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 2 – Other 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 3 – Mortgage 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
 
48,508

 
47,807

 
701

 
145,018

 
170,325

 
(25,307
)
 
Gain (loss) on financial instruments and other assets, net
 
1,454

 
1,337

 
117

 
14,636

 
(11,911
)
 
26,547

 
Change in fair value of mortgage servicing rights
 
5,281

 
(346
)
 
5,627

 
(5,624
)
 
16,627

 
(22,251
)
 
Other operating revenue
 
55,243

 
48,798

 
6,445

 
154,030

 
175,041

 
(21,011
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
23,732

 
22,989

 
743

 
71,607

 
70,201

 
1,406

 
Net losses (gains) and operating expenses of repossessed assets
 
50

 
(437
)
 
487

 
(432
)
 
(481
)
 
49

 
Other non-personnel expense
 
25,390

 
24,229

 
1,161

 
70,495

 
70,865

 
(370
)
 
Total other operating expense
 
49,172

 
46,781

 
2,391

 
141,670

 
140,585

 
1,085

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
36,109

 
35,144

 
965

 
104,347

 
131,378

 
(27,031
)
 
Corporate expense allocations
 
15,783

 
13,491

 
2,292

 
50,793

 
40,957

 
9,836

 
Income before taxes
 
20,326

 
21,653

 
(1,327
)
 
53,554

 
90,421

 
(36,867
)
 
Federal and state income tax
 
7,907

 
8,423

 
(516
)
 
20,833

 
35,174

 
(14,341
)
 
Net income
 
$
12,419

 
$
13,230

 
$
(811
)
 
$
32,721

 
$
55,247

 
$
(22,526
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
6,575,217

 
$
6,488,471

 
$
86,746

 
$
6,528,629

 
$
6,493,883

 
$
34,746

 
Average loans
 
2,348,654

 
2,366,494

 
(17,840
)
 
2,380,444

 
2,376,043

 
4,401

 
Average deposits
 
6,543,492

 
6,442,938

 
100,554

 
6,499,468

 
6,436,342

 
63,126

 
Average invested capital
 
271,705

 
293,716

 
(22,011
)
 
278,396

 
295,394

 
(16,998
)
 
Return on average assets
 
0.75
%
 
0.81
%
 
(6
)
bp
0.67
%
 
1.14
%
 
(47
)
bp
Return on invested capital
 
18.13
%
 
17.87
%
 
26

bp
15.71
%
 
25.01
%
 
(930
)
bp
Efficiency ratio
 
57.69
%
 
54.67
%
 
302

bp
54.98
%
 
49.61
%
 
537

bp
Net charge-offs (annualized) to average loans
 
0.20
%
 
0.15
%
 
5

bp
0.24
%
 
0.24
%
 
—

bp
Residential mortgage loans funded for sale
 
$
1,394,211

 
$
1,080,167

 
$
314,044

 
$
3,212,356

 
$
3,232,520

 
$
(20,164
)
 

 
 
September 30,
2014
 
September 30,
2013
 
Increase
(Decrease)
Banking locations
 
186

 
197

 
(11
)
Residential mortgage loan servicing portfolio1
 
$
16,617,111

 
$
14,395,227

 
$
2,221,884

1 
Includes outstanding principal for loans serviced for affiliates


- 16 -


Net interest revenue from Consumer Banking activities decreased $2.8 million or 8% compared to the third quarter of 2013, primarily due to a $2.9 million decrease in revenue on a deposit advance product that was phased out during the second quarter of 2014. Average loan balances were $18 million or 1% lower than the prior year. Net loans charged off increased $318 thousand over the prior year.

Fees and commissions revenue increased $701 thousand or 1% over the third quarter of 2013. Growth in mortgage banking revenue was partially offset by a decrease in deposit service charges. Mortgage banking revenue was up $3.3 million over the prior year. Residential mortgage fundings were higher compared to the third quarter of 2013, but gains on sale margin have narrowed. The mix of mortgage loan production shifted toward correspondent loans that typically have lower margins. Deposit service charges and fees decreased $2.4 million compared to the prior year primarily due to lower overdraft fees.

Operating expenses increased $2.4 million or 5% over the third quarter of 2013. Personnel expenses were up $743 thousand or 3% primarily due to increased incentive compensation expense and standard annual merit increases, partially offset by staffing reductions. Non-personnel expense increased $1.2 million or 5%. Professional fees were up $1.6 million primarily related to higher mortgage compliance costs. Data processing and communications expense increased $588 thousand primarily related to increased transaction activity. Mortgage banking costs were down $1.0 million compared to the prior year. Corporate expense allocations were up $2.3 million over the third quarter of 2013.

Average consumer deposits were up $101 million or 2% over the third quarter of 2013. Average demand deposit balances increased $153 million or 12% and average interest-bearing transaction accounts increased $97 million or 3%. Average time deposit balances were down $179 million or 10% compared to the prior year.

Mortgage banking activities include the origination, marketing and servicing of conventional and government-sponsored residential mortgage loans. We funded $1.4 billion of residential mortgage loans in the third quarter of 2014 and $1.1 billion in the third quarter of 2013. Mortgage loan fundings included $1.4 billion of mortgage loans funded for sale in the secondary market and $34 million funded for retention within the consolidated group. Approximately 14% of our mortgage loans funded were in the Oklahoma market and 11% in the Texas market. In addition, 48% of our mortgage loan fundings came from correspondent lenders compared to 37% in the third quarter of 2013 and 9% was originated from our recently added Home Direct Mortgage on-line sales channel launched in the fourth quarter of 2013.

At September 30, 2014, we serviced $15.5 billion of mortgage loans for others and $1.1 billion of loans retained within the consolidated group. Approximately 88% of the mortgage loans serviced were to borrowers in our primary geographical market areas. Loans past due 90 days or more totaled $70 million or 0.45% of loans serviced for others at September 30, 2014 compared to $71 million or 0.49% of loans serviced for others at June 30, 2014. Mortgage servicing revenue, including revenue on loans serviced for the consolidated group, totaled $14.7 million, up $2.1 million or 17% over the third quarter of 2013.


- 17 -


Wealth Management

Wealth Management contributed $4.8 million to consolidated net income in the third quarter of 2014 compared to $5.7 million in the third quarter of 2013. Growth in fiduciary and asset management revenue was partially offset by increased operating expenses. The third quarter of 2013 also included a $555 thousand net recovery.

Table 9 -- Wealth Management
(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
 
$
5,956

 
$
6,251

 
$
(295
)
 
$
17,574

 
$
19,242

 
$
(1,668
)
 
Net interest revenue from internal sources
 
5,191

 
4,848

 
343

 
14,593

 
15,251

 
(658
)
 
Total net interest revenue
 
11,147

 
11,099

 
48

 
32,167

 
34,493

 
(2,326
)
 
Net loans charged off (recovered)
 
—

 
(555
)
 
555

 
448

 
898

 
(450
)
 
Net interest revenue after net loans charged off (recovered)
 
11,147

 
11,654

 
(507
)
 
31,719

 
33,595

 
(1,876
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
61,173

 
55,530

 
5,643

 
181,542

 
162,720

 
18,822

 
Loss on financial instruments and other assets, net
 
(172
)
 
(222
)
 
50

 
(752
)
 
(634
)
 
(118
)
 
Other operating revenue
 
61,001

 
55,308

 
5,693

 
180,790

 
162,086

 
18,704

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
44,227

 
40,788

 
3,439

 
127,686

 
121,137

 
6,549

 
Net losses and expenses of repossessed assets
 
—

 
38

 
(38
)
 
329

 
87

 
242

 
Other non-personnel expense
 
12,007

 
9,190

 
2,817

 
32,623

 
27,354

 
5,269

 
Other operating expense
 
56,234

 
50,016

 
6,218

 
160,638

 
148,578

 
12,060

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
15,914

 
16,946

 
(1,032
)
 
51,871

 
47,103

 
4,768

 
Corporate expense allocations
 
8,065

 
7,650

 
415

 
24,096

 
22,777

 
1,319

 
Income before taxes
 
7,849

 
9,296

 
(1,447
)
 
27,775

 
24,326

 
3,449

 
Federal and state income tax
 
3,053

 
3,616

 
(563
)
 
10,804

 
9,463

 
1,341

 
Net income
 
$
4,796

 
$
5,680

 
$
(884
)
 
$
16,971

 
$
14,863

 
$
2,108

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
4,324,204

 
$
4,385,932

 
$
(61,728
)
 
$
4,499,858

 
$
4,537,917

 
$
(38,059
)
 
Average loans
 
1,000,165

 
929,163

 
71,002

 
971,169

 
930,902

 
40,267

 
Average deposits
 
4,207,216

 
4,176,380

 
30,836

 
4,376,874

 
4,373,556

 
3,318

 
Average invested capital
 
194,104

 
206,872

 
(12,768
)
 
199,537

 
204,592

 
(5,055
)
 
Return on average assets
 
0.49
%
 
0.54
 %
 
(5
)
bp
0.55
%
 
0.47
%
 
8

bp
Return on invested capital
 
10.94
%
 
11.46
 %
 
(52
)
bp
12.31
%
 
10.32
%
 
199

bp
Efficiency ratio
 
77.60
%
 
74.87
 %
 
273

bp
75.03
%
 
75.12
%
 
(9
)
bp
Net charge-offs (annualized) to average loans
 
—
%
 
(0.24
)%
 
24

bp
0.06
%
 
0.13
%
 
(7
)
bp


- 18 -


 
 
September 30,
 
Increase
(Decrease)
 
 
2014
 
2013
 
Fiduciary assets in custody for which BOKF has sole or joint discretionary authority
 
$
14,586,937

 
$
12,144,305

 
$
2,442,632

Fiduciary assets not in custody for which BOKF has sole or joint discretionary authority
 
3,322,947

 
2,039,644

 
1,283,303

Non-managed trust assets in custody
 
16,110,558

 
15,409,191

 
701,367

Total fiduciary assets
 
34,020,442

 
29,593,140

 
4,427,302

Assets held in safekeeping
 
22,814,401

 
21,974,293

 
840,108

Brokerage accounts under BOKF administration
 
5,564,443

 
4,782,980

 
781,463

Assets under management or in custody
 
$
62,399,286

 
$
56,350,413

 
$
6,048,873


Net interest revenue for the third quarter of 2014 was unchanged compared to the third quarter of 2013. Average deposit balances were up $31 million or 1% over the third quarter of 2013. Non-interest bearing demand deposits increased $59 million and interest-bearing transaction account balances decreased $33 million. Higher-costing time deposit balances increased $5.8 million. Average loan balances were up $71 million or 8% over the prior year. The benefit of this growth was partially offset by lower yields.

Fees and commissions revenue was up $5.6 million or 10% over the third quarter of 2013 primarily due to growth in fiduciary and asset management revenue. The acquisition of MBM Advisors in the second quarter of 2014 and GTRUST Financial Corporation in the first quarter of 2014 added approximately $2.7 million in revenue and $2.0 billion in fiduciary assets over the prior year. The remaining increase was primarily due to the increase in the fair value of assets managed. Brokerage and trading revenue decreased $717 thousand or 2%. A decrease in retail brokerage and customer hedging revenue, was partially offset by growth in securities trading and investment banking revenue.

Other operating revenue includes fees earned from state and municipal bond and corporate debt underwriting and financial advisory services, primarily in the Oklahoma and Texas markets. In the third quarter of 2014, the Wealth Management division participated in 127 state and municipal bond underwritings that totaled $2.2 billion. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $668 million of these underwritings. The Wealth Management division also participated in five corporate debt underwritings that totaled $2.1 billion. In the third quarter of 2013, the Wealth Management division participated in 129 state and municipal bond underwritings that totaled approximately $2.0 billion. Our interest in these underwritings totaled approximately $718 million. The Wealth Management division also participated in seven corporate debt underwritings that totaled $5.6 billion.

Operating expenses increased $6.2 million or 12% over the third quarter of 2013. Personnel expenses increased $3.4 million, including a $1.8 million increase in regular compensation and a $430 thousand increase in employee benefits primarily related to investments in Wealth Management talent, including the GTRUST and MBM acquisitions. Incentive compensation expense was up $1.2 million over the third quarter of 2013. Non-personnel expense increased $2.8 million, primarily related to increased professional fees and services, data processing and communications fees, net occupancy and equipment and amortization of identifiable intangible assets from the acquisitions of MBM Advisors and GTRUST Financial Corporation. Corporate expense allocations increased $415 thousand over the prior year.

- 19 -


Financial Condition
Securities

We maintain a securities portfolio to enhance profitability, manage interest rate risk, provide liquidity and comply with regulatory requirements. Securities are classified as trading, held for investment, or available for sale. See Note 2 to the consolidated financial statements for the composition of the securities portfolio as of September 30, 2014, December 31, 2013 and September 30, 2013.

At September 30, 2014, the carrying value of investment (held-to-maturity) securities was $655 million and the fair value was $676 million. Investment securities consist primarily of long-term, fixed rate Oklahoma and Texas municipal bonds, taxable Texas school construction bonds and residential mortgage-backed securities issued by U.S. government agencies. The investment security portfolio is diversified among issuers. The largest obligation of any single issuer is $30 million. Substantially all of these bonds are general obligations of the issuers. Approximately $104 million of the Texas school construction bonds are also guaranteed by the Texas Permanent School Fund Guarantee Program supervised by the State Board of Education for the State of Texas.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $9.3 billion at September 30, 2014, a decrease of $350 million from June 30, 2014. Available for sale securities consist primarily of U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans. At September 30, 2014, residential mortgage-backed securities represented 75% of total available for sale securities. The decrease in amortized cost during the third quarter was primarily due to U.S. government agency residential mortgage-backed securities.

A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. Our best estimate of the duration of the combined residential mortgage-backed securities portfolio held in investment and available for sale securities at September 30, 2014 is 3.1 years. Management estimates the duration extends to 3.4 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.9 years assuming a 50 basis point decline in the current rate environment.

Residential mortgage-backed securities also have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. At September 30, 2014, approximately $6.8 billion of the amortized cost of the Company’s residential mortgage-backed securities were issued by U.S. government agencies. The fair value of these residential mortgage-backed securities totaled $6.9 billion at September 30, 2014.

We also hold amortized cost of $161 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions, a decrease of $7.5 million from June 30, 2014. The decrease was due cash payments received during the quarter. The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $171 million at September 30, 2014.

The amortized cost of our portfolio of privately issued residential mortgage-backed securities included $93 million of Jumbo-A residential mortgage loans and $68 million of Alt-A residential mortgage loans. Jumbo-A residential mortgage loans generally meet government underwriting standards, but have loan balances that exceed agency maximums. Alt-A mortgage loans generally do not have sufficient documentation to meet government agency underwriting standards. Credit risk on residential mortgage-backed securities originated by private issuers is mitigated by investment in senior tranches with additional collateral support. All of our Alt-A residential mortgage-backed securities were issued with credit support from additional layers of loss-absorbing subordinated tranches, including all Alt-A residential mortgage-backed securities held that were originated in 2007 and 2006. The weighted average original credit enhancement of the Alt-A residential mortgage-backed securities was 9.5% and has been fully absorbed as of September 30, 2014. The Jumbo-A residential mortgage-backed securities had original credit enhancement of 9.7% and the current level is 2.5%. Approximately 91% of our Alt-A mortgage-backed securities represent pools of fixed rate residential mortgage loans. None of the adjustable rate mortgages are payment option adjustable rate mortgages (“ARMs”). Approximately 31% of our Jumbo-A residential mortgage-backed securities represent pools of fixed rate residential mortgage loans and none of the adjustable rate mortgages are payment option ARMs.

- 20 -



The aggregate gross amount of unrealized losses on available for sale securities totaled $67 million at September 30, 2014, compared to $55 million at June 30, 2014. On a quarterly basis, we perform separate evaluations on debt and equity securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. No other-than-temporary impairment charges were recognized in earnings in the third quarter of 2014.

Certain residential mortgage-backed securities issued by U.S. government agencies and included in fair value option securities on the Consolidated Balance Sheets have been segregated and designated as economic hedges of changes in the fair value of our mortgage servicing rights. We have elected to carry these securities at fair value with changes in fair value recognized in current period income. These securities are held with the intent that gains or losses will offset changes in the fair value of mortgage servicing rights and related derivative contracts.

BOK Financial is required to hold stock as members of the Federal Reserve system and the Federal Home Loan Banks ("FHLB"). These restricted equity securities are carried at cost as these securities do not have a readily determined fair value because the ownership of these shares are restricted and they lack a market. Federal Reserve Bank stock totaled $34 million and holdings of FHLB stock totaled $156 million at September 30, 2014. Holdings of FHLB stock increased $98 million over June 30, 2014. We are required to hold stock in the FHLB in proportion to our borrowings with the FHLB.
Bank-Owned Life Insurance

We have approximately $292 million of bank-owned life insurance at September 30, 2014. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $260 million is held in separate accounts. Our separate account holdings are invested in diversified portfolios of investment-grade fixed income securities and cash equivalents, including U.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio’s investment guidelines. The cash surrender value of certain life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments. At September 30, 2014, the cash surrender value represented by the underlying fair value of investments held in separate accounts was approximately $274 million. As the underlying fair value of the investments held in a separate account at September 30, 2014 exceeded the net book value of the investments, no cash surrender value was supported by the stable value wrap. The stable value wrap is provided by a domestic financial institution. The remaining cash surrender value of $32 million primarily represents the cash surrender value of policies held in general accounts and other amounts due from various insurance companies.

- 21 -


Loans

The aggregate loan portfolio before allowance for loan losses totaled $13.7 billion at September 30, 2014, an increase of $257 million over June 30, 2014. Outstanding commercial loans grew by $204 million over June 30, 2014, largely due to growth in energy and services sector loans. Commercial real estate loan balances were up $69 million primarily related to growth in loans secured by multifamily residential properties, office buildings and industrial facilities, partially offset by a decrease in loans secured by retail facilities and other commercial real estate loans. Residential mortgage loans decreased $29 million and consumer loans increased $12 million over June 30, 2014. 

Table 10 -- Loans
(In thousands)
 
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,551,699

 
$
2,419,788

 
$
2,344,072

 
$
2,351,760

 
$
2,311,991

Services
 
2,487,817

 
2,377,065

 
2,232,471

 
2,282,210

 
2,148,551

Wholesale/retail
 
1,273,241

 
1,318,151

 
1,225,990

 
1,201,364

 
1,181,806

Manufacturing
 
479,543

 
452,866

 
444,215

 
391,751

 
382,460

Healthcare
 
1,382,399

 
1,394,156

 
1,396,562

 
1,274,246

 
1,160,212

Other commercial and industrial
 
397,339

 
405,635

 
408,396

 
441,890

 
386,055

Total commercial
 
8,572,038

 
8,367,661

 
8,051,706

 
7,943,221

 
7,571,075

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
175,228

 
184,779

 
184,820

 
206,258

 
216,456

Retail
 
611,265

 
642,110

 
640,506

 
586,047

 
556,918

Office
 
438,909

 
394,217

 
436,264

 
411,499

 
422,043

Multifamily
 
739,757

 
677,403

 
662,674

 
576,502

 
520,454

Industrial
 
371,426

 
342,080

 
305,207

 
243,877

 
245,022

Other commercial real estate
 
387,614

 
414,389

 
401,936

 
391,170

 
388,336

Total commercial real estate
 
2,724,199

 
2,654,978

 
2,631,407

 
2,415,353

 
2,349,229

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
991,107

 
1,020,928

 
1,033,572

 
1,062,744

 
1,078,661

Permanent mortgages guaranteed by U.S. government agencies
 
198,488

 
188,087

 
184,822

 
181,598

 
163,919

Home equity
 
790,068

 
799,200

 
800,281

 
807,684

 
792,185

Total residential mortgage
 
1,979,663

 
2,008,215

 
2,018,675

 
2,052,026

 
2,034,765

 
 
 
 
 
 
 
 
 
 
 
Consumer
 
407,839

 
396,004

 
376,066

 
381,664

 
395,031

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,683,739

 
$
13,426,858

 
$
13,077,854

 
$
12,792,264

 
$
12,350,100



Commercial

Commercial loans represent loans for working capital, facilities acquisition or expansion, purchases of equipment and other needs of commercial customers primarily located within our geographical footprint. Commercial loans are underwritten individually and represent on-going relationships based on a thorough knowledge of the customer, the customer’s industry and market. While commercial loans are generally secured by the customer’s assets including real property, inventory, accounts receivable, operating equipment, interests in mineral rights and other property and may also include personal guarantees of the owners and related parties, the primary source of repayment of the loans is the on-going cash flow from operations of the customer’s business. Inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with commercial lending policies.


- 22 -


Commercial loans totaled $8.6 billion or 63% of the loan portfolio at September 30, 2014, an increase of $204 million over June 30, 2014. Energy loans grew by $132 million and service sector grew by $111 million over the prior quarter. Manufacturing sector loans increased $27 million while wholesale/retail sector loans decreased $45 million and healthcare sector loans decreased $12 million during the third quarter.

Table 11 presents the commercial sector of our loan portfolio distributed primarily by collateral location. Loans for which collateral location is less relevant, such as unsecured loans and reserve-based energy loans, are distributed by the borrower's primary operating location. The majority of the collateral securing our commercial loan portfolio is located within our geographical footprint with 34% concentrated in the Texas market and 24% concentrated in the Oklahoma market. The Other category is primarily composed of two states, California and Louisiana, which represent $198 million or 2% of the commercial loan portfolio and $185 million or 2% of the commercial loan portfolio, respectively, at September 30, 2014. All other states individually represent one percent or less of total commercial loans.

Table 11 -- Commercial Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Energy
 
$
556,166

 
$
1,217,804

 
$
41,675

 
$
6,950

 
$
355,353

 
$
14,311

 
$
66,930

 
$
292,510

 
$
2,551,699

Services
 
591,829

 
817,621

 
209,368

 
14,624

 
240,747

 
171,579

 
116,847

 
325,202

 
2,487,817

Wholesale/retail
 
412,938

 
455,063

 
34,724

 
63,015

 
65,228

 
45,780

 
65,368

 
131,125

 
1,273,241

Manufacturing
 
153,346

 
126,121

 
3,318

 
6,609

 
15,990

 
51,948

 
50,493

 
71,718

 
479,543

Healthcare
 
247,657

 
246,830

 
113,005

 
70,824

 
109,092

 
67,179

 
197,638

 
330,174

 
1,382,399

Other commercial and industrial
 
86,680

 
85,686

 
12,899

 
20,053

 
25,678

 
2,970

 
62,539

 
100,834

 
397,339

Total commercial loans
 
$
2,048,616

 
$
2,949,125

 
$
414,989

 
$
182,075

 
$
812,088

 
$
353,767

 
$
559,815

 
$
1,251,563

 
$
8,572,038

 
Supporting the energy industry with loans to producers and other energy-related entities has been a hallmark of the Company since its founding and represents a large portion of our commercial loan portfolio. In addition, energy production and related industries have a significant impact on the economy in our primary markets. Loans collateralized by oil and gas properties are subject to a semi-annual engineering review by our internal staff of petroleum engineers. This review is utilized as the basis for developing the expected cash flows supporting the loan amount. The projected cash flows are discounted according to risk characteristics of the underlying oil and gas properties. Loans are evaluated to demonstrate with reasonable certainty that crude oil, natural gas and natural gas liquids can be recovered from known oil and gas reservoirs under existing economic and operating conditions at current pricing levels and with existing conventional equipment and operating methods and costs. As part of our evaluation of credit quality, we analyze rigorous stress tests over a range of commodity prices and take proactive steps to mitigate risk when appropriate.

Outstanding energy loans totaled $2.6 billion or 19% of total loans at September 30, 2014. Unfunded energy loan commitments increased by $28 million to $2.8 billion at September 30, 2014. Approximately $2.2 billion of energy loans were to oil and gas producers, up $112 million over June 30, 2014. Approximately 59% of the committed production loans are secured by properties primarily producing oil and 41% of the committed production loans are secured by properties primarily producing natural gas. Loans to borrowers engaged in wholesale or retail energy sales were up $40 million over June 30, 2014 to $113 million. Loans to borrowers that provide services to the energy industry increased $22 million to $150 million at September 30, 2014. Loans to midstream oil and gas companies totaled $62 million at September 30, 2014, a decrease of $5.1 million from June 30, 2014. Loans to borrowers that manufacture equipment primarily for the energy industry totaled $14 million, down $4.9 million compared to the prior quarter.

The services sector of the loan portfolio totaled $2.5 billion or 18% of total loans and consists of a large number of loans to a variety of businesses, including government & educational, utilities, gaming, not-for-profit entities and insurance. Service sector loans grew by $111 million over June 30, 2014. Approximately $1.2 billion of the services category is made up of loans with individual balances of less than $10 million. Service sector loans are generally secured by the assets of the borrower with repayment coming from the cash flows of ongoing operations of the customer’s business. 

We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more

- 23 -


non-affiliated banks as participants. At September 30, 2014, the outstanding principal balance of these loans totaled $2.9 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 16% of our shared national credits, based on dollars committed. We hold shared credits to the same standard of analysis and perform the same level of review as internally originated credits. Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. In addition to management’s quarterly assessment of credit risk, banking regulators annually review a sample of shared national credits for proper risk grading.

Commercial Real Estate

Commercial real estate represents loans for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes generally within our geographical footprint, with larger concentrations in Texas and Oklahoma which represent 35% and 16% of the total commercial real estate portfolio at September 30, 2014, respectively. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

Commercial real estate loans totaled $2.7 billion or 20% of the loan portfolio at September 30, 2014. The outstanding balance of commercial real estate loans increased $69 million during the third quarter of 2014. Loans secured by multifamily residential properties grew by $62 million. Loans secured by office buildings increased $45 million and loans secured by industrial facilities increased $29 million. These increases were partially offset by a $31 million decrease in loans secured by retail properties and a $27 million decrease in other commercial real estate loans. Residential construction and land development sector loans decreased $10 million compared to June 30, 2014. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 18% to 22% over the past five years. The commercial real estate sector of our loan portfolio distributed by collateral location follows in Table 12.

Table 12 -- Commercial Real Estate Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Residential construction and land development
 
$
49,002

 
$
34,403

 
$
29,661

 
$
12,798

 
$
40,484

 
$
4,486

 
$
3,643

 
$
751

 
$
175,228

Retail
 
79,199

 
210,650

 
71,825

 
10,491

 
25,785

 
57,205

 
23,077

 
133,033

 
611,265

Office
 
79,497

 
185,655

 
33,122

 
5,098

 
30,784

 
38,287

 
12,344

 
54,122

 
438,909

Multifamily
 
125,406

 
293,315

 
45,261

 
23,356

 
60,062

 
45,210

 
53,914

 
93,233

 
739,757

Industrial
 
39,495

 
134,279

 
33,341

 
595

 
6,766

 
8,101

 
46,287

 
102,562

 
371,426

Other real estate
 
64,049

 
103,097

 
48,008

 
14,697

 
28,311

 
47,675

 
22,809

 
58,968

 
387,614

Total commercial real estate loans
 
$
436,648

 
$
961,399

 
$
261,218

 
$
67,035

 
$
192,192

 
$
200,964

 
$
162,074

 
$
442,669

 
$
2,724,199


- 24 -


Residential Mortgage and Consumer

Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. Residential mortgage loans are secured by a first or second-mortgage on the customer’s primary residence. Consumer loans include direct loans secured by and for the purchase of automobiles, recreational and marine equipment as well as other unsecured loans. Residential mortgage and consumer loans are made in accordance with underwriting policies we believe to be conservative and are fully documented. Credit scoring is assessed based on significant credit characteristics including credit history, residential and employment stability.

Residential mortgage loans totaled $2.0 billion, a $29 million decrease compared to June 30, 2014. In general, we sell the majority of our conforming fixed rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. We have no concentration in sub-prime residential mortgage loans. Our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or adjustable rate mortgage loans with initial rates that are below market. Collateral for 98% of our residential mortgage loan portfolio is located within our geographical footprint.

The majority of our permanent mortgage loan portfolio is composed of various non-conforming mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals or certain professionals. The aggregate outstanding balance of loans in these programs is $752 million. Jumbo loans may be fixed or variable rate and are fully amortizing. The size of jumbo loans exceed maximums set under government sponsored entity standards, but otherwise generally conform to those standards. These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38%. Loan-to-value ratios (“LTV”) are tiered from 60% to 100%, depending on the market. Special mortgage programs include fixed and variable rate fully amortizing loans tailored to the needs of certain healthcare professionals. Variable rate loans are fully indexed at origination and may have fixed rates for three to ten years, then adjust annually thereafter.

At September 30, 2014, $198 million of permanent residential mortgage loans are guaranteed by U.S. government agencies. We have minimal credit exposure on loans guaranteed by the agencies. This amount includes residential mortgage loans previously sold into GNMA mortgage pools that the Company may repurchase when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet. Permanent residential mortgage loans guaranteed by U.S. government agencies increased $10.4 million over June 30, 2014.

Home equity loans totaled $790 million at September 30, 2014, a decrease of $9.1 million compared to June 30, 2014. Our home equity loan portfolio is primarily composed of first-lien, fully amortizing home equity loans. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40%. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 5 year revolving period followed by a 15 year term of amortizing repayment. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term subject to an update of certain credit information. A summary of our home equity loan portfolio at September 30, 2014 by lien position and amortizing status follows in Table 13.

Table 13 -- Home Equity Loans
(In thousands)
 
 
Revolving
 
Amortizing
 
Total
First lien
 
$
37,254

 
$
510,603

 
$
547,857

Junior lien
 
66,648

 
175,563

 
242,211

Total home equity
 
$
103,902

 
$
686,166

 
$
790,068


The distribution of residential mortgage and consumer loans at September 30, 2014 is as follows in Table 14. Residential mortgage loans are distributed by collateral location. Consumer loans are generally distributed by borrower location.


- 25 -


Table 14 -- Residential Mortgage and Consumer Loans by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/Missouri
 
Other
 
Total
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Permanent mortgage
 
$
208,360

 
$
387,547

 
$
40,107

 
$
18,794

 
$
163,491

 
$
93,228

 
$
55,158

 
$
24,422

 
$
991,107

  Permanent mortgages guaranteed by U.S. government agencies
 
66,484

 
21,776

 
66,067

 
7,374

 
10,162

 
3,477

 
15,135

 
8,013

 
198,488

  Home equity
 
471,850

 
138,627

 
124,753

 
4,776

 
31,381

 
9,699

 
8,350

 
632

 
790,068

Total residential mortgage
 
$
746,694

 
$
547,950

 
$
230,927

 
$
30,944

 
$
205,034

 
$
106,404

 
$
78,643

 
$
33,067

 
$
1,979,663

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
$
196,618

 
$
148,027

 
$
11,827

 
$
1,222

 
$
24,827

 
$
11,198

 
$
12,139

 
$
1,981

 
$
407,839






- 26 -


The Company secondarily evaluates loan portfolio performance based on the primary geographical market managing the loan. Loans attributed to a geographical market may not represent the location of the borrower or the collateral. All permanent mortgage loans serviced by our mortgage banking unit and held for investment by the Bank are centrally managed by the Bank of Oklahoma.

Table 15 -- Loans Managed by Primary Geographical Market
(In thousands)
 
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
3,106,264

 
$
3,101,513

 
$
2,782,997

 
$
2,902,140

 
$
2,801,979

Commercial real estate
 
592,865

 
598,790

 
593,282

 
602,010

 
564,141

Residential mortgage
 
1,481,264

 
1,490,171

 
1,505,702

 
1,524,212

 
1,497,027

Consumer
 
193,207

 
187,914

 
179,733

 
192,283

 
207,360

Total Bank of Oklahoma
 
5,373,600

 
5,378,388

 
5,061,714

 
5,220,645

 
5,070,507

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
3,169,458

 
3,107,808

 
3,161,203

 
3,052,274

 
2,858,970

Commercial real estate
 
1,046,322

 
995,182

 
969,804

 
816,574

 
853,857

Residential mortgage
 
247,117

 
251,290

 
256,332

 
260,544

 
263,945

Consumer
 
148,965

 
147,322

 
136,782

 
131,297

 
129,144

Total Bank of Texas
 
4,611,862

 
4,501,602

 
4,524,121

 
4,260,689

 
4,105,916

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 

 
 

 
 

 
 

 
 

Commercial
 
378,663

 
381,843

 
351,454

 
342,336

 
325,542

Commercial real estate
 
313,905

 
309,421

 
305,080

 
308,829

 
306,914

Residential mortgage
 
130,045

 
137,110

 
131,932

 
133,900

 
131,756

Consumer
 
11,714

 
12,346

 
12,972

 
13,842

 
14,583

Total Bank of Albuquerque
 
834,327

 
840,720

 
801,438

 
798,907

 
778,795

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
74,866

 
71,859

 
73,804

 
81,556

 
73,063

Commercial real estate
 
96,874

 
85,633

 
81,181

 
78,264

 
84,364

Residential mortgage
 
7,492

 
8,334

 
7,898

 
7,922

 
10,466

Consumer
 
5,508

 
6,323

 
6,881

 
8,023

 
9,426

Total Bank of Arkansas
 
184,740

 
172,149

 
169,764

 
175,765

 
177,319

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 

 
 

 
 

 
 

 
 

Commercial
 
957,917

 
856,323

 
825,315

 
735,626

 
748,331

Commercial real estate
 
190,812

 
200,995

 
213,850

 
190,355

 
158,320

Residential mortgage
 
56,705

 
60,360

 
57,345

 
62,821

 
66,475

Consumer
 
24,812

 
23,330

 
22,095

 
22,686

 
22,592

Total Colorado State Bank & Trust
 
1,230,246

 
1,141,008

 
1,118,605

 
1,011,488

 
995,718

 
 
 
 
 
 
 
 
 
 
 
Bank of Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
500,208

 
446,814

 
453,799

 
417,702

 
379,817

Commercial real estate
 
316,698

 
292,799

 
301,266

 
257,477

 
250,129

Residential mortgage
 
39,256

 
41,059

 
42,899

 
47,111

 
49,109

Consumer
 
11,201

 
7,821

 
7,145

 
7,887

 
7,059

Total Bank of Arizona
 
867,363

 
788,493

 
805,109

 
730,177

 
686,114

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 

 
 

 
 

 
 

 
 

Commercial
 
384,662

 
401,501

 
403,134

 
411,587

 
383,373

Commercial real estate
 
166,723

 
172,158

 
166,944

 
161,844

 
131,504

Residential mortgage
 
17,784

 
19,891

 
16,567

 
15,516

 
15,987

Consumer
 
12,432

 
10,948

 
10,458

 
5,646

 
4,867

Total Bank of Kansas City
 
581,601

 
604,498

 
597,103

 
594,593

 
535,731

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
13,683,739

 
$
13,426,858

 
$
13,077,854

 
$
12,792,264

 
$
12,350,100



- 27 -


Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business. These arrangements included unfunded loan commitments which totaled $7.7 billion and standby letters of credit which totaled $451 million at September 30, 2014. Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower’s financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Approximately $624 thousand of the outstanding standby letters of credit were issued on behalf of customers whose loans are nonperforming at September 30, 2014.

As more fully described in Note 6 to the Consolidated Financial Statements, we have off-balance sheet commitments related to certain residential mortgage loans originated under community development loan programs that were sold to a U.S. government agency with full recourse. These mortgage loans were underwritten to standards approved by the agencies, including full documentation and originated under programs available only for owner-occupied properties. The Company no longer sells residential mortgage loans with recourse other than obligations under standard representations and warranties. We are obligated to repurchase these loans for the life of these loans in the event of foreclosure for the unpaid principal and interest at the time of foreclosure. At September 30, 2014, the principal balance of residential mortgage loans sold subject to recourse obligations totaled $175 million, down from $181 million at June 30, 2014. Substantially all of these loans are to borrowers in our primary markets including $121 million to borrowers in Oklahoma, $19 million to borrowers in Arkansas, $13 million to borrowers in New Mexico and $10 million to borrowers in the Kansas/Missouri market.

We also have an off-balance sheet obligation to repurchase residential mortgage loans sold to government sponsored entities through our mortgage banking activities due to standard representations and warranties made under contractual agreements as described further in Note 6 to the Consolidated Financial Statements. For the period from 2010 through the third quarter of 2014 combined, approximately 14% of repurchase requests have currently resulted in actual repurchases or indemnification by the Company. The accrual for credit losses related to potential loan repurchases under representations and warranties totaled $2.4 million at September 30, 2014 and $5.6 million at June 30, 2014.

- 28 -


Customer Derivative Programs
 
We offer programs that permit our customers to hedge various risks, including fluctuations in energy, cattle and other agricultural product prices, interest rates and foreign exchange rates. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and the Company. Offsetting contracts are executed between the Company and selected counterparties to minimize market risk due to changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to us as compensation for administrative costs, credit risk and profit.

The customer derivative programs create credit risk for potential amounts due to the Company from our customers and from the counterparties. Customer credit risk is monitored through existing credit policies and procedures. The effects of changes in commodity prices, interest rates or foreign exchange rates are evaluated across a range of possible options to determine the maximum exposure we are willing to have individually to any customer. Customers may also be required to provide cash margin or other collateral in conjunction with our credit agreements to further limit our credit risk.

