Annual Reports

 
Quarterly Reports

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

 
8-K

 
Other

BOK Financial 10-Q 2017

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 March 31, 2017
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

BOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
Oklahoma
 
73-1373454
(State or other jurisdiction
of Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
 
Bank of Oklahoma Tower
 
 
Boston Avenue at Second Street
 
 
Tulsa, Oklahoma
 
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   ¨ (Do not check if a smaller reporting company)    Smaller reporting company ¨
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 65,408,019 shares of common stock ($.00006 par value) as of March 31, 2017.





BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2017

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 $88.4 million or $1.35 per diluted share for the first quarter of 2017, compared to $42.6 million or $0.64 per diluted share for the first quarter of 2016 and $50.0 million or $0.76 per diluted share for the fourth quarter of 2016

Highlights of the first quarter of 2017 included:
Net interest revenue totaled $201.2 million for the first quarter of 2017, up from $182.6 million in the first quarter of 2016 and $194.2 million in the fourth quarter of 2016. The increase in net interest revenue over the prior year was driven by both growth in average earning assets and improving yields. Average earning assets were $29.6 billion for the first quarter of 2017 and $28.6 billion for the first quarter of 2016. Net interest margin was 2.81 percent for the first quarter of 2017. Net interest margin was 2.65 percent for the first quarter of 2016 and 2.69 percent for the fourth quarter of 2016
Fees and commissions revenue totaled $164.4 million for the first quarter of 2017, up $1.1 million over the first quarter of 2016. Growth in fiduciary and asset management revenue and brokerage and trading revenue was partially offset by lower mortgage banking revenue. Fees and commissions revenue increased $2.3 million over the fourth quarter of 2016. Brokerage and trading revenue for the fourth quarter of 2016 included the $5.0 million negative impact of an unexpected 85 basis point increase in the 10-year U.S. Treasury interest rate and related rates. Growth in fiduciary and asset management revenue was offset by a decrease in mortgage banking revenue and transaction card revenue.
The change in the fair value of mortgage servicing rights, net of economic hedges, increased pre-tax net income by $188 thousand in the first quarter of 2017. The improvement versus prior quarters was driven primarily by materially higher long–term interest rates and a relatively stable rate environment during the quarter. The change in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income by $11.4 million in the first quarter of 2016, largely driven by a decrease in mortgage interest rates during the first quarter of 2016 and a narrowing of the forward-looking spread between the primary mortgage interest rates offered to borrowers and secondary mortgage interest rates required by investors. The change in the fair value of mortgage servicing rights, net of economic hedges, decreased pre-tax net income by $17.0 million in the fourth quarter of 2016. The unexpected increase in long-term interest rates increased the fair value of our mortgage servicing rights by $39.8 million. The fair value of our economic hedges decreased $56.8 million.
Operating expense totaled $244.7 million for the first quarter of 2017, an increase of $2.1 million over the first quarter of 2016. Personnel expense increased $2.9 million and non-personnel expense decreased $722 thousand. Operating expense decreased $20.8 million compared to the fourth quarter of 2016. Expenses related to the Mobank acquisition, severance and a contribution to the BOKF Foundation added $11.7 million to the fourth quarter of 2016. Excluding these items, operating expense decreased $9.1 million, primarily due to lower mortgage banking and deposit insurance costs.
Income tax expense was $38.1 million or 30.1% of net income before taxes for the first quarter of 2017, compared to $21.4 million or 34.3% in the first quarter of 2016 and $22.5 million or 31.1% in the fourth quarter of 2016. The first quarter included a $3.9 million benefit related to the implementation of a new accounting standard that includes the tax effect of vested equity compensation awards in income tax expense. Previously the tax effect of these awards was included in stockholders' equity.
No provision for credit losses was recorded in the first quarter of 2017 or the fourth quarter of 2016 based on continued improvement in credit metric trends. A $35.0 million provision for credit losses was recorded in the first quarter of 2016 due to falling energy prices. Gross charge-offs were $2.2 million in the first quarter of 2017, $24.0 million in the first quarter of 2016 and $1.7 million in the fourth quarter of 2016. Recoveries were $2.9 million in the first quarter of 2017, compared to $1.5 million in the first quarter of 2016 and $2.8 million in the fourth quarter of 2016.
The combined allowance for credit losses totaled $258 million or 1.52 percent of outstanding loans at March 31, 2017, compared to $257 million or 1.52 percent of outstanding loans at December 31, 2016

- 1 -



Nonperforming assets that are not guaranteed by U.S. government agencies totaled $240 million or 1.43 percent of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at March 31, 2017 and $263 million or 1.56 percent of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at December 31, 2016. The decrease in nonperforming assets was primarily due to a $22 million decrease in nonaccruing energy loans during the first quarter.
Average loans increased by $412 million over the previous quarter, primarily due to a full quarter's impact of the Mobank acquisition. Period-end outstanding loan balances were $17.0 billion at March 31, 2017, largely unchanged compared to December 31, 2016.
Average deposits grew by $666 million over the previous quarter primarily, including $390 million related to the impact of a full quarter of deposits from the Mobank acquisition. Excluding this impact, growth in interest-bearing transaction account balances and time deposits was partially offset by a decrease in demand deposit balances. Period-end deposits were $22.6 billion at March 31, 2017, a $173 million decrease compared to December 31, 2016.
The Company's common equity Tier 1 ratio was 11.60% at March 31, 2017. In addition, the Company's Tier 1 capital ratio was 11.60%, total capital ratio was 13.26% and leverage ratio was 8.89% at March 31, 2017. The Company's common equity Tier 1 ratio was 11.21% at December 31, 2016. In addition, the Company's Tier 1 capital ratio was 11.21%, total capital ratio was 12.81% and leverage ratio was 8.72% at December 31, 2016.
The Company paid a regular quarterly cash dividend of $29 million or $0.44 per common share during the first quarter of 2017. On April 25, 2017, the board of directors approved a regular quarterly cash dividend of $0.44 per common share payable on or about May 26, 2017 to shareholders of record as of May 12, 2017.
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 $201.2 million for the first quarter of 2017, up from $182.6 million in first quarter of 2016 and $194.2 million in the fourth quarter of 2016. Net interest margin was 2.81 percent for the first quarter of 2017, 2.65 percent for the first quarter of 2016 and 2.69 percent for the fourth quarter of 2016.

