10-K 1 a20171231bokf10k.htm 10-K Document


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

FORM 10-K
(Mark One) 
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

BOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Oklahoma
 
73-1373454
(State or other jurisdiction
of Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
 
Bank of Oklahoma Tower
 
 
Boston Avenue at Second Street
 
 
Tulsa, Oklahoma
 
74172
(Address of Principal Executive Offices)
 
(Zip Code)
 (918) 588-6000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:  None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock, $0.00006 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ý  No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.  Yes  ¨  No  ý

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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer  ý     Accelerated filer  ¨    Non-accelerated filer  ¨ 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

The aggregate market value of the registrant's common stock ("Common Stock") held by non-affiliates is approximately $2.1 billion (based on the June 30, 2017 closing price of Common Stock of $84.13 per share). As of January 31, 2018, there were 65,550,406 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference from the Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders.





BOK Financial Corporation
Form 10-K
Year Ended December 31, 2017

Index

 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
 
 
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
 
 
Item 15
 
 
 
 
 
 
 
Exhibit 21
Subsidiaries of the Registrant
 
Exhibit 23
Consent of Independent Registered Public Accounting Firm
 
Exhibit 31.1
Chief Executive Officer Section 302 Certification
 
Exhibit 31.2
Chief Financial Officer Section 302 Certification
 
Exhibit 32
Section 906 Certifications
 






PART I

ITEM 1.   BUSINESS

General

Developments relating to individual aspects of the business of BOK Financial Corporation ("BOK Financial" or "the Company") are described below. Additional discussion of the Company’s activities during the current year appears within Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

Description of Business

BOK Financial is a financial holding company incorporated in the state of Oklahoma in 1990 whose activities are governed by the Bank Holding Company Act of 1956 ("BHCA"), as amended by the Financial Services Modernization Act or Gramm-Leach-Bliley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). BOK Financial offers full service banking in Oklahoma, Texas, New Mexico, Northwest Arkansas, Colorado, Arizona, and Kansas/Missouri. At December 31, 2017, the Company reported total consolidated assets of $32 billion and ranked as the 56th largest bank holding company based on asset size.

BOKF, NA ("the Bank") is a wholly owned subsidiary bank of BOK Financial. The Bank operates TransFund, Cavanal Hill Investment Management, BOK Financial Asset Management, Inc. and seven banking divisions: Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Mobank, Bank of Oklahoma, Bank of Texas and Colorado State Bank and Trust. Other wholly owned subsidiaries of BOK Financial include BOK Financial Securities, Inc., a broker/dealer that primarily engages in retail and institutional securities sales and municipal bond underwriting and The Milestone Group, Inc., an investment adviser to high net worth clients. Other non-bank subsidiary operations do not have a significant effect on the Company’s financial statements.

Our overall strategic objective is to emphasize growth in long-term value by building on our leadership position in Oklahoma through expansion into other high-growth markets in contiguous states. We operate primarily in the metropolitan areas of Tulsa and Oklahoma City, Oklahoma; Dallas, Fort Worth and Houston, Texas; Albuquerque, New Mexico; Denver, Colorado; Phoenix, Arizona, and Kansas City, Kansas/Missouri. Our acquisition strategy targets fairly priced quality organizations with demonstrated solid growth that would supplement our principal lines of business. We provide additional growth opportunities by hiring talent to enhance competitiveness, adding locations and broadening product offerings. Our operating philosophy embraces local decision-making in each of our geographic markets while adhering to common Company standards.

Our primary focus is to provide a comprehensive range of nationally competitive financial products and services in a personalized and responsive manner. Products and services include loans and deposits, cash management services, fiduciary services, mortgage banking and brokerage and trading services to middle-market businesses, financial institutions and consumers. Commercial banking represents a significant part of our business. Our credit culture emphasizes building relationships by making high quality loans and providing a full range of financial products and services to our customers. We offer derivative products that enable mortgage banking customers to manage their production risks and our energy financing expertise enables us to offer commodity derivatives for customers to use in their risk management. Our diversified base of revenue sources is designed to generate returns in a range of economic situations. Historically, fees and commissions provide 45% to 48% of our total revenue. Approximately 45% of our revenue came from fees and commissions in 2017.

BOK Financial’s corporate headquarters is located at Bank of Oklahoma Tower, Boston Avenue at Second Street, Tulsa, Oklahoma 74172.

The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available on the Company’s website at www.bokf.com as soon as reasonably practicable after the Company electronically files such material with or furnishes it to the Securities and Exchange Commission.


1



Operating Segments

BOK Financial operates 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 electronic funds network. Consumer Banking includes retail lending and deposit services, lending and deposit services to small business customers served through the retail branch network and all mortgage banking activities. Wealth Management provides fiduciary services, private bank services and investment advisory services in all markets. Wealth Management also underwrites state and municipal securities and engages in brokerage and trading activities. Discussion of these principal lines of business appears within the Lines of Business section of "Management's Discussion and Analysis of Financial Condition and Results of Operations".

Competition

BOK Financial and its operating segments face competition from other banks, thrifts, credit unions and other non-bank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, investment companies, financial technology firms, government agencies, mortgage brokers and insurance companies. The Company competes largely on the basis of customer services, interest rates on loans and deposits, lending limits and customer convenience. Some operating segments face competition from institutions that are not as closely regulated as banks, and therefore are not limited by the same capital requirements and other restrictions. All market share information presented below is based upon share of deposits in specified areas according to Federal Deposit Insurance Corporation ("FDIC") as of June 30, 2017.

We are the largest financial institution in the state of Oklahoma with 14% of the state’s total deposits. Bank of Oklahoma has 30% and 12% of the market share in the Tulsa and Oklahoma City areas, respectively. We compete with two banks that have operations nationwide and have greater access to funds at lower costs, higher lending limits, and greater access to technology resources. We also compete with regional and locally-owned banks in both the Tulsa and Oklahoma City areas, as well as in every other community in which we do business throughout the state.

Bank of Texas competes against numerous financial institutions, including some of the largest in the United States, and has a market share of approximately 2% in the Dallas, Fort Worth area and less than 1% in the Houston area. Bank of Albuquerque has a 10% market share in the Albuquerque area and competes with four large national banks, some regional banks and several locally-owned smaller community banks. Colorado State Bank and Trust has a market share of approximately 2% in the Denver area. Bank of Arkansas serves Benton and Washington counties in Arkansas with a market share of approximately 2%. Mobank has a market share of approximately 2% in the Kansas City, Missouri/Kansas area. Bank of Arizona operates as a community bank with locations in Phoenix, Mesa and Scottsdale with less than 1% market share. The Company’s ability to expand into additional states remains subject to various federal and state laws.

Employees

As of December 31, 2017, BOK Financial and its subsidiaries employed 4,930 full-time equivalent employees. None of the Company’s employees are represented by collective bargaining agreements. Management considers its employee relations to be good.

Supervision and Regulation

BOK Financial and its subsidiaries are subject to extensive regulations under federal and state laws. Both the scope of the laws and regulations and the intensity of the supervision to which our business is subject have increased in recent years. Regulatory enforcement and fines have also increased across the banking and financial services sector. Many of these changes have occurred as a result of the Dodd-Frank Act and its implementing regulations, most of which are now in place. These regulations and others are designed to promote safety and soundness, protect consumers and ensure the stability of the banking system as a whole. The purpose of these regulations is not necessarily to protect shareholders and creditors. As detailed below, these regulations require the Company and its subsidiaries to maintain certain capital balances and require the Company to provide financial support to its subsidiaries. These regulations may restrict the Company’s ability to diversify, to acquire other institutions and to pay dividends on its capital stock. These regulations also include requirements on certain programs and services offered to our customers, including restrictions on fees charged for certain services. President Trump has issued an executive order that sets forth principles for reform of the federal financial regulatory framework, and the Republican majority in Congress has also suggested an agenda for financial regulatory change. It is too early to assess whether there will be any major changes in the regulatory environment or merely a rebalancing of the post financial crisis framework. The Company expects that its business will remain subject to extensive regulation and supervision.

2




The following information summarizes certain existing laws and regulations that affect the Company’s operations. It does not summarize all provisions of these laws and regulations and does not include all laws and regulations that affect the Company presently or in the future.

General

As a financial holding company, BOK Financial is regulated under the BHCA and is subject to regular inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Under the BHCA, BOK Financial files quarterly reports and other information with the Federal Reserve Board.

BOKF, NA is organized as a national banking association under the National Banking Act, and is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the "OCC"), the FDIC, the Federal Reserve Board, the Consumer Financial Protection Bureau ("CFPB") and other federal and state regulatory agencies. The OCC has primary supervisory responsibility for national banks and must approve certain corporate or structural changes, including changes in capitalization, payment of dividends, change of place of business, and establishment of a branch or operating subsidiary. The OCC performs examinations concerning safety and soundness, the quality of management and directors, information technology and compliance with applicable regulations. The National Banking Act authorizes the OCC to examine every national bank as often as necessary.

A financial holding company, and the companies under its control, are permitted to engage in activities considered "financial in nature" as defined by the BHCA, Gramm-Leach-Bliley Act and Federal Reserve Board interpretations. Activities that are "financial in nature" include securities underwriting and dealing, insurance underwriting, merchant banking, operating a mortgage company, performing certain data processing operations, servicing loans and other extensions of credit, providing investment and financial advice, owning and operating savings and loan associations, and leasing personal property on a full pay-out, non-operating basis. A financial holding company is required to notify the Federal Reserve Board within thirty days of engaging in new activities determined to be "financial in nature." BOK Financial is engaged in some of these activities and has notified the Federal Reserve Board.

In order for a financial holding company to commence any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must be "well capitalized" and "well managed" and have received a rating of at least "satisfactory" in its most recent examination under the Community Reinvestment Act. A financial holding company and its depository institution subsidiaries are considered to be "well capitalized" if they meet the requirements discussed in the section captioned "Capital Adequacy and Prompt Corrective Action" which follows. A financial holding company and its depository institution subsidiaries are considered to be "well managed" if they receive a composite rating and management rating of at least "satisfactory" in their most recent examinations. If a financial holding company fails to meet these requirements, the Federal Reserve Board may impose limitations or conditions on the conduct of its activities and the company may not commence any new financial activities without prior approval.

The BHCA requires the Federal Reserve Board’s prior approval for the direct or indirect acquisition of more than five percent of any class of voting stock of any non-affiliated bank. Under the Federal Bank Merger Act, the prior approval of the OCC is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the applicant’s performance record under the Community Reinvestment Act and fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.

A financial holding company and its subsidiaries are prohibited under the BHCA from engaging in certain tie-in arrangements in connection with the provision of any credit, property or services. Thus, a subsidiary of a financial holding company may not extend credit, lease or sell property, furnish any services or fix or vary the consideration for these activities on the condition that (1) the customer obtain or provide additional credit, property or services from or to the financial holding company or any subsidiary thereof, or (2) the customer may not obtain some other credit, property or services from a competitor, except to the extent reasonable conditions are imposed to insure the soundness of credit extended.

The Bank and other non-bank subsidiaries are also subject to other federal and state laws and regulations. For example, BOK Financial Securities, Inc. is regulated by the Securities and Exchange Commission ("SEC"), the Financial Industry Regulatory Authority ("FINRA"), the Federal Reserve Board, and state securities regulators. Such regulations generally include licensing of certain personnel, customer interactions, and trading operations. 


3



Interchange Fees

The Durbin Amendment to the Dodd-Frank Act required that interchange fees on electronic debit transactions paid by merchants must be "reasonable and proportional to the cost incurred by the issuer" and prohibited card network rules that have limited price competition among networks. Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. An upward adjustment of no more than 1 cent to an issuer's debit card interchange fee is allowed if the card issuer develops and implements policies and procedures reasonably designed to achieve certain fraud prevention standards. The Durbin Amendment also required all banks to comply with the prohibition on network exclusivity and routing requirements. Debit card issuers are required to make at least two unaffiliated networks available to merchants. 

