BOK Financial Reports Quarterly Earnings of $76 Million

BOK Financial Corporation reported net income of $75.9 million or $1.10 per diluted share for the second quarter of 2014. Net income was $76.6 million or $1.11 per diluted share for the first quarter of 2014 and $79.9 million or $1.16 per diluted share for the second quarter of 2013.

Steven G. Bradshaw, President and Chief Executive Officer of BOK Financial Corporation, stated, “BOK Financial delivered improved results across the organization in the second quarter. Loan growth exceeded expectations, and each of our fee-generating businesses delivered very strong sequential revenue growth. The quarter’s results reflect the earnings power inherent in our diversified business model, as several lines of business grew this quarter, including energy lending, brokerage and trading, and mortgage banking. We are excited about the bank’s performance in the second quarter, and we believe our businesses are well-positioned for continued growth for the balance of 2014.”

Highlights of second quarter of 2014 included:

• Net interest revenue totaled $166.1 million for the second quarter of 2014, up $3.5 million over the first quarter of 2014. Net interest margin was 2.75% for the second quarter of 2014 and 2.71% for the first quarter of 2014.
• Fees and commissions revenue totaled $164.1 million for the second quarter of 2014, growing $23.2 million over the first quarter of 2014. Brokerage and trading, mortgage banking, fiduciary and asset management and transaction card revenues all experienced strong growth in the second quarter.
• Operating expenses were $214.7 million for the second quarter, an increase of $29.6 million over the previous quarter. Personnel expense increased $19.3 million. The first quarter included a $17.2 million benefit from adjustments to accruals for incentive compensation of executive officers of the Company. Non-personnel expense increased $10.3 million.
• No provision for credit losses was recorded in the second or first quarter of 2014. BOK Financial had net recoveries of $2.0 million for the second quarter of 2014 and $2.5 million in the previous quarter.
• The combined allowance for credit losses totaled $192 million or 1.43% of outstanding loans at June 30, 2014 compared to $190 million or 1.45% of outstanding loans at March 31, 2014. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $145 million or 1.09% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2014 and $153 million or 1.18% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at March 31, 2014.
• Average loans increased by $317 million over the previous quarter due primarily to growth in commercial loans. Average commercial loans were up $295 million, average consumer loans grew by $19 million and average commercial real estate loans increased $18 million. Period-end outstanding loan balances were $13.4 billion at June 30, 2014, a $349 million increase over March 31, 2014. Commercial loan balances increased $316 million and commercial real estate loans increased $24 million.
• Average deposits increased $262 million over the previous quarter. Growth in demand deposit balances was partially offset by a decrease in interest-bearing transaction accounts and time deposit balances. Period-end deposits were $20.6 billion at June 30, 2014, a $182 million increase over March 31, 2014, primarily due to growth in demand deposit balances.
• The Company's Tier 1 common equity ratio, as defined by banking regulations, was 13.46% at June 30, 2014 and 13.59% at March 31, 2014. The Company and its subsidiary bank continue to exceed the regulatory definition of well capitalized. The Company's Tier 1 capital ratio was 13.63% at June 30, 2014 and 13.77% at March 31, 2014. Total capital ratio was 15.38% at June 30, 2014 and 15.55% at March 31, 2014. The Company's leverage ratio was 10.26% at June 30, 2014 and 10.17% at March 31, 2014.
• The Company paid a regular quarterly cash dividend of $28 million or $0.40 per common share during the second quarter of 2014. On July 29, 2014, the board of directors approved a quarterly cash dividend of $0.40 per common share payable on or about August 29, 2014 to shareholders of record as of August 15, 2014.

Net Interest Revenue

Net interest revenue increased $3.5 million compared to the first quarter of 2014. Net interest margin was 2.75% for the second quarter of 2014, up 4 basis points over the first quarter of 2014.

The yield on average earning assets was 3.02%, an increase of 3 basis points over the prior quarter. The yield on the available for sale securities portfolio increased 5 basis points to 1.96%. Excess cash flows continue to be reinvested in short-duration securities that yield around 2%. The loan portfolio yield decreased 4 basis points from the previous quarter to 3.85% primarily due to continued market pricing pressure. Funding costs increased 1 basis point over the prior quarter to 0.42%.

