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BOKF BOK Financial

Filed: 5 May 20, 3:10pm
0000875357 us-gaap:OperatingSegmentsMember bokf:InstitutionaltrustretirementplanservicesrevenueMember bokf:WealthManagementMember 2019-01-01 2019-03-31


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

FORM 10-Q
(Mark One) 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedMarch 31, 2020
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: 70,308,532 shares of common stock ($.00006 par value) as of March 31, 2020.





BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2020

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 1A. Risk Factors
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 $62.1 million or $0.88 per diluted share for the first quarter of 2020. Net income was $110.6 million or $1.54 per diluted share for the first quarter of 2019 and $110.4 million or $1.56 per diluted share for the fourth quarter of 2019. The Company recorded a pre-tax provision for expected credit losses of $93.8 million in the first quarter of 2020. Pre-tax provisions for incurred losses of $19.0 million and $8.0 million were recorded in the fourth quarter of 2019 and the first quarter of 2019, respectively. The Company adopted the current expected credit loss ("CECL") model on January 1, 2020.

We incurred $12.7 million of CoBiz integration costs in the first quarter of 2019 resulting in a 13 cent per share reduction. The discussion below excludes the impact of these costs. Highlights of the first quarter of 2020 included:

COVID-19 Coronavirus Pandemic Response

We implemented our cross-functional crisis management team led by our Chief Human Resources Officer and Chief Risk Officer. This team has focused on ensuring employee and customer safety while continuing to meet customer needs. We have implemented social distancing measures within our internal and external operations. Employees are working from home as able, we have split remaining employees across multiple locations, and we have closed banking center lobbies and converted to drive-thru and by appointment only.
We have implemented programs to help our customers through this uncertain time. We are actively participating in programs initiated by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), including the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") that began on April 3, 2020 and Mortgage Forbearance program. As of April 17, 2020, we have processed approximately 4,700 PPP applications and currently have SBA approval for $1.8 billion. We have the ability to fund PPP loans through the Federal Reserve's PPP liquidity facility. We are also evaluating participating in the Main Street Lending Program. We are waiving fees on excessive savings and money market account withdrawals as well as overdraft protection transfer fees for automatic transfers between linked accounts at BOKF through May 31, 2020. Further, we waived loan payment late fees on consumer loan payments, mortgage accounts and small business loans in April 2020.
We have enhanced our benefits to support our employees as they navigate changes in their working environment. We are providing a temporary child care reimbursement program for those employees that need assistance because of school closures and have also added incremental paid time off hours for employees. We expanded our telemedicine options to deliver medical and behavioral health services at no cost. Further, we have enacted premium pay for certain non-exempt employees who must remain in the office.
We are closely monitoring our loan portfolio for effects related to COVID-19. Exposure to highly affected industries include, but are not limited to, oil and gas, entertainment and leisure, and senior housing. Energy loan balances comprise 18 percent of total loans, senior housing comprises 11 percent, and entertainment and leisure comprises approximately 8 percent. While our liquidity remains strong, given the extraordinary impact of the pandemic on the capital markets, we've taken a number of precautionary measures to ensure it remains so, including enhanced daily monitoring of liquidity by tracking deposit inflows and outflows by customer, analyzing loan advances by segment, optimizing our borrowing capacity at the Federal Home Loan Bank, and increasing our collateral at the Federal Reserve Discount Window, among other things.
Financial Highlights

Net interest revenue totaled $261.4 million, a decrease of $16.7 million compared to the first quarter of 2019. Net interest margin was 2.80 percent for the first quarter of 2020 compared to 3.30 percent for the first quarter of 2019. The Federal Reserve decreased the federal funds rate a total of 225 basis points since the middle of 2019. Three 25 basis point cuts were made in the second half of 2019 and an additional 150 basis points in emergency cuts were made in March 2020 in response to the economic environment resulting from the COVID-19 pandemic. Average earning assets were $38.4 billion for the first quarter of 2020 compared to $34.4 billion for the first quarter of 2019. Net interest revenue decreased $8.9 million compared to the fourth quarter of 2019 while net interest margin decreased 8 basis points.

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Fees and commissions revenue totaled $192.7 million, an increase of $32.2 million over the first quarter of 2019. Brokerage and trading revenue increased $19.2 million and mortgage banking revenue increased $13.3 million as lower mortgage interest rates have increased mortgage production and related trading activity. Fees and commissions revenue increased $13.3 million over the fourth quarter of 2019, largely due to increases in brokerage and trading and mortgage banking revenue.
Other operating expense totaled $268.6 million, a $5.8 million decrease compared to the first quarter of 2019. Personnel expense decreased $9.8 million, largely due to a decrease in deferred compensation costs. Non-personnel expense increased $4.0 million over the first quarter of 2019, primarily due to increases in data processing and communications expense and professional fees and services. Operating expense decreased $20.2 million compared to the fourth quarter of 2019. Personnel expense decreased $12.2 million with a decrease in deferred compensation and incentive compensation partially offset by a seasonal increase in employee benefits. Non-personnel expense decreased $7.9 million compared to the fourth quarter of 2019, led by decreases in mortgage banking and business promotion expenses.
The allowance for loan losses totaled $315 million or 1.40 percent of outstanding loans and 199 percent of nonaccruing loans at March 31, 2020, excluding residential mortgage loans guaranteed by U.S. government agencies. The combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was $344 million or 1.53 percent of outstanding loans at March 31, 2020. At December 31, 2019, the allowance for loan losses was $211 million or 0.97 percent of outstanding loans and 121 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was $212 million or 0.98 percent of outstanding loans.
Nonperforming assets not guaranteed by U.S. government agencies were relatively consistent compared to December 31, 2019. Potential problem loans increased $132 million while other loans especially mentioned increased $56 million. Net charge-offs were $17.2 million or 0.31 percent of average loans on an annualized basis for the first quarter of 2020, compared to $12.5 million or 0.22 percent of average loans on an annualized basis for the fourth quarter of 2019.
Period-end outstanding loan balances totaled $22.5 billion at March 31, 2020, an increase of $713 million over December 31, 2019. Average loan balances decreased $293 million to $21.9 billion at March 31, 2020.
Period-end deposits were $29.2 billion at March 31, 2020, a $1.6 billion increase compared to December 31, 2019. Interest-bearing transaction deposits increased $1.2 billion while demand deposit balances increased $360 million. Average deposits increased $1.1 billion, including a $1.5 billion increase in interest-bearing deposits partially offset by a $380 million decrease in demand deposits. Strong deposit growth was driven by a combination of our continued focus on growing core customer deposits, inflows from external money funds and seasonal inflows.
The common equity Tier 1 capital ratio at March 31, 2020 was 10.98 percent. Other regulatory capital ratios were Tier 1 capital ratio, 10.98 percent, total capital ratio, 12.65 percent, and leverage ratio, 8.15 percent. We have elected to implement relief afforded by the CARES Act, which allows us to defer a portion of the impact to regulatory capital impact resulting from our adoption of CECL over the next two years, followed by a phase out of that deferral over the following three years. At December 31, 2019, the common equity Tier 1 capital ratio was 11.39 percent, the Tier 1 capital ratio was 11.39 percent, total capital ratio was 12.94 percent, and leverage ratio was 8.40 percent.
The company repurchased 442,000 shares at an average price of $75.52 per share in the first quarter of 2020 and 280,000 shares at an average price of $81.59 in the fourth quarter of 2019. We view share buybacks opportunistically, but within the context of maintaining our strong capital position.
The Company paid a regular cash dividend of $35.9 million or $0.51 per common share during the first quarter of 2020. On April 28, 2020, the board of directors approved a quarterly cash dividend of $0.51 per common share payable on or about May 27, 2020 to shareholders of record as of May 11, 2020.

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Critical Accounting Policies & Estimates

The Consolidated Financial Statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The Company's accounting policies are more fully described in Note 1 of the Consolidated Financial Statements included in the 2019 Form 10-K. Management makes significant assumptions and estimates in the preparation of the Consolidated Financial Statements and accompanying notes in conformity with GAAP that may be highly subjective, complex and subject to variability. Actual results could differ significantly from these assumptions and estimates. The following discussion represents significant changes to critical accounting policies and estimates during 2020 in the most critical areas where these assumptions and estimates could affect the financial condition, results of operations and cash flows of the Company. Significant changes to critical accounting policies and estimates have been discussed with the appropriate committees of the Board of Directors.

Allowance for Loan Losses and Accrual for Off-Balance Sheet Credit Risk from Loan Commitments

The allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments represent the portion of amortized cost basis of loans and related unfunded commitments we do not expect to collect over the asset’s contractual life, considering past events, current conditions, as well as reasonable and supportable forecasts of future economic conditions. Determining appropriateness of the allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments requires management judgment about effects of uncertain matters, resulting in a subjective calculation which contains a certain amount of imprecision. Because of the subjective forward-looking nature of the calculation, changes in these measures may not directly correlate with actual economic events. In future periods, management judgment may consider new or changed information which may cause significant changes in these allowances in those future periods.

As of January 1, 2020 BOK Financial’s accounting policies have changed significantly with the adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Update No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Assets Measured at Amortized Cost ("ASU 2016-13" or "CECL"). Prior years are not restated. Prior to January 1, 2020, general allowances and nonspecific allowances were based on incurred credit losses. See Note 4 to the Consolidated Financial Statements for the description of the expected credit losses calculation of the allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments.

For the majority of risk-graded loans, the accruing loan’s expected credit loss estimate is sensitive to management judgment, particularly probability of default and loss given default assumptions, changes in specific macroeconomic factor forecasts, the probability weight assigned to each economic scenario, and judgmental allocations for risks otherwise not captured in the calculation.

Probability of default and loss given default measurements are based on historical data that may not be a good predictor of future performance or actual losses. Probability of default is based on risk grades, a subjective measurement of the risk of a loan. This subjective assessment of risk may not reflect actual risk of loss.

Other subjective measures include the forecast for each relevant economic loss driver and the probability weighting of economic scenarios, both of which are overseen by a senior management committee with members independent of the allowance process. Determining appropriateness of the allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments requires management judgment about effects of uncertain matters which may be reflected as industry or product judgmental allocations or nonspecific allowances. This results in a subjective calculation which is inherently imprecise.

Although the resulting expected credit loss estimate represents management’s best estimates at the time, actual credit losses will differ from management’s estimate. Portfolio composition will change over time, actual economic conditions will differ from probability-weighted assumptions, borrower-specific circumstances will change, as well as other factors. Differences between actual losses and management's estimates may materially affect the Company's results of operations.

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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 $264.1 million for the first quarter of 2020 and $280.6 million in the first quarter of 2019. Net purchase accounting discount accretion was $4.1 million in the first quarter of 2020 and $7.8 million in the first 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 2.80 percent for the first quarter of 2020, compared to 3.30 percent for the first quarter of 2019. The tax-equivalent yield on earning assets was 3.73 percent, a decrease of 73 basis points compared to the first quarter of 2019. The Federal Reserve decreased the federal funds rate a total of 225 basis points since the middle of 2019. Three 25 basis point cuts were made in the second half of 2019 and an additional 150 basis points in emergency cuts were made in March 2020 in response to the economic environment resulting from the COVID-19 pandemic. The latest reductions reduced the federal funds rate to nearly zero. The impact from these latest cuts will more fully be felt in the second quarter. Loan yields decreased 76 basis points to 4.50 percent, primarily as a result of the decrease in short-term interest rates. The yield on trading securities decreased 99 basis points to 2.89 percent. The yield on interest-bearing cash and cash equivalents decreased 123 basis points to 1.33 percent. The available for sale securities portfolio yield decreased 9 basis points to 2.48 percent and the yield on fair value option securities decreased 95 basis points to 2.67 percent.

Funding costs decreased 47 basis points compared to the first quarter of 2019. The cost of other borrowed funds decreased 107 basis points and the cost of interest-bearing deposits decreased 6 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 26 basis points for the first quarter of 2020, a decrease of 24 basis points compared to the first quarter of 2019.
 
Average earning assets for the first quarter of 2020 increased $4.0 billion or 12 percent over the first quarter of 2019. The average balance of available for sale securities, which consists largely of residential and commercial mortgage-backed securities guaranteed by U.S. government agencies, increased $2.8 billion. We purchase securities to supplement earnings and to manage interest rate risk. We have increased the size of our bond portfolio in order to reduce our exposure to falling short-term interest rates. Fair value option securities, which we hold as an economic hedge against changes in the fair value of our mortgage servicing rights, increased $1.2 billion. Average loans, net of allowance for loan losses, increased $133 million. Interest-bearing cash and cash equivalent balances increased $184 million. Trading securities balances decreased $278 million. Receivables from unsettled securities sales, primarily related to our U.S. agency residential mortgage-backed trading operations, increased $1.8 billion. Growth in average earning assets and non-interest bearing receivables was primarily funded by an increase in average deposits and other borrowed funds.

Average deposits increased $3.6 billion compared to the first quarter of 2019 as we have focused on acquiring and growing deposits to enhance liquidity and support balance sheet growth. Interest-bearing deposits increased $4.3 billion while demand deposit balances decreased $755 million. Average borrowed funds increased $1.3 billion over the first quarter of 2019, primarily from federal funds purchased and repurchase agreements.
Tax-equivalent net interest revenue decreased $8.9 million compared to the fourth quarter of 2019. The first quarter of 2020 included $4.1 million of purchase accounting discount accretion while the fourth quarter of 2019 included $5.8 million.

Average earning assets increased $291 million compared to the fourth quarter of 2019. Average available for sale securities increased $331 million as we repositioned the balance sheet for the current rate environment. Fair value option securities balances increased $272 million. Interest-bearing cash and cash equivalents increased $148 million. Average loan balances decreased $293 million. In addition, receivables from unsettled securities sales that support our mortgage trading activities increased $1.1 billion. Growth in average earning assets and non-interest bearing receivables was largely funded by a $1.5 billion increase in average interest-bearing deposits.

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Net interest margin was 2.80 percent compared to 2.88 percent in the previous quarter. While the Federal Reserve reduced the federal funds rate in multiple rates cuts in the latter half of 2019 and first quarter of 2020, LIBOR has remained elevated relative to the rate cuts. This, combined with our ability to move deposits costs down, preserved a large portion of our margin.
The yield on average earning assets decreased 20 basis points and the yield on the loan portfolio decreased 25 basis points. The yield on the available for sale securities portfolio decreased 4 basis points and the yield on interest-bearing cash and cash equivalents was down 29 basis points.
Funding costs decreased 21 basis points. The cost of interest-bearing deposits decreased 11 basis points and the cost of other borrowed funds decreased 36 basis points. The benefit to net interest margin from assets funded by non-interest bearing liabilities decreased 9 basis points to 26 basis points, which is the primary component of the 8 basis point decline in net interest margin from the prior quarter.

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
March 31, 2020 / 2019
    
Change Due To1
  Change Volume Yield/Rate
Tax-equivalent interest revenue:      
Interest-bearing cash and cash equivalents $(1,004) $905
 $(1,909)
Trading securities (6,935) (2,534) (4,401)
Investment securities (524) (622) 98
Available for sale securities 12,847
 14,976
 (2,129)
Fair value option securities 6,471
 9,205
 (2,734)
Restricted equity securities (451) 211
 (662)
Residential mortgage loans held for sale (540) (171) (369)
Loans (36,815) 3,314
 (40,129)
Total tax-equivalent interest revenue (26,951) 25,284
 (52,235)
Interest expense:      
Transaction deposits 8,153
 9,759
 (1,606)
Savings deposits (34) 7
 (41)
Time deposits 623
 424
 199
Funds purchased and repurchase agreements 482
 7,180
 (6,698)
Other borrowings (19,507) (2,485) (17,022)
Subordinated debentures (112) 13
 (125)
Total interest expense (10,395) 14,898
 (25,293)
Tax-equivalent net interest revenue (16,556) 10,386
 (26,942)
Change in tax-equivalent adjustment 186
    
Net interest revenue $(16,742)    
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 $180.3 million for the first quarter of 2020, a $23.0 million increase over the first quarter of 2019 and a $1.7 million increase over the fourth quarter of 2019. Lower mortgage interest rates have positively affected both our brokerage and trading and mortgage banking revenue, leading to increases of $19.2 million and $13.3 million over the first quarter of 2019, respectively, and $6.9 million and $11.8 million over the fourth quarter of 2019, respectively.

Table 2 – Other Operating Revenue 
(In thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2020 2019     
Brokerage and trading revenue $50,779
 $31,617
 $19,162
 61 % $43,843
 $6,936
 16 %
Transaction card revenue 21,881
 20,738
 1,143
 6 % 22,548
 (667) (3)%
Fiduciary and asset management revenue 44,458
 43,358
 1,100
 3 % 45,021
 (563) (1)%
Deposit service charges and fees 26,130
 28,243
 (2,113) (7)% 27,331
 (1,201) (4)%
Mortgage banking revenue 37,167
 23,834
 13,333
 56 % 25,396
 11,771
 46 %
Other revenue 12,309
 12,762
 (453) (4)% 15,283
 (2,974) (19)%
Total fees and commissions revenue 192,724
 160,552

32,172
 20 % 179,422

13,302
 7 %
Other gains (losses), net (10,741) 2,976
 (13,717) N/A
 (1,649) (9,092) N/A
Gain (loss) on derivatives, net 18,420
 4,667
 13,753
 N/A
 (4,644) 23,064
 N/A
Gain (loss) on fair value option securities, net 68,393
 9,665
 58,728
 N/A
 (8,328) 76,721
 N/A
Change in fair value of mortgage servicing rights (88,480) (20,666) (67,814) N/A
 9,297
 (97,777) N/A
Gain on available for sale securities, net 3
 76
 (73) N/A
 4,487
 (4,484) N/A
Total other operating revenue $180,319
 $157,270
 $23,049
 15 % $178,585
 $1,734
 1 %
               
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 42 percent of total revenue for the first quarter of 2020, 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 falling interest rates resulting in compression in net interest revenue or fiduciary and asset management revenue, may also increase mortgage related trading activities and 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, including the recent impact of the COVID-19 pandemic, 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 $19.2 million or 61 percent compared to the first quarter of 2019.


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Trading revenue includes net realized and unrealized gains and losses primarily related to sales of residential mortgage-backed securities guaranteed by U.S. government agencies and related derivative instruments that enable our mortgage-banking customers to manage their market risk. Trading revenue also includes net realized and unrealized gains and losses on municipal securities, asset-backed securities and other financial instruments that we sell to institutional customers, along with changes in the fair value of financial instruments we hold as economic hedges against market risk of our trading securities. Trading revenue was $34.4 million for the first quarter of 2020, a $21.5 million or 166 percent increase compared to the first quarter of 2019. Lower mortgage interest rates increased customer mortgage-backed trading activities. In addition, trading revenue growth reflects a shift in the mix of our to-be-announced residential mortgage-backed securities contracts from our customer hedging program to our trading program.

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 $3.2 million for the first quarter of 2020, a $3.5 million or 52 percent decrease compared to the first quarter of 2019.

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $5.0 million, a $1.2 million increase compared to the first quarter of 2019. Changes in investment banking revenue are primarily related to the timing and volume of completed transactions.
Brokerage and trading revenue increased $6.9 million compared to the previous quarter. Increased revenue of $15.0 million from mortgage trading activity was partially offset by a decrease in the fair value of asset-backed and municipal securities due to widened spreads.

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 $1.1 million or 3 percent compared to the first quarter of 2019. Fiduciary and asset management revenue was relatively consistent with the fourth quarter of 2019. The decline in the fair value of assets was primarily related to the final month in the quarter. As a result, revenues remained strong relative to the decrease in assets. Further, there has been a change in mix from corporate trust to a greater percentage invested in retirement plans, which yields higher margins.

