BOKF-2014.03.31-10Q


 

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 March 31, 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: 69,140,210 shares of common stock ($.00006 par value) as of March 31, 2014.
 





BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 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)
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 $76.6 million or $1.11 per diluted share for the first quarter of 2014, compared to $88.0 million or $1.28 per diluted share for the first quarter of 2013 and $73.0 million or $1.06 per diluted share for the fourth quarter of 2013

Highlights of the first quarter of 2014 included:
Net interest revenue totaled $162.6 million for the first quarter of 2014, compared to $171.5 million for the first quarter of 2013 and $166.2 million for the fourth quarter of 2013. Net interest margin was 2.71% for the first quarter of 2014. Net interest margin was 2.90% for the first quarter of 2013 and 2.74% for the fourth quarter of 2013
Fees and commissions revenue totaled $140.9 million for the first quarter of 2014, compared to $157.1 million for the first quarter of 2013 and $142.4 million for the fourth quarter of 2013. Mortgage banking revenue decreased $17.1 million compared to the first quarter of 2013 and increased $968 thousand over the fourth quarter of 2013. Mortgage production volume decreased compared to the first quarter of 2013 due to higher interest rates. Gain on sale margin decreased compared to the prior year, but improved compared to the fourth quarter. Fiduciary and asset management revenue also grew over the prior year and prior quarter.
Operating expenses totaled $185.1 million for the first quarter of 2014, a decrease of $18.9 million compared to the first quarter of 2013 and a decrease of $30.3 million compared to the previous quarter. Personnel costs decreased $21.2 million compared to both the first quarter of 2013 and the prior quarter. The Company reversed $15.5 million accrued during 2011 through 2013 for amounts payable to certain executive officers under the 2011 True-Up Plan. Non-personnel expense increased $2.3 million over the first quarter of 2013 primarily due to a $2.4 million discretionary contribution of appreciated stock to the BOKF Foundation during the first quarter of 2014. Non-personnel expenses decreased $9.1 million compared to the prior quarter. Mortgage banking expenses were down primarily due to lower provision for losses related to repurchases of mortgage loans. Other expense, professional fees and services and occupancy expense also decreased compared to the prior quarter. 
No provision for credit losses was recorded in the first quarter of 2014 compared to an $8.0 million negative provision for credit losses in the first quarter of 2013 and an $11.4 million negative provision for credit losses in the fourth quarter of 2013. Gross charge-offs were $2.8 million in the first quarter of 2014, $8.9 million in the first quarter of 2013 and $3.1 million in the fourth quarter of 2013. Recoveries were $5.4 million in the first quarter of 2014, compared to $6.6 million in the first quarter of 2013 and $6.1 million in the fourth quarter of 2013.
The combined allowance for credit losses totaled $190 million or 1.45% of outstanding loans at March 31, 2014 compared to $187 million or 1.47% of outstanding loans at December 31, 2013. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $153 million or 1.18% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at March 31, 2014 and $155 million or 1.23% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at December 31, 2013.
Outstanding loan balances were $13.1 billion at March 31, 2014, an increase of $286 million over December 31, 2013. Commercial loan balances grew by $108 million and commercial real estate loan balances were up $216 million during the first quarter. Residential mortgage loans decreased by $33 million and consumer loans were down $5.6 million compared to December 31, 2013.
Period end deposits totaled $20.4 billion at March 31, 2014, a $120 million increase over December 31, 2013. Demand deposit account balances increased $156 million during the first quarter, partially offset by a $34 million decrease in interest-bearing transaction accounts and a $34 million decrease in time deposits.
The Company's Tier 1 common equity ratio, as defined by banking regulations, was 13.59% at both March 31, 2014 and December 31, 2013. The Company and its subsidiary bank continue to exceed the regulatory definition of well capitalized. The Company's Tier 1 capital ratio was 13.77% at both March 31, 2014 and December 31, 2013. Total capital ratio was 15.55% at March 31, 2014 and 15.56% at December 31, 2013. The Company's leverage ratio was 10.17% at March 31, 2014 and 10.05% at December 31, 2013.

- 1 -




The Company paid a regular quarterly cash dividend of $28 million or $0.40 per common share during the first quarter of 2014. On April 29, 2014, the board of directors approved a quarterly cash dividend of $0.40 per common share payable on or about May 30, 2014 to shareholders of record as of May 16, 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 $162.6 million for the first quarter of 2014 compared to $171.5 million for the first quarter of 2013 and $166.2 million for the fourth quarter of 2013. Net interest margin was 2.71% for the first quarter of 2014, 2.90% for the first quarter of 2013 and 2.74% for the fourth quarter of 2013.

Net interest revenue decreased $8.8 million compared to the first quarter of 2013. Net interest revenue decreased $13.5 million primarily due to a narrowing of interest rate spreads. Net interest revenue increased $4.7 million primarily due to the growth in average outstanding loans and a decrease in the average balance of other borrowings, partially offset by a decrease in average securities balances.

The tax-equivalent yield on earning assets was 2.99% for the first quarter of 2014, down 22 basis points from the first quarter of 2013. Loan yields decreased 31 basis points. Credit spreads have narrowed due to market pricing pressure and improved credit quality in our loan portfolio. The available for sale securities portfolio yield decreased 20 basis points to 1.91%. 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 5 basis points from the first quarter of 2013. The cost of interest-bearing deposits decreased 5 basis points and the cost of other borrowed funds decreased 3 basis points. Additionally, the benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 13 basis points in the first quarter of 2014 compared to 15 basis points in the first quarter of 2013.

Average earning assets for the first quarter of 2014 decreased $350 million or 1% compared to the first quarter of 2013. Average loans, net of allowance for loan losses, increased $750 million due primarily to growth in average commercial and commercial real estate loans. The average balance of available for sale securities decreased $1.2 billion. We intend to allow the size of our bond portfolio to decrease to better position the balance sheet for a longer-term rising rate environment. We anticipate a $1 billion reduction in our bond portfolio over the full year of 2014. This reduction in earning assets is expected to be partially offset by loan growth in the mid to high single digits. The resulting shift in earning asset mix should be supportive of net interest margin. The average balance of investment securities was up over the prior year, offset by a decrease in the average balance of fair value option securities primarily held as an economic hedge of our mortgage servicing rights and a decrease in the average balance of our trading portfolio.

