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

FORM 10-Q
(Mark One) 
☒
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2019
OR
☐
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 70,858,010 shares of common stock ($.00006 par value) as of September 30, 2019.




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

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 $142.2 million or $2.00 per diluted share for the third quarter of 2019. Net income was $117.3 million or $1.79 per diluted share for the third quarter of 2018, including $11.5 million or 18 cents per share from a client asset management fee. The discussion below excludes the impact of this fee. Net income was $137.6 million or $1.93 per diluted share for the second quarter of 2019. 

Highlights of the third quarter of 2019 included:
•
Net interest revenue totaled $279.1 million, up $38.2 million over the third quarter of 2018. The acquisition of CoBiz Financial ("CoBiz") in the fourth quarter of 2018 added $40.6 million to net interest revenue in the third quarter of 2019. Net interest margin was 3.01 percent for the third quarter of 2019 compared to 3.21 percent for the third quarter of 2018. Average earning assets were $37.7 billion for the third quarter of 2019 compared to $30.0 billion for the third quarter of 2018. Net interest revenue decreased $6.3 million compared to the second quarter of 2019 while net interest margin decreased 29 basis points. Falling interest rates compressed the margin by 9 basis points compared to the second quarter of 2019.
•
Fees and commissions revenue totaled $186.1 million, an increase of $35.3 million over the third quarter of 2018. Brokerage and trading revenue increased $20.8 million and mortgage banking revenue increased $6.6 million as lower mortgage interest rates have increased mortgage production and related trading activity. Fees and commissions revenue increased $10.0 million over the second quarter of 2019 largely due to increases in brokerage and trading and mortgage banking revenue.
•
Other operating expense totaled $279.3 million, a $26.7 million increase over the third quarter of 2018. Expenses related to CoBiz operations added $20.8 million in the third quarter of 2019. Excluding CoBiz operations, personnel expense increased $5.7 million, primarily due to an increase in regular compensation. Non-personnel expense remained relatively consistent with the third quarter of 2018. Operating expense increased $2.2 million over the second quarter of 2019. Personnel expense increased $2.2 million with an increase in incentive compensation partially offset by a decrease in employee benefits. Non-personnel expense was largely unchanged compared to the second quarter of 2019.
•
The effective tax rate was 18.6 percent for the third quarter of 2019, 22.8 percent for the third quarter of 2018 and 21.4 percent for the second quarter of 2019. Income tax expense decreased $5.2 million compared to the second quarter of 2019 primarily due to the completion of 2018 tax filings and tax credit projects.
•
The Company recorded a provision for credit losses of $12.0 million in the third quarter of 2019. A provision of $5.0 million was recorded in the second quarter of 2019 and a provision of $4.0 million was recorded in the third quarter of 2018. Nonperforming assets not guaranteed by U.S. government agencies decreased $6.8 million compared to June 30, 2019. Potential problem loans decreased $18 million while other loans especially mentioned increased $38 million. Net charge-offs were $10.6 million or 0.19 percent of average loans for the third quarter of 2019, compared to net charge-offs of $7.7 million or 0.14 percent of average loans for the second quarter of 2019. The combined allowance for credit losses totaled $206 million or 0.92 percent of outstanding loans at September 30, 2019 compared to $204 million or 0.92 percent of outstanding loans at June 30, 2019.
•
Period-end outstanding loan balances totaled $22.3 billion at September 30, 2019, an increase of $30 million over June 30, 2019. Average loan balances grew $409 million to $22.4 billion at September 30, 2019.
•
Period-end deposits were $26.2 billion at September 30, 2019, an $862 million increase compared to June 30, 2019. Interest-bearing transaction deposits increased $670 million while demand deposit balances increased $177 million. Average deposits increased $538 million, including a $619 million increase in interest-bearing deposits partially offset by a $124 million decrease in demand deposits.
•
The common equity Tier 1 capital ratio at September 30, 2019 was 11.06 percent. Other regulatory capital ratios were Tier 1 capital ratio, 11.06 percent, total capital ratio, 12.56 percent, and leverage ratio, 8.41 percent. At June 30, 2019, the common equity Tier 1 capital ratio was 10.84 percent, the Tier 1 capital ratio was 10.84 percent, total capital ratio was 12.34 percent, and leverage ratio was 8.75 percent.


- 1 -


•
The Company paid a regular cash dividend of $35.5 million or $0.50 per common share during the third quarter of 2019. On October 29, 2019, the board of directors approved a quarterly cash dividend of $0.51 per common share payable on or about November 27, 2019 to shareholders of record as of November 12, 2019.

- 2 -


Results of Operations
Net Interest Revenue and Net Interest Margin

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

Tax-equivalent net interest revenue totaled $282.0 million for the third quarter of 2019, up from $242.8 million in the third quarter of 2018. CoBiz added $40.6 million to net interest revenue, including $10.9 million of net purchase accounting discount accretion in the third quarter of 2019. Table 1 shows the effect on net interest revenue from changes in average balances and interest rates for various types of earning assets and interest-bearing liabilities.

Net interest margin was 3.01 percent for the third quarter of 2019, compared to 3.21 percent for the third quarter of 2018. The tax-equivalent yield on earning assets was 4.25 percent, up 21 basis points over the third quarter of 2018. Loan yields increased 32 basis points to 5.12 percent primarily due to an increase in short-term interest rates and higher yields on acquired loans. The yield on interest-bearing cash and cash equivalents increased 44 basis points to 2.42 percent. The available for sale securities portfolio yield increased 23 basis points to 2.60 percent. The yield on trading securities decreased 49 basis points to 3.49 percent and the yield on fair value option securities decreased 46 basis points to 2.79 percent.

Funding costs were up 43 basis points over the third quarter of 2018. The cost of interest-bearing deposits increased 40 basis points and the cost of other borrowed funds increased 27 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 44 basis points for the third quarter of 2019, up 2 basis points over the third quarter of 2018.
 
Average earning assets for the third quarter of 2019 increased $7.7 billion or 26 percent over the third quarter of 2018. Average loans, net of allowance for loan losses, increased $4.2 billion, including acquired loans. Available for sale securities, increased $2.6 billion and fair value option securities, which we hold as an economic hedge against changes in fair value of our mortgage servicing rights, increased $1.1 billion. Approximately $1.7 billion of these lower yielding fixed-rate assets were added in the second and third quarters of 2019 in order to reduce our exposure to falling short-term interest rates. Interest-bearing cash and cash equivalent balances decreased $188 million.

Average deposits increased $3.8 billion compared to the third quarter of 2018, including acquired deposits. Interest bearing deposits increased $3.3 billion while demand deposit balances increased $435 million. Average borrowed funds increased $4.3 billion over the third quarter of 2018.
Tax-equivalent net interest revenue decreased $6.9 million compared to the second quarter of 2019. Recoveries of foregone interest on nonaccruing loans added $3.4 million to the second quarter of 2019. The third quarter of 2019 included $10.9 million of purchase accounting discount accretion while the second quarter of 2019 included $13.4 million.

Average earning assets increased $2.3 billion compared to the second quarter of 2019. Average available for sale securities increased $1.3 billion due to repositioning the balance sheet for additional interest rate decreases. Average fair value option securities balances increased $655 million. Average loan balances were up $409 million. Average borrowed funds increased $2.0 billion and average interest-bearing deposit balances increased $662 million compared to the second quarter of 2019.
Net interest margin was 3.01 percent compared to 3.30 percent in the previous quarter. Net interest margin was reduced 9 basis points due to available for sale securities expansion and 4 basis points due to the increase in the fair value hedge portfolio. In addition, lower foregone interest recoveries and discount accretion reduced net interest margin by 7 basis points. Falling interest rates compressed the net interest margin by an additional 9 basis points.
Excluding recoveries of forgone interest, the yield on average earning assets decreased 22 basis points while the yield on the loan portfolio decreased 21 basis points. The yield on the available for sale securities portfolio decreased 3 basis points and the yield on the trading securities portfolio was down 10 basis points.

- 3 -


Funding costs decreased 2 basis points. The cost of interest-bearing deposits increased 4 basis points and the cost of other borrowed funds decreased 22 basis points. The benefit to net interest margin from assets funded by non-interest liabilities decreased 5 basis points to 44 basis points.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately 78% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally reprice more quickly than liabilities. One of the strategies that we use to manage toward a relative rate-neutral position is to purchase fixed-rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market-rate-sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. 

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

Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
Sept. 30, 2019 / 2018
 
Nine Months Ended
Sept. 30, 2019 / 2018
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
(391
)
 
$
(1,047
)
 
$
656

 
$
(9,284
)
 
$
(15,071
)
 
$
5,787

Trading securities
 
(2,873
)
 
(764
)
 
(2,109
)
 
10,633

 
11,295

 
(662
)
Investment securities
 
(422
)
 
(605
)
 
183

 
(1,044
)
 
(1,958
)
 
914

Available for sale securities
 
18,724

 
13,469

 
5,255

 
42,022

 
21,303

 
20,719

Fair value option securities
 
6,827

 
8,021

 
(1,194
)
 
10,821

 
10,850

 
(29
)
Restricted equity securities
 
2,326

 
2,354

 
(28
)
 
4,662

 
4,159

 
503

Residential mortgage loans held for sale
 
(260
)
 
14

 
(274
)
 
(1,020
)
 
(782
)
 
(238
)
Loans
 
69,071

 
52,657

 
16,414

 
245,537

 
160,739

 
84,798

Total tax-equivalent interest revenue
 
93,002

 
74,099

 
18,903

 
302,327

 
190,535

 
111,792

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
18,684

 
6,805

 
11,879

 
53,441

 
14,128

 
39,313

Savings deposits
 
82

 
15

 
67

 
232

 
40

 
192

Time deposits
 
3,616

 
653

 
2,963

 
10,127

 
896

 
9,231

Funds purchased and repurchase agreements
 
11,963

 
7,851

 
4,112

 
31,719

 
17,771

 
13,948

Other borrowings
 
17,614

 
13,751

 
3,863

 
55,016

 
21,239

 
33,777

Subordinated debentures
 
1,788

 
1,824

 
(36
)
 
5,283

 
5,459

 
(176
)
Total interest expense
 
53,747

 
30,899

 
22,848

 
155,818

 
59,533

 
96,285

Tax-equivalent net interest revenue
 
39,255

 
43,200

 
(3,945
)
 
146,509

 
131,002

 
15,507

Change in tax-equivalent adjustment
 
1,042

 
 
 
 
 
3,060

 
 
 
 
Net interest revenue
 
$
38,213

 
 
 
 
 
$
143,449

 
 
 
 
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 $186.5 million for the third quarter of 2019, an $18.5 million increase over the third quarter of 2018 and a $14.4 million increase over the second quarter of 2019. The third quarter of 2018 included a $15.4 million fee earned through the sale of client assets. This fee is excluded from the discussion below. Lower mortgage interest rates have positively affected both our brokerage and trading and mortgage banking revenue leading to increases of $20.8 million and $6.6 million over the third quarter of 2018, respectively, and $3.3 million and $2.0 million over the second quarter of 2019, respectively.

Table 2 – Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended June 30, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Brokerage and trading revenue
 
$
43,840

 
$
23,086

 
$
20,754

 
90
 %
 
$
40,526

 
$
3,314

 
8
 %
Transaction card revenue
 
22,015

 
21,396

 
619

 
3
 %
 
21,915

 
100

 
—
 %
Fiduciary and asset management revenue
 
43,621

 
57,514

 
(13,893
)
 
(24
)%
 
45,025

 
(1,404
)
 
(3
)%
Deposit service charges and fees
 
28,837

 
27,765

 
1,072

 
4
 %
 
28,074

 
763

 
3
 %
Mortgage banking revenue
 
30,180

 
23,536

 
6,644

 
28
 %
 
28,131

 
2,049

 
7
 %
Other revenue
 
17,626

 
12,900

 
4,726

 
37
 %
 
12,437

 
5,189

 
42
 %
Total fees and commissions revenue
 
186,119

 
166,197


19,922

 
12
 %
 
176,108


10,011

 
6
 %
Other gains (losses), net
 
4,544

 
2,754

 
1,790

 
N/A

 
3,480

 
1,064

 
N/A

Gain (loss) on derivatives, net
 
3,778

 
(2,847
)
 
6,625

 
N/A

 
11,150

 
(7,372
)
 
N/A

Gain (loss) on fair value option securities, net
 
4,597

 
(4,385
)
 
8,982

 
N/A

 
9,853

 
(5,256
)
 
N/A

Change in fair value of mortgage servicing rights
 
(12,593
)
 
5,972

 
(18,565
)
 
N/A

 
(29,555
)
 
16,962

 
N/A

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

 
250

 
(245
)
 
N/A

 
1,029

 
(1,024
)
 
N/A

Total other operating revenue
 
$
186,450

 
$
167,941

 
$
18,509

 
11
 %
 
$
172,065

 
$
14,385

 
8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 40 percent of total revenue for the third quarter of 2019, excluding provision for credit losses and gains and losses on other assets, securities and derivatives and the change in the fair value of mortgage servicing rights. We believe that a variety of fee revenue sources provides an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors such as rising interest rates resulting in growth in net interest revenue or fiduciary and asset management revenue, may also decrease mortgage production volumes. We expect growth in other operating revenue to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and Trading Revenue

Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage and investment banking, increased $20.8 million or 90 percent compared to the third quarter of 2018.


- 5 -


Trading revenue includes net realized and unrealized gains and losses primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies, municipal securities and asset-backed securities to institutional customers and related derivative instruments. Trading revenue was $24.1 million for the third quarter of 2019, a $19.3 million or 399 percent increase compared to the third quarter of 2018. Lower mortgage interest rates have led to increased trading activity. This increase also includes a shift from our customer hedging portfolio.

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 $4.7 million for the third quarter of 2019, a $3.8 million or 45 percent decrease compared to the third quarter of 2018. The decrease is primarily due to a shift in the mix of our to-be-announced residential mortgage backed securities contracts from our customer hedging program to our U.S. government agency residential mortgage-backed trading program. The resulting increased activity remains within our established market risk limits as discussed further in Management's Discussion & Analysis – Market Risk section following.

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $3.9 million, a $2.8 million increase compared to the third quarter of 2018. Changes in investment banking revenue are primarily related to the timing and volume of completed transactions.

Insurance brokerage fees increased $2.7 million compared to the third quarter of 2018 due to the addition of CoBiz.
Brokerage and trading revenue increased $3.3 million compared to the previous quarter, primarily due to increased trading activity as a result of lower mortgage interest rates combined with increased syndication activity.

Fiduciary and Asset Management Revenue

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 90 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships. Fiduciary and asset management revenue increased $1.5 million or 4 percent compared to the third quarter of 2018. Fiduciary and asset management revenue decreased $1.4 million or 3 percent compared the second quarter of 2019, primarily due to seasonal tax fees earned in the second quarter.


- 6 -


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

Table 3 -- Assets Under Management or Administration
 
Three Months Ended
 
September 30, 2019
 
September 30, 2018
 
June 30, 2019
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
Managed fiduciary assets:
Personal
$
8,513,380

 
$
23,619

 
1.11
%
 
$
8,076,312

 
$
22,921

 
1.14
%
 
$
8,516,076

 
$
26,134

 
1.23
%
Institutional
14,796,223

 
5,846

 
0.16
%
 
13,568,115

 
5,504

 
0.16
%
 
14,286,046

 
6,283

 
0.18
%
Total managed fiduciary assets
23,309,603

 
29,465

 
0.51
%
 
21,644,427

 
28,425

 
0.53
%
 
22,802,122

 
32,417

 
0.57
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-managed assets:
Fiduciary
25,950,094

 
13,910

 
0.21
%
 
23,915,680

 
28,591

3 
0.48
%
 
26,494,774

 
12,275

 
0.19
%
Non-fiduciary
15,133,544

 
246

 
0.01
%
 
16,146,102

 
498

 
0.01
%
 
15,894,874

 
333

 
0.01
%
Safekeeping and brokerage assets under administration
16,403,708

 
—

 
—
%
 
15,921,806

 
—

 
—
%
 
16,582,832

 
—

 
—
%
Total non-managed assets
57,487,346

 
14,156

 
0.10
%
 
55,983,588

 
29,089

 
0.21
%
 
58,972,480

 
12,608

 
0.09
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets under management or administration
$
80,796,949

 
$
43,621

 
0.22
%
 
$
77,628,015

 
$
57,514

 
0.30
%
 
$
81,774,602

 
$
45,025

 
0.22
%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Annualized revenue divided by period-end balance.
3 A $15.4 million fee earned through client asset management added 8 basis points to the margin in the third quarter of 2018.

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

Table 4 -- Changes in Assets Under Management or Administration
 
 
Three Months Ended
September 30,
 
 
2019
 
2018
Beginning balance
 
$
81,774,602

 
$
78,873,446

Net inflows (outflows)
 
(1,230,466
)
 
(2,921,653
)
Net change in fair value
 
252,813

 
1,676,222

Ending balance
 
$
80,796,949

 
$
77,628,015


Mortgage Banking Revenue

Mortgage banking revenue increased $6.6 million or 28 percent compared to the third quarter of 2018. Mortgage loan production volumes increased $315 million or 53 percent as average primary mortgage interest rates have decreased. The gain on sale margin increased 30 basis points to 1.51 percent in the third quarter of 2019.

Mortgage banking revenue increased $2.0 million or 7 percent compared to the second quarter of 2019. Lower mortgage interest rates during the quarter led to an increase in mortgage production. Gain on sale margin improved 5 basis points over the prior quarter.


- 7 -


Table 5 – Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended June 30, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
Mortgage production revenue
 
$
13,814

 
$
7,250

 
$
6,564

 
91
 %
 
$
11,869

 
$
1,945

 
16
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
877,280

 
$
651,076

 


 


 
$
729,841

 
 
 
 
Add: Current period end outstanding commitments
 
379,377

 
197,752

 
 
 
 
 
344,087

 
 
 
 
Less: Prior period end outstanding commitments
 
344,087

 
251,231

 
 
 
 
 
263,434

 
 
 
 
Total mortgage production volume
 
$
912,570

 
$
597,597

 
$
314,973

 
53
 %
 
$
810,494

 
$
102,076

 
13
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loan refinances to mortgage loans funded for sale
 
56
%
 
23
%
 
3,300
 bps
 
 
 
31
%
 
2,500
 bps
 
 
Gains on sale margin
 
1.51
%
 
1.21
%
 
30
 bps
 
 
 
1.46
%
 
5
 bps
 
 
Primary mortgage interest rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
3.66
%
 
4.57
%
 
(91
) bps
 
 
 
4.01
%
 
(35
) bps
 
 
Period end
 
3.64
%
 
4.72
%
 
(108
) bps
 
 
 
3.73
%
 
(9
) bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue
 
$
16,366

 
$
16,286

 
$
80

 
—
 %
 
$
16,262

 
$
104

 
1
 %
Average outstanding principal balance of mortgage loans serviced for others
 
21,172,874

 
21,895,041

 
(722,167
)
 
(3
)%
 
21,418,690

 
(245,816
)
 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average mortgage servicing revenue rates
 
0.31
%
 
0.30
%
 
1
 bp
 
 
 
0.30
%
 
1
 bp
 
 

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

Net gains on other assets, securities and derivatives

As discussed in the Market Risk section following, the fair value of our mortgage servicing rights ("MSRs") changes in response to changes in primary mortgage loan rates and other assumptions. We attempt to mitigate the earnings volatility caused by changes in the fair value of MSRs by designating certain financial instruments as an economic hedge. Changes in the fair value of these instruments are generally expected to partially offset changes in the fair value of MSRs. The increase in the total economic cost of changes in the fair value of mortgage servicing rights, net of economic hedges is due to the combination of unhedgeable factors and significant mortgage interest rate volatility during the year.

Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
Sept. 30, 2019
 
June 30, 2019
 
Sept. 30, 2018
Gain (loss) on mortgage hedge derivative contracts, net
 
$
3,742

 
$
11,128

 
$
(2,843
)
Gain (loss) on fair value option securities, net
 
4,597

 
9,853

 
(4,385
)
Gain (loss) on economic hedge of mortgage servicing rights, net
 
8,339

 
20,981

 
(7,228
)
Gain (loss) on change in fair value of mortgage servicing rights
 
(12,593
)
 
(29,555
)
 
5,972

Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue
 
(4,254
)
 
(8,574
)
 
(1,256
)
Net interest revenue on fair value option securities1
 
1,245

 
1,296

 
1,100

Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges
 
$
(3,009
)
 
$
(7,278
)
 
$
(156
)
1 
Actual interest earned on fair value option securities less internal transfer-priced cost of funds.


- 8 -


Other Operating Expense

Other operating expense for the third quarter of 2019 totaled $279.3 million, up $26.7 million compared to the third quarter of 2018 and $2.2 million compared to the second quarter of 2019. Operating expenses in the third quarter of 2019 included $20.8 million of CoBiz operating expenses. 

Table 7 – Other Operating Expense
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended June 30, 2019
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Regular compensation
 
$
97,014

 
$
86,262

 
$
10,752

 
12
 %
 
$
98,247

 
$
(1,233
)
 
(1
)%
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
38,316

 
31,430

 
6,886

 
22
 %
 
33,155

 
5,161

 
16
 %
Share-based
 
3,471

 
3,935

 
(464
)
 
(12
)%
 
2,734

 
737

 
(27
)%
Deferred compensation
 
1,124

 
2,126

 
(1,002
)
 
N/A

 
1,534

 
(410
)
 
N/A

Total incentive compensation
 
42,911

 
37,491

 
5,420

 
14
 %
 
37,423

 
5,488

 
15
 %
Employee benefits
 
22,648

 
19,778

 
2,870

 
15
 %
 
24,672

 
(2,024
)
 
(8
)%
Total personnel expense
 
162,573

 
143,531

 
19,042

 
13
 %
 
160,342

 
2,231

 
1
 %
Business promotion
 
8,859

 
7,620

 
1,239

 
16
 %
 
10,142

 
(1,283
)
 
(13
)%
Charitable contributions to BOKF Foundation
 
—

 
—

 
—

 
N/A

 
1,000

 
(1,000
)
 
N/A

Professional fees and services
 
12,312

 
13,209

 
(897
)
 
(7
)%
 
13,002

 
(690
)
 
(5
)%
Net occupancy and equipment
 
27,558

 
23,394

 
4,164

 
18
 %
 
26,880

 
678

 
3
 %
Insurance
 
4,220

 
6,232

 
(2,012
)
 
(32
)%
 
6,454

 
(2,234
)
 
(35
)%
Data processing and communications
 
31,915

 
31,665

 
250

 
1
 %
 
29,735

 
2,180

 
7
 %
Printing, postage and supplies
 
3,825

 
3,837

 
(12
)
 
—
 %
 
4,107

 
(282
)
 
(7
)%
Net losses and operating expenses of repossessed assets
 
1,728

 
4,044

 
(2,316
)
 
(57
)%
 
580

 
1,148

 
198
 %
Amortization of intangible assets
 
5,064

 
1,603

 
3,461

 
216
 %
 
5,138

 
(74
)
 
(1
)%
Mortgage banking costs
 
14,975

 
11,741

 
3,234

 
28
 %
 
11,545

 
3,430

 
30
 %
Other expense
 
6,263

 
5,741

 
522

 
9
 %
 
8,212

 
(1,949
)
 
(24
)%
Total other operating expense
 
$
279,292

 
$
252,617

 
$
26,675

 
11
 %
 
$
277,137

 
$
2,155

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
5,101

 
4,870

 
231

 
5
 %
 
5,123

 
(22
)
 
—
 %
Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

Personnel expense increased $19.0 million over the third quarter of 2018. CoBiz operating expenses added $13.4 million to the third quarter of 2019. The remaining increase of $5.7 million is largely attributed to standard annual merit increases in regular compensation and incentive compensation.
Personnel expense increased $2.2 million compared the second quarter of 2019. Incentive compensation increased $5.5 million led by an increase in cash based incentive compensation primarily due to increased sales activities in wealth management and commercial banking. Increased incentive compensation was partially offset by a decrease in regular compensation of $1.2 million and employee benefits of $2.0 million. Employee benefits expense was down largely due to a seasonal decrease in payroll taxes.


- 9 -


Non-personnel operating expense

Non-personnel operating expense increased $7.6 million over the third quarter of 2018. CoBiz operating expenses added $7.4 million to the third quarter of 2019. Mortgage banking costs increased $3.2 million due to increased prepayment speeds as mortgage interest rates decline resulting in increased amortization of mortgage servicing rights. Occupancy and equipment expense increased $2.2 million, largely related to the Cobiz acquisition. Insurance expense decreased $2.6 million primarily due to the elimination of a large bank deposit insurance surcharge assessed by the FDIC. Net losses and expenses on repossessed assets decreased $2.3 million due to decreased expenses on certain oil and gas properties and a writedown on a healthcare property in the third quarter of 2018. Professional fees and services decreased $1.2 million largely due to CoBiz acquisition costs in the third quarter of 2018.
Non-personnel expense was relatively consistent compared to the second quarter of 2019. Mortgage banking costs increased $3.4 million primarily due to an increase in amortization of mortgage servicing rights as lower interest rates drive an increase in prepayment speeds. In addition, data processing and communications expense increased $2.2 million and net losses and expenses of repossessed assets increased $1.1 million.
Insurance expense decreased $2.2 million, other expense decreased $1.9 million, and business promotion expense decreased $1.3 million, all following higher activity in the second quarter of 2019 largely related to the CoBiz acquisition.
Income Taxes

The effective tax rate was 18.6 percent for the third quarter of 2019, 22.8 percent for the third quarter of 2018 and 21.4 percent second quarter of 2019. Income tax expense decreased $5.2 million compared to the second quarter of 2019 primarily due to the completion of 2018 tax filings and tax credit projects.
Lines of Business

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

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

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

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

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


- 10 -


The value of funds provided by the operating lines of business to the Funds Management unit is also based on rates that approximate wholesale market rates for funds with similar repricing and cash flow characteristics. Market rates are generally based on LIBOR or interest rate swap rates. The funds credit formula applied to deposit products with indeterminate maturities is established based on their repricing characteristics reflected in a combination of the short-term LIBOR rate and a moving average of an intermediate-term swap rate, with an appropriate spread applied to both. Shorter duration products are weighted towards the short-term LIBOR rate and longer duration products are weighted towards the intermediate-term swap rates. The expected duration ranges from 30 days for certain rate-sensitive deposits to five years. During 2018, the funds transfer pricing rates for non–maturity deposits became inverted due to the flattening of the yield curve. Short term rates continued to increase while long term rates remained relatively flat. In order to appropriately reflect the organizational value of these deposits to the lines of business, effective January 1, 2019, we made adjustments that push more deposit credit value to the business lines, with the offset to Funds Management and other.

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

As shown in Table 8, net income attributable to our lines of business was up $19.6 million or 16 percent over the third quarter of 2018. Net interest revenue grew by $38.7 million over the prior year, primarily due to the CoBiz acquisition combined with growth in average loan balances. Other operating revenue increased by $21.3 million and operating expense increased by $28.2 million compared to the third quarter of 2018. Net income attributed to Funds Management and other in the third quarter was positively affected by the increase in our available-for-sale securities portfolio and the impact of lower interest rates on the transfer pricing of funds provided by the operating segments.

