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BOK Financial 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
BOKF-2014.09.30-10Q


 

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, 2014
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: 69,337,498 shares of common stock ($.00006 par value) as of September 30, 2014.
 





BOK Financial Corporation
Form 10-Q
Quarter Ended September 30, 2014

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 $75.6 million or $1.09 per diluted share for the third quarter of 2014, compared to $75.7 million or $1.10 per diluted share for the third quarter of 2013 and $75.9 million or $1.10 per diluted share for the second quarter of 2014

Highlights of the third quarter of 2014 included:
Net interest revenue totaled $166.8 million for the third quarter of 2014, compared to $167.9 million for the third quarter of 2013 and $166.1 million for the second quarter of 2014. Net interest margin decreased to 2.67% for the third quarter of 2014 primarily due to increased deposits at the Federal Reserve Bank funded by Federal Home Loan Bank borrowings and continued pressure on loan pricing. Net interest margin was 2.75% for the third quarter of 2013 and 2.75% for the second quarter of 2014
Fees and commissions revenue totaled $158.5 million for the third quarter of 2014, a $13.3 million or 9% increase over the third quarter of 2013. Growth in fiduciary and asset management, mortgage banking and brokerage and trading revenue was partially offset by a decrease in deposit service charges and fees. Fees and commissions revenue decreased $5.5 million compared to the second quarter of 2014, primarily due to a decrease in brokerage and trading and mortgage banking revenue.
Change in the fair value of mortgage servicing rights, net of economic hedges, increased pre-tax net income in the third quarter of 2014 by $4.8 million, decreased pre-tax net income in the third quarter of 2013 by $404 thousand and decreased pre-tax net income by $1.5 million in the second quarter of 2014.
Operating expenses totaled $221.8 million for the third quarter of 2014, an increase of $11.5 million over the third quarter of 2013. Personnel costs decreased $2.8 million primarily due to lower incentive compensation expense, partially offset by increased regular compensation expense. Non-personnel expense increased $14.3 million. Professional fees and services, data processing and communications and net losses and operating expenses on repossessed assets increased over the prior year. Operating expenses increased $7.1 million over the previous quarter primarily due to increased professional fees and services expense and net losses and operating expenses of repossessed assets.
No provision for credit losses was recorded in the third quarter of 2014 or the second quarter of 2014. An $8.5 million negative provision for credit losses was recorded in the third quarter of 2013. Gross charge-offs were $2.6 million in the third quarter of 2014, $4.7 million in the third quarter of 2013 and $3.5 million in the second quarter of 2014. Recoveries were $3.1 million in the third quarter of 2014, compared to $4.4 million in the third quarter of 2013 and $5.5 million in the second quarter of 2014.
The combined allowance for credit losses totaled $192 million or 1.41% of outstanding loans at September 30, 2014, compared to $192 million or 1.43% of outstanding loans at June 30, 2014. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $144 million or 1.06% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at September 30, 2014 and $145 million or 1.09% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2014.
Outstanding loan balances were $13.7 billion at September 30, 2014, an increase of $257 million over June 30, 2014. Commercial loan balances grew by $204 million and commercial real estate loan balances were up $69 million. Residential mortgage loans decreased by $29 million and consumer loan balances increased $12 million.
Period end deposits totaled $20.3 billion at September 30, 2014, a $283 million decrease compared to June 30, 2014. Interest-bearing transaction accounts decreased $454 million, partially offset by a $130 million increase in demand deposits and a $49 million increase in time deposits.
The Company's Tier 1 common equity ratio, as defined by banking regulations, was 13.54% at September 30, 2014 and 13.46% at June 30, 2014. The Company and its subsidiary bank continue to exceed the regulatory definition of well capitalized. The Company's Tier 1 capital ratio was 13.71% at September 30, 2014 and 13.63% at June 30, 2014. Total capital ratio was 15.09% at September 30, 2014 and 15.38% at June 30, 2014. The Company's leverage ratio was 10.22% at September 30, 2014 and 10.26% at June 30, 2014.

- 1 -



The Company paid a regular quarterly cash dividend of $28 million or $0.40 per common share during the third quarter of 2014. On October 28, 2014, the board of directors approved an increase in the quarterly cash dividend to $0.42 per common share payable on or about December 1, 2014 to shareholders of record as of November 14, 2014.
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 $166.8 million for the third quarter of 2014 compared to $167.9 million for the third quarter of 2013 and $166.1 million for the second quarter of 2014. Net interest margin was 2.67% for the third quarter of 2014, 2.75% for the third quarter of 2013 and 2.75% for the second quarter of 2014.

Net interest revenue decreased $1.1 million compared to the third quarter of 2013. Net interest revenue decreased $7.2 million primarily due to continued narrowing of interest rate spreads, partially offset by a $6.3 million increase due to the growth in average earnings assets over the third quarter of 2013. Growth in average earning assets was driven by growth in average outstanding loans, partially offset by a decrease in average securities balances.

