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, 2016
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  ¨

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: 65,866,317 shares of common stock ($.00006 par value) as of June 30, 2016.
 




BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2016

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 $65.8 million or $1.00 per diluted share for the second quarter of 2016, compared to $79.2 million or $1.15 per diluted share for the second quarter of 2015 and $42.6 million or $0.64 per diluted share for the first quarter of 2016. 

Highlights of the second quarter of 2016 included:
•
Net interest revenue totaled $182.6 million for the second quarter of 2016, compared to $175.7 million for the second quarter of 2015 and $182.6 million for the first quarter of 2016. Net interest revenue increased over the prior year primarily due to growth in average earning assets. Average earning assets were $28.8 billion for the second quarter of 2016 and $27.6 billion for the second quarter of 2015. Net interest margin was 2.63 percent for the second quarter of 2016. Net interest margin was 2.61 percent for the second quarter of 2015 and 2.65 percent for the first quarter of 2016. 
•
Fees and commissions revenue totaled $183.5 million for the second quarter of 2016, up $10.9 million over the second quarter of 2015. All revenue categories grew over the prior year. Fees and commissions revenue increased $17.9 million over the first quarter of 2016, primarily due to a $7.2 million increase in brokerage and trading revenue and a $3.8 million increase in mortgage banking revenue. Fiduciary and asset management and transaction card revenue were both up over the prior quarter.
•
Changes in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income by $1.2 million in the second quarter of 2016, $1.1 million in the second quarter of 2015 and $11.4 million in the first quarter of 2016.
•
Operating expenses totaled $254.7 million for the second quarter of 2016, an increase of $27.6 million over the second quarter of 2015. Personnel expense increased $9.8 million primarily due to increased incentive compensation expense. Non-personnel expense increased $17.8 million largely due to growth in professional fees and mortgage banking expenses. Operating expenses increased $9.8 million over the previous quarter.
•
The Company recorded a $20.0 million provision for credit losses in the second quarter of 2016. The Company recorded a $35.0 million provision in the first quarter of 2016 and a $4.0 million provision for credit losses in the second quarter of 2015. Gross charge-offs were $8.8 million in the second quarter of 2016, $2.9 million in the second quarter of 2015 and $24.0 million in the first quarter of 2016. Recoveries were $1.4 million in the second quarter of 2016, compared to $2.2 million in the second quarter of 2015 and $1.5 million in the first quarter of 2016.
•
The combined allowance for credit losses totaled $252 million or 1.54 percent of outstanding loans at June 30, 2016, compared to $240 million or 1.50 percent of outstanding loans at March 31, 2016. The portion of the combined allowance attributed to the energy portfolio totaled 3.58 percent of outstanding energy loans at June 30, 2016, an increase from 3.19 percent of outstanding energy loans at March 31, 2016.
•
Nonperforming assets that are not guaranteed by U.S. government agencies totaled $251 million or 1.55 percent of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2016 and $252 million or 1.59 percent of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at March 31, 2016. Nonperforming energy loans increased $8.6 million during the second quarter.
•
Average loans increased by $271 million over the previous quarter due primarily to a $187 million increase in commercial real estate loans. Period-end outstanding loan balances were $16.4 billion at June 30, 2016, a $384 million increase over March 31, 2016, primarily due to growth in commercial real estate loans.
•
Average deposits decreased $159 million compared to the previous quarter primarily due to decreased interest-bearing transaction account balances. Growth in demand deposit balances was offset by a decrease in time deposits. Period-end deposits were $20.8 billion at June 30, 2016, an increase of $341 million from March 31, 2016.
•
The Company's common equity Tier 1 ratio was 11.86% at June 30, 2016. In addition, the Company's Tier 1 capital ratio was 11.86%, total capital ratio was 13.51% and leverage ratio was 9.06% at June 30, 2016. The Company's common equity Tier 1 ratio was 12.00% at March 31, 2016. In addition, the Company's Tier 1 capital ratio was 12.00%, total capital ratio was 13.21% and leverage ratio was 9.12% at March 31, 2016. The total capital ratio increased due to the issuance of $150 million of 40 year, fixed rate subordinated debt during the second quarter.

- 1 -


•
The Company paid a regular quarterly cash dividend of $28 million or $0.43 per common share during the second quarter of 2016. On July 26, 2016, the board of directors approved a regular quarterly cash dividend of $0.43 per common share payable on or about August 26, 2016 to shareholders of record as of August 12, 2016.
•
The Company repurchased 305,169 common shares at an average price of $58.23 per share during the second quarter of 2016. No shares were repurchased during the second quarter of 2015 and the first quarter of 2016.
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 $182.6 million for the second quarter of 2016 compared to $175.7 million for the second quarter of 2015 and $182.6 million for the first quarter of 2016. Net interest margin was 2.63 percent for the second quarter of 2016, 2.61 percent for the second quarter of 2015 and 2.65 percent for the first quarter of 2016.

Tax-equivalent net interest revenue increased $8.2 million over the second quarter of 2015. 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. Tax-equivalent net interest revenue increased $10.8 million primarily due to the growth in average loan balances, partially offset by increased borrowing costs. Net interest revenue decreased $2.6 million due to a change in rates from the increase in the federal funds rate by the Federal Reserve in the fourth quarter of 2015, a mix shift toward lower yielding floating rate loans, continued repricing of fixed rate loans and an increase in nonaccruing energy loans.

The tax-equivalent yield on earning assets was 2.91 percent for the second quarter of 2016, up 7 basis points over the second quarter of 2015. The available for sale securities portfolio yield increased 10 basis points to 2.04 percent. The yield on interest-bearing cash and cash equivalents increased 26 basis points. Loan yields decreased 7 basis points, primarily due to growth in variable-rate loans and continued repricing in the low rate environment. In addition, the increase in nonaccruing energy loans impacted the loan yield by 2 basis points. Funding costs were up 6 basis points over the second quarter of 2015. The cost of interest-bearing deposits decreased 2 basis points. The cost of other borrowed funds increased 26 basis points primarily due to increase in the federal funds rate by the Federal Reserve in the fourth quarter of 2015. The cost of subordinated debentures decreased 69 basis points as $122 million of fixed-rate subordinated debt matured on June 1, 2015. The cost of this subordinated debt was 5.56 percent. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 13 basis points for the second quarter of 2016, up a basis point over the second quarter of 2015.

Average earning assets for the second quarter of 2016 increased $1.2 billion or 4 percent over the second quarter of 2015. Average loans, net of allowance for loan losses, increased $1.3 billion due primarily to growth in average commercial and commercial real estate loans. The average balance of trading securities increased $110 million and the average balance of restricted equity securities increased $97 million. The average balance of available for sale securities decreased $173 million. The average balances of fair value option securities held as an economic hedge of our mortgage servicing rights, investment securities and residential residential mortgage loans held for sale all decreased compared to the prior year.

Average deposits decreased $626 million compared to the second quarter of 2015. Average interest-bearing transaction accounts decreased $473 million and average time deposits decreased $354 million, partially offset by a $165 million increase in average demand deposit balances. Average savings account balances also grew over the prior year. Average borrowed funds increased $1.9 billion over the second quarter of 2015, primarily due to increased borrowings from the Federal Home Loan Banks. The average balance of subordinated debentures decreased $75 million.

Net interest margin decreased 2 basis points compared to the first quarter of 2016. The yield on average earning assets decreased 1 basis point. The loan portfolio yield increased by a basis point to 3.58 percent. The yield on the available for sale securities portfolio decreased 4 basis points to 2.04 percent. Funding costs were 0.41 percent, up 1 basis point over the prior quarter. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was unchanged compared to the prior quarter.

- 2 -


Average earning assets increased $246 million during the second quarter of 2016, primarily due to growth in average outstanding loans of $271 million over the previous quarter. Average commercial real estate loan balances increased $187 million and average personal loan balances increased $89 million. The average balance of residential mortgage loans held for sale was up $111 million and trading securities balances increased $50 million over the prior quarter. This growth was partially offset by an $82 million decrease in the average balance of securities held as an economic hedge of mortgage servicing rights and a $61 million decrease in the average balance of the available for sale securities portfolio. Increased restricted equity balances were offset by a decrease in the average balance of interest-bearing cash and cash equivalents and investment securities.
Average deposits decreased $159 million compared to the previous quarter. Interest-bearing transaction account balances decreased $166 million and time deposit balances decreased $69 million, partially offset by a $56 million increase in demand deposit balances. The average balance of borrowed funds increased $399 million over the first quarter of 2016. Increased borrowings from the Federal Home Loan Banks were partially offset by decreased federal funds sold and 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 82% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will re-price within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that re-price more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally re-price more quickly than liabilities. Among the strategies that we use to manage toward a relatively rate-neutral position, we 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, 2016 / 2015
 
Six Months Ended
June 30, 2016 / 2015
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
1,319

 
$
18

 
$
1,301

 
$
2,603

 
$
(26
)
 
$
2,629

Trading securities
 
190

 
176

 
14

 
231

 
257

 
(26
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(182
)
 
(135
)
 
(47
)
 
(333
)
 
(295
)
 
(38
)
Tax-exempt securities
 
352

 
(267
)
 
619

 
773

 
(466
)
 
1,239

Total investment securities
 
170

 
(402
)
 
572

 
440

 
(761
)
 
1,201

Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
990

 
(948
)
 
1,938

 
2,817

 
(1,475
)
 
4,292

Tax-exempt securities
 
24

 
(132
)
 
156

 
(21
)
 
(284
)
 
263

Total available for sale securities
 
1,014

 
(1,080
)
 
2,094

 
2,796

 
(1,759
)
 
4,555

Fair value option securities
 
(258
)
 
(277
)
 
19

 
328

 
184

 
144

Restricted equity securities
 
635

 
1,584

 
(949
)
 
2,349

 
3,177

 
(828
)
Residential mortgage loans held for sale
 
(384
)
 
(554
)
 
170

 
(633
)
 
(1,076
)
 
443

Loans
 
9,105

 
12,011

 
(2,906
)
 
22,334

 
25,202

 
(2,868
)
Total tax-equivalent interest revenue
 
11,791

 
11,476

 
315

 
30,448

 
25,198

 
5,250

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
1,063

 
(147
)
 
1,210

 
1,915

 
(428
)
 
2,343

Savings deposits
 
(1
)
 
9

 
(10
)
 
(2
)
 
17

 
(19
)
Time deposits
 
(2,331
)
 
(1,105
)
 
(1,226
)
 
(4,745
)
 
(2,054
)
 
(2,691
)
Funds purchased
 
20

 
2

 
18

 
80

 
21

 
59

Repurchase agreements
 
11

 
(20
)
 
31

 
(4
)
 
(49
)
 
45

Other borrowings
 
5,628

 
2,320

 
3,308

 
10,982

 
4,960

 
6,022

Subordinated debentures
 
(817
)
 
(351
)
 
(466
)
 
(2,272
)
 
(916
)
 
(1,356
)
Total interest expense
 
3,573

 
708

 
2,865

 
5,954

 
1,551

 
4,403

Tax-equivalent net interest revenue
 
8,218

 
10,768

 
(2,550
)
 
24,494

 
23,647

 
847

Change in tax-equivalent adjustment
 
1,337

 
 
 
 
 
2,767

 
 
 
 
Net interest revenue
 
$
6,881

 
 
 
 
 
$
21,727

 
 
 
 
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 $188.9 million for the second quarter of 2016, a $12.6 million increase over the second quarter of 2015 and a $29.1 million increase over the first quarter of 2016. Fees and commissions revenue was up $10.9 million over the second quarter of 2015 and increased $17.9 million over the prior quarter. The change in the fair value of mortgage servicing rights, net of economic hedges, decreased other operating revenue by $1.2 million in the second quarter of 2016, $1.1 million in the second quarter of 2015 and $11.4 million in the first quarter of 2016.

Table 2 – Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
Mar. 31, 2016
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2016
 
2015
 
 
 
 
 
Brokerage and trading revenue
 
$
39,530

 
$
36,012

 
$
3,518

 
10
%
 
$
32,341

 
$
7,189

 
22
%
Transaction card revenue
 
34,950

 
32,778

 
2,172

 
7
%
 
32,354

 
2,596

 
8
%
Fiduciary and asset management revenue
 
34,813

 
32,712

 
2,101

 
6
%
 
32,056

 
2,757

 
9
%
Deposit service charges and fees
 
22,618

 
22,328

 
290

 
1
%
 
22,542

 
76

 
—
%
Mortgage banking revenue
 
38,224

 
36,846

 
1,378

 
4
%
 
34,430

 
3,794

 
11
%
Other revenue
 
13,352

 
11,871

 
1,481

 
12
%
 
11,904

 
1,448

 
12
%
Total fees and commissions revenue
 
183,487

 
172,547

 
10,940

 
6
%
 
165,627

 
17,860

 
11
%
Other gains, net
 
1,307

 
1,457

 
(150
)
 
N/A

 
1,560

 
(253
)
 
N/A

Gain (loss) on derivatives, net
 
10,766

 
(1,032
)
 
11,798

 
N/A

 
7,138

 
3,628

 
N/A

Gain (loss) on fair value option securities, net
 
4,279

 
(8,130
)
 
12,409

 
N/A

 
9,443

 
(5,164
)
 
N/A

Change in fair value of mortgage servicing rights
 
(16,283
)
 
8,010

 
(24,293
)
 
N/A

 
(27,988
)
 
11,705

 
N/A

Gain on available for sale securities, net
 
5,326

 
3,433

 
1,893

 
N/A

 
3,964

 
1,362

 
N/A

Total other operating revenue
 
$
188,882

 
$
176,285

 
$
12,597

 
7
%
 
$
159,744

 
$
29,138

 
18
%
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 50 percent of total revenue for the second quarter of 2016, 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 includes revenues from securities trading, customer hedging, retail brokerage and investment banking. Brokerage and trading revenue increased $3.5 million or 10 percent over the second quarter of 2015. Securities trading revenue was $12.3 million for the second quarter of 2016, an increase of $947 thousand or 8 percent over the second quarter of 2015. Securities 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. 


- 5 -


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 $13.5 million for the second quarter of 2016, a $1.8 million or 16 percent increase over the second quarter of 2015 primarily due to increased hedging activity by our energy customers.

Revenue earned from retail brokerage transactions increased $817 thousand or 14 percent over the second quarter of 2015 to $6.7 million. Retail brokerage revenue is primarily based on 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. The increase in revenue due to transaction volume growth was partially offset by a change in product mix to products that pay a lower commission rate. In addition, volume has shifted from sales of products that pay a one-time transaction fee to accounts that pay us an on-going management fee.

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $7.0 million for the second quarter of 2016, largely unchanged compared to the second quarter of 2015. Investment banking revenue is primarily related to the timing and volume of completed transactions.

Brokerage and trading revenue increased $7.2 million over the first quarter of 2016. Customer hedging revenue increased $4.6 million primarily due to increased volumes of contracts with our mortgage banking and energy customers.Investment banking revenue grew by $2.9 million primarily due to growth in loan syndication fees and bond underwriting fees, which are dependent on the timing and volume of completed transactions. Securities trading revenue decreased $627 thousand and retail brokerage fees were up $271 thousand over the prior quarter.

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. Transaction card revenue for the second quarter of 2016 increased $992 thousand or 3 percent over the second quarter of 2015, excluding the impact of a customer early termination fee in 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 $17.1 million, a $478 thousand or 3 percent increase over the prior year. Merchant services fees totaled $11.7 million, an increase of $410 thousand or 4 percent based on increased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.9 million, an increase of $104 thousand or 2 percent over the second quarter of 2015.
Excluding the impact of the customer early termination fee, transaction card revenue increased $1.4 million primarily due to a seasonal increase in transaction volumes on our TransFund EFT network. Merchant services fees and revenue from interchange fees also increased over the prior quarter.
 
Fiduciary and asset management revenue increased $2.1 million or 6 percent over the second quarter of 2015 largely due to 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 BOK Financial Securities, 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. We have voluntarily waived administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment. Waived fees totaled $1.8 million for the second quarter of 2016 compared to $2.9 million for the second quarter of 2015 and $2.0 million for the first quarter of 2016. The decrease in fee waivers was related to increased interest rates as a result of the Federal Reserve's federal funds rate increase in the fourth quarter of 2015. The remaining increase is primarily due to growth in assets under management related to the Company's acquisition of Weaver and Tidwell Financial Advisors LTD d/b/a Weaver Wealth Management, a registered investment advisor, in the first quarter of 2016 and changes in market values.

Fiduciary and asset management revenue increased $2.8 million over the first quarter of 2016 largely due to annual assessment of tax preparation fees and growth in assets under management.

The fair value of fiduciary assets administered by the Company totaled $39.9 billion at June 30, 2016, $38.8 billion at June 30, 2015 and $39.1 billion at March 31, 2016. Fiduciary assets are assets for which the Company possesses investment discretion on behalf of another or any other similar capacity.


- 6 -


Deposit service charges and fees were $22.6 million for the second quarter of 2016, an increase of $290 thousand or 1 percent over the second quarter of 2015. Commercial account service charge revenue totaled $11.1 million, up $677 thousand or 7 percent over the prior year. Overdraft fees were $9.9 million for the second quarter of 2016, a decrease of $229 thousand or 2 percent compared to the second quarter of 2015. Service charges on deposit accounts with a standard monthly fee were $1.6 million, a decrease of $165 thousand or 9 percent compared to the second quarter of 2015. Deposit service charges and fees were largely unchanged compared to the prior quarter. Growth in overdraft fees were offset by a decrease in commercial account service charge revenue and service charges on account with a standard monthly fee.

Mortgage banking revenue increased $1.4 million or 4% over the second quarter of 2015. Mortgage production revenue decreased $687 thousand compared to the prior year. Narrowing of margins on mortgage loans sold offset an increase in mortgage loan commitments. Mortgage servicing revenue was up $2.1 million or 15 percent over the second quarter of 2015. The outstanding principal balance of mortgage loans serviced for others totaled $21.2 billion, an increase of $3.2 billion or 18 percent.
Mortgage banking revenue increased $3.8 million over the first quarter of 2016. Mortgage production revenue increased $3.4 million due to growth in the volume of mortgage loans sold and mortgage loan commitments during the quarter. Average primary mortgage interest rates were 15 basis points lower than in the first quarter of 2016. Total mortgage loans originated during the second quarter of 2016 increased $575 million compared to the previous quarter. Outstanding mortgage loan commitments at June 30, 2016 were $63 million higher than at March 31, 2016. Revenue from mortgage loan servicing grew by $345 thousand due to an increase in the volume of loans serviced. The outstanding balance of mortgage loans serviced for others increased $884 million over March 31, 2016.

Table 3 – Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
Mar. 31, 2016
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2016
 
2015
 
 
 
 
Net realized gains on mortgage loans sold
 
$
19,205

 
$
23,856

 
$
(4,651
)
 
(19
)%
 
$
10,779

 
$
8,426

 
78
%
Change in net unrealized gains on mortgage loans held for sale
 
3,221

 
(743
)
 
3,964

 
(534
)%
 
8,198

 
(4,977
)
 
61
%
Total mortgage production revenue
 
22,426

 
23,113

 
(687
)
 
(3
)%
 
18,977

 
3,449

 
18
%
Servicing revenue
 
15,798

 
13,733

 
2,065

 
15
 %
 
15,453

 
345

 
2
%
Total mortgage revenue
 
$
38,224

 
$
36,846

 
$
1,378

 
4
 %
 
$
34,430

 
$
3,794

 
11
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
1,818,844

 
$
1,828,230

 
$
(9,386
)
 
(1
)%
 
$
1,244,015

 
$
574,829

 
46
%
Mortgage loans sold
 
1,742,582

 
1,861,968

 
(119,386
)
 
(6
)%
 
1,239,391

 
503,191

 
41
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end outstanding mortgage commitments, net
 
965,631

 
849,619

 
116,012

 
14
 %
 
902,986

 
62,645

 
7
%
Outstanding principal balance of mortgage loans serviced for others
 
21,178,387

 
17,979,623

 
3,198,764

 
18
 %
 
20,294,662

 
883,725

 
4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary residential mortgage interest rate – period end
 
3.48
%
 
4.02
%
 
(54
) bps
 
 
 
3.71
%
 
(23
) bps
 
 
Primary residential mortgage interest rate – average
 
3.59
%
 
3.82
%
 
(23
) bps
 
 
 
3.74
%
 
(15
) bps
 
 
Secondary residential mortgage interest rate – period end
 
2.31
%
 
3.13
%
 
(82
) bps
 
 
 
2.57
%
 
(26
) bps
 
 
Secondary residential mortgage interest rate – average
 
2.52
%
 
2.85
%
 
(33
) bps
 
 
 
2.70
%
 
(18
) bps
 
 

Primary rates disclosed in Table 3 above represent rates generally available to borrowers on 30 year conforming mortgage loans. Secondary rates generally represent yields on 30 year residential mortgage-backed securities guaranteed by U.S. government agencies.

Other revenue increased $1.5 million over the second quarter of 2015, primarily due to revenue from a merchant banking investment acquired in the second quarter of 2015. Other revenue increased $1.3 million over the first quarter of 2016.

- 7 -


Net gains on securities, derivatives and other assets

In the second quarter of 2016, we recognized a $5.3 million net gain from sales of $326 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential or to move into securities that are expected to perform better in the current rate environment. In the second quarter of 2015, we recognized a $3.4 million net gain from sales of $379 million of available for sale securities and in the first quarter of 2016, we recognized a $4.0 million net gain on sales of $469 million of available for sale securities.

We also maintain a portfolio of residential mortgage-backed securities issued by U.S. government agencies, U.S. Treasury securities and interest rate derivative contracts held as an economic hedge of the changes in the fair value of our mortgage servicing rights. The fair value of our mortgage servicing rights fluctuates due to changes in prepayment speeds and other assumptions as more fully described in Note 6 to the Consolidated Financial Statements. As benchmark mortgage rates increase, prepayment speeds slow and the value of our mortgage servicing rights increases. As benchmark mortgage rates fall, prepayment speeds increase and the value of our mortgage servicing rights decreases.

Changes in the fair value of mortgage servicing rights are highly dependent on changes in primary mortgage rates, rates offered to borrowers, and assumptions about servicing revenues, servicing costs and discount rates. Changes in the fair value of residential mortgage-backed securities are highly dependent on changes in secondary mortgage rates, or 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. Additionally, the fair value of mortgage servicing rights is dependent on intermediate-term interest rates that affect the value of custodial funds. Changes in the spread between short-term and long-term interest rates can also cause significant earnings volatility.

Table 4 following shows the relationship between changes in the fair value of mortgage servicing rights and the fair value of fair value option residential mortgage-backed securities and interest rate derivative contracts held as an economic hedge. Both period end primary and secondary mortgage rates fell during the second and first quarter of 2016. We increased the coverage of our hedge during the second quarter. During the first quarter, we observed a narrowing in the forward-looking spread between primary and secondary mortgage interest rates. A narrowing spread between primary and secondary mortgage interest rates decreases the fair value of mortgage servicing rights and is a risk that we cannot effectively hedge.


Table 4 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2016
 
Mar. 31, 2016
 
June 30, 2015
Gain (loss) on mortgage hedge derivative contracts, net
 
$
10,766

 
$
7,138

 
$
(1,005
)
Gain (loss) on fair value option securities, net
 
4,279

 
9,443

 
(8,130
)
Gain (loss) on economic hedge of mortgage servicing rights, net
 
15,045

 
16,581

 
(9,135
)
Gain (loss) on change in fair value of mortgage servicing rights
 
(16,283
)
 
(27,988
)
 
8,010

Loss on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
(1,238
)
 
$
(11,407
)
 
$
(1,125
)
 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
1,348

 
$
2,033

 
$
1,985







- 8 -


Other Operating Expense

Other operating expense for the second quarter of 2016 totaled $254.7 million, a $27.6 million or 12 percent increase over the second quarter of 2015. Personnel expenses increased $9.8 million or 7 percent. Non-personnel expenses increased $17.8 million or 19 percent over the prior year.

Operating expenses increased $9.8 million over the previous quarter. Personnel expense increased $6.6 million. Non-personnel expense increased $3.2 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
Mar. 31, 2016
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2016
 
2015
 
 
 
 
 
Regular compensation
 
$
82,441

 
$
78,105

 
$
4,336

 
6
 %
 
$
81,167

 
$
1,274

 
2
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
34,894

 
32,347

 
2,547

 
8
 %
 
30,444

 
4,450

 
15
 %
Share-based
 
3,701

 
3,057

 
644

 
21
 %
 
2,022

 
1,679

 
83
 %
Deferred compensation
 
211

 
118

 
93

 
N/A

 
69

 
142

 
N/A

Total incentive compensation
 
38,806

 
35,522

 
3,284

 
9
 %
 
32,535

 
6,271

 
19
 %
Employee benefits
 
21,243

 
19,068

 
2,175

 
11
 %
 
22,141

 
(898
)
 
(4
)%
Total personnel expense
 
142,490

 
132,695

 
9,795

 
7
 %
 
135,843

 
6,647

 
5
 %
Business promotion
 
6,703

 
7,765

 
(1,062
)
 
(14
)%
 
5,696

 
1,007

 
18
 %
Professional fees and services
 
14,158

 
9,560

 
4,598

 
48
 %
 
11,759

 
2,399

 
20
 %
Net occupancy and equipment
 
19,677

 
18,927

 
750

 
4
 %
 
18,766

 
911

 
5
 %
Insurance
 
7,129

 
5,116

 
2,013

 
39
 %
 
7,265

 
(136
)
 
(2
)%
Data processing and communications
 
32,802

 
30,655

 
2,147

 
7
 %
 
32,017

 
785

 
2
 %
Printing, postage and supplies
 
3,889

 
3,553

 
336

 
9
 %
 
3,907

 
(18
)
 
—
 %
Net losses and operating expenses of repossessed assets
 
1,588

 
223

 
1,365

 
612
 %
 
1,070

 
518

 
48
 %
Amortization of intangible assets
 
2,624

 
1,090

 
1,534

 
141
 %
 
1,159

 
1,465

 
126
 %
Mortgage banking costs
 
15,809

 
8,227

 
7,582

 
92
 %
 
12,379

 
3,430

 
28
 %
Other expense
 
7,856

 
9,302

 
(1,446
)
 
(16
)%
 
15,039

 
(7,183
)
 
(48
)%
Total other operating expense
 
$
254,725

 
$
227,113

 
$
27,612

 
12
 %
 
$
244,900

 
$
9,825

 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,893

 
4,776

 
117

 
2
 %
 
4,821

 
72

 
1
 %
Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs, increased $4.3 million or 6 percent over the second quarter of 2015. The average number of employees increased 2 percent over the prior year. Recent additions have primarily been higher-costing positions in compliance and risk management and technology. In addition, standard annual merit increases in regular compensation were effective for the majority of our staff on March 1.

Incentive compensation increased $3.3 million or 9 percent over the second quarter of 2015. 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. Total cash-based incentive compensation increased $2.5 million or 8 percent over the second quarter of 2015. 


- 9 -


Share-based compensation expense represents expense for equity awards based on grant-date fair value. Non-vested shares awarded prior to 2013 generally cliff vest in 3 years and are subject to a two year holding period after vesting. 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 $644 thousand or 21% over the prior year. Restricted shares subject to changes in BOK Financial's stock price increased and the fair value of BOK Financial common shares have appreciated subsequent to them being awarded.

Employee benefit expense increased $2.2 million or 11 percent over the second quarter of 2015 primarily due to increased employee medical costs.
Personnel costs increased by $6.6 million over the first quarter of 2016, primarily due to a $6.3 million increase in incentive compensation expense. Cash-based incentive compensation was up $4.5 million primarily due to revenue growth. Share-based compensation expense was $1.7 million higher due to the increase BOK Financial stock price. Regular compensation expense increased $1.3 million over the prior quarter largely due to the standard annual merit increases. A $1.6 million seasonal decrease in payroll tax expense was partially offset by a $1.1 million increase in employee medical costs.

Non-personnel operating expenses

Non-personnel operating expenses increased $17.8 million or 19 percent over the second quarter of 2015. Mortgage banking costs increased $7.6 million. The second quarter of 2015 included the benefit from an improvement in the estimated loss rates on outstanding claims on servicing certain defaulted residential mortgage loans guaranteed by U.S. government agencies. In addition, prepayments of loans serviced for others increased during the second quarter of 2016 due to lower mortgage interest rates. Professional fees and services expense increased $4.6 million primarily due to costs incurred in preparation for the mobank acquisition and increased legal fees. Data processing and communications expense increased $2.1 million due to increased transaction activity. Deposit insurance expense increased $2.0 million, primarily due to an increase in criticized and classified assets, an input to the deposit insurance assessment, and overall growth in assets. The increase in criticized and classified assets was related to falling energy prices.
Non-personnel expense increased $3.2 million over the first quarter of 2016. Mortgage banking expense increased $3.4 million primarily from increased prepayments of loans serviced for others due to lower mortgage interest rates. Professional fees and services expense also increased $2.4 million due largely to the annual cost of wealth management customer tax preparation services and costs incurred in preparation for the mobank acquisition. Intangible asset amortization was up $1.5 million from an adjustment to a consolidated merchant-banking investment. Business promotion expense had a seasonal increase of $1.0 million over the prior quarter. Other expense decreased $7.2 million compared to the prior quarter. The first quarter of 2016 included $4.1 million of litigation accruals and a $2.7 million post-acquisition valuation adjustment to a consolidated merchant banking investment. All other expense categories increased $2.1 million over the prior quarter on a combined basis.
Income Taxes

The Company's income tax expense from continuing operations was $30.5 million or 31.5% of book taxable income for the second quarter of 2016 compared to $40.6 million or 33.6% of book taxable income for the second quarter of 2015 and $21.4 million or 34.3% of book taxable income for the first quarter of 2016. The effective tax rate was lower in the second quarter of 2016 compared to the second quarter of 2015 and the first quarter of 2016, primarily due to a decrease in projected annual pre-tax book income.