Tax-equivalent net interest revenue increased $18.7 million over the first quarter of 2016. 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 $13.7 million primarily due to the growth in average loan and trading securities balances. Changes in interest rates and yields increased net interest revenue by $4.9 million. The benefit of an increase in short-term interest rates on the loan portfolio and interest-bearing cash and cash equivalents was partially offset by higher borrowing costs.

The tax-equivalent yield on earning assets was 3.15 percent for the first quarter of 2017, up 23 basis points over the first quarter of 2016 primarily due to an increase in the federal funds rate by the Federal Reserve in the fourth quarter of 2016. Loan yields increased 31 basis points to 3.88 percent 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 29 basis points. The available for sale securities portfolio yield decreased 3 basis points to 2.05 percent. Funding costs were up 12 basis points over the first quarter of 2016. Growth in the cost of interest-bearing deposits was limited to 1 basis point by a lack of market pricing pressure. The cost of other borrowed funds increased 25 basis points.  The cost of the subordinated debt was up 442 basis points as lower variable rate debt was replaced in the second quarter of 2016 by higher fixed rate debt. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 18 basis points for the first quarter of 2017, up 5 basis points over the first quarter of 2016. Average non-interest bearing deposits comprised 28% of total liabilities and equity for the first quarter of 2017, up from 26% for the first quarter of 2016.


- 2 -



Average earning assets for the first quarter of 2017 increased $1.0 billion or 4 percent over the first quarter of 2016, including $570 million related to the Mobank acquisition. Average loans, net of allowance for loan losses, increased $1.1 billion due primarily to growth in commercial real estate and commercial loans and included $486 million related to the Mobank acquisition. The average balance of trading securities increased $391 million primarily due to the addition of a new group trading in U.S. agency residential mortgage-backed securities in the third quarter of 2016. The average balance of available for sale securities decreased $384 million. The average balance of residential mortgage loans held for sale decreased $69 million and the investment securities portfolio balance decreased $57 million.

Average deposits increased $1.7 billion over the first quarter of 2016. Demand deposit balances grew by $996 million and interest-bearing transaction account balances increased, $811 million, partially offset by a $108 million decrease in average time deposits. Savings account balances also grew over the prior year. Average borrowed funds decreased $42 million compared to the first quarter of 2016. Increased borrowings from the Federal Home Loan Banks were partially offset by decreased repurchase agreement and federal funds purchased balances. The average balance of subordinated debentures decreased $82 million.

Net interest margin increased 12 basis points over the fourth quarter of 2016. The yield on average earning assets increased 17 basis points. The loan portfolio yield increased by 21 basis points to 3.88 percent primarily due to increases in the 30 day and 90 day LIBOR and improved energy loan yields. The yield on the available for sale securities portfolio increased 5 basis points to 2.05 percent. The yield on interest-bearing cash and cash equivalents increased 27 basis points. Funding costs were 0.52 percent, up 8 basis points over the prior quarter. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 3 basis points over the prior quarter.
Average earning assets increased $416 million over the fourth quarter of 2016. Average loan balances increased $412 million, primarily due a full quarter's impact of the Mobank acquisition. The average balance of fair value option securities held as an economic hedge of our mortgage servicing rights increased $206 million. Average trading securities portfolio balances increased $103 million and interest-bearing cash and cash equivalents balances were up $55 million. These increases were offset by a $200 million decrease in available for sale securities portfolio balances and a $125 million decrease in the average balance of residential mortgage loans held for sale.
Average deposits increased $666 million over the previous quarter. Interest-bearing transaction account balances increased $587 million and time deposit balances increased $82 million, partially offset by a $23 million decrease in demand deposit balances. The average balance of borrowed funds decreased $378 million compared to the fourth quarter of 2016 primarily due to decreased borrowings from the Federal Home Loan Banks.

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 81% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will re-price within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that re-price more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally re-price more quickly than liabilities. Among the strategies that we use to manage toward a relatively rate-neutral position, we purchase fixed rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market rate sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. 

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

- 3 -



Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
March 31, 2017 / 2016
 
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
1,538

 
$
58

 
$
1,480

Trading securities
 
4,642

 
5,488

 
(846
)
Investment securities:
 
 
 
 
 
 
Taxable securities
 
(162
)
 
(111
)
 
(51
)
Tax-exempt securities
 
(91
)
 
(279
)
 
188

Total investment securities
 
(253
)
 
(390
)
 
137

Available for sale securities:
 
 
 
 
 
 
Taxable securities
 
(2,005
)
 
(1,200
)
 
(805
)
Tax-exempt securities
 
(148
)
 
(211
)
 
63

Total available for sale securities
 
(2,153
)
 
(1,411
)
 
(742
)
Fair value option securities
 
(209
)
 
(93
)
 
(116
)
Restricted equity securities
 
(2
)
 
246

 
(248
)
Residential mortgage loans held for sale
 
(864
)
 
(606
)
 
(258
)
Loans
 
21,938

 
9,891

 
12,047

Total tax-equivalent interest revenue
 
24,637

 
13,183

 
11,454

Interest expense:
 
 
 
 
 
 
Transaction deposits
 
1,897

 
367

 
1,530

Savings deposits
 
(6
)
 
7

 
(13
)
Time deposits
 
(1,079
)
 
(350
)
 
(729
)
Funds purchased
 
(12
)
 
(53
)
 
41

Repurchase agreements
 
(57
)
 
(13
)
 
(44
)
Other borrowings
 
3,926

 
211

 
3,715

Subordinated debentures
 
1,315

 
(703
)
 
2,018

Total interest expense
 
5,984

 
(534
)
 
6,518

Tax-equivalent net interest revenue
 
18,653

 
13,717

 
4,936

Change in tax-equivalent adjustment
 
43

 
 
 
 
Net interest revenue
 
$
18,610

 
 
 
 
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 $170.3 million for the first quarter of 2017, a $12.9 million increase over the first quarter of 2016 and a $26.5 million increase over the fourth quarter of 2016. Fees and commissions revenue was up $1.1 million over the first quarter of 2016 and increased $2.3 million over the prior quarter. The change in the fair value of mortgage servicing rights, net of economic hedges, increased other operating revenue by $188 thousand in the first quarter of 2017, decreased other operating revenue by $11.4 million in the first quarter of 2016 and decreased other operating revenue $17.0 million in the fourth quarter of 2016.

