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BOKF BOK Financial

Filed: 30 Oct 19, 2:57pm
000.890.750.850.840.410.550.760.080.28P90DP90DP90DP90DP60DP60DP60DP60DP90DP90D0.07880.07880.07880.07460.07460.07460.94440.94440.94440.94420.94420.9442001501505005004000400010001000939467680.15740.17220.08050.0831false--12-31Q3201900008753570.000060.000062500000000250000000075711492757570097571149275757009136650001127800035885604898999 0000875357 us-gaap:ResidentialPortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-09-30 0000875357 us-gaap:CarryingReportedAmountFairValueDisclosureMember us-gaap:ResidentialPortfolioSegmentMember 2019-09-30


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

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

Commission File No. 0-19341

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

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

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

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

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

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

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

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





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

Index

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




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

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

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


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

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

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

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

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

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

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

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

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

Table 1 -- Volume/Rate Analysis
(In thousands)
  Three Months Ended
Sept. 30, 2019 / 2018
 Nine Months Ended
Sept. 30, 2019 / 2018
    
Change Due To1
   
Change Due To1
  Change Volume Yield/Rate Change Volume Yield/Rate
Tax-equivalent interest revenue:            
Interest-bearing cash and cash equivalents $(391) $(1,047) $656
 $(9,284) $(15,071) $5,787
Trading securities (2,873) (764) (2,109) 10,633
 11,295
 (662)
Investment securities (422) (605) 183
 (1,044) (1,958) 914
Available for sale securities 18,724
 13,469
 5,255
 42,022
 21,303
 20,719
Fair value option securities 6,827
 8,021
 (1,194) 10,821
 10,850
 (29)
Restricted equity securities 2,326
 2,354
 (28) 4,662
 4,159
 503
Residential mortgage loans held for sale (260) 14
 (274) (1,020) (782) (238)
Loans 69,071
 52,657
 16,414
 245,537
 160,739
 84,798
Total tax-equivalent interest revenue 93,002
 74,099
 18,903
 302,327
 190,535
 111,792
Interest expense:            
Transaction deposits 18,684
 6,805
 11,879
 53,441
 14,128
 39,313
Savings deposits 82
 15
 67
 232
 40
 192
Time deposits 3,616
 653
 2,963
 10,127
 896
 9,231
Funds purchased and repurchase agreements 11,963
 7,851
 4,112
 31,719
 17,771
 13,948
Other borrowings 17,614
 13,751
 3,863
 55,016
 21,239
 33,777
Subordinated debentures 1,788
 1,824
 (36) 5,283
 5,459
 (176)
Total interest expense 53,747
 30,899
 22,848
 155,818
 59,533
 96,285
Tax-equivalent net interest revenue 39,255
 43,200
 (3,945) 146,509
 131,002
 15,507
Change in tax-equivalent adjustment 1,042
     3,060
    
Net interest revenue $38,213
     $143,449
    
1 
Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

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Other Operating Revenue

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

Table 2 – Other Operating Revenue 
(In thousands)
  Three Months Ended
September 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended June 30, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Brokerage and trading revenue $43,840
 $23,086
 $20,754
 90 % $40,526
 $3,314
 8 %
Transaction card revenue 22,015
 21,396
 619
 3 % 21,915
 100
  %
Fiduciary and asset management revenue 43,621
 57,514
 (13,893) (24)% 45,025
 (1,404) (3)%
Deposit service charges and fees 28,837
 27,765
 1,072
 4 % 28,074
 763
 3 %
Mortgage banking revenue 30,180
 23,536
 6,644
 28 % 28,131
 2,049
 7 %
Other revenue 17,626
 12,900
 4,726
 37 % 12,437
 5,189
 42 %
Total fees and commissions revenue 186,119
 166,197

19,922
 12 % 176,108

10,011
 6 %
Other gains (losses), net 4,544
 2,754
 1,790
 N/A
 3,480
 1,064
 N/A
Gain (loss) on derivatives, net 3,778
 (2,847) 6,625
 N/A
 11,150
 (7,372) N/A
Gain (loss) on fair value option securities, net 4,597
 (4,385) 8,982
 N/A
 9,853
 (5,256) N/A
Change in fair value of mortgage servicing rights (12,593) 5,972
 (18,565) N/A
 (29,555) 16,962
 N/A
Gain (loss) on available for sale securities, net 5
 250
 (245) N/A
 1,029
 (1,024) N/A
Total other operating revenue $186,450
 $167,941
 $18,509
 11 % $172,065
 $14,385
 8 %
               
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

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

Brokerage and Trading Revenue

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


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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 $24.1 million for the third quarter of 2019, a $19.3 million or 399 percent increase compared to the third quarter of 2018. Lower mortgage interest rates have led to increased trading activity. This increase also includes a shift from our customer hedging portfolio.

Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $4.7 million for the third quarter of 2019, a $3.8 million or 45 percent decrease compared to the third quarter of 2018. The decrease is primarily due to a shift in the mix of our to-be-announced residential mortgage backed securities contracts from our customer hedging program to our U.S. government agency residential mortgage-backed trading program. The resulting increased activity remains within our established market risk limits as discussed further in Management's Discussion & Analysis – Market Risk section following.

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

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

Fiduciary and Asset Management Revenue

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


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

Table 3 -- Assets Under Management or Administration
 Three Months Ended
 September 30, 2019 September 30, 2018 June 30, 2019
 Balance 
Revenue1
 
Margin2
 Balance 
Revenue1
 
Margin2
 Balance 
Revenue1
 
Margin2
Managed fiduciary assets:
Personal$8,513,380
 $23,619
 1.11% $8,076,312
 $22,921
 1.14% $8,516,076
 $26,134
 1.23%
Institutional14,796,223
 5,846
 0.16% 13,568,115
 5,504
 0.16% 14,286,046
 6,283
 0.18%
Total managed fiduciary assets23,309,603
 29,465
 0.51% 21,644,427
 28,425
 0.53% 22,802,122
 32,417
 0.57%
                  
Non-managed assets:
Fiduciary25,950,094
 13,910
 0.21% 23,915,680
 28,591
3 
0.48% 26,494,774
 12,275
 0.19%
Non-fiduciary15,133,544
 246
 0.01% 16,146,102
 498
 0.01% 15,894,874
 333
 0.01%
Safekeeping and brokerage assets under administration16,403,708
 
 % 15,921,806
 
 % 16,582,832
 
 %
Total non-managed assets57,487,346
 14,156
 0.10% 55,983,588
 29,089
 0.21% 58,972,480
 12,608
 0.09%
                  
Total assets under management or administration$80,796,949
 $43,621
 0.22% $77,628,015
 $57,514
 0.30% $81,774,602
 $45,025
 0.22%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Annualized revenue divided by period-end balance.
3 A $15.4 million fee earned through client asset management added 8 basis points to the margin in the third quarter of 2018.

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

Table 4 -- Changes in Assets Under Management or Administration
  Three Months Ended
September 30,
  2019 2018
Beginning balance $81,774,602
 $78,873,446
Net inflows (outflows) (1,230,466) (2,921,653)
Net change in fair value 252,813
 1,676,222
Ending balance $80,796,949
 $77,628,015

Mortgage Banking Revenue

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

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


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Table 5 – Mortgage Banking Revenue 
(In thousands)
  Three Months Ended
September 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended June 30, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018    
Mortgage production revenue $13,814
 $7,250
 $6,564
 91 % $11,869
 $1,945
 16 %
               
Mortgage loans funded for sale $877,280
 $651,076
 

 

 $729,841
    
Add: Current period end outstanding commitments 379,377
 197,752
     344,087
    
Less: Prior period end outstanding commitments 344,087
 251,231
     263,434
    
Total mortgage production volume $912,570
 $597,597
 $314,973
 53 % $810,494
 $102,076
 13 %
               
Mortgage loan refinances to mortgage loans funded for sale 56% 23% 3,300 bps   31% 2,500 bps  
Gains on sale margin 1.51% 1.21% 30 bps   1.46% 5 bps  
Primary mortgage interest rates:              
Average 3.66% 4.57% (91) bps   4.01% (35) bps  
Period end 3.64% 4.72% (108) bps   3.73% (9) bps  
               
Mortgage servicing revenue $16,366
 $16,286
 $80
  % $16,262
 $104
 1 %
Average outstanding principal balance of mortgage loans serviced for others 21,172,874
 21,895,041
 (722,167) (3)% 21,418,690
 (245,816) (1)%
               
Average mortgage servicing revenue rates 0.31% 0.30% 1 bp   0.30% 1 bp  

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

Net gains on other assets, securities and derivatives

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

Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
  Three Months Ended
  Sept. 30, 2019 June 30, 2019 Sept. 30, 2018
Gain (loss) on mortgage hedge derivative contracts, net $3,742
 $11,128
 $(2,843)
Gain (loss) on fair value option securities, net 4,597
 9,853
 (4,385)
Gain (loss) on economic hedge of mortgage servicing rights, net 8,339
 20,981
 (7,228)
Gain (loss) on change in fair value of mortgage servicing rights (12,593) (29,555) 5,972
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue (4,254) (8,574) (1,256)
Net interest revenue on fair value option securities1
 1,245
 1,296
 1,100
Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges $(3,009) $(7,278) $(156)
1 
Actual interest earned on fair value option securities less internal transfer-priced cost of funds.


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Other Operating Expense

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

Table 7 – Other Operating Expense
(In thousands)
  Three Months Ended
September 30,
 Increase (Decrease) 
%
Increase (Decrease)
 Three Months Ended June 30, 2019 Increase (Decrease) 
%
Increase (Decrease)
  2019 2018     
Regular compensation $97,014
 $86,262
 $10,752
 12 % $98,247
 $(1,233) (1)%
Incentive compensation:     

 

      
Cash-based 38,316
 31,430
 6,886
 22 % 33,155
 5,161
 16 %
Share-based 3,471
 3,935
 (464) (12)% 2,734
 737
 (27)%
Deferred compensation 1,124
 2,126
 (1,002) N/A
 1,534
 (410) N/A
Total incentive compensation 42,911
 37,491
 5,420
 14 % 37,423
 5,488
 15 %
Employee benefits 22,648
 19,778
 2,870
 15 % 24,672
 (2,024) (8)%
Total personnel expense 162,573
 143,531
 19,042
 13 % 160,342
 2,231
 1 %
Business promotion 8,859
 7,620
 1,239
 16 % 10,142
 (1,283) (13)%
Charitable contributions to BOKF Foundation 
 
 
 N/A
 1,000
 (1,000) N/A
Professional fees and services 12,312
 13,209
 (897) (7)% 13,002
 (690) (5)%
Net occupancy and equipment 27,558
 23,394
 4,164
 18 % 26,880
 678
 3 %
Insurance 4,220
 6,232
 (2,012) (32)% 6,454
 (2,234) (35)%
Data processing and communications 31,915
 31,665
 250
 1 % 29,735
 2,180
 7 %
Printing, postage and supplies 3,825
 3,837
 (12)  % 4,107
 (282) (7)%
Net losses and operating expenses of repossessed assets 1,728
 4,044
 (2,316) (57)% 580
 1,148
 198 %
Amortization of intangible assets 5,064
 1,603
 3,461
 216 % 5,138
 (74) (1)%
Mortgage banking costs 14,975
 11,741
 3,234
 28 % 11,545
 3,430
 30 %
Other expense 6,263
 5,741
 522
 9 % 8,212
 (1,949) (24)%
Total other operating expense $279,292
 $252,617
 $26,675
 11 % $277,137
 $2,155
 1 %
               
Average number of employees (full-time equivalent) 5,101
 4,870
 231
 5 % 5,123
 (22)  %
Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

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


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Non-personnel operating expense

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

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

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

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

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

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

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


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

Table 8 -- Net Income by Line of Business
(In thousands)
  Three Months Ended
September 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended June 30, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Commercial Banking $101,573
 $84,964
 $16,609
 20 % $106,936
 $(5,363) (5)%
Consumer Banking 16,640
 8,015
 8,625
 108 % 16,342
 298
 2 %
Wealth Management 23,206
 28,866
 (5,660) (20)% 25,544
 (2,338) (9)%
Subtotal 141,419
 121,845
 19,574
 16 % 148,822
 (7,403) (5)%
Funds Management and other 812
 (4,589) 5,401
 N/A
 (11,259) 12,071
 N/A
Total $142,231
 $117,256
 $24,975
 21 % $137,563
 $4,668
 3 %
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.


