Document


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

FORM 10-Q
(Mark One) 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 65,416,403 shares of common stock ($.00006 par value) as of June 30, 2017.




BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2017

Index

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



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

BOK Financial Corporation (“the Company”) reported net income of $88.1 million or $1.35 per diluted share for the second quarter of 2017, compared to $65.8 million or $1.00 per diluted share for the second quarter of 2016 and $88.4 million or $1.35 per diluted share for the first quarter of 2017. 

Highlights of the second quarter of 2017 included:
•
Net interest revenue totaled $205.2 million for the second quarter of 2017, up from $182.6 million in the second quarter of 2016 and $201.2 million in the first quarter of 2017. The increase in net interest revenue over the prior year was driven by both improving yields and growth in average earning assets. Net interest margin was 2.89 percent for the second quarter of 2017. Net interest margin was 2.63 percent for the second quarter of 2016 and 2.81 percent for the first quarter of 2017. Average earning assets were $29.2 billion for the second quarter of 2017 and $28.8 billion for the second quarter of 2016.
•
Fees and commissions revenue totaled $177.5 million for the second quarter of 2017, a $2.7 million decrease compared to the second quarter of 2016. Growth in fiduciary and asset management revenue was offset by lower brokerage and trading revenue and mortgage banking revenue. Fees and commissions revenue increased $13.1 million over the first quarter of 2017. Growth in mortgage banking revenue, fiduciary and asset management revenue and transaction card revenue were partially offset by a decrease in brokerage and trading revenue.
•
Other operating expense for the second quarter of 2017 totaled $250.9 million, largely unchanged compared to the second quarter of 2016. Personnel expense increased $4.5 million, primarily due to an increase in the probability that certain performance-based equity awards will vest. Non-personnel expense decreased $5.0 million. Deposit insurance expense decreased primarily due to $5.1 million in credits received during the second quarter of 2017 related to revision of certain inputs to the assessment calculation filed in previous periods. Operating expenses increased $6.2 million over the previous quarter. Personnel expense was up $7.3 million and non-personnel expense decreased $1.1 million.
•
Income tax expense was $47.7 million or 34.9 percent of net income before taxes for the second quarter of 2017, compared to $30.5 million or 31.5 percent in the second quarter of 2016 and $38.1 million or 30.1 percent in the first quarter of 2017. Excluding the effect of a new accounting standard that requires the tax effect of vested equity compensation to be recorded in income tax expense, the effective tax rate would be 33.7 percent of net income before taxes for the second quarter of 2017 and 33.2 percent for the first quarter of 2017.
•
No provision for credit losses was recorded in the second quarter of 2017 or the first quarter of 2017. A $20.0 million provision for credit losses was recorded in the second quarter of 2016. Gross charge-offs were $2.9 million in the second quarter of 2017, $8.8 million in the second quarter of 2016 and $2.2 million in the first quarter of 2017. Recoveries were $1.2 million in the second quarter of 2017, compared to $1.4 million in the second quarter of 2016 and $2.9 million in the first quarter of 2017.
•
The combined allowance for credit losses totaled $256 million or 1.49 percent of outstanding loans at June 30, 2017, compared to $258 million or 1.52 percent of outstanding loans at March 31, 2017. 
•
Nonperforming assets that are not guaranteed by U.S. government agencies totaled $276 million or 1.62 percent of outstanding loans and repossessed assets at June 30, 2017 and $240 million or 1.43 percent of outstanding loans and repossessed assets at March 31, 2017. The increase in nonperforming assets was primarily due to an increase in nonaccruing healthcare and energy loans.
•
Average loans were largely unchanged compared to the previous quarter. Period-end outstanding loan balances were $17.2 billion at June 30, 2017, an increase of $192 million over March 31, 2017.
•
Average deposits decreased $277 million compared to the previous quarter. Growth in demand deposit balances was offset by a decrease in interest-bearing transaction account balances and time deposits. Period-end deposits were $22.3 billion at June 30, 2017, a $259 million decrease compared to March 31, 2017.

- 1 -


•
The Company's common equity Tier 1 ratio was 11.76% at June 30, 2017. In addition, the Company's Tier 1 capital ratio was 11.76%, total capital ratio was 13.36% and leverage ratio was 9.27% at June 30, 2017. The Company's common equity Tier 1 ratio was 11.59% at March 31, 2017. In addition, the Company's Tier 1 capital ratio was 11.59%, total capital ratio was 13.25% and leverage ratio was 8.89% at March 31, 2017.
•
The Company paid a regular quarterly cash dividend of $29 million or $0.44 per common share during the second quarter of 2017. On July 25, 2017, the board of directors approved a regular quarterly cash dividend of $0.44 per common share payable on or about August 25, 2017 to shareholders of record as of August 11, 2017.
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.

Net interest revenue totaled $205.2 million for the second quarter of 2017, up from $182.6 million in the second quarter of 2016 and $201.2 million in the first quarter of 2017. Net interest margin was 2.89 percent for the second quarter of 2017, 2.63 percent for the second quarter of 2016 and 2.81 percent for the first quarter of 2017.

Tax-equivalent net interest revenue increased $22.6 million over the second quarter of 2016. 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. Changes in interest rates and yields increased net interest revenue by $13.1 million. The benefit of an increase in short-term interest rates on the floating-rate earning assets was partially offset by higher borrowing costs. Tax-equivalent net interest revenue increased $9.4 million primarily due to the growth in average balances of loans and trading securities.

The tax-equivalent yield on earning assets was 3.30 percent for the second quarter of 2017, up 39 basis points over the second quarter of 2016, primarily due to increases in short-term interest rates resulting from three 25 basis point increases in the federal funds rate by the Federal Reserve since the second quarter of 2016. Loan yields increased 45 basis points to 4.03 percent. The yield on interest-bearing cash and cash equivalents increased 53 basis points. The available for sale securities portfolio yield was up 7 basis points to 2.11 percent. Funding costs were up 22 basis points over the second quarter of 2016. Growth in the cost of interest-bearing deposits was limited to 7 basis points by a lack of market pricing pressure. The cost of other borrowed funds increased 50 basis points. The cost of the subordinated debt was up 403 basis points as lower variable rate debt was replaced in the second quarter of 2016 by higher fixed rate debt. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 22 basis points for the second quarter of 2017, up 9 basis points over the second quarter of 2016. Average non-interest bearing deposits comprised 29% of total liabilities and equity for the second quarter of 2017, up from 26% for the second quarter of 2016.

Average earning assets for the second quarter of 2017 increased $424 million or 1 percent over the second quarter of 2016, including $495 million related to the Mobank acquisition. Average loans, net of allowance for loan losses, increased $860 million due primarily to growth in commercial, consumer and commercial real estate loans and included $495 million related to the Mobank acquisition. The average balance of trading securities increased $218 million primarily due to the addition of a new group in the third quarter of 2016 that trades in U.S. agency residential mortgage-backed securities. The average balance of fair value option securities held as an economic hedge of our mortgage servicing rights increased $108 million. The average balance of available for sale securities decreased $506 million. The average balance of residential mortgage loans held for sale decreased $156 million and the investment securities portfolio balance decreased $63 million.

Average deposits increased $1.6 billion over the second quarter of 2016, including $547 million from the Mobank acquisition in the fourth quarter of 2016. Demand deposit balances grew by $1.2 billion, including $265 million from Mobank. Interest-bearing transaction account balances increased $497 million, including $282 million from Mobank. This growth was partially offset by a $93 million decrease in average time deposits. Savings account balances also grew over the prior year. Average borrowed funds decreased $695 million compared to the second quarter of 2016, primarily due to decreased borrowings from the Federal Home Loan Banks and lower average repurchase agreement balances. The average balance of subordinated debentures decreased $88 million.

- 2 -



Net interest margin increased 8 basis points over the first quarter of 2017. The yield on average earning assets increased 15 basis points. The loan portfolio yield increased by 15 basis points primarily due to increases in the 30 day and 90 day LIBOR. The yield on the available for sale securities portfolio increased 6 basis points. The yield on interest-bearing cash and cash equivalents increased 22 basis points. Funding costs were 0.63 percent, up 11 basis points over the prior quarter. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 4 basis points over the prior quarter.
Average earning assets decreased $359 million compared to the first quarter of 2017. The average balance of the available for sale securities portfolio decreased $183 million. The average balance of fair value option securities held as an economic hedge of our mortgage servicing rights increased $60 million. Average trading securities portfolio balances decreased $124 million and interest-bearing cash and cash equivalents balances decreased $80 million.
Average deposits decreased $277 million compared to the previous quarter. Interest-bearing transaction account balances decreased $480 million and time deposit balances decreased $55 million, partially offset by a $237 million increase in demand deposit balances. The average balance of borrowed funds decreased $254 million compared to the first quarter of 2017 primarily due to decreased borrowings from the Federal Home Loan Banks and lower average repurchase agreement balances.

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 81% 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.

- 3 -


Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
June 30, 2017 / 2016
 
Six Months Ended
June 30, 2017 / 2016
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
2,629

 
$
(31
)
 
$
2,660

 
$
4,167

 
$
21

 
$
4,146

Trading securities
 
2,742

 
3,098

 
(356
)
 
7,384

 
8,346

 
(962
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(138
)
 
(101
)
 
(37
)
 
(300
)
 
(212
)
 
(88
)
Tax-exempt securities
 
(121
)
 
(322
)
 
201

 
(212
)
 
(604
)
 
392

Total investment securities
 
(259
)
 
(423
)
 
164

 
(512
)
 
(816
)
 
304

Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(425
)
 
(2,078
)
 
1,653

 
(2,430
)
 
(3,284
)
 
854

Tax-exempt securities
 
(137
)
 
(285
)
 
148

 
(285
)
 
(492
)
 
207

Total available for sale securities
 
(562
)
 
(2,363
)
 
1,801

 
(2,715
)
 
(3,776
)
 
1,061

Fair value option securities
 
1,477

 
689

 
788

 
1,268

 
562

 
706

Restricted equity securities
 
536

 
(424
)
 
960

 
534

 
(115
)
 
649

Residential mortgage loans held for sale
 
(1,122
)
 
(1,434
)
 
312

 
(1,986
)
 
(2,014
)
 
28

Loans
 
27,431

 
8,459

 
18,972

 
49,369

 
17,945

 
31,424

Total tax-equivalent interest revenue
 
32,872

 
7,571

 
25,301

 
57,509

 
20,153

 
37,356

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
3,177

 
241

 
2,936

 
5,074

 
607

 
4,467

Savings deposits
 
(7
)
 
12

 
(19
)
 
(13
)
 
25

 
(38
)
Time deposits
 
(545
)
 
(264
)
 
(281
)
 
(1,624
)
 
(584
)
 
(1,040
)
Funds purchased
 
63

 
(7
)
 
70

 
51

 
(61
)
 
112

Repurchase agreements
 
(4
)
 
(21
)
 
17

 
(61
)
 
(35
)
 
(26
)
Other borrowings
 
6,513

 
(1,040
)
 
7,553

 
10,439

 
(675
)
 
11,114

Subordinated debentures
 
1,125

 
(774
)
 
1,899

 
2,440

 
(1,507
)
 
3,947

Total interest expense
 
10,322

 
(1,853
)
 
12,175

 
16,306

 
(2,230
)
 
18,536

Tax-equivalent net interest revenue
 
22,550

 
9,424

 
13,126

 
41,203

 
22,383

 
18,820

Change in tax-equivalent adjustment
 
(42
)
 
 
 
 
 
1

 
 
 
 
Net interest revenue
 
$
22,592

 
 
 
 
 
$
41,202

 
 
 
 
1 
Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

- 4 -


Other Operating Revenue

Other operating revenue was $182.3 million for the second quarter of 2017, a $3.3 million decrease compared to the second quarter of 2016 and a $12.0 million increase over the first quarter of 2017. Fees and commissions revenue decreased $2.7 million compared to the second quarter of 2016 and increased $13.1 million over the prior quarter. The change in the fair value of mortgage servicing rights, net of economic hedges, decreased other operating revenue by $1.7 million in the second quarter of 2017, decreased other operating revenue by $1.2 million in the second quarter of 2016 and increased other operating revenue $266 thousand in the first quarter of 2017.

Table 2 – Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
Mar. 31, 2017
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2017
 
2016
 
 
 
 
 
Brokerage and trading revenue
 
$
31,764

 
$
39,530

 
$
(7,766
)
 
(20
)%
 
$
33,623

 
$
(1,859
)
 
(6
)%
Transaction card revenue
 
35,296

 
34,950

 
346

 
1
 %
 
32,127

 
3,169

 
10
 %
Fiduciary and asset management revenue
 
41,808

 
34,813

 
6,995

 
20
 %
 
38,631

 
3,177

 
8
 %
Deposit service charges and fees
 
23,354

 
22,618

 
736

 
3
 %
 
23,030

 
324

 
1
 %
Mortgage banking revenue
 
30,276

 
34,884

 
(4,608
)
 
(13
)%
 
25,191

 
5,085

 
20
 %
Other revenue
 
14,984

 
13,352

 
1,632

 
12
 %
 
11,752

 
3,232

 
28
 %
Total fees and commissions revenue
 
177,482

 
180,147

 
(2,665
)
 
(1
)%
 
164,354

 
13,128

 
8
 %
Other gains, net
 
6,108

 
1,307

 
4,801

 
N/A

 
3,627

 
2,481

 
N/A

Gain (loss) on derivatives, net
 
3,241

 
10,766

 
(7,525
)
 
N/A

 
(450
)
 
3,691

 
N/A

Gain (loss) on fair value option securities, net
 
1,984

 
4,279

 
(2,295
)
 
N/A

 
(1,140
)
 
3,124

 
N/A

Change in fair value of mortgage servicing rights
 
(6,943
)
 
(16,283
)
 
9,340

 
N/A

 
1,856

 
(8,799
)
 
N/A

Gain on available for sale securities, net
 
380

 
5,326

 
(4,946
)
 
N/A

 
2,049

 
(1,669
)
 
N/A

Total other operating revenue
 
$
182,252

 
$
185,542

 
$
(3,290
)
 
(2
)%
 
$
170,296

 
$
11,956

 
7
 %
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 46 percent of total revenue for the second quarter of 2017, 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 that cause net interest revenue compression such as falling interest rates may also drive growth in our mortgage banking 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, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage and investment banking, decreased $7.8 million or 20 percent compared to the second quarter of 2016. 


- 5 -


Trading revenue includes net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers and related derivative instruments. Trading revenue was $10.1 million for the second quarter of 2017, a $2.2 million or 18 percent decrease compared to the second quarter of 2016. Lower volumes of U.S. agency residential mortgage-backed and municipal securities sold to our institutional customers due to anticipation of future interest increase, was offset by the addition of a new group in the third quarter of 2016 that trades in U.S. government agency residential mortgage-backed securities and related to-be-announced derivatives. The addition of this group added $1.4 million of net interest revenue and $2.1 million of trading revenue in the second quarter. This new group increased our trading securities portfolio by $359 million and receivable for unsettled trades by $111 million at June 30, 2017.

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 $11.6 million for the second quarter of 2017, a $1.9 million or 14 percent decrease compared to the second quarter of 2016 primarily attributed to energy and mortgage banking customers.

Revenue earned from retail brokerage transactions decreased $740 thousand or 11 percent compared to the second quarter of 2016 to $6.0 million. Retail brokerage revenue includes fees and commissions earned on sales of fixed income securities, annuities, mutual funds and other financial instruments to retail customers. Revenue is primarily based on the volume of customer transactions and applicable commission rate for each product type. Trading volume decreased in the second quarter of 2017, primarily due to the impact of the implementation of the new Department of Labor ("DOL") fiduciary rule. New regulation issued by the DOL amended the definition of investment advice under the Employee Retirement Income Security Act ("ERISA"). The new rule is designed to provide better protection to plans, participants, beneficiaries and individual retirement account ("IRA") owners against conflicts of interest, imprudence and disloyalty.

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $4.0 million for the second quarter of 2017, a $2.9 million or 42 percent decrease compared to the second quarter of 2016. Investment banking revenue is primarily related to the timing and volume of completed transactions.

Brokerage and trading revenue decreased $1.9 million compared to the first quarter of 2017, primarily due to a $1.0 million decrease in trading revenue and an $862 thousand decrease in retail brokerage fees. Customer hedging revenue was unchanged compared to the prior quarter. Increased hedging activity from our mortgage banking customers was offset by a decreased volume of energy contracts.

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served. Excluding the impact of a customer early termination fee received in the second quarter of 2016, transaction card revenue for the second quarter of 2017 increased $1.5 million or 5 percent over the second quarter of 2016. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $18.1 million, up $1.0 million or 6% over the prior year. Merchant services fees totaled $12.1 million, a $373 thousand or 3 percent increase from increased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $5.1 million, an increase of $133 thousand or 3 percent over the second quarter of 2016.
Transaction card revenue increased $3.2 million over the prior quarter, primarily due to a seasonal increase in transaction volumes on our TransFund EFT network and a full quarter's impact of expansion into the Arizona market. Revenue from processing transactions on behalf of merchants and check card revenue also increased over the prior quarter.

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 80 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships.
 

- 6 -


Fiduciary and asset management revenue grew by $7.0 million or 20 percent over the second quarter of 2016, primarily due to growth in assets under management, improved pricing discipline and decreased fee waivers. We earn fees as administrator to and investment adviser for the Cavanal Hill Funds, a diversified, open-ended investment company established as a business trust under the Investment Company Act of 1940. The Bank is custodian and Cavanal Hill Distributors, Inc. is distributor for the Cavanal Hill Funds. Products of the Cavanal Hill Funds are offered to customers, employee benefit plans, trusts and the general public in the ordinary course of business. Prior to the recent increases in short-term market interest rates as a result of the Federal Reserve's federal funds rate increases, we voluntarily waived $1.8 million of administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the second quarter of 2016. We waived $445 thousand of fees in the first quarter of 2017. No fees were waived in the second quarter of 2017.

Fiduciary and asset management revenue increased $3.2 million over the first quarter of 2017, primarily due to an annual assessment of tax preparation fees, growth in assets under management and decreased 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,
 
2017
 
2016
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
Managed fiduciary assets:
 
 
 
 
 
 
 
 
 
 
 
Personal
$
7,581,555

 
$
21,698

 
1.14
%
 
$
6,696,329

 
$
19,561

 
1.17
%
Institutional
12,265,037

 
5,475

 
0.18
%
 
11,423,563

 
4,498

 
0.16
%
Total managed fiduciary assets
19,846,592

 
27,173

 
0.55
%
 
18,119,892

 
24,059

 
0.53
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-managed assets:
 
 
 
 
 
 
 
 
 
 
 
Fiduciary
25,242,561

 
14,049

 
0.22
%
 
22,376,691

 
10,287

 
0.18
%
Non-fiduciary
16,579,586

 
586

 
0.01
%
 
16,863,508

 
467

 
0.01
%
Safekeeping and brokerage assets under administration
16,143,023

 
—

 
—
%
 
15,641,425

 
—

 
—
%
Total non-managed assets
57,965,170

 
14,635

 
0.10
%
 
54,881,624

 
10,754

 
0.08
%
 
 
 
 
 
 
 
 
 
 
 
 
Total assets under management or administration
$
77,811,762

 
$
41,808

 
0.21
%
 
$
73,001,516

 
$
34,813

 
0.19
%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Annualized revenue divided by period-end balance.

A summary of changes in assets under management or administration for the three months ended June 30, 2017 and 2016 follows:

Table 4 -- Changes in Assets Under Management or Administration
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Beginning balance
 
$
77,418,956

 
$
71,869,013

Net inflows (outflows)
 
(918,076
)
 
377,244

Net change in fair value
 
1,310,882

 
755,259

Ending balance
 
$
77,811,762

 
$
73,001,516





- 7 -


Deposit service charges and fees were $23.4 million for the second quarter of 2017, an increase of $736 thousand or 3 percent over the second quarter of 2016. Commercial account service charge revenue totaled $11.8 million, up $705 thousand or 6 percent. Overdraft fees were $9.8 million, largely unchanged compared to the second quarter of 2016. Service charges on deposit accounts with a standard monthly fee were $1.7 million, an increase of $109 thousand or 7 percent. Deposit service charges and fees increased $324 thousand over the prior quarter primarily due to an increase in commercial account service charge revenue and a seasonal increase in overdraft fee volumes.

Mortgage banking revenue decreased $4.6 million or 13 percent compared to the second quarter of 2016. Mortgage production revenue decreased $5.2 million. Mortgage loan production volumes decreased $998 million, including a $581 million decrease related to the Company's strategic decision to exit the correspondent lending channel during the third quarter of 2016. Production volumes in the Home Direct online and retail channel both decreased compared to the prior year as average primary mortgage interest rates were up 39 basis points over the second quarter of 2016. Gains on sale margins increased 56 basis points over the prior year. The margin increase was primarily due to exiting the correspondent lending channel, the lowest margin of our three sales channels, partially offset by a decrease in margins from our Home Direct online origination channel. Mortgage servicing revenue was up $638 thousand or 4 percent over the second quarter of 2016. The outstanding principal balance of mortgage loans serviced for others totaled $22.1 billion, an increase of $917 million or 4 percent.
Mortgage banking revenue increased $5.1 million over the first quarter of 2017. Mortgage production revenue increased $5.3 million. Production volume increased $109 million in response to lower average primary mortgage interest rates and normal seasonality. Gains on sale margin improved due to increased retail margins and improved hedging performance. Revenue from mortgage loan servicing decreased $212 thousand compared to the prior quarter.

Table 5 – Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
Mar. 31, 2017
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2017
 
2016
 
 
 
 
Mortgage production revenue
 
$
13,840

 
$
19,086

 
$
(5,246
)
 
(27
)%
 
$
8,543

 
$
5,297

 
62
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
902,978

 
$
1,818,844

 


 


 
$
711,019

 
 
 
 
Add: Current period end outstanding commitments
 
362,088

 
965,631

 
 
 
 
 
381,732

 
 
 
 
Less: Prior period end outstanding commitments
 
381,732

 
902,986

 
 
 
 
 
318,359

 
 
 
 
Total mortgage production volume
 
$
883,334

 
$
1,881,489

 
$
(998,155
)
 
(53
)%
 
$
774,392

 
$
108,942

 
14
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loan refinances to mortgage loans funded for sale
 
33
%
 
44
%
 
(11
) bps
 
 
 
44
%
 
(11
) bps
 
 
Gains on sale margin
 
1.57
%
 
1.01
%
 
56
 bps
 
 
 
1.10
%
 
47
 bps
 
 
Primary mortgage interest rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
3.98
%
 
3.59
%
 
39
 bps
 
 
 
4.17
%
 
(19
) bps
 
 
Period end
 
3.88
%
 
3.48
%
 
40
 bps
 
 
 
4.14
%
 
(26
) bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue
 
$
16,436

 
$
15,798

 
$
638

 
4
 %
 
$
16,648

 
$
(212
)
 
(1
)%
Average outstanding principal balance of mortgage loans serviced for others
 
22,055,127

 
20,736,525

 
1,318,602

 
6
 %
 
22,006,295

 
48,832

 
—
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average mortgage servicing revenue rates
 
0.30
%
 
0.31
%
 
(1
) bp
 
 
 
0.31
%
 
(1
) bp
 
 
1 
Actual interest earned on fair value option securities less internal transfer-priced cost of funds.

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

- 8 -


Net gains on other assets, securities and derivatives

Other net gains totaled $6.1 million in the second quarter of 2017, due to the sale of a merchant banking investment. Other net gains totaled $3.6 million in the first quarter of 2017 related to holdings of two consolidated private equity funds and the sale of certain merchant banking investments. The sales of merchant banking investments included a consolidated entity that reduced goodwill by $2.7 million, identifiable intangible assets by $4.6 million and other assets by $5.6 million.

As discussed in the Market Risk section following, the fair value of our mortgage servicing rights ("MSRs") changes in response to changes in primary mortgage loan rates and other assumptions. We attempt to mitigate the earnings volatility caused by changes in the fair value of MSRs by designating certain financial instruments as an economic hedge. Changes in the fair value of these instruments are generally expected to partially offset changes in the fair value of MSRs.
The net economic benefit of the changes in fair value of mortgage servicing rights and related economic hedges was $247 thousand in the second quarter of 2017, including a $6.9 million decrease in the fair value of the mortgage servicing rights, a $5.2 million increase in the fair value of securities and derivative contracts held as an economic hedge and $2.0 million of related net interest revenue.

The net economic benefit of changes in the fair value of mortgage servicing rights and related economic hedges was $110 thousand for the second quarter of 2016. The fair value of mortgage servicing rights decreased $16.3 million.The fair value of securities and interest rate derivative contracts held as an economic hedge increased $15.0 million. Net interest earned on securities held as an economic hedge was $1.3 million.

The net economic benefit of changes in the fair value of mortgage servicing rights and related economic hedges was $1.5 million for the first quarter of 2017. The fair value of mortgage servicing rights increased by $1.9 million. The fair value of securities and interest rate derivative contracts held as an economic hedge decreased by $1.6 million.

Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2017
 
Mar. 31, 2017
 
June 30, 2016
Gain (loss) on mortgage hedge derivative contracts, net
 
$
3,241

 
$
(450
)
 
$
10,766

Gain (loss) on fair value option securities, net
 
1,984

 
(1,140
)
 
4,279

Gain (loss) on economic hedge of mortgage servicing rights, net
 
5,225

 
(1,590
)
 
15,045

Gain (loss) on change in fair value of mortgage servicing rights
 
(6,943
)
 
1,856

 
(16,283
)
Loss on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue
 
(1,718
)
 
266

 
(1,238
)
Net interest revenue on fair value option securities1
 
1,965

 
1,271

 
1,348

Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges
 
$
247

 
$
1,537

 
$
110


- 9 -


Other Operating Expense

Other operating expense for the second quarter of 2017 totaled $250.9 million, largely unchanged compared to the second quarter of 2016. Personnel expense increased $4.5 million or 3 percent. Non-personnel expense decreased $5.0 million or 4 percent compared to the prior year.

Other operating expense increased $6.2 million over previous quarter. Personnel expense was up $7.3 million, primarily due to changes in assumptions for the vesting of certain performance-based equity awards. Non-personnel expense decreased $1.1 million. Deposit insurance expense decreased primarily due to $5.1 million in credits received during the second quarter of 2017 related to the revision of certain inputs to the assessment calculation filed in previous periods. Data processing and communication expense increased $1.4 million and net losses and operating expenses of repossessed assets increased $1.3 million.

The discussion following excludes the impact of these items.

Table 7 – Other Operating Expense
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
Mar. 31, 2017
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2017
 
2016
 
 
 
 
 
Regular compensation
 
$
83,630

 
$
81,730

 
$
1,900

 
2
 %
 
$
83,228

 
$
402

 
—
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
29,954

 
32,595

 
(2,641
)
 
(8
)%
 
28,836

 
1,118

 
4
 %
Share-based
 
7,380

 
3,701

 
3,679

 
99
 %
 
1,603

 
5,777

 
360
 %
Deferred compensation
 
1,000

 
211

 
789

 
N/A

 
792

 
208

 
N/A

Total incentive compensation
 
38,334

 
36,507

 
1,827

 
5
 %
 
31,231

 
7,103

 
23
 %
Employee benefits
 
21,780

 
20,976

 
804

 
4
 %
 
21,966

 
(186
)
 
(1
)%
Total personnel expense
 
143,744

 
139,213

 
4,531

 
3
 %
 
136,425

 
7,319

 
5
 %
Business promotion
 
7,738

 
6,703

 
1,035

 
15
 %
 
6,717

 
1,021

 
15
 %
Professional fees and services
 
12,419

 
14,158

 
(1,739
)
 
(12
)%
 
11,417

 
1,002

 
9
 %
Net occupancy and equipment
 
21,125

 
19,677

 
1,448

 
7
 %
 
21,624

 
(499
)
 
(2
)%
Insurance
 
689

 
7,129

 
(6,440
)
 
(90
)%
 
6,404

 
(5,715
)
 
(89
)%
Data processing and communications
 
36,330

 
32,802

 
3,528

 
11
 %
 
34,902

 
1,428

 
4
 %
Printing, postage and supplies
 
4,140

 
3,889

 
251

 
6
 %
 
3,851

 
289

 
8
 %
Net losses (gains) and operating expenses of repossessed assets
 
2,267

 
1,588

 
679

 
43
 %
 
1,009

 
1,258

 
125
 %
Amortization of intangible assets
 
1,803

 
2,624

 
(821
)
 
(31
)%
 
1,802

 
1

 
—
 %
Mortgage banking costs
 
12,072

 
15,746

 
(3,674
)
 
(23
)%
 
13,003

 
(931
)
 
(7
)%
Other expense
 
8,558

 
7,856

 
702

 
9
 %
 
7,557

 
1,001

 
13
 %
Total other operating expense
 
$
250,885

 
$
251,385

 
$
(500
)
 
—
 %
 
$
244,711

 
$
6,174

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,910

 
4,893

 
17

 
—
 %
 
4,910

 
—

 
—
 %

Certain percentage increases (decreases) are not meaningful for comparison purposes.


- 10 -


Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs, increased 1.9 million or 2 percent over the second quarter of 2016. The average number of employees was relatively unchanged compared to the prior year. Recent additions from the Mobank acquisition and in mortgage and technology were offset by the impact of staff reductions in the fourth quarter of 2016. In addition, standard annual merit increases in regular compensation were effective for the majority of our staff on March 1.

Incentive compensation increased $1.8 million or 5 percent over the second quarter of 2016, primarily due to increased share-based compensation expense, partially offset by lower cash-based incentive compensation expense. 

Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Cash-based incentive compensation expense decreased $2.6 million or 8 percent compared to the second quarter of 2016.

Share-based compensation expense represents expense for equity awards based on grant-date fair value. Non-vested shares generally cliff vest in 3 years and are subject to a two year holding period after vesting. The number of shares that will ultimately vest is determined by BOKF's change in earnings per share relative to a defined group of peer banks. In addition, compensation costs related to certain shares is variable based on changes in the the fair value of BOK Financial common shares. Share-based compensation expense increased $3.7 million or 99% over the prior year, primarily due to changes in the vesting assumptions for performance-based awards that were granted in January 2015 and a $21.43 per share increase in the fair value of BOK Financial common shares.

Employee benefits expense increased $804 thousand or 4 percent over the the second quarter of 2016, primarily due to an increase in employee medical costs.
Personnel expense increased $7.3 million over the first quarter of 2017. Regular compensation expense was largely unchanged compared to the prior quarter. Incentive compensation expense increased $7.1 million, primarily due to a $5.8 million increase in share-based compensation expense and a $1.1 million increase in cash-based incentive compensation expense. A $2.6 million increase in employee healthcare costs was offset by a $2.2 million seasonal decrease in payroll tax expense.

Non-personnel operating expense

Non-personnel operating expense decreased $5.0 million or 4% compared to the second quarter of 2016.

Deposit insurance expense decreased $6.4 million. The company received $5.1 million in credits during the second quarter of 2017 related to the revision of certain inputs to the assessment calculation filed for years 2013 through 2016. In conjunction with ongoing cost reduction efforts, management performed a comprehensive review of inputs into the deposit insurance assessment calculation. We were able to support eligibility for the custodial bank adjustment, which allows for the deduction of certain qualifying low-risk assets from the deposit insurance assessment base for depository institutions with greater than $50 billion in trust assets. The remaining decrease was primarily due to the benefit of decreased criticized and classified assets levels related to the stabilization of energy prices, partially offset by a new surcharge for banks with more than $10 billion in assets that became effective in the third quarter of 2016.

Mortgage banking expense decreased $3.7 million, primarily due to improvement in the estimated loss rates on servicing certain defaulted residential mortgage loans serviced for U.S. government agencies and lower prepayments as average mortgage interest rates trended upward over the prior year. Professional fees and servicing expense was $1.7 million lower, primarily due to costs incurred in the second quarter of 2016 related to the Mobank acquisition and lower legal fees. Data processing and communications expense increased $3.5 million. Occupancy and equipment expense increased $1.4 million. Increases in these expense categories were primarily due to information technology infrastructure and cybersecurity project costs and increased data processing transaction activity. Business promotion expense was up $1.0 million primarily related to the timing of advertising spending.
Non-personnel expense decreased $1.1 million compared to the first quarter of 2017. Deposit insurance expense decreased $5.7 million. Data processing and communication expense increased $1.4 million primarily due to increased transaction activity. Net losses and operating expenses of repossessed assets increased $1.3 million primarily due to increased operating expenses related to repossessed oil and gas properties. This increased expense was offset by revenue from these properties included in other revenues.

- 11 -


Income Taxes

The Company's income tax expense was $47.7 million or 34.9 percent of net income before taxes for the second quarter of 2017 compared to $30.5 million or 31.5 percent of net income before taxes for the second quarter of 2016 and $38.1 million or 30.1 percent of net income before taxes for the first quarter of 2017.

The Company implemented a new accounting standard in the first quarter of 2017 that includes the tax effect of equity compensation in income tax expense that previously was included in stockholders' equity. The accounting standard was adopted prospectively without restatement of prior periods. Excluding this change, tax expense would have been 33.7 percent of net income before taxes for the second quarter of 2017 and 33.2 percent of net income before taxes for the first quarter of 2017.

The Company's effective tax rate is affected by recurring items such as amortization related to its investments in affordable housing investments net of affordable housing tax credits and other tax benefits, bank-owned life insurance and tax-exempt income. The effective tax rate is also affected by items that may occur in any given period but are not consistent from period to period. Accordingly, the comparability of the effective tax rate from period to period may be impacted.

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. The reserve for uncertain tax positions was $17 million at June 30, 2017, $17 million at March 31, 2017 and $13 million at June 30, 2016.
Lines of Business

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

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

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 support assets of the operating lines of business tends to insulate them from interest rate risk.

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


- 12 -


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 increased $23.7 million or 35 percent over the second quarter of 2016. Net interest revenue grew by $31.4 million over the prior year. Other operating revenue decreased $1.3 million while operating expenses decreased $1.4 million and net charge-offs were down $5.9 million.

Table 8 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
Commercial Banking
 
$
68,299

 
$
52,836

 
$
132,215

 
$
89,890

Consumer Banking
 
7,422

 
4,231

 
12,166

 
4,342

Wealth Management
 
15,824

 
10,780

 
30,108

 
17,758

Subtotal
 
91,545

 
67,847

 
174,489

 
111,990

Funds Management and other
 
(3,398
)
 
(2,046
)
 
2,014

 
(3,625
)
Total
 
$
88,147

 
$
65,801

 
$
176,503

 
$
108,365


- 13 -


Commercial Banking

Commercial Banking contributed $68.3 million to consolidated net income in the second quarter of 2017, an increase of $15.5 million or 29 percent over the second quarter of 2016. The increase in Commercial Banking's contribution was largely due to net interest revenue.

Table 9 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Six Months Ended
 
Increase (Decrease)
 
 
June 30,
 
 
June 30,
 
 
 
2017
 
2016
 
 
2017
 
2016
 
Net interest revenue from external sources
 
$
144,164

 
$
118,480

 
$
25,684

 
$
278,868

 
$
235,116

 
$
43,752

Net interest expense from internal sources
 
(20,347
)
 
(14,575
)
 
(5,772
)
 
(37,140
)
 
(29,208
)
 
(7,932
)
Total net interest revenue
 
123,817

 
103,905

 
19,912

 
241,728

 
205,908

 
35,820

Net loans charged off (recovered)
 
1,228

 
6,852

 
(5,624
)
 
(234
)
 
28,423

 
(28,657
)
Net interest revenue after net loans charged off (recovered)
 
122,589

 
97,053

 
25,536

 
241,962

 
177,485

 
64,477

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
49,792

 
51,028

 
(1,236
)
 
94,265

 
96,504

 
(2,239
)
Other gains, net
 
5,986

 
469

 
5,517

 
7,783

 
101

 
7,682

Other operating revenue
 
55,778

 
51,497

 
4,281

 
102,048

 
96,605

 
5,443

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
28,005

 
27,520

 
485

 
55,033

 
54,147

 
886

Non-personnel expense
 
31,123

 
25,074

 
6,049

 
56,532

 
54,516

 
2,016

Other operating expense
 
59,128

 
52,594

 
6,534

 
111,565

 
108,663

 
2,902

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
119,239

 
95,956

 
23,283

 
232,445

 
165,427

 
67,018

Gain on financial instruments, net
 
3

 
—

 
3

 
41

 
—

 
41

Gain (loss) on repossessed assets, net
 
1,403

 
(598
)
 
2,001

 
1,398

 
(680
)
 
2,078

Corporate expense allocations
 
8,862

 
8,883

 
(21
)
 
17,493

 
17,627

 
(134
)
Income before taxes
 
111,783

 
86,475

 
25,308

 
216,391

 
147,120

 
69,271

Federal and state income tax
 
43,484

 
33,639

 
9,845

 
84,176

 
57,230

 
26,946

Net income
 
$
68,299

 
$
52,836

 
$
15,463

 
$
132,215

 
$
89,890

 
$
42,325

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
17,596,273

 
$
16,973,663

 
$
622,610

 
$
17,517,960

 
$
16,971,339

 
$
546,621

Average loans
 
14,177,635

 
13,571,602

 
606,033

 
14,097,588

 
13,444,470

 
653,118

Average deposits
 
8,652,811

 
8,403,408

 
249,403

 
8,642,326

 
8,430,579

 
211,747

Average invested capital
 
1,239,492

 
1,167,840

 
71,652

 
1,226,041

 
1,160,485

 
65,556


Net interest revenue increased $19.9 million or 19 percent over the prior year. Growth in net interest revenue was primarily due to a $606 million or 4 percent increase in average loan balances and increased yields on commercial loans due to rising short-term interest rates. Average deposit balances increased $249 million or 3 percent. Yields on deposits sold to the funds management unit also went up due to the increase in short-term interest rates from the Federal Reserve increase in the federal funds rate.

