Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 31, 2017)
  • 10-Q (Jul 28, 2017)
  • 10-Q (Apr 28, 2017)
  • 10-Q (Oct 31, 2016)
  • 10-Q (Jul 29, 2016)
  • 10-Q (Apr 29, 2016)

 
8-K

 
Other

BOK Financial 10-Q 2016

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 March 31, 2016
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 66,155,103 shares of common stock ($.00006 par value) as of March 31, 2016.
 





BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2016

Index

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




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

BOK Financial Corporation (“the Company”) reported net income of $42.6 million or $0.64 per diluted share for the first quarter of 2016, compared to $74.8 million or $1.08 per diluted share for the first quarter of 2015 and $59.6 million or $0.89 per diluted share for the fourth quarter of 2015. The decrease in net income was largely based on an increase in the provision for credit losses and a decrease in the fair value of mortgage servicing rights, net of economic hedges.

Highlights of the first quarter of 2016 included:
Net interest revenue totaled $182.6 million for the first quarter of 2016, compared to $167.7 million for the first quarter of 2015 and $181.3 million for the fourth quarter of 2015. Net interest revenue increased over the prior year primarily due to growth in average earning assets. Average earning assets were $28.6 billion for the first quarter of 2016 and $27.3 billion for the first quarter of 2015. Net interest margin was 2.65 percent for the first quarter of 2016. Net interest margin was 2.55 percent for the first quarter of 2015 and 2.64 percent for the fourth quarter of 2015
Fees and commissions revenue totaled $165.6 million for the first quarter of 2016, largely unchanged compared to the first quarter of 2015. Mortgage banking revenue decreased $4.9 million primarily due to lower loan production volume. This decrease was offset by increases in all other revenue categories. Fees and commissions revenue increased $9.8 million over the fourth quarter of 2015, primarily due to a $9.4 million increase in mortgage banking revenue.
Changes in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income in the first quarter of 2016 by $11.4 million, decreased pre-tax net income in the first quarter of 2015 by $5.0 million and increased pre-tax net income by $2.6 million in the fourth quarter of 2015. Net changes in the fair value of mortgage servicing rights for the first quarter of 2016 were largely driven by a decrease in mortgage interest rates during the first quarter and a narrowing in the forward-looking spread between the primary mortgage interest rates offered to borrowers and secondary mortgage interest rates required by investors.
Operating expenses totaled $244.9 million for the first quarter of 2016, an increase of $24.6 million over the first quarter of 2015. Personnel expense increased $7.3 million and non-personnel expense increased $17.3 million. The first quarter of 2016 included several litigation accruals and post-acquisition valuation adjustments to a consolidated merchant banking investment. Deposit insurance expense increased due to increased criticized and classified assets levels, an input into the deposit insurance assessment calculation. Operating expenses increased $12.3 million compared to the previous quarter.
The Company recorded a $35.0 million provision for credit losses in the first quarter of 2016. The additional provision was largely a result of the extended decline in commodity prices and its impact on our energy loan portfolio. The Company recorded a $22.5 million provision in the fourth quarter of 2015. No provision for credit losses was recorded in the first quarter of 2015. Gross charge-offs were $24.0 million in the first quarter of 2016, $2.2 million in the first quarter of 2015 and $4.9 million in the fourth quarter of 2015. Recoveries were $1.5 million in the first quarter of 2016, compared to $10.5 million in the first quarter of 2015 and $1.9 million in the fourth quarter of 2015.
The combined allowance for credit losses totaled $240 million or 1.50 percent of outstanding loans at March 31, 2016, compared to $227 million or 1.43 percent of outstanding loans at December 31, 2015. The portion of the combined allowance attributed to the energy portfolio totaled 3.19 percent of outstanding energy loans at March 31, 2016, an increase from 2.89 percent of outstanding energy loans at December 31, 2015.
Nonperforming assets that are not guaranteed by U.S. government agencies totaled $252 million or 1.59 percent of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at March 31, 2016 and $156 million or 0.99 percent of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at December 31, 2015. Nonperforming energy loans increased $98 million during the first quarter.
Average loans increased by $405 million over the previous quarter due primarily to a $244 million increase in commercial loans and a $177 million increase in commercial real estate loans. Period-end outstanding loan balances were $16.0 billion at March 31, 2016, a $81 million increase over December 31, 2015. Commercial real estate loans increased $111 million, and commercial loan balances increased $36 million. Personal loans decreased $58 million.

- 1 -



Average deposit balances were largely unchanged compared to the previous quarter. Decreased demand and time deposit balances were offset by growth in interest-bearing transaction accounts. Period-end deposits were $20.4 billion at March 31, 2016, a decrease of $670 million compared to December 31, 2015. The overall decrease in period-end deposits was due to normal post-year-end activity and reductions in balances held by energy-related customers.
The Company's common equity Tier 1 ratio was 12.00% at March 31, 2016. In addition, the Company's Tier 1 capital ratio was 12.00%, total capital ratio was 13.21% and leverage ratio was 9.12% at March 31, 2016. The Company's common equity Tier 1 ratio was 12.13% at December 31, 2015. In addition, the Company's Tier 1 capital ratio was 12.13%, total capital ratio was 13.30% and leverage ratio was 9.25% at December 31, 2015.
The Company paid a regular quarterly cash dividend of $28 million or $0.43 per common share during the first quarter of 2016. On April 26, 2016, the board of directors approved a regular quarterly cash dividend of $0.43 per common share payable on or about May 27, 2016 to shareholders of record as of May 13, 2016.
Results of Operations
Net Interest Revenue and Net Interest Margin

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

Net interest revenue totaled $182.6 million for the first quarter of 2016 compared to $167.7 million for the first quarter of 2015 and $181.3 million for the fourth quarter of 2015. Net interest margin was 2.65 percent for the first quarter of 2016, 2.55 percent for the first quarter of 2015 and 2.64 percent for the fourth quarter of 2015.

