10-Q 1 a20160930bokf10q.htm 10-Q Document


 

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, 2016
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  ¨

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: 65,910,454 shares of common stock ($.00006 par value) as of September 30, 2016.
 




BOK Financial Corporation
Form 10-Q
Quarter Ended September 30, 2016

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 $74.3 million or $1.13 per diluted share for the third quarter of 2016, compared to $74.9 million or $1.09 per diluted share for the third quarter of 2015 and $65.8 million or $1.00 per diluted share for the second quarter of 2016. 

Highlights of the third quarter of 2016 included:
•
Net interest revenue totaled $187.8 million for the third quarter of 2016, compared to $178.6 million for the third quarter of 2015 and $182.6 million for the second quarter of 2016. Net interest revenue increased over the prior year primarily due to growth in average earning assets. Average earning assets were $29.1 billion for the third quarter of 2016 and $27.9 billion for the third quarter of 2015. Net interest margin was 2.64 percent for the third quarter of 2016. Net interest margin was 2.61 percent for the third quarter of 2015 and 2.63 percent for the second quarter of 2016. 
•
Fees and commissions revenue totaled $185.3 million for the third quarter of 2016, up $20.7 million over the third quarter of 2015. All revenue categories grew over the prior year, led by mortgage banking and brokerage and trading revenue. Fees and commissions revenue increased $1.8 million over the second quarter of 2016. Growth in mortgage banking revenue and deposit service charges and fees was partially offset by decreases in brokerage and trading revenue, transaction card revenue and fiduciary and asset management revenue.
•
Changes in the fair value of mortgage servicing rights, net of economic hedges, increased pre-tax net income by $1.2 million in the third quarter of 2016 , decreased pre-tax net income by $4.4 million in the third quarter of 2015 and decreased pre-tax net income by $1.2 million in the second quarter of 2016.
•
Operating expenses totaled $262.1 million for the third quarter of 2016, an increase of $37.5 million over the third quarter of 2015. Personnel expense increased $14.1 million primarily due to increased incentive compensation expense, regular compensation costs and higher employee healthcare costs. Non-personnel expense increased $23.4 million largely due to increased mortgage banking expenses, litigation accruals, deposit insurance expense and professional fees and services expense. Operating expenses increased $7.4 million over the previous quarter primarily due to increased litigation accruals and deposit insurance expense.
•
The Company recorded a $10.0 million provision for credit losses in the third quarter of 2016. The Company recorded a $20.0 million provision in the second quarter of 2016 and a $7.5 million provision for credit losses in the third quarter of 2015. Gross charge-offs were $8.1 million in the third quarter of 2016, $5.3 million in the third quarter of 2015 and $8.8 million in the second quarter of 2016. Recoveries were $2.0 million in the third quarter of 2016, compared to $3.5 million in the third quarter of 2015 and $1.4 million in the second quarter of 2016.
•
The combined allowance for credit losses totaled $256 million or 1.56 percent of outstanding loans at September 30, 2016, compared to $252 million or 1.54 percent of outstanding loans at June 30, 2016. The portion of the combined allowance attributed to the energy portfolio totaled 3.67 percent of outstanding energy loans at September 30, 2016, an increase from 3.58 percent of outstanding energy loans at June 30, 2016.
•
Nonperforming assets that are not guaranteed by U.S. government agencies totaled $253 million or 1.55 percent of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at September 30, 2016 and $251 million or 1.55 percent of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2016. Nonperforming energy loans decreased $25 million during the third quarter.
•
Average loans increased by $185 million over the previous quarter due primarily to a $239 million increase in commercial real estate loans, partially offset by a $156 million decrease in commercial loans, primarily due to a paydown of a single energy credit during the quarter. Period-end outstanding loan balances were $16.5 billion at September 30, 2016, a $58 million increase over June 30, 2016.
•
Average deposits grew by $297 million over the previous quarter primarily due to growth in demand deposit and interest-bearing transaction account balances, partially offset by a decrease in time deposits. Period-end deposits were $21.1 billion at September 30, 2016, an increase of $336 million over June 30, 2016.

- 1 -


•
The Company's common equity Tier 1 ratio was 11.99% at September 30, 2016. In addition, the Company's Tier 1 capital ratio was 11.99%, total capital ratio was 13.65% and leverage ratio was 9.06% at September 30, 2016. The Company's common equity Tier 1 ratio was 11.86% at June 30, 2016. In addition, the Company's Tier 1 capital ratio was 11.86%, total capital ratio was 13.51% and leverage ratio was 9.06% at June 30, 2016.
•
The Company paid a regular quarterly cash dividend of $28 million or $0.43 per common share during the third quarter of 2016. On October 25, 2016, the board of directors approved an increase in the regular quarterly cash dividend to $0.44 per common share payable on or about November 28, 2016 to shareholders of record as of November 14, 2016.
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 $187.8 million for the third quarter of 2016 compared to $178.6 million for the third quarter of 2015 and $182.6 million for the second quarter of 2016. Net interest margin was 2.64 percent for the third quarter of 2016, 2.61 percent for the third quarter of 2015 and 2.63 percent for the second quarter of 2016.

Tax-equivalent net interest revenue increased $10.4 million over the third quarter of 2015. 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. Tax-equivalent net interest revenue increased $12.5 million primarily due to the growth in average loan balances. Net interest revenue decreased $2.1 million primarily due to the full quarter impact of the issuance of $150 million of 40 year 5.375% fixed rate subordinated debt in the second quarter that replaced $227 million of floating rating subordinated debt at 1.0105% at September 30, 2015. This floating rate debt was a year from maturity and was phased out from having any benefit to regulatory capital. The longer term fixed rate debt will better position us as interest rates rise. The benefit from a mix shift toward floating rate loans and higher short term interest rates was offset by increased borrowing costs.

The tax-equivalent yield on earning assets was 2.93 percent for the third quarter of 2016, up 10 basis points over the third quarter of 2015. Loan yields increased 9 basis points to 3.63% primarily due to the growth in variable rate loans and an increase in short-term interest rates. The yield on interest-bearing cash and cash equivalents increased 23 basis points. The available for sale securities portfolio yield was unchanged compared to the prior year at 2.01 percent. Funding costs were up 12 basis points over the third quarter of 2015. The cost of interest-bearing deposits decreased 2 basis points. The cost of other borrowed funds increased 26 basis points primarily due to an increase in the federal funds rate by the Federal Reserve in the fourth quarter of 2015. The cost of the subordinated debt was up 280 basis points as the existing lower variable rate debt was replaced by higher fixed rate debt. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 15 basis points for the third quarter of 2016, up 5 basis points over the third quarter of 2015.

Average earning assets for the third quarter of 2016 increased $1.2 billion or 4 percent over the third quarter of 2015. Average loans, net of allowance for loan losses, increased $1.2 billion due primarily to growth in average commercial real estate and commercial loans. The average balance of trading securities increased $187 million and the average balance of restricted equity securities increased $80 million. The average balance of fair value option securities held as an economic hedge of our mortgage servicing rights decreased $163 million and the average balance of available for sale securities decreased $80 million. The average balance of investment securities decreased compared to the prior year, partially offset by an increase in the average balance of residential mortgage loans held for sale.

Average deposits increased $72 million over the third quarter of 2015. Average demand deposit balances grew by $502 million, partially offset by a $110 million decrease in interest-bearing transaction account balances and a $361 million decrease average time deposits. Average savings account balances also grew over the prior year. Average borrowed funds increased $1.4 billion over the third quarter of 2015, primarily due to increased borrowings from the Federal Home Loan Banks. The average balance of subordinated debentures increased $30 million.


- 2 -


Net interest margin increased 1 basis point over the second quarter of 2016. The yield on average earning assets increased 2 basis points. The loan portfolio yield increased by 5 basis points to 3.63 percent. The yield on the available for sale securities portfolio decreased 3 basis points to 2.01 percent. Funding costs were 0.44 percent, up 3 basis point over the prior quarter. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 2 basis points over the prior quarter.
Average earning assets increased $260 million over the second quarter of 2016. Average loan balances increased $185 million, primarily due to growth in commercial real estate balances. Average trading securities balances increased $129 million and the average balance of residential mortgage loans held for sale was up $45 million, partially offset by a $101 million decrease in the balance of fair value option securities held as an economic hedge of our mortgage servicing rights.
Average deposits increased $297 million compared to the previous quarter. Demand deposit balances increased $335 million and interest-bearing transaction account balances increased $60 million, partially offset by a $100 million decrease in time deposit balances. The average balance of borrowed funds increased $175 million over the second quarter of 2016. Increased borrowings from the Federal Home Loan Banks were partially offset by decreased federal funds sold and repurchase agreement balances.

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

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

- 3 -


Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
September 30, 2016 / 2015
 
Nine Months Ended
September 30, 2016 / 2015
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
1,209

 
$
18

 
$
1,191

 
$
3,812

 
$
(9
)
 
$
3,821

Trading securities
 
2,212

 
2,213

 
(1
)
 
2,443

 
2,285

 
158

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(211
)
 
(126
)
 
(85
)
 
(544
)
 
(421
)
 
(123
)
Tax-exempt securities
 
383

 
(255
)
 
638

 
1,156

 
(725
)
 
1,881

Total investment securities
 
172

 
(381
)
 
553

 
612

 
(1,146
)
 
1,758

Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(960
)
 
(924
)
 
(36
)
 
1,857

 
(2,181
)
 
4,038

Tax-exempt securities
 
71

 
(162
)
 
233

 
50

 
(443
)
 
493

Total available for sale securities
 
(889
)
 
(1,086
)
 
197

 
1,907

 
(2,624
)
 
4,531

Fair value option securities
 
(949
)
 
(355
)
 
(594
)
 
(621
)
 
(211
)
 
(410
)
Restricted equity securities
 
708

 
1,245

 
(537
)
 
3,057

 
4,429

 
(1,372
)
Residential mortgage loans held for sale
 
(178
)
 
362

 
(540
)
 
(811
)
 
(719
)
 
(92
)
Loans
 
14,579

 
11,157

 
3,422

 
36,913

 
36,580

 
333

Total tax-equivalent interest revenue
 
16,864

 
13,173

 
3,691

 
47,312

 
38,585

 
8,727

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
1,356

 
(69
)
 
1,425

 
3,271

 
(376
)
 
3,647

Savings deposits
 
3

 
11

 
(8
)
 
1

 
14

 
(13
)
Time deposits
 
(2,278
)
 
(1,131
)
 
(1,147
)
 
(7,023
)
 
(3,184
)
 
(3,839
)
Funds purchased
 
18

 
(1
)
 
19

 
98

 
19

 
79

Repurchase agreements
 
4

 
(12
)
 
16

 
—

 
(63
)
 
63

Other borrowings
 
5,468

 
1,701

 
3,767

 
16,450

 
6,737

 
9,713

Subordinated debentures
 
1,872

 
178

 
1,694

 
(400
)
 
(883
)
 
483

Total interest expense
 
6,443

 
677

 
5,766

 
12,397

 
2,264

 
10,133

Tax-equivalent net interest revenue
 
10,421

 
12,496

 
(2,075
)
 
34,915

 
36,321

 
(1,406
)
Change in tax-equivalent adjustment
 
1,211

 
 
 
 
 
3,978

 
 
 
 
Net interest revenue
 
$
9,210

 
 
 
 
 
$
30,937

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

- 4 -


Other Operating Revenue

Other operating revenue was $191.3 million for the third quarter of 2016, a $27.9 million increase over the third quarter of 2015 and a $2.5 million increase over the second quarter of 2016. Fees and commissions revenue was up $20.7 million over the third quarter of 2015 and increased $1.8 million over the prior quarter. The change in the fair value of mortgage servicing rights, net of economic hedges, increased other operating revenue by $1.2 million in the third quarter of 2016, decreased other operating revenue by $4.4 million in the third quarter of 2015 and decreased other operating revenue $1.2 million in the second quarter of 2016.

Table 2 – Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2016
 
2015
 
 
 
 
 
Brokerage and trading revenue
 
$
38,006

 
$
31,582

 
$
6,424

 
20
%
 
$
39,530

 
$
(1,524
)
 
(4
)%
Transaction card revenue
 
33,933

 
32,514

 
1,419

 
4
%
 
34,950

 
(1,017
)
 
(3
)%
Fiduciary and asset management revenue
 
34,073

 
30,807

 
3,266

 
11
%
 
34,813

 
(740
)
 
(2
)%
Deposit service charges and fees
 
23,668

 
23,606

 
62

 
—
%
 
22,618

 
1,050

 
5
 %
Mortgage banking revenue
 
42,548

 
33,170

 
9,378

 
28
%
 
38,224

 
4,324

 
11
 %
Other revenue
 
13,080

 
12,978

 
102

 
1
%
 
13,352

 
(272
)
 
(2
)%
Total fees and commissions revenue
 
185,308

 
164,657

 
20,651

 
13
%
 
183,487

 
1,821

 
1
 %
Other gains, net
 
2,442

 
1,161

 
1,281

 
N/A

 
1,307

 
1,135

 
N/A

Gain on derivatives, net
 
2,226

 
1,283

 
943

 
N/A

 
10,766

 
(8,540
)
 
N/A

Gain (loss) on fair value option securities, net
 
(3,355
)
 
5,926

 
(9,281
)
 
N/A

 
4,279

 
(7,634
)
 
N/A

Change in fair value of mortgage servicing rights
 
2,327

 
(11,757
)
 
14,084

 
N/A

 
(16,283
)
 
18,610

 
N/A

Gain on available for sale securities, net
 
2,394

 
2,166

 
228

 
N/A

 
5,326

 
(2,932
)
 
N/A

Total other operating revenue
 
$
191,342

 
$
163,436

 
$
27,906

 
17
%
 
$
188,882

 
$
2,460

 
1
 %
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 50 percent of total revenue for the third quarter of 2016, 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 that cause net interest revenue compression such as falling interest rates may also drive growth in our mortgage banking revenue. We expect growth in other operating revenue to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and trading revenue includes revenues from trading, customer hedging, retail brokerage and investment banking. Brokerage and trading revenue increased $6.4 million or 20 percent over the third quarter of 2015. 


- 5 -


Trading revenue includes net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers and related derivative instruments. Trading revenue was $12.0 million for the third quarter of 2016, an increase of $337 thousand or 3 percent over the third quarter of 2015. The Company added a new group trading in U.S. government agency residential mortgage-backed securities and related to-be-announced derivatives. The addition of this group added $2.0 million of net interest revenue and $1.9 million of trading revenue during the third quarter and added $426 million to the trading securities portfolio at September 30. This increase was partially offset by lower volumes of U.S. agency residential mortgage-backed securities, brokered certificates of deposit and municipal securities sold to our institutional customers.

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 $13.8 million for the third quarter of 2016, a $4.5 million or 48 percent increase over the third quarter of 2015 primarily due to increased hedging activity by our mortgage banking and energy customers.

Revenue earned from retail brokerage transactions increased $932 thousand or 15 percent over the third quarter of 2015 to $7.0 million. Retail brokerage revenue is primarily based on fees and commissions earned on sales of fixed income securities, annuities, mutual funds and other financial instruments to retail customers. Revenue is primarily based on the volume of customer transactions and applicable commission rate for each product type. The increase in revenue due to transaction volume growth was partially offset by a change in product mix to products that pay a lower commission rate. In addition, volume has shifted from sales of products that pay a one-time transaction fee to accounts that pay us an on-going management fee.

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $5.3 million for the third quarter of 2016, an increase of $688 thousand or 15 percent over the third quarter of 2015. Investment banking revenue is primarily related to the timing and volume of completed transactions.

Brokerage and trading revenue decreased $1.5 million compared to the second quarter of 2016. Investment banking revenue decreased $1.7 million primarily due to the timing and volume of completed transactions. Trading revenue decreased $307 thousand. Growth from the addition of our new mortgage trading group was offset by lower volumes of U.S. agency mortgage-backed securities and municipal securities to our institutional customers. Customer hedging revenue increased $256 thousand primarily due to increased volumes of contracts with our mortgage banking, partially offset by lower contract volumes with our energy customers. Retail brokerage fees were up $228 thousand over the prior quarter.

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 for the third quarter of 2016 increased $1.4 million or 4 percent over the third quarter of 2015. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $17.8 million, a $1.6 million or 10 percent increase over the prior year. Merchant services fees totaled $11.3 million, a $274 thousand or 2 percent decrease based on decreased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.9 million, an increase of $71 thousand or 1 percent over the third quarter of 2015.
Excluding the impact of a $1.2 million customer early termination fee in the second quarter of 2016, transaction card revenue increased $165 thousand primarily due to an increase in transaction volumes on our TransFund EFT network, partially offset by a decrease in merchant services fees and revenue from interchange fees compared to the prior quarter.
 
Fiduciary and asset management revenue increased $3.3 million or 11 percent over the third quarter of 2015, largely due to decreased fee waivers. We earn fees as administrator to and investment adviser for the Cavanal Hill Funds, a diversified, open-ended investment company established as a business trust under the Investment Company Act of 1940. The Bank is custodian and BOK Financial Securities, Inc. is distributor for the Cavanal Hill Funds. Products of the Cavanal Hill Funds are offered to customers, employee benefit plans, trusts and the general public in the ordinary course of business. We have voluntarily waived administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment. Waived fees totaled $1.6 million for the third quarter of 2016 compared to $3.4 million for the third quarter of 2015 and $1.8 million for the second quarter of 2016. The decrease in fee waivers was related to increased interest rates as a result of the Federal Reserve's federal funds rate increase in the fourth quarter of 2015. The remaining increase is primarily due to growth in assets under management related to the Company's acquisition of Weaver and Tidwell Financial Advisors LTD d/b/a Weaver Wealth Management, a registered investment advisor, in the first quarter of 2016 and changes in market values.


- 6 -


Fiduciary and asset management revenue decreased $740 thousand compared to the second quarter of 2016 primarily due to seasonality of annual assessment of tax preparation fees in the second quarter, partially offset by growth in assets under management.

The fair value of fiduciary assets administered by the Company totaled $41.2 billion at September 30, 2016, $37.8 billion at September 30, 2015 and $39.9 billion at June 30, 2016. Fiduciary assets are assets for which the Company possesses investment discretion on behalf of another or any other similar capacity.

Deposit service charges and fees were $23.7 million for the third quarter of 2016, largely unchanged compared to the third quarter of 2015. Commercial account service charge revenue totaled $11.4 million, up $595 thousand or 6 percent over the prior year. Overdraft fees were $10.6 million for the third quarter of 2016, a decrease of $470 thousand or 4 percent compared to the third quarter of 2015. Service charges on deposit accounts with a standard monthly fee were $1.7 million, a decrease of $68 thousand or 4 percent compared to the third quarter of 2015. Deposit service charges and fees increased $1.1 million over the prior quarter primarily due to a seasonal increase in overdraft fee volumes and increased commercial account service charge revenue.

Mortgage banking revenue increased $9.4 million or 28% over the third quarter of 2015. Mortgage production revenue increased $7.3 million over the prior year. Better gains on sale margins and an increased volume of loans sold was partially offset by a lower volume of mortgage loan commitments. Mortgage servicing revenue was up $2.1 million or 15 percent over the third quarter of 2015. The outstanding principal balance of mortgage loans serviced for others totaled $21.9 billion, an increase of $2.9 billion or 15 percent.
Outstanding mortgage loan commitments at September 30, 2016 decreased $112 million or 15% compared to September 30, 2015. The Company made a strategic decision to exit the correspondent lending channel during the third quarter of 2016 based on careful consideration of continued pressure on margin due to the competitive landscape and regulatory costs. This strategic decision decreased outstanding commitments by $289 million compared to the prior year. Mortgage loan commitments continued to grow in our retail and HomeDirect online channels. The correspondent lending channel represented $4.6 million of the total mortgage loan production revenue of $26.0 million for the third quarter of 2016 and $4.0 million of the total mortgage loan production revenue of $18.7 million for the third quarter of 2015.
Mortgage banking revenue increased $4.3 million over the second quarter of 2016. Mortgage production revenue increased $3.6 million due to growth in the volume of mortgage loans sold and increased gains on sale, partially offset by a decrease in mortgage loan commitments during the quarter. Average primary mortgage interest rates were 14 basis points lower than in the second quarter of 2016. Total mortgage loans originated during the third quarter of 2016 increased $46 million over the previous quarter. Outstanding mortgage loan commitments at September 30, 2016 decreased by $335 million from June 30, 2016. The decrease in commitments related to correspondent lending was $414 million compared to June 30. Mortgage loan commitments from both the retail and HomeDirect channels grew over the prior quarter. The correspondent lending channel represented $3.0 million of total mortgage production revenue of $22.4 million for the second quarter of 2016. Revenue from mortgage loan servicing grew by $760 thousand due to an increase in the volume of loans serviced. The outstanding balance of mortgage loans serviced for others increased $673 million over June 30, 2016.


- 7 -


Table 3 – Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2016
 
2015
 
 
 
 
Net realized gains on mortgage loans sold
 
$
27,142

 
$
18,968

 
$
8,174

 
43
 %
 
$
19,205

 
$
7,937

 
41
 %
Change in net unrealized gains on mortgage loans held for sale
 
(1,152
)
 
(251
)
 
N/A

 
N/A

 
3,221

 
N/A

 
N/A

Total mortgage production revenue
 
25,990

 
18,717

 
7,273

 
39
 %
 
22,426

 
3,564

 
16
 %
Servicing revenue
 
16,558

 
14,453

 
2,105

 
15
 %
 
15,798

 
760

 
5
 %
Total mortgage revenue
 
$
42,548

 
$
33,170

 
$
9,378

 
28
 %
 
$
38,224

 
$
4,324

 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
1,864,583

 
$
1,614,225

 
$
250,358

 
16
 %
 
$
1,818,844

 
$
45,739

 
3
 %
Mortgage loans sold
 
1,873,709

 
1,778,099

 
95,610

 
5
 %
 
1,742,582

 
131,127

 
8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end outstanding mortgage commitments, net
 
630,804

 
742,742

 
(111,938
)
 
(15
)%
 
965,631

 
(334,827
)
 
(35
)%
Outstanding principal balance of mortgage loans serviced for others
 
21,851,536

 
18,928,726

 
2,922,810

 
15
 %
 
21,178,387

 
673,149

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary residential mortgage interest rate – period end
 
3.42
%
 
3.86
%
 
(44
) bps
 
 
 
3.48
%
 
(6
) bps
 
 
Primary residential mortgage interest rate – average
 
3.45
%
 
3.95
%
 
(50
) bps
 
 
 
3.59
%
 
(14
) bps
 
 
Secondary residential mortgage interest rate – period end
 
2.34
%
 
2.87
%
 
(53
) bps
 
 
 
2.31
%
 
3
 bps
 
 
Secondary residential mortgage interest rate – average
 
2.36
%
 
2.97
%
 
(61
) bps
 
 
 
2.52
%
 
(16
) bps
 
 
Certain percentage increases (decreases) are not meaningful for comparison purposes based on the nature of the item.

Primary rates disclosed in Table 3 above represent rates generally available to borrowers on 30 year conforming mortgage loans. Secondary rates generally represent yields on 30 year residential mortgage-backed securities guaranteed by U.S. government agencies.
Net gains on securities, derivatives and other assets

In the third quarter of 2016, we recognized a $2.4 million net gain from sales of $232 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential or to move into securities that are expected to perform better in the current rate environment. In the third quarter of 2015, we recognized a $2.2 million net gain from sales of $451 million of available for sale securities and in the second quarter of 2016, we recognized a $5.3 million net gain on sales of $326 million of available for sale securities.

We also maintain a portfolio of residential mortgage-backed securities issued by U.S. government agencies, U.S. Treasury securities and interest rate derivative contracts held as an economic hedge of the changes in the fair value of our mortgage servicing rights. The fair value of our mortgage servicing rights fluctuates due to changes in prepayment speeds and other assumptions as more fully described in Note 6 to the Consolidated Financial Statements. As benchmark mortgage rates increase, prepayment speeds slow and the value of our mortgage servicing rights increases. As benchmark mortgage rates fall, prepayment speeds increase and the value of our mortgage servicing rights decreases.


- 8 -


Changes in the fair value of mortgage servicing rights are highly dependent on changes in primary mortgage rates, rates offered to borrowers, and assumptions about servicing revenues, servicing costs and discount rates. Changes in the fair value of residential mortgage-backed securities are highly dependent on changes in secondary mortgage rates, or 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. Additionally, the fair value of mortgage servicing rights is dependent on intermediate-term interest rates that affect the value of custodial funds. Changes in the spread between short-term and long-term interest rates can also cause significant earnings volatility.

Table 4 following shows the relationship between changes in the fair value of mortgage servicing rights and the fair value of fair value option residential mortgage-backed securities and interest rate derivative contracts held as an economic hedge. The fair value of mortgage servicing rights increased during the third quarter of 2016 primarily due to changes in short term interest rates. The fair value of securities and interest rate derivative contracts held as an economic hedge decreased primarily due to an increase in interest rate swap rates, partially offset by a decrease in average secondary mortgage rates. The fair value of mortgage servicing rights, net of economic hedges, decreased in the second quarter of 2016, primarily due to a decrease in secondary mortgage and interest rate swap rates. Hedge coverage was increased during the second quarter to improve its effectiveness.

Table 4 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
Sept. 30, 2016
 
June 30, 2016
 
Sept. 30, 2015
Gain on mortgage hedge derivative contracts, net
 
$
2,268

 
$
10,766

 
$
1,460

Gain (loss) on fair value option securities, net
 
(3,355
)
 
4,279

 
5,926

Gain (loss) on economic hedge of mortgage servicing rights, net
 
(1,087
)
 
15,045

 
7,386

Gain (loss) on change in fair value of mortgage servicing rights
 
2,327

 
(16,283
)
 
(11,757
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
1,240

 
$
(1,238
)
 
$
(4,371
)
 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
861

 
$
1,348

 
$
2,140







- 9 -


Other Operating Expense

Other operating expense for the third quarter of 2016 totaled $262.1 million, a $37.5 million or 17 percent increase over the third quarter of 2015. Personnel expenses increased $14.1 million or 11 percent. Non-personnel expenses increased $23.4 million or 24 percent over the prior year.

Operating expenses increased $7.4 million over the previous quarter. Personnel expense increased $695 thousand. Non-personnel expense increased $6.7 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2016
 
2015
 
 
 
 
 
Regular compensation
 
$
83,956

 
$
79,208

 
$
4,748

 
6
 %
 
$
82,441

 
$
1,515

 
2
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
36,133

 
30,462

 
5,671

 
19
 %
 
34,894

 
1,239

 
4
 %
Share-based
 
1,839

 
2,885

 
(1,046
)
 
(36
)%
 
3,701

 
(1,862
)
 
(50
)%
Deferred compensation
 
1,059

 
(539
)
 
1,598

 
N/A

 
211

 
848

 
N/A

Total incentive compensation
 
39,031

 
32,808

 
6,223

 
19
 %
 
38,806

 
225

 
1
 %
Employee benefits
 
20,198

 
17,046

 
3,152

 
18
 %
 
21,243

 
(1,045
)
 
(5
)%
Total personnel expense
 
143,185

 
129,062

 
14,123

 
11
 %
 
142,490

 
695

 
—
 %
Business promotion
 
6,839

 
5,922

 
917

 
15
 %
 
6,703

 
136

 
2
 %
Charitable contributions to BOKF Foundation
 
—

 
796

 
(796
)
 
N/A

 
—

 
—

 
N/A

Professional fees and services
 
14,038

 
10,147

 
3,891

 
38
 %
 
14,158

 
(120
)
 
(1
)%
Net occupancy and equipment
 
20,111

 
18,689

 
1,422

 
8
 %
 
19,677

 
434

 
2
 %
Insurance
 
9,390

 
4,864

 
4,526

 
93
 %
 
7,129

 
2,261

 
32
 %
Data processing and communications
 
33,331

 
30,708

 
2,623

 
9
 %
 
32,802

 
529

 
2
 %
Printing, postage and supplies
 
3,790

 
3,376

 
414

 
12
 %
 
3,889

 
(99
)
 
(3
)%
Net losses (gains) and operating expenses of repossessed assets
 
(926
)
 
267

 
(1,193
)
 
(447
)%
 
1,588

 
(2,514
)
 
(158
)%
Amortization of intangible assets
 
1,521

 
1,089

 
432

 
40
 %
 
2,624

 
(1,103
)
 
(42
)%
Mortgage banking costs
 
16,022

 
9,107

 
6,915

 
76
 %
 
15,809

 
213

 
1
 %
Other expense
 
14,819

 
10,601

 
4,218

 
40
 %
 
7,856

 
6,963

 
89
 %
Total other operating expense
 
$
262,120

 
$
224,628

 
$
37,492

 
17
 %
 
$
254,725

 
$
7,395

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,928

 
4,846

 
82

 
2
 %
 
4,893

 
35

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

Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs, increased $4.7 million or 6 percent over the third quarter of 2015. The average number of employees increased 2 percent over the prior year. Recent additions have primarily been in mortgage, wealth management and technology. In addition, standard annual merit increases in regular compensation were effective for the majority of our staff on March 1.

Incentive compensation increased $6.2 million or 19 percent over the third quarter of 2015. 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. Total cash-based incentive compensation increased $5.7 million or 19 percent over the third quarter of 2015. 

- 10 -


Share-based compensation expense represents expense for equity awards based on grant-date fair value. Non-vested shares generally cliff vest in 3 years and are subject to a two year holding period after vesting. Compensation costs related to certain shares is variable based on changes in the the fair value of BOK Financial common shares. Share-based compensation expense decreased $1.0 million or 36% compared to the prior year, primarily due to the decrease in the vesting probability of certain performance-based share awards.

Employee benefits expense increased $3.2 million or 18 percent over the third quarter of 2015 primarily due to a $2.4 million increase in employee medical costs. Retirement plan costs and payroll taxes also increased over the prior year.
Personnel costs increased by $695 thousand over the second quarter of 2016. Regular compensation expense increased $1.5 million. Cash-based incentive compensation was up $1.2 million primarily due to revenue growth. Deferred compensation expense was up $848 thousand over the prior quarter. This additional expense is largely offset by the increase in the fair value of deferred compensation plan assets included in Other revenue. Share-based compensation expense was $1.9 million lower primarily due to the decrease in the vesting probability of certain performance-based share awards. Employee benefits expense was lower compared to the prior quarter primarily due to a $1.5 million seasonal decrease in payroll tax expense, partially offset by a $365 thousand increase in employee medical costs.

Non-personnel operating expenses

Non-personnel operating expenses increased $23.4 million or 24 percent over the third quarter of 2015. Mortgage banking costs increased $6.9 million. Expense related to the effect of actual loan prepayments on the fair value of mortgage servicing rights totaled $11.4 million, a $4.6 million increase over the third quarter of 2015. Actual prepayments increased due to lower mortgage interest rates. Mortgage banking costs for the third quarter of 2015 included a $1.2 million benefit from the reversal of estimated claims based on a favorable resolution of an audit of servicing of certain residential mortgage loans guaranteed by U.S. government agencies.

Deposit insurance expense increased $4.5 million, primarily due to an increase in criticized and classified assets, an input to the deposit insurance assessment, and implementation of a new surcharge for banks over $10 billion in assets. Criticized and classified assets increased compared to the prior year as a result of falling energy prices that began in the fourth quarter of 2015. During the third quarter of 2016, the deposit insurance fund reached a target of 1.15% of insured deposits which triggered a new surcharge for banks with more than $10 billion in assets to bring the deposit insurance fund to 1.35% of insured deposits. This impact was partially offset by a reduction in the base rate.

Other expense increased $4.2 million over the prior year due primarily to a $5.0 million legal settlement accrual concerning the manner in which the Company posted charges to certain consumer and small business deposit accounts. Professional fees and services expense increased $3.9 million primarily due to costs incurred in preparation for the mobank acquisition and increased legal fees. Data processing and communications expense increased $2.6 million due to increased transaction activity. The Company had a net gain on sale of repossessed assets of $1.6 million in the third quarter of 2016 compared to a net loss of $517 thousand in the third quarter of 2015. Operating expenses related to repossessed assets also declined compared to the prior year.
Non-personnel expense increased $6.7 million over the second quarter of 2016 primarily due to the $5.0 million accrual related to a legal settlement during the third quarter. Deposit insurance expense was up $2.3 million primarily due to the new surcharge for banks with more than $10 billion in assets. Expense related to prepayments of residential mortgage loans serviced for others increased $1.6 million over the prior quarter, partially offset by a $1.4 million decrease in mortgage-related accruals. The Company had a net gain on sale of repossessed assets of $1.6 million in the third quarter compared to a net loss of $127 thousand in the second quarter. Operating expenses on repossessed assets also decreased compared to the prior quarter. The $1.1 million decrease in intangible asset amortization expense was due to an adjustment to a consolidated merchant-banking investment during the second quarter.
Income Taxes

The Company's income tax expense from continuing operations was $32.0 million or 29.8% of book taxable income for the third quarter of 2016 compared to $34.1 million or 31.0% of book taxable income for the third quarter of 2015 and $30.5 million or 31.5% of book taxable income for the second quarter of 2016.


- 11 -


The statute of limitations expired on uncertain income tax positions and the Company adjusted its current income tax liability amounts on filed tax returns for 2015 during the third quarter of 2016. These adjustments reduced income tax expense by $2.6 million in the third quarter of 2016 and $2.0 million in the third quarter of 2015. Excluding these adjustments, income tax expense would have been 32.3% of book taxable income for the third quarter of 2016 and 32.8% of book taxable income for the third quarter of 2015.
The Company's effective tax rate is affected by recurring items such as amortization related to its investments in affordable housing investments net of affordable housing tax credits and other tax benefits, bank-owned life insurance and tax-exempt income. 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 $14 million at both September 30, 2016 and September 30, 2015 and $13 million at June 30, 2016.
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 duration. Market rates are generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support 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 duration and re-pricing 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 re-pricing 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 swap rates. The expected duration ranges from 30 days for certain rate-sensitive deposits to five years.

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


- 12 -


As shown in Table 6, net income attributable to our lines of business increased $12.4 million or 20 percent over the third quarter of 2015. Net interest revenue grew by $19.3 million over the prior year. Other operating revenue was up $18.6 million. This revenue growth was partially offset by a $22.5 million increase in operating expense and a $4.4 million increase in net charge-offs primarily due to energy loans.

Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Commercial Banking
 
$
55,994

 
$
47,657

 
$
145,885

 
$
144,929

Consumer Banking
 
8,762

 
6,535

 
13,104

 
22,693

Wealth Management
 
9,108

 
7,250

 
26,866

 
24,672

Subtotal
 
73,864

 
61,442

 
185,855

 
192,294

Funds Management and other
 
413

 
13,449

 
(3,213
)
 
36,670

Total
 
$
74,277

 
$
74,891

 
$
182,642

 
$
228,964


- 13 -


Commercial Banking

Commercial Banking contributed $56.0 million to consolidated net income in the third quarter of 2016, an increase of $8.3 million or 18% over the third quarter of 2015. Growth in net interest revenue and fees and commissions revenue was partially offset by increased loan charge-offs and higher operating expenses. Commercial Banking net loans charged off were $5.6 million in the third quarter of 2016 compared to a net recovery of $997 thousand in the third quarter of 2015. The increase was primarily related to energy portfolio loans.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
2015
 
 
2016
 
2015
 
Net interest revenue from external sources
 
$
123,598

 
$
109,503

 
$
14,095

 
$
358,714

 
$
319,298

 
$
39,416

Net interest expense from internal sources
 
(15,052
)
 
(13,450
)
 
(1,602
)
 
(44,259
)
 
(38,728
)
 
(5,531
)
Total net interest revenue
 
108,546

 
96,053

 
12,493

 
314,455

 
280,570

 
33,885

Net loans charged off (recovered)
 
5,601

 
997

 
4,604

 
34,024

 
(7,952
)
 
41,976

Net interest revenue after net loans charged off (recovered)
 
102,945

 
95,056

 
7,889

 
280,431

 
288,522

 
(8,091
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
47,710

 
45,133

 
2,577

 
144,215

 
132,609

 
11,606

Other gains, net
 
1,932

 
143

 
1,789

 
2,033

 
387

 
1,646

Other operating revenue
 
49,642

 
45,276

 
4,366

 
146,248

 
132,996

 
13,252

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
28,365

 
27,354

 
1,011

 
82,513

 
80,736

 
1,777

Non-personnel expense
 
25,010

 
24,606

 
404

 
79,526

 
71,172

 
8,354

Other operating expense
 
53,375

 
51,960

 
1,415

 
162,039

 
151,908

 
10,131

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
99,212

 
88,372

 
10,840

 
264,640

 
269,610

 
(4,970
)
Gain on repossessed assets, net
 
1,486

 
350

 
1,136

 
806

 
336

 
470

Corporate expense allocations
 
9,054

 
10,723

 
(1,669
)
 
26,681

 
32,747

 
(6,066
)
Income before taxes
 
91,644

 
77,999

 
13,645

 
238,765

 
237,199

 
1,566

Federal and state income tax
 
35,650

 
30,342

 
5,308

 
92,880

 
92,270

 
610

Net income
 
$
55,994

 
$
47,657

 
$
8,337

 
$
145,885

 
$
144,929

 
$
956

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,934,587

 
$
16,156,446

 
$
778,141

 
$
16,958,999

 
$
16,229,307

 
$
729,692

Average loans
 
13,737,081

 
12,531,113

 
1,205,968

 
13,542,719

 
12,230,278

 
1,312,441

Average deposits
 
8,317,341

 
8,627,281

 
(309,940
)
 
8,392,558

 
8,849,091

 
(456,533
)
Average invested capital
 
1,170,465

 
1,062,053

 
108,412

 
1,161,996

 
1,028,013

 
133,983


Net interest revenue increased $12.5 million or 13% over the prior year. Growth in net interest revenue was primarily due to a $1.2 billion or 10% increase in average loan balances and increased yields on commercial loans due to rising short-term interest rates. The impact of decreased average deposit balances was offset by increased yields on deposits sold to the funds management unit related to the increase in short-term interest rates from the Federal Reserve increase in the federal funds rate in the fourth quarter of 2015.

Fees and commissions revenue grew by $2.6 million or 6% over the third quarter of 2015. Brokerage and trading revenue increased $1.5 million primarily due to growth in commercial loan syndication fees and increased hedging activity by our energy customers. Transaction card revenues from our TransFund electronic funds transfer network increased $1.3 million primarily due to increased transaction volumes. Commercial deposit service charge revenue was also up over the prior year, offset by a decrease in other revenue.


- 14 -


Operating expenses increased $1.4 million or 3% over the the third quarter of 2015. Personnel expense increased $1.0 million or 4% primarily due to standard annual merit increases and increased incentive compensation expense. Non-personnel expense increased $404 thousand or 2% primarily due to a $403 thousand increase in intangible asset amortization. Increased business promotion expense related to timing of expenditures was offset by lower professional fees and services expense. Corporate expense allocations decreased $1.7 million compared to the prior year.

The average outstanding balance of loans attributed to Commercial Banking grew by $1.2 billion or 10% over the third quarter of 2015 to $13.7 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 $8.3 billion for the third quarter of 2016, a decrease of $310 million or 4% compared to the third quarter of 2015. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.


Consumer Banking

Consumer Banking provides retail banking services through four primary distribution channels:  traditional branches, the 24-hour ExpressBank call center, Internet banking and mobile banking. Consumer Banking also conducts mortgage banking activities through offices located outside of our consumer banking markets and through Home Direct Mortgage, an online origination channel. During the third quarter of 2016. the Company made a strategic decision to exit the correspondent lending channel based on careful consideration of continued pressure on margin due to the competitive landscape and increasing regulatory costs.

Consumer Banking contributed $8.8 million to consolidated net income for the third quarter of 2016, up $2.2 million over the third quarter of 2015. Growth in mortgage banking revenue and net interest revenue was offset by the effect of increased actual prepayments of mortgage loans on mortgage servicing rights and increased personnel costs. Corporate expense allocations were $2.0 million lower than in the prior year.

Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $758 thousand increase in Consumer Banking net income in the third quarter of 2016 compared to a $2.7 million decrease in Consumer Banking net income in the third quarter of 2015.


- 15 -


Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
2015
 
 
2016
 
2015
 
Net interest revenue from external sources
 
$
22,098

 
$
21,551

 
$
547

 
$
65,897

 
$
63,993

 
$
1,904

Net interest revenue from internal sources
 
9,263

 
7,216

 
2,047

 
27,492

 
20,874

 
6,618

Total net interest revenue
 
31,361

 
28,767

 
2,594

 
93,389

 
84,867

 
8,522

Net loans charged off
 
1,157

 
1,431

 
(274
)
 
4,177

 
4,467

 
(290
)
Net interest revenue after net loans charged off
 
30,204

 
27,336

 
2,868

 
89,212

 
80,400

 
8,812

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
64,805

 
57,504

 
7,301

 
181,816

 
178,899

 
2,917

Other gains (losses), net
 
(170
)
 
(155
)
 
(15
)
 
(42
)
 
(667
)
 
625

Other operating revenue
 
64,635

 
57,349

 
7,286

 
181,774

 
178,232

 
3,542

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
30,576

 
26,128

 
4,448

 
87,206

 
78,251

 
8,955

Non-personnel expense
 
34,419

 
24,899

 
9,520

 
101,982

 
77,593

 
24,389

Total other operating expense
 
64,995

 
51,027

 
13,968

 
189,188

 
155,844

 
33,344

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
29,844

 
33,658

 
(3,814
)
 
81,798

 
102,788

 
(20,990
)
Gain (loss) on financial instruments, net
 
(1,087
)
 
7,386

 
(8,473
)
 
30,539

 
1,809

 
28,730

Change in fair value of mortgage servicing rights
 
2,327

 
(11,758
)
 
14,085

 
(41,944
)
 
(12,269
)
 
(29,675
)
Gain on repossessed assets, net
 
161

 
331

 
(170
)
 
566

 
888

 
(322
)
Corporate expense allocations
 
16,905

 
18,921

 
(2,016
)
 
49,513

 
56,075

 
(6,562
)
Income before taxes
 
14,340

 
10,696

 
3,644

 
21,446

 
37,141

 
(15,695
)
Federal and state income tax
 
5,578

 
4,161

 
1,417

 
8,342

 
14,448

 
(6,106
)
Net income
 
$
8,762

 
$
6,535

 
$
2,227

 
$
13,104

 
$
22,693

 
$
(9,589
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
8,827,816

 
$
8,843,926

 
$
(16,110
)
 
$
8,763,564

 
$
8,871,423

 
$
(107,859
)
Average loans
 
1,893,431

 
1,884,635

 
8,796

 
1,888,693

 
1,908,632

 
(19,939
)
Average deposits
 
6,660,514

 
6,675,990

 
(15,476
)
 
6,623,724

 
6,674,052

 
(50,328
)
Average invested capital
 
275,358

 
264,540

 
10,818

 
267,123

 
268,427

 
(1,304
)

Net interest revenue from Consumer Banking activities grew by $2.6 million or 9% over the the third quarter of 2015 primarily due to increased rates on deposit balances sold to the Funds Management unit. Both average deposits and average loan balnaces were largely unchanged compared to the the prior year.

Fees and commissions revenue increased $7.3 million or 13% over the third quarter of 2015, primarily due to a $9.4 million increase in mortgage banking revenue. Mortgage loans funded for sale increased $250 million or 16% over the third quarter of 2015. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company increased $166 thousand or 3%. Deposit service charges and fees decreased $502 thousand or 4% compared to the prior year. Other revenue decreased $1.7 million compared to the prior year due to change in earnings related to low income housing tax investments attributed to the Consumer Banking segment.


- 16 -


Operating expenses increased $14.0 million or 27% over the third quarter of 2015. Personnel expenses increased $4.4 million or 17%. Regular compensation expense was up $2.0 million primarily due to annual merit increases and growth in mortgage banking headcount. Incentive compensation expense was up $2.0 million over the prior year. Non-personnel expense increased $9.5 million or 38% over the prior year. Mortgage banking expense was up $7.5 million over the prior year. The effect of actual residential mortgage loan prepayments on the fair value of mortgage servicing rights increased expenses by $4.6 million. The third quarter of 2015 also included a $1.2 million benefit from the reversal of estimated claims based on a favorable resolution of an audit of servicing of certain residential mortgage loans guaranteed by U.S. government agencies. Business promotion, professional fees and services and printing, postage and supplies expense all increased over the prior year.

Corporate expense allocations decreased $2.0 million compared to the third quarter of 2015.

Average consumer deposits were largely unchanged compared to the third quarter of 2015. Average time deposit balances decreased $257 million or 19%, offset by a $163 million or 10% increase in demand deposit balances, a $48 million or 1% increase in interest-bearing transaction accounts and a $30 million or 8% increase in savings account balances.



- 17 -


Wealth Management

Wealth Management contributed $9.1 million to consolidated net income in the third quarter of 2016, up $1.9 million or 26% over the third quarter of 2015. Net interest revenue grew over the prior year. Growth in fiduciary and asset management revenue and brokerage and trading revenue was offset by increased operating expense.

Table 9 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
2015
 
 
2016
 
2015
 
Net interest revenue from external sources
 
$
9,274

 
$
6,674

 
$
2,600

 
$
21,622

 
$
18,271

 
$
3,351

Net interest revenue from internal sources
 
7,401

 
5,834

 
1,567

 
22,258

 
17,400

 
4,858

Total net interest revenue
 
16,675

 
12,508

 
4,167

 
43,880

 
35,671

 
8,209

Net loans charged off (recovered)
 
(89
)
 
(190
)
 
101

 
(479
)
 
(937
)
 
458

Net interest revenue after net loans charged off (recovered)
 
16,764

 
12,698

 
4,066

 
44,359

 
36,608

 
7,751

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
73,331

 
66,313

 
7,018

 
217,519

 
203,450

 
14,069

Other gains, net
 
192

 
228

 
(36
)
 
523

 
650

 
(127
)
Other operating revenue
 
73,523

 
66,541

 
6,982

 
218,042

 
204,100

 
13,942

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
48,969

 
45,316

 
3,653

 
142,235

 
133,923

 
8,312

Non-personnel expense
 
15,457

 
12,040

 
3,417

 
44,289

 
36,190

 
8,099

Other operating expense
 
64,426

 
57,356

 
7,070

 
186,524

 
170,113

 
16,411

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
25,861

 
21,883

 
3,978

 
75,877

 
70,595

 
5,282

Loss on financial instruments, net
 
(42
)
 
(176
)
 
134

 
(42
)
 
(204
)
 
162

Corporate expense allocations
 
10,912

 
9,841

 
1,071

 
31,864

 
30,011

 
1,853

Income before taxes
 
14,907

 
11,866

 
3,041

 
43,971

 
40,380

 
3,591

Federal and state income tax
 
5,799

 
4,616

 
1,183

 
17,105

 
15,708

 
1,397

Net income
 
$
9,108

 
$
7,250

 
$
1,858

 
$
26,866

 
$
24,672

 
$
2,194

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
6,413,735

 
$
5,433,238

 
$
980,497

 
$
5,916,545

 
$
5,401,433

 
$
515,112

Average loans
 
1,139,396

 
1,085,496

 
53,900

 
1,109,410

 
1,062,362

 
47,048

Average deposits
 
4,913,409

 
4,490,082

 
423,327

 
4,710,893

 
4,570,420

 
140,473

Average invested capital
 
244,291

 
226,477

 
17,814

 
238,917

 
225,222

 
13,695

 
 
September 30,
 
Increase
(Decrease)
 
 
2016
 
2015
 
Fiduciary assets in custody for which BOKF has sole or joint discretionary authority
 
$
14,256,866

 
$
14,027,771

 
$
229,095

Fiduciary assets not in custody for which BOKF has sole or joint discretionary authority
 
3,800,445

 
3,325,785

 
474,660

Non-managed trust assets in custody
 
23,164,851

 
20,427,113

 
2,737,738

Total fiduciary assets
 
41,222,162

 
37,780,669

 
3,441,493

Assets held in safekeeping
 
28,101,063

 
23,574,320

 
4,526,743

Brokerage accounts under BOKF administration
 
5,950,506

 
5,646,493

 
304,013

Assets under management or in custody
 
$
75,273,731

 
$
67,001,482

 
$
8,272,249



- 18 -


Net interest revenue for the third quarter of 2016 increased $4.2 million or 33% over the third quarter of 2015, primarily due to an increase in the size of the U.S. agency mortgage-backed portfolio related to a new trading group that began operations during the third quarter of 2016 and increased rates on deposit balances sold to the Funds Management unit. Average deposit balances grew by $423 million or 9% over the third quarter of 2015. Non-interest bearing demand deposits grew by $173 million or 17% and interest-bearing transaction account balances increased $307 million or 11%, partially offset by a $60 million or 8% decrease in time deposit balances. Average loan balances increased $54 million or 5% over the prior year.

Fees and commissions revenue was up $7.0 million or 11% over the third quarter of 2015. Fiduciary and asset management revenue increased $3.3 million or 11% over the prior year primarily due to decreased fee waivers, the Company's acquisition of Weaver and Tidwell Financial Advisors LTD d/b/a Weaver Wealth Management, a registered investment advisor, in the first quarter of 2016 and changes in market values. Brokerage and trading revenue grew by $3.2 million or 10%. The addition of a new group trading in U.S. government agency residential mortgage-backed securities and related derivatives added $1.9 million of trading revenue during the third quarter and $426 million to the trading securities portfolio at September 30. Growth in retail brokerage revenue was offset by lower investment banking revenue compared to the third quarter of 2015.

Other operating revenue includes fees earned from state and municipal bond and corporate debt underwriting and financial advisory services, primarily in the Oklahoma and Texas markets. In the third quarter of 2016, the Wealth Management division participated in 107 state and municipal bond underwritings that totaled $5.2 billion. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $708 million of these underwritings. The Wealth Management division also participated in 11 corporate debt underwritings that totaled $4 billion. Our interest in these underwritings was $93 million. In the third quarter of 2015, the Wealth Management division participated in 132 state and municipal bond underwritings that totaled approximately $3.2 billion. Our interest in these underwritings totaled approximately $997 million. The Wealth Management division also participated in three corporate debt underwritings that totaled $1.7 billion. Our interest in these underwritings was $27 million.

Operating expense increased $7.1 million or 12% over the third quarter of 2015. Personnel expenses increased $3.7 million, primarily due to incentive compensation expense and standard merit increases to regular compensation. Non-personnel expense increased $3.4 million, primarily due to a $1.8 million increase in professional fees and services expense.

Corporate expense allocations increased $1.1 million or 11% over the prior year.
Financial Condition
Securities

We maintain a securities portfolio to enhance profitability, manage interest rate risk, provide liquidity and comply with regulatory requirements. Securities are classified as trading, held for investment, or available for sale. See Note 2 to the consolidated financial statements for the composition of the securities portfolio as of September 30, 2016, December 31, 2015 and September 30, 2015.

At September 30, 2016, the carrying value of investment (held-to-maturity) securities was $546 million and the fair value was $580 million. Investment securities consist primarily of long-term, fixed rate Oklahoma and Texas municipal bonds, taxable Texas school construction bonds and residential mortgage-backed securities issued by U.S. government agencies. The investment security portfolio is diversified among issuers. The largest obligation of any single issuer is $30 million. Substantially all of these bonds are general obligations of the issuers. Approximately $104 million of the $200 million portfolio of Texas school construction bonds are also guaranteed by the Texas Permanent School Fund Guarantee Program supervised by the State Board of Education for the State of Texas.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $8.7 billion at September 30, 2016, an increase of $67 million over June 30, 2016. Available for sale securities consist primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans. At September 30, 2016, residential mortgage-backed securities represented 65 percent of total available for sale securities.


- 19 -


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, 2016 is 2.8 years. Management estimates the duration extends to 3.3 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.5 years assuming a 50 basis point decline in the current low rate environment.

Residential mortgage-backed securities also 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. At September 30, 2016, approximately $5.6 billion of the amortized cost of the Company’s residential mortgage-backed securities were issued by U.S. government agencies. The fair value of these residential mortgage-backed securities totaled $5.7 billion at September 30, 2016.

We also hold amortized cost of $108 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions, a decrease of $6.9 million from June 30, 2016. The decrease was due to cash payments received during the quarter. The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $122 million at September 30, 2016.

The amortized cost of our portfolio of privately issued residential mortgage-backed securities included $61 million of Jumbo-A residential mortgage loans and $47 million of Alt-A residential mortgage loans. Jumbo-A residential mortgage loans generally meet government underwriting standards, but have loan balances that exceed agency maximums. Alt-A mortgage loans generally do not have sufficient documentation to meet government agency underwriting standards. Approximately 90 percent of our Alt-A mortgage-backed securities represent pools of fixed rate residential mortgage loans. None of the adjustable rate mortgages are payment option adjustable rate mortgages (“ARMs”). Approximately 29 percent of our Jumbo-A residential mortgage-backed securities represent pools of fixed rate residential mortgage loans and none of the adjustable rate mortgages are payment option ARMs.

The aggregate gross amount of unrealized losses on available for sale securities totaled $6.2 million at September 30, 2016, compared to $3.0 million at June 30, 2016. On a quarterly basis, we perform separate evaluations on debt and equity 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 2016.

Certain U.S. Treasury securities and residential mortgage-backed securities issued by U.S. government agencies included in fair value option securities on the Consolidated Balance Sheets are held as an economic hedge of changes in the fair value of our mortgage servicing rights. We have elected to carry these securities at fair value with changes in fair value recognized in current period income. These securities are held with the intent that gains or losses will offset changes in the fair value of mortgage servicing rights and related derivative contracts.

BOK Financial is required to hold stock as members of the Federal Reserve system and the Federal Home Loan Banks ("FHLB"). These restricted equity securities are carried at cost as these securities do not have a readily determined fair value because the ownership of these shares is restricted and they lack a market. Federal Reserve Bank stock totaled $36 million and holdings of FHLB stock totaled $297 million at September 30, 2016. Holdings of FHLB stock increased $14 million over June 30, 2016. We are required to hold stock in the FHLB in proportion to our borrowings with the FHLB.

- 20 -


Bank-Owned Life Insurance

We have approximately $310 million of bank-owned life insurance at September 30, 2016. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $283 million is held in separate accounts. Our separate account holdings are invested in diversified portfolios of investment-grade fixed income securities and cash equivalents, including U.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio’s investment guidelines. The cash surrender value of certain life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments. At September 30, 2016, the fair value of investments held in separate accounts was approximately $297 million. As the underlying fair value of the investments held in a separate account at September 30, 2016 exceeded the net book value of the investments, no cash surrender value was supported by the stable value wrap. The stable value wrap is provided by a domestic financial institution. The remaining cash surrender value of $28 million primarily represents the cash surrender value of policies held in general accounts and other amounts due from various insurance companies.
Loans

The aggregate loan portfolio before allowance for loan losses totaled $16 billion at September 30, 2016, an increase of $58 million over June 30, 2016. The outstanding balance of commercial loans decreased by $236 million compared to June 30, 2016. Commercial real estate loan balances were up $212 million. Residential mortgage loans decreased $8.1 million compared to June 30, 2016 and personal loans increased $91 million over June 30, 2016. 

Table 10 -- Loans
(In thousands)
 
 
Sept. 30, 2016
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,520,804

 
$
2,818,656

 
$
3,029,420

 
$
3,097,328

 
$
2,838,167

Services
 
2,936,599

 
2,830,864

 
2,728,891

 
2,784,276

 
2,706,624

Healthcare
 
2,085,046

 
2,051,146

 
1,995,425

 
1,883,380

 
1,741,680

Wholesale/retail
 
1,602,030

 
1,532,957

 
1,451,846

 
1,422,064

 
1,461,936

Manufacturing
 
499,486

 
595,403

 
600,645

 
556,729

 
555,677

Other commercial and industrial
 
476,198

 
527,411

 
482,198

 
508,754

 
493,338

Total commercial
 
10,120,163

 
10,356,437

 
10,288,425

 
10,252,531

 
9,797,422

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Retail
 
801,377

 
795,419

 
810,522

 
796,499

 
769,449

Multifamily
 
873,773

 
787,200

 
733,689

 
751,085

 
758,658

Office
 
752,705

 
769,112

 
695,552

 
637,707

 
626,151

Industrial
 
838,021

 
645,586

 
564,467

 
563,169

 
563,871

Residential construction and land development
 
159,946

 
157,576

 
171,949

 
160,426

 
153,510

Other commercial real estate
 
367,776

 
427,073

 
394,328

 
350,147

 
363,428

Total commercial real estate
 
3,793,598

 
3,581,966

 
3,370,507

 
3,259,033

 
3,235,067

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
969,558

 
969,007

 
948,405

 
945,336

 
937,664

Permanent mortgages guaranteed by U.S. government agencies
 
190,309

 
192,732

 
197,350

 
196,937

 
192,712

Home equity
 
712,926

 
719,184

 
723,554

 
734,620

 
738,619

Total residential mortgage
 
1,872,793

 
1,880,923

 
1,869,309

 
1,876,893

 
1,868,995

 
 
 
 
 
 
 
 
 
 
 
Personal
 
678,232

 
587,423

 
494,325

 
552,697

 
465,957

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,464,786

 
$
16,406,749

 
$
16,022,566

 
$
15,941,154

 
$
15,367,441



- 21 -


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 on-going 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 on-going 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 $10.1 billion or 61 percent of the loan portfolio at September 30, 2016, a decrease of $236 million over June 30, 2016. Energy loan balances decreased $298 million, manufacturing sector loans decreased $96 million and industrial loans decreased $51 million. Service sector loans grew by $106 million, wholesale/retail sector loans increased by $69 million and healthcare sector loans increased by $34 million.

Table 11 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. 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 23 percent concentrated in the Oklahoma market. At September 30, 2016, the Other category is primarily composed of California - $295 million or 3 percent of the commercial loan portfolio, Louisiana - $175 million or 2 percent of the commercial loan portfolio, Florida - $117 million or 1% of the commercial loan portfolio, Tennessee - $106 million or 1% of the commercial loan portfolio and Ohio - $102 million or 1% of the commercial loan portfolio. All other states individually represent one percent or less of total commercial loans.

Table 11 -- Commercial Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Energy
 
$
535,942

 
$
1,203,558

 
$
16,511

 
$
5,273

 
$
279,101

 
$
10,150

 
$
91,841

 
$
378,428

 
$
2,520,804

Services
 
756,403

 
913,037

 
225,602

 
4,343

 
265,245

 
196,023

 
177,379

 
398,567

 
2,936,599

Healthcare
 
285,073

 
383,657

 
129,278

 
97,501

 
130,387

 
121,137

 
217,040

 
720,973

 
2,085,046

Wholesale/retail
 
487,050

 
566,871

 
40,167

 
47,045

 
65,280

 
66,227

 
40,639

 
288,751

 
1,602,030

Manufacturing
 
131,223

 
150,064

 
495

 
5,381

 
48,805

 
62,175

 
45,310

 
56,033

 
499,486

Other commercial and industrial
 
88,713

 
132,301

 
3,974

 
71,882

 
13,627

 
25,684

 
62,832

 
77,185

 
476,198

Total commercial loans
 
$
2,284,404

 
$
3,349,488

 
$
416,027

 
$
231,425

 
$
802,445

 
$
481,396

 
$
635,041

 
$
1,919,937

 
$
10,120,163

 
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.


- 22 -


Outstanding energy loans totaled $2.5 billion or 15 percent of total loans at September 30, 2016. Unfunded energy loan commitments increased by $326 million to $2.3 billion at September 30, 2016. Approximately $2.0 billion of energy loans were to oil and gas producers, down $235 million compared to June 30, 2016. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest risk form of energy lending. The Company has largely avoided higher-risk energy lending areas including second-lien financing, mezzanine debt and subordinated debt. In addition, the Company has no direct exposure to energy company equity or to borrowers with deep-water offshore exposure. 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 $253 million at September 30, 2016, an increase of $6.8 million over June 30, 2016. Loans to borrowers that provide services to the energy industry decreased $64 million from the prior quarter to $198 million at September 30, 2016. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $67 million, a $6.0 million decrease compared to the prior quarter.

The services sector of the loan portfolio totaled $2.9 billion or 18 percent of total loans and consists of a large number of loans to a variety of businesses, including governmental, finance and insurance, not-for-profit, educational services and loans to entities providing services for real estate and construction. Service sector loans increased by $106 million compared to June 30, 2016. 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 consists primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Healthcare also includes loans to hospitals and other medical service providers.

We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. At September 30, 2016, 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 17 percent of our shared national credits, based on dollars committed. We hold shared credits to the same standard of analysis and perform the same level of review as internally originated credits. Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. In addition to management’s quarterly assessment of credit risk, banking regulators annually review a sample of shared national credits for proper risk grading.

Commercial Real Estate

Commercial real estate represents loans for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes generally within our geographical footprint, with larger concentrations in Texas and Oklahoma which represent 30 percent and 12 percent of the total commercial real estate portfolio at September 30, 2016, 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 23 percent of the loan portfolio at September 30, 2016. The outstanding balance of commercial real estate loans increased $212 million during the third quarter of 2016. Loans secured by industrial facilities grew by $192 million and loans secured by multifamily residential properties increased $87 million. This growth was partially offset by a $59 million decrease in other commercial real estate loan balances. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 18 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 12. The Other category is primarily composed of California and Utah which represent $189 million or 5% and $128 million or 3%, respectively. All other states individually represent less than 3% of the total commercial real estate portfolio.


- 23 -


Table 12 -- Commercial Real Estate Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Retail
 
$
89,739

 
$
303,207

 
$
115,024

 
$
6,617

 
$
44,206

 
$
34,007

 
$
16,825

 
$
191,752

 
$
801,377

Multifamily
 
85,547

 
315,561

 
12,190

 
26,040

 
62,895

 
74,790

 
92,571

 
204,179

 
873,773

Office
 
115,226

 
196,448

 
51,972

 
1,638

 
62,727

 
54,491

 
68,971

 
201,232

 
752,705

Industrial
 
83,956

 
226,431

 
25,298

 
70

 
23,994

 
26,909

 
67,949

 
383,414

 
838,021

Residential construction and land development
 
16,747

 
28,750

 
19,358

 
6,214

 
32,736

 
5,941

 
5,043

 
45,157

 
159,946

Other real estate
 
71,616

 
63,497

 
15,977

 
6,118

 
28,571

 
42,345

 
8,679

 
130,973

 
367,776

Total commercial real estate loans
 
$
462,831

 
$
1,133,894

 
$
239,819

 
$
46,697

 
$
255,129

 
$
238,483

 
$
260,038

 
$
1,156,707

 
$
3,793,598


Residential Mortgage and Personal

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

Residential mortgage loans totaled $1.9 billion, largely unchanged compared to June 30, 2016. 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 97 percent 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, 2016, $190 million of permanent residential mortgage loans are guaranteed by U.S. government agencies. We have minimal credit exposure on loans guaranteed by the agencies. This amount includes residential mortgage loans previously sold into GNMA mortgage pools that the Company may repurchase when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet. Permanent residential mortgage loans guaranteed by U.S. government agencies decreased $2.4 million compared to June 30, 2016.


- 24 -


Home equity loans totaled $713 million at September 30, 2016, a decrease of $6.3 million compared to June 30, 2016. 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 40 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 5 year revolving period followed by a 15 year term of amortizing repayment. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term subject to an update of certain credit information. A summary of our home equity loan portfolio at September 30, 2016 by lien position and amortizing status follows in Table 13.

Table 13 -- Home Equity Loans
(In thousands)
 
 
Revolving
 
Amortizing
 
Total
First lien
 
$
45,605

 
$
422,576

 
$
468,181

Junior lien
 
102,044

 
142,701

 
244,745

Total home equity
 
$
147,649

 
$
565,277

 
$
712,926


The distribution of residential mortgage and personal loans at September 30, 2016 is as follows in Table 14. Residential mortgage loans are distributed by collateral location. Personal loans are generally distributed by borrower location.

Table 14 -- 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
 
$
186,695

 
$
402,807

 
$
39,408

 
$
14,896

 
$
155,399

 
$
95,382

 
$
46,250

 
$
28,721

 
$
969,558

Permanent mortgages  guaranteed by U.S. government agencies
 
57,007

 
23,236

 
60,328

 
5,975

 
7,220

 
1,749

 
12,598

 
22,196

 
190,309

Home equity
 
413,581

 
135,532

 
105,911

 
5,507

 
35,197

 
8,387

 
8,437

 
374

 
712,926

Total residential mortgage
 
$
657,283

 
$
561,575

 
$
205,647

 
$
26,378

 
$
197,816

 
$
105,518

 
$
67,285

 
$
51,291

 
$
1,872,793

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
$
260,840

 
$
274,693

 
$
11,237

 
$
6,758

 
$
44,070

 
$
29,607

 
$
39,771

 
$
11,256

 
$
678,232



- 25 -


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 Bank are centrally managed by the Bank of Oklahoma.

Table 15 -- Loans Managed by Primary Geographical Market
(In thousands)
 
 
Sept. 30, 2016
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
3,545,924

 
$
3,698,215

 
$
3,656,034

 
$
3,782,687

 
$
3,514,391

Commercial real estate
 
795,806

 
781,458

 
747,689

 
739,829

 
677,372

Residential mortgage
 
1,401,166

 
1,415,766

 
1,411,409

 
1,409,114

 
1,405,235

Personal
 
271,420

 
246,229

 
204,158

 
255,387

 
185,463

Total Bank of Oklahoma
 
6,014,316

 
6,141,668

 
6,019,290

 
6,187,017

 
5,782,461

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
3,903,218

 
3,901,632

 
3,936,809

 
3,908,425

 
3,752,193

Commercial real estate
 
1,400,709

 
1,311,408

 
1,211,978

 
1,204,202

 
1,257,741

Residential mortgage
 
229,345

 
222,548

 
217,539

 
219,126

 
222,395

Personal
 
278,167

 
233,304

 
210,456

 
203,496

 
194,051

Total Bank of Texas
 
5,811,439

 
5,668,892

 
5,576,782

 
5,535,249

 
5,426,380

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 

 
 

 
 

 
 

 
 

Commercial
 
398,147

 
398,427

 
402,082

 
375,839

 
368,027

Commercial real estate
 
299,785

 
322,956

 
323,059

 
313,422

 
312,953

Residential mortgage
 
110,478

 
114,226

 
117,655

 
120,507

 
121,232

Personal
 
11,333

 
10,569

 
10,823

 
11,557

 
10,477

Total Bank of Albuquerque
 
819,743

 
846,178

 
853,619

 
821,325

 
812,689

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
83,544

 
81,227

 
79,808

 
92,359

 
76,044

Commercial real estate
 
72,649

 
69,235

 
66,674

 
69,320

 
82,225

Residential mortgage
 
6,936

 
6,874

 
7,212

 
8,169

 
8,063

Personal
 
6,757

 
7,025

 
918

 
819

 
4,921

Total Bank of Arkansas
 
169,886

 
164,361

 
154,612

 
170,667

 
171,253

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 

 
 

 
 

 
 

 
 

Commercial
 
1,013,314

 
1,076,620

 
1,030,348

 
987,076

 
1,029,694

Commercial real estate
 
254,078

 
237,569

 
219,078

 
223,946

 
229,835

Residential mortgage
 
59,838

 
59,425

 
52,961

 
53,782

 
50,138

Personal
 
42,901

 
35,064

 
24,497

 
23,384

 
30,683

Total Colorado State Bank & Trust
 
1,370,131

 
1,408,678

 
1,326,884

 
1,288,188

 
1,340,350

 
 
 
 
 
 
 
 
 
 
 
Bank of Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
680,447

 
670,814

 
656,527

 
606,733

 
608,235

Commercial real estate
 
726,542

 
639,112

 
605,383

 
507,523

 
482,918

Residential mortgage
 
39,206

 
38,998

 
40,338

 
44,047

 
41,722

Personal
 
31,205

 
24,248

 
18,372

 
31,060

 
17,609

Total Bank of Arizona
 
1,477,400

 
1,373,172

 
1,320,620

 
1,189,363

 
1,150,484

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 

 
 

 
 

 
 

 
 

Commercial
 
495,569

 
529,502

 
526,817

 
499,412

 
448,838

Commercial real estate
 
244,029

 
220,228

 
196,646

 
200,791

 
192,023

Residential mortgage
 
25,824

 
23,086

 
22,195

 
22,148

 
20,210

Personal
 
36,449

 
30,984

 
25,101

 
26,994

 
22,753

Total Bank of Kansas City
 
801,871

 
803,800

 
770,759

 
749,345

 
683,824

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
16,464,786

 
$
16,406,749

 
$
16,022,566

 
$
15,941,154

 
$
15,367,441


- 26 -


Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business. These arrangements included unfunded loan commitments which totaled $8.7 billion and standby letters of credit which totaled $500 million at September 30, 2016. 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. Approximately $1.2 million of the outstanding standby letters of credit were issued on behalf of customers whose loans are nonperforming at September 30, 2016.

Table 16 – Off-Balance Sheet Credit Commitments
(In thousands)
 
 
Sept. 30, 2016
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
Loan commitments
 
$
8,697,322

 
$
8,508,606

 
$
8,567,017

 
$
8,455,037

 
$
8,325,540

Standby letters of credit
 
499,990

 
491,002

 
509,902

 
507,988

 
479,638

Mortgage loans sold with recourse
 
139,306

 
145,403

 
152,843

 
155,489

 
161,897


As more fully described in Note 6 to the Consolidated Financial Statements, 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 $90 million to borrowers in Oklahoma, $15 million to borrowers in Arkansas and $12 million to borrowers in New Mexico.

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 as described further in Note 6 to the Consolidated Financial Statements. For the period from 2010 through the third quarter of 2016 combined, approximately 21 percent of repurchase requests have currently resulted in actual repurchases or indemnification by the Company. The accrual for credit losses related to potential loan repurchases under representations and warranties totaled $3.2 million at September 30, 2016 and $3.3 million at June 30, 2016.
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 options 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.


- 27 -


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, 2016, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $658 million compared to $877 million at June 30, 2016. At September 30, 2016, the fair value of our derivative contracts included $536 million for foreign exchange contracts, $52 million related to to-be-announced residential mortgage-backed securities, $49 million for interest rate swaps and $13 million for energy contracts. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $654 million at September 30, 2016 and $872 million at June 30, 2016.

At September 30, 2016, total derivative assets were reduced by $10 million of cash collateral received from counterparties and total derivative liabilities were reduced by $83 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, 2016 follows in Table 17.

Table 17 -- Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
355,348

Banks and other financial institutions
 
289,162

Exchanges and clearing organizations
 
3,233

Fair value of customer risk management program asset derivative contracts, net
 
$
647,743

 
At September 30, 2016, our largest derivative exposure was to a customer for an interest rate derivative contract which totaled $6.5 million. At September 30, 2016, our aggregate gross exposure to internationally active domestic financial institutions was approximately $54 million comprised of $49 million of cash and securities positions and $5.5 million of gross derivative positions. We have no direct exposure to European sovereign debt and our aggregate gross exposure to European financial institutions totaled $9.3 million at September 30, 2016.

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 $26.57 per barrel of oil would decrease the fair value of derivative assets by $8.8 million. An increase in prices equivalent to $74.07 per barrel of oil would increase the fair value of derivative assets by $132 million as current prices move further away from the fixed prices embedded in our existing contracts. Liquidity requirements of this program are also affected by our credit rating. A decrease in our credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $18 million. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of September 30, 2016, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.

