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BOKF BOK Financial

Filed: 9 Aug 19, 2:38pm
0000875357 us-gaap:CommercialPortfolioSegmentMember bokf:OtherCommercialAndIndustrialMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-06-30 0000875357 us-gaap:AvailableforsaleSecuritiesMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USStatesAndPoliticalSubdivisionsMember 2019-03-31


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

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

Commission File No. 0-19341

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 71,193,770 shares of common stock ($.00006 par value) as of June 30, 2019.





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

Index

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




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

BOK Financial Corporation (“the Company”) reported net income of $137.6 million or $1.93 per diluted share for the second quarter of 2019. Net income was $114.4 million or $1.75 per diluted share for the second quarter of 2018 and $110.6 million or $1.54 per diluted share for the first quarter of 2019. 

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, resulting in a per share reduction of 13 cents. No meaningful integration costs were incurred in the second quarter. The fluctuation discussion in the highlights below excludes the impact of these items.

Highlights of the second quarter of 2019 included:
Net interest revenue totaled $285.4 million, up $46.9 million over the second quarter of 2018. CoBiz added $44.8 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 second quarter of 2019 compared to 3.17 percent for the second quarter of 2018. Average earning assets were $35.4 billion for the second quarter of 2019 compared to $30.3 billion for the second quarter of 2018. Net interest revenue increased $7.3 million compared to the first quarter of 2019 largely due to a recovery of foregone interest and an increase in loan discount accretion. Net interest margin was consistent with the first quarter of 2019.
Fees and commissions revenue totaled $176.1 million, an increase of $18.9 million over the second quarter of 2018. Brokerage and trading revenue increased $14.0 million and mortgage banking revenue increased $1.8 million as lower mortgage interest rates have increased mortgage production and related trading activity. Fiduciary and asset management revenue also increased $3.3 million. Fees and commissions revenue increased $15.6 million over the first quarter of 2019 led by increases in brokerage and trading and mortgage banking revenue.
Other operating expense totaled $277.1 million, a $30.7 million increase over the second quarter of 2018. Expenses related to CoBiz operations added $23.0 million in the second quarter of 2019. Excluding CoBiz operations, personnel expense increased $7.1 million, primarily due to an increase in regular compensation. Non-personnel expense remained relatively consistent with the second quarter of 2018. Operating expense increased $2.7 million over the first quarter of 2019. Personnel expense decreased $5.6 million, as efficiencies are realized from the CoBiz acquisition. Non-personnel expense increased $8.3 million led by increases in business promotion expense, professional fees and services, deposit insurance and mortgage banking costs.
The Company recorded a provision for credit losses of $5.0 million in the second quarter of 2019 and $8.0 million in the first quarter of 2019. No provision was recorded in the second quarter of 2018. Nonperforming assets not guaranteed by U.S. government agencies increased $31 million compared to March 31, 2019. Potential problem loans decreased $7.8 million while other loans especially mentioned decreased $54 million. Net charge-offs were $7.7 million or 0.14 percent of average loans for the second quarter of 2019, compared to net charge-offs of $10.1 million or 0.19 percent of average loans for the first quarter of 2019. The combined allowance for credit losses totaled $204 million or 0.92 percent of outstanding loans at June 30, 2019 compared to $207 million or 0.95 percent of outstanding loans at March 31, 2019.
Period-end outstanding loan balances totaled $22.3 billion at June 30, 2019, an increase of $497 million over March 31, 2019. Average loan balances grew $238 million to $22.0 billion at June 30, 2019.
Period-end deposits were $25.3 billion at June 30, 2019, a $27 million decrease compared to March 31, 2019. Interest-bearing transaction deposits increased $375 million while demand deposit balances decreased $429 million. Average deposits increased $548 million including a $581 million increase in interest-bearing deposits partially offset by a $104 million decrease in demand deposits.
The common equity Tier 1 capital ratio at June 30, 2019 was 10.84 percent. Other regulatory capital ratios were Tier 1 capital ratio, 10.84 percent, total capital ratio, 12.34 percent, and leverage ratio, 8.75 percent. At March 31, 2019, the common equity Tier 1 capital ratio was 10.71 percent, the Tier 1 capital ratio was 10.71 percent, total capital ratio was 12.24 percent, and leverage ratio was 8.76 percent.

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The Company repurchased 250,000 shares at an average price of $80.50 per share during the second quarter of 2019 and 705,609 shares at an average price of $85.85 in the first quarter of 2019.
The company paid a regular cash dividend of $35.6 million or $0.50 per common share during the second quarter of 2019. On July 30, 2019, the board of directors approved a quarterly cash dividend of $0.50 per common share payable on or about August 27, 2019 to shareholders of record as of August 12, 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 $288.9 million for the second quarter of 2019, up from $240.5 million in the second quarter of 2018. CoBiz added $44.8 million to net interest revenue, including $13.4 million of net purchase accounting discount accretion in the second quarter of 2019. Recoveries of forgone interest added $3.4 million to net interest revenue in the second quarter of 2019 and $5.3 million in the second quarter of 2018. 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 second quarter of 2019, compared to 3.17 percent for the second quarter of 2018. Recoveries of forgone interest and loan discount accretion added 19 basis points to net interest margin in the second quarter of 2019. Recoveries of forgone interest added 7 basis points to net interest margin in the second quarter of 2018. Excluding these items, the tax-equivalent yield on earning assets was 4.31 percent, up 47 basis points over the second quarter of 2018. Loan yields increased 41 basis points to 5.09 percent primarily due to an increase in short-term interest rates. The yield on interest-bearing cash and cash equivalents increased 71 basis points to 2.57 percent. The available for sale securities portfolio yield increased 33 basis points to 2.63 percent and the yield on fair value option securities was up 18 basis points to 3.34 percent.

Funding costs were up 59 basis points over the second quarter of 2018. The cost of interest-bearing deposits increased 47 basis points and the cost of other borrowed funds increased 69 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 49 basis points for the second quarter of 2019, up 12 basis points over the second quarter of 2018.
 
Average earning assets for the second quarter of 2019 increased $5.1 billion or 17 percent over the second quarter of 2018. Average loans, net of allowance for loan losses, increased $4.3 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 $1.3 billion and fair value option securities increased $412 million. Trading securities increased $275 million. Interest-bearing cash and cash equivalent balances decreased $1.1 billion. The Company reduced excess cash balances held at the Federal Reserve, including cash used in our purchase of CoBiz.

Average deposits increased $3.1 billion compared to the second quarter of 2018, including $3.1 billion related to CoBiz. Excluding acquired deposits, interest bearing deposits increased $891 million while demand deposit balances decreased $903 million. Average borrowed funds increased $2.2 billion over the second quarter of 2018, primarily due to funds purchased and repurchase agreement balances.
Tax-equivalent net interest revenue increased $8.3 million over the first quarter of 2019. Recoveries of foregone interest on non-accruing loans added $3.4 million to the second quarter of 2019. Recoveries were insignificant in the first quarter of 2019. The second quarter of 2019 included $13.4 million of purchase accounting discount accretion while the first quarter of 2019 included $7.8 million.
Net interest margin was 3.30 percent, consistent with the previous quarter. Excluding recoveries of forgone interest and increase in loan discount accretion noted above, the yield on average earning assets decreased 6 basis points while the yield on the loan portfolio decreased 2 basis points. The yield on the available for sale securities portfolio increased 6 basis points and the yield on the trading securities portfolio, which moves with long term interest rates because it turns over rapidly, was down 29 basis points.
Funding costs increased 4 basis points. The cost of interest-bearing deposits increased 9 basis points and the cost of other borrowed funds decreased 1 basis point to 2.53 percent. The benefit to net interest margin from assets funded by non-interest liabilities was relatively unchanged at 49 basis points.


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Average earning assets increased $933 million compared to the first quarter of 2019. Average available for sale securities increased $553 million. Average loan balances were up $238 million. Average fair value option securities balances increased $304 million. Average trading securities balances decreased $211 million. Average interest-bearing deposit balances increased $652 million and average borrowed funds increased $169 million compared to the first quarter of 2019.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately 78% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally reprice more quickly than liabilities. One of the strategies that we use to manage toward a relative rate-neutral position is to purchase fixed-rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market-rate-sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. In the second quarter of 2019 we increased our portfolio of available for sale securities by $1.4 billion as a measure to protect for a down rate environment.

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
June 30, 2019 / 2018
 Six Months Ended
June 30, 2019 / 2018
    
Change Due To1
   
Change Due To1
  Change Volume Yield/Rate Change Volume Yield/Rate
Tax-equivalent interest revenue:            
Interest-bearing cash and cash equivalents $(4,308) $(6,273) $1,965
 $(8,893) $(14,071) $5,178
Trading securities 2,525
 2,672
 (147) 13,506
 11,878
 1,628
Investment securities (320) (579) 259
 (622) (1,354) 732
Available for sale securities 12,425
 5,058
 7,367
 23,298
 7,905
 15,393
Fair value option securities 3,576
 3,258
 318
 3,994
 2,678
 1,316
Restricted equity securities 1,108
 1,035
 73
 2,336
 1,828
 508
Residential mortgage loans held for sale (579) (256) (323) (760) (795) 35
Loans 83,712
 54,249
 29,463
 176,466
 108,107
 68,359
Total tax-equivalent interest revenue 98,139
 59,164
 38,975
 209,325
 116,176
 93,149
Interest expense:            
Transaction deposits 18,547
 4,642
 13,905
 34,757
 7,332
 27,425
Savings deposits 78
 19
 59
 150
 38
 112
Time deposits 3,595
 281
 3,314
 6,511
 283
 6,228
Funds purchased and repurchase agreements 9,922
 4,788
 5,134
 19,756
 9,377
 10,379
Other borrowings 15,875
 3,845
 12,030
 37,402
 7,620
 29,782
Subordinated debentures 1,754
 1,830
 (76) 3,495
 3,641
 (146)
Total interest expense 49,771
 15,405
 34,366
 102,071
 28,291
 73,780
Tax-equivalent net interest revenue 48,368
 43,759
 4,609
 107,254
 87,885
 19,369
Change in tax-equivalent adjustment 1,498
     2,018
    
Net interest revenue $46,870
     $105,236
    
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 $172.1 million for the second quarter of 2019, a $15.7 million increase over the second quarter of 2018 and a $14.8 million increase over the first quarter of 2019. Lower mortgage interest rates have positively affected both our brokerage and trading and mortgage banking revenue leading to increases of $14.0 million and $1.8 million over the second quarter of 2018, respectively, and $8.9 million and $4.3 million over the first quarter of 2019, respectively.

Table 2 – Other Operating Revenue 
(In thousands)
  Three Months Ended
June 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Mar. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Brokerage and trading revenue $40,526
 $26,488
 $14,038
 53 % $31,617
 $8,909
 28 %
Transaction card revenue 21,915
 20,975
 940
 4 % 20,738
 1,177
 6 %
Fiduciary and asset management revenue 45,025
 41,692
 3,333
 8 % 43,358
 1,667
 4 %
Deposit service charges and fees 28,074
 27,834
 240
 1 % 28,243
 (169) (1)%
Mortgage banking revenue 28,131
 26,346
 1,785
 7 % 23,834
 4,297
 18 %
Other revenue 12,437
 13,923
 (1,486) (11)% 12,762
 (325) (3)%
Total fees and commissions revenue 176,108
 157,258

18,850
 12 % 160,552

15,556
 10 %
Other gains (losses), net 3,480
 4,578
 (1,098) N/A
 2,976
 504
 N/A
Gain (loss) on derivatives, net 11,150
 (3,057) 14,207
 N/A
 4,667
 6,483
 N/A
Gain (loss) on fair value option securities, net 9,853
 (3,341) 13,194
 N/A
 9,665
 188
 N/A
Change in fair value of mortgage servicing rights (29,555) 1,723
 (31,278) N/A
 (20,666) (8,889) N/A
Gain (loss) on available for sale securities, net 1,029
 (762) 1,791
 N/A
 76
 953
 N/A
Total other operating revenue $172,065
 $156,399
 $15,666
 10 % $157,270
 $14,795
 9 %
               
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 38 percent of total revenue for the second 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 $14.0 million or 53 percent compared to the second 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 $21.9 million for the second quarter of 2019, a $15.5 million or 245 percent increase compared to the second quarter of 2018. Average trading securities increased $275 million compared to the second quarter of 2018. Lower mortgage interest rates have led to increased trading activity in the second quarter of 2019.

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 $5.3 million for the second quarter of 2019, a $4.5 million or 45 percent decrease compared to the second quarter of 2018. The decrease is primarily due to a shift in the mix of our to-be-announced residential mortgage backed securities contracts from our customer hedging program to our U.S. government agency residential mortgage-backed trading program. The resulting increased activity remains within our established market risk limits as discussed further in Management's Discussion & Analysis – Market Risk section following.

Insurance brokerage fees increased $3.6 million compared to the second quarter of 2018 due to the addition of CoBiz.
Brokerage and trading revenue increased $8.9 million compared to the previous quarter, primarily due to increased trading activity as a result of lower mortgage interest rates.

Fiduciary and Asset Management Revenue

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 90 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships. Fiduciary and asset management revenue increased $3.3 million or 8 percent over the second quarter of 2018 largely due to asset increases and increased $1.7 million or 4 percent over the first quarter of 2019, primarily due to seasonal tax fees collected in the second quarter.

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
 June 30, 2019 June 30, 2018 March 31, 2019
 Balance 
Revenue1
 
Margin2
 Balance 
Revenue1
 
Margin2
 Balance 
Revenue1
 
Margin2
Managed fiduciary assets:
Personal$8,516,076
 $26,134
 1.23% $7,791,094
 $23,307
 1.20% $8,428,218
 $23,276
 1.10%
Institutional14,286,046
 6,283
 0.18% 13,448,068
 5,596
 0.17% 14,026,020
 6,138
 0.18%
Total managed fiduciary assets22,802,122
 32,417
 0.57% 21,239,162
 28,903
 0.54% 22,454,238
 29,414
 0.52%
                  
Non-managed assets:
Fiduciary26,494,774
 12,275
 0.19% 25,292,738
 12,426
 0.20% 23,946,911
 13,528
 0.23%
Non-fiduciary15,894,874
 333
 0.01% 16,422,810
 370
 0.01% 16,215,999
 416
 0.01%
Safekeeping and brokerage assets under administration16,582,832
 
 % 15,918,736
 
 % 16,235,136
 
 %
Total non-managed assets58,972,480
 12,608
 0.09% 57,634,284
 12,796
 0.09% 56,398,046
 13,944
 0.10%
                  
Total assets under management or administration$81,774,602
 $45,025
 0.22% $78,873,446
 $41,699
 0.21% $78,852,284
 $43,358
 0.22%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Annualized revenue divided by period-end balance.

