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BOKF BOK Financial

Filed: 4 Aug 20, 3:47pm
0000875357bokf:ConsumerMemberbokf:OverdraftfeerevenueMemberus-gaap:OperatingSegmentsMember2020-01-012020-06-30

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

FORM 10-Q
(Mark One) 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: 70,306,690 shares of common stock ($.00006 par value) as of June 30, 2020.

BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 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 $64.7 million or $0.92 per diluted share for the second quarter of 2020. Net income was $137.6 million or $1.93 per diluted share for the second quarter of 2019 and $62.1 million or $0.88 per diluted share for the first quarter of 2020. The Company recorded a pre-tax provision for expected credit losses of $135.3 million in the second quarter of 2020 and $93.8 million in the first quarter of 2020. A pre-tax provision for incurred credit losses of $5.0 million was recorded in the second quarter of 2019.

Highlights of the second quarter of 2020 included:

Net interest revenue totaled $278.1 million, a decrease of $7.3 million compared to the second quarter of 2019. Net interest margin was 2.83 percent for the second quarter of 2020 compared to 3.30 percent for the second 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 $40.3 billion for the second quarter of 2020 compared to $35.4 billion for the second quarter of 2019. Net interest revenue increased $16.7 million compared to the first quarter of 2020, largely due to the addition of loans related to the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") that began on April 3, 2020. Net interest margin increased 3 basis points, primarily due to our ability to move deposit costs down, along with LIBOR remaining elevated early in the second quarter and the strategic positioning of our balance sheet.
Fees and commissions revenue totaled $213.7 million, an increase of $37.6 million over the second quarter of 2019. Mortgage banking revenue increased $25.8 million and brokerage and trading revenue increased $21.5 million. Low mortgage interest rates continued to drive increases in mortgage production and related bond trading activity. These increases were partially offset by a reduction in service charges and fiduciary and asset management revenue. We waived certain fees during the second quarter as a result of the pandemic and lower interest rates. Fees and commissions revenue increased $21.0 million over the first quarter of 2020, largely due to increases in mortgage banking and brokerage and trading revenue.
Other operating expense totaled $295.4 million, an $18.3 million increase compared to the second quarter of 2019. Personnel expense increased $15.9 million, largely due to an increase in incentive compensation costs reflecting the growth in our trading activity. Non-personnel expense increased $2.4 million over the second quarter of 2019. Increases in mortgage banking costs, occupancy and equipment expense, data processing and communications expense and charitable contributions were partially offset by a decrease in business promotion expenses. Operating expense increased $26.8 million compared to the first quarter of 2020. Personnel expense increased $20.1 million including an $11.0 million increase in incentive compensation expense related to increased trading activity. Non-personnel expense increased $6.7 million compared to the first quarter of 2020, led by increases in mortgage banking costs, occupancy and equipment expenses, and charitable contributions, partially offset by a decrease in business promotion expenses.
Changes in the fair value of mortgage servicing rights and related economic hedges provided $9.3 million during the second quarter of 2020. A $7.4 million increase in the fair value of securities and derivative contracts held as an economic hedge and $2.7 million of related net interest revenue, was partially offset by a $761 thousand decrease in the fair value of mortgage servicing rights. The net economic cost of the changes in fair value of mortgage servicing rights and related economic hedges was $7.3 million during the second quarter of 2019, including a $21.0 million increase in the fair value of securities and derivatives contracts held as an economic hedge, $29.6 million decrease in the fair value of mortgage servicing rights, and $1.3 million of related net interest revenue.
We have implemented programs to help our customers through the pandemic and resulting uncertain times. We are actively participating in programs initiated by the CARES Act, including the SBA's PPP. Period-end outstanding loan balances totaled $24.2 billion at June 30, 2020, an increase of $1.7 billion over March 31, 2020. Average loan balances increased $2.2 billion to $24.1 billion at June 30, 2020. Period-end PPP loans were $2.1 billion and average PPP loans for the second quarter were $1.7 billion. We have also granted $1.2 billion in forbearance requests from customers as of June 30, including $704 million in commercial loans, $398 million in commercial real estate loans and $143 million in loans to individuals.
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The allowance for loan losses totaled $436 million or 1.80 percent of outstanding loans and 175 percent of nonaccruing loans at June 30, 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 $469 million or 1.94 percent of outstanding loans at June 30, 2020. Excluding PPP loans, the allowance for loan losses was 1.97 percent of outstanding loans and the combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was 2.12 percent. At March 31, 2020, the allowance for loan losses was $315 million or 1.40 percent of outstanding loans and 199 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 $344 million or 1.53 percent of outstanding loans.
Nonperforming assets not guaranteed by U.S. government agencies increased $90 million compared to March 31, 2020. Potential problem loans increased $333 million while other loans especially mentioned increased $391 million. Net charge-offs were $14.1 million or 0.25 percent of average loans on an annualized basis for the second quarter of 2020, excluding PPP loans, compared to $17.2 million or 0.31 percent of average loans on an annualized basis for the first quarter of 2020.
Period-end deposits were $33.9 billion at June 30, 2020, a $4.6 billion increase compared to March 31, 2020. Interest-bearing transaction deposits increased $2.3 billion while demand deposit balances increased $2.2 billion. Average deposits increased $4.5 billion, including a $2.3 billion increase in demand deposits and a $1.9 billion increase in interest-bearing deposits. An estimated $2.7 billion of this growth was related to funding of PPP loans and other CARES Act stimulus initiatives, with the remainder due to growth from our broader customer base.
The common equity Tier 1 capital ratio at June 30, 2020 was 11.44 percent. Other regulatory capital ratios were Tier 1 capital ratio, 11.44 percent, total capital ratio, 13.39 percent, and leverage ratio, 7.74 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 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 March 31, 2020, the common equity Tier 1 capital ratio was 10.98 percent, the Tier 1 capital ratio was 10.98 percent, total capital ratio was 12.65 percent, and leverage ratio was 8.15 percent.
The Company paid a regular cash dividend of $35.8 million or $0.51 per common share during the second quarter of 2020. On August 4, 2020, the board of directors approved a quarterly cash dividend of $0.51 per common share payable on or about August 26, 2020 to shareholders of record as of August 17, 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.

Goodwill Impairment

Goodwill for each reporting unit is evaluated for impairment annually as of October 1st or more frequently if conditions indicate that impairment may have occurred. The evaluation of possible goodwill impairment involves significant judgment based upon short-term and long-term projections of future performance.

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During the evaluation for impairment, management qualitatively assesses whether it is more likely than not that the fair value of the reporting units is less than their carrying value, including goodwill. Reporting unit carrying value includes sufficient capital to exceed regulatory requirements. This assessment includes consideration of relevant events and circumstances including, but not limited to, macroeconomic conditions, industry and market conditions, the financial and stock performance of the Company and other relevant factors. Specifically, the analysis may include:

General economic conditions including overall economic activity, consumer spending and mobility, unemployment rates, consumer confidence, and duration and severity of any current market moving instability.
Regional economic conditions including demand for oil and price stability of oil, other overarching conditions that may be affecting any of the Company's primary states such as weather or other catastrophes, pandemics and health related lockdowns, or other state mandates.
Industry conditions including federal funds rate movement by the Federal Reserve, the interest rate environment and the resulting effect on net interest revenue and operating revenue, and regulatory mandates that hinder or provide relief to the financial services industry.
Company specific conditions including current and forecasted income, changes in stock price, the Company's stock price compared to peers and other indexes, book value per share compared to fair value per share, goodwill compared to total shareholders' equity, current capital and liquidity position, demand for products and services, health of the loan portfolio and other credit related factors, and current credit ratings with the ratings agencies, and regulatory ratings.
Reporting unit performance and forecasts including any event that may significantly impact a reporting unit.

If management concludes based on the qualitative assessment that goodwill may be impaired, a quantitative impairment test will be applied to goodwill at all reporting units. The quantitative analysis compares the fair value of the reporting unit with its carrying value, including goodwill. The fair value of each reporting unit is estimated by the discounted future earnings method. Goodwill is considered impaired if the fair value of the reporting unit is less than the carrying value of the reporting unit, including goodwill.

Both the qualitative assessment and quantitative analysis require significant management judgment, including estimates of changes in future economic conditions and their underlying causes and duration, the reasonableness and effectiveness of management's responses to those changes, changes in governmental fiscal and monetary policies, and fair value measurements based largely on significant unobservable inputs. The results of these judgments may have a significant impact on the Company's reported 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 $280.7 million for the second quarter of 2020 and $288.9 million in the second quarter of 2019. PPP loans added $13.6 million to net interest revenue in the second quarter of 2020. Net purchase accounting discount accretion was $3.3 million in the second quarter of 2020 and $13.4 million in the second 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 2.83 percent for the second quarter of 2020, compared to 3.30 percent for the second quarter of 2019. Loan discount accretion added 3 basis points to net interest margin in the second quarter of 2020 and 15 basis points in the second quarter of 2019. The tax-equivalent yield on earning assets was 3.12 percent, a decrease of 139 basis points compared to the second 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. Loan yields decreased 176 basis points to 3.63 percent. The yield on trading securities decreased 113 basis points to 2.46 percent. The yield on interest-bearing cash and cash equivalents decreased 250 basis points to 0.07 percent. The available for sale securities portfolio yield decreased 34 basis points to 2.29 percent and the yield on fair value option securities decreased 134 basis points to 2.00 percent.

Funding costs decreased 133 basis points compared to the second quarter of 2019. The cost of other borrowed funds decreased 223 basis points and the cost of interest-bearing deposits decreased 79 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 8 basis points for the second quarter of 2020, a decrease of 41 basis points compared to the second quarter of 2019.
Average earning assets for the second quarter of 2020 increased $5.0 billion or 14 percent over the second 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 $3.0 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. Average loans, net of allowance for loan losses, increased $1.9 billion, largely due to the inflow of PPP loans. Receivables from unsettled securities sales, primarily related to our U.S. agency residential mortgage-backed trading operations, increased $3.2 billion. Growth in average earning assets and non-interest bearing receivables was primarily funded by an increase in average deposits.

Average deposits increased $7.5 billion compared to the second quarter of 2019. Not only have we focused on acquiring and growing deposits to enhance liquidity and support balance sheet growth, but we also saw a large inflow of deposits with the funding of PPP loans and other CARES Act related stimulus initiatives. Interest-bearing deposits increased $5.9 billion while demand deposit balances increased $1.6 billion.
Tax-equivalent net interest revenue increased $16.7 million compared to the first quarter of 2020. PPP loans also added $13.6 million to net interest revenue in the second quarter.
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Average earning assets increased $1.9 billion compared to the first quarter of 2020. Average loan balances increased $2.2 billion, largely due to the influx of PPP loans. Available for sale securities increased $816 million as we have adjusted our balance sheet for the current rate environment. Fair value option securities, held as an economic hedge of the changes in fair value of our mortgage servicing rights, decreased $1.0 billion. In addition, receivables from unsettled securities sales, primarily related to our U.S. agency residential mortgage-backed trading operations, increased $1.6 billion. Growth in average earning assets and non-interest bearing receivables was largely funded by a $2.2 billion increase in interest-bearing deposits. Other borrowings decreased $3.0 billion, primarily due to a decrease in funds borrowed from the Federal Home Loan Bank partially offset by an increase in PPP loans funded through the Federal Reserve's PPP Liquidity Facility. Funds purchased and repurchase agreements increased $2.0 billion.
Net interest margin was 2.83 percent compared to 2.80 percent in the previous quarter. The reduction in deposit costs, LIBOR remaining elevated early in the second quarter, and the strategic positioning of our balance sheet, have combined to reduce the pressure on margin. Excluding the impact of PPP loans, net interest margin was 2.82 percent compared to 2.80 percent in the previous quarter.
The yield on average earning assets decreased 61 basis points from the prior quarter as we start to see the effects of the recent Federal Reserve rate cuts. The loan portfolio yield was down 87 basis points. The yield on the available for sale securities portfolio decreased 19 basis points.
Funding costs decreased 82 basis points. The cost of interest-bearing deposits decreased 64 basis points and the cost of other borrowed funds was down 117 basis points. The benefit to net interest margin from assets funded by non-interest liabilities was 8 basis points for the second quarter of 2020 compared to 26 basis points for the first quarter of 2020.
Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately 77% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally reprice more quickly than liabilities. One of the strategies that we use to manage toward a relative rate-neutral position is to purchase fixed-rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market-rate-sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. 

