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Section 1: 10-Q (10-Q)

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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 March 31, 2018
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 65,459,505 shares of common stock ($.00006 par value) as of March 31, 2018.





BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2018

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 $105.6 million or $1.61 per diluted share for the first quarter of 2018, compared to $88.4 million or $1.35 per diluted share for the first quarter of 2017 and $72.5 million or $1.11 per diluted share for the fourth quarter of 2017. Lower federal corporate income tax rates decreased income tax expense for the first quarter of 2018 by approximately $13.8 million. Accounting for the Tax Cuts and Jobs Act increased income tax expense for the fourth quarter of 2017 by $11.7 million.


Highlights of the first quarter of 2018 included:
Net interest revenue totaled $219.7 million, up from $201.2 million in the first quarter of 2017 and $216.9 million in the fourth quarter of 2017. The increase in net interest revenue over the prior year was driven by both improving yields and growth in average earning assets. Net interest margin was 2.99 percent for the first quarter of 2018. Net interest margin was 2.81 percent for the first quarter of 2017 and 2.97 percent for the fourth quarter of 2017. Average earning assets were $29.9 billion for the first quarter of 2018 compared to $29.6 billion for the first quarter of 2017.
Fees and commissions revenue totaled $159.0 million. Adoption of the new revenue recognition accounting standard in the first quarter of 2018 resulted in $9.5 million of interchange fees we pay to issuing banks being netted against transaction card revenue. Previously these fees were included in data processing and communications expense. Excluding this impact, fees and commissions revenue increased $3.8 million over the first quarter of 2017. Growth in fiduciary and asset management revenue and transaction card revenue was partially offset by lower brokerage and trading revenue. Fees and commissions revenue was largely unchanged compared to the fourth quarter of 2017. Increased mortgage banking and transaction card revenues were offset by decreased brokerage and trading revenue.
Other operating expense totaled $244.4 million, an $8.9 million or 4 percent increase over the first quarter of 2017 on a comparable basis. Personnel expense increased $3.5 million, primarily due to incentive compensation expense and standard annual merit increases. Non-personnel expense increased $5.4 million due largely to a write-down of certain repossessed oil and gas properties. Operating expense decreased $10.0 million compared to the fourth quarter of 2017 on a comparable basis. Personnel expense decreased $5.4 million, primarily due to decreased incentive compensation expense. Non-personnel expense decreased $4.7 million. Professional fees and services expense and mortgage banking expense were lower in the first quarter.
Income tax expense was $30.9 million or 22.7 percent of net income before taxes for the first quarter of 2018 compared to $38.1 million or 30.1 percent for the first quarter of 2017 and $54.3 million or 42.9 percent for the fourth quarter of 2017. Beginning January 1, 2018, the Tax Cuts and Jobs Act ("the Act") decreased the corporate income tax rate from 35% to 21%. Accounting for the Act required us to revalue our deferred tax assets and liabilities in 2017. We anticipate our effective tax rate to be between 22 percent and 23 percent for 2018.
The Company recorded a $5.0 million negative provision for credit losses in the first quarter of 2018, due to improved credit metric trends. A $7.0 million negative provision for credit losses was recorded in the fourth quarter of 2017. The company had net charge-offs of $1.3 million or 0.03 percent of average loans on an annualized basis in the first quarter of 2018 compared to net charge-offs of $11.7 million or 0.27 percent of average loans on an annualized basis for the fourth quarter of 2017.
The combined allowance for credit losses totaled $228 million or 1.32 percent of outstanding loans at March 31, 2018 compared to $234 million or 1.37 percent of outstanding loans at December 31, 2017.
Nonperforming assets that are not guaranteed by U.S. government agencies totaled $195 million or 1.13 percent of outstanding loans and repossessed assets at March 31, 2018 and $207 million or 1.22 percent of outstanding loans and repossessed assets at December 31, 2017. In addition, potential problem loans decreased $19 million to $222 million at March 31, 2018.
Average loan balances grew by $80 million over the previous quarter, primarily due to growth in commercial loan balances. Period-end outstanding loan balances totaled $17.3 billion at March 31, 2018, a $184 million increase over December 31, 2017.

- 1 -



Average deposits were largely unchanged compared to the previous quarter. Average demand deposit balances decreased $266 million, largely offset by a $202 million increase in interest-bearing transaction deposit balances. Period-end deposits were $22.2 billion at March 31, 2018, a $144 million increase over December 31, 2017.
The common equity Tier 1 capital ratio at March 31, 2018 was 12.06 percent. Other regulatory capital ratios were Tier 1 capital ratio, 12.06 percent, total capital ratio, 13.49 percent, and leverage ratio, 9.40 percent. At December 31, 2017, the common equity Tier 1 capital ratio was 12.05 percent, the Tier 1 capital ratio was 12.05 percent, total capital ratio was 13.54 percent, and leverage ratio was 9.31 percent.
The company paid a regular cash dividend of $29.3 million or $0.45 per common share during the first quarter of 2018. On April 24, 2018, the board of directors approved a quarterly cash dividend of $0.45 per common share payable on or about May 25, 2018 to shareholders of record as of May 11, 2018.
The company repurchased 82,583 common shares at an average price of $91.83 per share during the first quarter of 2018. The company repurchased 80,000 common shares at an average price of $92.54 per share during the fourth quarter of 2017.

- 2 -



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 $219.7 million for the first quarter of 2018, up from $201.2 million in the first quarter of 2017 and $216.9 million in the fourth quarter of 2017. Net interest margin was 2.99 percent for the first quarter of 2018, 2.81 percent for the first quarter of 2017 and 2.97 percent for the fourth quarter of 2017. Net interest margin was 3 basis points lower in the first quarter of 2018 due to the impact of lower effective tax rates from the implementation of the Tax Cut and Jobs Act on the tax-equivalent yield of our tax-exempt loans and securities.

Tax-equivalent net interest revenue increased $16.1 million over the first quarter of 2017. Table 1 shows the effect on net interest revenue from changes in average balances and interest rates for various types of earning assets and interest-bearing liabilities. Changes in interest rates and yields increased net interest revenue by $13.2 million. The benefit of an increase in short-term interest rates on the floating-rate earning assets was partially offset by higher borrowing costs. Tax-equivalent net interest revenue increased $2.9 million due to growth in average assets. Growth in the average balances of trading securities, fair value option securities and loans was partially offset by decreases in available for sale securities and investment securities.

