

Corporate expense allocations
 
8,905

 
9,455

 
(550
)
 
(6
)%
 
11,176

 
(2,271
)
 
(20
)%
Income before taxes
 
103,148

 
116,527

 
(13,379
)
 
(11
)%
 
112,607

 
(9,459
)
 
(8
)%
Federal and state income tax
 
28,173

 
31,006

 
(2,833
)
 
(9
)%
 
30,588

 
(2,415
)
 
(8
)%
Net income
 
$
74,975

 
$
85,521

 
$
(10,546
)
 
(12
)%
 
$
82,019

 
$
(7,044
)
 
(9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
24,687,976

 
$
19,937,878

 
$
4,750,098

 
24
 %
 
$
24,346,565

 
$
341,411

 
1
 %
Average loans
 
18,812,015

 
15,988,843

 
2,823,172

 
18
 %
 
19,100,101

 
(288,086
)
 
(2
)%
Average deposits
 
11,907,386

 
8,261,543

 
3,645,843

 
44
 %
 
11,419,558

 
487,828

 
4
 %
Average invested capital
 
2,188,242

 
2,239,846

 
(51,604
)
 
(2
)%
 
2,217,828

 
(29,586
)
 
(1
)%
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 was relatively consistent compared to the prior year. Net interest revenue increased as a result of higher loan volumes, largely from acquired loans. This was partially offset by a decrease in deposit related net interest revenue as the value of deposits was impacted by falling interest rates. Non-earning assets also increased with the allocation of CoBiz goodwill in the second quarter of 2019, further reducing net interest revenue. Net loans charged-off increased $5.6 million.

Fees and commissions revenue increased $3.4 million or 9 percent largely due to an increase in loan syndication fees and deposit services charges. Other losses included an energy fund impairment charge recognized in the first quarter of 2020. Operating expense increased $10.1 million or 20 percent compared to the first quarter of 2019. Personnel expense increased $5.5 million and non-personnel expense increased $4.7 million, primarily due to the allocation of CoBiz operations beginning the second quarter of 2019. Corporate expense allocations decreased $550 thousand or 6 percent compared to the prior year.


- 14 -


The average outstanding balance of loans attributed to Commercial Banking was up $2.8 billion or 18 percent over the first quarter of 2019 to $18.8 billion, largely related to allocation of CoBiz loans to the segments in the second quarter of 2019. 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 $11.9 billion for the first quarter of 2020, a $3.6 billion or 44 percent increase over the first quarter of 2019, primarily related to the allocation of CoBiz deposits to the segments in the second quarter of 2019. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.
Net interest revenue decreased $10.8 million or 7 percent compared to the fourth quarter of 2019 largely due to a decrease in loan volumes combined with a decline in the value of deposits, as short term rates fell, from the Funds Management unit compared to the prior quarter. Fees and commissions revenue decreased $1.9 million, largely due to lower revenue from repossessed oil and gas properties. Operating expense decreased $8.5 million or 12 percent compared to the fourth quarter of 2019 primarily due to a $7.9 million decrease in personnel expense largely due to annual incentive compensation occurring in the fourth quarter of 2019. Non-personnel expense was relatively consistent with the fourth quarter of 2019.
Average loan balances decreased $288 million or 2 percent and average customer deposits increased $488 million or 4 percent over the fourth quarter of 2019.




- 15 -


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.

Consumer Banking contributed $22.9 million to consolidated net income for the first quarter of 2020, an increase of $7.6 million over the first quarter of 2019. Improved performance by Consumer Banking was largely due to the effect of lower mortgage interest rates, which has increased mortgage banking activity and related revenue. Further, increased effectiveness of the economic hedge of the fair value of mortgage servicing rights improved income before taxes by $4.9 million.

Table 10 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Dec. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2020
 
2019
 
 
 
 
 
Net interest revenue from external sources
 
$
25,876

 
$
22,475

 
$
3,401

 
15
 %
 
$
24,325

 
$
1,551

 
6
 %
Net interest revenue from internal sources
 
18,056

 
28,627

 
(10,571
)
 
(37
)%
 
18,851

 
(795
)
 
(4
)%
Total net interest revenue
 
43,932

 
51,102

 
(7,170
)
 
(14
)%
 
43,176

 
756

 
2
 %
Net loans charged off
 
1,256

 
1,085

 
171

 
16
 %
 
1,617

 
(361
)
 
(22
)%
Net interest revenue after net loans charged off
 
42,676

 
50,017

 
(7,341
)
 
(15
)%
 
41,559

 
1,117

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
55,062

 
42,821

 
12,241

 
29
 %
 
44,884

 
10,178

 
23
 %
Other losses, net
 
—

 
(73
)
 
73

 
N/A

 
(165
)
 
165

 
N/A

Other operating revenue
 
55,062

 
42,748

 
12,314

 
29
 %
 
44,719

 
10,343

 
23
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
23,620

 
24,336

 
(716
)
 
(3
)%
 
24,139

 
(519
)
 
(2
)%
Non-personnel expense
 
31,173

 
29,485

 
1,688

 
6
 %
 
35,563

 
(4,390
)
 
(12
)%
Total other operating expense
 
54,793

 
53,821

 
972

 
2
 %
 
59,702

 
(4,909
)
 
(8
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
42,945

 
38,944

 
4,001

 
10
 %
 
26,576

 
16,369

 
62
 %
Gain (loss) on financial instruments, net
 
86,764

 
14,097

 
72,667

 
N/A

 
(13,042
)
 
99,806

 
N/A

Change in fair value of mortgage servicing rights
 
(88,480
)
 
(20,666
)
 
(67,814
)
 
N/A

 
9,297

 
(97,777
)
 
N/A

Gain on repossessed assets, net
 
13

 
103

 
(90
)
 
N/A

 
86

 
(73
)
 
N/A

Corporate expense allocations
 
10,487

 
11,900

 
(1,413
)
 
(12
)%
 
11,798

 
(1,311
)
 
(11
)%
Income before taxes
 
30,755

 
20,578

 
10,177

 
49
 %
 
11,119

 
19,636

 
177
 %
Federal and state income tax
 
7,834

 
5,241

 
2,593

 
49
 %
 
2,832

 
5,002

 
177
 %
Net income
 
$
22,921

 
$
15,337

 
$
7,584

 
49
 %
 
$
8,287

 
$
14,634

 
177
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
9,850,853

 
$
8,371,683

 
$
1,479,170

 
18
 %
 
$
9,772,710

 
$
78,143

 
1
 %
Average loans
 
1,711,703

 
1,750,642

 
(38,939
)
 
(2
)%
 
1,730,467

 
(18,764
)
 
(1
)%
Average deposits
 
6,869,481

 
6,544,665

 
324,816

 
5
 %
 
6,974,453

 
(104,972
)
 
(2
)%
Average invested capital
 
274,384

 
302,195

 
(27,811
)
 
(9
)%
 
288,216

 
(13,832
)
 
(5
)%
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.


- 16 -


Net interest revenue from Consumer Banking activities declined by $7.2 million or 14 percent compared to the the first quarter of 2019. A decrease in the yield on deposits sold to our Funds Management unit was partially offset by an increase in the volume of securities used as an economic hedge of the fair value of mortgage servicing rights. Average consumer deposits grew $325 million over the first quarter of 2019 with demand deposit balances increasing $218 million or 11 percent, largely due to the allocation of acquired deposits.

Fees and commissions revenue increased $12.2 million or 29 percent over the first quarter of 2019. Lower mortgage interest rates increased mortgage loan origination volumes. Mortgage production volume increased $435 million or 71 percent and gain on sale margin increased 77 basis points. Operating expense increased by $972 thousand or 2 percent. Corporate expense allocations were $1.4 million or 12 percent lower than the prior year.

Changes in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income for the first quarter of 2020 by $1.7 million compared to a $6.6 million decrease in pre-tax net income in the first quarter of 2019.
Net interest revenue from Consumer Banking activities increased $756 thousand or 2 percent over the fourth quarter of 2019. Operating revenue increased $10.3 million or 23 percent over the fourth quarter of 2019. Revenues from mortgage banking activities increased $11.8 million. Mortgage production volume increased $413 million or 65 percent as a result of lower interest rates. Gain on sale margins climbed to 2.06 percent from 1.44 percent.
Operating expenses decreased $4.9 million, nearly all related to non-personnel expenses. Mortgage banking costs decreased $3.7 million due to lower amortization of mortgage servicing rights. A decrease in professional fees and services was mostly offset by an increase in occupancy and equipment expense.
Average consumer loans decreased $19 million or 1 percent. Average deposits decreased $105 million or 2 percent.


- 17 -


Wealth Management

Wealth Management contributed $22.6 million to consolidated net income in the first quarter of 2020, a decrease of $1.1 million or 5 percent compared to the first quarter of 2019. Increased fees and commissions revenue, primarily from mortgage-backed securities trading, was largely offset by increased operating expenses and decreased net interest revenue.


Table 11 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Dec. 31, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2020
 
2019
 
 
 
 
 
Net interest revenue from external sources
 
$
14,366

 
$
21,486

 
$
(7,120
)
 
(33
)%
 
$
10,224

 
$
4,142

 
41
 %
Net interest revenue from internal sources
 
4,538

 
6,770

 
(2,232
)
 
(33
)%
 
11,602

 
(7,064
)
 
(61
)%
Total net interest revenue
 
18,904

 
28,256

 
(9,352
)
 
(33
)%
 
21,826

 
(2,922
)
 
(13
)%
Net loans charged off (recovered)
 
(48
)
 
(119
)
 
71

 
(60
)%
 
(100
)
 
52

 
(52
)%
Net interest revenue after net loans charged off (recovered)
 
18,952

 
28,375

 
(9,423
)
 
(33
)%
 
21,926

 
(2,974
)
 
(14
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
97,881

 
73,256

 
24,625

 
34
 %
 
92,729

 
5,152

 
6
 %
Other gains, net
 
—

 
158

 
(158
)
 
N/A

 
68

 
(68
)
 
N/A

Other operating revenue
 
97,881

 
73,414

 
24,467

 
33
 %
 
92,797

 
5,084

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
56,443

 
43,991

 
12,452

 
28
 %
 
54,980

 
1,463

 
3
 %
Non-personnel expense
 
21,749

 
17,516

 
4,233

 
24
 %
 
19,708

 
2,041

 
10
 %
Other operating expense
 
78,192

 
61,507

 
16,685

 
27
 %
 
74,688

 
3,504

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
38,641

 
40,282

 
(1,641
)
 
(4
)%
 
40,035

 
(1,394
)
 
(3
)%
Corporate expense allocations
 
8,265

 
8,360

 
(95
)
 
(1
)%
 
9,296

 
(1,031
)
 
(11
)%
Income before taxes
 
30,383

 
31,922

 
(1,539
)
 
(5
)%
 
30,741

 
(358
)
 
(1
)%
Federal and state income tax
 
7,810

 
8,203

 
(393
)
 
(5
)%
 
7,878

 
(68
)
 
(1
)%
Net income
 
$
22,573

 
$
23,719

 
$
(1,146
)
 
(5
)%
 
$
22,863

 
$
(290
)
 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
12,723,412

 
$
9,328,986

 
$
3,394,426

 
36
 %
 
$
11,225,207

 
$
1,498,205

 
13
 %
Average loans
 
1,705,735

 
1,448,718

 
257,017

 
18
 %
 
1,667,278

 
38,457

 
2
 %
Average deposits
 
7,623,986

 
5,659,771

 
1,964,215

 
35
 %
 
7,301,391

 
322,595

 
4
 %
Average invested capital
 
288,264

 
265,572

 
22,692

 
9
 %
 
279,782

 
8,482

 
3
 %

Net interest revenue decreased $9.4 million or 33 percent compared to the first quarter of 2019, largely due to a decrease in the yield earned on deposits sold to the Funds Management unit. Further, Wealth Management incurred additional funding costs for non-interest bearing receivables related to unsettled securities sales. Average loans attributed to the Wealth Management segment increased $257 million or 18 percent and average deposits increased $2.0 billion or 35 percent, largely due to the allocation of acquired loans and deposits.

Fees and commissions revenue increased $24.6 million or 34 percent over the first quarter of 2019. Brokerage and trading revenue increased $20.2 million due to increased trading activity as a result of lower mortgage interest rates. Trust fees and commissions also increased $2.8 million. Operating expense increased $16.7 million or 27 percent compared to the first quarter of 2019. Personnel expense increased $12.5 million, primarily due to the increase of incentive compensation as a result of higher trading activity. Non-personnel expense increased $4.2 million or 24 percent over the first quarter of 2019, largely related to occupancy and equipment and data processing expenses. Corporate expense allocations decreased $95 thousand or 1 percent compared to the prior year.

- 18 -



Net income for Wealth Management decreased $290 thousand or 1 percent compared to the fourth 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.

Net interest revenue decreased $2.9 million primarily due to lower yields on deposits sold to our Funds Management unit combined with the increased carrying cost on larger unsettled securities receivables. Brokerage and trading revenue increased $5.7 million due to an increase in trading activity and volumes due to favorable interest rate changes. Trading revenue related to mortgage banking activities increased $15.0 and was partially offset by widened spreads in asset-backed and municipal securities. Operating expenses increased $3.5 million, largely due to variable incentive compensation related to revenue growth and an increase in occupancy allocations.

Average loans increased $38 million or 2 percent to $1.7 billion and average deposits increased $323 million or 4 percent to $7.6 billion.
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 March 31, 2020 and December 31, 2019.

We hold an inventory of trading securities in support of sales to a variety of customers, including banks, corporations, insurance companies, money managers and others. Trading securities increased $487 million to $2.1 billion during the first quarter of 2020. 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 relatively unchanged from levels set before our expanded trading activities.

At March 31, 2020, the carrying value of investment (held-to-maturity) securities was $273 million, including a $1.5 million allowance for expected credit losses. The fair value of investment securities was $296 million at March 31, 2020. 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 $12.3 billion at March 31, 2020, a $1.1 billion increase compared to December 31, 2019 as a measure to protect for a down rate environment. At March 31, 2020, 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 March 31, 2020 is 2.4 years. Management estimates the duration extends to 3.7 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.2 years assuming a 100 basis point decline in the current low rate environment.



- 19 -


Loans

The aggregate loan portfolio before allowance for loan losses totaled $22.5 billion at March 31, 2020, up $713 million over December 31, 2019. Growth in commercial loan balances during the first quarter was partially offset by a decrease in loans to individuals.

Table 12 -- Loans
(In thousands)
 
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
4,111,676

 
$
3,973,377

 
$
4,114,269

 
$
3,921,353

 
$
3,705,099

Healthcare
 
3,165,096

 
3,033,916

 
3,032,968

 
2,926,510

 
2,915,885

Services
 
3,955,748

 
3,832,031

 
4,011,089

 
4,105,117

 
4,090,646

General business
 
3,563,455

 
3,192,326

 
3,266,299

 
3,383,928

 
3,250,345

Total commercial
 
14,795,975

 
14,031,650

 
14,424,625

 
14,336,908

 
13,961,975

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Multifamily
 
1,282,457

 
1,265,562

 
1,324,839

 
1,300,372

 
1,210,358

Office
 
962,004

 
928,379

 
1,014,275

 
1,056,306

 
1,033,158

Retail
 
774,198

 
775,521

 
799,169

 
825,399

 
890,685

Industrial
 
728,026

 
856,117

 
873,536

 
828,569

 
767,757

Residential construction and land development
 
138,958

 
150,879

 
135,361

 
141,509

 
149,686

Other commercial real estate
 
564,442

 
457,325

 
478,877

 
557,878

 
549,007

Total commercial real estate
 
4,450,085

 
4,433,783

 
4,626,057

 
4,710,033

 
4,600,651

 
 
 
 
 
 
 
 
 
 
 
Loans to individuals:
 
 

 
 
 
 
 
 
 
 
Residential mortgage
 
1,844,555

 
1,886,378

 
1,925,539

 
1,975,449

 
1,999,312

Residential mortgage guaranteed by U.S. government agencies
 
197,889

 
197,794

 
191,764

 
195,373

 
193,308

Personal
 
1,175,466

 
1,201,382

 
1,117,382

 
1,037,889

 
1,003,734

Total loans to individuals
 
3,217,910

 
3,285,554

 
3,234,685

 
3,208,711

 
3,196,354

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
22,463,970

 
$
21,750,987

 
$
22,285,367

 
$
22,255,652

 
$
21,758,980

 
 
 
 
 
 
 
 
 
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. These 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 $14.8 billion or 66 percent of the loan portfolio at March 31, 2020, a $764 million increase over December 31, 2019. Advances on existing commercial revolving lines of credit represented $751 million of this increase during the first quarter, due to both seasonal factors and customer responses to the COVID-19 pandemic. In addition to being collateralized by customer's assets, revolving lines of credit are generally governed by a borrowing base.


- 20 -


Approximately 79 percent of loans in this segment are located within our geographic footprint, based on collateral location. Loans for which the collateral location is less relevant, such as unsecured loans and reserve-based energy loans are categorized by the borrower's primary operating location. The largest concentration of loans in this segment outside of our footprint is California, totaling 4 percent of the segment.

Supporting the energy industry with loans to producers and other energy-related entities has been a hallmark of the Company since its founding and represents a large portion of our commercial loan portfolio. In addition, energy production and related industries have a significant impact on the economy in our primary markets. Loans collateralized by oil and gas properties are subject to a semi-annual engineering review by our internal staff of petroleum engineers. This review is used as the basis for developing the expected cash flows supporting the loan amount. The projected cash flows are discounted according to risk characteristics of the underlying oil and gas properties. Loans are evaluated to demonstrate with reasonable certainty that crude oil, natural gas and natural gas liquids can be recovered from known oil and gas reservoirs under existing economic and operating conditions at current pricing levels and with existing conventional equipment and operating methods and costs. As part of our evaluation of credit quality, we analyze rigorous stress tests over a range of commodity prices and take proactive steps to mitigate risk when appropriate.

Outstanding energy loans totaled $4.1 billion or 18 percent of total loans at March 31, 2020, up $138 million over December 31, 2019. Approximately $3.2 billion of energy loans were to oil and gas producers, growing $65 million over December 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 62 percent of the committed production loans are secured by properties primarily producing oil and 38 percent of the committed production loans are secured by properties primarily producing natural gas.

Loans to midstream oil and gas companies totaled $672 million at March 31, 2020, up $63 million over December 31, 2019. Loans to borrowers that provide services to the energy industry totaled $184 million at March 31, 2020, an increase of $6.4 million. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $71 million, a $3.7 million increase over the prior quarter.

Unfunded energy loan commitments were $2.6 billion at March 31, 2020, a $386 million decrease compared to December 31, 2019 primarily due to increased utilization in the first quarter.

The healthcare sector of the loan portfolio totaled $3.2 billion or 14 percent of total loans. Healthcare loans increased $131 million over December 31, 2019. Healthcare sector loans consist primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Generally we loan to borrowers with a portfolio of multiple facilities that serves to help diversify risks specific to a single facility. Healthcare also includes loans to hospitals and other medical service providers impacted by a deferral of elective procedures to ensure adequate protective equipment and ventilators for those providing acute care to virus patients. The CARES Act does include multiple revenue enhancement measures for both hospitals and skilled nursing facilities as they manage through the risks of the virus.
 
The services sector of the loan portfolio increased $124 million to $4.0 billion or 18 percent of total loans. Service sector loans consist of a large number of loans to a variety of businesses, including Native American tribal and state and local governments, Native American tribal casino operations, educational services, consumer services and commercial services. Approximately $2.0 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. 

General business loans increased $371 million to $3.6 billion or 16 percent of total loans. General business loans consist of $2.0 billion of wholesale/retail loans, $698 million of manufacturing loans, and remainder from other industries.

Our services and general business loans include areas we consider to be more exposed to the economic slowdown as a result of the social distancing measures in place to combat the COVID-19 pandemic such as entertainment and recreation, retail, hotels, churches, airline travel, and higher education that are dependent on large social gatherings to remain profitable. This represents approximately 8 percent of our total portfolio. This risk may be further mitigated as some of these borrowers participate in the Payroll Protection Program and we will continue to monitor these areas closely in the coming months.


- 21 -


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 March 31, 2020, the outstanding principal balance of these loans totaled $5.0 billion, including $2.3 billion of energy loans. 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. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 20 percent to 22 percent over the past five years. The outstanding balance of commercial real estate loans increased $16 million over December 31, 2019.

Approximately 70 percent of loans in this segment are in our geographic footprint based on collateral location. The largest concentration of loans in this segment outside our footprint is Utah, totaling 6.8 percent of the segment, followed by California at 5.9 percent. All other states represent less than 4% individually.