The tax-equivalent yield on earning assets was 2.93% for the third quarter of 2014, down 10 basis points from the third quarter of 2013. Loan yields decreased 28 basis points. Spreads have narrowed due to market pricing pressure in our loan portfolio. The available for sale securities portfolio yield increased 2 basis points to 1.95%. Cash flows received from payments on residential mortgage-backed securities are currently being reinvested in short-duration securities that yield nearly 2%. Funding costs were down 1 basis point compared to the third quarter of 2013. The cost of interest-bearing deposits decreased 2 basis points and the cost of other borrowed funds increased 5 basis points largely due to the mix of funding sources. Additionally, the benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 15 basis points in the third quarter of 2014 compared to 14 basis points in the third quarter of 2013.

Average earning assets for the third quarter of 2014 increased $744 million or 3% over the third quarter of 2013. Average loans, net of allowance for loan losses, increased $1.1 billion due primarily to growth in average commercial and commercial real estate loans. The average balance of available for sale securities decreased $1.0 billion. We intend to allow the size of our bond portfolio to decrease through normal monthly runoff to better position the balance sheet for a longer-term rising rate environment. We anticipate an additional $300 million reduction in our bond portfolio over the remainder of 2014. This reduction in earning assets is expected to be partially offset by quarterly loan growth in low double-digits for the balance of the year. The resulting shift in earning asset mix should be supportive of net interest margin. The average balance of interest-bearing cash and cash equivalents was up $563 million compared to the third quarter of 2013. At the end of August, we increased our borrowings from the Federal Home Loan Bank by approximately $1.5 billion, earning a small spread by depositing the proceeds in the Federal Reserve. On a full-quarter basis, this will be additive to pre-tax net income by approximately $800 thousand, net interest margin will decrease by 15 basis points and the Tier 1 leverage ratio will also decline by approximately 50 basis points. The average balances of residential mortgage loans held for sale, investment securities and fair value option securities primarily held as an economic hedge of our mortgage servicing rights and residential mortgage loans held for sale were up over the prior year, partially offset by a decrease in the average balance of trading securities.

Average deposits increased $780 million over the third quarter of 2013, including a $690 million increase in average demand deposit balances and a $197 million increase in average interest-bearing transaction accounts, partially offset by a $132 million decrease in average time deposits. Average borrowed funds decreased $69 million compared to the third quarter of 2013 primarily due to decreased funds purchased, partially offset by increased borrowings from the Federal Home Loan Banks and repurchase agreements.


- 2 -



Net interest margin decreased 8 basis points compared to the second quarter of 2014. The yield on average earning assets decreased 9 basis points. The loan portfolio yield decreased 7 basis points to 3.78% primarily due to continued market pricing pressure. The yield on the available for sale securities portfolio decreased 1 basis point to 1.95%. Funding costs were down 1 basis point to 0.41%. Rates paid on time deposits increased 1 basis point. The cost of other borrowed funds increased 1 basis point over the second quarter. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was unchanged.
Average earning assets increased $688 million during the third quarter of 2014, primarily related to a $583 million increase in interest-bearing cash and cash equivalents as increased borrowings from the Federal Home Loan Banks were deposited in the Federal Reserve to earn a spread. A $274 million decrease in the available for sale securities portfolio was partially offset by growth in average outstanding loans of $254 million over the previous quarter. Average commercial loan balances were up $202 million and average commercial real estate loan balances increased $68 million. The average balance of residential mortgage loans held for sale increased $92 million. The average balance of restricted equity securities increased $45 million, as our required holdings of Federal Home Loan Bank stock increased in proportion to our increased borrowings.
Average deposits decreased $270 million compared to the previous quarter. Demand deposit balances increased $146 million. Interest-bearing transaction account balances decreased $377 million and time deposit account balances decreased $26 million. The average balance of borrowed funds increased $897 million compared to the second quarter of 2014, primarily due to a $1.0 billion increase in average borrowings from the Federal Home Loan Banks.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately ¾ of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will re-price within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that re-price more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally re-price more quickly than liabilities. Among the strategies that we use to manage toward a relatively rate-neutral position, we purchase fixed rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market rate sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. 