Table 2Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended Dec. 31, 2016
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2017
 
2016
 
 
 
 
 
Brokerage and trading revenue
 
$
33,623

 
$
32,341

 
$
1,282

 
4
 %
 
$
28,500

 
$
5,123

 
18
 %
Transaction card revenue
 
32,127

 
32,354

 
(227
)
 
(1
)%
 
34,521

 
(2,394
)
 
(7
)%
Fiduciary and asset management revenue
 
38,631

 
32,056

 
6,575

 
21
 %
 
34,535

 
4,096

 
12
 %
Deposit service charges and fees
 
23,030

 
22,542

 
488

 
2
 %
 
23,365

 
(335
)
 
(1
)%
Mortgage banking revenue
 
25,191

 
32,100

 
(6,909
)
 
(22
)%
 
28,414

 
(3,223
)
 
(11
)%
Other revenue
 
11,752

 
11,904

 
(152
)
 
(1
)%
 
12,693

 
(941
)
 
(7
)%
Total fees and commissions revenue
 
164,354

 
163,297

 
1,057

 
1
 %
 
162,028

 
2,326

 
1
 %
Other gains (losses), net
 
3,627

 
1,560

 
2,067

 
N/A

 
(1,279
)
 
4,906

 
N/A

Gain (loss) on derivatives, net
 
(450
)
 
7,138

 
(7,588
)
 
N/A

 
(35,815
)
 
35,365

 
N/A

Gain (loss) on fair value option securities, net
 
(1,140
)
 
9,443

 
(10,583
)
 
N/A

 
(20,922
)
 
19,782

 
N/A

Change in fair value of mortgage servicing rights
 
1,856

 
(27,988
)
 
29,844

 
N/A

 
39,751

 
(37,895
)
 
N/A

Gain on available for sale securities, net
 
2,049

 
3,964

 
(1,915
)
 
N/A

 
(9
)
 
2,058

 
N/A

Total other operating revenue
 
$
170,296

 
$
157,414

 
$
12,882

 
8
 %
 
$
143,754

 
$
26,542

 
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 45 percent of total revenue for the first quarter of 2017, 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, which includes revenues from trading, customer hedging, retail brokerage and investment banking, increased $1.3 million or 4 percent over the first quarter of 2016


- 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 $11.0 million for the first quarter of 2017, a $1.9 million or 15 percent decrease compared to the first quarter of 2016. The Company added a new group trading in U.S. government agency residential mortgage-backed securities and related to-be-announced derivatives in the third quarter of 2016. The addition of this group added $2.5 million of net interest revenue and $769 thousand of trading revenue in the first quarter. This new group increased our trading securities portfolio by $550 million and receivable for unsettled trades by $215 million at March 31, 2017. This increase was offset by lower volumes of U.S. agency residential mortgage-backed 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 $11.6 million for the first quarter of 2017, a $2.8 million or 31 percent increase over the first quarter of 2016 primarily due to increased hedging activity by our energy customers.

Revenue earned from retail brokerage transactions increased $393 thousand or 6 percent over the first quarter of 2016 to $6.9 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 $4.1 million for the first quarter of 2017, largely unchanged compared to the first quarter of 2016. Investment banking revenue is primarily related to the timing and volume of completed transactions.

Brokerage and trading revenue increased $5.1 million over the fourth quarter of 2016 primarily due to a $5.3 million increase in trading revenue. The fourth quarter of 2016 included the $5.0 million decrease in the fair value of trading assets caused by an unexpected 85 basis point increase in the 10-year Treasury interest rate and related rates. Customer hedging revenue increased $570 thousand. An increase in the valuation of energy derivative contracts was partially offset by a decrease in volumes of contracts with our mortgage banking customers. Retail brokerage fees were up $995 thousand over the prior quarter. Investment banking revenue decreased $1.7 million primarily due to the timing and volume of completed transactions.

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served. Transaction card revenue for the first quarter of 2017 was largely unchanged compared to the first quarter of 2016. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $16.3 million, unchanged from the prior year. Merchant services fees totaled $11.0 million, a $178 thousand or 2 percent decrease based on lower transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.7 million, an increase of $83 thousand or 2 percent over the first quarter of 2016.
Transaction card revenue decreased $2.4 million compared to the prior quarter, primarily due to a seasonal decrease in transaction volumes on our TransFund EFT network and from processing transactions on behalf of merchants.
 
Fiduciary and asset management revenue grew by $6.6 million or 21 percent over the first quarter of 2016, primarily due to growth in assets under management, improved pricing discipline and decreased fee waivers. We earn fees as administrator to and investment adviser for the Cavanal Hill Funds, a diversified, open-ended investment company established as a business trust under the Investment Company Act of 1940. The Bank is custodian and Cavanal Hill Distributors, Inc. is distributor for the Cavanal Hill Funds. Products of the Cavanal Hill Funds are offered to customers, employee benefit plans, trusts and the general public in the ordinary course of business. 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 $445 thousand for the first quarter of 2017, compared to $2.0 million for the first quarter of 2016 and $1.4 million for the fourth 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 increases. In addition, our mineral management team recognized revenue of $800 thousand during the first quarter of 2017 from the successful completion of lease negotiations.

Fiduciary and asset management revenue increased $4.1 million compared to the fourth quarter of 2016 primarily due to growth in assets under management and decreased fee waivers.


- 6 -



The fair value of fiduciary assets administered by the Company totaled $44.4 billion at March 31, 2017, $39.1 billion at March 31, 2016 and $41.8 billion at December 31, 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 $23.0 million for the first quarter of 2017, an increase of $488 thousand or 2 percent over the first quarter of 2016. Commercial account service charge revenue totaled $11.6 million, up $308 thousand or 3 percent. Overdraft fees were $9.7 million for the first quarter of 2017, an increase of $105 thousand or 1 percent. Service charges on deposit accounts with a standard monthly fee were $1.7 million, an increase of $76 thousand or 5 percent. Deposit service charges and fees decreased $335 thousand compared to the prior quarter primarily due to a seasonal decrease in overdraft fee volumes, partially offset by an increase in commercial account service charge revenue.