Loans secured by retail facilities are clearly the most vulnerable to the impacts of measures being taken to hinder the spread of the virus, the extent of which is dependent upon the duration of various governmental orders and adjustments in consumer behavior after these orders are lifted. While office and multifamily may also be impacted, we believe our geographic footprint will help in the long term because of strong in-migration over time.
Loans to individuals

Loans to individuals include residential mortgage and personal loans. Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. These loans are secured by a first or second mortgage on the customer's primary residence. These loans are made in accordance with underwriting policies we believe to be conservative and are fully documented. Loans may be individually underwritten or credit scored based on size and other criteria. Credit scoring is assessed based on significant credit characteristics including credit history, residential and employment stability.

In general, we sell the majority of our conforming fixed rate 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. Home equity loans are primarily first-lien and fully amortizing.

Residential mortgage, which includes home equity loans, 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.

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.

Approximately 94 percent of the loans in this segment are secured by collateral located within our geographical footprint. Loans for which the collateral location is less relevant, such as unsecured loans are categorized by the borrower’s primary operating location.

- 22 -



Residential mortgage loans guaranteed by U.S. government agencies have limited credit exposure because of the agency guarantee. This amount includes residential mortgage loans previously sold into GNMA mortgage pools that the Company may repurchase when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet.

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 Oklahoma market.


- 23 -


Table 13-- Loans Managed by Primary Geographical Market
(In thousands)

 
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
Texas:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
6,350,690

 
$
6,174,894

 
$
6,220,227

 
$
5,877,265

 
$
5,754,018

Commercial real estate
 
1,296,266

 
1,259,117

 
1,292,116

 
1,341,609

 
1,344,810

Loans to individuals
 
756,634

 
727,175

 
749,361

 
673,463

 
662,721

Total Texas
 
8,403,590

 
8,161,186

 
8,261,704

 
7,892,337

 
7,761,549

 
 
 
 
 
 
 
 
 
 
 
Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
3,886,086

 
3,454,825

 
3,690,100

 
3,762,234

 
3,551,054

Commercial real estate
 
593,473

 
631,026

 
679,786

 
717,970

 
665,190

Loans to individuals
 
1,788,518

 
1,854,864

 
1,753,698

 
1,786,162

 
1,792,188

Total Oklahoma
 
6,268,077

 
5,940,715

 
6,123,584

 
6,266,366

 
6,008,432

 
 
 
 
 
 
 
 
 
 
 
Colorado:
 
 
 
 
 
 
 
 
 
 
Commercial
 
2,181,309

 
2,169,598

 
2,247,798

 
2,325,742

 
2,231,703

Commercial real estate
 
955,608

 
927,826

 
975,066

 
1,023,410

 
957,348

Loans to individuals
 
268,674

 
276,939

 
303,605

 
314,317

 
307,534

Total Colorado
 
3,405,591

 
3,374,363

 
3,526,469

 
3,663,469

 
3,496,585

 
 
 
 
 
 
 
 
 
 
 
Arizona:
 
 
 
 
 
 
 
 
 
 
Commercial
 
1,396,582

 
1,307,073

 
1,276,534

 
1,330,415

 
1,335,140

Commercial real estate
 
714,161

 
728,832

 
771,425

 
761,243

 
791,466

Loans to individuals
 
181,821

 
186,539

 
170,815

 
168,019

 
160,848

Total Arizona
 
2,292,564

 
2,222,444

 
2,218,774

 
2,259,677

 
2,287,454

 
 
 
 
 
 
 
 
 
 
 
Kansas/Missouri:
 
 
 
 
 
 
 
 
 
 
Commercial
 
556,255

 
527,872

 
566,969

 
602,836

 
667,859

Commercial real estate
 
310,799

 
322,541

 
374,795

 
331,443

 
327,870

Loans to individuals
 
116,734

 
131,069

 
146,522

 
155,453

 
157,391

Total Kansas/Missouri
 
983,788

 
981,482

 
1,088,286

 
1,089,732

 
1,153,120

 
 
 
 
 
 
 
 
 
 
 
New Mexico:
 
 
 
 
 
 
 
 
 
 
Commercial
 
327,164

 
305,320

 
335,409

 
350,520

 
342,915

Commercial real estate
 
434,150

 
402,148

 
374,331

 
385,058

 
371,416

Loans to individuals
 
87,110

 
90,257

 
92,270

 
92,626

 
96,391

Total New Mexico
 
848,424

 
797,725

 
802,010

 
828,204

 
810,722

 
 
 
 
 
 
 
 
 
 
 
Arkansas:
 
 
 
 
 
 
 
 
 
 
Commercial
 
97,889

 
92,068

 
87,588

 
87,896

 
79,286

Commercial real estate
 
145,628

 
162,293

 
158,538

 
149,300

 
142,551

Loans to individuals
 
18,419

 
18,711

 
18,414

 
18,671

 
19,281

Total Arkansas
 
261,936

 
273,072

 
264,540

 
255,867

 
241,118

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
22,463,970

 
$
21,750,987

 
$
22,285,367

 
$
22,255,652

 
$
21,758,980



- 24 -


Off-Balance Sheet Commitments

We enter into certain off-balance sheet arrangements in the normal course of business as shown in Table 14. Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower’s financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

We have off-balance sheet commitments related to certain residential mortgage loans sold into mortgage-backed securities as part of our mortgage banking activities. We retain off-balance sheet credit risk related to losses in excess of amounts guaranteed by the U.S. Department of Veteran's Affairs ("VA"). We also have off-balance sheet credit risk related to certain residential mortgage loans primarily originated under community development loan programs that were sold to a U.S. government agency with full recourse prior to 2007. We are obligated to repurchase these loans for the life of these loans in the event of foreclosure for the unpaid principal and interest at the time of foreclosure. The majority of our conforming fixed rate loan originations are sold in the secondary market and we only retain repurchase obligations under standard underwriting representations and warranties.

Table 14 – Off-Balance Sheet Credit Commitments
(In thousands)
 
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
Loan commitments
 
$
9,960,678

 
$
11,065,649

 
$
11,259,366

 
$
11,411,819

 
$
12,243,886

Standby letters of credit
 
683,516

 
645,505

 
712,944

 
698,527

 
720,451

Unpaid principal balance of residential mortgage loans sold with recourse
 
86,336

 
88,808

 
92,139

 
93,606

 
94,938

Unpaid principal balance of residential mortgage loans transferred into mortgage-backed securities guaranteed by U.S. Dept. of Veteran's Affairs
 
3,217,567

 
3,375,451

 
3,472,375

 
3,568,408

 
3,604,005

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.


- 25 -


Derivative contracts are carried at fair value. At March 31, 2020, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $929 million compared to $302 million at December 31, 2019. At March 31, 2020, the net fair value of our derivative contracts included $482 million for energy contracts, $313 million for foreign exchange contracts and $132 million for interest rate swaps. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $893 million at March 31, 2020 and $291 million at December 31, 2019.

At March 31, 2020, total derivative assets were reduced by $414 million of cash collateral received from counterparties and total derivative liabilities were reduced by $123 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement.

A table showing the notional and fair value of derivative assets and liabilities on both a gross and net basis is presented in Note 3 to the Consolidated Financial Statements.

The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor at March 31, 2020 follows in Table 15.

Table 15 -- Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
277,987

Banks and other financial institutions
 
183,267

Exchanges and clearing organizations
 
53,106

Fair value of customer risk management program asset derivative contracts, net
 
$
514,360

 
At March 31, 2020, our largest derivative exposure was to a clearing organization for energy contracts, net of cash margin, of $53 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 $8.52 per barrel of oil would not be great enough to create a scenario in which we are owed by our customers. This is due to the price of oil being within the weighted average fixed price of the portfolio. Rather, we would be owed by the counterparties, however, due to our margining status with counterparties, one would not see any impact here. An increase in prices equivalent to $31.66 per barrel of oil would not yet create a scenario in which we are owed by customers as the price of oil would still be within the weighted average fixed price of the portfolio. Further increases in price to the equivalent of $45.95 per barrel of oil would increase the fair value of our derivative assets by $148 million with lending customers comprising the bulk of the assets. Liquidity requirements of this program may also be affected by our credit rating. At March 31, 2020, 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 March 31, 2020, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.

- 26 -


Summary of Credit Loss Experience

Table 16 -- Summary of Credit Loss Experience
(In thousands)

 
Three Months Ended Mar. 31, 2020
Allowance for loan losses:
 
Beginning balance
$
210,759

CECL transition adjustment1
25,809

Beginning balance, adjusted
236,568

Loans charged off
(18,917
)
Recoveries of loans previously charged off
1,696

Net loans charged off
(17,221
)
Provision for credit losses
95,964

Ending balance
315,311

 
 
Accrual for off-balance sheet credit risk from unfunded loan commitments:
 
Beginning balance
1,585

CECL transition adjustment
23,552

Beginning balance, adjusted
25,137

Provision for credit losses
3,377

Ending balance
28,514

 
 
Accrual for off-balance sheet credit risk associated with mortgage banking activities:
 
Beginning balance
4,820

CECL transition adjustment
10,915

Beginning balance, adjusted
15,735

Loans charged off
(55
)
Provision for credit losses
(6,020
)
Ending balance
9,660

 
 
Allowance for credit losses related to held-to-maturity (investment) securities:
 
Beginning balance
—

CECL transition adjustment
1,052

Beginning balance, adjusted
1,052

Provision for credit losses
450

Ending balance
1,502

 
 
Total provision for credit losses
93,771

 
 
Net charge-offs (recoveries) (annualized) to average loans
0.31
%
Recoveries to gross charge-offs
8.97
%
Provision for loan losses (annualized) to average loans
1.71
%
Allowance for loan losses to loans outstanding at period-end
1.40
%
Accrual for unfunded loan commitments to loan commitments
0.29
%
Combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments to loans outstanding at period-end
1.53
%
1 
Included $1.3 million related to measurement changes to the allowance attributed to outstanding loan balances and $24.5 million related to recognition of expected credit losses on acquired loans.

- 27 -



 
 
Three Months Ended
 
 
Dec. 31 2019
 
Sept. 30 2019
 
June 30, 2019
 
Mar. 31 2019
Allowance for loan losses:
 
 
 
 
 
 
 
 
Beginning balance
 
$
204,432

 
$
202,534

 
$
205,340

 
$
207,457

Loans charged off
 
(14,268
)
 
(11,707
)
 
(13,227
)
 
(11,775
)
Recoveries of loans previously charged off
 
1,816

 
1,066

 
5,503

 
1,689

Net loans charged off
 
(12,452
)
 
(10,641
)
 
(7,724
)
 
(10,086
)
Provision for loan losses
 
18,779

 
12,539

 
4,918

 
7,969

Ending balance
 
$
210,759

 
$
204,432

 
$
202,534

 
$
205,340

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 

Beginning balance
 
$
1,364

 
$
1,903

 
$
1,821

 
$
1,790

Provision for off-balance sheet credit losses
 
221

 
(539
)
 
82

 
31

Ending balance
 
$
1,585

 
$
1,364

 
$
1,903

 
$
1,821

Total combined provision for credit losses
 
$
19,000

 
$
12,000

 
$
5,000

 
$
8,000

Net charge-offs (recoveries) (annualized) to average loans
 
0.22
%
 
0.19
%
 
0.14
%
 
0.19
%
Provision for losses (annualized) to average loans
 
0.34
%
 
0.21
%
 
0.09
%
 
0.15
%
Recoveries to gross charge-offs
 
12.73
%
 
9.11
%
 
41.60
%
 
14.34
%
Provision for loan losses (annualized) to average loans
 
0.34
%
 
0.21
%
 
0.09
%
 
0.15
%
Allowance for loan losses to loans outstanding at period-end
 
0.97
%
 
0.92
%
 
0.91
%
 
0.94
%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.01
%
 
0.01
%
 
0.02
%
 
0.01
%
Combined allowance for credit losses and off-balance sheet credit risk from unfunded loan commitments to loans outstanding at period-end
 
0.98
%
 
0.92
%
 
0.92
%
 
0.95
%
Allowance for Loan Losses and Accrual for Off-Balance Sheet Credit Risk from Unfunded Loan Commitments
The Company adopted FASB Accounting Standard Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Assets Measured at Amortized Cost ("CECL") on January 1, 2020 through a pre-tax cumulative-effect adjustment to equity of $61.4 million. CECL requires recognition of expected credit losses on assets carried at amortized cost over their expected lives. The previous incurred loss model incorporated only known information as of the balance sheet date. Prior years reported under the incurred loss model have not been restated. CECL uses models to measure the probability of default and loss given default over a 12-month reasonable and supportable forecast period. Models incorporate base case, downside and upside macroeconomic variables such as real gross domestic product ("GDP") growth, civilian unemployment rate and West Texas Intermediate ("WTI") oil prices on a probability weighted basis. See Note 4 to the consolidated financial statements for additional discussion of methodology of allowance for loan losses.
The provision for credit losses was $93.8 million for the first quarter of 2020, primarily due to $99.3 million related to lending activity. Changes in our reasonable and supportable forecasts of macroeconomic variables, primarily due to the impact of the COVID-19 pandemic, oil price declines, and other assumptions, required a provision of $66.2 million. All other changes totaled $33.1 million, which included $7.5 million related to loan growth, $8.4 million related to changes in impairment, risk grading and other portfolio changes, and net charge-offs of $17.2 million.

Our base case reasonable and supportable forecast includes a 20 percent decrease in GDP and an 8.3 percent civilian unemployment rate in the second quarter of 2020. Our forward twelve month forecast through the first quarter of 2021 assumes a 4.6 percent decrease in GDP and a 6.5 percent civilian unemployment rate. WTI oil prices are projected to generally follow the NYMEX forward curve that existed at the end of March 2020, $25.10 per barrel for delivery in the second quarter of 2020 and increasing to $34.73 per barrel for delivery in the first quarter of 2021. This scenario is consistent with data and other industry forecasts available during the last week of March 2020.

- 28 -


Our downside reasonable and supportable forecast reflects a more severe and prolonged disruption in economic activity than the base case and includes a 30 percent decrease in GDP and a 9.5 percent civilian unemployment rate in the second quarter of 2020. Our forward twelve month forecast through the first quarter of 2021 assumes a 10.9 percent decrease in GDP and an 8.0 percent civilian unemployment rate. WTI oil prices are projected to range from $19.10 per barrel for delivery in the second quarter of 2020 to $31.73 per barrel for delivery in the first quarter of 2021.

The upside case reflects a more mild and abbreviated disruption in economic activity than the base case, with real GDP declining by 1.6 percent from the second quarter of 2020 to the first quarter of 2021. Other macroeconomic factors in this scenario also reflect this outlook compared to the base case with the civilian unemployment rate reaching a lower peak in the second quarter of 2020 and then recovering more quickly and WTI prices being less adverse.
The allowance for loan losses under CECL totaled $315 million or 1.40 percent of outstanding loans and 199 percent of nonaccruing loans at March 31, 2020, excluding residential mortgage loans guaranteed by U.S. government agencies. The combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was $344 million or 1.53 percent of outstanding loans and 217 percent of nonaccruing loans at March 31, 2020.

The allowance for credit losses attributed to energy was 2.43 percent of outstanding energy loans at March 31. Demand declines in the first quarter related to the COVID-19 pandemic coupled with the OPEC Plus production conflict have led to price declines of current spot and future oil prices. Natural gas prices have not been as significantly impacted with the recent price declines in oil. As we have said in the past, the duration of the downturn is a more significant factor affecting performance than the level of prices. Although current spot and future oil prices have been volatile, if drivers of this decline are short term, meaning less than twelve months, then expected losses in the portfolio will not be overly impactful to the Company.

We also conduct quarterly stress tests of our energy borrowers with more than 50 percent funding on their lines of credit and all criticized loans using a price deck discounted at 20 percent. This stress test helps us identify potential issues, although the most recent test resulted in no surprises once hedging was taken into consideration. Of all the energy customers that we stress test, which makes up 92 percent of production loans outstanding, 95 percent of our customers have some level of hedging in the 12-month range and many of them carry into the 24-month range.

The company recorded a $19.0 million provision for credit losses under the previous incurred loss model in the fourth quarter of 2019. The allowance for loan losses under the incurred loss model was $211 million or 0.97 percent of outstanding loans and 121 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies at December 31, 2019. The combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was $212 million or 0.98 percent of outstanding loans and 121 percent of nonaccruing loans.

Net Loans Charged Off

Net charge-offs of commercial loans were $16.2 million in the first quarter of 2020, primarily related to two previously impaired energy production loans. Net commercial real estate loan charge-offs were $839 thousand and net charge-offs of loans to individuals were $229 thousand. Net charge-offs of loans to individuals include deposit account overdraft losses.

Accrual for Off-Balance Sheet Credit Risk Associated with Mortgage Banking Activities

The accrual for off-balance sheet credit risk associated with mortgage banking activities includes consideration of credit risk related to certain residential mortgage loans sold into mortgage-backed securities in excess of amounts guaranteed by the U.S. Department of Veteran's Affairs ("VA") and mortgage loans originated under community development loan programs that were sold to a U.S. government agency with full recourse.

We use publicly available long-term national data to estimate total loss given default for our off-balance sheet credit risk related to losses in excess of amounts guaranteed by the VA. This result is combined with probability of default output from our mortgage servicing rights model to estimate total expected loss. Then, we estimate the VA's guarantee percentage to determine our portion of the credit risk. Qualitative adjustment may be used, if necessary.

The accrual for off-balance sheet credit risk associated with mortgage banking activities decreased $6.0 million during the first quarter primarily due to a shortening of the expected life of loans due to increased prepayment speeds as a result of decreased mortgage interest rates.


- 29 -


Allowance for Credit Losses Related to Held-to-Maturity (Investment) Securities

The expected credit losses principles apply to all financial assets measured at cost, including our held-to-maturity (investment) debt securities portfolio. Our investment portfolio includes municipal and other tax-exempt securities and other debt securities. Expected credit losses for these assets is based on probability of default and loss given default assumptions that align with similarly graded loans. Qualitative adjustment may be used, if necessary.

- 30 -


Nonperforming Assets

As more fully described in Note 4 to the Consolidated Financial Statements, loans are generally classified as nonaccruing when it becomes probable that we will not collect the full contractual principal and interest. Accruing renegotiated loans guaranteed by U.S. government agencies represent residential mortgage loans that have been modified in troubled debt restructurings. Interest continues to accrue based on the modified terms of the loan and loans may be sold once they become eligible according to U.S. government agency guidelines. Real estate and other repossessed assets are assets acquired in partial or total forgiveness of loans. The assets are carried at the lower of cost as determined by fair value at the date of foreclosure or current fair value, less estimated selling costs. A summary of nonperforming assets follows in Table 17:

Table 17 -- Nonperforming Assets
(In thousands)

 
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
Nonaccruing loans:
 
 

 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
96,448

 
$
91,722

 
$
88,894

 
$
71,632

 
$
35,332

Healthcare
 
4,070

 
4,480

 
5,978

 
16,148

 
18,768

Services
 
8,425

 
7,483

 
6,119

 
10,087

 
9,555

General business
 
9,681

 
11,731

 
10,715

 
25,528

 
26,703

Total commercial
 
118,624

 
115,416

 
111,706

 
123,395

 
90,358

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
8,545

 
27,626

 
23,185

 
21,670

 
21,508

 
 
 
 
 
 
 
 
 
 
 
Loans to individuals:
 
 
 
 
 
 
 
 

 
 

Residential mortgage
 
30,721

 
31,522

 
30,972

 
31,734

 
33,463

Residential mortgage guaranteed by U.S. government agencies
 
5,005

 
6,100

 
6,332

 
6,743

 
6,946

Personal
 
277

 
287

 
271

 
237

 
302

Total loans to individuals
 
36,003

 
37,909

 
37,575

 
38,714

 
40,711

Total nonaccruing loans
 
$
163,172

 
$
180,951

 
$
172,466

 
$
183,779

 
$
152,577

Accruing renegotiated loans guaranteed by U.S. government agencies
 
91,757

 
92,452

 
92,718

 
95,989

 
91,787

Real estate and other repossessed assets
 
36,744

 
20,359

 
21,026

 
16,940

 
17,139

Total nonperforming assets
 
$
291,673

 
$
293,762

 
$
286,210

 
$
296,708

 
$
261,503

Total nonperforming assets excluding those guaranteed by U.S. government agencies
 
$
194,911

 
$
195,210

 
$
187,160

 
$
193,976

 
$
162,770

 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses to nonaccruing loans1,2
 
199.35
%
 
120.54
%
 
123.05
%
 
114.40
%
 
141.00
%
Nonperforming assets to outstanding loans and repossessed assets
 
1.30
%
 
1.35
%
 
1.28
%
 
1.33
%
 
1.20
%
Nonaccruing commercial loans to outstanding commercial loans
 
0.80
%
 
0.82
%
 
0.77
%
 
0.86
%
 
0.65
%
Nonaccruing commercial real estate loans to outstanding commercial real estate loans
 
0.19
%
 
0.62
%
 
0.50
%
 
0.46
%
 
0.47
%
Nonaccruing loans to individuals to outstanding loans to individuals2
 
1.03
%
 
1.03
%
 
1.03
%
 
1.06
%
 
1.12
%
1
Effective January 1, 2020, the Company adopted the required expected credit loss approach for the allowance as required by ASU 2016-13, Financial Instruments - Credit Losses. All periods prior to January 1, 2020 reflect the incurred loss approach in effect at that time.
2
Excludes residential mortgages guaranteed by U.S. government agencies.
 
