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

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

Commission File No. 0-19341

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 65,434,258 shares of common stock ($.00006 par value) as of September 30, 2018.




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

Index

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



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

BOK Financial Corporation (“the Company”) reported net income of $117.3 million or $1.79 per diluted share for the third quarter of 2018, including $11.5 million or 18 cents per share from a client asset management fee. Net income was $85.6 million or $1.31 per diluted share for the third quarter of 2017 and $114.4 million or $1.75 per diluted share for the second quarter of 2018. 

On October 1, 2018, the Company acquired CoBiz Financial, Inc. (CoBiz). CoBiz is headquartered in Denver with a presence in Colorado and Arizona. The Company paid total consideration of $944 million, which included $242 million in cash along with the issuance of 7.2 million shares of BOK Financial stock valued at $702 million, in exchange for all outstanding shares of CoBiz stock. As of September 30, 2018, CoBiz had $3.1 billion in loans, $3.9 billion in total assets, $3.3 billion in deposits and $339 million in equity. The pro forma common equity Tier 1 capital ratio at September 30, 2018 on a combined basis was 10.92 percent, Tier 1 capital ratio was 10.92 percent, total capital ratio was 12.37 percent, and leverage ratio was 9.18 percent. We expect to incur approximately $45 million of total closing and integration costs during the fourth quarter of 2018 and first quarter of 2019 with an anticipated bank consolidation in the first quarter of 2019.

Highlights of the third quarter of 2018 included:
•
Net interest revenue totaled $240.9 million, up $22.4 million over the third quarter of 2017. The increase in net interest revenue over the prior year was driven by both growth in average earning assets and improving yields. Net interest margin was 3.21 percent for the third quarter of 2018 compared to 3.01 percent for the third quarter of 2017. Average earning assets were $30.0 billion for the third quarter of 2018 compared to $29.6 billion for the third quarter of 2017. Net interest revenue increased $2.3 million over the second quarter of 2018. Excluding the impact of interest recoveries in the second quarter, net interest margin grew by 11 basis points primarily due to the Company reducing excess cash balances held at the Federal Reserve funded by borrowings from the Federal Home Loan Banks.
•
Fees and commissions revenue totaled $167.5 million. Adoption of the new revenue recognition accounting standard in the first quarter of 2018 resulted in interchange fees we pay to issuing banks being netted against transaction card revenue. Previously these fees were included in data processing and communications expense. Excluding this impact, fees and commissions revenue increased $4.0 million compared to the third quarter of 2017. Trust fees and commissions increased $16.8 million largely as a result of a fee generated from the sale of client assets during the third quarter of 2018. Brokerage and trading revenue decreased $10.1 million while mortgage banking revenue decreased $1.4 million, both affected by the impact of rising interest rates on mortgage loan origination volumes and margins. Fees and commissions revenue increased $9.7 million compared to the second quarter of 2018. Trust fees and commissions increased $15.8 million compared to the second quarter of 2018. Brokerage and trading revenue decreased $3.4 million and mortgage banking revenue decreased $2.8 million.
•
Other operating expense totaled $252.6 million, a $3.4 million or 1 percent decrease compared to the third quarter of 2017 on a comparable basis. Personnel expense decreased $4.4 million, primarily due to decreased incentive compensation expense. Non-personnel expense increased $977 thousand. Operating expense increased $6.1 million over the second quarter of 2018. Personnel expense increased $4.6 million, primarily due to a reduction in share-based compensation expense in the second quarter of 2018 based on a change in assumptions for performance-based awards. Non-personnel expense increased $1.6 million. Professional fees and services expense and mortgage banking costs were higher in the second quarter.
•
Income tax expense was $34.7 million or 22.8 percent of net income before taxes for the third quarter of 2018 compared to $42.4 million or 33.1 percent for the third quarter of 2017 and $33.3 million or 22.4 percent for the second quarter of 2018. Beginning January 1, 2018, the Tax Cuts and Jobs Act ("the Act") decreased the corporate income tax rate from 35% to 21%.
•
The Company recorded provision for credit losses of $4.0 million in the third quarter of 2018. No provision for credit losses was recorded in the second quarter of 2018 or third quarter of 2017. Net charge-offs totaled $9.0 million or 0.20 percent of average loans on an annualized basis in the third quarter of 2018 compared to net charge-offs of $10.5 million or 0.24 percent of average loans on an annualized basis for the second quarter of 2018. Net charge-offs were $32.5 million or 0.18 percent of average loans over the last four quarters.

- 1 -


•
The combined allowance for credit losses totaled $213 million or 1.16 percent of outstanding loans at September 30, 2018 compared to $218 million or 1.21 percent of outstanding loans at June 30, 2018.
•
Nonperforming assets that are not guaranteed by U.S. government agencies totaled $170 million or 0.93 percent of outstanding loans and repossessed assets at September 30, 2018 and $186 million or 1.04 percent of outstanding loans and repossessed assets at June 30, 2018. Potential problem loans increased $36 million to $176 million at September 30, 2018.
•
Average loan balances grew by $453 million over the previous quarter, primarily due to growth in commercial and commercial real estate loan balances. Period-end outstanding loan balances totaled $18.3 billion at September 30, 2018, an increase of $346 million over June 30, 2018.
•
Average deposits were largely unchanged compared to the previous quarter. Average demand deposit balances increased $102 million, while interest-bearing transaction deposit balances decreased $179 million. Period-end deposits were $21.6 billion at September 30, 2018, a $537 million decrease compared to June 30, 2018.
•
The common equity Tier 1 capital ratio at September 30, 2018 was 12.05 percent. Other regulatory capital ratios were Tier 1 capital ratio, 12.05 percent, total capital ratio, 13.35 percent, and leverage ratio, 9.90 percent. At June 30, 2018, the common equity Tier 1 capital ratio was 11.92 percent, the Tier 1 capital ratio was 11.92 percent, total capital ratio was 13.26 percent, and leverage ratio was 9.57 percent.
•
The company paid a regular cash dividend of $32.6 million or $0.50 per common share during the third quarter of 2018. On October 30, 2018, the board of directors approved a quarterly cash dividend of $0.50 per common share payable on or about November 26, 2018 to shareholders of record as of November 12, 2018.

- 2 -


Results of Operations
Net Interest Revenue and Net Interest Margin

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

Net interest revenue totaled $240.9 million for the third quarter of 2018, up from $218.5 million in the third quarter of 2017. Net interest margin was 3.21 percent for the third quarter of 2018, compared to 3.01 percent for the third quarter of 2017. Recoveries of foregone interest on nonaccruing loans added $4.6 million or 6 basis points to the net interest margin in the third quarter of 2017. Recoveries of foregone interest were not significant in the third quarter of 2018. The discussion following excludes the impact of recoveries of foregone interest.

Tax-equivalent net interest revenue increased $20.0 million over the third quarter of 2017. Table 1 shows the effect on net interest revenue from changes in average balances and interest rates for various types of earning assets and interest-bearing liabilities. Changes in interest rates and yields increased net interest revenue by $5.1 million. The benefit of an increase in short-term interest rates on the floating-rate earning assets was partially offset by higher borrowing costs. Tax-equivalent net interest revenue increased $15.0 million due to growth in average assets. Growth in the average balances of trading securities and loans was partially offset by decreases in interest-bearing cash and cash equivalents.

Net interest margin increased 26 basis points due largely to changes in market interest rates and spreads, along with a change in the mix of earning assets.

The tax-equivalent yield on earning assets was 4.04 percent, up 60 basis points over the third quarter of 2017 primarily due to increases in short-term interest rates resulting from increases in the federal funds rate by the Federal Reserve. Loan yields increased 59 basis points to 4.80 percent. The available for sale securities portfolio yield increased 20 basis points to 2.37 percent. The yield on interest-bearing cash and cash equivalents increased 70 basis points. Funding costs were up 50 basis points over the third quarter of 2017. The cost of interest-bearing deposits increased 32 basis points and the cost of other borrowed funds increased 81 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 42 basis points for the third quarter of 2018, up 16 basis points over the third quarter of 2017.

Average earning assets for the third quarter of 2018 increased $319 million or 1 percent over the third quarter of 2017. The average balance of trading securities grew by $1.3 billion, primarily due to expansion of U.S. agency residential mortgage-backed securities trading activities. Average loans, net of allowance for loan losses, increased $984 million, due primarily to growth in commercial loans. Interest-bearing cash and cash equivalent balances decreased $1.3 billion. The Company reduced excess cash balances held at the Federal Reserve funded by borrowings from the Federal Home Loan Banks. Available for sale securities decreased $299 million. Average balances of fair value option securities held as an economic hedge of mortgage servicing rights decreased $215 million. Investment securities balances decreased $96 million.

Average deposits decreased $183 million compared to the third quarter of 2017. Time deposit balances decreased $79 million, interest-bearing transaction account balances decreased $78 million and demand deposit balances decreased $65 million. Savings account balances increased $40 million. Average borrowed funds increased $385 million over the third quarter of 2017, primarily due to the net impact of increased borrowings from the Federal Home Loan Banks. Funds purchased and repurchase agreement balances also increased over the prior year.
Net interest revenue increased $2.3 million over the second quarter of 2018. Recoveries of foregone interest on nonaccruing loans added $5.3 million to net interest revenue or 7 basis points to net interest margin in the previous quarter. Excluding this impact, net interest margin was 3.21 percent for the third quarter of 2018, up 11 basis points over the second quarter of 2018. Net interest margin improved 10 basis points in the third quarter due to the Company reducing excess cash balances held at the Federal Reserve funded by borrowings from the Federal Home Loan Banks.

- 3 -


The yield on average earning assets was up 20 basis points over the prior quarter. The loan portfolio yield increased 12 basis points. The yield on the available for sale securities portfolio increased 7 basis points. The yield on the trading securities portfolio was up 35 basis. Funding costs were 1.25 percent, up 14 basis points. The cost of interest-bearing deposits increased 11 basis points to 0.77 percent. The cost of other borrowed funds was up 20 basis points to 2.04 percent. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 5 basis points over the prior quarter.
Average earning assets decreased $345 million compared to the second quarter of 2018. Average loan balances grew by $453 million. Trading securities balances increased $280 million. Average interest-bearing cash and cash equivalents balances decreased $985 million. Average available for sale securities decreased $34 million. In addition, average balances of restricted equity securities, investment securities, fair value option securities held as an economic hedge of our mortgage servicing rights and residential mortgage loans held for sale all decreased compared to the prior quarter.
Average deposit balances decreased $119 million compared to the second quarter of 2018. Demand deposit balances grew by$102 million, offset by a $179 million decrease in interest-bearing transaction account balances and a $41 million decrease in time deposit balance. The average balance of borrowed funds decreased $131 million, primarily due to decreased borrowings from the Federal Home Loan Banks.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately 82% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally reprice more quickly than liabilities. One of the strategies that we use to manage toward a relative rate-neutral position is to purchase fixed-rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market-rate-sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. We currently expect additional increases in the Federal Funds rate to be accretive, although at a decreasing rate as competition for deposits intensifies in the future.

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

- 4 -


Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
September 30, 2018 / 2017
 
Nine Months Ended
September 30, 2018 / 2017
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
(2,934
)
 
$
(5,259
)
 
$
2,325

 
$
3,346

 
$
(5,703
)
 
$
9,049

Trading securities
 
13,297

 
11,912

 
1,385

 
25,304

 
24,096

 
1,208

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(103
)
 
(53
)
 
(50
)
 
(246
)
 
(10
)
 
(236
)
Tax-exempt securities
 
(633
)
 
(590
)
 
(43
)
 
(1,979
)
 
(1,752
)
 
(227
)
Total investment securities
 
(736
)
 
(643
)
 
(93
)
 
(2,225
)
 
(1,762
)
 
(463
)
Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
4,342

 
(192
)
 
4,534

 
11,632

 
(1,309
)
 
12,941

Tax-exempt securities
 
(571
)
 
(223
)
 
(348
)
 
(1,690
)
 
(1,005
)
 
(685
)
Total available for sale securities
 
3,771

 
(415
)
 
4,186

 
9,942

 
(2,314
)
 
12,256

Fair value option securities
 
(1,185
)
 
(1,599
)
 
414

 
1,642

 
273

 
1,369

Restricted equity securities
 
406

 
50

 
356

 
2,223

 
1,439

 
784

Residential mortgage loans held for sale
 
56

 
(460
)
 
516

 
11

 
(890
)
 
901

Loans
 
32,739

 
10,857

 
21,882

 
98,421

 
18,696

 
79,725

Total tax-equivalent interest revenue
 
45,414

 
14,443

 
30,971

 
138,664

 
33,835

 
104,829

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
8,967

 
2

 
8,965

 
22,803

 
(158
)
 
22,961

Savings deposits
 
18

 
7

 
11

 
19

 
22

 
(3
)
Time deposits
 
1,020

 
(264
)
 
1,284

 
2,389

 
(731
)
 
3,120

Funds purchased and repurchase agreements
 
3,512

 
1,484

 
2,028

 
4,556

 
1,080

 
3,476

Other borrowings
 
11,931

 
(1,748
)
 
13,679

 
41,762

 
4,069

 
37,693

Subordinated debentures
 
(45
)
 
1

 
(46
)
 
(22
)
 
6

 
(28
)
Total interest expense
 
25,403

 
(518
)
 
25,921

 
71,507

 
4,288

 
67,219

Tax-equivalent net interest revenue
 
20,011

 
14,961

 
5,050

 
67,157

 
29,547

 
37,610

Change in tax-equivalent adjustment
 
(2,420
)
 
 
 
 
 
(7,186
)
 
 
 
 
Net interest revenue
 
$
22,431

 
 
 
 
 
$
74,343

 
 
 
 
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 $167.9 million for the third quarter of 2018, a $2.1 million increase over the third quarter of 2017 and an $11.5 million increase over the second quarter of 2018. Fees and commissions revenue increased $4.0 million compared to the third quarter of 2017 and $9.7 million compared to the prior quarter. Rising interest rates have slowed the origination of mortgage loans and related investment products leading to compressed margins. This has adversely affected both our brokerage and trading revenue as well as our mortgage banking revenue.

Table 2 – Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Jun 30, 2018
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
 
Brokerage and trading revenue
 
$
23,086

 
$
33,169

 
$
(10,083
)
 
(30
)%
 
$
26,488

 
$
(3,402
)
 
(13
)%
Transaction card revenue1
 
21,396

 
22,929

 
(1,533
)
 
(7
)%
 
20,975

 
421

 
2
 %
Fiduciary and asset management revenue
 
57,514

 
40,687

 
16,827

 
41
 %
 
41,699

 
15,815

 
38
 %
Deposit service charges and fees
 
27,765

 
28,191

 
(426
)
 
(2
)%
 
27,827

 
(62
)
 
—
 %
Mortgage banking revenue
 
23,536

 
24,890

 
(1,354
)
 
(5
)%
 
26,346

 
(2,810
)
 
(11
)%
Other revenue
 
14,213

 
13,670

 
543

 
4
 %
 
14,518

 
(305
)
 
(2
)%
Total fees and commissions revenue
 
167,510

 
163,536


3,974

 
2
 %
 
157,853


9,657

 
6
 %
Other gains (losses), net
 
1,441

 
(1,283
)
 
2,724

 
N/A

 
3,983

 
(2,542
)
 
N/A

Loss on derivatives, net
 
(2,847
)
 
1,033

 
(3,880
)
 
N/A

 
(3,057
)
 
210

 
N/A

Loss on fair value option securities, net
 
(4,385
)
 
661

 
(5,046
)
 
N/A

 
(3,341
)
 
(1,044
)
 
N/A

Change in fair value of mortgage servicing rights
 
5,972

 
(639
)
 
6,611

 
N/A

 
1,723

 
4,249

 
N/A

Gain (loss) on available for sale securities, net
 
250

 
2,487

 
(2,237
)
 
N/A

 
(762
)
 
1,012

 
N/A

Total other operating revenue
 
$
167,941

 
$
165,795

 
$
2,146

 
1
 %
 
$
156,399

 
$
11,542

 
7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Reconciliation:1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transaction card revenue on income statement
 
$
21,396

 
$
32,844

 
N/A

 
N/A

 
$
20,975

 
N/A

 
N/A

Netting adjustment
 
—

 
(9,915
)
 
N/A

 
N/A

 
—

 
N/A

 
N/A

Transaction card revenue after netting adjustment
 
$
21,396

 
$
22,929

 
(1,533
)
 
(7
)%
 
$
20,975

 
421

 
2
 %
1 
Non-GAAP measure to net interchange charges from prior quarters between transaction card revenue and data processing and communications expense. This measure has no effect on net income or earnings per share.

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

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 41 percent of total revenue for the third quarter of 2018, excluding provision for credit losses and gains and losses on other assets, securities and derivatives and the change in the fair value of mortgage servicing rights. We believe that a variety of fee revenue sources provides an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors such as rising interest rates resulting in growth in net interest revenue or fiduciary and asset management revenue, may also decrease mortgage production volumes. We expect growth in other operating revenue to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

- 6 -


Brokerage and Trading Revenue

Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage and investment banking, decreased $10.1 million or 30 percent compared to the third quarter of 2017.

Trading revenue includes net realized and unrealized gains and losses primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers and related derivative instruments. Trading revenue was $4.8 million for the third quarter of 2018, a $7.1 million or 59 percent decrease compared to the third quarter of 2017. Rising mortgage interest rates narrowed trading margins and slowed turnover of our trading inventory. However, the higher average balance of trading securities generated an increase in net interest revenue of $5.6 million.

Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $8.5 million for the third quarter of 2018, a $2.0 million or 19 percent decrease compared to the third quarter of 2017.

Revenue earned from retail brokerage transactions decreased $748 thousand or 14 percent compared to the third quarter of 2017 to $4.5 million. Retail brokerage revenue includes fees and commissions earned on sales of fixed income securities, annuities, mutual funds and other financial instruments to retail customers. Revenue is primarily based on the volume of customer transactions and applicable commission rate for each product type.We expect retail brokerage revenue to continue to decline as more relationships are transitioned to managed accounts, which are included in fiduciary and asset management revenue.

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $5.2 million for the third quarter of 2018, a $254 thousand or 5 percent decrease compared to the third quarter of 2017. Changes in investment banking revenue are primarily related to the timing and volume of completed transactions.
Brokerage and trading revenue decreased $3.4 million compared to the previous quarter due largely to the continued impact of rising interest rates on mortgage-backed securities and related derivative products.


Transaction Card Revenue

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served. Transaction card revenue decreased $1.5 million or 7 percent compared to the third quarter of 2017, primarily due to an early customer termination fee that was received in the third quarter of 2017. Transaction card revenue was largely unchanged compared to the second quarter of 2018.

Fiduciary and Asset Management Revenue

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 80 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships. Fiduciary and asset management revenue increased $16.8 million or 41 percent over the third quarter of 2017 and $15.8 million or 38 percent over the second quarter of 2018. A fee earned through the sale of client assets added $15.4 million to third quarter 2018 revenue.

- 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
 
September 30, 2018
 
September 30, 2017
 
June 30, 2018
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
Managed fiduciary assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
$
8,076,312

 
$
22,921

 
1.14
%
 
$
7,611,265

 
$
21,299

 
1.12
%
 
$
7,791,094

 
$
23,307

 
1.20
%
Institutional
13,568,115

 
5,504

 
0.16
%
 
12,747,679

 
5,585

 
0.18
%
 
13,448,068

 
5,596

 
0.17
%
Total managed fiduciary assets
21,644,427

 
28,425

 
0.53
%
 
20,358,944

 
26,884

 
0.53
%
 
21,239,162

 
28,903

 
0.54
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-managed assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiduciary
23,915,680

 
28,591

3 
0.48
%
 
24,818,241

 
13,214

 
0.21
%
 
25,292,738

 
12,426

 
0.20
%
Non-fiduciary
16,146,102

 
498

 
0.01
%
 
16,458,382

 
589

 
0.01
%
 
16,422,810

 
370

 
0.01
%
Safekeeping and brokerage assets under administration
15,921,806

 
—

 
—
%
 
16,015,342

 
—

 
—
%
 
15,918,736

 
—

 
—
%
Total non-managed assets
55,983,588

 
29,089

 
0.21
%
 
57,291,965

 
13,803

 
0.10
%
 
57,634,284

 
12,796

 
0.09
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets under management or administration
$
77,628,015

 
$
57,514

 
0.30
%
 
$
77,650,909

 
$
40,687

 
0.21
%
 
$
78,873,446

 
$
41,699

 
0.21
%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Annualized revenue divided by period-end balance.
3 A $15.4 million fee earned through client asset management added 8 basis points to the margin in the third quarter of 2018.

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

Table 4 -- Changes in Assets Under Management or Administration
 
 
Three Months Ended
September 30,
 
 
2018
 
2017
Beginning balance
 
$
78,873,446

 
$
77,811,762

Net inflows (outflows)
 
(2,921,653
)
 
(1,781,037
)
Net change in fair value
 
1,676,222

 
1,620,184

Ending balance
 
$
77,628,015

 
$
77,650,909


Mortgage Banking Revenue

Mortgage banking revenue decreased $1.4 million or 5 percent compared to the third quarter of 2017 due to a decrease in mortgage production revenue. Mortgage loan production volumes decreased $207 million or 26 percent. Production volumes decreased compared to the prior year as average primary mortgage interest rates were up 69 basis points over the third quarter of 2017. Mortgage servicing revenue was relatively consistent compared to the third quarter of 2017. The outstanding principal balance of mortgage loans serviced for others totaled $21.8 billion, relatively consistent with the third quarter of 2017.



- 8 -


Table 5 – Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended June 30, 2018
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
Mortgage production revenue
 
$
7,250

 
$
8,329

 
$
(1,079
)
 
(13
)%
 
$
9,915

 
$
(2,665
)
 
(27
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
651,076

 
$
832,796

 


 


 
$
773,910

 
 
 
 
Add: Current period end outstanding commitments
 
197,752

 
334,337

 
 
 
 
 
251,231

 
 
 
 
Less: Prior period end outstanding commitments
 
251,231

 
362,088

 
 
 
 
 
298,318

 
 
 
 
Total mortgage production volume
 
$
597,597

 
$
805,045

 
$
(207,448
)
 
(26
)%
 
$
726,823

 
$
(129,226
)
 
(18
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loan refinances to mortgage loans funded for sale
 
23
%
 
38
%
 
(1,500
) bps
 
 
 
22
%
 
100
 bps
 
 
Gains on sale margin
 
1.21
%
 
1.03
%
 
18
 bps
 
 
 
1.36
%
 
(15
) bps
 
 
Primary mortgage interest rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
4.57
%
 
3.88
%
 
69
 bps
 
 
 
4.54
%
 
3
 bps
 
 
Period end
 
4.72
%
 
3.83
%
 
89
 bps
 
 
 
4.55
%
 
17
 bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue
 
$
16,286

 
$
16,561

 
$
(275
)
 
(2
)%
 
$
16,431

 
$
(145
)
 
(1
)%
Average outstanding principal balance of mortgage loans serviced for others
 
21,895,041

 
22,079,177

 
(184,136
)
 
(1
)%
 
21,986,065

 
(91,024
)
 
—
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average mortgage servicing revenue rates
 
0.30
%
 
0.30
%
 
—

 
 
 
0.30
%
 
—

 
 
1 
Actual interest earned on fair value option securities less internal transfer-priced cost of funds.

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

Net gains on other assets, securities and derivatives

Other net gains totaled $1.4 million in the third quarter of 2018 compared to net losses of $1.3 million in the third quarter of 2017. The third quarter of 2018 includes tornado insurance proceeds whereas the third quarter of 2017 included a write down related to tornado damages. Other net gains totaled $4.0 million in the second quarter of 2018.

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


- 9 -


Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
Sept. 30, 2018
 
June 30, 2018
 
Sept. 30, 2017
Gain (loss) on mortgage hedge derivative contracts, net
 
$
(2,843
)
 
$
(3,070
)
 
$
1,025

Gain (loss) on fair value option securities, net
 
(4,385
)
 
(3,341
)
 
661

Gain (loss) on economic hedge of mortgage servicing rights, net
 
(7,228
)
 
(6,411
)
 
1,686

Gain (loss) on change in fair value of mortgage servicing rights
 
5,972

 
1,723

 
(639
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue
 
(1,256
)
 
(4,688
)
 
1,047

Net interest revenue on fair value option securities1
 
1,100

 
1,203

 
2,543

Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges
 
$
(156
)
 
$
(3,485
)
 
$
3,590

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 third quarter of 2018 totaled $252.6 million, a decrease of $3.4 million or 1 percent compared to the third quarter of 2017. Personnel expense decreased $4.4 million or 3 percent. Non-personnel expense increased $977 thousand or 1 percent compared to the prior year.

Other operating expense increased $6.1 million or 2 percent over the previous quarter. Personnel expense increased $4.6 million and non-personnel expense increased $1.6 million.

Table 7 – Other Operating Expense
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended June 30, 2018
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
 
Regular compensation
 
$
86,262

 
$
83,583

 
$
2,679

 
3
 %
 
$
86,231

 
$
31

 
—
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
31,430

 
33,643

 
(2,213
)
 
(7
)%
 
31,933

 
(503
)
 
(2
)%
Share-based
 
3,935

 
8,407

 
(4,472
)
 
(53
)%
 
(1,361
)
 
5,296

 
389
 %
Deferred compensation
 
2,126

 
975

 
1,151

 
N/A

 
900

 
1,226

 
N/A

Total incentive compensation
 
37,491

 
43,025

 
(5,534
)
 
(13
)%
 
31,472

 
6,019

 
19
 %
Employee benefits
 
19,778

 
21,302

 
(1,524
)
 
(7
)%
 
21,244

 
(1,466
)
 
(7
)%
Total personnel expense
 
143,531

 
147,910

 
(4,379
)
 
(3
)%
 
138,947

 
4,584

 
3
 %
Business promotion
 
7,620

 
7,105

 
515

 
7
 %
 
7,686

 
(66
)
 
(1
)%
Professional fees and services
 
13,209

 
11,887

 
1,322

 
11
 %
 
14,978

 
(1,769
)
 
(12
)%
Net occupancy and equipment
 
23,394

 
21,325

 
2,069

 
10
 %
 
22,761

 
633

 
3
 %
Insurance
 
6,232

 
6,005

 
227

 
4
 %
 
6,245

 
(13
)
 
—
 %
Data processing and communications1
 
31,665

 
27,412

 
4,253

 
16
 %
 
27,739

 
3,926

 
14
 %
Printing, postage and supplies
 
3,837

 
3,917

 
(80
)
 
(2
)%
 
4,011

 
(174
)
 
(4
)%
Net losses (gains) and operating expenses of repossessed assets
 
4,044

 
6,071

 
(2,027
)
 
(33
)%
 
2,722

 
1,322

 
49
 %
Amortization of intangible assets
 
1,603

 
1,744

 
(141
)
 
(8
)%
 
1,386

 
217

 
16
 %
Mortgage banking costs
 
11,741

 
13,450

 
(1,709
)
 
(13
)%
 
12,890

 
(1,149
)
 
(9
)%
Other expense
 
5,741

 
9,193

 
(3,452
)
 
(38
)%
 
7,111

 
(1,370
)
 
(19
)%
Total other operating expense
 
$
252,617

 
$
256,019

 
$
(3,402
)
 
(1
)%
 
$
246,476

 
$
6,141

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,870

 
4,887

 
(17
)
 
—
 %
 
4,875

 
(5
)
 
—
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Reconciliation:1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Data processing and communications expense on income statement
 
31,665

 
37,327

 
N/A

 
N/A

 
27,739

 
N/A

 
N/A

Netting adjustment
 
—

 
(9,915
)
 
N/A

 
N/A

 
—

 
N/A

 
N/A

Data processing and communications expense after netting adjustment
 
31,665

 
27,412

 
N/A

 
N/A

 
27,739

 
N/A

 
N/A

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

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


- 11 -


Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs, increased $2.7 million or 3 percent over the third quarter of 2017. The average number of employees was relatively unchanged compared to the prior year. Standard annual merit increases in regular compensation were effective for the majority of our staff on March 1.

Incentive compensation decreased $5.5 million or 13 percent compared to the third quarter of 2017, primarily due to decreased share-based compensation expense.  The number of performance-based equity awards that will ultimately vest is determined by BOKF's change in earnings per share relative to a defined group of peer banks. Changes in assumptions used to estimate the number of performance-based equity awards that were expected to vest increased compensation expense recognized in the third quarter of 2017. No significant changes in vesting assumptions were made in the third quarter of 2018.

Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Cash-based incentive compensation expense decreased $2.2 million or 7 percent compared to the third quarter of 2017.

Employee benefits expense decreased $1.5 million or 7 percent compared to the third quarter of 2017 mainly due to lower healthcare costs in the third quarter of 2018. The Company is self-insured and these costs may be volatile.
Personnel expense increased $4.6 million over the second quarter of 2018. Incentive compensation expense increased $6.0 million. Share-based compensation expense was $3.9 million in the third quarter of 2018 compared to a negative $1.4 million in the previous quarter. Changes in assumptions used to estimate the number of performance-based equity awards that are expected to vest decreased compensation expense in the second quarter of 2018. Employee benefits expense decreased $1.5 million mainly due to a seasonal decrease in payroll tax expense.

Non-personnel operating expense

Non-personnel operating expense increased $977 thousand or 1 percent over the third quarter of 2017.

Data processing and communications expense increased $4.3 million or 16 percent primarily due to impairment of a software license along with increased project costs and data processing transaction activity. Occupancy and equipment expense increased $2.1 million or 10 percent mainly due to an increase in project costs. Professional fees and services expense increased $1.3 million or 11 percent mainly due to CoBiz acquisition costs in the third quarter of 2018.

Other expense decreased $3.5 million or 38 percent and mortgage banking costs decreased $1.7 million or 13 percent primarily as a result of lower loss contingency accruals.
Non-personnel expense increased $1.6 million over the second quarter of 2018. Data processing and communications expense increased $3.9 million, primarily due to impairment of a software license. Net losses and operating expenses of repossessed assets increased $1.3 million as a result of a write down on a healthcare property.
Professional fees and services expense decreased $1.8 million mainly due to seasonal wealth management tax service fees in the second quarter of 2018. Mortgage banking costs decreased $1.1 million primarily due to reduced loss contingency accruals.



- 12 -


Income Taxes

The Company's income tax expense was $34.7 million or 23 percent of net income before taxes for the third quarter of 2018, compared to $42.4 million or 33 percent of net income before taxes for the third quarter of 2017 and $33.3 million or 22 percent of net income before taxes for the second quarter of 2018.

The Tax Cut and Jobs Act ("the Act") enacted on December 22, 2017 reduced the federal corporate tax rate from 35 percent to 21 percent beginning January 1, 2018. The Company continues to evaluate the impact the Act will have on its financial position and results of operations, including recognition and measurement of deferred tax assets and liabilities and the determination of effective current and deferred federal and state income tax rates. No adjustments to provisional amounts were made during the second or third quarters of 2018.