Net interest revenue increased $14.8 million over the first quarter of 2015. Net interest revenue increased $12.9 million primarily due to the growth in average loan balances, partially offset by increased borrowings. Net interest revenue increased $3.4 million due to a change in rates primarily from the full quarter impact of the increase in the federal funds rate by the Federal Reserve in the fourth quarter of 2015.

The tax-equivalent yield on earning assets was 2.92 percent for the first quarter of 2016, up 12 basis points over the first quarter of 2015. The available for sale securities portfolio yield increased 10 basis points to 2.08 percent. The yield on interest-bearing cash and cash equivalents increased 26 basis points. Loan yields decreased 2 basis points, primarily due to growth in variable-rate loans and continued repricing in the low rate environment. Funding costs were up 2 basis points over the first quarter of 2015. The cost of interest-bearing deposits decreased 3 basis points and the cost of other borrowed funds increased 25 basis points largely due to the mix of funding sources. The cost of subordinated debentures decreased 126 basis points as $122 million of fixed-rate subordinated debt matured on June 1, 2015. The cost of this subordinated debt was 5.56 percent. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 13 basis points for the first quarter of 2016, unchanged compared to the first quarter of 2015.

Average earning assets for the first quarter of 2016 increased $1.3 billion or 5 percent over the first quarter of 2015. Average loans, net of allowance for loan losses, increased $1.4 billion due primarily to growth in average commercial and commercial real estate loans. The average balance of available for sale securities decreased $150 million and the average balance of restricted equity securities increased $115 million. The average balances of trading securities and fair value option securities held as an economic hedge of our mortgage servicing rights also increased, offset by decreases in residential mortgage loans held for sale, investment securities and interest-bearing cash and cash equivalents.

Average deposits decreased $622 million over the first quarter of 2015. Average interest-bearing transaction accounts decreased $582 million and average time deposits decreased $293 million, partially offset by a $220 million increase in average demand deposit balances. Average savings account balances also grew over the prior year. Average borrowed funds increased $2.2 billion over the first quarter of 2015, primarily due to increased borrowings from the Federal Home Loan Banks. The average balance of subordinated debentures decreased $122 million.


- 2 -



Net interest margin increased 1 basis point over the fourth quarter of 2015. The yield on average earning assets increased 6 basis points. The loan portfolio yield increased 2 basis points to 3.57 percent. The yield on the available for sale securities portfolio increased 4 basis points to 2.08 percent. Funding costs were 0.40 percent, up 6 basis points over the prior quarter. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 1 basis point. Increased earning asset yields and funding costs were primarily related to the full quarter impact of the increase in the federal funds rate by the Federal Reserve in the fourth quarter of 2015.
Average earning assets increased $464 million during the first quarter of 2016, primarily due to growth in average outstanding loans of $405 million over the previous quarter. Average commercial loan balances increased $244 million and average commercial real estate loan balances increased $177 million. The average balance of interest-bearing cash and cash equivalents increased $57 million. Trading securities balances were up $38 million and the average balance of restricted equity securities increased $32 million. This growth was partially offset by a $21 million decrease in the average balance of residential mortgage loans held for sale, a $20 million decrease in the average balance of the available for sale securities portfolio and a $15 million decrease in average investment securities balances.
Average deposits decreased $79 million compared to the previous quarter. Demand deposit balances decreased $207 million and time deposit balances decreased $116 million, partially offset by a $229 million increase in interest-bearing transaction account balances. The average balance of borrowed funds increased $704 million over the fourth quarter of 2015, primarily due to increased borrowings from the Federal Home Loan Banks and increased federal funds sold and repurchase agreement balances.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. 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
March 31, 2016 / 2015
 
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield /
Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
1,284

 
$
(48
)
 
$
1,332

Trading securities
 
42

 
64

 
(22
)
Investment securities:
 
 
 
 
 
 
Taxable securities
 
(151
)
 
(161
)
 
10

Tax-exempt securities
 
420

 
(205
)
 
625

Total investment securities
 
269

 
(366
)
 
635

Available for sale securities:
 
 
 
 
 
 
Taxable securities
 
1,827

 
(528
)
 
2,355

Tax-exempt securities
 
(45
)
 
(152
)
 
107

Total available for sale securities
 
1,782

 
(680
)
 
2,462

Fair value option securities
 
586

 
486

 
100

Restricted equity securities
 
1,714

 
1,662

 
52

Residential mortgage loans held for sale
 
(249
)
 
(519
)
 
270

Loans
 
13,228

 
13,410

 
(182
)
Total tax-equivalent interest revenue
 
18,656

 
14,009

 
4,647

Interest expense:
 
 
 
 
 
 
Transaction deposits
 
852

 
(162
)
 
1,014

Savings deposits
 
(1
)
 
8

 
(9
)
Time deposits
 
(2,414
)
 
(911
)
 
(1,503
)
Funds purchased
 
60

 
19

 
41

Repurchase agreements
 
(15
)
 
(37
)
 
22

Other borrowings
 
5,354

 
2,751

 
2,603

Subordinated debentures
 
(1,455
)
 
(563
)
 
(892
)
Total interest expense
 
2,381

 
1,105

 
1,276

Tax-equivalent net interest revenue
 
16,275

 
12,904

 
3,371

Change in tax-equivalent adjustment
 
1,429

 
 
 
 
Net interest revenue
 
$
14,846

 
 
 
 
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 $159.7 million for the first quarter of 2016, a $6.3 million decrease compared to the first quarter of 2015 and a $1.4 million decrease compared to the fourth quarter of 2015. Fees and commissions revenue decreased $364 thousand over the first quarter of 2015 and increased $9.8 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 $11.4 million in the first quarter of 2016, decreased other operating revenue by $5.0 million in the first quarter of 2015 and increased other operating revenue by $2.6 million in the fourth quarter of 2015.