Counterparty credit risk is evaluated through existing policies and procedures. This evaluation considers the total relationship between BOK Financial and each of the counterparties. Individual limits are established by management, approved by Credit Administration and reviewed by the Asset / Liability Committee. Margin collateral is required if the exposure between the Company and any counterparty exceeds established limits. Based on declines in the counterparties’ credit ratings, these limits may be reduced and additional margin collateral may be required.

A deterioration of the credit standing of one or more of the customers or counterparties to these contracts may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This occurs if the credit standing of the customer or counterparty deteriorated such that either the fair value of underlying collateral no longer supported the contract or the customer or counterparty’s ability to provide margin collateral was impaired. Credit losses on customer derivatives reduce brokerage and trading revenue in the Consolidated Statement of Earnings.

Derivative contracts are carried at fair value. At September 30, 2014, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $365 million compared to $359 million at June 30, 2014. Derivative contracts carried as assets included to-be-announced residential mortgage-backed securities sold to our mortgage banking customers considered interest rate derivative contracts. At September 30, 2014, the fair value of our derivative contracts included $24 million related to these to-be-announced residential mortgage-backed securities, $34 million for interest rate swaps, $16 million for energy contracts and $275 million for foreign exchange contracts. The aggregate net fair value of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $366 million at September 30, 2014 and $355 million at June 30, 2014.

At September 30, 2014, total derivative assets were reduced by $4.3 million of cash collateral received from counterparties and total derivative liabilities were reduced by $19 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement.

A table showing the notional and fair value of derivative assets and liabilities on both a gross and net basis is presented in Note 3 to the Consolidated Financial Statements.


- 29 -


The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor at September 30, 2014 follows in Table 16.

Table 16 -- Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
240,730

Banks and other financial institutions
 
109,281

Exchanges and clearing organizations
 
10,798

Fair value of customer risk management program asset derivative contracts, net
 
$
360,809

 
At September 30, 2014, our largest derivative exposure was to an internationally active financial institution for equity option contracts which totaled $10 million. At September 30, 2014, our aggregate gross exposure to internationally active domestic financial institutions was approximately $219 million comprised of $206 million of cash and securities positions and $13 million of gross derivative positions. We have no direct exposure to European sovereign debt and our aggregate gross exposure to European financial institutions totaled $5.5 million at September 30, 2014.

Our customer derivative program also introduces liquidity and capital risk. We are required to provide cash margin to certain counterparties when the net negative fair value of the contracts exceeds established limits. Also, changes in commodity prices affect the amount of regulatory capital we are required to hold as support for the fair value of our derivative assets. These risks are modeled as part of the management of these programs. Based on current prices, a decrease in market prices equivalent to $47.00 per barrel of oil would decrease the fair value of derivative assets by $8.1 million. An increase in prices equivalent to $131.03 per barrel of oil would increase the fair value of derivative assets by $139 million as current prices move away from the fixed prices embedded in our existing contracts. Liquidity requirements of this program are also affected by our credit rating. A decrease in our credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $19 million. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of September 30, 2014, changes in interest rates would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.
Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. The combined allowance for loan losses and off-balance sheet credit losses totaled $192 million or 1.41% of outstanding loans and 199% of nonaccruing loans at September 30, 2014. The allowance for loan losses was $191 million and the accrual for off-balance sheet credit losses was $1.2 million. At June 30, 2014, the combined allowance for credit losses was $192 million or 1.43% of outstanding loans and 199% of nonaccruing loans. The allowance for loan losses was $191 million and the accrual for off-balance sheet credit losses was $1.3 million. 

The provision for credit losses is the amount necessary to maintain the allowance for loan losses and an accrual for off-balance sheet credit risk at an amount determined by management to be appropriate based on its evaluation. The provision includes the combined charge to expense for both the allowance for loan losses and the accrual for off-balance sheet credit risk. All losses incurred from lending activities will ultimately be reflected in charge-offs against the allowance for loan losses following funds advanced against outstanding commitments. After evaluating all credit factors, the Company determined that no provision for credit losses was necessary during the third quarter of 2014. No provision for credit losses was recorded in the second quarter of 2014 and an $8.5 million negative provision for credit losses was recorded in the third quarter of 2013.


- 30 -


Table 17 -- Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
190,690

 
$
188,318

 
$
185,396

 
$
194,325

 
$
203,124

Loans charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
(117
)
 
(29
)
 
(144
)
 
(145
)
 
(1,354
)
Commercial real estate
 
(145
)
 
—

 
(220
)
 
(176
)
 
(419
)
Residential mortgage
 
(773
)
 
(1,842
)
 
(996
)
 
(956
)
 
(961
)
Consumer
 
(1,603
)
 
(1,651
)
 
(1,488
)
 
(1,836
)
 
(1,974
)
Total
 
(2,638
)
 
(3,522
)
 
(2,848
)
 
(3,113
)
 
(4,708
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
260

 
1,196

 
1,985

 
1,291

 
864

Commercial real estate
 
1,410

 
2,621

 
1,827

 
3,496

 
2,073

Residential mortgage
 
150

 
722

 
354

 
354

 
188

Consumer
 
1,294

 
985

 
1,194

 
927

 
1,284

Total
 
3,114

 
5,524

 
5,360

 
6,068

 
4,409

Net loans recovered (charged off)
 
476

 
2,002

 
2,512

 
2,955

 
(299
)
Provision for loan losses
 
78

 
370

 
410

 
(11,884
)
 
(8,500
)
Ending balance
 
$
191,244

 
$
190,690

 
$
188,318

 
$
185,396

 
$
194,325

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 
 
 

Beginning balance
 
$
1,308

 
$
1,678

 
$
2,088

 
$
1,604

 
$
1,604

Provision for off-balance sheet credit losses
 
(78
)
 
(370
)
 
(410
)
 
484

 
—

Ending balance
 
$
1,230

 
$
1,308

 
$
1,678

 
$
2,088

 
$
1,604

Total combined provision for credit losses
 
$
—

 
$
—

 
$
—

 
$
(11,400
)
 
$
(8,500
)
Allowance for loan losses to loans outstanding at period-end
 
1.40
 %
 
1.42
 %
 
1.44
 %
 
1.45
 %
 
1.57
 %
Net charge-offs (annualized) to average loans
 
(0.01
)%
 
(0.06
)%
 
(0.08
)%
 
(0.09
)%
 
0.01
 %
Total provision for credit losses (annualized) to average loans
 
—
 %
 
—
 %
 
—
 %
 
(0.37
)%
 
(0.27
)%
Recoveries to gross charge-offs
 
118.04
 %
 
156.84
 %
 
188.20
 %
 
194.92
 %
 
93.65
 %
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.02
 %
 
0.02
 %
 
0.02
 %
 
0.03
 %
 
0.02
 %
Combined allowance for credit losses to loans outstanding at period-end
 
1.41
 %
 
1.43
 %
 
1.45
 %
 
1.47
 %
 
1.59
 %
Allowance for Loan Losses

The appropriateness of the allowance for loan losses is assessed by management based on an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio. The allowance consists of specific allowances attributed to certain impaired loans, general allowances based on estimated loss rates by loan class and non-specific allowances based on general economic conditions, concentration in loans with large balances and other relevant factors.

Loans are considered to be impaired when it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement. This includes all nonaccruing loans, all loans modified in troubled debt restructurings and all government guaranteed loans repurchased from GNMA pools. At September 30, 2014, impaired loans totaled $291 million, including $4.3 million with specific allowances of $3.3 million and $287 million with no specific allowances because the loan balances represent the amounts we expect to recover. At June 30, 2014, impaired loans totaled $283 million, including $4.7 million of impaired loans with specific allowances of $3.4 million and $278 million with no specific allowances.


- 31 -


General allowances for unimpaired loans are based on an estimated loss rate by loan class. Estimated loss rates for risk-graded loans are either increased or decreased based on changes in risk grading for each loan class. Estimated loss rates for both risk-graded and non-risk graded loans may be further adjusted for inherent risk identified for the given loan class which have not yet been captured in the loss rate.

The aggregate amount of general allowances for all unimpaired loans totaled $160 million at September 30, 2014, unchanged compared to June 30, 2014.

Nonspecific allowances are maintained for risks beyond factors specific to a particular portfolio segment or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors. Nonspecific allowances totaled $28 million at September 30, 2014, an increase of $995 thousand compared to June 30, 2014. The nonspecific allowance also considers the possible impact of the European debt crisis and similar economic factors on our loan portfolio. Risks related to the European debt crisis and domestic economic risks remain stable compared to the previous quarter.

An allocation of the allowance for loan losses by loan category is included in Note 4 to the Consolidated Financial Statements.

Our loan monitoring process also identified loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in nonperforming assets. Known information does, however, cause management concern as to the borrowers’ ability to comply with current repayment terms. The potential problem loans totaled $108 million at September 30, 2014, primarily composed of $30 million of energy loans, $17 million of service sector loans, $15 million of residential construction and land development loans, $14 million of loans secured by multifamily residential properties and $11 million of other commerical & industrial loans. Potential problem loans totaled $105 million at June 30, 2014.
Net Loans Charged Off

Loans are charged off against the allowance for loan losses when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value. Internally risk graded loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Non-risk graded loans are generally charged off when payments are between 60 days and 180 days past due, depending on loan class. In addition, non-risk graded loans are generally charged-down to collateral value within 60 days of being notified of a borrower's bankruptcy filing, regardless of payment status.

BOK Financial had a net recovery of $476 thousand in the third quarter of 2014 compared to a net recovery of $2.0 million in the second quarter of 2014 and net charge-offs of $299 thousand in the third quarter of 2013. The ratio of net loans charged off (recovered) to average loans on an annualized basis was (0.01)% for the third quarter of 2014 compared with (0.06)% for the second quarter of 2014 and 0.01% for the third quarter of 2013. The net recovery in the third quarter of 2014 was $1.5 million less than the previous quarter.

Net commercial loans recoveries totaled $143 thousand in the third quarter of 2014 compared to $1.2 million in the second quarter of 2014. Net commercial real estate loan recoveries were $1.3 million in the third quarter and $2.6 million in the second quarter. Residential mortgage net charge-offs were $623 thousand and consumer net charge-offs were $309 thousand for the third quarter. Consumer loan net charge-offs include deposit account overdraft losses. 


- 32 -


Nonperforming Assets

Table 18 -- Nonperforming Assets
(In thousands)
 
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
16,404

 
$
17,103

 
$
19,047

 
$
16,760

 
$
19,522

Commercial real estate
 
30,660

 
34,472

 
39,305

 
40,850

 
52,502

Residential mortgage
 
48,907

 
44,340

 
45,380

 
42,320

 
39,256

Consumer
 
580

 
765

 
974

 
1,219

 
1,624

Total nonaccruing loans
 
96,551

 
96,680

 
104,706

 
101,149

 
112,904

Accruing renegotiated loans guaranteed by U.S. government agencies
 
70,459

 
57,818

 
55,507

 
54,322

 
50,099

Total nonperforming loans
 
167,010

 
154,498

 
160,213

 
155,471

 
163,003

Real estate and other repossessed assets:
 
 
 
 
 
 
 
 
 
 
Guaranteed by U.S. government agencies
 
46,809

 
49,720

 
45,638

 
37,431

 
37,906

Other
 
51,062

 
50,391

 
49,877

 
54,841

 
70,216

Real estate and other repossessed assets
 
97,871

 
100,111

 
95,515

 
92,272

 
108,122

Total nonperforming assets
 
$
264,881

 
$
254,609

 
$
255,728

 
$
247,743

 
$
271,125

Total nonperforming assets excluding those guaranteed by U.S. government agencies
 
$
143,778

 
$
145,124

 
$
153,011

 
$
155,213

 
$
182,543

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio segment and class:
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
1,508

 
$
1,619

 
$
1,759

 
$
1,860

 
$
1,953

Services
 
3,584

 
3,669

 
4,581

 
4,922

 
6,927

Wholesale / retail
 
5,502

 
5,885

 
6,854

 
6,969

 
7,223

Manufacturing
 
3,482

 
3,507

 
3,565

 
592

 
843

Healthcare
 
1,417

 
1,422

 
1,443

 
1,586

 
1,733

Other commercial and industrial
 
911

 
1,001

 
845

 
831

 
843

Total commercial
 
16,404

 
17,103

 
19,047

 
16,760

 
19,522

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 

 
 

Residential construction and land development
 
14,634

 
15,146

 
16,547

 
17,377

 
20,784

Retail
 
4,009

 
4,199

 
4,626

 
4,857

 
7,914

Office
 
3,499

 
3,591

 
6,301

 
6,391

 
6,838

Multifamily
 
—

 
—

 
—

 
7

 
4,350

Industrial
 
—

 
631

 
886

 
252

 
—

Other commercial real estate
 
8,518

 
10,905

 
10,945

 
11,966

 
12,616

Total commercial real estate
 
30,660

 
34,472

 
39,305

 
40,850

 
52,502

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
35,137

 
32,952

 
36,342

 
34,279

 
31,797

Permanent mortgage guaranteed by U.S. government agencies
 
3,835

 
1,947

 
1,572

 
777

 
577

Home equity
 
9,935

 
9,441

 
7,466

 
7,264

 
6,882

Total residential mortgage
 
48,907

 
44,340

 
45,380

 
42,320

 
39,256

Consumer
 
580

 
765

 
974

 
1,219

 
1,624

Total nonaccruing loans
 
$
96,551

 
$
96,680

 
$
104,706

 
$
101,149

 
$
112,904

 
 
 
 
 
 
 
 
 
 
 

- 33 -


 
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
Nonaccruing loans as % of outstanding balance for class:
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
0.06
%
 
0.07
%
 
0.08
%
 
0.08
%
 
0.08
%
Services
 
0.14
%
 
0.15
%
 
0.21
%
 
0.22
%
 
0.32
%
Wholesale / retail
 
0.43
%
 
0.45
%
 
0.56
%
 
0.58
%
 
0.61
%
Manufacturing
 
0.73
%
 
0.77
%
 
0.80
%
 
0.15
%
 
0.22
%
Healthcare
 
0.10
%
 
0.10
%
 
0.10
%
 
0.12
%
 
0.15
%
Other commercial and industrial
 
0.23
%
 
0.25
%
 
0.21
%
 
0.19
%
 
0.22
%
Total commercial
 
0.19
%
 
0.20
%
 
0.24
%
 
0.21
%
 
0.26
%
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
 
8.35
%
 
8.20
%
 
8.95
%
 
8.42
%
 
9.60
%
Retail
 
0.66
%
 
0.65
%
 
0.72
%
 
0.83
%
 
1.42
%
Office
 
0.80
%
 
0.91
%
 
1.44
%
 
1.55
%
 
1.62
%
Multifamily
 
—
%
 
—
%
 
—
%
 
—
%
 
0.84
%
Industrial
 
—
%
 
0.18
%
 
0.29
%
 
0.10
%
 
—
%
Other commercial real estate
 
2.20
%
 
2.63
%
 
2.72
%
 
3.06
%
 
3.25
%
Total commercial real estate
 
1.13
%
 
1.30
%
 
1.49
%
 
1.69
%
 
2.23
%
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
3.55
%
 
3.23
%
 
3.52
%
 
3.23
%
 
2.95
%
Permanent mortgage guaranteed by U.S. government agencies
 
1.93
%
 
1.04
%
 
0.85
%
 
0.43
%
 
0.35
%
Home equity
 
1.26
%
 
1.18
%
 
0.93
%
 
0.90
%
 
0.87
%
Total residential mortgage
 
2.47
%
 
2.21
%
 
2.25
%
 
2.06
%
 
1.93
%
Consumer
 
0.14
%
 
0.19
%
 
0.26
%
 
0.32
%
 
0.41
%
Total nonaccruing loans
 
0.71
%
 
0.72
%
 
0.80
%
 
0.79
%
 
0.91
%
 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 

 
 

Allowance for loan losses to nonaccruing loans
 
198.08
%
 
197.24
%
 
179.86
%
 
183.29
%
 
172.12
%
Nonaccruing loans to period-end loans
 
0.71
%
 
0.72
%
 
0.80
%
 
0.79
%
 
0.91
%
Accruing loans 90 days or more past due1
 
$
25

 
$
67

 
$
1,991

 
$
1,415

 
$
188

1 
Excludes residential mortgages guaranteed by agencies of the U.S. Government

Nonperforming assets totaled $265 million or 1.92% of outstanding loans and repossessed assets at September 30, 2014. Nonaccruing loans totaled $97 million, accruing renegotiated residential mortgage loans totaled $70 million and real estate and other repossessed assets totaled $98 million. All accruing renegotiated residential mortgage loans, $3.8 million of nonaccruing loans and $47 million of real estate and other repossessed assets are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets decreased $1.3 million during the third quarter. The Company generally retains nonperforming assets to maximize potential recovery which may cause future nonperforming assets to decrease more slowly.

Loans are generally classified as nonaccruing when it becomes probable that we will not collect the full contractual principal and interest. As more fully discussed in Note 4 to the Consolidated Financial Statements, we may modify loans in troubled debt restructurings. Modifications may include extension of payment terms and rate concessions. We generally do not forgive principal or accrued but unpaid interest. All loans modified in troubled debt restructurings, except for residential mortgage loans guaranteed by U.S. government agencies, are classified as nonaccruing. We may also renew matured nonaccruing loans. All nonaccruing loans, including those renewed or modified in troubled debt restructurings, are charged off when the loan balance is no longer covered by the paying capacity of the borrower based on a quarterly evaluation of available cash resources and collateral value. All nonaccruing loans generally remain on nonaccrual status until full collection of principal and interest in accordance with the original terms, including principal previously charged off, is probable. We generally do not voluntarily

- 34 -


modify consumer loans to troubled borrowers. Consumer loans modified at the direction of bankruptcy court orders are identified as troubled debt restructurings and classified as nonaccruing.

At September 30, 2014, renegotiated loans consist solely of accruing residential mortgage loans guaranteed by U.S. government agencies that have been modified in troubled debt restructurings. See Note 4 to the Consolidated Financial Statements for additional discussion of troubled debt restructurings. Generally, we modify residential mortgage loans primarily by reducing interest rates and extending the number of payments in accordance with U.S. government agency guidelines. Generally, no unpaid principal or interest is forgiven. Interest continues to accrue based on the modified terms of the loan. Modified loans guaranteed by U.S. government agencies under residential mortgage loan programs may be sold once they become eligible according to U.S. government agency guidelines.

A rollforward of nonperforming assets for the three and nine ended September 30, 2014 follows in Table 19.

Table 19 -- Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
September 30, 2014
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, June 30, 2014
 
$
96,680

 
$
57,818

 
$
100,111

 
$
254,609

Additions
 
18,588

 
22,428

 
—

 
41,016

Payments
 
(8,647
)
 
(546
)
 
—

 
(9,193
)
Charge-offs
 
(2,638
)
 
—

 
—

 
(2,638
)
Net gains and write-downs
 
—

 
—

 
(3,520
)
 
(3,520
)
Foreclosure of nonperforming loans
 
(7,379
)
 
—

 
7,379

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
—

 
(2,010
)
 
13,201

 
11,191

Proceeds from sales
 
—

 
(7,119
)
 
(3,093
)
 
(10,212
)
Conveyance to U.S. government agencies
 
—

 
—

 
(16,113
)
 
(16,113
)
Net transfers to nonaccruing loans
 
—

 
—

 
—

 
—

Return to accrual status
 
(53
)
 
—

 
—

 
(53
)
Other, net
 
—

 
(112
)
 
(94
)
 
(206
)
Balance, Sept. 30, 2014
 
$
96,551

 
$
70,459

 
$
97,871

 
$
264,881



- 35 -


 
 
Nine Months Ended
 
 
September 30, 2014
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, December 31, 2013
 
$
101,149

 
$
54,322

 
$
92,272

 
$
247,743

Additions
 
49,033

 
49,511

 
—

 
98,544

Payments
 
(28,997
)
 
(1,602
)
 
—

 
(30,599
)
Charge-offs
 
(9,008
)
 
—

 
—

 
(9,008
)
Net gains and write-downs
 
—

 
—

 
(2,988
)
 
(2,988
)
Foreclosure of nonperforming loans
 
(15,575
)
 
—

 
15,575

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
—

 
(6,780
)
 
43,802

 
37,022

Proceeds from sales
 
—

 
(24,605
)
 
(16,122
)
 
(40,727
)
Conveyance to U.S. government agencies
 
—

 
—

 
(34,425
)
 
(34,425
)
Net transfers to nonaccruing loans
 
—

 
—

 
—

 
—

Return to accrual status
 
(53
)
 
—

 
—

 
(53
)
Other, net
 
2

 
(387
)
 
(243
)
 
(628
)
Balance, Sept. 30, 2014
 
$
96,551

 
$
70,459

 
$
97,871

 
$
264,881


We foreclose on loans guaranteed by U.S. government agencies in accordance with agency guidelines. Generally these loans are not eligible for modification programs or have failed to comply with modified loan terms. Principal is guaranteed by agencies of the U.S. government, subject to limitations and credit risk is minimal. These properties will be conveyed to the agencies once applicable criteria have been met. During the third quarter of 2014, $13 million of properties guaranteed by U.S. government agencies were foreclosed on and $16 million of properties were conveyed to the applicable U.S. government agencies.

Nonaccruing loans totaled $97 million or 0.71% of outstanding loans at September 30, 2014 and $97 million or 0.72% of outstanding loans at June 30, 2014. Nonaccruing loans were largely unchanged compared to June 30, 2014. Newly identified nonaccruing loans totaled $19 million for the third quarter of 2014. These loans were offset by $9 million of payments, $7.4 million of foreclosures and $2.6 million of charge-offs.
Commercial

Nonaccruing commercial loans totaled $16 million or 0.19% of total commercial loans at September 30, 2014, compared to $17 million or 0.20% of total commercial loans at June 30, 2014. Nonaccruing commercial loans decreased $699 thousand in the third quarter of 2014. There were $494 thousand in newly identified nonaccruing commercial loans, $1.1 million in payments and $117 thousand of charge-offs during the third quarter. There were no foreclosures of nonaccruing commercial loans during the third quarter.

Nonaccruing commercial loans at September 30, 2014 were primarily composed of $5.5 million or 0.43% of total wholesale/retail sector loans, $3.6 million or 0.14% of total services sector loans and $3.5 million or 0.73% of total manufacturing sector loans. Over half of the balance of nonaccruing wholesale/retail sector loans was comprised of a single customer in the New Mexico market.
Commercial Real Estate

Nonaccruing commercial real estate loans totaled $31 million or 1.13% of outstanding commercial real estate loans at September 30, 2014 compared to $34 million or 1.30% of outstanding commercial real estate loans at June 30, 2014. Newly identified nonaccruing commercial real estate loans of $1.4 million were offset by $4.4 million of cash payments received and $653 thousand of foreclosures and $145 thousand of charge-offs. 

Nonaccruing commercial real estate loans continue to be largely concentrated in residential construction and land development loans, totaling $15 million or 8.35% of residential construction and land development loans. Other commercial real estate loans totaled $8.5 million or 2.20% of other commercial real estate loans.


- 36 -


Residential Mortgage and Consumer

Nonaccruing residential mortgage loans totaled $49 million or 2.47% of outstanding residential mortgage loans at September 30, 2014, compared to $44 million or 2.21% of outstanding residential mortgage loans at June 30, 2014. Newly identified nonaccruing residential mortgage loans totaled $14.9 million, offset by $3.0 million of payments, $6.5 million of foreclosures and $773 thousand of loans charged off during the quarter. 

Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans which totaled $35 million or 3.55% of outstanding non-guaranteed permanent residential mortgage loans at September 30, 2014. Nonaccruing home equity loans totaled $9.9 million or 1.26% of total home equity loans.

Payments of accruing residential mortgage loans and consumer loans may be delinquent. The composition of residential mortgage loans and consumer loans past due but still accruing is included in the following Table 20. Substantially all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 89 days past due decreased $1.8 million in the third quarter to $10 million at September 30, 2014. Consumer loans past due 30 to 89 days decreased $196 thousand over June 30, 2014.

Table 20 -- Residential Mortgage and Consumer Loans Past Due
(In thousands)
 
 
September 30, 2014
 
June 30, 2014
 
 
90 Days or More
 
30 to 89 Days
 
90 Days or More
 
30 to 89 Days
Residential mortgage:
 
 
 
 
 
 
 
 
   Permanent mortgage1
 
$
—

 
$
8,179

 
$
—

 
$
10,079

Home equity
 
20

 
1,938

 
41

 
1,855

Total residential mortgage
 
$
20

 
$
10,117

 
41

 
$
11,934

 
 
 

 
 

 
 

 
 

Consumer
 
$
—

 
$
796

 
$
1

 
$
992

1 
Excludes past due residential mortgage loans guaranteed by agencies of the U.S. government.


- 37 -


Real Estate and Other Repossessed Assets

Real estate and other repossessed assets are assets acquired in partial or total forgiveness of loans. The assets are carried at the lower of cost as determined by fair value at date of foreclosure or current fair value, less estimated selling costs.

Real estate and other repossessed assets totaled $98 million at September 30, 2014, a decrease of $2.2 million compared to June 30, 2014. The distribution of real estate and other repossessed assets attributed by geographical market is included in Table 21 following.

Table 21 -- Real Estate and Other Repossessed Assets by Collateral Location
(In thousands)
 
 
Oklahoma
 
Texas
 
Colorado
 
Arkansas
 
New
Mexico
 
Arizona
 
Kansas/
Missouri
 
Other
 
Total
1-4 family residential properties guaranteed by U.S. government agencies
 
$
15,741

 
$
2,456

 
$
1,370

 
$
1,043

 
$
20,604

 
$
539

 
$
4,337

 
$
718

 
$
46,808

Developed commercial real estate properties
 
2,311

 
106

 
2,709

 
796

 
4,109

 
2,090

 
—

 
5,073

 
17,194

1-4 family residential properties
 
5,317

 
2,500

 
175

 
1,839

 
4,478

 
3,684

 
699

 
362

 
19,054

Undeveloped land
 
272

 
2,971

 
2,431

 
—

 
—

 
2,388

 
1,114

 
—

 
9,176

Residential land development properties
 
164

 
30

 
1,483

 
1,125

 
—

 
2,504

 
4

 
—

 
5,310

Multifamily residential properties
 
—

 


 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other
 
5

 
—

 
—

 
—

 
—

 
324

 
—

 
—

 
329

Total real estate and other repossessed assets
 
$
23,810

 
$
8,063

 
$
8,168

 
$
4,803

 
$
29,191

 
$
11,529

 
$
6,154

 
$
6,153

 
$
97,871


Undeveloped land is primarily zoned for commercial development. Developed commercial real estate properties are primarily completed with no additional construction necessary for sale.

- 38 -


Liquidity and Capital
Subsidiary Bank

Deposits and borrowed funds are the primary sources of liquidity for the subsidiary bank. Based on the average balances for the third quarter of 2014, approximately 72% of our funding was provided by deposit accounts, 13% from borrowed funds, 1% from long-term subordinated debt and 12% from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

Deposit accounts represent our largest funding source. We compete for retail and commercial deposits by offering a broad range of products and services and focusing on customer convenience. Retail deposit growth is supported through our Perfect Banking sales and customer service program, free checking, online bill paying services, mobile banking services, an extensive network of branch locations and ATMs and a 24-hour Express Bank call center. Commercial deposit growth is supported by offering treasury management and lockbox services. We also acquire brokered deposits when the cost of funds is advantageous to other funding sources.

Average deposits for the third quarter of 2014 totaled $20.2 billion and represented approximately 72% of total liabilities and capital compared with $20.5 billion and 75% of total liabilities and capital for the second quarter of 2014. Average deposits decreased $270 million over the second quarter of 2014. Average demand deposit balances increased $146 million over the second quarter. Average interest-bearing transaction deposit accounts decreased $377 million and and average time deposits decreased $26 million. 

Average Commercial Banking deposit balances decreased $74 million compared to the second quarter of 2014. Treasury services customer balances decreased $275 million and commercial real estate customer balances decreased $17 million. Balances related to energy customers increased $123 million and balances related to commercial & industrial customers increased $44 million. Healthcare customer balances increased $29 million and small business customer balances increased $25 million. Commercial customers continue to retain large cash reserves primarily due to low yields available on other high quality investment alternatives and to minimize deposit service charges through the earnings credit. The earnings credit is a non-cash method that enables commercial customers to offset deposit service charges based on account balances. These deposit account balances may decline due to future changes in economic conditions.

Average Consumer Banking deposit balances increased $31 million. Demand deposit balances grew by $45 million, interest-bearing transaction deposits were up $43 million. This growth was partially offset by a $52 million decrease in time deposits. Average Wealth Management deposits decreased $220 million compared to the second quarter of 2014 primarily due to a $244 million decrease in interest-bearing transaction deposit account balances, partially offset by a $34 million increase in time deposit balances.

Brokered deposits included in time deposits averaged $233 million for the third quarter of 2014, an increase of $32 million over the second quarter of 2014. Average interest-bearing transaction accounts for the third quarter include $252 million of brokered deposits, a decrease of $7.4 million compared to the second quarter of 2014.


- 39 -


The distribution of our period end deposit account balances among principal markets follows in Table 22.

Table 22 -- Period End Deposits by Principal Market Area
(In thousands)
 
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
3,915,560

 
$
3,785,922

 
$
3,476,876

 
$
3,432,940

 
$
3,442,831

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
5,450,692

 
5,997,474

 
6,148,712

 
6,318,045

 
5,565,462

Savings
 
201,690

 
210,330

 
211,770

 
191,880

 
189,186

Time
 
1,292,738

 
1,195,586

 
1,209,002

 
1,214,507

 
1,197,617

Total interest-bearing
 
6,945,120

 
7,403,390

 
7,569,484

 
7,724,432

 
6,952,265

Total Bank of Oklahoma
 
10,860,680

 
11,189,312

 
11,046,360

 
11,157,372

 
10,395,096

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
2,636,713

 
2,617,194

 
2,513,729

 
2,481,603

 
2,498,668

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
2,020,737

 
1,957,236

 
1,967,107

 
1,966,580

 
1,853,586

Savings
 
66,798

 
67,012

 
70,890

 
64,632

 
63,368

Time
 
569,929

 
606,248

 
621,925

 
638,465

 
667,873

Total interest-bearing
 
2,657,464

 
2,630,496

 
2,659,922

 
2,669,677

 
2,584,827

Total Bank of Texas
 
5,294,177

 
5,247,690

 
5,173,651

 
5,151,280

 
5,083,495

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 
 
 
 
 
 
 
 
 
Demand
 
480,023

 
515,554

 
524,191

 
502,395

 
491,894

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
502,787

 
489,378

 
516,734

 
529,140

 
541,565

Savings
 
36,127

 
36,442

 
37,481

 
33,944

 
34,003

Time
 
303,074

 
309,540

 
320,352

 
327,281

 
334,946

Total interest-bearing
 
841,988

 
835,360

 
874,567

 
890,365

 
910,514

Total Bank of Albuquerque
 
1,322,011

 
1,350,914

 
1,398,758

 
1,392,760

 
1,402,408

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
35,075

 
44,471

 
40,026

 
38,566

 
33,378

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
234,063

 
205,216

 
212,144

 
144,018

 
205,891

Savings
 
2,222

 
2,287

 
2,264

 
1,986

 
1,919

Time
 
38,811

 
41,155

 
32,312

 
32,949

 
35,184

Total interest-bearing
 
275,096

 
248,658

 
246,720

 
178,953

 
242,994

Total Bank of Arkansas
 
310,171

 
293,129

 
286,746

 
217,519

 
276,372

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 
 
 
 
 
 
 
 
 
Demand
 
422,044

 
396,185

 
399,820

 
409,942

 
375,060

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
571,807

 
566,320

 
536,438

 
541,675

 
536,734

Savings
 
29,768

 
29,234

 
28,973

 
26,880

 
27,782

Time
 
372,401

 
385,252

 
399,948

 
407,088

 
424,225

Total interest-bearing
 
973,976

 
980,806

 
965,359

 
975,643

 
988,741

Total Colorado State Bank & Trust
 
1,396,020

 
1,376,991

 
1,365,179

 
1,385,585

 
1,363,801

 
 
 
 
 
 
 
 
 
 
 

- 40 -


 
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
Bank of Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
279,811

 
293,836

 
265,149

 
204,092

 
188,365

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
336,584

 
379,170

 
409,200

 
364,736

 
339,158

Savings
 
3,718

 
2,813

 
2,711

 
2,432

 
2,511

Time
 
38,842

 
37,666

 
37,989

 
34,391

 
36,285

Total interest-bearing
 
379,144

 
419,649

 
449,900

 
401,559

 
377,954

Total Bank of Arizona
 
658,955

 
713,485

 
715,049

 
605,651

 
566,319

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 
 
 
 
 
 
 
 
 
Demand
 
268,903

 
254,843

 
252,496

 
246,739

 
301,780

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
128,039

 
103,610

 
109,321

 
69,857

 
77,414

Savings
 
1,315

 
1,511

 
1,507

 
1,252

 
1,080

Time
 
48,785

 
40,379

 
40,646

 
41,312

 
23,890

Total interest-bearing
 
178,139

 
145,500

 
151,474

 
112,421

 
102,384

Total Bank of Kansas City
 
447,042

 
400,343

 
403,970

 
359,160

 
404,164

Total BOK Financial deposits
 
$
20,289,056

 
$
20,571,864

 
$
20,389,713

 
$
20,269,327

 
$
19,491,655


In addition to deposits, subsidiary bank liquidity is provided primarily by federal funds purchased, securities repurchase agreements and Federal Home Loan Bank borrowings. Federal funds purchased consist primarily of unsecured, overnight funds acquired from other financial institutions. Funds are primarily purchased from bankers’ banks and Federal Home Loan banks from across the country. The largest single source of federal funds purchased totaled $20 million at September 30, 2014. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $2.3 billion during the quarter, up from $1.3 billion during the second quarter of 2014.

At September 30, 2014, the estimated unused credit available to the subsidiary bank from collateralized sources was approximately $6.4 billion.

A summary of other borrowings by the subsidiary bank follows in Table 23.


- 41 -


Table 23 -- Borrowed Funds
(In thousands)
 
 
 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
 
 
September 30, 2014
 
 
 
June 30, 2014
 
 
September 30, 2014
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
June 30, 2014
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
Subsidiary Bank:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
$
85,135

 
$
320,817

 
0.07
%
 
$
449,473

 
$
705,573

 
$
574,926

 
0.07
%
 
$
709,072

Repurchase agreements
 
1,026,009

 
1,027,206

 
0.05
%
 
1,026,009

 
1,072,375

 
914,892

 
0.08
%
 
1,072,375

Other borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
 
3,453,400

 
2,299,390

 
0.24
%
 
3,453,400

 
1,200,000

 
1,264,533

 
0.23
%
 
1,400,000

GNMA repurchase liability
 
14,552

 
18,067

 
5.14
%
 
20,982

 
15,193

 
13,991

 
5.24
%
 
16,515

Other
 
16,535

 
16,504

 
4.94
%
 
16,294

 
16,469

 
16,408

 
5.02
%
 
16,227

Total other borrowings
 
3,484,487

 
2,333,961

 
0.34
%
 


 
1,231,662

 
1,294,932

 
0.40
%
 


Subordinated debentures
 
347,936

 
347,914

 
2.46
%
 
347,936

 
347,890

 
347,868

 
2.52
%
 
347,890

Total Subsidiary Bank
 
4,943,567

 
4,029,898

 
0.43
%
 
 
 
3,357,500

 
3,132,618

 
0.48
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Borrowed Funds
 
$
4,943,567

 
$
4,029,898

 
0.43
%
 
 
 
$
3,357,500

 
$
3,132,618

 
0.48
%
 
 
In 2007, the Company issued $250 million of subordinated debt due May 15, 2017 to fund the Worth National Bank and First United Bank acquisitions and fund continued asset growth. Interest on this debt was based on a fixed rate of 5.75% through May 14, 2012 which then converted to a floating rate of three-month LIBOR plus 0.69%. At September 30, 2014, $227 million of this subordinated debt remains outstanding.
In 2005, the Bank issued $150 million of 10-year, fixed rate subordinated debt. The cost of this subordinated debt, including issuance discounts and hedge loss is 5.56%. The proceeds of this debt were used to repay $95 million of BOK Financial's unsecured revolving line of credit and to provide additional capital to support asset growth. At September 30, 2014, $122 million of this subordinated debt remains outstanding.
The Bank also has a liability related to the repurchase of certain delinquent residential mortgage loans previously sold in GNMA mortgage pools. Interest is payable monthly at rates contractually due to investors.
Parent Company

The primary sources of liquidity for BOK Financial are cash on hand and dividends from the subsidiary bank. Dividends from the subsidiary bank are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the two preceding years. Dividends are further restricted by minimum capital requirements. At September 30, 2014, based on the most restrictive limitations as well as management’s internal capital policy, the subsidiary bank could declare up to $214 million of dividends without regulatory approval. Future losses or increases in required regulatory capital at the subsidiary bank could affect its ability to pay dividends to the parent company.