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

Table 4 -- Changes in Assets Under Management or Administration
  Three Months Ended
June 30,
  2019 2018
Beginning balance $78,852,284
 $78,878,989
Net inflows (outflows) 1,075,070
 (746,477)
Net change in fair value 1,847,248
 740,934
Ending balance $81,774,602
 $78,873,446

Mortgage Banking Revenue

Mortgage banking revenue increased $1.8 million or 7 percent compared to the second quarter of 2018. Mortgage loan production volumes increased $84 million or 12 percent as average primary mortgage interest rates have decreased.

Mortgage banking revenue increased $4.3 million or 18 percent compared to the first quarter of 2019. Lower mortgage interest rates during the quarter led to an increase in mortgage production.

Table 5 – Mortgage Banking Revenue 
(In thousands)
  Three Months Ended
June 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Mar. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018    
Mortgage production revenue $11,869
 $9,915
 $1,954
 20 % $7,868
 $4,001
 51 %
               
Mortgage loans funded for sale $729,841
 $773,910
 

 

 $510,527
    
Add: Current period end outstanding commitments 344,087
 251,231
     263,434
    
Less: Prior period end outstanding commitments 263,434
 298,318
     160,848
    
Total mortgage production volume $810,494
 $726,823
 $83,671
 12 % $613,113
 $197,381
 32 %
               
Mortgage loan refinances to mortgage loans funded for sale 31% 22% 900 bps   30% 100 bps  
Gains on sale margin 1.46% 1.36% 10 bps   1.28% 18 bps  
Primary mortgage interest rates:              
Average 4.01% 4.54% (53) bps   4.37% (36) bps  
Period end 3.73% 4.55% (82) bps   4.06% (33) bps  
               
Mortgage servicing revenue $16,262
 $16,431
 $(169) (1)% $15,966
 $296
 2 %
Average outstanding principal balance of mortgage loans serviced for others 21,418,690
 21,986,065
 (567,375) (3)% 21,581,835
 (163,145) (1)%
               
Average mortgage servicing revenue rates 0.30% 0.30% 
   0.30% 
  

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

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

Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
  Three Months Ended
  June 30, 2019 Mar. 31, 2019 June 30, 2018
Gain (loss) on mortgage hedge derivative contracts, net $11,128
 $4,432
 $(3,070)
Gain (loss) on fair value option securities, net 9,853
 9,665
 (3,341)
Gain (loss) on economic hedge of mortgage servicing rights, net 20,981
 14,097
 (6,411)
Gain (loss) on change in fair value of mortgage servicing rights (29,555) (20,666) 1,723
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue (8,574) (6,569) (4,688)
Net interest revenue on fair value option securities1
 1,296
 1,129
 1,203
Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges $(7,278) $(5,440) $(3,485)
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 second quarter of 2019 totaled $277.1 million, up $30.7 million compared to the second quarter of 2018. Operating expenses in the second quarter of 2019 included $23.0 million of CoBiz operating expenses. CoBiz added $12.7 million in integration costs and $26.6 million in operating costs during the first quarter of 2019.

Table 7 – Other Operating Expense
(In thousands)
  Three Months Ended
June 30,
 Increase (Decrease) 
%
Increase (Decrease)
 Three Months Ended Mar. 31, 2019 Increase (Decrease) 
%
Increase (Decrease)
  2019 2018     
Regular compensation $98,247
 $86,231
 $12,016
 14 % $100,650
 $(2,403) (2)%
Incentive compensation:     

 

      
Cash-based 33,155
 31,933
 1,222
 4 % 32,137
 1,018
 3 %
Share-based 2,734
 (1,361) 4,095
 (301)% 5,162
 (2,428) 47 %
Deferred compensation 1,534
 900
 634
 N/A
 3,911
 (2,377) N/A
Total incentive compensation 37,423
 31,472
 5,951
 19 % 41,210
 (3,787) (9)%
Employee benefits 24,672
 21,244
 3,428
 16 % 27,368
 (2,696) (10)%
Total personnel expense 160,342
 138,947
 21,395
 15 % 169,228
 (8,886) (5)%
Business promotion 10,142
 7,686
 2,456
 32 % 7,874
 2,268
 29 %
Charitable contributions to BOKF Foundation 1,000
 
 1,000
 N/A
 
 1,000
 N/A
Professional fees and services 13,002
 14,978
 (1,976) (13)% 16,139
 (3,137) (19)%
Net occupancy and equipment 26,880
 22,761
 4,119
 18 % 29,521
 (2,641) (9)%
Insurance 6,454
 6,245
 209
 3 % 4,839
 1,615
 33 %
Data processing and communications 29,735
 27,739
 1,996
 7 % 31,449
 (1,714) (5)%
Printing, postage and supplies 4,107
 4,011
 96
 2 % 4,885
 (778) (16)%
Net losses and operating expenses of repossessed assets 580
 2,722
 (2,142) (79)% 1,996
 (1,416) (71)%
Amortization of intangible assets 5,138
 1,386
 3,752
 271 % 5,191
 (53) (1)%
Mortgage banking costs 11,545
 12,890
 (1,345) (10)% 9,906
 1,639
 17 %
Other expense 8,212
 7,111
 1,101
 15 % 6,129
 2,083
 34 %
Total other operating expense $277,137
 $246,476
 $30,661
 12 % $287,157
 $(10,020) (3)%
               
Average number of employees (full-time equivalent) 5,123
 4,875
 248
 5 % 5,291
 (168) (3)%
Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

Personnel expense increased $21.4 million over the second quarter of 2018. CoBiz operating expenses added $14.3 million to the second quarter of 2019. The remaining increase of $7.1 million is largely attributed to standard annual merit increases in regular compensation and incentive compensation.
Personnel expense decreased $8.9 million compared the first quarter of 2019. CoBiz integration costs added $3.3 million to the first quarter of 2019. The remaining $5.6 million decrease is primarily due to the realization of efficiencies related to the CoBiz acquisition.


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Non-personnel operating expense

Non-personnel operating expense increased $9.3 million over the second quarter of 2018. CoBiz operating expenses added $8.6 million to the second quarter of 2019. Business promotion expense increased $2.1 million as we increase our brand marketing in Arizona and Colorado. Data processing and communications expense increased $1.7 million and occupancy and equipment expense increased $1.3 million, primarily related to increased project costs and data processing transaction activity. Professional fees and services decreased $2.1 million largely due to CoBiz acquisition costs in the second quarter of 2018. Net losses and expenses on repossessed assets decreased $2.1 million due to decreased expenses on certain oil and gas properties. Mortgage banking costs decreased $1.3 million, primarily due to reduced lead buying costs as we have exited the online lead buying business combined with a decrease in accruals related to default servicing and loss mitigation costs on loans serviced for others.
Non-personnel expense decreased $1.1 million compared to the first quarter of 2019. CoBiz integration costs added $9.4 million to the first quarter of 2019, which is excluded from the following fluctuations. Business promotion expense increased $2.9 million largely due to brand recognition advertising in our Arizona and Colorado markets. Insurance expense is up $1.9 million largely due to adjustments to deposit insurance expense related to CoBiz. Increases in professional fees and services of $1.7 million and mortgage banking costs of $1.6 million were partially offset by a decrease in net losses and expenses of repossessed assets of $1.4 million. The second quarter of 2019 also included a $1.0 million charitable donation to the BOKF Foundation.
Income Taxes

The effective tax rate was 21.4% for both the first and second quarter of 2019, down from 22.4% for the second quarter of 2018. Increased tax-exempt revenue from CoBiz was the primary driver of the decrease.
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 allocated to the operating segments in the second quarter of 2019. Prior to April 1, 2019, CoBiz operations were included in Funds Management and other.

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

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


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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 $35.3 million or 31 percent over the second quarter of 2018. Net interest revenue grew by $52.0 million over the prior year, primarily due to the CoBiz acquisition combined with growth in average loan balances. Net charge-offs decreased $2.6 million. Other operating revenue increased by $16.4 million and operating expense increased by $18.1 million compared to the second quarter of 2018.

Table 8 -- Net Income by Line of Business
(In thousands)
  Three Months Ended
June 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Mar. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Commercial Banking $106,932
 $87,577
 $19,355
 22% $86,143
 $20,789
 24%
Consumer Banking 16,344
 5,793
 10,551
 182% 15,337
 1,007
 7%
Wealth Management 25,545
 20,119
 5,426
 27% 23,719
 1,826
 8%
Subtotal 148,821
 113,489
 35,332
 31% 125,199
 23,622
 19%
Funds Management and other (11,258) 883
 (12,141) N/A
 (14,587) 3,329
 N/A
Total $137,563
 $114,372
 $23,191
 20% $110,612
 $26,951
 24%
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 $106.9 million to consolidated net income in the second quarter of 2019, an increase of $19.4 million or 22 percent over the second quarter of 2018. Growth in net interest revenue was partially offset by decreased operating revenue and increased operating expense.

Table 9 -- Commercial Banking
(Dollars in thousands)
  Three Months Ended
June 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Mar. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Net interest revenue from external sources $251,080
 $182,127
 $68,953
 38 % $204,209
 $46,871
 23 %
Net interest expense from internal sources (65,470) (37,102) (28,368) 76 % (52,562) (12,908) 25 %
Total net interest revenue 185,610
 145,025
 40,585
 28 % 151,647
 33,963
 22 %
Net loans charged off 6,823
 10,108
 (3,285) (32)% 11,245
 (4,422) (39)%
Net interest revenue after net loans charged off 178,787
 134,917
 43,870
 33 % 140,402
 38,385
 27 %
               
Fees and commissions revenue 41,105
 42,874
 (1,769) (4)% 38,046
 3,059
 8 %
Other gains, net 506
 173
 333
 N/A
 (434) 940
 N/A
Other operating revenue 41,611
 43,047
 (1,436) (3)% 37,612
 3,999
 11 %
               
Personnel expense 42,268
 29,584
 12,684
 43 % 31,217
 11,051
 35 %
Non-personnel expense 20,679
 19,802
 877
 4 % 18,960
 1,719
 9 %
Other operating expense 62,947
 49,386
 13,561
 27 % 50,177
 12,770
 25 %
               
Net direct contribution 157,451
 128,578
 28,873
 22 % 127,837
 29,614
 23 %
Gain on financial instruments, net 20
 9
 11
 N/A
 18
 2
 N/A
Loss on repossessed assets, net 
 (67) 67
 N/A
 (346) 346
 N/A
Corporate expense allocations 11,384
 9,366
 2,018
 22 % 10,148
 1,236
 12 %
Income before taxes 146,087
 119,154
 26,933
 23 % 117,361
 28,726
 24 %
Federal and state income tax 39,155
 31,577
 7,578
 24 % 31,218
 7,937
 25 %
Net income $106,932
 $87,577
 $19,355
 22 % $86,143
 $20,789
 24 %
               
Average assets $22,910,071
 $18,072,155
 $4,837,916
 27 % $19,936,895
 $2,973,176
 15 %
Average loans 18,812,800
 14,900,918
 3,911,882
 26 % 15,988,843
 2,823,957
 18 %
Average deposits 10,724,206
 8,379,584
 2,344,622
 28 % 8,261,543
 2,462,663
 30 %
Average invested capital 2,222,032
 1,352,679
 869,353
 64 % 2,121,699
 100,333
 5 %
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 $40.6 million or 28 percent over the prior year, primarily due to the allocation of CoBiz to the business lines. Additional 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 decreased $3.3 million.

Fees and commissions revenue decreased $1.8 million or 4 percent primarily due to a decrease in revenue earned on certain repossessed assets compared to the prior year while operating expense increased $13.6 million or 27 percent compared to the second quarter of 2018. Personnel expense increased $12.7 million primarily due to the incorporation of CoBiz employees combined with standard annual merit increases. Corporate expense allocations increased $2.0 million or 22 percent compared to the prior year.


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The average outstanding balance of loans attributed to Commercial Banking were up $3.9 billion or 26 percent over the second quarter of 2018 to $18.8 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans, which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $10.7 billion for the second quarter of 2019, a 28 percent increase compared to the second 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 $34.0 million or 22 percent over the first quarter of 2019 largely as a result of the allocation of acquired loans to the business line. Fees and commissions revenue increased $3.1 million, primarily due to an increase in loan syndication fees based on the timing of completed transactions and increased transaction card revenues related to a seasonal increase in transaction volume. Operating expense increased $12.8 million or 25 percent compared to the first quarter of 2019 primarily due to an $11.1 million increase in personnel expense largely due to the addition of CoBiz employees.
Average loan balances increased $2.8 billion or 18 percent and average customer deposits increased $2.5 billion or 30 percent, both largely impacted by acquired loans and deposits.




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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 $16.3 million to consolidated net income for the second quarter of 2019, an increase of $10.6 million over the second 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. The addition of CoBiz operations in the second quarter of 2019 did not significantly affect net income the Consumer Banking segment.

Table 10 -- Consumer Banking
(Dollars in thousands)
  Three Months Ended
June 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Mar. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Net interest revenue from external sources $24,203
 $21,747
 $2,456
 11 % $21,595
 $2,608
 12 %
Net interest revenue from internal sources 28,514
 17,548
 10,966
 62 % 29,507
 (993) (3)%
Total net interest revenue 52,717
 39,295
 13,422
 34 % 51,102
 1,615
 3 %
Net loans charged off 1,728
 1,140
 588
 52 % 1,085
 643
 59 %
Net interest revenue after net loans charged off 50,989
 38,155
 12,834
 34 % 50,017
 972
 2 %
               
Fees and commissions revenue 48,830
 46,332
 2,498
 5 % 42,821
 6,009
 14 %
Other losses, net (19) (12) (7) N/A
 (73) 54
 N/A
Other operating revenue 48,811
 46,320
 2,491
 5 % 42,748
 6,063
 14 %
               
Personnel expense 24,377
 25,203
 (826) (3)% 24,336
 41
  %
Non-personnel expense 33,317
 35,943
 (2,626) (7)% 29,485
 3,832
 13 %
Total other operating expense 57,694
 61,146
 (3,452) (6)% 53,821
 3,873
 7 %
               
Net direct contribution 42,106
 23,329
 18,777
 80 % 38,944
 3,162
 8 %
Gain (loss) on financial instruments, net 20,981
 (6,411) 27,392
 N/A
 14,097
 6,884
 N/A
Change in fair value of mortgage servicing rights (29,555) 1,723
 (31,278) N/A
 (20,666) (8,889) N/A
Gain on repossessed assets, net 92
 174
 (82) N/A
 103
 (11) N/A
Corporate expense allocations 11,695
 11,042
 653
 6 % 11,900
 (205) (2)%
Income before taxes 21,929
 7,773
 14,156
 182 % 20,578
 1,351
 7 %
Federal and state income tax 5,585
 1,980
 3,605
 182 % 5,241
 344
 7 %
Net income $16,344
 $5,793
 $10,551
 182 % $15,337
 $1,007
 7 %
               
Average assets $9,212,667
 $8,353,558
 $859,109
 10 % $8,371,683
 $840,984
 10 %
Average loans 1,796,823
 1,716,259
 80,564
 5 % 1,750,642
 46,181
 3 %
Average deposits 6,998,677
 6,579,635
 419,042
 6 % 6,544,665
 454,012
 7 %
Average invested capital 304,990
 284,798
 20,192
 7 % 291,846
 13,144
 5 %
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 $13.4 million or 34 percent over the the second quarter of 2018, primarily due to increased rates received on deposit balances sold to the Funds Management unit. Average consumer deposits grew $419 million over the second quarter of 2018 with demand deposit balances up by $371 million or 20 percent, largely due to the allocation of acquired deposits.

