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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 September 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: 65,910,454 shares of common stock ($.00006 par value) as of September 30, 2016.
 





BOK Financial Corporation
Form 10-Q
Quarter Ended September 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 $74.3 million or $1.13 per diluted share for the third quarter of 2016, compared to $74.9 million or $1.09 per diluted share for the third quarter of 2015 and $65.8 million or $1.00 per diluted share for the second quarter of 2016

Highlights of the third quarter of 2016 included:
Net interest revenue totaled $187.8 million for the third quarter of 2016, compared to $178.6 million for the third quarter of 2015 and $182.6 million for the second quarter of 2016. Net interest revenue increased over the prior year primarily due to growth in average earning assets. Average earning assets were $29.1 billion for the third quarter of 2016 and $27.9 billion for the third quarter of 2015. Net interest margin was 2.64 percent for the third quarter of 2016. Net interest margin was 2.61 percent for the third quarter of 2015 and 2.63 percent for the second quarter of 2016
Fees and commissions revenue totaled $185.3 million for the third quarter of 2016, up $20.7 million over the third quarter of 2015. All revenue categories grew over the prior year, led by mortgage banking and brokerage and trading revenue. Fees and commissions revenue increased $1.8 million over the second quarter of 2016. Growth in mortgage banking revenue and deposit service charges and fees was partially offset by decreases in brokerage and trading revenue, transaction card revenue and fiduciary and asset management revenue.
Changes in the fair value of mortgage servicing rights, net of economic hedges, increased pre-tax net income by $1.2 million in the third quarter of 2016 , decreased pre-tax net income by $4.4 million in the third quarter of 2015 and decreased pre-tax net income by $1.2 million in the second quarter of 2016.
Operating expenses totaled $262.1 million for the third quarter of 2016, an increase of $37.5 million over the third quarter of 2015. Personnel expense increased $14.1 million primarily due to increased incentive compensation expense, regular compensation costs and higher employee healthcare costs. Non-personnel expense increased $23.4 million largely due to increased mortgage banking expenses, litigation accruals, deposit insurance expense and professional fees and services expense. Operating expenses increased $7.4 million over the previous quarter primarily due to increased litigation accruals and deposit insurance expense.
The Company recorded a $10.0 million provision for credit losses in the third quarter of 2016. The Company recorded a $20.0 million provision in the second quarter of 2016 and a $7.5 million provision for credit losses in the third quarter of 2015. Gross charge-offs were $8.1 million in the third quarter of 2016, $5.3 million in the third quarter of 2015 and $8.8 million in the second quarter of 2016. Recoveries were $2.0 million in the third quarter of 2016, compared to $3.5 million in the third quarter of 2015 and $1.4 million in the second quarter of 2016.
The combined allowance for credit losses totaled $256 million or 1.56 percent of outstanding loans at September 30, 2016, compared to $252 million or 1.54 percent of outstanding loans at June 30, 2016. The portion of the combined allowance attributed to the energy portfolio totaled 3.67 percent of outstanding energy loans at September 30, 2016, an increase from 3.58 percent of outstanding energy loans at June 30, 2016.
Nonperforming assets that are not guaranteed by U.S. government agencies totaled $253 million or 1.55 percent of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at September 30, 2016 and $251 million or 1.55 percent of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2016. Nonperforming energy loans decreased $25 million during the third quarter.
Average loans increased by $185 million over the previous quarter due primarily to a $239 million increase in commercial real estate loans, partially offset by a $156 million decrease in commercial loans, primarily due to a paydown of a single energy credit during the quarter. Period-end outstanding loan balances were $16.5 billion at September 30, 2016, a $58 million increase over June 30, 2016.
Average deposits grew by $297 million over the previous quarter primarily due to growth in demand deposit and interest-bearing transaction account balances, partially offset by a decrease in time deposits. Period-end deposits were $21.1 billion at September 30, 2016, an increase of $336 million over June 30, 2016.

- 1 -



The Company's common equity Tier 1 ratio was 11.99% at September 30, 2016. In addition, the Company's Tier 1 capital ratio was 11.99%, total capital ratio was 13.65% and leverage ratio was 9.06% at September 30, 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 paid a regular quarterly cash dividend of $28 million or $0.43 per common share during the third quarter of 2016. On October 25, 2016, the board of directors approved an increase in the regular quarterly cash dividend to $0.44 per common share payable on or about November 28, 2016 to shareholders of record as of November 14, 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 $187.8 million for the third quarter of 2016 compared to $178.6 million for the third quarter of 2015 and $182.6 million for the second quarter of 2016. Net interest margin was 2.64 percent for the third quarter of 2016, 2.61 percent for the third quarter of 2015 and 2.63 percent for the second quarter of 2016.