Volcker and Swap Rules

Title VI of the Dodd-Frank Act, commonly known as the Volcker Rule, prohibits the Company from (1) engaging in short-term proprietary trading for our own account, and (2) having certain ownership interests in or relationships with private equity or hedge funds. The fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Company and its bank subsidiary. The final Volcker Rule regulations contain exemptions to the statutory prohibitions for market-making, hedging, underwriting, trading in U.S. government and agency obligations and also permit certain ownership interests in certain types of funds to be retained. They also permit the offering and sponsoring of funds under certain conditions. The final Volcker Rule regulations impose compliance and reporting obligations on banking entities and their covered activities. The Company has implemented a compliance program required by the Volcker Rule and has either divested or received an extension for holdings in certain legacy “illiquid funds.” The Company’s trading activity remains largely unaffected by the Volcker Rule as most of our trading activity is exempted or excluded from the proprietary trading prohibitions.

Title VII of the Dodd-Frank Act, commonly known as the Swap Rule, subjects nearly all derivative transactions to the regulations of the Commodity Futures Trading Commission ("CFTC") or SEC. This includes registration, recordkeeping, reporting, capital, margin and business conduct requirements on swap dealers and major swap participants. The CFTC and SEC both approved interim final rules on the definition "swap" and "swap dealer" which were effective October 2012. Under CFTC and SEC rules, entities transacting in less than $8 billion in notional value of swaps over any 12 month period during the phase-in period are exempt from the definition of and registration as a "swap dealer." In October 2017, the CFTC extended the phase-in period termination date by one year from December 31, 2018 to December 31, 2019. Barring any further action by the CFTC, the $8 billion threshold will be reduced to $3 billion at the end of 2019 when the phase-in period terminates. The Company currently estimates that the nature and volume of its swaps activity will not require it to register as a swap dealer any time prior to the phase-in period termination date.

Enhanced Prudential Standards

The Dodd-Frank Act directed the Federal Reserve Board to monitor emerging risks to financial institutions and enacted enhanced supervision and prudential standards applicable to bank holding companies with consolidated assets of $50 billion or more and non-bank covered companies designated as systematically important to the Financial Stability Oversight Council (often referred to as systemically important financial institutions). The Dodd-Frank Act mandates that certain regulatory requirements applicable to systemically important financial institutions be more stringent than those applicable to other financial institutions.

In February 2014, the Federal Reserve Board adopted rules to implement certain of these enhanced prudential standards. Beginning in 2015, the rules required publicly traded bank holding companies with $10 billion or more in total consolidated assets to establish risk committees and required bank holding companies with $50 billion or more in total consolidated assets to comply with enhanced liquidity and overall risk management standards. The Company has had a separate Risk Committee since 2013 and is in compliance with applicable requirements.

We monitor developments with respect to the enhanced prudential standards because of application to our Company if our total consolidated assets reach $50 billion or more.


4



Consumer Financial Protection

We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict our ability to raise interest rates and subject us to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we operate and civil money penalties. Failure to comply with consumer protection requirements may also damage our reputation and result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.

The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer’s interests. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction.

Community Reinvestment Act

The Community Reinvestment Act of 1977 ("CRA") requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering a request for an approval of a proposed transaction. The Bank received a rating of "outstanding" in its most recent CRA examination, which is above "satisfactory."

Financial Privacy

The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and is conveyed to outside parties.

Capital Adequacy and Prompt Corrective Action

The Federal Reserve Board, the OCC and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations to ensure capital adequacy based upon the risk levels of assets and off-balance sheet financial instruments. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators regarding components, risk weighting and other factors.


5



Federal Reserve Board risk-based guidelines define a four-tier capital framework based on three categories of regulatory capital. Common equity Tier 1 capital ("CET1") includes common shareholders' equity, less goodwill, most intangible assets and other adjustments. Tier 1 capital consists of CET1 capital plus certain additional capital instruments and related surplus. Supplementary capital ("Tier 2") consists of preferred stock not qualifying as Tier 1 capital, qualifying mandatory convertible debt securities, limited amounts of subordinated debt, other qualifying term debt and allowances for credit losses, subject to limitations. Assets and off-balance sheet exposures are assigned to categories of risk-weights, based primarily upon relative credit risk. Risk-based capital ratios are calculated by dividing CET1, Tier 1 and total capital by risk-weighted assets.

New capital rules were effective for banks and bank holding companies, including BOK Financial on January 1, 2015 as part of a package of regulatory reforms developed by the Basel Committee on Banking Supervision ("BCBS") to strengthen the regulation, supervision and risk management of the banking sector, commonly referred to as the Basel III framework. Components of these rules will phase in through January 1, 2019, with certain exceptions. The new capital rules established a 7% threshold for the common equity Tier 1 ratio consisting of a minimum level plus a capital conservation buffer. The rules also changed both the Tier 1 risk based capital requirements and the total risk based requirements to a minimum of 6% and 8%, respectively, plus a capital conservation buffer of 2.5% totaling 8.5% and 10.5%, respectively. The Company 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.

The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets. Banking organizations are required to maintain a ratio of at least 4%. 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 Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"), among other things, identifies five capital categories for insured depository institutions from well capitalized to critically under-capitalized and requires the respective federal regulatory agencies to implement systems for prompt corrective action for institutions failing to meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive covenants on operations, management and capital distributions, depending upon the category in which an institution is classified. The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered under-capitalized.

Liquidity Requirements

The Basel III framework also requires bank holding companies and banks to measure their liquidity against specific liquidity tests. One test, referred to as the liquidity coverage ratio, is designed to ensure that the banking entity maintains a prescribed minimum level of unencumbered high-quality liquid assets equal to expected net cash outflows as defined. The other test, referred to as the net stable funding ratio, is designed to promote greater reliance on medium and long term funding sources.

On September 3, 2014, U.S. federal banking agencies published the final rule covering Liquidity Risk Management Standards that would standardize minimum liquidity requirements for internationally active banking organizations as defined (generally those with total consolidated assets in excess of $250 billion) as well as modified liquidity requirements for other banking organizations with total consolidated assets in excess of $50 billion that are not internationally active. Although the final rule does not apply to banking organizations with total assets less than $50 billion, including the Company, if growth in the balance sheet of the Company were to approach the $50 billion threshold, the costs of such liquidity regulations would begin to be realized.

Stress Testing

As required by the Dodd-Frank Act, the Federal Reserve published regulations that require bank holding companies with $10 billion to $50 billion in assets to perform annual capital stress tests. The requirements for annual capital stress testing became effective for the Company in the fourth quarter of 2013. The Dodd-Frank Act Stress Test ("DFAST") is a forward-looking exercise under which the Company and its banking subsidiary estimate the impact of a hypothetical severely adverse macroeconomic scenario provided by the Federal Reserve and the Office of the Comptroller of the Currency on its financial condition and regulatory capital ratios over a nine-quarter time horizon. Under the scenario provided by the regulatory agencies for the Company's most recently completed stress test, all capital ratio measures remain above the minimum regulatory thresholds. Additional information concerning the annual stress test may be found on the Company's Investor Relations page at www.bokf.com under the "Presentations" tab. The results of future capital stress tests may place constraints on capital distributions or increases in required regulatory capital under certain circumstances.

6



Further discussion of regulatory capital, including regulatory capital amounts and ratios, is set forth under the heading "Liquidity and Capital" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 15 of the Company's Notes to Consolidated Financial Statements, both of which appear elsewhere herein.

Executive and Incentive Compensation

Guidelines adopted by federal banking agencies prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. The Federal Reserve Board has issued comprehensive guidance on incentive compensation intended to ensure that the incentive compensation policies do not undermine safety and soundness by encouraging excessive risk taking. This guidance covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, based on key principles that (i) incentives do not encourage risk-taking beyond the organization's ability to identify and manage risk, (ii) compensation arrangements are compatible with effective internal controls and risk management, and (iii) compensation arrangements are supported by strong corporate governance, including active and effective board oversight. Deficiencies in compensation practices may affect supervisory ratings and enforcement actions may be taken if incentive compensation arrangements pose a risk to safety and soundness.

Deposit Insurance

 
Substantially all of the deposits held by the Bank are insured up to applicable limits by the Deposit Insurance Fund ("DIF") of the FDIC and are subject to deposit insurance assessments to maintain the DIF. In 2011, the FDIC released a final rule to implement provisions of the Dodd-Frank Act that affect deposit insurance assessments. Among other things, the Dodd-Frank Act raised the minimum designated reserve ratio from 1.15% to 1.35% of estimated insured deposits, removed the upper limit of the designated reserve ratio, required that the designated reserve ratio reach 1.35% by September 30, 2020, and required that the FDIC offset the effect of increasing the minimum designated reserve ratio on depository institutions with total assets of less than $10 billion. The Dodd-Frank Act provided the FDIC flexibility in implementation of the increase in the designated reserve ratio, but it will ultimately result in increased deposit insurance costs to the Company. The Dodd-Frank Act also required that the FDIC redefine the assessment base to average consolidated assets minus average tangible equity. 

On June 30, 2016, the DIF rose above the 1.15%, resulting in a reduction of the initial assessment rate for all banks and implementing a 4.5% surcharge on insured depository institutions with total consolidated assets of $10 billion or more. The assessment base for the surcharge will be the regular assessment base reduced by $10 billion. If the DIF reserve ratio does not reach 1.35% by December 31, 2018, the FDIC will impose a shortfall assessment on banks with total consolidated assets of $10 billion or more in the first quarter of 2019.

Dividends

A key source of liquidity for BOK Financial is dividends from BOKF, NA, which is limited by various banking regulations to net profits, as defined, for the year plus retained profits for the preceding two years. Dividends are further restricted by minimum capital requirements and the Company's internal capital policy. BOKF, NA's dividend limitations are discussed under the heading "Liquidity and Capital" within "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Source of Strength Doctrine

According to Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. 

Transactions with Affiliates

The Federal Reserve Board regulates transactions between the Company and its subsidiaries. Generally, the Federal Reserve Act and Regulation W, as amended by the Dodd-Frank Act, limit the Company’s banking subsidiary and its subsidiaries, to lending and other "covered transactions" with affiliates. The aggregate amount of covered transactions a banking subsidiary or its subsidiaries may enter into with an affiliate may not exceed 10% of the capital stock and surplus of the banking subsidiary. The aggregate amount of covered transactions with all affiliates may not exceed 20% of the capital stock and surplus of the banking subsidiary.

7



Covered transactions with affiliates are also subject to collateral requirements and must be conducted on arm’s length terms. Covered transactions include (a) a loan or extension of credit by the banking subsidiary, including derivative contracts, (b) a purchase of securities issued to a banking subsidiary, (c) a purchase of assets by the banking subsidiary unless otherwise exempted by the Federal Reserve, (d) acceptance of securities issued by an affiliate to the banking subsidiary as collateral for a loan, and (e) the issuance of a guarantee, acceptance or letter of credit by the banking subsidiary on behalf of an affiliate.

Bank Secrecy Act and USA PATRIOT Act

The Bank Secrecy Act ("BSA") and The USA PATRIOT Act of 2001 ("PATRIOT Act") imposes many requirements on financial institutions in the interest of national security and law enforcement. BSA requires banks to maintain records and file suspicious activity reports that are of use to law enforcement and regulators in combating money laundering and other financial crimes. The PATRIOT Act is intended to deny terrorists and criminals the ability to access the U.S. financial services system and places significantly greater requirements on financial institutions. Financial institutions, such as the Company and its subsidiaries, must have a designated BSA Officer, internal controls, independent testing and training programs commensurate with their size and risk profile. As part of its internal control program, a financial institution is expected to have effective customer due diligence and enhanced due diligence requirements for high-risk customers, as well as processes to prohibit transactions with entities subject to Office of Foreign Asset Control sanctions. Documentation and recordkeeping requirements, as well as system requirements, aimed at identifying and reporting suspicious activity reporting, must increase with the institution's size and complexity. Failure to implement or maintain adequate programs and controls to combat terrorist financing and money laundering may have serious legal, financial, and reputational consequences.

Governmental Policies and Economic Factors

The operations of BOK Financial and its subsidiaries are affected by legislative changes and by the policies of various regulatory authorities and, in particular, the policies of the Federal Reserve Board. The Federal Reserve Board has statutory objectives to maximize employment and maintain price stability. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are: open-market operations in U.S. Government securities, changes in the discount rate and federal funds rate on bank borrowings, and changes in reserve requirements on bank deposits. The effect of future changes in such policies on the business and earnings of BOK Financial and its subsidiaries is uncertain.

