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BOK Financial 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
10-Q


 

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

FORM 10-Q
(Mark One) 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

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

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

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

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

Large accelerated filer  ý                               Accelerated filer  ¨                                   Non-accelerated filer  ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 67,713,031 shares of common stock ($.00006 par value) as of September 30, 2015.
 





BOK Financial Corporation
Form 10-Q
Quarter Ended September 30, 2015

Index

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




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

BOK Financial Corporation (“the Company”) reported net income of $74.9 million or $1.09 per diluted share for the third quarter of 2015, compared to $75.6 million or $1.09 per diluted share for the third quarter of 2014 and $79.2 million or $1.15 per diluted share for the second quarter of 2015

Highlights of the third quarter of 2015 included:
Net interest revenue totaled $178.6 million for the third quarter of 2015, compared to $166.8 million for the third quarter of 2014 and $175.7 million for the second quarter of 2015. Net interest revenue increased over the prior year primarily due to growth in average earning assets. Net interest margin was 2.61% for the third quarter of 2015. Net interest margin was 2.67% for the third quarter of 2014 and 2.61% for the second quarter of 2015. The decrease compared to the prior year was primarily due lower loan portfolio yield.
Fees and commissions revenue totaled $164.7 million for the third quarter of 2015, a $6.1 million or 4% increase over the third quarter of 2014. Mortgage banking revenue increased $6.4 million based on higher loan production volume. Fees and commissions revenue decreased $7.9 million compared to the second quarter of 2015. Brokerage and trading revenue decreased $4.4 million and mortgage banking revenue decreased $3.7 million.
Changes in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income in the third quarter of 2015 by $4.4 million, increased pre-tax net income in the third quarter of 2014 by $4.8 million and decreased pre-tax net income by $1.1 million in the second quarter of 2015. Net changes in the fair value of mortgage servicing rights for the third quarter of 2015 were largely driven by decreases in both the period end mortgage interest rates and escrow earnings rate.
Operating expenses totaled $224.6 million for the third quarter of 2015, an increase of $2.8 million over the third quarter of 2014. Personnel expense increased $6.0 million and non-personnel expense decreased $3.2 million. Operating expenses decreased $2.5 million compared to the previous quarter.
The Company recorded a $7.5 million provision for credit losses in the third quarter of 2015. The additional provision was primarily due to credit migration and loan portfolio growth during the third quarter. The Company recorded a $4.0 million provision in the second quarter of 2015. No provision for credit losses was recorded in the third quarter of 2014. Gross charge-offs were $5.3 million in the third quarter of 2015, $2.6 million in the third quarter of 2014 and $2.9 million in the second quarter of 2015. Recoveries were $3.5 million in the third quarter of 2015, compared to $3.1 million in the third quarter of 2014 and $2.2 million in the second quarter of 2015.
The combined allowance for credit losses totaled $208 million or 1.35% of outstanding loans at September 30, 2015, compared to $202 million or 1.34% of outstanding loans at June 30, 2015. The portion of the combined allowance attributed to the energy portfolio totaled 2.05 percent of outstanding energy loans at September 30, an increase from 1.74 percent of outstanding energy loans at June 30.
Nonperforming assets that are not guaranteed by U.S. government agencies totaled $119 million or 0.78% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at September 30, 2015 and $123 million or 0.82% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2015.
Average loans increased by $287 million over the previous quarter due primarily to a $209 million increase in commercial real estate loans. Average commercial loans and personal loans also increased over the previous quarter. Period-end outstanding loan balances were $15.4 billion at September 30, 2015, a $243 million increase over June 30, 2015. Commercial real estate loans increased $202 million, personal loans increased $36 million and commercial loan balances increased $22 million.
Average deposits decreased $401 million compared to the previous quarter, primarily due to a decrease in interest-bearing transaction accounts and time deposits. Period-end deposits were $20.6 billion at September 30, 2015, a decrease of $440 million compared to June 30, 2015.
New regulatory capital rules were effective for BOK Financial on January 1, 2015 and established a 7% threshold for the common equity Tier 1 ratio. The Company's common equity Tier 1 ratio was 12.78% at September 30, 2015. In

- 1 -



addition, the Company's Tier 1 capital ratio was 12.78%, total capital ratio was 13.89% and leverage ratio was 9.55% at September 30, 2015. The Company's common equity Tier 1 ratio was 13.01% at June 30, 2015. In addition, the Company's Tier 1 capital ratio was 13.01%, total capital ratio was 14.11% and leverage ratio was 9.75% at June 30, 2015.
The Company paid a regular quarterly cash dividend of $29 million or $0.42 per common share during the third quarter of 2015. On October 27, 2015, the board of directors approved an increase in the regular quarterly cash dividend to $0.43 per common share payable on or about November 27, 2015 to shareholders of record as of November 13, 2015.
The Company repurchased 1,258,348 common shares at an average price of $63.79 per share during the third quarter of 2015, completing the existing board approval for share repurchases. No shares were repurchased during the second quarter of 2015 and third quarter of 2014. On October 27, 2015, the board of directors authorized the Company to purchase up to five million additional common shares, subject to market conditions, securities law and other regulatory compliance limitations.
Results of Operations
Net Interest Revenue and Net Interest Margin

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

Net interest revenue totaled $178.6 million for the third quarter of 2015 compared to $166.8 million for the third quarter of 2014 and $175.7 million for the second quarter of 2015. Net interest margin was 2.61% for the third quarter of 2015, 2.67% for the third quarter of 2014 and 2.61% for the second quarter of 2015.