Table 8 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended June 30, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Commercial Banking
 
$
101,573

 
$
84,964

 
$
16,609

 
20
 %
 
$
106,936

 
$
(5,363
)
 
(5
)%
Consumer Banking
 
16,640

 
8,015

 
8,625

 
108
 %
 
16,342

 
298

 
2
 %
Wealth Management
 
23,206

 
28,866

 
(5,660
)
 
(20
)%
 
25,544

 
(2,338
)
 
(9
)%
Subtotal
 
141,419

 
121,845

 
19,574

 
16
 %
 
148,822

 
(7,403
)
 
(5
)%
Funds Management and other
 
812

 
(4,589
)
 
5,401

 
N/A

 
(11,259
)
 
12,071

 
N/A

Total
 
$
142,231

 
$
117,256

 
$
24,975

 
21
 %
 
$
137,563

 
$
4,668

 
3
 %
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.


- 11 -


Commercial Banking

Commercial Banking contributed $101.6 million to consolidated net income in the third quarter of 2019, an increase of $16.6 million or 20 percent over the third quarter of 2018. Growth in net interest revenue and fees and commissions revenue was partially offset by increased operating expense.

Table 9 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended June 30, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Net interest revenue from external sources
 
$
243,944

 
$
187,417

 
$
56,527

 
30
%
 
$
251,084

 
$
(7,140
)
 
(3
)%
Net interest expense from internal sources
 
(63,797
)
 
(42,270
)
 
(21,527
)
 
51
%
 
(65,470
)
 
1,673

 
(3
)%
Total net interest revenue
 
180,147

 
145,147

 
35,000

 
24
%
 
185,614

 
(5,467
)
 
(3
)%
Net loans charged off
 
9,505

 
8,047

 
1,458

 
18
%
 
6,823

 
2,682

 
39
 %
Net interest revenue after net loans charged off
 
170,642

 
137,100

 
33,542

 
24
%
 
178,791

 
(8,149
)
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
46,159

 
39,391

 
6,768

 
17
%
 
41,105

 
5,054

 
12
 %
Other gains, net
 
2,673

 
1,131

 
1,542

 
N/A

 
506

 
2,167

 
N/A

Other operating revenue
 
48,832

 
40,522

 
8,310

 
21
%
 
41,611

 
7,221

 
17
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
43,705

 
31,263

 
12,442

 
40
%
 
42,268

 
1,437

 
3
 %
Non-personnel expense
 
24,980

 
19,776

 
5,204

 
26
%
 
20,679

 
4,301

 
21
 %
Other operating expense
 
68,685

 
51,039

 
17,646

 
35
%
 
62,947

 
5,738

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
150,789

 
126,583

 
24,206

 
19
%
 
157,455

 
(6,666
)
 
(4
)%
Gain (loss) on financial instruments, net
 
28

 
(3
)
 
31

 
N/A

 
20

 
8

 
N/A

Gain (loss) on repossessed assets, net
 
802

 
(1,869
)
 
2,671

 
N/A

 
2

 
800

 
N/A

Corporate expense allocations
 
12,613

 
9,124

 
3,489

 
38
%
 
11,385

 
1,228

 
11
 %
Income before taxes
 
139,006

 
115,587

 
23,419

 
20
%
 
146,092

 
(7,086
)
 
(5
)%
Federal and state income tax
 
37,433

 
30,623

 
6,810

 
22
%
 
39,156

 
(1,723
)
 
(4
)%
Net income
 
$
101,573

 
$
84,964

 
$
16,609

 
20
%
 
$
106,936

 
$
(5,363
)
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
23,973,067

 
$
18,499,979

 
$
5,473,088

 
30
%
 
$
22,910,071

 
$
1,062,996

 
5
 %
Average loans
 
19,226,347

 
15,321,600

 
3,904,747

 
25
%
 
18,812,800

 
413,547

 
2
 %
Average deposits
 
10,833,057

 
8,633,204

 
2,199,853

 
25
%
 
10,724,206

 
108,851

 
1
 %
Average invested capital
 
2,217,828

 
1,382,983

 
834,845

 
60
%
 
2,222,032

 
(4,204
)
 
—
 %
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Net interest revenue increased $35.0 million or 24 percent over the prior year, primarily due to the allocation of CoBiz to the business lines and an increase in average originated loan balances, split almost equally, along with increased yields. Yields on deposits sold to the funds management unit also went up due to the increase in short-term interest rates. Net loans charged-off increased $1.5 million.

Fees and commissions revenue increased $6.8 million or 17 percent largely due to an increase in loan syndication fees based on the timing of completed transactions. Operating expense increased $17.6 million or 35 percent compared to the third quarter of 2018. Personnel expense increased $12.4 million primarily due to the incorporation of CoBiz employees combined with standard annual merit increases. Non-personnel expense increased $5.2 million, primarily due to increased intangible asset amortization related to CoBiz. Corporate expense allocations increased $3.5 million or 38 percent over the prior year.


- 12 -


The average outstanding balance of loans attributed to Commercial Banking was up $3.9 billion or 25 percent over the third quarter of 2018 to $19.2 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans, which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $10.8 billion for the third quarter of 2019, a 25 percent increase compared to the third quarter of 2018. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.
Net interest revenue decreased $5.5 million or 3 percent compared to the second quarter of 2019 largely as a result of a decrease in interest recoveries paired with a change in the deposit mix from non-interest bearing to interest bearing. Fees and commissions revenue increased $5.1 million, largely due to an increase in loan syndication fees based on the timing of completed transactions and an increase in revenue earned on repossessed assets related to certain oil and gas properties. Operating expense increased $5.7 million or 9 percent over the second quarter of 2019 primarily due to a $1.4 million increase in personnel expense largely due to incentive compensation. Non-personnel expense increased $4.3 million largely due to expenses related to repossessed assets on certain oil and gas properties mentioned above.
Average loan balances increased $414 million or 2 percent and average customer deposits increased $109 million or 1 percent over the second quarter of 2019.




- 13 -


Consumer Banking

Consumer Banking provides retail banking services through four primary distribution channels: traditional branches, the 24-hour ExpressBank call center, Internet banking and mobile banking. Consumer Banking also conducts mortgage banking activities through offices located outside of our Consumer Banking markets. In the first quarter of 2019, the strategic decision was made to exit our online lead buying business, HomeDirect, to focus more on our high margin, core competency of developing complete, long-term relationships with our clients through our traditional mortgage origination channel.

Consumer Banking contributed $16.6 million to consolidated net income for the third quarter of 2019, an increase of $8.6 million over the third quarter of 2018. Improved performance by Consumer Banking was largely due to the effect of lower mortgage interest rates, which has increased mortgage banking activity and related revenue.

Table 10 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended June 30, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Net interest revenue from external sources
 
$
27,580

 
$
20,005

 
$
7,575

 
38
%
 
$
25,300

 
$
2,280

 
9
 %
Net interest revenue from internal sources
 
20,882

 
19,039

 
1,843

 
10
%
 
27,415

 
(6,533
)
 
(24
)%
Total net interest revenue
 
48,462

 
39,044

 
9,418

 
24
%
 
52,715

 
(4,253
)
 
(8
)%
Net loans charged off
 
1,841

 
1,451

 
390

 
27
%
 
1,728

 
113

 
7
 %
Net interest revenue after net loans charged off
 
46,621

 
37,593

 
9,028

 
24
%
 
50,987

 
(4,366
)
 
(9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
51,460

 
44,039

 
7,421

 
17
%
 
48,830

 
2,630

 
5
 %
Other losses, net
 
(239
)
 
(15
)
 
(224
)
 
N/A

 
(19
)
 
(220
)
 
N/A

Other operating revenue
 
51,221

 
44,024

 
7,197

 
16
%
 
48,811

 
2,410

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
23,665

 
23,543

 
122

 
1
%
 
24,377

 
(712
)
 
(3
)%
Non-personnel expense
 
36,034

 
34,939

 
1,095

 
3
%
 
33,317

 
2,717

 
8
 %
Total other operating expense
 
59,699

 
58,482

 
1,217

 
2
%
 
57,694

 
2,005

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
38,143

 
23,135

 
15,008

 
65
%
 
42,104

 
(3,961
)
 
(9
)%
Gain (loss) on financial instruments, net
 
8,339

 
(7,229
)
 
15,568

 
N/A

 
20,981

 
(12,642
)
 
N/A

Change in fair value of mortgage servicing rights
 
(12,593
)
 
5,972

 
(18,565
)
 
N/A

 
(29,555
)
 
16,962

 
N/A

Gain (loss) on repossessed assets, net
 
214

 
(87
)
 
301

 
N/A

 
92

 
122

 
N/A

Corporate expense allocations
 
11,776

 
11,037

 
739

 
7
%
 
11,695

 
81

 
1
 %
Income before taxes
 
22,327

 
10,754

 
11,573

 
108
%
 
21,927

 
400

 
2
 %
Federal and state income tax
 
5,687

 
2,739

 
2,948

 
108
%
 
5,585

 
102

 
2
 %
Net income
 
$
16,640

 
$
8,015

 
$
8,625

 
108
%
 
$
16,342

 
$
298

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
9,827,130

 
$
8,323,543

 
$
1,503,587

 
18
%
 
$
9,212,667

 
$
614,463

 
7
 %
Average loans
 
1,773,831

 
1,719,679

 
54,152

 
3
%
 
1,796,823

 
(22,992
)
 
(1
)%
Average deposits
 
6,983,018

 
6,580,395

 
402,623

 
6
%
 
6,998,677

 
(15,659
)
 
—
 %
Average invested capital
 
288,216

 
285,521

 
2,695

 
1
%
 
304,990

 
(16,774
)
 
(5
)%
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

- 14 -


Net interest revenue from Consumer Banking activities grew by $9.4 million or 24 percent over the the third quarter of 2018, primarily due to an increase in the yield on deposits sold to our Funds Management unit. Average consumer deposits grew $403 million over the third quarter of 2018 with demand deposit balances increasing $330 million or 17 percent, largely due to the allocation of acquired deposits.

Fees and commissions revenue increased $7.4 million or 17 percent over the third quarter of 2018. Lower mortgage interest rates increased mortgage loan origination volumes. Mortgage production volume increased $315 million or 53 percent and gain on sale margin increased 30 basis points. Operating expense increased by $1.2 million. An increase in mortgage banking costs was partially offset by decreases in occupancy and equipment expense and professional fees and services. Corporate expense allocations were $739 thousand or 7 percent higher than the prior year.

Changes in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income for the third quarter of 2019 by $4.3 million compared to a $1.3 million decrease in pre-tax net income in the third quarter of 2018.
Net interest revenue from Consumer Banking activities decreased $4.3 million or 8 percent compared to the second quarter of 2019, primarily due to an decrease in the yield on deposits sold to our Funds Management unit.
Operating revenue increased $2.4 million or 5 percent compared to the second quarter of 2019. Revenues from mortgage banking activities increased $2.0 million due to lower interest rates that drove an increase in mortgage origination. Mortgage production volume increased $102 million or 13 percent and gain on sale margins climbed to 1.51 percent from 1.46 percent.
Operating expenses increased $2.0 million, nearly all related to non-personnel expenses. Mortgage banking costs increased $3.4 million related to increased payoffs as mortgage interest rates declined during the quarter. This increase was partially offset by a decrease in business promotion expense and personnel expense.
Average consumer loans decreased $23 million or 1 percent. Average deposits were consistent compared to the prior quarter.



- 15 -


Wealth Management

Wealth Management contributed $23.2 million to consolidated net income in the third quarter of 2019, down $5.7 million or 20 percent compared the third quarter of 2018. The third quarter of 2018 included an after tax benefit of $11.5 million as a result of a fee earned on the sale of client assets. This fee is excluded from the discussion below.


Table 11 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended June 30, 2019
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2019
 
2018
 
 
 
 
 
Net interest revenue from external sources
 
$
12,343

 
$
22,509

 
$
(10,166
)
 
(45
)%
 
$
17,222

 
$
(4,879
)
 
(28
)%
Net interest revenue from internal sources
 
10,723

 
6,267

 
4,456

 
71
 %
 
9,719

 
1,004

 
10
 %
Total net interest revenue
 
23,066

 
28,776

 
(5,710
)
 
(20
)%
 
26,941

 
(3,875
)
 
(14
)%
Net loans charged off (recovered)
 
(42
)
 
(84
)
 
42

 
(50
)%
 
(48
)
 
6

 
(13
)%
Net interest revenue after net loans charged off (recovered)
 
23,108

 
28,860

 
(5,752
)
 
(20
)%
 
26,989

 
(3,881
)
 
(14
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
89,422

 
83,562

 
5,860

 
7
 %
 
85,925

 
3,497

 
4
 %
Other gains (losses), net
 
(262
)
 
(205
)
 
(57
)
 
N/A

 
92

 
(354
)
 
N/A

Other operating revenue
 
89,160

 
83,357

 
5,803

 
7
 %
 
86,017

 
3,143

 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
52,316

 
45,572

 
6,744

 
15
 %
 
50,080

 
2,236

 
4
 %
Non-personnel expense
 
19,303

 
16,684

 
2,619

 
16
 %
 
19,372

 
(69
)
 
—
 %
Other operating expense
 
71,619

 
62,256

 
9,363

 
15
 %
 
69,452

 
2,167

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
40,649

 
49,961

 
(9,312
)
 
(19
)%
 
43,554

 
(2,905
)
 
(7
)%
Corporate expense allocations
 
9,416

 
11,127

 
(1,711
)
 
(15
)%
 
9,168

 
248

 
3
 %
Income before taxes
 
31,233

 
38,841

 
(7,608
)
 
(20
)%
 
34,386

 
(3,153
)
 
(9
)%
Federal and state income tax
 
8,027

 
9,975

 
(1,948
)
 
(20
)%
 
8,842

 
(815
)
 
(9
)%
Net income
 
$
23,206

 
$
28,866

 
$
(5,660
)
 
(20
)%
 
$
25,544

 
$
(2,338
)
 
(9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,392,988

 
$
8,498,363

 
$
1,894,625

 
22
 %
 
$
9,849,396

 
$
543,592

 
6
 %
Average loans
 
1,671,102

 
1,439,774

 
231,328

 
16
 %
 
1,647,680

 
23,422

 
1
 %
Average deposits
 
6,590,332

 
5,492,048

 
1,098,284

 
20
 %
 
6,220,848

 
369,484

 
6
 %
Average invested capital
 
279,782

 
252,961

 
26,821

 
11
 %
 
274,050

 
5,732

 
2
 %

Net interest revenue decreased $5.7 million or 20 percent compared the third quarter of 2018, largely due to decreased spreads on trading securities. Further, Wealth Management incurred additional funding costs related to an increase in non-interest bearing receivables related to unsettled securities. Average loans attributed to the Wealth Management segment increased $231 million or 16 percent and average deposits increased $1.1 billion or 20 percent largely due to the allocation of acquired loans and deposits.

Fees and commissions revenue increased $21.3 million or 31 percent over the third quarter of 2018. Brokerage and trading revenue increased $17.3 million due to increased trading activity as a result of lower mortgage interest rates. Operating expense increased $9.4 million or 15 percent compared to the third quarter of 2018. Personnel expense increased $6.7 million primarily due to the combination of standard annual merit increases and the increase of incentive compensation as a result of higher trading activity. Non-personnel expense increased $2.6 million or 16 percent compared to the third quarter of 2018 largely related to occupancy and equipment expense related to CoBiz. Corporate expense allocations decreased $1.7 million or 15 percent compared to the prior year.

- 16 -



Net income for Wealth Management decreased $2.3 million or 9 percent compared to the second quarter of 2019. An increase in brokerage and trading revenue was partially offset by a decrease in net interest revenue and an increase in operating expenses.

Net interest revenue decreased $3.9 million primarily due to a lower yield on deposits sold to our funds management unit and an increase in unsettled securities receivables. Brokerage and trading revenue increased $3.0 million due to an increase in trading activity and volumes due to favorable interest rate changes. Fiduciary and asset management revenue decreased $1.4 million largely due to a seasonal increase related to tax fees collected in the second quarter. Operating expenses increased $2.2 million, largely due to increased incentive compensation.

Average loans increased $23 million or 1 percent to $1.7 billion and average deposits increased $369 million or 6 percent to $6.6 billion.
Financial Condition
Securities

We maintain a securities portfolio to enhance profitability, manage interest rate risk, provide liquidity and comply with regulatory requirements. Securities are classified as trading, held for investment, or available for sale. See Note 2 to the Consolidated Financial Statements for the composition of the securities portfolio as of September 30, 2019 and December 31, 2018.

We hold an inventory of trading securities in support of sales to a variety of customers, including banks, corporations, insurance companies, money managers and others. Trading securities decreased $225 million to $1.7 billion during the third quarter of 2019. As discussed in the Market Risk section of this report, trading activities involve risk of loss from adverse price movement. We mitigate this risk within board-approved limits through the use of derivative contracts, short-sales and other techniques. These limits remain unchanged from levels set before our expanded trading activities.

At September 30, 2019, the carrying value of investment (held-to-maturity) securities was $304 million and the fair value was $324 million. Investment securities consist primarily of residential mortgage-backed securities issued by U.S. government agencies, long-term, fixed rate Oklahoma and Texas municipal bonds, and taxable Texas school construction bonds.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $10.8 billion at September 30, 2019, a $464 million increase compared to June 30, 2019 as a measure to protect for a down rate environment. At September 30, 2019, the available for sale securities portfolio consisted primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Both residential and commercial mortgage-backed securities have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans.

A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. Our best estimate of the duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at September 30, 2019 is 3.0 years. Management estimates the duration extends to 4.0 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.4 years assuming a 100 basis point decline in the current low rate environment.

The aggregate gross amount of unrealized losses on available for sale securities totaled $14 million at September 30, 2019, compared to $19 million at June 30, 2019. On a quarterly basis, we perform an evaluation on debt securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. No other-than-temporary impairment charges were recognized in earnings during the third quarter of 2019.

- 17 -


Loans

The aggregate loan portfolio before allowance for loan losses totaled $22.3 billion at September 30, 2019, up $30 million over June 30, 2019. Growth in commercial and personal loans was partially offset by a decrease in commercial real estate and residential mortgage loans.

Table 12 -- Loans
(In thousands)
 
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
4,114,269

 
$
3,921,353

 
$
3,705,099

 
$
3,590,333

 
$
3,294,867

Services
 
3,266,249

 
3,309,458

 
3,287,563

 
3,258,192

 
2,603,862

Healthcare
 
3,032,968

 
2,926,510

 
2,915,885

 
2,799,277

 
2,437,323

Wholesale/retail
 
1,848,617

 
1,793,118

 
1,706,900

 
1,621,158

 
1,650,729

Public finance
 
744,840

 
795,659

 
803,083

 
804,550

 
418,578

Manufacturing
 
698,408

 
761,357

 
742,374

 
730,521

 
660,582

Other commercial and industrial
 
719,274

 
829,453

 
801,071

 
832,047

 
510,160

Total commercial
 
14,424,625

 
14,336,908

 
13,961,975

 
13,636,078

 
11,576,101

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Multifamily
 
1,324,839

 
1,300,372

 
1,210,358

 
1,288,065

 
1,120,166

Office
 
1,014,275

 
1,056,306

 
1,033,158

 
1,072,920

 
824,829

Industrial
 
873,536

 
828,569

 
767,757

 
778,106

 
696,774

Retail
 
799,169

 
825,399

 
890,685

 
919,082

 
759,423

Residential construction and land development
 
135,361

 
141,509

 
149,686

 
148,584

 
101,872

Other commercial real estate
 
478,877

 
557,878

 
549,007

 
558,056

 
301,611

Total commercial real estate
 
4,626,057

 
4,710,033

 
4,600,651

 
4,764,813

 
3,804,675

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,066,460

 
1,088,370

 
1,098,481

 
1,122,610

 
1,094,926

Permanent mortgages guaranteed by U.S. government agencies
 
191,764

 
195,373

 
193,308

 
190,866

 
180,718

Home equity
 
859,079

 
887,079

 
900,831

 
916,557

 
696,098

Total residential mortgage
 
2,117,303

 
2,170,822

 
2,192,620

 
2,230,033

 
1,971,742

 
 
 
 
 
 
 
 
 
 
 
Personal
 
1,117,382

 
1,037,889

 
1,003,734

 
1,025,806

 
996,941

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
22,285,367

 
$
22,255,652

 
$
21,758,980

 
$
21,656,730

 
$
18,349,459


Commercial

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

Commercial loans totaled $14.4 billion or 65 percent of the loan portfolio at September 30, 2019, an $88 million increase over June 30, 2019. Energy loan balances grew by $193 million. Healthcare loans increased $106 million and wholesale/retail sector loans increased $55 million. Other commercial and industrial loans decreased $110 million, manufacturing loans decreased $63 million and public finance loans decreased by $51 million.


- 18 -


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

Table 13 -- Commercial Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Energy
 
$
751,519

 
$
2,322,908

 
$
57,593

 
$
122

 
$
519,377

 
$
542

 
$
105,908

 
$
356,300

 
$
4,114,269

Services
 
658,970

 
758,554

 
164,103

 
8,564

 
591,793

 
475,357

 
259,999

 
348,909

 
3,266,249

Healthcare
 
239,676

 
436,571

 
148,217

 
77,861

 
336,865

 
259,439

 
255,925

 
1,278,414

 
3,032,968

Wholesale/retail
 
315,869

 
726,422

 
35,523

 
31,778

 
168,007

 
107,826

 
60,447

 
402,745

 
1,848,617

Public finance
 
73,038

 
162,869

 
37,240

 
—

 
184,005

 
87,319

 
—

 
200,369

 
744,840

Manufacturing
 
106,422

 
180,837

 
990

 
5,055

 
160,769

 
123,256

 
52,522

 
68,557

 
698,408

Other commercial and industrial
 
115,567

 
115,144

 
3,174

 
56,466

 
115,776

 
37,674

 
57,881

 
217,592

 
719,274

Total commercial loans
 
$
2,261,061

 
$
4,703,305

 
$
446,840

 
$
179,846

 
$
2,076,592

 
$
1,091,413

 
$
792,682

 
$
2,872,886

 
$
14,424,625

 
The majority of the collateral securing our commercial loan portfolio is located within our geographical footprint with 33 percent concentrated in the Texas market, 16 percent concentrated in the Oklahoma market and 14 percent in the Colorado market. At September 30, 2019, the Other category is primarily composed of California - $578 million or 4 percent of the commercial loan portfolio, Florida - $261 million or 2 percent of the commercial loan portfolio, Louisiana - $163 million or 1 percent of the commercial loan portfolio, Pennsylvania - $159 million or 1 percent of the commercial loan portfolio, Ohio - $154 million or 1 percent of the commercial loan portfolio and North Carolina - $141 million or 1 percent of the commercial loan portfolio. All other states individually represent less than one percent of total commercial loans.

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

Outstanding energy loans totaled $4.1 billion or 18 percent of total loans at September 30, 2019. Unfunded energy loan commitments were $3.2 billion at September 30, 2019, a $44 million decrease compared to June 30, 2019 primarily due to increased utilization in the third quarter. Approximately $3.3 billion of energy loans were to oil and gas producers, growing $165 million over June 30, 2019. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest risk form of energy lending. Approximately 58 percent of the committed production loans are secured by properties primarily producing oil and 42 percent of the committed production loans are secured by properties primarily producing natural gas. Loans to midstream oil and gas companies totaled $574 million at September 30, 2019, up $4.9 million over June 30, 2019. Loans to borrowers that provide services to the energy industry totaled $190 million at September 30, 2019, an increase of $7.1 million. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $69 million, a $16 million increase over the prior quarter.

The services sector of the loan portfolio totaled $3.3 billion or 15 percent of total loans and consists of a large number of loans to a variety of businesses, including Native American tribal governments, entertainment and recreation, financial services, technology and media, and real estate services. Services sector loans decreased $43 million compared to June 30, 2019. Approximately $1.6 billion of the services category is made up of loans with individual balances of less than $10 million. Services sector loans are generally secured by the assets of the borrower with repayment coming from the cash flows of ongoing operations of the customer’s business. 


- 19 -


The healthcare sector of the loan portfolio totaled $3.0 billion or 14 percent of total loans and consists primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Healthcare also includes loans to hospitals and other medical service providers.

We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $100 million and with three or more non-affiliated banks as participants. At September 30, 2019, the outstanding principal balance of these loans totaled $4.8 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 national credits to the same standard of analysis and perform the same level of review as internally originated credits. Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. In addition to management’s quarterly assessment of credit risk, banking regulators annually review a sample of shared national credits for proper risk grading.

Commercial Real Estate

Commercial real estate represents loans for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes generally within our geographical footprint. Our larger concentrations are in Texas, Colorado and Oklahoma representing 24 percent, 11 percent and 11 percent of the total commercial real estate portfolio at September 30, 2019, respectively. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

Commercial real estate loans totaled $4.6 billion or 21 percent of the loan portfolio at September 30, 2019. The outstanding balance of commercial real estate loans decreased $84 million compared to June 30, 2019. Loans secured by industrial properties increased $45 million. Loans secured by multifamily residential properties increased $24 million. Other real estate loans decreased $79 million. Loans secured by office buildings decreased $42 million and loans secured by retail properties decreased $26 million. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 19 percent to 22 percent over the past five years. 

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

Table 14 -- Commercial Real Estate Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Multifamily
 
$
162,666

 
$
394,684

 
$
25,380

 
$
52,240

 
$
73,430

 
$
168,366

 
$
198,761

 
$
249,312

 
$
1,324,839

Office
 
124,991

 
208,216

 
102,960

 
19,612

 
88,703

 
77,374

 
52,204

 
340,215

 
1,014,275

Industrial
 
102,854

 
216,462

 
19,430

 
81

 
77,952

 
36,662

 
39,285

 
380,810

 
873,536

Retail
 
53,155

 
251,683

 
146,256

 
5,310

 
103,654

 
55,399

 
13,862

 
169,850

 
799,169

Residential construction and land development
 
6,880

 
20,108

 
12,903

 
157

 
52,220

 
9,012

 
7,002

 
27,079

 
135,361

Other commercial real estate
 
47,856

 
38,947

 
9,550

 
1,988

 
123,759

 
71,214

 
51,439

 
134,124

 
478,877

Total commercial real estate loans
 
$
498,402

 
$
1,130,100

 
$
316,479

 
$
79,388

 
$
519,718

 
$
418,027

 
$
362,553

 
$
1,301,390

 
$
4,626,057


The Other category is primarily composed of Utah - $265 million or 6 percent of the commercial real estate portfolio, California - $247 million or 5 percent of the commercial real estate portfolio, Georgia - $116 million or 3 percent of the commercial real estate portfolio, Nevada - $99 million or 2 percent of the commercial real estate portfolio and Virginia - $84 million or 2 percent of the commercial real estate portfolio. All other states represent less than 2% individually.


- 20 -


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

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

Residential mortgage loans totaled $2.1 billion, a decrease of $54 million compared to June 30, 2019. In general, we sell the majority of our conforming fixed rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. We have no concentration in sub-prime residential mortgage loans. Our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or adjustable rate mortgage loans with initial rates that are below market. Collateral for 93% of our residential mortgage loan portfolio is located within our geographical footprint.

The majority of our permanent mortgage loan portfolio is composed of various non-conforming mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals or certain professionals. Jumbo loans may be fixed or variable rate and are fully amortizing. The size of jumbo loans exceeds maximums set under government sponsored entity standards, but otherwise generally conform to those standards. These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38 percent. Loan-to-value ratios (“LTV”) are tiered from 60 percent to100 percent, depending on the market. Special mortgage programs include fixed and variable rate fully amortizing loans tailored to the needs of certain healthcare professionals. Variable rate loans are fully indexed at origination and may have fixed rates for three to ten years, then adjust annually thereafter.

At September 30, 2019, $192 million of permanent residential mortgage loans are guaranteed by U.S. government agencies. We have limited credit exposure on loans guaranteed by the agencies. This amount includes residential mortgage loans previously sold into GNMA mortgage pools that the Company may repurchase when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet. Permanent residential mortgage loans guaranteed by U.S. government agencies decreased $3.6 million compared to June 30, 2019.

