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Section 1: 10-Q (10-Q)

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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, 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: 65,456,786 shares of common stock ($.00006 par value) as of September 30, 2017.





BOK Financial Corporation
Form 10-Q
Quarter Ended September 30, 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 $85.6 million or $1.31 per diluted share for the third quarter of 2017, compared to $74.3 million or $1.13 per diluted share for the third quarter of 2016 and $88.1 million or $1.35 per diluted share for the second quarter of 2017

Highlights of the third quarter of 2017 included:
Net interest revenue totaled $218.5 million, up from $187.8 million in the third quarter of 2016 and $205.2 million in the second quarter of 2017. The increase in net interest revenue over the prior year was driven by both improving yields and growth in average earning assets. Net interest margin was 3.01 percent for the third quarter of 2017. Recoveries of foregone interest primarily related to nonaccruing energy loans added 6 basis points to the net interest margin for the third quarter. Net interest margin was 2.64 percent for the third quarter of 2016 and 2.89 percent for the second quarter of 2017. Average earning assets were $29.6 billion for the third quarter of 2017 compared to $29.1 billion for the third quarter of 2016.
Fees and commissions revenue totaled $173.5 million, a $7.8 million decrease compared to the third quarter of 2016, primarily due to a $13.6 million decrease in mortgage banking revenue. This decrease was partially offset by growth in fiduciary and asset management revenue. Fees and commissions revenue decreased $4.0 million compared to the second quarter of 2017, primarily due to mortgage banking revenue. Increased transaction card revenue and brokerage and trading revenue was partially offset by lower fiduciary and asset management revenue and other revenue.
Other operating expense totaled $265.9 million, up $7.8 million over the third quarter of 2016. Personnel expense increased $8.7 million, primarily due to $5.9 million of equity compensation charges caused by changes in the probability that certain performance-based equity awards will vest and growth in BOKF's stock price. Other operating expense increased $15.0 million over the previous quarter. Personnel expense was up $4.2 million. Non-personnel expense increased $10.9 million. Deposit insurance expense for the second quarter of 2017 included $5.1 million in credits related to the revision of certain inputs to the assessment calculation filed in previous periods. Net losses and operating expenses of repossessed assets was up $3.8 million over the prior quarter primarily due to a $4.7 million write-down of one set of repossessed oil and gas properties.
No provision for credit losses was recorded in the third quarter of 2017 or the second quarter of 2017. A $10.0 million provision for credit losses was recorded in the third quarter of 2016. Gross charge-offs were $5.8 million in the third quarter of 2017, $8.1 million in the third quarter of 2016 and $2.9 million in the second quarter of 2017. Recoveries were $2.4 million in the third quarter of 2017, compared to $2.0 million in the third quarter of 2016 and $1.2 million in the second quarter of 2017.
The combined allowance for credit losses totaled $253 million or 1.47 percent of outstanding loans at September 30, 2017, compared to $256 million or 1.49 percent of outstanding loans at June 30, 2017
Nonperforming assets that are not guaranteed by U.S. government agencies totaled $249 million or 1.46 percent of outstanding loans and repossessed assets at September 30, 2017 and $276 million or 1.62 percent of outstanding loans and repossessed assets at June 30, 2017. The decrease in nonperforming assets was primarily due to nonaccruing energy loans.
Average loans were largely unchanged compared to the previous quarter. Period-end outstanding loan balances were $17.2 billion at September 30, 2017, an increase of $23 million over June 30, 2017.
Average deposits were largely unchanged compared to the previous quarter. Growth in demand deposit balances was offset by decreased time deposit balances. Period-end deposits were $21.8 billion at September 30, 2017, a $468 million decrease compared to June 30, 2017.
The Company's common equity Tier 1 ratio was 11.90% at September 30, 2017. In addition, the Company's Tier 1 capital ratio was 11.90%, total capital ratio was 13.47% and leverage ratio was 9.30% at September 30, 2017. The Company's common equity Tier 1 ratio was 11.76% at June 30, 2017. In addition, the Company's Tier 1 capital ratio was 11.76%, total capital ratio was 13.36% and leverage ratio was 9.27% at June 30, 2017.

- 1 -



The Company paid a regular quarterly cash dividend of $29 million or $0.44 per common share during the third quarter of 2017. On October 31, 2017, the board of directors approved an increase in the regular quarterly cash dividend to $0.45 per common share payable on or about November 27, 2017 to shareholders of record as of November 13, 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 $218.5 million for the third quarter of 2017, up from $187.8 million in the third quarter of 2016 and $205.2 million in the second quarter of 2017. Net interest margin was 3.01 percent for the third quarter of 2017, 2.64 percent for the third quarter of 2016 and 2.89 percent for the second quarter of 2017. Approximately $4.7 million of foregone interest recoveries primarily related to nonaccruing energy loans added 6 basis points to the net interest margin for the third quarter of 2017. Interest recoveries from nonaccruing loans were not significant for the third quarter of 2016 and second quarter of 2017. This impact is excluded from the discussion following.

Tax-equivalent net interest revenue increased $30.5 million over the third 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. Changes in interest rates and yields increased net interest revenue by $19.1 million. The benefit of an increase in short-term interest rates on the floating-rate earning assets was partially offset by higher borrowing costs. Tax-equivalent net interest revenue increased $11.3 million. Growth in the average balances of loans, fair value option securities and trading securities was partially offset by decreases in available for sale securities and residential mortgage loans held for sale.