In response to the significant recession in business activity which began in 2007, the Federal Reserve took aggressive actions to reduce interest rates and provide liquidity. While many of the crisis-related programs have expired or been closed, government legislation and policies continue to be accommodative, including increases in government spending, reduction of certain taxes and promotion of affordable home programs. 

The Federal Reserve completed its bond purchase program designed to reduce longer–term rates in October of 2014 and has continued to maintain an accommodative policy of reinvesting principal payments from its holdings of agency debt and agency mortgage–backed securities and rolling over maturing Treasury securities. The Federal Reserve announced that, beginning in October of 2017, it would initiate a balance sheet normalization program that will gradually reduce the the reinvestment of principal payments from its securities holdings.

As a result of signs of an improving economy, the Federal Reserve increased its target rate by 25 basis points three times during 2017, after an initial 25 basis point increase in December of 2016, the second such increase since the end of 2008. Real gross domestic product is forecasted to increase at a solid pace during 2018, including consideration of the expected impact of tax reform. The inflation rate is expected to be close to the Federal Reserve's target of 2%. We expect a continuation of gradual increases in short term interest rates during 2018 and 2019, as the Federal Reserve has indicated a process of normalization while promoting sustainable expansion and a rise of inflation to about 2%. The short–term effectiveness and long–term impact of these programs on the economy in general and on BOK Financial in particular are uncertain.

The Tax Cuts and Jobs Act ("the Tax Reform Act"), signed into law on December 22, 2017, will have a broad impact on the Company and our customers. We believe that the overall impact of lower income tax rates and other provisions of the Tax Reform Act will be beneficial to future economic growth.

Foreign Operations

BOK Financial does not engage in operations in foreign countries, nor does it lend to foreign governments.

8



ITEM 1A.   RISK FACTORS

BOK Financial Corporation and its subsidiaries could be adversely affected by risks and uncertainties that could have a material impact on its financial condition and results of operations, as well as on its common stock and other financial instruments. Risk factors which are significant to the Company include, but are not limited to:

General and Regulatory Risk Factors

Adverse factors could impact BOK Financial's ability to implement its operating strategy.

Although BOK Financial has developed an operating strategy, which it expects to result in continuing improved financial performance, BOK Financial cannot ensure that it will be successful in fulfilling this strategy or that this operating strategy will be successful. Achieving success is dependent upon a number of factors, many of which are beyond BOK Financial's direct control. Factors that may adversely affect BOK Financial's ability to implement its operating strategy include:

deterioration of BOK Financial's asset quality;
deterioration in general economic conditions, especially in BOK Financial's core markets;
inability to control BOK Financial's non-interest expenses;
inability to increase non-interest income;
inability to access capital;
decreases in net interest margins;
increases in competition;
adverse regulatory developments.

Substantial competition could adversely affect BOK Financial.

Banking is a competitive business. BOK Financial competes actively for loan, deposit and other financial services business in the southwest region of the United States. BOK Financial's competitors include a large number of small and large local and national banks, savings and loan associations, credit unions, trust companies, broker-dealers and underwriters, as well as many financial and non-financial firms that offer services similar to those of BOK Financial. Large national financial institutions have substantial capital, technology and marketing resources. Such large financial institutions may have greater access to capital at a lower cost than BOK Financial does, which may adversely affect BOK Financial's ability to compete effectively.

BOK Financial has expanded into markets outside of Oklahoma, where it competes with a large number of financial institutions that have an established customer base and greater market share than BOK Financial. With respect to some of its services, BOK Financial competes with non-bank companies that are not subject to regulation. The absence of regulatory requirements may give non-banks a competitive advantage.

The increasingly competitive environment is in part a result of changes in regulation, changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers. Our success depends on our ability to respond to the threats and opportunities of financial technology innovations. Developments in "fintech" and crypto-currencies have the potential to disrupt the financial industry and change the way banks do business. Investment in new technology to stay competitive could result in significant costs and increased cybersecurity risk. Our success depends on our ability to adapt to the pace of the rapidly changing technological environment which is important to retention and acquisitions of customers.

Government regulations could adversely affect BOK Financial.

BOK Financial and BOKF, NA are subject to banking laws and regulations that limit the type of acquisitions and investments that we may make. In addition, certain permitted acquisitions and investments are subject to prior review and approval by banking regulators, including the Federal Reserve, OCC and FDIC. Banking regulators have broad discretion on whether to approve proposed acquisitions and investments. In deciding whether to approve a proposed acquisition, federal banking regulators will consider, among other things, the effect of the acquisition on competition; the convenience and needs of the communities to be served, including our record of compliance under the Community Reinvestment Act; and our effectiveness in combating money laundering. They will also consider our financial condition and our future prospects, including projected capital ratios and levels; the competence, experience, and integrity of our management; and our record of compliance with laws and regulations.
 

9



The last several years have seen an increase in regulatory costs borne by the banking industry. Laws, regulations or policies currently affecting BOK Financial and its subsidiaries may change. The implementation of the Dodd-Frank Act has and will continue to affect BOK Financial’s businesses, including interchange revenue, mortgage banking, derivative and trading activities on behalf of customers, consumer products and funds management.

Regulatory authorities may change their interpretation of these statutes and regulations, including the OCC, our primary regulator, and the CFPB, our regulator for certain designated consumer laws and regulations. Violations of laws and regulations could limit the growth potential of BOK Financial's businesses. We have made extensive investments in human and technological resources to address enhanced regulatory expectations, including investments in the areas of risk management, compliance, and capital planning. Political developments, including the change in administration in the United States, have added additional uncertainty to the implementation, scope and timing of changes in the regulatory environment for the banking industry and for the broader economy.

The Tax Reform Act was signed into law on December 22, 2017. Key provisions that will impact domestic banks include lowering of the corporate tax rate to 21%, full expensing of qualified assets purchased and placed in service after September 27, 2017, elimination of net operating loss carry-backs, and limitations on the deductibility of FDIC insurance and compensation expense for certain executive officers. Many provisions of the Tax Reform Act may also impact our customers, including limitations on deductions by businesses for net interest expense and by individuals for interest on mortgage loans in excess of $750,000 and elimination of deduction of interest on certain home equity loans. BOKF believes that the overall impact of the Tax Reform Act should benefit our customers. However, certain provisions could have an adverse impact on our customers and BOKF’s products, services and revenue.

Political environment could negatively impact BOK Financial’s business.

As a result of the financial crisis and related government intervention to stabilize the banking system, there have been a series of laws and related regulations proposed or enacted in an attempt to ensure the crisis is not repeated. Many of the new regulations have been far-reaching. The intervention by the government also impacted populist sentiment with a negative view of financial institutions. High profile mistakes by the very largest banks in the country have continued to fuel negative sentiment towards the banking industry. This sentiment may increase litigation risk to the Company or have an adverse impact on BOK Financial’s future operations. Recent legislative proposals could slow the rate of future increases in regulatory burden for BOK Financial. However, legislative outcomes and their durability are inherently uncertain.

Credit Risk Factors

Adverse regional economic developments could negatively affect BOK Financial's business.

At December 31, 2017, loans to businesses and individuals with collateral primarily located in Texas represented approximately 34% of the total loan portfolio and loans to businesses and individuals with collateral primarily located in Oklahoma represented approximately 19% of our total loan portfolio. These geographic concentrations subject the loan portfolio to the general economic conditions within these areas. Poor economic conditions in Oklahoma, Texas or other markets in the southwest region may cause BOK Financial to incur losses associated with higher default rates and decreased collateral values in BOK Financial's loan portfolio. A regional economic downturn could also adversely affect revenue from brokerage and trading activities, mortgage loan originations and other sources of fee-based revenue.

Extended oil and gas commodity price downturns could negatively affect BOK Financial customers.

At December 31, 2017, 17% of BOK Financial's total loan portfolio is comprised of loans to borrowers in the energy industry. The energy industry is historically cyclical and prolonged periods of low oil and gas commodity prices could negatively impact borrowers' ability to pay. In addition, the Company does business in several major oil and natural gas producing states including Oklahoma, Texas and Colorado. The economies of these states could be negatively impacted by prolonged periods of low oil and gas commodity prices resulting in increased credit migration to classified and nonaccruing categories, higher loan loss provisions and risk of credit losses from both energy borrowers and businesses and individuals in those regional economies.


10



Other adverse economic factors affecting particular industries could have a negative effect on BOK Financial customers and their ability to make payments to BOK Financial.

Certain industry-specific economic factors also affect BOK Financial. For example, BOK Financial's loan portfolio includes commercial real estate loans. A downturn in the real estate industry in general or in certain segments of the commercial real estate industry in the southwest region could also have an adverse effect on BOK Financial's operations. Regulatory changes in healthcare may negatively affect our customers, which to date primarily has been focused in senior housing. A U.S. House proposal that provides states more flexibility in using Medicare/Medicaid funds may reduce healthcare reimbursement rates.

Adverse global economic factors could have a negative effect on BOK Financial customers and counterparties.

Economic conditions globally, including those of the European Union and China, could impact BOK Financial’s customers and counterparties with which we do business. We have no direct exposure to European sovereign debt and our aggregate gross exposure to European financial institutions totaled $2.9 million at December 31, 2017. Our exposure to Chinese financial institutions is limited. In addition, we have an aggregate gross exposure to internationally active domestic financial institutions of approximately $226 million at December 31, 2017 composed of $217 million of cash and securities positions and $9.8 million of gross derivative positions. The financial condition of these institutions is monitored on an on-going basis. We have not identified any significant customer exposures to European sovereign debt, European financial institutions or Chinese financial institutions.

Liquidity and Interest Rate Risk Factors

Fluctuations in interest rates could adversely affect BOK Financial's business.

BOK Financial's business is highly sensitive to:

the monetary policies implemented by the Federal Reserve Board, including the discount rate on bank borrowings and changes in reserve requirements, which affect BOK Financial's ability to make loans and the interest rates we may charge;
changes in prevailing interest rates, due to the dependency of the the Bank on interest income;
open market operations in U.S. Government securities.

A significant increase in market interest rates, or the perception that an increase may occur, could adversely affect both BOK Financial's ability to originate new loans and BOK Financial's ability to grow. Conversely, a decrease in interest rates could result in acceleration in the payment of loans, including loans underlying BOK Financial's holdings of residential mortgage-backed securities and termination of BOK Financial's mortgage servicing rights. In addition, changes in market interest rates, changes in the relationships between short-term and long-term market interest rates or changes in the relationships between different interest rate indices, could affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income, which would reduce the Company’s net interest revenue. In a rising interest rate environment, the composition of the deposit portfolio could shift resulting in a mix that is more sensitive to changes in interest rates than is the current mix. An increase in market interest rates also could adversely affect the ability of BOK Financial's floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and net charge-offs, which could adversely affect BOK Financial's business.

We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. In 2017, the U.K. Financial Conduct Authority announced that LIBOR is to be transitioned to alternative rates during the next four years. U.S. regulatory authorities have voiced similar support for phasing out LIBOR. The impact of alternatives to LIBOR on the valuations, pricing and operation of our financial instruments is not yet known.


11



Changes in mortgage interest rates could adversely affect mortgage banking operations as well as BOK Financial's substantial holdings of residential mortgage-backed securities and mortgage servicing rights, and brokerage and trading revenue.

Our available for sale residential mortgage-backed security portfolio represents investment interests in pools of residential mortgages, composing $5.4 billion or 17% of total assets of the Company at December 31, 2017. The fair value of residential mortgage-backed securities is highly sensitive to changes in interest rates. BOK Financial mitigates this risk somewhat by investing principally in shorter duration mortgage products, which are less sensitive to changes in interest rates. A significant decrease in interest rates may lead mortgage holders to refinance the mortgages constituting the pool backing the securities, subjecting BOK Financial to a risk of prepayment and decreased return on investment due to subsequent reinvestment at lower interest rates. A significant decrease in interest rates may also accelerate premium amortization. Conversely, a significant increase in interest rates may cause mortgage holders to extend the term over which they repay their loans, which delays the Company’s opportunity to reinvest funds at higher rates.

