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BOK Financial 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
BOKF-2013.09.30-10Q


 

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, 2013
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 68,787,584 shares of common stock ($.00006 par value) as of September 30, 2013.
 





BOK Financial Corporation
Form 10-Q
Quarter Ended September 30, 2013

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)
Six Month Financial Summary – Unaudited (Item 2)
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 $75.7 million or $1.10 per diluted share for the third quarter of 2013, compared to $87.4 million or $1.27 per diluted share for the third quarter of 2012 and $79.9 million or $1.16 per diluted share for the second quarter of 2013

Net income for the nine months ended September 30, 2013 totaled $243.6 million or $3.54 per diluted share compared with $268.6 million or $3.92 per diluted share for the nine months ended September 30, 2012.

Highlights of the third quarter of 2013 included:
Net interest revenue totaled $166.4 million for the third quarter of 2013, compared to $176.0 million for the third quarter of 2012 and $167.2 million for the second quarter of 2013. Net interest margin was 2.80% for the third quarter of 2013. Net interest margin was 3.12% for the third quarter of 2012 and 2.81% for the second quarter of 2013
Fees and commissions revenue totaled $146.8 million for the third quarter of 2013, compared to $166.0 million for the third quarter of 2012 and $160.9 million for the second quarter of 2013. Mortgage banking revenue decreased $26.8 million compared to the third quarter of 2012 and $13.1 million compared to the second quarter of 2013 primarily due to a narrowed gain on sale margin and a change in product mix. Mortgage production volumes also decreased. Nearly all other fee-based revenue sources grew over the prior year and were largely unchanged compared to prior quarter.
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $210.3 million for the third quarter of 2013, a decrease of $2.5 million compared to the third quarter of 2012 and largely unchanged compared to the previous quarter. Personnel costs increased $3.0 million over the third quarter of 2012 primarily annual merit increases and incentive compensation. Personnel costs decreased $2.3 million compared to the second quarter of 2013 primarily due to a seasonal decrease in payroll taxes. Non-personnel expense decreased $5.5 million compared to the third quarter of 2012. Lower repossessed asset impairment charges and mortgage banking expense, were partially offset by a $2.1 million discretionary contribution to the BOKF Foundation during the third quarter of 2013. Non-personnel expenses increased $1.7 million over the prior quarter primarily due to the discretionary contribution to the BOKF Foundation.  
An $8.5 million negative provision for credit losses was recorded in the third quarter of 2013 compared to no provision for credit losses in both the third quarter of 2012 and the second quarter of 2013. Gross charge-offs were $4.7 million in the third quarter of 2013, $8.9 million in the third quarter of 2012 and $8.6 million in the second quarter of 2013. Recoveries were $4.4 million in the third quarter of 2013, compared to $3.2 million in the third quarter of 2012 and $6.2 million in the second quarter of 2013.
The combined allowance for credit losses totaled $196 million or 1.59% of outstanding loans at September 30, 2013 compared to $205 million or 1.65% of outstanding loans at June 30, 2013. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $183 million or 1.49% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at September 30, 2013 and $200 million or 1.62% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2013.
Outstanding loan balances were $12.4 billion at September 30, 2013, a decrease of $91 million compared to June 30, 2013. Commercial loan balances decreased $137 million during the third quarter, partially offset by a $32 million increase in commercial real estate loans. Residential mortgage loans decreased by $5.0 million and consumer loans were up $19 million over June 30, 2013.
Period end deposits totaled $19.5 billion at September 30, 2013, largely unchanged compared to June 30, 2013. Demand deposit account balances increased $187 million during the third quarter, offset by a $147 million decrease in interest-bearing transaction accounts and a $48 million decrease in time deposits.
The tangible common equity ratio was 9.73% at September 30, 2013 and 9.38% at June 30, 2013. The tangible common equity ratio is a non-GAAP measure of capital strength used by the Company and investors based on shareholders’ equity as defined by generally accepted accounting principles in the United States of America (“GAAP”) minus intangible assets and equity that does not benefit common shareholders.

- 1 -




The Company and its subsidiary bank continue to exceed the regulatory definition of well capitalized. The Company’s Tier 1 capital ratios as defined by banking regulations were 13.51% at September 30, 2013 and 13.37% at June 30, 2013.
The Company paid a regular quarterly cash dividend of $26 million or $0.38 per common share during the third quarter of 2013. On October 29, 2013, the board of directors approved an increase in the quarterly cash dividend to $0.40 per common share payable on or about November 29, 2013 to shareholders of record as of November 16, 2013.
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 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 $166.4 million for the third quarter of 2013 compared to $176.0 million for the third quarter of 2012 and $167.2 million for the second quarter of 2013. Net interest margin was 2.80% for the third quarter of 2013, 3.12% for the third quarter of 2012 and 2.81% for the second quarter of 2013.

Net interest revenue decreased $9.7 million compared to the third quarter of 2012. Net interest revenue decreased $11.7 million due to lower interest rates. Cash flows from the securities portfolio were reinvested at lower current market rates and loan yields decreased due to renewal of maturing fixed-rate loans at current lower rates and narrowing credit spreads. The decrease in yield on earning assets was partially offset by lower funding costs. Net interest revenue increased $2.1 million primarily due to the growth in average loan and securities balances, partially offset by an increase in the average balance of other borrowings.