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

Table 3 -- Assets Under Management or Administration
 Three Months Ended
 March 31, 2020 March 31, 2019 December 31, 2019
 Balance 
Revenue1
 
Margin2
 Balance 
Revenue1
 
Margin2
 Balance 
Revenue1
 
Margin2
Managed fiduciary assets:
Personal$8,796,030
 $23,609
 1.07% $8,428,218
 $23,276
 1.10% $10,441,048
 $24,498
 0.94%
Institutional12,186,588
 7,347
 0.24% 14,026,020
 6,138
 0.18% 13,512,904
 7,336
 0.22%
Total managed fiduciary assets20,982,618
 30,956
 0.59% 22,454,238
 29,414
 0.52% 23,953,952
 31,834
 0.53%
                  
Non-managed assets:
Fiduciary26,070,483
 13,132
 0.20% 23,946,911
 13,528
 0.23% 28,398,182
 12,767
 0.18%
Non-fiduciary13,176,722
 370
 0.01% 16,215,999
 416
 0.01% 14,250,586
 420
 0.01%
Safekeeping and brokerage assets under administration15,554,006
 
 % 16,235,136
 
 % 16,138,240
 
 %
Total non-managed assets54,801,211
 13,502
 0.10% 56,398,046
 13,944
 0.10% 58,787,008
 13,187
 0.09%
                  
Total assets under management or administration$75,783,829
 $44,458
 0.23% $78,852,284
 $43,358
 0.22% $82,740,960
 $45,021
 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.


A summary of changes in assets under management or administration for the three months ended March 31, 2020 and 2019 follows:

Table 4 -- Changes in Assets Under Management or Administration
  Three Months Ended
March 31,
  2020 2019
Beginning balance $82,740,961
 $76,279,777
Net inflows (outflows) (1,846,865) (989,398)
Net change in fair value (5,110,267) 3,561,905
Ending balance $75,783,829
 $78,852,284

Mortgage Banking Revenue

Mortgage banking revenue increased $13.3 million or 56 percent compared to the first quarter of 2019. Mortgage loan production volumes increased $435 million or 71 percent as average primary mortgage interest rates have decreased. The gain on sale margin increased 77 basis points to 2.06 percent in the first quarter of 2020 as a rapid decrease in interest rates has led to increased application demand and industry-wide capacity constraints.

Mortgage banking revenue increased $11.8 million or 46 percent compared to the fourth quarter of 2019. Lower mortgage interest rates during the quarter led to an increase in mortgage production of 65 percent. Gain on sale margin improved 61 basis points over the prior quarter.


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Table 5 – Mortgage Banking Revenue 
(In thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2020 2019    
Mortgage production revenue $21,570
 $7,868
 $13,702
 174 % $9,169
 $12,401
 135 %
               
Mortgage loans funded for sale $548,956
 $510,527
 

 

 $855,643
    
Add: Current period end outstanding commitments 657,570
 263,434
     158,460
    
Less: Prior period end outstanding commitments 158,460
 160,848
     379,377
    
Total mortgage production volume $1,048,066
 $613,113
 $434,953
 71 % $634,726
 $413,340
 65 %
               
Mortgage loan refinances to mortgage loans funded for sale 57% 30% 2,700 bps   57% 
  
Gains on sale margin 2.06% 1.28% 78 bps   1.44% 62 bps  
Primary mortgage interest rates:              
Average 3.51% 4.37% (86) bps   3.70% (19) bps  
Period end 3.33% 4.06% (73) bps   3.74% (41) bps  
               
Mortgage servicing revenue $15,597
 $15,966
 $(369) (2)% $16,227
 $(630) (4)%
Average outstanding principal balance of mortgage loans serviced for others 20,416,546
 21,581,835
 (1,165,289) (5)% 20,856,446
 (439,900) (2)%
               
Average mortgage servicing revenue rates 0.31% 0.30% 1 bp   0.31% 
  

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

Net gains on other assets, securities and derivatives

Other net losses totaled $10.7 million in the first quarter of 2020 compared to other net gains of $3.0 million in the first quarter of 2019. Other net losses were $1.6 million for the fourth quarter of 2019. These fluctuations are primarily related to changes in the fair value of investments related to deferred compensation of $8.5 million that are largely offset by a decrease in deferred compensation expense. The first quarter of 2020 also included a $3.1 million impairment of an energy fund investment.

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.


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Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
  Three Months Ended
  Mar. 31, 2020 Dec. 31, 2019 Mar. 31, 2019
Gain (loss) on mortgage hedge derivative contracts, net $18,371
 $(4,714) $4,432
Gain (loss) on fair value option securities, net 68,393
 (8,328) 9,665
Gain (loss) on economic hedge of mortgage servicing rights, net 86,764
 (13,042) 14,097
Gain (loss) on change in fair value of mortgage servicing rights (88,480) 9,297
 (20,666)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue (1,716) (3,745) (6,569)
Net interest revenue on fair value option securities1
 4,268
 1,544
 1,129
Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges $2,552
 $(2,201) $(5,440)
1 
Actual interest earned on fair value option securities less internal transfer-priced cost of funds.


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Other Operating Expense

Other operating expense for the first quarter of 2020 totaled $268.6 million, a decrease of $18.5 million compared to the first quarter of 2019 and $20.2 million compared to the fourth quarter of 2019. Operating expenses in the first quarter of 2019 included $12.7 million of CoBiz integration costs, primarily affecting professional fees and personnel compensation. The below fluctuation discussion excludes these costs.

Table 7 – Other Operating Expense
(In thousands)
  Three Months Ended
March 31,
 Increase (Decrease) 
%
Increase (Decrease)
 Three Months Ended Dec. 31, 2019 Increase (Decrease) 
%
Increase (Decrease)
  2020 2019     
Regular compensation $97,760
 $100,650
 $(2,890) (3)% $99,991
 $(2,231) (2)%
Incentive compensation:     

 

      
Cash-based 36,189
 32,137
 4,052
 13 % 40,918
 (4,729) (12)%
Share-based 3,108
 5,162
 (2,054) (40)% 3,689
 (581) 16 %
Deferred compensation (5,673) 3,911
 (9,584) N/A
 2,630
 (8,303) N/A
Total incentive compensation 33,624
 41,210
 (7,586) (18)% 47,237
 (13,613) (29)%
Employee benefits 24,797
 27,368
 (2,571) (9)% 21,194
 3,603
 17 %
Total personnel expense 156,181
 169,228
 (13,047) (8)% 168,422
 (12,241) (7)%
Business promotion 6,215
 7,874
 (1,659) (21)% 8,787
 (2,572) (29)%
Charitable contributions to BOKF Foundation 
 
 
 N/A
 2,000
 (2,000) N/A
Professional fees and services 12,948
 16,139
 (3,191) (20)% 13,408
 (460) (3)%
Net occupancy and equipment 26,061
 29,521
 (3,460) (12)% 26,316
 (255) (1)%
Insurance 4,980
 4,839
 141
 3 % 5,393
 (413) (8)%
Data processing and communications 32,743
 31,449
 1,294
 4 % 31,884
 859
 3 %
Printing, postage and supplies 4,272
 4,885
 (613) (13)% 3,700
 572
 15 %
Net losses and operating expenses of repossessed assets 1,531
 1,996
 (465) (23)% 2,403
 (872) (36)%
Amortization of intangible assets 5,094
 5,191
 (97) (2)% 5,225
 (131) (3)%
Mortgage banking costs 10,545
 9,906
 639
 6 % 14,259
 (3,714) (26)%
Other expense 8,054
 6,129
 1,925
 31 % 6,998
 1,056
 15 %
Total other operating expense $268,624
 $287,157
 $(18,533) (6)% $288,795
 $(20,171) (7)%
               
Average number of employees (full-time equivalent) 5,075
 5,291
 (216) (4)% 5,107
 (32) (1)%
Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

Personnel expense decreased $9.8 million compared to the first quarter of 2019. Regular compensation decreased $2.3 million while we were still working to fully integrate CoBiz in the first quarter of 2019. Incentive compensation decreased $5.5 million. Deferred compensation decreased $9.6 million; however, this is largely offset by a decrease in the value of related investments included in Other gains (losses). Cash based incentive compensation increased $6.1 million due to increased sales activity.
Personnel expense decreased $12.2 million compared the fourth quarter of 2019. Incentive compensation decreased $13.6 million, led by a decrease in deferred compensation. Cash based incentive compensation decreased $4.7 million, primarily due to annual incentives incurred in the fourth quarter of 2019. Regular compensation decreased $2.2 million. The fourth quarter included approximately $2.0 million in severance costs due to realignment of personnel. Employee benefits increased $3.6 million as a seasonal increase in payroll taxes and retirement plan expenses was partially offset by a decrease in employee healthcare costs.

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Non-personnel operating expense

Non-personnel operating expense increased $4.0 million over the first quarter of 2019. Data processing and communications expense increased $2.3 million, primarily due to technology project costs. Increases in professional fees and services and other expense were partially offset by a decrease in occupancy and equipment expense.
Non-personnel expense decreased $7.9 million compared to the fourth quarter of 2019. Mortgage banking costs decreased $3.7 million. Decreases in the fair value of mortgage servicing assets reduced the costs of actual payoffs. Business promotion expense decreased $2.6 million due to a seasonal decrease in advertising costs combined with reduced travel costs largely as a result of the current pandemic. The fourth quarter of 2019 included a $2.0 million charitable contribution to the BOKF Foundation, which provides support to many nonprofit partners in our communities.
Income Taxes

The effective tax rate was 21.8 percent for the first quarter of 2020, 21.4 percent for the first quarter of 2019 and 21.5 percent for the fourth quarter of 2019. Income tax expense decreased $13.0 million compared to the fourth quarter of 2019 primarily due to the decrease in net income before tax for the quarter.
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.

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

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


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As shown in Table 8, net income attributable to our lines of business decreased $4.1 million compared to the first quarter of 2019. Net interest revenue decreased by $15.7 million compared to the prior year, primarily due to decreases in the federal funds rate by the Federal Reserve. Other operating revenue increased by $37.4 million and operating expense increased by $27.8 million compared to the first quarter of 2019. Net income attributed to Funds Management and other was affected by the provision for expected credit losses in excess of net charge-offs of $76.6 million in the first quarter of 2020.

Table 8 -- Net Income by Line of Business
(In thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2020 2019     
Commercial Banking $74,975
 $85,521
 $(10,546) (12)% $82,019
 $(7,044) (9)%
Consumer Banking 22,921
 15,337
 7,584
 49 % 8,287
 14,634
 177 %
Wealth Management 22,573
 23,719
 (1,146) (5)% 22,863
 (290) (1)%
Subtotal 120,469
 124,577
 (4,108) (3)% 113,169
 7,300
 6 %
Funds Management and other (58,390) (13,965) (44,425) N/A
 28,258
 (86,648) N/A
Total $62,079
 $110,612
 $(48,533) (44)% $141,427
 $(79,348) (56)%
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 $75.0 million to consolidated net income in the first quarter of 2020, a decrease of $10.5 million or 12 percent compared to the first quarter of 2019.

Table 9 -- Commercial Banking
(Dollars in thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2020 2019     
Net interest revenue from external sources $201,902
 $204,209
 $(2,307) (1)% $219,912
 $(18,010) (8)%
Net interest expense from internal sources (50,495) (53,638) 3,143
 (6)% (57,672) 7,177
 (12)%
Total net interest revenue 151,407
 150,571
 836
 1 % 162,240
 (10,833) (7)%
Net loans charged off 16,880
 11,246
 5,634
 50 % 11,437
 5,443
 48 %
Net interest revenue after net loans charged off 134,527
 139,325
 (4,798) (3)% 150,803
 (16,276) (11)%
               
Fees and commissions revenue 41,459
 38,046
 3,413
 9 % 43,357
 (1,898) (4)%
Other losses, net (3,239) (434) (2,805) N/A
 (1,000) (2,239) N/A
Other operating revenue 38,220
 37,612
 608
 2 % 42,357
 (4,137) (10)%
               
Personnel expense 37,020
 31,546
 5,474
 17 % 44,900
 (7,880) (18)%
Non-personnel expense 23,732
 19,081
 4,651
 24 % 24,390
 (658) (3)%
Other operating expense 60,752
 50,627
 10,125
 20 % 69,290
 (8,538) (12)%
               
Net direct contribution 111,995
 126,310
 (14,315) (11)% 123,870
 (11,875) (10)%
Gain on financial instruments, net 49
 18
 31
 N/A
 39
 10
 N/A
Gain (loss) on repossessed assets, net 9
 (346) 355
 N/A
 (126) 135
 N/A
Corporate expense allocations 8,905
 9,455
 (550) (6)% 11,176
 (2,271) (20)%
Income before taxes 103,148
 116,527
 (13,379) (11)% 112,607
 (9,459) (8)%
Federal and state income tax 28,173
 31,006
 (2,833) (9)% 30,588
 (2,415) (8)%
Net income $74,975
 $85,521
 $(10,546) (12)% $82,019
 $(7,044) (9)%
  ��            
Average assets $24,687,976
 $19,937,878
 $4,750,098
 24 % $24,346,565
 $341,411
 1 %
Average loans 18,812,015
 15,988,843
 2,823,172
 18 % 19,100,101
 (288,086) (2)%
Average deposits 11,907,386
 8,261,543
 3,645,843
 44 % 11,419,558
 487,828
 4 %
Average invested capital 2,188,242
 2,239,846
 (51,604) (2)% 2,217,828
 (29,586) (1)%
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 was relatively consistent compared to the prior year. Net interest revenue increased as a result of higher loan volumes, largely from acquired loans. This was partially offset by a decrease in deposit related net interest revenue as the value of deposits was impacted by falling interest rates. Non-earning assets also increased with the allocation of CoBiz goodwill in the second quarter of 2019, further reducing net interest revenue. Net loans charged-off increased $5.6 million.

Fees and commissions revenue increased $3.4 million or 9 percent largely due to an increase in loan syndication fees and deposit services charges. Other losses included an energy fund impairment charge recognized in the first quarter of 2020. Operating expense increased $10.1 million or 20 percent compared to the first quarter of 2019. Personnel expense increased $5.5 million and non-personnel expense increased $4.7 million, primarily due to the allocation of CoBiz operations beginning the second quarter of 2019. Corporate expense allocations decreased $550 thousand or 6 percent compared to the prior year.


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The average outstanding balance of loans attributed to Commercial Banking was up $2.8 billion or 18 percent over the first quarter of 2019 to $18.8 billion, largely related to allocation of CoBiz loans to the segments in the second quarter of 2019. 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 $11.9 billion for the first quarter of 2020, a $3.6 billion or 44 percent increase over the first quarter of 2019, primarily related to the allocation of CoBiz deposits to the segments in the second quarter of 2019. 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 $10.8 million or 7 percent compared to the fourth quarter of 2019 largely due to a decrease in loan volumes combined with a decline in the value of deposits, as short term rates fell, from the Funds Management unit compared to the prior quarter. Fees and commissions revenue decreased $1.9 million, largely due to lower revenue from repossessed oil and gas properties. Operating expense decreased $8.5 million or 12 percent compared to the fourth quarter of 2019 primarily due to a $7.9 million decrease in personnel expense largely due to annual incentive compensation occurring in the fourth quarter of 2019. Non-personnel expense was relatively consistent with the fourth quarter of 2019.
Average loan balances decreased $288 million or 2 percent and average customer deposits increased $488 million or 4 percent over the fourth 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.

Consumer Banking contributed $22.9 million to consolidated net income for the first quarter of 2020, an increase of $7.6 million over the first quarter of 2019. 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. Further, increased effectiveness of the economic hedge of the fair value of mortgage servicing rights improved income before taxes by $4.9 million.

Table 10 -- Consumer Banking
(Dollars in thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2020 2019     
Net interest revenue from external sources $25,876
 $22,475
 $3,401
 15 % $24,325
 $1,551
 6 %
Net interest revenue from internal sources 18,056
 28,627
 (10,571) (37)% 18,851
 (795) (4)%
Total net interest revenue 43,932
 51,102
 (7,170) (14)% 43,176
 756
 2 %
Net loans charged off 1,256
 1,085
 171
 16 % 1,617
 (361) (22)%
Net interest revenue after net loans charged off 42,676
 50,017
 (7,341) (15)% 41,559
 1,117
 3 %
               
Fees and commissions revenue 55,062
 42,821
 12,241
 29 % 44,884
 10,178
 23 %
Other losses, net 
 (73) 73
 N/A
 (165) 165
 N/A
Other operating revenue 55,062
 42,748
 12,314
 29 % 44,719
 10,343
 23 %
               
Personnel expense 23,620
 24,336
 (716) (3)% 24,139
 (519) (2)%
Non-personnel expense 31,173
 29,485
 1,688
 6 % 35,563
 (4,390) (12)%
Total other operating expense 54,793
 53,821
 972
 2 % 59,702
 (4,909) (8)%
               
Net direct contribution 42,945
 38,944
 4,001
 10 % 26,576
 16,369
 62 %
Gain (loss) on financial instruments, net 86,764
 14,097
 72,667
 N/A
 (13,042) 99,806
 N/A
Change in fair value of mortgage servicing rights (88,480) (20,666) (67,814) N/A
 9,297
 (97,777) N/A
Gain on repossessed assets, net 13
 103
 (90) N/A
 86
 (73) N/A
Corporate expense allocations 10,487
 11,900
 (1,413) (12)% 11,798
 (1,311) (11)%
Income before taxes 30,755
 20,578
 10,177
 49 % 11,119
 19,636
 177 %
Federal and state income tax 7,834
 5,241
 2,593
 49 % 2,832
 5,002
 177 %
Net income $22,921
 $15,337
 $7,584
 49 % $8,287
 $14,634
 177 %
               
Average assets $9,850,853
 $8,371,683
 $1,479,170
 18 % $9,772,710
 $78,143
 1 %
Average loans 1,711,703
 1,750,642
 (38,939) (2)% 1,730,467
 (18,764) (1)%
Average deposits 6,869,481
 6,544,665
 324,816
 5 % 6,974,453
 (104,972) (2)%
Average invested capital 274,384
 302,195
 (27,811) (9)% 288,216
 (13,832) (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 declined by $7.2 million or 14 percent compared to the the first quarter of 2019. A decrease in the yield on deposits sold to our Funds Management unit was partially offset by an increase in the volume of securities used as an economic hedge of the fair value of mortgage servicing rights. Average consumer deposits grew $325 million over the first quarter of 2019 with demand deposit balances increasing $218 million or 11 percent, largely due to the allocation of acquired deposits.

Fees and commissions revenue increased $12.2 million or 29 percent over the first quarter of 2019. Lower mortgage interest rates increased mortgage loan origination volumes. Mortgage production volume increased $435 million or 71 percent and gain on sale margin increased 77 basis points. Operating expense increased by $972 thousand or 2 percent. Corporate expense allocations were $1.4 million or 12 percent lower than the prior year.

Changes in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income for the first quarter of 2020 by $1.7 million compared to a $6.6 million decrease in pre-tax net income in the first quarter of 2019.
Net interest revenue from Consumer Banking activities increased $756 thousand or 2 percent over the fourth quarter of 2019. Operating revenue increased $10.3 million or 23 percent over the fourth quarter of 2019. Revenues from mortgage banking activities increased $11.8 million. Mortgage production volume increased $413 million or 65 percent as a result of lower interest rates. Gain on sale margins climbed to 2.06 percent from 1.44 percent.
Operating expenses decreased $4.9 million, nearly all related to non-personnel expenses. Mortgage banking costs decreased $3.7 million due to lower amortization of mortgage servicing rights. A decrease in professional fees and services was mostly offset by an increase in occupancy and equipment expense.
Average consumer loans decreased $19 million or 1 percent. Average deposits decreased $105 million or 2 percent.


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Wealth Management

Wealth Management contributed $22.6 million to consolidated net income in the first quarter of 2020, a decrease of $1.1 million or 5 percent compared to the first quarter of 2019. Increased fees and commissions revenue, primarily from mortgage-backed securities trading, was largely offset by increased operating expenses and decreased net interest revenue.