Residential mortgage-backed securities are also subject to credit risk from delinquency or default of the underlying loans. BOK Financial mitigates this risk somewhat by investing in securities issued by U.S. government agencies. Principal and interest payments on the loans underlying these securities are guaranteed by these agencies.

BOK Financial derives a substantial amount of revenue from mortgage loan activities, including $38 million from the production and sale of mortgage loans, $66 million from the servicing of mortgage loans, $12 million from the trading of U.S. agency residential mortgage backed securities and related financial instruments and $35 million from sales of financial instruments to other mortgage lenders in 2017.

In addition, as part of BOK Financial's mortgage banking business, BOK Financial has substantial holdings of mortgage servicing rights, totaling $253 million or 0.78% of total assets at December 31, 2017. The fair value of these rights is also very sensitive to changes in interest rates. Falling interest rates tend to increase loan prepayments, which may lead to a decrease in the value of related servicing rights. BOK Financial attempts to manage this risk by maintaining an active hedging program for its mortgage servicing rights. The Company's hedging program focuses on partially hedging the risk of changes in fair value, primarily related to changes mortgage interest rates. Other factors, such as short-term interest rates, which also impact the value of mortgage servicing rights, may not be hedged. The value of mortgage servicing rights may also decrease due to rising delinquency or default of the loans serviced, which are not hedged. This risk is mitigated somewhat by adherence to underwriting standards on loans originated for sale.

Fees and commissions revenue, as well our substantial holdings of residential mortgage backed securities and mortgage servicing rights may be adversely affected by changes in government policies and programs.

Market disruptions could impact BOK Financial’s funding sources.

BOK Financial’s subsidiary bank may rely on other financial institutions and the Federal Home Loan Bank of Topeka as a significant source of funds. Our ability to fund loans, manage our interest rate risk and meet other obligations depends on funds borrowed from these sources. The inability to borrow funds at market interest rates could have a material adverse effect on our operations.

Operating Risk Factors

Dependence on technology increases cybersecurity risk.

As a financial institution, we process a significant number of customer transactions and possess a significant amount of sensitive customer information. As technology advances, the ability to initiate transactions and access data has become more widely distributed among mobile phones, personal computers, automated teller machines, remote deposit capture sites and similar access points. These technological advances increase cybersecurity risk. While the Company maintains programs intended to prevent or limit the effects of cybersecurity risk, there is no assurance that unauthorized transactions or unauthorized access to customer information will not occur. The financial, reputational and regulatory impact of unauthorized transactions or unauthorized access to customer information could be significant.


12



We depend on third parties for critical components of our infrastructure.

We outsource a significant portion of our information systems, communications, data management and transaction processing to third parties. These third parties are sources of risk associated with operational errors, system interruptions or breaches, unauthorized disclosure of confidential information and misuse of intellectual property. If the service providers encounter any of these issues, we could be exposed to disruption of service, reputation damages, and litigation risk that could be material to our business.

Risks Related to an Investment in Our Stock

Although publicly traded, BOK Financial's common stock has substantially less liquidity than the average trading market for a stock quoted on the NASDAQ National Market System.

A relatively small fraction of BOK Financial's outstanding common stock is actively traded. The risks of low liquidity include increased volatility of the price of BOK Financial's common stock. Low liquidity may also limit holders of BOK Financial's common stock in their ability to sell or transfer BOK Financial's shares at the price, time and quantity desired.

BOK Financial's principal shareholder controls a majority of BOK Financial's common stock.

Mr. George B. Kaiser owns approximately 60% of the outstanding shares of BOK Financial's common stock at December 31, 2017. Mr. Kaiser is able to elect all of BOK Financial's directors and effectively control the vote on all matters submitted to a vote of BOK Financial's common shareholders. Mr. Kaiser's ability to prevent an unsolicited bid for BOK Financial or any other change in control could have an adverse effect on the market price for BOK Financial's common stock. A substantial majority of BOK Financial's directors are not officers or employees of BOK Financial or any of its affiliates. However, because of Mr. Kaiser's control over the election of BOK Financial's directors, he could change the composition of BOK Financial's Board of Directors so that it would not have a majority of outside directors.

Possible future sales of shares by BOK Financial's principal shareholder could adversely affect the market price of BOK Financial's common stock.

Mr. Kaiser has the right to sell shares of BOK Financial's common stock in compliance with the federal securities laws at any time, or from time to time. The federal securities laws will be the only restrictions on Mr. Kaiser's ability to sell. Because of his current control of BOK Financial, Mr. Kaiser could sell large amounts of his shares of BOK Financial's common stock by causing BOK Financial to file a registration statement that would allow him to sell shares more easily. In addition, Mr. Kaiser could sell his shares of BOK Financial's common stock without registration under Rule 144 of the Securities Act. Although BOK Financial can make no predictions as to the effect, if any, that such sales would have on the market price of BOK Financial's common stock, sales of substantial amounts of BOK Financial's common stock, or the perception that such sales could occur, could adversely affect market prices. If Mr. Kaiser sells or transfers his shares of BOK Financial's common stock as a block, another person or entity could become BOK Financial's controlling shareholder.

Statutory restrictions on subsidiary dividends and other distributions and debts of BOK Financial's subsidiaries could limit amounts BOK Financial's subsidiaries may pay to BOK Financial.

A substantial portion of BOK Financial's cash flow typically comes from dividends paid by BOKF, NA. Statutory provisions and regulations restrict the amount of dividends BOKF, NA may pay to BOK Financial without regulatory approval. Management also developed, and the BOK Financial board of directors approved, an internal capital policy that is more restrictive than the regulatory capital standards. In the event of liquidation, creditors of the Bank and other non-bank subsidiaries of BOK Financial are entitled to receive distributions from the assets of that subsidiary before BOK Financial, as holder of an equity interest in the subsidiaries, is entitled to receive any distributions.

13



ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.
ITEM 2.   PROPERTIES

BOK Financial and its subsidiaries own and lease improved real estate that is carried at $184 million, net of depreciation and amortization. The Company’s principal offices are located in leased premises in the Bank of Oklahoma Tower in Tulsa, Oklahoma. Banking offices are primarily located in Tulsa and Oklahoma City, Oklahoma; Dallas, Fort Worth and Houston, Texas; Albuquerque, New Mexico; Denver, Colorado; Phoenix, Arizona; and Kansas City, Kansas/Missouri. Primary operations facilities are located in Tulsa and Oklahoma City, Oklahoma; Dallas, Texas and Albuquerque, New Mexico. The Company’s facilities are suitable for their respective uses and present needs.

The information set forth in Notes 5 and 14 of the Company’s Notes to Consolidated Financial Statements, which appear elsewhere herein, provides further discussion related to properties.
ITEM 3.   LEGAL PROCEEDINGS

The information set forth in Note 14 of the Company’s Notes to Consolidated Financial Statements, which appear elsewhere herein, provides discussion related to legal proceedings.
ITEM 4.   MINE SAFETY DISCLOSURES
 
Not applicable.

14



PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

BOK Financial’s $0.00006 par value common stock is traded on the NASDAQ Stock Market under the symbol BOKF. As of January 31, 2018, common shareholders of record numbered 699 with 65,550,406 shares outstanding.

The highest and lowest quarterly closing bid price for shares and cash dividends declared per share of BOK Financial common stock follows:
 
 
First
 
Second
 
Third
 
Fourth
2017:
 
 
 
 
 
 
 
 
Low
 
$
75.15

 
$
74.34

 
$
77.30

 
$
82.30

High
 
84.81

 
85.83

 
89.08

 
93.50

Cash dividends declared
 
0.44

 
0.44

 
0.44

 
0.45

2016:
 
 

 
 

 
 

 
 

Low
 
$
44.72

 
$
51.36

 
$
58.49

 
$
67.72

High
 
58.60

 
64.61

 
69.31

 
84.13

Cash dividends declared
 
0.43

 
0.43

 
0.43

 
0.44



15



Shareholder Return Performance Graph

Set forth below is a line graph comparing the change in cumulative shareholder return of the NASDAQ Composite Index, the KBW NASDAQ Bank Index and the SNL U.S. Bank NASDAQ Index for the period commencing December 31, 2012 and ending December 31, 2017.*
 
chart-b059afb2f2c657a38b5.jpg
 
 
Period Ending December 31,
Index
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
BOK Financial Corporation
 
100.00

 
124.80

 
115.80

 
118.37

 
169.16

 
192.20

NASDAQ Composite
 
100.00

 
140.12

 
160.78

 
171.97

 
187.22

 
242.71

SNL U.S. Bank NASDAQ
 
100.00

 
143.73

 
148.86

 
160.70

 
222.81

 
234.58

KBW NASDAQ Bank Index
 
100.00

 
137.75

 
150.65

 
151.39

 
194.56

 
230.73

*
Graph assumes value of an investment in the Company's Common Stock for each index was $100 on December 31, 2012. Cash dividends on Common Stock are assumed to have been reinvested in BOK Financial Common Stock.


16



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 December 31, 2017.
 
 
Period
 
 
Total Number of Shares Purchased 2
 
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 1
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans
October 1, 2017 to October 31, 2017
 

 
$

 

 
2,120,757

November 1, 2017 to November 30, 2017
 

 
$

 

 
2,120,757

December 1, 2017 to December 31, 2017
 
80,000

 
$
92.54

 
80,000

 
2,040,757

Total
 
80,000

 
 
 
80,000

 
 
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 December 31, 2017, the Company had repurchased 2,959,243 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 may repurchase shares from employees to cover the exercise price and taxes in connection with employee shared-based compensation.

17



ITEM 6.  SELECTED FINANCIAL DATA

The selected financial data is set forth within Table 1 of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Table 1 -- Consolidated Selected Financial Data
 
 
 
 
 
 
 
 
(Dollars in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Selected Financial Data
 
 
 
 
 
 
 
 
 
For the year:
 
 
 
 
 
 
 
 
 
Interest revenue
$
972,751

 
$
829,117

 
$
766,828

 
$
732,239

 
$
745,371

Interest expense
131,050

 
81,889

 
63,474

 
67,045

 
70,894

Net interest revenue
841,701

 
747,228

 
703,354

 
665,194

 
674,477

Provision for credit losses
(7,000
)
 
65,000

 
34,000

 

 
(27,900
)
Fees and commissions revenue
683,444

 
686,748

 
650,646

 
621,319

 
603,844

Net income attributable to BOK Financial Corporation shareholders
334,644

 
232,668

 
288,565

 
292,435

 
316,609

Period-end:
 
 
 

 
 

 
 

 
 

Loans
17,153,424

 
16,989,660

 
15,941,154

 
14,208,037

 
12,792,264

Assets
32,272,160

 
32,772,281

 
31,476,128

 
29,089,698

 
27,015,432

Deposits
22,061,305

 
22,748,095

 
21,088,158

 
21,140,859

 
20,269,327

Shareholders’ equity
3,495,367

 
3,274,854

 
3,230,556

 
3,302,179

 
3,020,049

Nonperforming assets1
290,305

 
356,641

 
251,908

 
256,617

 
247,743

 
 
 
 
 
 
 
 
 
 
Profitability Statistics
 
 
 

 
 

 
 

 
 

Earnings per share (based on average equivalent shares):
 
 
 

 
 

 
 

 
 

Basic
$
5.11

 
$
3.53

 
$
4.22

 
$
4.23

 
$
4.61

Diluted
5.11

 
3.53

 
4.21

 
4.22

 
4.59

Percentages (based on daily averages):
 
 
 

 
 

 
 

 
 

Return on average assets
1.02
%
 
0.72
%
 
0.94
%
 
1.04
%
 
1.16
%
Return on average shareholders' equity
9.82
%
 
7.02
%
 
8.65
%
 
9.21
%
 
10.64
%
Average total equity to average assets
10.43
%
 
10.38
%
 
11.03
%
 
11.47
%
 
11.00
%
 
 
 
 
 
 
 
 
 
 
Common Stock Performance
 
 
 

 
 

 
 

 
 

Per Share:
 
 
 