Net interest revenue increased $11.8 million over the third quarter of 2014. Net interest revenue increased $16.0 million primarily due to the growth in average loan balances. Net interest revenue decreased $3.6 million primarily due to lower loan yields, partially offset by lower funding costs and increased yields on the available for sale securities portfolio.

The tax-equivalent yield on earning assets was 2.83% for the third quarter of 2015, down 10 basis points from the third quarter of 2014. Loan yields decreased 24 basis points primarily due to continued market pricing pressure and lower interest rates. The available for sale securities portfolio yield increased 6 basis points to 2.01%. Funding costs were down 9 basis points compared to the third quarter of 2014. The cost of interest-bearing deposits decreased 7 basis points and the cost of other borrowed funds increased 3 basis points largely due to the mix of funding sources. The cost of subordinated debentures decreased 142 basis points as $122 million of fixed-rate subordinated debt matured on June 1, 2015. The cost of this subordinated debt, including issuance discounts and hedge loss was 5.56%. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 10 basis points for the third quarter of 2015 and 15 basis points for the third quarter of 2014.

Average earning assets for the third quarter of 2015 increased $2.4 billion or 9% over the third quarter of 2014. Average loans, net of allowance for loan losses, increased $1.7 billion due primarily to growth in average commercial and commercial real estate loans. The average balance of interest-bearing cash and cash equivalents was up $821 million over the third quarter of 2014 as borrowings from the Federal Home Loan Banks were deposited in the Federal Reserve to earn a spread. The average balance of available for sale securities decreased $584 million as we reduced the size of our bond portfolio during 2014 through normal monthly runoff to better position the balance sheet for a longer-term rising rate environment. The average balances of fair value option securities held as an economic hedge of our mortgage servicing rights, restricted equity securities, residential mortgage loans held for sale and trading securities were all up over the prior year.

Average deposits increased $466 million over the third quarter of 2014, including a $287 million increase in average interest-bearing transaction accounts and a $194 million increase in average demand deposit balances. Growth in average savings account balances was offset by a decrease in average time deposits compared to the prior year. Average borrowed funds increased $1.8 billion over the third quarter of 2014, primarily due to increased borrowings from the Federal Home Loan Banks. The average balance of subordinated debentures decreased $122 million.


- 2 -



Net interest margin was unchanged compared to the second quarter of 2015. The yield on average earning assets decreased 1 basis point. The loan portfolio yield decreased 11 basis points to 3.54%. The second quarter included a 6 basis point benefit from $2.3 million of nonaccrual interest recoveries. Competitive loan pricing and low interest rates continue to impact loan yields. The yield on the available for sale securities portfolio increased 7 basis points to 2.01%. Funding costs were down 3 basis points to 0.32%. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities decreased 2 basis points.
Average earning assets increased $203 million during the third quarter of 2015, primarily due to growth in average outstanding loans of $287 million over the previous quarter. Average commercial real estate loan balances increased $209 million and average commercial loan balances were up $51 million. The average balance of trading securities increased $52 million, the average balance of cash and cash equivalents increased $36 million and the average balance of restricted equity securities increased $34 million. This growth was partially offset by a $121 million decrease in the average balance of the available for sale securities portfolio and a $63 million decrease in the average balance of residential mortgage loans held for sale.
Average deposits decreased $401 million compared to the previous quarter. Interest-bearing transaction account balances decreased $303 million and average time deposit balances decreased $94 million. The average balance of borrowed funds increased $684 million over the second quarter of 2015, primarily due to increased borrowings from the Federal Home Loan Banks, partially offset by a decrease in average repurchase agreement balances. The average balance of subordinated debentures decreased $82 million.

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. More than three-fourths of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will re-price within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that re-price more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally re-price more quickly than liabilities. Among the strategies that we use to manage toward a relatively rate-neutral position, we purchase fixed rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market rate sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. 