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

- 3 -



Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
Sept. 30, 2014 / 2013
 
Nine Months Ended
Sept. 30, 2014 / 2013
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield /
Rate
 
Change
 
Volume
 
Yield
/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
246

 
$
296

 
$
(50
)
 
$
432

 
$
526

 
$
(94
)
Trading securities
 
(127
)
 
(237
)
 
110

 
(605
)
 
(898
)
 
293

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(196
)
 
(126
)
 
(70
)
 
(1,121
)
 
(761
)
 
(360
)
Tax-exempt securities
 
104

 
145

 
(41
)
 
647

 
1,425

 
(778
)
Total investment securities
 
(92
)
 
19

 
(111
)
 
(474
)
 
664

 
(1,138
)
Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(4,910
)
 
(5,445
)
 
535

 
(17,564
)
 
(13,458
)
 
(4,106
)
Tax-exempt securities
 
(153
)
 
(238
)
 
85

 
(331
)
 
(566
)
 
235

Total available for sale securities
 
(5,063
)
 
(5,683
)
 
620

 
(17,895
)
 
(14,024
)
 
(3,871
)
Fair value option securities
 
99

 
(13
)
 
112

 
(457
)
 
(530
)
 
73

Restricted equity securities
 
944

 
(410
)
 
1,354

 
889

 
(1,317
)
 
2,206

Residential mortgage loans held for sale
 
761

 
818

 
(57
)
 
788

 
141

 
647

Loans
 
1,846

 
11,012

 
(9,166
)
 
952

 
27,896

 
(26,944
)
Total tax-equivalent interest revenue
 
(1,386
)
 
5,802

 
(7,188
)
 
(16,370
)
 
12,458

 
(28,828
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
(300
)
 
(6
)
 
(294
)
 
(1,160
)
 
225

 
(1,385
)
Savings deposits
 
(6
)
 
5

 
(11
)
 
(42
)
 
33

 
(75
)
Time deposits
 
(501
)
 
(544
)
 
43

 
(2,632
)
 
(2,065
)
 
(567
)
Funds purchased
 
(75
)
 
(78
)
 
3

 
(376
)
 
(187
)
 
(189
)
Repurchase agreements
 
18

 
36

 
(18
)
 
76

 
23

 
53

Other borrowings
 
457

 
120

 
337

 
272

 
(465
)
 
737

Subordinated debentures
 
(55
)
 
(1
)
 
(54
)
 
(67
)
 
7

 
(74
)
Total interest expense
 
(462
)
 
(468
)
 
6

 
(3,929
)
 
(2,429
)
 
(1,500
)
Tax-equivalent net interest revenue
 
(924
)
 
6,270

 
(7,194
)
 
(12,441
)
 
14,887

 
(27,328
)
Change in tax-equivalent adjustment
 
174

 
 
 
 
 
262

 
 
 
 
Net interest revenue
 
$
(1,098
)
 
 
 
 
 
$
(12,703
)
 
 
 
 
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 $163.0 million for the third quarter of 2014, a $19.6 million increase over the third quarter of 2013 and a $479 thousand increase over the second quarter of 2014. Fees and commissions revenue increased $13.3 million over the third quarter of 2013 and decreased $5.5 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 $4.8 million in the third quarter of 2014, decreased other operating revenue $1.5 million in the second quarter of 2014 and decreased operating revenue $404 thousand in the third quarter of 2013. The third quarter of 2013 included $1.5 million of other-than temporary impairment charges.

Table 2Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
September 30,
 
 
 
 
 
Three Months Ended
June 30, 2014
 
 
 
 
 
 
2014
 
2013
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
Increase (Decrease)
 
% Increase (Decrease)
Brokerage and trading revenue
 
$
35,263

 
$
32,338

 
$
2,925

 
9
 %
 
$
39,056

 
$
(3,793
)
 
(10
)%
Transaction card revenue
 
31,578

 
30,055

 
1,523

 
5
 %
 
31,510

 
68

 
 %
Fiduciary and asset management revenue
 
29,738

 
23,892

 
5,846

 
25
 %
 
29,543

 
195

 
1
 %
Deposit service charges and fees
 
22,508

 
24,742

 
(2,234
)
 
(9
)%
 
23,133

 
(625
)
 
(3
)%
Mortgage banking revenue
 
26,814

 
23,486

 
3,328

 
14
 %
 
29,330

 
(2,516
)
 
(9
)%
Bank-owned life insurance
 
2,326

 
2,408

 
(82
)
 
(3
)%
 
2,274

 
52

 
2
 %
Other revenue
 
10,320

 
8,314

 
2,006

 
24
 %
 
9,208

 
1,112

 
12
 %
Total fees and commissions revenue
 
158,547

 
145,235

 
13,312

 
9
 %
 
164,054

 
(5,507
)
 
(3
)%
Loss on other assets, net
 
(501
)
 
(377
)
 
(124
)
 
N/A

 
(52
)
 
(449
)
 
N/A

Gain (loss) on derivatives, net
 
(93
)
 
31

 
(124
)
 
N/A

 
831

 
(924
)
 
N/A

Gain (loss) on fair value option securities, net
 
(332
)
 
(80
)
 
(252
)
 
N/A

 
4,176

 
(4,508
)
 
N/A

Change in fair value of mortgage servicing rights
 
5,281

 
(346
)
 
5,627

 
N/A

 
(6,444
)
 
11,725

 
N/A

Gain on available for sale securities, net
 
146

 
478

 
(332
)
 
N/A

 
4

 
142

 
N/A

Total other-than-temporary impairment
 

 
(1,436
)
 
1,436

 
N/A

 

 

 
N/A

Portion of loss recognized in (reclassified from) other comprehensive income
 

 
(73
)
 
73

 
N/A

 

 

 
N/A

Net impairment losses recognized in earnings
 

 
(1,509
)
 
1,509

 
N/A

 

 

 
N/A

Total other operating revenue
 
$
163,048

 
$
143,432

 
$
19,616

 
14
 %
 
$
162,569

 
$
479

 
 %
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 49% of total revenue for the third quarter of 2014, 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.