The tax-equivalent yield on earning assets was 3.61 percent, up 46 basis points over the first quarter of 2017, primarily due to increases in short-term interest rates resulting from three 25 basis point increases in the federal funds rate by the Federal Reserve. Loan yields increased 57 basis points to 4.45 percent. The yield on interest-bearing cash and cash equivalents increased 75 basis points. The available for sale securities portfolio yield was up 18 basis points to 2.23 percent. The yield on the fair value option securities portfolio increased 68 basis points primarily related to a change in the mix of securities and an increase in average rates. Funding costs were up 41 basis points over the first quarter of 2017. The cost of interest-bearing deposits increased 22 basis points and the cost of other borrowed funds increased 74 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 31 basis points for the first quarter of 2018, up 13 basis points over the first quarter of 2017.

Average earning assets for the first quarter of 2018 increased $277 million or 1 percent over the first quarter of 2017. Average loans, net of allowance for loan losses, increased $146 million, due primarily to growth in commercial loans partially offset by lower residential mortgage loan balances. The average balance of trading securities increased $354 million primarily due to expansion of U.S. agency residential mortgage-backed securities trading activities. Fair value option securities held as an economic hedge of our mortgage servicing rights increased $210 million. Available for sale securities decreased $330 million. Investment securities balances decreased $90 million.

Average deposits decreased $243 million compared to the first quarter of 2017. Interest-bearing transaction account balances decreased $223 million. Time deposit balances decreased $108 million. Demand deposit balances increased $50 million and savings account balances increased $39 million. Average borrowed funds increased $542 million over the first quarter of 2017, primarily due to the net impact of increased borrowings from the Federal Home Loan Banks and lower average repurchase agreement balances.

Net interest margin increased 2 basis points over the fourth quarter of 2017. The yield on average earning assets increased 12 basis points. The loan portfolio yield increased 16 basis points. The yield on the available for sale securities portfolio increased 2 basis points. The yield on interest-bearing cash and cash equivalents increased 30 basis points. Funding costs were 0.93 percent, up 14 basis points over the prior quarter. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 4 basis points over the prior quarter.
Average earning assets increased $120 million compared to the fourth quarter of 2017. Trading securities balances increased $373 million. Average interest-bearing cash and cash equivalents balances were up $83 million. Average loan balances grew by $80 million. Available for sale securities decreased $199 million and fair value option securities held as an economic hedge of our mortgage servicing rights decreased $166 million.

- 3 -



Average deposits decreased $34 million compared to the previous quarter. Demand deposit balances decreased $266 million, partially offset by a $202 million increase in interest-bearing transaction account balances. Time deposit and saving account balances also grew over the prior quarter. The average balance of borrowed funds increased $161 million over the fourth quarter of 2017, primarily due to increased borrowings from the Federal Home Loan Banks and funds purchased balances.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately 81% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally reprice more quickly than liabilities. One of the strategies that we use to manage toward a relative rate-neutral position is to purchase fixed-rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market-rate-sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. For the remainder of 2018, we expect low-to-mid single digit expansion in net interest margin for each 25 basis point increase in the federal funds rate.

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.

- 4 -




Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
March 31, 2018 / 2017
 
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
3,738

 
$
(134
)
 
$
3,872

Trading securities
 
2,440

 
3,327

 
(887
)
Investment securities:
 
 
 
 
 
 
Taxable securities
 
(57
)
 
71

 
(128
)
Tax-exempt securities
 
(685
)
 
(558
)
 
(127
)
Total investment securities
 
(742
)
 
(487
)
 
(255
)
Available for sale securities:
 
 
 
 
 
 
Taxable securities
 
2,888

 
(1,302
)
 
4,190

Tax-exempt securities
 
(535
)
 
(330
)
 
(205
)
Total available for sale securities
 
2,353

 
(1,632
)
 
3,985

Fair value option securities
 
2,439

 
1,529

 
910

Restricted equity securities
 
808

 
565

 
243

Residential mortgage loans held for sale
 
8

 
(183
)
 
191

Loans
 
25,555

 
1,082

 
24,473

Total tax-equivalent interest revenue
 
36,599

 
4,067

 
32,532

Interest expense:
 
 
 
 
 
 
Transaction deposits
 
6,280

 
(246
)
 
6,526

Savings deposits
 
1

 
10

 
(9
)
Time deposits
 
584

 
(312
)
 
896

Funds purchased
 
251

 
105

 
146

Repurchase agreements
 
175

 
(34
)
 
209

Other borrowings
 
13,194

 
1,645

 
11,549

Subordinated debentures
 
(22
)
 
2

 
(24
)
Total interest expense
 
20,463

 
1,170

 
19,293

Tax-equivalent net interest revenue
 
16,136

 
2,897

 
13,239

Change in tax-equivalent adjustment
 
(2,418
)
 
 
 
 
Net interest revenue
 
$
18,554

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

- 5 -



Other Operating Revenue

Other operating revenue was $156.0 million for the first quarter of 2018, a $5.1 million decrease compared to the first quarter of 2017 and a $1.3 million decrease compared to the fourth quarter of 2017. Fees and commissions revenue increased $3.8 million compared to the first quarter of 2017 and was very consistent compared to the prior quarter. 

Table 2Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Dec 31, 2017
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
 
Brokerage and trading revenue
 
$
30,648

 
$
33,623

 
$
(2,975
)
 
(9
)%
 
$
33,045

 
$
(2,397
)
 
(7
)%
Transaction card revenue1
 
20,990

 
18,177

 
2,813

 
15
 %
 
20,028

 
962

 
5
 %
Fiduciary and asset management revenue
 
41,832

 
38,631

 
3,201

 
8
 %
 
41,767

 
65

 
 %
Deposit service charges and fees
 
27,161

 
27,777

 
(616
)
 
(2
)%
 
27,685

 
(524
)
 
(2
)%
Mortgage banking revenue
 
26,025

 
25,191

 
834

 
3
 %
 
24,362

 
1,663

 
7
 %
Other revenue
 
12,330

 
11,752

 
578

 
5
 %
 
11,762

 
568

 
5
 %
Total fees and commissions revenue
 
158,986

 
155,151


3,835

 
2
 %
 
158,649


337

 
 %
Other gains (losses), net
 
(664
)
 
3,627

 
(4,291
)
 
N/A

 
552

 
(1,216
)
 
N/A

Loss on derivatives, net
 
(5,685
)
 
