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BOKF BOK Financial

Filed: 27 Apr 18, 4:39pm


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

FORM 10-Q
(Mark One) 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 65,459,505 shares of common stock ($.00006 par value) as of March 31, 2018.





BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2018

Index

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




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

BOK Financial Corporation (“the Company”) reported net income of $105.6 million or $1.61 per diluted share for the first quarter of 2018, compared to $88.4 million or $1.35 per diluted share for the first quarter of 2017 and $72.5 million or $1.11 per diluted share for the fourth quarter of 2017. Lower federal corporate income tax rates decreased income tax expense for the first quarter of 2018 by approximately $13.8 million. Accounting for the Tax Cuts and Jobs Act increased income tax expense for the fourth quarter of 2017 by $11.7 million.


Highlights of the first quarter of 2018 included:
Net interest revenue totaled $219.7 million, up from $201.2 million in the first quarter of 2017 and $216.9 million in the fourth quarter of 2017. The increase in net interest revenue over the prior year was driven by both improving yields and growth in average earning assets. Net interest margin was 2.99 percent for the first quarter of 2018. Net interest margin was 2.81 percent for the first quarter of 2017 and 2.97 percent for the fourth quarter of 2017. Average earning assets were $29.9 billion for the first quarter of 2018 compared to $29.6 billion for the first quarter of 2017.
Fees and commissions revenue totaled $159.0 million. Adoption of the new revenue recognition accounting standard in the first quarter of 2018 resulted in $9.5 million of interchange fees we pay to issuing banks being netted against transaction card revenue. Previously these fees were included in data processing and communications expense. Excluding this impact, fees and commissions revenue increased $3.8 million over the first quarter of 2017. Growth in fiduciary and asset management revenue and transaction card revenue was partially offset by lower brokerage and trading revenue. Fees and commissions revenue was largely unchanged compared to the fourth quarter of 2017. Increased mortgage banking and transaction card revenues were offset by decreased brokerage and trading revenue.
Other operating expense totaled $244.4 million, an $8.9 million or 4 percent increase over the first quarter of 2017 on a comparable basis. Personnel expense increased $3.5 million, primarily due to incentive compensation expense and standard annual merit increases. Non-personnel expense increased $5.4 million due largely to a write-down of certain repossessed oil and gas properties. Operating expense decreased $10.0 million compared to the fourth quarter of 2017 on a comparable basis. Personnel expense decreased $5.4 million, primarily due to decreased incentive compensation expense. Non-personnel expense decreased $4.7 million. Professional fees and services expense and mortgage banking expense were lower in the first quarter.
Income tax expense was $30.9 million or 22.7 percent of net income before taxes for the first quarter of 2018 compared to $38.1 million or 30.1 percent for the first quarter of 2017 and $54.3 million or 42.9 percent for the fourth quarter of 2017. Beginning January 1, 2018, the Tax Cuts and Jobs Act ("the Act") decreased the corporate income tax rate from 35% to 21%. Accounting for the Act required us to revalue our deferred tax assets and liabilities in 2017. We anticipate our effective tax rate to be between 22 percent and 23 percent for 2018.
The Company recorded a $5.0 million negative provision for credit losses in the first quarter of 2018, due to improved credit metric trends. A $7.0 million negative provision for credit losses was recorded in the fourth quarter of 2017. The company had net charge-offs of $1.3 million or 0.03 percent of average loans on an annualized basis in the first quarter of 2018 compared to net charge-offs of $11.7 million or 0.27 percent of average loans on an annualized basis for the fourth quarter of 2017.
The combined allowance for credit losses totaled $228 million or 1.32 percent of outstanding loans at March 31, 2018 compared to $234 million or 1.37 percent of outstanding loans at December 31, 2017.
Nonperforming assets that are not guaranteed by U.S. government agencies totaled $195 million or 1.13 percent of outstanding loans and repossessed assets at March 31, 2018 and $207 million or 1.22 percent of outstanding loans and repossessed assets at December 31, 2017. In addition, potential problem loans decreased $19 million to $222 million at March 31, 2018.
Average loan balances grew by $80 million over the previous quarter, primarily due to growth in commercial loan balances. Period-end outstanding loan balances totaled $17.3 billion at March 31, 2018, a $184 million increase over December 31, 2017.

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Average deposits were largely unchanged compared to the previous quarter. Average demand deposit balances decreased $266 million, largely offset by a $202 million increase in interest-bearing transaction deposit balances. Period-end deposits were $22.2 billion at March 31, 2018, a $144 million increase over December 31, 2017.
The common equity Tier 1 capital ratio at March 31, 2018 was 12.06 percent. Other regulatory capital ratios were Tier 1 capital ratio, 12.06 percent, total capital ratio, 13.49 percent, and leverage ratio, 9.40 percent. At December 31, 2017, the common equity Tier 1 capital ratio was 12.05 percent, the Tier 1 capital ratio was 12.05 percent, total capital ratio was 13.54 percent, and leverage ratio was 9.31 percent.
The company paid a regular cash dividend of $29.3 million or $0.45 per common share during the first quarter of 2018. On April 24, 2018, the board of directors approved a quarterly cash dividend of $0.45 per common share payable on or about May 25, 2018 to shareholders of record as of May 11, 2018.
The company repurchased 82,583 common shares at an average price of $91.83 per share during the first quarter of 2018. The company repurchased 80,000 common shares at an average price of $92.54 per share during the fourth quarter of 2017.

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Results of Operations
Net Interest Revenue and Net Interest Margin

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

Net interest revenue totaled $219.7 million for the first quarter of 2018, up from $201.2 million in the first quarter of 2017 and $216.9 million in the fourth quarter of 2017. Net interest margin was 2.99 percent for the first quarter of 2018, 2.81 percent for the first quarter of 2017 and 2.97 percent for the fourth quarter of 2017. Net interest margin was 3 basis points lower in the first quarter of 2018 due to the impact of lower effective tax rates from the implementation of the Tax Cut and Jobs Act on the tax-equivalent yield of our tax-exempt loans and securities.

Tax-equivalent net interest revenue increased $16.1 million over the first quarter of 2017. Table 1 shows the effect on net interest revenue from changes in average balances and interest rates for various types of earning assets and interest-bearing liabilities. Changes in interest rates and yields increased net interest revenue by $13.2 million. The benefit of an increase in short-term interest rates on the floating-rate earning assets was partially offset by higher borrowing costs. Tax-equivalent net interest revenue increased $2.9 million due to growth in average assets. Growth in the average balances of trading securities, fair value option securities and loans was partially offset by decreases in available for sale securities and investment securities.

The tax-equivalent yield on earning assets was 3.61 percent, up 46 basis points over the first quarter of 2017, primarily due to increases in short-term interest rates resulting from three 25 basis point increases in the federal funds rate by the Federal Reserve. Loan yields increased 57 basis points to 4.45 percent. The yield on interest-bearing cash and cash equivalents increased 75 basis points. The available for sale securities portfolio yield was up 18 basis points to 2.23 percent. The yield on the fair value option securities portfolio increased 68 basis points primarily related to a change in the mix of securities and an increase in average rates. Funding costs were up 41 basis points over the first quarter of 2017. The cost of interest-bearing deposits increased 22 basis points and the cost of other borrowed funds increased 74 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 31 basis points for the first quarter of 2018, up 13 basis points over the first quarter of 2017.

Average earning assets for the first quarter of 2018 increased $277 million or 1 percent over the first quarter of 2017. Average loans, net of allowance for loan losses, increased $146 million, due primarily to growth in commercial loans partially offset by lower residential mortgage loan balances. The average balance of trading securities increased $354 million primarily due to expansion of U.S. agency residential mortgage-backed securities trading activities. Fair value option securities held as an economic hedge of our mortgage servicing rights increased $210 million. Available for sale securities decreased $330 million. Investment securities balances decreased $90 million.

Average deposits decreased $243 million compared to the first quarter of 2017. Interest-bearing transaction account balances decreased $223 million. Time deposit balances decreased $108 million. Demand deposit balances increased $50 million and savings account balances increased $39 million. Average borrowed funds increased $542 million over the first quarter of 2017, primarily due to the net impact of increased borrowings from the Federal Home Loan Banks and lower average repurchase agreement balances.

Net interest margin increased 2 basis points over the fourth quarter of 2017. The yield on average earning assets increased 12 basis points. The loan portfolio yield increased 16 basis points. The yield on the available for sale securities portfolio increased 2 basis points. The yield on interest-bearing cash and cash equivalents increased 30 basis points. Funding costs were 0.93 percent, up 14 basis points over the prior quarter. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 4 basis points over the prior quarter.
Average earning assets increased $120 million compared to the fourth quarter of 2017. Trading securities balances increased $373 million. Average interest-bearing cash and cash equivalents balances were up $83 million. Average loan balances grew by $80 million. Available for sale securities decreased $199 million and fair value option securities held as an economic hedge of our mortgage servicing rights decreased $166 million.

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Average deposits decreased $34 million compared to the previous quarter. Demand deposit balances decreased $266 million, partially offset by a $202 million increase in interest-bearing transaction account balances. Time deposit and saving account balances also grew over the prior quarter. The average balance of borrowed funds increased $161 million over the fourth quarter of 2017, primarily due to increased borrowings from the Federal Home Loan Banks and funds purchased balances.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately 81% 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. For the remainder of 2018, we expect low-to-mid single digit expansion in net interest margin for each 25 basis point increase in the federal funds rate.

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.

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Table 1 -- Volume/Rate Analysis
(In thousands)
  Three Months Ended
March 31, 2018 / 2017
    
Change Due To1
  Change Volume Yield/Rate
Tax-equivalent interest revenue:      
Interest-bearing cash and cash equivalents $3,738
 $(134) $3,872
Trading securities 2,440
 3,327
 (887)
Investment securities:      
Taxable securities (57) 71
 (128)
Tax-exempt securities (685) (558) (127)
Total investment securities (742) (487) (255)
Available for sale securities:      
Taxable securities 2,888
 (1,302) 4,190
Tax-exempt securities (535) (330) (205)
Total available for sale securities 2,353
 (1,632) 3,985
Fair value option securities 2,439
 1,529
 910
Restricted equity securities 808
 565
 243
Residential mortgage loans held for sale 8
 (183) 191
Loans 25,555
 1,082
 24,473
Total tax-equivalent interest revenue 36,599
 4,067
 32,532
Interest expense:      
Transaction deposits 6,280
 (246) 6,526
Savings deposits 1
 10
 (9)
Time deposits 584
 (312) 896
Funds purchased 251
 105
 146
Repurchase agreements 175
 (34) 209
Other borrowings 13,194
 1,645
 11,549
Subordinated debentures (22) 2
 (24)
Total interest expense 20,463
 1,170
 19,293
Tax-equivalent net interest revenue 16,136
 2,897
 13,239
Change in tax-equivalent adjustment (2,418)    
Net interest revenue $18,554
    
1 
Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

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Other Operating Revenue

Other operating revenue was $156.0 million for the first quarter of 2018, a $5.1 million decrease compared to the first quarter of 2017 and a $1.3 million decrease compared to the fourth quarter of 2017. Fees and commissions revenue increased $3.8 million compared to the first quarter of 2017 and was very consistent compared to the prior quarter. 

Table 2Other Operating Revenue 
(In thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec 31, 2017 Increase (Decrease) % Increase (Decrease)
  2018 2017     
Brokerage and trading revenue $30,648
 $33,623
 $(2,975) (9)% $33,045
 $(2,397) (7)%
Transaction card revenue1
 20,990
 18,177
 2,813
 15 % 20,028
 962
 5 %
Fiduciary and asset management revenue 41,832
 38,631
 3,201
 8 % 41,767
 65
  %
Deposit service charges and fees 27,161
 27,777
 (616) (2)% 27,685
 (524) (2)%
Mortgage banking revenue 26,025
 25,191
 834
 3 % 24,362
 1,663
 7 %
Other revenue 12,330
 11,752
 578
 5 % 11,762
 568
 5 %
Total fees and commissions revenue 158,986
 155,151

3,835
 2 % 158,649

337
  %
Other gains (losses), net (664) 3,627
 (4,291) N/A
 552
 (1,216) N/A
Loss on derivatives, net (5,685) (450) (5,235) N/A
 (3,045) (2,640) N/A
Loss on fair value option securities, net (17,564) (1,140) (16,424) N/A
 (4,238) (13,326) N/A
Change in fair value of mortgage servicing rights 21,206
 1,856
 19,350
 N/A
 5,898
 15,308
 N/A
Gain (loss) on available for sale securities, net (290) 2,049
 (2,339) N/A
 (488) 198
 N/A
Total other operating revenue $155,989
 $161,093
 $(5,104) (3)% $157,328
 $(1,339) (1)%
               
Non-GAAP Reconciliation:1
              
Transaction card revenue on income statement $20,990
 $27,380
 N/A
 N/A
 $29,536
 N/A
 N/A
Netting adjustment 
 (9,203) N/A
 N/A
 (9,508) N/A
 N/A
Transaction card revenue after netting adjustment $20,990
 $18,177
 2,813
 15 % $20,028
 962
 5 %
1 
Non-GAAP measure to net interchange charges from prior quarters between transaction card revenue and data processing and communications expense. This measure has no effect on net income or earnings per share.

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

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 42 percent of total revenue for the first quarter of 2018, excluding provision for credit losses and gains and losses on other assets, securities and derivatives and the change in the fair value of mortgage servicing rights. We believe that a variety of fee revenue sources provides an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors such as rising interest rates resulting in growth in net interest revenue or fiduciary and asset management revenue, may also decrease mortgage production volumes. We expect growth in other operating revenue to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

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Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage and investment banking, decreased $3.0 million or 9 percent compared to the first quarter of 2017, primarily due to customer reaction to rising interest rates along with changes in regulation.

Revenue earned from retail brokerage transactions decreased $2.1 million or 31 percent compared to the first quarter of 2017 to $4.8 million. Retail brokerage revenue includes fees and commissions earned on sales of fixed income securities, annuities, mutual funds and other financial instruments to retail customers. Revenue is primarily based on the volume of customer transactions and applicable commission rate for each product type. The implementation of the new Department of Labor ("DOL") fiduciary rule in the second quarter of 2017 has negatively impacted retail brokerage revenue. New regulation issued by the DOL amended the definition of investment advice under the Employee Retirement Income Security Act ("ERISA"). The new rule is designed to provide better protection to plans, participants, beneficiaries and individual retirement account ("IRA") owners against conflicts of interest, imprudence and disloyalty.

Trading revenue includes net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers and related derivative instruments. Trading revenue was $10.4 million for the first quarter of 2018, a $650 thousand or 6 percent decrease compared to the first quarter of 2017

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 $10.9 million for the first quarter of 2018, a $731 thousand or 6 percent decrease compared to the first quarter of 2017 .

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $4.6 million for the first quarter of 2018, a $511 thousand or 13 percent increase over the first quarter of 2017. Investment banking revenue is primarily related to the timing and volume of completed transactions.

Brokerage and trading revenue decreased $2.4 million compared to the fourth quarter of 2017, largely driven by a decrease in investment banking revenue. Many municipal and public school district customers completed debt offerings in the fourth quarter in advance of tax law changes, which prohibit pre-funding of debt issuance.

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served. Transaction card revenue increased $2.8 million or 15 percent over the first quarter of 2017 primarily due to a $1.4 million early termination penalty in the first quarter of 2018. Excluding this termination penalty, TransFund electronic funds transfer ("EFT") network revenue increased $1.4 million or 9 percent over the first quarter of 2017.

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 80 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships.
 
Fiduciary and asset management revenue grew by $3.2 million or 8 percent over the first quarter of 2017, primarily due to growth in assets under management, improved pricing discipline and decreased fee waivers. Fiduciary and asset management revenue was consistent between the first quarter of 2018 and the fourth quarter of 2017 at $41.8 million.


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

Table 3 -- Assets Under Management or Administration
 Three Months Ended
March 31,
 2018 2017
 Balance 
Revenue1
 
Margin2
 Balance 
Revenue1
 
Margin2
Managed fiduciary assets:           
Personal$7,577,717
 $22,632
 1.19% $7,371,857
 $20,111
 1.09%
Institutional13,322,472
 5,469
 0.16% 12,444,816
 5,295
 0.17%
Total managed fiduciary assets20,900,189
 28,101
 0.54% 19,816,673
 25,406
 0.51%
            
Non-managed assets:           
Fiduciary25,748,101
 12,997
 0.20% 25,176,247
 12,562
 0.20%
Non-fiduciary16,321,458
 734
 0.02% 16,352,841
 663
 0.02%
Safekeeping and brokerage assets under administration15,909,241
 
 % 16,073,195
 
 %
Total non-managed assets57,978,800
 13,731
 0.09% 57,602,283
 13,225
 0.09%
            
Total assets under management or administration$78,878,989
 $41,832
 0.21% $77,418,956
 $38,631
 0.20%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Annualized revenue divided by period-end balance.

A summary of changes in assets under management or administration for the three months ended March 31, 2018 and 2017 follows:

Table 4 -- Changes in Assets Under Management or Administration
  Three Months Ended
March 31,
  2018 2017
Beginning balance $81,827,797
 $75,407,863
Net inflows (outflows) (3,434,649) (357,986)
Net change in fair value 485,841
 2,369,079
Ending balance $78,878,989
 $77,418,956

Deposit service charges and fees were $27.2 million for the first quarter of 2018, a decrease of $616 thousand or 2 percent compared to the first quarter of 2017. Commercial account service charge revenue totaled $11.9 million, an increase of $337 thousand or 3 percent. Overdraft fees were $8.6 million, a $1.1 million or 10.9 percent decrease compared to the first quarter of 2017. Service charges on deposit accounts with a standard monthly fee were $1.7 million, a decrease of $75 thousand or 4 percent. Deposit service charges and fees decreased $524 thousand compared to the prior quarter.