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Commercial Banking

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

Table 9 -- Commercial Banking
(Dollars in thousands)
  Three Months Ended
September 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended June 30, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Net interest revenue from external sources $243,944
 $187,417
 $56,527
 30% $251,084
 $(7,140) (3)%
Net interest expense from internal sources (63,797) (42,270) (21,527) 51% (65,470) 1,673
 (3)%
Total net interest revenue 180,147
 145,147
 35,000
 24% 185,614
 (5,467) (3)%
Net loans charged off 9,505
 8,047
 1,458
 18% 6,823
 2,682
 39 %
Net interest revenue after net loans charged off 170,642
 137,100
 33,542
 24% 178,791
 (8,149) (5)%
               
Fees and commissions revenue 46,159
 39,391
 6,768
 17% 41,105
 5,054
 12 %
Other gains, net 2,673
 1,131
 1,542
 N/A
 506
 2,167
 N/A
Other operating revenue 48,832
 40,522
 8,310
 21% 41,611
 7,221
 17 %
               
Personnel expense 43,705
 31,263
 12,442
 40% 42,268
 1,437
 3 %
Non-personnel expense 24,980
 19,776
 5,204
 26% 20,679
 4,301
 21 %
Other operating expense 68,685
 51,039
 17,646
 35% 62,947
 5,738
 9 %
               
Net direct contribution 150,789
 126,583
 24,206
 19% 157,455
 (6,666) (4)%
Gain (loss) on financial instruments, net 28
 (3) 31
 N/A
 20
 8
 N/A
Gain (loss) on repossessed assets, net 802
 (1,869) 2,671
 N/A
 2
 800
 N/A
Corporate expense allocations 12,613
 9,124
 3,489
 38% 11,385
 1,228
 11 %
Income before taxes 139,006
 115,587
 23,419
 20% 146,092
 (7,086) (5)%
Federal and state income tax 37,433
 30,623
 6,810
 22% 39,156
 (1,723) (4)%
Net income $101,573
 $84,964
 $16,609
 20% $106,936
 $(5,363) (5)%
               
Average assets $23,973,067
 $18,499,979
 $5,473,088
 30% $22,910,071
 $1,062,996
 5 %
Average loans 19,226,347
 15,321,600
 3,904,747
 25% 18,812,800
 413,547
 2 %
Average deposits 10,833,057
 8,633,204
 2,199,853
 25% 10,724,206
 108,851
 1 %
Average invested capital 2,217,828
 1,382,983
 834,845
 60% 2,222,032
 (4,204)  %
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

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

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


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




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

Table 10 -- Consumer Banking
(Dollars in thousands)
  Three Months Ended
September 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended June 30, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Net interest revenue from external sources $27,580
 $20,005
 $7,575
 38% $25,300
 $2,280
 9 %
Net interest revenue from internal sources 20,882
 19,039
 1,843
 10% 27,415
 (6,533) (24)%
Total net interest revenue 48,462
 39,044
 9,418
 24% 52,715
 (4,253) (8)%
Net loans charged off 1,841
 1,451
 390
 27% 1,728
 113
 7 %
Net interest revenue after net loans charged off 46,621
 37,593
 9,028
 24% 50,987
 (4,366) (9)%
               
Fees and commissions revenue 51,460
 44,039
 7,421
 17% 48,830
 2,630
 5 %
Other losses, net (239) (15) (224) N/A
 (19) (220) N/A
Other operating revenue 51,221
 44,024
 7,197
 16% 48,811
 2,410
 5 %
               
Personnel expense 23,665
 23,543
 122
 1% 24,377
 (712) (3)%
Non-personnel expense 36,034
 34,939
 1,095
 3% 33,317
 2,717
 8 %
Total other operating expense 59,699
 58,482
 1,217
 2% 57,694
 2,005
 3 %
               
Net direct contribution 38,143
 23,135
 15,008
 65% 42,104
 (3,961) (9)%
Gain (loss) on financial instruments, net 8,339
 (7,229) 15,568
 N/A
 20,981
 (12,642) N/A
Change in fair value of mortgage servicing rights (12,593) 5,972
 (18,565) N/A
 (29,555) 16,962
 N/A
Gain (loss) on repossessed assets, net 214
 (87) 301
 N/A
 92
 122
 N/A
Corporate expense allocations 11,776
 11,037
 739
 7% 11,695
 81
 1 %
Income before taxes 22,327
 10,754
 11,573
 108% 21,927
 400
 2 %
Federal and state income tax 5,687
 2,739
 2,948
 108% 5,585
 102
 2 %
Net income $16,640
 $8,015
 $8,625
 108% $16,342
 $298
 2 %
               
Average assets $9,827,130
 $8,323,543
 $1,503,587
 18% $9,212,667
 $614,463
 7 %
Average loans 1,773,831
 1,719,679
 54,152
 3% 1,796,823
 (22,992) (1)%
Average deposits 6,983,018
 6,580,395
 402,623
 6% 6,998,677
 (15,659)  %
Average invested capital 288,216
 285,521
 2,695
 1% 304,990
 (16,774) (5)%
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

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

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

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



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Wealth Management

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


Table 11 -- Wealth Management
(Dollars in thousands)
  Three Months Ended
September 30,
 Increase (Decrease) % Increase (Decrease) Three Months Ended June 30, 2019 Increase (Decrease) % Increase (Decrease)
  2019 2018     
Net interest revenue from external sources $12,343
 $22,509
 $(10,166) (45)% $17,222
 $(4,879) (28)%
Net interest revenue from internal sources 10,723
 6,267
 4,456
 71 % 9,719
 1,004
 10 %
Total net interest revenue 23,066
 28,776
 (5,710) (20)% 26,941
 (3,875) (14)%
Net loans charged off (recovered) (42) (84) 42
 (50)% (48) 6
 (13)%
Net interest revenue after net loans charged off (recovered) 23,108
 28,860
 (5,752) (20)% 26,989
 (3,881) (14)%
               
Fees and commissions revenue 89,422
 83,562
 5,860
 7 % 85,925
 3,497
 4 %
Other gains (losses), net (262) (205) (57) N/A
 92
 (354) N/A
Other operating revenue 89,160
 83,357
 5,803
 7 % 86,017
 3,143
 4 %
               
Personnel expense 52,316
 45,572
 6,744
 15 % 50,080
 2,236
 4 %
Non-personnel expense 19,303
 16,684
 2,619
 16 % 19,372
 (69)  %
Other operating expense 71,619
 62,256
 9,363
 15 % 69,452
 2,167
 3 %
               
Net direct contribution 40,649
 49,961
 (9,312) (19)% 43,554
 (2,905) (7)%
Corporate expense allocations 9,416
 11,127
 (1,711) (15)% 9,168
 248
 3 %
Income before taxes 31,233
 38,841
 (7,608) (20)% 34,386
 (3,153) (9)%
Federal and state income tax 8,027
 9,975
 (1,948) (20)% 8,842
 (815) (9)%
Net income $23,206
 $28,866
 $(5,660) (20)% $25,544
 $(2,338) (9)%
               
Average assets $10,392,988
 $8,498,363
 $1,894,625
 22 % $9,849,396
 $543,592
 6 %
Average loans 1,671,102
 1,439,774
 231,328
 16 % 1,647,680
 23,422
 1 %
Average deposits 6,590,332
 5,492,048
 1,098,284
 20 % 6,220,848
 369,484
 6 %
Average invested capital 279,782
 252,961
 26,821
 11 % 274,050
 5,732
 2 %

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

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

- 16 -




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

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

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

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

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

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

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

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

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

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Loans

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

Table 12 -- Loans
(In thousands)
  Sept. 30, 2019 June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018
Commercial:          
Energy $4,114,269
 $3,921,353
 $3,705,099
 $3,590,333
 $3,294,867
Services 3,266,249
 3,309,458
 3,287,563
 3,258,192
 2,603,862
Healthcare 3,032,968
 2,926,510
 2,915,885
 2,799,277
 2,437,323
Wholesale/retail 1,848,617
 1,793,118
 1,706,900
 1,621,158
 1,650,729
Public finance 744,840
 795,659
 803,083
 804,550
 418,578
Manufacturing 698,408
 761,357
 742,374
 730,521
 660,582
Other commercial and industrial 719,274
 829,453
 801,071
 832,047
 510,160
Total commercial 14,424,625
 14,336,908
 13,961,975
 13,636,078
 11,576,101
           
Commercial real estate:  
  
  
  
  
Multifamily 1,324,839
 1,300,372
 1,210,358
 1,288,065
 1,120,166
Office 1,014,275
 1,056,306
 1,033,158
 1,072,920
 824,829
Industrial 873,536
 828,569
 767,757
 778,106
 696,774
Retail 799,169
 825,399
 890,685
 919,082
 759,423
Residential construction and land development 135,361
 141,509
 149,686
 148,584
 101,872
Other commercial real estate 478,877
 557,878
 549,007
 558,056
 301,611
Total commercial real estate 4,626,057
 4,710,033
 4,600,651
 4,764,813
 3,804,675
           
Residential mortgage:  
  
  
  
  
Permanent mortgage 1,066,460
 1,088,370
 1,098,481
 1,122,610
 1,094,926
Permanent mortgages guaranteed by U.S. government agencies 191,764
 195,373
 193,308
 190,866
 180,718
Home equity 859,079
 887,079
 900,831
 916,557
 696,098
Total residential mortgage 2,117,303
 2,170,822
 2,192,620
 2,230,033
 1,971,742
           
Personal 1,117,382
 1,037,889
 1,003,734
 1,025,806
 996,941
           
Total $22,285,367
 $22,255,652
 $21,758,980
 $21,656,730
 $18,349,459

Commercial

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

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


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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 $751,519
 $2,322,908
 $57,593
 $122
 $519,377
 $542
 $105,908
 $356,300
 $4,114,269
Services 658,970
 758,554
 164,103
 8,564
 591,793
 475,357
 259,999
 348,909
 3,266,249
Healthcare 239,676
 436,571
 148,217
 77,861
 336,865
 259,439
 255,925
 1,278,414
 3,032,968
Wholesale/retail 315,869
 726,422
 35,523
 31,778
 168,007
 107,826
 60,447
 402,745
 1,848,617
Public finance 73,038
 162,869
 37,240
 
 184,005
 87,319
 
 200,369
 744,840
Manufacturing 106,422
 180,837
 990
 5,055
 160,769
 123,256
 52,522
 68,557
 698,408
Other commercial and industrial 115,567
 115,144
 3,174
 56,466
 115,776
 37,674
 57,881
 217,592
 719,274
Total commercial loans $2,261,061
 $4,703,305
 $446,840
 $179,846
 $2,076,592
 $1,091,413
 $792,682
 $2,872,886
 $14,424,625
 
The majority of the collateral securing our commercial loan portfolio is located within our geographical footprint with 33 percent concentrated in the Texas market, 16 percent concentrated in the Oklahoma market and 14 percent in the Colorado market. At September 30, 2019, the Other category is primarily composed of California - $578 million or 4 percent of the commercial loan portfolio, Florida - $261 million or 2 percent of the commercial loan portfolio, Louisiana - $163 million or 1 percent of the commercial loan portfolio, Pennsylvania - $159 million or 1 percent of the commercial loan portfolio, Ohio - $154 million or 1 percent of the commercial loan portfolio and North Carolina - $141 million or 1 percent of the commercial loan portfolio. All other states individually represent less than one percent of total commercial loans.