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 $13 million at both June 30, 2016 and March 31, 2016 and $14 million at June 30, 2015.

- 10 -


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 duration. Market rates are generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment 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 which approximate wholesale market rates for funds with similar duration and re-pricing 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 re-pricing 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 swap rates. The expected duration ranges from 30 days for certain rate-sensitive deposits to five years.

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

As shown in Table 6, net income attributable to our lines of business increased $1.6 million or 2 percent compared to the second quarter of 2015. Net interest revenue grew by $12.3 million over the prior year. Other operating revenue was up $12.5 million. This was offset by a $6.8 million increase in net charge-offs primarily due to energy loans and an $18.6 million increase in operating expense.

Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
Commercial Banking
 
$
52,836

 
$
48,670

 
$
89,951

 
$
97,272

Consumer Banking
 
4,231

 
8,874

 
4,342

 
16,155

Wealth Management
 
10,779

 
8,685

 
17,757

 
17,422

Subtotal
 
67,846

 
66,229

 
112,050

 
130,849

Funds Management and other
 
(2,045
)
 
13,001

 
(3,685
)
 
23,224

Total
 
$
65,801

 
$
79,230

 
$
108,365

 
$
154,073


- 11 -


Commercial Banking

Commercial Banking contributed $52.8 million to consolidated net income in the second quarter of 2016, an increase of $4.2 million or 9% over the second quarter of 2015. Growth in net interest revenue and fees and commissions revenue was partially offset by increased loan charge-offs and higher operating expenses. Commercial Banking net loans charged off were $6.9 million in the second quarter of 2016 compared to a net recovery of $47 thousand in the second quarter of 2015. The increase was primarily related to energy portfolio loans.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Six Months Ended
 
Increase (Decrease)
 
 
June 30,
 
 
June 30,
 
 
 
2016
 
2015
 
 
2016
 
2015
 
Net interest revenue from external sources
 
$
118,480

 
$
108,620

 
$
9,860

 
$
235,116

 
$
209,795

 
$
25,321

Net interest expense from internal sources
 
(14,575
)
 
(12,643
)
 
(1,932
)
 
(29,109
)
 
(25,278
)
 
(3,831
)
Total net interest revenue
 
103,905

 
95,977

 
7,928

 
206,007

 
184,517

 
21,490

Net loans charged off (recovered)
 
6,852

 
(47
)
 
6,899

 
28,423

 
(8,949
)
 
37,372

Net interest revenue after net loans charged off (recovered)
 
97,053

 
96,024

 
1,029

 
177,584

 
193,466

 
(15,882
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
51,028

 
45,173

 
5,855

 
96,504

 
87,476

 
9,028

Other gains, net
 
469

 
100

 
369

 
101

 
244

 
(143
)
Other operating revenue
 
51,497

 
45,273

 
6,224

 
96,605

 
87,720

 
8,885

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
27,520

 
27,131

 
389

 
54,147

 
53,381

 
766

Non-personnel expense
 
25,074

 
23,670

 
1,404

 
54,516

 
46,566

 
7,950

Other operating expense
 
52,594

 
50,801

 
1,793

 
108,663

 
99,947

 
8,716

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
95,956

 
90,496

 
5,460

 
165,526

 
181,239

 
(15,713
)
Loss on repossessed assets, net
 
(598
)
 
(58
)
 
(540
)
 
(680
)
 
(14
)
 
(666
)
Corporate expense allocations
 
8,883

 
10,782

 
(1,899
)
 
17,627

 
22,023

 
(4,396
)
Income before taxes
 
86,475

 
79,656

 
6,819

 
147,219

 
159,202

 
(11,983
)
Federal and state income tax
 
33,639

 
30,986

 
2,653

 
57,268

 
61,930

 
(4,662
)
Net income
 
$
52,836

 
$
48,670

 
$
4,166

 
$
89,951

 
$
97,272

 
$
(7,321
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,973,663

 
$
16,262,457

 
$
711,206

 
$
16,971,339

 
$
16,266,341

 
$
704,998

Average loans
 
13,571,602

 
12,260,003

 
1,311,599

 
13,444,470

 
12,077,367

 
1,367,103

Average deposits
 
8,403,408

 
8,928,997

 
(525,589
)
 
8,430,579

 
8,961,834

 
(531,255
)
Average invested capital
 
1,167,840

 
1,028,989

 
138,851

 
1,160,485

 
1,013,117

 
147,368


Net interest revenue increased $7.9 million or 8% over the prior year. Growth in net interest revenue was primarily due to a $1.3 billion or 11% increase in average loan balances. Net interest revenue was $1.3 million lower due to the impact of an increase in nonaccruing energy loans compared to the prior year. The remaining growth in net interest revenue was primarily related to increased yield on deposits sold to the funds management unit related to the increase in short-term interest rates from the Federal Reserve increase in the federal funds rate in the fourth quarter of 2015.

Fees and commissions revenue grew by $5.9 million or 13% over the second quarter of 2015. Transaction card revenues from our TransFund electronic funds transfer network increased $2.0 million primarily due to a customer early termination fee. Other revenue increased $1.9 million primarily related to merchant banking activity. Brokerage and trading revenue increased $1.6 million primarily due to increased hedging activity by our energy customers and growth in commercial loan syndication fees. Commercial deposit service charge revenue was up $623 thousand.


- 12 -


Operating expenses increased $1.8 million or 4% over the the second quarter of 2015. Personnel expense increased $389 thousand or 1% primarily due to standard annual merit increases, partially offset by lower incentive compensation expense. Non-personnel expense grew by $1.4 million or 6%. Intangible asset amortization increased $368 thousand, net repossession expense increased $324 thousand and professional fees and services expense increased $308 thousand over the prior year. Corporate expense allocations decreased $1.9 million compared to the prior year.

The average outstanding balance of loans attributed to Commercial Banking grew by $1.3 billion or 11% over the second quarter of 2015 to $13.6 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 $8.4 billion for the second quarter of 2016, a decrease of $526 million or 6% compared to the second quarter of 2015.


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, through correspondent loan originators and through Home Direct Mortgage, an online origination channel.

Consumer Banking contributed $4.2 million to consolidated net income for the second quarter of 2016 compared to $8.9 million in the second quarter of 2015. The decrease was largely due to a $10.5 million increase in non-personnel expense.

Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $756 thousand decrease in Consumer Banking net income in the second quarter of 2016 compared to a $687 thousand decrease in Consumer Banking net income in the second quarter of 2015.


- 13 -


Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Six Months Ended
 
Increase (Decrease)
 
 
June 30,
 
 
June 30,
 
 
 
2016
 
2015
 
 
2016
 
2015
 
Net interest revenue from external sources
 
$
22,349

 
$
21,721

 
$
628

 
$
43,799

 
$
42,440

 
$
1,359

Net interest revenue from internal sources
 
8,876

 
6,838

 
2,038

 
18,229

 
13,658

 
4,571

Total net interest revenue
 
31,225

 
28,559

 
2,666

 
62,028

 
56,098

 
5,930

Net loans charged off
 
1,318

 
1,614

 
(296
)
 
3,020

 
3,036

 
(16
)
Net interest revenue after net loans charged off
 
29,907

 
26,945

 
2,962

 
59,008

 
53,062

 
5,946

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
60,510

 
59,885

 
625

 
117,012

 
121,395

 
(4,383
)
Other losses (gains), net
 
270

 
(197
)
 
467

 
127

 
(512
)
 
639

Other operating revenue
 
60,780

 
59,688

 
1,092

 
117,139

 
120,883

 
(3,744
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
29,505

 
26,341

 
3,164

 
56,630

 
52,123

 
4,507

Non-personnel expense
 
36,641

 
26,170

 
10,471

 
67,564

 
52,694

 
14,870

Total other operating expense
 
66,146

 
52,511

 
13,635

 
124,194

 
104,817

 
19,377

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
24,541

 
34,122

 
(9,581
)
 
51,953

 
69,128

 
(17,175
)
Gain (loss) on financial instruments, net
 
15,045

 
(9,135
)
 
24,180

 
31,626

 
(5,577
)
 
37,203

Change in fair value of mortgage servicing rights
 
(16,283
)
 
8,010

 
(24,293
)
 
(44,271
)
 
(512
)
 
(43,759
)
Gain on repossessed assets, net
 
252

 
479

 
(227
)
 
406

 
557

 
(151
)
Corporate expense allocations
 
16,630

 
18,953

 
(2,323
)
 
32,608

 
37,155

 
(4,547
)
Income before taxes
 
6,925

 
14,523

 
(7,598
)
 
7,106

 
26,441

 
(19,335
)
Federal and state income tax
 
2,694

 
5,649

 
(2,955
)
 
2,764

 
10,286

 
(7,522
)
Net income
 
$
4,231

 
$
8,874

 
$
(4,643
)
 
$
4,342

 
$
16,155

 
$
(11,813
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
8,774,881

 
$
8,970,936

 
$
(196,055
)
 
$
8,731,085

 
$
8,885,400

 
$
(154,315
)
Average loans
 
1,888,692

 
1,901,579

 
(12,887
)
 
1,886,298

 
1,920,829

 
(34,531
)
Average deposits
 
6,634,362

 
6,724,188

 
(89,826
)
 
6,605,127

 
6,673,067

 
(67,940
)
Average invested capital
 
266,561

 
269,388

 
(2,827
)
 
262,762

 
270,738

 
(7,976
)

Net interest revenue from Consumer Banking activities grew by $2.7 million or 9% over the the second quarter of 2015 primarily due to increased rates on deposit balances sold to the Funds Management unit, partially offset by a $90 million or 1% decrease in average deposit balances. Average loan balances were $13 million or 1% lower than the prior year.

Fees and commissions revenue increased $625 thousand or 1% over the second quarter of 2015, primarily due to a $1.4 million increase in mortgage banking revenue primarily due to growth in mortgage servicing revenue. Mortgage loans funded for sale in the second quarter of 2016 were $9.4 million or 1% lower than in the second quarter of 2015. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company increased $222 thousand or 4%. Deposit service charges and fees decreased $341 thousand or 3% compared to the prior year. Other revenue decreased $612 thousand compared to the prior year.


- 14 -


Operating expense increased $13.6 million or 26% over the second quarter of 2015. Personnel expenses increased $3.2 million or 12%. Regular compensation expense was up $1.8 million primarily due to annual merit increases and growth in mortgage banking headcount. Incentive compensation expense was up $944 thousand over the prior year. Non-personnel expense increased $10.5 million or 40% over the prior year. Mortgage banking expense was up $8.4 million over the prior year. The second quarter of 2015 included the benefit from an improvement in the estimated loss rates on outstanding claims on servicing certain defaulted residential mortgage loans guaranteed by U.S. government agencies. In addition, prepayments of loans serviced for others increased due to lower mortgage interest rates. Other expense increased $1.2 million primarily due to a legal settlement during the quarter.

Corporate expense allocations decreased $2.3 million compared to the second quarter of 2015.

Average consumer deposits decreased $90 million or 1% compared to the second quarter of 2015. Average time deposit balances decreased $251 million or 18%, partially offset by a $71 million or 4% increase in demand deposit balances, a $60 million or 2% increase in interest-bearing transaction accounts and a $31 million or 8% increase in saving account balances.


Wealth Management

Wealth Management contributed $10.8 million to consolidated net income in the second quarter of 2016, up $2.1 million or 24% over the second quarter of 2015. Fiduciary and asset management revenue, brokerage and trading revenue and net interest revenue all grew over the prior year. This revenue growth was partially offset by increased operating expense.

Table 9 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Six Months Ended
 
Increase (Decrease)
 
 
June 30,
 
 
June 30,
 
 
 
2016
 
2015
 
 
2016
 
2015
 
Net interest revenue from external sources
 
$
6,269

 
$
6,221

 
$
48

 
$
12,347

 
$
11,597

 
$
750

Net interest revenue from internal sources
 
7,193

 
5,487

 
1,706

 
14,857

 
11,566

 
3,291

Total net interest revenue
 
13,462

 
11,708

 
1,754

 
27,204

 
23,163

 
4,041

Net loans charged off (recovered)
 
(239
)
 
(399
)
 
160

 
(390
)
 
(747
)
 
357

Net interest revenue after net loans charged off (recovered)
 
13,701

 
12,107

 
1,594

 
27,594

 
23,910

 
3,684

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
75,467

 
70,234

 
5,233

 
144,188

 
137,137

 
7,051

Other gains, net
 
305

 
365

 
(60
)
 
330

 
422

 
(92
)
Other operating revenue
 
75,772

 
70,599

 
5,173

 
144,518

 
137,559

 
6,959

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
48,147

 
46,192

 
1,955

 
93,266

 
88,607

 
4,659

Non-personnel expense
 
13,267

 
12,085

 
1,182

 
28,832

 
24,150

 
4,682

Other operating expense
 
61,414

 
58,277

 
3,137

 
122,098

 
112,757

 
9,341

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
28,059

 
24,429

 
3,630

 
50,014

 
48,712

 
1,302

Corporate expense allocations
 
10,417

 
10,187

 
230

 
20,952

 
20,170

 
782

Income before taxes
 
17,642

 
14,214

 
3,428

 
29,062

 
28,514

 
548

Federal and state income tax
 
6,863

 
5,529

 
1,334

 
11,305

 
11,092

 
213

Net income
 
$
10,779

 
$
8,685

 
$
2,094

 
$
17,757

 
$
17,422

 
$
335

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
5,765,390

 
$
5,319,568

 
$
445,822

 
$
5,665,218

 
$
5,385,266

 
$
279,952

Average loans
 
1,098,178

 
1,065,809

 
32,369

 
1,094,252

 
1,050,603

 
43,649

Average deposits
 
4,521,031

 
4,522,197

 
(1,166
)
 
4,608,522

 
4,611,255

 
(2,733
)
Average invested capital
 
240,693

 
224,971

 
15,722

 
236,798

 
224,247

 
12,551


- 15 -


 
 
June 30,
 
Increase
(Decrease)
 
 
2016
 
2015
 
Fiduciary assets in custody for which BOKF has sole or joint discretionary authority
 
$
13,935,411

 
$
15,170,488

 
$
(1,235,077
)
Fiduciary assets not in custody for which BOKF has sole or joint discretionary authority
 
3,612,632

 
3,471,856

 
140,776

Non-managed trust assets in custody
 
22,376,691

 
20,129,674

 
2,247,017

Total fiduciary assets
 
39,924,734

 
38,772,018

 
1,152,716

Assets held in safekeeping
 
27,287,123

 
24,099,473

 
3,187,650

Brokerage accounts under BOKF administration
 
5,789,659

 
5,739,210

 
50,449

Assets under management or in custody
 
$
73,001,516

 
$
68,610,701

 
$
4,390,815


Net interest revenue for the second quarter of 2016 increased $1.8 million or 15% over the second quarter of 2015, primarily due to increased rates on deposit balances sold to the Funds Management unit. Average deposit balances were largely unchanged compared to the second quarter of 2015. Interest-bearing transaction account balances decreased $43 million or 2% and time deposit balances decreased $89 million or 11%. Non-interest bearing demand deposits grew by $129 million or 14%. Average loan balances increased $32 million or 3% over the prior year.

Fees and commissions revenue was up $5.2 million or 8% over the second quarter of 2015. Fiduciary and asset management revenue increased $2.1 million or 6% over the prior year primarily due to decreased fee waivers, the Company's acquisition of Weaver and Tidwell Financial Advisors LTD d/b/a Weaver Wealth Management, a registered investment advisor, in the first quarter of 2016 and changes in market values. Brokerage and trading revenue grew by $1.9 million or 6% primarily due to growth in securities trading revenue over the prior year. Growth in retail brokerage revenue was offset by lower investment banking revenue compared to the second quarter of 2015. Other revenue increased $1.3 million or 29%.

Other operating revenue includes fees earned from state and municipal bond and corporate debt underwriting and financial advisory services, primarily in the Oklahoma and Texas markets. In the second quarter of 2016, the Wealth Management division participated in 136 state and municipal bond underwritings that totaled $4.2 billion. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $803 million of these underwritings. The Wealth Management division also participated in two corporate debt underwritings that totaled $350 million. Our interest in these underwritings was $44 million. In the second quarter of 2015, the Wealth Management division participated in 148 state and municipal bond underwritings that totaled approximately $3.0 billion. Our interest in these underwritings totaled approximately $844 million. The Wealth Management division also participated in five corporate debt underwritings that totaled $2.5 billion. Our interest in these underwritings was $43 million.

Operating expense increased $3.1 million or 5% over the second quarter of 2015. Personnel expenses increased $2.0 million, primarily due to incentive compensation expense and standard merit increases to regular compensation. Non-personnel expense increased $1.2 million. Professional fees and services expense increased $1.5 million and data processing and communications expense increased $436 thousand. Business promotion expense was $490 thousand less than the prior year and other expense decreased $362 thousand.

Corporate expense allocations increased $230 thousand or 2% over 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, 2016, December 31, 2015 and June 30, 2015.

At June 30, 2016, the carrying value of investment (held-to-maturity) securities was $561 million and the fair value was $599 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

- 16 -


these bonds are general obligations of the issuers. Approximately $105 million of the $201 million portfolio of Texas school construction bonds are 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 $8.6 billion at June 30, 2016, a decrease of $95 million compared to March 31, 2016. Available for sale securities consist primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans. At June 30, 2016, residential mortgage-backed securities represented 66 percent of total available for sale securities.

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, 2016 is 2.6 years. Management estimates the duration extends to 3.3 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.4 years assuming a 50 basis point decline in the current low rate environment.

Residential 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. At June 30, 2016, approximately $5.6 billion of the amortized cost of the Company’s residential mortgage-backed securities were issued by U.S. government agencies. The fair value of these residential mortgage-backed securities totaled $5.7 billion at June 30, 2016.

We also hold amortized cost of $115 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions, a decrease of $7.7 million from March 31, 2016. 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 $126 million at June 30, 2016.

The amortized cost of our portfolio of privately issued residential mortgage-backed securities included $66 million of Jumbo-A residential mortgage loans and $50 million of Alt-A residential mortgage loans. Jumbo-A residential mortgage loans generally meet government underwriting standards, but have loan balances that exceed agency maximums. Alt-A mortgage loans generally do not have sufficient documentation to meet government agency underwriting standards. Approximately 90 percent of our Alt-A mortgage-backed securities represent pools of fixed rate residential mortgage loans. None of the adjustable rate mortgages are payment option adjustable rate mortgages (“ARMs”). Approximately 29 percent of our Jumbo-A residential mortgage-backed securities represent pools of fixed rate residential mortgage loans and none of the adjustable rate mortgages are payment option ARMs.

The aggregate gross amount of unrealized losses on available for sale securities totaled $3.0 million at June 30, 2016, compared to $5.9 million at March 31, 2016. 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 2016.

Certain U.S. Treasury securities and residential mortgage-backed securities issued by U.S. government agencies included in fair value option securities on the Consolidated Balance Sheets are held as an economic hedge of changes in the fair value of our mortgage servicing rights. We have elected to carry these securities at fair value with changes in fair value recognized in current period income. These securities are held with the intent that gains or losses will offset changes in the fair value of mortgage servicing rights and related derivative contracts.

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 $36 million and holdings of FHLB stock totaled $283 million at June 30, 2016. Holdings of FHLB stock increased $4.9 million over March 31, 2016. We are required to hold stock in the FHLB in proportion to our borrowings with the FHLB.

- 17 -


Bank-Owned Life Insurance

We have approximately $308 million of bank-owned life insurance at June 30, 2016. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $278 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, 2016, the fair value of investments held in separate accounts was approximately $295 million. As the underlying fair value of the investments held in a separate account at June 30, 2016 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 $30 million primarily represents the cash surrender value of policies held in general accounts and other amounts due from various insurance companies.


- 18 -


Loans

The aggregate loan portfolio before allowance for loan losses totaled $16 billion at June 30, 2016, an increase of $384 million over March 31, 2016. Outstanding commercial loans grew by $68 million over March 31, 2016, largely due to growth in services, wholesale/retail, healthcare and other commercial and industrial sector loans, partially offset by a decrease in energy loan balances. Commercial real estate loan balances were up $211 million primarily related to growth in loans secured by industrial facilities, office buildings, multifamily residential and other commercial real estate loans. Residential mortgage loans increased $11.6 million compared to March 31, 2016 and personal loans increased $93 million compared to March 31, 2016. 

Table 10 -- Loans
(In thousands)
 
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,818,656

 
$
3,029,420

 
$
3,097,328

 
$
2,838,167

 
$
2,902,143

Services
 
2,830,864

 
2,728,891

 
2,784,276

 
2,706,624

 
2,681,126

Healthcare
 
2,051,146

 
1,995,425

 
1,883,380

 
1,741,680

 
1,646,025

Wholesale/retail
 
1,532,957

 
1,451,846

 
1,422,064

 
1,461,936

 
1,533,730

Manufacturing
 
595,403

 
600,645

 
556,729

 
555,677

 
579,549

Other commercial and industrial
 
527,411

 
482,198

 
508,754

 
493,338

 
433,148

Total commercial
 
10,356,437

 
10,288,425

 
10,252,531

 
9,797,422

 
9,775,721

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Retail
 
795,419

 
810,522

 
796,499

 
769,449

 
688,447

Multifamily
 
787,200

 
733,689

 
751,085

 
758,658

 
711,333

Office
 
769,112

 
695,552

 
637,707

 
626,151

 
563,085

Industrial
 
645,586

 
564,467

 
563,169

 
563,871

 
488,054

Residential construction and land development
 
157,576

 
171,949

 
160,426

 
153,510

 
148,574

Other commercial real estate
 
427,073

 
394,328

 
350,147

 
363,428

 
434,004

Total commercial real estate
 
3,581,966

 
3,370,507

 
3,259,033

 
3,235,067

 
3,033,497

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
969,007

 
948,405

 
945,336

 
937,664

 
946,324

Permanent mortgages guaranteed by U.S. government agencies
 
192,732

 
197,350

 
196,937

 
192,712

 
190,839

Home equity
 
719,184

 
723,554

 
734,620

 
738,619

 
747,565

Total residential mortgage
 
1,880,923

 
1,869,309

 
1,876,893

 
1,868,995

 
1,884,728

 
 
 
 
 
 
 
 
 
 
 
Personal
 
587,423

 
494,325

 
552,697

 
465,957

 
430,190

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,406,749

 
$
16,022,566

 
$
15,941,154

 
$
15,367,441

 
$
15,124,136



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 on-going 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 on-going 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.


- 19 -


Commercial loans totaled $10.4 billion or 63 percent of the loan portfolio at June 30, 2016, an increase of $68 million over March 31, 2016. Service sector loans increased by $102 million and wholesale/retail sector loans increased $81 million. Healthcare sector loans grew by $56 million and other commercial and industrial loans were up $45 million over the prior quarter. Energy loan balances decreased $211 million compared to March 31, 2016.

Table 11 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. 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 23 percent concentrated in the Oklahoma market. The Other category is primarily composed of two states, California and Louisiana, which represent $268 million or 3 percent of the commercial loan portfolio and $167 million or 2 percent of the commercial loan portfolio, respectively, at June 30, 2016. All other states individually represent one percent or less of total commercial loans.

Table 11 -- Commercial Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Energy
 
$
761,490

 
$
1,247,111

 
$
15,745

 
$
5,376

 
$
334,194

 
$
10,591

 
$
81,850

 
$
362,299

 
$
2,818,656

Services
 
689,877

 
913,689

 
227,236

 
4,099

 
275,643

 
199,421

 
169,325

 
351,574

 
2,830,864

Healthcare
 
266,079

 
348,074

 
124,893

 
88,676

 
152,523

 
107,167

 
223,084

 
740,650

 
2,051,146

Wholesale/retail
 
460,662

 
558,962

 
38,509

 
39,744

 
56,332

 
52,391

 
44,907

 
281,450

 
1,532,957

Manufacturing
 
134,179

 
184,528

 
254

 
6,620

 
56,376

 
66,578

 
69,026

 
77,842

 
595,403

Other commercial and industrial
 
77,544

 
141,690

 
4,489

 
76,388

 
33,140

 
35,311

 
73,823

 
85,026

 
527,411

Total commercial loans
 
$
2,389,831

 
$
3,394,054

 
$
411,126

 
$
220,903

 
$
908,208

 
$
471,459

 
$
662,015

 
$
1,898,841

 
$
10,356,437

 
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, 2016. Unfunded energy loan commitments decreased by $161 million to $1.9 billion at June 30, 2016. Approximately $2.2 billion of energy loans were to oil and gas producers, down $233 million compared to March 31, 2016. 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 deepwater offshore exposure. Approximately 60 percent of the committed production loans are secured by properties primarily producing oil and 40 percent of the committed production loans are secured by properties primarily producing natural gas. Loans to borrowers that provide services to the energy industry decreased $16 million from the prior quarter to $262 million at June 30, 2016. Loans to midstream oil and gas companies totaled $246 million at June 30, 2016, an increase of $44 million over March 31, 2016. Loans to other energy borrowers, including those engaged in wholesale or retail energy sales, totaled $73 million, a $5.7 million decrease compared to the prior quarter.

The services sector of the loan portfolio totaled $2.8 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, not-for-profit and loans to entities providing services for real estate and construction. Service sector loans increased by $102 million compared to March 31, 2016. 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. 


- 20 -


The healthcare sector of the loan portfolio 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, 2016, the outstanding principal balance of these loans totaled $3.9 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 17 percent of our shared national credits, based on dollars committed. We hold shared 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 30 percent and 13 percent of the total commercial real estate portfolio at June 30, 2016, 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 $3.6 billion or 22 percent of the loan portfolio at June 30, 2016. The outstanding balance of commercial real estate loans increased $211 million during the second quarter of 2016. Loans secured by industrial facilities grew by $81 million and loans secured by office buildings increased $74 million. Loans secured by multifamily residential properties increased $54 million. Growth in other commercial real estate loan balances was offset by decreases in loans secured by retail facilities and residential construction and land development loans. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 18 percent to 22 percent over the past five years. 

The commercial real estate sector of our loan portfolio distributed by collateral location follows in Table 12. The Other category is primarily composed of California and Florida which represent $157 million or 15% and $117 million or 11%, respectively. All other states individually represent less than 10% of the total commercial real estate portfolio.

Table 12 -- Commercial Real Estate Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Retail
 
$
90,337

 
$
286,385

 
$
112,725

 
$
6,706

 
$
54,459

 
$
36,359

 
$
9,092

 
$
199,356

 
$
795,419

Multifamily
 
104,151

 
291,146

 
28,951

 
22,531

 
58,002

 
72,857

 
76,409

 
133,153

 
787,200

Office
 
116,249

 
192,364

 
55,863

 
1,615

 
58,228

 
50,321

 
71,225

 
223,247

 
769,112

Industrial
 
69,142

 
197,435

 
25,865

 
192

 
5,316

 
15,306

 
35,468

 
296,862

 
645,586

Residential construction and land development
 
18,366

 
40,936

 
20,895

 
5,362

 
30,951

 
3,882

 
5,230

 
31,954

 
157,576

Other real estate
 
69,095

 
73,952

 
15,689

 
8,133

 
38,482

 
31,448

 
4,492

 
185,782

 
427,073

Total commercial real estate loans
 
$
467,340

 
$
1,082,218

 
$
259,988

 
$
44,539

 
$
245,438

 
$
210,173

 
$
201,916

 
$
1,070,354

 
$
3,581,966




- 21 -


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, a $12 million increase over March 31, 2016. 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 98 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 exceed 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, 2016, $193 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 were largely unchanged compared to March 31, 2016.

Home equity loans totaled $719 million at June 30, 2016, a decrease of $4.4 million compared to March 31, 2016. 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 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 repayment. 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. A summary of our home equity loan portfolio at June 30, 2016 by lien position and amortizing status follows in Table 13.

Table 13 -- Home Equity Loans
(In thousands)
 
 
Revolving
 
Amortizing
 
Total
First lien
 
$
44,011

 
$
438,396

 
$
482,407

Junior lien
 
92,652

 
144,125

 
236,777

Total home equity
 
$
136,663

 
$
582,521

 
$
719,184



- 22 -


The distribution of residential mortgage and personal loans at June 30, 2016 is as follows in Table 14. Residential mortgage loans are distributed by collateral location. Personal loans are generally distributed by borrower location.