- 5 -



Brokerage and trading revenue, which includes revenues from securities trading, customer hedging, retail brokerage and investment banking, increased $2.9 million over the third quarter of 2013

Securities trading revenue was $9.5 million for the third quarter of 2014, an increase of $1.2 million over the third quarter of 2013. Securities trading revenue includes net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers. 

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 $10.9 million for the third quarter of 2014, a $1.2 million increase over the prior year primarily due to higher volumes of derivative contracts executed by our mortgage banking and foreign exchange customers.

Revenue earned from retail brokerage transactions decreased $1.3 million or 14% compared to the third quarter of 2013 to $8.4 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 $6.5 million for the third quarter of 2014, a $1.8 million or 38% increase over the third quarter of 2013 primarily related to increased syndication fees.

Brokerage and trading revenue decreased $3.8 million compared to the second quarter of 2014. The second quarter included $1.6 million of recoveries received from the Lehman Brothers and MF Global bankruptcies. Excluding these recoveries, customer hedging revenue increased by $2.6 million. Securities trading revenue decreased $2.9 million. Retail brokerage fees were $1.9 million lower than the prior quarter. Investment banking continued to perform well, largely unchanged compared to the second quarter.

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served. Transaction card revenue for the third quarter of 2014 increased $1.5 million or 5% over the third quarter of 2013. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $16.2 million, a $952 thousand or 6% increase over the prior year, due to increased transaction volumes and increased dollar amounts per transaction. Merchant services fees totaled $10.6 million, an increase of $638 thousand or 6% on increased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.7 million, largely unchanged compared to the third quarter of 2013.

Transaction card revenue was largely unchanged compared to the second quarter of 2014. Increased revenue from processing transactions on behalf of members of our TransFund EFT network was partially offset by a decrease in interchange fees paid on debit cards issued by the Company and decreased revenue from merchant services fees.

Fiduciary and asset management revenue grew by $5.8 million or 25% over the third quarter of 2013. The acquisition of Topeka, Kansas-based GTRUST Financial Corporation in the first quarter of 2014 and Houston, Texas-based MBM Advisors in the second quarter of 2014 added $1.8 million of revenue in the third quarter of 2014 and $2.0 billion of fiduciary assets as of September 30, 2014. 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 $34.0 billion at September 30, 2014, $29.6 billion at September 30, 2013 and $32.7 billion at June 30, 2014.

Fiduciary and asset management revenue increased $195 thousand over the second quarter of 2014. A full quarter of revenue from the acquisition of MBM Advisors in the second quarter of 2014 added approximately $835 thousand in fiduciary and asset management revenue over the second quarter of 2014. This was offset by the seasonal timing of tax service fees which were recognized in the previous quarter.


- 6 -



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 $2.6 million for the third quarter of 2014 compared to $2.3 million for the third quarter of 2013 and $2.4 million for the second quarter of 2014.

Deposit service charges and fees were $22.5 million for the third quarter of 2014 compared to $24.7 million for the third quarter of 2013. Overdraft fees totaled $10.9 million for the third quarter of 2014, a decrease of $2.3 million or 17% compared to the third quarter of 2013. Commercial account service charge revenue totaled $9.7 million, an increase of $231 thousand or 2% over the prior year. Service charges on deposit accounts with a standard monthly fee were $1.9 million, a decrease of $188 thousand or 9% compared to the third quarter of 2013. Deposit service charges and fees decreased $625 thousand compared to the prior quarter primarily due to decreased overdraft fee volumes, partially offset by increased commercial account service charges.

Mortgage banking revenue increased $3.3 million over the third quarter of 2013. Mortgage production revenue increased $2.1 million. Net realized gains from loans funded and sold in the secondary market decreased $2.3 million. Loans sold increased over the prior year, but gains on sale margin decreased primarily due to increased activity in our correspondent origination channel. Approximately 49% of loans originated in the third quarter of 2014 were through correspondent channels, up from 39% for the third quarter of 2013. Mortgage loans funded for sale totaled $1.4 billion in the third quarter of 2014, an increase of $314 million over the third quarter of 2013. The valuation of loan commitments and loans that have closed but not yet sold, net of forward sales contracts at the end of the third quarter of 2014 was $4.5 million more than at the end of the third quarter of 2013. Mortgage servicing revenue grew by $1.2 million or 11% over the third quarter of 2013. The outstanding principal balance of mortgage loans serviced for others totaled $15.5 billion, an increase of $2.2 billion or 17%.
Mortgage banking revenue decreased $2.5 million compared to the second quarter of 2014. Revenue from mortgage loan production decreased $3.0 million. Net realized gains from loans funded and sold into the secondary market increased $4.4 million over the second quarter, primarily driven by a $354 million increase in loans sold. Average gains on sale margin decreased 3 basis points compared to the second quarter, primarily due to increased activity in our correspondent origination channel. The valuation of loan commitments and loans that have closed but have not yet been sold, net of forward sales contracts at the end of the third quarter was $7.4 million less than at the end of the second quarter of 2014. Revenue from mortgage loan servicing grew by $518 thousand due to an increase in the volume of loans serviced. The outstanding balance of mortgage loans serviced for others increased $873 million over June 30, 2014.