- 42 -


The Company has a $100 million senior unsecured 364 day revolving credit facility with Wells Fargo Bank, National Association, administrative agent and other commercial banks (“the Credit Facility”). Interest on amounts outstanding under the Credit Facility is to be paid at a defined base rate minus 1.25% or LIBOR plus 1.00% based upon the Company’s option. Interest on amounts borrowed for certain acquisitions converted to a term loan at the Company's option is to be paid at a defined base rate minus 1.25% or LIBOR plus 1.25%. A commitment fee equal to 0.20% shall be paid quarterly on the unused portion of the credit commitment under the Credit Facility and there are no prepayment penalties. Any amounts outstanding at the end of the Credit Facility term shall be converted into a term loan which, except for amounts borrowed for certain acquisitions, shall be payable June 5, 2015. The Credit Agreement contains customary representations and warranties, as well as affirmative and negative covenants including limits on the Company’s ability to borrow additional funds, make investments and sell assets. These covenants also require BOKF to maintain minimum capital levels. No amounts were outstanding under the Credit Facility at September 30, 2014 and the Company met all of the covenants.

Our equity capital at September 30, 2014 was $3.3 billion, an increase of $30 million over June 30, 2014. Net income less cash dividends paid increased equity $48 million during the third quarter of 2014 and accumulated other comprehensive income decreased $26 million primarily related to the change in unrealized gains on available for sale securities due to changes in interest rates. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt issuance, share repurchase and stock and cash dividends.

On April 24, 2012, the Board of Directors authorized the Company to purchase up to two million shares of our common stock. The specific timing and amount of shares repurchased will vary based on market conditions, regulatory limitations and other factors. Repurchases may be made over time in open market or privately negotiated transactions. The repurchase program may be suspended or discontinued at any time without prior notice. As of September 30, 2014, the Company has repurchased 39,496 shares for $2.1 million under this program. No shares were repurchased in the third quarter of 2014.

BOK Financial and the subsidiary bank are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have a material impact on operations. These capital requirements include quantitative measures of assets, liabilities and off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators.

For a banking institution to qualify as well capitalized, its Tier 1, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. The Company’s banking subsidiary exceeded the regulatory definitions of well capitalized. The capital ratios for BOK Financial on a consolidated basis are presented in Table 24.

Table 24 -- Capital Ratios
 
 
Well Capitalized
Minimums
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
Average total equity to average assets
 
—

 
11.55
%
 
11.56
%
 
11.40
%
 
11.27
%
 
10.88
%
Tangible common equity ratio
 
—

 
9.86
%
 
10.20
%
 
10.06
%
 
9.90
%
 
9.73
%
Tier 1 common equity ratio
 
—

 
13.54
%
 
13.46
%
 
13.59
%
 
13.59
%
 
13.33
%
Risk-based capital:
 
 

 
 
 
 
 
 
 
 

 
 

Tier 1 capital
 
6.00
%
 
13.71
%
 
13.63
%
 
13.77
%
 
13.77
%
 
13.51
%
Total capital
 
10.00
%
 
15.09
%
 
15.38
%
 
15.55
%
 
15.56
%
 
15.35
%
Leverage
 
5.00
%
 
10.22
%
 
10.26
%
 
10.17
%
 
10.05
%
 
9.80
%
In July 2013, banking regulators issued the final rule revising regulatory capital rules for substantially all U.S. banking organizations. The new capital rule will be effective for BOK Financial on January 1, 2015. Components of the rule will phase in through January 1, 2019. The new capital rule establishes a 7% threshold for the Tier 1 common equity ratio consisting of a minimum level plus capital conservation buffer. The Company expects to exclude unrealized gains and losses from available for sale securities from its calculation of Tier 1 capital, consistent with the treatment under current capital rules. BOK Financial's Tier 1 common equity ratio based on the existing capital rules was 13.54% as of September 30, 2014. Based on our interpretation of the new capital rule, our estimated Tier 1 common equity ratio on a fully phased-in basis would be 12.60%, nearly 560 basis points above the 7% regulatory threshold.


- 43 -


The rule also changes both the Tier 1 risk based capital requirements and the total risk based requirements to a minimum of 6% and 8%, respectively, plus a capital conservation buffer of 2.5% totaling 8.5% and 10.5%, respectively. The leverage ratio requirement under the rule is 4%. A bank which falls below these levels, including the capital conservation buffer, would be subject to regulatory restrictions on capital distributions (including but not limited to dividends and share repurchases) and executive bonus payments.

Capital resources of financial institutions are also regularly measured by the tangible common shareholders’ equity ratio. Tangible common shareholders’ equity is shareholders’ equity as defined by generally accepted accounting principles in the United States of America (“GAAP”) less intangible assets and equity which does not benefit common shareholders. Equity that does not benefit common shareholders includes preferred equity. This non-GAAP measure is a valuable indicator of a financial institution’s capital strength since it eliminates intangible assets from shareholders’ equity and retains the effect of unrealized losses on securities and other components of accumulated other comprehensive income in shareholders’ equity.

In accordance with the Dodd-Frank Act, the Federal Reserve must publish regulations that require bank holding companies with $10 billion to $50 billion in assets to perform annual capital stress tests. The requirements for annual capital stress tests became effective for the Company in the fourth quarter of 2013. Existing regulations indicate that results will be made public in June of 2015. The resulting capital stress test process may place constraints on capital distributions or increases in required regulatory capital under certain circumstances.

Table 25 provides a reconciliation of the non-GAAP measures with financial measures defined by GAAP.

Table 25 -- Non-GAAP Measure
(Dollars in thousands)
 
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
3,243,093

 
$
3,212,517

 
$
3,109,925

 
$
3,020,049

 
$
2,991,244

Less: Goodwill and intangible assets, net
 
413,256

 
414,356

 
396,131

 
384,323

 
385,166

Tangible common equity
 
2,829,837

 
2,798,161

 
2,713,794

 
2,635,726

 
2,606,078

Total assets
 
29,105,020

 
27,843,770

 
27,364,714

 
27,015,432

 
27,166,367

Less: Goodwill and intangible assets, net
 
413,256

 
414,356

 
396,131

 
384,323

 
385,166

Tangible assets
 
$
28,691,764

 
$
27,429,414

 
$
26,968,583

 
$
26,631,109

 
$
26,781,201

Tangible common equity ratio
 
9.86
%
 
10.20
%
 
10.06
%
 
9.90
%
 
9.73
%
 
 
 
 
 
 
 
 
 
 
 
Estimated Tier 1 common equity ratio under fully phased-in Basel III:
 
Tier 1 common equity under existing Basel I
 
2,777,436

 
 
 
 
 
 
 
 
Estimated equity adjustments
 
(33,000
)
 
 
 
 
 
 
 
 
Estimated Tier 1 common equity under fully phased-in Basel III

2,744,436

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk weighted assets
 
20,507,015

 
 
 
 
 
 
 
 
Estimated risk weighted asset adjustments
 
1,275,000

 
 
 
 
 
 
 
 
Estimated risk weighted assets under fully phased-in Basel III

21,782,015

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated Tier 1 common equity under fully phased-in Basel III

12.60
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Off-Balance Sheet Arrangements

See Note 8 to the Consolidated Financial Statements for a discussion of the Company’s significant off-balance sheet commitments.

- 44 -


Market Risk

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. Market risk excludes changes in fair value due to credit of the individual issuers of financial instruments.

BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy and agricultural product derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed.

The Asset/Liability Committee is responsible for managing market risk in accordance with policy guidelines established by the Board of Directors. The Committee monitors projected variation in net interest revenue, net income and economic value of equity due to specified changes in interest rates. The internal policy limit for net interest revenue variation is a maximum decline of 5% to an up or down 200 basis point change over twelve months. These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds and brokered deposits and establish minimum levels for unpledged assets, among other things. Compliance with these internal guidelines is reviewed monthly.
Interest Rate Risk – Other than Trading
 
As previously noted in the Net Interest Revenue section of this report, management has implemented strategies to manage the Company’s balance sheet to have relatively limited exposure to changes in interest rates over a twelve-month period. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates on the Company's performance across multiple interest rate scenarios. While the current internal policy limit for net interest revenue variation is a maximum decline of 5% or 200 basis points change over twelve months, the results of a 200 basis point decrease in interest rates in the current low-rate environment are not meaningful. We report the effect of a 50 basis point decrease in the interim.

The Company’s primary interest rate exposures include the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable rate loan pricing. Additionally, residential mortgage rates directly affect the prepayment speeds for residential mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. In addition, the impact on the level and composition of DDA and other core deposit balances resulting from a significant increase in short-term market interest rates and the overall interest rate environment is likely to be material. The simulation incorporates assumptions regarding the effects of such changes based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 26 due to the extreme volatility over such a large rate range and our active risk management approach for that asset. The effects of interest rate changes on the value of mortgage servicing rights and financial instruments identified as economic hedges are presented in Note 6 to the Consolidated Financial Statements.

The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of re-pricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors.
 

- 45 -


Table 26 -- Interest Rate Sensitivity
(Dollars in thousands)
 
 
200 bp Increase
 
50 bp Decrease
 
 
2014
 
2013
 
2014
 
2013
Anticipated impact over the next twelve months on net interest revenue
 
$
(7,658
)
 
$
(16,193
)
 
$
(16,325
)
 
$
(13,699
)
 
 
(1.07
)%
 
(2.38
)%
 
(2.28
)%
 
(1.93
)%
Trading Activities

BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will take positions in securities, generally residential mortgage-backed securities, government agency securities and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. On a limited basis, BOK Financial may also take trading positions in U.S. Treasury securities, residential mortgage-backed securities and municipal bonds to enhance returns on its securities portfolios. Both of these activities involve interest rate risk. BOK Financial has an insignificant exposure to foreign exchange risk and does not take positions in commodity derivatives.

A variety of methods are used to manage the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and position limits for each trading activity. Hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs.

Management uses a Value at Risk ("VaR") methodology to measure market risk due to changes in interest rates inherent in its trading activities. VaR is calculated based upon historical simulations over the past five years using a variance/covariance matrix of interest rate changes, a 10 business day holding period and a 99% confidence interval. It represents an amount of market loss that is likely to be exceeded in only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the VaR to $7.3 million. There were no instances of VaR being exceeded during the three months ended September 30, 2014 and 2013. At September 30, 2014, there were no trading positions for the purposes of enhancing returns on the Company's securities portfolio.

The average, high and low VaR amounts for three months ended September 30, 2014 and September 30, 2013 are as follows in Table 27.

Table 27 -- Value at Risk (VaR)
(In thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Average
$
1,601

 
$
2,244

 
$
1,739

 
$
3,049

High
3,064

 
3,908

 
3,731

 
5,826

Low
479

 
261

 
479

 
261


- 46 -


Controls and Procedures
 
As required by Rule 13a-15(b), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
Forward-Looking Statements

This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates, and projections about BOK Financial, the financial services industry and the economy in general. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and allowance for loan losses involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial’s acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to: (1) the ability to fully realize expected cost savings from mergers within the expected time frames, (2) the ability of other companies on which BOK Financial relies to provide goods and services in a timely and accurate manner, (3) changes in interest rates and interest rate relationships, (4) demand for products and services, (5) the degree of competition by traditional and nontraditional competitors, (6) changes in banking regulations, tax laws, prices, levies, and assessments, (7) the impact of technological advances and (8) trends in customer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

- 47 -


     
Consolidated Statements of Earnings (Unaudited)
 
 
 
 
 
 
 
 
(In thousands, except share and per share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Interest revenue
 
2014
 
2013
 
2014
 
2013
Loans
 
$
126,559

 
$
125,069

 
$
374,523

 
$
374,479

Residential mortgage loans held for sale
 
2,929

 
2,168

 
7,042

 
6,254

Trading securities
 
414

 
509

 
1,233

 
1,608

Taxable securities
 
3,238

 
3,434

 
9,715

 
10,836

Tax-exempt securities
 
1,373

 
1,163

 
4,348

 
3,341

Total investment securities
 
4,611

 
4,597

 
14,063

 
14,177

Taxable securities
 
45,257

 
50,167

 
138,970

 
156,534

Tax-exempt securities
 
451

 
560

 
1,576

 
1,851

Total available for sale securities
 
45,708

 
50,727

 
140,546

 
158,385

Fair value option securities
 
913

 
814

 
2,558

 
3,015

Restricted equity securities
 
2,133

 
1,189

 
4,405

 
3,516

Interest-bearing cash and cash equivalents
 
601

 
355

 
1,249

 
817

Total interest revenue
 
183,868

 
185,428

 
545,619

 
562,251

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
12,719

 
13,526

 
38,482

 
42,316

Borrowed funds
 
2,204

 
1,804

 
5,106

 
5,134

Subordinated debentures
 
2,154

 
2,209

 
6,501

 
6,568

Total interest expense
 
17,077

 
17,539

 
50,089

 
54,018

Net interest revenue
 
166,791

 
167,889

 
495,530

 
508,233

Provision for credit losses
 
—

 
(8,500
)
 
—

 
(16,500
)
Net interest revenue after provision for credit losses
 
166,791

 
176,389

 
495,530

 
524,733

Other operating revenue
 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
35,263

 
32,338

 
103,835

 
96,963

Transaction card revenue
 
31,578

 
30,055

 
92,222

 
87,689

Fiduciary and asset management revenue
 
29,738

 
23,892

 
85,003

 
71,008

Deposit service charges and fees
 
22,508

 
24,742

 
68,330

 
71,670

Mortgage banking revenue
 
26,814

 
23,486

 
78,988

 
100,058

Bank-owned life insurance
 
2,326

 
2,408

 
6,706

 
7,870

Other revenue
 
10,320

 
8,314

 
28,380

 
26,214

Total fees and commissions
 
158,547

 
145,235

 
463,464

 
461,472

Loss on other assets, net
 
(501
)
 
(377
)
 
(4,817
)
 
(1,576
)
Gain (loss) on derivatives, net
 
(93
)
 
31

 
1,706

 
(3,437
)
Gain (loss) on fair value option securities, net
 
(332
)
 
(80
)
 
6,504

 
(12,407
)
Change in fair value of mortgage servicing rights
 
5,281

 
(346
)
 
(5,624
)
 
16,627

Gain on available for sale securities, net
 
146

 
478

 
1,390

 
9,086

Total other-than-temporary impairment losses
 
—

 
(1,436
)
 
—

 
(2,574
)
Portion of loss recognized in (reclassified from) other comprehensive income
 
—

 
(73
)
 
—

 
266

Net impairment losses recognized in earnings
 
—

 
(1,509
)
 
—

 
(2,308
)
Total other operating revenue
 
163,048

 
143,432

 
462,623

 
467,457

Other operating expense
 
 

 
 

 
 

 
 

Personnel
 
123,043

 
125,799

 
351,190

 
379,563

Business promotion
 
6,160

 
5,355

 
19,151

 
16,578

Charitable contributions to BOKF Foundation
 
—

 
2,062

 
2,420

 
2,062

Professional fees and services
 
14,763

 
7,183

 
33,382

 
22,549

Net occupancy and equipment
 
18,892

 
17,280

 
54,577

 
50,670

Insurance
 
4,793

 
3,939

 
13,801

 
11,728

Data processing and communications
 
29,971

 
25,695

 
86,177

 
77,879

Printing, postage and supplies
 
3,380

 
3,505

 
10,350

 
10,759

Net losses and operating expenses of repossessed assets
 
4,966

 
2,014

 
7,516

 
3,542

Amortization of intangible assets
 
1,100

 
835

 
2,865

 
2,586

Mortgage banking costs
 
7,734

 
8,753

 
19,328

 
24,017

Other expense
 
7,032

 
7,878

 
20,888

 
23,268

Total other operating expense
 
221,834

 
210,298

 
621,645

 
625,201

Net income before taxes
 
108,005

 
109,523

 
336,508

 
366,989

Federal and state income taxes
 
31,879

 
33,461

 
106,610

 
121,980

Net income
 
76,126

 
76,062

 
229,898

 
245,009

Net income attributable to non-controlling interests
 
494

 
324

 
1,781

 
1,376

Net income attributable to BOK Financial Corporation shareholders
 
$
75,632

 
$
75,738

 
$
228,117

 
$
243,633

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.09

 
$
1.10

 
$
3.30

 
$
3.55

Diluted
 
$
1.09

 
$
1.10

 
$
3.29

 
$
3.54

Average shares used in computation:
 
 
 
 
 
 
 
 
Basic
 
68,455,866

 
68,049,179

 
68,364,549

 
67,953,253

Diluted
 
68,609,765

 
68,272,861

 
68,520,591

 
68,175,915

Dividends declared per share
 
$
0.40

 
$
0.38

 
$
1.20

 
$
1.14

See accompanying notes to consolidated financial statements.

- 48 -


Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
 
(In thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
76,126

 
$
76,062

 
$
229,898

 
$
245,009

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(42,399
)
 
(35,839
)
 
82,252

 
(240,384
)
Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
Interest revenue, Investments securities, Taxable securities
 
(273
)
 
(696
)
 
(1,009
)
 
(2,717
)
Interest expense, Subordinated debentures
 
52

 
85

 
206

 
209

Net impairment losses recognized in earnings
 
—

 
1,509

 
—

 
2,308

Gain on available for sale securities, net
 
(146
)
 
(478
)
 
(1,390
)
 
(9,086
)
Other comprehensive income (loss) before income taxes
 
(42,766
)
 
(35,419
)
 
80,059

 
(249,670
)
Federal and state income taxes
 
16,645

 
13,779

 
(31,141
)
 
97,124

Other comprehensive income (loss), net of income taxes
 
(26,121
)
 
(21,640
)
 
48,918

 
(152,546
)
Comprehensive income
 
50,005

 
54,422

 
278,816

 
92,463

Comprehensive income attributable to non-controlling interests
 
494

 
324

 
1,781

 
1,376

Comprehensive income attributable to BOK Financial Corp. shareholders
 
$
49,511

 
$
54,098

 
$
277,035

 
$
91,087


See accompanying notes to consolidated financial statements.

- 49 -


Consolidated Balance Sheets
(In thousands, except share data)
 
 
September 30,
2014
 
Dec 31,
2013
 
September 30,
2013
 
 
(Unaudited)
 
(Footnote 1)
 
(Unaudited)
Assets
 
 
 
 
 
 
Cash and due from banks
 
$
557,658

 
$
512,931

 
$
625,671

Interest-bearing cash and cash equivalents
 
2,007,901

 
574,282

 
535,313

Trading securities
 
169,712

 
91,616

 
150,887

Investment securities (fair value:  September 30, 2014 – $676,445; December 31, 2013 – $687,127 ; September 30, 2013 – $654,479)
 
655,091

 
677,878

 
644,225

Available for sale securities
 
9,306,886

 
10,147,162

 
10,372,903

Fair value option securities
 
175,761

 
167,125

 
167,860

Restricted equity securities
 
189,587

 
85,240

 
125,540

Residential mortgage loans held for sale
 
373,253

 
200,546

 
230,511

Loans
 
13,683,739

 
12,792,264

 
12,350,100

Allowance for loan losses
 
(191,244
)
 
(185,396
)
 
(194,325
)
Loans, net of allowance
 
13,492,495

 
12,606,868

 
12,155,775

Premises and equipment, net
 
275,718

 
277,849

 
275,347

Receivables
 
114,374

 
117,126

 
108,435

Goodwill
 
377,780

 
359,759

 
359,759

Intangible assets, net
 
35,476

 
24,564

 
25,407

Mortgage servicing rights
 
173,286

 
153,333

 
140,863

Real estate and other repossessed assets, net of allowance (September 30, 2014 – $25,916; December 31, 2013 – $24,195; September 30, 2013 – $26,910)
 
97,871

 
92,272

 
108,122

Derivative contracts
 
360,809

 
265,012

 
377,325

Cash surrender value of bank-owned life insurance
 
291,583

 
284,801

 
282,490

Receivable on unsettled securities sales
 
94,881

 
17,174

 
93,020

Other assets
 
354,898

 
359,894

 
386,914

Total assets
 
$
29,105,020

 
$
27,015,432

 
$
27,166,367

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
$
8,038,129

 
$
7,316,277

 
$
7,331,976

Interest-bearing deposits:
 
 

 
 

 
 

Transaction
 
9,244,709

 
9,934,051

 
9,119,810

Savings
 
341,638

 
323,006

 
319,849

Time
 
2,664,580

 
2,695,993

 
2,720,020

Total deposits
 
20,289,056

 
20,269,327

 
19,491,655

Funds purchased
 
85,135

 
868,081

 
992,345

Repurchase agreements
 
1,026,009

 
813,454

 
782,418

Other borrowings
 
3,484,487

 
1,040,353

 
1,837,181

Subordinated debentures
 
347,936

 
347,802

 
347,758

Accrued interest, taxes and expense
 
100,664

 
194,870

 
182,076

Derivative contracts
 
348,687

 
247,185

 
232,544

Due on unsettled securities purchases
 
8,126

 
45,740

 
114,259

Other liabilities
 
137,608

 
133,647

 
159,157

Total liabilities
 
25,827,708

 
23,960,459

 
24,139,393

Shareholders' equity:
 
 

 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: September 30, 2014 – 73,964,496 ; December 31, 2013 – 73,163,275; September 30, 2013 – 73,089,764)
 
4

 
4

 
4

Capital surplus
 
948,305

 
898,586

 
890,433

Retained earnings
 
2,495,338

 
2,349,428

 
2,303,688

Treasury stock (shares at cost:  September 30, 2014 – 4,626,998 ; December 31, 2013 – 4,304,782;  September 30, 2013 – 4,302,180)
 
(223,849
)
 
(202,346
)
 
(200,255
)
Accumulated other comprehensive income (loss)
 
23,295

 
(25,623
)
 
(2,626
)
Total shareholders’ equity
 
3,243,093

 
3,020,049

 
2,991,244

Non-controlling interests
 
34,219

 
34,924

 
35,730

Total equity
 
3,277,312

 
3,054,973

 
3,026,974

Total liabilities and equity
 
$
29,105,020

 
$
27,015,432

 
$
27,166,367


See accompanying notes to consolidated financial statements.

- 50 -


Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 
 
Common Stock
 
Capital
Surplus
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interests
 
Total Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2012
 
72,415

 
$
4

 
$
859,278

 
$
2,137,541

 
4,088

 
$
(188,883
)
 
$
149,920

 
$
2,957,860

 
$
35,821

 
$
2,993,681

Net income
 
—

 
—

 
—

 
243,633

 
—

 
—

 
—

 
243,633

 
1,376

 
245,009

Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
—

 
(152,546
)
 
(152,546
)
 
—

 
(152,546
)
Issuance of shares for equity compensation
 
675

 
—

 
26,317

 
—

 
214

 
(11,372
)
 
—

 
14,945

 
—

 
14,945

Tax effect from equity compensation, net
 
—

 
—

 
301

 
—

 
—

 
—

 
—

 
301

 
—

 
301

Share-based compensation
 
—

 
—

 
4,537

 
—

 
—

 
—

 
—

 
4,537

 
—

 
4,537

Cash dividends on common stock
 
—

 
—

 
—

 
(77,486
)
 
—

 
—

 
—

 
(77,486
)
 
—

 
(77,486
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,467
)
 
(1,467
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, Sept. 30, 2013
 
73,090

 
$
4

 
$
890,433

 
$
2,303,688

 
4,302

 
$
(200,255
)
 
$
(2,626
)
 
$
2,991,244

 
$
35,730

 
$
3,026,974

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2013
 
73,163

 
$
4

 
$
898,586

 
$
2,349,428

 
4,305

 
$
(202,346
)
 
$
(25,623
)
 
$
3,020,049

 
$
34,924

 
$
3,054,973

Net income
 
—

 
—

 
—

 
228,117

 
—

 
—

 
—

 
228,117

 
1,781

 
229,898

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
48,918

 
48,918

 
—

 
48,918

Issuance of shares for equity compensation
 
801

 
—

 
29,728

 
—

 
322

 
(21,503
)
 
—

 
8,225

 
—

 
8,225

Tax effect from equity compensation, net
 
—

 
—

 
8,176

 
—

 
—

 
—

 
—

 
8,176

 
—

 
8,176

Share-based compensation
 
—

 
—

 
11,815

 
—

 
—

 
—

 
—

 
11,815

 
—

 
11,815

Cash dividends on common stock
 
—

 
—

 
—

 
(82,207
)
 
—

 
—

 
—

 
(82,207
)
 
—

 
(82,207
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,486
)
 
(2,486
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, Sept. 30, 2014
 
73,964

 
$
4

 
$
948,305

 
$
2,495,338

 
4,627

 
$
(223,849
)
 
$
23,295

 
$
3,243,093

 
$
34,219

 
$
3,277,312


See accompanying notes to consolidated financial statements.

- 51 -


Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

 
Nine Months Ended
 
 
September 30,
 
 
2014
 
2013
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
229,898

 
$
245,009

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 

 
 

Provision for credit losses
 
—

 
(16,500
)
Change in fair value of mortgage servicing rights
 
5,624

 
(16,627
)
Unrealized losses (gains) from derivative contracts
 
(7,853
)
 
23,270

Tax effect from equity compensation, net
 
(8,176
)
 
(301
)
Change in bank-owned life insurance
 
(6,706
)
 
(7,870
)
Share-based compensation
 
11,815

 
4,537

Depreciation and amortization
 
40,833

 
40,820

Net amortization of securities discounts and premiums
 
43,078

 
47,468

Net realized losses (gains) on financial instruments and other assets
 
1,459

 
(7,917
)
Net gain on mortgage loans held for sale
 
(43,764
)
 
(79,045
)
Mortgage loans originated for sale
 
(3,220,120
)
 
(3,232,520
)
Proceeds from sale of mortgage loans held for sale
 
3,091,285

 
3,364,095

Capitalized mortgage servicing rights
 
(39,183
)
 
(39,157
)
Change in trading and fair value option securities
 
(88,005
)
 
177,953

Change in receivables
 
14,134

 
7,716

Change in other assets
 
36,931

 
58,311

Change in accrued interest, taxes and expense
 
(107,585
)
 
5,398

Change in other liabilities
 
23,164

 
(5,676
)
Net cash provided by (used in) operating activities
 
(23,171
)
 
568,964

Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
54,666

 
113,570

Proceeds from maturities or redemptions of available for sale securities
 
1,326,128

 
2,197,656

Purchases of investment securities
 
(37,094
)
 
(261,629
)
Purchases of available for sale securities
 
(2,324,730
)
 
(3,708,188
)
Proceeds from sales of available for sale securities
 
1,884,061

 
2,140,531

Change in amount receivable on unsettled securities transactions
 
(77,707
)
 
118,032

Loans originated, net of principal collected
 
(845,432
)
 
(27,426
)
Net payments on derivative asset contracts
 
(102,302
)
 
(67,707
)
Acquisitions, net of cash acquired
 
(21,898
)
 
—

Proceeds from disposition of assets
 
95,611

 
80,678

Purchases of assets
 
(193,597
)
 
(120,539
)
Net cash provided by (used in) investing activities
 
(242,294
)
 
464,978

Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
51,142

 
(1,439,433
)
Net change in time deposits
 
(31,413
)
 
(247,972
)
Net change in other borrowed funds
 
1,773,313

 
817,105

Net proceeds on derivative liability contracts
 
114,985

 
61,764

Net change in derivative margin accounts
 
(45,724
)
 
(105,226
)
Change in amount due on unsettled security transactions
 
(37,614
)
 
(183,194
)
Issuance of common and treasury stock, net
 
(6,847
)
 
14,945

Tax effect from equity compensation, net
 
8,176

 
301

Dividends paid
 
(82,207
)
 
(77,486
)
Net cash provided by (used in) financing activities
 
1,743,811

 
(1,159,196
)
Net increase (decrease) in cash and cash equivalents
 
1,478,346

 
(125,254
)
Cash and cash equivalents at beginning of period
 
1,087,213

 
1,286,239

Cash and cash equivalents at end of period
 
$
2,565,559

 
$
1,160,985

 
 
 
 
 
Cash paid for interest
 
$
47,264

 
$
51,689

Cash paid for taxes
 
$
61,627

 
$
104,589

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
38,797

 
$
73,075

Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period
 
$
100,430

 
$
88,618

Conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
34,425

 
$
31,641

Issuance of shares in settlement of accrued executive compensation
 
$
15,072

 
$
—

See accompanying notes to consolidated financial statements.

- 52 -


Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of BOK Financial Corporation (“BOK Financial” or “the Company”) have been prepared in accordance with accounting principles for interim financial information generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The unaudited consolidated financial statements include accounts of BOK Financial and its subsidiaries, principally BOKF, NA (“the Bank”), BOSC, Inc., The Milestone Group, Inc. and Cavanal Hill Investment Management Inc. Operating divisions of the Bank include Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust, Bank of Kansas City, BOK Financial Mortgage and the TransFund electronic funds network.

Certain reclassifications have been made to conform to the current period presentation.

The financial information should be read in conjunction with BOK Financial’s 2013 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2013 have been derived from the audited financial statements included in BOK Financial’s 2013 Form 10-K but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the nine-month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

FASB Accounting Standards Update No. 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements ("ASU 2013-08")

On June 7, 2013, the FASB issued ASU 2013-08 which amends the criteria an entity would need to meet to qualify as an investment company under ASC 946, Financial Services - Investment Companies. ASU 2013-08 also provides additional implementation guidance for the assessment and requires additional disclosures. ASU 2013-08 was effective prospectively during interim and annual periods beginning after December 15, 2013, with early adoption prohibited. The adoption of ASU 2013-08 did not have a material impact on the Company's consolidated financial statements.

FASB Accounting Standards Update No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects ("ASU 2014-01")

On January 15, 2014, the FASB issued ASU 2014-01 to simplify the amortization method an entity uses and modify the criteria to elect a measurement and presentation alternative, including the simplified amortization method, for certain investments in qualified affordable housing projects. This alternative permits the entity to present the investment's performance net of the related tax benefits as part of income tax expense. ASU 2014-01 is effective for the Company for interim and annual periods beginning after December 15, 2014. Early adoption is permitted. Adoption of ASU 2014-01 may affect income statement presentation, but otherwise is not expected to have a material impact on the Company's consolidated financial statements.


- 53 -


FASB Accounting Standards Update No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure ("ASU 2014-04")

On January 17, 2014, the FASB issued ASU 2014-04 to clarify when an entity is considered to have obtained physical possession (from an in-substance possession or foreclosure) of a residential real estate property collateralizing a mortgage loan. Upon physical possession of such real property, an entity is required to reclassify the nonperforming mortgage loan to other real estate owned. ASU 2014-04 is effective for the Company for interim and annual periods beginning after December 15, 2014. Early adoption is permitted. Adoption of ASU 2014-04 is not expected to have a material impact on the Company's consolidated financial statements.

FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09")

On May 28, 2014, the FASB issued ASU 2014-09 to clarify the principles for recognizing revenue by providing a more robust framework that will give greater consistency and comparability in revenue recognition practices. In the new framework, an entity recognizes revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services. The new model requires the identification of performance obligations included in contracts with customers, a determination of the transaction price and an allocation of the price to those performance obligations. The entity recognizes revenue when performance obligations are satisfied. ASU 2014-09 is effective for the Company for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the impact the adoption of ASU 2014-09 will have on the Company's financial statements.

FASB Accounting Standards Update No. 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure ("ASU 2014-14")

On August 8, 2014, the FASB issued ASU 2014-14 to give greater consistency in the classification of government-guaranteed loans upon foreclosure. ASU 2014-14 applies to all loans that contain a government guarantee that is not separable from the loan or for which the creditor has both the intent and ability to recover a fixed amount under the guarantee by conveying the property to the guarantor. Upon foreclosure, the creditor should reclassify the mortgage loan to an other receivable that is separate from loans and should measure the receivable at the amount of the loan balance expected to be recovered from the guarantor. ASU 2014-14 is effective for the Company for interim and annual periods beginning after December 15, 2014. Early adoption is permitted if the entity has already adopted ASU 2014-14. As of September 30, 2014, approximately $47 million of real estate and other repossessed assets is expected to be reclassified from Real estate and other repossessed assets to Receivables on the balance sheet with adoption of ASC 2014-14.
(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities is as follows (in thousands):
 
 
 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. Government agency debentures
 
$
41,004

 
$
(5
)
 
$
34,120

 
$
77

 
$
74,632

 
$
(598
)
U.S. agency residential mortgage-backed securities
 
33,226

 
(2,002
)
 
21,011

 
123

 
26,129

 
456

Municipal and other tax-exempt securities
 
76,884

 
90

 
27,350

 
(182
)
 
37,057

 
81

Other trading securities
 
18,598

 
62

 
9,135

 
(7
)
 
13,069

 
(25
)
Total
 
$
169,712

 
$
(1,855
)
 
$
91,616

 
$
11

 
$
150,887

 
$
(86
)

- 54 -


Investment Securities
 
The amortized cost and fair values of investment securities are as follows (in thousands):

 
 
September 30, 2014
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
410,595

 
$
410,595

 
$
415,233

 
$
4,847

 
$
(209
)
U.S. agency residential mortgage-backed securities – Other
 
37,763

 
38,585

 
40,259

 
1,674

 
—

Other debt securities
 
205,911

 
205,911

 
220,953

 
16,001

 
(959
)
Total
 
$
654,269

 
$
655,091

 
$
676,445

 
$
22,522

 
$
(1,168
)
1 
Carrying value includes $822 thousand of net unrealized gain which remains in Accumulated other comprehensive income (“AOCI”) in the Consolidated Balance Sheets related to certain securities transferred from the Available for Sale securities portfolio to the Investment securities portfolio as discussed in greater detail following.
2 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.
 
 
December 31, 2013
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
440,187

 
$
440,187

 
$
439,870

 
$
2,452

 
$
(2,769
)
U.S. agency residential mortgage-backed securities – Other
 
48,351

 
50,182

 
51,864

 
1,738

 
(56
)
Other debt securities
 
187,509

 
187,509

 
195,393

 
8,497

 
(613
)
Total
 
$
676,047

 
$
677,878

 
$
687,127

 
$
12,687

 
$
(3,438
)
1 
Carrying value includes $1.8 million of net unrealized gain which remains in Accumulated other comprehensive income (“AOCI”) in the Consolidated Balance Sheets related to certain securities transferred from the Available for Sale securities portfolio to the Investment securities portfolio as discussed in greater detail following.
2 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.
 
 
September 30, 2013
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
409,542

 
$
409,542

 
$
407,562

 
$
2,316

 
$
(4,296
)
U.S. agency residential mortgage-backed securities – Other
 
53,858

 
56,182

 
58,442

 
2,260

 
—

Other debt securities
 
178,501

 
178,501

 
188,475

 
10,094

 
(120
)
Total
 
$
641,901

 
$
644,225

 
$
654,479

 
$
14,670

 
$
(4,416
)
1 
Carrying value includes $2.3 million of net unrealized gain which remains in Accumulated other comprehensive income (“AOCI”) in the Consolidated Balance Sheets related to certain securities transferred from the Available for Sale securities portfolio to the Investment securities portfolio as discussed in greater detail following.
2 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.

During the three months ended September 30, 2011, the Company transferred certain U.S. government agency residential mortgage-backed securities from the available for sale portfolio to the investment securities (held-to-maturity) portfolio as the Company has the positive intent and ability to hold these securities to maturity. No gains or losses were recognized in the Consolidated Statement of Earnings at the time of the transfer. Transfers of debt securities into the investment securities portfolio (held-to-maturity) are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the investment securities portfolio.  Such amounts are amortized over the estimated remaining life of the security as an adjustment to yield, offsetting the related amortization of the premium or accretion of the discount on the transferred securities. At the time of transfer, the fair value totaled $131 million, amortized cost totaled $118 million and the pretax unrealized gain totaled $13 million.


- 55 -


The amortized cost and fair values of investment securities at September 30, 2014, by contractual maturity, are as shown in the following table (dollars in thousands):
 
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 
Total
 
Weighted
Average
Maturity²
Municipal and other tax-exempt:
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value
 
$
34,346

 
$
308,611

 
$
28,772

 
$
38,866

 
$
410,595

 
3.99

Fair value
 
34,512

 
310,492

 
29,280

 
40,949

 
415,233

 
 
Nominal yield¹
 
1.96
%
 
1.68
%
 
3.44
%
 
5.36
%
 
2.18
%
 
 
Other debt securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
15,052

 
36,732

 
56,463

 
97,664

 
205,911

 
9.47

Fair value
 
15,076

 
37,456

 
59,141

 
109,280

 
220,953

 
 
Nominal yield
 
3.41
%
 
4.91
%
 
5.22
%
 
6.16
%
 
5.48
%
 
 
Total fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
$
49,398

 
$
345,343

 
$
85,235

 
$
136,530

 
$
616,506

 
5.82

Fair value
 
49,588

 
347,948

 
88,421

 
150,229

 
636,186

 
 

Nominal yield
 
2.40
%
 
2.02
%
 
4.62
%
 
5.93
%
 
3.28
%
 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
38,585

 
³

Fair value
 
 

 
 

 
 

 
 

 
40,259

 
 

Nominal yield4
 
 

 
 

 
 

 
 

 
2.74
%
 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
655,091

 
 

Fair value
 
 

 
 

 
 

 
 

 
676,445

 
 

Nominal yield
 
 

 
 

 
 

 
 

 
3.25
%
 
 

1 
Calculated on a taxable equivalent basis using a 39% effective tax rate.
2 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
3 
The average expected lives of residential mortgage-backed securities were 3.0 years based upon current prepayment assumptions.
4 
The nominal yield on residential mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary - Unaudited for current yields on the investment securities portfolio.