Average earning assets increased $180 million during the second quarter of 2014. Growth in average loan balances of $317 million over the previous quarter was partially offset by a $276 million decrease in the available for sale securities portfolio. Cash flows received from payments on the securities portfolio funded loan growth or reduced short-term borrowings. The average balance of interest-bearing cash and cash equivalents, trading securities, restricted equity securities and residential mortgage loans held for sale all increased compared to the prior quarter. Average deposits increased $262 million and the average balance of borrowed funds decreased $49 million compared to the first quarter of 2014.

Steven Nell, Chief Financial Officer, added, "We remain on track with our plans to better position the balance sheet for a rising rate environment. Year-to-date, the amortized cost of our securities portfolio decreased by $599 million, while total loans have increased by $635 million. Our goal is to allow the securities portfolio to decrease by an additional $600 million by the end of 2014, replacing those securities with high-quality loans to commercial borrowers."

Fees and Commissions Revenue

Fees and commissions revenue totaled $164.1 million for the second quarter of 2014, an increase of $23.2 million over the first quarter of 2014.

Brokerage and trading revenue increased $9.5 million over the prior quarter. Securities trading revenue increased $3.5 million. Customer hedging revenue increased by $2.2 million primarily due to $1.6 million of recoveries received from the Lehman Brothers and MF Global bankruptcies during the second quarter. Investment banking had strong growth in the second quarter, increasing $3.0 million over the previous quarter. In addition, retail brokerage revenue was also up over the prior quarter.

Mortgage banking revenue totaled $29.3 million for the second quarter of 2014, an increase of $6.5 million over the first quarter of 2014. Revenue from mortgage loan production was up $6.3 million. Outstanding commitments to originate mortgage loans grew by $159 million over March 31 to $547 million at June 30. Residential mortgage loans funded for sale totaled $1.1 billion, an increase of $363 million over the previous quarter. Approximately 41% of loans originated in the second quarter were through correspondent channels, compared to 38% in the previous quarter. Origination from the recently added Home Direct mortgage origination channel was 7% of loans originated in the second quarter, unchanged from the prior quarter. Refinanced mortgage loans represented 25% of loans originated for sale in the second quarter of 2014 compared to 32% in the first quarter of 2014. Revenue from mortgage loan servicing grew by $211 thousand due to an increase in the volume of loans serviced.

Fiduciary and asset management revenue grew by $3.8 million over the first quarter of 2014. The acquisition of MBM Advisors in the second quarter and a full quarter of revenue from the acquisition of GTRUST Financial Corporation in the first quarter added approximately $1.5 million in fiduciary and asset management revenue over the first quarter of 2014. The remainder of the increase was primarily due to the seasonal timing of tax service fees and an increase in the fair value of assets managed.

Transaction card revenue increased $2.4 million over the prior quarter. Revenue increased from processing transactions on behalf of members of our TransFund electronic funds transfer network and from merchant services fees primarily due to growth in transaction volumes. Interchange fees paid on debit cards issued by the Company also increased over the prior quarter due to increased transaction volumes.

Operating Expenses

Total operating expenses were $214.7 million for the second quarter of 2014, an increase of $29.6 million over the first quarter of 2014.

Personnel costs were $19.3 million higher than the first quarter of 2014. The first quarter included a $17.2 million benefit from adjustments to accruals for incentive compensation of certain executive officers of the Company. 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, was up $4.3 million over the first quarter.

Non-personnel expense increased $10.3 million over the first quarter of 2014. Mortgage banking costs increased $4.3 million compared to the prior quarter. The Company finalized hold-back claims related to purchased mortgage loan servicing rights which reduced expenses by $1.3 million in the first quarter. Accruals for mortgage loan servicing costs were higher in the second quarter. Professional fees and services expense increased $3.5 million largely due to increased risk management and regulatory compliance costs. Data processing, net occupancy expense and business promotion expense all increased over the prior quarter. BOK Financial made a $2.4 million discretionary contribution of appreciated stock to the BOKF Foundation during the first quarter. This contribution also resulted in a $1.2 million reduction in income tax expense in the first quarter.

