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BOKF BOK Financial

Filed: 1 May 19, 4:39pm
0000875357 bokf:MisuseofRevenuesPledgedtoMunicipalBondsMember us-gaap:JudicialRulingMember 2019-03-31


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, 2019
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

BOK FINANCIAL 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: 71,449,982 shares of common stock ($.00006 par value) as of March 31, 2019.





BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2019

Index

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




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

BOK Financial Corporation (“the Company”) reported net income of $110.6 million or $1.54 per diluted share for the first quarter of 2019. Net income was $105.6 million or $1.61 per diluted share for the first quarter of 2018 and $108.5 million or $1.50 per diluted share for the fourth quarter of 2018. 

On October 1, 2018, the Company acquired CoBiz Financial, Inc. ("CoBiz"). We incurred $12.7 million of integration costs in the first quarter of 2019 and $14.5 million in the fourth quarter of 2018, resulting in a per share reduction of 13 cents and 15 cents, respectively. The fluctuation discussion in the highlights below excludes the impact of these items.

Highlights of the first quarter of 2019 included:
Net interest revenue totaled $278.1 million, up $58.4 million over the first quarter of 2018. CoBiz added $42.8 million to net interest revenue. The remaining increase in net interest revenue over the prior year was driven by both growth in average earning assets and improving yields. Net interest margin was 3.30 percent for the first quarter of 2019 compared to 2.99 percent for the first quarter of 2018. Average earning assets were $34.4 billion for the first quarter of 2019 compared to $29.9 billion for the first quarter of 2018. Net interest revenue decreased $7.6 million compared to the fourth quarter of 2018. Net interest margin decreased by 10 basis points. A decrease in average non-interest bearing demand deposits and an increase in average trading securities and related receivables combined to decrease net interest revenue and to compress the net interest margin.
Fees and commissions revenue totaled $160.6 million, an increase of $938 thousand compared to the first quarter of 2018. Increases in brokerage and trading, fiduciary and asset management and deposit service charges were partially offset by decreased mortgage banking revenue. Fees and commissions revenue were consistent with the fourth quarter of 2018. Increases in brokerage and trading and mortgage banking revenue were offset by a decrease in other revenue.
Other operating expense totaled $274.4 million, a $30.0 million increase over the first quarter of 2018. Expenses related to CoBiz operations added $26.6 million in the first quarter of 2019. Excluding CoBiz operations, personnel expense increased $9.6 million, primarily due to an increase in regular and share-based compensation. Non-personnel expense decreased $6.4 million, largely due to a decrease in net losses and expenses related to repossessed assets. Operating expense increased $4.3 million over the fourth quarter of 2018. Personnel expense increased $10.9 million, primarily due to an increase in share-based compensation expense due to changes in vesting assumptions. Non-personnel expense decreased $6.6 million.
The Company recorded a provision for credit losses of $8.0 million in the first quarter of 2019 and $9.0 million in the fourth quarter of 2018. A negative provision of $5.0 million was recorded in the first quarter of 2018. Nonperforming assets not guaranteed by U.S. government agencies decreased $10.8 million compared to December 31, 2018. Potential problem loans decreased $46 million while other loans especially mentioned increased $14 million. Net charge-offs were $10.1 million or 0.19 percent of average loans for the first quarter of 2019, compared to net charge-offs of $12.3 million or 0.23% of average loans for the fourth quarter of 2018. The combined allowance for credit losses totaled $207 million or 0.95 percent of outstanding loans at March 31, 2019 compared to $209 million or 0.97 percent of outstanding loans at December 31, 2018.
Period-end outstanding loan balances totaled $21.8 billion at March 31, 2019, an increase of $102 million over December 31, 2018.
Period-end deposits were $25.3 billion at March 31, 2019, a $68 million increase compared to December 31, 2018. Interest-bearing transaction deposits increased $270 million while demand deposit balances decreased $318 million. Savings and time deposits balances increased $116 million.
The common equity Tier 1 capital ratio at March 31, 2019 was 10.71 percent. Other regulatory capital ratios were Tier 1 capital ratio, 10.71 percent, total capital ratio, 12.24 percent, and leverage ratio, 8.76 percent. At December 31, 2018, the common equity Tier 1 capital ratio was 10.92 percent, the Tier 1 capital ratio was 10.92 percent, total capital ratio was 12.50 percent, and leverage ratio was 8.96 percent.


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The Company repurchased 705,609 shares at an average price of $85.85 per share during the first quarter of 2019 and 525,000 thousand shares at an average price of $85.82 in the fourth quarter of 2018.
The company paid a regular cash dividend of $35.9 million or $0.50 per common share during the first quarter of 2019. On April 30, 2019, the board of directors approved a quarterly cash dividend of $0.50 per common share payable on or about May 28, 2019 to shareholders of record as of May 13, 2019.

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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.

Tax-equivalent net interest revenue totaled $281.3 million for the first quarter of 2019, up from $221.7 million in the first quarter of 2018. CoBiz added $42.8 million to net interest revenue, including $7.8 million of net purchase accounting discount accretion in the first quarter of 2019. Net interest revenue increased $15.6 million primarily due to three 25 basis point increases in the federal funds rate by the Federal Reserve since the end of the first quarter of 2018 and $43.9 million primarily due to growth in average loan balances, including acquired loans. Table 1 shows the effect on net interest revenue from changes in average balances and interest rates for various types of earning assets and interest-bearing liabilities.

Net interest margin was 3.30 percent for the first quarter of 2019, compared to 2.99 percent for the first quarter of 2018. The tax-equivalent yield on earning assets was 4.46 percent, up 85 basis points over the first quarter of 2018. Loan yields increased 81 basis points to 5.26 percent primarily due to an increase in short-term interest rates. The yield on interest-bearing cash and cash equivalents increased 99 basis points to 2.56 percent. Yield on trading securities increased 48 basis points. The available for sale securities portfolio yield increased 34 basis points to 2.57 percent and the yield on fair value option securities was up 67 basis points. Funding costs were up 73 basis points over the first quarter of 2018. The cost of interest-bearing deposits increased 47 basis points and the cost of other borrowed funds increased 104 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 50 basis points for the first quarter of 2019, up 19 basis points over the first quarter of 2018.
 
Average earning assets for the first quarter of 2019 increased $4.5 billion or 15 percent over the first quarter of 2018. Average loans, net of allowance for loan losses, increased $4.5 billion, including acquired loans. The legacy BOKF portfolio grew $1.6 billion mainly due to growth in commercial and commercial real estate loans. Available for sale securities increased $646 million. The average balance of trading securities grew by $1.0 billion, primarily due to expansion of U.S. agency residential mortgage-backed securities trading activities. Interest-bearing cash and cash equivalent balances decreased $1.5 billion. The Company reduced excess cash balances held at the Federal Reserve, including cash used in our purchase of CoBiz.

Average deposits increased $2.5 billion compared to the first quarter of 2018, including $3.2 billion related to CoBiz. Excluding acquired deposits, demand deposit balances decreased $694 million and time deposits decreased $72 million. Average borrowed funds increased $2.2 billion over the first quarter of 2018, primarily due to funds purchased and repurchase agreement balances.
Tax-equivalent net interest revenue decreased $7.5 million compared to the fourth quarter of 2018. Net interest margin decreased 10 basis points compared to the fourth quarter of 2018. A decrease in average non-interest bearing demand deposits and an increase in average trading securities and related receivables combined to decrease net interest revenue and to compress the net interest margin. Due to the nature of trading activity, the increase in revenue associated with the increase in trading securities is recognized as brokerage and trading revenue, while the related funding costs remain in interest expense.
The yield on average earning assets was up 13 basis points over the prior quarter. The loan portfolio yield increased 17 basis points. The yield on interest-bearing cash and cash equivalents increased 33 basis points. The yield on the trading securities portfolio was down 22 basis points and the yield on the available for sale securities portfolio increased 6 basis points. Funding costs were 1.66 percent, up 24 basis points. The cost of interest-bearing deposits increased 17 basis points to 1.04 percent. The cost of other borrowed funds was up 21 basis points to 2.54 percent. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 1 basis point over the prior quarter.
Average earning assets increased $675 million compared to the fourth quarter of 2018. Average loan balances grew by $187 million. Average fair value option securities increased $317 million. Average available for sale securities increased $178 million. Trading securities balances increased $39 million.

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Average deposit balances decreased $481 million compared to the fourth quarter of 2018. Demand deposit balances decreased $661 million, partially offset by an increase in interest-bearing transaction account balances of $158 million. The average balance of borrowed funds increased $1.5 billion. The decrease in non-interest bearing demand deposits appears to have been driven primarily by seasonal factors along with commercial customers putting their cash to use.

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 77% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally reprice more quickly than liabilities. One of the strategies that we use to manage toward a relative rate-neutral position is to purchase fixed-rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market-rate-sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. 

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

Table 1 -- Volume/Rate Analysis
(In thousands)
  Three Months Ended
March 31, 2019 / 2018
    
Change Due To1
  Change Volume Yield/Rate
Tax-equivalent interest revenue:      
Interest-bearing cash and cash equivalents $(4,585) $(7,753) $3,168
Trading securities 10,981
 9,224
 1,757
Investment securities 317
 (966) 1,283
Available for sale securities 10,873
 2,780
 8,093
Fair value option securities 418
 (597) 1,015
Restricted equity securities 1,228
 811
 417
Residential mortgage loans held for sale (181) (549) 368
Loans 92,754
 53,853
 38,901
Total tax-equivalent interest revenue 111,805
 56,803
 55,002
Interest expense:      
Transaction deposits 16,210
 2,736
 13,474
Savings deposits 72
 12
 60
Time deposits 2,916
 3
 2,913
Funds purchased and repurchase agreements 9,834
 4,561
 5,273
Other borrowings 21,527
 3,746
 17,781
Subordinated debentures 1,742
 1,796
 (54)
Total interest expense 52,301
 12,854
 39,447
Tax-equivalent net interest revenue 59,504
 43,949
 15,555
Change in tax-equivalent adjustment 1,138
    
Net interest revenue $58,366
    
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 $157.3 million for the first quarter of 2019, a $1.3 million increase over the first quarter of 2018 and a $20.8 million increase over the fourth quarter of 2018. The change in the fair value of mortgage servicing rights, net of economic hedges, decreased other operating revenue by $6.6 million in the first quarter of 2018 and $12.4 million in the fourth quarter of 2018. In addition, other net gains and losses improved $11.3 million compared to the fourth quarter of 2018, largely related to assets held to offset changes in deferred compensation.

Table 2 – Other Operating Revenue 
(In thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2018 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Brokerage and trading revenue $31,617
 $30,648
 $969
 3 % $28,101
 $3,516
 13 %
Transaction card revenue 20,738
 20,990
 (252) (1)% 20,664
 74
  %
Fiduciary and asset management revenue 43,358
 41,832
 1,526
 4 % 43,665
 (307) (1)%
Deposit service charges and fees 28,243
 27,161
 1,082
 4 % 29,393
 (1,150) (4)%
Mortgage banking revenue 23,834
 26,025
 (2,191) (8)% 21,880
 1,954
 9 %
Other revenue 12,762
 12,958
 (196) (2)% 16,404
 (3,642) (22)%
Total fees and commissions revenue 160,552
 159,614

938
 1 % 160,107

445
  %
Other gains (losses), net 2,976
 (1,292) 4,268
 N/A
 (8,305) 11,281
 N/A
Loss on derivatives, net 4,667
 (5,685) 10,352
 N/A
 11,167
 (6,500) N/A
Gain (loss) on fair value option securities, net 9,665
 (17,564) 27,229
 N/A
 (282) 9,947
 N/A
Change in fair value of mortgage servicing rights (20,666) 21,206
 (41,872) N/A
 (24,233) 3,567
 N/A
Gain (loss) on available for sale securities, net 76
 (290) 366
 N/A
 (1,999) 2,075
 N/A
Total other operating revenue $157,270
 $155,989
 $1,281
 1 % $136,455
 $20,815
 15 %
               
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 37 percent of total revenue for the first quarter of 2019, excluding provision for credit losses and gains and losses on other assets, securities and derivatives and the change in the fair value of mortgage servicing rights. We believe that a variety of fee revenue sources provides an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors such as rising interest rates resulting in growth in net interest revenue or fiduciary and asset management revenue, may also decrease mortgage production volumes. We expect growth in other operating revenue to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and Trading Revenue

Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage and investment banking, increased $969 thousand or 3 percent compared to the first quarter of 2018.


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Trading revenue includes net realized and unrealized gains and losses primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies, municipal securities and asset-backed securities to institutional customers and related derivative instruments. Trading revenue was $12.9 million for the first quarter of 2019, a $2.5 million or 24 percent increase compared to the first quarter of 2018. Average trading securities increased $1.0 billion compared to the first quarter of 2018.

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 $6.7 million for the first quarter of 2019, a $4.2 million or 39 percent decrease compared to the first quarter of 2018, largely related to energy contracts.
Brokerage and trading revenue increased $3.5 million compared to the previous quarter, primarily due to increased trading volumes.

Fiduciary and Asset Management Revenue

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 80 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships. Fiduciary and asset management revenue increased $1.5 million or 4 percent over the first quarter of 2018 and was consistent compared to the fourth quarter of 2018.

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, 2019 March 31, 2018 December 31, 2018
 Balance 
Revenue1
 
Margin2
 Balance 
Revenue1
 
Margin2
 Balance 
Revenue1
 
Margin2
Managed fiduciary assets:                 
Personal$8,428,218
 $23,276
 1.10% $7,577,717
 $22,632
 1.19% $8,115,503
 $23,773
 1.17%
Institutional14,026,020
 6,138
 0.18% 13,322,472
 5,469
 0.16% 13,119,497
 5,918
 0.18%
Total managed fiduciary assets22,454,238
 29,414
 0.52% 20,900,189
 28,101
 0.54% 21,235,000
 29,691
 0.56%
                  
Non-managed assets:                 
Fiduciary23,946,911
 13,528
 0.23% 25,748,101
 12,997
 0.20% 23,606,339
 13,454
 0.23%
Non-fiduciary16,215,999
 416
 0.01% 16,321,458
 734
 0.02% 15,964,854
 521
 0.01%
Safekeeping and brokerage assets under administration16,235,136
 
 % 15,909,241
 
 % 15,473,584
 
 %
Total non-managed assets56,398,046
 13,944
 0.10% 57,978,800
 13,731
 0.09% 55,044,777
 13,975
 0.10%
                  
Total assets under management or administration$78,852,284
 $43,358
 0.22% $78,878,989
 $41,832
 0.21% $76,279,777
 $43,666
 0.23%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Annualized revenue divided by period-end balance.







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A summary of changes in assets under management or administration for the three months ended March 31, 2019 and 2018 follows:

Table 4 -- Changes in Assets Under Management or Administration
  Three Months Ended
March 31,
  2019 2018
Beginning balance $76,279,777
 $81,827,797
Net inflows (outflows) (989,398) (3,434,649)
Net change in fair value 3,561,905
 485,841
Ending balance $78,852,284
 $78,878,989

Mortgage Banking Revenue

Mortgage banking revenue decreased $2.2 million or 8 percent compared to the first quarter of 2018. Mortgage loan production volumes decreased $127 million or 17 percent as average primary mortgage rates have increased.

Mortgage banking revenue increased $2.0 million or 9 percent compared to the fourth quarter of 2018. Lower mortgage interest rates during the quarter led to an increase in mortgage applications.

Table 5 – Mortgage Banking Revenue 
(In thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2018 Increase (Decrease) % Increase (Decrease)
  2019 2018    
Mortgage production revenue $7,868
 $9,452
 $(1,584) (17)% $5,073
 $2,795
 55 %
               
Mortgage loans funded for sale $510,527
 $664,958
 

 

 $497,353
    
Add: Current period end outstanding commitments 263,434
 298,318
     160,848
    
Less: Prior period end outstanding commitments 160,848
 222,919
     197,752
    
Total mortgage production volume $613,113
 $740,357
 $(127,244) (17)% $460,449
 $152,664
 33 %
               
Mortgage loan refinances to mortgage loans funded for sale 30% 42% (1,200) bps   23% 700 bps  
Gains on sale margin 1.28% 1.28% 
   1.10% 18 bps  
Primary mortgage interest rates:              
Average 4.37% 4.28% 9 bps   4.78% (41) bps  
Period end 4.06% 4.44% (38) bps   4.55% (49) bps  
               
Mortgage servicing revenue $15,966
 $16,573
 $(607) (4)% $16,807
 $(841) (5)%
Average outstanding principal balance of mortgage loans serviced for others 21,581,835
 22,027,726
 (445,891) (2)% 21,706,541
 (124,706) (1)%
               
Average mortgage servicing revenue rates 0.30% 0.31% (1) bp   0.31% (1) bp  

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

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Net gains on other assets, securities and derivatives

Other net gains totaled $3.0 million in the first quarter of 2019 compared to net losses of $1.3 million in the first quarter of 2018. Other net losses totaled $8.3 million in the fourth quarter of 2018. These fluctuations are primarily related to changes in the fair value of investments related to deferred compensation that are largely offset by deferred compensation expense.