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

- 3 -



Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
September 30, 2015 / 2014
 
Nine Months Ended
September 30, 2015 / 2014
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield /
Rate
 
Change
 
Volume
 
Yield
/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
841

 
$
505

 
$
336

 
$
2,865

 
$
2,226

 
$
639

Trading securities
 
384

 
377

 
7

 
597

 
797

 
(200
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(27
)
 
72

 
(99
)
 
73

 
337

 
(264
)
Tax-exempt securities
 
(137
)
 
(118
)
 
(19
)
 
(642
)
 
(431
)
 
(211
)
Total investment securities
 
(164
)
 
(46
)
 
(118
)
 
(569
)
 
(94
)
 
(475
)
Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(1,784
)
 
(2,902
)
 
1,118

 
(10,037
)
 
(12,100
)
 
2,063

Tax-exempt securities
 
121

 
(85
)
 
206

 
138

 
(302
)
 
440

Total available for sale securities
 
(1,663
)
 
(2,987
)
 
1,324

 
(9,899
)
 
(12,402
)
 
2,503

Fair value option securities
 
1,567

 
1,382

 
185

 
4,245

 
3,690

 
555

Restricted equity securities
 
1,669

 
1,705

 
(36
)
 
5,222

 
4,476

 
746

Residential mortgage loans held for sale
 
864

 
865

 
(1
)
 
3,592

 
4,639

 
(1,047
)
Loans
 
6,803

 
15,464

 
(8,661
)
 
19,515

 
45,702

 
(26,187
)
Total tax-equivalent interest revenue
 
10,301

 
17,265

 
(6,964
)
 
25,568

 
49,034

 
(23,466
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
(320
)
 
115

 
(435
)
 
(706
)
 
128

 
(834
)
Savings deposits
 
(4
)
 
12

 
(16
)
 
(11
)
 
34

 
(45
)
Time deposits
 
(1,664
)
 
(179
)
 
(1,485
)
 
(3,663
)
 
(275
)
 
(3,388
)
Funds purchased
 
(44
)
 
(48
)
 
4

 
(283
)
 
(338
)
 
55

Repurchase agreements
 
(92
)
 
(42
)
 
(50
)
 
(260
)
 
(52
)
 
(208
)
Other borrowings
 
1,633

 
1,982

 
(349
)
 
4,832

 
6,088

 
(1,256
)
Subordinated debentures
 
(1,558
)
 
(533
)
 
(1,025
)
 
(2,045
)
 
(918
)
 
(1,127
)
Total interest expense
 
(2,049
)
 
1,307

 
(3,356
)
 
(2,136
)
 
4,667

 
(6,803
)
Tax-equivalent net interest revenue
 
12,350

 
15,958

 
(3,608
)
 
27,704

 
44,367

 
(16,663
)
Change in tax-equivalent adjustment
 
505

 
 
 
 
 
1,141

 
 
 
 
Net interest revenue
 
$
11,845

 
 
 
 
 
$
26,563

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

- 4 -



Other Operating Revenue

Other operating revenue was $163.4 million for the third quarter of 2015, a $1.5 million decrease compared to the third quarter of 2014 and a $12.8 million decrease compared to the second quarter of 2015. Fees and commissions revenue increased $6.1 million over the third quarter of 2014 and decreased $7.9 million compared to the prior quarter. The change in the fair value of mortgage servicing rights, net of economic hedges, decreased other operating revenue by $4.4 million in the third quarter of 2015 and $1.1 million in the second quarter of 2015 and increased other operating revenue by $4.8 million in the third quarter of 2014.

Table 2Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
 
 
 
 
Three Months Ended
June 30, 2015
 
 
 
 
 
 
2015
 
2014
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
Increase (Decrease)
 
% Increase (Decrease)
Brokerage and trading revenue
 
$
31,582

 
$
35,263

 
$
(3,681
)
 
(10
)%
 
$
36,012

 
$
(4,430
)
 
(12
)%
Transaction card revenue
 
32,514

 
31,578

 
936

 
3
 %
 
32,778

 
(264
)
 
(1
)%
Fiduciary and asset management revenue
 
30,807

 
29,738

 
1,069

 
4
 %
 
32,712

 
(1,905
)
 
(6
)%
Deposit service charges and fees
 
23,606

 
22,508

 
1,098

 
5
 %
 
22,328

 
1,278

 
6
 %
Mortgage banking revenue
 
33,170

 
26,814

 
6,356

 
24
 %
 
36,846

 
(3,676
)
 
(10
)%
Bank-owned life insurance
 
2,360

 
2,326

 
34

 
1
 %
 
2,398

 
(38
)
 
(2
)%
Other revenue
 
10,618

 
10,320

 
298

 
3
 %
 
9,473

 
1,145

 
12
 %
Total fees and commissions revenue
 
164,657

 
158,547

 
6,110

 
4
 %
 
172,547

 
(7,890
)
 
(5
)%
Gain on other assets, net
 
1,161

 
1,422

 
(261
)
 
N/A

 
1,457

 
(296
)
 
N/A

Gain (loss) on derivatives, net
 
1,283

 
(93
)
 
1,376

 
N/A

 
(1,032
)
 
2,315

 
N/A

Gain (loss) on fair value option securities, net
 
5,926

 
(332
)
 
6,258

 
N/A

 
(8,130
)
 
14,056

 
N/A

Change in fair value of mortgage servicing rights
 
(11,757
)
 
5,281

 
(17,038
)
 
N/A

 
8,010

 
(19,767
)
 
N/A

Gain on available for sale securities, net
 
2,166

 
146

 
2,020

 
N/A

 
3,433

 
(1,267
)
 