- 28 -


Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. At September 30, 2016, the combined allowance for loan losses and off-balance sheet credit losses totaled $256 million or 1.56 percent of outstanding loans and 116 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $245 million and the accrual for off-balance sheet credit losses was $11 million. At June 30, 2016, the combined allowance for credit losses was $252 million or 1.54 percent of outstanding loans and 111 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $243 million and the accrual for off-balance sheet credit losses was $9.0 million. The portion of the combined allowance for credit losses attributed to the energy portfolio totaled 3.67 percent of outstanding energy loans at September 30, 2016, an increase from 3.58 percent of outstanding energy loans at June 30, 2016.

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. After evaluating all credit factors, we recorded a $10.0 million provision for credit losses during the third quarter of 2016, compared to $20.0 million in the second quarter of 2016 and $7.5 million in the third quarter of 2015. The lower provision for credit losses compared to previous quarter reflects continued improvement in credit metric trends over the previous quarter largely driven by energy price stability and decreased rates of newly identified nonaccruing and potential problem loans.


- 29 -


Table 18 -- Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
Sept. 30, 2016
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
243,259

 
$
233,156

 
$
225,524

 
$
204,116

 
$
201,087

Loans charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
(6,266
)
 
(7,355
)
 
(22,126
)
 
(2,182
)
 
(3,497
)
Commercial real estate
 
—

 
—

 
—

 
(900
)
 
—

Residential mortgage
 
(285
)
 
(345
)
 
(474
)
 
(421
)
 
(446
)
Personal
 
(1,550
)
 
(1,145
)
 
(1,391
)
 
(1,348
)
 
(1,331
)
Total
 
(8,101
)
 
(8,845
)
 
(23,991
)
 
(4,851
)
 
(5,274
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
177

 
223

 
488

 
928

 
759

Commercial real estate
 
521

 
282

 
85

 
120

 
1,865

Residential mortgage
 
650

 
200

 
163

 
137

 
205

Personal
 
690

 
681

 
783

 
685

 
692

Total
 
2,038

 
1,386

 
1,519

 
1,870

 
3,521

Net loans recovered (charged off)
 
(6,063
)
 
(7,459
)
 
(22,472
)
 
(2,981
)
 
(1,753
)
Provision for loan losses
 
7,907

 
17,562

 
30,104

 
24,389

 
4,782

Ending balance
 
$
245,103

 
$
243,259

 
$
233,156

 
$
225,524

 
$
204,116

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 
 
 

Beginning balance
 
$
9,045

 
$
6,607

 
$
1,711

 
$
3,600

 
$
882

Provision for off-balance sheet credit losses
 
2,093

 
2,438

 
4,896

 
(1,889
)
 
2,718

Ending balance
 
$
11,138

 
$
9,045

 
$
6,607

 
$
1,711

 
$
3,600

Total combined provision for credit losses
 
$
10,000

 
$
20,000

 
$
35,000

 
$
22,500

 
$
7,500

Allowance for loan losses to loans outstanding at period-end
 
1.49
%
 
1.48
%
 
1.46
%
 
1.41
%
 
1.33
%
Net charge-offs (annualized) to average loans
 
0.15
%
 
0.18
%
 
0.56
%
 
0.08
%
 
0.05
%
Total provision for credit losses (annualized) to average loans
 
0.24
%
 
0.49
%
 
0.88
%
 
0.58
%
 
0.20
%
Recoveries to gross charge-offs
 
25.16
%
 
15.67
%
 
6.33
%
 
38.55
%
 
66.76
%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.12
%
 
0.10
%
 
0.07
%
 
0.02
%
 
0.04
%
Combined allowance for credit losses to loans outstanding at period-end
 
1.56
%
 
1.54
%
 
1.50
%
 
1.43
%
 
1.35
%
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 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, 2016, impaired loans totaled $412 million, including $43 million with specific allowances of $6.6 million and $369 million with no specific allowances. At June 30, 2016, impaired loans totaled $420 million, including $32 million of impaired loans with specific allowances of $4.3 million and $388 million with no specific allowances.

- 30 -


Risk grading guidelines, recently in the Office of the Comptroller of the Currency ("OCC") Oil and Gas Lending Handbook, heavily weight ability to repay total borrower debt, regardless of collateral position. This change in grading methodology has increased loans especially mentioned, potential problem loans and nonaccrual loans. Because substantially all of our energy portfolio is supported by senior lien positions that, in general, have substantially lower loss exposure, the historical relationship between loan classification and loss exposure may be more difficult to correlate.
The most recently completed energy portfolio redetermination supported that $100 million of impaired energy loans required no allowance for credit losses based on the adequacy of collateral. In addition, $85 million of impaired energy loans are current on all payments due.

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 $210 million at September 30, 2016, a decrease of $1.9 million compared to June 30, 2016, primarily due to a $5.9 million decrease in the general allowance attributed to the commercial loan segment, partially offset by a $3.1 million increase in the general allowance attributed to the commercial real estate 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 $28 million at September 30, 2016, up from $27 million at June 30, 2016. The nonspecific allowance includes consideration of the indirect impact that low energy prices might have on the broader economies within our geographical footprint that are highly dependent on the energy industry.

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 $478 million at September 30, 2016, primarily composed of $361 million of energy loans, $31 million of service sector loans, $27 million of wholesale/retail sector loans, $20 million of manufacturing sector loans, $19 million of healthcare sector loans and $10 million of other commercial and industrial loans. Potential problem loans totaled $501 million at June 30, 2016 including $421 million of potential problem energy loans.

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. Energy loans classified as other loans especially mentioned totaled $147 million or 6 percent of outstanding energy loans at September 30, 2016 and $198 million or 7 percent of outstanding energy loans at June 30, 2016.

We updated our energy loan portfolio stress test at quarter end to estimate how the energy portfolio may respond in a prolonged low-price environment. Stress test assumptions include a starting price of $2.00 per million BTUs for natural gas and $37.50 per barrel of oil, gradually escalating over seven years to a maximum of $3.00 and $55.00, respectively. In this scenario, the energy portfolio exhibits greater stress than we have experienced to date and losses would be expected to exceed our 15 year historical loss rate on energy loans of 7 basis points. The results of the stress test are factored into our expectation that the loan loss provision could range from $70 million to $85 million for 2016. This expectation is based upon current observed conditions.

- 31 -


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 loans charged off of $6.1 million in the third quarter of 2016, compared to $7.5 million in the second quarter of 2016 and $1.8 million in the third quarter of 2015. The ratio of net loans charged off to average loans on an annualized basis was 0.15 percent for the third quarter of 2016, compared with 0.18 percent for the second quarter of 2016 and 0.05 percent for the third quarter of 2015. 

Net commercial loans charged off totaled $6.1 million in the third quarter of 2016, compared to net loans charged off of $7.1 million in the second quarter of 2016. Charge-offs in both the third and second quarter of 2016 resulted primarily from energy loans. Net commercial real estate loan recoveries were $521 thousand in the third quarter, compared to net recoveries of $282 thousand in the second quarter. Residential mortgage net recoveries were $365 thousand and personal loan net charge-offs were $860 thousand for the third quarter. Personal loan net charge-offs include deposit account overdraft losses. 


- 32 -


Nonperforming Assets

Table 19 -- Nonperforming Assets
(In thousands)
 
 
Sept. 30, 2016
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
176,464

 
$
181,989

 
$
174,652

 
$
76,424

 
$
33,798

Commercial real estate
 
7,350

 
7,780

 
9,270

 
9,001

 
10,956

Residential mortgage
 
52,452

 
57,061

 
57,577

 
61,240

 
44,099

Personal
 
686

 
354

 
331

 
463

 
494

Total nonaccruing loans
 
236,952

 
247,184

 
241,830

 
147,128

 
89,347

Accruing renegotiated loans guaranteed by U.S. government agencies
 
80,306

 
78,806

 
77,597

 
74,049

 
81,598

Real estate and other repossessed assets
 
31,941

 
24,054

 
29,896

 
30,731

 
33,116

Total nonperforming assets
 
$
349,199

 
$
350,044

 
$
349,323

 
$
251,908

 
$
204,061

Total nonperforming assets excluding those guaranteed by U.S. government agencies
 
$
253,461

 
$
251,497

 
$
252,176

 
$
155,959

 
$
118,578

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio segment and class:
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
142,966

 
$
168,145

 
$
159,553

 
$
61,189

 
$
17,880

Services
 
8,477

 
9,388

 
9,512

 
10,290

 
10,692

Wholesale / retail
 
2,453

 
2,772

 
3,685

 
2,919

 
3,058

Manufacturing
 
274

 
293

 
312

 
331

 
352

Healthcare
 
855

 
875

 
1,023

 
1,072

 
1,218

Other commercial and industrial
 
21,439

 
516

 
567

 
623

 
598

Total commercial
 
176,464

 
181,989

 
174,652

 
76,424

 
33,798

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 

 
 

Residential construction and land development
 
3,739

 
4,261

 
4,789

 
4,409

 
4,748

Retail
 
1,249

 
1,265

 
1,302

 
1,319

 
1,648

Office
 
882

 
606

 
629

 
651

 
684

Multifamily
 
51

 
65

 
250

 
274

 
185

Industrial
 
76

 
76

 
76

 
76

 
76

Other commercial real estate
 
1,353

 
1,507

 
2,224

 
2,272

 
3,615

Total commercial real estate
 
7,350

 
7,780

 
9,270

 
9,001

 
10,956

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
25,956

 
27,228

 
27,497

 
28,984

 
30,660

Permanent mortgage guaranteed by U.S. government agencies
 
15,432

 
19,741

 
19,550

 
21,900

 
3,885

Home equity
 
11,064

 
10,092

 
10,530

 
10,356

 
9,554

Total residential mortgage
 
52,452

 
57,061

 
57,577

 
61,240

 
44,099

Personal
 
686

 
354

 
331

 
463

 
494

Total nonaccruing loans
 
$
236,952

 
$
247,184

 
$
241,830

 
$
147,128

 
$
89,347

 
 
 
 
 
 
 
 
 
 
 

- 33 -


 
 
Sept. 30, 2016
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
Nonaccruing loans as % of outstanding balance for class:
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
5.67
%
 
5.97
%
 
5.27
%
 
1.98
%
 
0.63
%
Services
 
0.29
%
 
0.33
%
 
0.35
%
 
0.37
%
 
0.40
%
Wholesale / retail
 
0.15
%
 
0.18
%
 
0.25
%
 
0.21
%
 
0.21
%
Manufacturing
 
0.05
%
 
0.05
%
 
0.05
%
 
0.06
%
 
0.06
%
Healthcare
 
0.04
%
 
0.04
%
 
0.05
%
 
0.06
%
 
0.07
%
Other commercial and industrial
 
4.50
%
 
0.10
%
 
0.12
%
 
0.12
%
 
0.12
%
Total commercial
 
1.74
%
 
1.76
%
 
1.70
%
 
0.75
%
 
0.34
%
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
 
2.34
%
 
2.70
%
 
2.79
%
 
2.75
%
 
3.09
%
Retail
 
0.16
%
 
0.16
%
 
0.16
%
 
0.17
%
 
0.21
%
Office
 
0.12
%
 
0.08
%
 
0.09
%
 
0.10
%
 
0.11
%
Multifamily
 
0.01
%
 
0.01
%
 
0.03
%
 
0.04
%
 
0.02
%
Industrial
 
0.01
%
 
0.01
%
 
0.01
%
 
0.01
%
 
0.01
%
Other commercial real estate
 
0.37
%
 
0.35
%
 
0.56
%
 
0.65
%
 
0.99
%
Total commercial real estate
 
0.19
%
 
0.22
%
 
0.28
%
 
0.28
%
 
0.34
%
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
2.68
%
 
2.81
%
 
2.90
%
 
3.07
%
 
3.27
%
Permanent mortgage guaranteed by U.S. government agencies
 
8.11
%
 
10.24
%
 
9.91
%
 
11.12
%
 
2.02
%
Home equity
 
1.55
%
 
1.40
%
 
1.46
%
 
1.41
%
 
1.29
%
Total residential mortgage
 
2.80
%
 
3.03
%
 
3.08
%
 
3.26
%
 
2.36
%
Personal
 
0.10
%
 
0.06
%
 
0.07
%
 
0.08
%
 
0.11
%
Total nonaccruing loans
 
1.44
%
 
1.51
%
 
1.51
%
 
0.92
%
 
0.58
%
 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 

 
 

Allowance for loan losses to nonaccruing loans1
 
110.65
%
 
106.95
%
 
104.89
%
 
180.09
%
 
238.84
%
Accruing loans 90 days or more past due1
 
$
3,839

 
$
2,899

 
$
8,019

 
$
1,207

 
$
101

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

Nonperforming assets totaled $349 million or 2.12 percent of outstanding loans and repossessed assets at September 30, 2016. Nonaccruing loans totaled $237 million, accruing renegotiated residential mortgage loans totaled $80 million and real estate and other repossessed assets totaled $32 million. All accruing renegotiated residential mortgage loans and $15 million of nonaccruing loans are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets increased $2.0 million during the third quarter. The Company generally retains nonperforming assets to maximize potential recovery which may cause future nonperforming assets to decrease more slowly.


- 34 -


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 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. All 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.

At September 30, 2016, renegotiated loans 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, 2016 follows in Table 20.

Table 20 -- Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
September 30, 2016
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, June 30, 2016
 
$
247,184

 
$
78,806

 
$
24,054

 
$
350,044

Additions
 
28,909

 
12,176

 
—

 
41,085

Payments
 
(10,841
)
 
(409
)
 
—

 
(11,250
)
Charge-offs
 
(8,101
)
 
—

 
—

 
(8,101
)
Net gains and write-downs
 
—

 
—

 
1,607

 
1,607

Foreclosure of nonperforming loans
 
(15,208
)
 
—

 
15,208

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(5,551
)
 
(2,446
)
 
—

 
(7,997
)
Proceeds from sales
 
—

 
(7,392
)
 
(8,892
)
 
(16,284
)
Net transfers to nonaccruing loans
 
560

 
(560
)
 
—

 
—

Other, net
 
—

 
131

 
(36
)
 
95

Balance, Sept. 30, 2016
 
$
236,952

 
$
80,306

 
$
31,941

 
$
349,199


- 35 -


 
 
Nine Months Ended
 
 
September 30, 2016
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, Dec. 31, 2015
 
$
147,128

 
$
74,049

 
$
30,731

 
$
251,908

Additions
 
240,918

 
35,685

 
—

 
276,603

Payments
 
(77,561
)
 
(1,423
)
 
—

 
(78,984
)
Charge-offs
 
(40,937
)
 
—

 
—

 
(40,937
)
Net gains and write-downs
 
—

 
—

 
1,805

 
1,805

Foreclosure of nonperforming loans
 
(20,580
)
 
—

 
20,580

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(13,912
)
 
(6,870
)
 
—

 
(20,782
)
Proceeds from sales
 
—

 
(19,498
)
 
(21,117
)
 
(40,615
)
Net transfers to nonaccruing loans
 
1,941

 
(1,941
)
 
—

 
—

Return to accrual status
 
(45
)
 
—

 
—

 
(45
)
Other, net
 
—

 
304

 
(58
)
 
246

Balance, Sept. 30, 2016
 
$
236,952

 
$
80,306

 
$
31,941

 
$
349,199


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 minimal. These properties will be conveyed to the agencies once applicable criteria have been met. 
Commercial

Nonaccruing commercial loans totaled $176 million or 1.74 percent of total commercial loans at September 30, 2016 and $182 million or 1.76 percent of commercial loans at June 30, 2016. There were $22 million in newly identified nonaccruing commercial loans during the quarter, offset by $7 million in payments and $6.3 million of charge-offs. Newly identified nonaccruing commercial loans were primarily other commercial and industrial loans and energy loans.

Nonaccruing commercial loans at September 30, 2016 were primarily composed of $143 million or 5.67 percent of total energy loans, and $21 million or 4.50 percent of total other commercial and industrial sector loans.
Commercial Real Estate

Nonaccruing commercial real estate loans totaled $7.4 million or 0.19 percent of outstanding commercial real estate loans at September 30, 2016, compared to $7.8 million or 0.22 percent of outstanding commercial real estate loans at June 30, 2016. Newly identified nonaccruing commercial real estate loans of $1.0 million were offset by $1.5 million 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 $3.7 million or 2.34 percent of residential construction and land development loans.

Residential Mortgage and Personal

Nonaccruing residential mortgage loans totaled $52 million or 2.80 percent of outstanding residential mortgage loans at September 30, 2016, compared to $57 million or 3.03 percent of outstanding residential mortgage loans at June 30, 2016. Newly identified nonaccruing residential mortgage loans totaling $4.0 million were offset by $6.3 million of foreclosures, $2.6 million of payments and $285 thousand of loans charged off during the quarter. 

Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans which totaled $26 million or 2.68 percent of outstanding non-guaranteed permanent residential mortgage loans at September 30, 2016. Nonaccruing home equity loans totaled $11 million or 1.55 percent of total home equity loans.


- 36 -


Payments of accruing residential mortgage loans and personal loans may be delinquent. The composition of residential mortgage loans and personal loans past due but still accruing is included in the following Table 21. Substantially all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 59 days past due decreased $2.6 million in the third quarter to $5.1 million at September 30, 2016 and residential mortgage loans 60 to 89 days past due increased by $224 thousand. Personal loans past due 30 to 59 days also decreased by $209 thousand compared to June 30, 2016 and personal loans 60 to 89 days increased $90 thousand.

Table 21 -- Residential Mortgage and Personal Loans Past Due
(In thousands)
 
 
September 30, 2016
 
June 30, 2016
 
 
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
 
$
—

 
$
202

 
$
3,547

 
$
—

 
$
124

 
$
5,798

Home equity
 
—

 
305

 
1,526

 
20

 
159

 
1,889

Total residential mortgage
 
$
—

 
$
507

 
$
5,073

 
20

 
$
283

 
$
7,687

 
 
 

 
 
 
 

 
 

 
 
 
 

Personal
 
$
13

 
$
148

 
$
191

 
$
—

 
$
58

 
$
400

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 $32 million at September 30, 2016, an increase of $7.9 million compared to June 30, 2016. The distribution of real estate and other repossessed assets attributed by geographical market is included in Table 22 following.

Table 22 -- Real Estate and Other Repossessed Assets by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
Colorado
 
Arkansas
 
New
Mexico
 
Arizona
 
Kansas/
Missouri
 
Other
 
Total
1-4 family residential properties
 
$
4,181

 
$
559

 
$
—

 
$
625

 
$
1,733

 
$
2,539

 
$
626

 
$
69

 
$
10,332

Developed commercial real estate properties
 
64

 
—

 
2,637

 
—

 
590

 
198

 
1,296

 
—

 
4,785

Undeveloped land
 
225

 
1,309

 
—

 
—

 
—

 
306

 
—

 
—

 
1,840

Residential land development properties
 
38

 
—

 
210

 
—

 
—

 
685

 
2

 
—

 
935

Oil and gas properties
 
—

 
14,042

 


 


 


 


 
—

 
—

 
14,042

Other
 
3

 
4

 
—

 
—

 
—

 
—

 
—

 
—

 
7

Total real estate and other repossessed assets
 
$
4,511

 
$
15,914

 
$
2,847

 
$
625

 
$
2,323

 
$
3,728

 
$
1,924

 
$
69

 
$
31,941


Undeveloped land is primarily zoned for commercial development. Developed commercial real estate properties are primarily completed with no additional construction necessary for sale.

- 37 -


Liquidity and Capital

Subsidiary Bank

Deposits and borrowed funds are the primary sources of liquidity for BOKF, NA, the wholly owned subsidiary bank of BOK Financial. Based on the average balances for the third quarter of 2016, approximately 64 percent of our funding was provided by deposit accounts, 21 percent from borrowed funds, and 10 percent from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

Deposit accounts represent our largest funding source. 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 our Perfect Banking sales and customer service program, free checking, online bill paying services, mobile banking services, an extensive network of branch locations and ATMs and a 24-hour Express Bank 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.

Table 23 - Average Deposits by Line of Business
(In thousands)
 
Three Months Ended
 
Sept. 30, 2016
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
Commercial Banking
$
8,317,341

 
$
8,403,408

 
$
8,457,750

 
$
8,549,240

 
$
8,627,281

Consumer Banking
6,660,514

 
6,634,362

 
6,575,893

 
6,652,104

 
6,675,990

Wealth Management
4,913,409

 
4,521,031

 
4,696,013

 
4,583,474

 
4,490,082

Subtotal
19,891,264

 
19,558,801

 
19,729,656

 
19,784,818

 
19,793,353

Funds Management and other
873,750

 
908,931

 
896,965

 
920,632

 
899,795

Total
$
20,765,014

 
$
20,467,732

 
$
20,626,621

 
$
20,705,450

 
$
20,693,148


Average deposits for the third quarter of 2016 totaled $20.8 billion and represented approximately 64 percent of total liabilities and capital, up from $20.5 billion and 64 percent of total liabilities and capital for the second quarter of 2016. Average deposits increased $297 million from the second quarter of 2016. Average demand deposits increased by $335 million and average interest-bearing transaction accounts increased by $60 million, partially offset by a $100 million decrease in average time deposit balances.

Average Commercial Banking deposit balances decreased $86 million compared to the second quarter of 2016, primarily due to a $102 million decrease in energy customer balances and a $62 million decrease in other commercial and industrial balances, partially offset by a $45 million increase in small business customer balances and a $21 million increase in commercial real estate customer balances. Commercial customers continue to retain large cash reserves primarily due to low yields available on other high quality investment alternatives and 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. If economic activity were to improve significantly or if short-term interest rates were to increase, deposits may decline as customers deploy funds into projects or shift demand deposits into money market instruments.

Average Consumer Banking deposit balances increased $26 million. Demand deposit balances increased by $66 million and interest-bearing transaction deposits increased by $1.4 million, partially offset by a $38 million decrease in time deposit balances. Growth in Consumer Banking deposits includes escrow funds associated with mortgage loan servicing. These deposits tend to grow throughout the year and are largely disbursed near year end.

Average Wealth Management deposits increased $392 million compared to the second quarter of 2016 primarily due to a $346 million increase in interest-bearing transaction account balances and an $84 million increase in demand deposits, partially offset by a $39 million decrease in time deposit balances. Growth in Wealth Management deposits include funds being held temporarily in anticipation of money market reforms.


- 38 -


Average time deposits for the third quarter of 2016 included $519 million of brokered deposits, an increase of $94 million over the second quarter of 2016. Average interest-bearing transaction accounts for the third quarter included $678 million of brokered deposits, an increase of $115 million over the second quarter of 2016. Changes in average brokered deposits largely affect Funds Management and Other.

The distribution of our period end deposit account balances among principal markets follows in Table 24.

Table 24 -- Period End Deposits by Principal Market Area
(In thousands)
 
 
Sept. 30, 2016
 
June 30, 2016
 
Mar. 31,2016
 
Dec. 31, 2015
 
Sept. 30, 2015
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
4,158,273

 
$
4,020,181

 
$
3,813,128

 
$
4,133,520

 
$
3,834,145

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
5,701,983

 
5,741,302

 
5,706,067

 
5,971,819

 
5,783,258

Savings
 
242,959

 
247,984

 
246,122

 
226,733

 
225,580

Time
 
1,091,464

 
1,167,271

 
1,198,022

 
1,202,274

 
1,253,137

Total interest-bearing
 
7,036,406

 
7,156,557

 
7,150,211

 
7,400,826

 
7,261,975

Total Bank of Oklahoma
 
11,194,679

 
11,176,738

 
10,963,339

 
11,534,346

 
11,096,120

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
2,734,981

 
2,677,253

 
2,571,883

 
2,627,764

 
2,689,493

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
2,240,040

 
2,035,634

 
2,106,905

 
2,132,099

 
1,996,223

Savings
 
84,642

 
83,862

 
83,263

 
77,902

 
74,674

Time
 
528,380

 
516,231

 
530,657

 
549,740

 
554,106

Total interest-bearing
 
2,853,062

 
2,635,727

 
2,720,825

 
2,759,741

 
2,625,003

Total Bank of Texas
 
5,588,043

 
5,312,980

 
5,292,708

 
5,387,505

 
5,314,496

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 
 
 
 
 
 
 
 
 
Demand
 
584,681

 
530,853

 
557,200

 
487,286

 
520,785

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
555,326

 
573,690

 
560,684

 
563,723

 
529,862

Savings
 
54,480

 
49,200

 
47,187

 
43,672

 
41,380

Time
 
244,706

 
250,068

 
259,630

 
267,821

 
281,426

Total interest-bearing
 
854,512

 
872,958

 
867,501

 
875,216

 
852,668

Total Bank of Albuquerque
 
1,439,193

 
1,403,811

 
1,424,701

 
1,362,502

 
1,373,453

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
32,203

 
30,607

 
31,318

 
27,252

 
25,397

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
313,480

 
278,335

 
265,803

 
202,857

 
290,728

Savings
 
2,051

 
1,853

 
1,929

 
1,747

 
1,573

Time
 
17,534

 
18,911

 
21,035

 
24,983

 
26,203

Total interest-bearing
 
333,065

 
299,099

 
288,767

 
229,587

 
318,504

Total Bank of Arkansas
 
365,268

 
329,706

 
320,085

 
256,839

 
343,901


- 39 -


 
 
Sept. 30, 2016
 
June 30, 2016
 
Mar. 31,2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 
 
 
 
 
 
 
 
 
Demand
 
517,063

 
528,124

 
413,506

 
497,318

 
430,675

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
623,055

 
625,240

 
610,077

 
616,697

 
655,206

Savings
 
31,613

 
31,509

 
33,108

 
31,927

 
31,398

Time
 
247,667

 
254,164

 
271,475

 
296,224

 
320,279

Total interest-bearing
 
902,335

 
910,913

 
914,660

 
944,848

 
1,006,883

Total Colorado State Bank & Trust
 
1,419,398

 
1,439,037

 
1,328,166

 
1,442,166

 
1,437,558

 
 
 
 
 
 
 
 
 
 
 
Bank of Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
418,718

 
396,837

 
341,828

 
326,324

 
306,425

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
303,750

 
302,297

 
313,825

 
358,556

 
293,319

Savings
 
2,959

 
3,198

 
3,277

 
2,893

 
4,121

Time
 
27,935

 
28,681

 
29,053

 
29,498

 
26,750

Total interest-bearing
 
334,644

 
334,176

 
346,155

 
390,947

 
324,190

Total Bank of Arizona
 
753,362

 
731,013

 
687,983

 
717,271

 
630,615

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 
 
 
 
 
 
 
 
 
Demand
 
235,445

 
240,754

 
221,812

 
197,424

 
234,847

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
86,526

 
112,371

 
146,405

 
153,203

 
150,253

Savings
 
1,645

 
1,656

 
1,619

 
1,378

 
1,570

Time
 
11,945

 
11,735

 
31,502

 
35,524

 
36,630

Total interest-bearing
 
100,116

 
125,762

 
179,526

 
190,105

 
188,453

Total Bank of Kansas City
 
335,561

 
366,516

 
401,338

 
387,529

 
423,300

Total BOK Financial deposits
 
$
21,095,504

 
$
20,759,801

 
$
20,418,320

 
$
21,088,158

 
$
20,619,443


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 $44 million at September 30, 2016. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and agency mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $6.3 billion during the quarter, compared to $6.0 billion in the second quarter of 2016.

At September 30, 2016, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $4.3 billion.

A summary of other borrowings for BOK Financial on a consolidated basis follows in Table 25.


- 40 -


Table 25 -- Borrowed Funds
(In thousands)
 
 
 
 
Three Months Ended
September 30, 2016
 
 
 
Three Months Ended
June 30, 2016
 
 
Sept. 30, 2016
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
June 30, 2016
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
$
109,031

 
$
68,280

 
0.19
%
 
$
109,031

 
$
56,780

 
$
70,682

 
0.19
%
 
$
70,264

Repurchase agreements
 
504,573

 
522,822

 
0.04
%
 
547,335

 
472,683

 
611,264

 
0.05
%
 
663,538

Other borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
 
6,500,000

 
6,309,783

 
0.55
%
 
6,500,000

 
5,800,000

 
6,046,154

 
0.55
%
 
6,400,000

GNMA repurchase liability
 
16,624

 
14,560

 
4.67
%
 
16,624

 
12,769

 
12,210

 
4.81
%
 
12,769

Other
 
16,819

 
18,026

 
2.40
%
 
18,067

 
17,967

 
17,664

 
2.44
%
 
17,967

Total other borrowings
 
6,533,443

 
6,342,369

 
0.57
%
 


 
5,830,736

 
6,076,028

 
0.57
%
 


Subordinated debentures
 
144,631

 
255,890

 
3.84
%
 
371,827

 
371,812

 
232,795

 
1.52
%
 
371,812

Total Borrowed Funds
 
$
7,291,678

 
$
7,189,361

 
0.64
%
 
 
 
$
6,732,011

 
$
6,990,769

 
0.55
%
 
 
In 2007, BOKF, NA issued $250 million of subordinated debt due May 15, 2017 to fund the Worth National Bank and First United Bank acquisitions and fund continued asset growth. Interest on this debt was based on a fixed rate of 5.75 percent through May 14, 2012 which then converted to a floating rate of three-month LIBOR plus 0.69 percent. The $227 million of this subordinated debt that remained outstanding was called during the third quarter of 2016.
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

On June 27, 2016, the parent company completed the issuance and sale of $150 million of subordinated debt that will mature on June 30, 2056. Interest on this debt bears interest at the rate of 5.375%, payable quarterly. On June 30, 2021, the parent company will have the option to redeem the debt at the principal amount plus accrued interest, subject to regulatory approval.

At September 30, 2016, cash and interest-bearing cash and cash equivalents held by the parent company totaled $336 million. The primary sources of liquidity for BOK Financial are cash on hand and dividends from BOKF, NA. Dividends from the bank are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the two preceding years. Dividends are further restricted by minimum capital requirements. At September 30, 2016, based upon the most restrictive limitations as well as management's internal capital policy, the bank could declare up to $172 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, 2016 was $3.4 billion, an increase of $30 million over June 30, 2016. Net income less cash dividends paid increased equity $46 million during the third quarter of 2016. Accumulated other comprehensive income decreased $22 million primarily related to the change in unrealized gains on available for sale securities due to changes in interest rates. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt issuance, share repurchase and stock and cash dividends.

On October 27, 2015, the board of directors authorized the Company to purchase up to five million common shares, subject to market conditions, securities law and other regulatory compliance limitations. As of September 30, 2016, a cumulative total of 2,179,243 shares have been repurchased under this authorization. No shares were repurchased in the third quarter of 2016.


- 41 -


BOK Financial and BOKF, NA are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have a material impact on operations. These capital requirements include quantitative measures of assets, liabilities and off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators.
Effective January 1, 2015 for BOK Financial, 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, consistent with the treatment under previous capital rules.

A summary of minimum capital requirements, including capital conservation buffer follows in Table 26. 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 26.

Table 26 -- Capital Ratios
 
 
Minimum Capital Requirement1
 
Capital Conservation Buffer2
 
Minimum Capital Requirement Including Capital Conservation Buffer
 
Sept. 30, 2016
 
June 30, 2016
 
Sept. 30, 2015
Risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1
 
4.50
%
 
2.50
%
 
7.00
%
 
11.99
%
 
11.86
%
 
12.78
%
Tier 1 capital
 
6.00
%
 
2.50
%
 
8.50
%
 
11.99
%
 
11.86
%
 
12.78
%
Total capital
 
8.00
%
 
2.50
%
 
10.50
%
 
13.65
%
 
13.51
%
 
13.89
%
Tier 1 Leverage
 
4.00
%
 
N/A

 
4.00
%
 
9.06
%
 
9.06
%
 
9.55
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average total equity to average assets
 
 
 
 
 
 
 
10.39
%
 
10.46
%
 
11.05
%
Tangible common equity ratio
 
 
 
 
 
 
 
9.19
%
 
9.33
%
 
9.78
%
1 
Effective January 1, 2015
2 
Effective January 1, 2016

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

Table 27 -- Non-GAAP Measure
(Dollars in thousands)
 
 
Sept. 30, 2016
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
3,398,311

 
$
3,368,833

 
$
3,321,555

 
$
3,230,556

 
$
3,377,226

Less: Goodwill and intangible assets, net
 
424,716

 
426,111

 
428,733

 
429,370

 
430,460

Tangible common equity
 
2,973,595

 
2,942,722

 
2,892,822

 
2,801,186

 
2,946,766

Total assets
 
32,779,231

 
31,970,450

 
31,413,945

 
31,476,128

 
30,566,905

Less: Goodwill and intangible assets, net
 
424,716

 
426,111

 
428,733

 
429,370

 
430,460

Tangible assets
 
$
32,354,515

 
$
31,544,339

 
$
30,985,212

 
$
31,046,758

 
$
30,136,445

Tangible common equity ratio
 
9.19
%
 
9.33
%
 
9.34
%
 
9.02
%
 
9.78
%


- 42 -


On October 20, 2016, BOK Financial published the results of its annual capital stress test. In accordance with the Dodd-Frank Act, the Federal Reserve must publish regulations that require bank holding companies with $10 billion to $50 billion in assets to perform annual capital stress tests. The Dodd-Frank Act Stress Test ("DFAST") is a forward-looking exercise under which the Company and its banking subsidiary estimate the impact of a hypothetical severely adverse macroeconomic scenario provided by the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency on its financial condition and regulatory capital ratios over a nine-quarter time horizon. Under the scenario provided by the regulatory agencies, all capital ratio measures remain above minimum regulatory thresholds. Additional information concerning the annual stress test may be found on the Company's Investor Relations page at www.bokf.com under the "Presentations" tab. The results of subsequent capital stress tests may alter the Company's future capital management plans.

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 the credit of the individual issuers of financial instruments.

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

The Asset/Liability Committee is responsible for managing market risk in accordance with policy guidelines 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. The internal policy limit for net interest revenue variation is a maximum decline of 5 percent to an up or down 200 basis point change over twelve months. These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds and brokered deposits and establish minimum levels for unpledged assets, among other things. Compliance with these internal guidelines is reviewed monthly. The Asset/Liabilty Committee is also responsible for monitoring market risk limits for mortgage banking production and mortgage servicing assets inclusive of economic hedge benefits. Each of these desks must limit projected exposure from a 50 basis point change in interest rates.

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, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates on the Company's performance across multiple interest rate scenarios. While the current internal policy limit for net interest revenue variation is a maximum decline of 5 percent due to a 200 basis point change over twelve months, the results of a 200 basis point decrease in interest rates in the current low-rate environment are not meaningful. We report the effect of a 50 basis point decrease in the interim.


- 43 -


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 DDA 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. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 28 due to the extreme volatility over such a large rate range and our active risk management approach for that asset. The effects of interest rate changes on the value of mortgage servicing rights are presented in Note 6 to the Consolidated Financial Statements.

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 re-pricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. 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.
 
Table 28 -- Interest Rate Sensitivity
(Dollars in thousands)
 
 
200 bp Increase
 
50 bp Decrease
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Anticipated impact over the next twelve months on net interest revenue
 
$
551

 
$
(5,325
)
 
$
(25,147
)
 
$
(20,047
)
 
 
0.07
%
 
(0.70
)%
 
(3.22
)%
 
(2.62
)%

Trading Activities

BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will 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, BOK Financial may also take trading positions in U.S. Treasury securities, residential mortgage-backed securities and municipal bonds to enhance returns on its securities portfolios. Both of these activities involve interest rate 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 manage 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, over the counter derivatives or cash markets may be used to reduce the risk associated with some trading programs.