 
 

 
 

 
 

Book value per common share
$
53.45

 
$
50.12

 
$
49.03

 
$
47.78

 
$
43.88

Market price: December 31 close
92.32

 
83.04

 
59.79

 
60.04

 
66.32

Market range – High close bid price
93.50

 
84.13

 
72.44

 
70.18

 
69.36

Market range – Low close bid price
74.34

 
44.72

 
53.37

 
57.87

 
55.05

Cash dividends declared
1.77

 
1.73

 
1.69

 
1.62

 
1.54

Dividend payout ratio
34.45
%
 
48.81
%
 
40.03
%
 
38.35
%
 
33.43
%
 
 
 
 
 
 
 
 
 
 

18



Table 1 -- Consolidated Selected Financial Data
 
 
 
 
 
 
 
 
(Dollars in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Selected Balance Sheet Statistics
 
 
 

 
 

 
 

 
 

Period-end:
 
 
 

 
 

 
 

 
 

Common equity Tier 1 ratio2
12.05
%
 
11.21
%
 
12.13
%
 
N/A

 
N/A

Tier 1 capital ratio2
12.05
%
 
11.21
%
 
12.13
%
 
13.33
%
 
13.77
%
Total capital ratio2
13.54
%
 
12.81
%
 
13.30
%
 
14.66
%
 
15.56
%
Leverage ratio2
9.31
%
 
8.72
%
 
9.25
%
 
9.96
%
 
10.05
%
Allowance for loan losses to nonaccruing loans4
129.09
%
 
112.33
%
 
180.09
%
 
245.34
%
 
184.71
%
Allowance for loan losses to loans
1.34
%
 
1.45
%
 
1.41
%
 
1.33
%
 
1.45
%
Combined allowances for credit losses to loans 3
1.37
%
 
1.52
%
 
1.43
%
 
1.34
%
 
1.47
%
Miscellaneous (at December 31)
 
 
 

 
 

 
 

 
 

Number of employees (full-time equivalent)
4,930

 
4,884

 
4,789

 
4,743

 
4,632

Number of TransFund locations
2,223

 
2,021

 
1,972

 
2,080

 
1,998

Fiduciary assets
$
48,761,477

 
$
42,378,053

 
$
38,333,638

 
$
35,997,877

 
$
30,137,092

Mortgage loans serviced for others
22,046,632

 
21,997,568

 
19,678,226

 
16,162,887

 
13,718,942

1 
Includes nonaccruing loans, renegotiated loans and assets acquired in satisfaction of loans. Excludes loans past due 90 days or more and still accruing.
2 
Risk-based capital ratios for 2017, 2016 and 2015 calculated under revised regulatory capital rules issued July 2013 and effective for the Company on January 1, 2015. Previous risk-based ratios presented are calculated in accordance with then current regulatory capital rules.    
3 
Includes allowance for loan losses and accrual for off-balance sheet credit risk.
4 
Excludes residential mortgage loans guaranteed by agencies of the U.S. government.

Management’s Assessment of Operations and Financial Condition

Overview

The following discussion is management’s analysis to assist in the understanding and evaluation of the financial condition and results of operations of BOK Financial Corporation ("BOK Financial" or "the Company"). This discussion should be read in conjunction with the Consolidated Financial Statements and footnotes and selected financial data presented elsewhere in this report.

For 2017, the U.S. economy continued to grow, supported by declining unemployment, continued payroll growth and modest inflation. The national unemployment rate fell to a 17-year low at 4.1% in December of 2017. Inflation also remained below 2% for 2017. The minutes of the Federal Open Market Committee ("FOMC") of the Federal Reserve for December indicated continued strengthening of labor market conditions, real gross domestic product rising at a solid pace in the second half of 2017 and unchanged longer-run inflation expectations. Investment returns remained strong for 2017, with the S&P 500 index up 19% for the year. This represents the 9th year in a row of positive returns for the S&P 500 index.

The Federal Reserve increased the target range for the federal funds rate by 25 basis points three different times during 2017. The 10-year U.S. Treasury note finished the year yielding 2.40%. We expect rates to continue to rise during 2018. Global quantitative easing and lack of inflation, combined with continued gradual federal funds rate increases by the Federal Reserve are contributing to a flattening of the yield curve. Higher long-term interest rates are likely in 2018.

On December 22, 2017, the Tax Reform Act was signed into law, lowering tax rates on corporations, pass-through entities, individuals and estates. We believe that the passage of tax reform will be beneficial to economic growth across our footprint by providing certainty for our customers to base their investment and borrowing decisions.


19



Performance Summary

Net income for the year ended December 31, 2017 totaled $334.6 million or $5.11 per diluted share compared with net income of $232.7 million or $3.53 per diluted share for the year ended December 31, 2016.

The Tax Reform Act resulted in an $11.7 million or $0.18 per share reduction of net income in the fourth quarter of 2017. A decrease in the federal corporate tax rate from 35% to 21% required us to revalue our deferred tax assets and liabilities. Provisions of the Tax Reform Act also limit the deductibility of certain other expenses.

Highlights of 2017 included:
Net interest revenue totaled $841.7 million for 2017, up from $747.2 million for 2016. The increase in net interest revenue was driven by both widening spreads and growth in average assets. Net interest margin was 2.92% for 2017 compared to 2.66% for 2016. Average earning assets were $29.6 billion for 2017, up $646 million over 2016.
Fees and commissions revenue was $683.4 million for 2017, largely unchanged compared to 2016. Fiduciary and asset management revenue grew by $27.4 million driven by growth in assets under management, improved pricing discipline and decreased fee waivers. Mortgage banking revenue decreased $29.2 million. Production volumes decreased primarily due to higher mortgage interest rates and the Company's strategic decision to exit the correspondent lending channel. This impact was partially offset by improved gain on sale margins. Brokerage and trading revenue decreased $6.8 million, primarily due to decreases in customer hedging revenue related to our mortgage banking customers and retail brokerage revenue.
The change in the fair value of mortgage servicing rights, net of economic hedges, decreased other operating revenue by $1.9 million in 2017, compared to a $28.4 million decrease in other operating revenue in 2016. In 2016, an unexpected 85 basis point increase in the 10-year U.S. Treasury interest rate and related interest rates due to the market's reaction to the outcome of the U.S. presidential election increased the fair value of our servicing rights $39.8 million. The fair value of our economic hedges decreased $56.8 million.
Other operating expense totaled $1.0 billion, largely unchanged compared to the prior year. Personnel expense increased$20.3 million, primarily due to increased share-based compensation expense. Non-personnel expense decreased $12.4 million compared to the prior year, primarily due to lower deposit insurance expenses, litigation and settlement costs and mortgage banking expense, partially offset by increased data processing and communications expense.
The Company recorded a $7.0 million negative provision for credit losses in 2017, compared to a $65.0 million provision for credit losses in 2016. Nonaccruing loans not guaranteed by U.S. government agencies decreased $40 million compared to December 31, 2016. Potential problem loans decreased $158 million and other loans especially mentioned decreased $111 million. Net charge-offs declined to $16.0 million or 0.09% of average loans for 2017, compared to net charge-offs of $34.8 million or 0.21% of average loans for 2016. The combined allowance for credit losses totaled $234 million or 1.37% of outstanding loans at December 31, 2017
Period-end outstanding loan balances were $17.2 billion at December 31, 2017, a $164 million or 1% increase over the prior year. Commercial loan balances grew by $343 million or 3%, partially offset by a $329 million or 9% decrease in commercial real estate loans. Residential mortgage loans increased $24 million and personal loans grew by $126 million.
Period-end deposits totaled $22.1 billion at December 31, 2017, a $687 million or 3% decrease compared to December 31, 2016. Interest-bearing transaction deposits decreased $615 million and time deposit balances decreased $123 million. Savings account balances increased $44 million and demand deposit balances were largely unchanged compared to the prior year.
The Company's common equity Tier 1 capital ratio was 12.05% at December 31, 2017. In addition, the Tier 1 capital ratio was 12.05%, total capital ratio was 13.54% and leverage ratio was 9.31% at December 31, 2017. At December 31, 2016, the Tier 1 capital ratio was 11.21%, the total capital ratio was 12.81% and the leverage ratio was 8.72%.
The Company repurchased 80,000 shares at an average price of $92.54 per share during 2017. The Company repurchased 1,005,169 shares at an average price of $66.45 during 2016.
The Company paid cash dividends of $1.77 per common share during 2017 and $1.73 per common share in 2016.


20



Net income for the fourth quarter of 2017 totaled $72.5 million or $1.11 per diluted share, up from $50.0 million or $0.76 per diluted share for the fourth quarter of 2016.

Highlights of the fourth quarter of 2017 included:
Net interest revenue totaled $216.9 million for the fourth quarter of 2017, up $22.7 million over the fourth quarter of 2016. Net interest margin was 2.97% for the fourth quarter of 2017, up from 2.69% for the fourth quarter of 2016. Net interest revenue increased primarily due to three 25 basis point increases in the federal funds rate by the Federal Reserve during 2017 and growth in average loan balances.
Fees and commissions revenue totaled $168.2 million, up $6.1 million over the fourth quarter of 2016. Fiduciary and asset management revenue grew by $7.2 million, primarily due to growth in assets under management. Brokerage and trading revenue increased $4.5 million, primarily due to a $5.0 million decrease in the fair value of trading securities in the fourth quarter of 2016. Mortgage banking revenue decreased $4.1 million compared to the fourth quarter of 2016. Production volumes decreased primarily due to higher mortgage interest rates. Gain on sale margins were lower as higher- margin refinance activity also declined.
The loss in the fair value of mortgage servicing rights, net of economic hedges, was $1.4 million in the fourth quarter of 2017 compared to $17.0 million in the fourth quarter of 2016. The fourth quarter of 2016 included $17.0 million of the previously noted decrease in the fair value of mortgage servicing rights, net of economic hedges due to an unexpected increase in the 10-year U.S. Treasury interest rate and related interest rates.
Operating expenses in the fourth quarter totaled $264.0 million, a $1.6 million decrease compared to the prior year. The fourth quarter of 2016 included $5.0 million of severance and other expenses related to workforce reductions and $4.7 million of integration costs related to the Mobank acquisition.


21



Critical Accounting Policies & Estimates

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

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

The appropriateness of the allowance for loan losses and accrual for off-balance sheet credit risk is assessed quarterly by management based on an ongoing evaluation of the probable estimated losses inherent in the loan portfolio and probable estimated losses on unused commitments to provide financing. A consistent, well-documented methodology has been developed and is applied by an independent Credit Administration department to ensure consistency across the Company. The allowance for loan losses consists of specific allowances attributed to certain impaired loans that have not yet been charged down to amounts we expect to recover, general allowances for unimpaired loans that are based on estimated loss rates by loan class and nonspecific allowances for risks beyond factors specific to a particular portfolio segment or loan class. There have been no material changes in the approach or techniques utilized in developing the allowance for loan losses and accrual for off-balance sheet credit risk during 2017.

Loans are considered impaired when it is probable that we will not collect all amounts due according to the contractual terms of the loan agreements, including loans modified in a troubled debt restructuring. Internally risk graded loans are evaluated individually for impairment. Substantially all commercial and commercial real estate loans and certain residential mortgage and personal loans are risk graded through a quarterly evaluation of the borrower's ability to repay.

Specific allowances for impaired loans that have not yet been charged down to amounts we expect to recover are measured by an evaluation of estimated future cash flows discounted at the loan's 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 generally are not adjusted by the Company. Updated appraisals are obtained at least annually or more frequently if market conditions indicate collateral values may have declined. Collateral value of mineral rights is determined by our internal staff of engineers based on projected cash flows under current market conditions. The value of other collateral is generally determined by our special assets staff based on liquidation 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 near 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.

