News Details

Loan and Fee Revenue Growth Drive Results

TULSA, Okla.--(BUSINESS WIRE)-- BOK Financial Corporation reported net income of $79.9 million or $1.16 per diluted share for the second quarter of 2013. Net income was $88.0 million or $1.28 per diluted share for the first quarter of 2013 and $97.6 million or $1.43 per diluted share for the second quarter of 2012. Net income for the second quarter of 2012 included $14.5 million or $0.21 per diluted share from a gain on the sale of common stock received in settlement of a defaulted loan and a negative provision for credit losses.

Net income for the six months ended June 30, 2013 totaled $167.9 million or $2.44 per diluted share compared to $181.2 million or $2.65 per diluted share for the six months ended June 30, 2012.

"Commercial loan growth and mortgage loan production volume both continued to be strong during the quarter. Outstanding commercial loan balances were up $290 million and mortgage loan production grew $240 million," said President and CEO Stan Lybarger. "Fee-based revenues grew $2.8 million over the first quarter, despite the impact of higher interest rates in the second quarter. We estimate that fair value adjustments to mortgage loan commitments and trading securities were reduced by $6 million from the market's reaction to statements that the Federal Reserve may curtail its bond buying program as economic indicators strengthen."

Highlights of second quarter of 2013 included:

• Net interest revenue totaled $167.2 million for the second quarter of 2013 compared to $170.4 million for the first quarter of 2013. Net interest margin was 2.81% for the second quarter of 2013 and 2.92% for the first quarter of 2013. The yield on the available for sale securities portfolio decreased 16 basis points.
• Fees and commissions revenue totaled $160.9 million, up $2.8 million over the first quarter of 2013. Trust fees and commissions, transaction card revenues, brokerage and trading revenues and deposit service charges and fees all increased over the previous quarter due largely to transaction volume. Mortgage banking revenue decreased due to lower gain on sale margins.
• Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $210.9 million, up $6.9 million or 3% over the previous quarter. Personnel expense increased $2.5 million. Non-personnel expense increased $4.5 million.
• No provision for credit losses was recorded in the second quarter of 2013 compared to an $8.0 million negative provision in the previous quarter. Net charge-offs in the second quarter of 2013 totaled $2.3 million or 0.08% of average loans on an annualized basis compared to $2.4 million or 0.08% of average loans on an annualized basis in the first quarter.
• The combined allowance for credit losses totaled $205 million or 1.65% of outstanding loans at June 30, 2013 compared to $207 million or 1.71% of outstanding loans at March 31, 2013. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $200 million or 1.62% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2013 and $207 million or 1.73% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at March 31, 2013.
• Outstanding loan balances were $12.4 billion at June 30, 2013, up $347 million over March 31, 2013. Commercial loan balances grew by $290 million during the second quarter. Commercial real estate loans increased by $32 million and residential mortgage loans increased by $27 million. Consumer loans were largely unchanged compared to March 31, 2013.
• Period end deposits totaled $19.5 billion at June 30, 2013 compared to $19.9 billion at March 31, 2013. Demand deposit account balances increased $244 million during the second quarter. Interest-bearing transaction accounts decreased $476 million and time deposits decreased $132 million.
• Tangible common equity ratio was 9.38% at June 30, 2013 and 9.70% at March 31, 2013. The tangible common equity ratio is a non-GAAP measure of capital strength used by the Company and investors based on shareholders' equity minus intangible assets and equity that does not benefit common shareholders. The Company and its subsidiary bank continue to exceed the regulatory definition of well capitalized. The Company's Tier 1 capital ratios, as defined by banking regulations, were 13.37% at June 30, 2013 and 13.35% at March 31, 2013.
• The Company paid a regular quarterly cash dividend of $26 million or $0.38 per common share during the second quarter of 2013. On July 30, 2013, the board of directors approved a quarterly cash dividend of $0.38 per common share payable on or about August 30, 2013 to shareholders of record as of August 16, 2013.

Net Interest Revenue

Net interest revenue decreased $3.2 million compared to the first quarter of 2013. Net interest margin was 2.81% for the second quarter of 2013 compared to 2.92% for the first quarter of 2013.