- 56 -


Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
September 30, 2014
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,014

 
$
1,015

 
$
1

 
$
—

 
$
—

Municipal and other tax-exempt
 
63,508

 
64,363

 
1,580

 
(725
)
 
—

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
4,117,747

 
4,158,631

 
61,663

 
(20,779
)
 
—

FHLMC
 
1,812,708

 
1,823,393

 
21,886

 
(11,201
)
 
—

GNMA
 
858,003

 
863,055

 
9,240

 
(4,188
)
 
—

Other
 
5,132

 
5,524

 
392

 
—

 
—

Total U.S. government agencies
 
6,793,590

 
6,850,603

 
93,181

 
(36,168
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
68,493

 
73,405

 
4,985

 
—

 
(73
)
Jumbo-A loans
 
92,831

 
98,088

 
5,611

 
—

 
(354
)
Total private issue
 
161,324

 
171,493

 
10,596

 
—

 
(427
)
Total residential mortgage-backed securities
 
6,954,914

 
7,022,096

 
103,777

 
(36,168
)
 
(427
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,168,978

 
2,141,645

 
1,841

 
(29,174
)
 
—

Other debt securities
 
34,470

 
34,291

 
71

 
(250
)
 
—

Perpetual preferred stock
 
22,171

 
24,358

 
2,194

 
(7
)
 
—

Equity securities and mutual funds
 
18,896

 
19,118

 
773

 
(551
)
 
—

Total
 
$
9,263,951

 
$
9,306,886

 
$
110,237

 
$
(66,875
)
 
$
(427
)
1 Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet.
2 Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

- 57 -


 
 
December 31, 2013
 
 
Amortized
 
Fair
 
Gross Unrealized¹
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,042

 
$
1,042

 
$
—

 
$
—

 
$
—

Municipal and other tax-exempt
 
73,232

 
73,775

 
1,606

 
(1,063
)
 
—

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
4,224,327

 
4,232,332

 
68,154

 
(60,149
)
 
—

FHLMC
 
2,308,341

 
2,293,943

 
25,813

 
(40,211
)
 
—

GNMA
 
1,151,225

 
1,152,128

 
9,435

 
(8,532
)
 
—

Other
 
36,296

 
37,607

 
1,311

 
—

 
—

Total U.S. government agencies
 
7,720,189

 
7,716,010

 
104,713

 
(108,892
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
104,559

 
107,212

 
4,386

 
—

 
(1,733
)
Jumbo-A loans
 
109,622

 
113,887

 
4,974

 
—

 
(709
)
Total private issue
 
214,181

 
221,099

 
9,360

 
—

 
(2,442
)
Total residential mortgage-backed securities
 
7,934,370

 
7,937,109

 
114,073

 
(108,892
)
 
(2,442
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,100,146

 
2,055,804

 
1,042

 
(45,384
)
 
—

Other debt securities
 
35,061

 
35,241

 
368

 
(188
)
 
—

Perpetual preferred stock
 
22,171

 
22,863

 
705

 
(13
)
 
—

Equity securities and mutual funds
 
19,069

 
21,328

 
2,326

 
(67
)
 
—

Total
 
$
10,185,091

 
$
10,147,162

 
$
120,120

 
$
(155,607
)
 
$
(2,442
)
1 Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet.
2 Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

 
 
September 30, 2013
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,052

 
$
1,052

 
$
—

 
$
—

 
$
—

Municipal and other tax-exempt
 
93,897

 
95,440

 
2,792

 
(1,249
)
 
—

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
4,513,161

 
4,544,505

 
81,984

 
(50,640
)
 
—

FHLMC
 
2,412,948

 
2,412,116

 
30,673

 
(31,505
)
 
—

GNMA
 
978,361

 
984,065

 
11,054

 
(5,350
)
 
—

Other
 
38,979

 
40,701

 
1,722

 
—

 
—

Total U.S. government agencies
 
7,943,449

 
7,981,387

 
125,433

 
(87,495
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
109,234

 
109,592

 
2,970

 
—

 
(2,612
)
Jumbo-A loans
 
118,312

 
121,308

 
3,816

 
(138
)
 
(682
)
Total private issue
 
227,546

 
230,900

 
6,786

 
(138
)
 
(3,294
)
Total residential mortgage-backed securities
 
8,170,995

 
8,212,287

 
132,219

 
(87,633
)
 
(3,294
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
1,985,924

 
1,946,295

 
354

 
(39,983
)
 
—

Other debt securities
 
35,091

 
35,362

 
459

 
(188
)
 
—

Perpetual preferred stock
 
22,171

 
23,680

 
1,534

 
(25
)
 
—

Equity securities and mutual funds
 
56,348

 
58,787

 
2,479

 
(40
)
 
—

Total
 
$
10,365,478

 
$
10,372,903

 
$
139,837

 
$
(129,118
)
 
$
(3,294
)
1 
Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet.
2 
Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

- 58 -



The amortized cost and fair values of available for sale securities at September 30, 2014, by contractual maturity, are as shown in the following table (dollars in thousands):
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 
Total
 
Weighted
Average
Maturity5
U.S. Treasuries:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
1,014

 
$
—

 
$
—

 
$
—

 
$
1,014

 
0.38

Fair value
1,015

 
—

 
—

 
—

 
1,015

 
 
Nominal yield
0.24
%
 
—
%
 
—
%
 
—
%
 
0.24
%
 
 
Municipal and other tax-exempt:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
6,690

 
$
30,604

 
$
2,265

 
$
23,949

 
$
63,508

 
8.48

Fair value
6,769

 
31,694

 
2,488

 
23,412

 
64,363

 
 
Nominal yield¹
3.71
%
 
4.06
%
 
6.48
%
 
1.92
%
6 
3.30
%
 
 
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
—

 
$
737,845

 
$
1,077,326

 
$
353,807

 
$
2,168,978

 
8.75

Fair value
—

 
730,164

 
1,062,449

 
349,032

 
2,141,645

 
 
Nominal yield
—
%
 
1.41
%
 
1.72
%
 
1.32
%
 
1.55
%
 
 
Other debt securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
30,070

 
$
—

 
$
—

 
$
4,400

 
$
34,470

 
4.39

Fair value
30,141

 
—

 
—

 
4,150

 
34,291

 
 
Nominal yield
1.80
%
 
—
%
 
—
%
 
1.71
%
6 
1.79
%
 
 
Total fixed maturity securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
37,774

 
$
768,449

 
$
1,079,591

 
$
382,156

 
$
2,267,970

 
8.67

Fair value
37,925

 
761,858

 
1,064,937

 
376,594

 
2,241,314

 
 
Nominal yield
2.09
%
 
1.51
%
 
1.73
%
 
1.37
%
 
1.60
%
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
 

 
 

 
 

 
 

 
$
6,954,914

 
2 

Fair value
 

 
 

 
 

 
 

 
7,022,096

 
 
Nominal yield4
 

 
 

 
 

 
 

 
1.91
%
 
 
Equity securities and mutual funds:
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 

 
 

 
 

 
 

 
$
41,067

 
³

Fair value
 

 
 

 
 

 
 

 
43,476

 
 

Nominal yield
 

 
 

 
 

 
 

 
1.27
%
 
 

Total available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 

Amortized cost
 

 
 

 
 

 
 

 
$
9,263,951

 
 

Fair value
 

 
 

 
 

 
 

 
9,306,886

 
 

Nominal yield
 

 
 

 
 

 
 

 
1.83
%
 
 

1 
Calculated on a taxable equivalent basis using a 39% effective tax rate.
2 
The average expected lives of mortgage-backed securities were 3.5 years based upon current prepayment assumptions.
3 
Primarily common stock and preferred stock of corporate issuers with no stated maturity.
4 
The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary –– Unaudited following for current yields on available for sale securities portfolio.
5 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
6 
Nominal yield on municipal and other tax-exempt securities and other debt securities with contractual maturity dates over ten years are based on variable rates which generally are reset within 35 days.


- 59 -


Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Proceeds
$
552,871

 
$
355,650

 
$
1,884,061

 
$
2,140,531

Gross realized gains
3,441

 
3,164

 
19,768

 
18,948

Gross realized losses
(3,295
)
 
(2,686
)
 
(18,378
)
 
(9,862
)
Related federal and state income tax expense
57

 
184

 
541

 
3,533


A summary of investment and available for sale securities that have been pledged as collateral for repurchase agreements, public trust funds on deposit and for other purposes, as required by law was as follows (in thousands):
 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
Investment:
 
 
 
 
 
Carrying value
$
66,470

 
$
89,087

 
$
92,442

Fair value
69,031

 
91,804

 
95,658

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
Amortized cost
5,388,372

 
5,171,782

 
5,020,732

Fair value
5,390,599

 
5,133,530

 
5,009,611


The secured parties do not have the right to sell or re-pledge these securities.


- 60 -


Temporarily Impaired Securities as of September 30, 2014
(in thousands):
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
24

 
$
481

 
$
—

 
$
60,742

 
$
209

 
$
61,223

 
$
209

U.S. Agency residential mortgage-backed securities – Other
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other debt securities
 
83

 
25,373

 
929

 
1,811

 
30

 
27,184

 
959

Total investment
 
107

 
$
25,854

 
$
929

 
$
62,553

 
$
239

 
$
88,407

 
$
1,168


 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Municipal and other tax-exempt
 
19

 
$
—

 
$
—

 
$
12,288

 
$
725

 
$
12,288

 
$
725

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 
 
 

 
 

 
 

 
 

 


 


FNMA
 
55

 
652,845

 
1,923

 
806,175

 
18,856

 
1,459,020

 
20,779

FHLMC
 
33

 
385,832

 
1,426

 
499,320

 
9,775

 
885,152

 
11,201

GNMA
 
8

 
58,730

 
13

 
144,397

 
4,175

 
203,127

 
4,188

Total U.S. agencies
 
96

 
1,097,407

 
3,362

 
1,449,892

 
32,806

 
2,547,299

 
36,168

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
4

 
12,169

 
73

 
—

 
—

 
12,169

 
73

Jumbo-A loans
 
8

 
3,252

 
106

 
7,587

 
248

 
10,839

 
354

Total private issue
 
12

 
15,421

 
179

 
7,587

 
248

 
23,008

 
427

Total residential mortgage-backed securities
 
108

 
1,112,828

 
3,541

 
1,457,479

 
33,054

 
2,570,307

 
36,595

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
125

 
428,610

 
2,312

 
1,235,200

 
26,862

 
1,663,810

 
29,174

Other debt securities
 
2

 
—

 
—

 
4,150

 
250

 
4,150

 
250

Perpetual preferred stocks
 
1

 
1,018

 
7

 
—

 
—

 
1,018

 
7

Equity securities and mutual   funds
 
81

 
4,869

 
511

 
1,497

 
40

 
6,366

 
551

Total available for sale
 
336

 
$
1,547,325


$
6,371


$
2,710,614


$
60,931


$
4,257,939


$
67,302

1Includes the following securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income:
Alt-A loans
 
4

 
12,169

 
73

 
—

 
—

 
12,169

 
73

Jumbo-A loans
 
8

 
3,252

 
106

 
7,587

 
248

 
10,839

 
354


- 61 -


Temporarily Impaired Securities as of December 31, 2013
(In thousands)
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
107

 
$
166,382

 
$
1,921

 
$
53,073

 
$
848

 
$
219,455

 
$
2,769

U.S. Agency residential mortgage-backed securities – Other
 
2

 
15,224

 
56

 
—

 
—

 
15,224

 
56

Other debt securities
 
30

 
10,932

 
549

 
777

 
64

 
11,709

 
613

Total investment
 
139

 
$
192,538

 
$
2,526

 
$
53,850

 
$
912

 
$
246,388

 
$
3,438


 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


Municipal and other tax-exempt
 
27

 
$
13,286

 
$
245

 
$
17,805

 
$
818

 
$
31,091

 
$
1,063

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
81

 
2,281,491

 
60,149

 
—

 
—

 
2,281,491

 
60,149

FHLMC
 
50

 
1,450,588

 
40,211

 
—

 
—

 
1,450,588

 
40,211

GNMA
 
27

 
647,058

 
8,532

 
—

 
—

 
647,058

 
8,532

Total U.S. agencies
 
158

 
4,379,137

 
108,892

 
—

 
—

 
4,379,137

 
108,892

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
7

 
11,043

 
756

 
30,774

 
977

 
41,817

 
1,733

Jumbo-A loans
 
9

 
14,642

 
709

 
—

 
—

 
14,642

 
709

Total private issue
 
16

 
25,685

 
1,465

 
30,774

 
977

 
56,459

 
2,442

Total residential mortgage-backed securities
 
174

 
4,404,822

 
110,357

 
30,774

 
977

 
4,435,596

 
111,334

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
123

 
1,800,717

 
45,302

 
2,286

 
82

 
1,803,003

 
45,384

Other debt securities
 
3

 
4,712

 
188

 
—

 
—

 
4,712

 
188

Perpetual preferred stocks
 
1

 
4,988

 
13

 
—

 
—

 
4,988

 
13

Equity securities and mutual funds
 
118

 
2,070

 
67

 
—

 
—

 
2,070

 
67

Total available for sale
 
446

 
$
6,230,595

 
$
156,172

 
$
50,865

 
$
1,877

 
$
6,281,460

 
$
158,049

1 
Includes the following securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income:
Alt-A loans
 
7

 
$
11,043

 
$
756

 
$
30,774

 
$
977

 
$
41,817

 
$
1,733

Jumbo-A loans
 
9

 
14,642

 
709

 
—

 
—

 
14,642

 
709



- 62 -


Temporarily Impaired Securities as of September 30, 2013
(In thousands)
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
136

 
$
257,359

 
$
4,292

 
$
803

 
$
4

 
$
258,162

 
$
4,296

U.S. Agency residential mortgage-backed securities – Other
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other debt securities
 
29

 
1,326

 
59

 
780

 
61

 
2,106

 
120

Total investment
 
165

 
$
258,685

 
$
4,351

 
$
1,583

 
$
65

 
$
260,268

 
$
4,416


 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


U.S. Treasury
 
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Municipal and other tax-exempt1
 
46

 
$
20,274

 
$
352

 
$
19,575

 
$
897

 
$
39,849

 
$
1,249

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
79

 
2,328,213

 
50,640

 
—

 
—

 
2,328,213

 
50,640

FHLMC
 
46

 
1,402,010

 
31,505

 
—

 
—

 
1,402,010

 
31,505

GNMA
 
23

 
674,512

 
5,350

 
—

 
—

 
674,512

 
5,350

Total U.S. agencies
 
148

 
4,404,735

 
87,495

 
—

 
—

 
4,404,735

 
87,495

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
10

 
11,336

 
707

 
48,849

 
1,905

 
60,185

 
2,612

Jumbo-A loans
 
10

 
15,326

 
682

 
11,742

 
138

 
27,068

 
820

Total private issue
 
20

 
26,662

 
1,389

 
60,591

 
2,043

 
87,253

 
3,432

Total residential mortgage-backed securities
 
168

 
4,431,397

 
88,884

 
60,591

 
2,043

 
4,491,988

 
90,927

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
116

 
1,803,008

 
39,983

 
—

 
—

 
1,803,008

 
39,983

Other debt securities
 
3

 
4,712

 
188

 
—

 
—

 
4,712

 
188

Perpetual preferred stocks
 
1

 
4,975

 
25

 
—

 
—

 
4,975

 
25

Equity securities and mutual funds
 
97

 
1,529

 
40

 
—

 
—

 
1,529

 
40

Total available for sale
 
431

 
$
6,265,895

 
$
129,472

 
$
80,166

 
$
2,940

 
$
6,346,061

 
$
132,412

1 
Includes the following securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income:
Alt-A loans
 
10

 
$
11,336

 
$
707

 
$
48,849

 
$
1,905

 
$
60,185

 
$
2,612

Jumbo-A loans
 
9

 
15,326

 
682

 
—

 
—

 
15,326

 
682


On a quarterly basis, the Company performs separate evaluations of impaired debt and equity investments and available for sale securities to determine if the unrealized losses are temporary.
 

- 63 -


For debt securities, management determines whether it intends to sell or if it is more-likely-than-not that it will be required to sell impaired securities. This determination considers current and forecasted liquidity requirements, regulatory and capital requirements and securities portfolio management. Based on this evaluation as of September 30, 2014, the Company does not intend to sell any impaired available for sale securities before fair value recovers to the current amortized cost and it is more-likely-than-not that the Company will not be required to sell impaired securities before fair value recovers, which may be maturity.

Impairment of debt securities rated investment grade by all nationally-recognized rating agencies is considered temporary unless specific contrary information is identified. None of the debt securities rated investment grade were considered to be other-than-temporarily impaired at September 30, 2014.

- 64 -


At September 30, 2014, the composition of the Company’s investment and available for sale securities portfolios by the lowest current credit rating assigned by any of the three nationally-recognized rating agencies is as follows (in thousands):
 
 
 
U.S. Govt / GSE 1
 

AAA - AA
 
 
A - BBB
 
 
Below Investment Grade
 
 
Not Rated
 
 
Total
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
$
—

 
$
—

 
$
268,636

 
$
269,922

 
$
13,679

 
$
13,865

 
$
—

 
$
—

 
$
128,280

 
$
131,446

 
$
410,595

 
$
415,233

Mortgage-backed securities -- other
 
38,585

 
40,259

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
38,585

 
40,259

Other debt securities
 
—

 
—

 
160,353

 
176,054

 
—

 
—

 
—

 
—

 
45,558

 
44,899

 
205,911

 
220,953

Total investment securities
 
$
38,585

 
$
40,259

 
$
428,989

 
$
445,976

 
$
13,679

 
$
13,865

 
$
—

 
$
—

 
$
173,838

 
$
176,345

 
$
655,091

 
$
676,445

 
 
U.S. Govt / GSE 1
 
AAA - AA
 
 
A - BBB
 
Below Investment Grade
 
Not Rated
 
Total
 
 
Amortized Cost
 
Fair
Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair
Value
Available for Sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
$
1,014

 
$
1,015

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,014

 
$
1,015

Municipal and other tax-exempt
 
—

 
—

 
40,532

 
41,834

 
11,520

 
11,007

 
—

 
—

 
11,456

 
11,522

 
63,508

 
64,363

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
4,117,747

 
4,158,631

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
4,117,747

 
4,158,631

FHLMC
 
1,812,708

 
1,823,393

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,812,708

 
1,823,393

GNMA
 
858,003

 
863,055

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
858,003

 
863,055

Other
 
5,132

 
5,524

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,132

 
5,524

Total U.S. government agencies
 
6,793,590

 
6,850,603

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
6,793,590

 
6,850,603

Private issue:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
68,493

 
73,405

 
—

 
—

 
68,493

 
73,405

Jumbo-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
92,831

 
98,088

 
—

 
—

 
92,831

 
98,088

Total private issue
 
—

 
—

 
—

 
—

 
—

 
—

 
161,324

 
171,493

 
—

 
—

 
161,324

 
171,493

Total residential mortgage-backed securities
 
6,793,590

 
6,850,603

 
—

 
—

 
—

 
—

 
161,324

 
171,493

 
—

 
—

 
6,954,914

 
7,022,096

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,168,978

 
2,141,645

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,168,978

 
2,141,645

Other debt securities
 
—

 
—

 
4,400

 
4,150

 
30,070

 
30,141

 
—

 
—

 
—

 
—

 
34,470

 
34,291

Perpetual preferred stock
 
—

 
—

 
—

 
—

 
11,406

 
12,447

 
10,765

 
11,911

 
—

 
—

 
22,171

 
24,358

Equity securities and mutual funds
 
—

 
—

 
4

 
510

 
—

 
—

 
—

 
—

 
18,892

 
18,608

 
18,896

 
19,118

Total available for sale securities
 
$
8,963,582

 
$
8,993,263

 
$
44,936

 
$
46,494

 
$
52,996

 
$
53,595

 
$
172,089

 
$
183,404

 
$
30,348

 
$
30,130

 
$
9,263,951

 
$
9,306,886

1 
U.S. government and government sponsored enterprises are not rated by the nationally-recognized rating agencies as these securities are guaranteed by agencies of the U.S. government or government-sponsored enterprises.

- 65 -


At September 30, 2014, the entire portfolio of privately issued residential mortgage-backed securities was rated below investment grade. The gross unrealized loss on these securities totaled $427 thousand. Ratings by the nationally-recognized rating agencies are subjective in nature and accordingly ratings can vary significantly amongst the agencies. Limitations generally expressed by the rating agencies include statements that ratings do not predict the specific percentage default likelihood over any given period of time and that ratings do not opine on expected loss severity of an obligation should the issuer default. As such, the impairment of securities rated below investment grade was evaluated to determine if we expect not to recover the entire amortized cost basis of the security. This evaluation was based on projections of estimated cash flows based on individual loans underlying each security using current and anticipated increases in unemployment and default rates, decreases in housing prices and estimated liquidation costs at foreclosure.

The primary assumptions used in this evaluation were:

 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
 
 
 
 
 
 
Unemployment rate
Moving down to 6.2% over the next 12 months and remains at 6.2% thereafter.
 
Increasing to 7.3% over the next 12 months and remain at 7.3% thereafter.
 
Increasing to 7.5% over the next 12 months and remain at 7.5% thereafter.
Housing price appreciation/depreciation
Starting with current depreciated housing prices based on information derived from the FHFA1, appreciating 4% over the next 12 months, then flat for the following 12 months and then appreciating at 2% per year thereafter.
 
Starting with current depreciated housing prices based on information derived from the FHFA, appreciating 4% over the next 12 months, then flat for the following 12 months and then appreciating at 2% per year thereafter.
 
Starting with current depreciated housing prices based on information derived from the FHFA, appreciating 5% over the next 12 months, then flat for the following 12 months and then appreciating at 2% per year thereafter.
Estimated liquidation costs
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
 
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
 
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
Discount rates
Estimated cash flows were discounted at rates that range from 2.00% to 6.25% based on our current expected yields.
 
Estimated cash flows were discounted at rates that range from 2.00% to 6.25% based on our current expected yields.
 
Estimated cash flows were discounted at rates that range from 2.00% to 6.25% based on our current expected yields.
1 
Federal Housing Finance Agency

We also consider the current loan-to-value ratio and remaining credit enhancement as part of the assessment of the cash flows available to recover the amortized cost of the debt securities. Each factor is considered in the evaluation.

The Company calculates the current loan-to-value ratio for each mortgage-backed security using loan-level data. The current loan-to-value ratio is the current outstanding loan amount divided by an estimate of the current home value. The current home value is derived from FHFA data. FHFA provides historical information on home price depreciation at both the Metropolitan Statistical Area and state level.  This information is matched to each loan to estimate the home price depreciation. Data is accumulated from the loan level to determine the current loan-to-value ratio for the security as a whole.

Remaining credit enhancement is the amount of credit enhancement available to absorb current projected losses within the pool of loans that support the security. The Company acquires the benefit of credit enhancement by investing in senior or super-senior tranches for many of our residential mortgage-backed securities. Subordinated tranches held by other investors are specifically designed to absorb losses before the senior or super-senior tranches, which effectively increases the typical credit support for these types of bonds. Current projected losses consider depreciation of home prices based on FHFA data, estimated costs and additional losses to liquidate collateral and delinquency status of the individual loans underlying the security.

Credit loss impairment is recorded as a charge to earnings. Additional impairment based on the difference between the total unrealized loss and the estimated credit loss on these securities is charged against other comprehensive income, net of deferred taxes. No credit loss impairments were recognized in earnings on privately issued residential mortgage-backed securities during the three months ended September 30, 2014.


- 66 -


A distribution of the amortized cost (after recognition of the other-than-temporary impairment), fair value and credit loss impairments recognized on our privately issued residential mortgage-backed securities is as follows (in thousands, except for number of securities):
 
 
 
 
 
 
 
 
Credit Losses Recognized
 
 
 
 
 
 
 
 
Three months ended
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
Life-to-date
 
 
Number of Securities
 
Amortized Cost
 
Fair Value
 
Number of
Securities
 
Amount
 
Number of Securities
 
Amount
Alt-A
 
14

 
$
68,493

 
$
73,405

 
—

 
$
—

 
14

 
$
36,127

Jumbo-A
 
30

 
92,831

 
98,088

 
—

 
—

 
29

 
18,220

Total
 
44

 
$
161,324

 
$
171,493

 
—

 
$
—

 
43

 
$
54,347


Impaired equity securities, including perpetual preferred stocks, are evaluated based on management's ability and intent to hold the securities until fair value recovers over periods not to exceed three years. The assessment of the ability and intent to hold these securities focuses on the liquidity needs, asset/liability management objectives and securities portfolio objectives. Factors considered when assessing recovery include forecasts of general economic conditions and specific performance of the issuer, analyst ratings and credit spreads for preferred stocks which have debt-like characteristics. The Company has evaluated the near-term prospects of the investments in relation to the severity and duration of the impairment and based on that evaluation has the ability and intent to hold these investments until a recovery in fair value. Accordingly, all impairment of equity securities was considered temporary at September 30, 2014.

The following is a tabular roll forward of the amount of credit-related OTTI recognized on available for sale debt securities in earnings (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Balance of credit-related OTTI recognized on available for sale debt, beginning of period
 
$
54,347

 
$
76,027

 
$
67,346

 
$
75,228

Additions for credit-related OTTI not previously recognized
 
—

 
67

 
—

 
619

Additions for increases in credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost
 
—

 
73

 
—

 
320

Reductions for change in intent to hold before recovery
 
—

 
(3,589
)
 
—

 
(3,589
)
Sales
 
—

 
(5,232
)
 
(12,999
)
 
(5,232
)
Balance of credit-related OTTI recognized on available for sale debt securities, end of period
 
$
54,347

 
$
67,346

 
$
54,347

 
$
67,346


Additions above exclude other-than-temporary impairment recorded due to change in intent to hold before recovery.

- 67 -


Fair Value Option Securities
 
Fair value option securities represent securities which the Company has elected to carry at fair value and are separately identified on the Consolidated Balance Sheets. Changes in the fair value are recognized in earnings as they occur. Certain residential mortgage-backed securities issued by U.S. government agencies and derivative contracts are held as an economic hedge of the mortgage servicing rights. In addition, certain corporate debt securities are economically hedged by derivative contracts to manage interest rate risk. Derivative contracts that have not been designated as hedging instruments effectively modify these fixed rate securities into variable rate securities.

The fair value and net unrealized gain (loss) included in fair value option securities is as follows (in thousands):
 
 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. agency residential mortgage-backed securities
 
$
175,761

 
$
(2,061
)
 
$
157,431

 
$
(8,378
)
 
$
163,567

 
$
(5,365
)
Other securities
 
—

 
—

 
9,694

 
209

 
4,293

 
1

Total
 
$
175,761

 
$
(2,061
)
 
$
167,125

 
$
(8,169
)
 
$
167,860

 
$
(5,364
)


Restricted Equity Securities

Restricted equity securities include stock we are required to hold as members of the Federal Reserve system and the Federal Home Loan Banks ("FHLB"). Restricted equity securities are carried at cost as these securities do not have a readily determined fair value because ownership of these shares are restricted and lacks a market. A summary of restricted equity securities follows (in thousands):

 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
Federal Reserve stock
$
33,971

 
$
33,742

 
$
33,695

Federal Home Loan Bank stock
155,616

 
51,498

 
91,845

Total
$
189,587

 
$
85,240

 
$
125,540



- 68 -


(3) Derivatives
 
Derivative instruments may be used by the Company as part of its interest rate risk management programs or may be offered to customers. All derivative instruments are carried at fair value and changes in fair value are reported in earnings as they occur. Credit risk is also considered in determining fair value.

When bilateral netting agreements or similar arrangements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by derivative contract type by counterparty basis.

Derivative contracts may require the Company to provide or receive cash margin as collateral for derivative assets and liabilities. Derivative assets and liabilities are reported net of cash margin when certain conditions are met. In addition, derivative contracts executed with customers under Customer Risk Management Programs may be secured by non-cash collateral in conjunction with a credit agreement with that customer. Access to collateral, in the event of default is reasonably assured. As of September 30, 2014, a decrease in BOK Financial's credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $19 million.
 
None of these derivative contracts have been designated as hedging instruments.

Customer Risk Management Programs
 
BOK Financial offers programs to permit its customers to manage various risks, including fluctuations in energy, cattle and other agricultural products, and foreign exchange rates, or to take positions in derivative contracts. Customers may also manage interest rate risk through interest rate swaps used by borrowers to modify interest rate terms of their loans or to-be-announced securities used by mortgage banking customers to hedge their loan production. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize the risk of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in other operating revenue – brokerage and trading revenue in the Consolidated Statements of Earnings.
 
Interest Rate Risk Management Programs
 
BOK Financial may use derivative contracts in managing its interest rate sensitivity and as part of its economic hedge of the change in the fair value of mortgage servicing rights. Interest rate swaps are generally used to reduce overall asset sensitivity by converting specific fixed-rate liabilities to floating-rate based on LIBOR. As of September 30, 2014, BOK Financial had interest rate swaps with a notional value of $47 million used as part of the economic hedge of the change in the fair value of the mortgage servicing rights.

As discussed in Note 6, certain derivative contracts not designated as hedging instruments related to mortgage loan commitments and forward sales contracts are included in Residential mortgage loans held for sale on the Consolidated Balance Sheets. See Note 6 for additional discussion of notional, fair value and impact on earnings of these contracts. Forward sales contracts are not considered swaps under the Commodity and Futures Trading Commission final rules.



- 69 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2014 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
13,125,309

 
$
48,913

 
$
(25,263
)
 
$
23,650

 
$
—

 
$
23,650

Interest rate swaps
 
1,171,163

 
34,148

 
—

 
34,148

 
(199
)
 
33,949

Energy contracts
 
847,446

 
32,005

 
(15,660
)
 
16,345

 
(3,499
)
 
12,846

Agricultural contracts
 
49,943

 
2,372

 
(470
)
 
1,902

 
—

 
1,902

Foreign exchange contracts
 
336,755

 
275,116

 
—

 
275,116

 
—

 
275,116

Equity option contracts
 
202,883

 
13,900

 
—

 
13,900

 
(554
)
 
13,346

Total customer risk management programs
 
15,733,499

 
406,454

 
(41,393
)
 
365,061

 
(4,252
)
 
360,809

Interest rate risk management programs
 
—

 
—

 
—

 
—

 
—

 
—

Total derivative contracts
 
$
15,733,499

 
$
406,454

 
$
(41,393
)
 
$
365,061

 
$
(4,252
)
 
$
360,809

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional¹
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
13,702,440

 
$
45,889

 
$
(25,263
)
 
$
20,626

 
$
—

 
$
20,626

Interest rate swaps
 
1,171,163

 
34,316

 
—

 
34,316

 
(15,145
)
 
19,171

Energy contracts
 
844,976

 
35,583

 
(15,660
)
 
19,923

 
—

 
19,923

Agricultural contracts
 
49,911

 
2,404

 
(470
)
 
1,934

 
(1,888
)
 
46

Foreign exchange contracts
 
336,661

 
274,829

 
—

 
274,829

 
(1,729
)
 
273,100

Equity option contracts
 
202,883

 
13,900

 
—

 
13,900

 
—

 
13,900

Total customer risk management programs
 
16,308,034

 
406,921

 
(41,393
)
 
365,528

 
(18,762
)
 
346,766

Interest rate risk management programs
 
47,000

 
1,921

 
—

 
1,921

 
—

 
1,921

Total derivative contracts
 
$
16,355,034

 
$
408,842

 
$
(41,393
)
 
$
367,449

 
$
(18,762
)
 
$
348,687

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.



- 70 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2013 (in thousands):

 
 
Assets
 
 
Notional
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
10,817,159

 
$
102,921

 
$
(46,623
)
 
$
56,298

 
$
—

 
$
56,298

Interest rate swaps
 
1,283,379

 
44,124

 
—

 
44,124

 
(731
)
 
43,393

Energy contracts
 
1,263,266

 
48,078

 
(29,957
)
 
18,121

 
(2,575
)
 
15,546

Agricultural contracts
 
100,886

 
2,060

 
(1,166
)
 
894

 
—

 
894

Foreign exchange contracts
 
136,543

 
136,543

 
—

 
136,543

 
(2,147
)
 
134,396

Equity option contracts
 
210,816

 
17,957

 
—

 
17,957

 
(3,472
)
 
14,485

Total customer risk management programs
 
13,812,049

 
351,683

 
(77,746
)
 
273,937

 
(8,925
)
 
265,012

Interest rate risk management programs
 
—

 
—

 
—

 
—

 
—

 
—

Total derivative contracts
 
$
13,812,049

 
$
351,683

 
$
(77,746
)
 
$
273,937

 
$
(8,925
)
 
$
265,012

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
10,982,049

 
$
99,830

 
$
(46,623
)
 
$
53,207

 
$
—

 
$
53,207

Interest rate swaps
 
1,283,379

 
44,377

 
—

 
44,377

 
(17,853
)
 
26,524

Energy contracts
 
1,216,426

 
46,095

 
(29,957
)
 
16,138

 
(6,055
)
 
10,083

Agricultural contracts
 
99,191

 
2,009

 
(1,166
)
 
843

 
—

 
843

Foreign exchange contracts
 
135,237

 
135,237

 
—

 
135,237

 
(294
)
 
134,943

Equity option contracts
 
210,816

 
17,957

 
—

 
17,957

 
—

 
17,957

Total customer risk management programs
 
13,927,098

 
345,505

 
(77,746
)
 
267,759

 
(24,202
)
 
243,557

Interest rate risk management programs
 
47,000

 
3,628

 
—

 
3,628

 
—

 
3,628

Total derivative contracts
 
$
13,974,098

 
$
349,133

 
$
(77,746
)
 
$
271,387

 
$
(24,202
)
 
$
247,185

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.





- 71 -


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2013 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
12,455,689

 
$
224,392

 
$
(99,970
)
 
$
124,422

 
$
(5,191
)
 
$
119,231

Interest rate swaps
 
1,361,499

 
49,183

 
—

 
49,183

 
—

 
49,183

Energy contracts
 
1,412,238

 
73,293

 
(42,078
)
 
31,215

 
(606
)
 
30,609

Agricultural contracts
 
262,770

 
5,783

 
(3,430
)
 
2,353

 
—

 
2,353

Foreign exchange contracts
 
164,970

 
164,970

 
—

 
164,970

 
—

 
164,970

Equity option contracts
 
212,452

 
14,339

 
—

 
14,339

 
(3,360
)
 
10,979

Total customer risk management programs
 
15,869,618

 
531,960

 
(145,478
)
 
386,482

 
(9,157
)
 
377,325

Interest rate risk management programs
 
—

 
—

 
—

 
—

 
—

 
—

Total derivative contracts
 
$
15,869,618

 
$
531,960

 
$
(145,478
)
 
$
386,482

 
$
(9,157
)
 
$
377,325

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
12,529,704

 
$
221,720

 
$
(99,970
)
 
$
121,750

 
$
(118,166
)
 
$
3,584

Interest rate swaps
 
1,361,499

 
49,518

 
—

 
49,518

 
(21,240
)
 
28,278

Energy contracts
 
1,400,542

 
71,971

 
(42,078
)
 
29,893

 
(10,762
)
 
19,131

Agricultural contracts
 
261,782

 
5,731

 
(3,430
)
 
2,301

 
(2,242
)
 
59

Foreign exchange contracts
 
164,455

 
164,455

 
—

 
164,455

 
—

 
164,455

Equity option contracts
 
212,452

 
14,339

 
—

 
14,339

 
—

 
14,339

Total customer risk management programs
 
15,930,434

 
527,734

 
(145,478
)
 
382,256

 
(152,410
)
 
229,846

Interest rate risk management programs
 
47,000

 
2,698

 
—

 
2,698

 
—

 
2,698

Total derivative contracts
 
$
15,977,434

 
$
530,432

 
$
(145,478
)
 
$
384,954

 
$
(152,410
)
 
$
232,544

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.