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

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Table 1 -- Volume/Rate Analysis
(In thousands)
Three Months Ended
June 30, 2020 / 2019
Six Months Ended
June 30, 2020 / 2019
  
Change Due To1
 
Change Due To1
ChangeVolumeYield/RateChangeVolumeYield/Rate
Tax-equivalent interest revenue:      
Interest-bearing cash and cash equivalents$(3,320) $273  $(3,593) $(4,324) $1,123  $(5,447) 
Trading securities(4,136) 953  (5,089) (11,071) (1,392) (9,679) 
Investment securities(411) (604) 193  (935) (1,225) 290  
Available for sale securities8,470  17,363  (8,893) 21,317  32,947  (11,630) 
Fair value option securities(3,393) (517) (2,876) 3,078  8,061  (4,983) 
Restricted equity securities(4,636) (2,565) (2,071) (5,087) (2,570) (2,517) 
Residential mortgage loans held for sale386  704  (318) (154) 602  (756) 
Loans(78,247) 23,060  (101,307) (115,062) 27,167  (142,229) 
Total tax-equivalent interest revenue(85,287) 38,667  (123,954) (112,238) 64,713  (176,951) 
Interest expense:
Transaction deposits(23,219) 8,448  (31,667) (15,066) 18,450  (33,516) 
Savings deposits(89) 19  (108) (123) 25  (148) 
Time deposits(2,130) 1,025  (3,155) (1,507) 1,499  (3,006) 
Funds purchased and repurchase agreements(8,662) 10,349  (19,011) (8,180) 17,945  (26,125) 
Other borrowings(42,746) (14,660) (28,086) (62,253) (20,147) (42,106) 
Subordinated debentures(262) (4) (258) (374)  (375) 
Total interest expense(77,108) 5,177  (82,285) (87,503) 17,773  (105,276) 
Tax-equivalent net interest revenue(8,179) 33,490  (41,669) (24,735) 46,940  (71,675) 
Change in tax-equivalent adjustment(851) (665) 
Net interest revenue$(7,328) $(24,070) 
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 $232.7 million for the second quarter of 2020, a $60.6 million increase over the second quarter of 2019 and a $52.4 million increase over the first quarter of 2020. Lower mortgage interest rates have positively affected both our brokerage and trading and mortgage banking revenue, leading to increases of $21.5 million and $25.8 million over the second quarter of 2019, respectively, and $11.2 million and $16.8 million over the first quarter of 2020, respectively.

Table 2 – Other Operating Revenue 
(In thousands)
 Three Months Ended June 30,Increase (Decrease)% Increase (Decrease)Three Months Ended
Mar. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20202019
Brokerage and trading revenue$62,022  $40,526  $21,496  53 %$50,779  $11,243  22 %
Transaction card revenue22,940  21,915  1,025  %21,881  1,059  %
Fiduciary and asset management revenue41,257  45,025  (3,768) (8)%44,458  (3,201) (7)%
Deposit service charges and fees22,046  28,074  (6,028) (21)%26,130  (4,084) (16)%
Mortgage banking revenue53,936  28,131  25,805  92 %37,167  16,769  45 %
Other revenue11,479  12,437  (958) (8)%12,309  (830) (7)%
Total fees and commissions revenue213,680  176,108  37,572  21 %192,724  20,956  11 %
Other gains (losses), net6,768  3,480  3,288  N/A(10,741) 17,509  N/A
Gain on derivatives, net21,885  11,150  10,735  N/A18,420  3,465  N/A
Gain (loss) on fair value option securities, net(14,459) 9,853  (24,312) N/A68,393  (82,852) N/A
Change in fair value of mortgage servicing rights(761) (29,555) 28,794  N/A(88,480) 87,719  N/A
Gain on available for sale securities, net5,580  1,029  4,551  N/A 5,577  N/A
Total other operating revenue$232,693  $172,065  $60,628  35 %$180,319  $52,374  29 %
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 43 percent of total revenue for the second 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 rising interest rates resulting in a decline in mortgage related trading activities and mortgage production volumes, may also increase net interest revenue or fiduciary and asset management revenue. 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 $21.5 million or 53 percent compared to the second 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 $43.9 million for the second quarter of 2020, a $22.0 million or 101 percent increase compared to the second quarter of 2019. Industry-wide mortgage loan production grew in the second quarter of 2020 driven by lower rates as the Federal Reserve stepped in to provide market stability. We increased our bond trading pipeline to provide greater liquidity to the housing market during a time of record loan production volumes.

Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $6.2 million for the second quarter of 2020, an $896 thousand or 17 percent increase compared to the second quarter of 2019.
Brokerage and trading revenue increased $11.2 million compared to the previous quarter. Continued low mortgage interest rates have increased mortgage production as well as related trading activity, which grew trading revenue $9.5 million. Customer hedging revenue also increased $3.0 million as existing customers increased energy hedging activities in the volatile environment.

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 decreased $3.8 million or 8 percent compared to the second quarter of 2019 and $3.2 million compared to the first quarter of 2020. The decrease is largely due to the decline in the fair value of average assets combined with the addition of approximately $1.1 million in fee waivers. A distribution of assets under management or administration and related fiduciary and asset management revenue follows:

Table 3 -- Assets Under Management or Administration
Three Months Ended
June 30, 2020June 30, 2019March 31, 2020
 Balance
Revenue1
Margin2
Balance
Revenue1
Margin2
Balance
Revenue1
Margin2
Managed fiduciary assets:
Personal$9,786,686  $23,826  0.97 %$8,516,076  $26,134  1.23 %$8,796,030  $23,609  1.07 %
Institutional13,568,898  6,872  0.20 %14,286,046  6,283  0.18 %12,186,588  7,347  0.24 %
Total managed fiduciary assets23,355,584  30,698  0.53 %22,802,122  32,417  0.57 %20,982,618  30,956  0.59 %
Non-managed assets:
Fiduciary27,205,000  10,142  0.15 %26,494,774  12,275  0.19 %26,070,483  13,132  0.20 %
Non-fiduciary12,831,130  417  0.01 %15,894,874  333  0.01 %13,176,722  370  0.01 %
Safekeeping and brokerage assets under administration16,060,788  —  — %16,582,832  —  — %15,554,006  —  — %
Total non-managed assets56,096,918  10,559  0.08 %58,972,480  12,608  0.09 %54,801,211  13,502  0.10 %
Total assets under management or administration$79,452,502  $41,257  0.21 %$81,774,602  $45,025  0.22 %$75,783,829  $44,458  0.23 %
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
Annualized revenue divided by period-end balance.

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A summary of changes in assets under management or administration for the three months ended June 30, 2020 and 2019 follows:

Table 4 -- Changes in Assets Under Management or Administration
Three Months Ended June 30,
20202019
Beginning balance$75,783,829  $78,852,284  
Net inflows (outflows)(1,219,567) 1,075,070  
Net change in fair value4,888,240  1,847,248  
Ending balance$79,452,502  $81,774,602  

Mortgage Banking Revenue

Mortgage banking revenue increased $25.8 million or 92 percent compared to the second quarter of 2019. Mortgage loan production volumes increased $262 million or 32 percent as average primary mortgage interest rates have decreased. The gain on sale margin increased 219 basis points to 3.65 percent in the second quarter of 2020. A rapid decrease in interest rates has led to increased application demand, especially refinance demand, and industry-wide capacity constraints.

Mortgage banking revenue increased $16.8 million or 45 percent compared to the first quarter of 2020. Lower mortgage interest rates during the quarter led to an increase in mortgage production of 2 percent over an already strong first quarter. Gain on sale margin improved 159 basis points over the prior quarter due to industry-wide capacity constraints.

Table 5 – Mortgage Banking Revenue 
(In thousands)
 Three Months Ended June 30,Increase (Decrease)% Increase (Decrease)Three Months Ended
Mar. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20202019
Mortgage production revenue$39,185  $11,869  $27,316  230 %$21,570  $17,615  82 %
Mortgage loans funded for sale$1,184,249  $729,841  $548,956  
Add: Current period end outstanding commitments546,304  344,087  657,570  
Less: Prior period end outstanding commitments657,570  263,434  158,460  
Total mortgage production volume$1,072,983  $810,494  $262,489  32 %$1,048,066  $24,917  %
Mortgage loan refinances to mortgage loans funded for sale71 %31 %4,000  bps57 %1,400  bps
Gains on sale margin3.65 %1.46 %219  bps2.06 %159  bps
Primary mortgage interest rates:
Average3.24 %4.01 %(77) bps3.51 %(27) bps
Period end3.13 %3.73 %(60) bps3.33 %(20) bps
Mortgage servicing revenue$14,751  $16,262  $(1,511) (9)%$15,597  $(846) (5)%
Average outstanding principal balance of mortgage loans serviced for others19,319,872  21,418,690  (2,098,818) (10)%20,416,546  (1,096,674) (5)%
Average mortgage servicing revenue rates0.31 %0.30 % bp0.31 %—  bp

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

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Service Charges

Deposit service charges and fees decreased $6.0 million compared to the second quarter of 2019 and $4.1 million compared to the first quarter of 2020. This decrease was due in part to "shelter in place" orders that led to lower activity and also to certain fee waivers in order to help our customers during uncertain times caused by the pandemic.

Net gains on other assets, securities and derivatives

Other net gains totaled $6.8 million in the second quarter of 2020 compared to other net gains of $3.5 million in the second quarter of 2019 and other net losses of $10.7 million in the first quarter of 2020. These fluctuations are primarily related to changes in the fair value of investments related to deferred compensation that are largely offset 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. In the second quarter of 2020, we completed a sale of mortgage servicing rights on $1.6 billion of unpaid principal balance, primarily related to loans guaranteed by the Veteran's Administration. This sale was completed to reduce exposure to out of footprint MSRs with higher credit risk where no other relationships with the borrower exist. The fair value of contracts held as an economic hedge increased in the second quarter of 2020 while the fair value of MSRs was largely unchanged. Interest rate movements between the date we established the transaction price and the closing date of the sale produced positive results.

Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 Three Months Ended
 June 30, 2020Mar. 31, 2020June 30, 2019
Gain on mortgage hedge derivative contracts, net$21,815  $18,371  $11,128  
Gain (loss) on fair value option securities, net(14,459) 68,393  9,853  
Gain on economic hedge of mortgage servicing rights, net7,356  86,764  20,981  
Loss on change in fair value of mortgage servicing rights(761) (88,480) (29,555) 
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue6,595  (1,716) (8,574) 
Net interest revenue on fair value option securities1
2,702  4,268  1,296  
Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges$9,297  $2,552  $(7,278) 
1 Actual interest earned on fair value option securities less internal transfer-priced cost of funds.

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Other Operating Expense

Other operating expense for the second quarter of 2020 totaled $295.4 million, an increase of $18.3 million compared to the second quarter of 2019 and $26.8 million compared to the first quarter of 2020.

Table 7 – Other Operating Expense
(In thousands)
Three Months Ended June 30,Increase (Decrease)%
Increase (Decrease)
Three Months Ended
Mar. 31, 2020
Increase (Decrease)%
Increase (Decrease)
 20202019
Regular compensation$99,267  $98,247  $1,020  %$97,760  $1,507  %
Incentive compensation:
Cash-based47,209  33,155  14,054  42 %36,189  11,020  30 %
Share-based2,815  2,734  81  %3,108  (293) %
Deferred compensation5,932  1,534  4,398  N/A(5,673) 11,605  N/A
Total incentive compensation55,956  37,423  18,533  50 %33,624  22,332  66 %
Employee benefits21,012  24,672  (3,660) (15)%24,797  (3,785) (15)%
Total personnel expense176,235  160,342  15,893  10 %156,181  20,054  13 %
Business promotion1,935  10,142  (8,207) (81)%6,215  (4,280) (69)%
Charitable contributions to BOKF Foundation3,000  1,000  2,000  N/A—  3,000  N/A
Professional fees and services12,161  13,002  (841) (6)%12,948  (787) (6)%
Net occupancy and equipment30,675  26,880  3,795  14 %26,061  4,614  18 %
Insurance5,156  6,454  (1,298) (20)%4,980  176  %
Data processing and communications32,942  29,735  3,207  11 %32,743  199  %
Printing, postage and supplies3,502  4,107  (605) (15)%4,272  (770) (18)%
Net losses and operating expenses of repossessed assets1,766  580  1,186  204 %1,531  235  15 %
Amortization of intangible assets5,190  5,138  52  %5,094  96  %
Mortgage banking costs15,598  11,545  4,053  35 %10,545  5,053  48 %
Other expense7,227  8,212  (985) (12)%8,054  (827) (10)%
Total other operating expense$295,387  $277,137  $18,250  %$268,624  $26,763  10 %
Average number of employees (full-time equivalent)5,037  5,123  (86) (2)%5,075  (38) (1)%
Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

Personnel expense increased $15.9 million compared to the second quarter of 2019. Incentive compensation increased $18.5 million. Cash based incentive compensation increased $14.1 million, largely due to increased mortgage-backed securities trading activity. Deferred compensation increased $4.4 million; however, this is largely offset by an increase in the value of related investments included in Other gains (losses). Employee benefits decreased $3.7 million. Due to the COVID-19 pandemic, many elective procedures have been put on hold and only essential services performed driving down employee healthcare costs.
Personnel expense increased $20.1 million compared the first quarter of 2020. Incentive compensation increased $22.3 million. Cash based incentive compensation increased $11.0 million, primarily due to increased mortgage-backed securities trading activity. Deferred compensation increased $11.6 million. This is largely offset by an increase in the value of related investments included in Other gains (losses). Employee benefits decreased $3.8 million led by a seasonal decrease in payroll taxes and retirement plan expenses.
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Non-personnel operating expense