Tax-equivalent net interest revenue increased $10.4 million over the third 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 $12.5 million primarily due to the growth in average loan balances. Net interest revenue decreased $2.1 million primarily due to the full quarter impact of the issuance of $150 million of 40 year 5.375% fixed rate subordinated debt in the second quarter that replaced $227 million of floating rating subordinated debt at 1.0105% at September 30, 2015. This floating rate debt was a year from maturity and was phased out from having any benefit to regulatory capital. The longer term fixed rate debt will better position us as interest rates rise. The benefit from a mix shift toward floating rate loans and higher short term interest rates was offset by increased borrowing costs.

The tax-equivalent yield on earning assets was 2.93 percent for the third quarter of 2016, up 10 basis points over the third quarter of 2015. Loan yields increased 9 basis points to 3.63% primarily due to the growth in variable rate loans and an increase in short-term interest rates. The yield on interest-bearing cash and cash equivalents increased 23 basis points. The available for sale securities portfolio yield was unchanged compared to the prior year at 2.01 percent. Funding costs were up 12 basis points over the third 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 an increase in the federal funds rate by the Federal Reserve in the fourth quarter of 2015. The cost of the subordinated debt was up 280 basis points as the existing lower variable rate debt was replaced by higher fixed rate debt. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 15 basis points for the third quarter of 2016, up 5 basis points over the third quarter of 2015.

Average earning assets for the third quarter of 2016 increased $1.2 billion or 4 percent over the third quarter of 2015. Average loans, net of allowance for loan losses, increased $1.2 billion due primarily to growth in average commercial real estate and commercial loans. The average balance of trading securities increased $187 million and the average balance of restricted equity securities increased $80 million. The average balance of fair value option securities held as an economic hedge of our mortgage servicing rights decreased $163 million and the average balance of available for sale securities decreased $80 million. The average balance of investment securities decreased compared to the prior year, partially offset by an increase in the average balance of residential mortgage loans held for sale.

Average deposits increased $72 million over the third quarter of 2015. Average demand deposit balances grew by $502 million, partially offset by a $110 million decrease in interest-bearing transaction account balances and a $361 million decrease average time deposits. Average savings account balances also grew over the prior year. Average borrowed funds increased $1.4 billion over the third quarter of 2015, primarily due to increased borrowings from the Federal Home Loan Banks. The average balance of subordinated debentures increased $30 million.


- 2 -



Net interest margin increased 1 basis point over the second quarter of 2016. The yield on average earning assets increased 2 basis points. The loan portfolio yield increased by 5 basis points to 3.63 percent. The yield on the available for sale securities portfolio decreased 3 basis points to 2.01 percent. Funding costs were 0.44 percent, up 3 basis point over the prior quarter. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 2 basis points over the prior quarter.
Average earning assets increased $260 million over the second quarter of 2016. Average loan balances increased $185 million, primarily due to growth in commercial real estate balances. Average trading securities balances increased $129 million and the average balance of residential mortgage loans held for sale was up $45 million, partially offset by a $101 million decrease in the balance of fair value option securities held as an economic hedge of our mortgage servicing rights.
Average deposits increased $297 million compared to the previous quarter. Demand deposit balances increased $335 million and interest-bearing transaction account balances increased $60 million, partially offset by a $100 million decrease in time deposit balances. The average balance of borrowed funds increased $175 million over the second 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
September 30, 2016 / 2015
 
Nine Months Ended
September 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
 
$
1,209

 
$
18

 
$
1,191

 
$
3,812

 
$
(9
)
 
$
3,821

Trading securities
 
2,212

 
2,213

 
(1
)
 
2,443

 
2,285

 
158

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(211
)
 
(126
)
 
(85
)
 
(544
)
 
(421
)
 
(123
)
Tax-exempt securities
 
383

 
(255
)
 
638

 
1,156

 
(725
)
 
1,881

Total investment securities
 
172

 
(381
)
 
553

 
612

 
(1,146
)
 
1,758

Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(960
)
 
(924
)
 
(36
)
 
1,857

 
(2,181
)
 
4,038

Tax-exempt securities
 
71

 
(162
)
 
233

 
50

 
(443
)
 
493

Total available for sale securities
 
(889
)
 
(1,086
)
 
197

 
1,907

 
(2,624
)
 
4,531

Fair value option securities
 
(949
)
 
(355
)
 
(594
)
 
(621
)
 
(211
)
 
(410
)
Restricted equity securities
 
708

 
1,245

 
(537
)
 
3,057

 
4,429

 
(1,372
)
Residential mortgage loans held for sale
 
(178
)
 
362

 
(540
)
 
(811
)
 
(719
)
 
(92
)
Loans
 
14,579

 
11,157

 
3,422

 
36,913

 
36,580

 
333

Total tax-equivalent interest revenue
 
16,864

 
13,173

 
3,691

 
47,312

 
38,585

 
8,727

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
1,356

 
(69
)
 