Excluding the impact of net interest recoveries in the third quarter of 2017, the tax-equivalent yield on earning assets was 3.44 percent, up 51 basis points over the third quarter of 2016, primarily due to increases in short-term interest rates resulting from three 25 basis point increases in the federal funds rate by the Federal Reserve. Loan yields increased 57 basis points to 4.20 percent. The yield on interest-bearing cash and cash equivalents increased 78 basis points. The available for sale securities portfolio yield was up 16 basis points to 2.17 percent. The yield on the fair value option securities portfolio increased 127 basis points primarily related to a change in the mix of securities and an increase in average rates. Funding costs were up 31 basis points over the third quarter of 2016. Growth in the cost of interest-bearing deposits was limited to 13 basis points by a lack of market pricing pressure. The cost of other borrowed funds increased 70 basis points. The cost of the subordinated debt was up 184 basis points as higher fixed rate debt issued in the second quarter of 2016 replaced lower variable rate debt paid off in third quarter of 2016. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 26 basis points for the third quarter of 2017, up 11 basis points over the third quarter of 2016. Average non-interest bearing deposits comprised 28% of total liabilities and equity for the third quarter of 2017, up from 26% for the third quarter of 2016.

Average earning assets for the third quarter of 2017 increased $559 million or 2 percent over the third quarter of 2016, including $482 million related to the Mobank acquisition in the fourth quarter of 2016. Average loans, net of allowance for loan losses, increased $806 million due primarily to growth in commercial and personal loans, partially offset by lower commercial real estate loan balances. Loan growth included $482 million related to the Mobank acquisition. Fair value option securities held as an economic hedge of our mortgage servicing rights increased $418 million. The average balance of trading securities increased $125 million primarily due to expansion of U.S. agency residential mortgage-backed securities trading activities. Available for sale securities decreased $434 million. The average balance of residential mortgage loans held for sale decreased $190 million. Interest-bearing cash and cash equivalents decreased $82 million and investment securities decreased $77 million.


- 2 -



Average deposits increased $1.4 billion over the third quarter of 2016, including $514 million from the Mobank acquisition. Demand deposit balances grew by $893 million, including $248 million from Mobank. Interest-bearing transaction account balances increased $438 million, including $233 million from Mobank. Savings account balances also grew over the prior year and time deposit balances were largely unchanged. Average borrowed funds decreased $360 million compared to the third quarter of 2016, primarily due to decreased borrowings from the Federal Home Loan Banks and lower average repurchase agreement balances. The average balance of subordinated debentures decreased $111 million.

Excluding the impact of net interest recoveries in the third quarter of 2017, net interest margin increased 6 basis points over the second quarter of 2017. The yield on average earning assets increased 14 basis points. The loan portfolio yield increased by 17 basis points primarily due to increases in the 30 day and 90 day LIBOR. The yield on the available for sale securities portfolio increased 6 basis points. The yield on interest-bearing cash and cash equivalents increased 25 basis points. Funding costs were 0.75 percent, up 12 basis points over the prior quarter. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 4 basis points over the prior quarter.
Average earning assets increased $395 million compared to the second quarter of 2017. Fair value option securities held as an economic hedge of our mortgage servicing rights increased $208 million. Average loan balances grew by $127 million. Available for sale securities increased $44 million, trading securities increased $36 million and restricted equity securities were up $33 million over the prior quarter. These increases were partially offset by a $42 million decrease in average interest-bearing cash and cash equivalents balances.
Average deposits increased $27 million over the previous quarter. Demand deposit balances increased $51 million, partially offset by a $28 million decrease in time deposit balances. Interest-bearing transaction account balances were largely unchanged compared to the prior quarter. The average balance of borrowed funds increased $511 million over the second quarter of 2017 primarily due to increased borrowings from the Federal Home Loan Banks, partially offset by lower average 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 81% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally reprice more quickly than liabilities. One of the strategies that we use to manage toward a relative rate-neutral position is to 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, 2017 / 2016
 
Nine Months Ended
September 30, 2017 / 2016
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield/Rate
 
Change
 
Volume
 
Yield/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
3,724

 
$
(204
)
 
$
3,928

 
$
7,891

 
$
(172
)
 
$
8,063

Trading securities
 
965

 
3,813

 
(2,848
)
 
8,349

 
12,645

 
(4,296
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(58
)
 
(40
)
 
(18
)
 
(358
)
 
(246
)
 
(112
)
Tax-exempt securities
 
(201
)
 
(452
)
 
251

 
(413
)
 
(1,058
)
 
645

Total investment securities
 
(259
)
 
(492
)
 
233

 
(771
)
 
(1,304
)
 
533

Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
2,066

 
(1,536
)
 
3,602

 
(364
)
 
(4,819
)
 
4,455

Tax-exempt securities
 
(301
)
 
(275
)
 
(26
)
 
(586
)
 
(771
)
 
185

Total available for sale securities
 
1,765

 
(1,811
)
 
3,576

 
(950
)
 
(5,590
)
 
4,640

Fair value option securities
 
3,535

 
1,881

 
1,654

 
4,803

 
2,532

 
2,271

Restricted equity securities
 
316

 
(168
)
 
484

 
850

 
(294
)
 
1,144

Residential mortgage loans held for sale
 
(1,520
)
 
(1,597
)
 
77

 
(3,506
)
 
(3,641
)
 
135

Loans
 
37,429

 
8,320

 
29,109

 
86,798

 
24,936

 
61,862

Total tax-equivalent interest revenue
 
45,955

 
9,742

 
36,213

 
103,464

 
29,112

 
74,352

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
4,645

 
211

 
4,434

 
9,719

 
816

 
8,903

Savings deposits
 
(10
)
 