Fees and commissions revenue increased $2.5 million or 5 percent compared to the second quarter of 2018. Lower mortgage interest rates increased mortgage loan origination volumes. Operating expense decreased by $3.5 million. Occupancy and equipment expense decreased $1.8 million. Mortgage banking costs decreased $1.3 million primarily due to a decrease in lead costs driven by the strategic decision to exit the lead buying space in the first quarter of 2019. Corporate expense allocations were $653 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 the second quarter of 2019 by $8.6 million compared to a $4.7 million decrease in pre-tax net income in the second quarter of 2018.
Net interest revenue from Consumer Banking activities increased $1.6 million or 3 percent over the first quarter of 2019, primarily due to an increase in interest earned on the fair value option portfolio combined with increased deposits sold to our Funds Management unit.
Revenues from mortgage banking activities increased $4.3 million over the prior quarter due to lower interest rates. Mortgage production volume increased $197 million or 32 percent and gain on sale margins climbed to 1.46 percent from 1.28 percent. Deposit service charges also increased $1.1 million due to two more days in the quarter compared to the previous quarter.
Operating expenses increased $3.9 million, nearly all related to non-personnel expenses. Mortgage banking costs increased $1.6 million related to increased payoffs as mortgage interest rates declined during the quarter. Business promotion expense increased $1.6 million primarily due to additional brand marketing.
Average consumer loans increased $46 million or 3 percent. Average deposits increased $454 million or 7 percent primarily due to the allocation of acquired deposits.



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Wealth Management

Wealth Management contributed $25.5 million to consolidated net income in the second quarter of 2019, up $5.4 million or 27 percent over the second quarter of 2018, primarily due to increased brokerage and trading revenue, partially offset by decreased net interest revenue and increased operating expense. The addition of CoBiz operations in the second quarter of 2019 did not significantly affect net income the Wealth Management segment.

Table 11 -- Wealth Management
(Dollars in thousands)
  Three Months Ended
June 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Mar. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Net interest revenue from external sources $17,224
 $18,754
 $(1,530) (8)% $21,486
 $(4,262) (20)%
Net interest revenue from internal sources 9,719
 10,232
 (513) (5)% 6,770
 2,949
 44 %
Total net interest revenue 26,943
 28,986
 (2,043) (7)% 28,256
 (1,313) (5)%
Net loans charged off (recovered) (48) (105) 57
 (54)% (119) 71
 (60)%
Net interest revenue after net loans charged off (recovered) 26,991
 29,091
 (2,100) (7)% 28,375
 (1,384) (5)%
               
Fees and commissions revenue 85,925
 70,489
 15,436
 22 % 73,256
 12,669
 17 %
Other gains (losses), net 92
 153
 (61) N/A
 158
 (66) N/A
Other operating revenue 86,017
 70,642
 15,375
 22 % 73,414
 12,603
 17 %
               
Personnel expense 50,080
 45,653
 4,427
 10 % 43,991
 6,089
 14 %
Non-personnel expense 19,372
 15,838
 3,534
 22 % 17,516
 1,856
 11 %
Other operating expense 69,452
 61,491
 7,961
 13 % 61,507
 7,945
 13 %
               
Net direct contribution 43,556
 38,242
 5,314
 14 % 40,282
 3,274
 8 %
Corporate expense allocations 9,168
 11,142
 (1,974) (18)% 8,360
 808
 10 %
Income before taxes 34,388
 27,100
 7,288
 27 % 31,922
 2,466
 8 %
Federal and state income tax 8,843
 6,981
 1,862
 27 % 8,203
 640
 8 %
Net income $25,545
 $20,119
 $5,426
 27 % $23,719
 $1,826
 8 %
               
Average assets $9,849,396
 $8,495,557
 $1,353,839
 16 % $9,328,986
 $520,410
 6 %
Average loans 1,647,680
 1,413,170
 234,510
 17 % 1,448,718
 198,962
 14 %
Average deposits 6,220,848
 5,834,669
 386,179
 7 % 5,659,771
 561,077
 10 %
Average invested capital 274,050
 249,827
 24,223
 10 % 255,948
 18,102
 7 %

Net interest revenue decreased $2.0 million or 7 percent compared the second quarter of 2018. Average loans attributed to the Wealth Management segment increased $235 million or 17 percent and average deposits increased $386 million or 7 percent largely due to the allocation of acquired loans. Growth in interest-bearing transaction account balances of $511 million was offset by an $89 million decrease in demand deposit balances and $43 million decrease in time deposit balances.

Fees and commissions revenue increased $15.4 million or 22 percent over the second quarter of 2018 primarily due to a $12.6 million increase in brokerage and trading revenue. Lower mortgage interest rates have led to an increase in related trading activity boosting brokerage and trading revenue. Operating expense increased $8.0 million or 13 percent compared to the second quarter of 2018. Personnel expense increased $4.4 million primarily due to standard annual merit increases. Non-personnel expense increased $3.5 million or 22 percent compared to the second quarter of 2018 largely related to occupancy and equipment expense. Corporate expense allocations decreased $2.0 million or 18 percent compared to the prior year.


- 16 -



Net income for Wealth Management increased $1.8 million or 8 percent compared to the first quarter of 2019. An increase in brokerage and trading revenue was partially offset by a decrease in net interest revenue and an increase in operating expenses.
Brokerage and trading revenue increased $8.4 million due to an increase in trading activity and volumes due to favorable interest rate changes. This increase was partially offset by a decrease in interest received on trading securities and an increase in funding costs. Fiduciary and asset management revenue increased $3.4 million largely due to a seasonal increase related to tax fees collected in the second quarter as well as increased assets under management. Operating expenses increased $7.9 million, including $6.1 million related to personnel expenses and $1.9 million related to other operating expenses.

Average loans increased $199 million or 14 percent to $1.6 billion and average deposits increased $561 million or 10 percent to $6.2 billion, primarily due to the allocation of CoBiz operations to the business lines.
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 June 30, 2019 and December 31, 2018.

We hold an inventory of trading securities in support of sales to a variety of customers, including banks, corporations, insurance companies, money managers and others. Trading securities decreased $240 million to $1.9 billion during the second 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 June 30, 2019, the carrying value of investment (held-to-maturity) securities was $328 million and the fair value was $347 million. Investment securities consist primarily of residential mortgage-backed securities issued by U.S. government agencies, long-term, fixed rate Oklahoma and Texas municipal bonds, and taxable Texas school construction bonds.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $10.4 billion at June 30, 2019, a $1.4 billion increase compared to March 31, 2019 as a measure to protect for a down rate environment. At June 30, 2019, the available for sale securities portfolio consisted primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Both residential and commercial mortgage-backed securities have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans.

A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. Our best estimate of the duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at June 30, 2019 is 3.1 years. Management estimates the duration extends to 3.9 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 $19 million at June 30, 2019, compared to $69 million at March 31, 2019. On a quarterly basis, we perform an evaluation on debt securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. No other-than-temporary impairment charges were recognized in earnings during the second quarter of 2019.

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Loans

The aggregate loan portfolio before allowance for loan losses totaled $22.3 billion at June 30, 2019, up $497 million over March 31, 2019, primarily due to growth in commercial and commercial real estate loans.

Table 12 -- Loans
(In thousands)
  June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018
Commercial:          
Energy $3,921,353
 $3,705,099
 $3,590,333
 $3,294,867
 $3,147,219
Services 3,309,458
 3,287,563
 3,258,192
 2,603,862
 2,516,676
Healthcare 2,926,510
 2,915,885
 2,799,277
 2,437,323
 2,353,722
Wholesale/retail 1,793,118
 1,706,900
 1,621,158
 1,650,729
 1,699,554
Public finance 795,659
 803,083
 804,550
 418,578
 433,408
Manufacturing 761,357
 742,374
 730,521
 660,582
 647,816
Other commercial and industrial 829,453
 801,071
 832,047
 510,160
 550,644
Total commercial 14,336,908
 13,961,975
 13,636,078
 11,576,101
 11,349,039
           
Commercial real estate:  
  
  
  
  
Multifamily 1,300,372
 1,210,358
 1,288,065
 1,120,166
 1,056,984
Office 1,056,306
 1,033,158
 1,072,920
 824,829
 820,127
Industrial 828,569
 767,757
 778,106
 696,774
 653,384
Retail 825,399
 890,685
 919,082
 759,423
 768,024
Residential construction and land development 141,509
 149,686
 148,584
 101,872
 118,999
Other commercial real estate 557,878
 549,007
 558,056
 301,611
 294,702
Total commercial real estate 4,710,033
 4,600,651
 4,764,813
 3,804,675
 3,712,220
           
Residential mortgage:  
  
  
  
  
Permanent mortgage 1,088,370
 1,098,481
 1,122,610
 1,094,926
 1,068,412
Permanent mortgages guaranteed by U.S. government agencies 195,373
 193,308
 190,866
 180,718
 169,653
Home equity 887,079
 900,831
 916,557
 696,098
 704,185
Total residential mortgage 2,170,822
 2,192,620
 2,230,033
 1,971,742
 1,942,250
           
Personal 1,037,889
 1,003,734
 1,025,806
 996,941
 1,000,187
           
Total $22,255,652
 $21,758,980
 $21,656,730
 $18,349,459
 $18,003,696

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 $14.3 billion or 64 percent of the loan portfolio at June 30, 2019, an increase of $375 million over March 31, 2019. Energy loan balances grew by $216 million. Wholesale/retail sector loans increased $86 million. Other commercial and industrial loans increased $28 million and services sector loans were up $22 million. Manufacturing and healthcare sector loans also increased over March 31.


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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 $819,979
 $2,105,298
 $57,153
 $122
 $483,286
 $548
 $100,035
 $354,932
 $3,921,353
Services 633,245
 779,445
 173,946
 16,513
 622,318
 448,033
 261,699
 374,259
 3,309,458
Healthcare 235,561
 390,596
 136,658
 84,456
 328,166
 227,487
 242,652
 1,280,934
 2,926,510
Wholesale/retail 309,597
 663,003
 38,280
 31,792
 179,169
 109,027
 64,481
 397,769
 1,793,118
Public finance 73,892
 167,025
 40,973
 
 169,482
 120,198
 
 224,089
 795,659
Manufacturing 88,827
 191,733
 575
 5,693
 187,014
 148,551
 63,605
 75,359
 761,357
Other commercial and industrial 157,211
 165,549
 3,150
 48,630
 117,124
 40,547
 63,914
 233,328
 829,453
Total commercial loans $2,318,312
 $4,462,649
 $450,735
 $187,206
 $2,086,559
 $1,094,391
 $796,386
 $2,940,670
 $14,336,908
 
The majority of the collateral securing our commercial loan portfolio is located within our geographical footprint with 31 percent concentrated in the Texas market, 16 percent concentrated in the Oklahoma market and 15 percent in the Colorado market. At June 30, 2019, the Other category is primarily composed of California - $587 million or 4 percent of the commercial loan portfolio, Florida - $269 million or 2 percent of the commercial loan portfolio, Louisiana - $168 million or 1 percent of the commercial loan portfolio, Pennsylvania - $164 million or 1 percent of the commercial loan portfolio and Ohio - $163 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 $3.9 billion or 18 percent of total loans at June 30, 2019. Unfunded energy loan commitments were $3.2 billion at June 30, 2019, a $222 million decrease compared to March 31, 2019 primarily due to increased utilization in the second quarter. Approximately $3.1 billion of energy loans were to oil and gas producers, growing $107 million over March 31, 2019. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest risk form of energy lending. Approximately 59 percent of the committed production loans are secured by properties primarily producing oil and 41 percent of the committed production loans are secured by properties primarily producing natural gas. Loans to midstream oil and gas companies totaled $569 million at June 30, 2019, up $106 million over March 31, 2019. Loans to borrowers that provide services to the energy industry totaled $183 million at June 30, 2019, an increase of $10 million. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $53 million, a $7.4 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, financial services, entertainment & recreation and consumer services. Services sector loans increased by $22 million over March 31, 2019. Approximately $1.6 billion of the services category is made up of loans with individual balances of less than $10 million. Services sector loans are generally secured by the assets of the borrower with repayment coming from the cash flows of ongoing operations of the customer’s business. 


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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 June 30, 2019, the outstanding principal balance of these loans totaled $4.6 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 26 percent, 12 percent and 11 percent of the total commercial real estate portfolio at June 30, 2019, respectively. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

Commercial real estate loans totaled $4.7 billion or 21 percent of the loan portfolio at June 30, 2019. The outstanding balance of commercial real estate loans increased $109 million compared to March 31, 2019. Loans secured by multifamily residential properties increased $90 million. Loans secured by industrial facilities grew by $61 million. Loans secured by office buildings increased $23 million. Loans secured by retail facilities decreased $65 million. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 19 percent to 22 percent over the past five years. 

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

Table 14 -- Commercial Real Estate Loans by Collateral Location
(In thousands)
  Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/Missouri Other Total
Multifamily $176,285
 $435,006
 $34,799
 $42,256
 $67,954
 $145,652
 $182,302
 $216,118
 $1,300,372
Office 109,007
 261,076
 97,769
 17,419
 117,713
 72,103
 35,118
 346,101
 1,056,306
Industrial 113,000
 204,789
 17,684
 87
 84,471
 37,315
 42,672
 328,551
 828,569
Retail 54,396
 270,837
 146,366
 5,362
 102,345
 62,012
 7,356
 176,725
 825,399
Residential construction and land development 6,616
 15,800
 12,985
 246
 54,304
 14,122
 9,855
 27,581
 141,509
Other commercial real estate 48,151
 38,572
 10,387
 2,328
 148,659
 80,421
 47,299
 182,061
 557,878
Total commercial real estate loans $507,455
 $1,226,080
 $319,990
 $67,698
 $575,446
 $411,625
 $324,602
 $1,277,137
 $4,710,033

The Other category is primarily composed of California - $275 million or 6 percent of the commercial real estate portfolio, Utah - $165 million or 4 percent of the commercial real estate portfolio, Nevada - $119 million or 3 percent of the commercial real estate portfolio, Georgia - $101 million or 2 percent of the commercial real estate portfolio and Virginia - $95 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 $22 million compared to March 31, 2019. In general, we sell the majority of our conforming fixed rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. We have no concentration in sub-prime residential mortgage loans. Our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or adjustable rate mortgage loans with initial rates that are below market. Collateral for 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 June 30, 2019, $195 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 $2.1 million over March 31, 2019.