N/A

Total other operating revenue
 
$
163,436

 
$
164,971

 
$
(1,535
)
 
(1
)%
 
$
176,285

 
$
(12,849
)
 
(7
)%
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 48% of total revenue for the third quarter of 2015, excluding provision for credit losses and gains and losses on other assets, securities and derivatives and the change in the fair value of mortgage servicing rights. We believe that a variety of fee revenue sources provides an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors that cause net interest revenue compression such as falling interest rates may also drive growth in our mortgage banking revenue. We expect growth in other operating revenue to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and trading revenue includes revenues from securities trading, customer hedging, retail brokerage and investment banking. Brokerage and trading revenue decreased $3.7 million compared to the third quarter of 2014

Securities trading revenue was $11.7 million for the third quarter of 2015, an increase of $2.2 million over the third quarter of 2014. Securities trading revenue includes net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers. 


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Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $9.3 million for the third quarter of 2015, a $1.6 million decrease compared to the third quarter of 2014. Higher volumes of derivative contracts executed by our mortgage banking customers were offset by lower volumes of energy, foreign exchange and interest rate contracts.

Revenue earned from retail brokerage transactions decreased $2.4 million or 29% compared to the third quarter of 2014 to $6.0 million. Retail brokerage revenue is primarily based on fees and commissions earned on sales of fixed income securities, annuities and mutual funds to retail customers. Revenue is primarily based on the volume of customer transactions during the quarter. While sales volume increased over 2014, customers moved toward lower margin products.

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $4.6 million for the third quarter of 2015, a $1.9 million or 29% decrease compared to the third quarter of 2014, primarily related to lower loan syndication fees.

Brokerage and trading revenue decreased $4.4 million compared to the second quarter of 2015. Investment banking fees decreased $2.5 million compared to the prior quarter primarily due to lower loan syndication, financial advisory and underwriting fees. Excluding the impact of $382 thousand of recoveries received from the Lehman Brothers bankruptcy in the second quarter of 2015, customer hedging revenue decreased $1.6 million. Securities trading revenue increased $303 thousand and retail brokerage fees were up $113 thousand over the prior quarter.

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served. Transaction card revenue for the third quarter of 2015 increased $936 thousand or 3% over the third quarter of 2014. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $16.1 million, largely unchanged compared to the prior year. Merchant services fees totaled $11.6 million, an increase of $946 thousand or 9% based on increased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.8 million, an increase of $69 thousand or 1% over the third quarter of 2014.

Transaction card revenue decreased $264 thousand compared to the second quarter of 2015. Decreased EFT network revenues were partially offset by growth in merchant services fees. Interchange fee revenue from debit cards issued by the Company was largely unchanged compared to the prior quarter.

Fiduciary and asset management revenue grew by $1.1 million or 4% over the third quarter of 2014. The increase was primarily due to the growth in the fair value of fiduciary assets administered by the Company. Fiduciary assets are assets for which the Company possesses investment discretion on behalf of another or any other similar capacity. The fair value of fiduciary assets administered by the Company totaled $37.8 billion at September 30, 2015, $34.0 billion at September 30, 2014 and $38.8 billion at June 30, 2015.

Fiduciary and asset management revenue decreased $1.9 million compared to the second quarter of 2015 primarily due to the seasonal timing of tax service fees which were recognized in the previous quarter and a decrease in the fair value of assets under management.

We also earn fees as administrator to and investment adviser for the Cavanal Hill Funds, a diversified, open-ended investment company established as a business trust under the Investment Company Act of 1940. The Bank is custodian and BOSC, Inc. is distributor for the Cavanal Hill Funds. Products of the Cavanal Hill Funds are offered to customers, employee benefit plans, trusts and the general public in the ordinary course of business. We have voluntarily waived administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment. Waived fees totaled $3.4 million for the third quarter of 2015 compared to $2.6 million for the third quarter of 2014 and $2.9 million for the second quarter of 2015.

Deposit service charges and fees were $23.6 million for the third quarter of 2015, up $1.1 million or 5% over the third quarter of 2014. Overdraft fees were $11.0 million for the third quarter of 2015, an increase of $117 thousand or 1% compared to the third quarter of 2014. Commercial account service charge revenue totaled $10.8 million, an increase of $1.1 million or 11% over the prior year. Service charges on deposit accounts with a standard monthly fee were $1.8 million, a decrease of $111 thousand or 6% compared to the third quarter of 2014. Deposit service charges and fees grew by $1.3 million over the prior quarter primarily due to an increase in overdraft fee volumes.