- 72 -


The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):
 
 
Three Months Ended
 
 
September 30, 2014
 
September 30, 2013
 
 
Brokerage
and Trading Revenue
 
Gain (Loss)
on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)
on Derivatives,
Net
Customer Risk Management Programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
(131
)
 
$
—

 
$
(2,078
)
 
$
—

Interest rate swaps
 
967

 
—

 
679

 
—

Energy contracts
 
1,523

 
—

 
1,682

 
—

Agricultural contracts
 
26

 
—

 
69

 
—

Foreign exchange contracts
 
806

 
—

 
192

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
3,191

 
—

 
544

 
—

Interest Rate Risk Management Programs
 
—

 
(93
)
 
—

 
31

Total Derivative Contracts
 
$
3,191

 
$
(93
)
 
$
544

 
$
31


 
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2013
 
 
Brokerage
and Trading Revenue
 
Gain (Loss)
on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)
on Derivatives,
Net
Customer Risk Management Programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
(67
)
 
$
—

 
$
(377
)
 
$
—

Interest rate swaps
 
1,998

 
—

 
2,214

 
—

Energy contracts
 
5,007

 
—

 
5,901

 
—

Agricultural contracts
 
127

 
—

 
254

 
—

Foreign exchange contracts
 
1,358

 
—

 
552

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
8,423

 
—

 
8,544

 
—

Interest Rate Risk Management Programs
 
—

 
1,706

 
—

 
(3,437
)
Total Derivative Contracts
 
$
8,423

 
$
1,706

 
$
8,544

 
$
(3,437
)

Net interest revenue was not significantly impacted by the settlement of amounts receivable or payable on interest rate swaps for the three and nine months ended September 30, 2014 and 2013, respectively. 

- 73 -


(4) Loans and Allowances for Credit Losses

Loans

Loans are either secured or unsecured based on the type of loan and the financial condition of the borrower. Repayment is generally expected from cash flow or proceeds from the sale of selected assets of the borrower. BOK Financial is exposed to risk of loss on loans due to the borrower’s difficulties, which may arise from any number of factors, including problems within the respective industry or local economic conditions. Access to collateral, in the event of borrower default, is reasonably assured through adherence to applicable lending laws and through sound lending standards and credit review procedures. Accounting policies for all loans, excluding residential mortgage loans guaranteed by U.S. government agencies, are as follows.

Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccruing status when, in the opinion of management, full collection of principal or interest is uncertain. Internally risk graded loans are individually evaluated for nonaccruing status quarterly. Non-risk graded loans are generally placed on nonaccruing status when more than 90 days past due or within 60 days of being notified of the borrower's bankruptcy filing. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccruing status. Payments on nonaccruing loans are applied to principal or recognized as interest income, according to management’s judgment as to the collectability of principal. Loans may be returned to accruing status when, in the opinion of management, full collection of principal and interest, including principal previously charged off, is probable based on improvements in the borrower’s financial condition or a sustained period of performance.

Loans to borrowers experiencing financial difficulties may be modified in troubled debt restructurings ("TDRs"). All TDRs are classified as nonaccruing. Modifications generally consist of extension of payment terms or interest rate concessions and may result either voluntarily through negotiations with the borrower or involuntarily through court order. Generally, principal and accrued but unpaid interest is not voluntarily forgiven.

Performing loans may be renewed under the current collateral value, debt service ratio and other underwriting standards. Nonaccruing loans may be renewed and will remain classified as nonaccruing. 

All loans are charged off when the loan balance or a portion of the loan balance is no longer supported by the paying capacity of the borrower or when the required cash flow is reduced in a TDR. The charge-off amount is determined through a quarterly evaluation of available cash resources and collateral value and charge-offs are taken in the quarter in which the loss is identified. Non-risk graded loans that are past due between 60 and 180 days, based on the loan product type, are charged off. Loans to borrowers whose personal obligation has been discharged through Chapter 7 bankruptcy proceedings are charged off within 60 days of notice of the bankruptcy filing, regardless of payment status.

Loan origination and commitment fees and direct loan acquisition and origination costs are deferred and amortized as an adjustment to yield over the life of the loan or over the commitment period, as applicable.

Qualifying residential mortgage loans guaranteed by U.S. government agencies have been sold into GNMA pools. Under certain performance conditions specified in government programs, the Company may have the right, but not the obligation to repurchase loans from GNMA pools. These loans no longer qualify for sale accounting and are recognized in the Consolidated Balance Sheets. Guaranteed loans are considered impaired because we do not expect to receive all principal and interest based on the loan's contractual terms. The principal balance continues to be guaranteed; however, interest accrues at a curtailed rate as specified in the programs. The carrying value of these loans is reduced based on an estimate of the expected cash flows discounted at the original note rate plus a liquidity spread. Guaranteed loans may be modified in TDRs in accordance with U.S. government agency guidelines. Interest continues to accrue based on the modified rate. Guaranteed loans may either be resold into GNMA pools after a performance period specified by the programs or foreclosed and conveyed to the guarantors.

Loans are disaggregated into portfolio segments and further disaggregated into classes. The portfolio segment is the level at which the Company develops and documents a systematic method for determining its allowance for credit losses. Classes are a further disaggregation of portfolio segments based on the risk characteristics of the loans and the Company’s method for monitoring and assessing credit risk. 


- 74 -


Portfolio segments of the loan portfolio are as follows (in thousands):

 
 
September 30, 2014
 
December 31, 2013
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
1,714,251

 
$
6,841,383

 
$
16,404

 
$
8,572,038

 
$
1,637,620

 
$
6,288,841

 
$
16,760

 
$
7,943,221

Commercial real estate
 
757,846

 
1,935,693

 
30,660

 
2,724,199

 
770,908

 
1,603,595

 
40,850

 
2,415,353

Residential mortgage
 
1,722,864

 
207,892

 
48,907

 
1,979,663

 
1,783,614

 
226,092

 
42,320

 
2,052,026

Consumer
 
106,736

 
300,523

 
580

 
407,839

 
135,494

 
244,951

 
1,219

 
381,664

Total
 
$
4,301,697

 
$
9,285,491

 
$
96,551

 
$
13,683,739

 
$
4,327,636

 
$
8,363,479

 
$
101,149

 
$
12,792,264

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
25

 
 

 
 

 
 

 
$
1,415

 
 
September 30, 2013
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
1,468,198

 
$
6,083,355

 
$
19,522

 
$
7,571,075

Commercial real estate
 
730,733

 
1,565,994

 
52,502

 
2,349,229

Residential mortgage
 
1,766,818

 
228,691

 
39,256

 
2,034,765

Consumer
 
137,194

 
256,213

 
1,624

 
395,031

Total
 
$
4,102,943

 
$
8,134,253

 
$
112,904

 
$
12,350,100

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
188

1 
Excludes residential mortgage loans guaranteed by agencies of the U.S. government

At September 30, 2014, $4.6 billion or 34% of our total loan portfolio is to businesses and individuals attributed to the Texas market and $3.4 billion or 25% of the total loan portfolio is to businesses and individuals attributed to the Oklahoma market. These geographic concentrations subject the loan portfolio to the general economic conditions within these areas.

Commercial

Commercial loans represent loans for working capital, facilities acquisition or expansion, purchases of equipment and other needs of commercial customers primarily located within our geographical footprint. Commercial loans are underwritten individually and represent on-going relationships based on a thorough knowledge of the customer, the customer’s industry and market. While commercial loans are generally secured by the customer’s assets including real property, inventory, accounts receivable, operating equipment, interest in mineral rights and other property and may also include personal guarantees of the owners and related parties, the primary source of repayment of the loans is the on-going cash flow from operations of the customer’s business. Inherent lending risk is centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with commercial lending policies.

At September 30, 2014, commercial loans attributed to the Texas market totaled $2.9 billion or 34% of the commercial loan portfolio segment and commercial loans attributed to the Oklahoma market totaled $2.0 billion or 24% of the commercial loan portfolio segment.

The commercial loan portfolio segment is further divided into loan classes. The energy loan class totaled $2.6 billion or 19% of total loans at September 30, 2014, including $2.2 billion of outstanding loans to energy producers. Approximately 59% of committed production loans are secured by properties primarily producing oil and 41% are secured by properties producing natural gas. The services loan class totaled $2.5 billion at September 30, 2014. Approximately $1.2 billion of loans in the services category consist of loans with individual balances of less than $10 million.  Businesses included in the services class include gaming, educational, public finance, insurance and community foundations.


- 75 -


Commercial Real Estate

Commercial real estate loans are for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes primarily within our geographical footprint. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

At September 30, 2014, 35% of commercial real estate loans are secured by properties primarily located in the Dallas and Houston areas of Texas. An additional 16% of commercial real estate loans are secured by properties located primarily in the Tulsa and Oklahoma City metropolitan areas of Oklahoma. 

Residential Mortgage and Consumer

Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. Residential mortgage loans are secured by a first or second mortgage on the customer’s primary residence. Consumer loans include direct loans secured by and for the purchase of automobiles, recreational and marine equipment as well as other unsecured loans. Consumer loans also include indirect automobile loans made through primary dealers. Residential mortgage and consumer loans are made in accordance with underwriting policies we believe to be conservative and are fully documented. Credit scoring is assessed based on significant credit characteristics including credit history, residential and employment stability. Residential mortgage loans retained in the Company’s portfolio are primarily composed of various mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals and certain professionals. Jumbo loans may be fixed or variable rate and are fully amortizing. Jumbo loans generally conform to government sponsored entity standards, except that the loan size exceeds maximums required under these standards. These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38%.  Loan-to-value (“LTV”) ratios are tiered from 60% to 100%, depending on the market. Special mortgage programs include fixed and variable fully amortizing loans tailored to the needs of certain healthcare professionals. Variable rate loans are fully indexed at origination and may have fixed rates for three to ten years, then adjust annually thereafter. 

At September 30, 2014, residential mortgage loans included $198 million of loans guaranteed by U.S. government agencies previously sold into GNMA mortgage pools. These loans either have been repurchased or are eligible to be repurchased by the Company when certain defined delinquency criteria are met. Although payments on these loans generally are past due more than 90 days, interest continues to accrue based on the government guarantee.

Home equity loans totaled $790 million at September 30, 2014. Approximately, 69% of the home equity loan portfolio is comprised of first lien loans and 31% of the home equity portfolio is comprised of junior lien loans. Junior lien loans are distributed 72% to amortizing term loans and 28% to revolving lines of credit. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40%. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 5 year revolving period followed by a 15 year term of amortizing repayments. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term, subject to an update of certain credit information.

Credit Commitments
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At September 30, 2014, outstanding commitments totaled $7.7 billion. Because some commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans.

The amount of collateral obtained, if deemed necessary, is based upon management’s credit evaluation of the borrower.


- 76 -


Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At September 30, 2014, outstanding standby letters of credit totaled $451 million. Commercial letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying transaction is consummated. At September 30, 2014, outstanding commercial letters of credit totaled $5.1 million.

Allowances for Credit Losses

BOK Financial maintains an allowance for loan losses and an accrual for off-balance sheet credit risk. The accrual for off-balance sheet credit risk is maintained at a level that is appropriate to cover estimated losses associated with credit instruments that are not currently recognized as assets such as loan commitments, standby letters of credit or guarantees. As discussed in greater detail in Note 6, the Company also has separate accruals for off-balance sheet credit risk related to residential mortgage loans previously sold with full or partial recourse and for residential mortgage loans sold to government sponsored agencies under standard representations and warranties.

The appropriateness of the allowance for loan losses and accrual for off-balance sheet credit losses (collectively "allowance for credit losses") is assessed by management based on an on-going quarterly evaluation of the probable estimated losses inherent in the portfolio, including probable losses on both outstanding loans and unused commitments.

The allowance for loan losses consists of specific allowances attributed to impaired loans that have not yet been charged down to amounts we expect to recover, general allowances for unimpaired loans based on estimated loss rates by loan class and nonspecific allowances based on general economic conditions, risk concentration and related factors. There have been no material changes in the approach or techniques utilized in developing the allowance for loan losses and the accrual for off-balance sheet credit losses for the three and nine months ended September 30, 2014.

Loans are considered to be impaired when it becomes probable that BOK Financial will be unable to collect all amounts due according to the contractual terms of the loan agreements. Internally risk graded loans are evaluated individually for impairment. Substantially all commercial and commercial real estate loans and certain residential mortgage and consumer loans are risk graded based on evaluation of the borrowers' ability to repay. Certain commercial loans and most residential mortgage and consumer loans are small balance, homogeneous pools of loans that are not risk graded. Non-risk graded loans are identified as impaired based on performance status. Generally, non-risk graded loans 90 days or more past due or modified in a TDR or in bankruptcy are considered to be impaired.

Specific allowances for impaired loans are measured by an evaluation of estimated future cash flows discounted at the loans’ initial effective interest rate or the fair value of collateral for certain collateral dependent loans. Collateral value of real property is generally based on third party appraisals that conform to Uniform Standards of Professional Appraisal Practice, less estimated selling costs. Appraised values are on an "as-is" basis and are generally not adjusted by the Company. Updated appraisals are obtained at least annually or more frequently if market conditions indicate collateral values have declined. Collateral value of mineral rights is generally determined by our internal staff of engineers based on projected cash flows under current market conditions. Collateral values and available cash resources that support impaired loans are evaluated quarterly. Historical statistics may be used as a practical way to estimate impairment in limited situations, such as when a collateral dependent loan is identified as impaired at the end of a reporting period, until an updated appraisal of collateral value is received or a full assessment of future cash flows is completed. Estimates of future cash flows and collateral values require significant judgments and may be volatile.


- 77 -


General allowances for unimpaired loans are based on estimated loss rates by loan class. The gross loss rate for each loan class is determined by the greater of the current gross loss rate based on the most recent twelve months or a ten-year gross loss rate. Recoveries are not directly considered in the estimation of loss rates. Recoveries generally do not follow predictable patterns and are not received until well after the charge-off date as a result of protracted legal actions. For risk graded loans, gross loss rates are adjusted for changes in risk grading. For each loan class, the current weighted average risk grade is compared to the long-term average risk grade. This comparison determines whether credit risk in each loan class is increasing or decreasing. Loss rates are adjusted upward or downward in proportion to changes in average risk grading. General allowances for unimpaired loans also consider inherent risks identified for each loan class. Inherent risks consider loss rates that most appropriately represent the current credit cycle and other factors attributable to specific loan classes which have not yet been represented in the gross loss rates or risk grading. These factors include changes in commodity prices or engineering imprecision, which may affect the value of reserves that secure our energy loan portfolio, construction risk that may affect commercial real estate loans, changes in regulations and public policy that may disproportionately impact health care loans and changes in loan products.

Nonspecific allowances are maintained for risks beyond factors specific to a particular loan or loan class. These factors include trends in the economy of our primary lending areas, concentrations in large balance loans and other relevant factors.

An accrual for off-balance sheet credit losses is included in Other liabilities in the Consolidated Balance Sheets. The appropriateness of this accrual is determined in the same manner as the allowance for loan losses.

A provision for credit losses is charged against or credited to earnings in amounts necessary to maintain an appropriate allowance for credit losses. Recoveries of loans previously charged off are added to the allowance when received.

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended September 30, 2014 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
87,806

 
$
41,252

 
$
27,654

 
$
7,029

 
$
26,949

 
$
190,690

Provision for loan losses
 
(1,174
)
 
(84
)
 
185

 
156

 
995

 
78

Loans charged off
 
(117
)
 
(145
)
 
(773
)
 
(1,603
)
 
—

 
(2,638
)
Recoveries
 
260

 
1,410

 
150

 
1,294

 
—

 
3,114

Ending balance
 
$
86,775

 
$
42,433

 
$
27,216

 
$
6,876

 
$
27,944

 
$
191,244

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
345

 
$
902

 
$
43

 
$
18

 
$
—

 
$
1,308

Provision for off-balance sheet credit losses
 
(65
)
 
10

 
(19
)
 
(4
)
 
—

 
(78
)
Ending balance
 
$
280

 
$
912

 
$
24

 
$
14

 
$
—

 
$
1,230

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(1,239
)
 
$
(74
)
 
$
166

 
$
152

 
$
995

 
$
—



- 78 -


The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the nine months ended September 30, 2014 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
79,180

 
$
41,573

 
$
29,465

 
$
6,965

 
$
28,213

 
$
185,396

Provision for loan losses
 
4,444

 
(4,633
)
 
136

 
1,180

 
(269
)
 
858

Loans charged off
 
(290
)
 
(365
)
 
(3,611
)
 
(4,742
)
 
—

 
(9,008
)
Recoveries
 
3,441

 
5,858

 
1,226

 
3,473

 
—

 
13,998

Ending balance
 
$
86,775

 
$
42,433

 
$
27,216

 
$
6,876

 
$
27,944

 
$
191,244

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
119

 
$
1,876

 
$
90

 
$
3

 
$
—

 
$
2,088

Provision for off-balance sheet credit losses
 
161

 
(964
)
 
(66
)
 
11

 
—

 
(858
)
Ending balance
 
$
280

 
$
912

 
$
24

 
$
14

 
$
—

 
$
1,230

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
4,605

 
$
(5,597
)
 
$
70

 
$
1,191

 
$
(269
)
 
$
—



The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended September 30, 2013 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
64,044

 
$
49,687

 
$
39,206

 
$
7,738

 
$
42,449

 
$
203,124

Provision for loan losses
 
(1,774
)
 
(6,279
)
 
(136
)
 
1,256

 
(1,567
)
 
(8,500
)
Loans charged off
 
(1,354
)
 
(419
)
 
(961
)
 
(1,974
)
 
—

 
(4,708
)
Recoveries
 
864

 
2,073

 
188

 
1,284

 
—

 
4,409

Ending balance
 
$
61,780

 
$
45,062

 
$
38,297

 
$
8,304

 
$
40,882

 
$
194,325

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
402

 
$
1,178

 
$
6

 
$
18

 
$
—

 
$
1,604

Provision for off-balance sheet credit losses
 
(228
)
 
202

 
42

 
(16
)
 
—

 
—

Ending balance
 
$
174

 
$
1,380

 
$
48

 
$
2

 
$
—

 
$
1,604

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(2,002
)
 
$
(6,077
)
 
$
(94
)
 
$
1,240

 
$
(1,567
)
 
$
(8,500
)


- 79 -


The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the nine months ended September 30, 2013 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
65,280

 
$
54,884

 
$
41,703

 
$
9,453

 
$
44,187

 
$
215,507

Provision for loan losses
 
(3,507
)
 
(10,077
)
 
187

 
513

 
(3,305
)
 
(16,189
)
Loans charged off
 
(6,190
)
 
(5,669
)
 
(4,797
)
 
(5,513
)
 
—

 
(22,169
)
Recoveries
 
6,197

 
5,924

 
1,204

 
3,851

 
—

 
17,176

Ending balance
 
$
61,780

 
$
45,062

 
$
38,297

 
$
8,304

 
$
40,882

 
$
194,325

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
475

 
$
1,353

 
$
78

 
$
9

 
$
—

 
$
1,915

Provision for off-balance sheet credit losses
 
(301
)
 
27

 
(30
)
 
(7
)
 
—

 
(311
)
Ending balance
 
$
174

 
$
1,380

 
$
48

 
$
2

 
$
—

 
$
1,604

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(3,808
)
 
$
(10,050
)
 
$
157

 
$
506

 
$
(3,305
)
 
$
(16,500
)


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at September 30, 2014 is as follows (in thousands):

 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
8,555,634

 
$
83,609

 
$
16,404

 
$
3,166

 
$
8,572,038

 
$
86,775

Commercial real estate
 
2,693,539

 
42,358

 
30,660

 
75

 
2,724,199

 
42,433

Residential mortgage
 
1,930,756

 
27,109

 
48,907

 
107

 
1,979,663

 
27,216

Consumer
 
407,259

 
6,876

 
580

 
—

 
407,839

 
6,876

Total
 
13,587,188

 
159,952

 
96,551

 
3,348

 
13,683,739

 
163,300

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
27,944

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,587,188

 
$
159,952

 
$
96,551

 
$
3,348

 
$
13,683,739

 
$
191,244




- 80 -


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 2013 is as follows (in thousands):

 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,926,461

 
$
78,607

 
$
16,760

 
$
573

 
$
7,943,221

 
$
79,180

Commercial real estate
 
2,374,503

 
41,440

 
40,850

 
133

 
2,415,353

 
41,573

Residential mortgage
 
2,010,483

 
29,217

 
41,543

 
248

 
2,052,026

 
29,465

Consumer
 
380,445

 
6,965

 
1,219

 
—

 
381,664

 
6,965

Total
 
12,691,892

 
156,229

 
100,372

 
954

 
12,792,264

 
157,183

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
28,213

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,691,892

 
$
156,229

 
$
100,372

 
$
954

 
$
12,792,264

 
$
185,396



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at September 30, 2013 is as follows (in thousands):

 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,551,553

 
$
61,208

 
$
19,522

 
$
572

 
$
7,571,075

 
$
61,780

Commercial real estate
 
2,296,727

 
44,574

 
52,502

 
488

 
2,349,229

 
45,062

Residential mortgage
 
1,996,086

 
38,083

 
38,679

 
214

 
2,034,765

 
38,297

Consumer
 
393,407

 
8,304

 
1,624

 
—

 
395,031

 
8,304

Total
 
12,237,773

 
152,169

 
112,327

 
1,274

 
12,350,100

 
153,443

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
40,882

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,237,773

 
$
152,169

 
$
112,327

 
$
1,274

 
$
12,350,100

 
$
194,325


- 81 -


Credit Quality Indicators

The Company utilizes loan class and risk grading as primary credit quality indicators. Substantially all commercial and commercial real estate loans and certain residential mortgage and consumer loans are risk graded based on a quarterly evaluation of the borrowers’ ability to repay the loans. Certain commercial loans and most residential mortgage and consumer loans are small, homogeneous pools that are not risk graded. 

The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at September 30, 2014 is as follows (in thousands):

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
8,545,949

 
$
85,892

 
$
26,089

 
$
883

 
$
8,572,038

 
$
86,775

Commercial real estate
 
2,724,199

 
42,433

 
—

 
—

 
2,724,199

 
42,433

Residential mortgage
 
200,701

 
4,083

 
1,778,962

 
23,133

 
1,979,663

 
27,216

Consumer
 
314,604

 
3,257

 
93,235

 
3,619

 
407,839

 
6,876

Total
 
11,785,453

 
135,665

 
1,898,286

 
27,635

 
13,683,739

 
163,300

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
27,944

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,785,453

 
$
135,665

 
$
1,898,286

 
$
27,635

 
$
13,683,739

 
$
191,244

 
The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at December 31, 2013 is as follows (in thousands):

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,888,219

 
$
78,250

 
$
55,002

 
$
930

 
$
7,943,221

 
$
79,180

Commercial real estate
 
2,415,353

 
41,573

 
—

 
—

 
2,415,353

 
41,573

Residential mortgage
 
220,635

 
5,481

 
1,831,391

 
23,984

 
2,052,026

 
29,465

Consumer
 
265,533

 
2,657

 
116,131

 
4,308

 
381,664

 
6,965

Total
 
10,789,740

 
127,961

 
2,002,524

 
29,222

 
12,792,264

 
157,183

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
28,213

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,789,740

 
$
127,961

 
$
2,002,524

 
$
29,222

 
$
12,792,264

 
$
185,396



- 82 -


The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at September 30, 2013 is as follows (in thousands):

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,553,151

 
$
60,570

 
$
17,924

 
$
1,210

 
$
7,571,075

 
$
61,780

Commercial real estate
 
2,349,229

 
45,062

 
—

 
—

 
2,349,229

 
45,062

Residential mortgage
 
236,399

 
3,764

 
1,798,366

 
34,533

 
2,034,765

 
38,297

Consumer
 
268,690

 
2,797

 
126,341

 
5,507

 
395,031

 
8,304

Total
 
10,407,469

 
112,193

 
1,942,631

 
41,250

 
12,350,100

 
153,443

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
40,882

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,407,469

 
$
112,193

 
$
1,942,631

 
$
41,250

 
$
12,350,100

 
$
194,325


Loans are considered to be performing if they are in compliance with the original terms of the agreement, which is consistent with the regulatory guideline of “pass.” Performing also includes loans considered to be “other loans especially mentioned” by regulatory guidelines. Other loans especially mentioned are in compliance with the original terms of the agreement but may have a weakness that deserves management’s close attention. Performing loans also include past due residential mortgages that are guaranteed by agencies of the U.S. government.

The risk grading process identified certain criticized loans as potential problem loans. These loans have a well-defined weakness (e.g. inadequate debt service coverage or liquidity or marginal capitalization; repayment may depend on collateral or other risk mitigation) that may jeopardize liquidation of the debt and represent a greater risk due to deterioration in the financial condition of the borrower. This is consistent with the regulatory guideline for “substandard.” Because the borrowers are still performing in accordance with the original terms of the loan agreements, these loans were not placed in nonaccruing status. Known information does, however, cause concern as to the borrowers’ continued compliance with current repayment terms. Nonaccruing loans represent loans for which full collection of principal and interest is uncertain. This is substantially the same criteria used to determine whether a loan is impaired and includes certain loans considered “substandard” and all loans considered “doubtful” by regulatory guidelines.


- 83 -


The following table summarizes the Company’s loan portfolio at September 30, 2014 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,519,924

 
$
30,267

 
$
1,508

 
$
—

 
$
—

 
$
2,551,699

Services
 
2,466,857

 
17,376

 
3,584

 
—

 
—

 
2,487,817

Wholesale/retail
 
1,264,333

 
3,406

 
5,502

 
—

 
—

 
1,273,241

Manufacturing
 
469,881

 
6,180

 
3,482

 
—

 
—

 
479,543

Healthcare
 
1,376,399

 
4,583

 
1,417

 
—

 
—

 
1,382,399

Other commercial and industrial
 
359,159

 
11,234

 
857

 
26,035

 
54

 
397,339

Total commercial
 
8,456,553

 
73,046

 
16,350

 
26,035

 
54

 
8,572,038

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
145,223

 
15,371

 
14,634

 
—

 
—

 
175,228

Retail
 
605,718

 
1,538

 
4,009

 
—

 
—

 
611,265

Office
 
434,829

 
581

 
3,499

 
—

 
—

 
438,909

Multifamily
 
725,720

 
14,037

 
—

 
—

 
—

 
739,757

Industrial
 
371,426

 
—

 
—

 
—

 
—

 
371,426

Other commercial real estate
 
377,419

 
1,677

 
8,518

 
—

 
—

 
387,614

Total commercial real estate
 
2,660,335

 
33,204

 
30,660

 
—

 
—

 
2,724,199

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
195,688

 
1,312

 
3,701

 
758,970

 
31,436

 
991,107

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
194,653

 
3,835

 
198,488

Home equity
 
—

 
—

 
—

 
780,133

 
9,935

 
790,068

Total residential mortgage
 
195,688

 
1,312

 
3,701

 
1,733,756

 
45,206

 
1,979,663

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
314,409

 
20

 
175

 
92,830

 
405

 
407,839

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,626,985

 
$
107,582

 
$
50,886

 
$
1,852,621

 
$
45,665

 
$
13,683,739



- 84 -


The following table summarizes the Company’s loan portfolio at December 31, 2013 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,347,519

 
$
2,381

 
$
1,860

 
$
—

 
$
—

 
$
2,351,760

Services
 
2,265,984

 
11,304

 
4,922

 
—

 
—

 
2,282,210

Wholesale/retail
 
1,191,791

 
2,604

 
6,969

 
—

 
—

 
1,201,364

Manufacturing
 
381,794

 
9,365

 
592

 
—

 
—

 
391,751

Healthcare
 
1,272,626

 
34

 
1,586

 
—

 
—

 
1,274,246

Other commercial and industrial
 
381,394

 
4,736

 
758

 
54,929

 
73

 
441,890

Total commercial
 
7,841,108

 
30,424

 
16,687

 
54,929

 
73

 
7,943,221

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
173,488

 
15,393

 
17,377

 
—

 
—

 
206,258

Retail
 
579,506

 
1,684

 
4,857

 
—

 
—

 
586,047

Office
 
403,951

 
1,157

 
6,391

 
—

 
—

 
411,499

Multifamily
 
562,800

 
13,695

 
7

 
—

 
—

 
576,502

Industrial
 
243,625

 
—

 
252

 
—

 
—

 
243,877

Other commercial real estate
 
371,628

 
7,576

 
11,966

 
—

 
—

 
391,170

Total commercial real estate
 
2,334,998

 
39,505

 
40,850

 
—

 
—

 
2,415,353

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
210,142

 
3,283

 
7,210

 
815,040

 
27,069

 
1,062,744

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
180,821

 
777

 
181,598

Home equity
 
—

 
—

 
—

 
800,420

 
7,264

 
807,684

Total residential mortgage
 
210,142

 
3,283

 
7,210

 
1,796,281

 
35,110

 
2,052,026

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
264,536

 
795

 
202

 
115,114

 
1,017

 
381,664

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,650,784

 
$
74,007

 
$
64,949

 
$
1,966,324

 
$
36,200

 
$
12,792,264



- 85 -


The following table summarizes the Company’s loan portfolio at September 30, 2013 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,305,225

 
$
4,813

 
$
1,953

 
$
—

 
$
—

 
$
2,311,991

Services
 
2,130,169

 
11,455

 
6,927

 
—

 
—

 
2,148,551

Wholesale/retail
 
1,171,923

 
2,660

 
7,223

 
—

 
—

 
1,181,806

Manufacturing
 
378,723

 
2,894

 
843

 
—

 
—

 
382,460

Healthcare
 
1,158,436

 
43

 
1,733

 
—

 
—

 
1,160,212

Other commercial and industrial
 
362,545

 
4,790

 
796

 
17,877

 
47

 
386,055

Total commercial
 
7,507,021

 
26,655

 
19,475

 
17,877

 
47

 
7,571,075

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
178,278

 
17,394

 
20,784

 
—

 
—

 
216,456

Retail
 
548,197

 
807

 
7,914

 
—

 
—

 
556,918

Office
 
413,083

 
2,122

 
6,838

 
—

 
—

 
422,043

Multifamily
 
504,548

 
11,556

 
4,350

 
—

 
—

 
520,454

Industrial
 
244,768

 
254

 
—

 
—

 
—

 
245,022

Other commercial real estate
 
365,051

 
10,669

 
12,616

 
—

 
—

 
388,336

Total commercial real estate
 
2,253,925

 
42,802

 
52,502

 
—

 
—

 
2,349,229

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
222,630

 
4,633

 
5,441

 
819,601

 
26,356

 
1,078,661

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
163,342

 
577

 
163,919

Home equity
 
3,695

 
—

 
—

 
781,608

 
6,882

 
792,185

Total residential mortgage
 
226,325

 
4,633

 
5,441

 
1,764,551

 
33,815

 
2,034,765

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
267,564

 
846

 
280

 
124,997

 
1,344

 
395,031

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,254,835

 
$
74,936

 
$
77,698

 
$
1,907,425

 
$
35,206

 
$
12,350,100




- 86 -


Impaired Loans

Loans are considered to be impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. This includes all nonaccruing loans, all loans modified in a TDR and all loans repurchased from GNMA pools.

A summary of impaired loans follows (in thousands):
 
As of
 
For the
 
For the
 
September 30, 2014
 
Three Months Ended
 
Nine Months Ended
 
 
 
Recorded Investment
 
 
 
September 30, 2014
 
September 30, 2014
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
1,536

 
$
1,508

 
$
1,508

 
$
—

 
$
—

 
$
1,563

 
$
—

 
$
1,684

 
$
—

Services
6,400

 
3,584

 
2,851

 
733

 
157

 
3,626

 
—

 
4,253

 
—

Wholesale/retail
10,792

 
5,502

 
5,470

 
32

 
9

 
5,693

 
—

 
6,235

 
—

Manufacturing
3,754

 
3,482

 
482

 
3,000

 
3,000

 
3,495

 
—

 
2,037

 
—

Healthcare
2,451

 
1,417

 
1,417

 
—

 
—

 
1,420

 
—

 
1,502

 
—

Other commercial and industrial
8,580

 
911

 
911

 
—

 
—

 
956

 
—

 
871

 
—

Total commercial
33,513

 
16,404

 
12,639

 
3,765

 
3,166

 
16,753

 
—

 
16,582

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
18,953

 
14,634

 
14,490

 
144

 
57

 
14,890

 
—

 
16,006

 
—

Retail
5,425

 
4,009

 
4,009

 
—

 
—

 
4,104

 
—

 
4,433

 
—

Office
6,004

 
3,499

 
3,499

 
—

 
—

 
3,545

 
—

 
4,945

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
315

 
—

 
126

 
—

Other real estate loans
15,261

 
8,518

 
8,341

 
177

 
18

 
9,711

 
—

 
10,242

 
—

Total commercial real estate
45,643

 
30,660

 
30,339

 
321

 
75

 
32,565

 
—

 
35,755

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
44,396

 
35,137

 
34,962

 
175

 
107

 
34,045

 
429

 
34,708

 
1,067

Permanent mortgage guaranteed by U.S. government agencies1
204,807

 
198,488

 
198,488

 
—

 
—

 
194,882

 
2,089

 
189,820

 
6,279

Home equity
10,031

 
9,935

 
9,935

 
—

 
—

 
9,688

 
—

 
8,599

 
—

Total residential mortgage
259,234

 
243,560

 
243,385

 
175

 
107

 
238,615

 
2,518

 
233,127

 
7,346

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
597

 
580

 
580

 
—

 
—

 
673

 
—

 
900

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
338,987

 
$
291,204

 
$
286,943

 
$
4,261

 
$
3,348

 
$
288,606

 
$
2,518

 
$
286,364

 
$
7,346

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At September 30, 2014, $3.8 million of these loans were nonaccruing and $195 million were accruing based on the guarantee by U.S. government agencies.

Generally, no interest income is recognized on impaired loans until all principal balances, including amounts charged-off, are recovered.


- 87 -


A summary of impaired loans at December 31, 2013 follows (in thousands): 
 
 
 
 
Recorded Investment
 
 
 
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
1,860

 
$
1,860

 
$
1,860

 
$
—

 
$
—

Services
 
6,486

 
4,922

 
3,791

 
1,131

 
516

Wholesale/retail
 
11,009

 
6,969

 
6,937

 
32

 
9

Manufacturing
 
746

 
592

 
592

 
—

 
—

Healthcare
 
2,193

 
1,586

 
1,538

 
48

 
48

Other commercial and industrial
 
8,532

 
831

 
831

 
—

 
—

Total commercial
 
30,826

 
16,760

 
15,549

 
1,211

 
573

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
20,804

 
17,377

 
17,050

 
327

 
107

Retail
 
6,133

 
4,857

 
4,857

 
—

 
—

Office
 
7,848

 
6,391

 
6,383

 
8

 
8

Multifamily
 
7

 
7

 
7

 
—

 
—

Industrial
 
252

 
252

 
252

 
—

 
—

Other real estate loans
 
14,593

 
11,966

 
11,779

 
187

 
18

Total commercial real estate
 
49,637

 
40,850

 
40,328

 
522

 
133

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
41,870

 
34,279

 
33,869

 
410

 
248

Permanent mortgage guaranteed by U.S. government agencies1
 
188,436

 
181,598

 
181,598

 
—

 
—

Home equity
 
7,537

 
7,264

 
7,264

 
—

 
—

Total residential mortgage
 
237,843

 
223,141

 
222,731

 
410

 
248

 
 
 
 
 
 
 
 
 
 
 
Total consumer
 
1,228

 
1,219

 
1,219

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
319,534

 
$
281,970

 
$
279,827

 
$
2,143

 
$
954

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At December 31, 2013, $777 thousand of these loans were nonaccruing and $181 million were accruing based on the guarantee by U.S. government agencies.


- 88 -


A summary of impaired loans at September 30, 2013 follows (in thousands): 
 
As of
 
For the
 
For the
 
As of September 30, 2013
 
Three Months Ended
 
Nine Months Ended
 
 
 
Recorded Investment
 
 
 
September 30, 2013
 
September 30, 2013
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
1,954

 
$
1,953

 
$
1,953

 
$
—

 
$
—

 
$
2,115

 
$
—

 
$
2,207

 
$
—

Services
9,105

 
6,927

 
5,789

 
1,138

 
515

 
7,188

 
—

 
9,509

 
—

Wholesale/retail
11,262

 
7,223

 
7,188

 
35

 
9

 
6,962

 
—

 
5,150

 
—

Manufacturing
1,051

 
843

 
843

 
—

 
—

 
860

 
—

 
1,425

 
—

Healthcare
2,340

 
1,733

 
1,685

 
48

 
48

 
2,202

 
—

 
2,450

 
—

Other commercial and industrial
8,535

 
843

 
843

 
—

 
—

 
871

 
—

 
1,255

 
—

Total commercial
34,247

 
19,522

 
18,301

 
1,221

 
572

 
20,198

 
—

 
21,996

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Residential construction and land development
24,219

 
20,784

 
20,395

 
389

 
148

 
20,960

 
—

 
23,458

 
—

Retail
9,380

 
7,914

 
7,914

 
—

 
—

 
8,160

 
—

 
8,016

 
—

Office
8,254

 
6,838

 
6,830

 
8

 
8

 
7,333

 
—

 
6,834

 
—

Multifamily
4,351

 
4,350

 
4,350

 
—

 
—

 
5,399

 
—

 
3,528

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,984

 
—

Other real estate loans
14,868

 
12,616

 
12,020

 
596

 
332

 
13,747

 
—

 
12,746

 
—

Total commercial real estate
61,072

 
52,502

 
51,509

 
993

 
488

 
55,599

 
—

 
56,566

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Permanent mortgage
39,648

 
31,797

 
31,527

 
270

 
214

 
32,272

 
539

 
35,829

 
1,142

Permanent mortgage guaranteed by U.S. government agencies1
171,935

 
163,919

 
163,919

 
—

 
—

 
162,497

 
1,722

 
162,337

 
5,130

Home equity
7,091

 
6,882

 
6,882

 
—

 
—

 
7,293

 
—

 
6,569

 
—

Total residential mortgage
218,674

 
202,598

 
202,328

 
270

 
214

 
202,062

 
2,261

 
204,735

 
6,272

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total consumer
1,637

 
1,624

 
1,624

 
—

 
—

 
1,831

 
—

 
2,167

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
315,630

 
$
276,246

 
$
273,762

 
$
2,484

 
$
1,274

 
$
279,690

 
$
2,261

 
$
285,464

 
$
6,272

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At September 30, 2013, $577 thousand of these loans were nonaccruing and $163 million were accruing based on the guarantee by U.S. government agencies.