(450
)
 
(5,235
)
 
N/A

 
(3,045
)
 
(2,640
)
 
N/A

Loss on fair value option securities, net
 
(17,564
)
 
(1,140
)
 
(16,424
)
 
N/A

 
(4,238
)
 
(13,326
)
 
N/A

Change in fair value of mortgage servicing rights
 
21,206

 
1,856

 
19,350

 
N/A

 
5,898

 
15,308

 
N/A

Gain (loss) on available for sale securities, net
 
(290
)
 
2,049

 
(2,339
)
 
N/A

 
(488
)
 
198

 
N/A

Total other operating revenue
 
$
155,989

 
$
161,093

 
$
(5,104
)
 
(3
)%
 
$
157,328

 
$
(1,339
)
 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Reconciliation:1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transaction card revenue on income statement
 
$
20,990

 
$
27,380

 
N/A

 
N/A

 
$
29,536

 
N/A

 
N/A

Netting adjustment
 

 
(9,203
)
 
N/A

 
N/A

 
(9,508
)
 
N/A

 
N/A

Transaction card revenue after netting adjustment
 
$
20,990

 
$
18,177

 
2,813

 
15
 %
 
$
20,028

 
962

 
5
 %
1 
Non-GAAP measure to net interchange charges from prior quarters between transaction card revenue and data processing and communications expense. This measure has no effect on net income or earnings per share.

Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 42 percent of total revenue for the first quarter of 2018, excluding provision for credit losses and gains and losses on other assets, securities and derivatives and the change in the fair value of mortgage servicing rights. We believe that a variety of fee revenue sources provides an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors such as rising interest rates resulting in growth in net interest revenue or fiduciary and asset management revenue, may also decrease mortgage production volumes. We expect growth in other operating revenue to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

- 6 -



Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage and investment banking, decreased $3.0 million or 9 percent compared to the first quarter of 2017, primarily due to customer reaction to rising interest rates along with changes in regulation.

Revenue earned from retail brokerage transactions decreased $2.1 million or 31 percent compared to the first quarter of 2017 to $4.8 million. Retail brokerage revenue includes fees and commissions earned on sales of fixed income securities, annuities, mutual funds and other financial instruments to retail customers. Revenue is primarily based on the volume of customer transactions and applicable commission rate for each product type. The implementation of the new Department of Labor ("DOL") fiduciary rule in the second quarter of 2017 has negatively impacted retail brokerage revenue. New regulation issued by the DOL amended the definition of investment advice under the Employee Retirement Income Security Act ("ERISA"). The new rule is designed to provide better protection to plans, participants, beneficiaries and individual retirement account ("IRA") owners against conflicts of interest, imprudence and disloyalty.

Trading revenue includes net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers and related derivative instruments. Trading revenue was $10.4 million for the first quarter of 2018, a $650 thousand or 6 percent decrease compared to the first quarter of 2017

Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $10.9 million for the first quarter of 2018, a $731 thousand or 6 percent decrease compared to the first quarter of 2017 .

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $4.6 million for the first quarter of 2018, a $511 thousand or 13 percent increase over the first quarter of 2017. Investment banking revenue is primarily related to the timing and volume of completed transactions.

Brokerage and trading revenue decreased $2.4 million compared to the fourth quarter of 2017, largely driven by a decrease in investment banking revenue. Many municipal and public school district customers completed debt offerings in the fourth quarter in advance of tax law changes, which prohibit pre-funding of debt issuance.

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 increased $2.8 million or 15 percent over the first quarter of 2017 primarily due to a $1.4 million early termination penalty in the first quarter of 2018. Excluding this termination penalty, TransFund electronic funds transfer ("EFT") network revenue increased $1.4 million or 9 percent over the first quarter of 2017.

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 80 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships.
 
Fiduciary and asset management revenue grew by $3.2 million or 8 percent over the first quarter of 2017, primarily due to growth in assets under management, improved pricing discipline and decreased fee waivers. Fiduciary and asset management revenue was consistent between the first quarter of 2018 and the fourth quarter of 2017 at $41.8 million.


- 7 -



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

Table 3 -- Assets Under Management or Administration
 
Three Months Ended
March 31,
 
2018
 
2017
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
Managed fiduciary assets:
 
 
 
 
 
 
 
 
 
 
 
Personal
$
7,577,717

 
$
22,632

 
1.19
%
 
$
7,371,857

 
$
20,111

 
1.09
%
Institutional
13,322,472

 
5,469

 
0.16
%
 
12,444,816

 
5,295

 
0.17
%
Total managed fiduciary assets
20,900,189

 
28,101

 
0.54
%
 
19,816,673

 
25,406

 
0.51
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-managed assets:
 
 
 
 
 
 
 
 
 
 
 
Fiduciary
25,748,101

 
12,997

 
0.20
%
 
25,176,247

 
12,562

 
0.20
%
Non-fiduciary
16,321,458

 
734

 
0.02
%
 
16,352,841

 
663

 
0.02
%
Safekeeping and brokerage assets under administration
15,909,241

 

 
%
 
16,073,195

 

 
%
Total non-managed assets
57,978,800

 
13,731

 
0.09
%
 
57,602,283

 
13,225

 
0.09
%
 
 
 
 
 
 
 
 
 
 
 
 
Total assets under management or administration
$
78,878,989

 
$
41,832

 
0.21
%
 
$
77,418,956

 
$
38,631

 
0.20
%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Annualized revenue divided by period-end balance.

A summary of changes in assets under management or administration for the three months ended March 31, 2018 and 2017 follows:

Table 4 -- Changes in Assets Under Management or Administration
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Beginning balance
 
$
81,827,797

 
$
75,407,863

Net inflows (outflows)
 
(3,434,649
)
 
(357,986
)
Net change in fair value
 
485,841

 
2,369,079

Ending balance
 
$
78,878,989

 
$
77,418,956


Deposit service charges and fees were $27.2 million for the first quarter of 2018, a decrease of $616 thousand or 2 percent compared to the first quarter of 2017. Commercial account service charge revenue totaled $11.9 million, an increase of $337 thousand or 3 percent. Overdraft fees were $8.6 million, a $1.1 million or 10.9 percent decrease compared to the first quarter of 2017. Service charges on deposit accounts with a standard monthly fee were $1.7 million, a decrease of $75 thousand or 4 percent. Deposit service charges and fees decreased $524 thousand compared to the prior quarter.