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Mortgage banking revenue increased $6.4 million over the third quarter of 2014. Mortgage production revenue increased $4.0 million largely due to increased production activity. Lower average primary mortgage interest rates and expansion of our correspondent and Home Direct lending channels increased loans closed during the quarter and outstanding loan commitments. Lower average interest rates also increased the percentage of refinanced mortgage loans to 30% in the third quarter of 2015 compared to 26% in the third quarter of 2014. Growth in our correspondent and Home Direct lending channels caused margins to compress compared to the third quarter of 2014. Additionally, production volumes in the third quarter of 2015 were impacted by the implementation of a new mortgage loan origination system during the quarter. Mortgage servicing revenue grew by $2.3 million or 19% over the third quarter of 2014. The outstanding principal balance of mortgage loans serviced for others totaled $18.9 billion, an increase of $3.4 billion or 22%.
Mortgage banking revenue decreased $3.7 million compared to the second quarter of 2015. Mortgage production revenue decreased $4.4 million. Increased average mortgage interest rates and implementation of a new mortgage origination system reduced mortgage production volume compared to the previous quarter. Total mortgage loans originated during the third quarter of 2015 decreased $214 million compared to the previous quarter and outstanding mortgage loan commitments at September 30 were $107 million lower compared to June 30. The increase in average mortgage interest rates during the quarter also reduced higher-margin refinance activity. Revenue from mortgage loan servicing grew by $720 thousand due to an increase in the volume of loans serviced. The outstanding balance of mortgage loans serviced for others increased $949 million over June 30, 2015.

Table 3Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
June 30, 2015
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2015
 
2014
 
 
 
 
Net realized gains on mortgage loans sold
 
$
18,968

 
$
17,100

 
$
1,868

 
11
 %
 
$
23,856

 
$
(4,888
)
 
(20
)%
Change in net unrealized gains on mortgage loans held for sale
 
(251
)
 
(2,407
)
 
2,156

 
(90
)%
 
(743
)
 
492

 
(66
)%
Total mortgage production revenue
 
18,717

 
14,693

 
4,024

 
27
 %
 
23,113

 
(4,396
)
 
(19
)%
Servicing revenue
 
14,453

 
12,121

 
2,332

 
19
 %
 
13,733

 
720

 
5
 %
Total mortgage revenue
 
$
33,170

 
$
26,814

 
$
6,356

 
24
 %
 
$
36,846

 
$
(3,676
)
 
(10
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
1,614,225

 
$
1,394,211

 
$
220,014

 
16
 %
 
$
1,828,230

 
$
(214,005
)
 
(12
)%
Mortgage loans sold
 
1,778,099

 
1,369,295

 
408,804

 
30
 %
 
1,861,968

 
(83,869
)
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end outstanding mortgage commitments, net
 
742,742

 
638,925

 
103,817

 
16
 %
 
849,619

 
(106,877
)
 
(13
)%
Outstanding principal balance of mortgage loans serviced for others
 
18,928,726

 
15,499,653

 
3,429,073

 
22
 %
 
17,979,623

 
949,103

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary residential mortgage interest rate – period end
 
3.86
%
 
4.20
%
 
(34
) bps
 
 
 
4.02
%
 
(16
) bps
 
 
Primary residential mortgage interest rate – average
 
3.95
%
 
4.14
%
 
(19
) bps
 
 
 
3.82
%
 
13
 bps
 
 
Secondary residential mortgage interest rate – period end
 
2.87
%
 
3.20
%
 
(33
) bps
 
 
 
3.13
%
 
(26
) bps
 
 
Secondary residential mortgage interest rate – average
 
2.97
%
 
3.21
%
 
(24
) bps
 
 
 
2.85
%
 
12
 bps
 
 
Net gains on securities, derivatives and other assets

In the third quarter of 2015, we recognized a $2.2 million net gain from sales of $451 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential return or to move into securities that will perform better in the current rate environment. In the third quarter of 2014, we recognized a $146 thousand net gain from sales of $553 million of available for sale securities and in the second quarter of 2015, we recognized a $3.4 million net gain on sales of $379 million of available for sale securities.


- 7 -



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

Changes in the fair value of mortgage servicing rights are highly dependent on changes in primary mortgage rates, rates offered to borrowers, and assumptions about servicing revenues, servicing costs and discount rates. Changes in the fair value of residential mortgage-backed securities and interest rate derivative contracts are highly dependent on changes in secondary mortgage rates, or rates required by investors. While primary and secondary mortgage rates generally move in the same direction, the spread between them may widen and narrow due to market conditions and government intervention. Changes in the spread between the primary and secondary rates can cause significant earnings volatility. Additionally, the fair value of mortgage servicing rights is dependent on short-term interest rates that affect the value of custodial funds, changes in the spread between short-term and long-term interest rates, and other assumptions such as estimated loan servicing costs.
Table 4 following shows the relationship between changes in the fair value of mortgage servicing rights and the fair value of fair value option residential mortgage-backed securities and interest rate derivative contracts designated as an economic hedge.