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

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. The reserve for uncertain tax positions was $20 million at September 30, 2018, $20 million at June 30, 2018 and $18 million at September 30, 2017.


- 13 -


Lines of Business

We operate three principal lines of business: Commercial Banking, Consumer Banking and Wealth Management. Commercial Banking includes lending, treasury and cash management services and customer risk management products for small businesses, middle market and larger commercial customers. Commercial Banking also includes the TransFund EFT network. Consumer Banking includes retail lending and deposit services, lending and deposit services to small business customers served through our consumer branch network and all mortgage banking activities. Wealth Management provides fiduciary services, private banking services and investment advisory services in all markets. Wealth Management also underwrites state and municipal securities and engages in brokerage and trading activities.

In addition to our lines of business, we have a Funds Management unit. The primary purpose of this unit is to manage our overall liquidity needs and interest rate risk. Each line of business borrows funds from and provides funds to the Funds Management unit as needed to support their operations. Operating results for Funds Management and other include the effect of interest rate risk positions and risk management activities, securities gains and losses including impairment charges, the provision for credit losses in excess of net loans charged off, tax planning strategies and certain executive compensation costs that are not attributed to the lines of business.

We allocate resources and evaluate the performance of our lines of business using the net direct contribution, which includes the allocation of funds, actual net credit losses and capital costs. In addition, we measure the performance of our business lines after allocation of certain indirect expenses and taxes based on statutory rates.

The cost of funds borrowed from the Funds Management unit by the operating lines of business is transfer priced at rates that approximate market rates for funds with similar repricing and cash flow characteristics. Market rates are generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment and liquidity risk. This method of transfer-pricing funds that supports assets of the operating lines of business tends to insulate them from interest rate risk.

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

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


- 14 -


As shown in Table 8, net income attributable to our lines of business was up $34.6 million or 39 percent over the third quarter of 2017. Net interest revenue grew by $22.8 million over the prior year, primarily due to loan growth. Other operating revenue increased by $2.5 million primarily due to a fiduciary and asset management fee earned through the sale of client assets, partially offset by decreased brokerage and trading revenue. Operating expense was largely unchanged compared to the third quarter of 2017. Income tax expense attributable to the lines of business was down $16.9 million, primarily due to lower corporate tax rates related to tax reform.

Table 8 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Jun 30, 2018
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
 
Commercial Banking
 
$
84,964

 
$
68,610

 
$
16,354

 
24
%
 
$
87,577

 
$
(2,613
)
 
(3
)%
Consumer Banking
 
9,162

 
4,809

 
4,353

 
91
%
 
6,102

 
3,060

 
50
 %
Wealth Management
 
29,331

 
15,472

 
13,859

 
90
%
 
20,358

 
8,973

 
44
 %
Subtotal
 
123,457

 
88,891

 
34,566

 
39
%
 
114,037

 
9,420

 
8
 %
Funds Management and other
 
(6,201
)
 
(3,242
)
 
(2,959
)
 
N/A

 
335

 
(6,536
)
 
N/A

Total
 
$
117,256

 
$
85,649

 
$
31,607

 
37
%
 
$
114,372

 
$
2,884

 
3
 %

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


- 15 -


Commercial Banking

Commercial Banking contributed $85.0 million to consolidated net income in the third quarter of 2018, an increase of $16.4 million or 24 percent over the third quarter of 2017, primarily due to the positive impact of the Tax Cut and Jobs Act. 

Table 9 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended June 30, 2018
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
 
Net interest revenue from external sources
 
$
187,417

 
$
160,572

 
$
26,845

 
17
 %
 
$
182,127

 
$
5,290

 
3
 %
Net interest expense from internal sources
 
(42,270
)
 
(25,460
)
 
(16,810
)
 
66
 %
 
(37,102
)
 
(5,168
)
 
14
 %
Total net interest revenue
 
145,147

 
135,112

 
10,035

 
7
 %
 
145,025

 
122

 
—
 %
Net loans charged off
 
8,047

 
3,217

 
4,830

 
150
 %
 
10,108

 
(2,061
)
 
(20
)%
Net interest revenue after net loans charged off
 
137,100

 
131,895

 
5,205

 
4
 %
 
134,917

 
2,183

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue1
 
39,391

 
44,747

 
(5,356
)
 
(12
)%
 
42,874

 
(3,483
)
 
(8
)%
Other gains, net
 
1,131

 
8

 
1,123

 
N/A

 
173

 
958

 
N/A

Other operating revenue
 
40,522

 
44,755

 
(4,233
)
 
(9
)%
 
43,047

 
(2,525
)
 
(6
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
31,263

 
29,181

 
2,082

 
7
 %
 
29,584

 
1,679

 
6
 %
Non-personnel expense1
 
17,873

 
18,249

 
(376
)
 
(2
)%
 
17,899

 
(26
)
 
—
 %
Other operating expense
 
49,136

 
47,430

 
1,706

 
4
 %
 
47,483

 
1,653

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
128,486

 
129,220

 
(734
)
 
(1
)%
 
130,481

 
(1,995
)
 
(2
)%
Gain (loss) on financial instruments, net
 
(3
)
 
4

 
(7
)
 
N/A

 
9

 
(12
)
 
N/A

Loss on repossessed assets, net
 
(1,869
)
 
(4,126
)
 
2,257

 
N/A

 
(67
)
 
(1,802
)
 
N/A

Corporate expense allocations
 
11,027

 
8,733

 
2,294

 
26
 %
 
11,269

 
(242
)
 
(2
)%
Income before taxes
 
115,587

 
116,365

 
(778
)
 
(1
)%
 
119,154

 
(3,567
)
 
(3
)%
Federal and state income tax
 
30,623

 
47,755

 
(17,132
)
 
(36
)%
 
31,577

 
(954
)
 
(3
)%
Net income
 
$
84,964

 
$
68,610

 
$
16,354

 
24
 %
 
$
87,577

 
$
(2,613
)
 
(3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
18,499,979

 
$
17,780,494

 
$
719,485

 
4
 %
 
$
18,072,155

 
$
427,824

 
2
 %
Average loans
 
15,321,600

 
14,511,639

 
809,961

 
6
 %
 
14,900,918

 
420,682

 
3
 %
Average deposits
 
8,633,204

 
8,727,221

 
(94,017
)
 
(1
)%
 
8,379,584

 
253,620

 
3
 %
Average invested capital
 
1,361,475

 
1,299,821

 
61,654

 
5
 %
 
1,345,840

 
15,635

 
1
 %
1 
Fees and commission revenue for 2017 has been adjusted on a comparable basis with 2018 (Non-GAAP measure) to net $9.9 million of interchange fees paid to issuing banks on card transactions processed by our TransFund merchant processing services for the three months ended September 30, 2017. The discussion following is based on this comparable basis.

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

Net interest revenue increased $10.0 million or 7 percent over the prior year. Growth in net interest revenue was primarily due to an $810 million or 6 percent increase in average loan balances and yields on commercial loans rising in excess of funding costs. Yields on deposits sold to the funds management unit also went up due to the increase in short-term interest rates. Net loans charged-off increased $4.8 million. Net charge-offs for the third quarter of 2018 were primarily related to a single energy production borrower and single wholesale/retail sector borrower, both of which had previously been identified as impaired and appropriately reserved.


- 16 -


Fees and commissions revenue decreased $5.4 million or 12 percent compared to the third quarter of 2017. Transaction card revenue decreased as the third quarter of 2017 included a $2.1 million customer early termination fee related to our transaction card business.

Operating expenses increased $1.7 million or 4 percent over the third quarter of 2017. Personnel expense increased $2.1 million or 7 percent, primarily due to increased incentive compensation expense related to loan growth combined with an annual increase in regular compensation. Non-personnel expense decreased $376 thousand or 2 percent.

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

The average outstanding balance of loans attributed to Commercial Banking were up $810 million or 6 percent over the third quarter of 2017 to $15.3 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans, which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $8.6 billion for the third quarter of 2018, a 1 percent decrease compared to the third quarter of 2017. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.
Net interest revenue was relatively consistent with the second quarter of 2018 at $145 million. Second quarter earnings included $5.3 million in interest recoveries on nonaccrual loans. Excluding the impact of interest recoveries, growth in net interest revenue was driven by strong growth in loan balances and improved loan yields. This growth was partially offset by a modest increase in our internal cost of funds allocation.
Fees and commissions revenue decreased $3.5 million or 8 percent as a result of reduced customer hedging revenue primarily from our energy customers and the timing of closing loan syndication transactions after an exceptionally strong second quarter. Expense growth outpaced revenue growth primarily due to an increase in incentive compensation as a result of continued loan growth as well as a $1.7 million write down of a repossessed property in the third quarter.
Average loan balances increased $421 million or 3 percent, largely impacted by energy, commercial real estate, service and other commercial and industrial loans. Average customer deposits increased $254 million or 3 percent, mostly due to energy, real estate, and general commercial and industrial deposits.




- 17 -


Consumer Banking

Consumer Banking provides retail banking services through four primary distribution channels: traditional branches, the 24-hour ExpressBank call center, Internet banking and mobile banking. Consumer Banking also conducts mortgage banking activities through offices located outside of our consumer banking markets and through HomeDirect Mortgage, an online origination channel.

Consumer Banking contributed $9.2 million to consolidated net income for the third quarter of 2018, an increase of $4.4 million over the third quarter of 2017. Growth in net interest revenue was partially offset by decreased mortgage banking revenue. Changes in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income for third quarter of 2018 by $1.3 million compared to a $1.0 million increase in pre-tax net income in the third quarter of 2017.

Table 10 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended June 30, 2018
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
 
Net interest revenue from external sources
 
$
21,075

 
$
21,965

 
$
(890
)
 
(4
)%
 
$
21,746

 
$
(671
)
 
(3
)%
Net interest revenue from internal sources
 
19,039

 
13,981

 
5,058

 
36
 %
 
17,548

 
1,491

 
8
 %
Total net interest revenue
 
40,114

 
35,946

 
4,168

 
12
 %
 
39,294

 
820

 
2
 %
Net loans charged off
 
1,451

 
1,316

 
135

 
10
 %
 
1,139

 
312

 
27
 %
Net interest revenue after net loans charged off
 
38,663

 
34,630

 
4,033

 
12
 %
 
38,155

 
508

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
44,038

 
45,006

 
(968
)
 
(2
)%
 
46,332

 
(2,294
)
 
(5
)%
Other losses, net
 
(15
)
 
(38
)
 
23

 
N/A

 
(12
)
 
(3
)
 
N/A

Other operating revenue
 
44,023

 
44,968

 
(945
)
 
(2
)%
 
46,320

 
(2,297
)
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
23,326

 
25,121

 
(1,795
)
 
(7
)%
 
24,995

 
(1,669
)
 
(7
)%
Non-personnel expense
 
29,861

 
31,026

 
(1,165
)
 
(4
)%
 
30,911

 
(1,050
)
 
(3
)%
Total other operating expense
 
53,187

 
56,147

 
(2,960
)
 
(5
)%
 
55,906

 
(2,719
)
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
29,499

 
23,451

 
6,048

 
26
 %
 
28,569

 
930

 
3
 %
Gain (loss) on financial instruments, net
 
(7,228
)
 
1,686

 
(8,914
)
 
N/A

 
(6,411
)
 
(817
)
 
N/A

Change in fair value of mortgage servicing rights
 
5,972

 
(639
)
 
6,611

 
N/A

 
1,723

 
4,249

 
N/A

Gain (loss) on repossessed assets, net
 
(87
)
 
292

 
(379
)
 
N/A

 
174

 
(261
)
 
N/A

Corporate expense allocations
 
15,863

 
16,920

 
(1,057
)
 
(6
)%
 
15,867

 
(4
)
 
—
 %
Income before taxes
 
12,293

 
7,870

 
4,423

 
56
 %
 
8,188

 
4,105

 
50
 %
Federal and state income tax
 
3,131

 
3,061

 
70

 
2
 %
 
2,086

 
1,045

 
50
 %
Net income
 
$
9,162

 
$
4,809

 
$
4,353

 
91
 %
 
$
6,102

 
$
3,060

 
50
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
8,323,542

 
$
8,683,998

 
$
(360,456
)
 
(4
)%
 
$
8,353,558

 
$
(30,016
)
 
—
 %
Average loans
 
1,719,679

 
1,724,523

 
(4,844
)
 
—
 %
 
1,716,259

 
3,420

 
—
 %
Average deposits
 
6,580,395

 
6,663,969

 
(83,574
)
 
(1
)%
 
6,579,635

 
760

 
—
 %
Average invested capital
 
291,980

 
289,186

 
2,794

 
1
 %
 
293,420

 
(1,440
)
 
—
 %

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


- 18 -


Net interest revenue from Consumer Banking activities grew by $4.2 million or 12 percent over the the third quarter of 2017, primarily due to increased rates received on deposit balances sold to the Funds Management unit.

Fees and commissions revenue decreased $968 thousand or 2 percent compared to the third quarter of 2017. Higher interest rates decreased mortgage loan origination volumes.

Operating expenses decreased $3.0 million or 5 percent compared to the third quarter of 2017. Personnel expenses decreased $1.8 million or 7 percent as mortgage originations have slowed and efforts have been made to right size current capacity. Non-personnel expenses decreased $1.2 million or 4 percent compared to the prior year primarily due to a decrease in mortgage banking costs.

Corporate expense allocations were $1.1 million or 6 percent lower than the prior year.

Average consumer deposits decreased $84 million compared to the third quarter of 2017. Demand deposit balances grew by $106 million or 6 percent and savings deposit balances were up $40 million or 9 percent. Higher-costing time deposit balances decreased $120 million or 12 percent and interest-bearing transaction account balances decreased $110 million or 3 percent.
Net interest revenue from Consumer Banking activities increased $820 thousand or 2 percent over the second quarter of 2018 while deposit service charges and fees increased $588 thousand. The introduction of a new time deposit product as well as interest rate increases on existing money market products have positively impacted runoff trends.
Revenues from mortgage banking activities decreased $2.8 million from the prior quarter. Continued rising interest rates and increased market competition slowed origination activity, which declined 16 percent compared to the prior quarter. Efforts to right size current capacity have resulted in personnel expense savings of $1.7 million from the previous quarter.
Average consumer loans and deposits remained relatively consistent compared to the prior quarter at $1.7 billion and $6.6 billion, respectively.




- 19 -


Wealth Management

Wealth Management contributed $29.3 million to consolidated net income in the third quarter of 2018, up $13.9 million or 90 percent over the third quarter of 2017. The third quarter of 2018 included an after tax benefit of $11.5 million as a result of a fee earned on the sale of client assets.

Table 11 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended June 30, 2018
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
 
Net interest revenue from external sources
 
$
23,131

 
$
11,170

 
$
11,961

 
107
 %
 
$
19,074

 
$
4,057

 
21
 %
Net interest revenue from internal sources
 
6,267

 
9,604

 
(3,337
)
 
(35
)%
 
10,232

 
(3,965
)
 
(39
)%
Total net interest revenue
 
29,398

 
20,774

 
8,624

 
42
 %
 
29,306

 
92

 
—
 %
Net loans charged off (recovered)
 
(84
)
 
(623
)
 
539

 
(87
)%
 
(105
)
 
21

 
(20
)%
Net interest revenue after net loans charged off (recovered)
 
29,482

 
21,397

 
8,085

 
38
 %
 
29,411

 
71

 
—
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
83,562

 
75,915

 
7,647

 
10
 %
 
70,489

 
13,073

 
19
 %
Other gains (losses), net
 
(205
)
 
(208
)
 
3

 
N/A

 
153

 
(358
)
 
N/A

Other operating revenue
 
83,357

 
75,707

 
7,650

 
10
 %
 
70,642

 
12,715

 
18
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
45,571

 
46,494

 
(923
)
 
(2
)%
 
45,653

 
(82
)
 
—
 %
Non-personnel expense
 
16,684

 
15,298

 
1,386

 
9
 %
 
15,838

 
846

 
5
 %
Other operating expense
 
62,255

 
61,792

 
463

 
1
 %
 
61,491

 
764

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
50,584

 
35,312

 
15,272

 
43
 %
 
38,562

 
12,022

 
31
 %
Gain on financial instruments, net
 
7

 
—

 
7

 
N/A

 
—

 
7

 
N/A

Corporate expense allocations
 
11,126

 
9,819

 
1,307

 
13
 %
 
11,142

 
(16
)
 
—
 %
Income before taxes
 
39,465

 
25,493

 
13,972

 
55
 %
 
27,420

 
12,045

 
44
 %
Federal and state income tax
 
10,134

 
10,021

 
113

 
1
 %
 
7,062

 
3,072

 
44
 %
Net income
 
$
29,331

 
$
15,472

 
$
13,859

 
90
 %
 
$
20,358

 
$
8,973

 
44
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
8,498,363

 
$
6,992,021

 
$
1,506,342

 
22
 %
 
$
8,495,557

 
$
2,806

 
—
 %
Average loans
 
1,439,774

 
1,324,574

 
115,200

 
9
 %
 
1,413,170

 
26,604

 
2
 %
Average deposits
 
5,492,048

 
5,495,250

 
(3,202
)
 
—
 %
 
5,834,669

 
(342,621
)
 
(6
)%
Average invested capital
 
249,817

 
236,815

 
13,002

 
5
 %
 
248,367

 
1,450

 
1
 %

Net interest revenue increased $8.6 million or 42 percent over the third quarter of 2017. Average trading securities balances increased $1.3 billion and average loans attributed to the Wealth Management segment increased $115 million or 9 percent. Average deposit balances were largely unchanged compared to the third quarter of 2017. Growth in interest-bearing transaction account balances and time deposit account balances of $177 million or 5 percent and $41 million or 5 percent, respectively, were offset by a $221 million decrease in demand deposits balances.

Fees and commissions revenue increased $7.6 million or 10 percent over the third quarter of 2017. Trust fees and commissions increased $16.9 million as a result of a fee generated from the sale of client assets. This increase was offset by a decrease of $9.8 million or 33 percent in brokerage and trading revenue, which has been adversely affected by rising interest rates that have slowed the origination of mortgage loans and related investment products.



- 20 -


Operating expense increased $463 thousand or 1 percent over the third quarter of 2017. Personnel expense decreased $923 thousand while non-personnel expense increased $1.4 million or 9 percent.

Corporate expense allocations were up $1.3 million or 13 percent over the prior year.

Net interest revenue remained relatively consistent compared to the second quarter of 2018. Trust fees and commissions increased $15.8 million as a result of a fee earned on the sale of client assets. Excluding this fee, fiduciary and asset management fees produced relatively consistent results compared to the second quarter of 2018.
Brokerage and trading revenue decreased $1.7 million or 8 percent compared to the second quarter of 2018 due to a decreased demand in investment products related to rising interest rates and slowing mortgage production.
Average loans increased $27 million or 2 percent to $1.4 billion. Average deposits decreased $343 million or 6 percent, primarily due to client migrations to investments. Assets under management decreased $1.2 billion or 2 percent to $77.6 billion at September 30, 2018.
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 September 30, 2018, December 31, 2017 and September 30, 2017.

We hold an inventory of trading securities in support of sales to a variety of customers, including banks, corporations, insurance companies, money managers and others. Trading securities decreased $296 million to $1.6 billion during the third quarter of 2018 in response to slower mortgage origination as a result of increased interest rates. As discussed in the Market Risk section of this report, trading activities involve risk of loss from adverse price movement. We mitigate this risk within board-approved limits through the use of derivative contracts, short-sales and other techniques. These limits remain unchanged from levels set before our expanded trading activities.

At September 30, 2018, the carrying value of investment (held-to-maturity) securities was $374 million and the fair value was $383 million. Investment securities consist primarily of residential mortgage-backed securities issued by U.S. government agencies, long-term, fixed rate Oklahoma and Texas municipal bonds, and taxable Texas school construction bonds.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $8.3 billion at September 30, 2018, a $55 million decrease compared to June 30, 2018. At September 30, 2018, the available for sale securities portfolio consisted primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Both residential and commercial mortgage-backed securities have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans.

A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. Our best estimate of the duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at September 30, 2018 is 3.6 years. Management estimates the duration extends to 4.2 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 3.4 years assuming a 50 basis point decline in the current low rate environment.

The aggregate gross amount of unrealized losses on available for sale securities totaled $241 million at September 30, 2018, compared to $205 million at June 30, 2018 due primarily to an increase in longer-term market interest rates. On a quarterly basis, we perform an evaluation on debt securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. No other-than-temporary impairment charges were recognized in earnings during the third quarter of 2018.

- 21 -


Loans

The aggregate loan portfolio before allowance for loan losses totaled $18.3 billion at September 30, 2018, up $346 million over June 30, 2018, primarily due to growth in commercial and commercial real estate loan balances. Residential mortgage loan balances increased slightly while personal loans were largely unchanged.

Table 12 -- Loans
(In thousands)
 
 
Sept. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,294,867

 
$
3,147,219

 
$
2,969,618

 
$
2,930,156

 
$
2,867,981

Services
 
3,017,311

 
2,944,499

 
2,928,294

 
2,986,949

 
2,967,513

Healthcare
 
2,437,323

 
2,353,722

 
2,359,928

 
2,314,753

 
2,239,451

Wholesale/retail
 
1,650,729

 
1,699,554

 
1,531,576

 
1,471,256

 
1,658,098

Manufacturing
 
660,582

 
647,816

 
559,695

 
496,774

 
519,446

Other commercial and industrial
 
515,289

 
556,229

 
570,556

 
534,087

 
543,445

Total commercial
 
11,576,101

 
11,349,039

 
10,919,667

 
10,733,975

 
10,795,934

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Multifamily
 
1,120,166

 
1,056,984

 
1,008,903

 
980,017

 
999,009

Office
 
824,829

 
820,127

 
737,144

 
831,770

 
797,089

Retail
 
759,423

 
768,024

 
750,396

 
691,532

 
725,865

Industrial
 
696,774

 
653,384

 
613,608

 
573,014

 
591,080

Residential construction and land development
 
101,872

 
118,999

 
117,458

 
117,245

 
112,102

Other commercial real estate
 
301,611

 
294,702

 
279,273

 
286,409

 
292,997

Total commercial real estate
 
3,804,675

 
3,712,220

 
3,506,782

 
3,479,987

 
3,518,142

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,094,926

 
1,068,412

 
1,047,785

 
1,043,435

 
1,013,965

Permanent mortgages guaranteed by U.S. government agencies
 
180,718

 
169,653

 
177,880

 
197,506

 
187,370

Home equity
 
696,098

 
704,185

 
720,104

 
732,745

 
744,415

Total residential mortgage
 
1,971,742

 
1,942,250

 
1,945,769

 
1,973,686

 
1,945,750

 
 
 
 
 
 
 
 
 
 
 
Personal
 
996,941

 
1,000,187

 
965,632

 
965,776

 
947,008

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
18,349,459

 
$
18,003,696

 
$
17,337,850

 
$
17,153,424

 
$
17,206,834


Commercial

Commercial loans represent loans for working capital, facilities acquisition or expansion, purchases of equipment and other needs of commercial customers primarily located within our geographical footprint. Commercial loans are underwritten individually and represent ongoing relationships based on a thorough knowledge of the customer, the customer’s industry and market. While commercial loans are generally secured by the customer’s assets including real property, inventory, accounts receivable, operating equipment, interests in mineral rights and other property and may also include personal guarantees of the owners and related parties, the primary source of repayment of the loans is the ongoing cash flow from operations of the customer’s business. Inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with commercial lending policies.

Commercial loans totaled $11.6 billion or 63 percent of the loan portfolio at September 30, 2018, an increase of $227 million over June 30, 2018. Energy loan balances grew by $148 million. Healthcare sector loan balances grew by $84 million. Service sector loans increased $73 million. This growth was partially offset by a $49 million decrease in wholesale/retail sector loans and a $41 million decrease in other commercial and industrial loans.

- 22 -


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

Table 13 -- Commercial Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Energy
 
$
702,213

 
$
1,747,899

 
$
39,961

 
$
3,026

 
$
333,378

 
$
18,092

 
$
86,618

 
$
363,680

 
$
3,294,867

Services
 
715,069

 
836,398

 
195,957

 
5,809

 
353,810

 
229,825

 
290,767

 
389,676

 
3,017,311

Healthcare
 
247,956

 
341,402

 
115,807

 
81,435

 
154,053

 
110,923

 
253,843

 
1,131,904

 
2,437,323

Wholesale/retail
 
379,152

 
583,575

 
34,116

 
30,267

 
87,732

 
56,742

 
80,141

 
399,004

 
1,650,729

Manufacturing
 
113,391

 
189,260

 
199

 
5,194

 
91,286

 
90,507

 
83,489

 
87,256

 
660,582

Other commercial and industrial
 
121,115

 
147,773

 
2,505

 
68,318

 
8,193

 
1,136

 
48,189

 
118,060

 
515,289

Total commercial loans
 
$
2,278,896

 
$
3,846,307

 
$
388,545

 
$
194,049

 
$
1,028,452

 
$
507,225

 
$
843,047

 
$
2,489,580

 
$
11,576,101

 
The majority of the collateral securing our commercial loan portfolio is located within our geographical footprint with 33 percent concentrated in the Texas market and 20 percent concentrated in the Oklahoma market. At September 30, 2018, the Other category is primarily composed of California - $302 million or 3 percent of the commercial loan portfolio, Florida - $266 million or 2 percent of the commercial loan portfolio, Louisiana - $162 million or 1 percent of the commercial loan portfolio, Pennsylvania - $146 million or 1 percent of the commercial loan portfolio, Ohio - $141 million or 1 percent of the commercial loan portfolio and Maryland - $114 million or 1 percent of the commercial loan portfolio. All other states individually represent less than one percent of total commercial loans.

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

Outstanding energy loans totaled $3.3 billion or 18 percent of total loans at September 30, 2018. Unfunded energy loan commitments were $3.1 billion at September 30, 2018, up $15 million over June 30, 2018. Approximately $2.7 billion of energy loans were to oil and gas producers, growing $96 million over June 30, 2018. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest risk form of energy lending. Approximately 57 percent of the committed production loans are secured by properties primarily producing oil and 43 percent of the committed production loans are secured by properties primarily producing natural gas. Loans to midstream oil and gas companies totaled $391 million at September 30, 2018, an increase of $21 million over June 30, 2018. Loans to borrowers that provide services to the energy industry totaled $151 million at September 30, 2018, up $12 million over the prior quarter. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $54 million, a $19 million increase over the prior quarter.

The services sector of the loan portfolio totaled $3.0 billion or 16 percent of total loans and consists of a large number of loans to a variety of businesses, including governmental, educational services, consumer services, financial services and commercial services. Service sector loans increased by $73 million over June 30, 2018. Loans to governmental entities totaled $549 million at September 30, 2018. Approximately $1.5 billion of the services category is made up of loans with individual balances of less than $10 million. Service sector loans are generally secured by the assets of the borrower with repayment coming from the cash flows of ongoing operations of the customer’s business. 

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

- 23 -


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 September 30, 2018, the outstanding principal balance of these loans totaled $3.8 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 16 percent of our shared national credits, based on dollars committed. We hold shared 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, with larger concentrations in Texas and Oklahoma which represent 32 percent and 12 percent of the total commercial real estate portfolio at September 30, 2018, respectively. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

Commercial real estate loans totaled $3.8 billion or 21 percent of the loan portfolio at September 30, 2018. The outstanding balance of commercial real estate loans increased $92 million during the third quarter of 2018. Loans secured by multifamily residential properties increased $63 million. Loans secured by industrial properties grew by $43 million while loans secured by residential construction and land development decreased $17 million. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 19 percent to 23 percent over the past five years. 

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

Table 14 -- Commercial Real Estate Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Multifamily
 
$
136,227

 
$
485,506

 
$
29,032

 
$
27,095

 
$
92,660

 
$
56,249

 
$
156,326

 
$
137,071

 
$
1,120,166

Office
 
107,938

 
250,912

 
91,841

 
13,057

 
31,529

 
51,207

 
35,032

 
243,313

 
824,829

Retail
 
58,052

 
269,243

 
122,203

 
5,891

 
45,142

 
31,256

 
14,607

 
213,029

 
759,423

Industrial
 
85,532

 
170,760

 
23,192

 
100

 
8,989

 
7,178

 
43,898

 
357,125

 
696,774

Residential construction and land development
 
7,017

 
19,994

 
14,891

 
1,726

 
25,442

 
2,017

 
13,084

 
17,701

 
101,872

Other commercial real estate
 
48,475

 
37,614

 
10,184

 
1,701

 
22,329

 
25,334

 
16,730

 
139,244

 
301,611

Total commercial real estate loans
 
$
443,241

 
$
1,234,029

 
$
291,343

 
$
49,570

 
$
226,091

 
$
173,241

 
$
279,677

 
$
1,107,483

 
$
3,804,675


The Other category is primarily composed of California - $259 million or 7 percent of the commercial real estate portfolio, Florida - $129 million or 3 percent of the commercial real estate portfolio, Utah - $82 million or 2 percent of the commercial real estate portfolio and Virginia - $79 million or 2 percent of the commercial real estate portfolio. All other states represent less than 2% individually.

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

- 24 -


Residential Mortgage and Personal

Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. Residential mortgage loans are secured by a first or second-mortgage on the customer’s primary residence. Personal loans consist primarily of loans to wealth management clients secured by the cash surrender value of insurance policies and marketable securities. It also includes direct loans secured by and for the purchase of automobiles, recreational and marine equipment as well as unsecured loans. Residential mortgage and personal loans are made in accordance with underwriting policies we believe to be conservative and are fully documented. Loans may be individually underwritten or credit scored based on size and other criteria. Credit scoring is assessed based on significant credit characteristics including credit history, residential and employment stability.

Residential mortgage loans totaled $2.0 billion, an increase of $29 million over June 30, 2018. In general, we sell the majority of our conforming fixed rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. We have no concentration in sub-prime residential mortgage loans. Our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or adjustable rate mortgage loans with initial rates that are below market. Collateral for 95% of our residential mortgage loan portfolio is located within our geographical footprint.

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

At September 30, 2018, $181 million of permanent residential mortgage loans are guaranteed by U.S. government agencies. We have limited credit exposure on loans guaranteed by the agencies. This amount includes residential mortgage loans previously sold into GNMA mortgage pools that the Company may repurchase when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet. Permanent residential mortgage loans guaranteed by U.S. government agencies increased $11 million over June 30, 2018.

Home equity loans totaled $696 million at September 30, 2018, an $8.1 million decrease compared to June 30, 2018. Our home equity loan portfolio is primarily composed of first-lien, fully amortizing home equity loans. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 50 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 10 year revolving period followed by a 15 year term of amortizing repayment. Interest-only home equity loans have a 5 year revolving period followed by a 15 year term of amortizing repayments and may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term subject to an update of certain credit information. A summary of our home equity loan portfolio at September 30, 2018 by lien position and amortizing status follows in Table 15.