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.

Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
  Three Months Ended
  Mar. 31, 2019 Dec. 31, 2018 Mar. 31, 2018
Gain (loss) on mortgage hedge derivative contracts, net $4,432
 $12,162
 $(5,698)
Gain (loss) on fair value option securities, net 9,665
 (282) (17,564)
Gain (loss) on economic hedge of mortgage servicing rights, net 14,097
 11,880
 (23,262)
Gain (loss) on change in fair value of mortgage servicing rights (20,666) (24,233) 21,206
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue (6,569) (12,353) (2,056)
Net interest revenue on fair value option securities1
 1,129
 695
 1,800
Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges $(5,440) $(11,658) $(256)
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 2019 totaled $287.2 million, up $42.7 million compared to the first quarter of 2018. Operating expenses in the first quarter of 2019 included $12.7 million of CoBiz integration costs and $26.6 million of CoBiz operating expenses. CoBiz added $14.5 million in integration costs and $29.7 million in operating costs during the fourth quarter of 2018.

Table 7 – Other Operating Expense
(In thousands)
  Three Months Ended
March 31,
 Increase (Decrease) 
%
Increase (Decrease)
 Three Months Ended Dec. 31, 2018 Increase (Decrease) 
%
Increase (Decrease)
  2019 2018     
Regular compensation $100,650
 $84,991
 $15,659
 18 % $100,796
 $(146)  %
Incentive compensation:     

 

      
Cash-based 32,137
 29,549
 2,588
 9 % 39,681
 (7,544) (19)%
Share-based 5,162
 2,902
 2,260
 78 % (1,904) 7,066
 371 %
Deferred compensation 3,911
 44
 3,867
 N/A
 (3,489) 7,400
 N/A
Total incentive compensation 41,210
 32,495
 8,715
 27 % 34,288
 6,922
 20 %
Employee benefits 27,368
 22,461
 4,907
 22 % 25,622
 1,746
 7 %
Total personnel expense 169,228
 139,947
 29,281
 21 % 160,706
 8,522
 5 %
Business promotion 7,874
 6,010
 1,864
 31 % 9,207
 (1,333) (14)%
Charitable contributions to BOKF Foundation 
 
 
 N/A
 2,846
 (2,846) N/A
Professional fees and services 16,139
 10,200
 5,939
 58 % 20,712
 (4,573) (22)%
Net occupancy and equipment 29,521
 24,046
 5,475
 23 % 27,780
 1,741
 6 %
Insurance 4,839
 6,593
 (1,754) (27)% 4,248
 591
 14 %
Data processing and communications 31,449
 27,817
 3,632
 13 % 27,575
 3,874
 14 %
Printing, postage and supplies 4,885
 4,089
 796
 19 % 5,232
 (347) (7)%
Net losses and operating expenses of repossessed assets 1,996
 7,705
 (5,709) (74)% 2,581
 (585) (23)%
Amortization of intangible assets 5,191
 1,300
 3,891
 299 % 5,331
 (140) (3)%
Mortgage banking costs 9,906
 10,149
 (243) (2)% 11,518
 (1,612) (14)%
Other expense 6,129
 6,574
 (445) (7)% 6,907
 (778) (11)%
Total other operating expense $287,157
 $244,430
 $42,727
 17 % $284,643
 $2,514
 1 %
               
Average number of employees (full-time equivalent) 5,291
 4,899
 392
 8 % 4,974
 317
 6 %
Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

Personnel expense increased $29.3 million over the first quarter of 2018. CoBiz integration costs added $3.3 million and CoBiz operating expenses added $16.4 million to the first quarter of 2019. The remaining increase of $9.6 million is largely attributed to standard annual merit increases in regular compensation and incentive compensation.
Personnel expense increased $8.5 million over the fourth quarter of 2018. CoBiz integration costs added $3.3 million to the first quarter of 2019 and $5.7 million to the fourth quarter of 2018. The remaining $10.9 million increase is primarily due to incentive compensation and a seasonal increase in payroll tax expense.


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Non-personnel operating expense

Non-personnel operating expense increased $13.4 million over the first quarter of 2018. CoBiz integration costs added $9.4 million and CoBiz operating expenses added $10.2 million to the first quarter of 2019. The remaining decrease of $6.2 million is largely attributed to net losses and operating expenses of repossessed assets. The first quarter of 2018 included a $5.0 million write-down of certain oil and gas properties.
Non-personnel expense decreased $6.0 million compared to the fourth quarter of 2018. CoBiz integration costs added $9.4 million in the first quarter of 2019 and $8.8 million to the fourth quarter of 2018. The remaining $6.6 million decrease is related to a $2.8 million charitable donation to the BOKF Foundation made in the fourth quarter combined with decreases in business promotion and mortgage banking related to seasonality. These were partially offset by an increase in data processing and communications expense.
Income Taxes

Income tax expense was $30.0 million or 21 percent of net income before taxes for the first quarter of 2019, compared to $30.9 million or 23 percent of net income before taxes for the first quarter of 2018 and $20.1 million or 16 percent of net income before taxes for the fourth quarter of 2018.

In 2018, we completed our accounting for uncertainties that resulted from the Tax Reform Act. Resolution of these uncertainties and revaluation of deferred taxes increased tax expense for the first quarter of 2018 by $1.9 million. Excluding these adjustments, the effective tax rate for the first quarter of 2018 would have been 21.3%. Resolution of uncertainties decreased fourth quarter of 2018 tax expense by $7.8 million. Excluding these adjustments, the fourth quarter 2018 effective tax rate would have been 21.7%.

Unrecognized tax benefits totaled $19.5 million at March 31, 2019, $18.9 million at December 31, 2018 and $19.6 million at March 31, 2018. 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. 
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.

The operations of CoBiz were not yet allocated to the operating segments at March 31, 2019 and are included in Funds Management and other.

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


- 10 -



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. During 2018 the funds transfer pricing rates for non–maturity deposits became inverted due to the flattening of the yield curve. Short term rates continued to increase while long term rates remained relatively flat. In order to appropriately reflect the organizational value of these deposits to the lines of business, effective January 1, 2019 we made adjustments that push more deposit credit value to the business lines, with the offset to Funds Management and other.

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

As shown in Table 8, net income attributable to our lines of business was up $17.2 million or 16 percent over the first quarter of 2018. Net interest revenue grew by $36.6 million over the prior year, primarily due to the change in the deposit funding credit noted above, combined with growth in average loan balances. Net charge-offs increased $10.3 million. Other operating revenue decreased by $5.6 million and operating expense decreased by $2.8 million compared to the first quarter of 2018.

Table 8 -- Net Income by Line of Business
(In thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2018 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Commercial Banking $86,143
 $79,247
 $6,896
 9% $84,588
 $1,555
 2%
Consumer Banking 15,584
 9,374
 6,210
 66% 2,741
 12,843
 469%
Wealth Management 23,719
 19,609
 4,110
 21% 17,472
 6,247
 36%
Subtotal 125,446
 108,230
 17,216
 16% 104,801
 20,645
 20%
Funds Management and other (14,834) (2,668) (12,166) N/A
 3,655
 (18,489) N/A
Total $110,612
 $105,562
 $5,050
 5% $108,456
 $2,156
 2%
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.


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Commercial Banking

Commercial Banking contributed $86.1 million to consolidated net income in the first quarter of 2019, an increase of $6.9 million or 9 percent over the first quarter of 2018. Growth in net interest revenue was partially offset by increased net loans charged off.

Table 9 -- Commercial Banking
(Dollars in thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2018 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Net interest revenue from external sources $204,209
 $160,414
 $43,795
 27 % $196,897
 $7,312
 4 %
Net interest expense from internal sources (52,562) (28,343) (24,219) 85 % (48,538) (4,024) 8 %
Total net interest revenue 151,647
 132,071
 19,576
 15 % 148,359
 3,288
 2 %
Net loans charged off 11,245
 627
 10,618
 1,693 % 11,577
 (332) (3)%
Net interest revenue after net loans charged off 140,402
 131,444
 8,958
 7 % 136,782
 3,620
 3 %
               
Fees and commissions revenue 38,046
 40,017
 (1,971) (5)% 39,667
 (1,621) (4)%
Other gains (losses), net (434) (341) (93) N/A
 173
 (607) N/A
Other operating revenue 37,612
 39,676
 (2,064) (5)% 39,840
 (2,228) (6)%
               
Personnel expense 31,217
 28,921
 2,296
 8 % 31,918
 (701) (2)%
Non-personnel expense 18,960
 19,449
 (489) (3)% 19,710
 (750) (4)%
Other operating expense 50,177
 48,370
 1,807
 4 % 51,628
 (1,451) (3)%
               
Net direct contribution 127,837
 122,750
 5,087
 4 % 124,994
 2,843
 2 %
Gain on financial instruments, net 18
 7
 11
 N/A
 13
 5
 N/A
Loss on repossessed assets, net (346) (4,166) 3,820
 N/A
 (431) 85
 N/A
Corporate expense allocations 10,148
 10,603
 (455) (4)% 9,112
 1,036
 11 %
Income before taxes 117,361
 107,988
 9,373
 9 % 115,464
 1,897
 2 %
Federal and state income tax 31,218
 28,741
 2,477
 9 % 30,492
 726
 2 %
Net income $86,143
 $79,247
 $6,896
 9 % $84,972
 $1,171
 1 %
               
Average assets $19,330,249
 $17,793,820
 $1,536,429
 9 % $18,766,165
 $564,084
 3 %
Average loans 15,992,749
 14,426,750
 1,565,999
 11 % 15,628,731
 364,018
 2 %
Average deposits 8,261,543
 8,664,452
 (402,909) (5)% 8,393,016
 (131,473) (2)%
Average invested capital 1,638,130
 1,335,896
 302,234
 23 % 1,519,983
 118,147
 8 %
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Net interest revenue increased $19.6 million or 15 percent over the prior year. Growth in net interest revenue was due to increased yields and an 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. Net loans charged-off increased $10.6 million.

Fees and commissions revenue decreased $2.0 million or 5 percent while operating expense increased $1.8 million or 4 percent compared to the first quarter of 2018. Corporate expense allocations decreased $455 thousand or 4 percent compared to the prior year.


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The average outstanding balance of loans attributed to Commercial Banking were up $1.6 billion or 11 percent over the first quarter of 2018 to $16.0 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans, which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $8.3 billion for the first quarter of 2019, a 5 percent decrease compared to the first quarter of 2018. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.
Net interest revenue increased $3.3 million or 2 percent over the fourth quarter of 2018. Fees and commissions revenue decreased $1.6 million or 4 percent, offset by a decrease in operating expense of $1.5 million.
Average loan balances increased $364 million or 2 percent, largely impacted by acquired loans. Average customer deposits decreased $131 million or 2 percent. The deposit mix continues to shift with a $411 million decrease in demand deposit balances partially offset by a $277 million increase in interest-bearing transaction account balances.




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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. In the first quarter of 2019, the strategic decision was made to exit our online lead buying business, HomeDirect, to focus more on our high margin, core competency of developing complete, long-term relationships with our clients through our traditional mortgage origination channel.

Consumer Banking contributed $15.6 million to consolidated net income for the first quarter of 2019, an increase of $6.2 million over the first quarter of 2018. Improved performance by Consumer Banking was largely due to the effect of changes in pricing of funds sold to the Funds Management unit, partially offset by net changes in the fair value of mortgage servicing rights.

Table 10 -- Consumer Banking
(Dollars in thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2018 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Net interest revenue from external sources $21,595
 $21,753
 $(158) (1)% $19,727
 $1,868
 9 %
Net interest revenue from internal sources 29,507
 15,224
 14,283
 94 % 21,637
 7,870
 36 %
Total net interest revenue 51,102
 36,977
 14,125
 38 % 41,364
 9,738
 24 %
Net loans charged off 1,085
 1,300
 (215) (17)% 1,253
 (168) (13)%
Net interest revenue after net loans charged off 50,017
 35,677
 14,340
 40 % 40,111
 9,906
 25 %
               
Fees and commissions revenue 42,821
 44,963
 (2,142) (5)% 42,839
 (18)  %
Other losses, net (73) (16) (57) N/A
 (7) (66) N/A
Other operating revenue 42,748
 44,947
 (2,199) (5)% 42,832
 (84)  %
               
Personnel expense 24,330
 24,341
 (11)  % 22,765
 1,565
 7 %
Non-personnel expense 29,176
 30,354
 (1,178) (4)% 33,316
 (4,140) (12)%
Total other operating expense 53,506
 54,695
 (1,189) (2)% 56,081
 (2,575) (5)%
               
Net direct contribution 39,259
 25,929
 13,330
 51 % 26,862
 12,397
 46 %
Gain (loss) on financial instruments, net 14,097
 (23,262) 37,359
 N/A
 11,880
 2,217
 N/A
Change in fair value of mortgage servicing rights (20,666) 21,206
 (41,872) N/A
 (24,234) 3,568
 N/A
Gain (loss) on repossessed assets, net 103
 (108) 211
 N/A
 267
 (164) N/A
Corporate expense allocations 11,883
 11,188
 695
 6 % 11,098
 785
 7 %
Income before taxes 20,910
 12,577
 8,333
 66 % 3,677
 17,233
 469 %
Federal and state income tax 5,326
 3,203
 2,123
 66 % 936
 4,390
 469 %
Net income $15,584
 $9,374
 $6,210
 66 % $2,741
 $12,843
 469 %
               
Average assets $8,371,683
 $8,468,101
 $(96,418) (1)% $8,071,978
 $299,705
 4 %
Average loans 1,750,642
 1,746,136
 4,506
  % 1,745,642
 5,000
  %
Average deposits 6,544,665
 6,538,096
 6,569
  % 6,542,188
 2,477
  %
Average invested capital 302,195
 298,438
 3,757
 1 % 291,846
 10,349
 4 %
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

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Net interest revenue from Consumer Banking activities grew by $14.1 million or 38 percent over the the first quarter of 2018, primarily due to increased rates received on deposit balances sold to the Funds Management unit. Average consumer deposits were relatively consistent compared to the first quarter of 2018. Demand deposit balances grew by $131 million or 7 percent, offset by a decrease of $133 million or 4 percent in interest-bearing transaction account balances.

Fees and commissions revenue decreased $2.1 million or 5 percent compared to the first quarter of 2018. Higher average interest rates decreased mortgage loan origination volumes. This was offset by a decrease of $1.2 million in operating expense. Corporate expense allocations were $695 thousand or 6 percent higher than the prior year.

Changes in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income for first quarter of 2019 by $6.6 million compared to a $2.1 million decrease in pre-tax net income in the first quarter of 2018.
Net interest revenue from Consumer Banking activities increased $9.7 million or 24 percent over the fourth quarter of 2018, primarily due to increased yields on deposits sold to the Funds Management unit. In addition, lower recent interest rates increased mortgage application volume in the first quarter of 2019.
Revenues from mortgage banking activities increased $1.9 million over the prior quarter, partially offset by a decrease of $1.6 million in service charges driven by two less days in the quarter. Operating expense decreased $2.6 million or 5 percent. Personnel expenses increased $1.6 million mainly due to increased incentive compensation costs. Non-personnel expense decreased $4.1 million. Mortgage banking costs decreased $1.6 million primarily affected by seasonality. Occupancy and equipment costs decreased $1.0 million.
Average consumer loans and deposits remained relatively consistent compared to the prior quarter at $1.8 billion and $6.5 billion, respectively.




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Wealth Management

Wealth Management contributed $23.7 million to consolidated net income in the first quarter of 2019, up $4.1 million or 21 percent over the first quarter of 2018. Improved performance by Wealth Management was primarily due to an increase in net interest revenue and a decrease in operating expenses.

Table 11 -- Wealth Management
(Dollars in thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2018 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Net interest revenue from external sources $21,486
 $15,407
 $6,079
 39 % $24,218
 $(2,732) (11)%
Net interest revenue from internal sources 6,770
 9,932
 (3,162) (32)% 5,074
 1,696
 33 %
Total net interest revenue 28,256
 25,339
 2,917
 12 % 29,292
 (1,036) (4)%
Net loans charged off (recovered) (119) (48) (71) 148 % (52) (67) 129 %
Net interest revenue after net loans charged off (recovered) 28,375
 25,387
 2,988
 12 % 29,344
 (969) (3)%
               
Fees and commissions revenue 73,256
 74,807
 (1,551) (2)% 67,607
 5,649
 8 %
Other gains (losses), net 158
 (41) 199
 N/A
 (4) 162
 N/A
Other operating revenue 73,414
 74,766
 (1,352) (2)% 67,603
 5,811
 9 %
               
Personnel expense 43,991
 46,947
 (2,956) (6)% 45,973
 (1,982) (4)%
Non-personnel expense 17,516
 17,995
 (479) (3)% 18,576
 (1,060) (6)%
Other operating expense 61,507
 64,942
 (3,435) (5)% 64,549
 (3,042) (5)%
               
Net direct contribution 40,282
 35,211
 5,071
 14 % 32,398
 7,884
 24 %
Corporate expense allocations 8,360
 8,815
 (455) (5)% 8,828
 (468) (5)%
Income before taxes 31,922
 26,396
 5,526
 21 % 23,570
 8,352
 35 %
Federal and state income tax 8,203
 6,787
 1,416
 21 % 6,098
 2,105
 35 %
Net income $23,719
 $19,609
 $4,110
 21 % $17,472
 $6,247
 36 %
               
Average assets $9,312,154
 $8,095,794
 $1,216,360
 15 % $8,687,234
 $624,920
 7 %
Average loans 1,448,718
 1,389,926
 58,792
 4 % 1,448,805
 (87)  %
Average deposits 5,659,771
 5,662,470
 (2,699)  % 5,483,455
 176,316
 3 %
Average invested capital 265,572
 246,673
 18,899
 8 % 255,948
 9,624
 4 %

Net interest revenue increased $2.9 million or 12 percent over the first quarter of 2018. Average trading securities balances increased $1.0 billion and average loans attributed to the Wealth Management segment increased $59 million or 4 percent. Average deposit balances were largely unchanged compared to the first quarter of 2018. Growth in interest-bearing transaction account balances of $118 million or 3 percent was offset by a decrease of $90 million in demand deposit balances and $34 million in time deposit balances.