Mortgage banking revenue increased $834 thousand or 3 percent compared to the first quarter of 2017. Mortgage production revenue increased $909 thousand. Internal changes to better manage our loan production pipeline, improved values of originated servicing rights and an increase in delivery through the retail channel resulted in an increase of 18 basis points in gain on sale margin. Mortgage loan production volumes decreased $34 million. Production volumes decreased compared to the prior year as average primary mortgage interest rates were up 11 basis points over the first quarter of 2017. Mortgage servicing revenue was relatively consistent compared to the first quarter of 2017. The outstanding principal balance of mortgage loans serviced for others totaled $22.0 billion, consistent with the first quarter of 2017.
Mortgage banking revenue increased $1.7 million compared to the fourth quarter of 2017. Revenue from mortgage loan production increased $1.7 million due to a 21 basis point increase in gain on sale margin and an increase in production volume.


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Table 5 – Mortgage Banking Revenue 
(In thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2017 Increase (Decrease) % Increase (Decrease)
  2018 2017    
Mortgage production revenue $9,452
 $8,543
 $909
 11 % $7,786
 $1,666
 21 %
               
Mortgage loans funded for sale $664,958
 $711,019
 

 

 $840,080
    
Add: Current period end outstanding commitments 298,318
 381,732
     222,919
    
Less: Prior period end outstanding commitments 222,919
 318,359
     334,337
    
Total mortgage production volume $740,357
 $774,392
 $(34,035) (4)% $728,662
 $11,695
 2 %
               
Mortgage loan refinances to mortgage loans funded for sale 42% 44% (200) bps   47% (500) bps  
Gains on sale margin 1.28% 1.10% 18 bps   1.07% 21 bps  
Primary mortgage interest rates:              
Average 4.28% 4.17% 11 bps   3.92% 36 bps  
Period end 4.44% 4.14% 30 bps   3.99% 45 bps  
               
Mortgage servicing revenue $16,573
 $16,648
 $(75)  % $16,576
 $(3)  %
Average outstanding principal balance of mortgage loans serviced for others 22,027,726
 22,006,295
 21,431
  % 22,054,877
 (27,151)  %
               
Average mortgage servicing revenue rates 0.31% 0.31% 
   0.30% 1 bp  
1 
Actual interest earned on fair value option securities less internal transfer-priced cost of funds.

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

Net gains on other assets, securities and derivatives

Other net losses totaled $664 thousand in the first quarter of 2018 compared to net gains of $3.6 million in the first quarter of 2017. The first quarter of 2017 included the sale of certain merchant banking investments. Other net gains totaled $552 thousand in the fourth quarter of 2017.

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 net economic cost of the changes in fair value of mortgage servicing rights and related economic hedges was $256 thousand in the first quarter of 2018, including a $21.2 million increase in the fair value of mortgage servicing rights, offset by a $23.3 million decrease in the fair value of securities and derivative contracts held as an economic hedge and $1.8 million of related net interest revenue.

The net economic benefit of changes in the fair value of mortgage servicing rights and related economic hedges was $1.5 million for the first quarter of 2017. The fair value of mortgage servicing rights increased $1.9 million. The fair value of securities and interest rate derivative contracts held as an economic hedge decreased $1.7 million. Net interest earned on securities held as an economic hedge was $1.3 million.
The net economic benefit of changes in the fair value of mortgage servicing rights and related economic hedges was $1.3 million for the fourth quarter of 2017. The fair value of mortgage servicing rights increased by $5.9 million. The fair value of securities and interest rate derivative contracts held as an economic hedge decreased by $7.3 million.


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Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
  Three Months Ended
  Mar. 31, 2018 Dec. 31, 2017 Mar. 31, 2017
Loss on mortgage hedge derivative contracts, net $(5,698) $(3,057) $(528)
Loss on fair value option securities, net (17,564) (4,238) (1,140)
Loss on economic hedge of mortgage servicing rights, net (23,262) (7,295) (1,668)
Gain on change in fair value of mortgage servicing rights 21,206
 5,898
 1,856
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue (2,056) (1,397) 188
Net interest revenue on fair value option securities1
 1,800
 2,656
 1,271
Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges $(256) $1,259
 $1,459
1 Actual interest earned on fair value option securities less internal transfer-priced cost of funds.

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Other Operating Expense

Other operating expense for the first quarter of 2018 totaled $244.4 million, an increase of $8.9 million or 4 percent compared to the first quarter of 2017. Personnel expense increased $3.5 million or 3 percent. Non-personnel expense increased $5.4 million or 5 percent compared to the prior year.

Other operating expense decreased $10.0 million compared to the previous quarter. Personnel expense decreased $5.4 million or 4 percent and non-personnel expense decreased $4.7 million or 4 percent.

Table 7 – Other Operating Expense
(In thousands)
  Three Months Ended
March 31,
 Increase (Decrease) 
%
Increase (Decrease)
 Three Months Ended Dec. 31, 2017 Increase (Decrease) 
%
Increase (Decrease)
  2018 2017     
Regular compensation $84,991
 $83,228
 $1,763
 2 % $82,785
 $2,206
 3 %
Incentive compensation:     

 

      
Cash-based 29,549
 28,836
 713
 2 % 35,531
 (5,982) (17)%
Share-based 2,902
 1,603
 1,299
 81 % 6,212
 (3,310) (53)%
Deferred compensation 44
 792
 (748) N/A
 1,324
 (1,280) N/A
Total incentive compensation 32,495
 31,231
 1,264
 4 % 43,067
 (10,572) (25)%
Employee benefits 22,461
 21,966
 495
 2 % 19,477
 2,984
 15 %
Total personnel expense 139,947
 136,425
 3,522
 3 % 145,329
 (5,382) (4)%
Business promotion 6,010
 6,717
 (707) (11)% 7,317
 (1,307) (18)%
Charitable contributions to BOKF Foundation 
 
 
 N/A
 2,000
 (2,000) N/A
Professional fees and services 10,200
 11,417
 (1,217) (11)% 15,344
 (5,144) (34)%
Net occupancy and equipment 24,046
 21,624
 2,422
 11 % 22,403
 1,643
 7 %
Insurance 6,593
 6,404
 189
 3 % 6,555
 38
 1 %
Data processing and communications1
 27,817
 25,699
 2,118
 8 % 28,903
 (1,086) (4)%
Printing, postage and supplies 4,089
 3,851
 238
 6 % 3,781
 308
 8 %
Net losses (gains) and operating expenses of repossessed assets 7,705
 1,009
 6,696
 664 % 340
 7,365
 2,166 %
Amortization of intangible assets 1,300
 1,802
 (502) (28)% 1,430
 (130) (9)%
Mortgage banking costs 10,149
 13,003
 (2,854) (22)% 14,331
 (4,182) (29)%
Other expense 6,574
 7,557
 (983) (13)% 6,746
 (172) (3)%
Total other operating expense $244,430
 $235,508
 $8,922
 4 % $254,479
 $(10,049) (4)%
               
Average number of employees (full-time equivalent) 4,899
 4,910
 (11)  % 4,900
 (1)  %
               
Non-GAAP Reconciliation:1
              
Data processing and communications expense on income statement 27,817
 34,902
 N/A
 N/A
 38,411
 N/A
 N/A
Netting adjustment 
 (9,203) N/A
 N/A
 (9,508) N/A
 N/A
Data processing and communications expense after netting adjustment 27,817
 25,699
 N/A
 N/A
 28,903
 N/A
 N/A
1 
Non-GAAP measure to net interchange charges from prior quarters between transaction card revenue and data processing and communications expense. This measure has no effect on net income or earnings per share.

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


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Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs, increased $1.8 million or 2 percent over the first quarter of 2017. The average number of employees was relatively unchanged compared to the prior year. Standard annual merit increases in regular compensation were effective for the majority of our staff on March 1.

Incentive compensation increased $1.3 million or 4 percent over the first quarter of 2017, primarily due to increased share-based compensation expense. Share-based compensation expense represents expense for equity awards based on grant-date fair value. Non-vested shares generally cliff vest in 3 years and are subject to a two year holding period after vesting. The number of shares that will ultimately vest is determined by BOKF's change in earnings per share relative to a defined group of peer banks. In addition, compensation costs related to certain shares is variable based on changes in the the fair value of BOK Financial common shares.

Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Cash-based incentive compensation expense increased $713 thousand or 2 percent over the first quarter of 2017.

Employee benefits expense increased $495 thousand or 2 percent over the the first quarter of 2017.
Personnel expense decreased $5.4 million compared to the fourth quarter of 2017. Incentive compensation expense decreased $10.6 million primarily due to the impact of tax reform on our earnings per share performance relative to peers. Regular compensation expense increased $2.2 million as merit increases were effective for most staff during the first quarter. A $4.7 million seasonal increase in payroll tax expense was partially offset by a net decrease in employee healthcare costs. The Company is self-insured and these costs may be volatile.

Non-personnel operating expense

Non-personnel operating expense increased $5.4 million or 5 percent compared to the first quarter of 2017 .

Net losses and operating expenses of repossessed assets increased $6.7 million The first quarter of 2018 included a $5.0 million write-down on a set of repossessed oil and gas properties based on an updated analysis of production data.

Data processing and communications expense increased $2.1 million or 8 percent. Occupancy and equipment expense increased $2.4 million or 11 percent due partially to a $1.3 million charge to relocate our primary Oklahoma City location. Other increases in these expense categories were primarily due to information technology infrastructure and cybersecurity project costs and increased data processing transaction activity.

Professional fees and services expense decreased $1.2 million or 11 percent mainly due to the inclusion of Mobank conversion expenses in the first quarter of 2017. Mortgage banking costs decreased $2.9 million compared to the first quarter of 2017, primarily due to a $2.6 million decrease in accruals related to default servicing and loss mitigation costs on loans serviced for others.
Non-personnel expense decreased $4.7 million compared to the fourth quarter of 2017. Professional fees and services expense decreased $5.1 million mainly due to expenses related to projects completed in the fourth quarter of 2017. Mortgage banking costs decreased $4.2 million primarily due to a $3.5 million decrease in accruals related to default servicing and loss mitigation costs on loans serviced for others. The fourth quarter also included a $2.0 million contribution to the BOKF Foundation.
Net losses and operating expenses of repossessed assets increased $7.4 million, primarily due to a $5.0 million write-down on a set of repossessed oil and gas properties.


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Income Taxes

The Company's income tax expense was $30.9 million or 22.7 percent of net income before taxes for the first quarter of 2018 compared to $38.1 million or 30.1 percent of net income before taxes for the first quarter of 2017 and $54.3 million or 42.9 percent of net income before taxes for the fourth quarter of 2017.

The Tax Cut and Jobs Act ("the Act") enacted on December 22, 2017 reduced the federal corporate tax rate from 35 percent to 21 percent beginning January 1, 2018. The Company continues to evaluate the impact the Act will have on its financial position and results of operations, including recognition and measurement of deferred tax assets and liabilities and the determination of effective current and deferred federal and state income tax rates. We recorded provisional adjustments of $9.5 million in the fourth quarter of 2017, including $6.4 million of net deferred tax assets resulting from a temporary difference recognized in Accumulated other comprehensive income on the Company's balance sheet. We also recorded a provisional adjustment of $2.2 million for deferred taxes resulting from executive compensation that may no longer be deductible. We recorded a $3.1 million increase in tax expense in the first quarter of 2018 related to information received related to the Act's impact on the proportional amortization of our investments in low-income housing tax credit projects. This additional expense was partially offset by a $1.2 million decrease to tax expense to adjust net deferred tax assets resulting from executive compensation. Provisional amounts recorded in 2017 may be adjusted based on our on-going evaluation, including subsequent guidance provided by federal and state taxing authorities and other information as it becomes available.

In addition to the impact of the Act, the excess benefit of vested share-based compensation decreased income tax expense by $1.6 million for the first quarter of 2018. Excluding the impact of adjustments for the Act and the excess benefit of share-based compensation, income tax expense would have been $30.7 million or 22.5% of net income before taxes for the first quarter of 2018 and $42.7 million or 33.7% of net income before taxes for the fourth quarter of 2017.

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

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. The reserve for uncertain tax positions was $20 million at March 31, 2018, $18 million at December 31, 2017 and $17 million at March 31, 2017.
Lines of Business

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

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

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


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

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

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

As shown in Table 8, net income attributable to our lines of business was up $22.4 million or 26.2% percent over the first quarter of 2017. Net interest revenue grew by $13.8 million over the prior year. Other operating revenue increased by $2.5 million and operating expense increased by $2.1 million. Income tax expense attributable to the lines of business was down $20.1 million due to tax reform.

Table 8 -- Net Income by Line of Business
(In thousands)
  Three Months Ended
  March 31,
  2018 2017
Commercial Banking $79,243
 $68,409
Consumer Banking 9,406
 3,246
Wealth Management 19,609
 14,159
Subtotal 108,258
 85,814
Funds Management and other (2,696) 2,542
Total $105,562
 $88,356

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Commercial Banking

Commercial Banking contributed $79.2 million to consolidated net income in the first quarter of 2018, an increase of $10.8 million or 16 percent over the first quarter of 2017. The increase in Commercial Banking's contribution was primarily due to lower corporate income tax rates in the first quarter, partially offset by increased losses on repossessed assets related to certain repossessed oil and gas properties and increased corporate expense allocations.

Table 9 -- Commercial Banking
(Dollars in thousands)
  Three Months Ended Increase (Decrease)
  March 31, 
  2018 2017 
Net interest revenue from external sources $160,413
 $147,376
 $13,037
Net interest expense from internal sources (28,343) (18,115) (10,228)
Total net interest revenue 132,070
 129,261
 2,809
Net loans charged off (recovered) 627
 (1,463) 2,090
Net interest revenue after net loans charged off (recovered) 131,443
 130,724
 719
       
Fees and commissions revenue1
 40,017
 35,999
 4,018
Other gains (losses), net (341) 1,642
 (1,983)
Other operating revenue 39,676
 37,641
 2,035
       
Personnel expense 28,921
 27,362
 1,559
Non-personnel expense1
 17,548
 16,340
 1,208
Other operating expense 46,469
 43,702
 2,767
       
Net direct contribution 124,650
 124,663
 (13)
Gain on financial instruments, net 7
 38
 (31)
Loss on repossessed assets, net (4,166) (5) (4,161)
Corporate expense allocations 12,507
 8,719
 3,788
Income before taxes 107,984
 115,977
 (7,993)
Federal and state income tax 28,741
 47,568
 (18,827)
Net income $79,243
 $68,409
 $10,834
       
Average assets $17,793,820
 $17,640,973
 $152,847
Average loans 14,426,750
 14,203,784
 222,966
Average deposits 8,664,452
 8,679,269
 (14,817)
Average invested capital 1,335,896
 1,315,200
 20,696
1 
Fees and commission revenue for 2017 has been adjusted on a comparable basis with 2018 (Non-GAAP measure) to net $9.2 million of interchange fees paid to issuing banks on card transactions processed by our TransFund merchant processing services. The discussion following is based on this comparable basis.

Net interest revenue increased $2.8 million or 2.2 percent over the prior year. Growth in net interest revenue was primarily due to increased yields on commercial loans due to rising short-term interest rates and a $223 million or 2 percent increase in average loan balances. Yields on deposits sold to the funds management unit also went up due to the increase in short-term interest rates from the Federal Reserve increases in the federal funds rate.

Fees and commissions revenue increased $4.0 million or 11 percent over the first quarter of 2017, primarily due to a $3.0 million increase in transaction card revenue primarily due to a $1.4 million early termination penalty. In addition, loan syndication fees and commercial deposit service charges and fees were up over the prior year.


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Operating expenses increased $2.8 million or 6 percent percent compared to the first quarter of 2017. Personnel expense increased $1.6 million or 6 percent, primarily due to incentive compensation expense and standard annual merit increases. Non-personnel expense increased $1.2 million or 7.4 percent.

Corporate expense allocations were up $3.8 million or 43 percent over the prior year, primarily due to enhancements of activity based costing drivers to better reflect services being utilized by the Commercial Banking line of business.

The average outstanding balance of loans attributed to Commercial Banking were up $223 million or 2 percent over the first quarter of 2017 to $14.4 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans, which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $8.7 billion for the first quarter of 2018, largely unchanged compared to the first quarter of 2017. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.



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Consumer Banking

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

Consumer Banking contributed $9.4 million to consolidated net income for the first quarter of 2018, up $6.2 million over the first quarter of 2017. Net interest revenue grew by $6.0 million and operating expense decreased $3.1 million.

Table 10 -- Consumer Banking
(Dollars in thousands)
  Three Months Ended Increase (Decrease)
  March 31, 
  2018 2017 
Net interest revenue from external sources $21,755
 $18,593
 $3,162
Net interest revenue from internal sources 15,224
 12,418
 2,806
Total net interest revenue 36,979
 31,011
 5,968
Net loans charged off 1,301
 1,273
 28
Net interest revenue after net loans charged off 35,678
 29,738
 5,940
       
Fees and commissions revenue 44,964
 45,193
 (229)
Other gains (losses), net (16) (59) 43
Other operating revenue 44,948
 45,134
 (186)
       
Personnel expense 24,301
 24,919
 (618)
Non-personnel expense 25,512
 27,947
 (2,435)
Total other operating expense 49,813
 52,866
 (3,053)
       
Net direct contribution 30,813
 22,006
 8,807
Loss on financial instruments, net (23,262) (1,668) (21,594)
Change in fair value of mortgage servicing rights 21,206
 1,856
 19,350
Loss on repossessed assets, net (108) (136) 28
Corporate expense allocations 16,029
 16,746
 (717)
Income before taxes 12,620
 5,312
 7,308
Federal and state income tax 3,214
 2,066
 1,148
Net income $9,406
 $3,246
 $6,160
       
Average assets $8,468,101
 $8,277,304
 $190,797
Average loans 1,746,136
 1,740,617
 5,519
Average deposits 6,538,096
 6,533,901
 4,195
Average invested capital 298,438
 277,403
 21,035

Net interest revenue from Consumer Banking activities grew by $6.0 million or 19 percent over the the first quarter of 2017, primarily due to increased rates received on deposit balances sold to the Funds Management unit.

Fees and commissions revenue decreased $229 thousand or 1 percent compared to the first quarter of 2017. Increased mortgage banking revenue from the increase in mortgage loan production volumes was offset by lower overdraft fees compared to the prior year.