Management uses a Value at Risk ("VaR") methodology to measure market risk due to changes in interest rates inherent in its trading activities. VaR is calculated based upon historical simulations over the past five years using a variance/covariance matrix of interest rate changes, a 10 business day holding period and a 99 percent confidence interval. It represents an amount of market loss that is likely to be exceeded in only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the VaR to $7.3 million. There were no instances of VaR being exceeded during the nine months ended September 30, 2016 and 2015. At September 30, 2016, there were no trading positions for the purposes of enhancing returns on the Company's securities portfolio.

The average, high and low VaR amounts for the three and nine months ended September 30, 2016 and September 30, 2015 are as follows in Table 29.


- 44 -


Table 29 -- Trading Value at Risk (VaR)
(In thousands)
 
Three Months Ended
Sept. 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Average
$
2,551

 
$
1,799

 
$
2,280

 
$
1,635

High
4,321

 
2,680

 
4,321

 
2,680

Low
1,152

 
1,048

 
775

 
782


The Company expanded its trading activities during the third quarter through the initial operation of a team that deals in specified pools of mortgage loans that have been placed into U.S. government agency issued securities and related derivative instruments. These instruments are generally customized to meet requirements of specific customers. This team also serves as a market maker that provides liquidity as both a buyer and seller of to-be-announced derivative instruments. Each of these expanded activities must fall within the VaR guidelines mentioned above.

The Company also bears interest rate risk by originating residential mortgages held for sale (RMHFS). A variety of methods are used to manage the interest rate 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. Interest rate risk from RMHFS is mitigated through forward sale contracts.

Management uses a pre-tax income sensitivity methodology to measure market risk from RMHFS. Pre-tax income sensitivity is calculated using a + / - 50 basis point change in interest rates, a 30 day average fall out rate, and a projected fall out-rate that is statistically modeled and recalibrated using such factors as loan product type, seasonality, region, originator, channel, rate lock terms, rate change scenario and various borrower characteristics. The Company monitors the effectiveness of this model through back-testing, updating the data and regular validations. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the pre-tax income sensitivity to $7 million. There were no instances of pre-tax income sensitivity exceeding the $7 million limit during the three and nine months ended September 30, 2016 and 2015.
The average, high and low pre-tax income sensitivity amounts for the three and nine months ended September 30, 2016 and September 30, 2015 are as follows.

Table 30 -- RMHFS Interest Rate Sensitivity
(In thousands)
 
Three Months Ended
Sept. 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Average
$
827

 
$
2,814

 
$
2,179

 
$
2,615

High
2,563

 
5,422

 
6,858

 
6,590

Low
17

 
86

 
12

 
68

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.

- 45 -


Forward-Looking Statements

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

- 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
 
2016
 
2015
 
2016
 
2015
Loans
 
$
146,840

 
$
132,985

 
$
427,512

 
$
392,878

Residential mortgage loans held for sale
 
3,615

 
3,793

 
9,823

 
10,634

Trading securities
 
2,996

 
669

 
4,136

 
1,618

Taxable securities
 
3,000

 
3,211

 
9,244

 
9,788

Tax-exempt securities
 
1,132

 
1,274

 
3,492

 
3,933

Total investment securities
 
4,132

 
4,485

 
12,736

 
13,721

Taxable securities
 
42,513

 
43,473

 
130,790

 
128,933

Tax-exempt securities
 
529

 
535

 
1,591

 
1,718

Total available for sale securities
 
43,042

 
44,008

 
132,381

 
130,651

Fair value option securities
 
1,531

 
2,480

 
6,182

 
6,803

Restricted equity securities
 
4,510

 
3,802

 
12,684

 
9,627

Interest-bearing cash and cash equivalents
 
2,651

 
1,442

 
7,926

 
4,114

Total interest revenue
 
209,317

 
193,664

 
613,380

 
570,046

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
9,812

 
10,731

 
30,351

 
34,102

Borrowed funds
 
9,191

 
3,701

 
25,943

 
9,395

Subordinated debentures
 
2,468

 
596

 
4,056

 
4,456

Total interest expense
 
21,471

 
15,028

 
60,350

 
47,953

Net interest revenue
 
187,846

 
178,636

 
553,030

 
522,093

Provision for credit losses
 
10,000

 
7,500

 
65,000

 
11,500

Net interest revenue after provision for credit losses
 
177,846

 
171,136

 
488,030

 
510,593

Other operating revenue
 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
38,006

 
31,582

 
109,877

 
99,301

Transaction card revenue
 
33,933

 
32,514

 
101,237

 
96,302

Fiduciary and asset management revenue
 
34,073

 
30,807

 
100,942

 
94,988

Deposit service charges and fees
 
23,668

 
23,606

 
68,828

 
67,618

Mortgage banking revenue
 
42,548

 
33,170

 
115,202

 
109,336

Other revenue
 
13,080

 
12,978

 
38,336

 
35,650

Total fees and commissions
 
185,308

 
164,657

 
534,422

 
503,195

Other gains, net
 
2,442

 
1,161

 
5,309

 
3,373

Gain on derivatives, net
 
2,226

 
1,283

 
20,130

 
1,162

Gain (loss) on fair value option securities, net
 
(3,355
)
 
5,926

 
10,367

 
443

Change in fair value of mortgage servicing rights
 
2,327

 
(11,757
)
 
(41,944
)
 
(12,269
)
Gain on available for sale securities, net
 
2,394

 
2,166

 
11,684

 
9,926

Total other-than-temporary impairment losses
 
—

 
—

 
—

 
(781
)
Portion of loss recognized in other comprehensive income
 
—

 
—

 
—

 
689

Net impairment losses recognized in earnings
 
—

 
—

 
—

 
(92
)
Total other operating revenue
 
191,342

 
163,436

 
539,968

 
505,738

Other operating expense
 
 

 
 

 
 

 
 

Personnel
 
143,185

 
129,062

 
421,518

 
390,305

Business promotion
 
6,839

 
5,922

 
19,238

 
19,435

Charitable contributions to BOKF Foundation
 
—

 
796

 
—

 
796

Professional fees and services
 
14,038

 
10,147

 
39,955

 
29,766

Net occupancy and equipment
 
20,111

 
18,689

 
58,554

 
56,660

Insurance
 
9,390

 
4,864

 
23,784

 
14,960

Data processing and communications
 
33,331

 
30,708

 
98,150

 
91,135

Printing, postage and supplies
 
3,790

 
3,376

 
11,586

 
10,390

Net losses (gains) and operating expenses of repossessed assets
 
(926
)
 
267

 
1,732

 
1,103

Amortization of intangible assets
 
1,521

 
1,089

 
5,304

 
3,269

Mortgage banking costs
 
16,022

 
9,107

 
44,210

 
27,501

Other expense
 
14,819

 
10,601

 
37,714

 
26,686

Total other operating expense
 
262,120

 
224,628

 
761,745

 
672,006

Net income before taxes
 
107,068

 
109,944

 
266,253

 
344,325

Federal and state income taxes
 
31,956

 
34,128

 
83,881

 
113,142

Net income
 
75,112

 
75,816

 
182,372

 
231,183

Net income (loss) attributable to non-controlling interests
 
835

 
925

 
(270
)
 
2,219

Net income attributable to BOK Financial Corporation shareholders
 
$
74,277

 
$
74,891

 
$
182,642

 
$
228,964

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.13

 
$
1.09

 
$
2.77

 
$
3.33

Diluted
 
$
1.13

 
$
1.09

 
$
2.76

 
$
3.32

Average shares used in computation:
 
 
 
 
 
 
 
 
Basic
 
65,085,392

 
67,668,076

 
65,208,774

 
68,004,508

Diluted
 
65,157,841

 
67,762,483

 
65,263,566

 
68,104,017

Dividends declared per share
 
$
0.43

 
$
0.42

 
$
1.29

 
$
1.26

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,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
75,112

 
$
75,816

 
$
182,372

 
$
231,183

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(33,458
)
 
57,892

 
133,108

 
57,763

Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
Interest revenue, Investment securities, Taxable securities
 
—

 
(105
)
 
(112
)
 
(418
)
Interest expense, Subordinated debentures
 
—

 
—

 
—

 
121

Net impairment losses recognized in earnings
 
—

 
—

 
—

 
92

Gain on available for sale securities, net
 
(2,394
)
 
(2,166
)
 
(11,684
)
 
(9,926
)
Other comprehensive income (loss) before income taxes
 
(35,852
)
 
55,621

 
121,312

 
47,632

Federal and state income taxes
 
(13,947
)
 
21,637

 
47,172

 
18,529

Other comprehensive income (loss), net of income taxes
 
(21,905
)

33,984


74,140


29,103

Comprehensive income
 
53,207

 
109,800

 
256,512

 
260,286

Comprehensive income (loss) attributable to non-controlling interests
 
835

 
925

 
(270
)
 
2,219

Comprehensive income attributable to BOK Financial Corp. shareholders
 
$
52,372

 
$
108,875

 
$
256,782

 
$
258,067


See accompanying notes to consolidated financial statements.

- 48 -


Consolidated Balance Sheets
(In thousands, except share data)
 
 
Sept. 30, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
 
(Unaudited)
 
(Footnote 1)
 
(Unaudited)
Assets
 
 
 
 
 
 
Cash and due from banks
 
$
535,916

 
$
573,699

 
$
489,268

Interest-bearing cash and cash equivalents
 
2,080,978

 
2,069,900

 
1,830,105

Trading securities
 
546,615

 
122,404

 
181,131

Investment securities (fair value:  September 30, 2016 – $580,310; December 31, 2015 – $629,159 ; September 30, 2015 – $643,091)
 
546,457

 
597,836

 
612,384

Available for sale securities
 
8,862,283

 
9,042,733

 
8,801,089

Fair value option securities
 
222,409

 
444,217

 
427,760

Restricted equity securities
 
333,391

 
273,684

 
263,587

Residential mortgage loans held for sale
 
447,592

 
308,439

 
357,414

Loans
 
16,464,786

 
15,941,154

 
15,367,441

Allowance for loan losses
 
(245,103
)
 
(225,524
)
 
(204,116
)
Loans, net of allowance
 
16,219,683

 
15,715,630

 
15,163,325

Premises and equipment, net
 
318,196

 
306,490

 
294,669

Receivables
 
650,368

 
163,480

 
151,451

Goodwill
 
382,739

 
385,461

 
385,461

Intangible assets, net
 
41,977

 
43,909

 
44,999

Mortgage servicing rights
 
203,621

 
218,605

 
200,049

Real estate and other repossessed assets, net of allowance (September 30, 2016 – $9,524; December 31, 2015 – $12,622; September 30, 2015 – $12,874)
 
31,941

 
30,731

 
33,116

Derivative contracts, net
 
655,078

 
586,270

 
726,159

Cash surrender value of bank-owned life insurance
 
310,211

 
303,335

 
300,981

Receivable on unsettled securities sales
 
19,642

 
40,193

 
30,009

Other assets
 
370,134

 
249,112

 
273,948

Total assets
 
$
32,779,231

 
$
31,476,128

 
$
30,566,905

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
$
8,681,364

 
$
8,296,888

 
$
8,041,767

Interest-bearing deposits:
 
 

 
 

 
 

Transaction
 
9,824,160

 
9,998,954

 
9,698,849

Savings
 
420,349

 
386,252

 
380,296

Time
 
2,169,631

 
2,406,064

 
2,498,531

Total deposits
 
21,095,504

 
21,088,158

 
20,619,443

Funds purchased
 
109,031

 
491,192

 
62,297

Repurchase agreements
 
504,573

 
722,444

 
555,677

Other borrowings
 
6,533,443

 
4,837,879

 
4,635,150

Subordinated debentures
 
144,631

 
226,350

 
226,314

Accrued interest, taxes and expense
 
191,276

 
119,584

 
158,048

Derivative contracts, net
 
573,987

 
581,701

 
636,115

Due on unsettled securities purchases
 
677

 
16,897

 
98,351

Other liabilities
 
193,698

 
124,284

 
159,348

Total liabilities
 
29,346,820

 
28,208,489

 
27,150,743

Shareholders' equity:
 
 

 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: September 30, 2016 – 74,866,429; December 31, 2015 – 74,530,364; September 30, 2015 – 74,461,234)
 
4

 
4

 
4

Capital surplus
 
995,680

 
982,009

 
973,824

Retained earnings
 
2,801,931

 
2,704,121

 
2,673,292

Treasury stock (shares at cost:  September 30, 2016 – 8,955,975; December 31, 2015 – 8,636,332;  September 30, 2015 – 6,748,203)
 
(495,031
)
 
(477,165
)
 
(355,670
)
Accumulated other comprehensive income
 
95,727

 
21,587

 
85,776

Total shareholders’ equity
 
3,398,311

 
3,230,556

 
3,377,226

Non-controlling interests
 
34,100

 
37,083

 
38,936

Total equity
 
3,432,411

 
3,267,639

 
3,416,162

Total liabilities and equity
 
$
32,779,231

 
$
31,476,128

 
$
30,566,905


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
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interests
 
Total Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, Dec. 31, 2014
 
74,004

 
$
4

 
$
954,644

 
$
2,530,837

 
4,890

 
$
(239,979
)
 
$
56,673

 
$
3,302,179

 
$
34,027

 
$
3,336,206

Net income (loss)
 
—

 
—

 
—

 
228,964

 
—

 
—

 
—

 
228,964

 
2,219

 
231,183

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
29,103

 
29,103

 
—

 
29,103

Repurchase of common stock
 
—

 
—

 
—

 
—

 
1,760

 
(109,760
)
 
—

 
(109,760
)
 
—

 
(109,760
)
Issuance of shares for equity compensation
 
457

 
—

 
10,728

 
—

 
98

 
(5,931
)
 
—

 
4,797

 
—

 
4,797

Tax effect from equity compensation, net
 
—

 
—

 
645

 
—

 
—

 
—

 
—

 
645

 
—

 
645

Share-based compensation
 
—

 
—

 
7,807

 
—

 
—

 
—

 
—

 
7,807

 
—

 
7,807

Cash dividends on common stock
 
—

 
—

 
—

 
(86,509
)
 
—

 
—

 
—

 
(86,509
)
 
—

 
(86,509
)
Sale of non-controlling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,500

 
5,500

Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,810
)
 
(2,810
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, Sept. 30, 2015
 
74,461

 
$
4

 
$
973,824

 
$
2,673,292

 
6,748

 
$
(355,670
)
 
$
85,776

 
$
3,377,226

 
$
38,936

 
$
3,416,162

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, Dec. 31, 2015
 
74,530

 
$
4

 
$
982,009

 
$
2,704,121

 
8,636

 
$
(477,165
)
 
$
21,587

 
$
3,230,556

 
$
37,083

 
$
3,267,639

Net income (loss)
 
—

 
—

 
—

 
182,642

 
—

 
—

 
—

 
182,642

 
(270
)
 
182,372

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
74,140

 
74,140

 
—

 
74,140

Repurchase of common stock
 
—

 
—

 
—

 
—

 
305

 
(17,771
)
 
—

 
(17,771
)
 
—

 
(17,771
)
Issuance of shares for equity compensation
 
336

 
—

 
5,513

 
—

 
15

 
(95
)
 
—

 
5,418

 
—

 
5,418

Tax effect from equity compensation, net
 
—

 
—

 
589

 
—

 
—

 
—

 
—

 
589

 
—

 
589

Share-based compensation
 
—

 
—

 
7,569

 
—

 
—

 
—

 
—

 
7,569

 
—

 
7,569

Cash dividends on common stock
 
—

 
—

 
—

 
(84,832
)
 
—

 
—

 
—

 
(84,832
)
 
—

 
(84,832
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,713
)
 
(2,713
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, Sept. 30, 2016
 
74,866

 
$
4

 
$
995,680

 
$
2,801,931

 
8,956

 
$
(495,031
)
 
$
95,727

 
$
3,398,311

 
$
34,100

 
$
3,432,411


See accompanying notes to consolidated financial statements.

- 50 -


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

 
Nine Months Ended
 
 
September 30,
 
 
2016
 
2015
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
182,372

 
$
231,183

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

 
 

Provision for credit losses
 
65,000

 
11,500

Change in fair value of mortgage servicing rights
 
41,944

 
12,269

Net unrealized gains from derivative contracts
 
(9,755
)
 
(974
)
Tax effect from equity compensation, net
 
(589
)
 
(645
)
Share-based compensation
 
7,569

 
7,807

Depreciation and amortization
 
64,543

 
50,088

Net amortization of securities discounts and premiums
 
31,373

 
42,757

Net realized gains on financial instruments and other net gains
 
(13,663
)
 
(12,601
)
Net gain on mortgage loans held for sale
 
(61,775
)
 
(60,075
)
Mortgage loans originated for sale
 
(4,927,442
)
 
(5,007,471
)
Proceeds from sale of mortgage loans held for sale
 
4,855,682

 
5,022,109

Capitalized mortgage servicing rights
 
(56,345
)
 
(62,375
)
Charitable contributions to BOKF Foundation
 
—

 
796

Change in trading and fair value option securities
 
(204,030
)
 
(110,857
)
Change in receivables
 
(483,836
)
 
8,455

Change in other assets
 
(17,931
)
 
(15,368
)
Change in accrued interest, taxes and expense
 
27,780

 
14,447

Change in other liabilities
 
7,262

 
40,670

Net cash provided by (used in) operating activities
 
(491,841
)
 
171,715

Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
65,104

 
53,795

Proceeds from maturities or redemptions of available for sale securities
 
1,120,917

 
1,307,177

Purchases of investment securities
 
(18,599
)
 
(19,037
)
Purchases of available for sale securities
 
(1,860,287
)
 
(2,271,374
)
Proceeds from sales of available for sale securities
 
1,027,379

 
1,164,425

Change in amount receivable on unsettled securities transactions
 
20,551

 
44,250

Loans originated, net of principal collected
 
(551,351
)
 
(1,121,100
)
Net payments on derivative asset contracts
 
(79,512
)
 
(291,949
)
Acquisitions, net of cash acquired
 
(7,700
)
 
(18,098
)
Proceeds from disposition of assets
 
131,761

 
131,824

Purchases of assets
 
(159,263
)
 
(203,546
)
Net cash used in investing activities
 
(311,000
)
 
(1,223,633
)
Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
243,779

 
(411,231
)
Net change in time deposits
 
(236,433
)
 
(110,185
)
Net change in other borrowed funds
 
1,015,822

 
1,786,438

Repayment of subordinated debentures
 
(226,550
)
 
(121,810
)
Issuance of subordinated debentures
 
145,331

 
—

Net proceeds on derivative liability contracts
 
76,144

 
277,872

Net change in derivative margin accounts
 
(129,141
)
 
(148,119
)
Change in amount due on unsettled security transactions
 
(16,220
)
 
(192,189
)
Issuance of common and treasury stock, net
 
5,418

 
4,797

Tax effect from equity compensation, net
 
589

 
645

Sale of non-controlling interests
 
—

 
5,500

Repurchase of common stock
 
(17,771
)
 
(109,760
)
Dividends paid
 
(84,832
)
 
(86,509
)
Net cash provided by financing activities
 
776,136

 
895,449

Net decrease in cash and cash equivalents
 
(26,705
)
 
(156,469
)
Cash and cash equivalents at beginning of period
 
2,643,599

 
2,475,842

Cash and cash equivalents at end of period
 
$
2,616,894

 
$
2,319,373


- 51 -


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

 
Nine Months Ended
 
 
September 30,
 
 
2016
 
2015
 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
Cash paid for interest
 
$
61,522

 
$
50,066

Cash paid for taxes
 
$
43,096

 
$
78,115

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
20,580

 
$
9,558

Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period
 
$
79,710

 
$
86,242

Conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
50,855

 
$
93,157

See accompanying notes to consolidated financial statements.

- 52 -


Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

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

The unaudited consolidated financial statements include accounts of BOK Financial and its subsidiaries, principally BOKF, NA (“the Bank”), BOK Financial Securities, Inc., The Milestone Group, Inc. and Cavanal Hill Investment Management Inc. Operating divisions of the Bank include Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust, Bank of Kansas City, 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 2015 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2015 have been derived from the audited financial statements included in BOK Financial’s 2015 Form 10-K but does 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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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. ASU 2014-09 is effective for the Company for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the impact the adoption of ASU 2014-09 will have on the Company's financial statements.

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. ASU 2016-08 is effective for the Company for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the impact the adoption of ASU 2016-08 will have on the Company's financial statements along with ASU 2014-09.


- 53 -


FASB Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ("ASU 2016-10")

On April 14, 2016, the FASB issued ASU 2016-10 which amends certain sections of ASU 2014-09 related to identifying performance obligations and licensing implementation. ASU 2016-10 is effective for the Company for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the impact the adoption of ASU 2016-10 will have on the Company's financial statements along with ASU 2014-09.

FASB Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ("ASU 2016-12")

On May 9, 2016, the FASB issued ASU 2016-12, which amends certain aspects of the Board's new revenue standard, ASU 2014-09. The amendments clarify information regarding collectibility, presentation of sales tax and other similar taxes collected from customers, noncash consideration, contract modifications and completed contracts at transition, and transition disclosures. ASU 2016-12 is effective for the Company for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the impact the adoption of ASU 2016-12 will have on the Company's financial statements along with ASU 2014-09.

FASB Accounting Standards Update No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity ("ASU 2014-16")

On November 3, 2014, the FASB issued ASU 2014-16 to eliminate the use of different methods and reduce diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share. For hybrid financial instruments issued in the form of a share, an entity should determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument. The entity should determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. For public business entities, the ASU was effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Adoption of ASU 2014-16 did not have a material impact on the Company's consolidated financial statements.

FASB Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02")

On February 18, 2015, the FASB issued ASU 2015-02 to address concerns that current U.S. GAAP may require a reporting entity to consolidate another legal entity where the reporting entity's contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity's voting rights, or the reporting entity is not exposed to a majority of the legal entity's economic benefits or obligations. The amendments affect limited partnerships and similar legal entities, the evaluation of fees paid to a decision maker or a service provider as a variable interest, the effect of fee arrangements and related parties on the primary beneficiary determination, and certain investment funds. The ASU was effective for periods beginning after December 15, 2015 for public companies. Adoption of ASU 2015-02 did not have a material impact on the Company's consolidated financial statements.

FASB Accounting Standards Update No. 2015-07, Fair Value Measurements (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) ("ASU 2015-07")

On May 1, 2015, the FASB issued ASU 2015-07 to gain consistency within the categorization of the fair value hierarchy. The update removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. It also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The ASU was effective for the Company for interim and annual periods beginning after December 15, 2015 and should be applied retrospectively to all periods presented. Adoption of ASU 2015-07 did not have a material impact on the Company's consolidated financial statements.


- 54 -


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. The ASU is effective for the Company for interim and annual periods beginning after December 15, 2017. Upon adoption, unrealized gains and losses from equity securities will be reclassified from other comprehensive income to retained earnings. At September 30, 2016, the Company had $3.3 million of unrealized gains included in accumulated other comprehensive income.

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 and disclosing key information about leasing arrangements. The final guidance requires lessees to put most leases on their balance sheets and may affect the presentation and timing of expense recognition, eliminates the current real estate-specific provisions, modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. The ASU is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application of the amendments is permitted. The Company is evaluating the impact the adoption of ASU 2016-02 will have on the Company's financial statements.

FASB Accounting Standards Update No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships ("ASU 2016-05")

On March 10, 2016, the FASB issued ASU 2016-05 which clarifies that "a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument" or "a change in a critical term of the hedging relationship." If all other hedge accounting criteria in ASC 815 are met, a hedging relationship where the hedging derivative instrument is novated would not be discontinued or need to be redesignated. The ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. An entity would apply the guidance prospectively unless modified retrospective transition is elected. Early adoption is permitted. Adoption of ASU 2016-05 is not expected to have a material impact on the Company's financial statements.

FASB Accounting Standards Update No. 2016-07, Investments - Equity Method and Joint Ventures ("ASU 2016-07")

On March 15, 2016, the FASB issued ASU 2016-07 to simplify the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as result of an increase in the level of ownership interest or degree of influence. The ASU also requires that unrealized holding gains or losses in accumulated other comprehensive income related to an available for sale security that becomes eligible for the equity method be recognized in earnings as of the date the investment qualifies for the equity method. The ASU is effective for all entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Adoption of ASU 2016-07 is not expected to have a material impact on the Company's financial statements.

FASB Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09")

On March 30, 2016, the FASB issued ASU 2016-09 to simplify multiple aspects of accounting for employee share-based payment transactions including accounting income taxes, forfeitures, and statutory tax withholding requirements. The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Implementation of ASU 2016-09 will add volatility to tax expense as stock prices change; however, we expect the impact to be insignificant.
 


- 55 -


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 an organization to measure all expected credit losses for financial assets carried at amortized cost at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 is 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 is evaluating the impact the adoption of ASU 2016-13 will have on the Company's financial statements.

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, in order to reduce inconsistent application. The amendments address eight cash flow issues including debt repayment and extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments following a business combination, proceeds from the settlement of insurance claims and corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows. ASU 2016-15 is effective for the Company for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. Adoption of ASU 2016-15 is not expected to have a material impact on the Company's financial statements.

- 56 -


(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities is as follows (in thousands):
 
 
 
September 30, 2016
 
December 31, 2015
 
September 30, 2015
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. government agency debentures
 
$
15,705

 
$
(7
)
 
$
61,295

 
$
(71
)
 
$
42,431

 
$
(38
)
U.S. government agency residential mortgage-backed securities
 
464,749

 
876

 
10,989

 
17

 
30,973

 
195

Municipal and other tax-exempt securities
 
54,856

 
(100
)
 
31,901

 
210

 
84,261

 
421

Other trading securities
 
11,305

 
14

 
18,219

 
(16
)
 
23,466

 
28

Total trading securities
 
$
546,615

 
$
783

 
$
122,404

 
$
140

 
$
181,131

 
$
606

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

 
 
September 30, 2016
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized1
 
 
Cost
 
Value
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
323,225

 
$
323,225

 
$
327,788

 
$
4,745

 
$
(182
)
U.S. government agency residential mortgage-backed securities – Other
 
22,166

 
22,166

 
23,452

 
1,286

 
—

Other debt securities
 
201,066

 
201,066

 
229,070

 
28,014

 
(10
)
Total investment securities
 
$
546,457

 
$
546,457

 
$
580,310

 
$
34,045

 
$
(192
)
1 
Gross unrealized gains and losses are not recognized in Accumulated Other Comprehensive Income "AOCI" in the Consolidated Balance Sheets.
 
 
December 31, 2015
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized1
 
 
Cost
 
Value
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
365,258

 
$
365,258

 
$
368,910

 
$
3,935

 
$
(283
)
U.S. government agency residential mortgage-backed securities – Other
 
26,721

 
26,833

 
27,874

 
1,063

 
(22
)
Other debt securities
 
205,745

 
205,745

 
232,375

 
26,689

 
(59
)
Total investment securities
 
$
597,724

 
$
597,836

 
$
629,159

 
$
31,687

 
$
(364
)
1 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.
 
 
September 30, 2015
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized1
 
 
Cost
 
Value
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
379,980

 
$
379,980

 
$
384,310

 
$
4,461

 
$
(131
)
U.S. government agency residential mortgage-backed securities – Other
 
28,456

 
28,653

 
30,080

 
1,427

 
—

Other debt securities
 
203,751

 
203,751

 
228,701

 
25,063

 
(113
)
Total investment securities
 
$
612,187

 
$
612,384

 
$
643,091

 
$
30,951

 
$
(244
)
1 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.

- 57 -


The amortized cost and fair values of investment securities at September 30, 2016, 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:
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value
 
$
87,330

 
$
195,763

 
$
8,778

 
$
31,354

 
$
323,225

 
2.76

Fair value
 
87,331

 
196,864

 
9,023

 
34,570

 
327,788

 
 
Nominal yield¹
 
1.42
%
 
2.01
%
 
3.20
%
 
6.08
%
 
2.28
%
 
 
Other debt securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
15,047

 
42,314

 
125,955

 
17,750

 
201,066

 
6.84

Fair value
 
15,191

 
45,802

 
148,422

 
19,655

 
229,070

 
 
Nominal yield
 
3.49
%
 
5.03
%
 
5.88
%
 
4.86
%
 
5.43
%
 
 
Total fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
$
102,377

 
$
238,077

 
$
134,733

 
$
49,104

 
$
524,291

 
4.32

Fair value
 
102,522

 
242,666

 
157,445

 
54,225

 
556,858

 
 

Nominal yield
 
1.72
%
 
2.54
%
 
5.70
%
 
5.64
%
 
3.48
%
 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
22,166

 
³

Fair value
 
 

 
 

 
 

 
 

 
23,452

 
 

Nominal yield4
 
 

 
 

 
 

 
 

 
2.75
%
 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
546,457

 
 

Fair value
 
 

 
 

 
 

 
 

 
580,310

 
 

Nominal yield
 
 

 
 

 
 

 
 

 
3.46
%
 
 

1 
Calculated on a taxable equivalent basis using a 39 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 4.3 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.


- 58 -


Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
September 30, 2016
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
1,002

 
$
2

 
$
—

 
$
—

Municipal and other tax-exempt
 
41,943

 
42,092

 
602

 
(453
)
 
—

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
3,035,041

 
3,101,136

 
67,859

 
(1,764
)
 
—

FHLMC
 
1,611,887

 
1,641,178

 
29,640

 
(349
)
 
—

GNMA
 
924,176

 
926,358

 
3,530

 
(1,348
)
 
—

Other
 
—

 
—

 
—

 
—

 
—

Total U.S. government agencies
 
5,571,104

 
5,668,672

 
101,029

 
(3,461
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
47,039

 
54,065

 
7,230

 
—

 
(204
)
Jumbo-A loans
 
61,377

 
67,538

 
6,187

 
(26
)
 
—

Total private issue
 
108,416

 
121,603

 
13,417

 
(26
)
 
(204
)
Total residential mortgage-backed securities
 
5,679,520

 
5,790,275

 
114,446

 
(3,487
)
 
(204
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,942,988

 
2,986,495

 
45,329

 
(1,822
)
 
—

Other debt securities
 
4,400

 
4,151

 
—

 
(249
)
 
—

Perpetual preferred stock
 
15,562

 
19,578

 
4,016

 
—

 
—

Equity securities and mutual funds
 
17,337

 
18,690

 
1,370

 
(17
)
 
—

Total available for sale securities
 
$
8,702,750

 
$
8,862,283

 
$
165,765

 
$
(6,028
)
 
$
(204
)
1 Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet.
2 Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

- 59 -


 
 
December 31, 2015
 
 
Amortized
 
Fair
 
Gross Unrealized¹
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
995

 
$
—

 
$
(5
)
 
$
—

Municipal and other tax-exempt
 
56,681

 
56,817

 
873

 
(737
)
 
—

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
3,156,214

 
3,187,215

 
41,502

 
(10,501
)
 
—

FHLMC
 
1,940,915

 
1,949,335

 
14,727

 
(6,307
)
 
—

GNMA
 
763,967

 
761,801

 
2,385

 
(4,551
)
 
—

Other
 
—

 
—

 
—

 
—

 
—

Total U.S. government agencies
 
5,861,096

 
5,898,351

 
58,614

 
(21,359
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
56,387

 
62,574

 
6,574

 
—

 
(387
)
Jumbo-A loans
 
71,724

 
76,544

 
5,260

 
—

 
(440
)
Total private issue
 
128,111

 
139,118

 
11,834

 
—

 
(827
)
Total residential mortgage-backed securities
 
5,989,207

 
6,037,469

 
70,448

 
(21,359
)
 
(827
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,919,044

 
2,905,796

 
5,396

 
(18,644
)
 
—

Other debt securities
 
4,400

 
4,151

 
—

 
(249
)
 
—

Perpetual preferred stock
 
17,171

 
19,672

 
2,501

 
—

 
—

Equity securities and mutual funds
 
17,121

 
17,833

 
752

 
(40
)
 
—

Total available for sale securities
 
$
9,004,624

 
$
9,042,733

 
$
79,970

 
$
(41,034
)
 
$
(827
)
1 Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet.
2 Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

 
 
September 30, 2015
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
1,003

 
$
3

 
$
—

 
$
—

Municipal and other tax-exempt
 
57,610

 
57,960

 
1,065

 
(715
)
 
—

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

 
 

 
 

 
 

 
 

FNMA
 
3,115,810

 
3,185,097

 
69,757

 
(470
)
 
—

FHLMC
 
1,853,379

 
1,885,201

 
32,646

 
(824
)
 
—

GNMA
 
741,212

 
744,647

 
4,557

 
(1,122
)
 
—

Other
 
3,922

 
4,182

 
260

 
—

 
—

Total U.S. government agencies
 
5,714,323

 
5,819,127

 
107,220

 
(2,416
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
58,801

 
64,700

 
6,519

 
—

 
(620
)
Jumbo-A loans
 
75,258

 
80,982

 
6,121

 
—

 
(397
)
Total private issue
 
134,059

 
145,682

 
12,640

 
—

 
(1,017
)
Total residential mortgage-backed securities
 
5,848,382

 
5,964,809

 
119,860

 
(2,416
)
 
(1,017
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,708,931

 
2,735,787

 
28,889

 
(2,033
)
 
—

Other debt securities
 
4,400

 
4,150

 
—

 
(250
)
 
—

Perpetual preferred stock
 
17,171

 
19,163

 
2,030

 
(38
)
 
—

Equity securities and mutual funds
 
18,711

 
18,217

 
950

 
(1,444
)
 
—

Total available for sale securities
 
$
8,656,205

 
$
8,801,089

 
$
152,797

 
$
(6,896
)
 
$
(1,017
)
1 
Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet.
2 
Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

- 60 -


The amortized cost and fair values of available for sale securities at September 30, 2016, 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
Maturity5
U.S. Treasuries:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
—

 
$
1,000

 
$
—

 
$
—

 
$
1,000

 
1.29

Fair value
—

 
1,002

 
—

 
—

 
1,002

 
 
Nominal yield
—
%
 
0.87
%
 
—
%
 
—
%
 
0.87
%
 
 
Municipal and other tax-exempt:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
9,089

 
$
13,593

 
$
2,092

 
$
17,169

 
$
41,943

 
8.14

Fair value
9,190

 
13,858

 
2,109

 
16,935

 
42,092

 
 
Nominal yield¹
4.97
%
 
3.85
%
 
3.46
%
 
2.36
%
6 
3.46
%
 
 
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
—

 
$
931,761

 
$
1,817,166

 
$
194,061

 
$
2,942,988

 
6.82

Fair value
—

 
942,994

 
1,848,462

 
195,039

 
2,986,495

 
 
Nominal yield
—
%
 
1.74
%
 
1.84
%
 
1.54
%
 
1.79
%
 
 
Other debt securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
—

 
$
—

 
$
—

 
$
4,400

 
$
4,400

 
30.91

Fair value
—

 
—

 
—

 
4,151

 
4,151

 
 
Nominal yield
—
%
 
—
%
 
—
%
 
1.71
%
6 
1.71
%
 
 
Total fixed maturity securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
9,089

 
$
946,354

 
$
1,819,258

 
$
215,630

 
$
2,990,331

 
6.87

Fair value
9,190

 
957,854

 
1,850,571

 
216,125

 
3,033,740

 
 
Nominal yield
4.97
%
 
1.77
%
 
1.85
%
 
1.61
%
 
1.81
%
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
 

 
 

 
 

 
 

 
$
5,679,520

 
2 

Fair value
 

 
 

 
 

 
 

 
5,790,275

 
 
Nominal yield4
 

 
 

 
 

 
 

 
1.87
%
 
 
Equity securities and mutual funds:
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 

 
 

 
 

 
 

 
$
32,899

 
³

Fair value
 

 
 

 
 

 
 

 
38,268

 
 

Nominal yield
 

 
 

 
 

 
 

 
—
%
 
 

Total available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 

Amortized cost
 

 
 

 
 

 
 

 
$
8,702,750

 
 

Fair value
 

 
 

 
 

 
 

 
8,862,283

 
 

Nominal yield
 

 
 

 
 

 
 

 
1.84
%
 
 

1 
Calculated on a taxable equivalent basis using a 39 percent effective tax rate.
2 
The average expected lives of mortgage-backed securities were 3.4 years years based upon current prepayment assumptions.
3 
Primarily common stock and preferred stock of corporate issuers with no stated maturity.
4 
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.
5 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
6 
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.


