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BOK Financial 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
BOKF-2014.06.30-10Q


 

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, 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: 69,286,001 shares of common stock ($.00006 par value) as of June 30, 2014.
 





BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 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)
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 $75.9 million or $1.10 per diluted share for the second quarter of 2014, compared to $79.9 million or $1.16 per diluted share for the second quarter of 2013 and $76.6 million or $1.11 per diluted share for the first quarter of 2014

Highlights of the second quarter of 2014 included:
Net interest revenue totaled $166.1 million for the second quarter of 2014, compared to $168.9 million for the second quarter of 2013 and $162.6 million for the first quarter of 2014. Net interest margin was 2.75% for the second quarter of 2014. Net interest margin was 2.80% for the second quarter of 2013 and 2.71% for the first quarter of 2014
Fees and commissions revenue totaled $164.1 million for the second quarter of 2014, a $4.9 million or 3% increase over the second quarter of 2013. Growth in brokerage and trading, fiduciary and asset management and transaction card revenues, was partially offset by a $7.3 million decrease in mortgage banking revenue. Mortgage production volume was lower than the second quarter of 2013 as mortgage interest rates have trended higher. Fees and commissions revenue increased $23.2 million over the first quarter of 2014. All fees and commissions revenue categories experienced growth over the first quarter of 2014.
Operating expenses totaled $214.7 million for the second quarter of 2014, an increase of $3.8 million over the second quarter of 2013. Personnel costs decreased $4.4 million primarily due to lower incentive compensation expense, partially offset by increased regular compensation expense. Non-personnel expense increased $8.2 million. Professional fees and services, data processing and communications and net occupancy expense increased over the prior year. Operating expenses increased $29.6 million over the previous quarter. Personnel costs increased $19.3 million. The Company reversed $17.2 million primarily related to amounts payable to certain executive officers accrued during 2011 through 2013 under the 2011 True-Up Plan in the first quarter of 2014. Non-personnel expense increased $10.3 million over the prior quarter. Mortgage banking expenses were up $4.3 million primarily due to increased accruals for loan servicing costs. The Company made a $2.4 million discretionary contribution of appreciated stock to the BOKF Foundation during the first quarter of 2014. Professional fees and services, data processing and communications and net occupancy expense also increased over the prior quarter.
No provision for credit losses was recorded in the second quarter of 2014 or the second quarter of 2013 and first quarter of 2014. Gross charge-offs were $3.5 million in the second quarter of 2014, $8.6 million in the second quarter of 2013 and $2.8 million in the first quarter of 2014. Recoveries were $5.5 million in the second quarter of 2014, compared to $6.2 million in the second quarter of 2013 and $5.4 million in the first quarter of 2014.
The combined allowance for credit losses totaled $192 million or 1.43% of outstanding loans at June 30, 2014 compared to $190 million or 1.45% of outstanding loans at March 31, 2014. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $145 million or 1.09% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2014 and $153 million or 1.18% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at March 31, 2014.
Outstanding loan balances were $13.4 billion at June 30, 2014, an increase of $349 million over March 31, 2014. Commercial loan balances grew by $316 million and commercial real estate loan balances were up $24 million. Residential mortgage loans decreased by $10 million and consumer loan balances increased $20 million.
Period end deposits totaled $20.6 billion at June 30, 2014, a $182 million increase over March 31, 2014. Demand deposit account balances increased $436 million, partially offset by a $201 million decrease in interest-bearing transaction accounts and a $46 million decrease in time deposits.
The Company's Tier 1 common equity ratio, as defined by banking regulations, was 13.46% at June 30, 2014 and 13.59% at March 31, 2014. The Company and its subsidiary bank continue to exceed the regulatory definition of well capitalized. The Company's Tier 1 capital ratio was 13.63% at June 30, 2014 and 13.77% at March 31, 2014. Total capital ratio was 15.38% at June 30, 2014 and 15.55% at March 31, 2014. The Company's leverage ratio was 10.26% at June 30, 2014 and 10.17% at March 31, 2014.

- 1 -




The Company paid a regular quarterly cash dividend of $28 million or $0.40 per common share during the second quarter of 2014. On July 29, 2014, the board of directors approved a quarterly cash dividend of $0.40 per common share payable on or about August 29, 2014 to shareholders of record as of August 15, 2014.
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 $166.1 million for the second quarter of 2014 compared to $168.9 million for the second quarter of 2013 and $162.6 million for the first quarter of 2014. Net interest margin was 2.75% for the second quarter of 2014, 2.80% for the second quarter of 2013 and 2.71% for the first quarter of 2014.

