Annual Reports

 
Quarterly Reports

  • 10-Q (Jul 28, 2017)
  • 10-Q (Apr 28, 2017)
  • 10-Q (Oct 31, 2016)
  • 10-Q (Jul 29, 2016)
  • 10-Q (Apr 29, 2016)
  • 10-Q (Oct 30, 2015)

 
8-K

 
Other

BOK Financial 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
BOKF-2013.06.30-10Q


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One) 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
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
 
 
P.O. Box 2300
 
 
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: 68,739,208 shares of common stock ($.00006 par value) as of June 30, 2013.
 





BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2013

Index

Part I.  Financial Information
 
Management’s Discussion and Analysis (Item 2)        
Market Risk (Item 3)                                                                                              
Controls and Procedures (Item 4)
Consolidated Financial Statements – Unaudited (Item 1)
Six Month Financial Summary – Unaudited (Item 2)
Quarterly Financial Summary – Unaudited (Item 2)
Quarterly Earnings Trend – Unaudited
 
 
Part II.  Other Information
 
Item 1.  Legal Proceedings
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.  Exhibits
Signatures




Management’s Discussion and Analysis of Financial Condition and Results of Operations

Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $79.9 million or $1.16 per diluted share for the second quarter of 2013, compared to $97.6 million or $1.43 per diluted share for the second quarter of 2012 and $88.0 million or $1.28 per diluted share for the first quarter of 2013

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. In addition, net income for the second quarter of 2012 included $3.8 million or $0.06 per diluted share related to a recovery of interest on a nonaccruing commercial loan and a recovery from the Lehman Brothers bankruptcy related to derivative contract losses incurred in 2008.

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

Highlights of the second quarter of 2013 included:
Net interest revenue totaled $167.2 million for the second quarter of 2013, compared to $181.4 million for the second quarter of 2012 and $170.4 million for the first quarter of 2013. Net interest margin was 2.81% for the second quarter of 2013. Net interest margin was 3.30% for the second quarter of 2012 and 2.92% for the first quarter of 2013
Fees and commissions revenue totaled $160.9 million for the second quarter of 2013, compared to $155.8 million for the second quarter of 2012 and $158.1 million for the first quarter of 2013. Mortgage banking revenue decreased compared to the second quarter of 2012 and first quarter of 2013 primarily due to a narrowed gain on sale margin and a change in product mix, partially offset by increased loan production volume. Nearly all other fee-based revenue sources grew over the prior year and prior quarter.
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $210.9 million for the second quarter of 2013, a decrease of $640 thousand compared to the second quarter of 2012 and up $6.9 million over the previous quarter. Personnel costs increased $5.8 million over the second quarter of 2012 primarily due to growth in headcount and incentive compensation. Personnel costs increased $2.5 million compared to the first quarter of 2013 due primarily to increased incentive compensation. Non-personnel expenses decreased $6.5 million compared to the second quarter of 2012 due to lower repossessed asset impairment charges and mortgage banking expense and increased $4.5 million over the prior quarter due to higher professional fees and data processing expense.  
No provision for credit losses was recorded in the second quarter of 2013 compared to an $8.0 million negative provision for credit losses in the second quarter of 2012 and an $8.0 million negative provision for credit losses in the first quarter of 2013. Gross charge-offs were $8.6 million in the second quarter of 2013, $11.5 million in the second quarter of 2012 and $8.9 million in the first quarter of 2013. Recoveries were $6.2 million in the second quarter of 2013 compared to $6.7 million in the second quarter of 2012 and $6.6 million in the first quarter of 2013.
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, an increase of $347 million over March 31, 2013. Commercial loan balances grew by $290 million, commercial real estate loans increased $32 million and residential mortgage loans increased by $27 million. Consumer loans were largely unchanged compared to the prior quarter.
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.

- 1 -




The 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 as defined by generally accepted accounting principles in the United States of America (“GAAP”) 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 31, 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.

- 2 -




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 $167.2 million for the second quarter of 2013 compared to $181.4 million for the second quarter of 2012 and $170.4 million for the first quarter of 2013. Net interest margin was 2.81% for the second quarter of 2013, 2.92% for the first quarter of 2013 and 3.30% for the second quarter of 2012. Net interest revenue for the second quarter of 2012 included $2.9 million from a full recovery of a nonaccruing commercial loan. Excluding this recovery, net interest margin was 3.25% for the second quarter of 2012.

Net interest revenue decreased $14.2 million compared to the second quarter of 2012. Net interest revenue decreased $18.4 million due to lower interest rates. Cash flows from the securities portfolio were reinvested at lower current market rates and loan yields decreased due to renewal of maturing fixed-rate loans at current lower rates and narrowing credit spreads. The decrease in yield on earning assets was partially offset by lower funding costs. Net interest revenue increased $4.6 million primarily due to the growth in average loan and securities balances, partially offset by an increase in the average balance of other borrowings.