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Operating expenses decreased $3.1 million or 6 percent compared to the first quarter of 2017. Personnel expenses decreased $618 thousand or 2 percent. Non-personnel expenses decreased $2.4 million or 9 percent compared to the prior year. Mortgage banking costs were down $2.9 million, primarily due to a decrease in accruals related to default servicing and loss mitigation costs on loans serviced for others.

Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $1.5 million decrease in Consumer Banking net income in the first quarter of 2018 compared to a $115 thousand increase in Consumer Banking net income in the first quarter of 2017.

Average consumer deposits were largely unchanged compared to the first quarter of 2017. Demand deposit balances grew by $123 million or 7 percent and savings deposit balances were up $42 million or 10 percent. Higher-costing time deposit balances decreased $109 million or 10 percent and interest-bearing transaction account balances decreased $53 million or 2 percent.


Wealth Management

Wealth Management contributed $19.6 million to consolidated net income in the first quarter of 2018, up $5.5 million or 38 percent over the first quarter of 2017, largely due to growth in net interest revenue.

Table 11 -- Wealth Management
(Dollars in thousands)
  Three Months Ended Increase (Decrease)
  March 31, 
  2018 2017 
Net interest revenue from external sources $15,407
 $11,485
 $3,922
Net interest revenue from internal sources 9,932
 8,856
 1,076
Total net interest revenue 25,339
 20,341
 4,998
Net loans charged off (recovered) (48) 39
 (87)
Net interest revenue after net loans charged off (recovered) 25,387
 20,302
 5,085
       
Fees and commissions revenue 74,807
 73,921
 886
Other gains (losses), net (41) 237
 (278)
Other operating revenue 74,766
 74,158
 608
       
Personnel expense 46,947
 44,787
 2,160
Non-personnel expense 15,855
 15,623
 232
Other operating expense 62,802
 60,410
 2,392
       
Net direct contribution 37,351
 34,050
 3,301
Corporate expense allocations 10,955
 10,672
 283
Income before taxes 26,396
 23,378
 3,018
Federal and state income tax 6,787
 9,219
 (2,432)
Net income $19,609
 $14,159
 $5,450
       
Average assets $8,095,794
 $7,160,849
 $934,945
Average loans 1,389,926
 1,266,579
 123,347
Average deposits 5,662,470
 5,582,554
 79,916
Average invested capital 246,673
 212,887
 33,786

Net interest revenue increased $5.0 million or 25 percent over the first quarter of 2017, primarily due to loan growth and net interest expansion. Average deposit balances increased by $80 million or 1 percent over the first quarter of 2017, primarily due to a $56 million or 2 percent increase in interest-bearing transaction account balances and a $29 million or 4 percent increase time deposit balances.

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Fees and commissions revenue increased $886 thousand or 1 percent over the first quarter of 2017. Fiduciary and asset management revenue grew by $3.2 million or 8 percent over the prior year, primarily due to growth in assets under management, improved pricing discipline and decreased fee waivers. Other revenue attributable to Wealth Management was also up $1.9 million. Brokerage and trading revenue decreased by $4.1 million or 14 percent compared to the prior year, primarily due to decreased activity related to our mortgage banking customers along with a decrease in brokerage fees due to the implementation of the DOL fiduciary rule in the second quarter of 2017.

Fees and commissions revenue above includes fees earned from state and municipal bond and corporate debt underwritings and financial advisory services, primarily in the Oklahoma and Texas markets. In the first quarter of 2018, the Wealth Management division participated in 45 state and municipal bond underwritings that totaled $626 million. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $189 million of these underwritings. The Wealth Management division also participated in 8 corporate debt underwritings that totaled $4.9 billion. Our interest in these underwritings was $131 million. In the first quarter of 2017, the Wealth Management division participated in 38 state and municipal bond underwritings that totaled approximately $1.6 billion. Our interest in these underwritings totaled approximately $316 million. The Wealth Management division also participated in 5 corporate debt underwritings that totaled $3.6 billion. Our interest in these underwritings was $111 million.

Operating expense increased $2.4 million or 4.0 percent over the first quarter of 2017. Personnel expense increased $2.2 million or 5 percent, primarily due to incentive compensation expense and standard annual merit increases. Non-personnel expense increased $232 thousand or 1 percent.
Financial Condition
Securities

We maintain a securities portfolio to enhance profitability, manage interest rate risk, provide liquidity and comply with regulatory requirements. Securities are classified as trading, held for investment, or available for sale. See Note 2 to the consolidated financial statements for the composition of the securities portfolio as of March 31, 2018, December 31, 2017 and March 31, 2017.

We hold an inventory of trading securities in support of sales to a variety of customers, including banks, corporations, insurance companies, money managers and others. Trading securities increased $830 million to $1.3 billion during the first quarter of 2018 in response to expanded relationships with mortgage loan originator clients. 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 March 31, 2018, the carrying value of investment (held-to-maturity) securities was $417 million and the fair value was $429 million. Investment securities consist primarily of long-term, fixed rate Oklahoma and Texas municipal bonds, taxable Texas school construction bonds and residential mortgage-backed securities issued by U.S. government agencies. The investment security portfolio is diversified among issuers. The largest obligation of any single issuer is $30 million. Substantially all of these bonds are general obligations of the issuers. Approximately $92 million of the $199 million portfolio of Texas school construction bonds is also guaranteed by the Texas Permanent School Fund Guarantee Program supervised by the State Board of Education for the State of Texas.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $8.4 billion at March 31, 2018, a $29 million increase compared to December 31, 2017. At March 31, 2018, the available for sale securities portfolio consisted primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Both residential and commercial mortgage-backed securities have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans.

A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making

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an investment and throughout the life of the security. Our best estimate of the duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at March 31, 2018 is 3.4 years. Management estimates the duration extends to 4.1 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 3.1 years assuming a 50 basis point decline in the current low rate environment.

The aggregate gross amount of unrealized losses on available for sale securities totaled $177 million at March 31, 2018, compared to $89 million at December 31, 2017. 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 first quarter of 2018.

BOK Financial is required to hold stock as members of the Federal Reserve system and the Federal Home Loan Banks ("FHLB"). These restricted equity securities are carried at cost as these securities do not have a readily determined fair value because the ownership of these shares is restricted and they lack a market. We are required to hold stock in the FHLB in proportion to our borrowings with the FHLB.
Loans

The aggregate loan portfolio before allowance for loan losses totaled $17.3 billion at March 31, 2018, up $184 million over December 31, 2017, primarily due to growth in commercial loan balances. Increased commercial real estate loans were offset by lower residential mortgage loan balances. Personal loan balances were largely unchanged compared to the prior quarter.

Table 12 -- Loans
(In thousands)
  Mar. 31, 2018 Dec. 31, 2017 Sept. 30, 2017 June 30, 2017 Mar. 31, 2017
Commercial:          
Energy $2,969,618
 $2,930,156
 $2,867,981
 $2,847,240
 $2,537,112
Services 2,928,294
 2,986,949
 2,967,513
 2,958,827
 3,013,375
Healthcare 2,359,928
 2,314,753
 2,239,451
 2,221,518
 2,265,604
Wholesale/retail 1,531,576
 1,471,256
 1,658,098
 1,543,695
 1,506,243
Manufacturing 559,695
 496,774
 519,446
 546,137
 543,430
Other commercial and industrial 570,556
 534,087
 543,445
 520,538
 461,346
Total commercial 10,919,667
 10,733,975
 10,795,934
 10,637,955
 10,327,110
           
Commercial real estate:  
  
  
  
  
Multifamily 1,008,903
 980,017
 999,009
 952,380
 922,991
Retail 750,396
 691,532
 725,865
 722,805
 745,046
Office 737,144
 831,770
 797,089
 862,973
 860,889
Industrial 613,608
 573,014
 591,080
 693,635
 871,463
Residential construction and land development 117,458
 117,245
 112,102
 141,592
 135,994
Other commercial real estate 279,273
 286,409
 292,997
 315,207
 334,680
Total commercial real estate 3,506,782
 3,479,987
 3,518,142
 3,688,592
 3,871,063
           
Residential mortgage:  
  
  
  
  
Permanent mortgage 1,047,785
 1,043,435
 1,013,965
 989,040
 977,743
Permanent mortgages guaranteed by U.S. government agencies 177,880
 197,506
 187,370
 191,729
 204,181
Home equity 720,104
 732,745
 744,415
 758,429
 764,350
Total residential mortgage 1,945,769
 1,973,686
 1,945,750
 1,939,198
 1,946,274
           
Personal 965,632
 965,776
 947,008
 917,900
 847,459
           
Total $17,337,850
 $17,153,424
 $17,206,834
 $17,183,645
 $16,991,906


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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 $10.9 billion or 63 percent of the loan portfolio at March 31, 2018, an increase of $186 million over December 31, 2017. Manufacturing sector loan balances were up $63 million. Wholesale/retail sector loan balances grew by $60 million. Healthcare sector loan balances increased $45 million. Energy loan balances grew by $39 million. Unfunded energy loan commitments increased $97 million over December 31, 2017 to $3.0 billion at March 31, 2018. Other commercial and industrial loans increased by $36 million. This growth was partially offset by a $59 million decrease in service sector loan balances.

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 $511,399
 $1,584,188
 $39,455
 $3,087
 $395,725
 $7,171
 $66,039
 $362,554
 $2,969,618
Services 695,043
 826,626
 156,522
 5,777
 335,914
 238,088
 291,582
 378,742
 2,928,294
Healthcare 251,766
 354,012
 116,386
 94,696
 152,477
 117,829
 260,423
 1,012,339
 2,359,928
Wholesale/retail 310,686
 558,838
 43,188
 25,583
 74,065
 59,580
 84,000
 375,636
 1,531,576
Manufacturing 90,797
 201,659
 113
 3,701
 60,182
 36,936
 91,496
 74,811
 559,695
Other commercial and industrial 83,396
 174,278
 2,609
 67,917
 26,479
 18,343
 72,945
 124,589
 570,556
Total commercial loans $1,943,087
 $3,699,601
 $358,273
 $200,761
 $1,044,842
 $477,947
 $866,485
 $2,328,671
 $10,919,667
 
The majority of the collateral securing our commercial loan portfolio is located within our geographical footprint with 34 percent concentrated in the Texas market and 18 percent concentrated in the Oklahoma market. At March 31, 2018, the Other category is primarily composed of California - $279 million or 3 percent of the commercial loan portfolio, Florida - $227 million or 2 percent of the commercial loan portfolio, Louisiana - $170 million or 2 percent of the commercial loan portfolio, Ohio - $140 million or 1 percent of the commercial loan portfolio, Pennsylvania - $129 million or 1 percent of the commercial loan portfolio and Tennessee - $128 million or 1 percent of the commercial loan portfolio. All other states individually represent one percent or less 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.


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Outstanding energy loans totaled $3.0 billion or 17 percent of total loans at March 31, 2018. Unfunded energy loan commitments were $3.0 billion at March 31, 2018, up $97 million over December 31, 2017. Approximately $2.5 billion of energy loans were to oil and gas producers, largely unchanged compared to December 31, 2017. 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 56 percent of the committed production loans are secured by properties primarily producing oil and 44 percent of the committed production loans are secured by properties primarily producing natural gas. Loans to midstream oil and gas companies totaled $299 million at March 31, 2018, an increase of $38 million over December 31, 2017. Loans to borrowers that provide services to the energy industry totaled $113 million at March 31, 2018, down $17 million compared to the prior quarter. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $59 million, a $3 million decrease compared to the prior quarter.

The services sector of the loan portfolio totaled $2.9 billion or 17 percent of total loans and consists of a large number of loans to a variety of businesses, including governmental, educational services, commercial services, loans to entities providing services for real estate and construction and consumer services. Service sector loans decreased by $59 million compared to December 31, 2017. Loans to governmental entities totaled $548 million at March 31, 2018. Approximately $1.4 billion of the services category is made up of loans with individual balances of less than $10 million. Service sector loans are generally secured by the assets of the borrower with repayment coming from the cash flows of ongoing operations of the customer’s business. 

The healthcare sector of the loan portfolio totaled $2.4 billion or 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 March 31, 2018, the outstanding principal balance of these loans totaled $3.6 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 15 percent of our shared national credits, based on dollars committed. We hold shared credits to the same standard of analysis and perform the same level of review as internally originated credits. Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. In addition to management’s quarterly assessment of credit risk, banking regulators annually review a sample of shared national credits for proper risk grading.

Commercial Real Estate

Commercial real estate represents loans for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes generally within our geographical footprint, with larger concentrations in Texas and Oklahoma which represent 34% and 12% of the total commercial real estate portfolio at March 31, 2018, respectively. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

Commercial real estate loans totaled $3.5 billion or 20% of the loan portfolio at March 31, 2018. The outstanding balance of commercial real estate loans increased $27 million during the first quarter of 2018. Loans secured by retail facilities were up $59 million. Loans secured by industrial properties grew by $41 million. Multifamily residential loans increased $29 million. This growth was partially offset by a $95 million decrease in loans secured by office buildings. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 19 percent to 23 percent over the past five years. 

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


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Table 14 -- Commercial Real Estate Loans by Collateral Location
(In thousands)
  Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/Missouri Other Total
Retail $61,706
 $281,164
 $114,127
 $7,581
 $45,364
 $27,699
 $15,756
 $196,999
 $750,396
Multifamily 120,768
 455,048
 23,457
 26,333
 71,230
 60,596
 119,997
 131,474
 1,008,903
Office 92,817
 198,338
 94,251
 9,846
 31,373
 71,139
 39,754
 199,626
 737,144
Industrial 66,660
 186,358
 22,517
 110
 9,208
 8,205
 44,153
 276,397
 613,608
Residential construction and land development 18,787
 21,524
 17,493
 2,185
 21,618
 4,003
 12,849
 18,999
 117,458
Other commercial real estate 53,303
 36,103
 12,709
 3,604
 11,277
 21,051
 28,080
 113,146
 279,273
Total commercial real estate loans $414,041
 $1,178,535
 $284,554
 $49,659
 $190,070
 $192,693
 $260,589
 $936,641
 $3,506,782

The Other category is primarily composed of California - $150 million or 4 percent of the commercial real estate portfolio, Utah - $114 million or 3 percent of the commercial real estate portfolio and Florida - $106 million or 3 percent of the commercial real estate portfolio. All other states represent less than 3% individually.

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

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

Residential mortgage loans totaled $1.9 billion, a decrease of $27.9 million compared to December 31, 2017. 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 96% of our residential mortgage loan portfolio is located within our geographical footprint.

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

At March 31, 2018, $178 million of permanent residential mortgage loans are guaranteed by U.S. government agencies. We have minimal credit exposure on loans guaranteed by the agencies. This amount includes residential mortgage loans previously sold into GNMA mortgage pools that the Company may repurchase when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet. Permanent residential mortgage loans guaranteed by U.S. government agencies decreased $20 million compared to December 31, 2017.

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Home equity loans totaled $720 million at March 31, 2018, a $13 million decrease compared to December 31, 2017. 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 March 31, 2018 by lien position and amortizing status follows in Table 15.

Table 15 -- Home Equity Loans
(In thousands)
  Revolving Amortizing Total
First lien $71,539
 $381,394
 $452,933
Junior lien 143,758
 123,413
 267,171
Total home equity $215,297
 $504,807
 $720,104


The distribution of residential mortgage and personal loans at March 31, 2018 is as follows in Table 16. Residential mortgage loans are distributed by collateral location. Personal loans are generally distributed by borrower location.

Table 16 -- Residential Mortgage and Personal Loans by Collateral Location
(In thousands)
  Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/Missouri Other Total
Residential mortgage:                  
Permanent mortgage $175,730
 $433,502
 $49,914
 $13,255
 $177,017
 $95,283
 $60,109
 $42,975
 $1,047,785
Permanent mortgages  guaranteed by U.S. government agencies 47,034
 33,411
 34,427
 7,675
 4,463
 1,175
 11,755
 37,940
 177,880
Home equity 379,874
 132,276
 88,581
 5,871
 38,787
 9,716
 62,370
 2,629
 720,104
Total residential mortgage $602,638
 $599,189
 $172,922
 $26,801
 $220,267
 $106,174
 $134,234
 $83,544
 $1,945,769
                   
Personal $311,032
 $390,469
 $11,467
 $9,916
 $64,861
 $52,123
 $77,860
 $47,904
 $965,632


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

Table 17 -- Loans Managed by Primary Geographical Market
(In thousands)
  Mar. 31, 2018 Dec. 31, 2017 Sept. 30, 2017 June. 30, 2017 Mar. 31, 2017
Bank of Oklahoma:          
Commercial $3,265,013
 $3,238,720
 $3,408,973
 $3,369,967
 $3,189,183
Commercial real estate 668,031
 682,037
 712,915
 667,932
 691,332
Residential mortgage 1,419,281
 1,435,432
 1,405,900
 1,398,021
 1,404,054
Personal 353,128
 342,212
 322,320
 318,016
 310,708
Total Bank of Oklahoma 5,705,453
 5,698,401
 5,850,108
 5,753,936
 5,595,277
           
Bank of Texas:  
  
  
  
  
Commercial 4,715,841
 4,520,401
 4,434,595
 4,339,634
 4,148,316
Commercial real estate 1,254,421
 1,261,864
 1,236,702
 1,360,164
 1,452,988
Residential mortgage 229,761
 233,675
 229,993
 232,074
 231,647
Personal 363,608
 375,084
 375,173
 354,222
 312,092
Total Bank of Texas 6,563,631
 6,391,024
 6,276,463
 6,286,094
 6,145,043
           
Bank of Albuquerque:  
  
  
  
  
Commercial 315,701
 343,296
 367,747
 369,370
 407,403
Commercial real estate 348,485
 341,282
 319,208
 324,405
 307,927
Residential mortgage 93,490
 98,018
 101,983
 103,849
 106,432
Personal 11,667
 11,721
 12,953
 12,439
 11,305
Total Bank of Albuquerque 769,343
 794,317
 801,891
 810,063
 833,067
           
Bank of Arkansas:  
  
  
  
  
Commercial 94,430
 95,644
 91,051
 85,020
 88,010
Commercial real estate 88,700
 87,393
 80,917
 73,943
 74,469
Residential mortgage 7,033
 6,596
 6,318
 6,395
 6,829
Personal 9,916
 9,992
 10,388
 11,993
 6,279
Total Bank of Arkansas 200,079
 199,625
 188,674
 177,351
 175,587
           
Colorado State Bank & Trust:  
  
  
  
  
Commercial 1,180,655
 1,130,714
 1,124,200
 1,065,780
 998,216
Commercial real estate 210,801
 174,201
 186,427
 255,379
 266,218
Residential mortgage 64,530
 63,350
 63,734
 63,346
 62,313
Personal 63,118
 63,115
 60,513
 56,187
 49,523
Total Colorado State Bank & Trust 1,519,104
 1,431,380
 1,434,874
 1,440,692
 1,376,270
           
Bank of Arizona:  
  
  
  
  
Commercial 624,106
 687,792
 634,809
 617,759
 643,222
Commercial real estate 672,319
 660,094
 706,188
 705,858
 737,088
Residential mortgage 39,227
 41,771
 40,730
 37,034
 36,737
Personal 57,023
 57,140
 55,050
 55,528
 51,386
Total Bank of Arizona 1,392,675
 1,446,797
 1,436,777
 1,416,179
 1,468,433
           
Mobank (Kansas City):  
  
  
  
  
Commercial 723,921
 717,408
 734,559
 790,425
 852,760
Commercial real estate 264,025
 273,116
 275,785
 300,911
 341,041
Residential mortgage 92,447
 94,844
 97,092
 98,479
 98,262
Personal 107,172
 106,512
 110,611
 109,515
 106,166
Total Mobank (Kansas City) 1,187,565
 1,191,880
 1,218,047
 1,299,330
 1,398,229
           
Total BOK Financial loans $17,337,850
 $17,153,424
 $17,206,834
 $17,183,645
 $16,991,906

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Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business. These arrangements included unfunded loan commitments, which totaled $10.2 billion and standby letters of credit, which totaled $664 million at March 31, 2018. Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower’s financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Approximately $15 thousand of the outstanding standby letters of credit were issued on behalf of customers whose loans are nonperforming at March 31, 2018.