Fees and commissions revenue was relatively unchanged compared to the first quarter of 2018. Operating expense decreased $3.4 million or 5 percent compared to the first quarter of 2018. Personnel expense decreased $3.0 million primarily due to a decrease in incentive compensation. Non-personnel expense was consistent with the first quarter of 2018. Corporate expense allocations decreased $455 thousand or 5 percent compared to the prior year.

Net interest revenue decreased $1.0 million or 4 percent compared to the fourth quarter of 2018. Brokerage and trading revenue increased $6.4 million or 33 percent compared to the fourth quarter of 2018. This increase was partially offset by a decrease in interest received on trading securities and an increase in funding costs.

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Average loans were largely unchanged at $1.4 billion. Average deposits increased $176 million or 3 percent, primarily due to an increase of $150 million in interest-bearing transaction account balances.
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, 2019 and December 31, 2018.

We hold an inventory of trading securities in support of sales to a variety of customers, including banks, corporations, insurance companies, money managers and others. Trading securities increased $183 million to $2.1 billion during the first quarter of 2019. As discussed in the Market Risk section of this report, trading activities involve risk of loss from adverse price movement. We mitigate this risk within board-approved limits through the use of derivative contracts, short-sales and other techniques. These limits remain unchanged from levels set before our expanded trading activities.

At March 31, 2019, the carrying value of investment (held-to-maturity) securities was $331 million and the fair value was $348 million. Investment securities consist primarily of residential mortgage-backed securities issued by U.S. government agencies, long-term, fixed rate Oklahoma and Texas municipal bonds, and taxable Texas school construction bonds.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $9.0 billion at March 31, 2019, a $75 million increase compared to December 31, 2018. At March 31, 2019, the available for sale securities portfolio consisted primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Both residential and commercial mortgage-backed securities have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans.

A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. Our best estimate of the duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at March 31, 2019 is 3.0 years. Management estimates the duration extends to 3.8 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.5 years assuming a 100 basis point decline in the current low rate environment.

The aggregate gross amount of unrealized losses on available for sale securities totaled $69 million at March 31, 2019, compared to $138 million at December 31, 2018. 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 2019.

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Loans

The aggregate loan portfolio before allowance for loan losses totaled $21.8 billion at March 31, 2019, up $102 million over December 31, 2018, primarily due to growth in commercial loans, partially offset by a decrease in commercial real estate loans.

Table 12 -- Loans
(In thousands)
  Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018 Mar. 31, 2018
Commercial:          
Energy $3,705,099
 $3,590,333
 $3,294,867
 $3,147,219
 $2,969,618
Services 3,287,563
 3,258,192
 2,603,862
 2,516,676
 2,488,065
Healthcare 2,915,885
 2,799,277
 2,437,323
 2,353,722
 2,359,928
Wholesale/retail 1,706,900
 1,621,158
 1,650,729
 1,699,554
 1,531,576
Public finance 803,083
 804,550
 418,578
 433,408
 445,814
Manufacturing 742,374
 730,521
 660,582
 647,816
 559,695
Other commercial and industrial 801,071
 832,047
 510,160
 550,644
 564,971
Total commercial 13,961,975
 13,636,078
 11,576,101
 11,349,039
 10,919,667
           
Commercial real estate:  
  
  
  
  
Multifamily 1,210,358
 1,288,065
 1,120,166
 1,056,984
 1,008,903
Office 1,033,158
 1,072,920
 824,829
 820,127
 737,144
Retail 890,685
 919,082
 759,423
 768,024
 750,396
Industrial 767,757
 778,106
 696,774
 653,384
 613,608
Residential construction and land development 149,686
 148,584
 101,872
 118,999
 117,458
Other commercial real estate 549,007
 558,056
 301,611
 294,702
 279,273
Total commercial real estate 4,600,651
 4,764,813
 3,804,675
 3,712,220
 3,506,782
           
Residential mortgage:  
  
  
  
  
Permanent mortgage 1,098,481
 1,122,610
 1,094,926
 1,068,412
 1,047,785
Permanent mortgages guaranteed by U.S. government agencies 193,308
 190,866
 180,718
 169,653
 177,880
Home equity 900,831
 916,557
 696,098
 704,185
 720,104
Total residential mortgage 2,192,620
 2,230,033
 1,971,742
 1,942,250
 1,945,769
           
Personal 1,003,734
 1,025,806
 996,941
 1,000,187
 965,632
           
Total $21,758,980
 $21,656,730
 $18,349,459
 $18,003,696
 $17,337,850

Commercial

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

Commercial loans totaled $14.0 billion or 64 percent of the loan portfolio at March 31, 2019, an increase of $326 million over December 31, 2018. Healthcare sector loan balances were up $117 million. Energy loan balances grew by $115 million. Wholesale/retail sector loans increased $86 million. This growth was partially offset by a $31 million decrease in other commercial and industrial loans.

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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 $765,840
 $2,089,600
 $34,802
 $2,483
 $353,639
 $4,564
 $108,588
 $345,583
 $3,705,099
Services 615,903
 761,921
 168,742
 3,971
 634,929
 433,433
 280,158
 388,506
 3,287,563
Healthcare 217,785
 382,523
 128,468
 81,713
 333,306
 235,783
 251,574
 1,284,733
 2,915,885
Wholesale/retail 239,075
 678,453
 38,597
 29,436
 175,128
 111,786
 65,831
 368,594
 1,706,900
Public finance 87,663
 157,819
 42,604
 
 167,447
 121,124
 
 226,426
 803,083
Manufacturing 97,019
 172,356
 697
 5,761
 185,771
 130,571
 70,249
 79,950
 742,374
Other commercial and industrial 111,899
 165,405
 3,404
 49,514
 120,115
 45,155
 63,255
 242,324
 801,071
Total commercial loans $2,135,184
 $4,408,077
 $417,314
 $172,878
 $1,970,335
 $1,082,416
 $839,655
 $2,936,116
 $13,961,975
 
The majority of the collateral securing our commercial loan portfolio is located within our geographical footprint with 32 percent concentrated in the Texas market, 15 percent concentrated in the Oklahoma market and 14 percent in the Colorado market. At March 31, 2019, the Other category is primarily composed of California - $561 million or 4 percent of the commercial loan portfolio, Florida - $279 million or 2 percent of the commercial loan portfolio, Pennsylvania - $167 million or 1 percent of the commercial loan portfolio, Ohio - $162 million or 1 percent of the commercial loan portfolio and Louisiana - $155 million or 1 percent of the commercial loan portfolio. All other states individually represent less than one percent of total commercial loans.

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

Outstanding energy loans totaled $3.7 billion or 17 percent of total loans at March 31, 2019. Unfunded energy loan commitments were $3.4 billion at March 31, 2019, up $221 million over December 31, 2018. Approximately $3.0 billion of energy loans were to oil and gas producers, growing $77 million over December 31, 2018. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest risk form of energy lending. Approximately 57 percent of the committed production loans are secured by properties primarily producing oil and 43 percent of the committed production loans are secured by properties primarily producing natural gas. Loans to midstream oil and gas companies totaled $463 million at March 31, 2019, an increase of $43 million over December 31, 2018. Loans to borrowers that provide services to the energy industry totaled $173 million at March 31, 2019, unchanged compared to the prior quarter. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $60 million, a $2.0 million decrease compared to the prior quarter.

The services sector of the loan portfolio totaled $3.3 billion or 15 percent of total loans and consists of a large number of loans to a variety of businesses, including commercial services, Native American tribal governments, entertainment & recreation, financial services and consumer services. Service sector loans increased by $29 million compared to December 31, 2018. Approximately $1.7 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. 


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The healthcare sector of the loan portfolio totaled $2.9 billion or 13 percent of total loans and consists primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Healthcare also includes loans to hospitals and other medical service providers.

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, 2019, the outstanding principal balance of these loans totaled $4.4 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 18 percent of our shared national credits, based on dollars committed. We hold shared national credits to the same standard of analysis and perform the same level of review as internally originated credits. Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. In addition to management’s quarterly assessment of credit risk, banking regulators annually review a sample of shared national credits for proper risk grading.

Commercial Real Estate

Commercial real estate represents loans for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes generally within our geographical footprint. Our larger concentrations are in Texas, Colorado and Oklahoma representing 27 percent, 13 percent and 10 percent of the total commercial real estate portfolio at March 31, 2019, respectively. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

Commercial real estate loans totaled $4.6 billion or 21 percent of the loan portfolio at March 31, 2019. The outstanding balance of commercial real estate loans decreased $164 million compared to December 31, 2018. Loans secured by multifamily residential properties decreased $78 million. Loans secured by office buildings decreased $40 million. Loans secured by retail facilities decreased $28 million. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 19 percent to 21 percent over the past five years. 

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

Table 14 -- Commercial Real Estate Loans by Collateral Location
(In thousands)
  Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/Missouri Other Total
Multifamily $160,566
 $434,105
 $31,706
 $49,405
 $63,150
 $118,339
 $176,069
 $177,018
 $1,210,358
Office 107,021
 275,583
 96,161
 16,669
 130,895
 73,767
 36,288
 296,774
 1,033,158
Retail 56,621
 255,901
 136,992
 5,469
 102,068
 73,138
 14,057
 246,439
 890,685
Industrial 83,536
 207,516
 19,203
 92
 78,359
 43,181
 41,248
 294,622
 767,757
Residential construction and land development 5,243
 13,890
 13,385
 559
 59,999
 13,278
 11,097
 32,235
 149,686
Other commercial real estate 49,323
 40,185
 11,264
 2,218
 155,721
 78,063
 39,969
 172,264
 549,007
Total commercial real estate loans $462,310
 $1,227,180
 $308,711
 $74,412
 $590,192
 $399,766
 $318,728
 $1,219,352
 $4,600,651

The Other category is primarily composed of California - $285 million or 6 percent of the commercial real estate portfolio, Utah - $137 million or 3 percent of the commercial real estate portfolio and Nevada - $108 million or 2 percent of the commercial real estate portfolio. All other states represent less than 2% individually.

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

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Residential Mortgage and Personal

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

Residential mortgage loans totaled $2.2 billion, a decrease of $37 million compared to December 31, 2018. In general, we sell the majority of our conforming fixed rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. We have no concentration in sub-prime residential mortgage loans. Our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or adjustable rate mortgage loans with initial rates that are below market. Collateral for 92% of our residential mortgage loan portfolio is located within our geographical footprint.

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

At March 31, 2019, $193 million of permanent residential mortgage loans are guaranteed by U.S. government agencies. We have limited credit exposure on loans guaranteed by the agencies. This amount includes residential mortgage loans previously sold into GNMA mortgage pools that the Company may repurchase when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet. Permanent residential mortgage loans guaranteed by U.S. government agencies increased $2.4 million over December 31, 2018.

Home equity loans totaled $901 million at March 31, 2019, a $16 million decrease compared to December 31, 2018. Our home equity loan portfolio is primarily composed of first-lien, fully amortizing home equity loans. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 50 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 10 year revolving period followed by a 15 year term of amortizing repayment. Interest-only home equity loans have a 5 year revolving period followed by a 15 year term of amortizing repayments and may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term subject to an update of certain credit information. A summary of our home equity loan portfolio at March 31, 2019 by lien position and amortizing status follows in Table 15.

Table 15 -- Home Equity Loans
(In thousands)
  Revolving Amortizing Total
First lien $87,364
 $520,691
 $608,055
Junior lien 175,625
 117,151
 292,776
Total home equity $262,989
 $637,842
 $900,831



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The distribution of residential mortgage and personal loans at March 31, 2019 is as follows in Table 16. Residential mortgage loans are distributed by collateral location. Personal loans are generally distributed by borrower location.

Table 16 -- Residential Mortgage and Personal Loans by Collateral Location
(In thousands)
  Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/Missouri Other Total
Residential mortgage:                  
Permanent mortgage $168,755
 $436,600
 $60,691
 $12,960
 $196,222
 $106,324
 $63,996
 $52,933
 $1,098,481
Permanent mortgages  guaranteed by U.S. government agencies 45,406
 31,333
 34,218
 9,998
 5,201
 1,264
 15,821
 50,067
 193,308
Home equity 360,862
 137,082
 80,170
 7,973
 156,039
 39,547
 52,389
 66,769
 900,831
Total residential mortgage $575,023
 $605,015
 $175,079
 $30,931
 $357,462
 $147,135
 $132,206
 $169,769
 $2,192,620
                   
Personal $316,266
 $418,582
 $12,210
 $11,696
 $72,738
 $55,643
 $52,910
 $63,689
 $1,003,734


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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 Company are centrally managed by the Bank of Oklahoma.

Table 17 -- Loans Managed by Primary Geographical Market
(In thousands)
  Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018 Mar. 31, 2018
Oklahoma:          
Commercial $3,551,054
 $3,491,117
 $3,609,109
 $3,465,407
 $3,265,013
Commercial real estate 665,190
 700,756
 651,315
 662,665
 668,031
Residential mortgage 1,417,381
 1,440,566
 1,429,843
 1,403,658
 1,419,281
Personal 374,807
 375,543
 376,201
 362,846
 353,128
Total Oklahoma 6,008,432
 6,007,982
 6,066,468
 5,894,576
 5,705,453
           
Texas:  
  
  
  
  
Commercial 5,754,018
 5,438,133
 5,115,646
 4,922,451
 4,715,841
Commercial real estate 1,344,810
 1,341,783
 1,354,679
 1,336,101
 1,254,421
Residential mortgage 265,927
 266,805
 253,265
 243,400
 229,761
Personal 396,794
 394,743
 381,452
 394,021
 363,608
Total Texas 7,761,549
 7,441,464
 7,105,042
 6,895,973
 6,563,631
           
New Mexico:  
  
  
  
  
Commercial 342,915
 340,489
 325,048
 305,167
 315,701
Commercial real estate 371,416
 383,670
 392,494
 386,878
 348,485
Residential mortgage 85,326
 87,346
 88,110
 90,581
 93,490
Personal 11,065
 10,662
 11,659
 11,107
 11,667
Total New Mexico 810,722
 822,167
 817,311
 793,733
 769,343
           
Arkansas:  
  
  
  
  
Commercial 79,286
 111,338
 102,237
 93,217
 94,430
Commercial real estate 142,551
 141,898
 106,701
 90,807
 88,700
Residential mortgage 7,731
 7,537
 7,278
 6,927
 7,033
Personal 11,550
 11,955
 12,126
 12,331
 9,916
Total Arkansas 241,118
 272,728
 228,342
 203,282
 200,079
           
Colorado:  
  
  
  
  
Commercial 2,231,703
 2,275,069
 1,132,500
 1,165,721
 1,180,655
Commercial real estate 957,348
 963,575
 354,543
 267,065
 210,801
Residential mortgage 241,722
 251,849
 68,694
 64,839
 64,530
Personal 65,812
 72,916
 56,999
 60,504
 63,118
Total Colorado 3,496,585
 3,563,409
 1,612,736
 1,558,129
 1,519,104
           
Arizona:  
  
  
  
  
Commercial 1,335,140
 1,320,139
 621,658
 681,852
 624,106
Commercial real estate 791,466
 889,903
 666,562
 710,784
 672,319
Residential mortgage 98,973
 97,959
 44,659
 47,010
 39,227
Personal 61,875
 68,546
 67,280
 65,541
 57,023
Total Arizona 2,287,454
 2,376,547
 1,400,159
 1,505,187
 1,392,675
           
Kansas/Missouri:  
  
  
  
  
Commercial 667,859
 659,793
 669,903
 715,224
 723,921
Commercial real estate 327,870
 343,228
 278,381
 257,920
 264,025
Residential mortgage 75,560
 77,971
 79,893
 85,835
 92,447
Personal 81,831
 91,441
 91,224
 93,837
 107,172
Total Kansas/Missouri 1,153,120
 1,172,433
 1,119,401
 1,152,816
 1,187,565
           
Total BOK Financial loans $21,758,980
 $21,656,730
 $18,349,459
 $18,003,696
 $17,337,850

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Loan Commitments

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

Table 18 – Off-Balance Sheet Credit Commitments
(In thousands)
  Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018 Mar. 31, 2018
Loan commitments $12,243,886
 $11,944,524
 $10,715,964
 $10,294,211
 $10,249,729
Standby letters of credit 720,451
 582,196
 671,844
 659,867
 664,342
Mortgage loans sold with recourse 94,938
 98,623
 101,512
 116,269
 121,197
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, 2019, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $354 million compared to $427 million at December 31, 2018. At March 31, 2019, the net fair value of our derivative contracts included $223 million for foreign exchange contracts, $58 million of to-be-announced residential mortgage-backed securities, $39 million for energy contracts and $28 million for interest rate swaps. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $343 million at March 31, 2019 and $413 million at December 31, 2018.