Table 11 -- Wealth Management
(Dollars in thousands)
  Three Months Ended
March 31,
 Increase (Decrease) % Increase (Decrease) Three Months Ended Dec. 31, 2019 Increase (Decrease) % Increase (Decrease)
  2020 2019     
Net interest revenue from external sources $14,366
 $21,486
 $(7,120) (33)% $10,224
 $4,142
 41 %
Net interest revenue from internal sources 4,538
 6,770
 (2,232) (33)% 11,602
 (7,064) (61)%
Total net interest revenue 18,904
 28,256
 (9,352) (33)% 21,826
 (2,922) (13)%
Net loans charged off (recovered) (48) (119) 71
 (60)% (100) 52
 (52)%
Net interest revenue after net loans charged off (recovered) 18,952
 28,375
 (9,423) (33)% 21,926
 (2,974) (14)%
               
Fees and commissions revenue 97,881
 73,256
 24,625
 34 % 92,729
 5,152
 6 %
Other gains, net 
 158
 (158) N/A
 68
 (68) N/A
Other operating revenue 97,881
 73,414
 24,467
 33 % 92,797
 5,084
 5 %
               
Personnel expense 56,443
 43,991
 12,452
 28 % 54,980
 1,463
 3 %
Non-personnel expense 21,749
 17,516
 4,233
 24 % 19,708
 2,041
 10 %
Other operating expense 78,192
 61,507
 16,685
 27 % 74,688
 3,504
 5 %
               
Net direct contribution 38,641
 40,282
 (1,641) (4)% 40,035
 (1,394) (3)%
Corporate expense allocations 8,265
 8,360
 (95) (1)% 9,296
 (1,031) (11)%
Income before taxes 30,383
 31,922
 (1,539) (5)% 30,741
 (358) (1)%
Federal and state income tax 7,810
 8,203
 (393) (5)% 7,878
 (68) (1)%
Net income $22,573
 $23,719
 $(1,146) (5)% $22,863
 $(290) (1)%
               
Average assets $12,723,412
 $9,328,986
 $3,394,426
 36 % $11,225,207
 $1,498,205
 13 %
Average loans 1,705,735
 1,448,718
 257,017
 18 % 1,667,278
 38,457
 2 %
Average deposits 7,623,986
 5,659,771
 1,964,215
 35 % 7,301,391
 322,595
 4 %
Average invested capital 288,264
 265,572
 22,692
 9 % 279,782
 8,482
 3 %

Net interest revenue decreased $9.4 million or 33 percent compared to the first quarter of 2019, largely due to a decrease in the yield earned on deposits sold to the Funds Management unit. Further, Wealth Management incurred additional funding costs for non-interest bearing receivables related to unsettled securities sales. Average loans attributed to the Wealth Management segment increased $257 million or 18 percent and average deposits increased $2.0 billion or 35 percent, largely due to the allocation of acquired loans and deposits.

Fees and commissions revenue increased $24.6 million or 34 percent over the first quarter of 2019. Brokerage and trading revenue increased $20.2 million due to increased trading activity as a result of lower mortgage interest rates. Trust fees and commissions also increased $2.8 million. Operating expense increased $16.7 million or 27 percent compared to the first quarter of 2019. Personnel expense increased $12.5 million, primarily due to the increase of incentive compensation as a result of higher trading activity. Non-personnel expense increased $4.2 million or 24 percent over the first quarter of 2019, largely related to occupancy and equipment and data processing expenses. Corporate expense allocations decreased $95 thousand or 1 percent compared to the prior year.

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Net income for Wealth Management decreased $290 thousand or 1 percent compared to the fourth 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 $2.9 million primarily due to lower yields on deposits sold to our Funds Management unit combined with the increased carrying cost on larger unsettled securities receivables. Brokerage and trading revenue increased $5.7 million due to an increase in trading activity and volumes due to favorable interest rate changes. Trading revenue related to mortgage banking activities increased $15.0 and was partially offset by widened spreads in asset-backed and municipal securities. Operating expenses increased $3.5 million, largely due to variable incentive compensation related to revenue growth and an increase in occupancy allocations.

Average loans increased $38 million or 2 percent to $1.7 billion and average deposits increased $323 million or 4 percent to $7.6 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 March 31, 2020 and December 31, 2019.

We hold an inventory of trading securities in support of sales to a variety of customers, including banks, corporations, insurance companies, money managers and others. Trading securities increased $487 million to $2.1 billion during the first quarter of 2020. 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 relatively unchanged from levels set before our expanded trading activities.

At March 31, 2020, the carrying value of investment (held-to-maturity) securities was $273 million, including a $1.5 million allowance for expected credit losses. The fair value of investment securities was $296 million at March 31, 2020. 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 $12.3 billion at March 31, 2020, a $1.1 billion increase compared to December 31, 2019 as a measure to protect for a down rate environment. At March 31, 2020, the available for sale securities portfolio consisted primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Both residential and commercial mortgage-backed securities have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans.

A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. Our best estimate of the duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at March 31, 2020 is 2.4 years. Management estimates the duration extends to 3.7 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.2 years assuming a 100 basis point decline in the current low rate environment.



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Loans

The aggregate loan portfolio before allowance for loan losses totaled $22.5 billion at March 31, 2020, up $713 million over December 31, 2019. Growth in commercial loan balances during the first quarter was partially offset by a decrease in loans to individuals.

Table 12 -- Loans
(In thousands)
  Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31, 2019
Commercial:          
Energy $4,111,676
 $3,973,377
 $4,114,269
 $3,921,353
 $3,705,099
Healthcare 3,165,096
 3,033,916
 3,032,968
 2,926,510
 2,915,885
Services 3,955,748
 3,832,031
 4,011,089
 4,105,117
 4,090,646
General business 3,563,455
 3,192,326
 3,266,299
 3,383,928
 3,250,345
Total commercial 14,795,975
 14,031,650
 14,424,625
 14,336,908
 13,961,975
           
Commercial real estate:          
Multifamily 1,282,457
 1,265,562
 1,324,839
 1,300,372
 1,210,358
Office 962,004
 928,379
 1,014,275
 1,056,306
 1,033,158
Retail 774,198
 775,521
 799,169
 825,399
 890,685
Industrial 728,026
 856,117
 873,536
 828,569
 767,757
Residential construction and land development 138,958
 150,879
 135,361
 141,509
 149,686
Other commercial real estate 564,442
 457,325
 478,877
 557,878
 549,007
Total commercial real estate 4,450,085
 4,433,783
 4,626,057
 4,710,033
 4,600,651
           
Loans to individuals:  
        
Residential mortgage 1,844,555
 1,886,378
 1,925,539
 1,975,449
 1,999,312
Residential mortgage guaranteed by U.S. government agencies 197,889
 197,794
 191,764
 195,373
 193,308
Personal 1,175,466
 1,201,382
 1,117,382
 1,037,889
 1,003,734
Total loans to individuals 3,217,910
 3,285,554
 3,234,685
 3,208,711
 3,196,354
           
Total $22,463,970
 $21,750,987
 $22,285,367
 $22,255,652
 $21,758,980
         
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. These 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 $14.8 billion or 66 percent of the loan portfolio at March 31, 2020, a $764 million increase over December 31, 2019. Advances on existing commercial revolving lines of credit represented $751 million of this increase during the first quarter, due to both seasonal factors and customer responses to the COVID-19 pandemic. In addition to being collateralized by customer's assets, revolving lines of credit are generally governed by a borrowing base.


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Approximately 79 percent of loans in this segment are located within our geographic footprint, based on collateral location. Loans for which the collateral location is less relevant, such as unsecured loans and reserve-based energy loans are categorized by the borrower's primary operating location. The largest concentration of loans in this segment outside of our footprint is California, totaling 4 percent of the segment.

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 used 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 March 31, 2020, up $138 million over December 31, 2019. Approximately $3.2 billion of energy loans were to oil and gas producers, growing $65 million over December 31, 2019. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest risk form of energy lending. Approximately 62 percent of the committed production loans are secured by properties primarily producing oil and 38 percent of the committed production loans are secured by properties primarily producing natural gas.

Loans to midstream oil and gas companies totaled $672 million at March 31, 2020, up $63 million over December 31, 2019. Loans to borrowers that provide services to the energy industry totaled $184 million at March 31, 2020, an increase of $6.4 million. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $71 million, a $3.7 million increase over the prior quarter.

Unfunded energy loan commitments were $2.6 billion at March 31, 2020, a $386 million decrease compared to December 31, 2019 primarily due to increased utilization in the first quarter.

The healthcare sector of the loan portfolio totaled $3.2 billion or 14 percent of total loans. Healthcare loans increased $131 million over December 31, 2019. Healthcare sector loans consist primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Generally we loan to borrowers with a portfolio of multiple facilities that serves to help diversify risks specific to a single facility. Healthcare also includes loans to hospitals and other medical service providers impacted by a deferral of elective procedures to ensure adequate protective equipment and ventilators for those providing acute care to virus patients. The CARES Act does include multiple revenue enhancement measures for both hospitals and skilled nursing facilities as they manage through the risks of the virus.
 
The services sector of the loan portfolio increased $124 million to $4.0 billion or 18 percent of total loans. Service sector loans consist of a large number of loans to a variety of businesses, including Native American tribal and state and local governments, Native American tribal casino operations, educational services, consumer services and commercial services. Approximately $2.0 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. 

General business loans increased $371 million to $3.6 billion or 16 percent of total loans. General business loans consist of $2.0 billion of wholesale/retail loans, $698 million of manufacturing loans, and remainder from other industries.

Our services and general business loans include areas we consider to be more exposed to the economic slowdown as a result of the social distancing measures in place to combat the COVID-19 pandemic such as entertainment and recreation, retail, hotels, churches, airline travel, and higher education that are dependent on large social gatherings to remain profitable. This represents approximately 8 percent of our total portfolio. This risk may be further mitigated as some of these borrowers participate in the Payroll Protection Program and we will continue to monitor these areas closely in the coming months.


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We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $100 million and with three or more non-affiliated banks as participants. At March 31, 2020, the outstanding principal balance of these loans totaled $5.0 billion, including $2.3 billion of energy loans. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 18 percent of our shared national credits, based on dollars committed. We hold shared national credits to the same standard of analysis and perform the same level of review as internally originated credits. Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. In addition to management’s quarterly assessment of credit risk, banking regulators annually review a sample of shared national credits for proper risk grading.

Commercial Real Estate

Commercial real estate represents loans for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes generally within our geographical footprint. 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.

The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 20 percent to 22 percent over the past five years. The outstanding balance of commercial real estate loans increased $16 million over December 31, 2019.

Approximately 70 percent of loans in this segment are in our geographic footprint based on collateral location. The largest concentration of loans in this segment outside our footprint is Utah, totaling 6.8 percent of the segment, followed by California at 5.9 percent. All other states represent less than 4% individually.

Loans secured by retail facilities are clearly the most vulnerable to the impacts of measures being taken to hinder the spread of the virus, the extent of which is dependent upon the duration of various governmental orders and adjustments in consumer behavior after these orders are lifted. While office and multifamily may also be impacted, we believe our geographic footprint will help in the long term because of strong in-migration over time.
Loans to individuals

Loans to individuals include residential mortgage and personal loans. Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. These loans are secured by a first or second mortgage on the customer's primary residence. These 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.

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. Home equity loans are primarily first-lien and fully amortizing.

Residential mortgage, which includes home equity loans, 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.

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.

Approximately 94 percent of the loans in this segment are secured by collateral located within our geographical footprint. Loans for which the collateral location is less relevant, such as unsecured loans are categorized by the borrower’s primary operating location.

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Residential mortgage loans guaranteed by U.S. government agencies have limited credit exposure because of the agency guarantee. 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.

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 Oklahoma market.


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Table 13-- Loans Managed by Primary Geographical Market
(In thousands)

  Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31, 2019
Texas:          
Commercial $6,350,690
 $6,174,894
 $6,220,227
 $5,877,265
 $5,754,018
Commercial real estate 1,296,266
 1,259,117
 1,292,116
 1,341,609
 1,344,810
Loans to individuals 756,634
 727,175
 749,361
 673,463
 662,721
Total Texas 8,403,590
 8,161,186
 8,261,704
 7,892,337
 7,761,549
           
Oklahoma:          
Commercial 3,886,086
 3,454,825
 3,690,100
 3,762,234
 3,551,054
Commercial real estate 593,473
 631,026
 679,786
 717,970
 665,190
Loans to individuals 1,788,518
 1,854,864
 1,753,698
 1,786,162
 1,792,188
Total Oklahoma 6,268,077
 5,940,715
 6,123,584
 6,266,366
 6,008,432
           
Colorado:          
Commercial 2,181,309
 2,169,598
 2,247,798
 2,325,742
 2,231,703
Commercial real estate 955,608
 927,826
 975,066
 1,023,410
 957,348
Loans to individuals 268,674
 276,939
 303,605
 314,317
 307,534
Total Colorado 3,405,591
 3,374,363
 3,526,469
 3,663,469
 3,496,585
           
Arizona:          
Commercial 1,396,582
 1,307,073
 1,276,534
 1,330,415
 1,335,140
Commercial real estate 714,161
 728,832
 771,425
 761,243
 791,466
Loans to individuals 181,821
 186,539
 170,815
 168,019
 160,848
Total Arizona 2,292,564
 2,222,444
 2,218,774
 2,259,677
 2,287,454
           
Kansas/Missouri:          
Commercial 556,255
 527,872
 566,969
 602,836
 667,859
Commercial real estate 310,799
 322,541
 374,795
 331,443
 327,870
Loans to individuals 116,734
 131,069
 146,522
 155,453
 157,391
Total Kansas/Missouri 983,788
 981,482
 1,088,286
 1,089,732
 1,153,120
           
New Mexico:          
Commercial 327,164
 305,320
 335,409
 350,520
 342,915
Commercial real estate 434,150
 402,148
 374,331
 385,058
 371,416
Loans to individuals 87,110
 90,257
 92,270
 92,626
 96,391
Total New Mexico 848,424
 797,725
 802,010
 828,204
 810,722
           
Arkansas:          
Commercial 97,889
 92,068
 87,588
 87,896
 79,286
Commercial real estate 145,628
 162,293
 158,538
 149,300
 142,551
Loans to individuals 18,419
 18,711
 18,414
 18,671
 19,281
Total Arkansas 261,936
 273,072
 264,540
 255,867
 241,118
           
Total BOK Financial loans $22,463,970
 $21,750,987
 $22,285,367
 $22,255,652
 $21,758,980


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Off-Balance Sheet Commitments

We enter into certain off-balance sheet arrangements in the normal course of business as shown in Table 14. 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.

We have off-balance sheet commitments related to certain residential mortgage loans sold into mortgage-backed securities as part of our mortgage banking activities. We retain off-balance sheet credit risk related to losses in excess of amounts guaranteed by the U.S. Department of Veteran's Affairs ("VA"). We also have off-balance sheet credit risk related to certain residential mortgage loans primarily originated under community development loan programs that were sold to a U.S. government agency with full recourse prior to 2007. We are obligated to repurchase these loans for the life of these loans in the event of foreclosure for the unpaid principal and interest at the time of foreclosure. The majority of our conforming fixed rate loan originations are sold in the secondary market and we only retain repurchase obligations under standard underwriting representations and warranties.

Table 14 – Off-Balance Sheet Credit Commitments
(In thousands)
  Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31, 2019
Loan commitments $9,960,678
 $11,065,649
 $11,259,366
 $11,411,819
 $12,243,886
Standby letters of credit 683,516
 645,505
 712,944
 698,527
 720,451
Unpaid principal balance of residential mortgage loans sold with recourse 86,336
 88,808
 92,139
 93,606
 94,938
Unpaid principal balance of residential mortgage loans transferred into mortgage-backed securities guaranteed by U.S. Dept. of Veteran's Affairs 3,217,567
 3,375,451
 3,472,375
 3,568,408
 3,604,005
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.


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Derivative contracts are carried at fair value. At March 31, 2020, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $929 million compared to $302 million at December 31, 2019. At March 31, 2020, the net fair value of our derivative contracts included $482 million for energy contracts, $313 million for foreign exchange contracts and $132 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 $893 million at March 31, 2020 and $291 million at December 31, 2019.

At March 31, 2020, total derivative assets were reduced by $414 million of cash collateral received from counterparties and total derivative liabilities were reduced by $123 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement.

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

The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor at March 31, 2020 follows in Table 15.

Table 15 -- Fair Value of Derivative Contracts
(In thousands)
Customers $277,987
Banks and other financial institutions 183,267
Exchanges and clearing organizations 53,106
Fair value of customer risk management program asset derivative contracts, net $514,360
 
At March 31, 2020, our largest derivative exposure was to a clearing organization for energy contracts, net of cash margin, of $53 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 $8.52 per barrel of oil would not be great enough to create a scenario in which we are owed by our customers. This is due to the price of oil being within the weighted average fixed price of the portfolio. Rather, we would be owed by the counterparties, however, due to our margining status with counterparties, one would not see any impact here. An increase in prices equivalent to $31.66 per barrel of oil would not yet create a scenario in which we are owed by customers as the price of oil would still be within the weighted average fixed price of the portfolio. Further increases in price to the equivalent of $45.95 per barrel of oil would increase the fair value of our derivative assets by $148 million with lending customers comprising the bulk of the assets. Liquidity requirements of this program may also be affected by our credit rating. At March 31, 2020, 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 March 31, 2020, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.

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Summary of Credit Loss Experience

Table 16 -- Summary of Credit Loss Experience
(In thousands)

 Three Months Ended Mar. 31, 2020
Allowance for loan losses: 
Beginning balance$210,759
CECL transition adjustment1
25,809
Beginning balance, adjusted236,568
Loans charged off(18,917)
Recoveries of loans previously charged off1,696
Net loans charged off(17,221)
Provision for credit losses95,964
Ending balance315,311
  
Accrual for off-balance sheet credit risk from unfunded loan commitments: 
Beginning balance1,585
CECL transition adjustment23,552
Beginning balance, adjusted25,137
Provision for credit losses3,377
Ending balance28,514
  
Accrual for off-balance sheet credit risk associated with mortgage banking activities: 
Beginning balance4,820
CECL transition adjustment10,915
Beginning balance, adjusted15,735
Loans charged off(55)
Provision for credit losses(6,020)
Ending balance9,660
  
Allowance for credit losses related to held-to-maturity (investment) securities: 
Beginning balance
CECL transition adjustment1,052
Beginning balance, adjusted1,052
Provision for credit losses450
Ending balance1,502
  
Total provision for credit losses93,771
  
Net charge-offs (recoveries) (annualized) to average loans0.31%
Recoveries to gross charge-offs8.97%
Provision for loan losses (annualized) to average loans1.71%
Allowance for loan losses to loans outstanding at period-end1.40%
Accrual for unfunded loan commitments to loan commitments0.29%
Combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments to loans outstanding at period-end1.53%
1 
Included $1.3 million related to measurement changes to the allowance attributed to outstanding loan balances and $24.5 million related to recognition of expected credit losses on acquired loans.