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

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

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


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

We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $100 million and with three or more non-affiliated banks as participants. At September 30, 2019, the outstanding principal balance of these loans totaled $4.8 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 17 percent of our shared national credits, based on dollars committed. We hold shared national credits to the same standard of analysis and perform the same level of review as internally originated credits. Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. In addition to management’s quarterly assessment of credit risk, banking regulators annually review a sample of shared national credits for proper risk grading.

Commercial Real Estate

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

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

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

Table 14 -- Commercial Real Estate Loans by Collateral Location
(In thousands)
  Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/Missouri Other Total
Multifamily $162,666
 $394,684
 $25,380
 $52,240
 $73,430
 $168,366
 $198,761
 $249,312
 $1,324,839
Office 124,991
 208,216
 102,960
 19,612
 88,703
 77,374
 52,204
 340,215
 1,014,275
Industrial 102,854
 216,462
 19,430
 81
 77,952
 36,662
 39,285
 380,810
 873,536
Retail 53,155
 251,683
 146,256
 5,310
 103,654
 55,399
 13,862
 169,850
 799,169
Residential construction and land development 6,880
 20,108
 12,903
 157
 52,220
 9,012
 7,002
 27,079
 135,361
Other commercial real estate 47,856
 38,947
 9,550
 1,988
 123,759
 71,214
 51,439
 134,124
 478,877
Total commercial real estate loans $498,402
 $1,130,100
 $316,479
 $79,388
 $519,718
 $418,027
 $362,553
 $1,301,390
 $4,626,057

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


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

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

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

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

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

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

Table 15 -- Home Equity Loans
(In thousands)
  Revolving Amortizing Total
First lien $91,591
 $463,681
 $555,272
Junior lien 193,195
 110,612
 303,807
Total home equity $284,786
 $574,293
 $859,079



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

Table 16 -- Residential Mortgage and Personal Loans by Collateral Location
(In thousands)
  Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/Missouri Other Total
Residential mortgage:                  
Permanent mortgage $163,590
 $423,298
 $62,563
 $13,100
 $194,677
 $104,603
 $55,998
 $48,631
 $1,066,460
Permanent mortgages  guaranteed by U.S. government agencies 49,434
 29,960
 30,655
 9,307
 5,305
 1,115
 15,868
 50,120
 191,764
Home equity 353,310
 137,625
 76,564
 7,485
 137,024
 36,847
 52,291
 57,933
 859,079
Total residential mortgage $566,334
 $590,883
 $169,782
 $29,892
 $337,006
 $142,565
 $124,157
 $156,684
 $2,117,303
                   
Personal $321,875
 $491,363
 $11,948
 $11,048
 $81,496
 $70,531
 $54,136
 $74,985
 $1,117,382


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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)
  Sept. 30, 2019 June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018
Oklahoma:          
Commercial $3,690,100
 $3,762,234
 $3,551,054
 $3,491,117
 $3,609,109
Commercial real estate 679,786
 717,970
 665,190
 700,756
 651,315
Residential mortgage 1,370,452
 1,403,398
 1,417,381
 1,440,566
 1,429,843
Personal 383,246
 382,764
 374,807
 375,543
 376,201
Total Oklahoma 6,123,584
 6,266,366
 6,008,432
 6,007,982
 6,066,468
           
Texas:  
  
  
  
  
Commercial 6,220,227
 5,877,265
 5,754,018
 5,438,133
 5,115,646
Commercial real estate 1,292,116
 1,341,609
 1,344,810
 1,341,783
 1,354,679
Residential mortgage 273,931
 272,878
 265,927
 266,805
 253,265
Personal 475,430
 400,585
 396,794
 394,743
 381,452
Total Texas 8,261,704
 7,892,337
 7,761,549
 7,441,464
 7,105,042
           
New Mexico:  
  
  
  
  
Commercial 335,409
 350,520
 342,915
 340,489
 325,048
Commercial real estate 374,331
 385,058
 371,416
 383,670
 392,494
Residential mortgage 81,383
 82,390
 85,326
 87,346
 88,110
Personal 10,887
 10,236
 11,065
 10,662
 11,659
Total New Mexico 802,010
 828,204
 810,722
 822,167
 817,311
           
Arkansas:  
  
  
  
  
Commercial 87,588
 87,896
 79,286
 111,338
 102,237
Commercial real estate 158,538
 149,300
 142,551
 141,898
 106,701
Residential mortgage 7,509
 7,463
 7,731
 7,537
 7,278
Personal 10,905
 11,208
 11,550
 11,955
 12,126
Total Arkansas 264,540
 255,867
 241,118
 272,728
 228,342
           
Colorado:  
  
  
  
  
Commercial 2,247,798
 2,325,742
 2,231,703
 2,275,069
 1,132,500
Commercial real estate 975,066
 1,023,410
 957,348
 963,575
 354,543
Residential mortgage 224,872
 241,780
 241,722
 251,849
 68,694
Personal 78,733
 72,537
 65,812
 72,916
 56,999
Total Colorado 3,526,469
 3,663,469
 3,496,585
 3,563,409
 1,612,736
           
Arizona:  
  
  
  
  
Commercial 1,276,534
 1,330,415
 1,335,140
 1,320,139
 621,658
Commercial real estate 771,425
 761,243
 791,466
 889,903
 666,562
Residential mortgage 92,121
 91,684
 98,973
 97,959
 44,659
Personal 78,694
 76,335
 61,875
 68,546
 67,280
Total Arizona 2,218,774
 2,259,677
 2,287,454
 2,376,547
 1,400,159
           
Kansas/Missouri:  
  
  
  
  
Commercial 566,969
 602,836
 667,859
 659,793
 669,903
Commercial real estate 374,795
 331,443
 327,870
 343,228
 278,381
Residential mortgage 67,035
 71,229
 75,560
 77,971
 79,893
Personal 79,487
 84,224
 81,831
 91,441
 91,224
Total Kansas/Missouri 1,088,286
 1,089,732
 1,153,120
 1,172,433
 1,119,401
           
Total BOK Financial loans $22,285,367
 $22,255,652
 $21,758,980
 $21,656,730
 $18,349,459

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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)
  Sept. 30, 2019 June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018
Loan commitments $11,259,366
 $11,411,819
 $12,243,886
 $11,944,524
 $10,715,964
Standby letters of credit 712,944
 698,527
 720,451
 582,196
 671,844
Mortgage loans sold with recourse 92,139
 93,606
 94,938
 98,623
 101,512
Customer Derivative Programs
 
We offer programs that permit our customers to hedge various risks, including fluctuations in energy, cattle and other agricultural product prices, interest rates and foreign exchange rates. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and the Company. Offsetting contracts are executed between the Company and selected counterparties to minimize market risk due to changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to us as compensation for administrative costs, credit risk and profit.

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

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

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

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

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

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

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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 September 30, 2019 follows in Table 19.

Table 19 -- Fair Value of Derivative Contracts
(In thousands)
Customers $152,530
Banks and other financial institutions 146,466
Exchanges and clearing organizations 35,096
Fair value of customer risk management program asset derivative contracts, net $334,092
 
At September 30, 2019, our largest derivative exposure was to an exchange for energy contracts, net of cash margin, of $35 million.

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

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

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



- 25 -



Table 20 -- Summary of Loan Loss Experience
(In thousands)
  Three Months Ended
  Sept. 30, 2019 June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018
Allowance for loan losses:          
Beginning balance $202,534
 $205,340
 $207,457
 $210,569
 $215,142
Loans charged off:          
Commercial (9,875) (11,385) (10,468) (12,940) (9,602)
Commercial real estate 
 (118) 
 
 
Residential mortgage (56) (94) (42) (52) (91)
Personal (1,776) (1,630) (1,265) (1,523) (1,380)
Total (11,707) (13,227) (11,775) (14,515) (11,073)
Recoveries of loans previously charged off:          
Commercial 260
 434
 711
 1,267
 1,263
Commercial real estate 60
 4,345
 112
 232
 40
Residential mortgage 119
 149
 154
 71
 229
Personal 627
 575
 712
 598
 560
Total 1,066
 5,503
 1,689
 2,168
 2,092
Net loans recovered (charged off) (10,641) (7,724) (10,086) (12,347) (8,981)
Provision for loan losses 12,539
 4,918
 7,969
 9,235
 4,408
Ending balance $204,432
 $202,534
 $205,340
 $207,457
 $210,569
Accrual for off-balance sheet credit losses:          
Beginning balance $1,903
 $1,821
 $1,790
 $2,025
 $2,433
Provision for off-balance sheet credit losses (539) 82
 31
 (235) (408)
Ending balance $1,364
 $1,903
 $1,821
 $1,790
 $2,025
Total combined provision for credit losses $12,000
 $5,000
 $8,000
 $9,000
 $4,000
Allowance for loan losses to loans outstanding at period-end 0.92% 0.91% 0.94% 0.96% 1.15%
Net charge-offs (recoveries) (annualized) to average loans 0.19% 0.14% 0.19% 0.23% 0.20%
Total provision for credit losses (annualized) to average loans 0.21% 0.09% 0.15% 0.17% 0.09%
Recoveries to gross charge-offs 9.11% 41.60% 14.34% 14.94% 18.89%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments 0.01% 0.02% 0.01% 0.01% 0.02%
Combined allowance for credit losses to loans outstanding at period-end 0.92% 0.92% 0.95% 0.97% 1.16%
Allowance for Loan Losses

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

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

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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 $179 million at September 30, 2019, a $2.5 million decrease compared to June 30, 2019. A decrease in general allowances related to the commercial loan segment was partially offset by an increase in general allowances related to the personal loan segment.

Nonspecific allowances are maintained for risks beyond factors specific to a particular portfolio segment or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors. Nonspecific allowances totaled $18 million at September 30, 2019, a $918 thousand increase compared to June 30, 2019.

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

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

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

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

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

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

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Nonperforming Assets

Table 21 -- Nonperforming Assets
(In thousands)
  Sept. 30, 2019 June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018
Nonaccruing loans:          
Commercial $111,706
 $123,395
 $90,358
 $99,841
 $109,490
Commercial real estate 23,185
 21,670
 21,508
 21,621
 1,316
Residential mortgage 37,304
 38,477
 40,409
 41,555
 41,917
Personal 271
 237
 302
 230
 269
Total nonaccruing loans 172,466
 183,779
 152,577
 163,247
 152,992
Accruing renegotiated loans guaranteed by U.S. government agencies 92,718
 95,989
 91,787
 86,428
 83,347
Real estate and other repossessed assets 21,026
 16,940
 17,139
 17,487
 24,515
Total nonperforming assets $286,210
 $296,708
 $261,503
 $267,162
 $260,854
Total nonperforming assets excluding those guaranteed by U.S. government agencies $187,160
 $193,976
 $162,770
 $173,602
 $169,717
           
Nonaccruing loans by loan portfolio segment and class:      
  
Commercial:        
  
Energy $88,894
 $71,632
 $35,332
 $47,494
 $54,033
Manufacturing 8,741
 8,613
 9,548
 8,919
 9,202
Services 6,119
 10,087
 9,555
 8,567
 4,097
Healthcare 5,978
 16,148
 18,768
 16,538
 15,704
Wholesale/retail 1,504
 1,390
 1,425
 1,316
 9,249
Public finance 
 
 
 
 
Other commercial and industrial 470
 15,525
 15,730
 17,007
 17,205
Total commercial 111,706
 123,395
 90,358
 99,841
 109,490
           
Commercial real estate:        
  
Retail 20,132
 20,057
 20,159
 20,279
 777
Industrial 909
 
 
 
 
Office 855
 855
 855
 
 
Residential construction and land development 350
 350
 350
 350
 350
Multifamily 286
 275
 
 301
 
Other commercial real estate 653
 133
 144
 691
 189
Total commercial real estate 23,185
 21,670
 21,508
 21,621
 1,316
           
Residential mortgage:        
  
Permanent mortgage 20,165
 21,803
 22,937
 23,951
 22,855
Permanent mortgage guaranteed by U.S. government agencies 6,332
 6,743
 6,946
 7,132
 7,790
Home equity 10,807
 9,931
 10,526
 10,472
 11,272
Total residential mortgage 37,304
 38,477
 40,409
 41,555
 41,917
Personal 271
 237
 302
 230
 269
Total nonaccruing loans $172,466
 $183,779
 $152,577
 $163,247
 $152,992
           
           
Allowance for loan losses to nonaccruing loans1
 123.05% 114.40% 141.00% 132.89% 145.02%
Accruing loans 90 days or more past due1
 $1,541
 $2,698
 $610
 $1,338
 $518
1 
Excludes residential mortgages guaranteed by agencies of the U.S. Government.