- 7 -



Table 3Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
June 30, 2014
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2014
 
2013
 
 
 
 
Net realized gains on mortgage loans sold
 
$
17,100

 
$
19,440

 
$
(2,340
)
 
 
(12
)%
 
$
12,746

 
$
4,354

 
 
34
 %
Change in net unrealized gains (losses) on mortgage loans held for sale
 
(3,110
)
 
11,618

 
(14,728
)
 
 
(127
)%
 
5,052

 
(8,162
)
 
 
(162
)%
Change in fair value of mortgage loan commitments
 
(5,136
)
 
12,657

 
(17,793
)
 
 
(141
)%
 
7,581

 
(12,717
)
 
 
(168
)%
Change in fair value of forward sales contracts
 
5,839

 
(31,167
)
 
37,006

 
 
(119
)%
 
(7,652
)
 
13,491

 
 
(176
)%
Total mortgage production revenue
 
14,693

 
12,548

 
2,145

 
 
17
 %
 
17,727

 
(3,034
)
 
 
(17
)%
Servicing revenue
 
12,121

 
10,938

 
1,183

 
 
11
 %
 
11,603

 
518

 
 
4
 %
Total mortgage revenue
 
$
26,814

 
$
23,486

 
$
3,328

 
 
14
 %
 
$
29,330

 
$
(2,516
)
 
 
(9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end outstanding mortgage commitments
 
$
537,975

 
$
351,196

 
$
186,779

 
 
53
 %
 
$
546,864

 
$
(8,889
)
 
 
(2
)%
Mortgage loans funded for sale
 
1,394,211

 
1,080,167

 
314,044

 
 
29
 %
 
1,090,629

 
303,582

 
 
28
 %
Average primary residential mortgage interest rate
 
4.14
%
 
4.44
%
 
(30
)
bp
 
 
 
4.23
%
 
(9
)
bp
 
 
Mortgage loan refinances to total funded
 
26
%
 
30
%
 
 

 
 
 

 
25
%
 
 

 
 
 

Outstanding principal balance of mortgage loans serviced for others
 
$
15,499,653

 
$
13,298,479

 
$
2,201,174

 
 
17
 %
 
$
14,626,291

 
$
873,362

 
 
6
 %
Net gains on securities, derivatives and other assets

In the third quarter of 2014, we recognized a $146 thousand net gain from sales of $553 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential return or to move into securities that will perform better in a rising rate environment. In the third quarter of 2013, we recognized a $478 thousand net gain from sales of $356 million of available for sale securities and in the second quarter of 2014, we recognized a $4 thousand net gain on sales of $800 million of available for sale securities.

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 6 to the Consolidated Financial Statements. As benchmark mortgage rates increase, prepayment speeds slow and the value of our mortgage servicing rights increases. As benchmark mortgage rates fall, prepayment speeds increase and the value of our mortgage servicing rights decreases.

Changes in the fair value of mortgage servicing rights are highly dependent on changes in primary mortgage rates, rates offered to borrowers, and assumptions about servicing revenues, servicing costs and discount rates. Changes in the fair value of residential mortgage-backed securities 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 other assumptions, such as estimated earnings on escrow accounts, cost of servicing, discount rate, prepayment speeds and delinquency rates can also cause significant quarterly earnings volatility.

- 8 -




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.

Table 4 -- Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
September 30,
2014
 
June 30,
2014
 
September 30,
2013
Gain (loss) on mortgage hedge derivative contracts, net
 
$
(93
)
 
$
831

 
$
31

Gain (loss) on fair value option securities, net
 
(341
)
 
4,074

 
(89
)
Gain (loss) on economic hedge of mortgage servicing rights
 
(434
)
 
4,905

 
(58
)
Gain (loss) on change in fair value of mortgage servicing rights
 
5,281

 
(6,444
)
 
(346
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
4,847

 
$
(1,539
)
 
$
(404
)
 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
830

 
$
721

 
$
741

 
 
 
 
 
 
 
Primary residential mortgage interest rate at period end
 
4.20
%
 
4.14
%
 
4.32
%
Secondary residential mortgage interest rate at period end
 
3.20
%
 
3.17
%
 
3.34
%

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.