Table 18 – Off-Balance Sheet Credit Commitments
(In thousands)
  Mar. 31, 2018 Dec. 31, 2017 Sept. 30, 2017 June 30, 2017 Mar. 31, 2017
Loan commitments $10,249,729
 $9,958,080
 $9,693,489
 $9,632,911
 $9,403,641
Standby letters of credit 664,342
 647,653
 665,513
 614,852
 595,746
Mortgage loans sold with recourse 121,197
 125,127
 128,681
 133,896
 134,631

We have off-balance sheet commitments related to certain residential mortgage loans originated under community development loan programs that were sold to a U.S. government agency with full recourse. These mortgage loans were underwritten to standards approved by the agencies, including full documentation and originated under programs available only for owner-occupied properties. The Company no longer sells residential mortgage loans with recourse. We are obligated to repurchase these loans for the life of these loans in the event of foreclosure for the unpaid principal and interest at the time of foreclosure. Substantially all of these loans are to borrowers in our primary markets including $73 million to borrowers in Oklahoma, $13 million to borrowers in Arkansas and $12 million to borrowers in New Mexico. An accrual related to this off-balance sheet risk is included in Other liabilities in the consolidated balance sheets and totaled $3.7 million at March 31, 2018 and $3.7 million at December 31, 2017 and $3.9 million at March 31, 2017.

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

For the period from 2010 through the first quarter of 2018 combined, approximately 17% of repurchase requests have currently resulted in actual repurchases or indemnification by the Company. The Company repurchased one loan from the agencies for $53 thousand during the first quarter of 2018. There was one indemnification on a loan paid during the first quarter of 2018. Losses recognized on repurchases were insignificant.

A summary of unresolved deficiency requests from the agencies follows (in thousands, except for number of unresolved deficiency requests):
 March 31,
 2018 2017
Number of unresolved deficiency requests181
 185
Aggregate outstanding principal balance subject to unresolved deficiency requests$8,160
 $9,622
Unpaid principal balance subject to indemnification by the Company4,512
 5,249

The accrual for potential loan repurchases under representations and warranties totaled $1.2 million at March 31, 2018, $1.4 million at December 31, 2017, and $2.6 million at March 31, 2017.

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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 March 31, 2018, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $292 million compared to $225 million at December 31, 2017. At March 31, 2018, the net fair value of our derivative contracts included $163 million for foreign exchange contracts, $76 million for energy contracts, $36 million for interest rate swaps and $13 million of to-be-announced residential mortgage-backed securities. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $280 million at March 31, 2018 and $214 million at December 31, 2017.

At March 31, 2018, total derivative assets were reduced by $9.9 million of cash collateral received from counterparties and total derivative liabilities were reduced by $66 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement.

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

The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor at March 31, 2018 follows in Table 19.

Table 19 -- Fair Value of Derivative Contracts
(In thousands)
Customers $153,903
Banks and other financial institutions 110,152
Exchanges and clearing organizations 17,693
Fair value of customer risk management program asset derivative contracts, net $281,748
 
At March 31, 2018, our largest derivative exposure was to an exchange for interest rate swap derivative contracts of $17 million.


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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 $32.95 per barrel of oil would decrease the fair value of derivative assets by $55 million. An increase in prices equivalent to $75.73 per barrel of oil would increase the fair value of derivative assets by $101 million as current prices move further away from the fixed prices embedded in our existing contracts. Liquidity requirements of this program may also be affected by our credit rating. At March 31, 2018, a decrease in our credit rating to below investment grade did not have a significant impact on our obligation to post cash margin on existing contracts. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of March 31, 2018, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.
Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. At March 31, 2018, the combined allowance for loan losses and off-balance sheet credit losses totaled $228 million or 1.32% of outstanding loans and 133% of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $224 million and the accrual for off-balance sheet credit losses was $4.1 million. At December 31, 2017, the combined allowance for credit losses was $234 million or 1.37 percent of outstanding loans and 131 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $231 million and the accrual for off-balance sheet credit losses was $3.7 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 continued trend of improvement in nonaccruing and potential problem loans, and net charge-offs, the Company determined that a $5.0 million negative provision for credit losses was appropriate for the first quarter of 2018. The Company recorded a $7.0 million negative provision for the fourth quarter of 2017.



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Table 20 -- Summary of Loan Loss Experience
(In thousands)
  Three Months Ended
  Mar. 31, 2018 Dec. 31, 2017 Sept. 30, 2017 June 30, 2017 Mar. 31, 2017
Allowance for loan losses:          
Beginning balance $230,682
 $247,703
 $250,061
 $248,710
 $246,159
Loans charged off:          
Commercial (1,563) (13,254) (4,429) (1,703) (424)
Commercial real estate 
 
 
 (76) 
Residential mortgage (100) (205) (168) (40) (236)
Personal (1,227) (1,290) (1,228) (1,053) (1,493)
Total (2,890) (14,749) (5,825) (2,872) (2,153)
Recoveries of loans previously charged off:          
Commercial 488
 1,982
 1,014
 283
 1,182
Commercial real estate 183
 258
 739
 208
 735
Residential mortgage 242
 229
 134
 169
 228
Personal 663
 592
 550
 554
 755
Total 1,576
 3,061
 2,437
 1,214
 2,900
Net loans recovered (charged off) (1,314) (11,688) (3,388) (1,658) 747
Provision for loan losses (5,401) (5,333) 1,030
 3,009
 1,804
Ending balance $223,967
 $230,682
 $247,703
 $250,061
 $248,710
Accrual for off-balance sheet credit losses:          
Beginning balance $3,734
 $5,401
 $6,431
 $9,440
 $11,244
Provision for off-balance sheet credit losses 401
 (1,667) (1,030) (3,009) (1,804)
Ending balance $4,135
 $3,734
 $5,401
 $6,431
 $9,440
Total combined provision for credit losses $(5,000) $(7,000) $
 $
 $
Allowance for loan losses to loans outstanding at period-end 1.29 % 1.34 % 1.44% 1.46% 1.46 %
Net charge-offs (recoveries) (annualized) to average loans 0.03 % 0.27 % 0.08% 0.04% (0.02)%
Total provision for credit losses (annualized) to average loans (0.12)% (0.16)% % %  %
Recoveries to gross charge-offs 54.53 % 20.75 % 41.84% 42.27% 134.70 %
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments 0.04 % 0.04 % 0.05% 0.06% 0.09 %
Combined allowance for credit losses to loans outstanding at period-end 1.32 % 1.37 % 1.47% 1.49% 1.52 %
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 March 31, 2018, impaired loans totaled $349 million, including $74 million with specific allowances of $13 million and $275 million with no specific allowances. At December 31, 2017, impaired loans totaled $376 million, including $51 million of impaired loans with specific allowances of $8.8 million and $325 million with no specific allowances.

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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 $191 million at March 31, 2018. The general allowance for unimpaired loans decreased $9.0 million compared to December 31, 2017, primarily related to the commercial loan segment.

Nonspecific allowances are maintained for risks beyond factors specific to a particular portfolio segment or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors. Nonspecific allowances totaled $20 million at March 31, 2018, a $2.2 million decrease compared to December 31, 2017. The nonspecific allowance decreased based on energy price environment stabilization. The nonspecific allowance also includes consideration of the estimated long-term impact of Hurricane Harvey in 2017 on the Houston, Texas market.

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 $222 million at March 31, 2018 and were primarily composed of $124 million or 4 percent of energy loans, $31 million or 1 percent of service sector loans, $28 million or 1 percent of healthcare sector loans, $19 million or 1 percent of wholesale/retail sector loans and $10 million or 2 percent of other commercial and industrial loans. Potential problem loans totaled $241 million at December 31, 2017.

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 $78 million at March 31, 2018 and were composed primarily of $23 million or 1 percent of service sector loans, $22 million or 3 percent of commercial real estate loans secured by retail facilities and $11 million or less than 1 percent of outstanding energy loans. Other loans especially mentioned totaled $118 million at December 31, 2017.

We updated our semi-annual energy loan portfolio stress test at December 31, 2017 to estimate how the energy portfolio may respond in a prolonged low-price environment. Stress test assumptions applied the five year forward pricing curve to a starting price of $2.17 per million BTUs for natural gas and $45.88 per barrel of oil and then escalating 3 percent annually for years six through ten to a maximum of $2.67 and $47.26, respectively.
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 $1.3 million in the first quarter of 2018, compared to net charge-offs of $11.7 million in the fourth quarter of 2017 and a net recovery of $747 thousand in the first quarter of 2017. The ratio of net loans charged off to average loans on an annualized basis was 0.03 percent for the first quarter of 2018, compared with 0.27 percent for the fourth quarter of 2017 and (0.02) percent for the first quarter of 2017


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Net charge-offs of commercial loans were $1.1 million in the first quarter of 2018. Net commercial real estate loan recoveries were $183 thousand in the first quarter of 2018. Net charge-offs of residential mortgage loans were $142 thousand and net charge-offs of personal loans were $564 thousand for the first quarter. Personal loan net charge-offs include deposit account overdraft losses. 


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Nonperforming Assets

Table 21 -- Nonperforming Assets
(In thousands)
  Mar. 31, 2018 Dec. 31, 2017 Sept. 30, 2017 June 30, 2017 Mar. 31, 2017
Nonaccruing loans:          
Commercial $131,460
 $137,303
 $176,900
 $197,157
 $156,825
Commercial real estate 2,470
 2,855
 2,975
 3,775
 4,475
Residential mortgage 45,794
 47,447
 45,506
 44,235
 46,081
Personal 340
 269
 255
 272
 235
Total nonaccruing loans 180,064
 187,874
 225,636
 245,439
 207,616
Accruing renegotiated loans guaranteed by U.S. government agencies 74,418
 73,994
 69,440
 80,624
 83,577
Real estate and other repossessed assets 23,652
 28,437
 32,535
 39,436
 42,726
Total nonperforming assets $278,134
 $290,305
 $327,611
 $365,499
 $333,919
Total nonperforming assets excluding those guaranteed by U.S. government agencies $194,833
 $207,132
 $249,280
 $275,823
 $240,234
           
Nonaccruing loans by loan portfolio segment and class:      
  
Commercial:        
  
Energy $89,942
 $92,284
 $110,683
 $123,992
 $110,425
Services 2,109
 2,620
 1,174
 7,754
 7,713
Healthcare 15,342
 14,765
 24,446
 24,505
 909
Wholesale/retail 2,564
 2,574
 1,893
 10,620
 11,090
Manufacturing 3,002
 5,962
 9,059
 9,656
 5,907
Other commercial and industrial 18,501
 19,098
 29,645
 20,630
 20,781
Total commercial 131,460
 137,303
 176,900
 197,157
 156,825
           
Commercial real estate:        
  
Multifamily 
 
 
 10
 24
Retail 264
 276
 289
 301
 314
Office 275
 275
 275
 396
 413
Industrial 
 
 
 
 76
Residential construction and land development 1,613
 1,832
 1,924
 2,051
 2,616
Other commercial real estate 318
 472
 487
 1,017
 1,032
Total commercial real estate 2,470
 2,855
 2,975
 3,775
 4,475
           
Residential mortgage:        
  
Permanent mortgage 24,578
 25,193
 24,623
 23,415
 24,188
Permanent mortgage guaranteed by U.S. government agencies 8,883
 9,179
 8,891
 9,052
 10,108
Home equity 12,333
 13,075
 11,992
 11,768
 11,785
Total residential mortgage 45,794
 47,447
 45,506
 44,235
 46,081
Personal 340
 269
 255
 272
 235
Total nonaccruing loans $180,064
 $187,874
 $225,636
 $245,439
 $207,616
           
Ratios:        
  
Allowance for loan losses to nonaccruing loans1
 130.84% 129.09% 114.28% 105.78% 125.92%
Accruing loans 90 days or more past due1
 $90
 $633
 $253
 $1,414
 $95
1 
Excludes residential mortgages guaranteed by agencies of the U.S. Government.


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Nonperforming assets totaled $278 million or 1.60 percent of outstanding loans and repossessed assets at March 31, 2018. Nonaccruing loans totaled $180 million, accruing renegotiated residential mortgage loans totaled $74 million and real estate and other repossessed assets totaled $24 million. All accruing renegotiated residential mortgage loans and $8.9 million of nonaccruing loans are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets decreased $12 million compared to the first quarter, primarily due to a decrease 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. All loans modified in troubled debt restructurings, except for residential mortgage loans guaranteed by U.S. government agencies, are classified as nonaccruing. We may also renew matured nonaccruing loans. All nonaccruing loans, including those renewed or modified in troubled debt restructurings, are charged off when the loan balance is no longer covered by the paying capacity of the borrower based on a quarterly evaluation of available cash resources and collateral value. All nonaccruing loans generally remain on nonaccrual status until full collection of principal and interest in accordance with the original terms, including principal previously charged off, is probable. We generally do not voluntarily modify personal loans to troubled borrowers. Personal loans modified at the direction of bankruptcy court orders are identified as troubled debt restructurings and classified as nonaccruing.

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

A rollforward of nonperforming assets for the three months ended March 31, 2018 follows in Table 22.

Table 22 -- Rollforward of Nonperforming Assets
(In thousands)
  Three Months Ended
  March 31, 2018
  
 
Nonaccruing Loans
 
 
Renegotiated Loans
 Real Estate and Other Repossessed Assets Total Nonperforming Assets
Balance, December 31, 2017 $187,874
 $73,994
 $28,437
 $290,305
Additions 10,420
 17,021
 
 27,441
Payments (12,439) (668) 
 (13,107)
Charge-offs (2,890) 
 
 (2,890)
Net gains, losses and write-downs 
 
 (4,186) (4,186)
Foreclosure of nonperforming loans (2,156) 
 2,156
 
Foreclosure of loans guaranteed by U.S. government agencies (1,528) (1,827) 
 (3,355)
Proceeds from sales 
 (13,723) (2,447) (16,170)
Net transfers to nonaccruing loans 783
 (783) 
 
Other, net 
 404
 (308) 96
Balance, March 31, 2018 $180,064
 $74,418
 $23,652
 $278,134
         

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

Nonaccruing commercial loans totaled $131 million or 1.20 percent of total commercial loans at March 31, 2018 and $137 million or 1.28 percent of commercial loans at December 31, 2017. There were $5.0 million in newly identified nonaccruing commercial loans during the quarter, offset by $8.8 million in payments and $1.6 million of charge-offs and $459 thousand of foreclosures.

Nonaccruing commercial loans at March 31, 2018 were primarily composed of $90 million or 3.03 percent of total energy loans, $19 million or 3.24 percent of total other commercial and industrial sector loans and $15 million or 0.65 percent of total healthcare sector loans.
Commercial Real Estate

Nonaccruing commercial real estate loans totaled $2.5 million or 0.07 percent of outstanding commercial real estate loans at March 31, 2018, compared to $2.9 million or 0.08 percent of outstanding commercial real estate loans at December 31, 2017. Newly identified nonaccruing commercial real estate loans of $725 thousand were offset by $1.1 million of cash payments received. There were no charge-offs or foreclosures of nonaccruing commercial real estate loans during the first quarter.

Nonaccruing commercial real estate loans were primarily composed of $1.6 million or 1.37 percent of residential construction and land development loans.

Residential Mortgage and Personal

Nonaccruing residential mortgage loans totaled $46 million or 2.35 percent of outstanding residential mortgage loans at March 31, 2018, a $1.7 million decrease compared to December 31, 2017. Newly identified nonaccruing residential mortgage loans totaling $3.3 million were partially offset by $3.2 million of foreclosures, $2.4 million of payments and $100 thousand of loans charged off during the quarter. 

Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans, which totaled $25 million or 2.35 percent of outstanding non-guaranteed permanent residential mortgage loans at March 31, 2018. Nonaccruing home equity loans totaled $12 million or 1.71 percent of total home equity loans.