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

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

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

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

Table 22 -- Rollforward of Nonperforming Assets
(In thousands)
  Three Months Ended
  September 30, 2019
  
 
Nonaccruing Loans
 
 
Renegotiated Loans
 Real Estate and Other Repossessed Assets Total Nonperforming Assets
Balance, June 30, 2019 $183,779
 $95,989
 $16,940
 $296,708
Additions 35,799
 9,371
 
 45,170
Payments (27,549) (765) 
 (28,314)
Charge-offs (11,707) 
 
 (11,707)
Net gains (losses) and write-downs 
 
 1,064
 1,064
Foreclosure of nonperforming loans (5,883) 
 5,883
 
Foreclosure of loans guaranteed by U.S. government agencies (967) (2,685) 
 (3,652)
Proceeds from sales 
 (9,508) (2,861) (12,369)
Return to accrual status 
 
 
 
Other, net 
 316
 
 316
Balance, September 30, 2019 $173,472
 $92,718
 $21,026
 $287,216

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  Nine Months Ended
  September 30, 2019
  
 
Nonaccruing Loans
 
 
Renegotiated Loans
 Real Estate and Other Repossessed Assets Total Nonperforming Assets
Balance, December 31, 2018 $163,247
 $86,428
 $17,487
 $267,162
Additions 115,602
 36,182
 
 151,784
Payments (56,852) (1,971) 
 (58,823)
Charge-offs (36,709) 
 
 (36,709)
Net gains (losses) and write-downs 
 
 901
 901
Foreclosure of nonperforming loans (8,489) 
 8,489
 
Foreclosure of loans guaranteed by U.S. government agencies (2,457) (8,103) 
 (10,560)
Proceeds from sales 
 (20,731) (5,851) (26,582)
Return to accrual status (1,876) 
 
 (1,876)
Other, net 
 913
 
 913
Balance, September 30, 2019 $172,466
 $92,718
 $21,026
 $286,210

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

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

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

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

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

Residential Mortgage and Personal

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

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


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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 increased $3.4 million in the third quarter to $8.4 million at September 30, 2019. Residential mortgage loans 60 to 89 days past due increased by $3.2 million. Personal loans past due 30 to 59 days decreased by $2.4 million and personal loans 60 to 89 days increased $6 thousand.

Table 23 -- Residential Mortgage and Personal Loans Past Due
(In thousands)
  September 30, 2019 June 30, 2019
  90 Days or More 60 to 89 Days 30 to 59 Days 90 Days or More 60 to 89 Days 30 to 59 Days
Residential mortgage:            
   Permanent mortgage1
 $
 $3,405
 $6,097
 $37
 $
 $3,641
Home equity 
 374
 2,282
 
 553
 1,380
Total residential mortgage $
 $3,779
 $8,379
 37
 $553
 $5,021
   
    
  
    
Personal $29
 $94
 $100
 $10
 $88
 $2,509
1 
Excludes past due residential mortgage loans guaranteed by agencies of the U.S. government.

Real Estate and Other Repossessed Assets

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

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


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Liquidity and Capital

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

Subsidiary Bank

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

Average deposits for the third quarter of 2019 totaled $25.7 billion, a $538 million increase over the second quarter of 2019. Interest-bearing transaction account balances increased $619 million and time deposits increased $44 million. Demand deposits decreased $124 million compared to the second quarter of 2019.
Table 24 - Average Deposits by Line of Business
(In thousands)
 Three Months Ended
 Sept. 30, 2019 Jun. 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018
Commercial Banking$10,833,057
 $10,724,206
 $8,261,543
 $8,393,016
 $8,633,204
Consumer Banking6,983,018
 6,998,677
 6,544,665
 6,542,188
 6,580,395
Wealth Management6,590,332
 6,220,848
 5,659,771
 5,483,455
 5,492,048
Subtotal24,406,407
 23,943,731
 20,465,979
 20,418,659
 20,705,647
Funds Management and other1,293,767
 1,218,645
 4,148,500
 4,676,736
 1,230,648
Total$25,700,174
 $25,162,376
 $24,614,479
 $25,095,395
 $21,936,295

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

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

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

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


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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)
  Sept. 30, 2019 June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018
Oklahoma:          
Demand $3,515,312
 $3,279,359
 $3,432,239
 $3,610,593
 $3,564,307
Interest-bearing:          
Transaction 7,447,799
 7,020,484
 6,542,548
 6,445,831
 6,010,972
Savings 308,103
 307,785
 309,875
 288,210
 288,080
Time 1,198,170
 1,253,804
 1,217,371
 1,118,643
 1,128,810
Total interest-bearing 8,954,072
 8,582,073
 8,069,794
 7,852,684
 7,427,862
Total Oklahoma 12,469,384
 11,861,432
 11,502,033
 11,463,277
 10,992,169
           
Texas:          
Demand 2,870,429
 2,974,005
 2,966,743
 3,291,433
 3,357,669
Interest-bearing:          
Transaction 2,589,511
 2,453,619
 2,385,305
 2,295,169
 2,182,114
Savings 100,597
 103,125
 101,849
 99,624
 97,909
Time 464,264
 425,253
 419,269
 423,880
 453,119
Total interest-bearing 3,154,372
 2,981,997
 2,906,423
 2,818,673
 2,733,142
Total Texas 6,024,801
 5,956,002
 5,873,166
 6,110,106
 6,090,811
           
New Mexico:          
Demand 645,698
 630,861
 662,362
 691,692
 722,188
Interest-bearing:          
Transaction 539,260
 557,881
 573,203
 571,347
 593,760
Savings 62,863
 62,636
 61,497
 58,194
 57,794
Time 236,135
 232,569
 228,212
 224,515
 221,513
Total interest-bearing 838,258
 853,086
 862,912
 854,056
 873,067
Total New Mexico 1,483,956
 1,483,947
 1,525,274
 1,545,748
 1,595,255
           
Arkansas:          
Demand 39,513
 29,176
 31,624
 36,800
 36,579
Interest-bearing:          
Transaction 149,506
 148,485
 147,964
 91,593
 128,001
Savings 1,747
 1,783
 1,785
 1,632
 1,826
Time 7,877
 7,810
 8,321
 8,726
 10,214
Total interest-bearing 159,130
 158,078
 158,070
 101,951
 140,041
Total Arkansas 198,643
 187,254
 189,694
 138,751
 176,620
           

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  Sept. 30, 2019 June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018
Colorado:          
Demand 1,694,044
 1,621,820
 1,897,547
 1,658,473
 593,442
Interest-bearing:          
Transaction 1,910,874
 1,800,271
 1,844,632
 1,899,203
 622,520
Savings 60,107
 57,263
 58,919
 57,289
 40,308
Time 273,622
 246,198
 261,235
 274,877
 217,628
Total interest-bearing 2,244,603
 2,103,732
 2,164,786
 2,231,369
 880,456
Total Colorado 3,938,647
 3,725,552
 4,062,333
 3,889,842
 1,473,898
           
Arizona:          
Demand 703,381
 700,480
 695,238
 707,402
 365,878
Interest-bearing:          
Transaction 599,655
 560,429
 621,735
 575,567
 130,105
Savings 12,487
 11,966
 12,144
 10,545
 3,559
Time 44,347
 43,099
 44,004
 43,051
 23,927
Total interest-bearing 656,489
 615,494
 677,883
 629,163
 157,591
Total Arizona 1,359,870
 1,315,974
 1,373,121
 1,336,565
 523,469
           
Kansas/Missouri:          
Demand 376,020
 431,856
 410,799
 418,199
 423,560
Interest-bearing:          
Transaction 284,940
 310,774
 361,590
 327,866
 322,747
Savings 11,689
 13,125
 13,815
 13,721
 13,125
Time 19,126
 19,205
 19,977
 19,688
 20,635
Total interest-bearing 315,755
 343,104
 395,382
 361,275
 356,507
Total Kansas/Missouri 691,775
 774,960
 806,181
 779,474
 780,067
Total BOK Financial deposits $26,167,076
 $25,305,121
 $25,331,802
 $25,263,763
 $21,632,289

In addition to deposits, liquidity is provided primarily by federal funds purchased, securities repurchase agreements and Federal Home Loan Bank borrowings. Federal funds purchased consist primarily of unsecured, overnight funds acquired from other financial institutions. Funds are primarily purchased from bankers’ banks and Federal Home Loan banks from across the country. The largest single source of wholesale federal funds purchased totaled $600 million at September 30, 2019. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short-term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and agency mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $8.1 billion during the quarter, compared to $7.2 billion in the second quarter of 2019.

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

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


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Table 26 -- Borrowed Funds
(In thousands)
    Three Months Ended
September 30, 2019
   Three Months Ended
June 30, 2019
  Sept. 30, 2019 
Average
Balance
During the
Quarter
 Rate 
Maximum
Outstanding
At Any Month
End During
the Quarter
 June 30, 2019 
Average
Balance
During the
Quarter
 Rate 
Maximum
Outstanding
At Any Month
End During
the Quarter
                 
Parent Company and Other Non-Bank Subsidiaries:
Other borrowings 8,132
 5,515
 3.54% $8,132
 5,578
 6,593
 3.22% 6,593
Subordinated debentures 275,909
 275,900
 5.48% $275,909
 275,892
 275,887
 5.53% 275,893
Total parent company and other non-bank subsidiaries 284,041
 281,415
 5.44%   281,470
 282,480
 5.47% 

                 
BOKF, NA:                
Funds purchased 3,030,691
 2,653,752
 2.25% 3,030,691
 1,975,086
 1,650,046
 2.46% 1,975,086
Repurchase agreements 382,360
 452,411
 0.58% 507,111
 356,861
 416,904
 0.56% 388,760
Other borrowings:                
Federal Home Loan Bank advances 6,800,000
 8,102,174
 2.41% 8,000,000
 7,800,000
 7,153,846
 2.65% 7,800,000
GNMA repurchase liability 10,419
 13,577
 4.53% 13,577
 14,499
 10,755
 4.44% 14,499
Other 3,783
 3,757
 5.82% 3,783
 3,732
 4,423
 4.62% 3,732
Total other borrowings 6,814,202
 8,119,508
 2.42% 

 7,818,231
 7,169,024
 2.67% 

Total BOKF, NA 10,227,253
 11,225,671
 2.30%   10,150,178
 9,235,974
 2.53%  
                 
Total other borrowed funds and subordinated debentures $10,511,294
 $11,507,086
 2.39%   $10,431,648
 $9,518,454
 2.62%  
BOKF, NA also has a liability related to the repurchase of certain delinquent residential mortgage loans previously sold in GNMA mortgage pools. Interest is payable monthly at rates contractually due to investors.