Net interest margin also declined compared to the second quarter of 2012. The tax-equivalent yield on earning assets was 3.11% for the second quarter of 2013, down 58 basis points from the second quarter of 2012. The available for sale securities portfolio yield decreased 61 basis points to 1.93%. Cash flows received from payments on residential mortgage-backed securities are currently being reinvested in short-duration securities that yield nearly 1.75%. Excluding the interest recovery in the prior year, the tax-equivalent yield on earning assets decreased 53 basis points and loan yields decreased 36 basis points. Credit spreads have narrowed due to market pricing pressure and improved credit quality in our loan portfolio. Funding costs were down 13 basis points from the second quarter of 2012. The cost of interest-bearing deposits decreased 10 basis points and the cost of other borrowed funds decreased 6 basis points. The average rate of interest paid on subordinated debentures decreased 141 basis points compared to the second quarter of 2012. The interest rate on $233 million of these subordinated debentures converted from a fixed rate of interest to a floating rate as of May 15, 2012. Additionally, the benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 13 basis points in the second quarter of 2013 compared to 17 basis points in the second quarter of 2012.

Average earning assets for the second quarter of 2013 increased $1.9 billion or 8% over the second quarter of 2012. The average balance of available for sale securities increased $1.0 billion over the prior year. Available for sale securities consists largely of U.S. government agency issued residential mortgage-backed securities and U.S. agency commercial mortgage-backed securities that are purchased to supplement earnings and to manage interest rate risk. Growth was primarily in U.S. government agency commercial mortgage-backed securities, partially offset by a decrease in U.S. agency mortgage-backed securities. Average loans, net of allowance for loan losses, increased $699 million over the second quarter of 2012 due primarily to growth in average commercial loans.

Average deposits increased $1.1 billion over the second quarter of 2012, including a $611 million increase in average demand deposit balances and a $724 million increase in average interest-bearing transaction accounts, partially offset by a $314 million decrease in average time deposits. Average borrowed funds increased $859 million over the second quarter of 2012 due primarily to increased borrowing from the Federal Home Loan Banks.

Net interest margin decreased 11 basis points from the first quarter of 2013.  The yield on average earning assets decreased 13 basis points. The yield on the available for sale securities portfolio decreased 16 basis points to 1.93% primarily due to cash flows being reinvested at lower current market rates, partially offset by slower prepayment speeds compared to the prior quarter. The loan portfolio yield decreased to 4.12% from 4.20% in the previous quarter primarily due to 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 benefit to net interest margin from earning assets funded by non-interest bearing liabilities decreased 1 basis point in the second quarter. The cost of other borrowed funds decreased 3 basis points.

- 3 -




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. Average commercial loan balances increased $108 million. Average 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.

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 two-thirds 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.

Net interest margin may continue to decline. Our ability to further decrease funding costs is limited and our ability to provide near-term net interest revenue support through continued securities portfolio growth may be constrained by our conservative interest rate risk policies. Although we have sufficient capital and liquidity, further securities portfolio growth may result in unacceptable risk as interest rates rise. This interest rate risk policy constraint does not affect our ability to continue loan portfolio growth.























- 4 -




Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
June 30, 2013 / 2012
 
Six Months Ended
June 30, 2013 / 2012
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield /
Rate
 
Change
 
Volume
 
Yield
/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Funds sold and resell agreements
 
$

 
$
4

 
$
(4
)
 
$

 
$
5

 
$
(5
)
Trading securities
 
281

 
160

 
121

 
542

 
452

 
90

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(678
)
 
(661
)
 
(17
)
 
(1,314
)
 
(1,333
)
 
19

Tax-exempt securities
 
107

 
1,807

 
(1,700
)
 
41

 
3,250

 
(3,209
)
Total investment securities
 
(571
)
 
1,146

 
(1,717
)
 
(1,273
)
 
1,917

 
(3,190
)
Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(10,212
)
 
5,523

 
(15,735
)
 
(14,849
)
 
11,290

 
(26,139
)
Tax-exempt securities
 
70

 
118

 
(48
)
 
84

 
2,710

 
(2,626
)
Total available for sale securities
 
(10,142
)
 
5,641

 
(15,783
)
 
(14,765
)
 
14,000

 
(28,765
)
Fair value option securities
 
(1,298
)
 
(798
)
 
(500
)
 
(3,620
)
 
(2,420
)
 
(1,200
)
Residential mortgage loans held for sale
 
510

 
642

 
(132
)
 
534

 
944

 
(410
)
Loans
 
(6,399
)
 
7,369

 
(13,768
)
 
(7,721
)
 
15,299

 
(23,020
)
Total tax-equivalent interest revenue
 
(17,619
)
 
14,164

 
(31,783
)
 
(26,303
)
 
30,197

 
(56,500
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
(810
)
 
258

 
(1,068
)
 
(1,490
)
 
431

 
(1,921
)
Savings deposits
 
(27
)
 