Mortgage banking revenue increased $834 thousand or 3 percent compared to the first quarter of 2017. Mortgage production revenue increased $909 thousand. Internal changes to better manage our loan production pipeline, improved values of originated servicing rights and an increase in delivery through the retail channel resulted in an increase of 18 basis points in gain on sale margin. Mortgage loan production volumes decreased $34 million. Production volumes decreased compared to the prior year as average primary mortgage interest rates were up 11 basis points over the first quarter of 2017. Mortgage servicing revenue was relatively consistent compared to the first quarter of 2017. The outstanding principal balance of mortgage loans serviced for others totaled $22.0 billion, consistent with the first quarter of 2017.
Mortgage banking revenue increased $1.7 million compared to the fourth quarter of 2017. Revenue from mortgage loan production increased $1.7 million due to a 21 basis point increase in gain on sale margin and an increase in production volume.


- 8 -



Table 5Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Dec. 31, 2017
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
Mortgage production revenue
 
$
9,452

 
$
8,543

 
$
909

 
11
 %
 
$
7,786

 
$
1,666

 
21
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
664,958

 
$
711,019

 


 


 
$
840,080

 
 
 
 
Add: Current period end outstanding commitments
 
298,318

 
381,732

 
 
 
 
 
222,919

 
 
 
 
Less: Prior period end outstanding commitments
 
222,919

 
318,359

 
 
 
 
 
334,337

 
 
 
 
Total mortgage production volume
 
$
740,357

 
$
774,392

 
$
(34,035
)
 
(4
)%
 
$
728,662

 
$
11,695

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loan refinances to mortgage loans funded for sale
 
42
%
 
44
%
 
(200
) bps
 
 
 
47
%
 
(500
) bps
 
 
Gains on sale margin
 
1.28
%
 
1.10
%
 
18
 bps
 
 
 
1.07
%
 
21
 bps
 
 
Primary mortgage interest rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
4.28
%
 
4.17
%
 
11
 bps
 
 
 
3.92
%
 
36
 bps
 
 
Period end
 
4.44
%
 
4.14
%
 
30
 bps
 
 
 
3.99
%
 
45
 bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue
 
$
16,573

 
$
16,648

 
$
(75
)
 
 %
 
$
16,576

 
$
(3
)
 
 %
Average outstanding principal balance of mortgage loans serviced for others
 
22,027,726

 
22,006,295

 
21,431

 
 %
 
22,054,877

 
(27,151
)
 
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average mortgage servicing revenue rates
 
0.31
%
 
0.31
%
 

 
 
 
0.30
%
 
1
 bp
 
 
1 
Actual interest earned on fair value option securities less internal transfer-priced cost of funds.

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

Net gains on other assets, securities and derivatives

Other net losses totaled $664 thousand in the first quarter of 2018 compared to net gains of $3.6 million in the first quarter of 2017. The first quarter of 2017 included the sale of certain merchant banking investments. Other net gains totaled $552 thousand in the fourth quarter of 2017.

As discussed in the Market Risk section following, the fair value of our mortgage servicing rights ("MSRs") changes in response to changes in primary mortgage loan rates and other assumptions. We attempt to mitigate the earnings volatility caused by changes in the fair value of MSRs by designating certain financial instruments as an economic hedge. Changes in the fair value of these instruments are generally expected to partially offset changes in the fair value of MSRs.
The net economic cost of the changes in fair value of mortgage servicing rights and related economic hedges was $256 thousand in the first quarter of 2018, including a $21.2 million increase in the fair value of mortgage servicing rights, offset by a $23.3 million decrease in the fair value of securities and derivative contracts held as an economic hedge and $1.8 million of related net interest revenue.

The net economic benefit of changes in the fair value of mortgage servicing rights and related economic hedges was $1.5 million for the first quarter of 2017. The fair value of mortgage servicing rights increased $1.9 million. The fair value of securities and interest rate derivative contracts held as an economic hedge decreased $1.7 million. Net interest earned on securities held as an economic hedge was $1.3 million.
The net economic benefit of changes in the fair value of mortgage servicing rights and related economic hedges was $1.3 million for the fourth quarter of 2017. The fair value of mortgage servicing rights increased by $5.9 million. The fair value of securities and interest rate derivative contracts held as an economic hedge decreased by $7.3 million.


- 9 -



Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Mar. 31, 2017
Loss on mortgage hedge derivative contracts, net
 
$
(5,698
)
 
$
(3,057
)
 
$
(528
)
Loss on fair value option securities, net
 
(17,564
)
 
(4,238
)
 
(1,140
)
Loss on economic hedge of mortgage servicing rights, net
 
(23,262
)
 
(7,295
)
 
(1,668
)
Gain on change in fair value of mortgage servicing rights
 
21,206

 
5,898

 
1,856

Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue
 
(2,056
)
 
(1,397
)
 
188

Net interest revenue on fair value option securities1
 
1,800

 
2,656

 
1,271

Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges
 
$
(256
)
 
$
1,259

 
$
1,459

1 Actual interest earned on fair value option securities less internal transfer-priced cost of funds.

- 10 -



Other Operating Expense

Other operating expense for the first quarter of 2018 totaled $244.4 million, an increase of $8.9 million or 4 percent compared to the first quarter of 2017. Personnel expense increased $3.5 million or 3 percent. Non-personnel expense increased $5.4 million or 5 percent compared to the prior year.

Other operating expense decreased $10.0 million compared to the previous quarter. Personnel expense decreased $5.4 million or 4 percent and non-personnel expense decreased $4.7 million or 4 percent.