Net interest margin also declined compared to the third quarter of 2012. The tax-equivalent yield on earning assets was 3.09% for the third quarter of 2013, down 38 basis points from the third quarter of 2012. The available for sale securities portfolio yield decreased 46 basis points to 1.92%. Cash flows received from payments on residential mortgage-backed securities are currently being reinvested in short-duration securities that yield nearly 1.75%. Loan yields decreased 27 basis points. Credit spreads have narrowed due to market pricing pressure and improved credit quality in our loan portfolio. Funding costs were down 10 basis points from the third quarter of 2012. The cost of interest-bearing deposits decreased 10 basis points and the cost of other borrowed funds decreased 4 basis points. The average rate of interest paid on subordinated debentures decreased 27 basis points compared to the third quarter of 2012. Additionally, the benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 13 basis points in the third quarter of 2013 compared to 17 basis points in the third quarter of 2012.

Average earning assets for the third quarter of 2013 increased $219 million or 1% over the third quarter of 2012. Average loans, net of allowance for loan losses, increased $692 million over the third quarter of 2012 due primarily to growth in average commercial loans. The average balance of available for sale securities decreased $499 million over the prior year. Available for sale securities consists largely of U.S. government agency issued residential mortgage-backed securities and U.S. agency commercial mortgage-backed securities that are purchased to supplement earnings and to manage interest rate risk. Growth was primarily in U.S. government agency commercial mortgage-backed securities, partially offset by a decrease in U.S. agency mortgage-backed securities. The average balance of investment securities was up over the prior year, partially offset by a decrease in the average balance of fair value option securities primarily held as an economic hedge of our mortgage servicing rights.

Average deposits increased $673 million over the third quarter of 2012, including a $392 million increase in average demand deposit balances and a $556 million increase in average interest-bearing transaction accounts, partially offset by a $326 million decrease in average time deposits. Average borrowed funds increased $863 million over the third quarter of 2012 due primarily to increased borrowing from the Federal Home Loan Banks.

- 2 -




Net interest margin decreased 1 basis point from the second quarter of 2013.  The yield on average earning assets decreased 2 basis points. The yield on the available for sale securities portfolio decreased 1 basis point to 1.92%. The loan portfolio yield decreased to 4.06% from 4.12% in the previous quarter primarily due to market pricing pressure. Funding costs decreased 1 basis point to 0.42%. Rates paid on time deposits and savings accounts each decreased 2 basis points. Rates paid on interest-bearing transaction accounts decreased a basis point. The cost of other borrowed funds and the benefit to net interest margin from earning assets funded by non-interest bearing liabilities was unchanged compared to the second quarter.
Average earning assets decreased $500 million during the third quarter of 2013. The available for sale securities portfolio decreased $502 million compared to the second quarter of 2013. Average outstanding loans increased $125 million. Average commercial loan balances were largely unchanged. Average commercial real estate loan balances increased $72 million, residential mortgage loan balances increased $30 million and consumer balances increased $26 million. Growth in average loan balances was offset by a $57 million decrease in trading securities, a $47 million decrease in fair value option securities and a $36 million decrease in the average balance of residential mortgage loans held for sale.
Average deposits decreased $80 million compared to the previous quarter. Demand deposit balances increased $221 million. Interest-bearing transaction account balances decreased $228 million and time deposit account balances decreased $76 million. The average balance of borrowed funds decreased $30 million over the second quarter of 2013.

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 two-thirds 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.

Net interest margin may continue to decline. Our ability to further decrease funding costs is limited and our ability to provide near-term net interest revenue support through continued securities portfolio growth may be constrained by our conservative interest rate risk policies. Although we have sufficient capital and liquidity, further securities portfolio growth may result in unacceptable risk as interest rates rise. This interest rate risk policy constraint does not affect our ability to continue loan portfolio growth.























- 3 -




Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
Sept. 30, 2013 / 2012
 
Nine Months Ended
Sept. 30, 2013 / 2012
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield /
Rate
 
Change
 
Volume
 
Yield
/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Funds sold and resell agreements
 
$
3

 
$
4

 
$
(1
)
 
$
3

 
$
9

 
$
(6
)
Trading securities
 
(15
)
 
(39
)
 
24

 
527

 
451

 
76

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(690
)
 
(635
)
 
(55
)
 
(2,004
)
 
(1,967
)
 
(37
)
Tax-exempt securities
 
289

 
1,856

 
(1,567
)
 
330

 
5,199

 
(4,869
)
Total investment securities
 
(401
)
 
1,221

 
(1,622
)
 
(1,674
)
 
3,232

 
(4,906
)
Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(9,303
)
 
2,303

 
(11,606
)
 
(24,152
)
 
13,623

 
(37,775
)
Tax-exempt securities
 
(216
)
 
66

 
(282
)
 
(132
)
 
8,024

 
(8,156
)
Total available for sale securities
 
(9,519
)
 
2,369

 
(11,888
)
 
(24,284
)
 
21,647

 
(45,931
)
Fair value option securities
 
(1,084
)
 
(823
)
 
(261
)
 
(4,704
)
 
(3,266
)
 
(1,438
)
Residential mortgage loans held for sale
 
(142
)
 
(348
)
 
206

 
392

 
597

 
(205
)
Loans
 
(967
)
 
7,126

 
(8,093
)
 
(8,688
)
 
22,474

 
(31,162
)
Total tax-equivalent interest revenue
 
(12,125
)
 
9,510

 
(21,635
)
 
(38,428
)
 
45,144

 
(83,572
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
(725
)
 