1,425

 
3,271

 
(376
)
 
3,647

Savings deposits
 
3

 
11

 
(8
)
 
1

 
14

 
(13
)
Time deposits
 
(2,278
)
 
(1,131
)
 
(1,147
)
 
(7,023
)
 
(3,184
)
 
(3,839
)
Funds purchased
 
18

 
(1
)
 
19

 
98

 
19

 
79

Repurchase agreements
 
4

 
(12
)
 
16

 

 
(63
)
 
63

Other borrowings
 
5,468

 
1,701

 
3,767

 
16,450

 
6,737

 
9,713

Subordinated debentures
 
1,872

 
178

 
1,694

 
(400
)
 
(883
)
 
483

Total interest expense
 
6,443

 
677

 
5,766

 
12,397

 
2,264

 
10,133

Tax-equivalent net interest revenue
 
10,421

 
12,496

 
(2,075
)
 
34,915

 
36,321

 
(1,406
)
Change in tax-equivalent adjustment
 
1,211

 
 
 
 
 
3,978

 
 
 
 
Net interest revenue
 
$
9,210

 
 
 
 
 
$
30,937

 
 
 
 
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 $191.3 million for the third quarter of 2016, a $27.9 million increase over the third quarter of 2015 and a $2.5 million increase over the second quarter of 2016. Fees and commissions revenue was up $20.7 million over the third quarter of 2015 and increased $1.8 million over the prior quarter. The change in the fair value of mortgage servicing rights, net of economic hedges, increased other operating revenue by $1.2 million in the third quarter of 2016, decreased other operating revenue by $4.4 million in the third quarter of 2015 and decreased other operating revenue $1.2 million in the second quarter of 2016.

Table 2Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2016
 
2015
 
 
 
 
 
Brokerage and trading revenue
 
$
38,006

 
$
31,582

 
$
6,424

 
20
%
 
$
39,530

 
$
(1,524
)
 
(4
)%
Transaction card revenue
 
33,933

 
32,514

 
1,419

 
4
%
 
34,950

 
(1,017
)
 
(3
)%
Fiduciary and asset management revenue
 
34,073

 
30,807

 
3,266

 
11
%
 
34,813

 
(740
)
 
(2
)%
Deposit service charges and fees
 
23,668

 
23,606

 
62

 
%
 
22,618

 
1,050

 
5
 %
Mortgage banking revenue
 
42,548

 
33,170

 
9,378

 
28
%
 
38,224

 
4,324

 
11
 %
Other revenue
 
13,080

 
12,978

 
102

 
1
%
 
13,352

 
(272
)
 
(2
)%
Total fees and commissions revenue
 
185,308

 
164,657

 
20,651

 
13
%
 
183,487

 
1,821

 
1
 %
Other gains, net
 
2,442

 
1,161

 
1,281

 
N/A

 
1,307

 
1,135

 
N/A

Gain on derivatives, net
 
2,226

 
1,283

 
943

 
N/A

 
10,766

 
(8,540
)
 
N/A

Gain (loss) on fair value option securities, net
 
(3,355
)
 
5,926

 
(9,281
)
 
N/A

 
4,279

 
(7,634
)
 
N/A

Change in fair value of mortgage servicing rights
 
2,327

 
(11,757
)
 
14,084

 
N/A

 
(16,283
)
 
18,610

 
N/A

Gain on available for sale securities, net
 
2,394

 
2,166

 
228

 
N/A

 
5,326

 
(2,932
)
 
N/A

Total other operating revenue
 
$
191,342

 
$
163,436

 
$
27,906

 
17
%
 
$
188,882

 
$
2,460

 
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 50 percent of total revenue for the third 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 trading, customer hedging, retail brokerage and investment banking. Brokerage and trading revenue increased $6.4 million or 20 percent over the third quarter of 2015


- 5 -



Trading revenue includes net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers and related derivative instruments. Trading revenue was $12.0 million for the third quarter of 2016, an increase of $337 thousand or 3 percent over the third quarter of 2015. The Company added a new group trading in U.S. government agency residential mortgage-backed securities and related to-be-announced derivatives. The addition of this group added $2.0 million of net interest revenue and $1.9 million of trading revenue during the third quarter and added $426 million to the trading securities portfolio at September 30. This increase was partially offset by lower volumes of U.S. agency residential mortgage-backed securities, brokered certificates of deposit and municipal securities sold to our 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 $13.8 million for the third quarter of 2016, a $4.5 million or 48 percent increase over the third quarter of 2015 primarily due to increased hedging activity by our mortgage banking and energy customers.

Revenue earned from retail brokerage transactions increased $932 thousand or 15 percent over the third quarter of 2015 to $7.0 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 $5.3 million for the third quarter of 2016, an increase of $688 thousand or 15 percent over the third quarter of 2015. Investment banking revenue is primarily related to the timing and volume of completed transactions.