Home equity loans totaled $887 million at June 30, 2019, a $14 million decrease compared to March 31, 2019. Our home equity loan portfolio is primarily composed of first-lien, fully amortizing home equity loans. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 50 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 10 year revolving period followed by a 15 year term of amortizing repayment. Interest-only home equity loans have a 5 year revolving period followed by a 15 year term of amortizing repayments and may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term subject to an update of certain credit information. A summary of our home equity loan portfolio at June 30, 2019 by lien position and amortizing status follows in Table 15.

Table 15 -- Home Equity Loans
(In thousands)
  Revolving Amortizing Total
First lien $89,399
 $495,512
 $584,911
Junior lien 187,872
 114,296
 302,168
Total home equity $277,271
 $609,808
 $887,079



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

Table 16 -- Residential Mortgage and Personal Loans by Collateral Location
(In thousands)
  Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/Missouri Other Total
Residential mortgage:                  
Permanent mortgage $166,762
 $428,793
 $63,403
 $13,039
 $201,900
 $103,739
 $59,363
 $51,371
 $1,088,370
Permanent mortgages  guaranteed by U.S. government agencies 47,020
 31,317
 32,239
 10,070
 5,320
 1,332
 16,036
 52,039
 195,373
Home equity 355,348
 139,910
 78,037
 7,408
 152,769
 38,751
 51,545
 63,311
 887,079
Total residential mortgage $569,130
 $600,020
 $173,679
 $30,517
 $359,989
 $143,822
 $126,944
 $166,721
 $2,170,822
                   
Personal $321,274
 $416,424
 $11,443
 $11,352
 $79,045
 $69,464
 $56,074
 $72,813
 $1,037,889


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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)
  June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018
Oklahoma:          
Commercial $3,762,234
 $3,551,054
 $3,491,117
 $3,609,109
 $3,465,407
Commercial real estate 717,970
 665,190
 700,756
 651,315
 662,665
Residential mortgage 1,403,398
 1,417,381
 1,440,566
 1,429,843
 1,403,658
Personal 382,764
 374,807
 375,543
 376,201
 362,846
Total Oklahoma 6,266,366
 6,008,432
 6,007,982
 6,066,468
 5,894,576
           
Texas:  
  
  
  
  
Commercial 5,877,265
 5,754,018
 5,438,133
 5,115,646
 4,922,451
Commercial real estate 1,341,609
 1,344,810
 1,341,783
 1,354,679
 1,336,101
Residential mortgage 272,878
 265,927
 266,805
 253,265
 243,400
Personal 400,585
 396,794
 394,743
 381,452
 394,021
Total Texas 7,892,337
 7,761,549
 7,441,464
 7,105,042
 6,895,973
           
New Mexico:  
  
  
  
  
Commercial 350,520
 342,915
 340,489
 325,048
 305,167
Commercial real estate 385,058
 371,416
 383,670
 392,494
 386,878
Residential mortgage 82,390
 85,326
 87,346
 88,110
 90,581
Personal 10,236
 11,065
 10,662
 11,659
 11,107
Total New Mexico 828,204
 810,722
 822,167
 817,311
 793,733
           
Arkansas:  
  
  
  
  
Commercial 87,896
 79,286
 111,338
 102,237
 93,217
Commercial real estate 149,300
 142,551
 141,898
 106,701
 90,807
Residential mortgage 7,463
 7,731
 7,537
 7,278
 6,927
Personal 11,208
 11,550
 11,955
 12,126
 12,331
Total Arkansas 255,867
 241,118
 272,728
 228,342
 203,282
           
Colorado:  
  
  
  
  
Commercial 2,325,742
 2,231,703
 2,275,069
 1,132,500
 1,165,721
Commercial real estate 1,023,410
 957,348
 963,575
 354,543
 267,065
Residential mortgage 241,780
 241,722
 251,849
 68,694
 64,839
Personal 72,537
 65,812
 72,916
 56,999
 60,504
Total Colorado 3,663,469
 3,496,585
 3,563,409
 1,612,736
 1,558,129
           
Arizona:  
  
  
  
  
Commercial 1,330,415
 1,335,140
 1,320,139
 621,658
 681,852
Commercial real estate 761,243
 791,466
 889,903
 666,562
 710,784
Residential mortgage 91,684
 98,973
 97,959
 44,659
 47,010
Personal 76,335
 61,875
 68,546
 67,280
 65,541
Total Arizona 2,259,677
 2,287,454
 2,376,547
 1,400,159
 1,505,187
           
Kansas/Missouri:  
  
  
  
  
Commercial 602,836
 667,859
 659,793
 669,903
 715,224
Commercial real estate 331,443
 327,870
 343,228
 278,381
 257,920
Residential mortgage 71,229
 75,560
 77,971
 79,893
 85,835
Personal 84,224
 81,831
 91,441
 91,224
 93,837
Total Kansas/Missouri 1,089,732
 1,153,120
 1,172,433
 1,119,401
 1,152,816
           
Total BOK Financial loans $22,255,652
 $21,758,980
 $21,656,730
 $18,349,459
 $18,003,696

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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)
  June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018
Loan commitments $11,411,819
 $12,243,886
 $11,944,524
 $10,715,964
 $10,294,211
Standby letters of credit 698,527
 720,451
 582,196
 671,844
 659,867
Mortgage loans sold with recourse 93,606
 94,938
 98,623
 101,512
 116,269
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 June 30, 2019, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $389 million compared to $354 million at March 31, 2019. At June 30, 2019, the net fair value of our derivative contracts included $251 million for foreign exchange contracts, $77 million for energy contracts, $49 million for interest rate swaps and $8.4 million of to-be-announced residential mortgage-backed securities. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $369 million at June 30, 2019 and $343 million at March 31, 2019.

At June 30, 2019, total derivative assets were reduced by $34 million of cash collateral received from counterparties and total derivative liabilities were reduced by $54 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 June 30, 2019 follows in Table 19.

Table 19 -- Fair Value of Derivative Contracts
(In thousands)
Customers $172,485
Banks and other financial institutions 156,279
Exchanges and clearing organizations 25,525
Fair value of customer risk management program asset derivative contracts, net $354,289
 
At June 30, 2019, our largest derivative exposure was to an exchange for energy contracts, net of cash margin, of $26 million.

Our customer derivative program also introduces liquidity and capital risk. We are required to provide cash margin to certain counterparties when the net negative fair value of the contracts exceeds established limits. Also, changes in commodity prices affect the amount of regulatory capital we are required to hold as support for the fair value of our derivative assets. These risks are modeled as part of the management of these programs. Based on current prices, a decrease in market prices equivalent to $28.87 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 $71.81 per barrel of oil would increase the fair value of derivative assets by $113 million. Further increases in price to the equivalent of $88.03 per barrel of oil would increase the fair value of our derivative assets by $330 million with lending customers comprising the bulk of the assets. Liquidity requirements of this program may also be affected by our credit rating. At June 30, 2019, a decrease in our credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $10 million. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of June 30, 2019, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.
Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. At June 30, 2019, the combined allowance for loan losses and off-balance sheet credit losses totaled $204 million or 0.92 percent of outstanding loans and 115 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. Excluding acquired loans measured at acquisition date fair value, the combined allowance for loan losses was 1.03 percent of outstanding loans and 126 percent of nonaccruing loans. The allowance for loan losses was $203 million and the accrual for off-balance sheet credit losses was $1.9 million. At March 31, 2019, the combined allowance for credit losses was $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. 

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 $5.0 million provision for credit losses was appropriate for the second quarter of 2019. The Company recorded $8.0 million provision for credit losses in the first quarter of 2019.



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Table 20 -- Summary of Loan Loss Experience
(In thousands)
  Three Months Ended
  June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018
Allowance for loan losses:          
Beginning balance $205,340
 $207,457
 $210,569
 $215,142
 $223,967
Loans charged off:          
Commercial (11,385) (10,468) (12,940) (9,602) (13,775)
Commercial real estate (118) 
 
 
 
Residential mortgage (94) (42) (52) (91) (135)
Personal (1,630) (1,265) (1,523) (1,380) (1,195)
Total (13,227) (11,775) (14,515) (11,073) (15,105)
Recoveries of loans previously charged off:          
Commercial 434
 711
 1,267
 1,263
 298
Commercial real estate 4,345
 112
 232
 40
 3,097
Residential mortgage 149
 154
 71
 229
 505
Personal 575
 712
 598
 560
 678
Total 5,503
 1,689
 2,168
 2,092
 4,578
Net loans recovered (charged off) (7,724) (10,086) (12,347) (8,981) (10,527)
Provision for loan losses 4,918
 7,969
 9,235
 4,408
 1,702
Ending balance $202,534
 $205,340
 $207,457
 $210,569
 $215,142
Accrual for off-balance sheet credit losses:          
Beginning balance $1,821
 $1,790
 $2,025
 $2,433
 $4,135
Provision for off-balance sheet credit losses 82
 31
 (235) (408) (1,702)
Ending balance $1,903
 $1,821
 $1,790
 $2,025
 $2,433
Total combined provision for credit losses $5,000
 $8,000
 $9,000
 $4,000
 $
Allowance for loan losses to loans outstanding at period-end 0.91% 0.94% 0.96% 1.15% 1.19%
Net charge-offs (recoveries) (annualized) to average loans 0.14% 0.19% 0.23% 0.20% 0.24%
Total provision for credit losses (annualized) to average loans 0.09% 0.15% 0.17% 0.09% %
Recoveries to gross charge-offs 41.60% 14.34% 14.94% 18.89% 30.31%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments 0.02% 0.01% 0.01% 0.02% 0.02%
Combined allowance for credit losses to loans outstanding at period-end 0.92% 0.95% 0.97% 1.16% 1.21%
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 June 30, 2019, impaired loans totaled $372 million, including $9.3 million with specific allowances of $4.0 million and $363 million with no specific allowances. At March 31, 2019, impaired loans totaled $339 million, including $8.0 million of impaired loans with specific allowances of $3.5 million and $331 million with no specific allowances.

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

The aggregate amount of general allowances for all unimpaired loans totaled $182 million at June 30, 2019, largely unchanged compared to March 31, 2019. A decrease in general allowances related to commercial real estate loans was largely 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 $17 million at June 30, 2019, a $2.3 million decrease compared to March 31, 2019.

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

Our loan monitoring process also identified certain accruing substandard loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in nonperforming assets. Known information does, however, cause management concern as to the borrowers’ ability to comply with current repayment terms. These potential problem loans totaled $161 million at June 30, 2019 and were primarily composed of $62 million or 1.58 percent of energy loans, $27 million or less than 1 percent of service sector loans, $20 million or 2.47 percent of other commercial and industrial loans, $14 million or 1.87 percent of manufacturing sector loans, $13 million or less than 1 percent of healthcare sector loans and $12 million or less than 1 percent of wholesale/retail sector loans. Potential problem loans totaled $169 million at March 31, 2019.

Based on regulatory guidelines, other loans especially mentioned are in compliance with the original terms of the agreement but may have a weakness that deserves management's close attention. Other loans especially mentioned totaled $141 million at June 30, 2019 and were composed primarily of $51 million or 1.53 percent of service sector loans, $29 million or 3.82 percent of manufacturing sector loans, $15 million or 0.52 percent healthcare sector loans, $13 million or 0.73 percent of wholesale/retail sector loans and $13 million or 0.33 percent of energy sector loans. Other loans especially mentioned totaled $196 million at March 31, 2019.
Net Loans Charged Off

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

BOK Financial had net charge-offs of $7.7 million in the second quarter of 2019, compared to net charge-offs of $10.1 million in the first quarter of 2019 and net charge-offs of $10.5 million in the second quarter of 2018. The ratio of net loans charged off to average loans on an annualized basis was 0.14 percent for the second quarter of 2019, compared with 0.19 percent for the first quarter of 2019 and 0.24 percent for the second quarter of 2018. 

Net charge-offs of commercial loans were $11.0 million in the second quarter of 2019, primarily related to two energy production borrowers and a single healthcare sector borrower. Net commercial real estate loan recoveries were $4.2 million in the second quarter of 2019. Net recoveries of residential mortgage loans were $55 thousand and net charge-offs of personal loans were $1.1 million for the second quarter. Personal loan net charge-offs include deposit account overdraft losses.

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Nonperforming Assets

Table 21 -- Nonperforming Assets
(In thousands)
  June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018
Nonaccruing loans:          
Commercial $123,395
 $90,358
 $99,841
 $109,490
 $120,978
Commercial real estate 21,670
 21,508
 21,621
 1,316
 1,996
Residential mortgage 38,477
 40,409
 41,555
 41,917
 42,343
Personal 237
 302
 230
 269
 340
Total nonaccruing loans 183,779
 152,577
 163,247
 152,992
 165,657
Accruing renegotiated loans guaranteed by U.S. government agencies 95,989
 91,787
 86,428
 83,347
 75,374
Real estate and other repossessed assets 16,940
 17,139
 17,487
 24,515
 27,891
Total nonperforming assets $296,708
 $261,503
 $267,162
 $260,854
 $268,922
Total nonperforming assets excluding those guaranteed by U.S. government agencies $193,976
 $162,770
 $173,602
 $169,717
 $185,981
           
Nonaccruing loans by loan portfolio segment and class:      
  
Commercial:        
  
Energy $71,632
 $35,332
 $47,494
 $54,033
 $65,597
Healthcare 16,148
 18,768
 16,538
 15,704
 16,125
Manufacturing 8,613
 9,548
 8,919
 9,202
 2,991
Services 10,087
 9,555
 8,567
 4,097
 4,377
Wholesale/retail 1,390
 1,425
 1,316
 9,249
 14,095
Public finance 
 
 
 
 
Other commercial and industrial 15,525
 15,730
 17,007
 17,205
 17,793
Total commercial 123,395
 90,358
 99,841
 109,490
 120,978
           
Commercial real estate:        
  
Retail 20,057
 20,159
 20,279
 777
 1,068
Residential construction and land development 350
 350
 350
 350
 350
Multifamily 275
 
 301
 
 
Office 855
 855
 
 
 275
Industrial 
 
 
 
 
Other commercial real estate 133
 144
 691
 189
 303
Total commercial real estate 21,670
 21,508
 21,621
 1,316
 1,996
           
Residential mortgage:        
  
Permanent mortgage 21,803
 22,937
 23,951
 22,855
 23,105
Permanent mortgage guaranteed by U.S. government agencies 6,743
 6,946
 7,132
 7,790
 7,567
Home equity 9,931
 10,526
 10,472
 11,272
 11,671
Total residential mortgage 38,477
 40,409
 41,555
 41,917
 42,343
Personal 237
 302
 230
 269
 340
Total nonaccruing loans $183,779
 $152,577
 $163,247
 $152,992
 $165,657
           
           
Allowance for loan losses to nonaccruing loans1
 114.40% 141.00% 132.89% 145.02% 136.09%
Accruing loans 90 days or more past due1
 $2,698
 $610
 $1,338
 $518
 $879
1 
Excludes residential mortgages guaranteed by agencies of the U.S. Government.

