BOK Financial Reports Annual and Quarterly Earnings for 2014

BOK Financial Corporation reported net income of $292.4 million or $4.22 per diluted share for the year ended December 31, 2014. Net income for the year ended December 31, 2013 was $316.6 million or $4.59 per diluted share.

Net income for fourth quarter of 2014 totaled $64.3 million or $0.93 per diluted share compared to net income of $75.6 million or $1.09 per diluted share for the third quarter of 2014. Branch closure costs accrued in the fourth quarter and net changes in the fair value of mortgage servicing rights between the third and fourth quarters reduced net income by $10.7 million or $0.16 per diluted share.

Steven G. Bradshaw, president and chief executive officer, stated, “Overall, 2014 was a very solid year for BOK Financial, and we executed well on the strategic objectives outlined at the start of the year. We re-energized loan growth, increased assets under management, repositioned our balance sheet to prepare for a possible rising interest rate environment, and made significant investments to further strengthen our risk and compliance infrastructure. We enter 2015 with strong momentum across the business and a sound plan to continue to enhance long-term shareholder value.”

Bradshaw continued, “The fourth quarter’s profitability was negatively impacted by two notable items. However, we posted our strongest quarter of the year from a loan growth standpoint and continued to show good revenue momentum in several key fee-generating lines of business while carefully managing expenses. All told, I am pleased with our results in 2014 and the fourth quarter. BOK Financial remains well-positioned with a strong franchise, high-quality products and services, a professional team, and a rock-solid balance sheet.”

Highlights of fourth quarter of 2014 included:

• Net interest revenue totaled $169.7 million for the fourth quarter of 2014, up $2.9 million over the third quarter of 2014. Net interest margin was 2.61% for the fourth quarter of 2014, and 2.67% for the third quarter of 2014.
• Fees and commissions revenue totaled $157.9 million for the fourth quarter of 2014, compared to $158.5 million for the third quarter of 2014. Brokerage and trading revenue decreased $4.7 million and mortgage banking revenue was up $3.3 million over the prior quarter.
• Change in fair value of mortgage servicing rights, net of economic hedges decreased pre-tax net income in the fourth quarter of 2014 by $6.1 million and increased pre-tax net income in the third quarter of 2014 by $4.8 million.
• Operating expenses were $225.9 million for the fourth quarter, an increase of $4.0 million over the previous quarter, including $4.9 million of branch closure costs. Personnel expense increased $2.7 million and non-personnel expense increased $1.3 million.
• No provision for credit losses was recorded in the fourth or third quarters of 2014. Net charge-offs were $2.2 million for the fourth quarter of 2014, compared to net recoveries of $476 thousand in the third quarter.
• The combined allowance for credit losses totaled $190 million or 1.34% of outstanding loans at December 31, 2014 compared to $192 million or 1.41% of outstanding loans at September 30, 2014. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $129 million or 0.92% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at December 31, 2014 and $144 million or 1.06% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at September 30, 2014.
• Average loans increased $363 million over the previous quarter due primarily to growth in commercial loans. Average commercial loans were up $418 million. Average commercial real estate loans decreased $26 million. Residential mortgage and consumer loans decreased by a total of $29 million. Period-end outstanding loan balances were $14.2 billion at December 31, 2014, an increase of $524 million over September 30, 2014. Commercial loan balances increased $524 million and commercial real estate loans were largely unchanged. A decrease in residential mortgage loans was partially offset by growth in consumer loans.
• Average deposits increased $471 million over the previous quarter. Interest-bearing transaction, demand and time deposits all grew over the prior quarter. Period end deposits grew by $852 million over September 30, 2014 to $21.1 billion at December 31, 2014. Interest-bearing transaction accounts increased $870 million. Demand deposit account balances were largely unchanged and time deposits decreased $56 million.
• The Company's Tier 1 common equity ratio, as defined by banking regulations, was 13.13% at December 31, 2014 and 13.55% at September 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 13.29% at December 31, 2014 and 13.72% at September 30, 2014. Total capital ratio was 14.61% at December 31, 2014 and 15.11% at September 30, 2014. The Company's leverage ratio was 9.96% at December 31, 2014 and 10.22% at September 30, 2014.
• The Company paid a regular quarterly cash dividend of $29 million or $0.42 per common share during the fourth quarter of 2014. On January 27, 2015, the board of directors approved a quarterly cash dividend of $0.42 per common share payable on or about February 27, 2015 to shareholders of record as of February 13, 2015. During the fourth quarter, the Company repurchased 200,000 common shares at an average price of $61.68 per share.

Net Interest Revenue

Net interest revenue increased $2.9 million over the third quarter of 2014. Net interest margin was 2.61% for the fourth quarter of 2014, compared to 2.67% for the third quarter of 2014.