Home equity loans totaled $859 million at September 30, 2019, a $28 million decrease compared to June 30, 2019. Our home equity loan portfolio is primarily composed of first-lien, fully amortizing home equity loans. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 50 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 10 year revolving period followed by a 15 year term of amortizing repayment. Interest-only home equity loans have a 5 year revolving period followed by a 15 year term of amortizing repayments and may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term subject to an update of certain credit information. A summary of our home equity loan portfolio at September 30, 2019 by lien position and amortizing status follows in Table 15.

Table 15 -- Home Equity Loans
(In thousands)
 
 
Revolving
 
Amortizing
 
Total
First lien
 
$
91,591

 
$
463,681

 
$
555,272

Junior lien
 
193,195

 
110,612

 
303,807

Total home equity
 
$
284,786

 
$
574,293

 
$
859,079




- 21 -


The distribution of residential mortgage and personal loans at September 30, 2019 is as follows in Table 16. Residential mortgage loans are distributed by collateral location. Personal loans are generally distributed by borrower location.

Table 16 -- Residential Mortgage and Personal Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
$
163,590

 
$
423,298

 
$
62,563

 
$
13,100

 
$
194,677

 
$
104,603

 
$
55,998

 
$
48,631

 
$
1,066,460

Permanent mortgages  guaranteed by U.S. government agencies
 
49,434

 
29,960

 
30,655

 
9,307

 
5,305

 
1,115

 
15,868

 
50,120

 
191,764

Home equity
 
353,310

 
137,625

 
76,564

 
7,485

 
137,024

 
36,847

 
52,291

 
57,933

 
859,079

Total residential mortgage
 
$
566,334

 
$
590,883

 
$
169,782

 
$
29,892

 
$
337,006

 
$
142,565

 
$
124,157

 
$
156,684

 
$
2,117,303

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
$
321,875

 
$
491,363

 
$
11,948

 
$
11,048

 
$
81,496

 
$
70,531

 
$
54,136

 
$
74,985

 
$
1,117,382



- 22 -


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

Table 17 -- Loans Managed by Primary Geographical Market
(In thousands)
 
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
3,690,100

 
$
3,762,234

 
$
3,551,054

 
$
3,491,117

 
$
3,609,109

Commercial real estate
 
679,786

 
717,970

 
665,190

 
700,756

 
651,315

Residential mortgage
 
1,370,452

 
1,403,398

 
1,417,381

 
1,440,566

 
1,429,843

Personal
 
383,246

 
382,764

 
374,807

 
375,543

 
376,201

Total Oklahoma
 
6,123,584

 
6,266,366

 
6,008,432

 
6,007,982

 
6,066,468

 
 
 
 
 
 
 
 
 
 
 
Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
6,220,227

 
5,877,265

 
5,754,018

 
5,438,133

 
5,115,646

Commercial real estate
 
1,292,116

 
1,341,609

 
1,344,810

 
1,341,783

 
1,354,679

Residential mortgage
 
273,931

 
272,878

 
265,927

 
266,805

 
253,265

Personal
 
475,430

 
400,585

 
396,794

 
394,743

 
381,452

Total Texas
 
8,261,704

 
7,892,337

 
7,761,549

 
7,441,464

 
7,105,042

 
 
 
 
 
 
 
 
 
 
 
New Mexico:
 
 

 
 

 
 

 
 

 
 

Commercial
 
335,409

 
350,520

 
342,915

 
340,489

 
325,048

Commercial real estate
 
374,331

 
385,058

 
371,416

 
383,670

 
392,494

Residential mortgage
 
81,383

 
82,390

 
85,326

 
87,346

 
88,110

Personal
 
10,887

 
10,236

 
11,065

 
10,662

 
11,659

Total New Mexico
 
802,010

 
828,204

 
810,722

 
822,167

 
817,311

 
 
 
 
 
 
 
 
 
 
 
Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
87,588

 
87,896

 
79,286

 
111,338

 
102,237

Commercial real estate
 
158,538

 
149,300

 
142,551

 
141,898

 
106,701

Residential mortgage
 
7,509

 
7,463

 
7,731

 
7,537

 
7,278

Personal
 
10,905

 
11,208

 
11,550

 
11,955

 
12,126

Total Arkansas
 
264,540

 
255,867

 
241,118

 
272,728

 
228,342

 
 
 
 
 
 
 
 
 
 
 
Colorado:
 
 

 
 

 
 

 
 

 
 

Commercial
 
2,247,798

 
2,325,742

 
2,231,703

 
2,275,069

 
1,132,500

Commercial real estate
 
975,066

 
1,023,410

 
957,348

 
963,575

 
354,543

Residential mortgage
 
224,872

 
241,780

 
241,722

 
251,849

 
68,694

Personal
 
78,733

 
72,537

 
65,812

 
72,916

 
56,999

Total Colorado
 
3,526,469

 
3,663,469

 
3,496,585

 
3,563,409

 
1,612,736

 
 
 
 
 
 
 
 
 
 
 
Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
1,276,534

 
1,330,415

 
1,335,140

 
1,320,139

 
621,658

Commercial real estate
 
771,425

 
761,243

 
791,466

 
889,903

 
666,562

Residential mortgage
 
92,121

 
91,684

 
98,973

 
97,959

 
44,659

Personal
 
78,694

 
76,335

 
61,875

 
68,546

 
67,280

Total Arizona
 
2,218,774

 
2,259,677

 
2,287,454

 
2,376,547

 
1,400,159

 
 
 
 
 
 
 
 
 
 
 
Kansas/Missouri:
 
 

 
 

 
 

 
 

 
 

Commercial
 
566,969

 
602,836

 
667,859

 
659,793

 
669,903

Commercial real estate
 
374,795

 
331,443

 
327,870

 
343,228

 
278,381

Residential mortgage
 
67,035

 
71,229

 
75,560

 
77,971

 
79,893

Personal
 
79,487

 
84,224

 
81,831

 
91,441

 
91,224

Total Kansas/Missouri
 
1,088,286

 
1,089,732

 
1,153,120

 
1,172,433

 
1,119,401

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
22,285,367

 
$
22,255,652

 
$
21,758,980

 
$
21,656,730

 
$
18,349,459


- 23 -


Loan Commitments

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

Table 18 – Off-Balance Sheet Credit Commitments
(In thousands)
 
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
Loan commitments
 
$
11,259,366

 
$
11,411,819

 
$
12,243,886

 
$
11,944,524

 
$
10,715,964

Standby letters of credit
 
712,944

 
698,527

 
720,451

 
582,196

 
671,844

Mortgage loans sold with recourse
 
92,139

 
93,606

 
94,938

 
98,623

 
101,512

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

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

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

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

Derivative contracts are carried at fair value. At September 30, 2019, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $401 million compared to $389 million at June 30, 2019. At September 30, 2019, the net fair value of our derivative contracts included $207 million for foreign exchange contracts, $124 million for energy contracts and $67 million for interest rate swaps. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $385 million at September 30, 2019 and $369 million at June 30, 2019.

At September 30, 2019, total derivative assets were reduced by $67 million of cash collateral received from counterparties and total derivative liabilities were reduced by $63 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement.

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

- 24 -


The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor at September 30, 2019 follows in Table 19.

Table 19 -- Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
152,530

Banks and other financial institutions
 
146,466

Exchanges and clearing organizations
 
35,096

Fair value of customer risk management program asset derivative contracts, net
 
$
334,092

 
At September 30, 2019, our largest derivative exposure was to an exchange for energy contracts, net of cash margin, of $35 million.

Our customer derivative program also introduces liquidity and capital risk. We are required to provide cash margin to certain counterparties when the net negative fair value of the contracts exceeds established limits. Also, changes in commodity prices affect the amount of regulatory capital we are required to hold as support for the fair value of our derivative assets. These risks are modeled as part of the management of these programs. Based on current prices, a decrease in market prices equivalent to $28.62 per barrel of oil would not be great enough to create a scenario in which we are owed by our customers. An increase in prices equivalent to $64.92 per barrel of oil would increase the fair value of derivative assets by $55 million. Further increases in price to the equivalent of $79.46 per barrel of oil would increase the fair value of our derivative assets by $268 million with lending customers comprising the bulk of the assets. Liquidity requirements of this program may also be affected by our credit rating. At September 30, 2019, a decrease in our credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $10 million. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of September 30, 2019, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.
Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. At September 30, 2019, the combined allowance for loan losses and off-balance sheet credit losses totaled $206 million or 0.92 percent of outstanding loans and 124 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. Excluding acquired loans measured at acquisition date fair value, the combined allowance for loan losses was 1.02 percent of outstanding loans and 130 percent of nonaccruing loans. The allowance for loan losses was $204 million and the accrual for off-balance sheet credit losses was $1.4 million. At June 30, 2019, the combined allowance for credit losses was $204 million or 0.92 percent of outstanding loans and 115 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. Excluding acquired loans measured at acquisition date fair value, the combined allowance for loan losses was 1.03 percent of outstanding loans and 126 percent of nonaccruing loans. The allowance for loan losses was $203 million and the accrual for off-balance sheet credit losses was $1.9 million. 

The provision for credit losses is the amount necessary to maintain the allowance for loan losses and an accrual for off-balance sheet credit risk at an amount determined by management to be appropriate based on its evaluation. The provision includes the combined charge to expense for both the allowance for loan losses and the accrual for off-balance sheet credit risk. All losses incurred from lending activities will ultimately be reflected in charge-offs against the allowance for loan losses following funds advanced against outstanding commitments. Based on an evaluation of all credit factors, including overall growth in the originated loan portfolio, the trends in nonaccruing loans, potential problem loans and net charge-offs, the Company determined that a $12.0 million provision for credit losses was appropriate for the third quarter of 2019. The Company recorded a $5.0 million provision for credit losses in the second quarter of 2019.



- 25 -


Table 20 -- Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
202,534

 
$
205,340

 
$
207,457

 
$
210,569

 
$
215,142

Loans charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
(9,875
)
 
(11,385
)
 
(10,468
)
 
(12,940
)
 
(9,602
)
Commercial real estate
 
—

 
(118
)
 
—

 
—

 
—

Residential mortgage
 
(56
)
 
(94
)
 
(42
)
 
(52
)
 
(91
)
Personal
 
(1,776
)
 
(1,630
)
 
(1,265
)
 
(1,523
)
 
(1,380
)
Total
 
(11,707
)
 
(13,227
)
 
(11,775
)
 
(14,515
)
 
(11,073
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
260

 
434

 
711

 
1,267

 
1,263

Commercial real estate
 
60

 
4,345

 
112

 
232

 
40

Residential mortgage
 
119

 
149

 
154

 
71

 
229

Personal
 
627

 
575

 
712

 
598

 
560

Total
 
1,066

 
5,503

 
1,689

 
2,168

 
2,092

Net loans recovered (charged off)
 
(10,641
)
 
(7,724
)
 
(10,086
)
 
(12,347
)
 
(8,981
)
Provision for loan losses
 
12,539

 
4,918

 
7,969

 
9,235

 
4,408

Ending balance
 
$
204,432

 
$
202,534

 
$
205,340

 
$
207,457

 
$
210,569

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 
 
 

Beginning balance
 
$
1,903

 
$
1,821

 
$
1,790

 
$
2,025

 
$
2,433

Provision for off-balance sheet credit losses
 
(539
)
 
82

 
31

 
(235
)
 
(408
)
Ending balance
 
$
1,364

 
$
1,903

 
$
1,821

 
$
1,790

 
$
2,025

Total combined provision for credit losses
 
$
12,000

 
$
5,000

 
$
8,000

 
$
9,000

 
$
4,000

Allowance for loan losses to loans outstanding at period-end
 
0.92
%
 
0.91
%
 
0.94
%
 
0.96
%
 
1.15
%
Net charge-offs (recoveries) (annualized) to average loans
 
0.19
%
 
0.14
%
 
0.19
%
 
0.23
%
 
0.20
%
Total provision for credit losses (annualized) to average loans
 
0.21
%
 
0.09
%
 
0.15
%
 
0.17
%
 
0.09
%
Recoveries to gross charge-offs
 
9.11
%
 
41.60
%
 
14.34
%
 
14.94
%
 
18.89
%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.01
%
 
0.02
%
 
0.01
%
 
0.01
%
 
0.02
%
Combined allowance for credit losses to loans outstanding at period-end
 
0.92
%
 
0.92
%
 
0.95
%
 
0.97
%
 
1.16
%
Allowance for Loan Losses

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

Loans are considered to be impaired when it is probable that we will not collect all amounts due according to the original contractual terms of the loan agreement. This includes all nonaccruing loans, all loans modified in troubled debt restructurings and all government guaranteed loans repurchased from GNMA pools. A specific allowance is required when the outstanding principal balance of the loan is not supported by either the discounted cash flows expected to be received from the borrower or the fair value of collateral for collateral dependent loans. At September 30, 2019, impaired loans totaled $358 million, including $26 million with specific allowances of $7.5 million and $331 million with no specific allowances. At June 30, 2019, impaired loans totaled $372 million, including $9.3 million of impaired loans with specific allowances of $4.0 million and $363 million with no specific allowances.

- 26 -


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

The aggregate amount of general allowances for all unimpaired loans totaled $179 million at September 30, 2019, a $2.5 million decrease compared to June 30, 2019. A decrease in general allowances related to the commercial loan segment was partially offset by an increase in general allowances related to the personal 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 $18 million at September 30, 2019, a $918 thousand increase compared to June 30, 2019.

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

Our loan monitoring process also identified certain accruing substandard loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in nonperforming assets. Known information does, however, cause management concern as to the borrowers’ ability to comply with current repayment terms. These potential problem loans totaled $143 million at September 30, 2019 and were primarily composed of $38 million or less than 1 percent of energy loans, $37 million or 1.12 percent of service sector loans, $17 million or less than 1 percent of healthcare sector loans, $17 million or 2.31 percent of other commercial and industrial loans and $13 million or 1.81 percent of manufacturing sector loans. Potential problem loans totaled $161 million at June 30, 2019.

Based on regulatory guidelines, other loans especially mentioned are in compliance with the original terms of the agreement but may have a weakness that deserves management's close attention. Other loans especially mentioned totaled $179 million at September 30, 2019 and were composed primarily of $60 million or 1.47 percent of energy sector loans, $38 million or 1.17 percent of service sector loans, $25 million or 0.83 percent healthcare sector loans, $24 million or 3.47 percent of manufacturing sector loans and $12 million or 1.51 percent of commercial real estate loans secured by retail facilities. Other loans especially mentioned totaled $141 million at June 30, 2019.
Net Loans Charged Off

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

BOK Financial had net charge-offs of $10.6 million in the third quarter of 2019, compared to net charge-offs of $7.7 million in the second quarter of 2019 and net charge-offs of $9.0 million in the third quarter of 2018. The ratio of net loans charged off to average loans on an annualized basis was 0.19 percent for the third quarter of 2019, compared with 0.14 percent for the second quarter of 2019 and 0.20 percent for the third quarter of 2018. 

Net charge-offs of commercial loans were $9.6 million in the third quarter of 2019, primarily related to a single energy production borrower, a single healthcare sector borrower and a single other commercial and industrial sector borrower. Net commercial real estate loan recoveries were $60 thousand in the third quarter of 2019. Net recoveries of residential mortgage loans were $63 thousand and net charge-offs of personal loans were $1.1 million for the third quarter. Personal loan net charge-offs include deposit account overdraft losses.

- 27 -


Nonperforming Assets

Table 21 -- Nonperforming Assets
(In thousands)
 
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
111,706

 
$
123,395

 
$
90,358

 
$
99,841

 
$
109,490

Commercial real estate
 
23,185

 
21,670

 
21,508

 
21,621

 
1,316

Residential mortgage
 
37,304

 
38,477

 
40,409

 
41,555

 
41,917

Personal
 
271

 
237

 
302

 
230

 
269

Total nonaccruing loans
 
172,466

 
183,779

 
152,577

 
163,247

 
152,992

Accruing renegotiated loans guaranteed by U.S. government agencies
 
92,718

 
95,989

 
91,787

 
86,428

 
83,347

Real estate and other repossessed assets
 
21,026

 
16,940

 
17,139

 
17,487

 
24,515

Total nonperforming assets
 
$
286,210

 
$
296,708

 
$
261,503

 
$
267,162

 
$
260,854

Total nonperforming assets excluding those guaranteed by U.S. government agencies
 
$
187,160

 
$
193,976

 
$
162,770

 
$
173,602

 
$
169,717

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio segment and class:
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
88,894

 
$
71,632

 
$
35,332

 
$
47,494

 
$
54,033

Manufacturing
 
8,741

 
8,613

 
9,548

 
8,919

 
9,202

Services
 
6,119

 
10,087

 
9,555

 
8,567

 
4,097

Healthcare
 
5,978

 
16,148

 
18,768

 
16,538

 
15,704

Wholesale/retail
 
1,504

 
1,390

 
1,425

 
1,316

 
9,249

Public finance
 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
470

 
15,525

 
15,730

 
17,007

 
17,205

Total commercial
 
111,706

 
123,395

 
90,358

 
99,841

 
109,490

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 

 
 

Retail
 
20,132

 
20,057

 
20,159

 
20,279

 
777

Industrial
 
909

 
—

 
—

 
—

 
—

Office
 
855

 
855

 
855

 
—

 
—

Residential construction and land development
 
350

 
350

 
350

 
350

 
350

Multifamily
 
286

 
275

 
—

 
301

 
—

Other commercial real estate
 
653

 
133

 
144

 
691

 
189

Total commercial real estate
 
23,185

 
21,670

 
21,508

 
21,621

 
1,316

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
20,165

 
21,803

 
22,937

 
23,951

 
22,855

Permanent mortgage guaranteed by U.S. government agencies
 
6,332

 
6,743

 
6,946

 
7,132

 
7,790

Home equity
 
10,807

 
9,931

 
10,526

 
10,472

 
11,272

Total residential mortgage
 
37,304

 
38,477

 
40,409

 
41,555

 
41,917

Personal
 
271

 
237

 
302

 
230

 
269

Total nonaccruing loans
 
$
172,466

 
$
183,779

 
$
152,577

 
$
163,247

 
$
152,992

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses to nonaccruing loans1
 
123.05
%
 
114.40
%
 
141.00
%
 
132.89
%
 
145.02
%
Accruing loans 90 days or more past due1
 
$
1,541

 
$
2,698

 
$
610

 
$
1,338

 
$
518

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

- 28 -


Nonperforming assets totaled $286 million or 1.28 percent of outstanding loans and repossessed assets at September 30, 2019. Nonaccruing loans totaled $172 million, accruing renegotiated residential mortgage loans totaled $93 million and real estate and other repossessed assets totaled $21 million. All accruing renegotiated residential mortgage loans and $6.3 million of nonaccruing loans are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets decreased $6.8 million compared to June 30, 2019. Decreases in nonaccruing commercial and industrial loans and healthcare sector loans were partially offset by an increase in nonaccruing energy loans. The Company generally retains nonperforming assets to maximize potential recovery, which may cause future nonperforming assets to decrease more slowly.

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

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

A rollforward of nonperforming assets for the three and nine months ended September 30, 2019 follows in Table 22.

Table 22 -- Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
September 30, 2019
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, June 30, 2019
 
$
183,779

 
$
95,989

 
$
16,940

 
$
296,708

Additions
 
35,799

 
9,371

 
—

 
45,170

Payments
 
(27,549
)
 
(765
)
 
—

 
(28,314
)
Charge-offs
 
(11,707
)
 
—

 
—

 
(11,707
)
Net gains (losses) and write-downs
 
—

 
—

 
1,064

 
1,064

Foreclosure of nonperforming loans
 
(5,883
)
 
—

 
5,883

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(967
)
 
(2,685
)
 
—

 
(3,652
)
Proceeds from sales
 
—

 
(9,508
)
 
(2,861
)
 
(12,369
)
Return to accrual status
 
—

 
—

 
—

 
—

Other, net
 
—

 
316

 
—

 
316

Balance, September 30, 2019
 
$
173,472

 
$
92,718

 
$
21,026

 
$
287,216


- 29 -


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

 
$
86,428

 
$
17,487

 
$
267,162

Additions
 
115,602

 
36,182

 
—

 
151,784

Payments
 
(56,852
)
 
(1,971
)
 
—

 
(58,823
)
Charge-offs
 
(36,709
)
 
—

 
—

 
(36,709
)
Net gains (losses) and write-downs
 
—

 
—

 
901

 
901

Foreclosure of nonperforming loans
 
(8,489
)
 
—

 
8,489

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(2,457
)
 
(8,103
)
 
—

 
(10,560
)
Proceeds from sales
 
—

 
(20,731
)
 
(5,851
)
 
(26,582
)
Return to accrual status
 
(1,876
)
 
—

 
—

 
(1,876
)
Other, net
 
—

 
913

 
—

 
913

Balance, September 30, 2019
 
$
172,466

 
$
92,718

 
$
21,026

 
$
286,210


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

Nonaccruing commercial loans totaled $112 million or 0.77 percent of total commercial loans at September 30, 2019 compared to $123 million or 0.86 percent of commercial loans at June 30, 2019. There were $27 million in newly identified nonaccruing commercial loans during the quarter, offset by $24 million in payments, $10 million of charge-offs and $5.5 million of foreclosures of nonaccruing commercial loans during the third quarter.

Nonaccruing commercial loans at September 30, 2019 were primarily composed of $89 million or 2.16 percent of total energy loans.
Commercial Real Estate

Nonaccruing commercial real estate loans totaled $23 million or 0.50 percent of outstanding commercial real estate loans at September 30, 2019, largely unchanged compared to $22 million or 0.46 percent of outstanding commercial real estate loans at June 30, 2019. 

Nonaccruing commercial real estate loans were primarily composed of $20 million or 2.52 percent of loans secured by retail facilities.

Residential Mortgage and Personal

Nonaccruing residential mortgage loans totaled $37 million or 1.76 percent of outstanding residential mortgage loans at September 30, 2019, a $1.2 million decrease compared to June 30, 2019. Newly identified nonaccruing residential mortgage loans totaling $3.9 million were offset by $3.6 million of payments. 

Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans, which totaled $20 million or 1.89 percent of outstanding non-guaranteed permanent residential mortgage loans at September 30, 2019. Nonaccruing home equity loans totaled $11 million or 1.26 percent of total home equity loans.


- 30 -


Payments of accruing residential mortgage loans and personal loans may be delinquent. The composition of residential mortgage loans and personal loans past due but still accruing is included in the following Table 23. Substantially all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 59 days past due increased $3.4 million in the third quarter to $8.4 million at September 30, 2019. Residential mortgage loans 60 to 89 days past due increased by $3.2 million. Personal loans past due 30 to 59 days decreased by $2.4 million and personal loans 60 to 89 days increased $6 thousand.

Table 23 -- Residential Mortgage and Personal Loans Past Due
(In thousands)
 
 
September 30, 2019
 
June 30, 2019
 
 
90 Days or More
 
60 to 89 Days
 
30 to 59 Days
 
90 Days or More
 
60 to 89 Days
 
30 to 59 Days
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
   Permanent mortgage1
 
$
—

 
$
3,405

 
$
6,097

 
$
37

 
$
—

 
$
3,641

Home equity
 
—

 
374

 
2,282

 
—

 
553

 
1,380

Total residential mortgage
 
$
—

 
$
3,779

 
$
8,379

 
37

 
$
553

 
$
5,021

 
 
 

 
 
 
 

 
 

 
 
 
 

Personal
 
$
29

 
$
94

 
$
100

 
$
10

 
$
88

 
$
2,509

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 $21 million at September 30, 2019, composed primarily of $9.2 million of developed commercial real estate, $5.6 million of oil and gas properties, $3.8 million of 1-4 family residential properties and $2.1 million of undeveloped land primarily zoned for commercial development. Real estate and other repossessed assets totaled $17 million at June 30, 2019.


- 31 -


Liquidity and Capital

Based on the average balances for the third quarter of 2019, approximately 59 percent of our funding was provided by deposit accounts, 26 percent from borrowed funds, less than 1 percent from long-term subordinated debt and 11 percent from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

Subsidiary Bank

Deposits and borrowed funds are the primary sources of liquidity for BOKF, NA, the wholly owned subsidiary bank of BOK Financial. We compete for retail and commercial deposits by offering a broad range of products and services and focusing on customer convenience. Retail deposit growth is supported through personal and small business checking, online bill paying services, mobile banking services, an extensive network of branch locations and ATMs and our ExpressBank call center. Commercial deposit growth is supported by offering treasury management and lockbox services. We also acquire brokered deposits when the cost of funds is advantageous to other funding sources.

Average deposits for the third quarter of 2019 totaled $25.7 billion, a $538 million increase over the second quarter of 2019. Interest-bearing transaction account balances increased $619 million and time deposits increased $44 million. Demand deposits decreased $124 million compared to the second quarter of 2019.
Table 24 - Average Deposits by Line of Business
(In thousands)
 
Three Months Ended
 
Sept. 30, 2019
 
Jun. 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
Commercial Banking
$
10,833,057

 
$
10,724,206

 
$
8,261,543

 
$
8,393,016

 
$
8,633,204

Consumer Banking
6,983,018

 
6,998,677

 
6,544,665

 
6,542,188

 
6,580,395

Wealth Management
6,590,332

 
6,220,848

 
5,659,771

 
5,483,455

 
5,492,048

Subtotal
24,406,407

 
23,943,731

 
20,465,979

 
20,418,659

 
20,705,647

Funds Management and other
1,293,767

 
1,218,645

 
4,148,500

 
4,676,736

 
1,230,648

Total
$
25,700,174

 
$
25,162,376

 
$
24,614,479

 
$
25,095,395

 
$
21,936,295


Acquired deposits were allocated to the lines of business from funds management and other in the second quarter of 2019. The fluctuations following include those deposits. Average Commercial Banking deposit balances increased $109 million over the second quarter of 2019. Interest-bearing transaction account balances increased $241 million and demand deposit balances decreased $138 million. Commercial customers continue to retain large cash reserves primarily due to a combination of factors including uncertainty about the economic environment and potential for growth, lack of preferable liquid alternatives and a desire to minimize deposit service charges through the earnings credit. The earnings credit is a non-cash method that enables commercial customers to offset deposit service charges based on account balances. Commercial deposit balances may decrease as the economic outlook improves and if short-term rates move higher, enhancing their investment alternatives.

Average Consumer Banking deposit balances were largely unchanged compared to the prior quarter. Growth in time deposit balances of $23 million over the prior quarter was offset by a $26 million decrease in interest-bearing transaction deposit balances and an $11 million decrease in demand deposit balances.

Average Wealth Management deposits increased $369 million over the second quarter of 2019. Interest-bearing transaction account balances were up $397 million. Demand deposit balances decreased $48 million. Time deposit balances were up $16 million.

Average time deposits for the third quarter of 2019 included $249 million of brokered deposits, a $5.2 million decrease compared to the second quarter of 2019. Average interest-bearing transaction accounts for the third quarter included $1.1 billion of brokered deposits, an $8.3 million increase over the second quarter of 2019.