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Nonperforming assets totaled $297 million or 1.33 percent of outstanding loans and repossessed assets at June 30, 2019. Nonaccruing loans totaled $184 million, accruing renegotiated residential mortgage loans totaled $96 million and real estate and other repossessed assets totaled $17 million. All accruing renegotiated residential mortgage loans and $6.7 million of nonaccruing loans are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets increased $31 million over the first quarter of 2019, primarily due to an increase in nonaccruing energy loans, partially offset by a decrease in nonaccruing healthcare sector loans. The Company generally retains nonperforming assets to maximize potential recovery, which may cause future nonperforming assets to decrease more slowly.

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

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

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

Table 22 -- Rollforward of Nonperforming Assets
(In thousands)
  Three Months Ended
  June 30, 2019
  
 
Nonaccruing Loans
 
 
Renegotiated Loans
 Real Estate and Other Repossessed Assets Total Nonperforming Assets
Balance, March 31, 2019 $152,577
 $91,787
 $17,139
 $261,503
Additions 53,941
 12,495
 
 66,436
Payments (7,128) (573) 
 (7,701)
Charge-offs (13,227) 
 
 (13,227)
Net gains (losses) and write-downs 
 
 82
 82
Foreclosure of nonperforming loans (1,574) 
 1,574
 
Foreclosure of loans guaranteed by U.S. government agencies (810) (2,894) 
 (3,704)
Proceeds from sales 
 (5,169) (1,855) (7,024)
Return to accrual status 
 
 
 
Other, net 
 343
 
 343
Balance, June 30, 2019 $183,779
 $95,989
 $16,940
 $296,708

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  Six Months Ended
  June 30, 2019
  
 
Nonaccruing Loans
 
 
Renegotiated Loans
 Real Estate and Other Repossessed Assets Total Nonperforming Assets
Balance, December 31, 2018 $163,247
 $86,428
 $17,487
 $267,162
Additions 80,809
 26,811
 
 107,620
Payments (29,303) (1,206) 
 (30,509)
Charge-offs (25,002) 
 
 (25,002)
Net gains (losses) and write-downs 
 
 (163) (163)
Foreclosure of nonperforming loans (2,606) 
 2,606
 
Foreclosure of loans guaranteed by U.S. government agencies (1,490) (5,418) 
 (6,908)
Proceeds from sales 
 (11,223) (2,990) (14,213)
Return to accrual status (1,876) 
 
 (1,876)
Other, net 
 597
 
 597
Balance, June 30, 2019 $183,779
 $95,989
 $16,940
 $296,708

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

Nonaccruing commercial loans totaled $123 million or 0.86 percent of total commercial loans at June 30, 2019 compared to $90 million or 0.65 percent of commercial loans at March 31, 2019. There were $49 million in newly identified nonaccruing commercial loans during the quarter, offset by $4.6 million in payments and $11 million of charge-offs of nonaccruing commercial loans during the second quarter.

Nonaccruing commercial loans at June 30, 2019 were primarily composed of $72 million or 1.83 percent of total energy loans, $16 million or 0.55 percent of total healthcare sector loans, $16 million or 1.87 percent of total other commercial and industrial sector loans and $10 million or 0.30 percent of other commercial and industrial loans.
Commercial Real Estate

Nonaccruing commercial real estate loans totaled $22 million or 0.46 percent of outstanding commercial real estate loans at June 30, 2019, largely unchanged compared to March 31, 2019 of $22 million or 0.47 percent of outstanding commercial real estate loans. 

Nonaccruing commercial real estate loans were primarily composed of $20 million or 2.43 percent of loans secured by retail facilities.

Residential Mortgage and Personal

Nonaccruing residential mortgage loans totaled $38 million or 1.77 percent of outstanding residential mortgage loans at June 30, 2019, a $1.9 million decrease compared to March 31, 2019. Newly identified nonaccruing residential mortgage loans totaling $2.9 million were offset by $2.8 million of payments and $1.2 million of foreclosures. 

Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans, which totaled $22 million or 2.00 percent of outstanding non-guaranteed permanent residential mortgage loans at June 30, 2019. Nonaccruing home equity loans totaled $9.9 million or 1.12 percent of total home equity loans.


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Payments of accruing residential mortgage loans and personal loans may be delinquent. The composition of residential mortgage loans and personal loans past due but still accruing is included in the following Table 23. Substantially all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 59 days past due decreased $4.5 million in the second quarter to $5.0 million at June 30, 2019. Residential mortgage loans 60 to 89 days past due increased by $385 thousand. Personal loans past due 30 to 59 days increased by $2.2 million and personal loans 60 to 89 days increased $72 thousand.

Table 23 -- Residential Mortgage and Personal Loans Past Due
(In thousands)
  June 30, 2019 March 31, 2019
  90 Days or More 60 to 89 Days 30 to 59 Days 90 Days or More 60 to 89 Days 30 to 59 Days
Residential mortgage:            
   Permanent mortgage1
 $37
 $
 $3,641
 $
 $
 $5,394
Home equity 
 553
 1,380
 
 168
 4,118
Total residential mortgage $37
 $553
 $5,021
 
 $168
 $9,512
   
    
  
    
Personal $10
 $88
 $2,509
 $
 $16
 $347
1 
Excludes past due residential mortgage loans guaranteed by agencies of the U.S. government.

Real Estate and Other Repossessed Assets

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

Real estate and other repossessed assets totaled $17 million at June 30, 2019, composed primarily of $6.0 million of oil and gas properties, $4.1 million of 1-4 family residential properties, $3.3 million of developed commercial real estate and $2.9 million of undeveloped land primarily zoned for commercial development. Real estate and other repossessed assets totaled $17 million at March 31, 2019.


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Liquidity and Capital

Based on the average balances for the second 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 second quarter of 2019 totaled $25.2 billion, a $548 million increase over the first quarter of 2019. Interest-bearing transaction account balances increased $581 million and time deposits increased $54 million. Demand deposits decreased $104 million compared to the first quarter of 2019.
Table 24 - Average Deposits by Line of Business
(In thousands)
 Three Months Ended
 June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018
Commercial Banking$10,724,206
 $8,261,543
 $8,393,016
 $8,633,204
 $8,379,584
Consumer Banking6,998,677
 6,544,665
 6,542,188
 6,580,395
 6,579,635
Wealth Management6,220,848
 5,659,771
 5,483,455
 5,492,048
 5,834,669
Subtotal23,943,731
 20,465,979
 20,418,659
 20,705,647
 20,793,888
Funds Management and other1,218,645
 4,148,500
 4,676,736
 1,230,648
 1,261,344
Total$25,162,376
 $24,614,479
 $25,095,395
 $21,936,295
 $22,055,232

Acquired deposits were allocated to the lines of business from funds management and other in the second quarter of 2019. The fluctuations following include those deposits. Average Commercial Banking deposit balances increased $2.5 billion compared to first quarter of 2019. Demand deposit balances increased $992 million and interest-bearing transaction account balances increased $1.4 billion. 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 $454 million over the prior quarter. Demand deposit balances increased $322 million and interest-bearing transaction deposit balances increased $75 million. Time deposit balances increased $32 million.

Average Wealth Management deposits increased $561 million over the first quarter of 2019. Interest-bearing transaction account balances were up $483 million. Demand deposit balances increased $38 million, and time deposits balances were up $36 million.

Average time deposits for the second quarter of 2019 included $254 million of brokered deposits, a $16 million decrease compared to the first quarter of 2019. Average interest-bearing transaction accounts for the second quarter included $1.1 billion of brokered deposits, a $214 million increase over the first quarter of 2019.


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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)
  June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018
Oklahoma:          
Demand $3,279,359
 $3,432,239
 $3,610,593
 $3,564,307
 $3,867,934
Interest-bearing:          
Transaction 7,020,484
 6,542,548
 6,445,831
 6,010,972
 5,968,459
Savings 307,785
 309,875
 288,210
 288,080
 289,202
Time 1,253,804
 1,217,371
 1,118,643
 1,128,810
 1,207,471
Total interest-bearing 8,582,073
 8,069,794
 7,852,684
 7,427,862
 7,465,132
Total Oklahoma 11,861,432
 11,502,033
 11,463,277
 10,992,169
 11,333,066
           
Texas:          
Demand 2,974,005
 2,966,743
 3,291,433
 3,357,669
 3,321,980
Interest-bearing:          
Transaction 2,453,619
 2,385,305
 2,295,169
 2,182,114
 2,169,155
Savings 103,125
 101,849
 99,624
 97,909
 97,809
Time 425,253
 419,269
 423,880
 453,119
 445,500
Total interest-bearing 2,981,997
 2,906,423
 2,818,673
 2,733,142
 2,712,464
Total Texas 5,956,002
 5,873,166
 6,110,106
 6,090,811
 6,034,444
           
New Mexico:          
Demand 630,861
 662,362
 691,692
 722,188
 770,974
Interest-bearing:          
Transaction 557,881
 573,203
 571,347
 593,760
 586,593
Savings 62,636
 61,497
 58,194
 57,794
 59,415
Time 232,569
 228,212
 224,515
 221,513
 212,689
Total interest-bearing 853,086
 862,912
 854,056
 873,067
 858,697
Total New Mexico 1,483,947
 1,525,274
 1,545,748
 1,595,255
 1,629,671
           
Arkansas:          
Demand 29,176
 31,624
 36,800
 36,579
 39,896
Interest-bearing:          
Transaction 148,485
 147,964
 91,593
 128,001
 143,298
Savings 1,783
 1,785
 1,632
 1,826
 1,885
Time 7,810
 8,321
 8,726
 10,214
 10,771
Total interest-bearing 158,078
 158,070
 101,951
 140,041
 155,954
Total Arkansas 187,254
 189,694
 138,751
 176,620
 195,850
           

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  June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018
Colorado:          
Demand 1,621,820
 1,897,547
 1,658,473
 593,442
 529,912
Interest-bearing:          
Transaction 1,800,271
 1,844,632
 1,899,203
 622,520
 701,362
Savings 57,263
 58,919
 57,289
 40,308
 38,176
Time 246,198
 261,235
 274,877
 217,628
 208,049
Total interest-bearing 2,103,732
 2,164,786
 2,231,369
 880,456
 947,587
Total Colorado 3,725,552
 4,062,333
 3,889,842
 1,473,898
 1,477,499
           
Arizona:          
Demand 700,480
 695,238
 707,402
 365,878
 383,627
Interest-bearing:          
Transaction 560,429
 621,735
 575,567
 130,105
 193,687
Savings 11,966
 12,144
 10,545
 3,559
 3,935
Time 43,099
 44,004
 43,051
 23,927
 22,447
Total interest-bearing 615,494
 677,883
 629,163
 157,591
 220,069
Total Arizona 1,315,974
 1,373,121
 1,336,565
 523,469
 603,696
           
Kansas/Missouri:          
Demand 431,856
 410,799
 418,199
 423,560
 459,636
Interest-bearing:          
Transaction 310,774
 361,590
 327,866
 322,747
 401,545
Savings 13,125
 13,815
 13,721
 13,125
 13,052
Time 19,205
 19,977
 19,688
 20,635
 20,805
Total interest-bearing 343,104
 395,382
 361,275
 356,507
 435,402
Total Kansas/Missouri 774,960
 806,181
 779,474
 780,067
 895,038
Total BOK Financial deposits $25,305,121
 $25,331,802
 $25,263,763
 $21,632,289
 $22,169,264

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 $575 million at June 30, 2019. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short-term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and agency mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $7.2 billion during the quarter, compared to $7.0 billion in the first quarter of 2019.

At June 30, 2019, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $7.8 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
June 30, 2019
   Three Months Ended
March 31, 2019
  June 30, 2019 
Average
Balance
During the
Quarter
 Rate 
Maximum
Outstanding
At Any Month
End During
the Quarter
 Mar. 31, 2019 
Average
Balance
During the
Quarter
 Rate 
Maximum
Outstanding
At Any Month
End During
the Quarter
                 
Parent Company and Other Non-Bank Subsidiaries:
Other borrowings 5,578
 6,593
 3.22% $6,593
 25,946
 5,877
 1.25% 25,946
Subordinated debentures 275,892
 275,887
 5.53% $275,893
 275,880
 275,882
 5.51% 275,880
Total parent company and other non-bank subsidiaries 281,470
 282,480
 5.47%   301,826
 281,759
 5.43% 

                 
BOKF, NA:                
Funds purchased 1,975,086
 1,650,046
 2.46% 1,975,086
 1,018,117
 1,622,580
 2.47% 1,862,316
Repurchase agreements 356,861
 416,904
 0.56% 388,760
 421,556
 410,456
 0.46% 421,556
Other borrowings:                
Federal Home Loan Bank advances 7,800,000
 7,153,846
 2.65% 7,800,000
 7,300,000
 7,013,333
 2.67% 7,300,000
GNMA repurchase liability 14,499
 10,755
 4.44% 14,499
 11,466
 17,413
 4.51% 19,581
Other 3,732
 4,423
 4.62% 3,732
 3,681
 3,656
 5.55% 3,681
Total other borrowings 7,818,231
 7,169,024
 2.67% 

 7,315,147
 7,034,402
 2.67% 

Total BOKF, NA 10,150,178
 9,235,974
 2.53%   8,754,820
 9,067,438
 2.54%  
                 
Total other borrowed funds and subordinated debentures $10,431,648
 $9,518,454
 2.62%   $9,056,646
 $9,349,197
 2.63%  
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 June 30, 2019, cash and interest-bearing cash and cash equivalents held by the parent company totaled $149 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 June 30, 2019, based upon the most restrictive limitations as well as management's internal capital policy, BOKF, NA could declare up to $125 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 June 30, 2019 was $4.7 billion, an $187 million increase over March 31, 2019. Net income less cash dividends paid increased equity $102 million during the second quarter of 2019. Changes in interest rates resulted in an accumulated other comprehensive gain of $99 million at June 30, 2019, compared to an accumulated other comprehensive loss of $3.5 million at March 31, 2019. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings including expected benefits from lower federal income tax rates, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt or perpetual preferred stock issuance, share repurchase and stock and cash dividends.