Table 2Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
March 31,
 
 
 
 
 
Three Months Ended
Dec. 31, 2015
 
 
 
 
 
 
2016
 
2015
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
Increase (Decrease)
 
% Increase (Decrease)
Brokerage and trading revenue
 
$
32,341

 
$
31,707

 
$
634

 
2
 %
 
$
30,255

 
$
2,086

 
7
 %
Transaction card revenue
 
32,354

 
31,010

 
1,344

 
4
 %
 
32,319

 
35

 
 %
Fiduciary and asset management revenue
 
32,056

 
31,469

 
587

 
2
 %
 
31,165

 
891

 
3
 %
Deposit service charges and fees
 
22,542

 
21,684

 
858

 
4
 %
 
22,813

 
(271
)
 
(1
)%
Mortgage banking revenue
 
34,430

 
39,320

 
(4,890
)
 
(12
)%
 
25,039

 
9,391

 
38
 %
Bank-owned life insurance
 
2,170

 
2,198

 
(28
)
 
(1
)%
 
2,348

 
(178
)
 
(8
)%
Other revenue
 
9,734

 
8,603

 
1,131

 
13
 %
 
11,885

 
(2,151
)
 
(18
)%
Total fees and commissions revenue
 
165,627

 
165,991

 
(364
)
 
 %
 
155,824

 
9,803

 
6
 %
Other gains, net
 
1,560

 
755

 
805

 
N/A

 
2,329

 
(769
)
 
N/A

Gain (loss) on derivatives, net
 
7,138

 
911

 
6,227

 
N/A

 
(732
)
 
7,870

 
N/A

Gain (loss) on fair value option securities, net
 
9,443

 
2,647

 
6,796

 
N/A

 
(4,127
)
 
13,570

 
N/A

Change in fair value of mortgage servicing rights
 
(27,988
)
 
(8,522
)
 
(19,466
)
 
N/A

 
7,416

 
(35,404
)
 
N/A

Gain on available for sale securities, net
 
3,964

 
4,327

 
(363
)
 
N/A

 
2,132

 
1,832

 
N/A

Total other-than-temporary impairment
 

 
(781
)
 
781

 
N/A

 
(2,114
)
 
2,114

 
N/A

Portion of loss recognized in (reclassified from) other comprehensive income
 

 
689

 
(689
)
 
N/A

 
387

 
(387
)
 
N/A

Net impairment losses recognized in earnings
 

 
(92
)
 
92

 
N/A

 
(1,727
)
 
1,727

 
N/A

Total other operating revenue
 
$
159,744

 
$
166,017

 
$
(6,273
)
 
(4
)%
 
$
161,115

 
$
(1,371
)
 
(1
)%
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 percent of total revenue for the first quarter of 2016, excluding provision for credit losses and gains and losses on other assets, securities and derivatives and the change in the fair value of mortgage servicing rights. We believe that a variety of fee revenue sources provides an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors that cause net interest revenue compression such as falling interest rates may also drive growth in our mortgage banking revenue. We expect growth in other operating revenue to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and trading revenue includes revenues from securities trading, customer hedging, retail brokerage and investment banking. Brokerage and trading revenue increased $634 thousand over the first quarter of 2015

- 5 -



Securities trading revenue was $12.9 million for the first quarter of 2016, an increase of $3.0 million or 30 percent over the first quarter of 2015. Securities trading revenue includes net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers. 

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 $8.9 million for the first quarter of 2016, a $1.5 million decrease compared to the first quarter of 2015 primarily due to lower hedging activity by our mortgage banking and energy customers.

Revenue earned from retail brokerage transactions decreased $334 thousand or 5 percent compared to the first quarter of 2015 to $6.5 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 and applicable commission rate for each product type. The decrease in revenue from changes in product mix to products that pay a lower commission rate was partially offset by transaction volume growth. In addition, volume has shifted from sales of products that pay a one-time transaction fee to accounts that pay us an on-going management fee.

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $4.1 million for the first quarter of 2016, a $556 thousand or 12 percent decrease compared to the first quarter of 2015, primarily related to the timing and volume of completed transactions.

Brokerage and trading revenue increased $2.1 million over the fourth quarter of 2015. Securities trading revenue increased $1.2 million primarily related to increased transaction volume in mortgage-backed and U.S. Treasury securities. Investment banking fees increased $936 thousand compared to the prior quarter primarily due to increased financial advisory fees. Retail brokerage fees were up $691 thousand over the prior quarter and customer hedging revenue decreased $779 thousand.

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 first quarter of 2016 increased $1.3 million or 4 percent over the first quarter of 2015. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $16.5 million, a $514 thousand or 3 percent increase over the prior year. Merchant services fees totaled $11.2 million, an increase of $743 thousand or 7 percent based on increased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.7 million, an increase of $87 thousand or 2 percent over the first quarter of 2015.

Transaction card revenue was largely unchanged compared to the fourth quarter of 2015. Growth in merchant services fees was offset by lower interchange fee revenue from debit cards issued by the Company and decreased EFT network revenues.

Fiduciary and asset management revenue increased $587 thousand or 2 percent over the first quarter of 2015 primarily due to decreased fee waivers. We earn fees as administrator to and investment adviser for the Cavanal Hill Funds, a diversified, open-ended investment company established as a business trust under the Investment Company Act of 1940. The Bank is custodian and 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 $2.0 million for the first quarter of 2016 compared to $2.7 million for the first quarter of 2015 and $3.5 million for the fourth quarter of 2015. The decrease in fee waivers was related to increased interest rates as a result of the Federal Reserve's federal funds rate increase in the fourth quarter of 2015.

Fiduciary and asset management revenue increased $891 thousand over the fourth quarter of 2015 primarily due decreased fee waivers.

The fair value of fiduciary assets administered by the Company totaled $39.1 billion at March 31, 2016, $37.5 billion at March 31, 2015 and $38.3 billion at December 31, 2015. Fiduciary assets are assets for which the Company possesses investment discretion on behalf of another or any other similar capacity.