- 27 -




  Three Months Ended
  Dec. 31 2019 Sept. 30 2019 June 30, 2019 Mar. 31 2019
Allowance for loan losses:        
Beginning balance $204,432
 $202,534
 $205,340
 $207,457
Loans charged off (14,268) (11,707) (13,227) (11,775)
Recoveries of loans previously charged off 1,816
 1,066
 5,503
 1,689
Net loans charged off (12,452) (10,641) (7,724) (10,086)
Provision for loan losses 18,779
 12,539
 4,918
 7,969
Ending balance $210,759
 $204,432
 $202,534
 $205,340
Accrual for off-balance sheet credit losses:        
Beginning balance $1,364
 $1,903
 $1,821
 $1,790
Provision for off-balance sheet credit losses 221
 (539) 82
 31
Ending balance $1,585
 $1,364
 $1,903
 $1,821
Total combined provision for credit losses $19,000
 $12,000
 $5,000
 $8,000
Net charge-offs (recoveries) (annualized) to average loans 0.22% 0.19% 0.14% 0.19%
Provision for losses (annualized) to average loans 0.34% 0.21% 0.09% 0.15%
Recoveries to gross charge-offs 12.73% 9.11% 41.60% 14.34%
Provision for loan losses (annualized) to average loans 0.34% 0.21% 0.09% 0.15%
Allowance for loan losses to loans outstanding at period-end 0.97% 0.92% 0.91% 0.94%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments 0.01% 0.01% 0.02% 0.01%
Combined allowance for credit losses and off-balance sheet credit risk from unfunded loan commitments to loans outstanding at period-end 0.98% 0.92% 0.92% 0.95%
Allowance for Loan Losses and Accrual for Off-Balance Sheet Credit Risk from Unfunded Loan Commitments
The Company adopted FASB Accounting Standard Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Assets Measured at Amortized Cost ("CECL") on January 1, 2020 through a pre-tax cumulative-effect adjustment to equity of $61.4 million. CECL requires recognition of expected credit losses on assets carried at amortized cost over their expected lives. The previous incurred loss model incorporated only known information as of the balance sheet date. Prior years reported under the incurred loss model have not been restated. CECL uses models to measure the probability of default and loss given default over a 12-month reasonable and supportable forecast period. Models incorporate base case, downside and upside macroeconomic variables such as real gross domestic product ("GDP") growth, civilian unemployment rate and West Texas Intermediate ("WTI") oil prices on a probability weighted basis. See Note 4 to the consolidated financial statements for additional discussion of methodology of allowance for loan losses.
The provision for credit losses was $93.8 million for the first quarter of 2020, primarily due to $99.3 million related to lending activity. Changes in our reasonable and supportable forecasts of macroeconomic variables, primarily due to the impact of the COVID-19 pandemic, oil price declines, and other assumptions, required a provision of $66.2 million. All other changes totaled $33.1 million, which included $7.5 million related to loan growth, $8.4 million related to changes in impairment, risk grading and other portfolio changes, and net charge-offs of $17.2 million.

Our base case reasonable and supportable forecast includes a 20 percent decrease in GDP and an 8.3 percent civilian unemployment rate in the second quarter of 2020. Our forward twelve month forecast through the first quarter of 2021 assumes a 4.6 percent decrease in GDP and a 6.5 percent civilian unemployment rate. WTI oil prices are projected to generally follow the NYMEX forward curve that existed at the end of March 2020, $25.10 per barrel for delivery in the second quarter of 2020 and increasing to $34.73 per barrel for delivery in the first quarter of 2021. This scenario is consistent with data and other industry forecasts available during the last week of March 2020.

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Our downside reasonable and supportable forecast reflects a more severe and prolonged disruption in economic activity than the base case and includes a 30 percent decrease in GDP and a 9.5 percent civilian unemployment rate in the second quarter of 2020. Our forward twelve month forecast through the first quarter of 2021 assumes a 10.9 percent decrease in GDP and an 8.0 percent civilian unemployment rate. WTI oil prices are projected to range from $19.10 per barrel for delivery in the second quarter of 2020 to $31.73 per barrel for delivery in the first quarter of 2021.

The upside case reflects a more mild and abbreviated disruption in economic activity than the base case, with real GDP declining by 1.6 percent from the second quarter of 2020 to the first quarter of 2021. Other macroeconomic factors in this scenario also reflect this outlook compared to the base case with the civilian unemployment rate reaching a lower peak in the second quarter of 2020 and then recovering more quickly and WTI prices being less adverse.
The allowance for loan losses under CECL totaled $315 million or 1.40 percent of outstanding loans and 199 percent of nonaccruing loans at March 31, 2020, excluding residential mortgage loans guaranteed by U.S. government agencies. The combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was $344 million or 1.53 percent of outstanding loans and 217 percent of nonaccruing loans at March 31, 2020.

The allowance for credit losses attributed to energy was 2.43 percent of outstanding energy loans at March 31. Demand declines in the first quarter related to the COVID-19 pandemic coupled with the OPEC Plus production conflict have led to price declines of current spot and future oil prices. Natural gas prices have not been as significantly impacted with the recent price declines in oil. As we have said in the past, the duration of the downturn is a more significant factor affecting performance than the level of prices. Although current spot and future oil prices have been volatile, if drivers of this decline are short term, meaning less than twelve months, then expected losses in the portfolio will not be overly impactful to the Company.

We also conduct quarterly stress tests of our energy borrowers with more than 50 percent funding on their lines of credit and all criticized loans using a price deck discounted at 20 percent. This stress test helps us identify potential issues, although the most recent test resulted in no surprises once hedging was taken into consideration. Of all the energy customers that we stress test, which makes up 92 percent of production loans outstanding, 95 percent of our customers have some level of hedging in the 12-month range and many of them carry into the 24-month range.

The company recorded a $19.0 million provision for credit losses under the previous incurred loss model in the fourth quarter of 2019. The allowance for loan losses under the incurred loss model was $211 million or 0.97 percent of outstanding loans and 121 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies at December 31, 2019. The combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was $212 million or 0.98 percent of outstanding loans and 121 percent of nonaccruing loans.

Net Loans Charged Off

Net charge-offs of commercial loans were $16.2 million in the first quarter of 2020, primarily related to two previously impaired energy production loans. Net commercial real estate loan charge-offs were $839 thousand and net charge-offs of loans to individuals were $229 thousand. Net charge-offs of loans to individuals include deposit account overdraft losses.

Accrual for Off-Balance Sheet Credit Risk Associated with Mortgage Banking Activities

The accrual for off-balance sheet credit risk associated with mortgage banking activities includes consideration of credit risk related to certain residential mortgage loans sold into mortgage-backed securities in excess of amounts guaranteed by the U.S. Department of Veteran's Affairs ("VA") and mortgage loans originated under community development loan programs that were sold to a U.S. government agency with full recourse.

We use publicly available long-term national data to estimate total loss given default for our off-balance sheet credit risk related to losses in excess of amounts guaranteed by the VA. This result is combined with probability of default output from our mortgage servicing rights model to estimate total expected loss. Then, we estimate the VA's guarantee percentage to determine our portion of the credit risk. Qualitative adjustment may be used, if necessary.

The accrual for off-balance sheet credit risk associated with mortgage banking activities decreased $6.0 million during the first quarter primarily due to a shortening of the expected life of loans due to increased prepayment speeds as a result of decreased mortgage interest rates.


- 29 -



Allowance for Credit Losses Related to Held-to-Maturity (Investment) Securities

The expected credit losses principles apply to all financial assets measured at cost, including our held-to-maturity (investment) debt securities portfolio. Our investment portfolio includes municipal and other tax-exempt securities and other debt securities. Expected credit losses for these assets is based on probability of default and loss given default assumptions that align with similarly graded loans. Qualitative adjustment may be used, if necessary.

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Nonperforming Assets

As more fully described in Note 4 to the Consolidated Financial Statements, loans are generally classified as nonaccruing when it becomes probable that we will not collect the full contractual principal and interest. Accruing renegotiated loans guaranteed by U.S. government agencies represent residential mortgage loans that have been modified in troubled debt restructurings. Interest continues to accrue based on the modified terms of the loan and loans may be sold once they become eligible according to U.S. government agency guidelines. 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. A summary of nonperforming assets follows in Table 17:

Table 17 -- Nonperforming Assets
(In thousands)

  Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31, 2019
Nonaccruing loans:  
        
Commercial:        
  
Energy $96,448
 $91,722
 $88,894
 $71,632
 $35,332
Healthcare 4,070
 4,480
 5,978
 16,148
 18,768
Services 8,425
 7,483
 6,119
 10,087
 9,555
General business 9,681
 11,731
 10,715
 25,528
 26,703
Total commercial 118,624
 115,416
 111,706
 123,395
 90,358
           
Commercial real estate 8,545
 27,626
 23,185
 21,670
 21,508
           
Loans to individuals:        
  
Residential mortgage 30,721
 31,522
 30,972
 31,734
 33,463
Residential mortgage guaranteed by U.S. government agencies 5,005
 6,100
 6,332
 6,743
 6,946
Personal 277
 287
 271
 237
 302
Total loans to individuals 36,003
 37,909
 37,575
 38,714
 40,711
Total nonaccruing loans $163,172
 $180,951
 $172,466
 $183,779
 $152,577
Accruing renegotiated loans guaranteed by U.S. government agencies 91,757
 92,452
 92,718
 95,989
 91,787
Real estate and other repossessed assets 36,744
 20,359
 21,026
 16,940
 17,139
Total nonperforming assets $291,673
 $293,762
 $286,210
 $296,708
 $261,503
Total nonperforming assets excluding those guaranteed by U.S. government agencies $194,911
 $195,210
 $187,160
 $193,976
 $162,770
           
Allowance for loan losses to nonaccruing loans1,2
 199.35% 120.54% 123.05% 114.40% 141.00%
Nonperforming assets to outstanding loans and repossessed assets 1.30% 1.35% 1.28% 1.33% 1.20%
Nonaccruing commercial loans to outstanding commercial loans 0.80% 0.82% 0.77% 0.86% 0.65%
Nonaccruing commercial real estate loans to outstanding commercial real estate loans 0.19% 0.62% 0.50% 0.46% 0.47%
Nonaccruing loans to individuals to outstanding loans to individuals2
 1.03% 1.03% 1.03% 1.06% 1.12%
1
Effective January 1, 2020, the Company adopted the required expected credit loss approach for the allowance as required by ASU 2016-13, Financial Instruments - Credit Losses. All periods prior to January 1, 2020 reflect the incurred loss approach in effect at that time.
2
Excludes residential mortgages guaranteed by U.S. government agencies.
         

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Excluding assets guaranteed by U.S. government agencies, nonperforming assets were largely unchanged compared to December 31, 2019. Newly identified nonaccruing loans totaled $30 million, primarily related to a single energy borrower, offset by $8.9 million of payments, $19 million of charge-offs and $18 million of foreclosures, primarily related to single commercial real estate borrower. The Company generally retains nonperforming assets to maximize potential recovery, which may cause future nonperforming assets to decrease more slowly.

A rollforward of nonperforming assets for the three months ended March 31, 2020 follows in Table 18.

Table 18 -- Rollforward of Nonperforming Assets
(In thousands)
  Three Months Ended
  March 31, 2020
  Nonaccruing Loans      
  Commercial Commercial Real Estate Loan to Individuals Total 
 
Renegotiated Loans
 Real Estate and Other Repossessed Assets Total Nonperforming Assets
Balance, Dec. 31, 2019 $115,416
 $27,626
 $37,909
 $180,951
 $92,452
 $20,359
 $293,762
Additions 26,689
 4
 3,146
 29,839
 8,857
 
 38,696
Payments (6,647) (154) (2,130) (8,931) (914) 
 (9,845)
Charge-offs (16,615) (886) (1,416) (18,917) 
 
 (18,917)
Net gains (losses) and write-downs 
 
 
 
 
 3
 3
Foreclosure of nonperforming loans 
 (18,045) (429) (18,474) 
 18,474
 
Foreclosure of loans guaranteed by U.S. government agencies 
 
 (1,077) (1,077) (1,839) 
 (2,916)
Proceeds from sales 
 
 
 
 (7,143) (2,092) (9,235)
Return to accrual status (219) 
 
 (219) 
 
 (219)
Other, net 
 
 
 
 344
 
 344
Balance, Mar. 31, 2020 $118,624
 $8,545
 $36,003
 $163,172
 $91,757
 $36,744
 $291,673
         
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. At foreclosure, these amounts are transferred to claims receivable accounts. These properties will be conveyed to the agencies once applicable criteria have been met. 

Real Estate and Other Repossessed Assets

Real estate and other repossessed assets totaled $37 million at March 31, 2020, composed primarily of $23 million of developed commercial real estate, $5.6 million of undeveloped land primarily zoned for commercial development, $5.3 million of oil and gas properties and $2.9 million of 1-4 family residential properties. Real estate and other repossessed assets totaled $20 million at December 31, 2019.


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Liquidity and Capital

Based on the average balances for the first quarter of 2020, approximately 62 percent of our funding was provided by deposit accounts, 23 percent from borrowed funds, less than 1 percent from long-term subordinated debt and 11 percent from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

Subsidiary Bank

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

Average deposits for the first quarter of 2020 totaled $28.2 billion, a $1.1 billion increase over the fourth quarter of 2019. Strong deposit growth was driven by a combination of our continued focus on growing core customer deposits, inflows from external money funds, and seasonal inflows. Interest-bearing transaction account balances increased $1.5 billion and demand deposits decreased $380 million.

Table 19 - Average Deposits by Line of Business
(In thousands)
 Three Months Ended
 Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31, 2019
Commercial Banking$11,907,386
 $11,419,558
 $10,833,057
 $10,724,206
 $8,261,543
Consumer Banking6,869,481
 6,974,453
 6,983,018
 6,998,677
 6,544,665
Wealth Management7,623,986
 7,301,391
 6,590,332
 6,220,848
 5,659,771
Subtotal26,400,853
 25,695,402
 24,406,407
 23,943,731
 20,465,979
Funds Management and other1,794,715
 1,404,838
 1,293,767
 1,218,645
 4,148,500
Total$28,195,568
 $27,100,240
 $25,700,174
 $25,162,376
 $24,614,479

Acquired deposits were allocated to the lines of business from funds management and other in the second quarter of 2019. Average Commercial Banking deposit balances increased $488 million over the fourth quarter of 2019. Interest-bearing transaction account balances increased $646 million and demand deposit balances decreased $165 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 decreased $105 million compared to the prior quarter. An $83 million decrease in demand deposit balances and a $55 million decrease in interest-bearing transaction deposit balances was partially offset by a $19 million increase in time deposit balances and a $14 million increase in savings account balances.

Average Wealth Management deposits increased $323 million over the fourth quarter of 2019. Interest-bearing transaction account balances were up $432 million. Demand deposit balances decreased $73 million. Time deposit balances decreased $34 million.

Average time deposits for the first quarter of 2020 included $247 million of brokered deposits, a $9.5 million increase compared to the fourth quarter of 2019. Average interest-bearing transaction accounts for the first quarter included $1.3 billion of brokered deposits, a $75 million increase compared to the fourth quarter of 2019.


- 33 -



The distribution of our period end deposit account balances among principal markets follows in Table 20.

Table 20 -- Period End Deposits by Principal Market Area
(In thousands)
  Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31, 2019
Oklahoma:          
Demand $3,669,558
 $3,257,337
 $3,515,312
 $3,279,360
 $3,432,239
Interest-bearing:          
Transaction 9,955,697
 8,574,912
 7,447,799
 7,020,484
 6,542,548
Savings 329,631
 306,194
 308,103
 307,785
 309,875
Time 1,137,802
 1,125,446
 1,198,170
 1,253,804
 1,217,371
Total interest-bearing 11,423,130
 10,006,552
 8,954,072
 8,582,073
 8,069,794
Total Oklahoma 15,092,688
 13,263,889
 12,469,384
 11,861,433
 11,502,033
           
Texas:          
Demand 2,767,399
 2,757,376
 2,867,915
 2,970,340
 2,964,600
Interest-bearing:          
Transaction 2,874,362
 2,911,731
 2,589,063
 2,453,187
 2,385,001
Savings 115,039
 102,456
 100,597
 103,125
 101,849
Time 505,565
 495,343
 464,264
 425,253
 419,269
Total interest-bearing 3,494,966
 3,509,530
 3,153,924
 2,981,565
 2,906,119
Total Texas 6,262,365
 6,266,906
 6,021,839
 5,951,905
 5,870,719
           
Colorado:          
Demand 1,579,764
 1,729,674
 1,694,044
 1,621,820
 1,897,547
Interest-bearing:          
Transaction 1,759,384
 1,769,037
 1,910,874
 1,800,271
 1,844,632
Savings 58,000
 53,307
 60,107
 57,263
 58,919
Time 279,105
 283,517
 273,622
 246,198
 261,235
Total interest-bearing 2,096,489
 2,105,861
 2,244,603
 2,103,732
 2,164,786
Total Colorado 3,676,253
 3,835,535
 3,938,647
 3,725,552
 4,062,333
           
New Mexico:          
Demand 750,052
 623,722
 645,698
 630,861
 662,362
Interest-bearing:          
Transaction 563,891
 558,493
 539,260
 557,881
 573,203
Savings 67,553
 63,999
 62,863
 62,636
 61,497
Time 235,778
 238,140
 236,135
 232,569
 228,212
Total interest-bearing 867,222
 860,632
 838,258
 853,086
 862,912
Total New Mexico 1,617,274
 1,484,354
 1,483,956
 1,483,947
 1,525,274
           

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  Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31, 2019
Arizona:          
Demand 665,396
 681,268
 705,895
 704,144
 697,381
Interest-bearing:          
Transaction 729,603
 684,929
 600,103
 560,861
 622,039
Savings 8,832
 10,314
 12,487
 11,966
 12,144
Time 47,081
 49,676
 44,347
 43,099
 44,004
Total interest-bearing 785,516
 744,919
 656,937
 615,926
 678,187
Total Arizona 1,450,912
 1,426,187
 1,362,832
 1,320,070
 1,375,568
           
Kansas/Missouri:          
Demand 318,985
 384,533
 376,020
 431,856
 410,799
Interest-bearing:          
Transaction 537,552
 784,574
 284,940
 310,774
 361,590
Savings 12,888
 12,169
 11,689
 13,125
 13,815
Time 19,137
 17,877
 19,126
 19,205
 19,977
Total interest-bearing 569,577
 814,620
 315,755
 343,104
 395,382
Total Kansas/Missouri 888,562
 1,199,153
 691,775
 774,960
 806,181
           
Arkansas:          
Demand 70,428
 27,381
 39,513
 29,176
 31,624
Interest-bearing:          
Transaction 175,803
 108,076
 149,506
 148,485
 147,964
Savings 1,862
 1,837
 1,747
 1,783
 1,785
Time 8,005
 7,850
 7,877
 7,810
 8,321
Total interest-bearing 185,670
 117,763
 159,130
 158,078
 158,070
Total Arkansas 256,098
 145,144
 198,643
 187,254
 189,694
Total BOK Financial deposits $29,244,152
 $27,621,168
 $26,167,076
 $25,305,121
 $25,331,802

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 $550 million at March 31, 2020. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale and trading securities. Federal Home Loan Bank borrowings are generally short-term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and agency mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $6.5 billion during the quarter, compared to $6.2 billion in the fourth quarter of 2019. On March 15, 2020, the Federal Reserve announced changes to the Discount Window, including narrowing the spread of the primary credit rate relative to the general level of overnight interest to help encourage more active use of the Discount Window by depository institutions. We did increase our collateral at the Discount Window and maintained a modest amount of borrowings in late March.

At March 31, 2020, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $11.4 billion.

A summary of other borrowings for BOK Financial on a consolidated basis follows in Table 21.


- 35 -



Table 21 -- Borrowed Funds
(In thousands)
    Three Months Ended
March 31, 2020
   Three Months Ended
December 31, 2019
  Mar. 31, 2020 
Average
Balance
During the
Quarter
 Rate 
Maximum
Outstanding
At Any Month
End During
the Quarter
 Dec. 31, 2019 
Average
Balance
During the
Quarter
 Rate 
Maximum
Outstanding
At Any Month
End During
the Quarter
                 
Funds purchased 1,827,134
 2,848,816
 1.25% 2,608,315
 3,390,528
 3,746,323
 1.66% 3,390,528
Repurchase agreements 2,756,634
 967,125
 0.82% 2,756,634
 427,822
 374,287
 0.61% 427,822
Other borrowings:                
Federal Home Loan Bank advances 5,500,000
 6,474,725
 1.65% 7,500,000
 4,500,000
 6,218,478
 1.98% 6,200,000
GNMA repurchase liability 15,030
 14,304
 4.41% 15,030
 15,417
 13,287
 4.36% 15,872
Federal Reserve Bank advances 
 36,264
 0.31% 
 
 
 % 
Other 14,524
 17,032
 4.13% 14,524
 11,638
 15,429
 4.22% 34,676
Total other borrowings 5,529,554
 6,542,325
 1.66% 

 4,527,055
 6,247,194
 2.01% 

Subordinated debentures1
 275,942
 275,932
 5.30% 275,942
 275,923
 275,916
 5.40% 275,923
Total other borrowed funds and subordinated debentures $10,389,264
 $10,634,198
 1.57%   $8,621,328
 $10,643,720
 1.92%  
1 Parent Company only.
BOKF, NA also has a liability related to the repurchase of certain delinquent residential mortgage loans previously sold in GNMA mortgage pools. Interest is payable monthly at rates contractually due to investors.