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On June 16, 2016, the FASB issued FASB Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Assets Measured at Amortized Cost ("ASU 2016-13" or "CECL") to provide more-timely recording of credit losses on loans and other financial assets measured at amortized cost, effective for the Company’s annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company will adopt the standard on January 1, 2020 through a cumulative-effect adjustment to retained earnings. The ASU broadens the scope of the allowance for credit losses to include acquired loans and certain serviced loans, among others. Specifically, CECL requires recognition of an allowance for credit losses on acquired loans that were initially recognized at fair value, which included an estimate of expected credit losses. This requirement will result in duplicate recognition of an allowance for expected credit losses on approximately $2.5 billion of acquired loans. The principles of CECL also apply to expected credit losses on residential mortgage loans the company has transferred into mortgage-backed securities, primarily expected losses on approximately $3.5 billion of residential mortgage loans that exceed amounts guaranteed by the U.S. Department of Veterans Affairs. We do not expect a significant change in our existing allowance for credit losses due primarily to our loan portfolio’s relatively short average life. Currently, we do not expect that the cumulative-effect adjustment to retained earnings from adoption of the CECL accounting standard will materially affect the company’s regulatory capital or liquidity. The ultimate impact will depend on the composition of our portfolio of assets measured at amortized cost as well as economic conditions and forecasts at adoption.

On April 30, 2019, the board of directors authorized the Company to purchase up to five million common shares, subject to market conditions, securities law and other regulatory compliance limitations. The Company repurchased 250,000 shares during the second quarter of 2019 under this new authorization at an average price of $80.50 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 June 30, 2019 Mar. 31, 2019 June 30, 2018
Risk-based capital:            
Common equity Tier 1 4.50% 2.50% 7.00% 10.84% 10.71% 11.92%
Tier 1 capital 6.00% 2.50% 8.50% 10.84% 10.71% 11.92%
Total capital 8.00% 2.50% 10.50% 12.34% 12.24% 13.26%
Tier 1 Leverage 4.00% N/A
 4.00% 8.75% 8.76% 9.57%
             
Average total equity to average assets       11.26% 11.29% 10.36%
Tangible common equity ratio       8.69% 8.64% 9.21%

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.


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Table 28 -- Non-GAAP Measure
(Dollars in thousands)
  June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 June 30, 2018
Tangible common equity ratio:          
Total shareholders' equity $4,709,438
 $4,522,873
 $4,432,109
 $3,615,032
 $3,553,431
Less: Goodwill and intangible assets, net 1,172,564
 1,177,573
 1,184,112
 480,800
 481,366
Tangible common equity 3,536,874
 3,345,300
 3,247,997
 3,134,232
 3,072,065
Total assets 41,893,073
 39,882,962
 38,020,504
 33,289,864
 33,833,107
Less: Goodwill and intangible assets, net 1,172,564
 1,177,573
 1,184,112
 480,800
 481,366
Tangible assets $40,720,509
 $38,705,389
 $36,836,392
 $32,809,064
 $33,351,741
Tangible common equity ratio 8.69% 8.64% 8.82% 9.55% 9.21%

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.

- 37 -



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

Table 29 -- Interest Rate Sensitivity
(Dollars in thousands)
  200 bp Increase 
100 bp Decrease1
  June 30, June 30,
  2019 2018 2019 2018
Anticipated impact over the next twelve months on net interest revenue $(15,527) $1,118
 $(32,930) $(35,335)
  (1.38)% 0.11% (2.93)% (3.59)%
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)
  June 30,
  2019 2018
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp
MSR Asset $32,153
 $(41,160) $22,858
 $(25,967)
MSR Hedge (36,192) 33,383
 (23,730) 21,281
Net Exposure (4,039) (7,777) (872) (4,686)


- 38 -



Trading Activities

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

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

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

Table 31 -- Mortgage Pipeline Sensitivity Analysis
(Dollars in thousands)
  Three Months Ended
June 30,
 Six Months Ended June 30,
  2019 2018 2019 2018
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp Up 50 bp Down 50 bp Up 50 bp Down 50 bp
Average1
 $(229) $(190) $663
 $(1,240) $(104) $(490) $422
 $(932)
Low2
 189
 330
 2,077
 (567) 436
 330
 2,077
 699
High3
 (664) (1,163) (374) (2,447) (664) (1,343) (1,015) (2,447)
Period End (278) (169) 216
 (678) (278) (169) 216
 (678)
1 
Average represents the simple average of each daily value observed during the reporting period.
2 
Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 
High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.

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

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

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

- 39 -




Table 32 -- Trading Sensitivity Analysis
(Dollars in thousands)
  Three Months Ended
June 30,
 Six Months Ended June 30,
  2019 2018 2019 2018
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp Up 50 bp Down 50 bp Up 50 bp Down 50 bp
Average1
 $(2,436) $2,503
 $(1,566) $1,405
 $(2,080) $2,051
 $(1,062) $874
Low2
 (202) 5,378
 1,518
 4,333
 857
 5,378
 1,518
 4,333
High3
 (5,153) 267
 (4,242) (2,472) (5,153) (729) (4,242) (2,472)
Period End (629) 936
 (2,602) 2,719
 (629) 936
 (2,602) 2,719
1 
Average represents the simple average of each daily value observed during the reporting period.
2 
Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 
High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.

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


- 40 -



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

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

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

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



- 41 -



     
Consolidated Statements of Earnings (Unaudited)        
(In thousands, except share and per share data) Three Months Ended Six Months Ended
  June 30, June 30,
Interest revenue 2019 2018 2019 2018
Loans $293,332
 $210,694
 $573,204
 $398,785
Residential mortgage loans held for sale 1,754
 2,333
 3,417
 4,177
Trading securities 15,498
 12,988
 34,193
 20,726
Investment securities 2,905
 3,663
 6,939
 7,520
Available for sale securities 59,880
 47,427
 116,711
 93,386
Fair value option securities 7,503
 3,927
 12,740
 8,746
Restricted equity securities 6,516
 5,408
 12,861
 10,525
Interest-bearing cash and cash equivalents 3,432
 7,740
 6,829
 15,722
Total interest revenue 390,820
 294,180
 766,894
 559,587
Interest expense  
  
  
  
Deposits 43,183
 20,963
 80,600
 39,182
Borrowed funds 58,404
 32,607
 115,214
 58,056
Subordinated debentures 3,801
 2,048
 7,546
 4,051
Total interest expense 105,388
 55,618
 203,360
 101,289
Net interest revenue 285,432
 238,562
 563,534
 458,298
Provision for credit losses 5,000
 
 13,000
 (5,000)
Net interest revenue after provision for credit losses 280,432
 238,562
 550,534
 463,298
Other operating revenue  
  
  
  
Brokerage and trading revenue 40,526
 26,488
 72,143
 57,136
Transaction card revenue 21,915
 20,975
 42,653
 41,965
Fiduciary and asset management revenue 45,025
 41,692
 88,383
 83,524
Deposit service charges and fees 28,074
 27,834
 56,317
 54,994
Mortgage banking revenue 28,131
 26,346
 51,965
 52,371
Other revenue 12,437
 13,923
 25,199
 26,882
Total fees and commissions 176,108
 157,258
 336,660
 316,872
Other gains (losses), net 3,480
 4,578
 6,456
 3,286
Gain (loss) on derivatives, net 11,150
 (3,057) 15,817
 (8,742)
Gain (loss) on fair value option securities, net 9,853
 (3,341) 19,518
 (20,905)
Change in fair value of mortgage servicing rights (29,555) 1,723
 (50,221) 22,929
Gain (loss) on available for sale securities, net 1,029
 (762) 1,105
 (1,052)
Total other operating revenue 172,065
 156,399
 329,335
 312,388
Other operating expense  
  
  
  
Personnel 160,342
 138,947
 329,570
 278,894
Business promotion 10,142
 7,686
 18,016
 13,696
Charitable contributions to BOKF Foundation 1,000
 
 1,000
 
Professional fees and services 13,002
 14,978
 29,141
 25,178
Net occupancy and equipment 26,880
 22,761
 56,401
 46,807
Insurance 6,454
 6,245
 11,293
 12,838
Data processing and communications 29,735
 27,739
 61,184
 55,556
Printing, postage and supplies 4,107
 4,011
 8,992
 8,100
Net losses and operating expenses of repossessed assets 580
 2,722
 2,576
 10,427
Amortization of intangible assets 5,138
 1,386
 10,329
 2,686
Mortgage banking costs 11,545
 12,890
 21,451
 23,039
Other expense 8,212
 7,111
 14,341
 13,685
Total other operating expense 277,137
 246,476
 564,294
 490,906
Net income before taxes 175,360
 148,485
 315,575
 284,780
Federal and state income taxes 37,580
 33,330
 67,530
 64,278
Net income 137,780
 115,155
 248,045
 220,502
Net income attributable to non-controlling interests 217
 783
 (130) 568
Net income attributable to BOK Financial Corporation shareholders $137,563
 $114,372
 $248,175
 $219,934
Earnings per share:  
  
  
  
Basic $1.93
 $1.75
 $3.47
 $3.36
Diluted $1.93
 $1.75
 $3.46
 $3.36
Average shares used in computation:        
Basic 70,887,063
 64,901,975
 71,135,414
 64,874,567
Diluted 70,902,033
 64,937,226
 71,151,558
 64,912,552
Dividends declared per share $0.50
 $0.45
 $1.00
 $0.90

See accompanying notes to consolidated financial statements.

- 42 -



Consolidated Statements of Comprehensive Income (Unaudited)    
(In thousands, except share and per share data)        
  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Net income $137,780
 $115,155
 $248,045
 $220,502
Other comprehensive income (loss) before income taxes:        
Net change in unrealized gain (loss) 135,417
 (33,117) 228,156
 (130,523)
Reclassification adjustments included in earnings:        
Loss (gain) on available for sale securities, net (1,029) 762
 (1,105) 1,052
Other comprehensive income (loss) before income taxes 134,388
 (32,355) 227,051
 (129,471)
Federal and state income taxes 32,288
 (8,241) 55,897
 (33,049)
Other comprehensive income (loss), net of income taxes 102,100

(24,114)
171,154

(96,422)
Comprehensive income 239,880
 91,041
 419,199
 124,080
Comprehensive income attributable to non-controlling interests 217
 783
 (130) 568
Comprehensive income attributable to BOK Financial Corp. shareholders $239,663
 $90,258
 $419,329
 $123,512

See accompanying notes to consolidated financial statements.

- 43 -



Consolidated Balance Sheets
(In thousands, except share data)
  June 30, 2019 Dec. 31, 2018
  (Unaudited) (Footnote 1)
Assets    
Cash and due from banks $739,109
 $741,749
Interest-bearing cash and cash equivalents 596,382
 401,675
Trading securities 1,900,395
 1,956,923
Investment securities (fair value:  June 30, 2019 – $347,015; December 31, 2018 – $367,298)
 327,677
 355,187
Available for sale securities 10,514,414
 8,857,120
Fair value option securities 1,138,819
 283,235
Restricted equity securities 461,017
 344,447
Residential mortgage loans held for sale 193,570
 149,221
Loans 22,255,652
 21,656,730
Allowance for loan losses (202,534) (207,457)
Loans, net of allowance 22,053,118
 21,449,273
Premises and equipment, net 468,368
 330,033
Receivables 213,608
 204,960
Goodwill 1,048,091
 1,049,263
Intangible assets, net 124,473
 134,849
Mortgage servicing rights 208,308
 259,254
Real estate and other repossessed assets, net of allowance (June 30, 2019 – $12,499; December 31, 2018 – $13,665)
 16,940
 17,487
Derivative contracts, net 415,221
 320,929
Cash surrender value of bank-owned life insurance 384,193
 381,608
Receivable on unsettled securities sales 583,421
 336,400
Other assets 505,949
 446,891
Total assets $41,893,073
 $38,020,504
     
Liabilities and Equity    
Liabilities:    
Noninterest-bearing demand deposits $9,667,557
 $10,414,592
Interest-bearing deposits:  
  
Transaction 12,851,943
 12,206,576
Savings 557,683
 529,215
Time 2,227,938
 2,113,380
Total deposits 25,305,121
 25,263,763
Funds purchased and repurchase agreements 2,331,947
 1,018,411
Other borrowings 7,823,809
 6,124,390
Subordinated debentures 275,892
 275,913
Accrued interest, taxes and expense 181,413
 192,826
Derivative contracts, net 381,454
 362,306
Due on unsettled securities purchases 565,268
 156,370
Other liabilities 309,694
 183,480
Total liabilities 37,174,598
 33,577,459
Shareholders' equity:  
  
Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2019 – 75,756,056; December 31, 2018 – 75,711,492)
 5
 5
Capital surplus 1,343,082
 1,334,030
Retained earnings 3,548,907
 3,369,654
Treasury stock (shares at cost:  June 30, 2019 – 4,562,286; December 31, 2018 – 3,588,560)
 (281,125) (198,995)
Accumulated other comprehensive gain (loss) 98,569
 (72,585)
Total shareholders’ equity 4,709,438
 4,432,109
Non-controlling interests 9,037
 10,936
Total equity 4,718,475
 4,443,045
Total liabilities and equity $41,893,073
 $38,020,504

See accompanying notes to consolidated financial statements.