Parent Company

At September 30, 2019, cash and interest-bearing cash and cash equivalents held by the parent company totaled $185 million. The primary sources of liquidity for BOK Financial are cash on hand and dividends from BOKF, NA. Dividends from the bank are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the two preceding years. Dividends are further restricted by minimum capital requirements. At September 30, 2019, based upon the most restrictive limitations as well as management's internal capital policy, BOKF, NA could declare up to $151 million of dividends without regulatory approval. Dividend constraints may be alleviated through increases in retained earnings, capital issuances or changes in risk weighted assets. Future losses or increases in required regulatory capital at the bank could affect its ability to pay dividends to the parent company.

Our equity capital at September 30, 2019 was $4.8 billion, a $119 million increase over June 30, 2019. Net income less cash dividends paid increased equity $107 million during the third quarter of 2019. Changes in interest rates resulted in a $35 million increase in accumulated other comprehensive gain over June 30, 2019. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings including expected benefits from lower federal income tax rates, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt or perpetual preferred stock issuance, share repurchase and stock and cash dividends.


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

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

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

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

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

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

Table 27 -- Capital Ratios
  Minimum Capital Requirement Capital Conservation Buffer Minimum Capital Requirement Including Capital Conservation Buffer Sept. 30, 2019 June 30, 2019 Sept. 30, 2018
Risk-based capital:            
Common equity Tier 1 4.50% 2.50% 7.00% 11.06% 10.84% 12.07%
Tier 1 capital 6.00% 2.50% 8.50% 11.06% 10.84% 12.07%
Total capital 8.00% 2.50% 10.50% 12.56% 12.34% 13.37%
Tier 1 Leverage 4.00% N/A
 4.00% 8.41% 8.75% 9.90%
             
Average total equity to average assets       10.97% 11.26% 10.73%
Tangible common equity ratio       8.72% 8.69% 9.55%

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

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


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Table 28 -- Non-GAAP Measure
(Dollars in thousands)
  Sept. 30, 2019 June 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018
Tangible common equity ratio:          
Total shareholders' equity $4,829,016
 $4,709,438
 $4,522,873
 $4,432,109
 $3,615,032
Less: Goodwill and intangible assets, net 1,172,411
 1,172,564
 1,177,573
 1,184,112
 480,800
Tangible common equity 3,656,605
 3,536,874
 3,345,300
 3,247,997
 3,134,232
Total assets 43,127,205
 41,893,073
 39,882,962
 38,020,504
 33,289,864
Less: Goodwill and intangible assets, net 1,172,411
 1,172,564
 1,177,573
 1,184,112
 480,800
Tangible assets $41,954,794
 $40,720,509
 $38,705,389
 $36,836,392
 $32,809,064
Tangible common equity ratio 8.72% 8.69% 8.64% 8.82% 9.55%

Off-Balance Sheet Arrangements

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

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

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

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

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

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

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

Table 29 -- Interest Rate Sensitivity
(Dollars in thousands)
  200 bp Increase 
100 bp Decrease1
  September 30, September 30,
  2019 2018 2019 2018
Anticipated impact over the next twelve months on net interest revenue $(20,916) $979
 $(28,509) $(36,275)
  (1.89)% 0.10% (2.57)% (3.65)%
1 The results of a 200 basis point decrease in interest rates in the low-rate environment are not meaningful, therefore we will instead report the effect of a 100 basis point decrease in interest rates.

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

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

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


Table 30 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
  September 30,
  2019 2018
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp
MSR Asset $33,176
 $(42,387) $14,068
 $(23,080)
MSR Hedge (41,744) 39,600
 (21,712) 19,921
Net Exposure (8,568) (2,787) (7,644) (3,159)


- 38 -



Trading Activities

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

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

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

Table 31 -- Mortgage Pipeline Sensitivity Analysis
(Dollars in thousands)
  Three Months Ended
September 30,
 Nine Months Ended September 30,
  2019 2018 2019 2018
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp Up 50 bp Down 50 bp Up 50 bp Down 50 bp
Average1
 $(84) $(171) $156
 $(655) $(97) $(382) $335
 $(841)
Low2
 528
 293
 596
 (347) 528
 330
 2,077
 699
High3
 (411) (478) (101) (1,025) (664) (1,343) (1,015) (2,447)
Period End 25
 (164) 139
 (601) 25
 (164) 139
 (601)
1 
Average represents the simple average of each daily value observed during the reporting period.
2 
Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 
High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.

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

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

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

- 39 -




Table 32 -- Trading Sensitivity Analysis
(Dollars in thousands)
  Three Months Ended
September 30,
 Nine Months Ended September 30,
  2019 2018 2019 2018
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp Up 50 bp Down 50 bp Up 50 bp Down 50 bp
Average1
 $(1,244) $1,361
 $(897) $(55) $(1,800) $1,820
 $(1,329) $714
Low2
 2,939
 3,065
 2,041
 3,447
 2,939
 5,378
 2,041
 4,423
High3
 (3,359) (4,747) (4,005) (3,463) (5,153) (4,747) (4,534) (3,463)
Period End (1,719) 1,371
 (2,116) 1,573
 (1,719) 1,371
 (2,116) 1,573
1 
Average represents the simple average of each daily value observed during the reporting period.
2 
Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 
High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.

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


- 40 -



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

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

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

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



- 41 -



     
Consolidated Statements of Earnings (Unaudited)        
(In thousands, except share and per share data) Three Months Ended Nine Months Ended
  September 30, September 30,
Interest revenue 2019 2018 2019 2018
Loans $286,694
 $218,732
 $859,898
 $617,517
Residential mortgage loans held for sale 1,891
 2,151
 5,308
 6,328
Trading securities 14,452
 17,295
 48,645
 38,021
Investment securities 3,221
 3,598
 10,160
 11,118
Available for sale securities 67,633
 48,917
 184,344
 142,303
Fair value option securities 10,708
 3,881
 23,448
 12,627
Restricted equity securities 7,558
 5,232
 20,419
 15,757
Interest-bearing cash and cash equivalents 3,050
 3,441
 9,879
 19,163
Total interest revenue 395,207
 303,247
 1,162,101
 862,834
Interest expense  
  
  
  
Deposits 46,917
 24,535
 127,517
 63,717
Borrowed funds 65,381
 35,804
 180,595
 93,860
Subordinated debentures 3,813
 2,025
 11,359
 6,076
Total interest expense 116,111
 62,364
 319,471
 163,653
Net interest revenue 279,096
 240,883
 842,630
 699,181
Provision for credit losses 12,000
 4,000
 25,000
 (1,000)
Net interest revenue after provision for credit losses 267,096
 236,883
 817,630
 700,181
Other operating revenue  
  
  
  
Brokerage and trading revenue 43,840
 23,086
 115,983
 80,222
Transaction card revenue 22,015
 21,396
 64,668
 63,361
Fiduciary and asset management revenue 43,621
 57,514
 132,004
 141,038
Deposit service charges and fees 28,837
 27,765
 85,154
 82,760
Mortgage banking revenue 30,180
 23,536
 82,145
 75,907
Other revenue 17,626
 12,900
 42,825
 39,781
Total fees and commissions 186,119
 166,197
 522,779
 483,069
Other gains, net 4,544
 2,754
 11,000
 6,040
Gain (loss) on derivatives, net 3,778
 (2,847) 19,595
 (11,589)
Gain (loss) on fair value option securities, net 4,597
 (4,385) 24,115
 (25,290)
Change in fair value of mortgage servicing rights (12,593) 5,972
 (62,814) 28,901
Gain (loss) on available for sale securities, net 5
 250
 1,110
 (802)
Total other operating revenue 186,450
 167,941
 515,785
 480,329
Other operating expense  
  
  
  
Personnel 162,573
 143,531
 492,143
 422,425
Business promotion 8,859
 7,620
 26,875
 21,316
Charitable contributions to BOKF Foundation 
 
 1,000
 
Professional fees and services 12,312
 13,209
 41,453
 38,387
Net occupancy and equipment 27,558
 23,394
 83,959
 70,201
Insurance 4,220
 6,232
 15,513
 19,070
Data processing and communications 31,915
 31,665
 93,099
 87,221
Printing, postage and supplies 3,825
 3,837
 12,817
 11,937
Net losses and operating expenses of repossessed assets 1,728
 4,044
 4,304
 14,471
Amortization of intangible assets 5,064
 1,603
 15,393
 4,289
Mortgage banking costs 14,975
 11,741
 36,426
 34,780
Other expense 6,263
 5,741
 20,604
 19,426
Total other operating expense 279,292
 252,617
 843,586
 743,523
Net income before taxes 174,254
 152,207
 489,829
 436,987
Federal and state income taxes 32,396
 34,662
 99,926
 98,940
Net income 141,858
 117,545
 389,903
 338,047
Net income (loss) attributable to non-controlling interests (373) 289
 (503) 857
Net income attributable to BOK Financial Corporation shareholders $142,231
 $117,256
 $390,406
 $337,190
Earnings per share:  
  
  
  
Basic $2.00
 $1.79
 $5.47
 $5.15
Diluted $2.00
 $1.79
 $5.47
 $5.15
Average shares used in computation:        
Basic 70,596,307
 64,901,095
 70,953,544
 64,883,319
Diluted 70,609,924
 64,934,351
 70,968,845
 64,919,728
Dividends declared per share $0.50
 $0.50
 $1.50
 $1.40

See accompanying notes to consolidated financial statements.

- 42 -



Consolidated Statements of Comprehensive Income (Unaudited)    
(In thousands, except share and per share data)        
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2019 2018 2019 2018
Net income $141,858
 $117,545
 $389,903
 $338,047
Other comprehensive income (loss) before income taxes:        
Net change in unrealized gain (loss) 46,285
 (35,941) 274,441
 (166,464)
Reclassification adjustments included in earnings:        
Loss (gain) on available for sale securities, net (5) (250) (1,110) 802
Other comprehensive income (loss) before income taxes 46,280
 (36,191) 273,331
 (165,662)
Federal and state income taxes 11,096
 (9,134) 66,993
 (42,183)
Other comprehensive income (loss), net of income taxes 35,184

(27,057)
206,338

(123,479)
Comprehensive income 177,042
 90,488
 596,241
 214,568
Comprehensive income (loss) attributable to non-controlling interests (373) 289
 (503) 857
Comprehensive income attributable to BOK Financial Corp. shareholders $177,415
 $90,199
 $596,744
 $213,711

See accompanying notes to consolidated financial statements.

- 43 -



Consolidated Balance Sheets
(In thousands, except share data)
  Sept. 30, 2019 Dec. 31, 2018
  (Unaudited) (Footnote 1)
Assets    
Cash and due from banks $761,130
 $741,749
Interest-bearing cash and cash equivalents 465,458
 401,675
Trading securities 1,675,212
 1,956,923
Investment securities (fair value:  September 30, 2019 – $324,021; December 31, 2018 – $367,298)
 304,224
 355,187
Available for sale securities 11,024,551
 8,857,120
Fair value option securities 1,816,398
 283,235
Restricted equity securities 479,018
 344,447
Residential mortgage loans held for sale 282,487
 149,221
Loans 22,285,367
 21,656,730
Allowance for loan losses (204,432) (207,457)
Loans, net of allowance 22,080,935
 21,449,273
Premises and equipment, net 516,597
 330,033
Receivables 219,420
 204,960
Goodwill 1,048,091
 1,049,263
Intangible assets, net 124,320
 134,849
Mortgage servicing rights 193,661
 259,254
Real estate and other repossessed assets, net of allowance (September 30, 2019 – $11,278; December 31, 2018 – $13,665)
 21,026
 17,487
Derivative contracts, net 352,019
 320,929
Cash surrender value of bank-owned life insurance 387,035
 381,608
Receivable on unsettled securities sales 904,630
 336,400
Other assets 470,993
 446,891
Total assets $43,127,205
 $38,020,504
     
Liabilities and Equity    
Liabilities:    
Noninterest-bearing demand deposits $9,844,397
 $10,414,592
Interest-bearing deposits:  
  
Transaction 13,521,545
 12,206,576
Savings 557,593
 529,215
Time 2,243,541
 2,113,380
Total deposits 26,167,076
 25,263,763
Funds purchased and repurchase agreements 3,413,051
 1,018,411
Other borrowings 6,822,334
 6,124,390
Subordinated debentures 275,909
 275,913
Accrued interest, taxes and expense 218,775
 192,826
Derivative contracts, net 336,791
 362,306
Due on unsettled securities purchases 703,448
 156,370
Other liabilities 352,156
 183,480
Total liabilities 38,289,540
 33,577,459
Shareholders' equity:  
  
Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: September 30, 2019 – 75,757,009; December 31, 2018 – 75,711,492)
 5
 5
Capital surplus 1,346,730
 1,334,030
Retained earnings 3,655,590
 3,369,654
Treasury stock (shares at cost:  September 30, 2019 – 4,898,999; December 31, 2018 – 3,588,560)
 (307,062) (198,995)
Accumulated other comprehensive gain (loss) 133,753
 (72,585)
Total shareholders’ equity 4,829,016
 4,432,109
Non-controlling interests 8,649
 10,936
Total equity 4,837,665
 4,443,045
Total liabilities and equity $43,127,205
 $38,020,504

See accompanying notes to consolidated financial statements.