At March 31, 2019, total derivative assets were reduced by $12 million of cash collateral received from counterparties and total derivative liabilities were reduced by $75 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.

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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, 2019 follows in Table 19.

Table 19 -- Fair Value of Derivative Contracts
(In thousands)
Customers $212,147
Banks and other financial institutions 129,213
Exchanges and clearing organizations 1,141
Fair value of customer risk management program asset derivative contracts, net $342,501
 
At March 31, 2019, our largest derivative exposure was to a counterparty for energy contracts of $8.5 million.

Our customer derivative program also introduces liquidity and capital risk. We are required to provide cash margin to certain counterparties when the net negative fair value of the contracts exceeds established limits. Also, changes in commodity prices affect the amount of regulatory capital we are required to hold as support for the fair value of our derivative assets. These risks are modeled as part of the management of these programs. Based on current prices, a decrease in market prices equivalent to $29.10 per barrel of oil would not be great enough to create a scenario in which we are owed by our customers. An increase in prices equivalent to $72.05 per barrel of oil would increase the fair value of derivative assets by $127 million. Further increases in price to the equivalent of $89.92 per barrel of oil would increase the fair value of our derivative assets by $320 million with lending customers comprising the bulk of the assets. Liquidity requirements of this program may also be affected by our credit rating. At March 31, 2019, 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, 2019, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.
Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. At March 31, 2019, the combined allowance for loan losses and off-balance sheet credit losses totaled $207 million or 0.95 percent of outstanding loans and 142 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. Excluding acquired loans measured at acquisition date fair value, the combined allowance for loan losses was 1.09 percent of outstanding loans and 159 percent of nonaccruing loans. The allowance for loan losses was $205 million and the accrual for off-balance sheet credit losses was $1.8 million. At December 31, 2018, the combined allowance for credit losses was $209 million or 0.97 percent of outstanding loans and 134 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. Excluding acquired loans measured at acquisition date fair value, the combined allowance for loan losses was 1.12 percent of outstanding loans and 146 percent of nonaccruing loans. The allowance for loan losses was $207 million and the accrual for off-balance sheet credit losses was $1.8 million. 

The provision for credit losses is the amount necessary to maintain the allowance for loan losses and an accrual for off-balance sheet credit risk at an amount determined by management to be appropriate based on its evaluation. The provision includes the combined charge to expense for both the allowance for loan losses and the accrual for off-balance sheet credit risk. All losses incurred from lending activities will ultimately be reflected in charge-offs against the allowance for loan losses following funds advanced against outstanding commitments. Based on an evaluation of all credit factors, including overall loan growth, the trends in nonaccruing loans, potential problem loans and net charge-offs, the Company determined that $8.0 million provision for credit losses was appropriate for the first quarter of 2019. The Company recorded $9.0 million provision for credit losses in the fourth quarter of 2018.



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Table 20 -- Summary of Loan Loss Experience
(In thousands)
  Three Months Ended
  Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018 Mar. 31, 2018
Allowance for loan losses:          
Beginning balance $207,457
 $210,569
 $215,142
 $223,967
 $230,682
Loans charged off:          
Commercial (10,468) (12,940) (9,602) (13,775) (1,563)
Commercial real estate 
 
 
 
 
Residential mortgage (42) (52) (91) (135) (100)
Personal (1,265) (1,523) (1,380) (1,195) (1,227)
Total (11,775) (14,515) (11,073) (15,105) (2,890)
Recoveries of loans previously charged off:          
Commercial 711
 1,267
 1,263
 298
 488
Commercial real estate 112
 232
 40
 3,097
 183
Residential mortgage 154
 71
 229
 505
 242
Personal 712
 598
 560
 678
 663
Total 1,689
 2,168
 2,092
 4,578
 1,576
Net loans recovered (charged off) (10,086) (12,347) (8,981) (10,527) (1,314)
Provision for loan losses 7,969
 9,235
 4,408
 1,702
 (5,401)
Ending balance $205,340
 $207,457
 $210,569
 $215,142
 $223,967
Accrual for off-balance sheet credit losses:          
Beginning balance $1,790
 $2,025
 $2,433
 $4,135
 $3,734
Provision for off-balance sheet credit losses 31
 (235) (408) (1,702) 401
Ending balance $1,821
 $1,790
 $2,025
 $2,433
 $4,135
Total combined provision for credit losses $8,000
 $9,000
 $4,000
 $
 $(5,000)
Allowance for loan losses to loans outstanding at period-end 0.94% 0.96% 1.15% 1.19% 1.29 %
Net charge-offs (recoveries) (annualized) to average loans 0.19% 0.23% 0.20% 0.24% 0.03 %
Total provision for credit losses (annualized) to average loans 0.15% 0.17% 0.09% % (0.12)%
Recoveries to gross charge-offs 14.34% 14.94% 18.89% 30.31% 54.53 %
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments 0.01% 0.01% 0.02% 0.02% 0.04 %
Combined allowance for credit losses to loans outstanding at period-end 0.95% 0.97% 1.16% 1.21% 1.32 %
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, 2019, impaired loans totaled $339 million, including $8.0 million with specific allowances of $3.5 million and $331 million with no specific allowances. At December 31, 2018, impaired loans totaled $347 million, including $35 million of impaired loans with specific allowances of $8.7 million and $312 million with no specific allowances.

- 26 -



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

The aggregate amount of general allowances for all unimpaired loans totaled $183 million at March 31, 2019. The general allowance for unimpaired loans increased $2 million compared to December 31, 2018, primarily due to a decrease in general allowances related to residential mortgage loans, partially offset by an increase in general allowances related to the commercial loan segment.

Nonspecific allowances are maintained for risks beyond factors specific to a particular portfolio segment or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors. Nonspecific allowances totaled $19 million at March 31, 2019, a $1.4 million increase over December 31, 2018.

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 $169 million at March 31, 2019 and were primarily composed of $81 million or 2.19 percent of energy loans, $28 million or less than 1 percent of service sector loans, $21 million or 2.87 percent of manufacturing sector loans and $14 million or less than 1 percent of healthcare sector loans. Potential problem loans totaled $215 million at December 31, 2018.

Based on regulatory guidelines, other loans especially mentioned are in compliance with the original terms of the agreement but may have a weakness that deserves management's close attention. Other loans especially mentioned totaled $196 million at March 31, 2019 and were composed primarily of $60 million or 1.84 percent of service sector loans, $39 million or 1.06 percent of energy sector loans, $34 million or 4.58 percent of manufacturing sector loans and $21 million or 1.24 percent of wholesale/retail sector loans and $14 million or 0.47 percent healthcare sector loans. Other loans especially mentioned totaled $182 million at December 31, 2018.
Net Loans Charged Off

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

BOK Financial had net charge-offs of $10.1 million in the first quarter of 2019, compared to net charge-offs of $12.3 million in the fourth quarter of 2018 and net charge-offs of $1.3 million in the first quarter of 2018. The ratio of net loans charged off to average loans on an annualized basis was 0.19 percent for the first quarter of 2019, compared with 0.23 percent for the fourth quarter of 2018 and 0.03 percent for the first quarter of 2018. 

Net charge-offs of commercial loans were $10 million in the first quarter of 2019, primarily related to a single energy production borrower and a single healthcare sector borrower. Net commercial real estate loan recoveries were $112 thousand in the first quarter of 2019. Net recoveries of residential mortgage loans were $112 thousand and net charge-offs of personal loans were $553 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, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018 Mar. 31, 2018
Nonaccruing loans:          
Commercial $90,358
 $99,841
 $109,490
 $120,978
 $131,460
Commercial real estate 21,508
 21,621
 1,316
 1,996
 2,470
Residential mortgage 40,409
 41,555
 41,917
 42,343
 45,794
Personal 302
 230
 269
 340
 340
Total nonaccruing loans 152,577
 163,247
 152,992
 165,657
 180,064
Accruing renegotiated loans guaranteed by U.S. government agencies 91,787
 86,428
 83,347
 75,374
 74,418
Real estate and other repossessed assets 17,139
 17,487
 24,515
 27,891
 23,652
Total nonperforming assets $261,503
 $267,162
 $260,854
 $268,922
 $278,134
Total nonperforming assets excluding those guaranteed by U.S. government agencies $162,770
 $173,602
 $169,717
 $185,981
 $194,833
           
Nonaccruing loans by loan portfolio segment and class:      
  
Commercial:        
  
Energy $35,332
 $47,494
 $54,033
 $65,597
 $89,942
Healthcare 18,768
 16,538
 15,704
 16,125
 15,342
Manufacturing 9,548
 8,919
 9,202
 2,991
 3,002
Services 9,555
 8,567
 4,097
 4,377
 2,109
Wholesale/retail 1,425
 1,316
 9,249
 14,095
 2,564
Public finance 
 
 
 
 
Other commercial and industrial 15,730
 17,007
 17,205
 17,793
 18,501
Total commercial 90,358
 99,841
 109,490
 120,978
 131,460
           
Commercial real estate:        
  
Retail 20,159
 20,279
 777
 1,068
 264
Residential construction and land development 350
 350
 350
 350
 1,613
Multifamily 
 301
 
 
 
Office 855
 
 
 275
 275
Industrial 
 
 
 
 
Other commercial real estate 144
 691
 189
 303
 318
Total commercial real estate 21,508
 21,621
 1,316
 1,996
 2,470
           
Residential mortgage:        
  
Permanent mortgage 22,937
 23,951
 22,855
 23,105
 24,578
Permanent mortgage guaranteed by U.S. government agencies 6,946
 7,132
 7,790
 7,567
 8,883
Home equity 10,526
 10,472
 11,272
 11,671
 12,333
Total residential mortgage 40,409
 41,555
 41,917
 42,343
 45,794
Personal 302
 230
 269
 340
 340
Total nonaccruing loans $152,577
 $163,247
 $152,992
 $165,657
 $180,064
           
Ratios:        
  
Allowance for loan losses to nonaccruing loans1
 141.00% 132.89% 145.02% 136.09% 130.84%
Accruing loans 90 days or more past due1
 $610
 $1,338
 $518
 $879
 $90
1 
Excludes residential mortgages guaranteed by agencies of the U.S. Government.

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Nonperforming assets totaled $262 million or 1.20 percent of outstanding loans and repossessed assets at March 31, 2019. Nonaccruing loans totaled $153 million, accruing renegotiated residential mortgage loans totaled $92 million and real estate and other repossessed assets totaled $17 million. All accruing renegotiated residential mortgage loans and $6.9 million of nonaccruing loans are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets decreased $11 million compared to the fourth quarter of 2018, 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 currently classified as nonaccruing. We may also renew matured nonaccruing loans. All nonaccruing loans, including those renewed or modified in troubled debt restructurings, are charged off when the loan balance is no longer covered by the paying capacity of the borrower based on a quarterly evaluation of available cash resources and collateral value. Nonaccruing loans generally remain on nonaccrual status until full collection of principal and interest in accordance with the original terms, including principal previously charged off, is probable. We generally do not voluntarily modify personal loans to troubled borrowers. Personal loans modified at the direction of bankruptcy court orders are identified as troubled debt restructurings and classified as nonaccruing.

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

A rollforward of nonperforming assets for the three months ended March 31, 2019 follows in Table 22.

Table 22 -- Rollforward of Nonperforming Assets
(In thousands)
  Three Months Ended
  March 31, 2019
  
 
Nonaccruing Loans
 
 
Renegotiated Loans
 Real Estate and Other Repossessed Assets Total Nonperforming Assets
Balance, December 31, 2018 $163,247
 $86,428
 $17,487
 $267,162
Additions 26,868
 14,316
 
 41,184
Payments (22,175) (633) 
 (22,808)
Charge-offs (11,775) 
 
 (11,775)
Net losses and write-downs 
 
 (245) (245)
Foreclosure of nonperforming loans (1,032) 
 1,032
 
Foreclosure of loans guaranteed by U.S. government agencies (680) (2,524) 
 (3,204)
Proceeds from sales 
 (6,054) (1,135) (7,189)
Return to accrual status (1,876) 
 
 (1,876)
Other, net 
 254
 
 254
Balance, March 31, 2019 $152,577
 $91,787
 $17,139
 $261,503
         
We foreclose on loans guaranteed by U.S. government agencies in accordance with agency guidelines. Generally these loans are not eligible for modification programs or have failed to comply with modified loan terms. Principal is guaranteed by agencies of the U.S. government, subject to limitations and credit risk is limited. These properties will be conveyed to the agencies once applicable criteria have been met. 

- 29 -



Commercial

Nonaccruing commercial loans totaled $90 million or 0.65 percent of total commercial loans at March 31, 2019 and $100 million or 0.73 percent of commercial loans at December 31, 2018. There were $20 million in newly identified nonaccruing commercial loans during the quarter, offset by $20 million in payments and $10 million of charge-offs of nonaccruing commercial loans during the first quarter.

Nonaccruing commercial loans at March 31, 2019 were primarily composed of $35 million or 0.95 percent of total energy loans, $19 million or 0.64 percent of total healthcare sector loans and $16 million or 1.96 percent of total other commercial and industrial sector loans.
Commercial Real Estate

Nonaccruing commercial real estate loans totaled $22 million or 0.47 percent of outstanding commercial real estate loans at March 31, 2019, compared to $22 million or 0.45 percent of outstanding commercial real estate loans at December 31, 2018. Newly identified nonaccruing commercial real estate loans of $855 thousand were offset by $132 thousand of cash payments received.

Nonaccruing commercial real estate loans were primarily composed of $20 million or 2.26 percent of loans secured by retail facilities.

Residential Mortgage and Personal

Nonaccruing residential mortgage loans totaled $40 million or 1.84 percent of outstanding residential mortgage loans at March 31, 2019, a $1.1 million decrease compared to December 31, 2018. Newly identified nonaccruing residential mortgage loans totaling $4.1 million were offset by $2.5 million of payments and $931 thousand of foreclosures. 

Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans, which totaled $23 million or 2.09 percent of outstanding non-guaranteed permanent residential mortgage loans at March 31, 2019. Nonaccruing home equity loans totaled $11 million or 1.17 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 increased $5.2 million in the first quarter to $10 million at March 31, 2019. Residential mortgage loans 60 to 89 days past due decreased by $550 thousand. Personal loans past due 30 to 59 days decreased by $132 thousand and personal loans 60 to 89 days decreased $780 thousand.

Table 23 -- Residential Mortgage and Personal Loans Past Due
(In thousands)
  March 31, 2019 December 31, 2018
  90 Days or More 60 to 89 Days 30 to 59 Days 90 Days or More 60 to 89 Days 30 to 59 Days
Residential mortgage:            
   Permanent mortgage1
 $
 $
 $5,394
 $
 $366
 $3,196
Home equity 
 168
 4,118
 59
 352
 1,102
Total residential mortgage $
 $168
 $9,512
 59
 $718
 $4,298
   
    
  
    
Personal $
 $16
 $347
 $3
 $796
 $479
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 $17 million at March 31, 2019, composed primarily of $6.0 million of oil and gas properties, $4.6 million of 1-4 family residential properties, $3.3 million of developed commercial real estate and $3.3 million of undeveloped land primarily zoned for commercial development. Real estate and other repossessed assets totaled $17 million at December 31, 2018.


- 31 -



Liquidity and Capital

Based on the average balances for the first quarter of 2019, approximately 62 percent of our funding was provided by deposit accounts, 23 percent from borrowed funds, less than 1 percent from long-term subordinated debt and 11 percent from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

Subsidiary Bank

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

Average deposits for the first quarter of 2019 totaled $25 billion, a decrease of $481 million compared to the fourth quarter of 2018. Interest-bearing transaction account balances increased $158 million and time deposits increased $6 million. Demand deposits decreased $661 million compared to the fourth quarter of 2018.
Table 24 - Average Deposits by Line of Business
(In thousands)
 Three Months Ended
 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018 Mar. 31, 2018
Commercial Banking$8,261,543
 $8,393,016
 $8,633,204
 $8,379,584
 $8,664,452
Consumer Banking6,544,665
 6,542,188
 6,580,395
 6,579,635
 6,538,096
Wealth Management5,659,771
 5,483,455
 5,492,048
 5,834,669
 5,662,470
Subtotal20,465,979
 20,418,659
 20,705,647
 20,793,888
 20,865,018
Funds Management and other4,148,500
 4,676,736
 1,230,648
 1,261,344
 1,261,877
Total$24,614,479
 $25,095,395
 $21,936,295
 $22,055,232
 $22,126,895

Average Commercial Banking deposit balances decreased $131 million compared to fourth quarter of 2018. Demand deposit balances decreased $411 million and interest-bearing transaction account balances increased $277 million. Despite the series of federal funds rate increases from the Federal Reserve, as well as modest increases in our earnings credit, commercial customers continue to retain large cash reserves primarily due to a combination of factors including uncertainty about the economic environment and potential for growth, lack of preferable liquid alternatives and a desire to minimize deposit service charges through the earnings credit. The earnings credit is a non-cash method that enables commercial customers to offset deposit service charges based on account balances. Commercial deposit balances may decrease as the economic outlook continues to improve and if short-term rates continue to move higher, enhancing their investment alternatives. As short-term rates move higher, related increases to the earnings credit rate may be appropriate, which will reduce the amount of deposits required to offset service charges.