Table 7Other Operating Expense
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended Dec. 31, 2017
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2018
 
2017
 
 
 
 
 
Regular compensation
 
$
84,991

 
$
83,228

 
$
1,763

 
2
 %
 
$
82,785

 
$
2,206

 
3
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
29,549

 
28,836

 
713

 
2
 %
 
35,531

 
(5,982
)
 
(17
)%
Share-based
 
2,902

 
1,603

 
1,299

 
81
 %
 
6,212

 
(3,310
)
 
(53
)%
Deferred compensation
 
44

 
792

 
(748
)
 
N/A

 
1,324

 
(1,280
)
 
N/A

Total incentive compensation
 
32,495

 
31,231

 
1,264

 
4
 %
 
43,067

 
(10,572
)
 
(25
)%
Employee benefits
 
22,461

 
21,966

 
495

 
2
 %
 
19,477

 
2,984

 
15
 %
Total personnel expense
 
139,947

 
136,425

 
3,522

 
3
 %
 
145,329

 
(5,382
)
 
(4
)%
Business promotion
 
6,010

 
6,717

 
(707
)
 
(11
)%
 
7,317

 
(1,307
)
 
(18
)%
Charitable contributions to BOKF Foundation
 

 

 

 
N/A

 
2,000

 
(2,000
)
 
N/A

Professional fees and services
 
10,200

 
11,417

 
(1,217
)
 
(11
)%
 
15,344

 
(5,144
)
 
(34
)%
Net occupancy and equipment
 
24,046

 
21,624

 
2,422

 
11
 %
 
22,403

 
1,643

 
7
 %
Insurance
 
6,593

 
6,404

 
189

 
3
 %
 
6,555

 
38

 
1
 %
Data processing and communications1
 
27,817

 
25,699

 
2,118

 
8
 %
 
28,903

 
(1,086
)
 
(4
)%
Printing, postage and supplies
 
4,089

 
3,851

 
238

 
6
 %
 
3,781

 
308

 
8
 %
Net losses (gains) and operating expenses of repossessed assets
 
7,705

 
1,009

 
6,696

 
664
 %
 
340

 
7,365

 
2,166
 %
Amortization of intangible assets
 
1,300

 
1,802

 
(502
)
 
(28
)%
 
1,430

 
(130
)
 
(9
)%
Mortgage banking costs
 
10,149

 
13,003

 
(2,854
)
 
(22
)%
 
14,331

 
(4,182
)
 
(29
)%
Other expense
 
6,574

 
7,557

 
(983
)
 
(13
)%
 
6,746

 
(172
)
 
(3
)%
Total other operating expense
 
$
244,430

 
$
235,508

 
$
8,922

 
4
 %
 
$
254,479

 
$
(10,049
)
 
(4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,899

 
4,910

 
(11
)
 
 %
 
4,900

 
(1
)
 
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Reconciliation:1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Data processing and communications expense on income statement
 
27,817

 
34,902

 
N/A

 
N/A

 
38,411

 
N/A

 
N/A

Netting adjustment
 

 
(9,203
)
 
N/A

 
N/A

 
(9,508
)
 
N/A

 
N/A

Data processing and communications expense after netting adjustment
 
27,817

 
25,699

 
N/A

 
N/A

 
28,903

 
N/A

 
N/A

1 
Non-GAAP measure to net interchange charges from prior quarters between transaction card revenue and data processing and communications expense. This measure has no effect on net income or earnings per share.

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


- 11 -



Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs, increased $1.8 million or 2 percent over the first quarter of 2017. The average number of employees was relatively unchanged compared to the prior year. Standard annual merit increases in regular compensation were effective for the majority of our staff on March 1.

Incentive compensation increased $1.3 million or 4 percent over the first quarter of 2017, primarily due to increased share-based compensation expense. Share-based compensation expense represents expense for equity awards based on grant-date fair value. Non-vested shares generally cliff vest in 3 years and are subject to a two year holding period after vesting. The number of shares that will ultimately vest is determined by BOKF's change in earnings per share relative to a defined group of peer banks. In addition, compensation costs related to certain shares is variable based on changes in the the fair value of BOK Financial common shares.

Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Cash-based incentive compensation expense increased $713 thousand or 2 percent over the first quarter of 2017.

Employee benefits expense increased $495 thousand or 2 percent over the the first quarter of 2017.
Personnel expense decreased $5.4 million compared to the fourth quarter of 2017. Incentive compensation expense decreased $10.6 million primarily due to the impact of tax reform on our earnings per share performance relative to peers. Regular compensation expense increased $2.2 million as merit increases were effective for most staff during the first quarter. A $4.7 million seasonal increase in payroll tax expense was partially offset by a net decrease in employee healthcare costs. The Company is self-insured and these costs may be volatile.

Non-personnel operating expense

Non-personnel operating expense increased $5.4 million or 5 percent compared to the first quarter of 2017 .

Net losses and operating expenses of repossessed assets increased $6.7 million The first quarter of 2018 included a $5.0 million write-down on a set of repossessed oil and gas properties based on an updated analysis of production data.

Data processing and communications expense increased $2.1 million or 8 percent. Occupancy and equipment expense increased $2.4 million or 11 percent due partially to a $1.3 million charge to relocate our primary Oklahoma City location. Other increases in these expense categories were primarily due to information technology infrastructure and cybersecurity project costs and increased data processing transaction activity.

Professional fees and services expense decreased $1.2 million or 11 percent mainly due to the inclusion of Mobank conversion expenses in the first quarter of 2017. Mortgage banking costs decreased $2.9 million compared to the first quarter of 2017, primarily due to a $2.6 million decrease in accruals related to default servicing and loss mitigation costs on loans serviced for others.
Non-personnel expense decreased $4.7 million compared to the fourth quarter of 2017. Professional fees and services expense decreased $5.1 million mainly due to expenses related to projects completed in the fourth quarter of 2017. Mortgage banking costs decreased $4.2 million primarily due to a $3.5 million decrease in accruals related to default servicing and loss mitigation costs on loans serviced for others. The fourth quarter also included a $2.0 million contribution to the BOKF Foundation.
Net losses and operating expenses of repossessed assets increased $7.4 million, primarily due to a $5.0 million write-down on a set of repossessed oil and gas properties.


- 12 -



Income Taxes

The Company's income tax expense was $30.9 million or 22.7 percent of net income before taxes for the first quarter of 2018 compared to $38.1 million or 30.1 percent of net income before taxes for the first quarter of 2017 and $54.3 million or 42.9 percent of net income before taxes for the fourth quarter of 2017.

The Tax Cut and Jobs Act ("the Act") enacted on December 22, 2017 reduced the federal corporate tax rate from 35 percent to 21 percent beginning January 1, 2018. The Company continues to evaluate the impact the Act will have on its financial position and results of operations, including recognition and measurement of deferred tax assets and liabilities and the determination of effective current and deferred federal and state income tax rates. We recorded provisional adjustments of $9.5 million in the fourth quarter of 2017, including $6.4 million of net deferred tax assets resulting from a temporary difference recognized in Accumulated other comprehensive income on the Company's balance sheet. We also recorded a provisional adjustment of $2.2 million for deferred taxes resulting from executive compensation that may no longer be deductible. We recorded a $3.1 million increase in tax expense in the first quarter of 2018 related to information received related to the Act's impact on the proportional amortization of our investments in low-income housing tax credit projects. This additional expense was partially offset by a $1.2 million decrease to tax expense to adjust net deferred tax assets resulting from executive compensation. Provisional amounts recorded in 2017 may be adjusted based on our on-going evaluation, including subsequent guidance provided by federal and state taxing authorities and other information as it becomes available.