- 32 -


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

Table 25 -- Period End Deposits by Principal Market Area
(In thousands)
 
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
3,515,312

 
$
3,279,359

 
$
3,432,239

 
$
3,610,593

 
$
3,564,307

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
7,447,799

 
7,020,484

 
6,542,548

 
6,445,831

 
6,010,972

Savings
 
308,103

 
307,785

 
309,875

 
288,210

 
288,080

Time
 
1,198,170

 
1,253,804

 
1,217,371

 
1,118,643

 
1,128,810

Total interest-bearing
 
8,954,072

 
8,582,073

 
8,069,794

 
7,852,684

 
7,427,862

Total Oklahoma
 
12,469,384

 
11,861,432

 
11,502,033

 
11,463,277

 
10,992,169

 
 
 
 
 
 
 
 
 
 
 
Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
2,870,429

 
2,974,005

 
2,966,743

 
3,291,433

 
3,357,669

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
2,589,511

 
2,453,619

 
2,385,305

 
2,295,169

 
2,182,114

Savings
 
100,597

 
103,125

 
101,849

 
99,624

 
97,909

Time
 
464,264

 
425,253

 
419,269

 
423,880

 
453,119

Total interest-bearing
 
3,154,372

 
2,981,997

 
2,906,423

 
2,818,673

 
2,733,142

Total Texas
 
6,024,801

 
5,956,002

 
5,873,166

 
6,110,106

 
6,090,811

 
 
 
 
 
 
 
 
 
 
 
New Mexico:
 
 
 
 
 
 
 
 
 
 
Demand
 
645,698

 
630,861

 
662,362

 
691,692

 
722,188

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
539,260

 
557,881

 
573,203

 
571,347

 
593,760

Savings
 
62,863

 
62,636

 
61,497

 
58,194

 
57,794

Time
 
236,135

 
232,569

 
228,212

 
224,515

 
221,513

Total interest-bearing
 
838,258

 
853,086

 
862,912

 
854,056

 
873,067

Total New Mexico
 
1,483,956

 
1,483,947

 
1,525,274

 
1,545,748

 
1,595,255

 
 
 
 
 
 
 
 
 
 
 
Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
39,513

 
29,176

 
31,624

 
36,800

 
36,579

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
149,506

 
148,485

 
147,964

 
91,593

 
128,001

Savings
 
1,747

 
1,783

 
1,785

 
1,632

 
1,826

Time
 
7,877

 
7,810

 
8,321

 
8,726

 
10,214

Total interest-bearing
 
159,130

 
158,078

 
158,070

 
101,951

 
140,041

Total Arkansas
 
198,643

 
187,254

 
189,694

 
138,751

 
176,620

 
 
 
 
 
 
 
 
 
 
 

- 33 -


 
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
Colorado:
 
 
 
 
 
 
 
 
 
 
Demand
 
1,694,044

 
1,621,820

 
1,897,547

 
1,658,473

 
593,442

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
1,910,874

 
1,800,271

 
1,844,632

 
1,899,203

 
622,520

Savings
 
60,107

 
57,263

 
58,919

 
57,289

 
40,308

Time
 
273,622

 
246,198

 
261,235

 
274,877

 
217,628

Total interest-bearing
 
2,244,603

 
2,103,732

 
2,164,786

 
2,231,369

 
880,456

Total Colorado
 
3,938,647

 
3,725,552

 
4,062,333

 
3,889,842

 
1,473,898

 
 
 
 
 
 
 
 
 
 
 
Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
703,381

 
700,480

 
695,238

 
707,402

 
365,878

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
599,655

 
560,429

 
621,735

 
575,567

 
130,105

Savings
 
12,487

 
11,966

 
12,144

 
10,545

 
3,559

Time
 
44,347

 
43,099

 
44,004

 
43,051

 
23,927

Total interest-bearing
 
656,489

 
615,494

 
677,883

 
629,163

 
157,591

Total Arizona
 
1,359,870

 
1,315,974

 
1,373,121

 
1,336,565

 
523,469

 
 
 
 
 
 
 
 
 
 
 
Kansas/Missouri:
 
 
 
 
 
 
 
 
 
 
Demand
 
376,020

 
431,856

 
410,799

 
418,199

 
423,560

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
284,940

 
310,774

 
361,590

 
327,866

 
322,747

Savings
 
11,689

 
13,125

 
13,815

 
13,721

 
13,125

Time
 
19,126

 
19,205

 
19,977

 
19,688

 
20,635

Total interest-bearing
 
315,755

 
343,104

 
395,382

 
361,275

 
356,507

Total Kansas/Missouri
 
691,775

 
774,960

 
806,181

 
779,474

 
780,067

Total BOK Financial deposits
 
$
26,167,076

 
$
25,305,121

 
$
25,331,802

 
$
25,263,763

 
$
21,632,289


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 $600 million at September 30, 2019. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short-term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and agency mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $8.1 billion during the quarter, compared to $7.2 billion in the second quarter of 2019.

At September 30, 2019, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $10.1 billion.

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


- 34 -


Table 26 -- Borrowed Funds
(In thousands)
 
 
 
 
Three Months Ended
September 30, 2019
 
 
 
Three Months Ended
June 30, 2019
 
 
Sept. 30, 2019
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
June 30, 2019
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company and Other Non-Bank Subsidiaries:
Other borrowings
 
8,132

 
5,515

 
3.54
%
 
$
8,132

 
5,578

 
6,593

 
3.22
%
 
6,593

Subordinated debentures
 
275,909

 
275,900

 
5.48
%
 
$
275,909

 
275,892

 
275,887

 
5.53
%
 
275,893

Total parent company and other non-bank subsidiaries
 
284,041

 
281,415

 
5.44
%
 
 
 
281,470

 
282,480

 
5.47
%
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BOKF, NA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
3,030,691

 
2,653,752

 
2.25
%
 
3,030,691

 
1,975,086

 
1,650,046

 
2.46
%
 
1,975,086

Repurchase agreements
 
382,360

 
452,411

 
0.58
%
 
507,111

 
356,861

 
416,904

 
0.56
%
 
388,760

Other borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
 
6,800,000

 
8,102,174

 
2.41
%
 
8,000,000

 
7,800,000

 
7,153,846

 
2.65
%
 
7,800,000

GNMA repurchase liability
 
10,419

 
13,577

 
4.53
%
 
13,577

 
14,499

 
10,755

 
4.44
%
 
14,499

Other
 
3,783

 
3,757

 
5.82
%
 
3,783

 
3,732

 
4,423

 
4.62
%
 
3,732

Total other borrowings
 
6,814,202

 
8,119,508

 
2.42
%
 


 
7,818,231

 
7,169,024

 
2.67
%
 


Total BOKF, NA
 
10,227,253

 
11,225,671

 
2.30
%
 
 
 
10,150,178

 
9,235,974

 
2.53
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other borrowed funds and subordinated debentures
 
$
10,511,294

 
$
11,507,086

 
2.39
%
 
 
 
$
10,431,648

 
$
9,518,454

 
2.62
%
 
 
BOKF, NA also has a liability related to the repurchase of certain delinquent residential mortgage loans previously sold in GNMA mortgage pools. Interest is payable monthly at rates contractually due to investors.

Parent Company

At September 30, 2019, cash and interest-bearing cash and cash equivalents held by the parent company totaled $185 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, 2019, based upon the most restrictive limitations as well as management's internal capital policy, BOKF, NA could declare up to $151 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, 2019 was $4.8 billion, a $119 million increase over June 30, 2019. Net income less cash dividends paid increased equity $107 million during the third quarter of 2019. Changes in interest rates resulted in a $35 million increase in accumulated other comprehensive gain over June 30, 2019. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings including expected benefits from lower federal income tax rates, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt or perpetual preferred stock issuance, share repurchase and stock and cash dividends.


- 35 -


On April 30, 2019, the board of directors authorized the Company to purchase up to five million common shares, subject to market conditions, securities law and other regulatory compliance limitations. As of September 30, 2019, 586,713 shares have been repurchased under this new authorization. The Company repurchased 336,713 shares during the third quarter of 2019 at an average price of $77.03 per share.

On June 16, 2016, the FASB issued FASB Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Assets Measured at Amortized Cost ("ASU 2016-13" or "CECL") to provide more-timely recording of credit losses on loans and other financial assets measured at amortized cost, effective for the Company’s annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company will adopt the standard on January 1, 2020 through a cumulative-effect adjustment to retained earnings. The ASU broadens the scope of the allowance for credit losses to include acquired loans and certain serviced loans, among others. Specifically, CECL requires recognition of an allowance for credit losses on acquired loans that were initially recognized at fair value, which included an estimate of expected credit losses. This requirement will result in duplicate recognition of an allowance for expected credit losses on approximately $2.0 billion of acquired loans. The principles of CECL also apply to expected credit losses on residential mortgage loans the company has transferred into mortgage-backed securities, primarily expected losses on approximately $3.5 billion of residential mortgage loans that exceed amounts guaranteed by the U.S. Department of Veterans Affairs.

We expect the pre-tax transition adjustment from the CECL implementation will be between $50 million and $75 million. We plan to adopt the three year transition approach for regulatory capital. The ultimate impact will depend on the composition of our portfolio of assets measured at amortized cost as well as economic conditions and forecasts at adoption.

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

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

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

Table 27 -- Capital Ratios
 
 
Minimum Capital Requirement
 
Capital Conservation Buffer
 
Minimum Capital Requirement Including Capital Conservation Buffer
 
Sept. 30, 2019
 
June 30, 2019
 
Sept. 30, 2018
Risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1
 
4.50
%
 
2.50
%
 
7.00
%
 
11.06
%
 
10.84
%
 
12.07
%
Tier 1 capital
 
6.00
%
 
2.50
%
 
8.50
%
 
11.06
%
 
10.84
%
 
12.07
%
Total capital
 
8.00
%
 
2.50
%
 
10.50
%
 
12.56
%
 
12.34
%
 
13.37
%
Tier 1 Leverage
 
4.00
%
 
N/A

 
4.00
%
 
8.41
%
 
8.75
%
 
9.90
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average total equity to average assets
 
 
 
 
 
 
 
10.97
%
 
11.26
%
 
10.73
%
Tangible common equity ratio
 
 
 
 
 
 
 
8.72
%
 
8.69
%
 
9.55
%

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

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


- 36 -


Table 28 -- Non-GAAP Measure
(Dollars in thousands)
 
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
4,829,016

 
$
4,709,438

 
$
4,522,873

 
$
4,432,109

 
$
3,615,032

Less: Goodwill and intangible assets, net
 
1,172,411

 
1,172,564

 
1,177,573

 
1,184,112

 
480,800

Tangible common equity
 
3,656,605

 
3,536,874

 
3,345,300

 
3,247,997

 
3,134,232

Total assets
 
43,127,205

 
41,893,073

 
39,882,962

 
38,020,504

 
33,289,864

Less: Goodwill and intangible assets, net
 
1,172,411

 
1,172,564

 
1,177,573

 
1,184,112

 
480,800

Tangible assets
 
$
41,954,794

 
$
40,720,509

 
$
38,705,389

 
$
36,836,392

 
$
32,809,064

Tangible common equity ratio
 
8.72
%
 
8.69
%
 
8.64
%
 
8.82
%
 
9.55
%

Off-Balance Sheet Arrangements

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

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

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

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

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

Interest Rate Risk – Other than Trading
 
As previously noted in the Net Interest Revenue section of this report, management has implemented strategies to manage the Company’s balance sheet to have relatively limited exposure to changes in interest rates over a twelve-month period. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue. A simulation model is used to estimate the effect of changes in interest rates on our performance across multiple interest rate scenarios. Our current internal policy limit for net interest revenue variation due to a 200 basis point parallel change in market interest rates over twelve months is a maximum decline of 5 percent. The results of a 200 basis point decrease in interest rates in the current low-rate environment are not meaningful. Until such time as it becomes meaningful, we will instead report the effect of a 100 basis point decrease in interest rates.

- 37 -


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

Table 29 -- Interest Rate Sensitivity
(Dollars in thousands)
 
 
200 bp Increase
 
100 bp Decrease1
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
Anticipated impact over the next twelve months on net interest revenue
 
$
(20,916
)
 
$
979

 
$
(28,509
)
 
$
(36,275
)
 
 
(1.89
)%
 
0.10
%
 
(2.57
)%
 
(3.65
)%
1 The results of a 200 basis point decrease in interest rates in the low-rate environment are not meaningful, therefore we will instead report the effect of a 100 basis point decrease in interest rates.

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

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

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


Table 30 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
 
 
September 30,
 
 
2019
 
2018
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
MSR Asset
 
$
33,176

 
$
(42,387
)
 
$
14,068

 
$
(23,080
)
MSR Hedge
 
(41,744
)
 
39,600

 
(21,712
)
 
19,921

Net Exposure
 
(8,568
)
 
(2,787
)
 
(7,644
)
 
(3,159
)


- 38 -


Trading Activities

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

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

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

Table 31 -- Mortgage Pipeline Sensitivity Analysis
(Dollars in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
Average1
 
$
(84
)
 
$
(171
)
 
$
156

 
$
(655
)
 
$
(97
)
 
$
(382
)
 
$
335

 
$
(841
)
Low2
 
528

 
293

 
596

 
(347
)
 
528

 
330

 
2,077

 
699

High3
 
(411
)
 
(478
)
 
(101
)
 
(1,025
)
 
(664
)
 
(1,343
)
 
(1,015
)
 
(2,447
)
Period End
 
25

 
(164
)
 
139

 
(601
)
 
25

 
(164
)
 
139

 
(601
)
1 
Average represents the simple average of each daily value observed during the reporting period.
2 
Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 
High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.

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

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

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

- 39 -



Table 32 -- Trading Sensitivity Analysis
(Dollars in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
Average1
 
$
(1,244
)
 
$
1,361

 
$
(897
)
 
$
(55
)
 
$
(1,800
)
 
$
1,820

 
$
(1,329
)
 
$
714

Low2
 
2,939

 
3,065

 
2,041

 
3,447

 
2,939

 
5,378

 
2,041

 
4,423

High3
 
(3,359
)
 
(4,747
)
 
(4,005
)
 
(3,463
)
 
(5,153
)
 
(4,747
)
 
(4,534
)
 
(3,463
)
Period End
 
(1,719
)
 
1,371

 
(2,116
)
 
1,573

 
(1,719
)
 
1,371

 
(2,116
)
 
1,573

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

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


- 40 -


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

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

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

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



- 41 -


     
Consolidated Statements of Earnings (Unaudited)
 
 
 
 
 
 
 
 
(In thousands, except share and per share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Interest revenue
 
2019
 
2018
 
2019
 
2018
Loans
 
$
286,694

 
$
218,732

 
$
859,898

 
$
617,517

Residential mortgage loans held for sale
 
1,891

 
2,151

 
5,308

 
6,328

Trading securities
 
14,452

 
17,295

 
48,645

 
38,021

Investment securities
 
3,221

 
3,598

 
10,160

 
11,118

Available for sale securities
 
67,633

 
48,917

 
184,344

 
142,303

Fair value option securities
 
10,708

 
3,881

 
23,448

 
12,627

Restricted equity securities
 
7,558

 
5,232

 
20,419

 
15,757

Interest-bearing cash and cash equivalents
 
3,050

 
3,441

 
9,879

 
19,163

Total interest revenue
 
395,207

 
303,247

 
1,162,101

 
862,834

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
46,917

 
24,535

 
127,517

 
63,717

Borrowed funds
 
65,381

 
35,804

 
180,595

 
93,860

Subordinated debentures
 
3,813

 
2,025

 
11,359

 
6,076

Total interest expense
 
116,111

 
62,364

 
319,471

 
163,653

Net interest revenue
 
279,096

 
240,883

 
842,630

 
699,181

Provision for credit losses
 
12,000

 
4,000

 
25,000

 
(1,000
)
Net interest revenue after provision for credit losses
 
267,096

 
236,883

 
817,630

 
700,181

Other operating revenue
 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
43,840

 
23,086

 
115,983

 
80,222

Transaction card revenue
 
22,015

 
21,396

 
64,668

 
63,361

Fiduciary and asset management revenue
 
43,621

 
57,514

 
132,004

 
141,038

Deposit service charges and fees
 
28,837

 
27,765

 
85,154

 
82,760

Mortgage banking revenue
 
30,180

 
23,536

 
82,145

 
75,907

Other revenue
 
17,626

 
12,900

 
42,825

 
39,781

Total fees and commissions
 
186,119

 
166,197

 
522,779

 
483,069

Other gains, net
 
4,544

 
2,754

 
11,000

 
6,040

Gain (loss) on derivatives, net
 
3,778

 
(2,847
)
 
19,595

 
(11,589
)
Gain (loss) on fair value option securities, net
 
4,597

 
(4,385
)
 
24,115

 
(25,290
)
Change in fair value of mortgage servicing rights
 
(12,593
)
 
5,972

 
(62,814
)
 
28,901

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

 
250

 
1,110

 
(802
)
Total other operating revenue
 
186,450

 
167,941

 
515,785

 
480,329

Other operating expense
 
 

 
 

 
 

 
 

Personnel
 
162,573

 
143,531

 
492,143

 
422,425

Business promotion
 
8,859

 
7,620

 
26,875

 
21,316

Charitable contributions to BOKF Foundation
 
—

 
—

 
1,000

 
—

Professional fees and services
 
12,312

 
13,209

 
41,453

 
38,387

Net occupancy and equipment
 
27,558

 
23,394

 
83,959

 
70,201

Insurance
 
4,220

 
6,232

 
15,513

 
19,070

Data processing and communications
 
31,915

 
31,665

 
93,099

 
87,221

Printing, postage and supplies
 
3,825

 
3,837

 
12,817

 
11,937

Net losses and operating expenses of repossessed assets
 
1,728

 
4,044

 
4,304

 
14,471

Amortization of intangible assets
 
5,064

 
1,603

 
15,393

 
4,289

Mortgage banking costs
 
14,975

 
11,741

 
36,426

 
34,780

Other expense
 
6,263

 
5,741

 
20,604

 
19,426

Total other operating expense
 
279,292

 
252,617

 
843,586

 
743,523

Net income before taxes
 
174,254

 
152,207

 
489,829

 
436,987

Federal and state income taxes
 
32,396

 
34,662

 
99,926

 
98,940

Net income
 
141,858

 
117,545

 
389,903

 
338,047

Net income (loss) attributable to non-controlling interests
 
(373
)
 
289

 
(503
)
 
857

Net income attributable to BOK Financial Corporation shareholders
 
$
142,231

 
$
117,256

 
$
390,406

 
$
337,190

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
2.00

 
$
1.79

 
$
5.47

 
$
5.15

Diluted
 
$
2.00

 
$
1.79

 
$
5.47

 
$
5.15

Average shares used in computation:
 
 
 
 
 
 
 
 
Basic
 
70,596,307

 
64,901,095

 
70,953,544

 
64,883,319

Diluted
 
70,609,924

 
64,934,351

 
70,968,845

 
64,919,728

Dividends declared per share
 
$
0.50

 
$
0.50

 
$
1.50

 
$
1.40


See accompanying notes to consolidated financial statements.

- 42 -


Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
 
(In thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
141,858

 
$
117,545

 
$
389,903

 
$
338,047

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
46,285

 
(35,941
)
 
274,441

 
(166,464
)
Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
Loss (gain) on available for sale securities, net
 
(5
)
 
(250
)
 
(1,110
)
 
802

Other comprehensive income (loss) before income taxes
 
46,280

 
(36,191
)
 
273,331

 
(165,662
)
Federal and state income taxes
 
11,096

 
(9,134
)
 
66,993

 
(42,183
)
Other comprehensive income (loss), net of income taxes
 
35,184


(27,057
)

206,338


(123,479
)
Comprehensive income
 
177,042

 
90,488

 
596,241

 
214,568

Comprehensive income (loss) attributable to non-controlling interests
 
(373
)
 
289

 
(503
)
 
857

Comprehensive income attributable to BOK Financial Corp. shareholders
 
$
177,415

 
$
90,199

 
$
596,744

 
$
213,711


See accompanying notes to consolidated financial statements.

- 43 -


Consolidated Balance Sheets
(In thousands, except share data)
 
 
Sept. 30, 2019
 
Dec. 31, 2018
 
 
(Unaudited)
 
(Footnote 1)
Assets
 
 
 
 
Cash and due from banks
 
$
761,130

 
$
741,749

Interest-bearing cash and cash equivalents
 
465,458

 
401,675

Trading securities
 
1,675,212

 
1,956,923

Investment securities (fair value:  September 30, 2019 – $324,021; December 31, 2018 – $367,298)
 
304,224

 
355,187

Available for sale securities
 
11,024,551

 
8,857,120

Fair value option securities
 
1,816,398

 
283,235

Restricted equity securities
 
479,018

 
344,447

Residential mortgage loans held for sale
 
282,487

 
149,221

Loans
 
22,285,367

 
21,656,730

Allowance for loan losses
 
(204,432
)
 
(207,457
)
Loans, net of allowance
 
22,080,935

 
21,449,273

Premises and equipment, net
 
516,597

 
330,033

Receivables
 
219,420

 
204,960

Goodwill
 
1,048,091

 
1,049,263

Intangible assets, net
 
124,320

 
134,849

Mortgage servicing rights
 
193,661

 
259,254

Real estate and other repossessed assets, net of allowance (September 30, 2019 – $11,278; December 31, 2018 – $13,665)
 
21,026

 
17,487

Derivative contracts, net
 
352,019

 
320,929

Cash surrender value of bank-owned life insurance
 
387,035

 
381,608

Receivable on unsettled securities sales
 
904,630

 
336,400

Other assets
 
470,993

 
446,891

Total assets
 
$
43,127,205

 
$
38,020,504

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Liabilities:
 
 
 
 
Noninterest-bearing demand deposits
 
$
9,844,397

 
$
10,414,592

Interest-bearing deposits:
 
 

 
 

Transaction
 
13,521,545

 
12,206,576

Savings
 
557,593

 
529,215

Time
 
2,243,541

 
2,113,380

Total deposits
 
26,167,076

 
25,263,763

Funds purchased and repurchase agreements
 
3,413,051

 
1,018,411

Other borrowings
 
6,822,334

 
6,124,390

Subordinated debentures
 
275,909

 
275,913

Accrued interest, taxes and expense
 
218,775

 
192,826

Derivative contracts, net
 
336,791

 
362,306

Due on unsettled securities purchases
 
703,448

 
156,370

Other liabilities
 
352,156

 
183,480

Total liabilities
 
38,289,540

 
33,577,459

Shareholders' equity:
 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: September 30, 2019 – 75,757,009; December 31, 2018 – 75,711,492)
 
5

 
5

Capital surplus
 
1,346,730

 
1,334,030

Retained earnings
 
3,655,590

 
3,369,654

Treasury stock (shares at cost:  September 30, 2019 – 4,898,999; December 31, 2018 – 3,588,560)
 
(307,062
)
 
(198,995
)
Accumulated other comprehensive gain (loss)
 
133,753

 
(72,585
)
Total shareholders’ equity
 
4,829,016

 
4,432,109

Non-controlling interests
 
8,649

 
10,936

Total equity
 
4,837,665

 
4,443,045

Total liabilities and equity
 
$
43,127,205

 
$
38,020,504


See accompanying notes to consolidated financial statements.

- 44 -


Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 
Common Stock
 
Capital
Surplus
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interests
 
Total Equity
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
Balance, June 30, 2019
75,756

 
$
5

 
$
1,343,082

 
$
3,548,907

 
4,562

 
$
(281,125
)
 
$
98,569

 
$
4,709,438

 
$
9,037

 
$
4,718,475

Net income (loss)
—

 
—

 
—

 
142,231

 
—

 
—

 
—

 
142,231

 
(373
)
 
141,858

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
35,184

 
35,184

 
—

 
35,184

Repurchase of common stock
—

 
—

 
—

 
—

 
337

 
(25,937
)
 
—

 
(25,937
)
 
—

 
(25,937
)
Share-based compensation plans:
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock options exercised
3

 
—

 
177

 
—

 
—

 
—

 
—

 
177

 
—

 
177

Non-vested shares awarded, net
(2
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation
—

 
—

 
3,471

 
—

 
—

 
—

 
—

 
3,471

 
—

 
3,471

Cash dividends on common stock
—

 
—

 
—

 
(35,548
)
 
—

 
—

 
—

 
(35,548
)
 
—

 
(35,548
)
Capital calls and distributions, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(15
)
 
(15
)
Balance, September 30, 2019
75,757

 
$
5

 
$
1,346,730

 
$
3,655,590

 
4,899

 
$
(307,062
)
 
$
133,753

 
$
4,829,016

 
$
8,649

 
$
4,837,665

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
75,711

 
$
5

 
$
1,334,030

 
$
3,369,654

 
3,589

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

 
$
10,936

 
$
4,443,045

Transition adjustment - Leasing standard
—

 
—

 
—

 
2,862

 
—

 
—

 
—

 
2,862

 
—

 
2,862

Balance, January 1, 2019, Adjusted
75,711

 
5

 
1,334,030

 
3,372,516

 
3,589

 
(198,995
)
 
(72,585
)
 
4,434,971

 
10,936

 
4,445,907

Net income (loss)
—

 
—

 
—

 
390,406

 
—

 
—

 
—

 
390,406

 
(503
)
 
389,903

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
206,338

 
206,338

 
—

 
206,338

Repurchase of common stock
—

 
—

 
—

 
—

 
1,292

 
(106,639
)
 
—

 
(106,639
)
 
—

 
(106,639
)
Share-based compensation plans:
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock options exercised
21

 
—

 
1,080

 
—

 
—

 
—

 
—

 
1,080

 
—

 
1,080

Non-vested shares awarded, net
25

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
—

 
—

 
—

 
—

 
18

 
(1,428
)
 
—

 
(1,428
)
 
—

 
(1,428
)
Share-based compensation
—

 
—

 
11,620

 
—

 
—

 
—

 
—

 
11,620

 
—

 
11,620

Cash dividends on common stock
—

 
—

 
—

 
(107,332
)
 
—

 
—

 
—

 
(107,332
)
 
—

 
(107,332
)
Capital calls and distributions, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,784
)
 
(1,784
)
Balance, September 30, 2019
75,757

 
$
5

 
$
1,346,730

 
$
3,655,590

 
4,899

 
$
(307,062
)
 
$
133,753

 
$
4,829,016

 
$
8,649

 
$
4,837,665

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2018
75,314

 
$
4

 
$
1,040,202

 
$
3,212,653

 
9,874

 
$
(564,123
)
 
$
(135,305
)
 
$
3,553,431

 
$
22,614

 
$
3,576,045

Net income (loss)
—

 
—

 
—

 
117,256

 
—

 
—

 
—

 
117,256

 
289

 
117,545

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
(27,057
)
 
(27,057
)
 
—

 
(27,057
)
Repurchase of common stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation plans:
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock options exercised
3

 
—

 
134

 
—

 
—

 
—

 
—

 
134

 
—

 
134

Non-vested shares awarded, net
(8
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation
—

 
—

 
4,094

 
—

 
—

 
—

 
—

 
4,094

 
—

 
4,094

Cash dividends on common stock
—

 
—

 
—

 
(32,826
)
 
—

 
—

 
—

 
(32,826
)
 
—

 
(32,826
)
Capital calls and distributions, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(12,175
)
 
(12,175
)
Balance, September 30, 2018
75,309

 
$
4

 
$
1,044,430

 
$
3,297,083

 
9,874

 
$
(564,123
)
 
$
(162,362
)
 
$
3,615,032

 
$
10,728

 
$
3,625,760

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
75,148

 
$
4

 
$
1,035,895

 
$
3,048,487

 
9,753

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

 
$
22,967

 
$
3,518,334

Transition adjustment of net unrealized gains on equity securities
—

 
—

 
—

 
2,709

 
—

 
—

 
(2,709
)
 
—

 
—

 
—

Balance, December 31, 2017, Adjusted
75,148

 
4

 
1,035,895

 
3,051,196

 
9,753

 
(552,845
)
 
(38,883
)
 
3,495,367

 
22,967

 
3,518,334

Net income (loss)
—

 
—

 
—

 
337,190

 
—

 
—

 
—

 
337,190

 
857

 
338,047

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
(123,479
)
 
(123,479
)
 
—

 
(123,479
)
Repurchase of common stock
—

 
—

 
—

 
—

 
90

 
(8,408
)
 
—

 
(8,408
)
 
—

 
(8,408
)
Share-based compensation plans:
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock options exercised
49

 
—

 
2,560

 
—

 
—

 
—

 
—

 
2,560

 
—

 
2,560

Non-vested shares awarded, net
112

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
—

 
—

 
—

 
—

 
31

 
(2,870
)
 
—

 
(2,870
)
 
—

 
(2,870
)
Share-based compensation
—

 
—

 
5,975

 
—

 
—

 
—

 
—

 
5,975

 
—

 
5,975

Cash dividends on common stock
—

 
—

 
—

 
(91,303
)
 
—

 
—

 
—

 
(91,303
)
 
—

 
(91,303
)
Capital calls and distributions, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(13,096
)
 
(13,096
)
Balance, September 30, 2018
75,309

 
$
4

 
$
1,044,430

 
$
3,297,083

 
9,874

 
$
(564,123
)
 
$
(162,362
)
 
$
3,615,032

 
$
10,728

 
$
3,625,760


- 45 -



See accompanying notes to consolidated financial statements.

