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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
Document


 

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

FORM 10-Q
(Mark One) 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 65,866,317 shares of common stock ($.00006 par value) as of June 30, 2016.
 





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

Index

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




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

BOK Financial Corporation (“the Company”) reported net income of $65.8 million or $1.00 per diluted share for the second quarter of 2016, compared to $79.2 million or $1.15 per diluted share for the second quarter of 2015 and $42.6 million or $0.64 per diluted share for the first quarter of 2016

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

- 1 -



The Company paid a regular quarterly cash dividend of $28 million or $0.43 per common share during the second quarter of 2016. On July 26, 2016, the board of directors approved a regular quarterly cash dividend of $0.43 per common share payable on or about August 26, 2016 to shareholders of record as of August 12, 2016.
The Company repurchased 305,169 common shares at an average price of $58.23 per share during the second quarter of 2016. No shares were repurchased during the second quarter of 2015 and the first quarter of 2016.
Results of Operations
Net Interest Revenue and Net Interest Margin

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

Net interest revenue totaled $182.6 million for the second quarter of 2016 compared to $175.7 million for the second quarter of 2015 and $182.6 million for the first quarter of 2016. Net interest margin was 2.63 percent for the second quarter of 2016, 2.61 percent for the second quarter of 2015 and 2.65 percent for the first quarter of 2016.

Tax-equivalent net interest revenue increased $8.2 million over the second quarter of 2015. Table 1 shows the effect on net interest revenue from changes in average balances and interest rates for various types of earning assets and interest-bearing liabilities. Tax-equivalent net interest revenue increased $10.8 million primarily due to the growth in average loan balances, partially offset by increased borrowing costs. Net interest revenue decreased $2.6 million due to a change in rates from the increase in the federal funds rate by the Federal Reserve in the fourth quarter of 2015, a mix shift toward lower yielding floating rate loans, continued repricing of fixed rate loans and an increase in nonaccruing energy loans.

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

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

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

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

- 2 -



Average earning assets increased $246 million during the second quarter of 2016, primarily due to growth in average outstanding loans of $271 million over the previous quarter. Average commercial real estate loan balances increased $187 million and average personal loan balances increased $89 million. The average balance of residential mortgage loans held for sale was up $111 million and trading securities balances increased $50 million over the prior quarter. This growth was partially offset by an $82 million decrease in the average balance of securities held as an economic hedge of mortgage servicing rights and a $61 million decrease in the average balance of the available for sale securities portfolio. Increased restricted equity balances were offset by a decrease in the average balance of interest-bearing cash and cash equivalents and investment securities.
Average deposits decreased $159 million compared to the previous quarter. Interest-bearing transaction account balances decreased $166 million and time deposit balances decreased $69 million, partially offset by a $56 million increase in demand deposit balances. The average balance of borrowed funds increased $399 million over the first quarter of 2016. Increased borrowings from the Federal Home Loan Banks were partially offset by decreased federal funds sold and repurchase agreement balances.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately 82% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will re-price within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that re-price more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally re-price more quickly than liabilities. Among the strategies that we use to manage toward a relatively rate-neutral position, we purchase fixed rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market rate sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. 

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

- 3 -



Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
June 30, 2016 / 2015
 
Six Months Ended
June 30, 2016 / 2015
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
1,319

 
$
18

 
$
1,301

 
$
2,603

 
$
(26
)
 
$
2,629

Trading securities
 
190

 
176

 
14

 
231

 
257

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

 
(267
)
 
619

 
773

 
(466
)
 
1,239

Total investment securities
 
170

 
(402
)
 
572

 
440

 
(761
)
 
1,201

Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
990

 
(948
)
 
1,938

 
2,817

 
(1,475
)
 
4,292

Tax-exempt securities
 
24

 
(132
)
 
156

 
(21
)
 
(284
)
 
263

Total available for sale securities
 
1,014

 
(1,080
)
 
2,094

 
2,796

 
(1,759
)
 
4,555

Fair value option securities
 
(258
)
 
(277
)
 
19

 
328

 
184

 
144

Restricted equity securities
 
635

 
1,584

 
(949
)
 
2,349

 
3,177

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

 
(633
)
 
(1,076
)
 
443

Loans
 
9,105

 
12,011

 
(2,906
)
 
22,334

 
25,202

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

 
11,476

 
315

 
30,448

 
25,198

 
5,250

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
1,063

 
(147
)
 
1,210

 
1,915

 
(428
)
 
2,343

Savings deposits
 
(1
)
 
9

 
(10
)
 
(2
)
 