299

 
(1,024
)
 
(2,215
)
 
625

 
(2,840
)
Savings deposits
 
(20
)
 
22

 
(42
)
 
(69
)
 
74

 
(143
)
Time deposits
 
(1,646
)
 
(1,252
)
 
(394
)
 
(5,205
)
 
(3,919
)
 
(1,286
)
Funds purchased
 
(498
)
 
(250
)
 
(248
)
 
(915
)
 
(611
)
 
(304
)
Repurchase agreements
 
(158
)
 
(62
)
 
(96
)
 
(413
)
 
(179
)
 
(234
)
Other borrowings
 
808

 
8,678

 
(7,870
)
 
1,429

 
27,097

 
(25,668
)
Subordinated debentures
 
(266
)
 
(30
)
 
(236
)
 
(4,971
)
 
(542
)
 
(4,429
)
Total interest expense
 
(2,505
)
 
7,405

 
(9,910
)
 
(12,359
)
 
22,545

 
(34,904
)
Tax-equivalent net interest revenue
 
(9,620
)
 
2,105

 
(11,725
)
 
(26,069
)
 
22,599

 
(48,668
)
Change in tax-equivalent adjustment
 
56

 
 
 
 
 
976

 
 
 
 
Net interest revenue
 
$
(9,676
)
 
 
 
 
 
$
(27,045
)
 
 
 
 
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 $145.3 million for the third quarter of 2013 compared to $179.9 million for the third quarter of 2012 and $150.8 million for the second quarter of 2013. Fees and commissions revenue decreased $19.2 million compared to the third quarter of 2012. Net gains (losses) on securities, derivatives and other assets decreased $15.0 million compared to the third quarter of 2012. Other-than temporary impairment charges were $405 thousand less than the prior year.

Other operating revenue decreased $5.4 million compared to the second quarter of 2013. Fees and commissions revenue decreased $14.1 million. Net gains on securities, derivatives and other assets increased $9.6 million. Other-than-temporary impairment charges were $957 thousand less than the previous quarter.

Table 2Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
 
 
 
 
Three Months Ended
June 30, 2013
 
 
 
 
 
 
2013
 
2012
 
Increase(Decrease)
 
% Increase(Decrease)
 
 
Increase(Decrease)
 
% Increase(Decrease)
Brokerage and trading revenue
 
$
32,338

 
$
31,261

 
$
1,077

 
3
 %
 
$
32,874

 
$
(536
)
 
(2
)%
Transaction card revenue
 
30,055

 
27,788

 
2,267

 
8
 %
 
29,942

 
113

 
 %
Trust fees and commissions
 
23,892

 
19,654

 
4,238

 
22
 %
 
24,803

 
(911
)
 
(4
)%
Deposit service charges and fees
 
24,742

 
25,148

 
(406
)
 
(2
)%
 
23,962

 
780

 
3
 %
Mortgage banking revenue
 
23,486

 
50,266

 
(26,780
)
 
(53
)%
 
36,596

 
(13,110
)
 
(36
)%
Bank-owned life insurance
 
2,408

 
2,707

 
(299
)
 
(11
)%
 
2,236

 
172

 
8
 %
Other revenue
 
9,852

 
9,149

 
703

 
8
 %
 
10,496

 
(644
)
 
(6
)%
Total fees and commissions revenue
 
146,773

 
165,973

 
(19,200
)
 
(12
)%
 
160,909

 
(14,136
)
 
(9
)%
Gain (loss) on other assets, net
 
(377
)
 
452

 
(829
)
 
N/A

 
(1,666
)
 
1,289

 
N/A

Gain (loss) on derivatives, net
 
31

 
464

 
(433
)
 
N/A

 
(2,527
)
 
2,558

 
N/A

Gain (loss) on fair value option securities, net
 
(80
)
 
6,192

 
(6,272
)
 
N/A

 
(9,156
)
 
9,076

 
N/A

Gain on available for sale securities
 
478

 
7,967

 
(7,489
)
 
N/A

 
3,753

 
(3,275
)
 
N/A

Total other-than-temporary impairment
 
(1,436
)
 

 
(1,436
)
 
N/A

 
(1,138
)
 
(298
)
 
N/A

Portion of loss recognized in (reclassified from) other comprehensive income
 
(73
)
 
(1,104
)
 
1,031

 
N/A

 
586

 
(659
)
 
N/A

Net impairment losses recognized in earnings
 
(1,509
)
 
(1,104
)
 
(405
)
 
N/A

 
(552
)
 
(957
)
 
N/A

Total other operating revenue
 
$
145,316

 
$
179,944

 
$
(34,628
)
 
(19
)%
 
$
150,761

 
$
(5,445
)
 
(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 47% of total revenue for the third quarter of 2013, excluding provision for credit losses and gains and losses on asset sales, securities and derivatives. We believe that a variety of fee revenue sources provide 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 also may drive growth in our mortgage banking revenue. We expect continued growth in other operating revenue through offering new products and services and by further development of our presence in markets outside of Oklahoma. 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 securities trading, retail brokerage, customer hedging and investment banking increased $1.1 million or 3% over the third quarter of 2012


- 5 -




Securities trading revenue totaled $17.3 million for the third quarter of 2013, down $1.6 million or 8% compared to the third quarter of 2012. Securities trading revenue represents 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. We believe these activities will be permitted under the Volcker Rule of the Dodd-Frank Act.