The yield on average earning assets was 2.86%, a decrease of 7 basis points compared to the prior quarter. The loan portfolio yield decreased 5 basis points from the previous quarter to 3.73% primarily due to continued market pricing pressure. The yield on the available for sale securities portfolio increased 4 basis points to 1.99%. Excess cash flows continue to be reinvested in short-duration securities that yield around 2%. Funding costs decreased 2 basis points compared to the prior quarter to 0.39%.

Average earning assets increased $1.0 billion during the fourth quarter of 2014 primarily due to an $872 million increase in interest-bearing cash and cash equivalents. This increase was primarily driven by the full quarter impact of depositing $1.5 billion of borrowed funds in the Federal Reserve Bank to earn a spread. Average loan balances increased $363 million, offset by a $365 million decrease in the available for sale securities portfolio. Average deposits increased $471 million over the third quarter of 2014. The average balance of borrowed funds increased $407 million primarily due to increased borrowings from the Federal Home Loan Bank.

Steven Nell, Chief Financial Officer, noted, “During the year, we remixed our balance sheet to replace fixed income securities with high-quality commercial loans, which should better position the bank in anticipation of rising interest rates in 2015. In total, the amortized cost of our securities portfolio decreased $1.3 billion, while our loan portfolio grew by $1.4 billion. We expect to continue this transition at a pace consistent with the fourth quarter. In addition, increased cash balances deposited at the Federal Reserve reduced tax equivalent net interest margin by 8 basis points compared to the third quarter. Excluding this strategy which adds net interest revenue, net interest margin increased two basis points over the third quarter."

Fees and Commissions Revenue

Fees and commissions revenue totaled $157.9 million for the fourth quarter of 2014, largely unchanged compared to the third quarter of 2014. A decrease in brokerage and trading revenue was largely offset by growth in mortgage banking revenue and fiduciary and asset management revenue.

Brokerage and trading revenue totaled $30.6 million, a $4.7 million decrease compared to the prior quarter. The fourth quarter included $562 thousand of recoveries from the Lehman bankruptcy. Excluding these recoveries, customer hedging revenue decreased $1.4 million primarily due to a decrease in energy and foreign exchange derivative contracts sold to customers. Retail brokerage fees were $2.7 million lower than the prior quarter. Investment banking revenue decreased $934 thousand and securities trading revenue decreased $179 thousand.

Mortgage banking revenue totaled $30.1 million for the fourth quarter of 2014, up $3.3 million over the third quarter of 2014. Revenue from mortgage loan production increased $2.5 million over the prior quarter. Net realized gain from loans funded and sold into the secondary market increased $571 thousand primarily due to an increase in refinanced mortgage loans. The valuation on loan commitments and loans that have closed but have not yet been sold as of the end of the fourth quarter, net of forward sales commitments was $1.9 million more than at the end of the third quarter. Revenue from mortgage loan servicing grew by $795 thousand due to an increase in the volume of loans serviced.

Fiduciary and asset management revenue was $30.6 million, a $911 thousand increase over the prior quarter, primarily due to growth in the fair value of fiduciary asset administered by the Company. Fiduciary assets were $36.0 billion at December 31, 2014 compared to $34.0 billion at September 30, 2014.

Operating Expenses

Total operating expenses were $225.9 million for the fourth quarter of 2014, an increase of $4.0 million over the third quarter of 2014. During the fourth quarter, the Company announced the discontinuation of the grocery store branch model, resulting in 29 in-store branch closures during the first quarter of 2015. The decision comes as consumer trends lean more towards use of digital banking for everyday transactions and banking center visits for in-person advice or consult. Approximately $4.9 million was expensed in the fourth quarter related to the announced closures, primarily related to facilities and severance costs.

Personnel costs increased $2.7 million over the previous quarter. Regular compensation expense increased $3.7 million and included $800 thousand of branch closure costs. This increase was partially offset by an $822 thousand seasonal decrease in payroll taxes. Incentive compensation was unchanged compared to the prior quarter.

Non-personnel expense increased $1.3 million over the third quarter of 2014. Net losses (gains) and operating expenses of repossessed assets decreased $6.5 million during the fourth quarter to a net gain of $1.5 million. Professional fees and services expense decreased $3.7 million as risk management and regulatory compliance cost stabilized. The third quarter included $2.2 million for an independent assessment of certain risk management capabilities. Net occupancy expense increased $3.8 million over the third quarter. Approximately $4.1 million was expensed in the fourth quarter related to branch closure costs. Mortgage banking costs increased $2.8 million over the third quarter primarily due to increased prepayments of loans serviced for others and accruals for loan servicing costs. The Company also made a $1.8 million contribution of developed commercial real estate to the BOKF Foundation during the fourth quarter. This contribution resulted in an $822 thousand reduction in income tax expense.