- 44 -



Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 Common Stock 
Capital
Surplus
 
Retained
Earnings
 Treasury Stock Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interests
 Total Equity
 Shares Amount   Shares Amount   
                    
Balance, March 31, 201975,762
 $5
 $1,340,323
 $3,447,076
 4,312
 $(261,000) $(3,531) $4,522,873
 $8,836
 $4,531,709
Net income
 
 
 137,563
 
 
 
 137,563
 217
 137,780
Other comprehensive income
 
 
 
 
 
 102,100
 102,100
 
 102,100
Repurchase of common stock
 
 
 
 250
 (20,125) 
 (20,125) 
 (20,125)
Share-based compensation plans:              

   

Stock options exercised
 
 24
 
 
 
 
 24
 
 24
Non-vested shares awarded, net(6) 
 
 
 
 
 
 
 
 
Vesting of non-vested shares
 
 
 
 
 
 
 
 
 
Share-based compensation
 
 2,735
 
 
 
 
 2,735
 
 2,735
Cash dividends on common stock
 
 
 (35,732) 
 
 
 (35,732) 
 (35,732)
Capital calls and distributions, net
 
 
 
 
 
 
 
 (16) (16)
Balance, June 30, 201975,756

$5

$1,343,082

$3,548,907

4,562

$(281,125)
$98,569

$4,709,438

$9,037

$4,718,475
                    
Balance, December 31, 201875,711
 $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, Adjusted75,711
 5
 1,334,030
 3,372,516
 3,589
 (198,995) (72,585) 4,434,971
 10,936
 4,445,907
Net income (loss)
 
 
 248,175
 
 
 
 248,175
 (130) 248,045
Other comprehensive income
 
 
 
 
 
 171,154
 171,154
 
 171,154
Repurchase of common stock
 
 
 
 955
 (80,702) 
 (80,702) 
 (80,702)
Share-based compensation plans:              

   

Stock options exercised18
 
 903
 
 
 
 
 903
 
 903
Non-vested shares awarded, net27
 
 
 
 
 
 
 
 
 
Vesting of non-vested shares
 
 
 
 18
 (1,428) 
 (1,428) 
 (1,428)
Share-based compensation
 
 8,149
 
 
 
 
 8,149
 
 8,149
Cash dividends on common stock
 
 
 (71,784) 
 
 
 (71,784) 
 (71,784)
Capital calls and distributions, net
 
 
 
 
 
 
 
 (1,769) (1,769)
Balance, June 30, 201975,756
 $5
 $1,343,082
 $3,548,907
 4,562
 $(281,125) $98,569
 $4,709,438
 $9,037
 $4,718,475
                    

- 45 -



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, March 31, 201875,318
 $4
 $1,041,242
 $3,127,575
 9,859
 $(562,601) $(111,191) $3,495,029
 $22,313
 $3,517,342
Net income
 
 
 114,372
 
 
 
 114,372
 783
 115,155
Other comprehensive loss
 
 
 
 
 
 (24,114) (24,114) 
 (24,114)
Repurchase of common stock
 
 
 
 7
 (824) 
 (824) 
 (824)
Share-based compensation plans:              

   

Stock options exercised3
 
 152
 
 
 
 
 152
 
 152
Non-vested shares awarded, net(7) 
 
 
 
 
 
 
 
 
Vesting of non-vested shares
 
 
 
 8
 (698) 
 (698) 
 (698)
Share-based compensation
 
 (1,192) 
 
 
 
 (1,192) 
 (1,192)
Cash dividends on common stock
 
 
 (29,294) 
 
 
 (29,294) 
 (29,294)
Capital calls and distributions, net
 
 
 
 
 
 
 
 (482) (482)
Balance, June 30, 201875,314
 $4
 $1,040,202
 $3,212,653
 9,874
 $(564,123) $(135,305) $3,553,431
 $22,614
 $3,576,045
                    
Balance, December 31, 201775,148
 $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, Adjusted75,148
 4
 1,035,895
 3,051,196
 9,753
 (552,845) (38,883) 3,495,367
 22,967
 3,518,334
Net income
 
 
 219,934
 
 
 
 219,934
 568
 220,502
Other comprehensive loss
 
 
 
 
 
 (96,422) (96,422) 
 (96,422)
Repurchase of common stock
 
 
 
 90
 (8,408) 
 (8,408) 
 (8,408)
Share-based compensation plans:              

   

Stock options exercised46
 
 2,426
 
 
 
 
 2,426
 
 2,426
Non-vested shares awarded, net120
 
 
 
 
 
 
 
 
 
Vesting of non-vested shares
 
 
 
 31
 (2,870) 
 (2,870) 
 (2,870)
Share-based compensation
 
 1,881
 
 
 
 
 1,881
 
 1,881
Cash dividends on common stock
 
 
 (58,477) 
 
 
 (58,477) 
 (58,477)
Capital calls and distributions, net
 
 
 
 
 
 
 
 (921) (921)
Balance, June 30, 201875,314
 $4
 $1,040,202
 $3,212,653
 9,874
 $(564,123) $(135,305) $3,553,431
 $22,614
 $3,576,045
                    

See accompanying notes to consolidated financial statements.

- 46 -



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

 Six Months Ended
  June 30,
  2019 2018
Cash Flows From Operating Activities:    
Net income $248,045
 $220,502
Adjustments to reconcile net income to net cash used in operating activities:    
Provision for credit losses 13,000
 (5,000)
Change in fair value of mortgage servicing rights due to market changes 50,221
 (22,929)
Change in the fair value of mortgage servicing rights due to principal payments 15,664
 16,797
Net unrealized losses (gains) from derivative contracts (17,095) 6,674
Share-based compensation 8,149
 1,881
Depreciation and amortization 45,926
 27,459
Net amortization of discounts and premiums (10,913) 12,855
Net losses (gains) on financial instruments and other losses (gains), net 564
 4,530
Net gain on mortgage loans held for sale (16,735) (19,314)
Mortgage loans originated for sale (1,240,368) (1,438,868)
Proceeds from sale of mortgage loans held for sale 1,215,756
 1,456,312
Capitalized mortgage servicing rights (14,939) (19,720)
Change in trading and fair value option securities (799,241) (1,174,526)
Change in receivables (228,973) (335,369)
Change in other assets (4,965) 1,737
Change in accrued interest, taxes and expense (41,866) (4,327)
Change in other liabilities 100,731
 334,765
Net cash used in operating activities (677,039) (936,541)
Cash Flows From Investing Activities:  
  
Proceeds from maturities or redemptions of investment securities 26,513
 71,722
Proceeds from maturities or redemptions of available for sale securities 704,542
 819,596
Purchases of investment securities 
 (3,968)
Purchases of available for sale securities (2,510,271) (1,020,018)
Proceeds from sales of available for sale securities 367,357
 187,533
Change in amount receivable on unsettled available for sale securities transactions (28,580) 38,075
Loans originated, net of principal collected (569,075) (847,351)
Net payments on derivative asset contracts (10,838) (70,987)
Acquisitions, net of cash acquired 
 (13,870)
Proceeds from disposition of assets 116,163
 97,027
Purchases of assets (250,911) (121,889)
Net cash used in investing activities (2,155,100) (864,130)
Cash Flows From Financing Activities:  
  
Net change in demand deposits, transaction deposits and savings accounts (73,200) 78,643
Net change in time deposits 114,377
 29,316
Net change in other borrowed funds 2,968,697
 1,057,118
Net proceeds on derivative liability contracts 6,140
 64,144
Net change in derivative margin accounts (152,533) (118,628)
Change in amount due on unsettled available for sale securities transactions 313,736
 (100,847)
Issuance of common and treasury stock, net (525) (444)
Repurchase of common stock (80,702) (8,408)
Dividends paid (71,784) (58,477)
Net cash provided by financing activities 3,024,206
 942,417
Net increase (decrease) in cash and cash equivalents 192,067
 (858,254)
Cash and cash equivalents at beginning of period 1,143,424
 2,317,054
Cash and cash equivalents at end of period $1,335,491
 $1,458,800
     
Supplemental Cash Flow Information:    
Cash paid for interest $203,513
 $100,532
Cash paid for taxes $54,722
 $29,623
Net loans and bank premises transferred to repossessed real estate and other assets $2,606
 $3,886
Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period $44,258
 $42,493
Conveyance of other real estate owned guaranteed by U.S. government agencies $15,484
 $23,845
Right-of-use assets obtained in exchange for operating lease liabilities $12,754
 $
See accompanying notes to consolidated financial statements.

- 47 -



Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

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

The unaudited consolidated financial statements include accounts of BOK Financial and its subsidiaries, principally BOKF, NA (“the Bank”), BOK Financial Securities, Inc., and BOK Financial Private Wealth, Inc. Operating divisions of the Bank include Bank of Albuquerque, Bank of 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 six-month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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

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

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

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

The company has established a CECL implementation team to evaluate the impact to the Company’s financial statements. The CECL implementation team, overseen by the Chief Credit Officer, Chief Financial Officer and Chief Risk Officer, has developed a project plan that incorporates input from various departments within the bank including Credit, Financial Reporting, Risk and Information Technology among others. The Audit Committee and Credit Committee of the Board of Directors is periodically updated on project progress. 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.


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

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

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

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

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

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

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(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities are as follows (in thousands):
 
  June 30, 2019 December 31, 2018
  Fair Value Net Unrealized Gain (Loss) Fair Value Net Unrealized Gain (Loss)
U.S. government agency debentures $83,148
 $127
 $63,765
 $254
U.S. government agency residential mortgage-backed securities 1,620,613
 7,558
 1,791,584
 9,966
Municipal and other tax-exempt securities 49,718
 191
 34,507
 (1)
Asset-backed securities 93,546
 548
 42,656
 685
Other trading securities 53,370
 202
 24,411
 65
Total trading securities $1,900,395
 $8,626
 $1,956,923
 $10,969

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

  June 30, 2019
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
Municipal and other tax-exempt $124,822
 $128,009
 $3,221
 $(34)
U.S. government agency residential mortgage-backed securities 11,599
 12,099
 500
 
Other debt securities 191,256
 206,907
 16,312
 (661)
Total investment securities $327,677
 $347,015
 $20,033
 $(695)

  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)




- 50 -



The amortized cost and fair values of investment securities at June 30, 2019, by contractual maturity, are as shown in the following table (dollars in thousands):
  
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 Total 
Weighted
Average
Maturity1
Fixed maturity debt securities:  
  
  
  
  
  
Amortized cost $51,600
 $104,247
 $144,405
 $15,826
 $316,078
 5.03
Fair value 51,791
 108,001
 159,416
 15,708
 334,916
  
Residential mortgage-backed securities:  
  
  
  
  
  
Amortized cost  
  
  
  
 $11,599
 
2 
Fair value  
  
  
  
 12,099
  
Total investment securities:  
  
  
  
  
  
Amortized cost  
  
  
  
 $327,677
  
Fair value  
  
  
  
 347,015
  
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 4.6 years based upon current prepayment assumptions.

Temporarily Impaired Investment Securities
(in thousands):
  June 30, 2019
  Number of Securities Less Than 12 Months 12 Months or Longer Total
   
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:              
Municipal and other tax-exempt 25
 $
 $
 $16,433
 $34
 $16,433
 $34
Other debt securities 24
 25
 1
 13,607
 660
 13,632
 661
Total investment securities 49
 $25
 $1
 $30,040
 $694
 $30,065
 $695

  December 31, 2018
  Number of Securities Less Than 12 Months 12 Months or Longer Total
   
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:              
Municipal and other tax-exempt 72
 $18,255
 $69
 $66,141
 $523
 $84,396
 $592
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




- 51 -



Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
  June 30, 2019
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
U.S. Treasury $1,887
 $1,889
 $3
 $(1)
Municipal and other tax-exempt 2,386
 2,470
 84
 
Mortgage-backed securities:  
  
  
  
Residential agency 7,280,092
 7,354,741
 90,111
 (15,462)
Residential non-agency 31,327
 47,057
 15,730
 
Commercial agency 3,066,442
 3,107,785
 44,783
 (3,440)
Other debt securities 500
 472
 
 (28)
Total available for sale securities $10,382,634
 $10,514,414
 $150,711
 $(18,931)

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


The amortized cost and fair values of available for sale securities at June 30, 2019, by contractual maturity, are as shown in the following table (dollars in thousands):
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 Total 
Weighted
Average
Maturity1
Fixed maturity debt securities:           
Amortized cost$90,708
 $968,503
 $1,571,395
 $440,609
 $3,071,215
 7.35
Fair value90,536
 974,073
 1,600,106
 447,901
 3,112,616
  
Residential mortgage-backed securities:           
Amortized cost        $7,311,419
 
2 
Fair value        7,401,798
  
Total available-for-sale securities:           
Amortized cost        $10,382,634
  
Fair value        10,514,414
  
1 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
2 
The average expected lives of residential mortgage-backed securities were 4.0 years based upon current prepayment assumptions.


- 52 -



Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 Three Months Ended
June 30,
 Six Months Ended June 30,
 2019 2018 2019 2018
Proceeds$122,098
 $142,743
 $367,357
 $187,533
Gross realized gains1,029
 257
 6,327
 450
Gross realized losses
 (1,019) (5,222) (1,502)
Related federal and state income tax expense (benefit)262
 (194) 281
 (268)


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 June 30, 2019 and $9.1 billion at December 31, 2018. The secured parties do not have the right to sell or repledge these securities.

Temporarily Impaired Available for Sale Securities
(in thousands)
  June 30, 2019
  Number of Securities Less Than 12 Months 12 Months or Longer Total
   
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:  
  
  
  
  
  
  
U.S. Treasury 1
 $
 $
 $498
 $1
 $498
 $1
Mortgage-backed securities:    
  
  
  
 

 

Residential agency 125

267,481

898

1,317,121

14,564

1,584,602

15,462
Commercial agency 78
 440,095
 895
 595,351
 2,545
 1,035,446
 3,440
Other debt securities 1
 
 
 472
 28
 472
 28
Total available for sale securities 205
 $707,576

$1,793

$1,913,442

$17,138

$2,621,018

$18,931


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

 

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

 

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

$1,615

$5,631,803

$136,642

$6,331,867

$138,257


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

- 53 -



(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.

- 54 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2019 (in thousands):
  Assets
  
Notional1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $1,303,659
 $11,707
 $(3,352) $8,355
 $
 $8,355
Interest rate swaps 2,254,122
 51,177
 (2,168) 49,009
 (42) 48,967
Energy contracts 1,849,474
 153,514
 (76,562) 76,952
 (33,847) 43,105
Agricultural contracts 16,662
 788
 (103) 685
 
 685
Foreign exchange contracts 252,272
 250,527
 
 250,527
 (384) 250,143
Equity option contracts 86,124
 3,034
 
 3,034
 
 3,034
Total customer risk management programs 5,762,313
 470,747
 (82,185) 388,562
 (34,273) 354,289
Internal risk management programs 52,977,229
 352,808
 (291,876) 60,932
 
 60,932
Total derivative contracts $58,739,542
 $823,555
 $(374,061) $449,494
 $(34,273) $415,221
             
  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 $1,298,129
 $11,596
 $(3,352) $8,244
 $(8,232) $12
Interest rate swaps 2,254,122
 51,271
 (2,168) 49,103
 (43,288) 5,815
Energy contracts 1,794,912
 145,442
 (76,562) 68,880
 (1,836) 67,044
Agricultural contracts 16,678
 776
 (103) 673
 (629) 44
Foreign exchange contracts 240,406
 238,625
 
 238,625
 (309) 238,316
Equity option contracts 86,124
 3,034
 
 3,034
 
 3,034
Total customer risk management programs 5,690,371
 450,744
 (82,185) 368,559
 (54,294) 314,265
Internal risk management programs 54,628,959
 359,065
 (291,876) 67,189
 
 67,189
Total derivative contracts $60,319,330
 $809,809
 $(374,061) $435,748
 $(54,294) $381,454
1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.



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The following 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.