17

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

 
2

 
18

 
80

 
21

 
59

Repurchase agreements
 
11

 
(20
)
 
31

 
(4
)
 
(49
)
 
45

Other borrowings
 
5,628

 
2,320

 
3,308

 
10,982

 
4,960

 
6,022

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

 
708

 
2,865

 
5,954

 
1,551

 
4,403

Tax-equivalent net interest revenue
 
8,218

 
10,768

 
(2,550
)
 
24,494

 
23,647

 
847

Change in tax-equivalent adjustment
 
1,337

 
 
 
 
 
2,767

 
 
 
 
Net interest revenue
 
$
6,881

 
 
 
 
 
$
21,727

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

- 4 -



Other Operating Revenue

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

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

 
$
36,012

 
$
3,518

 
10
%
 
$
32,341

 
$
7,189

 
22
%
Transaction card revenue
 
34,950

 
32,778

 
2,172

 
7
%
 
32,354

 
2,596

 
8
%
Fiduciary and asset management revenue
 
34,813

 
32,712

 
2,101

 
6
%
 
32,056

 
2,757

 
9
%
Deposit service charges and fees
 
22,618

 
22,328

 
290

 
1
%
 
22,542

 
76

 
%
Mortgage banking revenue
 
38,224

 
36,846

 
1,378

 
4
%
 
34,430

 
3,794

 
11
%
Other revenue
 
13,352

 
11,871

 
1,481

 
12
%
 
11,904

 
1,448

 
12
%
Total fees and commissions revenue
 
183,487

 
172,547

 
10,940

 
6
%
 
165,627

 
17,860

 
11
%
Other gains, net
 
1,307

 
1,457

 
(150
)
 
N/A

 
1,560

 
(253
)
 
N/A

Gain (loss) on derivatives, net
 
10,766

 
(1,032
)
 
11,798

 
N/A

 
7,138

 
3,628

 
N/A

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

 
(8,130
)
 
12,409

 
N/A

 
9,443

 
(5,164
)
 
N/A

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

 
(24,293
)
 
N/A

 
(27,988
)
 
11,705

 
N/A

Gain on available for sale securities, net
 
5,326

 
3,433

 
1,893

 
N/A

 
3,964

 
1,362

 
N/A

Total other operating revenue
 
$
188,882

 
$
176,285

 
$
12,597

 
7
%
 
$
159,744

 
$
29,138

 
18
%
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 50 percent of total revenue for the second quarter of 2016, excluding provision for credit losses and gains and losses on other assets, securities and derivatives and the change in the fair value of mortgage servicing rights. We believe that a variety of fee revenue sources provides an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors that cause net interest revenue compression such as falling interest rates may also drive growth in our mortgage banking revenue. We expect growth in other operating revenue to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and trading revenue includes revenues from securities trading, customer hedging, retail brokerage and investment banking. Brokerage and trading revenue increased $3.5 million or 10 percent over the second quarter of 2015. Securities trading revenue was $12.3 million for the second quarter of 2016, an increase of $947 thousand or 8 percent over the second quarter of 2015. Securities trading revenue includes net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers. 


- 5 -



Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $13.5 million for the second quarter of 2016, a $1.8 million or 16 percent increase over the second quarter of 2015 primarily due to increased hedging activity by our energy customers.

Revenue earned from retail brokerage transactions increased $817 thousand or 14 percent over the second quarter of 2015 to $6.7 million. Retail brokerage revenue is primarily based on fees and commissions earned on sales of fixed income securities, annuities, mutual funds and other financial instruments to retail customers. Revenue is primarily based on the volume of customer transactions and applicable commission rate for each product type. The increase in revenue due to transaction volume growth was partially offset by a change in product mix to products that pay a lower commission rate. In addition, volume has shifted from sales of products that pay a one-time transaction fee to accounts that pay us an on-going management fee.

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

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

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served. Transaction card revenue for the second quarter of 2016 increased $992 thousand or 3 percent over the second quarter of 2015, excluding the impact of a customer early termination fee in the second quarter of 2016. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $17.1 million, a $478 thousand or 3 percent increase over the prior year. Merchant services fees totaled $11.7 million, an increase of $410 thousand or 4 percent based on increased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.9 million, an increase of $104 thousand or 2 percent over the second quarter of 2015.
Excluding the impact of the customer early termination fee, transaction card revenue increased $1.4 million primarily due to a seasonal increase in transaction volumes on our TransFund EFT network. Merchant services fees and revenue from interchange fees also increased over the prior quarter.
 