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 decreased $1.5 million compared to the prior year to $545 thousand for the third quarter of 2013 primarily due to decreased activity by our mortgage banking customers.

Revenue earned from retail brokerage transactions increased $3.1 million or 46% over the third quarter of 2012 to $9.8 million. Retail brokerage revenue is primarily based on fees and commissions earned on sales of fixed income securities, annuities and mutual funds to retail customers. Revenue is primarily based on the volume of customer transactions during the quarter. The number of transactions typically increases with market volatility and decreases with market stability.

Investment banking, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $4.7 million for the third quarter of 2013, a $1.0 million or 29% increase over the third quarter of 2012 related to the timing and volume of completed transactions. The increased volume of transactions is primarily the result of the Company's expansion of its municipal financial advisory service capacity, particularly in the Texas market.

Brokerage and trading revenue decreased $536 thousand compared to the second quarter of 2013. Customer hedging revenue decreased $4.6 million primarily from decreased activity by our mortgage banking customers. Securities trading revenue increased $3.1 million primarily due to municipal securities and U.S. government agency securities. Retail brokerage fees were up $674 thousand and investment banking fees were up $273 thousand.

The proposed Volcker Rule in Title VI of the Dodd-Frank Act prohibits banking entities from engaging in proprietary trading as defined by the Dodd-Frank Act and restricts sponsorship of, or investment in, private equity funds and hedge funds, subject to limited exceptions. Based on the proposed rules, we expect the Company's trading activity to be largely unaffected. The Company's private equity investment activity may be curtailed, but is not expected to result in a material impact to the Company's financial statements. A compliance program will be required for activities permitted under the proposed rules resulting in additional operating and compliance costs by the Company.

Title VII of the Dodd-Frank Act subjects nearly all derivative transactions to Commodity Futures Trading Commission (“CFTC”) or Securities and Exchange Commission (“SEC”) regulations. This includes registration, recordkeeping, reporting, capital, margin and business conduct requirements on major swap dealers and major swap participants. These regulations, which are now largely complete, are comprehensive and establish a wide range of compliance and reporting obligations. However, in the Company's view, these new regulations do not appear to materially limit the Company's ability to effect derivative trades for its customers or materially increase compliance costs.

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 2013 increased $2.3 million or 8% over the third quarter of 2012. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $15.3 million, up $800 thousand or 6%, due to increased transaction volumes and increased dollar amount per transaction. Merchant services fees totaled $10.0 million, up $1.1 million or 12% on increased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.8 million, up $364 thousand or 8% over the third quarter of 2012.

Transaction card revenue was largely unchanged compared to the second quarter of 2013.

Effective October 1, 2011, the Federal Reserve issued its final rule that established a cap on interchange fees banks with more than $10 billion can charge merchants for certain debit card transaction, commonly known as the Durbin Amendment. The final rule has been successfully challenged by retail merchants and merchant trade groups and is currently on appeal. The ultimate resolution of this legal challenge is uncertain.

- 6 -




Trust fees and commissions grew by $4.2 million or 22% over the third quarter of 2012. The acquisition of the Milestone Group by BOK Financial in the third quarter of 2012 added $1.6 billion of fiduciary assets as of September 30, 2013. Trust fees and commissions generated by the Milestone Group were up $1.6 million over the third quarter of 2012. The remaining increase was primarily due to the growth in the fair value of fiduciary assets administered by the Company. Fiduciary assets are assets for which the Company possesses investment discretion on behalf of another or any other similar capacity. The fair value of fiduciary assets administered by the Company totaled $29.6 billion at September 30, 2013, $25.2 billion at September 30, 2012 and $28.3 billion at June 30, 2013. Trust fees and commissions were down $911 thousand compared to the second quarter of 2013 primarily due to the seasonal timing of tax service fees.

In addition to trust fees and commissions where we served as a fiduciary, we also earn fees as administrator to and investment adviser for the Cavanal Hill Funds, a diversified, open-ended investment company established as a business trust under the Investment Company Act of 1940. The Bank is custodian and BOSC, Inc. is distributor for the Cavanal Hill Funds. Products of the Cavanal Hill Funds are offered to customers, employee benefit plans, trusts and the general public in the ordinary course of business. We have voluntarily waived administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment. Waived fees totaled $2.3 million for the third quarter of 2013 compared to $1.9 million for the third quarter of 2012 and $1.9 million for the second quarter of 2013.

Deposit service charges and fees decreased $406 thousand or 2% compared to the third quarter of 2012. Overdraft fees totaled $13.2 million for the third quarter of 2013, a decrease of $1.1 million or 8% compared to the third quarter of 2012. Consumers are generally maintaining higher average balances and better managing their accounts to reduce overdraft fees. Commercial account service charge revenue totaled $9.5 million, up $740 thousand or 8% over the prior year. Service charges on deposit accounts with a standard monthly fee were $2.1 million, down $63 thousand or 3% compared to the third quarter of 2012. Deposit service charges and fees increased $780 thousand over the prior quarter on increased overdraft fee volumes.

Mortgage banking revenue decreased $26.8 million compared to the third quarter of 2012. Revenue from originating and marketing mortgage loans totaled $12.5 million, down $27.8 million or 69% compared to the third quarter of 2012. Mortgage loans funded for sale totaled $1.1 billion in the third quarter of 2013, up $34 million over the third quarter of 2012. Outstanding commitments to originate mortgage loans were down $101 million or 22% compared to September 30, 2012. The decrease in mortgage banking revenue compared to third quarter of 2012 was primarily due to an overall narrowing of gain on sale margins and a shift in product mix toward loans with narrower margins. Approximately 39% of loans originated in the third quarter of 2013 were through correspondent channels, up from 9% for the third quarter of 2012. Refinanced mortgage loans decreased to 30% of loans originated in third quarter of 2013 compared to 61% of loans originated in third quarter of 2012.