Brokerage and trading revenue decreased $1.5 million compared to the second quarter of 2016. Investment banking revenue decreased $1.7 million primarily due to the timing and volume of completed transactions. Trading revenue decreased $307 thousand. Growth from the addition of our new mortgage trading group was offset by lower volumes of U.S. agency mortgage-backed securities and municipal securities to our institutional customers. Customer hedging revenue increased $256 thousand primarily due to increased volumes of contracts with our mortgage banking, partially offset by lower contract volumes with our energy customers. Retail brokerage fees were up $228 thousand over the prior quarter.

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served. Transaction card revenue for the third quarter of 2016 increased $1.4 million or 4 percent over the third quarter of 2015. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $17.8 million, a $1.6 million or 10 percent increase over the prior year. Merchant services fees totaled $11.3 million, a $274 thousand or 2 percent decrease based on decreased 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 $71 thousand or 1 percent over the third quarter of 2015.
Excluding the impact of a $1.2 million customer early termination fee in the second quarter of 2016, transaction card revenue increased $165 thousand primarily due to an increase in transaction volumes on our TransFund EFT network, partially offset by a decrease in merchant services fees and revenue from interchange fees compared to the prior quarter.
 
Fiduciary and asset management revenue increased $3.3 million or 11 percent over the third 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 $1.6 million for the third quarter of 2016 compared to $3.4 million for the third quarter of 2015 and $1.8 million for the second 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.


- 6 -



Fiduciary and asset management revenue decreased $740 thousand compared to the second quarter of 2016 primarily due to seasonality of annual assessment of tax preparation fees in the second quarter, partially offset by growth in assets under management.

The fair value of fiduciary assets administered by the Company totaled $41.2 billion at September 30, 2016, $37.8 billion at September 30, 2015 and $39.9 billion at June 30, 2016. Fiduciary assets are assets for which the Company possesses investment discretion on behalf of another or any other similar capacity.

Deposit service charges and fees were $23.7 million for the third quarter of 2016, largely unchanged compared to the third quarter of 2015. Commercial account service charge revenue totaled $11.4 million, up $595 thousand or 6 percent over the prior year. Overdraft fees were $10.6 million for the third quarter of 2016, a decrease of $470 thousand or 4 percent compared to the third quarter of 2015. Service charges on deposit accounts with a standard monthly fee were $1.7 million, a decrease of $68 thousand or 4 percent compared to the third quarter of 2015. Deposit service charges and fees increased $1.1 million over the prior quarter primarily due to a seasonal increase in overdraft fee volumes and increased commercial account service charge revenue.

Mortgage banking revenue increased $9.4 million or 28% over the third quarter of 2015. Mortgage production revenue increased $7.3 million over the prior year. Better gains on sale margins and an increased volume of loans sold was partially offset by a lower volume of mortgage loan commitments. Mortgage servicing revenue was up $2.1 million or 15 percent over the third quarter of 2015. The outstanding principal balance of mortgage loans serviced for others totaled $21.9 billion, an increase of $2.9 billion or 15 percent.
Outstanding mortgage loan commitments at September 30, 2016 decreased $112 million or 15% compared to September 30, 2015. The Company made a strategic decision to exit the correspondent lending channel during the third quarter of 2016 based on careful consideration of continued pressure on margin due to the competitive landscape and regulatory costs. This strategic decision decreased outstanding commitments by $289 million compared to the prior year. Mortgage loan commitments continued to grow in our retail and HomeDirect online channels. The correspondent lending channel represented $4.6 million of the total mortgage loan production revenue of $26.0 million for the third quarter of 2016 and $4.0 million of the total mortgage loan production revenue of $18.7 million for the third quarter of 2015.
Mortgage banking revenue increased $4.3 million over the second quarter of 2016. Mortgage production revenue increased $3.6 million due to growth in the volume of mortgage loans sold and increased gains on sale, partially offset by a decrease in mortgage loan commitments during the quarter. Average primary mortgage interest rates were 14 basis points lower than in the second quarter of 2016. Total mortgage loans originated during the third quarter of 2016 increased $46 million over the previous quarter. Outstanding mortgage loan commitments at September 30, 2016 decreased by $335 million from June 30, 2016. The decrease in commitments related to correspondent lending was $414 million compared to June 30. Mortgage loan commitments from both the retail and HomeDirect channels grew over the prior quarter. The correspondent lending channel represented $3.0 million of total mortgage production revenue of $22.4 million for the second quarter of 2016. Revenue from mortgage loan servicing grew by $760 thousand due to an increase in the volume of loans serviced. The outstanding balance of mortgage loans serviced for others increased $673 million over June 30, 2016.