Payments of accruing residential mortgage loans and personal loans may be delinquent. The composition of residential mortgage loans and personal loans past due but still accruing is included in the following Table 23. Substantially all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 59 days past due decreased $1.9 million in the first quarter to $3.7 million at March 31, 2018. Residential mortgage loans 60 to 89 days past due decreased by $273 thousand. Personal loans past due 30 to 59 days increased by $113 thousand and personal loans 60 to 89 days decreased $177 thousand.

Table 23 -- Residential Mortgage and Personal Loans Past Due
(In thousands)
  March 31, 2018 December 31, 2017
  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
 $
 $
 $2,322
 $
 $219
 $3,435
Home equity 22
 386
 1,377
 17
 440
 2,206
Total residential mortgage $22
 $386
 $3,699
 17
 $659
 $5,641
   
    
  
    
Personal $62
 $14
 $794
 $261
 $191
 $681
1 
Excludes past due residential mortgage loans guaranteed by agencies of the U.S. government.


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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 $24 million at March 31, 2018, composed primarily of $12 million of oil and gas properties, $6.2 million of 1-4 family residential properties and $4.6 million of undeveloped land primarily zoned for commercial development. Real estate and other repossessed assets totaled $28 million at December 31, 2017.


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Liquidity and Capital

Based on the average balances for the first quarter of 2018, approximately 66 percent of our funding was provided by deposit accounts, 20 percent from borrowed funds, less than 1 percent is from long-term subordinated debt and 10 percent from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

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 Express Bank call center. Commercial deposit growth is supported by offering treasury management and lockbox services. We also acquire brokered deposits when the cost of funds is advantageous to other funding sources.

Average deposits for the first quarter of 2018 totaled $22.1 billion, largely unchanged compared to the fourth quarter of 2017. Demand deposit balances decreased $266 million, partially offset by a $202 million increase in interest-bearing transaction account balances. Both time deposits and savings account balances were also up over the fourth quarter of 2017.
Table 24 - Average Deposits by Line of Business
(In thousands)
 Three Months Ended
 Mar. 31, 2018 Dec. 31, 2017 Sept. 30, 2017 June 30, 2017 Mar. 31, 2017
Commercial Banking$8,622,436
 $8,756,437
 $8,683,331
 $8,652,811
 $8,631,724
Consumer Banking6,580,112
 6,664,878
 6,707,859
 6,662,838
 6,581,446
Wealth Management5,662,470
 5,457,566
 5,495,250
 5,531,091
 5,582,554
Subtotal20,865,018
 20,878,881
 20,886,440
 20,846,740
 20,795,724
Funds Management and other1,261,877
 1,282,179
 1,232,881
 1,245,591
 1,573,698
Total$22,126,895
 $22,161,060
 $22,119,321
 $22,092,331
 $22,369,422

Average Commercial Banking deposit balances decreased $134 million compared to the fourth quarter of 2017. Demand deposit balances decreased $183 million, partially offset by a $53 million increase in interest-bearing transaction account balances. Average deposit balances attributed to healthcare customers decreased by $68 million and average balances attributed to commercial real estate customers decreased $47 million. Balances attributed to small business customers were down $25 million. Balances attributed to treasury services customers grew by $11 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 once the economic outlook improves and customers deploy cash or related earnings credit rates rise, reducing the amount of deposits required to offset service charges.

Average Consumer Banking deposit balances decreased by $85 million. Interest-bearing transaction balances also decreased $46 million. Time deposit balances decreased by $24 million. Demand deposit balances were down $24 million. Savings deposit balances were up $15 million over the prior quarter.

Average Wealth Management deposits increased $205 million over the fourth quarter of 2017. A $192 million increase in interest-bearing transaction account balances and a $51 million increase in time deposits was partially offset by a $38 million decrease in demand deposit balances.

Average deposits attributed to Funds Management and Other decreased $20 million.

Average time deposits for the first quarter of 2018 included $657 million of brokered deposits, an increase of $75 million over the fourth quarter of 2017. Average interest-bearing transaction accounts for the first quarter included $1.6 billion of brokered deposits, an increase of $158 million over the fourth quarter of 2017.

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

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Table 25 -- Period End Deposits by Principal Market Area
(In thousands)
  Mar. 31, 2018 Dec. 31, 2017 Sept. 30, 2017 June 30, 2017 Mar. 31, 2017
Bank of Oklahoma:          
Demand $4,201,842
 $3,885,008
 $4,061,612
 $4,353,421
 $4,320,666
Interest-bearing:          
Transaction 6,051,302
 5,901,293
 5,909,259
 5,998,787
 6,114,288
Savings 289,351
 265,870
 265,023
 263,664
 265,014
Time 1,203,534
 1,092,133
 1,131,547
 1,170,014
 1,189,144
Total interest-bearing 7,544,187
 7,259,296
 7,305,829
 7,432,465
 7,568,446
Total Bank of Oklahoma 11,746,029
 11,144,304
 11,367,441
 11,785,886
 11,889,112
           
Bank of Texas:          
Demand 3,015,869
 3,239,098
 3,094,184
 3,121,890
 3,091,258
Interest-bearing:          
Transaction 2,208,480
 2,397,071
 2,272,987
 2,272,185
 2,317,576
Savings 98,852
 93,620
 93,400
 91,491
 89,640
Time 475,967
 502,879
 521,072
 502,128
 511,037
Total interest-bearing 2,783,299
 2,993,570
 2,887,459
 2,865,804
 2,918,253
Total Bank of Texas 5,799,168
 6,232,668
 5,981,643
 5,987,694
 6,009,511
           
Bank of Albuquerque:          
Demand 695,060
 663,353
 659,793
 612,117
 593,117
Interest-bearing:          
Transaction 555,414
 552,393
 551,884
 558,523
 623,677
Savings 60,596
 55,647
 53,532
 54,136
 53,683
Time 216,306
 216,743
 224,773
 229,616
 233,506
Total interest-bearing 832,316
 824,783
 830,189
 842,275
 910,866
Total Bank of Albuquerque 1,527,376
 1,488,136
 1,489,982
 1,454,392
 1,503,983
           
Bank of Arkansas:          
Demand 35,291
 30,384
 31,442
 40,511
 42,622
Interest-bearing:          
Transaction 94,206
 85,095
 126,746
 129,848
 106,804
Savings 1,960
 1,881
 1,876
 2,135
 2,304
Time 11,878
 14,045
 14,434
 14,876
 15,067
Total interest-bearing 108,044
 101,021
 143,056
 146,859
 124,175
Total Bank of Arkansas 143,335
 131,405
 174,498
 187,370
 166,797
           
Colorado State Bank & Trust:          
Demand 521,963
 633,714
 540,300
 577,617
 601,778
Interest-bearing:          
Transaction 687,785
 657,629
 628,807
 626,343
 610,510
Savings 37,232
 35,223
 34,776
 35,651
 37,801
Time 215,330
 224,962
 231,927
 228,458
 234,740
Total interest-bearing 940,347
 917,814
 895,510
 890,452
 883,051
Total Colorado State Bank & Trust 1,462,310
 1,551,528
 1,435,810
 1,468,069
 1,484,829
           

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  Mar. 31, 2018 Dec. 31, 2017 Sept. 30, 2017 June 30, 2017 Mar. 31, 2017
Bank of Arizona:          
Demand 330,196
 334,701
 335,740
 366,866
 342,854
Interest-bearing:          
Transaction 248,337
 274,846
 174,010
 154,457
 180,254
Savings 4,116
 3,343
 4,105
 3,638
 3,858
Time 21,009
 20,394
 20,831
 19,911
 26,112
Total interest-bearing 273,462
 298,583
 198,946
 178,006
 210,224
Total Bank of Arizona 603,658
 633,284
 534,686
 544,872
 553,078
           
Mobank (Kansas City):          
Demand 505,802
 457,080
 462,410
 496,473
 514,278
Interest-bearing:          
Transaction 381,447
 382,066
 361,391
 346,996
 406,105
Savings 13,845
 13,574
 12,513
 13,603
 13,424
Time 22,230
 27,260
 27,705
 31,119
 34,242
Total interest-bearing 417,522
 422,900
 401,609
 391,718
 453,771
Total Mobank (Kansas City) 923,324
 879,980
 864,019
 888,191
 968,049
Total BOK Financial deposits $22,205,200
 $22,061,305
 $21,848,079
 $22,316,474
 $22,575,359

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 $16 million at March 31, 2018. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and agency mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $6.3 billion during the quarter, up from $6.2 billion in the fourth quarter of 2017.

At March 31, 2018, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $5.6 billion.

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


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Table 26 -- Borrowed Funds
(In thousands)
    Three Months Ended
March 31, 2018
   Three Months Ended
December 31, 2017
  Mar 31,
2018
 
Average
Balance
During the
Quarter
 Rate 
Maximum
Outstanding
At Any Month
End During
the Quarter
 Dec 31,
2017
 
Average
Balance
During the
Quarter
 Rate 
Maximum
Outstanding
At Any Month
End During
the Quarter
                 
Parent Company and Other Non-Bank Subsidiaries:
Other borrowings 
 
 % $
 
 1,012
 11.33% 1,012
Subordinated debentures 144,687
 144,682
 5.61% $144,687
 144,677
 144,673
 5.55% 144,677
Total parent company and other non-bank subsidiaries 144,687
 144,682
 5.61%   144,677
 145,685
 5.58% 

                 
BOKF, NA:                
Funds purchased 130,561
 106,362
 1.20% 160,087
 58,628
 63,713
 0.90% 80,967
Repurchase agreements 415,763
 426,051
 0.20% 415,763
 516,335
 424,617
 0.18% 516,335
Other borrowings:                
Federal Home Loan Bank advances 5,700,000
 6,295,556
 1.58% 5,700,000
 5,100,000
 6,170,652
 1.34% 5,600,000
GNMA repurchase liability 12,020
 16,434
 4.64% 15,011
 19,947
 22,849
 4.55% 23,700
Other 15,005
 14,977
 2.33% 15,005
 14,950
 15,390
 2.37% 15,506
Total other borrowings 5,727,025
 6,326,967
 1.60% 

 5,134,897
 6,208,891
 1.36% 

Total BOKF, NA 6,273,349
 6,859,380
 1.50%   5,709,860
 6,697,221
 1.28%  
                 
Total other borrowed funds and subordinated debentures $6,418,036
 $7,004,062
 1.59%   $5,854,537
 $6,842,906
 1.37%  
BOKF, NA also has a liability related to the repurchase of certain delinquent residential mortgage loans previously sold in GNMA mortgage pools. Interest is payable monthly at rates contractually due to investors.
Parent Company

At March 31, 2018, cash and interest-bearing cash and cash equivalents held by the parent company totaled $165 million. The primary sources of liquidity for BOK Financial are cash on hand and dividends from BOKF, NA. Dividends from the bank are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the two preceding years. Dividends are further restricted by minimum capital requirements. At March 31, 2018, based upon the most restrictive limitations as well as management's internal capital policy, the bank could declare up to $366 million of dividends without regulatory approval. Dividend constraints may be alleviated through increases in retained earnings, capital issuances or changes in risk weighted assets. Future losses or increases in required regulatory capital at the bank could affect its ability to pay dividends to the parent company.

Our equity capital at March 31, 2018 was $3.5 billion, largely unchanged compared to December 31, 2017. Net income less cash dividends paid increased equity $76 million during the first quarter of 2018. Changes in interest rates resulted in an increase in the accumulated other comprehensive loss to $111 million at March 31, 2018, compared to $36 million at December 31, 2017. The Company also repurchased $9.8 million of our common stock during the first quarter of 2018. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings including expected benefits from lower federal income tax rates, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt or perpetual preferred stock issuance, share repurchase and stock and cash dividends.


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On October 27, 2015, the board of directors authorized the Company to purchase up to five million common shares, subject to market conditions, securities law and other regulatory compliance limitations. As of March 31, 2018, a cumulative total of 3,041,826 shares have been repurchased under this authorization. The Company repurchased 82,583 shares in the first quarter of 2018 at an average of $91.83 per share. The Company repurchased 80,000 shares in the fourth quarter of 2017 at an average price of $92.54 per share.

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

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

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

Table 27 -- Capital Ratios
  Minimum Capital Requirement Capital Conservation Buffer Minimum Capital Requirement Including Capital Conservation Buffer Mar. 31, 2018 Dec. 31, 2017 Mar. 31, 2017
Risk-based capital:            
Common equity Tier 1 4.50% 2.50% 7.00% 12.06% 12.05% 11.59%
Tier 1 capital 6.00% 2.50% 8.50% 12.06% 12.05% 11.59%
Total capital 8.00% 2.50% 10.50% 13.49% 13.54% 13.25%
Tier 1 Leverage 4.00% N/A
 4.00% 9.40% 9.31% 8.89%
             
Average total equity to average assets       10.31% 10.51% 10.10%
Tangible common equity ratio       9.18% 9.50% 8.88%

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

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.


- 40 -



Table 28 -- Non-GAAP Measure
(Dollars in thousands)
  Mar. 31, 2018 Dec. 31, 2017 Sept. 30, 2017 June 30, 2017 Mar. 31, 2017
Tangible common equity ratio:          
Total shareholders' equity $3,495,029
 $3,495,367
 $3,488,814
 $3,422,469
 $3,341,744
Less: Goodwill and intangible assets, net 477,088
 476,088
 485,710
 487,452
 488,294
Tangible common equity 3,017,941
 3,019,279
 3,003,104
 2,935,017
 2,853,450
Total assets 33,361,492
 32,272,160
 33,005,515
 32,263,532
 32,628,932
Less: Goodwill and intangible assets, net 477,088
 476,088
 485,710
 487,452
 488,294
Tangible assets $32,884,404
 $31,796,072
 $32,519,805
 $31,776,080
 $32,140,638
Tangible common equity ratio 9.18% 9.50% 9.23% 9.24% 8.88%

Off-Balance Sheet Arrangements

See Note 6 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.


- 41 -



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

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

Table 29 -- Interest Rate Sensitivity
(Dollars in thousands)
  200 bp Increase 50 bp Decrease
  March 31, March 31,
  2018 2017 2018 2017
Anticipated impact over the next twelve months on net interest revenue $(1,846) $(4,411) $(17,889) $(18,474)
  (0.20)% (0.53)% (1.89)% (2.20)%

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.



- 42 -



Table 30 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
  March 31,
  2018 2017
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp
MSR Asset $23,504
 $(26,145) $25,101
 $(30,489)
MSR Hedge (24,994) 22,132
 (29,524) 25,984
Net Exposure (1,490) (4,013) (4,423) (4,505)

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
March 31,
  2018 2017
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp
Average1
 $185
 $(619) $253
 $(1,215)
Low2
 942
 699
 991
 (398)
High3
 (1,015) (1,504) (456) (1,787)
Period End 390
 (1,201) 193
 (1,656)
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 enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, we take positions in securities, generally residential mortgage-backed securities, government agency securities and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. On a limited basis, we may also take trading positions in U.S. Treasury securities, residential mortgage-backed securities, and municipal bonds to enhance returns on securities portfolios. Both of these activities involve interest rate, liquidity and price risk. BOK Financial has an insignificant exposure to foreign exchange risk and does not take positions in commodity derivatives.

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


- 43 -



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

Table 32 -- Trading Sensitivity Analysis
(Dollars in thousands)
  Three Months Ended
March 31,
  2018 2017
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp
Average1
 $(563) $358
 $(2,643) $2,912
Low2
 849
 2,321
 86
 5,210
High3
 (2,808) (1,206) (4,386) 2
Period End 579
 (841) (3,222) 3,364
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.
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 in general. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “plans,” “projects,” “will,” “intends,” variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and allowance for credit losses, allowance for uncertain tax positions, accruals for loss contingencies and valuation of mortgage servicing rights involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial’s acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to changes in commodity prices, interest rates and interest rate relationships, demand for products and services, the degree of competition by traditional and nontraditional competitors, changes in banking regulations, tax laws, prices, levies and assessments, the impact of technological advances, and trends in customer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

- 44 -



     
Consolidated Statements of Earnings (Unaudited)    
(In thousands, except share and per share data) Three Months Ended
  March 31,
Interest revenue 2018 2017
Loans $188,091
 $160,895
Residential mortgage loans held for sale 1,844
 1,836
Trading securities 7,738
 5,183
Investment securities 3,857
 4,171
Available for sale securities 45,959
 43,372
Fair value option securities 4,819
 2,380
Restricted equity securities 5,117
 4,309
Interest-bearing cash and cash equivalents 7,982
 4,244
Total interest revenue 265,407
 226,390
Interest expense  
  
Deposits 18,219
 11,354
Borrowed funds 25,449
 11,829
Subordinated debentures 2,003
 2,025
Total interest expense 45,671
 25,208
Net interest revenue 219,736
 201,182
Provision for credit losses (5,000) 
Net interest revenue after provision for credit losses 224,736
 201,182
Other operating revenue  
  
Brokerage and trading revenue 30,648
 33,623
Transaction card revenue 20,990
 27,380
Fiduciary and asset management revenue 41,832
 38,631
Deposit service charges and fees 27,161
 27,777
Mortgage banking revenue 26,025
 25,191
Other revenue 12,330
 11,752
Total fees and commissions 158,986
 164,354
Other gains (losses), net (664) 3,627
Loss on derivatives, net (5,685) (450)
Loss on fair value option securities, net (17,564) (1,140)
Change in fair value of mortgage servicing rights 21,206
 1,856
Gain (loss) on available for sale securities, net (290) 2,049
Total other operating revenue 155,989
 170,296
Other operating expense  
  
Personnel 139,947
 136,425
Business promotion 6,010
 6,717
Professional fees and services 10,200
 11,417
Net occupancy and equipment 24,046
 21,624
Insurance 6,593
 6,404
Data processing and communications 27,817
 34,902
Printing, postage and supplies 4,089
 3,851
Net losses and operating expenses of repossessed assets 7,705
 1,009
Amortization of intangible assets 1,300
 1,802
Mortgage banking costs 10,149
 13,003
Other expense 6,574
 7,557
Total other operating expense 244,430
 244,711
Net income before taxes 136,295
 126,767
Federal and state income taxes 30,948
 38,103
Net income 105,347
 88,664
Net income (loss) attributable to non-controlling interests (215) 308
Net income attributable to BOK Financial Corporation shareholders $105,562
 $88,356
Earnings per share:  
  
Basic $1.61
 $1.35
Diluted $1.61
 $1.35
Average shares used in computation:    
Basic 64,847,334
 64,715,964
Diluted 64,888,033
 64,783,737
Dividends declared per share $0.45
 $0.44

See accompanying notes to consolidated financial statements.