Loans, Deposits and Capital

Loans

Outstanding loans were $14.2 billion at December 31, 2014, an increase of $524 million over the previous quarter. Commercial, commercial real estate and consumer loan balances all grew over the prior quarter, partially offset by a decrease in residential mortgage loan balances.

Outstanding commercial loan balances increased $524 million over September 30, 2014. All sectors of our commercial loan portfolio grew over the prior quarter. Energy sector loans grew $309 million over September 30, 2014. Healthcare sector loans were up $73 million and manufacturing sector loans grew by $53 million. Wholesale/retail sector loans were up $40 million, service sector loans balances grew by $30 million and Other commercial and industrial loans increased $19 million. Unfunded energy loan commitments were increased by $25 million in the fourth quarter to $2.9 billion. All other unfunded commercial loan commitments totaled $4.3 billion at December 31, 2014, an increase of $494 million over September 30, 2014.

Commercial real estate loans increased $4.0 million over September 30, 2014. Loans secured by industrial facilities were up $57 million and retail sector loans grew by $56 million over the prior quarter. This growth was offset by a $35 million decrease in loans secured by multifamily residential properties, a $23 million decrease in loans secured by office buildings and construction and a $32 million decrease in residential construction and land development loans. Unfunded commercial real estate loan commitments totaled $753 million at December 31, 2014, an increase of $95 million over September 30, 2014.

Dan Ellinor, Chief Operating Officer, stated, “We continue to see strong demand for commercial loans across the business. Fourth quarter loan growth was robust, and our new deal pipelines remain full at the beginning of 2015. Accordingly, we continue to forecast low-double-digit loan growth through 2015. In particular, as we expected, loan demand in our energy lending business has accelerated due to a more rational competitive environment as well as fewer non-bank alternatives for high-quality energy borrowers.”

Energy Loan Update

At December 31, 2014, the Company's energy loan portfolio totaled $2.9 billion, up from $2.6 billion at September 30, 2014 and $2.4 billion at December 31, 2013. Loans to energy exploration and production companies represented 86% of total energy loans outstanding. Loans to energy services, midstream and retail / wholesale energy companies were 8%, 3% and 3%, respectively.

With the recent decrease in energy prices, the Company has conducted a comprehensive credit review of those areas of the energy portfolio that it deems having the highest level of risk in an energy industry downturn: energy services companies, energy borrowers with high total leverage, and those energy customers determined to be most susceptible to lower commodity prices in the Company's most recent energy portfolio stress test. The Company conducted an updated stress test of its energy portfolio, assuming starting commodity prices of $45 per barrel for oil and $2.50 per MMBTUs for natural gas. The Company also reviewed borrowers who comprised a majority of energy loan growth in the fourth quarter.

The results of the comprehensive review and updated stress test did not alter the general view that the loan portfolio is well positioned to withstand a short-term correction in oil and natural gas prices. No material near-term losses were identified.

Stacy Kymes, Chief Credit Officer, noted, “Commodity price volatility is inherent in energy lending. Oil or natural gas prices have fallen by 50% or more in a six-month period six times since 2000, and thus far by historic standards, the price drop which began in June 2014 is less severe than those previous declines. Our average gross charge-offs in the energy production portfolio are 9.9 basis points over the past 10 years and 6.4 basis points over the past 20 years, making it our best performing portfolio from a credit quality standpoint.”

Kymes continued, “We believe the duration of the downturn is the key question to assess credit risk or risk of an economic slowdown in our footprint. To that end, we see two distinct risk periods: if commodity prices return to a normalized, stable level over the next 6-12 months, we expect to see some credits migrate to potential problem loan or non-accrual status, but few, if any material actual losses in the portfolio. In addition, we expect a more modest impact on economic growth in our footprint. If the downturn extends beyond 12 months, outcomes are obviously more difficult to predict. At that point, we would be more likely to see loss content in the portfolio and a greater impact on the overall economy, and in turn lower loan demand. However, at present our portfolio is strong, we are doing business with high-quality borrowers, and we do not view the current commodity price decline as inherently different than previous declines we have experienced since 2000.”

Deposits

Deposits totaled $21.1 billion at December 31, 2014, an increase of $852 million over September 30, 2014 primarily due to normal seasonality and temporary customer activity. Interest-bearing transaction account balances grew by $870 million. Demand deposit balances were largely unchanged compared to the prior quarter. Time deposits decreased $56 million. Among the lines of business, commercial deposits increased $173 million, consumer deposits decreased $5.9 million and wealth management deposits increased $298 million.