 
 
 
 
 
 
 
 

- 31 -


Excluding assets guaranteed by U.S. government agencies, nonperforming assets were largely unchanged compared to December 31, 2019. Newly identified nonaccruing loans totaled $30 million, primarily related to a single energy borrower, offset by $8.9 million of payments, $19 million of charge-offs and $18 million of foreclosures, primarily related to single commercial real estate borrower. The Company generally retains nonperforming assets to maximize potential recovery, which may cause future nonperforming assets to decrease more slowly.

A rollforward of nonperforming assets for the three months ended March 31, 2020 follows in Table 18.

Table 18 -- Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
March 31, 2020
 
 
Nonaccruing Loans
 
 
 
 
 
 
 
 
Commercial
 
Commercial Real Estate
 
Loan to Individuals
 
Total
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, Dec. 31, 2019
 
$
115,416

 
$
27,626

 
$
37,909

 
$
180,951

 
$
92,452

 
$
20,359

 
$
293,762

Additions
 
26,689

 
4

 
3,146

 
29,839

 
8,857

 
—

 
38,696

Payments
 
(6,647
)
 
(154
)
 
(2,130
)
 
(8,931
)
 
(914
)
 
—

 
(9,845
)
Charge-offs
 
(16,615
)
 
(886
)
 
(1,416
)
 
(18,917
)
 
—

 
—

 
(18,917
)
Net gains (losses) and write-downs
 
—

 
—

 
—

 
—

 
—

 
3

 
3

Foreclosure of nonperforming loans
 
—

 
(18,045
)
 
(429
)
 
(18,474
)
 
—

 
18,474

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
—

 
—

 
(1,077
)
 
(1,077
)
 
(1,839
)
 
—

 
(2,916
)
Proceeds from sales
 
—

 
—

 
—

 
—

 
(7,143
)
 
(2,092
)
 
(9,235
)
Return to accrual status
 
(219
)
 
—

 
—

 
(219
)
 
—

 
—

 
(219
)
Other, net
 
—

 
—

 
—

 
—

 
344

 
—

 
344

Balance, Mar. 31, 2020
 
$
118,624

 
$
8,545

 
$
36,003

 
$
163,172

 
$
91,757

 
$
36,744

 
$
291,673

 
 
 
 
 
 
 
 
 
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. At foreclosure, these amounts are transferred to claims receivable accounts. These properties will be conveyed to the agencies once applicable criteria have been met. 

Real Estate and Other Repossessed Assets

Real estate and other repossessed assets totaled $37 million at March 31, 2020, composed primarily of $23 million of developed commercial real estate, $5.6 million of undeveloped land primarily zoned for commercial development, $5.3 million of oil and gas properties and $2.9 million of 1-4 family residential properties. Real estate and other repossessed assets totaled $20 million at December 31, 2019.


- 32 -


Liquidity and Capital

Based on the average balances for the first quarter of 2020, 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 first quarter of 2020 totaled $28.2 billion, a $1.1 billion increase over the fourth quarter of 2019. Strong deposit growth was driven by a combination of our continued focus on growing core customer deposits, inflows from external money funds, and seasonal inflows. Interest-bearing transaction account balances increased $1.5 billion and demand deposits decreased $380 million.

Table 19 - Average Deposits by Line of Business
(In thousands)
 
Three Months Ended
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
Commercial Banking
$
11,907,386

 
$
11,419,558

 
$
10,833,057

 
$
10,724,206

 
$
8,261,543

Consumer Banking
6,869,481

 
6,974,453

 
6,983,018

 
6,998,677

 
6,544,665

Wealth Management
7,623,986

 
7,301,391

 
6,590,332

 
6,220,848

 
5,659,771

Subtotal
26,400,853

 
25,695,402

 
24,406,407

 
23,943,731

 
20,465,979

Funds Management and other
1,794,715

 
1,404,838

 
1,293,767

 
1,218,645

 
4,148,500

Total
$
28,195,568

 
$
27,100,240

 
$
25,700,174

 
$
25,162,376

 
$
24,614,479


Acquired deposits were allocated to the lines of business from funds management and other in the second quarter of 2019. Average Commercial Banking deposit balances increased $488 million over the fourth quarter of 2019. Interest-bearing transaction account balances increased $646 million and demand deposit balances decreased $165 million. Commercial customers continue to retain large cash reserves primarily due to a combination of factors including uncertainty about the economic environment and potential for growth, lack of preferable liquid alternatives and a desire to minimize deposit service charges through the earnings credit. The earnings credit is a non-cash method that enables commercial customers to offset deposit service charges based on account balances. Commercial deposit balances may decrease as the economic outlook improves and if short-term rates move higher, enhancing their investment alternatives.

Average Consumer Banking deposit balances decreased $105 million compared to the prior quarter. An $83 million decrease in demand deposit balances and a $55 million decrease in interest-bearing transaction deposit balances was partially offset by a $19 million increase in time deposit balances and a $14 million increase in savings account balances.

Average Wealth Management deposits increased $323 million over the fourth quarter of 2019. Interest-bearing transaction account balances were up $432 million. Demand deposit balances decreased $73 million. Time deposit balances decreased $34 million.

Average time deposits for the first quarter of 2020 included $247 million of brokered deposits, a $9.5 million increase compared to the fourth quarter of 2019. Average interest-bearing transaction accounts for the first quarter included $1.3 billion of brokered deposits, a $75 million increase compared to the fourth quarter of 2019.


- 33 -


The distribution of our period end deposit account balances among principal markets follows in Table 20.

Table 20 -- Period End Deposits by Principal Market Area
(In thousands)
 
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
3,669,558

 
$
3,257,337

 
$
3,515,312

 
$
3,279,360

 
$
3,432,239

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
9,955,697

 
8,574,912

 
7,447,799

 
7,020,484

 
6,542,548

Savings
 
329,631

 
306,194

 
308,103

 
307,785

 
309,875

Time
 
1,137,802

 
1,125,446

 
1,198,170

 
1,253,804

 
1,217,371

Total interest-bearing
 
11,423,130

 
10,006,552

 
8,954,072

 
8,582,073

 
8,069,794

Total Oklahoma
 
15,092,688

 
13,263,889

 
12,469,384

 
11,861,433

 
11,502,033

 
 
 
 
 
 
 
 
 
 
 
Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
2,767,399

 
2,757,376

 
2,867,915

 
2,970,340

 
2,964,600

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
2,874,362

 
2,911,731

 
2,589,063

 
2,453,187

 
2,385,001

Savings
 
115,039

 
102,456

 
100,597

 
103,125

 
101,849

Time
 
505,565

 
495,343

 
464,264

 
425,253

 
419,269

Total interest-bearing
 
3,494,966

 
3,509,530

 
3,153,924

 
2,981,565

 
2,906,119

Total Texas
 
6,262,365

 
6,266,906

 
6,021,839

 
5,951,905

 
5,870,719

 
 
 
 
 
 
 
 
 
 
 
Colorado:
 
 
 
 
 
 
 
 
 
 
Demand
 
1,579,764

 
1,729,674

 
1,694,044

 
1,621,820

 
1,897,547

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
1,759,384

 
1,769,037

 
1,910,874

 
1,800,271

 
1,844,632

Savings
 
58,000

 
53,307

 
60,107

 
57,263

 
58,919

Time
 
279,105

 
283,517

 
273,622

 
246,198

 
261,235

Total interest-bearing
 
2,096,489

 
2,105,861

 
2,244,603

 
2,103,732

 
2,164,786

Total Colorado
 
3,676,253

 
3,835,535

 
3,938,647

 
3,725,552

 
4,062,333

 
 
 
 
 
 
 
 
 
 
 
New Mexico:
 
 
 
 
 
 
 
 
 
 
Demand
 
750,052

 
623,722

 
645,698

 
630,861

 
662,362

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
563,891

 
558,493

 
539,260

 
557,881

 
573,203

Savings
 
67,553

 
63,999

 
62,863

 
62,636

 
61,497

Time
 
235,778

 
238,140

 
236,135

 
232,569

 
228,212

Total interest-bearing
 
867,222

 
860,632

 
838,258

 
853,086

 
862,912

Total New Mexico
 
1,617,274

 
1,484,354

 
1,483,956

 
1,483,947

 
1,525,274

 
 
 
 
 
 
 
 
 
 
 

- 34 -


 
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
665,396

 
681,268

 
705,895

 
704,144

 
697,381

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
729,603

 
684,929

 
600,103

 
560,861

 
622,039

Savings
 
8,832

 
10,314

 
12,487

 
11,966

 
12,144

Time
 
47,081

 
49,676

 
44,347

 
43,099

 
44,004

Total interest-bearing
 
785,516

 
744,919

 
656,937

 
615,926

 
678,187

Total Arizona
 
1,450,912

 
1,426,187

 
1,362,832

 
1,320,070

 
1,375,568

 
 
 
 
 
 
 
 
 
 
 
Kansas/Missouri:
 
 
 
 
 
 
 
 
 
 
Demand
 
318,985

 
384,533

 
376,020

 
431,856

 
410,799

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
537,552

 
784,574

 
284,940

 
310,774

 
361,590

Savings
 
12,888

 
12,169

 
11,689

 
13,125

 
13,815

Time
 
19,137

 
17,877

 
19,126

 
19,205

 
19,977

Total interest-bearing
 
569,577

 
814,620

 
315,755

 
343,104

 
395,382

Total Kansas/Missouri
 
888,562

 
1,199,153

 
691,775

 
774,960

 
806,181

 
 
 
 
 
 
 
 
 
 
 
Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
70,428

 
27,381

 
39,513

 
29,176

 
31,624

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
175,803

 
108,076

 
149,506

 
148,485

 
147,964

Savings
 
1,862

 
1,837

 
1,747

 
1,783

 
1,785

Time
 
8,005

 
7,850

 
7,877

 
7,810

 
8,321

Total interest-bearing
 
185,670

 
117,763

 
159,130

 
158,078

 
158,070

Total Arkansas
 
256,098

 
145,144

 
198,643

 
187,254

 
189,694

Total BOK Financial deposits
 
$
29,244,152

 
$
27,621,168

 
$
26,167,076

 
$
25,305,121

 
$
25,331,802


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 $550 million at March 31, 2020. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale and trading securities. Federal Home Loan Bank borrowings are generally short-term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and agency mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $6.5 billion during the quarter, compared to $6.2 billion in the fourth quarter of 2019. On March 15, 2020, the Federal Reserve announced changes to the Discount Window, including narrowing the spread of the primary credit rate relative to the general level of overnight interest to help encourage more active use of the Discount Window by depository institutions. We did increase our collateral at the Discount Window and maintained a modest amount of borrowings in late March.

At March 31, 2020, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $11.4 billion.

A summary of other borrowings for BOK Financial on a consolidated basis follows in Table 21.


- 35 -


Table 21 -- Borrowed Funds
(In thousands)
 
 
 
 
Three Months Ended
March 31, 2020
 
 
 
Three Months Ended
December 31, 2019
 
 
Mar. 31, 2020
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
Dec. 31, 2019
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
1,827,134

 
2,848,816

 
1.25
%
 
2,608,315

 
3,390,528

 
3,746,323

 
1.66
%
 
3,390,528

Repurchase agreements
 
2,756,634

 
967,125

 
0.82
%
 
2,756,634

 
427,822

 
374,287

 
0.61
%
 
427,822

Other borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
 
5,500,000

 
6,474,725

 
1.65
%
 
7,500,000

 
4,500,000

 
6,218,478

 
1.98
%
 
6,200,000

GNMA repurchase liability
 
15,030

 
14,304

 
4.41
%
 
15,030

 
15,417

 
13,287

 
4.36
%
 
15,872

Federal Reserve Bank advances
 
—

 
36,264

 
0.31
%
 
—

 
—

 
—

 
—
%
 
—

Other
 
14,524

 
17,032

 
4.13
%
 
14,524

 
11,638

 
15,429

 
4.22
%
 
34,676

Total other borrowings
 
5,529,554

 
6,542,325

 
1.66
%
 


 
4,527,055

 
6,247,194

 
2.01
%
 


Subordinated debentures1
 
275,942

 
275,932

 
5.30
%
 
275,942

 
275,923

 
275,916

 
5.40
%
 
275,923

Total other borrowed funds and subordinated debentures
 
$
10,389,264

 
$
10,634,198

 
1.57
%
 
 
 
$
8,621,328

 
$
10,643,720

 
1.92
%
 
 
1 Parent Company only.
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 March 31, 2020, cash and interest-bearing cash and cash equivalents held by the parent company totaled $170 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 March 31, 2020, based upon the most restrictive limitations as well as management's internal capital policy, BOKF, NA could declare up to $181 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 March 31, 2020 was $5.0 billion, a $170 million increase over December 31, 2019. Net income less cash dividends paid increased equity $26 million during the first quarter of 2020. The transition adjustment related to the implementation of CECL decreased equity by $47 million. Changes in interest rates resulted in a $226 million increase in accumulated other comprehensive gain over December 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.

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. As of March 31, 2020, 1,308,713 shares have been repurchased under this authorization. The Company repurchased 442,000 shares during the first quarter of 2020 at an average price of $75.52 per share. We view share buybacks opportunistically, but within the context of maintaining our strong capital position.


- 36 -


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 22. 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.

In March 2020, in response to the impact on the financial markets by the COVID-19 pandemic, the banking agencies issued an interim final rule permitting banking organizations that implement CECL the option to delay for two years an estimate of the CECL methodology's effect on regulatory capital, followed by a three-year transition period. The estimate includes the implementation date adjustment as of January 1, 2020 plus an estimate of the impact of the change for a two year period following implementation of CECL. We have elected to delay the regulatory capital impact of the transition in accordance with the interim final rule as of March 31, 2020.

The capital ratios for BOK Financial on a consolidated basis are presented in Table 22.

Table 22 -- Capital Ratios
 
 
Minimum Capital Requirement
 
Capital Conservation Buffer
 
Minimum Capital Requirement Including Capital Conservation Buffer
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Mar. 31, 2019
Risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1
 
4.50
%
 
2.50
%
 
7.00
%
 
10.98
%
 
11.39
%
 
10.71
%
Tier 1 capital
 
6.00
%
 
2.50
%
 
8.50
%
 
10.98
%
 
11.39
%
 
10.71
%
Total capital
 
8.00
%
 
2.50
%
 
10.50
%
 
12.65
%
 
12.94
%
 
12.24
%
Tier 1 Leverage
 
4.00
%
 
N/A

 
4.00
%
 
8.15
%
 
8.40
%
 
8.76
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average total equity to average assets
 
 
 
 
 
 
 
10.73
%
 
10.96
%
 
11.29
%
Tangible common equity ratio
 
 
 
 
 
 
 
8.39
%
 
8.98
%
 
8.64
%

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

Table 23 -- Non-GAAP Measure
(Dollars in thousands)
 
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
5,026,248

 
$
4,855,795

 
$
4,829,016

 
$
4,709,438

 
$
4,522,873

Less: Goodwill and intangible assets, net
 
1,169,898

 
1,173,362

 
1,172,411

 
1,172,564

 
1,177,573

Tangible common equity
 
3,856,350

 
3,682,433

 
3,656,605

 
3,536,874

 
3,345,300

Total assets
 
47,119,162

 
42,172,021

 
43,127,205

 
41,893,073

 
39,882,962

Less: Goodwill and intangible assets, net
 
1,169,898

 
1,173,362

 
1,172,411

 
1,172,564

 
1,177,573

Tangible assets
 
$
45,949,264

 
$
40,998,659

 
$
41,954,794

 
$
40,720,509

 
$
38,705,389

Tangible common equity ratio
 
8.39
%
 
8.98
%
 
8.72
%
 
8.69
%
 
8.64
%


- 37 -


Off-Balance Sheet Arrangements

See Note 4 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 the 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 percent. The results of a decrease in interest rates in the current low-rate environment are not meaningful.

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. 


- 38 -


Table 24 -- Interest Rate Sensitivity
(Dollars in thousands)
 
 
200 bp Increase
 
100 bp Decrease1
 
 
March 31,
 
March 31,
 
 
2020
 
2019
 
2020
 
2019
Anticipated impact over the next twelve months on net interest revenue
 
$
(10,523
)
 
$
(4,451
)
 
N/A
 
$
42,977

 
 
(1.02
)%
 
(0.38
)%
 
N/A
 
(3.70
)%
1 The results of a decrease in the current low-rate environment in 2020 are not meaningful. The results of a 200 basis point decrease in interest rates in the low-rate environment in 2019 were not meaningful, therefore we reported the effect of a 100 basis point decrease.

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 25 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
 
 
March 31,
 
 
2020
 
2019
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
MSR Asset
 
$
36,430

 
$
(18,051
)
 
$
25,936

 
$
(33,750
)
MSR Hedge
 
(27,134
)
 
26,900

 
(31,698
)
 
26,211

Net Exposure
 
9,296

 
8,849

 
(5,762
)
 
(7,539
)

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.


- 39 -


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 26 -- Mortgage Pipeline Sensitivity Analysis
(Dollars in thousands)
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
Average1
 
$
(211
)
 
$
(166
)
 
$
29

 
$
(810
)
Low2
 
582

 
998

 
436

 
(344
)
High3
 
(1,344
)
 
(1,483
)
 
(405
)
 
(1,343
)
Period End
 
(758
)
 
(262
)
 
127

 
(1,013
)
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 $11 million market risk limit for the trading portfolio, net of economic hedges.

Table 27 -- Trading Sensitivity Analysis
(Dollars in thousands)
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
Average1
 
$
(4,663
)
 
$
7,326

 
$
(1,707
)
 
$
1,577

Low2
 
(638
)
 
15,309

 
857

 
3,440

High3
 
(11,506
)
 
2,891

 
(3,665
)
 
(729
)
Period End
 
(5,987
)
 
6,400

 
127

 
(1,013
)
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.


- 40 -


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.
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 Corporation, the financial services industry, the economy generally and the expected or potential impact of the novel coronavirus (COVID-19) pandemic, and the related responses of the government, consumers, and others, on our business, financial condition and results of operations. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “plans,” “projects,” “will,”  “intends,” variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and allowance for credit losses, allowance for uncertain tax positions, accruals for loss contingencies and valuation of mortgage servicing rights involve judgments as to expected events and are inherently forward-looking statements. Assessments that acquisitions and growth endeavors will be profitable are necessary statements of belief as to the outcome of future events based in part on information provided by others which BOK Financial has not independently verified. These various forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions which are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expected, implied or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to changes in government, consumer or business responses to, and ability to treat or prevent further outbreak of, the COVID-19 pandemic, 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. 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.


- 41 -


In this report we may sometimes use non-GAAP financial measures. Please note that although non-GAAP financial measures provide useful insight to analysts, investors and regulators, they should not be considered in isolation or relied upon as a substitute for analysis using GAAP measures. If applicable, we provide GAAP reconciliations for non-GAAP financial measures.