General allowances for unimpaired loans are based on estimated loss rates by loan class. The appropriate historical gross loss rate for each loan class is determined by the greater of the current loss rate based on the most recent twelve months or a ten-year average gross loss rate. Recoveries are not directly considered in the estimation of historical 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 proceedings. For risk graded loans, historical loss rates are adjusted for changes in risk rating. For each loan class, the weighted average current risk grade is compared to the weighted average long-term risk grade. This comparison determines whether the risk in each loan class is increasing or decreasing. Historical loss rates are adjusted upward or downward in proportion to changes in weighted average risk grading. General allowances for unimpaired loans also consider inherent risks identified for a given loan class. Inherent risks include consideration of the loss rates that most appropriately represent the current credit cycle and other factors attributable to a specific loan class which have not yet been represented in the historical gross loss rates or risk grading. Examples of 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 product types.

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.

22



Fair Value Measurement

Certain assets and liabilities are recorded at fair value in the Consolidated Financial Statements. 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 markets for the given asset or liability at the measurement date based on market conditions at that date. An orderly transaction assumes exposure to the market for a customary period for marketing activities prior to the measurement date and not a forced liquidation or distressed sale.

A hierarchy for fair value has been established that prioritizes the inputs of valuation techniques used to measure fair value into three broad categories: unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), other observable inputs that can be observed either directly or indirectly (Level 2) and unobservable inputs for assets or liabilities (Level 3). Fair value may be recorded for certain assets and liabilities every reporting period on a recurring basis or under certain circumstances on a non-recurring basis.

The following represents significant fair value measurements included in the Consolidated Financial Statements based on estimates. See Note 18 of the Consolidated Financial Statements for additional discussion of fair value measurement and disclosure included in the Consolidated Financial Statements.

Mortgage Servicing Rights

We have a significant investment in mortgage servicing rights. Our mortgage servicing rights are primarily retained from sales in the secondary market of residential mortgage loans we have originated or purchased from correspondent lenders. Occasionally, mortgage servicing rights may be purchased from other lenders. Both originated and purchased mortgage servicing rights are initially recognized at fair value. We carry all mortgage servicing rights at fair value. Changes in fair value are recognized in earnings as they occur.

Mortgage servicing rights are not traded in active markets. The fair value of mortgage servicing rights is determined by discounting the projected cash flows. Certain significant assumptions and estimates used in valuing mortgage servicing rights are based on current market sources including projected prepayment speeds, assumed servicing costs, earnings on escrow deposits, ancillary income and discount rates. Assumptions used to value our mortgage servicing rights are considered significant unobservable inputs and represent our best estimate of assumptions that market participants would use to value this asset. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated periodically for changes in market conditions and adjusted to better correlate with actual performance of our servicing portfolio. The discount rate is based on benchmark rates for mortgage loans plus a market spread expected by investors in servicing rights. Significant assumptions used to determine the fair value of our mortgage servicing rights are presented in Note 7 to the Consolidated Financial Statements. At least annually, we request estimates of fair value from outside sources to corroborate the results of the valuation model.

The assumptions used in this model are primarily based on mortgage interest rates. Evaluation of the effect of a change in one assumption without considering the effect of that change on other assumptions is not meaningful. Considering all related assumptions, we expect a 50 basis point increase in primary mortgage interest rates to increase the fair value of our servicing rights by $26 million. We expect a $33 million decrease in the fair value of our mortgage servicing rights from a 50 basis point decrease in primary mortgage interest rates.

Valuation of Derivative Instruments

We use interest rate derivative instruments to manage our interest rate risk. We also offer interest rate, commodity, foreign exchange and equity derivative contracts to our customers. All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices in an active market for identical instruments. Fair values for over-the-counter interest rate contracts used to manage our interest rate risk are generated internally using third-party valuation models. Inputs used in third-party valuation models to determine fair values are considered significant other observable inputs. Fair values for interest rate, commodity, foreign exchange and equity contracts used in our customer hedging programs are based on valuations generated internally by third-party provided pricing models. These models use significant other observable market inputs to estimate fair values. Changes in assumptions used in these pricing models could significantly affect the reported fair values of derivative assets and liabilities, though the net effect of these changes should not significantly affect earnings.


23



Credit risk is considered in determining the fair value of derivative instruments. Deterioration in the credit rating of customers or dealers reduces the fair value of asset contracts. The reduction in fair value is recognized in earnings during the current period. Fair value adjustments are 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. Deterioration in our credit rating below investment grade would affect the fair value of our derivative liabilities. In the event of a credit down-grade, the fair value of our derivative liabilities would decrease. The reduction in fair value would be recognized in earnings in the current period. The impact of credit valuation adjustments on the total valuation of derivative contracts was not significant.

Valuation of Securities

The fair value of our securities portfolio is generally based on a single price for each financial instrument provided to us by a third-party pricing service determined by 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.

The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. We evaluate 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 December 31, 2017 or December 31, 2016.

Valuation of Impaired Loans and Real Estate and Other Repossessed Assets

The fair value of collateral for certain impaired loans and real estate and other repossessed assets is measured on a non-recurring basis. The fair value of real estate is generally based on unadjusted third-party appraisals derived principally from or corroborated by observable market data. Fair value measurements based on these appraisals are considered to be based on Level 2 inputs. Fair value measurements based on appraisals that are not based on observable inputs or that require significant adjustments by us or fair value measurements that are not based on third-party appraisals are considered to be based on Level 3 inputs. Significant unobservable inputs include listing prices for comparable assets, uncorroborated expert opinions or management's knowledge of the collateral or industry.

The fair value of mineral rights is generally determined by our internal staff of engineers based on projected cash flows from proven oil and gas reserves under existing economic and operating conditions. Proven oil and gas reserves are estimated quantities that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs using existing prices and costs. Projected cash flows incorporate assumptions related to a number of factors including production, sales prices, operating expenses, severance, ad valorem taxes, capital costs and appropriate discount rate. Fair values determined through this process are considered to be based on Level 3 inputs.
 
Income Taxes

Determination of income tax expense and related assets and liabilities is complex and requires estimates and judgments when applying tax laws, rules, regulations and interpretations. It also requires judgments as to future earnings and the timing of future events. Accrued income taxes represent an estimate of net amounts due to or from taxing jurisdictions based upon these estimates, interpretations and judgments.


24



Management evaluates the Company's current tax expense or benefit based upon estimates of taxable income, tax credits and statutory tax rates. Annually, we file tax returns with each jurisdiction where we conduct business and adjust recognized income tax expense or benefit to filed tax returns.

We recognize deferred tax assets and liabilities based upon the differences between the values of assets and liabilities as recognized in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that some portion of the entire deferred tax asset may not be realized.

We also recognize the benefit of uncertain income tax positions when based upon all relevant evidence, it is more-likely-than-not that our position would prevail upon examination, including resolution of related appeals or litigation, based upon the technical merits of the position. Unrecognized tax benefits, including estimated interest and penalties, are part of our current accrued income tax liability. Estimated penalties and interest are recognized in income tax expense. Income tax expense in future periods may decrease if an uncertain tax position is favorably resolved, generally upon completion of an examination by the taxing authorities, expiration of a statute of limitations, or changes in facts and circumstances.

25



Results of Operations
Net Interest Revenue and Net Interest Margin

Net interest revenue is the interest earned on debt securities, loans and other interest-earning assets less interest paid for interest-bearing deposits and other borrowings. The net interest margin is calculated by dividing tax-equivalent net interest revenue by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest spread due to interest income earned on assets funded by non-interest bearing liabilities such as demand deposits and equity.

Tax-equivalent net interest revenue totaled $858.9 million for 2017, up from $764.8 million for 2016. Net interest margin was 2.92% for 2017 and 2.66% for 2016. Tax-equivalent net interest revenue increased $94.1 million over the prior year. Net interest revenue increased $61.2 million due to rates and $32.9 million from growth in earning assets. The benefit of an increase in short-term interest rates on floating-rate earning assets was partially offset by higher borrowing costs. Table 2 shows the effects on net interest revenue due to changes in average balances and interest rates for the various types of earning assets and interest-bearing liabilities. In addition, see the Annual and Quarterly Financial Summary of consolidated daily average balances, yields and rates following the Consolidated Financial Statements.

The tax-equivalent yield on earning assets was 3.36% for 2017 up from 2.95% in 2016, primarily due to increases in short-term interest rates resulting from three 25 basis point increases in the federal funds rate by the Federal Reserve during the year. Loan yields increased 50 basis points to 4.13% . The yield on interest-bearing cash and cash equivalents increased 57 basis points to 1.10%. The available for sale securities portfolio yield increased 10 basis points to 2.13%. The yield on fair value option securities held as an economic hedge of our mortgage servicing rights increased 88 basis points to 2.81% primarily related to a change in the mix of securities and an increase in average rates. Funding costs increased 25 basis points over 2016. The cost of interest-bearing deposits was limited to a 9 basis point increase due to a lack of market pricing pressure. The cost of other borrowed funds increased 55 basis points. The cost of subordinated debentures increased 280 basis points due to the full year impact of higher fixed rate debt issued in the second quarter of 2016 to replace lower variable rate debt paid off in the third quarter of 2016. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 23 basis points for 2017, up from 13 basis points for 2016.

Average earning assets for 2017 increased $646 million or 2% over 2016. Average loans, net of allowance for loan losses, increased $812 million. Growth in average commercial, residential and personal loans was partially offset by a decrease in average commercial real estate loan balances. Average loan balances were up $439 million related to the full year's impact of loans from the Mobank acquisition in the fourth quarter of 2016. The average balance of the fair value option securities portfolio held as an economic hedge of our mortgage servicing rights increased $270 million. Average trading securities balances increased $204 million primarily related to expanded U.S. mortgage-backed securities trading activity. The average balance of available for sale securities, which consists largely of residential and commercial mortgage-backed securities guaranteed by U.S. government agencies, decreased $414 million. We purchase securities to supplement earnings and to manage interest rate risk. We have reduced the size of our bond portfolio during the past three years through normal monthly runoff to better position the balance sheet for an environment of rising longer-term rates. Our outlook for earning assets in 2018 is for mid single-digit growth in loan balances and flat to slightly decreasing securities portfolio balances. We expect stable to rising net interest margin and increasing net interest revenue. The average balance of residential mortgage loans held for sale decreased by $125 million.

Growth in average assets was funded by growth in demand and interest-bearing deposits, partially offset by decreased repurchase agreements and borrowings from the Federal Home Loan Banks. Total average deposits grew by $1.3 billion over the prior year, including $491 million related to the full-year impact of the Mobank acquisition. Average demand deposit balances were up $839 million over the prior year and average interest-bearing transaction account balances increased $475 million. This growth was partially offset by a $66 million decrease in average time deposits. Average borrowed funds decreased $273 million over the prior year. Borrowings from the Federal Home Loan Banks decreased $103 million and average repurchase agreement balances were down $155 million compared to the prior year. Subordinated debenture and funds purchased balances also declined compared to the prior year.


26



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. As shown in Table 21, approximately 81% of our commercial and commercial real estate loan portfolios are either variable rate loans or fixed rate loans 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 2 and in the interest rate sensitivity projections as shown in the Market Risk section of this report.

Fourth Quarter 2017 Net Interest Revenue

Tax-equivalent net interest revenue totaled $221.0 million for the fourth quarter of 2017, an increase of $22.4 million over the fourth quarter of 2016. Net interest margin was 2.97% for the fourth quarter of 2017 compared to 2.69% for the fourth quarter of 2016. Net interest revenue increased $19.1 million primarily due to three 25 basis point increases in the federal funds rate by the Federal Reserve during 2017 and $3.3 million primarily due to the growth in average loan balances.

The tax-equivalent yield on earning assets was 3.49% for the fourth quarter of 2017, up 51 basis points over the fourth quarter of 2016. Loan yields increased 62 basis points to 4.29%. The available for sale securities portfolio yield increased 21 basis points to 2.21%. The yield on interest-bearing cash and cash equivalents increased 72 basis points to 1.27%. Yield on fair value option securities held as an economic hedge of our mortgage servicing rights was up 191 basis points to 2.90% due to a change in the mix of securities and increased interest rates. Funding costs were up 35 basis points over the fourth quarter of 2016. The cost of interest-bearing deposits was limited to a 16 basis point increase over the fourth quarter of 2016 by a lack of market pricing pressure. The cost of other borrowed funds increased 72 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 27 basis points in the fourth quarter of 2017, up from 15 basis points in the fourth quarter of 2016.