Average Consumer Banking deposit balances increased $2.5 million over the prior quarter. Demand deposit and time deposit balances grew by $11 million and $6.9 million, respectively. This growth was offset by a decrease of $31 million in interest-bearing transaction account balances.

Average Wealth Management deposits increased $176 million over the fourth quarter of 2018 primarily due to customers deploying funds in other off-balance sheet investment alternatives. Interest-bearing transaction account balances were up $150 million, demand deposit balances increased $12 million, and time deposits balances were up $12 million.

Average time deposits for the first quarter of 2019 included $270 million of brokered deposits, an increase of $23 million over the fourth quarter of 2018. Average interest-bearing transaction accounts for the first quarter included $819 million of brokered deposits, a increase of $2.7 million over the fourth quarter of 2018.


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

Table 25 -- Period End Deposits by Principal Market Area
(In thousands)
  Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018 Mar. 31, 2018
Oklahoma:          
Demand $3,432,239
 $3,610,593
 $3,564,307
 $3,867,934
 $4,201,843
Interest-bearing:          
Transaction 6,542,548
 6,445,831
 6,010,972
 5,968,459
 6,051,301
Savings 309,875
 288,210
 288,080
 289,202
 289,351
Time 1,217,371
 1,118,643
 1,128,810
 1,207,471
 1,203,534
Total interest-bearing 8,069,794
 7,852,684
 7,427,862
 7,465,132
 7,544,186
Total Oklahoma 11,502,033
 11,463,277
 10,992,169
 11,333,066
 11,746,029
           
Texas:          
Demand 2,966,743
 3,291,433
 3,357,669
 3,321,980
 3,019,483
Interest-bearing:          
Transaction 2,385,305
 2,295,169
 2,182,114
 2,169,155
 2,208,892
Savings 101,849
 99,624
 97,909
 97,809
 98,852
Time 419,269
 423,880
 453,119
 445,500
 475,967
Total interest-bearing 2,906,423
 2,818,673
 2,733,142
 2,712,464
 2,783,711
Total Texas 5,873,166
 6,110,106
 6,090,811
 6,034,444
 5,803,194
           
New Mexico:          
Demand 662,362
 691,692
 722,188
 770,974
 695,060
Interest-bearing:          
Transaction 573,203
 571,347
 593,760
 586,593
 555,414
Savings 61,497
 58,194
 57,794
 59,415
 60,596
Time 228,212
 224,515
 221,513
 212,689
 216,306
Total interest-bearing 862,912
 854,056
 873,067
 858,697
 832,316
Total New Mexico 1,525,274
 1,545,748
 1,595,255
 1,629,671
 1,527,376
           
Arkansas:          
Demand 31,624
 36,800
 36,579
 39,896
 35,291
Interest-bearing:          
Transaction 147,964
 91,593
 128,001
 143,298
 94,206
Savings 1,785
 1,632
 1,826
 1,885
 1,960
Time 8,321
 8,726
 10,214
 10,771
 11,878
Total interest-bearing 158,070
 101,951
 140,041
 155,954
 108,044
Total Arkansas 189,694
 138,751
 176,620
 195,850
 143,335
           

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  Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018 Mar. 31, 2018
Colorado:          
Demand 1,897,547
 1,658,473
 593,442
 529,912
 521,963
Interest-bearing:          
Transaction 1,844,632
 1,899,203
 622,520
 701,362
 687,785
Savings 58,919
 57,289
 40,308
 38,176
 37,232
Time 261,235
 274,877
 217,628
 208,049
 215,330
Total interest-bearing 2,164,786
 2,231,369
 880,456
 947,587
 940,347
Total Colorado 4,062,333
 3,889,842
 1,473,898
 1,477,499
 1,462,310
           
Arizona:          
Demand 695,238
 707,402
 365,878
 383,627
 326,581
Interest-bearing:          
Transaction 621,735
 575,567
 130,105
 193,687
 247,926
Savings 12,144
 10,545
 3,559
 3,935
 4,116
Time 44,004
 43,051
 23,927
 22,447
 21,009
Total interest-bearing 677,883
 629,163
 157,591
 220,069
 273,051
Total Arizona 1,373,121
 1,336,565
 523,469
 603,696
 599,632
           
Kansas/Missouri:          
Demand 410,799
 418,199
 423,560
 459,636
 505,802
Interest-bearing:          
Transaction 361,590
 327,866
 322,747
 401,545
 381,447
Savings 13,815
 13,721
 13,125
 13,052
 13,845
Time 19,977
 19,688
 20,635
 20,805
 22,230
Total interest-bearing 395,382
 361,275
 356,507
 435,402
 417,522
Total Kansas/Missouri 806,181
 779,474
 780,067
 895,038
 923,324
Total BOK Financial deposits $25,331,802
 $25,263,763
 $21,632,289
 $22,169,264
 $22,205,200

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 $490 million at March 31, 2019. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short-term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and agency mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $5.7 billion during the quarter, compared to $6.5 billion in the fourth quarter of 2018.

At March 31, 2019, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $7.1 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, 2019
   Three Months Ended
December 31, 2018
  Mar. 31, 2019 
Average
Balance
During the
Quarter
 Rate 
Maximum
Outstanding
At Any Month
End During
the Quarter
 Dec. 31, 2018 
Average
Balance
During the
Quarter
 Rate 
Maximum
Outstanding
At Any Month
End During
the Quarter
                 
Parent Company and Other Non-Bank Subsidiaries:
Other borrowings 25,946
 5,877
 1.25% $25,946
 5,207
 5,254
 1.06% 5,255
Subordinated debentures 275,880
 275,882
 5.51% $275,880
 275,913
 276,378
 5.38% 276,141
Total parent company and other non-bank subsidiaries 301,826
 281,759
 5.43%   281,120
 281,632
 5.35% 

                 
BOKF, NA:                
Funds purchased 1,018,117
 1,622,580
 2.47% 1,862,316
 402,450
 658,539
 2.19% 488,823
Repurchase agreements 421,556
 410,456
 0.46% 421,556
 615,961
 547,029
 0.36% 615,961
Other borrowings:                
Federal Home Loan Bank advances 7,300,000
 7,013,333
 2.67% 7,300,000
 6,100,000
 6,335,946
 2.50% 6,100,000
GNMA repurchase liability 11,466
 17,413
 4.51% 19,581
 15,552
 15,844
 4.41% 16,529
Other 3,681
 3,656
 5.55% 3,681
 3,631
 4,097
 5.33% 4,187
Total other borrowings 7,315,147
 7,034,402
 2.67% 

 6,119,183
 6,355,887
 2.50% 

Total BOKF, NA 8,754,820
 9,067,438
 2.54%   7,137,594
 7,561,455
 2.32%  
                 
Total other borrowed funds and subordinated debentures $9,056,646
 $9,349,197
 2.63%   $7,418,714
 $7,843,087
 2.43%  
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, 2019, cash and interest-bearing cash and cash equivalents held by the parent company totaled $168 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, 2019, based upon the most restrictive limitations as well as management's internal capital policy, BOKF, NA could declare up to $67 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, 2019 was $4.5 billion, an $89 million increase over December 31, 2018. Net income less cash dividends paid increased equity $77 million during the first quarter of 2019. Changes in interest rates resulted in a decrease in the accumulated other comprehensive loss to $3.5 million at March 31, 2019, compared to $73 million at December 31, 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, 2019, a cumulative total of 4,280,692 shares have been repurchased under this authorization. The Company repurchased 705,609 shares in the first quarter of 2019 at an average price of $85.85. The Company repurchased 525,000 shares in the fourth quarter of 2018 at an average price of $85.82 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.

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, 2019 Dec. 31, 2018 Mar. 31, 2018
Risk-based capital:            
Common equity Tier 1 4.50% 2.50% 7.00% 10.71% 10.92% 12.06%
Tier 1 capital 6.00% 2.50% 8.50% 10.71% 10.92% 12.06%
Total capital 8.00% 2.50% 10.50% 12.24% 12.50% 13.49%
Tier 1 Leverage 4.00% N/A
 4.00% 8.76% 8.96% 9.40%
             
Average total equity to average assets       11.29% 11.31% 10.31%
Tangible common equity ratio       8.64% 8.82% 9.18%

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.

Table 28 -- Non-GAAP Measure
(Dollars in thousands)
  Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018 Mar. 31, 2018
Tangible common equity ratio:          
Total shareholders' equity $4,522,873
 $4,432,109
 $3,615,032
 $3,553,431
 $3,495,029
Less: Goodwill and intangible assets, net 1,177,573
 1,184,112
 480,800
 481,366
 477,088
Tangible common equity 3,345,300
 3,247,997
 3,134,232
 3,072,065
 3,017,941
Total assets 39,882,962
 38,020,504
 33,289,864
 33,833,107
 33,361,492
Less: Goodwill and intangible assets, net 1,177,573
 1,184,112
 480,800
 481,366
 477,088
Tangible assets $38,705,389
 $36,836,392
 $32,809,064
 $33,351,741
 $32,884,404
Tangible common equity ratio 8.64% 8.82% 9.55% 9.21% 9.18%


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Off-Balance Sheet Arrangements

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

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

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

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

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

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

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. 


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Table 29 -- Interest Rate Sensitivity
(Dollars in thousands)
  200 bp Increase 
100 bp Decrease1
  March 31, March 31,
  2019 2018 2019 2018
Anticipated impact over the next twelve months on net interest revenue $(4,451) $(1,846) $42,977
 $(36,571)
  (0.38)% (0.20)% (3.70)% (3.87)%
1 The results of a 200 basis point decrease in interest rates in the low-rate environment are not meaningful, therefore we will instead report the effect of a 100 basis point decrease in interest rates.

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

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

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


Table 30 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
  March 31,
  2019 2018
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp
MSR Asset $25,936
 $(33,750) $23,504
 $(26,145)
MSR Hedge (31,698) 26,211
 (24,994) 22,132
Net Exposure (5,762) (7,539) (1,490) (4,013)

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

- 38 -



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,
  2019 2018
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp
Average1
 $29
 $(810) $185
 $(619)
Low2
 436
 (344) 942
 699
High3
 (405) (1,343) (1,015) (1,504)
Period End 127
 (1,013) 390
 (1,201)
1 
Average represents the simple average of each daily value observed during the reporting period.
2 
Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 
High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.

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

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

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,
  2019 2018
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp
Average1
 $(1,707) $1,577
 $(563) $358
Low2
 857
 3,440
 849
 2,321
High3
 (3,665) (729) (2,808) (1,206)
Period End 127
 (1,013) 579
 (841)
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.

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

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

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

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



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Consolidated Statements of Earnings (Unaudited)    
(In thousands, except share and per share data) Three Months Ended
  March 31,
Interest revenue 2019 2018
Loans $279,872
 $188,091
Residential mortgage loans held for sale 1,663
 1,844
Trading securities 18,695
 7,738
Investment securities 4,034
 3,857
Available for sale securities 56,831
 45,959
Fair value option securities 5,237
 4,819
Restricted equity securities 6,345
 5,117
Interest-bearing cash and cash equivalents 3,397
 7,982
Total interest revenue 376,074
 265,407
Interest expense  
  
Deposits 37,417
 18,219
Borrowed funds 56,810
 25,449
Subordinated debentures 3,745
 2,003
Total interest expense 97,972
 45,671
Net interest revenue 278,102
 219,736
Provision for credit losses 8,000
 (5,000)
Net interest revenue after provision for credit losses 270,102
 224,736
Other operating revenue  
  
Brokerage and trading revenue 31,617
 30,648
Transaction card revenue 20,738
 20,990
Fiduciary and asset management revenue 43,358
 41,832
Deposit service charges and fees 28,243
 27,161
Mortgage banking revenue 23,834
 26,025
Other revenue 12,762
 12,958
Total fees and commissions 160,552
 159,614
Other gains (losses), net 2,976
 (1,292)
Gain (loss) on derivatives, net 4,667
 (5,685)
Gain (loss) on fair value option securities, net 9,665
 (17,564)
Change in fair value of mortgage servicing rights (20,666) 21,206
Gain (loss) on available for sale securities, net 76
 (290)
Total other operating revenue 157,270
 155,989
Other operating expense  
  
Personnel 169,228
 139,947
Business promotion 7,874
 6,010
Professional fees and services 16,139
 10,200
Net occupancy and equipment 29,521
 24,046
Insurance 4,839
 6,593
Data processing and communications 31,449
 27,817
Printing, postage and supplies 4,885
 4,089
Net losses and operating expenses of repossessed assets 1,996
 7,705
Amortization of intangible assets 5,191
 1,300
Mortgage banking costs 9,906
 10,149
Other expense 6,129
 6,574
Total other operating expense 287,157
 244,430
Net income before taxes 140,215
 136,295
Federal and state income taxes 29,950
 30,948
Net income 110,265
 105,347
Net income attributable to non-controlling interests (347) (215)
Net income attributable to BOK Financial Corporation shareholders $110,612
 $105,562
Earnings per share:  
  
Basic $1.54
 $1.61
Diluted $1.54
 $1.61
Average shares used in computation:    
Basic 71,387,070
 64,847,334
Diluted 71,404,388
 64,888,033
Dividends declared per share $0.50
 $0.45

See accompanying notes to consolidated financial statements.

- 41 -



Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands, except share and per share data)    
  Three Months Ended
  March 31,
  2019 2018
Net income $110,265
 $105,347
Other comprehensive income (loss) before income taxes:    
Net change in unrealized gain (loss) 92,739
 (97,406)
Reclassification adjustments included in earnings:    
Loss (gain) on available for sale securities, net (76) 290
Other comprehensive income (loss) before income taxes 92,663
 (97,116)
Federal and state income taxes 23,609
 (24,808)
Other comprehensive income (loss), net of income taxes 69,054

(72,308)
Comprehensive income 179,319
 33,039
Comprehensive income attributable to non-controlling interests (347) (215)
Comprehensive income attributable to BOK Financial Corp. shareholders $179,666
 $33,254

See accompanying notes to consolidated financial statements.

- 42 -



Consolidated Balance Sheets
(In thousands, except share data)
  Mar. 31, 2019 Dec. 31, 2018
  (Unaudited) (Footnote 1)
Assets    
Cash and due from banks $718,297
 $741,749
Interest-bearing cash and cash equivalents 564,404
 401,675
Trading securities 2,140,326
 1,956,923
Investment securities (fair value:  March 31, 2019 – $348,488; December 31, 2018 – $367,298)
 331,466
 355,187
Available for sale securities 9,025,198
 8,857,120
Fair value option securities 707,994
 283,235
Restricted equity securities 376,429
 344,447
Residential mortgage loans held for sale 160,157
 149,221
Loans 21,758,980
 21,656,730
Allowance for loan losses (205,340) (207,457)
Loans, net of allowance 21,553,640
 21,449,273
Premises and equipment, net 468,293
 330,033
Receivables 224,887
 204,960
Goodwill 1,048,091
 1,049,263
Intangible assets, net 129,482
 134,849
Mortgage servicing rights 238,193
 259,254
Real estate and other repossessed assets, net of allowance (March 31, 2019 – $12,586; December 31, 2018 – $13,665)
 17,139
 17,487
Derivative contracts, net 359,223
 320,929
Cash surrender value of bank-owned life insurance 384,174
 381,608
Receivable on unsettled securities sales 966,455
 336,400
Other assets 469,114
 446,891
Total assets $39,882,962
 $38,020,504
     
Liabilities and Equity    
Liabilities:    
Noninterest-bearing demand deposits $10,096,552
 $10,414,592
Interest-bearing deposits:  
  
Transaction 12,476,977
 12,206,576
Savings 559,884
 529,215
Time 2,198,389
 2,113,380
Total deposits 25,331,802
 25,263,763
Funds purchased and repurchase agreements 1,439,673
 1,018,411
Other borrowings 7,341,093
 6,124,390
Subordinated debentures 275,880
 275,913
Accrued interest, taxes and expense 173,434
 192,826
Derivative contracts, net 299,698
 362,306
Due on unsettled securities purchases 186,401
 156,370
Other liabilities 303,272
 183,480
Total liabilities 35,351,253
 33,577,459
Shareholders' equity:  
  
Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: March 31, 2019 – 75,762,268; December 31, 2018 – 75,711,492)
 5
 5
Capital surplus 1,340,323
 1,334,030
Retained earnings 3,447,076
 3,369,654
Treasury stock (shares at cost:  March 31, 2019 – 4,312,286; December 31, 2018 – 3,588,560)
 (261,000) (198,995)
Accumulated other comprehensive loss (3,531) (72,585)
Total shareholders’ equity 4,522,873
 4,432,109
Non-controlling interests 8,836
 10,936
Total equity 4,531,709
 4,443,045
Total liabilities and equity $39,882,962
 $38,020,504

See accompanying notes to consolidated financial statements.