Fiduciary and asset management revenue increased $2.1 million or 6 percent over the second quarter of 2015 largely due to decreased fee waivers. We earn fees as administrator to and investment adviser for the Cavanal Hill Funds, a diversified, open-ended investment company established as a business trust under the Investment Company Act of 1940. The Bank is custodian and BOK Financial Securities, Inc. is distributor for the Cavanal Hill Funds. Products of the Cavanal Hill Funds are offered to customers, employee benefit plans, trusts and the general public in the ordinary course of business. We have voluntarily waived administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment. Waived fees totaled $1.8 million for the second quarter of 2016 compared to $2.9 million for the second quarter of 2015 and $2.0 million for the first quarter of 2016. The decrease in fee waivers was related to increased interest rates as a result of the Federal Reserve's federal funds rate increase in the fourth quarter of 2015. The remaining increase is primarily due to growth in assets under management related to the Company's acquisition of Weaver and Tidwell Financial Advisors LTD d/b/a Weaver Wealth Management, a registered investment advisor, in the first quarter of 2016 and changes in market values.

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

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


- 6 -



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

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

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

 
$
23,856

 
$
(4,651
)
 
(19
)%
 
$
10,779

 
$
8,426

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

 
(743
)
 
3,964

 
(534
)%
 
8,198

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

 
23,113

 
(687
)
 
(3
)%
 
18,977

 
3,449

 
18
%
Servicing revenue
 
15,798

 
13,733

 
2,065

 
15
 %
 
15,453

 
345

 
2
%
Total mortgage revenue
 
$
38,224

 
$
36,846

 
$
1,378

 
4
 %
 
$
34,430

 
$
3,794

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

 
$
1,828,230

 
$
(9,386
)
 
(1
)%
 
$
1,244,015

 
$
574,829

 
46
%
Mortgage loans sold
 
1,742,582

 
1,861,968

 
(119,386
)
 
(6
)%
 
1,239,391

 
503,191

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

 
849,619

 
116,012

 
14
 %
 
902,986

 
62,645

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

 
17,979,623

 
3,198,764

 
18
 %
 
20,294,662

 
883,725

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

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

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

- 7 -



Net gains on securities, derivatives and other assets

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

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

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

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


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

 
$
7,138

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

 
9,443

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

 
16,581

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

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

 
$
2,033

 
$
1,985







- 8 -



Other Operating Expense

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

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

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

 
$
78,105

 
$
4,336

 
6
 %
 
$
81,167

 
$
1,274

 
2
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
34,894

 
32,347

 
2,547

 
8
 %
 
30,444

 
4,450

 
15
 %
Share-based
 
3,701

 
3,057

 
644

 
21
 %
 
2,022

 
1,679

 
83
 %
Deferred compensation
 
211

 
118

 
93

 
N/A

 
69

 
142

 
N/A

Total incentive compensation
 
38,806

 
35,522

 
3,284

 
9
 %
 
32,535

 
6,271

 
19
 %
Employee benefits
 
21,243

 
19,068

 
2,175

 
11
 %
 
22,141

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

 
132,695

 
9,795

 
7
 %
 
135,843

 
6,647

 
5
 %
Business promotion
 
6,703

 
7,765

 
(1,062
)
 
(14
)%
 
5,696

 
1,007

 
18
 %
Professional fees and services
 
14,158

 
9,560

 
4,598

 
48
 %
 
11,759

 
2,399

 
20
 %
Net occupancy and equipment
 
19,677

 
18,927

 
750

 
4
 %
 
18,766

 
911

 
5
 %
Insurance
 
7,129

 
5,116

 
2,013

 
39
 %
 
7,265

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

 
30,655

 
2,147

 
7
 %
 
32,017

 
785

 
2
 %
Printing, postage and supplies
 
3,889

 
3,553

 
336

 
9
 %
 
3,907

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

 
223

 
1,365

 
612
 %
 
1,070

 
518

 
48
 %
Amortization of intangible assets
 
2,624

 
1,090

 
1,534

 
141
 %
 
1,159

 
1,465

 
126
 %
Mortgage banking costs
 
15,809

 
8,227

 
7,582

 
92
 %
 
12,379

 
3,430

 
28
 %
Other expense
 
7,856

 
9,302

 
(1,446
)
 
(16
)%
 
15,039

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

 
$
227,113

 
$
27,612

 
12
 %
 
$
244,900

 
$
9,825

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

 
4,776

 
117

 
2
 %
 
4,821

 
72

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

Personnel expense

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

Incentive compensation increased $3.3 million or 9 percent over the second quarter of 2015. Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Total cash-based incentive compensation increased $2.5 million or 8 percent over the second quarter of 2015


- 9 -



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

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

Non-personnel operating expenses

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

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

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

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. The reserve for uncertain tax positions was $13 million at both June 30, 2016 and March 31, 2016 and $14 million at June 30, 2015.