Table 4 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
Sept. 30, 2015
 
June 30, 2015
 
Sept. 30, 2014
Gain (loss) on mortgage hedge derivative contracts, net
 
$
1,460

 
$
(1,005
)
 
$
(93
)
Gain (loss) on fair value option securities, net
 
5,926

 
(8,130
)
 
(341
)
Gain (loss) on economic hedge of mortgage servicing rights, net
 
7,386

 
(9,135
)
 
(434
)
Gain (loss) on change in fair value of mortgage servicing rights
 
(11,757
)
 
8,010

 
5,281

Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
(4,371
)
 
$
(1,125
)
 
$
4,847

 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
2,140

 
$
1,985

 
$
830


Primary rates disclosed in Table 3 above represent rates generally available to borrowers on 30 year conforming mortgage loans and affect the value of our mortgage servicing rights. Secondary rates represent rates generally paid on 30 year residential mortgage-backed securities guaranteed by U.S. government agencies and affect the value of securities and derivative contracts used as an economic hedge of our mortgage servicing rights.




- 8 -



Other Operating Expense

Other operating expense for the third quarter of 2015 totaled $224.6 million, a $2.8 million or 1% increase over the third quarter of 2014. Personnel expenses increased $6.0 million or 5%. Non-personnel expenses decreased $3.2 million or 3% compared to the prior year.

Operating expenses decreased $2.5 million compared to the previous quarter. Personnel expense decreased $3.6 million. Non-personnel expense increased $1.1 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
June 30, 2015
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2015
 
2014
 
 
 
 
 
Regular compensation
 
$
79,208

 
$
74,662

 
$
4,546

 
6
 %
 
$
78,105

 
$
1,103

 
1
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
30,462

 
28,721

 
1,741

 
6
 %
 
32,347

 
(1,885
)
 
(6
)%
Share-based
 
2,885

 
3,824

 
(939
)
 
(25
)%
 
3,057

 
(172
)
 
(6
)%
Deferred compensation
 
(539
)
 
(52
)
 
(487
)
 
N/A

 
118

 
(657
)
 
N/A

Total incentive compensation
 
32,808

 
32,493

 
315

 
1
 %
 
35,522

 
(2,714
)
 
(8
)%
Employee benefits
 
17,046

 
15,888

 
1,158

 
7
 %
 
19,068

 
(2,022
)
 
(11
)%
Total personnel expense
 
129,062

 
123,043

 
6,019

 
5
 %
 
132,695

 
(3,633
)
 
(3
)%
Business promotion
 
5,922

 
6,160

 
(238
)
 
(4
)%
 
7,765

 
(1,843
)
 
(24
)%
Charitable contributions to BOKF Foundation
 
796

 

 
796

 
N/A

 

 
796

 
N/A

Professional fees and services
 
10,147

 
14,763

 
(4,616
)
 
(31
)%
 
9,560

 
587

 
6
 %
Net occupancy and equipment
 
18,689

 
18,892

 
(203
)
 
(1
)%
 
18,927

 
(238
)
 
(1
)%
Insurance
 
4,864

 
4,793

 
71

 
1
 %
 
5,116

 
(252
)
 
(5
)%
Data processing and communications
 
31,228

 
29,971

 
1,257

 
4
 %
 
31,463

 
(235
)
 
(1
)%
Printing, postage and supplies
 
3,376

 
3,380

 
(4
)
 
 %
 
3,553

 
(177
)
 
(5
)%
Net losses and operating expenses of repossessed assets
 
267

 
4,966

 
(4,699
)
 
(95
)%
 
223

 
44

 
20
 %
Amortization of intangible assets
 
1,089

 
1,100

 
(11
)
 
(1
)%
 
1,090

 
(1
)
 
 %
Mortgage banking costs
 
8,587

 
7,734

 
853

 
11
 %
 
7,419

 
1,168

 
16
 %
Other expense
 
10,601

 
7,032

 
3,569

 
51
 %
 
9,302

 
1,299

 
14
 %
Total other operating expense
 
$
224,628

 
$
221,834

 
$
2,794

 
1
 %
 
$
227,113

 
$
(2,485
)
 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,846

 
4,669

 
177

 
4
 %
 
4,776

 
70

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

Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs, increased $4.5 million or 6% over the third quarter of 2014. Positions added since the prior year have primarily been higher-costing positions in compliance and risk management, technology and wealth management. In addition, standard annual merit increases in regular compensation were effective for the majority of our staff on March 1.

Incentive compensation increased $315 thousand over the third quarter of 2014. Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Total cash-based incentive compensation increased $1.7 million or 6% over the third quarter of 2014

- 9 -



Share-based compensation expense represents expense for equity awards based on grant-date fair value and is largely unaffected by subsequent changes in fair value. Non-vested shares awarded prior to 2013 generally cliff vest in 5 years. Non-vested shares awarded since January 1, 2013 generally cliff vest in 3 years and are subject to a two year holding period after vesting.

Employee benefit expense increased $1.2 million or 7% over the third quarter of 2014 primarily due to increased employee retirement plan and payroll tax expense.
Personnel costs decreased by $3.6 million compared to the second quarter of 2015, primarily due to a $2.7 million decrease in incentive compensation expense and a $1.6 million seasonal decrease in payroll taxes. These decreases were partially offset by a $1.1 million increase in regular compensation expense.