Table 15 -- Home Equity Loans
(In thousands)
 
 
Revolving
 
Amortizing
 
Total
First lien
 
$
68,256

 
$
357,039

 
$
425,295

Junior lien
 
152,885

 
117,918

 
270,803

Total home equity
 
$
221,141

 
$
474,957

 
$
696,098




- 25 -


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

Table 16 -- Residential Mortgage and Personal Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
$
174,482

 
$
444,286

 
$
58,153

 
$
13,316

 
$
194,457

 
$
95,578

 
$
64,813

 
$
49,841

 
$
1,094,926

Permanent mortgages  guaranteed by U.S. government agencies
 
45,635

 
31,780

 
33,319

 
8,816

 
3,758

 
1,250

 
13,393

 
42,767

 
180,718

Home equity
 
371,770

 
130,623

 
83,068

 
6,165

 
40,275

 
9,481

 
52,117

 
2,599

 
696,098

Total residential mortgage
 
$
591,887

 
$
606,689

 
$
174,540

 
$
28,297

 
$
238,490

 
$
106,309

 
$
130,323

 
$
95,207

 
$
1,971,742

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
$
326,912

 
$
404,543

 
$
12,759

 
$
12,275

 
$
60,256

 
$
60,901

 
$
61,776

 
$
57,519

 
$
996,941



- 26 -


The Company secondarily evaluates loan portfolio performance based on the primary geographical market managing the loan. Loans attributed to a geographical market may not represent the location of the borrower or the collateral. All permanent mortgage loans serviced by our mortgage banking unit and held for investment by the Company are centrally managed by the Bank of Oklahoma.

Table 17 -- Loans Managed by Primary Geographical Market
(In thousands)
 
 
Sept. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
3,609,109

 
$
3,465,407

 
$
3,265,013

 
$
3,238,720

 
$
3,408,973

Commercial real estate
 
651,315

 
662,665

 
668,031

 
682,037

 
712,915

Residential mortgage
 
1,429,843

 
1,403,658

 
1,419,281

 
1,435,432

 
1,405,900

Personal
 
376,201

 
362,846

 
353,128

 
342,212

 
322,320

Total Oklahoma
 
6,066,468

 
5,894,576

 
5,705,453

 
5,698,401

 
5,850,108

 
 
 
 
 
 
 
 
 
 
 
Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
5,115,646

 
4,922,451

 
4,715,841

 
4,520,401

 
4,434,595

Commercial real estate
 
1,354,679

 
1,336,101

 
1,254,421

 
1,261,864

 
1,236,702

Residential mortgage
 
253,265

 
243,400

 
229,761

 
233,675

 
229,993

Personal
 
381,452

 
394,021

 
363,608

 
375,084

 
375,173

Total Texas
 
7,105,042

 
6,895,973

 
6,563,631

 
6,391,024

 
6,276,463

 
 
 
 
 
 
 
 
 
 
 
Albuquerque:
 
 

 
 

 
 

 
 

 
 

Commercial
 
325,048

 
305,167

 
315,701

 
343,296

 
367,747

Commercial real estate
 
392,494

 
386,878

 
348,485

 
341,282

 
319,208

Residential mortgage
 
88,110

 
90,581

 
93,490

 
98,018

 
101,983

Personal
 
11,659

 
11,107

 
11,667

 
11,721

 
12,953

Total Albuquerque
 
817,311

 
793,733

 
769,343

 
794,317

 
801,891

 
 
 
 
 
 
 
 
 
 
 
Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
102,237

 
93,217

 
94,430

 
95,644

 
91,051

Commercial real estate
 
106,701

 
90,807

 
88,700

 
87,393

 
80,917

Residential mortgage
 
7,278

 
6,927

 
7,033

 
6,596

 
6,318

Personal
 
12,126

 
12,331

 
9,916

 
9,992

 
10,388

Total Arkansas
 
228,342

 
203,282

 
200,079

 
199,625

 
188,674

 
 
 
 
 
 
 
 
 
 
 
Colorado:
 
 

 
 

 
 

 
 

 
 

Commercial
 
1,132,500

 
1,165,721

 
1,180,655

 
1,130,714

 
1,124,200

Commercial real estate
 
354,543

 
267,065

 
210,801

 
174,201

 
186,427

Residential mortgage
 
68,694

 
64,839

 
64,530

 
63,350

 
63,734

Personal
 
56,999

 
60,504

 
63,118

 
63,115

 
60,513

Total Colorado
 
1,612,736

 
1,558,129

 
1,519,104

 
1,431,380

 
1,434,874

 
 
 
 
 
 
 
 
 
 
 
Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
621,658

 
681,852

 
624,106

 
687,792

 
634,809

Commercial real estate
 
666,562

 
710,784

 
672,319

 
660,094

 
706,188

Residential mortgage
 
44,659

 
47,010

 
39,227

 
41,771

 
40,730

Personal
 
67,280

 
65,541

 
57,023

 
57,140

 
55,050

Total Arizona
 
1,400,159

 
1,505,187

 
1,392,675

 
1,446,797

 
1,436,777

 
 
 
 
 
 
 
 
 
 
 
Kansas/Missouri:
 
 

 
 

 
 

 
 

 
 

Commercial
 
669,903

 
715,224

 
723,921

 
717,408

 
734,559

Commercial real estate
 
278,381

 
257,920

 
264,025

 
273,116

 
275,785

Residential mortgage
 
79,893

 
85,835

 
92,447

 
94,844

 
97,092

Personal
 
91,224

 
93,837

 
107,172

 
106,512

 
110,611

Total Kansas/Missouri
 
1,119,401

 
1,152,816

 
1,187,565

 
1,191,880

 
1,218,047

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
18,349,459

 
$
18,003,696

 
$
17,337,850

 
$
17,153,424

 
$
17,206,834


- 27 -


Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business as shown in Table 18. Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower’s financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Table 18 – Off-Balance Sheet Credit Commitments
(In thousands)
 
 
Sept. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
Loan commitments
 
$
10,715,964

 
$
10,294,211

 
$
10,249,729

 
$
9,958,080

 
$
9,693,489

Standby letters of credit
 
671,844

 
659,867

 
664,342

 
647,653

 
665,513

Mortgage loans sold with recourse
 
101,512

 
116,269

 
121,197

 
125,127

 
128,681


We have off-balance sheet commitments related to certain residential mortgage loans originated under community development loan programs that were sold to a U.S. government agency with full recourse. These mortgage loans were underwritten to standards approved by the agencies, including full documentation and originated under programs available only for owner-occupied properties. The Company no longer sells residential mortgage loans with recourse. We are obligated to repurchase these loans for the life of these loans in the event of foreclosure for the unpaid principal and interest at the time of foreclosure. Substantially all of these loans are to borrowers in our primary markets including $63 million to borrowers in Oklahoma and, $12 million to borrowers in Arkansas. An accrual related to this off-balance sheet risk is included in Other liabilities in the Consolidated Balance Sheets and totaled $3.1 million at September 30, 2018 and $3.5 million at June 30, 2018 and $3.8 million at September 30, 2017.

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

For the period from 2010 through the third quarter of 2018 combined, approximately 17 percent of repurchase requests have currently resulted in actual repurchases or indemnification by the Company. There were three loans repurchased from the agencies during the third quarter of 2018. There was one loan with indemnification paid during the third quarter of 2018. 

A summary of unresolved deficiency requests from the agencies follows (in thousands, except for number of unresolved deficiency requests):
 
September 30,
 
2018
 
2017
Number of unresolved deficiency requests
170

 
180

Aggregate outstanding principal balance subject to unresolved deficiency requests
$
6,066

 
$
8,899

Unpaid principal balance subject to indemnification by the Company
7,071

 
5,206


The accrual for potential loan repurchases under representations and warranties totaled $1.1 million at September 30, 2018, $1.1 million at June 30, 2018, and $1.4 million at September 30, 2017.

- 28 -


Customer Derivative Programs
 
We offer programs that permit our customers to hedge various risks, including fluctuations in energy, cattle and other agricultural product prices, interest rates and foreign exchange rates. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and the Company. Offsetting contracts are executed between the Company and selected counterparties to minimize market risk due to changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to us as compensation for administrative costs, credit risk and profit.

The customer derivative programs create credit risk for potential amounts due to the Company from our customers and from the counterparties. Customer credit risk is monitored through existing credit policies and procedures. The effects of changes in commodity prices, interest rates or foreign exchange rates are evaluated across a range of possible scenarios to determine the maximum exposure we are willing to have individually to any customer. Customers may also be required to provide cash margin or other collateral in conjunction with our credit agreements to further limit our credit risk.

Counterparty credit risk is evaluated through existing policies and procedures. This evaluation considers the total relationship between BOK Financial and each of the counterparties. Individual limits are established by management, approved by Credit Administration and reviewed by the Asset/Liability Committee. Margin collateral is required if the exposure between the Company and any counterparty exceeds established limits. Based on declines in the counterparties’ credit ratings, these limits may be reduced and additional margin collateral may be required.

A deterioration of the credit standing of one or more of the customers or counterparties to these contracts may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This occurs if the credit standing of the customer or counterparty deteriorated such that either the fair value of underlying collateral no longer supported the contract or the customer or the counterparty’s ability to provide margin collateral was impaired. Credit losses on customer derivatives reduce brokerage and trading revenue in the Consolidated Statements of Earnings.

Derivative contracts are carried at fair value. At September 30, 2018, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $359 million compared to $382 million at June 30, 2018. At September 30, 2018, the net fair value of our derivative contracts included $147 million for foreign exchange contracts, $134 million for energy contracts, $45 million for interest rate swaps and $28 million of to-be-announced residential mortgage-backed securities. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $351 million at September 30, 2018 and $364 million at June 30, 2018.

At September 30, 2018, total derivative assets were reduced by $17 million of cash collateral received from counterparties and total derivative liabilities were reduced by $119 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 September 30, 2018 follows in Table 19.

Table 19 -- Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
186,959

Banks and other financial institutions
 
102,405

Exchanges and clearing organizations
 
52,320

Fair value of customer risk management program asset derivative contracts, net
 
$
341,684

 
At September 30, 2018, our largest derivative exposure was to an exchange for to-be-announced mortgage-back security contracts of $27 million.


- 29 -


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 $33.33 per barrel of oil would decrease the fair value of derivative assets by $108 million. An increase in prices equivalent to $85.69 per barrel of oil would increase the fair value of derivative assets by $129 million. Liquidity requirements of this program may also be affected by our credit rating. At September 30, 2018, a decrease in our credit rating to below investment grade did not have a significant impact on our obligation to post cash margin on existing contracts. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of September 30, 2018, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.
Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. At September 30, 2018, the combined allowance for loan losses and off-balance sheet credit losses totaled $213 million or 1.16 percent of outstanding loans and 146 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $211 million and the accrual for off-balance sheet credit losses was $2.0 million. At June 30, 2018, the combined allowance for credit losses was $218 million or 1.21 percent of outstanding loans and 138 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $215 million and the accrual for off-balance sheet credit losses was $2.4 million. 

The provision for credit losses is the amount necessary to maintain the allowance for loan losses and an accrual for off-balance sheet credit risk at an amount determined by management to be appropriate based on its evaluation. The provision includes the combined charge to expense for both the allowance for loan losses and the accrual for off-balance sheet credit risk. All losses incurred from lending activities will ultimately be reflected in charge-offs against the allowance for loan losses following funds advanced against outstanding commitments. Based on an evaluation of all credit factors, including overall loan growth, the trends in nonaccruing loans, potential problem loans and net charge-offs, the Company determined that $4.0 million provision for credit losses was appropriate for the third quarter of 2018. The Company recorded no provision for credit losses in the second quarter of 2018.



- 30 -


Table 20 -- Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
Sept. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
215,142

 
$
223,967

 
$
230,682

 
$
247,703

 
$
250,061

Loans charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
(9,602
)
 
(13,775
)
 
(1,563
)
 
(13,254
)
 
(4,429
)
Commercial real estate
 
—

 
—

 
—

 
—

 
—

Residential mortgage
 
(91
)
 
(135
)
 
(100
)
 
(205
)
 
(168
)
Personal
 
(1,380
)
 
(1,195
)
 
(1,227
)
 
(1,290
)
 
(1,228
)
Total
 
(11,073
)
 
(15,105
)
 
(2,890
)
 
(14,749
)
 
(5,825
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
1,263

 
298

 
488

 
1,982

 
1,014

Commercial real estate
 
40

 
3,097

 
183

 
258

 
739

Residential mortgage
 
229

 
505

 
242

 
229

 
134

Personal
 
560

 
678

 
663

 
592

 
550

Total
 
2,092

 
4,578

 
1,576

 
3,061

 
2,437

Net loans recovered (charged off)
 
(8,981
)
 
(10,527
)
 
(1,314
)
 
(11,688
)
 
(3,388
)
Provision for loan losses
 
4,408

 
1,702

 
(5,401
)
 
(5,333
)
 
1,030

Ending balance
 
$
210,569

 
$
215,142

 
$
223,967

 
$
230,682

 
$
247,703

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 
 
 

Beginning balance
 
$
2,433

 
$
4,135

 
$
3,734

 
$
5,401

 
$
6,431

Provision for off-balance sheet credit losses
 
(408
)
 
(1,702
)
 
401

 
(1,667
)
 
(1,030
)
Ending balance
 
$
2,025

 
$
2,433

 
$
4,135

 
$
3,734

 
$
5,401

Total combined provision for credit losses
 
$
4,000

 
$
—

 
$
(5,000
)
 
$
(7,000
)
 
$
—

Allowance for loan losses to loans outstanding at period-end
 
1.15
%
 
1.19
%
 
1.29
 %
 
1.34
 %
 
1.44
%
Net charge-offs (recoveries) (annualized) to average loans
 
0.20
%
 
0.24
%
 
0.03
 %
 
0.27
 %
 
0.08
%
Total provision for credit losses (annualized) to average loans
 
0.09
%
 
—
%
 
(0.12
)%
 
(0.16
)%
 
—
%
Recoveries to gross charge-offs
 
18.89
%
 
30.31
%
 
54.53
 %
 
20.75
 %
 
41.84
%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.02
%
 
0.02
%
 
0.04
 %
 
0.04
 %
 
0.05
%
Combined allowance for credit losses to loans outstanding at period-end
 
1.16
%
 
1.21
%
 
1.32
 %
 
1.37
 %
 
1.47
%
Allowance for Loan Losses

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

Loans are considered to be impaired when it is probable that we will not collect all amounts due according to the original contractual terms of the loan agreement. This includes all nonaccruing loans, all loans modified in troubled debt restructurings and all government guaranteed loans repurchased from GNMA pools. A specific allowance is required when the outstanding principal balance of the loan is not supported by either the discounted cash flows expected to be received from the borrower or the fair value of collateral for collateral dependent loans. At September 30, 2018, impaired loans totaled $326 million, including $38 million with specific allowances of $14 million and $287 million with no specific allowances. At June 30, 2018, impaired loans totaled $328 million, including $60 million of impaired loans with specific allowances of $15 million and $268 million with no specific allowances.

- 31 -


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

The aggregate amount of general allowances for all unimpaired loans totaled $178 million at September 30, 2018. The general allowance for unimpaired loans decreased $6.6 million compared to June 30, 2018, primarily related to the commercial loan segment.

Nonspecific allowances are maintained for risks beyond factors specific to a particular portfolio segment or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors. Nonspecific allowances totaled $19 million at September 30, 2018, a $3.4 million increase over June 30, 2018. The nonspecific allowance increased primarily related to the estimated impact of interest rate increases on variable-rate borrowers and impact of tariffs on cost of goods borrowers use such as steel.

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

Our loan monitoring process also identified certain accruing substandard loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in nonperforming assets. Known information does, however, cause management concern as to the borrowers’ ability to comply with current repayment terms. These potential problem loans totaled $176 million at September 30, 2018 and were primarily composed of $106 million or 3 percent of energy loans, $21 million or 3 percent of commercial real estate loans secured by retail facilities, $16 million or 1 percent of healthcare sector loans, $13 million or 2 percent of manufacturing sector loans and $12 million or less than 1 percent of service sector loans. Potential problem loans totaled $140 million at June 30, 2018.

Based on regulatory guidelines, other loans especially mentioned are in compliance with the original terms of the agreement but may have a weakness that deserves management's close attention. Other loans especially mentioned totaled $56 million at September 30, 2018 and were composed primarily of $27 million or 1 percent of service sector loans. Other loans especially mentioned totaled $124 million at June 30, 2018.

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

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

BOK Financial had net charge-offs of $9.0 million in the third quarter of 2018, compared to net charge-offs of $10.5 million in the second quarter of 2018 and net charge-offs of $3.4 million in the third quarter of 2017. The ratio of net loans charged off to average loans on an annualized basis was 0.20 percent for the third quarter of 2018, compared with 0.24 percent for the second quarter of 2018 and 0.08 percent for the third quarter of 2017. 

Net charge-offs of commercial loans were $8.3 million in the third quarter of 2018, primarily related to a single energy production borrower and single wholesale/retail sector borrower. Net commercial real estate loan recoveries were $40 thousand in the third quarter of 2018. Net recoveries of residential mortgage loans were $138 thousand and net charge-offs of personal loans were $820 thousand for the third quarter. Personal loan net charge-offs include deposit account overdraft losses.

- 32 -


Nonperforming Assets

Table 21 -- Nonperforming Assets
(In thousands)
 
 
Sept. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
109,490

 
$
120,978

 
$
131,460

 
$
137,303

 
$
176,900

Commercial real estate
 
1,316

 
1,996

 
2,470

 
2,855

 
2,975

Residential mortgage
 
41,917

 
42,343

 
45,794

 
47,447

 
45,506

Personal
 
269

 
340

 
340

 
269

 
255

Total nonaccruing loans
 
152,992

 
165,657

 
180,064

 
187,874

 
225,636

Accruing renegotiated loans guaranteed by U.S. government agencies
 
83,347

 
75,374

 
74,418

 
73,994

 
69,440

Real estate and other repossessed assets
 
24,515

 
27,891

 
23,652

 
28,437

 
32,535

Total nonperforming assets
 
$
260,854

 
$
268,922

 
$
278,134

 
$
290,305

 
$
327,611

Total nonperforming assets excluding those guaranteed by U.S. government agencies
 
$
169,717

 
$
185,981

 
$
194,833

 
$
207,132

 
$
249,280

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio segment and class:
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
54,033

 
$
65,597

 
$
89,942

 
$
92,284

 
$
110,683

Healthcare
 
15,704

 
16,125

 
15,342

 
14,765

 
24,446

Wholesale/retail
 
9,249

 
14,095

 
2,564

 
2,574

 
1,893

Manufacturing
 
9,202

 
2,991

 
3,002

 
5,962

 
9,059

Services
 
4,097

 
4,377

 
2,109

 
2,620

 
1,174

Other commercial and industrial
 
17,205

 
17,793

 
18,501

 
19,098

 
29,645

Total commercial
 
109,490

 
120,978

 
131,460

 
137,303

 
176,900

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 

 
 

Retail
 
777

 
1,068

 
264

 
276

 
289

Residential construction and land development
 
350

 
350

 
1,613

 
1,832

 
1,924

Office
 
—

 
275

 
275

 
275

 
275

Multifamily
 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

Other commercial real estate
 
189

 
303

 
318

 
472

 
487

Total commercial real estate
 
1,316

 
1,996

 
2,470

 
2,855

 
2,975

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
22,855

 
23,105

 
24,578

 
25,193

 
24,623

Permanent mortgage guaranteed by U.S. government agencies
 
7,790

 
7,567

 
8,883

 
9,179

 
8,891

Home equity
 
11,272

 
11,671

 
12,333

 
13,075

 
11,992

Total residential mortgage
 
41,917

 
42,343

 
45,794

 
47,447

 
45,506

Personal
 
269

 
340

 
340

 
269

 
255

Total nonaccruing loans
 
$
152,992

 
$
165,657

 
$
180,064

 
$
187,874

 
$
225,636

 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 

 
 

Allowance for loan losses to nonaccruing loans1
 
145.02
%
 
136.09
%
 
130.84
%
 
129.09
%
 
114.28
%
Accruing loans 90 days or more past due1
 
$
518

 
$
879

 
$
90

 
$
633

 
$
253

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


- 33 -


Nonperforming assets totaled $261 million or 1.42 percent of outstanding loans and repossessed assets at September 30, 2018. Nonaccruing loans totaled $153 million, accruing renegotiated residential mortgage loans totaled $83 million and real estate and other repossessed assets totaled $25 million. All accruing renegotiated residential mortgage loans and $7.8 million of nonaccruing loans are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets decreased $16 million compared to the second quarter, primarily due to a decrease in nonaccruing energy and wholesale/retail sector loans. The Company generally retains nonperforming assets to maximize potential recovery, which may cause future nonperforming assets to decrease more slowly.

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

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

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

Table 22 -- Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
September 30, 2018
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, June 30, 2018
 
$
165,657

 
$
75,374

 
$
27,891

 
$
268,922

Additions
 
20,063

 
12,885

 
—

 
32,948

Payments
 
(20,162
)
 
(867
)
 
—

 
(21,029
)
Charge-offs
 
(11,073
)
 
—

 
—

 
(11,073
)
Net gains, losses and write-downs
 
—

 
—

 
(1,965
)
 
(1,965
)
Foreclosure of nonperforming loans
 
(770
)
 
—

 
770

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(873
)
 
(2,144
)
 
—

 
(3,017
)
Proceeds from sales
 
—

 
(2,136
)
 
(2,648
)
 
(4,784
)
Net transfers to nonaccruing loans
 
150

 
(150
)
 
—

 
—

Return to accrual status
 
—

 
—

 
—

 
—

Other, net
 
—

 
385

 
467

 
852

Balance, September 30, 2018
 
$
152,992

 
$
83,347

 
$
24,515

 
$
260,854


- 34 -


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

 
$
73,994

 
$
28,437

 
$
290,305

Additions
 
72,211

 
43,506

 
—

 
115,717

Payments
 
(63,700
)
 
(2,242
)
 
—

 
(65,942
)
Charge-offs
 
(29,068
)
 
—

 
—

 
(29,068
)
Net gains, losses and write-downs
 
—

 
—

 
(5,971
)
 
(5,971
)
Foreclosure of nonperforming loans
 
(9,513
)
 
—

 
9,513

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(4,059
)
 
(5,935
)
 
—

 
(9,994
)
Proceeds from sales
 
—

 
(26,221
)
 
(8,164
)
 
(34,385
)
Net transfers to nonaccruing loans
 
1,086

 
(1,086
)
 
—

 
—

Return to accrual status
 
(1,839
)
 
—

 
—

 
(1,839
)
Other, net
 
—

 
1,331

 
700

 
2,031

Balance, September 30, 2018
 
$
152,992

 
$
83,347

 
$
24,515

 
$
260,854


We foreclose on loans guaranteed by U.S. government agencies in accordance with agency guidelines. Generally these loans are not eligible for modification programs or have failed to comply with modified loan terms. Principal is guaranteed by agencies of the U.S. government, subject to limitations and credit risk is limited. These properties will be conveyed to the agencies once applicable criteria have been met. 
Commercial

Nonaccruing commercial loans totaled $109 million or 0.95 percent of total commercial loans at September 30, 2018 and $121 million or 1.07 percent of commercial loans at June 30, 2018. There were $15 million in newly identified nonaccruing commercial loans during the quarter, offset by $17 million in payments and $10 million of charge-offs of nonaccruing commercial loans during the third quarter. There were no foreclosures of commercial loans during the third quarter.

Nonaccruing commercial loans at September 30, 2018 were primarily composed of $54 million or 1.64 percent of total energy loans, $17 million or 3.34 percent of total other commercial and industrial sector loans and $16 million or 0.64 percent of total healthcare sector loans.
Commercial Real Estate

Nonaccruing commercial real estate loans totaled $1.3 million or 0.03 percent of outstanding commercial real estate loans at September 30, 2018, compared to $2.0 million or 0.05 percent of outstanding commercial real estate loans at June 30, 2018. Newly identified nonaccruing commercial real estate loans of $22 thousand were offset by $702 thousand of cash payments received. There were no charge-offs or foreclosures of nonaccruing commercial real estate loans during the third quarter.

Nonaccruing commercial real estate loans were primarily composed of $777 thousand or 0.10 percent of loans secured by retail facilities.

Residential Mortgage and Personal

Nonaccruing residential mortgage loans totaled $42 million or 2.13 percent of outstanding residential mortgage loans at September 30, 2018, a $426 thousand decrease compared to June 30, 2018. Newly identified nonaccruing residential mortgage loans totaling $3.6 million were offset $2.4 million of payments, $1.6 million of foreclosures and $91 thousand of loans charged off during the quarter. 

Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans, which totaled $23 million or 2.09 percent of outstanding non-guaranteed permanent residential mortgage loans at September 30, 2018. Nonaccruing home equity loans totaled $11 million or 1.62 percent of total home equity loans.


- 35 -


Payments of accruing residential mortgage loans and personal loans may be delinquent. The composition of residential mortgage loans and personal loans past due but still accruing is included in the following Table 23. Substantially all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 59 days past due increased $3.2 million in the third quarter to $7.3 million at September 30, 2018. Residential mortgage loans 60 to 89 days past due increased by $998 thousand. Personal loans past due 30 to 59 days increased by $722 thousand and personal loans 60 to 89 days decreased $92 thousand.

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

 
$
1,732

 
$
5,721

 
$
84

 
$
796

 
$
2,568

Home equity
 
121

 
156

 
1,609

 
65

 
94

 
1,612

Total residential mortgage
 
$
121

 
$
1,888

 
$
7,330

 
149

 
$
890

 
$
4,180

 
 
 

 
 
 
 

 
 

 
 
 
 

Personal
 
$
—

 
$
58

 
$
900

 
$
—

 
$
150

 
$
178

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

Real Estate and Other Repossessed Assets

Real estate and other repossessed assets are assets acquired in partial or total forgiveness of loans. The assets are carried at the lower of cost as determined by fair value at the date of foreclosure or current fair value, less estimated selling costs.

Real estate and other repossessed assets totaled $25 million at September 30, 2018, composed primarily of $11 million of oil and gas properties, $5.3 million of 1-4 family residential properties, $3.6 million of developed commercial real estate and $4.5 million of undeveloped land primarily zoned for commercial development. Real estate and other repossessed assets totaled $28 million at June 30, 2018.


- 36 -


Liquidity and Capital

Based on the average balances for the third quarter of 2018, approximately 65 percent of our funding was provided by deposit accounts, 21 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 third quarter of 2018 totaled $22 billion, a decrease of $119 million compared to the second quarter of 2018. Interest-bearing transaction account balances decreased $179 million and time deposits decreased $41 million. Demand deposits increased $102 million over second quarter of 2018.
Table 24 - Average Deposits by Line of Business
(In thousands)
 
Three Months Ended
 
Sept. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
Commercial Banking
$
8,633,204

 
$
8,379,584

 
$
8,679,269

 
$
8,799,166

 
$
8,727,221

Consumer Banking
6,580,395

 
6,579,635

 
6,533,901

 
6,622,149

 
6,663,969

Wealth Management
5,492,048

 
5,834,669

 
5,582,554

 
5,457,566

 
5,495,250

Subtotal
20,705,647

 
20,793,888

 
20,795,724

 
20,878,881

 
20,886,440

Funds Management and other
1,230,648

 
1,261,344

 
1,331,171

 
1,282,179

 
1,232,881

Total
$
21,936,295

 
$
22,055,232

 
$
22,126,895

 
$
22,161,060

 
$
22,119,321


Average Commercial Banking deposit balances increased $254 million over second quarter of 2018. Demand deposit balances increased $218 million and interest-bearing transaction account balances increased $28 million. Despite the series of federal funds rate increases from the Federal Reserve, as well as modest increases in our earnings credit, commercial customers continue to retain large cash reserves primarily due to a combination of factors including uncertainty about the economic environment and potential for growth, lack of preferable liquid alternatives and a desire to minimize deposit service charges through the earnings credit. The earnings credit is a non-cash method that enables commercial customers to offset deposit service charges based on account balances. Commercial deposit balances may decrease as the economic outlook continues to improve and if short-term rates continue to move higher, enhancing their investment alternatives. As short-term rates move higher, related increases to the earnings credit rate may be appropriate, which will reduce the amount of deposits required to offset service charges.

Average Consumer Banking deposit balances increased $760 thousand over the prior quarter. Demand deposit balances grew by $30 million. This growth was offset by decreases of $22 million in interest-bearing transaction account balances $6.9 million in time deposit balances.

Average Wealth Management deposits decreased $343 million compared to the second quarter of 2018 primarily due to customers deploying funds in other off-balance sheet investment alternatives. Interest-bearing transaction account balances were down $179 million, demand deposit balances decreased $124 million, and time deposits balances were down $39 million.

Average time deposits for the third quarter of 2018 included $248 million of brokered deposits, a decrease of $4.2 million compared to the second quarter of 2018. Average interest-bearing transaction accounts for the third quarter included $813 million of brokered deposits, a decrease of $14 million compared to the second quarter of 2018.