Parent Company

At March 31, 2020, cash and interest-bearing cash and cash equivalents held by the parent company totaled $170 million. The primary sources of liquidity for BOK Financial are cash on hand and dividends from BOKF, NA. Dividends from the bank are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the two preceding years. Dividends are further restricted by minimum capital requirements. At March 31, 2020, based upon the most restrictive limitations as well as management's internal capital policy, BOKF, NA could declare up to $181 million of dividends without regulatory approval. Dividend constraints may be alleviated through increases in retained earnings, capital issuances or changes in risk weighted assets. Future losses or increases in required regulatory capital at the bank could affect its ability to pay dividends to the parent company.

Our equity capital at March 31, 2020 was $5.0 billion, a $170 million increase over December 31, 2019. Net income less cash dividends paid increased equity $26 million during the first quarter of 2020. The transition adjustment related to the implementation of CECL decreased equity by $47 million. Changes in interest rates resulted in a $226 million increase in accumulated other comprehensive gain over December 31, 2019. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings including expected benefits from lower federal income tax rates, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt or perpetual preferred stock issuance, share repurchase and stock and cash dividends.

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 March 31, 2020, 1,308,713 shares have been repurchased under this authorization. The Company repurchased 442,000 shares during the first quarter of 2020 at an average price of $75.52 per share. We view share buybacks opportunistically, but within the context of maintaining our strong capital position.


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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 22. 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.

In March 2020, in response to the impact on the financial markets by the COVID-19 pandemic, the banking agencies issued an interim final rule permitting banking organizations that implement CECL the option to delay for two years an estimate of the CECL methodology's effect on regulatory capital, followed by a three-year transition period. The estimate includes the implementation date adjustment as of January 1, 2020 plus an estimate of the impact of the change for a two year period following implementation of CECL. We have elected to delay the regulatory capital impact of the transition in accordance with the interim final rule as of March 31, 2020.

The capital ratios for BOK Financial on a consolidated basis are presented in Table 22.

Table 22 -- Capital Ratios
  Minimum Capital Requirement Capital Conservation Buffer Minimum Capital Requirement Including Capital Conservation Buffer Mar. 31, 2020 Dec. 31, 2019 Mar. 31, 2019
Risk-based capital:            
Common equity Tier 1 4.50% 2.50% 7.00% 10.98% 11.39% 10.71%
Tier 1 capital 6.00% 2.50% 8.50% 10.98% 11.39% 10.71%
Total capital 8.00% 2.50% 10.50% 12.65% 12.94% 12.24%
Tier 1 Leverage 4.00% N/A
 4.00% 8.15% 8.40% 8.76%
             
Average total equity to average assets       10.73% 10.96% 11.29%
Tangible common equity ratio       8.39% 8.98% 8.64%

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

Table 23 -- Non-GAAP Measure
(Dollars in thousands)
  Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31, 2019
Tangible common equity ratio:          
Total shareholders' equity $5,026,248
 $4,855,795
 $4,829,016
 $4,709,438
 $4,522,873
Less: Goodwill and intangible assets, net 1,169,898
 1,173,362
 1,172,411
 1,172,564
 1,177,573
Tangible common equity 3,856,350
 3,682,433
 3,656,605
 3,536,874
 3,345,300
Total assets 47,119,162
 42,172,021
 43,127,205
 41,893,073
 39,882,962
Less: Goodwill and intangible assets, net 1,169,898
 1,173,362
 1,172,411
 1,172,564
 1,177,573
Tangible assets $45,949,264
 $40,998,659
 $41,954,794
 $40,720,509
 $38,705,389
Tangible common equity ratio 8.39% 8.98% 8.72% 8.69% 8.64%


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Off-Balance Sheet Arrangements

See Note 4 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 the 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 decrease in interest rates in the current low-rate environment are not meaningful.

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. 


- 38 -



Table 24 -- Interest Rate Sensitivity
(Dollars in thousands)
  200 bp Increase 
100 bp Decrease1
  March 31, March 31,
  2020 2019 2020 2019
Anticipated impact over the next twelve months on net interest revenue $(10,523) $(4,451) N/A $42,977
  (1.02)% (0.38)% N/A (3.70)%
1 The results of a decrease in the current low-rate environment in 2020 are not meaningful. The results of a 200 basis point decrease in interest rates in the low-rate environment in 2019 were not meaningful, therefore we reported the effect of a 100 basis point decrease.

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 25 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
  March 31,
  2020 2019
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp
MSR Asset $36,430
 $(18,051) $25,936
 $(33,750)
MSR Hedge (27,134) 26,900
 (31,698) 26,211
Net Exposure 9,296
 8,849
 (5,762) (7,539)

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.


- 39 -



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 26 -- Mortgage Pipeline Sensitivity Analysis
(Dollars in thousands)
  Three Months Ended
March 31,
  2020 2019
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp
Average1
 $(211) $(166) $29
 $(810)
Low2
 582
 998
 436
 (344)
High3
 (1,344) (1,483) (405) (1,343)
Period End (758) (262) 127
 (1,013)
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 $11 million market risk limit for the trading portfolio, net of economic hedges.

Table 27 -- Trading Sensitivity Analysis
(Dollars in thousands)
  Three Months Ended
March 31,
  2020 2019
  Up 50 bp Down 50 bp Up 50 bp Down 50 bp
Average1
 $(4,663) $7,326
 $(1,707) $1,577
Low2
 (638) 15,309
 857
 3,440
High3
 (11,506) 2,891
 (3,665) (729)
Period End (5,987) 6,400
 127
 (1,013)
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.


- 40 -



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.
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 Corporation, the financial services industry, the economy generally and the expected or potential impact of the novel coronavirus (COVID-19) pandemic, and the related responses of the government, consumers, and others, on our business, financial condition and results of operations. 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 acquisitions and 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 various forward-looking 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 government, consumer or business responses to, and ability to treat or prevent further outbreak of, the COVID-19 pandemic, 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. 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.


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In this report we may sometimes use non-GAAP financial measures. 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.



- 42 -



     
Consolidated Statements of Earnings (Unaudited)    
(In thousands, except share and per share data) Three Months Ended
  March 31,
Interest revenue 2020 2019
Loans $243,218
 $279,872
Residential mortgage loans held for sale 1,123
 1,663
Trading securities 11,760
 18,695
Investment securities 3,121
 4,034
Available for sale securities 69,720
 56,831
Fair value option securities 11,708
 5,237
Restricted equity securities 5,894
 6,345
Interest-bearing cash and cash equivalents 2,393
 3,397
Total interest revenue 348,937
 376,074
Interest expense  
  
Deposits 46,159
 37,417
Borrowed funds 37,785
 56,810
Subordinated debentures 3,633
 3,745
Total interest expense 87,577
 97,972
Net interest revenue 261,360
 278,102
Provision for credit losses 93,771
 8,000
Net interest revenue after provision for credit losses 167,589
 270,102
Other operating revenue  
  
Brokerage and trading revenue 50,779
 31,617
Transaction card revenue 21,881
 20,738
Fiduciary and asset management revenue 44,458
 43,358
Deposit service charges and fees 26,130
 28,243
Mortgage banking revenue 37,167
 23,834
Other revenue 12,309
 12,762
Total fees and commissions 192,724
 160,552
Other gains (losses), net (10,741) 2,976
Gain on derivatives, net 18,420
 4,667
Gain on fair value option securities, net 68,393
 9,665
Change in fair value of mortgage servicing rights (88,480) (20,666)
Gain on available for sale securities, net 3
 76
Total other operating revenue 180,319
 157,270
Other operating expense  
  
Personnel 156,181
 169,228
Business promotion 6,215
 7,874
Professional fees and services 12,948
 16,139
Net occupancy and equipment 26,061
 29,521
Insurance 4,980
 4,839
Data processing and communications 32,743
 31,449
Printing, postage and supplies 4,272
 4,885
Net losses and operating expenses of repossessed assets 1,531
 1,996
Amortization of intangible assets 5,094
 5,191
Mortgage banking costs 10,545
 9,906
Other expense 8,054
 6,129
Total other operating expense 268,624
 287,157
Net income before taxes 79,284
 140,215
Federal and state income taxes 17,300
 29,950
Net income 61,984
 110,265
Net income (loss) attributable to non-controlling interests (95) (347)
Net income attributable to BOK Financial Corporation shareholders $62,079
 $110,612
Earnings per share:  
  
Basic $0.88
 $1.54
Diluted $0.88
 $1.54
Average shares used in computation:    
Basic 70,123,685
 71,387,070
Diluted 70,130,166
 71,404,388
Dividends declared per share $0.51
 $0.50

See accompanying notes to consolidated financial statements.

- 43 -



Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands, except share and per share data)    
  Three Months Ended
  March 31,
  2020 2019
Net income $61,984
 $110,265
Other comprehensive income before income taxes:    
Net change in unrealized gain (loss) 297,843
 92,739
Reclassification adjustments included in earnings:    
Gain on available for sale securities, net (3) (76)
Other comprehensive income before income taxes 297,840
 92,663
Federal and state income taxes 71,471
 23,609
Other comprehensive income, net of income taxes 226,369

69,054
Comprehensive income 288,353
 179,319
Comprehensive loss attributable to non-controlling interests (95) (347)
Comprehensive income attributable to BOK Financial Corp. shareholders $288,448
 $179,666

See accompanying notes to consolidated financial statements.

- 44 -



Consolidated Balance Sheets
(In thousands, except share data)
  Mar. 31, 2020 Dec. 31, 2019
  (Unaudited) (Footnote 1)
Assets    
Cash and due from banks $670,500
 $735,836
Interest-bearing cash and cash equivalents 302,577
 522,985
Trading securities 2,110,585
 1,623,921
Investment securities, net of allowance (fair value: March 31, 2020 – $296,402; December 31, 2019 – $314,402)
 272,576
 293,418
Available for sale securities 12,694,277
 11,269,643
Fair value option securities 1,703,238
 1,098,577
Restricted equity securities 390,042
 460,552
Residential mortgage loans held for sale 204,720
 182,271
Loans 22,463,970
 21,750,987
Allowance for loan losses (315,311) (210,759)
Loans, net of allowance 22,148,659
 21,540,228
Premises and equipment, net 546,093
 535,519
Receivables 207,341
 231,811
Goodwill 1,048,091
 1,048,091
Intangible assets, net 121,807
 125,271
Mortgage servicing rights 110,828
 201,886
Real estate and other repossessed assets, net of allowance (March 31, 2020 – $11,029; December 31, 2019 – $11,013)
 36,744
 20,359
Derivative contracts, net 922,716
 323,375
Cash surrender value of bank-owned life insurance 391,006
 389,879
Receivable on unsettled securities sales 2,171,881
 1,020,404
Other assets 1,065,481
 547,995
Total assets $47,119,162
 $42,172,021
     
Liabilities and Equity    
Liabilities:    
Noninterest-bearing demand deposits $9,821,582
 $9,461,291
Interest-bearing deposits:  
  
Transaction 16,596,292
 15,391,752
Savings 593,805
 550,276
Time 2,232,473
 2,217,849
Total deposits 29,244,152
 27,621,168
Funds purchased and repurchase agreements 4,583,768
 3,818,350
Other borrowings 5,529,554
 4,527,055
Subordinated debentures 275,942
 275,923
Accrued interest, taxes and expense 309,236
 259,701
Derivative contracts, net 1,213,445
 251,128
Due on unsettled securities purchases 537,709
 182,547
Other liabilities 391,196
 372,230
Total liabilities 42,085,002
 37,308,102
Shareholders' equity:  
  
Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: March 31, 2020 – 76,000,985; December 31, 2019 – 75,758,597)
 5
 5
Capital surplus 1,354,826
 1,350,995
Retained earnings 3,709,019
 3,729,778
Treasury stock (shares at cost: March 31, 2020 – 5,692,453; December 31, 2019 – 5,178,999)
 (368,894) (329,906)
Accumulated other comprehensive gain 331,292
 104,923
Total shareholders’ equity 5,026,248
 4,855,795
Non-controlling interests 7,912
 8,124
Total equity 5,034,160
 4,863,919
Total liabilities and equity $47,119,162
 $42,172,021

See accompanying notes to consolidated financial statements.

- 45 -



Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 Common Stock Capital
Surplus
 Retained
Earnings
 Treasury Stock Accumulated
Other
Comprehensive
Income (Loss)
 Total
Shareholders’
Equity
 Non-
Controlling
Interests
 Total Equity
 Shares Amount   Shares Amount   
Balance, December 31, 201975,759
 $5
 $1,350,995
 $3,729,778
 5,179
 $(329,906) $104,923
 $4,855,795
 $8,124
 $4,863,919
Transition adjustment - CECL
 
 
 (46,696) 
 
 
 (46,696) 
 (46,696)
Balance, January 1, 2020 Adjusted75,759
 $5
 $1,350,995
 $3,683,082
 5,179
 $(329,906) $104,923
 $4,809,099
 $8,124
 $4,817,223
Net income (loss)
 
 
 62,079
 
 
 
 62,079
 (95) 61,984
Other comprehensive income
 
 
 
 
 
 226,369
 226,369
 
 226,369
Repurchase of common stock
 
 
 
 442
 (33,380) 
 (33,380) 
 (33,380)
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
Stock options exercised10
 
 586
 
 
 
 
 586
 
 586
Non-vested shares awarded, net232
 
 
 
 
 
 
 
 
 
Vesting of non-vested shares
 
 
 
 71
 (5,608) 
 (5,608) 
 (5,608)
Share-based compensation
 
 3,245
 
 
 
 
 3,245
 
 3,245
Cash dividends on common stock
 
 
 (36,142) 
 
 
 (36,142) 
 (36,142)
Capital calls and distributions, net
 
 
 
 
 
 
 
 (117) (117)
Balance, March 31, 202076,001
 $5
 $1,354,826
 $3,709,019
 5,692
 $(368,894) $331,292
 $5,026,248
 $7,912
 $5,034,160
                    
                    
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)
 
 
 110,612
 
 
 
 110,612
 (347) 110,265
Other comprehensive income
 
 
 
 
 
 69,054
 69,054
 
 69,054
Repurchase of common stock
 
 
 
 705
 (60,577) 
 (60,577) 
 (60,577)
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
Stock options exercised18
 
 879
 
 
 
 
 879
 
 879
Non-vested shares awarded, net33
 
 
 
 
 
 
 
 
 
Vesting of non-vested shares
 
 
 
 18
 (1,428) 
 (1,428) 
 (1,428)
Share-based compensation
 
 5,414
 
 
 
 
 5,414
 
 5,414
Cash dividends on common stock
 
 
 (36,052) 
 
 
 (36,052) 
 (36,052)
Capital calls and distributions, net
 
 
 
 
 
 
 
 (1,753) (1,753)
Balance, March 31, 201975,762
 $5
 $1,340,323
 $3,447,076
 4,312
 $(261,000) $(3,531) $4,522,873
 $8,836
 $4,531,709
                    
See accompanying notes to consolidated financial statements.

- 46 -



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

 Three Months Ended
  March 31,
  2020 2019
Cash Flows From Operating Activities:    
Net income $61,984
 $110,265
Adjustments to reconcile net income to net cash used in operating activities:    
Provision for credit losses 93,771
 8,000
Change in fair value of mortgage servicing rights due to market changes 88,480
 20,666
Change in the fair value of mortgage servicing rights due to principal payments 8,019
 6,583
Net unrealized losses from derivative contracts 15,369
 695
Share-based compensation 3,245
 5,414
Depreciation and amortization 23,198
 19,412
Net amortization of discounts and premiums 2,013
 4,339
Net losses (gains) on financial instruments and other losses (gains), net 10,742
 1,872
Net gain on mortgage loans held for sale (13,278) (5,640)
Mortgage loans originated for sale (548,956) (510,527)
Proceeds from sale of mortgage loans held for sale 548,077
 507,459
Capitalized mortgage servicing rights (5,441) (6,188)
Change in trading and fair value option securities (1,092,249) (608,232)
Change in receivables (1,107,130) (682,957)
Change in other assets (17,198) (5,074)
Change in accrued interest, taxes and expense (7,305) (18,220)
Change in other liabilities 193,857
 46,147
Net cash used in operating activities (1,742,802) (1,105,986)
Cash Flows From Investing Activities:  
  
Proceeds from maturities or redemptions of investment securities 19,079
 23,227
Proceeds from maturities or redemptions of available for sale securities 394,205
 337,822
Purchases of available for sale securities (1,552,914) (663,193)
Proceeds from sales of available for sale securities 26,894
 245,259
Change in amount receivable on unsettled available for sale securities transactions (22,113) 31,618
Loans originated, net of principal collected (729,881) (97,656)
Net payments on derivative asset contracts (98,215) (33,781)
Proceeds from disposition of assets 165,282
 70,379
Purchases of assets (119,785) (116,692)
Net cash used in investing activities (1,917,448) (203,017)
Cash Flows From Financing Activities:  
  
Net change in demand deposits, transaction deposits and savings accounts 1,608,360
 (16,970)
Net change in time deposits 14,624
 84,828
Net change in other borrowed funds 1,747,640
 1,614,995
Net proceeds on derivative liability contracts 82,126
 36,250
Net change in derivative margin accounts (163,911) (150,722)
Change in amount due on unsettled available for sale securities transactions 160,211
 (22,923)
Issuance of common and treasury stock, net (5,022) (549)
Repurchase of common stock (33,380) (60,577)
Dividends paid (36,142) (36,052)
Net cash provided by financing activities 3,374,506
 1,448,280
Net increase (decrease) in cash and cash equivalents (285,744) 139,277
Cash and cash equivalents at beginning of period 1,258,821
 1,143,424
Cash and cash equivalents at end of period $973,077
 $1,282,701
     
Supplemental Cash Flow Information:    
Cash paid for interest $87,468
 $94,660
Cash paid for taxes $853
 $898
Net loans and bank premises transferred to repossessed real estate and other assets $18,474
 $1,032
Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period $20,277
 $22,970
Conveyance of other real estate owned guaranteed by U.S. government agencies $5,694
 $8,404
Right-of-use assets obtained in exchange for operating lease liabilities $7,108
 $4,209
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 2019 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2019 have been derived from the audited financial statements included in BOK Financial’s 2019 Form 10-K but do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the three-month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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. The Company adopted the new standard January 1, 2020, through a cumulative effect adjustment to retained earnings. Prior periods were not restated.

Under ASU 2016-13, acquired loans must be reserved in a manner consistent with originated loans while the incurred loss model excluded purchased loans because the loans had been marked to fair value at acquisition. Under ASU 2016-13, the fair value discount will remain in place and be accreted into interest income over the life of any acquired loans in the portfolio.

Another transition adjustment component is related to expected credit losses for residential mortgage loans sold that exceed amounts guaranteed by the U.S. Department of Veterans Affairs as we retain the credit risk for any amounts exceeding the guarantee as well as for recourse loans.

Prior to ASU 2016-13, held-to-maturity non-agency securities carried no reserve for credit losses.

Note 4 disaggregates the transition adjustment for loans and unfunded loan commitments among portfolio segments as well as on-and off-balance sheet reserves.









- 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 the 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. The Company adopted ASU 2019-01 in the first quarter of 2020. Adoption of ASU 2019-01 did not 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 2016-01 include 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. The Company adopted ASU 2019-04 in the first quarter of 2020. Adoption of ASU 2019-04 did not 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. The Company did not elect the fair value option for additional financial instruments.