Average earning assets for the fourth quarter of 2017 increased $573 million over the fourth quarter of 2016, including $274 million related to the full-quarter's impact of the acquisition of Mobank on December 1, 2016. Average loans, net of allowance for loan losses, increased $458 million due primarily to growth in commercial, residential mortgage and personal loans, partially offset by decreased commercial real estate loan balances. The increase in average loans also included $292 million related to the full-quarter's impact of the Mobank acquisition. Fair value option securities held as an economic hedge of mortgage servicing rights were up $582 million over the fourth quarter of 2016, partially offset by a $331 million decrease in the available for sale securities portfolio.

Average deposits increased $458 million over the fourth quarter of 2016, including $312 million related to the full-quarter's impact of the Mobank acquisition. Average demand deposit balances increased $293 million and average interest-bearing transaction accounts increased $163 million. Average time deposits decreased $43 million. Average borrowed funds were largely unchanged compared to the fourth quarter of 2016. Increased Federal Home Loan Bank borrowings were offset by lower repurchase agreement balances.

2016 Net Interest Revenue

Tax-equivalent net interest revenue for 2016 was $764.8 million, up from $715.8 million for 2015. Net interest margin was 2.66% for 2016 compared to 2.60% for 2015. The $49.0 million increase in tax equivalent net interest revenue was due primarily to growth in earning assets. The benefit of an increase in short-term interest rates during 2016 on the loan portfolio and interest-bearing cash and cash equivalents yields was offset by higher borrowing costs.


27



The tax-equivalent yield on average earning assets increased 11 basis points over 2015. Loan yields increased 5 basis points primarily due growth in variable rate loans and an increase in short-term interest rates. The yield on trading securities increased 94 basis points due to a change in mix toward more higher-yielding U.S. agency residential mortgage-backed securities. The yield on interest-bearing cash and cash equivalents increased 26 basis points. The available for sale securities portfolio yield increased 4 basis points. The benefit from improved yields on investment securities was offset by lower yields on restricted equity and fair value option securities. The cost of interest-bearing liabilities increased 7 basis points. The cost of interest-bearing deposits decreased 1 basis point while the cost of other borrowed funds increased 25 basis points, primarily due to increases in federal funds rates by the Federal Reserve in the fourth quarters of 2016 and 2015. The cost of subordinated debentures increased 98 basis points as lower variable rate debt outstanding during 2015 was replaced by higher fixed rate debt. The Company issued $150 million of 40 year, 5.375% fixed rate subordinated debt during the second quarter of 2016 that replaced $227 million of floating rate subordinated debt based on three-month LIBOR plus 0.69%. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 13 basis points for 2016, compared to 11 basis points for 2015.

Average earning assets increased $1.2 billion or 4% during 2016. Average loans, net of allowance for loan losses, increased $1.3 billion. Average trading securities balances increased $168 million primarily related to the addition of a new group trading in U.S. mortgage-backed securities during 2016. The average balance of available for sale securities, which consists largely of residential and commercial mortgage-backed securities guaranteed by U.S. government agencies, decreased $152 million. We reduced the size of our bond portfolio during 2014, 2015 and 2016 through normal monthly runoff to better position the balance sheet for an environment of rising longer-term rates. Growth in average assets was funded by increased borrowings from the Federal Home Loan Banks and demand deposits growth, partially offset by lower interest-bearing deposits and subordinated debt balances. Total average deposits were largely unchanged compared to 2015. Average demand deposit account balances grew by $426 million. This growth was offset by a $328 million decrease in average time deposit balances and a $175 million decrease in average interest-bearing transaction account balances. Average borrowed funds balances increased $1.6 billion over 2015. Borrowings from the Federal Home Loan Banks increased $1.1 billion, partially offset by decreased funds purchased, repurchase agreements and subordinated debt balances.

28



Table 2Volume/Rate Analysis
(In thousands)
 
 
Year Ended
 
Year Ended
 
 
December 31, 2017 / 2016
 
December 31, 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
 
$
11,402

 
$
(252
)
 
$
11,654

 
$
5,146

 
$
(58
)
 
$
5,204

Trading securities
 
8,424

 
8,122

 
302

 
6,158

 
4,318

 
1,840

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(353
)
 
(196
)
 
(157
)
 
(664
)
 
(528
)
 
(136
)
Tax-exempt securities
 
(690
)
 
(1,567
)
 
877

 
1,596

 
(961
)
 
2,557

Total investment securities
 
(1,043
)
 
(1,763
)
 
720

 
932

 
(1,489
)
 
2,421

Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
2,232

 
(6,901
)
 
9,133

 
690

 
(2,617
)
 
3,307

Tax-exempt securities
 
(789
)
 
(994
)
 
205

 
12

 
(655
)
 
667

Total available for sale securities
 
1,443

 
(7,895
)
 
9,338

 
702

 
(3,272
)
 
3,974

Fair value option securities
 
10,032

 
5,886

 
4,146

 
(2,541
)
 
(1,290
)
 
(1,251
)
Restricted equity securities
 
1,252

 
(257
)
 
1,509

 
3,706

 
5,490

 
(1,784
)
Residential mortgage loans held for sale
 
(3,952
)
 
(4,389
)
 
437

 
(944
)
 
(416
)
 
(528
)
Loans
 
115,678

 
29,407

 
86,271

 
54,274

 
46,549

 
7,725

Total tax-equivalent interest revenue
 
143,236

 
28,859

 
114,377

 
67,433

 
49,832

 
17,601

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
14,721

 
851

 
13,870

 
5,085

 
(16
)
 
5,101

Savings deposits
 
(27
)
 
27

 
(54
)
 
3

 
39

 
(36
)
Time deposits
 
(1,385
)
 
(728
)
 
(657
)
 
(8,764
)
 
(4,139
)
 
(4,625
)
Funds purchased
 
235

 
(99
)
 
334

 
121

 
13

 
108

Repurchase agreements
 
187

 
(114
)
 
301

 
(34
)
 
(52
)
 
18

Other borrowings
 
33,366

 
(946
)
 
34,312

 
21,045

 
8,239

 
12,806

Subordinated debentures
 
2,064

 
(3,023
)
 
5,087

 
959

 
(1,445
)
 
2,404

Total interest expense
 
49,161

 
(4,032
)
 
53,193

 
18,415

 
2,639

 
15,776

Tax-equivalent net interest revenue
 
94,075

 
32,891

 
61,184

 
49,018

 
47,193

 
1,825

Change in tax-equivalent adjustment
 
(398
)
 
 
 
 
 
5,144

 
 
 
 
Net interest revenue
 
$
94,473

 
 
 
 
 
$
43,874

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



29



Table 2Volume/Rate Analysis (continued)
(In thousands)
 
 
Three Months Ended
 
 
December 31, 2017 / 2016
 
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield /
Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
3,511

 
$
(128
)
 
$
3,639

Trading securities
 
75

 
746

 
(671
)
Investment securities:
 
 
 
 
 
 
Taxable securities
 
5

 
52

 
(47
)
Tax-exempt securities
 
(277
)
 
(527
)
 
250

Total investment securities
 
(272
)
 
(475
)
 
203

Available for sale securities:
 
 
 
 
 
 
Taxable securities
 
2,596

 
(1,872
)
 
4,468

Tax-exempt securities
 
(203
)
 
(221
)
 
18

Total available for sale securities
 
2,393

 
(2,093
)
 
4,486

Fair value option securities
 
5,229

 
2,804

 
2,425

Restricted equity securities
 
402

 
44

 
358

Residential mortgage loans held for sale
 
(446
)
 
(757
)
 
311

Loans
 
28,880

 
3,488

 
25,392

Total tax-equivalent interest revenue
 
39,772

 
3,629

 
36,143

Interest expense:
 
 
 
 
 
 
Transaction deposits
 
5,002

 
144

 
4,858

Savings deposits
 
(4
)
 
14

 
(18
)
Time deposits
 
156

 
(119
)
 
275

Funds purchased
 
101

 
3

 
98

Repurchase agreements
 
161

 
(36
)
 
197

Other borrowings
 
11,927

 
330

 
11,597

Subordinated debentures
 
22

 
4

 
18

Total interest expense
 
17,365

 
340

 
17,025

Tax-equivalent net interest revenue
 
22,407

 
3,289

 
19,118

Change in tax-equivalent adjustment
 
(258
)
 
 
 
 
Net interest revenue
 
$
22,665

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

30



Other Operating Revenue

Other operating revenue was $695.1 million for 2017, up $21.1 million or 3% over 2016. The change in the fair value of mortgage servicing rights, net of economic hedges, decreased other operating revenue by $1.9 million in 2017 and $28.4 million in 2016.

Table 3Other Operating Revenue 
(In thousands)
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Brokerage and trading revenue
$
131,601

 
$
138,377

 
$
129,556

 
$
134,437

 
$
125,478

Transaction card revenue1
119,988

 
116,452

 
109,579

 
104,940

 
98,533

Fiduciary and asset management revenue
162,893

 
135,477

 
126,153

 
115,652

 
96,082

Deposit service charges and fees1
112,075

 
111,499

 
109,473

 
109,660

 
113,400

Mortgage banking revenue
104,719

 
133,914

 
126,002

 
109,093

 
121,934

Other revenue
52,168

 
51,029

 
49,883

 
47,537

 
48,417

Total fees and commissions revenue
683,444


686,748

 
650,646

 
621,319

 
603,844

Other gains, net
9,004

 
4,030

 
5,702

 
2,953

 
4,875

Gain (loss) on derivatives, net
779

 
(15,685
)
 
430

 
2,776

 
(4,367
)
Gain (loss) on fair value option securities, net
(2,733
)
 
(10,555
)
 
(3,684
)
 
10,189

 
(15,212
)
Change in fair value of mortgage servicing rights
172

 
(2,193
)
 
(4,853
)
 
(16,445
)
 
22,720

Gain on available for sale securities, net
4,428

 
11,675

 
12,058

 
1,539

 
10,720

Total other-than-temporary impairment

 

 
(2,443
)
 
(373
)
 
(2,574
)
Portion of loss recognized in (reclassified from) other comprehensive income

 

 
624

 

 
266

Net impairment losses recognized in earnings

 

 
(1,819
)
 
(373
)
 
(2,308
)
Total other operating revenue
$
695,094

 
$
674,020

 
$
658,480

 
$
621,958

 
$
620,272

1 
Check card revenue was reclassified from transaction card revenue to deposit service charges and fees for all periods presented.

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 45% of total revenue for 2017, excluding provision for credit losses and gains and losses on asset sales, 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 banking 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.

Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail broker and investment banking, decreased $6.8 million or 5% compared to the prior year. Excluding a $5.0 million decrease in the value of trading securities due to the unexpected increase in interest rates in 2016, brokerage and trading revenue decreased $11.8 million or 9%. The revenue decrease generally resulted from customer reaction to rising interest rates along with changes in regulations.

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 $43.6 million for 2017, a decrease of $4.4 million from 2016


31



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. Derivative contracts executed with customers are offset with contracts between selected counterparties and exchanges to minimize market risk from changes in commodity prices, interest rates or foreign exchange rates. Customer hedging revenue totaled $44.1 million for 2017, a decrease of $3.0 million or 6% compared to 2016. The volume of derivative contracts sold to our mortgage banking customers used to hedge their pipelines of mortgage loan originations decreased as average mortgage rates rose during 2017.

Revenue earned from retail brokerage transactions totaled $22.9 million for 2017, a decrease of $3.1 million or 12% compared the the prior year. 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 type of product. 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.

Investment banking, which includes fees earned upon completion of underwriting, financial advisory services and loan syndication fees totaled $20.9 million for 2017, a decrease of $1.2 million or 6% compared 2016, related to the timing and volume of completed transactions.

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 totaled $120 million for 2017, a $3.5 million or 3% increase over 2016. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $73.5 million, up $2.9 million or 4% over 2016, due primarily to a $2.1 million customer early termination penalty received in the third quarter of 2017. The number of TransFund ATM locations totaled 2,223 at December 31, 2017 compared to 2,021 at December 31, 2016. Merchant services fees paid by customers for account management and electronic processing of card transactions totaled $46.5 million, an increase of $608 thousand or 1% over the prior year.