- 61 -


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,
 
2016
 
2015
 
2016
 
2015
Proceeds
$
232,239

 
$
450,765

 
$
1,027,379

 
$
1,164,425

Gross realized gains
2,415

 
3,803

 
11,705

 
13,543

Gross realized losses
(21
)
 
(1,637
)
 
(21
)
 
(3,617
)
Related federal and state income tax expense
931

 
843

 
4,545

 
3,861


A summary of investment and available for sale securities that have been pledged as collateral for repurchase agreements, public trust funds on deposit and for other purposes, as required by law was as follows (in thousands):
 
Sept. 30,2016
 
Dec. 31, 2016
 
Sept. 30,2015
Investment:
 
 
 
 
 
Carrying value
$
301,754

 
$
231,033

 
$
50,380

Fair value
307,264

 
234,382

 
52,249

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
Amortized cost
7,098,721

 
6,831,743

 
6,225,689

Fair value
7,213,520

 
6,849,524

 
6,318,330


The secured parties do not have the right to sell or re-pledge these securities.


- 62 -


Temporarily Impaired Securities as of September 30, 2016
(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
 
75

 
$
100,624

 
$
106

 
$
4,359

 
$
76

 
$
104,983

 
$
182

U.S. government agency residential mortgage-backed securities – Other
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other debt securities
 
3

 
444

 
6

 
856

 
4

 
1,300

 
10

Total investment securities
 
78

 
$
101,068

 
$
112

 
$
5,215

 
$
80

 
$
106,283

 
$
192


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

 
 

 
 

 
 

 
 

 
 

 
 

Municipal and other tax-exempt
 
20

 
$
2,210

 
$
3

 
$
6,396

 
$
450

 
$
8,606

 
$
453

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 
 
 

 
 

 
 

 
 

 


 


FNMA
 
14

 
365,201

 
1,712

 
14,229

 
52

 
379,430

 
1,764

FHLMC
 
6

 
122,713

 
91

 
20,306

 
258

 
143,019

 
349

GNMA
 
16

 
230,043

 
1,157

 
212,705

 
191

 
442,748

 
1,348

Total U.S. government agencies
 
36

 
717,957

 
2,960

 
247,240

 
501

 
965,197

 
3,461

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
5

 
8,231

 
141

 
7,773

 
63

 
16,004

 
204

Jumbo-A loans
 
1

 
6,583

 
26

 
—

 
—

 
6,583

 
26

Total private issue
 
6

 
14,814

 
167

 
7,773

 
63

 
22,587

 
230

Total residential mortgage-backed securities
 
42

 
732,771

 
3,127

 
255,013

 
564

 
987,784

 
3,691

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
33

 
372,805

 
1,656

 
60,851

 
166

 
433,656

 
1,822

Other debt securities
 
2

 
—

 
—

 
4,151

 
249

 
4,151

 
249

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
33

 
86

 
—

 
886

 
17

 
972

 
17

Total available for sale securities
 
130

 
$
1,107,872


$
4,786


$
327,297


$
1,446


$
1,435,169


$
6,232

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


- 63 -


Temporarily Impaired Securities as of December 31, 2015
(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
 
73

 
$
127,319

 
$
207

 
$
13,380

 
$
77

 
$
140,699

 
$
284

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

 
5,533

 
22

 
—

 
—

 
5,533

 
22

Other debt securities
 
11

 
1,082

 
41

 
1,715

 
18

 
2,797

 
59

Total investment securities
 
85

 
$
133,934

 
$
270

 
$
15,095

 
$
95

 
$
149,029

 
$
365


 
 
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

 
$
995

 
$
5

 
$
—

 
$
—

 
$
995

 
$
5

Municipal and other tax-exempt
 
20

 
$
9,909

 
$
27

 
$
11,664

 
$
710

 
$
21,573

 
$
737

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
55

 
1,188,022

 
10,262

 
18,236

 
239

 
1,206,258

 
10,501

FHLMC
 
40

 
726,713

 
4,827

 
77,545

 
1,480

 
804,258

 
6,307

GNMA
 
15

 
364,919

 
1,951

 
102,109

 
2,600

 
467,028

 
4,551

Total U.S. government agencies
 
110

 
2,279,654

 
17,040

 
197,890

 
4,319

 
2,477,544

 
21,359

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
4

 
—

 
—

 
9,264

 
387

 
9,264

 
387

Jumbo-A loans
 
8

 
—

 
—

 
8,482

 
440

 
8,482

 
440

Total private issue
 
12

 
—

 
—

 
17,746

 
827

 
17,746

 
827

Total residential mortgage-backed securities
 
122

 
2,279,654

 
17,040

 
215,636

 
5,146

 
2,495,290

 
22,186

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
213

 
1,582,469

 
11,419

 
484,258

 
7,225

 
2,066,727

 
18,644

Other debt securities
 
2

 
—

 
—

 
4,151

 
249

 
4,151

 
249

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
61

 
782

 
5

 
991

 
35

 
1,773

 
40

Total available for sale securities
 
419

 
$
3,873,809


$
28,496


$
716,700


$
13,365


$
4,590,509


$
41,861

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



- 64 -


Temporarily Impaired Securities as of September 30, 2015
(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
 
15

 
$
6,250

 
$
81

 
$
13,438

 
$
50

 
$
19,688

 
$
131

U.S. government agency residential mortgage-backed securities – Other
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other debt securities
 
17

 
1,283

 
64

 
4,577

 
49

 
5,860

 
113

Total investment securities
 
32

 
$
7,533

 
$
145

 
$
18,015

 
$
99

 
$
25,548

 
$
244


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

 
 

 
 

 
 

 
 

 


 


Municipal and other tax-exempt1
 
18

 
$
7,868

 
$
485

 
$
3,800

 
$
230

 
$
11,668

 
$
715

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
6

 
155,747

 
470

 
—

 
—

 
155,747

 
470

FHLMC
 
4

 
71,930

 
503

 
26,848

 
321

 
98,778

 
824

GNMA
 
4

 
54,701

 
562

 
54,701

 
560

 
109,402

 
1,122

Total U.S. government agencies
 
14

 
282,378

 
1,535

 
81,549

 
881

 
363,927

 
2,416

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
4

 
2,857

 
186

 
6,667

 
434

 
9,524

 
620

Jumbo-A loans
 
8

 
5,380

 
236

 
3,681

 
161

 
9,061

 
397

Total private issue
 
12

 
8,237

 
422

 
10,348

 
595

 
18,585

 
1,017

Total residential mortgage-backed securities
 
26

 
290,615

 
1,957

 
91,897

 
1,476

 
382,512

 
3,433

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
31

 
327,790

 
1,488

 
223,007

 
545

 
550,797

 
2,033

Other debt securities
 
2

 
—

 
—

 
4,149

 
250

 
4,149

 
250

Perpetual preferred stocks
 
1

 
1,912

 
38

 
—

 
—

 
1,912

 
38

Equity securities and mutual funds
 
37

 
4,031

 
1,432

 
526

 
12

 
4,557

 
1,444

Total available for sale securities
 
115

 
$
632,216

 
$
5,400

 
$
323,379

 
$
2,513

 
$
955,595

 
$
7,913

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

On a quarterly basis, the Company performs separate evaluations of impaired debt and equity investments and available for sale securities to determine if the unrealized losses are temporary.
 
For debt securities, management determines whether it intends to sell or if it is more-likely-than-not that it will be required to sell impaired securities. This determination considers current and forecasted liquidity requirements, regulatory and capital requirements and securities portfolio management. Based on this evaluation as of September 30, 2016, the Company does not intend to sell any impaired available for sale 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.


- 65 -


Impairment of debt securities rated investment grade by all nationally-recognized rating agencies is considered temporary unless specific contrary information is identified. None of the debt securities rated investment grade were considered to be other-than-temporarily impaired at September 30, 2016.

At September 30, 2016, the composition of the Company’s investment and available for sale securities portfolios by the lowest current credit rating assigned by any of the three nationally-recognized rating agencies is as follows (in thousands):
 
 

AAA - AA
 
 
A - BBB
 
 
Below Investment Grade
 
 
Not Rated
 
 
Total
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
$
207,881

 
$
209,210

 
$
5,094

 
$
5,160

 
$
—

 
$
—

 
$
110,250

 
$
113,418

 
$
323,225

 
$
327,788

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

 
—

 
—

 
—

 
—

 
—

 
22,166

 
23,452

 
22,166

 
23,452

Other debt securities
 
140,184

 
164,118

 
—

 
—

 
—

 
—

 
60,882

 
64,952

 
201,066

 
229,070

Total investment securities
 
$
348,065

 
$
373,328

 
$
5,094

 
$
5,160

 
$
—

 
$
—

 
$
193,298

 
$
201,822

 
$
546,457

 
$
580,310

 
 
AAA - AA
 
 
A - BBB
 
Below Investment Grade
 
Not Rated
 
Total
 
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair
Value
Available for Sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,000

 
$
1,002

 
$
1,000

 
$
1,002

Municipal and other tax-exempt
 
23,837

 
24,290

 
5,675

 
5,316

 
—

 
—

 
12,431

 
12,486

 
41,943

 
42,092

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

 
—

 
—

 
—

 
—

 
—

 
5,571,104

 
5,668,672

 
5,571,104

 
5,668,672

Privately issued residential mortgage-backed securities
 
—

 
—

 
—

 
—

 
108,416

 
121,603

 
—

 
—

 
108,416

 
121,603

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

 
—

 
—

 
—

 
—

 
—

 
2,942,988

 
2,986,495

 
2,942,988

 
2,986,495

Other debt securities
 
4,400

 
4,151

 
—

 
—

 
—

 
—

 
—

 
—

 
4,400

 
4,151

Perpetual preferred stock
 
—

 
—

 
4,796

 
5,505

 
10,766

 
14,073

 
—

 
—

 
15,562

 
19,578

Equity securities and mutual funds
 
4

 
591

 
—

 
—

 
—

 
—

 
17,333

 
18,099

 
17,337

 
18,690

Total available for sale securities
 
$
28,241


$
29,032


$
10,471


$
10,821


$
119,182


$
135,676


$
8,544,856


$
8,686,754


$
8,702,750


$
8,862,283

1 
U.S. government and government sponsored enterprises are not rated by the nationally-recognized rating agencies as these securities are guaranteed by agencies of the U.S. government or government-sponsored enterprises.

At September 30, 2016, the entire portfolio of privately issued residential mortgage-backed securities was rated below investment grade by the nationally-recognized rating agencies. The gross unrealized loss on these securities totaled $230 thousand. Impairment of securities rated below investment grade was evaluated based on projections of estimated cash flows from individual loans underlying each security using current and anticipated unemployment and default rates, changes in housing prices and estimated liquidation costs at foreclosure. Each factor is considered in the evaluation.


- 66 -


The primary assumptions used in this evaluation were:

 
September 30, 2016
 
Dec. 31, 2015
 
September 30, 2015
 
 
 
 
 
 
Unemployment rate
Moving down to 4.7 percent over the next 12 months and remain at 4.7 percent thereafter.
 
Decreasing to 4.8 percent over the next 12 months and remain at 4.8 percent thereafter.
 
Moving down to 5.1 percent over the next 12 months and remain at 5.1 percent thereafter.
Housing price appreciation/depreciation
Starting with current depreciated housing prices based on information derived from the FHFA1, appreciating 3.5 percent over the next 12 months, then flat for the following 12 months and then appreciating at 2 percent per year thereafter.
 
Starting with current depreciated housing prices based on information derived from the FHFA1, appreciating 3.5 percent over the next 12 months, then flat for the following 12 months and then appreciating at 2 percent per year thereafter.
 
Starting with current depreciated housing prices based on information derived from the FHFA1, appreciating 3.2 percent over the next 12 months, then flat for the following 12 months and then appreciating at 2 percent per year thereafter.
Estimated liquidation costs
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
 
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
 
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
Discount rates
Estimated cash flows were discounted at rates that range from 2.00 percent to 6.25 percent based on our current expected yields.
 
Estimated cash flows were discounted at rates that range from 2.00 percent to 6.25 percent based on our current expected yields.
 
Estimated cash flows were discounted at rates that range from 2.00 percent to 6.25 percent based on our current expected yields.
1 
Federal Housing Finance Agency

Credit loss impairment is recorded as a charge to earnings. Additional impairment based on the difference between the total unrealized loss and the estimated credit loss on these securities is charged against other comprehensive income, net of deferred taxes. No credit loss impairments were recognized in earnings on privately issued residential mortgage-backed securities during the three months ended September 30, 2016.

A distribution of the amortized cost (after recognition of the other-than-temporary impairment), fair value and credit loss impairments recognized on our privately issued residential mortgage-backed securities is as follows (in thousands, except for number of securities):
 
 
 
 
 
 
 
 
Credit Losses Recognized
 
 
 
 
 
 
 
 
Three months ended
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
Life-to-date
 
 
Number of Securities
 
Amortized Cost
 
Fair Value
 
Number of
Securities
 
Amount
 
Number of Securities
 
Amount
Alt-A
 
14

 
$
47,039

 
$
54,065

 
—

 
$
—

 
14

 
$
36,284

Jumbo-A
 
30

 
61,377

 
67,538

 
—

 
—

 
29

 
18,220

Total
 
44

 
$
108,416

 
$
121,603

 
—

 
$
—

 
43

 
$
54,504


Impaired equity securities, including perpetual preferred stocks, are evaluated based on management's ability and intent to hold the securities until fair value recovers over periods not to exceed three years. The assessment of the ability and intent to hold these securities focuses on the liquidity needs, asset/liability management objectives and securities portfolio objectives. Factors considered when assessing recovery include forecasts of general economic conditions and specific performance of the issuer, analyst ratings and credit spreads for preferred stocks which have debt-like characteristics. The Company has evaluated the near-term prospects of the investments in relation to the severity and duration of the impairment and based on that evaluation has the ability and intent to hold these investments until a recovery in fair value. Accordingly, all impairment of equity securities was considered temporary at September 30, 2016.


- 67 -


The following is a tabular roll forward of the amount of credit-related OTTI recognized on available for sale debt securities in earnings (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Balance of credit-related OTTI recognized on available for sale debt securities, beginning of period
 
$
54,504

 
$
54,439

 
$
54,504

 
$
54,347

Additions for credit-related OTTI not previously recognized
 
—

 
—

 
—

 
—

Additions for increases in credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost
 
—

 
—

 
—

 
92

Reductions for change in intent to hold before recovery
 
—

 
—

 
—

 
—

Sales
 
—

 
—

 
—

 
—

Balance of credit-related OTTI recognized on available for sale debt securities, end of period
 
$
54,504

 
$
54,439

 
$
54,504

 
$
54,439


Additions above exclude other-than-temporary impairment recorded due to change in intent to hold before recovery.
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 U.S. Treasury securities, residential mortgage-backed securities issued by U.S. government agencies and derivative contracts 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):
 
 
Sept. 30,2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. Treasury
 
$
222,409

 
$
(2,397
)
 
$
—

 
$
—

 
$
—

 
$
—

U.S. government agency residential mortgage-backed securities
 
$
—

 
$
—

 
$
444,217

 
$
(2,060
)
 
$
427,760

 
$
2,067

Total
 
$
222,409

 
$
(2,397
)
 
$
444,217

 
$
(2,060
)
 
$
427,760

 
$
2,067



Restricted Equity Securities

Restricted equity securities primarily include stock we are required to hold as members of the Federal Reserve system and the Federal Home Loan Banks. Restricted equity securities are carried at cost as these securities do not have a readily determined fair value because ownership of these shares are restricted and lacks a market. A summary of restricted equity securities follows (in thousands):

 
Sept. 30,2016
 
Dec. 31, 2015
 
Sept. 30,2015
Federal Reserve stock
$
36,283

 
$
36,148

 
$
35,148

Federal Home Loan Bank stock
296,907

 
237,365

 
228,268

Other
201

 
171

 
171

Total
$
333,391


$
273,684


$
263,587


- 68 -


(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.

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. As of September 30, 2016, a decrease in BOK Financial's credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $18 million.
 
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, and foreign exchange rates, or to take positions in 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 as an economic hedge of trading securities. As of September 30, 2016, derivative contracts under the internal risk management programs were primarily used as part of the economic hedges of the change in the fair value of the mortgage servicing rights and trading securities.

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.

- 69 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2016 (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
 
$
20,078,974

 
$
90,999

 
$
(38,678
)
 
$
52,321

 
$
—

 
$
52,321

Interest rate swaps
 
1,323,045

 
49,279

 
—

 
49,279

 
(794
)
 
48,485

Energy contracts
 
729,202

 
41,775

 
(28,464
)
 
13,311

 
(288
)
 
13,023

Agricultural contracts
 
53,002

 
3,950

 
(1,571
)
 
2,379

 
(1,076
)
 
1,303

Foreign exchange contracts
 
550,828

 
536,264

 
—

 
536,264

 
(7,577
)
 
528,687

Equity option contracts
 
103,464

 
4,654

 
—

 
4,654

 
(730
)
 
3,924

Total customer risk management programs
 
22,838,515

 
726,921

 
(68,713
)
 
658,208

 
(10,465
)
 
647,743

Internal risk management programs
 
2,298,038

 
7,335

 
—

 
7,335

 
—

 
7,335

Total derivative contracts
 
$
25,136,553

 
$
734,256

 
$
(68,713
)
 
$
665,543

 
$
(10,465
)
 
$
655,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
19,776,883

 
$
86,812

 
$
(38,678
)
 
$
48,134

 
$
(39,042
)
 
$
9,092

Interest rate swaps
 
1,323,045

 
49,518

 
—

 
49,518

 
(34,457
)
 
15,061

Energy contracts
 
695,835

 
40,888

 
(28,464
)
 
12,424

 
(3,857
)
 
8,567

Agricultural contracts
 
52,997

 
3,943

 
(1,571
)
 
2,372

 
—

 
2,372

Foreign exchange contracts
 
550,943

 
536,660

 
—

 
536,660

 
(5,396
)
 
531,264

Equity option contracts
 
103,464

 
4,654

 
—

 
4,654

 
—

 
4,654

Total customer risk management programs
 
22,503,167

 
722,475

 
(68,713
)
 
653,762

 
(82,752
)
 
571,010

Interest risk management programs
 
1,485,691

 
2,977

 
—

 
2,977

 
—

 
2,977

Total derivative contracts
 
$
23,988,858

 
$
725,452

 
$
(68,713
)
 
$
656,739

 
$
(82,752
)
 
$
573,987

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



- 70 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2015 (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
 
$
14,583,052

 
$
43,270

 
$
(28,305
)
 
$
14,965

 
$
—

 
$
14,965

Interest rate swaps
 
1,332,044

 
31,744

 
—

 
31,744

 
(1,424
)
 
30,320

Energy contracts
 
470,613

 
83,045

 
(22,970
)
 
60,075

 
(18,606
)
 
41,469

Agricultural contracts
 
61,662

 
2,591

 
(1,158
)
 
1,433

 
—

 
1,433

Foreign exchange contracts
 
546,572

 
498,830

 
—

 
498,830

 
(4,140
)
 
494,690

Equity option contracts
 
137,278

 
3,780

 
—

 
3,780

 
(470
)
 
3,310

Total customer risk management programs
 
17,131,221

 
663,260

 
(52,433
)
 
610,827

 
(24,640
)
 
586,187

Interest risk management programs
 
22,000

 
83

 
—

 
83

 
—

 
83

Total derivative contracts
 
$
17,153,221

 
$
663,343

 
$
(52,433
)
 
$
610,910

 
$
(24,640
)
 
$
586,270

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
14,168,927

 
$
40,141

 
$
(28,305
)
 
$
11,836

 
$
(1,308
)
 
$
10,528

Interest rate swaps
 
1,332,044

 
31,928

 
—

 
31,928

 
(20,530
)
 
11,398

Energy contracts
 
463,703

 
81,869

 
(22,970
)
 
58,899

 
—

 
58,899

Agricultural contracts
 
61,657

 
2,579

 
(1,158
)
 
1,421

 
(1,248
)
 
173

Foreign exchange contracts
 
546,405

 
498,574

 
—

 
498,574

 
(1,951
)
 
496,623

Equity option contracts
 
137,278

 
3,780

 
—

 
3,780

 
—

 
3,780

Total customer risk management programs
 
16,710,014

 
658,871

 
(52,433
)
 
606,438

 
(25,037
)
 
581,401

Interest risk management programs
 
75,000

 
300

 
—

 
300

 
—

 
300

Total derivative contracts
 
$
16,785,014

 
$
659,171

 
$
(52,433
)
 
$
606,738

 
$
(25,037
)
 
$
581,701

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





- 71 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2015 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
16,093,704

 
$
136,435

 
$
(50,845
)
 
$
85,590

 
$
—

 
$
85,590

Interest rate swaps
 
1,345,779

 
42,636

 
—

 
42,636

 
—

 
42,636

Energy contracts
 
560,997

 
89,948

 
(28,535
)
 
61,413

 
(23,089
)
 
38,324

Agricultural contracts
 
101,321

 
8,064

 
(4,053
)
 
4,011

 
(1,558
)
 
2,453

Foreign exchange contracts
 
618,991

 
557,313

 
—

 
557,313

 
(3,985
)
 
553,328

Equity option contracts
 
143,452

 
3,784

 
—

 
3,784

 
(470
)
 
3,314

Total customer risk management programs
 
18,864,244

 
838,180

 
(83,433
)
 
754,747

 
(29,102
)
 
725,645

Interest risk management programs
 
47,000

 
514

 
—

 
514

 
—

 
514

Total derivative contracts
 
$
18,911,244

 
$
838,694

 
$
(83,433
)
 
$
755,261

 
$
(29,102
)
 
$
726,159

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
16,050,271

 
$
133,543

 
$
(50,845
)
 
$
82,698

 
$
(82,225
)
 
$
473

Interest rate swaps
 
1,345,779

 
42,901

 
—

 
42,901

 
(26,723
)
 
16,178

Energy contracts
 
551,989

 
85,856

 
(28,535
)
 
57,321

 
—

 
57,321

Agricultural contracts
 
101,325

 
8,045

 
(4,053
)
 
3,992

 
—

 
3,992

Foreign exchange contracts
 
618,770

 
556,890

 
—

 
556,890

 
(2,619
)
 
554,271

Equity option contracts
 
143,452

 
3,784

 
—

 
3,784

 
—

 
3,784

Total customer risk management programs
 
18,811,586

 
831,019

 
(83,433
)
 
747,586

 
(111,567
)
 
636,019

Interest risk management programs
 
7,500

 
96

 
—

 
96

 
—

 
96

Total derivative contracts
 
$
18,819,086

 
$
831,115

 
$
(83,433
)
 
$
747,682

 
$
(111,567
)
 
$
636,115

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







- 72 -


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, 2016
 
September 30, 2015
 
 
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
 
$
11,584

 
$
—

 
$
7,914

 
$
—

Interest rate swaps
 
710

 
—

 
411

 
—

Energy contracts
 
1,222

 
—

 
771

 
—

Agricultural contracts
 
25

 
—

 
44

 
—

Foreign exchange contracts
 
218

 
—

 
152

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
13,759

 
—

 
9,292

 
—

Interest risk management programs
 
(1,608
)
 
2,226

 
(199
)
 
1,283

Total derivative contracts
 
$
12,151

 
$
2,226

 
$
9,093

 
$
1,283

 
 
Nine Months Ended
 
 
September 30, 2016
 
September 30, 2015
 
 
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
 
$
28,886

 
$
—

 
$
25,942

 
$
—

Interest rate swaps
 
1,758

 
—

 
1,495

 
—

Energy contracts
 
4,667

 
—

 
3,138

 
—

Agricultural contracts
 
86

 
—

 
86

 
—

Foreign exchange contracts
 
730

 
—

 
618

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
36,127

 
—

 
31,279

 
—

Interest risk management programs
 
(1,617
)
 
20,130

 
(199
)
 
1,162

Total derivative contracts
 
$
34,510

 
$
20,130

 
$
31,080

 
$
1,162


Net interest revenue was not significantly impacted by the settlement of amounts receivable or payable on interest rate swaps for the nine months ended September 30, 2016 and 2015, respectively. 

- 73 -


(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. 

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 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.

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

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. 


- 74 -


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

 
 
September 30, 2016
 
December 31, 2015
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
1,991,423

 
$
7,952,276

 
$
176,464

 
$
10,120,163

 
$
1,850,548

 
$
8,325,559

 
$
76,424

 
$
10,252,531

Commercial real estate
 
565,429

 
3,220,819

 
7,350

 
3,793,598

 
627,678

 
2,622,354

 
9,001

 
3,259,033

Residential mortgage
 
1,572,288

 
248,053

 
52,452

 
1,872,793

 
1,598,992

 
216,661

 
61,240

 
1,876,893

Personal
 
104,408

 
573,138

 
686

 
678,232

 
91,816

 
460,418

 
463

 
552,697

Total
 
$
4,233,548

 
$
11,994,286

 
$
236,952

 
$
16,464,786

 
$
4,169,034

 
$
11,624,992

 
$
147,128

 
$
15,941,154

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
3,839

 
 

 
 

 
 

 
$
1,207

 
 
September 30, 2015
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
1,854,163

 
$
7,909,461

 
$
33,798

 
$
9,797,422

Commercial real estate
 
588,604

 
2,635,507

 
10,956

 
3,235,067

Residential mortgage
 
1,624,759

 
200,136

 
44,100

 
1,868,995

Personal
 
100,615

 
364,848

 
494

 
465,957

Total
 
$
4,168,141

 
$
11,109,952

 
$
89,348

 
$
15,367,441

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
101

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

At September 30, 2016, $5.3 billion or 32 percent of our total loan portfolio is to businesses and individuals attributed to the Texas market and $3.7 billion or 22 percent of the total loan portfolio is to businesses and individuals attributed to the Oklahoma market. These geographic concentrations subject the loan portfolio to the general economic conditions within these areas.

Commercial

Commercial loans represent loans for working capital, facilities acquisition or expansion, purchases of equipment and other needs of commercial customers primarily located within our geographical footprint. Commercial loans are underwritten individually and represent on-going 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 on-going 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, 2016, commercial loans attributed to the Texas market totaled $3.3 billion or 33 percent of the commercial loan portfolio segment and commercial loans attributed to the Oklahoma market totaled $2.3 billion or 23 percent of the commercial loan portfolio segment.

The commercial loan portfolio segment is further divided into loan classes. The energy loan class totaled $2.5 billion or 15 percent of total loans at September 30, 2016, including $2.0 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 $2.9 billion or 18 percent of total loans at September 30, 2016. Approximately $1.3 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, finance and insurance, not-for-profit, educational services and loans to entities providing services for real estate and construction. The healthcare loan class totaled $2.1 billion or 13 percent of total loans at September 30, 2016. 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 skill nursing. Healthcare also includes loans to hospitals and other medical service providers.


- 75 -


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, 2016, 30 percent of commercial real estate loans are secured by properties primarily located in the Dallas and Houston areas of Texas. An additional 12 percent of commercial real estate loans are secured by properties located primarily in the Tulsa and Oklahoma City metropolitan areas of Oklahoma. 

Residential Mortgage and Personal

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

At September 30, 2016, residential mortgage loans included $190 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 $713 million at September 30, 2016. Approximately, 66 percent of the home equity loan portfolio is comprised of first lien loans and 34 percent of the home equity portfolio is comprised of junior lien loans. Junior lien loans are distributed 58 percent to amortizing term loans and 42 percent to revolving lines of credit. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 5 year revolving period followed by a 15 year term of amortizing repayments. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term, subject to an update of certain credit information.

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, 2016, outstanding commitments totaled $8.7 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.


- 76 -


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, 2016, outstanding standby letters of credit totaled $500 million. Commercial letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying transaction is consummated. At September 30, 2016, outstanding commercial letters of credit totaled $5.2 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 on-going 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, 2016.

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.


- 77 -


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, 2016 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
145,139

 
$
46,745

 
$
18,690

 
$
6,001

 
$
26,684

 
$
243,259

Provision for loan losses
 
2,420

 
2,551

 
(466
)
 
1,900

 
1,502

 
7,907

Loans charged off
 
(6,266
)
 
—

 
(285
)
 
(1,550
)
 
—

 
(8,101
)
Recoveries
 
177

 
521

 
650

 
690

 
—

 
2,038

Ending balance
 
$
141,470

 
$
49,817

 
$
18,589

 
$
7,041

 
$
28,186

 
$
245,103

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
8,752

 
$
203

 
$
62

 
$
28

 
$
—

 
$
9,045

Provision for off-balance sheet credit losses
 
2,170

 
(53
)
 
(7
)
 
(17
)
 
—

 
2,093

Ending balance
 
$
10,922

 
$
150

 
$
55

 
$
11

 
$
—

 
$
11,138

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
4,590

 
$
2,498

 
$
(473
)
 
$
1,883

 
$
1,502

 
$
10,000


- 78 -


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, 2016 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
130,334

 
$
41,391

 
$
19,509

 
$
4,164

 
$
30,126

 
$
225,524

Provision for loan losses
 
45,995

 
7,538

 
(829
)
 
4,809

 
(1,940
)
 
55,573

Loans charged off
 
(35,747
)
 
—

 
(1,104
)
 
(4,086
)
 
—

 
(40,937
)
Recoveries
 
888

 
888

 
1,013

 
2,154

 
—

 
4,943

Ending balance
 
$
141,470

 
$
49,817

 
$
18,589

 
$
7,041

 
$
28,186

 
$
245,103

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
1,506

 
$
153

 
$
30

 
$
22

 
$
—

 
$
1,711

Provision for off-balance sheet credit losses
 
9,416

 
(3
)
 
25

 
(11
)
 
—

 
9,427

Ending balance
 
$
10,922

 
$
150

 
$
55

 
$
11

 
$
—

 
$
11,138

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
55,411

 
$
7,535

 
$
(804
)
 
$
4,798

 
$
(1,940
)
 
$
65,000


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, 2015 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
107,037

 
$
39,744

 
$
21,449

 
$
3,955

 
$
28,902

 
$
201,087

Provision for loan losses
 
4,694

 
180

 
(349
)
 
1,413

 
(1,156
)
 
4,782

Loans charged off
 
(3,497
)
 
—

 
(446
)
 
(1,331
)
 
—

 
(5,274
)
Recoveries
 
759

 
1,865

 
205

 
692

 
—

 
3,521

Ending balance
 
$
108,993

 
$
41,789

 
$
20,859

 
$
4,729

 
$
27,746

 
$
204,116

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
595

 
$
242

 
$
26

 
$
19

 
$
—

 
$
882

Provision for off-balance sheet credit losses
 
1,873

 
847

 
(2
)
 
—

 
—

 
2,718

Ending balance
 
$
2,468

 
$
1,089

 
$
24

 
$
19

 
$
—

 
$
3,600

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
6,567

 
$
1,027

 
$
(351
)
 
$
1,413

 
$
(1,156
)
 
$
7,500


- 79 -



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, 2015 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
90,875

 
$
42,445

 
$
23,458

 
$
4,233

 
$
28,045

 
$
189,056

Provision for loan losses
 
20,869

 
(11,571
)
 
(1,938
)
 
2,069

 
(299
)
 
9,130

Loans charged off
 
(4,552
)
 
(44
)
 
(1,784
)
 
(3,940
)
 
—

 
(10,320
)
Recoveries
 
1,801

 
10,959

 
1,123

 
2,367

 
—

 
16,250

Ending balance
 
$
108,993

 
$
41,789

 
$
20,859

 
$
4,729

 
$
27,746

 
$
204,116

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
475

 
$
707

 
$
28

 
$
20

 
$
—

 
$
1,230

Provision for off-balance sheet credit losses
 
1,993

 
382

 
(4
)
 
(1
)
 
—

 
2,370

Ending balance
 
$
2,468

 
$
1,089

 
$
24

 
$
19

 
$
—

 
$
3,600

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
22,862

 
$
(11,189
)
 
$
(1,942
)
 
$
2,068

 
$
(299
)
 
$
11,500


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at September 30, 2016 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
 
$
9,943,699

 
$
134,968

 
$
176,464

 
$
6,502

 
$
10,120,163

 
$
141,470

Commercial real estate
 
3,786,248

 
49,817

 
7,350

 
—

 
3,793,598

 
49,817

Residential mortgage
 
1,820,341

 
18,527

 
52,452

 
62

 
1,872,793

 
18,589

Personal
 
677,546

 
7,041

 
686

 
—

 
678,232

 
7,041

Total
 
16,227,834

 
210,353

 
236,952

 
6,564

 
16,464,786

 
216,917

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
28,186

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,227,834

 
$
210,353

 
$
236,952

 
$
6,564

 
$
16,464,786

 
$
245,103


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 2015 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
 
$
10,176,107

 
$
114,027

 
$
76,424

 
$
16,307

 
$
10,252,531

 
$
130,334

Commercial real estate
 
3,250,032

 
41,373

 
9,001

 
18

 
3,259,033

 
41,391

Residential mortgage
 
1,815,653

 
19,441

 
61,240

 
68

 
1,876,893

 
19,509

Personal
 
552,234

 
4,164

 
463

 
—

 
552,697

 
4,164

Total
 
15,794,026

 
179,005

 
147,128

 
16,393

 
15,941,154

 
195,398

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
30,126

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,794,026

 
$
179,005

 
$
147,128

 
$
16,393

 
$
15,941,154

 
$
225,524


- 80 -



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at September 30, 2015 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
 
$
9,763,624

 
$
104,157

 
$
33,798

 
$
4,836

 
$
9,797,422

 
$
108,993

Commercial real estate
 
3,224,111

 
41,771

 
10,956

 
18

 
3,235,067

 
41,789

Residential mortgage
 
1,824,896

 
20,762

 
44,099

 
97

 
1,868,995

 
20,859

Personal
 
465,463

 
4,729

 
494

 
—

 
465,957

 
4,729

Total
 
15,278,094

 
171,419

 
89,347

 
4,951

 
15,367,441

 
176,370

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
27,746

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,278,094

 
$
171,419

 
$
89,347

 
$
4,951

 
$
15,367,441

 
$
204,116

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, 2016 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,093,884

 
$
140,552

 
$
26,279

 
$
918

 
$
10,120,163

 
$
141,470

Commercial real estate
 
3,793,598

 
49,817

 
—

 
—

 
3,793,598

 
49,817

Residential mortgage
 
206,430

 
3,028

 
1,666,363

 
15,561

 
1,872,793

 
18,589

Personal
 
586,869

 
4,182

 
91,363

 
2,859

 
678,232

 
7,041

Total
 
14,680,781

 
197,579

 
1,784,005

 
19,338

 
16,464,786

 
216,917

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
28,186

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,680,781

 
$
197,579

 
$
1,784,005

 
$
19,338

 
$
16,464,786

 
$
245,103

 

- 81 -


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, 2015 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,227,303

 
$
129,426

 
$
25,228

 
$
908

 
$
10,252,531

 
$
130,334

Commercial real estate
 
3,259,033

 
41,391

 
—

 
—

 
3,259,033

 
41,391

Residential mortgage
 
196,701

 
2,883

 
1,680,192

 
16,626

 
1,876,893

 
19,509

Personal
 
467,955

 
1,390

 
84,742

 
2,774

 
552,697

 
4,164

Total
 
14,150,992

 
175,090

 
1,790,162

 
20,308

 
15,941,154

 
195,398

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
30,126

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,150,992

 
$
175,090

 
$
1,790,162

 
$
20,308

 
$
15,941,154

 
$
225,524


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, 2015 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
9,771,003

 
$
108,101

 
$
26,419

 
$
892

 
$
9,797,422

 
$
108,993

Commercial real estate
 
3,235,067

 
41,789

 
—

 
—

 
3,235,067

 
41,789

Residential mortgage
 
190,361

 
2,938

 
1,678,634

 
17,921

 
1,868,995

 
20,859

Personal
 
380,376

 
1,790

 
85,581

 
2,939

 
465,957

 
4,729

Total
 
13,576,807

 
154,618

 
1,790,634

 
21,752

 
15,367,441

 
176,370

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
27,746

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,576,807

 
$
154,618

 
$
1,790,634

 
$
21,752

 
$
15,367,441

 
$
204,116


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.