Average deposits increased $187 million over the first quarter of 2013, including a $310 million increase in average demand deposit balances and a $65 million increase in average interest-bearing transaction accounts, partially offset by a $228 million decrease in average time deposits. Average borrowed funds decreased $64 million compared to the first quarter of 2013. Decreased borrowings from the Federal Home Loan Banks and funds purchased and repurchase agreements was partially offset by increased borrowings from the Federal Reserve.

Net interest margin decreased 3 basis points from the fourth quarter of 2013.  The yield on average earning assets decreased 3 basis points. The loan portfolio yield decreased 12 basis points to 3.89% primarily due to market pricing pressure. The yield on the available for sale securities portfolio increased 2 basis points to 1.91%. Funding costs decreased 1 basis point to 0.41%. Rates paid on time deposits and savings accounts each increased 1 basis point. Rates paid on interest-bearing transaction accounts decreased a basis point. The cost of other borrowed funds was unchanged compared to the fourth quarter and the benefit to net interest margin from earning assets funded by non-interest bearing liabilities decreased a basis point.

- 2 -




Average earning assets increased $16 million during the first quarter of 2014. Growth in average outstanding loans of $486 million was partially offset by a $358 million decrease in the available for sale securities portfolio. Average commercial loan balances were up $234 million and average commercial real estate loan balances increased $252 million. The average balance of restricted equity securities was down $38 million, the average trading securities balance decreased $35 million and the average balance of residential mortgage loans held for sale decreased $33 million.
Average deposits increased $360 million over the previous quarter. Interest-bearing transaction account balances increased $415 million primarily due to a normal seasonal increase in public funds. Demand deposit balances decreased $44 million and time deposit account balances decreased $24 million. The average balance of borrowed funds decreased $218 million compared to the fourth quarter of 2013.

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
Mar. 31, 2014 / 2013
 
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield /
Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
81

 
$
74

 
$
7

Trading securities
 
(176
)
 
(359
)
 
183

Investment securities:
 
 
 
 
 
 
Taxable securities
 
(516
)
 
(367
)
 
(149
)
Tax-exempt securities
 
347

 
950

 
(603
)
Total investment securities
 
(169
)
 
583

 
(752
)
Available for sale securities:
 
 
 
 
 
 
Taxable securities
 
(7,752
)
 
(2,844
)
 
(4,908
)
Tax-exempt securities
 
(172
)
 
(101
)
 
(71
)
Total available for sale securities
 
(7,924
)
 
(2,945
)
 
(4,979
)
Fair value option securities
 
(326
)
 
(289
)
 
(37
)
Restricted equity securities
 
132

 
(8
)
 
140

Residential mortgage loans held for sale
 
(202
)
 
(250
)
 
48

Loans
 
(2,410
)
 
7,211

 
(9,621
)
Total tax-equivalent interest revenue
 
(10,994
)
 
4,017

 
(15,011
)
Interest expense:
 
 
 
 
 
 
Transaction deposits
 
(587
)
 
81

 
(668
)
Savings deposits
 
(22
)
 
12

 
(34
)
Time deposits
 
(1,286
)
 
(883
)
 
(403
)
Funds purchased
 
(203
)
 
(23
)
 
(180
)
Repurchase agreements
 
5

 
(17
)
 
22

Other borrowings
 
(22
)
 
191

 
(213
)
Subordinated debentures
 
(1
)
 

 
(1
)
Total interest expense
 
(2,116
)
 
(639
)
 
(1,477
)
Tax-equivalent net interest revenue
 
(8,878
)
 
4,656

 
(13,534
)
Change in tax-equivalent adjustment
 
(68
)
 
 
 
 
Net interest revenue
 
$
(8,810
)
 
 
 
 
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 $137.0 million for the first quarter of 2014, a $23.7 million decrease compared to the first quarter of 2013 and a $10.0 million decrease compared to the fourth quarter of 2013. Fees and commissions revenue decreased $16.2 million compared to the first quarter of 2013 and $1.5 million compared to the prior quarter. The change in the fair value of mortgage servicing rights, net of the change in the fair value of securities and derivative contracts held as an economic hedge, decreased other operating revenue by $908 thousand in the first quarter of 2014, increased other operating revenue $2.1 million in the fourth quarter of 2013 and decreased operating revenue $2.2 million in the first quarter of 2013. Net gains on available for sale securities decreased $3.6 million compared to the prior year and decreased $394 thousand compared to the previous quarter. The loss on other assets in the first quarter of 2014 was primarily due to changes in the value of assets held as an economic hedge of a deferred compensation liability and charges related to certain merchant banking equity investments.

Table 2Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
Mar. 31,
 
 
 
 
 
Three Months Ended
Dec. 31, 2013
 
 
 
 
 
 
2014
 
2013
 
Increase(Decrease)
 
% Increase(Decrease)
 
 
Increase(Decrease)
 
% Increase(Decrease)
Brokerage and trading revenue
 
$
29,516

 
$
31,751

 
$
(2,235
)
 
(7
)%
 
$
28,515

 
$
1,001

 
4
 %
Transaction card revenue
 
29,134

 
27,692

 
1,442

 
5
 %
 
29,134

 

 
 %
Fiduciary and asset management revenue
 
25,722

 
22,313

 
3,409

 
15
 %
 
25,074

 
648

 
3
 %
Deposit service charges and fees
 
22,689

 
22,966

 
(277
)
 
(1
)%
 
23,440

 
(751
)
 
(3
)%
Mortgage banking revenue
 
22,844

 
39,976

 
(17,132
)
 
(43
)%
 
21,876

 
968

 
4
 %
Bank-owned life insurance
 
2,106

 
3,226

 
(1,120
)
 
(35
)%
 
2,285

 
(179
)
 
(8
)%
Other revenue
 
8,852

 
9,140

 
(288
)
 
(3
)%
 
12,048

 
(3,196
)
 
(27
)%
Total fees and commissions revenue
 
140,863

 
157,064

 
(16,201
)
 
(10
)%
 
142,372

 
(1,509
)
 
(1
)%
Gain (loss) on other assets, net
 
(4,264
)
 
467

 
(4,731
)
 
N/A

 
651

 
(4,915
)
 
N/A

Gain (loss) on derivatives, net
 
968

 
(941
)
 
1,909

 
N/A

 
(930
)
 
1,898

 
N/A

Gain (loss) on fair value option securities, net
 
2,660

 
(3,171
)
 
5,831

 
N/A

 
(2,805
)
 
5,465

 
N/A

Change in fair value of mortgage servicing rights
 
(4,461
)
 
2,658

 
(7,119
)
 
N/A

 
6,093

 
(10,554
)
 
N/A

Gain on available for sale securities
 
1,240

 
4,855

 
(3,615
)
 
N/A

 
1,634

 
(394
)
 
N/A

Total other-than-temporary impairment
 

 

 

 
N/A

 

 

 
N/A

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

 
(247
)
 
247

 
N/A

 

 

 
N/A

Net impairment losses recognized in earnings
 

 
(247
)
 
247

 
N/A

 

 

 
N/A

Total other operating revenue
 
$
137,006

 
$
160,685

 
$
(23,679
)
 
(15
)%
 
$
147,015

 
$
(10,009
)
 
(7
)%
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 46% of total revenue for the first 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 also may 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, retail brokerage, customer hedging and investment banking decreased $2.2 million compared to the first quarter of 2013

Securities trading revenue totaled $15.1 million for the first quarter of 2014, a $2.0 million decrease compared to the first quarter of 2013. Securities trading revenue represents 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 decreased $1.3 million compared to the prior year to $1.5 million for the first quarter of 2014, primarily due to decreased activity by our energy and mortgage banking customers.