Net interest revenue decreased $2.8 million compared to the second quarter of 2013. Net interest revenue decreased $7.4 million primarily due to continued narrowing of interest rate spreads. Net interest revenue increased $4.8 million over the previous quarter 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 3.02% for the second quarter of 2014, down 8 basis points from the second quarter of 2013. Loan yields decreased 27 basis points. Credit spreads have narrowed due to market pricing pressure in our loan portfolio. The available for sale securities portfolio yield was unchanged at 1.96%. 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 1 basis point from the second quarter of 2013. The cost of interest-bearing deposits decreased 4 basis points and the cost of other borrowed funds increased 4 basis points largely due to the mix of funding sources. Additionally, the benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 15 basis points in the second quarter of 2014 compared to 13 basis points in the second quarter of 2013.

Average earning assets for the second quarter of 2014 decreased $188 million or 1% compared to the second quarter of 2013. Average loans, net of allowance for loan losses, increased $1.0 billion due primarily to growth in average commercial and commercial real estate loans. The average balance of available for sale securities decreased $1.3 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 $600 million reduction in our bond portfolio over the remainder of 2014. This reduction in earning assets is expected to be partially offset by quarterly loan growth in low double-digits for the balance of the year. The resulting shift in earning asset mix should be supportive of net interest margin. The average balance of interest-bearing cash and cash equivalents and investment securities was up over the prior year, offset by a decrease in the average balances of our trading portfolio, fair value option securities primarily held as an economic hedge of our mortgage servicing rights and residential mortgage loans held for sale.

Average deposits increased $970 million over the second quarter of 2013, including a $765 million increase in average demand deposit balances and a $347 million increase in average interest-bearing transaction accounts, partially offset by a $182 million decrease in average time deposits. Average borrowed funds decreased $996 million compared to the second quarter of 2013 primarily due to decreased borrowings from the Federal Home Loan Banks and funds purchased and repurchase agreements.

Net interest margin increased 4 basis points over the first quarter of 2014.  The yield on average earning assets increased 3 basis points. The yield on the available for sale securities portfolio increased 5 basis points to 1.96%. The loan portfolio yield decreased 4 basis points to 3.85% primarily due to market pricing pressure. Funding costs were up 1 basis point to 0.42%. Rates paid on time deposits decreased 1 basis point. The cost of other borrowed funds increased 4 basis points over the first quarter. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities increased 2 basis points.

- 2 -




Average earning assets increased $180 million during the second quarter of 2014. Growth in average outstanding loans of $317 million was partially offset by a $276 million decrease in the available for sale securities portfolio. Average commercial loan balances were up $295 million and average commercial real estate loan balances increased $18 million. The average balance of interest-bearing cash and cash equivalents increased $86 million, the average balance of residential mortgage loans held for sale increased $34 million, the average trading securities balance increased $24 million and the average balance of restricted equity securities increased $12 million.
Average deposits increased $262 million over the previous quarter. Demand deposit balances increased $342 million. Interest-bearing transaction account balances decreased $50 million and time deposit account balances decreased $50 million. The average balance of borrowed funds decreased $49 million compared to the first quarter of 2014.

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
June 30, 2014 / 2013
 
Six Months Ended
June 30, 2014 / 2013
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield /
Rate
 
Change
 
Volume
 
Yield
/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
105

 
$
144

 
$
(39
)
 
$
186

 
$
154

 
$
32

Trading securities
 
(302
)
 
(302
)
 

 
(478
)
 
(449
)
 
(29
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(409
)
 
(269
)
 
(140
)
 
(925
)
 
(550
)
 
(375
)
Tax-exempt securities
 
196

 
433

 
(237
)
 
543

 
812

 
(269
)
Total investment securities
 
(213
)
 
164

 
(377
)
 
(382
)
 
262

 
(644
)
Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(4,902
)
 
(4,877
)
 
(25
)
 
(12,654
)
 
(6,976
)
 
(5,678
)
Tax-exempt securities
 
(6
)
 
(221
)
 
215

 
(178
)
 
(201
)
 
23

Total available for sale securities
 
(4,908
)
 
(5,098
)
 
190

 
(12,832
)
 
(7,177
)
 
(5,655
)
Fair value option securities
 
(230
)
 
(238
)
 
8

 
(556
)
 
(402
)
 
(154
)
Restricted equity securities
 
(187
)
 