- 44 -



Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 Common Stock 
Capital
Surplus
 
Retained
Earnings
 Treasury Stock Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interests
 Total Equity
 Shares Amount   Shares Amount   
Balance, June 30, 201975,756
 $5
 $1,343,082
 $3,548,907
 4,562
 $(281,125) $98,569
 $4,709,438
 $9,037
 $4,718,475
Net income (loss)
 
 
 142,231
 
 
 
 142,231
 (373) 141,858
Other comprehensive income
 
 
 
 
 
 35,184
 35,184
 
 35,184
Repurchase of common stock
 
 
 
 337
 (25,937) 
 (25,937) 
 (25,937)
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
Stock options exercised3
 
 177
 
 
 
 
 177
 
 177
Non-vested shares awarded, net(2) 
 
 
 
 
 
 
 
 
Vesting of non-vested shares
 
 
 
 
 
 
 
 
 
Share-based compensation
 
 3,471
 
 
 
 
 3,471
 
 3,471
Cash dividends on common stock
 
 
 (35,548) 
 
 
 (35,548) 
 (35,548)
Capital calls and distributions, net
 
 
 
 
 
 
 
 (15) (15)
Balance, September 30, 201975,757
 $5
 $1,346,730
 $3,655,590
 4,899
 $(307,062) $133,753
 $4,829,016
 $8,649
 $4,837,665
                    
Balance, December 31, 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)
 
 
 390,406
 
 
 
 390,406
 (503) 389,903
Other comprehensive income
 
 
 
 
 
 206,338
 206,338
 
 206,338
Repurchase of common stock
 
 
 
 1,292
 (106,639) 
 (106,639) 
 (106,639)
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
Stock options exercised21
 
 1,080
 
 
 
 
 1,080
 
 1,080
Non-vested shares awarded, net25
 
 
 
 
 
 
 
 
 
Vesting of non-vested shares
 
 
 
 18
 (1,428) 
 (1,428) 
 (1,428)
Share-based compensation
 
 11,620
 
 
 
 
 11,620
 
 11,620
Cash dividends on common stock
 
 
 (107,332) 
 
 
 (107,332) 
 (107,332)
Capital calls and distributions, net
 
 
 
 
 
 
 
 (1,784) (1,784)
Balance, September 30, 201975,757
 $5
 $1,346,730
 $3,655,590
 4,899
 $(307,062) $133,753
 $4,829,016
 $8,649
 $4,837,665
                    
Balance, June 30, 201875,314
 $4
 $1,040,202
 $3,212,653
 9,874
 $(564,123) $(135,305) $3,553,431
 $22,614
 $3,576,045
Net income (loss)
 
 
 117,256
 
 
 
 117,256
 289
 117,545
Other comprehensive income
 
 
 
 
 
 (27,057) (27,057) 
 (27,057)
Repurchase of common stock
 
 
 
 
 
 
 
 
 
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
Stock options exercised3
 
 134
 
 
 
 
 134
 
 134
Non-vested shares awarded, net(8) 
 
 
 
 
 
 
 
 
Vesting of non-vested shares
 
 
 
 
 
 
 
 
 
Share-based compensation
 
 4,094
 
 
 
 
 4,094
 
 4,094
Cash dividends on common stock
 
 
 (32,826) 
 
 
 (32,826) 
 (32,826)
Capital calls and distributions, net
 
 
 
 
 
 
 
 (12,175) (12,175)
Balance, September 30, 201875,309
 $4
 $1,044,430
 $3,297,083
 9,874
 $(564,123) $(162,362) $3,615,032
 $10,728
 $3,625,760
                    
Balance, December 31, 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 (loss)
 
 
 337,190
 
 
 
 337,190
 857
 338,047
Other comprehensive income
 
 
 
 
 
 (123,479) (123,479) 
 (123,479)
Repurchase of common stock
 
 
 
 90
 (8,408) 
 (8,408) 
 (8,408)
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
Stock options exercised49
 
 2,560
 
 
 
 
 2,560
 
 2,560
Non-vested shares awarded, net112
 
 
 
 
 
 
 
 
 
Vesting of non-vested shares
 
 
 
 31
 (2,870) 
 (2,870) 
 (2,870)
Share-based compensation
 
 5,975
 
 
 
 
 5,975
 
 5,975
Cash dividends on common stock
 
 
 (91,303) 
 
 
 (91,303) 
 (91,303)
Capital calls and distributions, net
 
 
 
 
 
 
 
 (13,096) (13,096)
Balance, September 30, 201875,309
 $4
 $1,044,430
 $3,297,083
 9,874
 $(564,123) $(162,362) $3,615,032
 $10,728
 $3,625,760

- 45 -




See accompanying notes to consolidated financial statements.

- 46 -



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

 Nine Months Ended
  September 30,
  2019 2018
Cash Flows From Operating Activities:    
Net income $389,903
 $338,047
Adjustments to reconcile net income to net cash used in operating activities:    
Provision for credit losses 25,000
 (1,000)
Change in fair value of mortgage servicing rights due to market changes 62,814
 (28,901)
Change in the fair value of mortgage servicing rights due to principal payments 27,600
 25,783
Net unrealized losses (gains) from derivative contracts (25,306) 3,309
Share-based compensation 11,620
 5,975
Depreciation and amortization 69,762
 41,999
Net amortization of discounts and premiums (16,648) 19,001
Net losses (gains) on financial instruments and other losses (gains), net (2,656) 5,581
Net gain on mortgage loans held for sale (25,803) (26,242)
Mortgage loans originated for sale (2,170,287) (2,093,860)
Proceeds from sale of mortgage loans held for sale 2,070,572
 2,165,989
Capitalized mortgage servicing rights (24,821) (28,688)
Change in trading and fair value option securities (1,251,759) (848,409)
Change in receivables (613,872) (249,347)
Change in other assets 12,981
 (15,157)
Change in accrued interest, taxes and expense (15,600) 66,697
Change in other liabilities 419,982
 229,815
Net cash used in operating activities (1,056,518) (389,408)
Cash Flows From Investing Activities:  
  
Proceeds from maturities or redemptions of investment securities 49,621
 89,099
Proceeds from maturities or redemptions of available for sale securities 1,267,190
 1,208,373
Purchases of investment securities 
 (4,218)
Purchases of available for sale securities (3,802,635) (1,404,291)
Proceeds from sales of available for sale securities 628,385
 232,826
Change in amount receivable on unsettled available for sale securities transactions 29,010
 67,775
Loans originated, net of principal collected (590,196) (1,187,762)
Net payments on derivative asset contracts 40,922
 (39,485)
Acquisitions, net of cash acquired 
 (13,870)
Proceeds from disposition of assets 127,476
 265,786
Purchases of assets (308,630) (250,447)
Net cash used in investing activities (2,558,857) (1,036,214)
Cash Flows From Financing Activities:  
  
Net change in demand deposits, transaction deposits and savings accounts 773,152
 (406,446)
Net change in time deposits 129,980
 (22,570)
Net change in other borrowed funds 3,027,298
 1,035,549
Net proceeds on derivative liability contracts (43,932) 42,883
Net change in derivative margin accounts (85,468) (46,390)
Change in amount due on unsettled available for sale securities transactions 111,828
 (148,190)
Issuance of common and treasury stock, net (348) (310)
Repurchase of common stock (106,639) (8,408)
Dividends paid (107,332) (91,303)
Net cash provided by financing activities 3,698,539
 354,815
Net increase (decrease) in cash and cash equivalents 83,164
 (1,070,807)
Cash and cash equivalents at beginning of period 1,143,424
 2,317,054
Cash and cash equivalents at end of period $1,226,588
 $1,246,247
     
Supplemental Cash Flow Information:    
Cash paid for interest $316,481
 $163,381
Cash paid for taxes $77,912
 $77,373
Net loans and bank premises transferred to repossessed real estate and other assets $8,489
 $9,513
Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period $65,286
 $70,814
Conveyance of other real estate owned guaranteed by U.S. government agencies $22,449
 $32,206
Right-of-use assets obtained in exchange for operating lease liabilities $58,766
 $
See accompanying notes to consolidated financial statements.

- 47 -



Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

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

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

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

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

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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

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

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

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

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

- 48 -



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

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

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

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

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

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

- 49 -



(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities are as follows (in thousands):
 
  September 30, 2019 December 31, 2018
  Fair Value Net Unrealized Gain (Loss) Fair Value Net Unrealized Gain (Loss)
U.S. government agency debentures $63,334
 $23
 $63,765
 $254
Residential agency mortgage-backed securities 1,480,458
 3,851
 1,791,584
 9,966
Municipal and other tax-exempt securities 44,105
 (99) 34,507
 (1)
Asset-backed securities 36,928
 50
 42,656
 685
Other debt securities 50,387
 116
 24,411
 65
Total trading securities $1,675,212
 $3,941
 $1,956,923
 $10,969

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

  September 30, 2019
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
Municipal and other tax-exempt $104,418
 $107,647
 $3,247
 $(18)
Residential agency mortgage-backed securities 11,125
 11,650
 528
 (3)
Other debt securities 188,681
 204,724
 16,457
 (414)
Total investment securities $304,224
 $324,021
 $20,232
 $(435)

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




- 50 -



The amortized cost and fair values of investment securities at September 30, 2019, by contractual maturity, are as shown in the following table (dollars in thousands):
  
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 Total 
Weighted
Average
Maturity1
Fixed maturity debt securities:  
  
  
  
  
  
Amortized cost $42,266
 $93,139
 $145,046
 $12,648
 $293,099
 5.16
Fair value 42,426
 96,704
 160,698
 12,543
 312,371
  
Residential mortgage-backed securities:  
  
  
  
  
  
Amortized cost  
  
  
  
 $11,125
 
2 
Fair value  
  
  
  
 11,650
  
Total investment securities:  
  
  
  
  
  
Amortized cost  
  
  
  
 $304,224
  
Fair value  
  
  
  
 324,021
  
1 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
2 
The average expected lives of residential mortgage-backed securities were 4.5 years based upon current prepayment assumptions.