Mortgage banking revenue decreased $6.9 million or 22% compared to the first quarter of 2016. Mortgage production revenue decreased $8.1 million. Mortgage loan production volumes decreased $771 million due primarily to a strategic decision to exit the correspondent lending channel during the third quarter of 2016 based on careful consideration of continued pressure on margins and due to the competitive landscape and regulatory costs. Gains on sale margins increased 2 basis points over the prior year. The margin increase was primarily due to exiting the correspondent lending channel, the lowest margin of our three sales channels, partially offset by a decrease in margins from our Home Direct online origination channel. Mortgage servicing revenue was up $1.2 million or 8 percent over the first quarter of 2016. The outstanding principal balance of mortgage loans serviced for others totaled $22.0 billion, an increase of $1.7 billion or 8.5%.
Mortgage banking revenue decreased $3.2 million compared to the fourth quarter of 2016. Mortgage production revenue decreased $3.4 million. Production volume decreased $103.1 million in response to higher average primary mortgage interest rates. Gains on sale margins narrowed due to increased competition, largely in the Home Direct online channel. Revenue from mortgage loan servicing grew by $171 thousand due to an increase in the volume of loans serviced. The outstanding balance of mortgage loans serviced for others increased $17 million over December 31, 2016.

Table 3Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
Dec. 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2017
 
2016
 
 
 
 
Mortgage production revenue
 
$
8,543

 
$
16,647

 
$
(8,104
)
 
(49
)%
 
$
11,937

 
$
(3,394
)
 
(28
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
711,019

 
$
1,244,015

 


 


 
$
1,189,975

 
 
 
 
Add: Current period end outstanding commitments
 
381,732

 
902,986

 
 
 
 
 
318,359

 
 
 
 
Less: Prior period end outstanding commitments
 
318,359

 
601,147

 
 
 
 
 
630,804

 
 
 
 
Total mortgage production volume
 
$
774,392

 
$
1,545,854

 
$
(771,462
)
 
(50
)%
 
$
877,530

 
$
(103,138
)
 
(12
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loan refinances to mortgage loans funded for sale
 
44
%
 
49
%
 
(5
) bps
 
 
 
63
%
 
(19
) bps
 
 
Gains on sale margin
 
1.10
%
 
1.08
%
 
2
 bps
 
 
 
1.36
%
 
(26
) bps
 
 
Primary mortgage interest rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
4.17
%
 
3.74
%
 
43
 bps
 
 
 
3.83
%
 
34
 bps
 
 
Period end
 
4.14
%
 
3.71
%
 
43
 bps
 
 
 
4.32
%
 
(18
) bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue
 
$
16,648

 
$
15,453

 
$
1,195

 
8
 %
 
$
16,477

 
$
171

 
1
 %
Average outstanding principal balance of mortgage loans serviced for others
 
22,006,295

 
19,986,444

 
2,019,851

 
10
 %
 
21,924,552

 
81,743

 
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average mortgage servicing revenue rates
 
0.31
%
 
0.31
%
 

 
 
 
0.30
%
 
1
 bps
 
 
1 
Actual interest earned on fair value option securities less internal transfer-priced cost of funds.

Primary rates disclosed in Table 3 above represent rates generally available to borrowers on 30 year conforming mortgage loans.

- 7 -



Net gains on other assets, securities and derivatives

Other net gains totaled $3.6 million in the first quarter of 2017, related to holdings of two consolidated private equity funds and the sale of certain merchant banking investments in the first quarter of 2017. The sales of merchant banking investments included a consolidated entity that reduced goodwill by $2.7 million, identifiable intangible assets by $4.6 million and other assets by $5.6 million.

In the first quarter of 2017, we recognized a $2.0 million net gain from sales of $240 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential or to move into securities that are expected to perform better in the current rate environment. In the first quarter of 2016, we recognized a $4.0 million net gain from sales of $469 million of available for sale securities. There were no sales of available for sale securities in the fourth quarter of 2016.

As discussed in the Market Risk section following, the fair value of our mortgage servicing rights ("MSRs") changes in response to changes in primary mortgage loan rates and other assumptions. We attempt to mitigate the earnings volatility caused by changes in the fair value of MSRs to a $20 million limit approved by the Board of Directors by designating certain financial instruments as an economic hedge. Changes in the fair value of these instruments are generally expected to partially offset changes in the fair value of MSRs.
The net economic benefit of the changes in fair value of mortgage servicing rights and related economic hedges was $1.5 million in the first quarter of 2017, including a $1.9 million increase in the fair value of the mortgage servicing rights, a $1.7 million decrease in the fair value of securities and derivative contracts held as an economic hedge and $1.3 million of related net interest revenue. The improvement over the prior quarter was due primarily to materially higher long-term interest rates and a relatively stable rate environment during the first quarter.

The net economic cost of changes in the fair value of mortgage servicing rights and related economic hedges was $9.4 million for the first quarter of 2016. The fair value of mortgage servicing rights decreased $28.0 million.The fair value of securities and interest rate derivative contracts held as an economic hedge increased $16.6 million. Net interest earned on securities held as an economic hedge was $2.0 million. Both period end primary and secondary residential mortgage interest rates fell during the first quarter of 2016. However, we observed a narrowing of the forward-looking spreads, a risk that we cannot effectively hedge.

The net economic cost of changes in the fair value of mortgage servicing rights and related economic hedges was $16.9 million for the fourth quarter of 2016. The fair value of mortgage servicing rights increased by $39.8 million, primarily due to an increase in residential mortgage rates. The fair value of securities and interest rate derivative contracts held as an economic hedge decreased by $56.8 million. The significant increase in long-term interest rates in the fourth quarter resulted in a loss on this hedge, partially offset by an increase in the fair value of mortgage servicing rights.