- 46 -


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

 
Nine Months Ended
 
 
September 30,
 
 
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
389,903

 
$
338,047

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Provision for credit losses
 
25,000

 
(1,000
)
Change in fair value of mortgage servicing rights due to market changes
 
62,814

 
(28,901
)
Change in the fair value of mortgage servicing rights due to principal payments
 
27,600

 
25,783

Net unrealized losses (gains) from derivative contracts
 
(25,306
)
 
3,309

Share-based compensation
 
11,620

 
5,975

Depreciation and amortization
 
69,762

 
41,999

Net amortization of discounts and premiums
 
(16,648
)
 
19,001

Net losses (gains) on financial instruments and other losses (gains), net
 
(2,656
)
 
5,581

Net gain on mortgage loans held for sale
 
(25,803
)
 
(26,242
)
Mortgage loans originated for sale
 
(2,170,287
)
 
(2,093,860
)
Proceeds from sale of mortgage loans held for sale
 
2,070,572

 
2,165,989

Capitalized mortgage servicing rights
 
(24,821
)
 
(28,688
)
Change in trading and fair value option securities
 
(1,251,759
)
 
(848,409
)
Change in receivables
 
(613,872
)
 
(249,347
)
Change in other assets
 
12,981

 
(15,157
)
Change in accrued interest, taxes and expense
 
(15,600
)
 
66,697

Change in other liabilities
 
419,982

 
229,815

Net cash used in operating activities
 
(1,056,518
)
 
(389,408
)
Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
49,621

 
89,099

Proceeds from maturities or redemptions of available for sale securities
 
1,267,190

 
1,208,373

Purchases of investment securities
 
—

 
(4,218
)
Purchases of available for sale securities
 
(3,802,635
)
 
(1,404,291
)
Proceeds from sales of available for sale securities
 
628,385

 
232,826

Change in amount receivable on unsettled available for sale securities transactions
 
29,010

 
67,775

Loans originated, net of principal collected
 
(590,196
)
 
(1,187,762
)
Net payments on derivative asset contracts
 
40,922

 
(39,485
)
Acquisitions, net of cash acquired
 
—

 
(13,870
)
Proceeds from disposition of assets
 
127,476

 
265,786

Purchases of assets
 
(308,630
)
 
(250,447
)
Net cash used in investing activities
 
(2,558,857
)
 
(1,036,214
)
Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
773,152

 
(406,446
)
Net change in time deposits
 
129,980

 
(22,570
)
Net change in other borrowed funds
 
3,027,298

 
1,035,549

Net proceeds on derivative liability contracts
 
(43,932
)
 
42,883

Net change in derivative margin accounts
 
(85,468
)
 
(46,390
)
Change in amount due on unsettled available for sale securities transactions
 
111,828

 
(148,190
)
Issuance of common and treasury stock, net
 
(348
)
 
(310
)
Repurchase of common stock
 
(106,639
)
 
(8,408
)
Dividends paid
 
(107,332
)
 
(91,303
)
Net cash provided by financing activities
 
3,698,539

 
354,815

Net increase (decrease) in cash and cash equivalents
 
83,164

 
(1,070,807
)
Cash and cash equivalents at beginning of period
 
1,143,424

 
2,317,054

Cash and cash equivalents at end of period
 
$
1,226,588

 
$
1,246,247

 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
Cash paid for interest
 
$
316,481

 
$
163,381

Cash paid for taxes
 
$
77,912

 
$
77,373

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
8,489

 
$
9,513

Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period
 
$
65,286

 
$
70,814

Conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
22,449

 
$
32,206

Right-of-use assets obtained in exchange for operating lease liabilities
 
$
58,766

 
$
—

See accompanying notes to consolidated financial statements.

- 47 -


Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

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

The unaudited consolidated financial statements include accounts of BOK Financial and its subsidiaries, principally BOKF, NA (“the Bank”), BOK Financial Securities, Inc., and BOK Financial Private Wealth, Inc. Operating divisions of the Bank include Bank of Albuquerque, Bank of Oklahoma, Bank of Texas, BOK Financial in Arizona, Arkansas, Colorado and Kansas/Missouri, BOK Financial Mortgage and the TransFund electronic funds network.

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

The financial information should be read in conjunction with BOK Financial’s 2018 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2018 have been derived from the audited financial statements included in BOK Financial’s 2018 Form 10-K but do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the nine-month period ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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

On February 25, 2016, the FASB issued ASU 2016-02 to increase transparency and comparability by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Lessees are required to recognize an obligation for future lease payments measured on a discounted basis and a right-of-use asset. The Company adopted the new standard January 1, 2019 through a cumulative effect adjustment to retained earnings. Prior periods were not restated. BOKF elected to apply all practical expedients other than the lessee’s practical expedient to combine lease and non-lease components which would further gross up lease liability and the related right-of-use asset. The implementation of ASU 2016-02 increased the reported right-of-use asset and lease liability by $137 million. The effect on retained earnings was immaterial.

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

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

The company has established a CECL implementation team to evaluate the impact to the Company’s financial statements. The CECL implementation team, overseen by the Chief Credit Officer, Chief Financial Officer and Chief Risk Officer, has developed a project plan that incorporates input from various departments within the bank including Credit, Financial Reporting, Risk and Information Technology among others. The Audit Committee and Credit Committee of the Board of Directors is periodically updated on project progress. In the second half of 2019, the implementation team is focused on design and operation of internal controls over the expected credit losses estimate and formalizing governance and approval processes. This includes finalizing model validation, refinement of model assumptions and qualitative framework, as well as drafting policies, reporting, and disclosures. These activities support our parallel runs and related results. The Company will adopt the standard on January 1, 2020 through a cumulative-effect adjustment to retained earnings.

- 48 -


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

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

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

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

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

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

- 49 -


(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities are as follows (in thousands):
 
 
 
September 30, 2019
 
December 31, 2018
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
U.S. government agency debentures
 
$
63,334

 
$
23

 
$
63,765

 
$
254

Residential agency mortgage-backed securities
 
1,480,458

 
3,851

 
1,791,584

 
9,966

Municipal and other tax-exempt securities
 
44,105

 
(99
)
 
34,507

 
(1
)
Asset-backed securities
 
36,928

 
50

 
42,656

 
685

Other debt securities
 
50,387

 
116

 
24,411

 
65

Total trading securities
 
$
1,675,212

 
$
3,941

 
$
1,956,923

 
$
10,969


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

 
 
September 30, 2019
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
104,418

 
$
107,647

 
$
3,247

 
$
(18
)
Residential agency mortgage-backed securities
 
11,125

 
11,650

 
528

 
(3
)
Other debt securities
 
188,681

 
204,724

 
16,457

 
(414
)
Total investment securities
 
$
304,224

 
$
324,021

 
$
20,232

 
$
(435
)

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

 
$
138,562

 
$
1,858

 
$
(592
)
Residential agency mortgage-backed securities
 
12,612

 
12,770

 
293

 
(135
)
Other debt securities
 
205,279

 
215,966

 
12,257

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

 
$
367,298

 
$
14,408

 
$
(2,297
)




- 50 -


The amortized cost and fair values of investment securities at September 30, 2019, by contractual maturity, are as shown in the following table (dollars in thousands):
 
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 
Total
 
Weighted
Average
Maturity1
Fixed maturity debt securities:
 
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
 
$
42,266

 
$
93,139

 
$
145,046

 
$
12,648

 
$
293,099

 
5.16

Fair value
 
42,426

 
96,704

 
160,698

 
12,543

 
312,371

 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
11,125

 
2 
Fair value
 
 

 
 

 
 

 
 

 
11,650

 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
304,224

 
 

Fair value
 
 

 
 

 
 

 
 

 
324,021

 
 

1 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
2 
The average expected lives of residential mortgage-backed securities were 4.5 years based upon current prepayment assumptions.

Temporarily Impaired Investment Securities
(in thousands):
 
 
September 30, 2019
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
18

 
$
10,302

 
$
3

 
$
2,213

 
$
15

 
$
12,515

 
$
18

Residential agency mortgage-backed securities
 
1

 
2,318

 
3

 
—

 
—

 
2,318

 
3

Other debt securities
 
18

 
275

 
1

 
10,897

 
413

 
11,172

 
414

Total investment securities
 
37

 
$
12,895

 
$
7

 
$
13,110

 
$
428

 
$
26,005

 
$
435


 
 
December 31, 2018
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
72

 
$
18,255

 
$
69

 
$
66,141

 
$
523

 
$
84,396

 
$
592

Residential agency mortgage-backed securities
 
2

 
—

 
—

 
5,633

 
135

 
5,633

 
135

Other debt securities
 
72

 
13,372

 
64

 
23,028

 
1,506

 
36,400

 
1,570

Total investment securities
 
146

 
$
31,627

 
$
133

 
$
94,802

 
$
2,164

 
$
126,429

 
$
2,297





- 51 -


Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
September 30, 2019
 
 
Amortized
 
Fair
 
Gross Unrealized
 
 
Cost
 
Value
 
Gain
 
Loss
U.S. Treasury
 
$
2,294

 
$
2,296

 
$
2

 
$
—

Municipal and other tax-exempt
 
1,772

 
1,848

 
76

 
—

Mortgage-backed securities:
 
 

 
 

 
 

 
 

Residential agency
 
7,636,923

 
7,740,461

 
114,646

 
(11,108
)
Residential non-agency
 
28,814

 
44,803

 
15,989

 
—

Commercial agency
 
3,176,188

 
3,234,671

 
61,003

 
(2,520
)
Other debt securities
 
500

 
472

 
—

 
(28
)
Total available for sale securities
 
$
10,846,491

 
$
11,024,551

 
$
191,716

 
$
(13,656
)

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

 
$
493

 
$
—

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

 
2,864

 
82

 
—

Mortgage-backed securities:
 
 
 
 

 
 

 
 

Residential agency
 
5,886,323

 
5,804,708

 
16,149

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

 
59,736

 
18,788

 
—

Commercial agency
 
2,986,297

 
2,953,889

 
7,955

 
(40,363
)
Other debt securities
 
35,545

 
35,430

 
12

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

 
$
8,857,120

 
$
42,986

 
$
(138,257
)


The amortized cost and fair values of available for sale securities at September 30, 2019, by contractual maturity, are as shown in the following table (dollars in thousands):
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 
Total
 
Weighted
Average
Maturity1
Fixed maturity debt securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
35,845

 
$
1,069,415

 
$
1,476,121

 
$
599,373

 
$
3,180,754

 
8.29

Fair value
35,806

 
1,081,571

 
1,512,308

 
609,602

 
3,239,287

 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
7,665,737

 
2 
Fair value
 
 
 
 
 
 
 
 
7,785,264

 
 
Total available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
10,846,491

 
 
Fair value
 
 
 
 
 
 
 
 
11,024,551

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


- 52 -


Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Proceeds
$
261,028

 
$
45,293

 
$
628,385

 
$
232,826

Gross realized gains
989

 
250

 
7,316

 
700

Gross realized losses
(984
)
 
—

 
(6,206
)
 
(1,502
)
Related federal and state income tax expense (benefit)
1

 
64

 
282

 
(204
)


The fair value of debt securities pledged as collateral for repurchase agreements, public trust funds on deposit and for other purposes, as required by law was $10.8 billion at September 30, 2019 and $9.1 billion at December 31, 2018. The secured parties do not have the right to sell or repledge these securities.

Temporarily Impaired Available for Sale Securities
(in thousands)
 
 
September 30, 2019
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


Residential agency
 
108


931,248


3,260


753,448


7,848


1,684,696


11,108

Commercial agency
 
57

 
449,798

 
1,612

 
224,409

 
908

 
674,207

 
2,520

Other debt securities
 
1

 
—

 
—

 
472

 
28

 
472

 
28

Total available for sale securities
 
166

 
$
1,381,046


$
4,872


$
978,329


$
8,784


$
2,359,375


$
13,656



 
 
December 31, 2018
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


U.S. Treasury
 
1

 
$
—

 
$
—

 
$
493

 
$
3

 
$
493

 
$
3

Mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


Residential agency
 
289

 
510,824

 
1,158

 
3,641,370

 
96,606

 
4,152,194

 
97,764

Commercial agency
 
197

 
179,258

 
394

 
1,969,504

 
39,969

 
2,148,762

 
40,363

Other debt securities
 
3

 
9,982

 
63

 
20,436

 
64

 
30,418

 
127

Total available for sale securities
 
490

 
$
700,064


$
1,615


$
5,631,803


$
136,642


$
6,331,867


$
138,257



Based on evaluations of impaired securities as of September 30, 2019, the Company does not intend to sell any impaired available for sale debt securities before fair value recovers to the current amortized cost and it is more-likely-than-not that the Company will not be required to sell impaired securities before fair value recovers, which may be maturity.



- 53 -


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

The fair value and net unrealized gain (loss) included in fair value option securities is as follows (in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
U.S. Treasury
 
$
552,536

 
$
927

 
$
—

 
$
—

Residential agency mortgage-backed securities
 
1,263,862

 
18,588

 
283,235

 
2,766

Total
 
$
1,816,398

 
$
19,515

 
$
283,235

 
$
2,766




- 54 -


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

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

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

Customer Risk Management Programs
 
BOK Financial offers programs to permit its customers to manage various risks, including fluctuations in energy, cattle and other agricultural products, interest rates and foreign exchange rates with derivative contracts. Customers may also manage interest rate risk through interest rate swaps used by borrowers to modify interest rate terms of their loans. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize the risk of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in Other operating revenue – Brokerage and trading revenue in the Consolidated Statements of Earnings.
 
Trading

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

Internal Risk Management Programs
 
BOK Financial may use derivative contracts in managing its interest rate sensitivity, as part of its economic hedge of the change in the fair value of mortgage servicing rights and to mitigate the market risk of holding trading securities. Changes in the fair value of derivative instruments used in managing interest rate sensitivity and as part of the economic hedge of changes in the fair value of mortgage servicing rights are included in Other operating revenue – Gain (loss) on derivatives, net in the Consolidated Statements of Earnings.
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.

- 55 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2019 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Interest rate swaps
 
2,399,788

 
67,157

 
(240
)
 
66,917

 
(277
)
 
66,640

Energy contracts
 
1,980,406

 
183,204

 
(59,139
)
 
124,065

 
(66,149
)
 
57,916

Agricultural contracts
 
15,538

 
470

 
(302
)
 
168

 
—

 
168

Foreign exchange contracts
 
209,515

 
206,914

 
—

 
206,914

 
—

 
206,914

Equity option contracts
 
82,860

 
3,114

 
—

 
3,114

 
(660
)
 
2,454

Total customer risk management programs
 
4,688,107

 
460,859

 
(59,681
)
 
401,178

 
(67,086
)
 
334,092

Trading
 
73,658,685

 
205,188

 
(193,306
)
 
11,882

 
—

 
11,882

Internal risk management programs
 
433,804

 
9,037

 
(2,992
)
 
6,045

 
—

 
6,045

Total derivative contracts
 
$
78,780,596

 
$
675,084

 
$
(255,979
)
 
$
419,105

 
$
(67,086
)
 
$
352,019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Interest rate swaps
 
2,399,788

 
67,296

 
(240
)
 
67,056

 
(61,563
)
 
5,493

Energy contracts
 
1,936,369

 
175,613

 
(59,139
)
 
116,474

 
(784
)
 
115,690

Agricultural contracts
 
15,547

 
451

 
(302
)
 
149

 
—

 
149

Foreign exchange contracts
 
200,347

 
197,807

 
—

 
197,807

 
(433
)
 
197,374

Equity option contracts
 
82,860

 
3,114

 
—

 
3,114

 
—

 
3,114

Total customer risk management programs
 
4,634,911

 
444,281

 
(59,681
)
 
384,600

 
(62,780
)
 
321,820

Trading
 
75,247,769

 
207,542

 
(193,306
)
 
14,236

 
—

 
14,236

Internal risk management programs
 
483,370

 
5,435

 
(2,992
)
 
2,443

 
(1,708
)
 
735

Total derivative contracts
 
$
80,366,050

 
$
657,258

 
$
(255,979
)
 
$
401,279

 
$
(64,488
)
 
$
336,791

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



- 56 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2018 (in thousands):

 
 
Assets
 
 
Notional 1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
10,671,151

 
$
92,231

 
$
(26,787
)
 
$
65,444

 
$
—

 
$
65,444

Interest rate swaps
 
1,924,131

 
36,112

 
(6,688
)
 
29,424

 
(7,934
)
 
21,490

Energy contracts
 
1,472,209

 
206,418

 
(60,983
)
 
145,435

 
(106,752
)
 
38,683

Agricultural contracts
 
21,210

 
842

 
(201
)
 
641

 
—

 
641

Foreign exchange contracts
 
184,990

 
183,759

 
—

 
183,759

 
—

 
183,759

Equity option contracts
 
89,085

 
2,021

 
—

 
2,021

 
(648
)
 
1,373

Total customer risk management programs
 
14,362,776

 
521,383

 
(94,659
)
 
426,724

 
(115,334
)
 
311,390

Trading
 
15,356,909

 
45,346

 
(39,521
)
 
5,825

 
—

 
5,825

Internal risk management programs
 
553,079

 
5,064

 
(1,350
)
 
3,714

 
—

 
3,714

Total derivative contracts
 
$
30,272,764

 
$
571,793

 
$
(135,530
)
 
$
436,263

 
$
(115,334
)
 
$
320,929

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional 1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
10,558,151

 
$
90,388

 
$
(26,787
)
 
$
63,601

 
$
(63,596
)
 
$
5

Interest rate swaps
 
1,924,131

 
36,288

 
(6,688
)
 
29,600

 
(4,110
)
 
25,490

Energy contracts
 
1,434,247

 
202,494

 
(60,983
)
 
141,511

 
(1,490
)
 
140,021

Agricultural contracts
 
21,214

 
812

 
(201
)
 
611

 
—

 
611

Foreign exchange contracts
 
177,423

 
175,922

 
—

 
175,922

 
—

 
175,922

Equity option contracts
 
89,085

 
2,021

 
—

 
2,021

 
—

 
2,021

Total customer risk management programs
 
14,204,251

 
507,925

 
(94,659
)
 
413,266

 
(69,196
)
 
344,070

Trading
 
19,374,294

 
56,983

 
(39,521
)
 
17,462

 
—

 
17,462

Internal risk management programs
 
260,348

 
9,439

 
(1,350
)
 
8,089

 
(7,315
)
 
774

Total derivative contracts
 
$
33,838,893

 
$
574,347

 
$
(135,530
)
 
$
438,817

 
$
(76,511
)
 
$
362,306

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


- 57 -


The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):
 
 
Three Months Ended
 
 
September 30, 2019
 
September 30, 2018
 
 
Brokerage
and Trading Revenue
 
Gain (Loss) on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)on Derivatives, Net
Customer risk management programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
1,667

 
$
—

 
$
7,272

 
$
—

Interest rate swaps
 
1,252

 
—

 
618

 
—

Energy contracts
 
1,611

 
—

 
541

 
—

Agricultural contracts
 
16

 
—

 
6

 
—

Foreign exchange contracts
 
138

 
—

 
78

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
4,684

 
—

 
8,515

 
—

Trading
 
3,630

 
—

 
6,124

 
—

Internal risk management programs
 
—

 
3,778

 
—

 
(2,847
)
Total derivative contracts
 
$
8,314

 
$
3,778

 
$
14,639

 
$
(2,847
)


 
 
Nine Months Ended
 
 
September 30, 2019
 
September 30, 2018
 
 
Brokerage
and Trading Revenue
 
Gain (Loss) on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss) on Derivatives, Net
Customer risk management programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
9,579

 
$
—

 
$
21,677

 
$
—

Interest rate swaps
 
2,787

 
—

 
2,057

 
—

Energy contracts
 
3,923

 
—

 
5,097

 
—

Agricultural contracts
 
24

 
—

 
36

 
—

Foreign exchange contracts
 
392

 
—

 
350

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
16,705

 
—

 
29,217

 
—

Trading
 
4,365

 
—

 
3,260

 
—

Internal risk management programs
 
—

 
19,595

 
—

 
(11,589
)
Total derivative contracts
 
$
21,070

 
$
19,595

 
$
32,477

 
$
(11,589
)



- 58 -


(4) Loans and Allowances for Credit Losses

Loans

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

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

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

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

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

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

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

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


- 59 -


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

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

 
 
September 30, 2019
 
December 31, 2018
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
3,184,237

 
$
11,128,682

 
$
111,706

 
$
14,424,625

 
$
2,251,188

 
$
11,285,049

 
$
99,841

 
$
13,636,078

Commercial real estate
 
1,070,050

 
3,532,822

 
23,185

 
4,626,057

 
1,477,274

 
3,265,918

 
21,621

 
4,764,813

Residential mortgage
 
1,690,286

 
389,713

 
37,304

 
2,117,303

 
1,830,224

 
358,254

 
41,555

 
2,230,033

Personal
 
191,827

 
925,284

 
271

 
1,117,382

 
190,687

 
834,889

 
230

 
1,025,806

Total
 
$
6,136,400

 
$
15,976,501

 
$
172,466

 
$
22,285,367

 
$
5,749,373

 
$
15,744,110

 
$
163,247

 
$
21,656,730

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
1,541

 
 

 
 

 
 

 
$
1,338

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


Credit Commitments
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At September 30, 2019, outstanding commitments totaled $11 billion. Because some commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans.

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

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At September 30, 2019, outstanding standby letters of credit totaled $713 million. 

Allowances for Credit Losses

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

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

The allowance for loan losses consists of specific allowances attributed to impaired loans that have not yet been charged down to amounts we expect to recover, general allowances for unimpaired loans based on estimated loss rates by loan class and nonspecific allowances based on general economic conditions, risk concentration and related factors. There have been no material changes in the approach or techniques utilized in developing the allowance for loan losses and the accrual for off-balance sheet credit losses for the three and nine months ended September 30, 2019.


- 60 -


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

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

General allowances for unimpaired loans are based on estimated loss rates by loan class. The gross loss rate for each loan class is determined by the greater of the current gross loss rate based on the most recent twelve months or a long-term 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.


- 61 -


The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended September 30, 2019 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
106,397

 
$
54,188

 
$
15,724

 
$
9,388

 
$
16,837

 
$
202,534

Provision for loan losses
 
9,861

 
102

 
(253
)
 
1,911

 
918

 
12,539

Loans charged off
 
(9,875
)
 
—

 
(56
)
 
(1,776
)
 
—

 
(11,707
)
Recoveries
 
260

 
60

 
119

 
627

 
—

 
1,066

Ending balance
 
$
106,643

 
$
54,350

 
$
15,534

 
$
10,150

 
$
17,755

 
$
204,432

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
1,742

 
$
116

 
$
44

 
$
1

 
$
—

 
$
1,903

Provision for off-balance sheet credit losses
 
(536
)
 
(3
)
 
—

 
—

 
—

 
(539
)
Ending balance
 
$
1,206

 
$
113

 
$
44

 
$
1

 
$
—

 
$
1,364

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
9,325

 
$
99

 
$
(253
)
 
$
1,911

 
$
918

 
$
12,000



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

 
$
60,026

 
$
17,964

 
$
9,473

 
$
17,768

 
$
207,457

Provision for loan losses
 
34,740

 
(10,075
)
 
(2,660
)
 
3,434

 
(13
)
 
25,426

Loans charged off
 
(31,728
)
 
(118
)
 
(192
)
 
(4,671
)
 
—

 
(36,709
)
Recoveries
 
1,405

 
4,517

 
422

 
1,914

 
—

 
8,258

Ending balance
 
$
106,643

 
$
54,350

 
$
15,534

 
$
10,150

 
$
17,755

 
$
204,432

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
1,655

 
$
52

 
$
52

 
$
31

 
$
—

 
$
1,790

Provision for off-balance sheet credit losses
 
(449
)
 
61

 
(8
)
 
(30
)
 
—

 
(426
)
Ending balance
 
$
1,206

 
$
113

 
$
44

 
$
1

 
$
—

 
$
1,364

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
34,291

 
$
(10,014
)
 
$
(2,668
)
 
$
3,404

 
$
(13
)
 
$
25,000



- 62 -


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

 
$
58,758

 
$
18,544

 
$
8,646

 
$
15,472

 
$
215,142

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

 
1

 
883

 
3,418

 
4,408

Loans charged off
 
(9,602
)
 
—

 
(91
)
 
(1,380
)
 
—

 
(11,073
)
Recoveries
 
1,263

 
40

 
229

 
560

 
—

 
2,092

Ending balance
 
$
104,098

 
$
60,189

 
$
18,683

 
$
8,709

 
$
18,890

 
$
210,569

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
2,361

 
17

 
53

 
2

 
—

 
$
2,433

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

 
(3
)
 
—

 
—

 
(408
)
Ending balance
 
$
1,937

 
$
36

 
$
50

 
$
2

 
$
—

 
$
2,025

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

 
$
(2
)
 
$
883

 
$
3,418

 
$
4,000



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

 
$
56,621

 
$
18,451

 
$
9,124

 
$
22,217

 
$
230,682

Provision for loan losses
 
2,720

 
248

 
(418
)
 
1,486

 
(3,327
)
 
709

Loans charged off
 
(24,940
)
 
—

 
(326
)
 
(3,802
)
 
—

 
(29,068
)
Recoveries
 
2,049

 
3,320

 
976

 
1,901

 
—

 
8,246

Ending balance
 
$
104,098

 
$
60,189

 
$
18,683

 
$
8,709

 
$
18,890

 
$
210,569

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
3,644

 
$
45

 
$
43

 
$
2

 
$
—

 
$
3,734

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

 
—

 
—

 
(1,709
)
Ending balance
 
$
1,937

 
$
36

 
$
50

 
$
2

 
$
—

 
$
2,025

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
1,013

 
$
239

 
$
(411
)
 
$
1,486

 
$
(3,327
)
 
$
(1,000
)


- 63 -


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at September 30, 2019 is as follows (in thousands):
 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
14,312,919

 
$
99,110

 
$
111,706

 
$
7,533

 
$
14,424,625

 
$
106,643

Commercial real estate
 
4,602,872

 
54,350

 
23,185

 
—

 
4,626,057

 
54,350

Residential mortgage
 
2,079,999

 
15,534

 
37,304

 
—

 
2,117,303

 
15,534

Personal
 
1,117,111

 
10,150

 
271

 
—

 
1,117,382

 
10,150

Total
 
22,112,901

 
179,144

 
172,466

 
7,533

 
22,285,367

 
186,677

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
17,755

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
22,112,901

 
$
179,144

 
$
172,466

 
$
7,533

 
$
22,285,367

 
$
204,432


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 2018 is as follows (in thousands):
 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
13,536,237