Fees and commissions revenue decreased $1.2 million or 2 percent compared to the second quarter of 2016, primarily due to a $1.4 million decline in customer energy derivatives trading and a $1.3 million decline in loan syndication fees. This decline was partially offset by increases in deposit service fees and transaction card revenue from our TransFund electronic fund transfer network and other revenue from the operation of repossessed oil and gas properties.


- 14 -


Operating expenses increased $6.5 million or 12 percent compared to the second quarter of 2016. Personnel expense increased $485 thousand or 2 percent. Non-personnel expense increased $6.0 million or 24 percent. Net repossession expense increased $2.7 million related mainly to the repossession of oil and gas properties. Deposit insurance expense increased $1.7 million due to increased granularity in the allocation to the segments.

The average outstanding balance of loans attributed to Commercial Banking grew by $606 million or 4 percent over the second quarter of 2016 to $14.2 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $8.7 billion for the second quarter of 2017, an increase of $249 million or 3 percent compared to the second quarter of 2016. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.


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 and through Home Direct Mortgage, an online origination channel.

Consumer Banking contributed $7.4 million to consolidated net income for the second quarter of 2017, up $3.2 million over the second quarter of 2016. Growth in net interest revenue of $4.1 million was offset by a decrease in other operating revenue of $5.3 million while non-personnel expense decreased by $6.4 million.

- 15 -


Table 10 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Six Months Ended
 
Increase (Decrease)
 
 
June 30,
 
 
June 30,
 
 
 
2017
 
2016
 
 
2017
 
2016
 
Net interest revenue from external sources
 
$
23,503

 
$
22,349

 
$
1,154

 
$
44,632

 
$
43,799

 
$
833

Net interest revenue from internal sources
 
11,837

 
8,876

 
2,961

 
22,789

 
18,229

 
4,560

Total net interest revenue
 
35,340

 
31,225

 
4,115

 
67,421

 
62,028

 
5,393

Net loans charged off
 
926

 
1,318

 
(392
)
 
2,198

 
3,020

 
(822
)
Net interest revenue after net loans charged off
 
34,414

 
29,907

 
4,507

 
65,223

 
59,008

 
6,215

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
52,081

 
57,170

 
(5,089
)
 
99,472

 
111,341

 
(11,869
)
Other gains (losses), net
 
21

 
270

 
(249
)
 
(64
)
 
128

 
(192
)
Other operating revenue
 
52,102

 
57,440

 
(5,338
)
 
99,408

 
111,469

 
(12,061
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
25,545

 
26,228

 
(683
)
 
50,944

 
51,072

 
(128
)
Non-personnel expense
 
30,164

 
36,578

 
(6,414
)
 
58,298

 
67,452

 
(9,154
)
Total other operating expense
 
55,709

 
62,806

 
(7,097
)
 
109,242

 
118,524

 
(9,282
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
30,807

 
24,541

 
6,266

 
55,389

 
51,953

 
3,436

Gain on financial instruments, net
 
5,224

 
15,045

 
(9,821
)
 
3,557

 
31,626

 
(28,069
)
Change in fair value of mortgage servicing rights
 
(6,943
)
 
(16,283
)
 
9,340

 
(5,087
)
 
(44,271
)
 
39,184

Gain (loss) on repossessed assets, net
 
98

 
252

 
(154
)
 
(39
)
 
406

 
(445
)
Corporate expense allocations
 
17,039

 
16,630

 
409

 
33,908

 
32,608

 
1,300

Income before taxes
 
12,147

 
6,925

 
5,222

 
19,912

 
7,106

 
12,806

Federal and state income tax
 
4,725

 
2,694

 
2,031

 
7,746

 
2,764

 
4,982

Net income
 
$
7,422

 
$
4,231

 
$
3,191

 
$
12,166

 
$
4,342

 
$
7,824

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
8,845,398

 
$
8,774,881

 
$
70,517

 
$
8,747,524

 
$
8,731,085

 
$
16,439

Average loans
 
1,945,981

 
1,888,692

 
57,289

 
1,936,916

 
1,886,298

 
50,618

Average deposits
 
6,662,838

 
6,634,362

 
28,476

 
6,622,367

 
6,605,127

 
17,240

Average invested capital
 
282,932

 
266,561

 
16,371

 
280,454

 
262,762

 
17,692


Net interest revenue from Consumer Banking activities grew by $4.1 million or 13 percent over the the second quarter of 2016 primarily due to increased rates received on deposit balances sold to the Funds Management unit. Average loan balances grew by $57 million or 3 percent and average deposits were largely unchanged from prior year.

Fees and commissions revenue decreased $5.1 million or 9 percent compared to the second quarter of 2016, primarily due to a $4.6 million decrease in mortgage banking revenue. Mortgage loan production volumes decreased $998 million. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company and deposit service charges and fees were relatively unchanged compared to the prior year.

Operating expenses decreased $7.1 million or 11 percent compared to the second quarter of 2016. Personnel expenses decreased $683 thousand or 3 percent. Non-personnel expense decreased $6.4 million or 18 percent compared to the prior year. Mortgage banking costs were down $3.7 million primarily due to improvement in the estimated loss rates on outstanding claims on servicing certain defaulted residential mortgage loans guaranteed by U.S. government agencies as well as lower prepayments of loans serviced for others. Other expense decreased $1.3 million primarily due to a legal settlement in the second quarter of 2016. Professional fees and services were down $1.4 million.


- 16 -


Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $1.1 million decrease in Consumer Banking net income in the second quarter of 2017 compared to a $756 thousand decrease in Consumer Banking net income in the second quarter of 2016.

Corporate expense allocations increased $409 thousand or 3% over the second quarter of 2016.

Average consumer deposits were largely unchanged compared to the second quarter of 2016. Higher-costing time deposit balances decreased $135 million or 12 percent, offset by a $95 million or 6 percent increase in demand deposit balances, a $37 million or 9 percent increase in savings account balances and a $32 million or 1 percent increase in interest-bearing transaction accounts.


Wealth Management

Wealth Management contributed $15.8 million to consolidated net income in the second quarter of 2017, up $5.0 million or 47 percent over the second quarter of 2016 largely due to growth in net interest revenue.

Table 11 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Six Months Ended
 
Increase (Decrease)
 
 
June 30,
 
 
June 30,
 
 
 
2017
 
2016
 
 
2017
 
2016
 
Net interest revenue from external sources
 
$
10,474

 
$
6,271

 
$
4,203

 
$
21,960

 
$
12,349

 
$
9,611

Net interest revenue from internal sources
 
10,325

 
7,193

 
3,132

 
19,181

 
14,857

 
4,324

Total net interest revenue
 
20,799

 
13,464

 
7,335

 
41,141

 
27,206

 
13,935

Net loans charged off (recovered)
 
(93
)
 
(239
)
 
146

 
(53
)
 
(390
)
 
337

Net interest revenue after net loans charged off (recovered)
 
20,892

 
13,703

 
7,189

 
41,194

 
27,596

 
13,598

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
75,553

 
75,467

 
86

 
149,474

 
144,187

 
5,287

Other gains, net
 
16

 
305

 
(289
)
 
253

 
331

 
(78
)
Other operating revenue
 
75,569

 
75,772

 
(203
)
 
149,727

 
144,518

 
5,209

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
45,477

 
48,147

 
(2,670
)
 
90,264

 
93,266

 
(3,002
)
Non-personnel expense
 
15,138

 
13,267

 
1,871

 
30,761

 
28,832

 
1,929

Other operating expense
 
60,615

 
61,414

 
(799
)
 
121,025

 
122,098

 
(1,073
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
35,846

 
28,061

 
7,785

 
69,896

 
50,016

 
19,880

Corporate expense allocations
 
9,947

 
10,417

 
(470
)
 
20,619

 
20,952

 
(333
)
Income before taxes
 
25,899

 
17,644

 
8,255

 
49,277

 
29,064

 
20,213

Federal and state income tax
 
10,075

 
6,864

 
3,211

 
19,169

 
11,306

 
7,863

Net income
 
$
15,824

 
$
10,780

 
$
5,044

 
$
30,108

 
$
17,758

 
$
12,350

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
6,763,093

 
$
5,765,390

 
$
997,703

 
$
6,960,872

 
$
5,665,218

 
$
1,295,654

Average loans
 
1,312,857

 
1,098,178

 
214,679

 
1,289,846

 
1,094,252

 
195,594

Average deposits
 
5,531,091

 
4,521,031

 
1,010,060

 
5,556,680

 
4,608,522

 
948,158

Average invested capital
 
268,322

 
240,693

 
27,629

 
258,698

 
236,798

 
21,900



- 17 -


Net interest revenue for the second quarter of 2017 increased $7.3 million or 55 percent over the second quarter of 2016, primarily due to an increase in the size of the U.S. agency mortgage-backed securities portfolio related to a new trading group that began operations during the third quarter of 2016 and growth in deposit balances sold to the Funds Management unit. Average deposit balances grew by $1.0 billion or 22 percent over the second quarter of 2016. Non-interest bearing demand deposits grew by $285 million or 26 percent, interest-bearing transaction account balances increased $677 million or 25 percent and time deposit balances grew by $44 million or 6 percent. Average loan balances increased $215 million or 20 percent over the prior year.

Fees and commissions revenue was relatively unchanged compared to the second quarter of 2016. Brokerage and trading revenue decreased by $6.0 million or 18 percent primarily due to lower volumes of U.S. agency residential mortgage-backed and municipal securities sold to our institutional customers. Fiduciary and asset management revenue increased $7.0 million or 20 percent over the prior year primarily due to growth in assets under management, improved pricing discipline and decreased fee waivers.

Fees and commissions revenue above includes fees earned from state and municipal bond and corporate debt underwritings and financial advisory services, primarily in the Oklahoma and Texas markets. In the second quarter of 2017, the Wealth Management division participated in 74 state and municipal bond underwritings that totaled $1.4 billion. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $397 million of these underwritings. The Wealth Management division also participated in 6 corporate debt underwritings that totaled $2.3 billion. Our interest in these underwritings was $47 million. In the second quarter of 2016, the Wealth Management division participated in 136 state and municipal bond underwritings that totaled approximately $4.2 billion. Our interest in these underwritings totaled approximately $803 million. The Wealth Management division also participated in two corporate debt underwritings that totaled $350 million. Our interest in these underwritings was $44 million.

Operating expense decreased $799 thousand or 1 percent compared to the second quarter of 2016. Personnel expenses decreased $2.7 million primarily due to decreased incentive compensation expense. Non-personnel expense increased $1.9 million primarily due to a $1.3 million increase in data processing and communications expense.

Corporate expense allocations decreased $470 thousand or 5 percent from the prior year.
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, 2017, December 31, 2016 and June 30, 2016.

At June 30, 2017, the carrying value of investment (held-to-maturity) securities was $490 million and the fair value was $516 million. Investment securities consist primarily of long-term, fixed rate Oklahoma and Texas municipal bonds, taxable Texas school construction bonds and residential mortgage-backed securities issued by U.S. government agencies. The investment security portfolio is diversified among issuers. The largest obligation of any single issuer is $30 million. Substantially all of these bonds are general obligations of the issuers. Approximately $100 million of the $199 million portfolio of Texas school construction bonds is also guaranteed by the Texas Permanent School Fund Guarantee Program supervised by the State Board of Education for the State of Texas.

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 $8.3 billion at June 30, 2017, a $118 million decrease compared to March 31, 2017. At June 30, 2017, the available for sale securities portfolio consisted primarily of U.S. government agency residential mortgage-backed securities with an amortized cost of $5.4 billion and U.S. government agency commercial mortgage-backed securities with an amortized cost of $2.8 billion. Both residential and commercial mortgage-backed securities also 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.

- 18 -


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, 2017 is 3.2 years. Management estimates the duration extends to 3.9 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.8 years assuming a 50 basis point decline in the current low rate environment.

We also hold amortized cost of $87 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions, a decrease of $6.7 million from March 31, 2017. The decrease was due to cash payments received during the quarter. The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $103 million at June 30, 2017.

The aggregate gross amount of unrealized losses on available for sale securities totaled $50 million at June 30, 2017, compared to $68 million at March 31, 2017. On a quarterly basis, we perform separate evaluations on debt and equity securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. No other-than-temporary impairment charges were recognized in earnings during the second quarter of 2017.

BOK Financial is required to hold stock as members of the Federal Reserve system and the Federal Home Loan Banks ("FHLB"). These restricted equity securities are carried at cost as these securities do not have a readily determined fair value because the ownership of these shares is restricted and they lack a market. Federal Reserve Bank stock totaled $37 million and holdings of FHLB stock totaled $274 million at June 30, 2017. Holdings of FHLB stock increased $27 million compared to March 31, 2017. We are required to hold stock in the FHLB in proportion to our borrowings with the FHLB.
Bank-Owned Life Insurance

We have approximately $313 million of bank-owned life insurance at June 30, 2017. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $285 million is held in separate accounts. Our separate account holdings are invested in diversified portfolios of investment-grade fixed income securities and cash equivalents, including U.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio’s investment guidelines. The cash surrender value of certain life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments. At June 30, 2017, the fair value of investments held in separate accounts was approximately $290 million. As the underlying fair value of the investments held in a separate account at June 30, 2017 exceeded the net book value of the investments, no cash surrender value was supported by the stable value wrap. The stable value wrap is provided by a domestic financial institution. The remaining cash surrender value of $28 million primarily represents the cash surrender value of policies held in general accounts and other amounts due from various insurance companies.

- 19 -


Loans

The aggregate loan portfolio before allowance for loan losses totaled $17 billion at June 30, 2017, an increase of $192 million over March 31, 2017. The outstanding balance of commercial loans increased by $311 million, partially offset by a $182 million decrease in commercial real estate loan balances. Residential mortgage loans decreased $7.1 million and personal loans grew by $70 million. 

Table 12 -- Loans
(In thousands)
 
 
June 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sept. 30,2016
 
June 30, 2016
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,847,240

 
$
2,537,112

 
$
2,497,868

 
$
2,520,804

 
$
2,818,656

Services
 
2,958,827

 
3,013,375

 
3,108,990

 
2,936,599

 
2,830,864

Healthcare
 
2,221,518

 
2,265,604

 
2,201,916

 
2,085,046

 
2,051,146

Wholesale/retail
 
1,543,695

 
1,506,243

 
1,576,818

 
1,602,030

 
1,532,957

Manufacturing
 
546,137

 
543,430

 
514,975

 
499,486

 
595,403

Other commercial and industrial
 
520,538

 
461,346

 
490,257

 
476,198

 
527,411

Total commercial
 
10,637,955

 
10,327,110

 
10,390,824

 
10,120,163

 
10,356,437

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Retail
 
722,805

 
745,046

 
761,888

 
801,377

 
795,419

Multifamily
 
952,380

 
922,991

 
903,272

 
873,773

 
787,200

Office
 
862,973

 
860,889

 
798,888

 
752,705

 
769,112

Industrial
 
693,635

 
871,463

 
871,749

 
838,021

 
645,586

Residential construction and land development
 
141,592

 
135,994

 
135,533

 
159,946

 
157,576

Other commercial real estate
 
315,207

 
334,680

 
337,716

 
367,776

 
427,073

Total commercial real estate
 
3,688,592

 
3,871,063

 
3,809,046

 
3,793,598

 
3,581,966

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
989,040

 
977,743

 
1,006,820

 
969,558

 
969,007

Permanent mortgages guaranteed by U.S. government agencies
 
191,729

 
204,181

 
199,387

 
190,309

 
192,732

Home equity
 
758,429

 
764,350

 
743,625

 
712,926

 
719,184

Total residential mortgage
 
1,939,198

 
1,946,274

 
1,949,832

 
1,872,793

 
1,880,923

 
 
 
 
 
 
 
 
 
 
 
Personal
 
917,900

 
847,459

 
839,958

 
678,232

 
587,423

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
17,183,645

 
$
16,991,906

 
$
16,989,660

 
$
16,464,786

 
$
16,406,749


Commercial

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

Commercial loans totaled $10.6 billion or 62 percent of the loan portfolio at June 30, 2017, an increase of $311 million over March 31, 2017 primarily due to growth in energy loan balances. Other commercial and industrial loans increased by $59 million and wholesale/retail sector loan balances increased by $37 million. This growth was offset by a $55 million decrease in service sector loan balances and a $44 million decrease in healthcare sector loan balances.

- 20 -


Table 13 presents the commercial sector of our loan portfolio distributed primarily by collateral location. Loans for which collateral location is less relevant, such as unsecured loans and reserve-based energy loans, are distributed by the borrower's primary operating location.

Table 13 -- Commercial Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Energy
 
$
537,606

 
$
1,464,660

 
$
14,847

 
$
4,178

 
$
347,932

 
$
9,110

 
$
77,788

 
$
391,119

 
$
2,847,240

Services
 
650,748

 
873,279

 
195,368

 
5,184

 
306,628

 
209,729

 
332,001

 
385,890

 
2,958,827

Healthcare
 
277,652

 
383,698

 
138,205

 
96,924

 
119,288

 
127,803

 
272,382

 
805,566

 
2,221,518

Wholesale/retail
 
385,275

 
519,826

 
45,333

 
36,136

 
61,464

 
64,504

 
87,736

 
343,421

 
1,543,695

Manufacturing
 
102,594

 
186,172

 
1,492

 
13,583

 
39,541

 
31,760

 
106,832

 
64,163

 
546,137

Other commercial and industrial
 
97,919

 
132,119

 
2,438

 
58,396

 
26,947

 
28,780

 
80,232

 
93,707

 
520,538

Total commercial loans
 
$
2,051,794

 
$
3,559,754

 
$
397,683

 
$
214,401

 
$
901,800

 
$
471,686

 
$
956,971

 
$
2,083,866

 
$
10,637,955

 
The majority of the collateral securing our commercial loan portfolio is located within our geographical footprint with 33 percent concentrated in the Texas market and 19 percent concentrated in the Oklahoma market. At June 30, 2017, the Other category is primarily composed of California - $303 million or 3 percent of the commercial loan portfolio, Louisiana - $194 million or 2 percent of the commercial loan portfolio, Florida - $159 million or 1 percent of the commercial loan portfolio, Pennsylvania - $115 million or 1 percent of the commercial loan portfolio and Tennessee - $108 million or 1 percent of the commercial loan portfolio. All other states individually represent one percent or less of total commercial loans.

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

Outstanding energy loans totaled $2.8 billion or 17 percent of total loans at June 30, 2017. Unfunded energy loan commitments of $2.7 billion at June 30, 2017 were largely unchanged compared to March 31, 2017. Approximately $2.4 billion of energy loans were to oil and gas producers, up $362 million over March 31, 2017. The majority of this portfolio is first lien, senior secured, reserve-based lending, which we believe is the lowest risk form of energy lending. The Company has largely avoided higher-risk energy lending areas including second-lien financing, mezzanine debt and subordinated debt. In addition, the Company has no direct exposure to energy company equity or to borrowers with deep-water offshore exposure. Approximately 58 percent of the committed production loans are secured by properties primarily producing oil and 42 percent of the committed production loans are secured by properties primarily producing natural gas. Loans to midstream oil and gas companies totaled $277 million at June 30, 2017, a decrease of $39 million compared to March 31, 2017. Loans to borrowers that provide services to the energy industry totaled $178 million at June 30, 2017, largely unchanged compared to the prior quarter. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $38 million, a $15 million decrease over the prior quarter.

The services sector of the loan portfolio totaled $3.0 billion or 17 percent of total loans and consists of a large number of loans to a variety of businesses, including governmental, finance and insurance, educational services, loans to entities providing services for real estate and construction and professional services. Service sector loans decreased by $55 million compared to March 31, 2017. Loans to governmental entities totaled $562 million at June 30, 2017. Approximately $1.5 billion of the services category is made up of loans with individual balances of less than $10 million. Service sector loans are generally secured by the assets of the borrower with repayment coming from the cash flows of ongoing operations of the customer’s business. 


- 21 -


The healthcare sector of the loan portfolio totaled $2.2 billion or 13% of total loans and consists primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Healthcare also includes loans to hospitals and other medical service providers.

We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. At June 30, 2017, the outstanding principal balance of these loans totaled $4.0 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 18 percent of our shared national credits, based on dollars committed. We hold shared 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, with larger concentrations in Texas and Oklahoma which represent 32 percent and 12 percent of the total commercial real estate portfolio at June 30, 2017, respectively. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

Commercial real estate loans totaled $3.7 billion or 21 percent of the loan portfolio at June 30, 2017. The outstanding balance of commercial real estate loans decreased $182 million during the second quarter of 2017. Loans secured by industrial properties decreased $178 million. Retail sector loans decreased $22 million. Multifamily residential loans increased $29 million. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 18 percent to 23 percent over the past five years. 

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

Table 14 -- Commercial Real Estate Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Retail
 
$
73,978

 
$
272,460

 
$
107,535

 
$
6,526

 
$
30,853

 
$
27,747

 
$
25,354

 
$
178,352

 
$
722,805

Multifamily
 
110,567

 
428,929

 
13,801

 
25,191

 
64,959

 
56,347

 
113,529

 
139,057

 
952,380

Office
 
96,167

 
226,147

 
77,153

 
2,119

 
64,825

 
72,175

 
58,330

 
266,057

 
862,973

Industrial
 
81,871

 
192,427

 
25,791

 
—

 
16,233

 
11,753

 
48,457

 
317,103

 
693,635

Residential construction and land development
 
25,500

 
36,465

 
18,330

 
1,850

 
15,500

 
9,536

 
17,006

 
17,405

 
141,592

Other commercial real estate
 
53,010

 
40,603

 
22,784

 
4,282

 
14,721

 
38,051

 
30,168

 
111,588

 
315,207

Total commercial real estate loans
 
$
441,093

 
$
1,197,031

 
$
265,394

 
$
39,968

 
$
207,091

 
$
215,609

 
$
292,844

 
$
1,029,562

 
$
3,688,592


The Other category is primarily composed of California and Utah which represent $146 million or 4 percent and $120 million or 3 percent of the commercial real estate portfolio, respectively. All other states represent less than 3% individually.

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

- 22 -


Based on Moody's U.S. Retail Industry Classifications, approximately 60 percent of $723 million of outstanding retail commercial real estate loans have services-based tenants which are considered less susceptible to online competition. Additionally, 61 percent of the $653 million of outstanding retail loans included in our commercial wholesale/retail sector are service-based.
Residential Mortgage and Personal

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

Residential mortgage loans totaled $1.9 billion, largely unchanged compared to March 31, 2017. In general, we sell the majority of our conforming fixed rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. We have no concentration in sub-prime residential mortgage loans. Our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or adjustable rate mortgage loans with initial rates that are below market. Collateral for 96 percent of our residential mortgage loan portfolio is located within our geographical footprint.

The majority of our permanent mortgage loan portfolio is composed of various non-conforming mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals or certain professionals. Jumbo loans may be fixed or variable rate and are fully amortizing. The size of jumbo loans exceeds maximums set under government sponsored entity standards, but otherwise generally conform to those standards. These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38 percent. Loan-to-value ratios (“LTV”) are tiered from 60 percent to 100 percent, depending on the market. Special mortgage programs include fixed and variable rate fully amortizing loans tailored to the needs of certain healthcare professionals. Variable rate loans are fully indexed at origination and may have fixed rates for three to ten years, then adjust annually thereafter.

At June 30, 2017, $192 million of permanent residential mortgage loans are guaranteed by U.S. government agencies. We have minimal credit exposure on loans guaranteed by the agencies. This amount includes residential mortgage loans previously sold into GNMA mortgage pools that the Company may repurchase when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet. Permanent residential mortgage loans guaranteed by U.S. government agencies decreased $12 million compared to March 31, 2017.

Home equity loans totaled $758 million at June 30, 2017, a $5.9 million decrease compared to March 31, 2017. Our home equity loan portfolio is primarily composed of first-lien, fully amortizing home equity loans. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 50 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 10 year revolving period followed by a 15 year term of amortizing repayment. Interest-only home equity loans have a 5 year revolving period followed by a 15 year term of amortizing repayments and may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term subject to an update of certain credit information. A summary of our home equity loan portfolio at June 30, 2017 by lien position and amortizing status follows in Table 15.

Table 15 -- Home Equity Loans
(In thousands)
 
 
Revolving
 
Amortizing
 
Total
First lien
 
$
70,650

 
$
421,861

 
$
492,511

Junior lien
 
135,771

 
130,147

 
265,918

Total home equity
 
$
206,421

 
$
552,008

 
$
758,429



- 23 -


Personal loans totaled $918 million, a $70 million increase over the prior quarter primarily due to growth in loans to wealth management customers for investment in businesses that will be repaid from personal income.

The distribution of residential mortgage and personal loans at June 30, 2017 is as follows in Table 16. Residential mortgage loans are distributed by collateral location. Personal loans are generally distributed by borrower location.

Table 16 -- Residential Mortgage and Personal Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
$
181,030

 
$
413,293

 
$
40,810

 
$
13,864

 
$
162,013

 
$
93,997

 
$
49,766

 
$
34,267

 
$
989,040

Permanent mortgages  guaranteed by U.S. government agencies
 
54,187

 
25,912

 
46,426

 
5,975

 
5,968

 
1,881

 
14,555

 
36,825

 
191,729

Home equity
 
394,081

 
136,667

 
97,977

 
5,141

 
38,029

 
8,236

 
75,642

 
2,656

 
758,429

Total residential mortgage
 
$
629,298

 
$
575,872

 
$
185,213

 
$
24,980

 
$
206,010

 
$
104,114

 
$
139,963

 
$
73,748

 
$
1,939,198

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
$
305,856

 
$
385,087

 
$
11,615

 
$
11,993

 
$
58,918

 
$
54,434

 
$
76,967

 
$
13,030

 
$
917,900



- 24 -


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 Bank are centrally managed by the Bank of Oklahoma.

Table 17 -- Loans Managed by Primary Geographical Market
(In thousands)
 
 
June 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sept. 30,2016
 
June 30, 2016
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
3,369,967

 
$
3,189,183

 
$
3,370,259

 
$
3,545,924

 
$
3,698,215

Commercial real estate
 
667,932

 
691,332

 
684,381

 
795,806

 
781,458

Residential mortgage
 
1,398,021

 
1,404,054

 
1,407,197

 
1,401,166

 
1,415,766

Personal
 
318,016

 
310,708

 
303,823

 
271,420

 
246,229

Total Bank of Oklahoma
 
5,753,936

 
5,595,277

 
5,765,660

 
6,014,316

 
6,141,668

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
4,339,634

 
4,148,316

 
4,022,455

 
3,903,218

 
3,901,632

Commercial real estate
 
1,360,164

 
1,452,988

 
1,415,011

 
1,400,709

 
1,311,408

Residential mortgage
 
232,074

 
231,647

 
233,981

 
229,345

 
222,548

Personal
 
354,222

 
312,092

 
306,748

 
278,167

 
233,304

Total Bank of Texas
 
6,286,094

 
6,145,043

 
5,978,195

 
5,811,439

 
5,668,892

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 

 
 

 
 

 
 

 
 

Commercial
 
369,370

 
407,403

 
399,256

 
398,147

 
398,427

Commercial real estate
 
324,405

 
307,927

 
284,603

 
299,785

 
322,956

Residential mortgage
 
103,849

 
106,432

 
108,058

 
110,478

 
114,226

Personal
 
12,439

 
11,305

 
11,483

 
11,333

 
10,569

Total Bank of Albuquerque
 
810,063

 
833,067

 
803,400

 
819,743

 
846,178

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
85,020

 
88,010

 
86,577

 
83,544

 
81,227

Commercial real estate
 
73,943

 
74,469

 
73,616

 
72,649

 
69,235

Residential mortgage
 
6,395

 
6,829

 
7,015

 
6,936

 
6,874

Personal
 
11,993

 
6,279

 
6,524

 
6,757

 
7,025

Total Bank of Arkansas
 
177,351

 
175,587

 
173,732

 
169,886

 
164,361

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 

 
 

 
 

 
 

 
 

Commercial
 
1,065,780

 
998,216

 
1,018,208

 
1,013,314

 
1,076,620

Commercial real estate
 
255,379

 
266,218

 
265,264

 
254,078

 
237,569

Residential mortgage
 
63,346

 
62,313

 
59,631

 
59,838

 
59,425

Personal
 
56,187

 
49,523

 
50,372

 
42,901

 
35,064

Total Colorado State Bank & Trust
 
1,440,692

 
1,376,270

 
1,393,475

 
1,370,131

 
1,408,678

 
 
 
 
 
 
 
 
 
 
 
Bank of Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
617,759

 
643,222

 
686,253

 
680,447

 
670,814

Commercial real estate
 
705,858

 
737,088

 
747,409

 
726,542

 
639,112

Residential mortgage
 
37,034

 
36,737

 
36,265

 
39,206

 
38,998

Personal
 
55,528

 
51,386

 
52,553

 
31,205

 
24,248

Total Bank of Arizona
 
1,416,179

 
1,468,433

 
1,522,480

 
1,477,400

 
1,373,172

 
 
 
 
 
 
 
 
 
 
 
Mobank:
 
 

 
 

 
 

 
 

 
 

Commercial
 
790,425

 
852,760

 
807,816

 
495,569

 
529,502

Commercial real estate
 
300,911

 
341,041

 
338,762

 
244,029

 
220,228

Residential mortgage
 
98,479

 
98,262

 
97,685

 
25,824

 
23,086

Personal
 
109,515

 
106,166

 
108,455

 
36,449

 
30,984

Total Mobank
 
1,299,330

 
1,398,229

 
1,352,718

 
801,871

 
803,800

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
17,183,645

 
$
16,991,906

 
$
16,989,660

 
$
16,464,786

 
$
16,406,749


- 25 -


Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business. These arrangements included unfunded loan commitments, which totaled $9.6 billion and standby letters of credit, which totaled $615 million at June 30, 2017. 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. Approximately $317 thousand of the outstanding standby letters of credit were issued on behalf of customers whose loans are nonperforming at June 30, 2017.

Table 18 – Off-Balance Sheet Credit Commitments
(In thousands)
 
 
June 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sept. 30,2016
 
June 30, 2016
Loan commitments
 
$
9,632,911

 
$
9,403,641

 
$
9,404,665

 
$
8,697,322

 
$
8,508,606

Standby letters of credit
 
614,852

 
595,746

 
585,472

 
499,990

 
491,002

Mortgage loans sold with recourse
 
133,896

 
134,631

 
139,486

 
139,306

 
145,403


We have off-balance sheet commitments related to certain residential mortgage loans originated under community development loan programs that were sold to a U.S. government agency with full recourse. These mortgage loans were underwritten to standards approved by the agencies, including full documentation and originated under programs available only for owner-occupied properties. The Company no longer sells residential mortgage loans with recourse. 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. Substantially all of these loans are to borrowers in our primary markets including $82 million to borrowers in Oklahoma, $14 million to borrowers in Arkansas and $13 million to borrowers in New Mexico. An accrual related to this off-balance sheet risk is included in Other liabilities in the consolidated balances sheets and totaled $3.9 million at June 30, 2017 and $4.0 million at March 31, 2017.

We also have an off-balance sheet obligation to repurchase residential mortgage loans sold to government sponsored entities through our mortgage banking activities due to standard representations and warranties made under contractual agreements as described further in Note 6 to the Consolidated Financial Statements. For the period from 2010 through the second quarter of 2017 combined, approximately 17 percent of repurchase requests have currently resulted in actual repurchases or indemnification by the Company. The accrual for credit losses related to potential loan repurchases under representations and warranties totaled $1.6 million at June 30, 2017 and $2.6 million at March 31, 2017.
Customer Derivative Programs
 
We offer programs that permit our customers to hedge various risks, including fluctuations in energy, cattle and other agricultural product prices, interest rates and foreign exchange rates. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and the Company. Offsetting contracts are executed between the Company and selected counterparties to minimize market risk due to changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to us as compensation for administrative costs, credit risk and profit.

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

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


- 26 -


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, 2017, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $265 million compared to $304 million at March 31, 2017. At June 30, 2017, the fair value of our derivative contracts included $162 million for foreign exchange contracts, $36 million for energy contracts, $30 million for interest rate swaps and $29 million of to-be-announced residential mortgage-backed securities. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $257 million at June 30, 2017 and $296 million at March 31, 2017.

At June 30, 2017, total derivative assets were reduced by $24 million of cash collateral received from counterparties and total derivative liabilities were reduced by $21 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, 2017 follows in Table 19.

Table 19 -- Fair Value of Derivative Contracts
(In thousands)
Banks and other financial institutions
 
$
111,723

Customers
 
95,002

Exchanges and clearing organizations
 
33,379

Fair value of customer risk management program asset derivative contracts, net
 
$
240,104

 
At June 30, 2017, our largest derivative exposure was to an exchange for energy derivative contracts which totaled $14 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 $24.22 per barrel of oil would increase the fair value of derivative assets by $9.1 million. An increase in prices equivalent to $67.53 per barrel of oil would increase the fair value of derivative assets by $208 million as current prices move further away from the fixed prices embedded in our existing contracts. Liquidity requirements of this program may also be affected by our credit rating. At June 30, 2017 a decrease in our credit rating to below investment grade did not have a significant impact on our obligation to post cash margin on existing contracts. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of June 30, 2017, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.

- 27 -


Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. At June 30, 2017, the combined allowance for loan losses and off-balance sheet credit losses totaled $256 million or 1.49 percent of outstanding loans and 109 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $250 million and the accrual for off-balance sheet credit losses was $6.4 million. At March 31, 2017, the combined allowance for credit losses was $258 million or 1.52 percent of outstanding loans and 131 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $249 million and the accrual for off-balance sheet credit losses was $9.4 million. 

The provision for credit losses is the amount necessary to maintain the allowance for loan losses and an accrual for off-balance sheet credit risk at an amount determined by management to be appropriate based on its evaluation. The provision includes the combined charge to expense for both the allowance for loan losses and the accrual for off-balance sheet credit risk. All losses incurred from lending activities will ultimately be reflected in charge-offs against the allowance for loan losses following funds advanced against outstanding commitments. Based on an evaluation of all credit factors, including changes in nonaccruing and potential problem loans, overall loan growth and net charge-offs, the Company determined that no provision for credit losses was necessary in the second quarter of 2017. No provision for credit losses was necessary in the first quarter of 2017 based on continued improvements in credit metric trends largely driven by energy price stability. A $20 million provision for credit losses was recorded in the second quarter of 2016 due primarily to the effects of falling energy prices.