Loans, Deposits and Capital

Loans

Outstanding loans were $13.4 billion at June 30, 2014, an increase of $349 million over the previous quarter. Commercial, commercial real estate and consumer balances all grew over the prior quarter, partially offset by a decrease in residential mortgage loan balances.

Outstanding commercial loan balances increased $316 million or 4% over March 31, 2014. Service sector loans grew by $145 million over the prior quarter. Wholesale/retail sector loans were up $92 million and energy loans grew by $76 million over the prior quarter. Unfunded energy loan commitments increased by $171 million in the second quarter to $2.8 billion. All other unfunded commercial loan commitments totaled $3.7 billion at June 30, 2014, a decrease of $129 million compared to March 31, 2014.

Commercial real estate loans grew by $24 million or 1% over March 31, 2014 led by a $37 million increase in loan balances secured by industrial facilities. Loans secured by multifamily residential properties were up $15 million and other commercial real estate loan balances increased $12 million. Loans secured by office buildings decreased $42 million. Residential construction and land development loan balances were largely unchanged compared to March 31, 2014. Unfunded commercial real estate loan commitments totaled $603 million at June 30, 2014, an $80 million increase from March 31, 2014.

Dan Ellinor, Chief Operating Officer, added, “We continue to win in the competitive commercial lending market due to our reputation as a stable and reliable business partner for commercial borrowers. In the second quarter, energy, services, and wholesale/retail lending were our best performers with double-digit sequential loan growth, and Oklahoma was our fastest-growing market, contributing over 90% of total quarterly loan growth. The healthcare business, which generated strong growth for the past several quarters, was flat due to a significant number of borrowers moving to the permanent market late in the quarter. Our pipelines across the business remain healthy at present, and we expect low double-digit quarterly loan growth for the balance of the year.”

Deposits

Deposits totaled $20.6 billion at June 30, 2014, an increase of $182 million over March 31, 2014. Demand deposit balances grew by $436 million over the prior quarter. Interest-bearing transaction account balances decreased $201 million and time deposits decreased $46 million. Among the lines of business, commercial deposits increased $377 million, partially offset by a $76 million decrease in consumer deposits and a $95 million decrease in wealth management deposits. Growth in commercial deposit balances was primarily due to growth in balances attributed to energy and commercial & industrial customers during the second quarter.

Capital

The Company and its subsidiary bank exceeded the regulatory definition of well capitalized at June 30, 2014. The Company's Tier 1 capital ratio was 13.63% at June 30, 2014 and 13.77% at March 31, 2014. The total capital ratio was 15.38% at June 30, 2014 and 15.55% at March 31, 2014. In addition, the Company's tangible common equity ratio, a non-GAAP measure, was 10.20% at June 30, 2014 and 10.06% at March 31, 2014.

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. The new capital rule establishes a 7% threshold for the Tier 1 common equity ratio consisting of a minimum level plus a 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 Basel I standards was 13.46% as of June 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 12.35%, 535 basis points above the 7% regulatory threshold.

Credit Quality

Nonperforming assets totaled $255 million or 1.88% of outstanding loans and repossessed assets at June 30, 2014 compared to $256 million or 1.94% of outstanding loans and repossessed assets at March 31, 2014. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $145 million or 1.09% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2014 and $153 million or 1.18% at March 31, 2014, a decrease of $7.9 million.

Nonaccruing loans totaled $97 million or 0.72% of outstanding loans at June 30, 2014 compared to $105 million or 0.80% of outstanding loans at March 31, 2014. New nonaccruing loans identified in the second quarter totaled $14 million, offset by $13 million in payments received, $5.9 million in foreclosures and repossessions and $3.5 million in charge-offs. At June 30, 2014, nonaccruing commercial loans totaled $17 million or 0.20% of outstanding commercial loans, nonaccruing commercial real estate loans totaled $34 million or 1.30% of outstanding commercial real estate loans and nonaccruing residential mortgage loans totaled $44 million or 2.21% of outstanding residential mortgage loans.