- 42 -


     
Consolidated Statements of Earnings (Unaudited)
 
 
 
 
(In thousands, except share and per share data)
 
Three Months Ended
 
 
March 31,
Interest revenue
 
2020
 
2019
Loans
 
$
243,218

 
$
279,872

Residential mortgage loans held for sale
 
1,123

 
1,663

Trading securities
 
11,760

 
18,695

Investment securities
 
3,121

 
4,034

Available for sale securities
 
69,720

 
56,831

Fair value option securities
 
11,708

 
5,237

Restricted equity securities
 
5,894

 
6,345

Interest-bearing cash and cash equivalents
 
2,393

 
3,397

Total interest revenue
 
348,937

 
376,074

Interest expense
 
 

 
 

Deposits
 
46,159

 
37,417

Borrowed funds
 
37,785

 
56,810

Subordinated debentures
 
3,633

 
3,745

Total interest expense
 
87,577

 
97,972

Net interest revenue
 
261,360

 
278,102

Provision for credit losses
 
93,771

 
8,000

Net interest revenue after provision for credit losses
 
167,589

 
270,102

Other operating revenue
 
 

 
 

Brokerage and trading revenue
 
50,779

 
31,617

Transaction card revenue
 
21,881

 
20,738

Fiduciary and asset management revenue
 
44,458

 
43,358

Deposit service charges and fees
 
26,130

 
28,243

Mortgage banking revenue
 
37,167

 
23,834

Other revenue
 
12,309

 
12,762

Total fees and commissions
 
192,724

 
160,552

Other gains (losses), net
 
(10,741
)
 
2,976

Gain on derivatives, net
 
18,420

 
4,667

Gain on fair value option securities, net
 
68,393

 
9,665

Change in fair value of mortgage servicing rights
 
(88,480
)
 
(20,666
)
Gain on available for sale securities, net
 
3

 
76

Total other operating revenue
 
180,319

 
157,270

Other operating expense
 
 

 
 

Personnel
 
156,181

 
169,228

Business promotion
 
6,215

 
7,874

Professional fees and services
 
12,948

 
16,139

Net occupancy and equipment
 
26,061

 
29,521

Insurance
 
4,980

 
4,839

Data processing and communications
 
32,743

 
31,449

Printing, postage and supplies
 
4,272

 
4,885

Net losses and operating expenses of repossessed assets
 
1,531

 
1,996

Amortization of intangible assets
 
5,094

 
5,191

Mortgage banking costs
 
10,545

 
9,906

Other expense
 
8,054

 
6,129

Total other operating expense
 
268,624

 
287,157

Net income before taxes
 
79,284

 
140,215

Federal and state income taxes
 
17,300

 
29,950

Net income
 
61,984

 
110,265

Net income (loss) attributable to non-controlling interests
 
(95
)
 
(347
)
Net income attributable to BOK Financial Corporation shareholders
 
$
62,079

 
$
110,612

Earnings per share:
 
 

 
 

Basic
 
$
0.88

 
$
1.54

Diluted
 
$
0.88

 
$
1.54

Average shares used in computation:
 
 
 
 
Basic
 
70,123,685

 
71,387,070

Diluted
 
70,130,166

 
71,404,388

Dividends declared per share
 
$
0.51

 
$
0.50


See accompanying notes to consolidated financial statements.

- 43 -


Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands, except share and per share data)
 
 
 
 
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
Net income
 
$
61,984

 
$
110,265

Other comprehensive income before income taxes:
 
 
 
 
Net change in unrealized gain (loss)
 
297,843

 
92,739

Reclassification adjustments included in earnings:
 
 
 
 
Gain on available for sale securities, net
 
(3
)
 
(76
)
Other comprehensive income before income taxes
 
297,840

 
92,663

Federal and state income taxes
 
71,471

 
23,609

Other comprehensive income, net of income taxes
 
226,369


69,054

Comprehensive income
 
288,353

 
179,319

Comprehensive loss attributable to non-controlling interests
 
(95
)
 
(347
)
Comprehensive income attributable to BOK Financial Corp. shareholders
 
$
288,448

 
$
179,666


See accompanying notes to consolidated financial statements.

- 44 -


Consolidated Balance Sheets
(In thousands, except share data)
 
 
Mar. 31, 2020
 
Dec. 31, 2019
 
 
(Unaudited)
 
(Footnote 1)
Assets
 
 
 
 
Cash and due from banks
 
$
670,500

 
$
735,836

Interest-bearing cash and cash equivalents
 
302,577

 
522,985

Trading securities
 
2,110,585

 
1,623,921

Investment securities, net of allowance (fair value: March 31, 2020 – $296,402; December 31, 2019 – $314,402)
 
272,576

 
293,418

Available for sale securities
 
12,694,277

 
11,269,643

Fair value option securities
 
1,703,238

 
1,098,577

Restricted equity securities
 
390,042

 
460,552

Residential mortgage loans held for sale
 
204,720

 
182,271

Loans
 
22,463,970

 
21,750,987

Allowance for loan losses
 
(315,311
)
 
(210,759
)
Loans, net of allowance
 
22,148,659

 
21,540,228

Premises and equipment, net
 
546,093

 
535,519

Receivables
 
207,341

 
231,811

Goodwill
 
1,048,091

 
1,048,091

Intangible assets, net
 
121,807

 
125,271

Mortgage servicing rights
 
110,828

 
201,886

Real estate and other repossessed assets, net of allowance (March 31, 2020 – $11,029; December 31, 2019 – $11,013)
 
36,744

 
20,359

Derivative contracts, net
 
922,716

 
323,375

Cash surrender value of bank-owned life insurance
 
391,006

 
389,879

Receivable on unsettled securities sales
 
2,171,881

 
1,020,404

Other assets
 
1,065,481

 
547,995

Total assets
 
$
47,119,162

 
$
42,172,021

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Liabilities:
 
 
 
 
Noninterest-bearing demand deposits
 
$
9,821,582

 
$
9,461,291

Interest-bearing deposits:
 
 

 
 

Transaction
 
16,596,292

 
15,391,752

Savings
 
593,805

 
550,276

Time
 
2,232,473

 
2,217,849

Total deposits
 
29,244,152

 
27,621,168

Funds purchased and repurchase agreements
 
4,583,768

 
3,818,350

Other borrowings
 
5,529,554

 
4,527,055

Subordinated debentures
 
275,942

 
275,923

Accrued interest, taxes and expense
 
309,236

 
259,701

Derivative contracts, net
 
1,213,445

 
251,128

Due on unsettled securities purchases
 
537,709

 
182,547

Other liabilities
 
391,196

 
372,230

Total liabilities
 
42,085,002

 
37,308,102

Shareholders' equity:
 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: March 31, 2020 – 76,000,985; December 31, 2019 – 75,758,597)
 
5

 
5

Capital surplus
 
1,354,826

 
1,350,995

Retained earnings
 
3,709,019

 
3,729,778

Treasury stock (shares at cost: March 31, 2020 – 5,692,453; December 31, 2019 – 5,178,999)
 
(368,894
)
 
(329,906
)
Accumulated other comprehensive gain
 
331,292

 
104,923

Total shareholders’ equity
 
5,026,248

 
4,855,795

Non-controlling interests
 
7,912

 
8,124

Total equity
 
5,034,160

 
4,863,919

Total liabilities and equity
 
$
47,119,162

 
$
42,172,021


See accompanying notes to consolidated financial statements.

- 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, December 31, 2019
75,759

 
$
5

 
$
1,350,995

 
$
3,729,778

 
5,179

 
$
(329,906
)
 
$
104,923

 
$
4,855,795

 
$
8,124

 
$
4,863,919

Transition adjustment - CECL
—

 
—

 
—

 
(46,696
)
 
—

 
—

 
—

 
(46,696
)
 
—

 
(46,696
)
Balance, January 1, 2020 Adjusted
75,759

 
$
5

 
$
1,350,995

 
$
3,683,082

 
5,179

 
$
(329,906
)
 
$
104,923

 
$
4,809,099

 
$
8,124

 
$
4,817,223

Net income (loss)
—

 
—

 
—

 
62,079

 
—

 
—

 
—

 
62,079

 
(95
)
 
61,984

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
226,369

 
226,369

 
—

 
226,369

Repurchase of common stock
—

 
—

 
—

 
—

 
442

 
(33,380
)
 
—

 
(33,380
)
 
—

 
(33,380
)
Share-based compensation plans:
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock options exercised
10

 
—

 
586

 
—

 
—

 
—

 
—

 
586

 
—

 
586

Non-vested shares awarded, net
232

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
—

 
—

 
—

 
—

 
71

 
(5,608
)
 
—

 
(5,608
)
 
—

 
(5,608
)
Share-based compensation
—

 
—

 
3,245

 
—

 
—

 
—

 
—

 
3,245

 
—

 
3,245

Cash dividends on common stock
—

 
—

 
—

 
(36,142
)
 
—

 
—

 
—

 
(36,142
)
 
—

 
(36,142
)
Capital calls and distributions, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(117
)
 
(117
)
Balance, March 31, 2020
76,001

 
$
5

 
$
1,354,826

 
$
3,709,019

 
5,692

 
$
(368,894
)
 
$
331,292

 
$
5,026,248

 
$
7,912

 
$
5,034,160

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
—

 
—

 
—

 
110,612

 
—

 
—

 
—

 
110,612

 
(347
)
 
110,265

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
69,054

 
69,054

 
—

 
69,054

Repurchase of common stock
—

 
—

 
—

 
—

 
705

 
(60,577
)
 
—

 
(60,577
)
 
—

 
(60,577
)
Share-based compensation plans:
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock options exercised
18

 
—

 
879

 
—

 
—

 
—

 
—

 
879

 
—

 
879

Non-vested shares awarded, net
33

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
—

 
—

 
—

 
—

 
18

 
(1,428
)
 
—

 
(1,428
)
 
—

 
(1,428
)
Share-based compensation
—

 
—

 
5,414

 
—

 
—

 
—

 
—

 
5,414

 
—

 
5,414

Cash dividends on common stock
—

 
—

 
—

 
(36,052
)
 
—

 
—

 
—

 
(36,052
)
 
—

 
(36,052
)
Capital calls and distributions, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,753
)
 
(1,753
)
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

- 46 -


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

 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
61,984

 
$
110,265

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Provision for credit losses
 
93,771

 
8,000

Change in fair value of mortgage servicing rights due to market changes
 
88,480

 
20,666

Change in the fair value of mortgage servicing rights due to principal payments
 
8,019

 
6,583

Net unrealized losses from derivative contracts
 
15,369

 
695

Share-based compensation
 
3,245

 
5,414

Depreciation and amortization
 
23,198

 
19,412

Net amortization of discounts and premiums
 
2,013

 
4,339

Net losses (gains) on financial instruments and other losses (gains), net
 
10,742

 
1,872

Net gain on mortgage loans held for sale
 
(13,278
)
 
(5,640
)
Mortgage loans originated for sale
 
(548,956
)
 
(510,527
)
Proceeds from sale of mortgage loans held for sale
 
548,077

 
507,459

Capitalized mortgage servicing rights
 
(5,441
)
 
(6,188
)
Change in trading and fair value option securities
 
(1,092,249
)
 
(608,232
)
Change in receivables
 
(1,107,130
)
 
(682,957
)
Change in other assets
 
(17,198
)
 
(5,074
)
Change in accrued interest, taxes and expense
 
(7,305
)
 
(18,220
)
Change in other liabilities
 
193,857

 
46,147

Net cash used in operating activities
 
(1,742,802
)
 
(1,105,986
)
Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
19,079

 
23,227

Proceeds from maturities or redemptions of available for sale securities
 
394,205

 
337,822

Purchases of available for sale securities
 
(1,552,914
)
 
(663,193
)
Proceeds from sales of available for sale securities
 
26,894

 
245,259

Change in amount receivable on unsettled available for sale securities transactions
 
(22,113
)
 
31,618

Loans originated, net of principal collected
 
(729,881
)
 
(97,656
)
Net payments on derivative asset contracts
 
(98,215
)
 
(33,781
)
Proceeds from disposition of assets
 
165,282

 
70,379

Purchases of assets
 
(119,785
)
 
(116,692
)
Net cash used in investing activities
 
(1,917,448
)
 
(203,017
)
Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
1,608,360

 
(16,970
)
Net change in time deposits
 
14,624

 
84,828

Net change in other borrowed funds
 
1,747,640

 
1,614,995

Net proceeds on derivative liability contracts
 
82,126

 
36,250

Net change in derivative margin accounts
 
(163,911
)
 
(150,722
)
Change in amount due on unsettled available for sale securities transactions
 
160,211

 
(22,923
)
Issuance of common and treasury stock, net
 
(5,022
)
 
(549
)
Repurchase of common stock
 
(33,380
)
 
(60,577
)
Dividends paid
 
(36,142
)
 
(36,052
)
Net cash provided by financing activities
 
3,374,506

 
1,448,280

Net increase (decrease) in cash and cash equivalents
 
(285,744
)
 
139,277

Cash and cash equivalents at beginning of period
 
1,258,821

 
1,143,424

Cash and cash equivalents at end of period
 
$
973,077

 
$
1,282,701

 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
Cash paid for interest
 
$
87,468

 
$
94,660

Cash paid for taxes
 
$
853

 
$
898

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
18,474

 
$
1,032

Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period
 
$
20,277

 
$
22,970

Conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
5,694

 
$
8,404

Right-of-use assets obtained in exchange for operating lease liabilities
 
$
7,108

 
$
4,209

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 Oklahoma, Bank of Texas, BOK Financial in Arizona, Arkansas, Colorado and Kansas/Missouri, 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 2019 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2019 have been derived from the audited financial statements included in BOK Financial’s 2019 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 three-month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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. The Company adopted the new standard January 1, 2020, through a cumulative effect adjustment to retained earnings. Prior periods were not restated.

Under ASU 2016-13, acquired loans must be reserved in a manner consistent with originated loans while the incurred loss model excluded purchased loans because the loans had been marked to fair value at acquisition. Under ASU 2016-13, the fair value discount will remain in place and be accreted into interest income over the life of any acquired loans in the portfolio.

Another transition adjustment component is related to expected credit losses for residential mortgage loans sold that exceed amounts guaranteed by the U.S. Department of Veterans Affairs as we retain the credit risk for any amounts exceeding the guarantee as well as for recourse loans.

Prior to ASU 2016-13, held-to-maturity non-agency securities carried no reserve for credit losses.

Note 4 disaggregates the transition adjustment for loans and unfunded loan commitments among portfolio segments as well as on-and off-balance sheet reserves.









- 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 the 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. The Company adopted ASU 2019-01 in the first quarter of 2020. Adoption of ASU 2019-01 did not 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 2016-01 include 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. The Company adopted ASU 2019-04 in the first quarter of 2020. Adoption of ASU 2019-04 did not 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. The Company did not elect the fair value option for additional financial instruments.

FASB Accounting Standards Update No. 2019-11, Codification Improvements to Topic 326: Financial Instruments-Credit Losses ("ASU 2019-11")

On November 27, 2019, the FASB issued ASU 2019-11 which revises certain aspects of new guidance on credit losses. Topics addressed include purchased credit-deteriorated assets, transition relief for troubled debt restructurings, disclosure relief for accrued interest receivable, and financial assets secured by collateral maintenance provisions. ASU 2019-11 is effective for the Company for annual reporting periods beginning after December 15, 2019. The Company adopted ASU 2019-11 in the first quarter of 2020. Adoption of ASU 2019-11 did not have a material impact on the Company's financial statements.

FASB Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12")

On December 18, 2019, the FASB issued ASU 2019-12 which simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company for annual reporting periods beginning after December 15, 2020, and interim periods within; however, early adoption is permitted. The Company adopted ASU 2019-12 in the first quarter of 2020. Adoption of ASU 2019-12 did not 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):
 
 
 
March 31, 2020
 
December 31, 2019
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
U.S. government agency debentures
 
$
37,740

 
$
264

 
$
44,264

 
$
6

Residential agency mortgage-backed securities
 
1,922,725

 
26,195

 
1,504,651

 
2,293

Municipal and other tax-exempt securities
 
35,513

 
(289
)
 
26,196

 
60

Asset-backed securities
 
58,278

 
(2,381
)
 
14,084

 
(21
)
Other debt securities
 
56,329

 
(943
)
 
34,726

 
21

Total trading securities
 
$
2,110,585

 
$
22,846

 
$
1,623,921

 
$
2,359


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

 
 
March 31, 2020
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
86,212

 
$
89,359

 
$
3,149

 
$
(2
)
Residential agency mortgage-backed securities
 
10,253

 
11,099

 
846

 
—

Other debt securities
 
177,613

 
195,944

 
18,430

 
(99
)
Total investment securities
 
274,078

 
296,402

 
22,425

 
(101
)
Allowance for credit losses1
 
(1,502
)
 
 
 
 
 
 
Investment securities, net of allowance
 
272,576

 
296,402

 
22,425

 
(101
)

1 Effective with the adoption of FASB ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2020.
 
 
December 31, 2019
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
93,653

 
$
96,897

 
$
3,250

 
$
(6
)
Residential agency mortgage-backed securities
 
10,676

 
11,164

 
488

 
—

Other debt securities
 
189,089

 
206,341

 
17,547

 
(295
)
Total investment securities
 
$
293,418

 
$
314,402

 
$
21,285

 
$
(301
)





- 50 -


The amortized cost and fair values of investment securities at March 31, 2020, 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
 
$
38,058

 
$
91,847

 
$
122,431

 
$
11,489

 
$
263,825

 
5.12

Fair value
 
38,380

 
97,946

 
137,365

 
11,612

 
285,303

 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
10,253

 
2 
Fair value
 
 

 
 

 
 

 
 

 
11,099

 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
274,078

 
 

Fair value
 
 

 
 

 
 

 
 

 
296,402

 
 

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 4.7 years based upon current prepayment assumptions.

Temporarily Impaired Investment Securities
(in thousands):
 
 
March 31, 2020
 
 
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
 
2

 
$
232

 
$
1

 
$
347

 
$
1

 
$
579

 
$
2

Other debt securities
 
8

 
—

 
—

 
5,168

 
99

 
5,168

 
99

Total investment securities
 
10

 
$
232

 
$
1

 
$
5,515

 
$
100

 
$
5,747

 
$
101


 
 
December 31, 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
 
4

 
$
1,001

 
$
1

 
$
1,706

 
$
5

 
$
2,707

 
$
6

Other debt securities
 
13

 
275

 
1

 
8,041

 
294

 
8,316

 
295

Total investment securities
 
17

 
$
1,276

 
$
2

 
$
9,747

 
$
299

 
$
11,023

 
$
301





- 51 -


Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
March 31, 2020
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
U.S. Treasury
 
$
901

 
$
917

 
$
16

 
$
—

Municipal and other tax-exempt
 
23,166

 
24,034

 
872

 
(4
)
Mortgage-backed securities:
 
 

 
 

 
 

 
 

Residential agency
 
8,931,771

 
9,259,089

 
333,298

 
(5,980
)
Residential non-agency
 
24,002

 
34,866

 
10,949

 
(85
)
Commercial agency
 
3,277,948

 
3,374,899

 
103,953

 
(7,002
)
Other debt securities
 
500

 
472

 
—

 
(28
)
Total available for sale securities
 
$
12,258,288

 
$
12,694,277

 
$
449,088

 
$
(13,099
)

 
 
December 31, 2019
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
U.S. Treasury
 
$
1,598

 
$
1,600

 
$
2

 
$
—

Municipal and other tax-exempt
 
1,789

 
1,861

 
72

 
—

Mortgage-backed securities:
 
 
 
 

 
 

 
 

Residential agency
 
7,956,297

 
8,046,096

 
104,912

 
(15,113
)
Residential non-agency
 
25,968

 
41,609

 
15,641

 
—

Commercial agency
 
3,145,342

 
3,178,005

 
37,808

 
(5,145
)
Other debt securities
 
500

 
472

 
—

 
(28
)
Total available for sale securities
 
$
11,131,494

 
$
11,269,643

 
$
158,435

 
$
(20,286
)


The amortized cost and fair values of available for sale securities at March 31, 2020, 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
$
34,239

 
$
1,223,377

 
$
1,400,140

 
$
644,759

 
$
3,302,515

 
8.34

Fair value
34,320

 
1,264,488

 
1,439,807

 
661,707

 
3,400,322

 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
8,955,773

 
2 
Fair value
 
 
 
 
 
 
 
 
9,293,955

 
 
Total available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
12,258,288

 
 
Fair value
 
 
 
 
 
 
 
 
12,694,277

 
 
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 3.3 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
March 31,
 
2020
 
2019
Proceeds
$
26,894

 
$
245,259

Gross realized gains
3

 
5,298

Gross realized losses
—

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

 
19



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 $13.1 billion at March 31, 2020 and $10.1 billion at December 31, 2019. The secured parties do not have the right to sell or repledge these securities.

Temporarily Impaired Available for Sale Securities
(in thousands)
 
 
March 31, 2020
 
 
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:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Municipal and other tax-exempt
 
1

 
$
1,621

 
$
4

 
$
—

 
$
—

 
$
1,621

 
$
4

Mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


Residential agency
 
37


314,479


2,230


177,225


3,750


491,704


5,980

Residential non-agency
 
1

 
1,801

 
85

 
—

 
—

 
1,801

 
85

Commercial agency
 
52

 
740,780

 
6,203

 
155,708

 
799

 
896,488

 
7,002

Other debt securities
 
1

 
—

 
—

 
472

 
28

 
472

 
28

Total available for sale securities
 
92

 
$
1,058,681


$
8,522


$
333,405


$
4,577


$
1,392,086


$
13,099



 
 
December 31, 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:
 
 

 
 

 
 

 
 

 
 

 


 


Mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


Residential agency
 
133

 
$
1,352,597

 
$
6,690

 
$
686,002

 
$
8,423

 
$
2,038,599

 
$
15,113

Commercial agency
 
69

 
830,047

 
4,238

 
210,877

 
907

 
1,040,924

 
5,145

Other debt securities
 
1

 
—

 
—

 
472

 
28

 
472

 
28

Total available for sale securities
 
203

 
$
2,182,644


$
10,928


$
897,351


$
9,358


$
3,079,995


$
20,286



Based on evaluations of impaired securities as of March 31, 2020, 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 -


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

The fair value and net unrealized gain (loss) included in fair value option securities is as follows (in thousands):
 
 
March 31, 2020
 
December 31, 2019
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
U.S. Treasury
 
$
—

 
$
—

 
$
9,917

 
$
(48
)
Residential agency mortgage-backed securities
 
1,703,238

 
60,083

 
1,088,660

 
14,109

Total
 
$
1,703,238

 
$
60,083

 
$
1,098,577

 
$
14,061




- 54 -


(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. 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.
 