Non-personnel operating expense increased $2.4 million over the second quarter of 2019. Mortgage banking costs increased $4.1 million due to additional accruals related to default servicing and loss mitigation costs on loans serviced for others. Occupancy and equipment expenses increased $3.8 million, largely due to the impairment of two leases where assumptions regarding subleasing changed due to deteriorating economic conditions. Data processing and communications expense increased $3.2 million, primarily due to technology project costs. A $3.0 million charitable contribution was also made to the BOKF Foundation in the second quarter of 2020. These increases were partially offset by a decrease of $8.2 million in business promotion expense, primarily related to a combination of decreased travel and entertainment expense due to the pandemic and decreased advertising costs. We experienced higher than usual advertising costs in the second quarter of 2019 as we worked on brand recognition advertising in our Arizona and Colorado markets following the CoBiz acquisition.
Non-personnel expense increased $6.7 million compared to the first quarter of 2020. Mortgage banking costs increased $5.1 million. Accruals related to default servicing and loss mitigation costs on loans serviced for others increased $2.8 million due to changes in our portfolio and loan counts, delinquency levels, and additional accruals related to losses on loans in forbearance. Increased amortization of mortgage servicing rights from actual prepayments also added $1.7 million to mortgage banking costs during the second quarter of 2020. Occupancy and equipment expense increased $4.6 million as impairment charges were incurred on two leases. These increases were partially offset by a decrease of $4.3 million in business promotion costs, largely related to reduced travel and entertainment expenses.
Income Taxes

The effective tax rate was 19.7 percent for the second quarter of 2020, 21.4 percent for the second quarter of 2019 and 21.8 percent for the first quarter of 2020. The effective tax rate decreased for the second quarter of 2020 as a result of a decrease in forecasted net income before tax for 2020.
Lines of Business

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

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

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

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

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

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

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

As shown in Table 8, net income attributable to our lines of business decreased $1.9 million compared to the second quarter of 2019. Net interest revenue decreased by $52.9 million compared to the prior year, primarily due to decreases in the short-term interest rate related to a 225 basis point reduction in the federal funds rate by the Federal Reserve since the middle of 2019. Other operating revenue increased by $45.3 million led by our brokerage and trading and mortgage banking businesses. Operating expense increased $11.9 million compared to the second quarter of 2019, largely due to increased incentive compensation related to trading activities.

Net interest revenue decreased $3.0 million compared to the first quarter of 2020 as we started to see some of the effects of recent rate cuts by the Federal Reserve. Other operating revenue increased $30.6 million. Continued low mortgage interest rates drove increases in mortgage banking revenue of $16.7 million and brokerage and trading revenue of $12.5 million. Other operating expense increased $8.7 million, largely driven by increased incentive compensation related to trading activities. Net income attributed to Funds Management and other was affected by the provision for expected credit losses in excess of net charge-offs of $121.2 million in the second quarter of 2020 and $76.6 million in the first quarter of 2020.

Table 8 -- Net Income by Line of Business
(In thousands)
 Three Months Ended June 30,Increase (Decrease)% Increase (Decrease)Three Months Ended
Mar. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20202019
Commercial Banking$80,992  $106,280  $(25,288) (24)%$74,975  $6,017  %
Consumer Banking31,900  16,342  15,558  95 %22,921  8,979  39 %
Wealth Management33,394  25,544  7,850  31 %22,573  10,821  48 %
Subtotal146,286  148,166  (1,880) (1)%120,469  25,817  21 %
Funds Management and other(81,593) (10,603) (70,990) N/A(58,390) (23,203) N/A
Total$64,693  $137,563  $(72,870) (53)%$62,079  $2,614  %
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 $81.0 million to consolidated net income in the second quarter of 2020, a decrease of $25.3 million or 24 percent compared to the second quarter of 2019.

Table 9 -- Commercial Banking
(Dollars in thousands)
 Three Months Ended June 30,Increase (Decrease)% Increase (Decrease)Three Months Ended
Mar. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20202019
Net interest revenue from external sources$174,314  $251,084  $(76,770) (31)%$201,902  $(27,588) (14)%
Net interest expense from internal sources(29,205) (66,613) 37,408  (56)%(50,495) 21,290  (42)%
Total net interest revenue145,109  184,471  (39,362) (21)%151,407  (6,298) (4)%
Net loans charged off13,762  6,823  6,939  102 %16,880  (3,118) (18)%
Net interest revenue after net loans charged off131,347  177,648  (46,301) (26)%134,527  (3,180) (2)%
Fees and commissions revenue46,515  41,105  5,410  13 %41,459  5,056  12 %
Other gains (losses), net1,383  506  877  N/A(3,239) 4,622  N/A
Other operating revenue47,898  41,611  6,287  15 %38,220  9,678  25 %
Personnel expense39,873  42,620  (2,747) (6)%37,020  2,853  %
Non-personnel expense23,060  20,795  2,265  11 %23,732  (672) (3)%
Other operating expense62,933  63,415  (482) (1)%60,752  2,181  %
Net direct contribution116,312  155,844  (39,532) (25)%111,995  4,317  %
Gain on financial instruments, net48  20  28  N/A49  (1) N/A
Gain on repossessed assets, net191  —  191  N/A 182  N/A
Corporate expense allocations5,437  10,652  (5,215) (49)%8,905  (3,468) (39)%
Income before taxes111,114  145,212  (34,098) (23)%103,148  7,966  %
Federal and state income tax30,122  38,932  (8,810) (23)%28,173  1,949  %
Net income$80,992  $106,280  $(25,288) (24)%$74,975  $6,017  %
Average assets$27,575,652  $22,910,724  $4,664,928  20 %$24,687,976  $2,887,676  12 %
Average loans19,262,827  18,812,800  450,027  %18,812,015  450,812  %
Average deposits14,599,225  10,724,206  3,875,019  36 %11,907,386  2,691,839  23 %
Average invested capital2,230,707  2,222,032  8,675  — %2,188,242  42,465  %
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 decreased $39.4 million compared to the second quarter of 2019. Net interest revenue decreased due to a combination of compressed loan spreads and lower deposit related net interest revenue as the value of deposits was impacted by falling interest rates. Net loans charged-off increased $6.9 million.

Fees and commissions revenue increased $5.4 million or 13 percent largely due to an increase in customer energy hedging revenue as customers increased hedges due to the volatile price environment. Operating expenses were relatively consistent with the second quarter of 2019. Corporate expense allocations decreased $5.2 million or 49 percent compared to the prior year.

The average outstanding balance of loans attributed to Commercial Banking was up $450 million or 2 percent over the second quarter of 2019 to $19.3 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans, which are primarily attributed to the Commercial Banking segment. 
 
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Average deposits attributed to Commercial Banking were $14.6 billion for the second quarter of 2020, a $3.9 billion or 36 percent increase over the second quarter of 2019, largely related to the inflow of deposits from the CARES Act and other government stimulus initiatives along with core customer growth. 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 $6.3 million or 4 percent compared to the first quarter of 2020 largely due to a decrease in loan spreads 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 increased $5.1 million, led by an increase in customer energy hedging revenue of $4.4 million. Other gains (losses), net also increased over the first quarter of 2020, primarily related to an impairment charge recognized on an energy fund in the first quarter. Operating expense increased $2.2 million or 4 percent compared to the first quarter of 2020, primarily due to incentive compensation costs.

Average loan balances increased $451 million or 2 percent and average customer deposits increased $2.7 billion or 23 percent over the first quarter of 2020.



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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 $31.9 million to consolidated net income for the second quarter of 2020, an increase of $15.6 million over the second 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. Changes in the fair value of mortgage servicing rights, net of economic hedges, increased pre-tax net income for the second quarter of 2020 by $6.6 million compared to an $8.6 million decrease in pre-tax net income in the second quarter of 2019.

Table 10 -- Consumer Banking
(Dollars in thousands)
 Three Months Ended June 30,Increase (Decrease)% Increase (Decrease)Three Months Ended
Mar. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20202019
Net interest revenue from external sources$18,795  $25,300  $(6,505) (26)%$25,876  $(7,081) (27)%
Net interest revenue from internal sources20,475  27,415  (6,940) (25)%18,056  2,419  13 %
Total net interest revenue39,270  52,715  (13,445) (26)%43,932  (4,662) (11)%
Net loans charged off535  1,728  (1,193) (69)%1,256  (721) (57)%
Net interest revenue after net loans charged off38,735  50,987  (12,252) (24)%42,676  (3,941) (9)%
Fees and commissions revenue67,192  48,830  18,362  38 %55,062  12,130  22 %
Other losses, net—  (19) 19  N/A—  —  N/A
Other operating revenue67,192  48,811  18,381  38 %55,062  12,130  22 %
Personnel expense23,821  24,377  (556) (2)%23,620  201  %
Non-personnel expense35,115  33,317  1,798  %31,173  3,942  13 %
Total other operating expense58,936  57,694  1,242  %54,793  4,143  %
Net direct contribution46,991  42,104  4,887  12 %42,945  4,046  %
Gain on financial instruments, net7,356  20,981  (13,625) N/A86,764  (79,408) N/A
Change in fair value of mortgage servicing rights(761) (29,555) 28,794  N/A(88,480) 87,719  N/A
Gain on repossessed assets, net27  92  (65) N/A13  14  N/A
Corporate expense allocations10,812  11,695  (883) (8)%10,487  325  %
Income before taxes42,801  21,927  20,874  95 %30,755  12,046  39 %
Federal and state income tax10,901  5,585  5,316  95 %7,834  3,067  39 %
Net income$31,900  $16,342  $15,558  95 %$22,921  $8,979  39 %
Average assets$9,920,005  $9,212,667  $707,338  %$9,850,853  $69,152  %
Average loans1,679,164  1,796,823  (117,659) (7)%1,711,703  (32,539) (2)%
Average deposits7,587,246  6,998,677  588,569  %6,869,481  717,765  10 %
Average invested capital258,558  304,990  (46,432) (15)%274,384  (15,826) (6)%
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 $13.4 million or 26 percent compared to the second quarter of 2019, primarily due to a decrease in the yield on deposits sold to our Funds Management unit. Average consumer deposits grew $589 million over the second quarter of 2019 with demand deposit balances increasing $398 million or 18 percent. Deposit growth was related to CARES Act funding and government stimulus payments in addition to core growth.

Fees and commissions revenue increased $18.4 million or 38 percent over the second quarter of 2019. Lower mortgage interest rates increased mortgage loan origination volumes, particularly refinance volumes, which jumped to 71 percent of originations in the second quarter of 2020. Mortgage production volume increased $262 million or 32 percent and gain on sale margin increased 219 basis points due to industry-wide capacity constraints. Deposit service charges decreased $6.3 million, primarily due to reduced activity as a result of "shelter in place" initiatives as well as waived fees as a result of the pandemic. Operating expense increased by $1.2 million or 2 percent. Mortgage banking costs increased $4.0 million, largely related to accruals related to default servicing and loss mitigation costs on loans serviced for others. This was largely offset by a decrease in business promotion expense of 2.7 million, primarily due to rebranding efforts in the second quarter of 2019 following the CoBiz acquisition. Corporate expense allocations were $883 thousand or 8 percent lower than the prior year.

Changes in the fair value of mortgage servicing rights, net of economic hedges, increased pre-tax net income for the second quarter of 2020 by $6.6 million compared to an $8.6 million decrease in pre-tax net income in the second quarter of 2019. The completion of a sale of mortgage servicing rights on $1.6 billion of unpaid principal balance, primarily related to loans guaranteed by the Veteran's Administration, was a large contributor. The fair value of contracts held as an economic hedge increased while the fair value of the servicing rights was largely unchanged. Interest rate movements between the date the transaction price was established and the closing date of the sale produced positive results.

Net interest revenue from Consumer Banking activities decreased $4.7 million or 11 percent compared to the first quarter of 2020. Operating revenue increased $12.1 million or 22 percent over the first quarter of 2020. Revenues from mortgage banking activities increased $16.7 million. Mortgage production volume increased $25 million or 2 percent as a result of lower interest rates. Gain on sale margins climbed to 3.65 percent from 2.06 percent. Deposit service charge revenue decreased $3.9 million compared to the first quarter of 2020. We proactively waived certain fees in the second quarter to help customers throughout the uncertain time caused by the pandemic.

Operating expenses increased $4.1 million, largely related to higher amortization of mortgage servicing rights and accruals related to default servicing and loss mitigation costs on loans serviced for others.