- 6 -



Deposit service charges and fees were $22.5 million for the first quarter of 2016, an increase of $858 thousand or 4 percent over the first quarter of 2015. Overdraft fees were $9.6 million for the first quarter of 2016, an increase of $180 thousand or 2 percent compared to the first quarter of 2015. Commercial account service charge revenue totaled $11.3 million, up $786 thousand or 8 percent over the prior year. Service charges on deposit accounts with a standard monthly fee were $1.7 million, a decrease of $112 thousand or 6 percent compared to the first quarter of 2015. Deposit service charges and fees decreased by $271 thousand compared to the prior quarter primarily due to a seasonal decrease in overdraft fee volumes.

Mortgage banking revenue decreased $4.9 million compared to the first quarter of 2015. Mortgage production revenue decreased $7.1 million largely due to lower production activity and decreased percentage of higher-margin mortgage loan refinances. The percentage of refinanced mortgage loans was 49 percent in the first quarter of 2016 compared to 56 percent in the first quarter of 2015. Mortgage servicing revenue grew by $2.2 million or 16 percent over the first quarter of 2015. The outstanding principal balance of mortgage loans serviced for others totaled $20.3 billion, an increase of $3.4 billion or 20 percent.
Mortgage banking revenue increased $9.4 million over the fourth quarter of 2015. Mortgage production revenue increased $8.9 million primarily due to the increased volume of mortgage loan commitments during the quarter. Outstanding mortgage loan commitments at March 31, 2016 were $302 million higher than at December 31, 2015. Total mortgage loans originated during the first quarter of 2016 decreased $121 million compared to the previous quarter. Revenue from mortgage loan servicing grew by $504 thousand due to an increase in the volume of loans serviced. The outstanding balance of mortgage loans serviced for others increased $616 million over December 31, 2015.

Table 3Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
Dec. 31, 2015
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2016
 
2015
 
 
 
 
Net realized gains on mortgage loans sold
 
$
10,779

 
$
17,251

 
$
(6,472
)
 
(38
)%
 
$
15,705

 
$
(4,926
)
 
(31
)%
Change in net unrealized gains on mortgage loans held for sale
 
8,198

 
8,789

 
(591
)
 
(7
)%
 
(5,615
)
 
13,813

 
246
 %
Total mortgage production revenue
 
18,977

 
26,040

 
(7,063
)
 
(27
)%
 
10,090

 
8,887

 
88
 %
Servicing revenue
 
15,453

 
13,280

 
2,173

 
16
 %
 
14,949

 
504

 
3
 %
Total mortgage revenue
 
$
34,430

 
$
39,320

 
$
(4,890
)
 
(12
)%
 
$
25,039

 
$
9,391

 
38
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
1,244,015

 
$
1,565,016

 
$
(321,001
)
 
(21
)%
 
$
1,365,431

 
$
(121,416
)
 
(9
)%
Mortgage loans sold
 
1,239,391

 
1,382,042

 
(142,651
)
 
(10
)%
 
1,424,527

 
(185,136
)
 
(13
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end outstanding mortgage commitments, net
 
902,986

 
824,036

 
78,950

 
10
 %
 
601,147

 
301,839

 
50
 %
Outstanding principal balance of mortgage loans serviced for others
 
20,294,662

 
16,937,128

 
3,357,534

 
20
 %
 
19,678,226

 
616,436

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary residential mortgage interest rate – period end
 
3.71
%
 
3.69
%
 
2
 bps
 
 
 
3.96
%
 
(25
) bps
 
 
Primary residential mortgage interest rate – average
 
3.74
%
 
3.73
%
 
1
 bps
 
 
 
3.89
%
 
(15
) bps
 
 
Secondary residential mortgage interest rate – period end
 
2.57
%
 
2.75
%
 
(18
) bps
 
 
 
3.03
%
 
(46
) bps
 
 
Secondary residential mortgage interest rate – average
 
2.70
%
 
2.69
%
 
1
 bps
 
 
 
2.91
%
 
(21
) bps
 
 

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

Other revenue increased $1.1 million over the first quarter of 2015, primarily due to revenue from a merchant banking investment acquired in the second quarter of 2015. Other revenue decreased $2.2 million compared to the fourth quarter of 2015.

- 7 -



Net gains on securities, derivatives and other assets

In the first quarter of 2016, we recognized a $4.0 million net gain from sales of $469 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential or to move into securities that are expected to perform better in the current rate environment. In the first quarter of 2015, we recognized a $4.3 million net gain from sales of $335 million of available for sale securities and in the fourth quarter of 2015, we recognized a $2.1 million net gain on sales of $436 million of available for sale securities.

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 are highly dependent on changes in secondary mortgage rates, or rates required by investors and interest rate derivative contracts are highly dependent on changes in other market interest rates. While primary and secondary mortgage rates generally move in the same direction, the spread between them may widen and narrow due to market conditions and government intervention. Changes in the forward-looking spread between the primary and secondary rates can cause significant earnings volatility. Additionally, the fair value of mortgage servicing rights is dependent on short-term interest rates that affect the value of custodial funds. Changes in the spread between short-term and long-term interest rates can also cause significant earnings volatility.

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


Table 4 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
March 31, 2016
 
Dec. 31, 2015
 
March 31, 2015
Gain (loss) on mortgage hedge derivative contracts, net
 
$
7,138

 
$
(732
)
 
$
911

Gain (loss) on fair value option securities, net
 
9,443

 
(4,127
)
 
2,647

Gain (loss) on economic hedge of mortgage servicing rights, net
 
16,581

 
(4,859
)
 
3,558

Gain (loss) on change in fair value of mortgage servicing rights
 
(27,988
)
 
7,416

 
(8,522
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
(11,407
)
 
$
2,557

 
$
(4,964
)
 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
2,033

 
$
2,137

 
$
1,739







- 8 -



Other Operating Expense

Other operating expense for the first quarter of 2016 totaled $244.9 million, a $24.6 million or 11 percent increase over the first quarter of 2015. Personnel expenses increased $7.3 million or 6 percent. Non-personnel expenses increased $17.3 million or 19 percent over the prior year.