Temporarily Impaired Investment Securities
(in thousands):
  September 30, 2019
  Number of Securities Less Than 12 Months 12 Months or Longer Total
   
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:              
Municipal and other tax-exempt 18
 $10,302
 $3
 $2,213
 $15
 $12,515
 $18
Residential agency mortgage-backed securities 1
 2,318
 3
 
 
 2,318
 3
Other debt securities 18
 275
 1
 10,897
 413
 11,172
 414
Total investment securities 37
 $12,895
 $7
 $13,110
 $428
 $26,005
 $435

  December 31, 2018
  Number of Securities Less Than 12 Months 12 Months or Longer Total
   
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:              
Municipal and other tax-exempt 72
 $18,255
 $69
 $66,141
 $523
 $84,396
 $592
Residential agency mortgage-backed securities 2
 
 
 5,633
 135
 5,633
 135
Other debt securities 72
 13,372
 64
 23,028
 1,506
 36,400
 1,570
Total investment securities 146
 $31,627
 $133
 $94,802
 $2,164
 $126,429
 $2,297




- 51 -



Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
  September 30, 2019
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
U.S. Treasury $2,294
 $2,296
 $2
 $
Municipal and other tax-exempt 1,772
 1,848
 76
 
Mortgage-backed securities:  
  
  
  
Residential agency 7,636,923
 7,740,461
 114,646
 (11,108)
Residential non-agency 28,814
 44,803
 15,989
 
Commercial agency 3,176,188
 3,234,671
 61,003
 (2,520)
Other debt securities 500
 472
 
 (28)
Total available for sale securities $10,846,491
 $11,024,551
 $191,716
 $(13,656)

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


The amortized cost and fair values of available for sale securities at September 30, 2019, by contractual maturity, are as shown in the following table (dollars in thousands):
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 Total 
Weighted
Average
Maturity1
Fixed maturity debt securities:           
Amortized cost$35,845
 $1,069,415
 $1,476,121
 $599,373
 $3,180,754
 8.29
Fair value35,806
 1,081,571
 1,512,308
 609,602
 3,239,287
  
Residential mortgage-backed securities:           
Amortized cost        $7,665,737
 
2 
Fair value        7,785,264
  
Total available-for-sale securities:           
Amortized cost        $10,846,491
  
Fair value        11,024,551
  
1 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
2 
The average expected lives of residential mortgage-backed securities were 4.0 years based upon current prepayment assumptions.


- 52 -



Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 Three Months Ended
September 30,
 Nine Months Ended September 30,
 2019 2018 2019 2018
Proceeds$261,028
 $45,293
 $628,385
 $232,826
Gross realized gains989
 250
 7,316
 700
Gross realized losses(984) 
 (6,206) (1,502)
Related federal and state income tax expense (benefit)1
 64
 282
 (204)


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

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

 

Residential agency 108

931,248

3,260

753,448

7,848

1,684,696

11,108
Commercial agency 57
 449,798
 1,612
 224,409
 908
 674,207
 2,520
Other debt securities 1
 
 
 472
 28
 472
 28
Total available for sale securities 166
 $1,381,046

$4,872

$978,329

$8,784

$2,359,375

$13,656


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

 

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

 

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

$1,615

$5,631,803

$136,642

$6,331,867

$138,257


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



- 53 -



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

The fair value and net unrealized gain (loss) included in fair value option securities is as follows (in thousands):
  September 30, 2019 December 31, 2018
  Fair Value Net Unrealized Gain (Loss) Fair Value Net Unrealized Gain (Loss)
U.S. Treasury $552,536
 $927
 $
 $
Residential agency mortgage-backed securities 1,263,862
 18,588
 283,235
 2,766
Total $1,816,398
 $19,515
 $283,235
 $2,766



- 54 -



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

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

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

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

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

Internal Risk Management Programs
 
BOK Financial may use derivative contracts in managing its interest rate sensitivity, as part of its economic hedge of the change in the fair value of mortgage servicing rights and to mitigate the market risk of holding trading securities. Changes in the fair value of derivative instruments used in managing interest rate sensitivity and as part of the economic hedge of changes in the fair value of mortgage servicing rights are included in Other operating revenue – Gain (loss) on derivatives, net in the Consolidated Statements of Earnings.
As discussed in Note 6, certain derivative contracts not designated as hedging instruments related to mortgage loan commitments and forward sales contracts are included in Residential mortgage loans held for sale on the Consolidated Balance Sheets. See Note 6 for additional discussion of notional, fair value and impact on earnings of these contracts.

- 55 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2019 (in thousands):
  Assets
  
Notional1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $
 $
 $
 $
 $
 $
Interest rate swaps 2,399,788
 67,157
 (240) 66,917
 (277) 66,640
Energy contracts 1,980,406
 183,204
 (59,139) 124,065
 (66,149) 57,916
Agricultural contracts 15,538
 470
 (302) 168
 
 168
Foreign exchange contracts 209,515
 206,914
 
 206,914
 
 206,914
Equity option contracts 82,860
 3,114
 
 3,114
 (660) 2,454
Total customer risk management programs 4,688,107
 460,859
 (59,681) 401,178
 (67,086) 334,092
Trading 73,658,685
 205,188
 (193,306) 11,882
 
 11,882
Internal risk management programs 433,804
 9,037
 (2,992) 6,045
 
 6,045
Total derivative contracts $78,780,596
 $675,084
 $(255,979) $419,105
 $(67,086) $352,019
             
  Liabilities
  Notional¹ Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $
 $
 $
 $
 $
 $
Interest rate swaps 2,399,788
 67,296
 (240) 67,056
 (61,563) 5,493
Energy contracts 1,936,369
 175,613
 (59,139) 116,474
 (784) 115,690
Agricultural contracts 15,547
 451
 (302) 149
 
 149
Foreign exchange contracts 200,347
 197,807
 
 197,807
 (433) 197,374
Equity option contracts 82,860
 3,114
 
 3,114
 
 3,114
Total customer risk management programs 4,634,911
 444,281
 (59,681) 384,600
 (62,780) 321,820
Trading 75,247,769
 207,542
 (193,306) 14,236
 
 14,236
Internal risk management programs 483,370
 5,435
 (2,992) 2,443
 (1,708) 735
Total derivative contracts $80,366,050
 $657,258
 $(255,979) $401,279
 $(64,488) $336,791
1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.



- 56 -



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

  Assets
  
Notional 1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $10,671,151
 $92,231
 $(26,787) $65,444
 $
 $65,444
Interest rate swaps 1,924,131
 36,112
 (6,688) 29,424
 (7,934) 21,490
Energy contracts 1,472,209
 206,418
 (60,983) 145,435
 (106,752) 38,683
Agricultural contracts 21,210
 842
 (201) 641
 
 641
Foreign exchange contracts 184,990
 183,759
 
 183,759
 
 183,759
Equity option contracts 89,085
 2,021
 
 2,021
 (648) 1,373
Total customer risk management programs 14,362,776
 521,383
 (94,659) 426,724
 (115,334) 311,390
Trading 15,356,909
 45,346
 (39,521) 5,825
 
 5,825
Internal risk management programs 553,079
 5,064
 (1,350) 3,714
 
 3,714
Total derivative contracts $30,272,764
 $571,793
 $(135,530) $436,263
 $(115,334) $320,929
             
  Liabilities
  
Notional 1
 Gross Fair Value Netting Adjustments Net Fair Value Before Cash Collateral Cash Collateral Fair Value Net of Cash Collateral
Customer risk management programs:            
Interest rate contracts            
To-be-announced residential mortgage-backed securities $10,558,151
 $90,388
 $(26,787) $63,601
 $(63,596) $5
Interest rate swaps 1,924,131
 36,288
 (6,688) 29,600
 (4,110) 25,490
Energy contracts 1,434,247
 202,494
 (60,983) 141,511
 (1,490) 140,021
Agricultural contracts 21,214
 812
 (201) 611
 
 611
Foreign exchange contracts 177,423
 175,922
 
 175,922
 
 175,922
Equity option contracts 89,085
 2,021
 
 2,021
 
 2,021
Total customer risk management programs 14,204,251
 507,925
 (94,659) 413,266
 (69,196) 344,070
Trading 19,374,294
 56,983
 (39,521) 17,462
 
 17,462
Internal risk management programs 260,348
 9,439
 (1,350) 8,089
 (7,315) 774
Total derivative contracts $33,838,893
 $574,347
 $(135,530) $438,817
 $(76,511) $362,306
1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.


- 57 -



The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):
  Three Months Ended
  September 30, 2019 September 30, 2018
  
Brokerage
and Trading Revenue
 Gain (Loss) on Derivatives, Net 
Brokerage
and Trading
Revenue
 Gain (Loss)on Derivatives, Net
Customer risk management programs:        
Interest rate contracts        
To-be-announced residential mortgage-backed securities $1,667
 $
 $7,272
 $
Interest rate swaps 1,252
 
 618
 
Energy contracts 1,611
 
 541
 
Agricultural contracts 16
 
 6
 
Foreign exchange contracts 138
 
 78
 
Equity option contracts 
 
 
 
Total customer risk management programs 4,684
 
 8,515
 
Trading 3,630
 
 6,124
 
Internal risk management programs 
 3,778
 
 (2,847)
Total derivative contracts $8,314
 $3,778
 $14,639
 $(2,847)


  Nine Months Ended
  September 30, 2019 September 30, 2018
  
Brokerage
and Trading Revenue
 Gain (Loss) on Derivatives, Net 
Brokerage
and Trading
Revenue
 Gain (Loss) on Derivatives, Net
Customer risk management programs:        
Interest rate contracts        
To-be-announced residential mortgage-backed securities $9,579
 $
 $21,677
 $
Interest rate swaps 2,787
 
 2,057
 
Energy contracts 3,923
 
 5,097
 
Agricultural contracts 24
 
 36
 
Foreign exchange contracts 392
 
 350
 
Equity option contracts 
 
 
 
Total customer risk management programs 16,705
 
 29,217
 
Trading 4,365
 
 3,260
 
Internal risk management programs 
 19,595
 
 (11,589)
Total derivative contracts $21,070
 $19,595
 $32,477
 $(11,589)



- 58 -



(4) Loans and Allowances for Credit Losses

Loans

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

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

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

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

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

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

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

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


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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):

  September 30, 2019 December 31, 2018
  
Fixed
Rate
 
Variable
Rate
 Non-accrual Total 
Fixed
Rate
 
Variable
Rate
 Non-accrual Total
Commercial $3,184,237
 $11,128,682
 $111,706
 $14,424,625
 $2,251,188
 $11,285,049
 $99,841
 $13,636,078
Commercial real estate 1,070,050
 3,532,822
 23,185
 4,626,057
 1,477,274
 3,265,918
 21,621
 4,764,813
Residential mortgage 1,690,286
 389,713
 37,304
 2,117,303
 1,830,224
 358,254
 41,555
 2,230,033
Personal 191,827
 925,284
 271
 1,117,382
 190,687
 834,889
 230
 1,025,806
Total $6,136,400
 $15,976,501
 $172,466
 $22,285,367
 $5,749,373
 $15,744,110
 $163,247
 $21,656,730
Accruing loans past due (90 days)1
  
  
  
 $1,541
  
  
  
 $1,338
1 
Excludes residential mortgage loans guaranteed by agencies of the U.S. government
         


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

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

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

Allowances for Credit Losses

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

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

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


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

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

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

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


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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 September 30, 2019 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Residential Mortgage Personal Nonspecific Allowance Total
Allowance for loan losses:            
Beginning balance $106,397
 $54,188
 $15,724
 $9,388
 $16,837
 $202,534
Provision for loan losses 9,861
 102
 (253) 1,911
 918
 12,539
Loans charged off (9,875) 
 (56) (1,776) 
 (11,707)
Recoveries 260
 60
 119
 627
 
 1,066
Ending balance $106,643
 $54,350
 $15,534
 $10,150
 $17,755
 $204,432
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance $1,742
 $116
 $44
 $1
 $
 $1,903
Provision for off-balance sheet credit losses (536) (3) 
 
 
 (539)
Ending balance $1,206
 $113
 $44
 $1
 $
 $1,364
             
Total provision for credit losses $9,325
 $99
 $(253) $1,911
 $918
 $12,000


The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the nine months ended September 30, 2019 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Residential Mortgage Personal Nonspecific Allowance Total
Allowance for loan losses:            
Beginning balance $102,226
 $60,026
 $17,964
 $9,473
 $17,768
 $207,457
Provision for loan losses 34,740
 (10,075) (2,660) 3,434
 (13) 25,426
Loans charged off (31,728) (118) (192) (4,671) 
 (36,709)
Recoveries 1,405
 4,517
 422
 1,914
 