Average consumer loans decreased $33 million or 2 percent. Average deposits increased $718 million or 10 percent, primarily due to funding related to the CARES Act as well as core growth.


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Wealth Management

Wealth Management contributed $33.4 million to consolidated net income in the second quarter of 2020, an increase of $7.9 million or 31 percent compared to the second quarter of 2019. Increased fees and commissions revenue, primarily from residential mortgage-backed securities trading, was partially offset by related incentive compensation costs.


Table 11 -- Wealth Management
(Dollars in thousands)
 Three Months Ended June 30,Increase (Decrease)% Increase (Decrease)Three Months Ended
Mar. 31, 2020
Increase (Decrease)% Increase (Decrease)
 20202019
Net interest revenue from external sources$34,359  $17,222  $17,137  100 %$14,366  $19,993  139 %
Net interest revenue from internal sources(7,479) 9,719  (17,198) (177)%4,538  (12,017) (265)%
Total net interest revenue26,880  26,941  (61) — %18,904  7,976  42 %
Net loans charged off (recovered)(89) (48) (41) 85 %(48) (41) 85 %
Net interest revenue after net loans charged off (recovered)26,969  26,989  (20) — %18,952  8,017  42 %
Fees and commissions revenue106,757  85,925  20,832  24 %97,881  8,876  %
Other gains (losses), net(83) 92  (175) N/A—  (83) N/A
Other operating revenue106,674  86,017  20,657  24 %97,881  8,793  %
Personnel expense61,909  50,080  11,829  24 %56,443  5,466  10 %
Non-personnel expense18,658  19,372  (714) (4)%21,749  (3,091) (14)%
Other operating expense80,567  69,452  11,115  16 %78,192  2,375  %
Net direct contribution53,076  43,554  9,522  22 %38,641  14,435  37 %
Corporate expense allocations8,204  9,168  (964) (11)%8,265  (61) (1)%
Income before taxes44,872  34,386  10,486  30 %30,383  14,489  48 %
Federal and state income tax11,478  8,842  2,636  30 %7,810  3,668  47 %
Net income$33,394  $25,544  $7,850  31 %$22,573  $10,821  48 %
Average assets$15,721,452  $9,849,396  $5,872,056  60 %$12,723,412  $2,998,040  24 %
Average loans1,709,363  1,647,680  61,683  %1,705,735  3,628  — %
Average deposits8,385,681  6,220,848  2,164,833  35 %7,623,986  761,695  10 %
Average invested capital295,245  274,050  21,195  %288,264  6,981  %

Net interest revenue was relatively consistent with the second quarter of 2019. Increased net interest revenue related to growth in trading activity was offset by a reduction in the value of deposits sold to the Funds Management unit. Average loans attributed to the Wealth Management segment increased $62 million or 4 percent. Average deposits increased $2.2 billion or 35 percent, largely due to core growth.

Fees and commissions revenue increased $20.8 million or 24 percent over the second quarter of 2019. Brokerage and trading revenue increased $20.7 million due to increased trading activity as a result of lower mortgage interest rates. We increased our bond trading pipeline in the second quarter of 2020 to provide greater liquidity to the housing market during a time of record volumes. Average trading assets, which includes trading securities inventory and receivables from unsettled securities sales, were $6.3 billion for the second quarter of 2020 compared to $3.1 billion for the second quarter of 2019. Fiduciary and asset management revenue decreased $3.8 million related to a combination of lower average asset values and waived fees. Operating expense increased $11.1 million or 16 percent compared to the second quarter of 2019, primarily related to incentive
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compensation expense on higher trading activity. Corporate expense allocations decreased $964 thousand or 11 percent compared to the prior year.

Net income for Wealth Management increased $10.8 million or 48 percent compared to the first quarter of 2020.

Net interest revenue increased $8.0 million due to higher net interest revenue related to residential mortgage-backed trading activities and increased deposit balances, partially offset by the decline in the value of deposits sold to the Funds Management unit. Brokerage and trading revenue increased $8.9 million due to an increase in trading activity and volumes due to market volatility. Operating expenses increased $2.4 million, largely due to variable incentive compensation related to revenue growth, partially offset by lower business promotion expense.

Average loans maintained at $1.7 billion and average deposits increased $762 million or 10 percent to $8.4 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 June 30, 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 decreased $914 million to $1.2 billion during the second 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 June 30, 2020, the carrying value of investment (held-to-maturity) securities was $268 million, including a $1.6 million allowance for expected credit losses compared to $274 million at March 31, 2020 with a $1.5 million allowance for expected credit losses. The fair value of investment securities was $299 million at June 30, 2020 and $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 $12.0 billion at June 30, 2020, a $270 million decrease compared to March 31, 2020. At June 30, 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 June 30, 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 2.1 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 $24.2 billion at June 30, 2020, up $1.7 billion over March 31, 2020, primarily due to a $2.1 billion increase from PPP loans, partially offset by paydowns in the commercial portfolio.

Table 12 -- Loans
(In thousands)
June 30, 2020Mar. 31, 2020Dec. 31, 2019Sept. 30, 2019June 30, 2019
Commercial: 
Energy$3,974,174  $4,111,676  $3,973,377  $4,114,269  $3,921,353  
Services3,779,881  3,955,748  3,832,031  4,011,089  4,105,117  
Healthcare3,289,343  3,165,096  3,033,916  3,032,968  2,926,510  
General business3,115,112  3,563,455  3,192,326  3,266,299  3,383,928  
Total commercial14,158,510  14,795,975  14,031,650  14,424,625  14,336,908  
Commercial real estate:
Multifamily1,407,107  1,282,457  1,265,562  1,324,839  1,300,372  
Office973,995  962,004  928,379  1,014,275  1,056,306  
Retail780,467  774,198  775,521  799,169  825,399  
Industrial723,005  728,026  856,117  873,536  828,569  
Residential construction and land development136,911  138,958  150,879  135,361  141,509  
Other commercial real estate532,659  564,442  457,325  478,877  557,878  
Total commercial real estate4,554,144  4,450,085  4,433,783  4,626,057  4,710,033  
Paycheck protection program2,081,428  —  —  —  —  
Loans to individuals: 
Residential mortgage1,813,442  1,844,555  1,886,378  1,925,539  1,975,449  
Residential mortgage guaranteed by U.S. government agencies322,269  197,889  197,794  191,764  195,373  
Personal1,226,097  1,175,466  1,201,382  1,117,382  1,037,889  
Total loans to individuals3,361,808  3,217,910  3,285,554  3,234,685  3,208,711  
Total$24,155,890  $22,463,970  $21,750,987  $22,285,367  $22,255,652  
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. In addition, revolving lines of credit are generally governed by a borrowing base. 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 $14.2 billion or 59 percent of the loan portfolio at June 30, 2020, a $637 million decrease compared to March 31, 2020, primarily due to paydowns in the second quarter.

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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 $4.0 billion or 16 percent of total loans at June 30, 2020, a $138 million decrease compared to March 31, 2020. Approximately $3.1 billion of energy loans were to oil and gas producers, down $105 million compared to March 31, 2020. 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 $688 million at June 30, 2020, up $17 million over March 31, 2020. Loans to borrowers that provide services to the energy industry totaled $142 million at June 30, 2020, down $42 million. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $63 million, a $7.3 million decrease compared to the prior quarter.

Unfunded energy loan commitments were $2.5 billion at June 30, 2020, a $222 million decrease compared to March 31, 2020 primarily due to semi-annual borrowing base redeterminations completed during the second quarter.

The healthcare sector of the loan portfolio totaled $3.3 billion or 14 percent of total loans. Healthcare loans increased $124 million over March 31, 2020, primarily due to growth in balances from medical service providers. 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. The CARES Act includes 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 decreased $176 million to $3.8 billion or 16 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, foundations and not-for-profit organizations and specialty trade contractors. Approximately $1.9 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 decreased $448 million to $3.1 billion or 13 percent of total loans. General business loans consist of $1.7 billion of wholesale/retail loans, $780 million of loans from other commercial industries, and the remainder from manufacturing loans.

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 less than 7 percent of our total portfolio. Some of these borrowers have participated in the PPP, which has provided some measure of relief. 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 June 30, 2020, the outstanding principal balance of these loans totaled $4.7 billion, including $2.2 billion of energy loans. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 21 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 19 percent to 22 percent over the past five years. The outstanding balance of commercial real estate loans increased $104 million over March 31, 2020. Multifamily residential loans, our largest exposure in commercial real estate, increased $125 million to $1.4 billion at June 30, 2020. Pay downs from refinances into the permanent market slowed during the second quarter. Loans secured by office buildings increased $12 million to $974 million. Loans secured by other commercial real estate properties decreased $32 million to $533 million. Loans secured by retail facilities were $780 million at June 30, 2020, largely unchanged from the prior quarter.

Approximately 71 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 7 percent of the segment, followed by California at 6 percent. All other states represent less than 5 percent individually.

Loans secured by retail facilities and office buildings may be adversely impacted by measures being taken to hinder the spread of the virus as well as changes in consumer behavior.
Payment Protection Program
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. PPP provided fully forgivable loans when utilized for qualified expenditures, including to help small business maintain payrolls during the COVID-19 pandemic. These loans have a contractual term of two years, though most are expected to be forgiven prior to maturity after completion of a compliance period. Loans are guaranteed and amounts forgiven will be reimbursed to the Company by the SBA. The loans carry a rate of 1 percent. Interest plus loan fees, which vary depending on loan size, are accrued over the contractual life of the loan. Any unaccreted origination fees will be recognized when the loan is paid.
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.

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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 93 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.

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)
June 30, 2020Mar. 31, 2020Dec. 31, 2019Sept. 30, 2019June 30, 2019
Texas:
Commercial$5,771,691  $6,350,690  $6,174,894  $6,220,227  $5,877,265  
Commercial real estate1,389,547  1,296,266  1,259,117  1,292,116  1,341,609  
Paycheck protection program612,133  —  —  —  —  
Loans to individuals748,474  756,634  727,175  749,361  673,463  
Total Texas8,521,845  8,403,590  8,161,186  8,261,704  7,892,337  
Oklahoma:
Commercial5,086,934  3,886,086  3,454,825  3,690,100  3,762,234  
Commercial real estate636,021  593,473  631,026  679,786  717,970  
Paycheck protection program442,518  —  —  —  —  
Loans to individuals1,967,665  1,788,518  1,854,864  1,753,698  1,786,162  
Total Oklahoma8,133,138  6,268,077  5,940,715  6,123,584  6,266,366  
Colorado:
Commercial1,600,382  2,181,309  2,169,598  2,247,798  2,325,742  
Commercial real estate937,742  955,608  927,826  975,066  1,023,410  
Paycheck protection program488,279  —  —  —  —  
Loans to individuals264,872  268,674  276,939  303,605  314,317  
Total Colorado3,291,275  3,405,591  3,374,363  3,526,469  3,663,469  
Arizona:
Commercial1,036,862  1,396,582  1,307,073  1,276,534  1,330,415  
Commercial real estate689,121  714,161  728,832  771,425  761,243  
Paycheck protection program318,961  —  —  —  —  
Loans to individuals177,066  181,821  186,539  170,815  168,019  
Total Arizona2,222,010  2,292,564  2,222,444  2,218,774  2,259,677  
Kansas/Missouri:
Commercial404,860  556,255  527,872  566,969  602,836  
Commercial real estate314,504  310,799  322,541  374,795  331,443  
Paycheck protection program76,724  —  —  —  —  
Loans to individuals102,577  116,734  131,069  146,522  155,453  
Total Kansas/Missouri898,665  983,788  981,482  1,088,286  1,089,732  
New Mexico:
Commercial182,688  327,164  305,320  335,409  350,520  
Commercial real estate455,574  434,150  402,148  374,331  385,058  
Paycheck protection program128,058  —  —  —  —  
Loans to individuals83,470  87,110  90,257  92,270  92,626  
Total New Mexico849,790  848,424  797,725  802,010  828,204  
Arkansas:
Commercial75,093  97,889  92,068  87,588  87,896  
Commercial real estate131,635  145,628  162,293  158,538  149,300  
Paycheck protection program14,755  —  —  —  —  
Loans to individuals17,684  18,419  18,711  18,414  18,671  
Total Arkansas239,167  261,936  273,072  264,540  255,867  
Total BOK Financial loans$24,155,890  $22,463,970  $21,750,987  $22,285,367  $22,255,652  
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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"). During the second quarter, we sold mortgage servicing rights related to residential mortgage loans primarily guaranteed by the VA with an unpaid principal balance of $1.6 billion.

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.