Trading

BOK Financial may offer derivative instruments such as to-be-announced securities to mortgage banking customers to enable them to manage their market risk or to mitigate the Company's market risk of holding trading securities. Changes in the fair value of derivative instruments for trading purposes or used to mitigate the market risk of holding trading securities are included in Other operating revenue – Brokerage and trading revenue.

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. 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.

As discussed in Note 5, 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 5 for additional discussion of notional, fair value and impact on earnings of these contracts.

- 55 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at March 31, 2020 (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
 
2,632,062

 
132,346

 
(34
)
 
132,312

 
—

 
132,312

Energy contracts
 
2,097,638

 
583,117

 
(100,748
)
 
482,369

 
(413,946
)
 
68,423

Agricultural contracts
 
16,653

 
807

 
(715
)
 
92

 
—

 
92

Foreign exchange contracts
 
317,068

 
312,685

 
—

 
312,685

 
(25
)
 
312,660

Equity option contracts
 
77,973

 
1,162

 
—

 
1,162

 
(289
)
 
873

Total customer risk management programs
 
5,141,394

 
1,030,117

 
(101,497
)
 
928,620

 
(414,260
)
 
514,360

Trading
 
51,637,953

 
774,631

 
(371,512
)
 
403,119

 
(17,333
)
 
385,786

Internal risk management programs
 
765,572

 
22,837

 
(267
)
 
22,570

 
—

 
22,570

Total derivative contracts
 
$
57,544,919

 
$
1,827,585

 
$
(473,276
)
 
$
1,354,309

 
$
(431,593
)
 
$
922,716

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
2,632,062

 
132,622

 
(34
)
 
132,588

 
(122,237
)
 
10,351

Energy contracts
 
2,068,380

 
571,306

 
(100,748
)
 
470,558

 
—

 
470,558

Agricultural contracts
 
16,657

 
791

 
(715
)
 
76

 
—

 
76

Foreign exchange contracts
 
292,940

 
288,446

 
—

 
288,446

 
(621
)
 
287,825

Equity option contracts
 
77,973

 
1,162

 
—

 
1,162

 
—

 
1,162

Total customer risk management programs
 
5,088,012

 
994,327

 
(101,497
)
 
892,830

 
(122,858
)
 
769,972

Trading
 
54,719,502

 
804,059

 
(371,512
)
 
432,547

 
(5,037
)
 
427,510

Internal risk management programs
 
987,833

 
16,230

 
(267
)
 
15,963

 
—

 
15,963

Total derivative contracts
 
$
60,795,347

 
$
1,814,616

 
$
(473,276
)
 
$
1,341,340

 
$
(127,895
)
 
$
1,213,445

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 table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2019 (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
 
2,464,478

 
49,100

 
(1,839
)
 
47,261

 
—

 
47,261

Energy contracts
 
2,151,096

 
144,906

 
(107,591
)
 
37,315

 
(38
)
 
37,277

Agricultural contracts
 
16,118

 
1,522

 
(22
)
 
1,500

 
—

 
1,500

Foreign exchange contracts
 
214,119

 
213,007

 
—

 
213,007

 
—

 
213,007

Equity option contracts
 
81,455

 
3,233

 
—

 
3,233

 
(660
)
 
2,573

Total customer risk management programs
 
4,927,266

 
411,768

 
(109,452
)
 
302,316

 
(698
)
 
301,618

Trading
 
69,721,932

 
131,561

 
(115,949
)
 
15,612

 
—

 
15,612

Internal risk management programs
 
1,268,180

 
6,226

 
(81
)
 
6,145

 
—

 
6,145

Total derivative contracts
 
$
75,917,378

 
$
549,555

 
$
(225,482
)
 
$
324,073

 
$
(698
)
 
$
323,375

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
2,464,478

 
49,194

 
(1,839
)
 
47,355

 
(43,932
)
 
3,423

Energy contracts
 
2,105,391

 
139,311

 
(107,591
)
 
31,720

 
(6,031
)
 
25,689

Agricultural contracts
 
16,139

 
1,507

 
(22
)
 
1,485

 
(1,485
)
 
—

Foreign exchange contracts
 
207,919

 
207,020

 
—

 
207,020

 
—

 
207,020

Equity option contracts
 
81,455

 
3,233

 
—

 
3,233

 
—

 
3,233

Total customer risk management programs
 
4,875,382

 
400,265

 
(109,452
)
 
290,813

 
(51,448
)
 
239,365

Trading
 
65,144,388

 
125,535

 
(115,949
)
 
9,586

 
—

 
9,586

Internal risk management programs
 
380,401

 
3,121

 
(81
)
 
3,040

 
(863
)
 
2,177

Total derivative contracts
 
$
70,400,171

 
$
528,921

 
$
(225,482
)
 
$
303,439

 
$
(52,311
)
 
$
251,128

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


- 57 -


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
 
 
March 31, 2020
 
March 31, 2019
 
 
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
 
$
—

 
$
—

 
$
5,700

 
$
—

Interest rate swaps
 
942

 
—

 
593

 
—

Energy contracts
 
2,007

 
—

 
226

 
—

Agricultural contracts
 
15

 
—

 
4

 
—

Foreign exchange contracts
 
258

 
—

 
154

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
3,222

 
—

 
6,677

 
—

Trading1
 
(40,655
)
 
—

 
(7,295
)
 
—

Internal risk management programs
 
—

 
18,420

 
—

 
4,667

Total derivative contracts
 
$
(37,433
)
 
$
18,420

 
$
(618
)
 
$
4,667


1 
Represents changes in fair value of to-be-announced securities and other derivative instruments held to mitigate market risk of trading securities portfolio, which is offset by changes in fair value of trading securities also include in Brokerage and Trading Revenue in the Consolidated Statements of Earnings.
 
 
 
 
 
 
 
 
 



- 58 -


(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. Accrued but not paid interest receivable is included in Receivables in the Consolidated Balance Sheets. 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.

For loans acquired with no evidence of credit deterioration, discounts are accreted on either an individual basis for loans with unique characteristics or on a pool basis for groups of homogeneous loans.  Accretion is discontinued when a loan with an individually attributed discount is placed on nonaccruing status.

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 Consolidated 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. 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.


- 59 -


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):
 
 
March 31, 2020
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
3,205,558

 
11,471,793

 
118,624

 
$
14,795,975

Commercial real estate
 
1,045,825

 
3,395,715

 
8,545

 
4,450,085

Loans to individuals
 
1,878,018

 
1,303,889

 
36,003

 
3,217,910

Total
 
$
6,129,401

 
$
16,171,397

 
$
163,172

 
$
22,463,970




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 March 31, 2020, outstanding commitments totaled $10.0 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 March 31, 2020, outstanding standby letters of credit totaled $684 million. 

Allowances for Credit Losses and Accrual for Off-balance Sheet Credit Risk from Unfunded Loans Commitments

BOK Financial’s accounting policies have changed significantly with the adoption of CECL as of January 1, 2020. Prior periods are not restated. Prior to January 1, 2020, general allowances and nonspecific allowances were based on incurred credit losses in accordance with accounting policies disclosed in Note 1 of the Consolidated Financial Statements included in the 2019 Form 10-K.

The allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments represent the portion of the amortized cost basis of loans that we do not expect to collect over the asset’s contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions. The appropriateness of the allowance for credit losses, including industry and product adjustments and nonspecific allowances, is assessed quarterly by a senior management Allowance Committee. This review is based on an on-going evaluation of the estimated expected credit losses in the portfolio and on unused commitments to provide financing. A well-documented methodology has been developed and is applied by an independent Credit Administration department to assure consistency across the Company.

The allowance for loan losses consists of specific allowances attributed to certain individual loans, generally nonaccruing loans, with dissimilar risk characteristics that have not yet been charged down to amounts we expect to recover and general allowances for estimated credit losses on pools of loans that share similar risk characteristics.

When full collection of principal or interest is uncertain, the loan’s risk characteristics have changed, and we exclude the loan from the general allowance pool, typically designating it as nonaccruing. For these loans, a specific allowance reflects the expected credit loss.


- 60 -


We measure specific allowances for loans excluded from the general allowance pool 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. For a non-collateral dependent loan, the specific allowance is the amount by which the loan’s amortized cost basis exceeds its net realizable value. We measure the specific allowance for collateral dependent loans as the amount by which the loan’s amortized costs basis exceeds its fair value. When repayment is expected to be provided substantially through the sale of collateral, we deduct estimated selling costs from the collateral’s fair value. Generally, third party appraisals that conform to Uniform Standards of Professional Appraisal Practice serve as the basis for the fair value of real property held as collateral. These appraised values are on an “as-is” basis and generally are not adjusted by the Company. We obtain updated appraisals at least annually or more frequently if market conditions indicate collateral values may have declined. For energy loans, our internal staff of engineers generally determines collateral value of mineral rights based on projected cash flows from proven oil and gas reserves under existing economic and operating conditions. For real property held as collateral for other loans, third party appraisals that conform to Uniform Standards of Professional Appraisal Practice generally serve as the basis for the fair value. These appraised values are on an “as-is” basis and generally are not adjusted by the Company. We obtain updated appraisals at least annually or more frequently if market conditions indicate collateral values may have declined. Our special assets staff generally determines the value of other collateral based on projected liquidation cash flows under current market conditions. We evaluate collateral values and available cash resources quarterly. Historical statistics may be used to estimate specific allowances in limited situations, such as when a collateral dependent loan is removed from the general allowance pool near the end of a reporting period until an appraisal of collateral value is received or a full assessment of future cash flows is completed.

General allowances estimate expected credit losses on pools of loans sharing similar risk characteristics that are expected to occur over the loan’s estimated remaining life. The loan’s estimated remaining life represents the contractual term adjusted for amortization, estimates of prepayments, and borrower-owned extension options. Approximately 90 percent of the committed dollars in the loan portfolio is risk graded loans with general allowance model inputs that include probability of default, loss given default, and exposure at default. Probability of default is based on the migration of loans from performing to nonperforming using historical life of loan analysis periods. Loss given default is based on the aggregate losses incurred, net of estimated recoveries. Exposure at default represents an estimate of the outstanding amount of credit exposure at the time a default may occur.

Charge-off migration is used to calculate the general allowance for the majority of non-risk graded loans to individuals. The expected credit loss on less than 10 percent of the committed dollars in the portfolio is calculated using charge-off migration.

The expected credit loss on approximately 1 percent of the committed dollars in the portfolio is calculated using a non-modeled approach. Specifically, the calculation applies a long-term net charge-off rate to the loan balances, adjusted for the weighted average remaining maturity of each portfolio.
    
In estimating the expected credit losses for general allowances on performing risk-graded loans, each portfolio class is assigned relevant economic loss drivers which best explain variations in portfolio net loss rates. The probability of default estimates for each portfolio class are adjusted for current and forecasted economic conditions. The result is applied to the exposure at default and loss given default to calculate the lifetime expected credit loss estimate. Selection of relevant economic loss drivers is re-evaluated periodically and involves statistical analysis as well as management judgment. The unemployment rate factors significantly in the allowance for loan losses calculation, affecting commercial and loans to individuals segments. Other primary factors impacting the commercial portfolio include BBB corporate spreads, real gross domestic product growth rate, and energy commodity prices. The primary commercial real estate variables are vacancy rate and BBB corporate spreads. In addition to the unemployment rate, the forecast for loans to individuals is tied to home price index. The forecasts may include regional economic factors when localized conditions diverge from national conditions.

An Economic Forecast Committee, consisting of senior management with members largely independent of the allowance process develops a twelve-month forward-looking forecast for the relevant economic loss drivers. Management develops these forecasts based on external data as well as a view of future economic conditions, which may include adjustments for regional conditions. The forecast includes three economic scenarios and probability weights for each scenario. The base forecast represents management's view of the most likely outcome, while the downside forecast reflects reasonably possible worsening economic conditions, and the upside forecast projects reasonably possible improving conditions.

At the end of the one-year reasonable and supportable forecast period, we transition from shorter-term expected losses to long-term loss averages for the loan’s estimated remaining life. The difference between short-term loss forecasts and long-term loss averages is run-off over the reversion horizon, up to three years, depending on the forecasted economic scenarios.


- 61 -


General allowances also consider the estimated impact of factors that are not captured in the modeled results or historical experience. These qualitative adjustments, determined by management, may increase or decrease the allowance estimated by modeled results. Factors not captured in modeled results or historical experience may include for example, new lines of business, market conditions that have not been previously encountered, observed changes in credit risk that are not yet reflected in macro-economic factors, or economic conditions that impact loss given default assumptions.

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 that are not unconditionally cancelable by the bank. This accrual is included in other liabilities in the Consolidated Balance Sheets. The appropriateness of the accrual is determined in the same manner as the allowance for loan losses, with the added consideration of commitment usage over the remaining life for those loans that the bank can not unconditionally cancel.

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

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended March 31, 2020 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Loans to Individuals
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
118,187

 
$
51,805

 
$
23,572

 
$
17,195

 
$
210,759

Transition adjustment
 
33,681

 
(4,620
)
 
13,943

 
(17,195
)
 
25,809

Beginning balance, adjusted
 
151,868


47,185


37,515


—


236,568

Provision for loan losses
 
77,723

 
5,115

 
13,126

 
—

 
95,964

Loans charged off
 
(16,615
)
 
(886
)
 
(1,416
)
 
—

 
(18,917
)
Recoveries of loans previously charged off
 
462

 
47

 
1,187

 
—

 
1,696

Ending Balance
 
213,438

 
51,461

 
50,412

 
—

 
315,311

Allowance for off-balance sheet credit risk from unfunded loan commitments:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
1,434

 
107

 
44

 
—

 
1,585

Transition adjustment
 
10,144

 
11,660

 
1,748

 
—

 
23,552

Beginning balance, adjusted
 
11,578


11,767


1,792


—


25,137

Provision for off-balance sheet credit risk
 
2,462

 
808

 
107

 
—

 
3,377

Ending Balance
 
14,040


12,575


1,899


—


28,514

 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in our reasonable and supportable forecasts of macroeconomic variables, primarily due to the impact of the COVID-19 pandemic, oil price declines, and other assumptions, required a provision of $66.2 million during the first quarter of 2020. All other changes totaled $33.1 million, which included $7.5 million related to loan growth, $8.4 million related to changes in impairment, risk grading and other portfolio changes and net charge-offs of $17.2 million.

The allowance for loan losses and recorded investment of the related loans by portfolio segment for each measurement method at March 31, 2020 is as follows (in thousands):
 
 
Collectively Measured
for General Allowances
 
Individually Measured
for Specific Allowances
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
14,677,351

 
$
203,554

 
$
118,624

 
$
9,884

 
$
14,795,975

 
$
213,438

Commercial real estate
 
4,441,540

 
51,461

 
8,545

 
—

 
4,450,085

 
51,461

Loans to individuals
 
3,181,907

 
50,412

 
36,003

 
—

 
3,217,910

 
50,412

Total
 
22,300,798

 
305,427

 
163,172

 
9,884

 
22,463,970

 
315,311


- 62 -


Credit Quality Indicators

The Company utilizes risk grading as primary credit quality indicators as it influences the probability of default which is a key attribute in the expected credit losses calculation. Substantially all commercial as well as commercial real estate loans and certain loans to individuals are risk graded based on a quarterly evaluation of the borrowers’ ability to repay the loans. Certain commercial loans and most loans to individuals are small, homogeneous pools that are not risk-graded. The credit quality of these loans is based on past due days in accordance with regulatory guidelines.

We have included in the credit quality indicator “pass” loans that 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.” This also includes 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 ("Special Mention") 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. Non-graded loans 30 to 59 days past due are categorized as Special Mention.

The risk grading process identified certain loans that have a well-defined weakness (for example, 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 remain on accruing status. Non-graded loans 60 to 89 days past due are categorized as Accruing Substandard.

Nonaccruing loans represent loans for which full collection of principal and interest is uncertain. This includes certain loans considered “substandard” and all loans considered “doubtful” by regulatory guidelines. Non-graded loans 90 or more days past due are categorized as Nonaccrual.

Probability of default is lowest for pass graded loans and increases for each credit quality indicator, Special Mention, and Accruing Substandard.

Vintage represents the year of origination, except for revolving loans which are considered in aggregate. Loans that were once revolving but have converted to term loans without additional underwriting appear in a separate vintage column.


- 63 -


The following table summarizes the Company’s loan portfolio at March 31, 2020 by the risk grade categories and vintage (in thousands): 
 
Origination Year
 
 
 
 
2020
2019
2018
2017
2016
Prior
Revolving Loans
Revolving Loans Converted to Term Loans
Total
Commercial:
 
 
 
 
 
 
 
 
 
Energy
 
 
 
 
 
 
 
 
 
Pass
$
2,285

$
107,434

$
74,946

$
15,377

$
1,506

$
3,484

$
3,505,123

$
—

$
3,710,155

Special Mention
—

—

10,260

—

—

—

118,222

—

128,482

Accruing Substandard
—

—

—

—

58

13,439

163,094

—

176,591

Nonaccrual
—

3,802

—

—

—

28,899

63,747

—

96,448

Total energy
2,285

111,236

85,206

15,377

1,564

45,822

3,850,186

—

4,111,676

Healthcare
 
 
 
 
 
 
 
 
 
Pass
131,002

615,580

623,438

479,985

250,320

806,699

205,384

27

3,112,435

Special Mention
—

—

—

3,782

178

19,133

3,515

—

26,608

Accruing Substandard
—

3,505

7,955

1,001

57

9,465

—

—

21,983

Nonaccrual
29

37

535

—

—

2,935

534

—

4,070

Total healthcare
131,031

619,122

631,928

484,768

250,555

838,232

209,433

27

3,165,096

Services
 
 
 
 
 
 
 
 
 
Pass
65,471

529,831

512,549

441,302

407,067

899,776

987,628

2,594

3,846,218

Special Mention
—

1,125

18,071

13,977

4,219

10,963

10,715

—

59,070

Accruing Substandard
—

10,675

1,782

2,774

8,674

3,709

14,421

—

42,035

Nonaccrual
—

—

—

2,633

1,167

3,931

694

—

8,425

Total services
65,471

541,631

532,402

460,686

421,127

918,379

1,013,458

2,594

3,955,748

General business
 
 
 
 
 
 
 
 
 
Pass
154,807

525,223

365,108

271,723

165,711

278,923

1,705,114

15,600

3,482,209

Special Mention
—

7,382

3,259

6,530

1,003

5,168

7,387

138

30,867

Accruing Substandard
169

8,715

5,900

4,564

6,195

5,005

10,144

6

40,698

Nonaccrual
—

1,980

4,928

1,100

1,344

161

154

14

9,681

Total general business
154,976

543,300

379,195

283,917

174,253

289,257

1,722,799

15,758

3,563,455

Total commercial
353,763

1,815,289

1,628,731

1,244,748

847,499

2,091,690

6,795,876

18,379

14,795,975

 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
Pass
187,958

1,085,148

1,049,257

599,480

382,196

880,706

231,526

42

4,416,313

Special Mention
—

—

—

12,167

1,640

3,152

—

—

16,959

Accruing Substandard
—

35

1,011

6,722

—

473

27

—

8,268

Nonaccrual
—

—

—

232

7,484

829

—

—

8,545

Total commercial real estate
187,958

1,085,183

1,050,268

618,601

391,320

885,160

231,553

42

4,450,085

 
 
 
 
 
 
 
 
 
 


- 64 -


 
Origination Year
 
 
 
 
2020
2019
2018
2017
2016
Prior
Revolving Loans
Revolving Loans Converted to Term Loans
Total
Loans to individuals:
 
 
 
 
 
 
 
 
 
Residential mortgage
 
 
 
 
 
 
 
 
 
Pass
58,635

216,234

195,224

231,620

220,120

496,676

36,298

352,870

1,807,677

Special Mention
—

—

286

38

205

1,859

246

835

3,469

Accruing Substandard
—

—

—

94

2,155

277

40

122

2,688

Nonaccrual
—

31

491

322

1,039

26,039

658

2,141

30,721

Total residential mortgage
58,635

216,265

196,001

232,074

223,519

524,851

37,242

355,968

1,844,555

Residential mortgage guaranteed by U.S. government agencies
 
 
 
 
 
 
 
 
 
Pass
—

1,459

8,321

13,353

28,986

140,765

—

—

192,884

Nonaccrual
—

—

—

—

—

5,005

—

—

5,005

Total residential mortgage guaranteed by U.S. government agencies
—

1,459

8,321

13,353

28,986

145,770

—

—

197,889

Personal:
 
 
 
 
 
 
 
 
 
Pass
48,145

234,882

88,016

115,576

74,987

103,717

505,951

3,000

1,174,274

Special Mention
—

30

37

50

49

455

2

—

623

Accruing Substandard
—

264

9

—

—

—

19

—

292

Nonaccrual
—

57

53

24

62

50

31

—

277

Total personal
48,145

235,233

88,115

115,650

75,098

104,222

506,003

3,000

1,175,466

Total loans to individuals
106,780

452,957

292,437

361,077

327,603

774,843

543,245

358,968

3,217,910

Total loans
$
648,501

$
3,353,429

$
2,971,436

$
2,224,426

$
1,566,422

$
3,751,693

$
7,570,674

$
377,389

$
22,463,970




- 65 -


Nonaccruing Loans

A summary of nonaccruing loans at March 31, 2020 follows (in thousands): 
 
As of March 31, 2020
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
Commercial:
 
 
 
 
 
 
 
Energy
$
96,448

 
$
40,424

 
$
56,024

 
$
9,375

Healthcare
4,070

 
4,070

 
—

 
—

Services
8,425

 
7,258

 
1,167

 
240

General business
9,681

 
9,412

 
269

 
269

Total commercial
118,624

 
61,164

 
57,460

 
9,884

 
 
 
 
 
 
 
 
Commercial real estate
8,545

 
8,545

 
—

 
—

 
 
 
 
 
 
 
 
Loans to individuals:
 

 
 

 
 

 
 

Residential mortgage
30,721

 
30,721

 
—

 
—

Residential mortgage guaranteed by U.S. government agencies
5,005

 
5,005

 
—

 
—

Personal
277

 
277

 
—

 
—

Total loans to individuals
36,003

 
36,003

 
—

 
—

 
 
 
 
 
 
 
 
Total
$
163,172

 
$
105,712

 
$
57,460

 
$
9,884




Troubled Debt Restructurings

At March 31, 2020 the Company had $149 million in troubled debt restructurings ("TDRs"), of which $92 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $54 million of TDRs were performing in accordance with the modified terms.