27

 
(54
)
 
(49
)
 
53

 
(102
)
Time deposits
 
(1,644
)
 
(1,232
)
 
(412
)
 
(3,559
)
 
(2,638
)
 
(921
)
Funds purchased
 
(469
)
 
(307
)
 
(162
)
 
(417
)
 
(349
)
 
(68
)
Repurchase agreements
 
(136
)
 
(55
)
 
(81
)
 
(255
)
 
(115
)
 
(140
)
Other borrowings
 
589

 
10,986

 
(10,397
)
 
621

 
17,978

 
(17,357
)
Subordinated debentures
 
(1,312
)
 
(75
)
 
(1,237
)
 
(4,705
)
 
(557
)
 
(4,148
)
Total interest expense
 
(3,809
)
 
9,602

 
(13,411
)
 
(9,854
)
 
14,803

 
(24,657
)
Tax-equivalent net interest revenue
 
(13,810
)
 
4,562

 
(18,372
)
 
(16,449
)
 
15,394

 
(31,843
)
Change in tax-equivalent adjustment
 
395

 
 
 
 
 
920

 
 
 
 
Net interest revenue
 
$
(14,205
)
 
 
 
 
 
$
(17,369
)
 
 
 
 
1 Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

- 5 -




Other Operating Revenue

Other operating revenue was $150.8 million for the second quarter of 2013 compared to $186.3 million for the second quarter of 2012 and $159.1 million for the first quarter of 2013. Fees and commissions revenue increased $5.2 million over the second quarter of 2012. Net gains (losses) on securities, derivatives and other assets decreased $41.0 million compared to the second quarter of 2012.

Other operating revenue decreased $8.3 million compared to the first quarter of 2013. Fees and commissions revenue was up $2.8 million. Net gains on securities, derivatives and other assets decreased $10.8 million

Table 2Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
 
 
 
 
Three Months Ended
Mar. 31, 2013
 
 
 
 
 
 
2013
 
2012
 
Increase(Decrease)
 
% Increase(Decrease)
 
 
Increase(Decrease)
 
% Increase(Decrease)
Brokerage and trading revenue
 
$
32,874

 
$
32,600

 
$
274

 
1
 %
 
$
31,751

 
$
1,123

 
4
 %
Transaction card revenue
 
29,942

 
26,758

 
3,184

 
12
 %
 
27,692

 
2,250

 
8
 %
Trust fees and commissions
 
24,803

 
19,931

 
4,872

 
24
 %
 
22,313

 
2,490

 
11
 %
Deposit service charges and fees
 
23,962

 
25,216

 
(1,254
)
 
(5
)%
 
22,966

 
996

 
4
 %
Mortgage banking revenue
 
36,596

 
39,548

 
(2,952
)
 
(7
)%
 
39,976

 
(3,380
)
 
(8
)%
Bank-owned life insurance
 
2,236

 
2,838

 
(602
)
 
(21
)%
 
3,226

 
(990
)
 
(31
)%
Other revenue
 
10,496

 
8,860

 
1,636

 
18
 %
 
10,187

 
309

 
3
 %
Total fees and commissions revenue
 
160,909

 
155,751

 
5,158

 
3
 %
 
158,111

 
2,798

 
2
 %
Gain (loss) on other assets, net
 
(1,666
)
 
1,689

 
(3,355
)
 
N/A

 
467

 
(2,133
)
 
N/A

Gain (loss) on derivatives, net
 
(2,527
)
 
2,345

 
(4,872
)
 
N/A

 
(941
)
 
(1,586
)
 
N/A

Gain (loss) on fair value option securities, net
 
(9,156
)
 
6,852

 
(16,008
)
 
N/A

 
(3,171
)
 
(5,985
)
 
N/A

Gain on available for sale securities
 
3,753

 
20,481

 
(16,728
)
 
N/A

 
4,855

 
(1,102
)
 
N/A

Total other-than-temporary impairment
 
(1,138
)
 
(135
)
 
(1,003
)
 
N/A

 

 
(1,138
)
 
N/A

Portion of loss recognized in (reclassified from) other comprehensive income
 
586

 
(723
)
 
1,309

 
N/A

 
(247
)
 
833

 
N/A

Net impairment losses recognized in earnings
 
(552
)
 
(858
)
 
306

 
N/A

 
(247
)
 
(305
)
 
N/A

Total other operating revenue
 
$
150,761

 
$
186,260

 
$
(35,499
)
 
(19
)%
 
$
159,074

 
$
(8,313
)
 
(5
)%
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 49% of total revenue for the second quarter of 2013, excluding provision for credit losses and gains and losses on asset sales, securities and derivatives. We believe that a variety of fee revenue sources provide 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 drive growth in our mortgage banking revenue. We expect continued growth in other operating revenue through offering new products and services and by further development of our presence in markets outside of Oklahoma. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and trading revenue, which includes revenues from securities trading, retail brokerage, customer hedging and investment banking increased $274 thousand or 1% over the second quarter of 2012. The Company received a $2.9 million recovery from the Lehman Brothers bankruptcy in the second quarter of 2012 related to derivative contract losses incurred in 2008.