- 28 -


Table 20 -- Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30, 2016
 
June 30,
2016
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
248,710

 
$
246,159

 
$
245,103

 
$
243,259

 
$
233,156

Loans charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
(1,703
)
 
(424
)
 
(81
)
 
(6,266
)
 
(7,355
)
Commercial real estate
 
(76
)
 
—

 
—

 
—

 
—

Residential mortgage
 
(40
)
 
(236
)
 
(208
)
 
(285
)
 
(345
)
Personal
 
(1,053
)
 
(1,493
)
 
(1,362
)
 
(1,550
)
 
(1,145
)
Total
 
(2,872
)
 
(2,153
)
 
(1,651
)
 
(8,101
)
 
(8,845
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
283

 
1,182

 
839

 
177

 
223

Commercial real estate
 
208

 
735

 
395

 
521

 
282

Residential mortgage
 
169

 
228

 
986

 
650

 
200

Personal
 
554

 
755

 
593

 
690

 
681

Total
 
1,214

 
2,900

 
2,813

 
2,038

 
1,386

Net loans recovered (charged off)
 
(1,658
)
 
747

 
1,162

 
(6,063
)
 
(7,459
)
Provision for loan losses
 
3,009

 
1,804

 
(106
)
 
7,907

 
17,562

Ending balance
 
$
250,061

 
$
248,710

 
$
246,159

 
$
245,103

 
$
243,259

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 
 
 

Beginning balance
 
$
9,440

 
$
11,244

 
$
11,138

 
$
9,045

 
$
6,607

Provision for off-balance sheet credit losses
 
(3,009
)
 
(1,804
)
 
106

 
2,093

 
2,438

Ending balance
 
$
6,431

 
$
9,440

 
$
11,244

 
$
11,138

 
$
9,045

Total combined provision for credit losses
 
$
—

 
$
—

 
$
—

 
$
10,000

 
$
20,000

Allowance for loan losses to loans outstanding at period-end
 
1.46
%
 
1.46
 %
 
1.45
 %
 
1.49
%
 
1.48
%
Net charge-offs (recoveries) (annualized) to average loans
 
0.04
%
 
(0.02
)%
 
(0.03
)%
 
0.15
%
 
0.18
%
Total provision for credit losses (annualized) to average loans
 
—
%
 
—
 %
 
—
 %
 
0.24
%
 
0.49
%
Recoveries to gross charge-offs
 
42.27
%
 
134.70
 %
 
170.38
 %
 
25.16
%
 
15.67
%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.06
%
 
0.09
 %
 
0.11
 %
 
0.12
%
 
0.10
%
Combined allowance for credit losses to loans outstanding at period-end
 
1.49
%
 
1.52
 %
 
1.52
 %
 
1.56
%
 
1.54
%
Allowance for Loan Losses

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


- 29 -


Loans are considered to be impaired when it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement. This includes all nonaccruing loans, all loans modified in troubled debt restructurings and all government guaranteed loans repurchased from GNMA pools. A specific allowance is required when the outstanding principal balance of the loan is not supported by either the discounted cash flows expected to be received from the borrower or the fair value of collateral for collateral dependent loans. At June 30, 2017, impaired loans totaled $428 million, including $73 million with specific allowances of $9.7 million and $355 million with no specific allowances. At March 31, 2017, impaired loans totaled $402 million, including $52 million of impaired loans with specific allowances of $3.5 million and $350 million with no specific allowances.

Risk grading guidelines in the Office of the Comptroller of the Currency ("OCC") Oil and Gas Lending Handbook updated at the beginning of 2016, heavily weight the ability to repay total borrower debt, regardless of collateral position. This change in grading methodology has increased loans especially mentioned, potential problem loans and nonaccrual loans. Because substantially all of our energy portfolio is supported by senior lien positions that, in general, have substantially lower loss exposure, the historical relationship between loan classification and loss exposure may be more difficult to correlate. The most recently completed energy portfolio redetermination supported that $57 million of impaired energy loans required no allowance for credit losses based on the adequacy of collateral. In addition, $76 million of impaired energy loans are current on all payments due.

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

The aggregate amount of general allowances for all unimpaired loans totaled $213 million at June 30, 2017, a decrease of $4.9 million compared to March 31, 2017. The general allowance attributed to the commercial loan segment decreased $6.1 million, partially offset by an $859 thousand increase in the general allowance attributed to the personal loan segment.

Nonspecific allowances are maintained for risks beyond factors specific to a particular portfolio segment or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors. Nonspecific allowances totaled $27 million at June 30, 2017, unchanged compared to March 31, 2017. The nonspecific allowance includes consideration of the indirect impact of the prolonged low energy price environment on the broader economies within our geographical footprint that are highly dependent on the energy industry.

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

Our loan monitoring process also identified certain accruing substandard loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in nonperforming assets. Known information does, however, cause management concern as to the borrowers’ ability to comply with current repayment terms. These potential problem loans totaled $327 million at June 30, 2017 and wereprimarily composed of $226 million or 8 percent of energy loans, $33 million or 1 percent of healthcare sector loans, $17 million or 1 percent of service sector loans, $16 million or 3 percent of manufacturing sector loans and $10 million or 1 percent of wholesale/retail sector loans. Potential problem loans totaled $413 million at March 31, 2017.

Based on regulatory guidelines, other loans especially mentioned are in compliance with the original terms of the agreement but may have a weakness that deserves management's close attention. Other loans especially mentioned totaled $199 million at June 30, 2017 and were composed primarily of $120 million or 4 percent of outstanding energy loans, $34 million or 2 percent of outstanding healthcare loans, $16 million or 1 percent of outstanding wholesale/retail sector loans and $12 million or less than 1 percent of outstanding services loans. Other loans especially mentioned totaled $233 million at March 31, 2017.

We updated our semi-annual energy loan portfolio stress test at June 30, 2017 to estimate how the energy portfolio may respond in a prolonged low-price environment. Stress test assumptions include a starting price of $2.00 per million BTUs for natural gas and $35.87 per barrel of oil, gradually escalating over twelve to fifteen years to a maximum of $3.00 and $55.00, respectively. The results of the stress test are factored into our expectation that the loan loss provision could range from $0 to $10 million for 2017. This expectation is based upon current observed conditions. The portion of the combined allowance for credit losses attributable to the energy portfolio totaled 2.84 percent of outstanding energy loans at June 30, 2017, compared to 3.37 percent of outstanding energy loans at March 31, 2017.

- 30 -


Net Loans Charged Off

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

BOK Financial had net charge-offs of $1.7 million in the second quarter of 2017, compared to net recoveries of $747 thousand in the first quarter of 2017 and net loans charged off of $7.5 million in the second quarter of 2016. The ratio of net loans charged off to average loans on an annualized basis was 0.04 percent for the second quarter of 2017, compared with (0.02) percent for the first quarter of 2017 and 0.18 percent for the second quarter of 2016. 

Net charge-offs of commercial loans were $1.4 million in the second quarter of 2017, primarily due to a single healthcare borrower. Commercial loans had a net recovery of $758 thousand in the first quarter of 2017. Net commercial real estate loan recoveries were $132 thousand in the second quarter of 2017, compared to net recoveries of $735 thousand in the first quarter of 2017. Net charge-offs of residential mortgage loans were $129 thousand and net charge-offs of personal loans were $499 thousand for the second quarter. Personal loan net charge-offs include deposit account overdraft losses. 


- 31 -


Nonperforming Assets

Table 21 -- Nonperforming Assets
(In thousands)
 
 
June 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sept. 30,2016
 
June 30, 2016
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
197,157

 
$
156,825

 
$
178,953

 
$
176,464

 
$
181,989

Commercial real estate
 
3,775

 
4,475

 
5,521

 
7,350

 
7,780

Residential mortgage
 
44,235

 
46,081

 
46,220

 
52,452

 
57,061

Personal
 
272

 
235

 
290

 
686

 
354

Total nonaccruing loans
 
245,439

 
207,616

 
230,984

 
236,952

 
247,184

Accruing renegotiated loans guaranteed by U.S. government agencies
 
80,624

 
83,577

 
81,370

 
80,306

 
78,806

Real estate and other repossessed assets
 
39,436

 
42,726

 
44,287

 
31,941

 
24,054

Total nonperforming assets
 
$
365,499

 
$
333,919

 
$
356,641

 
$
349,199

 
$
350,044

Total nonperforming assets excluding those guaranteed by U.S. government agencies
 
$
275,823

 
$
240,234

 
$
263,425

 
$
253,461

 
$
251,497

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio segment and class:
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
123,992

 
$
110,425

 
$
132,499

 
$
142,966

 
$
168,145

Services
 
7,754

 
7,713

 
8,173

 
8,477

 
9,388

Wholesale / retail
 
10,620

 
11,090

 
11,407

 
2,453

 
2,772

Manufacturing
 
9,656

 
5,907

 
4,931

 
274

 
293

Healthcare
 
24,505

 
909

 
825

 
855

 
875

Other commercial and industrial
 
20,630

 
20,781

 
21,118

 
21,439

 
516

Total commercial
 
197,157

 
156,825

 
178,953

 
176,464

 
181,989

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 

 
 

Residential construction and land development
 
2,051

 
2,616

 
3,433

 
3,739

 
4,261

Retail
 
301

 
314

 
326

 
1,249

 
1,265

Office
 
396

 
413

 
426

 
882

 
606

Multifamily
 
10

 
24

 
38

 
51

 
65

Industrial
 
—

 
76

 
76

 
76

 
76

Other commercial real estate
 
1,017

 
1,032

 
1,222

 
1,353

 
1,507

Total commercial real estate
 
3,775

 
4,475

 
5,521

 
7,350

 
7,780

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
23,415

 
24,188

 
22,855

 
25,956

 
27,228

Permanent mortgage guaranteed by U.S. government agencies
 
9,052

 
10,108

 
11,846

 
15,432

 
19,741

Home equity
 
11,768

 
11,785

 
11,519

 
11,064

 
10,092

Total residential mortgage
 
44,235

 
46,081

 
46,220

 
52,452

 
57,061

Personal
 
272

 
235

 
290

 
686

 
354

Total nonaccruing loans
 
$
245,439

 
$
207,616

 
$
230,984

 
$
236,952

 
$
247,184

 
 
 
 
 
 
 
 
 
 
 

- 32 -


 
 
June 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sept. 30,2016
 
June 30, 2016
Nonaccruing loans as % of outstanding balance for class:
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
4.35
%
 
4.35
%
 
5.30
%
 
5.67
%
 
5.97
%
Services
 
0.26
%
 
0.26
%
 
0.26
%
 
0.29
%
 
0.33
%
Wholesale / retail
 
0.69
%
 
0.74
%
 
0.72
%
 
0.15
%
 
0.18
%
Manufacturing
 
1.77
%
 
1.09
%
 
0.96
%
 
0.05
%
 
0.05
%
Healthcare
 
1.10
%
 
0.04
%
 
0.04
%
 
0.04
%
 
0.04
%
Other commercial and industrial
 
3.96
%
 
4.50
%
 
4.31
%
 
4.50
%
 
0.10
%
Total commercial
 
1.85
%
 
1.52
%
 
1.72
%
 
1.74
%
 
1.76
%
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
 
1.45
%
 
1.92
%
 
2.53
%
 
2.34
%
 
2.70
%
Retail
 
0.04
%
 
0.04
%
 
0.04
%
 
0.16
%
 
0.16
%
Office
 
0.05
%
 
0.05
%
 
0.05
%
 
0.12
%
 
0.08
%
Multifamily
 
—
%
 
—
%
 
—
%
 
0.01
%
 
0.01
%
Industrial
 
—
%
 
0.01
%
 
0.01
%
 
0.01
%
 
0.01
%
Other commercial real estate
 
0.32
%
 
0.31
%
 
0.36
%
 
0.37
%
 
0.35
%
Total commercial real estate
 
0.10
%
 
0.12
%
 
0.14
%
 
0.19
%
 
0.22
%
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
2.37
%
 
2.47
%
 
2.27
%
 
2.68
%
 
2.81
%
Permanent mortgage guaranteed by U.S. government agencies
 
4.72
%
 
4.95
%
 
5.94
%
 
8.11
%
 
10.24
%
Home equity
 
1.55
%
 
1.54
%
 
1.55
%
 
1.55
%
 
1.40
%
Total residential mortgage
 
2.28
%
 
2.37
%
 
2.37
%
 
2.80
%
 
3.03
%
Personal
 
0.03
%
 
0.03
%
 
0.03
%
 
0.10
%
 
0.06
%
Total nonaccruing loans
 
1.43
%
 
1.22
%
 
1.36
%
 
1.44
%
 
1.51
%
 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 

 
 

Allowance for loan losses to nonaccruing loans1
 
105.78
%
 
125.92
%
 
112.33
%
 
110.65
%
 
106.95
%
Accruing loans 90 days or more past due1
 
$
1,414

 
$
95

 
$
5

 
$
3,839

 
$
2,899

1 
Excludes residential mortgages guaranteed by agencies of the U.S. Government.

Nonperforming assets totaled $365 million or 2.12 percent of outstanding loans and repossessed assets at June 30, 2017. Nonaccruing loans totaled $245 million, accruing renegotiated residential mortgage loans totaled $81 million and real estate and other repossessed assets totaled $39 million. All accruing renegotiated residential mortgage loans and $9.1 million of nonaccruing loans are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets increased $36 million over the second quarter primarily due to an increase in nonaccruing healthcare and energy loans. The Company generally retains nonperforming assets to maximize potential recovery, which may cause future nonperforming assets to decrease more slowly.


- 33 -


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

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

A rollforward of nonperforming assets for the three and six months ended June 30, 2017 follows in Table 22.

Table 22 -- Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2017
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, March 31, 2017
 
$
207,616

 
$
83,577

 
$
42,726

 
$
333,919

Additions
 
58,768

 
15,032

 
—

 
73,800

Transfers from premises and equipment
 
—

 
—

 
452

 
452

Payments
 
(15,230
)
 
(833
)
 
—

 
(16,063
)
Charge-offs
 
(2,872
)
 
—

 
—

 
(2,872
)
Net gains, losses and write-downs
 
—

 
—

 
1,694

 
1,694

Foreclosure of nonperforming loans
 
(688
)
 
—

 
688

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(1,580
)
 
(2,752
)
 
—

 
(4,332
)
Proceeds from sales
 
—

 
(14,662
)
 
(5,829
)
 
(20,491
)
Net transfers to nonaccruing loans
 
—

 
—

 
—

 
—

Return to accrual status
 
(618
)
 
—

 
—

 
(618
)
Other, net
 
43

 
262

 
(295
)
 
10

Balance, June 30, 2017
 
$
245,439

 
$
80,624

 
$
39,436

 
$
365,499


- 34 -


 
 
Six Months Ended
 
 
June 30, 2017
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, Dec. 31, 2016
 
$
230,984

 
$
81,370

 
$
44,287

 
$
356,641

Additions
 
81,732

 
26,354

 
—

 
108,086

Transfers from premises and equipment
 
—

 
—

 
452

 
452

Payments
 
(50,162
)
 
(1,786
)
 
—

 
(51,948
)
Charge-offs
 
(5,025
)
 
—

 
—

 
(5,025
)
Net gains, losses and write-downs
 
—

 
—

 
1,604

 
1,604

Foreclosure of nonperforming loans
 
(1,597
)
 
—

 
1,597

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(3,980
)
 
(4,290
)
 
—

 
(8,270
)
Proceeds from sales
 
—

 
(21,406
)
 
(7,702
)
 
(29,108
)
Return to accrual status
 
(6,556
)
 
—

 
—

 
(6,556
)
Other, net
 
43

 
382

 
(802
)
 
(377
)
Balance, June 30, 2017
 
$
245,439

 
$
80,624

 
$
39,436

 
$
365,499


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 minimal. These properties will be conveyed to the agencies once applicable criteria have been met. 
Commercial

Nonaccruing commercial loans totaled $197 million or 1.85 percent of total commercial loans at June 30, 2017 and $157 million or 1.52 percent of commercial loans at March 31, 2017. There were $54 million in newly identified nonaccruing commercial loans during the quarter, offset by $12 million in payments and $1.7 million of charge-offs. Newly identified nonaccruing commercial loans were primarily healthcare and energy loans.

Nonaccruing commercial loans at June 30, 2017 were primarily composed of $124 million or 4.35 percent of total energy loans, $25 million or 1.10 percent of total healthcare sector loans, $21 million or 3.96 percent of total other commercial and industrial sector loans and $11 million or 0.69 percent of wholesale/retail sector loans.
Commercial Real Estate

Nonaccruing commercial real estate loans totaled $3.8 million or 0.10 percent of outstanding commercial real estate loans at June 30, 2017, down from $4.5 million or 0.12 percent of outstanding commercial real estate loans at March 31, 2017. Newly identified nonaccruing commercial real estate loans of $195 thousand were offset by $819 thousand of cash payments received and $76 thousand in charge-offs. There were no foreclosures of nonaccruing commercial real estate loans during the second quarter.

Nonaccruing commercial real estate loans were primarily composed of $2.1 million or 1.45 percent of residential construction and land development loans.

Residential Mortgage and Personal

Nonaccruing residential mortgage loans totaled $44 million or 2.28 percent of outstanding residential mortgage loans at June 30, 2017, a $1.8 million decrease compared to March 31, 2017. Newly identified nonaccruing residential mortgage loans totaling $3.3 million were offset by $2.3 million of foreclosures, $2.2 million of payments and $40 thousand of loans charged off during the quarter. 

Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans, which totaled $23 million or 2.37 percent of outstanding non-guaranteed permanent residential mortgage loans at June 30, 2017. Nonaccruing home equity loans totaled $12 million or 1.55 percent of total home equity loans.


- 35 -


Payments of accruing residential mortgage loans and personal loans may be delinquent. The composition of residential mortgage loans and personal loans past due but still accruing is included in the following Table 23. Substantially all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 59 days past due decreased $3.2 million in the second quarter to $3.6 million at June 30, 2017. Residential mortgage loans 60 to 89 days past due increased by $1.1 million. Personal loans past due 30 to 59 days increased by $57 thousand and personal loans 60 to 89 days increased $184 thousand.

Table 23 -- Residential Mortgage and Personal Loans Past Due
(In thousands)
 
 
June 30, 2017
 
March 31, 2017
 
 
90 Days or More
 
60 to 89 Days
 
30 to 59 Days
 
90 Days or More
 
60 to 89 Days
 
30 to 59 Days
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
   Permanent mortgage1
 
$
132

 
$
1,026

 
$
2,024

 
$
—

 
$
—

 
$
5,364

Home equity
 
—

 
362

 
1,564

 
9

 
266

 
1,376

Total residential mortgage
 
$
132

 
$
1,388

 
$
3,588

 
9

 
$
266

 
$
6,740

 
 
 

 
 
 
 

 
 

 
 
 
 

Personal
 
$
—

 
$
289

 
$
487

 
$
37

 
$
105

 
$
430

1 
Excludes past due residential mortgage loans guaranteed by agencies of the U.S. government.

Real Estate and Other Repossessed Assets

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

Real estate and other repossessed assets totaled $39 million at June 30, 2017, a decrease of $3.3 million compared to March 31, 2017. The distribution of real estate and other repossessed assets attributed by geographical market is included in Table 24 following.

Table 24 -- Real Estate and Other Repossessed Assets by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
Colorado
 
Arkansas
 
New
Mexico
 
Arizona
 
Kansas/
Missouri
 
Other
 
Total
1-4 family residential properties
 
$
3,065

 
$
305

 
$
—

 
$
493

 
$
1,450

 
$
692

 
$
131

 
$
357

 
$
6,493

Developed commercial real estate properties
 
71

 
—

 
2,147

 
—

 
446

 
198

 
1,296

 
—

 
4,158

Undeveloped land
 
1,152

 
1,215

 
—

 
—

 
—

 
135

 
1,197

 
—

 
3,699

Residential land development properties
 
67

 
—

 
210

 
—

 
—

 
343

 
2

 
—

 
622

Oil and gas properties
 
—

 
24,433

 


 


 


 


 
—

 
—

 
24,433

Other
 
8

 
23

 
—

 
—

 
—

 
—

 
—

 
—

 
31

Total real estate and other repossessed assets
 
$
4,363

 
$
25,976

 
$
2,357

 
$
493

 
$
1,896

 
$
1,368

 
$
2,626

 
$
357

 
$
39,436


Undeveloped land is primarily zoned for commercial development. Developed commercial real estate properties are primarily completed with no additional construction necessary for sale.

- 36 -


Liquidity and Capital

Subsidiary Bank

Deposits and borrowed funds are the primary sources of liquidity for BOKF, NA, the wholly owned subsidiary bank of BOK Financial. Based on the average balances for the second quarter of 2017, approximately 68 percent of our funding was provided by deposit accounts, 19 percent from borrowed funds, less than 1 percent is from long-term subordinated debt and 11 percent from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

Deposit accounts represent our largest funding source. 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 Express Bank 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 2017 totaled $22.1 billion, a $277 million decrease compared to the first quarter of 2017. Interest-bearing transaction account balances decreased $480 million and time deposit balances decreased $55 million. Demand deposit balances grew by $237 million during the second quarter of 2017.
Table 25 - Average Deposits by Line of Business
(In thousands)
 
Three Months Ended
 
June 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sept. 30, 2016
 
June 30, 2016
Commercial Banking
$
8,652,811

 
$
8,631,724

 
$
8,543,532

 
$
8,317,341

 
$
8,403,408

Consumer Banking
6,662,838

 
6,581,446

 
6,659,380

 
6,660,514

 
6,634,362

Wealth Management
5,531,091

 
5,582,554

 
5,333,095

 
4,913,409

 
4,521,031

Subtotal
20,846,740

 
20,795,724

 
20,536,007

 
19,891,264

 
19,558,801

Funds Management and other
1,245,591

 
1,573,698

 
1,167,409

 
873,750

 
908,931

Total
$
22,092,331

 
$
22,369,422

 
$
21,703,416

 
$
20,765,014

 
$
20,467,732


Average Commercial Banking deposit balances were largely unchanged compared to the first quarter of 2017. Average demand deposit balances increased $202 million, offset by a $182 million decrease in the average balances of interest-bearing transaction accounts. Average deposit balances attributed to commercial and industrial customers grew by $113 million, offset by $53 million decrease in balances attributed to energy customers and a $36 million decrease in average balances attributed to healthcare customers. 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 once the economic outlook improves and customers deploy cash or short-term market interest rates rise and related earnings credit rates rise, reducing the amount of deposits required to offset service charges.

Average Consumer Banking deposit balances increased by $81 million. Demand deposit balances grew by $75 million, partially offset by a $35 million decrease in time deposit balances. Interest-bearing transaction and savings account balanaces also grew over the prior quarter.

Average Wealth Management deposits decreased $51 million compared to the first quarter of 2017. A $142 million decrease in interest-bearing transaction account balances was partially offset by a $90 million increase in demand deposit balances.

Average deposits attributed to Funds Management and Other decreased $328 million.

Average time deposits for the second quarter of 2017 included $590 million of brokered deposits, an increase of $12 million over the first quarter of 2017. Average interest-bearing transaction accounts for the second quarter included $1.3 billion of brokered deposits, a decrease of $14 million compared to the first quarter of 2017.

The distribution of our period end deposit account balances among principal markets follows in Table 26.


- 37 -


Table 26 -- Period End Deposits by Principal Market Area
(In thousands)
 
 
June 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sept. 30, 2016
 
June 30, 2016
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
4,353,421

 
$
4,320,666

 
$
3,993,170

 
$
4,158,273

 
$
4,020,181

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
5,998,787

 
6,114,288

 
6,345,536

 
5,701,983

 
5,741,302

Savings
 
263,664

 
265,014

 
241,696

 
242,959

 
247,984

Time
 
1,170,014

 
1,189,144

 
1,118,355

 
1,091,464

 
1,167,271

Total interest-bearing
 
7,432,465

 
7,568,446

 
7,705,587

 
7,036,406

 
7,156,557

Total Bank of Oklahoma
 
11,785,886

 
11,889,112

 
11,698,757

 
11,194,679

 
11,176,738

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
3,121,890

 
3,091,258

 
3,137,009

 
2,734,981

 
2,677,253

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
2,272,185

 
2,317,576

 
2,388,812

 
2,240,040

 
2,035,634

Savings
 
91,491

 
89,640

 
83,101

 
84,642

 
83,862

Time
 
502,128

 
511,037

 
535,642

 
528,380

 
516,231

Total interest-bearing
 
2,865,804

 
2,918,253

 
3,007,555

 
2,853,062

 
2,635,727

Total Bank of Texas
 
5,987,694

 
6,009,511

 
6,144,564

 
5,588,043

 
5,312,980

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 
 
 
 
 
 
 
 
 
Demand
 
612,117

 
593,117

 
627,979

 
584,681

 
530,853

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
558,523

 
623,677

 
590,571

 
555,326

 
573,690

Savings
 
54,136

 
53,683

 
49,963

 
54,480

 
49,200

Time
 
229,616

 
233,506

 
238,408

 
244,706

 
250,068

Total interest-bearing
 
842,275

 
910,866

 
878,942

 
854,512

 
872,958

Total Bank of Albuquerque
 
1,454,392

 
1,503,983

 
1,506,921

 
1,439,193

 
1,403,811

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
40,511

 
42,622

 
26,389

 
32,203

 
30,607

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
129,848

 
106,804

 
105,232

 
313,480

 
278,335

Savings
 
2,135

 
2,304

 
2,192

 
2,051

 
1,853

Time
 
14,876

 
15,067

 
16,696

 
17,534

 
18,911

Total interest-bearing
 
146,859

 
124,175

 
124,120

 
333,065

 
299,099

Total Bank of Arkansas
 
187,370

 
166,797

 
150,509

 
365,268

 
329,706

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 
 
 
 
 
 
 
 
 
Demand
 
577,617

 
601,778

 
576,000

 
517,063

 
528,124

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
626,343

 
610,510

 
616,679

 
623,055

 
625,240

Savings
 
35,651

 
37,801

 
32,866

 
31,613

 
31,509

Time
 
228,458

 
234,740

 
242,782

 
247,667

 
254,164

Total interest-bearing
 
890,452

 
883,051

 
892,327

 
902,335

 
910,913

Total Colorado State Bank & Trust
 
1,468,069

 
1,484,829

 
1,468,327

 
1,419,398

 
1,439,037

 
 
 
 
 
 
 
 
 
 
 

- 38 -


 
 
June 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sept. 30, 2016
 
June 30, 2016
Bank of Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
366,866

 
342,854

 
366,755

 
418,718

 
396,837

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
154,457

 
180,254

 
305,099

 
303,750

 
302,297

Savings
 
3,638

 
3,858

 
2,973

 
2,959

 
3,198

Time
 
19,911

 
26,112

 
27,765

 
27,935

 
28,681

Total interest-bearing
 
178,006

 
210,224

 
335,837

 
334,644

 
334,176

Total Bank of Arizona
 
544,872

 
553,078

 
702,592

 
753,362

 
731,013

 
 
 
 
 
 
 
 
 
 
 
Mobank:
 
 
 
 
 
 
 
 
 
 
Demand
 
496,473

 
514,278

 
508,418

 
235,445

 
240,755

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
346,996

 
406,105

 
513,176

 
86,526

 
112,371

Savings
 
13,603

 
13,424

 
12,679

 
1,645

 
1,656

Time
 
31,119

 
34,242

 
42,152

 
11,945

 
11,735

Total interest-bearing
 
391,718

 
453,771

 
568,007

 
100,116

 
125,762

Total Mobank
 
888,191

 
968,049

 
1,076,425

 
335,561

 
366,517

Total BOK Financial deposits
 
$
22,316,474

 
$
22,575,359

 
$
22,748,095

 
$
21,095,504

 
$
20,759,802


In addition to deposits, liquidity is provided primarily by federal funds purchased, securities repurchase agreements and Federal Home Loan Bank borrowings. Federal funds purchased consist primarily of unsecured, overnight funds acquired from other financial institutions. Funds are primarily purchased from bankers’ banks and Federal Home Loan banks from across the country. The largest single source of wholesale federal funds purchased totaled $22 million at June 30, 2017. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and agency mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $5.5 billion during the quarter, compared to $5.7 billion in the first quarter of 2017.

At June 30, 2017, the estimated unused credit available to BOKF, NA from collateralized sources was approximately $6.1 billion.

A summary of other borrowings for BOK Financial on a consolidated basis follows in Table 27.


- 39 -


Table 27 -- Borrowed Funds
(In thousands)
 
 
 
 
Three Months Ended
June 30, 2017
 
 
 
Three Months Ended
March 31, 2017
 
 
Jun 30,
2017
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
Mar 31,
2017
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company and Other Non-Bank Subsidiaries:
Trust preferred debt
 
$
—

 
$
6,084

 
3.49
%
 
$
7,217

 
$
7,217

 
$
7,217

 
3.32
%
 
$
7,217

Other
 
878

 
867

 
11.06
%
 
$
881

 
847

 
913

 
10.83
%
 
871

Total other borrowings
 
878

 
6,951

 
5.14
%
 
 
 
8,064

 
8,130

 
5.64
%
 


Subordinated debentures
 
144,658

 
144,654

 
5.55
%
 
$
144,658

 
144,649

 
144,644

 
5.68
%
 
144,649

Total parent company and other non-bank subsidiaries
 
145,536

 
151,605

 
5.53
%
 
 
 
152,713

 
152,774

 
5.68
%
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BOKF, NA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
67,990

 
63,263

 
0.61
%
 
67,990

 
47,629

 
55,508

 
0.47
%
 
50,154

Repurchase agreements
 
396,333

 
427,353

 
0.06
%
 
489,814

 
508,352

 
523,561

 
0.02
%
 
536,094

Other borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
 
5,200,000

 
5,532,967

 
1.07
%
 
5,600,000

 
5,200,000

 
5,691,111

 
0.80
%
 
5,700,000

GNMA repurchase liability
 
16,056

 
16,734

 
4.65
%
 
17,693

 
15,532

 
23,392

 
4.61
%
 
24,139

Other
 
15,409

 
15,379

 
2.40
%
 
15,409

 
15,351

 
15,322

 
2.41
%
 
15,351

Total other borrowings
 
5,231,465

 
5,565,080

 
1.09
%
 


 
5,230,883

 
5,729,825

 
0.82
%
 


Total BOKF, NA
 
5,695,788

 
6,055,696

 
1.01
%
 
 
 
5,786,864

 
6,308,894

 
0.75
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Other Borrowed Funds
 
$
5,841,324

 
$
6,207,301

 
1.12
%
 
 
 
$
5,939,577

 
$
6,461,668

 
0.87
%
 
 
BOKF, NA also has a liability related to the repurchase of certain delinquent residential mortgage loans previously sold in GNMA mortgage pools. Interest is payable monthly at rates contractually due to investors.
Parent Company

At June 30, 2017, cash and interest-bearing cash and cash equivalents held by the parent company totaled $187 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, 2017, based upon the most restrictive limitations as well as management's internal capital policy, the bank could declare up to $283 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, 2017 was $3.4 billion, an increase of $79 million over March 31, 2017. Net income less cash dividends paid increased equity $59 million during the second quarter of 2017. Accumulated other comprehensive income increased $13 million primarily related to the impact on changes in interest rates on the net unrealized gain (loss) of the available for sale securities portfolio. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings, 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.


- 40 -


On October 27, 2015, the board of directors authorized the Company to purchase up to five million common shares, subject to market conditions, securities law and other regulatory compliance limitations. As of June 30, 2017, a cumulative total of 2,879,243 shares have been repurchased under this authorization. No shares were repurchased in the second quarter of 2017.

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.
Effective January 1, 2015 for BOK Financial, regulatory capital rules establish a 7 percent threshold for the common equity Tier 1 ratio consisting of a minimum level plus capital conservation buffer. The Company has elected to exclude unrealized gains and losses from available for sale securities from its calculation of Tier 1 capital, consistent with the treatment under previous capital rules.

A summary of minimum capital requirements, including capital conservation buffer follows in Table 28. A bank which falls below these levels, including the capital conservation buffer, would be subject to regulatory restrictions on capital distributions (including but not limited to dividends and share repurchases) and executive bonus payments.

The capital ratios for BOK Financial on a consolidated basis are presented in Table 28.

Table 28 -- Capital Ratios
 
 
Minimum Capital Requirement
 
Capital Conservation Buffer
 
Minimum Capital Requirement Including Capital Conservation Buffer
 
June 30, 2017
 
Mar. 31, 2017
 
June 30, 2016
Risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1
 
4.50
%
 
2.50
%
 
7.00
%
 
11.76
%
 
11.59
%
 
11.86
%
Tier 1 capital
 
6.00
%
 
2.50
%
 
8.50
%
 
11.76
%
 
11.59
%
 
11.86
%
Total capital
 
8.00
%
 
2.50
%
 
10.50
%
 
13.36
%
 
13.25
%
 
13.51
%
Tier 1 Leverage
 
4.00
%
 
N/A

 
4.00
%
 
9.27
%
 
8.89
%
 
9.06
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average total equity to average assets
 
 
 
 
 
 
 
10.53
%
 
10.10
%
 
10.46
%
Tangible common equity ratio
 
 
 
 
 
 
 
9.24
%
 
8.88
%
 
9.33
%


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


- 41 -


Table 29 -- Non-GAAP Measure
(Dollars in thousands)
 
 
June 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sept. 30, 2016
 
June 30, 2016
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
3,422,469

 
$
3,341,744

 
$
3,274,854

 
$
3,398,311

 
$
3,368,833

Less: Goodwill and intangible assets, net
 
487,452

 
488,294

 
495,830

 
424,716

 
426,111

Tangible common equity
 
2,935,017

 
2,853,450

 
2,779,024

 
2,973,595

 
2,942,722

Total assets
 
32,263,532

 
32,628,932

 
32,772,281

 
32,779,231

 
31,970,450

Less: Goodwill and intangible assets, net
 
487,452

 
488,294

 
495,830

 
424,716

 
426,111

Tangible assets
 
$
31,776,080

 
$
32,140,638

 
$
32,276,451

 
$
32,354,515

 
$
31,544,339

Tangible common equity ratio
 
9.24
%
 
8.88
%
 
8.61
%
 
9.19
%
 
9.33
%

Off-Balance Sheet Arrangements

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

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

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

The Asset/Liability Committee is responsible for managing market risk in accordance with policy limits established by the Board of Directors. The Committee monitors projected variation in net interest revenue, net income and economic value of equity due to specified changes in interest rates. These limits also set maximum levels for short-term borrowings, short-term assets, public funds and brokered deposits and establish minimum levels for unpledged 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.


- 42 -


Interest Rate Risk – Other than Trading
 
As previously noted in the Net Interest Revenue section of this report, management has implemented strategies to manage the Company’s balance sheet to have relatively limited exposure to changes in interest rates over a twelve-month period. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue. A simulation model is used to estimate the effect of changes in interest rates on our performance across multiple interest rate scenarios. Our current internal policy limit for net interest revenue variation due to a 200 basis point parallel change in market interest rates over twelve months is a maximum decline of 5%. The results of a 200 basis point decrease in interest rates in the current low-rate environment are not meaningful. Until such time as it becomes meaningful, we will instead report the effect of a 50 basis point decrease in interest rates.

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

Table 30 -- Interest Rate Sensitivity
(Dollars in thousands)
 
 
200 bp Increase
 
50 bp Decrease
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
Anticipated impact over the next twelve months on net interest revenue
 
$
(104
)
 
$
(483
)
 
$
(17,632
)
 
$
(24,425
)
 
 
(0.01
)%
 
(0.06
)%
 
(2.07
)%
 
(3.18
)%

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 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.



- 43 -


Table 31 -- MSR Asset and Hedge Sensitivity Analysis
(Dollars in thousands)
 
 
June 30,
 
 
2017
 
2016
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
MSR Asset
 
$
25,977

 
$
(31,851
)
 
$
31,043

 
$
(53,564
)
MSR Hedge
 
(31,507
)
 
32,312

 
(28,934
)
 
31,098

Net Exposure
 
(5,530
)
 
461

 
2,109

 
(22,466
)

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 32 -- Mortgage Pipeline Sensitivity Analysis
(Dollars in thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
Average1
 
$
(3
)
 
$
(1,439
)
 
$
(3,835
)
 
$
(740
)
 
$
117

 
$
(1,316
)
 
$
(3,916
)
 
$
(591
)
Low2
 
1,030

 
(679
)
 
(288
)
 
724

 
1,030

 
(398
)
 
(288
)
 
1,815

High3
 
(810
)
 
(2,377
)
 
(6,858
)
 
(2,656
)
 
(810
)
 
(2,377
)
 
(6,858
)
 
(2,953
)
Period End
 
(263
)
 
(1,025
)
 
(1,328
)
 
(1,423
)
 
(263
)
 
(1,025
)
 
(1,328
)
 
(1,423
)
1 
Average represents the simple average of each daily value observed during the reporting period.
2 
Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 
High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.

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

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


- 44 -


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

Table 33 -- BOKFS Trading Sensitivity Analysis
(Dollars in thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
 
Up 50 bp
 
Down 50 bp
Average1
 
$
(1,359
)
 
$
1,592

 
$
(3,389
)
 
$
3,118

 
$
(1,991
)
 
$
2,241

 
$
(2,984
)
 
$
2,721

Low2
 
(219
)
 
3,833

 
(2,208
)
 
2,009

 
86

 
5,210

 
146

 
5,274

High3
 
(2,916
)
 
91

 
(4,211
)
 
2,092

 
(4,386
)
 
2

 
(5,607
)
 
(107
)
Period End
 
(1,842
)
 
1,727

 
(3,055
)
 
3,001

 
(1,842
)
 
1,727

 
(3,055
)
 
3,001

1 
Average represents the simple average of each daily value observed during the reporting period.
2 
Low represents least risk of loss in fair value measured as the smallest negative value or the largest positive value observed daily during the reporting period.
3 
High represents the greatest risk of loss in fair value measured as the largest negative value or the smallest positive value observed daily during the reporting period.
Controls and Procedures
 
As required by Rule 13a-15(b), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
Forward-Looking Statements

This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates, and projections about BOK Financial, the financial services industry and the economy in general. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “plans,” “projects,” “will,” “intends,” variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and allowance for credit losses, allowance for uncertain tax positions, accruals for loss contingencies and valuation of mortgage servicing rights involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial’s acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that 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 expressed, implied, or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to changes in commodity prices, interest rates and interest rate relationships, 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.