The yield on average earning assets decreased 13 basis points compared to the prior quarter to 3.11%. The yield on the available for sale securities portfolio decreased 16 basis points to 1.93% due to cash flows being reinvested at lower current market rates partially offset by slower prepayment speeds compared to the prior quarter. Cash flows received from payments on residential mortgage-backed securities are currently being reinvested in short-duration securities that yield nearly 1.75%. The loan portfolio yield decreased to 4.12% from 4.20% in the previous quarter. Loan yields decreased primarily due to increased market pricing pressure and improved credit quality in our loan portfolio.

Funding costs decreased 3 basis points to 0.43%. Rates paid on time deposits decreased 5 basis points. Rates paid on interest-bearing transaction accounts and savings accounts each decreased a basis point. The cost of other borrowed funds decreased 3 basis points. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities decreased 1 basis point in the second quarter.

Average earning assets decreased $49 million during the second quarter of 2013. The available for sale securities portfolio decreased $231 million compared to the first quarter of 2013. Average outstanding loans increased $52 million. Commercial loan balances increased $108 million. Commercial real estate loan balances decreased $23 million and residential mortgage loan balances decreased $21 million. The average balance of investment securities was up $76 million and the average balance of residential mortgage loans held for sale grew by $45 million.

Average deposits decreased $522 million compared to the previous quarter. Interest-bearing transaction account balances decreased $332 million. Demand deposit balances decreased $113 million and time deposit account balances decreased $95 million. The average balance of borrowed funds increased $883 million over the first quarter of 2013.

Fees and Commissions Revenue

Fees and commissions revenue totaled $160.9 million for the second quarter of 2013, up $2.8 million over the first quarter of 2013. Revenue growth from increased transaction volumes was partially offset by quarter-end mark-to-market valuation adjustments of residential mortgage loans held for sale and trading securities.

Mortgage banking revenue totaled $36.6 million for the second quarter of 2013 compared to $40.0 million for the first quarter of 2013. Residential mortgage loans funded for sale totaled $1.2 billion, an increase of $240 million over the previous quarter. Outstanding commitments to originate mortgage loans increased to $548 million at June 30 from $467 million at March 31. Revenue growth from increased loan production was offset by an overall narrowing of gain on sale margins and a shift in product mix toward loans with narrower margins. Approximately 26% of loans originated in the second quarter were through correspondent channels, up from 21% in the previous quarter. Refinanced mortgage loans decreased to 48% of loans originated for sale in the second quarter of 2013 compared to 62% in the first quarter of 2013. Additionally, the increase in interest rates near the end of June decreased the fair value of both our mortgage loans held for sale and outstanding mortgage loan commitments.

"We mitigate the risk of changes in the fair value of mortgage loans held for sale and mortgage loan commitments with forward sales contracts," said Executive Vice President and CFO Steven Nell. "We generally hedge all loans held for sale and an estimate of commitments that will ultimately become closed loans. The rapid increase in interest rates in response to comments by the Federal Reserve Bank increased the percent of loan commitments we expect to close which resulted in lower hedge coverage at quarter end. The net impact decreased the fair value of loan commitments by approximately $3.5 million."

"Recent comments by the Federal Reserve Bank have increased mortgage interest rates," said Nell. "While we welcome the long-term benefit this will have on our securities portfolio yield, we expect the transition may cause a decrease in mortgage loan production volume and continued narrowing of gain on sale margins."

Other significant fee revenue sources increased over the previous quarter. Trust fees and commissions were up $2.5 million primarily due to the seasonal timing of tax service fees. Transaction card revenue grew by $2.3 million primarily due to increased merchant services fees related to higher transaction volumes of credit and debit cards processed. Revenues from interchange fees paid by merchants for transactions processed from debit cards issued by the Company and revenues from processing transactions on behalf of members of our TransFund electronic funds transfer network also increased on higher transaction volumes. Deposit service charges and fees increased $996 thousand on increased overdraft fee volumes and increased commercial service charge revenue.

Brokerage and trading revenue increased $1.1 million. Customer hedging revenue was up $2.3 million primarily related to increased hedging activity by our mortgage banking customers. Securities trading revenue decreased $2.9 million primarily due to the quarter-end mark-to-market of municipal securities and U.S. government agency securities which was affected by rising interest rates. Brokerage revenue grew $908 thousand and investment banking revenue was up $750 thousand over the first quarter.

Operating Expenses

Total operating expenses were $196.6 million for the second quarter of 2013 compared to $201.3 million for the first quarter of 2013. Excluding changes in the fair value of mortgage servicing rights, operating expenses totaled $210.9 million, up $6.9 million over the first quarter of 2013.