Table 4 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
March 31, 2017
 
Dec. 31, 2016
 
March 31, 2016
Gain (loss) on mortgage hedge derivative contracts, net
 
$
(528
)
 
$
(35,868
)
 
$
7,138

Gain (loss) on fair value option securities, net
 
(1,140
)
 
(20,922
)
 
9,443

Gain (loss) on economic hedge of mortgage servicing rights, net
 
(1,668
)
 
(56,790
)
 
16,581

Gain (loss) on change in fair value of mortgage servicing rights
 
1,856

 
39,751

 
(27,988
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue
 
188

 
(17,039
)
 
(11,407
)
Net interest revenue on fair value option securities1
 
1,271

 
114

 
2,033

Total economic benefit (cost) of changes in the fair value of mortgage servicing rights, net of economic hedges
 
$
1,459

 
$
(16,925
)
 
$
(9,374
)

- 8 -



Other Operating Expense

Other operating expense for the first quarter of 2017 totaled $244.7 million, a $2.1 million or 1 percent increase over the first quarter of 2016. Personnel expenses increased $2.9 million or 2 percent. Non-personnel expenses decreased $722 thousand or 1 percent compared to the prior year. The first quarter of 2016 included $4.1 million of litigation accruals and $2.8 million post-acquisition valuation adjustments to a consolidated merchant banking investment, $1.1 million of which is attributable to non-controlling interests. 

Operating expenses decreased $20.8 million compared to the previous quarter. Expenses related to the completion of the Mobank acquisition were $2.0 million in the first quarter of 2017 and $4.7 million in the fourth quarter of 2016. In addition, operating expenses in the fourth quarter of 2016 included $5.0 million of severance and other expenses related to staff reductions and a $2.0 million contribution to the BOKF Foundation.

The discussion following excludes the impact of these items.

Table 5Other Operating Expense
(In thousands)
 
 
Three Months Ended
March 31,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended Dec. 31, 2016
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2017
 
2016
 
 
 
 
 
Regular compensation
 
$
83,228

 
$
80,559

 
$
2,669

 
3
 %
 
$
87,328

 
$
(4,100
)
 
(5
)%
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
28,836

 
28,972

 
(136
)
 
 %
 
33,270

 
(4,434
)
 
(13
)%
Share-based
 
1,603

 
2,022

 
(419
)
 
(21
)%
 
2,902

 
(1,299
)
 
(45
)%
Deferred compensation
 
792

 
69

 
723

 
N/A

 
348

 
444

 
N/A

Total incentive compensation
 
31,231

 
31,063

 
168

 
1
 %
 
36,520

 
(5,289
)
 
(14
)%
Employee benefits
 
21,966

 
21,940

 
26

 
 %
 
17,284

 
4,682

 
27
 %
Total personnel expense
 
136,425

 
133,562

 
2,863

 
2
 %
 
141,132

 
(4,707
)
 
(3
)%
Business promotion
 
6,717

 
5,696

 
1,021

 
18
 %
 
7,344

 
(627
)
 
(9
)%
Charitable contributions to BOKF Foundation
 

 

 

 
N/A

 
2,000

 
(2,000
)
 
N/A

Professional fees and services
 
12,379

 
11,759

 
620

 
5
 %
 
16,828

 
(4,449
)
 
(26
)%
Net occupancy and equipment
 
21,624

 
18,766

 
2,858

 
15
 %
 
21,470

 
154

 
1
 %
Insurance
 
6,404

 
7,265

 
(861
)
 
(12
)%
 
8,705

 
(2,301
)
 
(26
)%
Data processing and communications
 
33,940

 
32,017

 
1,923

 
6
 %
 
33,691

 
249

 
1
 %
Printing, postage and supplies
 
3,851

 
3,907

 
(56
)
 
(1
)%
 
3,998

 
(147
)
 
(4
)%
Net losses (gains) and operating expenses of repossessed assets
 
1,009

 
1,070

 
(61
)
 
(6
)%
 
1,627

 
(618
)
 
(38
)%
Amortization of intangible assets
 
1,802

 
1,159

 
643

 
55
 %
 
1,558

 
244

 
16
 %
Mortgage banking costs
 
13,003

 
12,330

 
673

 
5
 %
 
17,348

 
(4,345
)
 
(25
)%
Other expense
 
7,557

 
15,039

 
(7,482
)
 
(50
)%
 
9,846

 
(2,289
)
 
(23
)%
Total other operating expense
 
$
244,711

 
$
242,570

 
$
2,141

 
1
 %
 
$
265,547

 
$
(20,836
)
 
(8
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,910

 
4,821

 
89

 
2
 %
 
4,893

 
17

 
 %

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


- 9 -



Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs, increased $3.0 million or 2 percent over the first quarter of 2016. The average number of employees increased 2 percent over the prior year. Recent additions from the Mobank acquisition and in mortgage and technology were partially offset by the impact of staff reductions in the fourth quarter of 2016. In addition, standard annual merit increases in regular compensation were effective for the majority of our staff on March 1.

Incentive compensation was largely unchanged compared to the first quarter of 2016. 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 was unchanged compared to the first quarter of 2016

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 $419 thousand or 21% compared to the prior year, primarily due to the decrease in the vesting probability of certain performance-based share awards.

The Company currently offers a deferred compensation plan for certain executive and senior officers. Deferred compensation expense increased $723 thousand. Deferred compensation expense is largely offset by changes in the fair value of assets held in rabbi trusts for the benefit of participants included in other income in the consolidated statements of earnings.

Employee benefits expense was also largely unchanged compared to the first quarter of 2016. Increased payroll tax expense and retirement plan costs were offset by a decrease in employee medical costs.
Personnel expense increased $1.9 million over the fourth quarter of 2016. Employee benefit costs were up $4.7 million primarily due to a seasonal increase in payroll tax expense and increased employee retirement plan costs, partially offset by lower employee medical costs. Regular compensation increased $2.5 million and included a full quarter impact of the Mobank acquisition. Incentive compensation expense decreased $5.3 million primarily due to lower cash-based incentive compensation expense and share-based compensation expense.