- 9 -



Other Operating Expense

Other operating expense for the third quarter of 2014 totaled $221.8 million, a $11.5 million or 6% increase over the third quarter of 2013. Personnel expenses decreased $2.8 million or 2%. Non-personnel expenses increased $14.3 million or 17% over the prior year.

Operating expenses increased $7.1 million over the previous quarter. Personnel expense decreased $671 thousand. Non-personnel expense increased $7.8 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
June 30, 2014
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2014
 
2013
 
 
 
 
 
Regular compensation
 
$
74,662

 
$
69,363

 
$
5,299

 
8
 %
 
$
73,064

 
$
1,598

 
2
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
28,669

 
27,396

 
1,273

 
5
 %
 
29,042

 
(373
)
 
(1
)%
Share-based
 
3,824

 
11,461

 
(7,637
)
 
(67
)%
 
3,527

 
297

 
8
 %
Total incentive compensation
 
32,493

 
38,857

 
(6,364
)
 
(16
)%
 
32,569

 
(76
)
 
 %
Employee benefits
 
15,888

 
17,579

 
(1,691
)
 
(10
)%
 
18,081

 
(2,193
)
 
(12
)%
Total personnel expense
 
123,043

 
125,799

 
(2,756
)
 
(2
)%
 
123,714

 
(671
)
 
(1
)%
Business promotion
 
6,160

 
5,355

 
805

 
15
 %
 
7,150

 
(990
)
 
(14
)%
Charitable contributions to BOKF Foundation
 

 
2,062

 
(2,062
)
 
N/A

 

 

 
N/A

Professional fees and services
 
14,763

 
7,183

 
7,580

 
106
 %
 
11,054

 
3,709

 
34
 %
Net occupancy and equipment
 
18,892

 
17,280

 
1,612

 
9
 %
 
18,789

 
103

 
1
 %
Insurance
 
4,793

 
3,939

 
854

 
22
 %
 
4,467

 
326

 
7
 %
Data processing and communications
 
29,971

 
25,695

 
4,276

 
17
 %
 
29,071

 
900

 
3
 %
Printing, postage and supplies
 
3,380

 
3,505

 
(125
)
 
(4
)%
 
3,429

 
(49
)
 
(1
)%
Net losses and operating expenses of repossessed assets
 
4,966

 
2,014

 
2,952

 
147
 %
 
1,118

 
3,848

 
344
 %
Amortization of intangible assets
 
1,100

 
835

 
265

 
32
 %
 
949

 
151

 
16
 %
Mortgage banking costs
 
7,734

 
8,753

 
(1,019
)
 
(12
)%
 
7,960

 
(226
)
 
(3
)%
Other expense
 
7,032

 
7,878

 
(846
)
 
(11
)%
 
7,006

 
26

 
 %
Total other operating expense
 
$
221,834

 
$
210,298

 
$
11,536

 
5
 %
 
$
214,707

 
$
7,127

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,669

 
4,626

 
43

 
1
 %
 
4,657

 
12

 
 %
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 $5.3 million or 8% over the third quarter of 2013. Although the average number of employees was largely unchanged compared to the prior year, recent additions have been higher-costing wealth management, compliance and risk management positions. Growth in these positions was partially offset by a decrease in the average number of employees in consumer banking. In addition, standard annual merit increases in regular compensation were effective for the majority of our staff March 1.

Incentive compensation decreased $6.4 million compared to the third quarter of 2013. Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Total cash-based incentive compensation increased $1.3 million or 5% compared to the third quarter of 2013

- 10 -




The Company also provides share-based incentive compensation plans. Share-based compensation plans include both equity and liability awards. Compensation expense for equity awards increased $369 thousand and compensation expense for liability awards decreased $8.0 million compared to the third quarter of 2013.

Share-based compensation expense included accruals for amounts payable to certain executive officers of the Company under the 2011 True-Up Plan. Approved by shareholders on April 26, 2011, the True-Up Plan was 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 peer group of banks was determined based on asset size and included an equal number of publicly-traded SEC registered bank holding companies with the Company being the median bank. Amounts accrued related to the 2011 True-Up Plan were paid in May 2014. Share-based compensation expense for the third quarter of 2013 included a $7.4 million expense related to accruals for the 2011 True-Up Plan.

Share-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 share-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. Expenses based on changes in the fair value of BOK Financial common stock and other investments decreased $657 thousand compared to the third quarter of 2013.

Employee benefit expense decreased $1.7 million or 10% compared to the third quarter of 2013 primarily due to decreased employee medical costs. The Company self-insures a portion of its employee health care coverage and these costs may be volatile.
Personnel costs decreased $671 thousand compared to the second quarter of 2014. Regular compensation expense increased $1.6 million over prior quarter. Incentive compensation expense was largely unchanged compared to the the previous quarter. 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 $373 thousand. Share-based compensation expense increased $297 thousand. Employee benefits expense decreased $2.2 million primarily due to a seasonal decrease in payroll taxes, partially offset by an increase in employee medical costs.