- 10 -



Lines of Business

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

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

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

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

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

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

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

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

 
$
48,670

 
$
89,951

 
$
97,272

Consumer Banking
 
4,231

 
8,874

 
4,342

 
16,155

Wealth Management
 
10,779

 
8,685

 
17,757

 
17,422

Subtotal
 
67,846

 
66,229

 
112,050

 
130,849

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

 
(3,685
)
 
23,224

Total
 
$
65,801

 
$
79,230

 
$
108,365

 
$
154,073


- 11 -



Commercial Banking

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

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

 
$
108,620

 
$
9,860

 
$
235,116

 
$
209,795

 
$
25,321

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

 
95,977

 
7,928

 
206,007

 
184,517

 
21,490

Net loans charged off (recovered)
 
6,852

 
(47
)
 
6,899

 
28,423

 
(8,949
)
 
37,372

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

 
96,024

 
1,029

 
177,584

 
193,466

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

 
45,173

 
5,855

 
96,504

 
87,476

 
9,028

Other gains, net
 
469

 
100

 
369

 
101

 
244

 
(143
)
Other operating revenue
 
51,497

 
45,273

 
6,224

 
96,605

 
87,720

 
8,885

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
27,520

 
27,131

 
389

 
54,147

 
53,381

 
766

Non-personnel expense
 
25,074

 
23,670

 
1,404

 
54,516

 
46,566

 
7,950

Other operating expense
 
52,594

 
50,801

 
1,793

 
108,663

 
99,947

 
8,716

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
95,956

 
90,496

 
5,460

 
165,526

 
181,239

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

 
10,782

 
(1,899
)
 
17,627

 
22,023

 
(4,396
)
Income before taxes
 
86,475

 
79,656

 
6,819

 
147,219

 
159,202

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

 
30,986

 
2,653

 
57,268

 
61,930

 
(4,662
)
Net income
 
$
52,836

 
$
48,670

 
$
4,166

 
$
89,951

 
$
97,272

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

 
$
16,262,457

 
$
711,206

 
$
16,971,339

 
$
16,266,341

 
$
704,998

Average loans
 
13,571,602

 
12,260,003

 
1,311,599

 
13,444,470

 
12,077,367

 
1,367,103

Average deposits
 
8,403,408

 
8,928,997

 
(525,589
)
 
8,430,579

 
8,961,834

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

 
1,028,989

 
138,851

 
1,160,485

 
1,013,117

 
147,368


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

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


- 12 -



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

The average outstanding balance of loans attributed to Commercial Banking grew by $1.3 billion or 11% over the second quarter of 2015 to $13.6 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $8.4 billion for the second quarter of 2016, a decrease of $526 million or 6% compared to the second quarter of 2015.


Consumer Banking

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

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

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


- 13 -



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

 
$
21,721

 
$
628

 
$
43,799

 
$
42,440

 
$
1,359

Net interest revenue from internal sources
 
8,876

 
6,838

 
2,038

 
18,229

 
13,658

 
4,571

Total net interest revenue
 
31,225

 
28,559

 
2,666

 
62,028

 
56,098

 
5,930

Net loans charged off
 
1,318

 
1,614

 
(296
)
 
3,020

 
3,036

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

 
26,945

 
2,962

 
59,008

 
53,062

 
5,946

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
60,510

 
59,885

 
625

 
117,012

 
121,395

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

 
(197
)
 
467

 
127

 
(512
)
 
639

Other operating revenue
 
60,780

 
59,688

 
1,092

 
117,139

 
120,883

 
(3,744
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
29,505

 
26,341

 
3,164

 
56,630

 
52,123

 
4,507

Non-personnel expense
 
36,641

 
26,170

 
10,471

 
67,564

 
52,694

 
14,870

Total other operating expense
 
66,146

 
52,511

 
13,635

 
124,194

 
104,817

 
19,377

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
24,541

 
34,122

 
(9,581
)
 
51,953

 
69,128

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

 
(9,135
)
 
24,180

 
31,626

 
(5,577
)
 
37,203

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

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

 
479

 
(227
)
 
406

 
557

 
(151
)
Corporate expense allocations
 
16,630

 
18,953

 
(2,323
)
 
32,608

 
37,155

 
(4,547
)