At December 31, 2019, the Company had $132 million in TDRs, of which $92 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $57 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 months ended March 31, 2020, $28 million of loans were restructured and $2.0 million of loans designated as TDRs were charged off. During the three months ended March 31, 2019, $18 million of loans were restructured and $8.3 million of loans designated as TDRs were charged off.

- 66 -


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 and past due as of March 31, 2020 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
Past Due 90 Days or More and Accruing
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
4,058,605

 
$
267

 
$
—

 
$
52,804

 
$
4,111,676

 
$
—

Healthcare
 
3,160,196

 
46

 
111

 
4,743

 
3,165,096

 
714

Services
 
3,941,795

 
7,173

 
198

 
6,582

 
3,955,748

 
74

General business
 
3,553,504

 
2,618

 
4,651

 
2,682

 
3,563,455

 
—

Total commercial
 
14,714,100

 
10,104

 
4,960

 
66,811

 
14,795,975

 
788

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
4,433,887

 
4,523

 
340

 
11,335

 
4,450,085

 
2,796

 
 
 
 
 
 
 
 
 
 
 
 
 
Loans to individuals:
 
 

 
 

 
 
 
 

 
 

 
 
Residential mortgage
 
1,828,421

 
8,759

 
1,717

 
5,658

 
1,844,555

 
119

Residential mortgage guaranteed by U.S. government agencies
 
55,901

 
25,948

 
16,217

 
99,823

 
197,889

 
96,980

Personal
 
1,175,143

 
169

 
77

 
77

 
1,175,466

 
3

Total loans to individuals
 
3,059,465

 
34,876

 
18,011

 
105,558

 
3,217,910

 
97,102

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
22,207,452

 
$
49,503

 
$
23,311

 
$
183,704

 
$
22,463,970

 
$
100,686


Following is disclosure of loans and the combined allowance for loan losses and accrual for off-balance sheet credit losses under the previous incurred loss model.

Portfolio segments of the loan portfolio are as follows (in thousands):
 
 
December 31, 2019
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
3,231,485

 
$
10,684,749

 
$
115,416

 
$
14,031,650

Commercial real estate
 
1,056,321

 
3,349,836

 
27,626

 
4,433,783

Residential mortgage
 
1,652,653

 
393,897

 
37,622

 
2,084,172

Personal
 
193,903

 
1,007,192

 
287

 
1,201,382

Total
 
$
6,134,362

 
$
15,435,674

 
$
180,951

 
$
21,750,987

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
7,680

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



- 67 -


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 March 31, 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
 
11,108

 
(2,004
)
 
(2,408
)
 
(137
)
 
1,410

 
7,969

Loans charged off
 
(10,468
)
 
—

 
(42
)
 
(1,265
)
 
—

 
(11,775
)
Recoveries
 
711

 
112

 
154

 
712

 
—

 
1,689

Ending balance
 
$
103,577

 
$
58,134

 
$
15,668

 
$
8,783

 
$
19,178

 
$
205,340

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
1,655

 
52

 
52

 
31

 
—

 
$
1,790

Provision for off-balance sheet credit losses
 
70

 
(4
)
 
(5
)
 
(30
)
 
—

 
31

Ending balance
 
$
1,725

 
$
48

 
$
47

 
$
1

 
$
—

 
$
1,821

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
11,178

 
$
(2,008
)
 
$
(2,413
)
 
$
(167
)
 
$
1,410

 
$
8,000

 
 
 
 
 
 
 
 
 
 
 
 
 
The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 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
 
$
13,916,234

 
$
100,773

 
$
115,416

 
$
17,414

 
$
14,031,650

 
$
118,187

Commercial real estate
 
4,406,157

 
51,805

 
27,626

 
—

 
4,433,783

 
51,805

Residential mortgage
 
2,046,550

 
14,400

 
37,622

 
—

 
2,084,172

 
14,400

Personal
 
1,201,095

 
9,172

 
287

 
—

 
1,201,382

 
9,172

Total
 
21,570,036

 
176,150

 
180,951

 
17,414

 
21,750,987

 
193,564

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
17,195

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
21,570,036

 
$
176,150

 
$
180,951

 
$
17,414

 
$
21,750,987

 
$
210,759



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, 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
 
$
13,997,538

 
$
117,236

 
$
34,112

 
$
951

 
$
14,031,650

 
$
118,187

Commercial real estate
 
4,433,783

 
51,805

 
—

 
—

 
4,433,783

 
51,805

Residential mortgage
 
279,113

 
3,085

 
1,805,059

 
11,315

 
2,084,172

 
14,400

Personal
 
1,116,297

 
7,003

 
85,085

 
2,169

 
1,201,382

 
9,172

Total
 
19,826,731

 
179,129

 
1,924,256

 
14,435

 
21,750,987

 
193,564

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
17,195

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
19,826,731

 
$
179,129

 
$
1,924,256

 
$
14,435

 
$
21,750,987

 
$
210,759



- 68 -


The following table summarizes the Company’s loan portfolio at December 31, 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
 
$
3,700,406

 
$
117,298

 
$
63,951

 
$
91,722

 
$
—

 
$
—

 
$
3,973,377

Services
 
3,050,946

 
29,943

 
33,791

 
7,483

 
—

 
—

 
3,122,163

Wholesale/retail
 
1,749,023

 
5,281

 
5,399

 
1,163

 
—

 
—

 
1,760,866

Manufacturing
 
623,219

 
18,214

 
13,883

 
10,133

 
—

 
—

 
665,449

Healthcare
 
2,995,514

 
13,117

 
20,805

 
4,480

 
—

 
—

 
3,033,916

Public finance
 
709,868

 
—

 
—

 
—

 
—

 
—

 
709,868

Other commercial and industrial
 
709,729

 
4,028

 
17,744

 
398

 
34,075

 
37

 
766,011

Total commercial
 
13,538,705

 
187,881

 
155,573

 
115,379

 
34,075

 
37

 
14,031,650

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
150,529

 
—

 
—

 
350

 
—

 
—

 
150,879

Retail
 
743,343

 
12,067

 
1,243

 
18,868

 
—

 
—

 
775,521

Office
 
923,202

 
5,177

 
—

 
—

 
—

 
—

 
928,379

Multifamily
 
1,257,005

 
1,604

 
95

 
6,858

 
—

 
—

 
1,265,562

Industrial
 
852,539

 
1,658

 
1,011

 
909

 
—

 
—

 
856,117

Other commercial real estate
 
455,045

 
1,639

 
—

 
641

 
—

 
—

 
457,325

Total commercial real estate
 
4,381,663

 
22,145

 
2,349

 
27,626

 
—

 
—

 
4,433,783

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
276,138

 
78

 
2,404

 
493

 
758,260

 
19,948

 
1,057,321

Permanent mortgage guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
191,694

 
6,100

 
197,794

Home equity
 
—

 
—

 
—

 
—

 
817,976

 
11,081

 
829,057

Total residential mortgage
 
276,138

 
78

 
2,404

 
493

 
1,767,930

 
37,129

 
2,084,172

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
1,116,196

 
45

 
—

 
56

 
84,853

 
232

 
1,201,382

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
19,312,702

 
$
210,149

 
$
160,326

 
$
143,554

 
$
1,886,858

 
$
37,398

 
$
21,750,987




- 69 -


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.

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, 2019 follows (in thousands): 
 
 
 
 
Recorded Investment
 
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
149,441

 
$
91,722

 
$
44,244

 
$
47,478

 
$
16,854

Services
 
10,923

 
7,483

 
6,301

 
1,182

 
240

Wholesale/retail
 
1,980

 
1,163

 
902

 
261

 
101

Manufacturing
 
10,848

 
10,133

 
9,914

 
219

 
219

Healthcare
 
13,774

 
4,480

 
4,480

 
—

 
—

Public finance
 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
8,227

 
435

 
435

 
—

 
—

Total commercial
 
195,193

 
115,416

 
66,276

 
49,140

 
17,414

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
1,306

 
350

 
350

 
—

 
—

Retail
 
20,265

 
18,868

 
18,868

 
—

 
—

Office
 
—

 
—

 
—

 
—

 
—

Multifamily
 
6,858

 
6,858

 
6,858

 
—

 
—

Industrial
 
909

 
909

 
909

 
—

 
—

Other commercial real estate
 
801

 
641

 
641

 
—

 
—

Total commercial real estate
 
30,139

 
27,626

 
27,626

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
24,868

 
20,441

 
20,441

 
—

 
—

Permanent mortgage guaranteed by U.S. government agencies1
 
204,187

 
197,794

 
197,794

 
—

 
—

Home equity
 
12,967

 
11,081

 
11,081

 
—

 
—

Total residential mortgage
 
242,022

 
229,316

 
229,316

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Personal
 
360

 
287

 
287

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
467,714

 
$
372,645

 
$
323,505

 
$
49,140

 
$
17,414

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, 2019, the majority were accruing based on the guarantee by U.S. government agencies.

- 70 -


A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of December 31, 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
 
$
3,881,244

 
$
401

 
$
10

 
$
—

 
91,722

 
$
3,973,377

Services
 
3,105,621

 
1,737

 
523

 
6,799

 
7,483

 
3,122,163

Wholesale
 
1,758,878

 
712

 
113

 
—

 
1,163

 
1,760,866

Manufacturing
 
654,329

 
410

 
190

 
387

 
10,133

 
665,449

Healthcare
 
3,027,329

 
2,039

 
—

 
68

 
4,480

 
3,033,916

Public finance
 
707,638

 
2,230

 
—

 
—

 
—

 
709,868

Other commercial and industrial
 
764,390

 
414

 
772

 
—

 
435

 
766,011

Total commercial
 
13,899,429

 
7,943

 
1,608

 
7,254

 
115,416

 
14,031,650

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
 
147,379

 
3,093

 
—

 
57

 
350

 
150,879

Retail
 
756,653

 
—

 
—

 
—

 
18,868

 
775,521

Office
 
928,379

 
—

 
—

 
—

 
—

 
928,379

Multifamily
 
1,258,704

 
—

 
—

 
—

 
6,858

 
1,265,562

Industrial
 
855,208

 
—

 
—

 
—

 
909

 
856,117

Other commercial real estate
 
454,253

 
1,827

 
250

 
354

 
641

 
457,325

Total commercial real estate
 
4,400,576

 
4,920

 
250

 
411

 
27,626

 
4,433,783

 
 
 
 
 
 
 
 
 
 
 
 


Residential Mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
1,034,716

 
2,011

 
153

 
—

 
20,441

 
1,057,321

Permanent mortgage guaranteed by U.S. government agencies
 
46,898

 
24,203

 
18,187

 
102,406

 
6,100

 
197,794

Home equity
 
814,325

 
3,343

 
308

 
—

 
11,081

 
829,057

Total residential mortgage
 
1,895,939

 
29,557

 
18,648

 
102,406

 
37,622

 
2,084,172

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
1,196,362

 
4,664

 
54

 
15

 
287

 
1,201,382

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
21,392,306

 
$
47,084

 
$
20,560

 
$
110,086

 
$
180,951

 
$
21,750,987




- 71 -


(5) 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):
 
 
March 31, 2020
 
December 31, 2019
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
185,713

 
$
191,860

 
$
175,117

 
$
177,703

Residential mortgage loan commitments
 
657,570

 
24,250

 
158,460

 
5,233

Forward sales contracts
 
750,719

 
(11,390
)
 
315,203

 
(665
)
 
 
 

 
$
204,720

 
 

 
$
182,271



No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of March 31, 2020 or December 31, 2019. No credit losses were recognized on residential mortgage loans held for sale for the three month period ended March 31, 2020 and 2019.

Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
Production revenue:
 
 
 
 
Net realized gains on sale of mortgage loans
 
$
9,717

 
$
5,693

Net change in unrealized gain on mortgage loans held for sale
 
3,561

 
(53
)
Net change in the fair value of mortgage loan commitments
 
19,017

 
2,713

Net change in the fair value of forward sales contracts
 
(10,725
)
 
(485
)
Total production revenue
 
21,570

 
7,868

Servicing revenue
 
15,597

 
15,966

Total mortgage banking revenue
 
$
37,167

 
$
23,834



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.


- 72 -


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):
 
 
March 31, 2020
 
December 31, 2019
Number of residential mortgage loans serviced for others
 
124,819

 
126,828

Outstanding principal balance of residential mortgage loans serviced for others
 
$
20,261,526

 
$
20,727,106

Weighted average interest rate
 
3.96
%
 
3.98
%
Remaining term (in months)
 
287

 
289



The following represents activity in capitalized mortgage servicing rights (in thousands):
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
Beginning Balance
 
$
201,886

 
$
259,254

Additions, net
 
5,441

 
6,188

Change in fair value due to principal payments
 
(8,019
)
 
(6,583
)
Change in fair value due to market assumption changes
 
(88,480
)
 
(20,666
)
Ending Balance
 
$
110,828

 
$
238,193


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. 

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:
 
 
March 31, 2020
 
December 31, 2019
Discount rate – risk-free rate plus a market premium
 
9.80%
 
9.81%
Prepayment rate - based upon loan interest rate, original term and loan type
 
8.22% - 32.80%
 
8.28% - 16.05%
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
Performing loans
 
$69 - $94
 
$68 - $94
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
 
0.53%
 
1.73%
Primary/secondary mortgage rate spread
 
105 bps
 
104 bps
Delinquency rate
 
2.55%
 
2.73%


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.



- 73 -


(6)  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 (“Payment Plan”).

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. The New Jersey Federal District Action has been stayed until June 18, 2020. 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 Tulsa County District Court Action is pending on BOKF, NA’s motion to dismiss. Four separate arbitration complaints with similar allegations were filed with the Financial Institutions Regulatory Association ("FINRA"). BOKF, NA challenged FINRA's jurisdiction 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 and have not been refiled in any other venue.

On January 8, 2020, the New Jersey District Court entered judgment against the principal individual and his wife for $36,805,051 in principal amount and $10,937,831 in pre-judgment interest. On January 19, 2020, the New Jersey Federal District Court formally terminated the Payment Plan. Management is no longer able to conclude that the individual principal and his wife will be successful in paying the obligations they have to pay the bonds in full but such obligations remain and are not dischargeable in bankruptcy. 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. 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 collateral securing payment of the bonds, approximately $20 million will remain outstanding. 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 a Wrongful Death Judgment Creditor of 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, as Trustee, 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. On April 19, 2019, the Court granted BOKF, NA's Motion to Dismiss. On May 3, 2019, the plaintiff filed a Motion for Reconsideration which is pending. BOKF, NA is advised by counsel that BOKF, NA has valid defenses to the plaintiffs’ claims and no loss is probable.


- 74 -


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. On September 18, 2018, the District Court dismissed the Texas action and the plaintiff appealed the dismissal to the United States Court of Appeals for the Fifth Circuit which heard argument on October 8, 2019. 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. The District Court dismissed the plaintiff's action. The plaintiff has appealed to the United States Court of Appeals for the Tenth Circuit. Management is advised by counsel that a loss is not probable in either the now dismissed Texas action or the New Mexico 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. On January 20, 2020, the plaintiff dismissed the action without prejudice.

On March 7, 2020, three former employees sued BOKF, NA, the Plan Committee of the BOKF, NA 401k Plan, and Cavanal Hill Investment Management, Inc., a subsidiary of BOKF, NA, alleging that the Defendants included proprietary investment products as investment options in the BOKF, NA 401k Plan, whose fees were too high and performance too low, for the purpose of earning fees. The action is brought as a putative class action on behalf of all Plan Participants. The action is pending on the defendants' motions to dismiss. 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 a private equity fund 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 March 31, 2020, the Company has $258 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 $77 million of unfunded commitments included in Other liabilities on the Consolidated Balance Sheets.


- 75 -


(7) Shareholders' Equity

On April 28, 2020, the Company declared a quarterly cash dividend of $0.51 per common share payable on or about May 27, 2020 to shareholders of record as of May 11, 2020.

Dividends declared were $0.51 per share during the three months ended March 31, 2020 and $0.50 per share during the three months ended March 31, 2019.