- 45 -



Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands, except share and per share data)    
  Three Months Ended
  March 31,
  2018 2017
Net income $105,347
 $88,664
Other comprehensive income (loss) before income taxes:    
Net change in unrealized gain (loss) (97,406) 11,411
Reclassification adjustments included in earnings:    
Loss (gain) on available for sale securities, net 290
 (2,049)
Other comprehensive income (loss) before income taxes (97,116) 9,362
Federal and state income taxes (24,808) 3,616
Other comprehensive income (loss), net of income taxes (72,308)
5,746
Comprehensive income 33,039
 94,410
Comprehensive income (loss) attributable to non-controlling interests (215) 308
Comprehensive income attributable to BOK Financial Corp. shareholders $33,254
 $94,102

See accompanying notes to consolidated financial statements.

- 46 -



Consolidated Balance Sheets
(In thousands, except share data)
  Mar. 31, 2018 Dec. 31, 2017 Mar. 31, 2017
  (Unaudited) (Footnote 1) (Unaudited)
Assets      
Cash and due from banks $544,534
 $602,510
 $546,575
Interest-bearing cash and cash equivalents 2,054,899
 1,714,544
 2,220,640
Trading securities 1,292,432
 462,676
 677,156
Investment securities (fair value:  March 31, 2018 – $428,861; December 31, 2017 – $480,035 ; March 31, 2017 – $540,663)
 416,672
 461,793
 519,402
Available for sale debt securities 8,249,432
 8,321,578
 8,437,291
Fair value option securities 513,668
 755,054
 441,714
Restricted equity securities 338,552
 320,189
 283,936
Residential mortgage loans held for sale 225,190
 221,378
 248,707
Loans 17,337,850
 17,153,424
 16,991,906
Allowance for loan losses (223,967) (230,682) (248,710)
Loans, net of allowance 17,113,883
 16,922,742
 16,743,196
Premises and equipment, net 314,347
 317,335
 325,546
Receivables 478,027
 442,897
 394,394
Goodwill 447,430
 447,430
 445,738
Intangible assets, net 29,658
 28,658
 42,556
Mortgage servicing rights 274,978
 252,867
 249,403
Real estate and other repossessed assets, net of allowance (March 31, 2018 – $17,661; December 31, 2017 – $12,648; March 31, 2017 – $9,065)
 23,652
 28,437
 42,726
Derivative contracts, net 286,687
 220,502
 304,727
Cash surrender value of bank-owned life insurance 318,661
 316,498
 310,537
Receivable on unsettled securities sales 3,638
 75,980
 9,921
Other assets 435,152
 359,092
 384,767
Total assets $33,361,492
 $32,272,160
 $32,628,932
       
Liabilities and Equity      
Liabilities:      
Noninterest-bearing demand deposits $9,306,023
 $9,243,338
 $9,506,573
Interest-bearing deposits:  
  
  
Transaction 10,226,971
 10,250,393
 10,359,214
Savings 505,952
 469,158
 465,724
Time 2,166,254
 2,098,416
 2,243,848
Total deposits 22,205,200
 22,061,305
 22,575,359
Funds purchased 130,561
 58,628
 47,629
Repurchase agreements 415,763
 516,335
 508,352
Other borrowings 5,727,025
 5,134,897
 5,238,947
Subordinated debentures 144,687
 144,677
 144,649
Accrued interest, taxes and expense 156,146
 164,895
 140,235
Derivative contracts, net 233,202
 171,963
 276,422
Due on unsettled securities purchases 94,424
 151,198
 137,069
Other liabilities 737,142
 349,928
 189,376
Total liabilities 29,844,150
 28,753,826
 29,258,038
Shareholders' equity:  
  
  
Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: March 31, 2018 – 75,318,088; December 31, 2017 – 75,147,686; March 31, 2017 – 75,080,768)
 4
 4
 4
Capital surplus 1,041,242
 1,035,895
 1,009,360
Retained earnings 3,127,575
 3,048,487
 2,883,042
Treasury stock (shares at cost:  March 31, 2018 – 9,858,583; December 31, 2017 – 9,752,749;  March 31, 2017 – 9,672,749)
 (562,601) (552,845) (545,441)
Accumulated other comprehensive loss (111,191) (36,174) (5,221)
Total shareholders’ equity 3,495,029
 3,495,367
 3,341,744
Non-controlling interests 22,313
 22,967
 29,150
Total equity 3,517,342
 3,518,334
 3,370,894
Total liabilities and equity $33,361,492
 $32,272,160
 $32,628,932

See accompanying notes to consolidated financial statements.

- 47 -



Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
  Common Stock 
Capital
Surplus
 
Retained
Earnings
 Treasury Stock Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interests
 Total Equity
  Shares Amount   Shares Amount   
                     
Balance, December 31, 2016 74,993
 $4
 $1,006,535
 $2,823,334
 9,656
 $(544,052) $(10,967) $3,274,854
 $31,503
 $3,306,357
Net income 
 
 
 88,356
 
 
 
 88,356
 308
 88,664
Other comprehensive income 
 
 
 
 
 
 5,746
 5,746
 
 5,746
Share-based compensation plans:                    
Stock options exercised 27
 
 1,222
 
 
 
 
 1,222
 
 1,222
Non-vested shares awarded, net 61
 
 
 
 
 
 
 
 
 
Vesting of non-vested shares 
 
 
 
 17
 (1,389) 
 (1,389) 
 (1,389)
Share-based compensation 
 
 1,603
 
 
 
 
 1,603
 
 1,603
Cash dividends on common stock 
 
 
 (28,648) 
 
 
 (28,648) 
 (28,648)
Capital calls and distributions, net 
 
 
 
 
 
 
 
 (2,661) (2,661)
Balance, March 31, 2017 75,081
 $4
 $1,009,360
 $2,883,042
 9,673
 $(545,441) $(5,221) $3,341,744
 $29,150
 $3,370,894
                     
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) 
 
 
 105,562
 
 
 
 105,562
 (215) 105,347
Other comprehensive loss 
 
 
 
 
 
 (72,308) (72,308) 
 (72,308)
Repurchase of common stock 
 
 
 
 83
 (7,584) 
 (7,584) 
 (7,584)
Share-based compensation plans:                    
Stock options exercised 43
 
 2,274
 
 
 
 
 2,274
 
 2,274
Non-vested shares awarded, net 127
 
 
 
 
 
 
 
 
 
Vesting of non-vested shares 
 
 
 
 23
 (2,172) 
 (2,172) 
 (2,172)
Share-based compensation 
 
 3,073
 
 
 
 
 3,073
 
 3,073
Cash dividends on common stock 
 
 
 (29,183) 
 
 
 (29,183) 
 (29,183)
Capital calls and distributions, net 
 
 
 
 
 
 
 
 (439) (439)
Balance, March 31, 2018 75,318

4

1,041,242

3,127,575

9,859

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

22,313

3,517,342

See accompanying notes to consolidated financial statements.

- 48 -



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

 Three Months Ended
  March 31,
  2018 2017
Cash Flows From Operating Activities:    
Net income $105,347
 $88,664
Adjustments to reconcile net income to net cash used in operating activities:  
  
Provision for credit losses (5,000) 
Change in fair value of mortgage servicing rights due to market changes (21,206) (1,856)
Change in the fair value of mortgage servicing rights due to principal payments 7,995
 7,962
Net unrealized losses from derivative contracts 2,222
 1,093
Share-based compensation 3,073
 1,603
Depreciation and amortization 13,561
 12,516
Net amortization of securities discounts and premiums 6,555
 8,520
Net losses (gains) on financial instruments and other losses (gains), net 5,593
 (2,308)
Net gain on mortgage loans held for sale (7,549) (12,457)
Mortgage loans originated for sale (664,958) (711,019)
Proceeds from sale of mortgage loans held for sale 670,598
 772,752
Capitalized mortgage servicing rights (8,900) (8,436)
Change in trading and fair value option securities (588,588) (704,860)
Change in receivables (33,631) 379,310
Change in other assets (4,349) (6,805)
Change in accrued interest, taxes and expense (8,749) (6,469)
Change in other liabilities 379,649
 13,059
Net cash used in operating activities (148,337) (168,731)
Cash Flows From Investing Activities:  
  
Proceeds from maturities or redemptions of investment securities 44,031
 39,651
Proceeds from maturities or redemptions of available for sale securities 412,391
 396,410
Purchases of investment securities 
 (14,392)
Purchases of available for sale securities (518,361) (391,834)
Proceeds from sales of available for sale securities 44,790
 240,010
Change in amount receivable on unsettled securities transactions 72,342
 (2,733)
Loans originated, net of principal collected (180,381) 16,369
Net payments on derivative asset contracts (40,537) 361,996
Proceeds from disposition of assets 44,620
 103,521
Purchases of assets (59,788) (62,899)
Net cash provided by (used in) investing activities (180,893) 686,099
Cash Flows From Financing Activities:  
  
Net change in demand deposits, transaction deposits and savings accounts 76,057
 (194,784)
Net change in time deposits 67,838
 22,048
Net change in other borrowed funds 544,157
 191,785
Net proceeds on derivative liability contracts 41,486
 (365,752)
Net change in derivative margin accounts (24,490) (42,693)
Change in amount due on unsettled security transactions (56,774) 130,561
Issuance of common and treasury stock, net 102
 (167)
Repurchase of common stock (7,584) 
Dividends paid (29,183) (28,648)
Net cash provided by (used in) financing activities 611,609
 (287,650)
Net increase in cash and cash equivalents 282,379
 229,718
Cash and cash equivalents at beginning of period 2,317,054
 2,537,497
Cash and cash equivalents at end of period $2,599,433
 $2,767,215
     
Supplemental Cash Flow Information:    
Cash paid for interest $47,165
 $26,057
Cash paid for taxes $1,548
 $2,602
Net loans and bank premises transferred to repossessed real estate and other assets $2,156
 $909
Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period $19,332
 $30,481
Conveyance of other real estate owned guaranteed by U.S. government agencies $11,817
 $11,704
See accompanying notes to consolidated financial statements.

- 49 -



Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

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

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

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

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

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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

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

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

On March 17, 2016, the FASB Issued ASU 2016-08 to amend the principal versus agent implementation guidance in ASU 2014-09. The ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. Management adopted the standard in the first quarter of 2018. Interchange fees paid to issuing banks for card transactions processed related to its merchant processing services previously included in data processing and communication expense are now netted against the amounts charged to the merchant in transaction card processing revenue. For the first quarter of 2018, interchange fees related to merchant processing services were approximately $9.5 million.




- 50 -



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

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

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

On February 25, 2016, the FASB issued ASU 2016-02 to increase transparency and comparability by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Lessees will be required to recognize an obligation for future lease payments measured on a discounted basis and a right-of-use asset. The ASU is effective for the Company for interim and annual periods beginning after December 15, 2018 and requires transition through a modified retrospective approach for leases existing at or entered into after January 1, 2017. The Company currently estimates that implementation of ASU 2016-02 will increase reported right of use assets and liabilities by approximately $100 million to $150 million.
 
FASB Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Assets Measured at Amortized Cost ("ASU 2016-13")

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

FASB Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15")

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


- 51 -



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

On August 28, 2017, the FASB issued ASU 2017-12, which amends the hedge accounting recognition and presentation requirements in ASC 815 in order to improve transparency and understandability of information and reduce the complexity. The update expands the types of transactions eligible for hedge accounting, eliminates the requirement to separately measure and present hedge ineffectiveness, simplifies hedge effectiveness assessments and updates documentation and presentation requirements. The update allows the reclassification of certain debt securities from held to maturity to available for sale if the debt security is eligible to be hedged under the last-of-layer method. ASU 2017-12 is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods therein; however, early adoption is permitted. The Company is evaluating the impact the adoption of ASU 2017-12 will have on the Company's financial statements.

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

On March 13, 2018, the FASB issued ASU 2018-05, which adds SEC guidance related to SAB 118 - Income Tax Accounting Implications of the Tax Cuts and Jobs Act. ASU 2018-05 was effective upon issuance.

 

- 52 -



(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities are as follows (in thousands):
 
  March 31, 2018 December 31, 2017 March 31, 2017
  Fair Value Net Unrealized Gain (Loss) Fair Value Net Unrealized Gain (Loss) 
Fair
Value
 Net Unrealized Gain (Loss)
U.S. government agency debentures $37,115
 $68
 $21,196
 $8
 $18,365
 $(74)
U.S. government agency residential mortgage-backed securities 1,078,085
 (2,692) 392,673
 (517) 578,977
 1,575
Municipal and other tax-exempt securities 72,013
 
 13,559
 83
 45,114
 171
Asset-backed securities 94,734
 19
 23,885
 (26) 
 
Other trading securities 10,485
 (58) 11,363
 4
 34,700
 36
Total trading securities $1,292,432
 $(2,663) $462,676
��$(448) $677,156
 $1,708
Investment Securities
 
The amortized cost and fair values of investment securities are as follows (in thousands):

  March 31, 2018
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
Municipal and other tax-exempt $197,238
 $198,254
 $1,914
 $(898)
U.S. government agency residential mortgage-backed securities – Other 14,967
 15,112
 319
 (174)
Other debt securities 204,467
 215,495
 13,029
 (2,001)
Total investment securities $416,672
 $428,861
 $15,262
 $(3,073)
  December 31, 2017
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
Municipal and other tax-exempt $228,186
 $230,349
 $2,967
 $(804)
U.S. government agency residential mortgage-backed securities – Other 15,891
 16,242
 446
 (95)
Other debt securities 217,716
 233,444
 17,095
 (1,367)
Total investment securities $461,793
 $480,035
 $20,508
 $(2,266)
  March 31, 2017
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
Municipal and other tax-exempt $298,811
 $301,128
 $2,872
 $(555)
U.S. government agency residential mortgage-backed securities – Other 19,378
 19,967
 669
 (80)
Other debt securities 201,213
 219,568
 19,172
 (817)
Total investment securities $519,402
 $540,663
 $22,713
 $(1,452)



- 53 -



The amortized cost and fair values of investment securities at March 31, 2018, by contractual maturity, are as shown in the following table (dollars in thousands):
  
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 Total 
Weighted
Average
Maturity²
Municipal and other tax-exempt:            
Amortized cost $82,916
 $63,604
 $14,879
 $35,839
 $197,238
 3.77
Fair value 82,772
 63,244
 15,159
 37,079
 198,254
  
Nominal yield¹ 2.02% 2.62% 5.23% 5.65% 3.11%  
Other debt securities:  
  
  
  
  
  
Amortized cost 14,388
 50,653
 123,762
 15,664
 204,467
 6.22
Fair value 14,585
 52,890
 133,634
 14,386
 215,495
  
Nominal yield 4.13% 4.83% 5.67% 4.34% 5.25%  
Total fixed maturity securities:  
  
  
  
  
  
Amortized cost $97,304
 $114,257
 $138,641
 $51,503
 $401,705
 5.02
Fair value 97,357
 116,134
 148,793
 51,465
 413,749
  
Nominal yield 2.33% 3.60% 5.62% 5.25% 4.20%  
Residential mortgage-backed securities:  
  
  
  
  
  
Amortized cost  
  
  
  
 $14,967
 ³
Fair value  
  
  
  
 15,112
  
Nominal yield4
  
  
  
  
 2.76%  
Total investment securities:  
  
  
  
  
  
Amortized cost  
  
  
  
 $416,672
  
Fair value  
  
  
  
 428,861
  
Nominal yield  
  
  
  
 4.15%  
1 
Calculated on a taxable equivalent basis using a 25 percent effective tax rate.
2 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
3 
The average expected lives of residential mortgage-backed securities were 4.9 years based upon current prepayment assumptions.
4 
The nominal yield on residential mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary - Unaudited for current yields on the investment securities portfolio.