Revenue earned from retail brokerage transactions grew by $1.3 million or 15% over the first quarter of 2013 to $9.5 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 $3.5 million for the first quarter of 2014, a $182 thousand or 5% decrease over the first quarter of 2013 related to the timing and volume of completed transactions.

Brokerage and trading revenue increased $1.0 million over the fourth quarter of 2013. Retail brokerage fees were up $2.4 million and investment banking fees grew by $1.1 million. Customer hedging revenue decreased $2.3 million. In addition, we received recoveries from the Lehman Brothers and MF Global bankruptcies of $1.5 million during the fourth quarter of 2013. Securities trading revenue was largely unchanged compared to the prior 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 first quarter of 2014 increased $1.4 million or 5% over the first quarter of 2013. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $15.1 million, up $254 thousand or 2%, due to increased transaction volumes and increased dollar amounts per transaction. Merchant services fees totaled $9.5 million, up $871 thousand or 10% on increased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.5 million, an increase of $317 thousand or 8% over the first quarter of 2013.

Transaction card revenue was largely unchanged compared to the fourth quarter of 2013. Growth in merchant services fees was offset primarily by a seasonal decrease in interchange fee revenue from debit cards issued by the Company.

Effective October 1, 2011, the Federal Reserve issued its final rule to implement provisions of the Dodd-Frank Act commonly know as the Durbin Amendment. These provisions established a cap on interchange fees that larger banks can charge merchants for certain debit card transactions. A challenge of this final rule by retail merchants and merchant trade groups was overturned by an appellate court during the first quarter of 2014.

Fiduciary and asset management revenue grew by $3.4 million or 15% over the first quarter of 2013. The acquisition of Topeka, Kansas-based GTRUST Financial Corporation by BOK Financial in the first quarter of 2014 added $371 thousand of revenue and $631 million of fiduciary assets as of March 31, 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 $31.3 billion at March 31, 2014, $27.6 billion at March 31, 2013 and $30.1 billion at December 31, 2013. Fiduciary and asset management revenue increased $648 thousand over the fourth quarter of 2013.


- 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 $2.2 million for the first quarter of 2014 compared to $1.8 million for the first quarter of 2013 and $2.2 million for the fourth quarter of 2013.

Deposit service charges and fees were $22.7 million for the first quarter of 2014 compared to $23.0 million for the first quarter of 2013. Overdraft fees totaled $11.0 million for the first quarter of 2014, a decrease of $833 thousand or 7% compared to the first quarter of 2013. Consumers are generally maintaining higher average balances and better managing their accounts to reduce overdraft fees. Commercial account service charge revenue totaled $9.8 million, an increase of $753 thousand or 8% over the prior year. Service charges on deposit accounts with a standard monthly fee were $1.8 million, a decrease of $198 thousand or 10% compared to the first quarter of 2013. Deposit service charges and fees decreased $751 thousand compared to the prior quarter primarily due to decreased overdraft fee volumes, partially offset by increased commercial account service charges.

Mortgage banking revenue decreased $17.1 million compared to the first quarter of 2013. Mortgage production revenue totaled $11.5 million, a decrease of $18.5 million compared to the first quarter of 2013. Average primary mortgage interest rates were 4.36% for the first quarter of 2014, up 86 basis points over the first quarter of 2013. This increase in interest rates reduced loan production volume. Mortgage loans funded for sale totaled $728 million in the first quarter of 2014, a decrease of $229 million compared to the first quarter of 2013. Outstanding commitments to originate mortgage loans were down $79 million or 17% compared to March 31, 2013. In addition to the effect of lower production volume, mortgage banking revenue decreased due to an overall narrowing of gain on sale margins and a shift in product mix toward loans with narrower margins. Approximately 38% of loans originated in the first quarter of 2014 were through correspondent channels, up from 21% for the first quarter of 2013. Mortgage loans funded through Home Direct Mortgage, our online loan channel increased to 7% of total originations in the first quarter of 2014. Refinanced mortgage loans decreased to 32% of loans originated in the first quarter of 2014 compared to 62% of loans originated in the first quarter of 2013.

Mortgage servicing revenue grew by $1.3 million or 13% over the first quarter of 2013. The outstanding principal balance of mortgage loans serviced for others totaled $14.0 billion, an increase of $1.8 billion or 14% over March 31, 2013.

Mortgage banking revenue increased $968 thousand over the fourth quarter of 2013. Mortgage production revenue was up $721 thousand driven by a $129 million or 50% increase in outstanding commitments to originate mortgage loans. This increase was partially offset by a $121 million decrease in loans funded for sale. Gain on sale margins also improved over the previous quarter.

Mortgage servicing revenue increased $247 thousand over the prior quarter. The outstanding balance of mortgage loans serviced for others increased $327 million over December 31, 2013.