 
$
93,494

 
$
99,841

 
$
8,732

 
$
13,636,078

 
$
102,226

Commercial real estate
 
4,743,192

 
60,026

 
21,621

 
—

 
4,764,813

 
60,026

Residential mortgage
 
2,188,478

 
17,964

 
41,555

 
—

 
2,230,033

 
17,964

Personal
 
1,025,576

 
9,473

 
230

 
—

 
1,025,806

 
9,473

Total
 
21,493,483

 
180,957

 
163,247

 
8,732

 
21,656,730

 
189,689

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
17,768

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
21,493,483

 
$
180,957

 
$
163,247

 
$
8,732

 
$
21,656,730

 
$
207,457



 
 
 
 
 
 
 
 
 
 
 
 
 


- 64 -


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, 2019 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
14,396,278

 
$
105,714

 
$
28,347

 
$
929

 
$
14,424,625

 
$
106,643

Commercial real estate
 
4,626,057

 
54,350

 
—

 
—

 
4,626,057

 
54,350

Residential mortgage
 
283,297

 
3,375

 
1,834,006

 
12,159

 
2,117,303

 
15,534

Personal
 
1,032,522

 
7,836

 
84,860

 
2,314

 
1,117,382

 
10,150

Total
 
20,338,154

 
171,275

 
1,947,213

 
15,402

 
22,285,367

 
186,677

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
17,755

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
20,338,154

 
$
171,275

 
$
1,947,213

 
$
15,402

 
$
22,285,367

 
$
204,432

 
The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at December 31, 2018 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
13,586,654

 
$
101,303

 
$
49,424

 
$
923

 
$
13,636,078

 
$
102,226

Commercial real estate
 
4,764,813

 
60,026

 
—

 
—

 
4,764,813

 
60,026

Residential mortgage
 
505,046

 
3,310

 
1,724,987

 
14,654

 
2,230,033

 
17,964

Personal
 
948,890

 
6,633

 
76,916

 
2,840

 
1,025,806

 
9,473

Total
 
19,805,403

 
171,272

 
1,851,327

 
18,417

 
21,656,730

 
189,689

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
17,768

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
19,805,403

 
$
171,272

 
$
1,851,327

 
$
18,417

 
$
21,656,730

 
$
207,457

 
 
 
 
 
 
 
 
 
 
 
 
 


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

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


- 65 -


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

The following table summarizes the Company’s loan portfolio at September 30, 2019 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
 
 
 
 
 
 
 
 
 
Pass
 
Other Loans Especially Mentioned
 
Accruing Substandard
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,927,285

 
$
60,405

 
$
37,685

 
$
88,894

 
$
—

 
$
—

 
$
4,114,269

Services
 
3,185,367

 
38,118

 
36,645

 
6,119

 
—

 
—

 
3,266,249

Wholesale/retail
 
1,829,614

 
9,757

 
7,742

 
1,504

 
—

 
—

 
1,848,617

Manufacturing
 
652,804

 
24,229

 
12,634

 
8,741

 
—

 
—

 
698,408

Healthcare
 
2,984,306

 
25,205

 
17,479

 
5,978

 
—

 
—

 
3,032,968

Public finance
 
744,840

 
—

 
—

 
—

 
—

 
—

 
744,840

Other commercial and industrial
 
671,819

 
2,053

 
16,632

 
423

 
28,300

 
47

 
719,274

Total commercial
 
13,996,035

 
159,767

 
128,817

 
111,659

 
28,300

 
47

 
14,424,625

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
135,011

 
—

 
—

 
350

 
—

 
—

 
135,361

Retail
 
765,708

 
12,067

 
1,262

 
20,132

 
—

 
—

 
799,169

Office
 
1,007,136

 
5,203

 
1,081

 
855

 
—

 
—

 
1,014,275

Multifamily
 
1,316,856

 
1,196

 
6,501

 
286

 
—

 
—

 
1,324,839

Industrial
 
872,627

 
—

 
—

 
909

 
—

 
—

 
873,536

Other commercial real estate
 
474,465

 
784

 
2,975

 
653

 
—

 
—

 
478,877

Total commercial real estate
 
4,571,803

 
19,250

 
11,819

 
23,185

 
—

 
—

 
4,626,057

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
280,243

 
326

 
2,191

 
537

 
763,535

 
19,628

 
1,066,460

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
185,432

 
6,332

 
191,764

Home equity
 
—

 
—

 
—

 
—

 
848,272

 
10,807

 
859,079

Total residential mortgage
 
280,243

 
326

 
2,191

 
537

 
1,797,239

 
36,767

 
2,117,303

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
1,032,381

 
46

 
33

 
63

 
84,651

 
208

 
1,117,382

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
19,880,462

 
$
179,389

 
$
142,860

 
$
135,444

 
$
1,910,190

 
$
37,022

 
$
22,285,367




- 66 -


The following table summarizes the Company’s loan portfolio at December 31, 2018 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
 
 
 
 
 
 
 
 
 
Pass
 
Other Loans Especially Mentioned
 
Accruing Substandard
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,414,039

 
$
42,176

 
$
86,624

 
$
47,494

 
$
—

 
$
—

 
$
3,590,333

Services
 
3,167,203

 
49,761

 
32,661

 
8,567

 
—

 
—

 
3,258,192

Wholesale/retail
 
1,593,902

 
18,809

 
7,131

 
1,316

 
—

 
—

 
1,621,158

Manufacturing
 
668,438

 
30,934

 
22,230

 
8,919

 
—

 
—

 
730,521

Healthcare
 
2,730,121

 
14,920

 
37,698

 
16,538

 
—

 
—

 
2,799,277

Public finance
 
804,550

 
—

 
—

 
—

 
—

 
—

 
804,550

Other commercial and industrial
 
756,815

 
1,266

 
7,588

 
16,954

 
49,371

 
53

 
832,047

Total commercial
 
13,135,068

 
157,866

 
193,932

 
99,788

 
49,371

 
53

 
13,636,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
148,234

 
—

 
—

 
350

 
—

 
—

 
148,584

Retail
 
885,588

 
11,926

 
1,289

 
20,279

 
—

 
—

 
919,082

Office
 
1,059,334

 
10,532

 
3,054

 
—

 
—

 
—

 
1,072,920

Multifamily
 
1,287,471

 
281

 
12

 
301

 
—

 
—

 
1,288,065

Industrial
 
776,898

 
—

 
1,208

 
—

 
—

 
—

 
778,106

Other commercial real estate
 
555,301

 
1,188

 
876

 
691

 
—

 
—

 
558,056

Total commercial real estate
 
4,712,826

 
23,927

 
6,439

 
21,621

 
—

 
—

 
4,764,813

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
269,678

 
52

 
9,730

 
1,991

 
819,199

 
21,960

 
1,122,610

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
183,734

 
7,132

 
190,866

Home equity
 
223,298

 
—

 
296

 
—

 
682,491

 
10,472

 
916,557

Total residential mortgage
 
492,976

 
52

 
10,026

 
1,991

 
1,685,424

 
39,564

 
2,230,033

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
944,256

 
115

 
4,443

 
76

 
76,762

 
154

 
1,025,806

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
19,285,126

 
$
181,960

 
$
214,840

 
$
123,476

 
$
1,811,557

 
$
39,771

 
$
21,656,730


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




- 67 -


Impaired Loans

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

A summary of impaired loans at September 30, 2019 follows (in thousands):
 
As of
 
For the
 
For the
 
September 30, 2019
 
Three Months Ended
 
Nine Months Ended
 
 
 
Recorded Investment
 
 
 
September 30, 2019
 
September 30, 2019
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
139,897

 
$
88,894

 
$
62,981

 
$
25,913

 
$
7,176

 
$
80,263

 
$
—

 
$
67,705

 
$
—

Services
9,390

 
6,119

 
6,093

 
26

 
26

 
8,103

 
—

 
5,172

 
—

Wholesale/retail
1,718

 
1,504

 
1,243

 
261

 
101

 
1,447

 
—

 
1,087

 
—

Manufacturing1
9,153

 
8,741

 
8,511

 
230

 
230

 
8,677

 
—

 
8,448

 
—

Healthcare
17,786

 
5,978

 
5,978

 
—

 
—

 
11,063

 
—

 
8,547

 
—

Public finance
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
8,261

 
470

 
470

 
—

 
—

 
7,998

 
—

 
8,585

 
—

Total commercial
186,205

 
111,706

 
85,276

 
26,430

 
7,533

 
117,551

 
—

 
99,544

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
1,306

 
350

 
350

 
—

 
—

 
350

 
—

 
350

 
—

Retail
20,516

 
20,132

 
20,132

 
—

 
—

 
20,094

 
—

 
20,206

 
—

Office
855

 
855

 
855

 
—

 
—

 
855

 
—

 
427

 
—

Multifamily
286

 
286

 
286

 
—

 
—

 
281

 
—

 
294

 
—

Industrial
909

 
909

 
909

 
—

 
—

 
454

 
—

 
454

 
—

Other commercial real estate
813

 
653

 
653

 
—

 
—

 
393

 
—

 
672

 
—

Total commercial real estate
24,685

 
23,185

 
23,185

 
—

 
—

 
22,427

 
—

 
22,403

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
24,639

 
20,165

 
20,165

 
—

 
—

 
20,984

 
280

 
22,058

 
894

Permanent mortgage guaranteed by U.S. government agencies2
197,847

 
191,764

 
191,764

 
—

 
—

 
196,310

 
2,020

 
194,751

 
5,863

Home equity
12,621

 
10,807

 
10,807

 
—

 
—

 
10,369

 
—

 
10,639

 
—

Total residential mortgage
235,107

 
222,736

 
222,736

 
—

 
—

 
227,663

 
2,300

 
227,448

 
6,757

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
338

 
271

 
271

 
—

 
—

 
254

 
—

 
251

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
446,335

 
$
357,898

 
$
331,468

 
$
26,430

 
$
7,533

 
$
367,895

 
$
2,300

 
$
349,646

 
$
6,757

1 
Impaired manufacturing sector loans included $4.7 million of loans from an affiliated entity, with no allowance as the fair value of the collateral exceeded the outstanding principal balance at September 30, 2019.
2 All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At September 30, 2019, the majority were accruing based on the guarantee by U.S. government agencies.



- 68 -


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

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

 
$
47,494

 
$
18,639

 
$
28,855

 
$
5,362

Services
 
13,437

 
8,567

 
8,489

 
78

 
74

Wholesale/retail
 
1,722

 
1,316

 
1,015

 
301

 
101

Manufacturing
 
10,055

 
8,919

 
8,673

 
246

 
246

Healthcare
 
24,319

 
16,538

 
10,563

 
5,975

 
2,949

Public finance
 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
26,955

 
17,007

 
17,007

 
—

 
—

Total commercial
 
156,163

 
99,841

 
64,386

 
35,455

 
8,732

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
1,306

 
350

 
350

 
—

 
—

Retail
 
27,680

 
20,279

 
20,279

 
—

 
—

Office
 
—

 
—

 
—

 
—

 
—

Multifamily
 
301

 
301

 
301

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

Other commercial real estate
 
851

 
691

 
691

 
—

 
—

Total commercial real estate
 
30,138

 
21,621

 
21,621

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
28,716

 
23,951

 
23,951

 
—

 
—

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

 
190,866

 
190,866

 
—

 
—

Home equity
 
12,196

 
10,472

 
10,472

 
—

 
—

Total residential mortgage
 
237,208

 
225,289

 
225,289

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Personal
 
278

 
230

 
230

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
423,787

 
$
346,981

 
$
311,526

 
$
35,455

 
$
8,732

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At December 31, 2018, the majority were accruing based on the guarantee by U.S. government agencies.




- 69 -


Troubled Debt Restructurings

At September 30, 2019 the Company had $145 million in troubled debt restructurings (TDRs), of which $93 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $70 million of TDRs were performing in accordance with the modified terms.

At December 31, 2018, the Company had $166 million in TDRs, of which $86 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $71 million of TDRs were performing in accordance with the modified terms.

TDRs generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. During the three and nine months ended September 30, 2019, $6.2 million and $40 million of loans were restructured. During the three and nine months ended September 30, 2018, $31 million and $76 million of loans were restructured.





- 70 -


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, 2019 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
4,025,375

 
$
—

 
$
—

 
$
—

 
$
88,894

 
$
4,114,269

Services
 
3,249,994

 
7,305

 
2,096

 
735

 
6,119

 
3,266,249

Wholesale/retail
 
1,844,203

 
2,910

 
—

 
—

 
1,504

 
1,848,617

Manufacturing
 
687,358

 
2,309

 
—

 
—

 
8,741

 
698,408

Healthcare
 
3,026,838

 
94

 
2

 
56

 
5,978

 
3,032,968

Public finance
 
744,840

 
—

 
—

 
—

 
—

 
744,840

Other commercial and industrial
 
718,419

 
337

 
48

 
—

 
470

 
719,274

Total commercial
 
14,297,027

 
12,955

 
2,146

 
791

 
111,706

 
14,424,625

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
134,947

 
—

 
—

 
64

 
350

 
135,361

Retail
 
779,037

 
—

 
—

 
—

 
20,132

 
799,169

Office
 
1,013,420

 
—

 
—

 
—

 
855

 
1,014,275

Multifamily
 
1,318,148

 
6,405

 
—

 
—

 
286

 
1,324,839

Industrial
 
872,627

 
—

 
—

 
—

 
909

 
873,536

Other commercial real estate
 
477,126

 
335

 
106

 
657

 
653

 
478,877

Total commercial real estate
 
4,595,305

 
6,740

 
106

 
721

 
23,185

 
4,626,057

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
1,036,793

 
6,097

 
3,405

 
—

 
20,165

 
1,066,460

Permanent mortgages guaranteed by U.S. government agencies
 
47,207

 
23,412

 
21,676

 
93,137

 
6,332

 
191,764

Home equity
 
845,616

 
2,282

 
374

 
—

 
10,807

 
859,079

Total residential mortgage
 
1,929,616

 
31,791

 
25,455

 
93,137

 
37,304

 
2,117,303

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
1,116,888

 
100

 
94

 
29

 
271

 
1,117,382

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
21,938,836

 
$
51,586

 
$
27,801

 
$
94,678

 
$
172,466

 
$
22,285,367



- 71 -


A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of December 31, 2018 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,542,839

 
$
—

 
$
—

 
$
—

 
$
47,494

 
$
3,590,333

Services
 
3,237,578

 
6,009

 
6,038

 
—

 
8,567

 
3,258,192

Wholesale/retail
 
1,619,290

 
515

 
37

 
—

 
1,316

 
1,621,158

Manufacturing
 
721,204

 
392

 
6

 
—

 
8,919

 
730,521

Healthcare
 
2,781,944

 
241

 
—

 
554

 
16,538

 
2,799,277

Public finance
 
804,550

 
—

 
—

 
—

 
—

 
804,550

Other commercial and industrial
 
814,489

 
518

 
25

 
8

 
17,007

 
832,047

Total commercial
 
13,521,894

 
7,675

 
6,106

 
562

 
99,841

 
13,636,078

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
147,705

 
249

 
280

 
—

 
350

 
148,584

Retail
 
884,424

 
14,379

 
—

 
—

 
20,279

 
919,082

Office
 
1,072,920

 
—

 
—

 
—

 
—

 
1,072,920

Multifamily
 
1,287,483

 
281

 
—

 
—

 
301

 
1,288,065

Industrial
 
776,898

 
1,208

 
—

 
—

 
—

 
778,106

Other commercial real estate
 
556,239

 
412

 
—

 
714

 
691

 
558,056

Total commercial real estate
 
4,725,669

 
16,529

 
280

 
714

 
21,621

 
4,764,813

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
1,095,097

 
3,196

 
366

 
—

 
23,951

 
1,122,610

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

 
24,369

 
16,345

 
105,561

 
7,132

 
190,866

Home equity
 
904,572

 
1,102

 
352

 
59

 
10,472

 
916,557

Total residential mortgage
 
2,037,128

 
28,667

 
17,063

 
105,620

 
41,555

 
2,230,033

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
1,024,298

 
479

 
796

 
3

 
230

 
1,025,806

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
21,308,989

 
$
53,350

 
$
24,245

 
$
106,899

 
$
163,247

 
$
21,656,730





 
 
 
 
 
 
 
 
 
 
 
 
 


- 72 -


(5) Leasing

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

At September 30, 2019, right-of-use assets were $180 million, the weighted-average remaining lease term was 11.0 years and the weighted average discount rate on operating leases was 3.2 percent. Operating lease costs recognized as occupancy and equipment expense were $7.1 million and $19.3 million for the three and nine months ended September 30, 2019. Operating cash flows from operating leases were $5.9 million and $17.3 million for the three and nine months ended September 30, 2019.

At September 30, 2019, un-discounted operating lease liabilities are scheduled to mature as follows: $7.0 million in 2019, $29.6 million in 2020, $27.4 million in 2021, $20.3 million in 2022, $18.6 million in 2023 and $136.3 million thereafter. Operating expense and short term lease costs total $3.3 million and $10.9 million for the three and nine months ended September 30, 2019.

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

(6) Mortgage Banking Activities

Residential Mortgage Loan Production

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

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

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loan commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
269,610

 
$
272,489

 
$
145,057

 
$
146,971

Residential mortgage loan commitments
 
379,377

 
10,111

 
160,848

 
5,378

Forward sales contracts
 
649,161

 
(113
)
 
274,000

 
(3,128
)
 
 
 

 
$
282,487

 
 

 
$
149,221



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

- 73 -



Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Production revenue:
 
 
 
 
 
 
 
 
Net realized gains on sale of mortgage loans
 
$
8,971

 
$
9,063

 
$
24,838

 
$
28,699

Net change in unrealized gain on mortgage loans held for sale
 
97

 
(2,135
)
 
965

 
(2,457
)
Net change in the fair value of mortgage loan commitments
 
514

 
(2,446
)
 
4,733

 
(1,496
)
Net change in the fair value of forward sales contracts
 
4,232

 
2,768

 
3,015

 
1,871

Total production revenue
 
13,814

 
7,250

 
33,551

 
26,617

Servicing revenue
 
16,366

 
16,286

 
48,594

 
49,290

Total mortgage banking revenue
 
$
30,180

 
$
23,536

 
$
82,145

 
$
75,907



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

Residential Mortgage Servicing

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

The following represents a summary of mortgage servicing rights (dollars in thousands):
 
 
September 30, 2019
 
December 31, 2018
Number of residential mortgage loans serviced for others
 
128,463

 
132,463

Outstanding principal balance of residential mortgage loans serviced for others
 
$
21,046,136

 
$
21,658,335

Weighted average interest rate
 
3.99
%
 
3.99
%
Remaining term (in months)
 
290

 
293



The following represents activity in capitalized mortgage servicing rights (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Beginning Balance
 
$
208,308

 
$
278,719

 
$
259,254

 
$
252,867

Additions, net
 
9,882

 
8,968

 
24,821

 
28,688

Change in fair value due to principal payments
 
(11,936
)
 
(8,986
)
 
(27,600
)
 
(25,783
)
Change in fair value due to market assumption changes
 
(12,593
)
 
5,972

 
(62,814
)
 
28,901

Ending Balance
 
$
193,661

 
$
284,673

 
$
193,661

 
$
284,673


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


- 74 -


Mortgage servicing rights are not traded in active markets. Fair value is determined by discounting the projected net cash flows. Significant market assumptions used to determine fair value based on significant unobservable inputs were as follows:
 
 
September 30, 2019
 
December 31, 2018
Discount rate – risk-free rate plus a market premium
 
9.82%
 
9.90%
Prepayment rate - based upon loan interest rate, original term and loan type
 
8.31% - 17.22%
 
8.05% - 15.74%
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
Performing loans
 
$68 - $94
 
$67 - $93
Delinquent loans
 
$150 - $500
 
$150 - $500
Loans in foreclosure
 
$1,000 - $4,000
 
$1,000 - $4,000
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
1.51%
 
2.57%
Primary/secondary mortgage rate spread
 
102 bps
 
105 bps


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



- 75 -


(7)  Commitments and Contingent Liabilities

Litigation Contingencies

On June 24, 2015, BOKF, NA received a complaint alleging that an employee had colluded with a bond issuer and an individual in misusing revenues pledged to municipal bonds for which BOKF, NA served as trustee under the bond indenture. The Company conducted an investigation and concluded that employees in one of its Corporate Trust offices had, with respect to a single group of affiliated bond issuances, violated Company policies and procedures by waiving financial covenants, granting forbearances and accepting without disclosure to the bondholders, debt service payments from sources other than pledged revenues. The relationship manager was terminated. The Company reported the circumstances to, and cooperated with an investigation by, the Securities and Exchange Commission ("SEC").

On December 28, 2015, in an action brought by the SEC, the United States District Court for the District of New Jersey entered a judgment against the principals involved in issuing the bonds, precluding the principals from denying the alleged violations of the federal securities laws and requiring the principals to pay all outstanding principal, accrued interest, and other amounts required under the bond documents, less the value of the facilities securing repayment of the bonds), subject to oversight by a court appointed monitor (“Payment Plan”).

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

On August 26, 2016, BOKF, NA was sued in the United States District Court for New Jersey by two bondholders in a putative class action on behalf of all holders of the bonds alleging BOKF, NA participated in the fraudulent sale of securities by the principals. The New Jersey Federal District Action has been stayed until December 17, 2019. On September 14, 2016, BOKF, NA was sued in the District Court of Tulsa County, Oklahoma by 19 bondholders alleging BOKF, NA participated in the fraudulent sale of securities by the principals. The Tulsa County District Court Action is pending on BOKF, NA’s motion to dismiss. Four separate small groups of bondholders filed arbitration complaints with the Financial Institutions Regulatory Association respecting the bonds and other bonds for which BOKF, NA served as indenture trustee. BOKF, NA challenged the FINRA proceedings in the United States District Court of Nevada. On appeal, the United States Court of Appeals for the Ninth Circuit held BOKF, NA was not subject to FINRA jurisdiction. The four FINRA complaints were then dismissed.

On July 9, 2019, the New Jersey Federal District Court, upon motion of the SEC, terminated the Payment Plan except with respect to facilities then under contract to be sold. The SEC has announced its intention to seek judgment against the principal individual and his wife for the amount remaining on the bonds. As a result, management is no longer able to conclude that the individual principal and his wife will be successful in paying the obligations he has to pay the bonds in full. Management has been advised by counsel that BOKF, NA has valid defenses to claims of bondholders and that no loss to the company is probable. No provision for losses has been made at this time. BOKF, NA estimates that upon sale of all facilities securing payment of the bonds, including those currently under contract and those not currently under contract, approximately $20 million will remain outstanding. BOKF, NA is unable at this time to assess whether the individual principal and his wife will have the financial capacity to pay in full the balance due on the bonds. If the individual principal and his wife do not have the financial ability to pay the bonds in full, a bondholder loss could become probable. Under all circumstances, the obligation of the principals to repay the bonds continues as an obligation not dischargeable in bankruptcy. A reasonable estimate cannot be made of the amount of any bondholder loss, though the amount of bondholder loss could be material to the company in the event a loss to the company becomes probable.
 
On March 5, 2018, BOKF, NA was sued in the Fulton, Georgia County District Court by the administratrix of a deceased resident who had sued for and obtained a judgment for wrongful death against one of the operators of a nursing home financed by one of the bonds which are the subject of the litigation discussed above. The judgment is alleged to total approximately $8 million in principal and interest at this time. Plaintiff alleges that BOKF, in its capacity as indenture trustee for the bonds, colluded with the borrower and others to defraud creditors of the nursing home by misleading the public about the solvency of the nursing home. Plaintiff alleges that this conduct has prevented her from collecting on her judgment. BOKF, NA is advised by counsel that BOKF, NA has valid defenses to the plaintiffs’ claims and no loss is probable.


- 76 -


On March 14, 2017, BOKF, NA was sued in the United States District Court for the Northern District of Oklahoma by bondholders in a second putative class action representing a different set of municipal securities. The bondholders in this second action allege two individuals purchased facilities from the principals who are the subject of the SEC New Jersey proceedings by means of the fraudulent sale of $60 million of municipal securities for which BOKF, NA also served as indenture trustee. The bondholders allege BOKF, NA failed to disclose that the seller of the purchased facilities had engaged in the conduct complained of in the New Jersey action. BOKF, NA properly performed all duties as indenture trustee of this second set of municipal securities, timely commenced proceedings against the issuer of the securities when default occurred, is cooperating with the SEC in actions against the two principals, is not a target of the SEC proceedings, and has been advised by counsel that BOKF, NA has valid defenses to the claims of these bondholders. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.

On March 7, 2017, a plaintiff filed a putative class action in the United States District Court for the Northern District of Texas alleging an extended overdraft fee charged by BOKF, NA is interest and exceeds permitted rates. On September 18, 2018, the District Court dismissed the Texas action and the plaintiff appealed the dismissal to the United States Court of Appeals for the Fifth Circuit which heard argument on October 8, 2019. On August 22, 2018, a plaintiff filed a second putative class action in the United States District Court for New Mexico making the same allegations as the Texas action. Management is advised by counsel that a loss is not probable in either the now dismissed Texas action or the New Mexico action and that the loss, if any, cannot be reasonably estimated.

On July 6, 2018, a plaintiff served a petition in a putative class action in the Oklahoma District Court for Tulsa County Oklahoma alleging BOKF NA breached its Demand Deposit Agreements by charging overdraft and not sufficient funds fees to deposit accounts on the day of the transaction triggering the fee and by the bank's debit hold process causing overdraft fees. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.

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

Alternative Investment Commitments

The Company sponsors two private equity funds and invests in several tax credit entities and other funds as permitted by banking regulations. Consolidation of these investments is based on the variable interest model.

At September 30, 2019, the Company has $245 million in interests in various alternative investments generally consisting of unconsolidated limited partnership interests in entities for which investment return is in the form of low income housing tax credits or other investments in merchant banking activities. This investment balance also includes $70 million of unfunded commitments included in Other liabilities on the Consolidated Balance Sheets.


- 77 -


(8) Shareholders' Equity

On October 29, 2019, the Company declared a quarterly cash dividend of $0.51 per common share payable on or about November 27, 2019 to shareholders of record as of November 12, 2019.

Dividends declared were $0.50 and $1.50 per share during the three and nine months ended September 30, 2019 and $0.50 and $1.40 per share during the three and nine months ended September 30, 2018.