- 89 -


Troubled Debt Restructurings

A summary of troubled debt restructurings ("TDRs") by accruing status as of September 30, 2014 is as follows (in thousands):
 
 
As of September 30, 2014
 
Amounts Charged Off During
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended September 30, 2014
 
Nine Months Ended
Sept. 30, 2014
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
1,714

 
724

 
990

 
148

 
—

 
—

Wholesale/retail
 
3,545

 
3,440

 
105

 
9

 
—

 
—

Manufacturing
 
3,355

 
355

 
3,000

 
3,000

 
—

 
—

Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
644

 
48

 
596

 
—

 
—

 
—

Total commercial
 
9,258

 
4,567

 
4,691

 
3,157

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
8,562

 
264

 
8,298

 
56

 
—

 
—

Retail
 
3,664

 
2,486

 
1,178

 
—

 
—

 
—

Office
 
2,345

 
1,194

 
1,151

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
1,743

 
1,743

 
—

 
—

 
—

 
—

Total commercial real estate
 
16,314

 
5,687

 
10,627

 
56

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
16,764

 
11,227

 
5,537

 
80

 
147

 
246

Permanent mortgage guaranteed by U.S. government agencies
 
1,665

 
329

 
1,336

 
—

 
—

 
—

Home equity
 
4,937

 
3,864

 
1,073

 
—

 
12

 
58

Total residential mortgage
 
23,366

 
15,420

 
7,946

 
80

 
159

 
304

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
474

 
322

 
152

 
—

 
—

 
1

 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
49,412

 
$
25,996

 
$
23,416

 
$
3,293

 
$
159

 
$
305

 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgages guaranteed by U.S. government agencies
 
70,459

 
22,998

 
47,461

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
119,871

 
$
48,994

 
$
70,877

 
$
3,293

 
$
159

 
$
305


- 90 -


A summary of troubled debt restructurings by accruing status as of December 31, 2013 is as follows (in thousands):

 
 
As of
 
 
December 31, 2013
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

Services
 
2,235

 
852

 
1,383

 
237

Wholesale/retail
 
235

 
89

 
146

 
9

Manufacturing
 
391

 
—

 
391

 
—

Healthcare
 
—

 
—

 
—

 
—

Other commercial and industrial
 
771

 
173

 
598

 
—

Total commercial
 
3,632

 
1,114

 
2,518

 
246

 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

Residential construction and land development
 
10,148

 
1,444

 
8,704

 
107

Retail
 
4,359

 
3,141

 
1,218

 
—

Office
 
5,059

 
3,872

 
1,187

 
—

Multifamily
 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

Other real estate loans
 
5,011

 
2,885

 
2,126

 
—

Total commercial real estate
 
24,577

 
11,342

 
13,235

 
107

 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

Permanent mortgage
 
18,697

 
12,214

 
6,483

 
88

Home equity
 
4,045

 
3,531

 
514

 
—

Total residential mortgage
 
22,742

 
15,745

 
6,997

 
88

 
 
 
 
 
 
 
 
 
Consumer
 
1,008

 
758

 
250

 
—

 
 
 
 
 
 
 
 
 
Total nonaccuring TDRs
 
$
51,959

 
$
28,959

 
$
23,000

 
$
441

 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
Permanent mortgages guaranteed by U.S. government agencies
 
54,322

 
13,384

 
40,938

 
—

Total TDRs
 
$
106,281

 
$
42,343

 
$
63,938

 
$
441



- 91 -


A summary of troubled debt restructurings by accruing status as of September 30, 2013 is as follows (in thousands):
 
 
As of September 30, 2013
 
Amount Charged Off During
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended September 30, 2013
 
Nine Months Ended
Sept. 30, 2013
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
3,791

 
1,274

 
2,517

 
250

 
—

 
—

Wholesale/retail
 
275

 
141

 
134

 
9

 
—

 
—

Manufacturing
 
396

 
—

 
396

 
—

 
154

 
154

Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
772

 
30

 
742

 
—

 
—

 
—

Total commercial
 
5,234

 
1,445

 
3,789

 
259

 
154

 
154

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
10,673

 
1,776

 
8,897

 
148

 
—

 
54

Retail
 
6,030

 
2,032

 
3,998

 
—

 
—

 
627

Office
 
5,448

 
1,294

 
4,154

 
—

 
—

 
77

Multifamily
 
980

 
980

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
8,482

 
6,874

 
1,608

 
—

 
—

 
—

Total commercial real estate
 
31,613

 
12,956

 
18,657

 
148

 
—

 
758

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
17,319

 
9,579

 
7,740

 
13

 
73

 
450

Home equity
 
3,782

 
3,219

 
563

 
—

 
61

 
127

Total residential mortgage
 
21,101

 
12,798

 
8,303

 
13

 
134

 
577

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
1,288

 
1,024

 
264

 
—

 
2

 
3

 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
59,236

 
$
28,223

 
$
31,013

 
$
420

 
$
290

 
$
1,492

 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgages guaranteed by U.S. government agencies
 
50,099

 
11,975

 
38,124

 
—

 
—

 
—

Total TDRs
 
$
109,335

 
$
40,198

 
$
69,137

 
$
420

 
$
290

 
$
1,492


- 92 -


Troubled debt restructurings generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. The following tables detail the recorded balance of loans at September 30, 2014 by class that were restructured during the three and nine months ended September 30, 2014 by primary type of concession (in thousands):

 
Three Months Ended
Sept. 30, 2014
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
196

 
1,018

 
1,214

 
1,214

Permanent mortgage guaranteed by U.S. government agencies
3,439

 
12,626

 
16,065

 
—

 
—

 
163

 
163

 
16,228

Home equity
—

 
—

 
—

 
—

 
—

 
570

 
570

 
570

Total residential mortgage
3,439

 
12,626

 
16,065

 
—

 
196

 
1,751

 
1,947

 
18,012

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
—

 
—

 
—

 
—

 
—

 
20

 
20

 
20

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
3,439

 
$
12,626

 
$
16,065

 
$
—

 
$
196

 
$
1,771

 
$
1,967

 
$
18,032



- 93 -


 
Nine Months Ended
Sept. 30, 2014
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
3,400

 
—

 
3,400

 
3,400

Manufacturing
—

 
—

 
—

 
—

 
3,000

 
—

 
3,000

 
3,000

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
22

 
22

 
22

Total commercial
—

 
—

 
—

 
—

 
6,400

 
22

 
6,422

 
6,422

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
540

 
3,066

 
3,606

 
3,606

Permanent mortgage guaranteed by U.S. government agencies
8,288

 
19,222

 
27,510

 
—

 
—

 
1,128

 
1,128

 
28,638

Home equity
—

 
—

 
—

 
—

 
—

 
1,771

 
1,771

 
1,771

Total residential mortgage
8,288

 
19,222

 
27,510

 
—

 
540

 
5,965

 
6,505

 
34,015

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
—

 
—

 
—

 
—

 
—

 
41

 
41

 
41

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
8,288

 
$
19,222

 
$
27,510

 
$
—

 
$
6,940

 
$
6,028

 
$
12,968

 
$
40,478




- 94 -


Troubled debt restructurings generally consist of interest rate concessions, payment stream concessions or a combination of concessions to distressed borrowers. The following tables detail the recorded balance of loans by class that were restructured during the three and nine months ended September 30, 2013 by primary type of concession (in thousands):

 
Three Months Ended
Sept. 30, 2013
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
610

 
228

 
—

 
838

 
838

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
396

 
—

 
396

 
396

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
610

 
624

 
—

 
1,234

 
1,234

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
498

 
—

 
498

 
498

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
498

 
—

 
498

 
498

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
—

 
222

 
222

 
222

Permanent mortgage guaranteed by U.S. government agencies
1,971

 
2,892

 
4,863

 
—

 
—

 
—

 
—

 
4,863

Home equity
—

 
—

 
—

 
—

 
—

 
515

 
515

 
515

Total residential mortgage
1,971

 
2,892

 
4,863

 
—

 
—

 
737

 
737

 
5,600

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
—

 
—

 
—

 
—

 
—

 
116

 
116

 
116

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
1,971

 
$
2,892

 
$
4,863

 
$
610

 
$
1,122

 
$
853

 
$
2,585

 
$
7,448




- 95 -


 
Nine Months Ended
Sept. 30, 2013
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
610

 
1,351

 
—

 
1,961

 
1,961

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
396

 
—

 
396

 
396

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
145

 
—

 
—

 
145

 
145

Total commercial
—

 
—

 
—

 
755

 
1,747

 
—

 
2,502

 
2,502

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
1,110

 
—

 
1,110

 
1,110

Office
—

 
—

 
—

 
—

 
3,173

 
—

 
3,173

 
3,173

Multifamily
—

 
—

 
—

 
—

 
980

 
—

 
980

 
980

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
3,870

 
—

 
3,870

 
3,870

Total commercial real estate
—

 
—

 
—

 
—

 
9,133

 
—

 
9,133

 
9,133

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
132

 
864

 
996

 
996

Permanent mortgage guaranteed by U.S. government agencies
9,817

 
9,589

 
19,406

 
—

 
—

 
—

 
—

 
19,406

Home equity
—

 
—

 
—

 
—

 
—

 
2,490

 
2,490

 
2,490

Total residential mortgage
9,817

 
9,589

 
19,406

 
—

 
132

 
3,354

 
3,486

 
22,892

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
—

 
—

 
—

 
81

 
—

 
763

 
844

 
844

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
9,817

 
$
9,589

 
$
19,406

 
$
836

 
$
11,012

 
$
4,117

 
$
15,965

 
$
35,371



- 96 -


The following table summarizes, by loan class, the recorded investment at September 30, 2014 of loans modified as TDRs within the previous 12 months and for which there was a payment default during the three months ended September 30, 2014 (in thousands):

 
Three Months Ended
Sept. 30, 2014
 
Nine Months Ended
Sept. 30, 2014
 
Accruing
 
Nonaccrual
 
Total
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
3,000

 
3,000

 
—

 
3,000

 
3,000

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
3,000

 
3,000

 
—

 
3,000

 
3,000

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
445

 
445

 
—

 
445

 
445

Office
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
445

 
445

 
—

 
445

 
445

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
2,758

 
2,758

 
—

 
3,254

 
3,254

Permanent mortgage guaranteed by U.S. government agencies
23,376

 
1,115

 
24,491

 
24,126

 
1,115

 
25,241

Home equity
—

 
759

 
759

 
—

 
777

 
777

Total residential mortgage
23,376

 
4,632

 
28,008

 
24,126

 
5,146

 
29,272

 
 
 
 
 
 
 
 
 
 
 
 
Consumer
—

 
—

 
—

 
—

 
3

 
3

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
23,376

 
$
8,077

 
$
31,453

 
$
24,126

 
$
8,594

 
$
32,720


A payment default is defined as being 30 days or more past due. The table above includes loans that experienced a payment default during the period, but may be performing in accordance with the modified terms as of the balance sheet date.


- 97 -


The following table summarizes, by loan class, the recorded investment at September 30, 2013 of loans modified as TDRs within the previous 12 months and for which there was a payment default during the three months ended September 30, 2013 (in thousands):
 
Three Months Ended
Sept. 30, 2013
 
Nine Months Ended
Sept. 30, 2013
 
Accruing
 
Nonaccrual
 
Total
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
1,338

 
1,338

 
—

 
1,948

 
1,948

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
396

 
396

 
—

 
396

 
396

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
145

 
145

 
—

 
168

 
168

Total commercial
—

 
1,879

 
1,879

 
—

 
2,512

 
2,512

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Residential construction and land development
—

 
257

 
257

 
—

 
257

 
257

Retail
—

 
1,110

 
1,110

 
—

 
1,110

 
1,110

Office
—

 
3,173

 
3,173

 
—

 
3,173

 
3,173

Multifamily
—

 
—

 
—

 
—

 
980

 
980

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
3,870

 
3,870

Total commercial real estate
—

 
4,540

 
4,540

 
—

 
9,390

 
9,390

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
820

 
820

 
—

 
941

 
941

Permanent mortgage guaranteed by U.S. government agencies
22,359

 
—

 
22,359

 
26,636

 
—

 
26,636

Home equity
—

 
563

 
563

 
—

 
630

 
630

Total residential mortgage
22,359

 
1,383

 
23,742

 
26,636

 
1,571

 
28,207

 
 
 
 
 
 
 
 
 
 
 
 
Consumer
—

 
134

 
134

 
—

 
169

 
169

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
22,359

 
$
7,936

 
$
30,295

 
$
26,636

 
$
13,642

 
$
40,278


- 98 -


Nonaccrual & Past Due Loans

Past due status for all loan classes is based on the actual number of days since the last payment was due according to the contractual terms of the loans.

A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of September 30, 2014 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,549,441

 
$
750

 
$
—

 
$
1,508

 
$
2,551,699

Services
 
2,483,416

 
812

 
5

 
3,584

 
2,487,817

Wholesale/retail
 
1,267,206

 
533

 
—

 
5,502

 
1,273,241

Manufacturing
 
475,595

 
466

 
—

 
3,482

 
479,543

Healthcare
 
1,380,982

 
—

 
—

 
1,417

 
1,382,399

Other commercial and industrial
 
396,358

 
70

 
—

 
911

 
397,339

Total commercial
 
8,552,998

 
2,631

 
5

 
16,404

 
8,572,038

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
152,399

 
8,195

 
—

 
14,634

 
175,228

Retail
 
606,383

 
873

 
—

 
4,009

 
611,265

Office
 
434,160

 
1,250

 
—

 
3,499

 
438,909

Multifamily
 
739,757

 
—

 
—

 
—

 
739,757

Industrial
 
371,426

 
—

 
—

 
—

 
371,426

Other real estate loans
 
378,796

 
300

 
—

 
8,518

 
387,614

Total commercial real estate
 
2,682,921

 
10,618

 
—

 
30,660

 
2,724,199

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
947,791

 
8,179

 
—

 
35,137

 
991,107

Permanent mortgages guaranteed by U.S. government agencies
 
35,318

 
23,475

 
135,860

 
3,835

 
198,488

Home equity
 
778,175

 
1,938

 
20

 
9,935

 
790,068

Total residential mortgage
 
1,761,284

 
33,592

 
135,880

 
48,907

 
1,979,663

 
 
 
 
 
 
 
 
 
 
 
Consumer
 
406,463

 
796

 
—

 
580

 
407,839

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,403,666

 
$
47,637

 
$
135,885

 
$
96,551

 
$
13,683,739



- 99 -


A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of December 31, 2013 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,347,267

 
$
2,483

 
$
150

 
$
1,860

 
$
2,351,760

Services
 
2,276,036

 
1,210

 
42

 
4,922

 
2,282,210

Wholesale/retail
 
1,193,905

 
338

 
152

 
6,969

 
1,201,364

Manufacturing
 
391,159

 
—

 
—

 
592

 
391,751

Healthcare
 
1,272,660

 
—

 
—

 
1,586

 
1,274,246

Other commercial and industrial
 
440,973

 
81

 
5

 
831

 
441,890

Total commercial
 
7,922,000

 
4,112

 
349

 
16,760

 
7,943,221

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
188,434

 
428

 
19

 
17,377

 
206,258

Retail
 
580,926

 
264

 
—

 
4,857

 
586,047

Office
 
404,505

 
603

 
—

 
6,391

 
411,499

Multifamily
 
576,495

 
—

 
—

 
7

 
576,502

Industrial
 
243,625

 
—

 
—

 
252

 
243,877

Other real estate loans
 
376,699

 
1,493

 
1,012

 
11,966

 
391,170

Total commercial real estate
 
2,370,684

 
2,788

 
1,031

 
40,850

 
2,415,353

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,018,670

 
9,795

 
—

 
34,279

 
1,062,744

Permanent mortgages guaranteed by U.S. government agencies
 
21,916

 
17,290

 
141,615

 
777

 
181,598

Home equity
 
797,299

 
3,087

 
34

 
7,264

 
807,684

Total residential mortgage
 
1,837,885

 
30,172

 
141,649

 
42,320

 
2,052,026

 
 
 
 
 
 
 
 
 
 
 
Consumer
 
379,417

 
1,027

 
1

 
1,219

 
381,664

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,509,986

 
$
38,099

 
$
143,030

 
$
101,149

 
$
12,792,264


- 100 -


A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of September 30, 2013 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,308,639

 
$
1,399

 
$
—

 
$
1,953

 
$
2,311,991

Services
 
2,140,835

 
704

 
85

 
6,927

 
2,148,551

Wholesale/retail
 
1,173,628

 
955

 
—

 
7,223

 
1,181,806

Manufacturing
 
381,048

 
569

 
—

 
843

 
382,460

Healthcare
 
1,158,340

 
139

 
—

 
1,733

 
1,160,212

Other commercial and industrial
 
385,096

 
116

 
—

 
843

 
386,055

Total commercial
 
7,547,586

 
3,882

 
85

 
19,522

 
7,571,075

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
195,672

 
—

 
—

 
20,784

 
216,456

Retail
 
548,810

 
194

 
—

 
7,914

 
556,918

Office
 
415,205

 
—

 
—

 
6,838

 
422,043

Multifamily
 
516,104

 
—

 
—

 
4,350

 
520,454

Industrial
 
244,415

 
607

 
—

 
—

 
245,022

Other real estate loans
 
375,250

 
470

 
—

 
12,616

 
388,336

Total commercial real estate
 
2,295,456

 
1,271

 
—

 
52,502

 
2,349,229

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,040,616

 
6,248

 
—

 
31,797

 
1,078,661

Permanent mortgages guaranteed by U.S. government agencies
 
20,985

 
18,639

 
123,718

 
577

 
163,919

Home equity
 
782,954

 
2,321

 
28

 
6,882

 
792,185

Total residential mortgage
 
1,844,555

 
27,208

 
123,746

 
39,256

 
2,034,765

 
 
 
 
 
 
 
 
 
 
 
Consumer
 
391,604

 
1,728

 
75

 
1,624

 
395,031

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,079,201

 
$
34,089

 
$
123,906

 
$
112,904

 
$
12,350,100

(5) Acquisitions

On February 28, 2014, the Company acquired GTRUST Financial Corporation ("GTRUST"), a Topeka-based independent trust and asset management company with approximately $631 million of assets under management or custody at the date of acquisition.

On April 30, 2014, the Company acquired MBM Advisors, a Houston-based independent, full service retirement and pension plan investment firm and an SEC registered investment adviser with approximately $1.3 billion of assets under management at the date of acquisition.

The purchase price for these acquisitions totaled approximately $27 million including $23 million paid in cash and $4 million of contingent consideration. The purchase price allocation included $14 million of identifiable intangible assets and $18 million of goodwill. The pro-forma impact of these transactions was not material to the Company's consolidated financial statements.


- 101 -


(6) Mortgage Banking Activities

Residential Mortgage Loan Production

The Company originates, markets and services conventional and government-sponsored residential mortgage loans. Generally, conforming fixed rate residential mortgage loans are held for sale in the secondary market and non-conforming and adjustable-rate residential mortgage loans are held for investment. All residential mortgage loans originated for sale by the Company are carried at fair value based on sales commitments and market quotes. Changes in the fair value of mortgage loans held for sale are included in Other operating revenue – Mortgage banking revenue. Residential mortgage loans held for sale also includes the fair value of residential mortgage loan commitments and forward sale commitments which are considered derivative contracts that have not been designated as hedging instruments. The volume of mortgage loans originated for sale and secondary market prices are the primary drivers of originating and marketing revenue.

Residential mortgage loan commitments are generally outstanding for 60 to 90 days, which represents the typical period from commitment to originate a residential mortgage loan to when the closed loan is sold to an investor. Residential mortgage loan commitments are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. These latter contracts set the price for loans that will be delivered in the next 60 to 90 days.

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loan commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):
 
 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid
Principal
 Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
360,126

 
$
366,183

 
$
192,266

 
$
193,584

 
$
220,800

 
$
228,926

Residential mortgage loan commitments
 
537,975

 
8,480

 
258,873

 
2,656

 
351,196

 
10,948

Forward sales contracts
 
790,131

 
(1,410
)
 
435,867

 
4,306

 
560,069

 
(9,363
)
 
 
 

 
$
373,253

 
 

 
$
200,546

 
 

 
$
230,511


No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of September 30, 2014, December 31, 2013 or September 30, 2013. No credit losses were recognized on residential mortgage loans held for sale for the nine month periods ended September 30, 2014 and 2013.

Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
Production revenue:
 
 
 
 
 
 
 
 
Net realized gains on sale of mortgage loans
 
$
17,100

 
$
19,440

 
$
39,025

 
$
83,147

Net change in unrealized gain on mortgage loans held for sale
 
(3,110
)
 
11,618

 
4,739

 
(4,091
)
Change in the fair value of mortgage loan commitments
 
(5,136
)
 
12,657

 
5,824

 
(1,785
)
Change in the fair value of forward sales contracts
 
5,839

 
(31,167
)
 
(5,716
)
 
(8,457
)
Total production revenue
 
14,693

 
12,548

 
43,872

 
68,814

Servicing revenue
 
12,121

 
10,938

 
35,116

 
31,244

Total mortgage banking revenue
 
$
26,814

 
$
23,486

 
$
78,988

 
$
100,058


Production revenue includes gain (loss) on residential mortgage loans held for sale and changes in the fair value of derivative contracts not designated as hedging instruments related to residential mortgage loan commitments and forward sales contracts. Servicing revenue includes servicing fee income and late charges on loans serviced for others.


- 102 -


Residential Mortgage Servicing

Mortgage servicing rights may be recognized when mortgage loans are originated pursuant to an existing plan for sale or, if no such plan exists, when the mortgage loans are sold. Mortgage servicing rights may also be purchased. Both originated and purchased mortgage servicing rights are initially recognized at fair value. The Company has elected to carry all mortgage servicing rights at fair value. Changes in the fair value are recognized in earnings as they occur. The unpaid principal balance of loans serviced for others is the primary driver of servicing revenue.

The following represents a summary of mortgage servicing rights (Dollars in thousands):
 
 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
Number of residential mortgage loans serviced for others
 
114,493

 
106,137

 
104,115

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

 
$
13,718,942

 
$
13,298,479

Weighted average interest rate
 
4.33
%
 
4.40
%
 
4.42
%
Remaining term (in months)
 
295

 
292

 
292


Activity in capitalized mortgage servicing rights during the three months ended September 30, 2014 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, June 30, 2014
 
$
13,082

 
$
142,658

 
$
155,740

Additions, net
 
—

 
17,367

 
17,367

Change in fair value due to loan runoff
 
(624
)
 
(4,478
)
 
(5,102
)
Change in fair value due to market changes
 
821

 
4,460

 
5,281

Balance, Sept. 30, 2014
 
$
13,279

 
$
160,007

 
$
173,286


Activity in capitalized mortgage servicing rights during the nine months ended September 30, 2014 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, December 31, 2013
 
$
15,935

 
$
137,398

 
$
153,333

Additions, net
 
—

 
39,183

 
39,183

Change in fair value due to loan runoff
 
(1,737
)
 
(11,869
)
 
(13,606
)
Change in fair value due to market changes
 
(919
)
 
(4,705
)
 
(5,624
)
Balance, Sept. 30, 2014
 
$
13,279

 
$
160,007

 
$
173,286


Activity in capitalized mortgage servicing rights during the three months ended September 30, 2013 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, June 30, 2013
 
$
15,582

 
$
117,307

 
$
132,889

Additions, net
 
—

 
13,225

 
13,225

Change in fair value due to loan runoff
 
(693
)
 
(4,212
)
 
(4,905
)
Change in fair value due to market changes
 
(76
)
 
(270
)
 
(346
)
Balance, Sept. 30, 2013
 
$
14,813

 
$
126,050

 
$
140,863



- 103 -


Activity in capitalized mortgage servicing rights during the nine months ended September 30, 2013 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, December 31, 2012
 
$
12,976

 
$
87,836

 
$
100,812

Additions, net
 
—

 
39,157

 
39,157

Change in fair value due to loan runoff
 
(2,504
)
 
(13,229
)
 
(15,733
)
Change in fair value due to market changes
 
4,341

 
12,286

 
16,627

Balance, Sept. 30, 2013
 
$
14,813

 
$
126,050

 
$
140,863


Changes in the fair value of mortgage servicing rights are included in Other operating revenue in the Consolidated Statements of Earnings. Changes in fair value due to loan runoff are included in Mortgage banking costs. Changes in fair value due to market changes are reported separately. Changes in fair value due to market changes during the period relate to assets held at the reporting date.

There is no active market for trading in mortgage servicing rights after origination. Fair value is determined by discounting the projected net cash flows. Significant assumptions used to determine fair value based on significant unobservable inputs were as follows:

 
 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
Discount rate – risk-free rate plus a market premium
 
10.17%
 
10.21%
 
10.23%
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
 
 
    Performing loans
 
$60-$105
 
$60 - $105
 
$58 - $105
    Delinquent loans
 
$150 - $500
 
$150 - $500
 
$135 - $500
    Loans in foreclosure
 
$1,000 - $4,250
 
$1,000 - $4,250
 
$875 - $4,250
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
1.95%
 
1.80%
 
1.54%

The Company is exposed to interest rate risk as benchmark residential mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights, which is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated daily for changes in market conditions and adjusted to better correlate with actual performance of BOK Financial’s servicing portfolio.

Stratification of the residential mortgage loan servicing portfolio and outstanding principal of loans serviced for others by interest rate at September 30, 2014 follows (in thousands):
 
 
< 4.00%
 
4.00% - 4.99%

 
5.00% - 5.99%

 
> 5.99%
 
Total
Fair value
 
$
66,895

 
$
77,537

 
$
23,011

 
$
5,843

 
$
173,286

Outstanding principal of loans serviced for others
 
$
5,988,358

 
$
6,410,710

 
$
2,090,157

 
$
1,010,428

 
$
15,499,653

Weighted average prepayment rate1
 
7.10
%
 
8.06
%
 
11.63
%
 
26.41
%
 
9.37
%
1 
Annual prepayment estimates based upon loan interest rate, original term and loan type. Weighted average prepayment rate is determined by weighting the prepayment speed for each loan by its unpaid principal balance.

The interest rate sensitivity of our mortgage servicing rights and securities and derivative contracts held as an economic hedge is modeled over a range of +/- 50 basis points. At September 30, 2014, a 50 basis point increase in mortgage interest rates is expected to increase the fair value of our mortgage servicing rights, net of economic hedge by $3.2 million. A 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights, net of economic hedge by $5.4 million. In the model, changes in the value of servicing rights due to changes in interest rates assume stable relationships between residential mortgage rates and prepayment speeds. Changes in market conditions can cause variations from these assumptions. These factors and others may cause changes in the value of our mortgage servicing rights to differ from our expectations.


- 104 -


The aging status of our mortgage loans serviced for others by investor at September 30, 2014 follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89
Days
 
90 Days or More
 
Total
FHLMC
 
$
4,952,266

 
$
37,051

 
$
12,343

 
$
31,874

 
$
5,033,534

FNMA
 
4,957,520

 
29,596

 
8,963

 
18,070

 
5,014,149

GNMA
 
4,748,226

 
128,785

 
41,634

 
14,096

 
4,932,741

Other
 
505,623

 
5,473

 
2,555

 
5,578

 
519,229

Total
 
$
15,163,635

 
$
200,905

 
$
65,495

 
$
69,618

 
$
15,499,653


The Company has off-balance sheet credit risk related to residential mortgage loans sold to U.S. government agencies with recourse prior to 2008 under various community development programs. These loans consist of first lien, fixed-rate residential mortgage loans underwritten to standards approved by the agencies including full documentation and originated under programs available only for owner-occupied properties. However, these loans have a higher risk of delinquency and loss given default than traditional residential mortgage loans. The Company no longer sells residential mortgage loans with recourse other than obligations under standard representations and warranties. The recourse obligation relates to loan performance for the life of the loan and the Company is obligated to repurchase the loan at the time of foreclosure for the unpaid principal balance plus unpaid interest. The principal balance of residential mortgage loans sold subject to recourse obligations totaled $175 million at September 30, 2014, $191 million at December 31, 2013 and $198 million at September 30, 2013. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets totaling $8.3 million at September 30, 2014, $10 million at December 31, 2013 and $10 million at September 30, 2013. At September 30, 2014, approximately 3% of the loans sold with recourse with an outstanding principal balance of $5.8 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 5% with an outstanding balance of $9.1 million were past due 30 to 89 days. The provision for credit losses on loans sold with recourse is included in Mortgage banking costs in the Consolidated Statements of Earnings.

The activity in the allowance for losses on loans sold with recourse included in Other liabilities in the Consolidated Balance Sheets is summarized as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
8,690

 
$
10,920

 
$
9,562

 
$
13,158

Provision for recourse losses
93

 
576

 
260

 
228

Loans charged off, net
(461
)
 
(1,055
)
 
(1,500
)
 
(2,945
)
Ending balance
$
8,322

 
$
10,441

 
$
8,322

 
$
10,441


The Company also has obligations to repurchase or provide indemnification for residential mortgage loans sold to government sponsored entities due to standard representations and warranties made under contractual agreements and to service loans in accordance with investor guidelines. The Company has established accruals for losses related to these obligations that are included in Other liabilities in the Consolidated Balance Sheets and in Mortgage banking costs in the Consolidated Statements of Earnings. 

The level of repurchases and indemnifications related to standard representations and warranties has remained low. The Company repurchased nine loans from the agencies for $2.0 million during the third quarter of 2014. There were no indemnifications on loans paid during the third quarter of 2014. Losses recognized on indemnifications and repurchases were insignificant.




- 105 -


A summary of unresolved deficiency requests from the agencies follows (in thousands, except for number of unresolved deficiency requests):
 
September 30,
2014
 
September 30,
2013
Number of unresolved deficiency requests
184

 
524

Aggregate outstanding principal balance subject to unresolved deficiency requests
$
15,548

 
$
64,428

Unpaid principal balance subject to indemnification by the Company
4,792

 
2,440


The activity in the accruals for mortgage losses is summarized as follows (in thousands).
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
12,119

 
$
9,508

 
$
12,716

 
$
8,983

Provision for losses
1,122

 
1,804

 
2,475

 
4,111

Charge-offs, net
(3,486
)
 
(222
)
 
(5,436
)
 
(2,004
)
Ending balance
$
9,755


$
11,090


$
9,755


$
11,090

(7) Employee Benefits

BOK Financial has sponsored a defined benefit Pension Plan for all employees who satisfied certain age and service requirements.  Pension Plan benefits were curtailed as of April 1, 2006. The Company recognized periodic pension expense of $149 thousand and $500 thousand for the three months ended September 30, 2014 and 2013, respectively and $446 thousand and $1.5 million for the nine months ended September 30, 2014 and 2013, respectively. The Company made no Pension Plan contributions during the three and nine months ended September 30, 2014 and 2013.

No minimum contribution is required for 2014.

- 106 -


(8)  Commitments and Contingent Liabilities

Litigation Contingencies

As a member of Visa, BOK Financial is obligated for a proportionate share of certain covered litigation losses incurred by Visa under a retrospective responsibility plan. A contingent liability was recognized for the Company’s share of Visa’s covered litigation liabilities. Visa funded an escrow account to cover litigation claims, including covered litigation losses under the retrospective responsibility plan, with proceeds from its initial public offering in 2008 and from available cash. 

BOK Financial currently owns 251,837 Visa Class B shares which are convertible into 103,782 shares of Visa Class A shares after the final settlement of all covered litigation. Class B shares may be diluted in the future if the escrow fund is not adequate to cover future covered litigation costs. Therefore, no value has been currently assigned to the Class B shares and no value may be assigned until the Class B shares are converted into a known number of Class A shares.

In the ordinary course of business, BOK Financial and its subsidiaries are subject to legal actions and complaints. Management believes, based upon the opinion of counsel, that the actions and liability or loss, if any, resulting from the final outcomes of the proceedings, will not have a material effect on the Company’s financial condition, results of operations or cash flows.

Alternative Investment Commitments

The Company sponsors two private equity funds and invests in several tax credit entities and other funds as permitted by banking regulations. Consolidation of these investments is based on the variable interest model determined by the nature of the entity. Variable interest entities are generally defined as entities that either do not have sufficient equity to finance their activities without support from other parties or whose equity investors lack a controlling financial interest. Variable interest entities are consolidated based on the determination that the Company is the primary beneficiary including the power to direct the activities that most significantly impact the variable interest's economic performance and the obligation to absorb losses of the variable interest or the right to receive benefits of the variable interest that could be significant to the variable interest.

BOKF Equity, LLC, an indirect wholly-owned subsidiary, is the general partner of two consolidated private equity funds (“the Funds”). The Funds provide alternative investment opportunities to certain customers, some of which are related parties, through unaffiliated limited partnerships. These unaffiliated limited partnerships generally invest in distressed assets, asset buy-outs or venture capital companies. As general partner, BOKF Equity, LLC has the power to direct activities that most significantly affect the Funds' performance and contingent obligations to make additional investments totaling $5.5 million at September 30, 2014. Substantially all of the obligations are offset by limited partner commitments. The Company does not accrue its contingent liability to fund investments. The Volcker Rule in Title VI of the Dodd-Frank Act will limit both the amount and structure of these types of investments.

Consolidated tax credit investment entities represent the Company's interest in entities earning federal new market tax credits related to qualifying loans. The Company has the power to direct the activities that most significantly impact the variable interest's economic performance of the entity including being the primary beneficiary of or the obligation to absorb losses of the variable interest that could be significant to the variable interest.

The Company also has interests in various unrelated alternative investments generally consisting of unconsolidated limited partnership interests in or loans to entities for which investment return is primarily in the form of tax credits or that invest in distressed real estate loans and properties, energy development, venture capital and other activities. The Company is prohibited by banking regulations from controlling or actively managing the activities of these investments and the Company's maximum exposure to loss is restricted to its investment balance. The Company's obligation to fund alternative investments is included in Other liabilities in the Consolidated Balance Sheets.


- 107 -


A summary of consolidated and unconsolidated alternative investments as of September 30, 2014, December 31, 2013 and September 30, 2013 is as follows (in thousands):

 
 
September 30, 2014
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
27,118

 
$
—

 
$
—

 
$
22,141

Tax credit entities
 
10,000

 
12,982

 
—

 
10,964

 
10,000

Other
 
—

 
7,012

 
—

 
—

 
2,078

Total consolidated
 
$
10,000

 
$
47,112

 
$
—

 
$
10,964

 
$
34,219

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
18,243

 
$
93,291

 
$
25,611

 
$
—

 
$
—

Other
 
—

 
6,811

 
1,622

 
—

 
—

Total unconsolidated
 
$
18,243

 
$
100,102

 
$
27,233

 
$
—

 
$
—


 
 
December 31, 2013
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
27,341

 
$
—

 
$
—

 
$
23,036

Tax credit entities
 
10,000

 
13,448

 
—

 
10,964

 
9,869

Other
 
—

 
9,178

 
—

 
—

 
2,019

Total consolidated
 
$
10,000

 
$
49,967

 
$
—

 
$
10,964

 
$
34,924

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
27,319

 
$
90,260

 
$
35,776

 
$
—

 
$
—

Other
 
—

 
9,257

 
1,681

 
—

 
—

Total unconsolidated
 
$
27,319

 
$
99,517

 
$
37,457

 
$
—

 
$
—


 
 
September 30, 2013
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interests
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
27,799

 
$
—

 
$
—

 
$
23,710

Tax credit entities
 
10,000

 
13,577

 
—

 
10,964

 
10,000

Other
 
—

 
9,510

 
—

 
—

 
2,020

Total consolidated
 
$
10,000

 
$
50,886

 
$
—

 
$
10,964

 
$
35,730

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
30,345

 
$
92,039

 
$
44,285

 
$
—

 
$
—

Other
 
—

 
9,596

 
1,698

 
—

 
—

Total unconsolidated
 
$
30,345

 
$
101,635

 
$
45,983

 
$
—

 
$
—




- 108 -


Other Commitments and Contingencies

At September 30, 2014, Cavanal Hill Funds’ assets included $1.1 billion of U.S. Treasury, $1.2 billion of cash management and $245 million of tax-free money market funds. Assets of these funds consist of highly-rated, short-term obligations of the U.S. Treasury, corporate issuers and U.S. states and municipalities. The net asset value of units in these funds was $1.00 at September 30, 2014. An investment in these funds is not insured by the Federal Deposit Insurance Corporation or guaranteed by BOK Financial or any of its subsidiaries. BOK Financial may, but is not obligated to purchase assets from these funds to maintain the net asset value at $1.00. No assets were purchased from the funds in 2014 or 2013.