- 7 -




Table 3Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
Mar. 31,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
Dec. 31, 2013
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2014
 
2013
 
 
 
 
 
Mortgage production revenue
 
$
11,452

 
$
29,910

 
$
(18,458
)
 
(62
)%
 
$
10,731

 
$
721

 
7
 %
Servicing revenue
 
11,392

 
10,066

 
1,326

 
13
 %
 
11,145

 
247

 
2
 %
Total mortgage revenue
 
$
22,844

 
$
39,976

 
$
(17,132
)
 
(43
)%
 
$
21,876

 
$
968

 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end outstanding mortgage commitments
 
$
387,755

 
$
466,571

 
$
(78,816
)
 
(17
)%
 
$
258,873

 
$
128,882

 
50
 %
Mortgage loans funded for sale
 
727,516

 
956,315

 
(228,799
)
 
(24
)%
 
848,870

 
(121,354
)
 
(14
)%
Average primary residential mortgage interest rate
 
4.36
%
 
3.50
%
 
86
 bp
 
25
 %
 
4.29
%
 
7
 bp
 
2
 %
Mortgage loan refinances to total funded
 
32
%
 
62
%
 
 

 
 

 
29
%
 
 

 
 

Outstanding principal balance of mortgage loans serviced for others
 
$
14,045,642

 
$
12,272,691

 
$
1,772,951

 
14
 %
 
$
13,718,942

 
$
326,700

 
2
 %
Net gains on securities, derivatives and other assets

In the first quarter of 2014, we recognized a $1.2 million net gain from sales of $531 million 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. In the first quarter of 2013, we recognized a $4.9 million net gain from sales of $728 million of available for sale securities and in the fourth quarter of 2013, we recognized a $1.6 million net gain on sales of $270 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 assumptions and the spread between the primary and secondary rates can cause significant quarterly earnings volatility.

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.


- 8 -




Table 4 -- Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
March 31,
2014
 
December 31,
2013
 
March 31,
2013
Gain (loss) on mortgage hedge derivative contracts, net
 
$
968

 
$
(931
)
 
$
(1,654
)
Gain (loss) on fair value option securities, net
 
2,585

 
(3,013
)
 
(3,232
)
Gain (loss) on economic hedge of mortgage servicing rights
 
3,553

 
(3,944
)
 
(4,886
)
Gain (loss) on change in fair value of mortgage servicing rights
 
(4,461
)
 
6,093

 
2,658

Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
(908
)
 
$
2,149

 
$
(2,228
)
 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
790

 
$
811

 
$
828

 
 
 
 
 
 
 
Primary residential mortgage interest rate at period end
 
4.40
%
 
4.48
%
 
3.57
%
Secondary residential mortgage interest rate at period end
 
3.42
%
 
3.61
%
 
2.62
%

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.

Gain (loss) on other assets included changes in the fair value of certain equity investments the Company holds as an economic hedge of a deferred compensation liability. During the first quarter of 2014, the value of certain of these investments was adjusted downward by $1.7 million. Gain (loss) on other assets for the first quarter of 2014 also included a $1.5 million charge against a merchant-banking investment that is accounted for by the equity method. An indirect wholly-owned subsidiary of the Company is the general partner of two private equity funds. These investments are generally illiquid and do not readily provide for redemption or transfer. The impact of regulations issued to implement the Volcker Rule resulted in a $1.4 million impairment charge in the fourth quarter of 2013 based primarily on the expectation that we will be required to divest some or all of these investments by June 30, 2015.


- 9 -




Other Operating Expense

Other operating expense for the first quarter of 2014 totaled $185.1 million, a decrease of $18.9 million or 9% compared to the first quarter of 2013. Personnel expenses decreased $21.2 million or 17%. The Company reversed $15.5 million accrued during 2011 through 2013 for amounts payable to certain executive officers under the 2011 True-Up Plan. Non-personnel expenses increased $2.3 million or 3% over the prior year.

Operating expenses decreased $30.3 million compared to the previous quarter. Personnel expense decreased $21.2 million. Non-personnel expense decreased $9.1 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
Three Months Ended
Mar. 31,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
Dec. 31, 2013
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2014
 
2013
 
 
 
 
 
Regular compensation
 
$
72,367

 
$
68,834

 
$
3,533

 
5
 %
 
$
72,007

 
$
360

 
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
24,727

 
26,069

 
(1,342
)
 
(5
)%
 
27,295

 
(2,568
)
 
(9
)%
Stock-based
 
(13,193
)
 
10,700

 
(23,893
)
 
(223
)%
 
8,611

 
(21,804
)
 
(253
)%
Total incentive compensation
 
11,534

 
36,769

 
(25,235
)
 
(69
)%
 
35,906

 
(24,372
)
 
(68
)%
Employee benefits
 
20,532

 
20,051

 
481

 
2
 %
 
17,749

 
2,783

 
16
 %
Total personnel expense
 
104,433

 
125,654

 
(21,221
)
 
(17
)%
 
125,662

 
(21,229
)
 
(17
)%
Business promotion
 
5,841

 
5,453

 
388

 
7
 %
 
6,020

 
(179
)
 
(3
)%
Charitable contributions to BOKF Foundation
 
2,420

 

 
2,420

 
N/A

 

 
2,420

 
N/A

Professional fees and services
 
7,565

 
6,985

 
580

 
8
 %
 
10,003

 
(2,438
)
 
(24
)%
Net occupancy and equipment
 
16,896

 
16,481

 
415

 
3
 %
 
19,103

 
(2,207
)
 
(12
)%
Insurance
 
4,541

 
3,745

 
796

 
21
 %
 
4,394

 
147

 
3
 %
Data processing and communications
 
27,135

 
25,450

 
1,685

 
7
 %
 
28,196

 
(1,061
)
 
(4
)%
Printing, postage and supplies
 
3,541

 
3,674

 
(133
)
 
(4
)%
 
3,126

 
415

 
13
 %
Net losses and operating expenses of repossessed assets
 
1,432

 
1,246

 
186

 
15
 %
 
1,618

 
(186
)
 
(11
)%
Amortization of intangible assets
 
816

 
876

 
(60
)
 
(7
)%
 
842

 
(26
)
 
(3
)%
Mortgage banking costs
 
3,634

 
7,354

 
(3,720
)
 
(51
)%
 
7,071

 
(3,437
)
 
(49
)%
Other expense
 
6,850

 
7,064

 
(214
)
 
(3
)%
 
9,384

 
(2,534
)
 
(27
)%
Total other operating expense
 
$
185,104

 
$
203,982

 
$
(18,878
)
 
(9
)%
 
$
215,419

 
$
(30,315
)
 
(14
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,640

 
4,720

 
(80
)
 
(2
)%
 
4,638

 
2

 
 %
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 $3.5 million or 5% over the first quarter of 2013. Although the average number of employees decreased 2% compared to the prior year, we continue to invest in 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.


- 10 -




Incentive compensation decreased $25.2 million compared to the first 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 decreased $1.3 million or 5% compared to the first quarter of 2013

The Company also provides stock-based incentive compensation plans. Stock-based compensation plans include both equity and liability awards. Compensation expense for equity awards increased $3.6 million over the first quarter of 2013. The first quarter of 2013 included a reversal of compensation costs for awards that did not vest because the performance criteria were not met. Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value.