- 37 -


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

Table 25 -- Period End Deposits by Principal Market Area
(In thousands)
 
 
Sept. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
3,564,307

 
$
3,867,933

 
$
4,201,842

 
$
3,885,008

 
$
4,061,612

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
6,010,972

 
5,968,460

 
6,051,302

 
5,901,293

 
5,909,259

Savings
 
288,080

 
289,202

 
289,351

 
265,870

 
265,023

Time
 
1,128,810

 
1,207,471

 
1,203,534

 
1,092,133

 
1,131,547

Total interest-bearing
 
7,427,862

 
7,465,133

 
7,544,187

 
7,259,296

 
7,305,829

Total Oklahoma
 
10,992,169

 
11,333,066

 
11,746,029

 
11,144,304

 
11,367,441

 
 
 
 
 
 
 
 
 
 
 
Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
3,353,248

 
3,317,656

 
3,015,869

 
3,239,098

 
3,094,184

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
2,181,382

 
2,168,488

 
2,208,480

 
2,397,071

 
2,272,987

Savings
 
97,909

 
97,809

 
98,852

 
93,620

 
93,400

Time
 
453,119

 
445,500

 
475,967

 
502,879

 
521,072

Total interest-bearing
 
2,732,410

 
2,711,797

 
2,783,299

 
2,993,570

 
2,887,459

Total Texas
 
6,085,658

 
6,029,453

 
5,799,168

 
6,232,668

 
5,981,643

 
 
 
 
 
 
 
 
 
 
 
Albuquerque:
 
 
 
 
 
 
 
 
 
 
Demand
 
722,188

 
770,974

 
695,060

 
663,353

 
659,793

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
593,760

 
586,593

 
555,414

 
552,393

 
551,884

Savings
 
57,794

 
59,415

 
60,596

 
55,647

 
53,532

Time
 
221,513

 
212,689

 
216,306

 
216,743

 
224,773

Total interest-bearing
 
873,067

 
858,697

 
832,316

 
824,783

 
830,189

Total Albuquerque
 
1,595,255

 
1,629,671

 
1,527,376

 
1,488,136

 
1,489,982

 
 
 
 
 
 
 
 
 
 
 
Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
36,579

 
39,896

 
35,291

 
30,384

 
31,442

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
128,001

 
143,298

 
94,206

 
85,095

 
126,746

Savings
 
1,826

 
1,885

 
1,960

 
1,881

 
1,876

Time
 
10,214

 
10,771

 
11,878

 
14,045

 
14,434

Total interest-bearing
 
140,041

 
155,954

 
108,044

 
101,021

 
143,056

Total Arkansas
 
176,620

 
195,850

 
143,335

 
131,405

 
174,498

 
 
 
 
 
 
 
 
 
 
 

- 38 -


 
 
Sept. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
Colorado:
 
 
 
 
 
 
 
 
 
 
Demand
 
593,442

 
529,912

 
521,963

 
633,714

 
540,300

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
622,520

 
701,362

 
687,785

 
657,629

 
628,807

Savings
 
40,308

 
38,176

 
37,232

 
35,223

 
34,776

Time
 
217,628

 
208,049

 
215,330

 
224,962

 
231,927

Total interest-bearing
 
880,456

 
947,587

 
940,347

 
917,814

 
895,510

Total Colorado
 
1,473,898

 
1,477,499

 
1,462,310

 
1,551,528

 
1,435,810

 
 
 
 
 
 
 
 
 
 
 
Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
370,299

 
387,952

 
330,196

 
334,701

 
335,740

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
130,837

 
194,353

 
248,337

 
274,846

 
174,010

Savings
 
3,559

 
3,935

 
4,116

 
3,343

 
4,105

Time
 
23,927

 
22,447

 
21,009

 
20,394

 
20,831

Total interest-bearing
 
158,323

 
220,735

 
273,462

 
298,583

 
198,946

Total Arizona
 
528,622

 
608,687

 
603,658

 
633,284

 
534,686

 
 
 
 
 
 
 
 
 
 
 
Kansas/Missouri:
 
 
 
 
 
 
 
 
 
 
Demand
 
423,560

 
459,636

 
505,802

 
457,080

 
462,410

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
322,747

 
401,545

 
381,447

 
382,066

 
361,391

Savings
 
13,125

 
13,052

 
13,845

 
13,574

 
12,513

Time
 
20,635

 
20,805

 
22,230

 
27,260

 
27,705

Total interest-bearing
 
356,507

 
435,402

 
417,522

 
422,900

 
401,609

Total Kansas/Missouri
 
780,067

 
895,038

 
923,324

 
879,980

 
864,019

Total BOK Financial deposits
 
$
21,632,289

 
$
22,169,264

 
$
22,205,200

 
$
22,061,305

 
$
21,848,079


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 $250 million at September 30, 2018. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short-term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and agency mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $5.7 billion during the quarter, compared to $6.5 billion in the second quarter of 2018.

At September 30, 2018, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $6.3 billion.

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


- 39 -


Table 26 -- Borrowed Funds
(In thousands)
 
 
 
 
Three Months Ended
September 30, 2018
 
 
 
Three Months Ended
June 30, 2018
 
 
Sept. 30, 2018
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
June 30, 2018
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company and Other Non-Bank Subsidiaries:
Other borrowings
 
5,278

 
5,300

 
1.57
%
 
$
5,335

 
—

 
—

 
—
%
 
—

Subordinated debentures
 
144,707

 
144,702

 
5.55
%
 
$
144,707

 
144,697

 
144,692

 
5.67
%
 
144,697

Total parent company and other non-bank subsidiaries
 
149,985

 
150,002

 
5.41
%
 
 
 
144,697

 
144,692

 
5.67
%
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BOKF, NA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
339,978

 
725,518

 
1.90
%
 
949,531

 
305,668

 
133,064

 
1.44
%
 
305,668

Repurchase agreements
 
450,763

 
468,065

 
0.25
%
 
563,139

 
574,359

 
460,186

 
0.26
%
 
574,359

Other borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
 
6,000,000

 
5,731,522

 
2.19
%
 
6,000,000

 
5,900,000

 
6,470,330

 
1.96
%
 
6,500,000

GNMA repurchase liability
 
16,053

 
15,199

 
4.36
%
 
16,188

 
14,386

 
11,658

 
4.47
%
 
14,386

Other
 
4,152

 
13,419

 
2.25
%
 
15,096

 
15,059

 
15,032

 
2.35
%
 
15,059

Total other borrowings
 
6,020,205

 
5,760,140

 
2.20
%
 


 
5,929,445

 
6,497,020

 
1.96
%
 


Total BOKF, NA
 
6,810,946

 
6,953,723

 
2.04
%
 
 
 
6,809,472

 
7,090,270

 
1.84
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other borrowed funds and subordinated debentures
 
$
6,960,931

 
$
7,103,725

 
2.11
%
 
 
 
$
6,954,169

 
$
7,234,962

 
1.92
%
 
 
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 September 30, 2018, cash and interest-bearing cash and cash equivalents held by the parent company totaled $451 million, including $242 million of cash consideration available for the closing of the acquisition of CoBiz Financial on October 1, 2018. 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 September 30, 2018, based upon the most restrictive limitations as well as management's internal capital policy, the bank could declare up to $79 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 September 30, 2018 was $3.6 billion, a $62 million increase over June 30, 2018. Net income less cash dividends paid increased equity $84 million during the third quarter of 2018. Changes in interest rates resulted in an increase in the accumulated other comprehensive loss to $162 million at September 30, 2018, compared to $135 million at June 30, 2018. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings including expected benefits from lower federal income tax rates, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt or perpetual preferred stock issuance, share repurchase and stock and cash dividends.


- 40 -


On October 27, 2015, the board of directors authorized the Company to purchase up to five million common shares, subject to market conditions, securities law and other regulatory compliance limitations. As of September 30, 2018, a cumulative total of 3,050,083 shares have been repurchased under this authorization. The Company repurchased no shares in the third quarter of 2018. The Company repurchased 8,257 shares in the second quarter of 2018 at an average price of $99.84 per share.

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

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

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

Table 27 -- Capital Ratios
 
 
Minimum Capital Requirement
 
Capital Conservation Buffer
 
Minimum Capital Requirement Including Capital Conservation Buffer
 
Sept. 30, 2018
 
June 30, 2018
 
Sept 30, 2017
Risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1
 
4.50
%
 
2.50
%
 
7.00
%
 
12.05
%
 
11.92
%
 
11.90
%
Tier 1 capital
 
6.00
%
 
2.50
%
 
8.50
%
 
12.05
%
 
11.92
%
 
11.90
%
Total capital
 
8.00
%
 
2.50
%
 
10.50
%
 
13.35
%
 
13.26
%
 
13.47
%
Tier 1 Leverage
 
4.00
%
 
N/A

 
4.00
%
 
9.90
%
 
9.57
%
 
9.30
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average total equity to average assets
 
 
 
 
 
 
 
10.73
%
 
10.36
%
 
10.56
%
Tangible common equity ratio
 
 
 
 
 
 
 
9.55
%
 
9.21
%
 
9.23
%

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

Capital resources of financial institutions are also regularly measured by the tangible common shareholders’ equity ratio. Tangible common shareholders’ equity is shareholders’ equity as defined by generally accepted accounting principles in the United States of America (“GAAP”) less intangible assets and equity which does not benefit common shareholders. Equity that does not benefit common shareholders includes preferred equity. This non-GAAP measure is a valuable indicator of a financial institution’s capital strength since it eliminates intangible assets from shareholders’ equity and retains the effect of unrealized losses on securities and other components of accumulated other comprehensive income in shareholders’ equity.

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


- 41 -


Table 28 -- Non-GAAP Measure
(Dollars in thousands)
 
 
Sept. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
3,615,032

 
$
3,553,431

 
$
3,495,029

 
$
3,495,367

 
$
3,488,814

Less: Goodwill and intangible assets, net
 
480,800

 
481,366

 
477,088

 
476,088

 
485,710

Tangible common equity
 
3,134,232

 
3,072,065

 
3,017,941

 
3,019,279

 
3,003,104

Total assets
 
33,289,864

 
33,833,107

 
33,361,492

 
32,272,160

 
33,005,515

Less: Goodwill and intangible assets, net
 
480,800

 
481,366

 
477,088

 
476,088

 
485,710

Tangible assets
 
$
32,809,064

 
$
33,351,741

 
$
32,884,404

 
$
31,796,072

 
$
32,519,805

Tangible common equity ratio
 
9.55
%
 
9.21
%
 
9.18
%
 
9.50
%
 
9.23
%

Off-Balance Sheet Arrangements

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

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

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

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

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


- 42 -


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

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

Table 29 -- Interest Rate Sensitivity
(Dollars in thousands)
 
 
200 bp Increase
 
50 bp Decrease
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Anticipated impact over the next twelve months on net interest revenue
 
$
979

 
$
652

 
$
(17,843
)
 
$
(18,117
)
 
 
0.10
%
 
0.08
%
 
(1.79
)%
 
(2.10
)%

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.



- 43 -


Table 30 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
 
 
September 30,
 
 
2018
 
2017
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
MSR Asset
 
$
14,068

 
$
(23,080
)
 
$
26,449

 
$
(33,561
)
MSR Hedge
 
(21,712
)
 
19,921

 
(32,790
)
 
29,132

Net Exposure
 
(7,644
)
 
(3,159
)
 
(6,341
)
 
(4,429
)

Trading Activities

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

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

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

Table 31 -- Mortgage Pipeline Sensitivity Analysis
(Dollars in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
Average1
 
$
156

 
$
(655
)
 
$
(167
)
 
$
(881
)
 
$
335

 
$
(841
)
 
$
21

 
$
(1,172
)
Low2
 
596

 
(347
)
 
1,314

 
187

 
2,077

 
699

 
1,314

 
187

High3
 
(101
)
 
(1,025
)
 
(1,533
)
 
(1,993
)
 
(1,015
)
 
(2,447
)
 
(1,553
)
 
(2,377
)
Period End
 
139

 
(601
)
 
(744
)
 
(374
)
 
139

 
(601
)
 
(744
)
 
(374
)
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 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.


- 44 -


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

Table 32 -- Trading Sensitivity Analysis
(Dollars in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
Average1
 
$
(897
)
 
$
(55
)
 
$
(1,152
)
 
$
1,171

 
$
(1,329
)
 
$
714

 
$
(1,711
)
 
$
1,884

Low2
 
2,041

 
3,447

 
328

 
3,509

 
2,041

 
4,423

 
328

 
5,210

High3
 
(4,005
)
 
(3,463
)
 
(3,404
)
 
(486
)
 
(4,534
)
 
(3,463
)
 
(4,386
)
 
(486
)
Period End
 
(2,116
)
 
1,573

 
(1,395
)
 
945

 
(2,116
)
 
1,573

 
(1,395
)
 
945

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.

- 45 -


Controls and Procedures
 
As required by Rule 13a-15(b), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
Forward-Looking Statements

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

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

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

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



- 46 -


     
Consolidated Statements of Earnings (Unaudited)
 
 
 
 
 
 
 
 
(In thousands, except share and per share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Interest revenue
 
2018
 
2017
 
2018
 
2017
Loans
 
$
218,732

 
$
184,200

 
$
617,517

 
$
514,047

Residential mortgage loans held for sale
 
2,151

 
2,095

 
6,328

 
6,317

Trading securities
 
17,295

 
3,975

 
38,021

 
12,497

Investment securities
 
3,598

 
3,951

 
11,118

 
12,127

Available for sale securities
 
48,917

 
44,925

 
142,303

 
131,660

Fair value option securities
 
3,881

 
5,066

 
12,627

 
10,985

Restricted equity securities
 
5,232

 
4,826

 
15,757

 
13,534

Interest-bearing cash and cash equivalents
 
3,441

 
6,375

 
19,163

 
15,817

Total interest revenue
 
303,247

 
255,413

 
862,834

 
716,984

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
24,535

 
14,530

 
63,717

 
38,506

Borrowed funds
 
35,804

 
20,361

 
93,860

 
47,542

Subordinated debentures
 
2,025

 
2,070

 
6,076

 
6,098

Total interest expense
 
62,364

 
36,961

 
163,653

 
92,146

Net interest revenue
 
240,883

 
218,452

 
699,181

 
624,838

Provision for credit losses
 
4,000

 
—

 
(1,000
)
 
—

Net interest revenue after provision for credit losses
 
236,883

 
218,452

 
700,181

 
624,838

Other operating revenue
 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
23,086

 
33,169

 
80,222

 
98,556

Transaction card revenue
 
21,396

 
32,844

 
63,361

 
90,452

Fiduciary and asset management revenue
 
57,514

 
40,687

 
141,045

 
121,126

Deposit service charges and fees
 
27,765

 
28,191

 
82,753

 
84,390

Mortgage banking revenue
 
23,536

 
24,890

 
75,907

 
80,357

Other revenue
 
14,213

 
13,670

 
41,061

 
40,406

Total fees and commissions
 
167,510

 
173,451

 
484,349

 
515,287

Other gains, net
 
1,441

 
(1,283
)
 
4,760

 
8,452

Gain (loss) on derivatives, net
 
(2,847
)
 
1,033

 
(11,589
)
 
3,824

Gain (loss) on fair value option securities, net
 
(4,385
)
 
661

 
(25,290
)
 
1,505

Change in fair value of mortgage servicing rights
 
5,972

 
(639
)
 
28,901

 
(5,726
)
Gain (loss) on available for sale securities, net
 
250

 
2,487

 
(802
)
 
4,916

Total other operating revenue
 
167,941

 
175,710

 
480,329

 
528,258

Other operating expense
 
 

 
 

 
 

 
 

Personnel
 
143,531

 
147,910

 
422,425

 
428,079

Business promotion
 
7,620

 
7,105

 
21,316

 
21,560

Professional fees and services
 
13,209

 
11,887

 
38,387

 
35,723

Net occupancy and equipment
 
23,394

 
21,325

 
70,201

 
64,074

Insurance
 
6,232

 
6,005

 
19,070

 
13,098

Data processing and communications
 
31,665

 
37,327

 
87,221

 
108,559

Printing, postage and supplies
 
3,837

 
3,917

 
11,937

 
11,908

Net losses and operating expenses of repossessed assets
 
4,044

 
6,071

 
14,471

 
9,347

Amortization of intangible assets
 
1,603

 
1,744

 
4,289

 
5,349

Mortgage banking costs
 
11,741

 
13,450

 
34,780

 
38,525

Other expense
 
5,741

 
9,193

 
19,426

 
25,308

Total other operating expense
 
252,617

 
265,934

 
743,523

 
761,530

Net income before taxes
 
152,207

 
128,228

 
436,987

 
391,566

Federal and state income taxes
 
34,662

 
42,438

 
98,940

 
128,246

Net income
 
117,545

 
85,790

 
338,047

 
263,320

Net income attributable to non-controlling interests
 
289

 
141

 
857

 
1,168

Net income attributable to BOK Financial Corporation shareholders
 
$
117,256

 
$
85,649

 
$
337,190

 
$
262,152

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.79

 
$
1.31

 
$
5.15

 
$
4.01

Diluted
 
$
1.79

 
$
1.31

 
$
5.15

 
$
4.00

Average shares used in computation:
 
 
 
 
 
 
 
 
Basic
 
64,901,095

 
64,742,822

 
64,883,319

 
64,729,391

Diluted
 
64,934,351

 
64,805,172

 
64,919,728

 
64,793,893

Dividends declared per share
 
$
0.50

 
$
0.44

 
$
1.40

 
$
1.32


See accompanying notes to consolidated financial statements.

- 47 -


Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
 
(In thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
117,545

 
$
85,790

 
$
338,047

 
$
263,320

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(35,941
)
 
512

 
(166,464
)
 
33,881

Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
Loss (gain) on available for sale securities, net
 
(250
)
 
(2,487
)
 
802

 
(4,916
)
Other comprehensive income (loss) before income taxes
 
(36,191
)
 
(1,975
)
 
(165,662
)
 
28,965

Federal and state income taxes
 
(9,134
)
 
(768
)
 
(42,183
)
 
11,241

Other comprehensive income (loss), net of income taxes
 
(27,057
)

(1,207
)

(123,479
)

17,724

Comprehensive income
 
90,488

 
84,583

 
214,568

 
281,044

Comprehensive income attributable to non-controlling interests
 
289

 
141

 
857

 
1,168

Comprehensive income attributable to BOK Financial Corp. shareholders
 
$
90,199

 
$
84,442

 
$
213,711

 
$
279,876


See accompanying notes to consolidated financial statements.

- 48 -


Consolidated Balance Sheets
(In thousands, except share data)
 
 
Sept. 30, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
 
(Unaudited)
 
(Footnote 1)
 
(Unaudited)
Assets
 
 
 
 
 
 
Cash and due from banks
 
$
815,458

 
$
602,510

 
$
547,203

Interest-bearing cash and cash equivalents
 
430,789

 
1,714,544

 
1,926,779

Trading securities
 
1,613,400

 
462,676

 
614,117

Investment securities (fair value:  September 30, 2018 – $382,893; December 31, 2017 – $480,035 ; September 30, 2017 – $489,895)
 
374,039

 
461,793

 
466,562

Available for sale securities
 
8,072,014

 
8,321,578

 
8,383,199

Fair value option securities
 
452,150

 
755,054

 
819,531

Restricted equity securities
 
311,189

 
320,189

 
347,542

Residential mortgage loans held for sale
 
175,866

 
221,378

 
275,643

Loans
 
18,349,459

 
17,153,424

 
17,206,834

Allowance for loan losses
 
(210,569
)
 
(230,682
)
 
(247,703
)
Loans, net of allowance
 
18,138,890

 
16,922,742

 
16,959,131

Premises and equipment, net
 
327,129

 
317,335

 
320,060

Receivables
 
277,738

 
178,800

 
173,990

Goodwill
 
447,430

 
447,430

 
446,697

Intangible assets, net
 
33,370

 
28,658

 
39,013

Mortgage servicing rights
 
284,673

 
252,867

 
245,858

Real estate and other repossessed assets, net of allowance (September 30, 2018 – $19,794; December 31, 2017 – $12,648; September 30, 2017 – $11,738)
 
24,515

 
28,437

 
32,535

Derivative contracts, net
 
349,481

 
220,502

 
352,559

Cash surrender value of bank-owned life insurance
 
323,628

 
316,498

 
314,201

Receivable on unsettled securities sales
 
421,313

 
340,077

 
370,486

Other assets
 
416,792

 
359,092

 
370,409

Total assets
 
$
33,289,864

 
$
32,272,160

 
$
33,005,515

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
$
9,063,623

 
$
9,243,338

 
$
9,185,481

Interest-bearing deposits:
 
 

 
 

 
 

Transaction
 
9,990,219

 
10,250,393

 
10,025,084

Savings
 
502,601

 
469,158

 
465,225

Time
 
2,075,846

 
2,098,416

 
2,172,289

Total deposits
 
21,632,289

 
22,061,305

 
21,848,079

Funds purchased and repurchase agreements
 
790,741

 
574,964

 
390,545

Other borrowings
 
6,025,483

 
5,134,897

 
6,241,275

Subordinated debentures
 
144,707

 
144,677

 
144,668

Accrued interest, taxes and expense
 
231,592

 
164,895

 
152,029

Derivative contracts, net
 
252,387

 
171,963

 
336,327

Due on unsettled securities purchases
 
414,283

 
338,745

 
176,498

Other liabilities
 
172,622

 
162,380

 
201,655

Total liabilities
 
29,664,104

 
28,753,826

 
29,491,076

Shareholders' equity:
 
 

 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: September 30, 2018 – 75,308,727; December 31, 2017 – 75,147,686; September 30, 2017 – 75,129,535)
 
4

 
4

 
4

Capital surplus
 
1,044,430

 
1,035,895

 
1,028,489

Retained earnings
 
3,297,083

 
3,048,487

 
2,999,005

Treasury stock (shares at cost:  September 30, 2018 – 9,874,469; December 31, 2017 – 9,752,749;  September 30, 2017 – 9,672,749)
 
(564,123
)
 
(552,845
)
 
(545,441
)
Accumulated other comprehensive gain (loss)
 
(162,362
)
 
(36,174
)
 
6,757

Total shareholders’ equity
 
3,615,032

 
3,495,367

 
3,488,814

Non-controlling interests
 
10,728

 
22,967

 
25,625

Total equity
 
3,625,760

 
3,518,334

 
3,514,439

Total liabilities and equity
 
$
33,289,864

 
$
32,272,160

 
$
33,005,515


See accompanying notes to consolidated financial statements.

- 49 -


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

 
$
4

 
$
1,006,535

 
$
2,823,334

 
9,656

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

 
$
31,503

 
$
3,306,357

Net income
 
—

 
—

 
—

 
262,152

 
—

 
—

 
—

 
262,152

 
1,168

 
263,320

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
17,724

 
17,724

 
—

 
17,724

Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
 
80

 
—

 
4,564

 
—

 
—

 
—

 
—

 
4,564

 
—

 
4,564

Non-vested shares awarded, net
 
57

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
 
—

 
—

 
—

 
—

 
17

 
(1,389
)
 
—

 
(1,389
)
 
—

 
(1,389
)
Share-based compensation
 
—

 
—

 
17,390

 
—

 
—

 
—

 
—

 
17,390

 
—

 
17,390

Cash dividends on common stock
 
—

 
—

 
—

 
(86,481
)
 
—

 
—

 
—

 
(86,481
)
 
—

 
(86,481
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(7,046
)
 
(7,046
)
Balance, September 30, 2017
 
75,130

 
$
4

 
$
1,028,489

 
$
2,999,005

 
9,673

 
$
(545,441
)
 
$
6,757

 
$
3,488,814

 
$
25,625

 
$
3,514,439

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
75,148

 
$
4

 
$
1,035,895

 
$
3,048,487

 
9,753

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

 
$
22,967

 
$
3,518,334

Transition adjustment of net unrealized gains on equity securities
 
—

 
—

 
—

 
2,709

 
—

 
—

 
(2,709
)
 
—

 
—

 
—

Balance, December 31, 2017, Adjusted
 
75,148


4


1,035,895


3,051,196


9,753


(552,845
)

(38,883
)

3,495,367


22,967


3,518,334

Net income
 
—

 
—

 
—

 
337,190

 
—

 
—

 
—

 
337,190

 
857

 
338,047

Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
—

 
(123,479
)
 
(123,479
)
 
—

 
(123,479
)
Repurchase of common stock
 
—

 
—

 
—

 
—

 
90

 
(8,408
)
 
—

 
(8,408
)
 
—

 
(8,408
)
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
 
49

 
—

 
2,560

 
—

 
—

 
—

 
—

 
2,560

 
—

 
2,560

Non-vested shares awarded, net
 
112

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
 
—

 
—

 
—

 
—

 
31

 
(2,870
)
 
—

 
(2,870
)
 
—

 
(2,870
)
Share-based compensation
 
—

 
—

 
5,975

 
—

 
—

 
—

 
—

 
5,975

 
—

 
5,975

Cash dividends on common stock
 
—

 
—

 
—

 
(91,303
)
 
—

 
—

 
—

 
(91,303
)
 
—

 
(91,303
)
Sale of non-controlling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(10,000
)
 
(10,000
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3,096
)
 
(3,096
)
Balance, September 30, 2018
 
75,309


$
4


$
1,044,430


$
3,297,083


9,874


$
(564,123
)

$
(162,362
)

$
3,615,032


$
10,728


$
3,625,760


See accompanying notes to consolidated financial statements.

- 50 -


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

 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
338,047

 
$
263,320

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Provision for credit losses
 
(1,000
)
 
—

Change in fair value of mortgage servicing rights due to market changes
 
(28,901
)
 
5,726

Change in the fair value of mortgage servicing rights due to principal payments
 
25,783

 
24,928

Net unrealized losses (gains) from derivative contracts
 
3,309

 
(3,937
)
Share-based compensation
 
5,975

 
17,390

Depreciation and amortization
 
41,999

 
39,154

Net amortization of securities discounts and premiums
 
19,001

 
22,149

Net losses (gains) on financial instruments and other losses (gains), net
 
5,581

 
(1,930
)
Net gain on mortgage loans held for sale
 
(26,242
)
 
(35,778
)
Mortgage loans originated for sale
 
(2,093,860
)
 
(2,446,793
)
Proceeds from sale of mortgage loans held for sale
 
2,165,989

 
2,503,759

Capitalized mortgage servicing rights
 
(28,688
)
 
(29,439
)
Change in trading and fair value option securities
 
(848,409
)
 
(1,019,906
)
Change in receivables
 
(249,347
)
 
459,480

Change in other assets
 
(15,157
)
 
(18,991
)
Change in accrued interest, taxes and expense
 
66,697

 
(99
)
Change in other liabilities
 
229,815

 
43,767

Net cash used in operating activities
 
(389,408
)
 
(177,200
)
Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
89,099

 
94,243

Proceeds from maturities or redemptions of available for sale securities
 
1,208,373

 
1,345,575

Purchases of investment securities
 
(4,218
)
 
(18,802
)
Purchases of available for sale securities
 
(1,404,291
)
 
(2,001,160
)
Proceeds from sales of available for sale securities
 
232,826

 
966,044

Change in amount receivable on unsettled available for sale securities transactions
 
67,775

 
(223,037
)
Loans originated, net of principal collected
 
(1,187,762
)
 
(156,404
)
Net payments on derivative asset contracts
 
(39,485
)
 
334,709

Acquisitions, net of cash acquired
 
(13,870
)
 
—

Proceeds from disposition of assets
 
265,786

 
162,793

Purchases of assets
 
(250,447
)
 
(170,937
)
Net cash provided by (used in) investing activities
 
(1,036,214
)
 
333,024

Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
(406,446
)
 
(850,505
)
Net change in time deposits
 
(22,570
)
 
(49,511
)
Net change in other borrowed funds
 
1,035,549

 
957,859

Net proceeds on derivative liability contracts
 
42,883

 
(339,566
)
Net change in derivative margin accounts
 
(46,390
)
 
(8,583
)
Change in amount due on unsettled available for sale securities transactions
 
(148,190
)
 
154,273

Issuance of common and treasury stock, net
 
(310
)
 
3,175

Repurchase of common stock
 
(8,408
)
 
—

Dividends paid
 
(91,303
)
 
(86,481
)
Net cash provided by (used in) financing activities
 
354,815

 
(219,339
)
Net decrease in cash and cash equivalents
 
(1,070,807
)
 
(63,515
)
Cash and cash equivalents at beginning of period
 
2,317,054

 
2,537,497

Cash and cash equivalents at end of period
 
$
1,246,247

 
$
2,473,982

 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
Cash paid for interest
 
$
163,381

 
$
89,901

Cash paid for taxes
 
$
77,373

 
$
95,967

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
9,513

 
$
4,649

Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period
 
$
70,814

 
$
101,299

Conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
32,206

 
$
32,033

See accompanying notes to consolidated financial statements.

- 51 -


Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

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

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

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

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

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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

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

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

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


- 52 -


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

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

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

On February 25, 2016, the FASB issued ASU 2016-02 to increase transparency and comparability by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Lessees will be required to recognize an obligation for future lease payments measured on a discounted basis and a right-of-use asset. The ASU is effective for the Company for interim and annual periods beginning after December 15, 2018. As originally issued, ASU 2016-02 required implementation through the modified transition method applied as of the earliest period presented in the financial statements. In 2018 an additional and optional transition method that allows entities to apply the standard as of the adoption date was approved. BOKF intends to elect this optional transition method. BOKF also plans to elect all practical expedients other than the lessee’s practical expedient to combine lease and non-lease components which would further gross up the lease liability and related right of use asset. The Company currently estimates that implementation of ASU 2016-02 will increase reported right of use assets and liabilities by approximately $100 million to $150 million.
 
FASB Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Assets Measured at Amortized Cost ("ASU 2016-13")

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

The Company has established a CECL implementation team in order to evaluate the impact the adoption of ASU 2016-13 will have on the Company's financial statements. The CECL implementation team, overseen by the Chief Credit Officer, Chief Financial Officer, and Chief Risk Officer, has developed a project plan that incorporates input from various departments within the bank including Credit, Financial Reporting, Risk, and Information Technology among others. Key implementation activities for 2018 include portfolio segmentation, credit risk driver identification, model development, as well as process and information systems enhancements. The Company will adopt the standard on January 1, 2020.
FASB Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15")

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


- 53 -


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

On August 28, 2017, the FASB issued ASU 2017-12, which amends the hedge accounting recognition and presentation requirements in ASC 815 in order to improve transparency and understandability of information and reduce the complexity. The update expands the types of transactions eligible for hedge accounting, eliminates the requirement to separately measure and present hedge ineffectiveness, simplifies hedge effectiveness assessments and updates documentation and presentation requirements. The update allows the reclassification of certain debt securities from held to maturity to available for sale if the debt security is eligible to be hedged under the last-of-layer method. ASU 2017-12 is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods therein; however, early adoption is permitted. Adoption of ASU 2017-12 is not expected to have a material impact on the Company's financial statements.


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

On March 13, 2018, the FASB issued ASU 2018-05, which adds SEC guidance related to SAB 118 - Income Tax Accounting Implications of the Tax Cuts and Jobs Act. ASU 2018-05 was effective upon issuance. The adoption of ASU 2018-05 has not had a significant impact in 2018.

FASB Accounting Standards Update No. 2018-15, Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract ("ASU 2018-15")

On August 29, 2018, the FASB issued ASU 2018-15, which requires a customer in a cloud hosting arrangement that is a service contract to follow the internal use software requirements in ASC 350-40 to determine which implementation costs to capitalize or expense as incurred. Internal use software guidance requires the capitalization of costs incurred during the development phase. Capitalized costs will be amortized over the term of the hosting arrangement beginning when the arrangement is ready for its intended use. ASU 2018-15 is effective for the Company for fiscal years beginning after December 15, 2019; however, early adoption is permitted. The Company elected to early adopt the update prospectively in third quarter of 2018. The adoption of ASU 2018-15 did not have a significant impact in the third quarter.