- 43 -



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, 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 
 
 
 105,562
 
 
 
 105,562
 (215) 105,347
Other comprehensive income 
 
 
 
 
 
 (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
                     
Balance, December 31, 2018 75,711
 $5
 $1,334,030
 $3,369,654
 3,589
 $(198,995) $(72,585) $4,432,109
 $10,936
 $4,443,045
Transition adjustment - Leasing Standard 
 
 
 2,862
 
 
 
 2,862
 
 2,862
Balance, January 1, 2019, Adjusted 75,711
 5
 1,334,030
 3,372,516
 3,589
 (198,995) (72,585) 4,434,971
 10,936
 4,445,907
Net income 
 
 
 110,612
 
 
 
 110,612
 (347) 110,265
Other comprehensive loss 
 
 
 
 
 
 69,054
 69,054
 
 69,054
Repurchase of common stock 
 
 
 
 705
 (60,577) 
 (60,577) 
 (60,577)
Share-based compensation plans:                    
Stock options exercised 18
 
 879
 
 
 
 
 879
 
 879
Non-vested shares awarded, net 33
 
 
 
 
 
 
 
 
 
Vesting of non-vested shares 
 
 
 
 18
 (1,428) 
 (1,428) 
 (1,428)
Share-based compensation 
 
 5,414
 
 
 
 
 5,414
 
 5,414
Cash dividends on common stock 
 
 
 (36,052) 
 
 
 (36,052) 
 (36,052)
Capital calls and distributions, net 
 
 
 
 
 
 
 
 (1,753) (1,753)
Balance, March 31, 2019 75,762

$5

$1,340,323

$3,447,076

4,312

$(261,000)
$(3,531)
$4,522,873

$8,836

$4,531,709

See accompanying notes to consolidated financial statements.

- 44 -



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

 Three Months Ended
  March 31,
  2019 2018
Cash Flows From Operating Activities:    
Net income $110,265
 $105,347
Adjustments to reconcile net income to net cash used in operating activities:    
Provision for credit losses 8,000
 (5,000)
Change in fair value of mortgage servicing rights due to market changes 20,666
 (21,206)
Change in the fair value of mortgage servicing rights due to principal payments 6,583
 7,995
Net unrealized losses (gains) from derivative contracts 695
 2,222
Share-based compensation 5,414
 3,073
Depreciation and amortization 19,412
 13,561
Net amortization of securities discounts and premiums 4,339
 6,555
Net losses (gains) on financial instruments and other losses (gains), net 1,872
 5,593
Net gain on mortgage loans held for sale (5,640) (7,549)
Mortgage loans originated for sale (510,527) (664,958)
Proceeds from sale of mortgage loans held for sale 507,459
 670,598
Capitalized mortgage servicing rights (6,188) (8,900)
Change in trading and fair value option securities (608,232) (588,588)
Change in receivables (682,957) (33,631)
Change in other assets (5,074) (4,349)
Change in accrued interest, taxes and expense (18,220) (8,749)
Change in other liabilities 46,147
 379,649
Net cash used in operating activities (1,105,986) (148,337)
Cash Flows From Investing Activities:  
  
Proceeds from maturities or redemptions of investment securities 23,227
 44,031
Proceeds from maturities or redemptions of available for sale securities 337,822
 412,391
Purchases of available for sale securities (663,193) (518,361)
Proceeds from sales of available for sale securities 245,259
 44,790
Change in amount receivable on unsettled available for sale securities transactions 31,618
 72,342
Loans originated, net of principal collected (97,656) (180,381)
Net payments on derivative asset contracts (33,781) (40,537)
Proceeds from disposition of assets 70,379
 44,620
Purchases of assets (116,692) (59,788)
Net cash used in investing activities (203,017) (180,893)
Cash Flows From Financing Activities:  
  
Net change in demand deposits, transaction deposits and savings accounts (16,970) 76,057
Net change in time deposits 84,828
 67,838
Net change in other borrowed funds 1,614,995
 544,157
Net proceeds on derivative liability contracts 36,250
 41,486
Net change in derivative margin accounts (150,722) (24,490)
Change in amount due on unsettled available for sale securities transactions (22,923) (56,774)
Issuance of common and treasury stock, net (549) 102
Repurchase of common stock (60,577) (7,584)
Dividends paid (36,052) (29,183)
Net cash provided by financing activities 1,448,280
 611,609
Net increase in cash and cash equivalents 139,277
 282,379
Cash and cash equivalents at beginning of period 1,143,424
 2,317,054
Cash and cash equivalents at end of period $1,282,701
 $2,599,433
     
Supplemental Cash Flow Information:    
Cash paid for interest $94,660
 $47,165
Cash paid for taxes $898
 $1,548
Net loans and bank premises transferred to repossessed real estate and other assets $1,032
 $2,156
Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period $22,970
 $19,332
Conveyance of other real estate owned guaranteed by U.S. government agencies $8,404
 $11,817
See accompanying notes to consolidated financial statements.

- 45 -



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

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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

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

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

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

The Company has established a CECL implementation team to evaluate the impact to the Company's financial statements. The CECL implementation team, overseen by the Chief Credit Officer, Chief Financial Officer, and Chief Risk Officer, has developed a project plan that incorporates input from various departments within the bank including Credit, Financial Reporting, Risk, and Information Technology among others. The Audit Committee and Credit Committee of the Board of Directors is periodically updated on project progress. Key implementation activities for 2019 include model validation and quarterly parallel runs with development of governance, control, and disclosure frameworks. The Company will adopt the standard on January 1, 2020 through a cumulative-effect adjustment to retained earnings. The impact of adoption will depend on the composition of the loan and securities portfolios as well as current and expected economic conditions at that time.


- 46 -



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

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

- 47 -



(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities are as follows (in thousands):
 
  March 31, 2019 December 31, 2018
  Fair Value Net Unrealized Gain (Loss) Fair Value Net Unrealized Gain (Loss)
U.S. government agency debentures $51,576
 $52
 $63,765
 $254
U.S. government agency residential mortgage-backed securities 1,952,742
 12,377
 1,791,584
 9,966
Municipal and other tax-exempt securities 50,637
 225
 34,507
 (1)
Asset-backed securities 40,890
 128
 42,656
 685
Other trading securities 44,481
 116
 24,411
 65
Total trading securities $2,140,326
 $12,898
 $1,956,923
 $10,969

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

  March 31, 2019
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
Municipal and other tax-exempt $126,544
 $129,072
 $2,712
 $(184)
U.S. government agency residential mortgage-backed securities 12,106
 12,388
 349
 (67)
Other debt securities 192,816
 207,028
 15,091
 (879)
Total investment securities $331,466
 $348,488
 $18,152
 $(1,130)

  December 31, 2018
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
Municipal and other tax-exempt $137,296
 $138,562
 $1,858
 $(592)
U.S. government agency residential mortgage-backed securities 12,612
 12,770
 293
 (135)
Other debt securities 205,279
 215,966
 12,257
 (1,570)
Total investment securities $355,187
 $367,298
 $14,408
 $(2,297)

         




- 48 -



The amortized cost and fair values of investment securities at March 31, 2019, by contractual maturity, are as shown in the following table (dollars in thousands):
  
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 Total 
Weighted
Average
Maturity1
Fixed maturity debt securities:  
  
  
  
  
  
Amortized cost $52,230
 $105,189
 $136,731
 $25,210
 $319,360
 5.23
Fair value 52,406
 108,571
 149,919
 25,204
 336,100
  
Residential mortgage-backed securities:  
  
  
  
  
  
Amortized cost  
  
  
  
 $12,106
 
2 

Fair value  
  
  
  
 12,388
  
Total investment securities:  
  
  
  
  
  
Amortized cost  
  
  
  
 $331,466
  
Fair value  
  
  
  
 348,488
  
1 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
2 
The average expected lives of residential mortgage-backed securities were 4.7 years based upon current prepayment assumptions.

Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
  March 31, 2019
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
U.S. Treasury $1,880
 $1,878
 $
 $(2)
Municipal and other tax-exempt 2,365
 2,447
 82
 
Mortgage-backed securities:  
  
  
  
Residential agency 6,056,710
 6,040,086
 35,131
 (51,755)
Residential non-agency 33,305
 47,958
 14,653
 
Commercial agency 2,933,046
 2,932,357
 17,022
 (17,711)
Other debt securities 500
 472
 
 (28)
Total available for sale securities $9,027,806
 $9,025,198
 $66,888
 $(69,496)

  December 31, 2018
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
U.S. Treasury $496
 $493
 $
 $(3)
Municipal and other tax-exempt 2,782
 2,864
 82
 
Mortgage-backed securities:    
  
  
Residential agency 5,886,323
 5,804,708
 16,149
 (97,764)
Residential non-agency 40,948
 59,736
 18,788
 
Commercial agency 2,986,297
 2,953,889
 7,955
 (40,363)
Other debt securities 35,545
 35,430
 12
 (127)
Total available for sale securities $8,952,391
 $8,857,120
 $42,986
 $(138,257)

           



- 49 -



The amortized cost and fair values of available for sale securities at March 31, 2019, by contractual maturity, are as shown in the following table (dollars in thousands):
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 Total 
Weighted
Average
Maturity1
Fixed maturity debt securities: 
  
  
  
    
Amortized cost$94,933
 $983,438
 $1,467,481
 $391,939
 $2,937,791
 7.30
Fair value94,398
 976,737
 1,473,499
 392,520
 2,937,154
  
Residential mortgage-backed securities: 
  
  
  
    
Amortized cost 
  
  
  
 $6,090,015
 
2 

Fair value 
  
  
  
 6,088,044
  
Total available-for-sale securities: 
  
  
  
    
Amortized cost 
  
  
  
 $9,027,806
  
Fair value 
  
  
  
 9,025,198
  
1 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
2 
The average expected lives of mortgage-backed securities were 4.1 years based upon current prepayment assumptions.

Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 Three Months Ended
March 31,
 2019 2018
Proceeds$245,259
 $44,790
Gross realized gains5,298
 193
Gross realized losses(5,222) (483)
Related federal and state income tax expense (benefit)19
 (74)


The fair value of debt securities pledged as collateral for repurchase agreements, public trust funds on deposit and for other purposes, as required by law was $10.3 billion at March 31, 2019 and $9.1 billion at December 31, 2018. The secured parties do not have the right to sell or repledge these securities.


























- 50 -



Temporarily Impaired Securities as of March 31, 2019
(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 50
 $234
 $1
 $52,434
 $183
 $52,668
 $184
U.S. government agency residential mortgage-backed securities 2
 
 
 5,468
 67
 5,468
 67
Other debt securities 30
 25
 1
 16,932
 878
 16,957
 879
Total investment securities 82
 $259
 $2
 $74,834
 $1,128
 $75,093
 $1,130

  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
 $
 $
 $495
 $2
 $495
 $2
Mortgage-backed securities:    
  
  
  
 

 

Residential agency 244

300,369

1,016

3,251,359

50,739

3,551,728

51,755
Commercial agency 169
 432,254
 833
 1,590,803
 16,878
 2,023,057
 17,711
Other debt securities 1
 
 
 472
 28
 472
 28
Total available for sale securities 415
 $732,623

$1,849

$4,843,129

$67,647

$5,575,752

$69,496


Temporarily Impaired Securities as of December 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 72
 $18,255
 $69
 $66,141
 $523
 $84,396
 $592
U.S. government agency residential mortgage-backed securities 2
 
 
 5,633
 135
 5,633
 135
Other debt securities 72
 13,372
 64
 23,028
 1,506
 36,400
 1,570
Total investment securities 146
 $31,627
 $133
 $94,802
 $2,164
 $126,429
 $2,297

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

 

U.S. Treasury 1
 $
 $
 $493
 $3
 $493
 $3
Mortgage-backed securities:  
  
  
  
  
 

 

Residential agency 289
 510,824
 1,158
 3,641,370
 96,606
 4,152,194
 97,764
Commercial agency 197
 179,258
 394
 1,969,504
 39,969
 2,148,762
 40,363
Other debt securities 3
 9,982
 63
 20,436
 64
 30,418
 127
Total available for sale securities 490
 $700,064

$1,615

$5,631,803

$136,642

$6,331,867

$138,257


Based on evaluations of impaired securities as of March 31, 2019, the Company does not intend to sell any impaired available for sale debt securities before fair value recovers to the current amortized cost and it is more-likely-than-not that the Company will not be required to sell impaired securities before fair value recovers, which may be maturity.

- 51 -



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

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

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

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

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

- 52 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at March 31, 2019 (in thousands):
  Assets
  
Notional1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $11,338,256
 $91,727
 $(33,983) $57,744
 $
 $57,744
Interest rate swaps 2,047,117
 36,602
 (8,296) 28,306
 (593) 27,713
Energy contracts 1,501,876
 123,485
 (84,482) 39,003
 (10,130) 28,873
Agricultural contracts 23,660
 2,696
 (64) 2,632
 
 2,632
Foreign exchange contracts 224,741
 223,329
 
 223,329
 
 223,329
Equity option contracts 86,944
 3,140
 
 3,140
 (930) 2,210
Total customer risk management programs 15,222,594
 480,979
 (126,825) 354,154
 (11,653) 342,501
Internal risk management programs 25,928,716
 132,974
 (116,252) 16,722
 
 16,722
Total derivative contracts $41,151,310
 $613,953
 $(243,077) $370,876
 $(11,653) $359,223
             
  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 $11,140,756
 $89,929
 $(33,983) $55,946
 $(55,879) $67
Interest rate swaps 2,047,117
 36,644
 (8,296) 28,348
 (14,345) 14,003
Energy contracts 1,433,137
 119,097
 (84,482) 34,615
 (4,608) 30,007
Agricultural contracts 23,636
 2,662
 (64) 2,598
 
 2,598
Foreign exchange contracts 219,893
 218,400
 
 218,400
 (414) 217,986
Equity option contracts 86,944
 3,140
 
 3,140
 
 3,140
Total customer risk management programs 14,951,483
 469,872
 (126,825) 343,047
 (75,246) 267,801
Internal risk management programs 27,041,772
 151,686
 (116,252) 35,434
 (3,537) 31,897
Total derivative contracts $41,993,255
 $621,558
 $(243,077) $378,481
 $(78,783) $299,698
1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.



- 53 -



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

  Assets
  
Notional 1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $10,671,151
 $92,231
 $(26,787) $65,444
 $
 $65,444
Interest rate swaps 1,924,131
 36,112
 (6,688) 29,424
 (7,934) 21,490
Energy contracts 1,472,209
 206,418
 (60,983) 145,435
 (106,752) 38,683
Agricultural contracts 21,210
 842
 (201) 641
 
 641
Foreign exchange contracts 184,990
 183,759
 
 183,759
 
 183,759
Equity option contracts 89,085
 2,021
 
 2,021
 (648) 1,373
Total customer risk management programs 14,362,776
 521,383
 (94,659) 426,724
 (115,334) 311,390
Internal risk management programs 15,909,988
 50,410
 (40,871) 9,539
 
 9,539
Total derivative contracts $30,272,764
 $571,793
 $(135,530) $436,263
 $(115,334) $320,929
             
  Liabilities
  
Notional 1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $10,558,151
 $90,388
 $(26,787) $63,601
 $(63,596) $5
Interest rate swaps 1,924,131
 36,288
 (6,688) 29,600
 (4,110) 25,490
Energy contracts 1,434,247
 202,494
 (60,983) 141,511
 (1,490) 140,021
Agricultural contracts 21,214
 812
 (201) 611
 
 611
Foreign exchange contracts 177,423
 175,922
 
 175,922
 
 175,922
Equity option contracts 89,085
 2,021
 
 2,021
 
 2,021
Total customer risk management programs 14,204,251
 507,925
 (94,659) 413,266
 (69,196) 344,070
Internal risk management programs 19,634,642
 66,422
 (40,871) 25,551
 (7,315) 18,236
Total derivative contracts $33,838,893
 $574,347
 $(135,530) $438,817
 $(76,511) $362,306
1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.