Stock-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 stock-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 $2.9 million compared to the the first quarter of 2013. During the first quarter of 2014 a $1.7 million decrease in the fair value of investments held for deferred compensation purposes was recorded in gain / loss on other assets, net. This decrease was offset by a decrease in compensation expense. Substantially all deferred compensation will be distributed by the end of 2014.

In addition, the accrual for amounts payable to certain executive officers of the Company under the 2011 True-Up Plan was reduced by $15.5 million during the first quarter of 2014. We accrued $9.5 million for the 2011 True-Up Plan in the first quarter of 2013. Approved by shareholders on April 26, 2011, the True-Up Plan is 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 is determined based on asset size and includes an equal number of publicly-traded SEC registered bank holding companies with the Company being the median bank. Based on the annual Form 10-K and proxy statements filed by our peer banks in the first quarter of 2014, the composition of the peer group and the compensation levels of comparable senior executives used in determining the amounts payable both changed. These changes reduced the required accrual for the 2011 True-Up Plan to $54 million at March 31, 2014 which will be paid in May 2014.

Employee benefit expense increased $481 thousand or 2% over the first quarter of 2013 primarily due to increased employee medical costs. The Company self-insures a portion of its employee health care coverage and these costs may be volatile.
Personnel costs decreased $21.2 million compared to the fourth quarter of 2013 primarily due to the adjustment to the 2011 True-Up Plan accrual. Regular compensation expense was largely unchanged compared to the prior year. Incentive compensation expense decreased $21.8 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, was largely unchanged compared to the prior quarter. We accrued $4.5 million in the fourth quarter of 2013 related to the 2011 True-Up Plan. Employee benefits expense increased $2.8 million primarily due to a $3.5 million seasonal increase in payroll taxes, partially offset by a $1.1 million decrease in employee medical costs.


Non-personnel operating expenses

Non-personnel operating expenses increased $2.3 million or 3% over the first quarter of 2013. BOK Financial made a $2.4 million discretionary contribution of appreciated stock to the BOKF Foundation during the first quarter of 2014. This contribution also resulted in a $1.2 million reduction in income tax expense. Mortgage banking costs decreased $3.7 million primarily due to lower provisions for losses related to mortgage loans sold with standard representations and warranties and losses related to repurchases of loans sold to U.S. government agencies that no longer qualify for sale accounting. The Company also finalized hold-back claims related to purchased mortgage loan servicing rights which reduced expenses by $1.3 million in the first quarter. This decrease was offset by increased data processing and communications expense, FDIC insurance expense, professional fees and services expense and occupancy costs.

- 11 -




Non-personnel expense decreased $9.1 million compared to the fourth quarter of 2013. Mortgage banking costs decreased $3.4 million compared to the prior quarter. Other expenses decreased $2.5 million, professional fees and services expense decreased $2.4 million and net occupancy expense decreased $2.2 million compared to the fourth quarter. The decrease was largely due to the timing of accruals for regulatory and compliance projects, recruiting and relocation commitments, and facilities repairs. There were no contributions to the BOK Foundation in the fourth quarter of 2013.
Income Taxes

Income tax expense was $37.5 million or 33% of book taxable income for the first quarter of 2014 compared to $47.1 million or 35% of book taxable income for the first quarter of 2013 and $35.3 million or 32% of book taxable income for the fourth quarter of 2013. The Company made a charitable contribution of appreciated securities to the BOKF Foundation in the first quarter of 2014, which reduced income tax expense by $1.2 million.

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 March 31, 2014, $12 million at December 31, 2013 and $13 million at March 31, 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 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 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 decreased $7.7 million or 14% compared to the first quarter of 2013. The decrease was primarily due to lower mortgage banking revenue, partially offset by growth in other fee-based revenue and lower credit losses.

Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
Commercial Banking
 
$
36,342

 
$
35,137

Consumer Banking
 
8,381

 
17,884

Wealth Management
 
2,476

 
1,884

Subtotal
 
47,199

 
54,905

Funds Management and other
 
29,391

 
33,059

Total
 
$
76,590

 
$
87,964



- 13 -




Commercial Banking

Commercial Banking contributed $36.3 million to consolidated net income in the first quarter of 2014, up $1.2 million or 3% compared to the first quarter of 2013. Decreased net loans charged off was partially offset by increased operating expenses. Net interest revenue and fees and commissions grew over the prior year and corporate expense allocations decreased. The loss on financial instruments and other assets was due to a charge against a merchant banking investment accounted for by the equity method.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
 
 
March 31,
 
 
 
 
2014
 
2013
 
 
Net interest revenue from external sources
 
$
91,009

 
$
90,882

 
$
127

 
Net interest expense from internal sources
 
(8,857
)
 
(9,145
)
 
288

 
Total net interest revenue
 
82,152

 
81,737

 
415

 
Net loans charged off (recovered)
 
(3,312
)
 
1,021

 
(4,333
)
 
Net interest revenue after net loans charged off (recovered)
 
85,464

 
80,716

 
4,748

 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
42,165

 
41,432

 
733

 
Gain (loss) on financial instruments and other assets, net
 
(1,476
)
 
19

 
(1,495
)
 
Other operating revenue
 
40,689

 
41,451

 
(762
)
 
 
 
 
 
 
 
 
 
Personnel expense
 
26,951

 
25,469

 
1,482

 
Net losses and expenses of repossessed assets
 
2,192

 
1,170

 
1,022

 
Other non-personnel expense
 
20,246

 
20,022

 
224

 
Other operating expense
 
49,389

 
46,661

 
2,728

 
 
 
 
 
 
 
 
 
Net direct contribution
 
76,764

 
75,506

 
1,258

 
Corporate expense allocations
 
17,285

 
17,999

 
(714
)
 
Income before taxes
 
59,479

 
57,507

 
1,972

 
Federal and state income tax
 
23,137

 
22,370

 
767

 
Net income
 
$
36,342

 
$
35,137

 
$
1,205

 
 
 
 
 
 
 
 
 
Average assets
 
$
10,956,107

 
$
10,629,342

 
$
326,765

 
Average loans
 
10,280,418

 
9,579,451

 
700,967

 
Average deposits
 
9,599,824

 
9,245,666

 
354,158

 
Average invested capital
 
934,328

 
890,844

 
43,484

 
Return on average assets
 
1.35
 %
 
1.34
%
 
1

bp
Return on invested capital
 
15.77
 %
 
16.00
%
 
(23
)
bp
Efficiency ratio
 
39.67
 %
 
37.82
%
 
185

bp
Net charge-offs (annualized) to average loans
 
(0.13
)%
 
0.04
%
 
(17
)
bp

Net interest revenue increased $415 thousand or 1% over the prior year. Growth in net interest revenue was primarily due to a $701 million increase in average loan balances and a $354 million increase in average deposits over the first quarter of 2013, partially offset by reduced yields on loans and deposits sold to our Funds Management unit. The Commercial Banking unit experienced a net recovery of $3.3 million in the first quarter of 2014 compared to net loans charged off of $1.0 million in the first quarter of 2013.