Capital

The Company and its subsidiary bank exceeded the regulatory definition of well capitalized at December 31, 2014. The Company's Tier 1 capital ratio was 13.29% at December 31, 2014 and 13.72% at September 30, 2014. The total capital ratio was 14.61% at December 31, 2014 and 15.11% at September 30, 2014. In addition, the Company's tangible common equity ratio, a non-GAAP measure, was 10.08% at December 31, 2014 and 9.86% at September 30, 2014.

In July 2013, banking regulators issued the final rule revising regulatory capital rules for substantially all U.S. banking organizations. The new capital rules, which were effective for BOK Financial on January 1, 2015, establish a 7% threshold for the Tier 1 common equity ratio. The Company will elect 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 13.13% as of December 31, 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 approximately 12.25%, nearly 525 basis points above the 7% regulatory threshold.

Credit Quality

Nonperforming assets totaled $257 million or 1.79% of outstanding loans and repossessed assets at December 31, 2014 compared to $265 million or 1.92% of outstanding loans and repossessed assets at September 30, 2014. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $129 million or 0.92% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at December 31, 2014 and $144 million or 1.06% at September 30, 2014, a decrease of $15 million or 10%.

Nonaccruing loans totaled $81 million or 0.57% of outstanding loans at December 31, 2014 compared to $97 million or 0.71% of outstanding loans at September 30, 2014. New nonaccruing loans identified in the fourth quarter totaled $14 million, offset by $17 million in payments received, $7.2 million in charge-offs and $5.7 million in foreclosures and repossessions. At December 31, 2014, nonaccruing commercial loans totaled $14 million or 0.15% of outstanding commercial loans and nonaccruing commercial real estate loans totaled $19 million or 0.68% of outstanding commercial real estate loans. Nonaccruing residential mortgage loans totaled $48 million or 2.47% of outstanding residential mortgage loans.

Net charge-offs were $2.2 million for the fourth quarter of 2014, compared to net recoveries of $476 thousand for the third quarter of 2014. Gross charge-offs totaled $7.2 million for the fourth quarter, compared to $2.6 million for the previous quarter. Recoveries totaled $5.0 million for the fourth quarter of 2014 and $3.1 million for the third quarter of 2014.

After evaluating all credit factors, including the inherent risk of falling energy prices, the Company determined that no provision for credit losses was necessary during the fourth quarter of 2014. The combined allowance for credit losses totaled $190 million or 1.34% of outstanding loans and 235.59% of nonaccruing loans at December 31, 2014. The allowance for loan losses was $189 million and the accrual for off-balance sheet credit losses was $1.2 million.

Real estate and other repossessed assets totaled $102 million at December 31, 2014, primarily consisting of $68 million of 1-4 family residential properties (including $50 million guaranteed by U.S. government agencies), $21 million of developed commercial real estate properties, $7.9 million of undeveloped land and $4.9 million of residential land and land development properties.

Securities and Derivatives

The fair value of the available for sale securities portfolio totaled $9.0 billion at December 31, 2014 and $9.3 billion at September 30, 2014. At December 31, 2014, the available for sale portfolio consisted primarily of $6.6 billion of residential mortgage-backed securities fully backed by U.S. government agencies and $2.0 billion of commercial mortgage-backed securities fully backed by U.S. government agencies.

The available for sale securities portfolio had a net unrealized gain of $97 million at December 31, 2014, compared to a net unrealized gain of $43 million at September 30, 2014. Net unrealized gains on residential mortgage-backed securities issued by U.S. government agencies at September 30, 2014 increased $41 million during the fourth quarter to a net unrealized gain of $98 million at December 31, 2014. Commercial mortgage-backed securities had a net unrealized loss of $15 million at December 31, 2014, compared to a net unrealized loss of $27 million at September 30, 2014.

In the fourth quarter of 2014, the Company recognized net gains of $149 thousand from sales of $772 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 $553 million of available for sale securities in the third quarter of 2014 totaled $146 thousand.

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. The value of our mortgage servicing rights decreased by $10.8 million due primarily to a nearly 40 basis point decrease in residential mortgage interest rates during the fourth quarter of 2014. The value of securities and interest rate derivative contracts held as an economic hedge increased by $4.8 million. Mortgage interest rate changes increased the fair value of mortgage servicing rights net of economic hedges by $4.8 million in the third quarter.

Conference Call and Webcast

The Company will hold a conference call at 9:00 a.m. central time on Wednesday, January 28, 2015 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 # 10058729.

About BOK Financial Corporation

BOK Financial is a $29 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. and The Milestone Group, Inc. BOKF, NA operates TransFund, Cavanal Hill Investment Management, MBM Advisors 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 December 31, 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.