             








- 54 -



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, 2019 March 31, 2018
  
Brokerage
and Trading Revenue
 Gain (Loss) on Derivatives, Net 
Brokerage
and Trading
Revenue
 Gain (Loss)on Derivatives, Net
Customer risk management programs:        
Interest rate contracts        
To-be-announced residential mortgage-backed securities $5,700
 $
 $6,819
 $
Interest rate swaps 593
 
 756
 
Energy contracts 226
 
 3,140
 
Agricultural contracts 4
 
 15
 
Foreign exchange contracts 154
 
 176
 
Equity option contracts 
 
 
 
Total customer risk management programs 6,677
 
 10,906
 
Internal risk management programs (7,295) 4,667
 (1,883) (5,685)
Total derivative contracts $(618) $4,667
 $9,023
 $(5,685)

         



- 55 -



(4) Loans and Allowances for Credit Losses

Loans

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

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

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

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

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

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

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

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


- 56 -



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, 2019 December 31, 2018
  
Fixed
Rate
 
Variable
Rate
 Non-accrual Total 
Fixed
Rate
 
Variable
Rate
 Non-accrual Total
Commercial $3,336,747
 $10,534,870
 $90,358
 $13,961,975
 $2,251,188
 $11,285,049
 $99,841
 $13,636,078
Commercial real estate 1,004,692
 3,574,451
 21,508
 4,600,651
 1,477,274
 3,265,918
 21,621
 4,764,813
Residential mortgage 1,777,510
 374,701
 40,409
 2,192,620
 1,830,224
 358,254
 41,555
 2,230,033
Personal 160,472
 842,960
 302
 1,003,734
 190,687
 834,889
 230
 1,025,806
Total $6,279,421
 $15,326,982
 $152,577
 $21,758,980
 $5,749,373
 $15,744,110
 $163,247
 $21,656,730
Accruing loans past due (90 days)1
  
  
  
 $610
  
  
  
 $1,338
1 
Excludes residential mortgage loans guaranteed by agencies of the U.S. government
         


Credit Commitments
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At March 31, 2019, outstanding commitments totaled $12 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, 2019, outstanding standby letters of credit totaled $720 million. 

Allowances for Credit Losses

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

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

The allowance for loan losses consists of specific allowances attributed to impaired loans that have not yet been charged down to amounts we expect to recover, general allowances for unimpaired loans based on estimated loss rates by loan class and nonspecific allowances based on general economic conditions, risk concentration and related factors. There have been no material changes in the approach or techniques utilized in developing the allowance for loan losses and the accrual for off-balance sheet credit losses for the three months ended March 31, 2019.


- 57 -



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

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

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


- 58 -



The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended March 31, 2019 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Residential Mortgage Personal Nonspecific Allowance Total
Allowance for loan losses:            
Beginning balance $102,226
 $60,026
 $17,964
 $9,473
 $17,768
 $207,457
Provision for loan losses 11,108
 (2,004) (2,408) (137) 1,410
 7,969
Loans charged off (10,468) 
 (42) (1,265) 
 (11,775)
Recoveries 711
 112
 154
 712
 
 1,689
Ending balance $103,577
 $58,134
 $15,668
 $8,783
 $19,178
 $205,340
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance $1,655
 $52
 $52
 $31
 $
 $1,790
Provision for off-balance sheet credit losses 70
 (4) (5) (30) 
 31
Ending balance $1,725
 $48
 $47
 $1
 $
 $1,821
             
Total provision for credit losses $11,178
 $(2,008) $(2,413) $(167) $1,410
 $8,000
             

The 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)
             


- 59 -



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at March 31, 2019 is as follows (in thousands):
  
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $13,871,617
 $100,034
 $90,358
 $3,543
 $13,961,975
 $103,577
Commercial real estate 4,579,143
 58,134
 21,508
 
 4,600,651
 58,134
Residential mortgage 2,152,211
 15,668
 40,409
 
 2,192,620
 15,668
Personal 1,003,432
 8,783
 302
 
 1,003,734
 8,783
Total 21,606,403
 182,619
 152,577
 3,543
 21,758,980
 186,162
             
Nonspecific allowance 
 
 
 
 
 19,178
             
Total $21,606,403
 $182,619
 $152,577
 $3,543
 $21,758,980
 $205,340

The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 2018 is as follows (in thousands):
  
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $13,536,237
 $93,494
 $99,841
 $8,732
 $13,636,078
 $102,226
Commercial real estate 4,743,192
 60,026
 21,621
 
 4,764,813
 60,026
Residential mortgage 2,188,478
 17,964
 41,555
 
 2,230,033
 17,964
Personal 1,025,576
 9,473
 230
 
 1,025,806
 9,473
Total 21,493,483
 180,957
 163,247
 8,732
 21,656,730
 189,689
             
Nonspecific allowance 
 
 
 
 
 17,768
             
Total $21,493,483
 $180,957
 $163,247
 $8,732
 $21,656,730
 $207,457

             


- 60 -



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, 2019 is as follows (in thousands):
  Internally Risk Graded Non-Graded Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $13,931,425
 $102,646
 $30,550
 $931
 $13,961,975
 $103,577
Commercial real estate 4,600,651
 58,134
 
 
 4,600,651
 58,134
Residential mortgage 275,875
 3,176
 1,916,745
 12,492
 2,192,620
 15,668
Personal 912,343
 6,627
 91,391
 2,156
 1,003,734
 8,783
Total 19,720,294
 170,583
 2,038,686
 15,579
 21,758,980
 186,162
             
Nonspecific allowance 
 
 
 
 
 19,178
             
Total $19,720,294
 $170,583
 $2,038,686
 $15,579
 $21,758,980
 $205,340
 
The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at December 31, 2018 is as follows (in thousands):
  Internally Risk Graded Non-Graded Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $13,586,654
 $101,303
 $49,424
 $923
 $13,636,078
 $102,226
Commercial real estate 4,764,813
 60,026
 
 
 4,764,813
 60,026
Residential mortgage 505,046
 3,310
 1,724,987
 14,654
 2,230,033
 17,964
Personal 948,890
 6,633
 76,916
 2,840
 1,025,806
 9,473
Total 19,805,403
 171,272
 1,851,327
 18,417
 21,656,730
 189,689
             
Nonspecific allowance 
 
 
 
 
 17,768
             
Total $19,805,403
 $171,272
 $1,851,327
 $18,417
 $21,656,730
 $207,457
             


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

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


- 61 -



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

The following table summarizes the Company’s loan portfolio at March 31, 2019 by the risk grade categories (in thousands): 
  Internally Risk Graded Non-Graded  
  Performing        
  Pass Other Loans Especially Mentioned Accruing Substandard Nonaccrual Performing Nonaccrual Total
Commercial:              
Energy $3,549,167
 $39,285
 $81,315
 $35,332
 $
 $
 $3,705,099
Services 3,189,490
 60,361
 28,157
 9,555
 
 
 3,287,563
Wholesale/retail 1,675,248
 21,100
 9,127
 1,425
 
 
 1,706,900
Manufacturing 677,497
 34,033
 21,296
 9,548
 
 
 742,374
Healthcare 2,869,515
 13,748
 13,854
 18,768
 
 
 2,915,885
Public finance 803,083
 
 
 
 
 
 803,083
Other commercial and industrial 744,082
 3,190
 7,580
 15,669
 30,489
 61
 801,071
Total commercial 13,508,082
 171,717
 161,329
 90,297
 30,489
 61
 13,961,975
               
Commercial real estate:  
    
  
  
  
  
Residential construction and land development 149,336
 
 
 350
 
 
 149,686
Retail 857,698
 11,549
 1,279
 20,159
 
 
 890,685
Office 1,024,892
 4,219
 3,192
 855
 
 
 1,033,158
Multifamily 1,203,220
 7,136
 2
 
 
 
 1,210,358
Industrial 767,757
 
 
 
 
 
 767,757
Other commercial real estate 546,942
 1,071
 850
 144
 
 
 549,007
Total commercial real estate 4,549,845
 23,975
 5,323
 21,508
 
 
 4,600,651
               
Residential mortgage:  
    
  
  
  
  
Permanent mortgage 272,741
 
 2,225
 909
 800,578
 22,028
 1,098,481
Permanent mortgages guaranteed by U.S. government agencies 
 
 
 
 186,362
 6,946
 193,308
Home equity 
 
 
 
 890,305
 10,526
 900,831
Total residential mortgage 272,741
 
 2,225
 909
 1,877,245
 39,500
 2,192,620
               
Personal 912,187
 47
 33
 76
 91,165
 226
 1,003,734
               
Total $19,242,855
 $195,739
 $168,910
 $112,790
 $1,998,899
 $39,787
 $21,758,980



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The following table summarizes the Company’s loan portfolio at December 31, 2018 by the risk grade categories (in thousands): 
  Internally Risk Graded Non-Graded  
  Performing        
  Pass Other Loans Especially Mentioned Accruing Substandard Nonaccrual Performing Nonaccrual Total
Commercial:              
Energy $3,414,039
 $42,176
 $86,624
 $47,494
 $
 $
 $3,590,333
Services 3,167,203
 49,761
 32,661
 8,567
 
 
 3,258,192
Wholesale/retail 1,593,902
 18,809
 7,131
 1,316
 
 
 1,621,158
Manufacturing 668,438
 30,934
 22,230
 8,919
 
 
 730,521
Healthcare 2,730,121
 14,920
 37,698
 16,538
 
 
 2,799,277
Public finance 804,550
 
 
 
 
 
 804,550
Other commercial and industrial 756,815
 1,266
 7,588
 16,954
 49,371
 53
 832,047
Total commercial 13,135,068
 157,866
 193,932
 99,788
 49,371
 53
 13,636,078
               
Commercial real estate:  
    
  
  
  
  
Residential construction and land development 148,234
 
 
 350
 
 
 148,584
Retail 885,588
 11,926
 1,289
 20,279
 
 
 919,082
Office 1,059,334
 10,532
 3,054
 
 
 
 1,072,920
Multifamily 1,287,471
 281
 12
 301
 
 
 1,288,065
Industrial 776,898
 
 1,208
 
 
 
 778,106
Other commercial real estate 555,301
 1,188
 876
 691
 
 
 558,056
Total commercial real estate 4,712,826
 23,927
 6,439
 21,621
 
 
 4,764,813
               
Residential mortgage:  
    
  
  
  
  
Permanent mortgage 269,678
 52
 9,730
 1,991
 819,199
 21,960
 1,122,610
Permanent mortgages guaranteed by U.S. government agencies 
 
 
 
 183,734
 7,132
 190,866
Home equity 223,298
 
 296
 
 682,491
 10,472
 916,557
Total residential mortgage 492,976
 52
 10,026
 1,991
 1,685,424
 39,564
 2,230,033
               
Personal 944,256
 115
 4,443
 76
 76,762
 154
 1,025,806
               
Total $19,285,126
 $181,960
 $214,840
 $123,476
 $1,811,557
 $39,771
 $21,656,730
               




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Impaired Loans

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

A summary of impaired loans at March 31, 2019 follows (in thousands):
 As of For the
 March 31, 2019 Three Months Ended
   Recorded Investment   March 31, 2019
 
Unpaid
Principal
Balance
 Total With No
Allowance
 With Allowance Related Allowance Average Recorded
Investment
 Interest Income Recognized
Commercial:             
Energy$72,615
 $35,332
 $31,332
 $4,000
 $675
 $45,627
 $
Services13,744
 9,555
 9,529
 26
 26
 7,378
 
Wholesale/retail1,642
 1,425
 1,142
 283
 101
 1,047
 
Manufacturing1
9,697
 9,548
 9,307
 241
 241
 8,851
 
Healthcare30,189
 18,768
 15,270
 3,498
 2,500
 14,926
 
Public finance
 
 
 
 
 
 
Other commercial and industrial25,899
 15,730
 15,730
 
 
 16,215
 
Total commercial153,786
 90,358
 82,310
 8,048
 3,543
 94,044
 
              
Commercial real estate: 
  
  
  
  
  
  
Residential construction and land development1,306
 350
 350
 
 
 350
 
Retail20,491
 20,159
 20,159
 
 
 20,219
 
Office855
 855
 855
 
 
 427
 
Multifamily
 
 
 
 
 151
 
Industrial
 
 
 
 
 
 
Other commercial real estate305
 144
 144
 
 
 418
 
Total commercial real estate22,957
 21,508
 21,508
 
 
 21,565
 
              
Residential mortgage: 
  
  
  
  
  
  
Permanent mortgage27,658
 22,937
 22,937
 
 
 23,444
 298
Permanent mortgage guaranteed by U.S. government agencies2
198,882
 193,308
 193,308
 
 
 196,407
 1,905
Home equity12,279
 10,526
 10,526
 
 
 10,499
 
Total residential mortgage238,819
 226,771
 226,771
 
 
 230,350
 2,203
              
Personal358
 302
 302
 
 
 266
 
              
Total$415,920
 $338,939
 $330,891
 $8,048
 $3,543
 $346,225
 $2,203
1 
Impaired manufacturing sector loans included $4.7 million of loans from an affiliated entity, with no allowance as the fair value of the collateral exceeded the outstanding principal balance at March 31, 2019.
2 All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At March 31, 2019, the majority were accruing based on the guarantee by U.S. government agencies.


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


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A summary of impaired loans at December 31, 2018 follows (in thousands): 
    Recorded Investment
  
Unpaid
Principal
Balance
 Total 
With No
Allowance
 With Allowance Related Allowance
Commercial:          
Energy $79,675
 $47,494
 $18,639
 $28,855
 $5,362
Services 13,437
 8,567
 8,489
 78
 74
Wholesale/retail 1,722
 1,316
 1,015
 301
 101
Manufacturing 10,055
 8,919
 8,673
 246
 246
Healthcare 24,319
 16,538
 10,563
 5,975
 2,949
Public finance 
 
 
 
 
Other commercial and industrial 26,955
 17,007
 17,007
 
 
Total commercial 156,163
 99,841
 64,386
 35,455
 8,732
           
Commercial real estate:  
  
  
  
  
Residential construction and land development 1,306
 350
 350
 
 
Retail 27,680
 20,279
 20,279
 
 
Office 
 
 
 
 
Multifamily 301
 301
 301
 
 
Industrial 
 
 
 
 
Other commercial real estate 851
 691
 691
 
 
Total commercial real estate 30,138
 21,621
 21,621
 
 
           
Residential mortgage:  
  
  
  
  
Permanent mortgage 28,716
 23,951
 23,951
 
 
Permanent mortgage guaranteed by U.S. government agencies1
 196,296
 190,866
 190,866
 
 
Home equity 12,196
 10,472
 10,472
 
 
Total residential mortgage 237,208
 225,289
 225,289
 
 
           
Personal 278
 230
 230
 
 
           
Total $423,787
 $346,981
 $311,526
 $35,455
 $8,732
1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At December 31, 2018, the majority were accruing based on the guarantee by U.S. government agencies.




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Troubled Debt Restructurings

At March 31, 2019 the Company had $159 million in troubled debt restructurings (TDRs), of which $92 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $81 million of TDRs were performing in accordance with the modified terms.

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

TDRs generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. During the three months ended March 31, 2019, $18 million of loans were restructured. During the three months ended March 31, 2018, $37 million of loans were restructured.





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Nonaccrual & Past Due Loans

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

A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of March 31, 2019 is as follows (in thousands):
    Past Due    
  Current 
30 to 59
Days
 60 to 89 Days 
90 Days
or More
 Nonaccrual Total
Commercial:            
Energy $3,669,767
 $
 $
 $
 $35,332
 $3,705,099
Services 3,257,230
 20,214
 442
 122
 9,555
 3,287,563
Wholesale/retail 1,704,415
 833
 227
 
 1,425
 1,706,900
Manufacturing 732,644
 182
 
 
 9,548
 742,374
Healthcare 2,888,579
 7,837
 701
 
 18,768
 2,915,885
Public finance 803,083
 
 
 
 
 803,083
Other commercial and industrial 782,507
 2,695
 
 139
 15,730
 801,071
Total commercial 13,838,225
 31,761
 1,370
 261
 90,358
 13,961,975
             
Commercial real estate:  
  
    
  
  
Residential construction and land development 143,184
 6,152
 
 
 350
 149,686
Retail 870,526
 
 
 
 20,159
 890,685
Office 1,032,239
 
 64
 
 855
 1,033,158
Multifamily 1,209,726
 283
 
 349
 
 1,210,358
Industrial 767,757
 
 
 
 
 767,757
Other commercial real estate 547,563
 1,187
 113
 
 144
 549,007
Total commercial real estate 4,570,995
 7,622
 177
 349
 21,508
 4,600,651
             
Residential mortgage:  
  
    
  
  
Permanent mortgage 1,070,150
 5,394
 
 
 22,937
 1,098,481
Permanent mortgages guaranteed by U.S. government agencies 47,639
 38,748
 
 99,975
 6,946
 193,308
Home equity 886,019
 4,118
 168
 
 10,526
 900,831
Total residential mortgage 2,003,808
 48,260
 168
 99,975
 40,409
 2,192,620
             
Personal 1,003,069
 347
 16
 
 302
 1,003,734
             
Total $21,416,097
 $87,990
 $1,731
 $100,585
 $152,577
 $21,758,980


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

    Past Due    
  Current 
30 to 59
Days
 60 to 89 Days 
90 Days
or More
 Nonaccrual Total
Commercial:            
Energy $3,542,839
 $
 $
 $
 $47,494
 $3,590,333
Services 3,237,578
 6,009
 6,038
 
 8,567
 3,258,192
Wholesale/retail 1,619,290
 515
 37
 
 1,316
 1,621,158
Manufacturing 721,204
 392
 6
 
 8,919
 730,521
Healthcare 2,781,944
 241
 
 554
 16,538
 2,799,277
Public finance 804,550
 
 
 
 
 804,550
Other commercial and industrial 814,489
 518
 25
 8
 17,007
 832,047
Total commercial 13,521,894
 7,675
 6,106
 562
 99,841
 13,636,078
             
Commercial real estate:  
  
    
  
  
Residential construction and land development 147,705
 249
 280
 
 350
 148,584
Retail 884,424
 14,379
 
 
 20,279
 919,082
Office 1,072,920
 
 
 
 
 1,072,920
Multifamily 1,287,483
 281
 
 
 301
 1,288,065
Industrial 776,898
 1,208
 
 
 
 778,106
Other commercial real estate 556,239
 412
 
 714
 691
 558,056
Total commercial real estate 4,725,669
 16,529
 280
 714
 21,621
 4,764,813
             
Residential mortgage:  
  
    
  
  
Permanent mortgage 1,095,097
 3,196
 366
 
 23,951
 1,122,610
Permanent mortgages guaranteed by U.S. government agencies 37,459
 24,369
 16,345
 105,561
 7,132
 190,866
Home equity 904,572
 1,102
 352
 59
 10,472
 916,557
Total residential mortgage 2,037,128
 28,667
 17,063
 105,620
 41,555
 2,230,033
             
Personal 1,024,298
 479
 796
 3
 230
 1,025,806
             
Total $21,308,989
 $53,350
 $24,245
 $106,899
 $163,247
 $21,656,730




             


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(5) Leasing

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

Right-of-use assets initially recognized in the first quarter of 2019 were $137 million.