- 82 -


The following table summarizes the Company’s loan portfolio at September 30, 2016 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
 
$
1,869,598

 
$
147,153

 
$
361,087

 
$
142,966

 
$
—

 
$
—

 
$
2,520,804

Services
 
2,882,065

 
14,861

 
31,196

 
8,477

 
—

 
—

 
2,936,599

Wholesale/retail
 
1,557,067

 
15,337

 
27,173

 
2,453

 
—

 
—

 
1,602,030

Manufacturing
 
470,702

 
8,774

 
19,736

 
274

 
—

 
—

 
499,486

Healthcare
 
2,022,757

 
42,224

 
19,210

 
855

 
—

 
—

 
2,085,046

Other commercial and industrial
 
415,769

 
2,478

 
10,302

 
21,370

 
26,210

 
69

 
476,198

Total commercial
 
9,217,958

 
230,827

 
468,704

 
176,395

 
26,210

 
69

 
10,120,163

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
155,737

 
—

 
470

 
3,739

 
—

 
—

 
159,946

Retail
 
794,920

 
4,802

 
406

 
1,249

 
—

 
—

 
801,377

Office
 
750,924

 
899

 
—

 
882

 
—

 
—

 
752,705

Multifamily
 
868,501

 
—

 
5,221

 
51

 
—

 
—

 
873,773

Industrial
 
837,945

 
—

 
—

 
76

 
—

 
—

 
838,021

Other commercial real estate
 
366,416

 
—

 
7

 
1,353

 
—

 
—

 
367,776

Total commercial real estate
 
3,774,443

 
5,701

 
6,104

 
7,350

 
—

 
—

 
3,793,598

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
200,590

 
1,192

 
2,134

 
2,514

 
739,686

 
23,442

 
969,558

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
174,877

 
15,432

 
190,309

Home equity
 
—

 
—

 
—

 
—

 
701,862

 
11,064

 
712,926

Total residential mortgage
 
200,590

 
1,192

 
2,134

 
2,514

 
1,616,425

 
49,938

 
1,872,793

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
585,287

 
228

 
923

 
431

 
91,108

 
255

 
678,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,778,278

 
$
237,948

 
$
477,865

 
$
186,690

 
$
1,733,743

 
$
50,262

 
$
16,464,786



- 83 -


The following table summarizes the Company’s loan portfolio at December 31, 2015 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
 
$
2,580,694

 
$
325,663

 
$
129,782

 
$
61,189

 
$
—

 
$
—

 
$
3,097,328

Services
 
2,763,929

 
3,296

 
6,761

 
10,290

 
—

 
—

 
2,784,276

Wholesale/retail
 
1,394,596

 
18,184

 
6,365

 
2,919

 
—

 
—

 
1,422,064

Manufacturing
 
534,966

 
19,560

 
1,872

 
331

 
—

 
—

 
556,729

Healthcare
 
1,876,745

 
5,563

 
—

 
1,072

 
—

 
—

 
1,883,380

Other commercial and industrial
 
477,551

 
5,479

 
—

 
496

 
25,101

 
127

 
508,754

Total commercial
 
9,628,481

 
377,745

 
144,780

 
76,297

 
25,101

 
127

 
10,252,531

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
154,369

 
1,355

 
293

 
4,409

 
—

 
—

 
160,426

Retail
 
788,708

 
6,046

 
426

 
1,319

 
—

 
—

 
796,499

Office
 
636,210

 
291

 
555

 
651

 
—

 
—

 
637,707

Multifamily
 
744,299

 
—

 
6,512

 
274

 
—

 
—

 
751,085

Industrial
 
563,093

 
—

 
—

 
76

 
—

 
—

 
563,169

Other commercial real estate
 
347,864

 
—

 
11

 
2,272

 
—

 
—

 
350,147

Total commercial real estate
 
3,234,543

 
7,692

 
7,797

 
9,001

 
—

 
—

 
3,259,033

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
192,367

 
89

 
1,932

 
2,313

 
721,964

 
26,671

 
945,336

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
175,037

 
21,900

 
196,937

Home equity
 
—

 
—

 
—

 
—

 
724,264

 
10,356

 
734,620

Total residential mortgage
 
192,367

 
89

 
1,932

 
2,313

 
1,621,265

 
58,927

 
1,876,893

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
467,808

 
3

 
14

 
130

 
84,409

 
333

 
552,697

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,523,199

 
$
385,529

 
$
154,523

 
$
87,741

 
$
1,730,775

 
$
59,387

 
$
15,941,154



- 84 -


The following table summarizes the Company’s loan portfolio at September 30, 2015 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
 
$
2,527,543

 
$
196,298

 
$
96,446

 
$
17,880

 
$
—

 
$
—

 
$
2,838,167

Services
 
2,683,655

 
4,207

 
8,070

 
10,692

 
—

 
—

 
2,706,624

Wholesale/retail
 
1,432,460

 
23,176

 
3,242

 
3,058

 
—

 
—

 
1,461,936

Manufacturing
 
532,443

 
20,975

 
1,907

 
352

 
—

 
—

 
555,677

Healthcare
 
1,734,741

 
5,721

 
—

 
1,218

 
—

 
—

 
1,741,680

Other commercial and industrial
 
463,385

 
3,012

 
—

 
522

 
26,343

 
76

 
493,338

Total commercial
 
9,374,227

 
253,389

 
109,665

 
33,722

 
26,343

 
76

 
9,797,422

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
146,764

 
1,628

 
370

 
4,748

 
—

 
—

 
153,510

Retail
 
761,279

 
6,089

 
433

 
1,648

 
—

 
—

 
769,449

Office
 
624,611

 
296

 
560

 
684

 
—

 
—

 
626,151

Multifamily
 
750,791

 
—

 
7,682

 
185

 
—

 
—

 
758,658

Industrial
 
563,795

 
—

 
—

 
76

 
—

 
—

 
563,871

Other commercial real estate
 
359,672

 
—

 
141

 
3,615

 
—

 
—

 
363,428

Total commercial real estate
 
3,206,912

 
8,013

 
9,186

 
10,956

 
—

 
—

 
3,235,067

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
186,832

 
91

 
918

 
2,520

 
719,163

 
28,140

 
937,664

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
188,827

 
3,885

 
192,712

Home equity
 
—

 
—

 
—

 
—

 
729,065

 
9,554

 
738,619

Total residential mortgage
 
186,832

 
91

 
918

 
2,520

 
1,637,055

 
41,579

 
1,868,995

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
380,216

 
5

 
15

 
140

 
85,227

 
354

 
465,957

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,148,187

 
$
261,498

 
$
119,784

 
$
47,338

 
$
1,748,625

 
$
42,009

 
$
15,367,441




- 85 -


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 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, 2016
 
Three Months Ended
 
Nine Months Ended
 
 
 
Recorded Investment
 
 
 
September 30, 2016
 
September 30, 2016
 
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
$
179,578

 
$
142,966

 
$
100,300

 
$
42,666

 
$
6,502

 
$
155,555

 
$
—

 
$
85,333

 
$
—

Services
11,858

 
8,477

 
8,477

 
—

 
—

 
8,932

 
—

 
9,384

 
—

Wholesale/retail
8,528

 
2,453

 
2,453

 
—

 
—

 
2,613

 
—

 
2,686

 
—

Manufacturing
642

 
274

 
274

 
—

 
—

 
284

 
—

 
303

 
—

Healthcare
1,168

 
855

 
855

 
—

 
—

 
865

 
—

 
964

 
—

Other commercial and industrial
29,176

 
21,439

 
21,439

 
—

 
—

 
10,978

 
—

 
11,031

 
—

Total commercial
230,950

 
176,464

 
133,798

 
42,666

 
6,502

 
179,227

 
—

 
109,701

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
6,090

 
3,739

 
3,739

 
—

 
—

 
4,000

 
—

 
4,074

 
—

Retail
1,914

 
1,249

 
1,249

 
—

 
—

 
1,257

 
—

 
1,284

 
—

Office
1,187

 
882

 
882

 
—

 
—

 
744

 
—

 
766

 
—

Multifamily
1,000

 
51

 
51

 
—

 
—

 
58

 
—

 
163

 
—

Industrial
76

 
76

 
76

 
—

 
—

 
76

 
—

 
76

 
—

Other real estate loans
7,375

 
1,353

 
1,353

 
—

 
—

 
1,430

 
—

 
1,813

 
—

Total commercial real estate
17,642

 
7,350

 
7,350

 
—

 
—

 
7,565

 
—

 
8,176

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
32,372

 
25,956

 
25,847

 
109

 
62

 
26,592

 
292

 
27,470

 
923

Permanent mortgage guaranteed by U.S. government agencies1
196,162

 
190,309

 
190,309

 
—

 
—

 
190,547

 
2,098

 
193,879

 
5,893

Home equity
12,099

 
11,064

 
11,064

 
—

 
—

 
10,578

 
—

 
10,710

 
—

Total residential mortgage
240,633

 
227,329

 
227,220

 
109

 
62

 
227,717

 
2,390

 
232,059

 
6,816

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
724

 
686

 
686

 
—

 
—

 
520

 
—

 
575

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
489,949

 
$
411,829

 
$
369,054

 
$
42,775

 
$
6,564

 
$
415,029

 
$
2,390

 
$
350,511

 
$
6,816

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, 2016, $15 million of these loans were nonaccruing and $175 million were accruing based on the guarantee by U.S. government agencies.

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


- 86 -


A summary of impaired loans at December 31, 2015 follows (in thousands): 
 
 
 
 
Recorded Investment
 
 
 
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
63,910

 
$
61,189

 
$
18,330

 
$
42,859

 
$
16,115

Services
 
13,449

 
10,290

 
9,657

 
633

 
148

Wholesale/retail
 
8,582

 
2,919

 
2,907

 
12

 
9

Manufacturing
 
665

 
331

 
331

 
—

 
—

Healthcare
 
1,352

 
1,072

 
931

 
141

 
35

Other commercial and industrial
 
8,304

 
623

 
623

 
—

 
—

Total commercial
 
96,262

 
76,424

 
32,779

 
43,645

 
16,307

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
8,963

 
4,409

 
4,409

 
—

 
—

Retail
 
1,923

 
1,319

 
1,319

 
—

 
—

Office
 
937

 
651

 
651

 
—

 
—

Multifamily
 
1,192

 
274

 
274

 
—

 
—

Industrial
 
76

 
76

 
76

 
—

 
—

Other real estate loans
 
8,363

 
2,272

 
2,113

 
159

 
18

Total commercial real estate
 
21,454

 
9,001

 
8,842

 
159

 
18

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
37,273

 
28,984

 
28,868

 
116

 
68

Permanent mortgage guaranteed by U.S. government agencies1
 
202,984

 
196,937

 
196,937

 
—

 
—

Home equity
 
10,988

 
10,356

 
10,356

 
—

 
—

Total residential mortgage
 
251,245

 
236,277

 
236,161

 
116

 
68

 
 
 
 
 
 
 
 
 
 
 
Personal
 
489

 
463

 
463

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
369,450

 
$
322,165

 
$
278,245

 
$
43,920

 
$
16,393

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, 2015, $22 million of these loans were nonaccruing and $175 million were accruing based on the guarantee by U.S. government agencies.


- 87 -


A summary of impaired loans at September 30, 2015 follows (in thousands): 
 
 
 
For the
 
For the
 
As of September 30, 2015
 
Three Months Ended
 
Nine Months Ended
 
 
 
Recorded Investment
 
 
 
September 30, 2015
 
September 30, 2015
 
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
$
18,904

 
$
17,880

 
$
5,017

 
$
12,863

 
$
4,644

 
$
12,361

 
$
—

 
$
9,648

 
$
—

Services
13,677

 
10,692

 
10,041

 
651

 
148

 
10,818

 
—

 
7,946

 
—

Wholesale/retail
8,588

 
3,058

 
3,046

 
12

 
9

 
3,612

 
—

 
3,603

 
—

Manufacturing
675

 
352

 
352

 
—

 
—

 
365

 
—

 
401

 
—

Healthcare
1,612

 
1,218

 
1,064

 
154

 
35

 
1,248

 
—

 
1,299

 
—

Other commercial and industrial
8,277

 
598

 
598

 
—

 
—

 
611

 
—

 
765

 
—

Total commercial
51,733

 
33,798

 
20,118

 
13,680

 
4,836

 
29,015

 
—

 
23,662

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Residential construction and land development
9,349

 
4,748

 
4,748

 
—

 
—

 
7,058

 
—

 
5,023

 
—

Retail
2,252

 
1,648

 
1,648

 
—

 
—

 
2,737

 
—

 
2,787

 
—

Office
2,046

 
684

 
684

 
—

 
—

 
1,522

 
—

 
2,052

 
—

Multifamily
192

 
185

 
185

 
—

 
—

 
190

 
—

 
93

 
—

Industrial
76

 
76

 
76

 
—

 
—

 
76

 
—

 
38

 
—

Other real estate loans
9,650

 
3,615

 
3,452

 
163

 
18

 
3,965

 
—

 
4,763

 
—

Total commercial real estate
23,565

 
10,956

 
10,793

 
163

 
18

 
15,548

 
—

 
14,756

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Permanent mortgage
38,829

 
30,660

 
30,506

 
154

 
97

 
31,424

 
297

 
32,753

 
942

Permanent mortgage guaranteed by U.S. government agencies1
198,905

 
192,712

 
192,712

 
—

 
—

 
193,165

 
1,902

 
198,312

 
6,205

Home equity
10,085

 
9,554

 
9,554

 
—

 
—

 
9,810

 
—

 
9,559

 
—

Total residential mortgage
247,819

 
232,926

 
232,772

 
154

 
97

 
234,399

 
2,199

 
240,624

 
7,147

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
516

 
494

 
494

 
—

 
—

 
522

 
—

 
530

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
323,633

 
$
278,174

 
$
264,177

 
$
13,997

 
$
4,951

 
$
279,484

 
$
2,199

 
$
279,572

 
$
7,147

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, 2015, $3.9 million of these loans were nonaccruing and $189 million were accruing based on the guarantee by U.S. government agencies.


- 88 -


Troubled Debt Restructurings

A summary of troubled debt restructurings ("TDRs") by accruing status as of September 30, 2016 is as follows (in thousands):
 
 
As of September 30, 2016
 
Amounts Charged Off During:
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months
Ended
September 30, 2016
 
Nine Months Ended
Sept. 30, 2016
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
1,746

 
$
—

 
$
1,746

 
$
—

 
$
500

 
$
1,000

Services
 
7,761

 
7,034

 
727

 
—

 
—

 
—

Wholesale/retail
 
2,327

 
2,287

 
40

 
—

 
—

 
—

Manufacturing
 
238

 
238

 
—

 
—

 
—

 
—

Healthcare
 
623

 
—

 
623

 
—

 
—

 
—

Other commercial and industrial
 
497

 
61

 
436

 
—

 
—

 
57

Total commercial
 
13,192

 
9,620

 
3,572

 
—

 
500

 
1,057

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
794

 
359

 
435

 
—

 
—

 
—

Retail
 
1,249

 
892

 
357

 
—

 
—

 
—

Office
 
149

 
149

 
—

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
666

 
666

 
—

 
—

 
—

 
—

Total commercial real estate
 
2,858

 
2,066

 
792

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
16,109

 
11,944

 
4,165

 
62

 
—

 
2

Permanent mortgage guaranteed by U.S. government agencies
 
8,220

 
2,331

 
5,889

 
—

 
—

 
—

Home equity
 
5,168

 
4,667

 
501

 
—

 
34

 
153

Total residential mortgage
 
29,497

 
18,942

 
10,555

 
62

 
34

 
155

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
273

 
271

 
2

 
—

 
9

 
18

 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
45,820

 
$
30,899

 
$
14,921

 
$
62

 
$
543

 
$
1,230

 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgages guaranteed by U.S. government agencies
 
80,306

 
29,020

 
51,286

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
126,126

 
$
59,919

 
$
66,207

 
$
62

 
$
543

 
$
1,230


- 89 -


A summary of troubled debt restructurings by accruing status as of December 31, 2015 is as follows (in thousands):
 
 
As of
 
 
December 31, 2015
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
Energy
 
$
2,304

 
$
2,304

 
$
—

 
$
—

Services
 
9,027

 
8,210

 
817

 
148

Wholesale/retail
 
2,758

 
2,706

 
52

 
9

Manufacturing
 
282

 
282

 
—

 
—

Healthcare
 
673

 
673

 
—

 
—

Other commercial and industrial
 
621

 
89

 
532

 
—

Total commercial
 
15,665

 
14,264

 
1,401

 
157

 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

Residential construction and land development
 
2,328

 
1,556

 
772

 
—

Retail
 
1,319

 
942

 
377

 
—

Office
 
165

 
165

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

Other real estate loans
 
920

 
478

 
442

 
—

Total commercial real estate
 
4,732

 
3,141

 
1,591

 
—

 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

Permanent mortgage
 
16,618

 
9,043

 
7,575

 
68

Permanent mortgage guaranteed by U.S. government agencies
 
11,136

 
139

 
10,997

 
—

Home equity
 
5,159

 
4,218

 
941

 
—

Total residential mortgage
 
32,913

 
13,400

 
19,513

 
68

 
 
 
 
 
 
 
 
 
Personal
 
324

 
297

 
27

 
—

 
 
 
 
 
 
 
 
 
Total nonaccuring TDRs
 
$
53,634

 
$
31,102

 
$
22,532

 
$
225

 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
Permanent mortgages guaranteed by U.S. government agencies
 
74,050

 
23,029

 
51,021

 
—

 
 
 
 
 
 
 
 
 
Total TDRs
 
$
127,684

 
$
54,131

 
$
73,553

 
$
225



- 90 -


A summary of troubled debt restructurings by accruing status as of September 30, 2015 is as follows (in thousands):
 
 
As of September 30, 2015
 
Amounts Charged Off During
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended
September 30, 2015
 
Nine Months Ended
Sept. 30, 2015
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
9,362

 
8,502

 
860

 
148

 
—

 
—

Wholesale/retail
 
2,897

 
2,844

 
53

 
9

 
—

 
—

Manufacturing
 
296

 
296

 
—

 
—

 
—

 
—

Healthcare
 
689

 
689

 
—

 
—

 
—

 
—

Other commercial and industrial
 
590

 
76

 
514

 
—

 
100

 
100

Total commercial
 
13,834

 
12,407

 
1,427

 
157

 
100

 
100

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
2,539

 
1,624

 
915

 
—

 
—

 
—

Retail
 
1,356

 
960

 
396

 
—

 
—

 
—

Office
 
169

 
169

 
—

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
1,037

 
584

 
453

 
—

 
—

 
—

Total commercial real estate
 
5,101

 
3,337

 
1,764

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
16,359

 
9,361

 
6,998

 
97

 
140

 
142

Permanent mortgage guaranteed by U.S. government agencies
 
1,944

 
140

 
1,804

 
—

 
—

 
—

Home equity
 
4,975

 
4,336

 
639

 
—

 
10

 
68

Total residential mortgage
 
23,278

 
13,837

 
9,441

 
97

 
150

 
210

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
365

 
209

 
156

 
—

 
—

 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
42,578

 
$
29,790

 
$
12,788

 
$
254

 
$
250

 
$
312

 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgages guaranteed by U.S. government agencies
 
81,598

 
22,352

 
59,246

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
124,176

 
$
52,142

 
$
72,034

 
$
254

 
$
250

 
$
312


- 91 -


Troubled debt restructurings generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. The following tables detail the recorded balance of loans at September 30, 2016 by class that were restructured during the three months ended September 30, 2016 by primary type of concession (in thousands):

 
Three Months Ended
Sept. 30, 2016
 
Accruing
 
Nonaccrual
 
Total
 
 
Payment Stream
 
Combination & Other
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
—

 
—

 
—

 
—

 
151

 
151

 
151

Permanent mortgage guaranteed by U.S. government agencies
 
3,527

 
4,211

 
7,738

 
—

 
287

 
287

 
8,025

Home equity
 
—

 
—

 
—

 
—

 
920

 
920

 
920

Total residential mortgage
 
3,527

 
4,211

 
7,738

 
—

 
1,358

 
1,358

 
9,096

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
—

 
—

 
—

 
—

 
19

 
19

 
19

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
3,527

 
$
4,211

 
$
7,738

 
$
—

 
$
1,377

 
$
1,377

 
$
9,115




- 92 -


Troubled debt restructurings generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. The following tables detail the recorded balance of loans at September 30, 2016 by class that were restructured during the nine months ended September 30, 2016 by primary type of concession (in thousands):

 
Nine Months Ended
Sept. 30, 2016
 
Accruing
 
Nonaccrual
 
Total
 
 
Payment Stream
 
Combination & Other
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
501

 
$
—

 
$
501

 
$
501

Services
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
 
—

 
—

 
—

 
501

 
—

 
501

 
501

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
—

 
—

 
—

 
1,037

 
1,051

 
2,088

 
2,088

Permanent mortgage guaranteed by U.S. government agencies
 
9,687

 
9,350

 
19,037

 
—

 
982

 
982

 
20,019

Home equity
 
—

 
—

 
—

 
48

 
1,630

 
1,678

 
1,678

Total residential mortgage
 
9,687

 
9,350

 
19,037

 
1,085

 
3,663

 
4,748

 
23,785

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
—

 
—

 
—

 
—

 
82

 
82

 
82

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,687

 
$
9,350

 
$
19,037

 
$
1,586

 
$
3,745

 
$
5,331

 
$
24,368



- 93 -


Troubled debt restructurings generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. The following tables detail the recorded balance of loans by class that were restructured during three months ended September 30, 2015 by primary type of concession (in thousands):

 
Three Months Ended
Sept. 30, 2015
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
1,448

 
150

 
1,598

 
1,598

Permanent mortgage guaranteed by U.S. government agencies
5,809

 
3,846

 
9,655

 
—

 
—

 
—

 
—

 
9,655

Home equity
—

 
—

 
—

 
—

 
—

 
447

 
447

 
447

Total residential mortgage
5,809

 
3,846

 
9,655

 
—

 
1,448

 
597

 
2,045

 
11,700

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
—

 
—

 
—

 
—

 
18

 
18

 
18

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
5,809

 
$
3,846

 
$
9,655

 
$
—

 
$
1,448

 
$
615

 
$
2,063

 
$
11,718




- 94 -


Troubled debt restructurings generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. The following tables detail the recorded balance of loans by class that were restructured during nine months ended September 30, 2015 by primary type of concession (in thousands):
 
Nine Months Ended
Sept. 30, 2015
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
—

 
7,851

 
7,851

 
7,851

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
689

 
—

 
—

 
689

 
689

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
689

 
—

 
7,851

 
8,540

 
8,540

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
329

 
—

 
329

 
329

Retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
329

 
—

 
329

 
329

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
2,150

 
1,125

 
3,275

 
3,275

Permanent mortgage guaranteed by U.S. government agencies
15,858

 
10,397

 
26,255

 
—

 
—

 
843

 
843

 
27,098

Home equity
—

 
—

 
—

 
59

 
145

 
1,523

 
1,727

 
1,727

Total residential mortgage
15,858

 
10,397

 
26,255

 
59

 
2,295

 
3,491

 
5,845

 
32,100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
—

 
—

 
—

 
—

 
104

 
104

 
104

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
15,858

 
$
10,397

 
$
26,255

 
$
748

 
$
2,624

 
$
11,446

 
$
14,818

 
$
41,073



- 95 -


The following table summarizes, by loan class, the recorded investment at September 30, 2016 and 2015, respectively, of loans modified as TDRs within the previous 12 months and for which there was a payment default during the three months ended September 30, 2016 and 2015, respectively (in thousands):

 
Three Months Ended
Sept. 30, 2016
 
Nine Months Ended
Sept. 30, 2016
 
Accruing
 
Nonaccrual
 
Total
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
1,746

 
$
1,746

 
$
—

 
$
1,746

 
$
1,746

Services
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
1,746

 
1,746

 
—

 
1,746

 
1,746

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
298

 
298

 
—

 
542

 
542

Permanent mortgage guaranteed by U.S. government agencies
17,491

 
1,095

 
18,586

 
19,352

 
1,121

 
20,473

Home equity
—

 
258

 
258

 
—

 
258

 
258

Total residential mortgage
17,491

 
1,651

 
19,142

 
19,352

 
1,921

 
21,273

 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
11

 
11

 
—

 
11

 
11

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
17,491

 
$
3,408

 
$
20,899

 
$
19,352

 
$
3,678

 
$
23,030


A payment default is defined as being 30 days or more past due. The table above includes loans that experienced a payment default during the period, but may be performing in accordance with the modified terms as of the balance sheet date.

- 96 -


 
Three Months Ended
Sept. 30, 2015
 
Nine Months Ended
Sept. 30, 2015
 
Accruing
 
Nonaccrual
 
Total
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
329

 
329

 
—

 
329

 
329

Retail
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
329

 
329

 
—

 
329

 
329

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
2,364

 
2,364

 
—

 
2,543

 
2,543

Permanent mortgage guaranteed by U.S. government agencies
29,942

 
779

 
30,721

 
31,673

 
919

 
32,592

Home equity
—

 
398

 
398

 
—

 
435

 
435

Total residential mortgage
29,942

 
3,541

 
33,483

 
31,673

 
3,897

 
35,570

 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
38

 
38

 
—

 
38

 
38

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
29,942

 
$
3,908

 
$
33,850

 
$
31,673

 
$
4,264

 
$
35,937


- 97 -


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, 2016 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,365,850

 
$
11,988

 
$
—

 
$
—

 
$
142,966

 
$
2,520,804

Services
 
2,923,874

 
502

 
39

 
3,707

 
8,477

 
2,936,599

Wholesale/retail
 
1,599,356

 
221

 
—

 
—

 
2,453

 
1,602,030

Manufacturing
 
499,212

 
—

 
—

 
—

 
274

 
499,486

Healthcare
 
2,083,556

 
635

 
—

 
—

 
855

 
2,085,046

Other commercial and industrial
 
454,538

 
34

 
68

 
119

 
21,439

 
476,198

Total commercial
 
9,926,386

 
13,380

 
107

 
3,826

 
176,464

 
10,120,163

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
156,207

 
—

 
—

 
—

 
3,739

 
159,946

Retail
 
796,362

 
3,766

 
—

 
—

 
1,249

 
801,377

Office
 
751,823

 
—

 
—

 
—

 
882

 
752,705

Multifamily
 
868,591

 
—

 
5,131

 
—

 
51

 
873,773

Industrial
 
837,945

 
—

 
—

 
—

 
76

 
838,021

Other real estate loans
 
366,416

 
7

 
—

 
—

 
1,353

 
367,776

Total commercial real estate
 
3,777,344

 
3,773

 
5,131

 
—

 
7,350

 
3,793,598

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
939,853

 
3,547

 
202

 
—

 
25,956

 
969,558

Permanent mortgages guaranteed by U.S. government agencies
 
41,150

 
17,364

 
12,963

 
103,400

 
15,432

 
190,309

Home equity
 
700,031

 
1,526

 
305

 
—

 
11,064

 
712,926

Total residential mortgage
 
1,681,034

 
22,437

 
13,470

 
103,400

 
52,452

 
1,872,793

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
677,194

 
191

 
148

 
13

 
686

 
678,232

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,061,958

 
$
39,781

 
$
18,856

 
$
107,239

 
$
236,952

 
$
16,464,786



- 98 -


A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of December 31, 2015 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,033,504

 
$
2,635

 
—

 
$
—

 
$
61,189

 
$
3,097,328

Services
 
2,769,895

 
66

 
4,025

 
—

 
10,290

 
2,784,276

Wholesale/retail
 
1,418,396

 
49

 
—

 
700

 
2,919

 
1,422,064

Manufacturing
 
556,398

 
—

 
—

 
—

 
331

 
556,729

Healthcare
 
1,879,873

 
2,435

 
—

 
—

 
1,072

 
1,883,380

Other commercial and industrial
 
507,929

 
84

 
16

 
102

 
623

 
508,754

Total commercial
 
10,165,995

 
5,269

 
4,041

 
802

 
76,424

 
10,252,531

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
156,017

 
—

 
—

 
—

 
4,409

 
160,426

Retail
 
795,180

 
—

 
—

 
—

 
1,319

 
796,499

Office
 
637,056

 
—

 
—

 
—

 
651

 
637,707

Multifamily
 
742,697

 
8,114

 
—

 
—

 
274

 
751,085

Industrial
 
563,093

 
—

 
—

 
—

 
76

 
563,169

Other real estate loans
 
347,498

 
—

 
—

 
377

 
2,272

 
350,147

Total commercial real estate
 
3,241,541

 
8,114

 
—

 
377

 
9,001

 
3,259,033

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
913,062

 
3,290

 
—

 
—

 
28,984

 
945,336

Permanent mortgages guaranteed by U.S. government agencies
 
33,653

 
16,986

 
13,397

 
111,001

 
21,900

 
196,937

Home equity
 
721,149

 
2,379

 
716

 
20

 
10,356

 
734,620

Total residential mortgage
 
1,667,864

 
22,655

 
14,113

 
111,021

 
61,240

 
1,876,893

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
551,533

 
665

 
28

 
8

 
463

 
552,697

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,626,933

 
$
36,703

 
18,182

 
$
112,208

 
$
147,128

 
$
15,941,154



- 99 -


A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of September 30, 2015 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,813,145

 
$
7,142

 
—

 
$
—

 
$
17,880

 
$
2,838,167

Services
 
2,690,554

 
1,575

 
3,803

 
—

 
10,692

 
2,706,624

Wholesale/retail
 
1,458,681

 
197

 
—

 
—

 
3,058

 
1,461,936

Manufacturing
 
555,325

 
—

 
—

 
—

 
352

 
555,677

Healthcare
 
1,740,462

 
—

 
—

 
—

 
1,218

 
1,741,680

Other commercial and industrial
 
492,554

 
65

 
21

 
100

 
598

 
493,338

Total commercial
 
9,750,721

 
8,979

 
3,824

 
100

 
33,798

 
9,797,422

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
148,762

 
—

 
—

 
—

 
4,748

 
153,510

Retail
 
767,801

 
—

 
—

 
—

 
1,648

 
769,449

Office
 
625,250

 
217

 
—

 
—

 
684

 
626,151

Multifamily
 
752,055

 
—

 
6,418

 
—

 
185

 
758,658

Industrial
 
563,795

 
—

 
—

 
—

 
76

 
563,871

Other real estate loans
 
359,813

 
—

 
—

 
—

 
3,615

 
363,428

Total commercial real estate
 
3,217,476

 
217

 
6,418

 
—

 
10,956

 
3,235,067

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
903,685

 
3,183

 
135

 
—

 
30,661

 
937,664

Permanent mortgages guaranteed by U.S. government agencies
 
33,046

 
15,299

 
10,477

 
130,005

 
3,885

 
192,712

Home equity
 
725,572

 
2,873

 
619

 
1

 
9,554

 
738,619

Total residential mortgage
 
1,662,303

 
21,355

 
11,231

 
130,006

 
44,100

 
1,868,995

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
465,218

 
199

 
46

 
—

 
494

 
465,957

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,095,718

 
$
30,750

 
21,519

 
$
130,106

 
$
89,348

 
$
15,367,441


- 100 -


(5) Acquisitions

On December 8, 2015, the Company announced the signing of a definitive purchase agreement with MBT Bancshares (“MBT”). MBT is headquartered in Kansas City, Mo. and is the parent company of Missouri Bank and Trust of Kansas City (“mobank”). mobank operates four banking branches in the Kansas City, Mo. area. Under terms of the definitive agreement, BOK Financial will pay $102.5 million in an all-cash deal for all outstanding shares of MBT stock, subject to certain conditions and potential adjustments. The transaction has been approved by the boards of directors of both companies and is expected to close by the end of 2016, subject to customary closing conditions, including regulatory approval.

In the first quarter of 2016, the Company acquired Weaver and Tidwell Financial Advisors LTD d/b/a Weaver Wealth Management, a registered investment advisor and E-Spectrum Advisors, an energy investment banking firm in Texas. The cash purchase price for these acquisitions was $7.7 million. The purchase price allocation included $5.3 million of identifiable intangible assets and $3.3 million of goodwill.

On May 4, 2015, the Company acquired a majority voting interest in Heartland Food Products, LLC, a Kansas-based food product and restaurant equipment company. The cash purchase price for this acquisition was $18 million. The final purchase price allocation included $11 million of identifiable intangible assets and $2.7 million of goodwill.

The pro-forma impact of these transactions was not material to the Company's consolidated financial statements.
(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 sale commitments which are considered derivative contracts that have not been designated as hedging instruments. 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, 2016
 
Dec. 31, 2015
 
September 30, 2015
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid
Principal
 Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
422,523

 
$
433,040

 
$
293,637

 
$
299,505

 
$
336,974

 
$
348,400

Residential mortgage loan commitments
 
630,804

 
18,598

 
601,147

 
8,134

 
742,742

 
18,161

Forward sales contracts
 
929,907

 
(4,046
)
 
884,710

 
800

 
1,073,343

 
(9,147
)
 
 
 

 
$
447,592

 
 

 
$
308,439

 
 

 
$
357,414


No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of September 30, 2016, December 31, 2015 or September 30, 2015. No credit losses were recognized on residential mortgage loans held for sale for the nine month periods ended September 30, 2016 and 2015.