(724
)
 
537

 
(55
)
 
(388
)
 
333

Residential mortgage loans held for sale
 
229

 
(421
)
 
650

 
27

 
(329
)
 
356

Loans
 
1,516

 
9,959

 
(8,443
)
 
(894
)
 
8,420

 
(9,314
)
Total tax-equivalent interest revenue
 
(3,990
)
 
3,484

 
(7,474
)
 
(14,984
)
 
91

 
(15,075
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
(273
)
 
152

 
(425
)
 
(860
)
 
(158
)
 
(702
)
Savings deposits
 
(14
)
 
12

 
(26
)
 
(36
)
 
5

 
(41
)
Time deposits
 
(845
)
 
(709
)
 
(136
)
 
(2,131
)
 
(1,329
)
 
(802
)
Funds purchased
 
(98
)
 
(46
)
 
(52
)
 
(301
)
 
(116
)
 
(185
)
Repurchase agreements
 
53

 
13

 
40

 
58

 
18

 
40

Other borrowings
 
(163
)
 
(729
)
 
566

 
(185
)
 
(371
)
 
186

Subordinated debentures
 
(11
)
 
4

 
(15
)
 
(12
)
 
(1
)
 
(11
)
Total interest expense
 
(1,351
)
 
(1,303
)
 
(48
)
 
(3,467
)
 
(1,952
)
 
(1,515
)
Tax-equivalent net interest revenue
 
(2,639
)
 
4,787

 
(7,426
)
 
(11,517
)
 
2,043

 
(13,560
)
Change in tax-equivalent adjustment
 
156

 
 
 
 
 
88

 
 
 
 
Net interest revenue
 
$
(2,795
)
 
 
 
 
 
$
(11,605
)
 
 
 
 
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 $162.6 million for the second quarter of 2014, a $771 thousand decrease compared to the second quarter of 2013 and a $25.6 million increase over the first quarter of 2014. Fees and commissions revenue increased $4.9 million over the second quarter of 2013 and $23.2 million over 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 $1.5 million in the second quarter of 2014, decreased other operating revenue $908 thousand in the first quarter of 2014 and increased operating revenue $2.7 million in the second quarter of 2013. Net gains on available for sale securities decreased $3.7 million compared to the prior year and decreased $1.2 million compared to the previous quarter. The loss on other assets in the first quarter of 2014 was primarily due to changes in the fair 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
June 30,
 
 
 
 
 
Three Months Ended
Mar. 31, 2014
 
 
 
 
 
 
2014
 
2013
 
Increase(Decrease)
 
% Increase(Decrease)
 
 
Increase(Decrease)
 
% Increase(Decrease)
Brokerage and trading revenue
 
$
39,056

 
$
32,874

 
$
6,182

 
19
 %
 
$
29,516

 
$
9,540

 
32
%
Transaction card revenue
 
31,510

 
29,942

 
1,568

 
5
 %
 
29,134

 
2,376

 
8
%
Fiduciary and asset management revenue
 
29,543

 
24,803

 
4,740

 
19
 %
 
25,722

 
3,821

 
15
%
Deposit service charges and fees
 
23,133

 
23,962

 
(829
)
 
(4
)%
 
22,689

 
444

 
2
%
Mortgage banking revenue
 
29,330

 
36,596

 
(7,266
)
 
(20
)%
 
22,844

 
6,486

 
28
%
Bank-owned life insurance
 
2,274

 
2,236

 
38

 
2
 %
 
2,106

 
168

 
8
%
Other revenue
 
9,208

 
8,760

 
448

 
5
 %
 
8,852

 
356

 
4
%
Total fees and commissions revenue
 
164,054

 
159,173

 
4,881

 
3
 %
 
140,863

 
23,191

 
16
%
Loss on other assets, net
 
(52
)
 
(1,666
)
 
1,614

 
N/A

 
(4,264
)
 
4,212

 
N/A

Gain (loss) on derivatives, net
 
831

 
(2,527
)
 
3,358

 
N/A

 
968

 
(137
)
 
N/A

Gain (loss) on fair value option securities, net
 
4,176

 
(9,156
)
 
13,332

 
N/A

 
2,660

 
1,516

 
N/A

Change in fair value of mortgage servicing rights
 
(6,444
)
 
14,315

 
(20,759
)
 
N/A

 
(4,461
)
 
(1,983
)
 
N/A

Gain on available for sale securities, net
 
4

 
3,753

 
(3,749
)
 