- 14 -




Fees and commissions revenue increased $733 thousand or 2% over the first quarter of 2013 primarily due to a $1.5 million increase in transaction card revenues from our TransFund electronic funds transfer network and a $664 thousand increase in commercial service charges and fees over the prior year. Brokerage and trading revenue decreased $940 thousand primarily due to lower customer hedging revenue compared to the first quarter of 2013.

Operating expenses increased $2.7 million or 6% over the first quarter of 2013. Personnel costs increased $1.5 million or 6% primarily due to standard annual merit increases and increased incentive compensation. Net losses and operating expenses on repossessed assets increased $1.0 million over the first quarter of 2013, primarily due to an increase in impairment charges based on regularly scheduled appraisal updates. Other non-personnel expenses were largely unchanged. Corporate expense allocations decreased $714 thousand compared to the prior year.

The average outstanding balance of loans attributed to Commercial Banking grew by $701 million during the first quarter of 2014 to $10.3 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 $9.6 billion for the first quarter of 2014, up $354 million or 4% over the first quarter of 2013. Average balances attributed to our commercial & industrial loan customers increased $471 million or 16%. Balances related to healthcare customers grew by $122 million or 33% and balances related to small business customers were up $115 million or 6%. Balances from treasury services customers increased $67 million or 4%. This growth was partially offset by a $226 million or 14% decrease in balances attributed to energy customers and a $149 million or 28% decrease in commercial real estate balances. 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 on-line origination channel.

Consumer Banking contributed $8.4 million to consolidated net income for the first quarter of 2014, down $9.5 million compared to the first quarter of 2013 primarily due to a decrease in mortgage banking revenue and higher corporate expense allocations, partially offset by lower mortgage banking costs.


- 15 -




Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
 
 
March 31,
 
 
 
 
2014
 
2013
 
 
Net interest revenue from external sources
 
$
24,657

 
$
24,095

 
$
562

 
Net interest revenue from internal sources
 
4,193

 
5,483

 
(1,290
)
 
Total net interest revenue
 
28,850

 
29,578

 
(728
)
 
Net loans charged off
 
861

 
930

 
(69
)
 
Net interest revenue after net loans charged off
 
27,989

 
28,648

 
(659
)
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
46,142

 
63,205

 
(17,063
)
 
Gain (loss) on financial instruments and other assets, net
 
1,730

 
(6,063
)
 
7,793

 
Change in fair value of mortgage servicing rights
 
(4,461
)
 
2,657

 
(7,118
)
 
Other operating revenue
 
43,411

 
59,799

 
(16,388
)
 
 
 
 
 
 
 
 
 
Personnel expense
 
23,438

 
22,456

 
982

 
Net gains and expenses of repossessed assets
 
(568
)
 
(250
)
 
(318
)
 
Other non-personnel expense
 
18,974

 
22,802

 
(3,828
)
 
Total other operating expense
 
41,844

 
45,008

 
(3,164
)
 
 
 
 
 
 
 
 
 
Net direct contribution
 
29,556

 
43,439

 
(13,883
)
 
Corporate expense allocations
 
15,839

 
14,169

 
1,670

 
Income before taxes
 
13,717

 
29,270

 
(15,553
)
 
Federal and state income tax
 
5,336

 
11,386

 
(6,050
)
 
Net income
 
$
8,381

 
$
17,884

 
$
(9,503
)
 
 
 
 
 
 
 
 
 
Average assets
 
$
5,615,816

 
$
5,723,956

 
$
(108,140
)
 
Average loans
 
2,406,523

 
2,354,479

 
52,044

 
Average deposits
 
5,585,123

 
5,642,594

 
(57,471
)
 
Average invested capital
 
285,086

 
297,073

 
(11,987
)
 
Return on average assets
 
0.61
%
 
1.27
%
 
(66
)
bp
Return on invested capital
 
11.92
%
 
24.41
%
 
(1,249
)
bp
Efficiency ratio
 
52.22
%
 
46.58
%
 
564

bp
Net charge-offs (annualized) to average loans
 
0.15
%
 
0.16
%
 
(1
)
bp
Residential mortgage loans funded for sale
 
$
727,516

 
$
956,315

 
$
(228,799
)
 

 
 
March 31,
2014
 
March 31,
2013
 
Increase
(Decrease)
Banking locations
 
202

 
190

 
12

Residential mortgage loan servicing portfolio1
 
$
15,156,948

 
$
13,365,991

 
$
1,790,957

1 
Includes outstanding principal for loans serviced for affiliates

Net interest revenue from Consumer Banking activities decreased $728 thousand or 2% compared to the first quarter of 2013. Average loan balances were up $52 million or 2% over the prior year. Decreased balances of indirect automobile loans were offset by growth in other consumer loans.


- 16 -




Fees and commissions revenue decreased $17.1 million or 27% compared to the first quarter of 2013 primarily due to a $17.2 million decrease in mortgage banking revenue as residential mortgages funded for sale contracted and gains on sale margins narrowed compared to the prior year. The first quarter of 2013 had high mortgage refinance levels that tapered in the second half of the second quarter when long-term interest rates spiked. Deposit service charges and fees decreased $933 thousand compared to the prior year primarily due to lower overdraft fees.

Operating expenses decreased $3.2 million compared to the first quarter of 2013. Personnel expenses were up $982 thousand or 4%. Net losses and operating expenses of repossessed assets were down $318 thousand compared to the prior year. Non-personnel expense decreased $3.8 million or 17% primarily due to decreased mortgage banking expenses. Provisions for potential credit losses on loans sold to U.S. government agencies under standard representations and warranties and losses related to repurchases of loans sold to U.S. government agencies that no longer qualify for sale accounting were lower compared to the prior year. Corporate expense allocations were up $1.7 million over the first quarter of 2013.