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

Fiduciary and asset management revenue grew $27.4 million or 20% over 2016, primarily due to growth in assets under management, improved pricing discipline and decreased fee waivers.

We earn fees as administrator to and investment adviser for the Cavanal Hill Funds, a diversified, open-ended investment company established as a business trust under the Investment Company Act of 1940. BOKF, NA is custodian and Cavanal Hill Distributors, Inc. is distributor for the Cavanal Hill Funds. Products of the Cavanal Hill Funds are offered to customers, employee benefit plans, trusts and the general public in the ordinary course of business. In recent years, we voluntarily waived administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds during the low short-term interest rate environment. During 2017, we have phased out those fee waivers. Waived fees totaled $445 thousand for 2017, compared to $6.8 million for 2016. The decrease in fee waivers was primarily related to increased interest rates as a result of four Federal Reserve federal funds rate increases beginning in the fourth quarter of 2016.




32



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

Table 4 -- Assets Under Management or Administration
 
Year Ended December 31,
 
2017
 
2016
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
Managed fiduciary assets:
 
 
 
 
 
 
 
 
 
 
 
Personal
$
7,801,968

 
$
85,328

 
1.09
%
 
$
7,040,121

 
$
75,290

 
1.07
%
Institutional
13,192,969

 
21,630

 
0.16
%
 
11,646,153

 
18,018

 
0.15
%
Total managed fiduciary assets
20,994,937

 
106,958

 
0.51
%
 
18,686,274

 
93,308

 
0.50
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-managed assets:
 
 
 
 
 
 
 
 
 
 
 
Fiduciary
27,766,540

 
53,515

 
0.19
%
 
23,691,780

 
40,014

 
0.17
%
Non-fiduciary
16,969,222

 
2,420

 
0.01
%
 
17,636,113

 
2,155

 
0.01
%
Safekeeping and brokerage assets under administration
16,097,098

 

 
%
 
15,393,696

 

 
%
Total non-managed assets
60,832,860

 
55,935

 
0.09
%
 
56,721,589

 
42,169

 
0.07
%
 
 
 
 
 
 
 
 
 
 
 
 
Total assets under management or administration
$
81,827,797

 
$
162,893

 
0.20
%
 
$
75,407,863

 
$
135,477

 
0.18
%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Revenue divided by period-end balance.

A summary of changes in assets under management or administration for the year ended December 31, 2017 and 2016 follows:

Table 5 -- Changes in Assets Under Management or Administration
 
 
Year Ended
December 31,
 
 
2017
 
2016
Beginning balance
 
$
75,407,863

 
$
71,047,773

Net inflows (outflows)
 
(406,469
)
 
1,716,596

Change in assets from acquisitions
 

 
296,627

Net change in fair value
 
6,826,403

 
2,346,867

Ending balance
 
$
81,827,797

 
$
75,407,863


Deposit service charges and fees increased $576 thousand or 1% over 2016. Commercial account service charge revenue totaled $46.8 million, an increase of $1.8 million or 4% over the prior year. Overdraft fees totaled $38.5 million for 2017, a decrease of $2.0 million or 5% compared to last year. Service charges on deposit accounts with a standard monthly fee were $6.9 million, an increase of $196 thousand or 3% over the prior year. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued to the Company's depositors totaled $19.8 million, an increase of $519 thousand or 3% over 2016 due to increased transaction volume.

Mortgage banking revenue totaled $104.7 million for 2017, a $29.2 million or 22% decrease compared to 2016.

Mortgage production revenue totaled $38.5 million, a $31.1 million or 45% decrease compared to 2016. Mortgage loan production volume decreased $2.6 billion, including a $1.8 billion decrease related to the Company's strategic decision to exit the correspondent lending channel during 2016. Production volumes in the retail channel decreased compared to the prior year as average primary interest rates were up 34 basis points compared to 2016. Mortgage servicing revenue was $66.2 million, a $1.9 million or 3% increase over the prior year. The outstanding principal balance of mortgage loans serviced for others totaled $22.0 billion at December 31, 2017, a $49.1 million increase over December 31, 2016.


33



Table 6Mortgage Banking Revenue
(In thousands)
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Mortgage production revenue
$
38,498

 
$
69,628

 
$
69,587

 
$
61,061

 
$
79,545

 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
$
3,286,873

 
$
6,117,417

 
$
6,372,956

 
$
4,484,394

 
$
4,081,390

Add: Current year end outstanding commitments
222,919

 
318,359

 
601,147

 
627,505

 
258,873

Less: Prior year end outstanding commitments
318,359

 
601,147

 
627,505

 
258,873

 
356,634

Total mortgage production volume
3,191,433

 
5,834,629

 
6,346,598

 
4,853,026

 
3,983,629

 
 
 
 
 
 
 
 
 
 
Gain on sale margin
1.21
%
 
1.19
%
 
1.10
%
 
1.26
%
 
2.00
%
Mortgage loan refinances to mortgage loans funded for sale
40
%
 
51
%
 
42
%
 
30
%
 
43
%
Primary mortgage interest rates:
 
 
 
 
 
 
 
 
 
Average
3.99
%
 
3.65
%
 
3.85
%
 
4.17
%
 
3.98
%
Period end
3.99
%
 
4.32
%
 
3.96
%
 
3.83
%
 
4.48
%
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue
$
66,221

 
$
64,286

 
$
56,415

 
$
48,032

 
$
42,389

Average outstanding principal balance of mortgage loans serviced for others
22,055,002

 
20,837,897

 
17,920,557

 
14,940,915

 
12,850,283

 
 
 
 
 
 
 
 
 
 
Average mortgage servicing fee rates
0.30
%
 
0.31
%
 
0.31
%
 
0.32
%
 
0.33
%

Primary rates disclosed in Table 6 above represent rates generally available to borrowers on 30 year conforming mortgage loans.

Net gains on securities, derivatives and other assets

We recognized $4.4 million of net gains from sales of $1.3 billion of available for sale securities in 2017. We recognized $11.7 million of net gains from sales of $899 million of available for sale securities in 2016. 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.

As discussed in the Market Risk section following, the fair value of our mortgage servicing rights ("MSRs") changes in response to changes in primary mortgage loan rates and other assumptions. We attempt to mitigate the earnings volatility caused by changes in the fair value of MSRs by designating certain financial instruments as an economic hedge. Changes in the fair value of these instruments are generally expected to partially offset changes in the fair value of MSRs.
The net economic benefit of the changes in fair value of mortgage servicing rights and related economic hedges was $6.6 million in the 2017, including a $172 thousand increase in the fair value of mortgage servicing rights, offset by a $2.1 million decrease in the fair value of securities and derivative contracts held as an economic hedge and $8.4 million of related net interest revenue.

The net economic cost of changes in the fair value of mortgage servicing rights and related economic hedges was $24.1 million for 2016. The fair value of mortgage servicing rights decreased $2.2 million.The fair value of securities and interest rate derivative contracts held as an economic hedge decreased $26.3 million. Our economic hedges were generally designed to be effective over a + / - 50 basis point rate change. An 85 basis point increase in the 10-year U.S. Treasury rate in the fourth quarter of 2016 led to a $39.8 million increase in the fair value of MSRs and a $56.8 million decrease in the fair value of economic hedges. Net interest earned on securities held as an economic hedge was $4.4 million.


34



Table 7Gain (Loss) on Mortgage Servicing Rights, Net of Economic Hedge
(In thousands)
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Gain (loss) on mortgage hedge derivative contracts, net
$
681

 
$
(15,696
)
 
$
634

 
$
2,776

 
$
(5,080
)
Gain (loss) on fair value option securities, net
(2,733
)
 
(10,555
)
 
(3,684
)
 
10,003

 
(15,436
)
Gain (loss) on economic hedge of mortgage servicing rights
(2,052
)
 
(26,251
)
 
(3,050
)
 
12,779

 
(20,516
)
Gain (loss) on change in fair value of mortgage servicing rights
172

 
(2,193
)
 
(4,853
)
 
(16,445
)
 
22,720

Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue
(1,880
)
 
(28,444
)
 
(7,903
)
 
(3,666
)
 
2,204

Net interest revenue on fair value option securities1
8,435

 
4,356

 
8,001

 
3,253

 
3,290

Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges
$
6,555

 
$
(24,088
)
 
$
98

 
$
(413
)
 
$
5,494

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

Other gains, net totaled $9.0 million for 2017, mainly due to the sale of certain merchant banking investments during the year. Other gains, net totaled $4.0 million for 2016.

Fourth Quarter 2017 Other Operating Revenue

Other operating revenue was $166.8 million for the fourth quarter of 2017, up $1.1 million over the fourth quarter of 2016, excluding the impact of the unexpected change in interest rates in the fourth quarter of 2016. The fourth quarter of 2016 included a $5.0 million decrease in the net fair value of trading portfolio positions and a $17 million decrease in the fair value of mortgage servicing rights, net of economic hedges.

Fiduciary and asset management revenue increased $7.2 million over the fourth quarter of 2016 to $41.8 million primarily due to growth in assets under management and a decrease in waived administrative fees. There were no waived administration fees on the Cavanal Hill money market funds for the fourth quarter of 2017, compared to $1.4 million for the fourth quarter of 2016.

Mortgage banking revenue was $24.4 million for the fourth quarter of 2017, a decrease of $4.1 million compared to the fourth quarter of 2016 due primarily to a decrease in mortgage loan production volume. Mortgage loan production volumes were $729 million for the fourth quarter of 2017, compared to $878 million in the fourth quarter of 2016

All other revenue categories were relatively unchanged.

2016 Other Operating Revenue

Other operating revenue totaled $674.0 million for 2016, up $15.5 million or 2% over 2015. Fees and commissions revenue increased $36.1 million. The change in the fair value of mortgage servicing rights, net of economic hedges, decreased operating revenue in 2016 by $28.4 million and decreased operating revenue $7.9 million in 2015.

Brokerage and trading revenue for 2016 increased $8.8 million compared to 2015 largely due to customer hedging. Transaction card revenue grew by $6.9 million over 2015 primarily due to growth in transaction volumes. Fiduciary and asset management fees increased $9.3 million primarily due to decreased fee waivers and growth in assets under management. Deposit service charges and fees increased $2.0 million. Increased commercial account service charges were offset by lower overdraft fees and service charges on deposit accounts with a standard monthly fee.

Mortgage banking revenue grew by $7.9 million over 2015 mainly due to the increase in mortgage servicing revenue. An increase in gain on sale margins was mostly offset by a decrease in mortgage loan production volume.

Net gains on other assets totaled $4.0 million for 2016. The Company recognized $2.0 million related to the mutual termination of a rent guarantee between the Company and the City of Tulsa for office space in a building immediately adjacent to the Company's main office rented by third party tenants. The Company also recognized a $2.1 million gain on the sale of a merchant banking investment during the year.

35



Other Operating Expense

Other operating expense for 2017 totaled $1.0 billion, a $7.9 million or 1% increase over the prior year. Personnel expense increased $20.3 million or 4%. Non-personnel expenses decreased $12.4 million or 3% compared to the prior year.

Table 8Other Operating Expense
(In thousands)
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Regular compensation
$
333,226

 
$
332,740

 
$
313,403

 
$
298,420

 
$
279,493

Incentive compensation:
 
 
 
 
 
 
 
 
 
Cash-based compensation
127,964

 
128,077

 
114,305

 
111,748

 
110,871

Share-based compensation
23,602

 
10,464

 
12,358

 
10,875

 
8,189

Deferred compensation
4,091

 
1,687

 
361

 
(13,692
)
 
32,083

Total incentive compensation
155,657

 
140,228

 
127,024

 
108,931

 
151,143

Employee benefits
84,525

 
80,151

 
74,871

 
69,580

 
74,589

Total personnel expense
573,408

 
553,119

 
515,298

 
476,931

 
505,225

Business promotion
28,877

 
26,582

 
27,851

 
26,649

 
22,598

Charitable contributions to BOKF Foundation
2,000

 
2,000

 
796

 
4,267

 
2,062

Professional fees and services
51,067

 
56,783

 
40,123

 
44,440

 
32,552

Net occupancy and equipment
86,477

 
80,024