Accumulated Other Comprehensive Income (Loss)

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

A rollforward of the components of accumulated other comprehensive income (loss) is included as follows (in thousands):
 
 
Unrealized Gain (Loss) on
 
 
 
 
Available for Sale Securities
 
Employee Benefit Plans
 
Total
Balance, December 31, 2017
 
$
(35,385
)
 
$
(789
)
 
$
(36,174
)
Transition adjustment for net unrealized gains on equity securities
 
(2,709
)
 
—

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

 
(166,464
)
Reclassification adjustments included in earnings:
 
 
 
 
 

Loss on available for sale securities, net
 
802

 
—

 
802

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

 
(165,662
)
Federal and state income taxes1
 
(42,183
)
 
—

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

 
(123,479
)
Balance, September 30, 2018
 
$
(161,573
)
 
$
(789
)
 
$
(162,362
)
 
 
 
 
 
 

Balance, December 31, 2018
 
$
(70,999
)
 
$
(1,586
)
 
$
(72,585
)
Net change in unrealized gain (loss)
 
274,441

 
—

 
274,441

Reclassification adjustments included in earnings:
 
 
 
 
 

Gain on available for sale securities, net
 
(1,110
)
 
—

 
(1,110
)
Other comprehensive income, before income taxes
 
273,331

 
—

 
273,331

Federal and state income taxes1
 
66,993

 
—

 
66,993

Other comprehensive income, net of income taxes
 
206,338

 
—

 
206,338

Balance, September 30, 2019
 
$
135,339


$
(1,586
)
 
$
133,753


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


- 78 -


(9) Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to BOK Financial Corp. shareholders
 
$
142,231

 
$
117,256

 
$
390,406

 
$
337,190

Less: Earnings allocated to participating securities
 
875

 
963

 
2,553

 
2,940

Numerator for basic earnings per share – income available to common shareholders
 
141,356

 
116,293

 
387,853

 
334,250

Effect of reallocating undistributed earnings of participating securities
 
1

 
1

 
1

 
1

Numerator for diluted earnings per share – income available to common shareholders
 
$
141,357

 
$
116,294

 
$
387,854

 
$
334,251

 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 

 
 

Weighted average shares outstanding
 
71,033,405

 
65,438,849

 
71,425,855

 
65,455,306

Less:  Participating securities included in weighted average shares outstanding
 
437,098

 
537,754

 
472,311

 
571,987

Denominator for basic earnings per common share
 
70,596,307

 
64,901,095

 
70,953,544

 
64,883,319

Dilutive effect of employee stock compensation plans1
 
13,617

 
33,256

 
15,301

 
36,409

Denominator for diluted earnings per common share
 
70,609,924

 
64,934,351

 
70,968,845

 
64,919,728

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
2.00

 
$
1.79

 
$
5.47

 
$
5.15

Diluted earnings per share
 
$
2.00

 
$
1.79

 
$
5.47

 
$
5.15

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

 
—

 
—

 
—




- 79 -


(10)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2019 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
243,944

 
$
27,580

 
$
12,343

 
$
(4,771
)
 
$
279,096

Net interest revenue (expense) from internal sources
 
(63,797
)
 
20,882

 
10,723

 
32,192

 
—

Net interest revenue
 
180,147

 
48,462

 
23,066

 
27,421

 
279,096

Provision for credit losses
 
9,505

 
1,841

 
(42
)
 
696

 
12,000

Net interest revenue after provision for credit losses
 
170,642

 
46,621

 
23,108

 
26,725

 
267,096

Other operating revenue
 
48,832

 
51,221

 
89,160

 
(2,763
)
 
186,450

Other operating expense
 
68,685

 
59,699

 
71,619

 
79,289

 
279,292

Net direct contribution
 
150,789

 
38,143

 
40,649

 
(55,327
)
 
174,254

Gain on financial instruments, net
 
28

 
8,339

 
—

 
(8,367
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(12,593
)
 
—

 
12,593

 
—

Gain on repossessed assets, net
 
802

 
214

 
—

 
(1,016
)
 
—

Corporate expense allocations
 
12,613

 
11,776

 
9,416

 
(33,805
)
 
—

Net income before taxes
 
139,006

 
22,327

 
31,233

 
(18,312
)
 
174,254

Federal and state income taxes
 
37,433

 
5,687

 
8,027

 
(18,751
)
 
32,396

Net income
 
101,573

 
16,640

 
23,206

 
439

 
141,858

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

 
—

 
—

 
(373
)
 
(373
)
Net income attributable to BOK Financial Corp. shareholders
 
$
101,573

 
$
16,640

 
$
23,206

 
$
812

 
$
142,231

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
23,973,067

 
$
9,827,130

 
$
10,392,988

 
$
(611,075
)
 
$
43,582,110






- 80 -


Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2019 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other1
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
699,239

 
$
75,353

 
$
51,054

 
$
16,984

 
$
842,630

Net interest revenue (expense) from internal sources
 
(181,829
)
 
76,925

 
27,213

 
77,691

 
—

Net interest revenue
 
517,410

 
152,278

 
78,267

 
94,675

 
842,630

Provision for credit losses
 
27,574

 
4,654

 
(209
)
 
(7,019
)
 
25,000

Net interest revenue after provision for credit losses
 
489,836

 
147,624

 
78,476

 
101,694

 
817,630

Other operating revenue
 
128,055

 
142,780

 
248,591

 
(3,641
)
 
515,785

Other operating expense
 
181,809

 
171,214

 
202,579

 
287,984

 
843,586

Net direct contribution
 
436,082

 
119,190

 
124,488

 
(189,931
)
 
489,829

Gain on financial instruments, net
 
67

 
43,416

 
—

 
(43,483
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(62,814
)
 
—

 
62,814

 
—

Gain on repossessed assets, net
 
455

 
409

 
—

 
(864
)
 
—

Corporate expense allocations
 
34,146

 
35,369

 
26,943

 
(96,458
)
 
—

Net income before taxes
 
402,458

 
64,832

 
97,545

 
(75,006
)
 
489,829

Federal and state income taxes
 
107,807

 
16,513

 
25,076

 
(49,470
)
 
99,926

Net income
 
294,651

 
48,319

 
72,469

 
(25,536
)
 
389,903

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

 
—

 
—

 
(503
)
 
(503
)
Net income attributable to BOK Financial Corp. shareholders
 
$
294,651

 
$
48,319

 
$
72,469

 
$
(25,033
)
 
$
390,406

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
22,288,129

 
$
9,142,491

 
$
9,861,021

 
$
89,202

 
$
41,380,843

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


- 81 -


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

 
$
20,005

 
$
22,509

 
$
10,952

 
$
240,883

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

 
6,267

 
16,964

 
—

Net interest revenue
 
145,147

 
39,044

 
28,776

 
27,916

 
240,883

Provision for credit losses
 
8,047

 
1,451

 
(84
)
 
(5,414
)
 
4,000

Net interest revenue after provision for credit losses
 
137,100

 
37,593

 
28,860

 
33,330

 
236,883

Other operating revenue
 
40,522

 
44,024

 
83,357

 
38

 
167,941

Other operating expense
 
51,039

 
58,482

 
62,256

 
80,840

 
252,617

Net direct contribution
 
126,583

 
23,135

 
49,961

 
(47,472
)
 
152,207

Gain (loss) on financial instruments, net
 
(3
)
 
(7,229
)
 
7

 
7,225

 
—

Change in fair value of mortgage servicing rights
 
—

 
5,972

 
—

 
(5,972
)
 
—

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

 
1,956

 
—

Corporate expense allocations
 
9,124

 
11,037

 
11,127

 
(31,288
)
 
—

Net income before taxes
 
115,587

 
10,754

 
38,841

 
(12,975
)
 
152,207

Federal and state income taxes
 
30,623

 
2,739

 
9,975

 
(8,675
)
 
34,662

Net income
 
84,964

 
8,015

 
28,866

 
(4,300
)
 
117,545

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
289

 
289

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

 
$
8,015

 
$
28,866

 
$
(4,589
)
 
$
117,256

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
18,499,979

 
$
8,323,543

 
$
8,498,363

 
$
(1,626,068
)
 
$
33,695,817



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

 
$
63,504

 
$
56,990

 
$
48,729

 
$
699,181

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

 
26,431

 
29,473

 
—

Net interest revenue
 
422,243

 
115,315

 
83,421

 
78,202

 
699,181

Provision for credit losses
 
18,781

 
3,890

 
(238
)
 
(23,433
)
 
(1,000
)
Net interest revenue after provision for credit losses
 
403,462

 
111,425

 
83,659

 
101,635

 
700,181

Other operating revenue
 
123,245

 
135,291

 
228,766

 
(6,973
)
 
480,329

Other operating expense
 
148,796

 
174,728

 
188,691

 
231,308

 
743,523

Net direct contribution
 
377,911

 
71,988

 
123,734

 
(136,646
)
 
436,987

Gain (loss) on financial instruments, net
 
13

 
(36,901
)
 
7

 
36,881

 
—

Change in fair value of mortgage servicing rights
 
—

 
28,901

 
—

 
(28,901
)
 
—

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

 
6,123

 
—

Corporate expense allocations
 
29,092

 
33,283

 
31,084

 
(93,459
)
 
—

Net income before taxes
 
342,730

 
30,684

 
92,657

 
(29,084
)
 
436,987

Federal and state income taxes
 
90,943

 
7,816

 
23,824

 
(23,643
)
 
98,940

Net income
 
251,787

 
22,868

 
68,833

 
(5,441
)
 
338,047

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
857

 
857

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

 
$
22,868

 
$
68,833

 
$
(6,298
)
 
$
337,190

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
18,124,571

 
$
8,381,205

 
$
8,364,712

 
$
(1,094,993
)
 
$
33,775,495



- 82 -


(11) Fees and Commissions Revenue

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

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

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

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


- 83 -


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

 
$
—

 
$
24,091

 
$
—

 
$
24,091

 
$
24,091

 
$
—

Customer hedging revenue
2,283

 
—

 
1,810

 
591

 
4,684

 
4,684

 
—

Retail brokerage revenue
—

 
—

 
4,204

 
—

 
4,204

 
—

 
4,204

Insurance brokerage revenue
—

 
—

 
3,375

 
(513
)
 
2,862

 
—

 
2,862

Investment banking revenue
4,408

 
—

 
3,590

 
1

 
7,999

 
3,762

 
4,237

Brokerage and trading revenue
6,691

 
—

 
37,070

 
79

 
43,840

 
32,537

 
11,303

TransFund EFT network revenue
18,465

 
1,020

 
(23
)
 
2

 
19,464

 
—

 
19,464

Merchant services revenue
2,203

 
14

 
—

 
—

 
2,217

 
—

 
2,217

Corporate card revenue
328

 
—

 
6

 
—

 
334

 
—

 
334

Transaction card revenue
20,996

 
1,034

 
(17
)
 
2

 
22,015

 
—

 
22,015

Personal trust revenue
—

 
—

 
20,239

 
(1
)
 
20,238

 
—

 
20,238

Corporate trust revenue
—

 
—

 
6,204

 
1

 
6,205

 
—

 
6,205

Institutional trust & retirement plan services revenue
—

 
—

 
10,740

 
—

 
10,740

 
—

 
10,740

Investment management services and other revenue
—

 
—

 
6,480

 
(42
)
 
6,438

 
—

 
6,438

Fiduciary and asset management revenue
—

 
—

 
43,663

 
(42
)
 
43,621

 
—

 
43,621

Commercial account service charge revenue
10,609

 
467

 
540

 
(3
)
 
11,613

 
—

 
11,613

Overdraft fee revenue
81

 
9,603

 
45

 
3

 
9,732

 
—

 
9,732

Check card revenue
—

 
5,721

 
—

 
—

 
5,721

 
—

 
5,721

Automated service charge and other deposit fee revenue
197

 
1,519

 
53

 
2

 
1,771

 
—

 
1,771

Deposit service charges and fees
10,887

 
17,310

 
638

 
2

 
28,837

 
—

 
28,837

Mortgage production revenue
—

 
13,815

 
—

 
(1
)
 
13,814

 
13,814

 
—

Mortgage servicing revenue
—

 
16,828

 
—

 
(462
)
 
16,366

 
16,366

 
—

Mortgage banking revenue
—

 
30,643

 
—

 
(463
)
 
30,180

 
30,180

 
—

Other revenue
7,585

 
2,474

 
8,068

 
(501
)
 
17,626

 
11,812

 
5,814

Total fees and commissions revenue
$
46,159

 
$
51,461

 
$
89,422

 
$
(923
)
 
$
186,119

 
$
74,529

 
$
111,590

1  
Out of scope revenue generally relates to financial instruments or contractual rights and obligations within the scope of other applicable accounting guidance.
2 
In scope revenue represents revenue subject to FASB ASC Topic 606, Revenue from Contracts with Customers.
3  
CoBiz operations are included in Funds Management and Other for the first quarter of 2019.


- 84 -


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

 
$
—

 
$
58,890

 
$
—

 
$
58,890

 
$
58,890

 
$
—

Customer hedging revenue
6,243

 
—

 
9,444

 
1,019

 
16,706

 
16,706

 
—

Retail brokerage revenue
—

 
—

 
12,192

 
(65
)
 
12,127

 
—

 
12,127

Insurance brokerage revenue
—

 
—

 
7,063

 
3,729

 
10,792

 
—

 
10,792

Investment banking revenue
8,345

 
—

 
9,123

 
—

 
17,468

 
7,189

 
10,279

Brokerage and trading revenue
14,588

 
—

 
96,712

 
4,683

 
115,983

 
82,785

 
33,198

TransFund EFT network revenue
54,623

 
2,975

 
(60
)
 
3

 
57,541

 
—

 
57,541

Merchant services revenue
6,351

 
43

 
—

 
122

 
6,516

 
—

 
6,516

Corporate card revenue
598

 
—

 
11

 
2

 
611

 
—

 
611

Transaction card revenue
61,572

 
3,018

 
(49
)
 
127

 
64,668

 
—

 
64,668

Personal trust revenue
—

 
—

 
61,028

 
—

 
61,028

 
—

 
61,028

Corporate trust revenue
—

 
—

 
18,736

 
—

 
18,736

 
—

 
18,736

Institutional trust & retirement plan services revenue
—

 
—

 
32,919

 
—

 
32,919

 
—

 
32,919

Investment management services and other revenue
—

 
—

 
17,730

 
1,591

 
19,321

 
—

 
19,321

Fiduciary and asset management revenue
—

 
—

 
130,413

 
1,591

 
132,004

 
—

 
132,004

Commercial account service charge revenue
31,296

 
1,283

 
1,605

 
1,804

 
35,988

 
—

 
35,988

Overdraft fee revenue
248

 
26,971

 
108

 
(231
)
 
27,096

 
—

 
27,096

Check card revenue
—

 
16,299

 
—

 
165

 
16,464

 
—

 
16,464

Automated service charge and other deposit fee revenue
569

 
4,762

 
228

 
47

 
5,606

 
—

 
5,606

Deposit service charges and fees
32,113

 
49,315

 
1,941

 
1,785

 
85,154

 
—

 
85,154

Mortgage production revenue
—

 
33,554

 
—

 
(3
)
 
33,551

 
33,551

 
—

Mortgage servicing revenue
—

 
50,014

 
—

 
(1,420
)
 
48,594

 
48,594

 
—

Mortgage banking revenue
—

 
83,568

 
—

 
(1,423
)
 
82,145

 
82,145

 
—

Other revenue
17,037

 
7,211

 
19,586

 
(1,009
)
 
42,825

 
28,655

 
14,170

Total fees and commissions revenue
$
125,310

 
$
143,112

 
$
248,603

 
$
5,754

 
$
522,779

 
$
193,585

 
$
329,194

1  
Out of scope revenue generally relates to financial instruments or contractual rights and obligations within the scope of other applicable accounting guidance.
2 
In scope revenue represents revenue subject to FASB ASC Topic 606, Revenue from Contracts with Customers.
3  
CoBiz operations are included in Funds Management and Other for the first quarter of 2019.


- 85 -


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

 
$
—

 
$
4,830

 
$
—

 
$
4,830

 
$
4,830

 
$
—

Customer hedging revenue
1,350

 
—

 
6,935

 
229

 
8,514

 
8,514

 
—

Retail brokerage revenue
—

 
—

 
4,398

 
(73
)
 
4,325

 
—

 
4,325

Insurance brokerage revenue
—

 
—

 
170

 
—

 
170

 
—

 
170

Investment banking revenue
1,765

 
—

 
3,482

 
—

 
5,247

 
1,410

 
3,837

Brokerage and trading revenue
3,115

 
—

 
19,815

 
156

 
23,086

 
14,754

 
8,332

TransFund EFT network revenue
18,397

 
1,009

 
(21
)
 
2

 
19,387

 
—

 
19,387

Merchant services revenue
1,995

 
14

 
—

 
—

 
2,009

 
—

 
2,009

Corporate card revenue
—

 
—

 
—

 
—

 
—

 
—

 
—

Transaction card revenue
20,392

 
1,023

 
(21
)
 
2

 
21,396

 
—

 
21,396

Personal trust revenue
—

 
—

 
35,822

 
1

 
35,823

 
—

 
35,823

Corporate trust revenue
—

 
—

 
5,741

 
—

 
5,741

 
—

 
5,741

Institutional trust & retirement plan services revenue
—

 
—

 
11,095

 
(1
)
 
11,094

 
—

 
11,094

Investment management services and other revenue
—

 
—

 
4,903

 
(47
)
 
4,856

 
—

 
4,856

Fiduciary and asset management revenue
—

 
—

 
57,561

 
(47
)
 
57,514

 
—

 
57,514

Commercial account service charge revenue
10,294

 
366

 
587

 
(3
)
 
11,244

 
—

 
11,244

Overdraft fee revenue
95

 
9,413

 
30

 
3

 
9,541

 
—

 
9,541

Check card revenue
—

 
5,254

 
—

 
—

 
5,254

 
—

 
5,254

Automated service charge and other deposit fee revenue
35

 
1,661

 
22

 
8

 
1,726

 
—

 
1,726

Deposit service charges and fees
10,424

 
16,694

 
639

 
8

 
27,765

 
—

 
27,765

Mortgage production revenue
—

 
7,250

 
—

 
—

 
7,250

 
7,250

 
—

Mortgage servicing revenue
—

 
16,748

 
—

 
(462
)
 
16,286

 
16,286

 
—

Mortgage banking revenue
—

 
23,998

 
—

 
(462
)
 
23,536

 
23,536

 
—

Other revenue
5,460

 
2,323

 
5,568

 
(451
)
 
12,900

 
8,799

 
4,101

Total fees and commissions revenue
$
39,391

 
$
44,038

 
$
83,562

 
$
(794
)
 
$
166,197

 
$
47,089

 
$
119,108


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


- 86 -


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

 
$
—

 
$
21,562

 
$
—

 
$
21,562

 
$
21,562

 
$
—

Customer hedging revenue
6,264

 
—

 
21,511

 
1,441

 
29,216

 
29,216

 
—

Retail brokerage revenue
—

 
—

 
13,751

 
(246
)
 
13,505

 
—

 
13,505

Insurance brokerage revenue
—

 
—

 
555

 
—

 
555

 
—

 
555

Investment banking revenue
5,729

 
—

 
9,655

 
—

 
15,384

 
4,772

 
10,612

Brokerage and trading revenue
11,993

 
—

 
67,034

 
1,195

 
80,222

 
55,550

 
24,672

TransFund EFT network revenue
54,647

 
3,005

 
(61
)
 
5

 
57,596

 
—

 
57,596

Merchant services revenue
5,720

 
45

 
—

 
—

 
5,765

 
—

 
5,765

Corporate card revenue
—

 
—

 
—

 
—

 
—

 
—

 
—

Transaction card revenue
60,367

 
3,050

 
(61
)
 
5

 
63,361

 
—

 
63,361

Personal trust revenue
—

 
—

 
76,481

 
(2
)
 
76,479

 
—

 
76,479

Corporate trust revenue
—

 
—

 
16,317

 
—

 
16,317

 
—

 
16,317

Institutional trust & retirement plan services revenue
—

 
—

 
33,584

 
3

 
33,587

 
—

 
33,587

Investment management services and other revenue
—

 
—

 
14,808

 
(153
)
 
14,655

 
—

 
14,655

Fiduciary and asset management revenue
—

 
—

 
141,190

 
(152
)
 
141,038

 
—

 
141,038

Commercial account service charge revenue
32,150

 
1,087

 
1,802

 
(3
)
 
35,036

 
—

 
35,036

Overdraft fee revenue
283

 
26,665

 
96

 
13

 
27,057

 
—

 
27,057

Check card revenue
—

 
15,515

 
—

 
—

 
15,515

 
—

 
15,515

Automated service charge and other deposit fee revenue
110

 
4,953

 
72

 
17

 
5,152

 
—

 
5,152

Deposit service charges and fees
32,543

 
48,220

 
1,970

 
27

 
82,760

 
—

 
82,760

Mortgage production revenue
—

 
26,617

 
—

 
—

 
26,617

 
26,617

 
—

Mortgage servicing revenue
—

 
50,677

 
—

 
(1,387
)
 
49,290

 
49,290

 
—

Mortgage banking revenue
—

 
77,294

 
—

 
(1,387
)
 
75,907

 
75,907

 
—

Other revenue
17,379

 
6,770

 
18,725

 
(3,093
)
 
39,781

 
27,552

 
12,229

Total fees and commissions revenue
$
122,282

 
$
135,334

 
$
228,858

 
$
(3,405
)
 
$
483,069

 
$
159,009

 
$
324,060

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


- 87 -


(12) Fair Value Measurements

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

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

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

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

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

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

Transfers between levels are recognized as of the end of the reporting period. There were no transfers in or out of quoted prices in active markets for identical instruments to significant other observable inputs or significant unobservable inputs during the three and nine months ended September 30, 2019 and 2018, respectively. Transfers between significant other observable inputs and significant unobservable inputs during the three and nine months ended September 30, 2019 and 2018 are included in the summary of changes in recurring fair values measured using unobservable inputs.

The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. Management has evaluated the methodologies employed by the third-party pricing services by comparing the price provided by the pricing service with other sources, including brokers' quotes, sales or purchases of similar instruments and discounted cash flows to establish a basis for reliance on the pricing service values. Significant differences between the pricing service provided value and other sources are discussed with the pricing service to understand the basis for their values. Based on all observable inputs, management may adjust prices obtained from third-party pricing services to more appropriately reflect the prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market. No significant adjustments were made to prices provided by third-party pricing services at September 30, 2019 or December 31, 2018.


- 88 -


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, 2019 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
$
63,334

 
$
—

 
$
63,334

 
$
—

Residential agency mortgage-backed securities
 
1,480,458

 
—

 
1,480,458

 
—

Municipal and other tax-exempt securities
 
44,105

 
—

 
44,105

 
—

Asset-backed securities
 
36,928

 
—

 
36,928

 
—

Other trading securities
 
50,387

 
—

 
50,387

 
—

Total trading securities
 
1,675,212

 
—

 
1,675,212

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
2,296

 
2,296

 
—

 
—

Municipal and other tax-exempt securities
 
1,848

 
—

 
1,848

 
—

Residential agency mortgage-backed securities
 
7,740,461

 
—

 
7,740,461

 
—

Residential non-agency mortgage-backed securities
 
44,803

 
—

 
44,803

 
—

Commercial agency mortgage-backed securities
 
3,234,671

 
—

 
3,234,671

 
—

Other debt securities
 
472

 
—

 
—

 
472

Total available for sale securities
 
11,024,551

 
2,296

 
11,021,783

 
472

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
552,536

 
552,536

 
—

 
—

Residential agency mortgage-backed securities
 
1,263,862

 
—

 
1,263,862

 
—

Total fair value option securities
 
1,816,398

 
552,536

 
1,263,862

 
—

Residential mortgage loans held for sale
 
282,487

 
—

 
268,919

 
13,568

Mortgage servicing rights1
 
193,661

 
—

 
—

 
193,661

Derivative contracts, net of cash collateral2
 
352,019

 
40,491

 
311,528

 
—

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
336,791

 
—

 
336,791

 
—

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


- 89 -


The fair value of financial assets and liabilities measured on a recurring basis was as follows as of December 31, 2018 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
$
63,765

 
$
—

 
$
63,765

 
$
—

Residential agency mortgage-backed securities
 
1,791,584

 
—

 
1,791,584

 
—

Municipal and other tax-exempt securities
 
34,507

 
—

 
34,507

 
—

Asset-backed securities
 
42,656

 
—

 
42,656

 
—

Other trading securities
 
24,411

 
—

 
24,411

 
—

Total trading securities
 
1,956,923

 
—

 
1,956,923

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
493

 
493

 
—

 
—

Municipal and other tax-exempt securities
 
2,864

 
—

 
2,864

 
—

Residential agency mortgage-backed securities
 
5,804,708

 
—

 
5,804,708

 
—

Residential non-agency mortgage-backed securities
 
59,736

 
—

 
59,736

 
—

Commercial agency mortgage-backed securities
 
2,953,889

 
—

 
2,953,889

 
—

Other debt securities
 
35,430

 
—

 
34,958

 
472

Total available for sale securities
 
8,857,120

 
493

 
8,856,155

 
472

Fair value option securities – Residential agency mortgage-backed securities
 
283,235

 
—

 
283,235

 
—

Residential mortgage loans held for sale
 
149,221

 
—

 
134,014

 
15,207

Mortgage servicing rights1
 
259,254

 
—

 
—

 
259,254

Derivative contracts, net of cash collateral2
 
320,929

 
44,074

 
276,855

 
—

Liabilities:
 


 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
362,306

 
—

 
362,306

 
—

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




- 90 -


Following is a description of the Company's valuation methodologies used for assets and liabilities measured on a recurring basis:
Securities
The fair values of trading, available for sale and fair value option securities are based on quoted prices for identical instruments in active markets, when available. If quoted prices for identical instruments are not available, fair values are based on significant other observable inputs such as quoted prices of comparable instruments or interest rates and credit spreads, yield curves, volatilities, prepayment speeds and loss severities. The Company has elected to carry all residential mortgage-backed securities guaranteed by U.S. government agencies held as economic hedges against changes in the fair value of mortgage servicing rights at fair value with changes in the fair value recognized in earnings.

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

Derivatives

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

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

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

Residential Mortgage Loans Held for Sale

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


- 91 -


The following represents the changes for the three and nine months ended September 30, 2019 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):

 
 
Available for sale - Other debt securities
 
Residential mortgage loans held for sale
Balance, June 30, 2019
 
$
472

 
$
16,073

Transfer to Level 3 from Level 21
 
—

 
261

Purchases
 
—

 
—

Proceeds from sales
 
—

 
(3,152
)
Redemptions and distributions
 
—

 
—

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

 
386

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

 
—

Balance, September 30, 2019
 
$
472

 
$
13,568

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

 
 
Available for sale - Other debt securities
 
Residential mortgage loans held for sale
Balance, December 31, 2018
 
$
472

 
$
15,207

Transfer to Level 3 from Level 21
 
—

 
2,150

Purchases
 
—

 
—

Proceeds from sales
 
—

 
(4,531
)
Redemptions and distributions
 
—

 
—

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

 
742

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

 
—

Balance, September 30, 2019
 
$
472

 
$
13,568


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


- 92 -


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

 
$
471

 
$
14,243

Transfer to Level 3 from Level 21
 
—

 
—

 
2,862

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

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

 
—

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

 
—

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

 
1

 
—

Balance, September 30, 2018
 
$
—

 
$
472

 
$
16,838

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

 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, December 31, 2017
 
$
4,802

 
$
472

 
$
12,299

Transfer to Level 3 from Level 21
 
—

 
—

 
5,603

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

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

 
—

Gain (loss) recognized in earnings
 
 
 
 
 
 
Mortgage banking revenue
 
—

 
—

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

 
—

 
—

Balance, September 30, 2018
 
$
—

 
$
472

 
$
16,838


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



- 93 -


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

 
Discounted cash flows
1 
Interest rate spread
 
7.46%-7.46% (7.46%)
3 
94.42%-94.42% (94.42%)
2 
Residential mortgage loans held for sale
 
13,568

 
Quoted prices of loans sold in securitization transactions, with a liquidity discount applied
 
Liquidity discount applied to the market value of mortgage loans qualifying for sale to U.S. government agencies.
 
96.36%
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
Represents fair value as a percentage of par value.
3 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding approximately 3 percent.

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

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

 
Quoted prices of loans sold in securitization transactions, with a liquidity discount applied
 
Liquidity discount applied to the market value of mortgage loans qualifying for sale to U.S. government agencies.
 
92.38%
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume
2 
Represents fair value as a percentage of par value.
3 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 3 percent.