- 6 -





Securities trading revenue totaled $14.2 million for the second quarter of 2013, down $1.9 million or 12% compared to the second quarter of 2012 due primarily to the mark-to-market of municipal and U.S. government agency securities at June 30, 2013. The fair value of these securities decreased due to an increase in interest rates. 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. We believe these activities will be permitted under the Volcker Rule of the Dodd-Frank Act.

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. Excluding the impact of the Lehman Brother recovery in the second quarter of 2012, customer hedging revenue increased $3.8 million over the prior year to $5.2 million for the second quarter of 2013 primarily due to increased activity by our mortgage banking customers.

Revenue earned from retail brokerage transactions increased $1.0 million or 13% over the second quarter of 2012 to $9.1 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 $4.4 million for the second quarter of 2013, a $196 thousand or 5% increase over the second quarter of 2012 related to the timing and volume of completed transactions. The increased volume of transactions is primarily the result of the Company's expansion of its municipal financial advisory service capacity, particularly in the Texas market.

Brokerage and trading revenue increased $1.1 million over the first quarter of 2013. Customer hedging revenue was up $2.3 million primarily from increased activity by our mortgage banking customers. Securities trading revenue decreased $2.9 million primarily due to the impact of rising rates on the fair value of municipal securities and U.S. government agency securities held in our trading portfolio at quarter-end. Retail brokerage fees were up $908 thousand and investment banking fees were up $750 thousand.

The proposed Volcker Rule in Title VI of the Dodd-Frank Act prohibits banking entities from engaging in proprietary trading as defined by the Dodd-Frank Act and restricts sponsorship of, or investment in, private equity funds and hedge funds, subject to limited exceptions. Based on the proposed rules, we expect the Company's trading activity to be largely unaffected. The Company's private equity investment activity may be curtailed, but is not expected to result in a material impact to the Company's financial statements. A compliance program will be required for activities permitted under the proposed rules resulting in additional operating and compliance costs by the Company.

Title VII of the Dodd-Frank Act subjects nearly all derivative transactions to Commodity Futures Trading Commission (“CFTC”) or Securities and Exchange Commission (“SEC”) regulations. This includes registration, recordkeeping, reporting, capital, margin and business conduct requirements on major swap dealers and major swap participants. These regulations, which are now largely complete, are comprehensive and establish a wide range of compliance and reporting obligations. However, in the Company's view, do not appear to materially limit the Company's ability to effect derivative trades for its customers or materially increase compliance costs.

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 second quarter of 2013 increased $3.2 million or 12% over the second quarter of 2012. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $15.2 million, up $1.7 million or 13%, due to increased transaction volumes and increased dollar amount per transaction. Merchant services fees totaled $10.0 million, up $1.2 million or 13% on increased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.7 million, up from $4.5 million for the second quarter of 2012.

Transaction card revenue increased $2.3 million compared to the first quarter of 2013. Merchant services fees and revenues from processing transactions on behalf of members of our TransFund EFT network both increased due to increased transaction activity. Interchange fees from debit cards issued by the Company were also up over of the prior quarter.


- 7 -




Trust fees and commissions increased $4.9 million or 24% over the second quarter of 2012. The acquisition of the Milestone Group by BOK Financial in third quarter of 2012 added $1.5 billion of fiduciary assets as of June 30, 2013 and resulted in a $2.6 million increase in trust fees and commissions over the second quarter of 2012. 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 $28.3 billion at June 30, 2013, $23.1 billion at June 30, 2012 and $27.6 billion at March 31, 2013. Trust fees and commissions were up $2.5 million primarily due to the seasonal timing of tax service fees.

In addition to trust fees and commissions where we served as a fiduciary, 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 $1.9 million for the second quarter of 2013 compared to $2.2 million for the second quarter of 2012 and $1.8 million for the first quarter of 2013.

Deposit service charges and fees decreased $1.3 million or 5% compared to the second quarter of 2012. Overdraft fees totaled $12.4 million for the second quarter of 2013, a decrease of $1.8 million or 13% compared to the second quarter of 2012. Consumers are generally maintaining higher average balances and better managing their accounts to reduce overdraft fees. Commercial account service charge revenue totaled $9.5 million, up $752 thousand or 9% over the prior year. Service charges on deposit accounts with a standard monthly fee were $2.1 million, down $163 thousand or 7% compared to the second quarter of 2012. Deposit service charges and fees increased $996 thousand over the prior quarter on increased overdraft fee volumes and increased commercial service charge revenue.