Cottonwood Valley Ventures, Inc. (“CVV, Inc.”), an indirectly wholly-owned subsidiary of BOK Financial, is being audited by the Oklahoma Tax Commission (“OTC”) for tax years 2007 through 2009. CVV, Inc. is a qualified venture capital company under the applicable Oklahoma statute. As authorized by the statute, CVV, Inc. guarantees transferable Oklahoma state income tax credits by providing direct debt financing to private companies which qualify as statutory business ventures. Due to certain statutory limitations on utilization of such credits, CVV, Inc. must sell the majority of the credits to provide the economic incentives provided for by the statute. During the third quarter of 2012, CVV, Inc. and credit purchasers settled the assessment related to the 2008 tax credits disallowed with no material adverse impact to the consolidated financial statements. Management does not anticipate that the remaining issue under audit will have a material adverse impact to the consolidated financial statements.

The Company agreed to guarantee rents totaling $29 million through September of 2017 to the City of Tulsa as owner of a building immediately adjacent to the Bank’s main office for space currently rented by third-party tenants in the building. All rent payments are current. Remaining guaranteed rents totaled $9.1 million at September 30, 2014. In return for this guarantee, the Company will receive 80% of net cash flow as defined in an agreement with the City of Tulsa through September 2017 from rental of space that was vacant at the inception of the agreement. The maximum amount that the Company may receive under this agreement is $4.5 million.

- 109 -


(9) Shareholders' Equity

On October 28, 2014, the Company declared a a quarterly cash dividend of $0.42 per common share on or about December 1, 2014 to shareholders of record as of November 14, 2014.

Dividends declared were $0.40 and $1.20 per share during the three and nine months ended September 30, 2014, respectively. Dividends declared were $0.38 and $1.14 per share during the three and nine months ended September 30, 2013, respectively.

Accumulated Other Comprehensive Income (Loss)

AOCI includes unrealized gains and losses on available for sale ("AFS") securities and non-credit related unrealized losses on AFS securities for which an other-than-temporary impairment has been recorded in earnings. AOCI also includes unrealized gains on AFS securities that were transferred from AFS to investment securities in the third quarter of 2011. Such amounts are being amortized over the estimated remaining life of the security as an adjustment to yield, offsetting the related amortization of premium on the transferred securities. Unrealized losses on employee benefit plans will be reclassified into income as pension plan costs are recognized over the remaining service period of plan participants. Accumulated losses on the interest rate lock hedge of the 2005 subordinated debt issuance are being reclassified into income over the ten-year life of the debt. Gains and losses in AOCI are net of deferred income taxes.

A rollforward of the components of accumulated other comprehensive income (loss) is included as follows (in thousands):
 
 
Unrealized Gain (Loss) on
 
 
 
 
 
 
Available for Sale Securities
 
Investment Securities Transferred from AFS
 
Employee Benefit Plans
 
Loss on Effective Cash Flow Hedges
 
Total
Balance, December 31, 2012
 
$
155,553

 
$
3,078

 
$
(8,296
)
 
$
(415
)
 
$
149,920

Net change in unrealized gain (loss)
 
(240,384
)
 
—

 
—

 
—

 
(240,384
)
Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
 
 
Interest revenue, Investment securities, Taxable securities
 
—

 
(2,717
)
 
—

 
—

 
(2,717
)
Interest expense, Subordinated debentures
 
—

 
—

 
—

 
209

 
209

Net impairment losses recognized in earnings
 
2,308

 
—

 
—

 
—

 
2,308

Gain on available for sale securities, net
 
(9,086
)
 
—

 
—

 
—

 
(9,086
)
Other comprehensive income (loss), before income taxes
 
(247,162
)
 
(2,717
)
 
—

 
209

 
(249,670
)
Federal and state income taxes1
 
96,146

 
1,059

 
—

 
(81
)
 
97,124

Other comprehensive income (loss), net of income taxes
 
(151,016
)
 
(1,658
)
 
—

 
128

 
(152,546
)
Balance, Sept. 30, 2013
 
$
4,537

 
$
1,420

 
$
(8,296
)
 
$
(287
)
 
$
(2,626
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
 
$
(23,175
)
 
$
1,118

 
$
(3,311
)
 
$
(255
)
 
$
(25,623
)
Net change in unrealized gains (losses)
 
82,254

 
—

 
(2
)
 
—

 
82,252

Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
 
 
Interest revenue, Investment securities, Taxable securities
 
—

 
(1,009
)
 
—

 
—

 
(1,009
)
Interest expense, Subordinated debentures
 
—

 
—

 
—

 
206

 
206

Gain on available for sale securities, net
 
(1,390
)
 
—

 
—

 
—

 
(1,390
)
Other comprehensive income (loss), before income taxes
 
80,864

 
(1,009
)
 
(2
)
 
206

 
80,059

Federal and state income taxes1
 
(31,456
)
 
394

 
1

 
(80
)
 
(31,141
)
Other comprehensive income (loss), net of income taxes
 
49,408

 
(615
)
 
(1
)
 
126

 
48,918

Balance, Sept. 30, 2014
 
$
26,233

 
$
503

 
$
(3,312
)
 
$
(129
)
 
$
23,295

1 
Calculated using a 39% effective tax rate.

- 110 -


(10)  Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to BOK Financial Corp. shareholders
 
$
75,632

 
$
75,738

 
$
228,117

 
$
243,633

Less: Earnings allocated to participating securities
 
898

 
799

 
2,479

 
2,623

Numerator for basic earnings per share – income available to common shareholders
 
74,734

 
74,939

 
225,638

 
241,010

Effect of reallocating undistributed earnings of participating securities
 
1

 
2

 
3

 
6

Numerator for diluted earnings per share – income available to common shareholders
 
$
74,735

 
$
74,941

 
$
225,641

 
$
241,016

 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 

 
 

Weighted average shares outstanding
 
69,275,121

 
68,770,950

 
69,113,914

 
68,687,609

Less:  Participating securities included in weighted average shares outstanding
 
819,255

 
721,771

 
749,365

 
734,356

Denominator for basic earnings per common share
 
68,455,866

 
68,049,179

 
68,364,549

 
67,953,253

Dilutive effect of employee stock compensation plans1
 
153,899

 
223,682

 
156,042

 
222,662

Denominator for diluted earnings per common share
 
68,609,765

 
68,272,861

 
68,520,591

 
68,175,915

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.09

 
$
1.10

 
$
3.30

 
$
3.55

Diluted earnings per share
 
$
1.09

 
$
1.10

 
$
3.29

 
$
3.54

1  Excludes employee stock options with exercise prices greater than current market price.
 
—

 
—

 
—

 
—


- 111 -


(11)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2014 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
95,423

 
$
23,187

 
$
5,956

 
$
42,225

 
$
166,791

Net interest revenue (expense) from internal sources
 
(9,794
)
 
8,058

 
$
5,191

 
(3,455
)
 
—

Net interest revenue
 
85,629

 
31,245

 
11,147

 
38,770

 
166,791

Provision for credit losses
 
(994
)
 
1,207

 
—

 
(213
)
 
—

Net interest revenue after provision for credit losses
 
86,623

 
30,038

 
11,147

 
38,983

 
166,791

Other operating revenue
 
45,121

 
55,243

 
61,001

 
1,683

 
163,048

Other operating expense
 
54,961

 
49,172

 
56,234

 
61,467

 
221,834

Net direct contribution
 
76,783

 
36,109

 
15,914

 
(20,801
)
 
108,005

Corporate expense allocations
 
9,447

 
15,783

 
8,065

 
(33,295
)
 
—

Net income before taxes
 
67,336

 
20,326

 
7,849

 
12,494

 
108,005

Federal and state income taxes
 
26,194

 
7,907

 
3,053

 
(5,275
)
 
31,879

Net income
 
41,142

 
12,419

 
4,796

 
17,769

 
76,126

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
494

 
494

Net income attributable to BOK Financial Corp. shareholders
 
$
41,142

 
$
12,419

 
$
4,796

 
$
17,275

 
$
75,632

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
11,508,375

 
$
6,575,217

 
$
4,324,204

 
$
5,707,761

 
$
28,115,557

Average invested capital
 
940,091

 
271,705

 
194,104

 
1,842,529

 
3,248,429

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.42
%
 
0.75
%
 
0.49
%
 
 
 
1.07
%
Return on average invested capital
 
17.38
%
 
18.13
%
 
10.94
%
 
 
 
9.24
%
Efficiency ratio
 
41.95
%
 
57.69
%
 
77.60
%
 
 
 
66.79
%


- 112 -


Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2014 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
281,064

 
$
72,410

 
$
17,574

 
$
124,482

 
$
495,530

Net interest revenue (expense) from internal sources
 
(33,415
)
 
23,825

 
$
14,593

 
(5,003
)
 
—

Net interest revenue
 
247,649

 
96,235

 
32,167

 
119,479

 
495,530

Provision for credit losses
 
(8,978
)
 
4,248

 
448

 
4,282

 
—

Net interest revenue after provision for credit losses
 
256,627

 
91,987

 
31,719

 
115,197

 
495,530

Other operating revenue
 
126,527

 
154,030

 
180,790

 
1,276

 
462,623

Other operating expense
 
153,707

 
141,670

 
160,638

 
165,630

 
621,645

Net direct contribution
 
229,447

 
104,347

 
51,871

 
(49,157
)
 
336,508

Corporate expense allocations
 
30,246

 
50,793

 
24,096

 
(105,135
)
 
—

Net income before taxes
 
199,201

 
53,554

 
27,775

 
55,978

 
336,508

Federal and state income taxes
 
77,489

 
20,833

 
10,804

 
(2,516
)
 
106,610

Net income
 
121,712

 
32,721

 
16,971

 
58,494

 
229,898

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
1,781

 
1,781

Net income attributable to BOK Financial Corp. shareholders
 
$
121,712

 
$
32,721

 
$
16,971

 
$
56,713

 
$
228,117

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
11,222,552

 
$
6,528,629

 
$
4,499,858

 
$
5,365,888

 
$
27,616,927

Average invested capital
 
937,281

 
278,396

 
199,537

 
1,762,054

 
3,177,268

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.45
%
 
0.67
%
 
0.55
%
 
 
 
1.10
%
Return on average invested capital
 
17.40
%
 
15.71
%
 
12.31
%
 
 
 
9.60
%
Efficiency ratio
 
40.85
%
 
54.98
%
 
75.03
%
 
 
 
63.45
%




- 113 -


Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2013 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
91,418

 
$
25,302

 
$
6,251

 
$
44,918

 
$
167,889

Net interest revenue (expense) from internal sources
 
(13,070
)
 
8,714

 
4,848

 
(492
)
 
—

Net interest revenue
 
78,348

 
34,016

 
11,099

 
44,426

 
167,889

Provision for credit losses
 
45

 
889

 
(555
)
 
(8,879
)
 
(8,500
)
Net interest revenue after provision for credit losses
 
78,303

 
33,127

 
11,654

 
53,305

 
176,389

Other operating revenue
 
40,268

 
48,798

 
55,308

 
(942
)
 
143,432

Other operating expense
 
47,385

 
46,781

 
50,016

 
66,116

 
210,298

Net direct contribution
 
71,186

 
35,144

 
16,946

 
(13,753
)
 
109,523

Corporate expense allocations
 
11,650

 
13,491

 
7,650

 
(32,791
)
 
—

Net income before taxes
 
59,536

 
21,653

 
9,296

 
19,038

 
109,523

Federal and state income taxes
 
23,160

 
8,423

 
3,616

 
(1,738
)
 
33,461

Net income
 
36,376

 
13,230

 
5,680

 
20,776

 
76,062

Net loss attributable to non-controlling interests
 
—

 
—

 
—

 
324

 
324

Net income attributable to BOK Financial Corp. shareholders
 
$
36,376

 
$
13,230

 
$
5,680

 
$
20,452

 
$
75,738

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,440,231

 
$
6,488,471

 
$
4,385,932

 
$
5,940,098

 
$
27,254,732

Average invested capital
 
911,228

 
293,716

 
206,872

 
1,553,107

 
2,964,923

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.38
%
 
0.81
%
 
0.54
%
 
 
 
1.10
%
Return on average invested capital
 
15.84
%
 
17.87
%
 
11.46
%
 
 
 
10.13
%
Efficiency ratio
 
39.87
%
 
54.67
%
 
74.87
%
 
 
 
66.03
%


- 114 -


Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2013 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
272,565

 
$
74,513

 
$
19,242

 
$
141,913

 
$
508,233

Net interest revenue (expense) from internal sources
 
(38,838
)
 
26,598

 
15,251

 
(3,011
)
 
—

Net interest revenue
 
233,727

 
101,111

 
34,493

 
138,902

 
508,233

Provision for credit losses
 
98

 
4,189

 
898

 
(21,685
)
 
(16,500
)
Net interest revenue after provision for credit losses
 
233,629

 
96,922

 
33,595

 
160,587

 
524,733

Other operating revenue
 
120,911

 
175,041

 
162,086

 
9,419

 
467,457

Other operating expense
 
139,743

 
140,585

 
148,578

 
196,295

 
625,201

Net direct contribution
 
214,797

 
131,378

 
47,103

 
(26,289
)
 
366,989

Corporate expense allocations
 
36,291

 
40,957

 
22,777

 
(100,025
)
 
—

Net income before taxes
 
178,506

 
90,421

 
24,326

 
73,736

 
366,989

Federal and state income taxes
 
69,439

 
35,174

 
9,463

 
7,904

 
121,980

Net income
 
109,067

 
55,247

 
14,863

 
65,832

 
245,009

Net income attributable to non-controlling interests
 
—

 
—

 
—

 
1,376

 
1,376

Net income attributable to BOK Financial Corp. shareholders
 
$
109,067

 
$
55,247

 
$
14,863

 
$
64,456

 
$
243,633

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,362,166

 
$
6,493,883

 
$
4,537,917

 
$
6,080,916

 
$
27,474,882

Average invested capital
 
900,788

 
295,394

 
204,592

 
1,595,911

 
2,996,685

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.41
%
 
1.14
%
 
0.47
%
 
 
 
1.19
%
Return on average invested capital
 
16.19
%
 
25.01
%
 
10.32
%
 
 
 
10.87
%
Efficiency ratio
 
39.34
%
 
49.61
%
 
75.12
%
 
 
 
63.35
%


- 115 -


(12) Fair Value Measurements

Fair value is defined by applicable accounting guidance as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market for the given asset or liability at the measurement date based on market conditions at that date. Certain assets and liabilities are recorded in the Company’s financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis.

For some assets and liabilities, observable market transactions and market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. A hierarchy for fair value has been established which categorizes into three levels the inputs to valuation techniques used to measure fair value. The three levels are as follows:

Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) - fair value is based on unadjusted quoted prices in active markets for identical assets or liabilities.

Significant Other Observable Inputs (Level 2) - Fair value is based on significant other observable inputs which are generally determined based on a single price for each financial instrument provided to us by an applicable third-party pricing service and is based on one or more of the following:

•
Quoted prices for similar, but not identical, assets or liabilities in active markets;
•
Quoted prices for identical or similar assets or liabilities in inactive markets;
•
Inputs other than quoted prices that are observable, such as interest rate and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates;
•
Other inputs derived from or corroborated by observable market inputs.

Significant Unobservable Inputs (Level 3) - Fair value is based upon model-based valuation techniques for which at least one significant assumption is not observable in the market.

Transfers between levels are recognized as of the end of the reporting period. There were no transfers in or out of quoted prices in active markets for identical instruments to significant other observable inputs or significant unobservable inputs during the nine months ended September 30, 2014 and 2013, respectively. Transfers between significant other observable inputs and significant unobservable inputs during the three and nine months ended September 30, 2014 and 2013 are included in the summary of changes in recurring fair values measured using unobservable inputs.

The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. Management has evaluated the methodologies employed by the third-party pricing services by comparing the price provided by the pricing service with other sources, including brokers' quotes, sales or purchases of similar instruments and discounted cash flows to establish a basis for reliance on the pricing service values. Significant differences between the pricing service provided value and other sources are discussed with the pricing service to understand the basis for their values. Based on all observable inputs, management may adjust prices obtained from third-party pricing services to more appropriately reflect the prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market. No significant adjustments were made to prices provided by third-party pricing services at September 30, 2014, December 31, 2013 or September 30, 2013.


- 116 -


Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial assets and liabilities that are measured on a recurring basis is as follows as of September 30, 2014 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
$
41,004

 
$
—

 
$
41,004

 
$
—

U.S. agency residential mortgage-backed securities
 
33,226

 
—

 
33,226

 
—

Municipal and other tax-exempt securities
 
76,884

 
—

 
76,884

 
—

Other trading securities
 
18,598

 
—

 
18,598

 
—

Total trading securities
 
169,712

 
—

 
169,712

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,015

 
1,015

 
—

 
—

Municipal and other tax-exempt
 
64,363

 
—

 
54,170

 
10,193

U.S. agency residential mortgage-backed securities
 
6,850,603

 
—

 
6,850,603

 
—

Privately issued residential mortgage-backed securities
 
171,493

 
—

 
171,493

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,141,645

 
—

 
2,141,645

 
—

Other debt securities
 
34,291

 
—

 
30,141

 
4,150

Perpetual preferred stock
 
24,358

 
—

 
24,358

 
—

Equity securities and mutual funds
 
19,118

 
4,789

 
14,329

 
—

Total available for sale securities
 
9,306,886

 
5,804

 
9,286,739

 
14,343

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
175,761

 
—

 
175,761

 
—

     Other securities
 
—

 
—

 
—

 
—

Total fair value option securities
 
175,761

 
—

 
175,761

 
—

Residential mortgage loans held for sale
 
373,253

 
—

 
365,877

 
7,376

Mortgage servicing rights1
 
173,286

 
—

 
—

 
173,286

Derivative contracts, net of cash collateral2
 
360,809

 
10,799

 
350,010

 
—

Other assets – private equity funds
 
27,118

 
—

 
—

 
27,118

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
348,687

 
4,286

 
344,401

 
—

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type. Derivative contracts in asset positions that were valued based on quoted prices in active markets for identical instruments (Level 1) are primarily exchange-traded energy derivative contacts, net of cash margin. Derivative contacts in liability positions that were valued using quoted prices in active markets for identical instruments are exchange-traded interest rate and agricultural derivative contracts.


- 117 -


The fair value of financial assets and liabilities that are measured on a recurring basis is as follows as of December 31, 2013 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
$
34,120

 
$
—

 
$
34,120

 
$
—

U.S. agency residential mortgage-backed securities
 
21,011

 
—

 
21,011

 
—

Municipal and other tax-exempt securities
 
27,350

 
—

 
27,350

 
—

Other trading securities
 
9,135

 
—

 
9,135

 
—

Total trading securities
 
91,616

 
—

 
91,616

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,042

 
1,042

 
—

 
—

Municipal and other tax-exempt
 
73,775

 
—

 
55,970

 
17,805

U.S. agency residential mortgage-backed securities
 
7,716,010

 
—

 
7,716,010

 
—

Privately issued residential mortgage-backed securities
 
221,099

 
—

 
221,099

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,055,804

 
—

 
2,055,804

 
—

Other debt securities
 
35,241

 
—

 
30,529

 
4,712

Perpetual preferred stock
 
22,863

 
—

 
22,863

 
—

Equity securities and mutual funds
 
21,328

 
—

 
17,121

 
4,207

Total available for sale securities
 
10,147,162

 
1,042

 
10,119,396

 
26,724

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
157,431

 
—

 
157,431

 
—

     Other securities
 
9,694

 
—

 
9,694

 
—

Total fair value option securities
 
167,125

 
—

 
167,125

 
—

Residential mortgage loans held for sale
 
200,546

 
—

 
200,546

 
—

Mortgage servicing rights1
 
153,333

 
—

 
—

 
153,333

Derivative contracts, net of cash collateral2
 
265,012

 
2,712

 
262,300

 
—

Other assets – private equity funds
 
27,341

 
—

 
—

 
27,341

Liabilities:
 


 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
247,185

 
—

 
247,185

 
—

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type. Derivative contracts based on quoted prices in active markets for identical instruments (Level 1) are exchange-traded energy derivative contacts, net of cash margin.



- 118 -


The fair value of financial assets and liabilities that are measured on a recurring basis is as follows as of September 30, 2013 (in thousands):
 
 
Total
 
Quoted Prices in
Active Markets for Identical Instruments
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
$
74,632

 
$
—

 
$
74,632

 
$
—

U.S. agency residential mortgage-backed securities
 
26,129

 
—

 
26,129

 
—

Municipal and other tax-exempt securities
 
37,057

 
—

 
37,057

 
—

Other trading securities
 
13,069

 
—

 
13,069

 
—

Total trading securities
 
150,887

 
—

 
150,887

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,052

 
1,052

 
—

 
—

Municipal and other tax-exempt
 
95,440

 
—

 
55,769

 
39,671

U.S. agency residential mortgage-backed securities
 
7,981,387

 
—

 
7,981,387

 
—

Privately issued residential mortgage-backed securities
 
230,900

 
—

 
230,900

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
1,946,295

 
—

 
1,946,295

 
—

Other debt securities
 
35,362

 
—

 
30,650

 
4,712

Perpetual preferred stock
 
23,680

 
—

 
23,680

 
—

Equity securities and mutual funds
 
58,787

 
—

 
54,580

 
4,207

Total available for sale securities
 
10,372,903

 
1,052

 
10,323,261

 
48,590

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
163,567

 
—

 
163,567

 
—

Other securities
 
4,293

 
—

 
4,293

 
—

Total fair value option securities
 
167,860

 
—

 
167,860

 
—

Residential mortgage loans held for sale
 
230,511

 
—

 
230,511

 
—

Mortgage servicing rights1
 
140,863

 
—

 
—

 
140,863

Derivative contracts, net of cash collateral2
 
377,325

 
644

 
376,681

 
—

Other assets – private equity funds
 
27,799

 
—

 
—

 
27,799

Liabilities:
 
 

 
 
 
 
 
 
Derivative contracts, net of cash collateral2
 
232,544

 
—

 
232,544

 
—

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type. Derivative contracts based on quoted prices in active markets for identical instruments (Level 1) are exchange-traded energy and agricultural derivative contacts, net of cash margin.



- 119 -


Following is a description of the Company's valuation methodologies used for assets and liabilities measured on a recurring basis:
Securities
The fair values of trading, available for sale and fair value option securities are based on quoted prices for identical instruments in active markets, when available. If quoted prices for identical instruments are not available, fair values are based on significant other observable inputs such as quoted prices of comparable instruments or interest rates and credit spreads, yield curves, volatilities, prepayment speeds and loss severities.

The fair value of certain available for sale municipal and other debt securities may be based on significant unobservable inputs. These significant unobservable inputs include limited observed trades, projected cash flows, current credit rating of the issuers and, when applicable, the insurers of the debt and observed trades of similar debt. Discount rates are primarily based on reference to interest rate spreads on comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies adjusted for a lack of trading volume. Significant unobservable inputs are developed by investment securities professionals involved in the active trading of similar securities. A summary of significant inputs used to value these securities follows. A management committee composed of senior members from the Company's Capital Markets, Risk Management and Finance departments assess the appropriateness of these inputs monthly.

Derivatives

All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, commodity and foreign exchange contracts are based on valuations provided either by third-party dealers in the contracts, quotes provided by independent pricing services, or a third-party provided pricing model that uses significant other observable market inputs.

Credit risk is considered in determining the fair value of derivative instruments. Management determines fair value adjustments based on various risk factors including but not limited to counterparty credit rating or equivalent loan grading, derivative contract notional size, price volatility of the underlying commodity, duration of the derivative contracts and expected loss severity. Expected loss severity is based on historical losses for similarly risk graded commercial loan customers. Decreases in counterparty credit rating or grading and increases in price volatility and expected loss severity all tend to increase the credit quality adjustment which reduces the fair value of asset contracts. The reduction in fair value is recognized in earnings during the current period.

We also consider our own credit risk in determining the fair value of derivative contracts. Changes in our credit rating would affect the fair value of our derivative liabilities. In the event of a credit downgrade, the fair value of our derivative liabilities would increase. The change in the fair value would be recognized in earnings in the current period.
Residential Mortgage Loans Held for Sale
Residential mortgage loans held for sale are carried on the balance sheet at fair value. The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments.

Other Assets - Private Equity Funds
The fair value of the portfolio investments of the Company's two private equity funds are based upon net asset value reported by the underlying funds, as adjusted by the general partner when necessary to represent the price that would be received to sell the assets. The Company's private equity funds provide customers alternative investment opportunities as limited partners of the funds. As fund of funds, the private equity funds invest in other limited partnerships or limited liability companies that invest substantially all of their assets in U.S. companies pursuing diversified investment strategies including early-stage venture capital, distressed securities and corporate or asset buy-outs. Private equity fund assets are long-term, illiquid investments. No secondary market exists for these assets. The private equity funds typically invest in funds that provide no redemption rights to investors. The fair value of the private equity investments may only be realized through cash distributions from the underlying funds.


- 120 -


The following represents the changes for the three months ended September 30, 2014 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Equity securities and mutual funds
 
Residential mortgage loans held for sale
 
Other assets – private equity funds
Balance, June 30, 2014
 
$
10,445

 
$
4,231

 
$
—

 
$
—

 
$
27,833

Transfer to Level 3 from Level 2
 
—

 
—

 
—

 
7,764

 
—

Purchases and capital calls
 
—

 
—

 
—

 
—

 
505

Redemptions and distributions
 
—

 
—

 
—

 
—

 
(1,994
)
Gain (loss) recognized in earnings:
 
 
 
 
 
 
 
 
 
 
Mortgage banking revenue
 
—

 
—

 
—

 
(388
)
 
—

Gain on other assets, net
 
—

 
—

 
—

 
—

 
774

Loss on available for sale securities, net
 
—

 
—

 
—

 
—

 
—

Charitable contributions to BOKF Foundation
 
—

 
—

 
—

 
—

 
—

Other comprehensive gain (loss):
 
 
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(252
)
 
(81
)
 
—

 
—

 
—

Balance, Sept. 30, 2014
 
$
10,193

 
$
4,150

 
$
—

 
$
7,376

 
$
27,118


The following represents the changes for the nine months ended September 30, 2014 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Equity securities and mutual funds
 
Residential mortgage loans held for sale
 
Other assets – private equity funds
Balance, December 31, 2013
 
$
17,805

 
$
4,712

 
$
4,207

 
$
—

 
$
27,341

Transfer to Level 3 from Level 2
 
—

 
—

 
—

 
7,764

 
—

Purchases and capital calls
 
—

 
—

 
—

 
—

 
930

Redemptions and distributions
 
(7,487
)
 
(500
)
 
—

 
—

 
(5,175
)
Gain (loss) recognized in earnings:
 
 
 
 
 
 
 
 
 
 
Mortgage banking revenue
 
—

 
—

 
—

 
(388
)
 
—

Gain on other assets, net
 
—

 
—

 
—

 
—

 
4,022

Loss on available for sale securities, net
 
(235
)
 
—

 
—

 
—

 
—

Charitable contributions to BOKF Foundation
 
—

 
—

 
(2,420
)
 
—

 
—

Other comprehensive gain (loss):
 
 
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
110

 
(62
)
 
(1,787
)
 
—

 
—

Balance, Sept. 30, 2014
 
$
10,193

 
$
4,150

 
$
—

 
$
7,376

 
$
27,118


- 121 -



The following represents the changes for the three months ended September 30, 2013 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Equity securities and mutual funds
 
Other assets – private equity funds
Balance, June 30, 2013
 
$
38,847

 
$
5,193

 
$
2,247

 
$
28,379

Transfer to Level 3 from Level 2
 
—

 
—

 
—

 
—

Purchases, and capital calls
 
—

 
—

 
—

 
567

Redemptions and distributions
 
—

 
(500
)
 
—

 
(1,589
)
Gain (loss) recognized in earnings
 
 
 
 
 
 
 
 
Gain on other assets, net
 
—

 
—

 
—

 
442

Other-than-temporary impairment losses
 
(1,369
)
 
—

 
—

 
—

Other comprehensive gain (loss):
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
2,193

 
19

 
1,960

 
—

Balance, Sept. 30, 2013
 
$
39,671

 
$
4,712

 
$
4,207

 
$
27,799


The following represents the changes for the nine months ended September 30, 2013 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Equity securities and mutual funds
 
Other assets – private equity funds
Balance, December 31, 2012
 
$
40,702

 
$
5,399

 
$
2,161

 
$
28,169

Transfer to Level 3 from Level 2
 
—

 
—

 
—

 
—

Purchases, and capital calls
 
—

 
—

 
—

 
1,207

Redemptions and distributions
 
(98
)
 
(500
)
 
—

 
(3,424
)
Gain (loss) recognized in earnings
 
 
 
 
 
 
 
 
Gain on other assets, net
 
—

 
—

 
—

 
1,847

Other-than-temporary impairment losses
 
(1,369
)
 
—

 
—

 
—

Other comprehensive gain (loss):
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
436

 
(187
)
 
2,046

 
—

Balance, Sept. 30, 2013
 
$
39,671

 
$
4,712

 
$
4,207

 
$
27,799




- 122 -


A summary of quantitative information about assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of September 30, 2014 follows (in thousands):
Quantitative Information about Level 3 Recurring Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par
Value
 
Amortized
Cost/Unpaid Principal Balance
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
10,970

 
$
10,904

 
$
10,193

 
Discounted cash flows
1 
Interest rate spread
 
4.93%-5.23% (5.19%)
2 
92.68%-94.32% (93.13%)
3 
Other debt securities
 
4,400

 
4,400

 
4,150

 
Discounted cash flows
1 
Interest rate spread
 
5.61%-5.65% (5.65%)
4 
92.68% - 92.99 (92.80%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
N/A

 
7,764

 
7,376

 
Quoted prices of loans sold in securitization transactions, with a liquidity discount applied
 
Liquidity discount applied to the market value of a mortgage loans qualifying for sale to U.S. government agencies.
 
N/A
 
Other assets - private equity funds
 
N/A

 
N/A

 
27,118

 
Net asset value reported by underlying fund
 
Net asset value reported by underlying fund
 
N/A
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 482 to 514 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value.
4 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 1%.

The fair value of these securities measured at fair value using significant unobservable inputs are sensitive primarily to changes in interest rate spreads. At September 30, 2014, for tax-exempt securities rated investment grade by all nationally-recognized rating agencies, a 100 basis point increase in the spreads over average yields for comparable securities would result in an additional decrease in the fair value of $147 thousand. For taxable securities rated investment grade by all nationally-recognized rating agencies, a 100 basis point increase in the spreads over average yield for comparable securities would result in an additional decrease in the fair value of $59 thousand.

- 123 -



A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of December 31, 2013 follows (in thousands):
Quantitative Information about Level 3 Recurring Fair Value Measurements
 
 
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
$
18,695

 
$
18,624

 
$
17,805

 
Discounted cash flows
1 
Interest rate spread
 
4.97%-5.27% (5.16%)
2 
95.02%-95.50% (95.24%)
3 
Other debt securities
 
4,900

 
4,900

 
4,712

 
Discounted cash flows
1 
Interest rate spread
 
5.67% (5.67%)
4 
96.16% (96.16%)
3 
Equity securities and mutual funds
 
N/A

 
2,420

 
4,207

 
Publicly announced preliminary purchase price information from acquirer
 
Discount for settlement uncertainty
 
N/A
5 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets - private equity funds
 
N/A

 
N/A

 
27,341

 
Net asset value reported by underlying fund
 
Net asset value reported by underlying fund
 
N/A
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 467 to 518 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value.
4 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 1%.
5 
Fair value of shares of a smaller privately-held financial institution were valued using preliminary announced purchase information by a publicly-traded acquirer.


- 124 -


A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2013 follows (in thousands):

Quantitative Information about Level 3 Recurring Fair Value Measurements
 
 
Par
Value
 
Amortized
Cost6
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
$
21,545

 
$
21,467

 
$
20,531

 
Discounted cash flows
1 
Interest rate spread
 
4.98%-5.28% (5.15%)
2 
95.02%-95.55% (95.29%)
3 
Below investment grade
 
23,925

 
17,924

 
19,140

 
Proposed settlement agreement
1 
Discount for settlement uncertainty
 

4 
80.00%-80.00% (80.00%)
3 
Total municipal and other tax-exempt securities
 
45,470

 
39,391

 
39,671

 
 
 
 
 
 
 
Other debt securities
 
4,900

 
4,900

 
4,712

 
Discounted cash flows
1 
Interest rate spread
 
5.60%-5.68% (5.67%)
5 
96.16% - 96.16 (96.16%)
3 
Equity securities and mutual funds
 
N/A

 
2,420

 
4,207

 
Publicly announced preliminary purchase price information from acquirer.
 
Discount for settlement uncertainty
 
N/A
7 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets - private equity funds
 
N/A

 
N/A

 
27,799

 
Net asset value reported by underlying fund
 
Net asset value reported by underlying fund
 
N/A
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume.
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 462 to 517 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value.
4 
Fair value based on proposed settlement agreement between bond holders and issuer.
5 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 1%.
6 
Amortized cost reduced by other-than-temporary impairments recorded in earnings. See Note 2 for additional discussion.
7 
Fair value of shares of a smaller privately-held financial institution were valued using preliminary announced purchase information by a publicly-traded acquirer.


Fair Value of Assets and Liabilities Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis include collateral for certain impaired loans and real property and other assets acquired to satisfy loans, which are based primarily on comparisons to completed sales of similar assets.

The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at September 30, 2014 for which the fair value was adjusted during the nine months ended September 30, 2014:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at Sept. 30, 2014
 
Three Months Ended
Sept. 30, 2014
Recognized in:
 
Nine Months Ended
Sept. 30, 2014
Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
Impaired loans
$
—

 
$
6,585

 
$
681

 
$
809

 
$
—

 
$
2,263

 
$
—

Real estate and other repossessed assets
—

 
16,870

 
495

 
—

 
4,139

 
—

 
5,515

 

- 125 -


The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at September 30, 2013 for which the fair value was adjusted during the nine months ended September 30, 2013:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at Sept. 30, 2013
 
Three Months Ended
Sept. 30, 2013
Recognized in:
 
Nine Months Ended
Sept. 30, 2013
Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
Impaired loans
$
—

 
$
10,607

 
$
4,787

 
$
660

 
$
—

 
$
6,900

 
$
—

Real estate and other repossessed assets
—

 
14,901

 
170

 
—

 
1,767

 
—

 
2,560


The fair value of collateral-dependent impaired loans and real estate and other repossessed assets and the related fair value adjustments are generally based on unadjusted third-party appraisals. Our appraisal review policies require appraised values to be supported by observed inputs derived principally from or corroborated by observable market data. Appraisals that are not based on observable inputs or that require significant adjustments or fair value measurements that are not based on third-party appraisals are considered to be based on significant unobservable inputs. Non-recurring fair value measurements of collateral-dependent impaired loans and real estate and other repossessed assets based on significant unobservable inputs are generally due to estimates of current fair values between appraisal dates. Significant unobservable inputs include listing prices for the same or comparable assets, uncorroborated expert opinions or management's knowledge of the collateral or industry. These inputs are developed by asset management and workout professionals and approved by senior Credit Administration executives.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2014 follows (in thousands):
Quantitative Information about Level 3 Non-recurring Fair Value Measurements
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
681

 
Appraised value, as adjusted
 
Broker quotes and management's knowledge of industry and collateral.
 
N/A
Real estate and other repossessed assets
 
495

 
Appraised value, as adjusted
 
Marketability adjustment off appraised value1 or limited observable sales with similar development restrictions
 
N/A
1 
Marketability adjustments include consideration of estimated costs to sell, which is approximately 10% of fair value.


A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2013 follows (in thousands):
Quantitative Information about Level 3 Non-recurring Fair Value Measurements
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
Impaired loans
 
$
4,787

 
Appraised value, as adjusted
 
Broker quotes and management's knowledge of industry and collateral.
 
N/A
Real estate and other repossessed assets
 
170

 
Appraised value, as adjusted
 
Marketability adjustments off appraised value
 
82%-85% (83%)1
1 
Marketability adjustments include consideration of estimated costs to sell, which is approximately 15% of fair value.