Non-personnel operating expenses

Non-personnel operating expenses increased $14.3 million or 17% over the third quarter of 2013. Professional fees and services expense increased $7.6 million due to increased risk management and regulatory compliance costs. Data processing and communication expense was up $4.3 million primarily due to increased transaction activity. Net losses and operating expenses of repossessed assets increased $3.0 million primarily due to impairment losses related to regularly scheduled appraisal updates. During the third quarter of 2013, the Company made a $2.1 million discretionary contribution to the BOKF Foundation.
Non-personnel expense increased $7.8 million over the second quarter of 2014. Net losses and operating expenses of repossessed assets increased $3.8 million over the prior quarter, primarily due to two write-downs identified through regularly scheduled appraisal updates. Professional fees and services expense increased $3.7 million largely due to increased risk management and regulatory compliance costs including $2.2 million for testing of our system and processes.

- 11 -



Income Taxes

Income tax expense was $31.9 million or 30% of book taxable income for the third quarter of 2014 compared to $33.5 million or 31% of book taxable income for the third quarter of 2013 and $37.2 million or 33% of book taxable income for the second quarter of 2014. 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 2013 during the third quarter of 2014. These adjustments reduced income tax expense by $2.3 million in the third quarter of 2014 and $1.4 million in the third quarter of 2013. Excluding these adjustments, income tax expense would have been 32% of book taxable income for the third quarter of 2014 and 32% of book taxable income for the third quarter of 2013. The Company also made a charitable contribution to the BOKF Foundation and purchased state transferable credits in the third quarter of 2013, which reduced income tax expense by $1.1 million and $860 thousand, respectively.

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 $12 million at both September 30, 2014 and June 30, 2014, and $13 million at September 30, 2013.
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 conjunction with the previously announced change in our chief executive officer and other changes to the executive leadership team, we re-evaluated the reporting units within our principal lines of business. We defined reporting units to align with the various products and services offered by our lines of business rather than geographic region. This definition change better represents how the current executive team evaluates the Company's performance and growth beyond our traditional markets.

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. Corporate expense allocations were updated in the first quarter of 2014. The allocations for 2013 have been revised on a comparable basis.

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.


- 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 6, net income attributable to our lines of business increased $3.1 million or 6% compared to the third quarter of 2013. The increase was primarily due to increased net interest revenue from growth in Commercial Banking, increased operating revenue, partially offset by increased operating expense.

Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Commercial Banking
 
$
41,142

 
$
36,376

 
$
121,712

 
$
109,067

Consumer Banking
 
12,419

 
13,230

 
32,721

 
55,247

Wealth Management
 
4,796

 
5,680

 
16,971

 
14,863

Subtotal
 
58,357

 
55,286

 
171,404

 
179,177

Funds Management and other
 
17,275

 
20,452

 
56,713

 
64,456

Total
 
$
75,632

 
$
75,738

 
$
228,117

 
$
243,633



- 13 -



Commercial Banking

Commercial Banking contributed $41.1 million to consolidated net income in the third quarter of 2014, up $4.8 million or 13% over the third quarter of 2013. Increased net interest revenue, and growth in fees and commissions revenue was partially offset by increased operating expenses. In addition, Commercial Banking experienced a net recovery of $1.0 million in the third quarter of 2014 compared to net loans charged off of $45 thousand in the third quarter of 2013.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2014
 
2013
 
 
2014
 
2013
 
 
Net interest revenue from external sources
 
$
95,423

 
$
91,418

 
$
4,005

 
$
281,064

 
$
272,565

 
$
8,499

 
Net interest expense from internal sources
 
(9,794
)
 
(13,070
)
 
3,276

 
(33,415
)
 
(38,838
)
 
5,423

 
Total net interest revenue
 
85,629

 
78,348

 
7,281

 
247,649

 
233,727

 
13,922

 
Net loans charged off (recovered)
 
(994
)
 
45

 
(1,039
)
 
(8,978
)
 
98

 
(9,076
)
 
Net interest revenue after net loans charged off (recovered)
 
86,623

 
78,303

 
8,320

 
256,627

 
233,629

 
22,998

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
45,186

 
40,297

 
4,889

 
128,082

 
120,921

 
7,161

 
Loss on financial instruments and other assets, net
 
(65
)
 
(29
)
 
(36
)
 
(1,555
)
 
(10
)
 
(1,545
)
 
Other operating revenue
 
45,121

 
40,268

 
4,853

 
126,527

 
120,911

 
5,616

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
27,734

 
26,339

 
1,395

 
81,121

 
77,249

 
3,872

 
Net losses and operating expenses of repossessed assets
 
5,187

 
2,158

 
3,029

 
8,542

 
3,111

 
5,431

 
Other non-personnel expense
 
22,040

 
18,888

 
3,152

 
64,044

 
59,383

 
4,661

 
Other operating expense
 
54,961

 
47,385

 
7,576

 
153,707

 
139,743

 
13,964

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
76,783

 
71,186

 
5,597

 
229,447

 
214,797

 
14,650

 
Corporate expense allocations
 
9,447

 
11,650

 
(2,203
)
 