- 7 -



Table 3Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2016
 
2015
 
 
 
 
Net realized gains on mortgage loans sold
 
$
27,142

 
$
18,968

 
$
8,174

 
43
 %
 
$
19,205

 
$
7,937

 
41
 %
Change in net unrealized gains on mortgage loans held for sale
 
(1,152
)
 
(251
)
 
N/A

 
N/A

 
3,221

 
N/A

 
N/A

Total mortgage production revenue
 
25,990

 
18,717

 
7,273

 
39
 %
 
22,426

 
3,564

 
16
 %
Servicing revenue
 
16,558

 
14,453

 
2,105

 
15
 %
 
15,798

 
760

 
5
 %
Total mortgage revenue
 
$
42,548

 
$
33,170

 
$
9,378

 
28
 %
 
$
38,224

 
$
4,324

 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
1,864,583

 
$
1,614,225

 
$
250,358

 
16
 %
 
$
1,818,844

 
$
45,739

 
3
 %
Mortgage loans sold
 
1,873,709

 
1,778,099

 
95,610

 
5
 %
 
1,742,582

 
131,127

 
8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end outstanding mortgage commitments, net
 
630,804

 
742,742

 
(111,938
)
 
(15
)%
 
965,631

 
(334,827
)
 
(35
)%
Outstanding principal balance of mortgage loans serviced for others
 
21,851,536

 
18,928,726

 
2,922,810

 
15
 %
 
21,178,387

 
673,149

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary residential mortgage interest rate – period end
 
3.42
%
 
3.86
%
 
(44
) bps
 
 
 
3.48
%
 
(6
) bps
 
 
Primary residential mortgage interest rate – average
 
3.45
%
 
3.95
%
 
(50
) bps
 
 
 
3.59
%
 
(14
) bps
 
 
Secondary residential mortgage interest rate – period end
 
2.34
%
 
2.87
%
 
(53
) bps
 
 
 
2.31
%
 
3
 bps
 
 
Secondary residential mortgage interest rate – average
 
2.36
%
 
2.97
%
 
(61
) bps
 
 
 
2.52
%
 
(16
) bps
 
 
Certain percentage increases (decreases) are not meaningful for comparison purposes based on the nature of the item.

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.
Net gains on securities, derivatives and other assets

In the third quarter of 2016, we recognized a $2.4 million net gain from sales of $232 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 third quarter of 2015, we recognized a $2.2 million net gain from sales of $451 million of available for sale securities and in the second quarter of 2016, we recognized a $5.3 million net gain on sales of $326 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.


- 8 -



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. The fair value of mortgage servicing rights increased during the third quarter of 2016 primarily due to changes in short term interest rates. The fair value of securities and interest rate derivative contracts held as an economic hedge decreased primarily due to an increase in interest rate swap rates, partially offset by a decrease in average secondary mortgage rates. The fair value of mortgage servicing rights, net of economic hedges, decreased in the second quarter of 2016, primarily due to a decrease in secondary mortgage and interest rate swap rates. Hedge coverage was increased during the second quarter to improve its effectiveness.

Table 4 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
Sept. 30, 2016
 
June 30, 2016
 
Sept. 30, 2015
Gain on mortgage hedge derivative contracts, net
 
$
2,268

 
$
10,766

 
$
1,460

Gain (loss) on fair value option securities, net
 
(3,355
)
 
4,279

 
5,926

Gain (loss) on economic hedge of mortgage servicing rights, net
 
(1,087
)
 
15,045

 
7,386

Gain (loss) on change in fair value of mortgage servicing rights
 
2,327

 
(16,283
)
 
(11,757
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
1,240

 
$
(1,238
)
 
$
(4,371
)
 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
861

 
$
1,348

 
$
2,140







- 9 -



Other Operating Expense

Other operating expense for the third quarter of 2016 totaled $262.1 million, a $37.5 million or 17 percent increase over the third quarter of 2015. Personnel expenses increased $14.1 million or 11 percent. Non-personnel expenses increased $23.4 million or 24 percent over the prior year.

Operating expenses increased $7.4 million over the previous quarter. Personnel expense increased $695 thousand. Non-personnel expense increased $6.7 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2016
 
2015
 
 
 
 
 
Regular compensation
 
$
83,956

 
$
79,208

 
$
4,748

 
6
 %
 
$
82,441

 
$
1,515

 
2
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
36,133

 
30,462

 
5,671

 
19
 %
 
34,894

 
1,239

 
4
 %
Share-based
 
1,839

 
2,885

 
(1,046
)
 
(36
)%
 
3,701

 
(1,862
)
 
(50
)%
Deferred compensation
 
1,059

 
(539
)
 
1,598

 
N/A

 
211

 
848

 
N/A

Total incentive compensation
 
39,031

 
32,808

 
6,223

 
19
 %
 
38,806

 
225

 
1
 %
Employee benefits
 
20,198

 
17,046

 
3,152

 
18
 %
 
21,243

 
(1,045
)
 