5

 
(15
)
 
(23
)
 
36

 
(59
)
Time deposits
 
83

 
(43
)
 
126

 
(1,541
)
 
(659
)
 
(882
)
Funds purchased
 
83

 
(26
)
 
109

 
134

 
(92
)
 
226

Repurchase agreements
 
87

 
(37
)
 
124

 
26

 
(62
)
 
88

Other borrowings
 
11,000

 
(384
)
 
11,384

 
21,439

 
(1,190
)
 
22,629

Subordinated debentures
 
(398
)
 
(1,331
)
 
933

 
2,042

 
(2,823
)
 
4,865

Total interest expense
 
15,490

 
(1,605
)
 
17,095

 
31,796

 
(3,974
)
 
35,770

Tax-equivalent net interest revenue
 
30,465

 
11,347

 
19,118

 
71,668

 
33,086

 
38,582

Change in tax-equivalent adjustment
 
(141
)
 
 
 
 
 
(140
)
 
 
 
 
Net interest revenue
 
$
30,606

 
 
 
 
 
$
71,808

 
 
 
 
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 $175.7 million for the third quarter of 2017, an $11.6 million decrease compared to the third quarter of 2016 and a $6.5 million decrease compared to the second quarter of 2017. Fees and commissions revenue decreased $7.8 million compared to the third quarter of 2016 and decreased $4.0 million compared to the prior quarter. The change in the fair value of mortgage servicing rights, net of economic hedges, increased other operating revenue by $1.0 million in the third quarter of 2017, increased other operating revenue by $1.2 million in the third quarter of 2016 and decreased other operating revenue $1.7 million in the second quarter of 2017.

Table 2Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
June 30, 2017
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2017
 
2016
 
 
 
 
 
Brokerage and trading revenue
 
$
33,169

 
$
38,006

 
$
(4,837
)
 
(13
)%
 
$
31,764

 
$
1,405

 
4
 %
Transaction card revenue
 
37,826

 
33,933

 
3,893

 
11
 %
 
35,296

 
2,530

 
7
 %
Fiduciary and asset management revenue
 
40,687

 
34,073

 
6,614

 
19
 %
 
41,808

 
(1,121
)
 
(3
)%
Deposit service charges and fees
 
23,209

 
23,668

 
(459
)
 
(2
)%
 
23,354

 
(145
)
 
(1
)%
Mortgage banking revenue
 
24,890

 
38,516

 
(13,626
)
 
(35
)%
 
30,276

 
(5,386
)
 
(18
)%
Other revenue
 
13,670

 
13,080

 
590

 
5
 %
 
14,984

 
(1,314
)
 
(9
)%
Total fees and commissions revenue
 
173,451

 
181,276

 
(7,825
)
 
(4
)%
 
177,482

 
(4,031
)
 
(2
)%
Other gains (losses), net
 
(1,283
)
 
2,442

 
(3,725
)
 
N/A

 
6,108

 
(7,391
)
 
N/A

Gain on derivatives, net
 
1,033

 
2,226

 
(1,193
)
 
N/A

 
3,241

 
(2,208
)
 
N/A

Gain (loss) on fair value option securities, net
 
661

 
(3,355
)
 
4,016

 
N/A

 
1,984

 
(1,323
)
 
N/A

Change in fair value of mortgage servicing rights
 
(639
)
 
2,327

 
(2,966
)
 
N/A

 
(6,943
)
 
6,304

 
N/A

Gain on available for sale securities, net
 
2,487

 
2,394

 
93

 
N/A

 
380

 
2,107

 
N/A

Total other operating revenue
 
$
175,710

 
$
187,310

 
$
(11,600
)
 
(6
)%
 
$
182,252

 
$
(6,542
)
 
(4
)%
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 44 percent of total revenue for the third 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, decreased $4.8 million or 13 percent compared to the third quarter of 2016

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 $11.9 million for the third quarter of 2017, a $98 thousand or 1 percent decrease compared to the third quarter of 2016


- 5 -



Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $10.5 million for the third quarter of 2017, a $3.2 million or 23 percent decrease compared to the third quarter of 2016 primarily attributed to decreased activity related to our mortgage banking customers.

Revenue earned from retail brokerage transactions decreased $1.7 million or 25 percent compared to the third quarter of 2016 to $5.2 million. Retail brokerage revenue includes 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 implementation of the new Department of Labor ("DOL") fiduciary rule in the second quarter of 2017 has negatively impacted retail brokerage revenue. New regulation issued by the DOL amended the definition of investment advice under the Employee Retirement Income Security Act ("ERISA"). The new rule is designed to provide better protection to plans, participants, beneficiaries and individual retirement account ("IRA") owners against conflicts of interest, imprudence and disloyalty.

Investment banking revenue, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $5.5 million for the third quarter of 2017, a $214 thousand or 4 percent increase over the third quarter of 2016. Investment banking revenue is primarily related to the timing and volume of completed transactions.

Brokerage and trading revenue increased $1.4 million over the second quarter of 2017, primarily due to increases of $1.8 million in trading revenue and $1.5 million in investment banking revenue, partially offset by a decrease of $1.1 million in customer hedging revenue.