Operating expenses increased $12.3 million compared to the previous quarter. Personnel expense increased $2.7 million. Non-personnel expense increased $9.7 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
Dec. 31, 2015
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2016
 
2015
 
 
 
 
 
Regular compensation
 
$
81,167

 
$
77,762

 
$
3,405

 
4
 %
 
$
80,314

 
$
853

 
1
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
30,444

 
26,941

 
3,503

 
13
 %
 
30,137

 
307

 
1
 %
Share-based
 
2,022

 
2,140

 
(118
)
 
(6
)%
 
4,276

 
(2,254
)
 
(53
)%
Deferred compensation
 
69

 
130

 
(61
)
 
N/A

 
652

 
(583
)
 
N/A

Total incentive compensation
 
32,535

 
29,211

 
3,324

 
11
 %
 
35,065

 
(2,530
)
 
(7
)%
Employee benefits
 
22,141

 
21,575

 
566

 
3
 %
 
17,803

 
4,338

 
24
 %
Total personnel expense
 
135,843

 
128,548

 
7,295

 
6
 %
 
133,182

 
2,661

 
2
 %
Business promotion
 
5,696

 
5,748

 
(52
)
 
(1
)%
 
8,416

 
(2,720
)
 
(32
)%
Professional fees and services
 
11,759

 
10,059

 
1,700

 
17
 %
 
10,357

 
1,402

 
14
 %
Net occupancy and equipment
 
18,766

 
19,044

 
(278
)
 
(1
)%
 
19,356

 
(590
)
 
(3
)%
Insurance
 
7,265

 
4,980

 
2,285

 
46
 %
 
5,415

 
1,850

 
34
 %
Data processing and communications
 
32,017

 
29,772

 
2,245

 
8
 %
 
31,248

 
769

 
2
 %
Printing, postage and supplies
 
3,907

 
3,461

 
446

 
13
 %
 
3,108

 
799

 
26
 %
Net losses and operating expenses of repossessed assets
 
1,070

 
613

 
457

 
75
 %
 
343

 
727

 
212
 %
Amortization of intangible assets
 
1,159

 
1,090

 
69

 
6
 %
 
1,090

 
69

 
6
 %
Mortgage banking costs
 
12,379

 
10,167

 
2,212

 
22
 %
 
11,496

 
883

 
8
 %
Other expense
 
15,039

 
6,783

 
8,256

 
122
 %
 
8,547

 
6,492

 
76
 %
Total other operating expense
 
$
244,900

 
$
220,265

 
$
24,635

 
11
 %
 
$
232,558

 
$
12,342

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,821

 
4,744

 
77

 
2
 %
 
4,819

 
2

 
 %
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 $3.4 million or 4 percent over the first quarter of 2015. The average number of employees increased 2 percent over the prior year. Recent additions have primarily been higher-costing positions in compliance and risk management and technology. In addition, standard annual merit increases in regular compensation were effective for the majority of our staff on March 1.

Incentive compensation increased $3.3 million or 11 percent over the first quarter of 2015. Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Total cash-based incentive compensation increased $3.5 million or 13 percent over the first quarter of 2015


- 9 -



Share-based compensation expense represents expense for equity awards based on grant-date fair value. Non-vested shares awarded prior to 2013 generally cliff vest in 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. Share-based compensation expense decreased $118 thousand compared to the prior year.

Employee benefit expense increased $566 thousand or 3 percent over the first quarter of 2015 primarily due to increased employee retirement plan and payroll tax expense, partially offset by lower employee medical costs.
Personnel costs increased by $2.7 million over the fourth quarter of 2015, primarily due to a $4.2 million seasonal increase in payroll taxes, partially offset by a $2.5 million decrease in incentive compensation expense. Regular compensation expense increased $853 thousand over the prior quarter.

Non-personnel operating expenses

Non-personnel operating expenses increased $17.3 million or 19 percent over the first quarter of 2015. Other expense increased $8.3 million. We increased litigation accruals by $4.1 million during the first quarter of 2016 for matters previously disclosed in notes to our financial statements due to additional information received during the quarter. We also recorded $2.7 million of post-acquisition valuation adjustments to a consolidated merchant banking investment, $1.1 million of which is attributable to non-controlling interests. Deposit insurance expense increased $2.3 million, primarily due to an increase in criticized and classified assets, an input to the deposit insurance assessment. The increase in criticized and classified assets was related to falling energy prices and overall asset growth. Data processing and communications expense increased $2.2 million due to increased transaction activity. Mortgage banking costs increased $2.2 million due to increased mortgage servicing costs. Professional fees and services expense increased $1.7 million.
Non-personnel expense increased $9.7 million compared to the fourth quarter of 2015. Other expense increased $6.5 million due to litigation accruals and post-acquisition valuation adjustments to a consolidated merchant banking investment. Deposit insurance expense increased $1.9 million and professional fees and services expense increased $1.4 million, partially offset by a $2.7 million seasonal decrease in business promotion expense.
Income Taxes

Income tax expense was $21.4 million or 34.3% of book taxable income for the first quarter of 2016 compared to $38.4 million or 33.8% of book taxable income for the first quarter of 2015 and $26.2 million or 30.1% of book taxable income for the fourth quarter of 2015. Income tax expense as a percentage of net income before taxes was lower in the first quarter of 2016 compared to the first quarter of 2015 primarily due to lower income before taxes. Income tax expense as a percentage of net income before taxes was lower in the fourth quarter of 2015 compared to the first quarter of 2015 primarily due to a decrease in net income before taxes during the fourth quarter of 2015. This resulted in a year-to-date decrease in income tax expense that was recognized in the fourth quarter of 2015.