- 45 -


     
Consolidated Statements of Earnings (Unaudited)
 
 
 
 
 
 
 
 
(In thousands, except share and per share data)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Interest revenue
 
2017
 
2016
 
2017
 
2016
Loans
 
$
168,952

 
$
141,560

 
$
329,847

 
$
280,672

Residential mortgage loans held for sale
 
2,386

 
3,508

 
4,222

 
6,208

Trading securities
 
3,339

 
616

 
8,522

 
1,140

Investment securities
 
4,005

 
4,217

 
8,176

 
8,604

Available for sale securities
 
43,363

 
43,872

 
86,735

 
89,339

Fair value option securities
 
3,539

 
2,062

 
5,919

 
4,651

Restricted equity securities
 
4,399

 
3,863

 
8,708

 
8,174

Interest-bearing cash and cash equivalents
 
5,198

 
2,569

 
9,442

 
5,275

Total interest revenue
 
235,181

 
202,267

 
461,571

 
404,063

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
12,622

 
9,997

 
23,976

 
20,539

Borrowed funds
 
15,352

 
8,780

 
27,181

 
16,752

Subordinated debentures
 
2,003

 
878

 
4,028

 
1,588

Total interest expense
 
29,977

 
19,655

 
55,185

 
38,879

Net interest revenue
 
205,204

 
182,612

 
406,386

 
365,184

Provision for credit losses
 
—

 
20,000

 
—

 
55,000

Net interest revenue after provision for credit losses
 
205,204

 
162,612

 
406,386

 
310,184

Other operating revenue
 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
31,764

 
39,530

 
65,387

 
71,871

Transaction card revenue
 
35,296

 
34,950

 
67,423

 
67,304

Fiduciary and asset management revenue
 
41,808

 
34,813

 
80,439

 
66,869

Deposit service charges and fees
 
23,354

 
22,618

 
46,384

 
45,160

Mortgage banking revenue
 
30,276

 
34,884

 
55,467

 
66,984

Other revenue
 
14,984

 
13,352

 
26,736

 
25,256

Total fees and commissions
 
177,482

 
180,147

 
341,836

 
343,444

Other gains, net
 
6,108

 
1,307

 
9,735

 
2,867

Gain (loss) on derivatives, net
 
3,241

 
10,766

 
2,791

 
17,904

Gain (loss) on fair value option securities, net
 
1,984

 
4,279

 
844

 
13,722

Change in fair value of mortgage servicing rights
 
(6,943
)
 
(16,283
)
 
(5,087
)
 
(44,271
)
Gain on available for sale securities, net
 
380

 
5,326

 
2,429

 
9,290

Total other operating revenue
 
182,252

 
185,542

 
352,548

 
342,956

Other operating expense
 
 

 
 

 
 

 
 

Personnel
 
143,744

 
139,213

 
280,169

 
272,775

Business promotion
 
7,738

 
6,703

 
14,455

 
12,399

Professional fees and services
 
12,419

 
14,158

 
23,836

 
25,917

Net occupancy and equipment
 
21,125

 
19,677

 
42,749

 
38,443

Insurance
 
689

 
7,129

 
7,093

 
14,394

Data processing and communications
 
36,330

 
32,802

 
71,232

 
64,819

Printing, postage and supplies
 
4,140

 
3,889

 
7,991

 
7,796

Net losses (gains) and operating expenses of repossessed assets
 
2,267

 
1,588

 
3,276

 
2,658

Amortization of intangible assets
 
1,803

 
2,624

 
3,605

 
3,783

Mortgage banking costs
 
12,072

 
15,746

 
25,075

 
28,076

Other expense
 
8,558

 
7,856

 
16,115

 
22,895

Total other operating expense
 
250,885

 
251,385

 
495,596

 
493,955

Net income before taxes
 
136,571

 
96,769

 
263,338

 
159,185

Federal and state income taxes
 
47,705

 
30,497

 
85,808

 
51,925

Net income
 
88,866

 
66,272

 
177,530

 
107,260

Net income (loss) attributable to non-controlling interests
 
719

 
471

 
1,027

 
(1,105
)
Net income attributable to BOK Financial Corporation shareholders
 
$
88,147

 
$
65,801

 
$
176,503

 
$
108,365

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.35

 
$
1.00

 
$
2.70

 
$
1.64

Diluted
 
$
1.35

 
$
1.00

 
$
2.69

 
$
1.64

Average shares used in computation:
 
 
 
 
 
 
 
 
Basic
 
64,729,752

 
65,245,887

 
64,722,744

 
65,271,214

Diluted
 
64,793,134

 
65,302,926

 
64,788,322

 
65,317,177

Dividends declared per share
 
$
0.44

 
$
0.43

 
$
0.88

 
$
0.86


See accompanying notes to consolidated financial statements.

- 46 -


Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
 
(In thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
88,866

 
$
66,272

 
$
177,530

 
$
107,260

Other comprehensive income before income taxes:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
21,958

 
45,475

 
33,369

 
166,566

Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
Interest revenue, Investment securities, Taxable securities
 
—

 
(43
)
 
—

 
(112
)
Gain on available for sale securities, net
 
(380
)
 
(5,326
)
 
(2,429
)
 
(9,290
)
Other comprehensive income before income taxes
 
21,578

 
40,106

 
30,940

 
157,164

Federal and state income taxes
 
8,393

 
15,583

 
12,009

 
61,119

Other comprehensive income, net of income taxes
 
13,185


24,523


18,931


96,045

Comprehensive income
 
102,051

 
90,795

 
196,461

 
203,305

Comprehensive income (loss) attributable to non-controlling interests
 
719

 
471

 
1,027

 
(1,105
)
Comprehensive income attributable to BOK Financial Corp. shareholders
 
$
101,332

 
$
90,324

 
$
195,434

 
$
204,410


See accompanying notes to consolidated financial statements.

- 47 -


Consolidated Balance Sheets
(In thousands, except share data)
 
 
Jun 30, 2017
 
Dec 31, 2016
 
Jun 30, 2016
 
 
(Unaudited)
 
(Footnote 1)
 
(Unaudited)
Assets
 
 
 
 
 
 
Cash and due from banks
 
$
561,587

 
$
620,846

 
$
498,713

Interest-bearing cash and cash equivalents
 
2,078,831

 
1,916,651

 
1,907,838

Trading securities
 
441,414

 
337,628

 
211,622

Investment securities (fair value:  June 30, 2017 – $515,675; December 31, 2016 – $565,493 ; June 30, 2016 – $599,062)
 
490,426

 
546,145

 
560,711

Available for sale securities
 
8,341,041

 
8,676,829

 
8,830,689

Fair value option securities
 
445,169

 
77,046

 
263,265

Restricted equity securities
 
311,033

 
307,240

 
319,639

Residential mortgage loans held for sale
 
287,259

 
301,897

 
430,728

Loans
 
17,183,645

 
16,989,660

 
16,406,749

Allowance for loan losses
 
(250,061
)
 
(246,159
)
 
(243,259
)
Loans, net of allowance
 
16,933,584

 
16,743,501

 
16,163,490

Premises and equipment, net
 
321,038

 
325,849

 
315,199

Receivables
 
295,042

 
772,952

 
173,638

Goodwill
 
446,697

 
448,899

 
382,739

Intangible assets, net
 
40,755

 
46,931

 
43,372

Mortgage servicing rights
 
245,239

 
247,073

 
190,747

Real estate and other repossessed assets, net of allowance (June 30, 2017 – $8,576; December 31, 2016 – $9,562; June 30, 2016 – $9,448)
 
39,436

 
44,287

 
24,054

Derivative contracts, net
 
280,289

 
689,872

 
883,673

Cash surrender value of bank-owned life insurance
 
312,774

 
308,430

 
307,860

Receivable on unsettled securities sales
 
33,177

 
7,188

 
142,820

Other assets
 
358,741

 
353,017

 
319,653

Total assets
 
$
32,263,532

 
$
32,772,281

 
$
31,970,450

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
$
9,568,895

 
$
9,235,720

 
$
8,424,609

Interest-bearing deposits:
 
 

 
 

 
 

Transaction
 
10,087,139

 
10,865,105

 
9,668,869

Savings
 
464,318

 
425,470

 
419,262

Time
 
2,196,122

 
2,221,800

 
2,247,061

Total deposits
 
22,316,474

 
22,748,095

 
20,759,801

Funds purchased
 
67,990

 
57,929

 
56,780

Repurchase agreements
 
396,333

 
668,661

 
472,683

Other borrowings
 
5,232,343

 
4,846,072

 
5,830,736

Subordinated debentures
 
144,658

 
144,640

 
371,812

Accrued interest, taxes and expense
 
133,198

 
146,704

 
197,742

Derivative contracts, net
 
285,819

 
664,531

 
719,159

Due on unsettled securities purchases
 
32,636

 
6,508

 
11,757

Other liabilities
 
204,536

 
182,784

 
147,242

Total liabilities
 
28,813,987

 
29,465,924

 
28,567,712

Shareholders' equity:
 
 

 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2017 – 75,089,152; December 31, 2016 – 74,993,407; June 30, 2016 – 74,817,155)
 
4

 
4

 
4

Capital surplus
 
1,017,495

 
1,006,535

 
990,106

Retained earnings
 
2,942,447

 
2,823,334

 
2,755,766

Treasury stock (shares at cost:  June 30, 2017 – 9,672,749; December 31, 2016 – 9,655,975;  June 30, 2016 – 8,950,838)
 
(545,441
)
 
(544,052
)
 
(494,675
)
Accumulated other comprehensive income (loss)
 
7,964

 
(10,967
)
 
117,632

Total shareholders’ equity
 
3,422,469

 
3,274,854

 
3,368,833

Non-controlling interests
 
27,076

 
31,503

 
33,905

Total equity
 
3,449,545

 
3,306,357

 
3,402,738

Total liabilities and equity
 
$
32,263,532

 
$
32,772,281

 
$
31,970,450


See accompanying notes to consolidated financial statements.

- 48 -


Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 
 
Common Stock
 
Capital
Surplus
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interests
 
Total Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, Dec. 31, 2015
 
74,530

 
$
4

 
$
982,009

 
$
2,704,121

 
8,636

 
$
(477,165
)
 
$
21,587

 
$
3,230,556

 
$
37,083

 
$
3,267,639

Net income (loss)
 
—

 
—

 
—

 
108,365

 
—

 
—

 
—

 
108,365

 
(1,105
)
 
107,260

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
96,045

 
96,045

 
—

 
96,045

Repurchase of common stock
 
—

 
—

 
—

 
—

 
305

 
(17,770
)
 
—

 
(17,770
)
 
—

 
(17,770
)
Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
 
39

 
—

 
2,016

 
—

 
—

 
—

 
—

 
2,016

 
—

 
2,016

Non-vested shares awarded, net
 
248

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
 
—

 
—

 
—

 
—

 
10

 
260

 
—

 
260

 
—

 
260

Tax effect from equity compensation, net
 
—

 
—

 
351

 
—

 
—

 
—

 
—

 
351

 
—

 
351

Share-based compensation
 
—

 
—

 
5,730

 
—

 
—

 
—

 
—

 
5,730

 
—

 
5,730

Cash dividends on common stock
 
—

 
—

 
—

 
(56,720
)
 
—

 
—

 
—

 
(56,720
)
 
—

 
(56,720
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,073
)
 
(2,073
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2016
 
74,817

 
$
4

 
$
990,106

 
$
2,755,766

 
8,951

 
$
(494,675
)
 
$
117,632

 
$
3,368,833

 
$
33,905

 
$
3,402,738

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, Dec. 31, 2016
 
74,993

 
$
4

 
$
1,006,535

 
$
2,823,334

 
9,656

 
$
(544,052
)
 
$
(10,967
)
 
$
3,274,854

 
$
31,503

 
$
3,306,357

Net income (loss)
 
—

 
—

 
—

 
176,503

 
—

 
—

 
—

 
176,503

 
1,027

 
177,530

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
18,931

 
18,931

 
—

 
18,931

Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
 
41

 
—

 
1,977

 
—

 
—

 
—

 
—

 
1,977

 
—

 
1,977

Non-vested shares awarded, net
 
55

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vesting of non-vested shares
 
—

 
—

 
—

 
—

 
17

 
(1,389
)
 
—

 
(1,389
)
 
—

 
(1,389
)
Share-based compensation
 
—

 
—

 
8,983

 
—

 
—

 
—

 
—

 
8,983

 
—

 
8,983

Cash dividends on common stock
 
—

 
—

 
—

 
(57,390
)
 
—

 
—

 
—

 
(57,390
)
 
—

 
(57,390
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(5,454
)
 
(5,454
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2017
 
75,089

 
$
4

 
$
1,017,495

 
$
2,942,447

 
9,673

 
$
(545,441
)
 
$
7,964

 
$
3,422,469

 
$
27,076

 
$
3,449,545


See accompanying notes to consolidated financial statements.

- 49 -


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

 
Six Months Ended
 
 
June 30,
 
 
2017
 
2016
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
177,530

 
$
107,260

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Provision for credit losses
 
—

 
55,000

Change in fair value of mortgage servicing rights due to market changes
 
5,087

 
44,271

Change in the fair value of mortgage servicing rights due to loan runoff
 
16,261

 
17,942

Net unrealized gains from derivative contracts
 
(5,928
)
 
(15,459
)
Share-based compensation
 
8,983

 
5,730

Depreciation and amortization
 
25,864

 
23,532

Net amortization of securities discounts and premiums
 
15,377

 
21,814

Net realized gains on financial instruments and other net gains
 
(4,351
)
 
(9,787
)
Net gain on mortgage loans held for sale
 
(25,229
)
 
(37,151
)
Mortgage loans originated for sale
 
(1,613,997
)
 
(3,062,859
)
Proceeds from sale of mortgage loans held for sale
 
1,651,018

 
2,981,973

Capitalized mortgage servicing rights
 
(19,514
)
 
(34,355
)
Change in trading and fair value option securities
 
(472,682
)
 
90,484

Change in receivables
 
479,774

 
(9,698
)
Change in other assets
 
(17,548
)
 
(4,740
)
Change in accrued interest, taxes and expense
 
(19,703
)
 
20,299

Change in other liabilities
 
27,420

 
(8,854
)
Net cash provided by operating activities
 
228,362

 
185,402

Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
71,654

 
52,463

Proceeds from maturities or redemptions of available for sale securities
 
899,096

 
721,432

Purchases of investment securities
 
(18,802
)
 
(18,599
)
Purchases of available for sale securities
 
(1,242,070
)
 
(1,155,261
)
Proceeds from sales of available for sale securities
 
700,412

 
795,140

Change in amount receivable on unsettled securities transactions
 
(25,989
)
 
(102,627
)
Loans originated, net of principal collected
 
(159,924
)
 
(481,085
)
Net payments on derivative asset contracts
 
420,996

 
(204,041
)
Acquisitions, net of cash acquired
 
—

 
(7,700
)
Proceeds from disposition of assets
 
127,699

 
78,629

Purchases of assets
 
(106,362
)
 
(107,241
)
Net cash provided by investing activities
 
666,710

 
(428,890
)
Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
(405,943
)
 
(169,354
)
Net change in time deposits
 
(25,678
)
 
(159,003
)
Net change in other borrowed funds
 
64,833

 
259,359

Issuance of subordinated debentures
 
—

 
145,390

Net proceeds on derivative liability contracts
 
(422,016
)
 
196,225

Net change in derivative margin accounts
 
27,327

 
(188,823
)
Change in amount due on unsettled security transactions
 
26,128

 
(5,140
)
Issuance of common and treasury stock, net
 
588

 
2,276

Repurchase of common stock
 
—

 
(17,770
)
Dividends paid
 
(57,390
)
 
(56,720
)
Net cash provided by (used in) financing activities
 
(792,151
)
 
6,440

Net increase (decrease) in cash and cash equivalents
 
102,921

 
(237,048
)
Cash and cash equivalents at beginning of period
 
2,537,497

 
2,643,599

Cash and cash equivalents at end of period
 
$
2,640,418

 
$
2,406,551

 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
Cash paid for interest
 
$
54,881

 
$
40,213

Cash paid for taxes
 
$
60,654

 
$
14,671

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
2,049

 
$
5,372

Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period
 
$
59,171

 
$
49,325

Conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
22,602

 
$
29,512

See accompanying notes to consolidated financial statements.

- 50 -


Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

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

The unaudited consolidated financial statements include accounts of BOK Financial and its subsidiaries, principally BOKF, NA (“the Bank”), BOK Financial Securities, Inc., The Milestone Group, Inc. and Cavanal Hill Investment Management Inc. Operating divisions of the Bank include Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust, Mobank, BOK Financial Mortgage and the TransFund electronic funds network.

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

The financial information should be read in conjunction with BOK Financial’s 2016 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2016 have been derived from the audited financial statements included in BOK Financial’s 2016 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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09")

On May 28, 2014, the FASB issued ASU 2014-09 to clarify the principles for recognizing revenue by providing a more robust framework that will give greater consistency and comparability in revenue recognition practices. In the new framework, an entity recognizes revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services. The new model requires the identification of performance obligations included in contracts with customers, a determination of the transaction price and an allocation of the price to those performance obligations. The entity recognizes revenue when performance obligations are satisfied. ASU 2014-09 is effective for the Company for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Net interest revenue from financial assets and liabilities is explicitly excluded from the scope of ASU 2014-09. Management expects that most fees and commissions revenue will not be affected. The Company continues to evaluate the impact of ASU 2014-09 on Fiduciary and Asset Management Revenue and Transaction Card Revenue, which represents 19% of gross revenue and 43% of fees and commissions revenue for the first half of 2017. Timing of revenue recognition and gross versus net presentation may be affected. Management will adopt the standard in the first quarter of 2018 with a cumulative effect adjustment to opening retained earnings if such adjustment is significant.

FASB Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU 2016-08")

On March 17, 2016, the FASB Issued ASU 2016-08 to amend the principal versus agent implementation guidance in ASU 2014-09. The ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. ASU 2016-08 is effective for the Company for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the impact the adoption of ASU 2016-08 will have on the Company's financial statements along with ASU 2014-09.



- 51 -



FASB Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01")

On January 5, 2016, the FASB issued ASU 2016-01 over the recognition and measurement of financial assets and liabilities. The update requires equity investments, in general, to be measured at fair value with changes in fair value recognized in earnings. It also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, requires entities to use the exit price notion when measuring fair value, requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the fair value option has been elected, requires separate presentation of financial assets and liabilities by measurement category and form on the balance sheet or accompanying notes, clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets, and simplifies the impairment assessment of equity investments without readily determinable fair values. The ASU is effective for the Company for interim and annual periods beginning after December 15, 2017. Upon adoption, unrealized gains and losses from equity securities will be reclassified from other comprehensive income to retained earnings. At June 30, 2017, the Company had $3.2 million of unrealized gains included in accumulated other comprehensive income.

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

On February 25, 2016, the FASB issued ASU 2016-02 to increase transparency and comparability by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Lessees will be required to recognize an obligation for future lease payments measured on a discounted basis and a right-of-use asset. The ASU is effective for the Company for interim and annual periods beginning after December 15, 2018 and requires transition through a modified retrospective approach for leases existing at or entered into after January 1, 2017. The Company is evaluating the impact the adoption of ASU 2016-02 will have on the Company's financial statements.

FASB Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09")

On March 30, 2016, the FASB issued ASU 2016-09 to simplify multiple aspects of accounting for employee share-based payment transactions including accounting income taxes, forfeitures, and statutory tax withholding requirements. The ASU became effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Implementation of ASU 2016-09 decreased tax expense $2.3 million in the first six months of 2017.
 
FASB Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Assets Measured at Amortized Cost ("ASU 2016-13")

On June 16, 2016, the FASB issued ASU 2016-13 in order to provide more timely recording of credit losses on loans and other financial instruments. The ASU adds an impairment model (known as the current expected credit loss ("CECL") model) that is based on expected credit losses rather than incurred credit losses. It requires measurement of all expected credit losses for financial assets carried at amortized cost, including loans and investment securities, based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 also changes the recognition of other-than-temporary impairment of available for sale securities to an allowance methodology from a direct write-down methodology. ASU 2016-13 will be effective for the Company for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for annual reporting periods beginning after December 15, 2018. ASU 2016-13 will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is evaluating the impact the adoption of ASU 2016-13 will have on the Company's financial statements.

FASB Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15")

On August 26, 2016, the FASB issued ASU 2016-15, which amends guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The amendments address eight cash flow issues. ASU 2016-15 is effective for the Company for interim and annual reporting periods beginning after December 15, 2017. Entities generally must apply the guidance retrospectively to all periods presented. Adoption of ASU 2016-15 is not expected to have a material impact on the Company's financial statements.

- 52 -


(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities is as follows (in thousands):
 
 
 
June 30, 2017
 
December 31, 2016
 
June 30, 2016
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. government agency debentures
 
$
20,954

 
$
(9
)
 
$
6,234

 
$
(4
)
 
$
18,909

 
$
(8
)
U.S. government agency residential mortgage-backed securities
 
365,171

 
(1,032
)
 
310,067

 
635

 
122,306

 
363

Municipal and other tax-exempt securities
 
45,444

 
230

 
14,427

 
50

 
52,721

 
262

Other trading securities
 
9,845

 
(175
)
 
6,900

 
57

 
17,686

 
169

Total trading securities
 
$
441,414

 
$
(986
)
 
$
337,628

 
$
738

 
$
211,622

 
$
786

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

 
 
June 30, 2017
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
267,375

 
$
270,531

 
$
3,384

 
$
(228
)
U.S. government agency residential mortgage-backed securities – Other
 
18,035

 
18,642

 
668

 
(61
)
Other debt securities
 
205,016

 
226,502

 
22,040

 
(554
)
Total investment securities
 
$
490,426

 
$
515,675

 
$
26,092

 
$
(843
)
1 
Gross unrealized gains and losses are not recognized in Accumulated Other Comprehensive Income "AOCI" in the Consolidated Balance Sheets.
 
 
December 31, 2016
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
320,364

 
$
321,225

 
$
2,272

 
$
(1,411
)
U.S. government agency residential mortgage-backed securities – Other
 
20,777

 
21,473

 
767

 
(71
)
Other debt securities
 
205,004

 
222,795

 
18,115

 
(324
)
Total investment securities
 
$
546,145

 
$
565,493

 
$
21,154

 
$
(1,806
)
1 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.
 
 
June 30, 2016
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
Cost
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
334,551

 
$
340,700

 
$
6,234

 
$
(85
)
U.S. government agency residential mortgage-backed securities – Other
 
23,750

 
25,233

 
1,483

 
—

Other debt securities
 
202,410

 
233,129

 
30,723

 
(4
)
Total investment securities
 
$
560,711

 
$
599,062

 
$
38,440

 
$
(89
)
1 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.

- 53 -


The amortized cost and fair values of investment securities at June 30, 2017, 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
Maturity²
Municipal and other tax-exempt:
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
90,415

 
$
122,560

 
$
10,739

 
$
43,661

 
$
267,375

 
3.48

Fair value
 
90,436

 
122,914

 
11,220

 
45,961

 
270,531

 
 
Nominal yield¹
 
1.66
%
 
2.12
%
 
4.88
%
 
5.05
%
 
2.55
%
 
 
Other debt securities:
 
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
 
14,286

 
45,638

 
130,279

 
14,813

 
205,016

 
6.59

Fair value
 
14,482

 
48,973

 
148,415

 
14,632

 
226,502

 
 
Nominal yield
 
3.84
%
 
4.95
%
 
5.75
%
 
4.46
%
 
5.35
%
 
 
Total fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
 
$
104,701

 
$
168,198

 
$
141,018

 
$
58,474

 
$
472,391

 
4.83

Fair value
 
104,918

 
171,887

 
159,635

 
60,593

 
497,033

 
 

Nominal yield
 
1.95
%
 
2.89
%
 
5.69
%
 
4.90
%
 
3.77
%
 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
18,035

 
³

Fair value
 
 

 
 

 
 

 
 

 
18,642

 
 

Nominal yield4
 
 

 
 

 
 

 
 

 
2.76
%
 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 
 

 
 

 
 

 
 

 
$
490,426

 
 

Fair value
 
 

 
 

 
 

 
 

 
515,675

 
 

Nominal yield
 
 

 
 

 
 

 
 

 
3.73
%
 
 

1 
Calculated on a taxable equivalent basis using a 39 percent effective tax rate.
2 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
3 
The average expected lives of residential mortgage-backed securities were 4.7 years based upon current prepayment assumptions.
4 
The nominal yield on residential mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary - Unaudited for current yields on the investment securities portfolio.


- 54 -


Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
June 30, 2017
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
998

 
$
—

 
$
(2
)
 
$
—

Municipal and other tax-exempt
 
32,885

 
32,765

 
293

 
(413
)
 
—

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
3,005,920

 
3,008,531

 
24,213

 
(21,602
)
 
—

FHLMC
 
1,412,376

 
1,412,472

 
7,785

 
(7,689
)
 
—

GNMA
 
938,086

 
936,365

 
3,641

 
(5,362
)
 
—

Other
 
25,000

 
25,009

 
52

 
(43
)
 
—

Total U.S. government agencies
 
5,381,382

 
5,382,377

 
35,691

 
(34,696
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
38,334

 
46,903

 
8,569

 
—

 
—

Jumbo-A loans
 
48,322

 
56,480

 
8,158

 
—

 
—

Total private issue
 
86,656

 
103,383

 
16,727

 
—

 
—

Total residential mortgage-backed securities
 
5,468,038

 
5,485,760

 
52,418

 
(34,696
)
 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,788,543

 
2,782,070

 
7,804

 
(14,277
)
 
—

Other debt securities
 
4,400

 
4,152

 
—

 
(248
)
 
—

Perpetual preferred stock
 
12,562

 
16,568

 
4,006

 
—

 
—

Equity securities and mutual funds
 
17,572

 
18,728

 
1,219

 
(63
)
 
—

Total available for sale securities
 
$
8,325,000

 
$
8,341,041

 
$
65,740

 
$
(49,699
)
 
$
—

1 Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet.
2 Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

- 55 -


 
 
December 31, 2016
 
 
Amortized
 
Fair
 
Gross Unrealized¹
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
999

 
$
—

 
$
(1
)
 
$
—

Municipal and other tax-exempt
 
41,050

 
40,993

 
343

 
(400
)
 
—

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
3,062,525

 
3,055,676

 
25,066

 
(31,915
)
 
—

FHLMC
 
1,534,451

 
1,531,116

 
8,475

 
(11,810
)
 
—

GNMA
 
878,375

 
873,594

 
2,259

 
(7,040
)
 
—

Total U.S. government agencies
 
5,475,351

 
5,460,386

 
35,800

 
(50,765
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
44,245

 
51,512

 
7,485

 
—

 
(218
)
Jumbo-A loans
 
56,947

 
64,023

 
7,092

 
(16
)
 
—

Total private issue
 
101,192

 
115,535

 
14,577

 
(16
)
 
(218
)
Total residential mortgage-backed securities
 
5,576,543

 
5,575,921

 
50,377

 
(50,781
)
 
(218
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
3,035,750

 
3,017,933

 
5,472

 
(23,289
)
 
—

Other debt securities
 
4,400

 
4,152

 
—

 
(248
)
 
—

Perpetual preferred stock
 
15,561

 
18,474

 
2,913

 
—

 
—

Equity securities and mutual funds
 
17,424

 
18,357

 
1,060

 
(127
)
 
—

Total available for sale securities
 
$
8,691,728

 
$
8,676,829

 
$
60,165

 
$
(74,846
)
 
$
(218
)
1 Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet.
2 Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

 
 
June 30, 2016
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
1,004

 
$
4

 
$
—

 
$
—

Municipal and other tax-exempt
 
50,170

 
50,262

 
805

 
(713
)
 
—

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
2,908,698

 
2,988,974

 
80,549

 
(273
)
 
—

FHLMC
 
1,746,661

 
1,785,332

 
38,869

 
(198
)
 
—

GNMA
 
921,928

 
925,962

 
4,646

 
(612
)
 
—

Total U.S. government agencies
 
5,577,287

 
5,700,268

 
124,064

 
(1,083
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
49,522

 
54,536

 
5,461

 
—

 
(447
)
Jumbo-A loans
 
65,787

 
71,777

 
6,355

 
(36
)
 
(329
)
Total private issue
 
115,309

 
126,313

 
11,816

 
(36
)
 
(776
)
Total residential mortgage-backed securities
 
5,692,596

 
5,826,581

 
135,880

 
(1,119
)
 
(776
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,854,306

 
2,911,946

 
57,762

 
(122
)
 
—

Other debt securities
 
4,400

 
4,151

 
—

 
(249
)
 
—

Perpetual preferred stock
 
15,562

 
17,931

 
2,369

 
—

 
—

Equity securities and mutual funds
 
17,270

 
18,814

 
1,558

 
(14
)
 
—

Total available for sale securities
 
$
8,635,304

 
$
8,830,689

 
$
198,378

 
$
(2,217
)
 
$
(776
)
1 
Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet.
2 
Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.


- 56 -


The amortized cost and fair values of available for sale securities at June 30, 2017, 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
Maturity5
U.S. Treasuries:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
1,000

 
$
—

 
$
—

 
$
—

 
$
1,000

 
0.55

Fair value
998

 
—

 
—

 
—

 
998

 
 
Nominal yield
0.87
%
 
—
%
 
—
%
 
—
%
 
0.87
%
 
 
Municipal and other tax-exempt:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
8,981

 
$
6,380

 
$
1,028

 
$
16,496

 
$
32,885

 
8.87

Fair value
9,021

 
6,497

 
1,081

 
16,166

 
32,765

 
 
Nominal yield¹
4.24
%
 
3.91
%
 
6.72
%
 
2.28
%
6 
3.27
%
 
 
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
58,263

 
$
880,459

 
$
1,571,735

 
$
278,086

 
$
2,788,543

 
6.98

Fair value
58,147

 
879,286

 
1,568,732

 
275,905

 
2,782,070

 
 
Nominal yield
1.20
%
 
1.83
%
 
1.84
%
 
1.88
%
 
1.82
%
 
 
Other debt securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
—

 
$
—

 
$
—

 
$
4,400

 
$
4,400

 
30.16

Fair value
—

 
—

 
—

 
4,152

 
4,152

 
 
Nominal yield
—
%
 
—
%
 
—
%
 
1.71
%
6 
1.71
%
 
 
Total fixed maturity securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
68,244

 
$
886,839

 
$
1,572,763

 
$
298,982

 
$
2,826,828

 
7.03

Fair value
68,166

 
885,783

 
1,569,813

 
296,223

 
2,819,985

 
 
Nominal yield
1.60
%
 
1.85
%
 
1.85
%
 
1.90
%
 
1.83
%
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
 

 
 

 
 

 
 

 
$
5,468,038

 
2 

Fair value
 

 
 

 
 

 
 

 
5,485,760

 
 
Nominal yield4
 

 
 

 
 

 
 

 
1.94
%
 
 
Equity securities and mutual funds:
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 

 
 

 
 

 
 

 
$
30,134

 
³

Fair value
 

 
 

 
 

 
 

 
35,296

 
 

Nominal yield
 

 
 

 
 

 
 

 
—
%
 
 

Total available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 

Amortized cost
 

 
 

 
 

 
 

 
$
8,325,000

 
 

Fair value
 

 
 

 
 

 
 

 
8,341,041

 
 

Nominal yield
 

 
 

 
 

 
 

 
1.90
%
 
 

1 
Calculated on a taxable equivalent basis using a 39 percent effective tax rate.
2 
The average expected lives of mortgage-backed securities were 3.9 years years based upon current prepayment assumptions.
3 
Primarily common stock and preferred stock of corporate issuers with no stated maturity.
4 
The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary –– Unaudited following for current yields on available for sale securities portfolio.
5 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
6 
Nominal yield on municipal and other tax-exempt securities and other debt securities with contractual maturity dates over ten years are based on variable rates which generally are reset within 35 days.


- 57 -


Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Proceeds
$
460,402

 
$
325,758

 
$
700,412

 
$
795,140

Gross realized gains
2,763

 
5,326

 
4,855

 
9,290

Gross realized losses
(2,383
)
 
—

 
(2,426
)
 
—

Related federal and state income tax expense
148

 
2,072

 
945

 
3,614


A summary of investment and available for sale securities that have been pledged as collateral for repurchase agreements, public trust funds on deposit and for other purposes, as required by law was as follows (in thousands):
 
June 30, 2017
 
Dec. 31, 2016
 
June 30, 2016
Investment:
 
 
 
 
 
Amortized cost
$
251,684

 
$
322,208

 
$
287,166

Fair value
255,097

 
323,808

 
293,625

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
Amortized cost
6,327,666

 
7,353,116

 
7,502,361

Fair value
6,317,623

 
7,327,470

 
7,657,916


The secured parties do not have the right to sell or repledge these securities.


- 58 -


Temporarily Impaired Securities as of June 30, 2017
(in thousands):
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
82

 
$
111,078

 
$
149

 
$
3,000

 
$
79

 
$
114,078

 
$
228

U.S. government agency residential mortgage-backed securities – Other
 
1

 
3,810

 
61

 
—

 
—

 
3,810

 
61

Other debt securities
 
22

 
8,384

 
554

 
—

 
—

 
8,384

 
554

Total investment securities
 
105

 
$
123,272

 
$
764

 
$
3,000

 
$
79

 
$
126,272

 
$
843


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

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
1

 
$
997

 
$
2

 
$
—

 
$
—

 
$
997

 
$
2

Municipal and other tax-exempt
 
13

 
$
1,957

 
$
1

 
$
4,655

 
$
412

 
$
6,612

 
$
413

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 
 
 

 
 

 
 

 
 

 


 


FNMA
 
75

 
1,381,687

 
20,288

 
87,371

 
1,314

 
1,469,058

 
21,602

FHLMC
 
42

 
731,853

 
7,213

 
16,388

 
476

 
748,241

 
7,689

GNMA
 
21

 
291,806

 
3,766

 
76,605

 
1,596

 
368,411

 
5,362

Other
 
1

 
19,957

 
43

 
—

 
—

 
19,957

 
43

Total U.S. government agencies
 
139


2,425,303


31,310


180,364


3,386


2,605,667


34,696

Private issue:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Jumbo-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total private issue
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage-backed securities
 
139

 
2,425,303

 
31,310

 
180,364

 
3,386

 
2,605,667

 
34,696

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
121

 
1,388,406

 
12,690

 
78,828

 
1,587

 
1,467,234

 
14,277

Other debt securities
 
2

 
—

 
—

 
4,152

 
248

 
4,152

 
248

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
91

 
1,668

 
22

 
887

 
41

 
2,555

 
63

Total available for sale securities
 
367

 
$
3,818,331


$
44,025


$
268,886


$
5,674


$
4,087,217


$
49,699




- 59 -


Temporarily Impaired Securities as of December 31, 2016
(In thousands)
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
151

 
$
219,892

 
$
1,316

 
$
4,333

 
$
95

 
$
224,225

 
$
1,411

U.S. government agency residential mortgage-backed securities – Other
 
1

 
4,358

 
71

 
—

 
—

 
4,358

 
71

Other debt securities
 
41

 
11,820

 
322

 
855

 
2

 
12,675

 
324

Total investment securities
 
193

 
$
236,070

 
$
1,709

 
$
5,188

 
$
97

 
$
241,258

 
$
1,806


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

 
 

 
 

 
 

 
 

 


 


U.S. Treasury
 
1

 
$
999

 
$
1

 
$
—

 
$
—

 
$
999

 
$
1

Municipal and other tax-exempt
 
24

 
$
15,666

 
$
22

 
$
4,689

 
$
378

 
$
20,355

 
$
400

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
91

 
1,787,644

 
30,238

 
72,105

 
1,677

 
1,859,749

 
31,915

FHLMC
 
58

 
964,017

 
11,210

 
18,307

 
600

 
982,324

 
11,810

GNMA
 
31

 
548,637

 
6,145

 
25,796

 
895

 
574,433

 
7,040

Total U.S. government agencies
 
180

 
3,300,298

 
47,593

 
116,208

 
3,172

 
3,416,506

 
50,765

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
5

 
7,931

 
174

 
7,410

 
44

 
15,341

 
218

Jumbo-A loans
 
1

 
—

 
—

 
6,098

 
16

 
6,098

 
16

Total private issue
 
6

 
7,931

 
174

 
13,508

 
60

 
21,439

 
234

Total residential mortgage-backed securities
 
186

 
3,308,229

 
47,767

 
129,716

 
3,232

 
3,437,945

 
50,999

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
171

 
1,904,584

 
22,987

 
38,875

 
302

 
1,943,459

 
23,289

Other debt securities
 
2

 
—

 
—

 
4,152

 
248

 
4,152

 
248

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
104

 
2,127

 
41

 
817

 
86

 
2,944

 
127

Total available for sale securities
 
488

 
$
5,231,605


$
70,818


$
178,249


$
4,246


$
5,409,854


$
75,064

1 
Includes securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income.



- 60 -


Temporarily Impaired Securities as of June 30, 2016
(In thousands)
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
19

 
$
11,915

 
$
20

 
$
4,378

 
$
65

 
$
16,293

 
$
85

U.S. government agency residential mortgage-backed securities – Other
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other debt securities
 
1

 
—

 
—

 
858

 
4

 
858

 
4

Total investment securities
 
20

 
$
11,915

 
$
20

 
$
5,236

 
$
69

 
$
17,151

 
$
89


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

 
 

 
 

 
 

 
 

 


 


U.S. Treasury
 
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Municipal and other tax-exempt1
 
17

 
$
375

 
$
—

 
$
10,289

 
$
713

 
$
10,664

 
$
713

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
4

 
97,910

 
267

 
15,401

 
6

 
113,311

 
273

FHLMC
 
1

 
—

 
—

 
22,338

 
198

 
22,338

 
198

GNMA
 
11

 
349,631

 
612

 
—

 
—

 
349,631

 
612

Total U.S. government agencies
 
16

 
447,541

 
879

 
37,739

 
204

 
485,280

 
1,083

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
5

 
8,513

 
241

 
8,291

 
206

 
16,804

 
447

Jumbo-A loans
 
9

 
7,076

 
36

 
7,877

 
329

 
14,953

 
365

Total private issue
 
14

 
15,589

 
277

 
16,168

 
535

 
31,757

 
812

Total residential mortgage-backed securities
 
30

 
463,130

 
1,156

 
53,907

 
739

 
517,037

 
1,895

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
11

 
103,955

 
37

 
65,857

 
85

 
169,812

 
122

Other debt securities
 
2

 
—

 
—

 
4,151

 
249

 
4,151

 
249

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
30

 
—

 
—

 
889

 
14

 
889

 
14

Total available for sale securities
 
90

 
$
567,460

 
$
1,193

 
$
135,093

 
$
1,800

 
$
702,553

 
$
2,993

1 
Includes securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income.

For debt securities, management determines whether it intends to sell or if it is more-likely-than-not that it will be required to sell impaired securities. This determination considers current and forecasted liquidity requirements, regulatory and capital requirements and securities portfolio management. Based on this evaluation as of June 30, 2017, the Company does not intend to sell any impaired available for sale securities before fair value recovers to the current amortized cost and it is more-likely-than-not that the Company will not be required to sell impaired securities before fair value recovers, which may be maturity.
 