(5
)%
Total personnel expense
 
143,185

 
129,062

 
14,123

 
11
 %
 
142,490

 
695

 
 %
Business promotion
 
6,839

 
5,922

 
917

 
15
 %
 
6,703

 
136

 
2
 %
Charitable contributions to BOKF Foundation
 

 
796

 
(796
)
 
N/A

 

 

 
N/A

Professional fees and services
 
14,038

 
10,147

 
3,891

 
38
 %
 
14,158

 
(120
)
 
(1
)%
Net occupancy and equipment
 
20,111

 
18,689

 
1,422

 
8
 %
 
19,677

 
434

 
2
 %
Insurance
 
9,390

 
4,864

 
4,526

 
93
 %
 
7,129

 
2,261

 
32
 %
Data processing and communications
 
33,331

 
30,708

 
2,623

 
9
 %
 
32,802

 
529

 
2
 %
Printing, postage and supplies
 
3,790

 
3,376

 
414

 
12
 %
 
3,889

 
(99
)
 
(3
)%
Net losses (gains) and operating expenses of repossessed assets
 
(926
)
 
267

 
(1,193
)
 
(447
)%
 
1,588

 
(2,514
)
 
(158
)%
Amortization of intangible assets
 
1,521

 
1,089

 
432

 
40
 %
 
2,624

 
(1,103
)
 
(42
)%
Mortgage banking costs
 
16,022

 
9,107

 
6,915

 
76
 %
 
15,809

 
213

 
1
 %
Other expense
 
14,819

 
10,601

 
4,218

 
40
 %
 
7,856

 
6,963

 
89
 %
Total other operating expense
 
$
262,120

 
$
224,628

 
$
37,492

 
17
 %
 
$
254,725

 
$
7,395

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,928

 
4,846

 
82

 
2
 %
 
4,893

 
35

 
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 $4.7 million or 6 percent over the third quarter of 2015. The average number of employees increased 2 percent over the prior year. Recent additions have primarily been in mortgage, wealth 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 $6.2 million or 19 percent over the third 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 $5.7 million or 19 percent over the third quarter of 2015

- 10 -



Share-based compensation expense represents expense for equity awards based on grant-date fair value. Non-vested shares generally cliff vest in 3 years and are subject to a two year holding period after vesting. 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 decreased $1.0 million or 36% compared to the prior year, primarily due to the decrease in the vesting probability of certain performance-based share awards.

Employee benefits expense increased $3.2 million or 18 percent over the third quarter of 2015 primarily due to a $2.4 million increase in employee medical costs. Retirement plan costs and payroll taxes also increased over the prior year.
Personnel costs increased by $695 thousand over the second quarter of 2016. Regular compensation expense increased $1.5 million. Cash-based incentive compensation was up $1.2 million primarily due to revenue growth. Deferred compensation expense was up $848 thousand over the prior quarter. This additional expense is largely offset by the increase in the fair value of deferred compensation plan assets included in Other revenue. Share-based compensation expense was $1.9 million lower primarily due to the decrease in the vesting probability of certain performance-based share awards. Employee benefits expense was lower compared to the prior quarter primarily due to a $1.5 million seasonal decrease in payroll tax expense, partially offset by a $365 thousand increase in employee medical costs.

Non-personnel operating expenses

Non-personnel operating expenses increased $23.4 million or 24 percent over the third quarter of 2015. Mortgage banking costs increased $6.9 million. Expense related to the effect of actual loan prepayments on the fair value of mortgage servicing rights totaled $11.4 million, a $4.6 million increase over the third quarter of 2015. Actual prepayments increased due to lower mortgage interest rates. Mortgage banking costs for the third quarter of 2015 included a $1.2 million benefit from the reversal of estimated claims based on a favorable resolution of an audit of servicing of certain residential mortgage loans guaranteed by U.S. government agencies.

Deposit insurance expense increased $4.5 million, primarily due to an increase in criticized and classified assets, an input to the deposit insurance assessment, and implementation of a new surcharge for banks over $10 billion in assets. Criticized and classified assets increased compared to the prior year as a result of falling energy prices that began in the fourth quarter of 2015. During the third quarter of 2016, the deposit insurance fund reached a target of 1.15% of insured deposits which triggered a new surcharge for banks with more than $10 billion in assets to bring the deposit insurance fund to 1.35% of insured deposits. This impact was partially offset by a reduction in the base rate.