Average consumer deposits were largely unchanged compared to the first quarter of 2013. Average demand deposit balances were unchanged. Average interest-bearing transaction accounts increased $92 million or 3%. Average time deposit balances were down $172 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 $751 million of residential mortgage loans in the first quarter of 2014 and $1.0 billion in the first quarter of 2013. Mortgage loan fundings included $728 million of mortgage loans funded for sale in the secondary market and $23 million funded for retention within the consolidated group. Approximately 18% of our mortgage loans funded were in the Oklahoma market and 16% in the Texas market. In addition, 36% of our mortgage loan fundings came from correspondent lenders compared to 20% in the first quarter of 2013 and 7% was originated from our new Home Direct Mortgage on-line sales channel launched in the fourth quarter of 2013.

At March 31, 2014, we serviced $14.0 billion of mortgage loans for others and $1.1 billion of loans retained within the consolidated group. Approximately 92% of the mortgage loans serviced were to borrowers in our primary geographical market areas. Loans past due 90 days or more totaled $71 million or 0.51% of loans serviced for others at March 31, 2014 compared to $80 million or 0.58% of loans serviced for others at December 31, 2013. Mortgage servicing revenue, including revenue on loans serviced for the consolidated group, totaled $11.8 million, up $1.0 million or 9% over the first quarter of 2013. Changes in the fair value of our mortgage servicing rights, net of economic hedge, resulted in a $555 thousand decrease in Consumer Banking net income in the first quarter of 2014, compared to a $1.4 million decrease in Consumer Banking net income in the first quarter of 2013.


- 17 -




Wealth Management

Wealth Management contributed $2.5 million to consolidated net income in first quarter of 2014 compared to $1.9 million in the first quarter of 2013. Increased operating expenses and lower net interest revenue were partially offset by growth in fees and commissions revenue.

Table 9 -- Wealth Management
(Dollars in thousands)
 
Three Months Ended
 
Increase (Decrease)
 
 
March 31,
 
 
 
2014
 
2013
 
 
Net interest revenue from external sources
$
5,828

 
$
6,480

 
$
(652
)
 
Net interest revenue from internal sources
4,683

 
5,295

 
(612
)
 
Total net interest revenue
10,511

 
11,775

 
(1,264
)
 
Net loans charged off
49

 
519

 
(470
)
 
Net interest revenue after net loans charged off
10,462

 
11,256

 
(794
)
 
 
 
 
 
 
 
 
Fees and commissions revenue
54,670

 
52,095

 
2,575

 
Loss on financial instruments and other assets, net
(409
)
 
(605
)
 
196

 
Other operating revenue
54,261

 
51,490

 
2,771

 
 
 
 
 
 
 
 
Personnel expense
39,588

 
38,349

 
1,239

 
Net losses and expenses of repossessed assets
327

 
31

 
296

 
Other non-personnel expense
9,333

 
8,742

 
591

 
Other operating expense
49,248

 
47,122

 
2,126

 
 
 
 
 
 
 
 
Net direct contribution
15,475

 
15,624

 
(149
)
 
Corporate expense allocations
11,422

 
12,540

 
(1,118
)
 
Income before taxes
4,053

 
3,084

 
969

 
Federal and state income tax
1,577

 
1,200

 
377

 
Net income
$
2,476

 
$
1,884

 
$
592

 
 
 
 
 
 
 
 
Average assets
$
4,621,817

 
$
4,687,067

 
$
(65,250
)
 
Average loans
936,663

 
927,671

 
8,992

 
Average deposits
4,499,265

 
4,613,053

 
(113,788
)
 
Average invested capital
202,191

 
202,313

 
(122
)
 
Return on average assets
0.22
%
 
0.16
%
 
6

bp
Return on invested capital
4.97
%
 
3.78
%
 
119

bp
Efficiency ratio
75.42
%
 
73.55
%
 
187

bp
Net charge-offs (annualized) to average loans
0.02
%
 
0.23
%
 
(21
)
bp

 
 
March 31,
2014
 
March 31,
2013
 
Increase
(Decrease)
Fiduciary assets in custody for which BOKF has sole or joint discretionary authority
 
$
13,467,695

 
$
11,608,502

 
$
1,859,193

Fiduciary assets not in custody for which BOKF has sole or joint discretionary authority
 
1,746,634

 
1,955,313

 
(208,679
)
Non-managed trust assets in custody
 
16,082,236

 
14,042,365

 
2,039,871

Total fiduciary assets
 
31,296,565

 
27,606,180

 
3,690,385

Assets held in safekeeping
 
22,779,187

 
21,562,010

 
1,217,177

Brokerage accounts under BOKF administration
 
5,012,365

 
4,528,168

 
484,197

Assets under management or in custody
 
$
59,088,117

 
$
53,696,358

 
$
5,391,759


- 18 -





Net interest revenue for the first quarter of 2014 was down $1.3 million or 11% compared to the first quarter of 2013. Average deposit balances were $114 million or 2% lower than in the first quarter of 2013 and yields on funds sold to the Funds Management unit were down compared to the prior year. Interest-bearing transaction account balances decreased $32 million and non-interest bearing demand deposits decreased $22 million. Higher-costing time deposit balances decreased $66 million. Average loan balances were largely unchanged compared to the prior year. Residential mortgage loans previously originated by our Wealth Management division decreased, offset by growth in lower yielding consumer loan balances. Net loans charged off decreased $470 thousand compared to the first quarter of 2013 to $49 thousand or 0.02% of average loans on an annualized basis. 

Fees and commissions revenue was up $2.6 million or 5% over the first quarter of 2013. Fiduciary and asset management revenue grew by $3.4 million or 15%. The increase was primarily due to the growth in the fair value of fiduciary assets administered by the Company. In addition, the acquisition of The GTrust Financial Corporation, a Topeka, Kansas based independent trust and asset management company in the first quarter of 2014 added $371 thousand of revenue. Brokerage and trading revenue decreased $929 thousand or 3%. Growth in retail brokerage revenue was offset by the effect of decreased securities trading and hedging activity by mortgage banking customers.

Other operating revenue includes fees earned from state and municipal bond underwriting and financial advisory services, primarily in the Oklahoma and Texas markets. In the first quarter of 2014, the Wealth Management division participated in 76 underwritings that totaled $872 million. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $461 million of these underwritings. In the first quarter of 2013, the Wealth Management division participated in 88 underwritings that totaled approximately $1.3 billion. Our interest in these underwritings totaled approximately $537 million.

Operating expenses increased $2.1 million or 5% over the first quarter of 2013. Personnel expenses increased $1.2 million, including a $1.4 million increase in regular compensation and a $358 thousand increase in employee benefits primarily related to investments in Wealth Management talent, partially offset by a $497 thousand decrease in incentive compensation. Non-personnel expenses increased $591 thousand, including increased business promotion and amortization of identifiable intangible assets. Corporate expense allocations decreased $1.1 million compared to the prior year.