Table 14 -- 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
 
$
195,499

 
$
399,248

 
$
40,372

 
$
13,331

 
$
153,883

 
$
95,368

 
$
46,794

 
$
24,512

 
$
969,007

Permanent mortgages  guaranteed by U.S. government agencies
 
60,101

 
22,342

 
63,872

 
5,251

 
7,168

 
1,303

 
11,287

 
21,408

 
192,732

Home equity
 
419,677

 
133,503

 
109,894

 
5,395

 
33,339

 
8,861

 
8,081

 
434

 
719,184

Total residential mortgage
 
$
675,277

 
$
555,093

 
$
214,138

 
$
23,977

 
$
194,390

 
$
105,532

 
$
66,162

 
$
46,354

 
$
1,880,923

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
$
242,819

 
$
231,105

 
$
10,557

 
$
7,025

 
$
35,731

 
$
24,008

 
$
30,850

 
$
5,328

 
$
587,423



- 23 -


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 15 -- Loans Managed by Primary Geographical Market
(In thousands)
 
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
3,698,215

 
$
3,656,034

 
$
3,782,687

 
$
3,514,391

 
$
3,529,406

Commercial real estate
 
781,458

 
747,689

 
739,829

 
677,372

 
614,995

Residential mortgage
 
1,415,766

 
1,411,409

 
1,409,114

 
1,405,235

 
1,413,690

Personal
 
246,229

 
204,158

 
255,387

 
185,463

 
190,909

Total Bank of Oklahoma
 
6,141,668

 
6,019,290

 
6,187,017

 
5,782,461

 
5,749,000

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
3,901,632

 
3,936,809

 
3,908,425

 
3,752,193

 
3,738,742

Commercial real estate
 
1,311,408

 
1,211,978

 
1,204,202

 
1,257,741

 
1,158,056

Residential mortgage
 
222,548

 
217,539

 
219,126

 
222,395

 
228,683

Personal
 
233,304

 
210,456

 
203,496

 
194,051

 
156,260

Total Bank of Texas
 
5,668,892

 
5,576,782

 
5,535,249

 
5,426,380

 
5,281,741

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 

 
 

 
 

 
 

 
 

Commercial
 
398,427

 
402,082

 
375,839

 
368,027

 
392,362

Commercial real estate
 
322,956

 
323,059

 
313,422

 
312,953

 
291,953

Residential mortgage
 
114,226

 
117,655

 
120,507

 
121,232

 
123,376

Personal
 
10,569

 
10,823

 
11,557

 
10,477

 
11,939

Total Bank of Albuquerque
 
846,178

 
853,619

 
821,325

 
812,689

 
819,630

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
81,227

 
79,808

 
92,359

 
76,044

 
99,086

Commercial real estate
 
69,235

 
66,674

 
69,320

 
82,225

 
85,997

Residential mortgage
 
6,874

 
7,212

 
8,169

 
8,063

 
6,999

Personal
 
7,025

 
918

 
819

 
4,921

 
5,189

Total Bank of Arkansas
 
164,361

 
154,612

 
170,667

 
171,253

 
197,271

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 

 
 

 
 

 
 

 
 

Commercial
 
1,076,620

 
1,030,348

 
987,076

 
1,029,694

 
1,019,454

Commercial real estate
 
237,569

 
219,078

 
223,946

 
229,835

 
229,721

Residential mortgage
 
59,425

 
52,961

 
53,782

 
50,138

 
54,135

Personal
 
35,064

 
24,497

 
23,384

 
30,683

 
30,373

Total Colorado State Bank & Trust
 
1,408,678

 
1,326,884

 
1,288,188

 
1,340,350

 
1,333,683

 
 
 
 
 
 
 
 
 
 
 
Bank of Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
670,814

 
656,527

 
606,733

 
608,235

 
572,477

Commercial real estate
 
639,112

 
605,383

 
507,523

 
482,918

 
472,061

Residential mortgage
 
38,998

 
40,338

 
44,047

 
41,722

 
37,493

Personal
 
24,248

 
18,372

 
31,060

 
17,609

 
12,875

Total Bank of Arizona
 
1,373,172

 
1,320,620

 
1,189,363

 
1,150,484

 
1,094,906

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 

 
 

 
 

 
 

 
 

Commercial
 
529,502

 
526,817

 
499,412

 
448,838

 
424,194

Commercial real estate
 
220,228

 
196,646

 
200,791

 
192,023

 
180,714

Residential mortgage
 
23,086

 
22,195

 
22,148

 
20,210

 
20,352

Personal
 
30,984

 
25,101

 
26,994

 
22,753

 
22,645

Total Bank of Kansas City
 
803,800

 
770,759

 
749,345

 
683,824

 
647,905

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
16,406,749

 
$
16,022,566

 
$
15,941,154

 
$
15,367,441

 
$
15,124,136


- 24 -


Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business. These arrangements included unfunded loan commitments which totaled $8.5 billion and standby letters of credit which totaled $491 million at June 30, 2016. 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 $1.5 million of the outstanding standby letters of credit were issued on behalf of customers whose loans are nonperforming at June 30, 2016.

Table 16 – Off-Balance Sheet Credit Commitments
(In thousands)
 
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015
Loan commitments
 
$
8,508,606

 
$
8,567,017

 
$
8,455,037

 
$
8,325,540

 
$
8,064,841

Standby letters of credit
 
491,002

 
509,902

 
507,988

 
479,638

 
444,947

Mortgage loans sold with recourse
 
145,403

 
152,843

 
155,489

 
161,897

 
168,581


As more fully described in Note 6 to the Consolidated Financial Statements, 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 $94 million to borrowers in Oklahoma, $16 million to borrowers in Arkansas and $12 million to borrowers in New Mexico.

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 2016 combined, approximately 21 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 $3.3 million at June 30, 2016 and $3.0 million at March 31, 2016.
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 options 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.


- 25 -


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, 2016, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $877 million compared to $800 million at March 31, 2016. At June 30, 2016, the fair value of our derivative contracts included $676 million for foreign exchange contracts, $116 million related to to-be-announced residential mortgage-backed securities, $55 million for interest rate swaps and $25 million for energy contracts. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $872 million at June 30, 2016 and $796 million at March 31, 2016.

At June 30, 2016, total derivative assets were reduced by $7 million of cash collateral received from counterparties and total derivative liabilities were reduced by $153 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, 2016 follows in Table 17.

Table 17 -- Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
508,309

Banks and other financial institutions
 
354,360

Exchanges and clearing organizations
 
7,246

Fair value of customer risk management program asset derivative contracts, net
 
$
869,915

 
At June 30, 2016, our largest derivative exposure was to a customer for an interest rate derivative contract which totaled $7.2 million. At June 30, 2016, our aggregate gross exposure to internationally active domestic financial institutions was approximately $52 million comprised of $42 million of cash and securities positions and $9.0 million of gross derivative positions. We have no direct exposure to European sovereign debt and our aggregate gross exposure to European financial institutions totaled $9.2 million at June 30, 2016.

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 $27.32 per barrel of oil would decrease the fair value of derivative assets by $19 million. An increase in prices equivalent to $76.16 per barrel of oil would increase the fair value of derivative assets by $146 million as current prices move further away from the fixed prices embedded in our existing contracts. Liquidity requirements of this program are also affected by our credit rating. A decrease in our credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $18 million. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of June 30, 2016, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.

- 26 -


Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. At June 30, 2016, the combined allowance for loan losses and off-balance sheet credit losses totaled $252 million or 1.54 percent of outstanding loans and 111 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $243 million and the accrual for off-balance sheet credit losses was $9.0 million. At March 31, 2016, the combined allowance for credit losses was $240 million or 1.50 percent of outstanding loans and 108 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $233 million and the accrual for off-balance sheet credit losses was $6.6 million at June 30, 2016. The portion of the combined allowance for credit losses attributed to the energy portfolio totaled 3.58 percent of outstanding energy loans at June 30, 2016, an increase from 3.19 percent of outstanding energy loans at March 31, 2016.

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. After evaluating all credit factors, we recorded a $20.0 million provision for credit losses during the second quarter of 2016, compared to $35.0 million in the first quarter of 2016 and $4.0 million in the second quarter of 2015. The lower provision for credit losses compared to previous quarter reflects improvement in credit metric trends over the previous quarter largely driven by energy price stability and decreased rates of newly identified nonaccruing and potential problem loans.


- 27 -


Table 18 -- Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
233,156

 
$
225,524

 
$
204,116

 
$
201,087

 
$
197,686

Loans charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
(7,355
)
 
(22,126
)
 
(2,182
)
 
(3,497
)
 
(881
)
Commercial real estate
 
—

 
—

 
(900
)
 
—

 
(16
)
Residential mortgage
 
(345
)
 
(474
)
 
(421
)
 
(446
)
 
(714
)
Personal
 
(1,145
)
 
(1,391
)
 
(1,348
)
 
(1,331
)
 
(1,266
)
Total
 
(8,845
)
 
(23,991
)
 
(4,851
)
 
(5,274
)
 
(2,877
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
223

 
488

 
928

 
759

 
685

Commercial real estate
 
282

 
85

 
120

 
1,865

 
275

Residential mortgage
 
200

 
163

 
137

 
205

 
481

Personal
 
681

 
783

 
685

 
692

 
765

Total
 
1,386

 
1,519

 
1,870

 
3,521

 
2,206

Net loans recovered (charged off)
 
(7,459
)
 
(22,472
)
 
(2,981
)
 
(1,753
)
 
(671
)
Provision for loan losses
 
17,562

 
30,104

 
24,389

 
4,782

 
4,072

Ending balance
 
$
243,259

 
$
233,156

 
$
225,524

 
$
204,116

 
$
201,087

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 
 
 

Beginning balance
 
$
6,607

 
$
1,711

 
$
3,600

 
$
882

 
$
954

Provision for off-balance sheet credit losses
 
2,438

 
4,896

 
(1,889
)
 
2,718

 
(72
)
Ending balance
 
$
9,045

 
$
6,607

 
$
1,711

 
$
3,600

 
$
882

Total combined provision for credit losses
 
$
20,000

 
$
35,000

 
$
22,500

 
$
7,500

 
$
4,000

Allowance for loan losses to loans outstanding at period-end
 
1.48
%
 
1.46
%
 
1.41
%
 
1.33
%
 
1.33
%
Net charge-offs (annualized) to average loans
 
0.18
%
 
0.56
%
 
0.08
%
 
0.05
%
 
0.02
%
Total provision for credit losses (annualized) to average loans
 
0.49
%
 
0.88
%
 
0.58
%
 
0.20
%
 
0.11
%
Recoveries to gross charge-offs
 
15.67
%
 
6.33
%
 
38.55
%
 
66.76
%
 
76.68
%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.10
%
 
0.07
%
 
0.02
%
 
0.04
%
 
0.01
%
Combined allowance for credit losses to loans outstanding at period-end
 
1.54
%
 
1.50
%
 
1.43
%
 
1.35
%
 
1.34
%
Allowance for Loan Losses

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

Loans are considered to be impaired when it is probable that we will not collect all amounts due according to the 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, 2016, impaired loans totaled $420 million, including $32 million with specific allowances of $4.3 million and $388 million with no specific allowances. At March 31, 2016, impaired loans totaled $420 million, including $35 million of impaired loans with specific allowances of $2.7 million and $385 million with no specific allowances.

- 28 -


Risk grading guidelines, recently in the Office of the Comptroller of the Currency ("OCC") Oil and Gas Lending Handbook, heavily weight 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.
We completed an energy loan portfolio redetermination during the second quarter. The redetermination supported that $136 million of impaired energy loans required no allowance for credit losses based on the adequacy of collateral, including $123 million that 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 $212 million at June 30, 2016, an increase of $7.2 million over March 31, 2016, primarily due to a $3.7 million increase in the general allowance attributed to the commercial loan segment related to exposure to energy-related loans. In addition, the general allowance for commercial real estate loans increased $2.3 million.

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, 2016, compared to $25 million at March 31, 2016. The nonspecific allowance includes consideration of the indirect impact that low energy prices might have 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 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 $501 million at June 30, 2016, primarily composed of $421 million of energy loans, $27 million of wholesale/retail sector loans, $20 million of manufacturing sector loans, $9.9 million of service sector loans, $8.9 million of healthcare sector loans and $6.1 million of loans secured by multifamily residential properties. Potential problem loans totaled $460 million at March 31, 2016 including $403 million of potential problem energy loans.

Performing loan totals include loans that management considers to be "other loans especially mentioned" 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. Energy loans classified as other loans especially mentioned totaled $198 million or 7 percent of outstanding energy loans at June 30, 2016 and $269 million or 9 percent of outstanding energy loans at March 31, 2016.

We updated our energy loan portfolio stress test at quarter end 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 $37.50 per barrel of oil, gradually escalating over seven years to a maximum of $3.00 and $55.00, respectively. In this scenario, the energy portfolio exhibits greater stress than we have experienced to date and losses would be expected to exceed our 15 year historical loss rate on energy loans of 7 basis points. The results of the stress test are factored into our expectation that the loan loss provision could range from $71 million to $80 million for 2016. This expectation is based upon current observed conditions.

- 29 -


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 loans charged off of $7.5 million in the second quarter of 2016, compared to $22.5 million in the first quarter of 2016 and $671 thousand in the second quarter of 2015. The ratio of net loans charged off to average loans on an annualized basis was 0.18 percent for the second quarter of 2016, compared with 0.56 percent for the first quarter of 2016 and 0.02 percent for the second quarter of 2015. 

Net commercial loans charged off totaled $7.1 million in the second quarter of 2016, compared to net loans charged off of $21.6 million in the first quarter of 2016. Charge-offs in both the second and first quarter of 2016 resulted primarily from energy loans. Net commercial real estate loan recoveries were $282 thousand in the second quarter, compared to net recoveries of $85 thousand in the first quarter. Residential mortgage net charge-offs were $145 thousand and personal loan net charge-offs were $464 thousand for the second quarter. Personal loan net charge-offs include deposit account overdraft losses. 


- 30 -


Nonperforming Assets

Table 19 -- Nonperforming Assets
(In thousands)
 
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
181,989

 
$
174,652

 
$
76,424

 
$
33,798

 
$
24,233

Commercial real estate
 
7,780

 
9,270

 
9,001

 
10,956

 
20,139

Residential mortgage
 
57,061

 
57,577

 
61,240

 
44,099

 
45,969

Personal
 
354

 
331

 
463

 
494

 
550

Total nonaccruing loans
 
247,184

 
241,830

 
147,128

 
89,347

 
90,891

Accruing renegotiated loans guaranteed by U.S. government agencies
 
78,806

 
77,597

 
74,049

 
81,598

 
82,368

Real estate and other repossessed assets
 
24,054

 
29,896

 
30,731

 
33,116

 
35,499

Total nonperforming assets
 
$
350,044

 
$
349,323

 
$
251,908

 
$
204,061

 
$
208,758

Total nonperforming assets excluding those guaranteed by U.S. government agencies
 
$
251,497

 
$
252,176

 
$
155,959

 
$
118,578

 
$
122,673

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio segment and class:
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
168,145

 
$
159,553

 
$
61,189

 
$
17,880

 
$
6,841

Services
 
9,388

 
9,512

 
10,290

 
10,692

 
10,944

Wholesale / retail
 
2,772

 
3,685

 
2,919

 
3,058

 
4,166

Manufacturing
 
293

 
312

 
331

 
352

 
379

Healthcare
 
875

 
1,023

 
1,072

 
1,218

 
1,278

Other commercial and industrial
 
516

 
567

 
623

 
598

 
625

Total commercial
 
181,989

 
174,652

 
76,424

 
33,798

 
24,233

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 

 
 

Residential construction and land development
 
4,261

 
4,789

 
4,409

 
4,748

 
9,367

Retail
 
1,265

 
1,302

 
1,319

 
1,648

 
3,826

Office
 
606

 
629

 
651

 
684

 
2,360

Multifamily
 
65

 
250

 
274

 
185

 
195

Industrial
 
76

 
76

 
76

 
76

 
76

Other commercial real estate
 
1,507

 
2,224

 
2,272

 
3,615

 
4,315

Total commercial real estate
 
7,780

 
9,270

 
9,001

 
10,956

 
20,139

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
27,228

 
27,497

 
28,984

 
30,660

 
32,187

Permanent mortgage guaranteed by U.S. government agencies
 
19,741

 
19,550

 
21,900

 
3,885

 
3,717

Home equity
 
10,092

 
10,530

 
10,356

 
9,554

 
10,065

Total residential mortgage
 
57,061

 
57,577

 
61,240

 
44,099

 
45,969

Personal
 
354

 
331

 
463

 
494

 
550

Total nonaccruing loans
 
$
247,184

 
$
241,830

 
$
147,128

 
$
89,347

 
$
90,891

 
 
 
 
 
 
 
 
 
 
 

- 31 -


 
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015
Nonaccruing loans as % of outstanding balance for class:
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
5.97
%
 
5.27
%
 
1.98
%
 
0.63
%
 
0.24
%
Services
 
0.33
%
 
0.35
%
 
0.37
%
 
0.40
%
 
0.41
%
Wholesale / retail
 
0.18
%
 
0.25
%
 
0.21
%
 
0.21
%
 
0.27
%
Manufacturing
 
0.05
%
 
0.05
%
 
0.06
%
 
0.06
%
 
0.07
%
Healthcare
 
0.04
%
 
0.05
%
 
0.06
%
 
0.07
%
 
0.08
%
Other commercial and industrial
 
0.10
%
 
0.12
%
 
0.12
%
 
0.12
%
 
0.14
%
Total commercial
 
1.76
%
 
1.70
%
 
0.75
%
 
0.34
%
 
0.25
%
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
 
2.70
%
 
2.79
%
 
2.75
%
 
3.09
%
 
6.30
%
Retail
 
0.16
%
 
0.16
%
 
0.17
%
 
0.21
%
 
0.56
%
Office
 
0.08
%
 
0.09
%
 
0.10
%
 
0.11
%
 
0.42
%
Multifamily
 
0.01
%
 
0.03
%
 
0.04
%
 
0.02
%
 
0.03
%
Industrial
 
0.01
%
 
0.01
%
 
0.01
%
 
0.01
%
 
0.02
%
Other commercial real estate
 
0.35
%
 
0.56
%
 
0.65
%
 
0.99
%
 
0.99
%
Total commercial real estate
 
0.22
%
 
0.28
%
 
0.28
%
 
0.34
%
 
0.66
%
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
2.81
%
 
2.90
%
 
3.07
%
 
3.27
%
 
3.40
%
Permanent mortgage guaranteed by U.S. government agencies
 
10.24
%
 
9.91
%
 
11.12
%
 
2.02
%
 
1.95
%
Home equity
 
1.40
%
 
1.46
%
 
1.41
%
 
1.29
%
 
1.35
%
Total residential mortgage
 
3.03
%
 
3.08
%
 
3.26
%
 
2.36
%
 
2.44
%
Personal
 
0.06
%
 
0.07
%
 
0.08
%
 
0.11
%
 
0.13
%
Total nonaccruing loans
 
1.51
%
 
1.51
%
 
0.92
%
 
0.58
%
 
0.60
%
 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 

 
 

Allowance for loan losses to nonaccruing loans1
 
106.95
%
 
104.89
%
 
180.09
%
 
238.84
%
 
230.67
%
Accruing loans 90 days or more past due1
 
$
2,899

 
$
8,019

 
$
1,207

 
$
101

 
$
99

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

Nonperforming assets totaled $350 million or 2.13 percent of outstanding loans and repossessed assets at June 30, 2016. Nonaccruing loans totaled $247 million, accruing renegotiated residential mortgage loans totaled $79 million and real estate and other repossessed assets totaled $24 million. All accruing renegotiated residential mortgage loans and $20 million of nonaccruing loans are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets decreased $679 thousand during the second quarter. The Company generally retains nonperforming assets to maximize potential recovery which may cause future nonperforming assets to decrease more slowly.


- 32 -


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.

At June 30, 2016, 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, 2016 follows in Table 20.

Table 20 -- Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2016
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, March 31, 2016
 
$
241,830

 
$
77,597

 
$
29,896

 
$
349,323

Additions
 
32,847

 
10,412

 
—

 
43,259

Payments
 
(11,834
)
 
(510
)
 
—

 
(12,344
)
Charge-offs
 
(8,845
)
 
—

 
—

 
(8,845
)
Net gains and write-downs
 
—

 
—

 
127

 
127

Foreclosure of nonperforming loans
 
(3,161
)
 
—

 
3,161

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(5,034
)
 
(2,123
)
 
—

 
(7,157
)
Proceeds from sales
 
—

 
(5,202
)
 
(9,108
)
 
(14,310
)
Net transfers to nonaccruing loans
 
1,381

 
(1,381
)
 
—

 
—

Other, net
 
—

 
13

 
(22
)
 
(9
)
Balance, June 30, 2016
 
$
247,184

 
$
78,806

 
$
24,054

 
$
350,044


- 33 -


 
 
Six Months Ended
 
 
June 30, 2016
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, Dec. 31, 2015
 
$
147,128

 
$
74,049

 
$
30,731

 
$
251,908

Additions
 
212,009

 
23,509

 
—

 
235,518

Payments
 
(66,720
)
 
(1,014
)
 
—

 
(67,734
)
Charge-offs
 
(32,836
)
 
—

 
—

 
(32,836
)
Net gains and write-downs
 
—

 
—

 
198

 
198

Foreclosure of nonperforming loans
 
(5,372
)
 
—

 
5,372

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(8,361
)
 
(4,424
)
 
—

 
(12,785
)
Proceeds from sales
 
—

 
(12,106
)
 
(12,225
)
 
(24,331
)
Net transfers to nonaccruing loans
 
1,381

 
(1,381
)
 
—

 
—

Return to accrual status
 
(45
)
 
—

 
—

 
(45
)
Other, net
 
—

 
173

 
(22
)
 
151

Balance, June 30, 2016
 
$
247,184

 
$
78,806

 
$
24,054

 
$
350,044


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 $182 million or 1.76 percent of total commercial loans at June 30, 2016 and $175 million or 1.70 percent of commercial loans at March 31, 2016. There were $23 million in newly identified nonaccruing commercial loans during the quarter, offset by $7.9 million in payments and $7.4 million of charge-offs. Newly identified nonaccruing commercial loans were primarily energy loans.

Nonaccruing commercial loans at June 30, 2016 were primarily composed of $168 million or 5.97 percent of total energy loans, and $9.4 million or 0.33 percent of total services sector loans.
Commercial Real Estate

Nonaccruing commercial real estate loans totaled $7.8 million or 0.22 percent of outstanding commercial real estate loans at June 30, 2016, compared to $9.3 million or 0.28 percent of outstanding commercial real estate loans at March 31, 2016. Newly identified nonaccruing commercial real estate loans of $420 thousand were offset by $1.9 million of cash payments received. There were no charge-offs or foreclosures of nonaccruing commercial real estate loans during the second quarter.

Nonaccruing commercial real estate loans were primarily composed of $4.3 million or 2.70 percent of residential construction and land development loans.

Residential Mortgage and Personal

Nonaccruing residential mortgage loans totaled $57 million or 3.03 percent of outstanding residential mortgage loans at June 30, 2016, compared to $58 million or 3.08 percent of outstanding residential mortgage loans at March 31, 2016. Newly identified nonaccruing residential mortgage loans totaled $8.0 million, offset by $2.0 million of payments, $7.6 million of foreclosures and $345 thousand of loans charged off during the quarter. 

Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans which totaled $27 million or 2.81 percent of outstanding non-guaranteed permanent residential mortgage loans at June 30, 2016. Nonaccruing home equity loans totaled $10 million or 1.40 percent of total home equity loans.


- 34 -


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 21. Substantially all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 89 days past due increased $3.8 million in the second quarter to $8.0 million at June 30, 2016. Personal loans past due 30 to 89 days also increased by $187 thousand over March 31, 2016.

Table 21 -- Residential Mortgage and Personal Loans Past Due
(In thousands)
 
 
June 30, 2016
 
March 31, 2016
 
 
90 Days or More
 
30 to 89 Days
 
90 Days or More
 
30 to 89 Days
Residential mortgage:
 
 
 
 
 
 
 
 
   Permanent mortgage1
 
$
—

 
$
5,922

 
$
—

 
$
1,943

Home equity
 
20

 
2,048

 
—

 
2,200

Total residential mortgage
 
$
20

 
$
7,970

 
—

 
$
4,143

 
 
 

 
 

 
 

 
 

Personal
 
$
—

 
$
458

 
$
1

 
$
271

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 $24 million at June 30, 2016, a decrease of $5.8 million compared to March 31, 2016. The distribution of real estate and other repossessed assets attributed by geographical market is included in Table 22 following.

Table 22 -- 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
 
$
5,066

 
$
487

 
$
—

 
$
805

 
$
1,491

 
$
2,539

 
$
986

 
$
69

 
$
11,443

Developed commercial real estate properties
 
64

 
882

 
2,745

 
—

 
702

 
221

 
2,790

 
1,734

 
9,138

Undeveloped land
 
265

 
1,309

 
—

 
—

 
—

 
306

 
—

 
—

 
1,880

Residential land development properties
 
50

 
—

 
322

 
—

 
—

 
852

 
2

 
—

 
1,226

Other
 
40

 
—

 
—

 
—

 
3

 
324

 
—

 
—

 
367

Total real estate and other repossessed assets
 
$
5,485

 
$
2,678

 
$
3,067

 
$
805

 
$
2,196

 
$
4,242

 
$
3,778

 
$
1,803

 
$
24,054


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

- 35 -


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 2016, approximately 64 percent of our funding was provided by deposit accounts, 21 percent from borrowed funds, and 10 percent from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

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 our Perfect Banking sales and customer service program, free checking, online bill paying services, mobile banking services, an extensive network of branch locations and ATMs and a 24-hour 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.

Table 23 - Average Deposits by Line of Business
(In thousands)
 
Three Months Ended
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015
Commercial Banking
$
8,403,408

 
$
8,457,750

 
$
8,549,240

 
$
8,627,281

 
$
8,928,997

Consumer Banking
6,634,362

 
6,575,893

 
6,652,104

 
6,675,990

 
6,724,188

Wealth Management
4,521,031

 
4,696,013

 
4,583,474

 
4,490,082

 
4,522,197

Subtotal
19,558,801

 
19,729,656

 
19,784,818

 
19,793,353

 
20,175,382

Funds Management and other
908,931

 
896,965

 
920,632

 
899,795

 
918,577

Total
$
20,467,732

 
$
20,626,621

 
$
20,705,450

 
$
20,693,148

 
$
21,093,959


Average deposits for the second quarter of 2016 totaled $20.5 billion and represented approximately 64 percent of total liabilities and capital, compared with $20.6 billion and 65 percent of total liabilities and capital for the first quarter of 2016. Average deposits decreased $159 million from the first quarter of 2016. Average interest-bearing transaction accounts decreased by $166 million and average time deposit balances decreased $69 million, partially offset by a $56 million increase in average demand deposits.

Average Commercial Banking deposit balances decreased $54 million compared to the first quarter of 2016, primarily due to $162 million decrease in other commercial and industrial balances and a $46 million decrease in treasury services customer balances, partially offset by a $126 million increase in energy customer balances. Commercial customers continue to retain large cash reserves primarily due to low yields available on other high quality investment alternatives and 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. If economic activity were to improve significantly or if short-term interest rates were to increase, deposits may decline as customers deploy funds into projects or shift demand deposits into money market instruments.

Average Consumer Banking deposit balances increased $58 million. Demand deposit balances increased by $93 million, interest-bearing transaction deposits increased by $37 million, partially offset by a $90 million decrease in time deposit balances. Average Wealth Management deposits decreased $175 million compared to the first quarter of 2016 primarily due to a $139 million decrease in interest-bearing transaction account balances and a $57 million decrease in demand deposits, partially offset by a $20 million increase in time deposit balances.

Average time deposits for the second quarter of 2016 included $424 million of brokered deposits, an increase of $62 million over the first quarter of 2016. Average interest-bearing transaction accounts for the second quarter included $562 million of brokered deposits, an increase of $9.4 million over the first quarter of 2016. Changes in average brokered deposits largely affect Funds Management and Other.


- 36 -


The distribution of our period end deposit account balances among principal markets follows in Table 24.

Table 24 -- Period End Deposits by Principal Market Area
(In thousands)
 
 
June 30, 2016
 
Mar. 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
4,020,181

 
$
3,813,128

 
$
4,133,520

 
$
3,834,145

 
$
4,068,088

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
5,741,302

 
5,706,067

 
5,971,819

 
5,783,258

 
6,018,381

Savings
 
247,984

 
246,122

 
226,733

 
225,580

 
225,694

Time
 
1,167,271

 
1,198,022

 
1,202,274

 
1,253,137

 
1,380,566

Total interest-bearing
 
7,156,557

 
7,150,211

 
7,400,826

 
7,261,975

 
7,624,641

Total Bank of Oklahoma
 
11,176,738

 
10,963,339

 
11,534,346

 
11,096,120

 
11,692,729

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
2,677,253

 
2,571,883

 
2,627,764

 
2,689,493

 
2,565,234

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
2,035,634

 
2,106,905

 
2,132,099

 
1,996,223

 
2,020,817

Savings
 
83,862

 
83,263

 
77,902

 
74,674

 
74,373

Time
 
516,231

 
530,657

 
549,740

 
554,106

 
536,844

Total interest-bearing
 
2,635,727

 
2,720,825

 
2,759,741

 
2,625,003

 
2,632,034

Total Bank of Texas
 
5,312,980

 
5,292,708

 
5,387,505

 
5,314,496

 
5,197,268

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 
 
 
 
 
 
 
 
 
Demand
 
530,853

 
557,200

 
487,286

 
520,785

 
508,224

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
573,690

 
560,684

 
563,723

 
529,862

 
537,156

Savings
 
49,200

 
47,187

 
43,672

 
41,380

 
41,802

Time
 
250,068

 
259,630

 
267,821

 
281,426

 
285,890

Total interest-bearing
 
872,958

 
867,501

 
875,216

 
852,668

 
864,848

Total Bank of Albuquerque
 
1,403,811

 
1,424,701

 
1,362,502

 
1,373,453

 
1,373,072

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
30,607

 
31,318

 
27,252

 
25,397

 
19,731

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
278,335

 
265,803

 
202,857

 
290,728

 
284,349

Savings
 
1,853

 
1,929

 
1,747

 
1,573

 
1,712

Time
 
18,911

 
21,035

 
24,983

 
26,203

 
28,220

Total interest-bearing
 
299,099

 
288,767

 
229,587

 
318,504

 
314,281

Total Bank of Arkansas
 
329,706

 
320,085

 
256,839

 
343,901

 
334,012

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 
 
 
 
 
 
 
 
 
Demand
 
528,124

 
413,506

 
497,318

 
430,675

 
403,491

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
625,240

 
610,077

 
616,697

 
655,206

 
601,741

Savings
 
31,509

 
33,108

 
31,927

 
31,398

 
31,285

Time
 
254,164

 
271,475

 
296,224

 
320,279

 
322,432

Total interest-bearing
 
910,913

 
914,660

 
944,848

 
1,006,883

 
955,458

Total Colorado State Bank & Trust
 
1,439,037

 
1,328,166

 
1,442,166

 
1,437,558

 
1,358,949

 
 
 
 
 
 
 
 
 
 
 

- 37 -


 
 
June 30, 2016
 
Mar. 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015
Bank of Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
396,837

 
341,828

 
326,324

 
306,425

 
352,024

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
302,297

 
313,825

 
358,556

 
293,319

 
298,073

Savings
 
3,198

 
3,277

 
2,893

 
4,121

 
2,726

Time
 
28,681

 
29,053

 
29,498

 
26,750

 
28,165

Total interest-bearing
 
334,176

 
346,155

 
390,947

 
324,190

 
328,964

Total Bank of Arizona
 
731,013

 
687,983

 
717,271

 
630,615

 
680,988

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 
 
 
 
 
 
 
 
 
Demand
 
240,754

 
221,812

 
197,424

 
234,847

 
239,609

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
112,371

 
146,405

 
153,203

 
150,253

 
139,260

Savings
 
1,656

 
1,619

 
1,378

 
1,570

 
1,580

Time
 
11,735

 
31,502

 
35,524

 
36,630

 
42,262

Total interest-bearing
 
125,762

 
179,526

 
190,105

 
188,453

 
183,102

Total Bank of Kansas City
 
366,516

 
401,338

 
387,529

 
423,300

 
422,711

Total BOK Financial deposits
 
$
20,759,801

 
$
20,418,320

 
$
21,088,158

 
$
20,619,443

 
$
21,059,729


In addition to deposits, subsidiary bank 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. There were no wholesale federal funds purchased outstanding at June 30, 2016. 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 $6.0 billion during the quarter, compared to $5.5 billion in the first quarter of 2016.