Other expense increased $4.2 million over the prior year due primarily to a $5.0 million legal settlement accrual concerning the manner in which the Company posted charges to certain consumer and small business deposit accounts. Professional fees and services expense increased $3.9 million primarily due to costs incurred in preparation for the mobank acquisition and increased legal fees. Data processing and communications expense increased $2.6 million due to increased transaction activity. The Company had a net gain on sale of repossessed assets of $1.6 million in the third quarter of 2016 compared to a net loss of $517 thousand in the third quarter of 2015. Operating expenses related to repossessed assets also declined compared to the prior year.
Non-personnel expense increased $6.7 million over the second quarter of 2016 primarily due to the $5.0 million accrual related to a legal settlement during the third quarter. Deposit insurance expense was up $2.3 million primarily due to the new surcharge for banks with more than $10 billion in assets. Expense related to prepayments of residential mortgage loans serviced for others increased $1.6 million over the prior quarter, partially offset by a $1.4 million decrease in mortgage-related accruals. The Company had a net gain on sale of repossessed assets of $1.6 million in the third quarter compared to a net loss of $127 thousand in the second quarter. Operating expenses on repossessed assets also decreased compared to the prior quarter. The $1.1 million decrease in intangible asset amortization expense was due to an adjustment to a consolidated merchant-banking investment during the second quarter.
Income Taxes

The Company's income tax expense from continuing operations was $32.0 million or 29.8% of book taxable income for the third quarter of 2016 compared to $34.1 million or 31.0% of book taxable income for the third quarter of 2015 and $30.5 million or 31.5% of book taxable income for the second quarter of 2016.


- 11 -



The statute of limitations expired on uncertain income tax positions and the Company adjusted its current income tax liability amounts on filed tax returns for 2015 during the third quarter of 2016. These adjustments reduced income tax expense by $2.6 million in the third quarter of 2016 and $2.0 million in the third quarter of 2015. Excluding these adjustments, income tax expense would have been 32.3% of book taxable income for the third quarter of 2016 and 32.8% of book taxable income for the third quarter of 2015.
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 $14 million at both September 30, 2016 and September 30, 2015 and $13 million at June 30, 2016.
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 that 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.


- 12 -



As shown in Table 6, net income attributable to our lines of business increased $12.4 million or 20 percent over the third quarter of 2015. Net interest revenue grew by $19.3 million over the prior year. Other operating revenue was up $18.6 million. This revenue growth was partially offset by a $22.5 million increase in operating expense and a $4.4 million increase in net charge-offs primarily due to energy loans.

Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Commercial Banking
 
$
55,994

 
$
47,657

 
$
145,885

 
$
144,929

Consumer Banking
 
8,762

 
6,535

 
13,104

 
22,693

Wealth Management
 
9,108

 
7,250

 
26,866

 
24,672

Subtotal
 
73,864

 
61,442

 
185,855

 
192,294

Funds Management and other
 
413

 
13,449

 
(3,213
)
 
36,670

Total
 
$
74,277

 
$
74,891

 
$
182,642

 
$
228,964


- 13 -



Commercial Banking

Commercial Banking contributed $56.0 million to consolidated net income in the third quarter of 2016, an increase of $8.3 million or 18% over the third 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 $5.6 million in the third quarter of 2016 compared to a net recovery of $997 thousand in the third quarter of 2015. The increase was primarily related to energy portfolio loans.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
2015
 
 
2016
 
2015
 
Net interest revenue from external sources
 
$
123,598

 
$
109,503

 
$
14,095

 
$
358,714

 
$
319,298

 
$
39,416

Net interest expense from internal sources
 
(15,052
)
 
(13,450
)
 
(1,602
)
 
(44,259
)
 
(38,728
)
 
(5,531
)
Total net interest revenue
 
108,546

 
96,053

 
12,493

 
314,455

 
280,570

 
33,885

Net loans charged off (recovered)
 
5,601

 
997

 
4,604

 
34,024

 
(7,952
)
 
41,976

Net interest revenue after net loans charged off (recovered)
 
102,945

 
95,056

 
7,889

 
280,431

 
288,522

 
(8,091
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
47,710

 
45,133

 
2,577

 
144,215

 
132,609

 
11,606

Other gains, net
 
1,932

 
143

 
1,789

 
2,033

 
387

 
1,646

Other operating revenue
 
49,642

 
45,276

 
4,366

 
146,248

 
132,996

 
13,252

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
28,365

 
27,354

 
1,011

 
82,513

 
80,736

 
1,777

Non-personnel expense
 
25,010

 
24,606

 
404

 
79,526

 
71,172

 
8,354

Other operating expense
 
53,375

 
51,960

 
1,415

 
162,039

 
151,908

 
10,131

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
99,212

 
88,372

 
10,840

 
264,640

 
269,610

 
(4,970
)
Gain on repossessed assets, net
 
1,486

 
350

 
1,136

 
806

 
336

 
470

Corporate expense allocations
 
9,054

 
10,723

 
(1,669
)
 