We expect that the recent increase in mortgage interest rates will decrease future mortgage loan production volume and continue to narrow gain on sale margins. Some of the cost structure of our mortgage banking division is variable related to changes in production volume.

Mortgage servicing revenue increased $1.0 million or 10% over the third quarter of 2012. The outstanding principal balance of mortgage loans serviced for others totaled $13.3 billion, an increase of $1.5 billion over September 30, 2012.

Mortgage banking revenue decreased $13.1 million compared to the second quarter of 2013. Residential mortgage loans funded for sale decreased $116 million over the previous quarter. Outstanding commitments to originate mortgage loans decreased $196 million or 36% compared to June 30, 2013.

Mortgage servicing revenue increased $698 thousand over the prior quarter. The outstanding balance of mortgage loans serviced for others increased $557 million over June 30, 2013.


- 7 -




Table 3Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
June 30, 2013
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2013
 
2012
 
 
 
 
 
Originating and marketing revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages loan held for sale
 
$
31,047

 
$
40,463

 
$
(9,416
)
 
(23
)%
 
$
17,763

 
$
13,284

 
75
 %
Residential mortgage loan commitments
 
12,668

 
6,512

 
6,156

 
95
 %
 
(15,052
)
 
27,720

 
(184
)%
Forward sales contracts
 
(31,167
)
 
(6,618
)
 
(24,549
)
 
371
 %
 
23,645

 
(54,812
)
 
(232
)%
Total originating and marketing revenue
 
12,548

 
40,357

 
(27,809
)
 
(69
)%
 
26,356

 
(13,808
)
 
(52
)%
Servicing revenue
 
10,938

 
9,909

 
1,029

 
10
 %
 
10,240

 
698

 
7
 %
Total mortgage revenue
 
$
23,486

 
$
50,266

 
$
(26,780
)
 
(53
)%
 
$
36,596

 
$
(13,110
)
 
(36
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
1,080,167

 
$
1,046,608

 
$
33,559

 
3
 %
 
$
1,196,038

 
$
(115,871
)
 
(10
)%
Mortgage loan refinances to total funded
 
30
%
 
61
%
 
 

 
 

 
48
%
 
 

 
 


 
 
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2013
 
2012
 
 
 
June 30,
2013
 
 
Period end outstanding mortgage commitments
 
$
351,196

 
$
452,129

 
$
(100,933
)
 
(22
)%
 
$
547,508

 
$
(196,312
)
 
(36
)%
Outstanding principal balance of mortgage loans serviced for others
 
$
13,298,479

 
$
11,756,350

 
$
1,542,129

 
13
 %
 
$
12,741,651

 
$
556,828

 
4
 %
Net gains on securities, derivatives and other assets

In the third quarter of 2013, we recognized a $478 thousand gain from sales of $356 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential return or sold to reinvest those proceeds into shorter average life securities. In the third quarter of 2012, we recognized an $8.0 million gain from sales of $209 million of available for sale securities and a $3.8 million gain on sales of $1.1 billion of available for sale securities in the second quarter of 2013.

We also maintain a portfolio of residential mortgage-backed securities issued by U.S. government agencies and interest rate derivative contracts designated as an economic hedge of the changes in the fair value of our mortgage servicing rights. The fair value of our mortgage servicing rights fluctuate due to changes in prepayment speeds and other assumptions as more fully described in Note 5 to the Consolidated Financial Statements. As benchmark mortgage rates increase, prepayment speeds slow and the value of our mortgage servicing rights increases. As benchmark mortgage rates fall, prepayment speeds increase and the value of our mortgage servicing rights decreases.

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

Table 4 following shows the relationship between changes in the fair value of mortgage servicing rights and the fair value of fair value option residential mortgage-backed securities and interest rate derivative contracts designated as an economic hedge.


- 8 -




Table 4 -- Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
September 30,
2013
 
June 30,
2013
 
September 30,
2012
Gain (loss) on mortgage hedge derivative contracts, net
 
$
31

 
$
(2,526
)
 
$
645

Gain (loss) on fair value option securities, net
 
(89
)
 
(9,102
)
 
5,455

Gain (loss) on economic hedge of mortgage servicing rights
 
(58
)
 
(11,628
)
 
6,100

Gain (loss) on change in fair value of mortgage servicing rights
 
(346
)
 
14,315

 
(9,576
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
(404
)
 
$
2,687

 
$
(3,476
)
 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
741

 
$
910

 
$
1,750

 
 
 
 
 
 
 
Average primary residential mortgage interest rate
 
4.44
%
 
3.67
%
 
3.55
%
Average secondary residential mortgage interest rate
 
3.51
%
 
2.72
%
 
2.28
%

Primary rates disclosed in Table 4 above represent rates generally available to borrowers on 30 year conforming mortgage loans and affect the value of our mortgage servicing rights. Secondary rates represent rates generally paid on 30 year residential mortgage-backed securities guaranteed by U.S. government agencies and affect the value of securities and derivative contracts used as an economic hedge of our mortgage servicing rights. The difference between average primary and secondary rates for the third quarter of 2013 was 93 basis points compared to 95 basis points for the second quarter of 2013 and 127 basis points for the third quarter of 2012.