- 94 -


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, 2019 for which the fair value was adjusted during the nine months ended September 30, 2019:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at September 30, 2019
 
Three Months Ended
Sept. 30, 2019
Recognized in:
 
Nine Months Ended
Sept. 30, 2019
Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Net losses (gains) and operating expenses of repossessed assets
 
Gross charge-offs against allowance for loan losses
 
Net losses (gains) and operating expenses of repossessed assets
Impaired loans
$
—

 
$
79

 
$
9,810

 
$
2,644

 
$
—

 
$
13,868

 
$
—

Real estate and other repossessed assets
—

 
5,044

 
936

 
—

 
(979
)
 
—

 
(532
)
 
The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at September 30, 2018 for which the fair value was adjusted during the nine months ended September 30, 2018:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at September 30, 2018
 
Three Months Ended
Sept. 30, 2018
Recognized in:
 
Nine Months Ended
Sept. 30, 2018
Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Net losses and operating expenses of repossessed assets
 
Gross charge-offs against allowance for loan losses
 
Net losses and operating expenses of repossessed assets
Impaired loans
$
—

 
$
1,065

 
$
24,428

 
$
9,086

 
$
—

 
$
16,279

 
$
—

Real estate and other repossessed assets
—

 
4,608

 
6,545

 
—

 
2,161

 
—

 
7,388



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.


- 95 -


A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2019 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
9,810

 
Discounted cash flows
 
Management knowledge of industry and non-real estate collateral including but not limited to recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs
 
8% - 76% (28%)1
Real estate and other repossessed assets
 
936

 
Appraised value, as adjusted
 
Marketability adjustments off appraised value2
 
75% - 89% (85%)
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, 2018 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
24,428

 
Discounted cash flows
 
Management knowledge of industry and non-real estate collateral including but not limited to recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs
 
41% - 84% (55%)1
Real estate and other repossessed assets
 
6,545

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

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


- 96 -


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, 2019 (dollars in thousands):
 
 
Carrying
Value
 
Estimated
Fair
Value
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash and due from banks
 
$
761,130

 
$
761,130

 
$
761,130

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
465,458

 
465,458

 
465,458

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
63,334

 
63,334

 
—

 
63,334

 
—

Residential agency mortgage-backed securities
 
1,480,458

 
1,480,458

 
—

 
1,480,458

 
—

Municipal and other tax-exempt securities
 
44,105

 
44,105

 
—

 
44,105

 
—

Asset-backed securities
 
36,928

 
36,928

 
—

 
36,928

 
—

Other trading securities
 
50,387

 
50,387

 
—

 
50,387

 
—

Total trading securities
 
1,675,212

 
1,675,212

 
—

 
1,675,212

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
104,418

 
107,647

 
—

 
107,647

 
—

Residential agency mortgage-backed securities
 
11,125

 
11,650

 
—

 
11,650

 
—

Other debt securities
 
188,681

 
204,724

 
—

 
7,702

 
197,022

Total investment securities
 
304,224

 
324,021

 
—

 
126,999

 
197,022

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
2,296

 
2,296

 
2,296

 
—

 
—

Municipal and other tax-exempt securities
 
1,848

 
1,848

 
—

 
1,848

 
—

Residential agency mortgage-backed securities
 
7,740,461

 
7,740,461

 
—

 
7,740,461

 
—

Residential non-agency mortgage-backed securities
 
44,803

 
44,803

 
—

 
44,803

 
—

Commercial agency mortgage-backed securities
 
3,234,671

 
3,234,671

 
—

 
3,234,671

 
—

Other debt securities
 
472

 
472

 
—

 
—

 
472

Total available for sale securities
 
11,024,551

 
11,024,551

 
2,296

 
11,021,783

 
472

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
552,536

 
552,536

 
552,536

 
—

 
—

Residential agency mortgage-backed securities
 
1,263,862

 
1,263,862

 
—

 
1,263,862

 
—

Total fair value option securities
 
1,816,398

 
1,816,398

 
552,536

 
1,263,862

 
—

Residential mortgage loans held for sale
 
282,487

 
282,487

 
—

 
268,919

 
13,568

Loans:
 
 

 
 

 
 
 
—

 
 
Commercial
 
14,424,625

 
14,397,846

 
—

 
—

 
14,397,846

Commercial real estate
 
4,626,057

 
4,626,804

 
—

 
—

 
4,626,804

Residential mortgage
 
2,117,303

 
2,132,158

 
—

 
—

 
2,132,158

Personal
 
1,117,382

 
1,108,984

 
—

 
—

 
1,108,984

Total loans
 
22,285,367

 
22,265,792

 
—

 
—

 
22,265,792

Allowance for loan losses
 
(204,432
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
22,080,935

 
22,265,792

 
—

 
—

 
22,265,792

Mortgage servicing rights
 
193,661

 
193,661

 
—

 
—

 
193,661

Derivative instruments with positive fair value, net of cash collateral
 
352,019

 
352,019

 
40,491

 
311,528

 
—

Deposits with no stated maturity
 
23,923,535

 
23,923,535

 
—

 
—

 
23,923,535

Time deposits
 
2,243,541

 
2,241,778

 
—

 
—

 
2,241,778

Other borrowed funds
 
10,235,385

 
10,193,602

 
—

 
—

 
10,193,602

Subordinated debentures
 
275,909

 
276,393

 
—

 
276,393

 
—

Derivative instruments with negative fair value, net of cash collateral
 
336,791

 
336,791

 
—

 
336,791

 
—



- 97 -


The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of December 31, 2018 (dollars in thousands):
 
 
Carrying
Value
 
Estimated
Fair
Value
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash and due from banks
 
$
741,749

 
$
741,749

 
$
741,749

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
401,675

 
401,675

 
401,675

 
—

 
—

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

 
63,765

 
—

 
63,765

 
—

Residential agency mortgage-backed securities
 
1,791,584

 
1,791,584

 
—

 
1,791,584

 
—

Municipal and other tax-exempt securities
 
34,507

 
34,507

 
—

 
34,507

 
—

Asset-backed securities
 
42,656

 
42,656

 
—

 
42,656

 
—

Other trading securities
 
24,411

 
24,411

 
—

 
24,411

 
—

Total trading securities
 
1,956,923

 
1,956,923

 
—

 
1,956,923

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
137,296

 
138,562

 
—

 
138,562

 
—

Residential agency mortgage-backed securities
 
12,612

 
12,770

 
—

 
12,770

 
—

Other debt securities
 
205,279

 
215,966

 
—

 
7,905

 
208,061

Total investment securities
 
355,187

 
367,298

 
—

 
159,237

 
208,061

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
493

 
493

 
493

 
—

 
—

Municipal and other tax-exempt securities
 
2,864

 
2,864

 
—

 
2,864

 
—

Residential agency mortgage-backed securities
 
5,804,708

 
5,804,708

 
—

 
5,804,708

 
—

Residential non-agency mortgage-backed securities
 
59,736

 
59,736

 
—

 
59,736

 
—

Commercial agency mortgage-backed securities
 
2,953,889

 
2,953,889

 
—

 
2,953,889

 
—

Other debt securities
 
35,430

 
35,430

 
—

 
34,958

 
472

Total available for sale securities
 
8,857,120

 
8,857,120

 
493

 
8,856,155

 
472

Fair value option securities – Residential agency mortgage-backed securities
 
283,235

 
283,235

 
—

 
283,235

 
—

Residential mortgage loans held for sale
 
149,221

 
149,221

 
—

 
134,014

 
15,207

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
13,636,078

 
13,526,162

 
—

 
—

 
13,526,162

Commercial real estate
 
4,764,813

 
4,713,747

 
—

 
—

 
4,713,747

Residential mortgage
 
2,230,033

 
2,213,951

 
—

 
—

 
2,213,951

Personal
 
1,025,806

 
1,024,368

 
—

 
—

 
1,024,368

Total loans
 
21,656,730

 
21,478,228

 
—

 
—

 
21,478,228

Allowance for loan losses
 
(207,457
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
21,449,273

 
21,478,228

 
—

 
—

 
21,478,228

Mortgage servicing rights
 
259,254

 
259,254

 
—

 
—

 
259,254

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

 
320,929

 
44,074

 
276,855

 
—

Deposits with no stated maturity
 
23,150,383

 
23,150,383

 
—

 
—

 
23,150,383

Time deposits
 
2,113,380

 
2,073,538

 
—

 
—

 
2,073,538

Other borrowed funds
 
7,142,801

 
7,071,953

 
—

 
—

 
7,071,953

Subordinated debentures
 
275,913

 
261,977

 
—

 
261,977

 
—

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

 
362,306

 
—

 
362,306

 
—



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



- 98 -


(13) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on September 30, 2019 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q. No events were identified requiring recognition in and/or disclosure in the consolidated financial statements.


- 99 -


Nine-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Nine Months Ended
 
 
September 30, 2019
 
September 30, 2018
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
524,603

 
$
9,879

 
2.52
%
 
$
1,468,904

 
$
19,163

 
1.74
%
Trading securities
 
1,806,438

 
48,945

 
3.66
%
 
1,395,871

 
38,312

 
3.72
%
Investment securities
 
326,489

 
10,917

 
4.46
%
 
406,395

 
11,961

 
3.93
%
Available for sale securities
 
9,695,550

 
184,409

 
2.60
%
 
8,176,037

 
142,387

 
2.30
%
Fair value option securities
 
1,019,182

 
23,448

 
3.10
%
 
527,039

 
12,627

 
3.11
%
Restricted equity securities
 
428,973

 
20,419

 
6.35
%
 
342,297

 
15,757

 
6.14
%
Residential mortgage loans held for sale
 
180,367

 
5,308

 
3.93
%
 
208,519

 
6,328

 
4.09
%
Loans
 
22,063,499

 
867,722

 
5.26
%
 
17,742,288

 
622,185

 
4.69
%
Allowance for loan losses
 
(204,430
)
 
 
 
 
 
(221,949
)
 
 
 
 
Loans, net of allowance
 
21,859,069

 
867,722

 
5.31
%
 
17,520,339

 
622,185

 
4.75
%
Total earning assets
 
35,840,671

 
1,171,047

 
4.40
%
 
30,045,401

 
868,720

 
3.85
%
Receivable on unsettled securities sales
 
1,470,217

 
 
 
 
 
794,434

 
 
 
 
Cash and other assets
 
4,069,361

 
 
 
 
 
2,935,660

 
 
 
 
Total assets
 
$
41,380,249

 
 
 
 
 
$
33,775,495

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
12,529,517

 
$
95,957

 
1.02
%
 
$
10,180,060

 
$
42,516

 
0.56
%
Savings
 
552,535

 
523

 
0.13
%
 
495,954

 
291

 
0.08
%
Time
 
2,204,517

 
31,037

 
1.88
%
 
2,128,925

 
20,910

 
1.31
%
Total interest-bearing deposits
 
15,286,569

 
127,517

 
1.12
%
 
12,804,939

 
63,717

 
0.67
%
Funds purchased and repurchase agreements
 
2,405,981

 
36,791

 
2.04
%
 
775,504

 
5,072

 
0.87
%
Other borrowings
 
7,450,707

 
143,804

 
2.58
%
 
6,194,418

 
88,788

 
1.92
%
Subordinated debentures
 
276,129

 
11,359

 
5.50
%
 
144,692

 
6,076

 
5.61
%
Total interest-bearing liabilities
 
25,419,386

 
319,471

 
1.68
%
 
19,919,553

 
163,653

 
1.10
%
Non-interest bearing demand deposits
 
9,876,418

 
 
 
 
 
9,233,837

 
 
 
 
Due on unsettled securities purchases
 
674,909

 
 
 
 
 
543,601

 
 
 
 
Other liabilities
 
789,256

 
 
 
 
 
542,790

 
 
 
 
Total equity
 
4,620,280

 
 
 
 
 
3,535,714

 
 
 
 
Total liabilities and equity
 
$
41,380,249

 
 
 
 
 
$
33,775,495

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
851,576

 
2.72
%
 
 
 
$
705,067

 
2.75
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
3.20
%
 
 
 
 
 
3.13
%
Less tax-equivalent adjustment
 
 
 
8,946

 
 
 
 
 
5,886

 
 
Net Interest Revenue
 
 
 
842,630

 
 
 
 
 
699,181

 
 
Provision for credit losses
 
 
 
25,000

 
 
 
 
 
(1,000
)
 
 
Other operating revenue
 
 
 
515,785

 
 
 
 
 
480,329

 
 
Other operating expense
 
 
 
843,586

 
 
 
 
 
743,523

 
 
Income before taxes
 
 
 
489,829

 
 
 
 
 
436,987

 
 
Federal and state income taxes
 
 
 
99,926

 
 
 
 
 
98,940

 
 
Net income
 
 
 
389,903

 
 
 
 
 
338,047

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
(503
)
 
 
 
 
 
857

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
390,406

 
 
 
 
 
$
337,190

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
5.47

 
 

 
 

 
$
5.15

 
 

Diluted
 
 

 
$
5.47

 
 

 
 

 
$
5.15

 
 

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

- 100 -


Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
September 30, 2019
 
June 30, 2019
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
500,823

 
$
3,050

 
2.42
%
 
$
535,491

 
$
3,432

 
2.57
%
Trading securities
 
1,696,568

 
14,546

 
3.49
%
 
1,757,335

 
15,609

 
3.59
%
Investment securities
 
308,090

 
3,434

 
4.46
%
 
328,482

 
3,621

 
4.41
%
Available for sale securities
 
10,747,439

 
67,640

 
2.60
%
 
9,435,668

 
59,888

 
2.63
%
Fair value option securities
 
1,553,879

 
10,708

 
2.79
%
 
898,772

 
7,503

 
3.34
%
Restricted equity securities
 
476,781

 
7,558

 
6.34
%
 
413,812

 
6,516

 
6.30
%
Residential mortgage loans held for sale
 
203,319

 
1,891

 
3.73
%
 
192,102

 
1,754

 
3.65
%
Loans
 
22,412,918

 
289,316

 
5.12
%
 
22,004,405

 
295,978

 
5.39
%
Allowance for loan losses
 
(201,714
)
 
 
 
 
 
(205,532
)
 
 
 
 
Loans, net of allowance
 
22,211,204

 
289,316

 
5.17
%
 
21,798,873

 
295,978

 
5.45
%
Total earning assets
 
37,698,103

 
398,143

 
4.25
%
 
35,360,535

 
394,301

 
4.51
%
Receivable on unsettled securities sales
 
1,742,794

 
 
 
 
 
1,437,462

 
 
 
 
Cash and other assets
 
4,139,451

 
 
 
 
 
4,046,780

 
 
 
 
Total assets
 
$
43,580,348

 
 
 
 
 
$
40,844,777

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
13,131,542

 
$
35,713

 
1.08
%
 
$
12,512,282

 
$
32,540

 
1.04
%
Savings
 
557,122

 
190

 
0.14
%
 
558,738

 
173

 
0.12
%
Time
 
2,251,800

 
11,014

 
1.94
%
 
2,207,391

 
10,470

 
1.90
%
Total interest-bearing deposits
 
15,940,464

 
46,917

 
1.17
%
 
15,278,411

 
43,183

 
1.13
%
Funds purchased and repurchase agreements
 
3,106,163

 
15,731

 
2.01
%
 
2,066,950

 
10,704

 
2.08
%
Other borrowings
 
8,125,023

 
49,650

 
2.42
%
 
7,175,617

 
47,700

 
2.67
%
Subordinated debentures
 
275,900

 
3,813

 
5.48
%
 
275,887

 
3,801

 
5.53
%
Total interest-bearing liabilities
 
27,447,550

 
116,111

 
1.68
%
 
24,796,865

 
105,388

 
1.70
%
Non-interest bearing demand deposits
 
9,759,710

 
 
 
 
 
9,883,965

 
 
 
 
Due on unsettled securities purchases
 
745,893

 
 
 
 
 
821,688

 
 
 
 
Other liabilities
 
847,195

 
 
 
 
 
744,216

 
 
 
 
Total equity
 
4,780,000

 
 
 
 
 
4,598,043

 
 
 
 
Total liabilities and equity
 
$
43,580,348

 
 
 
 
 
$
40,844,777

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
282,032

 
2.57
%
 
 
 
$
288,913

 
2.81
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
 
 
3.01
%
 
 
 
 
 
3.30
%
Less tax-equivalent adjustment
 
 
 
2,936

 
 
 
 
 
3,481

 
 
Net Interest Revenue
 
 
 
279,096

 
 
 
 
 
285,432

 
 
Provision for credit losses
 
 
 
12,000

 
 
 
 
 
5,000

 
 
Other operating revenue
 
 
 
186,450

 
 
 
 
 
172,065

 
 
Other operating expense
 
 
 
279,292

 
 
 
 
 
277,137

 
 
Income before taxes
 
 
 
174,254

 
 
 
 
 
175,360

 
 
Federal and state income taxes
 
 
 
32,396

 
 
 
 
 
37,580

 
 
Net income
 
 
 
141,858

 
 
 
 
 
137,780

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
(373
)
 
 
 
 
 
217

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
142,231

 
 
 
 
 
$
137,563

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
2.00

 
 

 
 

 
$
1.93

 
 

Diluted
 
 

 
$
2.00

 
 

 
 

 
$
1.93

 
 

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.

- 101 -


Three Months Ended
March 31, 2019
 
December 31, 2018
 
September 30, 2018
Average Balance
 
Revenue /Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
537,903

 
$
3,397

 
2.56
%
 
$
563,132

 
$
3,170

 
2.23
%
 
$
688,872

 
$
3,441

 
1.98
%
1,968,399

 
18,790

 
3.88
%
 
1,929,601

 
19,636

 
4.10
%
 
1,762,794

 
17,419

 
3.98
%
343,282

 
3,862

 
4.50
%
 
364,737

 
3,887

 
4.26
%
 
379,566

 
3,856

 
4.06
%
8,883,054

 
56,881

 
2.57
%
 
8,704,963

 
55,085

 
2.51
%
 
8,129,214

 
48,916

 
2.37
%
594,349

 
5,237

 
3.62
%
 
277,575

 
2,578

 
3.56
%
 
469,398

 
3,881

 
3.25
%
395,432

 
6,345

 
6.42
%
 
362,729

 
5,798

 
6.39
%
 
328,842

 
5,232

 
6.36
%
145,040

 
1,663

 
4.58
%
 
179,553

 
1,795

 
4.00
%
 
207,488

 
2,151

 
4.27
%
21,766,065

 
282,428

 
5.26
%
 
21,579,331

 
276,711

 
5.09
%
 
18,203,785

 
220,245

 
4.80
%
(206,092
)
 
 
 
 
 
(209,613
)
 
 
 
 
 
(214,160
)
 
 
 
 
21,559,973

 
282,428

 
5.31
%
 
21,369,718

 
276,711

 
5.14
%
 
17,989,625

 
220,245

 
4.86
%
34,427,432

 
378,603

 
4.46
%
 
33,752,008

 
368,660

 
4.33
%
 
29,955,799

 
305,141

 
4.04
%
1,224,700

 
 
 
 
 
799,548

 
 
 
 
 
768,785

 
 
 
 
4,020,549

 
 
 
 
 
3,834,187

 
 
 
 
 
2,971,233

 
 
 
 
$
39,672,681

 
 
 
 
 
$
38,385,743

 
 
 
 
 
$
33,695,817

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
11,931,539

 
$
27,704

 
0.94
%
 
$
11,773,651

 
$
23,343

 
0.79
%
 
$
10,010,031

 
$
17,029

 
0.67
%
541,575

 
160

 
0.12
%
 
526,275

 
148

 
0.11
%
 
503,821

 
108

 
0.09
%
2,153,277

 
9,553

 
1.80
%
 
2,146,786

 
8,309

 
1.54
%
 
2,097,441

 
7,398

 
1.40
%
14,626,391

 
37,417

 
1.04
%
 
14,446,712

 
31,800

 
0.87
%
 
12,611,293

 
24,535

 
0.77
%
2,033,036

 
10,356

 
2.07
%
 
1,205,568

 
4,135

 
1.36
%
 
1,193,583

 
3,768

 
1.25
%
7,040,279

 
46,454

 
2.68
%
 
6,361,141

 
40,220

 
2.51
%
 
5,765,440

 
32,036

 
2.20
%
275,882

 
3,745

 
5.51
%
 
276,378

 
3,752

 
5.38
%
 
144,702

 
2,025

 
5.55
%
23,975,588

 
97,972

 
1.66
%
 
22,289,799

 
79,907

 
1.42
%
 
19,715,018

 
62,364

 
1.25
%
9,988,088

 
 
 
 
 
10,648,683

 
 
 
 
 
9,325,002

 
 
 
 
453,937

 
 
 
 
 
493,887

 
 
 
 
 
544,263

 
 
 
 
775,574

 
 
 
 
 
610,286

 
 
 
 
 
496,634

 
 
 
 
4,479,494

 
 
 
 
 
4,343,088

 
 
 
 
 
3,614,900

 
 
 
 
$
39,672,681

 
 
 
 
 
$
38,385,743

 
 
 
 
 
$
33,695,817

 
 
 
 
 
 
$
280,631

 
2.80
%
 
 
 
$
288,753

 
2.91
%
 
 
 
$
242,777

 
2.79
%
 
 
 
 
3.30
%
 
 
 
 
 
3.40
%
 
 
 
 
 
3.21
%
 
 
2,529

 
 
 
 
 
3,067

 
 
 
 
 
1,894

 
 
 
 
278,102

 
 
 
 
 
285,686

 
 
 
 
 
240,883

 
 
 
 
8,000

 
 
 
 
 
9,000

 
 
 
 
 
4,000

 
 
 
 
157,270

 
 
 
 
 
136,455

 
 
 
 
 
167,941

 
 
 
 
287,157

 
 
 
 
 
284,643

 
 
 
 
 
252,617

 
 
 
 
140,215

 
 
 
 
 
128,498

 
 
 
 
 
152,207

 
 
 
 
29,950

 
 
 
 
 
20,121

 
 
 
 
 
34,662

 
 
 
 
110,265

 
 
 
 
 
108,377

 
 
 
 
 
117,545

 
 
 
 
(347
)
 
 
 
 
 
(79
)
 
 
 
 
 
289

 
 
 
 
$
110,612

 
 
 
 
 
$
108,456

 
 
 
 
 
$
117,256

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
1.54

 
 

 
 

 
$
1.50

 
 

 
 

 
$
1.79

 
 

 

 
$
1.54

 
 

 
 

 
$
1.50

 
 

 
 

 
$
1.79

 
 




- 102 -


Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
Sept. 30, 2019
 
June 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sept. 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
395,207

 
$
390,820

 
$
376,074

 
$
365,592

 
$
303,247

Interest expense
 
116,111

 
105,388

 
97,972

 
79,906

 
62,364

Net interest revenue
 
279,096

 
285,432

 
278,102

 
285,686

 
240,883

Provision for credit losses
 
12,000

 
5,000

 
8,000

 
9,000

 
4,000

Net interest revenue after provision for credit losses
 
267,096

 
280,432

 
270,102

 
276,686

 
236,883

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
43,840

 
40,526

 
31,617

 
28,101

 
23,086

Transaction card revenue
 
22,015

 
21,915

 
20,738

 
20,664

 
21,396

Fiduciary and asset management revenue
 
43,621

 
45,025

 
43,358

 
43,665

 
57,514

Deposit service charges and fees
 
28,837

 
28,074

 
28,243

 
29,393

 
27,765

Mortgage banking revenue
 
30,180

 
28,131

 
23,834

 
21,880

 
23,536

Other revenue
 
17,626

 
12,437

 
12,762

 
16,404

 
12,900

Total fees and commissions
 
186,119

 
176,108

 
160,552

 
160,107

 
166,197

Other gains (losses), net
 
4,544

 
3,480

 
2,976

 
(8,305
)
 
2,754

Gain (loss) on derivatives, net
 
3,778

 
11,150

 
4,667

 
11,167

 
(2,847
)
Gain (loss) on fair value option securities, net
 
4,597

 
9,853

 
9,665

 
(282
)
 
(4,385
)
Change in fair value of mortgage servicing rights
 
(12,593
)
 
(29,555
)
 
(20,666
)
 
(24,233
)
 
5,972

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

 
1,029

 
76

 
(1,999
)
 
250

Total other operating revenue
 
186,450

 
172,065

 
157,270

 
136,455

 
167,941

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
162,573

 
160,342

 
169,228

 
160,706

 
143,531

Business promotion
 
8,859

 
10,142

 
7,874

 
9,207

 
7,620

Charitable contributions to BOKF Foundation
 
—

 
1,000

 
—

 
2,846

 
—

Professional fees and services
 
12,312

 
13,002

 
16,139

 
20,712

 
13,209

Net occupancy and equipment
 
27,558

 
26,880

 
29,521

 
27,780

 
23,394

Insurance
 
4,220

 
6,454

 
4,839

 
4,248

 
6,232

Data processing and communications
 
31,915

 
29,735

 
31,449

 
27,575

 
31,665

Printing, postage and supplies
 
3,825

 
4,107

 
4,885

 
5,232

 
3,837

Net losses (gains) and operating expenses of repossessed assets
 
1,728

 
580

 
1,996

 
2,581

 
4,044

Amortization of intangible assets
 
5,064

 
5,138

 
5,191

 
5,331

 
1,603

Mortgage banking costs
 
14,975

 
11,545

 
9,906

 
11,518

 
11,741

Other expense
 
6,263

 
8,212

 
6,129

 
6,907

 
5,741

Total other operating expense
 
279,292

 
277,137

 
287,157

 
284,643

 
252,617

Net income before taxes
 
174,254

 
175,360

 
140,215

 
128,498

 
152,207

Federal and state income taxes
 
32,396

 
37,580

 
29,950

 
20,121

 
34,662

Net income
 
141,858

 
137,780

 
110,265

 
108,377

 
117,545

Net income (loss) attributable to non-controlling interests
 
(373
)
 
217

 
(347
)
 
(79
)
 
289

Net income attributable to BOK Financial Corporation shareholders
 
$
142,231

 
$
137,563

 
$
110,612

 
$
108,456

 
$
117,256

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$2.00
 
$1.93
 
$1.54
 
$1.50
 
$1.79
Diluted
 
$2.00
 
$1.93
 
$1.54
 
$1.50
 
$1.79
Average shares used in computation:
 
 
 
 
 
 
 
 
 
 
Basic
 
70,596,307

 
70,887,063

 
71,387,070

 
71,808,029

 
64,901,095

Diluted
 
70,609,924

 
70,902,033

 
71,404,388

 
71,833,334

 
64,934,351




- 103 -


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, 2019.

 
Period
 
Total Number of Shares Purchased2
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans
July 1 to July 31, 2019
 
—

 
$
—

 
—

 
4,750,000

August 1 to August 31, 2019
 
311,713

 
$
77.23

 
311,713

 
4,438,287

September 1 to September 30, 2019
 
25,000

 
$
74.46

 
25,000

 
4,413,287

Total
 
336,713

 
 

 
336,713

 
 

1 
On April 30, 2019, the Company's board of directors authorized the Company to repurchase up to five million shares of the Company's common stock. As of September 30, 2019, the Company had repurchased 586,713 shares under this plan. Future repurchases of the Company's common stock will vary based on market conditions, regulatory limitations and other factors.
2 
The Company may repurchase mature shares from employees to cover the exercise price and taxes in connection with employee equity compensation.
Item 6. Exhibits

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

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

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

101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to Consolidated Financial Statements. The XBRL instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.


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



- 104 -


Signatures


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


BOK FINANCIAL CORPORATION
(Registrant)



Date:        October 30, 2019                                                                  



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

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


- 105 -