In addition to the impact of the Act, the excess benefit of vested share-based compensation decreased income tax expense by $1.6 million for the first quarter of 2018. Excluding the impact of adjustments for the Act and the excess benefit of share-based compensation, income tax expense would have been $30.7 million or 22.5% of net income before taxes for the first quarter of 2018 and $42.7 million or 33.7% of net income before taxes for the fourth quarter of 2017.

The Company's effective tax rate is affected by recurring items such as tax-exempt income, net amortization related to its investments in low-income housing tax credit investments and share-based compensation. 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 $20 million at March 31, 2018, $18 million at December 31, 2017 and $17 million at March 31, 2017.
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.


- 13 -



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

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

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

As shown in Table 8, net income attributable to our lines of business was up $22.4 million or 26.2% percent over the first quarter of 2017. Net interest revenue grew by $13.8 million over the prior year. Other operating revenue increased by $2.5 million and operating expense increased by $2.1 million. Income tax expense attributable to the lines of business was down $20.1 million due to tax reform.

Table 8 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
 
March 31,
 
 
2018
 
2017
Commercial Banking
 
$
79,243

 
$
68,409

Consumer Banking
 
9,406

 
3,246

Wealth Management
 
19,609

 
14,159

Subtotal
 
108,258

 
85,814

Funds Management and other
 
(2,696
)
 
2,542

Total
 
$
105,562

 
$
88,356


- 14 -



Commercial Banking

Commercial Banking contributed $79.2 million to consolidated net income in the first quarter of 2018, an increase of $10.8 million or 16 percent over the first quarter of 2017. The increase in Commercial Banking's contribution was primarily due to lower corporate income tax rates in the first quarter, partially offset by increased losses on repossessed assets related to certain repossessed oil and gas properties and increased corporate expense allocations.

Table 9 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
 
March 31,
 
 
 
2018
 
2017
 
Net interest revenue from external sources
 
$
160,413

 
$
147,376

 
$
13,037

Net interest expense from internal sources
 
(28,343
)
 
(18,115
)
 
(10,228
)
Total net interest revenue
 
132,070

 
129,261

 
2,809

Net loans charged off (recovered)
 
627

 
(1,463
)
 
2,090

Net interest revenue after net loans charged off (recovered)
 
131,443

 
130,724

 
719

 
 
 
 
 
 
 
Fees and commissions revenue1
 
40,017

 
35,999

 
4,018

Other gains (losses), net
 
(341
)
 
1,642

 
(1,983
)
Other operating revenue
 
39,676

 
37,641

 
2,035

 
 
 
 
 
 
 
Personnel expense
 
28,921

 
27,362

 
1,559

Non-personnel expense1
 
17,548

 
16,340

 
1,208

Other operating expense
 
46,469

 
43,702

 
2,767

 
 
 
 
 
 
 
Net direct contribution
 
124,650

 
124,663

 
(13
)
Gain on financial instruments, net
 
7

 
38

 
(31
)
Loss on repossessed assets, net
 
(4,166
)
 
(5
)
 
(4,161
)
Corporate expense allocations
 
12,507

 
8,719

 
3,788

Income before taxes
 
107,984

 
115,977

 
(7,993
)
Federal and state income tax
 
28,741

 
47,568

 
(18,827
)
Net income
 
$
79,243

 
$
68,409

 
$
10,834

 
 
 
 
 
 
 
Average assets
 
$
17,793,820

 
$
17,640,973

 
$
152,847

Average loans
 
14,426,750

 
14,203,784

 
222,966

Average deposits
 
8,664,452

 
8,679,269

 
(14,817
)
Average invested capital
 
1,335,896

 
1,315,200

 
20,696

1 
Fees and commission revenue for 2017 has been adjusted on a comparable basis with 2018 (Non-GAAP measure) to net $9.2 million of interchange fees paid to issuing banks on card transactions processed by our TransFund merchant processing services. The discussion following is based on this comparable basis.

Net interest revenue increased $2.8 million or 2.2 percent over the prior year. Growth in net interest revenue was primarily due to increased yields on commercial loans due to rising short-term interest rates and a $223 million or 2 percent increase in average loan balances. Yields on deposits sold to the funds management unit also went up due to the increase in short-term interest rates from the Federal Reserve increases in the federal funds rate.

Fees and commissions revenue increased $4.0 million or 11 percent over the first quarter of 2017, primarily due to a $3.0 million increase in transaction card revenue primarily due to a $1.4 million early termination penalty. In addition, loan syndication fees and commercial deposit service charges and fees were up over the prior year.


- 15 -



Operating expenses increased $2.8 million or 6 percent percent compared to the first quarter of 2017. Personnel expense increased $1.6 million or 6 percent, primarily due to incentive compensation expense and standard annual merit increases. Non-personnel expense increased $1.2 million or 7.4 percent.

Corporate expense allocations were up $3.8 million or 43 percent over the prior year, primarily due to enhancements of activity based costing drivers to better reflect services being utilized by the Commercial Banking line of business.

The average outstanding balance of loans attributed to Commercial Banking were up $223 million or 2 percent over the first quarter of 2017 to $14.4 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans, which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $8.7 billion for the first quarter of 2018, largely unchanged compared to the first quarter of 2017. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.



- 16 -



Consumer Banking

Consumer Banking provides retail banking services through four primary distribution channels:  traditional branches, the 24-hour ExpressBank call center, Internet banking and mobile banking. Consumer Banking also conducts mortgage banking activities through offices located outside of our consumer banking markets and through Home Direct Mortgage, an online origination channel.

Consumer Banking contributed $9.4 million to consolidated net income for the first quarter of 2018, up $6.2 million over the first quarter of 2017. Net interest revenue grew by $6.0 million and operating expense decreased $3.1 million.