- 126 -


Fair Value of Financial Instruments

The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of September 30, 2014 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and due from banks
 
$
557,658

 
 
 
 
 
 
 
$
557,658

Interest-bearing cash and cash equivalents
 
2,007,901

 
 
 
 
 
 
 
2,007,901

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
41,004

 
 
 
 
 
 
 
41,004

U.S. agency residential mortgage-backed securities
 
33,226

 
 
 
 
 
 
 
33,226

Municipal and other tax-exempt securities
 
76,884

 
 
 
 
 
 
 
76,884

Other trading securities
 
18,598

 
 
 
 
 
 
 
18,598

Total trading securities
 
169,712

 
 
 
 
 
 
 
169,712

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
410,595

 
 
 
 
 
 
 
415,233

U.S. agency residential mortgage-backed securities
 
38,585

 
 
 
 
 
 
 
40,259

Other debt securities
 
205,911

 
 
 
 
 
 
 
220,953

Total investment securities
 
655,091

 
 
 
 
 
 
 
676,445

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,015

 
 
 
 
 
 
 
1,015

Municipal and other tax-exempt
 
64,363

 
 
 
 
 
 
 
64,363

U.S. agency residential mortgage-backed securities
 
6,850,603

 
 
 
 
 
 
 
6,850,603

Privately issued residential mortgage-backed securities
 
171,493

 
 
 
 
 
 
 
171,493

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,141,645

 
 
 
 
 
 
 
2,141,645

Other debt securities
 
34,291

 
 
 
 
 
 
 
34,291

Perpetual preferred stock
 
24,358

 
 
 
 
 
 
 
24,358

Equity securities and mutual funds
 
19,118

 
 
 
 
 
 
 
19,118

Total available for sale securities
 
9,306,886

 
 
 
 
 
 
 
9,306,886

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
175,761

 
 
 
 
 
 
 
175,761

      Other securities
 
—

 
 
 
 
 
 
 
—

Total fair value option securities
 
175,761

 
 
 
 
 
 
 
175,761

Residential mortgage loans held for sale
 
373,253

 
 
 
 
 
 
 
373,253

Loans:
 
 

 
 
 
 
 
 
 
 

Commercial
 
8,572,038

 
0.25% - 30.00%
 
0.60

 
0.53% - 4.30%

 
8,441,120

Commercial real estate
 
2,724,199

 
0.38% - 18.00%
 
0.80

 
1.13% - 3.66%

 
2,702,389

Residential mortgage
 
1,979,663

 
1.20% - 18.00%
 
2.42

 
0.57% - 4.21%

 
2,009,619

Consumer
 
407,839

 
0.38% - 21.00%
 
0.46

 
1.07% - 3.88%

 
401,986

Total loans
 
13,683,739

 
 
 
 

 
 

 
13,555,114

Allowance for loan losses
 
(191,244
)
 
 
 
 

 
 

 
—

Loans, net of allowance
 
13,492,495

 
 
 
 

 
 

 
13,555,114

Mortgage servicing rights
 
173,286

 
 
 
 

 
 

 
173,286

Derivative instruments with positive fair value, net of cash margin
 
360,809

 
 
 
 

 
 

 
360,809

Other assets – private equity funds
 
27,118

 
 
 
 

 
 

 
27,118

Deposits with no stated maturity
 
17,624,476

 
 
 
 

 
 

 
17,624,476

Time deposits
 
2,664,580

 
0.02% - 9.64%
 
2.02

 
0.74% - 1.31%

 
2,670,657

Other borrowed funds
 
4,595,631

 
0.21% - 6.68%
 
0.46

 
0.07% - 2.62%

 
4,555,307

Subordinated debentures
 
347,936

 
0.92% - 5.00%
 
2.00

 
2.17
%
 
344,764

Derivative instruments with negative fair value, net of cash margin
 
348,687

 
 
 
 

 
 

 
348,687



- 127 -


The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of December 31, 2013 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and due from banks
 
$
512,931

 
 
 
 
 
 
 
$
512,931

Interest-bearing cash and cash equivalents
 
574,282

 
 
 
 
 
 
 
574,282

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
34,120

 
 
 
 
 
 
 
34,120

U.S. agency residential mortgage-backed securities
 
21,011

 
 
 
 
 
 
 
21,011

Municipal and other tax-exempt securities
 
27,350

 
 
 
 
 
 
 
27,350

Other trading securities
 
9,135

 
 
 
 
 
 
 
9,135

Total trading securities
 
91,616

 
 
 
 
 
 
 
91,616

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
440,187

 
 
 
 
 
 
 
439,870

U.S. agency residential mortgage-backed securities
 
50,182

 
 
 
 
 
 
 
51,864

Other debt securities
 
187,509

 
 
 
 
 
 
 
195,393

Total investment securities
 
677,878

 
 
 
 
 
 
 
687,127

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,042

 
 
 
 
 
 
 
1,042

Municipal and other tax-exempt
 
73,775

 
 
 
 
 
 
 
73,775

U.S. agency residential mortgage-backed securities
 
7,716,010

 
 
 
 
 
 
 
7,716,010

Privately issued residential mortgage-backed securities
 
221,099

 
 
 
 
 
 
 
221,099

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
2,055,804

 
 
 
 
 
 
 
2,055,804

Other debt securities
 
35,241

 
 
 
 
 
 
 
35,241

Perpetual preferred stock
 
22,863

 
 
 
 
 
 
 
22,863

Equity securities and mutual funds
 
21,328

 
 
 
 
 
 
 
21,328

Total available for sale securities
 
10,147,162

 
 
 
 
 
 
 
10,147,162

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
157,431

 
 
 
 
 
 
 
157,431

      Other securities
 
9,694

 
 
 
 
 
 
 
9,694

Total fair value option securities
 
167,125

 
 
 
 
 
 
 
167,125

Residential mortgage loans held for sale
 
200,546

 
 
 
 
 
 
 
200,546

Loans:
 
 

 
 
 
 

 
 

 
 

Commercial
 
7,943,221

 
0.04% - 30.00%
 
0.49

 
0.48% - 4.33%

 
7,835,325

Commercial real estate
 
2,415,353

 
0.38% - 18.00%
 
0.78

 
1.21% - 3.49%

 
2,394,443

Residential mortgage
 
2,052,026

 
0.38% - 18.00%
 
2.63

 
0.59% - 4.73%

 
2,068,690

Consumer
 
381,664

 
0.38% - 21.00%
 
0.55

 
1.22% - 3.75%

 
375,962

Total loans
 
12,792,264

 
 
 
 

 
 

 
12,674,420

Allowance for loan losses
 
(185,396
)
 
 
 
 

 
 

 
—

Loans, net of allowance
 
12,606,868

 
 
 
 

 
 

 
12,674,420

Mortgage servicing rights
 
153,333

 
 
 
 

 
 

 
153,333

Derivative instruments with positive fair value, net of cash margin
 
265,012

 
 
 
 

 
 

 
265,012

Other assets – private equity funds
 
27,341

 
 
 
 

 
 

 
27,341

Deposits with no stated maturity
 
17,573,334

 
 
 
 

 
 

 
17,573,334

Time deposits
 
2,695,993

 
0.01% - 9.64%
 
2.12

 
0.75% - 1.33%

 
2,697,290

Other borrowed funds
 
2,721,888

 
0.25% - 4.78%
 
0.03

 
0.08% - 2.64%

 
2,693,788

Subordinated debentures
 
347,802

 
0.95% - 5.00%
 
2.63

 
2.22
%
 
344,783

Derivative instruments with negative fair value, net of cash margin
 
247,185

 
 
 
 

 
 

 
247,185



- 128 -


The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of September 30, 2013 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and due from banks
 
$
625,671

 
 
 
 
 
 
 
$
625,671

Interest-bearing cash and cash equivalents
 
535,313

 
 
 
 
 
 
 
535,313

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
74,632

 
 
 
 
 
 
 
74,632

U.S. agency residential mortgage-backed securities
 
26,129

 
 
 
 
 
 
 
26,129

Municipal and other tax-exempt securities
 
37,057

 
 
 
 
 
 
 
37,057

Other trading securities
 
13,069

 
 
 
 
 
 
 
13,069

Total trading securities
 
150,887

 
 
 
 
 
 
 
150,887

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
409,542

 
 
 
 
 
 
 
407,562

U.S. agency residential mortgage-backed securities
 
56,182

 
 
 
 
 
 
 
58,442

Other debt securities
 
178,501

 
 
 
 
 
 
 
188,475

Total investment securities
 
644,225

 
 
 
 
 
 
 
654,479

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,052

 
 
 
 
 
 
 
1,052

Municipal and other tax-exempt
 
95,440

 
 
 
 
 
 
 
95,440

U.S. agency residential mortgage-backed securities
 
7,981,387

 
 
 
 
 
 
 
7,981,387

Privately issued residential mortgage-backed securities
 
230,900

 
 
 
 
 
 
 
230,900

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
1,946,295

 
 
 
 
 
 
 
1,946,295

Other debt securities
 
35,362

 
 
 
 
 
 
 
35,362

Perpetual preferred stock
 
23,680

 
 
 
 
 
 
 
23,680

Equity securities and mutual funds
 
58,787

 
 
 
 
 
 
 
58,787

Total available for sale securities
 
10,372,903

 
 
 
 
 
 
 
10,372,903

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
163,567

 
 
 
 
 
 
 
163,567

Other securities
 
4,293

 
 
 
 
 
 
 
4,293

Total fair value option securities
 
167,860

 
 
 
 
 
 
 
167,860

Residential mortgage loans held for sale
 
230,511

 
 
 
 
 
 
 
230,511

Loans:
 
 

 
 
 
 
 
 
 
 

Commercial
 
7,571,075

 
0.25% - 30.00%
 
0.46

 
0.50% - 4.19%

 
7,493,143

Commercial real estate
 
2,349,229

 
0.38% - 18.00%
 
0.79

 
1.20% - 3.42%

 
2,326,908

Residential mortgage
 
2,034,765

 
0.38% - 18.00%
 
2.56

 
0.64% - 4.40%

 
2,056,072

Consumer
 
395,031

 
0.38% - 21.00%
 
0.55

 
1.24% - 3.71%

 
388,490

Total loans
 
12,350,100

 
 
 
 

 
 

 
12,264,613

Allowance for loan losses
 
(194,325
)
 
 
 
 

 
 

 
—

Loans, net of allowance
 
12,155,775

 
 
 
 

 
 

 
12,264,613

Mortgage servicing rights
 
140,863

 
 
 
 

 
 

 
140,863

Derivative instruments with positive fair value, net of cash margin
 
377,325

 
 
 
 

 
 

 
377,325

Other assets – private equity funds
 
27,799

 
 
 
 

 
 

 
27,799

Deposits with no stated maturity
 
16,771,635

 
 
 
 

 
 

 
16,771,635

Time deposits
 
2,720,020

 
0.01% - 9.64%
 
2.08

 
0.75% - 1.28%

 
2,739,764

Other borrowed funds
 
3,611,944

 
0.25% - 4.78%
 
—

 
0.06% - 2.65%

 
3,570,228

Subordinated debentures
 
347,758

 
0.97% - 5.00%
 
2.87

 
2.22
%
 
344,854

Derivative instruments with negative fair value, net of cash margin
 
232,544

 
 
 
 

 
 

 
232,544



- 129 -


Because no market exists for certain of these financial instruments and management does not intend to sell these financial instruments, the fair values shown in the tables above may not represent values at which the respective financial instruments could be sold individually or in the aggregate at the given reporting date.

The following methods and assumptions were used in estimating the fair value of these financial instruments:
 
Cash and Cash Equivalents
 
The book value reported in the consolidated balance sheets for cash and short-term instruments approximates those assets’ fair values.
 
Securities
 
The fair values of securities are generally based on Significant Other Observable Inputs such as quoted prices for comparable instruments or interest rates and credit spreads, yield curves, volatilities, prepayment speeds and loss severities. 

Loans
 
The fair value of loans, excluding loans held for sale, are based on discounted cash flow analyses using interest rates and credit and liquidity spreads currently being offered for loans with similar remaining terms to maturity and risk, adjusted for the impact of interest rate floors and ceilings which are classified as Significant Unobservable Inputs. The fair values of loans were estimated to approximate their discounted cash flows less loan loss allowances allocated to these loans of $163 million at September 30, 2014, $157 million at December 31, 2013 and $153 million at September 30, 2013.
 
Deposits
 
The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions which are considered Significant Unobservable Inputs. Estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, is equal to the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, adjusting fair value for the expected benefit of these deposits is prohibited. Accordingly, the positive effect of such deposits is not included in the tables above.
 
Other Borrowings and Subordinated Debentures
 
The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments which are considered Significant Unobservable Inputs.

Off-Balance Sheet Instruments
 
The fair values of commercial loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance sheet instruments were not significant at September 30, 2014, December 31, 2013 or September 30, 2013.
Fair Value Election

As more fully disclosed in Note 2 and Note 6 to the Consolidated Financial Statements, the Company has elected to carry all residential mortgage-backed securities which have been designated as economic hedges against changes in the fair value of mortgage servicing rights, certain corporate debt securities economically hedged by derivative contracts to manage interest rate risk and all residential mortgage loans originated for sale at fair value. Changes in the fair value of these financial instruments are recognized in earnings.

- 130 -


(13) Federal and State Income Taxes

The reconciliations of income (loss) attributable to continuing operations at the U.S. federal statutory tax rate to income tax expense are as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Amount:
 
 
 
 
 
 
 
 
Federal statutory tax
 
$
37,802

 
$
38,333

 
$
117,778

 
$
128,446

Tax exempt revenue
 
(2,164
)
 
(1,860
)
 
(6,254
)
 
(5,405
)
Effect of state income taxes, net of federal benefit
 
2,328

 
2,072

 
7,655

 
8,572

Utilization of tax credits
 
(2,746
)
 
(1,669
)
 
(8,213
)
 
(5,217
)
Bank-owned life insurance
 
(806
)
 
(871
)
 
(2,358
)
 
(2,749
)
Reduction of tax accrual
 
(2,281
)
 
(1,400
)
 
(2,281
)
 
(1,400
)
Charitable contributions to BOKF Foundation
 
—

 
(1,115
)
 
(427
)
 
(1,115
)
Other, net
 
(254
)
 
(29
)
 
710

 
848

Total
 
$
31,879

 
$
33,461

 
$
106,610

 
$
121,980


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Percent of pretax income:
 
 
 
 
 
 
 
 
Federal statutory tax
 
35
 %
 
35
 %
 
35
 %
 
35
 %
Tax exempt revenue
 
(2
)
 
(2
)
 
(2
)
 
(1
)
Effect of state income taxes, net of federal benefit
 
3

 
2

 
3

 
2

Utilization of tax credits
 
(3
)
 
(1
)
 
(2
)
 
(1
)
Bank-owned life insurance
 
(1
)
 
(1
)
 
(1
)
 
(1
)
Reduction of tax accrual
 
(2
)
 
(1
)
 
(1
)
 
(1
)
Charitable contributions to BOKF Foundation
 
—

 
(1
)
 
—

 
—

Other, net
 
—

 
—

 
—

 
—

Total
 
30
 %
 
31
 %
 
32
 %
 
33
 %
(14) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on September 30, 2014 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q. No events were identified requiring recognition in and/or disclosure in the consolidated financial statements.


- 131 -


Nine-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2013
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
803,300

 
$
1,249

 
0.21
%
 
$
484,624

 
$
817

 
0.23
%
Trading securities
 
105,558

 
1,619

 
2.63
%
 
156,165

 
2,224

 
2.26
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
229,300

 
9,715

 
5.65
%
 
246,922

 
10,836

 
5.85
%
Tax-exempt
 
427,896

 
5,199

 
1.62
%
 
342,333

 
4,552

 
1.90
%
Total investment securities
 
657,196

 
14,914

 
3.03
%
 
589,255

 
15,388

 
3.62
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
9,705,731

 
138,970

 
1.93
%
 
10,850,459

 
156,534

 
1.98
%
Tax-exempt
 
93,788

 
2,417

 
3.57
%
 
117,374

 
2,748

 
3.26
%
Total available for sale securities
 
9,799,519

 
141,387

 
1.94
%
 
10,967,833

 
159,282

 
2.00
%
Fair value option securities
 
170,210

 
2,558

 
1.99
%
 
212,143

 
3,015

 
1.94
%
Restricted equity securities
 
108,432

 
4,405

 
5.42
%
 
127,178

 
3,516

 
3.69
%
Residential mortgage loans held for sale
 
238,936

 
7,042

 
3.96
%
 
234,894

 
6,254

 
3.59
%
Loans2
 
13,245,746

 
380,538

 
3.84
%
 
12,302,149

 
379,586

 
4.12
%
Allowance for loan losses
 
189,165

 
 
 
 
 
207,435

 
 
 
 
Loans, net of allowance
 
13,056,581

 
380,538

 
3.90
%
 
12,094,714

 
379,586

 
4.20
%
Total earning assets
 
24,939,732

 
553,712

 
2.98
%
 
24,866,806

 
570,082

 
3.11
%
Receivable on unsettled securities sales
 
95,415

 
 
 
 
 
134,522

 
 
 
 
Cash and other assets
 
2,581,780

 
 
 
 
 
2,473,554

 
 
 
 
Total assets
 
$
27,616,927

 
 
 
 
 
$
27,474,882

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
9,740,231

 
$
7,429

 
0.10
%
 
$
9,536,771

 
$
8,589

 
0.12
%
Savings
 
344,863

 
305

 
0.12
%
 
309,963

 
347

 
0.15
%
Time
 
2,644,073

 
30,748

 
1.55
%
 
2,824,541

 
33,380

 
1.58
%
Total interest-bearing deposits
 
12,729,167

 
38,482

 
0.40
%
 
12,671,275

 
42,316

 
0.45
%
Funds purchased
 
636,599

 
327

 
0.07
%
 
905,823

 
703

 
0.10
%
Repurchase agreements
 
906,006

 
474

 
0.07
%
 
832,118

 
398

 
0.06
%
Other borrowings
 
1,560,624

 
4,305

 
0.37
%
 
1,741,982

 
4,033

 
0.31
%
Subordinated debentures
 
347,869

 
6,501

 
2.50
%
 
347,696

 
6,568

 
2.53
%
Total interest-bearing liabilities
 
16,180,265

 
50,089

 
0.41
%
 
16,498,894

 
54,018

 
0.44
%
Non-interest bearing demand deposits
 
7,590,672

 
 
 
 
 
7,000,765

 
 
 
 
Due on unsettled securities
 
135,954

 
 
 
 
 
367,340

 
 
 
 
Other liabilities
 
532,768

 
 
 
 
 
611,198

 
 
 
 
Total equity
 
3,177,268

 
 
 
 
 
2,996,685

 
 
 
 
Total liabilities and equity
 
$
27,616,927

 
 
 
 
 
$
27,474,882

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
503,623

 
2.57
%
 
 
 
$
516,064

 
2.67
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
 
 
2.71
%
 
 
 
 
 
2.82
%
Less tax-equivalent adjustment
 
 
 
8,093

 
 
 
 
 
7,831

 
 
Net Interest Revenue
 
 
 
495,530

 
 
 
 
 
508,233

 
 
Provision for credit losses
 
 
 
—

 
 
 
 
 
(16,500
)
 
 
Other operating revenue
 
 
 
462,623

 
 
 
 
 
467,458

 
 
Other operating expense
 
 
 
621,645

 
 
 
 
 
625,201

 
 
Income before taxes
 
 
 
336,508

 
 
 
 
 
366,990

 
 
Federal and state income taxes
 
 
 
106,610

 
 
 
 
 
121,980

 
 
Net income
 
 
 
229,898

 
 
 
 
 
245,009

 
 
Net income attributable to non-controlling interests
 
 
 
1,781

 
 
 
 
 
1,376

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
228,117

 
 
 
 
 
$
243,633

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
3.30

 
 

 
 

 
$
3.55

 
 

Diluted
 
 

 
$
3.29

 
 

 
 

 
$
3.54

 
 

Yield calculations are shown on a tax equivalent at the statutory federal and state rates for the periods presented. The yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income and the unrealized gains and losses. The yield calculation also includes average loan balances for which the accrual of interest has been discontinued and are net of unearned income. Yield / rate calculations are generally based on the conventions that determine how interest income and expense is accrued.

- 132 -


Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
September 30, 2014
 
June 30, 2014
 
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
1,217,942

 
$
601

 
0.20
%
 
$
635,140

 
$
383

 
0.24
%
Trading securities
 
107,909

 
561

 
2.67
%
 
116,186

 
527

 
2.40
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
228,771

 
3,238

 
5.66
%
 
226,528

 
3,195

 
5.64
%
Tax-exempt
 
412,604

 
1,605

 
1.56
%
 
432,265

 
1,764

 
1.63
%
Total investment securities
 
641,375

 
4,843

 
3.03
%
 
658,793

 
4,959

 
3.01
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
9,436,137

 
45,257

 
1.94
%
 
9,706,965

 
46,458

 
1.94
%
Tax-exempt
 
90,590

 
675

 
3.14
%
 
93,969

 
1,007

 
4.44
%
Total available for sale securities
 
9,526,727

 
45,932

 
1.95
%
 
9,800,934

 
47,465

 
1.96
%
Fair value option securities
 
180,268

 
913

 
2.05
%
 
164,684

 
794

 
1.94
%
Restricted equity securities
 
142,418

 
2,133

 
5.99
%
 
97,016

 
1,275

 
5.26
%
Residential mortgage loans held for sale
 
310,924

 
2,929

 
3.79
%
 
219,308

 
2,523

 
4.63
%
Loans2
 
13,518,578

 
128,695

 
3.78
%
 
13,264,461

 
127,508

 
3.85
%
Allowance for loan losses
 
(191,141
)
 
 
 
 
 
(189,329
)
 
 
 
 
Loans, net of allowance
 
13,327,437

 
128,695

 
3.83
%
 
13,075,132

 
127,508

 
3.91
%
Total earning assets
 
25,455,000

 
186,607

 
2.93
%
 
24,767,193

 
185,434

 
3.02
%
Receivable on unsettled securities sales
 
63,277

 
 
 
 
 
108,825

 
 
 
 
Cash and other assets
 
2,597,280

 
 
 
 
 
2,610,803

 
 
 
 
Total assets
 
$
28,115,557

 
 
 
 
 
$
27,486,821

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
9,473,575

 
$
2,381

 
0.10
%
 
$
9,850,991

 
$
2,489

 
0.10
%
Savings
 
342,488

 
101

 
0.12
%
 
355,459

 
106

 
0.12
%
Time
 
2,610,561

 
10,237

 
1.56
%
 
2,636,444

 
10,182

 
1.55
%
Total interest-bearing deposits
 
12,426,624

 
12,719

 
0.41
%
 
12,842,894

 
12,777

 
0.40
%
Funds purchased
 
320,817

 
59

 
0.07
%
 
574,926

 
107

 
0.07
%
Repurchase agreements
 
1,027,206

 
141

 
0.05
%
 
914,892

 
182

 
0.08
%
Other borrowings
 
2,333,961

 
2,004

 
0.34
%
 
1,294,932

 
1,279

 
0.40
%
Subordinated debentures
 
347,914

 
2,154

 
2.46
%
 
347,868

 
2,189

 
2.52
%
Total interest-bearing liabilities
 
16,456,522

 
17,077

 
0.41
%
 
15,975,512

 
16,534

 
0.42
%
Non-interest bearing demand deposits
 
7,800,350

 
 
 
 
 
7,654,225

 
 
 
 
Due on unsettled securities purchases
 
124,952

 
 
 
 
 
166,521

 
 
 
 
Other liabilities
 
485,304

 
 
 
 
 
513,839

 
 
 
 
Total equity
 
3,248,429

 
 
 
 
 
3,176,724

 
 
 
 
Total liabilities and equity
 
$
28,115,557

 
 
 
 
 
$
27,486,821

 
 
 
 
Tax-equivalent Net Interest Revenue
 
 
 
$
169,530

 
2.52
%
 
 
 
$
168,900

 
2.60
%
Tax-equivalent Net Interest Revenue to Earning Assets
 
 
 
 
 
2.67
%
 
 
 
 
 
2.75
%
Less tax-equivalent adjustment
 
 
 
2,739

 
 
 
 
 
2,803

 
 
Net Interest Revenue
 
 
 
166,791

 
 
 
 
 
166,097

 
 
Provision for credit losses
 
 
 
—

 
 
 
 
 
—

 
 
Other operating revenue
 
 
 
163,048

 
 
 
 
 
162,569

 
 
Other operating expense
 
 
 
221,834

 
 
 
 
 
214,707

 
 
Income before taxes
 
 
 
108,005

 
 
 
 
 
113,959

 
 
Federal and state income taxes
 
 
 
31,879

 
 
 
 
 
37,230

 
 
Net income
 
 
 
76,126

 
 
 
 
 
76,729

 
 
Net income attributable to non-controlling interests
 
 
 
494

 
 
 
 
 
834

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
75,632

 
 
 
 
 
$
75,895

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.09

 
 

 
 

 
$
1.10

 
 

Diluted
 
 

 
$
1.09

 
 

 
 

 
$
1.10

 
 

Yield calculations are shown on a tax equivalent at the statutory federal and state rates for the periods presented. The yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income and the unrealized gains and losses. The yield calculation also includes average loan balances for which the accrual of interest has been discontinued and are net of unearned income. Yield / rate calculations are generally based on the conventions that determine how interest income and expense is accrued.

- 133 -


Three Months Ended
March 31, 2014
 
December 31, 2013
 
September 30, 2013
Average Balance
 
Revenue /Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
549,473

 
$
265

 
0.20
%
 
$
559,918

 
$
258

 
0.18
%
 
$
654,591

 
$
355

 
0.22
%
92,409

 
531

 
2.85
%
 
127,011

 
472

 
1.73
%
 
124,689

 
688

 
2.25
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
232,646

 
3,282

 
5.64
%
 
238,306

 
3,424

 
5.75
%
 
237,487

 
3,434

 
5.78
%
439,110

 
1,830

 
1.67
%
 
434,416

 
1,772

 
1.66
%
 
383,617

 
1,501

 
1.60
%
671,756

 
5,112

 
3.04
%
 
672,722

 
5,196

 
3.12
%
 
621,104

 
4,935

 
3.22
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9,980,069

 
47,255

 
1.90
%
 
10,322,624

 
48,295

 
1.89
%
 
10,439,353

 
50,167

 
1.92
%
96,873

 
735

 
3.11
%
 
112,186

 
751

 
2.74
%
 
119,324

 
828

 
2.81
%
10,076,942

 
47,990

 
1.91
%
 
10,434,810

 
49,046

 
1.89
%
 
10,558,677

 
50,995

 
1.93
%
165,515

 
851

 
1.99
%
 
167,490

 
892

 
2.06
%
 
169,299

 
814

 
1.80
%
85,234

 
997

 
4.68
%
 
123,009

 
1,555

 
5.06
%
 
155,938

 
1,189

 
3.05
%
185,196

 
1,590

 
3.46
%
 
217,811

 
2,251

 
4.16
%
 
225,789

 
2,168

 
3.87
%
12,947,926

 
124,335

 
3.89
%
 
12,461,576

 
125,917

 
4.01
%
 
12,402,096

 
126,849

 
4.06
%
(186,979
)
 
 
 
 
 
(193,309
)
 
 
 
 
 
(201,616
)
 
 
 
 
12,760,947

 
124,335

 
3.95
%
 
12,268,267

 
125,917

 
4.07
%
 
12,200,480

 
126,849

 
4.13
%
24,587,472

 
181,671

 
2.99
%
 
24,571,038

 
185,587

 
3.02
%
 
24,710,567

 
187,993

 
3.03
%
114,708

 
 
 
 
 
83,016

 
 
 
 
 
90,014

 
 
 
 
2,536,588

 
 
 
 
 
2,448,734

 
 
 
 
 
2,454,151

 
 
 
 
$
27,238,768

 
 
 
 
 
$
27,102,788

 
 
 
 
 
$
27,254,732

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
9,900,823

 
$
2,559

 
0.10
%
 
$
9,486,136

 
$
2,566

 
0.11
%
 
$
9,276,136

 
$
2,681

 
0.11
%
336,576

 
98

 
0.12
%
 
323,123

 
95

 
0.12
%
 
317,912

 
107

 
0.13
%
2,686,041

 
10,329

 
1.56
%
 
2,710,019

 
10,587

 
1.55
%
 
2,742,970

 
10,738

 
1.55
%
12,923,440

 
12,986

 
0.41
%
 
12,519,278

 
13,248

 
0.42
%
 
12,337,018

 
13,526

 
0.43
%
1,021,755

 
161

 
0.06
%
 
748,074

 
145

 
0.08
%
 
776,356

 
134

 
0.07
%
773,127

 
151

 
0.08
%
 
752,286

 
105

 
0.06
%
 
799,175

 
123

 
0.06
%
1,038,747

 
1,022

 
0.40
%
 
1,551,591

 
1,205

 
0.31
%
 
2,175,747

 
1,547

 
0.28
%
347,824

 
2,158

 
2.52
%
 
347,781

 
2,173

 
2.48
%
 
347,737

 
2,209

 
2.52
%
16,104,893

 
16,478

 
0.41
%
 
15,919,010

 
16,876

 
0.42
%
 
16,436,033

 
17,539

 
0.42
%
7,312,076

 
 
 
 
 
7,356,063

 
 
 
 
 
7,110,079

 
 
 
 
116,295

 
 
 
 
 
152,078

 
 
 
 
 
111,998

 
 
 
 
600,430

 
 
 
 
 
621,834

 
 
 
 
 
631,699

 
 
 
 
3,105,074

 
 
 
 
 
3,053,803

 
 
 
 
 
2,964,923

 
 
 
 
$
27,238,768

 
 
 
 
 
$
27,102,788

 
 
 
 
 
$
27,254,732

 
 
 
 
 
 
$
165,193

 
2.58
%
 
 
 
$
168,711

 
2.60
%
 
 
 
$
170,454

 
2.61
%
 
 
 
 
2.71
%
 
 
 
 
 
2.74
%
 
 
 
 
 
2.75
%
 
 
2,551

 
 
 
 
 
2,467

 
 
 
 
 
2,565

 
 
 
 
162,642

 
 
 
 
 
166,244

 
 
 
 
 
167,889

 
 
 
 
—

 
 
 
 
 
(11,400
)
 
 
 
 
 
(8,500
)
 
 
 
 
137,006

 
 
 
 
 
147,015

 
 
 
 
 
143,432

 
 
 
 
185,104

 
 
 
 
 
215,419

 
 
 
 
 
210,298

 
 
 
 
114,544

 
 
 
 
 
109,240

 
 
 
 
 
109,523

 
 
 
 
37,501

 
 
 
 
 
35,318

 
 
 
 
 
33,461

 
 
 
 
77,043

 
 
 
 
 
73,922

 
 
 
 
 
76,062

 
 
 
 
453

 
 
 
 
 
946

 
 
 
 
 
324

 
 
 
 
$
76,590

 
 
 
 
 
$
72,976

 
 
 
 
 
$
75,738

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
1.11

 
 

 
 

 
$
1.06

 
 

 
 

 
$
1.10

 
 

 

 
$
1.11

 
 

 
 

 
$
1.06

 
 

 
 

 
$
1.10

 
 




- 134 -



Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
183,868

 
$
182,631

 
$
179,120

 
$
183,120

 
$
185,428

Interest expense
 
17,077

 
16,534

 
16,478

 
16,876

 
17,539

Net interest revenue
 
166,791

 
166,097

 
162,642

 
166,244

 
167,889

Provision for credit losses
 
—

 
—

 
—

 
(11,400
)
 
(8,500
)
Net interest revenue after provision for credit losses
 
166,791

 
166,097

 
162,642

 
177,644

 
176,389

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
35,263

 
39,056

 
29,516

 
28,515

 
32,338

Transaction card revenue
 
31,578

 
31,510

 
29,134

 
29,134

 
30,055

Fiduciary and asset management revenue
 
29,738

 
29,543

 
25,722

 
25,074

 
23,892

Deposit service charges and fees
 
22,508

 
23,133

 
22,689

 
23,440

 
24,742

Mortgage banking revenue
 
26,814

 
29,330

 
22,844

 
21,876

 
23,486

Bank-owned life insurance
 
2,326

 
2,274

 
2,106

 
2,285

 
2,408

Other revenue
 
10,320

 
9,208

 
8,852

 
12,048

 
8,314

Total fees and commissions
 
158,547

 
164,054

 
140,863

 
142,372

 
145,235

Gain (loss) on other assets, net
 
(501
)
 
(52
)
 
(4,264
)
 
651

 
(377
)
Gain (loss) on derivatives, net
 
(93
)
 
831

 
968

 
(930
)
 
31

Gain (loss) on fair value option securities, net
 
(332
)
 
4,176

 
2,660

 
(2,805
)
 
(80
)
Change in fair value of mortgage servicing rights
 
5,281

 
(6,444
)
 
(4,461
)
 
6,093

 
(346
)
Gain on available for sale securities, net
 
146

 
4

 
1,240

 
1,634

 
478

Total other-than-temporary impairment losses
 
—

 
—

 
—

 
—

 
(1,436
)
Portion of loss recognized in (reclassified from) other comprehensive income
 
—

 
—

 
—

 
—

 
(73
)
Net impairment losses recognized in earnings
 
—

 
—

 
—

 
—

 
(1,509
)
Total other operating revenue
 
163,048

 
162,569

 
137,006

 
147,015

 
143,432

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
123,043

 
123,714

 
104,433

 
125,662

 
125,799

Business promotion
 
6,160

 
7,150

 
5,841

 
6,020

 
5,355

Charitable contributions to BOKF Foundation
 
—

 
—

 
2,420

 
—

 
2,062

Professional fees and services
 
14,763

 
11,054

 
7,565

 
10,003

 
7,183

Net occupancy and equipment
 
18,892

 
18,789

 
16,896

 
19,103

 
17,280

Insurance
 
4,793

 
4,467

 
4,541

 
4,394

 
3,939

Data processing and communications
 
29,971

 
29,071

 
27,135

 
28,196

 
25,695

Printing, postage and supplies
 
3,380

 
3,429

 
3,541

 
3,126

 
3,505

Net losses and operating expenses of repossessed assets
 
4,966

 
1,118

 
1,432

 
1,618

 
2,014

Amortization of intangible assets
 
1,100

 
949

 
816

 
842

 
835

Mortgage banking costs
 
7,734

 
7,960

 
3,634

 
7,071

 
8,753

Other expense
 
7,032

 
7,006

 
6,850

 
9,384

 
7,878

Total other operating expense
 
221,834

 
214,707

 
185,104

 
215,419

 
210,298

Net income before taxes
 
108,005

 
113,959

 
114,544

 
109,240

 
109,523

Federal and state income taxes
 
31,879

 
37,230

 
37,501

 
35,318

 
33,461

Net income
 
76,126

 
76,729

 
77,043

 
73,922

 
76,062

Net income attributable to non-controlling interests
 
494

 
834

 
453

 
946

 
324

Net income attributable to BOK Financial Corporation shareholders
 
$
75,632

 
$
75,895

 
$
76,590

 
$
72,976

 
$
75,738

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$1.09
 
$1.10
 
$1.11
 
$1.06
 
$1.10
Diluted
 
$1.09
 
$1.10
 
$1.11
 
$1.06
 
$1.10
Average shares used in computation:
 
 
 
 
 
 
 
 
 
 
Basic
 
68,455,866

 
68,359,945

 
68,273,685

 
68,095,254

 
68,049,179

Diluted
 
68,609,765

 
68,511,378

 
68,436,478

 
68,293,758

 
68,272,861


- 135 -


PART II. Other Information

Item 1. Legal Proceedings
 
See discussion of legal proceedings at Note 8 to the Consolidated Financial Statements.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2014.
 
Period
 
Total Number of Shares Purchased2
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans
July 1 to July 31, 2014
 
—

 
$
—

 
—

 
1,960,504

August 1 to August 31, 2014
 
16,004

 
$
67.65

 
—

 
1,960,504

September 1 to September 30, 2014
 
96

 
$
66.88

 
—

 
1,960,504

Total
 
16,100

 
 

 
—

 
 

1 
On April 24, 2012, the Company’s board of directors authorizing the Company to repurchase up to two million shares of the Company’s common stock. As of September 30, 2014, the Company had repurchased 39,496 shares under this plan.
2 
The Company routinely repurchases mature shares from employees to cover the exercise price and taxes in connection with employee stock option exercises.

Item 6. Exhibits

31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act   of 2002

31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to Consolidated Financial Statements


Items 1A, 3, 4 and 5 are not applicable and have been omitted.



- 136 -


Signatures


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


BOK FINANCIAL CORPORATION
(Registrant)



Date:        October 31, 2014                                                                  



/s/ Steven E. Nell
Steven E. Nell
Executive Vice President and
Chief Financial Officer

    
/s/ John C. Morrow
John C. Morrow
Senior Vice President and
Chief Accounting Officer


- 137 -