As more fully discussed in Note 2 to the Consolidated Financial Statements, we recognized $1.5 million of other-than-temporary impairment losses in earnings during the third quarter of 2013 including a $1.4 million impairment on certain municipal securities and a $140 thousand impairment on certain private-label residential mortgage-backed securities we do not intend to sell. We recognized other-than-temporary impairment losses in earnings of $1.1 million in the third quarter of 2012 and $552 thousand in the second quarter of 2013.

- 9 -




Other Operating Expense

Other operating expense for the third quarter of 2013 totaled $210.6 million, down $11.7 million or 5% compared to the third quarter of 2012. Changes in the fair value of mortgage servicing rights increased operating expense $346 thousand in the third quarter of 2013 and increased operating expense $9.6 million in the third quarter of 2012. Excluding changes in the fair value of mortgage servicing rights, operating expenses decreased $2.5 million or 1% compared to the third quarter of 2012. Personnel expenses increased $3.0 million or 2%. Non-personnel expenses decreased $5.5 million or 6%.

Excluding changes in the fair value of mortgage servicing rights, operating expenses were down $623 thousand compared to the previous quarter. Personnel expenses decreased $2.3 million and non-personnel expenses increased $1.7 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
June 30, 2013
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2013
 
2012
 
 
 
 
 
Regular compensation
 
$
68,483

 
$
66,708

 
$
1,775

 
3
 %
 
$
68,319

 
$
164

 
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
28,276

 
30,756

 
(2,480
)
 
(8
)%
 
31,081

 
(2,805
)
 
(9
)%
Stock-based
 
11,461

 
7,214

 
4,247

 
59
 %
 
9,500

 
1,961

 
21
 %
Total incentive compensation
 
39,737

 
37,970

 
1,767

 
5
 %
 
40,581

 
(844
)
 
(2
)%
Employee benefits
 
17,579

 
18,097

 
(518
)
 
(3
)%
 
19,210

 
(1,631
)
 
(8
)%
Total personnel expense
 
125,799

 
122,775

 
3,024

 
2
 %
 
128,110

 
(2,311
)
 
(2
)%
Business promotion
 
5,355

 
6,054

 
(699
)
 
(12
)%
 
5,770

 
(415
)
 
(7
)%
Charitable contribution to BOKF Foundation
 
2,062

 

 
2,062

 
 %
 

 
2,062

 
 %
Professional fees and services
 
7,183

 
7,991

 
(808
)
 
(10
)%
 
8,381

 
(1,198
)
 
(14
)%
Net occupancy and equipment
 
17,280

 
16,914

 
366

 
2
 %
 
16,909

 
371

 
2
 %
Insurance
 
3,939

 
3,690

 
249

 
7
 %
 
4,044

 
(105
)
 
(3
)%
Data processing and communications
 
25,695

 
26,486

 
(791
)
 
(3
)%
 
26,734

 
(1,039
)
 
(4
)%
Printing, postage and supplies
 
3,505

 
3,611

 
(106
)
 
(3
)%
 
3,580

 
(75
)
 
(2
)%
Net losses and operating expenses of repossessed assets
 
2,014

 
5,706

 
(3,692
)
 
(65
)%
 
282

 
1,732

 
614
 %
Amortization of intangible assets
 
835

 
742

 
93

 
13
 %
 
875

 
(40
)
 
(5
)%
Mortgage banking costs
 
8,753

 
13,036

 
(4,283
)
 
(33
)%
 
7,910

 
843

 
11
 %
Change in fair value of mortgage servicing rights
 
346

 
9,576

 
(9,230
)
 
(96
)%
 
(14,315
)
 
14,661

 
(102
)%
Other expense
 
7,878

 
5,759

 
2,119

 
37
 %
 
8,326

 
(448
)
 
(5
)%
Total other operating expense
 
$
210,644

 
$
222,340

 
$
(11,696
)
 
(5
)%
 
$
196,606

 
$
14,038

 
7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of employees (full-time equivalent)
 
4,626

 
4,627

 
(1
)
 
 %
 
4,712

 
(86
)
 
(2
)%

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

Personnel expense

The increase in personnel expense was primarily due to standard annual merit increases in regular compensation which were effective for the majority of our staff March 1 and increased incentive compensation. Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs increased $1.8 million or 3% over the third quarter of 2012.


- 10 -




Incentive compensation increased $1.8 million or 5% over the third quarter of 2012. 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 decreased $2.5 million or 8% over the third quarter of 2012

The Company also provides stock-based incentive compensation plans. Stock-based compensation plans include both equity and liability awards. Compensation expense for equity awards increased $1.7 million over the third quarter of 2012. Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value. Stock-based compensation expense also includes deferred compensation that will ultimately be settled in cash indexed to the investment performance or changes in earnings per share. Certain executive officers are permitted to defer recognition of taxable income from their stock-based compensation. Deferred compensation may also be diversified into investments other than BOK Financial common stock. Compensation expense reflects changes in the market value of BOK Financial common stock and other investments. Expense based on changes in the fair value of BOK Financial common stock and other investments decreased $304 thousand compared to the the third quarter of 2012. In addition, $7.4 million was accrued in third quarter of 2013 and $4.5 million was accrued in the third quarter of 2012 for the BOK Financial Corp. 2011 True-Up Plan. Approved by shareholders on April 26, 2011, the True-Up Plan is designed to adjust annual and long-term performance-based incentive compensation for certain senior executives either upward or downward based on the earnings per share performance and compensation of comparable senior executives at peer banks for 2006 through 2013. The accrual for the 2011 True-Up Plan totaled $64 million at September 30, 2013. Based on currently available information, amounts estimated to be payable under the 2011 True-Up Plans are approximately $72 million. The final amount due under the 2011 True-Up Plan will be determined as of December 31, 2013 and distributed in 2014. Performance measurement through 2013 may result in future upward or downward adjustments to compensation expense.  