Mortgage banking revenue decreased $3.0 million compared to the second quarter of 2012. Revenue from originating and marketing mortgage loans totaled $26.4 million, down $3.3 million or 11% compared to the second quarter of 2012. Mortgage loans funded for sale totaled $1.2 billion in the second quarter of 2013, up from $841 million in the second quarter of 2012. Outstanding commitments to originate mortgage loans were up $155 million or 40% over June 30, 2012. 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 of 2013 were through correspondent channels, up from 11% for the second quarter of 2012 and refinanced mortgage loans decreased to 48% of loans originated in 2013 from 51% of loans originated in 2012. Additionally, an increase in interest rates near the end of June 2013 decreased the fair value of both mortgage loans held for sale and mortgage loan commitments. We mitigate the risk of changes in the fair value of mortgage loans and commitments with forward sale contracts. We generally economically 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 commitments we expect to result in closed loans which resulted in lower hedge coverage at quarter end. The net impact decreased the fair value of mortgage loan commitments by approximately $3.5 million.

We expect that the recent increase in mortgage interest rates will decrease future mortgage loan production volume and continue to narrow gain on sale margins. Some of the cost structure of our mortgage banking division is variable related to changes in production volume.

Mortgage servicing revenue increased $382 thousand or 4% over the second quarter of 2012. The outstanding principal balance of mortgage loans serviced for others totaled $12.7 billion, an increase of $1.2 billion over June 30, 2012.

Mortgage banking revenue decreased $3.4 million compared to the first quarter of 2013 primarily due to narrowed gain on sale margins and the June 30, 2013 mark-to-market valuation adjustments. Residential mortgage loans funded for sale increased $240 million over the previous quarter. Outstanding commitments to originate mortgage loans were up $81 million or 17% over March 31, 2013.

Mortgage servicing revenue increased $174 thousand over the prior quarter. The outstanding balance of mortgage loans serviced for others increased $469 million over March 31, 2013.


- 8 -




Table 3Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
 
 
%
 
Three Months Ended
Mar. 31, 2013
 
 
 
%
 
 
2013
 
2012
 
Increase
(Decrease)
 
Increase
(Decrease)
 
 
Increase
(Decrease)
 
Increase
(Decrease)
Originating and marketing revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages loan held for sale
 
$
17,763

 
$
27,706

 
$
(9,943
)
 
(36
)%
 
$
30,235

 
$
(12,472
)
 
(41
)%
Residential mortgage loan commitments
 
(15,052
)
 
6,900

 
(21,952
)
 
(318
)%
 
610

 
(15,662
)
 
(2,568
)%
Forward sales contracts
 
23,645

 
(4,917
)
 
28,562

 
(581
)%
 
(935
)
 
24,580

 
(2,629
)%
Total originating and marketing revenue
 
26,356

 
29,689

 
(3,333
)
 
(11
)%
 
29,910

 
(3,554
)
 
(12
)%
Servicing revenue
 
10,240

 
9,859

 
381

 
4
 %
 
10,066

 
174

 
2
 %
Total mortgage revenue
 
$
36,596

 
$
39,548

 
$
(2,952
)
 
(7
)%
 
$
39,976

 
$
(3,380
)
 
(8
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
1,196,038

 
$
840,765

 
$
355,273

 
42
 %
 
$
956,315

 
$
239,723

 
25
 %
Mortgage loan refinances to total funded
 
48
%
 
51
%
 
 

 
 

 
62
%
 
 

 
 


 
 
June 30,
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
2012
 
Increase
 
% Increase
 
March 31,
2013
 
Increase
 
% Increase
Outstanding principal balance of mortgage loans serviced for others
 
$
12,741,651

 
$
11,564,643

 
$
1,177,008

 
10
%
 
$
12,272,691

 
$
468,960

 
4
%
Net gains on securities, derivatives and other assets

In the second quarter of 2013, we recognized a $3.8 million gain 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. In the second quarter of 2012, we recognized a $14.2 million gain on the sale of $26 million of common stock received in 2009 in partial satisfaction of a defaulted commercial loan. In addition, we recognized $6.1 million of gains on sales of $433 million of residential mortgage-backed securities guaranteed by U.S. government agencies. We recognized a $4.9 million gain on sales of $728 million of available for sale securities in the first quarter of 2013.

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 5 to the Consolidated Financial Statements. As benchmark mortgage rates increase, prepayment speeds slow and the value of our mortgage servicing rights increase. As benchmark mortgage rates fall, prepayment speeds increase and the value of our mortgage servicing rights decrease.

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.


- 9 -




Table 4 -- Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
June 30,
2013
 
March 31,
2013
 
June 30,
2012
Loss on mortgage hedge derivative contracts, net
 
$
(2,526
)
 
$
(1,654
)
 
$
2,623

Loss on fair value option securities, net
 
(9,102
)
 
(3,232
)
 
6,908

Loss on economic hedge of mortgage servicing rights
 
(11,628
)
 
(4,886
)
 
9,531

Gain on change in fair value of mortgage servicing rights
 
14,315

 
2,658

 
(11,450
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
2,687

 
$
(2,228
)
 
$
(1,919
)
 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
910

 
$
828

 
$
2,148

 
 
 
 
 
 
 
Average primary residential mortgage interest rate
 
3.67
%
 
3.50
%
 
3.79
%
Average secondary residential mortgage interest rate
 
2.72
%
 
2.54
%
 
2.74
%

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. The difference between average primary and secondary rates for the second quarter of 2013 was 95 basis points compared to 96 basis points for the first quarter of 2013 and 105 basis points for the second quarter of 2012.