Non-personnel operating expenses

Non-personnel operating expenses increased $4.3 million or 4 percent over the first quarter of 2016. Occupancy and equipment expense increased $2.7 million and data processing and communications expense increased $1.9 million. The increases were primarily due to information technology infrastructure and cybersecurity project costs. Deposit insurance expense decreased $861 thousand. The benefit of decreased criticized and classified assets levels related to the stabilization of energy prices was partially offset by a new surcharge for banks with more than $10 billion in assets that became effective in the third quarter of 2016.
Non-personnel expense decreased $13.1 million compared to the fourth quarter of 2016. Mortgage banking expense decreased $4.3 million, primarily due to the effect of slowing actual residential mortgage loan prepayments on the fair value of mortgage servicing rights. Deposit insurance expense was $2.3 million lower due to improvements in credit quality and other risk factors. Professional fees were down $2.3 million and other expense decreased $2.3 million.

- 10 -



Income Taxes

The Company's income tax expense from continuing operations was $38.1 million or 30.1% of book taxable income for the first quarter of 2017 compared to $21.4 million or 34.3% of book taxable income for the first quarter of 2016 and $22.5 million or 31.1% of book taxable income for the fourth quarter of 2016. The first quarter of 2017 included a $3.9 million benefit related to the implementation of a new accounting standard that includes the tax effect of vested equity compensation awards in income tax expense. Previously, the tax effect of these awards was included in stockholders' equity. The tax benefit resulted from an increase in the company's stock price to over $80 per share which exceeded compensation costs based on grant date fair value of these awards. Additionally, awards granted in two different years vested in the first quarter of 2017. Excluding this benefit, tax expense would have been 33.2% of book taxable income for the first quarter of 2017. The accounting standard was adopted prospectively without restatement of prior periods.

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 $17 million at March 31, 2017, $16 million at December 31, 2016 and $13 million at March 31, 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 repricing and cash flow characteristics. 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 repricing and cash flow 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

- 11 -



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 $38.8 million or 88 percent over the first quarter of 2016. Net interest revenue grew by $23.8 million over the prior year. Other operating revenue was relatively flat while operating expenses decreased $6.1 million and net charge-offs decreased $23.3 million.

Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
Commercial Banking
 
$
63,916

 
$
37,054

Consumer Banking
 
4,746

 
109

Wealth Management
 
14,283

 
6,977

Subtotal
 
82,945

 
44,140

Funds Management and other
 
5,411

 
(1,576
)
Total
 
$
88,356

 
$
42,564


- 12 -



Commercial Banking

Commercial Banking contributed $63.9 million to consolidated net income in the first quarter of 2017, an increase of $26.9 million or 73% over the first quarter of 2016. Commercial Banking had net recoveries of $1.5 million in the first quarter of 2017 compared to net charge-offs of $21.6 million in the first quarter of 2016. Growth in net interest revenue and lower operating expense also contributed to increased net direct contribution by Commercial Banking.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
 
March 31,
 
 
 
2017
 
2016
 
Net interest revenue from external sources
 
$
134,704

 
$
116,637

 
$
18,067

Net interest expense from internal sources
 
(16,793
)
 
(14,632
)
 
(2,161
)
Total net interest revenue
 
117,911

 
102,005

 
15,906

Net loans charged off (recovered)
 
(1,462
)
 
21,572

 
(23,034
)
Net interest revenue after net loans charged off (recovered)
 
119,373

 
80,433

 
38,940

 
 
 
 
 
 
 
Fees and commissions revenue
 
44,473

 
45,476

 
(1,003
)
Other gains (losses), net
 
1,797

 
(368
)
 
2,165

Other operating revenue
 
46,270

 
45,108

 
1,162

 
 
 
 
 
 
 
Personnel expense
 
27,027

 
26,628

 
399

Non-personnel expense
 
25,409

 
29,442

 
(4,033
)
Other operating expense
 
52,436

 
56,070

 
(3,634
)
 
 
 
 
 
 
 
Net direct contribution
 
113,207

 
69,471

 
43,736

Gain on financial instruments, net
 
38

 

 
38

Loss on repossessed assets, net
 
(5
)
 
(82
)
 
77

Corporate expense allocations
 
8,631

 
8,744

 
(113
)
Income before taxes
 
104,609

 
60,645

 
43,964

Federal and state income tax
 
40,693

 
23,591

 
17,102

Net income
 
$
63,916

 
$
37,054

 
$
26,862

 
 
 
 
 
 
 
Average assets
 
$
17,438,776

 
$
16,969,015

 
$
469,761

Average loans
 
14,016,652

 
13,317,338

 
699,314

Average deposits
 
8,631,724

 
8,457,750

 
173,974

Average invested capital
 
1,214,056

 
1,155,572

 
58,484


Net interest revenue increased $15.9 million or 16% over the prior year. Growth in net interest revenue was primarily due to a $699 million or 5% increase in average loan balances and increased yields on commercial loans due to rising short-term interest rates. Average deposit balances increased $174 million or 2% and the yields on deposits sold to the funds management unit increased due to an increase in short-term interest rates.

Fees and commissions revenue decreased $1.0 million or 2% compared to the first quarter of 2016, primarily due to a decrease in revenue from merchant banking activity. Increased brokerage and trading revenue and commercial deposit service charge fees were partially offset by a decrease in transaction card revenue from our TransFund electronic fund transfer network.

Operating expenses decreased $3.6 million or 7% compared to the first quarter of 2016. Personnel expense increased $399 thousand or 2% primarily due to standard annual merit increases and increased incentive compensation expense. Non-personnel expense decreased $4.0 million or 14%. The first quarter of 2016 included $3.9 million of litigation settlements and $2.7 million of post-acquisition valuation adjustments to a consolidated merchant banking investment. Deposit insurance expense increased $1.7 million.

- 13 -




The average outstanding balance of loans attributed to Commercial Banking grew by $699 million or 5% over the first quarter of 2016 to $14.0 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $8.6 billion for the first quarter of 2017, an increase of $174 million or 2% compared to the first quarter of 2016. 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.

Consumer Banking contributed $4.7 million to consolidated net income for the first quarter of 2017, up $4.6 million over the first quarter of 2016. Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $115 thousand increase in Consumer Banking net income in the first quarter of 2017 compared to a $7.0 million decrease in Consumer Banking net income in the first quarter of 2016.