30,246

 
36,291

 
(6,045
)
 
Income before taxes
 
67,336

 
59,536

 
7,800

 
199,201

 
178,506

 
20,695

 
Federal and state income tax
 
26,194

 
23,160

 
3,034

 
77,489

 
69,439

 
8,050

 
Net income
 
$
41,142

 
$
36,376

 
$
4,766

 
$
121,712

 
$
109,067

 
$
12,645

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
11,508,375

 
$
10,440,231

 
$
1,068,144

 
$
11,222,552

 
$
10,362,166

 
$
860,386

 
Average loans
 
10,827,829

 
9,701,974

 
1,125,855

 
10,548,702

 
9,621,936

 
926,766

 
Average deposits
 
8,924,040

 
8,315,622

 
608,418

 
8,889,451

 
8,336,626

 
552,825

 
Average invested capital
 
940,091

 
911,228

 
28,863

 
937,281

 
900,788

 
36,493

 
Return on average assets
 
1.42
 %
 
1.38
%
 
4

bp
1.45
 %
 
1.41
%
 
4

bp
Return on invested capital
 
17.38
 %
 
15.84
%
 
154

bp
17.40
 %
 
16.19
%
 
121

bp
Efficiency ratio
 
41.95
 %
 
39.87
%
 
208

bp
40.85
 %
 
39.34
%
 
151

bp
Net charge-offs (annualized) to average loans
 
(0.04
)%
 
%
 
(4
)
bp
(0.11
)%
 
%
 
(11
)
bp

Net interest revenue increased $7.3 million or 9% over the prior year. Growth in net interest revenue was primarily due to a $1.1 billion or 12% increase in average loan balances and a $608 million or 7% increase in average deposits over the third quarter of 2013, partially offset by reduced yields on loans.

- 14 -



Fees and commissions revenue increased $4.9 million or 12% over the third quarter of 2013. Brokerage and trading revenue was up $2.1 million primarily due to increased customer hedging revenue and growth in loan syndication fees. Transaction card revenues from our TransFund electronic funds transfer network was up $1.7 million over the prior year primarily due to increased transaction activity. Commercial deposit service charge revenue and other revenues were also up slightly over the prior year.

Operating expenses increased $7.6 million or 16% over the third quarter of 2013. Personnel costs increased $1.4 million or 5% primarily due to standard annual merit increases and increased incentive compensation. Net losses and operating expenses on repossessed assets increased $3.0 million primarily due to an asset impairment identified though regularly scheduled annual appraisal updates. Other non-personnel expenses increased $3.2 million or 17%, primarily related to increased data processing expenses related to growth in the transaction activity. Corporate expense allocations decreased $2.2 million compared to the prior year.

The average outstanding balance of loans attributed to Commercial Banking grew by $1.1 billion over the third quarter of 2013 to $10.8 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 $8.9 billion for the third quarter of 2014, up $608 million or 7% over the third quarter of 2013, primarily due to a $594 million or 16% increase in average balances attributed to our commercial & industrial loan customers. Balances attributed to our energy customers grew by $47 million or 4%, balances attributed to healthcare customers grew by $42 million or 8% and balances attributed to small business customers were up $22 million or 2%. This growth was partially offset by a decrease in balances attributed to treasury services customers. 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 provides retail banking services 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, through correspondent loan originators and through Home Direct Mortgage, an online origination channel.

Consumer Banking contributed $12.4 million to consolidated net income for the third quarter of 2014, a decrease of $811 thousand compared to the third quarter of 2013. Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $3.0 million increase in Consumer Banking net income in the third quarter of 2014, compared to a $247 thousand decrease in Consumer Banking net income in the third quarter of 2013. Decreased net interest revenue and higher non-personnel expense and corporate expense allocations, were partially offset by increased mortgage banking revenue.


- 15 -



Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2014
 
2013
 
 
2014
 
2013
 
 
Net interest revenue from external sources
 
$
23,187

 
$
25,302

 
$
(2,115
)
 
$
72,410

 
$
74,513

 
$
(2,103
)
 
Net interest revenue from internal sources
 
8,058

 
8,714

 
(656
)
 
23,825

 
26,598

 
(2,773
)
 
Total net interest revenue
 
31,245

 
34,016

 
(2,771
)
 
96,235

 
101,111

 
(4,876
)
 
Net loans charged off
 
1,207

 
889

 
318

 
4,248

 
4,189

 
59

 
Net interest revenue after net loans charged off
 
30,038

 
33,127

 
(3,089
)
 
91,987

 
96,922

 
(4,935
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
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