As more fully discussed in Note 2 to the Consolidated Financial Statements, we recognized $552 thousand of other-than-temporary impairment losses in earnings during the second quarter of 2013 on certain private-label residential mortgage-backed securities we do not intend to sell. We recognized other-than-temporary impairment losses in earnings of $858 thousand in the second quarter of 2012 and $247 thousand in the first quarter of 2013.

- 10 -




Other Operating Expense

Other operating expense for the second quarter of 2013 totaled $196.6 million, down $26.4 million or 12% compared to the second quarter of 2012. Changes in the fair value of mortgage servicing rights decreased operating expense $14.3 million in the second quarter of 2013 and increased operating expense $11.5 million in the second quarter of 2012. Excluding changes in the fair value of mortgage servicing rights, operating expenses were largely unchanged compared to the second quarter of 2012. Personnel expenses increased $5.8 million or 5%. Non-personnel expenses decreased $6.5 million or 7%.

Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $6.9 million over the previous quarter. Personnel expenses increased $2.5 million and non-personnel expenses increased $4.5 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase
 
%
Increase
 
Three Months Ended
Mar. 31, 2013
 
Increase
 
%
Increase
 
 
2013
 
2012
 
(Decrease)
 
(Decrease)
 
 
(Decrease)
 
(Decrease)
Regular compensation
 
$
68,319

 
$
65,218

 
$
3,101

 
5
 %
 
$
67,858

 
$
461

 
1
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
31,081

 
27,950

 
3,131

 
11
 %
 
27,045

 
4,036

 
15
 %
Stock-based
 
9,500

 
11,349

 
(1,849
)
 
(16
)%
 
10,700

 
(1,200
)
 
(11
)%
Total incentive compensation
 
40,581

 
39,299

 
1,282

 
3
 %
 
37,745

 
2,836

 
8
 %
Employee benefits
 
19,210

 
17,780

 
1,430

 
8
 %
 
20,051

 
(841
)
 
(4
)%
Total personnel expense
 
128,110

 
122,297

 
5,813

 
5
 %
 
125,654

 
2,456

 
2
 %
Business promotion
 
5,770

 
6,746

 
(976
)
 
(14
)%
 
5,453

 
317

 
6
 %
Professional fees and services
 
8,381

 
8,343

 
38

 
 %
 
6,985

 
1,396

 
20
 %
Net occupancy and equipment
 
16,909

 
16,906

 
3

 
 %
 
16,481

 
428

 
3
 %
Insurance
 
4,044

 
4,011

 
33

 
1
 %
 
3,745

 
299

 
8
 %
Data processing and communications
 
26,734

 
25,264

 
1,470

 
6
 %
 
25,450

 
1,284

 
5
 %
Printing, postage and supplies
 
3,580

 
3,903

 
(323
)
 
(8
)%
 
3,674

 
(94
)
 
(3
)%
Net losses and operating expenses of repossessed assets
 
282

 
5,912

 
(5,630
)
 
(95
)%
 
1,246

 
(964
)
 
(77
)%
Amortization of intangible assets
 
875

 
545

 
330

 
61
 %
 
876

 
(1
)
 
 %
Mortgage banking costs
 
7,910

 
12,315

 
(4,405
)
 
(36
)%
 
7,354

 
556

 
8
 %
Change in fair value of mortgage servicing rights
 
(14,315
)
 
11,450

 
(25,765
)
 
(225
)%
 
(2,658
)
 
(11,657
)
 
439
 %
Other expense
 
8,326

 
5,319

 
3,007

 
57
 %
 
7,064

 
1,262

 
18
 %
Total other operating expense
 
$
196,606

 
$
223,011

 
$
(26,405
)
 
(12
)%
 
$
201,324

 
$
(4,718
)
 
(2
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of employees (full-time equivalent)
 
4,712

 
4,585

 
127

 
3
 %
 
4,697

 
15

 
 %

Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

The increase in personnel expense was primarily due to standard annual merit increases in regular compensation which were effective for the majority of our staff March 1, increased incentive compensation and higher employee healthcare costs. Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs increased $3.1 million or 5% over the second quarter of 2012.