At June 30, 2016, the estimated unused credit available to the subsidiary bank from collateralized sources was approximately $4.5 billion.

A summary of other borrowings follows in Table 25.


- 38 -


Table 25 -- Borrowed Funds
(In thousands)
 
 
 
 
Three Months Ended
June 30, 2016
 
 
 
Three Months Ended
March 31, 2016
 
 
June 30, 2016
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
March 31, 2016
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
$
56,780

 
$
70,682

 
0.19
%
 
$
70,264

 
$
62,755

 
$
112,211

 
0.27
%
 
$
567,103

Repurchase agreements
 
472,683

 
611,264

 
0.05
%
 
663,538

 
630,101

 
662,640

 
0.05
%
 
649,579

Other borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
 
5,800,000

 
6,046,154

 
0.55
%
 
6,400,000

 
5,600,000

 
5,547,803

 
0.53
%
 
5,600,000

GNMA repurchase liability
 
12,769

 
12,210

 
4.81
%
 
12,769

 
15,491

 
17,594

 
4.91
%
 
19,520

Other
 
17,967

 
17,664

 
2.44
%
 
17,967

 
18,371

 
18,520

 
2.45
%
 
18,747

Total other borrowings
 
5,830,736

 
6,076,028

 
0.57
%
 


 
5,633,862

 
5,583,917

 
0.56
%
 


Subordinated debentures
 
371,812

 
232,795

 
1.52
%
 
371,812

 
226,385

 
226,368

 
1.26
%
 
226,385

Total Borrowed Funds
 
$
6,732,011

 
$
6,990,769

 
0.55
%
 
 
 
$
6,553,103

 
$
6,585,136

 
0.53
%
 
 
In 2007, the subsidiary bank issued $250 million of subordinated debt due May 15, 2017 to fund the Worth National Bank and First United Bank acquisitions and fund continued asset growth. Interest on this debt was based on a fixed rate of 5.75 percent through May 14, 2012 which then converted to a floating rate of three-month LIBOR plus 0.69 percent. At June 30, 2016, $227 million of this subordinated debt remains outstanding.
The subsidiary bank 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

On June 27, 2016, the parent company completed the issuance and sale of $150 million of subordinated debt that will mature on June 30, 2056. Interest on this debt bears interest at the rate of 5.375%, payable quarterly. On June 30, 2021, the parent company will have the option to redeem the debt at the principal amount plus accrued interest, subject to regulatory approval.

At June 30, 2016, cash and interest-bearing cash and cash equivalents held by the parent company totaled $373 million. The primary sources of liquidity for BOK Financial are cash on hand and dividends from the subsidiary bank. Dividends from the subsidiary 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, 2016, based upon the most restrictive limitations as well as management's internal capital policy, the subsidiary bank could declare up to $113 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 subsidiary bank could affect its ability to pay dividends to the parent company.

Our equity capital at June 30, 2016 was $3.4 billion, an increase of $46 million over March 31, 2016. Net income less cash dividends paid increased equity $37 million during the second quarter of 2016. Accumulated other comprehensive income increased $25 million primarily related to the change in unrealized gains on available for sale securities due to changes in interest rates. 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 issuance, share repurchase and stock and cash dividends.

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, 2016, a cumulative total of 2,179,243 shares have been repurchased under this authorization. The Company repurchased 305,169 shares under this plan in the second quarter of 2016 at an average price of $58.23 per share.


- 39 -


BOK Financial and the subsidiary bank 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 26. 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 26.

Table 26 -- Capital Ratios
 
 
Minimum Capital Requirement1
 
Capital Conservation Buffer2
 
Minimum Capital Requirement Including Capital Conservation Buffer
 
June 30, 2016
 
March 31, 2016
 
June 30, 2015
Risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1
 
4.50
%
 
2.50
%
 
7.00
%
 
11.86
%
 
12.00
%
 
13.01
%
Tier 1 capital
 
6.00
%
 
2.50
%
 
8.50
%
 
11.86
%
 
12.00
%
 
13.01
%
Total capital
 
8.00
%
 
2.50
%
 
10.50
%
 
13.51
%
 
13.21
%
 
14.11
%
Tier 1 Leverage
 
4.00
%
 
N/A

 
4.00
%
 
9.06
%
 
9.12
%
 
9.75
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average total equity to average assets
 
 
 
 
 
 
 
10.46
%
 
10.55
%
 
11.10
%
Tangible common equity ratio
 
 
 
 
 
 
 
9.33
%
 
9.34
%
 
9.72
%
1 
Effective January 1, 2015
2 
Effective January 1, 2016

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

Table 27 -- Non-GAAP Measure
(Dollars in thousands)
 
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
3,368,833

 
$
3,321,555

 
$
3,230,556

 
$
3,377,226

 
$
3,375,632

Less: Goodwill and intangible assets, net
 
426,111

 
428,733

 
429,370

 
430,460

 
431,515

Tangible common equity
 
2,942,722

 
2,892,822

 
2,801,186

 
2,946,766

 
2,944,117

Total assets
 
31,970,450

 
31,413,945

 
31,476,128

 
30,566,905

 
30,725,563

Less: Goodwill and intangible assets, net
 
426,111

 
428,733

 
429,370

 
430,460

 
431,515

Tangible assets
 
$
31,544,339

 
$
30,985,212

 
$
31,046,758

 
$
30,136,445

 
$
30,294,048

Tangible common equity ratio
 
9.33
%
 
9.34
%
 
9.02
%
 
9.78
%
 
9.72
%


- 40 -


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 the credit of the individual issuers of financial instruments.

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

The Asset/Liability Committee is responsible for managing market risk in accordance with policy guidelines 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. The internal policy limit for net interest revenue variation is a maximum decline of 5 percent to an up or down 200 basis point change over twelve months. These guidelines 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. Compliance with these internal guidelines is reviewed monthly. The Asset/Liabilty Committee is also responsible for monitoring market risk limits for mortgage banking production and mortgage servicing assets inclusive of economic hedge benefits. Each of these desks must limit projected exposure from a 50 basis point change in interest rates.

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, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates on the Company's performance across multiple interest rate scenarios. While the current internal policy limit for net interest revenue variation is a maximum decline of 5 percent due to a 200 basis point change over twelve months, the results of a 200 basis point decrease in interest rates in the current low-rate environment are not meaningful. We report the effect of a 50 basis point decrease in the interim.

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 DDA 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. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 28 due to the extreme volatility over such a large rate range and our active risk management approach for that asset. The effects of interest rate changes on the value of mortgage servicing rights are presented in Note 6 to the Consolidated Financial Statements.

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 re-pricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. 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.
 

- 41 -


Table 28 -- Interest Rate Sensitivity
(Dollars in thousands)
 
 
200 bp Increase
 
50 bp Decrease
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
Anticipated impact over the next twelve months on net interest revenue
 
$
(483
)
 
$
(6,605
)
 
$
(24,425
)
 
$
(18,764
)
 
 
(0.06
)%
 
(0.88
)%
 
(3.18
)%
 
(2.49
)%

Trading Activities

BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will 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, BOK Financial may also take trading positions in U.S. Treasury securities, residential mortgage-backed securities and municipal bonds to enhance returns on its securities portfolios. Both of these activities involve interest rate 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 manage 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, over the counter derivatives or cash markets may be used to reduce the risk associated with some trading programs.

Management uses a Value at Risk ("VaR") methodology to measure market risk due to changes in interest rates inherent in its trading activities. VaR is calculated based upon historical simulations over the past five years using a variance/covariance matrix of interest rate changes, a 10 business day holding period and a 99 percent confidence interval. It represents an amount of market loss that is likely to be exceeded in only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the VaR to $7.3 million. There were no instances of VaR being exceeded during the six months ended June 30, 2016 and 2015. At June 30, 2016, there were no trading positions for the purposes of enhancing returns on the Company's securities portfolio.

The average, high and low VaR amounts for the three and six months ended June 30, 2016 and June 30, 2015 are as follows in Table 29.

Table 29 -- Trading Value at Risk (VaR)
(In thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Average
$
2,443

 
$
1,623

 
$
2,134

 
$
1,551

High
3,009

 
2,629

 
4,130

 
2,629

Low
1,544

 
1,041

 
774

 
782


The Company also bears interest rate risk by originating residential mortgages held for sale (RMHFS). A variety of methods are used to manage the interest rate 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. Interest rate risk from RMHFS is mitigated through forward sale contracts.

Management uses a pre-tax income sensitivity methodology to measure market risk from RMHFS. Pre-tax income sensitivity is calculated using a + / - 50 basis point change in interest rates, a 30 day average fall out rate, and a projected fall out-rate that is statistically modeled and recalibrated using such factors as loan product type, seasonality, region, originator, channel, rate lock terms, rate change scenario, various borrower characteristics. The Company monitors the effectiveness of this model through back-testing, updating the data and regular validations. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the pre-tax income sensitivity to $7 million. There were no instances of pre-tax income sensitivity exceeding the $7 million limit during the three and six months ended June 30, 2016 and 2015.

- 42 -


The average, high and low pre-tax income sensitivity amounts for the three and six months ended June 30, 2016 and June 30, 2015 are as follows.

Table 30 -- RMHFS VaR
(In thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Average
$
3,890

 
$
3,572

 
$
3,945

 
$
3,043

High
6,858

 
6,590

 
6,858

 
6,590

Low
288

 
1,315

 
288

 
1,315

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.

- 43 -


     
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
 
2016
 
2015
 
2016
 
2015
Loans
 
$
141,560

 
$
133,197

 
$
280,672

 
$
259,893

Residential mortgage loans held for sale
 
3,508

 
3,892

 
6,208

 
6,841

Trading securities
 
616

 
442

 
1,140

 
949

Taxable securities
 
3,069

 
3,251

 
6,244

 
6,577

Tax-exempt securities
 
1,148

 
1,315

 
2,360

 
2,659

Total investment securities
 
4,217

 
4,566

 
8,604

 
9,236

Taxable securities
 
43,345

 
42,355

 
88,277

 
85,460

Tax-exempt securities
 
527

 
563

 
1,062

 
1,183

Total available for sale securities
 
43,872

 
42,918

 
89,339

 
86,643

Fair value option securities
 
2,062

 
2,320

 
4,651

 
4,323

Restricted equity securities
 
3,863

 
3,228

 
8,174

 
5,825

Interest-bearing cash and cash equivalents
 
2,569

 
1,250

 
5,275

 
2,672

Total interest revenue
 
202,267

 
191,813

 
404,063

 
376,382

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
9,997

 
11,266

 
20,539

 
23,371

Borrowed funds
 
8,780

 
3,121

 
16,752

 
5,694

Subordinated debentures
 
878

 
1,695

 
1,588

 
3,860

Total interest expense
 
19,655

 
16,082

 
38,879

 
32,925

Net interest revenue
 
182,612

 
175,731

 
365,184

 
343,457

Provision for credit losses
 
20,000

 
4,000

 
55,000

 
4,000

Net interest revenue after provision for credit losses
 
162,612

 
171,731

 
310,184

 
339,457

Other operating revenue
 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
39,530

 
36,012

 
71,871

 
67,719

Transaction card revenue
 
34,950

 
32,778

 
67,304

 
63,788

Fiduciary and asset management revenue
 
34,813

 
32,712

 
66,869

 
64,181

Deposit service charges and fees
 
22,618

 
22,328

 
45,160

 
44,012

Mortgage banking revenue
 
38,224

 
36,846

 
72,654

 
76,166

Other revenue
 
13,352

 
11,871

 
25,256

 
22,672

Total fees and commissions
 
183,487

 
172,547

 
349,114

 
338,538

Other gains, net
 
1,307

 
1,457

 
2,867

 
2,212

Gain (loss) on derivatives, net
 
10,766

 
(1,032
)
 
17,904

 
(121
)
Gain (loss) on fair value option securities, net
 
4,279

 
(8,130
)
 
13,722

 
(5,483
)
Change in fair value of mortgage servicing rights
 
(16,283
)
 
8,010

 
(44,271
)
 
(512
)
Gain on available for sale securities, net
 
5,326

 
3,433

 
9,290

 
7,760

Total other-than-temporary impairment losses
 
—

 
—

 
—

 
(781
)
Portion of loss recognized in other comprehensive income
 
—

 
—

 
—

 
689

Net impairment losses recognized in earnings
 
—

 
—

 
—

 
(92
)
Total other operating revenue
 
188,882

 
176,285

 
348,626

 
342,302

Other operating expense
 
 

 
 

 
 

 
 

Personnel
 
142,490

 
132,695

 
278,333

 
261,243

Business promotion
 
6,703

 
7,765

 
12,399

 
13,513

Professional fees and services
 
14,158

 
9,560

 
25,917

 
19,619

Net occupancy and equipment
 
19,677

 
18,927

 
38,443

 
37,971

Insurance
 
7,129

 
5,116

 
14,394

 
10,096

Data processing and communications
 
32,802

 
30,655

 
64,819

 
60,427

Printing, postage and supplies
 
3,889

 
3,553

 
7,796

 
7,014

Net losses and operating expenses of repossessed assets
 
1,588

 
223

 
2,658

 
836

Amortization of intangible assets
 
2,624

 
1,090

 
3,783

 
2,180

Mortgage banking costs
 
15,809

 
8,227

 
28,188

 
18,394

Other expense
 
7,856

 
9,302

 
22,895

 
16,085

Total other operating expense
 
254,725

 
227,113

 
499,625

 
447,378

Net income before taxes
 
96,769

 
120,903

 
159,185

 
234,381

Federal and state income taxes
 
30,497

 
40,630

 
51,925

 
79,014

Net income
 
66,272

 
80,273

 
107,260

 
155,367

Net income (loss) attributable to non-controlling interests
 
471

 
1,043

 
(1,105
)
 
1,294

Net income attributable to BOK Financial Corporation shareholders
 
$
65,801

 
$
79,230

 
$
108,365

 
$
154,073

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.00

 
$
1.15

 
$
1.64

 
$
2.23

Diluted
 
$
1.00

 
$
1.15

 
$
1.64

 
$
2.23

Average shares used in computation:
 
 
 
 
 
 
 
 
Basic
 
65,245,887

 
68,096,341

 
65,271,214

 
68,175,327

Diluted
 
65,302,926

 
68,210,353

 
65,317,177

 
68,277,386

Dividends declared per share
 
$
0.43

 
$
0.42

 
$
0.86

 
$
0.84


See accompanying notes to consolidated financial statements.

- 44 -


Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
 
(In thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
66,272

 
$
80,273

 
$
107,260

 
$
155,367

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
45,475

 
(59,516
)
 
166,566

 
(129
)
Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
Interest revenue, Investments securities, Taxable securities
 
(43
)
 
(134
)
 
(112
)
 
(313
)
Interest expense, Subordinated debentures
 
—

 
56

 
—

 
121

Net impairment losses recognized in earnings
 
—

 
—

 
—

 
92

Gain on available for sale securities, net
 
(5,326
)
 
(3,433
)
 
(9,290
)
 
(7,760
)
Other comprehensive income (loss) before income taxes
 
40,106

 
(63,027
)
 
157,164

 
(7,989
)
Federal and state income taxes
 
15,583

 
(24,516
)
 
61,119

 
(3,108
)
Other comprehensive income (loss), net of income taxes
 
24,523


(38,511
)

96,045


(4,881
)
Comprehensive income
 
90,795

 
41,762

 
203,305

 
150,486

Comprehensive income (loss) attributable to non-controlling interests
 
471

 
1,043

 
(1,105
)
 
1,294

Comprehensive income attributable to BOK Financial Corp. shareholders
 
$
90,324

 
$
40,719

 
$
204,410

 
$
149,192


See accompanying notes to consolidated financial statements.

- 45 -


Consolidated Balance Sheets
(In thousands, except share data)
 
 
June 30, 2016
 
Dec. 31, 2015
 
June 30, 2015
 
 
(Unaudited)
 
(Footnote 1)
 
(Unaudited)
Assets
 
 
 
 
 
 
Cash and due from banks
 
$
498,713

 
$
573,699

 
$
443,577

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

 
2,069,900

 
2,119,072

Trading securities
 
211,622

 
122,404

 
158,209

Investment securities (fair value:  June 30, 2016 – $599,062; December 31, 2015 – $629,159 ; June 30, 2015 – $642,042)
 
560,711

 
597,836

 
625,664

Available for sale securities
 
8,830,689

 
9,042,733

 
9,000,117

Fair value option securities
 
263,265

 
444,217

 
436,324

Restricted equity securities
 
319,639

 
273,684

 
231,520

Residential mortgage loans held for sale
 
430,728

 
308,439

 
502,571

Loans
 
16,406,749

 
15,941,154

 
15,124,136

Allowance for loan losses
 
(243,259
)
 
(225,524
)
 
(201,087
)
Loans, net of allowance
 
16,163,490

 
15,715,630

 
14,923,049

Premises and equipment, net
 
315,199

 
306,490

 
284,238

Receivables
 
173,638

 
163,480

 
149,629

Goodwill
 
382,739

 
385,461

 
385,454

Intangible assets, net
 
43,372

 
43,909

 
46,061

Mortgage servicing rights
 
190,747

 
218,605

 
198,694

Real estate and other repossessed assets, net of allowance (June 30, 2016 – $9,448; December 31, 2015 – $12,622; June 30, 2015 – $17,296)
 
24,054

 
30,731

 
35,499

Derivative contracts, net
 
883,673

 
586,270

 
630,435

Cash surrender value of bank-owned life insurance
 
307,860

 
303,335

 
298,606

Receivable on unsettled securities sales
 
142,820

 
40,193

 
8,693

Other assets
 
319,653

 
249,112

 
248,151

Total assets
 
$
31,970,450

 
$
31,476,128

 
$
30,725,563

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
$
8,424,609

 
$
8,296,888

 
$
8,156,401

Interest-bearing deposits:
 
 

 
 

 
 

Transaction
 
9,668,869

 
9,998,954

 
9,899,777

Savings
 
419,262

 
386,252

 
379,172

Time
 
2,247,061

 
2,406,064

 
2,624,379

Total deposits
 
20,759,801

 
21,088,158

 
21,059,729

Funds purchased
 
56,780

 
491,192

 
64,677

Repurchase agreements
 
472,683

 
722,444

 
712,033

Other borrowings
 
5,830,736

 
4,837,879

 
4,332,162

Subordinated debentures
 
371,812

 
226,350

 
226,278

Accrued interest, taxes and expense
 
197,742

 
119,584

 
124,568

Derivative contracts, net
 
719,159

 
581,701

 
620,277

Due on unsettled securities purchases
 
11,757

 
16,897

 
37,571

Other liabilities
 
147,242

 
124,284

 
135,435

Total liabilities
 
28,567,712

 
28,208,489

 
27,312,730

Shareholders' equity:
 
 

 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2016 – 74,817,155; December 31, 2015 – 74,530,364; June 30, 2015 – 74,428,730)
 
4

 
4

 
4

Capital surplus
 
990,106

 
982,009

 
970,054

Retained earnings
 
2,755,766

 
2,704,121

 
2,627,250

Treasury stock (shares at cost:  June 30, 2016 – 8,950,838 ; December 31, 2015 – 8,636,332;  June 30, 2015 – 5,483,591)
 
(494,675
)
 
(477,165
)
 
(273,468
)
Accumulated other comprehensive income
 
117,632

 
21,587

 
51,792

Total shareholders’ equity
 
3,368,833

 
3,230,556

 
3,375,632

Non-controlling interests
 
33,905

 
37,083

 
37,201

Total equity
 
3,402,738

 
3,267,639

 
3,412,833

Total liabilities and equity
 
$
31,970,450

 
$
31,476,128

 
$
30,725,563


See accompanying notes to consolidated financial statements.

- 46 -


Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 
 
Common Stock
 
Capital
Surplus
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interests
 
Total Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, Dec. 31, 2014
 
74,004

 
$
4

 
$
954,644

 
$
2,530,837

 
4,890

 
$
(239,979
)
 
$
56,673

 
$
3,302,179

 
$
34,027

 
$
3,336,206

Net income
 
—

 
—

 
—

 
154,073

 
—

 
—

 
—

 
154,073

 
1,294

 
155,367

Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
—

 
(4,881
)
 
(4,881
)
 
—

 
(4,881
)
Repurchase of common stock
 
—

 
—

 
—

 
—

 
502

 
(29,484
)
 
—

 
(29,484
)
 
—

 
(29,484
)
Issuance of shares for equity compensation
 
425

 
—

 
9,744

 
—

 
91

 
(4,005
)
 
—

 
5,739

 
—

 
5,739

Tax effect from equity compensation, net
 
—

 
—

 
744

 
—

 
—

 
—

 
—

 
744

 
—

 
744

Share-based compensation
 
—

 
—

 
4,922

 
—

 
—

 
—

 
—

 
4,922

 
—

 
4,922

Cash dividends on common stock
 
—

 
—

 
—

 
(57,660
)
 
—

 
—

 
—

 
(57,660
)
 
—

 
(57,660
)
Sale of non-controlling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,500

 
5,500

Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3,620
)
 
(3,620
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2015
 
74,429

 
$
4

 
$
970,054

 
$
2,627,250

 
5,483

 
$
(273,468
)
 
$
51,792

 
$
3,375,632

 
$
37,201

 
$
3,412,833

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
)
Issuance of shares for equity compensation
 
287

 
—

 
2,016

 
—

 
10

 
260

 
—

 
2,276

 
—

 
2,276

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


See accompanying notes to consolidated financial statements.

- 47 -


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

 
Six Months Ended
 
 
June 30,
 
 
2016
 
2015
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
107,260

 
$
155,367

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 

 
 

Provision for credit losses
 
55,000

 
4,000

Change in fair value of mortgage servicing rights
 
44,271

 
512

Net unrealized gains from derivative contracts
 
(15,459
)
 
(982
)
Tax effect from equity compensation, net
 
(351
)
 
(744
)
Change in bank-owned life insurance
 
(4,515
)
 
(4,596
)
Share-based compensation
 
5,730

 
4,922

Depreciation and amortization
 
41,474

 
33,753

Net amortization of securities discounts and premiums
 
21,814

 
29,341

Net realized gains on financial instruments and other net gains
 
(9,787
)
 
(12,483
)
Net gain on mortgage loans held for sale
 
(37,151
)
 
(39,192
)
Mortgage loans originated for sale
 
(3,062,859
)
 
(3,393,246
)
Proceeds from sale of mortgage loans held for sale
 
2,981,973

 
3,244,010

Capitalized mortgage servicing rights
 
(34,355
)
 
(42,382
)
Change in trading and fair value option securities
 
90,484

 
(95,757
)
Change in receivables
 
(9,698
)
 
11,610

Change in other assets
 
(225
)
 
(7,749
)
Change in accrued interest, taxes and expense
 
20,299

 
2,644

Change in other liabilities
 
(8,854
)
 
21,943

Net cash provided by (used in) operating activities
 
185,051

 
(89,029
)
Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
52,463

 
32,786

Proceeds from maturities or redemptions of available for sale securities
 
721,432

 
954,893

Purchases of investment securities
 
(18,599
)
 
(9,584
)
Purchases of available for sale securities
 
(1,155,261
)
 
(1,711,619
)
Proceeds from sales of available for sale securities
 
795,140

 
713,660

Change in amount receivable on unsettled securities transactions
 
(102,627
)
 
65,566

Loans originated, net of principal collected
 
(481,085
)
 
(890,180
)
Net payments on derivative asset contracts
 
(204,041
)
 
(174,475
)
Acquisitions, net of cash acquired
 
(7,700
)
 
(18,064
)
Proceeds from disposition of assets
 
78,629

 
102,736

Purchases of assets
 
(107,241
)
 
(144,454
)
Net cash used in investing activities
 
(428,890
)
 
(1,078,735
)
Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
(169,354
)
 
(96,793
)
Net change in time deposits
 
(159,003
)
 
15,663

Net change in other borrowed funds
 
259,359

 
1,675,859

Repayment of subordinated debentures
 
—

 
(121,810
)
Issuance of subordinated debentures
 
145,390

 
—

Net proceeds on derivative liability contracts
 
196,225

 
157,498

Net change in derivative margin accounts
 
(188,823
)
 
(47,716
)
Change in amount due on unsettled security transactions
 
(5,140
)
 
(252,969
)
Issuance of common and treasury stock, net
 
2,276

 
5,739

Tax effect from equity compensation, net
 
351

 
744

Sale of non-controlling interests
 
—

 
5,500

Repurchase of common stock
 
(17,770
)
 
(29,484
)
Dividends paid
 
(56,720
)
 
(57,660
)
Net cash provided by financing activities
 
6,791

 
1,254,571

Net increase (decrease) in cash and cash equivalents
 
(237,048
)
 
86,807

Cash and cash equivalents at beginning of period
 
2,643,599

 
2,475,842

Cash and cash equivalents at end of period
 
$
2,406,551

 
$
2,562,649


- 48 -


Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
Cash paid for interest
 
$
40,213

 
$
34,116

Cash paid for taxes
 
$
14,671

 
$
51,699

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
5,372

 
$
4,262

Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period
 
$
49,325

 
$
52,569

Conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
29,512

 
$
80,048

See accompanying notes to consolidated financial statements.

- 49 -


Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed 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, Bank of Kansas City, 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 2015 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2015 have been derived from the audited financial statements included in BOK Financial’s 2015 Form 10-K but does 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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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. The Company is evaluating the impact the adoption of ASU 2014-09 will have on the Company's financial statements.

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.


- 50 -


FASB Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ("ASU 2016-10")

On April 14, 2016, the FASB issued ASU 2016-10 which amends certain sections of ASU 2014-09 related to identifying performance obligations and licensing implementation. ASU 2016-10 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 2016-10 will have on the Company's financial statements along with ASU 2014-09.

FASB Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ("ASU 2016-12")

On May 9, 2016, the FASB issued ASU 2016-12, which amends certain aspects of the Board's new revenue standard, ASU 2014-09. The amendments clarify information regarding collectibility, presentation of sales tax and other similar taxes collected from customers, noncash consideration, contract modifications and completed contracts at transition, and transition disclosures. ASU 2016-12 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 2016-12 will have on the Company's financial statements along with ASU 2014-09.

FASB Accounting Standards Update No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity ("ASU 2014-16")

On November 3, 2014, the FASB issued ASU 2014-16 to eliminate the use of different methods and reduce diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share. For hybrid financial instruments issued in the form of a share, an entity should determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument. The entity should determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. For public business entities, the ASU was effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Adoption of ASU 2014-16 did not have a material impact on the Company's consolidated financial statements.

FASB Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02")

On February 18, 2015, the FASB issued ASU 2015-02 to address concerns that current U.S. GAAP may require a reporting entity to consolidate another legal entity where the reporting entity's contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity's voting rights, or the reporting entity is not exposed to a majority of the legal entity's economic benefits or obligations. The amendments affect limited partnerships and similar legal entities, the evaluation of fees paid to a decision maker or a service provider as a variable interest, the effect of fee arrangements and related parties on the primary beneficiary determination, and certain investment funds. The ASU was effective for periods beginning after December 15, 2015 for public companies. Adoption of ASU 2015-02 did not have a material impact on the Company's consolidated financial statements.

FASB Accounting Standards Update No. 2015-07, Fair Value Measurements (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) ("ASU 2015-07")

On May 1, 2015, the FASB issued ASU 2015-07 to gain consistency within the categorization of the fair value hierarchy. The update removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. It also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The ASU was effective for the Company for interim and annual periods beginning after December 15, 2015 and should be applied retrospectively to all periods presented. Adoption of ASU 2015-07 did not have a material impact on the Company's consolidated financial statements.


- 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, 2016, the Company had $2.4 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 and disclosing key information about leasing arrangements. The final guidance requires lessees to put most leases on their balance sheets and may affect the presentation and timing of expense recognition, eliminates the current real estate-specific provisions, modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. The ASU is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application of the amendments is permitted. 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. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships ("ASU 2016-05")

On March 10, 2016, the FASB issued ASU 2016-05 which clarifies that "a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument" or "a change in a critical term of the hedging relationship." If all other hedge accounting criteria in ASC 815 are met, a hedging relationship where the hedging derivative instrument is novated would not be discontinued or need to be redesignated. The ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. An entity would apply the guidance prospectively unless modified retrospective transition is elected. Early adoption is permitted. Adoption of ASU 2016-05 is not expected to have a material impact on the Company's financial statements.

FASB Accounting Standards Update No. 2016-07, Investments - Equity Method and Joint Ventures ("ASU 2016-07")

On March 15, 2016, the FASB issued ASU 2016-07 to simplify the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as result of an increase in the level of ownership interest or degree of influence. The ASU also requires that unrealized holding gains or losses in accumulated other comprehensive income related to an available for sale security that becomes eligible for the equity method be recognized in earnings as of the date the investment qualifies for the equity method. The ASU is effective for all entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Adoption of ASU 2016-07 is not expected to have a material impact 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 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Implementation of ASU 2016-09 will add volatility to tax expense as stock prices change; however, we expect the impact to be insignificant.
 