26,681

 
32,747

 
(6,066
)
Income before taxes
 
91,644

 
77,999

 
13,645

 
238,765

 
237,199

 
1,566

Federal and state income tax
 
35,650

 
30,342

 
5,308

 
92,880

 
92,270

 
610

Net income
 
$
55,994

 
$
47,657

 
$
8,337

 
$
145,885

 
$
144,929

 
$
956

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
16,934,587

 
$
16,156,446

 
$
778,141

 
$
16,958,999

 
$
16,229,307

 
$
729,692

Average loans
 
13,737,081

 
12,531,113

 
1,205,968

 
13,542,719

 
12,230,278

 
1,312,441

Average deposits
 
8,317,341

 
8,627,281

 
(309,940
)
 
8,392,558

 
8,849,091

 
(456,533
)
Average invested capital
 
1,170,465

 
1,062,053

 
108,412

 
1,161,996

 
1,028,013

 
133,983


Net interest revenue increased $12.5 million or 13% over the prior year. Growth in net interest revenue was primarily due to a $1.2 billion or 10% increase in average loan balances and increased yields on commercial loans due to rising short-term interest rates. The impact of decreased average deposit balances was offset by increased yields 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 $2.6 million or 6% over the third quarter of 2015. Brokerage and trading revenue increased $1.5 million primarily due to growth in commercial loan syndication fees and increased hedging activity by our energy customers. Transaction card revenues from our TransFund electronic funds transfer network increased $1.3 million primarily due to increased transaction volumes. Commercial deposit service charge revenue was also up over the prior year, offset by a decrease in other revenue.


- 14 -



Operating expenses increased $1.4 million or 3% over the the third quarter of 2015. Personnel expense increased $1.0 million or 4% primarily due to standard annual merit increases and increased incentive compensation expense. Non-personnel expense increased $404 thousand or 2% primarily due to a $403 thousand increase in intangible asset amortization. Increased business promotion expense related to timing of expenditures was offset by lower professional fees and services expense. Corporate expense allocations decreased $1.7 million compared to the prior year.

The average outstanding balance of loans attributed to Commercial Banking grew by $1.2 billion or 10% over the third quarter of 2015 to $13.7 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 $8.3 billion for the third quarter of 2016, a decrease of $310 million or 4% compared to the third quarter of 2015. See Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital for further discussion of change.


Consumer Banking

Consumer Banking provides retail banking services through four primary distribution channels:  traditional branches, the 24-hour ExpressBank call center, Internet banking and mobile banking. Consumer Banking also conducts mortgage banking activities through offices located outside of our consumer banking markets and through Home Direct Mortgage, an online origination channel. During the third quarter of 2016. the Company made a strategic decision to exit the correspondent lending channel based on careful consideration of continued pressure on margin due to the competitive landscape and increasing regulatory costs.

Consumer Banking contributed $8.8 million to consolidated net income for the third quarter of 2016, up $2.2 million over the third quarter of 2015. Growth in mortgage banking revenue and net interest revenue was offset by the effect of increased actual prepayments of mortgage loans on mortgage servicing rights and increased personnel costs. Corporate expense allocations were $2.0 million lower than in the prior year.

Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $758 thousand increase in Consumer Banking net income in the third quarter of 2016 compared to a $2.7 million decrease in Consumer Banking net income in the third quarter of 2015.


- 15 -



Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
2015
 
 
2016
 
2015
 
Net interest revenue from external sources
 
$
22,098

 
$
21,551

 
$
547

 
$
65,897

 
$
63,993

 
$
1,904

Net interest revenue from internal sources
 
9,263

 
7,216

 
2,047

 
27,492

 
20,874

 
6,618

Total net interest revenue
 
31,361

 
28,767

 
2,594

 
93,389

 
84,867

 
8,522

Net loans charged off
 
1,157

 
1,431

 
(274
)
 
4,177

 
4,467

 
(290
)
Net interest revenue after net loans charged off
 
30,204

 
27,336

 
2,868

 
89,212

 
80,400

 
8,812

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
64,805

 
57,504

 
7,301

 
181,816

 
178,899

 
2,917

Other gains (losses), net
 
(170
)
 
(155
)
 
(15
)
 
(42
)
 
(667
)
 
625

Other operating revenue
 
64,635

 
57,349

 
7,286

 
181,774

 
178,232

 
3,542

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
30,576

 
26,128

 
4,448

 
87,206

 
78,251

 
8,955

Non-personnel expense
 
34,419

 
24,899

 
9,520

 
101,982

 
77,593

 
24,389

Total other operating expense
 
64,995

 
51,027

 
13,968

 
189,188

 
155,844

 
33,344

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
29,844

 
33,658

 
(3,814
)
 
81,798

 
102,788

 
(20,990
)
Gain (loss) on financial instruments, net
 
(1,087
)
 
7,386

 
(8,473
)
 
30,539

 
1,809

 
28,730

Change in fair value of mortgage servicing rights
 
2,327

 
(11,758
)
 
14,085

 
(41,944
)
 
(12,269
)