- 11 -




Incentive compensation increased $1.3 million or 3% over the second quarter of 2012. Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Total cash-based incentive compensation increased $3.1 million or 11% over the second quarter of 2012

The Company also provides stock-based incentive compensation plans. Stock-based compensation plans include both equity and liability awards. Compensation expense for equity awards decreased $670 thousand compared to the second quarter of 2012. 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. Expense based on changes in the fair value of BOK Financial common stock and other investments decreased $100 thousand compared to the the second quarter of 2012. In addition, $7.0 million was accrued in second quarter of 2013 and $8.0 million was accrued in the second quarter of 2012 for the BOK Financial Corp. 2011 True-Up Plan. 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 accrual for the 2011 True-Up Plan totaled $57 million at June 30, 2013. Based on currently available information, amounts estimated to be payable under the 2011 True-Up Plans are approximately $72 million. The final amount due under the 2011 True-Up Plan will be determined as of December 31, 2013 and distributed in 2014. Performance measurement through 2013 may result in future upward or downward adjustments to compensation expense.  

Employee benefit expense increased $1.4 million or 8% over the second quarter of 2012 primarily due to increased employee medical insurance costs and payroll taxes. The Company self-insures a portion of its employee health care coverage and these costs may be volatile.
Personnel costs increased $2.5 million over 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 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 operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, decreased $6.5 million compared over the second quarter of 2012. Net losses and operating expenses of repossessed assets were down $5.6 million primarily due to decreased impairment charges based on regularly scheduled appraisal updates. Mortgage banking costs were down $4.4 million primarily due to lower provision for potential losses on loans sold to U.S. government agencies under standard representations and warranties. Data processing and communications expense increased $1.5 million primarily due to transaction card activity. All other expenses were up $2.1 million over the second quarter of 2012.

Excluding changes in the fair value of mortgage servicing rights, non-personnel operating expenses 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.

- 12 -




Income Taxes

Income tax expense was $41.4 million or 34% of book taxable income for the second quarter of 2013 compared to $53.1 million or 35% of book taxable income for the second quarter of 2012 and $47.1 million or 35% of book taxable income for the first quarter of 2013.

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 $13 million at June 30, 2013, March 31, 2013 and June 30, 2012.
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, brokerage and trading, private bank services and investment advisory services in all markets. Wealth Management also originates loans for high net worth clients.

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 after allocation of funds, certain indirect expenses, taxes based on statutory rates, actual net credit losses and capital costs. 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.

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 $2.5 million or 4% compared to the second quarter of 2012. Decreased net interest revenue was offset by lower net loans charged off compared to the prior year. Nearly all of our diversified revenue categories grew over the prior year, partially offset by increased personnel expenses. Non-personnel expense and net losses and operating expenses were both down compared to the prior year. The gain (loss) on mortgage servicing rights, net of economic hedges increased over the prior year. The second quarter of 2012 also included a $14.2 million gain on the sale of stock received in partial satisfaction of a defaulted loan which was attributed to the Commercial Banking line of business.


- 13 -




Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Commercial Banking
 
$
39,537

 
$
43,317

 
$
78,060

 
$
76,300

Consumer Banking
 
20,327

 
15,411

 
40,746

 
35,552

Wealth Management
 
2,561

 
6,172

 
6,758

 
10,092

Subtotal
 
62,425

 
64,900

 
125,564

 
121,944

Funds Management and other
 
17,506

 
32,728

 
42,331

 
59,299

Total
 
$
79,931

 
$
97,628

 
$
167,895

 
$
181,243



- 14 -




Commercial Banking

Commercial Banking contributed $39.5 million to consolidated net income in the second quarter of 2013, down $3.8 million or 9% over the second quarter of 2012. Excluding the gain on the sale of stock received in partial satisfaction of a defaulted loan from net income for the second quarter of 2012, Commercial Banking net income increased $4.9 million or 14%.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
 
2013
 
2012
 
(Decrease)
 
2013
 
2012
 
(Decrease)
 
Net interest revenue from external sources
 
$
90,505

 
$
93,549

 
$
(3,044
)
 
$
181,349

 
$
183,041

 
$
(1,692
)
 
Net interest expense from internal sources
 
(9,375
)
 
(11,439
)
 
2,064

 
(18,502
)
 
(23,488
)
 
4,986

 
Total net interest revenue
 
81,130

 
82,110

 
(980
)
 
162,847

 
159,553

 
3,294

 
Net loans charged off
 
86

 
748

 
(662
)
 
1,107

 
7,140

 
(6,033
)
 
Net interest revenue after net loans charged off
 
81,044

 
81,362

 
(318
)
 
161,740

 
152,413

 
9,327

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
43,330

 
37,795

 
5,535

 
84,762

 
76,543

 
8,219

 
Gain on financial instruments and other assets, net
 
81

 
14,363

 
(14,282
)
 
81

 
14,407

 
(14,326
)
 
Other operating revenue
 
43,411

 
52,158

 
(8,747
)
 
84,843

 
90,950

 
(6,107
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
26,723

 
25,504

 
1,219

 
52,204

 
50,348

 
1,856

 
Net losses (gains) and expenses of repossessed assets
 
(217
)
 