Non-personnel operating expenses

Non-personnel operating expenses decreased $3.2 million or 3% compared to the third quarter of 2014. Net losses and operating expenses of repossessed assets were $4.7 million lower than in the prior year. Professional fees and services expense decreased $4.6 million. The third quarter of 2014 included $2.2 million of risk management and regulatory compliance costs related to testing our systems and processes. Other expense increased $2.8 million due to accruals for settled litigation. Data processing and communications expense increased $1.3 million due to increased transaction activity.
Non-personnel expense increased $1.1 million compared to the second quarter of 2015. Mortgage banking expense increased $1.2 million and other expense increased $1.3 million, partially offset by a $1.8 million decrease in business promotion expense.
Income Taxes

Income tax expense was $34.1 million or 31.0% of book taxable income for the third quarter of 2015 compared to $33.8 million or 30.7% of book taxable income for the third quarter of 2014 and $40.6 million or 33.6% of book taxable income for the second quarter of 2015.

The statute of limitations expired on uncertain income tax positions and the Company adjusted its current income tax liability to amounts on filed tax returns for 2014 during the third quarter of 2015. These adjustments reduced income tax expense by $2.0 million in the third quarter of 2015 and $2.3 million in the third quarter of 2014. The Company also made a charitable contribution to the BOKF Foundation in the third quarter of 2015, which reduced income tax expense by $99 thousand. Excluding these adjustments, income tax expense would have been 32.9% of book taxable income for the third quarter of 2015 and 32.8% of book taxable income for the third quarter of 2014.

The Company adopted FASB Accounting Standards Update No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, on January 1, 2015. This standard was retrospectively applied to all periods presented. Approximately $1.9 million was reclassified from pre-tax earnings to income tax expense in the third quarter of 2014 and approximately $7.4 million was reclassified from pre-tax earnings to income tax expense for the nine months ended September 30, 2014. This reclassification increased the effective tax rate by 120 basis points in the third quarter of 2014 and 150 basis points for the nine months ended September 30, 2014. Adoption of this standard did not affect net income.

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. The reserve for uncertain tax positions was $14 million at both September 30, 2015 and at June 30, 2015 and $12 million at September 30, 2014.

- 10 -



Lines of Business

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

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

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

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

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

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

As shown in Table 6, net income attributable to our lines of business increased $3.2 million or 6% over the third quarter of 2014. Growth in both net interest revenue and fees and commissions revenue was partially offset by increased operating expenses. The third quarter of 2015 had $2.3 million of net charge-offs compared to net recoveries of $228 thousand in the third quarter of 2014.

Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
Sept. 30,
 
Sept. 30,
 
 
2015
 
2014
 
2015
 
2014
Commercial Banking
 
$
45,012

 
$
39,004

 
$
136,260

 
$
113,348

Consumer Banking
 
5,073

 
9,513

 
18,549

 
26,412

Wealth Management
 
3,870

 
2,258

 
12,921

 
9,568

Subtotal
 
53,955

 
50,775

 
167,730

 
149,328

Funds Management and other
 
20,936

 
24,857

 
61,234

 
78,789

Total
 
$
74,891

 
$
75,632

 
$
228,964

 
$
228,117


- 11 -



Commercial Banking

Commercial Banking contributed $45.0 million to consolidated net income in the third quarter of 2015, up $6.0 million or 15% over the third quarter of 2014. Increased net interest revenue and lower operating expenses, was partially offset by an increase net loans charged off. Commercial Banking had $828 thousand of net loans charged off in the third quarter of 2015 compared $1.7 million of net recoveries in the third quarter of 2014.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
Sept. 30,
 
 
Sept. 30,
 
 
 
 
2015
 
2014
 
 
2015
 
2014
 
 
Net interest revenue from external sources
 
$
109,495

 
$
95,423

 
$
14,072

 
$
319,279

 
$
281,064

 
$
38,215

 
Net interest expense from internal sources
 
(12,730
)
 
(9,796
)
 
(2,934
)
 
(37,928
)
 
(33,419
)
 
(4,509
)
 
Total net interest revenue
 
96,765

 
85,627

 
11,138

 
281,351

 
247,645

 
33,706

 
Net loans charged off (recovered)
 
828

 
(1,702
)
 
2,530

 
(8,122
)
 
(8,894
)
 
772

 
Net interest revenue after net loans charged off (recovered)
 
95,937

 
87,329

 
8,608

 
289,473

 
256,539

 
32,934

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
45,317

 
44,994

 
323

 
133,527

 
127,505

 
6,022

 
Gain (loss) on financial instruments and other assets, net
 
(418
)
 
127

 
(545
)
 
(164
)
 
(978
)
 
814

 
Other operating revenue
 
44,899

 
45,121

 
(222
)
 
133,363

 
126,527

 
6,836

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
28,544

 
28,133

 
411

 
84,362

 
82,455

 
1,907

 
Non-personnel expense
 
23,955

 
27,399

 
(3,444
)
 
71,493

 
73,074

 
(1,581
)
 
Other operating expense
 
52,499

 
55,532

 
(3,033
)
 