 

- 54 -


(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities are as follows (in thousands):
 
 
 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. government agency debentures
 
$
80,692

 
$
21

 
$
21,196

 
$
8

 
$
30,162

 
$
(101
)
U.S. government agency residential mortgage-backed securities
 
1,378,450

 
(3,498
)
 
392,673

 
(517
)
 
516,760

 
723

Municipal and other tax-exempt securities
 
41,345

 
(161
)
 
13,559

 
83

 
56,148

 
153

Asset-backed securities
 
72,309

 
(100
)
 
23,885

 
(26
)
 
—

 
—

Other trading securities
 
40,604

 
5

 
11,363

 
4

 
11,047

 
23

Total trading securities
 
$
1,613,400

 
$
(3,733
)
 
$
462,676

 
$
(448
)
 
$
614,117

 
$
798


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

 
 
September 30, 2018
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
157,723

 
$
158,230

 
$
1,403

 
$
(896
)
U.S. government agency residential mortgage-backed securities
 
13,234

 
13,201

 
205

 
(238
)
Other debt securities
 
203,082

 
211,462

 
10,721

 
(2,341
)
Total investment securities
 
$
374,039

 
$
382,893

 
$
12,329

 
$
(3,475
)

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

 
$
230,349

 
$
2,967

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

 
16,242

 
446

 
(95
)
Other debt securities
 
217,716

 
233,444

 
17,095

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

 
$
480,035

 
$
20,508

 
$
(2,266
)

 
 
September 30, 2017
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
246,000

 
$
249,250

 
$
3,415

 
$
(165
)
U.S. government agency residential mortgage-backed securities
 
16,926

 
17,458

 
594

 
(62
)
Other debt securities
 
203,636

 
223,187

 
20,141

 
(590
)
Total investment securities
 
$
466,562

 
$
489,895

 
$
24,150

 
$
(817
)




- 55 -


The amortized cost and fair values of investment securities at September 30, 2018, by contractual maturity, are as shown in the following table (dollars in thousands):
 
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 
Total
 
Weighted
Average
Maturity²
Municipal and other tax-exempt:
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
65,789

 
$
41,827

 
$
35,652

 
$
14,455

 
$
157,723

 
4.13

Fair value
 
65,633

 
41,432

 
36,677

 
14,488

 
158,230

 
 
Nominal yield¹
 
2.06
%
 
2.82
%
 
6.00
%
 
4.33
%
 
3.36
%
 
 
Other debt securities:
 
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
 
14,847

 
60,825

 
115,587

 
11,823

 
203,082

 
7.23

Fair value
 
14,941

 
62,604

 
123,236

 
10,681

 
211,462

 
 
Nominal yield
 
4.17
%
 
4.70
%
 
5.76
%
 
4.34
%
 
5.25
%
 
 
Total fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
 
$
80,636

 
$
102,652

 
$
151,239

 
$
26,278

 
$
360,805

 
5.88

Fair value
 
80,574

 
104,036

 
159,913

 
25,169

 
369,692

 
 

Nominal yield
 
2.44
%
 
3.94
%
 
5.82
%
 
4.33
%
 
4.42
%
 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
13,234

 
³

Fair value
 
 

 
 

 
 

 
 

 
13,201

 
 

Nominal yield4
 
 

 
 

 
 

 
 

 
2.77
%
 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
374,039

 
 

Fair value
 
 

 
 

 
 

 
 

 
382,893

 
 

Nominal yield
 
 

 
 

 
 

 
 

 
4.36
%
 
 

1 
Calculated on a taxable equivalent basis using a 25 percent effective tax rate.
2 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
3 
The average expected lives of residential mortgage-backed securities were 5.2 years based upon current prepayment assumptions.
4 
The nominal yield on residential mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary - Unaudited for current yields on the investment securities portfolio.


- 56 -


Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
September 30, 2018
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI
U.S. Treasury
 
$
495

 
$
490

 
$
—

 
$
(5
)
 
$
—

Municipal and other tax-exempt
 
4,269

 
4,349

 
81

 
(1
)
 
—

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
3,057,570

 
2,959,457

 
1,653

 
(99,766
)
 
—

FHLMC
 
1,562,569

 
1,512,928

 
501

 
(50,142
)
 
—

GNMA
 
677,496

 
659,967

 
450

 
(17,979
)
 
—

Total U.S. government agencies
 
5,297,635

 
5,132,352

 
2,604

 
(167,887
)
 
—

Private issue
 
54,932

 
74,685

 
19,753

 
—

 
—

Total residential mortgage-backed securities
 
5,352,567


5,207,037


22,357


(167,887
)

—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,905,974

 
2,834,691

 
1,363

 
(72,646
)
 
—

Other debt securities
 
25,502

 
25,447

 
11

 
(66
)
 
—

Total available for sale securities
 
$
8,288,807

 
$
8,072,014

 
$
23,812

 
$
(240,605
)
 
$
—


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

 
$
1,000

 
$
—

 
$
—

 
$
—

Municipal and other tax-exempt
 
27,182

 
27,080

 
181

 
(283
)
 
—

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
3,021,551

 
2,997,563

 
11,549

 
(35,537
)
 
—

FHLMC
 
1,545,971

 
1,531,009

 
3,148

 
(18,110
)
 
—

GNMA
 
787,626

 
780,580

 
1,607

 
(8,653
)
 
—

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

 
5,309,152

 
16,304

 
(62,300
)
 
—

Private issue
 
74,311

 
93,221

 
19,301

 
—

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


5,402,373


35,605


(62,300
)

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

 
2,834,961

 
1,963

 
(25,887
)
 
—

Other debt securities
 
25,500

 
25,481

 
50

 
(69
)
 
—

Perpetual preferred stock
 
12,562

 
15,767

 
3,205

 
—

 
—

Equity securities and mutual funds
 
14,487

 
14,916

 
515

 
(86
)
 
—

Total available for sale securities
 
$
8,369,075

 
$
8,321,578

 
$
41,519

 
$
(88,625
)
 
$
(391
)



- 57 -


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

 
$
999

 
$
—

 
$
(1
)
 
$
—

Municipal and other tax-exempt
 
28,411

 
28,368

 
240

 
(283
)
 
—

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

 
 

 
 

 
 

 
 

FNMA
 
3,103,869

 
3,108,822

 
25,510

 
(20,557
)
 
—

FHLMC
 
1,331,212

 
1,330,159

 
6,630

 
(7,683
)
 
—

GNMA
 
864,256

 
862,394

 
3,254

 
(5,116
)
 
—

Other
 
25,000

 
25,009

 
51

 
(42
)
 
—

Total U.S. government agencies
 
5,324,337

 
5,326,384

 
35,445

 
(33,398
)
 
—

Private issue
 
80,797

 
99,994

 
19,197

 
—

 
—

Total residential mortgage-backed securities
 
5,405,134


5,426,378


54,642


(33,398
)

—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,899,828

 
2,889,346

 
5,577

 
(16,059
)
 
—

Other debt securities
 
4,400

 
4,153

 
—

 
(247
)
 
—

Perpetual preferred stock
 
12,562

 
16,245

 
3,683

 
—

 
—

Equity securities and mutual funds
 
17,803

 
17,710

 
655

 
(748
)
 
—

Total available for sale securities
 
$
8,369,138

 
$
8,383,199

 
$
64,797

 
$
(50,736
)
 
$
—




- 58 -


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

 
$
495

 
$
—

 
$
—

 
$
495

 
1.34

Fair value
—

 
490

 
—

 
—

 
490

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

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
—

 
$
—

 
$
—

 
$
4,269

 
$
4,269

 
18.72

Fair value
—

 
—

 
—

 
4,349

 
4,349

 
 
Nominal yield¹
—
%
 
—
%
 
—
%
 
5.60
%
5 
5.60
%
 
 
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
74,694

 
$
1,070,820

 
$
1,449,084

 
$
311,376

 
$
2,905,974

 
7.11

Fair value
73,929

 
1,043,429

 
1,413,692

 
303,641

 
2,834,691

 
 
Nominal yield
1.70
%
 
2.02
%
 
2.24
%
 
2.45
%
 
2.17
%
 
 
Other debt securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
—

 
$
—

 
$
—

 
$
25,502

 
$
25,502

 
13.93

Fair value
—

 
—

 
—

 
25,447

 
25,447

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

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
74,694

 
$
1,071,315

 
$
1,449,084

 
$
341,147

 
$
2,936,240

 
7.18

Fair value
73,929

 
1,043,919

 
1,413,692

 
333,437

 
2,864,977

 
 
Nominal yield
1.70
%
 
2.02
%
 
2.24
%
 
2.42
%
 
2.17
%
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
 

 
 

 
 

 
 

 
$
5,352,567

 
2 

Fair value
 

 
 

 
 

 
 

 
5,207,037

 
 
Nominal yield3
 

 
 

 
 

 
 

 
2.24
%
 
 
Total available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 

Amortized cost
 

 
 

 
 

 
 

 
$
8,288,807

 
 

Fair value
 

 
 

 
 

 
 

 
8,072,014

 
 

Nominal yield
 

 
 

 
 

 
 

 
2.21
%
 
 

1 
Calculated on a taxable equivalent basis using a 25 percent effective tax rate.
2 
The average expected lives of mortgage-backed securities were 4.4 years based upon current prepayment assumptions.
3 
The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary –– Unaudited following for current yields on available for sale securities portfolio.
4 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
5 
Nominal yield on municipal and other tax-exempt securities and other debt securities with contractual maturity dates over ten years are based on variable rates which generally are reset within 35 days.

Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Proceeds
$
45,293

 
$
265,632

 
$
232,826

 
$
966,044

Gross realized gains
250

 
2,768

 
700

 
7,623

Gross realized losses
—

 
(281
)
 
(1,502
)
 
(2,707
)
Related federal and state income tax expense (benefit)
64

 
967

 
(204
)
 
1,912




- 59 -


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 $8.0 billion at September 30, 2018, $7.3 billion at December 31, 2017 and $7.0 billion at September 30, 2017.

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


Temporarily Impaired Securities as of September 30, 2018
(in thousands):
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
85

 
$
46,618

 
$
277

 
$
54,149

 
$
619

 
$
100,767

 
$
896

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

 
6,682

 
96

 
2,625

 
142

 
9,307

 
238

Other debt securities
 
93

 
38,441

 
2,035

 
4,714

 
306

 
43,155

 
2,341

Total investment securities
 
181

 
$
91,741

 
$
2,408

 
$
61,488

 
$
1,067

 
$
153,229

 
$
3,475


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

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
1

 
$
490

 
$
5

 
$
—

 
$
—

 
$
490

 
$
5

Municipal and other tax-exempt
 
2

 
1,046

 
1

 
—

 
—

 
1,046

 
1

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 
 
 

 
 

 
 

 
 

 


 


FNMA
 
188

 
1,584,010

 
32,919

 
1,277,814

 
66,847

 
2,861,824

 
99,766

FHLMC
 
99

 
702,707

 
15,450

 
781,589

 
34,692

 
1,484,296

 
50,142

GNMA
 
38

 
285,731

 
5,326

 
253,506

 
12,653

 
539,237

 
17,979

Total U.S. government agencies
 
325


2,572,448


53,695


2,312,909


114,192


4,885,357


167,887

Private issue1
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage-backed securities
 
325

 
2,572,448

 
53,695

 
2,312,909

 
114,192

 
4,885,357

 
167,887

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
220

 
1,174,544

 
24,982

 
1,238,848

 
47,664

 
2,413,392

 
72,646

Other debt securities
 
2

 
—

 
—

 
20,435

 
66

 
20,435

 
66

Total available for sale securities
 
550

 
$
3,748,528


$
78,683


$
3,572,192


$
161,922


$
7,320,720


$
240,605


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


- 60 -


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

 
$
145,960

 
$
643

 
$
5,833

 
$
161

 
$
151,793

 
$
804

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

 
—

 
—

 
3,356

 
95

 
3,356

 
95

Other debt securities
 
49

 
20,091

 
1,238

 
3,076

 
129

 
23,167

 
1,367

Total investment securities
 
150

 
$
166,051

 
$
1,881

 
$
12,265

 
$
385

 
$
178,316

 
$
2,266


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

 
 

 
 

 
 

 
 

 


 


U.S. Treasury
 
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Municipal and other tax-exempt
 
19

 
12,765

 
18

 
4,802

 
265

 
17,567

 
283

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
113

 
1,203,041

 
9,618

 
824,029

 
25,919

 
2,027,070

 
35,537

FHLMC
 
69

 
863,778

 
7,297

 
385,816

 
10,813

 
1,249,594

 
18,110

GNMA
 
27

 
201,887

 
1,452

 
248,742

 
7,201

 
450,629

 
8,653

Total U.S. government agencies
 
209

 
2,268,706

 
18,367

 
1,458,587

 
43,933

 
3,727,293

 
62,300

Private issue1
 
8

 
5,898

 
391

 
—

 
—

 
5,898

 
391

Total residential mortgage-backed securities
 
217

 
2,274,604

 
18,758

 
1,458,587

 
43,933

 
3,733,191

 
62,691

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

 
1,465,703

 
11,824

 
652,296

 
14,063

 
2,117,999

 
25,887

Other debt securities
 
2

 
19,959

 
41

 
472

 
28

 
20,431

 
69

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
111

 
911

 
7

 
2,203

 
79

 
3,114

 
86

Total available for sale securities
 
534

 
$
3,773,942


$
30,648


$
2,118,360


$
58,368


$
5,892,302


$
89,016


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


- 61 -


Temporarily Impaired Securities as of September 30, 2017
(In thousands)
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
63

 
$
80,235

 
$
70

 
$
9,795

 
$
95

 
$
90,030

 
$
165

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

 
3,578

 
62

 
—

 
—

 
3,578

 
62

Other debt securities
 
28

 
10,022

 
566

 
427

 
24

 
10,449

 
590

Total investment securities
 
92

 
$
93,835

 
$
698

 
$
10,222

 
$
119

 
$
104,057

 
$
817


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

 
 

 
 

 
 

 
 

 


 


U.S. Treasury
 
1

 
$
999

 
$
1

 
$
—

 
$
—

 
$
999

 
$
1

Municipal and other tax-exempt
 
11

 
576

 
1

 
4,785

 
282

 
5,361

 
283

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
81

 
1,054,171

 
10,288

 
480,994

 
10,269

 
1,535,165

 
20,557

FHLMC
 
42

 
477,823

 
3,546

 
198,478

 
4,137

 
676,301

 
7,683

GNMA
 
17

 
166,565

 
1,718

 
124,037

 
3,398

 
290,602

 
5,116

Other
 
1

 
19,958

 
42

 
—

 
—

 
19,958

 
42

Total U.S. government agencies
 
141

 
1,718,517

 
15,594

 
803,509

 
17,804

 
2,522,026

 
33,398

Private issue1
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage-backed securities
 
141

 
1,718,517

 
15,594

 
803,509

 
17,804

 
2,522,026

 
33,398

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
137

 
1,154,911

 
7,194

 
559,984

 
8,865

 
1,714,895

 
16,059

Other debt securities
 
2

 
—

 
—

 
4,153

 
247

 
4,153

 
247

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
91

 
3,672

 
696

 
1,428

 
52

 
5,100

 
748

Total available for sale securities
 
383

 
$
2,878,675

 
$
23,486

 
$
1,373,859

 
$
27,250

 
$
4,252,534

 
$
50,736

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

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


- 62 -


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):
 
 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. government agency residential mortgage-backed securities
 
$
452,150

 
$
(7,923
)
 
$
755,054

 
$
(1,877
)
 
$
819,531

 
$
1,671






- 63 -


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

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

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

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

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

- 64 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2018 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
12,423,155

 
$
45,983

 
$
(18,338
)
 
$
27,645

 
$
—

 
$
27,645

Interest rate swaps
 
1,702,731

 
46,160

 
(1,300
)
 
44,860

 
(13,307
)
 
31,553

Energy contracts
 
1,509,976

 
202,086

 
(67,611
)
 
134,475

 
(3,020
)
 
131,455

Agricultural contracts
 
26,318

 
1,024

 
(196
)
 
828

 
—

 
828

Foreign exchange contracts
 
148,824

 
146,719

 
—

 
146,719

 
—

 
146,719

Equity option contracts
 
89,606

 
4,144

 
—

 
4,144

 
(660
)
 
3,484

Total customer risk management programs
 
15,900,610

 
446,116

 
(87,445
)
 
358,671

 
(16,987
)
 
341,684

Internal risk management programs
 
1,064,113

 
23,887

 
(16,090
)
 
7,797

 
—

 
7,797

Total derivative contracts
 
$
16,964,723

 
$
470,003

 
$
(103,535
)
 
$
366,468

 
$
(16,987
)
 
$
349,481

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional¹
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
12,160,590

 
$
43,074

 
$
(18,338
)
 
$
24,736

 
$
—

 
$
24,736

Interest rate swaps
 
1,702,731

 
46,162

 
(1,300
)
 
44,862

 
(3,844
)
 
41,018

Energy contracts
 
1,485,036

 
200,290

 
(67,611
)
 
132,679

 
(115,191
)
 
17,488

Agricultural contracts
 
26,316

 
998

 
(196
)
 
802

 
—

 
802

Foreign exchange contracts
 
145,943

 
143,817

 
—

 
143,817

 
(48
)
 
143,769

Equity option contracts
 
89,606

 
4,144

 
—

 
4,144

 
—

 
4,144

Total customer risk management programs
 
15,610,222

 
438,485

 
(87,445
)
 
351,040

 
(119,083
)
 
231,957

Internal risk management programs
 
4,079,094

 
36,520

 
(16,090
)
 
20,430

 
—

 
20,430

Total derivative contracts
 
$
19,689,316

 
$
475,005

 
$
(103,535
)
 
$
371,470

 
$
(119,083
)
 
$
252,387

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



- 65 -


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

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

 
$
23,606

 
$
(18,096
)
 
$
5,510

 
$
—

 
$
5,510

Interest rate swaps
 
1,478,944

 
28,278

 
—

 
28,278

 
(4,964
)
 
23,314

Energy contracts
 
1,190,067

 
103,044

 
(47,873
)
 
55,171

 
(196
)
 
54,975

Agricultural contracts
 
53,238

 
1,576

 
(960
)
 
616

 
—

 
616

Foreign exchange contracts
 
132,397

 
129,551

 
—

 
129,551

 
(448
)
 
129,103

Equity option contracts
 
99,633

 
5,503

 
—

 
5,503

 
(920
)
 
4,583

Total customer risk management programs
 
15,301,821

 
291,558

 
(66,929
)
 
224,629

 
(6,528
)
 
218,101

Internal risk management programs
 
4,736,701

 
9,494

 
(7,093
)
 
2,401

 
—

 
2,401

Total derivative contracts
 
$
20,038,522

 
$
301,052

 
$
(74,022
)
 
$
227,030

 
$
(6,528
)
 
$
220,502

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

 
$
20,367

 
$
(18,096
)
 
$
2,271

 
$
(704
)
 
$
1,567

Interest rate swaps
 
1,478,944

 
28,298

 
—

 
28,298

 
(12,896
)
 
15,402

Energy contracts
 
1,166,924

 
101,603

 
(47,873
)
 
53,730

 
(42,767
)
 
10,963

Agricultural contracts
 
48,552

 
1,551

 
(960
)
 
591

 
—

 
591

Foreign exchange contracts
 
126,251

 
123,321

 
—

 
123,321

 
(53
)
 
123,268

Equity option contracts
 
99,633

 
5,503

 
—

 
5,503

 
—

 
5,503

Total customer risk management programs
 
14,458,046

 
280,643

 
(66,929
)
 
213,714

 
(56,420
)
 
157,294

Internal risk management programs
 
5,728,421

 
21,762

 
(7,093
)
 
14,669

 
—

 
14,669

Total derivative contracts
 
$
20,186,467

 
$
302,405

 
$
(74,022
)
 
$
228,383

 
$
(56,420
)
 
$
171,963

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





- 66 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2017 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
14,244,442

 
$
38,875

 
$
(9,547
)
 
$
29,328

 
$
—

 
$
29,328

Interest rate swaps
 
1,368,210

 
27,016

 
—

 
27,016

 
(2,820
)
 
24,196

Energy contracts
 
983,794

 
45,368

 
(35,166
)
 
10,202

 
(238
)
 
9,964

Agricultural contracts
 
60,745

 
1,870

 
(1,172
)
 
698

 
—

 
698

Foreign exchange contracts
 
252,525

 
249,788

 
—

 
249,788

 
—

 
249,788

Equity option contracts
 
101,841

 
4,871

 
—

 
4,871

 
(920
)
 
3,951

Total customer risk management programs
 
17,011,557

 
367,788

 
(45,885
)
 
321,903

 
(3,978
)
 
317,925

Internal risk management programs
 
11,941,260

 
34,634

 
—

 
34,634

 
—

 
34,634

Total derivative contracts
 
$
28,952,817

 
$
402,422

 
$
(45,885
)
 
$
356,537

 
$
(3,978
)
 
$
352,559

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
14,244,442

 
$
34,948

 
$
(9,547
)
 
$
25,401

 
$
(374
)
 
$
25,027

Interest rate swaps
 
1,368,230

 
27,056

 
—

 
27,056

 
(16,599
)
 
10,457

Energy contracts
 
939,350

 
42,744

 
(35,166
)
 
7,578

 
—

 
7,578

Agricultural contracts
 
60,746

 
1,846

 
(1,172
)
 
674

 
—

 
674

Foreign exchange contracts
 
249,269

 
245,925

 
—

 
245,925

 
(1,395
)
 
244,530

Equity option contracts
 
101,841

 
4,871

 
—

 
4,871

 
—

 
4,871

Total customer risk management programs
 
16,963,878

 
357,390

 
(45,885
)
 
311,505

 
(18,368
)
 
293,137

Internal risk management programs
 
9,180,531

 
43,190

 
—

 
43,190

 
—

 
43,190

Total derivative contracts
 
$
26,144,409

 
$
400,580

 
$
(45,885
)
 
$
354,695

 
$
(18,368
)
 
$
336,327

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







- 67 -


The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):
 
 
Three Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
 
Brokerage
and Trading Revenue
 
Gain (Loss) on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)on Derivatives, Net
Customer risk management programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
7,272

 
$
—

 
$
9,181

 
$
—

Interest rate swaps
 
618

 
—

 
767

 
—

Energy contracts
 
541

 
—

 
378

 
—

Agricultural contracts
 
6

 
—

 
38

 
—

Foreign exchange contracts
 
78

 
—

 
164

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
8,515

 
—

 
10,528

 
—

Internal risk management programs
 
6,124

 
(2,847
)
 
(711
)
 
1,033

Total derivative contracts
 
$
14,639

 
$
(2,847
)
 
$
9,817

 
$
1,033


 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
 
Brokerage
and Trading Revenue
 
Gain (Loss) on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss) on Derivatives, Net
Customer risk management programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
21,677

 
$
—

 
$
26,413

 
$
—

Interest rate swaps
 
2,057

 
—

 
1,891

 
—

Energy contracts
 
5,097

 
—

 
4,917

 
—

Agricultural contracts
 
36

 
—

 
58

 
—

Foreign exchange contracts
 
350

 
—

 
524

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
29,217

 
—

 
33,803

 
—

Internal risk management programs
 
3,260

 
(11,589
)
 
5,307

 
3,824

Total derivative contracts
 
$
32,477

 
$
(11,589
)
 
$
39,110

 
$
3,824




- 68 -


(4) Loans and Allowances for Credit Losses

Loans

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

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

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

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

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

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

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

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


- 69 -


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):

 
 
September 30, 2018
 
December 31, 2017
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
2,150,138

 
$
9,316,473

 
$
109,490

 
$
11,576,101

 
$
2,217,432

 
$
8,379,240

 
$
137,303

 
$
10,733,975

Commercial real estate
 
603,515

 
3,199,844

 
1,316

 
3,804,675

 
548,692

 
2,928,440

 
2,855

 
3,479,987

Residential mortgage
 
1,592,249

 
337,576

 
41,917

 
1,971,742

 
1,608,655

 
317,584

 
47,447

 
1,973,686

Personal
 
163,067

 
833,605

 
269

 
996,941

 
154,517

 
810,990

 
269

 
965,776

Total
 
$
4,508,969

 
$
13,687,498

 
$
152,992

 
$
18,349,459

 
$
4,529,296

 
$
12,436,254

 
$
187,874

 
$
17,153,424

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
518

 
 

 
 

 
 

 
$
633

 
 
September 30, 2017
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
2,225,470

 
$
8,393,564

 
$
176,900

 
$
10,795,934

Commercial real estate
 
564,681

 
2,950,486

 
2,975

 
3,518,142

Residential mortgage
 
1,589,013

 
311,231

 
45,506

 
1,945,750

Personal
 
153,750

 
793,003

 
255

 
947,008

Total
 
$
4,532,914

 
$
12,448,284

 
$
225,636

 
$
17,206,834

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
253

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

At September 30, 2018, loans to businesses and collateral primarily located in Texas totaled $6.1 billion or 33 percent of the total loan portfolio. Loans to businesses and individuals with collateral primarily located in Oklahoma totaled $3.6 billion or 20 percent of our total loan portfolio.  Loans for which the collateral location is not relevant, such as unsecured loans and reserve-based energy loans, are distributed by the borrower's primary operating location. These geographic concentrations subject the loan portfolio to the general economic conditions within these areas.

Commercial

Commercial loans represent loans for working capital, facilities acquisition or expansion, purchases of equipment and other needs of commercial customers primarily located within our geographical footprint. Commercial loans are underwritten individually and represent ongoing relationships based on a thorough knowledge of the customer, the customer’s industry and market. While commercial loans are generally secured by the customer’s assets including real property, inventory, accounts receivable, operating equipment, interest in mineral rights and other property and may also include personal guarantees of the owners and related parties, the primary source of repayment of the loans is the ongoing cash flow from operations of the customer’s business. Inherent lending risk is centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with commercial lending policies.

At September 30, 2018, commercial loans with collateral primarily located in Texas market totaled $3.8 billion or 33 percent of the commercial loan portfolio segment and commercial loans with collateral primarily located in Oklahoma totaled $2.3 billion or 20 percent of the commercial loan portfolio segment.


- 70 -


The commercial loan portfolio segment is further divided into loan classes. The energy loan class totaled $3.3 billion or 18 percent of total loans at September 30, 2018, including $2.7 billion of outstanding loans to energy producers. Approximately 57 percent of committed production loans are secured by properties primarily producing oil and 43 percent are secured by properties producing natural gas. The services loan class totaled $3.0 billion or 16 percent of total loans at September 30, 2018. Approximately $1.5 billion of loans in the services category consist of loans with individual balances of less than $10 million. Businesses included in the services class include governmental, educational services, consumer services, financial services and loans to entities providing services for real estate and construction. The healthcare loan class totaled $2.4 billion or 13 percent of total loans at September 30, 2018. The healthcare loan class consists primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Healthcare also includes loans to hospitals and other medical service providers.

Commercial Real Estate

Commercial real estate loans are for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes primarily within our geographical footprint. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

At September 30, 2018, 32 percent of commercial real estate loans are secured by properties primarily located in the Dallas and Houston areas of Texas. An additional 12 percent of commercial real estate loans are secured by properties located primarily in the Tulsa and Oklahoma City metropolitan areas of Oklahoma. 

Residential Mortgage and Personal

Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. Residential mortgage loans are secured by a first or second mortgage on the customer’s primary residence. Personal loans consist primarily of loans secured by the cash surrender value of insurance policies and marketable securities. It also includes direct loans secured by and for the purchase of automobiles, recreational and marine equipment as well as unsecured loans. Residential mortgage and personal loans are made in accordance with underwriting policies we believe to be conservative and are fully documented. Loans may be individually underwritten or credit scored based on size and other criteria. Credit scoring is assessed based on significant credit characteristics including credit history, residential and employment stability. Residential mortgage loans retained in the Company’s portfolio are primarily composed of various mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals and certain professionals. Jumbo loans may be fixed or variable rate and are fully amortizing. Jumbo loans generally conform to government sponsored entity standards, except that the loan size exceeds maximums required under these standards. These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38 percent.  Loan-to-value (“LTV”) ratios are tiered from 60 percent to 100 percent, depending on the market. Special mortgage programs include fixed and variable fully amortizing loans tailored to the needs of certain healthcare professionals. Variable rate loans are fully indexed at origination and may have fixed rates for 3 years to ten years, then adjust annually thereafter. 

At September 30, 2018, residential mortgage loans included $181 million of loans guaranteed by U.S. government agencies previously sold into GNMA mortgage pools. These loans either have been repurchased or are eligible to be repurchased by the Company when certain defined delinquency criteria are met. Although payments on these loans generally are past due more than 90 days, interest continues to accrue based on the government guarantee.

Home equity loans totaled $696 million at September 30, 2018. Approximately 61 percent of the home equity loan portfolio is comprised of first lien loans and 39 percent of the home equity portfolio is comprised of junior lien loans. Junior lien loans are distributed 44 percent to amortizing term loans and 56 percent to revolving lines of credit. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a revolving period of 5 years followed by 15 years of amortizing repayments. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional revolving term of 5 years, subject to an update of certain credit information.


- 71 -


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 September 30, 2018, outstanding commitments totaled $10.7 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 September 30, 2018, outstanding standby letters of credit totaled $672 million. 