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 2017 increased $3.9 million or 11.5 percent, including a $2.1 million early termination penalty, over the third quarter of 2016. Excluding the penalty, TransFund revenue was up $1.0 million or 5.3 percent. TransFund electronic funds transfer ("EFT") network revenue totaled $20.8 million, up $3.1 million or 17.3 percent over the prior year. Merchant services fees totaled $12.0 million, a $712 thousand or 6 percent increase. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $5.0 million, an increase of $114 thousand or 2 percent.
Transaction card revenue increased $2.5 million over the prior quarter, primarily due to a customer early termination fee in the third quarter of 2017.

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 80 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships.
 
Fiduciary and asset management revenue grew by $6.6 million or 19 percent over the third quarter of 2016, primarily due to growth in assets under management, improved pricing discipline and decreased fee waivers.

Fiduciary and asset management revenue decreased $1.1 million compared to the second quarter of 2017. The annual assessment of tax preparation fees added $1.0 million in the second quarter of 2017.


- 6 -



A distribution of assets under management or administration and related fiduciary and asset management revenue follows:

Table 3 -- Assets Under Management or Administration
 
Three Months Ended
September 30,
 
2017
 
2016
 
Balance
 
Revenue1
 
Margin2
 
Balance
 
Revenue1
 
Margin2
Managed fiduciary assets:
 
 
 
 
 
 
 
 
 
 
 
Personal
$
7,611,265

 
$
21,299

 
1.12
%
 
$
7,502,577

 
$
19,521

 
1.04
%
Institutional
12,747,679

 
5,585

 
0.18
%
 
11,732,295

 
4,366

 
0.15
%
Total managed fiduciary assets
20,358,944

 
26,884

 
0.53
%
 
19,234,872

 
23,887

 
0.50
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-managed assets:
 
 
 
 
 
 
 
 
 
 
 
Fiduciary
24,818,241

 
13,214

 
0.21
%
 
23,164,851

 
9,692

 
0.17
%
Non-fiduciary
16,458,382

 
589

 
0.01
%
 
17,289,854

 
494

 
0.01
%
Safekeeping and brokerage assets under administration
16,015,342

 

 
%
 
15,584,153

 

 
%
Total non-managed assets
57,291,965

 
13,803

 
0.10
%
 
56,038,858

 
10,186

 
0.07
%
 
 
 
 
 
 
 
 
 
 
 
 
Total assets under management or administration
$
77,650,909

 
$
40,687

 
0.21
%
 
$
75,273,730

 
$
34,073

 
0.18
%
1 
Fiduciary and asset management revenue includes asset-based and other fees associated with the assets.
2 
Annualized revenue divided by period-end balance.

A summary of changes in assets under management or administration for the three months ended September 30, 2017 and 2016 follows:

Table 4 -- Changes in Assets Under Management or Administration
 
 
Three Months Ended
September 30,
 
 
2017
 
2016
Beginning balance
 
$
77,811,762

 
$
73,001,516

Net inflows (outflows)
 
(1,781,037
)
 
870,819

Net change in fair value
 
1,620,184

 
1,401,395

Ending balance
 
$
77,650,909

 
$
75,273,730


Deposit service charges and fees were $23.2 million for the third quarter of 2017, a decrease of $459 thousand or 2 percent compared to the third quarter of 2016. Commercial account service charge revenue totaled $11.8 million, up $400 thousand or 4 percent. Overdraft fees were $9.7 million, an $895 thousand or 8.5 percent decrease compared to the third quarter of 2016. Service charges on deposit accounts with a standard monthly fee were $1.7 million, an increase of $33 thousand or 2 percent. Deposit service charges and fees decreased $145 thousand compared to the prior quarter.

Mortgage banking revenue decreased $13.6 million or 35 percent compared to the third quarter of 2016. Mortgage production revenue decreased $13.6 million. Mortgage loan production volumes decreased $725 million, including a $539 million decrease related to the Company's strategic decision to exit the correspondent lending channel during the third quarter of 2016. Production volumes in the retail channel decreased compared to the prior year as average primary mortgage interest rates were up 43 basis points over the third quarter of 2016. Gain on sale margin decreased 41 basis points compared to the prior year. The margin decrease was primarily due to market pricing pressure. Mortgage servicing revenue was relatively consistent compared to the third quarter of 2016. The outstanding principal balance of mortgage loans serviced for others totaled $22.1 billion, an increase of $212 million or 1 percent.

- 7 -



Mortgage banking revenue decreased $5.4 million compared to the second quarter of 2017. Mortgage production revenue decreased $5.5 million. Production volume decreased $78 million primarily due to increased competition. Gain on sale margin decreased due to increased market pricing pressure. Revenue from mortgage loan servicing increased $125 thousand over the prior quarter.

Table 5Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
June 30, 2017
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2017
 
2016
 
 
 
 
Mortgage production revenue
 
$
8,329

 
$
21,958

 
$
(13,629
)
 
(62
)%
 
$
13,840

 
$
(5,511
)
 
(40
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
832,796

 
$
1,864,583

 


 


 
$
902,978

 
 
 
 
Add: Current period end outstanding commitments
 
334,337

 
630,804

 
 
 
 
 
362,088

 
 
 
 
Less: Prior period end outstanding commitments
 
362,088

 
965,631

 
 
 
 
 
381,732

 
 
 
 
Total mortgage production volume
 
$
805,045

 
$
1,529,756

 
$
(724,711
)
 
(47
)%
 
$
883,334

 
$
(78,289
)
 
(9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loan refinances to mortgage loans funded for sale
 
38
%
 
51
%
 
(1,300
) bps
 
 
 
33
%
 
500
 bps
 
 
Gains on sale margin
 
1.03
%
 
1.44
%
 
(41
) bps
 
 
 