- 14 -



Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
 
March 31,
 
 
 
2017
 
2016
 
Net interest revenue from external sources
 
$
21,129

 
$
21,449

 
$
(320
)
Net interest revenue from internal sources
 
10,952

 
9,353

 
1,599

Total net interest revenue
 
32,081

 
30,802

 
1,279

Net loans charged off
 
1,272

 
1,702

 
(430
)
Net interest revenue after net loans charged off
 
30,809

 
29,100

 
1,709

 
 
 
 
 
 
 
Fees and commissions revenue
 
47,391

 
54,171

 
(6,780
)
Other losses, net
 
(85
)
 
(142
)
 
57

Other operating revenue
 
47,306

 
54,029

 
(6,723
)
 
 
 
 
 
 
 
Personnel expense
 
25,398

 
24,844

 
554

Non-personnel expense
 
28,134

 
30,874

 
(2,740
)
Total other operating expense
 
53,532

 
55,718

 
(2,186
)
 
 
 
 
 
 
 
Net direct contribution
 
24,583

 
27,411

 
(2,828
)
Gain (loss) on financial instruments, net
 
(1,667
)
 
16,581

 
(18,248
)
Change in fair value of mortgage servicing rights
 
1,856

 
(27,988
)
 
29,844

Gain (loss) on repossessed assets, net
 
(136
)
 
153

 
(289
)
Corporate expense allocations
 
16,868

 
15,978

 
890

Income before taxes
 
7,768

 
179

 
7,589

Federal and state income tax
 
3,022

 
70

 
2,952

Net income
 
$
4,746

 
$
109

 
$
4,637

 
 
 
 
 
 
 
Average assets
 
$
8,648,562

 
$
8,687,289

 
$
(38,727
)
Average loans
 
1,927,750

 
1,883,904

 
43,846

Average deposits
 
6,581,446

 
6,575,893

 
5,553

Average invested capital
 
276,914

 
258,888

 
18,026


Net interest revenue from Consumer Banking activities grew by $1.3 million or 4% over the the first quarter of 2016 primarily due to increased rates on deposit balances sold to the Funds Management unit. Average loan balances grew by $43.8 million or 2% and average deposits remained relatively flat.

Fees and commissions revenue decreased $6.8 million or 13% over the first quarter of 2016, primarily due to a $6.9 million decrease in mortgage banking revenue. Mortgage loan production volumes decreased $771 million due primarily to a strategic decision to exit the correspondent lending channel during the third quarter of 2016. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company and deposit service charges and fees were largely unchanged from the prior year.

Operating expenses decreased $2.2 million or 4% over the first quarter of 2016. Personnel expenses increased $554 thousand or 2%. Regular compensation expense was up $741 thousand primarily due to an increase in regular compensation partially offset by a decrease in incentive compensation expense. Non-personnel expense decreased $2.7 million or 9% over the prior year. Data processing and communications expenses decreased $1.1 million and professional fees and services were down $959 thousand over the prior year. The first quarter of 2016 also included $1.8 million in litigation settlements.

Corporate expense allocations increased $890 thousand compared to the first quarter of 2016.


- 15 -



Average consumer deposits were largely unchanged compared to the first quarter of 2016. Average time deposit balances decreased $190 million or 15%, offset by a $114 million or 7% increase in demand deposit balances, a $49 million or 1% increase in interest-bearing transaction accounts and a $32 million or 9% increase in savings account balances.


Wealth Management

Wealth Management contributed $14.3 million to consolidated net income in the first quarter of 2017, up $7.3 million or 105% over the first quarter of 2016. Net interest revenue grew over the prior year. Growth in fiduciary and asset management revenue was partially offset by a decrease in brokerage and trading revenue.

Table 9 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
 
March 31,
 
 
 
2017
 
2016
 
Net interest revenue from external sources
 
$
11,485

 
$
6,078

 
$
5,407

Net interest revenue from internal sources
 
8,856

 
7,663

 
1,193

Total net interest revenue
 
20,341

 
13,741

 
6,600

Net loans charged off (recovered)
 
40

 
(150
)
 
190

Net interest revenue after net loans charged off (recovered)
 
20,301

 
13,891

 
6,410

 
 
 
 
 
 
 
Fees and commissions revenue
 
73,921

 
68,721

 
5,200

Other gains, net
 
237

 
26

 
211

Other operating revenue
 
74,158

 
68,747

 
5,411

 
 
 
 
 
 
 
Personnel expense
 
44,787

 
45,119

 
(332
)
Non-personnel expense
 
15,623

 
15,565

 
58

Other operating expense
 
60,410

 
60,684

 
(274
)
 
 
 
 
 
 
 
Net direct contribution
 
34,049

 
21,954

 
12,095

Corporate expense allocations
 
10,672

 
10,535

 
137

Income before taxes
 
23,377

 
11,419

 
11,958

Federal and state income tax
 
9,094

 
4,442

 
4,652

Net income
 
$
14,283

 
$
6,977

 
$
7,306

 
 
 
 
 
 
 
Average assets
 
$
7,160,849

 
$
5,565,047

 
$
1,595,802

Average loans
 
1,266,579

 
1,090,326

 
176,253

Average deposits
 
5,582,554

 
4,696,013

 
886,541

Average invested capital
 
250,899

 
233,079

 
17,820

 
 
March 31,
 
Increase
(Decrease)
 
 
2017
 
2016
 
Fiduciary assets in custody for which BOKF has sole or joint discretionary authority
 
$
15,193,307

 
$
13,847,023

 
$
1,346,284

Fiduciary assets not in custody for which BOKF has sole or joint discretionary authority
 
4,001,956

 
3,653,228

 
348,728

Non-managed trust assets in custody
 
25,176,247

 
21,613,054

 
3,563,193

Total fiduciary assets
 
44,371,510

 
39,113,305

 
5,258,205

Assets held in safekeeping
 
26,883,350

 
27,115,904

 
(232,554
)
Brokerage accounts under BOKF administration
 
6,164,096

 
5,639,804

 
524,292

Assets under management or in custody
 
$
77,418,956

 
$
71,869,013

 
$
5,549,943



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Net interest revenue for the first quarter of 2017 increased $6.6 million or 48% over the first quarter of 2016, primarily due to an increase in the size of the U.S. agency mortgage-backed portfolio related to a new trading group that began operations during the third quarter of 2016 and growth in deposit balances sold to the Funds Management unit. Average deposit balances grew by $887 million or 19% over the first quarter of 2016. Non-interest bearing demand deposits grew by $139 million or 12%, interest-bearing transaction account balances increased $681 million or 24% and time deposit balances grew by $64 million or 9%. Average loan balances increased $176 million or 16% over the prior year.