- 61 -


 
 
Fair Value Option Securities
 
Fair value option securities represent securities which the Company has elected to carry at fair value and are separately identified on the Consolidated Balance Sheets. Changes in the fair value are recognized in earnings as they occur. Certain U.S. Treasury securities, residential mortgage-backed securities issued by U.S. government agencies and derivative contracts are held as an economic hedge of the mortgage servicing rights. 

The fair value and net unrealized gain (loss) included in fair value option securities is as follows (in thousands):
 
 
June 30, 2017
 
Dec. 31, 2016
 
June 30, 2016
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. Treasury
 
$
—

 
$
—

 
$
—

 
$
—

 
$
25,306

 
$
(43
)
U.S. government agency residential mortgage-backed securities
 
445,169

 
1,247

 
77,046

 
(1,777
)
 
237,959

 
4,476

Total
 
$
445,169

 
$
1,247

 
$
77,046

 
$
(1,777
)
 
$
263,265

 
$
4,433



Restricted Equity Securities

Restricted equity securities primarily include stock we are required to hold as members of the Federal Reserve system and the Federal Home Loan Banks. Restricted equity securities are carried at cost as these securities do not have a readily determined fair value because ownership of these shares are restricted and they lack a market. A summary of restricted equity securities follows (in thousands):

 
June 30, 2017
 
Dec. 31, 2016
 
June 30, 2016
Federal Reserve stock
$
36,676

 
$
36,498

 
$
36,283

Federal Home Loan Bank stock
274,113

 
270,541

 
283,155

Other
244

 
201

 
201

Total
$
311,033


$
307,240


$
319,639


- 62 -


(3) Derivatives
 
Derivative instruments may be used by the Company as part of its internal risk management programs or may be offered to customers. All derivative instruments are carried at fair value and changes in fair value are reported in earnings as they occur. Credit risk is also considered in determining fair value.

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

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

Customer Risk Management Programs
 
BOK Financial offers programs to permit its customers to manage various risks, including fluctuations in energy, cattle and other agricultural products, interest rates and foreign exchange rates with derivative contracts. Customers may also manage interest rate risk through interest rate swaps used by borrowers to modify interest rate terms of their loans or to-be-announced securities used by mortgage banking customers to hedge their loan production. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize the risk of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in other operating revenue – brokerage and trading revenue in the Consolidated Statements of Earnings.
 
Internal Risk Management Programs
 
BOK Financial may use derivative contracts in managing its interest rate sensitivity, as part of its economic hedge of the change in the fair value of mortgage servicing rights and as an economic hedge of trading securities. As of June 30, 2017, derivative contracts under the internal risk management programs were primarily used as part of the economic hedges of the change in the fair value of the mortgage servicing rights and trading securities.

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

- 63 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2017 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
16,174,687

 
$
57,948

 
$
(29,034
)
 
$
28,914

 
$
—

 
$
28,914

Interest rate swaps
 
1,450,193

 
29,932

 
—

 
29,932

 
(2,206
)
 
27,726

Energy contracts
 
891,480

 
56,824

 
(20,546
)
 
36,278

 
(21,267
)
 
15,011

Agricultural contracts
 
45,250

 
3,541

 
(1,027
)
 
2,514

 
—

 
2,514

Foreign exchange contracts
 
169,529

 
162,429

 
—

 
162,429

 
(7
)
 
162,422

Equity option contracts
 
100,159

 
4,437

 
—

 
4,437

 
(920
)
 
3,517

Total customer risk management programs
 
18,831,298

 
315,111

 
(50,607
)
 
264,504

 
(24,400
)
 
240,104

Internal risk management programs
 
10,680,498

 
40,185

 
—

 
40,185

 
—

 
40,185

Total derivative contracts
 
$
29,511,796

 
$
355,296

 
$
(50,607
)
 
$
304,689

 
$
(24,400
)
 
$
280,289

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional¹
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
16,174,687

 
$
53,829

 
$
(29,034
)
 
$
24,795

 
$
—

 
$
24,795

Interest rate swaps
 
1,450,193

 
29,982

 
—

 
29,982

 
(15,396
)
 
14,586

Energy contracts
 
874,625

 
53,895

 
(20,546
)
 
33,349

 
—

 
33,349

Agricultural contracts
 
45,262

 
3,538

 
(1,027
)
 
2,511

 
(2,511
)
 
—

Foreign exchange contracts
 
169,553

 
162,276

 
—

 
162,276

 
(3,188
)
 
159,088

Equity option contracts
 
100,159

 
4,437

 
—

 
4,437

 
—

 
4,437

Total customer risk management programs
 
18,814,479

 
307,957

 
(50,607
)
 
257,350

 
(21,095
)
 
236,255

Internal risk management programs
 
8,310,950

 
49,564

 
—

 
49,564

 
—

 
49,564

Total derivative contracts
 
$
27,125,429

 
$
357,521

 
$
(50,607
)
 
$
306,914

 
$
(21,095
)
 
$
285,819

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.



- 64 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2016 (in thousands):

 
 
Assets
 
 
Notional 1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
16,949,152

 
$
180,695

 
$
(60,555
)
 
$
120,140

 
$
—

 
$
120,140

Interest rate swaps
 
1,403,408

 
34,442

 
—

 
34,442

 
(4,567
)
 
29,875

Energy contracts
 
835,566

 
64,140

 
(28,298
)
 
35,842

 
(71
)
 
35,771

Agricultural contracts
 
53,209

 
1,382

 
(515
)
 
867

 
—

 
867

Foreign exchange contracts
 
580,886

 
494,349

 
—

 
494,349

 
(5,183
)
 
489,166

Equity option contracts
 
100,924

 
4,357

 
—

 
4,357

 
(730
)
 
3,627

Total customer risk management programs
 
19,923,145

 
779,365

 
(89,368
)
 
689,997

 
(10,551
)
 
679,446

Internal risk management programs
 
2,514,169

 
10,426

 
—

 
10,426

 
—

 
10,426

Total derivative contracts
 
$
22,437,314

 
$
789,791

 
$
(89,368
)
 
$
700,423

 
$
(10,551
)
 
$
689,872

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional 1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
16,637,532

 
$
176,928

 
$
(60,555
)
 
$
116,373

 
$
—

 
$
116,373

Interest rate swaps
 
1,403,408

 
34,442

 
—

 
34,442

 
(11,977
)
 
22,465

Energy contracts
 
820,365

 
64,306

 
(28,298
)
 
36,008

 
(31,534
)
 
4,474

Agricultural contracts
 
53,216

 
1,365

 
(515
)
 
850

 
(769
)
 
81

Foreign exchange contracts
 
580,712

 
494,695

 
—

 
494,695

 
(3,630
)
 
491,065

Equity option contracts
 
100,924

 
4,357

 
—

 
4,357

 
—

 
4,357

Total customer risk management programs
 
19,596,157

 
776,093

 
(89,368
)
 
686,725

 
(47,910
)
 
638,815

Internal risk management programs
 
2,582,202

 
25,716

 
—

 
25,716

 
—

 
25,716

Total derivative contracts
 
$
22,178,359

 
$
801,809

 
$
(89,368
)
 
$
712,441

 
$
(47,910
)
 
$
664,531

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.





- 65 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2016 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
18,774,134

 
$
183,118

 
$
(67,383
)
 
$
115,735

 
$
—

 
$
115,735

Interest rate swaps
 
1,299,985

 
54,978

 
—

 
54,978

 
(1,100
)
 
53,878

Energy contracts
 
757,669

 
59,103

 
(33,996
)
 
25,107

 
(155
)
 
24,952

Agricultural contracts
 
50,848

 
2,488

 
(1,609
)
 
879

 
(37
)
 
842

Foreign exchange contracts
 
701,436

 
675,804

 
—

 
675,804

 
(5,054
)
 
670,750

Equity option contracts
 
116,901

 
4,236

 
—

 
4,236

 
(478
)
 
3,758

Total customer risk management programs
 
21,700,973

 
979,727

 
(102,988
)
 
876,739

 
(6,824
)
 
869,915

Internal risk management programs
 
1,337,000

 
13,758

 
—

 
13,758

 
—

 
13,758

Total derivative contracts
 
$
23,037,973

 
$
993,485

 
$
(102,988
)
 
$
890,497

 
$
(6,824
)
 
$
883,673

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
18,662,334

 
$
179,443

 
$
(67,383
)
 
$
112,060

 
$
(103,724
)
 
$
8,336

Interest rate swaps
 
1,299,985

 
55,404

 
—

 
55,404

 
(32,597
)
 
22,807

Energy contracts
 
734,538

 
58,033

 
(33,996
)
 
24,037

 
(11,784
)
 
12,253

Agricultural contracts
 
50,843

 
2,476

 
(1,609
)
 
867

 
—

 
867

Foreign exchange contracts
 
701,219

 
675,383

 
—

 
675,383

 
(4,723
)
 
670,660

Equity option contracts
 
116,901

 
4,236

 
—

 
4,236

 
—

 
4,236

Total customer risk management programs
 
21,565,820

 
974,975

 
(102,988
)
 
871,987

 
(152,828
)
 
719,159

Internal risk management programs
 
—

 
—

 
—

 
—

 
—

 
—

Total derivative contracts
 
$
21,565,820

 
$
974,975

 
$
(102,988
)
 
$
871,987

 
$
(152,828
)
 
$
719,159

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.







- 66 -


The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):
 
 
Three Months Ended
 
 
June 30, 2017
 
June 30, 2016
 
 
Brokerage
and Trading Revenue
 
Gain (Loss) on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)on Derivatives, Net
Customer risk management programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
9,205

 
$
—

 
$
9,862

 
$
—

Interest rate swaps
 
665

 
—

 
723

 
—

Energy contracts
 
1,666

 
—

 
2,749

 
—

Agricultural contracts
 
11

 
—

 
32

 
—

Foreign exchange contracts
 
90

 
—

 
134

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
11,637

 
—

 
13,500

 
—

Internal risk management programs
 
6,485

 
3,241

 
(9
)
 
10,766

Total derivative contracts
 
$
18,122

 
$
3,241

 
$
13,491

 
$
10,766

 
 
Six Months Ended
 
 
June 30, 2017
 
June 30, 2016
 
 
Brokerage
and Trading Revenue
 
Gain (Loss) on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss) on Derivatives, Net
Customer risk management programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
17,232

 
$
—

 
$
17,302

 
$
—

Interest rate swaps
 
1,124

 
—

 
1,048

 
—

Energy contracts
 
4,539

 
—

 
3,445

 
—

Agricultural contracts
 
20

 
—

 
61

 
—

Foreign exchange contracts
 
360

 
—

 
512

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
23,275

 
—

 
22,368

 
—

Internal risk management programs
 
6,018

 
2,791

 
(9
)
 
17,904

Total derivative contracts
 
$
29,293

 
$
2,791

 
$
22,359

 
$
17,904



- 67 -


(4) Loans and Allowances for Credit Losses

Loans

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

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

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

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

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

Loan origination and commitment fees and direct loan acquisition and origination costs are deferred and amortized as an adjustment to yield over the life of the loan or over the commitment period, as applicable.

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

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


- 68 -


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

 
 
June 30, 2017
 
December 31, 2016
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
2,198,066

 
$
8,242,732

 
$
197,157

 
$
10,637,955

 
$
2,327,085

 
$
7,884,786

 
$
178,953

 
$
10,390,824

Commercial real estate
 
594,542

 
3,090,275

 
3,775

 
3,688,592

 
624,187

 
3,179,338

 
5,521

 
3,809,046

Residential mortgage
 
1,597,587

 
297,376

 
44,235

 
1,939,198

 
1,647,357

 
256,255

 
46,220

 
1,949,832

Personal
 
150,728

 
766,900

 
272

 
917,900

 
154,971

 
684,697

 
290

 
839,958

Total
 
$
4,540,923

 
$
12,397,283

 
$
245,439

 
$
17,183,645

 
$
4,753,600

 
$
12,005,076

 
$
230,984

 
$
16,989,660

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
1,414

 
 

 
 

 
 

 
$
5

 
 
June 30, 2016
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
1,994,415

 
$
8,180,033

 
$
181,989

 
$
10,356,437

Commercial real estate
 
612,822

 
2,961,364

 
7,780

 
3,581,966

Residential mortgage
 
1,586,116

 
237,746

 
57,061

 
1,880,923

Personal
 
109,447

 
477,622

 
354

 
587,423

Total
 
$
4,302,800

 
$
11,856,765

 
$
247,184

 
$
16,406,749

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
2,899

1 
Excludes residential mortgage loans guaranteed by agencies of the U.S. government

At June 30, 2017, $5.7 billion or 33 percent of our total loan portfolio is to businesses and individuals attributed to the Texas market and $3.4 billion or 20 percent of the total loan portfolio is to businesses and individuals attributed to the Oklahoma market. These geographic concentrations subject the loan portfolio to the general economic conditions within these areas.

Commercial

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

At June 30, 2017, commercial loans attributed to the Texas market totaled $3.6 billion or 33 percent of the commercial loan portfolio segment and commercial loans attributed to the Oklahoma market totaled $2.1 billion or 19 percent of the commercial loan portfolio segment.

The commercial loan portfolio segment is further divided into loan classes. The energy loan class totaled $2.8 billion or 17 percent of total loans at June 30, 2017, including $2.4 billion of outstanding loans to energy producers. Approximately 58 percent of committed production loans are secured by properties primarily producing oil and 42 percent are secured by properties producing natural gas. The services loan class totaled $3.0 billion or 17 percent of total loans at June 30, 2017. Approximately $1.5 billion of loans in the services category consist of loans with individual balances of less than $10 million. Businesses included in the services class include governmental, finance and insurance, not-for-profit, educational services and loans to entities providing services for real estate and construction. The healthcare loan class totaled $2.2 billion or 13 percent of total loans at June 30, 2017. The healthcare loan class consists primarily of loans for the development and operation of senior housing and care facilities, including independent living, assisted living and skilled nursing. Healthcare also includes loans to hospitals and other medical service providers.


- 69 -


Commercial Real Estate

Commercial real estate loans are for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes primarily 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.

At June 30, 2017, 32 percent of commercial real estate loans are secured by properties primarily located in the Dallas and Houston areas of Texas. An additional 12 percent of commercial real estate loans are secured by properties located primarily in the Tulsa and Oklahoma City metropolitan areas of Oklahoma. 

Residential Mortgage and Personal

Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. Residential mortgage loans are secured by a first or second mortgage on the customer’s primary residence. Personal loans consist primarily of loans secured by the cash surrender value of insurance policies and marketable securities. It also includes direct loans secured by and for the purchase of automobiles, recreational and marine equipment as well as unsecured loans. Residential mortgage and personal loans are made in accordance with underwriting policies we believe to be conservative and are fully documented. Loans may be individually underwritten or credit scored based on size and other criteria. Credit scoring is assessed based on significant credit characteristics including credit history, residential and employment stability. Residential mortgage loans retained in the Company’s portfolio are primarily composed of various mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals and certain professionals. Jumbo loans may be fixed or variable rate and are fully amortizing. Jumbo loans generally conform to government sponsored entity standards, except that the loan size exceeds maximums required under these standards. These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38 percent.  Loan-to-value (“LTV”) ratios are tiered from 60 percent to 100 percent, depending on the market. Special mortgage programs include fixed and variable fully amortizing loans tailored to the needs of certain healthcare professionals. Variable rate loans are fully indexed at origination and may have fixed rates for three to ten years, then adjust annually thereafter. 

At June 30, 2017, residential mortgage loans included $192 million of loans guaranteed by U.S. government agencies previously sold into GNMA mortgage pools. These loans either have been repurchased or are eligible to be repurchased by the Company when certain defined delinquency criteria are met. Although payments on these loans generally are past due more than 90 days, interest continues to accrue based on the government guarantee.

Home equity loans totaled $758 million at June 30, 2017. Approximately 65 percent of the home equity loan portfolio is comprised of first lien loans and 35 percent of the home equity portfolio is comprised of junior lien loans. Junior lien loans are distributed 49 percent to amortizing term loans and 51 percent to revolving lines of credit. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40 percent. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 5 year revolving period followed by a 15 year term of amortizing repayments. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term, subject to an update of certain credit information.

Credit Commitments
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At June 30, 2017, outstanding commitments totaled $9.6 billion. Because some commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans.

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


- 70 -


Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At June 30, 2017, outstanding standby letters of credit totaled $615 million. Commercial letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying transaction is consummated. At June 30, 2017, outstanding commercial letters of credit totaled $3.2 million.

Allowances for Credit Losses

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

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

The allowance for loan losses consists of specific allowances attributed to impaired loans that have not yet been charged down to amounts we expect to recover, general allowances for unimpaired loans based on estimated loss rates by loan class and nonspecific allowances based on general economic conditions, risk concentration and related factors. There have been no material changes in the approach or techniques utilized in developing the allowance for loan losses and the accrual for off-balance sheet credit losses for the three and six months ended June 30, 2017.

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

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


- 71 -


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

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

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

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

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended June 30, 2017 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
137,616

 
$
58,343

 
$
18,177

 
$
7,247

 
$
27,327

 
$
248,710

Provision for loan losses
 
1,546

 
105

 
(47
)
 
1,358

 
47

 
3,009

Loans charged off
 
(1,703
)
 
(76
)
 
(40
)
 
(1,053
)
 
—

 
(2,872
)
Recoveries
 
283

 
208

 
169

 
554

 
—

 
1,214

Ending balance
 
$
137,742

 
$
58,580

 
$
18,259

 
$
8,106

 
$
27,374

 
$
250,061

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
9,288

 
$
106

 
$
40

 
$
6

 
$
—

 
$
9,440

Provision for off-balance sheet credit losses
 
(2,987
)
 
(22
)
 
(2
)
 
2

 
—

 
(3,009
)
Ending balance
 
$
6,301

 
$
84

 
$
38

 
$
8

 
$
—

 
$
6,431

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(1,441
)
 
$
83

 
$
(49
)
 
$
1,360

 
$
47

 
$
—


- 72 -


The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the six months ended June 30, 2017 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
140,213

 
$
50,749

 
$
18,224

 
$
8,773

 
$
28,200

 
$
246,159

Provision for loan losses
 
(1,809
)
 
6,964

 
(86
)
 
570

 
(826
)
 
4,813

Loans charged off
 
(2,127
)
 
(76
)
 
(276
)
 
(2,546
)
 
—

 
(5,025
)
Recoveries
 
1,465

 
943

 
397

 
1,309

 
—

 
4,114

Ending balance
 
$
137,742

 
$
58,580

 
$
18,259

 
$
8,106

 
$
27,374

 
$
250,061

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
11,063

 
$
123

 
$
50

 
$
8

 
$
—

 
$
11,244

Provision for off-balance sheet credit losses
 
(4,762
)
 
(39
)
 
(12
)
 
—

 
—

 
(4,813
)
Ending balance
 
$
6,301

 
$
84

 
$
38

 
$
8

 
$
—

 
$
6,431

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(6,571
)
 
$
6,925

 
$
(98
)
 
$
570

 
$
(826
)
 
$
—


The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended June 30, 2016 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
139,793

 
$
44,453

 
$
18,467

 
$
5,022

 
$
25,421

 
$
233,156

Provision for loan losses
 
12,478

 
2,010

 
368

 
1,443

 
1,263

 
17,562

Loans charged off
 
(7,355
)
 
—

 
(345
)
 
(1,145
)
 
—

 
(8,845
)
Recoveries
 
223

 
282

 
200

 
681

 
—

 
1,386

Ending balance
 
$
145,139

 
$
46,745

 
$
18,690

 
$
6,001

 
$
26,684

 
$
243,259

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
6,319

 
$
228

 
$
58

 
$
2

 
$
—

 
$
6,607

Provision for off-balance sheet credit losses
 
2,433

 
(25
)
 
4

 
26

 
—

 
2,438

Ending balance
 
$
8,752

 
$
203

 
$
62

 
$
28

 
$
—

 
$
9,045

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
14,911

 
$
1,985

 
$
372

 
$
1,469

 
$
1,263

 
$
20,000



- 73 -


The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the six months ended June 30, 2016 is summarized as follows (in thousands):

 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
130,334

 
$
41,391

 
$
19,509

 
$
4,164

 
$
30,126

 
$
225,524

Provision for loan losses
 
43,575

 
4,987

 
(363
)
 
2,909

 
(3,442
)
 
47,666

Loans charged off
 
(29,481
)
 
—

 
(819
)
 
(2,536
)
 
—

 
(32,836
)
Recoveries
 
711

 
367

 
363

 
1,464

 
—

 
2,905

Ending balance
 
$
145,139

 
$
46,745

 
$
18,690

 
$
6,001

 
$
26,684

 
$
243,259

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
1,506

 
$
153

 
$
30

 
$
22

 
$
—

 
$
1,711

Provision for off-balance sheet credit losses
 
7,246

 
50

 
32

 
6

 
—

 
7,334

Ending balance
 
$
8,752

 
$
203

 
$
62

 
$
28

 
$
—

 
$
9,045

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
50,821

 
$
5,037

 
$
(331
)
 
$
2,915

 
$
(3,442
)
 
$
55,000


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at June 30, 2017 is as follows (in thousands):
 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,440,798

 
$
128,049

 
$
197,157

 
$
9,693

 
$
10,637,955

 
$
137,742

Commercial real estate
 
3,684,817

 
58,580

 
3,775

 
—

 
3,688,592

 
58,580

Residential mortgage
 
1,894,963

 
18,259

 
44,235

 
—

 
1,939,198

 
18,259

Personal
 
917,628

 
8,106

 
272

 
—

 
917,900

 
8,106

Total
 
16,938,206

 
212,994

 
245,439

 
9,693

 
17,183,645

 
222,687

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
27,374

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,938,206

 
$
212,994

 
$
245,439

 
$
9,693

 
$
17,183,645

 
$
250,061


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 2016 is as follows (in thousands):
 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,211,871

 
$
139,416

 
$
178,953

 
$
797

 
$
10,390,824

 
$
140,213

Commercial real estate
 
3,803,525

 
50,749

 
5,521

 
—

 
3,809,046

 
50,749

Residential mortgage
 
1,903,612

 
18,178

 
46,220

 
46

 
1,949,832

 
18,224

Personal
 
839,668

 
8,773

 
290

 
—

 
839,958

 
8,773

Total
 
16,758,676

 
217,116

 
230,984

 
843

 
16,989,660

 
217,959

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
28,200

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,758,676

 
$
217,116

 
$
230,984

 
$
843

 
$
16,989,660

 
$
246,159



- 74 -


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at June 30, 2016 is as follows (in thousands):
 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,174,448

 
$
140,911

 
$
181,989

 
$
4,228

 
$
10,356,437

 
$
145,139

Commercial real estate
 
3,574,186

 
46,727

 
7,780

 
18

 
3,581,966

 
46,745

Residential mortgage
 
1,823,862

 
18,626

 
57,061

 
64

 
1,880,923

 
18,690

Personal
 
587,069

 
6,001

 
354

 
—

 
587,423

 
6,001

Total
 
16,159,565

 
212,265

 
247,184

 
4,310

 
16,406,749

 
216,575

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
26,684

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,159,565

 
$
212,265

 
$
247,184

 
$
4,310

 
$
16,406,749

 
$
243,259

Credit Quality Indicators

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

The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at June 30, 2017 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,612,477

 
$
136,819

 
$
25,478

 
$
923

 
$
10,637,955

 
$
137,742

Commercial real estate
 
3,688,592

 
58,580

 
—

 
—

 
3,688,592

 
58,580

Residential mortgage
 
216,007

 
2,976

 
1,723,191

 
15,283

 
1,939,198

 
18,259

Personal
 
824,318

 
5,742

 
93,582

 
2,364

 
917,900

 
8,106

Total
 
15,341,394

 
204,117

 
1,842,251

 
18,570

 
17,183,645

 
222,687

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
27,374

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,341,394

 
$
204,117

 
$
1,842,251

 
$
18,570

 
$
17,183,645

 
$
250,061

 

- 75 -


The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at December 31, 2016 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,360,725

 
$
139,293

 
$
30,099

 
$
920

 
$
10,390,824

 
$
140,213

Commercial real estate
 
3,809,046

 
50,749

 
—

 
—

 
3,809,046

 
50,749

Residential mortgage
 
243,703

 
2,893

 
1,706,129

 
15,331

 
1,949,832

 
18,224

Personal
 
744,602

 
5,035

 
95,356

 
3,738

 
839,958

 
8,773

Total
 
15,158,076

 
197,970

 
1,831,584

 
19,989

 
16,989,660

 
217,959

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
28,200

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,158,076

 
$
197,970

 
$
1,831,584

 
$
19,989

 
$
16,989,660

 
$
246,159


The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at June 30, 2016 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,331,701

 
$
144,217

 
$
24,736

 
$
922

 
$
10,356,437

 
$
145,139

Commercial real estate
 
3,581,966

 
46,745

 
—

 
—

 
3,581,966

 
46,745

Residential mortgage
 
202,520

 
2,995

 
1,678,403

 
15,695

 
1,880,923

 
18,690

Personal
 
500,240

 
3,624

 
87,183

 
2,377

 
587,423

 
6,001

Total
 
14,616,427

 
197,581

 
1,790,322

 
18,994

 
16,406,749

 
216,575

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
26,684

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,616,427

 
$
197,581

 
$
1,790,322

 
$
18,994

 
$
16,406,749

 
$
243,259


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

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

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


- 76 -


The following table summarizes the Company’s loan portfolio at June 30, 2017 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
 
 
 
 
 
 
 
 
 
Pass
 
Other Loans Especially Mentioned
 
Accruing Substandard
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,376,368

 
$
120,473

 
$
226,407

 
$
123,992

 
$
—

 
$
—

 
$
2,847,240

Services
 
2,921,510

 
12,452

 
17,111

 
7,754

 
—

 
—

 
2,958,827

Wholesale/retail
 
1,507,063

 
16,224

 
9,788

 
10,620

 
—

 
—

 
1,543,695

Manufacturing
 
513,442

 
6,540

 
16,499

 
9,656

 
—

 
—

 
546,137

Healthcare
 
2,130,339

 
33,554

 
33,120

 
24,505

 
—

 
—

 
2,221,518

Other commercial and industrial
 
453,712

 
2,961

 
17,861

 
20,526

 
25,374

 
104

 
520,538

Total commercial
 
9,902,434

 
192,204

 
320,786

 
197,053

 
25,374

 
104

 
10,637,955

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
138,790

 
—

 
751

 
2,051

 
—

 
—

 
141,592

Retail
 
720,730

 
1,774

 
—

 
301

 
—

 
—

 
722,805

Office
 
859,722

 
2,855

 
—

 
396

 
—

 
—

 
862,973

Multifamily
 
947,950

 
—

 
4,420

 
10

 
—

 
—

 
952,380

Industrial
 
693,635

 
—

 
—

 
—

 
—

 
—

 
693,635

Other commercial real estate
 
314,187

 
—

 
3

 
1,017

 
—

 
—

 
315,207

Total commercial real estate
 
3,675,014

 
4,629

 
5,174

 
3,775

 
—

 
—

 
3,688,592

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
212,563

 
1,693

 
478

 
1,273

 
750,891

 
22,142

 
989,040

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
182,677

 
9,052

 
191,729

Home equity
 
—

 
—

 
—

 
—

 
746,661

 
11,768

 
758,429

Total residential mortgage
 
212,563

 
1,693

 
478

 
1,273

 
1,680,229

 
42,962

 
1,939,198

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
823,304

 
49

 
877

 
88

 
93,398

 
184

 
917,900

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,613,315

 
$
198,575

 
$
327,315

 
$
202,189

 
$
1,799,001

 
$
43,250

 
$
17,183,645



- 77 -


The following table summarizes the Company’s loan portfolio at December 31, 2016 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
 
 
 
 
 
 
 
 
 
Pass
 
Other Loans Especially Mentioned
 
Accruing Substandard
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
1,937,790

 
$
119,583

 
$
307,996

 
$
132,499

 
$
—

 
$
—

 
$
2,497,868

Services
 
3,052,002

 
10,960

 
37,855

 
8,173

 
—

 
—

 
3,108,990

Wholesale/retail
 
1,535,463

 
16,886

 
13,062

 
11,407

 
—

 
—

 
1,576,818

Manufacturing
 
468,314

 
26,532

 
15,198

 
4,931

 
—

 
—

 
514,975

Healthcare
 
2,140,458

 
44,472

 
16,161

 
825

 
—

 
—

 
2,201,916

Other commercial and industrial
 
433,789

 
5,309

 
—

 
21,060

 
30,041

 
58

 
490,257

Total commercial
 
9,567,816

 
223,742

 
390,272

 
178,895

 
30,041

 
58

 
10,390,824

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
131,630

 
—

 
470

 
3,433

 
—

 
—

 
135,533

Retail
 
756,418

 
4,745

 
399

 
326

 
—

 
—

 
761,888

Office
 
798,462

 
—

 
—

 
426

 
—

 
—

 
798,888

Multifamily
 
898,800

 
—

 
4,434

 
38

 
—

 
—

 
903,272

Industrial
 
871,673

 
—

 
—

 
76

 
—

 
—

 
871,749

Other commercial real estate
 
336,488

 
—

 
6

 
1,222

 
—

 
—

 
337,716

Total commercial real estate
 
3,793,471

 
4,745

 
5,309

 
5,521

 
—

 
—

 
3,809,046

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
238,769

 
1,186

 
2,331

 
1,417

 
741,679

 
21,438

 
1,006,820

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
187,541

 
11,846

 
199,387

Home equity
 
—

 
—

 
—

 
—

 
732,106

 
11,519

 
743,625

Total residential mortgage
 
238,769

 
1,186

 
2,331

 
1,417

 
1,661,326

 
44,803

 
1,949,832

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
743,451

 
—

 
1,054

 
97

 
95,163

 
193

 
839,958

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,343,507

 
$
229,673

 
$
398,966

 
$
185,930

 
$
1,786,530

 
$
45,054

 
$
16,989,660



- 78 -


The following table summarizes the Company’s loan portfolio at June 30, 2016 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
 
 
 
 
 
 
 
 
 
Pass
 
Other Loans Especially Mentioned
 
Accruing Substandard
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,031,955

 
$
197,531

 
$
421,025

 
$
168,145

 
$
—

 
$
—

 
$
2,818,656

Services
 
2,805,307

 
6,253

 
9,916

 
9,388

 
—

 
—

 
2,830,864

Wholesale/retail
 
1,478,966

 
24,595

 
26,624

 
2,772

 
—

 
—

 
1,532,957

Manufacturing
 
556,741

 
18,757

 
19,612

 
293

 
—

 
—

 
595,403

Healthcare
 
2,011,934

 
29,420

 
8,917

 
875

 
—

 
—

 
2,051,146

Other commercial and industrial
 
478,169

 
24,053

 
—

 
453

 
24,673

 
63

 
527,411

Total commercial
 
9,363,072

 
300,609

 
486,094

 
181,926

 
24,673

 
63

 
10,356,437

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
152,343

 
—

 
972

 
4,261

 
—

 
—

 
157,576

Retail
 
787,779

 
5,962

 
413

 
1,265

 
—

 
—

 
795,419

Office
 
767,296

 
906

 
304

 
606

 
—

 
—

 
769,112

Multifamily
 
781,058

 
—

 
6,077

 
65

 
—

 
—

 
787,200

Industrial
 
645,510

 
—

 
—

 
76

 
—

 
—

 
645,586

Other commercial real estate
 
425,558

 
—

 
8

 
1,507

 
—

 
—

 
427,073

Total commercial real estate
 
3,559,544

 
6,868

 
7,774

 
7,780

 
—

 
—

 
3,581,966

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
194,962

 
1,197

 
3,406

 
2,955

 
742,214

 
24,273

 
969,007

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
—

 
172,991

 
19,741

 
192,732

Home equity
 
—

 
—

 
—

 
—

 
709,092

 
10,092

 
719,184

Total residential mortgage
 
194,962

 
1,197

 
3,406

 
2,955

 
1,624,297

 
54,106

 
1,880,923

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
496,534

 
—

 
3,590

 
116

 
86,945

 
238

 
587,423

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,614,112

 
$
308,674

 
$
500,864

 
$
192,777

 
$
1,735,915

 
$
54,407

 
$
16,406,749




- 79 -


Impaired Loans

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

A summary of impaired loans follows (in thousands):
 
As of
 
For the
 
For the
 
June 30, 2017
 
Three Months Ended
 
Six Months Ended
 
 
 
Recorded Investment
 
 
 
June 30, 2017
 
June 30, 2017
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
141,091

 
$
123,992

 
$
56,988

 
$
67,004

 
$
8,874

 
$
117,209

 
$
—

 
$
128,246

 
$
—

Services
11,209

 
7,754

 
7,754

 
—

 
—

 
7,734

 
—

 
7,964

 
—

Wholesale/retail
17,392

 
10,620

 
10,620

 
—

 
—

 
10,855

 
—

 
11,013

 
—

Manufacturing
10,223

 
9,656

 
9,656

 
—

 
—

 
7,781

 
—

 
7,293

 
—

Healthcare
24,795

 
24,505

 
18,883

 
5,622

 
802

 
12,707

 
—

 
12,665

 
—

Other commercial and industrial
28,933

 
20,630

 
20,609

 
21

 
17

 
20,706

 
—

 
20,874

 
—

Total commercial
233,643

 
197,157

 
124,510

 
72,647

 
9,693

 
176,992

 
—

 
188,055

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
3,676

 
2,051

 
2,051

 
—

 
—

 
2,334

 
—

 
2,742

 
—

Retail
518

 
301

 
301

 
—

 
—

 
308

 
—

 
314

 
—

Office
499

 
396

 
396

 
—

 
—

 
404

 
—

 
411

 
—

Multifamily
1,000

 
10

 
10

 
—

 
—

 
17

 
—

 
24

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
38

 
—

 
38

 
—

Other commercial real estate
1,212

 
1,017

 
1,017

 
—

 
—

 
1,024

 
—

 
1,119

 
—

Total commercial real estate
6,905

 
3,775

 
3,775

 
—

 
—

 
4,125

 
—

 
4,648

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
28,603

 
23,415

 
23,415

 
—

 
—

 
23,801

 
307

 
23,135

 
598

Permanent mortgage guaranteed by U.S. government agencies1
197,659

 
191,729

 
191,729

 
—

 
—

 
202,946

 
2,021

 
205,159

 
3,925

Home equity
13,064

 
11,768

 
11,768

 
—

 
—

 
11,776

 
—

 
11,643

 
—

Total residential mortgage
239,326

 
226,912

 
226,912

 
—

 
—

 
238,523

 
2,328

 
239,937

 
4,523

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
307

 
272

 
272

 
—

 
—

 
253

 
—

 
281

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
480,181

 
$
428,116

 
$
355,469

 
$
72,647

 
$
9,693

 
$
419,893

 
$
2,328

 
$
432,921

 
$
4,523

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At June 30, 2017, $9.1 million of these loans were nonaccruing and $183 million were accruing based on the guarantee by U.S. government agencies.