- 54 -




Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
  March 31, 2018
  Amortized Fair Gross Unrealized  
  Cost Value Gain Loss OTTI
U.S. Treasury $493
 $491
 $
 $(2) $
Municipal and other tax-exempt 20,428
 20,414
 136
 (150) 
Residential mortgage-backed securities:  
  
  
  
  
U. S. government agencies:  
  
  
  
  
FNMA 3,107,874
 3,041,408
 4,197
 (70,663) 
FHLMC 1,567,520
 1,532,582
 1,390
 (36,328) 
GNMA 817,800
 805,931
 1,265
 (13,134) 
Total U.S. government agencies 5,493,194
 5,379,921
 6,852
 (120,125) 
Private issue 70,434
 90,160
 19,726
 
 
Total residential mortgage-backed securities 5,563,628

5,470,081

26,578

(120,125)

Commercial mortgage-backed securities guaranteed by U.S. government agencies 2,787,630
 2,732,966
 1,998
 (56,662) 
Other debt securities 25,500
 25,480
 48
 (68) 
Total available for sale securities $8,397,679
 $8,249,432
 $28,760
 $(177,007) $

- 55 -



  December 31, 2017
  Amortized Fair Gross Unrealized  
  Cost Value Gain Loss OTTI
U.S. Treasury $1,000
 $1,000
 $
 $
 $
Municipal and other tax-exempt 27,182
 27,080
 181
 (283) 
Residential mortgage-backed securities:    
  
  
  
U. S. government agencies:  
  
  
  
  
FNMA 3,021,551
 2,997,563
 11,549
 (35,537) 
FHLMC 1,545,971
 1,531,009
 3,148
 (18,110) 
GNMA 787,626
 780,580
 1,607
 (8,653) 
Total U.S. government agencies 5,355,148
 5,309,152
 16,304
 (62,300) 
Private issue 74,311
 93,221
 19,301
 
 (391)
Total residential mortgage-backed securities 5,429,459

5,402,373

35,605

(62,300)
(391)
Commercial mortgage-backed securities guaranteed by U.S. government agencies 2,858,885
 2,834,961
 1,963
 (25,887) 
Other debt securities 25,500
 25,481
 50
 (69) 
Perpetual preferred stock 12,562
 15,767
 3,205
 
 
Equity securities and mutual funds 14,487
 14,916
 515
 (86) 
Total available for sale securities $8,369,075
 $8,321,578
 $41,519
 $(88,625) $(391)

  March 31, 2017
  Amortized Fair Gross Unrealized  
  Cost Value Gain Loss OTTI
U.S. Treasury $1,000
 $999
 $
 $(1) $
Municipal and other tax-exempt 35,555
 35,453
 343
 (445) 
Residential mortgage-backed securities:          
U. S. government agencies:  
  
  
  
  
FNMA 3,126,933
 3,126,083
 26,304
 (27,154) 
FHLMC 1,401,752
 1,399,011
 7,836
 (10,577) 
GNMA 851,498
 847,822
 2,499
 (6,175) 
Total U.S. government agencies 5,380,183
 5,372,916
 36,639
 (43,906) 
Private issue 93,372
 108,626
 15,332
 (14) (64)
Total residential mortgage-backed securities 5,473,555

5,481,542

51,971

(43,920)
(64)
Commercial mortgage-backed securities guaranteed by U.S. government agencies 2,895,258
 2,877,028
 4,883
 (23,113) 
Other debt securities 4,400
 4,153
 
 (247) 
Perpetual preferred stock 15,562
 19,272
 3,710
 
 
Equity securities and mutual funds 17,498
 18,844
 1,433
 (87) 
Total available for sale securities $8,442,828
 $8,437,291
 $62,340
 $(67,813) $(64)


- 56 -



The amortized cost and fair values of available for sale securities at March 31, 2018, by contractual maturity, are as shown in the following table (dollars in thousands):
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 Total 
Weighted
Average
Maturity4
U.S. Treasuries:           
Amortized cost$
 $493
 $
 $
 $493
 1.84
Fair value
 491
 
 
 491
  
Nominal yield% 1.99% % % 1.99%  
Municipal and other tax-exempt: 
  
  
  
    
Amortized cost$5,687
 $2,282
 $
 $12,459
 $20,428
 10.02
Fair value5,692
 2,391
 
 12,331
 20,414
  
Nominal yield¹3.18% 6.27% % 2.84%
5 
3.32%  
Commercial mortgage-backed securities:           
Amortized cost$18,207
 $1,021,173
 $1,502,536
 $245,714
 $2,787,630
 6.97
Fair value18,124
 1,005,725
 1,469,488
 239,629
 2,732,966
  
Nominal yield1.58% 1.93% 2.06% 2.08% 2.01%  
Other debt securities: 
  
  
  
    
Amortized cost$
 $
 $
 $25,500
 $25,500
 14.43
Fair value
 
 
 25,480
 25,480
  
Nominal yield% % % 1.59%
5 
1.59%  
Total fixed maturity securities: 
  
  
  
    
Amortized cost$23,894
 $1,023,948
 $1,502,536
 $283,672
 $2,834,051
 7.06
Fair value23,816
 1,008,607
 1,469,488
 277,440
 2,779,351
  
Nominal yield1.96% 1.94% 2.06% 2.07% 2.02%  
Residential mortgage-backed securities: 
  
  
  
    
Amortized cost 
  
  
  
 $5,563,628
 
2 

Fair value 
  
  
  
 5,470,081
  
Nominal yield3
 
  
  
  
 2.00%  
Total available-for-sale securities: 
  
  
  
    
Amortized cost 
  
  
  
 $8,397,679
  
Fair value 
  
  
  
 8,249,432
  
Nominal yield 
  
  
  
 2.01%  
1 
Calculated on a taxable equivalent basis using a 25 percent effective tax rate.
2 
The average expected lives of mortgage-backed securities were 4.3 years years based upon current prepayment assumptions.
3 
The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary –– Unaudited following for current yields on available for sale securities portfolio.
4 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
5 
Nominal yield on municipal and other tax-exempt securities and other debt securities with contractual maturity dates over ten years are based on variable rates which generally are reset within 35 days.

Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 Three Months Ended
March 31,
 2018 2017
Proceeds$44,790
 $240,010
Gross realized gains193
 2,092
Gross realized losses(483) (43)
Related federal and state income tax expense74
 797


- 57 -



A summary of investment and available for sale securities that have been pledged as collateral for repurchase agreements, public trust funds on deposit and for other purposes, as required by law was as follows (in thousands):
 Mar. 31, 2018 Dec. 31, 2017 Mar. 31, 2017
Investment:     
Amortized cost$196,566
 $226,852
 $290,417
Fair value197,845
 229,429
 293,352
      
Available for sale:     
Amortized cost8,289,623
 7,151,468
 6,647,659
Fair value8,124,367
 7,089,346
 6,629,319

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



- 58 -



Temporarily Impaired Securities as of March 31, 2018
(in thousands):
  Number of Securities Less Than 12 Months 12 Months or Longer Total
   
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:              
Municipal and other tax-exempt 96
 $121,251
 $699
 $5,014
 $199
 $126,265
 $898
U.S. government agency residential mortgage-backed securities – Other 2
 3,578
 47
 3,082
 127
 6,660
 174
Other debt securities 78
 34,042
 1,803
 3,321
 198
 37,363
 2,001
Total investment securities 176
 $158,871
 $2,549
 $11,417
 $524
 $170,288
 $3,073

  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
 $491
 $2
 $
 $
 $491
 $2
Municipal and other tax-exempt 13
 12,935
 8
 1,891
 142
 14,826
 150
Residential mortgage-backed securities:    
  
  
  
 

 

U. S. government agencies:    
  
  
  
 

 

FNMA 156
 1,815,606
 35,077
 755,589
 35,586
 2,571,195
 70,663
FHLMC 82
 998,792
 21,502
 361,326
 14,826
 1,360,118
 36,328
GNMA 32
 252,190
 3,986
 235,156
 9,148
 487,346
 13,134
Total U.S. government agencies 270

3,066,588

60,565

1,352,071

59,560

4,418,659

120,125
Private issue 
 
 
 
 
 
 
Total residential mortgage-backed securities 270
 3,066,588
 60,565
 1,352,071
 59,560
 4,418,659
 120,125
Commercial mortgage-backed securities guaranteed by U.S. government agencies 216
 1,658,562
 36,141
 582,971
 20,521
 2,241,533
 56,662
Other debt securities 2
 19,961
 40
 472
 28
 20,433
 68
Total available for sale securities 502
 $4,758,537

$96,756

$1,937,405

$80,251

$6,695,942

$177,007



- 59 -



Temporarily Impaired Securities as of December 31, 2017
(In thousands)
  Number of Securities Less Than 12 Months 12 Months or Longer Total
   
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:              
Municipal and other tax-exempt 100
 $145,960
 $643
 $5,833
 $161
 $151,793
 $804
U.S. government agency residential mortgage-backed securities – Other 1
 
 
 3,356
 95
 3,356
 95
Other debt securities 49
 20,091
 1,238
 3,076
 129
 23,167
 1,367
Total investment securities 150
 $166,051
 $1,881
 $12,265
 $385
 $178,316
 $2,266

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

 

U.S. Treasury 
 $
 $
 $
 $
 $
 $
Municipal and other tax-exempt 19
 12,765
 18
 4,802
 265
 17,567
 283
Residential mortgage-backed securities:  
  
  
  
  
 

 

U. S. government agencies:  
  
  
  
  
 

 

FNMA 113
 1,203,041
 9,618
 824,029
 25,919
 2,027,070
 35,537
FHLMC 69
 863,778
 7,297
 385,816
 10,813
 1,249,594
 18,110
GNMA 27
 201,887
 1,452
 248,742
 7,201
 450,629
 8,653
Total U.S. government agencies 209
 2,268,706
 18,367
 1,458,587
 43,933
 3,727,293
 62,300
Private issue1
 8
 5,898
 391
 
 
 5,898
 391
Total residential mortgage-backed securities 217
 2,274,604
 18,758
 1,458,587
 43,933
 3,733,191
 62,691
Commercial mortgage-backed securities guaranteed by U.S. government agencies 185
 1,465,703
 11,824
 652,296
 14,063
 2,117,999
 25,887
Other debt securities 2
 19,959
 41
 472
 28
 20,431
 69
Perpetual preferred stocks 
 
 
 
 
 
 
Equity securities and mutual funds 111
 911
 7
 2,203
 79
 3,114
 86
Total available for sale securities 534
 $3,773,942

$30,648

$2,118,360

$58,368

$5,892,302

$89,016
1 
Includes securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income.


- 60 -



Temporarily Impaired Securities as of March 31, 2017
(In thousands)
  Number of Securities Less Than 12 Months 12 Months or Longer Total
   
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:              
Municipal and other tax-exempt 102
 $127,374
 $515
 $1,563
 $40
 $128,937
 $555
U.S. government agency residential mortgage-backed securities – Other 1
 4,055
 80
 
 
 4,055
 80
Other debt securities 43
 14,440
 817
 
 
 14,440
 817
Total investment securities 146
 $145,869
 $1,412
 $1,563
 $40
 $147,432
 $1,452

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

 

U.S. Treasury 1
 $999
 $1
 $
 $
 $999
 $1
Municipal and other tax-exempt 12
 1,407
 1
 4,623
 444
 6,030
 445
Residential mortgage-backed securities:  
  
  
  
  
 

 

U. S. government agencies:  
  
  
  
  
 

 

FNMA 83
 1,595,879
 25,623
 68,215
 1,531
 1,664,094
 27,154
FHLMC 51
 795,586
 10,001
 17,284
 576
 812,870
 10,577
GNMA 25
 325,565
 4,402
 69,563
 1,773
 395,128
 6,175
Total U.S. government agencies 159
 2,717,030
 40,026
 155,062
 3,880
 2,872,092
 43,906
Private issue1
 6
 6,805
 37
 13,461
 41
 20,266
 78
Total residential mortgage-backed securities 165
 2,723,835
 40,063
 168,523
 3,921
 2,892,358
 43,984
Commercial mortgage-backed securities guaranteed by U.S. government agencies 161
 1,828,685
 22,758
 36,305
 355
 1,864,990
 23,113
Other debt securities 2
 
 
 4,153
 247
 4,153
 247
Perpetual preferred stocks 
 
 
 
 
 
 
Equity securities and mutual funds 104
 2,116
 40
 856
 47
 2,972
 87
Total available for sale securities 445
 $4,557,042
 $62,863
 $214,460
 $5,014
 $4,771,502
 $67,877
1 
Includes securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income.

Based on evaluations of impaired securities as of March 31, 2018, the Company does not intend to sell any impaired available for sale debt securities before fair value recovers to the current amortized cost and it is more-likely-than-not that the Company will not be required to sell impaired securities before fair value recovers, which may be maturity.
 
  

- 61 -



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

The fair value and net unrealized gain (loss) included in fair value option securities is as follows (in thousands):
  March 31, 2018 December 31, 2017 March 31, 2017
  Fair Value Net Unrealized Gain (Loss) Fair Value Net Unrealized Gain (Loss) 
Fair
Value
 Net Unrealized Gain (Loss)
U.S. government agency residential mortgage-backed securities 513,668
 (5,269) 755,054
 (1,877) 441,714
 (1,646)


Restricted Equity Securities

Restricted equity securities primarily include stock we are required to hold as members of the Federal Reserve system and the Federal Home Loan Banks. Restricted equity securities are carried at cost as these securities do not have a readily determined fair value because ownership of these shares are restricted and they lack a market. A summary of restricted equity securities follows (in thousands):
 Mar. 31, 2018 Dec. 31, 2017 Mar. 31, 2017
Federal Reserve stock$41,178
 $40,746
 $36,498
Federal Home Loan Bank stock297,374
 279,200
 247,194
Other
 243
 244
Total$338,552

$320,189

$283,936

- 62 -



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

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

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

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

As discussed in Note 5, certain derivative contracts not designated as hedging instruments related to mortgage loan commitments and forward sales contracts are included in Residential mortgage loans held for sale on the Consolidated Balance Sheets. See Note 5 for additional discussion of notional, fair value and impact on earnings of these contracts.

- 63 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at March 31, 2018 (in thousands):
  Assets
  
Notional1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $12,375,681
 $49,371
 $(36,833) $12,538
 $
 $12,538
Interest rate swaps 1,500,421
 38,114
 (2,220) 35,894
 (9,107) 26,787
Energy contracts 1,219,505
 134,873
 (59,308) 75,565
 
 75,565
Agricultural contracts 60,706
 2,023
 (1,256) 767
 
 767
Foreign exchange contracts 166,060
 162,966
 
 162,966
 (164) 162,802
Equity option contracts 99,239
 3,949
 
 3,949
 (660) 3,289
Total customer risk management programs 15,421,612
 391,296
 (99,617) 291,679
 (9,931) 281,748
Internal risk management programs 3,789,270
 57,387
 (52,448) 4,939
 
 4,939
Total derivative contracts $19,210,882
 $448,683
 $(152,065) $296,618
 $(9,931) $286,687
             
  Liabilities
  Notional¹ Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $12,229,881
 $46,180
 $(36,833) $9,347
 $(6,539) $2,808
Interest rate swaps 1,500,421
 38,116
 (2,220) 35,896
 (5,674) 30,222
Energy contracts 1,193,851
 131,459
 (59,308) 72,151
 (54,199) 17,952
Agricultural contracts 60,608
 1,993
 (1,256) 737
 
 737
Foreign exchange contracts 160,945
 157,621
 
 157,621
 
 157,621
Equity option contracts 99,239
 3,949
 
 3,949
 
 3,949
Total customer risk management programs 15,244,945
 379,318
 (99,617) 279,701
 (66,412) 213,289
Internal risk management programs 4,469,374
 72,361
 (52,448) 19,913
 
 19,913
Total derivative contracts $19,714,319
 $451,679
 $(152,065) $299,614
 $(66,412) $233,202
1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.



- 64 -



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

  Assets
  
Notional 1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $12,347,542
 $23,606
 $(18,096) $5,510
 $
 $5,510
Interest rate swaps 1,478,944
 28,278
 
 28,278
 (4,964) 23,314
Energy contracts 1,190,067
 103,044
 (47,873) 55,171
 (196) 54,975
Agricultural contracts 53,238
 1,576
 (960) 616
 
 616
Foreign exchange contracts 132,397
 129,551
 
 129,551
 (448) 129,103
Equity option contracts 99,633
 5,503
 
 5,503
 (920) 4,583
Total customer risk management programs 15,301,821
 291,558
 (66,929) 224,629
 (6,528) 218,101
Internal risk management programs 4,736,701
 9,494
 (7,093) 2,401
 
 2,401
Total derivative contracts $20,038,522
 $301,052
 $(74,022) $227,030
 $(6,528) $220,502
             
  Liabilities
  
Notional 1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $11,537,742
 $20,367
 $(18,096) $2,271
 $(704) $1,567
Interest rate swaps 1,478,944
 28,298
 
 28,298
 (12,896) 15,402
Energy contracts 1,166,924
 101,603
 (47,873) 53,730
 (42,767) 10,963
Agricultural contracts 48,552
 1,551
 (960) 591
 
 591
Foreign exchange contracts 126,251
 123,321
 
 123,321
 (53) 123,268
Equity option contracts 99,633
 5,503
 
 5,503
 
 5,503
Total customer risk management programs 14,458,046
 280,643
 (66,929) 213,714
 (56,420) 157,294
Internal risk management programs 5,728,421
 21,762
 (7,093) 14,669
 
 14,669
Total derivative contracts $20,186,467
 $302,405
 $(74,022) $228,383
 $(56,420) $171,963
1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.





- 65 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at March 31, 2017 (in thousands):
  Assets
  
Notional1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $14,549,828
 $80,272
 $(33,143) $47,129
 $
 $47,129
Interest rate swaps 1,491,414
 32,286
 
 32,286
 (3,349) 28,937
Energy contracts 886,699
 42,598
 (28,455) 14,143
 (543) 13,600
Agricultural contracts 51,679
 2,031
 (786) 1,245
 
 1,245
Foreign exchange contracts 211,837
 204,774
 
 204,774
 (72) 204,702
Equity option contracts 99,031
 4,505
 
 4,505
 (920) 3,585
Total customer risk management programs 17,290,488
 366,466
 (62,384) 304,082
 (4,884) 299,198
Internal risk management programs 2,756,963
 5,529
 
 5,529
 
 5,529
Total derivative contracts $20,047,451
 $371,995
 $(62,384) $309,611
 $(4,884) $304,727
             
  Liabilities
  
Notional1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $14,322,223
 $76,971
 $(33,143) $43,828
 $(34,310) $9,518
Interest rate swaps 1,491,414
 33,036
 
 33,036
 
 33,036
Energy contracts 844,406
 40,604
 (28,455) 12,149
 (258) 11,891
Agricultural contracts 51,509
 2,015
 (786) 1,229
 (1,040) 189
Foreign exchange contracts 208,236
 201,043
 
 201,043
 (3,726) 197,317
Equity option contracts 99,031
 4,505
 
 4,505
 
 4,505
Total customer risk management programs 17,016,819
 358,174
 (62,384) 295,790
 (39,334) 256,456
Internal risk management programs 1,090,867
 19,966
 
 19,966
 
 19,966
Total derivative contracts $18,107,686
 $378,140
 $(62,384) $315,756
 $(39,334) $276,422
1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.