FASB Accounting Standards Update No. 2019-11, Codification Improvements to Topic 326: Financial Instruments-Credit Losses ("ASU 2019-11")

On November 27, 2019, the FASB issued ASU 2019-11 which revises certain aspects of new guidance on credit losses. Topics addressed include purchased credit-deteriorated assets, transition relief for troubled debt restructurings, disclosure relief for accrued interest receivable, and financial assets secured by collateral maintenance provisions. ASU 2019-11 is effective for the Company for annual reporting periods beginning after December 15, 2019. The Company adopted ASU 2019-11 in the first quarter of 2020. Adoption of ASU 2019-11 did not have a material impact on the Company's financial statements.

FASB Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12")

On December 18, 2019, the FASB issued ASU 2019-12 which simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company for annual reporting periods beginning after December 15, 2020, and interim periods within; however, early adoption is permitted. The Company adopted ASU 2019-12 in the first quarter of 2020. Adoption of ASU 2019-12 did not 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):
 
  March 31, 2020 December 31, 2019
  Fair Value Net Unrealized Gain (Loss) Fair Value Net Unrealized Gain (Loss)
U.S. government agency debentures $37,740
 $264
 $44,264
 $6
Residential agency mortgage-backed securities 1,922,725
 26,195
 1,504,651
 2,293
Municipal and other tax-exempt securities 35,513
 (289) 26,196
 60
Asset-backed securities 58,278
 (2,381) 14,084
 (21)
Other debt securities 56,329
 (943) 34,726
 21
Total trading securities $2,110,585
 $22,846
 $1,623,921
 $2,359

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

  March 31, 2020
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
Municipal and other tax-exempt $86,212
 $89,359
 $3,149
 $(2)
Residential agency mortgage-backed securities 10,253
 11,099
 846
 
Other debt securities 177,613
 195,944
 18,430
 (99)
Total investment securities 274,078
 296,402
 22,425
 (101)
Allowance for credit losses1
 (1,502)      
Investment securities, net of allowance 272,576
 296,402
 22,425
 (101)

1 Effective with the adoption of FASB ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2020.
  December 31, 2019
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
Municipal and other tax-exempt $93,653
 $96,897
 $3,250
 $(6)
Residential agency mortgage-backed securities 10,676
 11,164
 488
 
Other debt securities 189,089
 206,341
 17,547
 (295)
Total investment securities $293,418
 $314,402
 $21,285
 $(301)





- 50 -



The amortized cost and fair values of investment securities at March 31, 2020, 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 $38,058
 $91,847
 $122,431
 $11,489
 $263,825
 5.12
Fair value 38,380
 97,946
 137,365
 11,612
 285,303
  
Residential mortgage-backed securities:  
  
  
  
  
  
Amortized cost  
  
  
  
 $10,253
 
2 
Fair value  
  
  
  
 11,099
  
Total investment securities:  
  
  
  
  
  
Amortized cost  
  
  
  
 $274,078
  
Fair value  
  
  
  
 296,402
  
1 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
2 
The average expected lives of residential mortgage-backed securities were 4.7 years based upon current prepayment assumptions.

Temporarily Impaired Investment Securities
(in thousands):
  March 31, 2020
  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 2
 $232
 $1
 $347
 $1
 $579
 $2
Other debt securities 8
 
 
 5,168
 99
 5,168
 99
Total investment securities 10
 $232
 $1
 $5,515
 $100
 $5,747
 $101

  December 31, 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 4
 $1,001
 $1
 $1,706
 $5
 $2,707
 $6
Other debt securities 13
 275
 1
 8,041
 294
 8,316
 295
Total investment securities 17
 $1,276
 $2
 $9,747
 $299
 $11,023
 $301




- 51 -



Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
  March 31, 2020
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
U.S. Treasury $901
 $917
 $16
 $
Municipal and other tax-exempt 23,166
 24,034
 872
 (4)
Mortgage-backed securities:  
  
  
  
Residential agency 8,931,771
 9,259,089
 333,298
 (5,980)
Residential non-agency 24,002
 34,866
 10,949
 (85)
Commercial agency 3,277,948
 3,374,899
 103,953
 (7,002)
Other debt securities 500
 472
 
 (28)
Total available for sale securities $12,258,288
 $12,694,277
 $449,088
 $(13,099)

  December 31, 2019
  Amortized Fair Gross Unrealized
  Cost Value Gain Loss
U.S. Treasury $1,598
 $1,600
 $2
 $
Municipal and other tax-exempt 1,789
 1,861
 72
 
Mortgage-backed securities:    
  
  
Residential agency 7,956,297
 8,046,096
 104,912
 (15,113)
Residential non-agency 25,968
 41,609
 15,641
 
Commercial agency 3,145,342
 3,178,005
 37,808
 (5,145)
Other debt securities 500
 472
 
 (28)
Total available for sale securities $11,131,494
 $11,269,643
 $158,435
 $(20,286)


The amortized cost and fair values of available for sale securities at March 31, 2020, 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$34,239
 $1,223,377
 $1,400,140
 $644,759
 $3,302,515
 8.34
Fair value34,320
 1,264,488
 1,439,807
 661,707
 3,400,322
  
Residential mortgage-backed securities:           
Amortized cost        $8,955,773
 
2 
Fair value        9,293,955
  
Total available-for-sale securities:           
Amortized cost        $12,258,288
  
Fair value        12,694,277
  
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 3.3 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
March 31,
 2020 2019
Proceeds$26,894
 $245,259
Gross realized gains3
 5,298
Gross realized losses
 (5,222)
Related federal and state income tax expense (benefit)1
 19


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 $13.1 billion at March 31, 2020 and $10.1 billion at December 31, 2019. The secured parties do not have the right to sell or repledge these securities.

Temporarily Impaired Available for Sale Securities
(in thousands)
  March 31, 2020
  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:  
  
  
  
  
  
  
Municipal and other tax-exempt 1
 $1,621
 $4
 $
 $
 $1,621
 $4
Mortgage-backed securities:    
  
  
  
 

 

Residential agency 37

314,479

2,230

177,225

3,750

491,704

5,980
Residential non-agency 1
 1,801
 85
 
 
 1,801
 85
Commercial agency 52
 740,780
 6,203
 155,708
 799
 896,488
 7,002
Other debt securities 1
 
 
 472
 28
 472
 28
Total available for sale securities 92
 $1,058,681

$8,522

$333,405

$4,577

$1,392,086

$13,099


  December 31, 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:  
  
  
  
  
 

 

Mortgage-backed securities:  
  
  
  
  
 

 

Residential agency 133
 $1,352,597
 $6,690
 $686,002
 $8,423
 $2,038,599
 $15,113
Commercial agency 69
 830,047
 4,238
 210,877
 907
 1,040,924
 5,145
Other debt securities 1
 
 
 472
 28
 472
 28
Total available for sale securities 203
 $2,182,644

$10,928

$897,351

$9,358

$3,079,995

$20,286


Based on evaluations of impaired securities as of March 31, 2020, 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):
  March 31, 2020 December 31, 2019
  Fair Value Net Unrealized Gain (Loss) Fair Value Net Unrealized Gain (Loss)
U.S. Treasury $
 $
 $9,917
 $(48)
Residential agency mortgage-backed securities 1,703,238
 60,083
 1,088,660
 14,109
Total $1,703,238
 $60,083
 $1,098,577
 $14,061



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

- 55 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at March 31, 2020 (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 2,632,062
 132,346
 (34) 132,312
 
 132,312
Energy contracts 2,097,638
 583,117
 (100,748) 482,369
 (413,946) 68,423
Agricultural contracts 16,653
 807
 (715) 92
 
 92
Foreign exchange contracts 317,068
 312,685
 
 312,685
 (25) 312,660
Equity option contracts 77,973
 1,162
 
 1,162
 (289) 873
Total customer risk management programs 5,141,394
 1,030,117
 (101,497) 928,620
 (414,260) 514,360
Trading 51,637,953
 774,631
 (371,512) 403,119
 (17,333) 385,786
Internal risk management programs 765,572
 22,837
 (267) 22,570
 
 22,570
Total derivative contracts $57,544,919
 $1,827,585
 $(473,276) $1,354,309
 $(431,593) $922,716
             
  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 2,632,062
 132,622
 (34) 132,588
 (122,237) 10,351
Energy contracts 2,068,380
 571,306
 (100,748) 470,558
 
 470,558
Agricultural contracts 16,657
 791
 (715) 76
 
 76
Foreign exchange contracts 292,940
 288,446
 
 288,446
 (621) 287,825
Equity option contracts 77,973
 1,162
 
 1,162
 
 1,162
Total customer risk management programs 5,088,012
 994,327
 (101,497) 892,830
 (122,858) 769,972
Trading 54,719,502
 804,059
 (371,512) 432,547
 (5,037) 427,510
Internal risk management programs 987,833
 16,230
 (267) 15,963
 
 15,963
Total derivative contracts $60,795,347
 $1,814,616
 $(473,276) $1,341,340
 $(127,895) $1,213,445
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, 2019 (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 2,464,478
 49,100
 (1,839) 47,261
 
 47,261
Energy contracts 2,151,096
 144,906
 (107,591) 37,315
 (38) 37,277
Agricultural contracts 16,118
 1,522
 (22) 1,500
 
 1,500
Foreign exchange contracts 214,119
 213,007
 
 213,007
 
 213,007
Equity option contracts 81,455
 3,233
 
 3,233
 (660) 2,573
Total customer risk management programs 4,927,266
 411,768
 (109,452) 302,316
 (698) 301,618
Trading 69,721,932
 131,561
 (115,949) 15,612
 
 15,612
Internal risk management programs 1,268,180
 6,226
 (81) 6,145
 
 6,145
Total derivative contracts $75,917,378
 $549,555
 $(225,482) $324,073
 $(698) $323,375
             
  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 2,464,478
 49,194
 (1,839) 47,355
 (43,932) 3,423
Energy contracts 2,105,391
 139,311
 (107,591) 31,720
 (6,031) 25,689
Agricultural contracts 16,139
 1,507
 (22) 1,485
 (1,485) 
Foreign exchange contracts 207,919
 207,020
 
 207,020
 
 207,020
Equity option contracts 81,455
 3,233
 
 3,233
 
 3,233
Total customer risk management programs 4,875,382
 400,265
 (109,452) 290,813
 (51,448) 239,365
Trading 65,144,388
 125,535
 (115,949) 9,586
 
 9,586
Internal risk management programs 380,401
 3,121
 (81) 3,040
 (863) 2,177
Total derivative contracts $70,400,171
 $528,921
 $(225,482) $303,439
 $(52,311) $251,128
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
  March 31, 2020 March 31, 2019
  
Brokerage
and Trading Revenue
 Gain (Loss) on Derivatives, Net 
Brokerage
and Trading
Revenue
 Gain (Loss)on Derivatives, Net
Customer risk management programs:        
Interest rate contracts        
To-be-announced residential mortgage-backed securities $
 $
 $5,700
 $
Interest rate swaps 942
 
 593
 
Energy contracts 2,007
 
 226
 
Agricultural contracts 15
 
 4
 
Foreign exchange contracts 258
 
 154
 
Equity option contracts 
 
 
 
Total customer risk management programs 3,222
 
 6,677
 
Trading1
 (40,655) 
 (7,295) 
Internal risk management programs 
 18,420
 
 4,667
Total derivative contracts $(37,433) $18,420
 $(618) $4,667

1 
Represents changes in fair value of to-be-announced securities and other derivative instruments held to mitigate market risk of trading securities portfolio, which is offset by changes in fair value of trading securities also include in Brokerage and Trading Revenue in the Consolidated Statements of Earnings.
         



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(4) Loans and Allowances for Credit Losses

Loans

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

Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccruing status when, in the opinion of management, full collection of principal or interest is uncertain. Internally risk graded loans are individually evaluated for nonaccruing status quarterly. Non-risk graded loans are generally placed on nonaccruing status when more than 90 days past due or within 60 days of being notified of the borrower's bankruptcy filing. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccruing status. Accrued but not paid interest receivable is included in Receivables in the Consolidated Balance Sheets. 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.

For loans acquired with no evidence of credit deterioration, discounts are accreted on either an individual basis for loans with unique characteristics or on a pool basis for groups of homogeneous loans.  Accretion is discontinued when a loan with an individually attributed discount is placed on nonaccruing status.

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 Consolidated 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. The carrying value of these loans is reduced based on an estimate of the expected cash flows discounted at the original note rate plus a liquidity spread. Guaranteed loans may be modified in TDRs in accordance with U.S. government agency guidelines. Interest continues to accrue based on the modified rate. Guaranteed loans may either be resold into GNMA pools after a performance period specified by the programs or foreclosed and conveyed to the guarantors.


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

Portfolio segments of the loan portfolio are as follows (in thousands):
  March 31, 2020
  
Fixed
Rate
 
Variable
Rate
 Non-accrual Total
Commercial 3,205,558
 11,471,793
 118,624
 $14,795,975
Commercial real estate 1,045,825
 3,395,715
 8,545
 4,450,085
Loans to individuals 1,878,018
 1,303,889
 36,003
 3,217,910
Total $6,129,401
 $16,171,397
 $163,172
 $22,463,970



Credit Commitments
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At March 31, 2020, outstanding commitments totaled $10.0 billion. Because some commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans.

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

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At March 31, 2020, outstanding standby letters of credit totaled $684 million. 

Allowances for Credit Losses and Accrual for Off-balance Sheet Credit Risk from Unfunded Loans Commitments

BOK Financial’s accounting policies have changed significantly with the adoption of CECL as of January 1, 2020. Prior periods are not restated. Prior to January 1, 2020, general allowances and nonspecific allowances were based on incurred credit losses in accordance with accounting policies disclosed in Note 1 of the Consolidated Financial Statements included in the 2019 Form 10-K.

The allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments represent the portion of the amortized cost basis of loans that we do not expect to collect over the asset’s contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions. The appropriateness of the allowance for credit losses, including industry and product adjustments and nonspecific allowances, is assessed quarterly by a senior management Allowance Committee. This review is based on an on-going evaluation of the estimated expected credit losses in the portfolio and on unused commitments to provide financing. A well-documented methodology has been developed and is applied by an independent Credit Administration department to assure consistency across the Company.

The allowance for loan losses consists of specific allowances attributed to certain individual loans, generally nonaccruing loans, with dissimilar risk characteristics that have not yet been charged down to amounts we expect to recover and general allowances for estimated credit losses on pools of loans that share similar risk characteristics.

When full collection of principal or interest is uncertain, the loan’s risk characteristics have changed, and we exclude the loan from the general allowance pool, typically designating it as nonaccruing. For these loans, a specific allowance reflects the expected credit loss.


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We measure specific allowances for loans excluded from the general allowance pool 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. For a non-collateral dependent loan, the specific allowance is the amount by which the loan’s amortized cost basis exceeds its net realizable value. We measure the specific allowance for collateral dependent loans as the amount by which the loan’s amortized costs basis exceeds its fair value. When repayment is expected to be provided substantially through the sale of collateral, we deduct estimated selling costs from the collateral’s fair value. Generally, third party appraisals that conform to Uniform Standards of Professional Appraisal Practice serve as the basis for the fair value of real property held as collateral. These appraised values are on an “as-is” basis and generally are not adjusted by the Company. We obtain updated appraisals at least annually or more frequently if market conditions indicate collateral values may have declined. For energy loans, our internal staff of engineers generally determines collateral value of mineral rights based on projected cash flows from proven oil and gas reserves under existing economic and operating conditions. For real property held as collateral for other loans, third party appraisals that conform to Uniform Standards of Professional Appraisal Practice generally serve as the basis for the fair value. These appraised values are on an “as-is” basis and generally are not adjusted by the Company. We obtain updated appraisals at least annually or more frequently if market conditions indicate collateral values may have declined. Our special assets staff generally determines the value of other collateral based on projected liquidation cash flows under current market conditions. We evaluate collateral values and available cash resources quarterly. Historical statistics may be used to estimate specific allowances in limited situations, such as when a collateral dependent loan is removed from the general allowance pool near the end of a reporting period until an appraisal of collateral value is received or a full assessment of future cash flows is completed.

General allowances estimate expected credit losses on pools of loans sharing similar risk characteristics that are expected to occur over the loan’s estimated remaining life. The loan’s estimated remaining life represents the contractual term adjusted for amortization, estimates of prepayments, and borrower-owned extension options. Approximately 90 percent of the committed dollars in the loan portfolio is risk graded loans with general allowance model inputs that include probability of default, loss given default, and exposure at default. Probability of default is based on the migration of loans from performing to nonperforming using historical life of loan analysis periods. Loss given default is based on the aggregate losses incurred, net of estimated recoveries. Exposure at default represents an estimate of the outstanding amount of credit exposure at the time a default may occur.

Charge-off migration is used to calculate the general allowance for the majority of non-risk graded loans to individuals. The expected credit loss on less than 10 percent of the committed dollars in the portfolio is calculated using charge-off migration.

The expected credit loss on approximately 1 percent of the committed dollars in the portfolio is calculated using a non-modeled approach. Specifically, the calculation applies a long-term net charge-off rate to the loan balances, adjusted for the weighted average remaining maturity of each portfolio.
    
In estimating the expected credit losses for general allowances on performing risk-graded loans, each portfolio class is assigned relevant economic loss drivers which best explain variations in portfolio net loss rates. The probability of default estimates for each portfolio class are adjusted for current and forecasted economic conditions. The result is applied to the exposure at default and loss given default to calculate the lifetime expected credit loss estimate. Selection of relevant economic loss drivers is re-evaluated periodically and involves statistical analysis as well as management judgment. The unemployment rate factors significantly in the allowance for loan losses calculation, affecting commercial and loans to individuals segments. Other primary factors impacting the commercial portfolio include BBB corporate spreads, real gross domestic product growth rate, and energy commodity prices. The primary commercial real estate variables are vacancy rate and BBB corporate spreads. In addition to the unemployment rate, the forecast for loans to individuals is tied to home price index. The forecasts may include regional economic factors when localized conditions diverge from national conditions.

An Economic Forecast Committee, consisting of senior management with members largely independent of the allowance process develops a twelve-month forward-looking forecast for the relevant economic loss drivers. Management develops these forecasts based on external data as well as a view of future economic conditions, which may include adjustments for regional conditions. The forecast includes three economic scenarios and probability weights for each scenario. The base forecast represents management's view of the most likely outcome, while the downside forecast reflects reasonably possible worsening economic conditions, and the upside forecast projects reasonably possible improving conditions.

At the end of the one-year reasonable and supportable forecast period, we transition from shorter-term expected losses to long-term loss averages for the loan’s estimated remaining life. The difference between short-term loss forecasts and long-term loss averages is run-off over the reversion horizon, up to three years, depending on the forecasted economic scenarios.


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General allowances also consider the estimated impact of factors that are not captured in the modeled results or historical experience. These qualitative adjustments, determined by management, may increase or decrease the allowance estimated by modeled results. Factors not captured in modeled results or historical experience may include for example, new lines of business, market conditions that have not been previously encountered, observed changes in credit risk that are not yet reflected in macro-economic factors, or economic conditions that impact loss given default assumptions.

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 that are not unconditionally cancelable by the bank. This accrual is included in other liabilities in the Consolidated Balance Sheets. The appropriateness of the accrual is determined in the same manner as the allowance for loan losses, with the added consideration of commitment usage over the remaining life for those loans that the bank can not unconditionally cancel.