N/A

 
1,240

 
(1,236
)
 
N/A

Total other-than-temporary impairment
 

 
(1,138
)
 
1,138

 
N/A

 

 

 
N/A

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

 
586

 
(586
)
 
N/A

 

 

 
N/A

Net impairment losses recognized in earnings
 

 
(552
)
 
552

 
N/A

 

 

 
N/A

Total other operating revenue
 
$
162,569

 
$
163,340

 
$
(771
)
 
 %
 
$
137,006

 
$
25,563

 
19
%
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 50% of total revenue for the second 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 such as falling interest rates may also 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, increased $6.2 million over the second quarter of 2013

Securities trading revenue totaled $18.6 million for the second quarter of 2014, a $4.4 million increase over the second 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. The second quarter of 2013 included a negative mark-to-market of municipal and U.S. government agency securities due to an increase in interest rates.

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 totaled $3.7 million for the second quarter of 2014. Combined recoveries from the Lehman Brothers and MF Global bankruptcies totaled $1.6 million and $662 thousand in the second quarter of 2014 and 2013, respectively. Excluding the impact of these recoveries, customer hedging revenue decreased $2.4 million compared to the second quarter of 2013, primarily due to a lower volume of derivative contracts executed by our energy and mortgage banking customers.

Revenue earned from retail brokerage transactions grew by $1.2 million or 13% over the second quarter of 2013 to $10.3 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 $6.5 million for the second quarter of 2014, a $2.0 million or 47% increase over the second quarter of 2013 related to the timing and volume of completed transactions.

Brokerage and trading revenue increased $9.5 million over the first quarter of 2014. Securities trading revenue increased $3.5 million. Excluding the impact of recoveries from the Lehman Brothers and MF Global bankruptcies, customer hedging revenue increased $590 thousand over the prior quarter. Retail brokerage fees were up $863 thousand and investment banking fees grew by $3.0 million.

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 2014 increased $1.6 million or 5% over the second quarter of 2013. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $16.0 million, a $796 thousand or 5% increase over the prior year, due to increased transaction volumes and increased dollar amounts per transaction. Merchant services fees totaled $10.7 million, an increase of $695 thousand or 7% on increased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.8 million, an increase of $77 thousand or 2% over the second quarter of 2013.

Transaction card revenue increased $2.4 million over the the first quarter of 2014. Revenue increased from processing transactions on behalf of members of our TransFund EFT network and from merchant services fees primarily due to growth in transaction volumes. Interchange fees paid on debit cards issued by the Company also increased over the prior quarter on increased transaction volumes.

Fiduciary and asset management revenue grew by $4.7 million or 19% over the second quarter of 2013. The acquisition of Topeka, Kansas-based GTRUST Financial Corporation in the first quarter of 2014 added $371 thousand of revenue and $631 million of fiduciary assets as of June 30, 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 $32.7 billion at June 30, 2014, $28.3 billion at June 30, 2013 and $31.3 billion at March 31, 2014.

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

- 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 $2.4 million for the second quarter of 2014 compared to $1.9 million for the second quarter of 2013 and $2.2 million for the first quarter of 2014.

Deposit service charges and fees were $23.1 million for the second quarter of 2014 compared to $24.0 million for the second quarter of 2013. Overdraft fees totaled $12.0 million for the second quarter of 2014, a decrease of $468 thousand or 4% compared to the second 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 $9.3 million, a decrease of $147 thousand or 2% compared to the prior year. Service charges on deposit accounts with a standard monthly fee were $1.8 million, a decrease of $216 thousand or 11% compared to the second quarter of 2013. Deposit service charges and fees increased $444 thousand over the prior quarter primarily due to increased overdraft fee volumes, partially offset by decreased commercial account service charges.

Mortgage banking revenue decreased $7.3 million compared to the second quarter of 2013. Mortgage production revenue totaled $17.7 million, a decrease of $8.6 million. Average primary mortgage interest rates were 4.23% for the first quarter of 2014, up 56 basis points over the second quarter of 2013. This increase in interest rates reduced loan production volume compared to the prior year. Mortgage loans funded for sale totaled $1.1 billion in the second quarter of 2014, a decrease of $105 million compared to the second quarter of 2013. Outstanding commitments to originate mortgage loans were largely unchanged compared to June 30, 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 41% of loans originated in the second quarter of 2014 were through correspondent channels, up from 26% for the second quarter of 2013. Mortgage loans funded through Home Direct Mortgage, our recently launched online loan channel, were 7% of total originations in the second quarter of 2014. Refinanced mortgage loans decreased to 25% of loans originated in the second quarter of 2014 compared to 48% of loans originated in the second quarter of 2013.