Employee benefit expense decreased $518 thousand or 3% compared to the third quarter of 2012 primarily due to decreased employee retirement plan and other benefit costs.
Personnel costs decreased $2.3 million over the second quarter of 2013 primarily due to a seasonal decrease in payroll taxes. Regular compensation expensed was unchanged compared to the prior quarter. Incentive compensation expense decreased $844 thousand. Cash-based incentive compensation, which rewards employees as they generate business opportunities for the Company by growing loans, deposits, customer relationships or other measurable metrics, decreased $2.8 million. Stock-based incentive compensation expense increased $2.0 million. Employee benefits expense decreased $1.6 million primarily due to a $2.1 million seasonal decrease in payroll taxes. Increased employee medical costs were partially offset by a decrease in employee retirement plan costs. The Company self-insures a portion of its employee health care coverage and these costs may be volatile.


Non-personnel operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, decreased $5.5 million compared to the third quarter of 2012. Mortgage banking costs were down $4.3 million primarily due to a lower provision for potential losses on loans sold to U.S. government agencies under standard representations and warranties. Net losses and operating expenses of repossessed assets were down $3.7 million primarily due to decreased impairment charges based on regularly scheduled appraisal updates. During the third quarter of 2013, the Company made a $2.1 million discretionary contribution to the BOKF Foundation. The BOKF Foundation partners with various charitable organizations to support needs within our communities. All other expenses were up $423 thousand over the third quarter of 2012.

Excluding changes in the fair value of mortgage servicing rights, non-personnel operating expenses increased $1.7 million over the second quarter of 2013 primarily due to the discretionary contribution to the BOKF Foundation during the third quarter. Net losses and operating expenses of repossessed assets increased $1.7 million due to increased impairment charges as a result of regularly scheduled appraisal updates. Professional fees and services were down $1.2 million. Data processing and communications expense decreased $1.0 million compared to the prior quarter due to the benefit from service contract repricings. All other non-personnel expenses increased $171 thousand.

- 11 -




Income Taxes

Income tax expense was $33.5 million or 31% of book taxable income for the third quarter of 2013 compared to $45.8 million or 34% of book taxable income for the third quarter of 2012 and $41.4 million or 34% of book taxable income for the second quarter of 2013. The statute of limitations expired on uncertain income tax positions and the Company adjusted its current income tax liability to amounts on filed tax returns for 2012 during the third quarter of 2013. These adjustments reduced income tax expense by $1.4 million in the third quarter of 2013 and $1.0 million in the third quarter of 2012. The Company also made a charitable contribution to the BOKF Foundation and purchased state transferable tax credits in the third quarter of 2013, which reduced income tax expense by $1.1 million and $860 thousand, respectively. Excluding these items, income tax expense would have been 34% of book taxable income for the third quarter of 2013 and 35% of book taxable income for the third quarter of 2012.

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. The reserve for uncertain tax positions was $13 million at September 30, 2013, $13 million at June 30, 2013 and $12 million at September 30, 2012.
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 and all mortgage banking activities. Wealth Management provides fiduciary services, brokerage and trading, private bank services and investment advisory services in all markets. Wealth Management also originates loans for high net worth clients.

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 after allocation of funds, certain indirect expenses, taxes based on statutory rates, actual net credit losses and capital costs. The cost of funds borrowed from the Funds Management unit by the operating lines of business is transfer priced at rates that approximate market rates for funds with similar duration. Market rates are generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk.

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

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

As shown in Table 6, net income attributable to our lines of business decreased $4.9 million or 8% compared to the third quarter of 2012. The decrease was primarily due to lower mortgage banking revenue, partially offset by growth in other fee-based revenue and lower credit losses.


- 12 -




Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Commercial Banking
 
$
39,716

 
$
33,351

 
$
117,775

 
$
109,651

Consumer Banking
 
11,830

 
22,050

 
52,575

 
57,603

Wealth Management
 
3,965

 
5,038

 
10,724

 
15,130

Subtotal
 
55,511

 
60,439

 
181,074

 
182,384

Funds Management and other
 
20,227

 
26,943

 
62,559

 
86,242

Total
 
$
75,738

 
$
87,382

 
$
243,633

 
$
268,626



- 13 -




Commercial Banking

Commercial Banking contributed $39.7 million to consolidated net income in the third quarter of 2013, up $6.4 million or 19% over the third quarter of 2012. Growth in commercial banking net income was largely due to a decrease in net loans charged off and lower repossessed asset costs.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue from external sources
 
$
91,540

 
$
91,381

 
$
159

 
$
272,889

 
$
274,423

 
$
(1,534
)
 
Net interest expense from internal sources
 
(9,405
)
 
(11,002
)
 
1,597

 
(27,907
)
 
(34,491
)
 