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The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):
  Three Months Ended
  March 31, 2018 March 31, 2017
  
Brokerage
and Trading Revenue
 Gain (Loss) on Derivatives, Net 
Brokerage
and Trading
Revenue
 Gain (Loss)on Derivatives, Net
Customer risk management programs:        
Interest rate contracts        
To-be-announced residential mortgage-backed securities $6,819
 $
 $8,027
 $
Interest rate swaps 756
 
 459
 
Energy contracts 3,140
 
 2,873
 
Agricultural contracts 15
 
 9
 
Foreign exchange contracts 176
 
 270
 
Equity option contracts 
 
 
 
Total customer risk management programs 10,906
 
 11,638
 
Internal risk management programs (1,883) (5,685) (467) (450)
Total derivative contracts $9,023
 $(5,685) $11,171
 $(450)
         


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(4) Loans and Allowances for Credit Losses

Loans

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

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

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

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

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

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

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

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


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

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

  March 31, 2018 December 31, 2017
  
Fixed
Rate
 
Variable
Rate
 Non-accrual Total 
Fixed
Rate
 
Variable
Rate
 Non-accrual Total
Commercial $2,193,469
 $8,594,738
 $131,460
 $10,919,667
 $2,217,432
 $8,379,240
 $137,303
 $10,733,975
Commercial real estate 538,291
 2,966,021
 2,470
 3,506,782
 548,692
 2,928,440
 2,855
 3,479,987
Residential mortgage 1,587,416
 312,559
 45,794
 1,945,769
 1,608,655
 317,584
 47,447
 1,973,686
Personal 158,845
 806,447
 340
 965,632
 154,517
 810,990
 269
 965,776
Total $4,478,021
 $12,679,765
 $180,064
 $17,337,850
 $4,529,296
 $12,436,254
 $187,874
 $17,153,424
Accruing loans past due (90 days)1
  
  
  
 $90
  
  
  
 $633
  March 31, 2017
  
Fixed
Rate
 
Variable
Rate
 Non-accrual Total
Commercial $2,201,040
 $7,969,245
 $156,825
 $10,327,110
Commercial real estate 590,375
 3,276,213
 4,475
 3,871,063
Residential mortgage 1,616,328
 283,865
 46,081
 1,946,274
Personal 149,312
 697,912
 235
 847,459
Total $4,557,055
 $12,227,235
 $207,616
 $16,991,906
Accruing loans past due (90 days)1
  
  
  
 $95
1 
Excludes residential mortgage loans guaranteed by agencies of the U.S. government

At March 31, 2018, $5.9 billion or 34 percent of our total loan portfolio is to businesses and individuals attributed to the Texas market and $3.3 billion or 19 percent of the total loan portfolio is to businesses and individuals attributed to the Oklahoma market. These geographic concentrations subject the loan portfolio to the general economic conditions within these areas.

Commercial

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

At March 31, 2018, commercial loans attributed to the Texas market totaled $3.7 billion or 34 percent of the commercial loan portfolio segment, commercial loans attributed to the Oklahoma market totaled $1.9 billion or 18 percent of the commercial loan portfolio segment and commercial loans attributed to the Colorado market totaled $1.0 billion or 10 percent of the commercial loan portfolio segment.


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The commercial loan portfolio segment is further divided into loan classes. The energy loan class totaled $3.0 billion or 17 percent of total loans at March 31, 2018, including $2.5 billion of outstanding loans to energy producers. Approximately 56 percent of committed production loans are secured by properties primarily producing oil and 44 percent are secured by properties producing natural gas. The services loan class totaled $2.9 billion or 17 percent of total loans at March 31, 2018. Approximately $1.4 billion of loans in the services category consist of loans with individual balances of less than $10 million. Businesses included in the services class include governmental, educational services, commercial services, loans to entities providing services for real estate and construction and consumer services. The healthcare loan class totaled $2.4 billion or 14 percent of total loans at March 31, 2018. The healthcare loan class consists primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Healthcare also includes loans to hospitals and other medical service providers.

Commercial Real Estate

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

At March 31, 2018, 34 percent of commercial real estate loans are secured by properties primarily located in the Dallas and Houston areas of Texas. An additional 12 percent of commercial real estate loans are secured by properties located primarily in the Tulsa and Oklahoma City metropolitan areas of Oklahoma. 

Residential Mortgage and Personal

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

At March 31, 2018, residential mortgage loans included $178 million of loans guaranteed by U.S. government agencies previously sold into GNMA mortgage pools. These loans either have been repurchased or are eligible to be repurchased by the Company when certain defined delinquency criteria are met. Although payments on these loans generally are past due more than 90 days, interest continues to accrue based on the government guarantee.

Home equity loans totaled $720 million at March 31, 2018. Approximately 63 percent of the home equity loan portfolio is comprised of first lien loans and 37 percent of the home equity portfolio is comprised of junior lien loans. Junior lien loans are distributed 46 percent to amortizing term loans and 54 percent to revolving lines of credit. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 5 year revolving period followed by a 15 year term of amortizing repayments. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term, subject to an update of certain credit information.


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Credit Commitments
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At March 31, 2018, outstanding commitments totaled $10.2 billion. Because some commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans.

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

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At March 31, 2018, outstanding standby letters of credit totaled $664 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 5, 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 months ended March 31, 2018.

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

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


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

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

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

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

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended March 31, 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 (3,111) 266
 (162) (152) (2,242) (5,401)
Loans charged off (1,563) 
 (100) (1,227) 
 (2,890)
Recoveries 488
 183
 242
 663
 
 1,576
Ending balance $120,083
 $57,070
 $18,431
 $8,408
 $19,975
 $223,967
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance $3,644
 $45
 $43
 $2
 $
 $3,734
Provision for off-balance sheet credit losses 383
 (1) 19
 
 
 401
Ending balance $4,027
 $44
 $62
 $2
 $
 $4,135
             
Total provision for credit losses $(2,728) $265
 $(143) $(152) $(2,242) $(5,000)

             


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The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended March 31, 2017 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Residential Mortgage Personal Nonspecific Allowance Total
Allowance for loan losses:            
Beginning balance $140,213
 $50,749
 $18,224
 $8,773
 $28,200
 $246,159
Provision for loan losses (3,355) 6,859
 (39) (788) (873) 1,804
Loans charged off (424) 
 (236) (1,493) 
 (2,153)
Recoveries 1,182
 735
 228
 755
 
 2,900
Ending balance $137,616
 $58,343
 $18,177
 $7,247
 $27,327
 $248,710
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance $11,063
 $123
 $50
 $8
 $
 $11,244
Provision for off-balance sheet credit losses (1,775) (17) (10) (2) 
 (1,804)
Ending balance $9,288
 $106
 $40
 $6
 $
 $9,440
             
Total provision for credit losses $(5,130) $6,842
 $(49) $(790) $(873) $
             

The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at March 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 $10,788,207
 $106,721
 $131,460
 $13,362
 $10,919,667
 $120,083
Commercial real estate 3,504,312
 57,070
 2,470
 
 3,506,782
 57,070
Residential mortgage 1,899,975
 18,431
 45,794
 
 1,945,769
 18,431
Personal 965,292
 8,408
 340
 
 965,632
 8,408
Total 17,157,786
 190,630
 180,064
 13,362
 17,337,850
 203,992
             
Nonspecific allowance 
 
 
 
 
 19,975
             
Total $17,157,786
 $190,630
 $180,064
 $13,362
 $17,337,850
 $223,967


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The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 2017 is as follows (in thousands):
  
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $10,596,672
 $115,438
 $137,303
 $8,831
 $10,733,975
 $124,269
Commercial real estate 3,477,132
 56,621
 2,855
 
 3,479,987
 56,621
Residential mortgage 1,926,239
 18,451
 47,447
 
 1,973,686
 18,451
Personal 965,507
 9,124
 269
 
 965,776
 9,124
Total 16,965,550
 199,634
 187,874
 8,831
 17,153,424
 208,465
             
Nonspecific allowance 
 
 
 
 
 22,217
             
Total $16,965,550
 $199,634
 $187,874
 $8,831
 $17,153,424
��$230,682

The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at March 31, 2017 is as follows (in thousands):
  
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $10,170,285
 $134,164
 $156,825
 $3,452
 $10,327,110
 $137,616
Commercial real estate 3,866,588
 58,343
 4,475
 
 3,871,063
 58,343
Residential mortgage 1,900,193
 18,132
 46,081
 45
 1,946,274
 18,177
Personal 847,224
 7,247
 235
 
 847,459
 7,247
Total 16,784,290
 217,886
 207,616
 3,497
 16,991,906
 221,383
             
Nonspecific allowance 
 
 
 
 
 27,327
             
Total $16,784,290
 $217,886
 $207,616
 $3,497
 $16,991,906
 $248,710

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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 March 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 $10,894,979
 $119,202
 $24,688
 $881
 $10,919,667
 $120,083
Commercial real estate 3,506,782
 57,070
 
 
 3,506,782
 57,070
Residential mortgage 229,996
 2,949
 1,715,773
 15,482
 1,945,769
 18,431
Personal 880,694
 6,570
 84,938
 1,838
 965,632
 8,408
Total 15,512,451
 185,791
 1,825,399
 18,201
 17,337,850
 203,992
             
Nonspecific allowance 
 
 
 
 
 19,975
             
Total $15,512,451
 $185,791
 $1,825,399
 $18,201
 $17,337,850
 $223,967
 
The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at December 31, 2017 is as follows (in thousands):
  Internally Risk Graded Non-Graded Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $10,706,035
 $123,383
 $27,940
 $886
 $10,733,975
 $124,269
Commercial real estate 3,479,987
 56,621
 
 
 3,479,987
 56,621
Residential mortgage 234,477
 2,947
 1,739,209
 15,504
 1,973,686
 18,451
Personal 877,390
 6,461
 88,386
 2,663
 965,776
 9,124
Total 15,297,889
 189,412
 1,855,535
 19,053
 17,153,424
 208,465
             
Nonspecific allowance 
 
 
 
 
 22,217
             
Total $15,297,889
 $189,412
 $1,855,535
 $19,053
 $17,153,424
 $230,682

The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at March 31, 2017 is as follows (in thousands):
  Internally Risk Graded Non-Graded Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $10,302,774
 $136,672
 $24,336
 $944
 $10,327,110
 $137,616
Commercial real estate 3,871,063
 58,343
 
 
 3,871,063
 58,343
Residential mortgage 211,846
 2,958
 1,734,428
 15,219
 1,946,274
 18,177
Personal 749,028
 5,136
 98,431
 2,111
 847,459
 7,247
Total 15,134,711
 203,109
 1,857,195
 18,274
 16,991,906
 221,383
             
Nonspecific allowance 
 
 
 
 
 27,327
             
Total $15,134,711
 $203,109
 $1,857,195
 $18,274
 $16,991,906
 $248,710

- 75 -




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

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

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


- 76 -



The following table summarizes the Company’s loan portfolio at March 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 $2,745,169
 $10,750
 $123,757
 $89,942
 $
 $
 $2,969,618
Services 2,872,017
 23,155
 31,013
 2,109
 
 
 2,928,294
Wholesale/retail 1,507,322
 2,705
 18,985
 2,564
 
 
 1,531,576
Manufacturing 540,580
 9,047
 7,066
 3,002
 
 
 559,695
Healthcare 2,316,962
 
 27,624
 15,342
 
 
 2,359,928
Other commercial and industrial 516,970
 
 10,421
 18,477
 24,664
 24
 570,556
Total commercial 10,499,020
 45,657
 218,866
 131,436
 24,664
 24
 10,919,667
               
Commercial real estate:  
    
  
  
  
  
Residential construction and land development 113,894
 1,828
 123
 1,613
 
 
 117,458
Retail 728,045
 21,993
 94
 264
 
 
 750,396
Office 729,824
 7,045
 
 275
 
 
 737,144
Multifamily 1,008,863
 
 40
 
 
 
 1,008,903
Industrial 613,608
 
 
 
 
 
 613,608
Other commercial real estate 278,955
 
 
 318
 
 
 279,273
Total commercial real estate 3,473,189
 30,866
 257
 2,470
 
 
 3,506,782
               
Residential mortgage:  
    
  
  
  
  
Permanent mortgage 224,232
 1,499
 3,147
 1,118
 794,329
 23,460
 1,047,785
Permanent mortgages guaranteed by U.S. government agencies 
 
 
 
 168,997
 8,883
 177,880
Home equity 
 
 
 
 707,771
 12,333
 720,104
Total residential mortgage 224,232
 1,499
 3,147
 1,118
 1,671,097
 44,676
 1,945,769
               
Personal 880,509
 48
 55
 82
 84,680
 258
 965,632
               
Total $15,076,950
 $78,070
 $222,325
 $135,106
 $1,780,441
 $44,958
 $17,337,850


- 77 -



The following table summarizes the Company’s loan portfolio at December 31, 2017 by the risk grade categories (in thousands): 
  Internally Risk Graded Non-Graded  
  Performing        
  Pass Other Loans Especially Mentioned Accruing Substandard Nonaccrual Performing Nonaccrual Total
Commercial:              
Energy $2,632,986
 $60,288
 $144,598
 $92,284
 $
 $
 $2,930,156
Services 2,943,869
 13,927
 26,533
 2,620
 
 
 2,986,949
Wholesale/retail 1,443,917
 19,263
 5,502
 2,574
 
 
 1,471,256
Manufacturing 472,869
 6,653
 11,290
 5,962
 
 
 496,774
Healthcare 2,253,497
 3,186
 43,305
 14,765
 
 
 2,314,753
Other commercial and industrial 478,951
 7
 8,161
 19,028
 27,870
 70
 534,087
Total commercial 10,226,089
 103,324
 239,389
 137,233
 27,870
 70
 10,733,975
               
Commercial real estate:  
    
  
  
  
  
Residential construction and land development 113,190
 1,828
 395
 1,832
 
 
 117,245
Retail 686,915
 4,243
 98
 276
 
 
 691,532
Office 824,408
 7,087
 
 275
 
 
 831,770
Multifamily 979,969
 
 48
 
 
 
 980,017
Industrial 573,014
 
 
 
 
 
 573,014
Other commercial real estate 285,506
 145
 286
 472
 
 
 286,409
Total commercial real estate 3,463,002
 13,303
 827
 2,855
 
 
 3,479,987
               
Residential mortgage:  
    
  
  
  
  
Permanent mortgage 232,492
 
 822
 1,163
 784,928
 24,030
 1,043,435
Permanent mortgages guaranteed by U.S. government agencies 
 
 
 
 188,327
 9,179
 197,506
Home equity 
 
 
 
 719,670
 13,075
 732,745
Total residential mortgage 232,492
 
 822
 1,163
 1,692,925
 46,284
 1,973,686
               
Personal 875,696
 1,548
 63
 83
 88,200
 186
 965,776
               
Total $14,797,279
 $118,175
 $241,101
 $141,334
 $1,808,995
 $46,540
 $17,153,424


- 78 -



The following table summarizes the Company’s loan portfolio at March 31, 2017 by the risk grade categories (in thousands): 
  Internally Risk Graded Non-Graded  
  Performing        
  Pass Other Loans Especially Mentioned Accruing Substandard Nonaccrual Performing Nonaccrual Total
Commercial:              
Energy $1,988,392
 $144,157
 $294,138
 $110,425
 $
 $
 $2,537,112
Services 2,960,912
 13,931
 30,819
 7,713
 
 
 3,013,375
Wholesale/retail 1,459,703
 21,970
 13,480
 11,090
 
 
 1,506,243
Manufacturing 504,824
 1,917
 30,782
 5,907
 
 
 543,430
Healthcare 2,196,517
 35,704
 32,474
 909
 
 
 2,265,604
Other commercial and industrial 407,317
 4,641
 4,315
 20,737
 24,292
 44
 461,346
Total commercial 9,517,665
 222,320
 406,008
 156,781
 24,292
 44
 10,327,110
               
Commercial real estate:  
    
  
  
  
  
Residential construction and land development 132,127
 
 1,251
 2,616
 
 
 135,994
Retail 738,978
 5,754
 
 314
 
 
 745,046
Office 857,582
 2,894
 
 413
 
 
 860,889
Multifamily 918,542
 
 4,425
 24
 
 
 922,991
Industrial 871,387
 
 
 76
 
 
 871,463
Other commercial real estate 333,554
 
 94
 1,032
 
 
 334,680
Total commercial real estate 3,852,170
 8,648
 5,770
 4,475
 
 
 3,871,063
               
Residential mortgage:  
    
  
  
  
  
Permanent mortgage 207,886
 1,710
 490
 1,760
 743,469
 22,428
 977,743
Permanent mortgages guaranteed by U.S. government agencies 
 
 
 
 194,073
 10,108
 204,181
Home equity 
 
 
 
 752,565
 11,785
 764,350
Total residential mortgage 207,886
 1,710
 490
 1,760
 1,690,107
 44,321
 1,946,274
               
Personal 748,000
 49
 888
 91
 98,287
 144
 847,459
               
Total $14,325,721
 $232,727
 $413,156
 $163,107
 $1,812,686
 $44,509
 $16,991,906



- 79 -



Impaired Loans

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

A summary of impaired loans follows (in thousands):
 As of For the
 March 31, 2018 Three Months Ended
   Recorded Investment   March 31, 2018
 
Unpaid
Principal
Balance
 Total With No
Allowance
 With Allowance Related Allowance Average Recorded
Investment
 Interest Income Recognized
Commercial:             
Energy$111,002
 $89,942
 $22,816
 $67,126
 $12,701
 $91,113
 $
Services4,865
 2,109
 2,109
 
 
 2,365
 
Wholesale/retail9,089
 2,564
 2,564
 
 
 2,569
 
Manufacturing3,111
 3,002
 2,741
 261
 261
 4,482
 
Healthcare26,019
 15,342
 9,107
 6,235
 400
 15,053
 
Other commercial and industrial27,421
 18,501
 18,501
 
 
 18,799
 
Total commercial181,507
 131,460
 57,838
 73,622
 13,362
 134,381
 
              
Commercial real estate: 
  
  
  
  
  
  
Residential construction and land development3,059
 1,613
 1,613
 
 
 1,723
 
Retail498
 264
 264
 
 
 270
 
Office287
 275
 275
 
 
 275
 
Multifamily
 
 
 
 
 
 
Industrial
 
 
 
 
 
 
Other commercial real estate522
 318
 318
 
 
 395
 
Total commercial real estate4,366
 2,470
 2,470
 
 
 2,663
 
              
Residential mortgage: 
  
  
  
  
  
  
Permanent mortgage29,686
 24,578
 24,578
 
 
 24,885
 306
Permanent mortgage guaranteed by U.S. government agencies1
183,476
 177,880
 177,880
 
 
 199,380
 1,848
Home equity13,898
 12,333
 12,333
 
 
 12,704
 
Total residential mortgage227,060
 214,791
 214,791
 
 
 236,969
 2,154