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

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended March 31, 2020 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Loans to Individuals Nonspecific Allowance Total
Allowance for loan losses:          
Beginning balance $118,187
 $51,805
 $23,572
 $17,195
 $210,759
Transition adjustment 33,681
 (4,620) 13,943
 (17,195) 25,809
Beginning balance, adjusted 151,868

47,185

37,515



236,568
Provision for loan losses 77,723
 5,115
 13,126
 
 95,964
Loans charged off (16,615) (886) (1,416) 
 (18,917)
Recoveries of loans previously charged off 462
 47
 1,187
 
 1,696
Ending Balance 213,438
 51,461
 50,412
 
 315,311
Allowance for off-balance sheet credit risk from unfunded loan commitments:          
Beginning balance 1,434
 107
 44
 
 1,585
Transition adjustment 10,144
 11,660
 1,748
 
 23,552
Beginning balance, adjusted 11,578

11,767

1,792



25,137
Provision for off-balance sheet credit risk 2,462
 808
 107
 
 3,377
Ending Balance 14,040

12,575

1,899



28,514
             
Changes in our reasonable and supportable forecasts of macroeconomic variables, primarily due to the impact of the COVID-19 pandemic, oil price declines, and other assumptions, required a provision of $66.2 million during the first quarter of 2020. All other changes totaled $33.1 million, which included $7.5 million related to loan growth, $8.4 million related to changes in impairment, risk grading and other portfolio changes and net charge-offs of $17.2 million.

The allowance for loan losses and recorded investment of the related loans by portfolio segment for each measurement method at March 31, 2020 is as follows (in thousands):
  
Collectively Measured
for General Allowances
 
Individually Measured
for Specific Allowances
 Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $14,677,351
 $203,554
 $118,624
 $9,884
 $14,795,975
 $213,438
Commercial real estate 4,441,540
 51,461
 8,545
 
 4,450,085
 51,461
Loans to individuals 3,181,907
 50,412
 36,003
 
 3,217,910
 50,412
Total 22,300,798
 305,427
 163,172
 9,884
 22,463,970
 315,311

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Credit Quality Indicators

The Company utilizes risk grading as primary credit quality indicators as it influences the probability of default which is a key attribute in the expected credit losses calculation. Substantially all commercial as well as commercial real estate loans and certain loans to individuals are risk graded based on a quarterly evaluation of the borrowers’ ability to repay the loans. Certain commercial loans and most loans to individuals are small, homogeneous pools that are not risk-graded. The credit quality of these loans is based on past due days in accordance with regulatory guidelines.

We have included in the credit quality indicator “pass” loans that 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.” This also includes 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 ("Special Mention") 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. Non-graded loans 30 to 59 days past due are categorized as Special Mention.

The risk grading process identified certain loans that have a well-defined weakness (for example, 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 remain on accruing status. Non-graded loans 60 to 89 days past due are categorized as Accruing Substandard.

Nonaccruing loans represent loans for which full collection of principal and interest is uncertain. This includes certain loans considered “substandard” and all loans considered “doubtful” by regulatory guidelines. Non-graded loans 90 or more days past due are categorized as Nonaccrual.

Probability of default is lowest for pass graded loans and increases for each credit quality indicator, Special Mention, and Accruing Substandard.

Vintage represents the year of origination, except for revolving loans which are considered in aggregate. Loans that were once revolving but have converted to term loans without additional underwriting appear in a separate vintage column.


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The following table summarizes the Company’s loan portfolio at March 31, 2020 by the risk grade categories and vintage (in thousands): 
 Origination Year   
 20202019201820172016PriorRevolving LoansRevolving Loans Converted to Term LoansTotal
Commercial:         
Energy         
Pass$2,285
$107,434
$74,946
$15,377
$1,506
$3,484
$3,505,123
$
$3,710,155
Special Mention

10,260



118,222

128,482
Accruing Substandard



58
13,439
163,094

176,591
Nonaccrual
3,802



28,899
63,747

96,448
Total energy2,285
111,236
85,206
15,377
1,564
45,822
3,850,186

4,111,676
Healthcare         
Pass131,002
615,580
623,438
479,985
250,320
806,699
205,384
27
3,112,435
Special Mention


3,782
178
19,133
3,515

26,608
Accruing Substandard
3,505
7,955
1,001
57
9,465


21,983
Nonaccrual29
37
535


2,935
534

4,070
Total healthcare131,031
619,122
631,928
484,768
250,555
838,232
209,433
27
3,165,096
Services         
Pass65,471
529,831
512,549
441,302
407,067
899,776
987,628
2,594
3,846,218
Special Mention
1,125
18,071
13,977
4,219
10,963
10,715

59,070
Accruing Substandard
10,675
1,782
2,774
8,674
3,709
14,421

42,035
Nonaccrual


2,633
1,167
3,931
694

8,425
Total services65,471
541,631
532,402
460,686
421,127
918,379
1,013,458
2,594
3,955,748
General business         
Pass154,807
525,223
365,108
271,723
165,711
278,923
1,705,114
15,600
3,482,209
Special Mention
7,382
3,259
6,530
1,003
5,168
7,387
138
30,867
Accruing Substandard169
8,715
5,900
4,564
6,195
5,005
10,144
6
40,698
Nonaccrual
1,980
4,928
1,100
1,344
161
154
14
9,681
Total general business154,976
543,300
379,195
283,917
174,253
289,257
1,722,799
15,758
3,563,455
Total commercial353,763
1,815,289
1,628,731
1,244,748
847,499
2,091,690
6,795,876
18,379
14,795,975
          
Commercial real estate:         
Pass187,958
1,085,148
1,049,257
599,480
382,196
880,706
231,526
42
4,416,313
Special Mention


12,167
1,640
3,152


16,959
Accruing Substandard
35
1,011
6,722

473
27

8,268
Nonaccrual


232
7,484
829


8,545
Total commercial real estate187,958
1,085,183
1,050,268
618,601
391,320
885,160
231,553
42
4,450,085
          


- 64 -



 Origination Year   
 20202019201820172016PriorRevolving LoansRevolving Loans Converted to Term LoansTotal
Loans to individuals:         
Residential mortgage         
Pass58,635
216,234
195,224
231,620
220,120
496,676
36,298
352,870
1,807,677
Special Mention

286
38
205
1,859
246
835
3,469
Accruing Substandard


94
2,155
277
40
122
2,688
Nonaccrual
31
491
322
1,039
26,039
658
2,141
30,721
Total residential mortgage58,635
216,265
196,001
232,074
223,519
524,851
37,242
355,968
1,844,555
Residential mortgage guaranteed by U.S. government agencies         
Pass
1,459
8,321
13,353
28,986
140,765


192,884
Nonaccrual




5,005


5,005
Total residential mortgage guaranteed by U.S. government agencies
1,459
8,321
13,353
28,986
145,770


197,889
Personal:         
Pass48,145
234,882
88,016
115,576
74,987
103,717
505,951
3,000
1,174,274
Special Mention
30
37
50
49
455
2

623
Accruing Substandard
264
9



19

292
Nonaccrual
57
53
24
62
50
31

277
Total personal48,145
235,233
88,115
115,650
75,098
104,222
506,003
3,000
1,175,466
Total loans to individuals106,780
452,957
292,437
361,077
327,603
774,843
543,245
358,968
3,217,910
Total loans$648,501
$3,353,429
$2,971,436
$2,224,426
$1,566,422
$3,751,693
$7,570,674
$377,389
$22,463,970



- 65 -



Nonaccruing Loans

A summary of nonaccruing loans at March 31, 2020 follows (in thousands): 
 As of March 31, 2020
 Total 
With No
Allowance
 With Allowance Related Allowance
Commercial:       
Energy$96,448
 $40,424
 $56,024
 $9,375
Healthcare4,070
 4,070
 
 
Services8,425
 7,258
 1,167
 240
General business9,681
 9,412
 269
 269
Total commercial118,624
 61,164
 57,460
 9,884
        
Commercial real estate8,545
 8,545
 
 
        
Loans to individuals: 
  
  
  
Residential mortgage30,721
 30,721
 
 
Residential mortgage guaranteed by U.S. government agencies5,005
 5,005
 
 
Personal277
 277
 
 
Total loans to individuals36,003
 36,003
 
 
        
Total$163,172
 $105,712
 $57,460
 $9,884



Troubled Debt Restructurings

At March 31, 2020 the Company had $149 million in troubled debt restructurings ("TDRs"), of which $92 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $54 million of TDRs were performing in accordance with the modified terms.

At December 31, 2019, the Company had $132 million in TDRs, of which $92 million were accruing residential mortgage loans guaranteed by U.S. government agencies. Approximately $57 million of TDRs were performing in accordance with the modified terms.

TDRs generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. During the three months ended March 31, 2020, $28 million of loans were restructured and $2.0 million of loans designated as TDRs were charged off. During the three months ended March 31, 2019, $18 million of loans were restructured and $8.3 million of loans designated as TDRs were charged off.

- 66 -



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 and past due as of March 31, 2020 is as follows (in thousands):
    Past Due   Past Due 90 Days or More and Accruing
  Current 
30 to 59
Days
 60 to 89 Days 
90 Days
or More
 Total 
Commercial:            
Energy $4,058,605
 $267
 $
 $52,804
 $4,111,676
 $
Healthcare 3,160,196
 46
 111
 4,743
 3,165,096
 714
Services 3,941,795
 7,173
 198
 6,582
 3,955,748
 74
General business 3,553,504
 2,618
 4,651
 2,682
 3,563,455
 
Total commercial 14,714,100
 10,104
 4,960
 66,811
 14,795,975
 788
             
Commercial real estate 4,433,887
 4,523
 340
 11,335
 4,450,085
 2,796
             
Loans to individuals:  
  
    
  
  
Residential mortgage 1,828,421
 8,759
 1,717
 5,658
 1,844,555
 119
Residential mortgage guaranteed by U.S. government agencies 55,901
 25,948
 16,217
 99,823
 197,889
 96,980
Personal 1,175,143
 169
 77
 77
 1,175,466
 3
Total loans to individuals 3,059,465
 34,876
 18,011
 105,558
 3,217,910
 97,102
             
Total $22,207,452
 $49,503
 $23,311
 $183,704
 $22,463,970
 $100,686

Following is disclosure of loans and the combined allowance for loan losses and accrual for off-balance sheet credit losses under the previous incurred loss model.

Portfolio segments of the loan portfolio are as follows (in thousands):
  December 31, 2019
  Fixed
Rate
 Variable
Rate
 Non-accrual Total
Commercial $3,231,485
 $10,684,749
 $115,416
 $14,031,650
Commercial real estate 1,056,321
 3,349,836
 27,626
 4,433,783
Residential mortgage 1,652,653
 393,897
 37,622
 2,084,172
Personal 193,903
 1,007,192
 287
 1,201,382
Total $6,134,362
 $15,435,674
 $180,951
 $21,750,987
Accruing loans past due (90 days)1
  
  
  
 $7,680
1 
Excludes residential mortgage loans guaranteed by agencies of the U.S. government



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The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended March 31, 2019 is summarized as follows (in thousands):
  Commercial Commercial Real Estate Residential Mortgage Personal Nonspecific Allowance Total
Allowance for loan losses:            
Beginning balance $102,226
 $60,026
 $17,964
 $9,473
 $17,768
 $207,457
Provision for loan losses 11,108
 (2,004) (2,408) (137) 1,410
 7,969
Loans charged off (10,468) 
 (42) (1,265) 
 (11,775)
Recoveries 711
 112
 154
 712
 
 1,689
Ending balance $103,577
 $58,134
 $15,668
 $8,783
 $19,178
 $205,340
Allowance for off-balance sheet credit losses:  
  
  
  
  
  
Beginning balance 1,655
 52
 52
 31
 
 $1,790
Provision for off-balance sheet credit losses 70
 (4) (5) (30) 
 31
Ending balance $1,725
 $48
 $47
 $1
 $
 $1,821
             
Total provision for credit losses $11,178
 $(2,008) $(2,413) $(167) $1,410
 $8,000
             
The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 2019 is as follows (in thousands):
  Collectively Measured
for Impairment
 Individually Measured
for Impairment
 Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment Related
Allowance
Commercial $13,916,234
 $100,773
 $115,416
 $17,414
 $14,031,650
 $118,187
Commercial real estate 4,406,157
 51,805
 27,626
 
 4,433,783
 51,805
Residential mortgage 2,046,550
 14,400
 37,622
 
 2,084,172
 14,400
Personal 1,201,095
 9,172
 287
 
 1,201,382
 9,172
Total 21,570,036
 176,150
 180,951
 17,414
 21,750,987
 193,564
             
Nonspecific allowance 
 
 
 
 
 17,195
             
Total $21,570,036
 $176,150
 $180,951
 $17,414
 $21,750,987
 $210,759


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, 2019 is as follows (in thousands):
  Internally Risk Graded Non-Graded Total
  Recorded Investment Related Allowance Recorded Investment Related Allowance Recorded Investment 
Related
Allowance
Commercial $13,997,538
 $117,236
 $34,112
 $951
 $14,031,650
 $118,187
Commercial real estate 4,433,783
 51,805
 
 
 4,433,783
 51,805
Residential mortgage 279,113
 3,085
 1,805,059
 11,315
 2,084,172
 14,400
Personal 1,116,297
 7,003
 85,085
 2,169
 1,201,382
 9,172
Total 19,826,731
 179,129
 1,924,256
 14,435
 21,750,987
 193,564
             
Nonspecific allowance 
 
 
 
 
 17,195
             
Total $19,826,731
 $179,129
 $1,924,256
 $14,435
 $21,750,987
 $210,759


- 68 -



The following table summarizes the Company’s loan portfolio at December 31, 2019 by the risk grade categories (in thousands): 
  Internally Risk Graded Non-Graded  
  Performing        
  Pass Other Loans Especially Mentioned Accruing Substandard Nonaccrual Performing Nonaccrual Total
Commercial:              
Energy $3,700,406
 $117,298
 $63,951
 $91,722
 $
 $
 $3,973,377
Services 3,050,946
 29,943
 33,791
 7,483
 
 
 3,122,163
Wholesale/retail 1,749,023
 5,281
 5,399
 1,163
 
 
 1,760,866
Manufacturing 623,219
 18,214
 13,883
 10,133
 
 
 665,449
Healthcare 2,995,514
 13,117
 20,805
 4,480
 
 
 3,033,916
Public finance 709,868
 
 
 
 
 
 709,868
Other commercial and industrial 709,729
 4,028
 17,744
 398
 34,075
 37
 766,011
Total commercial 13,538,705
 187,881
 155,573
 115,379
 34,075
 37
 14,031,650
               
Commercial real estate:  
    
  
  
  
  
Residential construction and land development 150,529
 
 
 350
 
 
 150,879
Retail 743,343
 12,067
 1,243
 18,868
 
 
 775,521
Office 923,202
 5,177
 
 
 
 
 928,379
Multifamily 1,257,005
 1,604
 95
 6,858
 
 
 1,265,562
Industrial 852,539
 1,658
 1,011
 909
 
 
 856,117
Other commercial real estate 455,045
 1,639
 
 641
 
 
 457,325
Total commercial real estate 4,381,663
 22,145
 2,349
 27,626
 
 
 4,433,783
               
Residential mortgage:  
    
  
  
  
  
Permanent mortgage 276,138
 78
 2,404
 493
 758,260
 19,948
 1,057,321
Permanent mortgage guaranteed by U.S. government agencies 
 
 
 
 191,694
 6,100
 197,794
Home equity 
 
 
 
 817,976
 11,081
 829,057
Total residential mortgage 276,138
 78
 2,404
 493
 1,767,930
 37,129
 2,084,172
               
Personal 1,116,196
 45
 
 56
 84,853
 232
 1,201,382
               
Total $19,312,702
 $210,149
 $160,326
 $143,554
 $1,886,858
 $37,398
 $21,750,987



- 69 -



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.

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, 2019 follows (in thousands): 
    Recorded Investment
  
Unpaid
Principal
Balance
 Total 
With No
Allowance
 With Allowance Related Allowance
Commercial:          
Energy $149,441
 $91,722
 $44,244
 $47,478
 $16,854
Services 10,923
 7,483
 6,301
 1,182
 240
Wholesale/retail 1,980
 1,163
 902
 261
 101
Manufacturing 10,848
 10,133
 9,914
 219
 219
Healthcare 13,774
 4,480
 4,480
 
 
Public finance 
 
 
 
 
Other commercial and industrial 8,227
 435
 435
 
 
Total commercial 195,193
 115,416
 66,276
 49,140
 17,414
           
Commercial real estate:  
  
  
  
  
Residential construction and land development 1,306
 350
 350
 
 
Retail 20,265
 18,868
 18,868
 
 
Office 
 
 
 
 
Multifamily 6,858
 6,858
 6,858
 
 
Industrial 909
 909
 909
 
 
Other commercial real estate 801
 641
 641
 
 
Total commercial real estate 30,139
 27,626
 27,626
 
 
           
Residential mortgage:  
  
  
  
  
Permanent mortgage 24,868
 20,441
 20,441
 
 
Permanent mortgage guaranteed by U.S. government agencies1
 204,187
 197,794
 197,794
 
 
Home equity 12,967
 11,081
 11,081
 
 
Total residential mortgage 242,022
 229,316
 229,316
 
 
           
Personal 360
 287
 287
 
 
           
Total $467,714
 $372,645
 $323,505
 $49,140
 $17,414
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, 2019, the majority were accruing based on the guarantee by U.S. government agencies.

- 70 -



A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of December 31, 2019 is as follows (in thousands):

    Past Due    
  Current 
30 to 59
Days
 60 to 89 Days 
90 Days
or More
 Nonaccrual Total
Commercial:            
Energy $3,881,244
 $401
 $10
 $
 91,722
 $3,973,377
Services 3,105,621
 1,737
 523
 6,799
 7,483
 3,122,163
Wholesale 1,758,878
 712
 113
 
 1,163
 1,760,866
Manufacturing 654,329
 410
 190
 387
 10,133
 665,449
Healthcare 3,027,329
 2,039
 
 68
 4,480
 3,033,916
Public finance 707,638
 2,230
 
 
 
 709,868
Other commercial and industrial 764,390
 414
 772
 
 435
 766,011
Total commercial 13,899,429
 7,943
 1,608
 7,254
 115,416
 14,031,650
             
Commercial real estate:            
Residential construction and land development 147,379
 3,093
 
 57
 350
 150,879
Retail 756,653
 
 
 
 18,868
 775,521
Office 928,379
 
 
 
 
 928,379
Multifamily 1,258,704
 
 
 
 6,858
 1,265,562
Industrial 855,208
 
 
 
 909
 856,117
Other commercial real estate 454,253
 1,827
 250
 354
 641
 457,325
Total commercial real estate 4,400,576
 4,920
 250
 411
 27,626
 4,433,783
            

Residential Mortgage:            
Permanent mortgage 1,034,716
 2,011
 153
 
 20,441
 1,057,321
Permanent mortgage guaranteed by U.S. government agencies 46,898
 24,203
 18,187
 102,406
 6,100
 197,794
Home equity 814,325
 3,343
 308
 
 11,081
 829,057
Total residential mortgage 1,895,939
 29,557
 18,648
 102,406
 37,622
 2,084,172
             
Personal 1,196,362
 4,664
 54
 15
 287
 1,201,382
             
Total $21,392,306
 $47,084
 $20,560
 $110,086
 $180,951
 $21,750,987



- 71 -



(5) Mortgage Banking Activities

Residential Mortgage Loan Production

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

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

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loan commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):
  March 31, 2020 December 31, 2019
  
Unpaid Principal Balance/
Notional
 Fair Value 
Unpaid Principal Balance/
Notional
 Fair Value
Residential mortgage loans held for sale $185,713
 $191,860
 $175,117
 $177,703
Residential mortgage loan commitments 657,570
 24,250
 158,460
 5,233
Forward sales contracts 750,719
 (11,390) 315,203
 (665)
   
 $204,720
  
 $182,271


No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of March 31, 2020 or December 31, 2019. No credit losses were recognized on residential mortgage loans held for sale for the three month period ended March 31, 2020 and 2019.