5,002

 
(5,219
)
 
953

 
5,669

 
(4,716
)
 
Other non-personnel expense
 
20,792

 
18,835

 
1,957

 
40,774

 
36,560

 
4,214

 
Corporate allocations
 
12,448

 
13,284

 
(836
)
 
24,895

 
25,908

 
(1,013
)
 
Total other operating expense
 
59,746

 
62,625

 
(2,879
)
 
118,826

 
118,485

 
341

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
64,709

 
70,895

 
(6,186
)
 
127,757

 
124,878

 
2,879

 
Federal and state income tax
 
25,172

 
27,578

 
(2,406
)
 
49,697

 
48,578

 
1,119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
39,537

 
$
43,317

 
$
(3,780
)
 
$
78,060

 
$
76,300

 
$
1,760

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,359,660

 
$
9,865,389

 
$
494,271

 
$
10,486,541

 
$
9,939,627

 
$
546,914

 
Average loans
 
9,623,460

 
9,024,475

 
598,985

 
9,599,529

 
8,942,733

 
656,796

 
Average deposits
 
9,027,907

 
8,211,478

 
816,429

 
9,136,184

 
8,283,114

 
853,070

 
Average invested capital
 
899,088

 
862,816

 
36,272

 
895,749

 
883,408

 
12,341

 
Return on average assets
 
1.53
%
 
1.77
%
 
(24
)
bp
1.50
%
 
1.54
%
 
(4
)
bp
Return on invested capital
 
17.64
%
 
20.19
%
 
(255
)
bp
17.57
%
 
17.37
%
 
20

bp
Efficiency ratio
 
48.00
%
 
52.23
%
 
(423
)
bp
47.99
%
 
50.19
%
 
(220
)
bp
Net charge-offs (annualized) to average loans
 
%
 
0.03
%
 
(3
)
bp
0.02
%
 
0.16
%
 
(14
)
bp

Net interest revenue was largely unchanged compared to the prior year. The second quarter of 2012 included $2.9 million from the recovery of foregone interest and fees on a nonaccruing loan. Excluding this recovery, growth in net interest revenue was due to a $599 million increase in average loan balances and a $816 million increase in average deposits over the second quarter of 2012, partially offset by reduced yields on loans and deposits sold to our Funds Management unit.


- 15 -




Fees and commissions revenue increased $5.5 million or 15% over the second quarter of 2012 primarily due to a $3.0 million increase in transaction card revenues. Brokerage and trading revenue was up $1.2 million primarily due to an increase in customer hedging activity. Commercial deposit service charges and fees increased $571 thousand compared to the prior year.

Operating expenses decreased $2.9 million or 5% compared to the second quarter of 2012. Personnel costs increased $1.2 million or 5% primarily due to standard annual merit increases and headcount. Net losses and operating expenses on repossessed assets decreased $5.2 million compared to the second quarter of 2012, primarily due to a decrease in impairment charges based on regularly scheduled appraisal updates. Other non-personnel expenses increased $2.0 million over the second quarter of 2012 primarily due to increased data processing expenses related to increased transaction card volumes. Corporate expense allocations were down $836 thousand compared to the prior year.

The average outstanding balance of loans attributed to Commercial Banking increased $599 million to $9.6 billion for the second quarter of 2013. 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 $9.0 billion for the second quarter of 2013, up $816 million or 10% over the second quarter of 2012. Average balances attributed to our energy customers increased $384 million or 31%, commercial & industrial loan customers increased $177 million or 6% and small business customers increased $90 million or 5%. Average balances held by treasury services customers were down $10 million compared to the second quarter of 2012. 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 services are provided 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 and through correspondent loan originators.

Consumer Banking contributed $20.3 million to consolidated net income for the second quarter of 2013, up $4.9 million over the second quarter of 2012 primarily due to a decrease in net loans charged off and an increase related to changes in the fair value of our mortgage servicing rights, net of economic hedge. Changes in fair value of our mortgage servicing rights, net of economic hedge, increased net income attributed to consumer banking by $1.6 million in the second quarter of 2013 compared to decreasing net income attributed to Consumer Banking by $1.2 million in the second quarter of 2012.


- 16 -




Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
 
2013
 
2012
 
(Decrease)
 
2013
 
2012
 
(Decrease)
 
Net interest revenue from external sources
 
$
24,830

 
$
25,723

 
$
(893
)
 
$
48,925

 
$
52,310

 
$
(3,385
)
 
Net interest revenue from internal sources
 
5,167

 
4,803

 
364

 
10,650

 
9,683

 
967

 
Total net interest revenue
 
29,997

 
30,526

 
(529
)
 
59,575

 
61,993

 
(2,418
)
 
Net loans charged off
 
1,402

 
4,221

 
(2,819
)
 
2,332

 
5,653

 
(3,321
)
 
Net interest revenue after net loans charged off
 
28,595

 
26,305

 
2,290

 
57,243

 
56,340

 
903