- 101 -


Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
Sept. 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Production revenue:
 
 
 
 
 
 
 
 
Net realized gains on sale of mortgage loans
 
$
27,142

 
$
18,968

 
$
57,126

 
$
60,075

Net change in unrealized gain on mortgage loans held for sale
 
(2,518
)
 
6,666

 
4,649

 
4,751

Net change in the fair value of mortgage loan commitments
 
(6,901
)
 
9,838

 
10,464

 
8,190

Net change in the fair value of forward sales contracts
 
8,267

 
(16,755
)
 
(4,846
)
 
(5,146
)
Total production revenue
 
25,990

 
18,717

 
67,393

 
67,870

Servicing revenue
 
16,558

 
14,453

 
47,809

 
41,466

Total mortgage banking revenue
 
$
42,548

 
$
33,170

 
$
115,202

 
$
109,336


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 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,
2016
 
Dec. 31,
2015
 
September 30,
2015
Number of residential mortgage loans serviced for others
 
139,587

 
131,859

 
128,828

Outstanding principal balance of residential mortgage loans serviced for others
 
$
21,851,536

 
$
19,678,226

 
$
18,928,726

Weighted average interest rate
 
4.01
%
 
4.12
%
 
4.15
%
Remaining term (in months)
 
302

 
300

 
300


Activity in capitalized mortgage servicing rights during the three months ended September 30, 2016 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, June 30, 2016
 
$
4,067

 
$
186,680

 
$
190,747

Additions, net
 
—

 
21,990

 
21,990

Change in fair value due to scheduled payments and full-balance payoffs
 
(753
)
 
(10,690
)
 
(11,443
)
Change in fair value due to market assumption changes
 
251

 
2,076

 
2,327

Balance, Sept. 30, 2016
 
$
3,565

 
$
200,056

 
$
203,621


Activity in capitalized mortgage servicing rights during the nine months ended September 30, 2016 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, Dec. 31, 2015
 
$
9,911

 
$
208,694

 
$
218,605

Additions, net
 
—

 
56,345

 
56,345

Change in fair value due to scheduled payments and full-balance payoffs
 
(2,109
)
 
(27,276
)
 
(29,385
)
Change in fair value due to market assumption changes
 
(4,237
)
 
(37,707
)
 
(41,944
)
Balance, Sept. 30, 2016
 
$
3,565

 
$
200,056

 
$
203,621


- 102 -


Activity in capitalized mortgage servicing rights during the three months ended September 30, 2015 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, June 30, 2015
 
$
10,730

 
$
187,964

 
$
198,694

Additions, net
 
—

 
19,993

 
19,993

Change in fair value due to scheduled payments and full-balance payoffs
 
(661
)
 
(6,220
)
 
(6,881
)
Change in fair value due to market assumption changes
 
(656
)
 
(11,101
)
 
(11,757
)
Balance, Sept. 30, 2015
 
$
9,413

 
$
190,636

 
$
200,049


Activity in capitalized mortgage servicing rights during the nine months ended September 30, 2015 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, Dec. 31, 2014
 
$
11,114

 
$
160,862

 
$
171,976

Additions, net
 
—

 
62,375

 
62,375

Change in fair value due to scheduled payments and full-balance payoffs
 
(2,171
)
 
(19,862
)
 
(22,033
)
Change in fair value due to market assumption changes
 
470

 
(12,739
)
 
(12,269
)
Balance, Sept. 30, 2015
 
$
9,413

 
$
190,636

 
$
200,049


Changes in the fair value of mortgage servicing rights are included in Other operating revenue in the Consolidated Statements of Earnings. Changes in fair value due to actual loan payments are included in Mortgage banking costs. Changes in fair value due to market assumption changes are reported separately. Changes in fair value due to market assumption changes during the period relate to assets held at the reporting date.

There is no active market for trading in mortgage servicing rights after origination. Fair value is determined by discounting the projected net cash flows. Significant assumptions used to determine fair value based on significant unobservable inputs were as follows:
 
 
September 30,
2016
 
Dec. 31,
2015
 
September 30,
2015
Discount rate – risk-free rate plus a market premium
 
10.08%
 
10.11%
 
10.12%
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
 
 
Performing loans
 
$63-$120
 
$63 - $105
 
$63 - $105
Delinquent loans
 
$150 - $500
 
$150 - $500
 
$150 - $500
Loans in foreclosure
 
$650 - $4,250
 
$650 - $4,250
 
$650 - $4,250
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
1.18%
 
1.73%
 
1.40%
Primary/secondary mortgage rate spread
 
115 bps
 
130 bps
 
135 bps

The Company is exposed to interest rate risk as benchmark residential mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights, which is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. 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 daily for changes in market conditions and adjusted to better correlate with actual performance of BOK Financial’s servicing portfolio.

Stratification of the residential mortgage loan servicing portfolio and outstanding principal of loans serviced for others by interest rate at September 30, 2016 follows (in thousands):
 
 
< 4.00%
 
4.00% - 4.99%

 
5.00% - 5.99%

 
> 5.99%
 
Total
Fair value
 
$
121,802

 
$
74,830

 
$
4,968

 
$
2,021

 
$
203,621

Outstanding principal of loans serviced for others
 
$
12,145,996

 
$
7,720,311

 
$
1,215,692

 
$
769,537

 
$
21,851,536

Weighted average prepayment rate1
 
9.16
%
 
12.48
%
 
36.75
%
 
47.15
%
 
13.20
%
1 
Annual prepayment estimates based upon loan interest rate, original term and loan type. Weighted average prepayment rate is determined by weighting the prepayment speed for each loan by its unpaid principal balance.

- 103 -


The interest rate sensitivity of our mortgage servicing rights is modeled over a range of +/- 50 basis points. At September 30, 2016, a 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights by $52.6 million. A 50 basis point increase in mortgage interest rates is expected to increase the fair value of our mortgage servicing rights by $30.6 million. In the model, changes in the value of servicing rights due to changes in interest rates assume stable relationships between residential mortgage rates and prepayment speeds. Changes in market conditions can cause variations from these assumptions. These factors and others may cause changes in the value of our mortgage servicing rights to differ from our expectations.

The aging status of our mortgage loans serviced for others by investor at September 30, 2016 follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89
Days
 
90 Days or More
 
Total
FHLMC
 
$
7,760,547

 
$
34,145

 
$
10,399

 
$
23,938

 
$
7,829,029

FNMA
 
6,944,158

 
43,046

 
8,704

 
17,097

 
7,013,005

GNMA
 
6,338,155

 
150,386

 
48,790

 
16,624

 
6,553,955

Other
 
452,083

 
1,219

 
596

 
1,649

 
455,547

Total
 
$
21,494,943

 
$
228,796

 
$
68,489

 
$
59,308

 
$
21,851,536


The Company has off-balance sheet credit risk related to residential mortgage loans sold to U.S. government agencies with recourse prior to 2008 under various community development programs. These loans consist of first lien, fixed-rate residential mortgage loans underwritten to standards approved by the agencies including full documentation and originated under programs available only for owner-occupied properties. However, these loans have a higher risk of delinquency and loss given default than traditional residential mortgage loans. The Company no longer sells residential mortgage loans with recourse other than obligations under standard representations and warranties. The recourse obligation relates to loan performance for the life of the loan and the Company is obligated to repurchase the loan at the time of foreclosure for the unpaid principal balance plus unpaid interest. The principal balance of residential mortgage loans sold subject to recourse obligations totaled $139 million at September 30, 2016, $155 million at December 31, 2015 and $162 million at September 30, 2015. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets. At September 30, 2016, approximately 2 percent of the loans sold with recourse with an outstanding principal balance of $3.3 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 5 percent with an outstanding balance of $7.1 million were past due 30 to 89 days. The provision for credit losses on loans sold with recourse is included in Mortgage banking costs in the Consolidated Statements of Earnings.

The activity in the accrual for losses on loans sold with recourse included in Other liabilities in the Consolidated Balance Sheets is summarized as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
4,339

 
$
6,691

 
$
4,649

 
$
7,299

Provision for recourse losses
113

 
81

 
504

 
211

Loans charged off, net
(235
)
 
(506
)
 
(936
)
 
(1,244
)
Ending balance
$
4,217

 
$
6,266

 
$
4,217

 
$
6,266


The Company also has obligations to repurchase or provide indemnification for residential mortgage loans sold to government sponsored entities 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. 

The Company repurchased 2 loans from the agencies for $309 thousand during the third quarter of 2016. There were no indemnifications on loans paid during the third quarter of 2016. Losses recognized on repurchases were insignificant.


- 104 -


A summary of unresolved deficiency requests from the agencies follows (in thousands, except for number of unresolved deficiency requests):
 
September 30,
 
2016
 
2015
Number of unresolved deficiency requests
221

 
194

Aggregate outstanding principal balance subject to unresolved deficiency requests
$
15,750

 
$
14,237

Unpaid principal balance subject to indemnification by the Company
5,399

 
4,604


The activity in the accruals for mortgage losses is summarized as follows (in thousands).
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
8,043

 
$
8,908

 
$
7,732

 
$
11,868

Provision for losses
1,357

 
(52
)
 
5,260

 
(3,056
)
Charge-offs, net
(1,758
)
 
(1,262
)
 
(5,350
)
 
(1,218
)
Ending balance
$
7,642


$
7,594


$
7,642


$
7,594

(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 415,755 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 March 3, 2015, the Bank and the Company were named as defendants in a class action alleging (1) that the manner in which the Bank posted charges to its consumer deposit accounts was improper from September 1, 2011 through July 8, 2014, the period after which the Bank and BOK Financial had settled a class action respecting a similar claim, and before it made changes to its posting order and (2) that the manner in which the Bank posted charges to its small business deposit accounts was improper from July 9, 2009 through July 8, 2014. Following mediation of the case in August 2016, the Class Representatives and the Bank reached a settlement of the action for $7.8 million. The settlement is subject to the approval of the Court which the Parties to the Action expect. Management has established an accrual for the settlement. 
 
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 the 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 (estimated to be approximately $73 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 January 7, 2016, the terminated employee filed an action against the Bank alleging the Bank defamed the employee and made a

- 105 -


demand for indemnification respecting the SEC investigation which demand the respective boards of directors of the Company and the Bank denied. On September 9, 2016, the SEC filed a complaint against the terminated employee alleging the employee violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and requiring the employee to disgorge ill-gotten gains. On September 26, 2016, the employee dismissed the action without prejudice. 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. Management has been advised by counsel that the Bank has valid defenses to the claims. The Bank expects the Court ordered payment plan will result in the payment of the bonds by the principals. Accordingly, no loss is probable at this time and no provision for loss has been made. If the payment plan does not result in payment of the bonds, a loss could become probable. A reasonable estimate cannot be made at this time though the amount could be material to the Company.

The Director of the New Mexico Securities Division of the State of New Mexico Regulation and Licensing Department ("the Director") issued a Notice of Contemplated Action in connection with the purchase of various municipal bonds by the elected County Treasurer of Bernalillo County, New Mexico, from BOK Financial Securities, Inc., the Company’s broker-dealer affiliate. The Notice was settled by a $125,000 payment to the Division’s Educational fund, without any fine, penalty or sanction. The County of Bernalillo, New Mexico, has commenced arbitration pursuant to the Arbitration Rules of FINRA seeking recovery of $5.6 million arising out of the purchase. The Company has been advised that any recovery by the County is remote.
 
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 $4.6 million at September 30, 2016. 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.


- 106 -


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, 2016, December 31, 2015 and September 30, 2015 is as follows (in thousands):

 
 
September 30, 2016
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
18,420

 
$
—

 
$
—

 
$
15,946

Tax credit entities
 
10,000

 
11,740

 
—

 
10,964

 
10,000

Other
 
—

 
30,978

 
2,346

 
1,063

 
8,154

Total consolidated
 
$
10,000

 
$
61,138

 
$
2,346

 
$
12,027

 
$
34,100

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
39,849

 
$
129,715

 
$
57,026

 
$
—

 
$
—

Other
 
—

 
30,272

 
13,653

 
—

 
—

Total unconsolidated
 
$
39,849

 
$
159,987

 
$
70,679

 
$
—

 
$
—


 
 
Dec. 31, 2015
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
22,472

 
$
—

 
$
—

 
$
17,823

Tax credit entities
 
10,000

 
12,206

 
—

 
10,964

 
10,000

Other
 
—

 
40,453

 
2,198

 
2,831

 
9,260

Total consolidated
 
$
10,000

 
$
75,131

 
$
2,198

 
$
13,795

 
$
37,083

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
16,916

 
$
85,274

 
$
14,572

 
$
—

 
$
—

Other
 
—

 
15,506

 
6,319

 
—

 
—

Total unconsolidated
 
$
16,916

 
$
100,780

 
$
20,891

 
$
—

 
$
—



- 107 -


 
 
September 30, 2015
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
24,133

 
$
—

 
$
—

 
$
19,947

Tax credit entities
 
10,000

 
12,361

 
—

 
10,964

 
10,000

Other
 
—

 
41,197

 
2,774

 
2,788

 
8,989

Total consolidated
 
$
10,000

 
$
77,691

 
$
2,774

 
$
13,752

 
$
38,936

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
18,114

 
$
94,600

 
$
21,973

 
$
—

 
$
—

Other
 
—

 
15,822

 
6,899

 
—

 
—

Total unconsolidated
 
$
18,114

 
$
110,422

 
$
28,872

 
$
—

 
$
—


Other Commitments and Contingencies

At September 30, 2016, Cavanal Hill Funds’ assets included U.S. Treasury, cash management and tax-free money market funds. Assets of these funds consist of highly-rated, short-term obligations of the U.S. Treasury, corporate issuers and U.S. states and municipalities. The net asset value of units in these funds was $1.00 at September 30, 2016. An investment in these funds is not insured by the Federal Deposit Insurance Corporation or guaranteed by BOK Financial or any of its subsidiaries. BOK Financial may, but is not obligated to purchase assets from these funds to maintain the net asset value at $1.00. No assets were purchased from the funds in 2016 or 2015.

The Company has agreed to purchase approximately $7.5 million of Oklahoma Historic State Income Tax Credits from the George Kaiser Family Foundation, a principal shareholder of BOKF. These credits will be used to reduce the Company's state income tax liability in 2016 and 2017.
(8) Shareholders' Equity

On October 25, 2016, the Company declared a quarterly cash dividend of $0.44 per common share on or about November 28, 2016 to shareholders of record as of November 14, 2016.

Dividends declared were $0.43 per share and $1.29 per share during the three and nine months ended September 30, 2016 and $0.42 per share and $1.26 during the three and nine months ended September 30, 2015.

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. AOCI also includes unrealized gains on AFS securities that were transferred from AFS to investment securities in the third quarter of 2011. Such amounts are being amortized over the estimated remaining life of the security as an adjustment to yield, offsetting the related amortization of premium on the transferred securities. 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. Accumulated losses on the interest rate lock hedge of the 2005 subordinated debt issuance were reclassified into income over the ten-year life of the debt. Gains and losses in AOCI are net of deferred income taxes.


- 108 -


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
 
Investment Securities Transferred from AFS
 
Employee Benefit Plans
 
Loss on Effective Cash Flow Hedges
 
Total
Balance, Dec. 31, 2014
 
$
59,239

 
$
376

 
$
(2,868
)
 
$
(74
)
 
$
56,673

Net change in unrealized gain (loss)
 
57,763

 
—

 
—

 
—

 
57,763

Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
 
 
Interest revenue, Investment securities, Taxable securities
 
—

 
(418
)
 
—

 
—

 
(418
)
Interest expense, Subordinated debentures
 
—

 
—

 
—

 
121

 
121

Net impairment losses recognized in earnings
 
92

 
—

 
—

 
—

 
92

Gain on available for sale securities, net
 
(9,926
)
 
—

 
—

 
—

 
(9,926
)
Other comprehensive income (loss), before income taxes
 
47,929

 
(418
)
 
—

 
121

 
47,632

Federal and state income taxes1
 
18,644

 
(162
)
 
—

 
47

 
18,529

Other comprehensive income (loss), net of income taxes
 
29,285

 
(256
)
 
—

 
74

 
29,103

Balance, Sept. 30, 2015
 
$
88,524

 
$
120

 
$
(2,868
)
 
$
—

 
$
85,776

 
 
 
 
 
 
 
 
 
 
 
Balance, Dec. 31, 2015
 
$
23,284

 
$
68

 
$
(1,765
)
 
$
—

 
$
21,587

Net change in unrealized gain (loss)
 
133,108

 
—

 
—

 
—

 
133,108

Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
 
 
Interest revenue, Investment securities, Taxable securities
 
—

 
(112
)
 
—

 
—

 
(112
)
Interest expense, Subordinated debentures
 
—

 
—

 
—

 
—

 
—

Net impairment losses recognized in earnings
 
—

 
—

 
—

 
—

 
—

Gain on available for sale securities, net
 
(11,684
)
 
—

 
—

 
—

 
(11,684
)
Other comprehensive income (loss), before income taxes
 
121,424

 
(112
)
 
—

 
—

 
121,312

Federal and state income taxes1
 
47,216

 
(44
)
 
—

 
—

 
47,172

Other comprehensive income (loss), net of income taxes
 
74,208

 
(68
)
 
—

 
—

 
74,140

Balance, Sept. 30, 2016
 
$
97,492

 
$
—

 
$
(1,765
)
 
$
—

 
$
95,727

1 
Calculated using a 39 percent effective tax rate.

- 109 -


(9)  Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to BOK Financial Corp. shareholders
 
$
74,277

 
$
74,891

 
$
182,642

 
$
228,964

Less: Earnings allocated to participating securities
 
916

 
894

 
2,275

 
2,652

Numerator for basic earnings per share – income available to common shareholders
 
73,361

 
73,997

 
180,367

 
226,312

Effect of reallocating undistributed earnings of participating securities
 
1

 
1

 
1

 
2

Numerator for diluted earnings per share – income available to common shareholders
 
$
73,362

 
$
73,998

 
$
180,368

 
$
226,314

 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 

 
 

Weighted average shares outstanding
 
65,895,430

 
68,486,376

 
66,031,497

 
68,800,419

Less:  Participating securities included in weighted average shares outstanding
 
810,038

 
818,300

 
822,723

 
795,911

Denominator for basic earnings per common share
 
65,085,392

 
67,668,076

 
65,208,774

 
68,004,508

Dilutive effect of employee stock compensation plans1
 
72,449

 
94,407

 
54,792

 
99,509

Denominator for diluted earnings per common share
 
65,157,841

 
67,762,483

 
65,263,566

 
68,104,017

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.13

 
$
1.09

 
$
2.77

 
$
3.33

Diluted earnings per share
 
$
1.13

 
$
1.09

 
$
2.76

 
$
3.32

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

 
—

 
—

 
—


- 110 -


(10)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2016 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
123,598

 
$
22,098

 
$
9,274

 
$
32,876

 
$
187,846

Net interest revenue (expense) from internal sources
 
(15,052
)
 
9,263

 
7,401

 
(1,612
)
 
—

Net interest revenue
 
108,546

 
31,361

 
16,675

 
31,264

 
187,846

Provision for credit losses
 
5,601

 
1,157

 
(89
)
 
3,331

 
10,000

Net interest revenue after provision for credit losses
 
102,945

 
30,204

 
16,764

 
27,933

 
177,846

Other operating revenue
 
49,642

 
64,635

 
73,523

 
3,542

 
191,342

Other operating expense
 
53,375

 
64,995

 
64,426

 
79,324

 
262,120

Net direct contribution
 
99,212

 
29,844

 
25,861

 
(47,849
)
 
107,068

Loss on financial instruments, net
 
—

 
(1,087
)
 
(42
)
 
1,129

 
—

Change in fair value of mortgage servicing rights
 
—

 
2,327

 
—

 
(2,327
)
 
—

Gain on repossessed assets, net
 
1,486

 
161

 
—

 
(1,647
)
 
—

Corporate expense allocations
 
9,054

 
16,905

 
10,912

 
(36,871
)
 
—

Net income before taxes
 
91,644

 
14,340

 
14,907

 
(13,823
)
 
107,068

Federal and state income taxes
 
35,650

 
5,578

 
5,799

 
(15,071
)
 
31,956

Net income
 
55,994

 
8,762

 
9,108

 
1,248

 
75,112

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
835

 
835

Net income attributable to BOK Financial Corp. shareholders
 
$
55,994

 
$
8,762

 
$
9,108

 
$
413

 
$
74,277

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,934,587

 
$
8,827,816

 
$
6,413,735

 
$
470,335

 
$
32,646,473

Average invested capital
 
1,170,465

 
275,358

 
244,291

 
1,667,437

 
3,357,551



- 111 -


Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2016 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
358,714

 
$
65,897

 
$
21,622

 
$
106,797

 
$
553,030

Net interest revenue (expense) from internal sources
 
(44,259
)
 
27,492

 
22,258

 
(5,491
)
 
—

Net interest revenue
 
314,455

 
93,389

 
43,880

 
101,306

 
553,030

Provision for credit losses
 
34,024

 
4,177

 
(479
)
 
27,278

 
65,000

Net interest revenue after provision for credit losses
 
280,431

 
89,212

 
44,359

 
74,028

 
488,030

Other operating revenue
 
146,248

 
181,774

 
218,042

 
(6,096
)
 
539,968

Other operating expense
 
162,039

 
189,188

 
186,524

 
223,994

 
761,745

Net direct contribution
 
264,640

 
81,798

 
75,877

 
(156,062
)
 
266,253

Gain (loss) on financial instruments, net
 
—

 
30,539

 
(42
)
 
(30,497
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(41,944
)
 
—

 
41,944

 
—

Gain on repossessed assets, net
 
806

 
566

 
—

 
(1,372
)
 
—

Corporate expense allocations
 
26,681

 
49,513

 
31,864

 
(108,058
)
 
—

Net income before taxes
 
238,765

 
21,446

 
43,971

 
(37,929
)
 
266,253

Federal and state income taxes
 
92,880

 
8,342

 
17,105

 
(34,446
)
 
83,881

Net income
 
145,885

 
13,104

 
26,866

 
(3,483
)
 
182,372

Net loss attributable to non-controlling interests
 
—

 
—

 
—

 
(270
)
 
(270
)
Net income attributable to BOK Financial Corp. shareholders
 
$
145,885

 
$
13,104

 
$
26,866

 
$
(3,213
)
 
$
182,642

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,958,999

 
$
8,763,564

 
$
5,916,545

 
$
410,075

 
$
32,049,183

Average invested capital
 
1,161,996

 
267,123

 
238,917

 
1,650,563

 
3,318,599



- 112 -


Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2015 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
109,503

 
$
21,551

 
$
6,674

 
$
40,908

 
$
178,636

Net interest revenue (expense) from internal sources
 
(13,450
)
 
7,216

 
$
5,834

 
400

 
—

Net interest revenue
 
96,053

 
28,767

 
12,508

 
41,308

 
178,636

Provision for credit losses
 
997

 
1,431

 
(190
)
 
5,262

 
7,500

Net interest revenue after provision for credit losses
 
95,056

 
27,336

 
12,698

 
36,046

 
171,136

Other operating revenue
 
45,276

 
57,349

 
66,541

 
(5,730
)
 
163,436

Other operating expense
 
51,960

 
51,027

 
57,356

 
64,285

 
224,628

Net direct contribution
 
88,372

 
33,658

 
21,883

 
(33,969
)
 
109,944

Gain (loss) on financial instruments, net
 
—

 
7,386

 
(176
)
 
(7,210
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(11,758
)
 
—

 
11,758

 
—

Gain on repossessed assets, net
 
350

 
331

 
—

 
(681
)
 
—

Corporate expense allocations
 
10,723

 
18,921

 
9,841

 
(39,485
)
 
—

Net income before taxes
 
77,999

 
10,696

 
11,866

 
9,383

 
109,944

Federal and state income taxes
 
30,342

 
4,161

 
4,616

 
(4,991
)
 
34,128

Net income
 
47,657

 
6,535

 
7,250

 
14,374

 
75,816

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
925

 
925

Net income attributable to BOK Financial Corp. shareholders
 
$
47,657

 
$
6,535

 
$
7,250

 
$
13,449

 
$
74,891

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,156,446

 
$
8,843,926

 
$
5,433,238

 
$
336,123

 
$
30,769,733

Average invested capital
 
1,062,053

 
264,540

 
226,477

 
1,808,477

 
3,361,547



- 113 -


Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2015 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
319,298

 
$
63,993

 
$
18,271

 
$
120,531

 
$
522,093

Net interest revenue (expense) from internal sources
 
(38,728
)
 
20,874

 
$
17,400

 
454

 
—

Net interest revenue
 
280,570

 
84,867

 
35,671

 
120,985

 
522,093

Provision for credit losses
 
(7,952
)
 
4,467

 
(937
)
 
15,922

 
11,500

Net interest revenue after provision for credit losses
 
288,522

 
80,400

 
36,608

 
105,063

 
510,593

Other operating revenue
 
132,996

 
178,232

 
204,100

 
(9,590
)
 
505,738

Other operating expense
 
151,908

 
155,844

 
170,113

 
194,141

 
672,006

Net direct contribution
 
269,610

 
102,788

 
70,595

 
(98,668
)
 
344,325

Gain (loss) on financial instruments, net
 
—

 
1,809

 
(204
)
 
(1,605
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(12,269
)
 
—

 
12,269

 
—

Gain on repossessed assets, net
 
336

 
888

 
—

 
(1,224
)
 
—

Corporate expense allocations
 
32,747

 
56,075

 
30,011

 
(118,833
)
 
—

Net income before taxes
 
237,199

 
37,141

 
40,380

 
29,605

 
344,325

Federal and state income taxes
 
92,270

 
14,448

 
15,708

 
(9,284
)
 
113,142

Net income
 
144,929

 
22,693

 
24,672

 
38,889

 
231,183

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
2,219

 
2,219

Net income attributable to BOK Financial Corp. shareholders
 
$
144,929

 
$
22,693

 
$
24,672

 
$
36,670

 
$
228,964

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,229,307

 
$
8,871,423

 
$
5,401,433

 
$
(97,733
)
 
$
30,404,430

Average invested capital
 
1,028,013

 
268,427

 
225,222

 
1,819,969

 
3,341,631



- 114 -


(11) Fair Value Measurements

Fair value is defined by applicable accounting guidance as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market for the given asset or liability at the measurement date based on market conditions at that date. Certain assets and liabilities are recorded in the Company’s financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis.

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

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

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

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

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

Transfers between levels are recognized as of the end of the reporting period. There were no transfers in or out of quoted prices in active markets for identical instruments to significant other observable inputs or significant unobservable inputs during the three and nine months ended September 30, 2016 and 2015, respectively. Transfers between significant other observable inputs and significant unobservable inputs during the three and nine months ended September 30, 2016 and 2015 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, 2016, December 31, 2015 or September 30, 2015.


- 115 -


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, 2016 (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
 
$
15,705

 
$
—

 
$
15,705

 
$
—

U.S. government agency residential mortgage-backed securities
 
464,749

 
—

 
464,749

 
—

Municipal and other tax-exempt securities
 
54,856

 
—

 
54,856

 
—

Other trading securities
 
11,305

 
—

 
11,305

 
—

Total trading securities
 
546,615

 
—

 
546,615

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,002

 
1,002

 
—

 
—

Municipal and other tax-exempt
 
42,092

 
—

 
36,379

 
5,713

U.S. government agency residential mortgage-backed securities
 
5,668,672

 
—

 
5,668,672

 
—

Privately issued residential mortgage-backed securities
 
121,603

 
—

 
121,603

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,986,495

 
—

 
2,986,495

 
—

Other debt securities
 
4,151

 
—

 
—

 
4,151

Perpetual preferred stock
 
19,578

 
—

 
19,578

 
—

Equity securities and mutual funds
 
18,690

 
3,544

 
15,146

 
—

Total available for sale securities
 
8,862,283

 
4,546

 
8,847,873

 
9,864

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. government agency residential mortgage-backed securities
 
—

 
—

 
—

 
—

U.S. Treasury
 
222,409

 
222,409

 
—

 
—

Total fair value option securities
 
222,409

 
222,409

 
—

 
—

Residential mortgage loans held for sale
 
447,592

 
—

 
438,291

 
9,301

Mortgage servicing rights1
 
203,621

 
—

 
—

 
203,621

Derivative contracts, net of cash collateral2
 
655,078

 
5,575

 
649,503

 
—

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
573,987

 
1,308

 
572,679

 
—

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


- 116 -


The fair value of financial assets and liabilities measured on a recurring basis was as follows as of December 31, 2015 (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
 
$
61,295

 
$
—

 
$
61,295

 
$
—

U.S. government agency residential mortgage-backed securities
 
10,989

 
—

 
10,989

 
—

Municipal and other tax-exempt securities
 
31,901

 
—

 
31,901

 
—

Other trading securities
 
18,219

 
—

 
18,219

 
—

Total trading securities
 
122,404

 
—

 
122,404

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
995

 
995

 
—

 
—

Municipal and other tax-exempt
 
56,817

 
—

 
47,207

 
9,610

U.S. government agency residential mortgage-backed securities
 
5,898,351

 
—

 
5,898,351

 
—

Privately issued residential mortgage-backed securities
 
139,118

 
—

 
139,118

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,905,796

 
—

 
2,905,796

 
—

Other debt securities
 
4,151

 
—

 
—

 
4,151

Perpetual preferred stock
 
19,672

 
—

 
19,672

 
—

Equity securities and mutual funds
 
17,833

 
3,265

 
14,568

 
—

Total available for sale securities
 
9,042,733

 
4,260

 
9,024,712

 
13,761

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. government agency residential mortgage-backed securities
 
444,217

 
—

 
444,217

 
—

U.S. Treasury
 
—

 
—

 
—

 
—

Total fair value option securities
 
444,217

 
—

 
444,217

 
—

Residential mortgage loans held for sale
 
308,439

 
—

 
300,565

 
7,874

Mortgage servicing rights1
 
218,605

 
—

 
—

 
218,605

Derivative contracts, net of cash collateral2
 
586,270

 
38,530

 
547,740

 
—

Liabilities:
 


 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
581,701

 
—

 
581,701

 
—

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



- 117 -


The fair value of financial assets and liabilities measured on a recurring basis was as follows as of September 30, 2015 (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
 
$
42,431

 
$
—

 
$
42,431

 
$
—

U.S. government agency residential mortgage-backed securities
 
30,973

 
—

 
30,973

 
—

Municipal and other tax-exempt securities
 
84,261

 
—

 
84,261

 
—

Other trading securities
 
23,466

 
—

 
23,466

 
—

Total trading securities
 
181,131

 
—

 
181,131

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,003

 
1,003

 
—

 
—

Municipal and other tax-exempt
 
57,960

 
—

 
48,360

 
9,600

U.S. government agency residential mortgage-backed securities
 
5,819,127

 
—

 
5,819,127

 
—

Privately issued residential mortgage-backed securities
 
145,682

 
—

 
145,682

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,735,787

 
—

 
2,735,787

 
—

Other debt securities
 
4,150

 
—

 
—

 
4,150

Perpetual preferred stock
 
19,163

 
—

 
19,163

 
—

Equity securities and mutual funds
 
18,217

 
3,505

 
14,712

 
—

Total available for sale securities
 
8,801,089

 
4,508

 
8,782,831

 
13,750

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. government agency residential mortgage-backed securities
 
427,760

 
—

 
427,760

 
—

U.S. Treasury
 
—

 
—

 
—

 
—

Total fair value option securities
 
427,760

 
—

 
427,760

 
—

Residential mortgage loans held for sale
 
357,414

 
—

 
349,381

 
8,033

Mortgage servicing rights1
 
200,049

 
—

 
—

 
200,049

Derivative contracts, net of cash collateral2
 
726,159

 
4,922

 
721,237

 
—

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
636,115

 
—

 
636,115

 
—

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



- 118 -


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 monthly.

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 counterparty credit rating or equivalent loan grading, derivative contract notional size, price volatility of the underlying commodity, duration of the derivative contracts and expected loss severity. Expected loss severity is based on historical losses for similarly risk graded commercial loan customers. Decreases in counterparty credit rating or grading and increases in price volatility and expected loss severity all tend to increase the credit quality adjustment which reduces the fair value of asset contracts. The reduction in fair value is recognized in earnings during the current period.

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. The change in the fair value would be recognized in earnings in the current period.
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.

Other Assets - Private Equity Funds
The fair value of the portfolio investments of the Company's two private equity funds is based upon net asset value reported by the underlying funds, as adjusted by the general partner when necessary, as a practical expedient to measure the fair value of the investments in the underlying funds. The Company's private equity funds provide customers alternative investment opportunities as limited partners of the funds. As fund of funds, the private equity funds invest in other limited partnerships or limited liability companies that invest substantially all of their assets in U.S. companies pursuing diversified investment strategies including early-stage venture capital, distressed securities and corporate or asset buy-outs. Private equity fund assets are long-term, illiquid investments. No secondary market exists for these assets. The private equity funds typically invest in funds that provide no redemption rights to investors. The fair value of the private equity investments may only be realized through cash distributions from the underlying funds.

See Note 7 for disclosure of the fair value of the private equity funds using the net asset value per share of the underlying investments, as a practical expedient, included in Other assets in the Consolidated Balance Sheets of the Company.

- 119 -


The following represents the changes for the three months ended September 30, 2016 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
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, June 30, 2016
 
$
9,600

 
$
4,151

 
$
9,749

Transfer to Level 3 from Level 2
 
—

 
—

 
442

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(1,003
)
Redemptions and distributions
 
(3,975
)
 
—

 
—

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

 
—

 
113

Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
88

 
—

 
—

Balance, Sept. 30, 2016
 
$
5,713

 
$
4,151

 
$
9,301


The following represents the changes for the nine months ended September 30, 2016 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
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, Dec. 31, 2015
 
$
9,610

 
$
4,151

 
$
7,874

Transfer to Level 3 from Level 2
 
—

 
—

 
3,982

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(2,365
)
Redemptions and distributions
 
(3,975
)
 
—

 
—

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

 
—

 
(190
)
Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
78

 
—

 
—

Balance, Sept. 30, 2016
 
$
5,713

 
$
4,151

 
$
9,301


- 120 -


The following represents the changes for the three months ended September 30, 2015 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
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, June 30, 2015
 
$
9,617

 
$
4,150

 
$
7,973

Transfer to Level 3 from Level 2
 
—

 
—

 
966

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(811
)
Redemptions and distributions
 
—

 
—

 
—

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

 
—

 
(95
)
Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(17
)
 
—

 
—

Balance, Sept. 30, 2015
 
$
9,600

 
$
4,150

 
$
8,033


The following represents the changes for the nine months ended September 30, 2015 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
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, Dec. 31, 2014
 
$
10,093

 
$
4,150

 
$
11,856

Transfer to Level 3 from Level 2
 
—

 
—

 
2,153

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(6,099
)
Redemptions and distributions
 
(500
)
 
—

 
—

Gain (loss) recognized in earnings
 
 
 
 
 
—

Mortgage banking revenue
 
—

 
—

 
123

Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
7

 
—

 
—

Balance, Sept. 30, 2015
 
$
9,600

 
$
4,150

 
$
8,033




- 121 -


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, 2016 follows (in thousands):
 
 
Par
Value
 
Amortized
Cost/Unpaid Principal Balance
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
6,195

 
$
6,162

 
$
5,713

 
Discounted cash flows
1 
Interest rate spread
 
5.60%-5.90% (5.85%)
2 
90.00%-93.79% (92.22%)
3 
Other debt securities
 
4,400

 
4,400

 
4,151

 
Discounted cash flows
1 
Interest rate spread
 
5.98%-6.03% (6.02%)
4 
94.34% - 94.34 (94.34%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
N/A

 
9,957

 
9,301

 
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.
 
93.41%
 
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 437 to 484 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 1 percent.



A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of December 31, 2015 follows (in thousands):
 
 
Par
Value
 
Amortized
Cost/Unpaid Principal Balance
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
10,370

 
$
10,311

 
$
9,610

 
Discounted cash flows
1 
Interest rate spread
 
5.47%-5.77% (5.73%)
2 
92.34%-92.93% (92.67%)
3 
Other debt securities
 
4,400

 
4,400

 
4,151

 
Discounted cash flows
1 
Interest rate spread
 
5.80%-5.92% (5.90%)
4 
94.33% - 94.34 (94.34%)
3 
Residential mortgage loans held for sale
 
N/A

 
8,395

 
7,874

 
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.
 
93.79%
 
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 499 to 541 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 1 percent.


- 122 -


A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2015 follows (in thousands):
 
 
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
10,370

 
$
10,310

 
$
9,600

 
Discounted cash flows
1 
Interest rate spread
 
5.23%-5.53% (5.49%)
2 
92.35%-92.73% (92.57%)
3 
Other debt securities
 
4,400

 
4,400

 
4,150

 
Discounted cash flows
1 
Interest rate spread
 
5.65%-5.70% (5.69%)
4 
94.32% - 94.33 (94.33%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
N/A

 
8,538

 
8,033

 
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.
 