Table 10 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
 
March 31,
 
 
 
2018
 
2017
 
Net interest revenue from external sources
 
$
21,755

 
$
18,593

 
$
3,162

Net interest revenue from internal sources
 
15,224

 
12,418

 
2,806

Total net interest revenue
 
36,979

 
31,011

 
5,968

Net loans charged off
 
1,301

 
1,273

 
28

Net interest revenue after net loans charged off
 
35,678

 
29,738

 
5,940

 
 
 
 
 
 
 
Fees and commissions revenue
 
44,964

 
45,193

 
(229
)
Other gains (losses), net
 
(16
)
 
(59
)
 
43

Other operating revenue
 
44,948

 
45,134

 
(186
)
 
 
 
 
 
 
 
Personnel expense
 
24,301

 
24,919

 
(618
)
Non-personnel expense
 
25,512

 
27,947

 
(2,435
)
Total other operating expense
 
49,813

 
52,866

 
(3,053
)
 
 
 
 
 
 
 
Net direct contribution
 
30,813

 
22,006

 
8,807

Loss on financial instruments, net
 
(23,262
)
 
(1,668
)
 
(21,594
)
Change in fair value of mortgage servicing rights
 
21,206

 
1,856

 
19,350

Loss on repossessed assets, net
 
(108
)
 
(136
)
 
28

Corporate expense allocations
 
16,029

 
16,746

 
(717
)
Income before taxes
 
12,620

 
5,312

 
7,308

Federal and state income tax
 
3,214

 
2,066

 
1,148

Net income
 
$
9,406

 
$
3,246

 
$
6,160

 
 
 
 
 
 
 
Average assets
 
$
8,468,101

 
$
8,277,304

 
$
190,797

Average loans
 
1,746,136

 
1,740,617

 
5,519

Average deposits
 
6,538,096

 
6,533,901

 
4,195

Average invested capital
 
298,438

 
277,403

 
21,035


Net interest revenue from Consumer Banking activities grew by $6.0 million or 19 percent over the the first quarter of 2017, primarily due to increased rates received on deposit balances sold to the Funds Management unit.

Fees and commissions revenue decreased $229 thousand or 1 percent compared to the first quarter of 2017. Increased mortgage banking revenue from the increase in mortgage loan production volumes was offset by lower overdraft fees compared to the prior year.


- 17 -



Operating expenses decreased $3.1 million or 6 percent compared to the first quarter of 2017. Personnel expenses decreased $618 thousand or 2 percent. Non-personnel expenses decreased $2.4 million or 9 percent compared to the prior year. Mortgage banking costs were down $2.9 million, primarily due to a decrease in accruals related to default servicing and loss mitigation costs on loans serviced for others.

Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $1.5 million decrease in Consumer Banking net income in the first quarter of 2018 compared to a $115 thousand increase in Consumer Banking net income in the first quarter of 2017.

Average consumer deposits were largely unchanged compared to the first quarter of 2017. Demand deposit balances grew by $123 million or 7 percent and savings deposit balances were up $42 million or 10 percent. Higher-costing time deposit balances decreased $109 million or 10 percent and interest-bearing transaction account balances decreased $53 million or 2 percent.


Wealth Management

Wealth Management contributed $19.6 million to consolidated net income in the first quarter of 2018, up $5.5 million or 38 percent over the first quarter of 2017, largely due to growth in net interest revenue.

Table 11 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
 
March 31,
 
 
 
2018
 
2017
 
Net interest revenue from external sources
 
$
15,407

 
$
11,485

 
$
3,922

Net interest revenue from internal sources
 
9,932

 
8,856

 
1,076

Total net interest revenue
 
25,339

 
20,341

 
4,998

Net loans charged off (recovered)
 
(48
)
 
39

 
(87
)
Net interest revenue after net loans charged off (recovered)
 
25,387

 
20,302

 
5,085

 
 
 
 
 
 
 
Fees and commissions revenue
 
74,807

 
73,921

 
886

Other gains (losses), net
 
(41
)
 
237

 
(278
)
Other operating revenue
 
74,766

 
74,158

 
608

 
 
 
 
 
 
 
Personnel expense
 
46,947

 
44,787

 
2,160

Non-personnel expense
 
15,855

 
15,623

 
232

Other operating expense
 
62,802

 
60,410

 
2,392

 
 
 
 
 
 
 
Net direct contribution
 
37,351

 
34,050

 
3,301

Corporate expense allocations
 
10,955

 
10,672

 
283

Income before taxes
 
26,396

 
23,378

 
3,018

Federal and state income tax
 
6,787

 
9,219

 
(2,432
)
Net income
 
$
19,609

 
$
14,159

 
$
5,450

 
 
 
 
 
 
 
Average assets
 
$
8,095,794

 
$
7,160,849

 
$
934,945

Average loans
 
1,389,926

 
1,266,579

 
123,347

Average deposits
 
5,662,470

 
5,582,554

 
79,916

Average invested capital
 
246,673

 
212,887

 
33,786


Net interest revenue increased $5.0 million or 25 percent over the first quarter of 2017, primarily due to loan growth and net interest expansion. Average deposit balances increased by $80 million or 1 percent over the first quarter of 2017, primarily due to a $56 million or 2 percent increase in interest-bearing transaction account balances and a $29 million or 4 percent increase time deposit balances.

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Fees and commissions revenue increased $886 thousand or 1 percent over the first quarter of 2017. Fiduciary and asset management revenue grew by $3.2 million or 8 percent over the prior year, primarily due to growth in assets under management, improved pricing discipline and decreased fee waivers. Other revenue attributable to Wealth Management was also up $1.9 million. Brokerage and trading revenue decreased by $4.1 million or 14 percent compared to the prior year, primarily due to decreased activity related to our mortgage banking customers along with a decrease in brokerage fees due to the implementation of the DOL fiduciary rule in the second quarter of 2017.

Fees and commissions revenue above includes fees earned from state and municipal bond and corporate debt underwritings and financial advisory services, primarily in the Oklahoma and Texas markets. In the first quarter of 2018, the Wealth Management division participated in 45 state and municipal bond underwritings that totaled $626 million. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $189 million of these underwritings. The Wealth Management division also participated in 8 corporate debt underwritings that totaled $4.9 billion. Our interest in these underwritings was $131 million. In the first quarter of 2017, the Wealth Management division participated in 38 state and municipal bond underwritings that totaled approximately $1.6 billion. Our interest in these underwritings totaled approximately $316 million. The Wealth Management division also participated in 5 corporate debt underwritings that totaled $3.6 billion. Our interest in these underwritings was $111 million.