1.57
%
 
(54
) bps
 
 
Primary mortgage interest rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
3.88
%
 
3.45
%
 
43
 bps
 
 
 
3.98
%
 
(10
) bps
 
 
Period end
 
3.83
%
 
3.42
%
 
41
 bps
 
 
 
3.88
%
 
(5
) bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue
 
$
16,561

 
$
16,558

 
$
3

 
 %
 
$
16,436

 
$
125

 
1
 %
Average outstanding principal balance of mortgage loans serviced for others
 
22,079,177

 
21,514,962

 
564,215

 
3
 %
 
22,055,127

 
24,050

 
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average mortgage servicing revenue rates
 
0.30
%
 
0.31
%
 
(1
) bp
 
 
 
0.30
%
 

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

Primary rates disclosed in Table 5 above represent rates generally available to borrowers on 30 year conforming mortgage loans.

Net gains on other assets, securities and derivatives

Other net losses totaled $1.3 million in the third quarter of 2017, which includes a $1.1 million write-down related to recent tornado damage. Other net gains totaled $6.1 million in the second quarter of 2017 due to the sale of a merchant banking investment.

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 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 $3.6 million in the third quarter of 2017, including a $639 thousand decrease in the fair value of mortgage servicing rights, offset by a $1.7 million increase in the fair value of securities and derivative contracts held as an economic hedge and $2.5 million of related net interest revenue.

The net economic benefit of changes in the fair value of mortgage servicing rights and related economic hedges was $2.1 million for the third quarter of 2016. The fair value of mortgage servicing rights increased $2.3 million.The fair value of securities and interest rate derivative contracts held as an economic hedge decreased $1.1 million. Net interest earned on securities held as an economic hedge was $861 thousand.

- 8 -



The net economic benefit of changes in the fair value of mortgage servicing rights and related economic hedges was $247 thousand for the second quarter of 2017. The fair value of mortgage servicing rights decreased by $6.9 million. The fair value of securities and interest rate derivative contracts held as an economic hedge increased by $5.2 million.

Table 6 - Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
Sept. 30, 2017
 
June 30, 2017
 
Sept. 30, 2016
Gain on mortgage hedge derivative contracts, net
 
$
1,025

 
$
3,241

 
$
2,268

Gain (loss) on fair value option securities, net
 
661

 
1,984

 
(3,355
)
Gain (loss) on economic hedge of mortgage servicing rights, net
 
1,686

 
5,225

 
(1,087
)
Gain (loss) on change in fair value of mortgage servicing rights
 
(639
)
 
(6,943
)
 
2,327

Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges included in other operating revenue
 
1,047

 
(1,718
)
 
1,240

Net interest revenue on fair value option securities1
 
2,543

 
1,965

 
861

Total economic benefit of changes in the fair value of mortgage servicing rights, net of economic hedges
 
$
3,590

 
$
247

 
$
2,101

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

- 9 -



Other Operating Expense

Other operating expense for the third quarter of 2017 totaled $265.9 million, an increase of $7.8 million or 3 percent over the third quarter of 2016. Personnel expense increased $8.7 million or 6 percent. Non-personnel expense decreased $852 thousand or 1 percent compared to the prior year.

Other operating expense increased $15.0 million over the previous quarter. Personnel expense was up $4.2 million and non-personnel expense increased $10.9 million.

In addition to $1.1 million of losses included in other gain (losses), net, operating expense for the third quarter of 2017 included $1.3 million of additional expense related to tornado damage sustained on our Tulsa operations center and the impact of the hurricane in the Houston market.

Table 7Other Operating Expense
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
June 30, 2017
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2017
 
2016
 
 
 
 
 
Regular compensation
 
$
83,583

 
$
83,123

 
$
460

 
1
 %
 
$
83,630

 
$
(47
)
 
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
33,643

 
33,240

 
403

 
1
 %
 
29,954

 
3,689

 
12
 %
Share-based
 
8,407

 
1,839

 
6,568

 
357
 %
 
7,380

 
1,027

 
14
 %
Deferred compensation
 
975

 
1,059

 
(84
)
 
N/A

 
1,000

 
(25
)
 
N/A

Total incentive compensation
 
43,025

 
36,138

 
6,887

 
19
 %
 
38,334

 
4,691

 
12
 %
Employee benefits
 
21,302

 
19,951

 
1,351

 
7
 %
 
21,780

 
(478
)
 
(2
)%
Total personnel expense
 
147,910

 
139,212

 
8,698

 
6
 %
 
143,744

 
4,166

 
3
 %
Business promotion
 
7,105

 
6,839

 
266

 
4
 %
 
7,738

 
(633
)
 
(8
)%
Professional fees and services
 
11,887

 
14,038

 
(2,151
)
 
(15
)%
 
12,419

 
(532
)
 
(4
)%
Net occupancy and equipment
 
21,325

 
20,111

 
1,214

 
6
 %
 
21,125

 
200

 
1
 %
Insurance
 
6,005

 
9,390

 
(3,385
)
 
(36
)%
 
689

 
5,316

 
772
 %
Data processing and communications
 
37,327

 
33,331

 
3,996

 
12
 %
 
36,330

 
997

 
3
 %
Printing, postage and supplies
 
3,917

 
3,790

 
127

 
3
 %
 
4,140

 
(223
)
 
(5
)%
Net losses (gains) and operating expenses of repossessed assets
 
6,071

 
(926
)
 