 8,258
Ending balance $106,643
 $54,350
 $15,534
 $10,150
 $17,755
 $204,432
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance $1,655
 $52
 $52
 $31
 $
 $1,790
Provision for off-balance sheet credit losses (449) 61
 (8) (30) 
 (426)
Ending balance $1,206
 $113
 $44
 $1
 $
 $1,364
             
Total provision for credit losses $34,291
 $(10,014) $(2,668) $3,404
 $(13) $25,000


- 62 -



The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended September 30, 2018 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Residential Mortgage Personal Nonspecific Allowance Total
Allowance for loan losses:            
Beginning balance $113,722
 $58,758
 $18,544
 $8,646
 $15,472
 $215,142
Provision for loan losses (1,285) 1,391
 1
 883
 3,418
 4,408
Loans charged off (9,602) 
 (91) (1,380) 
 (11,073)
Recoveries 1,263
 40
 229
 560
 
 2,092
Ending balance $104,098
 $60,189
 $18,683
 $8,709
 $18,890
 $210,569
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance 2,361
 17
 53
 2
 
 $2,433
Provision for off-balance sheet credit losses (424) 19
 (3) 
 
 (408)
Ending balance $1,937
 $36
 $50
 $2
 $
 $2,025
             
Total provision for credit losses $(1,709) $1,410
 $(2) $883
 $3,418
 $4,000


The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the nine months ended September 30, 2018 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Residential Mortgage Personal Nonspecific Allowance Total
Allowance for loan losses:            
Beginning balance $124,269
 $56,621
 $18,451
 $9,124
 $22,217
 $230,682
Provision for loan losses 2,720
 248
 (418) 1,486
 (3,327) 709
Loans charged off (24,940) 
 (326) (3,802) 
 (29,068)
Recoveries 2,049
 3,320
 976
 1,901
 
 8,246
Ending balance $104,098
 $60,189
 $18,683
 $8,709
 $18,890
 $210,569
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance $3,644
 $45
 $43
 $2
 $
 $3,734
Provision for off-balance sheet credit losses (1,707) (9) 7
 
 
 (1,709)
Ending balance $1,937
 $36
 $50
 $2
 $
 $2,025
             
Total provision for credit losses $1,013
 $239
 $(411) $1,486
 $(3,327) $(1,000)


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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 September 30, 2019 is as follows (in thousands):
  
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $14,312,919
 $99,110
 $111,706
 $7,533
 $14,424,625
 $106,643
Commercial real estate 4,602,872
 54,350
 23,185
 
 4,626,057
 54,350
Residential mortgage 2,079,999
 15,534
 37,304
 
 2,117,303
 15,534
Personal 1,117,111
 10,150
 271
 
 1,117,382
 10,150
Total 22,112,901
 179,144
 172,466
 7,533
 22,285,367
 186,677
             
Nonspecific allowance 
 
 
 
 
 17,755
             
Total $22,112,901
 $179,144
 $172,466
 $7,533
 $22,285,367
 $204,432

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


             


- 64 -



Credit Quality Indicators

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

The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at September 30, 2019 is as follows (in thousands):
  Internally Risk Graded Non-Graded Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $14,396,278
 $105,714
 $28,347
 $929
 $14,424,625
 $106,643
Commercial real estate 4,626,057
 54,350
 
 
 4,626,057
 54,350
Residential mortgage 283,297
 3,375
 1,834,006
 12,159
 2,117,303
 15,534
Personal 1,032,522
 7,836
 84,860
 2,314
 1,117,382
 10,150
Total 20,338,154
 171,275
 1,947,213
 15,402
 22,285,367
 186,677
             
Nonspecific allowance 
 
 
 
 
 17,755
             
Total $20,338,154
 $171,275
 $1,947,213
 $15,402
 $22,285,367
 $204,432
 
The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at December 31, 2018 is as follows (in thousands):
  Internally Risk Graded Non-Graded Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $13,586,654
 $101,303
 $49,424
 $923
 $13,636,078
 $102,226
Commercial real estate 4,764,813
 60,026
 
 
 4,764,813
 60,026
Residential mortgage 505,046
 3,310
 1,724,987
 14,654
 2,230,033
 17,964
Personal 948,890
 6,633
 76,916
 2,840
 1,025,806
 9,473
Total 19,805,403
 171,272
 1,851,327
 18,417
 21,656,730
 189,689
             
Nonspecific allowance 
 
 
 
 
 17,768
             
Total $19,805,403
 $171,272
 $1,851,327
 $18,417
 $21,656,730
 $207,457
             


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

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


- 65 -



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

The following table summarizes the Company’s loan portfolio at September 30, 2019 by the risk grade categories (in thousands): 
  Internally Risk Graded Non-Graded  
  Performing        
  Pass Other Loans Especially Mentioned Accruing Substandard Nonaccrual Performing Nonaccrual Total
Commercial:              
Energy $3,927,285
 $60,405
 $37,685
 $88,894
 $
 $
 $4,114,269
Services 3,185,367
 38,118
 36,645
 6,119
 
 
 3,266,249
Wholesale/retail 1,829,614
 9,757
 7,742
 1,504
 
 
 1,848,617
Manufacturing 652,804
 24,229
 12,634
 8,741
 
 
 698,408
Healthcare 2,984,306
 25,205
 17,479
 5,978
 
 
 3,032,968
Public finance 744,840
 
 
 
 
 
 744,840
Other commercial and industrial 671,819
 2,053
 16,632
 423
 28,300
 47
 719,274
Total commercial 13,996,035
 159,767
 128,817
 111,659
 28,300
 47
 14,424,625
               
Commercial real estate:  
    
  
  
  
  
Residential construction and land development 135,011
 
 
 350
 
 
 135,361
Retail 765,708
 12,067
 1,262
 20,132
 
 
 799,169
Office 1,007,136
 5,203
 1,081
 855
 
 
 1,014,275
Multifamily 1,316,856
 1,196
 6,501
 286
 
 
 1,324,839
Industrial 872,627
 
 
 909
 
 
 873,536
Other commercial real estate 474,465
 784
 2,975
 653
 
 
 478,877
Total commercial real estate 4,571,803
 19,250
 11,819
 23,185
 
 
 4,626,057
               
Residential mortgage:  
    
  
  
  
  
Permanent mortgage 280,243
 326
 2,191
 537
 763,535
 19,628
 1,066,460
Permanent mortgages guaranteed by U.S. government agencies 
 
 
 
 185,432
 6,332
 191,764
Home equity 
 
 
 
 848,272
 10,807
 859,079
Total residential mortgage 280,243
 326
 2,191
 537
 1,797,239
 36,767
 2,117,303
               
Personal 1,032,381
 46
 33
 63
 84,651
 208
 1,117,382
               
Total $19,880,462
 $179,389
 $142,860
 $135,444
 $1,910,190
 $37,022
 $22,285,367



- 66 -



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

               




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Impaired Loans

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

A summary of impaired loans at September 30, 2019 follows (in thousands):
 As of For the For the
 September 30, 2019 Three Months Ended Nine Months Ended
   Recorded Investment   September 30, 2019 September 30, 2019
 
Unpaid
Principal
Balance
 Total With No
Allowance
 With Allowance Related Allowance Average Recorded
Investment
 Interest Income Recognized Average Recorded
Investment
 Interest Income Recognized
Commercial:                 
Energy$139,897
 $88,894
 $62,981
 $25,913
 $7,176
 $80,263
 $
 $67,705
 $
Services9,390
 6,119
 6,093
 26
 26
 8,103
 
 5,172
 
Wholesale/retail1,718
 1,504
 1,243
 261
 101
 1,447
 
 1,087
 
Manufacturing1
9,153
 8,741
 8,511
 230
 230
 8,677
 
 8,448
 
Healthcare17,786
 5,978
 5,978
 
 
 11,063
 
 8,547
 
Public finance
 
 
 
 
 
 
 
 
Other commercial and industrial8,261
 470
 470
 
 
 7,998
 
 8,585
 
Total commercial186,205
 111,706
 85,276
 26,430
 7,533
 117,551
 
 99,544
 
                  
Commercial real estate: 
  
  
  
  
  
  
  
  
Residential construction and land development1,306
 350
 350
 
 
 350
 
 350
 
Retail20,516
 20,132
 20,132
 
 
 20,094
 
 20,206
 
Office855
 855
 855
 
 
 855
 
 427
 
Multifamily286
 286
 286
 
 
 281
 
 294
 
Industrial909
 909
 909
 
 
 454
 
 454
 
Other commercial real estate813
 653
 653
 
 
 393
 
 672
 
Total commercial real estate24,685
 23,185
 23,185
 
 
 22,427
 
 22,403
 
                  
Residential mortgage: 
  
  
  
  
  
  
  
  
Permanent mortgage24,639
 20,165
 20,165
 
 
 20,984
 280
 22,058
 894
Permanent mortgage guaranteed by U.S. government agencies2
197,847
 191,764
 191,764
 
 
 196,310
 2,020
 194,751
 5,863
Home equity12,621
 10,807
 10,807
 
 
 10,369
 
 10,639
 
Total residential mortgage235,107
 222,736
 222,736
 
 
 227,663
 2,300
 227,448
 6,757
                  
Personal338
 271
 271
 
 
 254
 
 251
 
                  
Total$446,335
 $357,898
 $331,468
 $26,430
 $7,533
 $367,895
 $2,300
 $349,646
 $6,757
1 
Impaired manufacturing sector loans included $4.7 million of loans from an affiliated entity, with no allowance as the fair value of the collateral exceeded the outstanding principal balance at September 30, 2019.
2 All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At September 30, 2019, the majority were accruing based on the guarantee by U.S. government agencies.



- 68 -



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

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




- 69 -



Troubled Debt Restructurings

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

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

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





- 70 -



Nonaccrual & Past Due Loans

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

A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of September 30, 2019 is as follows (in thousands):
    Past Due    
  Current 
30 to 59
Days
 60 to 89 Days 
90 Days
or More
 Nonaccrual Total
Commercial:            
Energy $4,025,375
 $
 $
 $
 $88,894
 $4,114,269
Services 3,249,994
 7,305
 2,096
 735
 6,119
 3,266,249
Wholesale/retail 1,844,203
 2,910
 
 
 1,504
 1,848,617
Manufacturing 687,358
 2,309
 
 
 8,741
 698,408
Healthcare 3,026,838
 94
 2
 56
 5,978
 3,032,968
Public finance 744,840
 
 
 
 
 744,840
Other commercial and industrial 718,419
 337
 48
 
 470
 719,274
Total commercial 14,297,027
 12,955
 2,146
 791
 111,706
 14,424,625
             
Commercial real estate:  
  
    
  
  
Residential construction and land development 134,947
 
 
 64
 350
 135,361
Retail 779,037
 
 
 
 20,132
 799,169
Office 1,013,420
 
 
 
 855
 1,014,275
Multifamily 1,318,148
 6,405
 
 
 286
 1,324,839
Industrial 872,627
 
 
 
 909
 873,536
Other commercial real estate 477,126
 335
 106
 657
 653
 478,877
Total commercial real estate 4,595,305
 6,740
 106
 721
 23,185
 4,626,057
             
Residential mortgage:  
  
    
  
  
Permanent mortgage 1,036,793
 6,097
 3,405
 
 20,165
 1,066,460
Permanent mortgages guaranteed by U.S. government agencies 47,207
 23,412
 21,676
 93,137
 6,332
 191,764
Home equity 845,616
 2,282
 374
 
 10,807
 859,079
Total residential mortgage 1,929,616
 31,791
 25,455
 93,137
 37,304
 2,117,303
             
Personal 1,116,888
 100
 94
 29
 271
 1,117,382
             
Total $21,938,836
 $51,586
 $27,801
 $94,678
 $172,466
 $22,285,367


- 71 -



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

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