Mortgage servicing revenue grew by $1.4 million or 13% over the second quarter of 2013. The outstanding principal balance of mortgage loans serviced for others totaled $14.6 billion, an increase of $1.9 billion or 15% over June 30, 2013.

Mortgage banking revenue increased $6.5 million over the first quarter of 2014. Mortgage production revenue was up $6.3 million. Outstanding commitments to originate residential mortgage loans were up $159 million or 41% and residential mortgage loans funded for sale increased $363 million over the prior quarter. In addition to the typical seasonal increase in mortgage loan funding and commitment volumes, interest rates also decreased compared to the prior quarter and we continue to expand our correspondent channel.

Mortgage servicing revenue increased $211 thousand over the prior quarter. The outstanding balance of mortgage loans serviced for others increased $581 million over March 31, 2014.


- 7 -




Table 3Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
Mar. 31, 2014
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2014
 
2013
 
 
 
 
Mortgage production revenue
 
$
17,727

 
$
26,356

 
$
(8,629
)
 
 
(33
)%
 
$
11,452

 
$
6,275

 
 
55
%
Servicing revenue
 
11,603

 
10,240

 
1,363

 
 
13
 %
 
11,392

 
211

 
 
2
%
Total mortgage revenue
 
$
29,330

 
$
36,596

 
$
(7,266
)
 
 
(20
)%
 
$
22,844

 
$
6,486

 
 
28
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end outstanding mortgage commitments
 
$
546,864

 
$
547,508

 
$
(644
)
 
 
 %
 
$
387,755

 
$
159,109

 
 
41
%
Mortgage loans funded for sale
 
1,090,629

 
1,196,038

 
(105,409
)
 
 
(9
)%
 
727,516

 
363,113

 
 
50
%
Average primary residential mortgage interest rate
 
4.23
%
 
3.67
%
 
56

bp
 
 
 
4.36
%
 
(13
)
bp
 
 
Mortgage loan refinances to total funded
 
25
%
 
48
%
 
 

 
 
 

 
32
%
 
 

 
 
 

Outstanding principal balance of mortgage loans serviced for others
 
$
14,626,291

 
$
12,741,651

 
$
1,884,640

 
 
15
 %
 
$
14,045,642

 
$
580,649

 
 
4
%
Net gains on securities, derivatives and other assets

In the second quarter of 2014, we recognized a $4 thousand net gain from sales of $800 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential return or to move into securities that will perform better in a rising rate environment. In the second quarter of 2013, we recognized a $3.8 million net gain from sales of $1.1 billion of available for sale securities and in the first quarter of 2014, we recognized a $1.2 million net gain on sales of $531 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
 
 
June 30,
2014
 
March 31,
2014
 
June 30,
2013
Gain (loss) on mortgage hedge derivative contracts, net
 
$
831

 
$
968

 
$
(2,526
)
Gain (loss) on fair value option securities, net
 
4,074

 
2,585

 
(9,102
)
Gain (loss) on economic hedge of mortgage servicing rights
 
4,905

 
3,553

 
(11,628
)
Gain (loss) on change in fair value of mortgage servicing rights
 
(6,444
)
 
(4,461
)
 
14,315

Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
(1,539
)
 
$
(908
)
 
$
2,687

 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
721

 
$
790

 
$
910

 
 
 
 
 
 
 
Primary residential mortgage interest rate at period end
 
4.14
%
 
4.40
%
 
4.46
%
Secondary residential mortgage interest rate at period end
 
3.17
%
 
3.42
%
 
3.31
%

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 fair 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.


- 9 -




Other Operating Expense

Other operating expense for the second quarter of 2014 totaled $214.7 million, a $3.8 million or 2% increase over the second quarter of 2013. Personnel expenses decreased $4.4 million or 3%. Non-personnel expenses increased $8.2 million or 10% over the prior year.