Personnel costs increased $2.5 million from the first quarter of 2013 due largely to incentive compensation. Incentive compensation expense increased $2.8 million. 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, increased $4.0 million. Stock-based incentive compensation expense decreased $1.2 million primarily due to decreased accruals for executive compensation plans, partially offset by the impact of the reversal of costs in the first quarter related to performance shares that did not vest.

Non-personnel expense increased $4.5 million over the first quarter of 2013. Professional fees and services increased $1.4 million and data processing and communications expense increased $1.3 million over the prior quarter, both due to higher transaction activity. All other non-personnel expenses increased $1.8 million.

Loans, Deposits and Capital

Loans

Outstanding loans increased $347 million over March 31, 2013 to $12.4 billion at June 30, 2013 due primarily to an increase in outstanding commercial loan balances. Commercial real estate and residential mortgage loans also increased during the second quarter. Consumer loans were largely unchanged.

Outstanding commercial loan balances grew by $290 million over March 31, 2013. Wholesale/retail sector loans increased $91 million and service sector loans increased $89 million. Other commercial and industrial loans increased $61 million, healthcare sector loans grew by $37 million and energy sector loans increased $35 million. Commercial loan growth was primarily attributed to the Oklahoma and Texas markets. Unfunded energy loan commitments grew by $137 million in the second quarter to $2.5 billion. All other unfunded commercial loan commitments totaled $3.4 billion at June 30, 2013, up $10 million over March 31, 2013.

Commercial real estate loans increased $32 million over March 31, 2013. Loans secured by multifamily residential properties were up $40 million, growing in almost all the markets, partially offset by decreases attributed to the Colorado and Arkansas markets. Loans secured by office buildings grew by $39 million primarily in the Arizona and Kansas City markets. Industrial sector loans were up $17 million primarily related to growth in the Kansas City market. Retail sector loans decreased $31 million, primarily in the Oklahoma, Arizona and New Mexico markets. Other real estate loans decreased $21 million primarily in the New Mexico market. Unfunded commercial real estate loan commitments totaled $605 million at June 30, 2013, a decrease of $47 million from March 31, 2013.

Residential mortgage loans increased $27 million from March 31, 2013, due primarily to an increase in first lien, fully amortizing home equity loans.

Deposits

Deposits totaled $19.5 billion at June 30, 2013 compared to $19.9 billion at March 31, 2013. Demand deposit balances increased $244 million. Interest-bearing transaction account balances decreased $476 million and time deposits decreased $132 million. Among the lines of business, commercial deposits increased $31 million, consumer deposits decreased $92 million and wealth management deposits decreased $365 million. Healthcare, small business and commercial and industrial account balances all increased over the prior quarter. Treasury services, energy and commercial real estate customer account balances decreased during the second quarter.

Capital

The Company and its subsidiary bank exceeded the regulatory definition of well capitalized at June 30, 2013. The Company's Tier 1 capital ratio was 13.37% at June 30, 2013 and 13.35% at March 31, 2013. The total capital ratio was 15.28% at June 30, 2013 and 15.68% at March 31, 2013. In addition, the Company's tangible common equity ratio, a non-GAAP measure, was 9.38% at June 30, 2013 and 9.70% at March 31, 2013. Unrealized securities gains added 8 basis points to the tangible common equity ratio at June 30, 2013 and added 44 basis points to the tangible common equity ratio at March 31, 2013.

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 13.19% as of June 30, 2013. Based on our interpretation of the new capital rule, our estimated Tier 1 common equity ratio is approximately 12.20%, nearly 520 basis points above the 7% regulatory threshold.

Credit Quality

Nonperforming assets totaled $281 million or 2.24% of outstanding loans and repossessed assets at June 30, 2013 compared to $283 million or 2.32% of outstanding loans and repossessed assets at March 31, 2013. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $200 million or 1.62% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2013 and $207 million or 1.73% at March 31, 2013, a decrease of $7.2 million.

Nonaccruing loans totaled $122 million or 0.98% of outstanding loans at June 30, 2013 compared to $133 million or 1.10% of outstanding loans at March 31, 2013. New nonaccruing loans identified in the second quarter totaled $39 million, offset by $30 million in foreclosures and repossessions, $12 million in payments received and $8.6 million in charge-offs.