- 56 -



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
  June 30, 2019 June 30, 2018
  
Brokerage
and Trading Revenue
 Gain (Loss) on Derivatives, Net 
Brokerage
and Trading
Revenue
 Gain (Loss)on Derivatives, Net
Customer risk management programs:        
Interest rate contracts        
To-be-announced residential mortgage-backed securities $2,212
 $
 $7,586
 $
Interest rate swaps 942
 
 683
 
Energy contracts 2,086
 
 1,416
 
Agricultural contracts 4
 
 15
 
Foreign exchange contracts 100
 
 96
 
Equity option contracts 
 
 
 
Total customer risk management programs 5,344
 
 9,796
 
Internal risk management programs 8,030
 11,150
 (981) (3,057)
Total derivative contracts $13,374
 $11,150
 $8,815
 $(3,057)


  Six Months Ended
  June 30, 2019 June 30, 2018
  
Brokerage
and Trading Revenue
 Gain (Loss) on Derivatives, Net 
Brokerage
and Trading
Revenue
 Gain (Loss) on Derivatives, Net
Customer risk management programs:        
Interest rate contracts        
To-be-announced residential mortgage-backed securities $7,912
 $
 $14,405
 $
Interest rate swaps 1,535
 
 1,439
 
Energy contracts 2,312
 
 4,556
 
Agricultural contracts 8
 
 30
 
Foreign exchange contracts 254
 
 272
 
Equity option contracts 
 
 
 
Total customer risk management programs 12,021
 
 20,702
 
Internal risk management programs 735
 15,817
 (2,864) (8,742)
Total derivative contracts $12,756
 $15,817
 $17,838
 $(8,742)



- 57 -



(4) Loans and Allowances for Credit Losses

Loans

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

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

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

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

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

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

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

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


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

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

  June 30, 2019 December 31, 2018
  
Fixed
Rate
 
Variable
Rate
 Non-accrual Total 
Fixed
Rate
 
Variable
Rate
 Non-accrual Total
Commercial $3,264,990
 $10,948,523
 $123,395
 $14,336,908
 $2,251,188
 $11,285,049
 $99,841
 $13,636,078
Commercial real estate 1,008,236
 3,680,127
 21,670
 4,710,033
 1,477,274
 3,265,918
 21,621
 4,764,813
Residential mortgage 1,751,803
 380,542
 38,477
 2,170,822
 1,830,224
 358,254
 41,555
 2,230,033
Personal 181,855
 855,797
 237
 1,037,889
 190,687
 834,889
 230
 1,025,806
Total $6,206,884
 $15,864,989
 $183,779
 $22,255,652
 $5,749,373
 $15,744,110
 $163,247
 $21,656,730
Accruing loans past due (90 days)1
  
  
  
 $2,698
  
  
  
 $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 June 30, 2019, outstanding commitments totaled $11 billion. Because some commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans.

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

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At June 30, 2019, outstanding standby letters of credit totaled $699 million. 

Allowances for Credit Losses

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

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

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


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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.


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The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended June 30, 2019 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Residential Mortgage Personal Nonspecific Allowance Total
Allowance for loan losses:            
Beginning balance $103,577
 $58,134
 $15,668
 $8,783
 $19,178
 $205,340
Provision for loan losses 13,771
 (8,173) 1
 1,660
 (2,341) 4,918
Loans charged off (11,385) (118) (94) (1,630) 
 (13,227)
Recoveries 434
 4,345
 149
 575
 
 5,503
Ending balance $106,397
 $54,188
 $15,724
 $9,388
 $16,837
 $202,534
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance $1,725
 $48
 $47
 $1
 $
 $1,821
Provision for off-balance sheet credit losses 17
 68
 (3) 
 
 82
Ending balance $1,742
 $116
 $44
 $1
 $
 $1,903
             
Total provision for credit losses $13,788
 $(8,105) $(2) $1,660
 $(2,341) $5,000


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 six months ended June 30, 2019 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Residential Mortgage Personal Nonspecific Allowance Total
Allowance for loan losses:            
Beginning balance $102,226
 $60,026
 $17,964
 $9,473
 $17,768
 $207,457
Provision for loan losses 24,879
 (10,177) (2,407) 1,523
 (931) 12,887
Loans charged off (21,853) (118) (136) (2,895) 
 (25,002)
Recoveries 1,145
 4,457
 303
 1,287
 
 7,192
Ending balance $106,397
 $54,188
 $15,724
 $9,388
 $16,837
 $202,534
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance $1,655
 $52
 $52
 $31
 $
 $1,790
Provision for off-balance sheet credit losses 87
 64
 (8) (30) 
 113
Ending balance $1,742
 $116
 $44
 $1
 $
 $1,903
             
Total provision for credit losses $24,966
 $(10,113) $(2,415) $1,493
 $(931) $13,000


- 61 -



The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended June 30, 2018 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Residential Mortgage Personal Nonspecific Allowance Total
Allowance for loan losses:            
Beginning balance $120,083
 $57,070
 $18,431
 $8,408
 $19,975
 $223,967
Provision for loan losses 7,116
 (1,409) (257) 755
 (4,503) 1,702
Loans charged off (13,775) 
 (135) (1,195) 
 (15,105)
Recoveries 298
 3,097
 505
 678
 
 4,578
Ending balance $113,722
 $58,758
 $18,544
 $8,646
 $15,472
 $215,142
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance 4,027
 44
 62
 2
 
 $4,135
Provision for off-balance sheet credit losses (1,666) (27) (9) 
 
 (1,702)
Ending balance $2,361
 $17
 $53
 $2
 $
 $2,433
             
Total provision for credit losses $5,450
 $(1,436) $(266) $755
 $(4,503) $


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 six months ended June 30, 2018 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Residential Mortgage Personal Nonspecific Allowance Total
Allowance for loan losses:            
Beginning balance $124,269
 $56,621
 $18,451
 $9,124
 $22,217
 $230,682
Provision for loan losses 4,005
 (1,143) (419) 603
 (6,745) (3,699)
Loans charged off (15,338) 
 (235) (2,422) 
 (17,995)
Recoveries 786
 3,280
 747
 1,341
 
 6,154
Ending balance $113,722
 $58,758
 $18,544
 $8,646
 $15,472
 $215,142
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance $3,644
 $45
 $43
 $2
 $
 $3,734
Provision for off-balance sheet credit losses (1,283) (28) 10
 
 
 (1,301)
Ending balance $2,361
 $17
 $53
 $2
 $
 $2,433
             
Total provision for credit losses $2,722
 $(1,171) $(409) $603
 $(6,745) $(5,000)


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The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at June 30, 2019 is as follows (in thousands):
  
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $14,213,513
 $102,359
 $123,395
 $4,038
 $14,336,908
 $106,397
Commercial real estate 4,688,363
 54,188
 21,670
 
 4,710,033
 54,188
Residential mortgage 2,132,345
 15,724
 38,477
 
 2,170,822
 15,724
Personal 1,037,652
 9,388
 237
 
 1,037,889
 9,388
Total 22,071,873
 181,659
 183,779
 4,038
 22,255,652
 185,697
             
Nonspecific allowance 
 
 
 
 
 16,837
             
Total $22,071,873
 $181,659
 $183,779
 $4,038
 $22,255,652
 $202,534

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

             


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Credit Quality Indicators

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

The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at June 30, 2019 is as follows (in thousands):
  Internally Risk Graded Non-Graded Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $14,307,867
 $105,435
 $29,041
 $962
 $14,336,908
 $106,397
Commercial real estate 4,710,033
 54,188
 
 
 4,710,033
 54,188
Residential mortgage 279,905
 3,318
 1,890,917
 12,406
 2,170,822
 15,724
Personal 949,413
 7,074
 88,476
 2,314
 1,037,889
 9,388
Total 20,247,218
 170,015
 2,008,434
 15,682
 22,255,652
 185,697
             
Nonspecific allowance 
 
 
 
 
 16,837
             
Total $20,247,218
 $170,015
 $2,008,434
 $15,682
 $22,255,652
 $202,534
 
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. 


- 64 -



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 June 30, 2019 by the risk grade categories (in thousands): 
  Internally Risk Graded Non-Graded  
  Performing        
  Pass Other Loans Especially Mentioned Accruing Substandard Nonaccrual Performing Nonaccrual Total
Commercial:              
Energy $3,774,846
 $12,871
 $62,004
 $71,632
 $
 $
 $3,921,353
Services 3,221,580
 50,662
 27,129
 10,087
 
 
 3,309,458
Wholesale/retail 1,767,002
 13,080
 11,646
 1,390
 
 
 1,793,118
Manufacturing 709,460
 29,056
 14,228
 8,613
 
 
 761,357
Healthcare 2,882,190
 15,089
 13,083
 16,148
 
 
 2,926,510
Public finance 795,659
 
 
 
 
 
 795,659
Other commercial and industrial 761,650
 2,831
 20,488
 15,443
 28,959
 82
 829,453
Total commercial 13,912,387
 123,589
 148,578
 123,313
 28,959
 82
 14,336,908
               
Commercial real estate:  
    
  
  
  
  
Residential construction and land development 141,159
 
 
 350
 
 
 141,509
Retail 792,406
 11,664
 1,272
 20,057
 
 
 825,399
Office 1,048,029
 4,197
 3,225
 855
 
 
 1,056,306
Multifamily 1,293,248
 1,200
 5,649
 275
 
 
 1,300,372
Industrial 828,569
 
 
 
 
 
 828,569
Other commercial real estate 557,038
 547
 160
 133
 
 
 557,878
Total commercial real estate 4,660,449
 17,608
 10,306
 21,670
 
 
 4,710,033
               
Residential mortgage:  
    
  
  
  
  
Permanent mortgage 276,782
 115
 2,206
 803
 787,464
 21,000
 1,088,370
Permanent mortgages guaranteed by U.S. government agencies 
 
 
 
 188,630
 6,743
 195,373
Home equity 
 
 
 
 877,148
 9,931
 887,079
Total residential mortgage 276,782
 115
 2,206
 803
 1,853,242
 37,674
 2,170,822
               
Personal 949,258
 46
 33
 76
 88,315
 161
 1,037,889
               
Total $19,798,876
 $141,358
 $161,123
 $145,862
 $1,970,516
 $37,917
 $22,255,652



- 65 -



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
               




- 66 -



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 June 30, 2019 follows (in thousands):
 As of For the For the
 June 30, 2019 Three Months Ended Six Months Ended
   Recorded Investment   June 30, 2019 June 30, 2019
 
Unpaid
Principal
Balance
 Total With No
Allowance
 With Allowance Related Allowance Average Recorded
Investment
 Interest Income Recognized Average Recorded
Investment
 Interest Income Recognized
Commercial:                 
Energy$118,959
 $71,632
 $64,066
 $7,566
 $1,175
 $58,185
 $
 $59,074
 $
Services13,343
 10,087
 10,061
 26
 26
 10,309
 
 7,156
 
Wholesale/retail1,600
 1,390
 1,126
 264
 101
 1,407
 
 1,030
 
Manufacturing1
8,896
 8,613
 8,383
 230
 236
 9,080
 
 8,384
 
Healthcare30,255
 16,148
 14,972
 1,176
 2,500
 17,441
 
 13,632
 
Public finance
 
 
 
 
 
 
 
 
Other commercial and industrial25,838
 15,525
 15,525
 
 
 15,627
 
 16,113
 
Total commercial198,891
 123,395
 114,133
 9,262
 4,038
 112,049
 
 105,389
 
                  
Commercial real estate: 
  
  
  
  
  
  
  
  
Residential construction and land development1,306
 350
 350
 
 
 350
 
 350
 
Retail20,380
 20,057
 20,057
 
 
 20,108
 
 20,168
 
Office855
 855
 855
 
 
 855
 
 427
 
Multifamily275
 275
 275
 
 
 138
 
 288
 
Industrial
 
 
 
 
 
 
 
 
Other commercial real estate293
 133
 133
 
 
 139
 
 412
 
Total commercial real estate23,109
 21,670
 21,670
 
 
 21,590
 
 21,645
 
                  
Residential mortgage: 
  
  
  
  
  
  
  
  
Permanent mortgage26,434
 21,803
 21,803
 
 
 22,370
 316
 22,877
 614
Permanent mortgage guaranteed by U.S. government agencies2
201,217
 195,373
 195,373
 
 
 191,537
 1,938
 193,958
 3,843
Home equity11,728
 9,931
 9,931
 
 
 10,228
 
 10,202
 
Total residential mortgage239,379
 227,107
 227,107
 
 
 224,135
 2,254
 227,037
 4,457
                  
Personal289
 237
 237
 
 
 269
 
 234
 
                  
Total$461,668
 $372,409
 $363,147
 $9,262
 $4,038
 $358,043
 $2,254
 $354,305
 $4,457
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 June 30, 2019.
2 All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At June 30, 2019, the majority were accruing based on the guarantee by U.S. government agencies.



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

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




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Troubled Debt Restructurings

At June 30, 2019 the Company had $169 million in troubled debt restructurings (TDRs), of which $96 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $70 million of TDRs were performing in accordance with the modified terms.

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

TDRs generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. During the three and six months ended June 30, 2019, $21 million and $38 million of loans were restructured. During the three and six months ended June 30, 2018, $19 million and $32 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 June 30, 2019 is as follows (in thousands):
    Past Due    
  Current 
30 to 59
Days
 60 to 89 Days 
90 Days
or More
 Nonaccrual Total
Commercial:            
Energy $3,849,711
 $10
 $
 $
 $71,632
 $3,921,353
Services 3,297,119
 1,045
 759
 448
 10,087
 3,309,458
Wholesale/retail 1,787,095
 2,954
 189
 1,490
 1,390
 1,793,118
Manufacturing 750,517
 197
 2,030
 
 8,613
 761,357
Healthcare 2,909,249
 383
 609
 121
 16,148
 2,926,510
Public finance 795,659
 
 
 
 
 795,659
Other commercial and industrial 811,129
 2,037
 762
 
 15,525
 829,453
Total commercial 14,200,479
 6,626
 4,349
 2,059
 123,395
 14,336,908
             
Commercial real estate:  
  
    
  
  
Residential construction and land development 140,555
 604
 
 
 350
 141,509
Retail 805,342
 
 
 
 20,057
 825,399
Office 1,055,034
 
 353
 64
 855
 1,056,306
Multifamily 1,299,665
 131
 301
 
 275
 1,300,372
Industrial 827,660
 
 909
 
 
 828,569
Other commercial real estate 556,562
 111
 544
 528
 133
 557,878
Total commercial real estate 4,684,818
 846
 2,107
 592
 21,670
 4,710,033
             
Residential mortgage:  
  
    
  
  
Permanent mortgage 1,062,889
 3,641
 
 37
 21,803
 1,088,370
Permanent mortgages guaranteed by U.S. government agencies 49,015
 23,742
 21,619
 94,254
 6,743
 195,373
Home equity 875,215
 1,380
 553
 
 9,931
 887,079
Total residential mortgage 1,987,119
 28,763
 22,172
 94,291
 38,477
 2,170,822
             
Personal 1,035,045
 2,509
 88
 10
 237
 1,037,889
             
Total $21,907,461
 $38,744
 $28,716
 $96,952
 $183,779
 $22,255,652


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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.

At June 30, 2019, right-of-use assets were $139 million, the weighted-average remaining lease term was 10.0 years and the weighted average discount rate on operating leases was 3.50%. Operating lease costs recognized as occupancy and equipment expense were $5.7 million and $12.1 million for the three and six months ended June 30, 2019. Operating cash flows from operating leases were $5.5 million and $11.4 million for the three and six months ended June 30, 2019.

At June 30, 2019, un-discounted operating lease liabilities are scheduled to mature as follows: $17.7 million in 2019, $28.9 million in 2020, $26.1 million in 2021, $18.9 million in 2022, $16.5 million in 2023 and $104.2 million thereafter. Operating expense and short term lease costs total $3.7 million and $6.1 million for the three and six months ended June 30, 2019.

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

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