155,855

 
155,529

 
326

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
88,337

 
76,918

 
11,419

 
266,981

 
227,537

 
39,444

 
Corporate expense allocations
 
14,668

 
13,081

 
1,587

 
43,970

 
42,024

 
1,946

 
Income before taxes
 
73,669

 
63,837

 
9,832

 
223,011

 
185,513

 
37,498

 
Federal and state income tax
 
28,657

 
24,833

 
3,824

 
86,751

 
72,165

 
14,586

 
Net income
 
$
45,012

 
$
39,004

 
$
6,008

 
$
136,260

 
$
113,348

 
$
22,912

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
13,544,828

 
$
11,508,661

 
$
2,036,167

 
$
13,114,958

 
$
11,222,847

 
$
1,892,111

 
Average loans
 
12,531,113

 
10,827,829

 
1,703,284

 
12,230,278

 
10,548,702

 
1,681,576

 
Average deposits
 
8,628,520

 
8,924,040

 
(295,520
)
 
8,850,537

 
8,889,451

 
(38,914
)
 
Average invested capital
 
1,062,053

 
940,091

 
121,962

 
1,028,013

 
937,281

 
90,732

 
Return on average assets
 
1.32
%
 
1.35
 %
 
(3
)
bp
1.39
 %
 
1.35
 %
 
4

bp
Return on invested capital
 
16.83
%
 
16.47
 %
 
36

bp
17.74
 %
 
16.21
 %
 
153

bp
Efficiency ratio
 
36.90
%
 
42.45
 %
 
(555
)
bp
37.51
 %
 
41.39
 %
 
(388
)
bp
Net recoveries (annualized) to average loans
 
0.03
%
 
(0.06
)%
 
9

bp
(0.09
)%
 
(0.11
)%
 
2

bp

Net interest revenue increased $11.1 million or 13% over the prior year. Growth in net interest revenue was primarily due to a $1.7 billion or 16% increase in average loan balances, partially offset by reduced yields on loans and a $296 million decrease in average deposit balances.


- 12 -



Fees and commissions revenue increased $323 thousand or 1% over the third quarter of 2014. Other revenue increased $1.6 million primarily related to merchant banking activity. Commercial deposit service charge revenue increased $994 thousand. Transaction card revenues from our TransFund electronic funds transfer network were up $931 thousand. These increases were partially offset by a $3.2 million decrease related to the timing and volume of commercial loan syndication fees.

Operating expenses decreased $3.0 million or 5% compared to the third quarter of 2014. Personnel costs increased $411 thousand or 1% primarily due to standard annual merit increases, partially offset by lower incentive compensation expense. Non-personnel expenses decreased $3.4 million or 13%. Net losses and operating expenses of repossessed assets decreased $5.2 million compared to the prior year. Data processing and communication expense increased $898 thousand related to growth in transaction activity and other expense increased $894 thousand primarily due to merchant banking investment activity. Corporate expense allocations increased $1.6 million over the prior year.

The average outstanding balance of loans attributed to Commercial Banking grew by $1.7 billion over the third quarter of 2014 to $12.5 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $8.6 billion for the third quarter of 2015, a decrease of $296 million compared to the third quarter of 2014. Commercial customers continue to maintain high account balances due to continued economic uncertainty and persistently low yields available on high quality investments.


Consumer Banking

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

Consumer Banking contributed $5.1 million to consolidated net income for the third quarter of 2015, a decrease of $4.4 million compared to the third quarter of 2014.

Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $2.7 million decrease in Consumer Banking net income in the third quarter of 2015 compared to a $3.0 million increase in Consumer Banking net income in the third quarter of 2014. Mortgage banking revenue grew by $6.3 million over the prior year, mostly offset by a $3.6 million increase in corporate expense allocations.


- 13 -



Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
Sept. 30,
 
 
Sept. 30,
 
 
 
 
2015
 
2014
 
 
2015
 
2014
 
 
Net interest revenue from external sources
 
$
21,578

 
$
19,742

 
$
1,836

 
$
64,030

 
$
61,672

 
$
2,358

 
Net interest revenue from internal sources
 
7,688

 
9,517

 
(1,829
)
 
23,226

 
28,354

 
(5,128
)
 
Total net interest revenue
 
29,266

 
29,259

 
7

 
87,256

 
90,026

 
(2,770
)
 
Net loans charged off
 
1,488

 
1,599

 
(111
)
 
1,488

 
1,599

 
(111
)
 
Net interest revenue after net loans charged off
 
27,778

 
27,660

 
118

 
85,768

 
88,427

 
(2,659
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
55,117

 
48,508

 
6,609

 
171,760

 
145,018

 
26,742

 
Gain on financial instruments and other assets, net
 
9,618

 
1,454

 
8,164

 
8,282

 
14,636

 
(6,354
)
 
Change in fair value of mortgage servicing rights
 
(11,757
)
 
5,281

 
(17,038
)
 
(12,269
)
 
(5,624
)
 
(6,645
)
 
Other operating revenue
 
52,978

 
55,243

 
(2,265
)
 
167,773

 
154,030

 
13,743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
26,063

 
23,667