6,997

 
(756
)%
 
2,267

 
3,804

 
168
 %
Amortization of intangible assets
 
1,744

 
1,521

 
223

 
15
 %
 
1,803

 
(59
)
 
(3
)%
Mortgage banking costs
 
13,450

 
15,963

 
(2,513
)
 
(16
)%
 
12,072

 
1,378

 
11
 %
Other expense
 
9,193

 
14,819

 
(5,626
)
 
(38
)%
 
8,558

 
635

 
7
 %
Total other operating expense
 
$
265,934

 
$
258,088

 
$
7,846

 
3
 %
 
$
250,885

 
$
15,049

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,887

 
4,928

 
(41
)
 
(1
)%
 
4,910

 
(23
)
 
 %
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 $460 thousand or 1 percent over the third quarter of 2016. The average number of employees was relatively unchanged compared to the prior year. Standard annual merit increases in regular compensation were effective for the majority of our staff on March 1.


- 10 -



Incentive compensation increased $6.9 million or 19 percent over the third quarter of 2016, primarily due to increased share-based compensation expense. 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. The number of shares that will ultimately vest is determined by BOKF's change in earnings per share relative to a defined group of peer banks. In addition, compensation costs related to certain shares is variable based on changes in the the fair value of BOK Financial common shares. Third quarter 2017 equity compensation expense included charges of $4.0 million from changes in the vesting assumptions for performance-based awards and $1.9 million from an increase in the fair value of BOK Financial common shares.

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. Cash-based incentive compensation expense increased $403 thousand or 1 percent over the third quarter of 2016.

Employee benefits expense increased $1.4 million or 7 percent over the the third quarter of 2016, primarily due to an increase in employee medical costs.
Personnel expense increased $4.2 million over the second quarter of 2017. Cash-based incentive compensation increased $3.7 million due to continued improvement of performance metrics against internal targets. Regular compensation expense was largely unchanged compared to the prior quarter. A $1.5 million seasonal decrease in payroll tax expense was partially offset by a $740 thousand increase in employee healthcare costs.

Non-personnel operating expense

Non-personnel operating expense decreased $852 thousand or 1% compared to the third quarter of 2016.

Deposit insurance expense decreased $3.4 million due to improvement in risk factors including the benefit of decreased criticized and classified asset levels. Mortgage banking expense decreased $2.5 million primarily due to lower prepayments as average mortgage interest rates trended upward. Professional fees and servicing expense decreased $2.2 million.

Data processing and communications expense increased $4.0 million. Occupancy and equipment expense increased $1.2 million. Increases in these expense categories were primarily due to information technology infrastructure and cybersecurity project costs and increased data processing transaction activity.

Other expense decreased $5.6 million compared to the third quarter of 2016, primarily due 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 in the third quarter of 2016.
Non-personnel expense increased $10.9 million over the second quarter of 2017. Deposit insurance expense increased $5.3 million, primarily due to $5.1 million in credits received during the second quarter of 2017 related to the revision of certain inputs to the assessment calculation filed in previous periods. Net losses and operating expenses of repossessed assets increased $3.8 million mainly due to a $4.7 million write-down of a set of oil and gas properties. Mortgage banking expense increased $1.4 million and data processing and communication expense increased $1.0 million.

- 11 -



Income Taxes

The Company's income tax expense was $42.4 million or 33.1 percent of net income before taxes for the third quarter of 2017 compared to $32.0 million or 29.8 percent of net income before taxes for the third quarter of 2016 and $47.7 million or 34.9 percent of net income before taxes for the second quarter of 2017.

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 2016 during the third quarter of 2017. These adjustments reduced income tax expense by $3.1 million in the third quarter of 2017. Adjustments reduced income tax expense by $4.1 million in the third quarter of 2016 related to filed tax returns for 2015. Excluding these adjustments, income tax expense would have been 35.5 percent of net income before taxes for the third quarter of 2017 and 33.7 percent of net income before taxes for the third quarter of 2016.

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 $18 million at September 30, 2017, $17 million at June 30, 2017 and $14 million at September 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 repricing and cash flow characteristics. Market rates are generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment and liquidity risk. This method of transfer-pricing funds that supports 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 repricing 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-term swap rates. The expected duration ranges from 30 days for certain rate-sensitive deposits to five years.


- 12 -



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

As shown in Table 8, net income attributable to our lines of business increased $18.1 million or 25 percent over the third quarter of 2016. Net interest revenue grew by $34.9 million over the prior year. Other operating revenue decreased $6.9 million while operating expenses decreased $3.2 million. Net charge-offs were down $2.8 million compared to the prior year.

Table 8 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Commercial Banking
 
$
69,689

 
$
55,995

 
$
201,603

 
$
145,885

Consumer Banking
 
6,734

 
8,761

 
18,900

 
13,103

Wealth Management
 
15,576

 
9,108

 
45,684

 
26,865

Subtotal
 
91,999

 
73,864

 
266,187

 
185,853

Funds Management and other
 
(6,350
)
 
413

 
(4,035
)
 
(3,211
)
Total
 
$
85,649

 
$
74,277

 
$
262,152

 
$
182,642


- 13 -



Commercial Banking

Commercial Banking contributed $69.7 million to consolidated net income in the third quarter of 2017, an increase of $13.7 million or 25 percent over the third quarter of 2016. The increase in Commercial Banking's contribution was largely due to an increase in net interest revenue.