The CARES Act provided protections for borrowers with agency-backed residential mortgages that are serviced by the Company. Forbearance must be granted upon receiving a request from a borrower and the borrower's attestation to a financial hardship associated with the COVID-19 emergency. The Bank is required to offer up to a 6 month forbearance, with the possibility of an additional 6 month extension. This program was available to all current and delinquent borrowers, including those in bankruptcy and/or foreclosure. As of June 30, 2020, agency-serviced loans in forbearance included 4,503 borrowers with an unpaid principal balance of $792 million. For certain contracts, we must advance principal and interest payments during the forbearance period. Advances as of June 30, 2020 totaled $6.2 million. Advances are generally reimbursed to us by the appropriate agencies. Loans in forbearance are considered delinquent when payments are not made for purposes of valuing mortgage servicing rights and for purposes of determining GNMA loans that are eligible to be repurchased. As of June 30, 2020, 40% of borrowers in forbearance remained current.

Table 14 – Off-Balance Sheet Credit Commitments
(In thousands)
 June 30, 2020Mar. 31, 2020Dec. 31, 2019Sept. 30, 2019June 30, 2019
Loan commitments$10,298,572  $9,960,678  $11,065,649  $11,259,366  $11,411,819  
Standby letters of credit693,177  683,516  645,505  712,944  698,527  
Unpaid principal balance of residential mortgage loans sold with recourse82,305  86,336  88,808  92,139  93,606  
Unpaid principal balance of residential mortgage loans transferred into mortgage-backed securities guaranteed by U.S. Dept. of Veteran's Affairs1,715,025  3,217,567  3,375,451  3,472,375  3,568,408  
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.

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

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

Derivative contracts are carried at fair value. At June 30, 2020, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $658 million compared to $929 million at March 31, 2020. At June 30, 2020, the net fair value of our derivative contracts included $282 million for foreign exchange contracts, $235 million for energy contracts and $140 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 $620 million at June 30, 2020 and $893 million at March 31, 2020.

At June 30, 2020, total derivative assets were reduced by $156 million of cash collateral received from counterparties and total derivative liabilities were reduced by $132 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 June 30, 2020 follows in Table 15.

Table 15 -- Fair Value of Derivative Contracts
(In thousands)
Customers$292,957  
Banks and other financial institutions162,132  
Exchanges and clearing organizations46,645  
Fair value of customer risk management program asset derivative contracts, net$501,734  
 
At June 30, 2020, our largest derivative exposure was to an exchange for energy contracts of $47 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 $26.16 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 $53.24 per barrel of oil would increase the fair value of derivative assets by $127 million as margin received falls faster than the asset values. Further increases in price to the equivalent of $70.65 per barrel of oil would increase the fair value of our derivative assets by $312 million with lending customers comprising the bulk of the assets. Liquidity requirements of this program may also be affected by our credit rating. At June 30, 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 June 30, 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
June 30, 2020Mar. 31, 2020
Allowance for loan losses:
Beginning balance$315,311  $210,759  
CECL transition adjustment1
—  25,809  
Beginning balance, adjusted315,311  236,568  
Loans charged off(15,570) (18,917) 
Recoveries of loans previously charged off1,491  1,696  
Net loans charged off(14,079) (17,221) 
Provision for credit losses134,365  95,964  
Ending balance$435,597  $315,311  
Accrual for off-balance sheet credit risk from unfunded loan commitments:
Beginning balance$28,514  $1,585  
CECL transition adjustment—  23,552  
Beginning balance, adjusted28,514  25,137  
Provision for credit losses4,405  3,377  
Ending balance$32,919  $28,514  
Accrual for off-balance sheet credit risk associated with mortgage banking activities:
Beginning balance$9,660  $4,820  
CECL transition adjustment—  10,915  
Beginning balance, adjusted9,660  15,735  
Loans charged off(44) (55) 
Provision for credit losses(3,575) (6,020) 
Ending balance$6,041  $9,660  
Allowance for credit losses related to held-to-maturity (investment) securities:
Beginning balance$1,502  $—  
CECL transition adjustment—  1,052  
Beginning balance, adjusted1,502  1,052  
Provision for credit losses126  450  
Ending balance$1,628  $1,502  
Total provision for credit losses$135,321  $93,771  
Net charge-offs (recoveries) (annualized) to average loans0.23 %0.31 %
Net charge-offs (recoveries) (annualized) to average loans excluding PPP loans2
0.25 %0.31 %
Recoveries to gross charge-offs9.58 %8.97 %
Provision for loan losses (annualized) to average loans2.25 %1.71 %
Allowance for loan losses to loans outstanding at period-end1.80 %1.40 %
Allowance for loan losses to loans outstanding at period-end excluding PPP loans2
1.97 %1.40 %
Accrual for unfunded loan commitments to loan commitments0.32 %0.29 %
Combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments to loans outstanding at period-end1.94 %1.53 %
Combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments to loans outstanding at period-end excluding PPP loans2
2.12 %1.53 %
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.
2 Metric meaningful due to the unique characteristics and short-term nature of the PPP loans.
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 Three Months Ended
Dec. 31, 2019Sept. 30, 2019June 30, 2019
Allowance for loan losses:  
Beginning balance$204,432  $202,534  $205,340  
Loans charged off(14,268) (11,707) (13,227) 
Recoveries of loans previously charged off1,816  1,066  5,503  
Net loans charged off(12,452) (10,641) (7,724) 
Provision for loan losses18,779  12,539  4,918  
Ending balance$210,759  $204,432  $202,534  
Accrual for off-balance sheet credit losses: 
Beginning balance$1,364  $1,903  $1,821  
Provision for off-balance sheet credit losses221  (539) 82  
Ending balance$1,585  $1,364  $1,903  
Total combined provision for credit losses$19,000  $12,000  $5,000  
Net charge-offs (recoveries) (annualized) to average loans0.22 %0.19 %0.14 %
Recoveries to gross charge-offs12.73 %9.11 %41.60 %
Provision for loan losses (annualized) to average loans0.34 %0.21 %0.09 %
Allowance for loan losses to loans outstanding at period-end0.97 %0.92 %0.91 %
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments0.01 %0.01 %0.02 %
Combined allowance for credit losses and off-balance sheet credit risk from unfunded loan commitments to loans outstanding at period-end0.98 %0.92 %0.92 %

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 $135.3 million for the second quarter of 2020, with $138.8 million related to lending activities. Changes in our reasonable and supportable forecasts of macroeconomic variables, primarily due to the anticipated impact of the on-going COVID-19 pandemic, and other assumptions, required a provision of $54.6 million. All other changes totaled $84.2 million, which included $14.4 million primarily due to increased specific impairment of energy loans, portfolio changes of $55.7 million primarily due to changes in risk grades related to energy loans partially offset by the impact of a decrease in loan balances, and net charge-offs of $14.1 million. The provision related to lending activities was decreased by a $3.6 million reduction in the accrual for expected credit losses from mortgage banking activities. During the second quarter, the Company sold certain mortgage servicing rights related to residential mortgage loans transferred to mortgage-backed securities. These servicing rights expose the Company to credit risk for amounts that exceed the U.S. government agency guarantees.
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Our reasonable and supportable forecast of macroeconomic variables are significantly influenced by the COVID-19 pandemic developments and related government stimulus policies. A summary of macroeconomic variables considered in developing our estimate of expected credit losses follows:
BaseDownsideUpside
Scenario probability weighting50%25%25%
COVID-19 trajectoryLocalized and state-level hotspots with second waves emerging. This leads to more targeted shutdowns; however, widespread shutdown is not enacted.A broader second wave emerges in the second half of 2020. As cases rise, a widespread shutdown is implemented.Improves more quickly than currently expected and the severity of the illness abates. Minimal shutdowns occur, even at a more localized level.
Economic recovery (driven by COVID-19 trajectory)Swoosh shaped recovery. A gradual and measured reopening of the economy after a significant second quarter decline. GDP recovering to pre-COVID-19 levels by mid-year 2022.U-shaped recovery. Pace of recovery is slow. Economic activity and the labor market struggle significantly though improved from April trough. GDP does not recover to pre-COVID-19 levels until late 2023.V-shaped recovery. A more confident and full reopening of the economy. GDP recovering to pre-COVID-19 levels by mid-year 2021.
Fiscal stimulus (driven by economic recovery)Additional fiscal stimulus of $1.3 trillion to $1.6 trillion is expected to be deployed over the next 6 to 9 months. Stimulus will be more targeted and include a less generous round of unemployment benefits and additional direct payment to individuals, state fiscal aid, and support for specifically impacted business sectors.Additional broad-based fiscal stimulus of $2.0 trillion to $2.5 trillion is deployed.Smaller, more-targeted stimulus package of $1.0 trillion to $1.2 trillion is deployed focused on state aid and specific business support.
Macro-eocnomic factors
Cumulative GDP from the fourth quarter of 2019 (pre-COVID-19) through the second quarter of 2021 is forecasted to contract 2.4 percent.
Civilian unemployment rate of 13.7 percent in the second quarter of 2020 gradually improves to 8.5 percent by the second quarter of 2021.
WTI oil prices are projected to generally follow the NYMEX forward curve that existed at the end of June 2020 and are expected to average $39.58 per barrel over the next 12 months.
Cumulative GDP from the fourth quarter of 2019 (pre-COVID-19) through the second quarter of 2021 is forecasted to contract 7.0 percent.
Civilian unemployment rate of 13.7 percent in the second quarter of 2020 slowly improves to 10.0 percent by the second quarter of 2021.
WTI oil prices are projected to average $32.90 over the next 12 months.
Cumulative GDP from the fourth quarter of 2019 (pre-COVID-19) through the second quarter of 2021 forecasted to grow by 0.7 percent.
Civilian unemployment rate of 13.7 percent in the second quarter of 2020 quickly improves to 6.8 percent by the second quarter of 2021.
WTI oil prices are projected to average $42.78 per barrel over the next 12 months.

The civilian unemployment rate is used in estimating expected credit losses for a number of our portfolios because historically it has been a good indicator of financial difficulty. The upward change in unemployment rates during the first half of 2020 was unprecedented and has been considered within the context of the government’s response through the CARES Act. These enacted economic stimulus programs, which expire in the third quarter of 2020, have increased benefits available and broadened definitions of those eligible for unemployment benefits. As a result, the historical relationship between unemployment rates and credit losses is currently not a reliable indicator of future expected credit losses. Instead, management developed a forecast for civilian unemployment rates then analyzed the effect of enacted economic stimulus. This analysis showed current expected credit losses are likely more similar to unemployment rates 2 to 4 percentage points lower than forecasted rates. We reduced the base case forecasted civilian unemployment rate for the third quarter of 2020 to 8.4 percent, the downside case to 9.7 percent, and the upside case to 7.4 percent.
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Management took a similar approach in estimating the impact of possible future government stimulus programs deployed after the third quarter of 2020 for the remainder of the forecast period. Expected credit losses are likely to be more similar to unemployment rates that are 1 percentage point lower than forecasted rates causing management to reduce its estimate of expected credit losses through a qualitative adjustment of $15 million.

The second quarter provision for credit losses was also affected by changes in risk grading. A summary of loans by risk grade is included in Note 4 to the Consolidated Financial Statements. Non-pass grade loans which include other loans especially mentioned, defined by regulatory guidelines as loans that are currently performing in compliance with original terms but may have a potential weakness that deserves management’s close attention, accruing substandard loans, and nonaccruing loans totaled $1.5 billion at June 30, an $816 million increase from March 31. Non-pass graded energy loans totaled $1.1 billion at June 30, a $716 million increase from March 31. The recent oil price decline, coupled with the capital markets environment requiring certain customers to work through their liquidity needs weighed on some energy borrowers. The forward price curve for energy, particularly oil, remained depressed throughout most of the second quarter, but recovered somewhat in June. This risk grade migration was realized as we completed most of our energy borrowing base redeterminations in April and May. Prices have improved since, but do remain fragile and closely tied to the continued economic recovery. Should current price levels hold into our next semi-annual borrowing base redetermination in the fall, we would anticipate positive credit quality migration in this portfolio.

Although fiscal stimulus through PPP, SBA support and other CARES Act programs have had a positive impact on credit quality, we received a number of deferral or forbearance requests early in the second quarter. All requests were evaluated on a case-by-case basis and all loans greater than $1 million that requested forbearance were reviewed for proper grading. We granted $1.2 billion in forbearance requests from customers as of June 30, including $704 million, or 5 percent of commercial loans, primarily in small business and healthcare, $398 million, or 9 percent of commercial real estate loans and $143 million, or 4 percent of loans to individuals. As of mid-July, we are approaching the expiration of the first 90-day deferral period. Upon request, we will consider an additional 90-day deferral. To date, over 60 percent of the loans with payment deferrals are going back to regular payments.

The allowance for loan losses totaled $436 million or 1.80 percent of outstanding loans and 175 percent of nonaccruing loans at June 30, 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 $469 million or 1.94 percent of outstanding loans and 188 percent of nonaccruing loans at June 30, 2020. Excluding PPP loans, the allowance for loan losses was 1.97 percent of outstanding loans and the combined allowance for loan losses and accrual for off-balance sheet credit risk from unfunded loan commitments was 2.12 percent.