Mortgage banking revenue was as follows (in thousands):
  Three Months Ended
March 31,
  2020 2019
Production revenue:    
Net realized gains on sale of mortgage loans $9,717
 $5,693
Net change in unrealized gain on mortgage loans held for sale 3,561
 (53)
Net change in the fair value of mortgage loan commitments 19,017
 2,713
Net change in the fair value of forward sales contracts (10,725) (485)
Total production revenue 21,570
 7,868
Servicing revenue 15,597
 15,966
Total mortgage banking revenue $37,167
 $23,834


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


- 72 -



Residential Mortgage Servicing

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

The following represents a summary of mortgage servicing rights (dollars in thousands):
  March 31, 2020 December 31, 2019
Number of residential mortgage loans serviced for others 124,819
 126,828
Outstanding principal balance of residential mortgage loans serviced for others $20,261,526
 $20,727,106
Weighted average interest rate 3.96% 3.98%
Remaining term (in months) 287
 289


The following represents activity in capitalized mortgage servicing rights (in thousands):
  Three Months Ended
March 31,
  2020 2019
Beginning Balance $201,886
 $259,254
Additions, net 5,441
 6,188
Change in fair value due to principal payments (8,019) (6,583)
Change in fair value due to market assumption changes (88,480) (20,666)
Ending Balance $110,828
 $238,193

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

Mortgage servicing rights are not traded in active markets. Fair value is determined by discounting the projected net cash flows. Significant market assumptions used to determine fair value based on significant unobservable inputs were as follows:
  March 31, 2020 December 31, 2019
Discount rate – risk-free rate plus a market premium 9.80% 9.81%
Prepayment rate - based upon loan interest rate, original term and loan type 8.22% - 32.80% 8.28% - 16.05%
Loan servicing costs – annually per loan based upon loan type:    
Performing loans $69 - $94 $68 - $94
Delinquent loans $150 - $500 $150 - $500
Loans in foreclosure $1,000 - $4,000 $1,000 - $4,000
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life 0.53% 1.73%
Primary/secondary mortgage rate spread 105 bps 104 bps
Delinquency rate 2.55% 2.73%


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



- 73 -



(6)  Commitments and Contingent Liabilities

Litigation Contingencies

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

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

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

On August 26, 2016, BOKF, NA was sued in the United States District Court for New Jersey by 2 bondholders in a putative class action on behalf of all holders of the bonds alleging BOKF, NA participated in the fraudulent sale of securities by the principals. The New Jersey Federal District Action has been stayed until June 18, 2020. On September 14, 2016, BOKF, NA was sued in the District Court of Tulsa County, Oklahoma by 19 bondholders alleging BOKF, NA participated in the fraudulent sale of securities by the principals. The Tulsa County District Court Action is pending on BOKF, NA’s motion to dismiss. Four separate arbitration complaints with similar allegations were filed with the Financial Institutions Regulatory Association ("FINRA"). BOKF, NA challenged FINRA's jurisdiction in the United States District Court of Nevada. On appeal, the United States Court of Appeals for the Ninth Circuit held BOKF, NA was not subject to FINRA jurisdiction. The four FINRA complaints were then dismissed and have not been refiled in any other venue.

On January 8, 2020, the New Jersey District Court entered judgment against the principal individual and his wife for $36,805,051 in principal amount and $10,937,831 in pre-judgment interest. On January 19, 2020, the New Jersey Federal District Court formally terminated the Payment Plan. Management is no longer able to conclude that the individual principal and his wife will be successful in paying the obligations they have to pay the bonds in full but such obligations remain and are not dischargeable in bankruptcy. If the individual principal and his wife do not have the financial ability to pay the bonds in full, a bondholder loss could become probable. Management has been advised by counsel that BOKF, NA has valid defenses to claims of bondholders and that no loss to the company is probable. No provision for losses has been made at this time. BOKF, NA estimates that, upon sale of all collateral securing payment of the bonds, approximately $20 million will remain outstanding. A reasonable estimate cannot be made of the amount of any bondholder loss, though the amount of bondholder loss could be material to the company in the event a loss to the company becomes probable.
    
On March 5, 2018, BOKF, NA was sued in the Fulton, Georgia County District Court by a Wrongful Death Judgment Creditor of one of the operators of a nursing home financed by one of the bonds which are the subject of the litigation discussed above. The judgment is alleged to total approximately $8 million in principal and interest at this time. Plaintiff alleges that BOKF, as Trustee, colluded with the borrower and others to defraud creditors of the nursing home by misleading the public about the solvency of the nursing home. Plaintiff alleges that this conduct has prevented her from collecting on her judgment. On April 19, 2019, the Court granted BOKF, NA's Motion to Dismiss. On May 3, 2019, the plaintiff filed a Motion for Reconsideration which is pending. BOKF, NA is advised by counsel that BOKF, NA has valid defenses to the plaintiffs’ claims and no loss is probable.


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On March 14, 2017, BOKF, NA was sued in the United States District Court for the Northern District of Oklahoma by bondholders in a second putative class action representing a different set of municipal securities. The bondholders in this second action allege 2 individuals purchased facilities from the principals who are the subject of the SEC New Jersey proceedings by means of the fraudulent sale of $60 million of municipal securities for which BOKF, NA also served as indenture trustee. The bondholders allege BOKF, NA failed to disclose that the seller of the purchased facilities had engaged in the conduct complained of in the New Jersey action. BOKF, NA properly performed all duties as indenture trustee of this second set of municipal securities, timely commenced proceedings against the issuer of the securities when default occurred, is cooperating with the SEC in actions against the 2 principals, is not a target of the SEC proceedings, and has been advised by counsel that BOKF, NA has valid defenses to the claims of these bondholders. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.

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

On July 6, 2018, a plaintiff served a petition in a putative class action in the Oklahoma District Court for Tulsa County Oklahoma alleging BOKF NA breached its Demand Deposit Agreements by charging overdraft and not sufficient funds fees to deposit accounts on the day of the transaction triggering the fee and by the bank's debit hold process causing overdraft fees. On January 20, 2020, the plaintiff dismissed the action without prejudice.

On March 7, 2020, 3 former employees sued BOKF, NA, the Plan Committee of the BOKF, NA 401k Plan, and Cavanal Hill Investment Management, Inc., a subsidiary of BOKF, NA, alleging that the Defendants included proprietary investment products as investment options in the BOKF, NA 401k Plan, whose fees were too high and performance too low, for the purpose of earning fees. The action is brought as a putative class action on behalf of all Plan Participants. The action is pending on the defendants' motions to dismiss. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.

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

Alternative Investment Commitments

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

At March 31, 2020, the Company has $258 million in interests in various alternative investments generally consisting of unconsolidated limited partnership interests in entities for which investment return is in the form of low income housing tax credits or other investments in merchant banking activities. This investment balance also includes $77 million of unfunded commitments included in Other liabilities on the Consolidated Balance Sheets.


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(7) Shareholders' Equity

On April 28, 2020, the Company declared a quarterly cash dividend of $0.51 per common share payable on or about May 27, 2020 to shareholders of record as of May 11, 2020.

Dividends declared were $0.51 per share during the three months ended March 31, 2020 and $0.50 per share during the three months ended March 31, 2019.

Accumulated Other Comprehensive Income (Loss)

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

A rollforward of the components of accumulated other comprehensive income (loss) is included as follows (in thousands):
  Unrealized Gain (Loss) on  
  Available for Sale Securities Employee Benefit Plans Total
Balance, December 31, 2018 $(70,999) $(1,586) $(72,585)
Net change in unrealized gain (loss) 92,739
 
 92,739
Reclassification adjustments included in earnings:     
Gain on available for sale securities, net (76) 
 (76)
Other comprehensive income, before income taxes 92,663
 
 92,663
Federal and state income taxes1
 23,609
 
 23,609
Other comprehensive income, net of income taxes 69,054
 
 69,054
Balance, March 31, 2019 $(1,945) $(1,586) $(3,531)
      
Balance, December 31, 2019 $104,996
 $(73) $104,923
Net change in unrealized gain (loss) 297,843
 
 297,843
Reclassification adjustments included in earnings:     
Gain on available for sale securities, net (3) 
 (3)
Other comprehensive income, before income taxes 297,840
 
 297,840
Federal and state income taxes1
 71,471
 
 71,471
Other comprehensive income, net of income taxes 226,369
 
 226,369
Balance, March 31, 2020 $331,365

$(73) $331,292

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


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(8) Earnings Per Share
 
(In thousands, except share and per share amounts) Three Months Ended
March 31,
  2020 2019
Numerator:    
Net income attributable to BOK Financial Corp. shareholders $62,079
 $110,612
Less: Earnings allocated to participating securities 343
 828
Numerator for basic earnings per share – income available to common shareholders 61,736
 109,784
Effect of reallocating undistributed earnings of participating securities 
 
Numerator for diluted earnings per share – income available to common shareholders $61,736
 $109,784
     
Denominator:  
  
Weighted average shares outstanding 70,513,807
 71,926,041
Less:  Participating securities included in weighted average shares outstanding 390,122
 538,971
Denominator for basic earnings per common share 70,123,685
 71,387,070
Dilutive effect of employee stock compensation plans 6,481
 17,318
Denominator for diluted earnings per common share 70,130,166
 71,404,388
     
Basic earnings per share $0.88
 $1.54
Diluted earnings per share $0.88
 $1.54



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(9)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2020 is as follows (in thousands):
  Commercial Consumer 
Wealth
Management
 Funds Management and Other 
BOK
Financial
Consolidated
Net interest revenue from external sources $201,902
 $25,876
 $14,366
 $19,216
 $261,360
Net interest revenue (expense) from internal sources (50,495) 18,056
 4,538
 27,901
 
Net interest revenue 151,407
 43,932
 18,904
 47,117
 261,360
Provision for credit losses 16,880
 1,256
 (48) 75,683
 93,771
Net interest revenue after provision for credit losses 134,527
 42,676
 18,952
 (28,566) 167,589
Other operating revenue 38,220
 55,062
 97,881
 (10,844) 180,319
Other operating expense 60,752
 54,793
 78,192
 74,887
 268,624
Net direct contribution 111,995
 42,945
 38,641
 (114,297) 79,284
Gain on financial instruments, net 49
 86,764
 7
 (86,820) 
Change in fair value of mortgage servicing rights 
 (88,480) 
 88,480
 
Gain on repossessed assets, net 9
 13
 
 (22) 
Corporate expense allocations 8,905
 10,487
 8,265
 (27,657) 
Net income before taxes 103,148
 30,755
 30,383
 (85,002) 79,284
Federal and state income taxes 28,173
 7,834
 7,810
 (26,517) 17,300
Net income 74,975
 22,921
 22,573
 (58,485) 61,984
Net income (loss) attributable to non-controlling interests 
 
 
 (95) (95)
Net income attributable to BOK Financial Corp. shareholders $74,975
 $22,921
 $22,573
 $(58,390) $62,079
           
Average assets $24,687,976
 $9,850,853
 $12,723,412
 $(1,541,623) $45,720,618

           




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Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2019 is as follows (in thousands):
  Commercial Consumer 
Wealth
Management
 
Funds Management and Other1
 
BOK
Financial
Consolidated
Net interest revenue from external sources $204,209
 $22,475
 $21,486
 $29,932
 $278,102
Net interest revenue (expense) from internal sources (53,638) 28,627
 6,770
 18,241
 
Net interest revenue 150,571
 51,102
 28,256
 48,173
 278,102
Provision for credit losses 11,246
 1,085
 (119) (4,212) 8,000
Net interest revenue after provision for credit losses 139,325
 50,017
 28,375
 52,385
 270,102
Other operating revenue 37,612
 42,748
 73,414
 3,496
 157,270
Other operating expense 50,627
 53,821
 61,507
 121,202
 287,157
Net direct contribution 126,310
 38,944
 40,282
 (65,321) 140,215
Gain (loss) on financial instruments, net 18
 14,097
 
 (14,115) 
Change in fair value of mortgage servicing rights 
 (20,666) 
 20,666
 
Gain (loss) on repossessed assets, net (346) 103
 
 243
 
Corporate expense allocations 9,455
 11,900
 8,360
 (29,715) 
Net income before taxes 116,527
 20,578
 31,922
 (28,812) 140,215
Federal and state income taxes 31,006
 5,241
 8,203
 (14,500) 29,950
Net income 85,521
 15,337
 23,719
 (14,312) 110,265
Net income attributable to non-controlling interests 
 
 
 (347) (347)
Net income (loss) attributable to BOK Financial Corp. shareholders $85,521
 $15,337
 $23,719
 $(13,965) $110,612
           
Average assets $19,937,878
 $8,371,683
 $9,328,986
 $2,034,134
 $39,672,681

1 CoBiz operations are included in Funds Management and Other for the first quarter of 2019.
           


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(10) Fees and Commissions Revenue

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

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

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

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


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Fees and commissions revenue by reportable segment and primary service line is as follows for the three months ended March 31, 2020.
 Commercial Consumer Wealth Management Funds Management & Other Consolidated 
Out of Scope1
 
In Scope2
Trading revenue$
 $
 $34,384
 $
 $34,384
 $34,384
 $
Customer hedging revenue2,525
 
 135
 563
 3,223
 3,223
 
Retail brokerage revenue
 
 4,343
 
 4,343
 
 4,343
Insurance brokerage revenue
 
 3,789
 
 3,789
 
 3,789
Investment banking revenue1,880
 
 3,160
 
 5,040
 1,828
 3,212
Brokerage and trading revenue4,405
 
 45,811
 563
 50,779
 39,435
 11,344
TransFund EFT network revenue18,212
 831
 (19) 2
 19,026
 
 19,026
Merchant services revenue2,305
 14
 
 
 2,319
 
 2,319
Corporate card revenue520
 
 16
 
 536
 
 536
Transaction card revenue21,037
 845
 (3) 2
 21,881
 
 21,881
Personal trust revenue
 
 20,649
 
 20,649
 
 20,649
Corporate trust revenue
 
 6,362
 
 6,362
 
 6,362
Institutional trust & retirement plan services revenue
 
 11,757
 
 11,757
 
 11,757
Investment management services and other revenue
 
 5,731
 (41) 5,690
 
 5,690
Fiduciary and asset management revenue
 
 44,499
 (41) 44,458
 
 44,458
Commercial account service charge revenue11,039
 410
 545
 (1) 11,993
 
 11,993
Overdraft fee revenue49
 7,205
 22
 2
 7,278
 
 7,278
Check card revenue
 5,229
 
 
 5,229
 
 5,229
Automated service charge and other deposit fee revenue229
 1,386
 13
 2
 1,630
 
 1,630
Deposit service charges and fees11,317
 14,230
 580
 3
 26,130
 
 26,130
Mortgage production revenue
 21,569
 
 
 21,569
 21,569
 
Mortgage servicing revenue
 16,042
 
 (444) 15,598
 15,598
 
Mortgage banking revenue
 37,611
 
 (444) 37,167
 37,167
 
Other revenue4,700
 2,376
 6,994
 (1,761) 12,309
 8,408
 3,901
Total fees and commissions revenue$41,459
 $55,062
 $97,881
 $(1,678) $192,724
 $85,010
 $107,714
1  
Out of scope revenue generally relates to financial instruments or contractual rights and obligations within the scope of other applicable accounting guidance.
2 
In scope revenue represents revenue subject to FASB ASC Topic 606, Revenue from Contracts with Customers.

              




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Fees and commissions revenue by reportable segment and primary service line is as follows for the three months ended March 31, 2019.
 Commercial Consumer Wealth Management 
Funds Management & Other3
 Consolidated 
Out of Scope1
 
In Scope2
Trading revenue$
 $
 $12,920
 $
 $12,920
 $12,920
 $
Customer hedging revenue1,575
 
 5,728
 (626) 6,677
 6,677
 
Retail brokerage revenue
 
 4,074
 (52) 4,022
 
 4,022
Insurance brokerage revenue
 
 379
 3,729
 4,108
 
 4,108
Investment banking revenue1,389
 
 2,501
 
 3,890
 1,229
 2,661
Brokerage and trading revenue2,964
 
 25,602
 3,051
 31,617
 20,826
 10,791
TransFund EFT network revenue17,654
 958
 (17) 1
 18,596
 
 18,596
Merchant services revenue1,925
 14
 
 123
 2,062
 
 2,062
Corporate card revenue80
 
 
 
 80
 
 80
Transaction card revenue19,659
 972
 (17) 124
 20,738
 
 20,738
Personal trust revenue
 
 19,574
 
 19,574
 
 19,574
Corporate trust revenue
 
 6,201
 
 6,201
 
 6,201
Institutional trust & retirement plan services revenue
 
 11,107
 
 11,107
 
 11,107
Investment management services and other revenue
 
 4,801
 1,675
 6,476
 
 6,476
Fiduciary and asset management revenue
 
 41,683
 1,675
 43,358
 
 43,358
Commercial account service charge revenue10,062
 387
 527
 1,807
 12,783
 
 12,783
Overdraft fee revenue74
 8,395
 27
 (236) 8,260
 
 8,260
Check card revenue
 4,992
 
 164
 5,156
 
 5,156
Automated service charge and other deposit fee revenue158
 1,665
 177
 44
 2,044
 
 2,044
Deposit service charges and fees10,294
 15,439
 731
 1,779
 28,243
 
 28,243
Mortgage production revenue
 7,868
 
 
 7,868
 7,868
 
Mortgage servicing revenue
 16,445
 
 (479) 15,966
 15,966
 
Mortgage banking revenue
 24,313
 
 (479) 23,834
 23,834
 
Other revenue5,129
 2,097
 5,257
 279
 12,762
 8,720
 4,042
Total fees and commissions revenue$38,046
 $42,821
 $73,256
 $6,429
 $160,552
 $53,380
 $107,172

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




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(11) Fair Value Measurements

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

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

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

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

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

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

Transfers between levels are recognized as of the end of the reporting period. There were no transfers in or out of quoted prices in active markets for identical instruments to significant other observable inputs or significant unobservable inputs during the three months ended March 31, 2020 and 2019, respectively. Transfers between significant other observable inputs and significant unobservable inputs during the three months ended March 31, 2020 and 2019 are included in the summary of changes in recurring fair values measured using unobservable inputs.

The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. Management has evaluated the methodologies employed by the third-party pricing services by comparing the price provided by the pricing service with other sources, including brokers' quotes, sales or purchases of similar instruments and discounted cash flows to establish a basis for reliance on the pricing service values. Significant differences between the pricing service provided value and other sources are discussed with the pricing service to understand the basis for their values. Based on all observable inputs, management may adjust prices obtained from third-party pricing services to more appropriately reflect the prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market. No significant adjustments were made to prices provided by third-party pricing services at March 31, 2020 or December 31, 2019.


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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial assets and liabilities measured on a recurring basis was as follows as of March 31, 2020 (in thousands):
  Total Quoted Prices in Active Markets for Identical Instruments (Level 1) Significant Other Observable Inputs (Level 2) 
Significant Unobservable Inputs
(Level 3)
Assets:        
Trading securities:        
U.S. government agency debentures $37,740
 $
 $37,740
 $
Residential agency mortgage-backed securities 1,922,725
 
 1,922,725
 
Municipal and other tax-exempt securities 35,513
 
 35,513
 
Asset-backed securities 58,278
 
 58,278
 
Other trading securities 56,329
 
 56,329
 
Total trading securities 2,110,585
 
 2,110,585
 
Available for sale securities:  
  
  
  
U.S. Treasury 917
 917
 
 
Municipal and other tax-exempt securities 24,034
 
 24,034
 
Residential agency mortgage-backed securities 9,259,089
 
 9,259,089
 
Residential non-agency mortgage-backed securities 34,866
 
 34,866
 
Commercial agency mortgage-backed securities 3,374,899
 
 3,374,899
 
Other debt securities 472
 
 
 472
Total available for sale securities 12,694,277
 917
 12,692,888
 472
Fair value option securities:        
U.S. Treasury 
 
 
 
Residential agency mortgage-backed securities 1,703,238
 
 1,703,238
 
Total fair value option securities 1,703,238
 
 1,703,238
 
Residential mortgage loans held for sale 204,720
 
 195,146
 9,574
Mortgage servicing rights1
 110,828
 
 
 110,828
Derivative contracts, net of cash collateral2
 922,716
 83,268
 839,448
 
Liabilities:  
      
Derivative contracts, net of cash collateral2