6,584

 
Total net interest revenue
 
82,135

 
80,379

 
1,756

 
244,982

 
239,932

 
5,050

 
Net loans charged off (recovered)
 
(1,326
)
 
3,253

 
(4,579
)
 
(219
)
 
10,393

 
(10,612
)
 
Net interest revenue after net loans charged off (recovered)
 
83,461

 
77,126

 
6,335

 
245,201

 
229,539

 
15,662

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
42,507

 
40,091

 
2,416

 
127,269

 
116,635

 
10,634

 
Gain on financial instruments and other assets, net
 
2

 

 
2

 
83

 
14,407

 
(14,324
)
 
Other operating revenue
 
42,509

 
40,091

 
2,418

 
127,352

 
131,042

 
(3,690
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
27,011

 
25,655

 
1,356

 
79,214

 
76,003

 
3,211

 
Net losses and expenses of repossessed assets
 
2,157

 
4,908

 
(2,751
)
 
3,111

 
10,577

 
(7,466
)
 
Other non-personnel expense
 
19,084

 
19,571

 
(487
)
 
59,858

 
56,131

 
3,727

 
Corporate allocations
 
12,717

 
12,499

 
218

 
37,612

 
38,408

 
(796
)
 
Total other operating expense
 
60,969

 
62,633

 
(1,664
)
 
179,795

 
181,119

 
(1,324
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
65,001

 
54,584

 
10,417

 
192,758

 
179,462

 
13,296

 
Federal and state income tax
 
25,285

 
21,233

 
4,052

 
74,983

 
69,811

 
5,172

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
39,716

 
$
33,351

 
$
6,365

 
$
117,775

 
$
109,651

 
$
8,124

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,460,986

 
$
10,065,208

 
$
395,778

 
$
10,470,800

 
$
9,981,793

 
$
489,007

 
Average loans
 
9,722,064

 
9,117,263

 
604,801

 
9,640,823

 
9,001,334

 
639,489

 
Average deposits
 
9,150,841

 
8,446,680

 
704,161

 
9,141,123

 
8,338,034

 
803,089

 
Average invested capital
 
911,229

 
865,157

 
46,072

 
900,789

 
880,777

 
20,012

 
Return on average assets
 
1.51
 %
 
1.32
%
 
19

bp
1.50
%
 
1.47
%
 
3

bp
Return on invested capital
 
17.29
 %
 
15.34
%
 
195

bp
17.48
%
 
16.63
%
 
85

bp
Efficiency ratio
 
48.92
 %
 
51.99
%
 
(307
)
bp
48.30
%
 
50.80
%
 
(250
)
bp
Net charge-offs (annualized) to average loans
 
(0.05
)%
 
0.14
%
 
(19
)
bp
%
 
0.15
%
 
(15
)
bp

Net interest revenue increased $1.8 million or 2% over the prior year. Growth in net interest revenue was primarily due to a $605 million increase in average loan balances and a $704 million increase in average deposits over the third quarter of 2012, partially offset by reduced yields on loans and deposits sold to our Funds Management unit.


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Fees and commissions revenue increased $2.4 million or 6% over the third quarter of 2012 primarily due to a $1.8 million increase in transaction card revenues. Commercial deposit service charges and fees increased $613 thousand over the prior year.

Operating expenses decreased $1.7 million or 3% compared to the third quarter of 2012. Personnel costs increased $1.4 million or 5% primarily due to standard annual merit increases and headcount. Net losses and operating expenses on repossessed assets decreased $2.8 million compared to the third quarter of 2012, primarily due to a decrease in impairment charges based on regularly scheduled appraisal updates. Other non-personnel expenses and corporate expense allocations were largely unchanged.

The average outstanding balance of loans attributed to Commercial Banking increased $605 million to $9.7 billion for the third quarter of 2013. 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 $9.2 billion for the third quarter of 2013, up $704 million or 8% over the third quarter of 2012. Average balances attributed to our commercial & industrial loan customers increased $248 million or 9%, treasury services customers were up $175 million or 12%, energy customers increased $135 million or 11% and small business customers grew by $117 million or 6% over the third quarter of 2012. Commercial customers continue to maintain high account balances due to continued economic uncertainty and persistently low yields available on high quality investments.


Consumer Banking

Consumer Banking services are provided through five primary distribution channels:  traditional branches, supermarket 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 correspondent loan originators.

Consumer Banking contributed $11.8 million to consolidated net income for the third quarter of 2013, down $10.2 million compared to the third quarter of 2012 primarily due to a decrease in mortgage banking revenue, partially offset by lower mortgage banking costs. Excluding the impact of mortgage banking, net interest revenue was up. Non-personnel expenses and corporate expense allocations were also lower compared to the prior year. Changes in fair value of our mortgage servicing rights, net of economic hedge, increased net income attributed to consumer banking by $247 thousand in the third quarter of 2013, compared to decreasing net income attributed to Consumer Banking by $2.1 million in the third quarter of 2012.


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Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue from external sources
 
$
25,131

 
$
24,862

 
$
269

 
$
74,056

 
$
77,173

 
$
(3,117
)
 
Net interest revenue from internal sources
 
5,060

 
5,410

 
(350
)
 
15,711

 
15,093

 
618

 
Total net interest revenue
 
30,191

 
30,272

 
(81
)
 
89,767

 
92,266

 
(2,499
)
 
Net loans charged off
 
1,331

 
338

 
993

 
3,663

 
5,991

 
(2,328
)