The allowance for credit losses attributed to energy was 4.44 percent of outstanding energy loans at June 30. Our semi-annual borrowing base redeterminations based on forward pricing curves that existed at that time resulted in credit quality migration. While forward prices subsequently improved, the pricing environment remains fragile and tied to the continued economic recovery from the impact of the COVID-19 pandemic. We believe the duration of the downturn is a more significant factor affecting performance than the level of prices.

We also conduct quarterly stress tests of our energy borrowers with more than 50 percent funding on their lines of credit and all non-pass graded loans using a current price deck discounted at 20 percent. This stress test helps us identify potential issues, although the most recent test corroborated the risk grading of energy borrowers evaluated once hedging was taken into consideration. Of all the energy customers that we stress test, which makes up 96 percent of production loans outstanding, 91 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 $93.8 million provision for credit losses in the first quarter of 2020. The allowance for loan losses was $315 million or 1.40 percent of outstanding loans and 199 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies at March 31, 2020. 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.

Net Loans Charged Off

Net charge-offs of commercial loans were $14.2 million in the second quarter of 2020, primarily related to energy production loans. Net commercial real estate loan recoveries were $74 thousand and net recoveries of loans to individuals were $16 thousand. Net charge-offs of loans to individuals include deposit account overdraft losses.

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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 $3.6 million during the second quarter, primarily due to the sale of mortgage servicing rights related to $1.6 billion of residential mortgage loans during the quarter. These servicing rights expose the Company to credit risk for amounts that exceed the U.S. government agency guarantees.

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)
June 30, 2020Mar. 31, 2020Dec. 31, 2019Sept. 30, 2019June 30, 2019
Nonaccruing loans:    
Commercial:  
Energy$162,989  $96,448  $91,722  $88,894  $71,632  
Healthcare3,645  4,070  4,480  5,978  16,148  
Services21,032  8,425  7,483  6,119  10,087  
General business14,333  9,681  11,731  10,715  25,528  
Total commercial201,999  118,624  115,416  111,706  123,395  
Commercial real estate13,956  8,545  27,626  23,185  21,670  
Loans to individuals:  
Residential mortgage33,098  30,721  31,522  30,972  31,734  
Residential mortgage guaranteed by U.S. government agencies6,110  5,005  6,100  6,332  6,743  
Personal233  277  287  271  237  
Total loans to individuals39,441  36,003  37,909  37,575  38,714  
Total nonaccruing loans$255,396  $163,172  $180,951  $172,466  $183,779  
Accruing renegotiated loans guaranteed by U.S. government agencies114,571  91,757  92,452  92,718  95,989  
Real estate and other repossessed assets35,330  36,744  20,359  21,026  16,940  
Total nonperforming assets$405,297  $291,673  $293,762  $286,210  $296,708  
Total nonperforming assets excluding those guaranteed by U.S. government agencies$284,616  $194,911  $195,210  $187,160  $193,976  
Allowance for loan losses to nonaccruing loans1,2
174.74 %199.35 %120.54 %123.05 %114.40 %
Nonperforming assets to outstanding loans and repossessed assets1.68 %1.30 %1.35 %1.28 %1.33 %
Nonperforming assets to outstanding loans and repossessed assets excluding residential mortgage and PPP loans guaranteed by U.S. government agencies2
1.31 %0.87 %0.90 %0.85 %0.88 %
Nonaccruing commercial loans to outstanding commercial loans1.43 %0.80 %0.82 %0.77 %0.86 %
Nonaccruing commercial real estate loans to outstanding commercial real estate loans0.31 %0.19 %0.62 %0.50 %0.46 %
Nonaccruing loans to individuals to outstanding loans to individuals3
1.10 %1.03 %1.03 %1.03 %1.06 %
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 mortgage and PPP loans guaranteed by U.S. government agencies.
3 Excludes residential mortgages guaranteed by U.S. government agencies.
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Excluding assets guaranteed by U.S. government agencies, nonperforming assets increased $90 million over March 31, 2020, primarily due to a $67 million increase in nonaccruing energy loans and a $13 million increase in nonaccruing services loans. Newly identified nonaccruing loans totaled $124 million, partially offset by $16 million of payments, $16 million of charge-offs and $1.1 million of foreclosures. 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 and six months ended June 30, 2020 follows in Table 18.

Table 18 -- Rollforward of Nonperforming Assets
(In thousands)
 Three Months Ended
June 30, 2020
Nonaccruing Loans
 CommercialCommercial Real EstateLoan to IndividualsTotal
 
Renegotiated Loans
Real Estate and Other Repossessed AssetsTotal Nonperforming Assets
Balance, Mar. 31, 2020$118,624  $8,545  $36,003  $163,172  $91,757  $36,744  $291,673  
Additions112,947  5,446  6,044  124,437  31,992  —  156,429  
Payments(14,005) (34) (2,455) (16,494) (671) —  (17,165) 
Charge-offs(14,487) (1) (1,082) (15,570) —  —  (15,570) 
Net gains (losses) and write-downs—  —  —  —  —  579  579  
Foreclosure of nonperforming loans(1,080) —  (2) (1,082) —  1,082  —  
Foreclosure of loans guaranteed by U.S. government agencies—  —  —  —  (323) —  (323) 
Proceeds from sales—  —  —  —  (7,592) (3,075) (10,667) 
Return to accrual status—  —  933  933  (933) —  —  
Other, net—  —  —  —  341  —  341  
Balance, June 30, 2020$201,999  $13,956  $39,441  $255,396  $114,571  $35,330  $405,297  
Six Months Ended
June 30, 2020
Nonaccruing Loans
CommercialCommercial Real EstateLoan to IndividualsTotal
 
Renegotiated Loans
Real Estate and Other Repossessed AssetsTotal Nonperforming Assets
Balance, Dec. 31, 2019$115,416  $27,626  $37,909  $180,951  $92,452  $20,359  $293,762  
Additions139,636  5,450  9,190  154,276  40,849  —  195,125  
Payments(20,652) (188) (4,585) (25,425) (1,585) —  (27,010) 
Charge-offs(31,102) (887) (2,498) (34,487) —  —  (34,487) 
Net gains (losses) and write-downs—  —  —  —  —  582  582  
Foreclosure of nonperforming loans(1,080) (18,045) (431) (19,556) —  19,556  —  
Foreclosure of loans guaranteed by U.S. government agencies—  —  (1,077) (1,077) (2,162) —  (3,239) 
Proceeds from sales—  —  —  —  (14,735) (5,167) (19,902) 
Return to accrual status(219) —  933  714  (933) —  (219) 
Other, net—  —  —  —  685  —  685  
Balance, June 30, 2020$201,999  $13,956  $39,441  $255,396  $114,571  $35,330  $405,297  

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We foreclose on loans guaranteed by U.S. government agencies in accordance with agency guidelines. Generally these loans are not eligible for modification programs or have failed to comply with modified loan terms. Principal is guaranteed by agencies of the U.S. government, subject to limitations and credit risk is 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 $35 million at June 30, 2020, composed primarily of $23 million of developed commercial real estate, $5.6 million of undeveloped land primarily zoned for commercial development, $5.1 million of oil and gas properties and $1.6 million of 1-4 family residential properties. Real estate and other repossessed assets totaled $37 million at March 31, 2020.

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Liquidity and Capital

Based on the average balances for the second quarter of 2020, approximately 66 percent of our funding was provided by deposit accounts, 19 percent from borrowed funds, less than 1 percent from long-term subordinated debt and 10 percent from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

Subsidiary Bank

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

Average deposits for the second quarter of 2020 totaled $32.7 billion, a $4.5 billion increase over the first quarter of 2020. Inflows resulting from PPP loans and other government stimulus payments provided to customers by the CARES Act during the pandemic, along with additional core deposit growth as customer's maintain higher balances, have all contributed to the significant increase in deposits. Demand deposits increased $2.3 billion, interest-bearing transaction account balances increased $1.9 billion.

Table 19 - Average Deposits by Line of Business
(In thousands)
Three Months Ended
 June 30, 2020Mar. 31, 2020Dec. 31, 2019Sept. 30, 2019June 30, 2019
Commercial Banking$14,599,225  $11,907,386  $11,419,558  $10,833,057  $10,724,206  
Consumer Banking7,587,246  6,869,481  6,974,453  6,983,018  6,998,677  
Wealth Management8,385,681  7,623,986  7,301,391  6,590,332  6,220,848  
Subtotal30,572,152  26,400,853  25,695,402  24,406,407  23,943,731  
Funds Management and other2,078,802  1,794,715  1,404,838  1,293,767  1,218,645  
Total$32,650,954  $28,195,568  $27,100,240  $25,700,174  $25,162,376  

Average Commercial Banking deposit balances increased $2.7 billion over the first quarter of 2020. Demand deposit balances increased $1.6 billion and interest-bearing transaction account balances increased $723 million. Time deposits were up $358 million over the prior quarter. 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 increased $718 million compared to the prior quarter. A $502 million increase in demand deposit balances, a $153 million increase in interest-bearing transaction deposit balances and an $81 million increase in savings account balances was partially offset by an $18 million decrease in time deposit balances.

Average Wealth Management deposits increased $762 million over the first quarter of 2020. Interest-bearing transaction account balances were up $603 million. Demand deposit balances increased $163 million.

Average time deposits for the second quarter of 2020 included $158 million of brokered deposits, an $89 million decrease compared to the first quarter of 2020. Average interest-bearing transaction accounts for the second quarter included $1.8 billion of brokered deposits, a $448 million increase over the first quarter of 2020.

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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)
June 30, 2020Mar. 31, 2020Dec. 31, 2019Sept. 30, 2019June 30, 2019
Oklahoma:  
Demand$4,378,559  $3,669,558  $3,257,337  $3,515,312  $3,279,360  
Interest-bearing:
Transaction11,438,489  9,955,697  8,574,912  7,447,799  7,020,484  
Savings387,557  329,631  306,194  308,103  307,785  
Time1,330,619  1,137,802  1,125,446  1,198,170  1,253,804  
Total interest-bearing13,156,665  11,423,130  10,006,552  8,954,072  8,582,073  
Total Oklahoma17,535,224  15,092,688  13,263,889  12,469,384  11,861,433  
Texas:
Demand3,070,955  2,767,399  2,757,376  2,867,915  2,970,340  
Interest-bearing:
Transaction3,358,090  2,874,362  2,911,731  2,589,063  2,453,187  
Savings128,892  115,039  102,456  100,597  103,125  
Time476,867  505,565  495,343  464,264  425,253  
Total interest-bearing3,963,849  3,494,966  3,509,530  3,153,924  2,981,565  
Total Texas7,034,804  6,262,365  6,266,906  6,021,839  5,951,905  
Colorado:
Demand2,096,075  1,579,764  1,729,674  1,694,044  1,621,820  
Interest-bearing:
Transaction1,816,604  1,759,384  1,769,037  1,910,874  1,800,271  
Savings67,477  58,000  53,307  60,107  57,263  
Time254,845  279,105  283,517  273,622  246,198  
Total interest-bearing2,138,926  2,096,489  2,105,861  2,244,603  2,103,732  
Total Colorado4,235,001  3,676,253  3,835,535  3,938,647  3,725,552  
New Mexico:
Demand965,877  750,052  623,722  645,698  630,861  
Interest-bearing:
Transaction752,565  563,891  558,493  539,260  557,881  
Savings80,242  67,553  63,999  62,863  62,636  
Time222,370  235,778  238,140  236,135  232,569  
Total interest-bearing1,055,177  867,222  860,632  838,258  853,086  
Total New Mexico2,021,054  1,617,274  1,484,354  1,483,956  1,483,947  
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June 30, 2020Mar. 31, 2020Dec. 31, 2019Sept. 30, 2019June 30, 2019
Arizona:
Demand985,757  665,396  681,268  705,895  704,144  
Interest-bearing:
Transaction780,500  729,603  684,929  600,103  560,861  
Savings15,669  8,832  10,314  12,487  11,966  
Time42,318  47,081  49,676  44,347  43,099  
Total interest-bearing838,487  785,516  744,919  656,937  615,926  
Total Arizona1,824,244  1,450,912  1,426,187  1,362,832  1,320,070  
Kansas/Missouri:
Demand427,795  318,985  384,533  376,020  431,856  
Interest-bearing:
Transaction526,635  537,552  784,574  284,940  310,774  
Savings15,033  12,888  12,169  11,689  13,125  
Time17,746  19,137  17,877  19,126  19,205  
Total interest-bearing559,414  569,577  814,620  315,755  343,104  
Total Kansas/Missouri987,209  888,562  1,199,153  691,775  774,960  
Arkansas:
Demand67,147  70,428  27,381  39,513  29,176  
Interest-bearing:
Transaction177,535  175,803  108,076  149,506  148,485  
Savings2,101  1,862  1,837  1,747  1,783  
Time7,995  8,005  7,850  7,877  7,810  
Total interest-bearing187,631  185,670  117,763  159,130  158,078  
Total Arkansas254,778  256,098  145,144  198,643  187,254  
Total BOK Financial deposits$33,892,314  $29,244,152  $27,621,168  $26,167,076  $25,305,121  

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 $200 million at June 30, 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 $2.7 billion during the quarter, compared to $6.5 billion in the first quarter of 2020.