- 52 -


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 an organization to measure all expected credit losses for financial assets carried at amortized cost at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 is 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.

- 53 -


(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities is as follows (in thousands):
 
 
 
June 30, 2016
 
December 31, 2015
 
June 30, 2015
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. government agency debentures
 
$
18,909

 
$
(8
)
 
$
61,295

 
$
(71
)
 
$
40,212

 
$
(28
)
U.S. government agency residential mortgage-backed securities
 
122,306

 
363

 
10,989

 
17

 
23,090

 
181

Municipal and other tax-exempt securities
 
52,721

 
262

 
31,901

 
210

 
62,801

 
(41
)
Other trading securities
 
17,686

 
169

 
18,219

 
(16
)
 
32,106

 
47

Total trading securities
 
$
211,622

 
$
786

 
$
122,404

 
$
140

 
$
158,209

 
$
159

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

 
 
June 30, 2016
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized1
 
 
Cost
 
Value
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
334,551

 
$
334,551

 
$
340,700

 
$
6,234

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

 
23,750

 
25,233

 
1,483

 
—

Other debt securities
 
202,410

 
202,410

 
233,129

 
30,723

 
(4
)
Total investment securities
 
$
560,711

 
$
560,711

 
$
599,062

 
$
38,440

 
$
(89
)
1 
Gross unrealized gains and losses are not recognized in Accumulated Other Comprehensive Income "AOCI" in the Consolidated Balance Sheets.
 
 
December 31, 2015
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized1
 
 
Cost
 
Value
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
365,258

 
$
365,258

 
$
368,910

 
$
3,935

 
$
(283
)
U.S. government agency residential mortgage-backed securities – Other
 
26,721

 
26,833

 
27,874

 
1,063

 
(22
)
Other debt securities
 
205,745

 
205,745

 
232,375

 
26,689

 
(59
)
Total investment securities
 
$
597,724

 
$
597,836

 
$
629,159

 
$
31,687

 
$
(364
)
1 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.

- 54 -


 
 
June 30, 2015
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized1
 
 
Cost
 
Value
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
389,824

 
$
389,824

 
$
392,367

 
$
3,158

 
$
(615
)
U.S. government agency residential mortgage-backed securities – Other
 
30,565

 
30,867

 
32,133

 
1,276

 
(10
)
Other debt securities
 
204,973

 
204,973

 
217,542

 
14,017

 
(1,448
)
Total investment securities
 
$
625,362

 
$
625,664

 
$
642,042

 
$
18,451

 
$
(2,073
)
1 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.
The amortized cost and fair values of investment securities at June 30, 2016, 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:
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value
 
$
74,024

 
$
216,810

 
$
9,178

 
$
34,539

 
$
334,551

 
3.02

Fair value
 
74,119

 
218,972

 
9,469

 
38,140

 
340,700

 
 
Nominal yield¹
 
1.47
%
 
1.95
%
 
3.18
%
 
5.70
%
 
2.27
%
 
 
Other debt securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
13,055

 
43,730

 
125,949

 
19,676

 
202,410

 
6.95

Fair value
 
13,264

 
47,596

 
150,198

 
22,071

 
233,129

 
 
Nominal yield
 
3.99
%
 
4.80
%
 
5.88
%
 
4.82
%
 
5.36
%
 
 
Total fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
$
87,079

 
$
260,540

 
$
135,127

 
$
54,215

 
$
536,961

 
4.48

Fair value
 
87,383

 
266,568

 
159,667

 
60,211

 
573,829

 
 

Nominal yield
 
1.84
%
 
2.43
%
 
5.70
%
 
5.38
%
 
3.44
%
 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
23,750

 
³

Fair value
 
 

 
 

 
 

 
 

 
25,233

 
 

Nominal yield4
 
 

 
 

 
 

 
 

 
2.75
%
 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
560,711

 
 

Fair value
 
 

 
 

 
 

 
 

 
599,062

 
 

Nominal yield
 
 

 
 

 
 

 
 

 
3.41
%
 
 

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 3.9 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.


- 55 -


Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
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
)
 
—

Other
 
—

 
—

 
—

 
—

 
—

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 -


 
 
December 31, 2015
 
 
Amortized
 
Fair
 
Gross Unrealized¹
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
995

 
$
—

 
$
(5
)
 
$
—

Municipal and other tax-exempt
 
56,681

 
56,817

 
873

 
(737
)
 
—

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
3,156,214

 
3,187,215

 
41,502

 
(10,501
)
 
—

FHLMC
 
1,940,915

 
1,949,335

 
14,727

 
(6,307
)
 
—

GNMA
 
763,967

 
761,801

 
2,385

 
(4,551
)
 
—

Other
 
—

 
—

 
—

 
—

 
—

Total U.S. government agencies
 
5,861,096

 
5,898,351

 
58,614

 
(21,359
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
56,387

 
62,574

 
6,574

 
—

 
(387
)
Jumbo-A loans
 
71,724

 
76,544

 
5,260

 
—

 
(440
)
Total private issue
 
128,111

 
139,118

 
11,834

 
—

 
(827
)
Total residential mortgage-backed securities
 
5,989,207

 
6,037,469

 
70,448

 
(21,359
)
 
(827
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,919,044

 
2,905,796

 
5,396

 
(18,644
)
 
—

Other debt securities
 
4,400

 
4,151

 
—

 
(249
)
 
—

Perpetual preferred stock
 
17,171

 
19,672

 
2,501

 
—

 
—

Equity securities and mutual funds
 
17,121

 
17,833

 
752

 
(40
)
 
—

Total available for sale securities
 
$
9,004,624

 
$
9,042,733

 
$
79,970

 
$
(41,034
)
 
$
(827
)
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, 2015
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
1,000

 
$
—

 
$
—

 
$
—

Municipal and other tax-exempt
 
61,341

 
61,624

 
1,028

 
(745
)
 
—

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

 
 

 
 

 
 

 
 

FNMA
 
3,558,224

 
3,609,273

 
57,269

 
(6,220
)
 
—

FHLMC
 
1,929,685

 
1,954,917

 
27,594

 
(2,362
)
 
—

GNMA
 
768,342

 
770,739

 
4,928

 
(2,531
)
 
—

Other
 
4,224

 
4,520

 
296

 
—

 
—

Total U.S. government agencies
 
6,260,475

 
6,339,449

 
90,087

 
(11,113
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
61,486

 
67,711

 
6,692

 
—

 
(467
)
Jumbo-A loans
 
80,968

 
86,439

 
5,843

 
—

 
(372
)
Total private issue
 
142,454

 
154,150

 
12,535

 
—

 
(839
)
Total residential mortgage-backed securities
 
6,402,929

 
6,493,599

 
102,622

 
(11,113
)
 
(839
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,405,480

 
2,401,364

 
7,988

 
(12,104
)
 
—

Other debt securities
 
4,400

 
4,150

 
—

 
(250
)
 
—

Perpetual preferred stock
 
17,171

 
19,648

 
2,477

 
—

 
—

Equity securities and mutual funds
 
18,638

 
18,732

 
840

 
(746
)
 
—

Total available for sale securities
 
$
8,910,959

 
$
9,000,117

 
$
114,955

 
$
(24,958
)
 
$
(839
)
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.

- 57 -


The amortized cost and fair values of available for sale securities at June 30, 2016, 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

 
1.55

Fair value
—

 
1,004

 
—

 
—

 
1,004

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

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
9,693

 
$
16,270

 
$
2,806

 
$
21,401

 
$
50,170

 
8.43

Fair value
9,781

 
16,636

 
2,867

 
20,978

 
50,262

 
 
Nominal yield¹
4.51
%
 
4.11
%
 
3.70
%
 
2.01
%
6 
3.27
%
 
 
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
—

 
$
904,982

 
$
1,760,882

 
$
188,442

 
$
2,854,306

 
6.91

Fair value
—

 
919,153

 
1,802,497

 
190,296

 
2,911,946

 
 
Nominal yield
—
%
 
1.66
%
 
1.87
%
 
1.50
%
 
1.78
%
 
 
Other debt securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
—

 
$
—

 
$
—

 
$
4,400

 
$
4,400

 
31.16

Fair value
—

 
—

 
—

 
4,151

 
4,151

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

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
9,693

 
$
922,252

 
$
1,763,688

 
$
214,243

 
$
2,909,876

 
6.97

Fair value
9,781

 
936,793

 
1,805,364

 
215,425

 
2,967,363

 
 
Nominal yield
4.51
%
 
1.71
%
 
1.87
%
 
1.55
%
 
1.80
%
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
 

 
 

 
 

 
 

 
$
5,692,596

 
2 

Fair value
 

 
 

 
 

 
 

 
5,826,581

 
 
Nominal yield4
 

 
 

 
 

 
 

 
1.90
%
 
 
Equity securities and mutual funds:
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 

 
 

 
 

 
 

 
$
32,832

 
³

Fair value
 

 
 

 
 

 
 

 
36,745

 
 

Nominal yield
 

 
 

 
 

 
 

 
—
%
 
 

Total available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 

Amortized cost
 

 
 

 
 

 
 

 
$
8,635,304

 
 

Fair value
 

 
 

 
 

 
 

 
8,830,689

 
 

Nominal yield
 

 
 

 
 

 
 

 
1.86
%
 
 

1 
Calculated on a taxable equivalent basis using a 39 percent effective tax rate.
2 
The average expected lives of mortgage-backed securities were 3.3 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.


- 58 -


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,
 
2016
 
2015
 
2016
 
2015
Proceeds
$
325,758

 
$
378,835

 
$
795,140

 
$
713,660

Gross realized gains
5,326

 
4,840

 
9,290

 
9,740

Gross realized losses
—

 
(1,407
)
 
—

 
(1,980
)
Related federal and state income tax expense
2,072

 
1,335

 
3,614

 
3,018


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, 2016
 
Dec. 31, 2015
 
June 30, 2015
Investment:
 
 
 
 
 
Carrying value
$
287,166

 
$
231,033

 
$
58,875

Fair value
293,625

 
234,382

 
60,645

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
Amortized cost
7,502,361

 
6,831,743

 
6,035,423

Fair value
7,657,916

 
6,849,524

 
6,089,438


The secured parties do not have the right to sell or re-pledge these securities.


- 59 -


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:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Municipal and other tax-exempt
 
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.


- 60 -


Temporarily Impaired Securities as of December 31, 2015
(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
 
73

 
$
127,319

 
$
207

 
$
13,380

 
$
77

 
$
140,699

 
$
284

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

 
5,533

 
22

 
—

 
—

 
5,533

 
22

Other debt securities
 
11

 
1,082

 
41

 
1,715

 
18

 
2,797

 
59

Total investment securities
 
85

 
$
133,934

 
$
270

 
$
15,095

 
$
95

 
$
149,029

 
$
365


 
 
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

 
$
995

 
$
5

 
$
—

 
$
—

 
$
995

 
$
5

Municipal and other tax-exempt
 
20

 
$
9,909

 
$
27

 
$
11,664

 
$
710

 
$
21,573

 
$
737

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
55

 
1,188,022

 
10,262

 
18,236

 
239

 
1,206,258

 
10,501

FHLMC
 
40

 
726,713

 
4,827

 
77,545

 
1,480

 
804,258

 
6,307

GNMA
 
15

 
364,919

 
1,951

 
102,109

 
2,600

 
467,028

 
4,551

Total U.S. government agencies
 
110

 
2,279,654

 
17,040

 
197,890

 
4,319

 
2,477,544

 
21,359

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
4

 
—

 
—

 
9,264

 
387

 
9,264

 
387

Jumbo-A loans
 
8

 
—

 
—

 
8,482

 
440

 
8,482

 
440

Total private issue
 
12

 
—

 
—

 
17,746

 
827

 
17,746

 
827

Total residential mortgage-backed securities
 
122

 
2,279,654

 
17,040

 
215,636

 
5,146

 
2,495,290

 
22,186

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
213

 
1,582,469

 
11,419

 
484,258

 
7,225

 
2,066,727

 
18,644

Other debt securities
 
2

 
—

 
—

 
4,151

 
249

 
4,151

 
249

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
61

 
782

 
5

 
991

 
35

 
1,773

 
40

Total available for sale securities
 
419

 
$
3,873,809


$
28,496


$
716,700


$
13,365


$
4,590,509


$
41,861

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



- 61 -


Temporarily Impaired Securities as of June 30, 2015
(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
 
79

 
$
102,223

 
$
351

 
$
50,991

 
$
264

 
$
153,214

 
$
615

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

 
6,491

 
10

 
—

 
—

 
6,491

 
10

Other debt securities
 
110

 
31,875

 
1,407

 
2,458

 
41

 
34,333

 
1,448

Total investment securities
 
190

 
$
140,589

 
$
1,768

 
$
53,449

 
$
305

 
$
194,038

 
$
2,073


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

 
 

 
 

 
 

 
 

 


 


Municipal and other tax-exempt1
 
20

 
$
9,855

 
$
41

 
$
11,688

 
$
704

 
$
21,543

 
$
745

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
29

 
601,863

 
4,327

 
118,269

 
1,893

 
720,132

 
6,220

FHLMC
 
13

 
121,217

 
795

 
117,408

 
1,567

 
238,625

 
2,362

GNMA
 
6

 
66,131

 
50

 
115,103

 
2,481

 
181,234

 
2,531

Total U.S. government agencies
 
48

 
789,211

 
5,172

 
350,780

 
5,941

 
1,139,991

 
11,113

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
4

 
10,244

 
467

 
—

 
—

 
10,244

 
467

Jumbo-A loans
 
11

 
7,542

 
18

 
9,310

 
354

 
16,852

 
372

Total private issue
 
15

 
17,786

 
485

 
9,310

 
354

 
27,096

 
839

Total residential mortgage-backed securities
 
63

 
806,997

 
5,657

 
360,090

 
6,295

 
1,167,087

 
11,952

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
128

 
712,973

 
3,848

 
791,108

 
8,256

 
1,504,081

 
12,104

Other debt securities
 
2

 
—

 
—

 
4,149

 
250

 
4,149

 
250

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
51

 
4,706

 
714

 
994

 
32

 
5,700

 
746

Total available for sale securities
 
264

 
$
1,534,531

 
$
10,260

 
$
1,168,029

 
$
15,537

 
$
2,702,560

 
$
25,797

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

On a quarterly basis, the Company performs separate evaluations of impaired debt and equity investments and available for sale securities to determine if the unrealized losses are temporary.
 
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, 2016, 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.


- 62 -


Impairment of debt securities rated investment grade by all nationally-recognized rating agencies is considered temporary unless specific contrary information is identified. None of the debt securities rated investment grade were considered to be other-than-temporarily impaired at June 30, 2016.

At June 30, 2016, the composition of the Company’s investment and available for sale securities portfolios by the lowest current credit rating assigned by any of the three nationally-recognized rating agencies is as follows (in thousands):
 

AAA - AA
 
 
A - BBB
 
 
Below Investment Grade
 
 
Not Rated
 
 
Total
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
$
211,530

 
$
213,727

 
$
6,696

 
$
6,789

 
$
—

 
$
—

 
$
116,325

 
$
120,184

 
$
334,551

 
$
340,700

U.S. government agency residential mortgage-backed securities 1
—

 
—

 
—

 
—

 
—

 
—

 
23,750

 
25,233

 
23,750

 
25,233

Other debt securities
140,184

 
166,203

 
—

 
—

 
—

 
—

 
62,226

 
66,926

 
202,410

 
233,129

Total investment securities
$
351,714

 
$
379,930

 
$
6,696

 
$
6,789

 
$
—

 
$
—

 
$
202,301

 
$
212,343

 
$
560,711

 
$
599,062

 
 
AAA - AA
 
 
A - BBB
 
Below Investment Grade
 
Not Rated
 
Total
 
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair
Value
Available for Sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,000

 
$
1,004

 
$
1,000

 
$
1,004

Municipal and other tax-exempt
 
27,841

 
28,404

 
9,621

 
9,025

 
—

 
—

 
12,708

 
12,833

 
50,170

 
50,262

U.S. government agency residential mortgage-backed securities 1
 
—

 
—

 
—

 
—

 
—

 
—

 
5,577,287

 
5,700,268

 
5,577,287

 
5,700,268

Privately issued residential mortgage-backed securities
 
—

 
—

 
—

 
—

 
115,309

 
126,313

 
—

 
—

 
115,309

 
126,313

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

 
—

 
—

 
—

 
—

 
—

 
2,854,306

 
2,911,946

 
2,854,306

 
2,911,946

Other debt securities
 
4,400

 
4,151

 
—

 
—

 
—

 
—

 
—

 
—

 
4,400

 
4,151

Perpetual preferred stock
 
—

 
—

 
4,796

 
5,543

 
10,766

 
12,388

 
—

 
—

 
15,562

 
17,931

Equity securities and mutual funds
 
4

 
492

 
—

 
—

 
—

 
—

 
17,266

 
18,322

 
17,270

 
18,814

Total available for sale securities
 
$
32,245


$
33,047


$
14,417


$
14,568


$
126,075


$
138,701


$
8,462,567


$
8,644,373


$
8,635,304


$
8,830,689

1 
U.S. government and government sponsored enterprises are not rated by the nationally-recognized rating agencies as these securities are guaranteed by agencies of the U.S. government or government-sponsored enterprises.

At June 30, 2016, the entire portfolio of privately issued residential mortgage-backed securities was rated below investment grade by the nationally-recognized rating agencies. The gross unrealized loss on these securities totaled $812 thousand. Impairment of securities rated below investment grade was evaluated based on projections of estimated cash flows from individual loans underlying each security using current and anticipated unemployment and default rates, changes in housing prices and estimated liquidation costs at foreclosure. Each factor is considered in the evaluation.


- 63 -


The primary assumptions used in this evaluation were:

 
June 30, 2016
 
Dec. 31, 2015
 
June 30, 2015
 
 
 
 
 
 
Unemployment rate
Moving down to 4.7 percent over the next 12 months and remain at 4.7 percent thereafter.
 
Decreasing to 4.8 percent over the next 12 months and remain at 4.8 percent thereafter.
 
Held constant at 5.6 percent over the next 12 months and remain at 5.6 percent thereafter.
Housing price appreciation/depreciation
Starting with current depreciated housing prices based on information derived from the FHFA1, appreciating 3.5 percent over the next 12 months, then flat for the following 12 months and then appreciating at 2 percent per year thereafter.
 
Starting with current depreciated housing prices based on information derived from the FHFA1, appreciating 3.5 percent over the next 12 months, then flat for the following 12 months and then appreciating at 2 percent per year thereafter.
 
Starting with current depreciated housing prices based on information derived from the FHFA1, appreciating 3.2 percent over the next 12 months, then flat for the following 12 months and then appreciating at 2 percent per year thereafter.
Estimated liquidation costs
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
 
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
 
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
Discount rates
Estimated cash flows were discounted at rates that range from 2.00 percent to 6.25 percent based on our current expected yields.
 
Estimated cash flows were discounted at rates that range from 2.00 percent to 6.25 percent based on our current expected yields.
 
Estimated cash flows were discounted at rates that range from 2.00 percent to 6.25 percent based on our current expected yields.
1 
Federal Housing Finance Agency

Credit loss impairment is recorded as a charge to earnings. Additional impairment based on the difference between the total unrealized loss and the estimated credit loss on these securities is charged against other comprehensive income, net of deferred taxes. No credit loss impairments were recognized in earnings on privately issued residential mortgage-backed securities during the three months ended June 30, 2016.

A distribution of the amortized cost (after recognition of the other-than-temporary impairment), fair value and credit loss impairments recognized on our privately issued residential mortgage-backed securities is as follows (in thousands, except for number of securities):
 
 
 
 
 
 
 
 
Credit Losses Recognized
 
 
 
 
 
 
 
 
Three months ended
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
Life-to-date
 
 
Number of Securities
 
Amortized Cost
 
Fair Value
 
Number of
Securities
 
Amount
 
Number of Securities
 
Amount
Alt-A
 
14

 
$
49,522

 
$
54,536

 
—

 
$
—

 
14

 
$
36,284

Jumbo-A
 
30

 
65,787

 
71,777

 
—

 
—

 
29

 
18,220

Total
 
44

 
$
115,309

 
$
126,313

 
—

 
$
—

 
43

 
$
54,504


Impaired equity securities, including perpetual preferred stocks, are evaluated based on management's ability and intent to hold the securities until fair value recovers over periods not to exceed three years. The assessment of the ability and intent to hold these securities focuses on the liquidity needs, asset/liability management objectives and securities portfolio objectives. Factors considered when assessing recovery include forecasts of general economic conditions and specific performance of the issuer, analyst ratings and credit spreads for preferred stocks which have debt-like characteristics. The Company has evaluated the near-term prospects of the investments in relation to the severity and duration of the impairment and based on that evaluation has the ability and intent to hold these investments until a recovery in fair value. Accordingly, all impairment of equity securities was considered temporary at June 30, 2016.


- 64 -


The following is a tabular roll forward of the amount of credit-related OTTI recognized on available for sale debt securities in earnings (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
Balance of credit-related OTTI recognized on available for sale debt securities, beginning of period
 
$
54,504

 
$
54,439

 
$
54,504

 
$
54,347

Additions for credit-related OTTI not previously recognized
 
—

 
—

 
—

 
—

Additions for increases in credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost
 
—

 
—

 
—

 
92

Reductions for change in intent to hold before recovery
 
—

 
—

 
—

 
—

Sales
 
—

 
—

 
—

 
—

Balance of credit-related OTTI recognized on available for sale debt securities, end of period
 
$
54,504

 
$
54,439

 
$
54,504

 
$
54,439


Additions above exclude other-than-temporary impairment recorded due to change in intent to hold before recovery.
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, 2016
 
Dec. 31, 2015
 
June 30, 2015
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. government agency residential mortgage-backed securities
 
$
237,959

 
$
4,476

 
$
444,217

 
$
(2,060
)
 
$
436,324

 
$
(3,859
)
U.S. Treasury
 
25,306

 
(43
)
 
—

 
—

 
—

 
—

Total
 
$
263,265

 
$
4,433

 
$
444,217

 
$
(2,060
)
 
$
436,324

 
$
(3,859
)


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 lacks a market. A summary of restricted equity securities follows (in thousands):

 
June 30, 2016
 
Dec. 31, 2015
 
June 30, 2015
Federal Reserve stock
$
36,283

 
$
36,148

 
$
35,148

Federal Home Loan Bank stock
283,155

 
237,365

 
196,201

Other
201

 
171

 
171

Total
$
319,639


$
273,684


$
231,520


- 65 -


(3) Derivatives
 
Derivative instruments may be used by the Company as part of its interest rate 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. As of June 30, 2016, a decrease in BOK Financial's credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $18 million.
 
None of these derivative contracts have been designated as hedging instruments.

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, and foreign exchange rates, or to take positions in 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.
 
Interest Rate Risk Management Programs
 
BOK Financial may use derivative contracts in managing its interest rate sensitivity and as part of its economic hedge of the change in the fair value of mortgage servicing rights. As of June 30, 2016, derivative contracts under the interest rate risk management program were primarily used as part of the economic hedge of the change in the fair value of the mortgage servicing rights.

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.

- 66 -


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

Interest rate 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

Interest rate 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.



- 67 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2015 (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
 
$
14,583,052

 
$
43,270

 
$
(28,305
)
 
$
14,965

 
$
—

 
$
14,965

Interest rate swaps
 
1,332,044

 
31,744

 
—

 
31,744

 
(1,424
)
 
30,320

Energy contracts
 
470,613

 
83,045

 
(22,970
)
 
60,075

 
(18,606
)
 
41,469

Agricultural contracts
 
61,662

 
2,591

 
(1,158
)
 
1,433

 
—

 
1,433

Foreign exchange contracts
 
546,572

 
498,830

 
—

 
498,830

 
(4,140
)
 
494,690

Equity option contracts
 
137,278

 
3,780

 
—

 
3,780

 
(470
)
 
3,310

Total customer risk management programs
 
17,131,221

 
663,260

 
(52,433
)
 
610,827

 
(24,640
)
 
586,187

Interest rate risk management programs
 
22,000

 
83

 
—

 
83

 
—

 
83

Total derivative contracts
 
$
17,153,221

 
$
663,343

 
$
(52,433
)
 
$
610,910

 
$
(24,640
)
 
$
586,270

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
14,168,927

 
$
40,141

 
$
(28,305
)
 
$
11,836

 
$
(1,308
)
 
$
10,528

Interest rate swaps
 
1,332,044

 
31,928

 
—

 
31,928

 
(20,530
)
 
11,398

Energy contracts
 
463,703

 
81,869

 
(22,970
)
 
58,899

 
—

 
58,899

Agricultural contracts
 
61,657

 
2,579

 
(1,158
)
 
1,421

 
(1,248
)
 
173

Foreign exchange contracts
 
546,405

 
498,574

 
—

 
498,574

 
(1,951
)
 
496,623

Equity option contracts
 
137,278

 
3,780

 
—

 
3,780

 
—

 
3,780

Total customer risk management programs
 
16,710,014

 
658,871

 
(52,433
)
 
606,438

 
(25,037
)
 
581,401

Interest rate risk management programs
 
75,000

 
300

 
—

 
300

 
—

 
300

Total derivative contracts
 
$
16,785,014

 
$
659,171

 
$
(52,433
)
 
$
606,738

 
$
(25,037
)
 
$
581,701

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





- 68 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2015 (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
 
$
17,412,925

 
$
116,138

 
$
(42,003
)
 
$
74,135

 
$
—

 
$
74,135

Interest rate swaps
 
1,282,503

 
33,311

 
—

 
33,311

 
(70
)
 
33,241

Energy contracts
 
711,123

 
82,871

 
(42,115
)
 
40,756

 
(20,122
)
 
20,634

Agricultural contracts
 
66,430

 
1,367

 
(724
)
 
643

 
—

 
643

Foreign exchange contracts
 
574,049

 
495,952

 
—

 
495,952

 
(1,100
)
 
494,852

Equity option contracts
 
168,122

 
6,993

 
—

 
6,993

 
(63
)
 
6,930

Total customer risk management programs
 
20,215,152

 
736,632

 
(84,842
)
 
651,790

 
(21,355
)
 
630,435

Interest rate risk management programs
 
—

 
—

 
—

 
—

 
—

 
—

Total derivative contracts
 
$
20,215,152

 
$
736,632

 
$
(84,842
)
 
$
651,790

 
$
(21,355
)
 
$
630,435

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
17,863,884

 
$
112,166

 
$
(42,003
)
 
$
70,163

 
$
—

 
$
70,163

Interest rate swaps
 
1,282,503

 
33,471

 
—

 
33,471

 
(17,889
)
 
15,582

Energy contracts
 
676,214

 
78,044

 
(42,115
)
 
35,929

 
—

 
35,929

Agricultural contracts
 
66,433

 
1,355

 
(724
)
 
631

 
(475
)
 
156

Foreign exchange contracts
 
573,403

 
495,320

 
—

 
495,320

 
(4,826
)
 
490,494

Equity option contracts
 
168,122

 
6,993

 
—

 
6,993

 
—

 
6,993

Total customer risk management programs
 
20,630,559

 
727,349

 
(84,842
)
 
642,507

 
(23,190
)
 
619,317

Interest rate risk management programs
 
52,000

 
960

 
—

 
960

 
—

 
960

Total derivative contracts
 
$
20,682,559

 
$
728,309

 
$
(84,842
)
 
$
643,467

 
$
(23,190
)
 
$
620,277

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







- 69 -


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, 2016
 
June 30, 2015
 
 
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
 
$
9,862

 
$
—

 
$
9,778

 
$
—

Interest rate swaps
 
723

 
—

 
611

 
—

Energy contracts
 
2,749

 
—

 
1,026

 
—

Agricultural contracts
 
32

 
—

 
30

 
—

Foreign exchange contracts
 
134

 
—

 
221

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
13,500

 
—

 
11,666

 
—

Interest rate risk management programs
 
(9
)
 
10,766

 
—

 
(1,032
)
Total derivative contracts
 
$
13,491

 
$
10,766

 
$
11,666

 
$
(1,032
)
 
 
Six Months Ended
 
 
June 30, 2016
 
June 30, 2015
 
 
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
 
$
17,302

 
$
—

 
$
18,028

 
$
—

Interest rate swaps
 
1,048

 
—

 
1,084

 
—

Energy contracts
 
3,445

 
—

 
2,367

 
—

Agricultural contracts
 
61

 
—

 
42

 
—

Foreign exchange contracts
 
512

 
—

 
466

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
22,368

 
—

 
21,987

 
—

Interest rate risk management programs
 
(9
)
 
17,904

 
—

 
(121
)
Total derivative contracts
 
$
22,359

 
$
17,904

 
$
21,987

 
$
(121
)
Net interest revenue was not significantly impacted by the settlement of amounts receivable or payable on interest rate swaps for the six months ended June 30, 2016 and 2015, respectively. 

- 70 -


(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 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. 