Fees and commissions revenue was up $5.2 million or 8% over the first quarter of 2016. Fiduciary and asset management revenue increased $6.6 million or 21% over the prior year primarily due to growth in assets under management, improved pricing discipline and decreased fee waivers. Brokerage and trading revenue decreased by $1.5 million or 5%.

Other operating revenue includes fees earned from state and municipal bond and corporate debt underwritings and financial advisory services, primarily in the Oklahoma and Texas markets. In the first quarter of 2017, the Wealth Management division participated in 38 state and municipal bond underwritings that totaled $1.6 billion. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $316 million of these underwritings. The Wealth Management division also participated in 5 corporate debt underwritings that totaled $3.6 billion. Our interest in these underwritings was $111 million. In the first quarter of 2016, the Wealth Management division participated in 74 state and municipal bond underwritings that totaled approximately $5.4 billion. Our interest in these underwritings totaled approximately $598 million.

Operating expense decreased $274 thousand or 1% compared to the first quarter of 2016. Personnel expenses decreased $332 thousand and non-personnel expense increased $58 thousand. The first quarter of 2016 included $1.6 million of litigation accruals. This impact was offset by increased occupancy and equipment costs and higher data processing and communications expense.

Corporate expense allocations increased $137 thousand or 1% over the prior year.
Financial Condition
Securities

We maintain a securities portfolio to enhance profitability, manage interest rate risk, provide liquidity and comply with regulatory requirements. Securities are classified as trading, held for investment, or available for sale. See Note 2 to the consolidated financial statements for the composition of the securities portfolio as of March 31, 2017, December 31, 2016 and March 31, 2016.

At March 31, 2017, the carrying value of investment (held-to-maturity) securities was $519 million and the fair value was $541 million. Investment securities consist primarily of long-term, fixed rate Oklahoma and Texas municipal bonds, taxable Texas school construction bonds and residential mortgage-backed securities issued by U.S. government agencies. The investment security portfolio is diversified among issuers. The largest obligation of any single issuer is $30 million. Substantially all of these bonds are general obligations of the issuers. Approximately $96 million of the $195 million portfolio of Texas school construction bonds is also guaranteed by the Texas Permanent School Fund Guarantee Program supervised by the State Board of Education for the State of Texas.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $8.4 billion at March 31, 2017, a $249 million decrease compared to December 31, 2016. Available for sale securities consist primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans. At March 31, 2017, residential mortgage-backed securities represented 65 percent of total available for sale securities.

A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. Our best estimate of the duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at March 31, 2017 is 3.1 years. Management

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estimates the duration extends to 3.4 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.9 years assuming a 50 basis point decline in the current low rate environment.

Residential mortgage-backed securities also have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. At March 31, 2017, approximately $5.4 billion of the amortized cost of the Company’s residential mortgage-backed securities were issued by U.S. government agencies. The fair value of these residential mortgage-backed securities totaled $5.4 billion at March 31, 2017.

We also hold amortized cost of $93 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions, a decrease of $7.8 million from December 31, 2016. The decrease was due to cash payments received during the quarter. The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $109 million at March 31, 2017.

The aggregate gross amount of unrealized losses on available for sale securities totaled $67.9 million at March 31, 2017, compared to $75.1 million at December 31, 2016. On a quarterly basis, we perform separate evaluations on debt and equity securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. No other-than-temporary impairment charges were recognized in earnings during the first quarter of 2017.

BOK Financial is required to hold stock as members of the Federal Reserve system and the Federal Home Loan Banks ("FHLB"). These restricted equity securities are carried at cost as these securities do not have a readily determined fair value because the ownership of these shares is restricted and they lack a market. Federal Reserve Bank stock totaled $36 million and holdings of FHLB stock totaled $247 million at March 31, 2017. Holdings of FHLB stock decreased $23 million compared to December 31, 2016. We are required to hold stock in the FHLB in proportion to our borrowings with the FHLB.
Bank-Owned Life Insurance

We have approximately $311 million of bank-owned life insurance at March 31, 2017. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $283 million is held in separate accounts. Our separate account holdings are invested in diversified portfolios of investment-grade fixed income securities and cash equivalents, including U.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio’s investment guidelines. The cash surrender value of certain life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments. At March 31, 2017, the fair value of investments held in separate accounts was approximately $287 million. As the underlying fair value of the investments held in a separate account at March 31, 2017 exceeded the net book value of the investments, no cash surrender value was supported by the stable value wrap. The stable value wrap is provided by a domestic financial institution. The remaining cash surrender value of $28 million primarily represents the cash surrender value of policies held in general accounts and other amounts due from various insurance companies.
Loans

The aggregate loan portfolio before allowance for loan losses totaled $17 billion at March 31, 2017 and was largely unchanged compared to December 31, 2016. The outstanding balance of commercial loans decreased by $64 million. Commercial real estate loan balances were up $62 million. Residential mortgage loans decreased $3.6 million and personal loans increased $7.5 million


- 18 -



Table 10 -- Loans
(In thousands)
 
 
March 31, 2017
 
Dec. 31, 2016
 
Sept. 30, 2016
 
June 30, 2016
 
March 31, 2016
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,537,112

 
$
2,497,868

 
$
2,520,804

 
$
2,818,656

 
$
3,029,420

Services
 
3,013,375

 
3,108,990

 
2,936,599

 
2,830,864

 
2,728,891

Healthcare
 
2,265,604

 
2,201,916

 
2,085,046

 
2,051,146

 
1,995,425

Wholesale/retail
 
1,506,243

 
1,576,818