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


- 80 -


A summary of impaired loans at December 31, 2016 follows (in thousands): 
 
 
 
 
Recorded Investment
 
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
146,897

 
$
132,499

 
$
121,418

 
$
11,081

 
$
762

Services
 
11,723

 
8,173

 
8,173

 
—

 
—

Wholesale/retail
 
17,669

 
11,407

 
11,407

 
—

 
—

Manufacturing
 
5,320

 
4,931

 
4,931

 
—

 
—

Healthcare
 
1,147

 
825

 
825

 
—

 
—

Other commercial and industrial
 
29,006

 
21,118

 
21,083

 
35

 
35

Total commercial
 
211,762

 
178,953

 
167,837

 
11,116

 
797

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
4,951

 
3,433

 
3,433

 
—

 
—

Retail
 
530

 
326

 
326

 
—

 
—

Office
 
521

 
426

 
426

 
—

 
—

Multifamily
 
1,000

 
38

 
38

 
—

 
—

Industrial
 
76

 
76

 
76

 
—

 
—

Other commercial real estate
 
7,349

 
1,222

 
1,222

 
—

 
—

Total commercial real estate
 
14,427

 
5,521

 
5,521

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
28,830

 
22,855

 
22,809

 
46

 
46

Permanent mortgage guaranteed by U.S. government agencies1
 
205,564

 
199,387

 
199,387

 
—

 
—

Home equity
 
12,611

 
11,519

 
11,519

 
—

 
—

Total residential mortgage
 
247,005

 
233,761

 
233,715

 
46

 
46

 
 
 
 
 
 
 
 
 
 
 
Personal
 
332

 
290

 
290

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
473,526

 
$
418,525

 
$
407,363

 
$
11,162

 
$
843

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At December 31, 2016, $12 million of these loans were nonaccruing and $188 million were accruing based on the guarantee by U.S. government agencies.


- 81 -


A summary of impaired loans at June 30, 2016 follows (in thousands): 
 
 
 
For the
 
For the
 
As of June 30, 2016
 
Three Months Ended
 
Six Months Ended
 
 
 
Recorded Investment
 
 
 
June 30, 2016
 
June 30, 2016
 
Unpaid Principal Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
202,369

 
$
168,145

 
$
136,264

 
$
31,881

 
$
4,228

 
$
163,849

 
$
—

 
$
97,923

 
$
—

Services
12,780

 
9,388

 
9,388

 
—

 
—

 
9,450

 
—

 
9,839

 
—

Wholesale/retail
8,697

 
2,772

 
2,772

 
—

 
—

 
3,229

 
—

 
2,846

 
—

Manufacturing
650

 
293

 
293

 
—

 
—

 
303

 
—

 
312

 
—

Healthcare
1,175

 
875

 
875

 
—

 
—

 
949

 
—

 
973

 
—

Other commercial and industrial
8,186

 
516

 
516

 
—

 
—

 
542

 
—

 
569

 
—

Total commercial
233,857

 
181,989

 
150,108

 
31,881

 
4,228

 
178,322

 
—

 
112,462

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Residential construction and land development
7,177

 
4,261

 
4,261

 
—

 
—

 
4,525

 
—

 
4,335

 
—

Retail
1,914

 
1,265

 
1,265

 
—

 
—

 
1,283

 
—

 
1,292

 
—

Office
907

 
606

 
606

 
—

 
—

 
618

 
—

 
628

 
—

Multifamily
1,000

 
65

 
65

 
—

 
—

 
157

 
—

 
169

 
—

Industrial
76

 
76

 
76

 
—

 
—

 
76

 
—

 
76

 
—

Other commercial real estate
7,445

 
1,507

 
1,355

 
152

 
18

 
1,865

 
—

 
1,890

 
—

Total commercial real estate
18,519

 
7,780

 
7,628

 
152

 
18

 
8,524

 
—

 
8,390

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Permanent mortgage
33,793

 
27,228

 
27,117

 
111

 
64

 
27,362

 
304

 
28,106

 
631

Permanent mortgage guaranteed by U.S. government agencies1
198,534

 
192,732

 
192,732

 
—

 
—

 
191,430

 
2,023

 
195,563

 
3,795

Home equity
10,964

 
10,092

 
10,092

 
—

 
—

 
10,311

 
—

 
10,224

 
—

Total residential mortgage
243,291

 
230,052

 
229,941

 
111

 
64

 
229,103

 
2,327

 
233,893

 
4,426

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
1,174

 
354

 
354

 
—

 
—

 
342

 
—

 
409

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
496,841

 
$
420,175

 
$
388,031

 
$
32,144

 
$
4,310

 
$
416,291

 
$
2,327

 
$
355,154

 
$
4,426

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At June 30, 2016, $20 million of these loans were nonaccruing and $173 million were accruing based on the guarantee by U.S. government agencies.


- 82 -


Troubled Debt Restructurings

A summary of troubled debt restructurings ("TDRs") by accruing status as of June 30, 2017 is as follows (in thousands):
 
 
As of June 30, 2017
 
Amounts Charged Off During:
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended June 30, 2017
 
Six Months Ended
June 30, 2017
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
22,466

 
$
12,692

 
$
9,774

 
$
4,308

 
$
—

 
$
—

Services
 
7,208

 
6,561

 
647

 
—

 
3

 
3

Wholesale/retail
 
10,524

 
10,524

 
—

 
—

 
—

 
—

Manufacturing
 
195

 
195

 
—

 
—

 
—

 
—

Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
20,531

 
35

 
20,496

 
—

 
—

 
—

Total commercial
 
60,924

 
30,007

 
30,917

 
4,308

 
3

 
3

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
381

 
145

 
236

 
—

 
—

 
—

Retail
 
301

 
301

 
—

 
—

 
—

 
—

Office
 
121

 
—

 
121

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
 
365

 
365

 
—

 
—

 
—

 
—

Total commercial real estate
 
1,168

 
811

 
357

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
14,284

 
9,939

 
4,345

 
—

 
—

 
—

Permanent mortgage guaranteed by U.S. government agencies
 
5,962

 
1,176

 
4,786

 
—

 
—

 
—

Home equity
 
5,549

 
4,239

 
1,310

 
—

 
—

 
31

Total residential mortgage
 
25,795

 
15,354

 
10,441

 
—

 
—

 
31

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
228

 
228

 
—

 
—

 
7

 
8

 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
88,115

 
$
46,400

 
$
41,715

 
$
4,308

 
$
10

 
$
42

 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgages guaranteed by U.S. government agencies
 
80,624

 
24,506

 
56,118

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
168,739

 
$
70,906

 
$
97,833

 
$
4,308

 
$
10

 
$
42


- 83 -


A summary of troubled debt restructurings by accruing status as of December 31, 2016 is as follows (in thousands):
 
 
As of
 
 
December 31, 2016
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
Energy
 
$
16,893

 
$
10,867

 
$
6,026

 
$
—

Services
 
7,527

 
6,830

 
697

 
—

Wholesale/retail
 
11,291

 
11,251

 
40

 
—

Manufacturing
 
224

 
224

 
—

 
—

Healthcare
 
607

 
—

 
607

 
—

Other commercial and industrial
 
337

 
53

 
284

 
—

Total commercial
 
36,879

 
29,225

 
7,654

 
—

 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

Residential construction and land development
 
690

 
97

 
593

 
—

Retail
 
326

 
326

 
—

 
—

Office
 
143

 
143

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

Other commercial real estate
 
548

 
548

 
—

 
—

Total commercial real estate
 
1,707

 
1,114

 
593

 
—

 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

Permanent mortgage
 
14,876

 
10,175

 
4,701

 
46

Permanent mortgage guaranteed by U.S. government agencies
 
6,702

 
2,241

 
4,461

 
—

Home equity
 
5,346

 
4,458

 
888

 
—

Total residential mortgage
 
26,924

 
16,874

 
10,050

 
46

 
 
 
 
 
 
 
 
 
Personal
 
237

 
236

 
1

 
—

 
 
 
 
 
 
 
 
 
Total nonaccuring TDRs
 
$
65,747

 
$
47,449

 
$
18,298

 
$
46

 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
Permanent mortgages guaranteed by U.S. government agencies
 
81,370

 
27,289

 
54,081

 
—

 
 
 
 
 
 
 
 
 
Total TDRs
 
$
147,117

 
$
74,738

 
$
72,379

 
$
46



- 84 -


A summary of troubled debt restructurings by accruing status as of June 30, 2016 is as follows (in thousands):
 
 
As of June 30, 2016
 
Amounts Charged Off During:
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended
June 30, 2016
 
Six Months Ended
June 30, 2016
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,246

 
$
—

 
$
2,246

 
$
—

 
$
500

 
$
500

Services
 
8,610

 
7,853

 
757

 
—

 
—

 
—

Wholesale/retail
 
2,467

 
2,427

 
40

 
—

 
—

 
—

Manufacturing
 
253

 
253

 
—

 
—

 
—

 
—

Healthcare
 
640

 
640

 
—

 
—

 
—

 
—

Other commercial and industrial
 
516

 
63

 
453

 
—

 
—

 
57

Total commercial
 
14,732

 
11,236

 
3,496

 
—

 
500

 
557

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
1,601

 
1,079

 
522

 
—

 
—

 
—

Retail
 
1,264

 
907

 
357

 
—

 
—

 
—

Office
 
152

 
152

 
—

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
 
793

 
372

 
421

 
—

 
—

 
—

Total commercial real estate
 
3,810

 
2,510

 
1,300

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
17,367

 
12,462

 
4,905

 
64

 
37

 
52

Permanent mortgage guaranteed by U.S. government agencies
 
9,709

 
2,024

 
7,685

 
—

 
—

 
—

Home equity
 
4,763

 
4,139

 
624

 
—

 
60

 
126

Total residential mortgage
 
31,839

 
18,625

 
13,214

 
64

 
97

 
178

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
298

 
276

 
22

 
—

 
3

 
9

 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
50,679

 
$
32,647

 
$
18,032

 
$
64

 
$
600

 
$
744

 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgages guaranteed by U.S. government agencies
 
78,806

 
27,999

 
50,807

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
129,485

 
$
60,646

 
$
68,839

 
$
64

 
$
600

 
$
744


- 85 -


Troubled debt restructurings generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. The following tables detail the recorded balance of loans at June 30, 2017 by class that were restructured during the three months ended June 30, 2017 by primary type of concession (in thousands):

 
Three Months Ended
June 30, 2017
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
626

 
626

 
626

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
20,242

 
—

 
20,242

 
20,242

Total commercial
—

 
—

 
—

 
20,242

 
626

 
20,868

 
20,868

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
138

 
53

 
191

 
191

Permanent mortgage guaranteed by U.S. government agencies
10,410

 
1,568

 
11,978

 
223

 
—

 
223

 
12,201

Home equity
—

 
—

 
—

 
26

 
559

 
585

 
585

Total residential mortgage
10,410

 
1,568

 
11,978

 
387

 
612

 
999

 
12,977

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
—

 
—

 
—

 
47

 
47

 
47

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
10,410

 
$
1,568

 
$
11,978

 
$
20,629

 
$
1,285

 
$
21,914

 
$
33,892


- 86 -


 
Six Months Ended
June 30, 2017
 
Accruing
Nonaccrual
 
Total
 
 
Payment Stream
 
Combination & Other
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
13,010

 
$
—

 
$
13,010

 
$
13,010

Services
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
 
—

 
—

 
—

 
—

 
626

 
626

 
626

Manufacturing
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
—

 
—

 
—

 
20,242

 
—

 
20,242

 
20,242

Total commercial
 
—

 
—

 
—

 
33,252

 
626

 
33,878

 
33,878

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
—

 
—

 
—

 
153

 
84

 
237

 
237

Permanent mortgage guaranteed by U.S. government agencies
 
14,883

 
2,586

 
17,469

 
224

 
85

 
309

 
17,778

Home equity
 
—

 
—

 
—

 
149

 
1,053

 
1,202

 
1,202

Total residential mortgage
 
14,883

 
2,586

 
17,469

 
526

 
1,222

 
1,748

 
19,217

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
—

 
—

 
—

 
—

 
51

 
51

 
51

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,883

 
$
2,586

 
$
17,469

 
$
33,778

 
$
1,899

 
$
35,677

 
$
53,146


- 87 -


Troubled debt restructurings generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. The following tables detail the recorded balance of loans by class that were restructured during three months ended June 30, 2016 by primary type of concession (in thousands):

 
Three Months Ended
June 30, 2016
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
684

 
1,183

 
1,867

 
1,867

Permanent mortgage guaranteed by U.S. government agencies
2,783

 
4,455

 
7,238

 
—

 
625

 
625

 
7,863

Home equity
—

 
—

 
—

 
48

 
329

 
377

 
377

Total residential mortgage
2,783

 
4,455

 
7,238

 
732

 
2,137

 
2,869

 
10,107

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
—

 
—

 
—

 
65

 
65

 
65

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
2,783

 
$
4,455

 
$
7,238

 
$
732

 
$
2,202

 
$
2,934

 
$
10,172


- 88 -


 
Six Months Ended
June 30, 2016
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
501

 
$
—

 
$
501

 
$
501

Services
—

 
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
501

 
—

 
501

 
501

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
1,046

 
1,244

 
2,290

 
2,290

Permanent mortgage guaranteed by U.S. government agencies
6,625

 
7,818

 
14,443

 
—

 
625

 
625

 
15,068

Home equity
—

 
—

 
—

 
48

 
791

 
839

 
839

Total residential mortgage
6,625

 
7,818

 
14,443

 
1,094

 
2,660

 
3,754

 
18,197

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
—

 
—

 
—

 
72

 
72

 
72

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
6,625

 
$
7,818

 
$
14,443

 
$
1,595

 
$
2,732

 
$
4,327

 
$
18,770


- 89 -


The following table summarizes, by loan class, the recorded investment at June 30, 2017 and 2016, respectively, of loans modified as TDRs within the previous 12 months and for which there was a payment default during the three months ended June 30, 2017 and 2016, respectively (in thousands):

 
Three Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2017
 
Accruing
 
Nonaccrual
 
Total
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
9,774

 
$
9,774

 
$
—

 
$
9,774

 
$
9,774

Services
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
20,242

 
20,242

 
—

 
20,242

 
20,242

Total commercial
—

 
30,016

 
30,016

 
—

 
30,016

 
30,016

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
161

 
161

 
—

 
161

 
161

Permanent mortgage guaranteed by U.S. government agencies
22,234

 
918

 
23,152

 
22,590

 
918

 
23,508

Home equity
—

 
1,113

 
1,113

 
—

 
1,262

 
1,262

Total residential mortgage
22,234

 
2,192

 
24,426

 
22,590

 
2,341

 
24,931

 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
22,234

 
$
32,208

 
$
54,442

 
$
22,590

 
$
32,357

 
$
54,947


A payment default is defined as being 30 days or more past due. The table above includes loans that experienced a payment default during the period, but may be performing in accordance with the modified terms as of the balance sheet date.

- 90 -


 
Three Months Ended
June 30, 2016
 
Six Months Ended
June 30, 2016
 
Accruing
 
Nonaccrual
 
Total
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
2,246

 
$
2,246

 
$
—

 
$
2,246

 
$
2,246

Services
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
2,246

 
2,246

 
—

 
2,246

 
2,246

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
788

 
788

 
—

 
1,806

 
1,806

Permanent mortgage guaranteed by U.S. government agencies
18,893

 
1,006

 
19,899

 
20,621

 
1,006

 
21,627

Home equity
—

 
232

 
232

 
—

 
232

 
232

Total residential mortgage
18,893

 
2,026

 
20,919

 
20,621

 
3,044

 
23,665

 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
18,893

 
$
4,272

 
$
23,165

 
$
20,621

 
$
5,290

 
$
25,911


- 91 -


Nonaccrual & Past Due Loans

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

A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of June 30, 2017 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,723,248

 
$
—

 
$
—

 
$
—

 
$
123,992

 
$
2,847,240

Services
 
2,949,562

 
50

 
180

 
1,281

 
7,754

 
2,958,827

Wholesale/retail
 
1,532,986

 
89

 
—

 
—

 
10,620

 
1,543,695

Manufacturing
 
536,481

 
—

 
—

 
—

 
9,656

 
546,137

Healthcare
 
2,196,088

 
925

 
—

 
—

 
24,505

 
2,221,518

Other commercial and industrial
 
499,743

 
45

 
119

 
1

 
20,630

 
520,538

Total commercial
 
10,438,108

 
1,109

 
299

 
1,282

 
197,157

 
10,637,955

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
139,070

 
471

 
—

 
—

 
2,051

 
141,592

Retail
 
722,504

 
—

 
—

 
—

 
301

 
722,805

Office
 
862,577

 
—

 
—

 
—

 
396

 
862,973

Multifamily
 
952,370

 
—

 
—

 
—

 
10

 
952,380

Industrial
 
693,635

 
—

 
—

 
—

 
—

 
693,635

Other commercial real estate
 
314,187

 
3

 
—

 
—

 
1,017

 
315,207

Total commercial real estate
 
3,684,343

 
474

 
—

 
—

 
3,775

 
3,688,592

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
962,443

 
2,024

 
1,026

 
132

 
23,415

 
989,040

Permanent mortgages guaranteed by U.S. government agencies
 
36,867

 
18,416

 
13,581

 
113,813

 
9,052

 
191,729

Home equity
 
744,735

 
1,564

 
362

 
—

 
11,768

 
758,429

Total residential mortgage
 
1,744,045

 
22,004

 
14,969

 
113,945

 
44,235

 
1,939,198

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
916,852

 
487

 
289

 
—

 
272

 
917,900

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,783,348

 
$
24,074

 
$
15,557

 
$
115,227

 
$
245,439

 
$
17,183,645



- 92 -


A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of December 31, 2016 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,364,890

 
$
479

 
—

 
$
—

 
$
132,499

 
$
2,497,868

Services
 
3,099,605

 
191

 
1,021

 
—

 
8,173

 
3,108,990

Wholesale/retail
 
1,561,650

 
3,761

 
—

 
—

 
11,407

 
1,576,818

Manufacturing
 
509,662

 
382

 
—

 
—

 
4,931

 
514,975

Healthcare
 
2,201,050

 
—

 
41

 
—

 
825

 
2,201,916

Other commercial and industrial
 
468,981

 
155

 
3

 
—

 
21,118

 
490,257

Total commercial
 
10,205,838

 
4,968

 
1,065

 
—

 
178,953

 
10,390,824

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 
 
 

 
 

 
 

Residential construction and land development
 
132,100

 
—

 
—

 
—

 
3,433

 
135,533

Retail
 
761,562

 
—

 
—

 
—

 
326

 
761,888

Office
 
798,462

 
—

 
—

 
—

 
426

 
798,888

Multifamily
 
903,234

 
—

 
—

 
—

 
38

 
903,272

Industrial
 
871,673

 
—

 
—

 
—

 
76

 
871,749

Other commercial real estate
 
336,488

 
6

 
—

 
—

 
1,222

 
337,716

Total commercial real estate
 
3,803,519

 
6

 
—

 
—

 
5,521

 
3,809,046

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 
 
 

 
 

 
 

Permanent mortgage
 
979,386

 
3,299

 
1,280

 
—

 
22,855

 
1,006,820

Permanent mortgages guaranteed by U.S. government agencies
 
40,594

 
17,465

 
13,803

 
115,679

 
11,846

 
199,387

Home equity
 
729,493

 
2,276

 
337

 
—

 
11,519

 
743,625

Total residential mortgage
 
1,749,473

 
23,040

 
15,420

 
115,679

 
46,220

 
1,949,832

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
838,811

 
589

 
263

 
5

 
290

 
839,958

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,597,641

 
$
28,603

 
16,748

 
$
115,684

 
$
230,984

 
$
16,989,660



- 93 -


A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of June 30, 2016 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89 Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,647,678

 
$
—

 
—

 
$
2,833

 
$
168,145

 
$
2,818,656

Services
 
2,817,217

 
494

 
3,765

 
—

 
9,388

 
2,830,864

Wholesale/retail
 
1,530,110

 
75

 
—

 
—

 
2,772

 
1,532,957

Manufacturing
 
595,110

 
—

 
—

 
—

 
293

 
595,403

Healthcare
 
2,050,271

 
—

 
—

 
—

 
875

 
2,051,146

Other commercial and industrial
 
526,691

 
76

 
82

 
46

 
516

 
527,411

Total commercial
 
10,167,077

 
645

 
3,847

 
2,879

 
181,989

 
10,356,437

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
153,315

 
—

 
—

 
—

 
4,261

 
157,576

Retail
 
794,154

 
—

 
—

 
—

 
1,265

 
795,419

Office
 
768,506

 
—

 
—

 
—

 
606

 
769,112

Multifamily
 
784,826

 
2,309

 
—

 
—

 
65

 
787,200

Industrial
 
645,510

 
—

 
—

 
—

 
76

 
645,586

Other commercial real estate
 
425,566

 
—

 
—

 
—

 
1,507

 
427,073

Total commercial real estate
 
3,571,877

 
2,309

 
—

 
—

 
7,780

 
3,581,966

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
935,857

 
5,798

 
124

 
—

 
27,228

 
969,007

Permanent mortgages guaranteed by U.S. government agencies
 
42,019

 
15,349

 
11,869

 
103,754

 
19,741

 
192,732

Home equity
 
707,024

 
1,889

 
159

 
20

 
10,092

 
719,184

Total residential mortgage
 
1,684,900

 
23,036

 
12,152

 
103,774

 
57,061

 
1,880,923

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
586,611

 
400

 
58

 
—

 
354

 
587,423

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,010,465

 
$
26,390

 
16,057

 
$
106,653

 
$
247,184

 
$
16,406,749


- 94 -


(5) Acquisitions

On December 1, 2016, the Company acquired MBT Bancshares (“MBT”), parent company of Missouri Bank and Trust of Kansas City (“Mobank”) following regulatory approval of the transaction. Mobank operated four banking branches in the Kansas City, Mo. area. BOK Financial paid $102.5 million in an all-cash deal for all outstanding shares of MBT stock. MBT was merged into BOK Financial and Mobank became a wholly owned subsidiary of BOK Financial on December 1, 2016. On February 21, 2017, Mobank was merged with the Bank of Kansas City division of BOKF, NA. All branches in the Kansas City market will operate under the Mobank name. The preliminary purchase price allocation was updated in the first quarter of 2017 resulting in a $2.0 million increase in identifiable intangibles, $1.5 million decrease in premises and equipment and other repossessed assets, and a $526 thousand decrease in goodwill.
(6) Mortgage Banking Activities

Residential Mortgage Loan Production

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

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

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loan commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):
 
 
June 30, 2017
 
Dec. 31, 2016
 
June 30, 2016
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid
Principal
 Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
269,772

 
$
275,179

 
$
286,414

 
$
286,971

 
$
404,507

 
$
417,542

Residential mortgage loan commitments
 
362,088

 
10,993

 
318,359

 
9,733

 
965,631

 
25,499

Forward sales contracts
 
587,595

 
1,087

 
569,543

 
5,193

 
1,216,966

 
(12,313
)
 
 
 

 
$
287,259

 
 

 
$
301,897

 
 

 
$
430,728


No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of June 30, 2017, December 31, 2016 or June 30, 2016. No credit losses were recognized on residential mortgage loans held for sale for the three and six month periods ended June 30, 2017 and 2016.

- 95 -


Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Production revenue:
 
 
 
 
 
 
 
 
Net realized gains on sale of mortgage loans
 
$
11,787

 
$
15,865

 
$
20,402

 
$
24,314

Net change in unrealized gain on mortgage loans held for sale
 
985

 
3,884

 
4,827

 
7,167

Net change in the fair value of mortgage loan commitments
 
(3,274
)
 
5,329

 
1,260

 
17,365

Net change in the fair value of forward sales contracts
 
4,342

 
(5,992
)
 
(4,106
)
 
(13,113
)
Total production revenue
 
13,840

 
19,086

 
22,383

 
35,733

Servicing revenue
 
16,436

 
15,798

 
33,084

 
31,251

Total mortgage banking revenue
 
$
30,276

 
$
34,884

 
$
55,467

 
$
66,984


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

Residential Mortgage Servicing

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

The following represents a summary of mortgage servicing rights (Dollars in thousands):
 
 
June 30,
2017
 
Dec. 31,
2016
 
June 30,
2016
Number of residential mortgage loans serviced for others
 
138,335

 
139,340

 
137,210

Outstanding principal balance of residential mortgage loans serviced for others
 
$
22,095,232

 
$
21,997,568

 
$
21,178,387

Weighted average interest rate
 
3.95
%
 
3.97
%
 
4.06
%
Remaining term (in months)
 
299

 
301

 
301


Activity in capitalized mortgage servicing rights during the three months ended June 30, 2017 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, March 31, 2017
 
$
8,316

 
$
241,087

 
$
249,403

Additions, net
 
—

 
11,078

 
11,078

Change in fair value due to scheduled payments and full-balance payoffs
 
(464
)
 
(7,835
)
 
(8,299
)
Change in fair value due to market assumption changes
 
143

 
(7,086
)
 
(6,943
)
Balance, June 30, 2017
 
$
7,995

 
$
237,244

 
$
245,239

 
 
Purchased
 
Originated
 
Total
Balance, Dec. 31, 2016
 
$
8,909

 
$
238,164

 
$
247,073

Additions, net
 
—

 
19,514

 
19,514

Change in fair value due to scheduled payments and full-balance payoffs
 
(973
)
 
(15,288
)
 
(16,261
)
Change in fair value due to market assumption changes
 
59

 
(5,146
)
 
(5,087
)
Balance, June 30, 2017
 
$
7,995

 
$
237,244

 
$
245,239


- 96 -


Activity in capitalized mortgage servicing rights during the three months ended June 30, 2016 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, March 31, 2016
 
$
5,949

 
$
190,106

 
$
196,055

Additions, net
 
—

 
20,773

 
20,773

Change in fair value due to scheduled payments and full-balance payoffs
 
(730
)
 
(9,068
)
 
(9,798
)
Change in fair value due to market assumption changes
 
(1,152
)
 
(15,131
)
 
(16,283
)
Balance, June 30, 2016
 
$
4,067

 
$
186,680

 
$
190,747

 
 
Purchased
 
Originated
 
Total
Balance, Dec. 31, 2015
 
$
9,911

 
$
208,694

 
$
218,605

Additions, net
 
—

 
34,355

 
34,355

Change in fair value due to scheduled payments and full-balance payoffs
 
(1,356
)
 
(16,586
)
 
(17,942
)
Change in fair value due to market assumption changes
 
(4,488
)
 
(39,783
)
 
(44,271
)
Balance, June 30, 2016
 
$
4,067

 
$
186,680

 
$
190,747


Changes in the fair value of mortgage servicing rights are included in Other operating revenue in the Consolidated Statements of Earnings. Changes in fair value due to actual loan payments are included in Mortgage banking costs. Changes in fair value due to market assumption changes are reported separately. Changes in fair value due to market assumption changes during the period relate to assets held at the reporting date.

There is no active market for trading in mortgage servicing rights after origination. Fair value is determined by discounting the projected net cash flows. Significant assumptions used to determine fair value based on significant unobservable inputs were as follows:
 
 
June 30,
2017
 
Dec. 31,
2016
 
June 30,
2016
Discount rate – risk-free rate plus a market premium
 
9.84%
 
10.08%
 
10.09%
Prepayment rate - based upon loan interest rate, original term and loan type
 
8.61%-15.91%
 
8.98%-16.91%
 
9.26%-42.77%
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
 
 
Performing loans
 
$65-$120
 
$63 - $120
 
$63 - $120
Delinquent loans
 
$150-$500
 
$150 - $500
 
$150 - $500
Loans in foreclosure
 
$1,000-$4,250
 
$650 - $4,250
 
$650 - $4,250
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
1.95%
 
1.98%
 
0.99%
Primary/secondary mortgage rate spread
 
105 bps
 
105 bps
 
115 bps

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

The aging status of our mortgage loans serviced for others by investor at June 30, 2017 follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89
Days
 
90 Days or More
 
Total
FHLMC
 
$
8,083,330

 
$
48,659

 
$
12,294

 
$
27,338

 
$
8,171,621

FNMA
 
6,756,211

 
46,918

 
10,679

 
23,981

 
6,837,789

GNMA
 
6,331,439

 
170,889

 
47,335

 
16,082

 
6,565,745

Other
 
514,272

 
3,278

 
932

 
1,595

 
520,077

Total
 
$
21,685,252

 
$
269,744

 
$
71,240

 
$
68,996

 
$
22,095,232



- 97 -


The Company has obligations to repurchase or provide indemnification for residential mortgage loans sold to government sponsored entities due to standard representations and warranties made under contractual agreements and to service loans in accordance with investor guidelines. The Company has established accruals for losses related to these obligations that are included in Other liabilities in the Consolidated Balance Sheets and in Mortgage banking costs in the Consolidated Statements of Earnings. 

The Company repurchased five loans from the agencies for $1.3 million during the second quarter of 2017. There were four indemnifications on loans paid during the second quarter of 2017. Losses recognized on repurchases were insignificant.

A summary of unresolved deficiency requests from the agencies follows (in thousands, except for number of unresolved deficiency requests):
 
June 30,
 
2017
 
2016
Number of unresolved deficiency requests
206

 
211

Aggregate outstanding principal balance subject to unresolved deficiency requests
$
13,370

 
$
15,920

Unpaid principal balance subject to indemnification by the Company
5,074

 
5,519


The activity in the accruals for mortgage losses related to repurchases is summarized as follows (in thousands).
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Beginning balance
$
2,587

 
$
2,974

 
$
2,788

 
$
3,359

Provision for losses
(895
)
 
368

 
(1,094
)
 
250

Charge-offs, net
(45
)
 
(89
)
 
(47
)
 
(356
)
Ending balance
$
1,647


$
3,253


$
1,647


$
3,253


- 98 -


(7)  Commitments and Contingent Liabilities

Litigation Contingencies

As a member of Visa, BOK Financial is obligated for a proportionate share of certain covered litigation losses incurred by Visa under a retrospective responsibility plan. A contingent liability was recognized for the Company’s share of Visa’s covered litigation liabilities. Visa funded an escrow account to cover litigation claims, including covered litigation losses under the retrospective responsibility plan, with proceeds from its initial public offering in 2008 and from available cash.
BOK Financial currently owns 252,233 Visa Class B shares which are convertible into 415,755 shares of Visa Class A shares after the final settlement of all covered litigation. Class B shares may be diluted in the future if the escrow fund is not adequate to cover future covered litigation costs. Therefore, no value has been currently assigned to the Class B shares and no value may be assigned until the Class B shares are converted into a known number of Class A shares.
On March 3, 2015, BOKF, NA and the Company were named as defendants in a class action alleging (1) that the manner in which the Bank posted charges to its consumer deposit accounts was improper from September 1, 2011 through July 8, 2014, the period after which the Bank and BOK Financial had settled a class action respecting a similar claim, and before it made changes to its posting order and (2) that the manner in which the Bank posted charges to its small business deposit accounts was improper from July 9, 2009 through July 8, 2014. Following mediation of the case in August 2016, the Class Representatives and the Bank reached a settlement of the action for $7.8 million. The Settlement was approved by the Court in a final order, the Company funded the settlement, and the settlement has been implemented. 
On June 24, 2015, the Bank received a complaint alleging that an employee had colluded with a bond issuer and an individual in misusing revenues pledged to municipal bonds for which the Bank served as trustee under the bond indenture. The Company conducted an investigation and concluded that employees in one of its Corporate Trust offices had, with respect to a single group of affiliated bond issuances, violated Company policies and procedures by waiving financial covenants, granting forbearances and accepting without disclosure to the bondholders, debt service payments from sources other than pledged revenues. The relationship manager was terminated. The Company reported the circumstances to, and cooperated with an investigation by, the Securities and Exchange Commission ("SEC"). On December 28, 2015, in an action brought by the SEC, the United States District Court for the District of New Jersey entered a judgment against the principals involved in issuing the bonds, precluding the principals from denying the alleged violations of the federal securities laws and requiring the principals to pay all outstanding principal, accrued interest, and other amounts required under the bond documents (estimated to be approximately $73 million, less the value of the facilities securing repayment of the bonds), subject to oversight by a court appointed monitor. On September 7, 2016, the Bank agreed, and the SEC entered, a consent order finding that the Bank had violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and requiring the Bank to disgorge $1,067,721 of fees and pay a civil penalty of $600,000. The Bank has disgorged the fees and paid the penalty. On August 26, 2016, the Bank was sued in the United States District Court for New Jersey by two bondholders in a putative class action on behalf of all holders of the bonds alleging the Bank participated in the fraudulent sale of securities by the principals. On September 14, 2016, the Bank was sued in the District Court of Tulsa County, Oklahoma by 19 bondholders alleging the Bank participated in the fraudulent sale of securities by the principals. Management has been advised by counsel that the Bank has valid defenses to the claims. The Bank expects the Court ordered payment plan will result in the payment of the bonds by the principals. Accordingly, no loss is probable at this time and no provision for loss has been made. If the payment plan does not result in payment of the bonds, a loss could become probable. A reasonable estimate cannot be made at this time though the amount could be material to the Company.
On March 14, 2017, the Bank was sued in the United States District Court for the Northern District of Oklahoma by bondholders in a second putative class action. The bondholders in this second action allege two individuals purchased facilities from the principals who are the subject of the SEC New Jersey proceedings by means of the fraudulent sale of $60 million of municipal securities for which the Bank also served as indenture trustee. The bondholders allege the Bank failed to disclose that the seller of the purchased facilities had engaged in the conduct complained of in the New Jersey action. The Bank properly performed all duties as indenture trustee of this second set of municipal securities, timely commenced proceedings against the issuer of the securities when default occurred, is cooperating with the SEC in actions against the two principals, is not a target of the SEC proceedings, and has been advised by counsel that the Bank has valid defenses to the claims of these bondholders. It is the opinion of management that no loss is probable at this time.
The County of Bernalillo, New Mexico, commenced arbitration pursuant to the Arbitration Rules of FINRA seeking recovery of $5.6 million alleging that various municipal bonds purchased by the elected County Treasurer of Bernalillo County, New Mexico, from BOK Financial Securities, Inc. were unsuitable. The arbitration was conducted in July 2017. Management has been advised by counsel that a loss is not probable.


- 99 -


On March 30, 2017, two deposit customers of the Bank sued the Bank in the District Court of Harris County, Texas. A judgment creditor had served a garnishment summons on the Bank. The deposit customers allege that, because the Bank was unable to produce adequate documentation of ownership of a series of deposit accounts at the Bank owned by them, they were compelled to enter into a settlement agreement with the judgment creditor pursuant to which the Bank paid $4.2 million from the accounts to the judgment creditor. The two deposit customers seek $7 million. Management has been advised by counsel that a loss is not probable and that the amount of the liability, if any, cannot be quantified at this time.
On March 7, 2017, a plaintiff filed a putative class action in the United States District Court for the Northern District of Texas alleging an extended overdraft fee charged by BOKF, NA is interest and exceeds permitted rates. BOKF, NA was previously sued in a class action in the United States District Court for the Northern District of Oklahoma making the same allegations.  Pursuant to a motion to dismiss, the Northern District of Oklahoma Court action was dismissed. Other courts considering the question whether extended overdraft fees are interest have likewise determined such fees are not interest. BOKF, NA has moved to dismiss the action. Management is advised by counsel that a loss is not probable and that the loss, if any, cannot be reasonably estimated.