Operating expenses increased $29.6 million over the previous quarter. Personnel expense increased $19.3 million. During the first quarter of 2014, the Company reversed $17.2 million primarily related to amounts payable to certain executive officers that had been accrued during 2011 through 2013 under the 2011 True-Up Plan. Non-personnel expense increased $10.3 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
Mar. 31, 2014
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2014
 
2013
 
 
 
 
 
Regular compensation
 
$
73,064

 
$
69,289

 
$
3,775

 
5
 %
 
$
72,367

 
$
697

 
1
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
29,042

 
30,111

 
(1,069
)
 
(4
)%
 
24,727

 
4,315

 
17
 %
Stock-based
 
3,527

 
9,500

 
(5,973
)
 
(63
)%
 
(13,193
)
 
16,720

 
(127
)%
Total incentive compensation
 
32,569

 
39,611

 
(7,042
)
 
(18
)%
 
11,534

 
21,035

 
182
 %
Employee benefits
 
18,081

 
19,210

 
(1,129
)
 
(6
)%
 
20,532

 
(2,451
)
 
(12
)%
Total personnel expense
 
123,714

 
128,110

 
(4,396
)
 
(3
)%
 
104,433

 
19,281

 
18
 %
Business promotion
 
7,150

 
5,770

 
1,380

 
24
 %
 
5,841

 
1,309

 
22
 %
Charitable contributions to BOKF Foundation
 

 

 

 
N/A

 
2,420

 
(2,420
)
 
N/A

Professional fees and services
 
11,054

 
8,381

 
2,673

 
32
 %
 
7,565

 
3,489

 
46
 %
Net occupancy and equipment
 
18,789

 
16,909

 
1,880

 
11
 %
 
16,896

 
1,893

 
11
 %
Insurance
 
4,467

 
4,044

 
423

 
10
 %
 
4,541

 
(74
)
 
(2
)%
Data processing and communications
 
29,071

 
26,734

 
2,337

 
9
 %
 
27,135

 
1,936

 
7
 %
Printing, postage and supplies
 
3,429

 
3,580

 
(151
)
 
(4
)%
 
3,541

 
(112
)
 
(3
)%
Net losses and operating expenses of repossessed assets
 
1,118

 
282

 
836

 
296
 %
 
1,432

 
(314
)
 
(22
)%
Amortization of intangible assets
 
949

 
875

 
74

 
8
 %
 
816

 
133

 
16
 %
Mortgage banking costs
 
7,960

 
7,910

 
50

 
1
 %
 
3,634

 
4,326

 
119
 %
Other expense
 
7,006

 
8,326

 
(1,320
)
 
(16
)%
 
6,850

 
156

 
2
 %
Total other operating expense
 
$
214,707

 
$
210,921

 
$
3,786

 
2
 %
 
$
185,104

 
$
29,603

 
16
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of employees (full-time equivalent)
 
4,657

 
4,731

 
(74
)
 
(2
)%
 
4,640

 
17

 
 %
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 $3.8 million or 5% over the second 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 $7.0 million compared to the second 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 $1.1 million or 4% compared to the second 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 $1.3 million and compensation expense for liability awards decreased $7.3 million compared to the second quarter of 2013.

Stock-based compensation expense included accruals for amounts payable to certain executive officers of the Company under the 2011 True-Up Plan. Approved by shareholders on April 26, 2011, the True-Up Plan was 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 was determined based on asset size and included an equal number of publicly-traded SEC registered bank holding companies with the Company being the median bank. Amounts accrued related to the 2011 True-Up Plan were paid in May 2014. Stock-based compensation expense for the second quarter of 2013 included $7.0 million expense related to accruals for the 2011 True-Up Plan.

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 $264 thousand compared to the second quarter of 2013.

Employee benefit expense decreased $1.1 million or 6% compared to the second quarter of 2013 primarily due to decreased employee medical costs. The Company self-insures a portion of its employee health care coverage and these costs may be volatile.
Personnel costs increased $19.3 million over the first quarter of 2014 primarily due to the adjustment to the 2011 True-Up Plan accrual during the first quarter. Regular compensation expense increased $697 thousand over prior quarter. Incentive compensation expense increased $21.0 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 $4.3 million. Stock-based compensation expense increased $16.7 million. The first quarter included a $17.2 million reversal of amounts payable to certain executive officers of the Company primarily related to the 2011 True-Up Plan. 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. The first quarter of 2014 also included a $1.7 million decrease in the deferred compensation expense related to the decrease in the fair value of assets held for deferred compensation purposes. This decrease in fair value was included in the gain (loss) on other assets, net. Employee benefits expense decreased $2.5 million primarily due to a decrease in employee medical costs.