Allowances for Credit Losses

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

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

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

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

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


- 72 -


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

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

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

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

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended September 30, 2018 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
113,722

 
$
58,758

 
$
18,544

 
$
8,646

 
$
15,472

 
$
215,142

Provision for loan losses
 
(1,285
)
 
1,391

 
1

 
883

 
3,418

 
4,408

Loans charged off
 
(9,602
)
 
—

 
(91
)
 
(1,380
)
 
—

 
(11,073
)
Recoveries
 
1,263

 
40

 
229

 
560

 
—

 
2,092

Ending balance
 
$
104,098

 
$
60,189

 
$
18,683

 
$
8,709

 
$
18,890

 
$
210,569

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
2,361

 
$
17

 
$
53

 
$
2

 
$
—

 
$
2,433

Provision for off-balance sheet credit losses
 
(424
)
 
19

 
(3
)
 
—

 
—

 
(408
)
Ending balance
 
$
1,937

 
$
36

 
$
50

 
$
2

 
$
—

 
$
2,025

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(1,709
)
 
$
1,410

 
$
(2
)
 
$
883

 
$
3,418

 
$
4,000



- 73 -


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 nine months ended September 30, 2018 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
124,269

 
$
56,621

 
$
18,451

 
$
9,124

 
$
22,217

 
$
230,682

Provision for loan losses
 
2,720

 
248

 
(418
)
 
1,486

 
(3,327
)
 
709

Loans charged off
 
(24,940
)
 
—

 
(326
)
 
(3,802
)
 
—

 
(29,068
)
Recoveries
 
2,049

 
3,320

 
976

 
1,901

 
—

 
8,246

Ending balance
 
$
104,098

 
$
60,189

 
$
18,683

 
$
8,709

 
$
18,890

 
$
210,569

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
3,644

 
$
45

 
$
43

 
$
2

 
$
—

 
$
3,734

Provision for off-balance sheet credit losses
 
(1,707
)
 
(9
)
 
7

 
—

 
—

 
(1,709
)
Ending balance
 
$
1,937

 
$
36

 
$
50

 
$
2

 
$
—

 
$
2,025

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
1,013

 
$
239

 
$
(411
)
 
$
1,486

 
$
(3,327
)
 
$
(1,000
)

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended September 30, 2017 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
137,742

 
$
58,580

 
$
18,259

 
$
8,106

 
$
27,374

 
$
250,061

Provision for loan losses
 
2,474

 
(2,914
)
 
168

 
598

 
704

 
1,030

Loans charged off
 
(4,429
)
 
—

 
(168
)
 
(1,228
)
 
—

 
(5,825
)
Recoveries
 
1,014

 
739

 
134

 
550

 
—

 
2,437

Ending balance
 
$
136,801

 
$
56,405

 
$
18,393

 
$
8,026

 
$
28,078

 
$
247,703

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
6,301

 
$
84

 
$
38

 
$
8

 
$
—

 
$
6,431

Provision for off-balance sheet credit losses
 
(976
)
 
(49
)
 
1

 
(6
)
 
—

 
(1,030
)
Ending balance
 
$
5,325

 
$
35

 
$
39

 
$
2

 
$
—

 
$
5,401

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
1,498

 
$
(2,963
)
 
$
169

 
$
592

 
$
704

 
$
—



- 74 -


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

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

 
$
50,749

 
$
18,224

 
$
8,773

 
$
28,200

 
$
246,159

Provision for loan losses
 
665

 
4,050

 
82

 
1,168

 
(122
)
 
5,843

Loans charged off
 
(6,556
)
 
(76
)
 
(444
)
 
(3,774
)
 
—

 
(10,850
)
Recoveries
 
2,479

 
1,682

 
531

 
1,859

 
—

 
6,551

Ending balance
 
$
136,801

 
$
56,405

 
$
18,393

 
$
8,026

 
$
28,078

 
$
247,703

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
11,063

 
$
123

 
$
50

 
$
8

 
$
—

 
$
11,244

Provision for off-balance sheet credit losses
 
(5,738
)
 
(88
)
 
(11
)
 
(6
)
 
—

 
(5,843
)
Ending balance
 
$
5,325

 
$
35

 
$
39

 
$
2

 
$
—

 
$
5,401

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(5,073
)
 
$
3,962

 
$
71

 
$
1,162

 
$
(122
)
 
$
—



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at September 30, 2018 is as follows (in thousands):
 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
11,466,611

 
$
90,301

 
$
109,490

 
$
13,797

 
$
11,576,101

 
$
104,098

Commercial real estate
 
3,803,359

 
60,189

 
1,316

 
—

 
3,804,675

 
60,189

Residential mortgage
 
1,929,825

 
18,683

 
41,917

 
—

 
1,971,742

 
18,683

Personal
 
996,672

 
8,709

 
269

 
—

 
996,941

 
8,709

Total
 
18,196,467

 
177,882

 
152,992

 
13,797

 
18,349,459

 
191,679

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
18,890

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
18,196,467

 
$
177,882

 
$
152,992

 
$
13,797

 
$
18,349,459

 
$
210,569



- 75 -


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

 
$
115,438

 
$
137,303

 
$
8,831

 
$
10,733,975

 
$
124,269

Commercial real estate
 
3,477,132

 
56,621

 
2,855

 
—

 
3,479,987

 
56,621

Residential mortgage
 
1,926,239

 
18,451

 
47,447

 
—

 
1,973,686

 
18,451

Personal
 
965,507

 
9,124

 
269

 
—

 
965,776

 
9,124

Total
 
16,965,550

 
199,634

 
187,874

 
8,831

 
17,153,424

 
208,465

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
22,217

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,965,550

 
$
199,634

 
$
187,874

 
$
8,831

 
$
17,153,424

 
$
230,682


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at September 30, 2017 is as follows (in thousands):
 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,619,034

 
$
123,517

 
$
176,900

 
$
13,284

 
$
10,795,934

 
$
136,801

Commercial real estate
 
3,515,167

 
56,405

 
2,975

 
—

 
3,518,142

 
56,405

Residential mortgage
 
1,900,244

 
18,393

 
45,506

 
—

 
1,945,750

 
18,393

Personal
 
946,753

 
8,026

 
255

 
—

 
947,008

 
8,026

Total
 
16,981,198

 
206,341

 
225,636

 
13,284

 
17,206,834

 
219,625

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
28,078

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,981,198

 
$
206,341

 
$
225,636

 
$
13,284

 
$
17,206,834

 
$
247,703



- 76 -


Credit Quality Indicators

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

The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at September 30, 2018 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
11,549,529

 
$
103,185

 
$
26,572

 
$
913

 
$
11,576,101

 
$
104,098

Commercial real estate
 
3,804,675

 
60,189

 
—

 
—

 
3,804,675

 
60,189

Residential mortgage
 
262,612

 
3,099

 
1,709,130

 
15,584

 
1,971,742

 
18,683

Personal
 
916,587

 
6,509

 
80,354

 
2,200

 
996,941

 
8,709

Total
 
16,533,403

 
172,982

 
1,816,056

 
18,697

 
18,349,459

 
191,679

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
18,890

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,533,403

 
$
172,982

 
$
1,816,056

 
$
18,697

 
$
18,349,459

 
$
210,569

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

 
$
123,383

 
$
27,940

 
$
886

 
$
10,733,975

 
$
124,269

Commercial real estate
 
3,479,987

 
56,621

 
—

 
—

 
3,479,987

 
56,621

Residential mortgage
 
234,477

 
2,947

 
1,739,209

 
15,504

 
1,973,686

 
18,451

Personal
 
877,390

 
6,461

 
88,386

 
2,663

 
965,776

 
9,124

Total
 
15,297,889

 
189,412

 
1,855,535

 
19,053

 
17,153,424

 
208,465

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
22,217

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,297,889

 
$
189,412

 
$
1,855,535

 
$
19,053

 
$
17,153,424

 
$
230,682


The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at September 30, 2017 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,750,657

 
$
135,846

 
$
45,277

 
$
955

 
$
10,795,934

 
$
136,801

Commercial real estate
 
3,518,142

 
56,405

 
—

 
—

 
3,518,142

 
56,405

Residential mortgage
 
226,306

 
3,068

 
1,719,444

 
15,325

 
1,945,750

 
18,393

Personal
 
856,030

 
6,043

 
90,978

 
1,983

 
947,008

 
8,026

Total
 
15,351,135

 
201,362

 
1,855,699

 
18,263

 
17,206,834

 
219,625

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
28,078

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,351,135

 
$
201,362

 
$
1,855,699

 
$
18,263

 
$
17,206,834

 
$
247,703



- 77 -


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

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

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


- 78 -


The following table summarizes the Company’s loan portfolio at September 30, 2018 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
 
 
 
 
 
 
 
 
 
Pass
 
Other Loans Especially Mentioned
 
Accruing Substandard
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,127,227

 
$
7,233

 
$
106,374

 
$
54,033

 
$
—

 
$
—

 
$
3,294,867

Services
 
2,974,082

 
27,337

 
11,795

 
4,097

 
—

 
—

 
3,017,311

Wholesale/retail
 
1,636,405

 
1,508

 
3,567

 
9,249

 
—

 
—

 
1,650,729

Manufacturing
 
631,198

 
7,265

 
12,917

 
9,202

 
—

 
—

 
660,582

Healthcare
 
2,402,801

 
2,614

 
16,204

 
15,704

 
—

 
—

 
2,437,323

Other commercial and industrial
 
471,188

 
385

 
—

 
17,144

 
26,511

 
61

 
515,289

Total commercial
 
11,242,901

 
46,342

 
150,857

 
109,429

 
26,511

 
61

 
11,576,101

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
99,694

 
1,828

 
—

 
350

 
—

 
—

 
101,872

Retail
 
737,313

 
—

 
21,333

 
777

 
—

 
—

 
759,423

Office
 
817,854

 
6,975

 
—

 
—

 
—

 
—

 
824,829

Multifamily
 
1,120,145

 
—

 
21

 
—

 
—

 
—

 
1,120,166

Industrial
 
695,554

 
—

 
1,220

 
—

 
—

 
—

 
696,774

Other commercial real estate
 
300,887

 
535

 
—

 
189

 
—

 
—

 
301,611

Total commercial real estate
 
3,771,447

 
9,338

 
22,574

 
1,316

 
—

 
—

 
3,804,675

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
259,106

 
—

 
2,520

 
986

 
810,445

 
21,869

 
1,094,926

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
172,928

 
7,790

 
180,718

Home equity
 
—

 
—

 
—

 
—

 
684,826

 
11,272

 
696,098

Total residential mortgage
 
259,106

 
—

 
2,520

 
986

 
1,668,199

 
40,931

 
1,971,742

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
916,430

 
47

 
34

 
76

 
80,161

 
193

 
996,941

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,189,884

 
$
55,727

 
$
175,985

 
$
111,807

 
$
1,774,871

 
$
41,185

 
$
18,349,459




- 79 -


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

 
$
60,288

 
$
144,598

 
$
92,284

 
$
—

 
$
—

 
$
2,930,156

Services
 
2,943,869

 
13,927

 
26,533

 
2,620

 
—

 
—

 
2,986,949

Wholesale/retail
 
1,443,917

 
19,263

 
5,502

 
2,574

 
—

 
—

 
1,471,256

Manufacturing
 
472,869

 
6,653

 
11,290

 
5,962

 
—

 
—

 
496,774

Healthcare
 
2,253,497

 
3,186

 
43,305

 
14,765

 
—

 
—

 
2,314,753

Other commercial and industrial
 
478,951

 
7

 
8,161

 
19,028

 
27,870

 
70

 
534,087

Total commercial
 
10,226,089

 
103,324

 
239,389

 
137,233

 
27,870

 
70

 
10,733,975

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
113,190

 
1,828

 
395

 
1,832

 
—

 
—

 
117,245

Retail
 
686,915

 
4,243

 
98

 
276

 
—

 
—

 
691,532

Office
 
824,408

 
7,087

 
—

 
275

 
—

 
—

 
831,770

Multifamily
 
979,969

 
—

 
48

 
—

 
—

 
—

 
980,017

Industrial
 
573,014

 
—

 
—

 
—

 
—

 
—

 
573,014

Other commercial real estate
 
285,506

 
145

 
286

 
472

 
—

 
—

 
286,409

Total commercial real estate
 
3,463,002

 
13,303

 
827

 
2,855

 
—

 
—

 
3,479,987

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
232,492

 
—

 
822

 
1,163

 
784,928

 
24,030

 
1,043,435

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
188,327

 
9,179

 
197,506

Home equity
 
—

 
—

 
—

 
—

 
719,670

 
13,075

 
732,745

Total residential mortgage
 
232,492

 
—

 
822

 
1,163

 
1,692,925

 
46,284

 
1,973,686

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
875,696

 
1,548

 
63

 
83

 
88,200

 
186

 
965,776

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,797,279

 
$
118,175

 
$
241,101

 
$
141,334

 
$
1,808,995

 
$
46,540

 
$
17,153,424



- 80 -


The following table summarizes the Company’s loan portfolio at September 30, 2017 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
 
 
 
 
 
 
 
 
 
Pass
 
Other Loans Especially Mentioned
 
Accruing Substandard
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,436,465

 
$
114,065

 
$
206,768

 
$
110,683

 
$
—

 
$
—

 
$
2,867,981

Services
 
2,932,577

 
26,372

 
7,390

 
1,174

 
—

 
—

 
2,967,513

Wholesale/retail
 
1,637,698

 
9,021

 
9,486

 
1,893

 
—

 
—

 
1,658,098

Manufacturing
 
486,383

 
7,181

 
16,823

 
9,059

 
—

 
—

 
519,446

Healthcare
 
2,150,099

 
31,855

 
33,051

 
24,446

 
—

 
—

 
2,239,451

Other commercial and industrial
 
458,796

 
52

 
9,820

 
29,500

 
45,132

 
145

 
543,445

Total commercial
 
10,102,018

 
188,546

 
283,338

 
176,755

 
45,132

 
145

 
10,795,934

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
110,178

 
—

 
—

 
1,924

 
—

 
—

 
112,102

Retail
 
724,887

 
689

 
—

 
289

 
—

 
—

 
725,865

Office
 
788,539

 
8,275

 
—

 
275

 
—

 
—

 
797,089

Multifamily
 
998,125

 
—

 
884

 
—

 
—

 
—

 
999,009

Industrial
 
591,080

 
—

 
—

 
—

 
—

 
—

 
591,080

Other commercial real estate
 
292,509

 
—

 
1

 
487

 
—

 
—

 
292,997

Total commercial real estate
 
3,505,318

 
8,964

 
885

 
2,975

 
—

 
—

 
3,518,142

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
224,235

 
393

 
462

 
1,216

 
764,252

 
23,407

 
1,013,965

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
178,479

 
8,891

 
187,370

Home equity
 
—

 
—

 
—

 
—

 
732,423

 
11,992

 
744,415

Total residential mortgage
 
224,235

 
393

 
462

 
1,216

 
1,675,154

 
44,290

 
1,945,750

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
855,857

 
49

 
38

 
86

 
90,809

 
169

 
947,008

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,687,428

 
$
197,952

 
$
284,723

 
$
181,032

 
$
1,811,095

 
$
44,604

 
$
17,206,834





- 81 -


Impaired Loans

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

A summary of impaired loans follows (in thousands):
 
As of
 
For the
 
For the
 
September 30, 2018
 
Three Months Ended
 
Nine Months Ended
 
 
 
Recorded Investment
 
 
 
September 30, 2018
 
September 30, 2018
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
73,600

 
$
54,033

 
$
28,180

 
$
25,853

 
$
5,305

 
$
59,815

 
$
—

 
$
73,159

 
$
—

Services
6,959

 
4,097

 
4,021

 
76

 
76

 
4,237

 
—

 
3,358

 
—

Wholesale/retail
14,281

 
9,249

 
2,227

 
7,022

 
4,102

 
11,672

 
—

 
5,911

 
—

Manufacturing2
9,212

 
9,202

 
6,217

 
2,985

 
2,985

 
6,096

 
—

 
7,582

 
—

Healthcare
25,923

 
15,704

 
13,162

 
2,542

 
1,329

 
15,915

 
—

 
15,235

 
—

Other commercial and industrial
26,645

 
17,205

 
17,205

 
—

 
—

 
17,499

 
—

 
18,151

 
—

Total commercial
156,620

 
109,490

 
71,012

 
38,478

 
13,797

 
115,234

 
—

 
123,396

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
1,306

 
350

 
350

 
—

 
—

 
350

 
—

 
1,091

 
—

Retail
7,951

 
777

 
777

 
—

 
—

 
923

 
—

 
527

 
—

Office
—

 
—

 
—

 
—

 
—

 
137

 
—

 
137

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
354

 
189

 
189

 
—

 
—

 
246

 
—

 
330

 
—

Total commercial real estate
9,611

 
1,316

 
1,316

 
—

 
—

 
1,656

 
—

 
2,085

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
27,603

 
22,855

 
22,855

 
—

 
—

 
22,980

 
318

 
24,024

 
947

Permanent mortgage guaranteed by U.S. government agencies1
185,788

 
180,718

 
180,718

 
—

 
—

 
174,653

 
1,557

 
178,643

 
4,979

Home equity
13,048

 
11,272

 
11,272

 
—

 
—

 
11,472

 
—

 
12,174

 
—

Total residential mortgage
226,439

 
214,845

 
214,845

 
—

 
—

 
209,105

 
1,875

 
214,841

 
5,926

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
320

 
269

 
269

 
—

 
—

 
305

 
—

 
269

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
392,990

 
$
325,920

 
$
287,442

 
$
38,478

 
$
13,797

 
$
326,300

 
$
1,875

 
$
340,591

 
$
5,926

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 September 30, 2018, $7.8 million of these loans were nonaccruing and $173 million were accruing based on the guarantee by U.S. government agencies.
2 
Impaired manufacturing sector loans included $6.2 million of loans from an affiliated entity, with no allowance as the fair value of the collateral exceeded the outstanding principal balance at September 30, 2018.

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


- 82 -


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

 
$
92,284

 
$
40,968

 
$
51,316

 
$
8,814

Services
 
5,324

 
2,620

 
2,620

 
—

 
—

Wholesale/retail
 
9,099

 
2,574

 
2,574

 
—

 
—

Manufacturing
 
6,073

 
5,962

 
5,962

 
—

 
—

Healthcare
 
25,140

 
14,765

 
14,765

 
—

 
—

Other commercial and industrial
 
27,957

 
19,098

 
19,080

 
18

 
17

Total commercial
 
184,604

 
137,303

 
85,969

 
51,334

 
8,831

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
3,285

 
1,832

 
1,832

 
—

 
—

Retail
 
509

 
276

 
276

 
—

 
—

Office
 
287

 
275

 
275

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

Other commercial real estate
 
670

 
472

 
472

 
—

 
—

Total commercial real estate
 
4,751

 
2,855

 
2,855

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
30,435

 
25,193

 
25,193

 
—

 
—

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

 
197,506

 
197,506

 
—

 
—

Home equity
 
14,548

 
13,075

 
13,075

 
—

 
—

Total residential mortgage
 
248,797

 
235,774

 
235,774

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Personal
 
307

 
269

 
269

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
438,459

 
$
376,201

 
$
324,867

 
$
51,334

 
$
8,831

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


- 83 -


A summary of impaired loans at September 30, 2017 follows (in thousands): 
 
 
 
For the
 
For the
 
As of September 30, 2017
 
Three Months Ended
 
Nine Months Ended
 
 
 
Recorded Investment
 
 
 
September 30, 2017
 
September 30, 2017
 
Unpaid Principal Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
133,643

 
$
110,683

 
$
45,169

 
$
65,514

 
$
4,944

 
$
117,338

 
$
—

 
$
121,591

 
$
—

Services
3,838

 
1,174

 
1,174

 
—

 
—

 
4,464

 
—

 
4,674

 
—

Wholesale/retail
8,418

 
1,893

 
1,893

 
—

 
—

 
6,256

 
—

 
6,650

 
—

Manufacturing
9,674

 
9,059

 
9,059

 
—

 
—

 
9,357

 
—

 
6,995

 
—

Healthcare
24,591

 
24,446

 
474

 
23,972

 
8,323

 
24,476

 
—

 
12,635

 
—

Other commercial and industrial
38,222

 
29,645

 
29,626

 
19

 
17

 
25,138

 
—

 
25,382

 
—

Total commercial
218,386

 
176,900

 
87,395

 
89,505

 
13,284

 
187,029

 
—

 
177,927

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Residential construction and land development
3,532

 
1,924

 
1,924

 
—

 
—

 
1,988

 
—

 
2,679

 
—

Retail
513

 
289

 
289

 
—

 
—

 
295

 
—

 
308

 
—

Office
287

 
275

 
275

 
—

 
—

 
335

 
—

 
351

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
5

 
—

 
19

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
38

 
—

Other commercial real estate
671

 
487

 
487

 
—

 
—

 
752

 
—

 
855

 
—

Total commercial real estate
5,003

 
2,975

 
2,975

 
—

 
—

 
3,375

 
—

 
4,250

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Permanent mortgage
29,861

 
24,623

 
24,623

 
—

 
—

 
24,019

 
315

 
23,739

 
912

Permanent mortgage guaranteed by U.S. government agencies1
193,594

 
187,370

 
187,370

 
—

 
—

 
188,461

 
1,884

 
199,532

 
5,809

Home equity
13,332

 
11,992

 
11,992

 
—

 
—

 
11,880

 
—

 
11,755

 
—

Total residential mortgage
236,787

 
223,985

 
223,985

 
—

 
—

 
224,360

 
2,199

 
235,026

 
6,721

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
290

 
255

 
255

 
—

 
—

 
263

 
—

 
273

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
460,466

 
$
404,115

 
$
314,610

 
$
89,505

 
$
13,284

 
$
415,027

 
$
2,199

 
$
417,476

 
$
6,721

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 September 30, 2017, $8.9 million of these loans were nonaccruing and $178 million were accruing based on the guarantee by U.S. government agencies.


- 84 -


Troubled Debt Restructurings

At September 30, 2018 the Company had $171 million in troubled debt restructurings (TDRs), of which $83 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $83 million of TDRs were performing in accordance with the modified terms.

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

At September 30, 2017, TDRs totaled $129 million, of which $69 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $60 million of TDRs were performing in accordance with the modified terms.

TDRs generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. During the three and nine months ended September 30, 2018, $31 million and $76 million of loans were restructured and $4.5 million and $10.2 million of loans designated as TDRs were charged off. During the three and nine months ended September 30, 2017, $11 million and $53 million of loans were restructured and $4.4 million and $4.4 million of loans designated as TDRs were charged off.




- 85 -


Nonaccrual & Past Due Loans

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

A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of September 30, 2018 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,240,684

 
$
150

 
$
—

 
$
—

 
$
54,033

 
$
3,294,867

Services
 
3,006,581

 
4,908

 
1,725

 
—

 
4,097

 
3,017,311

Wholesale/retail
 
1,641,447

 
33

 
—

 
—

 
9,249

 
1,650,729

Manufacturing
 
648,242

 
3,138

 
—

 
—

 
9,202

 
660,582

Healthcare
 
2,421,166

 
453

 
—

 
—

 
15,704

 
2,437,323

Other commercial and industrial
 
498,066

 
18

 
—

 
—

 
17,205

 
515,289

Total commercial
 
11,456,186

 
8,700

 
1,725

 
—

 
109,490

 
11,576,101

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
101,185

 
337

 
—

 
—

 
350

 
101,872

Retail
 
758,646

 
—

 
—

 
—

 
777

 
759,423

Office
 
824,829

 
—

 
—

 
—

 
—

 
824,829

Multifamily
 
1,120,166

 
—

 
—

 
—

 
—

 
1,120,166

Industrial
 
696,774

 
—

 
—

 
—

 
—

 
696,774

Other commercial real estate
 
300,450

 
530

 
45

 
397

 
189

 
301,611

Total commercial real estate
 
3,802,050

 
867

 
45

 
397

 
1,316

 
3,804,675

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
1,064,618

 
5,721

 
1,732

 
—

 
22,855

 
1,094,926

Permanent mortgages guaranteed by U.S. government agencies
 
39,523

 
23,370

 
13,753

 
96,282

 
7,790

 
180,718

Home equity
 
682,940

 
1,609

 
156

 
121

 
11,272

 
696,098

Total residential mortgage
 
1,787,081

 
30,700

 
15,641

 
96,403

 
41,917

 
1,971,742

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
995,714

 
900

 
58

 
—

 
269

 
996,941

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
18,041,031

 
$
41,167

 
$
17,469

 
$
96,800

 
$
152,992

 
$
18,349,459



- 86 -


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

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

 
$
—

 
$
4,204

 
$
—

 
$
92,284

 
$
2,930,156

Services
 
2,983,222

 
514

 
486

 
107

 
2,620

 
2,986,949

Wholesale/retail
 
1,468,284

 
398

 
—

 
—

 
2,574

 
1,471,256

Manufacturing
 
490,739

 
—

 
73

 
—

 
5,962

 
496,774

Healthcare
 
2,284,770

 
15,218

 
—

 
—

 
14,765

 
2,314,753

Other commercial and industrial
 
514,701

 
85

 
78

 
125

 
19,098

 
534,087

Total commercial
 
10,575,384

 
16,215

 
4,841

 
232

 
137,303

 
10,733,975

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
115,213

 
200

 
—

 
—

 
1,832

 
117,245

Retail
 
691,256

 
—

 
—

 
—

 
276

 
691,532

Office
 
831,118

 
254

 
—

 
123

 
275

 
831,770

Multifamily
 
979,625

 
22

 
370

 
—

 
—

 
980,017

Industrial
 
573,014

 
—

 
—

 
—

 
—

 
573,014

Other commercial real estate
 
285,937

 
—

 
—

 
—

 
472

 
286,409

Total commercial real estate
 
3,476,163

 
476

 
370

 
123

 
2,855

 
3,479,987

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
1,014,588

 
3,435

 
219

 
—

 
25,193

 
1,043,435

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

 
18,978

 
13,468

 
133,189

 
9,179

 
197,506

Home equity
 
717,007

 
2,206

 
440

 
17

 
13,075

 
732,745

Total residential mortgage
 
1,754,287

 
24,619

 
14,127

 
133,206

 
47,447

 
1,973,686

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
964,374

 
681

 
191

 
261

 
269

 
965,776

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,770,208

 
$
41,991

 
$
19,529

 
$
133,822

 
$
187,874

 
$
17,153,424



- 87 -


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

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,752,259

 
$
—

 
$
5,039

 
$
—

 
$
110,683

 
$
2,867,981

Services
 
2,963,746

 
2,343

 
250

 
—

 
1,174

 
2,967,513

Wholesale/retail
 
1,654,018

 
1,748

 
409

 
30

 
1,893

 
1,658,098

Manufacturing
 
508,231

 
—

 
2,156

 
—

 
9,059

 
519,446

Healthcare
 
2,214,849

 
156

 
—

 
—

 
24,446

 
2,239,451

Other commercial and industrial
 
513,748

 
52

 
—

 
—

 
29,645

 
543,445

Total commercial
 
10,606,851

 
4,299

 
7,854

 
30

 
176,900

 
10,795,934

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
109,994

 
184

 
—

 
—

 
1,924

 
112,102

Retail
 
724,850

 
726

 
—

 
—

 
289

 
725,865

Office
 
796,687

 
127

 
—

 
—

 
275

 
797,089

Multifamily
 
999,009

 
—

 
—

 
—

 
—

 
999,009

Industrial
 
591,080

 
—

 
—

 
—

 
—

 
591,080

Other commercial real estate
 
292,322

 
1

 
—

 
187

 
487

 
292,997

Total commercial real estate
 
3,513,942

 
1,038

 
—

 
187

 
2,975

 
3,518,142

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
985,183

 
3,705

 
454

 
—

 
24,623

 
1,013,965

Permanent mortgages guaranteed by U.S. government agencies
 
25,169

 
17,346

 
13,343

 
122,621

 
8,891

 
187,370

Home equity
 
728,884

 
3,066

 
445

 
28

 
11,992

 
744,415

Total residential mortgage
 
1,739,236

 
24,117

 
14,242

 
122,649

 
45,506

 
1,945,750

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
943,368

 
3,296

 
81

 
8

 
255

 
947,008

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,803,397

 
$
32,750

 
$
22,177

 
$
122,874

 
$
225,636

 
$
17,206,834



- 88 -


(5) Acquisitions

On October 1, 2018, the Company acquired CoBiz Financial, Inc. (CoBiz). CoBiz is headquartered in Denver with a presence in Colorado and Arizona. The Company paid total consideration of $944 million, which included $242 million in cash along with the issuance of 7.2 million shares of BOK Financial stock valued at $702 million in exchange for all outstanding shares of CoBiz stock. As of September 30, 2018, CoBiz had $3.1 billion in loans, $3.9 billion in total assets, $3.3 billion in deposits and $339 million in equity. The assets and liabilities of CoBiz and the results of its operations will be consolidated for periods after the acquisition date.

On May 1, 2018, the Company acquired a majority voting interest in Switchgrass Holdings, LLC, a restaurant franchise owner and operator, pursuant to merchant banking regulations and restrictions. The purchase price for this acquisition was $14 million. As of September 30, 2018, the preliminary purchase price allocation included $6.7 million of intangible assets.
(6) Mortgage Banking Activities

Residential Mortgage Loan Production

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

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

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loan commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid
Principal
 Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
169,095

 
$
169,226

 
$
212,525

 
$
215,113

 
$
261,868

 
$
265,783

Residential mortgage loan commitments
 
197,752

 
5,027

 
222,919

 
6,523

 
334,337

 
9,066

Forward sales contracts
 
330,876

 
1,613

 
380,159

 
(258
)
 
524,878

 
794

 
 
 

 
$
175,866

 
 

 
$
221,378

 
 

 
$
275,643



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

- 89 -



Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Production revenue:
 
 
 
 
 
 
 
 
Net realized gains on sale of mortgage loans
 
$
9,063

 
$
12,041

 
$
28,699

 
$
32,443

Net change in unrealized gain on mortgage loans held for sale
 
(2,135
)
 
(1,492
)
 
(2,457
)
 
3,335

Net change in the fair value of mortgage loan commitments
 
(2,446
)
 
(1,927
)
 
(1,496
)
 
(667
)
Net change in the fair value of forward sales contracts
 
2,768

 
(293
)
 
1,871

 
(4,399
)
Total production revenue
 
7,250

 
8,329

 
26,617

 
30,712

Servicing revenue
 
16,286

 
16,561

 
49,290

 
49,645

Total mortgage banking revenue
 
$
23,536

 
$
24,890

 
$
75,907

 
$
80,357



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

Residential Mortgage Servicing

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

The following represents a summary of mortgage servicing rights (dollars in thousands):
 
 
September 30,
2018
 
December 31, 2017
 
September 30,
2017
Number of residential mortgage loans serviced for others
 
133,538

 
136,528

 
137,359

Outstanding principal balance of residential mortgage loans serviced for others
 
$
21,826,773

 
$
22,046,632

 
$
22,063,121

Weighted average interest rate
 
3.97
%
 
3.94
%
 
3.95
%
Remaining term (in months)
 
295

 
297

 
298



The following represents activity in capitalized mortgage servicing rights (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Beginning Balance
$
278,719

 
$
245,239

 
$
252,867

 
$
247,073

Additions, net
8,968

 
9,925

 
28,688

 
29,439

Change in fair value due to principal payments
(8,986
)
 
(8,667
)
 
(25,783
)
 
(24,928
)
Change in fair value due to market assumption changes
5,972

 
(639
)
 
28,901

 
(5,726
)
Ending Balance
$
284,673

 
$
245,858

 
$
284,673

 
$
245,858


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


- 90 -


Mortgage servicing rights are not traded in active markets. Fair value is determined by discounting the projected net cash flows. Significant market assumptions used to determine fair value based on significant unobservable inputs were as follows:
 
 
September 30,
2018
 
December 31, 2017
 
September 30,
2017
Discount rate – risk-free rate plus a market premium
 
9.95%
 
9.84%
 
9.84%
Prepayment rate - based upon loan interest rate, original term and loan type
 
7.85%-15.04%
 
8.72%-15.16%
 
8.71%-15.43%
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
 
 
Performing loans
 
$66-$92
 
$65-$88
 
$65-$120
Delinquent loans
 
$150-$500
 
$150-$500
 
$150-$500
Loans in foreclosure
 
$1,000-$4,000
 
$1,000-$4,000
 
$1,000-$4,250
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
3.07%
 
2.24%
 
2.00%
Primary/secondary mortgage rate spread
 
105 bps
 
105 bps
 
105 bps


Changes in primary residential mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated periodically for changes in market conditions and adjusted to better correlate with actual performance of BOK Financial’s servicing portfolio.