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 increased our collateral at the Discount Window and maintained a modest amount of borrowings in late March into early April. On April 13, 2020, the banking agencies published an interim final rule which permits banking organizations to exclude from regulatory capital requirements PPP covered loans pledged to the Federal Reserve's Paycheck Protection Program Liquidity Facility ("PPLF"). The Company initially funded PPP loans from deposits and Federal Home Loan Bank borrowings, but transitioned to the PPLF in June in order to realize this regulatory capital relief.

At June 30, 2020, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $14.6 billion.

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

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Table 21 -- Borrowed Funds
(In thousands)
  Three Months Ended
June 30, 2020
 Three Months Ended
Mar. 31, 2020
June 30, 2020Average
Balance
During the
Quarter
RateMaximum
Outstanding
At Any Month
End During
the Quarter
Mar. 31, 2020Average
Balance
During the
Quarter
RateMaximum
Outstanding
At Any Month
End During
the Quarter
Funds purchased830,732  2,411,533  0.15 %3,311,938  1,827,134  2,848,816  1.25 %2,608,315  
Repurchase agreements526,870  3,404,951  0.14 %3,230,097  2,756,634  967,125  0.82 %2,756,634  
Other borrowings:
Federal Home Loan Bank advances1,000,000  2,658,242  0.53 %2,300,000  5,500,000  6,474,725  1.65 %7,500,000  
GNMA repurchase liability126,569  21,229  4.28 %126,569  15,030  14,304  4.41 %15,030  
Federal Reserve Bank advances—  135,165  0.25 %—  —  36,264  0.31 %—  
Paycheck protection program liquidity facility2,013,414  678,645  0.36 %2,013,414  —  —  — %—  
Other33,580  34,022  3.51 %49,376  14,524  17,032  4.13 %14,524  
Total other borrowings3,173,563  3,527,303  0.56 %5,529,554  6,542,325  1.66 %
Subordinated debentures1
275,973  275,949  5.16 %275,973  275,942  275,932  5.30 %275,942  
Total other borrowed funds and subordinated debentures$4,807,138  $9,619,736  0.44 %$10,389,264  $10,634,198  1.57 %
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. This liability increased over the prior quarter primarily due to GNMA loans serviced by the Company that are participating in the forbearance program included in the CARES Act, which began in the second quarter. As delinquencies increase, the GNMA repurchase liability will also increase.

Parent Company

At June 30, 2020, cash and interest-bearing cash and cash equivalents held by the parent company totaled $180 million. The primary sources of liquidity for BOK Financial are cash on hand and dividends from BOKF, NA. Dividends from the bank are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the two preceding years. Dividends are further restricted by minimum capital requirements. At June 30, 2020, based upon the most restrictive limitations as well as management's internal capital policy, BOKF, NA could declare up to $134 million of dividends without regulatory approval. Dividend constraints may be alleviated through increases in retained earnings, capital issuances or changes in risk weighted assets. Future losses or increases in required regulatory capital at the bank could affect its ability to pay dividends to the parent company.

Our equity capital at June 30, 2020 was $5.1 billion, a $70 million increase over March 31, 2020. Net income less cash dividends paid increased equity $29 million during the second quarter of 2020. Changes in interest rates resulted in a $39 million increase in accumulated other comprehensive gain over March 31, 2020. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings including expected benefits from lower federal income tax rates, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt or perpetual preferred stock issuance, share repurchase and stock and cash dividends.

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On April 30, 2019, the board of directors authorized the Company to purchase up to five million common shares, subject to market conditions, securities law and other regulatory compliance limitations. As of June 30, 2020, 1,308,713 shares have been repurchased under this authorization. The Company paused share repurchases through the second quarter of 2020. We view share buybacks opportunistically, but within the context of maintaining our strong capital position.

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. Deferral of the impact of CECL added 30 basis points to the Company's Common equity Tier 1 capital at June 30, 2020.

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

Table 22 -- Capital Ratios
Minimum Capital RequirementCapital Conservation BufferMinimum Capital Requirement Including Capital Conservation BufferJune 30, 2020Mar. 31, 2020June 30, 2019
Risk-based capital:
Common equity Tier 14.50 %2.50 %7.00 %11.44 %10.98 %10.84 %
Tier 1 capital6.00 %2.50 %8.50 %11.44 %10.98 %10.84 %
Total capital8.00 %2.50 %10.50 %13.43 %12.65 %12.34 %
Tier 1 Leverage4.00 %N/A4.00 %7.74 %8.15 %8.75 %
Average total equity to average assets10.19 %10.73 %11.26 %
Tangible common equity ratio8.79 %8.39 %8.69 %

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.

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Table 23 -- Non-GAAP Measure
(Dollars in thousands)
June 30, 2020Mar. 31, 2020Dec. 31, 2019Sept. 30, 2019June 30, 2019
Tangible common equity ratio:     
Total shareholders' equity$5,096,995  $5,026,248  $4,855,795  $4,829,016  $4,709,438  
Less: Goodwill and intangible assets, net1,171,686  1,169,898  1,173,362  1,172,411  1,172,564  
Tangible common equity3,925,309  3,856,350  3,682,433  3,656,605  3,536,874  
Total assets45,819,874  47,119,162  42,172,021  43,127,205  41,893,073  
Less: Goodwill and intangible assets, net1,171,686  1,169,898  1,173,362  1,172,411  1,172,564  
Tangible assets$44,648,188  $45,949,264  $40,998,659  $41,954,794  $40,720,509  
Tangible common equity ratio8.79 %8.39 %8.98 %8.72 %8.69 %

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.

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

Table 24 -- Interest Rate Sensitivity
(Dollars in thousands)
 
200 bp Increase1
100 bp Decrease2
June 30,June 30,
 2020201920202019
Anticipated impact over the next twelve months on net interest revenue$35,746  $(15,527) N/A$(32,930) 
 3.47 %(1.38)%N/A(2.93)%
1 Repricing assumptions for non-maturity deposits were updated in the second quarter of 2020 to better represent observed historical performance.
2 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)
June 30,
 20202019
Up 50 bpDown 50 bpUp 50 bpDown 50 bp
MSR Asset$28,466  $(13,198) $32,153  $(41,160) 
MSR Hedge(25,186) 23,542  (36,192) 33,383  
Net Exposure3,280  10,344  (4,039) (7,777) 

- 42 -


Trading Activities

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

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

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

Table 26 -- Mortgage Pipeline Sensitivity Analysis
(Dollars in thousands)
Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Up 50 bpDown 50 bpUp 50 bpDown 50 bpUp 50 bpDown 50 bpUp 50 bpDown 50 bp
Average1
$(393) $(49) $(229) $(190) $(304) $(107) $(104) $(490) 
Low2
403  723  189  330  582  998  436  330  
High3
(1,310) (823) (664) (1,163) (1,344) (1,483) (664) (1,343) 
Period End(195) 10  (278) (169) (195) 10  (278) (169) 
Average represents the simple average of each daily value observed during the reporting period.
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.
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.
- 43 -



Table 27 -- Trading Sensitivity Analysis
(Dollars in thousands)
Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Up 50 bpDown 50 bpUp 50 bpDown 50 bpUp 50 bpDown 50 bpUp 50 bpDown 50 bp
Average1
$(2,161) $3,314  $(2,436) $2,503  $(3,371) $5,266  $(2,080) $2,051  
Low2
2,919  14,163  (202) 5,378  2,919  15,309  857  5,378  
High3
(12,490) (2,049) (5,153) 267  (12,490) (2,049) (5,153) (729) 
Period End704  463  (629) 936  704  463  629  936  
Average represents the simple average of each daily value observed during the reporting period.
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.
High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.

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

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.
- 44 -


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.

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.

- 45 -



Consolidated Statements of Earnings (Unaudited)
(In thousands, except share and per share data)Three Months EndedSix Months Ended
 June 30,June 30,
Interest revenue2020201920202019
Loans$215,438  $293,332  $458,656  $573,204  
Residential mortgage loans held for sale2,140  1,754  3,263  3,417  
Trading securities11,407  15,498  23,167  34,193  
Investment securities3,000  2,905  6,121  6,939  
Available for sale securities68,297  59,880  138,017  116,711  
Fair value option securities4,110  7,503  15,818  12,740  
Restricted equity securities1,880  6,516  7,774  12,861  
Interest-bearing cash and cash equivalents112  3,432  2,505  6,829  
Total interest revenue306,384  390,820  655,321  766,894  
Interest expense    
Deposits17,745  43,183  63,904  80,600  
Borrowed funds6,996  58,404  44,781  115,214  
Subordinated debentures3,539  3,801  7,172  7,546  
Total interest expense28,280  105,388  115,857  203,360  
Net interest revenue278,104  285,432  539,464  563,534  
Provision for credit losses135,321  5,000  229,092  13,000  
Net interest revenue after provision for credit losses142,783  280,432  310,372  550,534  
Other operating revenue    
Brokerage and trading revenue62,022  40,526  112,801  72,143  
Transaction card revenue22,940  21,915  44,821  42,653  
Fiduciary and asset management revenue41,257  45,025  85,715  88,383  
Deposit service charges and fees22,046  28,074  48,176  56,317  
Mortgage banking revenue53,936  28,131  91,103  51,965  
Other revenue11,479  12,437  23,788  25,199  
Total fees and commissions213,680  176,108  406,404  336,660  
Other gains (losses), net6,768  3,480  (3,973) 6,456  
Gain on derivatives, net21,885  11,150  40,305  15,817  
Gain (loss) on fair value option securities, net(14,459) 9,853  53,934  19,518  
Change in fair value of mortgage servicing rights(761) (29,555) (89,241) (50,221) 
Gain on available for sale securities, net5,580  1,029  5,583  1,105  
Total other operating revenue232,693  172,065  413,012  329,335  
Other operating expense    
Personnel176,235  160,342  332,416  329,570  
Business promotion1,935  10,142  8,150  18,016  
Charitable contributions to BOKF Foundation3,000  1,000  3,000  1,000  
Professional fees and services12,161  13,002  25,109  29,141  
Net occupancy and equipment30,675  26,880  56,736  56,401  
Insurance5,156  6,454  10,136  11,293  
Data processing and communications32,942  29,735  65,685  61,184  
Printing, postage and supplies3,502  4,107  7,774  8,992  
Net losses and operating expenses of repossessed assets1,766  580  3,297  2,576  
Amortization of intangible assets5,190  5,138  10,284  10,329  
Mortgage banking costs15,598  11,545  26,143  21,451  
Other expense7,227  8,212  15,281  14,341  
Total other operating expense295,387  277,137  564,011  564,294  
Net income before taxes80,089  175,360  159,373  315,575  
Federal and state income taxes15,803  37,580  33,103  67,530  
Net income64,286  137,780  126,270  248,045  
Net income (loss) attributable to non-controlling interests(407) 217  (502) (130) 
Net income attributable to BOK Financial Corporation shareholders$64,693  $137,563  $126,772  $248,175  
Earnings per share:    
Basic$0.92  $1.93  $1.80  $3.47  
Diluted$0.92  $1.93  $1.80  $3.46  
Average shares used in computation:
Basic69,876,043  70,887,063  69,999,865  71,135,414  
Diluted69,877,467  70,902,033  70,003,817  71,151,558  
Dividends declared per share$0.51  $0.50  $1.02  $1.00  

See accompanying notes to consolidated financial statements.
- 46 -


Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands, except share and per share data)  
 Three Months EndedSix Months Ended
June 30,June 30,
 2020201920202019
Net income$64,286  $137,780  $126,270  $248,045  
Other comprehensive income before income taxes:    
Net change in unrealized gain (loss)56,922  135,417  354,765  228,156  
Reclassification adjustments included in earnings:
Gain on available for sale securities, net(5,577) (1,029) (5,580) (1,105) 
Other comprehensive income before income taxes51,345  134,388  349,185  227,051  
Federal and state income taxes12,321  32,288  83,792  55,897  
Other comprehensive income, net of income taxes39,024  102,100  265,393  171,154  
Comprehensive income103,310  239,880  391,663  419,199  
Comprehensive income (loss) attributable to non-controlling interests(407) 217  (502) (130) 
Comprehensive income attributable to BOK Financial Corp. shareholders$103,717  $239,663  $392,165  $419,329  