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, 2018
 
$
(70,999
)
 
$
(1,586
)
 
$
(72,585
)
Net change in unrealized gain (loss)
 
92,739

 
—

 
92,739

Reclassification adjustments included in earnings:
 
 
 
 
 

Gain on available for sale securities, net
 
(76
)
 
—

 
(76
)
Other comprehensive income, before income taxes
 
92,663

 
—

 
92,663

Federal and state income taxes1
 
23,609

 
—

 
23,609

Other comprehensive income, net of income taxes
 
69,054

 
—

 
69,054

Balance, March 31, 2019
 
$
(1,945
)
 
$
(1,586
)
 
$
(3,531
)
 
 
 
 
 
 

Balance, December 31, 2019
 
$
104,996

 
$
(73
)
 
$
104,923

Net change in unrealized gain (loss)
 
297,843

 
—

 
297,843

Reclassification adjustments included in earnings:
 
 
 
 
 

Gain on available for sale securities, net
 
(3
)
 
—

 
(3
)
Other comprehensive income, before income taxes
 
297,840

 
—

 
297,840

Federal and state income taxes1
 
71,471

 
—

 
71,471

Other comprehensive income, net of income taxes
 
226,369

 
—

 
226,369

Balance, March 31, 2020
 
$
331,365


$
(73
)
 
$
331,292


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


- 76 -


(8) Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
March 31,
 
 
2020
 
2019
Numerator:
 
 
 
 
Net income attributable to BOK Financial Corp. shareholders
 
$
62,079

 
$
110,612

Less: Earnings allocated to participating securities
 
343

 
828

Numerator for basic earnings per share – income available to common shareholders
 
61,736

 
109,784

Effect of reallocating undistributed earnings of participating securities
 
—

 
—

Numerator for diluted earnings per share – income available to common shareholders
 
$
61,736

 
$
109,784

 
 
 
 
 
Denominator:
 
 

 
 

Weighted average shares outstanding
 
70,513,807

 
71,926,041

Less:  Participating securities included in weighted average shares outstanding
 
390,122

 
538,971

Denominator for basic earnings per common share
 
70,123,685

 
71,387,070

Dilutive effect of employee stock compensation plans
 
6,481

 
17,318

Denominator for diluted earnings per common share
 
70,130,166

 
71,404,388

 
 
 
 
 
Basic earnings per share
 
$
0.88

 
$
1.54

Diluted earnings per share
 
$
0.88

 
$
1.54




- 77 -


(9)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2020 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
201,902

 
$
25,876

 
$
14,366

 
$
19,216

 
$
261,360

Net interest revenue (expense) from internal sources
 
(50,495
)
 
18,056

 
4,538

 
27,901

 
—

Net interest revenue
 
151,407

 
43,932

 
18,904

 
47,117

 
261,360

Provision for credit losses
 
16,880

 
1,256

 
(48
)
 
75,683

 
93,771

Net interest revenue after provision for credit losses
 
134,527

 
42,676

 
18,952

 
(28,566
)
 
167,589

Other operating revenue
 
38,220

 
55,062

 
97,881

 
(10,844
)
 
180,319

Other operating expense
 
60,752

 
54,793

 
78,192

 
74,887

 
268,624

Net direct contribution
 
111,995

 
42,945

 
38,641

 
(114,297
)
 
79,284

Gain on financial instruments, net
 
49

 
86,764

 
7

 
(86,820
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(88,480
)
 
—

 
88,480

 
—

Gain on repossessed assets, net
 
9

 
13

 
—

 
(22
)
 
—

Corporate expense allocations
 
8,905

 
10,487

 
8,265

 
(27,657
)
 
—

Net income before taxes
 
103,148

 
30,755

 
30,383

 
(85,002
)
 
79,284

Federal and state income taxes
 
28,173

 
7,834

 
7,810

 
(26,517
)
 
17,300

Net income
 
74,975

 
22,921

 
22,573

 
(58,485
)
 
61,984

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

 
—

 
—

 
(95
)
 
(95
)
Net income attributable to BOK Financial Corp. shareholders
 
$
74,975

 
$
22,921

 
$
22,573

 
$
(58,390
)
 
$
62,079

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
24,687,976

 
$
9,850,853

 
$
12,723,412

 
$
(1,541,623
)
 
$
45,720,618


 
 
 
 
 
 
 
 
 
 
 




- 78 -


Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2019 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other1
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
204,209

 
$
22,475

 
$
21,486

 
$
29,932

 
$
278,102

Net interest revenue (expense) from internal sources
 
(53,638
)
 
28,627

 
6,770

 
18,241

 
—

Net interest revenue
 
150,571

 
51,102

 
28,256

 
48,173

 
278,102

Provision for credit losses
 
11,246

 
1,085

 
(119
)
 
(4,212
)
 
8,000

Net interest revenue after provision for credit losses
 
139,325

 
50,017

 
28,375

 
52,385

 
270,102

Other operating revenue
 
37,612

 
42,748

 
73,414

 
3,496

 
157,270

Other operating expense
 
50,627

 
53,821

 
61,507

 
121,202

 
287,157

Net direct contribution
 
126,310

 
38,944

 
40,282

 
(65,321
)
 
140,215

Gain (loss) on financial instruments, net
 
18

 
14,097

 
—

 
(14,115
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(20,666
)
 
—

 
20,666

 
—

Gain (loss) on repossessed assets, net
 
(346
)
 
103

 
—

 
243

 
—

Corporate expense allocations
 
9,455

 
11,900

 
8,360

 
(29,715
)
 
—

Net income before taxes
 
116,527

 
20,578

 
31,922

 
(28,812
)
 
140,215

Federal and state income taxes
 
31,006

 
5,241

 
8,203

 
(14,500
)
 
29,950

Net income
 
85,521

 
15,337

 
23,719

 
(14,312
)
 
110,265

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
(347
)
 
(347
)
Net income (loss) attributable to BOK Financial Corp. shareholders
 
$
85,521

 
$
15,337

 
$
23,719

 
$
(13,965
)
 
$
110,612

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
19,937,878

 
$
8,371,683

 
$
9,328,986

 
$
2,034,134

 
$
39,672,681


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


- 79 -


(10) 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.


- 80 -


Fees and commissions revenue by reportable segment and primary service line is as follows for the three months ended March 31, 2020.
 
Commercial
 
Consumer
 
Wealth Management
 
Funds Management & Other
 
Consolidated
 
Out of Scope1
 
In Scope2
Trading revenue
$
—

 
$
—

 
$
34,384

 
$
—

 
$
34,384

 
$
34,384

 
$
—

Customer hedging revenue
2,525

 
—

 
135

 
563

 
3,223

 
3,223

 
—

Retail brokerage revenue
—

 
—

 
4,343

 
—

 
4,343

 
—

 
4,343

Insurance brokerage revenue
—

 
—

 
3,789

 
—

 
3,789

 
—

 
3,789

Investment banking revenue
1,880

 
—

 
3,160

 
—

 
5,040

 
1,828

 
3,212

Brokerage and trading revenue
4,405

 
—

 
45,811

 
563

 
50,779

 
39,435

 
11,344

TransFund EFT network revenue
18,212

 
831

 
(19
)
 
2

 
19,026

 
—

 
19,026

Merchant services revenue
2,305

 
14

 
—

 
—

 
2,319

 
—

 
2,319

Corporate card revenue
520

 
—

 
16

 
—

 
536

 
—

 
536

Transaction card revenue
21,037

 
845

 
(3
)
 
2

 
21,881

 
—

 
21,881

Personal trust revenue
—

 
—

 
20,649

 
—

 
20,649

 
—

 
20,649

Corporate trust revenue
—

 
—

 
6,362

 
—

 
6,362

 
—

 
6,362

Institutional trust & retirement plan services revenue
—

 
—

 
11,757

 
—

 
11,757

 
—

 
11,757

Investment management services and other revenue
—

 
—

 
5,731

 
(41
)
 
5,690

 
—

 
5,690

Fiduciary and asset management revenue
—

 
—

 
44,499

 
(41
)
 
44,458

 
—

 
44,458

Commercial account service charge revenue
11,039

 
410

 
545

 
(1
)
 
11,993

 
—

 
11,993

Overdraft fee revenue
49

 
7,205

 
22

 
2

 
7,278

 
—

 
7,278

Check card revenue
—

 
5,229

 
—

 
—

 
5,229

 
—

 
5,229

Automated service charge and other deposit fee revenue
229

 
1,386

 
13

 
2

 
1,630

 
—

 
1,630

Deposit service charges and fees
11,317

 
14,230

 
580

 
3

 
26,130

 
—

 
26,130

Mortgage production revenue
—

 
21,569

 
—

 
—

 
21,569

 
21,569

 
—

Mortgage servicing revenue
—

 
16,042

 
—

 
(444
)
 
15,598

 
15,598

 
—

Mortgage banking revenue
—

 
37,611

 
—

 
(444
)
 
37,167

 
37,167

 
—

Other revenue
4,700

 
2,376

 
6,994

 
(1,761
)
 
12,309

 
8,408

 
3,901

Total fees and commissions revenue
$
41,459

 
$
55,062

 
$
97,881

 
$
(1,678
)
 
$
192,724

 
$
85,010

 
$
107,714

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.

 
 
 
 
 
 
 
 
 
 
 
 
 
 




- 81 -


Fees and commissions revenue by reportable segment and primary service line is as follows for the three months ended March 31, 2019.
 
Commercial
 
Consumer
 
Wealth Management
 
Funds Management & Other3
 
Consolidated
 
Out of Scope1
 
In Scope2
Trading revenue
$
—

 
$
—

 
$
12,920

 
$
—

 
$
12,920

 
$
12,920

 
$
—

Customer hedging revenue
1,575

 
—

 
5,728

 
(626
)
 
6,677

 
6,677

 
—

Retail brokerage revenue
—

 
—

 
4,074

 
(52
)
 
4,022

 
—

 
4,022

Insurance brokerage revenue
—

 
—

 
379

 
3,729

 
4,108

 
—

 
4,108

Investment banking revenue
1,389

 
—

 
2,501

 
—

 
3,890

 
1,229

 
2,661

Brokerage and trading revenue
2,964

 
—

 
25,602

 
3,051

 
31,617

 
20,826

 
10,791

TransFund EFT network revenue
17,654

 
958

 
(17
)
 
1

 
18,596

 
—

 
18,596

Merchant services revenue
1,925

 
14

 
—

 
123

 
2,062

 
—

 
2,062

Corporate card revenue
80

 
—

 
—

 
—

 
80

 
—

 
80

Transaction card revenue
19,659

 
972

 
(17
)
 
124

 
20,738

 
—

 
20,738

Personal trust revenue
—

 
—

 
19,574

 
—

 
19,574

 
—

 
19,574

Corporate trust revenue
—

 
—

 
6,201

 
—

 
6,201

 
—

 
6,201

Institutional trust & retirement plan services revenue
—

 
—

 
11,107

 
—

 
11,107

 
—

 
11,107

Investment management services and other revenue
—

 
—

 
4,801

 
1,675

 
6,476

 
—

 
6,476

Fiduciary and asset management revenue
—

 
—

 
41,683

 
1,675

 
43,358

 
—

 
43,358

Commercial account service charge revenue
10,062

 
387

 
527

 
1,807

 
12,783

 
—

 
12,783

Overdraft fee revenue
74

 
8,395

 
27

 
(236
)
 
8,260

 
—

 
8,260

Check card revenue
—

 
4,992

 
—

 
164

 
5,156

 
—

 
5,156

Automated service charge and other deposit fee revenue
158

 
1,665

 
177

 
44

 
2,044

 
—

 
2,044

Deposit service charges and fees
10,294

 
15,439

 
731

 
1,779

 
28,243

 
—

 
28,243

Mortgage production revenue
—

 
7,868

 
—

 
—

 
7,868

 
7,868

 
—

Mortgage servicing revenue
—

 
16,445

 
—

 
(479
)
 
15,966

 
15,966

 
—

Mortgage banking revenue
—

 
24,313

 
—

 
(479
)
 
23,834

 
23,834

 
—

Other revenue
5,129

 
2,097

 
5,257

 
279

 
12,762

 
8,720

 
4,042

Total fees and commissions revenue
$
38,046

 
$
42,821

 
$
73,256

 
$
6,429

 
$
160,552

 
$
53,380

 
$
107,172


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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 




- 82 -


(11) 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 months ended March 31, 2020 and 2019, respectively. Transfers between significant other observable inputs and significant unobservable inputs during the three months ended March 31, 2020 and 2019 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 March 31, 2020 or December 31, 2019.


- 83 -


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 March 31, 2020 (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
 
$
37,740

 
$
—

 
$
37,740

 
$
—

Residential agency mortgage-backed securities
 
1,922,725

 
—

 
1,922,725

 
—

Municipal and other tax-exempt securities
 
35,513

 
—

 
35,513

 
—

Asset-backed securities
 
58,278

 
—

 
58,278

 
—

Other trading securities
 
56,329

 
—

 
56,329

 
—

Total trading securities
 
2,110,585

 
—

 
2,110,585

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
917

 
917

 
—

 
—

Municipal and other tax-exempt securities
 
24,034

 
—

 
24,034

 
—

Residential agency mortgage-backed securities
 
9,259,089

 
—

 
9,259,089

 
—

Residential non-agency mortgage-backed securities
 
34,866

 
—

 
34,866

 
—

Commercial agency mortgage-backed securities
 
3,374,899

 
—

 
3,374,899

 
—

Other debt securities
 
472

 
—

 
—

 
472

Total available for sale securities
 
12,694,277

 
917

 
12,692,888

 
472

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
—

 
—

 
—

 
—

Residential agency mortgage-backed securities
 
1,703,238

 
—

 
1,703,238

 
—

Total fair value option securities
 
1,703,238

 
—

 
1,703,238

 
—

Residential mortgage loans held for sale
 
204,720

 
—

 
195,146

 
9,574

Mortgage servicing rights1
 
110,828

 
—

 
—

 
110,828

Derivative contracts, net of cash collateral2
 
922,716

 
83,268

 
839,448

 
—

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
1,213,445

 
—

 
1,213,445

 
—

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 5, 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, interest rate and agricultural 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 derivative contracts, fully offset by cash margin.


- 84 -


The fair value of financial assets and liabilities measured on a recurring basis was as follows as of December 31, 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
 
$
44,264

 
$
—

 
$
44,264

 
$
—

Residential agency mortgage-backed securities
 
1,504,651

 
—

 
1,504,651

 
—

Municipal and other tax-exempt securities
 
26,196

 
—

 
26,196

 
—

Asset-backed securities
 
14,084

 
—

 
14,084

 
—

Other trading securities
 
34,726

 
—

 
34,726

 
—

Total trading securities
 
1,623,921

 
—

 
1,623,921

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,600

 
1,600

 
—

 
—

Municipal and other tax-exempt securities
 
1,861

 
—

 
1,861

 
—

Residential agency mortgage-backed securities
 
8,046,096

 
—

 
8,046,096

 
—

Residential non-agency mortgage-backed securities
 
41,609

 
—

 
41,609

 
—

Commercial agency mortgage-backed securities
 
3,178,005

 
—

 
3,178,005

 
—

Other debt securities
 
472

 
—

 
—

 
472

Total available for sale securities
 
11,269,643

 
1,600

 
11,267,571

 
472

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
9,917

 
9,917

 
—

 
—

Residential agency mortgage-backed securities
 
1,088,660

 
—

 
1,088,660

 
—

Total fair value option securities
 
1,098,577

 
9,917

 
1,088,660

 
—

Residential mortgage loans held for sale
 
182,271

 
—

 
173,958

 
8,313

Mortgage servicing rights1
 
201,886

 
—

 
—

 
201,886

Derivative contracts, net of cash collateral2
 
323,375

 
8,944

 
314,431

 
—

Liabilities:
 


 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
251,128

 
—

 
251,128

 
—

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 5, 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 and energy 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 and agricultural contracts, fully offset by cash margin.




- 85 -


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.


- 86 -


The following represents the changes for the three months ended March 31, 2020 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):

 
 
Available for sale - Other debt securities
 
Residential mortgage loans held for sale
Balance, December 31, 2019
 
$
472

 
$
8,313

Transfer to Level 3 from Level 21
 
—

 
2,264

Purchases
 
—

 
—

Proceeds from sales
 
—

 
(940
)
Redemptions and distributions
 
—

 
—

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

 
(63
)
Other comprehensive income (loss):
 
 
 
 
Net change in unrealized gain (loss)
 
—

 
—

Balance, March 31, 2020
 
$
472

 
$
9,574

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.
 
 
 
 
 


The following represents the changes for the three months ended March 31, 2019 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for sale - Other debt securities
 
Residential mortgage loans held for sale
Balance, December 31, 2018
 
$
472

 
$
15,207

Transfer to Level 3 from Level 21
 
—

 
982

Purchases
 
—

 
—

Proceeds from sales
 
—

 
(381
)
Redemptions and distributions
 
—

 
—

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

 
(32
)
Other comprehensive income (loss):
 
 
 
 
Net change in unrealized gain (loss)
 
—

 
—

Balance, March 31, 2019
 
$
472

 
$
15,776

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.
 
 
 
 
 
 
 





- 87 -


A summary of quantitative information about assets measured at fair value on a recurring basis using Significant Unobservable Inputs (Level 3) as of March 31, 2020 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
 
6.69%-6.69% (6.69%)
3 
94.38%-94.38% (94.38%)
2 
Residential mortgage loans held for sale
 
9,574

 
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.
 
95.24%
 
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, 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
 
7.08%-7.08% (7.08%)
3 
94.40%-94.40% (94.40%)
2 
Residential mortgage loans held for sale
 
8,313

 
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.
 
95.23%
 
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.




- 88 -


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 nonaccruing 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 March 31, 2020 for which the fair value was adjusted during the three months ended March 31, 2020:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at March 31, 2020
 
Three Months Ended
March 31, 2020
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 operating expenses of repossessed assets
Nonaccruing loans
$
—

 
$
293

 
$
22,746

 
$
15,789

 
$
—

Real estate and other repossessed assets
—

 
1,066

 
400

 
—

 
226

 
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 March 31, 2019 for which the fair value was adjusted during the three months ended March 31, 2019:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at March 31, 2019
 
Three Months Ended
March 31, 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 operating expenses of repossessed assets
Nonaccruing loans
$
—

 
$
—

 
$
9,712

 
$
9,581

 
$
—

Real estate and other repossessed assets
—

 
2,688

 
144

 
—

 
434



The fair value of collateral-dependent nonaccruing 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 nonaccruing 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.


- 89 -


A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of March 31, 2020 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Nonaccruing loans
 
$
22,746

 
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
 
6% - 71% (36%)1
Real estate and other repossessed assets
 
400

 
Appraised value, as adjusted
 
Marketability adjustments off appraised value2
 
87% - 87% (87%)
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 March 31, 2019 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Nonaccruing loans
 
$
9,712

 
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
 
14% - 74% (31%)1
Real estate and other repossessed assets
 
144

 
Appraised value, as adjusted
 
Marketability adjustments off appraised value2
 
75% - 85% (79%)

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.



- 90 -


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 March 31, 2020 (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
 
$
670,500

 
$
670,500

 
$
670,500

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
302,577

 
302,577

 
302,577

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
37,740

 
37,740

 
—

 
37,740

 
—

Residential agency mortgage-backed securities
 
1,922,725

 
1,922,725

 
—

 
1,922,725

 
—

Municipal and other tax-exempt securities
 
35,513

 
35,513

 
—

 
35,513

 
—

Asset-backed securities
 
58,278

 
58,278

 
—

 
58,278

 
—

Other trading securities
 
56,329

 
56,329

 
—

 
56,329

 
—

Total trading securities
 
2,110,585

 
2,110,585

 
—

 
2,110,585

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
86,212

 
89,359

 
—

 
89,359

 
—

Residential agency mortgage-backed securities
 
10,253

 
11,099

 
—

 
11,099

 
—

Other debt securities
 
177,613

 
195,944

 
—

 
8,547

 
187,397

Total investment securities
 
274,078

 
296,402

 
—

 
109,005

 
187,397

Allowance for credit losses
 
(1,502
)
 
—

 
—

 
—

 
—

Investment securities, net of allowance
 
272,576

 
296,402

 
—

 
109,005

 
187,397

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
917

 
917

 
917

 
—

 
—

Municipal and other tax-exempt securities
 
24,034

 
24,034

 
—

 
24,034

 
—

Residential agency mortgage-backed securities
 
9,259,089

 
9,259,089

 
—

 
9,259,089

 
—

Residential non-agency mortgage-backed securities
 
34,866

 
34,866

 
—

 
34,866

 
—

Commercial agency mortgage-backed securities
 
3,374,899

 
3,374,899

 
—

 
3,374,899

 
—

Other debt securities
 
472

 
472

 
—

 
—

 
472

Total available for sale securities
 
12,694,277

 
12,694,277

 
917

 
12,692,888

 
472

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
—

 
—

 
—

 
—

 
—

Residential agency mortgage-backed securities
 
1,703,238

 
1,703,238

 
—

 
1,703,238

 
—

Total fair value option securities
 
1,703,238

 
1,703,238

 
—

 
1,703,238

 
—

Residential mortgage loans held for sale
 
204,720

 
204,720

 
—

 
195,146

 
9,574

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
14,795,975

 
14,733,781

 
—

 
—

 
14,733,781

Commercial real estate
 
4,450,085

 
4,469,491

 
—

 
—

 
4,469,491

Loans to individuals
 
3,217,910

 
3,236,809

 
—

 
—

 
3,236,809

Total loans
 
22,463,970

 
22,440,081

 
—

 
—

 
22,440,081

Allowance for loan losses
 
(315,311
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
22,148,659

 
22,440,081

 
—

 
—

 
22,440,081

Mortgage servicing rights
 
110,828

 
110,828

 
—

 
—

 
110,828

Derivative instruments with positive fair value, net of cash collateral
 
922,716

 
922,716

 
83,268

 
839,448

 
—

Deposits with no stated maturity
 
27,011,679

 
27,011,679

 
—

 
—

 
27,011,679

Time deposits
 
2,232,473

 
2,257,136

 
—

 
—

 
2,257,136

Other borrowed funds
 
10,113,322

 
10,110,076

 
—

 
—

 
10,110,076

Subordinated debentures
 
275,942

 
263,674

 
—

 
263,674

 
—

Derivative instruments with negative fair value, net of cash collateral
 
1,213,445

 
1,213,445

 
—

 
1,213,445

 
—



- 91 -


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, 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
 
$
735,836

 
$
735,836

 
$
735,836

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
522,985

 
522,985

 
522,985

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
44,264

 
44,264

 
—

 
44,264

 
—

Residential agency mortgage-backed securities
 
1,504,651

 
1,504,651

 
—

 
1,504,651

 
—

Municipal and other tax-exempt securities
 
26,196

 
26,196

 
—

 
26,196

 
—

Asset-backed securities
 
14,084

 
14,084

 
—

 
14,084

 
—

Other trading securities
 
34,726

 
34,726

 
—

 
34,726

 
—

Total trading securities
 
1,623,921

 
1,623,921

 
—

 
1,623,921

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
93,653

 
96,897

 
—

 
96,897

 
—

Residential agency mortgage-backed securities
 
10,676

 
11,164

 
—

 
11,164

 
—

Other debt securities
 
189,089

 
206,341

 
—

 
8,206

 
198,135

Total investment securities
 
293,418

 
314,402

 
—

 
116,267

 
198,135

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
1,600

 
1,600

 
1,600

 
—

 
—

Municipal and other tax-exempt securities
 
1,861

 
1,861

 
—

 
1,861

 
—

Residential agency mortgage-backed securities
 
8,046,096

 
8,046,096

 
—

 
8,046,096

 
—

Residential non-agency mortgage-backed securities
 
41,609

 
41,609

 
—

 
41,609

 
—

Commercial agency mortgage-backed securities
 
3,178,005

 
3,178,005

 
—

 
3,178,005

 
—

Other debt securities
 
472

 
472

 
—

 
—

 
472

Total available for sale securities
 
11,269,643

 
11,269,643

 
1,600

 
11,267,571

 
472

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
9,917

 
9,917

 
9,917

 
—

 
—

Residential agency mortgage-backed securities
 
1,088,660

 
1,088,660

 
—

 
1,088,660

 
—

Total fair value option securities
 
1,098,577

 
1,098,577

 
9,917

 
1,088,660

 
—

Residential mortgage loans held for sale
 
182,271

 
182,271

 
—

 
173,958

 
8,313

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
14,031,650

 
13,966,221

 
—

 
—

 
13,966,221

Commercial real estate
 
4,433,783

 
4,422,717

 
—

 
—

 
4,422,717

Residential mortgage
 
2,084,172

 
2,098,093

 
—

 
—

 
2,098,093

Personal
 
1,201,382

 
1,202,298

 
—

 
—

 
1,202,298

Total loans
 
21,750,987

 
21,689,329

 
—

 
—

 
21,689,329

Allowance for loan losses
 
(210,759
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
21,540,228

 
21,689,329

 
—

 
—

 
21,689,329

Mortgage servicing rights
 
201,886

 
201,886

 
—

 
—

 
201,886

Derivative instruments with positive fair value, net of cash collateral
 
323,375

 
323,375

 
8,944

 
314,431

 
—

Deposits with no stated maturity
 
25,403,319

 
25,403,319

 
—

 
—

 
25,403,319

Time deposits
 
2,217,849

 
2,212,467

 
—

 
—

 
2,212,467

Other borrowed funds
 
8,345,405

 
8,315,860

 
—

 
—

 
8,315,860

Subordinated debentures
 
275,923

 
284,627

 
—

 
284,627

 
—

Derivative instruments with negative fair value, net of cash collateral
 
251,128

 
251,128

 
—

 
251,128

 
—



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.