- 71 -


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

 
 
June 30, 2016
 
December 31, 2015
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
1,994,415

 
$
8,180,033

 
$
181,989

 
$
10,356,437

 
$
1,850,548

 
$
8,325,559

 
$
76,424

 
$
10,252,531

Commercial real estate
 
612,822

 
2,961,364

 
7,780

 
3,581,966

 
627,678

 
2,622,354

 
9,001

 
3,259,033

Residential mortgage
 
1,586,116

 
237,746

 
57,061

 
1,880,923

 
1,598,992

 
216,661

 
61,240

 
1,876,893

Personal
 
109,447

 
477,622

 
354

 
587,423

 
91,816

 
460,418

 
463

 
552,697

Total
 
$
4,302,800

 
$
11,856,765

 
$
247,184

 
$
16,406,749

 
$
4,169,034

 
$
11,624,992

 
$
147,128

 
$
15,941,154

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
2,899

 
 

 
 

 
 

 
$
1,207

 
 
June 30, 2015
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
1,730,675

 
$
8,020,813

 
$
24,233

 
$
9,775,721

Commercial real estate
 
715,062

 
2,298,296

 
20,139

 
3,033,497

Residential mortgage
 
1,639,773

 
198,986

 
45,969

 
1,884,728

Personal
 
100,028

 
329,612

 
550

 
430,190

Total
 
$
4,185,538

 
$
10,847,707

 
$
90,891

 
$
15,124,136

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
99

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

At June 30, 2016, $5.3 billion or 32 percent of our total loan portfolio is to businesses and individuals attributed to the Texas market and $3.8 billion or 23 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 on-going 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 on-going 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, 2016, commercial loans attributed to the Texas market totaled $3.4 billion or 33 percent of the commercial loan portfolio segment and commercial loans attributed to the Oklahoma market totaled $2.4 billion or 23 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, 2016, including $2.2 billion of outstanding loans to energy producers. Approximately 60 percent of committed production loans are secured by properties primarily producing oil and 40 percent are secured by properties producing natural gas. The services loan class totaled $2.8 billion or 17 percent of total loans at June 30, 2016. Approximately $1.3 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 $2.1 billion or 13 percent of total loans at June 30, 2016. 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 skill nursing. Healthcare also includes loans to hospitals and other medical service providers.


- 72 -


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, 2016, 30 percent of commercial real estate loans are secured by properties primarily located in the Dallas and Houston areas of Texas. An additional 13 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, 2016, residential mortgage loans included $193 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 $719 million at June 30, 2016. Approximately, 67 percent of the home equity loan portfolio is comprised of first lien loans and 33 percent of the home equity portfolio is comprised of junior lien loans. Junior lien loans are distributed 61 percent to amortizing term loans and 39 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, 2016, outstanding commitments totaled $8.5 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.


- 73 -


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, 2016, outstanding standby letters of credit totaled $491 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, 2016, outstanding commercial letters of credit totaled $6.7 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 on-going 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, 2016.

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.


- 74 -


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, 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


- 75 -


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 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, 2015 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
101,411

 
$
40,819

 
$
23,244

 
$
4,139

 
$
28,073

 
$
197,686

Provision for loan losses
 
5,822

 
(1,334
)
 
(1,562
)
 
317

 
829

 
4,072

Loans charged off
 
(881
)
 
(16
)
 
(714
)
 
(1,266
)
 
—

 
(2,877
)
Recoveries
 
685

 
275

 
481

 
765

 
—

 
2,206

Ending balance
 
$
107,037

 
$
39,744

 
$
21,449

 
$
3,955

 
$
28,902

 
$
201,087

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
577

 
$
333

 
$
24

 
$
20

 
$
—

 
$
954

Provision for off-balance sheet credit losses
 
18

 
(91
)
 
2

 
(1
)
 
—

 
(72
)
Ending balance
 
$
595

 
$
242

 
$
26

 
$
19

 
$
—

 
$
882

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
5,840

 
$
(1,425
)
 
$
(1,560
)
 
$
316

 
$
829

 
$
4,000


- 76 -



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, 2015 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Personal
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
90,875

 
$
42,445

 
$
23,458

 
$
4,233

 
$
28,045

 
$
189,056

Provision for loan losses
 
16,175

 
(11,751
)
 
(1,589
)
 
656

 
857

 
4,348

Loans charged off
 
(1,055
)
 
(44
)
 
(1,338
)
 
(2,609
)
 
—

 
(5,046
)
Recoveries
 
1,042

 
9,094

 
918

 
1,675

 
—

 
12,729

Ending balance
 
$
107,037

 
$
39,744

 
$
21,449

 
$
3,955

 
$
28,902

 
$
201,087

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
475

 
$
707

 
$
28

 
$
20

 
$
—

 
$
1,230

Provision for off-balance sheet credit losses
 
120

 
(465
)
 
(2
)
 
(1
)
 
—

 
(348
)
Ending balance
 
$
595

 
$
242

 
$
26

 
$
19

 
$
—

 
$
882

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
16,295

 
$
(12,216
)
 
$
(1,591
)
 
$
655

 
$
857

 
$
4,000


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


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 2015 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
 
$
10,176,107

 
$
114,027

 
$
76,424

 
$
16,307

 
$
10,252,531

 
$
130,334

Commercial real estate
 
3,250,032

 
41,373

 
9,001

 
18

 
3,259,033

 
41,391

Residential mortgage
 
1,815,653

 
19,441

 
61,240

 
68

 
1,876,893

 
19,509

Personal
 
552,234

 
4,164

 
463

 
—

 
552,697

 
4,164

Total
 
15,794,026

 
179,005

 
147,128

 
16,393

 
15,941,154

 
195,398

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
30,126

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,794,026

 
$
179,005

 
$
147,128

 
$
16,393

 
$
15,941,154

 
$
225,524



- 77 -


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at June 30, 2015 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
 
$
9,751,488

 
$
106,690

 
$
24,233

 
$
347

 
$
9,775,721

 
$
107,037

Commercial real estate
 
3,013,358

 
39,726

 
20,139

 
18

 
3,033,497

 
39,744

Residential mortgage
 
1,838,759

 
21,349

 
45,969

 
100

 
1,884,728

 
21,449

Personal
 
429,640

 
3,955

 
550

 
—

 
430,190

 
3,955

Total
 
15,033,245

 
171,720

 
90,891

 
465

 
15,124,136

 
172,185

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
28,902

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,033,245

 
$
171,720

 
$
90,891

 
$
465

 
$
15,124,136

 
$
201,087

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, 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

 

- 78 -


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, 2015 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
10,227,303

 
$
129,426

 
$
25,228

 
$
908

 
$
10,252,531

 
$
130,334

Commercial real estate
 
3,259,033

 
41,391

 
—

 
—

 
3,259,033

 
41,391

Residential mortgage
 
196,701

 
2,883

 
1,680,192

 
16,626

 
1,876,893

 
19,509

Personal
 
467,955

 
1,390

 
84,742

 
2,774

 
552,697

 
4,164

Total
 
14,150,992

 
175,090

 
1,790,162

 
20,308

 
15,941,154

 
195,398

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
30,126

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,150,992

 
$
175,090

 
$
1,790,162

 
$
20,308

 
$
15,941,154

 
$
225,524


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, 2015 is as follows (in thousands):
 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
9,752,301

 
$
106,162

 
$
23,420

 
$
875

 
$
9,775,721

 
$
107,037

Commercial real estate
 
3,033,497

 
39,744

 
—

 
—

 
3,033,497

 
39,744

Residential mortgage
 
190,744

 
2,922

 
1,693,984

 
18,527

 
1,884,728

 
21,449

Personal
 
343,114

 
1,549

 
87,076

 
2,406

 
430,190

 
3,955

Total
 
13,319,656

 
150,377

 
1,804,480

 
21,808

 
15,124,136

 
172,185

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
28,902

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,319,656

 
$
150,377

 
$
1,804,480

 
$
21,808

 
$
15,124,136

 
$
201,087


Loans are considered to be performing if they are in compliance with the original terms of the agreement, which is consistent with the regulatory guideline of “pass.” Performing also includes loans considered to be “other loans especially mentioned” by 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. Performing loans also include past due residential mortgages that are guaranteed by agencies of the U.S. government.

The risk grading process identified certain criticized loans as potential problem loans. These loans 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. Known information does, however, cause concern as to the borrowers’ continued compliance with current repayment terms. 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.


- 79 -


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
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,229,486

 
$
421,025

 
$
168,145

 
$
—

 
$
—

 
$
2,818,656

Services
 
2,811,560

 
9,916

 
9,388

 
—

 
—

 
2,830,864

Wholesale/retail
 
1,503,561

 
26,624

 
2,772

 
—

 
—

 
1,532,957

Manufacturing
 
575,498

 
19,612

 
293

 
—

 
—

 
595,403

Healthcare
 
2,041,354

 
8,917

 
875

 
—

 
—

 
2,051,146

Other commercial and industrial
 
502,222

 
—

 
453

 
24,673

 
63

 
527,411

Total commercial
 
9,663,681

 
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
 
793,741

 
413

 
1,265

 
—

 
—

 
795,419

Office
 
768,202

 
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
 
3,566,412

 
7,774

 
7,780

 
—

 
—

 
3,581,966

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
196,159

 
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
 
196,159

 
3,406

 
2,955

 
1,624,297

 
54,106

 
1,880,923

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
496,534

 
3,590

 
116

 
86,945

 
238

 
587,423

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,922,786

 
$
500,864

 
$
192,777

 
$
1,735,915

 
$
54,407

 
$
16,406,749



- 80 -


The following table summarizes the Company’s loan portfolio at December 31, 2015 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,906,357

 
$
129,782

 
$
61,189

 
$
—

 
$
—

 
$
3,097,328

Services
 
2,767,225

 
6,761

 
10,290

 
—

 
—

 
2,784,276

Wholesale/retail
 
1,412,780

 
6,365

 
2,919

 
—

 
—

 
1,422,064

Manufacturing
 
554,526

 
1,872

 
331

 
—

 
—

 
556,729

Healthcare
 
1,882,308

 
—

 
1,072

 
—

 
—

 
1,883,380

Other commercial and industrial
 
483,030

 
—

 
496

 
25,101

 
127

 
508,754

Total commercial
 
10,006,226

 
144,780

 
76,297

 
25,101

 
127

 
10,252,531

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
155,724

 
293

 
4,409

 
—

 
—

 
160,426

Retail
 
794,754

 
426

 
1,319

 
—

 
—

 
796,499

Office
 
636,501

 
555

 
651

 
—

 
—

 
637,707

Multifamily
 
744,299

 
6,512

 
274

 
—

 
—

 
751,085

Industrial
 
563,093

 
—

 
76

 
—

 
—

 
563,169

Other commercial real estate
 
347,864

 
11

 
2,272

 
—

 
—

 
350,147

Total commercial real estate
 
3,242,235

 
7,797

 
9,001

 
—

 
—

 
3,259,033

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
192,456

 
1,932

 
2,313

 
721,964

 
26,671

 
945,336

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
175,037

 
21,900

 
196,937

Home equity
 
—

 
—

 
—

 
724,264

 
10,356

 
734,620

Total residential mortgage
 
192,456

 
1,932

 
2,313

 
1,621,265

 
58,927

 
1,876,893

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
467,811

 
14

 
130

 
84,409

 
333

 
552,697

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,908,728

 
$
154,523

 
$
87,741

 
$
1,730,775

 
$
59,387

 
$
15,941,154



- 81 -


The following table summarizes the Company’s loan portfolio at June 30, 2015 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,771,248

 
$
124,054

 
$
6,841

 
$
—

 
$
—

 
$
2,902,143

Services
 
2,662,028

 
8,154

 
10,944

 
—

 
—

 
2,681,126

Wholesale/retail
 
1,506,059

 
23,505

 
4,166

 
—

 
—

 
1,533,730

Manufacturing
 
567,752

 
11,418

 
379

 
—

 
—

 
579,549

Healthcare
 
1,644,747

 
—

 
1,278

 
—

 
—

 
1,646,025

Other commercial and industrial
 
406,799

 
2,385

 
544

 
23,339

 
81

 
433,148

Total commercial
 
9,558,633

 
169,516

 
24,152

 
23,339

 
81

 
9,775,721

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
138,721

 
486

 
9,367

 
—

 
—

 
148,574

Retail
 
684,182

 
439

 
3,826

 
—

 
—

 
688,447

Office
 
560,159

 
566

 
2,360

 
—

 
—

 
563,085

Multifamily
 
703,449

 
7,689

 
195

 
—

 
—

 
711,333

Industrial
 
487,978

 
—

 
76

 
—

 
—

 
488,054

Other commercial real estate
 
429,544

 
145

 
4,315

 
—

 
—

 
434,004

Total commercial real estate
 
3,004,033

 
9,325

 
20,139

 
—

 
—

 
3,033,497

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
186,568

 
1,690

 
2,486

 
725,879

 
29,701

 
946,324

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
187,122

 
3,717

 
190,839

Home equity
 
—

 
—

 
—

 
737,500

 
10,065

 
747,565

Total residential mortgage
 
186,568

 
1,690

 
2,486

 
1,650,501

 
43,483

 
1,884,728

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
342,949

 
16

 
149

 
86,675

 
401

 
430,190

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,092,183

 
$
180,547

 
$
46,926

 
$
1,760,515

 
$
43,965

 
$
15,124,136




- 82 -


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, 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 real estate loans
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.

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


- 83 -


A summary of impaired loans at December 31, 2015 follows (in thousands): 
 
 
 
 
Recorded Investment
 
 
 
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
63,910

 
$
61,189

 
$
18,330

 
$
42,859

 
$
16,115

Services
 
13,449

 
10,290

 
9,657

 
633

 
148

Wholesale/retail
 
8,582

 
2,919

 
2,907

 
12

 
9

Manufacturing
 
665

 
331

 
331

 
—

 
—

Healthcare
 
1,352

 
1,072

 
931

 
141

 
35

Other commercial and industrial
 
8,304

 
623

 
623

 
—

 
—

Total commercial
 
96,262

 
76,424

 
32,779

 
43,645

 
16,307

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
8,963

 
4,409

 
4,409

 
—

 
—

Retail
 
1,923

 
1,319

 
1,319

 
—

 
—

Office
 
937

 
651

 
651

 
—

 
—

Multifamily
 
1,192

 
274

 
274

 
—

 
—

Industrial
 
76

 
76

 
76

 
—

 
—

Other real estate loans
 
8,363

 
2,272

 
2,113

 
159

 
18

Total commercial real estate
 
21,454

 
9,001

 
8,842

 
159

 
18

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
37,273

 
28,984

 
28,868

 
116

 
68

Permanent mortgage guaranteed by U.S. government agencies1
 
202,984

 
196,937

 
196,937

 
—

 
—

Home equity
 
10,988

 
10,356

 
10,356

 
—

 
—

Total residential mortgage
 
251,245

 
236,277

 
236,161

 
116

 
68

 
 
 
 
 
 
 
 
 
 
 
Personal
 
489

 
463

 
463

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
369,450

 
$
322,165

 
$
278,245

 
$
43,920

 
$
16,393

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, 2015, $22 million of these loans were nonaccruing and $175 million were accruing based on the guarantee by U.S. government agencies.


- 84 -


A summary of impaired loans at June 30, 2015 follows (in thousands): 
 
 
 
For the
 
For the
 
As of June 30, 2015
 
Three Months Ended
 
Six Months Ended
 
 
 
Recorded Investment
 
 
 
June 30, 2015
 
June 30, 2015
 
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
$
7,476

 
$
6,841

 
$
6,324

 
$
517

 
$
151

 
$
4,358

 
$
—

 
$
4,129

 
$
—

Services
13,815

 
10,944

 
10,270

 
674

 
152

 
7,844

 
—

 
8,072

 
—

Wholesale/retail
9,781

 
4,166

 
4,134

 
32

 
9

 
4,283

 
—

 
4,157

 
—

Manufacturing
690

 
379

 
379

 
—

 
—

 
398

 
—

 
414

 
—

Healthcare
1,646

 
1,278

 
1,088

 
190

 
35

 
1,418

 
—

 
1,329

 
—

Other commercial and industrial
8,302

 
625

 
625

 
—

 
—

 
755

 
—

 
778

 
—

Total commercial
41,710

 
24,233

 
22,820

 
1,413

 
347

 
19,056

 
—

 
18,879

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Residential construction and land development
14,143

 
9,367

 
9,367

 
—

 
—

 
9,483

 
—

 
7,333

 
—

Retail
5,369

 
3,826

 
3,826

 
—

 
—

 
3,842

 
—

 
3,876

 
—

Office
4,439

 
2,360

 
2,360

 
—

 
—

 
2,385

 
—

 
2,890

 
—

Multifamily
195

 
195

 
195

 
—

 
—

 
98

 
—

 
98

 
—

Industrial
76

 
76

 
76

 
—

 
—

 
76

 
—

 
38

 
—

Other real estate loans
10,411

 
4,315

 
4,149

 
166

 
18

 
4,138

 
—

 
5,113

 
—

Total commercial real estate
34,633

 
20,139

 
19,973

 
166

 
18

 
20,022

 
—

 
19,348

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Permanent mortgage
41,092

 
32,187

 
32,029

 
158

 
100

 
32,776

 
330

 
33,516

 
645

Permanent mortgage guaranteed by U.S. government agencies1
197,090

 
190,839

 
190,839

 
—

 
—

 
194,138

 
2,047

 
200,929

 
4,303

Home equity
10,510

 
10,065

 
10,065

 
—

 
—

 
9,966

 
—

 
9,815

 
—

Total residential mortgage
248,692

 
233,091

 
232,933

 
158

 
100

 
236,880

 
2,377

 
244,260

 
4,948

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
570

 
550

 
550

 
—

 
—

 
506

 
—

 
558

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
325,605

 
$
278,013

 
$
276,276

 
$
1,737

 
$
465

 
$
276,464

 
$
2,377

 
$
283,045

 
$
4,948

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, 2015, $3.7 million of these loans were nonaccruing and $187 million were accruing based on the guarantee by U.S. government agencies.


- 85 -


Troubled Debt Restructurings

A summary of troubled debt restructurings ("TDRs") 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 real estate loans
 
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


- 86 -


A summary of troubled debt restructurings by accruing status as of December 31, 2015 is as follows (in thousands):
 
 
As of
 
 
December 31, 2015
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
Energy
 
$
2,304

 
$
2,304

 
$
—

 
$
—

Services
 
9,027

 
8,210

 
817

 
148

Wholesale/retail
 
2,758

 
2,706

 
52

 
9

Manufacturing
 
282

 
282

 
—

 
—

Healthcare
 
673

 
673

 
—

 
—

Other commercial and industrial
 
621

 
89

 
532

 
—

Total commercial
 
15,665

 
14,264

 
1,401

 
157

 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

Residential construction and land development
 
2,328

 
1,556

 
772

 
—

Retail
 
1,319

 
942

 
377

 
—

Office
 
165

 
165

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

Other real estate loans
 
920

 
478

 
442

 
—

Total commercial real estate
 
4,732

 
3,141

 
1,591

 
—

 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

Permanent mortgage
 
16,618

 
9,043

 
7,575

 
68

Permanent mortgage guaranteed by U.S. government agencies
 
11,136

 
139

 
10,997

 
—

Home equity
 
5,159

 
4,218

 
941

 
—

Total residential mortgage
 
32,913

 
13,400

 
19,513

 
68

 
 
 
 
 
 
 
 
 
Personal
 
324

 
297

 
27

 
—

 
 
 
 
 
 
 
 
 
Total nonaccuring TDRs
 
$
53,634

 
$
31,102

 
$
22,532

 
$
225

 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
Permanent mortgages guaranteed by U.S. government agencies
 
74,050

 
23,029

 
51,021

 
—

 
 
 
 
 
 
 
 
 
Total TDRs
 
$
127,684

 
$
54,131

 
$
73,553

 
$
225



- 87 -


A summary of troubled debt restructurings by accruing status as of June 30, 2015 is as follows (in thousands):
 
 
As of June 30, 2015
 
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, 2015
 
Six Months Ended
June 30, 2015
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
1,176

 
$
1,176

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
9,541

 
8,641

 
900

 
148

 
—

 
—

Wholesale/retail
 
3,064

 
2,984

 
80

 
9

 
—

 
—

Manufacturing
 
311

 
311

 
—

 
—

 
—

 
—

Healthcare
 
706

 
706

 
—

 
—

 
—

 
—

Other commercial and industrial
 
613

 
81

 
532

 
—

 
—

 
—

Total commercial
 
15,411

 
13,899

 
1,512

 
157

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
7,027

 
4,790

 
2,237

 
—

 
—

 
—

Retail
 
3,524

 
977

 
2,547

 
—

 
—

 
—

Office
 
1,360

 
—

 
1,360

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
1,376

 
1,376

 
—

 
—

 
—

 
—

Total commercial real estate
 
13,287

 
7,143

 
6,144

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
15,671

 
10,326

 
5,345

 
100

 
2

 
3

Permanent mortgage guaranteed by U.S. government agencies
 
2,058

 
141

 
1,917

 
—

 
—

 
—

Home equity
 
5,318

 
4,549

 
769

 
—

 
48

 
58

Total residential mortgage
 
23,047

 
15,016

 
8,031

 
100

 
50

 
61

 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
420

 
266

 
154

 
—

 
2

 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
52,165

 
$
36,324

 
$
15,841

 
$
257

 
$
52

 
$
63

 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgages guaranteed by U.S. government agencies
 
82,368

 
27,032

 
55,336

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
134,533

 
$
63,356

 
$
71,177

 
$
257

 
$
52

 
$
63


- 88 -


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, 2016 by class that were restructured during the 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 real estate loans
 
—

 
—

 
—

 
—

 
—

 
—

 
—

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




- 89 -


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, 2016 by class that were restructured during the six months ended June 30, 2016 by primary type of concession (in thousands):

 
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 real estate loans
 
—

 
—

 
—

 
—

 
—

 
—

 
—

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



- 90 -


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, 2015 by primary type of concession (in thousands):

 
Three Months Ended
June 30, 2015
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
1,176

 
$
—

 
$
1,176

 
$
1,176

Services
—

 
—

 
—

 
—

 
—

 
7,972

 
7,972

 
7,972

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
706

 
—

 
—

 
706

 
706

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
706

 
1,176

 
7,972

 
9,854

 
9,854

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
57

 
475

 
532

 
532

Permanent mortgage guaranteed by U.S. government agencies
5,532

 
7,404

 
12,936

 
—

 
—

 
—

 
—

 
12,936

Home equity
—

 
—

 
—

 
—

 
—

 
578

 
578

 
578

Total residential mortgage
5,532

 
7,404

 
12,936

 
—

 
57

 
1,053

 
1,110

 
14,046

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
—

 
—

 
—

 
—

 
89

 
89

 
89

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
5,532

 
$
7,404

 
$
12,936

 
$
706

 
$
1,233

 
$
9,114

 
$
11,053

 
$
23,989




- 91 -


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 six months ended June 30, 2015 by primary type of concession (in thousands):
 
Six Months Ended
June 30, 2015
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
1,176

 
$
—

 
$
1,176

 
$
1,176

Services
—

 
—

 
—

 
—

 
—

 
7,972

 
7,972

 
7,972

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
706

 
—

 
—

 
706

 
706

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
706

 
1,176

 
7,972

 
9,854

 
9,854

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
4,581

 
—

 
4,581

 
4,581

Retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
4,581

 
—

 
4,581

 
4,581

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
707

 
1,091

 
1,798

 
1,798

Permanent mortgage guaranteed by U.S. government agencies
11,904

 
11,215

 
23,119

 
—

 
—

 
843

 
843

 
23,962

Home equity
—

 
—

 
—

 
61

 
149

 
1,182

 
1,392

 
1,392

Total residential mortgage
11,904

 
11,215

 
23,119

 
61

 
856

 
3,116

 
4,033

 
27,152

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
—

 
—

 
—

 
—

 
121

 
121

 
121

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
11,904

 
$
11,215

 
$
23,119

 
$
767

 
$
6,613

 
$
11,209

 
$
18,589

 
$
41,708



- 92 -


The following table summarizes, by loan class, the recorded investment at June 30, 2016 and 2015, 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, 2016 and 2015, respectively (in thousands):

 
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 real estate loans
—

 
—

 
—

 
—

 
—

 
—

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


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.

- 93 -


 
Three Months Ended
June 30, 2015
 
Six Months Ended
June 30, 2015
 
Accruing
 
Nonaccrual
 
Total
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
337

 
337

Retail
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
337

 
337

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
1,341

 
1,341

 
—

 
1,796

 
1,796

Permanent mortgage guaranteed by U.S. government agencies
29,741

 
1,112

 
30,853

 
31,715

 
1,252

 
32,967

Home equity
—

 
479

 
479

 
—

 
503

 
503

Total residential mortgage
29,741

 
2,932

 
32,673

 
31,715

 
3,551

 
35,266

 
 
 
 
 
 
 
 
 
 
 
 
Personal
—

 
30

 
30

 
—

 
30

 
30

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
29,741

 
$
2,962

 
$
32,703

 
$
31,715

 
$
3,918

 
$
35,633


- 94 -


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, 2016 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 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

 
4,259

 
—

 
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

 
158

 
46

 
516

 
527,411

Total commercial
 
10,167,077

 
4,492

 
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 real estate loans
 
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

 
5,922

 
—

 
27,228

 
969,007

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

 
27,218

 
103,754

 
19,741

 
192,732

Home equity
 
707,024

 
2,048

 
20

 
10,092

 
719,184

Total residential mortgage
 
1,684,900

 
35,188

 
103,774

 
57,061

 
1,880,923

 
 
 
 
 
 
 
 
 
 
 
Personal
 
586,611

 
458

 
—

 
354

 
587,423

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,010,465

 
$
42,447

 
$
106,653

 
$
247,184

 
$
16,406,749



- 95 -


A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of December 31, 2015 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
3,033,504

 
$
2,635

 
$
—

 
$
61,189

 
$
3,097,328

Services
 
2,769,895

 
4,091

 
—

 
10,290

 
2,784,276

Wholesale/retail
 
1,418,396

 
49

 
700

 
2,919

 
1,422,064

Manufacturing
 
556,398

 
—

 
—

 
331

 
556,729

Healthcare
 
1,879,873

 
2,435

 
—

 
1,072

 
1,883,380

Other commercial and industrial
 
507,929

 
100

 
102

 
623

 
508,754

Total commercial
 
10,165,995

 
9,310

 
802

 
76,424

 
10,252,531

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
156,017

 
—

 
—

 
4,409

 
160,426

Retail
 
795,180

 
—

 
—

 
1,319

 
796,499

Office
 
637,056

 
—

 
—

 
651

 
637,707

Multifamily
 
742,697

 
8,114

 
—

 
274

 
751,085

Industrial
 
563,093

 
—

 
—

 
76

 
563,169

Other real estate loans
 
347,498

 
—

 
377

 
2,272

 
350,147

Total commercial real estate
 
3,241,541

 
8,114

 
377

 
9,001

 
3,259,033

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
913,062

 
3,290

 
—

 
28,984

 
945,336

Permanent mortgages guaranteed by U.S. government agencies
 
33,653

 
30,383

 
111,001

 
21,900

 
196,937

Home equity
 
721,149

 
3,095

 
20

 
10,356

 
734,620

Total residential mortgage
 
1,667,864

 
36,768

 
111,021

 
61,240

 
1,876,893

 
 
 
 
 
 
 
 
 
 
 
Personal
 
551,533

 
693

 
8

 
463

 
552,697

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
15,626,933

 
$
54,885

 
$
112,208

 
$
147,128

 
$
15,941,154



- 96 -


A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of June 30, 2015 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,895,302

 
$
—

 
$
—

 
$
6,841

 
$
2,902,143

Services
 
2,665,133

 
5,049

 
—

 
10,944

 
2,681,126

Wholesale/retail
 
1,529,477

 
87

 
—

 
4,166

 
1,533,730

Manufacturing
 
579,170

 
—

 
—

 
379

 
579,549

Healthcare
 
1,644,747

 
—

 
—

 
1,278

 
1,646,025

Other commercial and industrial
 
432,159

 
364

 
—

 
625

 
433,148

Total commercial
 
9,745,988

 
5,500

 
—

 
24,233

 
9,775,721

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
139,207

 
—

 
—

 
9,367

 
148,574

Retail
 
684,621

 
—

 
—

 
3,826

 
688,447

Office
 
560,725

 
—

 
—

 
2,360

 
563,085

Multifamily
 
710,486

 
652

 
—

 
195

 
711,333

Industrial
 
487,978

 
—

 
—

 
76

 
488,054

Other real estate loans
 
429,689

 
—

 
—

 
4,315

 
434,004

Total commercial real estate
 
3,012,706

 
652

 
—

 
20,139

 
3,033,497

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
907,860

 
6,277

 
—

 
32,187

 
946,324

Permanent mortgages guaranteed by U.S. government agencies
 
38,524

 
24,660

 
123,938

 
3,717

 
190,839

Home equity
 
734,837

 
2,564

 
99

 
10,065

 
747,565

Total residential mortgage
 
1,681,221

 
33,501

 
124,037

 
45,969

 
1,884,728

 
 
 
 
 
 
 
 
 
 
 
Personal
 
429,214

 
426

 
—

 
550

 
430,190

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,869,129

 
$
40,079

 
$
124,037

 
$
90,891

 
$
15,124,136


- 97 -


(5) Acquisitions

On December 8, 2015, the Company announced the signing of a definitive purchase agreement with MBT Bancshares (“MBT”). MBT is headquartered in Kansas City, Mo. and is the parent company of Missouri Bank and Trust of Kansas City (“mobank”). mobank operates four banking branches in the Kansas City, Mo. area. Under terms of the definitive agreement, BOK Financial will pay $102.5 million in an all-cash deal for all outstanding shares of MBT stock, subject to certain conditions and potential adjustments. The transaction has been approved by the boards of directors of both companies and is expected to close by the end of 2016, subject to customary closing conditions, including regulatory approval.

In the first quarter of 2016, the Company acquired Weaver and Tidwell Financial Advisors LTD d/b/a Weaver Wealth Management, a registered investment advisor and E-Spectrum Advisors, an energy investment banking firm in Texas. The cash purchase price for these acquisitions was $7.7 million. The purchase price allocation included $5.3 million of identifiable intangible assets and $3.3 million of goodwill.

On May 4, 2015, the Company acquired a majority voting interest in Heartland Food Products, LLC, a Kansas-based food product and restaurant equipment company. The cash purchase price for this acquisition was $18 million. The final purchase price allocation included $11 million of identifiable intangible assets and $2.7 million of goodwill.