See accompanying notes to consolidated financial statements.
- 47 -


Consolidated Balance Sheets
(In thousands, except share data)
 June 30, 2020Dec. 31, 2019
 (Unaudited)(Footnote 1)
Assets  
Cash and due from banks$762,453  $735,836  
Interest-bearing cash and cash equivalents485,319  522,985  
Trading securities1,196,105  1,623,921  
Investment securities, net of allowance (fair value: June 30, 2020 – $299,126; December 31, 2019 – $314,402)
267,988  293,418  
Available for sale securities12,475,919  11,269,643  
Fair value option securities722,657  1,098,577  
Restricted equity securities125,683  460,552  
Residential mortgage loans held for sale319,357  182,271  
Loans24,155,890  21,750,987  
Allowance for loan losses(435,597) (210,759) 
Loans, net of allowance23,720,293  21,540,228  
Premises and equipment, net550,230  535,519  
Receivables226,934  231,811  
Goodwill1,048,091  1,048,091  
Intangible assets, net123,595  125,271  
Mortgage servicing rights97,971  201,886  
Real estate and other repossessed assets, net of allowance (June 30, 2020 – $10,861; December 31, 2019 – $11,013)
35,330  20,359  
Derivative contracts, net651,553  323,375  
Cash surrender value of bank-owned life insurance393,741  389,879  
Receivable on unsettled securities sales1,863,719  1,020,404  
Other assets752,936  547,995  
Total assets$45,819,874  $42,172,021  
Liabilities and Equity
Liabilities:
Noninterest-bearing demand deposits$11,992,165  $9,461,291  
Interest-bearing deposits:  
Transaction18,850,418  15,391,752  
Savings696,971  550,276  
Time2,352,760  2,217,849  
Total deposits33,892,314  27,621,168  
Funds purchased and repurchase agreements1,357,602  3,818,350  
Other borrowings3,173,563  4,527,055  
Subordinated debentures275,973  275,923  
Accrued interest, taxes and expense365,634  259,701  
Derivative contracts, net610,020  251,128  
Due on unsettled securities purchases599,510  182,547  
Other liabilities440,835  372,230  
Total liabilities40,715,451  37,308,102  
Shareholders' equity:  
Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2020 – 75,999,195; December 31, 2019 – 75,758,597)
  
Capital surplus1,357,706  1,350,995  
Retained earnings3,737,862  3,729,778  
Treasury stock (shares at cost: June 30, 2020 – 5,692,505; December 31, 2019 – 5,178,999)
(368,894) (329,906) 
Accumulated other comprehensive gain370,316  104,923  
Total shareholders’ equity5,096,995  4,855,795  
Non-controlling interests7,428  8,124  
Total equity5,104,423  4,863,919  
Total liabilities and equity$45,819,874  $42,172,021  

See accompanying notes to consolidated financial statements.
- 48 -


Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 Common StockCapital
Surplus
Retained
Earnings
Treasury StockAccumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Non-
Controlling
Interests
Total Equity
 SharesAmountSharesAmount
Balance, March 31, 202076,001  $ $1,354,826  $3,709,019  5,692  $(368,894) $331,292  $5,026,248  $7,912  $5,034,160  
Net income (loss)—  —  —  64,693  —  —  —  64,693  (407) 64,286  
Other comprehensive income—  —  —  —  —  —  39,024  39,024  —  39,024  
Repurchase of common stock—  —  —  —  —  —  —  —  —  —  
Share-based compensation plans:
Stock options exercised—  —  —  —  —  —  —  —  —  —  
Non-vested shares awarded,
net
(2) —  —  —  —  —  —  —  —  —  
Vesting of non-vested
shares
—  —  —  —   —  —  —  —  —  
Share-based compensation—  —  2,880  —  —  —  —  2,880  —  2,880  
Cash dividends on common
stock
—  —  —  (35,850) —  —  —  (35,850) —  (35,850) 
Capital calls and distributions,
net
—  —  —  —  —  —  —  —  (77) (77) 
Balance, June 30, 202075,999  $ $1,357,706  $3,737,862  5,693  $(368,894) $370,316  $5,096,995  $7,428  $5,104,423  
Balance, December 31, 201975,759  $ $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,
Adjusted
75,759   1,350,995  3,683,082  5,179  (329,906) 104,923  4,809,099  8,124  4,817,223  
Net income (loss)—  —  —  126,772  —  —  —  126,772  (502) 126,270  
Other comprehensive income—  —  —  —  —  —  265,393  265,393  —  265,393  
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,
net
230  —  —  —  —  —  —  —  —  —  
Vesting of non-vested
shares
—  —  —  —  72  (5,608) —  (5,608) —  (5,608) 
Share-based compensation—  —  6,125  —  —  —  —  6,125  —  6,125  
Cash dividends on common
stock
—  —  —  (71,992) —  —  —  (71,992) —  (71,992) 
Capital calls and distributions,
net
—  —  —  —  —  —  —  —  (194) (194) 
Balance, June 30, 202075,999  $ $1,357,706  $3,737,862  5,693  $(368,894) $370,316  $5,096,995  $7,428  $5,104,423  
- 49 -


 Common StockCapital
Surplus
Retained
Earnings
Treasury StockAccumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Non-
Controlling
Interests
Total Equity
 SharesAmountSharesAmount
Balance, March 31, 201975,762  $ $1,340,323  $3,447,076  4,312  $(261,000) $(3,531) $4,522,873  $8,836  $4,531,709  
Net income—  —  —  137,563  —  —  —  137,563  217  137,780  
Other comprehensive income—  —  —  —  —  —  102,100  102,100  —  102,100  
Repurchase of common stock—  —  —  —  250  (20,125) —  (20,125) —  (20,125) 
Share-based compensation
plans:
Stock options exercised—  —  24  —  —  —  —  24  —  24  
Non-vested shares awarded,
net
(6) —  —  —  —  —  —  —  —  —  
Vesting of non-vested
shares
—  —  —  —  —  —  —  —  —  —  
Share-based compensation—  —  2,735  —  —  —  —  2,735  —  2,735  
Cash dividends on common
stock
—  —  —  (35,732) —  —  —  (35,732) —  (35,732) 
Capital calls and distributions,
net
—  —  —  —  —  —  —  —  (16) (16) 
Balance, June 30, 201975,756  $ $1,343,082  $3,548,907  4,562  $(281,125) $98,569  $4,709,438  $9,037  $4,718,475  
Balance, December 31, 201875,711  $ $1,334,030  $3,369,654  3,589  $(198,995) $(72,585) $4,432,109  $10,936  $4,443,045  
Transition adjustment -
Leasing Standard
—  —  —  2,862  —  —  —  2,862  —  2,862  
Balance, January 1, 2019,
Adjusted
75,711   1,334,030  3,372,516  3,589  (198,995) (72,585) 4,434,971  10,936  4,445,907  
Net income (loss)—  —  —  248,175  —  —  —  248,175  (130) 248,045  
Other comprehensive loss—  —  —  —  —  —  171,154  171,154  —  171,154  
Repurchase of common stock—  —  —  —  955  (80,702) —  (80,702) —  (80,702) 
Share-based compensation
plans:
Stock options exercised18  —  903  —  —  —  —  903  —  903  
Non-vested shares awarded,
net
27  —  —  —  —  —  —  —  —  —  
Vesting of non-vested
shares
—  —  —  —  18  (1,428) —  (1,428) —  (1,428) 
Share-based compensation—  —  8,149  —  —  —  —  8,149  —  8,149  
Cash dividends on common
stock
—  —  —  (71,784) —  —  —  (71,784) —  (71,784) 
Capital calls and distributions,
net
—  —  —  —  —  —  —  —  (1,769) (1,769) 
Balance, June 30, 201975,756  $ $1,343,082  $3,548,907  4,562  $(281,125) $98,569  $4,709,438  $9,037  $4,718,475  
See accompanying notes to consolidated financial statements.
- 50 -


Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Six Months Ended
 June 30,
 20202019
Cash Flows From Operating Activities:  
Net income$126,270  $248,045  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses229,092  13,000  
Change in fair value of mortgage servicing rights due to market assumption changes89,241  50,221  
Change in the fair value of mortgage servicing rights due to principal payments17,779  15,664  
Net unrealized (gains) losses from derivative contracts(56,678) (17,095) 
Share-based compensation6,125  8,149  
Depreciation and amortization47,016  45,926  
Net amortization of discounts and premiums7,199  (10,913) 
Net losses (gains) on financial instruments and other losses (gains), net(2,186) 564  
Net gain on mortgage loans held for sale(42,411) (16,735) 
Mortgage loans originated for sale(1,733,205) (1,240,368) 
Proceeds from sale of mortgage loans held for sale1,654,433  1,215,756  
Capitalized mortgage servicing rights(13,906) (14,939) 
Change in trading and fair value option securities801,215  (799,241) 
Change in receivables(724,486) (228,973) 
Change in other assets(29,352) (4,965) 
Change in accrued interest, taxes and expense36,773  (41,866) 
Change in other liabilities373,541  100,731  
Net cash provided by (used in) operating activities786,460  (677,039) 
Cash Flows From Investing Activities:  
Proceeds from maturities or redemptions of investment securities23,296  26,513  
Proceeds from maturities or redemptions of available for sale securities1,070,585  704,542  
Purchases of available for sale securities(2,139,775) (2,510,271) 
Proceeds from sales of available for sale securities205,945  367,357  
Change in amount receivable on unsettled available for sale securities transactions(118,744) (28,580) 
Loans originated, net of principal collected(2,294,658) (569,075) 
Net payments on derivative asset contracts(67,105) (10,838) 
Proceeds from disposition of assets710,269  116,163  
Purchases of assets(416,815) (250,911) 
Net cash used in investing activities(3,027,002) (2,155,100) 
Cash Flows From Financing Activities:  
Net change in demand deposits, transaction deposits and savings accounts6,136,235  (73,200) 
Net change in time deposits134,911  114,377  
Net change in other borrowed funds(3,971,540) 2,968,697  
Net proceeds on derivative liability contracts60,851  6,140  
Net change in derivative margin accounts(96,114) (152,533) 
Change in amount due on unsettled available for sale securities transactions75,544  313,736  
Issuance of common and treasury stock, net(5,022) (525) 
Repurchase of common stock(33,380) (80,702) 
Dividends paid(71,992) (71,784) 
Net cash provided by financing activities2,229,493  3,024,206  
Net increase (decrease) in cash and cash equivalents(11,049) 192,067  
Cash and cash equivalents at beginning of period1,258,821  1,143,424  
Cash and cash equivalents at end of period$1,247,772  $1,335,491  
Supplemental Cash Flow Information:
Cash paid for interest$117,471  $203,513  
Cash paid for taxes$5,470  $54,722  
Net loans and bank premises transferred to repossessed real estate and other assets$19,556  $2,606  
Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period$157,300  $44,258  
Conveyance of other real estate owned guaranteed by U.S. government agencies$6,255  $15,484  
Right-of-use assets obtained in exchange for operating lease liabilities$9,151  $12,754  
See accompanying notes to consolidated financial statements.
- 51 -


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 six-month period ended June 30, 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.








- 52 -


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.
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(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities are as follows (in thousands):
 
 June 30, 2020December 31, 2019
 Fair ValueNet Unrealized Gain (Loss)Fair ValueNet Unrealized Gain (Loss)
U.S. government agency debentures$4,237  $19  $44,264  $ 
Residential agency mortgage-backed securities1,146,454  3,589  1,504,651  2,293  
Municipal and other tax-exempt securities22,710  116  26,196  60  
Asset-backed securities —  14,084  (21) 
Other debt securities22,699  127  34,726  21  
Total trading securities$1,196,105  $3,851  $1,623,921  $2,359  
Investment Securities
 
The amortized cost and fair values of investment securities are as follows (in thousands):
 June 30, 2020
 AmortizedFairGross Unrealized
 CostValueGainLoss
Municipal and other tax-exempt$84,239  $88,623  $4,384  $—  
Residential agency mortgage-backed securities9,812  10,734  922  —  
Other debt securities175,565  199,769  24,235  (31) 
Total investment securities269,616  299,126  29,541  (31) 
Allowance for credit losses1
(1,628) 
Investment securities, net of allowance267,988  299,126  29,541  (31) 
1 Effective with the adoption of FASB ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2020.
 December 31, 2019
 AmortizedFairGross Unrealized
 CostValueGainLoss
Municipal and other tax-exempt$93,653  $96,897  $3,250  $(6) 
Residential agency mortgage-backed securities10,676  11,164  488  —  
Other debt securities189,089  206,341  17,547  (295) 
Total investment securities$293,418  $314,402  $21,285  $(301) 



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The amortized cost and fair values of investment securities at June 30, 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$39,734  $87,863  $122,309  $9,898  $259,804  4.95  
Fair value40,151  96,615  141,378  10,248  288,392   
Residential mortgage-backed securities:      
Amortized cost    $9,812  2
Fair value    10,734   
Total investment securities:      
Amortized cost    $269,616   
Fair value    299,126   
1Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
2The average expected lives of residential mortgage-backed securities were 4.6 years based upon current prepayment assumptions.

Temporarily Impaired Investment Securities
(in thousands):
June 30, 2020