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

The Company sponsors two private equity funds and invests in several tax credit entities and other funds as permitted by banking regulations. Consolidation of these investments is based on the variable interest model determined by the nature of the entity. Variable interest entities are generally defined as entities that either do not have sufficient equity to finance their activities without support from other parties or whose equity investors lack a controlling financial interest. Variable interest entities are consolidated based on the determination that the Company is the primary beneficiary including the power to direct the activities that most significantly impact the variable interest's economic performance and the obligation to absorb losses of the variable interest or the right to receive benefits of the variable interest that could be significant to the variable interest.

BOKF Equity, LLC, an indirect wholly-owned subsidiary, is the general partner of two consolidated private equity funds (“the Funds”). The Funds provide alternative investment opportunities to certain customers, some of which are related parties, through unaffiliated limited partnerships. These unaffiliated limited partnerships generally invest in distressed assets, asset buy-outs or venture capital companies. As general partner, BOKF Equity, LLC has the power to direct activities that most significantly affect the Funds' performance and contingent obligations to make additional investments totaling $4.0 million at June 30, 2017. Substantially all of the obligations are offset by limited partner commitments. The Company does not accrue its contingent liability to fund investments. The Volcker Rule in Title VI of the Dodd-Frank Act will limit both the amount and structure of these types of investments.

Consolidated tax credit investment entities represent the Company's interest in entities earning federal new market tax credits related to qualifying loans. The Company has the power to direct the activities that most significantly impact the variable interest's economic performance of the entity including being the primary beneficiary of or the obligation to absorb losses of the variable interest that could be significant to the variable interest.

Other consolidated alternative investments include entities held under merchant banking authority. While the Company owns a majority of the voting interest in these entities, its ability to manage daily operations is limited by applicable banking regulations. Consolidated other assets includes total tangible assets, identifiable intangible assets and goodwill held by these entities.

The Company also has interests in various unrelated alternative investments generally consisting of unconsolidated limited partnership interests in or loans to entities for which investment return is primarily in the form of tax credits or that invest in distressed real estate loans and properties, energy development, venture capital and other activities. The Company is prohibited by banking regulations from controlling or actively managing the activities of these investments and the Company's maximum exposure to loss is restricted to its investment balance. The Company's obligation to fund alternative investments is included in Other liabilities in the Consolidated Balance Sheets.


- 100 -


A summary of consolidated and unconsolidated alternative investments as of June 30, 2017, December 31, 2016 and June 30, 2016 is as follows (in thousands):

 
 
June 30, 2017
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
16,905

 
$
—

 
$
—

 
$
14,199

Tax credit entities
 
10,000

 
11,274

 
—

 
10,964

 
10,000

Other
 
—

 
15,894

 
1,621

 
878

 
2,877

Total consolidated
 
$
10,000

 
$
44,073

 
$
1,621

 
$
11,842

 
$
27,076

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
59,744

 
$
148,525

 
$
63,822

 
$
—

 
$
—

Other
 
—

 
33,155

 
13,680

 
—

 
—

Total unconsolidated
 
$
59,744

 
$
181,680

 
$
77,502

 
$
—

 
$
—


 
 
Dec. 31, 2016
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
17,357

 
$
—

 
$
—

 
$
13,237

Tax credit entities
 
10,000

 
11,585

 
—

 
10,964

 
10,000

Other
 
—

 
29,783

 
3,189

 
1,092

 
8,266

Total consolidated
 
$
10,000

 
$
58,725

 
$
3,189

 
$
12,056

 
$
31,503

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
44,488

 
$
143,715

 
$
63,329

 
$
—

 
$
—

Other
 
—

 
31,675

 
15,028

 
—

 
—

Total unconsolidated
 
$
44,488

 
$
175,390

 
$
78,357

 
$
—

 
$
—


 
 
June 30, 2016
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
20,469

 
$
—

 
$
—

 
$
16,316

Tax credit entities
 
10,000

 
11,895

 
—

 
10,964

 
10,000

Other
 
—

 
35,387

 
2,004

 
2,272

 
7,589

Total consolidated
 
$
10,000

 
$
67,751

 
$
2,004

 
$
13,236

 
$
33,905

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
32,679

 
$
102,138

 
$
30,953

 
$
—

 
$
—

Other
 
—

 
23,439

 
13,767

 
—

 
—

Total unconsolidated
 
$
32,679

 
$
125,577

 
$
44,720

 
$
—

 
$
—



- 101 -


Other Commitments and Contingencies

At June 30, 2017, Cavanal Hill Funds’ assets included U.S. Treasury, cash management and tax-free money market funds. Assets of these funds consist of highly-rated, short-term obligations of the U.S. Treasury, corporate issuers and U.S. states and municipalities. The net asset value of units in these funds was $1.00 at June 30, 2017. An investment in these funds is not insured by the Federal Deposit Insurance Corporation or guaranteed by BOK Financial or any of its subsidiaries. BOK Financial may, but is not obligated to purchase assets from these funds to maintain the net asset value at $1.00. No assets were purchased from the funds in 2017 or 2016.
(8) Shareholders' Equity

On July 25, 2017, the Company declared a quarterly cash dividend of $0.44 per common share on or about August 25, 2017 to shareholders of record as of August 11, 2017.

Dividends declared were $0.44 per share and $0.88 per share during the three and six months ended June 30, 2017 and $0.43 per share and $0.86 per share during the three and six months ended June 30, 2016.

Accumulated Other Comprehensive Income (Loss)

AOCI includes unrealized gains and losses on available for sale ("AFS") securities and non-credit related unrealized losses on AFS securities for which an other-than-temporary impairment has been recorded in earnings. AOCI also includes unrealized gains on AFS securities that were transferred from AFS to investment securities in the third quarter of 2011. Such amounts are being amortized over the estimated remaining life of the security as an adjustment to yield, offsetting the related amortization of premium on the transferred securities. Unrealized losses on employee benefit plans will be reclassified into income as pension plan costs are recognized over the remaining service period of plan participants. Gains and losses in AOCI are net of deferred income taxes.

A rollforward of the components of accumulated other comprehensive income (loss) is included as follows (in thousands):
 
 
Unrealized Gain (Loss) on
 
 
 
 
Available for Sale Securities
 
Investment Securities Transferred from AFS
 
Employee Benefit Plans
 
Total
Balance, Dec. 31, 2015
 
$
23,284

 
$
68

 
$
(1,765
)
 
$
21,587

Net change in unrealized gain (loss)
 
166,566

 
—

 
—

 
166,566

Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
Interest revenue, Investment securities, Taxable securities
 
—

 
(112
)
 
—

 
(112
)
Gain on available for sale securities, net
 
(9,290
)
 
—

 
—

 
(9,290
)
Other comprehensive income (loss), before income taxes
 
157,276

 
(112
)
 
—

 
157,164

Federal and state income taxes1
 
61,163

 
(44
)
 
—

 
61,119

Other comprehensive income (loss), net of income taxes
 
96,113

 
(68
)
 
—

 
96,045

Balance, June 30, 2016
 
$
119,397

 
$
—

 
$
(1,765
)
 
$
117,632

 
 
 
 
 
 
 
 
 
Balance, Dec. 31, 2016
 
$
(9,087
)
 
$
—

 
$
(1,880
)
 
$
(10,967
)
Net change in unrealized gain (loss)
 
33,369

 
—

 
—

 
33,369

Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
Gain on available for sale securities, net
 
(2,429
)
 
—

 
—

 
(2,429
)
Other comprehensive income, before income taxes
 
30,940

 
—

 
—

 
30,940

Federal and state income taxes1
 
12,009

 


 
—

 
12,009

Other comprehensive income, net of income taxes
 
18,931

 
—

 
—

 
18,931

Balance, June 30, 2017
 
$
9,844

 
$
—

 
$
(1,880
)
 
$
7,964

1 
Calculated using a 39 percent effective tax rate.

- 102 -


(9)  Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to BOK Financial Corp. shareholders
 
$
88,147

 
$
65,801

 
$
176,503

 
$
108,365

Less: Earnings allocated to participating securities
 
926

 
821

 
1,929

 
1,359

Numerator for basic earnings per share – income available to common shareholders
 
87,221

 
64,980

 
174,574

 
107,006

Effect of reallocating undistributed earnings of participating securities
 
1

 
—

 
1

 
—

Numerator for diluted earnings per share – income available to common shareholders
 
$
87,222

 
$
64,980

 
$
174,575

 
$
107,006

 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 

 
 

Weighted average shares outstanding
 
65,416,274

 
66,069,392

 
65,436,909

 
66,100,279

Less:  Participating securities included in weighted average shares outstanding
 
686,522

 
823,505

 
714,165

 
829,065

Denominator for basic earnings per common share
 
64,729,752

 
65,245,887

 
64,722,744

 
65,271,214

Dilutive effect of employee stock compensation plans1
 
63,382

 
57,039

 
65,578

 
45,963

Denominator for diluted earnings per common share
 
64,793,134

 
65,302,926

 
64,788,322

 
65,317,177

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.35

 
$
1.00

 
$
2.70

 
$
1.64

Diluted earnings per share
 
$
1.35

 
$
1.00

 
$
2.69

 
$
1.64

1  Excludes employee stock options with exercise prices greater than current market price.
 
—

 
—

 
—

 
145,247



- 103 -


(10)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2017 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
144,164

 
$
23,503

 
$
10,474

 
$
27,063

 
$
205,204

Net interest revenue (expense) from internal sources
 
(20,347
)
 
11,837

 
10,325

 
(1,815
)
 
—

Net interest revenue
 
123,817

 
35,340

 
20,799

 
25,248

 
205,204

Provision for credit losses
 
1,228

 
926

 
(93
)
 
(2,061
)
 
—

Net interest revenue after provision for credit losses
 
122,589

 
34,414

 
20,892

 
27,309

 
205,204

Other operating revenue
 
55,778

 
52,102

 
75,569

 
(1,197
)
 
182,252

Other operating expense
 
59,128

 
55,709

 
60,615

 
75,433

 
250,885

Net direct contribution
 
119,239

 
30,807

 
35,846

 
(49,321
)
 
136,571

Gain on financial instruments, net
 
3

 
5,224

 
—

 
(5,227
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(6,943
)
 
—

 
6,943

 
—

Gain on repossessed assets, net
 
1,403

 
98

 
—

 
(1,501
)
 
—

Corporate expense allocations
 
8,862

 
17,039

 
9,947

 
(35,848
)
 
—

Net income before taxes
 
111,783

 
12,147

 
25,899

 
(13,258
)
 
136,571

Federal and state income taxes
 
43,484

 
4,725

 
10,075

 
(10,579
)
 
47,705

Net income
 
68,299

 
7,422

 
15,824

 
(2,679
)
 
88,866

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
719

 
719

Net income attributable to BOK Financial Corp. shareholders
 
$
68,299

 
$
7,422

 
$
15,824

 
$
(3,398
)
 
$
88,147

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
17,596,273

 
$
8,845,398

 
$
6,763,093

 
$
(836,193
)
 
$
32,368,571



- 104 -


Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2017 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
278,868

 
$
44,632

 
$
21,960

 
$
60,926

 
$
406,386

Net interest revenue (expense) from internal sources
 
(37,140
)
 
22,789

 
19,181

 
(4,830
)
 
—

Net interest revenue
 
241,728

 
67,421

 
41,141

 
56,096

 
406,386

Provision for credit losses
 
(234
)
 
2,198

 
(53
)
 
(1,911
)
 
—

Net interest revenue after provision for credit losses
 
241,962

 
65,223

 
41,194

 
58,007

 
406,386

Other operating revenue
 
102,048

 
99,408

 
149,727

 
1,365

 
352,548

Other operating expense
 
111,565

 
109,242

 
121,025

 
153,764

 
495,596

Net direct contribution
 
232,445

 
55,389

 
69,896

 
(94,392
)
 
263,338

Gain on financial instruments, net
 
41

 
3,557

 
—

 
(3,598
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(5,087
)
 
—

 
5,087

 
—

Gain (loss) on repossessed assets, net
 
1,398

 
(39
)
 
—

 
(1,359
)
 
—

Corporate expense allocations
 
17,493

 
33,908

 
20,619

 
(72,020
)
 
—

Net income before taxes
 
216,391

 
19,912

 
49,277

 
(22,242
)
 
263,338

Federal and state income taxes
 
84,176

 
7,746

 
19,169

 
(25,283
)
 
85,808

Net income
 
132,215

 
12,166

 
30,108

 
3,041

 
177,530

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
1,027

 
1,027

Net income attributable to BOK Financial Corp. shareholders
 
$
132,215

 
$
12,166

 
$
30,108

 
$
2,014

 
$
176,503

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
17,517,960

 
$
8,747,524

 
$
6,960,872

 
$
(566,196
)
 
$
32,660,160


Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2016 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
118,480

 
$
22,349

 
$
6,271

 
$
35,512

 
$
182,612

Net interest revenue (expense) from internal sources
 
(14,575
)
 
8,876

 
$
7,193

 
(1,494
)
 
—

Net interest revenue
 
103,905

 
31,225

 
13,464

 
34,018

 
182,612

Provision for credit losses
 
6,852

 
1,318

 
(239
)
 
12,069

 
20,000

Net interest revenue after provision for credit losses
 
97,053

 
29,907

 
13,703

 
21,949

 
162,612

Other operating revenue
 
51,497

 
57,440

 
75,772

 
833

 
185,542

Other operating expense
 
52,594

 
62,806

 
61,414

 
74,571

 
251,385

Net direct contribution
 
95,956

 
24,541

 
28,061

 
(51,789
)
 
96,769

Gain on financial instruments, net
 
—

 
15,045

 
—

 
(15,045
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(16,283
)
 
—

 
16,283

 
—

Gain (loss) on repossessed assets, net
 
(598
)
 
252

 
—

 
346

 
—

Corporate expense allocations
 
8,883

 
16,630

 
10,417

 
(35,930
)
 
—

Net income before taxes
 
86,475

 
6,925

 
17,644

 
(14,275
)
 
96,769

Federal and state income taxes
 
33,639

 
2,694

 
6,864

 
(12,700
)
 
30,497

Net income
 
52,836

 
4,231

 
10,780

 
(1,575
)
 
66,272

Net gain attributable to non-controlling interests
 
—

 
—

 
—

 
471

 
471

Net income attributable to BOK Financial Corp. shareholders
 
$
52,836

 
$
4,231

 
$
10,780

 
$
(2,046
)
 
$
65,801

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,973,663

 
$
8,774,881

 
$
5,765,390

 
$
472,108

 
$
31,986,042


- 105 -



Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2016 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
235,116

 
$
43,799

 
$
12,349

 
$
73,920

 
$
365,184

Net interest revenue (expense) from internal sources
 
(29,208
)
 
18,229

 
$
14,857

 
(3,878
)
 
—

Net interest revenue
 
205,908

 
62,028

 
27,206

 
70,042

 
365,184

Provision for credit losses
 
28,423

 
3,020

 
(390
)
 
23,947

 
55,000

Net interest revenue after provision for credit losses
 
177,485

 
59,008

 
27,596

 
46,095

 
310,184

Other operating revenue
 
96,605

 
111,469

 
144,518

 
(9,636
)
 
342,956

Other operating expense
 
108,663

 
118,524

 
122,098

 
144,670

 
493,955

Net direct contribution
 
165,427

 
51,953

 
50,016

 
(108,211
)
 
159,185

Gain on financial instruments, net
 
—

 
31,626

 
—

 
(31,626
)
 
—

Change in fair value of mortgage servicing rights
 
—

 
(44,271
)
 
—

 
44,271

 
—

Gain (loss) on repossessed assets, net
 
(680
)
 
406

 
—

 
274

 
—

Corporate expense allocations
 
17,627

 
32,608

 
20,952

 
(71,187
)
 
—

Net income before taxes
 
147,120

 
7,106

 
29,064

 
(24,105
)
 
159,185

Federal and state income taxes
 
57,230

 
2,764

 
11,306

 
(19,375
)
 
51,925

Net income
 
89,890

 
4,342

 
17,758

 
(4,730
)
 
107,260

Net loss attributable to non-controlling interests
 
—

 
—

 
—

 
(1,105
)
 
(1,105
)
Net income attributable to BOK Financial Corp. shareholders
 
$
89,890

 
$
4,342

 
$
17,758

 
$
(3,625
)
 
$
108,365

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,971,339

 
$
8,731,085

 
$
5,665,218

 
$
379,615

 
$
31,747,257


- 106 -


(11) Fair Value Measurements

Fair value is defined by applicable accounting guidance as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market for the given asset or liability at the measurement date based on market conditions at that date. Certain assets and liabilities are recorded in the Company’s financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis.

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

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

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

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

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

Transfers between levels are recognized as of the end of the reporting period. There were no transfers in or out of quoted prices in active markets for identical instruments to significant other observable inputs or significant unobservable inputs during the three and six months ended June 30, 2017 and 2016, respectively. Transfers between significant other observable inputs and significant unobservable inputs during the three and six months ended June 30, 2017 and 2016 are included in the summary of changes in recurring fair values measured using unobservable inputs.

The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. Management has evaluated the methodologies employed by the third-party pricing services by comparing the price provided by the pricing service with other sources, including brokers' quotes, sales or purchases of similar instruments and discounted cash flows to establish a basis for reliance on the pricing service values. Significant differences between the pricing service provided value and other sources are discussed with the pricing service to understand the basis for their values. Based on all observable inputs, management may adjust prices obtained from third-party pricing services to more appropriately reflect the prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market. No significant adjustments were made to prices provided by third-party pricing services at June 30, 2017, December 31, 2016 or June 30, 2016.


- 107 -


Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial assets and liabilities measured on a recurring basis was as follows as of June 30, 2017 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
$
20,954

 
$
—

 
$
20,954

 
$
—

U.S. government agency residential mortgage-backed securities
 
365,171

 
—

 
365,171

 
—

Municipal and other tax-exempt securities
 
45,444

 
—

 
45,444

 
—

Other trading securities
 
9,845

 
—

 
9,845

 
—

Total trading securities
 
441,414

 
—

 
441,414

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
998

 
998

 
—

 
—

Municipal and other tax-exempt securities
 
32,765

 
—

 
28,110

 
4,655

U.S. government agency residential mortgage-backed securities
 
5,382,377

 
—

 
5,382,377

 
—

Privately issued residential mortgage-backed securities
 
103,383

 
—

 
103,383

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,782,070

 
—

 
2,782,070

 
—

Other debt securities
 
4,152

 
—

 
—

 
4,152

Perpetual preferred stock
 
16,568

 
—

 
16,568

 
—

Equity securities and mutual funds
 
18,728

 
3,516

 
15,212

 
—

Total available for sale securities
 
8,341,041

 
4,514

 
8,327,720

 
8,807

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
445,169

 
—

 
445,169

 
—

Residential mortgage loans held for sale
 
287,259

 
—

 
274,524

 
12,735

Mortgage servicing rights1
 
245,239

 
—

 
—

 
245,239

Derivative contracts, net of cash collateral2
 
280,289

 
20,213

 
260,076

 
—

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
285,819

 
5,919

 
279,900

 
—

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type. Derivative contracts in asset positions that were valued based on quoted prices in active markets for identical instruments (Level 1) are primarily exchange-traded energy and interest rate derivative contacts. Derivative contacts in liability positions that were valued using quoted prices in active markets for identical instruments are exchange-traded interest rate and agricultural derivative contracts, net of cash margin.


- 108 -


The fair value of financial assets and liabilities measured on a recurring basis was as follows as of December 31, 2016 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
$
6,234

 
$
—

 
$
6,234

 
$
—

U.S. government agency residential mortgage-backed securities
 
310,067

 
—

 
310,067

 
—

Municipal and other tax-exempt securities
 
14,427

 
—

 
14,427

 
—

Other trading securities
 
6,900

 
—

 
6,900

 
—

Total trading securities
 
337,628

 
—

 
337,628

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
999

 
999

 
—

 
—

Municipal and other tax-exempt securities
 
40,993

 
—

 
35,204

 
5,789

U.S. government agency residential mortgage-backed securities
 
5,460,386

 
—

 
5,460,386

 
—

Privately issued residential mortgage-backed securities
 
115,535

 
—

 
115,535

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
3,017,933

 
—

 
3,017,933

 
—

Other debt securities
 
4,152

 
—

 
—

 
4,152

Perpetual preferred stock
 
18,474

 
—

 
18,474

 
—

Equity securities and mutual funds
 
18,357

 
3,495

 
14,862

 
—

Total available for sale securities
 
8,676,829

 
4,494

 
8,662,394

 
9,941

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
77,046

 
—

 
77,046

 
—

Residential mortgage loans held for sale
 
301,897

 
—

 
290,280

 
11,617

Mortgage servicing rights1
 
247,073

 
—

 
—

 
247,073

Derivative contracts, net of cash collateral2
 
689,872

 
7,541

 
682,331

 
—

Liabilities:
 


 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
664,531

 
6,972

 
657,559

 
—

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type. Derivative contracts based on quoted prices in active markets for identical instruments (Level 1) are exchange-traded interest-rate and energy derivative contacts, net of cash margin. Derivative contracts in liability positions that were valued using quoted prices in active markets for identical instruments (Level 1) are exchange-traded interest rate, energy and agricultural derivative contracts, net of cash margin.



- 109 -


The fair value of financial assets and liabilities measured on a recurring basis was as follows as of June 30, 2016 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. government agency debentures
 
$
18,909

 
$
—

 
$
18,909

 
$
—

U.S. government agency residential mortgage-backed securities
 
122,306

 
—

 
122,306

 
—

Municipal and other tax-exempt securities
 
52,721

 
—

 
52,721

 
—

Other trading securities
 
17,686

 
—

 
17,686

 
—

Total trading securities
 
211,622

 
—

 
211,622

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,004

 
1,004

 
—

 
—

Municipal and other tax-exempt securities
 
50,262

 
—

 
40,662

 
9,600

U.S. government agency residential mortgage-backed securities
 
5,700,268

 
—

 
5,700,268

 
—

Privately issued residential mortgage-backed securities
 
126,313

 
—

 
126,313

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,911,946

 
—

 
2,911,946

 
—

Other debt securities
 
4,151

 
—

 
—

 
4,151

Perpetual preferred stock
 
17,931

 
—

 
17,931

 
—

Equity securities and mutual funds
 
18,814

 
3,785

 
15,029

 
—

Total available for sale securities
 
8,830,689

 
4,789

 
8,812,149

 
13,751

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
25,306

 
25,306

 
—

 
—

U.S. government agency residential mortgage-backed securities
 
237,959

 
—

 
237,959

 
—

Total fair value option securities
 
263,265

 
25,306

 
237,959

 
—

Residential mortgage loans held for sale
 
430,728

 
—

 
420,979

 
9,749

Mortgage servicing rights1
 
190,747

 
—

 
—

 
190,747

Derivative contracts, net of cash collateral2
 
883,673

 
7,246

 
876,427

 
—

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
719,159

 
4,808

 
714,351

 
—

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type. Derivative contracts based on quoted prices in active markets for identical instruments (Level 1) are exchange-traded energy and agricultural derivative contacts, net of cash margin. Derivative contracts in liability positions that were valued using quoted prices in active markets for identical instruments (Level 1) are exchange-traded interest rate and energy derivative contracts, net cash margin.



- 110 -


Following is a description of the Company's valuation methodologies used for assets and liabilities measured on a recurring basis:
Securities
The fair values of trading, available for sale and fair value option securities are based on quoted prices for identical instruments in active markets, when available. If quoted prices for identical instruments are not available, fair values are based on significant other observable inputs such as quoted prices of comparable instruments or interest rates and credit spreads, yield curves, volatilities, prepayment speeds and loss severities.

The fair value of certain available for sale municipal and other debt securities may be based on significant unobservable inputs. These significant unobservable inputs include limited observed trades, projected cash flows, current credit rating of the issuers and, when applicable, the insurers of the debt and observed trades of similar debt. Discount rates are primarily based on references to interest rate spreads on comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies adjusted for a lack of trading volume. Significant unobservable inputs are developed by investment securities professionals involved in the active trading of similar securities. A summary of significant inputs used to value these securities follows. A management committee composed of senior members from the Company's Capital Markets, Risk Management and Finance departments assesses the appropriateness of these inputs quarterly.

Derivatives

All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, commodity and foreign exchange contracts are based on valuations provided either by third-party dealers in the contracts, quotes provided by independent pricing services, or a third-party provided pricing model that uses significant other observable market inputs.

Credit risk is considered in determining the fair value of derivative instruments. Management determines fair value adjustments based on various risk factors including but not limited to counterparty credit rating or equivalent loan grading, derivative contract notional size, price volatility of the underlying commodity, duration of the derivative contracts and expected loss severity. Expected loss severity is based on historical losses for similarly risk graded commercial loan customers. Decreases in counterparty credit rating or grading and increases in price volatility and expected loss severity all tend to increase the credit quality adjustment which reduces the fair value of asset contracts. The reduction in fair value is recognized in earnings during the current period.

We also consider our own credit risk in determining the fair value of derivative contracts. Changes in our credit rating would affect the fair value of our derivative liabilities. In the event of a credit downgrade, the fair value of our derivative liabilities would increase. The change in the fair value would be recognized in earnings in the current period.
Residential Mortgage Loans Held for Sale
Residential mortgage loans held for sale are carried on the balance sheet at fair value. The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments and forward sales contracts. The fair value of mortgage loans that were unable to be sold to U.S. government agencies were determined using quoted prices of loans that are sold in securitization transactions with a liquidity discount applied.

Other Assets - Private Equity Funds
The fair value of the portfolio investments of the Company's two private equity funds is based upon net asset value reported by the underlying funds, as adjusted by the general partner when necessary, as a practical expedient to measure the fair value of the investments in the underlying funds. The Company's private equity funds provide customers alternative investment opportunities as limited partners of the funds. As fund of funds, the private equity funds invest in other limited partnerships or limited liability companies that invest substantially all of their assets in U.S. companies pursuing diversified investment strategies including early-stage venture capital, distressed securities and corporate or asset buy-outs. Private equity fund assets are long-term, illiquid investments. No secondary market exists for these assets. The private equity funds typically invest in funds that provide no redemption rights to investors. The fair value of the private equity investments may only be realized through cash distributions from the underlying funds.

See Note 7 for disclosure of the fair value of the private equity funds using the net asset value per share of the underlying investments, as a practical expedient, included in Other assets in the Consolidated Balance Sheets of the Company.

- 111 -


The following represents the changes for the three and six months ended June 30, 2017 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt securities
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, March 31, 2017
 
$
5,722

 
$
4,153

 
$
12,679

Transfer to Level 3 from Level 21
 
—

 
—

 
853

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(1,030
)
Redemptions and distributions
 
(1,100
)
 
—

 
—

Gain (loss) recognized in earnings:
 
 
 
 
 
 
Mortgage banking revenue
 
—

 
—

 
233

Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
33

 
(1
)
 
—

Balance, June 30, 2017
 
$
4,655

 
$
4,152

 
$
12,735

1  
Recurring transfers to Level 3 from Level 2 consist of residential mortgage loans intended for sale to U.S. government agencies that fail to meet conforming standards.
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, Dec. 31, 2016
 
$
5,789

 
$
4,152

 
$
11,617

Transfer to Level 3 from Level 21
 
—

 
—

 
2,740

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(1,702
)
Redemptions and distributions
 
(1,100
)
 
—

 
—

Gain (loss) recognized in earnings:
 
 
 
 
 
 
Mortgage banking revenue
 
—

 
—

 
80

Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(34
)
 
—

 
—

Balance, June 30, 2017
 
$
4,655

 
$
4,152

 
$
12,735

1 
Recurring transfers to Level 3 from Level 2 consist of residential mortgage loans intended for sale to U.S. government agencies that fail to meet conforming standards.

- 112 -


The following represents the changes for the three and six months ended June 30, 2016 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt securities
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, March 31, 2016
 
$
9,614

 
$
4,151

 
$
8,099

Transfer to Level 3 from Level 21
 
—

 
—

 
3,080

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(1,249
)
Redemptions and distributions
 
—

 
—

 
—

Gain (loss) recognized in earnings:
 
 
 
 
 
 
Mortgage banking revenue
 
—

 
—

 
(181
)
Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(14
)
 
—

 
—

Balance, June 30, 2016
 
$
9,600

 
$
4,151

 
$
9,749

1 
Recurring transfers to Level 3 from Level 2 consist of residential mortgage loans intended for sale to U.S. government agencies that fail to meet conforming standards.

 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, Dec. 31, 2015
 
$
9,610

 
$
4,151

 
$
7,874

Transfer to Level 3 from Level 21
 
—

 
—

 
3,540

Purchases
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(1,362
)
Redemptions and distributions
 
—

 
—

 
—

Gain (loss) recognized in earnings
 
 
 
 
 
 
Mortgage banking revenue
 
—

 
—

 
(303
)
Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(10
)
 
—

 
—

Balance, June 30, 2016
 
$
9,600

 
$
4,151

 
$
9,749

1  
Recurring transfers to Level 3 from Level 2 consist of residential mortgage loans intended for sale to U.S. government agencies that fail to meet conforming standards.



- 113 -


A summary of quantitative information about assets measured at fair value on a recurring basis using Significant Unobservable Inputs (Level 3) as of June 30, 2017 follows (in thousands):
 
 
Par
Value
 
Amortized
Cost/Unpaid Principal Balance
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
5,095

 
$
5,067

 
$
4,655

 
Discounted cash flows
1 
Interest rate spread
 
5.98%-5.98% (5.98%)
2 
90.00%-94.90% (92.93%)
3 
Other debt securities
 
4,400

 
4,400

 
4,152

 
Discounted cash flows
1 
Interest rate spread
 
5.41%-6.72% (6.57%)
4 
94.31% - 94.38 (94.37%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
N/A

 
13,274

 
12,563

 
Quoted prices of loans sold in securitization transactions, with a liquidity discount applied
 
Liquidity discount applied to the market value of a mortgage loans qualifying for sale to U.S. government agencies.
 
94.64%
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 360 to 446 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value.
4 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 3 percent.


A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of December 31, 2016 follows (in thousands):
 
 
Par
Value
 
Amortized
Cost/Unpaid Principal Balance
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
6,195

 
$
6,163

 
$
5,789

 
Discounted cash flows
1 
Interest rate spread
 
5.91%-6.21% (6.16%)
2 
90.00%-93.40% (92.20%)
3 
Other debt securities
 
4,400

 
4,400

 
4,152

 
Discounted cash flows
1 
Interest rate spread
 
6.01%-6.26% (6.23%)
4 
94.34% - 94.36 (94.36%)
3 
Residential mortgage loans held for sale
 
N/A

 
12,431

 
11,617

 
Quoted prices of loans sold in securitization transactions, with a liquidity discount applied
 
Liquidity discount applied to the market value of a mortgage loans qualifying for sale to U.S. government agencies.
 
93.45%
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 467 to 525 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value.
4 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 1 percent.


- 114 -


A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of June 30, 2016 follows (in thousands):
 
 
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
10,370

 
$
10,312

 
$
9,600

 
Discounted cash flows
1 
Interest rate spread
 
5.34%-5.64% (5.60%)
2 
90.00%-93.28% (92.58%)
3 
Other debt securities
 
4,400

 
4,400

 
4,151

 
Discounted cash flows
1 
Interest rate spread
 
5.51%-5.96% (5.91%)
4 
94.32% - 94.34 (94.34%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
N/A

 
10,518

 
9,749

 
Quoted prices of loans sold in securitization transactions, with a liquidity discount applied
 
Liquidity discount applied to the market value of a mortgage loans qualifying for sale to U.S. government agencies.
 
92.69%
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 474 to 513 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value.
4 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 1 percent.


Fair Value of Assets and Liabilities Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis include collateral for certain impaired loans and real property and other assets acquired to satisfy loans, which are based primarily on comparisons to completed sales of similar assets.

The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at June 30, 2017 for which the fair value was adjusted during the six months ended June 30, 2017:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at June 30, 2017
 
Three Months Ended
June 30, 2017
Recognized in:
 
Six Months Ended
June 30, 2017
Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
Impaired loans
$
—

 
$
464

 
$
3,570

 
$
232

 
$
—

 
$
676

 
$
—

Real estate and other repossessed assets
—

 
3,488

 
530

 
—

 
772

 
—

 
906

 

- 115 -


The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at June 30, 2016 for which the fair value was adjusted during the six months ended June 30, 2016:
 
Carrying Value at June 30, 2016
 
Fair Value Adjustments for the Three Months Ended
June 30, 2016
Recognized in:
 
Six Months Ended
June 30, 2016
Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
Impaired loans
$
—

 
$
634

 
$
42,342

 
$
7,041

 
$
—

 
$
29,186

 
$
—

Real estate and other repossessed assets
—

 
5,709

 
1,693

 
—

 
751

 
—

 
1,068


The fair value of collateral-dependent impaired loans secured by real estate and real estate and other repossessed assets and the related fair value adjustments are generally based on unadjusted third-party appraisals. Our appraisal review policies require appraised values to be supported by observed inputs derived principally from or corroborated by observable market data. Appraisals that are not based on observable inputs or that require significant adjustments or fair value measurements that are not based on third-party appraisals are considered to be based on significant unobservable inputs. Non-recurring fair value measurements of collateral-dependent impaired loans and real estate and other repossessed assets based on significant unobservable inputs are generally due to estimates of current fair values between appraisal dates. Significant unobservable inputs include listing prices for the same or comparable assets, uncorroborated expert opinions or management's knowledge of the collateral or industry. Non-recurring fair value measurements of collateral dependent loans secured by mineral rights are generally determined by our internal staff of engineers on projected cash flows under current market conditions and are based on significant unobservable inputs. Projected cash flows are discounted according to risk characteristics of the underlying oil and gas properties. Assets 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 prices with existing conventional equipment, operating methods and costs. Significant unobservable inputs are developed by asset management and workout professionals and approved by senior Credit Administration executives.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of June 30, 2017 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
3,570

 
Discounted cash flows
 
Recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs
 
75% - 90% (83%)1
Real estate and other repossessed assets
 
530

 
Appraised value, as adjusted
 
Marketability adjustment off appraised value2
 
65% - 88% (80%)
1 
Represents fair value as a percentage of the unpaid principal balance.
2  
Marketability adjustments include consideration of estimated costs to sell which is approximately 10% of the fair value.


A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of June 30, 2016 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
42,342

 
Discounted cash flows
 
Recoverable oil and gas reserves, forward-looking commodity prices, estimated operating costs
 
25% - 71% (58%)1
Real estate and other repossessed assets
 
1,693

 
Appraised value, as adjusted
 
Marketability adjustments off appraised value2
 
68% - 80% (71%)
1  
Represents fair value as a percentage of the unpaid principal balance.
2  
Marketability adjustments include consideration of estimated costs to sell which is approximately 10% of the fair value.