The pro-forma impact of these transactions was not material to the Company's consolidated financial statements.
(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. 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, 2016
 
Dec. 31, 2015
 
June 30, 2015
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid
Principal
 Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
404,507

 
$
417,542

 
$
293,637

 
$
299,505

 
$
481,880

 
$
486,640

Residential mortgage loan commitments
 
965,631

 
25,499

 
601,147

 
8,134

 
849,619

 
8,323

Forward sales contracts
 
1,216,966

 
(12,313
)
 
884,710

 
800

 
1,201,018

 
7,608

 
 
 

 
$
430,728

 
 

 
$
308,439

 
 

 
$
502,571


No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of June 30, 2016, December 31, 2015 or June 30, 2015. No credit losses were recognized on residential mortgage loans held for sale for the six month periods ended June 30, 2016 and 2015.

- 98 -


Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Production revenue:
 
 
 
 
 
 
 
 
Net realized gains on sale of mortgage loans
 
$
19,205

 
$
23,856

 
$
29,984

 
$
41,107

Net change in unrealized gain on mortgage loans held for sale
 
3,884

 
(5,366
)
 
7,167

 
(1,915
)
Net change in the fair value of mortgage loan commitments
 
5,329

 
(9,177
)
 
17,365

 
(1,648
)
Net change in the fair value of forward sales contracts
 
(5,992
)
 
13,800

 
(13,113
)
 
11,609

Total production revenue
 
22,426

 
23,113

 
41,403

 
49,153

Servicing revenue
 
15,798

 
13,733

 
31,251

 
27,013

Total mortgage banking revenue
 
$
38,224

 
$
36,846

 
$
72,654

 
$
76,166


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 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,
2016
 
Dec. 31,
2015
 
June 30,
2015
Number of residential mortgage loans serviced for others
 
137,210

 
131,859

 
124,825

Outstanding principal balance of residential mortgage loans serviced for others
 
$
21,178,387

 
$
19,678,226

 
$
17,979,623

Weighted average interest rate
 
4.06
%
 
4.12
%
 
4.18
%
Remaining term (in months)
 
301

 
300

 
298


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 loan runoff
 
(730
)
 
(9,068
)
 
(9,798
)
Change in fair value due to market changes
 
(1,152
)
 
(15,131
)
 
(16,283
)
Balance, June 30, 2016
 
$
4,067

 
$
186,680

 
$
190,747


Activity in capitalized mortgage servicing rights during the six months ended June 30, 2016 was as follows (in thousands):
 
 
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 loan runoff
 
(1,356
)
 
(16,586
)
 
(17,942
)
Change in fair value due to market changes
 
(4,488
)
 
(39,783
)
 
(44,271
)
Balance, June 30, 2016
 
$
4,067

 
$
186,680

 
$
190,747


- 99 -


Activity in capitalized mortgage servicing rights during the three months ended June 30, 2015 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, March 31, 2015
 
$
9,593

 
$
165,458

 
$
175,051

Additions, net
 
—

 
23,232

 
23,232

Change in fair value due to loan runoff
 
(729
)
 
(6,870
)
 
(7,599
)
Change in fair value due to market changes
 
1,866

 
6,144

 
8,010

Balance, June 30, 2015
 
$
10,730

 
$
187,964

 
$
198,694


Activity in capitalized mortgage servicing rights during the six months ended June 30, 2015 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, Dec. 31, 2014
 
$
11,114

 
$
160,862

 
$
171,976

Additions, net
 
—

 
42,382

 
42,382

Change in fair value due to loan runoff
 
(1,510
)
 
(13,642
)
 
(15,152
)
Change in fair value due to market changes
 
1,126

 
(1,638
)
 
(512
)
Balance, June 30, 2015
 
$
10,730

 
$
187,964

 
$
198,694


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 loan runoff are included in Mortgage banking costs. Changes in fair value due to market changes are reported separately. Changes in fair value due to market 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,
2016
 
Dec. 31,
2015
 
June 30,
2015
Discount rate – risk-free rate plus a market premium
 
10.09%
 
10.11%
 
10.13%
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
 
 
Performing loans
 
$63-$120
 
$63 - $105
 
$63 - $105
Delinquent loans
 
$150 - $500
 
$150 - $500
 
$175 - $550
Loans in foreclosure
 
$650 - $4,250
 
$650 - $4,250
 
$1000 - $4,000
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
0.99%
 
1.73%
 
1.77%
Primary/secondary mortgage rate spread
 
115 bps
 
130 bps
 
129 bps

The Company is exposed to interest rate risk as benchmark residential mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights, which is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. 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 daily for changes in market conditions and adjusted to better correlate with actual performance of BOK Financial’s servicing portfolio.

Stratification of the residential mortgage loan servicing portfolio and outstanding principal of loans serviced for others by interest rate at June 30, 2016 follows (in thousands):
 
 
< 4.00%
 
4.00% - 4.99%

 
5.00% - 5.99%

 
> 5.99%
 
Total
Fair value
 
$
106,779

 
$
75,899

 
$
5,632

 
$
2,437

 
$
190,747

Outstanding principal of loans serviced for others
 
$
11,038,292

 
$
8,016,480

 
$
1,306,095

 
$
817,520

 
$
21,178,387

Weighted average prepayment rate1
 
9.26
%
 
12.70
%
 
35.21
%
 
42.77
%
 
13.46
%
1 
Annual prepayment estimates based upon loan interest rate, original term and loan type. Weighted average prepayment rate is determined by weighting the prepayment speed for each loan by its unpaid principal balance.


- 100 -


The interest rate sensitivity of our mortgage servicing rights is modeled over a range of +/- 50 basis points. At June 30, 2016, a 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights by $53.6 million. A 50 basis point increase in mortgage interest rates is expected to increase the fair value of our mortgage servicing rights by $31.0 million. In the model, changes in the value of servicing rights due to changes in interest rates assume stable relationships between residential mortgage rates and prepayment speeds. Changes in market conditions can cause variations from these assumptions. These factors and others may cause changes in the value of our mortgage servicing rights to differ from our expectations.

The aging status of our mortgage loans serviced for others by investor at June 30, 2016 follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89
Days
 
90 Days or More
 
Total
FHLMC
 
$
7,327,905

 
$
38,148

 
$
10,178

 
$
22,948

 
$
7,399,179

FNMA
 
6,887,666

 
36,463

 
6,734

 
17,517

 
6,948,380

GNMA
 
5,982,805

 
136,885

 
38,413

 
12,681

 
6,170,784

Other
 
652,700

 
4,247

 
919

 
2,178

 
660,044

Total
 
$
20,851,076

 
$
215,743

 
$
56,244

 
$
55,324

 
$
21,178,387


The Company has off-balance sheet credit risk related to residential mortgage loans sold to U.S. government agencies with recourse prior to 2008 under various community development programs. These loans consist of first lien, fixed-rate residential mortgage loans underwritten to standards approved by the agencies including full documentation and originated under programs available only for owner-occupied properties. However, these loans have a higher risk of delinquency and loss given default than traditional residential mortgage loans. The Company no longer sells residential mortgage loans with recourse other than obligations under standard representations and warranties. The recourse obligation relates to loan performance for the life of the loan and the Company is obligated to repurchase the loan at the time of foreclosure for the unpaid principal balance plus unpaid interest. The principal balance of residential mortgage loans sold subject to recourse obligations totaled $145 million at June 30, 2016, $155 million at December 31, 2015 and $169 million at June 30, 2015. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets. At June 30, 2016, approximately 2 percent of the loans sold with recourse with an outstanding principal balance of $3.5 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 5 percent with an outstanding balance of $7.2 million were past due 30 to 89 days. The provision for credit losses on loans sold with recourse is included in Mortgage banking costs in the Consolidated Statements of Earnings.

The activity in the accrual for losses on loans sold with recourse included in Other liabilities in the Consolidated Balance Sheets is summarized as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
4,443

 
$
7,020

 
$
4,649

 
$
7,299

Provision for recourse losses
245

 
(40
)
 
391

 
130

Loans charged off, net
(349
)
 
(289
)
 
(701
)
 
(738
)
Ending balance
$
4,339

 
$
6,691

 
$
4,339

 
$
6,691


The Company also 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 9 loans from the agencies for $2.6 million during the second quarter of 2016. There were three indemnifications on loans paid during the second quarter of 2016. Losses recognized on indemnifications and repurchases were insignificant.


- 101 -


A summary of unresolved deficiency requests from the agencies follows (in thousands, except for number of unresolved deficiency requests):
 
June 30,
2016
 
June 30,
2015
Number of unresolved deficiency requests
211

 
214

Aggregate outstanding principal balance subject to unresolved deficiency requests
$
15,920

 
$
17,446

Unpaid principal balance subject to indemnification by the Company
5,519

 
4,269


The activity in the accruals for mortgage losses is summarized as follows (in thousands).
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
8,129

 
$
11,140

 
$
7,732

 
$
11,868

Provision for losses
2,553

 
(2,216
)
 
3,903

 
(3,004
)
Charge-offs, net
(2,639
)
 
(16
)
 
(3,592
)
 
44

Ending balance
$
8,043


$
8,908


$
8,043


$
8,908

(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 251,837 Visa Class B shares which are convertible into 415,103 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, the Bank and the Company were named as defendants in a putative 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. The Court has denied the Bank’s motion to dismiss the claims as pre-empted by federal law, but limited the plaintiffs’ claim to a only breach of contract action involving Oklahoma customers.  Discovery is on-going. Based on currently available information, management has established an accrual within a reasonable range of probable losses and anticipates the claims will be resolved without material loss to the Company. 
 
On June 24, 2015, the Bank received a complaint alleging that an employee had colluded with a borrower 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 is cooperating with an investigation by, the Securities and Exchange Commission. 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 the 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, subject to oversight by a court appointed monitor.  The terminated employee has filed an action against the Bank alleging the Bank defamed the employee and made a demand for indemnification respecting the SEC investigation which demand the respective boards of directors of the Company and the Bank have denied. The Bank has been advised by its counsel that there is no basis for the employee’s action and that any recovery by the employee is remote.    

- 102 -


 
The Director of the New Mexico Securities Division of the State of New Mexico Regulation and Licensing Department ("the Director") has issued a Notice of Contemplated Action in connection with the purchase of various municipal bonds by the elected County Treasurer of Bernalillo County, New Mexico, from BOK Financial Securities, Inc., the Company’s broker-dealer affiliate. The Director seeks to determine whether to seek sanctions, which could include a fine and/or the suspension or revocation of registration, on the grounds that the Company’s broker-dealer affiliate violated the suitability rule. The County of Bernalillo, New Mexico, has commenced arbitration pursuant to the Arbitration Rules of FINRA seeking recovery of $5.6 million dollars arising out of the purchase. The Company has been advised by its counsel that there is no basis to suggest the Director should make such a determination and that any recovery by the County is remote.
 
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 $4.5 million at June 30, 2016. 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.


- 103 -


A summary of consolidated and unconsolidated alternative investments as of June 30, 2016, December 31, 2015 and June 30, 2015 is as follows (in thousands):

 
 
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

 
$
—

 
$
—


 
 
Dec. 31, 2015
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
22,472

 
$
—

 
$
—

 
$
17,823

Tax credit entities
 
10,000

 
12,206

 
—

 
10,964

 
10,000

Other
 
—

 
40,453

 
2,198

 
2,831

 
9,260

Total consolidated
 
$
10,000

 
$
75,131

 
$
2,198

 
$
13,795

 
$
37,083

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
16,916

 
$
85,274

 
$
14,572

 
$
—

 
$
—

Other
 
—

 
15,506

 
6,319

 
—

 
—

Total unconsolidated
 
$
16,916

 
$
100,780

 
$
20,891

 
$
—

 
$
—


 
 
June 30, 2015
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
24,399

 
$
—

 
$
—

 
$
19,278

Tax credit entities
 
10,000

 
12,516

 
—

 
10,964

 
10,000

Other
 
—

 
41,221

 
2,738

 
2,784

 
7,923

Total consolidated
 
$
10,000

 
$
78,136

 
$
2,738

 
$
13,748

 
$
37,201

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
18,147

 
$
91,949

 
$
22,585

 
$
—

 
$
—

Other
 
—

 
12,184

 
3,918

 
—

 
—

Total unconsolidated
 
$
18,147

 
$
104,133

 
$
26,503

 
$
—

 
$
—



- 104 -


Other Commitments and Contingencies

At June 30, 2016, 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, 2016. 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 2016 or 2015.
(8) Shareholders' Equity

On July 26, 2016, the Company declared a quarterly cash dividend of $0.43 per common share on or about August 26, 2016 to shareholders of record as of August 12, 2016.

Dividends declared were $0.43 per share and $0.86 per share during the three and six months ended June 30, 2016 and $0.42 per share and $0.84 during the three and six months ended June 30, 2015.

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. Accumulated losses on the interest rate lock hedge of the 2005 subordinated debt issuance were reclassified into income over the ten-year life of the debt. Gains and losses in AOCI are net of deferred income taxes.


- 105 -


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
 
Loss on Effective Cash Flow Hedges
 
Total
Balance, Dec. 31, 2014
 
$
59,239

 
$
376

 
$
(2,868
)
 
$
(74
)
 
$
56,673

Net change in unrealized gain (loss)
 
(129
)
 
—

 
—

 
—

 
(129
)
Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
 
 
Interest revenue, Investment securities, Taxable securities
 
—

 
(313
)
 
—

 
—

 
(313
)
Interest expense, Subordinated debentures
 
—

 
—

 
—

 
121

 
121

Net impairment losses recognized in earnings
 
92

 
—

 
—

 
—

 
92

Gain on available for sale securities, net
 
(7,760
)
 
—

 
—

 
—

 
(7,760
)
Other comprehensive income (loss), before income taxes
 
(7,797
)
 
(313
)
 
—

 
121

 
(7,989
)
Federal and state income taxes1
 
(3,033
)
 
(122
)
 
—

 
47

 
(3,108
)
Other comprehensive income (loss), net of income taxes
 
(4,764
)
 
(191
)
 
—

 
74

 
(4,881
)
Balance, June 30, 2015
 
$
54,475

 
$
185

 
$
(2,868
)
 
$
—

 
$
51,792

 
 
 
 
 
 
 
 
 
 
 
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
)
Interest expense, Subordinated debentures
 
—

 
—

 
—

 
—

 
—

Net impairment losses recognized in earnings
 
—

 
—

 
—

 
—

 
—

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

1 
Calculated using a 39 percent effective tax rate.

- 106 -


(9)  Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to BOK Financial Corp. shareholders
 
$
65,801

 
$
79,230

 
$
108,365

 
$
154,073

Less: Earnings allocated to participating securities
 
821

 
944

 
1,359

 
1,758

Numerator for basic earnings per share – income available to common shareholders
 
64,980

 
78,286

 
107,006

 
152,315

Effect of reallocating undistributed earnings of participating securities
 
—

 
1

 
—

 
2

Numerator for diluted earnings per share – income available to common shareholders
 
$
64,980

 
$
78,287

 
$
107,006

 
$
152,317

 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 

 
 

Weighted average shares outstanding
 
66,069,392

 
68,917,977

 
66,100,279

 
68,960,043

Less:  Participating securities included in weighted average shares outstanding
 
823,505

 
821,636

 
829,065

 
784,716

Denominator for basic earnings per common share
 
65,245,887

 
68,096,341

 
65,271,214

 
68,175,327

Dilutive effect of employee stock compensation plans1
 
57,039

 
114,012

 
45,963

 
102,059

Denominator for diluted earnings per common share
 
65,302,926

 
68,210,353

 
65,317,177

 
68,277,386

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.00

 
$
1.15

 
$
1.64

 
$
2.23

Diluted earnings per share
 
$
1.00

 
$
1.15

 
$
1.64

 
$
2.23

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

 
—

 
145,247

 
—


- 107 -


(10)  Reportable Segments

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

 
$
6,269

 
$
35,514

 
$
182,612

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

 
7,193

 
(1,494
)
 
—

Net interest revenue
 
103,905

 
31,225

 
13,462

 
34,020

 
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

 
13,701

 
21,951

 
162,612

Other operating revenue
 
51,497

 
60,780

 
75,772

 
833

 
188,882

Other operating expense
 
52,594

 
66,146

 
61,414

 
74,571

 
254,725

Net direct contribution
 
95,956

 
24,541

 
28,059

 
(51,787
)
 
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

 
17,642

 
(14,273
)
 
96,769

Federal and state income taxes
 
33,639

 
2,694

 
6,863

 
(12,699
)
 
30,497

Net income
 
52,836

 
4,231

 
10,779

 
(1,574
)
 
66,272

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
471

 
471

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

 
$
4,231

 
$
10,779

 
$
(2,045
)
 
$
65,801

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,973,663

 
$
8,774,881

 
$
5,765,390

 
$
472,108

 
$
31,986,042

Average invested capital
 
1,167,840

 
266,561

 
240,693

 
1,634,377

 
3,309,471



- 108 -


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

 
$
12,347

 
$
73,922

 
$
365,184

Net interest revenue (expense) from internal sources
 
(29,109
)
 
18,229

 
14,857

 
(3,977
)
 
—

Net interest revenue
 
206,007

 
62,028

 
27,204

 
69,945

 
365,184

Provision for credit losses
 
28,423

 
3,020

 
(390
)
 
23,947

 
55,000

Net interest revenue after provision for credit losses
 
177,584

 
59,008

 
27,594

 
45,998

 
310,184

Other operating revenue
 
96,605

 
117,139

 
144,518

 
(9,636
)
 
348,626

Other operating expense
 
108,663

 
124,194

 
122,098

 
144,670

 
499,625

Net direct contribution
 
165,526

 
51,953

 
50,014

 
(108,308
)
 
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
 
147,219

 
7,106

 
29,062

 
(24,202
)
 
159,185

Federal and state income taxes
 
57,268

 
2,764

 
11,305

 
(19,412
)
 
51,925

Net income
 
89,951

 
4,342

 
17,757

 
(4,790
)
 
107,260

Net loss attributable to non-controlling interests
 
—

 
—

 
—

 
(1,105
)
 
(1,105
)
Net income attributable to BOK Financial Corp. shareholders
 
$
89,951

 
$
4,342

 
$
17,757

 
$
(3,685
)
 
$
108,365

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,971,339

 
$
8,731,085

 
$
5,665,218

 
$
379,615

 
$
31,747,257

Average invested capital
 
1,160,485

 
262,762

 
236,798

 
1,638,864

 
3,298,909



- 109 -


Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2015 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
108,620

 
$
21,721

 
$
6,221

 
$
39,169

 
$
175,731

Net interest revenue (expense) from internal sources
 
(12,643
)
 
6,838

 
$
5,487

 
318

 
—

Net interest revenue
 
95,977

 
28,559

 
11,708

 
39,487

 
175,731

Provision for credit losses
 
(47
)
 
1,614

 
(399
)
 
2,832

 
4,000

Net interest revenue after provision for credit losses
 
96,024

 
26,945

 
12,107

 
36,655

 
171,731

Other operating revenue
 
45,273

 
59,688

 
70,599

 
725

 
176,285

Other operating expense
 
50,801

 
52,511

 
58,277

 
65,524

 
227,113

Net direct contribution
 
90,496

 
34,122

 
24,429

 
(28,144
)
 
120,903

Gain (loss) on financial instruments, net
 
—

 
(9,135
)
 
(28
)
 
9,163

 
—

Change in fair value of mortgage servicing rights
 
—

 
8,010

 
—

 
(8,010
)
 
—

Gain (loss) on repossessed assets, net
 
(58
)
 
479

 
—

 
(421
)
 
—

Corporate expense allocations
 
10,782

 
18,953

 
10,187

 
(39,922
)
 
—

Net income before taxes
 
79,656

 
14,523

 
14,214

 
12,510

 
120,903

Federal and state income taxes
 
30,986

 
5,649

 
5,529

 
(1,534
)
 
40,630

Net income
 
48,670

 
8,874

 
8,685

 
14,044

 
80,273

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
1,043

 
1,043

Net income attributable to BOK Financial Corp. shareholders
 
$
48,670

 
$
8,874

 
$
8,685

 
$
13,001

 
$
79,230

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,262,457

 
$
8,970,936

 
$
5,319,568

 
$
(88,889
)
 
$
30,464,072

Average invested capital
 
1,028,989

 
269,388

 
224,971

 
1,821,262

 
3,344,610



- 110 -


Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2015 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
209,795

 
$
42,440

 
$
11,597

 
$
79,625

 
$
343,457

Net interest revenue (expense) from internal sources
 
(25,278
)
 
13,658

 
$
11,566

 
54

 
—

Net interest revenue
 
184,517

 
56,098

 
23,163

 
79,679

 
343,457

Provision for credit losses
 
(8,949
)
 
3,036

 
(747
)
 
10,660

 
4,000

Net interest revenue after provision for credit losses
 
193,466

 
53,062

 
23,910

 
69,019

 
339,457

Other operating revenue
 
87,720

 
120,883

 
137,559

 
(3,860
)
 
342,302

Other operating expense
 
99,947

 
104,817

 
112,757

 
129,857

 
447,378

Net direct contribution
 
181,239

 
69,128

 
48,712

 
(64,698
)
 
234,381

Gain (loss) on financial instruments, net
 
—

 
(5,577
)
 
(28
)
 
5,605

 
—

Change in fair value of mortgage servicing rights
 
—

 
(512
)
 
—

 
512

 
—

Gain (loss) on repossessed assets, net
 
(14
)
 
557

 
—

 
(543
)
 
—

Corporate expense allocations
 
22,023

 
37,155

 
20,170

 
(79,348
)
 
—

Net income before taxes
 
159,202

 
26,441

 
28,514

 
20,224

 
234,381

Federal and state income taxes
 
61,930

 
10,286

 
11,092

 
(4,294
)
 
79,014

Net income
 
97,272

 
16,155

 
17,422

 
24,518

 
155,367

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
1,294

 
1,294

Net income attributable to BOK Financial Corp. shareholders
 
$
97,272

 
$
16,155

 
$
17,422

 
$
23,224

 
$
154,073

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,266,341

 
$
8,885,400

 
$
5,385,266

 
$
(318,256
)
 
$
30,218,751

Average invested capital
 
1,013,117

 
270,738

 
224,247

 
1,823,406

 
3,331,508



- 111 -


(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, 2016 and 2015, respectively. Transfers between significant other observable inputs and significant unobservable inputs during the three and six months ended June 30, 2016 and 2015 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, 2016, December 31, 2015 or June 30, 2015.


- 112 -


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

 
—

 
237,959

 
—

U.S. Treasury
 
25,306

 
25,306

 
—

 
—

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 in asset positions that were valued based on quoted prices in active markets for identical instruments (Level 1) are primarily exchange-traded energy and agricultural derivative contacts, net of cash margin. Derivative contacts in liability positions that were valued using quoted prices in active markets for identical instruments are exchange-traded interest rate and energy derivative contracts, net of cash margin.


- 113 -


The fair value of financial assets and liabilities measured on a recurring basis was as follows as of December 31, 2015 (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
 
$
61,295

 
$
—

 
$
61,295

 
$
—

U.S. government agency residential mortgage-backed securities
 
10,989

 
—

 
10,989

 
—

Municipal and other tax-exempt securities
 
31,901

 
—

 
31,901

 
—

Other trading securities
 
18,219

 
—

 
18,219

 
—

Total trading securities
 
122,404

 
—

 
122,404

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
995

 
995

 
—

 
—

Municipal and other tax-exempt
 
56,817

 
—

 
47,207

 
9,610

U.S. government agency residential mortgage-backed securities
 
5,898,351

 
—

 
5,898,351

 
—

Privately issued residential mortgage-backed securities
 
139,118

 
—

 
139,118

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,905,796

 
—

 
2,905,796

 
—

Other debt securities
 
4,151

 
—

 
—

 
4,151

Perpetual preferred stock
 
19,672

 
—

 
19,672

 
—

Equity securities and mutual funds
 
17,833

 
3,265

 
14,568

 
—

Total available for sale securities
 
9,042,733

 
4,260

 
9,024,712

 
13,761

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. government agency residential mortgage-backed securities
 
444,217

 
—

 
444,217

 
—

U.S. Treasury
 
—

 
—

 
—

 
—

Total fair value option securities
 
444,217

 
—

 
444,217

 
—

Residential mortgage loans held for sale
 
308,439

 
—

 
300,565

 
7,874

Mortgage servicing rights1
 
218,605

 
—

 
—

 
218,605

Derivative contracts, net of cash collateral2
 
586,270

 
38,530

 
547,740

 
—

Liabilities:
 


 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
581,701

 
—

 
581,701

 
—

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 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 agricultural derivative contracts, net of cash margin.



- 114 -


The fair value of financial assets and liabilities measured on a recurring basis was as follows as of June 30, 2015 (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
 
$
40,212

 
$
—

 
$
40,212

 
$
—

U.S. government agency residential mortgage-backed securities
 
23,090

 
—

 
23,090

 
—

Municipal and other tax-exempt securities
 
62,801

 
—

 
62,801

 
—

Other trading securities
 
32,106

 
—

 
32,106

 
—

Total trading securities
 
158,209

 
—

 
158,209

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,000

 
1,000

 
—

 
—

Municipal and other tax-exempt
 
61,624

 
—

 
52,007

 
9,617

U.S. government agency residential mortgage-backed securities
 
6,339,449

 
—

 
6,339,449

 
—

Privately issued residential mortgage-backed securities
 
154,150

 
—

 
154,150

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,401,364

 
—

 
2,401,364

 
—

Other debt securities
 
4,150

 
—

 
—

 
4,150

Perpetual preferred stock
 
19,648

 
—

 
19,648

 
—

Equity securities and mutual funds
 
18,732

 
4,216

 
14,516

 
—

Total available for sale securities
 
9,000,117

 
5,216

 
8,981,134

 
13,767

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. government agency residential mortgage-backed securities
 
436,324

 
—

 
436,324

 
—

U.S. Treasury
 
—

 
—

 
—

 
—

Total fair value option securities
 
436,324

 
—

 
436,324

 
—

Residential mortgage loans held for sale
 
502,571

 
—

 
494,598

 
7,973

Mortgage servicing rights1
 
198,694

 
—

 
—

 
198,694

Derivative contracts, net of cash collateral2
 
630,435

 
11,484

 
618,951

 
—

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
620,277

 
1,080

 
619,197

 
—

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 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) were exchange-traded agricultural derivative contracts.



- 115 -


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 monthly.

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.

- 116 -


The following represents the changes for the three 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
 
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 2
 
—

 
—

 
3,080

Purchases and capital calls
 
—

 
—

 
—

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


The following represents the changes for the 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
 
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 2
 
—

 
—

 
3,540

Purchases and capital calls
 
—

 
—

 
—

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


- 117 -


The following represents the changes for the three months ended June 30, 2015 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
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, March 31, 2015
 
$
9,623

 
$
4,150

 
$
6,870

Transfer to Level 3 from Level 2
 
—

 
—

 
944

Purchases and capital calls
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
—

Redemptions and distributions
 
—

 
—

 
—

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

 
—

 
159

Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(6
)
 
—

 
—

Balance, June 30, 2015
 
$
9,617

 
$
4,150

 
$
7,973


The following represents the changes for the six months ended June 30, 2015 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
 
Other debt securities
 
Residential mortgage loans held for sale
Balance, Dec. 31, 2014
 
$
10,093

 
$
4,150

 
$
11,856

Transfer to Level 3 from Level 2
 
—

 
—

 
1,187

Purchases, and capital calls
 
—

 
—

 
—

Proceeds from sales
 
—

 
—

 
(5,288
)
Redemptions and distributions
 
(500
)
 
—

 
—

Gain (loss) recognized in earnings
 
 
 
 
 
—

Mortgage banking revenue
 
—

 
—

 
218

Other comprehensive income (loss):
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
24

 
—

 
—

Balance, June 30, 2015
 
$
9,617

 
$
4,150

 
$
7,973




- 118 -


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, 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
 
$
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.



A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of December 31, 2015 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
 
$
10,370

 
$
10,311

 
$
9,610

 
Discounted cash flows
1 
Interest rate spread
 
5.47%-5.77% (5.73%)
2 
92.34%-92.93% (92.67%)
3 
Other debt securities
 
4,400

 
4,400

 
4,151

 
Discounted cash flows
1 
Interest rate spread
 
5.80%-5.92% (5.90%)
4 
94.33% - 94.34 (94.34%)
3 
Residential mortgage loans held for sale
 
N/A

 
8,395

 
7,874

 
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.
 
93.79%
 
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 499 to 541 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.


- 119 -


A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of June 30, 2015 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

 
$
10,310

 
$
9,617

 
Discounted cash flows
1 
Interest rate spread
 
5.11%-5.41% (5.37%)
2 
92.50%-92.85% (92.74%)
3 
Other debt securities
 
4,400

 
4,400

 
4,150

 
Discounted cash flows
1 
Interest rate spread
 
4.36%-5.69% (5.54%)
4 
94.25% - 94.33 (94.32%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
N/A

 
8,384

 
7,973

 
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.
 
95.09%
 
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 502 to 527 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, 2016 for which the fair value was adjusted during the three and six months ended June 30, 2016:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at June 30, 2016
 
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

 

- 120 -


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, 2015 for which the fair value was adjusted during the three and six months ended June 30, 2015:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at June 30, 2015
 
Three Months Ended
June 30, 2015
Recognized in:
 
Six Months Ended
June 30, 2015
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
$
—

 
$
5,041

 
$
17

 
$
574

 
$
—

 
$
1,117

 
$
—

Real estate and other repossessed assets
—

 
8,046

 
445

 
—

 
533

 
—

 
1,126


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, 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 adjustment 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.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of June 30, 2015 follows (in thousands):
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
17

 
Appraised value, as adjusted
 
Broker quotes and management's knowledge of industry and collateral
 
N/A
Real estate and other repossessed assets
 
445

 
Appraised value, as adjusted
 
Marketability adjustments off appraised value1
 
41% - 86% (72%)
1  
Marketability adjustments include consideration of estimated costs to sell which is approximately 10% of the fair value.