Table 9 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
September 30,
 
 
September 30,
 
 
 
2017
 
2016
 
 
2017
 
2016
 
Net interest revenue from external sources
 
$
157,080

 
$
123,599

 
$
33,481

 
$
435,946

 
$
358,713

 
$
77,233

Net interest expense from internal sources
 
(24,173
)
 
(15,052
)
 
(9,121
)
 
(61,803
)
 
(44,259
)
 
(17,544
)
Total net interest revenue
 
132,907

 
108,547

 
24,360

 
374,143

 
314,454

 
59,689

Net loans charged off
 
3,217

 
5,601

 
(2,384
)
 
2,983

 
34,024

 
(31,041
)
Net interest revenue after net loans charged off
 
129,690

 
102,946

 
26,744

 
371,160

 
280,430

 
90,730

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
53,928

 
47,710

 
6,218

 
148,193

 
144,215

 
3,978

Other gains, net
 
163

 
1,932

 
(1,769
)
 
7,946

 
2,033

 
5,913

Other operating revenue
 
54,091

 
49,642

 
4,449

 
156,139

 
146,248

 
9,891

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
28,902

 
28,365

 
537

 
83,935

 
82,513

 
1,422

Non-personnel expense
 
28,050

 
25,010

 
3,040

 
84,582

 
79,526

 
5,056

Other operating expense
 
56,952

 
53,375

 
3,577

 
168,517

 
162,039

 
6,478

 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
126,829

 
99,213

 
27,616

 
358,782

 
264,639

 
94,143

Gain on financial instruments, net
 
4

 

 
4

 
46

 

 
46

Gain (loss) on repossessed assets, net
 
(4,126
)
 
1,486

 
(5,612
)
 
(2,728
)
 
806

 
(3,534
)
Corporate expense allocations
 
8,650

 
9,054

 
(404
)
 
26,144

 
26,681

 
(537
)
Income before taxes
 
114,057

 
91,645

 
22,412

 
329,956

 
238,764

 
91,192

Federal and state income tax
 
44,368

 
35,650

 
8,718

 
128,353

 
92,879

 
35,474

Net income
 
$
69,689

 
$
55,995

 
$
13,694

 
$
201,603

 
$
145,885

 
$
55,718

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
17,558,390

 
$
16,934,587

 
$
623,803

 
$
17,525,658

 
$
16,958,999

 
$
566,659

Average loans
 
14,274,896

 
13,737,081

 
537,815

 
14,157,340

 
13,542,719

 
614,621

Average deposits
 
8,683,331

 
8,317,341

 
365,990

 
8,656,144

 
8,392,558

 
263,586

Average invested capital
 
1,353,525

 
1,285,627

 
67,898

 
1,334,056

 
1,234,962

 
99,094


Net interest revenue increased $24.4 million or 22 percent over the prior year. Growth in net interest revenue was primarily due to increased yields on commercial loans due to rising short-term interest rates and a $538 million or 4 percent increase in average loan balances. Average deposit balances increased $366 million or 4 percent. The Mobank acquisition increased loans by $390 million and deposits by $396 million. Yields on deposits sold to the funds management unit also went up due to the increase in short-term interest rates from the Federal Reserve increase in the federal funds rate.

Fees and commissions revenue increased $6.2 million or 13 percent compared to the third quarter of 2016 primarily due to a $3.9 million increase in transaction card revenue and a $1.5 million increase in brokerage and trading revenue. The increase in transaction card revenue included a $2.1 million early customer termination fee received in the third quarter of 2017. The increase in brokerage and trading revenue was largely due a $1.2 million increase in loan syndication fees.


- 14 -



Operating expenses increased $3.6 million or 7 percent compared to the third quarter of 2016. Personnel expense increased $537 thousand or 2 percent. Non-personnel expense increased $3.0 million or 12 percent. Net repossession expense increased $1.3 million related mainly to the repossession of certain oil and gas properties. Deposit insurance expense increased $1.4 million due to increased granularity in the allocation to the segments.

The average outstanding balance of loans attributed to Commercial Banking grew by $538 million or 4 percent over the third quarter of 2016 to $14.3 billion. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans, which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $8.7 billion for the third quarter of 2017, an increase of $366 million or 4 percent compared to the third 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 $6.7 million to consolidated net income for the third quarter of 2017, down $2.0 million compared to the third quarter of 2016. Growth in net interest revenue of $6.4 million was offset by a decrease in other operating revenue of $13.6 million while operating expense decreased by $4.2 million.

- 15 -



Table 10 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
September 30,
 
 
September 30,
 
 
 
2017
 
2016
 
 
2017
 
2016
 
Net interest revenue from external sources
 
$
25,576

 
$
22,098

 
$
3,478

 
$
70,208

 
$
65,897

 
$
4,311

Net interest revenue from internal sources
 
12,213

 
9,263

 
2,950

 
35,002

 
27,492

 
7,510

Total net interest revenue
 
37,789

 
31,361

 
6,428

 
105,210

 
93,389

 
11,821

Net loans charged off
 
1,315

 
1,157

 
158

 
3,512

 
4,177

 
(665
)
Net interest revenue after net loans charged off
 
36,474

 
30,204

 
6,270

 
101,698

 
89,212

 
12,486

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
47,134

 
60,773

 
(13,639
)
 
146,605

 
172,114

 
(25,509
)
Other gains (losses), net
 
(101
)
 
(170
)
 
69

 
(165
)
 
(42
)
 
(123
)
Other operating revenue
 
47,033

 
60,603

 
(13,570
)
 
146,440

 
172,072

 
(25,632
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
25,547

 
26,604

 
(1,057
)
 