Non-personnel operating expenses

Non-personnel operating expenses increased $8.2 million or 10% over the second quarter of 2013. Professional fees and services expense increased $2.7 million due to increased increased risk management and regulatory compliance costs. Data processing and communication expense was up $2.3 million primarily due to increased transaction activity.
Non-personnel expense increased $10.3 million over the first quarter of 2014. Mortgage banking costs increased $4.3 million over the prior quarter. The Company finalized hold-back claims related to purchased mortgage loan servicing rights which reduced expenses by $1.3 million in the first quarter. The remaining increase was due to increased accruals for loan servicing costs. Professional fees and services expense increased $3.5 million largely due to increased risk management and regulatory compliance costs. Data processing, net occupancy expense and business promotion expense all increased over the prior quarter. In addition, 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.

- 11 -




Income Taxes

Income tax expense was $37.2 million or 33% of book taxable income for the second quarter of 2014 compared to $41.4 million or 34% of book taxable income for the second quarter of 2013 and $37.5 million or 33% of book taxable income for the first quarter of 2014. 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 both June 30, 2014 and March 31, 2014, and $13 million at June 30, 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.

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 other 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.


- 12 -




As shown in Table 6, net income attributable to our lines of business decreased $1.7 million or 3% compared to the second quarter of 2013. The decrease was primarily due to increased operating expenses and lower mortgage banking revenue, partially offset by growth in other fee-based revenue, increased net interest revenue and lower credit losses.

Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
Commercial Banking
 
$
40,033

 
$
36,039

 
$
76,331

 
$
71,177

Consumer Banking
 
7,790

 
17,757

 
16,174

 
35,641

Wealth Management
 
5,162

 
926

 
7,703

 
2,812

Subtotal
 
52,985

 
54,722

 
100,208

 
109,630

Funds Management and other
 
22,910

 
25,209

 
52,277

 
58,265

Total
 
$
75,895

 
$
79,931

 
$
152,485

 
$
167,895



- 13 -




Commercial Banking

Commercial Banking contributed $40.0 million to consolidated net income in the second quarter of 2014, up $4.0 million or 11% over the second quarter of 2013. Increased net interest revenue, decreased net loans charged off and growth in transaction card revenue was partially offset by increased operating expenses.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Six Months Ended
 
Increase (Decrease)
 
 
 
June 30,
 
 
June 30,
 
 
 
 
2014
 
2013
 
 
2014
 
2013
 
 
Net interest revenue from external sources
 
$
95,018

 
$
90,551

 
$
4,467

 
$
186,037

 
$
181,433

 
$
4,604

 
Net interest expense from internal sources
 
(7,857
)
 
(9,389
)
 
1,532

 
(16,714
)
 
(18,534
)
 
1,820

 
Total net interest revenue
 
87,161

 
81,162

 
5,999

 
169,323

 
162,899

 
6,424

 
Net loans charged off (recovered)
 
(2,812
)
 
86

 
(2,898
)
 
(6,043
)
 
1,107

 
(7,150
)
 
Net interest revenue after net loans charged off (recovered)
 
89,973

 
81,076

 
8,897

 
175,366

 
161,792

 
13,574

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
44,849

 
43,330

 
1,519

 
87,014

 
84,762

 
2,252

 
Gain (loss) on financial instruments and other assets, net
 
(13
)
 

 
(13
)
 
(1,489
)
 
19

 
(1,508
)
 
Other operating revenue
 
44,836

 
43,330

 
1,506

 
85,525

 
84,781

 
744

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
27,544

 
26,699

 
845

 
54,496

 
52,168

 
2,328

 
Net losses (gains) and operating expenses of repossessed assets
 
1,162

 
(217
)
 
1,379

 
3,354

 
953

 
2,401

 
Other non-personnel expense
 
22,216

 
20,860

 
1,356

 
42,460

 
40,881

 
1,579

 
Other operating expense
 
50,922

 
47,342

 
3,580

 
100,310

 
94,002

 
6,308

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net direct contribution
 
83,887

 
77,064

 
6,823

 
160,581

 
152,571

 
8,010

 
Corporate expense allocations
 
18,367

 
18,080

 
287

 
35,653

 
36,079

 
(426
)
 