- 19 -




Financial Condition
Securities

We maintain a securities portfolio to enhance profitability, support customer transactions, 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 March 31, 2014, December 31, 2013 and March 31, 2013.

At March 31, 2014, the carrying value of investment (held-to-maturity) securities was $669 million and the fair value was $685 million. Investment securities consist primarily of long-term, fixed rate Oklahoma 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 $80 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 $9.9 billion at March 31, 2014, a decrease of $267 million from December 31, 2013. The decrease was primarily in U.S. government agency residential mortgage-backed securities partially offset by an increase in U.S. government agency commercial mortgage-backed securities. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans. At March 31, 2014, residential mortgage-backed securities represented 77% of total available for sale 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 March 31, 2014 is 3.2 years. Management estimates the duration extends to 3.4 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 3.1 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 March 31, 2014, approximately $7.4 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 $7.5 billion at March 31, 2014.

We also hold amortized cost of $180 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions, a decrease of $35 million from December 31, 2013. The decrease was due to the sale of approximately $28 million in amortized cost during the first quarter and cash payments received. The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $189 million at March 31, 2014.

The amortized cost of our portfolio of privately issued residential mortgage-backed securities included $106 million of Jumbo-A residential mortgage loans and $73 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 March 31, 2014. The Jumbo-A residential mortgage-backed securities had original credit enhancement of 9.7% and the current level is 3.5%. 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 33% 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 $102 million at March 31, 2014, compared to $158 million at December 31, 2013. 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 first 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 $52 million at March 31, 2014.
Bank-Owned Life Insurance

We have approximately $287 million of bank-owned life insurance at March 31, 2014. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $255 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 March 31, 2014, the cash surrender value represented by the underlying fair value of investments held in separate accounts was approximately $267 million. As the underlying fair value of the investments held in a separate account at March 31, 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 $13.1 billion at March 31, 2014, an increase of $286 million over December 31, 2013. Outstanding commercial loans grew by $108 million over December 31, 2013, largely due to growth in healthcare sector loans. Commercial real estate loan balances were up $216 million with growth in nearly all sectors of the portfolio, partially offset by a decrease in residential construction and land development loans. Residential mortgage loans decreased $33 million and consumer loans decreased $5.6 million compared to December 31, 2013

Table 10 -- Loans
(In thousands)
 
 
March 31,
2014
 
December 31,
2013
 
September 30,
2013
 
June 30,
2013
 
March 31,
2013
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,344,072

 
$
2,351,760

 
$
2,311,991

 
$
2,384,746

 
$
2,349,432

Services
 
2,232,471

 
2,282,210

 
2,148,551

 
2,204,253

 
2,114,799

Wholesale/retail
 
1,225,990

 
1,201,364

 
1,181,806

 
1,175,543

 
1,085,000

Manufacturing
 
444,215

 
391,751

 
382,460

 
386,133

 
399,818

Healthcare
 
1,396,562

 
1,274,246

 
1,160,212

 
1,118,810

 
1,081,636

Integrated food services
 
126,514

 
150,494

 
141,440

 
163,551

 
173,800

Other commercial and industrial
 
281,882

 
291,396

 
244,615

 
275,084

 
213,820

Total commercial
 
8,051,706

 
7,943,221

 
7,571,075

 
7,708,120

 
7,418,305

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Residential construction and land development
 
184,820

 
206,258

 
216,456

 
225,654

 
237,829

Retail
 
640,506

 
586,047

 
556,918

 
553,412

 
584,279

Office
 
436,264

 
411,499

 
422,043

 
459,558

 
420,644

Multifamily
 
662,674

 
576,502

 
520,454

 
500,452

 
460,474

Industrial
 
305,207

 
243,877

 
245,022

 
253,990

 
237,049

Other commercial real estate
 
401,936

 
391,170

 
388,336

 
324,030

 
344,885

Total commercial real estate
 
2,631,407

 
2,415,353

 
2,349,229

 
2,317,096

 
2,285,160

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,033,572

 
1,062,744

 
1,078,661

 
1,095,871

 
1,091,575

Permanent mortgages guaranteed by U.S. government agencies
 
184,822

 
181,598

 
163,919

 
156,887

 
162,419

Home equity
 
800,281

 
807,684

 
792,185

 
787,027

 
758,456

Total residential mortgage
 
2,018,675

 
2,052,026

 
2,034,765

 
2,039,785

 
2,012,450

 
 
 
 
 
 
 
 
 
 
 
Consumer
 
376,066

 
381,664

 
395,031

 
375,781

 
377,649

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
13,077,854

 
$
12,792,264

 
$
12,350,100

 
$
12,440,782

 
$
12,093,564











- 22 -




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.

Commercial loans totaled $8.1 billion or 62% of the loan portfolio at March 31, 2014, an increase of $108 million over December 31, 2013. Healthcare sector loans grew by $122 million over December 31, 2013. Manufacturing sector loans were up $52 million and wholesale/retail sector loans were up $25 million. This growth was partially offset by a $50 million decrease in service sector loans and a $24 million decrease in integrated food service sector loans.

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 36% concentrated in the Texas market and 22% concentrated in the Oklahoma market. The Other category is primarily composed of two states, California and Louisiana, which represent $191 million or 2% of the commercial loan portfolio and $147 million or 2% of the commercial loan portfolio, respectively, at March 31, 2014. All other states individually represent less than one percent 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
 
$
471,953

 
$
1,118,691

 
$
61,789

 
$
8,175

 
$
309,065

 
$
16,397

 
$
86,374

 
$
271,628

 
$
2,344,072

Services
 
547,194

 
734,932

 
183,903

 
19,340

 
195,898

 
161,521

 
121,759

 
267,924

 
2,232,471

Wholesale/retail
 
323,614

 
517,395

 
26,592

 
61,903

 
46,253

 
52,372

 
60,410

 
137,451

 
1,225,990

Manufacturing
 
124,782

 
121,992

 
5,717

 
6,358

 
15,498

 
36,737

 
55,758

 
77,373

 
444,215

Healthcare
 
228,404

 
263,365

 
107,615

 
79,099

 
116,366

 
77,635

 
198,606

 
325,472

 
1,396,562

Integrated food services
 
5,003

 
7,565

 

 

 
31,090

 

 
13,519

 
69,337

 
126,514

Other commercial and industrial
 
69,058

 
99,031

 
12,625

 
11,100