76,490

 
77,675

 
(1,185
)
Non-personnel expense
 
31,238

 
34,360

 
(3,122
)
 
89,537

 
101,812

 
(12,275
)
Total other operating expense
 
56,785

 
60,964

 
(4,179
)
 
166,027

 
179,487

 
(13,460
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
26,722

 
29,843

 
(3,121
)
 
82,111

 
81,797

 
314

Gain (loss) on financial instruments, net
 
1,686

 
(1,087
)
 
2,773

 
5,242

 
30,539

 
(25,297
)
Change in fair value of mortgage servicing rights
 
(639
)
 
2,327

 
(2,966
)
 
(5,726
)
 
(41,944
)
 
36,218

Gain on repossessed assets, net
 
292

 
161

 
131

 
253

 
566

 
(313
)
Corporate expense allocations
 
17,039

 
16,905

 
134

 
50,947

 
49,513

 
1,434

Income before taxes
 
11,022

 
14,339

 
(3,317
)
 
30,933

 
21,445

 
9,488

Federal and state income tax
 
4,288

 
5,578

 
(1,290
)
 
12,033

 
8,342

 
3,691

Net income
 
$
6,734

 
$
8,761

 
$
(2,027
)
 
$
18,900

 
$
13,103

 
$
5,797

 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
9,115,319

 
$
8,827,816

 
$
287,503

 
$
8,871,470

 
$
8,763,564

 
$
107,906

Average loans
 
1,961,265

 
1,893,431

 
67,834

 
1,945,122

 
1,888,693

 
56,429

Average deposits
 
6,707,859

 
6,660,514

 
47,345

 
6,651,177

 
6,623,724

 
27,453

Average invested capital
 
327,667

 
356,788

 
(29,121
)
 
321,420

 
328,752

 
(7,332
)

Net interest revenue from Consumer Banking activities grew by $6.4 million or 21 percent over the the third quarter of 2016 primarily due to increased rates received on deposit balances sold to the Funds Management unit. Average loan balances grew by $68 million or 4 percent and average deposits increased $47 million or 1% over the prior year.

Fees and commissions revenue decreased $13.6 million or 22 percent compared to the third quarter of 2016 due to a $13.6 million decrease in mortgage banking revenue. Mortgage loan production volumes decreased $725 million, largely due to the exit from the correspondent lending channel. Gain on sale margin decreased 41 basis points due to market pricing pressure. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company and deposit service charges and fees were relatively unchanged compared to the prior year.

Operating expenses decreased $4.2 million or 7 percent compared to the third quarter of 2016. Personnel expenses decreased $1.1 million or 4 percent. Non-personnel expense decreased $3.1 million or 9 percent compared to the prior year. Mortgage banking costs were down $2.5 million primarily due to lower prepayments of loans serviced for others. A $1.8 million decrease in professional fees and services expense was partially offset by an increase of $575 thousand in data processing and communications expense and $569 thousand in business promotion expense.


- 16 -



Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $640 thousand increase in Consumer Banking net income in the third quarter of 2017 compared to a $758 thousand increase in Consumer Banking net income in the third quarter of 2016.

Average consumer deposits grew by $47 million over the third quarter of 2016. Higher-costing time deposit balances decreased $114 million or 10 percent, offset by an $80 million or 5 percent increase in demand deposit balances, a $42 million or 11 percent increase in savings account balances and a $39 million or 1 percent increase in interest-bearing transaction accounts.


Wealth Management

Wealth Management contributed $15.6 million to consolidated net income in the third quarter of 2017, up $6.5 million or 71 percent over the third quarter of 2016, largely due to growth in net interest revenue.

Table 11 -- Wealth Management
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
September 30,
 
 
September 30,
 
 
 
2017
 
2016
 
 
2017
 
2016
 
Net interest revenue from external sources
 
$
11,169

 
$
9,274

 
$
1,895

 
$
33,130

 
$
21,620

 
$
11,510

Net interest revenue from internal sources
 
9,604

 
7,401

 
2,203

 
28,784

 
22,258

 
6,526

Total net interest revenue
 
20,773

 
16,675

 
4,098

 
61,914

 
43,878

 
18,036

Net loans charged off (recovered)
 
(623
)
 
(89
)
 
(534
)
 
(676
)
 
(479
)
 
(197
)
Net interest revenue after net loans charged off (recovered)
 
21,396

 
16,764

 
4,632

 
62,590

 
44,357

 
18,233

 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
75,915

 
73,331

 
2,584

 
225,390

 
217,519

 
7,871

Other gains (losses), net
 
(208
)
 
192

 
(400
)
 
44

 
523

 
(479
)
Other operating revenue
 
75,707

 
73,523

 
2,184

 
225,434

 
218,042

 
7,392

 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
46,494

 
48,969

 
(2,475
)
 
136,758

 
142,235

 
(5,477
)
Non-personnel expense
 
15,297

 
15,457

 
(160
)
 
46,058

 
44,289

 
1,769

Other operating expense
 
61,791

 
64,426

 
(2,635
)
 
182,816

 
186,524

 
(3,708
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
35,312

 
25,861

 
9,451

 
105,208

 
75,875

 
29,333

Loss on financial instruments, net
 

 
(42
)
 
42

 

 
(42
)
 
42

Corporate expense allocations
 
9,819

 
10,912

 
(1,093
)
 
30,438

 
31,864

 
(1,426
)
Income before taxes
 
25,493

 
14,907

 
10,586

 
74,770

 
43,969

 
30,801

Federal and sta