94.09%
 
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 510 to 538 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 1 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, 2016 for which the fair value was adjusted during the three and nine months ended September 30, 2016:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at September 30, 2016
 
Three Months Ended
September 30, 2016
Recognized in:
 
Nine Months Ended
September 30, 2016
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
$
—

 
$
436

 
$
23,089

 
$
6,334

 
$
—

 
$
30,200

 
$
—

Real estate and other repossessed assets
—

 
6,048

 
1,927

 
—

 
480

 
—

 
1,260

 

- 123 -


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, 2015 for which the fair value was adjusted during the three and nine months ended September 30, 2015:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at September 30, 2015
 
Three Months Ended
September 30, 2015
Recognized in:
 
Nine Months Ended
September 30, 2015
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
$
—

 
$
3,239

 
$
12,386

 
$
890

 
$
—

 
$
1,439

 
$
—

Real estate and other repossessed assets
—

 
12,689

 
702

 
—

 
670

 
—

 
1,771


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, 2016 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
23,089

 
Discounted cash flows
 
Recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs
 
23% - 59% (43%)1
Real estate and other repossessed assets
 
1,927

 
Appraised value, as adjusted
 
Marketability adjustment off appraised value2
 
68% - 80% (71%)
1 
Represents fair value as a percentage of the unpaid principal balance.
2  
Marketability adjustments include consideration of estimated costs to sell which is approximately 10% of the fair value.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2015 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
12,386

 
Appraised value, as adjusted
 
Broker quotes and management's knowledge of industry and collateral
 
N/A
Real estate and other repossessed assets
 
702

 
Appraised value, as adjusted
 
Marketability adjustments off appraised value1
 
66%-86% (78%)
1  
Marketability adjustments include consideration of estimated costs to sell which is approximately 10% of the fair value.


- 124 -


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, 2016 (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
 
$
535,916

 
$
535,916

 
$
535,916

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
2,080,978

 
2,080,978

 
2,080,978

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
—

 
 
U.S. government agency debentures
 
15,705

 
15,705

 
—

 
15,705

 
—

U.S. government agency residential mortgage-backed securities
 
464,749

 
464,749

 
—

 
464,749

 
—

Municipal and other tax-exempt securities
 
54,856

 
54,856

 
—

 
54,856

 
—

Other trading securities
 
11,305

 
11,305

 
—

 
11,305

 
—

Total trading securities
 
546,615

 
546,615

 
—

 
546,615

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt
 
323,225

 
327,788

 
—

 
327,788

 
—

U.S. government agency residential mortgage-backed securities
 
22,166

 
23,452

 
—

 
23,452

 
—

Other debt securities
 
201,066

 
229,070

 
—

 
229,070

 
—

Total investment securities
 
546,457

 
580,310

 
—

 
580,310

 
—

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
1,002

 
1,002

 
1,002

 
—

 
—

Municipal and other tax-exempt
 
42,092

 
42,092

 
—

 
36,379

 
5,713

U.S. government agency residential mortgage-backed securities
 
5,668,672

 
5,668,672

 
—

 
5,668,672

 
—

Privately issued residential mortgage-backed securities
 
121,603

 
121,603

 
—

 
121,603

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,986,495

 
2,986,495

 
—

 
2,986,495

 
—

Other debt securities
 
4,151

 
4,151

 
—

 
—

 
4,151

Perpetual preferred stock
 
19,578

 
19,578

 
—

 
19,578

 
—

Equity securities and mutual funds
 
18,690

 
18,690

 
3,544

 
15,146

 
—

Total available for sale securities
 
8,862,283

 
8,862,283

 
4,546

 
8,847,873

 
9,864

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency residential mortgage-backed securities
 
—

 
—

 
—

 
—

 
—

U.S. Treasury
 
222,409

 
222,409

 
222,409

 
—

 
—

Total fair value option securities
 
222,409

 
222,409

 
222,409

 
—

 
—

Residential mortgage loans held for sale
 
447,592

 
447,592

 
—

 
438,291

 
9,301

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
10,120,163

 
9,926,548

 
—

 
—

 
9,926,548

Commercial real estate
 
3,793,598

 
3,769,427

 
—

 
—

 
3,769,427

Residential mortgage
 
1,872,793

 
1,905,786

 
—

 
—

 
1,905,786

Personal
 
678,232

 
671,421

 
—

 
—

 
671,421

Total loans
 
16,464,786

 
16,273,182

 
—

 
—

 
16,273,182

Allowance for loan losses
 
(245,103
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
16,219,683

 
16,273,182

 
—

 
—

 
16,273,182

Mortgage servicing rights
 
203,621

 
203,621

 
—

 
—

 
203,621

Derivative instruments with positive fair value, net of cash margin
 
655,078

 
655,078

 
5,575

 
649,503

 
—

Deposits with no stated maturity
 
18,925,873

 
18,925,873

 
—

 
—

 
18,925,873

Time deposits
 
2,169,631

 
2,163,947

 
—

 
—

 
2,163,947

Other borrowed funds
 
7,147,047

 
7,079,737

 
—

 
—

 
7,079,737

Subordinated debentures
 
144,631

 
148,360

 
—

 
148,360

 
—

Derivative instruments with negative fair value, net of cash margin
 
573,987

 
573,987

 
1,308

 
572,679

 
—


- 125 -


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, 2015 (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
 
$
573,699

 
$
573,699

 
$
573,699

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
2,069,900

 
2,069,900

 
2,069,900

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
—

 
 
U.S. government agency debentures
 
61,295

 
61,295

 
—

 
61,295

 
—

U.S. government agency residential mortgage-backed securities
 
10,989

 
10,989

 
—

 
10,989

 
—

Municipal and other tax-exempt securities
 
31,901

 
31,901

 
—

 
31,901

 
—

Other trading securities
 
18,219

 
18,219

 
—

 
18,219

 
—

Total trading securities
 
122,404

 
122,404

 
—

 
122,404

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt
 
365,258

 
368,910

 
—

 
368,910

 
—

U.S. government agency residential mortgage-backed securities
 
26,833

 
27,874

 
—

 
27,874

 
—

Other debt securities
 
205,745

 
232,375

 
—

 
232,375

 
—

Total investment securities
 
597,836

 
629,159

 
—

 
629,159

 
—

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
995

 
995

 
995

 
—

 
—

Municipal and other tax-exempt
 
56,817

 
56,817

 
—

 
47,207

 
9,610

U.S. government agency residential mortgage-backed securities
 
5,898,351

 
5,898,351

 
—

 
5,898,351

 
—

Privately issued residential mortgage-backed securities
 
139,118

 
139,118

 
—

 
139,118

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,905,796

 
2,905,796

 
—

 
2,905,796

 
—

Other debt securities
 
4,151

 
4,151

 
—

 
—

 
4,151

Perpetual preferred stock
 
19,672

 
19,672

 
—

 
19,672

 
—

Equity securities and mutual funds
 
17,833

 
17,833

 
3,265

 
14,568

 
—

Total available for sale securities
 
9,042,733

 
9,042,733

 
4,260

 
9,024,712

 
13,761

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency residential mortgage-backed securities
 
444,217

 
444,217

 
—

 
444,217

 
—

U.S. Treasury
 
—

 
—

 
—

 
—

 
—

Total fair value option securities
 
444,217

 
444,217

 
—

 
444,217

 
—

Residential mortgage loans held for sale
 
308,439

 
308,439

 
—

 
300,565

 
7,874

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
10,252,531

 
10,053,952

 
—

 
—

 
10,053,952

Commercial real estate
 
3,259,033

 
3,233,476

 
—

 
—

 
3,233,476

Residential mortgage
 
1,876,893

 
1,902,976

 
—

 
—

 
1,902,976

Personal
 
552,697

 
549,068

 
—

 
—

 
549,068

Total loans
 
15,941,154

 
15,739,472

 
—

 
—

 
15,739,472

Allowance for loan losses
 
(225,524
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
15,715,630

 
15,739,472

 
—

 
—

 
15,739,472

Mortgage servicing rights
 
218,605

 
218,605

 
—

 
—

 
218,605

Derivative instruments with positive fair value, net of cash margin
 
586,270

 
586,270

 
38,530

 
547,740

 
—

Deposits with no stated maturity
 
18,682,094

 
18,682,094

 
—

 
—

 
18,682,094

Time deposits
 
2,406,064

 
2,394,562

 
—

 
—

 
2,394,562

Other borrowed funds
 
6,051,515

 
5,600,932

 
—

 
—

 
5,600,932

Subordinated debentures
 
226,350

 
223,758

 
—

 
—

 
223,758

Derivative instruments with negative fair value, net of cash margin
 
581,701

 
581,701

 
—

 
581,701

 
—



- 126 -


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, 2015 (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
 
$
489,268

 
$
489,268

 
$
489,268

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
1,830,105

 
1,830,105

 
1,830,105

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
—

 
 
U.S. government agency debentures
 
42,431

 
42,431

 
—

 
42,431

 
—

U.S. government agency residential mortgage-backed securities
 
30,973

 
30,973

 
—

 
30,973

 
—

Municipal and other tax-exempt securities
 
84,261

 
84,261

 
—

 
84,261

 
—

Other trading securities
 
23,466

 
23,466

 
—

 
23,466

 
—

Total trading securities
 
181,131

 
181,131

 
—

 
181,131

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt
 
379,980

 
384,310

 
—

 
384,310

 
—

U.S. government agency residential mortgage-backed securities
 
28,653

 
30,080

 
—

 
30,080

 
—

Other debt securities
 
203,751

 
228,701

 
—

 
228,701

 
—

Total investment securities
 
612,384

 
643,091

 
—

 
643,091

 
—

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
1,003

 
1,003

 
1,003

 
—

 
—

Municipal and other tax-exempt
 
57,960

 
57,960

 
—

 
48,360

 
9,600

U.S. government agency residential mortgage-backed securities
 
5,819,127

 
5,819,127

 
—

 
5,819,127

 
—

Privately issued residential mortgage-backed securities
 
145,682

 
145,682

 
—

 
145,682

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,735,787

 
2,735,787

 
—

 
2,735,787

 
—

Other debt securities
 
4,150

 
4,150

 
—

 
—

 
4,150

Perpetual preferred stock
 
19,163

 
19,163

 
—

 
19,163

 
—

Equity securities and mutual funds
 
18,217

 
18,217

 
3,505

 
14,712

 
—

Total available for sale securities
 
8,801,089

 
8,801,089

 
4,508

 
8,782,831

 
13,750

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency residential mortgage-backed securities
 
427,760

 
427,760

 
—

 
427,760

 
—

U.S. Treasury
 
—

 
—

 
—

 
—

 
—

Total fair value option securities
 
427,760

 
427,760

 
—

 
427,760

 
—

Residential mortgage loans held for sale
 
357,414

 
357,414

 
—

 
349,381

 
8,033

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
9,797,422

 
9,530,437

 
—

 
—

 
9,530,437

Commercial real estate
 
3,235,067

 
3,330,298

 
—

 
—

 
3,330,298

Residential mortgage
 
1,868,995

 
1,906,585

 
—

 
—

 
1,906,585

Personal
 
465,957

 
462,266

 
—

 
—

 
462,266

Total loans
 
15,367,441

 
15,229,586

 
—

 
—

 
15,229,586

Allowance for loan losses
 
(204,116
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
15,163,325

 
15,229,586

 
—

 
—

 
15,229,586

Mortgage servicing rights
 
200,049

 
200,049

 
—

 
—

 
200,049

Derivative instruments with positive fair value, net of cash margin
 
726,159

 
726,159

 
4,922

 
721,237

 
—

Deposits with no stated maturity
 
18,120,912

 
18,120,912

 
—

 
—

 
18,120,912

Time deposits
 
2,498,531

 
2,500,469

 
—

 
—

 
2,500,469

Other borrowed funds
 
5,253,124

 
5,239,400

 
—

 
—

 
5,239,400

Subordinated debentures
 
226,314

 
223,334

 
—

 
—

 
223,334

Derivative instruments with negative fair value, net of cash margin
 
636,115

 
636,115

 
—

 
636,115

 
—



- 127 -


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.

The following methods and assumptions were used in estimating the fair value of these financial instruments:
 
Cash and Cash Equivalents
 
The book value reported in the consolidated balance sheets for cash and short-term instruments approximates those assets’ fair values.
 
Securities
 
The fair values of securities are generally based on Significant Other Observable Inputs such as quoted prices for comparable instruments or interest rates and credit spreads, yield curves, volatilities, prepayment speeds and loss severities. 

Loans
 
The fair value of loans, excluding loans held for sale, are based on discounted cash flow analyses using interest rates and credit and liquidity spreads currently being offered for loans with similar remaining terms to maturity and risk, adjusted for the impact of interest rate floors and ceilings which are classified as Significant Unobservable Inputs. The fair values of loans were estimated to approximate their discounted cash flows less loan loss allowances allocated to these loans of $217 million at September 30, 2016, $195 million at December 31, 2015 and $176 million at September 30, 2015. A summary of assumptions used in determining the fair value of loans follows:

 
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
September 30, 2016:
 
 
 
 
 
 
Commercial
 
0.38% - 30.00%
 
0.69
 
0.54% - 3.93%
Commercial real estate
 
0.38% - 18.00%
 
0.72
 
0.80% - 3.90%
Residential mortgage
 
1.74% - 18.00%
 
1.95
 
1.57% - 3.55%
Personal
 
0.25% - 21.00%
 
0.35
 
0.75% - 4.15%
 
 
 
 
 
 
 
December 31, 2015:
 
 
 
 
 
 
Commercial
 
0.25% - 30.00%
 
0.62
 
0.52% - 4.34%
Commercial real estate
 
0.38% - 18.00%
 
0.73
 
0.95% - 3.93%
Residential mortgage
 
1.67% - 18.00%
 
2.42
 
0.86% - 4.25%
Personal
 
0.38% - 21.00%
 
0.37
 
1.19% - 4.11%
 
 
 
 
 
 
 
September 30, 2015:
 
 
 
 
 
 
Commercial
 
0.19% - 30.00%
 
0.63
 
0.47%-4.06%
Commercial real estate
 
0.38% - 18.00%
 
0.77
 
0.92%-3.60%
Residential mortgage
 
1.25% - 18.00%
 
2.34
 
0.86%-3.94%
Personal
 
0.38% - 21.00%
 
0.40
 
0.89%-3.86%
 
Deposits
 
The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions which are considered Significant Unobservable Inputs. Estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, is equal to the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, adjusting fair value for the expected benefit of these deposits is prohibited. Accordingly, the positive effect of such deposits is not included in the tables above.


- 128 -


A summary of assumptions used in determining the fair value of time deposits follows:

 
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
September 30, 2016
 
0.03% - 9.65%
 
2.10
 
1.37% - 1.66%
December 31, 2015
 
0.02% - 5.50%
 
1.78
 
1.11% - 1.57%
September 30, 2015
 
0.02% - 9.64%
 
1.75
 
0.85%-1.25%

 Other Borrowings and Subordinated Debentures
 
The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments which are considered Significant Unobservable Inputs. A summary of assumptions used in determining the fair value of other borrowing and subordinated debentures follows:

 
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
September 30, 2016:
 
 
 
 
 
 
Other borrowed funds
 
0.25% - 3.81%
 
0.02
 
0.29% - 2.99%
Subordinated debentures
 
5.38%
 
18.37
 
5.38%
 
 
 
 
 
 
 
December 31, 2015:
 
 
 
 
 
 
Other borrowed funds
 
0.25% - 3.40%
 
0.00
 
0.20% - 2.89%
Subordinated debentures
 
1.05%
 
1.37
 
2.12%
 
 
 
 
 
 
 
September 30, 2015:
 
 
 
 
 
 
Other borrowed funds
 
0.25% - 3.34%
 
0.02
 
0.07%-2.66%
Subordinated debentures
 
1.01%
 
1.63
 
1.83%

Off-Balance Sheet Instruments
 
The fair values of commercial loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance sheet instruments were not significant at September 30, 2016, December 31, 2015 or September 30, 2015.
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 and U.S. Treasury securities 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.



- 129 -


(12) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on September 30, 2016 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q. No events were identified requiring recognition in and/or disclosure in the consolidated financial statements.


- 130 -


Nine-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Nine Months Ended
 
 
September 30, 2016
 
September 30, 2015
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
2,040,978

 
$
7,926

 
0.52
%
 
$
2,043,351

 
$
4,114

 
0.27
%
Trading securities
 
264,525

 
4,659

 
2.48
%
 
149,292

 
2,216

 
2.37
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
227,136

 
9,244

 
5.43
%
 
237,416

 
9,788

 
5.50
%
Tax-exempt
 
340,292

 
5,713

 
2.24
%
 
391,621

 
4,557

 
1.55
%
Total investment securities
 
567,428

 
14,957

 
3.52
%
 
629,037

 
14,345

 
3.04
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
8,831,032

 
130,790

 
2.02
%
 
8,952,043

 
128,933

 
1.96
%
Tax-exempt
 
70,205

 
2,605

 
5.15
%
 
82,951

 
2,555

 
4.26
%
Total available for sale securities
 
8,901,237

 
133,395

 
2.04
%
 
9,034,994

 
131,488

 
1.98
%
Fair value option securities
 
361,623

 
6,182

 
2.11
%
 
423,432

 
6,803

 
2.25
%
Restricted equity securities
 
316,563

 
12,684

 
5.34
%
 
219,248

 
9,627

 
5.85
%
Residential mortgage loans held for sale
 
379,174

 
9,823

 
3.49
%
 
404,756

 
10,634

 
3.52
%
Loans
 
16,235,071

 
436,966

 
3.59
%
 
14,886,418

 
400,053

 
3.59
%
Allowance for loan losses
 
(242,508
)
 
 
 
 
 
(198,755
)
 
 
 
 
Loans, net of allowance
 
15,992,563

 
436,966

 
3.65
%
 
14,687,663

 
400,053

 
3.64
%
Total earning assets
 
28,824,091

 
626,592

 
2.92
%
 
27,591,773

 
579,280

 
2.82
%
Receivable on unsettled securities sales
 
141,957

 
 
 
 
 
86,095

 
 
 
 
Cash and other assets
 
3,083,135

 
 
 
 
 
2,726,562

 
 
 
 
Total assets
 
$
32,049,183

 
 
 
 
 
$
30,404,430

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
9,666,048

 
$
9,994

 
0.14
%
 
$
10,052,159

 
$
6,723

 
0.09
%
Savings
 
411,568

 
295

 
0.10
%
 
375,883

 
294

 
0.10
%
Time
 
2,286,844

 
20,062

 
1.17
%
 
2,622,634

 
27,085

 
1.38
%
Total interest-bearing deposits
 
12,364,460

 
30,351

 
0.33
%
 
13,050,676

 
34,102

 
0.35
%
Funds purchased
 
83,668

 
142

 
0.23
%
 
67,777

 
44

 
0.09
%
Repurchase agreements
 
598,631

 
214

 
0.05
%
 
814,429

 
214

 
0.04
%
Other borrowings
 
6,002,018

 
25,587

 
0.57
%
 
3,961,436

 
9,137

 
0.31
%
Subordinated debentures
 
238,415

 
4,056

 
2.27
%
 
293,623

 
4,456

 
2.03
%
Total interest-bearing liabilities
 
19,287,192

 
60,350

 
0.42
%
 
18,187,941

 
47,953

 
0.35
%
Non-interest bearing demand deposits
 
8,255,859

 
 
 
 
 
7,959,336

 
 
 
 
Due on unsettled securities purchases
 
150,994

 
 
 
 
 
148,445

 
 
 
 
Other liabilities
 
1,001,283

 
 
 
 
 
731,126

 
 
 
 
Total equity
 
3,353,855

 
 
 
 
 
3,377,582

 
 
 
 
Total liabilities and equity
 
$
32,049,183

 
 
 
 
 
$
30,404,430

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
566,242

 
2.50
%
 
 
 
$
531,327

 
2.47
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
2.64
%
 
 
 
 
 
2.59
%
Less tax-equivalent adjustment
 
 
 
13,212

 
 
 
 
 
9,234

 
 
Net Interest Revenue
 
 
 
553,030

 
 
 
 
 
522,093

 
 
Provision for credit losses
 
 
 
65,000

 
 
 
 
 
11,500

 
 
Other operating revenue
 
 
 
539,968

 
 
 
 
 
505,738

 
 
Other operating expense
 
 
 
761,745

 
 
 
 
 
672,006

 
 
Income before taxes
 
 
 
266,253

 
 
 
 
 
344,325

 
 
Federal and state income taxes
 
 
 
83,881

 
 
 
 
 
113,142

 
 
Net income
 
 
 
182,372

 
 
 
 
 
231,183

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
(270
)
 
 
 
 
 
2,219

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
182,642

 
 
 
 
 
$
228,964

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
2.77

 
 

 
 

 
$
3.33

 
 

Diluted
 
 

 
$
2.76

 
 

 
 

 
$
3.32

 
 

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.

- 131 -


Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
September 30, 2016
 
June 30, 2016
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
2,047,991

 
$
2,651

 
0.51
%
 
$
2,022,028

 
$
2,569

 
0.51
%
Trading securities
 
366,545

 
3,157

 
2.71
%
 
237,808

 
775

 
1.89
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
224,518

 
3,000

 
5.34
%
 
227,103

 
3,069

 
5.41
%
Tax-exempt
 
328,074

 
1,851

 
2.26
%
 
335,288

 
1,878

 
2.25
%
Total investment securities
 
552,592

 
4,851

 
3.51
%
 
562,391

 
4,947

 
3.52
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
8,795,869

 
42,513

 
1.99
%
 
8,819,135

 
43,345

 
2.01
%
Tax-exempt
 
66,721

 
867

 
5.47
%
 
70,977

 
862

 
5.06
%
Total available for sale securities
 
8,862,590

 
43,380

 
2.01
%
 
8,890,112

 
44,207

 
2.04
%
Fair value option securities
 
266,998

 
1,531

 
1.70
%
 
368,434

 
2,062

 
2.19
%
Restricted equity securities
 
335,812

 
4,510

 
5.37
%
 
319,136

 
3,863

 
4.84
%
Residential mortgage loans held for sale
 
445,930

 
3,615

 
3.28
%
 
401,114

 
3,508

 
3.53
%
Loans
 
16,447,750

 
150,077

 
3.63
%
 
16,263,132

 
144,708

 
3.58
%
Allowance for loan losses
 
(247,901
)
 
 
 
 
 
(245,448
)
 
 
 
 
Loans, net of allowance
 
16,199,849

 
150,077

 
3.69
%
 
16,017,684

 
144,708

 
3.63
%
Total earning assets
 
29,078,307

 
213,772

 
2.93
%
 
28,818,707

 
206,639

 
2.91
%
Receivable on unsettled securities sales
 
259,906

 
 
 
 
 
49,568

 
 
 
 
Cash and other assets
 
3,308,260

 
 
 
 
 
3,117,767

 
 
 
 
Total assets
 
$
32,646,473

 
 
 
 
 
$
31,986,042

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
9,650,618

 
$
3,417

 
0.14
%
 
$
9,590,855

 
$
3,260

 
0.14
%
Savings
 
420,009

 
100

 
0.09
%
 
417,122

 
102

 
0.10
%
Time
 
2,197,350

 
6,295

 
1.14
%
 
2,297,621

 
6,635

 
1.16
%
Total interest-bearing deposits
 
12,267,977

 
9,812

 
0.32
%
 
12,305,598

 
9,997

 
0.33
%
Funds purchased
 
68,280

 
33

 
0.19
%
 
70,682

 
33

 
0.19
%
Repurchase agreements
 
522,822

 
53

 
0.04
%
 
611,264

 
72

 
0.05
%
Other borrowings
 
6,342,369

 
9,105

 
0.57
%
 
6,076,028

 
8,675

 
0.57
%
Subordinated debentures
 
255,890

 
2,468

 
3.84
%
 
232,795

 
878

 
1.52
%
Total interest-bearing liabilities
 
19,457,338

 
21,471

 
0.44
%
 
19,296,367

 
19,655

 
0.41
%
Non-interest bearing demand deposits
 
8,497,037

 
 
 
 
 
8,162,134

 
 
 
 
Due on unsettled securities purchases
 
200,574

 
 
 
 
 
93,812

 
 
 
 
Other liabilities
 
1,099,858

 
 
 
 
 
1,089,483

 
 
 
 
Total equity
 
3,391,666

 
 
 
 
 
3,344,246

 
 
 
 
Total liabilities and equity
 
$
32,646,473

 
 
 
 
 
$
31,986,042

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
192,301

 
2.49
%
 
 
 
$
186,984

 
2.50
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
 
 
2.64
%
 
 
 
 
 
2.63
%
Less tax-equivalent adjustment
 
 
 
4,455

 
 
 
 
 
4,372

 
 
Net Interest Revenue
 
 
 
187,846

 
 
 
 
 
182,612

 
 
Provision for credit losses
 
 
 
10,000

 
 
 
 
 
20,000

 
 
Other operating revenue
 
 
 
191,342

 
 
 
 
 
188,882

 
 
Other operating expense
 
 
 
262,120

 
 
 
 
 
254,725

 
 
Income before taxes
 
 
 
107,068

 
 
 
 
 
96,769

 
 
Federal and state income taxes
 
 
 
31,956

 
 
 
 
 
30,497

 
 
Net income
 
 
 
75,112

 
 
 
 
 
66,272

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
835

 
 
 
 
 
471

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
74,277

 
 
 
 
 
$
65,801

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.13

 
 

 
 

 
$
1.00

 
 

Diluted
 
 

 
$
1.13

 
 

 
 

 
$
1.00

 
 

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.

- 132 -


Three Months Ended
March 31, 2016
 
December 31, 2015
 
September 30, 2015
Average Balance
 
Revenue /Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2,052,840

 
$
2,706

 
0.53
%
 
$
1,995,945

 
$
1,466

 
0.29
%
 
$
2,038,611

 
$
1,442

 
0.28
%
188,100

 
727

 
2.47
%
 
150,402

 
840

 
2.86
%
 
179,098

 
945

 
2.70
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
229,817

 
3,175

 
5.53
%
 
232,566

 
3,144

 
5.41
%
 
233,914

 
3,211

 
5.49
%
357,648

 
1,984

 
2.22
%
 
369,803

 
1,413

 
1.53
%
 
382,177

 
1,468

 
1.54
%
587,465

 
5,159

 
3.51
%
 
602,369

 
4,557

 
3.03
%
 
616,091

 
4,679

 
3.04
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,878,478

 
44,932

 
2.06
%
 
8,894,019

 
43,649

 
2.02
%
 
8,862,917

 
43,473

 
1.99
%
72,958

 
876

 
4.95
%
 
77,071

 
786

 
4.22
%
 
79,344

 
796

 
4.15
%
8,951,435

 
45,808

 
2.08
%
 
8,971,090

 
44,435

 
2.04
%
 
8,942,261

 
44,269

 
2.01
%
450,478

 
2,589

 
2.38
%
 
435,449

 
2,461

 
2.32
%
 
429,951

 
2,480

 
2.30
%
294,529

 
4,311

 
5.85
%
 
262,461

 
3,905

 
5.95
%
 
255,610

 
3,802

 
5.95
%
289,743

 
2,700

 
3.75
%
 
310,425

 
2,968

 
3.85
%
 
401,359

 
3,793

 
3.79
%
15,991,993

 
142,181

 
3.57
%
 
15,586,998

 
139,372

 
3.55
%
 
15,192,311

 
135,498

 
3.54
%
(234,116
)
 
 
 
 
 
(207,156
)
 
 
 
 
 
(202,829
)
 
 
 
 
15,757,877

 
142,181

 
3.63
%
 
15,379,842

 
139,372

 
3.60
%
 
14,989,482

 
135,498

 
3.59
%
28,572,467

 
206,181

 
2.92
%
 
28,107,983

 
200,004

 
2.86
%
 
27,852,463

 
196,908

 
2.83
%
115,101

 
 
 
 
 
62,228

 
 
 
 
 
64,591

 
 
 
 
2,820,903

 
 
 
 
 
2,909,965

 
 
 
 
 
2,852,679

 
 
 
 
$
31,508,471

 
 
 
 
 
$
31,080,176

 
 
 
 
 
$
30,769,733

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
9,756,843

 
$
3,317

 
0.14
%
 
$
9,527,491

 
$
2,098

 
0.09
%
 
$
9,760,839

 
$
2,061

 
0.08
%
397,479

 
93

 
0.09
%
 
382,284

 
89

 
0.09
%
 
379,828

 
97

 
0.10
%
2,366,543

 
7,132

 
1.21
%
 
2,482,714

 
7,881

 
1.26
%
 
2,557,874

 
8,573

 
1.33
%
12,520,865

 
10,542

 
0.34
%
 
12,392,489

 
10,068

 
0.32
%
 
12,698,541

 
10,731

 
0.34
%
112,211

 
76

 
0.27
%
 
73,220

 
21

 
0.11
%
 
70,281

 
15

 
0.08
%
662,640

 
89

 
0.05
%
 
623,921

 
68

 
0.04
%
 
672,085

 
49

 
0.03
%
5,583,917

 
7,807

 
0.56
%
 
4,957,175

 
4,720

 
0.38
%
 
4,779,981

 
3,637

 
0.30
%
226,368

 
710

 
1.26
%
 
226,332

 
644

 
1.13
%
 
226,296

 
596

 
1.04
%
19,106,001

 
19,224

 
0.40
%
 
18,273,137

 
15,521

 
0.34
%
 
18,447,184

 
15,028

 
0.32
%
8,105,756

 
 
 
 
 
8,312,961

 
 
 
 
 
7,994,607

 
 
 
 
158,050

 
 
 
 
 
248,811

 
 
 
 
 
90,135

 
 
 
 
813,427

 
 
 
 
 
884,652

 
 
 
 
 
838,612

 
 
 
 
3,325,237

 
 
 
 
 
3,360,615

 
 
 
 
 
3,399,195

 
 
 
 
$
31,508,471

 
 
 
 
 
$
31,080,176

 
 
 
 
 
$
30,769,733

 
 
 
 
 
 
$
186,957

 
2.52
%
 
 
 
$
184,483

 
2.52
%
 
 
 
$
181,880

 
2.51
%
 
 
 
 
2.65
%
 
 
 
 
 
2.64
%
 
 
 
 
 
2.61
%
 
 
4,385

 
 
 
 
 
3,222

 
 
 
 
 
3,244

 
 
 
 
182,572

 
 
 
 
 
181,261

 
 
 
 
 
178,636

 
 
 
 
35,000

 
 
 
 
 
22,500

 
 
 
 
 
7,500

 
 
 
 
159,744

 
 
 
 
 
161,115

 
 
 
 
 
163,436

 
 
 
 
244,900

 
 
 
 
 
232,558

 
 
 
 
 
224,628

 
 
 
 
62,416

 
 
 
 
 
87,318

 
 
 
 
 
109,944

 
 
 
 
21,428

 
 
 
 
 
26,242

 
 
 
 
 
34,128

 
 
 
 
40,988

 
 
 
 
 
61,076

 
 
 
 
 
75,816

 
 
 
 
(1,576
)
 
 
 
 
 
1,475

 
 
 
 
 
925

 
 
 
 
$
42,564

 
 
 
 
 
$
59,601

 
 
 
 
 
$
74,891

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
0.64

 
 

 
 

 
$
0.89

 
 

 
 

 
$
1.09

 
 

 

 
$
0.64

 
 

 
 

 
$
0.89

 
 

 
 

 
$
1.09

 
 




- 133 -


Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
Sept. 30,2016
 
June 30, 2016
 
Mar. 31, 2016
 
Dec. 31, 2015
 
Sept. 30,2015
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
209,317

 
$
202,267

 
$
201,796

 
$
196,782

 
$
193,664

Interest expense
 
21,471

 
19,655

 
19,224

 
15,521

 
15,028

Net interest revenue
 
187,846

 
182,612

 
182,572

 
181,261

 
178,636

Provision for credit losses
 
10,000

 
20,000

 
35,000

 
22,500

 
7,500

Net interest revenue after provision for credit losses
 
177,846

 
162,612

 
147,572

 
158,761

 
171,136

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
38,006

 
39,530

 
32,341

 
30,255

 
31,582

Transaction card revenue
 
33,933

 
34,950

 
32,354

 
32,319

 
32,514

Fiduciary and asset management revenue
 
34,073

 
34,813

 
32,056

 
31,165

 
30,807

Deposit service charges and fees
 
23,668

 
22,618

 
22,542

 
22,813

 
23,606

Mortgage banking revenue
 
42,548

 
38,224

 
34,430

 
25,039

 
33,170

Other revenue
 
13,080

 
13,352

 
11,904

 
14,233

 
12,978

Total fees and commissions
 
185,308

 
183,487

 
165,627

 
155,824

 
164,657

Other gains, net
 
2,442

 
1,307

 
1,560

 
2,329

 
1,161

Gain (loss) on derivatives, net
 
2,226

 
10,766

 
7,138

 
(732
)
 
1,283

Gain (loss) on fair value option securities, net
 
(3,355
)
 
4,279

 
9,443

 
(4,127
)
 
5,926

Change in fair value of mortgage servicing rights
 
2,327

 
(16,283
)
 
(27,988
)
 
7,416

 
(11,757
)
Gain on available for sale securities, net
 
2,394

 
5,326

 
3,964

 
2,132

 
2,166

Total other-than-temporary impairment losses
 
—

 
—

 
—

 
(2,114
)
 
—

Portion of loss recognized in other comprehensive income
 
—

 
—

 
—

 
387

 
—

Net impairment losses recognized in earnings
 
—

 
—

 
—

 
(1,727
)
 
—

Total other operating revenue
 
191,342

 
188,882

 
159,744

 
161,115

 
163,436

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
143,185

 
142,490

 
135,843

 
133,182

 
129,062

Business promotion
 
6,839

 
6,703

 
5,696

 
8,416

 
5,922

Charitable contributions to BOKF Foundation
 
—

 
—

 
—

 
—

 
796

Professional fees and services
 
14,038

 
14,158

 
11,759

 
10,357

 
10,147

Net occupancy and equipment
 
20,111

 
19,677

 
18,766

 
19,356

 
18,689

Insurance
 
9,390

 
7,129

 
7,265

 
5,415

 
4,864

Data processing and communications
 
33,331

 
32,802

 
32,017

 
31,248

 
30,708

Printing, postage and supplies
 
3,790

 
3,889

 
3,907

 
3,108

 
3,376

Net losses (gains) and operating expenses of repossessed assets
 
(926
)
 
1,588

 
1,070

 
343

 
267

Amortization of intangible assets
 
1,521

 
2,624

 
1,159

 
1,090

 
1,089

Mortgage banking costs
 
16,022

 
15,809

 
12,379

 
11,496

 
9,107

Other expense
 
14,819

 
7,856

 
15,039

 
8,547

 
10,601

Total other operating expense
 
262,120

 
254,725

 
244,900

 
232,558

 
224,628

Net income before taxes
 
107,068

 
96,769

 
62,416

 
87,318

 
109,944

Federal and state income taxes
 
31,956

 
30,497

 
21,428

 
26,242

 
34,128

Net income
 
75,112

 
66,272

 
40,988

 
61,076

 
75,816

Net income (loss) attributable to non-controlling interests
 
835

 
471

 
(1,576
)
 
1,475

 
925

Net income attributable to BOK Financial Corporation shareholders
 
$
74,277

 
$
65,801

 
$
42,564

 
$
59,601

 
$
74,891

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$1.13
 
$1.00
 
$0.64
 
$0.89
 
$1.09
Diluted
 
$1.13
 
$1.00
 
$0.64
 
$0.89
 
$1.09
Average shares used in computation:
 
 
 
 
 
 
 
 
 
 
Basic
 
65,085,392

 
65,245,887

 
65,296,541

 
66,378,380

 
67,668,076

Diluted
 
65,157,841

 
65,302,926

 
65,331,428

 
66,467,729

 
67,762,483


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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, 2016.

 
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, 2016
 
—

 
$
—

 
—

 
2,820,757

August 1 to August 31, 2016
 
5,137

 
$
69.24

 
—

 
2,820,757

September 1 to September 30, 2016
 
—

 
$
—

 
—

 
2,820,757

Total
 
5,137

 
 

 
—

 
 

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, 2016, the Company had repurchased 2,179,243 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 stock option exercises.
Item 6. Exhibits

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

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

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

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


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



- 135 -


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 31, 2016                                                                  



/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


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