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

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. The reserve for uncertain tax positions was $13 million at March 31, 2016, $13 million at December 31, 2015, and $14 million at March 31, 2015.

- 10 -



Lines of Business

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

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

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

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

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

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


- 11 -



As shown in Table 6, net income attributable to our lines of business decreased $20.2 million or 31 percent compared to the first quarter of 2015. Net interest revenue grew by $19.1 million over the prior year. This was offset by a $30.6 million increase in net charge-offs primarily due to energy loans and an $18.9 million increase in operating expense primarily due to increased litigation accruals, increased mortgage banking expense, and a post-acquisition valuation adjustment on a consolidated merchant banking investment.

Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Commercial Banking
 
$
37,115

 
$
48,603

Consumer Banking
 
119

 
7,281

Wealth Management
 
6,977

 
8,526

Subtotal
 
44,211

 
64,410

Funds Management and other
 
(1,647
)
 
10,433

Total
 
$
42,564

 
$
74,843


- 12 -



Commercial Banking

Commercial Banking contributed $37.1 million to consolidated net income in the first quarter of 2016, a decrease of $11.5 million or 24% compared to the first quarter of 2015. Increased loan charge-offs and higher operating expenses were partially offset by growth in net interest revenue and fees and commissions revenue. Commercial Banking net loans charged off were $21.6 million in the first quarter of 2016 compared to a net recovery $8.9 million in the first quarter of 2015. The increase was primarily related to energy portfolio loans.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
 
March 31,
 
 
 
2016
 
2015
 
Net interest revenue from external sources
 
$
116,637

 
$
101,175

 
$
15,462

Net interest expense from internal sources
 
(14,534
)
 
(12,635
)
 
(1,899
)
Total net interest revenue
 
102,103

 
88,540

 
13,563

Net loans charged off (recovered)
 
21,572

 
(8,902
)
 
30,474

Net interest revenue after net loans charged off (recovered)
 
80,531

 
97,442

 
(16,911
)
 
 
 
 
 
 
 
Fees and commissions revenue
 
45,476

 
42,302

 
3,174

Other gains (losses), net
 
(368
)
 
144

 
(512
)
Other operating revenue
 
45,108

 
42,446

 
2,662

 
 
 
 
 
 
 
Personnel expense
 
26,628

 
26,250

 
378

Non-personnel expense
 
29,441

 
22,895

 
6,546

Other operating expense
 
56,069

 
49,145

 
6,924

 
 
 
 
 
 
 
Net direct contribution
 
69,570

 
90,743

 
(21,173
)
Gain (loss) on repossessed assets, net
 
(82
)
 
45

 
(127
)
Corporate expense allocations
 
8,744

 
11,241

 
(2,497
)
Income before taxes
 
60,744

 
79,547

 
(18,803
)
Federal and state income tax
 
23,629

 
30,944

 
(7,315
)
Net income
 
$
37,115

 
$
48,603

 
$
(11,488
)
 
 
 
 
 
 
 
Average assets
 
$
16,969,015

 
$
16,270,266

 
$
698,749

Average loans
 
13,317,338

 
11,892,703

 
1,424,635

Average deposits
 
8,457,750

 
8,995,036

 
(537,286
)
Average invested capital
 
1,155,572

 
994,596

 
160,976


Net interest revenue increased $13.6 million or 15% over the prior year. Growth in net interest revenue was primarily due to a $1.4 billion or 12% increase in average loan balances and a $537 million or 6% decrease in average deposit balances.

Fees and commissions revenue grew by $3.2 million or 8% over the first quarter of 2015. Other revenue increased $1.6 million primarily related to merchant banking activity. Transaction card revenues from our TransFund electronic funds transfer network increased $1.2 million. Commercial deposit service charge revenue was up $701 thousand.

Operating expenses increased $6.9 million or 14% over the the first quarter of 2015. Personnel expense increased $378 thousand or 1% primarily due to increased incentive compensation expense and standard annual merit increases. Non-personnel expense grew by $6.5 million or 29%. The first quarter of 2016 included $3.9 million of litigation settlements and $2.7 million of post-acquisition valuation adjustments to a consolidated merchant banking investment. Corporate expense allocations decreased $2.5 million compared to the prior year.


- 13 -



The average outstanding balance of loans attributed to Commercial Banking grew by $1.4 billion or 12% over the first quarter of 2015 to $13.3 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 $8.5 billion for the first quarter of 2016, a decrease of $537 million or 6% compared to the first quarter of 2015. 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 online origination channel.

Consumer Banking contributed $119 thousand to consolidated net income for the first quarter of 2016 compared to $7.3 million in the first quarter of 2015.

Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $7.0 million decrease in Consumer Banking net income in the first quarter of 2016 compared to a $3.0 million decrease in Consumer Banking net income in the first quarter of 2015. Mortgage banking revenue was $4.9 million lower than in the prior year. Growth in net interest revenue and lower corporate expense allocations were partially offset by increased operating expense.


- 14 -



Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
 
March 31,
 
 
 
2016
 
2015
 
Net interest revenue from external sources
 
$
21,465

 
$
20,719

 
$
746

Net interest revenue from internal sources
 
9,353

 
6,819

 
2,534

Total net interest revenue
 
30,818

 
27,538

 
3,280

Net loans charged off
 
1,702

 
1,422

 
280

Net interest revenue after net loans charged off
 
29,116

 
26,116

 
3,000

 
 
 
 
 
 
 
Fees and commissions revenue
 
56,501

 
61,510

 
(5,009
)
Other losses, net
 
(142
)
 
(315
)
 
173

Other operating revenue
 
56,359

 
61,195

 
(4,836
)
 
 
 
 
 
 
 
Personnel expense
 
27,125

 
25,782

 
1,343

Non-personnel expense
 
30,923

 
26,524

 
4,399

Total other operating expense
 
58,048

 
52,306

 
5,742

 
 
 
 
 
 