Income before taxes
 
65,520

 
58,984

 
6,536

 
124,928

 
116,492

 
8,436

 
Federal and state income tax
 
25,487

 
22,945

 
2,542

 
48,597

 
45,315

 
3,282

 
Net income
 
$
40,033

 
$
36,039

 
$
3,994

 
$
76,331

 
$
71,177

 
$
5,154

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
11,243,678

 
$
10,363,144

 
$
880,534

 
$
11,100,687

 
$
10,486,544

 
$
614,143

 
Average loans
 
10,577,582

 
9,626,933

 
950,649

 
10,429,821

 
9,603,323

 
826,498

 
Average deposits
 
9,875,644

 
9,027,912

 
847,732

 
9,738,496

 
9,136,188

 
602,308

 
Average invested capital
 
937,085

 
899,087

 
37,998

 
934,768

 
895,748

 
39,020

 
Return on average assets
 
1.43
 %
 
1.39
%
 
4

bp
1.39
 %
 
1.37
%
 
2

bp
Return on invested capital
 
17.14
 %
 
16.08
%
 
106

bp
16.47
 %
 
16.02
%
 
45

bp
Efficiency ratio
 
38.52
 %
 
37.96
%
 
56

bp
39.07
 %
 
37.89
%
 
118

bp
Net charge-offs (annualized) to average loans
 
(0.11
)%
 
%
 
(11
)
bp
(0.12
)%
 
0.02
%
 
(14
)
bp

Net interest revenue increased $6.0 million or 7% over the prior year. Growth in net interest revenue was primarily due to a $951 million increase in average loan balances and a $848 million increase in average deposits over the second 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 $2.8 million in the second quarter of 2014 compared to net loans charged off of $86 thousand in the second quarter of 2013.

- 14 -





Fees and commissions revenue increased $1.5 million or 4% over the second quarter of 2013 primarily due to a $1.6 million increase in transaction card revenues from our TransFund electronic funds transfer network. Brokerage and trading revenue decreased $138 thousand primarily due to lower customer hedging revenue. Commercial deposit service charge revenue was largely unchanged compared to the prior year.

Operating expenses increased $3.6 million or 8% over the second quarter of 2013. Personnel costs increased $845 thousand or 3% primarily due to standard annual merit increases and increased incentive compensation. Net losses and operating expenses on repossessed assets increased $1.4 million. Net gains on repossessed assets in the the second quarter of 2013 were $1.1 million. A minimal net loss was experienced in the second quarter of 2014 and operating expenses of repossessed assets increased. Other non-personnel expenses increased $1.4 million or 7%, primarily related to increased data processing expenses related to growth in the transaction activity. Corporate expense allocations also increased $287 thousand over the prior year.

The average outstanding balance of loans attributed to Commercial Banking grew by $951 million during the second quarter of 2014 to $10.6 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 $9.9 billion for the second quarter of 2014, up $848 million or 9% over the second quarter of 2013. Average balances attributed to our commercial & industrial loan customers increased $718 million or 24%. Balances related to small business customers were up $139 million or 7% and balances from treasury services customers increased $123 million or 7%. Balances related to healthcare customers grew by $37 million or 8% and commercial real estate balances increased $15 million or 4%. This growth was partially offset by a $164 million or 11% decrease in balances attributed to energy customers. 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 $7.8 million to consolidated net income for the second quarter of 2014, down $10.0 million compared to the second quarter of 2013 primarily due to a decrease in mortgage banking revenue and higher non-personnel expense and corporate expense allocations.


- 15 -




Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Six Months Ended
 
Increase (Decrease)
 
 
 
June 30,
 
 
June 30,
 
 
 
 
2014
 
2013
 
 
2014
 
2013
 
 
Net interest revenue from external sources
 
$
24,170

 
$
24,830

 
$
(660
)
 
$
48,826

 
$
48,925

 
$
(99
)
 
Net interest revenue from internal sources
 
4,666

 
5,167

 
(501
)
 
8,860

 
10,650

 
(1,790
)
 
Total net interest revenue
 
28,836

 
29,997

 
(1,161
)
 
57,686

 
59,575

 
(1,889
)
 
Net loans charged off
 
1,345

 
1,402

 
(57
)
 
2,201

 
2,332

 
(131
)
 
Net interest revenue after net loans charged off
 
27,491

 
28,595

 
(1,104
)
 
55,485

 
57,243

 
(1,758
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
54,443

 
61,338

 
(6,895
)
 
100,585

 
124,541

 
(23,956
)
 
Gain (loss) on financial instruments and other assets, net
 
3,257

 
(13,344
)
 
16,601

 
4,988

 
(19,406
)
 
24,394

 
Change in fair value of mortgage servicing rights
 
(6,444
)
 
14,315

 
(20,759
)
 
(10,905
)
 
16,973

 
(27,878
)
 
Other operating revenue
 
51,256

 
62,309

 
(11,053
)
 
94,668

 
122,108

 
(27,440