- 121 -


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

 
237,959

 
—

 
237,959

 
—

U.S. Treasury
 
25,306

 
25,306

 
25,306

 
—

 
—

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 margin
 
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 margin
 
719,159

 
719,159

 
4,808

 
714,351

 
—


- 122 -


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, 2015 (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
 
$
573,699

 
$
573,699

 
$
573,699

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
2,069,900

 
2,069,900

 
2,069,900

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
—

 
 
U.S. government agency debentures
 
61,295

 
61,295

 
—

 
61,295

 
—

U.S. government agency residential mortgage-backed securities
 
10,989

 
10,989

 
—

 
10,989

 
—

Municipal and other tax-exempt securities
 
31,901

 
31,901

 
—

 
31,901

 
—

Other trading securities
 
18,219

 
18,219

 
—

 
18,219

 
—

Total trading securities
 
122,404

 
122,404

 
—

 
122,404

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt
 
365,258

 
368,910

 
—

 
368,910

 
—

U.S. government agency residential mortgage-backed securities
 
26,833

 
27,874

 
—

 
27,874

 
—

Other debt securities
 
205,745

 
232,375

 
—

 
232,375

 
—

Total investment securities
 
597,836

 
629,159

 
—

 
629,159

 
—

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
995

 
995

 
995

 
—

 
—

Municipal and other tax-exempt
 
56,817

 
56,817

 
—

 
47,207

 
9,610

U.S. government agency residential mortgage-backed securities
 
5,898,351

 
5,898,351

 
—

 
5,898,351

 
—

Privately issued residential mortgage-backed securities
 
139,118

 
139,118

 
—

 
139,118

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,905,796

 
2,905,796

 
—

 
2,905,796

 
—

Other debt securities
 
4,151

 
4,151

 
—

 
—

 
4,151

Perpetual preferred stock
 
19,672

 
19,672

 
—

 
19,672

 
—

Equity securities and mutual funds
 
17,833

 
17,833

 
3,265

 
14,568

 
—

Total available for sale securities
 
9,042,733

 
9,042,733

 
4,260

 
9,024,712

 
13,761

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency residential mortgage-backed securities
 
444,217

 
444,217

 
—

 
444,217

 
—

U.S. Treasury
 
—

 
—

 
—

 
—

 
—

Total fair value option securities
 
444,217

 
444,217

 
—

 
444,217

 
—

Residential mortgage loans held for sale
 
308,439

 
308,439

 
—

 
300,565

 
7,874

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
10,252,531

 
10,053,952

 
—

 
—

 
10,053,952

Commercial real estate
 
3,259,033

 
3,233,476

 
—

 
—

 
3,233,476

Residential mortgage
 
1,876,893

 
1,902,976

 
—

 
—

 
1,902,976

Personal
 
552,697

 
549,068

 
—

 
—

 
549,068

Total loans
 
15,941,154

 
15,739,472

 
—

 
—

 
15,739,472

Allowance for loan losses
 
(225,524
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
15,715,630

 
15,739,472

 
—

 
—

 
15,739,472

Mortgage servicing rights
 
218,605

 
218,605

 
—

 
—

 
218,605

Derivative instruments with positive fair value, net of cash margin
 
586,270

 
586,270

 
38,530

 
547,740

 
—

Deposits with no stated maturity
 
18,682,094

 
18,682,094

 
—

 
—

 
18,682,094

Time deposits
 
2,406,064

 
2,394,562

 
—

 
—

 
2,394,562

Other borrowed funds
 
6,051,515

 
5,600,932

 
—

 
—

 
5,600,932

Subordinated debentures
 
226,350

 
223,758

 
—

 
—

 
223,758

Derivative instruments with negative fair value, net of cash margin
 
581,701

 
581,701

 
—

 
581,701

 
—



- 123 -


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, 2015 (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
 
$
443,577

 
$
443,577

 
$
443,577

 
$
—

 
$
—

Interest-bearing cash and cash equivalents
 
2,119,072

 
2,119,072

 
2,119,072

 
—

 
—

Trading securities:
 
 
 
 
 
 
 
—

 
 
U.S. government agency debentures
 
40,212

 
40,212

 
—

 
40,212

 
—

U.S. government agency residential mortgage-backed securities
 
23,090

 
23,090

 
—

 
23,090

 
—

Municipal and other tax-exempt securities
 
62,801

 
62,801

 
—

 
62,801

 
—

Other trading securities
 
32,106

 
32,106

 
—

 
32,106

 
—

Total trading securities
 
158,209

 
158,209

 
—

 
158,209

 
—

Investment securities:
 
 

 
 

 
 
 
 
 
 
Municipal and other tax-exempt
 
389,824

 
392,367

 
—

 
392,367

 
—

U.S. government agency residential mortgage-backed securities
 
30,867

 
32,133

 
—

 
32,133

 
—

Other debt securities
 
204,973

 
217,542

 
—

 
217,542

 
—

Total investment securities
 
625,664

 
642,042

 
—

 
642,042

 
—

Available for sale securities:
 
 

 
 

 
 
 
 
 
 
U.S. Treasury
 
1,000

 
1,000

 
1,000

 
—

 
—

Municipal and other tax-exempt
 
61,624

 
61,624

 
—

 
52,007

 
9,617

U.S. government agency residential mortgage-backed securities
 
6,339,449

 
6,339,449

 
—

 
6,339,449

 
—

Privately issued residential mortgage-backed securities
 
154,150

 
154,150

 
—

 
154,150

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,401,364

 
2,401,364

 
—

 
2,401,364

 
—

Other debt securities
 
4,150

 
4,150

 
—

 
—

 
4,150

Perpetual preferred stock
 
19,648

 
19,648

 
—

 
19,648

 
—

Equity securities and mutual funds
 
18,732

 
18,732

 
4,216

 
14,516

 
—

Total available for sale securities
 
9,000,117

 
9,000,117

 
5,216

 
8,981,134

 
13,767

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. government agency residential mortgage-backed securities
 
436,324

 
436,324

 
—

 
436,324

 
—

U.S. Treasury
 
—

 
—

 
—

 
—

 
—

Total fair value option securities
 
436,324

 
436,324

 
—

 
436,324

 
—

Residential mortgage loans held for sale
 
502,571

 
502,571

 
—

 
494,598

 
7,973

Loans:
 
 

 
 

 
 
 
 
 
 
Commercial
 
9,775,721

 
9,605,218

 
—

 
—

 
9,605,218

Commercial real estate
 
3,033,497

 
3,011,614

 
—

 
—

 
3,011,614

Residential mortgage
 
1,884,728

 
1,913,482

 
—

 
—

 
1,913,482

Personal
 
430,190

 
426,983

 
—

 
—

 
426,983

Total loans
 
15,124,136

 
14,957,297

 
—

 
—

 
14,957,297

Allowance for loan losses
 
(201,087
)
 
—

 
—

 
—

 
—

Loans, net of allowance
 
14,923,049

 
14,957,297

 
—

 
—

 
14,957,297

Mortgage servicing rights
 
198,694

 
198,694

 
—

 
—

 
198,694

Derivative instruments with positive fair value, net of cash margin
 
630,435

 
630,435

 
11,484

 
618,951

 
—

Deposits with no stated maturity
 
18,435,350

 
18,435,350

 
—

 
—

 
18,435,350

Time deposits
 
2,624,379

 
2,618,625

 
—

 
—

 
2,618,625

Other borrowed funds
 
5,108,872

 
5,088,104

 
—

 
—

 
5,088,104

Subordinated debentures
 
226,278

 
222,842

 
—

 
—

 
222,842

Derivative instruments with negative fair value, net of cash margin
 
620,277

 
620,277

 
1,080

 
619,197

 
—



- 124 -


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 $217 million at June 30, 2016, $195 million at December 31, 2015 and $172 million at June 30, 2015. 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, 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%
 
 
 
 
 
 
 
December 31, 2015:
 
 
 
 
 
 
Commercial
 
0.25% - 30.00%
 
0.62
 
0.52% - 4.34%
Commercial real estate
 
0.38% - 18.00%
 
0.73
 
0.95% - 3.93%
Residential mortgage
 
1.67% - 18.00%
 
2.42
 
0.86% - 4.25%
Personal
 
0.38% - 21.00%
 
0.37
 
1.19% - 4.11%
 
 
 
 
 
 
 
June 30, 2015:
 
 
 
 
 
 
Commercial
 
0.19% - 30.00%
 
0.63
 
0.49% - 4.42%
Commercial real estate
 
0.38% - 18.00%
 
0.76
 
1.01% - 3.77%
Residential mortgage
 
1.25% - 18.00%
 
2.20
 
0.97% - 3.99%
Personal
 
0.38% - 21.00%
 
0.42
 
0.78% - 4.16%
 
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.


- 125 -


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, 2016
 
0.03% - 9.64%
 
2.15
 
1.16% - 1.43%
December 31, 2015
 
0.02% - 5.50%
 
1.78
 
1.11% - 1.57%
June 30, 2015
 
0.02% - 9.64%
 
1.68
 
0.80% - 1.30%

 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 borrowing and subordinated debentures follows:

 
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
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%
 
 
 
 
 
 
 
December 31, 2015:
 
 
 
 
 
 
Other borrowed funds
 
0.25% - 3.40%

 
0.00
 
0.20% - 2.89%
Subordinated debentures
 
1.05%
 
1.37
 
2.12%
 
 
 
 
 
 
 
June 30, 2015:
 
 
 
 
 
 
Other borrowed funds
 
0.25% - 5.07%

 
0.00
 
0.08% - 2.65%
Subordinated debentures
 
0.96
%
 
1.88
 
1.79%

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, 2016, December 31, 2015 or June 30, 2015.
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.



- 126 -


(12) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on June 30, 2016 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.


- 127 -


Six-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Six Months Ended
 
 
June 30, 2016
 
June 30, 2015
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
2,037,433

 
$
5,275

 
0.52
%
 
$
2,045,761

 
$
2,672

 
0.26
%
Trading securities
 
212,954

 
1,502

 
2.13
%
 
134,142

 
1,271

 
2.17
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
228,460

 
6,244

 
5.47
%
 
239,195

 
6,577

 
5.50
%
Tax-exempt
 
346,468

 
3,862

 
2.23
%
 
396,422

 
3,089

 
1.56
%
Total investment securities
 
574,928

 
10,106

 
3.52
%
 
635,617

 
9,666

 
3.04
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
8,848,806

 
88,277

 
2.04
%
 
8,997,344

 
85,460

 
1.94
%
Tax-exempt
 
71,967

 
1,738

 
5.01
%
 
84,785

 
1,759

 
4.31
%
Total available for sale securities
 
8,920,773

 
90,015

 
2.06
%
 
9,082,129

 
87,219

 
1.96
%
Fair value option securities
 
409,456

 
4,651

 
2.29
%
 
420,119

 
4,323

 
2.22
%
Restricted equity securities
 
306,833

 
8,174

 
5.33
%
 
200,766

 
5,825

 
5.80
%
Residential mortgage loans held for sale
 
345,429

 
6,208

 
3.62
%
 
406,482

 
6,841

 
3.38
%
Loans2
 
16,127,563

 
286,889

 
3.58
%
 
14,730,936

 
264,555

 
3.62
%
Allowance for loan losses
 
(239,782
)
 
 
 
 
 
(196,684
)
 
 
 
 
Loans, net of allowance
 
15,887,781

 
286,889

 
3.63
%
 
14,534,252

 
264,555

 
3.67
%
Total earning assets
 
28,695,587

 
412,820

 
2.91
%
 
27,459,268

 
382,372

 
2.82
%
Receivable on unsettled securities sales
 
82,335

 
 
 
 
 
97,025

 
 
 
 
Cash and other assets
 
2,969,335

 
 
 
 
 
2,662,458

 
 
 
 
Total assets
 
$
31,747,257

 
 
 
 
 
$
30,218,751

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
9,673,849

 
$
6,577

 
0.14
%
 
$
10,200,234

 
$
4,662

 
0.09
%
Savings
 
407,300

 
195

 
0.10
%
 
373,878

 
197

 
0.11
%
Time
 
2,332,082

 
13,767

 
1.19
%
 
2,655,550

 
18,512

 
1.41
%
Total interest-bearing deposits
 
12,413,231

 
20,539

 
0.33
%
 
13,229,662

 
23,371

 
0.36
%
Funds purchased
 
91,446

 
109

 
0.24
%
 
66,504

 
29

 
0.09
%
Repurchase agreements
 
636,952

 
161

 
0.05
%
 
886,781

 
165

 
0.04
%
Other borrowings
 
5,829,974

 
16,482

 
0.57
%
 
3,545,381

 
5,500

 
0.31
%
Subordinated debentures
 
229,581

 
1,588

 
1.39
%
 
327,844

 
3,860

 
2.37
%
Total interest-bearing liabilities
 
19,201,184

 
38,879

 
0.41
%
 
18,056,172

 
32,925

 
0.37
%
Non-interest bearing demand deposits
 
8,133,945

 
 
 
 
 
7,941,409

 
 
 
 
Due on unsettled securities purchases
 
125,931

 
 
 
 
 
178,084

 
 
 
 
Other liabilities
 
951,455

 
 
 
 
 
676,489

 
 
 
 
Total equity
 
3,334,742

 
 
 
 
 
3,366,597

 
 
 
 
Total liabilities and equity
 
$
31,747,257

 
 
 
 
 
$
30,218,751

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
373,941

 
2.50
%
 
 
 
$
349,447

 
2.45
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
2.64
%
 
 
 
 
 
2.58
%
Less tax-equivalent adjustment
 
 
 
8,757

 
 
 
 
 
5,990

 
 
Net Interest Revenue
 
 
 
365,184

 
 
 
 
 
343,457

 
 
Provision for credit losses
 
 
 
55,000

 
 
 
 
 
4,000

 
 
Other operating revenue
 
 
 
348,626

 
 
 
 
 
342,302

 
 
Other operating expense
 
 
 
499,625

 
 
 
 
 
447,378

 
 
Income before taxes
 
 
 
159,185

 
 
 
 
 
234,381

 
 
Federal and state income taxes
 
 
 
51,925

 
 
 
 
 
79,014

 
 
Net income
 
 
 
107,260

 
 
 
 
 
155,367

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
(1,105
)
 
 
 
 
 
1,294

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
108,365

 
 
 
 
 
$
154,073

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.64

 
 

 
 

 
$
2.23

 
 

Diluted
 
 

 
$
1.64

 
 

 
 

 
$
2.23

 
 

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.

- 128 -


Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
June 30, 2016
 
March 31, 2016
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
2,022,028

 
$
2,569

 
0.51
%
 
$
2,052,840

 
$
2,706

 
0.53
%
Trading securities
 
237,808

 
775

 
1.89
%
 
188,100

 
727

 
2.47
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
227,103

 
3,069

 
5.41
%
 
229,817

 
3,175

 
5.53
%
Tax-exempt
 
335,288

 
1,878

 
2.25
%
 
357,648

 
1,984

 
2.22
%
Total investment securities
 
562,391

 
4,947

 
3.52
%
 
587,465

 
5,159

 
3.51
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
8,819,135

 
43,345

 
2.01
%
 
8,878,478

 
44,932

 
2.06
%
Tax-exempt
 
70,977

 
862

 
5.06
%
 
72,958

 
876

 
4.95
%
Total available for sale securities
 
8,890,112

 
44,207

 
2.04
%
 
8,951,435

 
45,808

 
2.08
%
Fair value option securities
 
368,434

 
2,062

 
2.19
%
 
450,478

 
2,589

 
2.38
%
Restricted equity securities
 
319,136

 
3,863

 
4.84
%
 
294,529

 
4,311

 
5.85
%
Residential mortgage loans held for sale
 
401,114

 
3,508

 
3.53
%
 
289,743

 
2,700

 
3.75
%
Loans2
 
16,263,132

 
144,708

 
3.58
%
 
15,991,993

 
142,181

 
3.57
%
Allowance for loan losses
 
(245,448
)
 
 
 
 
 
(234,116
)
 
 
 
 
Loans, net of allowance
 
16,017,684

 
144,708

 
3.63
%
 
15,757,877

 
142,181

 
3.63
%
Total earning assets
 
28,818,707

 
206,639

 
2.91
%
 
28,572,467

 
206,181

 
2.92
%
Receivable on unsettled securities sales
 
49,568

 
 
 
 
 
115,101

 
 
 
 
Cash and other assets
 
3,117,767

 
 
 
 
 
2,820,903

 
 
 
 
Total assets
 
$
31,986,042

 
 
 
 
 
$
31,508,471

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
9,590,855

 
$
3,260

 
0.14
%
 
$
9,756,843

 
$
3,317

 
0.14
%
Savings
 
417,122

 
102

 
0.10
%
 
397,479

 
93

 
0.09
%
Time
 
2,297,621

 
6,635

 
1.16
%
 
2,366,543

 
7,132

 
1.21
%
Total interest-bearing deposits
 
12,305,598

 
9,997

 
0.33
%
 
12,520,865

 
10,542

 
0.34
%
Funds purchased
 
70,682

 
33

 
0.19
%
 
112,211

 
76

 
0.27
%
Repurchase agreements
 
611,264

 
72

 
0.05
%
 
662,640

 
89

 
0.05
%
Other borrowings
 
6,076,028

 
8,675

 
0.57
%
 
5,583,917

 
7,807

 
0.56
%
Subordinated debentures
 
232,795

 
878

 
1.52
%
 
226,368

 
710

 
1.26
%
Total interest-bearing liabilities
 
19,296,367

 
19,655

 
0.41
%
 
19,106,001

 
19,224

 
0.40
%
Non-interest bearing demand deposits
 
8,162,134

 
 
 
 
 
8,105,756

 
 
 
 
Due on unsettled securities purchases
 
93,812

 
 
 
 
 
158,050

 
 
 
 
Other liabilities
 
1,089,483

 
 
 
 
 
813,427

 
 
 
 
Total equity
 
3,344,246

 
 
 
 
 
3,325,237

 
 
 
 
Total liabilities and equity
 
$
31,986,042

 
 
 
 
 
$
31,508,471

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
186,984

 
2.50
%
 
 
 
$
186,957

 
2.52
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
 
 
2.63
%
 
 
 
 
 
2.65
%
Less tax-equivalent adjustment
 
 
 
4,372

 
 
 
 
 
4,385

 
 
Net Interest Revenue
 
 
 
182,612

 
 
 
 
 
182,572

 
 
Provision for credit losses
 
 
 
20,000

 
 
 
 
 
35,000

 
 
Other operating revenue
 
 
 
188,882

 
 
 
 
 
159,744

 
 
Other operating expense
 
 
 
254,725

 
 
 
 
 
244,900

 
 
Income before taxes
 
 
 
96,769

 
 
 
 
 
62,416

 
 
Federal and state income taxes
 
 
 
30,497

 
 
 
 
 
21,428

 
 
Net income
 
 
 
66,272

 
 
 
 
 
40,988

 
 
Net income (loss) attributable to non-controlling interests
 
 
 
471

 
 
 
 
 
(1,576
)
 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
65,801

 
 
 
 
 
$
42,564

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.00

 
 

 
 

 
$
0.64

 
 

Diluted
 
 

 
$
1.00

 
 

 
 

 
$
0.64

 
 

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.

- 129 -


Three Months Ended
December 31, 2015
 
September 30, 2015
 
June 30, 2015
Average Balance
 
Revenue /Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,995,945

 
$
1,466

 
0.29
%
 
$
2,038,611

 
$
1,442

 
0.28
%
 
$
2,002,456

 
$
1,250

 
0.25
%
150,402

 
840

 
2.86
%
 
179,098

 
945

 
2.70
%
 
127,391

 
585

 
1.85
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
232,566

 
3,144

 
5.41
%
 
233,914

 
3,211

 
5.49
%
 
236,956

 
3,251

 
5.49
%
369,803

 
1,413

 
1.53
%
 
382,177

 
1,468

 
1.54
%
 
391,533

 
1,526

 
1.56
%
602,369

 
4,557

 
3.03
%
 
616,091

 
4,679

 
3.04
%
 
628,489

 
4,777

 
3.05
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,894,019

 
43,649

 
2.02
%
 
8,862,917

 
43,473

 
1.99
%
 
8,980,312

 
42,355

 
1.92
%
77,071

 
786

 
4.22
%
 
79,344

 
796

 
4.15
%
 
82,694

 
838

 
4.21
%
8,971,090

 
44,435

 
2.04
%
 
8,942,261

 
44,269

 
2.01
%
 
9,063,006

 
43,193

 
1.94
%
435,449

 
2,461

 
2.32
%
 
429,951

 
2,480

 
2.30
%
 
435,294

 
2,320

 
2.17
%
262,461

 
3,905

 
5.95
%
 
255,610

 
3,802

 
5.95
%
 
221,911

 
3,228

 
5.82
%
310,425

 
2,968

 
3.85
%
 
401,359

 
3,793

 
3.79
%
 
464,269

 
3,892

 
3.37
%
15,586,998

 
139,372

 
3.55
%
 
15,192,311

 
135,498

 
3.54
%
 
14,905,352

 
135,603

 
3.65
%
(207,156
)
 
 
 
 
 
(202,829
)
 
 
 
 
 
(198,400
)
 
 
 
 
15,379,842

 
139,372

 
3.60
%
 
14,989,482

 
135,498

 
3.59
%
 
14,706,952

 
135,603

 
3.70
%
28,107,983

 
200,004

 
2.86
%
 
27,852,463

 
196,908

 
2.83
%
 
27,649,768

 
194,848

 
2.84
%
62,228

 
 
 
 
 
64,591

 
 
 
 
 
94,374

 
 
 
 
2,909,965

 
 
 
 
 
2,852,679

 
 
 
 
 
2,719,930

 
 
 
 
$
31,080,176

 
 
 
 
 
$
30,769,733

 
 
 
 
 
$
30,464,072

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
9,527,491

 
$
2,098

 
0.09
%
 
$
9,760,839

 
$
2,061

 
0.08
%
 
$
10,063,589

 
$
2,197

 
0.09
%
382,284

 
89

 
0.09
%
 
379,828

 
97

 
0.10
%
 
381,833

 
103

 
0.11
%
2,482,714

 
7,881

 
1.26
%
 
2,557,874

 
8,573

 
1.33
%
 
2,651,820

 
8,966

 
1.36
%
12,392,489

 
10,068

 
0.32
%
 
12,698,541

 
10,731

 
0.34
%
 
13,097,242

 
11,266

 
0.35
%
73,220

 
21

 
0.11
%
 
70,281

 
15

 
0.08
%
 
63,312

 
13

 
0.08
%
623,921

 
68

 
0.04
%
 
672,085

 
49

 
0.03
%
 
773,977

 
61

 
0.03
%
4,957,175

 
4,720

 
0.38
%
 
4,779,981

 
3,637

 
0.30
%
 
4,001,479

 
3,047

 
0.31
%
226,332

 
644

 
1.13
%
 
226,296

 
596

 
1.04
%
 
307,903

 
1,695

 
2.21
%
18,273,137

 
15,521

 
0.34
%
 
18,447,184

 
15,028

 
0.32
%
 
18,243,913

 
16,082

 
0.35
%
8,312,961

 
 
 
 
 
7,994,607

 
 
 
 
 
7,996,717

 
 
 
 
248,811

 
 
 
 
 
90,135

 
 
 
 
 
151,369

 
 
 
 
884,652

 
 
 
 
 
838,612

 
 
 
 
 
690,604

 
 
 
 
3,360,615

 
 
 
 
 
3,399,195

 
 
 
 
 
3,381,469

 
 
 
 
$
31,080,176

 
 
 
 
 
$
30,769,733

 
 
 
 
 
$
30,464,072

 
 
 
 
 
 
$
184,483

 
2.52
%
 
 
 
$
181,880

 
2.51
%
 
 
 
$
178,766

 
2.49
%
 
 
 
 
2.64
%
 
 
 
 
 
2.61
%
 
 
 
 
 
2.61
%
 
 
3,222

 
 
 
 
 
3,244

 
 
 
 
 
3,035

 
 
 
 
181,261

 
 
 
 
 
178,636

 
 
 
 
 
175,731

 
 
 
 
22,500

 
 
 
 
 
7,500

 
 
 
 
 
4,000

 
 
 
 
161,115

 
 
 
 
 
163,436

 
 
 
 
 
176,285

 
 
 
 
232,558

 
 
 
 
 
224,628

 
 
 
 
 
227,113

 
 
 
 
87,318

 
 
 
 
 
109,944

 
 
 
 
 
120,903

 
 
 
 
26,242

 
 
 
 
 
34,128

 
 
 
 
 
40,630

 
 
 
 
61,076

 
 
 
 
 
75,816

 
 
 
 
 
80,273

 
 
 
 
1,475

 
 
 
 
 
925

 
 
 
 
 
1,043

 
 
 
 
$
59,601

 
 
 
 
 
$
74,891

 
 
 
 
 
$
79,230

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
0.89

 
 

 
 

 
$
1.09

 
 

 
 

 
$
1.15

 
 

 

 
$
0.89

 
 

 
 

 
$
1.09

 
 

 
 

 
$
1.15

 
 




- 130 -


Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
June 30, 2016
 
March 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
202,267

 
$
201,796

 
$
196,782

 
$
193,664

 
$
191,813

Interest expense
 
19,655

 
19,224

 
15,521

 
15,028

 
16,082

Net interest revenue
 
182,612

 
182,572

 
181,261

 
178,636

 
175,731

Provision for credit losses
 
20,000

 
35,000

 
22,500

 
7,500

 
4,000

Net interest revenue after provision for credit losses
 
162,612

 
147,572

 
158,761

 
171,136

 
171,731

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
39,530

 
32,341

 
30,255

 
31,582

 
36,012

Transaction card revenue
 
34,950

 
32,354

 
32,319

 
32,514

 
32,778

Fiduciary and asset management revenue
 
34,813

 
32,056

 
31,165

 
30,807

 
32,712

Deposit service charges and fees
 
22,618

 
22,542

 
22,813

 
23,606

 
22,328

Mortgage banking revenue
 
38,224

 
34,430

 
25,039

 
33,170

 
36,846

Other revenue
 
13,352

 
11,904

 
14,233

 
12,978

 
11,871

Total fees and commissions
 
183,487

 
165,627

 
155,824

 
164,657

 
172,547

Other gains, net
 
1,307

 
1,560

 
2,329

 
1,161

 
1,457

Gain (loss) on derivatives, net
 
10,766

 
7,138

 
(732
)
 
1,283

 
(1,032
)
Gain (loss) on fair value option securities, net
 
4,279

 
9,443

 
(4,127
)
 
5,926

 
(8,130
)
Change in fair value of mortgage servicing rights
 
(16,283
)
 
(27,988
)
 
7,416

 
(11,757
)
 
8,010

Gain on available for sale securities, net
 
5,326

 
3,964

 
2,132

 
2,166

 
3,433

Total other-than-temporary impairment losses
 
—

 
—

 
(2,114
)
 
—

 
—

Portion of loss recognized in other comprehensive income
 
—

 
—

 
387

 
—

 
—

Net impairment losses recognized in earnings
 
—

 
—

 
(1,727
)
 
—

 
—

Total other operating revenue
 
188,882

 
159,744

 
161,115

 
163,436

 
176,285

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
142,490

 
135,843

 
133,182

 
129,062

 
132,695

Business promotion
 
6,703

 
5,696

 
8,416

 
5,922

 
7,765

Charitable contributions to BOKF Foundation
 
—

 
—

 
—

 
796

 
—

Professional fees and services
 
14,158

 
11,759

 
10,357

 
10,147

 
9,560

Net occupancy and equipment
 
19,677

 
18,766

 
19,356

 
18,689

 
18,927

Insurance
 
7,129

 
7,265

 
5,415

 
4,864

 
5,116

Data processing and communications
 
32,802

 
32,017

 
31,248

 
30,708

 
30,655

Printing, postage and supplies
 
3,889

 
3,907

 
3,108

 
3,376

 
3,553

Net losses and operating expenses of repossessed assets
 
1,588

 
1,070

 
343

 
267

 
223

Amortization of intangible assets
 
2,624

 
1,159

 
1,090

 
1,089

 
1,090

Mortgage banking costs
 
15,809

 
12,379

 
11,496

 
9,107

 
8,227

Other expense
 
7,856

 
15,039

 
8,547

 
10,601

 
9,302

Total other operating expense
 
254,725

 
244,900

 
232,558

 
224,628

 
227,113

Net income before taxes
 
96,769

 
62,416

 
87,318

 
109,944

 
120,903

Federal and state income taxes
 
30,497

 
21,428

 
26,242

 
34,128

 
40,630

Net income
 
66,272

 
40,988

 
61,076

 
75,816

 
80,273

Net income (loss) attributable to non-controlling interests
 
471

 
(1,576
)
 
1,475

 
925

 
1,043

Net income attributable to BOK Financial Corporation shareholders
 
$
65,801

 
$
42,564

 
$
59,601

 
$
74,891

 
$
79,230

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$1.00
 
$0.64
 
$0.89
 
$1.09
 
$1.15
Diluted
 
$1.00
 
$0.64
 
$0.89
 
$1.09
 
$1.15
Average shares used in computation:
 
 
 
 
 
 
 
 
 
 
Basic
 
65,245,887

 
65,296,541

 
66,378,380

 
67,668,076

 
68,096,341

Diluted
 
65,302,926

 
65,331,428

 
66,467,729

 
67,762,483

 
68,210,353


- 131 -


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, 2016.

 
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, 2016
 
—

 
$
—

 
—

 
3,125,926

May 1 to May 31, 2016
 
140,000

 
$
57.41

 
—

 
2,985,926

June 1 to June 30, 2016
 
165,169

 
$
58.93

 
—

 
2,820,757

Total
 
305,169

 
 

 
—

 
 

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, 2016, the Company had repurchased 2,179,243 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 stock option exercises.
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.



- 132 -


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 29, 2016                                                                  



/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


- 133 -