- 92 -


(12) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on March 31, 2020 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.


- 93 -


Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
March 31, 2020
 
December 31, 2019
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
721,659

 
$
2,393

 
1.33
%
 
$
573,203

 
$
2,335

 
1.62
%
Trading securities
 
1,690,104

 
11,855

 
2.89
%
 
1,672,426

 
13,015

 
3.19
%
Investment securities, net of allowance
 
282,265

 
3,338

 
4.73
%
 
298,567

 
3,500

 
4.69
%
Available for sale securities
 
11,664,521

 
69,728

 
2.48
%
 
11,333,524

 
69,692

 
2.52
%
Fair value option securities
 
1,793,480

 
11,708

 
2.67
%
 
1,521,528

 
9,488

 
2.62
%
Restricted equity securities
 
429,133

 
5,894

 
5.49
%
 
479,687

 
6,441

 
5.37
%
Residential mortgage loans held for sale
 
129,708

 
1,123

 
3.50
%
 
203,535

 
1,797

 
3.55
%
Loans
 
21,943,023

 
245,613

 
4.50
%
 
22,236,000

 
266,315

 
4.75
%
Allowance for loan losses
 
(250,338
)
 
 
 
 
 
(205,417
)
 
 
 
 
Loans, net of allowance
 
21,692,685

 
245,613

 
4.55
%
 
22,030,583

 
266,315

 
4.80
%
Total earning assets
 
38,403,555

 
351,652

 
3.73
%
 
38,113,053

 
372,583

 
3.93
%
Receivable on unsettled securities sales
 
3,046,111

 
 
 
 
 
1,973,604

 
 
 
 
Cash and other assets
 
4,270,952

 
 
 
 
 
4,126,697

 
 
 
 
Total assets
 
$
45,720,618

 
 
 
 
 
$
44,213,354

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
16,159,654

 
$
35,857

 
0.89
%
 
$
14,685,385

 
$
36,897

 
1.00
%
Savings
 
563,821

 
126

 
0.09
%
 
554,605

 
154

 
0.11
%
Time
 
2,239,234

 
10,176

 
1.83
%
 
2,247,717

 
10,970

 
1.94
%
Total interest-bearing deposits
 
18,962,709

 
46,159

 
0.98
%
 
17,487,707

 
48,021

 
1.09
%
Funds purchased and repurchase agreements
 
3,815,941

 
10,838

 
1.14
%
 
4,120,610

 
16,212

 
1.56
%
Other borrowings
 
6,542,325

 
26,947

 
1.66
%
 
6,247,194

 
31,621

 
2.01
%
Subordinated debentures
 
275,932

 
3,633

 
5.30
%
 
275,916

 
3,754

 
5.40
%
Total interest-bearing liabilities
 
29,596,907

 
87,577

 
1.19
%
 
28,131,427

 
99,608

 
1.40
%
Non-interest bearing demand deposits
 
9,232,859

 
 
 
 
 
9,612,533

 
 
 
 
Due on unsettled securities purchases
 
960,780

 
 
 
 
 
784,174

 
 
 
 
Other liabilities
 
1,022,106

 
 
 
 
 
837,732

 
 
 
 
Total equity
 
4,907,966

 
 
 
 
 
4,847,488

 
 
 
 
Total liabilities and equity
 
$
45,720,618

 
 
 
 
 
$
44,213,354

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
264,075

 
2.54
%
 
 
 
$
272,975

 
2.53
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
 
 
2.80
%
 
 
 
 
 
2.88
%
Less tax-equivalent adjustment
 
 
 
2,715

 
 
 
 
 
2,726

 
 
Net Interest Revenue
 
 
 
261,360

 
 
 
 
 
270,249

 
 
Provision for credit losses
 
 
 
93,771

 
 
 
 
 
19,000

 
 
Other operating revenue
 
 
 
180,319

 
 
 
 
 
178,585

 
 
Other operating expense
 
 
 
268,624

 
 
 
 
 
288,795

 
 
Income before taxes
 
 
 
79,284

 
 
 
 
 
141,039

 
 
Federal and state income taxes
 
 
 
17,300

 
 
 
 
 
30,257

 
 
Net income
 
 
 
61,984

 
 
 
 
 
110,782

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
(95
)
 
 
 
 
 
430

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
62,079

 
 
 
 
 
$
110,352

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
0.88

 
 

 
 

 
$
1.56

 
 

Diluted
 
 

 
$
0.88

 
 

 
 

 
$
1.56

 
 

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.

- 94 -


Three Months Ended
September 30, 2019
 
June 30, 2019
 
March 31, 2019
Average Balance
 
Revenue /Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
500,823

 
$
3,050

 
2.42
%
 
$
535,491

 
$
3,432

 
2.57
%
 
$
537,903

 
$
3,397

 
2.56
%
1,696,568

 
14,546

 
3.49
%
 
1,757,335

 
15,609

 
3.59
%
 
1,968,399

 
18,790

 
3.88
%
308,090

 
3,434

 
4.46
%
 
328,482

 
3,621

 
4.41
%
 
343,282

 
3,862

 
4.50
%
10,747,439

 
67,640

 
2.60
%
 
9,435,668

 
59,888

 
2.63
%
 
8,883,054

 
56,881

 
2.57
%
1,553,879

 
10,708

 
2.79
%
 
898,772

 
7,503

 
3.34
%
 
594,349

 
5,237

 
3.62
%
476,781

 
7,558

 
6.34
%
 
413,812

 
6,516

 
6.30
%
 
395,432

 
6,345

 
6.42
%
203,319

 
1,891

 
3.73
%
 
192,102

 
1,754

 
3.65
%
 
145,040

 
1,663

 
4.58
%
22,412,918

 
289,316

 
5.12
%
 
22,004,405

 
295,978

 
5.39
%
 
21,766,065

 
282,428

 
5.26
%
(201,714
)
 
 
 
 
 
(205,532
)
 
 
 
 
 
(206,092
)
 
 
 
 
22,211,204

 
289,316

 
5.17
%
 
21,798,873

 
295,978

 
5.45
%
 
21,559,973

 
282,428

 
5.31
%
37,698,103

 
398,143

 
4.25
%
 
35,360,535

 
394,301

 
4.51
%
 
34,427,432

 
378,603

 
4.46
%
1,742,794

 
 
 
 
 
1,437,462

 
 
 
 
 
1,224,700

 
 
 
 
4,139,451

 
 
 
 
 
4,046,780

 
 
 
 
 
4,020,549

 
 
 
 
$
43,580,348

 
 
 
 
 
$
40,844,777

 
 
 
 
 
$
39,672,681

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
13,131,542

 
$
35,713

 
1.08
%
 
$
12,512,282

 
$
32,540

 
1.04
%
 
$
11,931,539

 
$
27,704

 
0.94
%
557,122

 
190

 
0.14
%
 
558,738

 
173

 
0.12
%
 
541,575

 
160

 
0.12
%
2,251,800

 
11,014

 
1.94
%
 
2,207,391

 
10,470

 
1.90
%
 
2,153,277

 
9,553

 
1.80
%
15,940,464

 
46,917

 
1.17
%
 
15,278,411

 
43,183

 
1.13
%
 
14,626,391

 
37,417

 
1.04
%
3,106,163

 
15,731

 
2.01
%
 
2,066,950

 
10,704

 
2.08
%
 
2,033,036

 
10,356

 
2.07
%
8,125,023

 
49,650

 
2.42
%
 
7,175,617

 
47,700

 
2.67
%
 
7,040,279

 
46,454

 
2.68
%
275,900

 
3,813

 
5.48
%
 
275,887

 
3,801

 
5.53
%
 
275,882

 
3,745

 
5.50
%
27,447,550

 
116,111

 
1.68
%
 
24,796,865

 
105,388

 
1.70
%
 
23,975,588

 
97,972

 
1.66
%
9,759,710

 
 
 
 
 
9,883,965

 
 
 
 
 
9,988,088

 
 
 
 
745,893

 
 
 
 
 
821,688

 
 
 
 
 
453,937

 
 
 
 
847,195

 
 
 
 
 
744,216

 
 
 
 
 
775,574

 
 
 
 
4,780,000

 
 
 
 
 
4,598,043

 
 
 
 
 
4,479,494

 
 
 
 
$
43,580,348

 
 
 
 
 
$
40,844,777

 
 
 
 
 
$
39,672,681

 
 
 
 
 
 
$
282,032

 
2.57
%
 
 
 
$
288,913

 
2.81
%
 
 
 
$
280,631

 
2.80
%
 
 
 
 
3.01
%
 
 
 
 
 
3.30
%
 
 
 
 
 
3.30
%
 
 
2,936

 
 
 
 
 
3,481

 
 
 
 
 
2,529

 
 
 
 
279,096

 
 
 
 
 
285,432

 
 
 
 
 
278,102

 
 
 
 
12,000

 
 
 
 
 
5,000

 
 
 
 
 
8,000

 
 
 
 
186,450

 
 
 
 
 
172,065

 
 
 
 
 
157,270

 
 
 
 
279,292

 
 
 
 
 
277,137

 
 
 
 
 
287,157

 
 
 
 
174,254

 
 
 
 
 
175,360

 
 
 
 
 
140,215

 
 
 
 
32,396

 
 
 
 
 
37,580

 
 
 
 
 
29,950

 
 
 
 
141,858

 
 
 
 
 
137,780

 
 
 
 
 
110,265

 
 
 
 
(373
)
 
 
 
 
 
217

 
 
 
 
 
(347
)
 
 
 
 
$
142,231

 
 
 
 
 
$
137,563

 
 
 
 
 
$
110,612

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
2.00

 
 

 
 

 
$
1.93

 
 

 
 

 
$
1.54

 
 

 

 
$
2.00

 
 

 
 

 
$
1.93

 
 

 
 

 
$
1.54

 
 




- 95 -


Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
348,937

 
$
369,857

 
$
395,207

 
$
390,820

 
$
376,074

Interest expense
 
87,577

 
99,608

 
116,111

 
105,388

 
97,972

Net interest revenue
 
261,360

 
270,249

 
279,096

 
285,432

 
278,102

Provision for credit losses
 
93,771

 
19,000

 
12,000

 
5,000

 
8,000

Net interest revenue after provision for credit losses
 
167,589

 
251,249

 
267,096

 
280,432

 
270,102

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
50,779

 
43,843

 
43,840

 
40,526

 
31,617

Transaction card revenue
 
21,881

 
22,548

 
22,015

 
21,915

 
20,738

Fiduciary and asset management revenue
 
44,458

 
45,021

 
43,621

 
45,025

 
43,358

Deposit service charges and fees
 
26,130

 
27,331

 
28,837

 
28,074

 
28,243

Mortgage banking revenue
 
37,167

 
25,396

 
30,180

 
28,131

 
23,834

Other revenue
 
12,309

 
15,283

 
17,626

 
12,437

 
12,762

Total fees and commissions
 
192,724

 
179,422

 
186,119

 
176,108

 
160,552

Other gains (losses), net
 
(10,741
)
 
(1,649
)
 
4,544

 
3,480

 
2,976

Gain (loss) on derivatives, net
 
18,420

 
(4,644
)
 
3,778

 
11,150

 
4,667

Gain (loss) on fair value option securities, net
 
68,393

 
(8,328
)
 
4,597

 
9,853

 
9,665

Change in fair value of mortgage servicing rights
 
(88,480
)
 
9,297

 
(12,593
)
 
(29,555
)
 
(20,666
)
Gain on available for sale securities, net
 
3

 
4,487

 
5

 
1,029

 
76

Total other operating revenue
 
180,319

 
178,585

 
186,450

 
172,065

 
157,270

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
156,181

 
168,422

 
162,573

 
160,342

 
169,228

Business promotion
 
6,215

 
8,787

 
8,859

 
10,142

 
7,874

Charitable contributions to BOKF Foundation
 
—

 
2,000

 
—

 
1,000

 
—

Professional fees and services
 
12,948

 
13,408

 
12,312

 
13,002

 
16,139

Net occupancy and equipment
 
26,061

 
26,316

 
27,558

 
26,880

 
29,521

Insurance
 
4,980

 
5,393

 
4,220

 
6,454

 
4,839

Data processing and communications
 
32,743

 
31,884

 
31,915

 
29,735

 
31,449

Printing, postage and supplies
 
4,272

 
3,700

 
3,825

 
4,107

 
4,885

Net losses and operating expenses of repossessed assets
 
1,531

 
2,403

 
1,728

 
580

 
1,996

Amortization of intangible assets
 
5,094

 
5,225

 
5,064

 
5,138

 
5,191

Mortgage banking costs
 
10,545

 
14,259

 
14,975

 
11,545

 
9,906

Other expense
 
8,054

 
6,998

 
6,263

 
8,212

 
6,129

Total other operating expense
 
268,624

 
288,795

 
279,292

 
277,137

 
287,157

Net income before taxes
 
79,284

 
141,039

 
174,254

 
175,360

 
140,215

Federal and state income taxes
 
17,300

 
30,257

 
32,396

 
37,580

 
29,950

Net income
 
61,984

 
110,782

 
141,858

 
137,780

 
110,265

Net income (loss) attributable to non-controlling interests
 
(95
)
 
430

 
(373
)
 
217

 
(347
)
Net income attributable to BOK Financial Corporation shareholders
 
$
62,079

 
$
110,352

 
$
142,231

 
$
137,563

 
$
110,612

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$0.88
 
$1.56
 
$2.00
 
$1.93
 
$1.54
Diluted
 
$0.88
 
$1.56
 
$2.00
 
$1.93
 
$1.54
Average shares used in computation:
 
 
 
 
 
 
 
 
 
 
Basic
 
70,123,685

 
70,295,899

 
70,596,307

 
70,887,063

 
71,387,070

Diluted
 
70,130,166

 
70,309,644

 
70,609,924

 
70,902,033

 
71,404,388




- 96 -


PART II. Other Information

Item 1. Legal Proceedings
 
See discussion of legal proceedings at Note 6 to the Consolidated Financial Statements.

Item 1A. Risk Factors
The following risk factor supplements the “Risk Factors” section in Item 1A of our 2019 Form 10-K.
Our business, financial condition, liquidity and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

The Coronavirus Disease 2019 (“COVID-19”) pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, BOKF’s business, financial condition, liquidity and results of operations. The extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the continued effectiveness of our business continuity plan, the direct and indirect impact of the pandemic on our employees, customers, clients, counterparties and service providers, as well as other market participants, and the effectiveness of actions taken by governmental authorities and other third parties in response to the pandemic.

The spread of the COVID-19 virus and the resulting "stay at home" orders, travel restrictions, and closed schools and work places have caused severe disruptions in the U.S. economy, which has in turn disrupted the business activities and operations of our customers, as well as our business and operations. The COVID-19 outbreak was first reported in Wuhan, Hubei Province, China in December 2019, and has resulted in more than a million confirmed cases identified around the world, with hundreds of thousands of cases in the U.S. As a result of the pandemic, many businesses have been shut down, supply chains have been interrupted, slowed, or rendered inoperable, and many individuals have become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions.
Specific to our operations, we face the following risks:
•
The pandemic, combined with pre-existing factors, including, but not limited to, international trade disputes, inflation risks, and oil price volatility, could further destabilize the financial markets and markets in which the Company operates. The resulting impacts on consumers, including the sudden increase in the unemployment rate, could cause changes in consumer and business spending, borrowing needs, and saving habits, which will likely affect the demand for loans and other products or services the Company offers, as well as the creditworthiness of potential and current borrowers.

•
Governmental mandates have forced shutdowns of our customers' and vendors' facilities that may extend for indefinite periods. This may cause customers, third-party service providers, and counterparties to be unable to meet existing payment or other obligations to the Company.

•
The COVID-19 virus may have an adverse effect on customer deposits, the ability of our borrowers to satisfy their obligations, the demand for our loans or other products and services, or on financial markets, real estate markets, or economic growth, which could adversely affect our liquidity, financial condition and results of operations.

•
The Federal Reserve reduced the target federal funds rate to 0.00% to 0.25% on March 15, 2020 and announced a $700 billion quantitative easing program in response to the economic downturn caused by COVID-19. These reductions, especially if prolonged, could adversely affect our net interest income and margins, the value of mortgage servicing rights, and our profitability.

•
Widespread outbreaks of the COVID-19 virus in our primary geographies could adversely affect our workforce resulting in serious health issues and absenteeism. Social distancing measures enacted for working employees such as working from home, working in different locations, and working different shifts could further disrupt the workforce and normal internal control environment. This could lead to the inability to adequately meet customer needs, maintain adequate financial controls and cybersecurity controls, and meet regulatory deadlines.


- 97 -


•
The determination of the appropriate level of allowance for credit losses involves a high degree of subjectivity and requires management to make significant estimates of current expected credit losses. The COVID-19 pandemic and the unprecedented governmental response could make these subjective judgments even more difficult. The economic impact of the pandemic and government responses may have an adverse effect on current and forward prices for oil and natural gas, which could result in significant credit losses. The value of real estate and other collateral securing loans may also be adversely affected.

As a result of the preceding and other risks, if the COVID-19 virus continues to spread and the response to contain the pandemic is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, and results of operations. These adverse impacts could lead to a material impairment of goodwill and other intangible assets assigned to our reporting units.




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 March 31, 2020.

 
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
January 1 to January 31, 2020
 
8,793

 
$
86.16

 
—

 
4,133,287

February 1 to February 29, 2020
 
419,661

 
$
78.82

 
357,000

 
3,776,287

March 1 to March 31, 2020
 
85,000

 
$
60.62

 
85,000

 
3,691,287

Total
 
513,454

 
 

 
442,000

 
 

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 March 31, 2020, the Company had repurchased 1,308,713 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.


- 98 -



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



- 99 -


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:        May 5, 2020                                                                  



/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


- 100 -

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