 
Net direct contribution
 
27,427

 
35,005

 
(7,578
)
Gain on financial instruments, net
 
16,581

 
3,558

 
13,023

Change in fair value of mortgage servicing rights
 
(27,988
)
 
(8,522
)
 
(19,466
)
Gain on repossessed assets, net
 
153

 
78

 
75

Corporate expense allocations
 
15,978

 
18,202

 
(2,224
)
Income before taxes
 
195

 
11,917

 
(11,722
)
Federal and state income tax
 
76

 
4,636

 
(4,560
)
Net income
 
$
119

 
$
7,281

 
$
(7,162
)
 
 
 
 
 
 
 
Average assets
 
$
8,687,289

 
$
8,798,913

 
$
(111,624
)
Average loans
 
1,883,904

 
1,940,293

 
(56,389
)
Average deposits
 
6,575,893

 
6,621,377

 
(45,484
)
Average invested capital
 
258,888

 
272,315

 
(13,427
)

Net interest revenue from Consumer Banking activities grew by $3.3 million or 12% over the the first quarter of 2015 primarily due to increased rates on deposit balances sold to the Funds Management unit, partially offset by a $45 million or 1% decrease in average deposit balances. Average loan balances were $56 million or 3% lower than the prior year.

Fees and commissions revenue decreased $5.0 million or 8% compared to the first quarter of 2015, primarily due to a $4.9 million decrease in mortgage banking revenue. Mortgage loans funded for sale in the first quarter of 2016 were $321 million or 21% lower than in the first quarter of 2015. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company increased $152 thousand or 3%. Deposit service charges and fees were largely unchanged compared to the prior year.

Operating expenses increased $5.7 million or 11% over the first quarter of 2015. Personnel expenses increased $1.3 million or 5%, primarily due to increases in regular compensation expense. Non-personnel expense increased $4.4 million or 17% over the prior year. Mortgage banking expense was up $2.2 million over the prior year due to increased mortgage repurchase accruals. Data processing and communications expense increased $1.1 million. Non-personnel expense also included $1.8 million of litigation settlements during the first quarter of 2016. Professional fees and services expense was $644 thousand lower than in the prior year.

Corporate expense allocations decreased $2.2 million compared to the first quarter of 2015.


- 15 -



Average consumer deposits decreased $45 million or 1% compared to the first quarter of 2015. Average time deposit balances decreased $199 million or 14%. Average demand deposit balances grew by $74 million or 5%, average interest-bearing transaction accounts increased $51 million or 2% and average savings account balances increased $28 million or 8%.


Wealth Management

Wealth Management contributed $7.0 million to consolidated net income in the first quarter of 2016, up $1.5 million or 18% over the first quarter of 2015. Net interest revenue, brokerage and trading revenue and fiduciary and asset management revenue all grew over the prior year. This was partially offset by increased operating expenses and corporate expense allocations.

Table 9 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
 
March 31,
 
 
 
2016
 
2015
 
Net interest revenue from external sources
 
$
6,078

 
$
5,376

 
$
702

Net interest revenue from internal sources
 
7,663

 
6,079

 
1,584

Total net interest revenue
 
13,741

 
11,455

 
2,286

Net loans charged off (recovered)
 
(150
)
 

 
(150
)
Net interest revenue after net loans charged off (recovered)
 
13,891

 
11,455

 
2,436

 
 
 
 
 
 
 
Fees and commissions revenue
 
68,721

 
66,904

 
1,817

Other gains, net
 
26

 
57

 
(31
)
Other operating revenue
 
68,747

 
66,961

 
1,786

 
 
 
 
 
 
 
Personnel expense
 
45,119

 
42,415

 
2,704

Non-personnel expense
 
15,565

 
12,065

 
3,500

Other operating expense
 
60,684

 
54,480

 
6,204

 
 
 
 
 
 
 
Net direct contribution
 
21,954

 
23,936

 
(1,982
)
Corporate expense allocations
 
10,535

 
9,982

 
553

Income before taxes
 
11,419

 
13,954

 
(2,535
)
Federal and state income tax
 
4,442

 
5,428

 
(986
)
Net income
 
$
6,977

 
$
8,526

 
$
(1,549
)
 
 
 
 
 
 
 
Average assets
 
$
5,565,047

 
$
5,451,695

 
$
113,352

Average loans
 
1,090,326

 
1,035,229

 
55,097

Average deposits
 
4,696,013

 
4,701,302

 
(5,289
)
Average invested capital
 
233,079

 
223,967

 
9,112


 
 
March 31,
 
Increase
(Decrease)
 
 
2016
 
2015
 
Fiduciary assets in custody for which BOKF has sole or joint discretionary authority
 
$
13,847,023

 
$
15,197,567

 
$
(1,350,544
)
Fiduciary assets not in custody for which BOKF has sole or joint discretionary authority
 
3,653,228

 
3,442,421

 
210,807

Non-managed trust assets in custody
 
21,613,054

 
18,871,758

 
2,741,296

Total fiduciary assets
 
39,113,305

 
37,511,746

 
1,601,559

Assets held in safekeeping
 
27,115,904

 
23,311,704

 
3,804,200

Brokerage accounts under BOKF administration
 
5,639,804

 
5,854,364

 
(214,560
)
Assets under management or in custody
 
$
71,869,013

 
$
66,677,814

 
$
5,191,199



- 16 -



Net interest revenue for the first quarter of 2016 increased $2.3 million or 20% over the first quarter of 2015. Average deposit balances were largely unchanged compared to the first quarter of 2015. Interest-bearing transaction account balances decreased $195 million or 7% and time deposit balances decreased $50 million or 7%. Non-interest bearing demand deposits grew by $239 million or 27%. Average loan balances increased $55 million or 5% over the prior year and rates improved.