The aging status of our mortgage loans serviced for others by investor at September 30, 2018 follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89
Days
 
90 Days or More
 
Total
FHLMC
 
$
7,804,568

 
$
84,339

 
$
14,825

 
$
22,326

 
$
7,926,058

FNMA
 
6,495,003

 
91,699

 
14,698

 
17,281

 
6,618,681

GNMA
 
6,569,093

 
245,827

 
54,429

 
16,867

 
6,886,216

Other
 
388,107

 
5,290

 
529

 
1,892

 
395,818

Total
 
$
21,256,771

 
$
427,155

 
$
84,481

 
$
58,366

 
$
21,826,773

- 91 -


(7)  Commitments and Contingent Liabilities

Litigation Contingencies

As a member of Visa, BOK Financial is obligated for a proportionate share of certain covered litigation losses incurred by Visa under a retrospective responsibility plan. A contingent liability was recognized for the Company’s share of Visa’s covered litigation liabilities. Visa funded an escrow account to cover litigation claims, including covered litigation losses under the retrospective responsibility plan, with proceeds from its initial public offering in 2008 and from available cash.
BOK Financial currently owns 252,233 Visa Class B shares which are convertible into 411,089 shares of Visa Class A shares after the final settlement of all covered litigation. Class B shares may be diluted in the future if the escrow fund is not adequate to cover future covered litigation costs. Therefore, no value has been currently assigned to the Class B shares and no value may be assigned until the Class B shares are converted into a known number of Class A shares.
On June 24, 2015, the Bank received a complaint alleging that an employee had colluded with a bond issuer and an individual in misusing revenues pledged to municipal bonds for which the Bank served as trustee under the bond indenture. The Company conducted an investigation and concluded that employees in one of its Corporate Trust offices had, with respect to a single group of affiliated bond issuances, violated Company policies and procedures by waiving financial covenants, granting forbearances and accepting without disclosure to the bondholders, debt service payments from sources other than pledged revenues. The relationship manager was terminated. The Company reported the circumstances to, and cooperated with an investigation by, the Securities and Exchange Commission ("SEC"). On December 28, 2015, in an action brought by the SEC, the United States District Court for the District of New Jersey entered a judgment against the principals involved in issuing the bonds, precluding the principals from denying the alleged violations of the federal securities laws and requiring the principals to pay all outstanding principal, accrued interest, and other amounts required under the bond documents (now estimated to be approximately $40 million, less the value of the facilities securing repayment of the bonds), subject to oversight by a court appointed monitor. On September 7, 2016, the Bank agreed, and the SEC entered, a consent order finding that the Bank had violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and requiring the Bank to disgorge $1,067,721 of fees and pay a civil penalty of $600,000. The Bank has disgorged the fees and paid the penalty. 
On August 26, 2016, the Bank was sued in the United States District Court for New Jersey by two bondholders in a putative class action on behalf of all holders of the bonds alleging the Bank participated in the fraudulent sale of securities by the principals. On September 14, 2016, the Bank was sued in the District Court of Tulsa County, Oklahoma by 19 bondholders alleging the Bank participated in the fraudulent sale of securities by the principals. Two separate small groups of bondholders have filed arbitration complaints with the Financial Institutions Regulatory Association respecting the bonds and other bonds for which the Bank served as indenture trustee. Management has been advised by counsel that the Bank has valid defenses to the claims.
On September 15, 2017, the principal of the bond issuances filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Georgia. The principal subsequently sought and obtained an order dismissing the Chapter 11 proceeding. The obligation of the principal to pay all principal and interest on the bonds is non-dischargeable in bankruptcy.
A hearing on a motion by the principal to extend the time within which to perform the Court ordered payment plan until December 31, 2019 and a motion by Court Monitor compelling the principal to perform his obligation to maintain the minimum segregated account balance before the Federal Judge in New Jersey is scheduled for October 26, 2018. We expect that the extension will be granted, but there is no assurance that it will be. The Bank continues to expect the Court ordered payment plan will result in the payment of the bonds by the principals. Accordingly, no loss is probable at this time and no provision for loss has been made. If the payment plan does not result in payment of the bonds, a loss could become probable. A reasonable estimate cannot be made at this time though the amount could be material to the Company. 
On March 5, 2018, the Bank was sued in the Fulton, Georgia County District Court by the administratrix of a deceased resident who had sued for and obtained a judgment for wrongful death against one of the operators of a nursing home financed by one of the bonds which are the subject of the litigation discussed above. The judgment is alleged to total approximately $8 million in principal and interest at this time. Plaintiff alleges that BOKF, in its capacity as indenture trustee for the bonds, colluded with the borrower and others to defraud creditors of the nursing home by misleading the public about the solvency of the nursing home. Plaintiff alleges that this conduct has prevented her from collecting on her judgment. The Bank is advised by counsel that the Bank has valid defenses to the plaintiffs’ claims and no loss is probable.

- 92 -


On March 14, 2017, the Bank was sued in the United States District Court for the Northern District of Oklahoma by bondholders in a second putative class action representing a different set of municipal securities. The bondholders in this second action allege two individuals purchased facilities from the principals who are the subject of the SEC New Jersey proceedings by means of the fraudulent sale of $60 million of municipal securities for which the Bank also served as indenture trustee. The bondholders allege the Bank failed to disclose that the seller of the purchased facilities had engaged in the conduct complained of in the New Jersey action. The Bank properly performed all duties as indenture trustee of this second set of municipal securities, timely commenced proceedings against the issuer of the securities when default occurred, is cooperating with the SEC in actions against the two principals, is not a target of the SEC proceedings, and has been advised by counsel that the Bank has valid defenses to the claims of these bondholders. 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 the Bank is interest and exceeds permitted rates. This action makes the same allegations as a putative class action that was dismissed by the United States District Court for the Northern District of Oklahoma on October 19, 2015. On August 22, 2018, a plaintiff filed a second putative class action in the United States District Court for New Mexico making the same allegations as the Texas action. On September 18, 2018, the District Court dismissed the Texas action. Management is advised by counsel that a loss is not probable in the New Mexico action or the Texas action and that the loss, if any, cannot be reasonably estimated.
On July 6, 2018, a plaintiff served a petition in a putative class action in the Oklahoma District Court for Tulsa County Oklahoma alleging BOKF NA breached its Demand Deposit Agreements by charging overdraft and not sufficient funds fees to deposit accounts on the day of the transaction triggering the fee and by the bank's debit hold process causing overdraft fees. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.

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

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

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

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

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

- 93 -


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

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

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

 
$
11,535

 
$
—

 
$
—

 
$
8,693

Tax credit entities
 
—

 
—

 
—

 
—

 
—

Other
 
—

 
17,145

 
1,358

 
—

 
2,035

Total consolidated
 
$
—

 
$
28,680

 
$
1,358

 
$
—

 
$
10,728

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
62,188

 
$
158,429

 
$
54,460

 
$
—

 
$
—

Other
 
—

 
47,906

 
16,200

 
—

 
—

Total unconsolidated
 
$
62,188

 
$
206,335

 
$
70,660

 
$
—

 
$
—


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

 
$
14,783

 
$
—

 
$
—

 
$
11,927

Tax credit entities
 
10,000

 
10,964

 
—

 
10,964

 
10,000

Other
 
—

 
1,040

 
—

 
—

 
1,040

Total consolidated
 
$
10,000

 
$
26,787

 
$
—

 
$
10,964

 
$
22,967

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
52,852

 
$
153,506

 
$
47,859

 
$
—

 
$
—

Other
 
—

 
38,397

 
22,968

 
—

 
—

Total unconsolidated
 
$
52,852

 
$
191,903

 
$
70,827

 
$
—

 
$
—



- 94 -


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

 
$
15,621

 
$
—

 
$
—

 
$
12,806

Tax credit entities
 
10,000

 
11,119

 
—

 
10,963

 
10,000

Other
 
—

 
15,618

 
1,588

 
3,104

 
2,819

Total consolidated
 
$
10,000

 
$
42,358

 
$
1,588

 
$
14,067

 
$
25,625

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
65,247

 
$
145,479

 
$
61,364

 
$
—

 
$
—

Other
 
—

 
32,462

 
13,657

 
—

 
—

Total unconsolidated
 
$
65,247

 
$
177,941

 
$
75,021

 
$
—

 
$
—




- 95 -


(8) Shareholders' Equity

On October 30, 2018, the Company declared a quarterly cash dividend of $0.50 per common share payable on or about November 26, 2018 to shareholders of record as of November 12, 2018.

Dividends declared were $0.50 and $1.40 per share during the three and nine months ended September 30, 2018 and $0.44 and $1.32 per share during the three and nine months ended September 30, 2017.

Accumulated Other Comprehensive Income (Loss)

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

A rollforward of the components of accumulated other comprehensive income (loss) is included as follows (in thousands):
 
 
Unrealized Gain (Loss) on
 
 
 
 
Available for Sale Securities
 
Employee Benefit Plans
 
Total
Balance, December 31, 2016
 
$
(9,087
)
 
$
(1,880
)
 
$
(10,967
)
Net change in unrealized gain (loss)
 
33,876

 
5

 
33,881

Reclassification adjustments included in earnings:
 
 
 
 
 

Gain on available for sale securities, net
 
(4,916
)
 
—

 
(4,916
)
Other comprehensive income (loss), before income taxes
 
28,960

 
5

 
28,965

Federal and state income taxes1
 
11,239

 
2

 
11,241

Other comprehensive income (loss), net of income taxes
 
17,721

 
3

 
17,724

Balance, September 30, 2017
 
$
8,634

 
$
(1,877
)
 
$
6,757

 
 
 
 
 
 

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

 
(2,709
)
Net change in unrealized gain (loss)
 
(166,464
)
 
—

 
(166,464
)
Reclassification adjustments included in earnings:
 
 
 
 
 

Loss on available for sale securities, net
 
802

 
—

 
802

Other comprehensive income (loss), before income taxes
 
(165,662
)
 
—

 
(165,662
)
Federal and state income taxes2
 
(42,183
)
 
—

 
(42,183
)
Other comprehensive income (loss), net of income taxes
 
(123,479
)
 
—

 
(123,479
)
Balance, September 30, 2018
 
$
(161,573
)

$
(789
)
 
$
(162,362
)

1 
Calculated using a 39 percent blended federal and state statutory tax rate.
2 
Calculated using a 25 percent blended federal and state statutory tax rate.

- 96 -


(9)  Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to BOK Financial Corp. shareholders
 
$
117,256

 
$
85,649

 
$
337,190

 
$
262,152

Less: Earnings allocated to participating securities
 
963

 
888

 
2,940

 
2,817

Numerator for basic earnings per share – income available to common shareholders
 
116,293

 
84,761

 
334,250

 
259,335

Effect of reallocating undistributed earnings of participating securities
 
1

 
1

 
1

 
2

Numerator for diluted earnings per share – income available to common shareholders
 
$
116,294

 
$
84,762

 
$
334,251

 
$
259,337

 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 

 
 

Weighted average shares outstanding
 
$
65,438,849

 
$
65,423,258

 
$
65,455,306

 
$
65,432,313

Less:  Participating securities included in weighted average shares outstanding
 
537,754

 
680,436

 
571,987

 
702,922

Denominator for basic earnings per common share
 
64,901,095

 
64,742,822

 
64,883,319

 
64,729,391

Dilutive effect of employee stock compensation plans1
 
33,256

 
62,350

 
36,409

 
64,502

Denominator for diluted earnings per common share
 
$
64,934,351

 
$
64,805,172

 
$
64,919,728

 
$
64,793,893

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.79

 
$
1.31

 
$
5.15

 
$
4.01

Diluted earnings per share
 
$
1.79

 
$
1.31

 
$
5.15

 
$
4.00

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

 
—

 
—

 
—




- 97 -


(10)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2018 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
187,417

 
$
21,075

 
$
23,131

 
$
9,260

 
$
240,883

Net interest revenue (expense) from internal sources
 
(42,270
)
 
19,039

 
6,267

 
16,964

 
—

Net interest revenue
 
145,147

 
40,114

 
29,398

 
26,224

 
240,883

Provision for credit losses
 
8,047

 
1,451

 
(84
)
 
(5,414
)
 
4,000

Net interest revenue after provision for credit losses
 
137,100

 
38,663

 
29,482

 
31,638

 
236,883

Other operating revenue
 
40,522

 
44,023

 
83,357

 
39

 
167,941

Other operating expense
 
49,136

 
53,187

 
62,255

 
88,039

 
252,617

Net direct contribution
 
128,486

 
29,499

 
50,584

 
(56,362
)
 
152,207

Gain (loss) on financial instruments, net
 
(3
)
 
(7,228
)
 
7

 
7,224

 
—

Change in fair value of mortgage servicing rights
 
—

 
5,972

 
—

 
(5,972
)
 
—

Gain (loss) on repossessed assets, net
 
(1,869
)
 
(87
)
 
—

 
1,956

 
—

Corporate expense allocations
 
11,027

 
15,863

 
11,126

 
(38,016
)
 
—

Net income before taxes
 
115,587

 
12,293

 
39,465

 
(15,138
)
 
152,207

Federal and state income taxes
 
30,623

 
3,131

 
10,134

 
(9,226
)
 
34,662

Net income
 
84,964

 
9,162

 
29,331

 
(5,912
)
 
117,545

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
289

 
289

Net income attributable to BOK Financial Corp. shareholders
 
$
84,964

 
$
9,162

 
$
29,331

 
$
(6,201
)
 
$
117,256

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
18,499,979

 
$
8,323,542

 
$
8,498,363

 
$
(1,626,067
)
 
$
33,695,817


- 98 -


Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2018 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
529,958

 
$
64,574

 
$
57,612

 
$
47,037

 
$
699,181

Net interest revenue (expense) from internal sources
 
(107,715
)
 
51,811

 
26,431

 
29,473

 
—

Net interest revenue
 
422,243

 
116,385

 
84,043

 
76,510

 
699,181

Provision for credit losses
 
18,781

 
3,890

 
(236
)
 
(23,435
)
 
(1,000
)
Net interest revenue after provision for credit losses
 
403,462

 
112,495

 
84,279

 
99,945

 
700,181

Other operating revenue
 
123,244

 
135,292

 
228,766

 
(6,973
)
 
480,329

Other operating expense
 
143,085

 
158,947

 
186,549

 
254,942

 
743,523

Net direct contribution
 
383,621

 
88,840

 
126,496

 
(161,970
)
 
436,987

Gain on financial instruments, net
 
13

 
(36,901
)
 
7

 
36,881

 
—

Change in fair value of mortgage servicing rights
 
—

 
28,901

 
—

 
(28,901
)
 
—

Gain (loss) on repossessed assets, net
 
(6,102
)
 
(21
)
 
—

 
6,123

 
—

Corporate expense allocations
 
34,802

 
47,760

 
33,223

 
(115,785
)
 
—

Net income before taxes
 
342,730

 
33,059

 
93,280

 
(32,082
)
 
436,987

Federal and state income taxes
 
90,943

 
8,421

 
23,982

 
(24,406
)
 
98,940

Net income
 
251,787

 
24,638

 
69,298

 
(7,676
)
 
338,047

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
857

 
857

Net income attributable to BOK Financial Corp. shareholders
 
$
251,787

 
$
24,638

 
$
69,298

 
$
(8,533
)
 
$
337,190

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
18,124,571

 
$
8,381,204

 
$
8,364,712

 
$
(1,094,992
)
 
$
33,775,495


Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2017 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
160,572

 
$
21,965

 
$
11,170

 
$
24,745

 
$
218,452

Net interest revenue (expense) from internal sources
 
(25,460
)
 
13,981

 
9,604

 
1,875

 
—

Net interest revenue
 
135,112

 
35,946

 
20,774

 
26,620

 
218,452

Provision for credit losses
 
3,217

 
1,316

 
(623
)
 
(3,910
)
 
—

Net interest revenue after provision for credit losses
 
131,895

 
34,630

 
21,397

 
30,530

 
218,452

Other operating revenue
 
54,670

 
44,968

 
75,707

 
365

 
175,710

Other operating expense
 
57,345

 
56,147

 
61,792

 
90,650

 
265,934

Net direct contribution
 
129,220

 
23,451

 
35,312

 
(59,755
)
 
128,228

Gain (loss) on financial instruments, net
 
4

 
1,686

 
—

 
(1,690
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(639
)
 
—

 
639

 
—

Gain (loss) on repossessed assets, net
 
(4,126
)
 
292

 
—

 
3,834

 
—

Corporate expense allocations
 
8,733

 
16,920

 
9,819

 
(35,472
)
 
—

Net income before taxes
 
116,365

 
7,870

 
25,493

 
(21,500
)
 
128,228

Federal and state income taxes
 
47,755

 
3,061

 
10,021

 
(18,399
)
 
42,438

Net income
 
68,610

 
4,809

 
15,472

 
(3,101
)
 
85,790

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
141

 
141

Net income (loss) attributable to BOK Financial Corp. shareholders
 
$
68,610

 
$
4,809

 
$
15,472

 
$
(3,242
)
 
$
85,649

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
17,780,494

 
$
8,683,998

 
$
6,992,021

 
$
(448,343
)
 
$
33,008,170



- 99 -



Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2017 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
462,325

 
$
61,313

 
$
33,130

 
$
68,070

 
$
624,838

Net interest revenue (expense) from internal sources
 
(65,291
)
 
39,845

 
28,784

 
(3,338
)
 
—

Net interest revenue
 
397,034

 
101,158

 
61,914

 
64,732

 
624,838

Provision for credit losses
 
2,982

 
3,515

 
(676
)
 
(5,821
)
 
—

Net interest revenue after provision for credit losses
 
394,052

 
97,643

 
62,590

 
70,553

 
624,838

Other operating revenue
 
157,868

 
140,847

 
225,434

 
4,109

 
528,258

Other operating expense
 
169,761

 
164,138

 
182,816

 
244,815

 
761,530

Net direct contribution
 
382,159

 
74,352

 
105,208

 
(170,153
)
 
391,566

Gain (loss) on financial instruments, net
 
46

 
5,242

 
—

 
(5,288
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(5,726
)
 
—

 
5,726

 
—

Gain (loss) on repossessed assets, net
 
(2,728
)
 
253

 
—

 
2,475

 
—

Corporate expense allocations
 
26,407

 
50,577

 
30,438

 
(107,422
)
 
—

Net income before taxes
 
353,070

 
23,544

 
74,770

 
(59,818
)
 
391,566

Federal and state income taxes
 
144,704

 
9,159

 
29,450

 
(55,067
)
 
128,246

Net income
 
208,366

 
14,385

 
45,320

 
(4,751
)
 
263,320

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
1,168

 
1,168

Net income attributable to BOK Financial Corp. shareholders
 
$
208,366

 
$
14,385

 
$
45,320

 
$
(5,919
)
 
$
262,152

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
17,738,224

 
$
8,469,201

 
$
6,971,369

 
$
(401,356
)
 
$
32,777,438



- 100 -


(11) Fees and Commissions Revenue

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

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

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

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


- 101 -


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

 
$
—

 
$
4,830

 
$
—

 
$
4,830

 
$
4,830

 
$
—

Customer hedging revenue
1,350

 
—

 
6,935

 
229

 
8,514

 
8,514

 
—

Retail brokerage revenue
—

 
—

 
4,568

 
(73
)
 
4,495

 
—

 
4,495

Investment banking revenue
1,765

 
—

 
3,482

 
—

 
5,247

 
1,411

 
3,836

Brokerage and trading revenue
3,115

 
—

 
19,815

 
156

 
23,086

 
14,755

 
8,331

TransFund EFT network revenue
18,397

 
1,009

 
(21
)
 
2

 
19,387

 
—

 
19,387

Merchant services revenue
1,995

 
14

 
—

 
—

 
2,009

 
—

 
2,009

Transaction card revenue
20,392

 
1,023

 
(21
)
 
2

 
21,396

 
—

 
21,396

Personal trust revenue
—

 
—

 
35,528

 
—

 
35,528

 
—

 
35,528

Corporate trust revenue
—

 
—

 
5,741

 
—

 
5,741

 
—

 
5,741

Institutional trust & retirement plan services revenue
—

 
—

 
11,056

 
—

 
11,056

 
—

 
11,056

Investment management services and other
—

 
—

 
5,236

 
(47
)
 
5,189

 
—

 
5,189

Fiduciary and asset management revenue
—

 
—

 
57,561

 
(47
)
 
57,514

 
—

 
57,514

Commercial account service charge revenue
10,294

 
366

 
587

 
(3
)
 
11,244

 
—

 
11,244

Overdraft fee revenue
95

 
9,413

 
30

 
3

 
9,541

 
—

 
9,541

Check card revenue
—

 
5,254

 
—

 
—

 
5,254

 
—

 
5,254

Automated service charge and other deposit fee revenue
35

 
1,661

 
22

 
8

 
1,726

 
—

 
1,726

Deposit service charges and fees
10,424

 
16,694

 
639

 
8

 
27,765

 
—

 
27,765

Mortgage production revenue
—

 
7,250

 
—

 
—

 
7,250

 
7,250

 
—

Mortgage servicing revenue
—

 
16,748

 
—

 
(462
)
 
16,286

 
16,286

 
—

Mortgage banking revenue
—

 
23,998

 
—

 
(462
)
 
23,536

 
23,536

 
—

Other revenue
5,460

 
2,323

 
5,568

 
862

 
14,213

 
10,051

 
4,162

Total fees and commissions revenue
$
39,391

 
$
44,038

 
$
83,562

 
$
519

 
$
167,510

 
$
48,342

 
$
119,168

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


- 102 -


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

 
$
—

 
$
21,562

 
$
—

 
$
21,562

 
$
21,562

 
$
—

Customer hedging revenue
6,264

 
—

 
21,511

 
1,441

 
29,216

 
29,216

 
—

Retail brokerage revenue
—

 
—

 
14,306

 
(246
)
 
14,060

 
—

 
14,060

Investment banking revenue
5,729

 
—

 
9,655

 
—

 
15,384

 
4,772

 
10,612

Brokerage and trading revenue
11,993

 
—

 
67,034

 
1,195

 
80,222

 
55,550

 
24,672

TransFund EFT network revenue
54,647

 
3,005

 
(61
)
 
5

 
57,596

 
—

 
57,596

Merchant services revenue
5,720

 
45

 
—

 
—

 
5,765

 
—

 
5,765

Transaction card revenue
60,367

 
3,050

 
(61
)
 
5

 
63,361

 
—

 
63,361

Personal trust revenue
—

 
—

 
75,568

 
—

 
75,568

 
—

 
75,568

Corporate trust revenue
—

 
—

 
16,317

 
—

 
16,317

 
—

 
16,317

Institutional trust & retirement plan services revenue
—

 
—

 
33,545

 
—

 
33,545

 
—

 
33,545

Investment management services and other
—

 
—

 
15,760

 
(145
)
 
15,615

 
—

 
15,615

Fiduciary and asset management revenue
—

 
—

 
141,190

 
(145
)
 
141,045

 
—

 
141,045

Commercial account service charge revenue
32,150

 
1,087

 
1,802

 
(3
)
 
35,036

 
—

 
35,036

Overdraft fee revenue
283

 
26,665

 
96

 
13

 
27,057

 
—

 
27,057

Check card revenue
—

 
15,515

 
—

 
—

 
15,515

 
—

 
15,515

Automated service charge and other deposit fee revenue
110

 
4,953

 
72

 
10

 
5,145

 
—

 
5,145

Deposit service charges and fees
32,543

 
48,220

 
1,970

 
20

 
82,753

 
—

 
82,753

Mortgage production revenue
—

 
26,617

 
—

 
—

 
26,617

 
26,617

 
—

Mortgage servicing revenue
—

 
50,677

 
—

 
(1,387
)
 
49,290

 
49,290

 
—

Mortgage banking revenue
—

 
77,294

 
—

 
(1,387
)
 
75,907

 
75,907

 
—

Other revenue
17,379

 
6,770

 
18,725

 
(1,813
)
 
41,061

 
27,778

 
13,283

Total fees and commissions revenue
$
122,282

 
$
135,334

 
$
228,858

 
$
(2,125
)
 
$
484,349

 
$
159,235

 
$
325,114

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


- 103 -


(12) Federal and State Income Taxes

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

The reconciliations of income attributable to continuing operations at the U.S. federal statutory tax rate to income tax expense are as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Amount:
 
 
 
 
 
 
 
Federal statutory tax
$
31,963

 
$
44,880

 
$
91,767

 
$
137,048

Tax exempt revenue
(2,059
)
 
(3,001
)
 
(5,524
)
 
(9,336
)
Effect of state income taxes, net of federal benefit
3,740

 
2,486

 
10,685

 
7,875

Utilization of tax credits, net of proportional amortization of low-income housing limited partnership investments
56

 
(387
)
 
(2,611
)
 
(3,363
)
Share-based compensation
(26
)
 
(169
)
 
(2,070
)
 
(2,470
)
Adjustment to provisional amounts related to tax reform
—

 
—

 
1,895

 
—

Other, net
988

 
(1,371
)
 
4,798

 
(1,508
)
Total income tax expense
$
34,662

 
$
42,438

 
$
98,940

 
$
128,246


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Percent of pretax income:
 
 
 
 
 
 
 
Federal statutory tax
21.0
 %
 
35.0
 %
 
21.0
 %
 
35.0
 %
Tax exempt revenue
(1.4
)
 
(2.3
)
 
(1.3
)
 
(2.4
)
Effect of state income taxes, net of federal benefit
2.5

 
1.9

 
2.4

 
2.0

Utilization of tax credits, net of proportional amortization of low-income housing limited partnership investments
—

 
(0.3
)
 
(0.6
)
 
(0.9
)
Share-based compensation
—

 
(0.1
)
 
(0.5
)
 
(0.6
)
Adjustment to provisional amounts related to tax reform
—

 
—

 
0.4

 
—

Other, net
0.7

 
(1.1
)
 
1.2

 
(0.3
)
Total
22.8
 %
 
33.1
 %
 
22.6
 %
 
32.8
 %


- 104 -


(13) Fair Value Measurements

Fair value is defined by applicable accounting guidance as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market for the given asset or liability at the measurement date based on market conditions at that date. An orderly transaction assumes exposure to the market for a customary period for marketing activities prior to the measurement date and not a forced liquidation or distressed sale. Certain assets and liabilities are recorded in the Company’s financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis.

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

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

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

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

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

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

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


- 105 -


Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial assets and liabilities measured on a recurring basis was as follows as of September 30, 2018 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
$
80,692

 
$
—

 
$
80,692

 
$
—

U.S. government agency residential mortgage-backed securities
 
1,378,450

 
—

 
1,378,450

 
—

Municipal and other tax-exempt securities
 
41,345

 
—

 
41,345

 
—

Asset-backed securities
 
72,309

 
—

 
72,309

 
—

Other trading securities
 
40,604

 
—

 
40,604

 
—

Total trading securities
 
1,613,400

 
—

 
1,613,400

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
490

 
490

 
—

 
—

Municipal and other tax-exempt securities
 
4,349

 
—

 
4,349

 


U.S. government agency residential mortgage-backed securities
 
5,132,352

 
—

 
5,132,352

 
—

Privately issued residential mortgage-backed securities
 
74,685

 
—

 
74,685

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,834,691

 
—

 
2,834,691

 
—

Other debt securities
 
25,447

 
—

 
24,975

 
472

Total available for sale securities
 
8,072,014

 
490

 
8,071,052

 
472

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
452,150

 
—

 
452,150

 
—

Residential mortgage loans held for sale
 
175,866

 
—

 
159,028

 
16,838

Mortgage servicing rights1
 
284,673

 
—

 
—

 
284,673

Derivative contracts, net of cash collateral2
 
349,481

 
26,196

 
323,285

 
—

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
252,387

 
17,872

 
234,515

 
—

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


- 106 -


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

 
$
—

 
$
21,196

 
$
—

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

 
—

 
392,673

 
—

Municipal and other tax-exempt securities
 
13,559

 
—

 
13,559

 
—

Asset-backed securities
 
23,885

 
—

 
23,885

 
—

Other trading securities
 
11,363

 
—

 
11,363

 
—

Total trading securities
 
462,676

 
—

 
462,676

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,000

 
1,000

 
—

 
—

Municipal and other tax-exempt securities
 
27,080

 
—

 
22,278

 
4,802

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

 
—

 
5,309,152

 
—

Privately issued residential mortgage-backed securities
 
93,221

 
—

 
93,221

 
—

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

 
—

 
2,834,961

 
—

Other debt securities
 
25,481

 
—

 
25,009

 
472

Perpetual preferred stock
 
15,767

 
—

 
15,767

 
—

Equity securities and mutual funds
 
14,916

 
—

 
14,916

 
—

Total available for sale securities
 
8,321,578

 
1,000

 
8,315,304

 
5,274

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

 
—

 
755,054

 
—

Residential mortgage loans held for sale
 
221,378

 
—

 
209,079

 
12,299

Mortgage servicing rights1
 
252,867

 
—

 
—

 
252,867

Derivative contracts, net of cash collateral2
 
220,502

 
8,179

 
212,323

 
—

Liabilities:
 


 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
171,963

 
—

 
171,963

 
—

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


- 107 -


The fair value of financial assets and liabilities measured on a recurring basis was as follows as of September 30, 2017 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
$
30,162

 
$
—

 
$
30,162

 
$
—

U.S. government agency residential mortgage-backed securities
 
516,760

 
—

 
516,760

 
—

Municipal and other tax-exempt securities
 
56,148

 
—

 
56,148

 
—

Other trading securities
 
11,047

 
—

 
11,047

 
—

Total trading securities
 
614,117

 
—

 
614,117

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
999

 
999

 
—

 
—

Municipal and other tax-exempt securities
 
28,368

 
—

 
23,583

 
4,785

U.S. government agency residential mortgage-backed securities
 
5,326,384

 
—

 
5,326,384

 
—

Privately issued residential mortgage-backed securities
 
99,994

 
—

 
99,994

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,889,346

 
—

 
2,889,346

 
—

Other debt securities
 
4,153

 
—

 
—

 
4,153

Perpetual preferred stock
 
16,245

 
—

 
16,245

 
—

Equity securities and mutual funds
 
17,710

 
2,578

 
15,132

 
—

Total available for sale securities
 
8,383,199

 
3,577

 
8,370,684

 
8,938

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
819,531

 
—

 
819,531

 
—

Residential mortgage loans held for sale
 
275,643

 
—

 
263,543

 
12,100

Mortgage servicing rights1
 
245,858

 
—

 
—

 
245,858

Derivative contracts, net of cash collateral2
 
352,559

 
8,498

 
344,061

 
—

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
336,327

 
6,903

 
329,424

 
—

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


- 108 -


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

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

Derivatives

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

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

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

Residential Mortgage Loans Held for Sale

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


- 109 -


The following represents the changes for the three and nine months ended September 30, 2018 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt securities
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, June 30, 2018
 
$
2,030

 
$
471

 
$
14,243

Transfer to Level 3 from Level 21
 
—

 
—

 
2,862

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(143
)
Redemptions and distributions
 
(2,050
)
 
—

 
—

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

 
—

 
(124
)
Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
20

 
1

 
—

Balance, September 30, 2018
 
$
—

 
$
472

 
$
16,838

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

 
$
472

 
$
12,299

Transfer to Level 3 from Level 21
 
—

 
—

 
5,603

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(853
)
Redemptions and distributions
 
(5,095
)
 
—

 
—

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

 
—

 
(211
)
Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
293

 


 
—

Balance, September 30, 2018
 
$
—

 
$
472

 
$
16,838


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


- 110 -


The following represents the changes for the three and nine months ended September 30, 2017 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt securities
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, June 30, 2017
 
$
4,655

 
$
4,152

 
$
12,735

Transfer to Level 3 from Level 21
 
—

 
—

 
176

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(847
)
Redemptions and distributions
 


 
—

 
—

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

 
—

 
36

Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
130

 
1

 
—

Balance, September 30, 2017
 
$
4,785

 
$
4,153

 
$
12,100

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

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

 
$
4,152

 
$
11,617

Transfer to Level 3 from Level 21
 
—

 
—

 
2,916

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(2,549
)
Redemptions and distributions
 
(1,100
)
 
—

 
—

Gain (loss) recognized in earnings
 
 
 
 
 
 
Mortgage banking revenue
 
—

 
—

 
116

Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
96

 
1

 
—

Balance, September 30, 2017
 
$
4,785

 
$
4,153

 
$
12,100


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


- 111 -


A summary of quantitative information about assets measured at fair value on a recurring basis using Significant Unobservable Inputs (Level 3) as of September 30, 2018 follows (in thousands):
 
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
Other debt securities
 
472

 
Discounted cash flows
1 
Interest rate spread
 
6.37%-6.37% (6.37%)
3 
94.36%-94.36% (94.36%)
2 
Residential mortgage loans held for sale
 
16,838

 
Quoted prices of loans sold in securitization transactions, with a liquidity discount applied
 
Liquidity discount applied to the market value of mortgage loans qualifying for sale to U.S. government agencies.
 