Operating expense increased $2.4 million or 4.0 percent over the first quarter of 2017. Personnel expense increased $2.2 million or 5 percent, primarily due to incentive compensation expense and standard annual merit increases. Non-personnel expense increased $232 thousand or 1 percent.
Financial Condition
Securities

We maintain a securities portfolio to enhance profitability, manage interest rate risk, provide liquidity and comply with regulatory requirements. Securities are classified as trading, held for investment, or available for sale. See Note 2 to the consolidated financial statements for the composition of the securities portfolio as of March 31, 2018, December 31, 2017 and March 31, 2017.

We hold an inventory of trading securities in support of sales to a variety of customers, including banks, corporations, insurance companies, money managers and others. Trading securities increased $830 million to $1.3 billion during the first quarter of 2018 in response to expanded relationships with mortgage loan originator clients. As discussed in the Market Risk section of this report, trading activities involve risk of loss from adverse price movement. We mitigate this risk within board-approved limits through the use of derivative contracts, short-sales and other techniques. These limits remain unchanged from levels set before our expanded trading activities.

At March 31, 2018, the carrying value of investment (held-to-maturity) securities was $417 million and the fair value was $429 million. Investment securities consist primarily of long-term, fixed rate Oklahoma and Texas municipal bonds, taxable Texas school construction bonds and residential mortgage-backed securities issued by U.S. government agencies. The investment security portfolio is diversified among issuers. The largest obligation of any single issuer is $30 million. Substantially all of these bonds are general obligations of the issuers. Approximately $92 million of the $199 million portfolio of Texas school construction bonds is also guaranteed by the Texas Permanent School Fund Guarantee Program supervised by the State Board of Education for the State of Texas.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $8.4 billion at March 31, 2018, a $29 million increase compared to December 31, 2017. At March 31, 2018, the available for sale securities portfolio consisted primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Both residential and commercial mortgage-backed securities have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans.

A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making

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an investment and throughout the life of the security. Our best estimate of the duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at March 31, 2018 is 3.4 years. Management estimates the duration extends to 4.1 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 3.1 years assuming a 50 basis point decline in the current low rate environment.

The aggregate gross amount of unrealized losses on available for sale securities totaled $177 million at March 31, 2018, compared to $89 million at December 31, 2017. On a quarterly basis, we perform an evaluation on debt securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. No other-than-temporary impairment charges were recognized in earnings during the first quarter of 2018.

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. We are required to hold stock in the FHLB in proportion to our borrowings with the FHLB.
Loans

The aggregate loan portfolio before allowance for loan losses totaled $17.3 billion at March 31, 2018, up $184 million over December 31, 2017, primarily due to growth in commercial loan balances. Increased commercial real estate loans were offset by lower residential mortgage loan balances. Personal loan balances were largely unchanged compared to the prior quarter.

Table 12 -- Loans
(In thousands)
 
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
 
Mar. 31, 2017
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,969,618

 
$
2,930,156

 
$
2,867,981

 
$
2,847,240

 
$
2,537,112

Services
 
2,928,294

 
2,986,949

 
2,967,513

 
2,958,827

 
3,013,375

Healthcare
 
2,359,928

 
2,314,753

 
2,239,451

 
2,221,518

 
2,265,604

Wholesale/retail
 
1,531,576

 
1,471,256

 
1,658,098

 
1,543,695

 
1,506,243

Manufacturing
 
559,695

 
496,774

 
519,446

 
546,137

 
543,430

Other commercial and industrial
 
570,556

 
534,087

 
543,445

 
520,538

 
461,346

Total commercial
 
10,919,667

 
10,733,975

 
10,795,934

 
10,637,955

 
10,327,110

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Multifamily
 
1,008,903

 
980,017

 
999,009

 
952,380

 
922,991

Retail
 
750,396

 
691,532

 
725,865

 
722,805

 
745,046

Office
 
737,144

 
831,770

 
797,089

 
862,973

 
860,889

Industrial
 
613,608

 
573,014

 
591,080

 
693,635

 
871,463

Residential construction and land development
 
117,458

 
117,245

 
112,102

 
141,592

 
135,994

Other commercial real estate
 
279,273

 
286,409

 
292,997

 
315,207

 
334,680

Total commercial real estate
 
3,506,782

 
3,479,987

 
3,518,142

 
3,688,592

 
3,871,063

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,047,785

 
1,043,435

 
1,013,965

 
989,040

 
977,743

Permanent mortgages guaranteed by U.S. government agencies
 
177,880

 
197,506

 
187,370

 
191,729

 
204,181

Home equity
 
720,104

 
732,745

 
744,415

 
758,429

 
764,350

Total residential mortgage
 
1,945,769

 
1,973,686

 
1,945,750

 
1,939,198

 
1,946,274

 
 
 
 
 
 
 
 
 
 
 
Personal
 
965,632

 
965,776

 
947,008

 
917,900

 
847,459

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
17,337,850

 
$
17,153,424

 
$
17,206,834

 
$
17,183,645

 
$
16,991,906



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Commercial

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

Commercial loans totaled $10.9 billion or 63 percent of the loan portfolio at March 31, 2018, an increase of $186 million over December 31, 2017. Manufacturing sector loan balances were up $63 million. Wholesale/retail sector loan balances grew by $60 million. Healthcare sector loan balances increased $45 million. Energy loan balances grew by $39 million. Unfunded energy loan commitments increased $97 million over December 31, 2017 to $3.0 billion at March 31, 2018. Other commercial and industrial loans increased by $36 million. This growth was partially offset by a $59 million decrease in service sector loan balances.

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

Table 13 -- Commercial Loans by Collateral Location
(In thousands)
<
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Energy
 
$
511,399

 
$
1,584,188

 
$
39,455

 
$
3,087

 
$
395,725

 
$
7,171

 
$
66,039

 
$
362,554

 
$
2,969,618

Services
 
695,043

 
826,626

 
156,522

 
5,777

 
335,914

 
238,088

 
291,582

 
378,742

 
2,928,294

Healthcare
 
251,766

 
354,012

 
116,386

 
94,696

 
152,477

 
117,829

 
260,423

 
1,012,339

 
2,359,928

Wholesale/retail
 
310,686

 
558,838

 
43,188

 
25,583

 
74,065

 
59,580

 
84,000

 
375,636

 
1,531,576

Manufacturing
 
90,797

 
201,659

 
113

 
3,701

 
60,182

 
36,936

 
91,496

 
74,811