The following represents a summary of operating lease activities (dollars in thousands):
  March 31, 2019
Operating lease cost recognized as occupancy and equipment expense $6,419
Operating cash flows from operating leases 5,914
Weighted-average remaining lease term 10.1 years
Weighted-average discount rate operating leases 3.50%

At March 31, 2019, un-discounted operating lease liabilities are scheduled to mature as follows: $30.2 million in 2019, $28.4 million in 2020, $25.1 million in 2021, $17.7 million in 2022, $15.3 million in 2023 and $97.6 million thereafter. Operating expense and short term lease costs total $2.4 million for the three months ended March 31, 2019.

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

(6) Mortgage Banking Activities

Residential Mortgage Loan Production

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

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

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loan commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):

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  March 31, 2019 December 31, 2018
  
Unpaid Principal Balance/
Notional
 Fair Value 
Unpaid Principal Balance/
Notional
 Fair Value
Residential mortgage loans held for sale $153,818
 $155,679
 $145,057
 $146,971
Residential mortgage loan commitments 263,434
 8,091
 160,848
 5,378
Forward sales contracts 376,411
 (3,613) 274,000
 (3,128)
   
 $160,157
  
 $149,221


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

Mortgage banking revenue was as follows (in thousands):
  Three Months Ended
March 31,
  2019 2018
Production revenue:    
Net realized gains on sale of mortgage loans $5,693
 $8,918
Net change in unrealized gain on mortgage loans held for sale (53) (1,369)
Net change in the fair value of mortgage loan commitments 2,713
 2,074
Net change in the fair value of forward sales contracts (485) (171)
Total production revenue 7,868
 9,452
Servicing revenue 15,966
 16,573
Total mortgage banking revenue $23,834
 $26,025


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

Residential Mortgage Servicing

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


- 70 -



The following represents a summary of mortgage servicing rights (dollars in thousands):
  March 31, 2019 December 31, 2018
Number of residential mortgage loans serviced for others 131,636,000
 132,463,000
Outstanding principal balance of residential mortgage loans serviced for others $21,544,295
 $21,658,335
Weighted average interest rate 4.00% 3.99%
Remaining term (in months) 292
 293


The following represents activity in capitalized mortgage servicing rights (in thousands):
  Three Months Ended
March 31,
  2019 2018
Beginning Balance $259,254
 $252,867
Additions, net 6,188
 8,900
Change in fair value due to principal payments (6,583) (7,995)
Change in fair value due to market assumption changes (20,666) 21,206
Ending Balance $238,193
 $274,978

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

Mortgage servicing rights are not traded in active markets. Fair value is determined by discounting the projected net cash flows. Significant market assumptions used to determine fair value based on significant unobservable inputs were as follows:
  March 31, 2019 December 31, 2018
Discount rate – risk-free rate plus a market premium 9.83% 9.90%
Prepayment rate - based upon loan interest rate, original term and loan type 8.14% - 16.02% 8.05% - 15.74%
Loan servicing costs – annually per loan based upon loan type:    
Performing loans $68 - $94 $67 - $93
Delinquent loans $150 - $500 $150 - $500
Loans in foreclosure $1,000 - $4,000 $1,000 - $4,000
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life 2.29% 2.57%
Primary/secondary mortgage rate spread 105 bps 105 bps


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



- 71 -



(7)  Commitments and Contingent Liabilities

Litigation Contingencies

On June 24, 2015, BOKF, NA received a complaint alleging that an employee had colluded with a bond issuer and an individual in misusing revenues pledged to municipal bonds for which BOKF, NA served as trustee under the bond indenture. The Company conducted an investigation and concluded that employees in one of its Corporate Trust offices had, with respect to a single group of affiliated bond issuances, violated Company policies and procedures by waiving financial covenants, granting forbearances and accepting without disclosure to the bondholders, debt service payments from sources other than pledged revenues. The relationship manager was terminated. The Company reported the circumstances to, and cooperated with an investigation by, the Securities and Exchange Commission ("SEC"). On December 28, 2015, in an action brought by the SEC, the United States District Court for the District of New Jersey entered a judgment against the principals involved in issuing the bonds, precluding the principals from denying the alleged violations of the federal securities laws and requiring the principals to pay all outstanding principal, accrued interest, and other amounts required under the bond documents (now estimated to be approximately $40 million, less the value of the facilities securing repayment of the bonds), subject to oversight by a court appointed monitor. The obligation of the principal to pay all principal and interest on the bonds is non-dischargeable in bankruptcy. On September 7, 2016, BOKF, NA agreed, and the SEC entered, a consent order finding that BOKF, NA had violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and requiring BOKF, NA to disgorge $1,067,721 of fees and pay a civil penalty of $600,000. BOKF, NA disgorged the fees and paid the penalty. 

On August 26, 2016, BOKF, NA was sued in the United States District Court for New Jersey by two bondholders in a putative class action on behalf of all holders of the bonds alleging BOKF, NA participated in the fraudulent sale of securities by the principals. On September 14, 2016, BOKF, NA was sued in the District Court of Tulsa County, Oklahoma by 19 bondholders alleging BOKF, NA participated in the fraudulent sale of securities by the principals. Two separate small groups of bondholders have filed arbitration complaints with the Financial Institutions Regulatory Association respecting the bonds and other bonds for which BOKF, NA served as indenture trustee. Management has been advised by counsel that BOKF, NA has valid defenses to the claims. The time by which the principal must perform the Court ordered payment plan currently expires on June 20, 2019. BOKF, NA expects the Court ordered payment plan to be continued from time to time until the principals complete the payment of the bonds, though there is no assurance that it will be. No loss is probable at this time and no provision for loss has been made. If the payment plan does not result in payment of the bonds, a loss could become probable. A reasonable estimate cannot be made at this time though the amount could be material to the Company. 
 
On March 5, 2018, BOKF, NA was sued in the Fulton, Georgia County District Court by the administratrix of a deceased resident who had sued for and obtained a judgment for wrongful death against one of the operators of a nursing home financed by one of the bonds which are the subject of the litigation discussed above. The judgment is alleged to total approximately $8 million in principal and interest at this time. Plaintiff alleges that BOKF, in its capacity as indenture trustee for the bonds, colluded with the borrower and others to defraud creditors of the nursing home by misleading the public about the solvency of the nursing home. Plaintiff alleges that this conduct has prevented her from collecting on her judgment. BOKF, NA is advised by counsel that BOKF, NA has valid defenses to the plaintiffs’ claims and no loss is probable.

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

On March 7, 2017, a plaintiff filed a putative class action in the United States District Court for the Northern District of Texas alleging an extended overdraft fee charged by BOKF, NA is interest and exceeds permitted rates. This action makes the same allegations as a putative class action that was dismissed by the United States District Court for the Northern District of Oklahoma on October 19, 2015. On August 22, 2018, a plaintiff filed a second putative class action in the United States District Court for New Mexico making the same allegations as the Texas action. On September 18, 2018, the District Court dismissed the Texas action. Management is advised by counsel that a loss is not probable in the New Mexico action or the Texas action and that the loss, if any, cannot be reasonably estimated.


- 72 -



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

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

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

At March 31, 2019, the Company has $232 million in interests in various alternative investments generally consisting of unconsolidated limited partnership interests in entities for which investment return is in the form of low income housing tax credits or other investments in merchant banking activities. This investment balance also includes $67 million of unfunded commitments included in Other liabilities on the Consolidated Balance Sheets.
           
           
           



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(8) Shareholders' Equity

On April 30, 2019, the Company declared a quarterly cash dividend of $0.50 per common share payable on or about May 28, 2019 to shareholders of record as of May 13, 2019.

Dividends declared were $0.50 per share during the three months ended March 31, 2019 and $0.45 per share during the three months ended March 31, 2018.

Accumulated Other Comprehensive Income (Loss)

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

A rollforward of the components of accumulated other comprehensive income (loss) is included as follows (in thousands):
  Unrealized Gain (Loss) on  
  Available for Sale Securities Employee Benefit Plans Total
Balance, December 31, 2017 $(35,385) $(789) $(36,174)
Transition adjustment for net unrealized gains on equity securities (2,709) 
 (2,709)
Net change in unrealized gain (loss) (97,406) 
 (97,406)
Reclassification adjustments included in earnings:     
Loss on available for sale securities, net 290
 
 290
Other comprehensive income (loss), before income taxes (97,116) 
 (97,116)
Federal and state income taxes1
 (24,808) 
 (24,808)
Other comprehensive income (loss), net of income taxes (72,308) 
 (72,308)
Balance, March 31, 2018 $(110,402) $(789) $(111,191)
      
Balance, December 31, 2018 $(70,999) $(1,586) $(72,585)
Net change in unrealized gain (loss) 92,739
 
 92,739
Reclassification adjustments included in earnings:     
Gain on available for sale securities, net (76) 
 (76)
Other comprehensive income (loss), before income taxes 92,663
 
 92,663
Federal and state income taxes1
 23,609
 
 23,609
Other comprehensive income (loss), net of income taxes 69,054
 
 69,054
Balance, March 31, 2019 $(1,945)
$(1,586) $(3,531)

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


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(9) Earnings Per Share
 
(In thousands, except share and per share amounts) Three Months Ended
March 31,
  2019 2018
Numerator:    
Net income attributable to BOK Financial Corp. shareholders $110,612
 $105,562
Less: Earnings allocated to participating securities 828
 1,022
Numerator for basic earnings per share – income available to common shareholders 109,784
 104,540
Effect of reallocating undistributed earnings of participating securities 
 
Numerator for diluted earnings per share – income available to common shareholders $109,784
 $104,540
     
Denominator:  
  
Weighted average shares outstanding $71,926,041
 $65,479,482
Less:  Participating securities included in weighted average shares outstanding 538,971
 632,148
Denominator for basic earnings per common share 71,387,070
 64,847,334
Dilutive effect of employee stock compensation plans1
 17,318
 40,699
Denominator for diluted earnings per common share $71,404,388
 $64,888,033
     
Basic earnings per share $1.54
 $1.61
Diluted earnings per share $1.54
 $1.61
1  Excludes employee stock options with exercise prices greater than current market price.
 
 



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(10)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2019 is as follows (in thousands):
  Commercial Consumer 
Wealth
Management
 
Funds Management and Other1
 
BOK
Financial
Consolidated
Net interest revenue from external sources $204,209
 $21,595
 $21,486
 $30,812
 $278,102
Net interest revenue (expense) from internal sources (52,562) 29,507
 6,770
 16,285
 
Net interest revenue 151,647
 51,102
 28,256
 47,097
 278,102
Provision for credit losses 11,245
 1,085
 (119) (4,211) 8,000
Net interest revenue after provision for credit losses 140,402
 50,017
 28,375
 51,308
 270,102
Other operating revenue 37,612
 42,748
 73,414
 3,496
 157,270
Other operating expense 50,177
 53,506
 61,507
 121,967
 287,157
Net direct contribution 127,837
 39,259
 40,282
 (67,163) 140,215
Gain (loss) on financial instruments, net 18
 14,097
 
 (14,115) 
Change in fair value of mortgage servicing rights 
 (20,666) 
 20,666
 
Gain (loss) on repossessed assets, net (346) 103
 
 243
 
Corporate expense allocations 10,148
 11,883
 8,360
 (30,391) 
Net income before taxes 117,361
 20,910
 31,922
 (29,978) 140,215
Federal and state income taxes 31,218
 5,326
 8,203
 (14,797) 29,950
Net income 86,143
 15,584
 23,719
 (15,181) 110,265
Net income attributable to non-controlling interests 
 
 
 (347) (347)
Net income attributable to BOK Financial Corp. shareholders $86,143
 $15,584
 $23,719
 $(14,834) $110,612
           
Average assets $19,330,249
 $8,371,683
 $9,312,154
 $2,658,595
 $39,672,681
1 CoBiz operations are included in Funds Management and Other for the first quarter of 2019.

           


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Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2018 is as follows (in thousands):
  Commercial Consumer 
Wealth
Management
 Funds Management and Other 
BOK
Financial
Consolidated
Net interest revenue from external sources $160,414
 $21,753
 $15,407
 $22,162
 $219,736
Net interest revenue (expense) from internal sources (28,343) 15,224
 9,932
 3,187
 
Net interest revenue 132,071
 36,977
 25,339
 25,349
 219,736
Provision for credit losses 627
 1,300
 (48) (6,879) (5,000)
Net interest revenue after provision for credit losses 131,444
 35,677
 25,387
 32,228
 224,736
Other operating revenue 39,676
 44,947
 74,766
 (3,400) 155,989
Other operating expense 48,370
 54,695
 64,942
 76,423
 244,430
Net direct contribution 122,750
 25,929
 35,211
 (47,595) 136,295
Gain (loss) on financial instruments, net 7
 (23,262) 
 23,255
 
Change in fair value of mortgage servicing rights 
 21,206
 
 (21,206) 
Gain (loss) on repossessed assets, net (4,166) (108) 
 4,274
 
Corporate expense allocations 10,603
 11,188
 8,815
 (30,606) 
Net income before taxes 107,988
 12,577
 26,396
 (10,666) 136,295
Federal and state income taxes 28,741
 3,203
 6,787
 (7,783) 30,948
Net income 79,247
 9,374
 19,609
 (2,883) 105,347
Net income attributable to non-controlling interests 
 
 
 (215) (215)
Net income (loss) attributable to BOK Financial Corp. shareholders $79,247
 $9,374
 $19,609
 $(2,668) $105,562
           
Average assets $17,793,820
 $8,468,101
 $8,095,794
 $(632,763) $33,724,952
           


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(11) Fees and Commissions Revenue

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

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

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

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


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Fees and commissions revenue by reportable segment and primary service line is as follows for the three months ended March 31, 2019.
 Commercial Consumer Wealth Management 
Funds Management & Other3
 Consolidated 
Out of Scope1
 
In Scope2
Trading revenue$
 $
 $12,920
 $
 $12,920
 $12,920
 $
Customer hedging revenue1,575
 
 5,728
 (626) 6,677
 6,677
 
Retail brokerage revenue
 
 4,074
 (52) 4,022
 
 4,022
Insurance brokerage revenue
 
 379
 3,729
 4,108
 
 4,108
Investment banking revenue1,389
 
 2,501
 
 3,890
 1,229
 2,661
Brokerage and trading revenue2,964
 
 25,602
 3,051
 31,617
 20,826
 10,791
TransFund EFT network revenue17,654
 958
 (17) 1
 18,596
 
 18,596
Merchant services revenue1,925
 14
 
 123
 2,062
 
 2,062
Corporate card revenue80
 
 
 
 80
 
 80
Transaction card revenue19,659
 972
 (17) 124
 20,738
 
 20,738
Personal trust revenue
 
 19,574
 
 19,574
 
 19,574
Corporate trust revenue
 
 6,201
 
 6,201
 
 6,201
Institutional trust & retirement plan services revenue
 
 11,107
 
 11,107
 
 11,107
Investment management services and other
 
 4,801
 1,675
 6,476
 
 6,476
Fiduciary and asset management revenue
 
 41,683
 1,675
 43,358
 
 43,358
Commercial account service charge revenue10,062
 387
 527
 1,807
 12,783
 
 12,783
Overdraft fee revenue74
 8,395
 27
 (236) 8,260
 
 8,260
Check card revenue
 4,992
 
 164
 5,156
 
 5,156
Automated service charge and other deposit fee revenue