94.94%
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
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.

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, 2017 follows (in thousands):
 
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
4,802

 
Discounted cash flows
1 
Interest rate spread
 
6.60%-6.60% (6.60%)
2 
92.25%-94.76% (93.75%)
3 
Other debt securities
 
472

 
Discounted cash flows
1 
Interest rate spread
 
6.85%-6.85% (6.85%)
4 
94.39%-94.39% (94.39%)
3 
Residential mortgage loans held for sale
 
12,299

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


- 112 -


A summary of quantitative information about assets measured at fair value on a recurring basis using Significant Unobservable Inputs (Level 3) as of September 30, 2017 follows (in thousands):
 
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
4,785

 
Discounted cash flows
1 
Interest rate spread
 
6.05%-6.05% (6.05%)
2 
92.25%-95.02% (93.91%)
3 
Other debt securities
 
4,153

 
Discounted cash flows
1 
Interest rate spread
 
6.65%-6.73% (6.72%)
4 
94.38%-94.38% (94.38%)
3 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
12,100

 
Quoted prices of loans sold in securitization transactions, with a liquidity discount applied
 
Liquidity discount applied to the market value of a mortgage loans qualifying for sale to U.S. government agencies.
 
95.94%
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 352 to 467 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value.
4 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 3 percent.

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

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

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

 
$
1,065

 
$
24,428

 
$
9,086

 
$
—

 
$
16,279

 
$
—

Real estate and other repossessed assets
—

 
4,608

 
6,545

 
—

 
2,161

 
—

 
7,388

 

- 113 -


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

 
$
423

 
$
10,960

 
$
4,397

 
$
—

 
$
5,058

 
$
—

Real estate and other repossessed assets
—

 
4,392

 
6,845

 
—

 
4,683

 
—

 
4,915



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

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2018 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
24,428

 
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
 
41% - 84% (55%)1
Real estate and other repossessed assets
 
6,545

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


- 114 -


A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2017 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
10,960

 
Discounted cash flows
 
Recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs
 
64% - 88% (68%)1
Real estate and other repossessed assets
 
6,845

 
Discounted cash flows
 
Recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs
 
N/A

1  
Represents fair value as a percentage of the unpaid principal balance.


- 115 -


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 September 30, 2018 (dollars in thousands):
 
 
Carrying
Value
 
Estimated
Fair
Value
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash and due from banks
 
$
815,458

 
$
815,458

 
$
815,458

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
430,789

 
430,789

 
430,789

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
80,692

 
80,692

 
—

 
80,692

 
—

U.S. government agency residential mortgage-backed securities
 
1,378,450

 
1,378,450

 
—

 
1,378,450

 
—

Municipal and other tax-exempt securities
 
41,345

 
41,345

 
—

 
41,345

 
—

Asset-backed securities
 
72,309

 
72,309

 
—

 
72,309

 
—

Other trading securities
 
40,604

 
40,604

 
—

 
40,604

 
—

Total trading securities
 
1,613,400

 
1,613,400

 
—

 
1,613,400

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
157,723

 
158,230

 
—

 
158,230

 
—

U.S. government agency residential mortgage-backed securities
 
13,234

 
13,201

 
—

 
13,201

 
—

Other debt securities
 
203,082

 
211,462

 
—

 
211,462

 
—

Total investment securities
 
374,039

 
382,893

 
—

 
382,893

 
—

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
490

 
490

 
490

 
—

 
—

Municipal and other tax-exempt securities
 
4,349

 
4,349

 
—

 
4,349

 


U.S. government agency residential mortgage-backed securities
 
5,132,352

 
5,132,352

 
—

 
5,132,352

 
—

Privately issued residential mortgage-backed securities
 
74,685

 
74,685

 
—

 
74,685

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,834,691

 
2,834,691

 
—

 
2,834,691

 
—

Other debt securities
 
25,447

 
25,447

 
—

 
24,975

 
472

Total available for sale securities
 
8,072,014

 
8,072,014

 
490

 
8,071,052

 
472

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
452,150

 
452,150

 
—

 
452,150

 
—

Residential mortgage loans held for sale
 
175,866

 
175,866

 
—

 
159,028

 
16,838

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
11,576,101

 
11,431,818

 
—

 
—

 
11,431,818

Commercial real estate
 
3,804,675

 
3,738,494

 
—

 
—

 
3,738,494

Residential mortgage
 
1,971,742

 
1,937,171

 
—

 
—

 
1,937,171

Personal
 
996,941

 
1,003,857

 
—

 
—

 
1,003,857

Total loans
 
18,349,459

 
18,111,340

 
—

 
—

 
18,111,340

Allowance for loan losses
 
(210,569
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
18,138,890

 
18,111,340

 
—

 
—

 
18,111,340

Mortgage servicing rights
 
284,673

 
284,673

 
—

 
—

 
284,673

Derivative instruments with positive fair value, net of cash collateral
 
349,481

 
349,481

 
26,196

 
323,285

 
—

Deposits with no stated maturity
 
19,556,443

 
19,556,443

 
—

 
—

 
19,556,443

Time deposits
 
2,075,846

 
2,023,244

 
—

 
—

 
2,023,244

Other borrowed funds
 
6,816,224

 
6,530,396

 
—

 
—

 
6,530,396

Subordinated debentures
 
144,707

 
144,186

 
—

 
144,186

 
—

Derivative instruments with negative fair value, net of cash collateral
 
252,387

 
252,387

 
17,872

 
234,515

 
—


- 116 -


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

 
$
602,510

 
$
602,510

 
$
—

 
$
—

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

 
1,714,544

 
1,714,544

 
—

 
—

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

 
21,196

 
—

 
21,196

 
—

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

 
392,673

 
—

 
392,673

 
—

Municipal and other tax-exempt securities
 
13,559

 
13,559

 
—

 
13,559

 
—

Asset-backed securities
 
23,885

 
23,885

 
—

 
23,885

 
—

Other trading securities
 
11,363

 
11,363

 
—

 
11,363

 
—

Total trading securities
 
462,676

 
462,676

 
—

 
462,676

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
228,186

 
230,349

 
—

 
230,349

 
—

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

 
16,242

 
—

 
16,242

 
—

Other debt securities
 
217,716

 
233,444

 
—

 
233,444

 
—

Total investment securities
 
461,793

 
480,035

 
—

 
480,035

 
—

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
1,000

 
1,000

 
1,000

 
—

 
—

Municipal and other tax-exempt securities
 
27,080

 
27,080

 
—

 
22,278

 
4,802

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

 
5,309,152

 
—

 
5,309,152

 
—

Privately issued residential mortgage-backed securities
 
93,221

 
93,221

 
—

 
93,221

 
—

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

 
2,834,961

 
—

 
2,834,961

 
—

Other debt securities
 
25,481

 
25,481

 
—

 
25,009

 
472

Perpetual preferred stock
 
15,767

 
15,767

 
—

 
15,767

 
—

Equity securities and mutual funds
 
14,916

 
14,916

 
—

 
14,916

 
—

Total available for sale securities
 
8,321,578

 
8,321,578

 
1,000

 
8,315,304

 
5,274

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

 
755,054

 
—

 
755,054

 
—

Residential mortgage loans held for sale
 
221,378

 
221,378

 
—

 
209,079

 
12,299

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
10,733,975

 
10,524,627

 
—

 
—

 
10,524,627

Commercial real estate
 
3,479,987

 
3,428,733

 
—

 
—

 
3,428,733

Residential mortgage
 
1,973,686

 
1,977,721

 
—

 
—

 
1,977,721

Personal
 
965,776

 
956,706

 
—

 
—

 
956,706

Total loans
 
17,153,424

 
16,887,787

 
—

 
—

 
16,887,787

Allowance for loan losses
 
(230,682
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
16,922,742

 
16,887,787

 
—

 
—

 
16,887,787

Mortgage servicing rights
 
252,867

 
252,867

 
—

 
—

 
252,867

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

 
220,502

 
8,179

 
212,323

 
—

Deposits with no stated maturity
 
19,962,889

 
19,962,889

 
—

 
—

 
19,962,889

Time deposits
 
2,098,416

 
2,064,558

 
—

 
—

 
2,064,558

Other borrowed funds
 
5,709,861

 
5,703,121

 
—

 
—

 
5,703,121

Subordinated debentures
 
144,677

 
148,207

 
—

 
148,207

 
—

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

 
171,963

 
—

 
171,963

 
—



- 117 -


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 September 30, 2017 (dollars in thousands):
 
 
Carrying
Value
 
Estimated
Fair
Value
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash and due from banks
 
$
547,203

 
$
547,203

 
$
547,203

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
1,926,779

 
1,926,779

 
1,926,779

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
30,162

 
30,162

 
—

 
30,162

 
—

U.S. government agency residential mortgage-backed securities
 
516,760

 
516,760

 
—

 
516,760

 
—

Municipal and other tax-exempt securities
 
56,148

 
56,148

 
—

 
56,148

 
—

Other trading securities
 
11,047

 
11,047

 
—

 
11,047

 
—

Total trading securities
 
614,117

 
614,117

 
—

 
614,117

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
246,000

 
249,250

 
—

 
249,250

 
—

U.S. government agency residential mortgage-backed securities
 
16,926

 
17,458

 
—

 
17,458

 
—

Other debt securities
 
203,636

 
223,187

 
—

 
223,187

 
—

Total investment securities
 
466,562

 
489,895

 
—

 
489,895

 
—

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
999

 
999

 
999

 
—

 
—

Municipal and other tax-exempt securities
 
28,368

 
28,368

 
—

 
23,583

 
4,785

U.S. government agency residential mortgage-backed securities
 
5,326,384

 
5,326,384

 
—

 
5,326,384

 
—

Privately issued residential mortgage-backed securities
 
99,994

 
99,994

 
—

 
99,994

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,889,346

 
2,889,346

 
—

 
2,889,346

 
—

Other debt securities
 
4,153

 
4,153

 
—

 
—

 
4,153

Perpetual preferred stock
 
16,245

 
16,245

 
—

 
16,245

 
—

Equity securities and mutual funds
 
17,710

 
17,710

 
2,578

 
15,132

 
—

Total available for sale securities
 
8,383,199

 
8,383,199

 
3,577

 
8,370,684

 
8,938

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
819,531

 
819,531

 
—

 
819,531

 
—

Residential mortgage loans held for sale
 
275,643

 
275,643

 
—

 
263,543

 
12,100

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
10,795,934

 
10,574,720

 
—

 
—

 
10,574,720

Commercial real estate
 
3,518,142

 
3,467,009

 
—

 
—

 
3,467,009

Residential mortgage
 
1,945,750

 
1,958,632

 
—

 
—

 
1,958,632

Personal
 
947,008

 
938,819

 
—

 
—

 
938,819

Total loans
 
17,206,834

 
16,939,180

 
—

 
—

 
16,939,180

Allowance for loan losses
 
(247,703
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
16,959,131

 
16,939,180

 
—

 
—

 
16,939,180

Mortgage servicing rights
 
245,858

 
245,858

 
—

 
—

 
245,858

Derivative instruments with positive fair value, net of cash collateral
 
352,559

 
352,559

 
8,498

 
344,061

 
—

Deposits with no stated maturity
 
19,675,790

 
19,675,790

 
—

 
—

 
19,675,790

Time deposits
 
2,172,289

 
2,138,367

 
—

 
—

 
2,138,367

Other borrowed funds
 
6,631,820

 
6,609,642

 
—

 
—

 
6,609,642

Subordinated debentures
 
144,668

 
146,693

 
—

 
146,693

 
—

Derivative instruments with negative fair value, net of cash collateral
 
336,327

 
336,327

 
6,903

 
329,424

 
—




- 118 -


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

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

The Company evaluated events from the date of the consolidated financial statements on September 30, 2018 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q. Except as discussed in Note 5, no other events were identified requiring recognition in and/or disclosure in the consolidated financial statements.


- 119 -


Nine-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
1,468,904

 
$
19,163

 
1.74
%
 
$
2,020,003

 
$
15,817

 
1.05
%
Trading securities
 
1,395,871

 
38,312

 
3.72
%
 
508,741

 
13,008

 
3.55
%
Investment securities
 
406,395

 
11,961

 
3.93
%
 
501,802

 
14,186

 
3.77
%
Available for sale securities
 
8,176,037

 
142,387

 
2.30
%
 
8,459,312

 
132,445

 
2.11
%
Fair value option securities
 
527,039

 
12,627

 
3.11
%
 
526,714

 
10,985

 
2.77
%
Restricted equity securities
 
342,297

 
15,757

 
6.14
%
 
312,365

 
13,534

 
5.78
%
Residential mortgage loans held for sale
 
208,519

 
6,328

 
4.09
%
 
240,822

 
6,317

 
3.55
%
Loans
 
17,742,288

 
622,185

 
4.69
%
 
17,174,450

 
523,764

 
4.08
%
Allowance for loan losses
 
(221,949
)
 
 
 
 
 
(250,538
)
 
 
 
 
Loans, net of allowance
 
17,520,339

 
622,185

 
4.75
%
 
16,923,912

 
523,764

 
4.14
%
Total earning assets
 
30,045,401

 
868,720

 
3.85
%
 
29,493,671

 
730,056

 
3.32
%
Receivable on unsettled securities sales
 
794,434

 
 
 
 
 
452,348

 
 
 
 
Cash and other assets
 
2,935,660

 
 
 
 
 
2,831,419

 
 
 
 
Total assets
 
$
33,775,495

 
 
 
 
 
$
32,777,438

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
10,180,060

 
$
42,516

 
0.56
%
 
$
10,246,125

 
$
19,713

 
0.26
%
Savings
 
495,954

 
291

 
0.08
%
 
455,740

 
272

 
0.08
%
Time
 
2,128,925

 
20,910

 
1.31
%
 
2,213,090

 
18,521

 
1.12
%
Total interest-bearing deposits
 
12,804,939

 
63,717

 
0.67
%
 
12,914,955

 
38,506

 
0.40
%
Funds purchased and repurchase agreements
 
775,504

 
5,072

 
0.87
%
 
493,043

 
516

 
0.14
%
Other borrowings
 
6,194,418

 
88,788

 
1.92
%
 
5,825,764

 
47,026

 
1.08
%
Subordinated debentures
 
144,692

 
6,076

 
5.61
%
 
144,653

 
6,098

 
5.64
%
Total interest-bearing liabilities
 
19,919,553

 
163,653

 
1.10
%
 
19,378,415

 
92,146

 
0.64
%
Non-interest bearing demand deposits
 
9,233,837

 
 
 
 
 
9,277,820

 
 
 
 
Due on unsettled securities purchases
 
543,601

 
 
 
 
 
133,942

 
 
 
 
Other liabilities
 
542,790

 
 
 
 
 
579,530

 
 
 
 
Total equity
 
3,535,714

 
 
 
 
 
3,407,731

 
 
 
 
Total liabilities and equity
 
$
33,775,495

 
 
 
 
 
$
32,777,438

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
705,067

 
2.75
%
 
 
 
$
637,910

 
2.68
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
3.13
%
 
 
 
 
 
2.90
%
Less tax-equivalent adjustment
 
 
 
5,886

 
 
 
 
 
13,072

 
 
Net Interest Revenue
 
 
 
699,181

 
 
 
 
 
624,838

 
 
Provision for credit losses
 
 
 
(1,000
)
 
 
 
 
 
—

 
 
Other operating revenue
 
 
 
480,329

 
 
 
 
 
528,258

 
 
Other operating expense
 
 
 
743,523

 
 
 
 
 
761,530

 
 
Income before taxes
 
 
 
436,987

 
 
 
 
 
391,566

 
 
Federal and state income taxes
 
 
 
98,940

 
 
 
 
 
128,246

 
 
Net income
 
 
 
338,047

 
 
 
 
 
263,320

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
857

 
 
 
 
 
1,168

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
337,190

 
 
 
 
 
$
262,152

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
5.15

 
 

 
 

 
$
4.01

 
 

Diluted
 
 

 
$
5.15

 
 

 
 

 
$
4.00

 
 

Yield calculations are shown on a tax equivalent at the statutory federal and state rates for the periods presented. The yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income and the unrealized gains and losses. The yield calculation also includes average loan balances for which the accrual of interest has been discontinued and are net of unearned income. Yield / rate calculations are generally based on the conventions that determine how interest income and expense is accrued.

- 120 -






























Page intentionally left blank.


- 121 -


Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
September 30, 2018
 
June 30, 2018
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
688,872

 
$
3,441

 
1.98
%
 
$
1,673,387

 
$
7,740

 
1.86
%
Trading securities
 
1,762,794

 
17,419

 
3.98
%
 
1,482,302

 
13,084

 
3.63
%
Investment securities
 
379,566

 
3,856

 
4.06
%
 
399,088

 
3,941

 
3.95
%
Available for sale securities
 
8,129,214

 
48,916

 
2.37
%
 
8,163,142

 
47,463

 
2.30
%
Fair value option securities
 
469,398

 
3,881

 
3.25
%
 
487,192

 
3,927

 
3.16
%
Restricted equity securities
 
328,842

 
5,232

 
6.36
%
 
348,546

 
5,408

 
6.21
%
Residential mortgage loans held for sale
 
207,488

 
2,151

 
4.27
%
 
218,600

 
2,333

 
4.28
%
Loans
 
18,203,785

 
220,245

 
4.80
%
 
17,751,242

 
212,266

 
4.80
%
Allowance for loan losses
 
(214,160
)
 
 
 
 
 
(222,856
)
 
 
 
 
Loans, net of allowance
 
17,989,625

 
220,245

 
4.86
%
 
17,528,386

 
212,266

 
4.86
%
Total earning assets
 
29,955,799

 
305,141

 
4.04
%
 
30,301,191

 
296,162

 
3.91
%
Receivable on unsettled securities sales
 
768,785

 
 
 
 
 
618,240

 
 
 
 
Cash and other assets
 
2,971,233

 
 
 
 
 
2,986,604

 
 
 
 
Total assets
 
$
33,695,817

 
 
 
 
 
$
33,906,035

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
10,010,031

 
$
17,029

 
0.67
%
 
$
10,189,354

 
$
13,993

 
0.55
%
Savings
 
503,821

 
108

 
0.09
%
 
503,671

 
95

 
0.08
%
Time
 
2,097,441

 
7,398

 
1.40
%
 
2,138,880

 
6,875

 
1.29
%
Total interest-bearing deposits
 
12,611,293

 
24,535

 
0.77
%
 
12,831,905

 
20,963

 
0.66
%
Funds purchased and repurchase agreements
 
1,193,583

 
3,768

 
1.25
%
 
593,250

 
782

 
0.53
%
Other borrowings
 
5,765,440

 
32,036

 
2.20
%
 
6,497,020

 
31,825

 
1.96
%
Subordinated debentures
 
144,702

 
2,025

 
5.55
%
 
144,692

 
2,047

 
5.67
%
Total interest-bearing liabilities
 
19,715,018

 
62,364

 
1.25
%
 
20,066,867

 
55,617

 
1.11
%
Non-interest bearing demand deposits
 
9,325,002

 
 
 
 
 
9,223,327

 
 
 
 
Due on unsettled securities purchases
 
544,263

 
 
 
 
 
527,804

 
 
 
 
Other liabilities
 
496,634

 
 
 
 
 
575,865

 
 
 
 
Total equity
 
3,614,900

 
 
 
 
 
3,512,172

 
 
 
 
Total liabilities and equity
 
$
33,695,817

 
 
 
 
 
$
33,906,035

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
242,777

 
2.79
%
 
 
 
$
240,545

 
2.80
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
 
 
3.21
%
 
 
 
 
 
3.17
%
Less tax-equivalent adjustment
 
 
 
1,894

 
 
 
 
 
1,983

 
 
Net Interest Revenue
 
 
 
240,883

 
 
 
 
 
238,562

 
 
Provision for credit losses
 
 
 
4,000

 
 
 
 
 
—

 
 
Other operating revenue
 
 
 
167,941

 
 
 
 
 
156,399

 
 
Other operating expense
 
 
 
252,617

 
 
 
 
 
246,476

 
 
Income before taxes
 
 
 
152,207

 
 
 
 
 
148,485

 
 
Federal and state income taxes
 
 
 
34,662

 
 
 
 
 
33,330

 
 
Net income
 
 
 
117,545

 
 
 
 
 
115,155

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
289

 
 
 
 
 
783

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
117,256

 
 
 
 
 
$
114,372

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.79

 
 

 
 

 
$
1.75

 
 

Diluted
 
 

 
$
1.79

 
 

 
 

 
$
1.75

 
 

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.

- 122 -


Three Months Ended
March 31, 2018
 
December 31, 2017
 
September 30, 2017
Average Balance
 
Revenue /Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2,059,517

 
$
7,982

 
1.57
%
 
$
1,976,395

 
$
6,311

 
1.27
%
 
$
1,965,645

 
$
6,375

 
1.29
%
933,404

 
7,809

 
3.40
%
 
560,321

 
4,629

 
3.38
%
 
491,613

 
4,122

 
3.47
%
441,207

 
4,164

 
3.78
%
 
462,869

 
4,606

 
3.98
%
 
475,705

 
4,592

 
3.86
%
8,236,938

 
46,008

 
2.23
%
 
8,435,916

 
45,623

 
2.21
%
 
8,428,353

 
45,145

 
2.17
%
626,251

 
4,819

 
2.95
%
 
792,647

 
5,770

 
2.90
%
 
684,571

 
5,066

 
2.97
%
349,176

 
5,117

 
5.86
%
 
337,673

 
4,956

 
5.87
%
 
328,677

 
4,826

 
5.87
%
199,380

 
1,844

 
3.71
%
 
257,927

 
2,389

 
3.72
%
 
256,343

 
2,095

 
3.36
%
17,261,481

 
189,674

 
4.45
%
 
17,181,007

 
185,614

 
4.29
%
 
17,256,663

 
187,506

 
4.31
%
(228,996
)
 
 
 
 
 
(246,143
)
 
 
 
 
 
(250,590
)
 
 
 
 
17,032,485

 
189,674

 
4.51
%
 
16,934,864

 
185,614

 
4.35
%
 
17,006,073

 
187,506

 
4.38
%
29,878,358

 
267,417

 
3.61
%
 
29,758,612

 
259,898

 
3.49
%
 
29,636,980

 
259,727

 
3.50
%
998,803

 
 
 
 
 
821,275

 
 
 
 
 
608,412

 
 
 
 
2,847,791

 
 
 
 
 
2,872,228

 
 
 
 
 
2,762,778

 
 
 
 
$
33,724,952

 
 
 
 
 
$
33,452,115

 
 
 
 
 
$
33,008,170

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
10,344,469

 
$
11,494

 
0.45
%
 
$
10,142,744

 
$
8,914

 
0.35
%
 
$
10,088,522

 
$
8,062

 
0.32
%
480,110

 
88

 
0.07
%
 
466,496

 
87

 
0.07
%
 
464,130

 
90

 
0.08
%
2,151,044

 
6,637

 
1.25
%
 
2,134,469

 
6,296

 
1.17
%
 
2,176,820

 
6,378

 
1.16
%
12,975,623

 
18,219

 
0.57
%
 
12,743,709

 
15,297

 
0.48
%
 
12,729,472

 
14,530

 
0.45
%
532,412

 
522

 
0.40
%
 
488,330

 
340

 
0.28
%
 
411,286

 
256

 
0.25
%
6,326,967

 
24,927

 
1.60
%
 
6,209,903

 
21,242

 
1.36
%
 
6,162,641

 
20,105

 
1.29
%
144,682

 
2,003

 
5.61
%
 
144,673

 
2,025

 
5.55
%
 
144,663

 
2,070

 
5.68
%
19,979,684

 
45,671

 
0.93
%
 
19,586,615

 
38,904

 
0.79
%
 
19,448,062

 
36,961

 
0.75
%
9,151,272

 
 
 
 
 
9,417,351

 
 
 
 
 
9,389,849

 
 
 
 
558,898

 
 
 
 
 
332,155

 
 
 
 
 
145,977

 
 
 
 
556,524

 
 
 
 
 
600,604

 
 
 
 
 
539,641

 
 
 
 
3,478,574

 
 
 
 
 
3,515,390

 
 
 
 
 
3,484,641

 
 
 
 
$
33,724,952

 
 
 
 
 
$
33,452,115

 
 
 
 
 
$
33,008,170

 
 
 
 
 
 
$
221,746

 
2.68
%
 
 
 
$
220,994

 
2.70
%
 
 
 
$
222,766

 
2.75
%
 
 
 
 
2.99
%
 
 
 
 
 
2.97
%
 
 
 
 
 
3.01
%
 
 
2,010

 
 
 
 
 
4,131

 
 
 
 
 
4,314

 
 
 
 
219,736

 
 
 
 
 
216,863

 
 
 
 
 
218,452

 
 
 
 
(5,000
)
 
 
 
 
 
(7,000
)
 
 
 
 
 
—

 
 
 
 
155,989

 
 
 
 
 
166,836

 
 
 
 
 
175,710

 
 
 
 
244,430

 
 
 
 
 
263,987

 
 
 
 
 
265,934

 
 
 
 
136,295

 
 
 
 
 
126,712

 
 
 
 
 
128,228

 
 
 
 
30,948

 
 
 
 
 
54,347

 
 
 
 
 
42,438

 
 
 
 
105,347

 
 
 
 
 
72,365

 
 
 
 
 
85,790

 
 
 
 
(215
)
 
 
 
 
 
(127
)
 
 
 
 
 
141

 
 
 
 
$
105,562

 
 
 
 
 
$
72,492

 
 
 
 
 
$
85,649

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
1.61

 
 

 
 

 
$
1.11

 
 

 
 

 
$
1.31

 
 

 

 
$
1.61

 
 

 
 

 
$
1.11

 
 

 
 

 
$
1.31

 
 




- 123 -


Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
Sept. 30, 2018
 
June 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
303,247

 
$
294,180

 
$
265,407

 
$
255,767

 
$
255,413

Interest expense
 
62,364

 
55,618

 
45,671

 
38,904

 
36,961

Net interest revenue
 
240,883

 
238,562

 
219,736

 
216,863

 
218,452

Provision for credit losses
 
4,000

 
—

 
(5,000
)
 
(7,000
)
 
—

Net interest revenue after provision for credit losses
 
236,883

 
238,562

 
224,736

 
223,863

 
218,452

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
23,086

 
26,488

 
30,648

 
33,045

 
33,169

Transaction card revenue1
 
21,396

 
20,975

 
20,990

 
20,028

 
22,929

Fiduciary and asset management revenue
 
57,514

 
41,699

 
41,832

 
41,767

 
40,687

Deposit service charges and fees
 
27,765

 
27,827

 
27,161

 
27,685

 
28,191

Mortgage banking revenue
 
23,536

 
26,346

 
26,025

 
24,362

 
24,890

Other revenue
 
14,213

 
14,518

 
12,330

 
11,762

 
13,670

Total fees and commissions
 
167,510

 
157,853

 
158,986

 
158,649

 
163,536

Other gains (losses), net
 
1,441

 
3,983

 
(664
)
 
552

 
(1,283
)
Gain (loss) on derivatives, net
 
(2,847
)
 
(3,057
)
 
(5,685
)
 
(3,045
)
 
1,033

Gain (loss) on fair value option securities, net
 
(4,385
)
 
(3,341
)
 
(17,564
)
 
(4,238
)
 
661

Change in fair value of mortgage servicing rights
 
5,972

 
1,723

 
21,206

 
5,898

 
(639
)
Gain (loss) on available for sale securities, net
 
250

 
(762
)
 
(290
)
 
(488
)
 
2,487

Total other operating revenue
 
167,941

 
156,399

 
155,989

 
157,328

 
165,795

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
143,531

 
138,947

 
139,947

 
145,329

 
147,910

Business promotion
 
7,620

 
7,686

 
6,010

 
7,317

 
7,105

Charitable contributions to BOKF Foundation
 
—

 
—

 
—

 
2,000

 
—

Professional fees and services
 
13,209

 
14,978

 
10,200

 
15,344

 
11,887

Net occupancy and equipment
 
23,394

 
22,761

 
24,046

 
22,403

 
21,325

Insurance
 
6,232

 
6,245

 
6,593

 
6,555

 
6,005

Data processing and communications1
 
31,665

 
27,739

 
27,817

 
28,903

 
27,412

Printing, postage and supplies
 
3,837

 
4,011

 
4,089

 
3,781

 
3,917

Net losses (gains) and operating expenses of repossessed assets
 
4,044

 
2,722

 
7,705

 
340

 
6,071

Amortization of intangible assets
 
1,603

 
1,386

 
1,300

 
1,430

 
1,744

Mortgage banking costs
 
11,741

 
12,890

 
10,149

 
14,331

 
13,450

Other expense
 
5,741

 
7,111

 
6,574

 
6,746

 
9,193

Total other operating expense
 
252,617

 
246,476

 
244,430

 
254,479

 
256,019

Net income before taxes
 
152,207

 
148,485

 
136,295

 
126,712

 
128,228

Federal and state income taxes
 
34,662

 
33,330

 
30,948

 
54,347

 
42,438

Net income
 
117,545

 
115,155

 
105,347

 
72,365

 
85,790

Net income (loss) attributable to non-controlling interests
 
289

 
783

 
(215
)
 
(127
)
 
141

Net income attributable to BOK Financial Corporation shareholders
 
$
117,256

 
$
114,372

 
$
105,562

 
$
72,492

 
$
85,649

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$1.79
 
$1.75
 
$1.61
 
$1.11
 
$1.31
Diluted
 
$1.79
 
$1.75
 
$1.61
 
$1.11
 
$1.31
Average shares used in computation:
 
 
 
 
 
 
 
 
 
 
Basic
 
64,901,095

 
64,901,975

 
64,847,334

 
64,793,005

 
64,742,822

Diluted
 
64,934,351

 
64,937,226

 
64,888,033

 
64,843,179

 
64,805,172

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


- 124 -


PART II. Other Information

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

 
Period
 
Total Number of Shares Purchased2
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans
July 1 to July 31, 2018
 
—

 
$
—

 
—

 
1,949,917

August 1 to August 31, 2018
 
—

 
$
—

 
—

 
1,949,917

September 1 to September 30, 2018
 
—

 
$
—

 
—

 
1,949,917

Total
 
—

 
 

 
—

 
 

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

31.1

31.2

32

99.1

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


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



- 125 -


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:        October 30, 2018                                                                  



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

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


- 126 -