Fees and commissions revenue was up $1.8 million or 3% over the first quarter of 2015, primarily due to a $1.6 million or 6% increase in brokerage and trading revenue. Fiduciary and asset management revenue increased $527 thousand or 2% over the prior year, partially offset by a $382 thousand or 8% decrease in other revenue.

Other operating revenue includes fees earned from state and municipal bond and corporate debt underwriting and financial advisory services, primarily in the Oklahoma and Texas markets. In the first quarter of 2016, the Wealth Management division participated in 74 state and municipal bond underwritings that totaled $5.4 billion. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $598 million of these underwritings. In the first quarter of 2015, the Wealth Management division participated in 93 state and municipal bond underwritings that totaled approximately $1.7 billion. Our interest in these underwritings totaled approximately $609 million. The Wealth Management division also participated in 5 corporate debt underwritings that totaled $5.9 billion. Our interest in these underwritings was $149 million.

Operating expenses increased $6.2 million or 11% over the first quarter of 2015. Personnel expenses increased $2.7 million, primarily due to incentive compensation expense. Non-personnel expense increased $3.5 million including $1.6 million of litigation accruals. Professional fees and services expense increased $1.3 million. Occupancy and equipment costs increased $454 thousand and data processing and communications expense increased $397 thousand.

Corporate expense allocations increased $553 thousand or 6% over the prior year.
Financial Condition
Securities

We maintain a securities portfolio to enhance profitability, manage interest rate risk, provide liquidity and comply with regulatory requirements. Securities are classified as trading, held for investment, or available for sale. See Note 2 to the consolidated financial statements for the composition of the securities portfolio as of March 31, 2016, December 31, 2015 and March 31, 2015.

At March 31, 2016, the carrying value of investment (held-to-maturity) securities was $576 million and the fair value was $610 million. Investment securities consist primarily of long-term, fixed rate Oklahoma and Texas municipal bonds, taxable Texas school construction bonds and residential mortgage-backed securities issued by U.S. government agencies. The investment security portfolio is diversified among issuers. The largest obligation of any single issuer is $30 million. Substantially all of these bonds are general obligations of the issuers. Approximately $105 million of the Texas school construction bonds are also guaranteed by the Texas Permanent School Fund Guarantee Program supervised by the State Board of Education for the State of Texas.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $8.7 billion at March 31, 2016, a decrease of $274 million compared to December 31, 2015. Available for sale securities consist primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans. At March 31, 2016, residential mortgage-backed securities represented 66 percent of total available for sale securities.

A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. Our best estimate of the duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at March 31, 2016 is 2.8 years. Management estimates the duration extends to 3.4 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.5 years assuming a 50 basis point decline in the current low rate environment.


- 17 -



Residential mortgage-backed securities also have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. At March 31, 2016, approximately $5.6 billion of the amortized cost of the Company’s residential mortgage-backed securities were issued by U.S. government agencies. The fair value of these residential mortgage-backed securities totaled $5.7 billion at March 31, 2016.

We also hold amortized cost of $123 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions, a decrease of $5.1 million from December 31, 2015. The decrease was due to cash payments received during the quarter. The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $133 million at March 31, 2016.

The amortized cost of our portfolio of privately issued residential mortgage-backed securities included $69 million of Jumbo-A residential mortgage loans and $54 million of Alt-A residential mortgage loans. Jumbo-A residential mortgage loans generally meet government underwriting standards, but have loan balances that exceed agency maximums. Alt-A mortgage loans generally do not have sufficient documentation to meet government agency underwriting standards. Approximately 90 percent of our Alt-A mortgage-backed securities represent pools of fixed rate residential mortgage loans. None of the adjustable rate mortgages are payment option adjustable rate mortgages (“ARMs”). Approximately 30 percent of our Jumbo-A residential mortgage-backed securities represent pools of fixed rate residential mortgage loans and none of the adjustable rate mortgages are payment option ARMs.

The aggregate gross amount of unrealized losses on available for sale securities totaled $5.9 million at March 31, 2016, compared to $42 million at December 31, 2015. On a quarterly basis, we perform separate evaluations on debt and equity securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. No other-than-temporary impairment charges were recognized in earnings during the first quarter of 2016.

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

BOK Financial is required to hold stock as members of the Federal Reserve system and the Federal Home Loan Banks ("FHLB"). These restricted equity securities are carried at cost as these securities do not have a readily determined fair value because the ownership of these shares is restricted and they lack a market. Federal Reserve Bank stock totaled $36 million and holdings of FHLB stock totaled $278 million at March 31, 2016. Holdings of FHLB stock increased $41 million over December 31, 2015. We are required to hold stock in the FHLB in proportion to our borrowings with the FHLB.

- 18 -



Bank-Owned Life Insurance

We have approximately $306 million of bank-owned life insurance at March 31, 2016. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $275 million is held in separate accounts. Our separate account holdings are invested in diversified portfolios of investment-grade fixed income securities and cash equivalents, including U.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio’s investment guidelines. The cash surrender value of certain life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments. At March 31, 2016, the fair value of investments held in separate accounts was approximately $290 million. As the underlying fair value of the investments held in a separate account at March 31, 2016 exceeded the net book value of the investments, no cash surrender value was supported by the stable value wrap. The stable value wrap is provided by a domestic financial institution. The remaining cash surrender value of $31 million primarily represents the cash surrender value of policies held in general accounts and other amounts due from various insurance companies.

Loans

The aggregate loan portfolio before allowance for loan losses totaled $16 billion at March 31, 2016, an increase of $81 million over December 31, 2015. Outstanding commercial loans grew by $36 million over December 31, 2015, largely due to growth in healthcare, manufacturing and wholesale/retail sectors loans, partially offset by a decrease in services and energy loan balances. Commercial real estate loan balances were up $111 million primarily related to growth in loans secured by office buildings and other other commercial real estate loans. Residential mortgage loans decreased $7.6 million compared to December 31, 2015 and personal loans decreased $58 million compared to December 31, 2015

Table 10 -- Loans
(In thousands)