BOK Financial had net recoveries of $2.0 million for the second quarter of 2014 and $2.5 million for the first quarter of 2014. Gross charge-offs totaled $3.5 million for the second quarter, compared to $2.8 million for the previous quarter. Recoveries totaled $5.5 million for the second quarter of 2014 and $5.4 million for the first quarter of 2014.

After evaluating all credit factors, the Company determined that no provision for credit losses was necessary during the second quarter of 2014. The combined allowance for credit losses totaled $192 million or 1.43% of outstanding loans and 199% of nonaccruing loans at June 30, 2014. The allowance for loan losses was $191 million and the accrual for off-balance sheet credit losses was $1.3 million.

Real estate and other repossessed assets totaled $100 million at June 30, 2014, primarily consisting of $65 million of 1-4 family residential properties (including $50 million guaranteed by U.S. government agencies), $17 million of developed commercial real estate properties, $12 million of undeveloped land and $6.1 million of residential land and land development properties.

Securities and Derivatives

The fair value of the available for sale securities portfolio totaled $9.7 billion at June 30, 2014 and $9.9 billion at March 31, 2014. At June 30, 2014, the available for sale portfolio consisted primarily of $7.3 billion of residential mortgage-backed securities fully backed by U.S. government agencies and $2.1 billion of commercial mortgage-backed securities fully backed by U.S. government agencies.

At June 30, 2014 the available for sale securities portfolio had a net unrealized gain of $85 million compared to a net unrealized gain of $15 million at March 31, 2014. Net unrealized gains on residential mortgage-backed securities issued by U.S. government agencies at June 30, 2014 increased $47 million during the second quarter to $85 million. Commercial mortgage-backed securities had a net unrealized loss of $14 million at June 30, 2014, compared to a net unrealized loss of $36 million at March 31, 2014.

In the second quarter of 2014, the Company recognized a minimal net gain from sales of $800 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. Net gains from sales of $531 million of available for sale securities in the first quarter of 2014 totaled $1.2 million.

The Company also maintains 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. Due to fluctuations in residential mortgage interest rates during the second quarter of 2014, the value of our mortgage servicing rights decreased by $6.4 million. The value of securities and interest rate derivative contracts held as an economic hedge increased by $4.9 million.

Conference Call and Webcast

The Company will hold a conference call at 9:00 a.m. central time on Wednesday, July 30, 2014 to discuss the financial results with investors. The live audio webcast and presentation slides will be available on the company’s website at www.bokf.com. The conference call can also be accessed by dialing 1-412-902-6611. A conference call and webcast replay will also be available shortly after conclusion of the live call at www.bokf.com or by dialing 1-412-317-0088 and referencing conference ID # 10049802.

About BOK Financial Corporation

BOK Financial is a $28 billion regional financial services company based in Tulsa, Oklahoma. The Company's stock is publicly traded on NASDAQ under the Global Select market listings (symbol: BOKF). BOK Financial's holdings include BOKF, NA, BOSC, Inc., The Milestone Group, Inc. and Cavanal Hill Investment Management, Inc. BOKF, NA operates the TransFund electronic funds network and seven banking divisions: Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas and Colorado State Bank and Trust. Through its subsidiaries, the Company provides commercial and consumer banking, investment and trust services, mortgage origination and servicing, and an electronic funds transfer network. For more information, visit www.bokf.com.

The Company will continue to evaluate critical assumptions and estimates, such as the appropriateness of the allowance for credit losses and asset impairment as of June 30, 2014 through the date its financial statements are filed with the Securities and Exchange Commission and will adjust amounts reported if necessary.

This news release 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 generally. 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 credit losses involve judgments as to future 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 which BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions which 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 expected, 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 consumer 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.

Loans attributed to a geographical region may not always represent the location of the borrower or the collateral.