Nonaccruing commercial loans were $21 million or 0.27% of outstanding commercial loans at June 30, 2013 compared to $20 million or 0.27% of outstanding commercial loans at March 31, 2013.

Nonaccruing commercial real estate loans decreased to $59 million or 2.53% of outstanding commercial real estate loans at June 30, 2013 from $65 million or 2.85% of outstanding commercial real estate loans at March 31, 2013. Nonaccruing commercial real estate loans consist primarily of land development and residential construction loans. Nonaccruing land development and residential construction loans totaled $21 million at June 30, 2013, a decrease of $2.3 million during the second quarter.

Nonaccruing residential mortgage loans totaled $41 million or 1.99% of outstanding residential mortgage loans, a decrease of $4.9 million from March 31, 2013. Principally all non-guaranteed residential mortgage loans past due 90 days or more are nonaccruing. Residential mortgage loans past due 30 to 89 days and still accruing interest, excluding loans guaranteed by U.S. government agencies, totaled $11.1 million at June 30, 2013 and $8.4 million at March 31, 2013.

After evaluating all credit factors, the Company determined that no provision for credit losses was necessary during the second quarter of 2013. The combined allowance for credit losses totaled $205 million or 1.65% of outstanding loans and 167.63% of nonaccruing loans at June 30, 2013. The allowance for loan losses was $203 million and the accrual for off-balance sheet credit losses was $1.6 million. Gross charge-offs totaled $8.6 million for the second quarter, compared to $8.9 million for the previous quarter. Recoveries totaled $6.2 million for the second quarter of 2013. Net charge-offs were $2.3 million or 0.08% on an annualized basis for the second quarter of 2013 compared with net charge-offs of $2.4 million or 0.08% on an annualized basis for the first quarter of 2013.

Real estate and other repossessed assets totaled $110 million at June 30, 2013, primarily consisting of $53 million of 1-4 family residential properties (including $32 million guaranteed by U.S. government agencies), $26 million of developed commercial real estate properties, $17 million of undeveloped land and $13 million of residential land and land development properties. The distribution of real estate owned and other repossessed assets among various markets included $31 million attributed to New Mexico, $20 million attributed to Arizona, $16 million attributed to Oklahoma, $13 million attributed to Texas and $10 million attributed to Colorado. Real estate and other repossessed assets increased $7.4 million during the second quarter of 2013. Additions of $30 million were partially offset by $24 million of sales. Additions included $16 million and sales included $11 million of 1-4 family residential properties guaranteed by U.S. government agencies. Net gains on sales and writedowns of real estate and other repossessed assets totaled $1.1 million in the second quarter of 2013 compared to $273 thousand in the first quarter.

Securities and Derivatives

The fair value of the available for sale securities portfolio totaled $10.7 billion at June 30, 2013 and $11.1 billion at March 31, 2013. At June 30, 2013, the available for sale portfolio consisted primarily of $8.4 billion of residential mortgage-backed securities fully backed by U.S. government agencies and $1.8 billion of commercial mortgage-backed securities fully backed by U.S. government agencies. Net unamortized premiums are less than 1% of the securities portfolio amortized cost.

Net unrealized gains on available for sale securities totaled $42 million at June 30, 2013 and $229 million at March 31, 2013. Substantially all of the decrease in net unrealized gains resulted from negative market valuations driven by the upward movement in interest rates. Net unrealized gains on residential mortgage-backed securities issued by U.S. government agencies decreased $138 million during the second quarter to $70 million at June 30, 2013. Commercial mortgage-backed securities had a net unrealized loss of $39 million at June 30, 2013 compared to a net unrealized gain of $2.8 million at March 31, 2013.

In the second quarter of 2013, the Company recognized net gains of $3.8 million from sales of $1.1 billion of available for sale securities. Securities were sold either because they had reached their expected maximum potential return or sold to reinvest those proceeds into shorter average life securities. Net gains from sales of $728 million of available for sale securities in the first quarter of 2013 totaled $4.9 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 changes in residential mortgage interest rates during the second quarter of 2013, prepayment speeds decreased and the value of our mortgage servicing rights increased by $14.3 million. This increase was partially offset by an $11.6 million decrease in the value of securities and interest rate derivative contracts held as an economic hedge.

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, 2013 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.

¹ Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income.