- 116 -



Fair Value of Financial Instruments

The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of June 30, 2017 (dollars in thousands):
 
 
Carrying
Value
 
Estimated
Fair
Value
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash and due from banks
 
$
561,587

 
$
561,587

 
$
561,587

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
2,078,831

 
2,078,831

 
2,078,831

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
—

 
 
U.S. government agency debentures
 
20,954

 
20,954

 
—

 
20,954

 
—

U.S. government agency residential mortgage-backed securities
 
365,171

 
365,171

 
—

 
365,171

 
—

Municipal and other tax-exempt securities
 
45,444

 
45,444

 
—

 
45,444

 
—

Other trading securities
 
9,845

 
9,845

 
—

 
9,845

 
—

Total trading securities
 
441,414

 
441,414

 
—

 
441,414

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
267,375

 
270,531

 
—

 
270,531

 
—

U.S. government agency residential mortgage-backed securities
 
18,035

 
18,642

 
—

 
18,642

 
—

Other debt securities
 
205,016

 
226,502

 
—

 
226,502

 
—

Total investment securities
 
490,426

 
515,675

 
—

 
515,675

 
—

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
998

 
998

 
998

 
—

 
—

Municipal and other tax-exempt securities
 
32,765

 
32,765

 
—

 
28,110

 
4,655

U.S. government agency residential mortgage-backed securities
 
5,382,377

 
5,382,377

 
—

 
5,382,377

 
—

Privately issued residential mortgage-backed securities
 
103,383

 
103,383

 
—

 
103,383

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,782,070

 
2,782,070

 
—

 
2,782,070

 
—

Other debt securities
 
4,152

 
4,152

 
—

 
—

 
4,152

Perpetual preferred stock
 
16,568

 
16,568

 
—

 
16,568

 
—

Equity securities and mutual funds
 
18,728

 
18,728

 
3,516

 
15,212

 
—

Total available for sale securities
 
8,341,041

 
8,341,041

 
4,514

 
8,327,720

 
8,807

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
445,169

 
445,169

 
—

 
445,169

 
—

Residential mortgage loans held for sale
 
287,259

 
287,259

 
—

 
274,524

 
12,735

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
10,637,955

 
10,413,704

 
—

 
—

 
10,413,704

Commercial real estate
 
3,688,592

 
3,636,365

 
—

 
—

 
3,636,365

Residential mortgage
 
1,939,198

 
1,950,577

 
—

 
—

 
1,950,577

Personal
 
917,900

 
909,055

 
—

 
—

 
909,055

Total loans
 
17,183,645

 
16,909,701

 
—

 
—

 
16,909,701

Allowance for loan losses
 
(250,061
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
16,933,584

 
16,909,701

 
—

 
—

 
16,909,701

Mortgage servicing rights
 
245,239

 
245,239

 
—

 
—

 
245,239

Derivative instruments with positive fair value, net of cash collateral
 
280,289

 
280,289

 
46,366

 
233,923

 
—

Deposits with no stated maturity
 
20,120,352

 
20,120,352

 
—

 
—

 
20,120,352

Time deposits
 
2,196,122

 
2,164,115

 
—

 
—

 
2,164,115

Other borrowed funds
 
5,696,666

 
5,664,273

 
—

 
—

 
5,664,273

Subordinated debentures
 
144,658

 
147,204

 
—

 
147,204

 
—

Derivative instruments with negative fair value, net of cash collateral
 
285,819

 
285,819

 
20,915

 
264,904

 
—


- 117 -


The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of December 31, 2016 (dollars in thousands):
 
 
Carrying
Value
 
Estimated
Fair
Value
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash and due from banks
 
$
620,846

 
$
620,846

 
$
620,846

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
1,916,651

 
1,916,651

 
1,916,651

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
—

 
 
U.S. government agency debentures
 
6,234

 
6,234

 
—

 
6,234

 
—

U.S. government agency residential mortgage-backed securities
 
310,067

 
310,067

 
—

 
310,067

 
—

Municipal and other tax-exempt securities
 
14,427

 
14,427

 
—

 
14,427

 
—

Other trading securities
 
6,900

 
6,900

 
—

 
6,900

 
—

Total trading securities
 
337,628

 
337,628

 
—

 
337,628

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
320,364

 
321,225

 
—

 
321,225

 
—

U.S. government agency residential mortgage-backed securities
 
20,777

 
21,473

 
—

 
21,473

 
—

Other debt securities
 
205,004

 
222,795

 
—

 
222,795

 
—

Total investment securities
 
546,145

 
565,493

 
—

 
565,493

 
—

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
999

 
999

 
999

 
—

 
—

Municipal and other tax-exempt securities
 
40,993

 
40,993

 
—

 
35,204

 
5,789

U.S. government agency residential mortgage-backed securities
 
5,460,386

 
5,460,386

 
—

 
5,460,386

 
—

Privately issued residential mortgage-backed securities
 
115,535

 
115,535

 
—

 
115,535

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
3,017,933

 
3,017,933

 
—

 
3,017,933

 
—

Other debt securities
 
4,152

 
4,152

 
—

 
—

 
4,152

Perpetual preferred stock
 
18,474

 
18,474

 
—

 
18,474

 
—

Equity securities and mutual funds
 
18,357

 
18,357

 
3,495

 
14,862

 
—

Total available for sale securities
 
8,676,829

 
8,676,829

 
4,494

 
8,662,394

 
9,941

Fair value option securities – U.S. government agency residential mortgage-backed securities
 
77,046

 
77,046

 
—

 
77,046

 
—

Residential mortgage loans held for sale
 
301,897

 
301,897

 
—

 
290,280

 
11,617

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
10,390,824

 
10,437,016

 
—

 
—

 
10,437,016

Commercial real estate
 
3,809,046

 
3,850,981

 
—

 
—

 
3,850,981

Residential mortgage
 
1,949,832

 
2,025,159

 
—

 
—

 
2,025,159

Personal
 
839,958

 
864,904

 
—

 
—

 
864,904

Total loans
 
16,989,660

 
17,178,060

 
—

 
—

 
17,178,060

Allowance for loan losses
 
(246,159
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
16,743,501

 
17,178,060

 
—

 
—

 
17,178,060

Mortgage servicing rights
 
247,073

 
247,073

 
—

 
—

 
247,073

Derivative instruments with positive fair value, net of cash collateral
 
689,872

 
689,872

 
7,541

 
682,331

 
—

Deposits with no stated maturity
 
20,526,295

 
20,526,295

 
—

 
—

 
20,526,295

Time deposits
 
2,221,800

 
2,218,303

 
—

 
—

 
2,218,303

Other borrowed funds
 
5,572,662

 
5,556,327

 
—

 
—

 
5,556,327

Subordinated debentures
 
144,640

 
128,903

 
—

 
128,903

 
—

Derivative instruments with negative fair value, net of cash collateral
 
664,531

 
664,531

 
6,972

 
657,559

 
—



- 118 -


The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of June 30, 2016 (dollars in thousands):
 
 
Carrying
Value
 
Estimated
Fair
Value
 
Quoted Prices in Active Markets for Identical Instruments (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash and due from banks
 
$
498,713

 
$
498,713

 
$
498,713

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
1,907,838

 
1,907,838

 
1,907,838

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
—

 
 
U.S. government agency debentures
 
18,909

 
18,909

 
—

 
18,909

 
—

U.S. government agency residential mortgage-backed securities
 
122,306

 
122,306

 
—

 
122,306

 
—

Municipal and other tax-exempt securities
 
52,721

 
52,721

 
—

 
52,721

 
—

Other trading securities
 
17,686

 
17,686

 
—

 
17,686

 
—

Total trading securities
 
211,622

 
211,622

 
—

 
211,622

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt securities
 
334,551

 
340,700

 
—

 
340,700

 
—

U.S. government agency residential mortgage-backed securities
 
23,750

 
25,233

 
—

 
25,233

 
—

Other debt securities
 
202,410

 
233,129

 
—

 
233,129

 
—

Total investment securities
 
560,711

 
599,062

 
—

 
599,062

 
—

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
1,004

 
1,004

 
1,004

 
—

 
—

Municipal and other tax-exempt securities
 
50,262

 
50,262

 
—

 
40,662

 
9,600

U.S. government agency residential mortgage-backed securities
 
5,700,268

 
5,700,268

 
—

 
5,700,268

 
—

Privately issued residential mortgage-backed securities
 
126,313

 
126,313

 
—

 
126,313

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,911,946

 
2,911,946

 
—

 
2,911,946

 
—

Other debt securities
 
4,151

 
4,151

 
—

 
—

 
4,151

Perpetual preferred stock
 
17,931

 
17,931

 
—

 
17,931

 
—

Equity securities and mutual funds
 
18,814

 
18,814

 
3,785

 
15,029

 
—

Total available for sale securities
 
8,830,689

 
8,830,689

 
4,789

 
8,812,149

 
13,751

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
25,306

 
25,306

 
25,306

 
—

 
—

U.S. government agency residential mortgage-backed securities
 
237,959

 
237,959

 
—

 
237,959

 
—

Total fair value option securities
 
263,265

 
263,265

 
25,306

 
237,959

 
—

Residential mortgage loans held for sale
 
430,728

 
430,728

 
—

 
420,979

 
9,749

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
10,356,437

 
10,172,701

 
—

 
—

 
10,172,701

Commercial real estate
 
3,581,966

 
3,563,378

 
—

 
—

 
3,563,378

Residential mortgage
 
1,880,923

 
1,913,208

 
—

 
—

 
1,913,208

Personal
 
587,423

 
582,353

 
—

 
—

 
582,353

Total loans
 
16,406,749

 
16,231,640

 
—

 
—

 
16,231,640

Allowance for loan losses
 
(243,259
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
16,163,490

 
16,231,640

 
—

 
—

 
16,231,640

Mortgage servicing rights
 
190,747

 
190,747

 
—

 
—

 
190,747

Derivative instruments with positive fair value, net of cash collateral
 
883,673

 
883,673

 
7,246

 
876,427

 
—

Deposits with no stated maturity
 
18,512,740

 
18,512,740

 
—

 
—

 
18,512,740

Time deposits
 
2,247,061

 
2,252,212

 
—

 
—

 
2,252,212

Other borrowed funds
 
6,360,199

 
6,342,885

 
—

 
—

 
6,342,885

Subordinated debentures
 
371,812

 
371,808

 
—

 
150,234

 
221,574

Derivative instruments with negative fair value, net of cash collateral
 
719,159

 
719,159

 
4,808

 
714,351

 
—



- 119 -


Because no market exists for certain of these financial instruments and management does not intend to sell these financial instruments, the fair values shown in the tables above may not represent values at which the respective financial instruments could be sold individually or in the aggregate at the given reporting date.

The following methods and assumptions were used in estimating the fair value of these financial instruments:
 
Cash and Cash Equivalents
 
The book value reported in the consolidated balance sheets for cash and short-term instruments approximates those assets’ fair values.
 
Securities
 
The fair values of securities are generally based on Significant Other Observable Inputs such as quoted prices for comparable instruments or interest rates and credit spreads, yield curves, volatilities, prepayment speeds and loss severities. 

Loans
 
The fair value of loans, excluding loans held for sale, are based on discounted cash flow analyses using interest rates and credit and liquidity spreads currently being offered for loans with similar remaining terms to maturity and risk, adjusted for the impact of interest rate floors and ceilings, which are classified as Significant Unobservable Inputs. The fair values of loans were estimated to approximate their discounted cash flows less loan loss allowances allocated to these loans of $223 million at June 30, 2017, $218 million at December 31, 2016 and $217 million at June 30, 2016. A summary of assumptions used in determining the fair value of loans follows:

 
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
June 30, 2017:
 
 
 
 
 
 
Commercial
 
0.38% - 30.00%
 
0.64
 
0.71% - 4.56%
Commercial real estate
 
0.38% - 18.00%
 
0.77
 
1.03% - 4.31%
Residential mortgage
 
1.74% - 18.00%
 
2.18
 
1.75% - 4.19%
Personal
 
0.25% - 21.00%
 
0.28
 
0.70% - 4.68%
 
 
 
 
 
 
 
December 31, 2016:
 
 
 
 
 
 
Commercial
 
0.38% - 30.00%
 
0.70
 
0.64% - 4.60%
Commercial real estate
 
0.38% - 18.00%
 
0.71
 
0.94% - 4.27%
Residential mortgage
 
1.74% - 18.00%
 
2.27
 
1.71% - 4.26%
Personal
 
0.25% - 21.00%
 
0.40
 
1.03% - 4.59%
 
 
 
 
 
 
 
June 30, 2016:
 
 
 
 
 
 
Commercial
 
0.38% - 30.00%
 
0.69
 
0.55% - 3.68%
Commercial real estate
 
0.38% - 18.00%
 
0.73
 
0.80% - 3.65%
Residential mortgage
 
1.70% - 18.00%
 
1.97
 
1.25% - 3.75%
Personal
 
0.25% - 21.00%
 
0.35
 
0.71% - 3.91%
 
Deposits
 
The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions which are considered Significant Unobservable Inputs. Estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, is equal to the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, adjusting fair value for the expected benefit of these deposits is prohibited. Accordingly, the positive effect of such deposits is not included in the tables above.


- 120 -


A summary of assumptions used in determining the fair value of time deposits follows:

 
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
June 30, 2017
 
0.03% - 10.00%
 
1.91
 
1.81% - 2.12%
December 31, 2016
 
0.02% - 9.65%
 
1.96
 
1.57% - 2.00%
June 30, 2016
 
0.03% - 9.64%
 
2.15
 
1.16% - 1.43%

 Other Borrowings and Subordinated Debentures
 
The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments, which are considered Significant Unobservable Inputs. A summary of assumptions used in determining the fair value of other borrowings and subordinated debentures follows:

 
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
June 30, 2017:
 
 
 
 
 
 
Other borrowed funds
 
0.25% - 3.58%
 
0.02
 
1.06% - 3.69%
Subordinated debentures
 
5.38%
 
16.90
 
4.89%
 
 
 
 
 
 
 
December 31, 2016:
 
 
 
 
 
 
Other borrowed funds
 
0.25% - 3.50%
 
0.00
 
0.55% - 3.22%
Subordinated debentures
 
5.38%
 
16.86
 
6.11%
 
 
 
 
 
 
 
June 30, 2016:
 
 
 
 
 
 
Other borrowed funds
 
0.25% - 3.28%
 
0.02
 
0.30% - 2.92%
Subordinated debentures
 
1.32% - 5.38%
 
8.35
 
2.16% - 5.38%

Off-Balance Sheet Instruments
 
The fair values of commercial loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance sheet instruments were not significant at June 30, 2017, December 31, 2016 or June 30, 2016.
Fair Value Election

As more fully disclosed in Note 2 and Note 6 to the Consolidated Financial Statements, the Company has elected to carry all residential mortgage-backed securities guaranteed by U.S. government agencies and U.S. Treasury securities held as economic hedges against changes in the fair value of mortgage servicing rights and all residential mortgage loans originated for sale at fair value. Changes in the fair value of these financial instruments are recognized in earnings.



- 121 -


(12) Federal and State Income Taxes

The reconciliations of income (loss) attributable to continuing operations at the U.S. federal statutory tax rate to income tax expense are as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Amount:
 
 
 
 
 
 
 
 
Federal statutory tax
 
$
47,800

 
$
33,869

 
$
92,168

 
$
55,715

Tax exempt revenue
 
(3,224
)
 
(2,568
)
 
(6,335
)
 
(5,100
)
Effect of state income taxes, net of federal benefit
 
2,944

 
1,557

 
5,389

 
3,858

Utilization of tax credits:
 
 
 
 
 
 
 
 
Low-income housing tax credit, net of amortization
 
(526
)
 
(572
)
 
(2,249
)
 
(1,882
)
Other tax credits
 
(363
)
 
(521
)
 
(727
)
 
(1,042
)
Bank-owned life insurance
 
(775
)
 
(810
)
 
(1,547
)
 
(1,601
)
Share-based compensation
 
1,636

 
—

 
(2,301
)
 
—

Other, net
 
213

 
(458
)
 
1,410

 
1,977

Total income tax expense
 
$
47,705

 
$
30,497

 
$
85,808

 
$
51,925



 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Percent of pretax income:
 
 
 
 
 
 
 
 
Federal statutory tax
 
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
Tax exempt revenue
 
(2.4
)
 
(2.7
)
 
(2.4
)
 
(3.2
)
Effect of state income taxes, net of federal benefit
 
2.2

 
1.6

 
2.0

 
2.4

Utilization of tax credits:
 
 
 
 
 
 
 
 
Low-income housing tax credit, net of amortization
 
(0.4
)
 
(0.6
)
 
(0.8
)
 
(1.2
)
Other tax credits
 
(0.3
)
 
(0.5
)
 
(0.3
)
 
(0.6
)
Bank-owned life insurance
 
(0.6
)
 
(0.8
)
 
(0.6
)
 
(1.0
)
Share-based compensation
 
1.2

 
—

 
(0.9
)
 
—

Other, net
 
0.2

 
(0.5
)
 
0.6

 
1.2

Total
 
34.9
 %
 
31.5
 %
 
32.6
 %
 
32.6
 %
(13) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on June 30, 2017 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q. No events were identified requiring recognition in and/or disclosure in the consolidated financial statements.


- 122 -


Six-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Six Months Ended
 
 
June 30, 2017
 
June 30, 2016
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
2,047,633

 
$
9,442

 
0.93
%
 
$
2,037,433

 
$
5,275

 
0.52
%
Trading securities
 
517,447

 
8,886

 
3.59
%
 
212,954

 
1,502

 
2.13
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
220,528

 
5,944

 
5.39
%
 
228,460

 
6,244

 
5.47
%
Tax-exempt
 
294,539

 
3,650

 
2.48
%
 
346,468

 
3,862

 
2.23
%
Total investment securities
 
515,067

 
9,594

 
3.73
%
 
574,928

 
10,106

 
3.52
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
8,420,578

 
85,847

 
2.06
%
 
8,848,806

 
88,277

 
2.04
%
Tax-exempt
 
54,470

 
1,453

 
5.71
%
 
71,967

 
1,738

 
5.01
%
Total available for sale securities
 
8,475,048

 
87,300

 
2.08
%
 
8,920,773

 
90,015

 
2.06
%
Fair value option securities
 
446,478

 
5,919

 
2.62
%
 
409,456

 
4,651

 
2.29
%
Restricted equity securities
 
304,074

 
8,708

 
5.73
%
 
306,833

 
8,174

 
5.33
%
Residential mortgage loans held for sale
 
232,932

 
4,222

 
3.65
%
 
345,429

 
6,208

 
3.62
%
Loans
 
17,132,662

 
336,258

 
3.96
%
 
16,127,563

 
286,889

 
3.58
%
Allowance for loan losses
 
(250,512
)
 
 
 
 
 
(239,782
)
 
 
 
 
Loans, net of allowance
 
16,882,150

 
336,258

 
4.01
%
 
15,887,781

 
286,889

 
3.63
%
Total earning assets
 
29,420,829

 
470,329

 
3.23
%
 
28,695,587

 
412,820

 
2.91
%
Receivable on unsettled securities sales
 
70,990

 
 
 
 
 
82,335

 
 
 
 
Cash and other assets
 
3,168,341

 
 
 
 
 
2,969,335

 
 
 
 
Total assets
 
$
32,660,160

 
 
 
 
 
$
31,747,257

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
10,326,232

 
$
11,651

 
0.23
%
 
$
9,673,849

 
$
6,577

 
0.14
%
Savings
 
451,476

 
182

 
0.08
%
 
407,300

 
195

 
0.10
%
Time
 
2,231,526

 
12,143

 
1.10
%
 
2,332,082

 
13,767

 
1.19
%
Total interest-bearing deposits
 
13,009,234

 
23,976

 
0.37
%
 
12,413,231

 
20,539

 
0.33
%
Funds purchased
 
59,407

 
160

 
0.54
%
 
91,446

 
109

 
0.24
%
Repurchase agreements
 
475,191

 
100

 
0.04
%
 
636,952

 
161

 
0.05
%
Other borrowings
 
5,654,534

 
26,921

 
0.96
%
 
5,829,974

 
16,482

 
0.57
%
Subordinated debentures
 
144,649

 
4,028

 
5.62
%
 
229,581

 
1,588

 
1.39
%
Total interest-bearing liabilities
 
19,343,015

 
55,185

 
0.58
%
 
19,201,184

 
38,879

 
0.41
%
Non-interest bearing demand deposits
 
9,220,877

 
 
 
 
 
8,133,945

 
 
 
 
Due on unsettled securities purchases
 
124,666

 
 
 
 
 
125,931

 
 
 
 
Other liabilities
 
602,964

 
 
 
 
 
951,455

 
 
 
 
Total equity
 
3,368,638

 
 
 
 
 
3,334,742

 
 
 
 
Total liabilities and equity
 
$
32,660,160

 
 
 
 
 
$
31,747,257

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
415,144

 
2.65
%
 
 
 
$
373,941

 
2.50
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
2.85
%
 
 
 
 
 
2.64
%
Less tax-equivalent adjustment
 
 
 
8,758

 
 
 
 
 
8,757

 
 
Net Interest Revenue
 
 
 
406,386

 
 
 
 
 
365,184

 
 
Provision for credit losses
 
 
 
—

 
 
 
 
 
55,000

 
 
Other operating revenue
 
 
 
352,548

 
 
 
 
 
342,956

 
 
Other operating expense
 
 
 
495,596

 
 
 
 
 
493,955

 
 
Income before taxes
 
 
 
263,338

 
 
 
 
 
159,185

 
 
Federal and state income taxes
 
 
 
85,808

 
 
 
 
 
51,925

 
 
Net income
 
 
 
177,530

 
 
 
 
 
107,260

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
1,027

 
 
 
 
 
(1,105
)
 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
176,503

 
 
 
 
 
$
108,365

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
2.70

 
 

 
 

 
$
1.64

 
 

Diluted
 
 

 
$
2.69

 
 

 
 

 
$
1.64

 
 

Yield calculations are shown on a tax equivalent at the statutory federal and state rates for the periods presented. The yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income and the unrealized gains and losses. The yield calculation also includes average loan balances for which the accrual of interest has been discontinued and are net of unearned income. Yield / rate calculations are generally based on the conventions that determine how interest income and expense is accrued.

- 123 -


Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
June 30, 2017
 
March 31, 2017
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
2,007,746

 
$
5,198

 
1.04
%
 
$
2,087,964

 
$
4,244

 
0.82
%
Trading securities
 
456,028

 
3,517

 
3.23
%
 
579,549

 
5,369

 
3.87
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
219,385

 
2,931

 
5.34
%
 
221,684

 
3,013

 
5.44
%
Tax-exempt
 
279,987

 
1,757

 
2.51
%
 
309,252

 
1,893

 
2.45
%
Total investment securities
 
499,372

 
4,688

 
3.76
%
 
530,936

 
4,906

 
3.70
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
8,332,709

 
42,920

 
2.09
%
 
8,509,423

 
42,927

 
2.02
%
Tax-exempt
 
51,348

 
725

 
6.09
%
 
57,626

 
728

 
5.37
%
Total available for sale securities
 
8,384,057

 
43,645

 
2.11
%
 
8,567,049

 
43,655

 
2.05
%
Fair value option securities
 
476,102

 
3,539

 
2.92
%
 
416,524

 
2,380

 
2.27
%
Restricted equity securities
 
295,743

 
4,399

 
5.95
%
 
312,498

 
4,309

 
5.52
%
Residential mortgage loans held for sale
 
245,401

 
2,386

 
3.92
%
 
220,325

 
1,836

 
3.35
%
Loans
 
17,129,533

 
172,139

 
4.03
%
 
17,135,825

 
164,119

 
3.88
%
Allowance for loan losses
 
(251,632
)
 
 
 
 
 
(249,379
)
 
 
 
 
Loans, net of allowance
 
16,877,901

 
172,139

 
4.09
%
 
16,886,446

 
164,119

 
3.94
%
Total earning assets
 
29,242,350

 
239,511

 
3.30
%
 
29,601,291

 
230,818

 
3.15
%
Receivable on unsettled securities sales
 
79,248

 
 
 
 
 
62,641

 
 
 
 
Cash and other assets
 
3,046,973

 
 
 
 
 
3,291,057

 
 
 
 
Total assets
 
$
32,368,571

 
 
 
 
 
$
32,954,989

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
10,087,640

 
$
6,437

 
0.26
%
 
$
10,567,475

 
$
5,214

 
0.20
%
Savings
 
461,586

 
95

 
0.08
%
 
441,254

 
87

 
0.08
%
Time
 
2,204,422

 
6,090

 
1.11
%
 
2,258,930

 
6,053

 
1.09
%
Total interest-bearing deposits
 
12,753,648

 
12,622

 
0.40
%
 
13,267,659

 
11,354

 
0.35
%
Funds purchased
 
63,263

 
96

 
0.61
%
 
55,508

 
64

 
0.47
%
Repurchase agreements
 
427,353

 
68

 
0.06
%
 
523,561

 
32

 
0.02
%
Other borrowings
 
5,572,031

 
15,188

 
1.09
%
 
5,737,955

 
11,733

 
0.83
%
Subordinated debentures
 
144,654

 
2,003

 
5.55
%
 
144,644

 
2,025

 
5.68
%
Total interest-bearing liabilities
 
18,960,949

 
29,977

 
0.63
%
 
19,729,327

 
25,208

 
0.52
%
Non-interest bearing demand deposits
 
9,338,683

 
 
 
 
 
9,101,763

 
 
 
 
Due on unsettled securities purchases
 
157,438

 
 
 
 
 
91,529

 
 
 
 
Other liabilities
 
502,068

 
 
 
 
 
704,978

 
 
 
 
Total equity
 
3,409,433

 
 
 
 
 
3,327,392

 
 
 
 
Total liabilities and equity
 
$
32,368,571

 
 
 
 
 
$
32,954,989

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
209,534

 
2.67
%
 
 
 
$
205,610

 
2.63
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
 
 
2.89
%
 
 
 
 
 
2.81
%
Less tax-equivalent adjustment
 
 
 
4,330

 
 
 
 
 
4,428

 
 
Net Interest Revenue
 
 
 
205,204

 
 
 
 
 
201,182

 
 
Provision for credit losses
 
 
 
—

 
 
 
 
 
—

 
 
Other operating revenue
 
 
 
182,252

 
 
 
 
 
170,296

 
 
Other operating expense
 
 
 
250,885

 
 
 
 
 
244,711

 
 
Income before taxes
 
 
 
136,571

 
 
 
 
 
126,767

 
 
Federal and state income taxes
 
 
 
47,705

 
 
 
 
 
38,103

 
 
Net income
 
 
 
88,866

 
 
 
 
 
88,664

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
719

 
 
 
 
 
308

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
88,147

 
 
 
 
 
$
88,356

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.35

 
 

 
 

 
$
1.35

 
 

Diluted
 
 

 
$
1.35

 
 

 
 

 
$
1.35

 
 

Yield calculations are shown on a tax equivalent at the statutory federal and state rates for the periods presented. The yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income and the unrealized gains and losses. The yield calculation also includes average loan balances for which the accrual of interest has been discontinued and are net of unearned income. Yield / rate calculations are generally based on the conventions that determine how interest income and expense is accrued.

- 124 -


Three Months Ended
December 31, 2016
 
September 30, 2016
 
June 30, 2016
Average Balance
 
Revenue /Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
Average Balance
 
Revenue / Expense
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2,032,785

 
$
2,800

 
0.55
%
 
$
2,047,991

 
$
2,651

 
0.51
%
 
$
2,022,028

 
$
2,569

 
0.51
%
476,498

 
4,554

 
3.91
%
 
366,545

 
3,157

 
2.71
%
 
237,808

 
775

 
1.89
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
224,376

 
3,024

 
5.39
%
 
224,518

 
3,000

 
5.34
%
 
227,103

 
3,069

 
5.41
%
318,493

 
1,854

 
2.33
%
 
328,074

 
1,851

 
2.26
%
 
335,288

 
1,878

 
2.25
%
542,869

 
4,878

 
3.60
%
 
552,592

 
4,851

 
3.51
%
 
562,391

 
4,947

 
3.52
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,706,449

 
42,482

 
1.98
%
 
8,795,869

 
42,513

 
1.99
%
 
8,819,135

 
43,345

 
2.01
%
60,106

 
748

 
5.27
%
 
66,721

 
867

 
5.47
%
 
70,977

 
862

 
5.06
%
8,766,555

 
43,230

 
2.00
%
 
8,862,590

 
43,380

 
2.01
%
 
8,890,112

 
44,207

 
2.04
%
210,733

 
541

 
0.99
%
 
266,998

 
1,531

 
1.70
%
 
368,434

 
2,062

 
2.19
%
334,114

 
4,554

 
5.45
%
 
335,812

 
4,510

 
5.37
%
 
319,136

 
3,863

 
4.84
%
345,066

 
2,835

 
3.31
%
 
445,930

 
3,615

 
3.28
%
 
401,114

 
3,508

 
3.53
%
16,723,588

 
156,734

 
3.67
%
 
16,447,750

 
150,077

 
3.63
%
 
16,263,132

 
144,708

 
3.58
%
(246,977
)
 
 
 
 
 
(247,901
)
 
 
 
 
 
(245,448
)
 
 
 
 
16,476,611

 
156,734

 
3.72
%
 
16,199,849

 
150,077

 
3.69
%
 
16,017,684

 
144,708

 
3.63
%
29,185,231

 
220,126

 
2.98
%
 
29,078,307

 
213,772

 
2.93
%
 
28,818,707

 
206,639

 
2.91
%
33,813

 
 
 
 
 
259,906

 
 
 
 
 
49,568

 
 
 
 
3,742,032

 
 
 
 
 
3,308,260

 
 
 
 
 
3,117,767

 
 
 
 
$
32,961,076

 
 
 
 
 
$
32,646,473

 
 
 
 
 
$
31,986,042

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
9,980,132

 
$
3,912

 
0.16
%
 
$
9,650,618

 
$
3,417

 
0.14
%
 
$
9,590,855

 
$
3,260

 
0.14
%
421,654

 
91

 
0.09
%
 
420,009

 
100

 
0.09
%
 
417,122

 
102

 
0.10
%
2,177,035

 
6,140

 
1.12
%
 
2,197,350

 
6,295

 
1.14
%
 
2,297,621

 
6,635

 
1.16
%
12,578,821

 
10,143

 
0.32
%
 
12,267,977

 
9,812

 
0.32
%
 
12,305,598

 
9,997

 
0.33
%
62,004

 
44

 
0.28
%
 
68,280

 
33

 
0.19
%
 
70,682

 
33

 
0.19
%
560,891

 
34

 
0.02
%
 
522,822

 
53

 
0.04
%
 
611,264

 
72

 
0.05
%
6,072,150

 
9,315

 
0.61
%
 
6,342,369

 
9,105

 
0.57
%
 
6,076,028

 
8,675

 
0.57
%
144,635

 
2,003

 
5.51
%
 
255,890

 
2,468

 
3.84
%
 
232,795

 
878

 
1.52
%
19,418,501

 
21,539

 
0.44
%
 
19,457,338

 
21,471

 
0.44
%
 
19,296,367

 
19,655

 
0.41
%
9,124,595

 
 
 
 
 
8,497,037

 
 
 
 
 
8,162,134

 
 
 
 
77,575

 
 
 
 
 
200,574

 
 
 
 
 
93,812

 
 
 
 
1,004,212

 
 
 
 
 
1,099,858

 
 
 
 
 
1,089,483

 
 
 
 
3,336,193

 
 
 
 
 
3,391,666

 
 
 
 
 
3,344,246

 
 
 
 
$
32,961,076

 
 
 
 
 
$
32,646,473

 
 
 
 
 
$
31,986,042

 
 
 
 
 
 
$
198,587

 
2.54
%
 
 
 
$
192,301

 
2.49
%
 
 
 
$
186,984

 
2.50
%
 
 
 
 
2.69
%
 
 
 
 
 
2.64
%
 
 
 
 
 
2.63
%
 
 
4,389

 
 
 
 
 
4,455

 
 
 
 
 
4,372

 
 
 
 
194,198

 
 
 
 
 
187,846

 
 
 
 
 
182,612

 
 
 
 
—

 
 
 
 
 
10,000

 
 
 
 
 
20,000

 
 
 
 
143,754

 
 
 
 
 
187,310

 
 
 
 
 
185,542

 
 
 
 
265,547

 
 
 
 
 
258,088

 
 
 
 
 
251,385

 
 
 
 
72,405

 
 
 
 
 
107,068

 
 
 
 
 
96,769

 
 
 
 
22,496

 
 
 
 
 
31,956

 
 
 
 
 
30,497

 
 
 
 
49,909

 
 
 
 
 
75,112

 
 
 
 
 
66,272

 
 
 
 
(117
)
 
 
 
 
 
835

 
 
 
 
 
471

 
 
 
 
$
50,026

 
 
 
 
 
$
74,277

 
 
 
 
 
$
65,801

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
0.76

 
 

 
 

 
$
1.13

 
 

 
 

 
$
1.00

 
 

 

 
$
0.76

 
 

 
 

 
$
1.13

 
 

 
 

 
$
1.00

 
 




- 125 -


Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
June 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sept. 30, 2016
 
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
235,181

 
$
226,390

 
$
215,737

 
$
209,317

 
$
202,267

Interest expense
 
29,977

 
25,208

 
21,539

 
21,471

 
19,655

Net interest revenue
 
205,204

 
201,182

 
194,198

 
187,846

 
182,612

Provision for credit losses
 
—

 
—

 
—

 
10,000

 
20,000

Net interest revenue after provision for credit losses
 
205,204

 
201,182

 
194,198

 
177,846

 
162,612

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
31,764

 
33,623

 
28,500

 
38,006

 
39,530

Transaction card revenue
 
35,296

 
32,127

 
34,521

 
33,933

 
34,950

Fiduciary and asset management revenue
 
41,808

 
38,631

 
34,535

 
34,073

 
34,813

Deposit service charges and fees
 
23,354

 
23,030

 
23,365

 
23,668

 
22,618

Mortgage banking revenue
 
30,276

 
25,191

 
28,414

 
38,516

 
34,884

Other revenue
 
14,984

 
11,752

 
12,693

 
13,080

 
13,352

Total fees and commissions
 
177,482

 
164,354

 
162,028

 
181,276

 
180,147

Other gains, net
 
6,108

 
3,627

 
(1,279
)
 
2,442

 
1,307

Gain (loss) on derivatives, net
 
3,241

 
(450
)
 
(35,815
)
 
2,226

 
10,766

Gain (loss) on fair value option securities, net
 
1,984

 
(1,140
)
 
(20,922
)
 
(3,355
)
 
4,279

Change in fair value of mortgage servicing rights
 
(6,943
)
 
1,856

 
39,751

 
2,327

 
(16,283
)
Gain (loss) on available for sale securities, net
 
380

 
2,049

 
(9
)
 
2,394

 
5,326

Total other operating revenue
 
182,252

 
170,296

 
143,754

 
187,310

 
185,542

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
143,744

 
136,425

 
141,132

 
139,212

 
139,213

Business promotion
 
7,738

 
6,717

 
7,344

 
6,839

 
6,703

Charitable contributions to BOKF Foundation
 
—

 
—

 
2,000

 
—

 
—

Professional fees and services
 
12,419

 
11,417

 
16,828

 
14,038

 
14,158

Net occupancy and equipment
 
21,125

 
21,624

 
21,470

 
20,111

 
19,677

Insurance
 
689

 
6,404

 
8,705

 
9,390

 
7,129

Data processing and communications
 
36,330

 
34,902

 
33,691

 
33,331

 
32,802

Printing, postage and supplies
 
4,140

 
3,851

 
3,998

 
3,790

 
3,889

Net losses (gains) and operating expenses of repossessed assets
 
2,267

 
1,009

 
1,627

 
(926
)
 
1,588

Amortization of intangible assets
 
1,803

 
1,802

 
1,558

 
1,521

 
2,624

Mortgage banking costs
 
12,072

 
13,003

 
17,348

 
15,963

 
15,746

Other expense
 
8,558

 
7,557

 
9,846

 
14,819

 
7,856

Total other operating expense
 
250,885

 
244,711

 
265,547

 
258,088

 
251,385

Net income before taxes
 
136,571

 
126,767

 
72,405

 
107,068

 
96,769

Federal and state income taxes
 
47,705

 
38,103

 
22,496

 
31,956

 
30,497

Net income
 
88,866

 
88,664

 
49,909

 
75,112

 
66,272

Net income (loss) attributable to non-controlling interests
 
719

 
308

 
(117
)
 
835

 
471

Net income attributable to BOK Financial Corporation shareholders
 
$
88,147

 
$
88,356

 
$
50,026

 
$
74,277

 
$
65,801

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$1.35
 
$1.35
 
$0.76
 
$1.13
 
$1.00
Diluted
 
$1.35
 
$1.35
 
$0.76
 
$1.13
 
$1.00
Average shares used in computation:
 
 
 
 
 
 
 
 
 
 
Basic
 
64,729,752

 
64,715,964

 
64,719,018

 
65,085,392

 
65,245,887

Diluted
 
64,793,134

 
64,783,737

 
64,787,728

 
65,157,841

 
65,302,926


- 126 -


PART II. Other Information

Item 1. Legal Proceedings
 
See discussion of legal proceedings at Note 7 to the Consolidated Financial Statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended June 30, 2017.

 
Period
 
Total Number of Shares Purchased2
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans
April 1 to April 30, 2017
 
—

 
$
—

 
—

 
2,120,757

May 1 to May 31, 2017
 
—

 
$
—

 
—

 
2,120,757

June 1 to June 30, 2017
 
—

 
$
—

 
—

 
2,120,757

Total
 
—

 
 

 
—

 
 

1 
On October 1, 2015, the Company's board of directors authorized the Company to repurchase up to five million shares of the Company's common stock. As of June 30, 2017, the Company had repurchased 2,879,243 shares under this plan. Future repurchases of the Company's common stock will vary based on market conditions, regulatory limitations and other factors.
2 
The Company routinely repurchases mature shares from employees to cover the exercise price and taxes in connection with employee equity compensation.
Item 6. Exhibits

31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act   of 2002

31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to Consolidated Financial Statements


Items 1A, 3, 4 and 5 are not applicable and have been omitted.



- 127 -


Signatures


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


BOK FINANCIAL CORPORATION
(Registrant)



Date:        July 28, 2017                                                                  



/s/ Steven E. Nell
Steven E. Nell
Executive Vice President and
Chief Financial Officer

    
/s/ John C. Morrow
John C. Morrow
Senior Vice President and
Chief Accounting Officer


- 128 -